General Publications December 10, 2021

“DOJ May Face Hurdles in Individual Wire Fraud Prosecutions,” Law360, December 10, 2021.

Extracted from Law360

The U.S. Department of Justice's announcement that its single most important white collar imperative is the prosecution of individuals raises the question of whether it even has jurisdiction to convict most individuals for federal mail and wire fraud offenses.

Recent judicial application of U.S. Supreme Court authority narrowly construing the federal mail and wire fraud statutes shows that the DOJ has an uphill climb in meeting its ambitions.

As anticipated, the DOJ recently announced a renewed focus on individual culpability for white collar criminal offenses. The DOJ's "first priority in corporate criminal matters [is] to prosecute the individuals who commit and profit from corporate malfeasance."[1]

To receive cooperation credit, companies are once again required to disclose all culpable individual misconduct they discover. This rescinds prior guidance that companies need only identify those substantially involved in criminal conduct.

But the DOJ's focus on individual criminal liability faces substantial legal impediments. Unless federal officers or federal funds are involved, private fraud schemes are typically prosecuted under the federal mail and wire fraud statutes, Title 18 of the U.S. Code Sections 1341 and 1343, and the mail and wire fraud conspiracy statute, Title 18 of the U.S. Code, Section 1349.

The U.S. Supreme Court, however, has narrowed coverage of the mail and wire fraud statutes to a theft of money or property, as these terms are traditionally defined. And the lower federal courts are now applying Supreme Court precedent with increasing frequency to curtail the DOJ's pursuit of individual targets, including by dismissing indictments.

The Supreme Court's jurisprudence limiting application of the mail and wire fraud statutes effectively began with the 2000 decision Cleveland v. U.S.,[2] holding that the mail fraud statute does not reach corruption in obtaining a state or municipal regulatory license.

This was followed by the 2010 Supreme Court decision Skilling v. U.S.,[3] finding that crimes of dishonesty under the federal fraud statutes require an economic dimension, specifically a bribe or a kickback. Then, in 2020, came Kelly v. United States,[4] holding that acts of political retribution do not involve a theft of money or property.

It follows that dishonest acts or even regulatory violations, standing alone, do not implicate the workhorse federal fraud statutes.[5] Rather, these acts must be denominated by or converge with a theft of money or property.[6] This implicates a limited category of individuals, especially in regulated sectors.

Legal Limitations on Application of Mail And Wire Fraud Statutes

Before the Supreme Court's 1987 decision in McNally v. U.S.,[7] both prosecutors and the courts construed the mail and wire fraud statutes to apply to a deprivation of honest services by public officials.

The government also extended this honest-services fraud theory to purely private schemes, which facilitated a wide-ranging inquiry into the everyday acts of individual targets. This allowed prosecutors to attach criminal sanctions to corruption and self-dealing without tying the underlying misconduct to an actual or intended deprivation of money or property.

Beginning with McNally, the Supreme Court limited the scope of the mail and wire fraud statutes to the protection of property rights, rejecting a fraud theory based principally on dishonesty.[8] While this holding purported to narrow the scope of the mail and wire fraud statutes, it spawned an era of creative prosecutions in which the DOJ construed the corrupt procurement of various government benefits as a theft of government property.

Thirteen years after McNally, the Supreme Court again stepped in, holding in Cleveland that state and municipal licenses do not constitute property for purposes of the federal mail and wire fraud statutes. There, the government sought to convict the defendant of tricking the state of Louisiana into issuing him a video-poker license.

The court rejected this theory, noting that the state's loss could hardly be construed as economic, insofar as the underlying violation was limited to an obstruction of the state's regulatory power.[9]

Relying on Cleveland and McNally, the court in Skilling set out to put an end to "asymmetrical" prosecutions of honest-services fraud, specifically those following congressional enactment of Title 18 of the U.S. Code, Section 1346, which codified that a deprivation of "the intangible right of honest services," including by private individuals, is criminally actionable as fraud.

To avoid constitutional vagueness concerns, and to ensure this prosecution theory accorded with criminal liability for a theft of money or property, the court reasoned that honest-services fraud should be limited to situations where the defendant has breached his fiduciary duty as a result of a bribe or kickback.[10]

Finally, in a recent culmination of Supreme Court authority circumscribing application of the federal mail and wire fraud statutes, the court in Kelly ruled on the propriety of charging the parties to the Bridgegate scandal with mail and wire fraud.

Relying heavily on Cleveland, the Kelly court concluded that a scheme sounding substantially in political retribution, even if it leads to certain tangible public expense, does not implicate a taking of government property. In other words, the government must show that a defendant engaged in deception, the object of which is money or property.[11]

 And while the government's right to its employees' time and labor is undoubtedly a property interest, the court required a substantial causal nexus between the charged scheme and the resulting money or property deprivation.

In Kelly, however, the stepped-up use of Port Authority of New York and New Jersey employees to handle politically motivated and manipulated traffic patterns was, even if foreseeable, merely incidental. Increased government expense was not the object of the scheme and therefore not a basis for mail and wire fraud jurisdiction.[12]

The element of a close causal nexus — otherwise known as convergence — between a fraud scheme and a theft of money or property from those who have been deceived has also become a featured aspect of case law limiting the scope of the federal mail and wire fraud statutes.

