High Court Upends Popular Anti-fraud Law

By John W. Schoen
|  Thursday, Jun 24, 2010  |  Updated 3:00 PM PDT
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High Court Upends Popular Anti-fraud Law

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The Supreme Court Thursday defanged a legal doctrine used to convict a rogues gallery of corporate fraudsters based on a 23-year-old statute that says the public has an “intangible right to honest services” from public officials.

This is a good day for the bad guys.

The Supreme Court Thursday defanged a legal doctrine used to convict a rogues gallery of corporate fraudsters based on a 23-year-old statute that says the public has an “intangible right to honest services” from public officials. In the past decade, prosecutors have used the law to press fraud cases against corporate executives, including Enron’s CEO Jeffrey Skilling, whose appeal lead to the ruling.

Defense attorneys have complained that the statute is so vague that it gives prosecutors sweeping powers to bring fraud charges. But defenders of the statute argue that, as corporate fraud has become increasingly complex, existing statutes haven’t kept up with the schemes cooked up by executives looking to defraud shareholders and the public.

“The gutting today of the honest services law is a disaster for prosecutors and the public at large,” said Andrew Stoltmann, a Chicago attorney who represents investors in investment fraud cases. “This will make prosecuting the future Dennis Kozlowskis of Tyco and Bernie Ebbers of Worldcom much more difficult.”

The law has been a valuable tool for prosecutors taking on a variety of public and private fraud cases. Supreme Court nominee Elena Kagan said recently that the honest services cases at the high court were the ones that mattered most to the Justice Department.

Justice Department spokeswoman Tracy Schmaler said prosecutors would continue to urge that honest services convictions for Skilling, Black and others be upheld.

"While we are disappointed that today's Supreme Court decisions narrowed the honest services statute, we are pleased that the Court upheld many of the core provisions that have been used for decades to prosecute corrupt public officials and corporate executives who have breached their duties to their constituents, clients, and investors," Schmaler said.

Honest services charges have figured in convictions won against former Govs. George Ryan of Illinois and Don Siegelman of Alabama, and former Reps. Randy "Duke" Cunningham of California, William Jefferson of Louisiana and Bob Ney of Ohio. Former New York Senate leader Joseph Bruno is facing two years in prison after being convicted under the same federal statute, and the judge in his case said he is reviewing the court's decision. 

Honest services charges also have been used regularly in public corruption cases stemming from the Jack Abramoff lobbying scandal, including in the pending retrial of former Abramoff associate Kevin Ring.

Melanie Sloan, executive director of the government watchdog group Citizens for Responsibility and Ethics in Washington, said the decision "deprives prosecutors of an important tool in their efforts to fight public corruption. Previous convictions may be vacated and corrupt officials will have an easier time escaping accountability for their misdeeds."

Thursday’s ruling didn’t strike down the law, but the court effectively limited its use to cases where there is direct evidence that defendants accepted bribes or kickbacks.

"Because Skilling's misconduct entailed no bribe or kickback," Ruth Bader Ginsburg wrote in the majority opinion, "he did not conspire to commit honest-services fraud under our confined construction" of the law.

Skilling was convicted in 2006 for his role in the downfall of Enron on 19 counts of conspiracy, securities fraud, insider trading and lying to auditors. The company collapsed into bankruptcy in 2001 under the weight of years of illicit business deals and accounting tricks. Skilling is serving a sentence of more than 24 years at a minimum security prison outside Denver.

In assembling their case, prosecutors also argued that Skilling had denied shareholders their "intangible right to honest services,” invoking a law originally intended to convict public officials of bribery.

Skilling's lawyer, Daniel Petrocelli, said the government is going to be "hard pressed" to defend its conviction of Skilling without using the statute.

That remains to be seen. Government prosecutors, who based their case on other fraud statutes, argue that Skilling's conviction should be sustained.

The Supreme Court's decision Thursday sent Skilling's case back to the lower courts.

Others convicted of fraud in cases that relied more heavily on the “honest services” law could also successfully appeal to have their sentences reduced, according to Stoltmann. “I don’t think we’re going to see the jail doors open and a mass exodus in the next year,” he said. “But I think a number of guilty people are dancing a jig right now because their sentences will likely be shaved down.”

Controversy over the law has been brewing for decades. In 1971, federal court judge and former Illinois governor Otto Kerner was indicted on bribery and convicted two years later.

Prosecutors used a then-novel interpretation of federal mail fraud statutes, arguing that Kerner had denied the public of its “intangible right to honest services.” Use of the legal strategy spread until 1987, when the Supreme Court ruled in McNally v. United States, that mail fraud only applied to schemes involving money or property.

The law didn’t guarantee citizens the right to good government. But a year later, Congress added the “intangible right of honest services” language to federal mail fraud statutes.

Since then, the statute has become popular with prosecutors trying to win complex fraud cases.

“There are a lot of cases that it’s going to touch,” said Christine Hurt, a corporate law professor at the University of Illinois who has been following the Skilling case. “There are a lot of cases now that are being prosecuted under that statute that are going to have to switch gears.”

Among them are cases involving former newspaper magnate Conrad Black, Alaska lawmaker Bruce Weyhrauch and former Illinois Gov. Rod Blagojevich.

The decision raised questions about Black's conviction and justices instructed the lower courts to re-examine the case. Black was convicted of defrauding Hollinger International.

Critics of the law say Congress went too far when it added the “honest services” language to the mail fraud statue. In theory, they argue, an employee who called in sick to go to a baseball game could be convicted of a federal crime for denying his employer the “intangible right to his honest services.”

The result, they argue, is that the statute has been overused by prosecutors in cases where they didn’t have enough evidence to prove specific wire, mail or securities fraud.

Honest services fraud allows prosecutors to circumvent the narrowly crafted bribery and gratuities statute and potentially to criminalize an ever-broader range of conduct. That leaves public officials and private citizens to wonder what the boundaries are between lawful and unlawful behavior, according to Randall Eliason, writing in the George Washington University Journal of Criminal Law & Criminology last year.

But defenders of the “honest services” statute argue that those “narrowly-crafted” laws against corporate and investment fraud don’t do a good enough job in a world of increasingly complex accounting rules and financial vehicles.

“The practical reality is that Congress can’t keep up with the new and enterprising way guys like Jeff Skilling and Ken Lay used to defraud shareholders,” said Stoltmann. “This decision is a disaster for good corporate and political governance.”

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