Navigating the Honest Services Fraud Statute After Skilling v. United States

• Jurisdiction: United States,Federal
• Citation: Vol. 72 No. 4 Pg. 0295
• Pages: 0295
• Publication year: 2011

Navigating the Honest Services Fraud Statute After Skilling v. United States
Vol. 72 No. 4 Pg. 295
The Alabama Lawyer
JULY, 2011 By J. B. Perrine and Patricia M. Kipnis

Former Alabama Governor Don Siegelman and HealthSouth Corporation founder and former CEO Richard Scrushy were prosecuted for a scheme by which Scrushy contributed $500,000 to Siegelman's campaign for a statewide lottery referendum in exchange for Siegelman's appointing him to Alabama's Certificate of Need Review Board. In June 2006, Siegelman and Scrushy were convicted of separate counts of federal funds bribery in violation of 18 U.S.C. § 666, four counts of honest services mail fraud in violation of 18 U.S.C §§ 1341 and 1346, and one count of conspiracy in violation of 18 U.S.C § 371. Siegelman was also convicted of obstruction of justice in violation of 18 U.S.C. § 1512(b)(3). On direct appeal, the United States Court of Appeals for the Eleventh Circuit affirmed all counts of convictions except that it reversed for insufficiency of the evidence two counts of honest services fraud against Siegelman. United States v. Siegelman, et al, 561 F.3d 1215 (11^th Cir. 2009). On June 29, 2010, the Supreme Court vacated and remanded Siegelman's and Scrushy's remaining honest services fraud convictions in light of its decision five days earlier in Skilling v. United States, 130 S.Ct. 2896 (2010). See Scrushy v. United States, No. 09-167, 2010 WL 2571879 (U.S. June 29, 2010); Siegelman v. United States, No. 09-182, 2010 WL 2571880 (U.S. June 29, 2010). On remand, the Eleventh Circuit upheld Siegelman's and Scrushy's convictions for federal funds bribery, conspiracy and the honest services fraud counts predicated on their bribery scheme, but held that after Skilling it must reverse Scrushy's convictions on two honest services fraud counts because the evidence was insufficient to show that Scrushy bribed another CON board member after Siegelman appointed him to the Certificate of Need Review Board. United States v. Siegelman, ___ F.3d ___, 2011, No. 07-13163, WL 1753789 at **9, 13 (11^th Cir. May 10, 2011) The Court affirmed Siegelman's conviction for obstruction of justice.

In Skilling v. United States, 130 S.Ct. 2896 (2010), the United States Supreme Court curtailed the government's ability to prosecute certain fraudulent schemes orchestrated by public officials as well as private employees. The Court shortened the government's prosecutorial reach by narrowing the scope of the honest services fraud statute, codified at Title 18, United States Code, Section 1346. Specifically, the Court held that the honest services fraud statute applied only to bribery and kickback schemes, and no longer covered schemes where the actor only engaged in undisclosed self-dealing. The Skilling decision is the latest chapter in the decades-long effort by the courts and Congress to prosecute self-dealing without running afoul of due process. The precise effects of Skilling are uncertain, though significant, as shown by the Eleventh Circuit's recent reversal of two counts of convictions for honest services fraud against former HealthSouth CEO Richard Scrushy.¹ Courts have yet to encounter a sufficiently diverse array of factual scenarios to establish the new contours of the statute, while Congress has been busy drafting and debating new legislation that addresses the Skilling Court's constitutional concerns. This article discusses the legal context of the honest services fraud statute before and after Skilling and provides insights on how to monitor exposure to the honest services fraud statute during this period of uncertainty.

The Honest Services Fraud Statute Prior to Skilling v. United States

The mail and wire fraud statutes, codified at Title 18, United States Code, sections 1341 and 1343, prohibit the use of the mails or interstate wires to execute any "scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises." Prosecutors have long used these statutes to hold accountable individuals who deceived others in criminal schemes that used the United States mail or interstate wire communication as a "step in the plot."² For at least 70 years, courts have upheld prosecutions under these statutes in "intangible rights" cases,³ that is, cases which do not involve the typical fraud in which a victim's loss of money provides a defendant's gain; rather, the "offender profit[s], [but] the betrayed party suffer[s] no deprivation of money or property; instead, a third party, who ha[s] not been deceived, provide[s] the enrichment." Skilling, 130 S.Ct. at 2926.

Over the years, the Supreme Court expressed constitutional concerns about such prosecutions on the theory that individuals did not have sufficient notice of what conduct constituted a prosecutable crime. The zenith of this concern was reached in the Supreme Court's decision in McNally v. United States, 483 U.S. 350 (1987). There, the Court reversed a conviction where the jury was instructed that a violation of the mail fraud statute could be found when a state Democratic Party chair with control over the selection of insurance agencies by the state directed payments to an agency in which he had an ownership interest without disclosing that interest to those whose actions might have been affected by the disclosure. The Court found that this prosecution was unconstitutional because the wire fraud statute was limited to the protection of property rights, and "does not extend to the intangible right of the citizenry to good government." McNally, 483 U.S. at 356. In so construing the statute, the McNally Court instructed that, if "Congress desires to go further, it must speak more clearly than it has." Id. at 360.

Congress immediately spoke by passing Title 18, United States Code, Section 1346, which provided a "McNally fix" by defining a "scheme or artifice to defraud" to include one that "deprive[s] another of the intangible right of honest services." This language once again allowed federal prosecutors to pursue convictions based on defendants' deprivations of others' rights to their "honest services." See Nicholas J. Wagoner, Honest-Services Fraud: The Supreme Court Defuses the Government's Weapon of Mass Discretion in Skilling v. United States, 51 S. Tex. L. Rev. 1121, 1135-36 (2010) (describing the government's use of honest services fraud as its "primary weapon against public and private corruption.").

The honest services fraud statute as written after McNally was particularly useful in combating public corruption. For example, the United States Court of Appeals for the Eleventh Circuit interpreted the term "honest services" in Section 1346 to mean public officials had a fiduciary duty to the public. United States v. Walker, 490 F.3d 1282, 1297 (11th Cir. 2007). The Eleventh Circuit's position was that this fiduciary duty and Section 1346 were violated where the...