The "Honest Services" Decision

In the broadest context, governments rightly prosecute frauds, as well as crimes of overt physical coercion, because fraud involves the use of deceit to obtain something of value. Since the person who yields up the item of value is deceived as to the nature of the exchange he is entering into, the defrauder no more obtains his goods by voluntary consent than does a pickpocket lifting a wallet. A legal ban on fraud of that sort thus makes sense.

 

But beginning in 1973, legal activists promoted the idea that fraud need not involve depriving a person of some concrete value. For example, they argued, if a governmental official or corporate officer accepts an undisclosed gratuity from a vendor, that would be an act of deceit and should be considered fraud, even if there were no evidence that the person accepting the gift inflicted any monetary loss on anyone. The polity or company he works for is nonetheless deprived of “honest services.”

 

In the 1970s and 1980s, such prosecutions for “honest services” fraud flourished under the federal mail-fraud statute (1872) and the essentially similar wire-fraud statute (1952). Then, in McNally v. United States, 483 US 350 (1987), the Supreme Court struck down the whole notion. Justice Byron White reviewed the entire history of the mail fraud statute and wrote: “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, 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.”

 

No sooner said than done. A bill was introduced in Congress, and it became Section 1346 of the mail fraud law. Senator (as he then was) Biden spoke of it as follows: “It reverses the McNally case by creating a new public corruption statute that will be used to bring charges against anyone who attempts to deprive the citizens of the United States or of any State of the honest services of a public official, or against anyone who attempts to corrupt the election process. It also amends the existing mail and wire fraud statutes to make clear that notwithstanding the holding in McNally, it is a crime to deprive any organization—such as a corporation or a labor union—of the loyal services of its employees.”

 

But what does Section 1346 actually say? “For the purposes of this chapter, the term ‘scheme or artifice to defraud’ includes a scheme or artifice to deprive another of the intangible right of honest services.” In short, Congress made clear that it wished the mail-fraud law to include the kinds of “honest service” prosecutions that courts had allowed before McNally. But it did not say which of those prosecutions should be allowed. All of them? Some of them? All of them and more besides? There was no way of knowing.

 

Of course, prosecutors welcomed this legislative vagueness. In January 2010, Fortune senior editor Roger Parloff wrote an article that quoted former federal prosecutor Richard Craig Smith as saying, "Look around at all the high-profile cases today. Ninety-five percent of them are charged under honest-services fraud. That's not just an accident." Not an accident, but not justice either. Parloff also quoted Susan Necheles, a white-collar defense lawyer, as saying: "If you defraud someone out of money, there's clearly a crime, and there are plenty of statutes that cover it. When the government resorts to honest-services fraud, on the other hand, it's almost always because there's a real question whether this was a crime or just aggressive business behavior."

 

Fortunately, under the prodding of Justice Antonin Scalia, the Supreme Court once again agreed to tackle the issue of the “honest service” law’s vagueness. On December 8, 2009, the Court heard oral arguments in two “honest services” cases: that of Conrad Black, the Canadian publisher; and that of Bruce Weyhrauch, a former state representative in Alaska. On Monday, March 1, the Court heard the most interesting case of all: that of Jeff Skilling, the former president of Enron. The Skilling case was the acid test for “honest services” prosecutions, because the “deceit” alleged was merely some less-than-frank corporate hype that supposedly deprived Enron’s “shareholder-owners” of a candid assessment that might have prompted them to bail out. There were no allegations of bribes or kickbacks to public officials, and no allegation of self-dealing by a corporate executive to the detriment of his company. Some lower courts have held that, whatever else Congress may have intended by passing Section 1346, it clearly intended to criminalize those more egregious behaviors, but not more than those. Would the Supreme Court agree?

 

On June 24, we got the answer: And it is a significant although partial victory for business rights. The Court has held that the “honest services” law is not unconstitutionally broad on its face, but that it is sufficiently well defined only if it is limited to forbidding bribery and kickback schemes. That, said Justice Ginsberg, is the clear core of the pre-McNally prosecutions that Congress wished to reinstate in the wake of SCOTUS’s 1987 decision.

 

But as Justice Scalia pointed out: If that was the notion of “honest services” that Congress had wished to enact into law, it had only to say so—and it didn’t; it left the matter unconstitutionally vague and the Supreme Court is not in a position to say how Congress should have eliminated that vagueness.

 

One could go further: What business is it of the federal government to decide for states, municipalities, and private organizations what behavior by employees should be looked upon as “non-monetary fraud” and what should be looked upon as mere disciplinary matters—or indeed as acceptable behavior?