Honest-Services Fraud in the Wake of Skillings

While Skilling sought to address some of Justice Scalia's concerns, it left many others unresolved, and the same federalism and vagueness objections persist today. Honest-services fraud is premised on the notion that public officials and private employees violate fiduciary duties owed to the public or the employer when they deprive those bodies of their honest services. In his concurrence in Skilling, Justice Scalia observed that none of the pre-McNally honest-services cases clearly defined this fiduciary duty, and that the majority had again failed to do so. The definition of a fiduciary, the scope of that duty and its beneficiaries still remain unclear, and many observers believe that these questions are best left to state law and should not be subject to a national standard determined by Congress.

New Uncertainties

The Skilling decision creates new uncertainties that impact past and pending cases. Although Jeffrey Skilling's request for bail while the lower courts reconsider his case was denied, he has a renewed chance for some or all of his convictions to be reversed. Skilling was convicted of conspiracy to commit fraud, a count premised on one of three alternative conspiracy theories, including honest-services fraud. Because the jury did not identify the theory on which it convicted Skilling, the Fifth Circuit must now decide whether the conspiracy conviction can stand. And Skilling urges that all his other convictions are tainted by prejudicial evidence admitted against him under the flawed honest-services charges and so must be vacated.

Other Litigation

In a related Supreme Court case, the honest-services conviction of Conrad Black was also reversed. See Black v. United States, 130 S. Ct. 2963, 2970 (2010). On remand, the Seventh Circuit has now reversed one fraud count that was based on $5.5 million in payments that Black claimed were actually owed to him as management fees, but which he had characterized as payments connected to an agreement not to compete to avoid Canadian taxes. See United States v. Black, Slip Op., No. 07-4080 at *14 (7th Cir. Oct. 29, 2010). Black asserted that it was possible that the jury acquitted him of “pecuniary” fraud but improperly convicted him of honest-services fraud for failing to disclose the fees to his employer. The Seventh Circuit found this “unlikely,” but did not go so far as to conclude beyond a reasonable doubt that the jury had not reached this conclusion. It affirmed the rest of Black's fraud and obstruction convictions. Although the court remanded the matter for a new trial on the reversed fraud claim, it suggested that the “government may wish to conserve its resources and wind up this protracted litigation” by dismissing the reversed count and proceeding instead to resentencing, noting that the district court could potentially consider the conduct underlying the reversed count when sentencing Black.

Courts also continue to grapple with whether the government must always prove a direct quid pro quo between money and conduct and, if so, what evidence is necessary to meet that burden. For example, one court permitted a retrial of a Jack Abramoff associate for honest-services fraud even though the government had not directly alleged bribery, holding that a jury could infer bribery through evidence regarding pricey meals and sports tickets. United States v. Ring, No. 1:08-cv-274 (D.D.C. Aug. 5, 2010). Other cases involving former Illinois Governor George Ryan, former Alabama Governor Don Siegelman, and HealthSouth executive Richard Scrushy all test whether and when political contributions amount to bribery under the newly-constricted honest-services fraud law. Must prosecutors prove that an official took a specific action in exchange for a bribe or kickback? What evidence is sufficient? And must the official personally benefit from the contribution?

Assistant Attorney General Lanny Breur recently admitted to Congress that Skilling has had a “significant” impact on pending cases and criminal investigations, and that conduct prosecutable before Skilling is no longer covered. The Department of Justice (DOJ) already has dropped several active cases. For example, the government moved to dismiss a high-profile prosecution of two executives at Kansas's largest electric utility, Westar Energy, who were accused of denying Westar their honest services through the undisclosed use of corporate perks, such as the corporate jet. See United States v. Wittig, No. 5:03-cr-40142 (D. Kan. Aug. 20, 2010). Likewise, prosecutors in New York agreed to drop an honest-services fraud claim against the former mayor of Niagara Falls because, in light of Skilling, they would have difficulty proving a direct connection between money allegedly received by the mayor and acts that he allegedly performed in exchange for it. See United States v. Anello, No. 1:08-cr-321 (W.D.N.Y.).

Congress Tries to Speak More Clearly (Again)

Responding to the Court's call and to these ongoing problems, Sen. Patrick Leahy (D-VT) recently introduced the “Honest Services Restoration Act” to amend ' 1346 by prohibiting undisclosed self-dealing by public officials and by the officers and directors of public corporations. S. 3854, 111th Cong. Assistant Attorney General Breur, urging the Senate Judiciary Committee to fill in what the DOJ sees as a gap left by Skilling, has argued that new legislation is necessary because individuals can still improperly steer benefits to entities in which they have an undisclosed interest without engaging in bribery. To preempt potential vagueness challenges, Breur asserted that Congress should require the government to prove both the knowing concealment of an undisclosed interest and a specific intent to defraud, thus minimizing the risk that someone might be convicted for the inadvertent failure to disclose an interest.

