Gratuities and Honest Services Fraud

Just a few months earlier, however, in United States v. Bahel, 662 F.3d 610, 633 (2d Cir. 2011), the government had adopted a more conservative approach, conceding at oral argument that after Skilling, honest services fraud does not encompass illegal gratuities. The defendant had challenged the pre-Skilling jury instruction, arguing that it could have permitted him to be convicted on the basis of receiving illegal gratuities instead of bribes. Although the court did not decide whether honest services fraud can be premised on a gratuity theory of liability, it characterized Skilling as having “defined classic kickbacks as involving the receipt of something of value from a third party 'in exchange for' official action,” consistent with the distinction in United States v. Sun-Diamond Growers of California, 526 U.S. 398, 404-05 (1999), between bribes and gratuities under 18 U.S.C. ' 201. Because the district court's instruction provided that the official acts must have been “in return for” something and did not incorporate the word “reward,” the court held that the jury was properly instructed.

And in subsequent cases the Second Circuit, without mention of Nicolo, recognized that a quid pro quo is now required by Skilling. See, e.g., United States v. Bruno, 661 F.3d 733, 743 (2d Cir. 2011). Other post-Skilling courts also have held or assumed that “[t]he bribery-and-kickback theory of honest services fraud requires 'a quid pro quo.'” United States v. Ciavarella, 716 F.3d 705, 729 (3d Cir. 2013); see also United States v. McDonough, 727 F.3d 143, 152 (1st Cir. 2013); United States v. Grace, 2014 WL 2111174 at *4 (5th Cir. May 21, 2014) (unpublished opinion). In United States v. Lynch, 807 F. Supp. 2d 224, 232-33 (E.D. Pa. 2011), the court vacated a plea entered into pre- Skilling because the government had not alleged that the payments made to a city tax assessor by a real estate developer involved quid pro quo bribery.

Limiting Principles

Despite the conflicting signals emanating from Skilling and other cases, the question of whether gratuities should be enough to support a ' 1346 prosecution seems readily answerable by reference to a few basic principles. First, the terms “bribery and kickbacks” do not, in their ordinary and natural meaning, encompass mere gratuities. Notwithstanding United States v. Biaggi, 853 F.2d 89, 101-02 (2d Circuit, 1988), gratuities are not a form of “bribery.” The Supreme Court's decision in Sun Diamond ' which drew a sharp line between a “bribery” and a “gratuity” and unequivocally held that “for bribery there must be a quid pro quo, a specific intent to give or receive something of value in exchange for an official act,” makes that abundantly clear. See also McCutcheon v. FEC, 134 S.Ct. 1434, 1441 (2014) (“The hallmark of corruption is the financial quid pro quo: dollars for political favors.”) (citation omitted).

Second, to fall within ' 1346, a bribery or kickback scheme must be one designed to “deprive another of the intangible right to honest services.” Although receipt of a gratuity for conduct related to an official position might be dishonest, without intent to influence official action the conduct does not actually deprive the public of honest services. See United States v. Sawyer, 85 F.3d at 725 (1st Cir. 1996). Thus, in essence, the receipt or giving of a gratuity that does not involve a quid pro quo is akin to undisclosed self-dealing ( see id . at 730), which Skilling specifically eliminated as a predicate for an honest services fraud prosecution.

Third, as Skilling instructs, honest services prosecutions are now limited to the “the bribery-and-kickback core” of pre- McNally case law, “the paradigmatic cases of bribes and kickbacks.” But prosecutions predicated on mere gratuities certainly were not part of the pre- McNally “core” and do not represent a “paradigmatic” bribery-and-kickback case.

Conclusion

In light of Skilling's limitation of ' 1346 to “bribery and kickback” schemes, as well as its recognition that not every instance of self-dealing amounts to honest services fraud, permitting prosecution under ' 1346 for giving or receiving gratuities would be incongruous.

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.

As noted in Part One of this article, 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, yet did not define what a “bribery” or “kickback” scheme must entail. So the question becomes this: Must a “bribe or kickback” involve a quid pro quo ' a specific intent to give or receive something in exchange for favorable official action? Or will payment of a gratuity as a reward for official action suffice to support a prosecution for honest services fraud? The debate continues.

