'Obtainable Property' and the Mail and Wire Fraud Statutes

The Hobbs Act defines extortion as “the obtaining of property from another” induced by wrongful threats. (The Court assumed that ' 875(d) defines extortion the same way). In a special verdict forum, the jury was asked whether the property that Sekhar allegedly attempted to extort consisted of: 1) the State's commitment to invest with Sekhar's fund; 2) the Comptroller's approval of the commitment; or 3) the general counsel's recommendation to approve the investment. The jury chose only the third option.

The principal issue before the Supreme Court was whether the case involved “property” that can be the subject of a Hobbs Act extortion. The government argued that the general counsel's “right to give disinterested legal advice to the State Comptroller free from threats” constituted “property” under the Hobbs Act. Sekhar argued that such an intangible right was far too tenuous to be “property” and that, at most, Sekhar's conduct constituted the crime of coercion under New York state law.

'Obtainable Property'

That the Supreme Court unanimously reversed Sekhar's conviction is perhaps unsurprising. But the underlying reasoning, on which the Court was not united, warrants attention. A concurring opinion, authored by Justice Alito and joined by Justices Kennedy and Sotomayor, maintained that the general counsel's right to make a recommendation is not “property” that is capable of being extorted under the Hobbs Act. Justice Scalia's majority opinion for the Court, however, demurred on the “property” issue (“[w]e are not sure of that”), and instead rested on the term “obtaining.” The Court held that “[w]hether one considers the personal right at issue to be 'property' in a broad sense or not, it certainly was not obtainable property under the Hobbs Act.”

The “defining feature” of obtainable property, the Court emphasized, is that it must be “transferable ' that is, capable of passing from one person to another.” Citing its prior ruling in Scheidler v. NOW, 537 U.S. 393 (2003), the Court explained that obtaining property requires “not only the deprivation but also the acquisition of property.” That is, “it requires that the victim 'part with' his property and that the extortionist 'gain possession' of it.” Scheidler, Sekhar said, stands for the principle that the defendant “must pursue something of value from the victim that can be exercised, transferred, or sold.”

The general counsel's right to give his disinterested legal opinion lacked this defining element of obtainable property ' “it cannot be transferred, so it cannot be the object of extortion under the statute.” In debunking the government's theory, Justice Scalia asked rhetorically: “But what, exactly, would the petitioner have obtained for himself? A right to give his own disinterested legal opinion to his own client free of improper interference? Or perhaps, a right to give the general counsel's disinterested legal opinion legal opinion to the general counsel's client?” Justice Scalia's answer: “Either formulation sounds absurd, because it is.”

Sekhar's Implications

Is Sekhar's concept of “obtainable property” transferable to mail and wire fraud prosecutions? Like the Hobbs Act, the statutory text for mail and wire fraud (18 U.S.C. ” 1341 and 1343) ' as well as bank fraud (18 U.S.C. ' 1344) and securities fraud (18 U.S.C. ' 1348) ' addresses schemes “for obtaining money or property.” That language strongly suggests that a mail or wire fraud scheme must seek not merely the deprivation, but also the acquisition, of property.

Yet that argument has been shot down repeatedly. Several federal circuit courts held post-Scheidler that neither the mail nor the wire fraud statute requires that a defendant “obtain” property before violating the statute. Rather, it is enough that the defendant merely deprived another of property. Porcelli v. United States, 404 F.3d 157, 161-62 (2d Cir. 2005); United States v. Hedaithy, 392 F.3d 580, 601-02 & n.21 (3d Cir. 2004); United States v. Welch, 327 F.3d 1081, 1108 & n.27 (10th Cir. 2003). Sekhar, however, may breathe new life into the argument that these cases are wrongly decided, and that federal fraud, no less than federal extortion, requires proof that the defendant sought to obtain property.

Notably, Sekhar relied on Cleveland v. United States, 531 U.S. 12 (2000), a mail fraud prosecution involving misrepresentations made to obtain a state video poker license. The Court reversed the conviction on the ground that a government regulator does not part with “property” when it issues a license. As described in Sekhar, Cleveland holds that “a 'license' is not 'property' while in the State's hands, and so cannot be 'obtained' from the State.” (Emphasis added). That characterization of Cleveland plainly assumes that, to violate the mail and wire fraud statutes, the scheme must have as its object not just property, but “obtainable property.”

