The Supreme Court Curtails Corruption Prosecutions Under "Honest-Services" Fraud Theory

by F. Hill Allen, Tharrington Smith, L.L.P.

In federal corruption prosecutions here in North Carolina and elsewhere, charges of “honest-services” fraud have figured prominently or even been the only charges brought. But, in a trio of long-awaited decisions issued in late June, the U.S. Supreme Court trimmed the use of the honest-services theory back to its roots – requiring bribery and kickbacks. The Court rejected the use of the statute to convict for “undisclosed self-dealing by a public official or private employee – i.e., the taking of official action by the employee that furthers his own undisclosed financial interests while purporting to act in the interests of those to whom he owes a fiduciary duty.”

At the heart of the dispute is a short statute, 18 U.S.C. § 1346, a complement to the mail and wire fraud statutes, which provides:

For the purposes of th[e] chapter [of the United States Code that prohibits, inter alia, mail fraud, § 1341, and wire fraud, § 1343], the term “scheme or artifice to defraud” includes a scheme or artifice to deprive another of the intangible right of honest services.

Congress enacted that language only a year after the Court’s 1987 decision, McNally v. United States, which limited the earlier “honest-services” doctrine to the protection of property rights. In its June 24 rulings, the Supreme Court again invited Congress back to the drawing board – while making apparent that any future enactment will face further constitutional scrutiny.

The Court chose Skilling v. United States as the primary vehicle to address the honest services statute. Skilling arose from the Enron scandal. The Government charged Jeffrey Skilling (at various times, the company’s president, COO and, briefly, CEO) with conspiring to defraud Enron’s shareholders by misrepresenting the company’s fiscal health, thereby artificially inflating its stock price. The Government did not allege that Skilling solicited or accepted payments from third parties. Skilling asked the Court to strike down Section 1346 as unconstitutionally vague. Instead, the Court construed § 1346 to avoid a constitutional problem, rather than invalidate the entire statute, and held that it criminalizes “only the bribe-and-kickback core of the pre-McNally caselaw.” As an example of a “classic kickback scheme,” the Court offered the conduct in McNally: “A public official, in exchange for routing Kentucky’s insurance business through a middleman company, arranged for that company to share its commissions with entities in which the official held an interest.” Under Skilling, that official could be prosecuted for honest-services fraud. By contrast, although Skilling himself profited from the artificially inflated stock price through salary, bonuses and the sale of Enron stock, the Government conceded that Skilling did not engage in bribery or kickbacks. Thus, Skilling did not commit honest-services fraud under the Court’s “core” reading of the statute.

In the second of its trio of June 24 decisions, Black v. United States, the Supreme Court considered the mail-fraud convictions of Conrad Black and other executives of a publicly held company, Hollinger International. The Government prosecuted Black and his co-defendants on alternative mail-fraud theories: (1) that they stole millions from Hollinger by fraudulently paying themselves bogus “noncompetition fees” (a money-or-property theory); and (2) that by failing to disclose those fees, defendants deprived Hollinger of their honest services. The District Court instructed the jury on both theories, including, over defendants’ objections, that a person commits honest-services fraud “if he misuses his position for private gain for himself and/or a co-schemer” and “knowingly and intentionally breaches his duty of loyalty.” Based on the decision in Skilling, the Court concluded those honest-services instructions were “incorrect” and then went on to analyze whether their resistance to special verdict forms proposed by the Government forfeited defendants’ challenge (it did not, the Court held).

In the third of its June 24 decisions, Weyhrauch v. United States, the Supreme Court considered a petition by Bruce Weyhrauch, a lawyer and former legislator in Alaska. The Government charged Weyhrauch with honest-services fraud for allegedly attempting to obtain legal work from an oil field services company while he was a member of the state legislature in return for his voting on tax measures that the company favored. The theory was that Weyhrauch had an obligation to disclose to voters that he was seeking the legal work while a legislator, which he failed to do. The Ninth Circuit Court of Appeal had held that the Government could proceed even without any proof that the legislator had a duty under state law to disclose his alleged conflict of interest. But, in a one-paragraph decision, the Supreme Court returned the case to the Ninth Circuit for further consideration in light of Skilling.

The upshot of these decisions is that the Court has reined in the highly malleable honest-services theory employed in past prosecutions and, indeed, called prior convictions into question. In the Kevin Geddings case here in the Eastern District of North Carolina, for example, in reaction to the Supreme Court’s decisions, the District Court sua sponte directed the parties to brief whether Geddings should remain imprisoned. Geddings’s conviction of honest-services fraud rested on his failure to disclose a potential conflict of interest in a “‘Long Form’ Statement of Economic Interest” required in connection with his appointment as Lottery Commissioner – namely, receipt of $163,545 from a lottery vendor vying for a contract to run the North Carolina State Lottery. A federal jury convicted Geddings of five counts of “honest services mail fraud,” and the Fourth Circuit Court of Appeals upheld the conviction. Less than a week after the Supreme Court’s trio of decisions, however – since all of the charges were based on “undisclosed self-dealing” and in light of the Government’s concession that Geddings is entitled to have his conviction vacated due to Skilling – the District Court ordered him released from prison, and presumably his conviction will be vacated.

Going forward, expect to see more litigation in the lower federal courts over efforts by the Government to shoe-horn their facts into the “bribe or kickback” model blessed by the Court, particularly with respect to prior convictions under the honest-services theory. The Skilling and Black decisions, however, would seem to limit the prospect of further “honest-services fraud” prosecutions for conduct involving not paradigmatic bribes or kickbacks but ethics or other “undisclosed self-dealing.” As a policy matter, such conduct often is better addressed through state criminal provisions, alternative remedies (civil or administrative) or in the court of public opinion. Certainly, the Supreme Court has narrowed the range of cases (once relatively unbounded) in which the honest-services theory adds meaningfully to the Government’s arsenal. Instead, the Government will have to measure whether a federal case can be successfully prosecuted under more cautious mail and wire fraud standards.