Entries in White Collar (2)


Honest Service Doctrine Going Down Again?

A few weeks ago, the so-called Honest Services Doctrine had another rough day before the United States Supreme Court, making it likely that the doctrine may be overturned for the second time in 25 years.  And this time, the doctrine may be found to be unconstitutional, which would make it less likely that Congress could revive it in its current form.  This is significant given how malleable the concept of “honest services” was for federal prosecutors who sought to utilize this doctrine to significantly expand the jurisdictional reach of the mail and wire fraud statutes.  (Transcript for Black Case; Transcript for Weyhrauch Case)

For those unfamiliar with the Honest Services Doctrine, it is a doctrine that derived from the federal government’s application of the mail fraud statute to combat political corruption.  In essence, the federal government successfully convicted politicians who took bribes or kickbacks by arguing that the bribe or kickback deprived the politician’s constituents of his or her honest services, which constituted mail fraud when the political used the mail as part of the scheme.  (The doctrine also applied to wire fraud cases.)  At first, this fraud theory hinged on the fact that, because politicians were considered fiduciaries to the public, their failure to disclose the bribe or kickback amounted to fraud by omission.  Because it was a fraud theory based on a fiduciary’s failure to disclose, one court noted, in dicta, that a disclosure of the bribe or kickback would likely negate a prosecution under this theory.  See United States v. Sawyer, 85 F.3d 713, 725 (1st Cir. 1996) (“Ostensibly, a person could offer an illegal bribe to a public official and not be concerned with its secrecy.  Thus, the evidence presented [for mail fraud] must permit a finding that [the defendant]. . . also intended to deceive the public about that conduct.”). 

Over the years, the federal government began extending the reach of this doctrine to cover items beyond bribery and kickbacks.  In some instances, the federal government convicted private employees who deprived their private employers of their honest services.  In other instances, the government sought convictions of private individuals who were involved in the public corruption cases even though the private individual did not, unlike the politician, owe a fiduciary duty to disclose anything to the public. 

But the real expansion of the doctrine began when the federal government extended the doctrine to cover situations where an individual merely failed to disclose a conflict of interest.  Thus, even in cases where a public official was not influenced by the conflict of interest, the mere failure to publicly disclose the conflict could constitute a federal felony as a fraud of omission.  Because many state legislatures have part-time legislatures where the public official has a full time job as a teacher, lawyer, doctor, etc., the potential reach of the Honest Services Doctrine was significant given the potential number of conflicts of interest.  For instance, an attorney from a large, national law firm could have a significant number of potential conflicts that would make it difficult to fully disclose, especially if the lawyer was prohibited from disclosure under the state’s professional conduct rules. 

To highlight the potential abuse associated with this expansion of the Honest Services Doctrine, Judge Harrington, a former federal judge and federal prosecutor in Massachusetts, argued that this expansion amounted to the federal government turning state misdemeanor violations into federal felonies:

This Court re-emphasizes the threat to liberty and reputation of individuals which occurs when federal prosecutors selectively transform state ethics violations,. . .typically enforced by the imposition of civil penalties, into serious federal felonies.  The government should be wary of the broad language and elastic interpretation of the federal criminal fraud statute, and refuse to engage in the innovative prosecutorial process of 'federalization' of state laws.

In 1986, the United States Supreme Court found that the Honest Services Doctrine was an improper extension of the mail fraud statute because this statute was not applicable to the intangible right of the citizenry to good government.  McNally v. United States, 483 U.S. 350 (1987).  Shortly after McNally was issued, Congress passed a federal statute that attempted to reinstate the Honest Services Doctrine.  18 U.S.C. § 1346.  Under 18 U.S.C. § 1346, the text read, “For the purposes of this chapter [18 USCS §§ 1341 et seq.], the term ‘scheme or artifice to defraud’ includes a scheme or artifice to deprive another of the intangible right of honest services.”  In applying this statute, federal courts generally defined the term “deprive another of the intangible right of honest services” in accord with the case law preceding McNally

Despite Congress’ attempt to revive the Honest Services Doctrine, the United States Supreme Court is again analyzing the legitimacy of the doctrine and may find that the doctrine, as delineated in the § 1346, is an unconstitutionally vague criminal statute.  While the government argues that the doctrine is not unconstitutional vague because federal courts have generally limited the doctrine to bribery, kickback, and concealed conflict of interest cases, nothing in the statute supports that limitation.  And nothing in the statute prohibits a federal prosecutor from using the generic term “honest services” to apply to something beyond those general limitations.  The following exchange between Justice Scalia and the government attorney highlights the constitutional issue:

JUSTICE SCALIA: There is no such thing as a vague law, so long as this Court says, oh, what the law -- it is absolutely unclear what the law means, so long as this Court says, oh, we think the law means --what do you want to pick -- bribery, then -- then it's okay. Right?

