Thursday, June 24, 2010

Supreme Court Limits Scope of Honest Services Fraud (6/24/10)

The Supreme Court has handed down decisions in the Jeff Skilling and Conrad Black honest-services fraud cases  (Skilling v. United States, 561 U.S. ___ (2010), here, and Black v. United States, 561 U.S. ___ (2010), here).  I have previously blogged on the honest-services fraud issue and its potential relationship to tax crimes here.  I have not had time to study the opnions and develop any impact on tax crimes, so I just offer for now the Supreme Court's summary of the honest-servces fraud reasoning of the majority opinion:


2. Section 1346, which proscribes fraudulent deprivations of “the intangible right of honest services,” is properly confined to cover only bribery and kickback schemes. Because Skilling’s alleged misconduct entailed no bribe or kickback, it does not fall within the Court’s confinement of §1346’s proscription. Pp. 34–51.
(a) To place Skilling’s claim that §1346 is unconstitutionally vague in context, the Court reviews the origin and subsequent application of the honest-services doctrine. Pp. 34–38.
(1) In a series of decisions beginning in the 1940s, the Courts of Appeals, one after another, interpreted the mail-fraud statute’s prohibition of “any scheme or artifice to defraud” to include deprivations not only of money or property, but also of intangible rights. See, e.g., Shushan v. United States, 117 F. 2d 110, which stimulated the development of the “honest-services” doctrine. Unlike traditional fraud, in which the victim’s loss of money or property supplied the defendant’s gain, with one the mirror image of the other, the honest-services doctrine targeted corruption that lacked similar symmetry. While the offender profited, the betrayed party suffered no deprivation of money or property; instead, a third party, who had not been deceived, provided the enrichment. Even if the scheme occasioned a money or property gain for the betrayed party, courts reasoned, actionable harm lay in the denial of that party’s right to the offender’s “honest services.” Most often these cases involved bribery of public officials, but over time, the courts increasingly recognized that the doctrine applied to a private employee who breached his allegiance to his employer, often by accepting bribes or kickbacks. By 1982, all Courts of Appeals had embraced the honest-services theory of fraud. Pp. 34–37.

(2) In 1987, this Court halted the development of the intangible rights doctrine in McNally v. United States, 483 U. S. 350, 360, which held that the mail-fraud statute was “limited in scope to the protection of property rights.” “If Congress desires to go further,” the Court stated, “it must speak more clearly.” Ibid. P. 37.

(3) Congress responded the next year by enacting §1346, which provides: “For the purposes of th[e] chapter [of the U. S. Code that prohibits, inter alia, mail fraud, §1341, and wire fraud, §1343], the term ‘scheme or artifice to defraud’ includes a scheme or artifice to deprive another of the intangible right of honest services.” Pp 37–38.
(b) Section 1346, properly confined to core cases, is not unconstitutionally vague. Pp. 38–51.
(1) To satisfy due process, “a penal statute [must] define the criminal offense [1] with sufficient definiteness that ordinary people can understand what conduct is prohibited and [2] in a manner that does not encourage arbitrary and discriminatory enforcement.” Kolender v. Lawson, 461 U. S. 352, 357. The void-for-vagueness doc-trine embraces these requirements. Skilling contends that §1346 meets neither of the two due-process essentials. But this Court must, if possible, construe, not condemn, Congress’ enactments. See, e.g., Civil Service Comm’n v. Letter Carriers, 413 U. S. 548, 571. Alert to §1346’s potential breadth, the Courts of Appeals have divided on how best to interpret the statute. Uniformly, however, they have declined to throw out the statute as irremediably vague. This Court agrees that §1346 should be construed rather than invalidated. P. 38–39.

(2) The Court looks to the doctrine developed in pre-McNally cases in an endeavor to ascertain the meaning of the phrase “the in-tangible right of honest services.” There is no doubt that Congress intended §1346 to refer to and incorporate the honest-services doc-trine recognized in Courts of Appeals’ decisions before McNally derailed the intangible-rights theory of fraud. Congress, it bears emphasis, enacted §1346 on the heels of McNally and drafted the statute using that decision’s terminology. See 483 U. S., at 355, 362. Pp. 39–40.

