The U.S. Supreme Court is slated to decide this year whether 18 U.S.C.A. § 1346, the honest-services fraud law, is being applied too broadly, rendering it unconstitutional. On December 8, 2009, the Court heard arguments in the cases of former Alaska state legislature, Bruce Weyhrauch, and former Hollinger International CEO, Conrad Black. On March 1, 2010, the Court will hear arguments on former Enron CEO, Jeff Skilling. Decisions on these cases, where each defendant was charged with honest-services fraud, are expected this summer.
The use of honest-services fraud can be traced back to 1949. However, it was not until the 1970s that this legal theory became an outright success. Essentially, this concept extends the traditional theory of fraud beyond the classic Madoff-type cases to cases where deceit was used to deprive the public of honest services. Under this theory, deprivation of honest services is considered to be a theft of intangible rights that falls under the “scheme to defraud” prong of the federal mail and wire fraud laws.
The honest-services fraud theory became extraordinarily useful for federal prosecutors put in the position of prosecuting corrupt state officials because often, federal bribery laws did not apply or it was challenging to prove bribery beyond a reasonable doubt. Honest-services fraud, on the other hand, could be proven more easily because secret payments to a state official cheated the public of the official’s honest services, which is sufficient to prove honest-services fraud. The use of honest-services fraud became so popular in the mid-1980s that the Chief of the business crimes unit at the U.S. Attorney’s office, now U.S. District Judge, Jed Rakoff, wrote that the theory was “our Colt .45, our Louisville Slugger.”
Part of the success of honest-services fraud is due to the fact that it proves most useful in cases where criminality is most unclear. Primarily, honest-services fraud is most suitable in self-dealing cases, wherein a corporate officer directs corporate business to a company in which the officer has an undisclosed private interest, or where an official leans on regulators for the same type of favorable private result. Most recently, it has been used in the high-profile cases of former Illinois Governor, Rod Blagojevich; former U.S. congressman of Louisiana, William Jefferson; and lobbyist Jack Abramoff.
This year will not be the first grapple the Supreme Court has faced with honest-services fraud. In 1987, the Court heard McNally v. U.S. Despite every appellate court endorsing the concept of honest-services fraud, the Supreme Court, by a 7-2 vote, rejected the concept, stating: “we read § 1341 [the mail and wire fraud statute] as limited in scope to the protection of property rights.” The Court was primarily concerned with the vagueness, federalism, and separation-of-powers issues inherent in the unstructured principle. In response, in October 1988, Congress passed the law now at issue (§ 1346), but resolved none of the Court’s constitutional concerns.
Once the law was passed, appellate courts resurrected their pre-McNally precedents and continued to determine limitations on an ad hoc basis. Some federal courts require a defendant to have “contemplated economic harm” to victims; others require that the defendant have violated a state law; and yet there are some federal courts that don’t require state violations. But there must always be some set of factors present. This non-uniform application of § 1346 is precisely what the Supreme Court has set out to analyze and review.
Critics of § 1346 are on both ends of the spectrum, objecting to its constitutionality because of violations of due process or federalism. The due process argument is based on the statute not providing fair notice to businessmen and state officials about what is and is not a crime before inadvertently committing one. Meanwhile, the federalism argument relies on the issue that the Constitution does not give the federal government direct power to punish fraud, and the honest-services fraud beefs-up the federal mail fraud law to such an extent that it violates the language of the Constitution and directly infringes on states’ rights to regulate fraud.
Preliminary discussions in the Supreme Court have not yielded a definitive consensus either way. However, no matter which way the Court rules, the significance of this decision cannot be understated, especially for counsel in the pending cases of Weyhrauch, Black, and Skilling.