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Congress Revisits Honest Services Fraud

Since its inception in 1988, a doctrine known as “honest services” fraud has helped prosecutors send hundreds of public officials to jail on corruption charges. The doctrine came about when Congress rewrote mail and wire fraud statutes to specifically include schemes designed to “deprive another of the intangible right of honest services.”

Simply stated, the law codifies a public official’s duty of providing honest services to taxpayers. It also applies to the duty that corporate executives have to place the interests of company shareholders above their own. Traditionally, honest services fraud has been easier to prove than other similar crimes like bribery (which requires proof that a public official was willing to take some action in return for an improper payment). In some states, the concept of honest services fraud has been used to prosecute legislators who accepted jobs or gifts from lobbyists or institutions that receive public money.

A recent Supreme Court decision may have a massive impact on future public corruption charges. In June, the nation’s highest court limited honest services fraud, restricting its application to only bribery and kickbacks. While defense attorneys are celebrating the new limitation on a law they say stacked the deck against them, not everyone shares their enthusiasm: Congress and the Department of Justice are brainstorming on ways to act within the confines of the ruling while still allowing prosecutors the power needed to investigate allegations of undisclosed conflicts of interests.

The Case and Its Effects

The case before the U.S. Supreme Court when it made the precedent-setting ruling limited the application of honest services fraud involved the prosecution of former Enron Chief Executive Jeffrey Skilling. In it, Skilling’s attorneys argued that the honest services fraud theory was unconstitutionally vague as applied to his case. A majority of the Court agreed, saying that generously reading the statute to prohibit a range of conduct wider than bribes and kickbacks “would raise the due process concerns underlying the vagueness doctrine.” While the ruling is a major victory for Skilling, since it did not cover at least one of his convictions, he will remain in prison for the foreseeable future. The decision, however, has already caused a wave of requests for convictions to be set aside in other cases.

There is little doubt that the ruling in the Skilling case deprived prosecutors of a powerful legal means by which to fight public corruption. According to former federal prosecutor Bill Mateja, “honest services was a good tool in the hands of a good prosecutor.” But, he added that, “all too often prosecutors used the statute because they could[,] not because they should.”

Honest services fraud has been used to prosecute officials for a wide range of misconduct: omitting income on financial disclosure statements while meanwhile voting against legislation affecting that same undisclosed income; taking “sham” jobs with businesses or governmental agencies; making or taking campaign contributions in expectation of government action; and, in one case, a Missouri lawmaker was convicted after he accepted free lodging from an insurance lobbyist.

One government lawyer, who devoted a significant amount of attention to honest services fraud cases, gave this advice to those officials worried about running afoul of the law: “if you have to think about whether you should be doing it, maybe you shouldn’t be doing it.” But, the versatility of honest services fraud is what led to its undoing. Since honest services fraud had been used to punish such a wide array of conduct, it became unclear just what behavior was and was not prohibited by the law, thus warranting the Supreme Court’s finding of unconstitutional vagueness.

For both 2008 and 2009, honest services fraud charges were brought in more than 100 cases. Anticipating a review by the Supreme Court, the government slowed the pace in the second half of last year. Thanks to this early recognition and the resulting modification of key cases, so far only a few cases have been completely tossed out. In some others, prosecutors negotiated with defendants to accept different charges. Many more cases are still pending, though.

The Reaction From Congress

Meanwhile, some members of Congress are seething. Senator Patrick Leahy of Vermont, Chairman of the Senate Judiciary Committee, said that because of the ruling, “whole categories of corrupt and fraudulent conduct could go unpunished.” He promised that he was working with colleagues “to determine how best to clarify and restore this statute.” The Committee is acting quickly, and has already held hearings on the matter. Along with federal lawmakers, Justice Department officials are also weighing in on how new legislation could salvage the honest services doctrine while closing what many see as a significant gap in the law.

Until Congress acts, some fear a negative impact on the deterrence of fraud and corruption. And prosecutors who wish to pursue cases of undisclosed conflicts of interest formerly targeted by honest services fraud will either have to get creative or bide their time.

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