Honest services fraud is a crime defined in (the federal
mail and wire fraud statute), added by the
United States Congress
The United States Congress is the legislature of the federal government of the United States. It is bicameral, composed of a lower body, the House of Representatives, and an upper body, the Senate. It meets in the U.S. Capitol in Washing ...
in 1988,
which states "For the purposes of this chapter, the term ''scheme or artifice to defraud'' includes a scheme or artifice to deprive another of the intangible right of honest services."
The statute has been applied by federal prosecutors in cases of public corruption as well as in cases in which private individuals breached a
fiduciary
A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons). Typically, a fiduciary prudently takes care of money or other assets for another person. One party, for exampl ...
duty to another. In the former, the courts have been divided on the question of whether a state
law violation
A wrong (from Old English – 'crooked') is an act that is illegal or immoral. Legal wrongs are usually quite clearly defined in the law of a State (polity), state and/or jurisdiction. They can be divided into civil wrongs and crimes (or ''crimi ...
is necessary for honest services fraud to have occurred. In the latter, the courts have taken differing approaches to determining whether a private individual has committed honest services fraud—a test based on reasonably foreseeable economic harm and a test based on materiality. The statute, which has been a target of criticism, was given a narrow construction by the
Supreme Court of the United States
The Supreme Court of the United States (SCOTUS) is the highest court in the federal judiciary of the United States. It has ultimate appellate jurisdiction over all U.S. federal court cases, and over state court cases that involve a point o ...
in the case of ''
Skilling v. United States'' (2010). In order to avoid finding the statute to be unconstitutionally vague, the Court interpreted the statute to cover only "fraudulent schemes to deprive another of honest services through bribes or
kickbacks
A kickback is a form of negotiated bribery in which a commission is paid to the bribe-taker in exchange for services rendered. Generally speaking, the remuneration (money, goods, or services handed over) is negotiated ahead of time. The kickbac ...
supplied by a third party who ha
not been deceived".
History and case law
Since at least 1941, particularly in the 1970s and 1980s, and prior to 1987, the courts had interpreted the mail fraud and wire fraud statutes as criminalizing not only schemes to defraud victims of money and property, but also schemes to defraud victims of intangible rights such as the "honest services" of a public official.
[Ninth Circuit Joins Other Circuits in Ruling that Honest Services Fraud Conviction of a Public Official Does Not Require a Violation of State Law]
Martindale.com In 1987, the
Supreme Court of the United States
The Supreme Court of the United States (SCOTUS) is the highest court in the federal judiciary of the United States. It has ultimate appellate jurisdiction over all U.S. federal court cases, and over state court cases that involve a point o ...
ruled in ''
McNally v. United States'' that the mail fraud and wire fraud statutes pertained strictly to schemes to defraud victims of tangible property, including money.
[
] In 1988, Congress enacted a new law that specifically criminalized schemes to defraud victims of "the intangible right of honest services."
Meaning of "honest services" in public corruption
Honest services fraud is generally more easily proven in the public sphere than in the private, because honest services fraud by public officials can include most unethical conduct, whereas honest services fraud by private individuals only includes some
unethical
Ethics or moral philosophy is a branch of philosophy that "involves systematizing, defending, and recommending concepts of right and wrong behavior".''Internet Encyclopedia of Philosophy'' The field of ethics, along with aesthetics, concerns ma ...
conduct. Federal courts have generally recognized two main areas of public-sector honest service fraud:
bribery
Bribery is the Offer and acceptance, offering, Gift, giving, Offer and acceptance, receiving, or Solicitation, soliciting of any item of value to influence the actions of an official, or other person, in charge of a public or legal duty. With reg ...
(direct or indirect), where a public official was paid in some way for a particular decision or action, and failure to disclose a
conflict of interest
A conflict of interest (COI) is a situation in which a person or organization is involved in multiple interests, financial or otherwise, and serving one interest could involve working against another. Typically, this relates to situations i ...
, resulting in personal gain.
Necessity, or lack thereof, of state law violations
In 1997, the
United States Court of Appeals for the Fifth Circuit
The United States Court of Appeals for the Fifth Circuit (in case citations, 5th Cir.) is a federal court with appellate jurisdiction over the district courts in the following federal judicial districts:
* Eastern District of Louisiana
* M ...
decided in ''United States v. Brumley'' that in order for a state official to have committed honest services fraud, he or she must have violated the state statute defining the services which were owed to the employer (the state).
We find nothing to suggest that Congress was attempting in § 1346 to garner to the federal government the right to impose upon states a federal vision of appropriate services—to establish, in other words, an ethical regime for state employees. Such a taking of power would sorely tax separation of powers and erode our federalist structure. Under the most natural reading of the statute, a federal prosecutor must prove that conduct of a state official breached a duty respecting the provision of services owed to the official's employer under state law. Stated directly, the official must act or fail to act contrary to the requirements of his job under state law. This means that if the official does all that is required under state law, alleging that the services were not otherwise done "honestly" does not charge a violation of the mail fraud statute.
However, the First, Fourth,
Ninth
In music, a ninth is a compound interval consisting of an octave plus a second.
Like the second, the interval of a ninth is classified as a dissonance in common practice tonality. Since a ninth is an octave larger than a second, its ...
, and Eleventh Circuit Courts have all held that the federal statute does not limit the meaning of "honest services" to violations of state law.
