By Jennifer S. Freel & Michael J. Murtha

The U.S. Supreme Court began its new term last week and is poised to answer some major questions in criminal and regulatory law. This term, the Court is tasked with construing the Bank Secrecy Act’s penalty provision, ruling on whether the “right to control theory” provides a viable theory of liability under the federal wire fraud statute, and deciding whether a private citizen who has informal political influence over governmental decision-making can be convicted of honest services fraud. It also must decide whether the Government has authority to dismiss a False Claims Act case after initially declining to intervene. And, just last week, the Court agreed to decide whether the attorney-client privilege protects communications that include mixed-use legal advice.

The Court will do all of this with a new jurist added to the bench—Justice Ketanji Brown Jackson. For the eight years prior to her elevation to the Court, Justice Jackson served as a district court judge for the United States District Court for the District of Columbia. Her influence on the Court’s criminal law jurisprudence will be worth watching this term.

Bittner v. United States

Case No. 21-1195; Argument on November 2, 2022

Issue:

Whether the Bank Secrecy Act’s penalty for non-willful violations of the foreign financial agency reporting requirements, which requires a citizen to file an annual Report of Foreign Bank and Financial Accounts detailing his or her foreign accounts, is calculated on a per-account or per-report basis.

Commentary:

Alexandru Bittner emigrated to the United States from Romania in December 1982. He became a naturalized American citizen in 1987. Shortly thereafter, he moved back to Romania while retaining his dual-citizenship. From 1990 to 2011, Bittner generated more than $70 million in income from various businesses and investments. He stored at least some of that income in a number of foreign financial accounts, many of which had a balance that exceeded $10,000. Unbeknownst to him, he was required to report his foreign financial accounts to the United States by filing a governmentally mandated Report of Foreign Bank and Financial Accounts, or FBAR. Bittner failed to file an FBAR From 1996 to 2011.

After Bittner returned to the United States in 2011, a professional accountant informed him that he needed to file an FBAR. He filed his first FBAR in 2012, and he then filed amended FBARs for years 2006-2010 in 2013. The Internal Revenue Service responded by levying a $2,720,000 penalty against Bittner pursuant to 31 U.S.C. § 5321(a)(5)(A) and (B), which authorizes the Secretary of the Treasury to penalize non-willful “violations” of the Bank Secrecy Act’s, 31 U.S.C. § 5314 et seq., implementing regulations. Those regulations serve as the basis for the FBAR filing requirement. See 31 C.F.R. §§ 1010.350(a) and .360. Based on the IRS’s findings, the United States brought an action to collect the judgment. The parties then filed cross-motions for summary judgment. The parties agreed that given the statutory-regulatory scheme, it is the failure to file an FBAR that triggers § 5321’s civil penalty provisions. They disagreed, however, on how to calculate the penalty.

According to the Government, Bittner failed to report 272 accounts between 2007 and 2011. Thus, when the $10,000 penalty provided for under § 5321(a)(5)(B)(i) is calculated on a per-account basis, Bittner owed the United States $2,720,000. Bittner disagreed, asserting that any violation should be calculated on a per-report basis, regardless of the number of accounts. After considering the text of § 5321 in light of the statutory-regulatory framework, the rule of lenity, and prior case law, the District Court found that a non-willful violation of the FBAR reporting requirement constitutes a single violation, irrespective of the actual number of foreign financial accounts. The United States appealed.

By the time the Fifth Circuit heard Bittner’s case, the Ninth Circuit had already considered the issue in United States v. Boyd. The District Court in Boyd previously found, without explanation, that FBAR violations were to be calculated on a per-account basis. But the Ninth Circuit, over a dissent, reversed, holding that penalties should be calculated on a per-form basis because the relevant regulation only authorized one penalty per accurate report. It further reasoned that the rule of lenity supported its decision given the possibly ambiguous text.

Despite the Ninth Circuit, and District Court in Bittner’s case, coming down on the per-form side, the Fifth Circuit held that each failure to report an account qualifies as a separate reporting violation, resulting in a circuit split. According to the Fifth Circuit, the District Court and Ninth Circuit erroneously relied on language from California Bankers Association v. Shultz, 416 U.S. 21 (1974), as a reason to begin the analysis with the regulatory text. Taking a page from the Boyd dissent’s book, the Fifth Circuit reasoned that the statutory text should be the starting point. It then reasoned that the statutory text has both substantive and procedural elements. The substantive obligation requires the disclosure of accounts, while the procedural obligation requires the filing of the appropriate reporting form. This divide, the Court concluded, supported calculating penalties on a per-account basis. The Court also reasoned that the use of the term “violation” in other portions of the statute supported its decision, and that the rule of lenity was inapplicable because the statutory and regulatory texts are unambiguous.

