Fate of Honest-Services Fraud Uncertain Post-Skilling

The future of the honest-services fraud statute, one of the most common tools prosecutors use in anti-corruption cases, remains a mystery in Washington, as courts digest the effect of a recent Supreme Court ruling narrowing the law while lawmakers try to undo that same decision.

The ruling, Skilling v. United States, vacated the conviction of Jeffrey Skilling, the now-infamous ex-CEO of Enron who led the company as it collapsed in accounting fraud in 2001. The Supreme Court handed down that decision in June and also reined in the scope of the honest-services statue, holding that it covers only bribery and kickback schemes and not undisclosed self-dealing. Now federal district courts across the land are trying to apply that standard to current fraud and corruption cases.

O’Toole

“There have been a few cases where courts are asking for briefings in light of Skilling, but that’s as far as it’s gotten,” says Tim O’Toole of the law firm Miller & Chevalier.

Congress, meanwhile, wants to blunt the impact of the court’s ruling as soon as it can. Senate Judiciary Committee Chairman Patrick Leahy, D-Vt., has introduced the Honest Services Restoration Act to expand the law back to its traditional reach, covering improper, undisclosed self-dealing by state and federal public officials and corporate officers and directors.

Hartman

Corporate defense lawyers have long complained that prosecutors use the statute far more broadly than ever intended and cheered when the Skilling decision came down last summer. Specifically, they said that the language of the law was unclear on what it prohibited: ”It had become a catch-all used to target any sort of conduct that didn’t smell right,” says Barry Hartman, a partner in the law firm K&L Gates.

Prior to Skilling, the statute expressly provided that the mail and wire fraud statutes covered schemes “to deprive another of the intangible right to honest services.” Prosecutors ran with that language as far as they could, using the statute to convict Skilling and other ex-CEOs who became poster boys for corporate misconduct in the 2000s. They also used it to convict former Louisiana congressman William Jefferson on bribery charges in 2009.

Skilling was convicted in 2006 on 19 counts, including honest-services fraud, and sentenced to 292 months in prison. Although the Supreme Court said the former Enron executive didn’t commit honest-services fraud, it also said the ruling didn’t require reversal of Skilling’s conviction, and remanded the case to the lower court to determine what, if any, effect there would be on the other counts of conviction.

“The same cases are being brought trying to fit the conduct into the bribery or kickback mold, or they’re being brought under other federal statutes.”

—Tim O’Toole,

Lawyer,

Miller & Chevalier

Some other high-profile honest-services convictions are currently under review as a result of the court’s Skilling decision. The high court also vacated the honest-services fraud convictions of media mogul Conrad Black, former chief executive of Hollinger International, and former Alaska state legislator Bruce Weyhrauch. Both cases were remanded to lower courts for further proceedings. The Supreme Court also ordered the 11th Circuit Court of Appeals to review the bribery and honest-services convictions of former Alabama governor Don Siegelman and former HealthSouth CEO Richard Scrushy.

Still, O’Toole says there “hasn’t been a huge onslaught of cases trying to overturn honest-services convictions.”

Others say Skilling hasn’t dissuaded prosecutors from bringing cases charging honest-services fraud. Indeed, honest-services fraud was among the charges brought by the Justice Department just this month in a 39-count indictment against 11 Alabama legislators, lobbyists, and businessmen charged in an alleged conspiracy to influence votes related to electronic bingo legislation.

“The same cases are being brought trying to fit the conduct into the bribery or kickback mold, or they’re being brought under other federal statutes,” O’Toole says.

For instance, he says, other federal statutes, such as the bribery statute that applies to state and local officials and the federal Travel Act, are being used more frequently. And some prosecutors still try to “stretch the law just as far as it went before,” he says.

