What Does High Court’s Skilling Ruling Mean for Criminalizing Economic Conduct?

Guest Commentary

J. Brady Dugan, Akin Gump Strauss Hauer & Feld LLP

In a trio of highly anticipated rulings issued on June 24, the Supreme Court changed the way DOJ will prosecute fraud offenses.  The decisions in Black v. U.S., Skilling v. U.S. and Weyhrauch v. U.S. deal with “honest services fraud,” a specific type of mail and wire fraud that an individual commits by depriving another of their intangible right to honest services.

Violations of the mail and wire fraud statutes are some of the most commonly charged federal offenses.  In a Washington Legal Foundation Legal Backgrounder published late last year, Akin Gump’s Mark Botti and I discussed how one component of the U.S. Department of Justice (DOJ), the Antitrust Division, uses the statute to prosecute crimes that corrupt the competitive process:  Honest Services Fraud and Antitrust:  Will the Supreme Court Re-Write the Rules for “Competition Crimes?” Given the wide-spread use of the honest services statute, the Supreme Court’s decisions should broadly impact the government’s fraud enforcement program.

Congress enacted the honest services statute, 18 U.S.C. § 1346, in response to the Supreme Court’s decision in McNally v. U.S.  Prior to McNally, the lower courts had read the mail and wire fraud statutes to prohibit defrauding persons of money or property, as well as intangible rights.  Under the intangible rights theory, a mail or wire fraud scheme could be based, for example, on a politician’s depriving his constituents of his honest services by taking a bribe.  A prosecution could also be based on a private citizen’s depriving her employer of her honest services by violating a fiduciary duty owed to her employer.  McNally restricted the use of the mail- and wire-fraud laws to cases that involved deprivations of money or property – not deprivations of intangible rights.  After McNally, Congress passed §1346 to specifically criminalize the deprivation of “the intangible right of honest services.”  But the broad wording of the law has made it difficult to know what conduct falls within the scope of the statute.  The lower courts came up with a variety of sometimes conflicting interpretations of the statute. 

On June 24, the Court restricted §1346 to cases involving “offenders who, in violation of a fiduciary duty, participated in bribery or kickback schemes.”  Skilling v. United States, No. 08-1349, slip op. at 43 (U.S. June 24, 2010).  A bloc of the Court felt that the opinion should have gone further and found the statute unconstitutional.  Justice Scalia explained, “[a]mong all the pre-McNally smorgasbord-offerings of varieties of honest-services fraud, not one is limited to bribery and kickbacks.  That is a dish the Court has cooked up all on its own.”  Skilling, No. 08-1349, at 8 (opinion concurring in part and concurring in judgment).  In light of the newly pared down reach of honest-services fraud, each of the three cases was vacated and remanded to a lower court. 

The cases should provide some needed guidance to the business community – they appear to more definitively establish the boundaries of what constitutes a § 1346 violation.  However, questions remain.  For example, as Justice Scalia explains in his opinion, there is no test laid out by either the statute or the Court for determining the criteria of a “fiduciary.”  Moreover, the rulings will cast doubt on the convictions of individuals charged under a pre-Skilling theory of liability.  It will be important to watch DOJ closely to discern their enforcement intentions with respect to the newly-cabined statute.  Given the questions left unresolved, further litigation regarding what constitutes honest services fraud seems likely.

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