FraudDefendants in the “Varsity Blues” university admissions scandal recently succeeded in their latest effort to beat back some of the charges against them by arguing that university admissions slots are not “property” for purposes of federal mail and wire fraud.  The decision in U.S. v. Ernst (D. Mass. 19-cr-10081) conflicts with the conclusion reached by another judge in a related case earlier this year.  This disagreement highlights the lack of clarity as to what constitutes “property” for mail/wire fraud.

As is familiar to readers of legal news and celebrity tabloids, the Varsity Blues defendants allegedly conspired to cheat on college entrance exams and admissions applications in order to fraudulently obtain admission to the schools.  The defendants in U.S. v. Ernst are coaches and an athletic director from the University of Southern California, Wake Forest University, and Georgetown University.  In the alleged scheme, applicants’ parents made payments to a college prep business and related charity run by Rick Singer.  Singer arranged for the payments to be passed along as bribes to college athletic recruiters, who in return accepted applicants without relevant athletic ability into the schools’ athletic programs.  Funds also were used to pay ringers to take exams and complete coursework on behalf of students whose parents thought their college applications needed a boost.

The defendants were charged with federal mail/wire fraud, which occurs when a person makes use of the mail or an interstate telephone call or electronic communication “for obtaining money or property by means of false or fraudulent pretenses, representations, or promises.”  18 U.S.C. §§ 1341.  Courts have determined that “property” may be intangible, such as a victim’s confidential business information.  Carpenter v. U.S., 484 U.S. 19 (1987), is the classic example where the Supreme Court held that non-public information concerning stocks is “property.”

But can the definition of “property” stretch to include university admissions slots?  The Ernst court held that it cannot, opining that university admissions slots do not have traditional commercial value like the confidential business information in Carpenter and similar cases, nor were they treated by the universities as an intangible property asset.

The Ernst court relied on Cleveland v. United States, in which the Supreme Court held that video poker licenses awarded by the state of Louisiana did not constitute “property.”  531 U.S. 12 (2000).  The Cleveland defendants used false statements to obtain video poker licenses.  The Supreme Court held that, although this deprived the state of its sovereign right to choose who obtained the licenses, it did not deprive the state of “property” as that concept traditionally has been understood.  As the Court further noted, the licenses only became “property” when placed in the hands of the recipients.

The Ernst court also cited the recent Supreme Court decision in Kelly v. U.S., 140 S. Ct. 1565 (2020), the “Bridgegate” case.  There, deputies of New Jersey Governor Chris Christie reduced access to traffic lanes in Fort Lee leading to the George Washington Bridge as a means of political retribution against Fort Lee’s mayor, a Christie critic.  This summer, the Supreme Court rejected the government’s effort to expand the definition of “property” to include either the physical lanes of the roadway or the labor of the government employees who engineered the lane realignment.  The Supreme Court determined that the scheme was directed not at obtaining government property, but at altering a regulatory decision.  Any cost imposed on the local bridge authority was not property that the defendants “sought to obtain” but rather was an “incidental byproduct” of the defendants’ conduct.

In holding that the university admissions slots were not “property,” Ernst rejected the government’s reliance on U.S. v. Frost, a Sixth Circuit decision concerning fraudulently awarded university degrees.  11 125 F.3d 346 (6th Cir. 1997). The court determined that Frost was not on point:  the question the Sixth Circuit faced was not whether the university had been fraudulently deprived of property, but rather whether the university had been deprived of the honest services of its employees (i.e., honest services fraud).  The analysis undertaken by the Sixth Circuit “did not wrestle with whether the degrees amounted to ‘intangible property rights’ under the standard set forth in Carpenter.”  Furthermore, Frost predated the Supreme Court’s decisions in Cleveland and Kelly.

The Ernst decision might suggest that there is finally a clear boundary line around what is rightly considered “property” for the purposes of mail/wire property fraud, and that this boundary turns on whether the alleged property has commercial value and can be monetized.  But in fact, this boundary is not so well-defined.  Another judge in the same court came to the opposite conclusion in a related Varsity Blues case this summer, United States v. Sidoo (D. Mass. 1:19-cr-10080).  Sidoo relied on Frost to hold that “the definition of ‘property’ extends readily to encompass admission slots.”  Sidoo focused on the monetary and commercial aspects of university admissions, noting for example that the admission of unqualified students hurts a school’s reputation, which in turn diminishes its ability to attract qualified tuition-paying students and solicit donations.

Courts in other districts continue to grapple with the definition of property.  For example, the Second Circuit recently held in a 2-1 decision in United States v. Blaszczak (2d Cir. 18-2811, Dec. 30, 2019) that a governmental regulatory agency’s confidential information is “property” akin to the confidential business information in Carpenter, because the agency had a “property right in keeping confidential and making exclusive use” of that information before announcing its regulatory position.  The Second Circuit opined that it is not required that a property interest be “economic” in nature, but nonetheless the agency had an economic interest in the information in Blaszczak, because the leaking of the information could hamper its decision-making process and make it less efficient.  And in United States v. Middendorf, (S.D.N.Y. 1:18-cr-36 (JPO), July 17, 2018), a New York district court held that confidential information belonging to the Public Company Accounting Oversight Board which was leaked to one of the accounting firms subject to its supervision was “property” for purposes of the wire fraud statute.

The Blaszczak defendants filed a petition for certiorari, citing extensively to Kelly, which was decided by the Supreme Court after the Second Circuit’s Blaszczak decision.  The government has requested that the Supreme Court vacate the Second Circuit’s decision and remand the case for further consideration in light of Kelly.  The Supreme Court has not yet decided whether to grant the certiorari petition.  Meanwhile, the trial defendants in Middendorf have appealed their convictions to the Second Circuit, but oral argument has not yet been scheduled.  So it appears that the Second Circuit, and possibly the Supreme Court, will have additional opportunities to explain what does and does not qualify as “property” for the purposes of federal mail/wire fraud.  In the meantime, the Varsity Blues cases continue to provide an interesting angle for examination of this enduring question.