After Ciminelli: Are the Feds Betting Too Big on Wire Fraud?

By: Abbey Block

Can a technical violation of a website’s terms and conditions constitute a violation of the federal wire fraud statute? A federal court will soon decide just how broadly the statute may sweep, and whether all such forms of potentially dishonest conduct are subject to such stringent criminalization.

On Monday, all eyes will be on the District Court for the Eastern District of New York when Judge LaShann DeArcy Hall hears oral argument on Defendant Terry Rozier’s Motion to Dismiss. [1]  By way of background, Mr. Rozier filed the motion in December, seeking dismissal of the two-count indictment filed against him and five other co-defendants, alleging violation of both the federal wire fraud and money laundering statutes.[2]

The wire fraud statute, enacted in 1952, was originally intended to address and criminalize fraudulent advertising through the then-emerging technologies of radio and television. But since its inception, the government has relied on the statute to prosecute a broad array of dishonest behavior, including conduct undertaken by some of the country’s most notorious white-collar criminals, such as Bernie Madoff, Elizabeth Holmes, and FTX founder Sam Brankman-Fried. The elements of both a wire fraud and mail fraud charge are essentially the same, requiring the government to establish (1) a scheme or an artifice to defraud; (2) use of the U.S. mails or wires in furtherance of the said scheme; and (3) use of the mails or wires with the specific intent to deceive or defraud.

Here, the “scheme” alleged by the Government has been billed as involving  “insider betting” and “rigging” professional basketball games. But in reality, the conduct alleged is something less headline-worthy: the Government contends that some bettors broke certain sportsbooks’ terms of use against wagering based on non-public information and “straw betting.”

Specifically, the Government contends that the defendants committed wire fraud by misrepresenting that certain wagers were placed in accordance with the Betting Companies’ rules, or failing to disclose that they were not. That is, they allegedly deprived the betting companies of valuable economic information that affected the companies’ economic decision-making – here, whether the betting company would accept, honor, or invalidate the wagers at issue. Mr. Rozier’s motion to dismiss argues that this theory of wire fraud –referred to as the “right to control” theory – is, pursuant to Supreme Court precedent, an invalid legal basis upon which to base wire fraud charges.

The Supreme Court considered and rejected the “right to control” theory in Ciminelli v. United States, 598 U.S. 306 (2023). There, the government alleged that the defendants lied about the characteristics of their companies in their bids to obtain government contracts worth hundreds of millions of dollars. At trial, the government argued that the defendants had fraudulently deprived the government of valuable economic information necessary to make discretionary economic decisions – i.e., whether or not to award the contracts at issue.

On appeal, the Supreme Court rejected the Government’s right to control to control theory, cautioning that such a broad interpretation of the wire fraud statute would make a “federal crime of an almost limitless variety of deceptive acts traditionally left to state contract law and tort law” – a result that would be inconsistent with principles of federalism and the statute’s structure, history, and purpose. The Court concluded, “the wire fraud statute reaches only traditional property interests” and the “right to valuable economic information needed to make discretionary economic decisions is not  a traditional property interest.”

Notably though, the Ciminelli decision did not emerge in a vacuum. Rather, the Court’s federalism discussion in Ciminelli represents the culmination of a long line of Supreme Court cases narrowing the reach of the federal wire fraud statute, and restoring the delicate “federal-state balance in the prosecution of crimes.” Cleveland v. United States, 531 U.S. 12, 25 (2000). By way of example,  in Cleveland v. United States the Supreme Court opined that the federal fraud statutes were intended to criminalize only schemes that deprive people of “traditional property interests.” To hold otherwise, the Court reasoned, would result in “a sweeping expansion of federal criminal jurisdiction in the absence of a clear statement by Congress.” Similarly, in Carpenter v. United States, the Supreme Court held that the “contractual right” to “honest and faithful services[3]” was “too ethereal” to be considered a traditional property right capable of being the object of a wire fraud scheme.484 U.S. 19, 25 (1987). Congress disagreed with the narrowing of wire fraud’s scope, passing 18 U.S.C. § 1346 to reestablish that honest services fraud was subject to federal prosecution. The fact that no similar effort has been made to provide jurisdiction over right to control cases is telling.  Simply put, Ciminelli and its progeny establish that the Government cannot rely upon the federal fraud statutes as a “plenary ban on fraud.” Loughrin v. United States, 573 U.S. 351, 362 (2014) (internal quotation marks omitted) (quoting Bond v. United States, 572 U.S. 844, 859 (2014)). To do so would “effect a significant change in the relation between federal and state criminal jurisdiction.” Id.

Against this backdrop, Mr. Rozier filed a motion to dismiss, arguing that the Government’s theory of fraud flies in the face of the Supreme Court’s holding in Ciminelli. If accepted, the Government’s theory of wire fraud would open the door to the federal criminalization of a host of relatively innocuous, but nevertheless potentially dishonest, activities. By way of example, if in an effort to save a couple of dollars, an individual knowingly uses a family member’s username and password to access an online entertainment streaming platform (a violation of most streaming platforms’ policies) does that constitute federal wire fraud? According to the Government’s theory and allegations in the indictment, it would.

In opposition, the Government attempts to draw a distinction between (1) the conspiracy’s alleged means – i.e., the defendant’s alleged use of non-public information; and (2) the conspiracy’s alleged object – i.e., money. From the Government’s perspective, because the defendants were allegedly motivated by the potential for financial gain, the property interest at issue is money, rather than valuable economic information. But under the Government’s theory, the Ciminelli Court’s ruling would effectively be rendered a nullity given that almost every fraudulent scheme – including the one considered in Ciminelli – is undertaken with the intention of some financial benefit.

The idea of a “white collar criminal” usually conjures up images of those notoriously infamous figures – Bernie Madoff, Elizebeth Holmes, and Sam Bankman-Fried – who were convicted for masterminding complex fraudulent schemes. But if Ciminelli is ignored, and the scope of potential criminal liability is expanded, the everyday conduct of average citizens could be subjected to extensive scrutiny and potential prosecution. Thus, while the validity of the right to control theory of wire fraud is a bit of an academic debate, the outcome of Monday’s hearing could have very tangible consequences for the way in which dishonest conduct is regulated and criminalized.

[1] Mr. Rozier is represented by Ifrah Law partners, Jim Trusty and Jeff Ifrah.

[2]  As alleged in the indictment, the money laundering charge is predicated upon the wire fraud charge – i.e., the wire fraud charge serves as the predicate specific unlawful activity. Accordingly, in the event the wire fraud charge is dismissed, the money laundering charge also cannot survive.

[3] Specifically,18 U.S.C. § 1346 provides that the term “scheme or artifice to defraud” includes a scheme or artifice to deprive another of the intangible right of honest services, which the Supreme Court has held to encompass bribery and kickback schemes. See United States v. Napout, 332 F. Supp.3d 533, 549 (E.D.N.Y. 2018).