US: New Definition of ‘Fraud’ Wipes Out High-Profile Prosecutions
Aug. 3, 2023
Scandals in auditing, college admissions and a hedge fund are all hit by Supreme Court ruling
Fraud doesn’t mean what it used to. A string of high-profile federal prosecutions are falling apart as courts apply a newly narrowed legal definition of the crime.
The latest case came this week in the prominent “steal the exam” auditing case. Other prosecutions, in the Varsity Blues college-admissions scandal and a hedge-fund trading case involving confidential government data, also were dismissed.
The failed prosecutions are casualties of a Supreme Court decision that threw out the fraud convictions of two political aides to former New Jersey Gov. Chris Christie. That scandal involved a political retribution scheme to cripple a town near the George Washington Bridge with traffic jams. The “Bridgegate” case wasn’t fraud because it didn’t take money or property, the justices found.
In the latest fallout from Bridgegate, Manhattan federal prosecutors said this week that David Middendorf, the former No. 2 auditor at Big Four accounting firm KPMG LLP, shouldn’t have been convicted of wire fraud over his role in a scheme to obtain confidential information from his regulator. The conviction of Jeffrey Wada, who worked at the regulatory agency, also should be set aside, the Manhattan U.S. Attorney’s Office told a court on Monday. The appeals court still has to approve the prosecutors’ application.
Middendorf and other partners at KPMG improperly obtained advance information about which of the firm’s audits would be inspected by the Public Company Accounting Oversight Board. Wada, who prosecutors said was unhappy with how the PCAOB treated him, funneled the tips to KPMG, according to the charges. Four other former KPMG auditors pleaded guilty for their participation in the scheme.
KPMG had struggled on recent PCAOB reviews of its work, and executives hoped to glean information that would make it easier to prepare for the regulators’ exam, authorities said. KPMG said at the time that audit quality “has been and continues to be a top priority across all levels of KPMG.”
Prosecutors conceded this week that information taken from the PCAOB didn’t constitute property, a requirement for charging wire fraud, according to the Supreme Court. The undisclosed list of audit inspections had value to regulators, but it didn’t have the economic value that is necessary to support a fraud claim.
Prosecutors commonly use wire fraud to go after a variety of white-collar crimes because the law is written broadly. The recent dismissals are a sign that enforcers have less flexibility today to use wire fraud to go after conduct that looks dodgy—but according to courts isn’t always criminal.
“The wire fraud statute has been interpreted by the Justice Department extremely broadly, and the Supreme Court has unanimously rejected a number of those interpretations,” said Michael Levy, a white-collar defense lawyer and former federal prosecutor in Washington.
An attorney for Middendorf declined to comment. An attorney for Wada didn’t respond to a request seeking comment.
The Middendorf case comes on the heels of other collapsed prosecutions. In May, an appeals court in Boston tossed most charges against two parents who were found guilty of fraud in 2021 as part of the Varsity Blues college-admissions cheating case. The three-judge panel said admissions slots at the University of Southern California didn’t qualify as property for the purposes of charging wire fraud.
In December, the U.S. Court of Appeals for the Second Circuit said fraud charges against a political-intelligence consultant, David Blaszczak, and two hedge-fund traders should be dismissed. Prosecutors in 2017 charged Blaszczak with funneling tips about insurance reimbursement levels for cancer treatments and kidney dialysis to a hedge fund that traded on them.
The tips, which were lucrative for the hedge fund, didn’t have economic value for the Centers for Medicare & Medicaid Services and therefore didn’t qualify as property, according to the majority of the panel that heard the appeal. Prosecutors agreed after the Supreme Court’s Bridgegate decision that fraud charges didn’t apply in the Blaszczak case.
One judge in the Blaszczak case disagreed, writing that trading tips shouldn’t be equated with the lane closures on the George Washington Bridge. The outcome “effectively permits sophisticated insiders to leverage their access to confidential government information and sell it to the highest bidders,” Judge Richard J. Sullivan wrote in December.
The government’s losses in the KPMG and Blaszczak cases don’t mean authorities are unable to punish misconduct that fraud laws can’t reach, according to Levy and other attorneys. State prosecutors or civil regulators such as the Securities and Exchange Commission, which enforces its own antifraud statutes, can still pursue wrongdoing if it affects industries or markets they oversee.
Middendorf is still suspended from auditing the financial statements of public companies, a punishment that was automatic after his felony conviction. His attorney declined Wednesday to say whether he will seek to have the suspension lifted.
[Wall Street Journal]