As the Ninth Circuit decided in ''United States v. Weyhrauch'' in 2008,
Because laws governing official conduct differ from state to state, conditioning mail fraud convictions on state law means that conduct in one state might violate the mail fraud statute, whereas identical conduct in a neighboring state would not. Congress has given no indication it intended the criminality of official conduct under federal law to depend on geography.[
]
The defendant in that case,
Bruce Weyhrauch
Bruce Weyhrauch is an attorney in Juneau, Alaska, United States. He is also a former representative in the Alaska State House representing Juneau's District 4. Weyhrauch has practiced at his own law office in Juneau for nearly three decades. ...
, appealed that decision to the
United States Supreme Court
The Supreme Court of the United States (SCOTUS) is the highest court in the federal judiciary of the United States. It has ultimate appellate jurisdiction over all U.S. federal court cases, and over state court cases that involve a point o ...
, which ruled in his favor, remanding the case back to the Ninth Circuit, where federal charges were eventually dropped.
Intent to defraud and personal benefit
In 1997, the
United States Court of Appeals for the First Circuit
The United States Court of Appeals for the First Circuit (in case citations, 1st Cir.) is a federal court with appellate jurisdiction over the district courts in the following districts:
* District of Maine
* District of Massachusetts
* ...
set a key limit on honest services fraud in ''United States v. Czubinski'', ruling that a mere
workplace violation
Labour laws (also known as labor laws or employment laws) are those that mediate the relationship between workers, employing entities, trade unions, and the government. Collective labour law relates to the tripartite relationship between employee, ...
does not constitute fraud without evidence of depriving the employer of property in some way. Richard Czubinski was employed in
by the
Internal Revenue Service
The Internal Revenue Service (IRS) is the revenue service for the United States federal government, which is responsible for collecting U.S. federal taxes and administering the Internal Revenue Code, the main body of the federal statutory ta ...
when, in 1992, he violated IRS rules by carrying out several unauthorized searches of the IRS database and accessing files outside of the course of his official duties.
In 1995, he was convicted of wire fraud (defrauding the IRS of property and the public of his honest services) and
computer fraud
Computer fraud is a cybercrime and the act of using a computer to take or alter electronic data, or to gain unlawful use of a computer or system. In the United States, computer fraud is specifically proscribed by the Computer Fraud and Abuse Act, ...
. The appellate court reversed the honest services fraud conviction on the basis that Czubinski's actions did not amount to anything more than a workplace violation, warranting no more than a dismissal:
Czubinski was not bribed or otherwise influenced in any public decisionmaking capacity. Nor did he embezzle funds. He did not receive, nor can it be found that he intended to receive, any tangible benefit. ... The conclusive consideration is that the government simply did not prove that Czubinski deprived, or intended to deprive, the public or his employer of their right to his honest services. Although he clearly committed wrongdoing in searching confidential information, there is no suggestion that he failed to carry out his official tasks adequately, or intended to do so.[
]
Czubinski's other convictions were also reversed.
Meaning of "honest services" in private fiduciary relationships
Although the law is most often applied to corrupt public officials, several federal courts have upheld honest services fraud convictions of private individuals who breached a
fiduciary
A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons). Typically, a fiduciary prudently takes care of money or other assets for another person. One party, for exampl ...
duty to another, such as an employer.
Generally, the federal circuit courts have adhered to one of two approaches when dealing with honest services fraud cases. One, the "reasonably foreseeable economic harm" test, requires that the defendant intentionally breached his fiduciary duty and "foresaw or reasonably should have foreseen" that his actions could cause economic harm to his victim. The other, the "materiality" test, requires that the defendant possessed a fraudulent intent and made "any misrepresentation that has the natural tendency to influence or is capable of influencing" the victim to change his behavior.
"Reasonably foreseeable economic harm" test
In 1997, the
United States Court of Appeals for the Sixth Circuit
The United States Court of Appeals for the Sixth Circuit (in case citations, 6th Cir.) is a federal court with appellate jurisdiction over the district courts in the following districts:
* Eastern District of Kentucky
* Western District of ...
held in ''United States v. Frost'' that private individuals could be also convicted of honest services fraud. Two professors at the
University of Tennessee Space Institute
A university () is an institution of higher (or tertiary) education and research which awards academic degrees in several academic disciplines. Universities typically offer both undergraduate and postgraduate programs. In the United States, th ...
, Walter Frost and Robert Eugene Turner, were also president and vice president, respectively, of FWG Associates, a private
atmospheric science
Atmospheric science is the study of the Atmosphere of Earth, Earth's atmosphere and its various inner-working physical processes. Meteorology includes atmospheric chemistry and atmospheric physics with a major focus on weather forecasting. Climat ...
research firm. Frost and Turner gave FWG reports to two of their students, one a doctoral candidate employed by the
Department of the Army
The United States Department of the Army (DA) is one of the three military departments within the Department of Defense of the U.S. The Department of the Army is the federal government agency within which the United States Army (U.S.) is org ...
and one a master's degree candidate employed by
NASA
The National Aeronautics and Space Administration (NASA ) is an independent agency of the US federal government responsible for the civil space program, aeronautics research, and space research.
NASA was established in 1958, succeeding t ...
, allowing them to
plagiarize
Plagiarism is the fraudulent representation of another person's language, thoughts, ideas, or expressions as one's own original work.From the 1995 '' Random House Compact Unabridged Dictionary'': use or close imitation of the language and thought ...
an overwhelming majority of the reports for their respective dissertations. They also allowed another doctoral candidate, employed by NASA, to submit a dissertation which was mostly written by one of their employees at FWG. Their aim was to secure federal contracts with the agencies employing these students. All three students received their degrees, facilitated by Frost and Turner. In addition to many other charges, Frost and Turner were convicted of three counts of mail fraud for defrauding the
University of Tennessee
The University of Tennessee (officially The University of Tennessee, Knoxville; or UT Knoxville; UTK; or UT) is a public land-grant research university in Knoxville, Tennessee. Founded in 1794, two years before Tennessee became the 16th state, ...
of their honest services as employees. On appeal, Frost and Turner argued that § 1346 did not apply to them because they were not public servants. The court disagreed, ruling that "private individuals, such as Frost and Turner, may commit mail fraud by breaching a fiduciary duty and thereby depriving the person or entity to which the duty is owed of the intangible right to the honest services of that individual."
