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

January 12, 2010

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!


President Obama and Those Fat Cats from Wall Street – 2009 Ethics a Year in Review (1 of 3)

January 1, 2010

Frankly I couldn’t believe what I heard on the news when President Obama, in an interview, called bankers into the White House to seek their help with the economy – having referred to them the day before as “Fat Cat” bankers.  Hum…the President of the United States resorting to labeling people in less than a professional manner.  Perhaps it is just his folksy style, but that type of approach seems much less than presidential.  But then I got to thinking…

Seems like in this administration there was some effort to curb the abuses that the banks have hurled at consumers when it came to credit cards.  That, for everyone but the banks, was hailed as “about time” legislation.  Ethically, the banks have played less than fair with consumers.  Personal example…my wife, who has spotless credit had a Bank of American card with a zero balance and substantial credit limit, received a letter from BofA increasing her interest rate to 22.9% from 8.9%.  She called asking why and was told it was a mistake, but one that could not be undone.  After expressing her deep dissatisfaction and then vowing (after she got off the phone not to ever use the card), she got a letter from Bank of America (just a week later) cutting her credit line by 75%.  Ethical actions by Bank of America – yea right.

According to Money Magazine senior writer – Donna Rosato – “Lawmakers gave issuers till February 2010 to fully comply with the new law. Meanwhile, issuers have rushed to raise interest rates, impose new fees and cut credit limits. The median rate on credit cards surged 13% to 23% from December 2008 to July 2009, according to a study by the Pew Charitable Trusts. Meanwhile, a bill to expedite the credit card reforms, the Credit Card Rate Freeze Act, has gone nowhere. When the new law kicks in in 2010, consumers will have more protection.”

Maybe the term “Fat Cat” Bankers was justified.

Ah…but there’s more.

Fortune Magazine states:

What Ken Lewis wanted, Ken Lewis got. During his eight-year tenure as Bank of America’s CEO, he embarked on a dizzying series of acquisitions to create the nation’s biggest financial services company.

But when his last two big buys — toxic-mortgage giant Countrywide and dead-on-its-feet bank Merrill Lynch — drew too much scrutiny from regulators and shareholders, Lewis packed up his golden parachute last October and bailed.

Maybe I should be a bit kinder in my blog.  Perhaps after squandering Bank of American funds on losing propositions, they needed the rate increase on credit cards.  Of course, that assumes that folks use those credit cards.  In our case, I think not.

BUT TO TOP IT OFF…

When the government, back in the Clinton administration, asked Fannie Mae and Freddie Mac to extend credit to many American who, otherwise, were not credit worthy – I have to ask the question – with rising deficits and massive government spending – why should anyone in the government call anyone names when the government is doing just what those Wall Street “Fat Cats” did – namely living above their means.  We have massive debt and seem to believe that living in debt is O.K.

Perhaps the ethical thing to do is say – NO to additional government debt and do what is being preached to the population – live within your means and act ethically and in a responsible manner.

WHAT DO YOU THINK?