White Collar Update

U.S. Supreme Court Limits Government’s Ability to Prosecute White Collar Defendants Under Honest Services Fraud Statute

In three recent opinions the U.S. Supreme Court severely limited the government’s ability to prosecute individuals—particularly white collar defendants—under the so-called honest services fraud statute.1 In Skilling v. United States and two related opinions, Black v. United States and Weyhrauch v. United States, the Court limited honest services prosecutions to “only the bribe-and-kickback core” of the statute, expressly excluding from prosecution undisclosed self-dealing by public officials or private employees like that alleged in Black and Skilling.2

Long the subject of debate, the honest services fraud statute was historically used to prosecute wayward politicians accused of using their public office for personal gain by, for example, soliciting bribes or accepting kickbacks. More recently, however, the statute has become a mainstay in the prosecutions of white collar defendants. Applying a broad interpretation of “intangible rights,” prosecutors routinely charged corporate executives under the statute, accusing them of depriving their employer of their “honest services” by breaching their fiduciary duty to the company or engaging in corporate malfeasance. The Court’s trio of decisions effectively brings an end to such prosecutions, and returns honest services prosecutions to their bribe-and-kickback roots.

In Skilling, federal prosecutors charged former Enron Corporation executive Jeffrey Skilling with numerous fraud counts, including conspiracy to commit wire fraud in violation of the honest services statute, on the theory that Mr. Skilling conspired to defraud Enron’s shareholders by misrepresenting the company’s financial status to artificially inflate Enron’s stock price. On appeal, Mr. Skilling asked the Court to find the statute unconstitutionally vague, arguing that it fails to provide fair notice of the prohibited conduct.

Recognizing that “there was considerable disarray over the statute’s application outside” the core, bribe-and-kickback cases, the Court nonetheless declined to strike down the statute in its entirety. Finding that the statute is not unconstitutionally vague if confined to bribery and kickback schemes, the Court reasoned that because the “vast majority” of honest-services cases implicated bribery or kickback schemes, Congress intended the statute to criminalize “at least” that conduct.3 Because the Government did not allege that Mr. Skilling committed bribery or received improper kickbacks, the Court held that the evidence presented against Skilling could not sustain a conviction for violating the honest services statute.4

Similarly, in Black v. United States, the Court vacated the Seventh Circuit’s opinion upholding the mail fraud conviction of firm client, and former Hollinger International, Inc. chairman and CEO, Conrad Black.5 At trial, the district court instructed the jury 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.’” Because the charges against Mr. Black did not allege a bribery or kickback scheme, the Court—relying on Skilling—found that the district court’s honest services fraud instructions were erroneous.6

Federal prosecutors have used the honest services fraud statute to charge defendants based on a broad range of fraud theories, including undisclosed self-dealing and other breaches of fiduciary duties. While three justices (Scalia, Thomas and Kennedy) would have invalidated the statute altogether, the majority voted to preserve the statute by limiting its application only to bribery and kickback schemes. For corporate executives facing governmental scrutiny, the opinion nonetheless struck a blow to prosecutors by expressly stating that the statute does not extend to undisclosed self-dealing by public or private officials. Now, prosecutors will have to show that a defendant did more than personally profit from his or her official position in order to satisfy the demands of the honest services statute.

In sum, while the statute remains intact, the Court in Skilling severely limited its scope, thereby rendering it a less powerful tool for the government to wield in prosecuting white collar defendants.

1 The honest services fraud statute permits prosecution of mail or wire fraud involving “a scheme or artifice to deprive another of the intangible right of honest services.” 18 U.S.C. § 1346.
2 Skilling v. United States, 561 U.S. __, at 45, 2010 WL 2518587 (June 24, 2010); Black v. United States, 561 U.S. __, 2010 WL 2518593 (June 24, 2010); Weyhrauch v. United States, 531 U.S. __, 2010 WL 2518696 (June 24, 2010).
3 Skilling, 561 U.S. ___, at 43 and 44.
4 The Court remanded the case to the Fifth Circuit Court of Appeals to determine whether the error was harmless and thus whether Skilling’s conspiracy conviction should be vacated or upheld.
5 Baker Botts L.L.P. represented Mr. Black at trial in 2007.
6 The Court remanded the case to the Seventh Circuit Court of Appeals to determine whether the district court’s error was harmless.