In 1998, the
United States Court of Appeals for the D.C. Circuit upheld the wire fraud conviction of
Sun-Diamond Growers of California for defrauding its hired public relations firm of the honest services of one of its agents, James H. Lake, in order to curry favor with the
United States Secretary of Agriculture
The United States secretary of agriculture is the head of the United States Department of Agriculture. The position carries similar responsibilities to those of agriculture ministers in other governments.
The department includes several organi ...
,
Mike Espy
Alphonso Michael Espy (born November 30, 1953) is an American lawyer and politician who served as the 25th United States Secretary of Agriculture from 1993 to 1994. He was both the first African American and first person from the Deep South to h ...
. The corporation's vice president for corporate affairs, Richard Douglas, had acted in the scheme in such a manner that potentially could have caused economic harm to the public relations firm (tarnishing its reputation by engaging Lake in illegal activity) – he and Lake had illegally funneled contributions to a congressional candidate, Espy's brother. Sun-Diamond argued that those actions could not be criminal because there was no intent to do economic harm to the firm. However, the court ruled that an intent to do economic harm was not necessary to have committed wire fraud, affirming a pre-''McNally'' decision in light of the 1988 statute:
In the private sector context, § 1346 poses special risks. Every material act of dishonesty by an employee deprives the employer of that worker's "honest services," yet not every such act is converted into a federal crime by the mere use of the mails or interstate phone system. Aware of the risk that federal criminal liability could metastasize, we held in ''Lemire'' that "not every breach of a fiduciary duty works a criminal fraud." ... Rather, " ere must be a failure to disclose something which in the knowledge or contemplation of the employee poses an independent business risk to the employer." ... Sun-Diamond appears to confuse the requirement of an intent to defraud...with a requirement of intent to cause economic harm.
In 1999, the
United States Court of Appeals for the Eleventh Circuit
The United States Court of Appeals for the Eleventh Circuit (in case citations, 11th Cir.) is a federal court with appellate jurisdiction over the following U.S. district courts:
* Middle District of Alabama
* Northern District of Alabama
* ...
adopted a similar interpretation in ''United States v. deVegter''. Michael deVegter was a financial advisor hired by
Fulton County Fulton County is the name of eight counties in the United States of America. Most are named for Robert Fulton, inventor of the first practical steamboat:
*Fulton County, Arkansas, named after Governor William Savin Fulton
*Fulton County, Georgia
*F ...
,
Georgia
Georgia most commonly refers to:
* Georgia (country), a country in the Caucasus region of Eurasia
* Georgia (U.S. state), a state in the Southeast United States
Georgia may also refer to:
Places
Historical states and entities
* Related to the ...
, to craft a professional recommendation of the best
underwriter
Underwriting (UW) services are provided by some large financial institutions, such as banks, insurance companies and investment houses, whereby they guarantee payment in case of damage or financial loss and accept the financial risk for liabilit ...
for the county to hire. DeVegter accepted a payment of about $42,000 from Richard Poirier in exchange for manipulating the report to influence Fulton County into hiring Poirier's investment banking firm for the underwriter job. DeVegter and Poirier were both indicted for conspiracy and wire fraud, with the latter including charges under the honest services statute. The district court dismissed the honest services charges for lack of evidence before the trial began; the government appealed. The court agreed with the government that there was sufficient evidence alleged in the indictment for the defendants to be charged with honest services fraud, because the allegations showed a breach of fiduciary duty and an intent to defraud in such a manner that "reasonably foreseeable economic harm to Fulton County" was a consequence of the scheme.
In 2001, the
United States Court of Appeals for the Fourth Circuit
The United States Court of Appeals for the Fourth Circuit (in case citations, 4th Cir.) is a federal court located in Richmond, Virginia, with appellate jurisdiction over the district courts in the following districts:
* District of Maryla ...
recognized that there were two different tests that other circuit courts had generally used to determine whether honest services fraud had been committed; in ''United States v. Vinyard'',
it concluded that the "reasonably foreseeable economic harm" test was superior (because it was based on employee intent and not employer response) and applied that test to the case at hand. The defendant in the case, Michael Vinyard, had been convicted in the
of fourteen counts of mail fraud and twelve counts of money laundering. His brother, James Vinyard, was an employee of the Sunoco Products Corporation who was charged with finding an independent broker to research recycled
resin
In polymer chemistry and materials science, resin is a solid or highly viscous substance of plant or synthetic origin that is typically convertible into polymers. Resins are usually mixtures of organic compounds. This article focuses on natu ...
s for their manufacture of plastic bags. The brothers instead created their own brokerage, "Charles Stewart Enterprises," incorporated in the state of Iowa, and misrepresented it to Sunoco as an legitimate, independent firm that was supplying recycled resins at the lowest possible price. They purchased recycled resins from plastic vendors and, marking up the price, sold them to Sunoco, which eventually yielded $2.8 million in profits. The brothers funneled these profits from CSE to themselves through another entity in order to conceal their involvement with CSE on their tax returns. When the brothers were eventually indicted for mail fraud and money laundering, James Vinyard pleaded guilty and testified against his brother. Michael Vinyard appealed, arguing that his conviction of honest services fraud (defrauding Sunoco of the honest services of his brother, their employee) was wrongful because he did not cause harm nor did he intend to cause economic harm to the victim, Sunoco. Upholding his conviction, the court rejected this argument:
The reasonably foreseeable harm test is met whenever, at the time of the fraud scheme, the employee could foresee that the scheme potentially might be detrimental to the employer's economic well-being. Furthermore, the concept of "economic risk" embraces the idea of risk to future opportunities for savings or profit; the focus on the employer's wellbeing encompasses both the long-term and the short-term health of the business. Whether the risk materializes or not is irrelevant; the point is that the employee has no right to endanger the employer's financial health or jeopardize the employer's long-term prospects through self-dealing. Therefore, so long as the employee could have reasonably foreseen the risk to which he was exposing the employer, the requirements of § 1346 will have been met.
