“Honest Services” Law Likely Will Be Overturned By U.S. Supreme Court

March 2010

Earlier this month, the U.S. Supreme Court heard oral argument in Jeffrey Skilling’s appeal of his Enron-related conviction. Skilling is the last of three cases to challenge the federal “honest services” law that is frequently used to prosecute white collar fraud. The unusual act of taking three cases involving the same law in a single term strongly suggests that the Court intends to make changes. The Justices’ questioning during each of these cases further suggests that the law will either be limited or held entirely unconstitutional because the law is too vague and overreaching.

The first two similar cases were heard on December 8, 2009. They two earlier cases involve Bruce Weyhrauch, a former Alaska politician who solicited a job from an oil-services firm before he left office, and Conrad Black, the chairman of Hollinger International who was convicted of defrauding the now-defunct newspaper company.

The current law resulted from a 1987 decision in re: McNally vs. United States. Then, the U.S. Supreme Court ruled a mail and wire fraud statute unconstitutional, declaring that the law properly involved tangible goods like money and property, but "does not refer to the intangible right of a citizenry to good government." The ruling said if Congress intended otherwise, "it must speak more clearly than it has." Determined to keep the then-overturned law, Congress “fixed” 18 USC 1346 in 1988 by making illegal "a scheme or artifice to deprive another of the intangible right of honest services". More than two decades later, this simple addition is before the Supreme Court for similar reasons.

The “honest services” law is a broad tool used to prosecute politicians and executives whose conduct did not involve bribes, theft, or other direct financial gain. Prosecutors find it convenient (some might say lazy) to use the “honest services” law to address malfeasance that could probably be considered criminal under other laws. But this broadness may be its undoing, since it may be impossible to know the boundaries of what is legal and illegal. In the words of Skilling’s lawyer at the oral argument:

"Its sweep is breathtaking. … It would have the capacity to convert almost any workplace lie into a federal felony.”

As is typical of prosecutions under this law, Skilling was not convicted of stealing money. Instead, Skilling's actions included approving financial structures that hid Enron’s debt. At trial, prosecutors successfully contended that Skilling deprived investors and employee pension plans of honest labor they were entitled to receive from Skilling.

But in light of the three cases now before the Supreme Court, that may not be enough. The government signaled that it knew its case against Skilling was at risk. At this point, the government hopes the justices will only address Skilling’s conviction, and leave the broader statute still constitutional. The government argued:

"I want to say at the outset that this jury instruction was drafted against the background of Fifth Circuit law, which I think did take a somewhat broader view of the honest services crime than the government has taken in this Court, and it has to be read against that background."

In Skilling’s case, an overturned conviction would be maddening. Skilling made enormous money from bonuses, stock options and stock sales, all of which were increased because of Enron’s aggressive accounting. It would be unfortunate if no punishment occurred because prosecutors decided to use an overly broad law, instead of focusing on other statutes.

Fulcrum Inquiry performs fraud and financial investigations, and operates turn-key whistleblower reporting services.