MR. DREEBEN: Justice Scalia --

JUSTICE SCALIA: Is that the system we have, that Congress can say, nobody shall do any bad things?

MR. DREEBEN: That's not what --

JUSTICE SCALIA: And it comes to this Court, and this Court says, bad things means bribery. And that law is a valid law, right?

MR. DREEBEN: That's not what this law says, and that's not what this Court has done in response to other criminal law.

JUSTICE SCALIA: What is it -- what is it that you are arguing for, that -- that a law that is, on its face, inherently vague can, somehow, be rendered valid to the citizens by a decision of this Court?

MR. DREEBEN: But that is common. This Court takes common law terms of art, such as fraud, and it reads into them elements that are not on their face on the basis of the common law. Take, for example, 18 U.S.C. 1111, which is the federal murder statute. It uses the phrase "malice aforethought."

 *   *   *

JUSTICE SCALIA: Well, you say it was a body of law. It wasn't about a body of law. We said it was wrong [in McNally]. So Congress is not here referring to some established common law crimes at all. It's referring to a mistaken series of decisions by the courts of appeals.

MR. DREEBEN: Well, I can't --

JUSTICE SCALIA: And that's quite different from -- from harking back to a common law term, such as fraud.

A review of the transcripts makes it seem that the Honest Services Doctrine is in trouble.  But the cases before the Supreme Court have not technically challenged the constitutionality of the doctrine, making it possible that the Supreme Court’s holding will limit the doctrine without rendering it unconstitutional.  Yet, Justice Scalia noted that it did not make sense to address the specific issues before the Supreme Court if the statute was unconstitutionally vague.  So, even if the doctrine holds on to fight another day, it will only be a matter of time before it is killed off.


Why did the DOJ amend its guidelines on corporate cooperation? 

In a written summary of a recent seminar on white collar defense, Peter Hardy, a guest blogger for the White Collar Crime Prof Blog, included the following statement concerning the federal government’s decision to amend the so-called Thompson Memo, the federal memorandum that had delineated the federal government’s guidelines on corporate cooperation:

The DOJ has changed what it has said about what constitutes cooperation by a corporation.  Knowing or feeling that it has all the power, DOJ has imposed great demands upon corporations and its employees, and threatened the corporation with its own destruction.  (emphasis added). 

It is tough to ascertain what Mr. Hardy means in the highlighted section.  Is Mr. Hardy implying that the DOJ changed its policy on corporate cooperation because it wanted to level the playing field given its knowledge of its own power?  If so, he is wrong.  The DOJ leveled the playing field (i.e. it modified the Thompson Memo) after Judge Kaplan, a federal judge sitting in the District Court for the Southern District of New York, dismissed the indictments against a number of former KMPG employees who were indicted for allegedly setting up illegal tax shelters and, in the process, castigated the actions of at least two Assistant United States Attorneys for the Southern District of New York.  This was an unprecedented decision and a great blow to the federal government. 

According to Judge Kaplan, the federal government had violated the defendant’s right to counsel under the Sixth Amendment when it utilized the Thompson Memo to pressure KPMG into cutting off its payment of legal funds to these former employees.  After the Second Circuit affirmed Kaplan’s decision, the federal government had to change something, so it modified some aspects of the government’s ability to encourage a company to “cooperate.”  In addition to the Kaplan decision, some members of Congress had started to introduce legislation that would limit the government’s ability to force corporations to cooperate when it was targeting some of the corporation’s employees.  It was the ripple effect of the Kaplan bomb shell that forced the federal government to reconsider its cooperation guidelines; it had nothing to do with the DOJ’s concern about its own power.