Supreme Court Limits Federal “Honest Services” Fraud Statute

Posted by Edward F. Greene, Cleary Gottlieb Steen & Hamilton LLP, on Thursday July 1, 2010 at 9:11 am
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Editor’s Note: Edward Greene is a partner at Cleary Gottlieb Steen & Hamilton LLP focusing on corporate law matters. This post is based on a Cleary Gottlieb Alert Memo and relates to the U.S. Supreme Court decisions in Skilling v. United States and Black v. United States, which are available here and here.

Since the enactment of the “honest services” fraud statute, 18 U.S.C. § 1346, which defines the scope of the federal mail and wire fraud statutes to include the use of interstate means of communication to effect a “scheme or artifice to defraud … another of the intangible right of honest services,” federal prosecutors have used the provision in numerous cases to combat public and private corruption, and alleged corporate wrongdoing – even in situations where the defendant does not directly obtain money or property from the alleged victims of the fraud. Today, the U.S. Supreme Court issued two opinions that significantly restrict the scope of this statute. Skilling v. United States, 561 U.S, No. 08-1394 (June 24, 2010); Black v. United States, 561 U.S., No. 08-876 (June 24, 2010).

I. The Decisions

The principal question that the Supreme Court considered in Skilling was whether Section 1346’s prohibition against conduct that deprives another of “the intangible right of honest services” is unconstitutionally vague. [1] Writing for the Court, Justice Ginsburg declined to rule that the law should be invalidated in its entirety, but found that “Skilling’s vagueness challenge has force,” and limited “honest services” fraud to reach only bribery and kickback schemes. [2] Under this approach, the Court found that Mr. Skilling could not have violated Section 1346 because the prosecution did not allege that he solicited or accepted bribes or kickbacks, but rather that he conspired to defraud Enron’s shareholders by other means. Because Mr. Skilling’s conviction for conspiracy was predicated not only on the “honest services” fraud theory, but also on theories including securities fraud, the Court remanded the case to the courts to determine whether to invalidate Mr. Skilling’s conspiracy conviction, and to determine whether the other charges on which Mr. Skilling was convicted would be affected.

In a separate concurrence, Justice Scalia, joined by Justices Thomas and Kennedy, both agreed that Mr. Skilling’s conviction for “honest services” fraud was erroneous, and further concluded that Section 1346 was unconstitutionally vague in its entirety and could not be salvaged.

The Justices reiterated their views in Black, [3] and similarly remanded the case for further proceedings in the lower courts.

II. Ramifications of the Decisions

The decisions severely cabin Section 1346’s scope to apply solely to the most egregious quid pro quo-style transactions, and not to “honest services” claims based on other forms of alleged corporate malfeasance, such as self-dealing. Thus, the decisions may dramatically change the federal white-collar criminal landscape. Although prosecutors still have many tools in their toolbox, the decisions remove a powerful tool they have used in the investigation and prosecution of alleged corporate malfeasance. Indeed, prosecutors will no longer be able to prosecute under an “honest services” fraud theory conduct, including breaches of fiduciary duties, which is typically addressed in civil litigation. The Supreme Court’s decisions continue a trend of recent court decisions reorienting the balance between the state and individual in the criminal law.

Endnotes

[1] After the collapse of Enron, Mr. Skilling was convicted of, among other charges, conspiring to deprive Enron and its shareholders of his “honest services” by participating in a scheme to inflate the value of Enron’s shares by overstating Enron’s financial health.
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[2] Id. at 41-44.
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[3] Publishing magnate Conrad Black was convicted of violating federal mail fraud laws for enriching himself through improper dealings with Hollinger that he failed to disclose to Hollinger’s shareholders. Under the prosecution’s theory, the defendants’ failure to disclose these dealings “deprived Hollinger of their honest services as managers of the company.” Black, Slip Op. at 2.
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  1. Congratulations to the Supreme Court for recognizing that there is no such thing as “honest services” fraud, and pointing out how “charging claims” are important to the bringing of cases against alleged thieves and conspirators.

    Skilling conspiring to rob shareholders of his own honest services is equivalent to the Supreme Court robbing petitioners of their honest services by conspiring (deciding) not to bring the case forward.

    Thieves, however, generally do not offer honest services, and therein lies the problem of anchoring upon the honest services principles that allowed the case not to go forward on that basis.

    Because in Supreme Court decisions, the proof in in the pudding, only those cases brought can be rightfully decided, or wrongfully.

    When the Supreme Court decides that a day in court brings not justice, but an opportunity to be heard as the standard for justice, they would have already reduced the Constitution to the triviality it becomes, and robbed the American people of the judicial excellence they are promised under the Constitution. That is when the Constitution is made impotent for justice seekers.

    Wrongful charging cannot solve an honest service fraud case because there are no honest services to be had. Conspiracies lie before the fact, not after the harm is done, and the proof is in the pudding of the outcome of having conspired to produce the theft.

    Intentional harms have little to do with honest services; honest services fraud? is that like a little pregnant? accidents and errors happen just as accidental ommissions do; but commissions aforethought have little to do with honest services.

    Comment by Pat — December 31, 2010 @ 9:34 pm

 

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