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The Supreme Court Redefines Honest-Services Fraud

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July 2010 | Advisory

On June 24, 2010, the United States Supreme Court issued a decision fundamentally changing the scope of the federal statute prohibiting “honest-services” mail and wire fraud, 18 U.S.C. § 1346. In Skilling v. United States1,  the Court held that the statute, which criminalizes the participation in a scheme to defraud another of “the intangible right to honest services,”  applies only to two discrete kinds of conduct:  bribes and kickbacks.  Before Skilling, the statute had been a favorite of prosecutors seeking to criminalize a wide variety of conduct (of both of private individuals and public officials), including bribery, kickbacks, corporate self-dealing, and the failure to disclose material information. It was against this backdrop that three cases involving honest-services fraud came before the Supreme Court this term, Skilling v. United States, Black v. United States2,  and Weyhrauch v. United States.3 All three petitioners challenged the application of the honest-services law, and Skilling challenged the constitutionality of the statute, arguing that the term “intangible right to honest services” was unconstitutionally vague.  The Court used Skilling’s case as an opportunity to redefine the law of honest-services fraud.

Background
In 2006, Jeffrey Skilling, the former chief executive officer of Enron Corporation, was convicted of, among other crimes, conspiracy to commit honest-services fraud; specifically, the government charged Skilling with conspiring to defraud Enron’s shareholders by misrepresenting the company’s true financial status, thereby overstating the company’s stock price. The government argued that Skilling had received a benefit for his conduct (his handsome salary, bonuses, and Enron stock), and the jury convicted Skilling of conspiring to deprive Enron’s shareholders of his honest services. On appeal, Skilling argued, among other things, that the statute was unconstitutionally vague.     

The Decision
The Supreme Court did not strike down the entire statute as unconstitutionally vague, but instead decided to save the statute by severely limiting its reach. The Court held that the statute is limited to bribery and kickbacks and does not encompass conduct (like Skilling’s) such as self-dealing or the failure to disclose material information. The Court based this new limitation on the majority’s view of what Congress understood the term “the intangible right to honest services” to mean in 1988, the year it enacted 18 U.S.C. § 1346.     

At that time, the mail fraud statute, 18 U.S.C. § 1341, provided that: “Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, . . . for the purpose of executing such scheme or artifice or attempting so to do, [uses the mails or causes them to be used], shall be fined not more than $1,000 or imprisoned not more than five years, or both.” The wire fraud statute, 18 U.S.C. § 1343, contained similar language, but nowhere in the U.S. Criminal Code was there a provision stating expressly that the deprivation of “the intangible right to honest services” could serve as the basis for a mail or wire fraud conviction. The Supreme Court, in McNally v. United States, held that the deprivation of the intangible right to honest services did not constitute mail fraud (even though convictions under honest-services theories had been upheld since the 1940s) because there was no explicit language to that effect in the Code. In response to McNally, Congress explicitly codified the crime of depriving others of “the intangible right to honest services,” applying the language to both mail and wire fraud.    

In Skilling, the Court reasoned that, because the vast majority of cases before McNally involved bribery or kickbacks, rather than other less-defined types of dishonest conduct, Congress’s language should be construed not to apply to any possible honest-services fraud but only to bribes and kickbacks. Such a limitation gave effect to Congress’s intention at the time—to re-criminalize bribery and kickbacks under the mail and wire fraud statutes. With this limitation, the Supreme Court determined that 18 U.S.C. § 1346 presented no vagueness problem, and thus was not constitutionally infirm. The case was remanded to the Court of Appeals to determine whether the trial court’s error was harmless and whether the Court’s ruling affected any of the other numerous counts on which Skilling was convicted.  

The Court issued only brief opinions in the two other honest-services fraud cases, Black and Weyhrauch, and the cases were remanded to the lower courts to be considered in light of Skilling.     

Consequences
Because none of the three cases involved bribery or kickbacks, the convictions will not be sustained under the honest-services law as it currently stands. As the Supreme Court noted in Skilling, if Congress wishes to criminalize honest-services fraud beyond bribes and kickbacks, it must “speak more clearly than it has.”     

While the Supreme Court’s ruling will affect numerous criminal convictions and pending cases, it will also provide clarity to prosecutors for future charging decisions. By way of example, a hospital purchasing agent who accepted bribes or kickbacks from a vendor and favored that vendor could still be prosecuted under the honest-services law if the other elements of the crime were satisfied. However, a controller who misrepresented the hospital’s financial condition to keep his job could not be prosecuted, absent a kickback or bribe.

Some academics and commentators had predicted that the Court might invalidate the honest-services statute as to all private sector conduct, but the Court did not go this far. The government can continue to prosecute private sector employees whose decision-making for their companies is influenced bribe or kickback inducements.

1 Skilling v. United States, No. 08-1394. 
2 Black v. United States, 08-876.
3 Weyhrauch v. United States, 08-1196
4 McNally v. United States, 483 U.S. 350 (1987). 

This alert was prepared by Sarah P. Kelly, a member of the 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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