Supreme Court: 'Honest Services’ Fraud Limited to Bribery and Kickbacks

WASHINGTON — The Supreme Court yesterday ruled that “honest services” fraud — a criminal statute that has been used to prosecute wrongdoing in the municipal market — is limited to bribery and kickback schemes.

The majority of the justices reached that conclusion in a 51-page opinion in Jeffrey K. Skilling v. United States that vacated the honest-services wire fraud charges against former Enron Corp. chief executive officer Jeffrey Skilling because he was not accused of making bribes or taking kickbacks.

However, three other justices — Antonin Scalia, Anthony Kennedy, and Clarence Thomas — in an 11-page minority opinion written by Scalia, claimed the honest services wire fraud statute is unconstitutional because it is vague and violates the Fifth Amendment’s due process clause.

The justices took the same position on honest services fraud in rulings handed down yesterday in two other cases, Black v. United States, and Weyhrauch v. United States.

Several lawyers said the high court opinions were not a surprise because the justices had telegraphed their concerns about the vagueness of the honest services fraud statute in oral arguments in the Skilling case in May.

Judges and prosecutors in several criminal cases had either delayed rulings or reworked charges anticipating the high court’s action in the Skilling case, the lawyers said.

Federal prosecutors had revised their indictment of former Illinois Gov. Rod Blagojevich to de-emphasize honest services fraud charges and add other charges because of concerns about the ruling in the Skilling case.

Blagojevich’s lawyers yesterday asked for a continuance of his case so they could study the Supreme Court ruling. But U.S. District Judge James Zagel denied their request, saying the ruling in the Skilling case “may not offer a lot of hope for you” because federal prosecutors filed so many other charges against Blagojevich.

The former governor’s ex-aide testified earlier this month that Blagojevich and his associates expected to reap $500,000 from an $809,000 consultant’s fee paid by Bear, Stearns & Co. for its role as book-runner on the state’s $10 billion 2003 pension bond sale.

Writing the Supreme Court’s majority opinion in the Skilling case, Justice Ruth Ginsburg said: “In proscribing fraudulent deprivations of 'the intangible right of honest services,’ Congress intended at least to reach schemes to defraud involving bribes and kickbacks. Construing the honest-services statute to extend beyond that core meaning, we conclude, would encounter a vagueness shoal. We therefore hold that [the statute] covers only bribery and kickback schemes. Because Skilling’s alleged misconduct entailed no bribe or kickback, it does not fall within [the statute’s] proscription.”

The justices sent the case back to the Fifth Circuit Court of Appeals for further action.

Jack Coffee, a professor at Columbia University School of Law and recognized securities law expert, said the Supreme Court ruling “probably will have more of an effect on the public sector” and public corruption cases where the 1989 honest-services fraud statute has increasingly been used as a favorite tool of prosecutors in complex criminal cases.

Congress intended for the statute to overrule a 1987 Supreme Court decision in McNally v. United States that limited mail fraud prosecutions to property or money fraud cases and barred prosecution for what is now termed honest services fraud.

The mail and wire fraud statutes criminalize the use of the mails or wires in furtherance of any scheme or artifice to defraud, or to obtain money or property by means of false of fraudulent pretenses, representations, or promises. The honest-services fraud statute defines the term “scheme or artifice to defraud” to include “a scheme or artifice to deprive another of the intangible right of honest services.”

However, Congress never specifically defined “intangible right to honest services.”

The charge has been used in several muni-related cases, many of which have involved pay-to-play practices and bribes or kickbacks. Former Philadelphia Treasurer Corey Kemp, for example, was fined $10,000, ordered to pay $334,000 in restitution, and sentenced to 10 years in prison in 2005 for honest services fraud, attempted extortion, and other charges in connection with steering bond business and city contracts to firms for gifts, loans, and illegal payments.

Two former executives at Commerce Bancorp, Glenn Holck and Stephen Umbrell, were also fined and sent to prison for conspiracy to commit honest services fraud by helping to arrange loans for Kemp, his church, and his brother-in-law in exchange for city bond business.

But Coffee and other lawyers said the Supreme Court’s narrowing of the definition of honest services fraud will likely mean that it cannot be applied in cases involving self-dealing or the failure to disclose conflicts of interest.

Former Palm Beach County commissioner Mary McCarty pleaded guilty to conspiring to deprive constituents of her honest services after she used her influence to steer bond business to her husband while he worked at Bear Stearns  and Raymond James & Associates Inc. The case did not appear to involve kickbacks or bribes in connection with the bond business. She benefited because her husband benefited, a form of self-dealing.

Several lawyers said the high court ruling could reopen a number of past cases that involved honest services fraud, with defendants’ lawyers asking for reconsideration of the charges in light of the Supreme Court rulings.

Skilling launched his career at Enron in 1990 and became CEO in 2001 as the Houston-based firm grew into one of the world’s leading energy companies. He resigned in August 2001, less than four months before it plunged into bankruptcy.

Skilling was charged with participating in an elaborate conspiracy to prop up Enron's short-run stock prices by overstating the company's financial well-being in public presentations and financial statements that were false and misleading. In 2006, he was convicted of several charges, including honest services fraud and insider trading, and was sentenced to more than 24 years in prison and ordered to pay $45 million in restitution.

He appealed all the way to the Supreme Court, which was asked whether pre-trial publicity and community prejudice denied him from having a fair trial and whether he violated the honest services fraud statute. The high court ruled his trial was fair.

Conrad Black, who also tested the honest fraud statute, was an executive at Hollinger International Inc., a large media company. He was accused of stealing money and property from his employer in the form of illegitimate compensation packages. He was convicted of honest services fraud and obstruction. He was sentenced to 78 months in prison and ordered to pay a fine of $125,000 and $6.1 million in restitution.

He appealed all the way to the high court, claiming his conduct did not violate the honest-services fraud statute because his compensation did not result in any economic harm to the company. The high court ruled in his favor and found the judge’s instructions to the jury on the honest-services fraud statute were incorrect.

Federal prosecutors alleged that former Alaska Sen. Bruce Weyhrauch agreed to take action to benefit the oil services company VECO in exchange for the promise of being paid to perform future legal work for the company. They claimed he had a duty to disclose this conflict of interest and that the failure to do so violated the honest-services fraud statute. Weyhrauch challenged the charge.

The high court remanded the case back to the Ninth Circuit Court of Appeals in light of its ruling in the Skilling case.

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