In Ciminelli v. United States the U.S. Supreme Court will decide whether the “right-to-control” theory of fraud — which treats the deprivation of complete and accurate information bearing on a person’s economic decision as a type of property fraud — is a valid basis for liability under the federal wire fraud statute.
In 2012 then-Governor Andrew Cuomo launched the “Buffalo Billion” initiative to develop the greater Buffalo area through the investment of $1 billion in taxpayer funds. A nonprofit named Fort Schuyler was used as “the vehicle for purchasing the land and developing the facilities for the Buffalo Billion development projects.”
Louis Ciminelli owned a construction company. He and others circumvented Fort Schuyler’s request-for-proposal (RFP) process. Specifically, a Fort Schuyler insider, Alain Kaloyeros, created a “Buffalo RFP” which wasn’t for a specific project. Ciminelli helped Kaloyeros draft the RFP in a way that would give Ciminelli an advantage unbeknownst to others at Fort Schuyler. Ciminelli’s company was awarded preferred bidder status for “Buffalo RFP” projects.
Ciminelli was tried and convicted for committing federal wire fraud. The Second Circuit affirmed Ciminelli’s conviction under a “right-to-control” theory of wire fraud. This theory allows for conviction on “a showing that the defendant, through the withholding or inaccurate reporting of information that could impact on economic decisions, deprived some person or entity of potentially valuable economic information.”
According to the Second Circuit, the “right-to-control” theory requires proof that “misrepresentations or non-disclosures can or do result in tangible economic harm.” A “cognizable harm occurs where the defendant’s scheme denies the victim the right to control its assets by depriving it of information necessary to make discretionary economic decisions.” To prove a scheme to defraud, “[i]t need not be shown that the intended victim of the fraud was actually harmed; it is enough to show defendants contemplated doing actual harm.”
In the Second Circuit Ciminelli argued that the government “failed to prove economic harm for two interrelated reasons.” First, preferred status didn’t guarantee Ciminelli contracts. Second, the federal government did not offer evidence that another company with lower prices, better quality, or better value would have applied and been selected for the “Buffalo RFP.”
The Second Circuit rejected these arguments responding that even in Ciminelli wasn’t guaranteed contracts he “indisputably” had “a leg up because [his company] had been preselected,” as the designation “guaranteed them the beginning of a partnership with . . . Fort Schuyler.”
Regarding lack of evidence of a better offer the Second Circuit opined: “The bargain at issue was not the terms of the contracts ultimately negotiated, but instead Fort Schuyler’s ability to contract in the first instance, armed with the potentially valuable economic information that would have resulted from a legitimate and competitive RFP process. Depriving Fort Schuyler of that information was precisely the object of defendants’ fraudulent scheme, and for Fort Schuyler, it was an essential element of the bargain.”
Before the Supreme Court Ciminelli no longer argues that his actions didn’t meet the “right-of-control” theory of wire fraud. Instead, he argues the Court should abandon the theory because it doesn’t involve property fraud. “The theory targets deception without a concrete connection to traditional property interests. A scheme that deprives a person of economic information alone, without threatening economic loss, may violate an intangible interest or a sense of moral uprightness; it does not rise to the level of a property fraud.”