“Honest-Services Fraud” law – taking ethics and fraud deterrence too far?

Is it possible that in our quest for improved ethics and fraud deterrence that we’ve created a capture net that is too broad and too easy to be caught in?

Years ago I spent time in federal prison.  I am not proud of that fact, but it’s a fact that I cannot change.  Like Bernie Madoff, I defrauded clients (through the creation of a Ponzi scheme) and, when the card was pulled from the house of cards I created, I found myself facing that dreaded walk into federal prison.  Those 23 steps from the curb into federal prison were the longest 23 steps of my life.

Yet, while I was there…(as you can imagine) I became acquainted with many folks – most of whom had, in fact, done the crime.  They, like I, were paying the price for our crimes by doing the time (so to speak).  From that experience, one thing I learned was the broad sweeping power to convict of the word – CONSPIRACY.

It became clear that the government could use CONSPIRACY laws to capture “would be” criminals or make it easy to win convictions for those who committed crime, but otherwise would walk. Now it would appear that the broad bush word CONSPIRACY has been replaced with an even broader bush (or criminal capture net) called “HONEST SERVICES.”

HERE’S THE CONCEPT – according to an article in Fortune Magazine:

If a judge or governor accepts bribes, for instance, he is not necessarily stealing money from anyone, but he is depriving the public of the “honest services” they have a right to expect from him. Likewise, if a corporate purchasing officer accepts secret kickbacks from vendors, he’s depriving his employer of his “honest services.”

“Look around at all the high-profile cases today,” says Richard Craig Smith, a former federal prosecutor now with the law firm Fulbright & Jaworski. “Ninety-five percent of them are charged under honest-services fraud. That’s not just an accident.”

In fact, recent defendants in such cases compose a white-collar rogues’ gallery for our times, featuring such tarnished luminaries as former governor Rod Blagojevich of Illinois; former U.S. congressman William Jefferson of Louisiana; newspaper magnate and former Hollinger International CEO Conrad Black; lobbyist Jack Abramoff; and former Enron CEO Jeff Skilling.

HERE’S THE RUB – Just about anything that someone might perceive as wrong could be captured with the very wide net of the “Honest-Services” doctrine.  The Fortune article goes on to say:  “The feature that prosecutors love about honest-services fraud is precisely what critics say dooms it constitutionally: its nearly infinite adaptability. “There’s almost no fact pattern that cannot be fit around 1346,” says Smith, referring to the section of Title 18 of the U.S. Code that defines the offense. Read literally, it seems broad enough to catch any deceit at all. If so, then who among us is not guilty?”

If the law is so vague, broad and ill defined that you could commit a crime without knowing that you’ve committed one…then it is possible that the law that prosecutors love could be struck down as unconstitutional.  In fact thee are two cases before the Supreme Court on that very issue.

The law “invites 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,” wrote U.S. Supreme Court Justice Antonin Scalia.  “Carried to its logical conclusion,” he continued, it “also renders criminal a state legislator’s decision to vote for a bill because he expects it will curry favor with a small minority essential to his reelection; a mayor’s attempt to use the prestige of his office to obtain a restaurant table without a reservation; [or] a salaried employee’s phoning in sick to go to a ball game.”

“If you defraud someone out of money,” explains Susan Necheles, a white-collar defense lawyer at New York’s Hafetz & Necheles, “there’s clearly a crime, and there are plenty of statutes that cover it. When the government resorts to honest-services fraud, on the other hand, it’s almost always because there’s a real question whether this was a crime or just aggressive business behavior.”

SO HERE’S THE QUESTION:

As an ethics and fraud prevention speaker, I wonder, in the governments efforts to rein in fraud – have they gone too far in their efforts to broadly define “Honest-Services” for purposes of prosecuting and convicting those accused of (shall we say) “ethical” crimes?  The Fortune Magazine article provides an outstanding framework for this law’s background (read here).

In December the Supreme Court signaled, hearing an “Honest Services” case that the law was ambiguous and therefore likely to be struck down.  “A citizen is supposed to be able to understand the criminal law,” Breyer said, yet it was unclear what the law in question branded as a crime.

Early next year, the justices will hear a third case testing the honest-services fraud law, brought by former Enron Chief Executive Jeffrey K. Skilling.  The justices hinted that they would put off ruling on the issue until they had considered Skilling’s case, since his lawyers argued most directly that the entire law should be thrown out as too vague.

QUESTION:  Do you feel that this statute should be struck down for being too vague?  If so, what should replace it?

COMMENTS ARE WELCOME!

Advertisements

5 Responses to “Honest-Services Fraud” law – taking ethics and fraud deterrence too far?

  1. Eric says:

    Chuck – good article and summation of honest services fraud.

    Yes, I believe this statute should be struck down as unconstitutional. Read excerpts from a book authored by Harvey Silverglate titled “Three Felonies a Day” and you will gain greater insight toward honest services fraud and vague federal laws that have been used for years by prosecutors to target individuals who have not committed a crime at all.

    Somehow, we need to ensure the public is aware of the activities of these aggressive federal prosecutors.

    If you want to understand a truly tragic and unfair situation, please research the charges of Robert Blagojevich, the brother to the former governor of Illinois. Robert has been charged with two counts of honest services fraud. To be used as a hostage in an attempt to snare his brother, the federal prosecutors have gone way too far.

    Downright scary and shameful.

  2. Roam says:

    So what happens to the wire fraud charges that were applied along with HSF? Are these also dropped?

    • No…if the charges are brought primarily on the honest services fraud then they would not stand. If wire fraud charges are brought as well, then they would have to be proven on their own.

  3. Roam says:

    I was charged with HSF here is my indictment, just trying to figure out where they get WF From.

    C:\Documents and Settings\Luis M. Candelario\My Documents\Indictment U_S_ v_ Luis M_ Candelario and Thomas E_ Vander Luitgaren.mht

  4. JBernoulli says:

    I am glad that this topic was discussed on this blog, totally agree with all the above, but there are some problems in the legal regulation in the light of recent changes in legislation. I would not wish to write here in great detail, much is written on the site … But thanks anyway!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: