When a government or corporate official steals money from the public fisc or from their employer, it is clear that such conduct is and should be illegal. What if the official does not take anything tangible, but instead allows his or her private interests to affect his or her job performance? Is that a crime? If so, under what circumstances?
Historically, the Department of Justice used the mail fraud statute (perhaps the broadest of federal criminal statutes) to criminalize such conduct, arguing that it deprived the public or the corporation of “the intangible right of honest services.” In 1987, the Supreme Court put an end to that, holding that the mail fraud statute did not include the theft of intangible rights. Undeterred, Congress amended the statute expressly to include schemes to deprive “the intangible right of honest services.”
In the subsequent 20 years, federal prosecutors charged a wide range of conduct as constituting the “theft of honest services,” including Rod Blagojevich’s alleged attempt to sell President Obama’s Senate seat, Baylor University’s basketball coach’s alleged scheme to violate NCAA rules, and a Mississippi judge’s alleged acceptance of a bribe from tort lawyer Richard Scruggs. According to recent press reports, prosecutors are currently considering whether Roman Catholic Church officials’ attempts to cover up sexual abuse by priests can be charged under this statute.
Critics of “honest services theft” abound. One judge posited: “How can the public be expected to know what the statute means when the judges and prosecutors themselves do not know, or must make it up as they go along?” Another judge complained that “it is quite clear that the statute imposes insufficient constraint on prosecutors, gives insufficient guidance to judges, and affords insufficient notice to defendants.” In February, in dissenting from the Supreme Court’s denial of certiorari in a case involving the theft of honest services conviction of three local officials who doled out public jobs in Chicago, Justice Antonin Scalia wrote that the statute “invites abuses by headline-grabbing prosecutors in pursuit of local officials, state legislators, and corporate C.E.O.’s.” Scalia entreated his colleagues to review the law, noting that “[i]t seems to me quite irresponsible to let the current chaos prevail.” The Supreme Court listened and has accepted certiorari in three high-profile theft of honest services cases. This article discusses the three cases and how they may change this controversial law.
The first case involves Conrad Black, the former newspaper mogul, who along with fellow senior officials of Hollinger International Inc., was convicted of diverting corporate opportunities. On appeal, Black argued that, while he engaged in a scheme for his private gain, that gain would come purely at the expense of the Canadian government (in the form of a tax break) an entity to which he had no duty to provide honest services. In urging Supreme Court review, Black pointed to a split among the circuit courts as to whether, in order to be convicted of theft of honest services, a defendant must contemplate identifiable economic harm to the party to whom the honest services are owed.
Next, the Supreme Court agreed to review the conviction of former Alaska legislator Bruce Weyhrauch, who sought a promise of future employment from an oil field services business in exchange for taking official actions favorable to the company. Weyhrauch argued on appeal that his actions were not illegal under state law and therefore could not form the basis of a federal conviction for the “theft of honest services.” Circuit courts are split on whether a public official’s actions must violate state law in order to form the basis of a theft of honest services conviction. According to Weyhrauch, this “state law limiting principle” provides an important block that keeps federal law from overweening states’ attempts to set their own ethical and legal standards for public officials.
The third case features Jeffrey Skilling, Enron’s former CEO, who was convicted of concealing from investors the true nature of certain loans that enabled Enron to inflate its earnings. Skilling claims that “theft of honest services fraud” is unconstitutionally vague because it fails to give fair warning as to what is criminal and what is not. On Oct. 13, the Supreme Court added this case to its docket.
More recently, on Oct. 22, the 3rd U.S. Circuit Court of Appeals overturned convictions of executives of a nonprofit corporation that entered into a contract to administer a project for the Navy. The 3rd Circuit held that the executives did not owe a fiduciary duty to the Navy even though they clearly owed it the duty of good faith and fair dealing. In the absence of a fiduciary duty, the conduct could not constitute the “theft of honest services fraud.” The 3rd Circuit — mirroring concerns raised by Scalia — sought a “limiting principle” for applying the law so as to avoid “nebulous standards that are not discernible to people of ordinary intelligence.” The court further noted that “the federalization under the criminal law of the law of contracts and other business transactions — quintessential matters for state regulation — is a real concern.” This particular issue — the need to show the violation of a fiduciary duty in order to convict a private actor for the theft of honest services — is not currently before the Supreme Court. It demonstrates, however, the type of narrowing of the mail fraud statute that many Supreme Court watchers expect from the Black, Weyhrauch and Skilling cases.
In conclusion, the Supreme Court’s decisions in this trio of “theft of honest services” cases may do away altogether with this crime, or may substantially limit its application. While the ultimate decisions are impossible to predict, it is almost certain that, if it allows the crime to continue at all, the Supreme Court will endeavor to draw bright lines between conduct that is subject to prosecution and that which is not. Whether the court succeeds will make for interesting reading. •
David M. Laigaie, a partner at Dilworth Paxson, heads the corporate investigations & white-collar group. His areas of practice include health care fraud, securities fraud, tax fraud, export violations, pharmaceutical marketing fraud, municipal corruption, defense procurement fraud and public finance fraud. He regularly conducts internal corporate investigations. He can be reached at 215-575-7168 or firstname.lastname@example.org.