Gratuities and Honest Services Fraud

In Skilling, the former CEO of Enron was convicted of participating in a scheme to defraud his company and its shareholders of the intangible right of his honest services by manipulating the company's publicly reported financial statements and making misleading public statements about the company's performance in order to enrich himself. The Supreme Court held that, in order to avoid a constitutional vagueness problem, ' 1346 should be construed to criminalize “only the bribe-and-kickback core” of the honest services theory of mail and wire fraud prior to McNally v. United States, 483 U.S. 350 (1987). Because the government did not allege that Skilling “solicited or accepted side payments from a third party in exchange for [his alleged] misrepresentations,” the Supreme Court held that he did not commit honest services fraud.

Detailing the evolution of the honest services theory of fraud ' from lower court decisions in the 1940s that developed the theory to its rejection in McNally and revival and codification by Congress the following year in ' 1346 ' Skilling noted that the doctrine “had its genesis in prosecutions involving bribery allegations” and that the “vast majority” of pre- McNally honest services cases involved “bribery or kickback schemes.” So long as ' 1346 is limited to this pre-McNally “core” of wrongdoing, the Court reasoned, it is not unconstitutionally vague.

But what sort of “bribery or kickback schemes” are within ' 1346? The Court did not say. Nor does ' 1346, since the bribery-and-kickback limitation comes from the Court, not from the statutory text. Skilling did offer some clues, explaining that the “prohibition on bribes and kickbacks draws content not only from the pre-McNally case law, but also from federal statutes proscribing ' and defining ' similar crimes.” Unfortunately, these sources offer varying and potentially conflicting definitions of what a bribe or kickback is and do not make clear whether gratuities fall within the ambit of ' 1346.

Pre-Skilling Uncertainty

Of the three federal statutes cited in Skilling, one on its face encompasses gratuities, one does not encompass gratuities, and there is a split of authority as to the third. The Anti-Kickback Act, which governs the activities of federal contractors, does not require that the payment be given in exchange for an official act; it specifically covers gratuities and other things of value intended to reward an official act. See 41 U.S.C. ' 52(2) (since recodified as 41 U.S.C. ' 8701(2)) (defining a “kickback” to mean “any money, fee, commission, credit, gift, gratuity, thing of value, or compensation of any kind which is provided, directly or indirectly, to [enumerated persons] for the purpose of obtaining or rewarding favorable treatment in connection with [enumerated circumstances]“).

By contrast, the provision of the general federal bribery statute cited in Skilling ' 18 U.S.C. ' 201(b) ' does require a quid pro quo, i.e., the acceptance of a payment in exchange for the federal official's “being influenced” in the performance of an official act. That provision is not violated by the receipt of a gratuity, which “may constitute merely a reward for some future act that the public official will take (and may have already determined to take), or for a past act that he has already taken.” United States v. Sun-Diamond Growers of California, 526 U.S. 398, 404-05 (1999) (distinguishing between bribes and illegal gratuities). Notably, even though a different provision of the same statute ' 18 U.S.C. ' 201(c) ' does outlaw gratuities, the Skilling Court did not cite that provision.

Finally, the federal circuit courts have disagreed about whether a mere gratuity violates 18 U.S.C. ' 666(a)(2), which makes it illegal for any person to “corruptly” make a payment “with intent to influence or reward” a state or local official in connection with a federally funded program. See United States v. Fernandez, 722 F.3d 1, 20-26 (1st Cir. 2013) (holding that ' 666 does not criminalize gratuities while noting that the Second, Seventh and Eighth Circuits have reached the opposite result).

The Travel Act, 18 U.S.C. ' 1952, which was not cited in Skilling, criminalizes interstate travel and the use of interstate facilities to promote (among other things) “bribery” in violation of state or federal law. The Second Circuit, in United States v. Biaggi, 853 F.2d 89, 101-02 (2d Cir. 1988), held that “bribery” under the Travel Act can include gratuities prohibited under 18 U.S.C. ' 201; accord United States v. Gaines, 996 F.2d 1213 (4th Cir. 1993) (unpublished opinion). But another federal court has held that a violation of the Massachusetts gratuity statute cannot serve as a valid predicate for a Travel Act prosecution. United States v. Ferber, 966 F. Supp. 90, 101-07 (D. Mass. 1997).