The Supreme Court recently agreed to resolve the split between the Fifth and Ninth Circuits and thus wade into the per-form, per-account dichotomy. As is often the case in issues of complex statutory and regulatory construction, there are reasonable arguments on each side. And, as Boyd and Bittner illustrate, whether you begin with the statutory or regulatory text as your frame of reference matters, possibly to the tune of $2,000,000.

Ciminelli v. United States

Case No. 21-1170; Argument date to be determined

Issue:

Whether the U.S. Court of Appeals for the Second Circuit’s “right to control” theory of fraud—which treats the deprivation of complete and accurate information bearing on a person’s economic decision as a species of property fraud—states a valid basis for liability under the federal wire fraud statute.

Commentary:

In 2012, New York Governor Andrew Cuomo announced the “Buffalo Billion” plan—a program that would invest one billion dollars in upstate-New York. To implement the plan, Fort Schuyler Management Corporation was tasked with selecting developers and construction managers through requests for proposals, or RFPs. In 2014, Fort Schuyler selected LPCiminelli as a preferred developer under its 2013 RFP. LPCiminelli was later awarded a $750 million dollar contract.

Evidence was eventually uncovered that a Fort Schuyler board member drafted the 2013 RFP to favor LPCiminelli. The evidence was presented to a federal grand jury, and the grand jury indicted Ciminelli on charges of wire fraud, in violation of 18 U.S.C. § 1343, and conspiring to commit wire fraud, in violation of §§ 1343 and 1349. At trial, the District Court instructed the jury that it must find beyond a reasonable doubt that Ciminelli’s scheme deprived Fort Schuyler of money or property. It further instructed the jury that the term “property” includes “intangible interests such as the right to control the use of one’s assets” and that a victim is deprived of that right when it is deprived of “potentially valuable economic information that it would consider valuable in deciding how to use its assets.” The jury convicted Ciminelli.

On appeal, Ciminelli argued that the “right-to-control” theory of wire fraud was not only inconsistent with the statute’s text and structure, but that it was also incompatible with the traditional conception of “property.” Nonetheless, the Second Circuit affirmed. According to its opinion, a wire fraud conviction under the right-to-control theory is permissible if there is “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.” This showing, it went on, requires proof that “misrepresentations or non-disclosures can or do result in tangible economic harm.” The Second Circuit recognized that evidence demonstrating a tangible harm was minimal—and the government offered little evidence that Fort Schuyler would have received a better deal absent fraud—but it held that evidence of actual economic harm is not required in right-to-control cases.

The right-to-control theory is now in the Supreme Court’s sights, but the Court could issue a narrow opinion. According to Ciminelli, the Court must reverse the Second Circuit’s “right-to-control” theory, or else the theory will swallow a host of conduct that only affects information, not a traditional property interest. According to the Government, though, Ciminelli’s argument is a non-starter: the evidence established, and the jury found, that Ciminelli’s scheme “caused or would cause economic harm.” Time will tell if the Supreme Court addresses the issue on the merits—as its decision to hear the case suggests it will—or if the Court agrees with the Government and opts for a narrow opinion affirming Ciminelli’s conviction.

Percoco v. United States

Case No. 21-1158; Argument date to be determined

Issue(s):

Whether a private citizen who holds no elected office or government employment, but has informal political or other influence over governmental decision-making, owes a fiduciary duty to the general public such that he can be convicted of honest-services fraud.

Related Insights:
U.S. Supreme Court Again to Address DOJ’s Prosecution of ‘Honest Services Fraud’

Commentary:

In this case, the Court is again asked to settle a dispute over the scope of the honest-services fraud statute. In recent years, the Court has not been shy to restrict the government’s authority to prosecute under the statute. It seems that trend will likely be followed here.

Joseph Percoco was an executive aide in the Executive Chamber of New York Governor Andrew Cuomo. When Cuomo sought reelection, Percoco temporarily left his role and became Cuomo’s re-election campaign manager. While serving in that role, he accepted money from lobbyists in exchange for his agreement to help a real estate developer navigate the State’s bureaucracy and governmental approval process. Percoco followed through on his promise, and the state acceded to his requests. Then federal prosecutors got involved and a grand jury returned an indictment against Percoco, charging him with conspiracy to commit honest-services wire fraud in violation of 18 U.S.C. §§ 1346 and 1349.