In 2006, the
United States Court of Appeals for the Ninth Circuit
The United States Court of Appeals for the Ninth Circuit (in case citations, 9th Cir.) is the U.S. federal court of appeals that has appellate jurisdiction over the U.S. district courts in the following federal judicial districts:
* District ...
treated the issue of whether private defendants could be prosecuted under § 1346 as settled law, citing the numerous other circuits which had affirmed the practice. In the case ''United States v. Williams'', the defendant, John Anthony Williams, was an
Oregon
Oregon () is a U.S. state, state in the Pacific Northwest region of the Western United States. The Columbia River delineates much of Oregon's northern boundary with Washington (state), Washington, while the Snake River delineates much of it ...
insurance salesman who had sold several annuities to an elderly rancher named Loyd Stubbs. When Stubbs liquidated his annuities, Williams deposited the resulting funds in a joint bank account he had opened in his and Stubbs' names. Williams proceeded to make massive cash withdrawals from the account, depositing the money in his own personal account and spending much of it; he also wired money to personal bank accounts he had in
Belize
Belize (; bzj, Bileez) is a Caribbean and Central American country on the northeastern coast of Central America. It is bordered by Mexico to the north, the Caribbean Sea to the east, and Guatemala to the west and south. It also shares a wate ...
and
Louisiana
Louisiana , group=pronunciation (French: ''La Louisiane'') is a state in the Deep South and South Central regions of the United States. It is the 20th-smallest by area and the 25th most populous of the 50 U.S. states. Louisiana is borde ...
. Williams was convicted of four counts of wire fraud, three counts of mail fraud, three counts of money laundering, and one count of foreign transportation of stolen money; the fraud charges stemmed from schemes to defraud Stubbs of money and of Williams' honest services as his financial advisor. On appeal, Williams argued that § 1346 did not apply to private commerce. The court disagreed, and, citing previous case law, ruled that within a fiduciary relationship the statute applied.
"Materiality" test
In 1996, the
United States Court of Appeals for the Fifth Circuit
The United States Court of Appeals for the Fifth Circuit (in case citations, 5th Cir.) is a federal court with appellate jurisdiction over the district courts in the following federal judicial districts:
* Eastern District of Louisiana
* M ...
laid out the "materiality" test in its decision in ''United States v. Gray''. Kevin Gray, Gary Thomas, and Troy Drummond were three members of the men's basketball coaching staff at
Baylor University
Baylor University is a private Baptist Christian research university in Waco, Texas. Baylor was chartered in 1845 by the last Congress of the Republic of Texas. Baylor is the oldest continuously operating university in Texas and one of the fir ...
in
Texas
Texas (, ; Spanish language, Spanish: ''Texas'', ''Tejas'') is a state in the South Central United States, South Central region of the United States. At 268,596 square miles (695,662 km2), and with more than 29.1 million residents in 2 ...
. These coaches helped five players, recruited from two-year colleges, to obtain the credits required for eligibility and possibly scholarships by providing these students with written course work or answers to correspondence exams, which were then sent to the sponsoring schools as the students' work. They were convicted of conspiracy, mail fraud, and wire fraud; the fraud charges stemmed from schemes to deprive Baylor University of both property (in the form of scholarships) and the coaches' honest services as Baylor employees. The court upheld the convictions, affirming the honest services fraud convictions on the basis that the coaches made "material" misrepresentations:
A breach of fiduciary duty can constitute illegal fraud...only when there is some detriment to the employer. ... The detriment can be a deprivation of an employee's faithful and honest services if a violation of the employee's duty to disclose material information is involved. ... Materiality exists whenever "an employee has reason to believe the information would lead a reasonable employer to change its business conduct." ... The information withheld, i.e. the "coaches' cheating scheme", was material because Baylor did not get the quality student it expected. Further, appellants failure to disclose the scheme to Baylor was material as Baylor might have been able to recruit other qualified, eligible students to play basketball. Instead, once the scheme was suspected, Baylor was forced to institute a costly investigation and the players under suspicion were withheld from competition. It is quite reasonable to believe that Baylor would have changed its business conduct had it known of the "cheating scheme."[
]
In 1997, the
United States Court of Appeals for the Tenth Circuit
The United States Court of Appeals for the Tenth Circuit (in case citations, 10th Cir.) is a federal court with appellate jurisdiction over the district courts in the following districts:
* District of Colorado
* District of Kansas
* Dist ...
also applied the "materiality" test in its decision in ''United States v. Cochran''. Robert M. Cochran was a bond underwriter in
Oklahoma
Oklahoma (; Choctaw language, Choctaw: ; chr, ᎣᎧᎳᎰᎹ, ''Okalahoma'' ) is a U.S. state, state in the South Central United States, South Central region of the United States, bordered by Texas on the south and west, Kansas on the nor ...
