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A Question of Ethics

What Is the Impact of the Skilling Decision?

Roll Call
July 13, 2010

by C. Simon Davidson

Q: I have a question about the recent Supreme Court decision in the criminal trial of former Enron CEO Jeffrey Skilling. Although the case concerned a private-sector situation, I have been told that it marks a major change in public corruption law and that it will make it more difficult for federal prosecutors to punish offenders both within and outside government. What is the impact of the decision? Will it really result in an increase of unpunished public corruption?

A: To put your question in context, a little background is in order. The honest services fraud statute has its origins in the general federal statutes criminalizing fraud. They prohibit using mail and other means of communication for the purpose of a “scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises.” Over time, disagreement developed over whether these statutes should apply even where a victim does not lose any money or property to the perpetrator of the fraud.

In general, federal appeals courts said that they do. In a series of decisions beginning in the 1940s, courts interpreted the statutes to include deprivations not only of money or property, but of intangible rights as well. In the classic example, a city official accepts a bribe from a third party in exchange for awarding a government contract to the party. The contract terms and performance are exactly the same as they would have been in the absence of the bribe. In these circumstances, the city has suffered no monetary loss. However, courts reasoned, the city has been deprived of its right to the official’s honest services as a result of the official’s fraud. Thus evolved the “honest services” doctrine of fraud. By 1982, all federal appeals courts had embraced it.

In 1987, however, the Supreme Court put on the brakes. It held that the statute could not apply to deprivations of mere “intangible rights” in the absence of “clear and definite” language from Congress. Congress responded the following year by enacting the honest services fraud statute, which provides that fraud includes “a scheme or artifice to deprive another of the intangible right of honest services.” However, the new statute did not define “honest services” or explain the types of circumstances in which the “intangible right” to those services is deprived.

The statute quickly became a popular tool among federal prosecutors. Part of its attraction, no doubt, was its malleability. Over time, the statute was applied to ever-expanding groups of conduct. Defense attorneys howled about the lack of clarity. It seemed only a matter of time before it all would come to a head.

In February 2009, it almost did, but the Supreme Court instead declined an opportunity to address a challenge to the statute. Justice Antonin Scalia disagreed with the high court’s decision. Scalia noted that the statute, which “consists of only 28 words,” had been invoked to capture “a staggeringly broad swath of behavior, including misconduct not only by public officials and employees but also by private employees and corporate fiduciaries.” Without a coherent limiting principle to define the intangible right of honest services, Scalia argued, the law invited “abuse by headline-grabbing prosecutors in pursuit of local officials, state legislators, and corporate CEOs who engage in any manner of unappealing or ethically questionable conduct.”

“It seems to me quite irresponsible,” Scalia contended, “to let the current chaos prevail.”

Last month, the Supreme Court finally did address the “chaos” that Scalia described. In the Skilling case, the high court pared the statute “down to its core” by holding that it could apply only to cases involving bribes or kickbacks. More specifically, the statute was constitutional when applied to “fraudulent schemes to deprive another of honest services through bribes or kickbacks supplied by a third party who had not been deceived.” The statute no longer applies, the court said, to “undisclosed self-dealing by a public official or private employee.” In other words, it does not cover officials or employees who act to further their own undisclosed financial interests while ostensibly acting in the interests of others.

So, what is the impact of all of this? Most importantly, public officials and private employees should not consider the decision to be a license to engage in undisclosed self-dealing. Depending on the circumstances, engaging in such self-dealing could expose officials and employees to other legal risks. These may include securities laws, insider trading laws and civil suits by shareholders, among others. Skilling was charged with conspiring to commit not only honest services fraud, but also money-or-property fraud and securities fraud.

Therefore, I would not expect a surge in unpunished public corruption. As the court noted, the vast majority of honest services fraud cases historically involved bribes or kickbacks. These cases are still covered by the statute.

Moreover, Congress may respond, just as it did the last time. The Supreme Court did not say that it is unconstitutional per se to criminalize undisclosed self-dealing. Rather, it said that if Congress wants to do so, it should “employ standards of sufficient definiteness and specificity” to overcome constitutional concerns. In other words, be clearer than last time.


© Copyright 2010, Roll Call Inc. Reprinted with permission. Widely regarded as the leading publication for Congressional news and information, Roll Call has been the newspaper of Capitol Hill since 1955. For more information, visit www.rollcall.com.