The Right-to-Control Theory

Moreover, the Court was evidently unimpressed with one of the key arguments in the government's brief: that Sekhar committed extortion by attempting to exercise the general counsel's “right to control his own labor” or his “right to control the substance of his own recommendation.” Many lower federal courts have accepted the theory that depriving a victim of its “right to control” what it does with its property is sufficient to meet the property requirement for mail or wire fraud. The Supreme Court, however, has never addressed this theory. Sekhar's tacit rejection of the right-to-control argument does not bode well for the government when the issue arises in the mail or wire fraud context.

The right-to-control theory does not seem consistent with Sekhar's “obtainable property” test. Misrepresentations that induce a victim to do something with its property that it would not otherwise have done could logically be said to involve the deprivation of property. Less clear, in cases where the victim is not induced to part with any property, is how such a scheme would involve obtaining property. As in Sekhar, a right of control typically is not itself “transferable” ' the “defining feature” of' obtainable property. To say that the person making the alleged misrepresentations is thereby “obtaining” the victim's right to control its property would, in many cases, “make nonsense of words,” as Justice Scalia characterized the government's theory in Sekhar.

Text, Purpose, History

The Hobbs Act and the mail and wire fraud statutes do differ in one seemingly important respect. Hobbs Act extortion requires “the obtaining of property from another.” Mail and wire fraud, by contrast, encompass “any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises.” This, however, is a textual distinction without a difference.

In both Cleveland and McNally v. United States, 483 U.S. 350 (1987), the Supreme Court declined to interpret these two proscribed schemes independently and instead held that the money-or-property requirement of the “false or fraudulent pretenses” prong applies equally to the “scheme to defraud” prong. If the second prong's property requirement were construed to mean obtainable property ' as its plain language suggests ' that interpretation should likewise govern across the board. Such a construction would, moreover, be consistent with the second prong's provenance in the state-law crime of obtaining property by false pretenses. See James E. Grigsby, The Criminal Law ' 502 (1922) (elements of false pretenses include a false statement or representation made “with an intent of obtaining the property of another”).

Even setting aside the explicit statutory reference to “obtaining money or property,” inherent in a “scheme to defraud” is the concept of taking away property from the victim. When the mail fraud statute was enacted in 1872, the term “defraud” was understood to mean “[t]o deprive of right either by obtaining something by deception or artifice, or by taking something wrongfully, without the knowledge or consent of the owner.” Noah Webster, An American Dictionary of the English Language (rev ed. 1857). Indeed, the prefix “de-” signifies separation or removal. Congress could have prohibited the use of the mails to transmit misrepresentations designed to injure another's property. But that is not the statute it wrote.

Allowing prosecution of fraudulent schemes that contemplate only the deprivation ' and not also the obtaining ' of property would lead to clearly unintended results. For example, imagine a sleep-deprived homeowner who, in order to rid himself of the loud barking that is keeping him up at night, mails his neighbor a phony “free sample” of dog food that in fact contains poison. Surely he could be charged with malicious destruction of property under state law, and even with the federal felony of mailing nonmailable matter with the intent to injure property (18 U.S.C. ' 1716(j)(2)). But it seems wrong to say he has also committed a mail fraud. Fraud connotes more than a mere intent to damage or destroy another's property.

Conclusion

The federal courts have often had occasion to limit overly expansive interpretations of the mail and wire fraud statutes urged by federal prosecutors, as the Supreme Court did in McNally, Cleveland, and, more recently, Skilling v. United States, 130 S. Ct. 2896 (2010). The unmooring of mail and wire fraud from any requirement that the defendant seek to obtain money or property from a victim would appear to furnish another such occasion. And Sekhar's “obtainable property” requirement may furnish the means for doing so.

Gary Stein, a member of this newsletter's Board of Editors, is a partner with Schulte Roth & Zabel, LLP.

Announced the same morning as its landmark rulings on same-sex marriage, the Supreme Court's invalidation of a Hobbs Act conviction in Sekhar v. United States will not be the best-remembered decision of the last day of its 2012-13 Term. Yet for white-collar practitioners, Sekhar could prove significant indeed. The decision coins a new legal term ' “obtainable property” ' that not only will govern future Hobbs Act prosecutions, but also could limit the scope of the federal mail and wire fraud statutes.

