Honest Services Fraud: The Trial Courts' Turn

Article by Sarah P. Kelly* and Megan E. Jeans**

Previously published in On Remand

Much hay has been made of the Supreme Court's 2010 decision, Skilling v. United States.1 In its opinion, the Court took the opportunity to try to scale back the definition of honest services fraud, something key members of the Court—notably Justice Scalia—had been eager to do for some time.2 The Court explicitly limited the statute to bribes and kickbacks and excluded other forms of honest services deprivation, notably undisclosed self-dealing.

But this was not the first time the Supreme Court had tried to curtail honest services fraud law; it had done so in 1986 in McNally v. United States.3 Shortly after McNally, however, Congress acted quickly to restore the scope of honest services fraud and enacted the current version of 18 U.S.C. § 1346. After Skilling, commentators and legislators alike began to call for Congress to once again undo the Supreme Court's work and restore federal prosecutors' ability to reach a broad range of corrupt conduct.4 Yet this time, two years after Skilling, Congress has failed to do anything. In this day and age, expanding the scope of the honest services statute appears not to be a priority.

This Article addresses whether the Supreme Court's decision in Skilling, or even Congress's subsequent failure to act, has any real effect on prosecutors' efforts to fight public corruption. While the Court presumably sought to clarify the law and pare it down to its clear statutory meaning, it now appears that the state of the law is close to where it was in May 2010—somewhat vague. In response, courts, rather than insisting on strict definitions of "bribery" or "kickbacks," have gone out of their way to shoehorn conduct into the new meaning of § 1346. Given the general willingness of trial and appellate courts to find almost any deprivation of honest services sufficient—with the emphasis on whether or not the deprivation was of actual honesty, not property—there appears to be little need to try to rewrite the statute. Courts have filled in where Congress has failed; they have expanded the law or added a good dose of common sense where necessary to ensure that those depriving the public of their honest services, just as the statute requires, face consequences for doing so.

Part I begins by briefly outlining the history of the honest services law up through 2010, when the Supreme Court issued its opinion in Skilling. Part II examines Skilling itself—the majority opinion, the dissent, and where the Court left unresolved questions. Part III analyzes sample district court cases (a few reviewed by the Courts of Appeals) that have dealt with recurring open questions, largely successfully. And finally, Part IV concludes with a few predictions and suggestions for the future, so as to keep the law in this area moving in the same direction—to make sure that public officials are on notice of what constitutes honest services fraud and, at the same time, make sure that the definition is not so narrow that clearly corrupt behavior is beyond the statute's reach.

1. A BRIEF HISTORY

   Before 1987, while there was no express law criminalizing the deprivation of "honest services," a body of common law allowed for the mail and wire fraud statutes to be used to prosecute elected officials for corruption or misconduct, or, in other words, for depriving their constituents of their honest services.5 In 1987, however, the Supreme Court struck down this body of law in McNally v. United States.6 The Court held that, while "[t]he mail fraud statute clearly protects property rights, . . . [it] does not refer to the intangible right of the citizenry to good government."7 The Court declined to read such a crime into the plain language of the mail and wire fraud statutes because Congress had not explicitly included the term "honest services." The Court stated: "If Congress desires to go further, it must speak more clearly than it has."8

   Congress responded by enacting 18 U.S.C. § 1346. The one-sentence statute defined the phrase "scheme or artifice to defraud" to include schemes to deprive others of "the intangible right of honest services."9 The definition—and the accompanying underlying crimes of mail and wire fraud— became one of prosecutors' favorite ways of criminalizing a wide variety of public and private conduct including bribery, kickbacks, corporate self-dealing, and the failure to disclose material information.

   For over twenty years, the Courts of Appeals unanimously upheld § 1346's ability to reach those who deprived others of the intangible right of honest services.10 In their opinion, the constitutionality of the new statute was not in question. The Courts of Appeals did, however, differ over what exactly the term "honest services" meant and what, if any, limitations should be placed on the language of the statute.

   The legal landscape shifted in 2009 when three Chicago City employees convicted of depriving the city of their honest services asked the Supreme Court to hear their case.11 Although the Court declined to hear the case, Justice Scalia took the opportunity to critique § 1346. In his dissent from the denial of certiorari, he wrote that the statute had been "invoked to impose criminal penalties upon a staggeringly broad swath of behavior, including misconduct not only by public officials but also by private employees and corporate fiduciaries."12 He went on:

   If the 'honest services' theory—broadly stated, that officeholders and employees owe a duty to act only in the best interests of their constituents and employers—is taken seriously and carried to its logical conclusion, presumably the statute also renders criminal a state legislator's decision to vote for a bill because he expects it will curry favor with a small minority essential to his reelection; a mayor's attempt to use the prestige of his office to obtain a restaurant table without a reservation; a public employee's recommendation of his incompetent friend for a public contract; and any self-dealing by a corporate office. Indeed, it would seemingly cover a salaried employee's phoning in sick to go to a ball game.13

   Further, Justice Scalia was concerned about the inconsistent applications of the statute by the courts. He noted: "[T]he Courts of Appeals have spent two decades attempting to cabin the breadth of § 1346 through a variety of limiting principles. No consensus has emerged."14

   The following term, the Supreme Court agreed to hear three cases concerning the scope of the honest services fraud statute: Black v. United States,15 United States v. Weyhrauch,16 and United States v. Skilling.17 Echoing Justice Scalia's concerns, Skilling challenged the constitutionality of the statute, arguing that the term "intangible right to honest services" was unconstitutionally vague.18

2. THE SKILLING DECISION

   In 2006, Jeffrey Skilling, the former chief executive officer of Enron Corporation, was convicted of conspiracy to commit honest services fraud; specifically, the government charged Skilling with conspiring to defraud Enron's shareholders by misrepresenting the company's true financial status, thereby overstating the company's stock price. The government argued that Skilling had received a benefit for his conduct— salary, bonuses, and Enron stock. On appeal, Skilling argued that the statute was unconstitutionally vague.

   The Supreme Court did not agree with Skilling entirely, but it took the opportunity to restrict the reach of the honest services fraud statute. The Court conceded that there was no uniform definition of the "intangible right" to "honest services" before McNally. However, in an effort to "save" the statute, the Court limited its meaning to the "vast majority" of pre-McNally cases that involved bribes or kickbacks.

   The Court reasoned that, because most of the cases before McNally involved bribery or kickbacks—rather than other less-defined types of dishonest conduct such as undisclosed self-dealing— Congress's language should not be construed to apply to any possible corrupt conduct but only to bribes and kickbacks.19 Such a limitation effectuated Congress's intention at the time: re-criminalization of bribery and kickbacks under the...