One wonders how Conrad Black and Jeffrey Skilling would fare as cellmates. After being charged with criminal offences in 2005, Black distanced himself from other prominent white-collar cases. “This isn’t Enron, this isn’t WorldCom,” he admonished reporters. His lawyers repeated that reasoning while arguing for a lenient sentence after his 2007 conviction. Black seemed to imply that Enron’s executives did something wrong, even reprehensible.
But now, Black and Skilling — both serving time in federal prisons — have something very much in common. They’re fighting shoulder-to-shoulder against a peculiar American legal concept called “honest services” that helped put them behind bars. Black’s representatives are to appear before the U.S. Supreme Court in Washington, D.C., in December to argue his convictions should be overturned. Skilling has already filed a brief in that case, and in October got word the Supreme Court will hear his own challenge. If either man succeeds, it could throw open the gates of U.S. prisons, releasing a rogue’s gallery of white-collar convicts brought down by honest services, from disgraced lobbyist Jack Abramoff to former Illinois governor George Ryan.
Two great themes, trust and betrayal, underpin the honest-services theory. Broadly, it holds that government officials and corporate employees, including executives, must act in the best interests of their constituents or employers. Should such individuals abuse their positions for personal gain, they can be found guilty of fraud. The idea is that fraud isn’t simply about money; victims can be deprived of something intangible, namely their right to the “honest services” of executives and public servants. Thus, a Philadelphia treasurer who accepted bribes from a lawyer seeking business from the city was found guilty of honest-services fraud, even though she never filched a single dollar from taxpayers. A former attorney for West Virginia’s lottery commission, who bought stock of a gambling company he knew would soon receive a lucrative state contract, became ensnared by the same concept. It has even been applied to basketball coaches who helped players cheat on correspondence exams to obtain university credits.
To many, the idea of honest services seems intuitively just. Yet critics claim it’s so nebulous that it criminalizes virtually any act of dishonesty, no matter how banal. Frank Razzano, a partner with Pepper Hamilton LLP in Washington, D.C., and a former prosecutor, is among those who’d like to see it repealed. “It’s truly a national disgrace that we would indict people in this country and send them to jail for violating a statute which has no definition,” he says, “and which the courts themselves can’t define.”
The honest-services theory reflects the often untidy manner in which laws are forged. After the American Civil War, swindlers exploited new forms of travel and communications that sprang up across a newly unified country, spurring Congress to enact a new legislation in 1872 to protect the postal service. One sponsor said the new mail-fraud statute would protect citizens from “the frauds which are mostly gotten up in the large cities…by thieves, forgers, and rapscallions generally.”
The sanctity of the postal system was soon forgotten. Wily prosecutors learned they could now pursue crimes formerly handled at the state or local levels, provided they could prove their quarry licked a stamp or two while executing their schemes. A similar statute was introduced in 1952 to prohibit fraud using television, radio or phone — the so-called wire-fraud statute. It proved so useful that one federal judge called mail and wire fraud the prosecutor’s “Colt .45.”
And it would broaden still further. Traditionally, fraud involved theft of property, usually money. But there was another way to look at things. In the 1930s, five public officials conspired with bond businessmen to have the Orleans Parish Levee Board pass a bond-refunding plan that funnelled exorbitant fees into their pockets. Clearly, they’d stolen taxpayers’ money, but the Supreme Court focused instead on the fact that in securing their plan’s approval, one schemer bribed a board member, while another (who’d recently left a senior position at the board) abused his connections to secure the governor’s unwitting assistance.
That case, Shushan v. United States, lay largely forgotten for decades. But it was resurrected forcefully in the 1970s, as prosecutors went after corrupt officials plaguing states like Louisiana and New Jersey. Time and again, prosecutors cited Shushan to support their premise that depriving citizens of intangible rights was equivalent to causing them financial harm. “Then, some prosecutors took it one step further,” says Razzano. “They said, ‘Well, if the people of a state can be defrauded of their right to honest services by political leaders taking bribes, then why shouldn’t that apply in the private sector as well?’”
The Supreme Court eventually called a time out. McNally v. United States involved state officials convicted of conspiring to pay themselves commissions on sales of insurance to the government. In its 1987 decision overturning their convictions, the Supreme Court ruled that the mail-fraud statute applied only to tangible property. If Congress wanted the statute to extend beyond property rights, “it must speak more clearly than it has.”
Congress obliged — sort of. While passing a popular omnibus drug bill the following year, it added a new 28-word provision to the mail-fraud statute called Section 1346. It read: “For the purposes of this chapter, the term ‘scheme or artifice to defraud’ includes a scheme or artifice to deprive another of the intangible right of honest services .” With honest services now codified in law, prosecutions resumed in earnest. Because Section 1346 made no distinction between businessmen and public officials, one might say it was now more like an AK-47 than a Colt .45 — a crude but effective prosecutorial weapon aimed squarely at white-collar suspects.
Some regard Section 1346’s vagueness as a strength. “Broad laws are actually very important,” says Todd Henderson, assistant professor of law at the University of Chicago law school. “And prosecutors generally do a good job exercising the discretion they’re given in competent ways.” But in failing to clarify what honest services really meant, and to whom the law would apply, Congress set the stage for further confusion.
