I. Introduction
Siding with convicted former Enron CEO Jeffrey Skilling, a majority of the United States Supreme Court today cut sharply back on the scope of a federal fraud law that has been a favorite tool of prosecutors for many years, the so-called “honest services fraud” statute, 18 U.S.C. § 1346. The Court held that Section 1346, which defines as fraudulent efforts to “deprive another of the intangible right of honest services,” is properly confined to cover only bribery and kickback schemes, which constitute only a fraction of all Section 1346 prosecutions. By sharply limiting the types of offenses that can be prosecuted under Section 1346 — which for years has been criticized for its vagueness and which has been used to prosecute a wide range of conduct — the Court has dramatically reduced concerns that public and private-sector officials might be prosecuted for conduct that is not clearly unlawful.

II. The Honest Services Fraud Statute, 18 U.S.C. § 1346
In 1987, the Supreme Court held in McNally v. United States that the criminal mail fraud statute, which prohibits the use of the mails in “any scheme or artifice to defraud,” did not prohibit a scheme or artifice to defraud “citizens of their intangible rights to honest and impartial Government.”¹ The Court held that the mail fraud statute protected money and property rights only, not intangible rights, and stated that “[i]f Congress desires to go further, it must speak more clearly than it has.”²

Just one year later, Congress responded to McNally by amending the mail and wire fraud statute to include “a scheme or artifice to deprive another of the intangible right of honest services.”³ Congress, however, did not define what constitutes the “right of honest services,” who is entitled to such a right, and what actions constitute a scheme to defraud a person of his right to honest services. Since its passage, the statute has been a powerful weapon in the arsenal of federal prosecutors in public corruption cases and in the prosecution of individuals in the private sector for failing to provide honest services to those whom they owed a fiduciary duty, such as their employers. Prosecutors had taken the statute still further, prosecuting as “honest services” fraud alleged undisclosed conflicts-of-interest between an executive and his or her company or a public official and his or her constituents.

While prosecutors have embraced the statute, defendants have protested that, among other things, Section 1346 is unconstitutionally vague and did not provide fair notice about what conduct is prohibited. Without a statutory definition of what constitutes “the intangible right of honest services,” most courts considering such challenges have held that Section 1346 “reinstate[d] the doctrine of intangible rights to honest services” in place before the McNally decision.⁴ In the Skilling case, the Supreme Court took a narrow view of that approach, limiting the statute to “core” bribery and kickback cases.

III. The Supreme Court Narrows Section 1346 in Three Cases
A. Skilling v. United States
The prosecution of Jeffrey K. Skilling arose from the October 2001 collapse of Enron. Skilling was a longtime executive of the company, serving as President and COO for several years before taking over as CEO in February 2001. Skilling resigned as CEO of Enron in August 2001, shortly before the Enron scandal became public. He was indicted in 2004, along with several other executives of the company. On May 25, 2006, Skilling was convicted of conspiracy to commit wire fraud, along with several other charges, including securities fraud and insider trading. Skilling was sentenced to over 24 years in prison and ordered to pay $45 million in restitution.

The questions presented in Skilling’s appeal to the Supreme Court were whether Section 1346 applies where the defendant’s conduct was undertaken to further the economic interests of his employer, as opposed to advancing the defendant’s private interests at the expense of his employer’s, and, if so, whether the statute was unconstitutionally vague.

The Court began its analysis by noting that “[t]here is no doubt that congress intended § 1346 to refer to and incorporate the honest-services doctrine recognized in Court of Appeals’ decisions before McNally derailed the intangible-rights theory of fraud.” The Court acknowledged that Skilling’s broad argument that Section 1346 was unconstitutionally vague in its entirety “has force, for honest-services decisions preceding McNally were not models of clarity or consistency,” but a six-Justice majority rejected it, holding that the statute was constitutional if limited to bribery and kickbacks. The Court noted that “[b]oth before McNally and after § 1346’s enactment, Courts of Appeals described schemes involving bribes or kickbacks as ‘core . . . honest services fraud precedents,’” (quoting United States v. Czubinski, 106 F.3d 1069, 1077 (1st Cir. 1997)). The Court therefore concluded “there is no doubt that Congress intended § 1346 to reach at least bribes and kickbacks.” The Court found no such consensus about prosecutions that involved mere conflicts of interest, which were so infrequent that courts had reached no pre-McNally consensus about what schemes were unlawful. Accordingly, while “[r]eading the statute to proscribe a wider range of offensive conduct . . . would raise the due process concerns underlying the vagueness doctrine,” the Court concluded that the statute was not unconstitutionally vague if limited to bribery and kickbacks.

Justices Scalia, Kennedy, and Thomas would have gone farther and struck down the statute in its entirety as unconstitutionally vague. They said the majority’s limiting construction of Section 1346 was a product of “not interpretation but invention.”

While the Court concluded “[i]t is . . . clear that, as we read § 1346, Skilling did not commit honest-services fraud,” the Court noted that honest-services fraud was only one of three objects of the charged conspiracy. The Court thus remanded Skilling’s case for a determination whether the error was harmless as well as for consideration of whether reversal of Skilling’s Section 1346 conspiracy count would affect any of Skilling’s other convictions.

