Supreme Court narrows the definition of wire fraud, making it harder to prove

When is a secret backroom deal a fraud? Not always, says the U.S. Supreme Court. Prosecutors must show beyond a reasonable doubt that the alleged victim actually lost money.

The case involved Louis Ciminelli, a New York businessman who won a $750 million contract for a state government real estate project. The problem was, he had an insider on the board awarding the project, and he and that insider allegedly manipulated events so that Ciminelli’s bid would be chosen. The real estate project was otherwise successful, but Ciminelli was charged federally with wire fraud.

As we discussed when the high court first heard the case, there were three main elements of wire fraud, and prosecutors were required to prove all three beyond a reasonable doubt:

  • There was a scheme or the use of false pretenses in order to obtain money
  • The defendant knew and intended to defraud someone
  • Communications across state lines facilitated the scheme

The federal prosecutor pointed to this allegedly rigged bidding process as a fraud scheme under a theory known as the “right to control.” They alleged that the state has the right to control how its funds are disbursed and therefore was harmed by the lack of a fair and honest bidding process. Ciminelli’s alleged scheme deprived it of valuable economic information it would have wanted when it was evaluating bids.

Not so fast, high court says. It might not be fraud at all.

In a unanimous opinion, Justice Clarence Thomas ruled that the prosecutor in Mr. Ciminelli’s case had failed to prove that the state had suffered a quantifiable financial loss. After all, it agreed to pay Ciminelli for the work at the given price and he did, in fact, complete the work. The defense argued that the state actually got a good deal.

The Court refused to answer whether a prosecutor could ever prove a state’s loss of money due to a rigged bidding process. It simply found that the prosecutor had failed to do so in Mr. Ciminelli’s case.

As a result, the Court also made clear that the “right to control” theory is insufficient. Prosecutors may not use it to prove a fraud occurred unless they can separately prove the government in question actually lost money. The “right to control” theory is, essentially, insufficient because it does not represent a traditional property interest.

So, in the future, defendants can argue that the government they contracted with got a good deal or, at least, didn’t lose money. If that is the case, prosecutors may not be able to prove a fraud occurred at all, even when the bidding process was demonstrably corrupt.

Government contractors can still face wire fraud charges

The Supreme Court remanded Ciminelli’s case to the district court for a new trial. At that trial, the prosecutor may be able to prove concrete losses by the state of New York. If it can, Ciminelli could be convicted.

Those who wish to bid on government contracts should, therefore, be cautious. Federal wire fraud charges remain possible.

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