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The Supreme Court Reconsiders Honest Services Fraud

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April 2010 | Advisory

This term, the United States Supreme Court will decide three cases concerning the federal mail and wire fraud statutes, 18 U.S.C. §1341, et seq. All three cases involve a particular type of fraud, commonly known as “honest services” fraud.  

For decades, the Department of Justice has used the mail and wire fraud statutes to prosecute elected officials who, while not depriving their victims of tangible property, failed to provide the “intangible right of honest services” to their constituents. In recent years, this theory increasingly has been applied in both the public and private sectors to charge legislators, corporate officers, and others with failing to provide honest services. This year, questions concerning this controversial application of the mail and wire fraud statutes have made their way to the Supreme Court, and the justices will have the opportunity to define, or perhaps even invalidate, the honest services fraud statute.  

Before 1987, every one of the United States Courts of Appeals accepted the argument that the mail and wire fraud statutes could be used to prosecute elected officials for corruption or misconduct, or, in other words, for depriving their constituents of their honest services. In 1987, however, the Supreme Court struck down this theory in McNally v. United States, 483 U.S. 350 (1987), finding that while “[t]he mail fraud statute clearly protects property
rights, . . . [it] does not refer to the intangible right of the citizenry to good government.” The Court reasoned that Congress had not explicitly included “honest services” in the mail fraud statute and declined to read such a crime into the plain language of the mail and wire fraud statutes. The Court called upon Congress to act, stating: “If Congress desires to go further, it must speak more clearly than it has.”

Congress did so. Shortly after McNally, Congress enacted 18 U.S.C. §1346, a one-sentence statute that defined the phrase “scheme or artifice to defraud” to include schemes to deprive others of “the intangible right of honest services.” Since then, the statute has become a favorite of federal prosecutors. It has been used increasingly to prosecute corrupt politicians, including Governors Rod Blagojevich and George Ryan of Illinois; Joseph Bruno, the former New York Senate Majority Leader; and Governor Donald E. Siegelman of Alabama; lobbyists such as Jack Abramoff; and corporate executives.  

In the twenty years since Congress’s amendment, none of the Courts of Appeals has found the wire fraud statute to be unconstitutional; they have unanimously upheld the statute’s ability to reach those who have deprived others of the intangible right of honest services. The Courts of Appeals have, however, differed over what exactly the term “honest services” means and what, if any, limitations should be placed on the broad language of the statute. A challenge to the scope of the statute reached the Supreme Court in 2009, when three Chicago City employees convicted of violating the wire fraud statute for depriving the City of their honest services petitioned the Supreme Court for certiorari. See Sorich v. United States, 129 S. Ct. 1308 (2009). The Court declined to hear the case, but Justice Scalia, dissenting from the denial of certiorari, took the opportunity to write a scathing critique of “honest services” fraud. He wrote that the statute had been “invoked to impose criminal penalties upon a staggeringly broad swath of behavior, including misconduct not only by public officials but also by private employees and corporate fiduciaries.” He went on:

If the ‘honest services’ theory—broadly stated, that officeholders and employees owe a duty to act only in the best interests of their constituents and employers—is taken seriously and carried to its logical conclusion, presumably the statute also renders criminal a state legislator’s decision to vote for a bill because he expects it will curry favor with a small minority essential to his reelection; a mayor’s attempt to use the prestige of his office to obtain a restaurant table without a reservation; a public employee’s recommendation of his incompetent friend for a public contract; and any self-dealing by a corporate office. Indeed, it would seemingly cover a salaried employee’s phoning in sick to go to a ball game.

Scalia also lamented the inconsistent applications of the statute by the courts. He noted: “The Courts of Appeals have spent two decades attempting to cabin the breadth of §1346 through a variety of limiting principles. No consensus has emerged.”    

While the remaining justices were not inclined to hear Sorich’s case in 2009, the Supreme Court, this term, has taken three cases concerning honest services fraud, giving it ample opportunity to review the “limiting principles” imposed by various Courts of Appeals. The Court has granted certiorari and heard oral argument in three cases involving honest services fraud, United States v. Black, United States v. Weyhrauch, and United States v. Skilling. All three cases raise different issues, in the context of honest services fraud, for the Court.

The first case, United States v. Black, raises the issue of whether a charge of honest services fraud requires that the victim suffer some “identifiable” economic loss, as a number of Courts of Appeals have held. Black was a wire fraud case brought against newspaper executive Conrad Black. Black, the CEO of Hollinger International Inc. (“Hollinger”), was convicted of failing to disclose a certain tax benefit he received to Hollinger’s Board of Directors. Black did not, according to his attorneys, cause any economic harm to Hollinger’s shareholders. Thus, he argued that he could not—by definition—be guilty of wire fraud, as a “scheme to defraud” must include a victim (the employer) who was actually defrauded. Here, there was no economic loss to the victim, and thus, no “fraud” occurred.

Not surprisingly, the Solicitor General in response pointed to the plain language of §1346. This language would be unnecessary, indeed entirely redundant, the government argued, if the deprivation of honest services also required a deprivation of property or economic loss. As the government put it, “An economic-harm requirement would reintroduce into the mail fraud statute a variant of the very restriction that Section 1346 was designed to eliminate.”

The second case before the Court, United States v. Weyhrauch, raises an entirely different issue:  whether a public official, if he does not violate a specific duty imposed by state law, can properly be charged with honest services fraud. Bruce Weyhrauch was a member of Alaska’s House of Representatives. While discussing potential future employment with an oil corporation, he voted on a bill directly affecting that corporation. He did not disclose his potential future employment, but violated no Alaska law in failing to do so.

The U.S. Government argued that there was no requirement anywhere in the statute that the “honest services” deprivation also be a violation of state law, and that Congress intended none. Weyhrauch argued that the statute, if read not to require a state law violation, was nothing more than limitless federal criminal common law, allowing prosecutors to decide what ethical practices violated their own senses of fairness.

Finally, later in the term, the Court heard argument on United States v. Skilling, an appeal of the conviction of Jeffrey Skilling, the former Chief Executive Officer of Enron. Skilling’s appeal focused largely on jury selection in his trial, but Skilling also challenged the constitutionality of §1346 on vagueness grounds, arguing that it does not give a person of “ordinary intelligence a reasonable opportunity to know what is prohibited.” He further argued that if the statute was not struck down, it should be limited to cases involving bribes or kickbacks. The government defended the statute, arguing that it required:  (1) a material breach of the duty of loyalty, as all misrepresentations in fraud cases must be material, and (2) a specific intent to deceive. These elements, the government argued, clearly limit the statute’s reach. The government further noted that the statute, in codifying pre-McNally case law, prohibited two general types of conduct:  bribes/kickbacks and undisclosed personal financial conflicts of interest. Thus, given the clear delineation of prohibited conduct, the statute is not unconstitutionally vague.

Decisions are expected on all three of these cases by the end of this term. The Court appears poised to redefine the law in this area. Many Court watchers expect that the law will be struck down or significantly limited. If the Court takes either of these steps, finding the law to be unconstitutional or radically limiting its reach, there will likely be a new round of litigation as defendants previously convicted under §1346 seek to vacate their convictions.

This article was prepared by Sarah P. Kelly, a member of the firm’s Government Investigations and White Collar Defense practice group. For more information please contact Sarah or your Nutter attorney at 617-439-2000.

This article is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.

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