High Court Limits Scope of “Honest Services Fraud,” Restricting Reach of RICO

This posting was written by Mark Engstrom, Editor of CCH RICO Business Disputes Guide.

The recent Supreme Court decision in Skilling v. United States restricted the definition of “honest services fraud” to schemes involving bribery and kickbacks. In doing so, the decision restricted the reach of the federal Racketeer Influenced and Corrupt Organizations Act (through the mail and wire fraud statutes), as well.

Violations of the federal mail and wire fraud statutes, which make it a crime to use the interstate mails or wires to further a scheme or artifice to defraud, constitute predicate acts under RICO.

Although the Supreme Court held in McNally v. U.S. (483 U.S. 350; 1987) that the mail fraud statute protected property rights, not the “intangible rights to honest services,” Congress quickly nullified that decision by enacting the honest services fraud statute (18 U.S.C. §1346), which defined a “scheme or artifice to defraud” to include schemes and artifices that deprive others of their "intangible right of honest services."

Constitutionality

In Skilling, former Enron officer Jeffrey Skilling—who was convicted of conspiring to prop up Enron's stock price by overstating the company's financial health—challenged the constitutionality of the honest services fraud statute.

To satisfy due process, a penal statute must define a criminal offense: (1) with sufficient definiteness that ordinary people can understand what conduct is being prohibited and (2) in a manner that does not encourage arbitrary and discriminatory enforcement. According to Skilling, the honest services fraud statute did neither. First, the phrase “intangible right to honest services” failed to adequately define the behavior that it barred. Second, the statute’s “standardless sweep” allowed policemen, prosecutors, and juries to pursue personal predilections that facilitated opportunistic and arbitrary prosecutions.

The Court disagreed. Viewed in light of the “solid core” of pre-McNally case law, which "uniformly recognized bribery and kickback schemes as honest services fraud," and in light of federal statutes that prohibited and defined similar crimes, there was "no doubt" that Congress had intended the honest services fraud statute to include bribes and kickbacks. Therefore, a criminal defendant who has participated in a bribery or kickback scheme could not tenably assert that the phrase “intangible right to honest services” was unconstitutionally vague.

If Congress had intended the honest services fraud statute to reach further, however, it had to "speak more clearly." Construing the statute to proscribe a wider range of misconduct would raise due process concerns, according to the Supreme Court.

Flawed Conviction

Nevertheless, Skilling's conspiracy conviction was “flawed.” Because Skilling’s misrepresentation of Enron's financial health involved neither bribery nor kickbacks, his conviction could not rest on honest services fraud. Moreover, the government had based its conspiracy charge on securities fraud and money-or-property wire fraud in addition to honest services wire fraud.

The jury, however, had not identified the basis on which their conspiracy verdict rested. Accordingly, the Fifth Circuit's ruling was vacated and the case was remanded to determine whether Skilling's conviction could be upheld absent honest services wire fraud.

Concurrence

Justices Scalia and Thomas joined the majority in rejecting honest services fraud as a legitimate basis for Skilling's conviction, but they did so for a different reason. The justices thought that the statutory phrase "intangible right to honest services" was unconstitutionally vague.

The June 24 decision, Skilling v. United States, appears at CCH RICO Business Disputes Guide ¶11,875.

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