(3) To preserve what Congress certainly intended §1346 to cover, the Court pares the pre-McNally body of precedent down to its core: In the main, the pre-McNally cases involved fraudulent schemes to deprive another of honest services through bribes or kickbacks supplied by a third party who had not been deceived. In parsing the various pre-McNally decisions, the Court acknowledges that Skilling’s vagueness challenge has force, for honest-services decisions were not models of clarity or consistency. It has long been the Court’s practice, however, before striking a federal statute as impermissibly vague, to consider whether the prescription is amenable to a limiting construction. See, e.g., Hooper v. California, 155 U. S. 648, 657. Arguing against any limiting construction, Skilling contends that it is impossible to identify a salvageable honest-services core because the pre-McNally cases are inconsistent and hopelessly unclear. This Court rejected an argument of the same tenor in Letter Carriers, 413 U. S., at 571–572. Although some applications of the pre-McNally honest-services doctrine occasioned disagreement among the Courts of Appeals, these decisions do not cloud the fact that the vast majority of cases involved offenders who, in violation of a fiduciary duty, participated in bribery or kickback schemes. Indeed, McNally itself presented a paradigmatic kickback fact pattern. 483 U. S., at 352–353, 360. In view of this history, there is no doubt that Congress intended §1346 to reach at least bribes and kickbacks. Because reading the statute to proscribe a wider range of offensive conduct would raise vagueness concerns, the Court holds that §1346 criminalizes only the bribe-and-kickback core of the pre-McNally case law. Pp. 41–45.

(4) The Government urges the Court to go further by reading §1346 to proscribe another category of conduct: undisclosed self-dealing by a public official or private employee. Neither of the Government’s arguments in support of this position withstands close inspection. Contrary to the first, McNally itself did not center on non-disclosure of a conflicting financial interest, but rather involved a classic kickback scheme. See 483 U. S., at 352–353, 360. Reading §1346 to proscribe bribes and kickbacks—and nothing more— satisfies Congress’ undoubted aim to reverse McNally on its facts. Nor is the Court persuaded by the Government’s argument that the pre-McNally conflict-of-interest cases constitute core applications of the honest-services doctrine. Although the Courts of Appeals upheld honest-services convictions for some conflict-of-interest schemes, they reached no consensus on which schemes qualified. Given the relative infrequency of those prosecutions and the intercircuit inconsistencies they produced, the Court concludes that a reasonable limiting construction of §1346 must exclude this amorphous category of cases. Further dispelling doubt on this point is the principle that “ambiguity concerning the ambit of criminal statutes should be resolved in favor of lenity.” Cleveland v. United States, 531 U. S. 12, 25. The Court therefore resists the Government’s less constrained construction of §1346 absent Congress’ clear instruction otherwise. “If Congress desires to go further,” the Court reiterates, “it must speak more clearly than it has.” McNally, 483 U. S., at 360. Pp. 45–47.

(5) Interpreted to encompass only bribery and kickback schemes, §1346 is not unconstitutionally vague. A prohibition on fraudulently depriving another of one’s honest services by accepting bribes or kickbacks presents neither a fair-notice nor an arbitrary-prosecution problem. See Kolender, 461 U. S., at 357. As to fair notice, it has always been clear that bribes and kickbacks constitute honest-services fraud, Williams v. United States, 341 U. S. 97, 101, and the statute’s mens rea requirement further blunts any notice concern, see, e.g., Screws v. United States, 325 U. S. 91, 101–104. As to arbitrary prosecutions, the Court perceives no significant risk that the honest-services statute, as here interpreted, will be stretched out of shape. Its prohibition on bribes and kickbacks draws content not only from the pre-McNally case law, but also from federal statutes proscribing and defining similar crimes. Pp. 48–49.
(c) Skilling did not violate §1346, as the Court interprets the statute. The Government charged Skilling with conspiring to defraud Enron’s shareholders by misrepresenting the company’s fiscal health to his own profit, but the Government never alleged that he solicited or accepted side payments from a third party in exchange for making these misrepresentations. Because the indictment alleged three objects of the conspiracy—honest-services wire fraud, money-or-property wire fraud, and securities fraud—Skilling’s conviction is flawed. See Yates v. United States, 354 U. S. 298. This determination, however, does not necessarily require reversal of the conspiracy conviction, for errors of the Yates variety are subject to harmless-error analysis. The Court leaves the parties’ dispute about whether the error here was harmless for resolution on remand, along with thequestion whether reversal on the conspiracy count would touch any of Skilling’s other convictions. Pp. 49–50.