The Decision in Sekhar

In Sekhar, the general counsel of New York State's pension fund had recommended to the State Comptroller that the State not invest with a fund managed by Giridhar C. Sekhar. The general counsel then received a series of anonymous e-mails threatening to disclose to his wife, the press and New York officials that he was having an extramarital affair, unless he changed his recommendation and urged that Sekhar's fund be awarded the investment. The e-mails were subsequently traced to Sekhar, who was charged with, and convicted of, attempted extortion in violation of the Hobbs Act, 18 U.S.C. ' 1951(a), and interstate transmission of extortionate threats, in violation of 18 U.S.C. ' 875(d).

The Hobbs Act defines extortion as “the obtaining of property from another” induced by wrongful threats. (The Court assumed that ' 875(d) defines extortion the same way). In a special verdict forum, the jury was asked whether the property that Sekhar allegedly attempted to extort consisted of: 1) the State's commitment to invest with Sekhar's fund; 2) the Comptroller's approval of the commitment; or 3) the general counsel's recommendation to approve the investment. The jury chose only the third option.

The principal issue before the Supreme Court was whether the case involved “property” that can be the subject of a Hobbs Act extortion. The government argued that the general counsel's “right to give disinterested legal advice to the State Comptroller free from threats” constituted “property” under the Hobbs Act. Sekhar argued that such an intangible right was far too tenuous to be “property” and that, at most, Sekhar's conduct constituted the crime of coercion under New York state law.

'Obtainable Property'

That the Supreme Court unanimously reversed Sekhar's conviction is perhaps unsurprising. But the underlying reasoning, on which the Court was not united, warrants attention. A concurring opinion, authored by Justice Alito and joined by Justices Kennedy and Sotomayor, maintained that the general counsel's right to make a recommendation is not “property” that is capable of being extorted under the Hobbs Act. Justice Scalia's majority opinion for the Court, however, demurred on the “property” issue (“[w]e are not sure of that”), and instead rested on the term “obtaining.” The Court held that “[w]hether one considers the personal right at issue to be 'property' in a broad sense or not, it certainly was not obtainable property under the Hobbs Act.”

The “defining feature” of obtainable property, the Court emphasized, is that it must be “ transferable ' that is, capable of passing from one person to another.” Citing its prior ruling in Scheidler v. NOW , 537 U.S. 393 (2003), the Court explained that obtaining property requires “not only the deprivation but also the acquisition of property.” That is, “it requires that the victim 'part with' his property and that the extortionist 'gain possession' of it.” Scheidler , Sekhar said, stands for the principle that the defendant “must pursue something of value from the victim that can be exercised, transferred, or sold.”

The general counsel's right to give his disinterested legal opinion lacked this defining element of obtainable property ' “it cannot be transferred, so it cannot be the object of extortion under the statute.” In debunking the government's theory, Justice Scalia asked rhetorically: “But what, exactly, would the petitioner have obtained for himself? A right to give his own disinterested legal opinion to his own client free of improper interference? Or perhaps, a right to give the general counsel's disinterested legal opinion legal opinion to the general counsel's client?” Justice Scalia's answer: “Either formulation sounds absurd, because it is.”

Sekhar's Implications

Is Sekhar's concept of “obtainable property” transferable to mail and wire fraud prosecutions? Like the Hobbs Act, the statutory text for mail and wire fraud (18 U.S.C. ” 1341 and 1343) ' as well as bank fraud (18 U.S.C. ' 1344) and securities fraud (18 U.S.C. ' 1348) ' addresses schemes “for obtaining money or property.” That language strongly suggests that a mail or wire fraud scheme must seek not merely the deprivation, but also the acquisition, of property.

Yet that argument has been shot down repeatedly. Several federal circuit courts held post-Scheidler that neither the mail nor the wire fraud statute requires that a defendant “obtain” property before violating the statute. Rather, it is enough that the defendant merely deprived another of property. Porcelli v. United States , 404 F.3d 157, 161-62 (2d Cir. 2005); United States v. Hedaithy , 392 F.3d 580, 601-02 & n.21 (3d Cir. 2004); United States v. Welch , 327 F.3d 1081, 1108 & n.27 (10th Cir. 2003). Sekhar, however, may breathe new life into the argument that these cases are wrongly decided, and that federal fraud, no less than federal extortion, requires proof that the defendant sought to obtain property.

