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In a country governed by the rule of law and subject to a due process clause that requires both fair notice to the public of what constitutes a crime and effective restraints on enforcement discretion, is it acceptable to have a law that criminalizes schemes and artifices to defraud a victim (by means involving use of the mail or a wire) of “the intangible right of honest services”? In late December, the 2d U.S. Circuit Court of Appeals, en banc, decided, 7-4, that it is. Secret payments by two lawyers and their firm The case involved secret payments by two lawyers and their law firm (the defendants) to insurance adjusters to expedite settlements. The government did not seek to prove that any settlement amount had been inflated. The adjusters’ employers had written policies prohibiting the adjusters from accepting any gift or fee, and requiring them to report any offer of a gift or fee. The defendants were convicted of mail and wire fraud in violation of 18 U.S.C. 1341 (mail fraud), 1343 (wire fraud) and 1346 (defining a “scheme or artifice to defraud” as including “a scheme or artifice to deprive another of the intangible right of honest services”). The panel affirmed, though it acknowledged that “the potential reach of Section 1346 is virtually limitless.” United States v. Rybicki, 287 F.3d 257, 264 (2d Cir. 2002). On rehearing en banc, the full court also affirmed. Nos. 00-1043, 00-1044 and 00-1055, 2003 WL 23018917 at 14-15 (2d Cir. Dec. 29, 2003) (en banc). Whereas the panel defined the elements of the offense as (1) a scheme or artifice to defraud, (2) for the purpose of depriving another of the intangible right of honest services, (3) where it is reasonably foreseeable that the scheme could cause some economic or pecuniary harm to the victim that is more than de minimis and (4) use of the mails or wires in furtherance of the scheme, the en banc court rejected the formulation of element 3 and substituted a requirement that the fraudulent misrepresentation or omission be material. Id. at 14-15. The en banc dissenters argued forcefully that Section 1346 is unconstitutionally vague: that it has no settled meaning to a lay person; and that neither prosecutors nor other lawyers, nor judges, have a clear understanding of what it prohibits. They pointed out uncertainties as to the nature and source(s) of the protected “intangible right” as to whether the misrepresentation required as an element of the offense must be material or involve some risk of harm to the victim’s interests, and as to the required mens rea (whether the accused must have intended to harm the victim or to achieve personal gain). The dissenters noted that, on these and other interpretive issues, the circuits are split. In the face of such disagreement about the basic elements of the crime, how can it be other than unconstitutionally vague? The en banc majority acknowledged the unclarity of the statutory text. Id. at 8. Therefore, it turned to a source that, in its view, does supply the constitutionally required “clear and properly limited meaning.” Prior to 1987, the lower federal courts, on their own, had interpreted the phrase “scheme or artifice to defraud” in sections 1341 and 1343 as including a scheme or artifice to defraud another of the intangible right of honest services. A substantial jurisprudence had developed. In McNally v. United States, 483 U.S. 350 (1987), which involved alleged public corruption, the Supreme Court held that that phrase protects only property rights, not a right to honest services. The court did not squarely hold that the jurisprudence of “honest services” was unconstitutionally vague. Instead, it said: “Rather than construe the statute in a manner that leaves its outer boundaries ambiguous and involves the Federal Government in setting standards of disclosure and good government for local and state officials, we read Section 1341 as limited in scope to protection of property rights. If Congress desires to go further, it must speak more clearly than it has.” Id. at 360. The reference to ambiguity suggested the possibility of vagueness, but the principal concerns appear to have been federalism (especially in cases involving state or local officials) and separation of powers (the need for Congress, not the courts, to define crimes). The 2d Circuit majority responded to the dissent’s assertions of vagueness by treating the jurisprudence of “honest services” overruled in McNally as having been resurrected by Section 1346, which was enacted in 1988. Pub. L. No. 100-690, � 7603(a), 102 Stat. 4181, 4508 (1988). From that jurisprudence, the 2d Circuit drew the following general description of the crime, which, it concluded, satisfies the Constitution: The term “scheme or artifice to defraud another of the