At trial, the District Court instructed the jury that it was the government’s burden to establish that Percoco owed a duty of honest services to the public. Percoco objected. The District Court then added that “[a] person does not need to have a formal employment relationship with the state in order to owe . . . a duty of honest services to the public.” Instead, the jury could find that Percoco had a duty if it found that “he dominated and controlled any governmental business” and also 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.

The Second Circuit affirmed the District Court’s jury instructions and Percoco’s conviction on appeal. Percoco argued that the District Court erred in relying on a fiduciary duty theory because the case that supported that theory, United States v. Margiotta, 688 F.2d 108 (2d Cir. 1982), was reversed by McNally v. United States, 483 U.S. 350 (1987). More specifically, Percoco argued that McNally, which held that the government could not prosecute defendants via the mail and wire fraud statutes under an honest-services theory, invalidated Margiotta’s holding that “‘a formal employment relationship, that is, public office,’ is not a ‘rigid prerequisite to a finding of fiduciary duty in the public sector.’” The Second Circuit disagreed. Citing Congress’s post-McNally decision to enact § 1346 and thereby make it a crime to defraud the public of honest services, the Second Circuit concluded that Congress adopted its fiduciary duty theory, and thus Margiotta survived McNally. Percoco subsequently petitioned for a writ of certiorari, and the Court granted it.

If Percoco stands, as Jackson Walker previously shared, family members, friends, and media figures who share close relationships with public figures, and especially lobbyists who previously served in public role, could become new targets of honest-services fraud. That said, the Court has routinely demonstrated that it is happy to reign in honest-services fraud prosecutions. This could be yet another case where the Court does just that.

United States, ex rel. Polansky v. Executive Health Resources, Inc.

Case No. 21-1052; Argument date to be determined

Issue:

Whether the government has authority to dismiss a False Claims Act suit after initially declining to proceed with the action, and what standard applies if the government has that authority.

Related Insights:
U.S. Supreme Court to Decide Standard for DOJ Dismissal of Qui Tam Cases

Commentary:

Jackson Walker covered this case when the Court first agreed to hear it. Relator Dr. Jesse Polansky was a physician advisor to Executive Health Resources, a company that provides hospitals that bill Medicare with review and billing certification services. During his tenure, Polansky came to believe that EHR was enabling client hospitals to “over-admit patients by certifying inpatient services that should have been provided on an outpatient basis.” In other words, he believed EHR was systematically aiding hospitals in exploiting the Government’s reimbursement rates by billing for inpatient stays that were not “reasonable and necessary”—a requirement for Medicare reimbursement.

Polansky accordingly filed an action under the False Claims Act, 31 U.S.C. § 3729 et seq., in 2012. After investigating the case for two years, the Government decided to not intervene. Polansky, in turn, decided to conduct the action for himself and the United States. After years of discovery and trial preparation, though, the Government notified Polansky that it would seek dismissal of the case. A few months later, the Government filed its motion to dismiss pursuant § 3730(c)(2)(A), which the District Court granted. In granting dismissal of the case, the District Court noted that there was a circuit split over what standard applied to § 3730(c)(2)(A). Nonetheless, it found that the Government met any of the prevailing standards.

On appeal to the Third Circuit, Polansky argued that the Government lacked statutory authority to move to dismiss the claim in the first place, and, even if it had that authority, the District Court should have denied the motion under the applicable standard. Beginning with the Government’s statutory authority, the Third Circuit looked to the “interrelationship among the subsections of § 3730(c).” In considering that interrelationship, it noted that circuits have split on how to interpret § 3730(c). The Seventh Circuit requires that the Government intervene after showing good cause before it can move to dismiss. And the Sixth Circuit held that the Government can only move to dismiss if it intervened. Meanwhile, the Ninth, Tenth, and D.C. Circuits have all held that the Government can dismiss at any point in the litigation even without intervening—albeit, with some slight variation on the Government’s burden in each circuit, such as the Ninth and Tenth Circuits’ two-prong burden-shifting test.

The Third Circuit rejected the Sixth, Seventh, Ninth, Tenth, and D.C. Circuit’s various holdings. Instead, it invoked Federal Rule of Civil Procedure 41(a)(2) to judge the Government’s authority to dismiss a qui tam action. That provision states that “once an action has passed the ‘point of no return,’ with the filing of the defendant’s responsive pleading, then ‘an action may be dismissed at the plaintiff’s request only by court order, on terms that the court considers proper.’” Importantly, a district court’s decision to dismiss under that provision is governed by an abuse of discretion standard. With that standard in mind, the Third Circuit concluded that the District Court did not abuse its “broad grant of discretion” under the Rule, thus affirming the dismissal.

Both relators and the Government have faced varying, irreconcilable standards when trying to ascertain whether the Government can move to dismiss a qui tam case. Now that the Supreme Court has the issue squarely before it, both sides in FCA litigation can be hopeful that there will finally be some clarity on this issue.