who was convicted of five counts of wire fraud, two counts of money laundering, and one count of interstate transportation of stolen property. Three of wire fraud counts for which Cochran was convicted were honest services fraud. Cochran's firm,
Stifel, Nicolaus & Company, served as managing underwriter when the
SSM Healthcare System, a non-profit corporation operating several hospitals and nursing homes, issued more than $265 million of tax-exempt bonds; Sakura Global Capital bid $400,000 to provide SSM with a
forward supply contract. However, SGC subsequently made a secret payment of $100,000 to Cochran's firm over the course of three wire transmissions; thus, Cochran supposedly deprived SSM and its bondholders of his honest services. The appellate court reversed his conviction, deciding that the government did not provide sufficient evidence that Cochran had actually defrauded SSM or its bondholders of his honest services, applying the "materiality" test:
Though Stifel misrepresented that SGC would not pay an additional fee to Stifel for the forward supply contract, this information resulted in no actual or potential harm to SSM. ... No evidence independent of the alleged scheme suggests in any way that Mr. Cochran sought to harm SSM or its bondholders. Moreover, we know not from this record how SSM would have changed its conduct had the disclosure been made.[
]
In 1999, the
United States Court of Appeals for the Eighth Circuit
The United States Court of Appeals for the Eighth Circuit (in case citations, 8th Cir.) is a United States federal court with appellate jurisdiction over the following United States district courts:
* Eastern District of Arkansas
* Western Dis ...
diverged from the D.C. Circuit's ''Sun-Diamond'' ruling in its decision in ''United States v. Pennington''. Donald B. Pennington was the president of Harvest Foods, a grocery store chain in eastern
Arkansas
Arkansas ( ) is a landlocked state in the South Central United States. It is bordered by Missouri to the north, Tennessee and Mississippi to the east, Louisiana to the south, and Texas and Oklahoma to the west. Its name is from the Osage ...
, when that company contracted with a food broker and a consultant, John Oldner, to negotiate deals between it and its suppliers. The broker and consultant both funneled a portion of their money from Harvest Foods and its supplier to Pennington – through a sham corporation, Capitol City Marketing – as
kickbacks
A kickback is a form of negotiated bribery in which a commission is paid to the bribe-taker in exchange for services rendered. Generally speaking, the remuneration (money, goods, or services handed over) is negotiated ahead of time. The kickbac ...
. Pennington was convicted of money laundering and mail fraud; in his appeal he contended that there was insufficient evidence to convict him because the government had failed to show that he had an intent to defraud Harvest Foods of his honest services as its president. The court upheld the conviction, stating that there was sufficient evidence that his actions were a breach of his duty as a fiduciary of Harvest Foods to disclose his material interest in their contracts with Oldner and the broker. However, the court also went further and required (and found) intent to economically ''harm'':
Pennington and Oldner correctly assert that, when dealing with business transactions in the private sector, a mere breach of fiduciary or employee duty may not be sufficient to deprive a client or corporation of "honest services" for purposes of § 1346—to be guilty of mail fraud, defendants must also cause or intend to cause actual harm or injury, and in most business contexts, that means financial or economic harm. ... However, proof of intent to harm may be inferred from the willful non-disclosure by a fiduciary, such as a corporate officer, of material information he has a duty to disclose.
In 2003, the
United States Court of Appeals for the Second Circuit
The United States Court of Appeals for the Second Circuit (in case citations, 2d Cir.) is one of the thirteen United States Courts of Appeals. Its territory comprises the states of Connecticut, New York and Vermont. The court has appellate juri ...
, like the Fourth Circuit in ''Vinyard'', noted the existence of the two tests, but unlike the Fourth Circuit, it opted to use the "materiality" test (describing it as "arising out of fundamental principles of the law of fraud" and critiquing the alternative as "designed simply to limit the scope" of the law). It applied this test to the case at hand, ''United States v. Rybicki''. The defendants were two personal injury lawyers, Thomas Rybicki and Fredric Grae, in the state of
New York
New York most commonly refers to:
* New York City, the most populous city in the United States, located in the state of New York
* New York (state), a state in the northeastern United States
New York may also refer to:
Film and television
* '' ...
; both were convicted of twenty counts of mail fraud, two counts of wire fraud, and one count of conspiracy. The fraud charges pertained to a scheme to make illegal payments to insurance claims adjusters with the intent of inducing the adjusters to expedite the settlement of certain claims; Rybicki and Grae made such payments in at least twenty cases. As the acceptance of such payments by the adjusters was against the insurance companies' policies, Rybicki and Grae had defrauded those insurance companies of the honest services of their employees. Such was the basis for the successful fraud prosecution. The court affirmed the conviction, determining that all of the necessary elements for the crime of honest services fraud to have occurred were present, including material misrepresentation. The court defined the crime as follows:
The phrase "scheme or artifice o defraudby depriv nganother of the intangible right of honest services," in the private sector context, means a scheme or artifice to use the mails or wires to enable an officer or employee of a private entity (or a person in a relationship that gives rise to a duty of loyalty comparable to that owed by employees to employers) purporting to act for and in the interests of his or her employer (or of the other person to whom the duty of loyalty is owed) secretly to act in his or her or the defendant's own interests instead, accompanied by a material misrepresentation made or omission of information disclosed to the employer or other person.
Usage and criticism
The statute grants jurisdiction to the federal government to prosecute local, state and federal officials. It is frequently used to fight public corruption because it is easier to prove than bribery or
extortion
Extortion is the practice of obtaining benefit through coercion. In most jurisdictions it is likely to constitute a criminal offence; the bulk of this article deals with such cases. Robbery is the simplest and most common form of extortion, ...
.
The term "honest services" is broad and open to jury interpretation, according to several legal experts.
