Supreme Court

Enron Case Has Muni Echoes

WASHINGTON  — Supreme Court justices yesterday signaled they have concerns about the “honest-services fraud” statute used to convict former Enron Corp. chief executive officer Jeffrey Skilling, but were unclear if they would grant his request that they declare it unconstitutionally broad and vague.

The statute has also been used to prosecute wrongdoing in the municipal market.

During an hour of oral arguments, the justices appeared to focus primarily on another question Skilling posed to the court in his appeal of his 2006 conviction: whether it was impossible for a federal judge in Houston to find 12 fair and impartial jurors even though that city bore the brunt of the collapse of Enron, which was based there.

Though the justices may only rule on the second question, the case is significant because it is the first before the high court to squarely challenge the constitutionality of the 1989 honest-services statute, which has been used by federal prosecutors in a growing number of complex criminal cases, including those involving muni market participants.

Two other honest-services fraud cases are before the court this term, though they do not directly challenge the constitutionality of the statute.

Specifically, the statute makes it a felony for a public or private employee to use the mail or wires to deprive his employer of its “intangible right” to the employee’s “honest services.”

Added quietly as part of an unrelated bill, the statute was intended to legislatively overrule a 1987 Supreme Court decision, McNally v. United States, that limited mail fraud prosecutions to property or money fraud cases and excluded prosecution for what is now termed honest-services fraud. However, Congress did nothing to specify the meaning of “the intangible right to honest services.”

But its use in criminal cases has increased significantly in recent years, including Justice Department charges filed last year against a Palm Beach County, Fla. commissioner, Mary McCarty, for using her elected position to enrich herself by steering bond business to her husband, Kevin McCarty, a bond dealer.

The statute also was used successfully by the Justice Department in 2004 against former Philadelphia Treasurer Corey Kemp over his having accepted illegal payments, loans and other gifts in return for steering city bond deals to certain firms. The charges against Kemp included conspiracy to defraud the city of honest services.

When Chief Justice John Roberts moved the discussion to the honest-services statute, Sri Srinivasan, a partner at O’Melveny & Myers LLP here who represented Skilling before the court, tried to argue that the government’s interpretation of the statute is so broad that “it would threaten to convert almost any lie in the workplace into an honest-services fraud prosecution,” with “devastating implications for workplace relations.”

However, deputy solicitor general Michael Dreeben, argued that Skilling was exaggerating the government’s interpretation of the statute, saying that it would only apply in cases involving “conflicting interests and the misuse of official position.”

He added that the Skilling prosecution “is the logical extension of the basic principle that we have urged the court to adopt in the nondislcosure cases,” and that there must be some showing of “scienter,” or an intent to deceive. In Skilling’s case, the government argues that he failed to disclose -— and took steps to conceal — the true financial condition of Enron prior to its collapse.

But Justice Antonin Scalia, who has vocally expressed opposition to the honest-services fraud statute, said it is unclear what constitutes criminal conduct under the statute. He also appeared to struggle to accept the government’s argument that the statute could be limited only to certain employees with a fiduciary duty to the company, and not more widely to all employees.

On the question of jury selection, Justice Stephen Breyer and others noted that at least three — and as many as six — members of the jury expressed the opinion in pretrial questionnaires that the Enron management deserved to be convicted of fraud, a fact which suggested they may not have been able to serve in a fair and impartial light.

Though Justice Anthony Kennedy said the five hours the trial judge used for jury selection sounded “about standard for a case of this difficulty,” others said that it seemed like too little time when jury selection for other high-profile cases has lasted weeks.

Underscoring the extent to which Breyer was concerned about jury selection in the case, he said that he had read all 200 pages of pretrial questionnaires, or voir dire.

“I am worried about a fair trial in this instance,” he said. However, he added that “at the same, I am worried about controlling too much a trial judge.”

Similarly, Roberts said it seems reasonable for a trial judge with years of experience to quickly determine whether a juror could be fair and impartial rather than have attorneys for both sides take do so over the course of potentially many weeks.

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