Mail Fraud - Intangible Rights -- Honest Services

Skilling v. United States, 130 S.Ct. 2896 (2010)

Reviewing the conviction of the CEO of Enron, the Supreme Court concludes that the honest services fraud component of the mail fraud statue, 18 U.S.C. § 1346, is constitutional, but only if it is limited to situations in which the defendant accepts a bribe or a kickback in connection with his work either in the private context (i.e., without the consent of his employer) or as a public official. Under this construction of the statute, Skilling’s conviction for honest services fraud was reversed. See also Black v. United States, 130 S. Ct. 2963 (2010) and United States v. Weyhrauch, 130 S.Ct. 2971 (2010).

United States v. Hawkins, 777 F.3d 880 (7th Cir. 2015)

Though 18 U.S.C. § 666 covers both bribes and gratuities, in order to violate § 1346, the payment must amount to a bribe, not a gratuity. There must be a quid pro quo, not a mere “reward” in order to violate the honest services fraud provision.

United States v. Sadler, 750 F.3d 585 (6th Cir. 2014)

The operator of a pill mill lied to a pharmaceutical supplier about who was to receive the drugs. Nevertheless, the operator paid full price. This does not constitute wire fraud and will not support a conviction under 18 U.S.C. § 1343 or § 1346. The seller’s right to “accurate information” is not an intangible right that is cognizable under the honest services fraud provision.

United States v. Avery, 719 F.3d 1080 (9th Cir. 2013)

The factual basis of defendant’s plea demonstrated that the defendant’s plea was based on a theory of honest services fraud that did no survive Skilling. The factual basis established that the defendant violated his fiduciary duty to a trust by spending money on speculative investments that benefitted him.

United States v. Garrido, 713 F.3d 985 (9th Cir. 2013)

The defendants’ honest services mail fraud convictions, predicated on a “failure to disclose a conflict of interest” theory, were reversed.

United States v. Ring, 706 F.3d 460 (D. C. Cir. 2013)

The D.C. Circuit provides a thorough post-Skilling review of the honest services mail fraud theory and the law of gratuities in the context of a lobbyist providing gifts to federal officials.

United States v. Jiminez, 705 F.3d 1305 (11th Cir. 2013)

18 U.S.C. § 666 is often applied to employees of an entity that receives federal funds and who accepts money (either a bribe or a gratuity) to benefit the payor. The statute also applies,however, to agents of an entity that receives federal funds who misapplies money of the entity. In this case, the defendant encouraged his employer to purchase books that, unbeknownst to his employer, were actually written by the defendant’s wife. The defendant failed to reveal his conflict of interest. The Eleventh Circuit held that this was neither an honest service fraud offense, or a § 666 violation. Skilling foreclosed the theory that a conflict of interest could be the basis for an honest services fraud prosecution. The § 666 offense was invalid, because the defendant was not the person responsible for spending the funds of the agency.

United States v. Milovanovic, 678 F.3d 713 (9th Cir. 2012) (en banc)

In this post-Skillingen banc decision, the Ninth Circuit reinstates an indictment against a company that contracted with the State to provide driving tests to commercial drivers, but which accepted bribes. The court held that a fiduciary duty is required, but not necessarily a formal fiduciary duty (a trust relationship is sufficient). The court also held that foreseeable economic harm is not a necessary ingredient of honest services mail fraud – at least not in a public honest services fraud case – though materiality is an essential element.

United States v. Hornsby, 666 F.3d 296 (4th Cir. 2012)

Honest services fraud counts were invalid in light of Skilling.

United States v. Wright, 665 F.3d 560 (3rd Cir. 2012)

The jury was instructed on different theories under which the defendant could be convicted of honest services mail fraud, including bribery and conflict of interest. The latter, post-Skilling was invalid. Not only were the honest services mail fraud counts reversed, but the traditional mail fraud counts were also reversed because of the prejudicial spillover effect caused by the admission of evidence relating to the honest services counts that would not have been admitted in a traditional mail fraud trial.