In re Grand Jury

Case No. 21-1397; Argument date to be determined

Issue:

Whether a communication involving both legal and non-legal advice is protected by attorney-client privilege when obtaining or providing legal advice was one of the significant purposes behind the communication.

Commentary:

A company and law firm were served with grand jury subpoenas demanding documents and communications for an ongoing criminal investigation. The law firm represents the company and has been providing it with legal advice on the tax consequences of its anticipated expatriation, in addition to helping the company prepare various tax filings. Then, the company’s owner became the target of a criminal investigation.

The company and the law firm partially complied with the subpoenas and produced thousands of documents. But they withheld other documents, citing the attorney-client privilege and work product doctrine for certain dual purpose documents and communications. The Government moved to compel, and the District Court granted the motion in part, finding both that the attorney-client privilege was not applicable and the crime-fraud exception to the privilege applied. After the company and law firm refused to produce the documents, the District Court held them in contempt. An appeal to the Ninth Circuit followed.

Recognizing that “some communications might have more than one purpose, especially ‘in the tax law context, where an attorney’s advice may integrally involve both legal and non-legal analyses[,]’” the Ninth Circuit adopted the “primary purpose test” for dual purpose communications. After reviewing the common law landscape of the work product doctrine and attorney-client privilege, the Ninth Circuit held that a dual purpose communication is privileged if the primary purpose of the communication was to obtain legal advice, as opposed to business or tax advice.

In adopting this test, the Ninth Circuit expressly left open whether the D.C. Circuit’s “significant purpose test” could apply in future cases, recognizing that “[e]ven though it theoretically sounds easy to isolate ‘the primary or predominant’ purpose of a communication, the exercise can quickly become messy in practice.” That said, the Ninth Circuit expressed some doubt on the merit of the significant purpose test, noting that it would “only change the outcome of a privilege analysis in truly close cases, like where the legal purpose is just as significant as a non-legal purpose.” In then left that test for another day and affirmed the District Court’s decision. The law firm petitioned for a writ of certiorari.

The law firm argued that the Ninth Circuit’s test invites courts to engage in an ex-post balance of subjective considerations on relative importance that the Supreme Court has rejected in the past. It also rejected the Seventh Circuit’s test, which states that a dual-purpose document is never privileged in the context of tax law. It accordingly urged the Court to hear its case and adopt the D.C. Circuit’s “significant purpose” approach, an approach crafted in 2014 by then-Judge Kavanaugh.

The Supreme Court granted certiorari on October 3, 2022.

The Jackson Walker team will monitor these cases and others that will likely be added to this year’s term. We will let you know how and why the Court rules on these important matters.

The opinions expressed are those of the authors and do not necessarily reflect the views of the firm, its clients, or any of its or their respective affiliates. This article is for informational purposes only and does not constitute legal advice. For questions related to these cases, please contact Jennifer Freel, Michael Murtha, or a member of the Investigations & White Collar Defense practice.

Meet Jennifer

Jennifer S. Freel is a partner in the Investigations & White Collar Defense practice of Jackson Walker’s Austin office. A former federal prosecutor, Jennifer advises businesses and individuals under investigation by the government and conducts internal investigations for companies seeking an independent party. She also represents clients in civil disputes at the pre-trial, trial, and appellate levels in state and federal court. She is an elected Fellow of the Texas Bar Foundation, a member of the Texas Supreme Court Historical Society’s Board of Trustees, a past chair of the Criminal Law Section of the Federal Bar Association, and a past president of the Austin Chapter of the Federal Bar Association.​​​​ She has been ranked among the top Texas attorneys for Litigation: White-Collar Crime & Government Investigations by Chambers USA: America’s Leading Lawyers for Business since 2021, and was named among The Best Lawyers in America for Criminal Defense: White Collar (Austin) in 2022.

Meet Michael

Michael J. Murtha is an attorney in the Trial & Appellate Litigation and Investigations & White Collar Defense practices of Jackson Walker’s Dallas office. A former federal clerk, Michael is experienced in legal drafting, courtroom hearings, complex commercial litigation, and white collar defense. Prior to Jackson Walker, Michael served as a judicial law clerk to the Honorable Edith Brown Clement of the U.S. Court of Appeals for the Fifth Circuit and to the Honorable Amos L. Mazzant, III of the U.S. District Court for the Eastern District of Texas. He also previously served as a law clerk in the Texas Office of the Solicitor General and advised Texas Senator John Cornyn’s office during the confirmation of Justice Amy Coney Barrett.