June 24, 2010
Skilling v. United States: Theft of Honest Services
Posted by Christine Hurt

The aspect of the Skilling case most interesting to us business law types was the reach of 18 U.S.C. 1346, or the theft of honest-services statute, which allows the mail and wire fraud statutes to be used when there is a scheme or artifice to defraud another of the intanglible right of honest services.  As readers of this blog and followers of the actions of the Enron Task Force well know, this statute was a favorite weapon of the Enron Task Force and a favorite grounds for vacating convictions by the Fifth Circuit.  To me, today's routing of the use of this statute in corporate fraud is a symbolic reversal of the body of Enron Task Force prosecutions.  (Opinion here.)

The Court ably explains the development of the honest services doctrine, then statute, in terms of its original application:  bribes and kickback schemes involving an actor, a constituency to which the actor owes its services, and a third party who induces the actor in the actor's provision of services.  This bribe may not negatively impact the constituency, but it violates the statute nevertheless.  However, the Court notes that the statute has been used in recent years to cover a multitude of situations, particularly employer-employee situations otherwise characterized as involving a conflict of interest or other breach of a fiduciary duty.  Skilling argued that the statute was unconstitutionally void for vagueness; the prosecution argued that it could be constitutionally applied to the narrow realm of cases involving "the taking of official action by the employee that furthers his own undisclosed financial interests while purporting to act in the interests of those to whom he owes a fiduciary duty."  The Court came down somewhere in the middle.

The Court does not agree with the prosecution:

If Congress were to take up the enterprise of criminalizing "undisclosed self-dealing by a public official or private employee," it would have to employ standards of sufficient definiteness and specificity to overcome due process concerns. The Government proposes a standard that prohibits the "taking of official action by the employee that furthers his own undisclosed financial interests while purporting to act in the interests of those to whom he owes a fiduciary duty," so long as the employee acts with a specific intent to deceive and the undisclosed conduct could influence the victim to change its behavior. That formulation, however, leaves many questions unanswered. How direct or significant does the conflicting financial interest have to be? To what extent does the offical action have to further that interest in order to amount to fraud? To whome should the disclosure be made and what information should it convey? These questions and others call for particular care in attempting to formulate an adequate criminal prohibition in this context.
However, the Court does not hold the statute unconstitutionally void, protesting that its job is to "avoid constitutional difficulties by [adopting a limiting interpretation] if such a construction is fairly possible." The Court reasons that citizens have at least always been on notice that section 1346 criminalizes bribery and kickback schemes, so it therefore holds that the statute stands, but criminalizes only bribery and kickback schemes. Good news for Skilling, though, as he did not participate in any bribery or kickback scheme. So, Skilling did not violate section 1346. Justice Scalia, joined by Thomas, argues for holding the statute unconstitutionally vague, though the result would be the same for Skilling. Scalia argues that it would be even more of an improperly legislative role for the Court to rewrite the statute than to strike it. So, what's the result for Skilling? Skilling was found guilty on multiple counts, including conspiracy to commit mail/wire fraud, securities fraud and honest services fraud. Now, the Court has left it to the Fifth Circuit to determine whether the inclusion of an improper statute nullifies the conspiracy conviction. Then, the Court has also left it to the Fifth Circuit to determine whether the inclusion of an improper count colors the entire conviction. This is definitely a victory, but perhaps not a complete one. However, it is a victory for the law, as upholding loose applications of a criminal statute to matters best left to employers with the power to terminate employment and shareholders with the power to bring fiduciary duty civil suits would have cemented in place a decade of the overcriminalization of corporate law. My colleague Larry Ribstein has his own take at TOTM.

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