intangible right of honest services” means, in private-sector cases, “a scheme or artifice to use the mails or wires to enable an officer or employee of a private entity (or a person in a relationship that gives rise to a duty of loyalty comparable to that owed by employees to employers) purporting to act for and in the interests of his or her employer (or of the other person to whom the duty of loyalty is owed) secretly to act in his or her or the defendant’s own interests instead, accompanied by a material misrepresentation made or omission of information disclosed to the employer or other person.” In “self-dealing cases [as distinct from bribery cases] . . . there may also be a requirement of proof that the conflict [of interest] caused, or at least was capable of causing, some detriment” to the victim. 2003 WL 23018917 at 11. This solution to the problem of vagueness is troubling in several ways. The U.S. Supreme Court has noted that “[t]here are no constructive offenses.” Fasulo v. United States, 272 U.S. 620, 629 (1926). The Rybicki court treats the pre- McNally jurisprudence as if it had created a definition of a common law crime, and it treats Section 1346 as codifying that definition. The circuit conflicts noted by the dissent and the majority’s discussion of some of the elements of the crime show, however, that those elements were not fully crystallized in 1988, and are not fully crystallized even today. Thus, even with Section 1346, deprivation of honest services is to a substantial extent a constructive, common law crime still in development. ‘Duty of loyalty’ definition is ill-defined crime The nature and sources of the “duty of loyalty” that is now part of the 2d Circuit’s definition of the crime are not fully explicated. In the 2d Circuit, it need not arise from a fiduciary relationship. United States v. Sancho, 157 F.3d 918, 921 (2d Cir. 1998). Potential alternative sources include federal and state tort, regulatory and criminal law; private contracts; and industry, professional and other similar standards of varying authoritativeness, formality, precision and relevance. The nature of the potential “detriment” to the victim is also undefined. Pecuniary detriment suffices, but the court was clear that “actual or intended economic or pecuniary harm to the victim need not be established.” 2003 WL 23018917 at 14. Does injury to goodwill unconnected to any specifiable pecuniary loss suffice? Might other kinds of detriment? In sum, there are more opportunities here for prosecutorial creativeness than a criminal statute should provide. An unpromising interpretive future Atmospheric factors may lead prosecutors, juries and judges to accept such creativeness. It has long been recognized that the federal mail and wire fraud statutes are the first line of prosecutorial defense against all manner of fraud that human imagination can devise. Particularly at a time of great public concern about business fraud, it is unlikely that the utility of these statutes will be put at risk by restrictive interpretation. Moreover, the other elements of mail and wire fraud limit the potentially culpable defendants to those who make a material misrepresentation (as defined by the court). Thus, this class of defendants, of which the Rybicki defendants are examples, are dishonest and hence not particularly attractive candidates for sympathy. The issue, however, is whether they have committed federal mail or wire fraud. Decision-makers in the criminal process are likely to be less than eager to interpret or apply the law so as to let dishonest defendants escape conviction under one or both of those laws. “The Constitution does not permit a legislature to ‘set a net large enough to catch all possible offenders, and leave it to the courts to step inside and say who could be rightfully detained, and who should be set at large.’ ” City of Chicago v. Morales, 527 U.S. 41, 60 (1999) (Stevens, J., for himself, Souter & Ginsburg, JJ.) (quoting United States v. Reese, 92 U.S. 214, 221 (1876)). Yet the routine use of mail and wires by most people (whether honest or dishonest) gives federal prosecutors enormous discretion in deciding which dishonest users to prosecute. In the end, the question is whether the benefit in fraud reduction under this loosely articulated federal criminal prohibition-which gives prosecutors large scope for case selection and provides judges with large interpretive freedom-justifies the statute’s failure to give clear public notice and to cabin official discretion closely. The answer depends on what kind of law enforcement, and what kind of society, you think the due process clause requires. Richard Cooper is a partner at Williams & Connolly in Washington. He can be reached by e-mail at [email protected].

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