Does an individual owe a fiduciary duty to the public that can serve as the basis of an honest-services fraud conviction under 18 U.S.C. § 1346, notwithstanding the fact that the individual does not have an official government position but only informal influence over government decisionmaking?
This case asks the Court to analyze 18 U.S.C. § 1346, the honest-services fraud statute, and determine if an individual with informal power but no official governmental position can violate the statute. Joseph Percoco and Steven Aiello argue that private individuals lacking formal governmental power cannot commit honest-services fraud because they do not owe the public a duty of honest services. Percoco and Aiello further argue that including private individuals within § 1346 would render the statue unconstitutionally vague, violate the First Amendment, and entrench upon state sovereignty. The United States contends that private individuals can commit honest-services fraud when they have been selected for public office and when they are de facto officeholders in all but name. The United States also argues that § 1346 clearly defines improper behavior and does not limit First Amendment activity. This case touches on important questions regarding lobbying, free speech, and the interaction of state and federal bribery laws.
Questions as Framed for the Court by the Parties
Whether a private citizen who holds no elected office or government employment, but has informal political or other influence over governmental decisionmaking, owes a fiduciary duty to the general public such that he can be convicted of honest-services fraud.
Petitioner Joseph Percoco served as Executive Deputy Secretary under former Governor Andrew Cuomo from 2011 until 2016, except for eight months in 2014 while Percoco ran the Governor’s reelection campaign. United States v. Percoco at 5. This position required managing both intergovernmental and legislative matters. Brief for Respondent, United States of America at 3. In 2012, Percoco encountered financial difficulties which prompted him to reach out to lobbyist Todd Howe, asking if Howe had any clients who would hire Percoco’s wife. Percoco at 5. Howe approached his client, Peter Kelly Jr., who owned Competitive Power Ventures (“CPV”) – an energy company that happened to be seeking a “Power Purchase Agreement” (“PPA”), an agreement that would have made New York State procure power from CPV. Id. Percoco, Howe, and Kelly discussed employment and pay for Percoco’s wife in exchange for Percoco’s help in acquiring the PPA for CPV. Id. CPV hired Percoco’s wife with a monthly salary of $7,500 for a few hours per week as an education consultant, while excluding her name from official CPV documents. Id. Percoco upheld his part of the agreement by speaking with the supervisor of New York’s state agencies, as Howe had instructed him to do. Id. CPV also paid Percoco to encourage New York State officials to reach a “Reciprocity Agreement,” in which CPV would obtain low-cost emission credits in New York while constructing a power plant in New Jersey. Id.
In 2014, Percoco left his position as Executive Deputy Secretary to manage Governor Cuomo’s re-election campaign, but openly expressed his intent to return to his former role. Id. at 7. Steven Aiello, owner of COR Development Company LLC (“COR”), sought to gain funding from Empire State Development, a state-run organization, without undergoing the expensive process of obtaining a “Labor Peace Agreement” (“LPA”). Brief For Respondent at 6. Within two weeks, COR transferred $15,000 to Howe which Howe then passed along to Percoco’s wife, with an additional $20,000 to come. Percoco at 8. A few days before Percoco resumed his position as Executive Deputy Secretary, he called an Empire State Development official and pressured him to forgo the LPA in funding COR. Id. Percoco conducted this interaction from his Executive Deputy Secretary office, while not officially serving in this capacity at the time. Id. Shortly after this interaction, the LPA requirement was waived. Id.
Following a grand jury indictment, Percoco, Aiello, and Kelly were tried in 2018 in the United States District Court for the Southern District of New York. Id. at 10. The district court instructed the jury that Percoco could be found guilty of honest-services wire fraud under 18 U.S.C. § 1346 for actions taken while he did not work for the government. Brief for Respondent at 10. The jury found Percoco and Aiello guilty of honest-services wire fraud pertaining to their dealings with COR. Percoco at 13. Percoco was also found guilty of wire fraud and soliciting bribes or gratuities in relation to his interactions with CPV. Id. Percoco and Aiello appealed, claiming that the district court erred in its jury instructions, and that there was insufficient evidence to convict them. Id. at 14. The United States Court of Appeals for the Second Circuit rejected Percoco’s claim, holding that there was sufficient evidence and that the jury instructions were permissible because private citizens, like Percoco, who “in reality or effect are the government owe a fiduciary duty to the citizenry '' that can serve as the basis for an honest-services fraud conviction. Id. at 30, 49–52.
