After considering a trilogy of cases, the Supreme Court of the United States held that Congress' proscription of fraudulent deprivations of the intangible right of honest services is limited to schemes involving bribes and kickbacks. In Skilling v. United States, the Court vacated the Fifth Circuit's ruling affirming former Enron CEO Jeffrey Skilling's conspiracy conviction, which was based on an honest services fraud theory pursuant to 18 U.S.C. § 1346. The Court declined to strike down the statute as unconstitutionally vague, instead concluding that § 1346 "should be construed rather than invalidated" and looking to the "core" of honest services jurisprudence in supporting its construction. Skilling v. United States, No. 08-1394, slip op. at 39 (U.S. June 24, 2010).
In Black v. United States, the Court relied on its holding in Skilling to vacate the mail fraud conviction of media magnate Conrad Black and other leading executives of Hollinger International, and further held that a criminal defendant need not acquiesce to the Government's request for discrete jury findings in order to preserve a timely objection to jury instructions on an alternative theory of guilt. To require otherwise, the Court held, would conflict with the Federal Rules of Criminal Procedure.
Finally, in Weyhrauch v. United States, the Court relied on its ruling in Skilling to vacate the Ninth Circuit's judgment against a former attorney and member of the Alaska House of Representatives arising from his alleged solicitation of future legal work from a corporation in exchange for favorable votes and other legislative actions.
These decisions affect numerous pending prosecutions by foreclosing an expansive theory of criminal liability that the Government has been pursuing vigorously against both public officials and corporate officers.
Background
18 U.S.C. § 1341 makes it a federal crime to use the Postal Service or any private or commercial interstate carrier to execute or attempt to execute "any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises . . . ."1 Before 1987, the federal courts generally interpreted this prohibition to include schemes to defraud another of "intangible rights," such as the honest service of public officials, in addition to schemes involving money and property. See, e.g., United States v. Weyhrauch, 548 F.3d 1237, 1243 (9th Cir. 2008). The Supreme Court overturned this line of cases in McNally v. United States, 483 U.S. 350 (1987). The McNally court ruled that "[t]here are no constructive offenses; and before one can be punished, it must be shown that his case is plainly within the statute." Id. at 360. "Rather than construe the statute in a manner that leaves its outer boundaries ambiguous and involves the Federal Government in setting standards of disclosure and good government for local and state officials," the Court wrote, "we read § 1341 as limited in scope to the protection of property rights. If Congress desires to go further, it must speak more clearly than it has." Id.
In response to McNally, Congress enacted 18 U.S.C. § 1346, which defines the phrase "scheme or artifice to defraud," as used in §§ 1341 and 1343, to include "a scheme or artifice to deprive another of the intangible right of honest services." The Government has used an expansive interpretation of the mail and wire fraud statutes in prosecutions of both public officials and corporate officers accused of malfeasance. The Skilling/Black/ Weyhrauch trilogy narrows the prosecution theories available to the Government under these statutes.
Skilling v. United States
The primary case in the honest services trilogy is that of former Enron Corporation CEO Jeffrey Skilling. A jury convicted Skilling of one count of conspiracy. The Government's theory at trial allowed for three possible objects of the conspiracy: "to commit (1) securities fraud, (2) wire fraud to deprive Enron and its shareholders of money and property, and (3) wire fraud to deprive Enron and its shareholders of the honest services owed by its employees." United States v. Skilling, 554 F.3d 529, 542 (5th Cir. 2009). Skilling argued to the Fifth Circuit that it must reverse his convictions because the honest services fraud theory was invalid. Id.
The Fifth Circuit disagreed, reasoning that the "elements of honest-services wire fraud applicable here are (1) a material breach of a fiduciary duty imposed under state law, including duties defined by the employer-employee relationship, (2) that results in a detriment to the employer." Id. at 547. The Fifth Circuit rejected Skilling's argument that he did not breach his fiduciary duty because "his fraud was in the corporate interest and therefore was not self-dealing." Id. at 545. The court reasoned that "no one at Enron sanctioned Skilling's improper conduct. . . . Of course, a senior executive cannot wear his 'executive' hat to sanction a fraudulent scheme and then wear his 'employee' hat to perpetuate that fraud." Id. at 546.
On appeal to the Supreme Court, Skilling argued that 18 U.S.C. § 1346 is unconstitutionally vague because it "says nothing about the conduct it proscribes." Brief for the Petitioner at 22, Skilling v. United States, No. 08-1394 (Dec. 11, 2009). In the alternative, Skilling argued that honest services fraud under § 1346 should be limited to "bribes or kickbacks received from a third party as a quid pro quo for some advantage from the employer." Id. at 48.
