Monday, November 28, 2022

Does the Honest Services Statute Apply to a Person Who Left Government but Came Back?

The Supreme Court heard oral argument today in Percoco v. United States, the case testing whether the honest services statute applies against a person who left government service, but then returned. Here's my Preview, from the ABA Preview of United States Supreme Court Cases, with permission:

Case at a Glance

Joseph Percoco served as the Governor’s Executive Deputy Secretary to then-New York Governor Andrew Cuomo. He resigned that office in April 2014 to manage the Governor’s reelection campaign. During this period, he arranged through a lobbyist to receive monetary payments from a corporation in exchange for pressuring state officials to provide funding for the corporation without complying with a potentially expensive labor peace agreement. Percoco succeeded in pressuring officials to drop the requirement right around the time that he returned to his prior position in the Governor’s Office. 

INTRODUCTION

The federal honest-services-fraud statute makes it a crime for a person to communicate over interstate channels any “scheme or artifice to deprive another of the intangible right of honest services,” that is, the citizenry’s “intangible” right to honest and impartial government free of corruption. The statute most obviously criminalizes the transmission of any scheme to defraud the government by a public employee. This case tests whether the statute also applies to persons like Percoco, who are not public employees, but who nevertheless exercise some level of government authority and influence and who later return to public office.

ISSUE

Does the federal honest-services-fraud statute apply to persons who are no longer government officials, but who retain some level of government authority and who later return to public office?

FACTS

Starting in 2011, Joseph Percoco served as the Governor’s Executive Deputy Secretary to then-New York Governor Andrew Cuomo. In this role, Percoco was one of the most senior officials in the Governor’s Office (also called the “Executive Chamber”), with a portfolio that included a variety of significant public-policy issues.

In mid-April 2014, Percoco resigned his position in the Governor’s Office to manage Governor Cuomo’s reelection campaign. As a result, Percoco did not formally exercise official authority, but he nevertheless continued to use his public office “to conduct state business.” Others around him understood that during this time Percoco’s “grip on power never changed, diminished, or dissipated,” that he “instruct[ed]” the governor’s staff “on various non-campaign topics,” and that and that he “spoke for the governor” on legislative matters.

Around this time (there may be some dispute as to the exact timing), Percoco contacted Todd Howe, a lobbyist, to ask if Howe could help him find a client who could pay him while he was working on the campaign. Howe identified Steven Aiello, whose company, COR Development, sought to obtain funding from Empire State Development (ESD), a state agency, without entering into a potentially expensive labor peace agreement. In July 2014, Aiello e-mailed Howe asking whether “there [is] any way Joe P can help us” to avoid a labor peace agreement “while he is off the 2nd floor [the Governor’s Office] working on the Campaign.”

(This wasn’t the first time that Percoco worked through Howe to execute a bribery scheme. When he was still officially in the Governor’s Office, Percoco worked through Howe to secure a lucrative job for his wife in exchange for Percoco’s assistance in obtaining a power purchase agreement for Competitive Power Venture (CPV), an energy company associated with Howe.)

In early August, COR Development funneled $15,000 through an entity controlled by Howe to Percoco’s wife. Later, in October, after Aiello, Howe, and Percoco exchanged e-mails about the labor peace agreement, COR Development funneled an additional $20,000 through Howe to Percoco’s wife.

Around the same time, Percoco separately told Howe and a bank that he planned to return to Governor Cuomo’s administration after the election. On November 25, after Governor Cuomo won reelection, Percoco signed forms related to his reinstatement. On December 1, he executed those forms before a notary.

On December 3, Aiello’s partner, Joseph Gerardi, pressured Howe by e-mail to resolve the labor peace agreement issue. Howe forwarded the e-mail to Percoco, who then called the Deputy Director of State Operations, the official responsible for overseeing ESD, and told him that the project should move forward without a labor peace agreement. The Deputy Director understood Percoco’s instruction as “pressure” from his “principal[],” a “senior staff member[].” The Deputy Director then directed senor officials at ESD “that a labor peace agreement . . . should not be required as part of this project.” The next day, ESD officials informed COR Development of the decision.

On December 8, Percoco formally resumed his prior position in the Governor’s Office. He instructed officials to prioritize the release to funds owed to COR Development and secured an additional raise for Aiello’s son, who worked in the Executive Chamber.

In 2017, Percoco was charged in federal court with two counts of conspiring to commit honest-services wire fraud, two counts of soliciting bribes and gratuities, and three counts of Hobbs Act extortion. (Aiello, Gerardi, and others were charged with these and other crimes, too.)