The proposed legislation attempts to avoid vagueness by defining undisclosed self-dealing by a public official to occur when: 1) a public official performs an official act to benefit that official (or someone or some entity closely connected to that official); and 2) the official knowingly conceals or fails to disclose material information that the official had a duty to disclose under an existing law or regulation. Meanwhile, undisclosed self-dealing by a private actor would occur when: 1) officers or directors perform acts which cause or are intended to cause harm to employers and which are undertaken to benefit or further (by $5,000 or more) a financial interest of the officers or directors (or individuals or entities connected to them); and 2) the officer or director knowingly conceals or fails to disclose information required to be disclosed under existing law or regulation.

Conclusion

While the proposed legislation contains more detail than the current ' 1346, it is not clear whether it will address adequately the Skilling Court's admonition “to employ standards of sufficient definiteness and specificity to overcome due process concerns.” It is also unclear whether there is enough political support to pass legislation that further expands federal authority in a time of anti-federal public sentiment. Honest-services fraud thus remains as murky as it was before Skilling. Whether Congress meets the challenge this time around still remains to be seen.

Robert Plotkin ([email protected]), a member of this newsletter's Board of Editors, is a partner at McGuireWoods LLP and head of its Securities Enforcement group. Nicholas B. Lewis, an associate in the the firm's Washington, DC, office, practices within the firm's government, Regulatory, and Criminal Investigations department.

The Supreme Court has tried again to restrict application of the honest-services fraud statute (18 U.S.C. ' 1346), which has been zealously used by prosecutors to target a wide swath of allegedly unethical behavior by public officials and private employees alike. In Skilling v. United States, the Court “pared” honest-services fraud to what the majority perceived as the provision's core: fraudulent schemes to deprive another of honest services through bribes or kickbacks. 130 S. Ct. 2896, 2928 (2010). The Court majority rejected the government's contention that the law also reached so-called “undisclosed self-dealing” by public officials and private employees. It warned Congress “to speak more clearly than it has” if it intends for the statute to cover undisclosed self-dealing. Justice Scalia, joined by two other Justices, agreed to reverse Skilling's conviction, but would have gone further and declared ' 1346 unconstitutionally vague.

Background

Skilling is the Court's latest effort to resolve the “honest-services” controversy that has raged for decades. Previously, in McNally v. United States, the Court declared that mail fraud protected only property rights and not “the intangible right of the citizenry to good government.” The Court then “invited” Congress to amend the law to define the offense more carefully. 483 U.S. 350, 356, 360 (1987). This led Congress to pass the statute considered 23 years later in Skilling, which hardly resolved the Court's problems with honest services. During the Supreme Court term just preceding the Skilling decision, Justice Scalia foreshadowed Skilling when he dissented from the denial of a petition for certiorari in an honest-services fraud case, raising federalism and vagueness concerns about the statute anew and warning that it was “quite irresponsible to let the current chaos prevail.” Sorich v. United States , 129 S. Ct. 1308, 1311 (2009) (Scalia, J., dissenting).

While Skilling sought to address some of Justice Scalia's concerns, it left many others unresolved, and the same federalism and vagueness objections persist today. Honest-services fraud is premised on the notion that public officials and private employees violate fiduciary duties owed to the public or the employer when they deprive those bodies of their honest services. In his concurrence in Skilling, Justice Scalia observed that none of the pre-McNally honest-services cases clearly defined this fiduciary duty, and that the majority had again failed to do so. The definition of a fiduciary, the scope of that duty and its beneficiaries still remain unclear, and many observers believe that these questions are best left to state law and should not be subject to a national standard determined by Congress.

New Uncertainties

The Skilling decision creates new uncertainties that impact past and pending cases. Although Jeffrey Skilling's request for bail while the lower courts reconsider his case was denied, he has a renewed chance for some or all of his convictions to be reversed. Skilling was convicted of conspiracy to commit fraud, a count premised on one of three alternative conspiracy theories, including honest-services fraud. Because the jury did not identify the theory on which it convicted Skilling, the Fifth Circuit must now decide whether the conspiracy conviction can stand. And Skilling urges that all his other convictions are tainted by prejudicial evidence admitted against him under the flawed honest-services charges and so must be vacated.

