Wednesday, August 2, 2006

Reversal in Enron Barge/Merrill Lynch Case

A six week trial down the drain, and yet another loss for the government.  The Fifth Circuit Court of Appeals tossed out the conspiracy, and wire fraud counts against the defendants leaving one individual's conviction for perjury and obstruction of justice. The basis for the reversal is premised on the "honest services theory" upon which the government rested this prosecution.

The court upholds the reasoning in prior decisions, including the Second Circuit's famous Rybicki case.  There is no elimination of the entire honest services approach.  Rather, the court holds that:

"What makes this case exceptional is that, in typical bribery and self-dealing cases, there is usually no question that the defendant understood the benefit to him resulting from his misconduct to be at odds with the employer’s expectations. This case, in which Enron employees breached a fiduciary duty in pursuit of what they understood to be a corporate goal, presents a situation in which the dishonest conduct is disassociated from bribery or self-dealing and indeed associated with and concomitant to the employer’s own immediate interest."

The Fifth Circuit notes that "[t]his opinion should not be read to suggest that no dishonest, fraudulent, wrongful, or criminal act has occurred.  We hold only that the alleged conduct is not a federal crime under the honest-services theory of fraud specifically."

In addition to Judge Jolly's opinion, there are two other separate opinions in this case. 

One concurring and dissenting opinion (concurring on Judge Jolly's opinion reversing the honest services based convictions and dissenting on the affirmation of the perjury and obstruction of justice convictions) by Circuit Judge DeMoss' calls for holding the statute as vague. Advocating the position taken by the dissenters in the Rybicki case, he states that "Congress should repair this statute that, in my opinion, fails to provide the requisite 'minimal guidelines to govern law enforcement.'"

Courts have been wrestling with what is, or is not, a sufficient basis for a mail and/or wire fraud prosecution when the government proceeds under section 1346, the honest services statute that was enacted to counteract the Supreme Court's holding in McNally. Prosecutors may find it easier to obtain a conviction when using this statute, but as seen here, it can place them in a tougher position on appeal.  And rightfully so.  After all, what is a deprivation of honest services? As I state in an article written years back in the South Carolina Law Review - if a candidate should say "Read my Lips, No New Taxes, " and then raise taxes, could this absurd example be interpreted to be a deprivation of honest services?  My answer is no, but it demonstrates the possible breadth of some of the terms in this statute.

Decision Can Be Found here -

(esp) ( w/ a hat tip to Doug Berman)

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While I have no love lost for "honest services" as I understand the court's holding, the employees of Murder, Inc. provide honest services when they perform a "hit" because the corporation made a fee from the illegal act.

If plain meaning has anything to do with this, this is not honest services. Also, someplace along the line a 2nd Circut case named Wallach has a lot to say about what is an honest service. Most certainly, what the ML employees did according to the opinion was a departure from moral uprightness.

Posted by: John Davidson | Aug 2, 2006 9:09:55 AM

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