Jeffrey Skilling led Enron from 1997 to 2001. During his tenure Enron grew into one of the most successful companies in the United States, primarily as an energy trading company. Many of its employees invested their life savings in Enron stock, and investors flocked to the company; Enron became the darling of the investment community and its officers joined the inner circle of industry elite. Unfortunately, the success was more apparent than real, because the steady rise in earnings that motivated investors was partially the result of deceptive and manipulative actions by Skilling and others. Among other things, Skilling himself allegedly conspired to arrange bogus transactions that shifted company accounting losses from one contrived company subdivision to another so as to misrepresent the financial health of the company. The apparent motivation was to enhance the value of Enron stock (Skilling and his cohorts were significant shareholders) and to allow the company to continue to maintain the lines of credit critical to its businesses.

The traditional mail/wire fraud laws punished a “scheme to defraud” that deprives others of property of financial value, but in 1988 Congress passed 18 U.S.C. 1346, which expanded the definition of fraud to include schemes that deprive others of the honest services to which they are entitled. Section 1346 was aimed mainly at corruption among state and local officials, especially since the specific federal bribery statute, 18 U.S.C. 201, only punishes bribe taking by federal officials. But for reasons Congress never explained, it also extended this honest services concept to purely private affairs.

Illustration of a thickset man with four arms. The front arms are raised in a righteous position. The other two hide bags of money behind his back.
Illustration by David Plunkert

The inflated earnings and reserves were discovered within four months of Skilling’s resignation in 2001, and Enron soon entered bankruptcy, its market capitalization falling from more than $60 billion to zero. Skilling was indicted for conspiracy involving two categories of crimes. One was a fairly conventional securities fraud charge for the misrepresentations under SEC Rule 10b-5 and the related criminal statute. The other was so-called “honest services” fraud, falling under the mail and wire fraud statutes.Skilling was ultimately convicted under both categories and sentenced to 24-plus years in prison, with the honest services charge a significant factor in the length of sentence. The claim against Skilling was not that he failed to fulfill his duty to run Enron and promote its activities, or that he stole from or cheated the company, or even that he had any desire to harm Enron; rather, in effect, the charge was simply that in connection with the services he rendered to his employer, he had exhibited dishonesty.

Conrad Black, a Canadian, was the CEO of Hollinger International, a publicly held company that owned such newspapers as the Chicago Sun-Times, The Daily Telegraph in London, and The Jerusalem Post. He was identified as the 238th wealthiest person in the United Kingdom, and he lived an ostentatiously self-indulgent life that attracted great media attention. In 1999, without informing the Hollinger board, Black arranged for a subsidiary of Hollinger to enter into a covenant whereby, in exchange for the approximately $6 million paid to him, he agreed not to compete against the subsidiary. The government charged him under Section 1346, but not because he gave no real consideration for the money (although there were some arguments to that effect); the government argued that at best, in reality, the arrangement was for Black to serve as a management consultant to the subsidiary and that he had improperly characterized the deal as a covenant not to compete solely as a way to avoid Canadian taxes. Black was convicted for the crime of depriving Hollinger of the honest services he owed and was sentenced to nearly seven years in prison.

Bruce Weyhrauch, a lawyer, was a member of the Alaska House of Representatives while Alaska’s legislature was considering legislation that would alter how the state taxed oil production. In 2006, Weyhrauch solicited future legal work from VECO, an oil services company, while the legislature was considering the oil tax legislation, and he voted in a manner favorable to VECO. For this act he was indicted under section 1346. The gist of the charge was that Weyhrauch had failed to disclose the conflict of interest, even though it appears that Alaska law did not specifically require public officials to disclose such conflicts. The case has been wending its way through the courts since 2007. The district court decided to strike from the case key evidence related to the honest services charge. But before the case ever went to the jury, the Government appealed the judge’s ruling to the Ninth Circuit Court of Appeals, and, as we explain below, the case ended up before the Supreme Court.

