The Future of Honest Services Fraud

On June 24, in a trio of long-anticipated decisions, the U.S. Supreme Court sharply limited one of the federal prosecutors' favorite statutes: honest services mail and wire fraud. The rulings came in the cases of two corporate executives ' former Enron Chief Executive Officer Jeffrey Skilling and media mogul Conrad Black ' and an Alaskan state legislator, Bruce Weyhrauch. In each case, the defendant was charged with defrauding others of their intangible right to honest services.

Background

Honest-services fraud has been around for decades. In the 1987 McNally v. U.S. case, the Supreme Court brought prosecutions to a temporary halt by ruling that the denial of honest services was too amorphous a concept to constitute fraud. Congress responded the following year with 18 U.S.C. ' 1346, which specifies that
fraud does include depriving another of honest services but provides no further definition or clarification.

Since the passage of ' 1346, prosecutors have charged an ever-widening range of misconduct, by both public- and private-sector defendants, as honest-services fraud. The cases have involved not only traditional corruption such as bribery, but also conflicts of interest, breaches of fiduciary duties and other lesser misdeeds. Lower courts splintered over the meaning and scope of the doctrine, finally leading the Supreme Court to speak once again.

The majority in Skilling v. U.S. (the lead case) declined to strike down the entire statute as irredeemably vague. The Court opted instead for a narrowing construction: ' 1346 should be limited to cases involving bribery or kickbacks because, the Court concluded, such cases made up the core of honest-services prosecutions at the time Congress passed ' 1346. The government asked that self-dealing cases also be included, but the Court declined, finding insufficient support for that theory in the pre-McNally cases.

Implications of the Ruling

Skilling has significant implications for white-collar prosecutions. First, the decision clearly curtails some of the more aggressive (and sometimes marginal) honest-services theories that had emerged over the years. This is probably just as well. Such cases often involve misconduct that is better handled through state criminal or civil remedies, administrative sanctions, employee discipline or at the ballot box. Not every instance of sleazy or unethical behavior deserves to be a 20-year federal felony. Skilling's effects will be felt the least in private-sector cases, in which honest-services fraud most frequently is employed as simply one of a number of prosecution theories. Prosecutors love having multiple alternative theories, but the truth is most serious corporate fraud cases can get along just fine without an honest-services charge. In Skilling's own case, for example, honest-services fraud was only one of three different bases for the conspiracy charge on which he was convicted. In Black's case, it was one of two different theories of mail fraud. Both men faced other criminal charges, as well. Indeed it is far from clear that either man will have his sentence substantially reduced, much less that either will now walk free.

In public-sector cases, Skilling's impact will be felt more keenly. Of course, cases involving bribery or kickbacks ' particularly in state or local government ' have always been the heartland of honest-services fraud, and those remain viable. In other cases, prosecutors will be able to reframe criminal charges based on the same conduct without relying on honest services. This was done recently in the superseding indictment, returned in anticipation of Skilling, of former Illinois Gov. Rod Blagojevich.

The loss of the self-dealing theory, however, is a significant blow. A politician who steers a public contract to his own company commits essentially the same wrong as one who accepts a bribe to steer the contract to the bribe payer. In each case, the politician's official actions are being driven not by the public interest, but by the politician's desire to line his own pockets. Both should be paradigm honest-services violations, but after Skilling, only the bribery case may be prosecuted under ' 1346.

Another area of concern is cases involving a series of gifts to a public official in connection with official acts. Bribery requires proof of a quid pro quo: that a particular official act was influenced by the gift. Even a federal gratuity charge requires proof that a particular gift was for, or because of, a particular official act. Honest-services fraud was frequently employed when there was a stream of gifts to a public official and a corresponding series of official acts, but proof that a specific gift corresponded to a particular act was weak or absent. Most of the guilty pleas in the Jack Abramoff investigation, for example, have involved this type of honest-services charge.

After Skilling, such cases are no longer viable under ' 1346 unless the government can prove a direct bribery quid pro quo ' a much higher evidentiary hurdle. Again, this is not entirely a bad thing; to the extent such cases involved mere gratuities, a 20-year felony was overkill, and clear statutory boundaries are crucial in the area of political corruption. Still, such ongoing misconduct that falls short of bribery should not go completely unpunished.

So where does the law of honest-services fraud go from here? Overall, the decision in Skilling was reasonable and necessary ' the outer branches of honest-services doctrine were certainly in need of some pruning. But now Congress needs to finish the job.

Conclusion

A more specific statutory definition of honest-services fraud should include not only bribery and kickbacks but also self-dealing. Simple amendments to the federal gratuities statute could also ensure that Abramoff-style strings of gratuities could be prosecuted even in the absence of a direct link between a particular gift and a particular official act.

After the McNally decision, Congress acted promptly, albeit not too clearly, to codify its intent concerning honest-services fraud. In the wake of Skilling, Congress should now take the opportunity to step in and significantly improve this area of white-collar criminal law.

Randall D. Eliason is the former chief of the Public Corruption/Government Fraud section of the U.S. Attorney's Office for the District of Columbia. He teaches white-collar crime at the law schools of George Washington University and American University. This article originally ran in The National Law Journal, an ALM sister publication of this newsletter.