Writing for a 6-3 majority on the honest services issue, Justice Ginsburg wrote that, "[i]n proscribing fraudulent deprivations of 'the intangible right of honest services,' Congress intended at least to reach schemes to defraud involving bribes and kickbacks." Skilling, No. 08-1394, slip op. at 1. Although it acknowledged that "Skilling's vagueness challenge has force," the Court observed that "[i]t has long been our practice, however, before striking a federal statute as impermissibly vague, to consider whether the prescription is amenable to a limiting construction." Id. at 41. Adhering to this approach, the Court held that while "some applications of the pre-McNally honest services doctrine occasioned disagreement among the Courts of Appeals, these cases do not cloud the doctrine's solid core: The 'vast majority' of the honest-services cases involved offenders who, in violation of a fiduciary duty, participated in bribery or kickback schemes." Id. at 43.
The Court further maintained that any concerns that the statute presented regarding (1) fair notice or (2) arbitrary and discriminatory prosecutions, were insufficient to warrant a void-for-vagueness ruling. "As to fair notice, whatever the school of thought concerning the scope and meaning of §1346, it has always been as plain as a pikestaff that bribes and kickbacks constitute honest-services fraud, and the statute's mens rea requirement further blunts any notice concern." Id. at 48 (internal citations and quotation marks omitted). The Court saw "no significant risk" of arbitrary prosecutions because the statute's "prohibition on bribes and kickbacks draws content not only from pre-McNally case law, but also from federal statutes proscribing – and defining – similar crimes." Id. at 48.2
Black v. United States
The defendants in Black were senior executives of Hollinger International ("Hollinger"), which owns newspapers through its subsidiary companies. 530 F.3d 596, 599 (7th Cir. 2008). One of Hollinger's subsidiaries, APC, owned a number of newspapers that "it was in the process of selling." Id. When APC was left with only one newspaper, Hollinger's general counsel prepared and executed, on behalf of APC, an agreement to pay Hollinger's senior executives a total of $5.5 million in exchange for their promise not to compete with APC for three years after their employment with Hollinger terminated. Id. The defendants maintained at trial that the payment constituted management fees and that it was characterized as such for Canadian tax purposes; the Government alleged that the transaction was fraudulent. Id. Although the jury was instructed on money-or-property fraud, it was also instructed, over the defendants' objections, that it could convict "upon proof that [the defendants] had schemed to deprive Hollinger and its shareholders 'of their intangible right to the honest services of the corporate officers, directors or controlling shareholders of Hollinger,' provided the objective of the scheme was 'private gain.'" Id. at 600. After a four-month trial, the jury convicted all of the defendants of mail and wire fraud.
Writing for a unanimous panel of the Seventh Circuit, Judge Posner affirmed the convictions. With regard to the Government's allegations of honest services fraud, the court held that the defendants could be guilty of both conventional fraud and honest services fraud under 18 U.S.C. §§ 1341 and 1346 if the jury found a misappropriation of funds that "both deprived their employer of its right to their honest services and obtained money from it as a result." Id. "Nothing is more common," Judge Posner wrote, "than for the same conduct to violate more than one criminal statute." Id. The court further held that the defendants' claim that the private gain sought was from a third party and not from the party to whom they allegedly owed their honest services was of no import. "[I]f the defendants in this case deprived their employer, Hollinger, of the honest services they owed it, the fact that the inducement was the anticipation of money from a third party (the anticipated tax benefit) is no defense." Id. at 601.3 Finally, the court held that the defendants had forfeited their objections to the honest services fraud instructions given to the jury by objecting to the Government's request for specific jury findings on the separate charges of (1) money-or-property fraud and (2) honest services fraud.
In their brief to the Supreme Court, the petitioners referred to 18 U.S.C. § 1346 as "a model of vagueness." Brief for the Petitioners at 17, Black v. United States, No. 08-876 (July 30, 2009). "No one who is not a federal prosecutor," argued appellants, "believes that a deprivation of 'honest services,' by itself, adequately and clearly describes an offense with the specificity required by the Constitution." Id. Ultimately, Petitioners argued that, regardless of the scope of Section 1346, their convictions had to be reversed because a conviction for honest services fraud could not be sustained "without a jury finding that the defendant contemplated some identifiable economic harm to the victim." Id. at 22. With regard to the Seventh Circuit's procedural holding, the petitioners argued that the court erred "in manufacturing an ad hoc amendment to the federal rules that retroactively imposed an onerous requirement for preserving instructional error." Id. at 50.
Applying its holding in Skilling, the Supreme Court held that the honest services jury instructions given by the district court in Black were incorrect because "[t]he scheme to defraud alleged . . . did not involve any bribes or kickbacks." Black v. United States, No. 08-876, slip op. at 5 n.7 (U.S. June 24, 2010). However, the Court had to decide a second issue before determining whether the Black judgment likewise should be vacated. In affirming the convictions, the circuit court in Black had held that the defendants forfeited their objections to the honest services fraud jury instructions by objecting to the Government's request for a specific jury verdict form. The Seventh Circuit opined that the defendants' insistence on a general verdict form had allowed them to "reserve the right to make the kind of challenge they are mounting in this court." Black, 530 F.3d at 603.
