In McNally v. United States, 483 U.S. 350 (1987), the Supreme Court rejected prosecutorial efforts to extend the mail and wire fraud statutes to so-caled honest services fraud. Instead, the Court limited those statutes to "the protection of property rights. If Congress desires to go further, it must speak more clearly than it has."
In response, Congress enacted the honest services fraud statute, 18 U.S.C. §1346, which provides that “For the purposes of [Ch. 63 of Title 18, which includes the mail and wire fraud provisions], the term ‘scheme or artifice to defraud’ includes a scheme or artifice to deprive another of the intangible right of honest services.”
Federal prosecutors have used the honest services statute aggressively to pursue public corruption cases against state and local officials. A typical example is provided by US v. McCarty, in which Palm Beach County commissioner Mary McCarty pleaded guilty to honest services fraud for voting on multiple bond awards to underwriting firms where her husband was employed without disclosing such information to the public. McCarty also admitted to failing to disclose that she and her husband received gifts, such as free and discounted stays at hotels, from parties who had matters before the commission.
More recently, they have also begun using it to prosecute corporate officers and directors who violated their fiduciary duties to shareholders and the corporation for which they work. In two high profile cases that reached the SCOTUS this year, Enron's CEO Jeffrey Skilling and Hollinger's CEO Conrad Black were convicted of honest services fraud. In the former's case, the Fifth Circuit held that "The elements of honest-services wire fraud applicable here are (1) a material breach of a fiduciary duty imposed under state law, including duties defined by the employer-employee relationship, [and] (2) that results in a detriment to the employer."
The honest services statute has been widely criticized. As a policy matter, it criminalizes agency costs better dealt with as a matter of state fiduciary duty law. Larry Ribstein has been on top of this problem for a long time. Last year, for example, he wrote that the "central problem is ... distinguishing between ordinary agency costs, which are pervasive in firms, and which firms have a wide range of contractual devices to deal with, and the agency costs that should trigger jail time." He continues:
As I said in Perils of Criminalizing Agency Costs:The criminal law is not particularly well suited to make the sort of fine distinctions these cases require. Letting some of these people off while others spend their lives in jail creates a wide perception of injustice. Sending all of them to jail dissipates the moral force of the criminal law. Moreover. . . giving prosecutors such broad discretion as to which agents to charge creates opportunities for prosecutorial misconduct whose effects may be even worse than anything the corporate agents did. And . . . this line-drawing puts heavy demands on fact-finders unschooled in business.The Law Blog says that if the Supreme Court is struck down,Expect defendants convicted under the law to rush the courthouse door. Striking down the honest-services crime would trigger "an earthquake within the criminal justice community," said David Seide, a former federal prosecutor now with Curtis Mallet-Prevost Colt & Mosle LLP in Washington. Defendants convicted under the statute "will be able to say their convictions need to be reversed," he saidThe government agents responsible for this excess and the ensuing "earthquake" will never be held to account. But hopefully the lesson will be learned.
When the SCOTUS decided to hear the Skilling and Black cases, it seemed unlikely that the Court would address that policy issue. The validity of criminalizing agency costs is really a matter for the legislature.
Instead, the Court took the cases to address the honest services statute's vagueness. The statute nowhere defines what it means by "honest services." Two decades of judicial opinions have failed to articulate clear boundaries for the statute. Almost everybody agrees that bribes and kickbacks are covered by the statute. beyond those clear violations, however, there was great uncertainty.
Today, a divided SCOTUS took a hatchet to the honest services statute, using Skilling's case as the vehicle. The opinion held that the statute was not unconstitutionally vague on its face. Instead, as limited to the core set of cases that the pre-McNally case law had criminalized and which Congress intended to restore by passing the statute. Accordingly, the statute properly could be applied to fraudulent schemes to deprive another of honest services through bribes or kickbacks supplied by a third party who had not been deceived.
Because reading the statute to proscribe a wider range of offensive conduct would raise vagueness concerns, however, the Court held that §1346 criminalizes only the bribe-and-kickback core of the pre-McNally case law. Because the prosecutors charged Skilling with conspiring to defraud Enron’s shareholders by misrepresenting the company’s fiscal health to his own profit, but never alleged that he solicited or accepted side payments from a third party in exchange for making these misrepresentations, his undisclosed self-dealing and conflict of interest could not constitutionally be prosecuted as honest services fraud.
The court did not reverse Skilling's convictions, however. Instead, it sent the case back to the 5th Circuit for a determination of whether the statutory problems amounted to harmless error, because, as the government contended, it was possible that “any juror who voted for conviction based on [the honest-services theory] also would have found [Skilling] guilty of conspiring to commit securities fraud.” Robert Plotkin explains that:
The Supreme Court said specifically that they are not throwing out his conviction. They are asking the Fifth Circuit to see whether or not there was any aspect of bribery or kickbacks involved in his case and thus whether his conviction as to honest services should stand or be reversed. Skilling was also convicted of insider trading and other charges, so, if the honest-services charge is thrown out it doesn’t mean he’s home free. The question becomes whether the evidence that came in under an honest-services theory, such as his alleged conflicts of interest, taint the other convictions. Did the jury, in other words, rely on that evidence to convict him of insider trading and securities fraud.
There's also a long discussion in the opinion of Skilling's argument that his conviction was tainted by juror bias. he argued that the trial court should have granted him a change of venue, because he could not get a fair trial in Houston. The Court rejected that argument. It is, of course, an issue beyond the scope of this blog. Lyle Denniston's summary of the case offers a nice summary of the holding. Christine Hurt also has a nice discussion of the issues at stake in this part of the opinion.
Denniston also summarizes the Court's ruling in Conrad Black's case:
In the Court’s separate opinion in the Black case, it similarly put into doubt the conviction of former Canadian newspaper magnate Conrad M. Black as well as those of two of his corporate colleagues, but did not overturn their convictions outright. Black and his colleagues had been convicted of violating the “honest services” fraud law by a scheme of corporate compensation that prosecutors attacked as violating duties they owed to the newspaper corporation, Hollinger International.
The Court, noting its Skilling opinion, said that the charge in this other case “did not involve any bribes or kickbacks,” so it ruled that its decision had undercut a jury instruction by the trial judge that they could convict the Hollinger executives if they found that they had misused their positions for private gain or had violated their duty of loyalty to the company. The executives’ lawyer had properly objected to that instruction, so they were free to challenge that on appeal, the Court ruled, even though they had resisted the use of a clarifying verdict form that could have indicated just what part of the verdict on fraud was based on the denial of “honest services.”
But, as in the Skilling case, the Court said that lower courts were free to consider whether the flawed instruction was a “harmless” error; thus, it did not nullify the fraud conviction explicitly. The Court also indicated that Black, who had also been convicted of obstructing justice by destroying records, could raise in lower courts his argument that the “honest services” evidence had spilled over to taint the obstruction conviction.
The Black opinion is here.