The US Supreme Court Limits the Scope of Honest Services Fraud

Honest services fraud, pursuant to section 1346 of Title 18 – Crimes and Criminal Procedure, 63 U.S.C., is mail or wire fraud occurring within “a scheme or artifice to deprive another of the intangible right of honest services.” In Skilling v. United States 554 F. 3d 529 (2010) the USSC vacated the conviction of former Enron Executive Jeffrey Skilling on the charge of honest services fraud. In doing this, the USSC narrowed the scope of section 1346 to refer only to “schemes to defraud that involve bribes or kickbacks.” Skilling had been convicted of honest services fraud in part by deceiving investors and employees on the financial state of Enron. His transgressions did not involve bribes or kickbacks.

Writing for the majority in Skilling, Justice Ginsberg stated that honest services fraud, as defined to prosecute Skilling, was unconstitutionally vague, and “[t]o satisfy due process, “a penal statute [must] define the criminal offense [1] with sufficient definiteness that ordinary people can understand what conduct is prohibited and [2] in a manner that does not encourage arbitrary and discriminatory enforcement.”

As a result of the Skilling decision, the honest services fraud conviction against former Hollinger executive Conrad Black was vacated in a unanimous decision by the USSC in Black et al. v. United States 530 F. 3d 596 (2010). (Black’s obstruction of justice conviction still stands, and the case was sent back to the United States Court of Appeals for the Seventh Circuit. His lawyers assert that the obstruction of justice charge should be vacated because he was convicted of trying to hide a crime that did not take place.)

Background and Facts

In part, Conrad Black was convicted of mail fraud and received a sentence of 78 months in prison. Pursuant to section 1341 of Title 18 – Crimes and Criminal Procedure, 63 U.S.C., a person commits mail fraud if:

having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses…for the purpose of executing such scheme or artifice or attempting so to do, places in any post office or authorized depository for mail matter, any matter or thing whatever to be sent or delivered by the Postal Service…[emphasis added]

Essentially, a fraudulent scheme in which the perpetrator uses the postal services for related reasons, in part or in full, is mail fraud. Furthermore, as mentioned, according to section 1346 honest services fraud is mail or wire fraud where ““any scheme or artifice to defraud”” includes a scheme or artifice to deprive another of the intangible right of honest services.”

In the trial of U.S. v. Black et al, 5 CR 727 (2005) (pdf), the defendants, senior executives of the American company Hollinger International, were convicted of various offences, including honest services fraud. Hollinger was controlled by the Canadian company Ravelston, in which Black was a controlling shareholder. A subsidiary of Hollinger, American Publishing Company (“APC”), was in the process of selling its newspapers when APC came to an agreement with Hollinger to pay $5.5 million to Hollinger executives in a non-competition agreement. Neither Hollinger’s board of directors nor its audit committee were notified of these payments.

According to the government, either the defendants were guilty of stealing “millions from Hollinger by fraudulently paying themselves bogus “noncompetition fees…” or “by failing to disclose their receipt of those fees, [d]efendants deprived Hollinger of their honest services as managers of the company.”

At trial, the government requested that the jury specify the charges the defendants were convicted on, one or both of the aforementioned. The proposal was rejected by the defendants, who requested that a simple guilty verdict be given upon conviction. The jury was also instructed that “a person commits honest-services fraud if he ““misuse[s] his position for private gain for himself and/or a co-schemer”” and knowingly and intentionally breache[s] his duty of loyalty.” Ultimately, a general verdict was given.

Conrad Black appealed to the United States Court of Appeals for the Seventh Circuit. In United States v. Black, 530 F.3d 596 (2008) (pdf), Mr. Black relied on Yates v. United States 354 U.S. 298 (1957) in an attempt to vacate the conviction of honest services fraud. In Yates, it was ruled that “a general verdict may be set aside ““where the verdict is supportable on one ground, but not on another, and it is impossible to tell which ground the jury selected.””

The Court of Appeals found that the honest services instructions to the jury at trial were correct, and because the appellants had rejected the government’s request to provide a specific rather than general verdict they forfeited their right to challenge the instructions.

