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Supreme Court Limits Widely Used Anti-Fraud Law




July 2010

2010-July Sp 2 web-Honest Services-Law book 

 

On June 24 the Supreme Court scaled back an anti-fraud law that prosecutors have regularly relied upon to convict business executives and politicians: the “honest services” law. The decision could affect many past, current, and pending fraud cases.

In a unanimous ruling on the conviction of former Enron CEO Jeffrey Skilling, Justice Ruth Bader Ginsburg wrote that the federal honest services law couldn’t be used to convict Skilling for his role in the collapse of Enron. The ruling, however, doesn’t necessarily require Skilling’s conviction to be overturned.

The statute at issue is a 28-word law that criminalizes any scheme that deprives another of the “intangible right of honest services.”

Congress adopted the law in 1988 after the Supreme Court tried to halt the expansion of the mail and wire fraud statutes, ruling that those laws didn’t encompass depriving citizens of the intangible right to honest government.

Although its core involves public officials who, in violation of their fiduciary duties, accept bribes or personally benefit from undisclosed conflicts of interest, prosecutors have used the honest services statute to address a wide range of conduct by public officials and private actors, which make it a valuable tool for federal prosecutors in cases involving fraud.

The statute, however, has long been criticized for being so vague that it allows prosecutors to criminalize behavior that might not be explicitly illegal. As Justice Antonin Scalia wrote last year, the law is “invoked to impose criminal penalties upon a staggeringly broad swath of behavior” by those who “engage in any manner of unappealing or ethically questionable conduct.”

And over time, the vagueness of “honest services” led to a medley of conflicting interpretations as courts struggled with how to apply the statute, according to John Gill, J.D., CFE, vice president of education for the ACFE. Use of this law, he said, “caused confusion among the courts.”

In its opinion, the Court rejected Skilling’s argument on appeal that the definition of “honest services” was unconstitutionally vague.

The Court, however, held that the government stretched the law too far when it prosecuted Skilling. The Court said Congress enacted the statute specifically to address bribery and kickbacks, but found that the statute could become vague if applied to “a wider range of offensive conduct.”

Accordingly, the Court ruled that the statute wasn’t unconstitutionally vague if limited to bribery and kickback schemes. That is, defendants accused of violating the honest services statutes must have gained some benefit from the alleged conduct. And because the government didn’t accuse Skilling of bribery or taking kickbacks, the Court sent his case back to the lower courts to determine whether his conviction should be overturned.

Using that same legal standard, the Court also sided with imprisoned media executive Conrad Black, who was convicted of honest services fraud for failing to disclose noncompetition fees, setting aside a federal appeals decision that upheld Black’s conviction. But as in Skilling’s case, Black’s conviction won’t necessarily be overturned; instead, the case will be sent back to the federal appellate court for further consideration.

The justices also sided with former Alaska legislator Bruce Weyhrauch, who is facing charges under the honest services law for failing to disclose a conflict of interest in seeking a job with a company while it was lobbying the legislature.

Additionally, the Skilling decision could affect many other cases involving charges of honest services fraud including the case against former Illinois Governor Rod Blagojevich, and the convictions of former Alabama Governor Don Siegelman and ex-HealthSouth CEO Richard Scrushy.

Moreover, because the Skilling case has limited the honest services statute to bribery and kickbacks, it makes it more difficult for prosecutors to pursue criminal cases against corporate executives for misconduct that harms their companies. As a result, the decision will likely result in fewer private-sector fraud cases brought under the honest services fraud law.

And because the decision in Skilling will affect how certain fraud cases are prosecuted in the future, “the theory on many fraud cases, as to both government and business officials, may need to be adjusted in light of the opinion,” said Bruce Dorris, J.D., CFE, CVA, CPA, program director for the ACFE. “Fraud examiners should be aware of the change as they investigate and build their cases in the future.”

But even with the Court’s ruling, Gill said prosecutors still have a variety of other, less controversial laws they can invoke in fraud cases.

“There are still plenty of other methods to prosecute corruption that are less controversial than this one,” he said.

Read about the Skilling decision here, and the Black case here.

Mark Scott, J.D., CFE, is a legal writer/editor in the ACFE’s research department. 

The Association of Certified Fraud Examiners assumes sole copyright of any article published on www.fraud-magazine.com or www.ACFE.com. ACFE follows a policy of exclusive publication. Permission of the publisher is required before an article can be copied or reproduced. Requests for reprinting an article in any form must be e-mailed to: FraudMagazine@ACFE.com. 

 

 




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