Thursday, October 7, 2010

The Post-Skilling Battle That Could Decide the War

Guest Blogger - Dane C. Ball - Gerger & Clarke

We’ve all memorized Skilling’s core holding: 18 U.S.C. § 1346 (“honest-services fraud”) criminalizes only “bribe or kickback schemes” that violate a “fiduciary duty.”  Prosecutors and criminal defense attorneys are now fighting over questions like:  What kind of “fiduciary duty” is required—one created by state or federal law, contract, or simply a relationship of trust?  What’s the definition of “bribe or kickback”—a quid pro quo or something less?  Though these are important issues, regardless their outcome Skilling will remain a significant victory for the criminal defense bar.

But a more dangerous battle is being fought in the Northern District of New York in United States v. Queri.  This battle could decide the war—if the government wins, Skilling may end up meaning next to nothing.

In Quire the government has taken the position that Skilling-barred honest services theories (e.g., undisclosed self dealing or conflicts of interest) are viable traditional money and propertyfraud theories under §§ 1341 and 1343.  The government reasons that such nondisclosures deprive others of an intangible property right to information that “could impact financial decisions” or cause a “change in business conduct.”[1]

If the criminal defense bar is to successfully respond, it must understand Skilling at a deeper level than “honest-services fraud prosecutions require a bribe or kickback scheme.”  At a minimum, it must be made clear (to lower courts) that:

  1. Skilling must mean something.  And the government’s approach in Queri renders Skilling meaningless.  An employer may always claim that disclosure of a conflict or self dealing would have caused it to “change its business conduct.”  It would have investigated, demoted, suspended, terminated the employee or avoided a deal altogether if tainted by “misconduct.”
  2. It is not just unlikely, but unthinkable that in Skilling’s 3 opinions and 60 pages, 9 Justices failed to mention that the case actually was a waste of time because the honest-services fraud theories at issue were viable intangible property rights theories.  Their silence does not leave the questions open—there was no reason to address this issue because the government asserted in extensive briefing that § 1346 was a crucial enforcement tool that catches many schemes that fall through the cracks of §§ 1341 and 1343.  The government certainly did not take the position that the very same theories at issue in Skilling also passed scrutiny under §§ 1341 and 1343.  A wise decision considering that § 1346 is a definitional statute (not a separate crime) expanding the universe of actionable schemes under the mail and wire fraud statutes.
  3. Finally, and perhaps most importantly, morphing Skilling-barred honest-services fraud theories into traditional money and property fraud theories does not avoid the constitutional problems Skillingsought to remedy:  wishy-washy theories based on undisclosed self dealing and conflicts of interest are too “amorphous” to provide fair notice to criminal defendants.  Removing the “right to honest services” label and replacing it with “intangible property right to information” is constitutionally insignificant.  Such repackaging also ignores the federalism concerns that run throughout Skilling and earlier decisions like McNally and Cleveland.

In sum, we must understand and explain that Skilling has meaning outside the honest-services fraud context.  If we fail, we will have snatched defeat from the jaws of victory.

Dane C. Ball is a Houston-based criminal defense attorney with Gerger & Clarke.


[1] The facts in the Quire—employees received side payments from those doing business with the employer and didn’t tell anyone—demonstrate that Skilling’s “bribe or kickback scheme” requirement appears to have teeth.  The government dropped its honest-services theory after Skilling and opted for more clever traditional money and property theories that look a whole lot like honest-services theories, but require no true “bribe” or “kickback.”

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The courts' "splitting hairs" decision regarding 'honest services' fails to address the underlying issue that someone positioned to benefit from a transaction has a fiduciary duty to disclose that potential benefit to all parties to a transaction. Failure to do so undermines the essence of the deal and clearly represents a breach of the good faith doctrine upon which all transactions and contracts are based. While perhaps not illegal under the SC ruling, nevertheless failure to render honest serivces renders the basis for any dealings, financial or otherwise, suspect. Perhaps if the Supremes had some money invested with Bernie Madoff, they would better understand the impact of 'dis-honest services.

Posted by: F. Smith | Oct 8, 2010 10:21:40 AM

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Posted by: prakash | Oct 11, 2010 10:34:51 PM

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