In a decision dated June 24, 2010, the Supreme Court significantly narrowed the scope of the honest-services statute, 18 U.S.C. § 1346, finding that it only applies to schemes involving bribery or kickbacks. The Court further held that undisclosed self-dealing or conflicts of interest by a public official or a private employee is not criminalized by the honest-services statute.
"Honest-Services" Statute
Section 1346 of Title 18, United States Code, commonly referred to as the honest-services statute, expands fraud offenses such as wire and mail fraud under Sections 1341 and 1343 to include cases where victims were not deprived of money or property. It provides, "[f]or the purposes of this chapter, the term 'scheme or artifice to defraud' includes a scheme or artifice to deprive another of the intangible right of honest services." The theory -- broadly stated -- is that public officials, private employees and other fiduciaries owe a duty to act only in the best interests of their constituents and employers.
A deprivation of "honest services" in a fraud prosecution does not require proof of loss of money or property, making it easier for prosecutors to use. Section 1346 has been used as a "catch all" charge, enabling the government to allege criminal liability where there is no direct tangible loss.
The Case
Jeffrey Skilling steadily rose through the ranks of the Enron Corporation, one of the world's leading energy companies. His career culminated with a six-month stint as chief executive officer, after which he left Enron. Less than four months after Mr. Skilling's departure, Enron declared bankruptcy. The government investigated Enron's collapse and concluded that officers, employees and others were part of a vast conspiracy to inflate Enron's stock prices by overstating the company's financial well-being.
The government prosecuted numerous individuals who allegedly participated in the scheme, including Mr. Skilling, who was indicted in July of 2004. Count One of the indictment charged Mr. Skilling with conspiracy to commit securities and wire fraud. In particular, it alleged that one objective of the conspiracy was to "deprive[e] Enron and its shareholders of the intangible right of [his] honest services." The indictment included over 25 counts charging violations of securities fraud, wire fraud, making false representations to Enron's auditors and insider trading. The jury found Mr. Skilling guilty of 19 counts, including the conspiracy charge.
On appeal, Mr. Skilling raised a host of challenges, including a challenge to his conspiracy conviction based on honest-services fraud. The U.S. Court of Appeals for the Fifth Circuit found that the jury was entitled to convict Mr. Skilling of honest-services fraud because: 1) Mr. Skilling materially breached his fiduciary duty to his employer and 2) the breach resulted in a detriment to his employer.
Mr. Skilling sought relief from the Supreme Court, which granted certiorari. One of his arguments for reversing his conviction was based on the honest-services objective of the conspiracy count. Mr. Skilling maintained that the honest-services statute is unconstitutionally vague. Alternatively, he argued that his conduct did not fall within the statute's ambit.
In considering Mr. Skilling's challenge, the Court first reviewed the origin and subsequent application of the honest-services statute. In a series of decisions beginning in the 1940s, the Courts of Appeal around the country interpreted the prohibition of "any scheme or artifice to defraud" in the mail and wire fraud statutes to include deprivations of intangible rights. The honest-services doctrine was used to target corruption where an offender profited, the betrayed party suffered no deprivation, and a third party, who had not been deceived, provided the enrichment. While these cases most often involved public officials, courts also applied the doctrine to private sector employees, particularly those who breached allegiance to their employers by accepting bribes or kickbacks.
In 1987, the Supreme Court halted the development of the honest-services doctrine with its decision in McNally v. United States. In that decision, the Court limited the scope of the mail fraud statute to deprivations of tangible property rights. The following year, Congress enacted Section 1346 designed specifically to overturn McNally and broaden the scope of the fraud statutes to cover intangible rights.
While recognizing that the Courts of Appeal have divided on their interpretation of the honest-services statute, the Supreme Court declined to invalidate the statute as irremediably vague. Ruling that the honest-services statute should be construed narrowly instead, the Court surveyed the honest-services decisions of the Courts of Appeal before McNally to determine Congress' intent in enacting Section 1346. Rejecting Mr. Skilling's argument that pre-McNally case law is a "hodgepodge of oft-conflicting holdings," the Court identified what it referred to as the "core" of those cases -- schemes involving bribes or kickbacks.
The Court rejected the government's contention that undisclosed self-dealing by a public official or private employee also was at the "core" of honest-services fraud. The Court acknowledged that reading the statute to proscribe a wider range of offensive conduct would raise due process concerns under the vagueness doctrine. Thus, to preserve the statute, the Court held that Section 1346 criminalizes only the bribery and kickback core of the pre-McNally case law.
Finally, the Court turned to whether Mr. Skilling's conduct violated Section 1346. Since the government did not allege or prove that Mr. Skilling solicited or accepted side payments from a third party in exchange for misrepresenting Enron's financial condition, the Court found that Mr. Skilling did not commit honest-services fraud. In other words, even if he took actions against the company and its shareholders for his own benefit, he was not liable because he did not receive a bribe or a kickback for his actions.
The Court remanded the case to the Court of Appeals to determine whether charging honest-services fraud as one object of the conspiracy was harmless error. The Fifth Circuit must also address Mr. Skilling's contention that all of his other convictions hinged on the conspiracy count and, therefore, must be vacated. Unless Mr. Skilling prevails on this challenging point, he will continue to serve his twenty-four year sentence.
The Lessons
Current prosecutions based on the application of the honest-services statute may be weakened or subject to dismissal if the allegations or proof do not include bribes or kickbacks;
Others who have been prosecuted under the honest-services statute may have grounds for review. Indeed, the Supreme Court remanded the cases of media mogul Conrad Black, former Alaskan state representative Bruce Weyhrauch, former Intercounty Title executive Jack Hargrove, Bosna Truck Driving School owner Mustafa Redzic, HealthSouth Corporation founder Richard Scrushy, former Alabama Governor Don Siegelman, and former Californian Mayor Paul Richards and his sister Paula Harris on account of the Court's decision in Mr. Skilling's case; and
The honest-services statute does not encompass undisclosed self-dealing or conflicts of interest. It remains to be seen whether lower courts will permit defendants to challenge prior convictions based on these theories and whether Congress will amend Section 1346 with sufficient specificity to permit such prosecutions and satisfy the requirements of due process.
Posted by Tracy Green, Esq. Any questions should be directed to Tracy Green, a very experienced Los Angeles white collar criminal attorney and Los Angeles fraud attorney. You can email her at tgreen@greenassoc.com or call her at 213-233-2261.
The firm focuses its practice on the representation of licensed professionals, individuals and businesses in civil, business, administrative and criminal proceedings. They have a specialty in representing professionals in criminal matters, including fraud and other financial crimes in California and throughout the country. Their website is: http://www.greenassoc.com/
