May 19, 2009
On May 18, 2009, the United States Supreme Court granted certiorari in Conrad M. Black v. United States, No. 08-876, agreeing to decide whether and to what extent private sector conduct can be prosecuted under 18 U.S.C. § 1346–a wide-ranging statute that prohibits use of the mails or wire communications in furtherance of a scheme to defraud another of the right to "honest services." Gibson Dunn prepared the successful petition on behalf of Conrad M. Black and is also representing him in briefing and argument of the case before the Supreme Court in the Fall.
The Prosecution of Conrad Black and Others Under an "Honest Services" Theory
The government charged Black, his two co-petitioners, John A. Boultbee and Mark S. Kipnis, and others with engaging in a scheme to steal money from Hollinger International, Inc. (a public company of which they were officers) and from Hollinger’s subsidiaries by causing the companies to pay the defendants for entering into purportedly bogus covenants not to compete. Petitioners’ defense at trial, aided significantly by unequivocal testimony from the government’s own cooperating witness, was that the payments had already been authorized by Hollinger’s board of directors in the form of management fees. Petitioners decided to have the management fees characterized instead as non-competition agreement payments (and they signed agreements obligating themselves not to compete with Hollinger affiliates after leaving the company) in order to take advantage of a Canadian tax ruling that exempted non-competition agreement proceeds from Canadian income tax. Their characterization of the fees was entirely proper under Canadian law, and the government modified the indictment before trial to eliminate any allegation that Canada was a victim of the scheme.
In addition to charging that petitioners stole money from Hollinger that did not belong to them, the government alleged that petitioners deprived Hollinger of its right to their honest services–invoking duties that Delaware law imposes on corporate officers to disclose certain transactions fully and fairly. Under Seventh Circuit law–and contrary to the law in at least five other circuits–the government was able to obtain a conviction under this theory without proving that the defendants contemplated an economic or property harm to Hollinger. In fact, the jury acquitted on the bulk of the fraud counts in the indictment–all of which hinged on the government’s fraud-by-theft theory–but convicted on the three counts where the government also offered proof that the officers had not provided full disclosure to Hollinger about how or why the fees would be re-characterized.
The Supreme Court’s Decision to Review a Section 1346 Prosecution for the First Time
This case will be closely watched because it marks the first time the Court has agreed to address whether or how the honest services fraud theory applies outside the context of alleged misconduct by a public official. In fact, it will be the first time the Court decides any question about the meaning of this twenty-one-year-old statute.
Congress enacted Section 1346 in 1988, one year after the Supreme Court ruled–in McNally v. United States–that the federal mail fraud statute as it then was drafted did not extend to alleged schemes to deprive another of the "intangible right" to "honest services." Section 1346 expanded the definition of a scheme to defraud under the mail and wire fraud statutes to include a scheme to deprive another of the "intangible right of honest services." As Justice Scalia noted earlier this Term in dissenting from denial of certiorari in a case involving public-sector conduct, from its inception Section 1346’s malleability has sparked substantial controversy and "invite[d] abuse by headline-grabbing prosecutors." Sorich v. United States, 129 S.Ct. 1308, 1310 (2009) (Scalia, J., dissenting from denial of certiorari).
For two decades, the government has capitalized on the statute’s vague wording, applying it to all manner of conduct that, while perhaps contrary to state administrative rules or employer ethics codes, does not rise to the level of a federal crime punishable by up to twenty years in prison. The government’s expansive interpretation of Section 1346 arguably renders the statute "nothing more than an invitation for federal courts to develop a common-law crime of unethical conduct." Id. Moreover, many concerns engendered by Section 1346–such as prosecutorial overreaching, federalizing state-law fiduciary duties, and criminalizing otherwise lawful conduct merely because it contravenes corporate governance rules–are most acute in private sector cases such as this one.
Deep fault lines have developed among the circuits on the reach of "honest services fraud." Black’s petition is based on one of the most significant disagreements among the federal courts of appeals: whether Section 1346 applies to persons who, although seeking private gain, do not contemplate causing economic or property harm to those to whom their honest services are owed. At least five circuits require proof that such harm was contemplated. But three, including the Seventh Circuit (where this case was prosecuted), do not. In addressing this sharp split in authority, the Court will also need to grapple with the broader question whether the statute is so vague as to be inapplicable at all to private-sector conduct.
The Black case presents the Court with its first opportunity to replace prosecutorial creativity with coherent, sensible, and long-overdue limits on honest services fraud prosecutions. In the process, the Court will be able to resolve some of the circuit-by-circuit variances that cause certain conduct to be either lawful or punishable by up to twenty years in federal prison depending on the circuit in which the conduct is prosecuted.
Gibson Dunn lawyers Miguel A. Estrada and David Debold prepared the petition for a writ of certiorari, with assistance from Ashley E. Johnson, Robert A. Gomez, Ryan J. Watson, and Scott Stewart. The case will be argued in the Court’s October Term 2009. Gibson Dunn will provide an analysis of the opinion after the Court issues its decision.
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