Honest Services Fraud Back in the Spotlight with “Operation Varsity Blues”

Featured Expert Contributor, White Collar Crime & Corporate Compliance

Gregory A. Brower, a Shareholder with Brownstein Hyatt Farber Schreck, LLP in Las Vegas, NV and Washington, DC, with Stanley L. Garnett, a Shareholder in the firm’s Denver, CO office.

The charges federal prosecutors have filed in the “Operation Varsity Blues” college-admissions corruption scandal have thrust the federal crime of honest services fraud back into the spotlight.  Over the past two or three decades, this section of the federal criminal code has been the subject of much controversy.  Although the facts alleged in the various Operation Varsity Blues charging documents are unseemly, at best, and the evidence seems overwhelming, the government’s reliance on the honest services fraud statute is likely to renew the debate in white collar defense circles about what exactly the statute means and whether it is appropriately applied to private-sector actors.

The government charged each of the more than four dozen defendants with participating in a conspiracy to commit honest services fraud in violation of 18 U.S.C. § 1346.  Specifically, the documents allege the defendants “conspired (1) to bribe college entrance exam administrators to facilitate cheating on college entrance exams; (2) to bribe varsity coaches and administrators at elite universities to designate certain applicants as recruited athletes or as other favored candidates, thereby facilitating the applicants’ admission to those universities; and (3) to use the facade of a charitable organization to conceal the nature and source of the bribe payments.”

Federal prosecutors have applied the honest services fraud statute in cases of public corruption as well as in cases in which private actors breached a fiduciary duty to another.  Courts have defined the burden-of-proof requirements for an honest services fraud case filed against a public official more clearly than those filed against purely private actors.  As a result, while the use of the statute to prosecute traditional public corruption targets, such as elected officials, has been generally accepted, the application of the law in the context of purely private-sector conduct has been much more controversial, and has the subject of much litigation over the past few decades, including several U.S. Supreme Court decisions.

Indeed, Justice Antonin Scalia, in a typically blunt dissent from the majority decision in Sorich v. United States, 129 U.S. 1308 (2009), proffered a list of examples of how “preposterous” the logical extension of the government’s use of the statute could be.  Since then, the Court has clarified the scope of § 1346, holding that the government can rely upon the statute only when charging criminal mail and wire fraud when the alleged scheme involves bribes or kickbacks. Nevertheless, the question remains, even where the alleged conduct falls within this narrowed scope—as appears to be the case with the Varsity Blues charges—should such conduct be the focus of the federal criminal system, or should such conduct give rise to civil litigation claims sounding in tort and contract?

Beyond the criminal versus civil debate, application of § 1346 against private actors generates controversy because of the statute’s generally vague nature.  Judicial opinions on the definition of honest services fraud vary widely.  It is thus arguably impossible for citizens to know whether their conduct crosses the line into activity that a prosecutor might think is illegal.  Indeed, in a 1998 decision, the D.C. Circuit warned that:

In the private sector context, section 1346 poses special risks.  Every material act of dishonesty by an employee deprives the employer of that worker’s “honest services,” yet not every act is converted into a federal crime by the mere use of the mails or interstate phone system [and]…not every breach of fiduciary works a criminal fraud.”

United States v. Sun-Diamond, 138 F.3d 961, 973 (quoting United States v. George, 477 F.2d 508, 512 (7th Cir. 1973).

Many of the defendants charged in Operation Varsity Blues have already retained experienced white-collar defense attorneys and have ample resources to vigorously challenge the Justice Department’s latest attempt to apply the honest services fraud statute to private actors.  These cases will thus generate a great deal of interest among criminal attorneys and those that view expansive readings of criminal laws with skepticism.

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