Before the USSC

As mentioned, in the recent Skilling decision it was decided that honest services fraud only refers to “schemes to defraud that involve bribes or kickbacks.” Consequently, in Black, the USSC ruled that the honest services fraud instructions given to the jury at trial were incorrect. Furthermore, the defendants could challenge the instructions despite the fact that they rejected the specific verdict at trial, a right denied by the Court of Appeals.

Delivering the opinion of the USSC, Justice Ginsberg determined that the Court of Appeals improperly imposed a “forfeiture sanction” whereby a denial of a request for a special verdict resulted in the defendants giving up their right to challenge the jury instruction on honest services fraud. Simply, the appellants properly objected to the jury instructions at trial as required by rule 30(d) of the Federal Rules of Criminal Procedure (2009), which states:

A party who objects to any portion of the instructions or to a failure to give a requested instruction must inform the court of the specific objection and the grounds for the objection before the jury retires to deliberate. An opportunity must be given to object out of the jury’s hearing and, on request, out of the jury’s presence. Failure to object in accordance with this rule precludes appellate review…

The Court of Appeals added an additional requirement not set in law. The USSC ruled this was a violation of rule 57(b) of the Federal Rules of Criminal Procedure (2009) which states:

No sanction or other disadvantage may be imposed for noncompliance with any requirement not in federal law [or] federal rules … unless the alleged violator was furnished with actual notice of the requirement before the noncompliance.

A Brief History of Honest Services Fraud

In his partially concurring opinion, Justice Kennedy rejected the use of the honest services fraud provision as unconstitutionally vague even with its scope limited to “schemes to defraud that involve bribes or kickbacks.” A conviction under the honest services fraud theory, according to Justice Kennedy, “would violate his or her rights under the Due Process Clause of the Fifth Amendment.”

Honest services fraud originated from an effort to discourage the fraudulent actions of government officials, but it has become an increasingly common prosecutorial tool in the private sector. It has been used to convict a variety of high profile white collar criminals, including lobbyist Jack Abramoff, former Governor of Alabama Don Siegelman and former House member William Jefferson.

In McNally v. United States, 483 U. S. 350 (1987), the USSC limited the scope of honest services fraud to that only involving money or property. In that case a public official was charged with defrauding citizens of their ““intangible right”” to have the Commonwealth’s affairs conducted honestly…”

Read in the conjunctive, “any scheme or artifice to defraud” appears to relate only to schemes associated with money or property. Read in the disjunctive, “any scheme or artifice to defraud” can be interpreted separate from “for obtaining money or property…” Clearly, two interpretations can arise and it is reasonable from a reading of the text that “any scheme or artifice to defraud” can be considered a separate category from “for obtaining money or property…” However, by looking into the legislative context, the USSC in McNally ruled that “the statute was amended to include the second phrase simply to make it clear that it reaches false promises and misrepresentations as to the future as well as other frauds involving money or property.”

In response Congress added section 1346 to Title 18 – Crimes and Criminal Procedure, 63 U.S.C., which expanded the definition of “any scheme or artifice to defraud” to include “a scheme or artifice to deprive another of the intangible right of honest services.” Regardless of whether the USSC in McNally got it wrong on Congress’s intent, by specifically including the deprivation of honest services, the McNally decision was effectively nullified. At this point, an intangible loss of honest services was afforded the same protection as the tangible loss of property and money.

But, as mentioned, the recent Skilling decision limits the scope of honest services fraud to refer only to “schemes to defraud that involve bribes or kickbacks.” The USSC has, it appears, come up with a compromise. The deprivation of honest services is a type of mail or wire fraud when it involves kickbacks and bribes. This incorporates the money and property requirement of § 1341 and the intangible right of honest services. While likely not a precise interpretation of Congress’s intent, until and if the House and Senate specify the scope of § 1346, the Skilling decision provides some much needed clarification.

You may also like...

Join the conversation

Loading Facebook Comments ...