Other Litigation

In a related Supreme Court case, the honest-services conviction of Conrad Black was also reversed. See Black v. United States , 130 S. Ct. 2963, 2970 (2010). On remand, the Seventh Circuit has now reversed one fraud count that was based on $5.5 million in payments that Black claimed were actually owed to him as management fees, but which he had characterized as payments connected to an agreement not to compete to avoid Canadian taxes. See United States v. Black, Slip Op., No. 07-4080 at *14 (7th Cir. Oct. 29, 2010). Black asserted that it was possible that the jury acquitted him of “pecuniary” fraud but improperly convicted him of honest-services fraud for failing to disclose the fees to his employer. The Seventh Circuit found this “unlikely,” but did not go so far as to conclude beyond a reasonable doubt that the jury had not reached this conclusion. It affirmed the rest of Black's fraud and obstruction convictions. Although the court remanded the matter for a new trial on the reversed fraud claim, it suggested that the “government may wish to conserve its resources and wind up this protracted litigation” by dismissing the reversed count and proceeding instead to resentencing, noting that the district court could potentially consider the conduct underlying the reversed count when sentencing Black.

Courts also continue to grapple with whether the government must always prove a direct quid pro quo between money and conduct and, if so, what evidence is necessary to meet that burden. For example, one court permitted a retrial of a Jack Abramoff associate for honest-services fraud even though the government had not directly alleged bribery, holding that a jury could infer bribery through evidence regarding pricey meals and sports tickets. United States v. Ring, No. 1:08-cv-274 (D.D.C. Aug. 5, 2010). Other cases involving former Illinois Governor George Ryan, former Alabama Governor Don Siegelman, and HealthSouth executive Richard Scrushy all test whether and when political contributions amount to bribery under the newly-constricted honest-services fraud law. Must prosecutors prove that an official took a specific action in exchange for a bribe or kickback? What evidence is sufficient? And must the official personally benefit from the contribution?

Assistant Attorney General Lanny Breur recently admitted to Congress that Skilling has had a “significant” impact on pending cases and criminal investigations, and that conduct prosecutable before Skilling is no longer covered. The Department of Justice (DOJ) already has dropped several active cases. For example, the government moved to dismiss a high-profile prosecution of two executives at Kansas's largest electric utility, Westar Energy, who were accused of denying Westar their honest services through the undisclosed use of corporate perks, such as the corporate jet. See United States v. Wittig, No. 5:03-cr-40142 (D. Kan. Aug. 20, 2010). Likewise, prosecutors in New York agreed to drop an honest-services fraud claim against the former mayor of Niagara Falls because, in light of Skilling, they would have difficulty proving a direct connection between money allegedly received by the mayor and acts that he allegedly performed in exchange for it. See United States v. Anello, No. 1:08-cr-321 (W.D.N.Y.).

Congress Tries to Speak More Clearly (Again)

Responding to the Court's call and to these ongoing problems, Sen. Patrick Leahy (D-VT) recently introduced the “Honest Services Restoration Act” to amend ' 1346 by prohibiting undisclosed self-dealing by public officials and by the officers and directors of public corporations. S. 3854, 111th Cong. Assistant Attorney General Breur, urging the Senate Judiciary Committee to fill in what the DOJ sees as a gap left by Skilling, has argued that new legislation is necessary because individuals can still improperly steer benefits to entities in which they have an undisclosed interest without engaging in bribery. To preempt potential vagueness challenges, Breur asserted that Congress should require the government to prove both the knowing concealment of an undisclosed interest and a specific intent to defraud, thus minimizing the risk that someone might be convicted for the inadvertent failure to disclose an interest.

The proposed legislation attempts to avoid vagueness by defining undisclosed self-dealing by a public official to occur when: 1) a public official performs an official act to benefit that official (or someone or some entity closely connected to that official); and 2) the official knowingly conceals or fails to disclose material information that the official had a duty to disclose under an existing law or regulation. Meanwhile, undisclosed self-dealing by a private actor would occur when: 1) officers or directors perform acts which cause or are intended to cause harm to employers and which are undertaken to benefit or further (by $5,000 or more) a financial interest of the officers or directors (or individuals or entities connected to them); and 2) the officer or director knowingly conceals or fails to disclose information required to be disclosed under existing law or regulation.

Conclusion

While the proposed legislation contains more detail than the current ' 1346, it is not clear whether it will address adequately the Skilling Court's admonition “to employ standards of sufficient definiteness and specificity to overcome due process concerns.” It is also unclear whether there is enough political support to pass legislation that further expands federal authority in a time of anti-federal public sentiment. Honest-services fraud thus remains as murky as it was before Skilling. Whether Congress meets the challenge this time around still remains to be seen.

Robert Plotkin ([email protected]), a member of this newsletter's Board of Editors, is a partner at McGuireWoods LLP and head of its Securities Enforcement group. Nicholas B. Lewis, an associate in the the firm's Washington, DC, office, practices within the firm's government, Regulatory, and Criminal Investigations department.