Percoco appealed, and the Supreme Court granted certiorari on June 30, 2022.
DEFINING THE SCOPE OF § 1346
Percoco argues that, as a private citizen, he could not commit honest-services fraud under 18 U.S.C. § 1346, which criminalizes a “scheme or artifice to deprive another of the intangible right of honest services.” Brief for Petitioner, Joseph Percoco at 47. Percoco contends that his conviction impermissibly resurrects the Second Circuit’s holding in United States v. Margiotta, which held that private citizens owe the public honest services when government officials rely on private citizens to the point of de facto control. Id. at 21. Percoco claims that reliance alone cannot create a duty of honest services because individuals only owe the public duties when they consent to represent the public. Id. at 24–25. Percoco states that, when individuals accept public office, they accept a fiduciary duty to act in the public interest. Id. at 22. By contrast, Percoco argues, private individuals—even highly influential ones—do not agree to serve the public and do not accept fiduciary duties to act in the public interest. Therefore, Percoco argues, private individuals cannot owe the public honest services. Id. Percoco concludes that, since he was a private citizen during his alleged crime, he owed no duties to the public and could not commit honest-services fraud. Id. at 47.
Percoco also contends that Supreme Court precedent exempts private individuals from honest-services fraud convictions. Id. at 29. Percoco notes that Congress enacted § 1346 in response to McNally v. United States, overturning decisions such as Margiotta which criminalized honest-services fraud. Id. Percoco argues that, while § 1346 partially reversed McNally by criminalizing honest-services fraud, it did not restore Margiotta. Id. Percoco asserts that, under Skilling v. United States, § 1346 only penalizes “paradigmatic” bribes and kickbacks, the “solid core” of honest-services fraud. Id. at 29–30. Percoco contends that Margiotta’s application of honest-services fraud to private individuals was highly controversial, and thus that honest-services fraud by private citizens is not “paradigmatic” bribery. Id. Furthermore, Percoco asserts that, per the Supreme Court’s decision in McDonnell v. United States, bribery requires an “official act.” Id. at 34. Percoco argues official acts only occur when officials leverage formal power. Id. Percoco states that, when non-governmental individuals are prosecuted for bribery, they are contractors with formally delegated official duties. Id. at 36–37. Percoco argues that, since he only held informal influence, he could not commit bribery, thus placing his actions outside the honest-services fraud statute. Id. at 45.
The United States counters that private citizens owe a duty of honest services if: 1) they have been selected to become public officials; or 2) they are functionally government officials, viewed by other officials as making binding decisions. Brief for Respondent, United States at 25–26. The United States notes that honest-services fraud includes bribery under 18 U.S.C. § 201, which encompasses individuals selected to be (but not yet) public officials. Id. at 21. The United States also claims individuals have duties of honest services whenever they are “authorized to act” for the government. Id. at 20. The United States posits that governments authorize private individuals to act for them when they entrust private individuals with governmental responsibilities. Id. at 27. The United States argues these individuals choose to become government officials in all but name, thus they accept the role’s fiduciary duties and must act in the public’s interest. Id. The United States concludes that Percoco was functionally a government official because he was about to regain office and he issued instructions viewed as official commands; therefore, he owed the public honest services. Id. at 20, 32.
Additionally, the United States rejects Percoco’s contention that his conviction is unsupported by precedent. Id. at 36. The United States argues Percoco misinterprets the scope of honest-services fraud’s “solid core.” Id. The United States contends that, while Skilling confined § 1346 to bribery and kickbacks, it did not limit which bribe and kickback cases were barred. Id. Instead, the United States argues, Skilling deemed bribery and kickbacks in general the “core” of honest-services fraud. Id. at 18. The United States argues bribery includes private individuals. Id. at 36–37. The United States asserts that federal bribery incorporates statutes like § 201, which prohibits bribery of people selected to be government officials. Id. at 21. The United States also highlights Dixson v. United States, which held that bribery does not require a formal governmental relationship if someone occupies a “position of public trust with official responsibilities.” Id. at 21–22. The United States alleges that, while Percoco was not formally employed by the government, he functionally maintained his former position and thus held official responsibilities. Id. at 28. Furthermore, the United States notes bribery includes using one’s position to influence other officials, which Percoco did when, on behalf of COR, he pressured the Empire State Development official to forgo the LPA requirement. Id. at 37.