While courts have declined to go so far as to require that the deceived party actually lose money or property,[13] they have counseled prosecutors that the intent must be to obtain property from the one who is deceived.[14]

The DOJ thus faces serious pleading and litigation risk when deceptive conduct is largely untethered from a corresponding theft of money or property from the alleged victim or victims.

An Object Lesson in the Government's Criminal Pleading Obstacles

The notion that a regulatory violation that neither implicates a theft of property nor converges with its monetization presents a significant legal obstacle to the DOJ's renewed focus on individuals featured prominently in the U.S. District Court for the Eastern District of Michigan's Oct. 28 decision in U.S. v. Palma,[15] a criminal action at the heart of the government's much-publicized "defeat diesel" initiative.

Emanuele Palma, formerly a Fiat Chrysler Automobiles engineer, was initially charged with, among other things, conspiracy to commit wire fraud and substantive wire fraud counts.

According to his original indictment, Palma helped Fiat Chrysler mislead regulators and consumers about the emissions control systems in certain of the company's vehicles. This was allegedly done to obtain regulatory certifications that would enable Fiat Chrysler to claim best-in-class mileage coupled with environmentally friendly emission levels.

Palma's initial indictment further charged that he made and caused false statements to be made to Fiat Chrysler's regulators and customers to enrich himself through receipt of compensation and other benefits.

The district court, however, dismissed the wire fraud conspiracy and substantive wire fraud counts of Palma's original indictment.

The government argued that the charged scheme had the goal of fraudulently obtaining money from customers who relied on Fiat Chrysler's misleading fuel economy representations. But the district court found that this theory lacks convergence — the parties alleged to have been deprived of money or property — Fiat Chrysler's customers — were not the same parties that had been deceived — Fiat Chrysler's regulators.[16]

The district court therefore dismissed the wire fraud conspiracy and substantive wire fraud counts as a matter of law "because the causal connection between Defendant's alleged deceit and [Fiat Chrysler's] customers' loss of money was too attenuated."[17]

Rather than concede a fatal lack of correspondence — at Palma's level — between regulatory deception and Fiat Chrysler's fraudulent receipt of consumer funds, the government doubled down by filing a superseding indictment. The government claimed the wire fraud counts in the superseding indictment included new, consumer-focused allegations that addressed the district court's convergence issues.

Indeed, aside from repackaging its wire fraud charges, the government also charged two other similarly situated Italian nationals as wire fraud co-conspirators.[18]

Much like in the original indictment, the DOJ alleged in the superseding indictment that the purpose of the wire fraud conspiracy was to obtain money for Fiat Chrysler through increased sales of vehicles the co-conspirators knew failed to comply with applicable U.S. Environmental Protection Agency rules and regulations governing emissions, in part by making and causing others to make material misrepresentations to consumers.

The district court remained unconvinced. Noting that the ultimate goal of any car manufacturer is to sell vehicles to its customers, the district court found as a matter of law that the charged wire fraud scheme lacked "a sufficiently direct causal nexus between Defendant's alleged fraud and [Fiat Chrysler] customers' loss of money."[19]

Because there were intervening factors between the allegedly fraudulent regulatory behavior and a customer's decision to purchase a subject vehicle, "that fraud cannot be said to have naturally induced customers to part with their money."[20] This was true even accepting the government's allegation that Palma's miscalibrations enabled Fiat Chrysler to market its vehicles as having best-in-class fuel efficiency.

The district court also found that the superseding indictment circumvented Kelly.

Aside from the fact that Palma was not personally responsible for Fiat Chrysler's marketing activity, because achieving Fiat Chrysler's marketing goals was intertwined with obtaining regulatory approval, and especially because the goals of the underlying regulations are not directed to protecting the monetary interests of third parties, the regulatory approval at issue did not implicate a criminally actionable money or property theory.[21]

According to the district court:

The government cannot circumvent the holding of Kelly by simply repackaging its theory in this way, especially where the role of the underlying regulations is to implement and enforce standards for air quality, water quality and individual pollutants, not to protect the monetary interests of others.[22]

Broader Lessons and Applications

The government's multiple failures in Palma even to plead a viable wire fraud conspiracy or scheme have significant resonance. Successful motions to dismiss indictments have been exceedingly rare. But they will become more common as the DOJ looks to charge private individuals — who do not meet the criteria for mail and wire fraud liability — in pursuit of prosecuting a broader swath of individual misconduct.

The district court's successive dismissal orders in Palma confirm that intent to engage in a regulatory violation — undoubtedly a core focus of DOJ attention — does not form the basis of a mail or wire fraud prosecution. This is because, following McNally and Cleveland, regulatory deception fails to implicate money or property interests.

Moreover, when the alleged criminal conduct relates to regulatory misconduct, rather than its monetization in the form of illicit corporate gain, the necessary convergence under Kelly between the intent to deceive and the intent to induce the party who was deceived to part with money or property is lacking.

