by Michael Connor

In a decision with far-reaching implications for the prosecution of corruption and fraud cases in the United States, the U.S. Supreme Court ruled that the federal government’s “honest services” law could be constitutionally applied only to cases involving bribery and kickbacks.

US Supreme CourtThe court’s ruling was a partial victory for two high-profile corporate defendants who had been charged under the honest services statute – Jeffrey Skilling, former CEO of Enron, and Conrad Black, former chairman of Hollinger International.

The court’s reasoning in the Skilling case influenced its decision in the case involving Mr. Black and a third case involving Bruce Weyhrauch, a former Alaska lawmaker convicted under the honest services statute.

In opinions written by Justice Ruth Bader Ginsburg, the court sent the cases back to different lower courts to determine whether portions of the respective convictions should be thrown out.

With regard to Enron’s Mr. Skilling, Justice Ginsburg wrote: “The Government charged Skilling with conspiring to defraud Enron’s shareholders by misrepresenting the company’s fiscal health to his own profit, but the Government never alleged that he solicited or accepted side payments from a third party in exchange for making these misrepresentations…Because Skilling’s alleged misconduct entailed no bribe or kickback, it does not fall within” the Court’s confined definition of what is proscribed by the law.

The full text of the Court’s ruling in Mr. Skilling’s case can be found here. The ruling in Mr. Black’s case can be found here.  The ruling in Mr. Weyhrauch’s case can be found here.

The Court’s decision was not surprising.  During oral arguments before the court last December, a number of justices attacked the honest services law as broad and vague.

Chief Justice John Roberts Jr. declared at the time that the public “has to be able to understand the law, and if it can’t, it is invalid.” Justice Stephen Breyer imagined an employee shirking an honest day’s work in order “to read the Racing Form,” adding that this statute potentially criminalizes “100 million workers in the United States.”

Chapter 18, section 1346 of the U.S. Code, makes it a crime to use the mail or wire services in a scheme “to deprive another of the intangible right of honest services.”   The law was passed by Congress in 1988 in response to a Supreme Court decision the year earlier (McNally v United States) which struck down the honest services theory, ruling that it was an impermissible interpretation of the mail and wire fraud statutes at that time.

The problem, according to many legal observers, is that neither the 28-word provision nor the legislative history shed light on what “the intangible right of honest services” means or to whom it is owed.

Broad Impact Anticipated

The court was unanimous in narrowing the honest services statute, while three justices – Antonin Scalia, Clarence Thomas and Anthony Kennedy – would have declared the law unconstitutional even for bribery and kickback cases.

The court’s ruling is likely to have a broad impact on pending and future white collar criminal fraud cases.

By limiting the statute to cases involving bribery and kickbacks, the decision “will sharply limit the number and types of cases” where the honest services statute is prosecuted, said John J. Falvey, Jr., a white collar criminal defense attorney with the firm of Goodwin Procter LLP.

Mr. Falvey, who in the past criticized the statute as “vague and capable of seemingly endless elasticity,”  today praised the court’s opinion because “it effectively takes a bludgeon out of the hands of aggressive federal prosecutors who viewed every conflict of interest as a theft of honest services.”

The court’s ruling means prosecutors must now demonstrate “palpable conduct” by someone charged with honest services fraud, Mr. Falvey said.  In his own practice, he added, “there are several pending investigations that might be abandoned or narrowed because of the much narrower definition of the standard.”

“This strikes me as a very reasonable middle-ground decision,” said law professor Randall D. Eliason, former Chief of the Public Corruption/Government Fraud section of the U.S. Attorney’s office in the District of Columbia.  The core of the honest services theory historically has been cases involving bribery and kickbacks, he said, and “the Court has returned and confined the honest services theory to that core.”   The decision, he added, addresses “the vagueness and overbreadth concerns about some of the more sweeping and aggressive applications of that doctrine that we have seen in recent years.”

Mr. Eliason cautioned that the court’s decision “does not mean that there are all these cases out there that are now not going to get prosecuted.”   In most high-level corruption cases – as with Mr. Skilling and Mr. Black – prosecutors bring multiple charges based on several different theories of a case.   The court’s decision is likely only to totally exclude “cases that are on the margins,” he said.

Gerry Moohr, a professor at the University of Houston Law Center, said, “We used to say that the honest services law was a stradivarius, and prosecutors played it well before the jury.   Well, now they don’t have that instrument to play anymore.”

Ms. Moohr noted that the court’s ruling does not change fraud law, involving theft of money or property.   As a result, she said, “there’s a chance we’ll see prosecutors being a little more creative about saying something is property than they have in the past.”   Employers could allege, for example, that corporate information is property with real value, and “that because you deprived me of the value of my information, my property, you are therefore guilty of fraud.”

Those who argued for a broader interpretation of the law said the court’s ruling was a setback.  “Today’s decision deprives prosecutors of an important tool in their efforts to fight public corruption,” said Melanie Sloan, executive director of Citizen for Responsibility and Ethics in Washington (CREW), a non-profit organization that had filed an amicus brief in Mr. Black’s case urging the Court to uphold the honest services fraud statute.

Ms. Sloan said the court’s ruling means previous convictions may be vacated and “corrupt officials will have an easier time escaping accountability for their misdeeds.”  In anticipation of the ruling, CREW has been advocating a legislative fix. “Federal law currently prohibits executive branch employees from taking any official action that affects their personal financial interest,” Ms. Sloan said. “This statute could easily be extended to cover members of Congress and state and local officials to ensure Americans are protected from government officials who sacrifice the public interest for their own private gain.”

In a footnote to the court’s opinion in the Skilling case, Justice Ginsburg noted that if Congress were to take up the enterprise of criminalizing “undisclosed self-dealing by a public official or private employee” it “would have to employ standards of sufficient definiteness and specificity to overcome due process concerns.”

The opinion concluded: “That formulation, however, leaves many questions unanswered. How direct or significant does the conflicting financial interest have to be? To what extent does the official action have to further that interest in order to amount to fraud? To whom should the disclosure be made and what information should it convey? These questions and others call for particular care in attempting to formulate an adequate criminal prohibition in this context.”

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