“Theft of Honest Services” Fraud Statute Narrowed by Supreme Court

Jul 02, 2010   

A number of high profile white collar criminal prosecutions have included fraud charges based on the “theft of honest services ” fraud statute, 18 U.S.C. Sec. 3146.  This statute provides that the term, “scheme or artifice to defraud” includes not only a scheme to defraud someone of money, but also to deprive another of the intangible right of honest services.  Since its enactment, the “honest services” fraud statute has been a favorite charging statute for federal prosecutors.  For example, it is being used to prosecute former Illinois Governor Ron Blagojevich for his alleged attempt to sell a senate seat.  It has also been used to prosecute college basketball coaches who helped players violate rules to obtain scholarships.  Most notoriously, it was used to prosecute Enron executives for lying to auditors, and to prosecute Conrad Black, the former chair and CEO of Hollinger International, for paying himself illegitimate “noncompetition” fees that he failed to disclose to the board of directors.

A number of appeals courts have expressed concerns that the “honest services” fraud statute violates due process rights by failing to provide fair notice to defendants of what conduct violates the statute. The Supreme Court, in a June 24th decision, has now held that as interpreted in previous prosecutions, the statute is impermissibly vague, thereby violating the Constitution. In Skilling v. United States, the Supreme Court sharply limited the scope of the “honest services” statute, by ruling that it is unconstitutionally vague except in cases involving bribery and kickback schemes. The decision rejected the statutes constitutionality in cases where public officials or private-sector employees are charged with engaging in self-dealing or having undisclosed conflicts of interest, without a bribery or kickback scheme.  The Supreme Court stated that by limiting the “honest services” fraud statute to bribery or kickback schemes,  it “establishes a uniform national standard, define[s] honest services with clarity, (and) reach[es] only seriously culpable conduct”.

The effect of the Supreme Courts decision is to remove a tool from the government that was increasingly used to prosecute violations of ethics where there was no victim harm or proof that  a payment or inducement had actually affected any official action.  Now that the “honest services” fraud statute has been narrowed by the Court, it may be of minimal value to prosecutors who already have ample federal bribery and extortion statutes with which to prosecute wrongdoers. What the decision leaves businessmen and public officials alike, is with a more definite awareness of what conduct will be considered a violation of the federal criminal fraud statute.