VAGUENESS AND OTHER CONSTITUTIONAL CONCERNS
Percoco argues that including private citizens within honest-services fraud renders the statute unconstitutionally vague. Brief for Petitioner at 44. Percoco states that, when interpreting statutes, courts must follow the rule of lenity: if statues can be interpreted multiple ways, courts must adopt the more restrictive interpretation. Id. Percoco also contends that Skilling sharply limited § 1346 to create a clear line between constitutional lobbying and honest-services fraud. Id at 29. Percoco posits that letting courts punish private individuals would defeat this purpose, by making the line too vague to enforce. Id. at 44. Percoco further asserts that narrow interpretations are especially important in criminal law because individuals are owed notice that their actions are criminal. Id. Percoco argues that private citizens are not expected to act for the public good, and that the United States’ interpretation of § 1346 includes variables individuals can’t easily predict, like whether officials view a defendant’s statements as authoritative. Id. at 22. Percoco concludes that private citizens are not aware that they could face punishment for self-interested actions; therefore, applying honest-services fraud to private individuals is unconstitutional. Id. at 38.
Finally, Percoco argues that prosecuting private individuals for honest-services fraud violates the First Amendment and New York’s sovereignty. Id. at 38, 42. Percoco maintains that prosecuting private citizens under § 1346 infringes upon protected speech. Id. at 39. Percoco argues that his actions were constitutionally protected lobbying. Id. at 38, 43. Percoco further reasons that, if § 1346 ties indirect influence to criminal liability, prosecutors could misuse it to stifle free speech. Id. at 39. Percoco contends that the Court must define statues narrowly if a broad reading would encroach upon constitutional rights; thus, the Court must read the honest-services fraud statute narrowly to protect free speech. Id. at 41. Percoco additionally alleges that states determine for themselves who are state officials; and, under New York law he owed no duty to the public. Id. at 42–23. Therefore, Percoco posits, the federal government overrode New York’s sovereignty by criminalizing his actions. Id.
In response, the United States asserts that applying § 1346 to de facto public officials is not unconstitutionally vague. Brief for Respondent at 38. The United States argues that the rule of lenity only applies when alternative explanations are equally supported by precedent. Id. The United States maintains that precedent clearly establishes honest-services fraud includes “once-and-future public officials” like Percoco, who are selected to become public officials and assume the responsibilities of government posts. Id. at 39. The United States claims individuals can reasonably expect that, when they are selected to become a public official or take over government positions, they will be held to the same standards as officeholders. Id. at 27. Furthermore, the United States argues, individuals have notice because convictions for honest-services fraud require criminal intent; specifically, juries must find defendants acted knowingly, with intent to deceive. Id. at 39. The United States reasons defendants convicted of honest-services fraud knew their actions were illegal and were not deprived of notice; therefore, honest-services fraud applies to private defendants like Percoco. Id.
The United States also argues prosecuting Percoco for honest-services fraud is consistent with the First Amendment and New York law. Id. at 40–41. The United States argues that people chosen to become government officials are not lobbyists and that lobbyists’ requests, while influential, are not treated like official governmental commands. Id. at 40. Therefore, the United States concludes that prosecuting de facto public officials for honest-services fraud does not bar protected speech, because there are clear lines between lobbyists and de facto officials. Id. Additionally, the United States affirms that § 1346 does not override New York’s sovereignty, because Percoco would also be convicted under New York law and because § 1346, as a federal statute, is enforced independently from state law. Id.
FEDERALISM AND STATE SOVEREIGNTY
Citizens United, Citizens United Foundation, and the Presidential Coalition (collectively “Citizens United”), in support of Percoco, contend that the Second Circuit’s test supersedes state laws pertaining to the ethics of public duty, thus disrupting the balance of power between federal and state governments. Brief of Amici Curiae Citizens United et al., in Support of Petitioner at 21. Citizens United argues that only a clear statement from Congress can permit a federal law to override the authority of the states and § 1346 does not provide this clear statement. Id. Citizens United claims that the State of New York has its own ethical guidelines for public officials, which are far less ambiguous than the test the Second Circuit uses. Id. at 23-24. Further, as Citizens United states, the state laws are formulated by the people as opposed to the whims of federal prosecutors and judges and are therefore representative of the constituents’ preferences. Id.
