Supreme Court Narrows Scope of Honest
Services Fraud Statute
The U.S. Supreme Court, ruling on the appeal of Jeffrey Skilling,
a former high ranking official of Enron Corporation, construed the
honest services wire fraud statute to be properly confined to cover
only bribery and kickback schemes. The ruling responded to Mr.
Skilling’s appeal of the Fifth Circuit’s decision that upheld the
charge that Mr. Skilling had conspired to commit honest services
fraud by depriving Enron and its shareholders of the intangible
right of his honest services.
The court applied the Skilling decision to two other cases
in which appeals were brought regarding the honest services fraud
statute. The first case was Black v. U.S, which concerned
Conrad Black, the former CEO of Hollinger International who was
indicted under the honest services fraud statute for stealing money
from Hollinger by paying himself undisclosed non-competition fees.
The court also applied the Skilling holding to Weyhrauch
v. U.S. (Doc. No. 08-119), a case in which Bruce Weyhrauch, an
Alaskan legislator, was charged with honest services fraud for
failing to disclose a conflict of interest. The three cases were
remanded to the lower courts for further consideration in light of
the court’s holding in Skilling.
In reviewing the history of the honest services doctrine, the
court noted that beginning in the 1940s, the circuit courts
interpreted the mail fraud statute’s prohibition of any scheme or
artifice to defraud to include deprivations not only of money or
property, but also of intangible rights. The court stopped the
development of the intangible-rights doctrine in McNally v. U.S.,
483 U.S. 350 (1987), which ruled that the statute was
"limited in scope to the protection of property
rights." Congress responded in 1988 by enacting Section 1346
which provided that the mail and wire fraud statutes would apply to
the deprivation of another’s right to honest services.
The court rejected Mr. Skilling’s argument that the honest
services statute should be struck down completely because it is
unconstitutionally vague, finding instead that the statute should be
construed narrowly rather than invalidated.
The court searched the doctrines developed in pre-McNally
cases in an endeavor to ascertain the meaning of the phrase “the
intangible right of honest services.” In order to preserve what
Congress intended Section 1346 to cover, the court found that, in
the main, the pre-McNally cases involved fraudulent schemes
to deprive another of honest services through bribes or kickbacks
supplied by a third party who had not been deceived. In view of this
history, the court found no doubt that Congress intended Section
1346 to at least reach bribes and kickbacks. The court found that
because interpreting the statute to proscribe a wider range of
offensive conduct would raise vagueness concerns, Section 1346
criminalizes only behavior involving bribes and kickbacks.
The court rejected the government’s argument that the court
should hold that Section 1346 pertains to another category of
conduct, the undisclosed self-dealing by a public official or a
private employee. Observing that McNally did not concern a
non-disclosure of a conflict of a financial interest but involved a
classic kickback scheme, the court said that reading the statute to
proscribe bribes and kickbacks and nothing more, satisfied Congress’
desire to reverse McNally on its facts.
The government’s argument that the pre-McNally conflict of
interest cases constituted core applications of the honest services
doctrine did not sway the court, which noted that while the Circuit
courts upheld honest services convictions for some conflict of
interest schemes in the pre-McNally cases, they reached no
consensus on which schemes qualified. Given the relative infrequency
of these prosecutions and the inconsistencies they produced among
the circuits, the court concluded that a reasonable limiting
construction of Section 1346 should exclude this amorphous category
of cases. The court said that if Congress wishes these categories to
be covered it "must speak more clearly than it
has."
Justice Ruth Ginsburg was joined in the ruling regarding the
honest services fraud doctrine by Chief Justice John G. Roberts Jr.
and Justices John Paul Stevens, Stephen G. Breyer, Samuel A. Alito
Jr. and Sonia Sotomayor. In a concurring opinion with regard to the
honest services doctrine, Justice Antonin Scalia agreed that the
decision upholding Mr. Skilling’s conviction for so-called
"honest services fraud" must be reversed
but for a different reason—because the statute is vague and
therefore violates the due process clause of the Fifth Amendment.
Justice Scalia stated that the court, in transforming the
prohibition of honest services fraud into a prohibition of bribery
and kickbacks, has taken a "step out of the
frying pan into the fire." Justice Scalia noted that the
court’s determination would not solve the most fundamental
indeterminacy of the statute, which is the character of the
"fiduciary capacity" to which the bribery
and kickback restriction applies.
□ Skilling v. U.S. will be published in a forthcoming
Report.