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The Fate of Honest Services Fraud - 06/25/10

The U.S. Supreme Court has ruled that official misconduct (or misconduct by any accused person) is honest services fraud only if it involves bribery or kickbacks "improperly obtaining or rewarding favorable treatment." In a challenge to the federal honest services fraud statute, Justices Scalia, Thomas, and Kennedy sided with the petitioner Jeffrey Skilling that the statute, 18 U.S.C §1346, is unconstitutionally vague and, therefore, invalid.

Justice Ginsberg wrote the majority opinion in Skilling's case, in which the remaining justices either joined or concurred or concurred in part. Scalia, Thomas, and Kennedy, while disagreeing with the rationale, also concurred in the judgment. (The Court overruled Skilling's honest services fraud conviction.)

The decision was made public on June 24th.

Skilling was the former Enron CEO who was charged in connection with an elaborate conspiracy to prop up Enron’s stock prices by overstating the company’s financial well-being. Skilling and other Enron executives were charged with conspiracy, honest services fraud, and more than 25 counts of securities fraud, wire fraud, making false representations to Enron’s auditors, and insider trading. Four months after Skilling left Enron, the company, once the seventh highest revenue-grossing U.S. company, "spiraled into bankruptcy."

At the same time the Court decided Skilling's case, it overturned the convictions of Conrad M. Black, two co-defendants in Black's case, and former Alaska state representative Bruce Weyhrauch. In Weyhrauch's case, Bruce Weyhrauch was charged with honest services fraud because he did not disclose that he was seeking employment from a company with an interest in pending legislation which Weyhrauch voted on as a legislator. He was convicted despite the fact there was no state law requiring disclosure.

One rationale the Court might have used to uphold §1346 is that it is constitutionally applied if used in conjunction with a state law requiring disclosure or proscribing certain conduct. In other words, if Weyhrauch had violated a state law requiring disclosure, he could be convicted of honest services fraud (assuming, of course, that mail or wire was used in the commission of the crime) and could not have challenged the statute using the void-for-vagueness argument.

Honest services fraud has been a valuable tool for federal prosecutors combating local and state government corruption. A broad interpretation of honest services is one way for the feds to charge local officials over whom they otherwise have little criminal jurisdiction. But over-the-top cases like Weyhrauch provide ammunition to those who think §1346 is overbroad and a violation of due process.

The history of honest services fraud goes back to what is known as the pre-McNally era, before §1346 was enacted. Federal prosecutors started to charge persons with honest services fraud using the mail fraud statute under what is known as the intangible-rights doctrine. Then, as the Court recounts it,

In 1987, this Court, in McNally v. United States, stopped the development of the intangible-rights doctrine in its tracks. McNally involved a state officer who, in selecting Kentucky’s insurance agent, arranged to procure a share of the agent’s commissions via kickbacks paid to companies the official partially controlled. The prosecutor... maintained that the kickback scheme “defraud[ed] the citizens and government of Kentucky of their right to have the Commonwealth’s affairs conducted honestly.”

We held that the scheme did not qualify as mail fraud. “Rather than constru[ing] the statute in a manner that leaves its outer boundaries ambiguous and involves the Federal Government in setting standards of disclosure and good government for local and state officials,” we read the statute “as limited in scope to the protection of property rights.” “If Congress desires to go further,” we stated, “it must speak more clearly."

[Citations omitted]

Congress responded to McNally by passing §1346:

For the purposes of [the mail and wire fraud statute], the term “scheme or artifice to defraud” includes a scheme or artifice to deprive another of the intangible right of honest services.

18 U.S.C. §1341, the core mail fraud statute, provides:

Whoever, having devised or intending to devise any scheme or artifice to defraud... places in any post office or authorized depository for mail matter, any matter or thing whatever to be sent or delivered by the Postal Service... shall be fined under this title or imprisoned not more than 20 years, or both.

"Mail fraud" also applies to frauds perpetrated "by means of wire, radio, or television communication in interstate or foreign commerce" (18 U.S.C. §1343) and thus is often referred to as mail and wire fraud.

As earlier noted, federal prosecutors have used the mail and wire fraud statute in conjunction with 18 U.S.C. §1346 to convict numerous local and state officials, as well as corrupt business persons such as Jeffrey Skilling and Conrad Black. The law has also been ripe for attack as unconstitutionally vague not only by criminals, but also in the view of many legal scholars. The Supreme Court had not, however, had a chance to review the vagueness issue until the three cases decided June 24th -- Skilling, Black, and Weyhrauch -- reached the Court this term.

While acknowledging that the vagueness argument advanced by Skilling and by Justices Scalia, Thomas, and Kennedy has some force, the Skilling decision nonetheless held, "Interpreted to encompass only bribery and kickback schemes, §1346 is not unconstitutionally vague."

Why just bribery and kickbacks? Remember McNally? It involved a kickback scheme. Most cases prior to the McNally decision involved bribery and kickbacks. Therefore, the Court concluded, in passing §1346 to restore the status quo ante and in view of the history of honest services prosecution pre-McNally, Congress must have intended honest services fraud "to reach at least bribes and kickbacks." However,

Reading the statute to proscribe a wider range of offensive conduct, we acknowledge, would raise the due process concerns underlying the vagueness doctrine. To preserve the statute without transgressing constitutional limitations, we now hold that §1346 criminalizes only the bribe-and-kickback core of the pre-McNally case law.

The dissenting justices thought this rationale was defective, but it served the purpose of preserving the statute and knocked the vagueness argument out of the water. It's now up to Congress to see if they want to refine the honest services law to encompass a "wider range of offensive conduct."