Prosecutors are testing the bounds of the “right to control” theory against Nevin Shetty, a former CFO facing wire fraud charges for Shetty’s $35 million investment of company funds in a stablecoin cryptocurrency account at HighTower Treasury.
At issue is that by failing to disclose the nature of the investment and his ownership, Shetty deprived his employer Fabric—a deprivation prosecutors contend amounts to fraud. Legal experts, however, assert that this theory dangerously broadens federal fraud statutes, sidestepping Supreme Court precedent and threatening to criminalize routine business decisions.
The Right to Control Theory in Fraud Cases
The “right to control” theory has become a focal point in fraud cases involving business decisions, especially those made with an element of omission or nondisclosure. The theory suggests that individuals can be held criminally liable if their actions deprive a party of economically valuable information, preventing them from making fully informed decisions regarding their property or assets. In the Shetty case, prosecutors claim that by failing to disclose his interest in HighTower, Shetty denied Fabric the chance to make an informed decision about its assets, thus amounting to fraud.
But in Ciminelli v. United States (2023), the Supreme Court, in a 9-0 ruling, firmly rejected this broad interpretation of fraud law, ruling that federal statutes like wire fraud were never intended to cover the deprivation of intangible rights, such as control over property, but only tangible property or money itself. The ruling clarified that the “right to control” cannot be classified as property under federal fraud statutes, narrowing the grounds on which such cases can be prosecuted. Nonetheless, prosecutors continue to rely on this theory, arguing that Shetty’s actions constitute a fraud scheme that deprived Fabric of its ability to exercise full control over its assets.
Prosecutorial Overreach
Prosecutors allege that Shetty secretly invested Fabric’s funds in a volatile asset—cryptocurrency—knowing the board had expressed a preference for conservative investments. This, they claim, deprived Fabric of its ability to exercise control over its funds by choosing a safer, board-approved investment. However, as Shetty’s defense team points out, this theory transforms what is essentially a workplace policy dispute into a criminal matter. Experts caution that prosecutorial overreach poses broader risks.
This prosecutorial strategy has sparked concerns within the legal community. According to the National Association of Criminal Defense Lawyers (NACDL), who filed an amicus brief supporting Shetty’s motion to dismiss, prosecutorial reliance on the right to control theory represents a significant overreach. The NACDL argues that by focusing on nondisclosure rather than a clear intent to deceive or deprive, the government’s interpretation “risks criminalizing even routine business judgments,” blurring the line between unethical business practices and criminal fraud.
If successful, the government’s approach could establish a legal precedent allowing business disputes—whether related to investment decisions or executive compensation—to be prosecuted as fraud, vastly expanding federal jurisdiction in corporate governance matters. “The government’s maximally flexible interpretation would empower federal prosecutors—without congressional authorization—to “enforce their view of integrity in broad swaths of state and local policymaking” warns the NACDL “to transform their mistaken interpretations of internal company policies into trip wires for criminal liability”.
The Ciminelli Ruling and the Restriction on Federal Fraud Statutes
In rejecting the right to control theory, the Ciminelli decision represented a decisive moment in the Supreme Court’s long-standing effort to limit overbroad interpretations of federal fraud statutes. The ruling emphasized that fraud requires a tangible deprivation—namely, an intended loss of money or property—not merely a lost opportunity to make a more informed choice. This decision follows a series of recent cases, including Skilling v. United States (2010) and Kelly v. United States (2020), in which the Court narrowed the scope of federal fraud statutes, requiring clear evidence that a defendant intended to deprive the victim of something concrete.
Legal scholars observe that the Shetty case appears to clash with the Ciminelli precedent. Despite the ruling, the prosecution has maintained that Shetty’s nondisclosure of the nature of the investment and his ownership interest in HighTower was enough to constitute fraud. However, under Ciminelli, the right to control one’s assets does not qualify as “property” under federal fraud laws; the statute requires that defendants intend to deprive their victim of a traditional, tangible property interest. Shetty’s defense argues that the prosecution is attempting to impose criminal liability in an area recently deemed outside the reach of federal law.
Indeed, the allegations against Shetty could be perceived as an attempt to punish him for a breach of corporate ethics rather than criminal fraud. While self-dealing or failing to disclose conflicts of interest may violate corporate fiduciary standards, they do not meet the criteria for criminal prosecution under wire fraud statutes. The use of the right to control theory in this context, legal experts argue, opens a path to criminalizing breaches of corporate policy that, while perhaps unethical, are not inherently criminal.
Business Decisions and the Boundaries of Fraud
At issue in the Shetty case is the interpretation of whether an investment, which lost value, constitutes fraud simply because it appears high-risk in hindsight. The government’s argument hinges on equating nondisclosure of information with property, an approach the Supreme Court has consistently rejected in cases like Ciminelli and Kelly. To hold Shetty liable under wire fraud, the government must demonstrate that he intended to defraud Fabric of its assets—not merely that he invested in a way the board would have opposed if fully informed.
The prosecution’s case relies on painting Shetty’s investment decision as an intentional attempt to deceive and harm his employer. However, legal experts point out that Shetty’s investment in HighTower was ultimately designed to benefit Fabric. HighTower offered Fabric a guaranteed return of 6%, while any returns above this threshold would have benefited HighTower, indirectly benefiting Shetty. This arrangement, while self-interested, does not imply intent to deprive Fabric of its assets, making it questionable as a basis for wire fraud. In fact, courts have repeatedly ruled that self-dealing does not meet the standard for fraud unless it involves tangible deprivation of property.
The defense team argues that prosecuting Shetty for fraud under these circumstances could have significant ramifications for executive decision-making. High-stakes investments often involve a degree of risk, and business leaders frequently make judgment calls for the benefit of the business but may not algin with the board of directors. Prosecutors scale a slippery slope of criminalizing any decision that loses money and which the level of risk can be perceived differently at different points in time.
Repercussions for Corporate Governance and Federal Jurisdiction
Should the government succeed in this case, it could set a precedent that significantly expands the scope of federal fraud statutes to encompass a wide range of business decisions. This would be particularly problematic for corporate executives and investment professionals. Expanding fraud statutes to include business decisions made in the absence of theft or misappropriation risks transforming federal prosecutors into enforcers of corporate ethics, a role traditionally reserved for company boards and civil courts.
Prosecutorial reliance on the right to control theory also raises concerns about federal overreach in corporate governance. The Supreme Court has long warned against expansive interpretations of federal statutes that encroach upon areas traditionally governed by state law or corporate policy. This case could serve as a pivotal test of federal jurisdiction and the boundary between corporate governance and criminal law.
Conclusion: Defining the Limits of Fraud
The case against Nevin Shetty illustrates a growing tension between unchecked prosecutorial ambition and judicial prudence in the application of federal fraud statutes. While Shetty’s decision to invest in HighTower may have breached corporate fiduciary duties, it did not result in a tangible deprivation of Fabric’s assets, a crucial distinction highlighted in Ciminelli. By asserting that nondisclosure alone can constitute fraud, the government risks opening the door to overcriminalization, effectively making federal fraud laws an all-encompassing catchall for complex business disputes.
As the Shetty case progresses, it will challenge the courts to clarify the line between potentially unethical business conduct and criminal fraud. Legal scholars emphasize the importance of upholding the Supreme Court’s guidance in Ciminelli and other cases to prevent an erosion of the protections that federal statutes afford. The outcome of this case will likely have significant implications for business leaders and the scope of prosecutorial power, underscoring the need for clear boundaries that respect both corporate autonomy and the proper reach of federal fraud laws.
