Supreme Court Upholds Honest Services Fraud, but Vacates Skillings Conviction

In a much anticipated decision, the United States Supreme Court upheld the constitutionality of the "honest services" theory of mail fraud and wire fraud prosecutions. However, in doing so, the Court vacated the conviction of former Enron executive Jeffrey Skillings. The Skillings case was remanded to a lower court for further proceedings.

The Justice Department had charged Skillings with conspiracy to commit wire and mail fraud for defrauding Enron investors of his honest services. The Government charged Skillings with conspiring to defraud Enron’s shareholders by breaching his duty of honest services in misrepresenting the company’s fiscal health, thereby artificially inflating its stock price. It was the Government’s theory at trial that Skillings profited from the fraudulent scheme by receiving of salary and bonuses. Additionally, the Government alleged that he realized $89 million from the sale of Enron stock.

Skillings's defense team had attacked the mail fraud and wire fraud honest services theory as unconstitutionally vague. Justice Ginsburg in her decision held that the historic core of the honest services theory of the fraud statutes was the subversion of honest services by bribery and kickback schemes. Thus, the Court held that the application of the honest services theory in these instances met constitutional scrutiny. In such cases it is immaterial whether any person or entity suffered an economic or other tangible loss. The harm comes from the victim not receiving the honest services of the violator.

In the case before the Supreme Court the Government had charged the following as the objects of its conspiracy count: 1) honest services wire fraud, 2) money or property wire fraud, and 3) securities fraud. A conviction of Skillings for conspiracy based on honest services wire fraud would be unconstitutional because the Government did not allege a bribe or kickback as a basis for the honest services fraud. Instead, it alleged a conflict of interest as the basis. However, the Justice Ginsburg rejected a conflict of interest basis for honest services fraud. Because the jury returned a general verdict of guilty to the conspiracy count, the Court was unable to determine whether it had used the constitutionally impermissible theory. Therefore, the Court vacated the conviction and remanded the case to the Fifth Circuit Court of Appeals for further proceedings.

The case is particularly significant because it will allow the federal government to continue the use of wire and mail fraud statutes to combat official corruption. The fraud statutes and the honest services theory of prosecution had become government favorites in the prosecution of local and state officials. Federal bribery statutes only apply to federal officials. So, to target corrupt state and local government officers, the Justice Department uses the honest services theory based on bribery or kickbacks. To a lesser extent, the Government also uses the theory against corrupt business people, although the money or property fraud theory is much more prevalent in the private sector context.

For more about the Supreme Court's decision, please see The New York Times, "Justices Limit Use of 'Honest Services' Law against Fraud," June 24, 2010, http://www.nytimes.com/2010/06/25/business/25bizcourt.html?hp.