The Court rejected Skilling’s claim that pretrial publicity had deprived him of a fair trial. The Court held that the pretrial publicity was not so poisonous or widespread as to presume prejudice, and given the “large, diverse pool of potential jurors available” in Houston, the Nation’s fourth-largest city, and the absence of prejudicial evidence from the coverage, Skilling had not demonstrated undue prejudice. Justice Sotomayor, joined by Justices Stevens and Breyer, dissented from that portion of the Court’s opinion, saying that the district court’s jury selection procedures “lacked the necessary thoroughness and left serious doubts about whether the jury empaneled to decide Skilling’s case was capable of rendering an impartial decision.” Justice Alito also wrote separately to note that while he shared some of Justice Sotomayor’s concerns, he believes that Skilling received a fair trial.

B. Black v. United States
Like Skilling’s case, the prosecution of media executive Conrad M. Black also tested the limits of the honest services fraud statute as applied to the conduct of private individuals. And as in Skilling, the Court held that the government had exceeded the reach of Section 1346.

Black and his co-defendants were executives for Hollinger International, Inc., a large media company that owned and operate newspapers around the globe, including the Chicago Sun-Times and the London Daily Telegraph. Prosecutors alleged that Black stole money and property from his employer in the form of illegitimate compensation packages that defrauded his company, and that his actions deprived the company of the intangible right to honest services. Black was convicted of mail fraud and obstruction and sentenced to 78 months in prison, and he was ordered to pay a $125,000 fine and $6.1 million in restitution.

On appeal to the Supreme Court, Black argued that his conduct did not violate Section 1346 because his compensation — primarily management fees designed to lessen his tax burden in Canada — was legitimate and did not result in any economic harm to the company. The question before the Court in Black was whether Section 1346 applied to the conduct of private individuals whose alleged scheme did not contemplate economic harm to the person to whom the duty of honest services was owed.

The Supreme Court today ruled in favor of Black, stating that “[o]ur decision in Skilling makes it plain that the honest-services [jury] instructions in this case were indeed incorrect.” The Court rejected the claim that Black had not adequately preserved his claim of error because he had opposed government efforts to submit a “special verdict” form to the jury to ask them to specify the theory under which he had been convicted, noting that there was no provision in the Federal Rules of Criminal Procedure imposing such a requirement to preserve claims of error. As in Skilling, the Court remanded for application of harmless error analysis.

C. Weyhrauch v. United States
Of the three honest services fraud cases heard by the Supreme Court this Term, Weyhrauch is the only one involving allegations of public corruption. The prosecution of Bruce Weyhrauch arises from the same corruption investigation that ensnared former Alaska Senator Ted Stevens. Weyhrauch was a member of the Alaska House of Representatives from 2002 - 2006, and the government alleged that he promised to perform official acts benefitting oil services company VECO in exchange for the promise of performing future legal work for the company.

The government contended that Weyhrauch had a duty to disclose this conflict of interest and that his failure to disclose constituted a violation of Section 1346. The district court held that the government’s theory required the existence of a duty to disclose under state law and found that such a duty did not exist. The Ninth Circuit reversed, holding that a conviction under Section 1346 for failure to disclose a conflict of interest did not require the existence of a state law duty to disclose. Weyhrauch sought Supreme Court review on the question whether the government must prove that a defendant violated a disclosure duty imposed by state law in order to convict a state official of depriving the public of its right to the defendant’s honest services under Section 1346.

The Supreme Court issued a one-sentence order in Weyhrauch’s case, vacating the decision of the Ninth Circuit that had affirmed his conviction, and remanding to that court “for further consideration in light of Skilling.” Because the Court invalidated undisclosed-conflict-of-interest prosecutions as a whole, it did not reach the narrower question whether a duty of disclosure must be based on state law. It remains to be seen whether the government will attempt to revive this prosecution — which has not yet gone to trial — by characterizing Weyhrauch’s conduct as an attempt to solicit a bribe.

IV. Conclusion
While the Court stopped short of invalidating Section 1346 in its entirety as unconstitutionally vague, the Court’s construction limiting its reach to bribery and kickbacks cuts sharply back on the kinds of offenses that can be punished under the statute, and thus dramatically reduces concerns that public and private-sector officials might be prosecuted for conduct that is not clearly unlawful.

Indeed, the decision may provide avenues for previously convicted persons who were prosecuted under now-invalid theories of “honest services” fraud to file federal habeas corpus petitions challenging their convictions under Skilling. At a minimum, the decision is consistent with a recent trend in judicial decisions seeking to limit efforts by prosecutors to expand the reach of federal criminal law.

For more information, please contact Vinson & Elkins lawyers John Elwood, Craig Margolis, or Randall Warden. Visit our website to learn more about V&E's Government Investigations and White Collar Criminal Defense and Appellate practices, or e-mail one of the White Collar or Appellate practice contacts.