Appropriate deference – DOJ's fresh approach to "honest services" fraud law

by Ben Vernia | September 30th, 2010

Some may find this post a bit off-topic for this blog, whose focus is the federal and state False Claims Acts. But’s motto is, after all, “All things false and fraudulent,” so I think the honest services fraud statute, 18 USC 1346, is fair game.

For the past quarter century, the relationship between the federal judiciary, Congress and the Executive with respect to criminal law has been marked by deep distrust and outright hostility to the federal courts by the other two branches. Good examples of this hostility include mandatory minimums, the sentencing guidelines, and the crack/powder cocaine sentencing disparity. Each of these reflect hard-line legislators and administration officials pushing back against what they perceive to be bleeding heart judges. Throughout this period, even the fact that judges complaining that laws are inflexible or unreasonably harsh have come from both political parties, or have prosecutorial backgrounds, hasn’t slowed down the movement to strip judges of discretion.

That could well have been the case, too, with the Supreme Court’s recent decisions regarding mail and wire fraud prosecutions brought under the “honest services” fraud definition, 18 USC 1346. In fact, the statute itself was born of inter-branch strife. In 1987, the Supreme Court struck down a conviction for honest services fraud in McNally v. United States, 483 U.S. 350 (1987). McNally was a private individual, convicted with a codefendant who was a Kentucky official, under a judicial interpretation of the wire fraud statute (18 USC 1341) which encompassed depriving Kentucky citizens of their right to the official’s honest services; the Court ruled that the definition of a scheme to defraud was not so broad as to include this claim.

Congress acted swiftly (well, for Congress – it was 18 months later). It essentially reversed McNally by simply defining “scheme or artifice to defraud” to include “a scheme or artifice to deprive another of the intangible right of honest services.” In doing so, it failed utterly to heed the concerns of numerous judges that the “honest services” definition of fraud was unworkable and vague.

Late in the Supreme Court’s term this year, it rejected a broad interpretation of honest services fraud in three cases, most notably Skilling v. United States. It held there that the statute was constitutionally vague unless its scope is limited to its “core” concepts of bribery and kickbacks.

Perhaps the Justice Department realized that it was futile to fight the Supreme Court, but it should nevertheless be praised for taking a more deferential approach on Capitol Hill in trying to modify the law. In testimony before the Senate Judiciary Committee, Criminal Division Assistant Attorney General Lanny Breuer offered constructive and careful suggestions which I think are very helpful:

First, in order to follow the Supreme Court’s direction in Skilling that any legislation in this area provide notice to citizens as to what conduct is prohibited, the statute should be clear and specific.

Second, like Section 1346, the new statute should rely upon the mail and wire fraud statutes, which provide a reliable and well-established jurisdictional basis for prosecution, and would enable prosecutors to capture the full scope of an expansive criminal scheme in an appropriate criminal charge.

Third, in order to define the scope of the financial interests that underlie improper self-dealing, the statute should draw content from the well-established federal conflict of interest statute, 18 U.S.C. § 208, which currently applies to the federal Executive Branch.

Finally, the statute should provide that no public official can be prosecuted unless he or she knowingly conceals, covers up, or fails to disclose material information that he or she is already required by law or regulation to disclose. By requiring the government to prove both knowing concealment and a specific intent to defraud, there is no risk that a person could be convicted for a mistake or unwitting conflict of interest.

We believe that legislation along these lines would restore our ability to address the full range of criminal conduct by state, local, and federal public officials, whether the corrupting influence comes from an outside third-party, or from the public official’s concealment of his financial interests.

The Department is also interested in working with the Committee on legislation to address corrupt private sector actors as well. For a number of reasons, crafting appropriate language concerning undisclosed self-dealing in the private sector is more difficult than with respect to the public sector. In addition, because undisclosed self-dealing in the private sector usually involves a loss of money or property, the existing mail and wire fraud statutes can often be used effectively to reach the improper conduct. That said, there are certain types of self-dealing by corporate officers that existing statutes do not allow us to reach and where a new prosecutorial tool would be welcomed. The Department is happy to work with the Committee in crafting an appropriate solution.

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