Writing for a unanimous Court on this issue, Justice Ginsburg vacated the judgment, holding that a criminal defendant "need not request special interrogatories, nor need he acquiesce in the Government's request for discrete findings by the jury, in order to preserve in full a timely raised objection to jury instructions on an alternative theory of guilt." Black, No. 08-876, slip op. at 2. The Court began its analysis by noting that "the Criminal Rules are silent on special verdicts . . . ." Id. at 7. As the Criminal Rules are spe- cific regarding what counsel must do to preserve an objection to a jury instruction, the Court reasoned that the Seventh Circuit had "in essence, added a further requirement for preservation of a meaningful objection to jury instructions" that was "unmoored to any federal statute or criminal rule." Id. Moreover, it had applied a sanction to the defendants by holding their argument forfeited without "any notice that forfeiture would attend their resistance to the Government's special-verdict request." Id. at 8. The Court held that this action violated Criminal Rule 57(b)'s proscription against imposing sanctions "for any requirement not in federal law [or] federal rules . . . unless the alleged violator was furnished with actual notice of the requirement before the noncompliance." Id. (quoting FED. R. CRIM. P. 57(b)) (alteration in original).
Weyhrauch v. United States
Unlike Skilling and Black, this case involved the conduct of a public official. Weyhrauch was a lawyer and a member of the Alaska House of Representatives in 2006. 548 F.3d at 1239. During his term of service, Alaska's legislature was considering legislation that would change the State's taxes on oil production, thus affecting corporate entities such as VECO Corp., an oil field services company. Id. According to the Government's indictment, Weyhrauch "solicited, by mail, telephone and personal contact, future legal work from VECO in exchange for voting on the oil tax legislation as VECO instructed and taking other actions favorable to VECO in Weyhrauch's capacity as a state legislator . . . ." Id. Count VII of the indictment charged honest services fraud. When the district court excluded evidence critical to Count VII on the theory that Weyhrauch had not violated a duty imposed by state law, the Government filed an interlocutory appeal. Id.
Considering its pre-McNally and relevant post-McNally decisions, as well as those of other circuit courts, the Ninth Circuit reversed, declining to adopt the "state law limiting principle." Id. at 1243-44. The circuit court expressed concerns about the potential breadth of § 1346, id., but nevertheless recognized two categories of public honest services fraud: "(1) taking a bribe or otherwise being paid for a decision while purporting to be exercising independent discretion and (2) nondisclosure of material information." Id. at 1247.4
On appeal to the Supreme Court, Weyhrauch urged the Court to "hold that a state official's failure to disclose a conflict of interest can never, standing alone, constitute a violation of the right of honest services, if it does not violate a clear legal duty separate and apart from § 1346." Brief for the Petitioner at 18, Weyhrauch v. United States, No. 08-1196 (Sept. 14, 2009). The Court again relied on its ruling in Skilling to vacate the Ninth Circuit's judgment without further analysis.
Conclusions
The practical implications of the Supreme Court holdings in Skilling and Black, as well as its remand in Weyhrauch, are significant and far-reaching. As the facts of these cases demonstrate, the Government has vigorously pursued an overly expansive theory of criminal liability against both public officials and corporate officers. The Court's holding in Skilling places the future of these prosecutions in serious jeopardy to the extent that they do not involve bribes or kickbacks taken in breach of a fiduciary duty. Furthermore, the Court's remand in Weyhrauch signals that prosecutions against public officials may be subject to the same limitations as those brought against private individuals like Skilling.
Although the Skilling holding regarding honest services fraud may garner the majority of the headlines, the Court's pronouncement in Black on the more procedural issue of preserving objections to jury instructions should not be overlooked by white-collar defendants or their counsel. The Court's decision provides defendants with a shield against overly aggressive Government prosecutions based on dubious legal theories. While the Court clarified that it did not "mean to suggest that special verdicts in criminal cases are never appropriate," id. at 6 n.11, criminal defendants and their counsel should carefully consider the strategic implications of Black on a case-by-case basis with an eye toward their litigation strategy.
Footnotes
1. 18 U.S.C. §1343 prohibits similar schemes executed via wire communications.
2. Justice Scalia filed a concurring opinion, joined by Justice Thomas and, in part, by Justice Kennedy, opining that § 1346 is unconstitutionally vague. Id. at 1 (Scalia, J., concurring). Justice Scalia charged that the majority, while striking "a pose of judicial humility . . . wield[ed] a power we long ago abjured: the power to define new federal crimes." Id.
3. The court maintained that, even if it were wrong on this point, the defense would still fail because "honest services fraud bleeds into money or property fraud." Black, 530 F.3d at 601. "In this case," Judge Posner wrote, "had the defendants disclosed to Hollinger's audit committee and board of directors that the recharacterization of management fees would net the defendants a higher after-tax income, the committee or the board might have decided that this increase in the value of the fees to them warranted a reduction in the size of the fees." Id. at 602. Although the court acknowledged that corporate employees are not regularly required to advise their employers of their tax status, it maintained that the defendants had a duty of candor due to their inherent conflict of interest. Id
4. The court further noted that the Government "must still prove fraudulent intent . . . and materiality." Weyhrauch, 548 F.3d at 1247 n.8.
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