Prosecutions under the 1970
Racketeer Influenced and Corrupt Organizations Act
The Racketeer Influenced and Corrupt Organizations (RICO) Act is a United States federal law that provides for extended criminal penalties and a civil cause of action for acts performed as part of an ongoing criminal organization.
RICO was en ...
(RICO) frequently use violations of the honest services statute,
as mail and wire fraud are predicate acts of racketeering; therefore, two mailings or wire transmissions in the execution of honest services fraud can form "a pattern of racketeering activity."
Prosecutions for honest services fraud that do not involve public corruption generally involve corporate crime, although the line between
tort
A tort is a civil wrong that causes a claimant to suffer loss or harm, resulting in legal liability for the person who commits the tortious act. Tort law can be contrasted with criminal law, which deals with criminal wrongs that are punishable ...
s and crimes in such cases is considered murky and unclear.
The law is reportedly a favorite of federal prosecutors because the language of statute is vague enough to be applied to corrupt political officials' unethical or criminal activities when they do not fall into a specific category, such as bribery or extortion.
For similar reasons, defense attorneys dislike the law, viewing it as a poorly defined law that can be used by prosecutors to convert any kind of unethical behavior into a
federal crime
In the United States, a federal crime or federal offense is an act that is made illegal by U.S. federal legislation enacted by both the United States Senate and United States House of Representatives and signed into law by the president. Prosec ...
.
Often, defendants plead guilty to honest services fraud so as to avoid greater liability under the incredibly broad
RICO
The Racketeer Influenced and Corrupt Organizations (RICO) Act is a United States federal law that provides for extended criminal penalties and a civil cause of action for acts performed as part of an ongoing criminal organization.
RICO was en ...
statute.
Nevertheless, prosecutors must still prove all the elements of mail fraud or wire fraud in a case regarding a scheme to defraud of honest services.
The late U.S. Supreme Court Justice
Antonin Scalia
Antonin Gregory Scalia (; March 11, 1936 – February 13, 2016) was an American jurist who served as an associate justice of the Supreme Court of the United States from 1986 until his death in 2016. He was described as the intellectu ...
criticized the statute, stating that the clause was so poorly defined that it could be the basis for prosecuting "a mayor for using the prestige of his office to get a table at a restaurant without a reservation."
In ''The Perfect Villain: John McCain and the Demonization of Lobbyist Jack Abramoff'', investigative journalist Gary S. Chafetz argued that honest-services fraud is so vague as to be unconstitutional, and that prosecutors abused it as a tool to increase their conviction rates. Bennett L. Gershmann, a professor at
Pace University Law School, similarly has contended that the law "is not only subject to abuse...but has been abused."
The case of former
Alabama Governor Don Siegelman
Donald Eugene Siegelman ( ; born February 24, 1946) is a former American politician, lawyer and convicted felon who was the 51st governor of Alabama from 1999 to 2003. A member of the Democratic Party, as of , Siegelman is the last Democrat, as ...
is often cited as an example of possible prosecutorial misconduct and abuse of the honest services law.
Many
interest group
Advocacy groups, also known as interest groups, special interest groups, lobbying groups or pressure groups use various forms of advocacy in order to influence public opinion and ultimately policy. They play an important role in the developm ...
s oppose the usage of the honest services law, including the conservative
United States Chamber of Commerce
The United States Chamber of Commerce (USCC) is the largest lobbying group in the United States, representing over three million businesses and organizations. The group was founded in April 1912 out of local chambers of commerce at the urging ...
and
Washington Legal Foundation
The Washington Legal Foundation (WLF) is a non-profit legal organization located at 2007-2009 Massachusetts Avenue NW, on Embassy Row in Washington, D.C. Founded in 1977, the Foundation's stated goal is "to defend and promote the principles of f ...
, as well as the more liberal
National Association of Criminal Defense Lawyers
The National Association of Criminal Defense Lawyers (NACDL) is an American criminal defense organization.
Members include private criminal defense lawyers, public defenders, active U.S. military defense counsel, law professors, judges, and defe ...
.
One notable proponent of the law is the
Citizens for Responsibility and Ethics in Washington.
Recent notable prosecutions
Several notable figures have been charged with or convicted of honest services fraud.
*Washington lobbyist
Jack Abramoff
Jack Allan Abramoff (; born February 28, 1959) is an American lobbyist, businessman, film producer, writer, and convicted felon. He was at the center of an extensive corruption investigation led by Earl Devaney that resulted in his conviction ...
pleaded guilty in 2006 to honest services fraud in addition to conspiracy and tax evasion; he was convicted in 2008 of further charges of honest services fraud in addition to further charges of
conspiracy
A conspiracy, also known as a plot, is a secret plan or agreement between persons (called conspirers or conspirators) for an unlawful or harmful purpose, such as murder or treason, especially with political motivation, while keeping their agree ...
and
tax evasion
Tax evasion is an illegal attempt to defeat the imposition of taxes by individuals, corporations, trusts, and others. Tax evasion often entails the deliberate misrepresentation of the taxpayer's affairs to the tax authorities to reduce the taxp ...
.
*Former
Enron
Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. It was founded by Kenneth Lay in 1985 as a merger between Lay's Houston Natural Gas and InterNorth, both relatively small regional companies. ...
CEO
Jeffrey Skilling
Jeffrey Keith Skilling (born November 25, 1953) is an American businessman who is best known as the CEO of Enron Corporation during the Enron scandal. In 2006, he was convicted of federal felony charges relating to Enron's collapse and eventual ...
was convicted in 2006 of honest services fraud, in addition to
securities fraud
Securities fraud, also known as stock fraud and investment fraud, is a deceptive practice in the stock or commodities markets that induces investors to make purchase or sale decisions on the basis of false information, frequently resulting in los ...
