Business School Ranking Scandal Tests The Scope Of Federal Fraud Statutes | Vinson & Elkins LLP
The federal wire fraud statute makes it a crime to effect, through the use of wires, “any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations or promises.”2 The Supreme Court has held that the statute “prohibits only deceptive schemes to deprive the victim of money or property.”3
Dr. Porat argues that the indictment should be dismissed because: (1) U.S. News rankings are not cognizable property interests; (2) the incidental effects on enrollment and donations do not make the alleged conduct a property crime; and (3) the victims were not defrauded.4 The court’s determination of these issues could help shape the outer bounds of criminal fraud.
Whether U.S. News Rankings Constitute Property.
The indictment alleges that Dr. Porat submitted inaccurate information to achieve higher rankings for certain Fox School programs. The court is being asked whether a U.S. News ranking constitutes a cognizable property right protected by the wire fraud statute.
While the mail and wire fraud statutes protect against deprivations of intangible property, such as confidential business information,5 courts have taken different positions on what forms of intangible property are covered by the fraud statutes. In United States v. Henry, the Third Circuit, which has appellate jurisdiction over the Pennsylvania court, held that a property right must be “traditionally recognized [and] enforceable” to fall within the ambit of the wire fraud statute.6 There, the defendants disclosed sensitive information to specific banks so that those banks could narrowly outbid others for deposits from the Delaware River Joint Toll Bridge Commission.
In Henry, the government argued that a fair bidding opportunity is a property right. The court disagreed. Although the right to exclude is a tenet of traditional property rights, a fair bidding opportunity does not guarantee a bidder’s right to exclude other bidders from the process. In the absence of the bidder’s right to exclude, the court held that a fair bidding process does not constitute a traditionally recognized and enforceable property right.
The Second Circuit’s decision in United States v. Carlo, however, stands in contrast to Henry. There, the court upheld jury instructions that defined a property interest as “the interest of a victim in controlling his or her assets,” without evaluating whether the interest was traditionally recognized and enforceable.7 In Carlo, the defendant misrepresented the status of his attempts to obtain financing for developers’ real estate projects. The court sustained the conviction because the defendant “caus[ed] the developers to make economic decisions about the viability of their real estate projects based on misleading information, [which] harmed the developers’ property interests.”8 Thus, the court held that property harms include “the deprivation of information necessary to make discretionary economic decisions.”9
Unlike Carlo, where the defendant directly lied to the real estate developers, here, U.S. News served as the conduit for Dr. Porat’s misrepresentations that allegedly harmed students’ property interests. Because of this fact and the holding in Henry, we suspect the court will support Dr. Porat’s position that a U.S. News ranking is not a property interest protected by the fraud statute.
Whether Effects on Enrollment and Donations Were Incidental Byproducts That Cannot Support a Wire Fraud Charge.
The indictment alleges that the distorted U.S. News rankings resulted in more applications, higher student enrollment, and a substantial increase in donations — effects Dr. Porat describes as “incidental” and “downstream.” He points to the recent Supreme Court precedent overturning the so-called “Bridgegate” convictions, which established that the loss to the victim of a wire fraud scheme cannot be “an incidental byproduct of the scheme.”10
Dr. Porat argues that the government’s indictment lacks a causal connection between his misrepresentations and any monetary effects on Fox School students, applicants, and donors.11 He asserts that, at best, the indictment concludes that he sought to increase the school’s prestige, not increase enrollment or gain some other benefit. The indictment’s allegations cut both in favor of and against this argument. On one hand, the indictment describes how the school’s enrollment changed simultaneously with its ranking;12 on the other hand, tuition rates decreased during the relevant period.13
Dr. Porat cites several cases holding that the causal connection between the alleged deceit and the victims’ loss must be direct and intentional, not tenuous and incidental.14 The government will likely argue that Dr. Porat’s misconduct constitutes direct and intentional deprivations. The court’s inquiry into this causation will likely resemble courts’ proximate cause analysis in Racketeering Influenced and Corrupt Organizations (“RICO”) cases.15
Whether Dr. Porat Defrauded the Victims.
According to the indictment, Dr. Porat’s false submissions to U.S. News allegedly defrauded the school’s “applicants, students, and donors out of money and property.”16 His actions purportedly resulted in better rankings, more applications, more students, and larger donations. But applicants were never guaranteed admission, students received the degree that they paid for, and donors never expected anything in return. So what property did Dr. Porat defraud them of? Dr. Porat’s defense team raised the same question in its motion to dismiss, positing that the victims may have been deceived but not defrauded.
Dr. Porat is not alone. As noted by several commentators, case law distinguishes between an in-actionable lie and an actionable lie to obtain a proprietary or monetary benefit.17 The latter situation only exists if Dr. Porat lied to U.S. News to obtain more tuition and/or donations. Further, even if Dr. Porat lied to U.S. News, he argues that the students could not be defrauded because U.S. News rankings do not impact the degree’s value. Dr. Porat, like many school deans, believes that the quality of a degree from the Fox School is not dictated by U.S. News, which precludes him from forming the intent to harm students or donors by attracting them to the Fox School. This argument could have the judge asking, “If that’s true, why lie at all?”
Potential Implications to the Scope of the Wire Fraud Statute.
The outcome of Dr. Porat’s case has potential impacts to both criminal and civil liability. Should the court hold that a wire fraud charge is viable in these circumstances, the wire fraud statute could potentially be interpreted as reaching corporate misrepresentations to media entities such as Yelp, Glassdoor, LinkedIn, and many others. Further, because wire fraud serves as a predicate act under RICO, defendants risk being found liable for treble damages in a civil case if a cognizable RICO scheme is proven. To reduce potential criminal and civil liability, companies should take precautions to ensure that they provide accurate information to independent entities that serve as a resource to potential consumers. In the meantime, Vinson & Elkins will continue to monitor and provide updates on the case against Dr. Porat.
1Kelly v. United States, 140 S. Ct. 1565 (2020).
2 18 U.S.C. § 1343.
3Kelly, 140 S. Ct. at 1571 (internal quotation marks omitted).
4See Motion to Dismiss (Dkt. 24), United States v. Porat, No. 21-cr-170 (E.D. Pa.) at 8, 10.
5See Carpenter v. United States, 484 U.S. 19, 25 (1987).
6United States v. Henry, 29 F.3d 112, 115 (3d Cir. 1994).
7 507 F.3d 799, 802 (2d Cir. 2007).
10Kelly, 140 S. Ct. at 1573.
11See Motion to Dismiss at 10–11.
12See Indictment at 3–5 (summarizing the enrollment changes).
14See Motion to Dismiss at 10–11 (citing Kelly, 140 S. Ct. at 1572; United States v. Palma, No. 19-20626, 2020 U.S. Dist. LEXIS 214675 (E.D. Mich., Nov. 17, 2020); United States v. Berroa, 856 F.3d 141, 147 (1st Cir. 2017)).
15See Anza v. Ideal Steel Supply Corp., 547 U.S. 451, 461 (2006) (“[W]hether the alleged violation led directly to the plaintiff’s injuries.”).
16See Indictment at 26.
17See Orin Kerr, Is it a Federal Crime for a University to Submit Fake Numbers to U.S. News to Change Its Ranking?, Reason (Apr. 23, 2021) (citing United States v. Takhalov, 827 F.3d 1307, 1314 (11th Cir.), as revised (Oct. 3, 2016), opinion modified on denial of reh’g, 838 F.3d 1168 (11th Cir. 2016)) https://reason.com/volokh/2021/04/23/is-it-a-federal-crime-for-a-university-to-submit-fake-numbers-to-u-s-news-to-change-its-ranking/.