18 USC 1346, Honest Services Prosecutions Require Bribes or Kickbacks

By: Houston Criminal Lawyer John Floyd and Paralegal Billy Sinclair

The Enron Corporation was founded in 1985. Its headquarters were located in downtown Houston. It became the seventh highest revenue grossing company in America. Between 1995 and 2000 alone, its annual revenues rose from $9 billion to $100 billion. Jeffery Skilling, a longtime Enron officer, was an integral component in company’s phenomenal rise to economic success and corporate power. Between February and August 2001, he served as CEO of the company before he abruptly resigned. Less than four months later Enron declared bankruptcy and its stock value plummeted. The nation’s economic and political institutions were stunned by the far-reaching economic and political implications of the company’s collapse.

In February 2004 Jeff Skilling was indicted by a grand jury sitting in the Southern District of Texas on 36 charges. The Government charged Skilling and Richard Causey, Enron’s former chief accounting officer, with conspiring to defraud Enron shareholders by misrepresenting the financial condition of the company for their own profit. Count 1 of the indictment alleged their conspiracy had three objects: honest-services wire fraud, money-or-property wire, and securities fraud. The conspiracy charge was brought under 18 U.S.C. Sec. 371 and the wire fraud charges were brought under 18 U.S.C. Sec. 1343. The “honest-services” wire fraud was brought under 18 U.S.C. Sec. 1346. The “honest-services” part of the conspiracy was premised on the Government’s theory that Skilling and Causey conspired to deprive Enron and its shareholders of the “intangible right” of their honest services.

This part of the indictment, and Skilling’s conviction based on it, were doomed from the beginning, as his defense team quickly recognized, because the former CEO never took any bribes or kickbacks as part of the alleged conspiracy scheme. For more than two decades federal prosecutors have used the “honest services” provisions of § 1346 to expand the original congressional intent of prosecuting conspiracies under the wire fraud statute. And, fortunately, the United States Supreme Court on June 24, 2010 in Skilling v. United States put the skids on the Government’s frequent abuse of the “honest services” provisions. Absent proof beyond a reasonable doubt that an individual took bribes or kickbacks, the Government cannot prosecute him for conspiracy under the wire fraud statue. The ScotusBlog succinctly conveyed the basis for Skilling decision this way:

“Almost from the day Congress enacted the law (1987) specifying that fraud can be committed by denying someone the ‘intangible right’ to one’s ‘honest services,’ lower courts have struggled to define just what kind of wrongdoing would fit within that concept. Perhaps to illustrate just how uncertain the meaning of the law is, the Justices themselves could not agree on Thursday on how to read the string of lower court decisions that have interpreted the law; six Justices thought the pattern of those rulings was quite clear and definite, but three other Justices said the rulings were a hodgepodge.

“The three Justices who read those rulings as varying widely would have struck down the law as unconstitutionally vague. But the other six Justices proceeded on the premise that the Court’s duty was ‘to construe, not condemn, Congress’ enactments.’ And the construction those Justices put on the law was that it criminalizes ‘bribes and kickbacks—and nothing more.’

“The majority thus reject Justice Department arguments that the law should also be available for prosecuting ‘self-dealing’—that is, taking some action that gives one personal gain, without disclosing that fact—or going after conflicts-of-interest. Reading the law as covering anything but bribes and kickbacks, the Court ruled, would raise constitutional questions about enacting a vague law that did not give people clear warning of what was forbidden. (Near the end of the main opinion, the Court in a footnote suggested that, if Congress were to try to add new crimes under the ‘honest services law, it would ‘leave many questions unanswered,’ so the lawmakers should proceed with ‘particular care.’).”

The immediate impact of the Skilling ruling is that his case (as well as Conrad Black’s case) was sent back to the Fifth Circuit Court of Appeals for a “harmless error” determination. In a nutshell, the Government will be allowed to show that its use of the “honest services” theory to secure a wire fraud conspiracy conviction was “harmless error” while Skilling can show that every count of his conviction was prejudiced by the “honest services” fraud charge and thus all the counts should be vacated and set aside.

The Skilling decision had an immediate impact in the Fifth Circuit. James H. Leslie was indicted for honest services fraud in connection with the improper sale of horses during his tenure as director of Prison Enterprises, a state agency that provides for the agricultural work of inmates and keeps horses at the Louisiana State Penitentiary. Since there were no bribes or kickbacks involved in the fraud, the U.S. District Court for the Middle District of Louisiana dismissed the charges based on the Skilling ruling.

Besides the Fifth Circuit, at least three other circuits have reported courts either dismissing “honest services” indictments or remanding for a hearing to determine if such an indictment should be dismissed. There have been a significant number of other cases not reported where the district courts have dismissed honest services indictments or appellate courts have remanded for hearings on the issue. The following is a list of the reported cases involving dismissals:

  • United States v. Leslie, 2010 U.S. Dist. LEXIS 81800 (M.D.La. Aug. 10, 2010)
  • United States v. Ferriero, 2010 U.S. Dist. LEXIS 78111 (N.J. Aug. 2, 2010)
  • United States v. Harris, 2010 U.S. App. LEXIS 14796 (9th Cir. July 19, 2010)
  • United States v. Hatfield, 2010 U.S. Dist. LEXIS 68234 (E.D.N.Y. July 8, 2010)

Of course, there will be many more cases involving dismissal of “honest services” indictments. These cases bode well for Jeffery Skilling. It reflects that the courts (and the Government in most instances) have conceded the notion that an “honest services” indictment cannot be a “harmless error.” The U.S. Supreme Court in 1967 inChapman v. California created what has become known as the “harmless error” doctrine which prevents courts from setting ”aside convictions for small errors or defects that have little, if any, likelihood of having changed the result at trial” The Court in Arizona v. Fulminante distinguished a “small error” from a what is now called a “structural error” by saying the latter calls into question the “fundamental fairness” of the trial and thus can never be subject to harmless error analysis. The Court in United States v. Gonzalez-Lopez illustrated a structural error as one such as where a defendant was deprived of his right to choice of counsel. In other words, the right is so constitutionally fundamental that its deprivation can never be considered harmless. But this does not mean that all constitutional rights are so fundamental as to preclude harmless error analysis when they are violated. The Court in Mitchell v. Esparza held that a “constitutional error” can be “harmless” when it appears beyond a reasonable doubt that the error did not contribute to the verdict. However, as the Court held in Kotteakos v. United States (two decades before Chapman)—a rule that remains in effect to this day—if a court has “grave doubts” about whether an error is small or substantial, it cannot be considered “harmless.”

It is against this constitutional backdrop that Jeff Skilling’s fate hangs. Even if the Fifth Circuit should go against the established constitutional grain and rule that the Government’s use of the “honest services fraud” theory was a “harmless error,” that issue will move directly back to the Supreme Court where, we believe, all of Skilling’s convictions will be reversed.

Like it or not, Jeffery Skilling could be a free man next year—and that is going to be a hard rub for those former Enron officials who cut deals with the government and who are still doing time. Lady Justice can sometimes resemble the “lady” you meet late in the bar after way too much to drink, and who you take to the motel that leaves the lights on for you, and whose dentures you see lying on the nightstand next to your depleted wallet the next morning.

By: Houston Criminal Attorney John Floyd and Paralegal Billy Sinclair