These cases are different in some important respects. Skilling had provided the services he had promised the entity for which he worked, and he had acted in what he apparently believed were the interests of that entity, and perhaps its shareholders. But by falsely overstating its earnings he had crossed a clear line drawn by the securities laws. For him, the question was whether he should be punished solely for violating those laws, which were designed to protect investors and lenders against accounting fraud, or whether he should face additional penalties under Section 1346 on the theory that his misdeeds defrauded his own company even though his actions aimed, however wrongly, to benefit the company. Black’s covenant not to compete was an utter fiction, but there was evidence that he had actually provided management services to the subsidiary, and in any event his actions never cost Hollinger or its shareholders a penny, nor did he fail to deliver on his duties as CEO. His bad intent was to cheat the Canadian government, a party unrelated to his employer, and so the question was whether he merely committed tax fraud under Canadian law or should be punished as well for the collateral dishonesty of his mischaracterization of the covenant. Weyhrauch provided all the expected services as a legislator and never took a bribe, but his apparent motivation in the performance of one of those acts of service was the hope of future legal work. He had an undisclosed conflict of interest. Since he violated no law specifically requiring disclosure of such a conflict of interest, the question was whether he could be punished under Section 1346 on the amorphous theory that he owed a duty to his constituents to avoid or to disclose this conflict because of the honest service of transparent government he owed them.

In each of these cases, the defendant appealed on the basis that his honest services fraud charge could not stand because the statute was unconstitutional under the “void for vagueness” doctrine. This venerable due process principle forbids laws so vague that they give no clear notice of what conduct they proscribe and therefore invite law enforcement authorities to engage in arbitrary exercise of discretion in choosing which alleged offenders to pursue.

In effect, these three appellants argued that it is incongruous that these very different actions can all be the same crime: Services are provided, services are not provided; money is lost, money is not lost; the victim is the employer, the victim is mostly some third party unrelated to the employer, etc. Lurking in each of these cases are questions of the breadth of definition of dishonesty that can prove a federal felony and what connection, if any, this dishonesty must bear to any actual or even threatened harm to any purported victim. In both Skilling and Black, an employee gave his employer all the consideration he owed the company as an employee but arguably violated a contractual or fiduciary duty to act with general honesty. And even if a corporate employee violates some specific material clause in his contract, it seems bizarre that this breach of contract can establish a federal crime; the bizarreness turns to tautology when the alleged breach involves an amorphous duty that derives from a vague phrase in federal statute that disregards any question of actual or intended harm. And as for Weyhrauch, what breach of contract or fiduciary duty to the people of his state does a politician commit when he does not cross any line drawn by state law or the rules of his branch of government? Each of these cases also asks why federal prosecutors were deploying an indeterminate federal statute when various prosecutorial authorities had at hand very specific laws aimed directly at the conduct in question: for Skilling, securities fraud, for Black, Canadian tax fraud, and for Weyhrauch, bribery (if any) under Alaska law. Was the government just exploiting Section 1346 to win long sentences for publicity—or to offer defendants plea bargains no sane defendant could refuse?

Skilling, Black, and Weyhrauch all have one other important element in common—each won some vindication from the Supreme Court of the United States at the end of the last term. The dominant decision in these cases is Skilling v. United States.

For two decades before Skilling, prosecutors had increasingly been using the vague language of Section 1346 to prosecute a host of different acts of arguable malfeasance by employees or contractors of businesses. In many circuits it did not matter whether the employer (or client) suffered injury or if the alleged wrongdoer had even intended any harm, so long as a U.S. attorney could identify some potential or speculative harm that the conduct in question posed a risk of causing. On the public side, the prosecutor could frame an indictment on the grounds that the accused official had somehow violated a general norm of honest government.

The actus reus of the crime was the ephemeral notion of the deprivation of honest services, and the mens rea required was the intent to deprive the employer (or client or constituency) of honest services owed. In the public sector the presumed justification was protection of the political process. In the private sector the presumed justification was protection of a somewhat analogous notion of the integrity of the “economic process” or the markets. Prosecutors seemed free to make judgments of the permissibility of conduct based on their personal sense of morality, without a requirement of proving intended harm, without a requirement of proving that actual harm had occurred, without a requirement of a coherent distinction between contract violation and a crime. Thus, Section 1346 did not criminalize anything not covered by more targeted statutes, so perhaps its only real role was to create the real possibility of substantially enhanced prison terms and hence more credible prosecutorial threats to induce guilty pleas.