The U.S. Chamber of Commerce (“Chamber of Commerce”), in support of neither party, asserts that an expansion of the honest-services fraud statute is unnecessary in light of extensive regulations implemented at the federal, state, and local levels. Brief of Amicus Curiae The Chamber of Commerce of The United States of America, in Support of Neither Party at 14. The Chamber of Commerce emphasizes that New York has extensive lobbying regulations and limitations relating to interactions between lobbyists and government officials. Id. at 17. The Chamber of Commerce contends that the Second Circuit erred when it relied on federal fraud statutes, as opposed to focusing on the myriad lobbying regulations already in place at both the federal and state levels, because its holding risks enlarging an all too powerful federal government. Id.
The United States of America counters that the Second Circuit’s decision is consistent with typical notions of federalism and does not disrupt the separation of powers. Brief for Respondent, The United States of America at 41. The United States claims that, because Percoco’s actions are in violation of both federal and state laws, his conviction shows no potential damage to state sovereignty. Id. Additionally, the United States addresses concerns related to federal courts superseding state laws by stating that an individual does not need to violate state law in order to display an honest-services duty. Id. Therefore, as the United States explains, this is not an instance of the federal government overstepping and stripping control away from the states. Id. Rather, the United States claims that Percoco, convicted under § 1346, was in violation of a federal statute embodying an independent federal interest, and therefore his conviction does not threaten to limit state powers. Id. The United States opines that, just because there is state law speaking to similar conduct, the federal government does not hinder states from exercising their own vested power. Id. at 42.
EFFECTS ON LOBBYING AND POLITICAL ADVOCACY
Citizens United, in support of Percoco, contends that the Second Circuit’s test is too vague and that it will result in a chilling effect on free speech protected under the First Amendment. Brief of Citizens United at 28. Citizens United states that the Second Circuit’s ambiguous line between permitted “mere influence” and prohibited “domination and control” over the political process is so amorphous that it would have a chilling effect on permitted conduct and speech. Id. at 29.
Further, the Chamber of Commerce, in support of neither party, argues lobbyists and public policy advocates play an integral role in petitioning the government, which is protected activity under the First Amendment. Brief of The Chamber of Commerce at 23. The Chamber of Commerce stresses that vague standards for imposing criminal punishment related to freedom of speech have long been acknowledged as having a chilling effect on protected speech. Id. at 24. The Chamber posits that, under the Second Circuit’s interpretation of § 1346, businesses might abstain from policy advocacy on the grounds that a lobbyist might be too influential and subject them to criminal liability, in turn depriving the businesses of the opportunity to have their interests heard. Id.
The United States of America counters that Percoco’s conviction does not trigger First Amendment concerns for lobbyists. Brief for Respondent at 16. According to the United States, lobbyists, unlike Percoco, are not active or incoming government officials, and therefore the standards of this case have no bearing on freedom of speech for those not similarly situated. Id. Additionally, the United States claims that an affirmance of the Second Circuit’s ruling will not chill lobbyists’ free speech, but will simply dissuade those who hold, or will soon hold, government office from exerting undue influence or control over governmental decisionmaking. Id. at 40.
- Robert J. Anello and Richard F. Albert, Chastening the Prosecutor’s Darlings? SCOTUS to Assess ‘Right to Control’ and Honest Services Fraud, New York Law Journal (Aug. 10, 2022.)
- Luc Cohen, U.S. Supreme Court to hear ex-Cuomo aide’s appeal of bribery conviction, Reuters Legal (June 20, 2022).
- Edward F. Novak and Matthew L. Hickman, Supreme Court to Hear Cases That Could Further Narrow Federal Fraud Statutes, The National Law Review (July 5, 2022).
- Rebekah Yeager-Malkin, U.S. Supreme Court to hear fraud case involving former Cuomo campaign manager, Jurist (July 2, 2022).