  1. Jack, this post doesn't belong here, but I wanted to throw a few thoughts at you regarding the VDP.

    First, the first 250 account names were selected by UBS, right? So, you have a confessed guilty party selecting which names to give the government which would seem to be wide open to manipulation. (ie they could sacrifice clients who had taken business away from them, while protecting more lucrative/loyal customers or avoiding embarrassing clients like arms dealers or drug dealers). I wonder if this gives rise to any due process issues.

    Secondly, the government has basically rigged the name disclosure process to conform to the VDP rules. After all, the government could have requested all 4450 names if they wanted to back in February 2009, but they didn't. They have avoided taking possession of those names so they could stay within their own voluntary disclosure rule and say they didn't physically have the names yet. Moreover, the US has extended the VD deadlines (multiple times) to avoid obtaining the names precisely to maintain the "technical" compliance with their own VD procedures. [We, the Govt. can take all of these Sept./Oct. VD's because though we know the list is on the way, though we've demanded the list and we're going to get it, though we could make a phone call TODAY and have the names read to us, technically, we still don't have them in hand, so it is still within our rules.] Historically, the rule seems to have been that the UBS investigation would have been considered a "triggering event" and therefore the 4450 should be ineligible. If getting letter in the mail from UBS that someone's account is going to be disclosed is not considered a "triggering event", I don't know what is. That might seem to be a due process issue as well. It sort of makes a mockery of the idea of a "timely" disclosure! This is kind of a manipulation or bending of the VD process that gives the appearance that the late-VD-filers have satisfied the requirements of the VD rules, when in reality, a lot of the earlier "untimely" people did much more, much earlier, under harsher penalties, and in much better faith than the current johnny-come-latelys.

  2. Anonymous, thanks again for your comments.

    I address now only the issue of whether the topic -- the paring back of the honest services crime based on vagueness in the statute – belongs on the blog. I think it does because at least two tax crimes – the defraud / Klein conspiracy and tax obstruction – suffer in some of their broader formulations from the same defect that the Supreme Court unanimously found in the honest services statute. I challenge my readers to distinguish in any meaningful way the broader construction of these statutes with the defective broad application of the crime of honest services fraud. Perhaps the Supreme Court’s holding in Hammerschmidt does useful limiting work for the defraud / Klein conspiracy, but I think that the courts continue to use broad language in defining these tax crimes in ways that the ordinary public would not understand precisely what conduct is being prescribed. A return to the fraud concept for the defraud conspiracy could also serve a limiting purpose, although there may be too much water under the bridge for that to happen.

    Thus, a frequent broad claim in tax cases is that even honest conduct done with some type of motive to impair or impeded the IRS is all that is required. Hammerschmidt held for the defraud conspiracy that the lie was required (interference or obstruction of Government function “by deceit, craft or trickery, or at least by means that are dishonest.”). Judge Kozinski importantly emphasized that limiting function in United States v. Caldwell, 989 F.2d 1056, 1058 (9th Cir. 1993), but, in my judgment, the Government continues to press that boundary seeing deceit, et. al. in conduct that is otherwise clearly legal and the existence of even a deceit, etc. (the lie) is in the eye of the beholder. So, I think the same genre of issue is implicated, but like I said there may be too much history for the defraud / Klein conspiracy and tax obstruction for the Skilling case to serve as anything except a reminder that Hammerschmidt concepts (and similar concepts for tax obstruction) need to be carefully observed so that these statutes are not applied in a way that they are too vague.

    Jack Townsend


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