The appellate courts responded to these concerns in various ways. Most notably, a panel of the Second Circuit found 1346 unconstitutional as applied in United States v. Handakas (2002), under the void for vagueness doctrine. Handakas involved a private employer under state contract who falsely claimed to be paying the prevailing wage rate in violation of a New York statute. The theory of honest services violation was that a state agency had a right to determine how its contracts would be fulfilled and that Handakas “took away that right.” (One might wonder why, if this was so vile an act, the New York state prosecutors did not get involved.) The panel expressed appalled disbelief at the prosecutor’s argument that an intentional breach of contract could constitute a federal felony, denouncing it as a “concept without boundary or standard.” Ultimately, however, in 2003, the en banc Second Circuit, in United States v. Rybicki, upheld a conviction of lawyers who paid kickbacks to insurance company adjusters to obtain favorable (but apparently reasonable) settlements for their clients. The court reversed the earlier Handakas opinion and found the statute clear and specific enough to avoid due process danger. It purported to perform a narrowing reading of the law to save it from the constitutional danger zone. But it did so with the rather weak requirement that the alleged fraud pose a reasonably foreseeable risk of harm—not actual or intended harm—and it defined harm broadly to include almost any alteration of the victim’s business affairs even if it did not involve demonstrable financial loss.

No other court went quite as far as Handakas, but several courts expressed serious worry about the statute’s seemingly limitless application. As one judge put it, “The cumulative effect of a vague criminal statute, a broad conception of conspiracy, and an unprincipled theory of harm … is a very real threat, of potentially dramatic proportion, to legitimate and lawful business relationships. Some courts followed Rybicki in requiring reasonably foreseeable harm, and others were more aggressive in requiring actual harm or intended harm to the victim or significant economic benefit to the defendant, while others required that the conduct at least violated some identifiable state law or rule.

Last year the Supreme Court determined that it had to address the question whether Section 1346 was unconstitutionally vague. And the Court’s answer, in an opinion by Justice Ginsburg, was yes—or a qualified yes. The Court concluded that the core types of corrupt conduct at which the statute aimed were bribes and kickbacks and that limiting the statute’s reach to these specific categories salvaged its constitutionality. And perhaps acknowledging that even these core categories might be somewhat imprecise in definition, Justice Ginsburg offered the reassurance that “the statute’s mens rea requirement further blunts any notice concern.”

As a result of this holding, Skilling might get a retrial and a possibly reduced sentence. The same is true of Conrad Black. And in light of the holding in Skilling, the Supreme Court sent the Weyhrauch case back to the Ninth Circuit Court of Appeals, since under Skilling, nondisclosure of a conflict of interest would not be sufficient for a mail or wire fraud charge, wholly apart from the question of whether a violation of state law is required. Now the case may go back to the trial court to determine whether there is any basis to the charge that would survive Skilling.

To return to the more general significance of the Skilling decision, Justice Ginsburg’s reassurance that the mens rea requirement alleviates any lingering due process concerns may be insufficient because the remaining problem with Section 1346 has nothing to do with mens rea, itself a highly elusive concept in white-collar crime. It has to do with the continuing absence of any role for harm. And the Court’s use of “bribery and kickbacks” as a mantra for saving the law does not address that problem. The terms bribery and kickbacks may supply imagery that resonates with general moral notions of corruption; they are not self-defining. Perhaps the Court meant to distinguish the terms semantically, so that the word bribe applies only in the case of a public official taking money; if so, perhaps the Court thought it was helpfully narrowing the notion of a kickback in private business to something close to bribes: that is, a payment for the purpose of improperly obtaining or rewarding favorable treatment.