As for the pre- McNally case law, it appears to have been extremely rare for the government to bring an honest services prosecution predicated on an official's receipt of gratuities. And in one such case, cited in Skilling , the Eighth Circuit held that the government had overstepped its bounds in doing so. United States v. McNeive, 536 F.2d 1245 (8th Cir. 1976) (holding that a plumbing inspector's receipt of unsolicited gratuities, which did not affect the performance of his official duties, could not be prosecuted under an honest services fraud theory).

The most extensive discussion of gratuities in the context of an honest services fraud prosecution is in United States v. Sawyer, 85 F.3d 713 (1st Cir. 1996). There, the First Circuit held that “proof of a violation'of the Massachusetts gratuity statute, without more, does not establish an intent to commit honest services fraud,” because honest services fraud also requires a finding of “corrupt intent, i.e. , improper intent to influence official decision-making.” The court, however, suggested that a gratuity given with such intent could be sufficient, even if a bribery-like specific quid pro quo was lacking, as such conduct “would be akin to” the then-extant line of cases (subsequently overruled in Skilling) applying ' 1346 to undisclosed conflicts of interest.

Next Month

Following the Skilling decision, courts have continued to struggle with the question of whether the payment of a gratuity constitutes honest services fraud. We will look at some of the post-Skilling cases that have grappled with this issue in next month's newsletter.

Gary Stein, a member of this newsletter's Board of Editors, is a partner with Schulte Roth & Zabel, LLP. Eli J. Mark is an associate with the firm.

In Skilling v. United States , 130 S.Ct. 2896 (2010), the U.S. Supreme Court limited the scope of the honest services fraud statute (18 U.S.C. ' 1346) to “bribery and kickback” schemes. But those terms are not self-defining, and the Court did not define them.

This article examines one question that Skilling leaves unanswered: Must a “bribe or kickback” involve a quid pro quo, i.e., an intent to give or receive something in exchange for favorable official action? Or may an honest services fraud prosecution be predicated upon a payment made merely as a reward for official action ' in other words, a gratuity?

Skilling

In Skilling, the former CEO of Enron was convicted of participating in a scheme to defraud his company and its shareholders of the intangible right of his honest services by manipulating the company's publicly reported financial statements and making misleading public statements about the company's performance in order to enrich himself. The Supreme Court held that, in order to avoid a constitutional vagueness problem, ' 1346 should be construed to criminalize “only the bribe-and-kickback core” of the honest services theory of mail and wire fraud prior to McNally v. United States , 483 U.S. 350 (1987). Because the government did not allege that Skilling “solicited or accepted side payments from a third party in exchange for [his alleged] misrepresentations,” the Supreme Court held that he did not commit honest services fraud.

Detailing the evolution of the honest services theory of fraud ' from lower court decisions in the 1940s that developed the theory to its rejection in McNally and revival and codification by Congress the following year in ' 1346 ' Skilling noted that the doctrine “had its genesis in prosecutions involving bribery allegations” and that the “vast majority” of pre- McNally honest services cases involved “bribery or kickback schemes.” So long as ' 1346 is limited to this pre-McNally “core” of wrongdoing, the Court reasoned, it is not unconstitutionally vague.

But what sort of “bribery or kickback schemes” are within ' 1346? The Court did not say. Nor does ' 1346, since the bribery-and-kickback limitation comes from the Court, not from the statutory text. Skilling did offer some clues, explaining that the “prohibition on bribes and kickbacks draws content not only from the pre-McNally case law, but also from federal statutes proscribing ' and defining ' similar crimes.” Unfortunately, these sources offer varying and potentially conflicting definitions of what a bribe or kickback is and do not make clear whether gratuities fall within the ambit of ' 1346.

