Supreme Court narrows 'honest services' fraud statute

In Skilling v US(1) the Supreme Court vacated the Fifth Circuit's ruling affirming former Enron executive Jeffrey Skilling's conviction under the 'honest services' component of the federal ban on mail and wire fraud. The decision curbs a widely used prosecutorial tool by limiting the scope of the statute to fraud involving bribery and kickbacks. Nevertheless, the decision may not fully eliminate ambiguity in the statute's application within the bribery and kickback contexts regarding the types of individual who are covered and the source of the fiduciary obligations underlying the statute.

The honest services statute provides that for the purposes of specified mail and wire fraud offences, "the term 'scheme or artifice to defraud' includes a scheme or artifice to deprive another of the intangible right of honest services".(2) Skilling urged the court to hold the statute void as unconstitutionally vague, because it fails adequately to define barred conduct and facilitates "opportunistic and arbitrary" prosecutions. The court, in a portion of the opinion authored by Justice Ginsburg and joined by five other justices, rejected that position. Looking to the early development of the honest services doctrine before the enactment of Section 1346, the court found that the courts of appeals "dominantly and consistently applied the fraud statute to bribery and kickback schemes", though there was "considerable disarray" of its application outside that core category. The court's 1987 decision in McNally v US had halted this development of the honest services doctrine in fraud cases by limiting it to the protection of property rights. The next year, Congress responded by enacting Section 1346. By doing so, the court concluded, Congress "meant to reinstate the body of pre-McNally honest-services law".

Although the courts of appeals were divided on how to interpret Section 1346, none had held that the statute was unconstitutionally vague. Likewise, the court agreed that Section 1346 "should be construed rather than invalidated", and that Congress's intent to reverse McNally and reinstate the prior cases "can and should be salvaged by confining its scope to the core pre-McNally applications". Opting for a "limiting construction" of the statute, the court confined its scope to pre-McNally cases that "involved fraudulent schemes to deprive another of honest services through bribes or kickbacks supplied by a third party who had not been deceived". Thus, Section 1346 "criminalizes only the bribe-and-kickback core of the pre-McNally case law".

The government had argued that the statute also encompassed:

"undisclosed self-dealing by a public official or private employee—i.e., the taking of an official action by the employee that furthers his own undisclosed financial interests while purporting to act in the interests of those to whom he owes a fiduciary duty."

But the court rejected this view, finding that while some pre-McNally cases had upheld honest services convictions for non-disclosure or concealment of information, the courts of appeals "reached no consensus" on the applicable standards, and a construction of Section 1346 "must exclude this amorphous category of cases".

Because the government did not allege that Skilling engaged in bribery or kickbacks from a third party in exchange for any misrepresentations, he could not be convicted of honest services fraud. The Supreme Court vacated the court of appeals' opinion, and remanded for a determination of whether the conspiracy indictment constituted harmless error and whether a reversal on the conspiracy count, if any, would affect his other convictions.

While six justices found that pre-McNally case law yielded principles coherent enough to pass constitutional muster, three justices disagreed. A concurring opinion authored by Justice Scalia and joined by Justices Thomas and Kennedy found the honest services statute was unconstitutionally vague and would have reversed Skilling's conviction on the basis that Section 1346 provided no "ascertainable standard" of guilt. By reviving "the pre-McNally honest-services doctrine", the concurring justices argued that the court took "a step out of the frying pan and into the fire", leaving unacceptable ambiguity in the scope and standards of a criminal statute, including (i) whether the statute applies to both public and private officials, and (ii) what is the indefinite source of the fiduciary obligations underlying the statute.

Such unresolved issues indicate that the parameters of prosecutorial discretion, while curbed, are still not clearly defined. The Skilling decision will likely eliminate prosecutions where the defendant is not alleged to have secured a benefit from a third party in exchange for fraudulent conduct, because it will be difficult, if not impossible, to characterize such circumstances as involving bribery or kickbacks. In Skilling's case, for example, the prosecution had alleged that he had engaged in fraudulent conduct in order to benefit his company and, indirectly, increase his own compensation. In two companion cases where the court vacated convictions on the basis of Skilling, the defendants were not alleged to have gained any personal benefit from their allegedly fraudulent activities. The court, however, held that none of this conduct is covered by Section 1346. The decision leaves open the question of whose duties create violations of the statute in conjunction with a benefit from a third party, and whether those duties are prescribed by state or federal law. The divergent views of the members of the court foreshadow the contours of future cases - barring potential legislative enactments - as the court's decision directs the courts to interpret the statute based on a less-than-settled body of pre-1987 cases.

For further information on this topic please contact Richard Craig Smith, Jonathan S Franklin, Kimberly Sullivan Walker or Mark Thomas Emery at Fulbright & Jaworski LLP by telephone (+1 202 662 0200), fax (+1 202 662 4643) or email (rcsmith@fulbright.com, jfranklin@fulbright.com, kwalker@fulbright.com or memery@fulbright.com ).

Endnotes

(1) No 08-1394.

(2) 18 USC § 1346.