But even a public bribe is hard to define if we neglect the issue of what harm it does. The statute governing bribery of federal officials, Section 201, distinguishes between true “quid pro quo” bribes from lesser wrongs called “gratuities” and both of these from legitimate campaign contributions given with the general goal of influencing the official. Justice Ginsburg never addresses these distinctions; indeed she refers to the federal bribery statute, Section 201(b), but pointedly does not refer to the gratuity statute, Section 201(c). In addition, Section 201 cases have raised the question of a difference between (a) a payment given to obtain a governmental action that the bribe-giver does not deserve from (b) a payment (perhaps properly characterized as a gratuity) simply given to accelerate a decision that is otherwise the proper one. And in the case of private affairs, Justice Ginsburg’s opinion never discusses whether 1346 requires any demonstrable harm, even though some of the lower courts have thought this a useful approach. Does Justice Ginsburg believe a bribe or a kickback causes harm in and of itself, because the money given logically belongs to the employer or principal?  Perhaps the harm to the employer is assumed to arise whenever the employee receives a bribe or kickback since that payment is arguably owed to the employer? What if the payment can legitimately be described as in the best interests of all the parties?

There is some literature suggesting that some payments that can be characterized as kickbacks actually ensure the continuing quality of the work performed by the payer of the kickback. An example is so-called “soft-dollar” arrangements with hedge fund portfolio managers. The manager pays an above-market commission to a broker, who in exchange provides research services that the manager might otherwise be required to pay for, and the manager guarantees a certain quantity of transactions to the brokerage firm. The increase in the commission is charged to the portfolio investors, but has anyone been harmed, even if the deal was not transparent to all? Even if the non-transparency is ethically worrisome, did the manager and broker commit a federal felony?  Behind all of these concerns is the question of the role of harm in determining the existence of honest services fraud. If no demonstrable harm is required to be shown because the kickback or bribe is considered ipso facto improper, then 1346 certainly could be used in all of these cases.

Finally, there is a borderline problem area between the public and private spheres, where private arrangements arguably harm diffuse public interests. Some early cases involved officials of political parties, which are of course private organizations, but whose actions have huge influence on government. But the range of these borderline public/private cases is wider. Take the case of the Winter Olympics. In United States v. Welch (2003), the defendants were officers of the Salt Lake City Bid Committee charged with getting the Winter Olympics awarded to their city.  These officers apparently coordinated and made payments to members of the International Olympic Committee (IOC) to persuade them to award the games to Salt Lake City. The defendants were indicted under the Travel Act 18 U.S.C. Section 1952 (a rarely used law governing commercial bribery), as defined by state law, if done in interstate commerce, as well as the mail fraud and honest services fraud provisions of Section 1341 and Section 1346. The court conceded that even if this arrangement theoretically violated state law, the state itself evinced no interest in declaring it a violation. So the government considered Swiss law, which was the law applicable to the IOC members, as a source of fiduciary duty, but Swiss experts were dubious of that theory. Nevertheless, the circuit court continued to hunt for a source of the duty, and it found it in the Olympic charter, which states, “Fairness in the site selection process depends on the undivided loyalty of IOC members to the IOC—a loyalty critical to the IOC’s mission.” The court found this sufficient as a general evocation of the national, indeed patriotic, interests that Americans had in the integrity of the Olympic Games, and other similarly broad concepts, to establish a violation of the duty owed by the IOC members to the IOC and cognizable under Utah law and hence indictable under 1341/1346. The court felt no need to establish any concrete harm to the IOC (or, needless to say, to Salt Lake City) except that the defendant agents acted in some way in relation to the principal’s affairs that could be construed as morally disloyal.

The Welch defendants were ultimately able to get the case dropped—ironically, the judge apologized for the charge and ordered an acquittal, probably imagining that any jurors would have applauded any action that won the Olympic prize for their city. But the circuit court decision, with its emphasis on patriotic interests and broad greater societal goals, wonderfully illustrates the problems that arise when the difficulty of identifying harm to any victim is tied to the complexity of finding a fiduciary duty breached.

To its credit, in Skilling the Supreme Court took away from U.S. attorneys the power to use their imagination and personal discretion to police a wide spectrum of allegedly self-dealing conduct that clearly does not involve bribes or kickbacks. But since harm (as of now, at least) is not a requirement for finding a Section 1346 violation, these issues still linger. Are all bribes and kickbacks now proscribed, or only those that somehow tie to a violation of a duty of honest services? And, if the latter is the case, don’t we still have to define honest services? Skilling meaningfully changes the landscape with regard to 1346 prosecutions. It brings some precision. How much precision remains to be seen.