HONEST SERVICES FRAUD — INTERPRETING OR REWRITING THE STATUTE?

Congressional hearings to consider a person for a seat on the Supreme Court frequently focus on the judicial philosophy of the nominee. Senators pose question after question trying to discern if the justice will interpret the law as written by Congress or be an activist who somehow rewrites it using his or her own philosophy. The conservatives are supposed to adhere to the former philosophy, while the liberals are on the side of the latter, at least that seems to be the conventional thinking. This is clearly the intent behind many of the questions posed to Solicitor General Elena Kagan.

A more interesting question is what these labels mean in the context of deciding a case? The constitutional challenges to 18 U.S.C. § 1346, the so-called “honest services fraud” statute, are a case in point. The concept of “honest services” fraud began as a theory of wire and mail fraud and evolved over time. It applied in a variety of cases involving public servants, private employees and to various kinds of conduct. There were disputes as to the scope of the statute and the source of the legal duties it imposed. Many complained the theory was open-ended and gave federal prosecutors a virtual blank check. See generally, John C. Coffee, Jr., “The Metastasis of Mail Fraud: The Continuing Story of the ‘Evolution’ of a White-Collar Crime,” 21 A. Crim. L. Rev. 1 (1983-1984).

The Supreme Court eventually concluded that “honest services” fraud was not within the parameters of the wire and mail fraud statutes. McNally v. U.S., 483 U.S. 350 (1987). In reaching this conclusion, the Court told Congress that if it wanted this concept to be covered by those two statutes it must speak more clearly. It did. Congress quickly passed Section 1346 which defines mail and wire fraud to include “honest services fraud.” No further definition was offered by Congress.

It seems that McNally changed nothing. Prosecutors returned to creatively employing the theory. The courts returned to trying to figure out what the phrase means. Defendants returned to raising constitutional challenges claiming the statute is void for vagueness and failed to give proper notice.

This term the Supreme Court took up the question of “honest services” fraud again. In Skilling v. U.S., Case No. 08-1394 (Decided June 24, 2010) (and also in other cases, discussed here), the Court rejected a constitutional challenge to the statute. The Court based its conclusion on three key points. First, it acknowledged that “the Court of Appeals have been divided on how best to interpret the statute. Uniformly, however, they have declined to throw out the statute as irremediably vague.” Slip op. at 39. But see Morrison v. National Australia Bank Ltd., Case No. 08-119 (Decided June 24, 2010), Slip op. at 4-5 (rejecting the decisions of the courts of appeals which had considered the issue which had concluded that the issue in foreign cubed cases is one of jurisdiction rather than a construction of Section 10(b)). Building on this premise, the Court went on to state that its job is to uphold the statute rather than strike it down if possible.

Second, Justice Ginsberg, writing for the Court, concluded that there is “no doubt that Congress intended Section 1346 to refer to and incorporate the honest-services doctrine recognized in Court of Appeals’ decisions before McNally derailed the intangible-rights theory of fraud.” The dissent, written by Justice Scalia, agreed.

It is the third point on which the majority and dissent disagree and which raises the question frequently poised by Senators at confirmation hearings. What precisely does a reference to the pre-McNally case law mean? While acknowledging that there is some disarray in that case law, Justice Ginsberg concluded that it should be “pared down” to its “core.” That core “involved offenders who, in violation of a fiduciary duty, participated in bribery or kickback schemes.” Id. at 43. To define the limits of this theory, the Court cites to the pre-McNally case law as well as federal statutes dealing with bribery and kickbacks. In reaching its conclusion, the majority rejected a suggestion by the Department of Justice that the statute should also cover undisclosed conflicts of interest.

Justice Scalia rejects the reading of the earlier case law offered by the majority. Rather, the dissent views that case law as lacking in any real focus and essentially open-ended.

Now, over two decades after McNally,, the theory of honest services fraud has returned to whatever the pre-McNally case law said about bribes and kickbacks complemented by a few federal statutes which address the subject. Whether the statute now provides any more clarity and notice than it did at the time of McNally, or in the years since the Section was passed, is at best debatable.

Perhaps the more interesting question however, is the predicate for the Court’s decision. While all the Justices agree that Congress referenced the pre-McNally case law when it passed the statute, that is the only point which is clear. There is nothing to suggest that Congress directed the Court to select a portion of the existing case law and engraft it onto the statute. There is nothing to suggest that Congress was directing the High Court to add kickbacks and bribery to the definition of “honest services,” but not undisclosed conflicts of interest. In short, there is nothing to suggest that Congress expected the Court to “pare down” the case law or select only what it guessed to be the “core” parts and use it to write definitions for its open-ended creation.

If Skilling is used as a predicate to question a potential Supreme Court nominee, the Senators might ask whether the Court “construed” the statute as Justice Ginsberg claims or rewrote it as Justice Scalia argues. A follow up question might focus on whether writing definitions for a statute based on speculation as to what Congress may have thought – assuming it considered the issue at all – is “interpreting a statute” or judicial legislation. And, the final question from the Senate panel might be which position is the “conservative” one and which is the “liberal” one.