On June 24, in a trio of long-anticipated decisions, the U.S. Supreme Court sharply limited one of the federal prosecutors' favorite statutes: honest services mail and wire fraud. The rulings came in the cases of two corporate executives ' former Enron Chief Executive Officer Jeffrey Skilling and media mogul Conrad Black ' and an Alaskan state legislator, Bruce Weyhrauch. In each case, the defendant was charged with defrauding others of their intangible right to honest services.

Background

Honest-services fraud has been around for decades. In the 1987 McNally v. U.S. case, the Supreme Court brought prosecutions to a temporary halt by ruling that the denial of honest services was too amorphous a concept to constitute fraud. Congress responded the following year with 18 U.S.C. ' 1346, which specifies that
fraud does include depriving another of honest services but provides no further definition or clarification.

Since the passage of ' 1346, prosecutors have charged an ever-widening range of misconduct, by both public- and private-sector defendants, as honest-services fraud. The cases have involved not only traditional corruption such as bribery, but also conflicts of interest, breaches of fiduciary duties and other lesser misdeeds. Lower courts splintered over the meaning and scope of the doctrine, finally leading the Supreme Court to speak once again.

The majority in Skilling v. U.S. (the lead case) declined to strike down the entire statute as irredeemably vague. The Court opted instead for a narrowing construction: ' 1346 should be limited to cases involving bribery or kickbacks because, the Court concluded, such cases made up the core of honest-services prosecutions at the time Congress passed ' 1346. The government asked that self-dealing cases also be included, but the Court declined, finding insufficient support for that theory in the pre-McNally cases.

Implications of the Ruling

Skilling has significant implications for white-collar prosecutions. First, the decision clearly curtails some of the more aggressive (and sometimes marginal) honest-services theories that had emerged over the years. This is probably just as well. Such cases often involve misconduct that is better handled through state criminal or civil remedies, administrative sanctions, employee discipline or at the ballot box. Not every instance of sleazy or unethical behavior deserves to be a 20-year federal felony. Skilling's effects will be felt the least in private-sector cases, in which honest-services fraud most frequently is employed as simply one of a number of prosecution theories. Prosecutors love having multiple alternative theories, but the truth is most serious corporate fraud cases can get along just fine without an honest-services charge. In Skilling's own case, for example, honest-services fraud was only one of three different bases for the conspiracy charge on which he was convicted. In Black's case, it was one of two different theories of mail fraud. Both men faced other criminal charges, as well. Indeed it is far from clear that either man will have his sentence substantially reduced, much less that either will now walk free.

In public-sector cases, Skilling's impact will be felt more keenly. Of course, cases involving bribery or kickbacks ' particularly in state or local government ' have always been the heartland of honest-services fraud, and those remain viable. In other cases, prosecutors will be able to reframe criminal charges based on the same conduct without relying on honest services. This was done recently in the superseding indictment, returned in anticipation of Skilling, of former Illinois Gov. Rod Blagojevich.

The loss of the self-dealing theory, however, is a significant blow. A politician who steers a public contract to his own company commits essentially the same wrong as one who accepts a bribe to steer the contract to the bribe payer. In each case, the politician's official actions are being driven not by the public interest, but by the politician's desire to line his own pockets. Both should be paradigm honest-services violations, but after Skilling, only the bribery case may be prosecuted under ' 1346.

Another area of concern is cases involving a series of gifts to a public official in connection with official acts. Bribery requires proof of a quid pro quo: that a particular official act was influenced by the gift. Even a federal gratuity charge requires proof that a particular gift was for, or because of, a particular official act. Honest-services fraud was frequently employed when there was a stream of gifts to a public official and a corresponding series of official acts, but proof that a specific gift corresponded to a particular act was weak or absent. Most of the guilty pleas in the Jack Abramoff investigation, for example, have involved this type of honest-services charge.

After Skilling, such cases are no longer viable under ' 1346 unless the government can prove a direct bribery quid pro quo ' a much higher evidentiary hurdle. Again, this is not entirely a bad thing; to the extent such cases involved mere gratuities, a 20-year felony was overkill, and clear statutory boundaries are crucial in the area of political corruption. Still, such ongoing misconduct that falls short of bribery should not go completely unpunished.

So where does the law of honest-services fraud go from here? Overall, the decision in Skilling was reasonable and necessary ' the outer branches of honest-services doctrine were certainly in need of some pruning. But now Congress needs to finish the job.

Conclusion

A more specific statutory definition of honest-services fraud should include not only bribery and kickbacks but also self-dealing. Simple amendments to the federal gratuities statute could also ensure that Abramoff-style strings of gratuities could be prosecuted even in the absence of a direct link between a particular gift and a particular official act.

After the McNally decision, Congress acted promptly, albeit not too clearly, to codify its intent concerning honest-services fraud. In the wake of Skilling, Congress should now take the opportunity to step in and significantly improve this area of white-collar criminal law.

Randall D. Eliason is the former chief of the Public Corruption/Government Fraud section of the U.S. Attorney's Office for the District of Columbia. He teaches white-collar crime at the law schools of George Washington University and American University. This article originally ran in The National Law Journal, an ALM sister publication of this newsletter.