Pre-Skilling Uncertainty

Of the three federal statutes cited in Skilling, one on its face encompasses gratuities, one does not encompass gratuities, and there is a split of authority as to the third. The Anti-Kickback Act, which governs the activities of federal contractors, does not require that the payment be given in exchange for an official act; it specifically covers gratuities and other things of value intended to reward an official act. See 41 U.S.C. ' 52(2) (since recodified as 41 U.S.C. ' 8701(2)) (defining a “kickback” to mean “any money, fee, commission, credit, gift, gratuity, thing of value, or compensation of any kind which is provided, directly or indirectly, to [enumerated persons] for the purpose of obtaining or rewarding favorable treatment in connection with [enumerated circumstances]“).

By contrast, the provision of the general federal bribery statute cited in Skilling ' 18 U.S.C. ' 201(b) ' does require a quid pro quo, i.e., the acceptance of a payment in exchange for the federal official's “being influenced” in the performance of an official act. That provision is not violated by the receipt of a gratuity, which “may constitute merely a reward for some future act that the public official will take (and may have already determined to take), or for a past act that he has already taken.” United States v. Sun-Diamond Growers of California , 526 U.S. 398, 404-05 (1999) (distinguishing between bribes and illegal gratuities). Notably, even though a different provision of the same statute ' 18 U.S.C. ' 201(c) ' does outlaw gratuities, the Skilling Court did not cite that provision.

Finally, the federal circuit courts have disagreed about whether a mere gratuity violates 18 U.S.C. ' 666(a)(2), which makes it illegal for any person to “corruptly” make a payment “with intent to influence or reward” a state or local official in connection with a federally funded program. See United States v. Fernandez , 722 F.3d 1, 20-26 (1st Cir. 2013) (holding that ' 666 does not criminalize gratuities while noting that the Second, Seventh and Eighth Circuits have reached the opposite result).

The Travel Act, 18 U.S.C. ' 1952, which was not cited in Skilling, criminalizes interstate travel and the use of interstate facilities to promote (among other things) “bribery” in violation of state or federal law. The Second Circuit, in United States v. Biaggi , 853 F.2d 89, 101-02 (2d Cir. 1988), held that “bribery” under the Travel Act can include gratuities prohibited under 18 U.S.C. ' 201; accord United States v. Gaines , 996 F.2d 1213 (4th Cir. 1993) (unpublished opinion). But another federal court has held that a violation of the Massachusetts gratuity statute cannot serve as a valid predicate for a Travel Act prosecution. United States v. Ferber , 966 F. Supp. 90, 101-07 (D. Mass. 1997).

As for the pre- McNally case law, it appears to have been extremely rare for the government to bring an honest services prosecution predicated on an official's receipt of gratuities. And in one such case, cited in Skilling , the Eighth Circuit held that the government had overstepped its bounds in doing so. United States v. McNeive , 536 F.2d 1245 (8th Cir. 1976) (holding that a plumbing inspector's receipt of unsolicited gratuities, which did not affect the performance of his official duties, could not be prosecuted under an honest services fraud theory).

The most extensive discussion of gratuities in the context of an honest services fraud prosecution is in United States v. Sawyer , 85 F.3d 713 (1st Cir. 1996). There, the First Circuit held that “proof of a violation'of the Massachusetts gratuity statute, without more, does not establish an intent to commit honest services fraud,” because honest services fraud also requires a finding of “corrupt intent, i.e. , improper intent to influence official decision-making.” The court, however, suggested that a gratuity given with such intent could be sufficient, even if a bribery-like specific quid pro quo was lacking, as such conduct “would be akin to” the then-extant line of cases (subsequently overruled in Skilling) applying ' 1346 to undisclosed conflicts of interest.

Next Month

Following the Skilling decision, courts have continued to struggle with the question of whether the payment of a gratuity constitutes honest services fraud. We will look at some of the post-Skilling cases that have grappled with this issue in next month's newsletter.

Gary Stein, a member of this newsletter's Board of Editors, is a partner with Schulte Roth & Zabel, LLP. Eli J. Mark is an associate with the firm.