Supreme Court Limits Reach of "Honest Services" Statute

Competition, Antitrust & White-Collar Crime Update

Date: June 25, 2010

Overview

On June 24, the United States Supreme Court substantially limited the scope of one of federal prosecutors' favorite tools for pursuing politicians and corporate executives - the "honest services" fraud statute, 18 U.S.C. ? 1346. The Court unanimously held that prosecutors have gone too far in expanding the scope of a statute that makes it a crime to deprive the public or a company "of the intangible right of honest services." The primary case, Skilling v. United States, grew out of the Enron debacle. In Skilling, the Court held that the statute only applies where there is a violation of a fiduciary duty and a clear link to either a bribe or a kickback.1 Such conduct has long been a crime for public officials and persons dealing with them under a separate statute that does not apply to private businesses. Therefore, although the decision limits the reach of the statute, it preserves federal criminal jurisdiction under the "honest services" statute over corporate executives and employees who engage in bribery and kickback arrangements.

Background

Prior to 1987, a series of appellate court decisions developed what came to be known as the "honest services" doctrine of mail fraud and wire fraud. That doctrine primarily took shape in cases of public corruption where the victim suffered no tangible loss, but a public official was influenced in the performance of his or her functions. The classic example was the prosecution of a public official who accepted a gift or payment in connection with a contract with a third party, even though the public did not lose any money as a result of the scheme, for example where the contract price and terms were favorable to the public agency. The theory was that the public possessed a right to the official's honest services, and even where there was no loss of money as a result of the official's influence being rewarded, the public was nonetheless deprived of the intangible right to completely independent and objective judgment.

In 1987, in McNally v. United States, the Supreme Court held that mail fraud and wire fraud required that the fraud victim must suffer some form of property loss. Therefore, absent a clear statute adopted by Congress, prosecutors could not rely on the "honest services" doctrine unless they could show that the victim was harmed in a tangible way. In response to McNally, Congress swiftly enacted the "honest services" statute, which provides that "for the purposes of ... mail fraud and wire fraud, the term 'scheme or artifice to defraud' includes a scheme or artifice to deprive another of the intangible right of honest services." Because the language of the statute was broad and imprecise, and was not limited to public corruption, the statute exposed private business people to criminal charges for their dealings with each other. As a result, it has been used by federal prosecutors to impose criminal penalties for a wide swath of business conduct.

Skilling v. United States

In prosecuting Skilling, the government argued that Enron's former chief executive officer conspired to commit "honest services" wire fraud by deceiving investors about the true financial performance of Enron while he, in turn, received increased compensation. On appeal, Skilling argued that his conviction should be vacated because the statute didn't adequately define the conduct it prohibited, and it allowed prosecutors arbitrarily to determine when a violation occurred.

After reviewing the statute's history, the Supreme Court held that the statute would be unconstitutionally vague if the Court did not limit its reach. In doing so, the Court stated that the core type of conduct that the doctrine prohibited before the enactment of the 1987 statute included bribes or kickbacks. Prosecuting individuals without establishing a link to bribery or a kickback scheme, the Court stated, constituted a violation of due process. In Skilling's case, because the government had conceded that his conduct did not include a bribe or a kickback, the Court held that he did not commit "honest services" fraud. As a result, the Court sent the case back to the lower courts to determine whether the clear error in the jury instruction was harmless, because other grounds may sufficiently support his conviction.

In reaching this conclusion, the Court rejected the government's argument that the statute should be used to prosecute a broad range of cases involving undisclosed self-dealing by public officials or private employees, absent evidence of bribery or a kickback. The Court recognized that cases pre-dating McNally had held that self-dealing, concealment of material information and non-disclosure of a conflict of interest, standing alone, violated the "honest services" doctrine. The Court stated, however, that those cases were too infrequent and inconsistent among the circuits to fall within the new boundaries set by the Court's narrow construction of the statute. Nevertheless, the Court once again invited Congress to "speak more clearly" if it wishes to prohibit additional categories of conduct. The Court cautioned, however, that a new statute would have to be far more precise in its description of the acts to be prohibited.

Implications

Significantly, the Court did not strike down the statute as unconstitutional on its face. Rather, it narrowed the scope of the statute so that it only applies to circumstances where a party violates his fiduciary duty and the prosecution can link that breach to a bribe or kickback. This is customarily referred to as proof of a quid pro quo. Additionally, the Court observed that this construction parallels separate existing provisions for public officials, but preserving the "core" of the honest services statute continues federal bribery jurisdiction over corporate executives and employees.

It appears that, in the aftermath of the most recent financial crisis, Congress may respond to the Court's suggestion and enact a statute that again attempts to expand the scope of "honest services" crimes. Senator Patrick Leahy, chairman of the Senate Judiciary Committee, has already criticized the Court's ruling, stating that the Court "has once again disregarded the will of Congress and undermined those efforts to protect Americans from abuses by powerful corporate and political interests."

Footnote

1Following its decision in Skilling, the Court held that the trial court's jury instruction addressing "honest services" fraud in the Conrad Black trial was defective and remanded his case to the trial court. Similarly, the Court also remanded the third companion case, against Alaska State Senator Weyhrauch, in an unsigned, per curiam opinion.