June 28, 2010

U.S. Supreme Court Curtails Federal "Honest Services" Fraud Statute

On June 24, the U.S. Supreme Court, in Skilling v. United States and two companion cases, sharply limited the scope of the federal “theft of honest services” fraud statute, 18 U.S.C. § 1346.  In Skilling, it ruled that the theft of honest services statute is unconstitutionally vague except in cases involving bribery and kickback schemes.  It thus reversed one count of the conviction of Jeffrey Skilling, the former Chief Executive Officer of Enron, and overturned appellate court decisions in criminal cases involving media executive Conrad Black and an Alaska state politician.  The decision squarely rejected the statute’s constitutionality in cases where public officials or private-sector employees are charged with engaging in self-dealing or having undisclosed conflicts of interest, but in which prosecutors cannot prove a bribery or kickback scheme. 

Background: Theft of Honest Services Fraud

Since the mid-20th century, federal courts had held in a range of cases that the federal mail and wire fraud statutes encompassed not only fraud that caused a deprivation of money or property, but also where the deception caused intangible harm – especially government officials’ betrayals of the public trust.  But in 1987, in McNally v. United States, the Supreme Court struck down the “theft of honest services” variety of mail and wire fraud as unsupported in the legislative history of the mail and wire fraud statutes.  Congress responded the following year by enacting Section 1346, reinstating the doctrine as a matter of law.  The statute provides that for purposes of the federal mail and wire fraud statutes, “the term ‘scheme or artifice to defraud’ includes a scheme or artifice to deprive another of the intangible right of honest services.”  

Expansive Use of the Doctrine

Since its enactment, the honest-services fraud statute has been a favorite charging statute for federal prosecutors, particularly in public corruption cases.  Currently, for example, federal prosecutors are using the statute (among others) to prosecute former Illinois Governor Rod Blagojevich for his alleged attempt to sell the U.S. Senate seat formerly held by President Obama.  The statute has also been used to charge a wide range of conduct by public officials as well as private actors.  For example, in 1996, a federal appeals court upheld the conviction of two Baylor University basketball coaches for helping basketball recruits violate NCAA rules to obtain scholarships.  In a 2006 case, a Wisconsin state employee was convicted of honest services fraud based on her decision to award a travel services contract – even though the contract went to the lowest bidder, consistent with applicable rules – because the company had contributed to the political campaign of the governor. 

As a result of the statute’s tremendous potential breadth, federal appeals courts over the last two decades repeatedly expressed concern that the statute violates due process rights by failing to provide fair notice to prospective defendants of what conduct may violate the statute.  The federal courts were forced to develop an unusual patchwork of rules, varying from circuit to circuit, designed to clearly mark the outer boundaries of the statute to prevent every ethical lapse from being construed as a federal crime.

The Skilling, Black and Weyhrauch Cases

The three theft-of-honest-services cases the court addressed illustrate the statute’s broad range and the lower courts’ struggles to limit it.  Jeffrey Skilling was convicted on 18 counts of securities fraud, insider trading and lying to Enron’s auditors, as well as a conspiracy charge that he deprived Enron and its shareholders of the honest services that he owed them.  Conrad Black, the former chair and CEO of Hollinger International, was convicted on three counts of depriving Hollinger of his honest services by paying himself illegitimate “noncompetition” fees that he did not disclose to Hollinger’s board of directors.  Bruce Weyhrauch, a state representative in Alaska, was charged with soliciting future employment from an oil services company at a time when the legislature was considering tax legislation affecting the company. 

Skilling argued that the statute should be struck down altogether, while the Justice Department claimed that it appropriately criminalized undisclosed self-dealing by any public or private employee.  The Supreme Court, in a six-to-three decision, took a middle course.  It held that the statute as it had been interpreted was impermissibly vague.  But it reviewed the pre-1987 theft of honest services case law and found that the “solid core” of those cases before the McNally decision involved fraudulent schemes to deprive another of honest services through bribes or kickbacks.   It held that to survive the due process challenge, the statute must be read to apply only to “the bribe-and-kickback core of the pre-McNally case law.”   The honest services statute, under its limiting construction, met several key goals:  it “establish[es] a uniform national standard, define[s] honest services with clarity, reach[es] only seriously culpable conduct, and accomplish[es] Congress’s goal of ‘overruling’ McNally.”  As a result, the court reversed the lower courts’ rulings in all three of the cases before it insofar as they upheld the Section 1346 convictions, sending the cases back to the lower courts for further proceedings.  In two of the three, Skilling and Black, it noted that no bribery or kickback scheme was either alleged or proven.

The Future of Theft of Honest Services

The effect of the court’s opinion in Skilling is to take away from prosecutors a tool that they increasingly used to prosecute ethical violations where they could not prove either victim harm or that the payment or inducement had affected any official action.  As narrowed by the court, Section 1346 may be of relatively limited value to prosecutors who already have federal bribery and extortion statutes on the books.  The court also expressly noted that if Congress wishes to extend the reach of the statute, it would have to proceed cautiously – “to employ standards of sufficient definitiveness and specificity to overcome due process concerns.”