.
*Former
Illinois
Illinois ( ) is a U.S. state, state in the Midwestern United States, Midwestern United States. Its largest metropolitan areas include the Chicago metropolitan area, and the Metro East section, of Greater St. Louis. Other smaller metropolita ...
governor
George Ryan
George Homer Ryan (born February 24, 1934) is an American former politician and member of the Republican Party who served as the 39th governor of Illinois from 1999 to 2003.
Elected in 1998, Ryan received national attention for his 1999 mora ...
was convicted in 2006 of honest services fraud, in addition to
racketeering
Racketeering is a type of organized crime in which the perpetrators set up a coercive, fraudulent, extortionary, or otherwise illegal coordinated scheme or operation (a "racket") to repeatedly or consistently collect a profit.
Originally and of ...
,
tax fraud
Tax evasion is an illegal attempt to defeat the imposition of taxes by individuals, corporations, trusts, and others. Tax evasion often entails the deliberate misrepresentation of the taxpayer's affairs to the tax authorities to reduce the taxp ...
,
obstruction of justice
Obstruction of justice, in United States jurisdictions, is an act that involves unduly influencing, impeding, or otherwise interfering with the justice system, especially the legal and procedural tasks of prosecutors, investigators, or other gov ...
, and
making false statements
Making false statements () is the common name for the United States federal process crime laid out in Section 1001 of Title 18 of the United States Code, which generally prohibits knowingly and willfully making false or fraudulent statements, or ...
to federal agents.
*Former
Alabama
(We dare defend our rights)
, anthem = "Alabama (state song), Alabama"
, image_map = Alabama in United States.svg
, seat = Montgomery, Alabama, Montgomery
, LargestCity = Huntsville, Alabama, Huntsville
, LargestCounty = Baldwin County, Al ...
Governor
Don Siegelman
Donald Eugene Siegelman ( ; born February 24, 1946) is a former American politician, lawyer and convicted felon who was the 51st governor of Alabama from 1999 to 2003. A member of the Democratic Party, as of , Siegelman is the last Democrat, as ...
was convicted in 2006 of honest services fraud, in addition to conspiracy,
bribery
Bribery is the Offer and acceptance, offering, Gift, giving, Offer and acceptance, receiving, or Solicitation, soliciting of any item of value to influence the actions of an official, or other person, in charge of a public or legal duty. With reg ...
, and obstruction of justice.
*
Duke Cunningham
Randall Harold "Duke" Cunningham (born December 8, 1941) is a former American politician, decorated Vietnam War veteran, fighter ace, and ex-felon. Cunningham served as a Republican member of the U.S. House of Representatives from California's ...
, a former Congressman from California, was convicted of corruption charges including honest services fraud.
*
Bob Ney
Robert William Ney (born July 5, 1954) is an American politician from Ohio. A Republican, Ney represented Ohio's 18th congressional district in the U.S. House of Representatives from 1995 until November 3, 2006, when he resigned. Ney's resignat ...
, a former congressman from Ohio, was convicted of corruption charges including honest services fraud.
*Newspaper magnate
Conrad Black
Conrad Moffat Black, Baron Black of Crossharbour (born 25 August 1944), is a Canadian-born British former newspaper publisher, businessman, and writer.
His father was businessman George Montegu Black II, who had significant holdings in Canadi ...
was convicted in 2007 of honest services fraud, in addition to obstruction of justice.
*Former
Alaska
Alaska ( ; russian: Аляска, Alyaska; ale, Alax̂sxax̂; ; ems, Alas'kaaq; Yup'ik: ''Alaskaq''; tli, Anáaski) is a state located in the Western United States on the northwest extremity of North America. A semi-exclave of the U.S., ...
state legislator
A state legislature is a legislative branch or body of a political subdivision in a federal system.
Two federations literally use the term "state legislature":
* The legislative branches of each of the fifty state governments of the United S ...
Bruce Weyhrauch
Bruce Weyhrauch is an attorney in Juneau, Alaska, United States. He is also a former representative in the Alaska State House representing Juneau's District 4. Weyhrauch has practiced at his own law office in Juneau for nearly three decades. ...
was convicted in 2007 of honest services fraud in addition to bribery and extortion.
*Former
New York
New York most commonly refers to:
* New York City, the most populous city in the United States, located in the state of New York
* New York (state), a state in the northeastern United States
New York may also refer to:
Film and television
* '' ...
Senate
A senate is a deliberative assembly, often the upper house or chamber of a bicameral legislature. The name comes from the ancient Roman Senate (Latin: ''Senatus''), so-called as an assembly of the senior (Latin: ''senex'' meaning "the el ...
Majority Leader
Joseph Bruno
Joseph Louis Bruno (April 8, 1929 – October 6, 2020) was an American businessman and Republican Party (United States), Republican politician from upstate New York. Bruno served in the New York State Senate from 1977 to 2008 and was Senate Majo ...
was convicted in 2009 on two counts of honest services fraud.
*
Mary McCarty, a former
Palm Beach County
Palm Beach County is a county located in the southeastern part of Florida and lies directly north of Broward County and Miami-Dade County. The county had a population of 1,492,191 as of the 2020 census, making it the third-most populous county ...
Commissioner, is currently serving a federal prison sentence for honest services fraud.
