In an unusual move, the Supreme Court will review three criminal appeals this term challenging the government’s prosecution of “honest services” fraud. While one of the cases involved a public official convicted of having defrauded his constituents of his “honest services” due to an undisclosed conflict of interest, the other two cases involved corporate officers convicted of defrauding shareholders or investors of their “honest services” by misrepresenting the true nature of certain business transactions. Published reports of the December 8, 2009, oral argument in two of those cases suggest that the government may have difficulty defending the pertinent criminal statute against charges that it is unconstitutionally vague or that it has been used to establish a uniform, federal standard of behavior for local and state officials regardless of any applicable state statutory scheme.
Over 20 years ago, in McNally v. United States, 483 U.S. 350 (1987), the Supreme Court ruled that the federal mail fraud statute was not broad enough to encompass “honest services” fraud. The following year, Congress enacted 18 U.S.C. § 1346 to extend the scope of the mail fraud statute to a “scheme or artifice to deprive another of the intangible right of honest services.” In the two decades since, prosecutors have aggressively applied § 1346 in the public sector to attack forms of corruption not specifically criminalized by other federal statutes and in the private sector to punish fraudulent conduct that does not necessarily involve depriving a victim of money or some other tangible property right.
However, in public sector cases, the circuit courts have split over whether a public official’s misconduct must violate a state law or breach a fiduciary duty under state law to qualify as “honest services” fraud. In the absence of such requirements, several courts have reasoned, federal prosecutors can, on a case-by-case basis, prescribe a single, federal code of conduct for public officials at all levels, regardless of the standards prescribed by individual state legislatures. Similarly, in private sector cases, the circuit courts have split over whether the government must prove that the goal of a defendant’s scheme was to obtain “private gain” at the expense of the employer or other entity to which the defendant owed a duty of “honest services.” Such issues have given rise to the argument that the “honest services” fraud statute is unconstitutionally vague because it gives inadequate notice of what constitutes criminal misconduct.
The Supreme Court first granted certiorari last May in the prosecution of media mogul Conrad Black. Black was the CEO of Hollinger International, a media conglomerate, and was convicted of depriving Hollinger of his “honest services” by disguising the true nature of a multi-million-dollar payment to himself and other executives. The Seventh Circuit affirmed Black’s conviction on the grounds that the objective of Black’s scheme had been “private gain,” even though Black had offered evidence that the only gain he had hoped to achieve from disguising the payment was not at the expense of Hollinger but of a third party, the Canadian government, in the form of a favorable tax treatment of the payment. United States v. Black, 530 F.3d 596 (7th Cir. 2008), cert. granted 129 S.Ct. 2379 (U.S. 2009).
Last June, the Supreme Court agreed to review the conviction of an Alaska state legislator who had voted on oil tax legislation without disclosing that he was negotiating to obtain future legal work from an affected company. See United States v. Weyhrauch, 548 F.3d 1237 (9th Cir. 2008), cert. granted 129 S.Ct. 2863 (U.S. 2009) and see the Winter 2009 issue of Day Pitney’s White Collar Quarterly for our coverage of the Ninth Circuit decision. The legislator was convicted of “honest services” fraud even though he had not yet received anything of value from the oil company and in the absence of any state law requiring that he disclose the conflict of interest.
Then, in October, the Supreme Court granted certiorari in the prosecution of former Enron CEO Jeffrey Skilling. Skilling had been charged with complicity in a variety of false statements and deceptive transactions designed to keep Enron’s stock price artificially high. The Fifth Circuit affirmed his conspiracy conviction despite Skilling’s contention that he had not engaged in self-dealing and that he had committed no fraud against Enron since he had acted in pursuit of the company’s goal of achieving a higher stock price. United States v. Skilling, 554 F.3d 529 (5th Cir. 2009), cert. granted 130 S.Ct. 393 (U.S. 2009).
The Supreme Court heard oral argument on December 8, 2009, in both the Black and Weyhrauch cases, with much of the discussion focusing on whether the “honest services” fraud statute was unconstitutionally vague. The New York Times reported that the law was met with “almost universal hostility from the justices.” Black’s attorney was asked just 25 questions during oral argument, while the Deputy Solicitor General was peppered with 60 questions from the justices. The newspaper described Justice John Paul Stevens, who had dissented in the 1987 McNally decision, as the only justice who seemed at all sympathetic to the government’s position in favor of the statute’s constitutionality as written.