America’s 94 judicial districts are grouped into 12 regional “circuits,” each topped by its own appeals court. “The lower courts have tried to limit the breadth of this statute by tying the fraud to some other factor,” explains Henderson. “In some courts, the defendant has to have violated some state law to be guilty of honest-services fraud…other courts have required some evidence showing intent to defraud, or that there be some quid pro quo.” But consensus proved elusive, leaving judges uncertain about how to apply the law.
These varying interpretations invite arguments that Section 1346 is unconstitutional because citizens are entitled to fair notice of what’s illegal, as part of their broader right to due process. “If after 20 years the courts of the United States can’t figure out what it means, then how can an average citizen?” asks Razzano. “Due process means that if you’re an honest, law-abiding citizen, you should be able to go to the law books, read the law and understand what you’re permitted to do and what you’re not permitted to do.”
Some courts recognize this; the U.S. Court of Appeals for the Second Circuit once called the statute “unconstitutionally vague.” Yet it has survived persistent constitutional challenges, and not everyone finds it confusing. “The circuit courts interpreting honest-services fraud in the public sector have been reasonably clear as to what constitutes the theft of honest services,” argued the Washington-based Groom Law Group in a 2006 paper.
French moralist François Duc de la Rochefoucauld wrote that we are much harder on people who betray us in small ways than those who betray us in great ones, and some say Section 1346 exemplifies that axiom. Critics contend that its vagueness allows prosecutors to criminalize mild infractions not proscribed anywhere else in American law. Some courts have shared this concern; the District of Columbia Circuit opined that “[once] disloyalty alone becomes the crime, little remains before every civil wrong is potentially indictable.”
For two decades, the Supreme Court remained silent. But earlier this year, Associate Justice Antonin Scalia ripped the honest-services statute, saying it was irresponsible to allow this confusion to continue. Taken to its logical conclusion, he warned, the statute might “cover a salaried employee phoning in sick to go to a ball game.”
Scalia’s outrage probably informed the Supreme Court’s decision to revisit honest services this year, more than two decades after McNally. This is no idle exercise. On average, that court receives 10,000 petitions every year; it chooses to hear only a handful, typically involving weighty questions about federal law or the Constitution. This year it has certified three cases challenging honest services.
Perhaps the most interesting is that of Bruce Weyhrauch, an attorney and former member of the Alaska House of Representatives. In February 2006, Alaska’s governor proposed a new legislation altering how the state would tax oil production. Months later, Weyhrauch, who’d decided not to run for re-election, wrote a letter to the CEO of an oilfield services company, VECO Corp., seeking employment. VECO, naturally, had interest in the proposed tax changes. Prosecutors alleged Weyhrauch abused his position by, among other things, feeding information to VECO about the proposed legislation. Critically, they argued they didn’t need to prove Weyhrauch accepted a bribe; rather he “violated his duties of honest services by knowingly concealing his conflict of interest from the Alaska State Legislature and from the citizens of the State of Alaska” while voting on the legislation.
Weyhrauch’s trial was put on hold in January, pending his Supreme Court appeal. Weyhrauch argues that having an undisclosed conflict of interest is not sufficient to support an honest-services charge; there must also be a clear violation of state law. That’s important, he contends, because no Alaskan law required him to reveal his conflict. Razzano agrees. “Often, conflicts of interest are hard to identify, particularly when you’re in the situation,” he says. “They’re easier to identify in hindsight.”
Skilling’s lawyers want the court to impose a different limiting factor: that in order to support an honest-services conviction, prosecutors must first prove the accused sought personal gain. That’s significant because according to his counsel, “Skilling was convicted under the statute even though, by everyone’s admission, he sought only to advance Enron’s interests, did not act out of greed, and did not seek or receive any private gain.” The lower court found that prosecutors needed only to prove that Skilling violated state fiduciary laws.
Black’s four-month criminal trial revolved around so-called non-competition payments. Traditionally, buyers of newspapers pay them to secure assurances the sellers won’t compete with them following the sale. Black and fellow executives of Hollinger International, a holding company for newspaper assets, caused themselves to receive such payments as Hollinger sold newspapers. Some of these payments weren’t requested by the buyers; defendants claimed the paymentswere actually compensation owed to them, re-characterized as non-competition payments in order to exploit a Canadian tax loophole.
In instructing jurors prior to verdict, U.S. District Court Judge Amy St. Eve explained the case wasn’t necessarily about the money. The jury could find Black and his co-defendants guilty of depriving the company and its shareholders of “their intangible right to the honest services of the corporation’s officers, directors and/or controlling shareholders.” Under Delaware law, officers and directors must act in their employer’s best interests. The jury found Black guilty of three counts of mail fraud, along with a count of obstruction of justice. In his brief to the Supreme Court, Black argues that honest-services fraud should apply in private-sector cases only if juries find the accused intended economic harm to the same individuals to whom he owed a fiduciary duty. That’s significant because Black contends he intended to avoid taxes, not harm shareholders. He didn’t owe a fiduciary duty to the Canada Revenue Agency.
Conceivably, any of these three cases might provoke the Supreme Court to strike down honest services again. Razzano hopes it will, but doubts it could muster the necessary five-vote majority to do that. “The Supreme Court doesn’t like to strike statutes down as unconstitutional,” he observes. More likely, the court might specify new limiting principles for the statute. For example, Henderson suggests it could stipulate that honest-services fraud can’t be established without an attendant violation of state law. For Black, Skilling and others convicted under the statute, the looming decision could mean new trials, even freedom — or merely a final disappointment, to which there is no recourse.
