Tuesday, February 3, 2015

Honest Services Fraud: The Federal Criminal Regulation of a Non-Federal Crime

There is no good answer to the question of when the private conduct just described becomes a federal crime because Congress did not define the term "honest services," and there is almost no legislative history explaining honest services fraud.

The mail fraud statute, 18 U.S.C. § 1341, and wire fraud statute, 18 U.S.C. § 1343, have historically been powerful weapons used by prosecutors to charge a wide range of fraudulent conduct that might otherwise escape more specific federal criminal statutes.

The original purpose of these statutes was to protect citizens from schemes to deprive them of their money or property.

Through section 1346, Congress intended to target public sector corruption, and the statute has proven an invaluable prosecutorial tool for this purpose. See John C. Coffee, Modern Mail Fraud: The Restoration of the Public/Private Distinction, 35 AM. CRIM. L. REV. 427, 456-59 (1998) (discussing the emphasis on public corruption in House and Senate discussion of section 1346).

A well-established application of the Honest Services fraud statute allows prosecutors to indict public officials on the basis of their intentional non-disclosure of a material conflict of interest (such as a conflict created by the acceptance of a bribe). See, e.g., United States v. Woodward, 149 F.3d 46, 30 (1st Cir. 1998); see also United States v. Panarella, 277 F.3d 678, 697 (3d Cir. 2002) (a public official’s duty to disclose conflicts of interest arises in part from the practical difficulty of detecting and prosecuting bribery schemes).

For federal prosecutors, obtaining an Honest Services Fraud conviction requires proof only of the official’s intent to deceive with respect to material information, a much easier evidentiary burden than the bribery statutes impose.

However, in the 1970s and early 1980s, federal prosecutors began extending the mail and wire fraud statutes to criminalize the deprivation of intangible rights, particularly a citizen's right to receive honest services from public servants and an employer's right to the honest services of his or her employees.

The U.S. Supreme Court temporarily put a stop to this trend in 1987 in the case of McNally v. United States, 483 U.S. 350 (1987), in which the Court held that neither the mail fraud statute nor the wire fraud statute encompassed honest services fraud. However, the concept of honest services fraud quickly made its way back into the mail and wire fraud analysis when Congress, less than a year later, rushed through 18 U.S.C. § 1346, which defines a "scheme or artifice to defraud" under the mail and wire fraud statutes to include "a scheme or artifice to deprive another of the intangible right of honest services."

Thus, a new crime of honest services fraud was created with the following elements:
(1) a scheme to defraud that includes a material deception;
(2) with the intent to defraud;
(3) while using the mails, private commercial carriers, and/or interstate wires in furtherance of that scheme; and
(4) that resulted in the deprivation of the intangible right of honest services.

The meaning of these elements has proven to be just as intangible as the right to honest services the statute is intended to protect. The fact is the statute provides no guidance on what conduct constitutes honest services fraud. It does not define "honest services." Nor does the statute identify the person or persons to whom this "intangible right of honest services" is owed.

In the case of United States v. DeVegter, the Eleventh Cirtcuit held that the government must prove that economic harm was at least reasonably foreseeable in a private sector “honest services” fraud case.

A Georgia district court recently articulated another outer-limit of honest services fraud when it found the theory inapplicable to an arms-length contract between two sophisticated parties. United States v. Bradley, 428 F. Supp. 2d 1365, 1368 (S.D. Ga. 2006).

In United States v. Bradley, the court analyzed whether a breach of contract by a corporation owned by the defendants constituted honest services fraud. The court held that such a violation could not support a Section 1346 charge. Specifically, the court held that “[a]t the heart of a fiduciary relationship lies reliance, and de facto control and dominance. The relationship exists when confidence is reposed on one side and there is resulting superiority and influence on the other.” Id. at 1367 (quoting United States v. deVegter, 198 F.3d 1324, 1331 n.8 (11th Cir. 1999)).

The court held that there could be no Section 1346 conviction as the parties were sophisticated and engaged in “arm’s length, plain-vanilla contractual relationships” Id. at 1368.

Most recently, on May 25, 2009, the United States Supreme Court granted certiorari in the case of Black v. United States. It is expected that the Court will decide whether Honest Services Fraud applies in a purely private setting where the defendant’s conduct did not risk any foreseeable harm to the alleged victims.

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