After trial, the court instructed the jury that the government had to prove that Percoco owed a duty of honest services to the public in order to convict Percoco on the honest-services charges. The court told the jury that Percoco owed such a duty “[w]hile [he] was employed by the state . . . by virtue of his official position.” The court also explained that the jury could find that Percoco owed a duty of honest services to the public even “when he was not a state employee if you find that at the time he owed the public a fiduciary duty.” The court told the jury that they could find that Percoco owed a fiduciary duty if they determined (1) that he “dominated and controlled any governmental business” and (2) that “people working in the government actually relied on him because of a special relationship he had with the government.”

The jury found Percoco guilty of conspiring to commit honest-services wire fraud related to the COR Development scheme. (The jury also found him guilty on charges of honest-services fraud and solicitation of bribes or gratuities in the other bribery scheme, mentioned parenthetically above. The jury acquitted him on the other counts. Aiello was convicted of conspiring to commit honest-services wire fraud related to the COR Development scheme and acquitted on other counts.) The United States Court of Appeals for the Second Circuit affirmed. This appeal followed.

CASE ANALYSIS

In order to see the parties’ arguments more clearly, let’s take a look at a little history. Before 1987, the federal wire- and mail-fraud statutes prohibited any scheme to defraud the government. The prohibition plainly applied to public officers who were formally employed by the government who corruptly defrauded the government of money or property. But at the time, all federal courts of appeals interpreted these statutes to prohibit honest-services fraud, too. In other words, the courts of appeals said that the statute also prohibited any scheme to defraud the government of the citizenry’s “intangible” right to honest and impartial government, regardless of whether the scheme directly involved government money or property.

As a result, in some cases the statutes applied to certain private citizens, too. In particular, they applied to those private citizens who were so closely aligned with the government that they could defraud the government of the citizenry’s intangible right to honest and impartial government. For example, as relevant here, the Second Circuit in United States v. Margiotta noted that “[i]t requires little imaginative leap to conclude that individuals who in reality or effect are the government owe a fiduciary duty to the citizenry,” just as much as public employees. The court looked to common law and New York law to determine whether the prohibition applied to a particular private person and ultimately concluded that “the concepts of reliance, and de facto control and dominance” are “at the heart of the fiduciary relationship.” United States v. Margiotta, 688 F.2d 108 (2d Cir. 1982).

Then, in 1987, the Supreme Court interpreted the mail-fraud statute “as limited in scope to the protection of property rights.” McNally v. United States, 483 U.S. 350 (1987). The Court in McNally reversed a Sixth Circuit ruling that, relying on Margiotta, held that “an individual without formal office” was a “public fiduciary,” because he “substantially participated in government affairs and exercised significant, if not exclusive, control” of certain government decisions. The ruling meant that the wire-fraud statute no longer applied to protect the “intangible” right to honest services.

Congress responded the next year by enacting Section 1346, the honest-services-fraud statute at issue in this case. Section 1346 defined the “scheme or artifice” in the wire-fraud statute to “include[] a scheme or artifice to deprive another of the intangible right of honest services.” 18 U.S.C. § 1346. In other words, Congress effectively overruled McNally.

But while Congress specifically included the “right of honest services” in Section 1346, it didn’t necessarily revive all pre-McNally caselaw in the circuits. In particular, Section 1346 didn’t obviously revive Margiotta and its holding that the fraud statutes applied to certain private persons. The Second Circuit ruled that it did, however, and upheld Prococo’s conviction on that basis.

Percoco argues first that Margiotta was wrong on its own terms. He says that “[u]nlike public officials, private citizens owe no fiduciary duty to act in the public interest,” because they “exercise no authority on [the government’s] behalf.” He contends that the whole idea of a republican government “is that private citizens and factions will advance their own parochial self-interests,” and that they cannot be bound by honest-services restrictions in the public sector. (Percoco claims that Margiotta’s reasoning doesn’t make sense in the private sector, either, where “[f]iduciary obligations arise from legal relationships (usually principal-agent), not from one party’s unilateral reliance on another,” as Margiotta would have it.)

Percoco argues next that Margiotta cannot survive the Court’s most recent rulings on government corruption statutes. He says that these most recent cases narrow the law and reinstate only the “core” of the pre-McNally caselaw to “paradigmatic cases of bribes and kickbacks” and “the sale of official authority.” He says that these simply don’t apply to private citizens.

