Supreme Court limits use of Federal Criminal Fraud Statutes to establish Good Government Standard in Kelly v. US

In Kelly v. United States, issued this week—the so-called “Bridgegate” case—the Supreme Court once again limits the use of federal criminal fraud statutes to establish a standard of good government for state and local governments. As in McNally v. United States and Skilling v. United States, the Court in Kelly continues to insist that fraud, to be a federal crime, must have as its goal the obtaining of money or property. Until the Court decided McNally in 1987, courts had approved of convictions where a defendant sought to deprive the victim of the “honest services” of someone who owed a fiduciary duty to the victim, on the theory that such services were “property” of the victim. The Court rejected this expansive definition of property in McNally, narrowing the scope of the mail and wire fraud statutes. Congress immediately amended the statutes in 1988 to reinstate the broader concept: “For the purposes of this chapter, the term ‘scheme or artifice to defraud’ includes a scheme or artifice to deprive another of the intangible right of honest services.” In Skilling the Court again took up “honest services” fraud and held that the statutes encompass only such schemes as involve bribery or kickbacks. After Skilling all federal fraud cases must either involve money or property as the goal of the fraud, or if the goal is subversion of “honest services” it must be by means of bribery or kickbacks. Since in Kelly no bribes were given, the government advanced two ways they said that the defendants deprived the Port Authority, which operated the bridge, of property.

The Court found the government’s case lacking and reversed convictions against the New Jersey officials in New Jersey who perpetrated “Bridgegate.” Justice Kagan’s opinion for a unanimous court opens with the heart of the action: “For four days in September 2013, traffic ground to a halt in Fort Lee, New Jersey.”  It turned out that this was political payback. The mayor of Fort Lee, New Jersey, the town on one side of the George Washington Bridge, had refused to endorse Governor Chris Christie’s re-election bid, and Christie’s aides, looking for a way to express the governor’s displeasure, hit on the plan of using their sway with the Port Authority to re-vamp the traffic pattern at the toll booths, reducing 3 lanes normally allocated to local Fort Lee traffic during rush hour to 1 lane, resulting in chaos on the toll plaza and gridlock that backed into Fort Lee. The Court described the results thus:

Without advance notice and on the (traffic-heavy) first day of school, Port Authority employees placed traffic cones two lanes further to the right than usual, restricting cars from Fort Lee to a single lane. Almost immediately, the town’s streets came to a standstill. According to the Fort Lee Chief of Police, the traffic rivaled that of 9/11, when the George Washington Bridge had shut down. School buses stood in place for hours. An ambulance struggled to reach the victim of a heart attack; police had trouble responding to a report of a missing child.

The public outrage when the scheme came to light resulted in the perpetrators losing their jobs. It also resulted in their indictment, trial and conviction in federal court for wire fraud and federal program fraud (the Port Authority which operated the Bridge being the federal program). The federal government persuaded a jury and the Court of Appeals that the defendants’ scheme had deprived the Port Authority of “property” and hence constituted a “scheme to defraud” proscribed by federal law.

The government had two theories of what property had been the object of the scheme.  First, the actual lanes of traffic that had before been allocated to Fort Lee traffic were “property,” which it was the defendants’ goal to “obtain.” The Supreme Court saw that as “a quintessential exercise of regulatory power” which, as it had held in Cleveland v. United States, is not property, stating: “The State’s ‘intangible rights of allocation, exclusion, and control’—its prerogatives over who should get a benefit and who should not—do ‘not create a property interest.’” The Court held that because the scheme did not deprive the Port of Authority of property, it did not violate the relevant federal criminal statutes.

The second theory fared no better, but for a different reason. The government argued that the scheme required expenditure of Port Authority resources – extra toll both attendants and traffic engineers who were directed to create a sham “traffic study” to provide an ostensible reason for the altered traffic pattern. While the Court agreed that obtaining the services of employees of the agency could constitute fraud, where obtaining the services itself is the goal of the scheme, in this case neither requiring extra toll takers nor the engineers’ traffic-study labors were the goal of the scheme, or even contemplated. They were “by-products” of the scheme, whose object was political payback.

The Court therefore overturned the convictions. The Court acknowledged that the schemes were reprehensible and corrupt, but concluded, as it had in previous cases, that federal regulation of state corruption was not, and should not be, all-encompassing,  effectively creating a federal standard of “good government” for states. The states are left to regulate corrupt behavior by their employees and citizens dealing with them, so long as money or property are not the goal of fraud or the means of perpetrating fraud, by way of bribery.