Yesterday, in a 9-0 ruling in Skilling v. U.S., No.
08-1394, the Supreme Court limited the "honest services"
theory of mail- and wire-fraud prosecutions to cases of corporate
employees and public officials participating in "bribery and
kickback schemes." This landmark ruling places critical
constraints on prosecutions under the statute—some of
which went so far as to charge conduct as commonplace as business
decisions that proved unwise in retrospect. Congress is being
called on to expand the scope of the statute in light of the
Court's ruling, and executives should follow any such
developments closely, given the way the statute was used to
criminalize everyday business decisions.
For five years, O'Melveny litigated this issue on behalf of
Jeffrey Skilling, Enron's former CEO. Skilling was indicted in
2004 under an honest-services theory—not for accepting
bribes or kickbacks, but as prosecutors put it for doing his job
inappropriately, taking business risks, and breaching his fiduciary
duties. O'Melveny moved to dismiss, arguing the statute, 18
U.S.C. § 1346, which does not define "honest
services," was unconstitutionally vague; or, if the statute
was to be saved from a vagueness challenge, its scope must be
limited to cases of bribes or kickbacks. The lower courts rejected
these arguments, but the Supreme Court unanimously held that the
honest-services charges against Skilling were
"flawed"—six Justices reasoning the statute is
limited to cases of bribes and kickbacks, and three concluding the
statute is unconstitutionally vague.
Before Congress enacted § 1346 in 1988, most lower courts had
come to recognize an "honest services" theory of mail-
and wire-fraud in bribery and kickback cases, but that theory found
no grounding in the text of the statutes, and the cases recognizing
the theory were in a state of disarray. In 1987, in McNally v.
U.S., 483 U.S. 350, the Supreme Court rejected the
"honest services" theory, but invited Congress to
"speak more clearly" and amend the statute if it wanted
to endorse it. Congress soon enacted § 1346, but did so with
little or no debate and no care to define what "honest
services" meant.
Over the next 22 years, courts predictably struggled with how to
apply the statute, and a series of circuit splits developed, with
courts offering competing interpretations. In early 2009, the
Supreme Court showed its first inklings of hearing an
honest-services case. O'Melveny lawyers, acting as amicus
counsel, helped convince Justice Scalia to write a sharp dissent
from a denial of certiorari in a public-corruption honest-services
case, in which he signaled that § 1346 was being overextended
and might be unconstitutional.
In the months that followed, the Court granted cert in two
honest-services cases—both raising circuit splits over
how to read the statute, but not the constitutional question. In a
cert petition in the Skilling case, and an amicus brief in another,
O'Melveny argued Skilling's case must be
heard—because it squarely presented the constitutional
question and the alternative rule he posited was the most
appropriate. The Court granted cert in Skilling's case, used it
as the vehicle to clarify the scope of the statute, and unanimously
ruled, it is "clear that ... Skilling did not commit
honest-services fraud."
O'Melveny & Myers LLP routinely provides advice to clients on complex transactions in which these issues may arise, including finance, mergers and acquisitions, and licensing arrangements. If you have any questions about the operation of the applicable statutory provisions or the case law interpreting these provisions, please contact any of the attorneys listed on this alert.
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