Finally, Percoco argues that Margiotta raises “serious constitutional concerns.” He claims that the ruling threatens private persons’ First Amendment freedoms, potentially outlawing ordinary political advocacy and lobbying by private persons and even family members of government officials. Moreover, he says that the ruling “improperly puts federal courts in the position of regulating how private citizens interact with the government and its officials,” interfering with “this fundamental aspect of state sovereignty.” And finally, he contends that Margiotta’s approach is so vague that it “deprives citizens of the notice to which they are constitutionally entitled.”

For all of these reasons, Percoco argues that the honest-services-fraud statute cannot apply to him, because he was not a government official at the time of his actions.

The government counters that the honest-services-fraud statute can extend to certain private persons like Percoco. The government points to the plain language of the statute and its history (as described above) to say that the statute bans any “scheme or artifice to deprive another of the intangible right of honest services,” whether performed by a government officer or not. The government contends that the Court’s most recent cases support its position.

The government argues next that other federal statutes support its position, too. In particular, the government points to federal public bribery statutes that apply to private persons. The government says that Court interpretation of these statutes support its position that the honest-services-fraud statute applies to private persons, too. According to the government, that’s because “a person who is not a formal employee or agent of a government can still owe a duty of honest services . . . when the person has been selected to work for the government, or when the person actually exercises the powers of a government position with the acquiescence of the relevant government personnel.”

The government argues that Percoco easily fits within these principles. It says that at the time of the scheme, Percoco “was both (1) slated to return as the Executive Deputy Secretary, and (2) acting as a functional public official . . . .” The government contends that “[e]ither basis alone is sufficient to support his conviction.”

Finally, the government argues that the application of Section 1346 to persons like Percoco raises no constitutional issues. The government points out that Section 1346 contains a mens rea (or guilty mind) requirement, like the bribery statutes, and therefore provides fair notice. Moreover, it says that this application of Section 1346 raises no First Amendment concerns, “because lobbyists, family members, and the like are neither incoming nor functional government officials, as [Percoco] was.” Finally, the government contends that this application of Section 1346 does not interfere with state sovereignty, because “even assuming a violation of state law were required for [Percoco’s] conviction [under Section 1346], state bribery and ethics laws do not suggest that [Percoco’s] conduct was permissible.”

SIGNIFICANCE

As the parties point out, the Court in the last twelve years or so has circumscribed the reach Section 1346 and a similar bribery statute. In particular, in Skilling v. United States, the Court limited Section 1346 to bribery and kick-back schemes. 561 U.S. 358 (2010). More recently, in McDonnell v. United States, the Court held that an “official action” under the federal bribery statute is an action that involves a specific exercise of formal government power. 579 U.S. 550 (2016).

But while those rulings circumscribe the statutes, neither ruling squarely addresses the issue in this case, whether the honest-services-fraud statute applies to private persons.

Given the number and types of private persons who effectively control government decision-making in one way or another, this issue matters. Percoco’s case is a perfect illustration why. On the one hand, if Section 1346 applies only to government officials—and does not apply to Percoco and those like him (with very close relationships to the government)—this could sharply limit the statute’s reach and allow more government corruption, as in Percoco’s case itself. At the extreme, this could invite individuals to skirt criminal liability simply by formally severing their relationship with the government, even as they maintain a very close practical relationship with the government and effective control over government decision-making. On the other hand, if Section 1346 applies to Percoco and those like him, this could prevent and punish more corruption, again, as in Percoco’s case itself.

The case is therefore likely to come down to line-drawing. A bright-line rule that applies Section 1346 only to government officials has the benefits of determinacy, certainty, and easy applicability in the courts, even if it also has a relatively limited reach. A more nuanced rule that applies Section 1346 to certain private persons who effectively wield government power is necessarily less determinate and certain, and harder to apply in the courts, even if it also comes with relatively broader reach.

Percoco picks up on this and claims that any attempt to apply Section 1346 to anyone other than a government employee risks criminalizing historically protected activity like ordinary political advocacy and lobbying. (Percoco’s case is easily distinguishable from ordinary political advocacy and lobbying. He’s hardly the best messenger for this slippery-slope argument, to say the least.) While the Second Circuit thinks it developed a sufficiently determinate test in Margiotta to prevent this problem, look for the Supreme Court to be skeptical. And look for it to lean toward a bright-line rule in which Section 1346 applies only to government employees.

https://lawprofessors.typepad.com/conlaw/2022/11/does-the-honest-services-statute-apply-to-a-person-who-left-government-but-came-back.html

Cases and Case Materials, News | Permalink

Comments

Post a comment