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(The article featured below is a selection from Federal Securities Law Reporter, which is available to subscribers of that publication.)

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.