Notably, Sekhar relied on Cleveland v. United States , 531 U.S. 12 (2000), a mail fraud prosecution involving misrepresentations made to obtain a state video poker license. The Court reversed the conviction on the ground that a government regulator does not part with “property” when it issues a license. As described in Sekhar, Cleveland holds that “a 'license' is not 'property' while in the State's hands, and so cannot be 'obtained' from the State.” (Emphasis added). That characterization of Cleveland plainly assumes that, to violate the mail and wire fraud statutes, the scheme must have as its object not just property, but “obtainable property.”

The Right-to-Control Theory

Moreover, the Court was evidently unimpressed with one of the key arguments in the government's brief: that Sekhar committed extortion by attempting to exercise the general counsel's “right to control his own labor” or his “right to control the substance of his own recommendation.” Many lower federal courts have accepted the theory that depriving a victim of its “right to control” what it does with its property is sufficient to meet the property requirement for mail or wire fraud. The Supreme Court, however, has never addressed this theory. Sekhar's tacit rejection of the right-to-control argument does not bode well for the government when the issue arises in the mail or wire fraud context.

The right-to-control theory does not seem consistent with Sekhar's “obtainable property” test. Misrepresentations that induce a victim to do something with its property that it would not otherwise have done could logically be said to involve the deprivation of property. Less clear, in cases where the victim is not induced to part with any property, is how such a scheme would involve obtaining property. As in Sekhar, a right of control typically is not itself “transferable” ' the “defining feature” of' obtainable property. To say that the person making the alleged misrepresentations is thereby “obtaining” the victim's right to control its property would, in many cases, “make nonsense of words,” as Justice Scalia characterized the government's theory in Sekhar.

Text, Purpose, History

The Hobbs Act and the mail and wire fraud statutes do differ in one seemingly important respect. Hobbs Act extortion requires “the obtaining of property from another.” Mail and wire fraud, by contrast, encompass “any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises.” This, however, is a textual distinction without a difference.

In both Cleveland and McNally v. United States , 483 U.S. 350 (1987), the Supreme Court declined to interpret these two proscribed schemes independently and instead held that the money-or-property requirement of the “false or fraudulent pretenses” prong applies equally to the “scheme to defraud” prong. If the second prong's property requirement were construed to mean obtainable property ' as its plain language suggests ' that interpretation should likewise govern across the board. Such a construction would, moreover, be consistent with the second prong's provenance in the state-law crime of obtaining property by false pretenses. See James E. Grigsby, The Criminal Law ' 502 (1922) (elements of false pretenses include a false statement or representation made “with an intent of obtaining the property of another”).

Even setting aside the explicit statutory reference to “obtaining money or property,” inherent in a “scheme to defraud” is the concept of taking away property from the victim. When the mail fraud statute was enacted in 1872, the term “defraud” was understood to mean “[t]o deprive of right either by obtaining something by deception or artifice, or by taking something wrongfully, without the knowledge or consent of the owner.” Noah Webster, An American Dictionary of the English Language (rev ed. 1857). Indeed, the prefix “de-” signifies separation or removal. Congress could have prohibited the use of the mails to transmit misrepresentations designed to injure another's property. But that is not the statute it wrote.

Allowing prosecution of fraudulent schemes that contemplate only the deprivation ' and not also the obtaining ' of property would lead to clearly unintended results. For example, imagine a sleep-deprived homeowner who, in order to rid himself of the loud barking that is keeping him up at night, mails his neighbor a phony “free sample” of dog food that in fact contains poison. Surely he could be charged with malicious destruction of property under state law, and even with the federal felony of mailing nonmailable matter with the intent to injure property (18 U.S.C. ' 1716(j)(2)). But it seems wrong to say he has also committed a mail fraud. Fraud connotes more than a mere intent to damage or destroy another's property.

Conclusion

The federal courts have often had occasion to limit overly expansive interpretations of the mail and wire fraud statutes urged by federal prosecutors, as the Supreme Court did in McNally , Cleveland , and, more recently, Skilling v. United States , 130 S. Ct. 2896 (2010). The unmooring of mail and wire fraud from any requirement that the defendant seek to obtain money or property from a victim would appear to furnish another such occasion. And Sekhar's “obtainable property” requirement may furnish the means for doing so.

Gary Stein, a member of this newsletter's Board of Editors, is a partner with Schulte Roth & Zabel, LLP.