*
New Jersey
New Jersey is a state in the Mid-Atlantic and Northeastern regions of the United States. It is bordered on the north and east by the state of New York; on the east, southeast, and south by the Atlantic Ocean; on the west by the Delaware ...
political boss
Joe Ferriero
Joseph A. Ferriero (born June 25, 1957) is an American Democratic Party political leader from New Jersey and former chairman of the Bergen County Democratic Organization. Ferriero, an attorney by profession, resides in Hackensack.
In Septembe ...
was convicted in 2009 of conspiracy and two counts of mail fraud.
*Former
Illinois
Illinois ( ) is a U.S. state, state in the Midwestern United States, Midwestern United States. Its largest metropolitan areas include the Chicago metropolitan area, and the Metro East section, of Greater St. Louis. Other smaller metropolita ...
governor
Rod Blagojevich
Rod Blagojevich ( , born December 10, 1956), often referred to by his nicknames "Blago" or "B-Rod", is an American former politician, political commentator, and convicted felon who served as the 40th governor of Illinois from 2003 to 2009, when ...
was indicted in 2009 for allegedly conspiring to commit honest services fraud, as well as for allegedly soliciting bribes.
*Former Alabama state legislator Sue Schmitz was convicted in 2009 of three counts of mail fraud and four counts of fraud involving a program receiving federal funds.
*Judges
Mark Ciavarella
Mark Arthur Ciavarella Jr. (born March 3, 1950) is an American convicted felon and former President Judge of the Luzerne County Court of Common Pleas in Wilkes-Barre, Pennsylvania, who was involved, along with fellow judge Michael Conahan, in t ...
and
Michael Conahan originally pleaded guilty to honest services fraud and conspiracy in the
Kids for cash scandal
The "kids for cash" scandal centered on judicial kickbacks to two judges at the Luzerne County Court of Common Pleas in Wilkes-Barre, Pennsylvania, US. In 2008, judges Michael Conahan and Mark Ciavarella were convicted of accepting money in ret ...
. The pleas were later withdrawn.
*Former Virginia Governor
Bob McDonnell
Robert Francis McDonnell (born June 15, 1954) is an American attorney, businessman, politician, and former military officer who served as the 71st governor of Virginia from 2010 to 2014. His career ended after his corruption scandal and convic ...
and wife Maureen were convicted of multiple counts, including conspiring to defraud the public and honest services violations in September 2014 (
convictions overturned by U.S. Supreme Court, 2016).
*In the
2019 college admissions scandal, more than 30 people were charged with conspiracy in an honest services fraud scheme involving bribery and entrance exam cheating, to gain admissions for their children to several universities.
*San Francisco Public Works Director, Mohammed Nuru, as part of a broader Federal probe into the city's contracting practices
Supreme Court cases
In its 2009-2010 term, there were three appeals against the statute at the
United States Supreme Court
The Supreme Court of the United States (SCOTUS) is the highest court in the federal judiciary of the United States. It has ultimate appellate jurisdiction over all U.S. federal court cases, and over state court cases that involve a point o ...
, all challenging its constitutionality. All three appellants were convicted of honest services fraud in 2006 or 2007.
''Weyhrauch v. United States'', by former Alaska state legislator
Bruce Weyhrauch
Bruce Weyhrauch is an attorney in Juneau, Alaska, United States. He is also a former representative in the Alaska State House representing Juneau's District 4. Weyhrauch has practiced at his own law office in Juneau for nearly three decades. ...
, deals with whether a public official can be charged with honest services fraud without violating his duty under state law.
''
Black v. United States'', by newspaper magnate
Conrad Black
Conrad Moffat Black, Baron Black of Crossharbour (born 25 August 1944), is a Canadian-born British former newspaper publisher, businessman, and writer.
His father was businessman George Montegu Black II, who had significant holdings in Canadi ...
, deals with whether there must be proof that the defendant knew his actions would cause economic harm to the company.
''
Skilling v. United States'', by former
Enron
Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. It was founded by Kenneth Lay in 1985 as a merger between Lay's Houston Natural Gas and InterNorth, both relatively small regional companies. ...
CEO
Jeffrey Skilling
Jeffrey Keith Skilling (born November 25, 1953) is an American businessman who is best known as the CEO of Enron Corporation during the Enron scandal. In 2006, he was convicted of federal felony charges relating to Enron's collapse and eventual ...
, deals with whether the honest services statute requires proof of personal gain.
He is also contending that the statute is unconstitutionally vague and unfair.
In December 2009, the
Associated Press
The Associated Press (AP) is an American non-profit news agency headquartered in New York City. Founded in 1846, it operates as a cooperative, unincorporated association. It produces news reports that are distributed to its members, U.S. newspa ...
reported that the Justices of the Court "seemed to be in broad agreement that the law is vague and has been used to make a crime out of mistakes, minor transgressions and mere ethical violations."
Both liberal and conservative justices have criticized the law.
Richard Thornburgh
Richard Lewis Thornburgh (July 16, 1932 – December 31, 2020) was an American lawyer, author, and Republican politician who served as the 41st governor of Pennsylvania from 1979 to 1987, and then as the United States attorney general fro ...
, a former
United States Attorney General
The United States attorney general (AG) is the head of the United States Department of Justice, and is the chief law enforcement officer of the federal government of the United States. The attorney general serves as the principal advisor to the p ...
, has remarked that he expects the court to issue "something fairly sweeping...without doing violence to proper law enforcement."
On June 24, 2010, the Supreme Court ruled unanimously in the cases of Black and Skilling that the law against "honest services" fraud is too vague to constitute a crime unless a bribe or kickback was involved.
Chicago Tribune June 24, 2010, Supreme Court limits use of fraud law, siding with ex-Enron CEO Skilling
/ref>
References
{{DEFAULTSORT:Honest Services Fraud
Mail and wire fraud
United States federal public corruption crime