Post-Skilling Uncertainty

In reviewing challenges to honest services fraud convictions after Skilling , some courts have referenced the broad definition of “kickback” under the Anti-Kickback Act and found that the government is not required to establish that an official act was taken in exchange for a payment. In United States v. Nicolo , 421 Fed. Appx. 57, 64 (2d Cir. 2011), the defendant, a town assessor, had pleaded guilty pre- Skilling to receiving money in connection with tax assessments, but in his allocution he had expressly disclaimed that the money was a quid pro quo for favorable treatment. The Second Circuit ' in a non-precedential opinion ' rejected his post-Skilling argument that his plea lacked a sufficient factual basis, holding that because the defendant “freely acknowledged receiving money in connection with the assessment reductions that he had arranged,” such conduct amounted to “kickbacks” sufficient to warrant prosecution under ' 1346. See also United States v. Yaron, 2011 WL 3279054, at *4 (S.D.N.Y. July 28, 2011) (stating that gratuities fall within the definition of a kickback under Skilling).

Just a few months earlier, however, in United States v. Bahel , 662 F.3d 610, 633 (2d Cir. 2011), the government had adopted a more conservative approach, conceding at oral argument that after Skilling , honest services fraud does not encompass illegal gratuities. The defendant had challenged the pre-Skilling jury instruction, arguing that it could have permitted him to be convicted on the basis of receiving illegal gratuities instead of bribes. Although the court did not decide whether honest services fraud can be premised on a gratuity theory of liability, it characterized Skilling as having “defined classic kickbacks as involving the receipt of something of value from a third party ' in exchange for ' official action,” consistent with the distinction in United States v. Sun-Diamond Growers of California , 526 U.S. 398, 404-05 (1999), between bribes and gratuities under 18 U.S.C. ' 201. Because the district court's instruction provided that the official acts must have been “in return for” something and did not incorporate the word “reward,” the court held that the jury was properly instructed.

And in subsequent cases the Second Circuit, without mention of Nicolo, recognized that a quid pro quo is now required by Skilling. See, e.g., United States v. Bruno, 661 F.3d 733, 743 (2d Cir. 2011). Other post- Skilling courts also have held or assumed that “[t]he bribery-and-kickback theory of honest services fraud requires 'a quid pro quo .'” United States v. Ciavarella , 716 F.3d 705, 729 (3d Cir. 2013); see also United States v. McDonough , 727 F.3d 143, 152 (1st Cir. 2013); United States v. Grace, 2014 WL 2111174 at *4 (5th Cir. May 21, 2014) (unpublished opinion). In United States v. Lynch , 807 F. Supp. 2d 224, 232-33 (E.D. Pa. 2011), the court vacated a plea entered into pre- Skilling because the government had not alleged that the payments made to a city tax assessor by a real estate developer involved quid pro quo bribery.

Limiting Principles

Despite the conflicting signals emanating from Skilling and other cases, the question of whether gratuities should be enough to support a ' 1346 prosecution seems readily answerable by reference to a few basic principles. First, the terms “bribery and kickbacks” do not, in their ordinary and natural meaning, encompass mere gratuities. Notwithstanding United States v. Biaggi , 853 F.2d 89, 101-02 (2d Circuit, 1988), gratuities are not a form of “bribery.” The Supreme Court's decision in Sun Diamond ' which drew a sharp line between a “bribery” and a “gratuity” and unequivocally held that “for bribery there must be a quid pro quo , a specific intent to give or receive something of value in exchange for an official act,” makes that abundantly clear. See also McCutcheon v. FEC , 134 S.Ct. 1434, 1441 (2014) (“The hallmark of corruption is the financial quid pro quo : dollars for political favors.”) (citation omitted).

Second, to fall within ' 1346, a bribery or kickback scheme must be one designed to “deprive another of the intangible right to honest services.” Although receipt of a gratuity for conduct related to an official position might be dishonest, without intent to influence official action the conduct does not actually deprive the public of honest services. See United States v. Sawyer , 85 F.3d at 725 (1st Cir. 1996). Thus, in essence, the receipt or giving of a gratuity that does not involve a quid pro quo is akin to undisclosed self-dealing ( see id . at 730), which Skilling specifically eliminated as a predicate for an honest services fraud prosecution.

Third, as Skilling instructs, honest services prosecutions are now limited to the “the bribery-and-kickback core” of pre- McNally case law, “the paradigmatic cases of bribes and kickbacks.” But prosecutions predicated on mere gratuities certainly were not part of the pre- McNally “core” and do not represent a “paradigmatic” bribery-and-kickback case.

Conclusion

In light of Skilling's limitation of ' 1346 to “bribery and kickback” schemes, as well as its recognition that not every instance of self-dealing amounts to honest services fraud, permitting prosecution under ' 1346 for giving or receiving gratuities would be incongruous.

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.