And even if the government is able to connect individual intent to deceive with the intent to steal from consumers or the markets — a measure of convergence implicating a level of status and seniority rarely seen in federal fraud prosecutions[23] — when the gravamen of the charged misconduct is to falsely obtain regulatory approval, mail and wire fraud jurisdiction is lacking.

This is true even if fraudulent regulatory approval is intertwined with marketing strategy, and especially true if the regulations are designed primarily to ensure public health and safety, rather than consumers' financial or economic interests.

Individual fraud prosecution targets caught up in the DOJ's renewed focus on individual culpability — particularly those with regulatory or compliance responsibilities divorced from marketing and sales activities — are well-advised to assert the limitation of mail and wire fraud liability principles that are embodied in Palma throughout the course of an investigation and prosecution.

This includes in (1) preindictment immunity and declination discussions with the government, (2) post-indictment motions to dismiss, and (3) if necessary, requests to charge.

Courts, including most notably the Supreme Court, have signaled that the net of individual criminal liability the DOJ intends to cast will likely ensnare individuals who are not liable for mail and wire fraud as a matter of law. This presents opportunities to raise legal concerns with individual targeting decisions that the government previously ignored in preindictment advocacy and often brushed off post-indictment until trial and appeal.


[1] "Deputy Attorney General Lisa O. Monaco Gives Keynote Address at ABA's 36th National Institute on White Collar Crime," Oct. 28, 2021, https://www.justice.gov/opa/speech/deputy-attorney-general-lisa-o-monaco-gives-keynote-address-abas-36th-national-institute.

[2] Cleveland v. U.S., 531 U.S. 12 (2000).

[3] Skilling v. U.S., 561 U.S. 358 (2010).

[4] Kelly v. U.S., 140 S. Ct. 1565 (2020).

[5] Although not technically mail and wire fraud decisions, the Supreme Court's holdings in Yates v. United States , 574 U.S. 528 (2015) (destruction of "tangible objects" reference in federal obstruction statute is limited to financial records), and McDonnell v. United States, 136 S. Ct. 2355 (2016) (requiring a quid pro quo exchange of a corrupt payment for a corrupt act to trigger the federal bribery statute), also reflect the Supreme Court's sentiment that federal mail and wire fraud prosecutions require a discrete, economic component to limit the government's charging decisions.

[6] The definition of property continues to be judicially refined. In the bank fraud context, the Ninth Circuit recently rejected the government's "accurate-information" property theory, holding that "[t]here is no cognizable property interest in the ethereal right to accurate information." United States v. Yates , No. 18-30183, 2021 U.S. App. LEXIS 30236, *15-16 (9th Cir. Oct. 8, 2021). In the mail and wire fraud context, defendants convicted in the first "Varsity Blues" trial have argued in seeking a new trial that college admission slots are not property as contemplated by the federal fraud statutes. United States v. Abdelaziz, et al., ECF No. 2412, Case No. 1:19-CR-10080-NMG (D. Mass. Nov. 5, 2021).

[7] McNally v. United States, 483 U.S. 350 (1987).

[8] Id. at 360.

[9] 531 U.S. at 20.

[10] 561 U.S. at 408-409.

[11] 140 S. Ct. at 1571.

[12] Id. at 1572.

[13] United States v. Evans , 844 F.2d 36, 39-40 (2d Cir. 1988).

[14] United States v. Ali , 620 F.3d 1062, 1070 (9th Cir. 2010).

[15] United States v. Palma , No. 2:19-CR-20626-NGE-DRG, 2021 U.S. Dist. LEXIS 207902 (E.D. Mich.).

[16] Id. at *9.

[17] Id.

[18] "Two Senior Managers in Italy Charged with Conspiracy to Cheat U.S. Emissions Tests and Defraud U.S. Consumers," Apr. 20, 2021, https://www.justice.gov/opa/pr/two-senior-managers-italy-charged-conspiracy-cheat-us-emissions-tests-and-defraud-us.

[19] 2021 U.S. Dist. LEXIS 207902, at *10-11.

[20] Id. at *11 (citing United States v. Berroa , 856 F.3d 141, 149 n.4, 150 (1st Cir. 2017)).

[21] Id. at *11-12.

[22] Id.

[23] To the extent requisite convergence exists, federal appellate courts have also demonstrated a willingness to curtail sentencing exposure for mail and wire fraud schemes based on application of legal principles limiting victim loss or individual gain. See generally United States v. McClatchey , 316 F.3d 1122, 1128 (10th Cir. 2003) (finding that a sentencing court should limit the defendant's liability to those acts of co-conspirators that were reasonably foreseeable and part of the criminal activity that the defendant agreed to jointly undertake); United States v. Treadwell , 593 F.3d 990, 1002 (9th Cir. 2010) ("[A] district court may not automatically hold an individual defendant responsible for losses attributable to the entire conspiracy, but rather must identify the loss that fell within the scope of the defendant's agreement with his co-conspirators and was reasonably foreseeable to the defendant.").

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