On the Hill

NEED FOR LEGISLATION

In this excerpt from the Department of Justice Assistant Attorney General Lanny Breuer’s statement before the U.S. Senate Committee on the Judiciary, Breuer discusses why legislation is needed around honest services fraud:

A public official who conceals his financial interests and then takes official action to

advance those interests engages in behavior every bit as corrupt as if he accepts a clear bribe

from a third party. The Department urges Congress to act quickly to restore our ability to

prosecute individuals for this kind of undisclosed self-dealing. We recognize that Congress

cannot remedy the problems caused by Skilling in regard to past conduct because of the Ex Post

Facto Clause of the Constitution, but it can act to provide our prosecutors with an additional

important tool to fight fraud and corruption in the future. We look forward to working with the

Committee to insure that any legislative solution to fill the gap created by Skilling will not only

cover the necessary ground, but also stand the test of time.

The need for a statute focusing on the public sector is urgent because undisclosed self-

dealing by public officials is the type of corrupt conduct that is most likely to fall outside the

reach of any other statute. The Department therefore supports legislation that would restore our

ability to use the mail and wire fraud statutes to prosecute state, local, and federal officials who

engage in schemes that involve undisclosed self-dealing. Let me provide a few suggestions

regarding such legislation:

First, in order to follow the Supreme Court’s direction in Skilling that any legislation in

this area provide notice to citizens as to what conduct is prohibited, the statute should be clear

and specific.

Second, like Section 1346, the new statute should rely upon the mail and wire fraud

statutes, which provide a reliable and well-established jurisdictional basis for prosecution, and

would enable prosecutors to capture the full scope of an expansive criminal scheme in an

appropriate criminal charge.

Third, in order to define the scope of the financial interests that underlie improper self-

dealing, the statute should draw content from the well-established federal conflict of interest

statute, 18 U.S.C. § 208, which currently applies to the federal Executive Branch.

Finally, the statute should provide that no public official can be prosecuted unless he or

she knowingly conceals, covers up, or fails to disclose material information that he or she is

already required by law or regulation to disclose. By requiring the government to prove both

knowing concealment and a specific intent to defraud, there is no risk that a person could be

convicted for a mistake or unwitting conflict of interest.

We believe that legislation along these lines would restore our ability to address the full

range of criminal conduct by state, local, and federal public officials, whether the corrupting

influence comes from an outside third-party, or from the public official’s concealment of his

financial interests.

Source

Breuer Testimony on Honest Services Statute (Sept. 28, 2010)

Leahy’s bill was introduced on Sept. 28—the same day the Senate Judiciary Committee held a hearing on the Skilling decision where Assistant Attorney General Lanny Breuer argued for a new law to restore its ability to prosecute honest-services fraud more broadly.

Breuer

Breuer testified that the Skilling decision created a gap in the Justice Department’s ability to address the full range of corrupt conduct by public officials and corporate executives. “The impact of Skilling on pending investigations and our ability to bring criminal charges for certain types of corrupt conduct is significant,” he told the committee.

Defense attorneys tend to disagree with Breuer’s assessment. Abbe Lowell, head of the white-collar defense practice at McDermott Will & Emery, says prosecutors and regulators still have a full arsenal of weapons to combat corruption. The Skilling decision doesn’t “impair the department and U.S. attorneys from charging any case that merits an indictment under other laws,” he says. “The vagueness of the honest-services statute caused prosecutors to be sloppy, using a statute that was not precise and that was easier for them to seek and obtain a conviction.”

Lowell

In a footnote to the Skilling decision, the Supreme Court specifically addressed congressional attempts to draft a new law. “If Congress were to take up the enterprise of criminalizing ‘undisclosed self-dealing by a public official or private employee’ … it would have to employ standards of sufficient definiteness and specificity to overcome due process concerns,” the note stated. In other words, the court told lawmakers that if they didn’t like its decision, they should be more precise in their language next time around.

The court also raised a number of questions about how to craft a workable standard—which, legal experts say, Leahy’s bill doesn’t address in its current form. And, of course, the fate of his bill could turn on the November elections. If Republicans make significant inroads in the Senate, the bill may well go into the deep freeze.

Either way, white-collar defendants won’t get much of a reprieve. “There are very few, if any, cases where honest-services fraud is the only charge; it’s usually an add-on to raise the stakes for defendants,” Hartman says. “And while there is potential for [Skilling] to have an impact, we haven’t seen it yet, and there are questions about how big that potential is.”