Originally published April 21, 2010
This term, the United States Supreme Court will decide three
cases concerning the federal mail and wire fraud statutes, 18
U.S.C. §1341, et seq. All three cases involve a
particular type of fraud, commonly known as "honest
services" fraud.
For decades, the Department of Justice has used the mail and
wire fraud statutes to prosecute elected officials who, while not
depriving their victims of tangible property, failed to provide the
"intangible right of honest services" to their
constituents. In recent years, this theory increasingly has been
applied in both the public and private sectors to charge
legislators, corporate officers, and others with failing to provide
honest services. This year, questions concerning this controversial
application of the mail and wire fraud statutes have made their way
to the Supreme Court, and the justices will have the opportunity to
define, or perhaps even invalidate, the honest services fraud
statute.
Before 1987, every one of the United States Courts of Appeals
accepted the argument that the mail and wire fraud statutes could
be used to prosecute elected officials for corruption or
misconduct, or, in other words, for depriving their constituents of
their honest services. In 1987, however, the Supreme Court struck
down this theory in McNally v. United States, 483 U.S. 350
(1987), finding 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." The
Court reasoned that Congress had not explicitly included
"honest services" in the mail fraud statute and declined
to read such a crime into the plain language of the mail and wire
fraud statutes. The Court called upon Congress to act, stating:
"If Congress desires to go further, it must speak more clearly
than it has."
Congress did so. Shortly after McNally, Congress
enacted 18 U.S.C. §1346, a one-sentence statute that defined
the phrase "scheme or artifice to defraud" to include
schemes to deprive others of "the intangible right of honest
services." Since then, the statute has become a favorite of
federal prosecutors. It has been used increasingly to prosecute
corrupt politicians, including Governors Rod Blagojevich and George
Ryan of Illinois; Joseph Bruno, the former New York Senate Majority
Leader; and Governor Donald E. Siegelman of Alabama; lobbyists such
as Jack Abramoff; and corporate executives.
In the twenty years since Congress's amendment, none of the
Courts of Appeals have found the wire fraud statute to be
unconstitutional; they have unanimously upheld the statute's
ability to reach those who have deprived others of the intangible
right of honest services. The Courts of Appeals have, however,
differed over what exactly the term "honest services"
means and what, if any, limitations should be placed on the broad
language of the statute. A challenge to the scope of the statute
reached the Supreme Court in 2009, when three Chicago City
employees convicted of violating the wire fraud statute for
depriving the City of their honest services petitioned the Supreme
Court for certiorari. See Sorich v. United States, 129 S.
Ct. 1308 (2009). The Court declined to hear the case, but Justice
Scalia, dissenting from the denial of certiorari, took the
opportunity to write a scathing critique of "honest
services" fraud. 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." He went on:
Scalia also lamented the inconsistent applications of the statute by the courts. He noted: "The Courts of Appeals have spent two decades attempting to cabin the breadth of §1346 through a variety of limiting principles. No consensus has emerged."
While the remaining justices were not inclined to hear
Sorich's case in 2009, the Supreme Court, this term, has taken
three cases concerning honest services fraud, giving it ample
opportunity to review the "limiting principles" imposed
by various Courts of Appeals. The Court has granted certiorari and
heard oral argument in three cases involving honest services fraud,
United States v. Black, United States v.
Weyhrauch, and United States v. Skilling. All three
cases raise different issues, in the context of honest services
fraud, for the Court.
The first case, United States v. Black, raises the
issue of whether a charge of honest services fraud requires that
the victim suffer some "identifiable" economic loss, as a
number of Courts of Appeals have held. Black was a wire
fraud case brought against newspaper executive Conrad Black. Black,
the CEO of Hollinger International Inc. ("Hollinger"),
was convicted of failing to disclose a certain tax benefit he
received to Hollinger's Board of Directors. Black did not,
according to his attorneys, cause any economic harm to
Hollinger's shareholders. Thus, he argued that he could
not—by definition—be guilty of wire fraud, as a
"scheme to defraud" must include a victim (the employer)
who was actually defrauded. Here, there was no economic
loss to the victim, and thus, no "fraud" occurred.
Not surprisingly, the Solicitor General in response pointed to
the plain language of §1346. This language would be
unnecessary, indeed entirely redundant, the government argued, if
the deprivation of honest services also required a deprivation of
property or economic loss. As the government put it, "An
economic-harm requirement would reintroduce into the mail fraud
statute a variant of the very restriction that Section 1346 was
designed to eliminate."
The second case before the Court, United States v.
Weyhrauch, raises an entirely different issue: whether a
public official, if he does not violate a specific duty imposed by
state law, can properly be charged with honest services fraud.
Bruce Weyhrauch was a member of Alaska's House of
Representatives. While discussing potential future employment with
an oil corporation, he voted on a bill directly affecting that
corporation. He did not disclose his potential future employment,
but violated no Alaska law in failing to do so.
The U.S. Government argued that there was no requirement anywhere in the statute that the "honest services" deprivation also be a violation of state law, and that Congress intended none. Weyhrauch argued that the statute, if read not to require a state law violation, was nothing more than limitless federal criminal common law, allowing prosecutors to decide what ethical practices violated their own senses of fairness.
Finally, later in the term, the Court heard argument on
United States v. Skilling, an appeal of the conviction of
Jeffrey Skilling, the former Chief Executive Officer of Enron.
Skilling's appeal focused largely on jury selection in his
trial, but Skilling also challenged the constitutionality of
§1346 on vagueness grounds, arguing that it does not give a
person of "ordinary intelligence a reasonable opportunity to
know what is prohibited." He further argued that if the
statute was not struck down, it should be limited to cases
involving bribes or kickbacks. The government defended the statute,
arguing that it required: (1) a material breach of the duty of
loyalty, as all misrepresentations in fraud cases must be material,
and (2) a specific intent to deceive. These elements, the
government argued, clearly limit the statute's reach. The
government further noted that the statute, in codifying
pre-McNally case law, prohibited two general types of
conduct: bribes/kickbacks and undisclosed personal financial
conflicts of interest. Thus, given the clear delineation of
prohibited conduct, the statute is not unconstitutionally
vague.
Decisions are expected on all three of these cases by the end of
this term. The Court appears poised to redefine the law in this
area. Many Court watchers expect that the law will be struck down
or significantly limited. If the Court takes either of these steps,
finding the law to be unconstitutional or radically limiting its
reach, there will likely be a new round of litigation as defendants
previously convicted under §1346 seek to vacate their
convictions.
This article was prepared by Robert L. Ullmann and Sarah P. Kelly, members of the firm's Government Investigations and White Collar Defense practice groups.
This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.