United States v. Siegelman, 640 F.3d 1159 (11th Cir. 2011)

Certain counts of the Siegelman / Scrushy prosecution did not survive Skilling and were reversed on remand from the U.S. Supreme Court.

United States v. Riley, 621 F.3d 312 (3rd Cir. 2010)

The defendants’ honest services fraud convictions were not based on either a kickback, or bribe theory and for that reason, under plain error review, the convictions could not be sustained post-Skilling. One defendant was the mayor of Newark and the other co-defendant was apparently his intimidate friend. City business was sent her way and the honest services fraud prosecution was based on this misconduct which did not amount to either a kickback or a bribe.

United States v. Kincaid-Chauncey, 556 F.3d 923 (9th Cir. 2009)

The Ninth Circuit affirms the defendant’s Hobbs Act and Honest Services Mail Fraud convictions, concluding that the court properly explained to the jury that the government was required to prove that there was a quid pro quo arrangement between the unlawful payment and an official act, even though the words “quid pro quo” were not used. The court noted that the quid quo pro requirement must be proven in the Hobbs Act context whether the payment is made in the context of a campaign contribution, or not. In the context of an Honest Services MailFraud prosecution of a public official, a specific quid pro quo is not required if the theory is an undisclosed conflict of interest, but a quid quo pro, at least an implicit quid pro quo, is required in an honest service “bribe” case. Though not necessarily requiring a definite and identifiable quid pro quo as required by McCormick and it s progeny, the minimum proof that is required is similar to what is required in a gratuity case (18 U.S.C. § 201(c)), as explained in United States v. Sun-Diamond Growers of Cal., 526 U.S. 398 (1999) (mere payments to public official that are designed to build a reservoir of goodwill are not sufficient to prove a gratuity violation). Portions of this case did not survive the decision in Skilling and Weyhrauch.

United States v. Sorich, 523 F.3d 702 (7th Cir. 2008)

The Seventh Circuit re-affirms that “private gain” is a prerequisite for an honest services fraud prosecution. However, accommodating the various decisions from other Circuits that questioned the Seventh Circuit’s position, the court notes that “private gain” does not necessarily have to inure to the benefit of the defendant. This case contains a useful Circuit-by-Circuit review of the caselaw in the area of honest services fraud.

United States v. Howard, 517 F.3d 731 (5th Cir. 2008)

The trial court properly vacated one count of the defendant’s conviction, because the jury may have relied on an improper theory of guilt; that is, a theory that the Fifth Circuit rejected in United States v. Brown, 459 F.3d 509 (5th Cir. 2006) relating to honest services fraud of an employee.

United States v. Urciuoli, 513 F.3d 290 (1st Cir. 2008)

In this honest services fraud prosecution, the defendants were two hospital administrators who hired a legislator to provide “consulting” services. The evidence relating to what the legislator did in connection with the hospitals was to urge local municipalities to comply with the law regarding where ambulances should take patients; and urging health insurance companies to settle disputed claims with the hospitals. Because urging the municipalities to comply with the law was not improper and did not involve work on pending legislation, this could not be the basis of an honest services fraud prosecution. Pressuring insurance companies was an activity that could be prosecuted as honest services fraud. However, because the jury’s verdict could have relied on the improper theory, the conviction was reversed.

United States v. Thompson, 484 F.3d 877 (7th Cir. 2007)

An honest services fraud prosecution may not be predicated on proof that the defendant made decisions about awarding contracts for state work based on the contractor’s political affiliation or alliance with the political party in power. The court reversed not only the § 1346 honest services conviction, but also the § 666 bribery/gratuity/misapplication conviction. The defendant did not “misapply” the money by making a procurement decision based in part on political considerations, even if her decision was not completely in accordance with state procurement rules. With regard to the honest services conviction, even though the defendant received a raise, based in part on her work on this contract, this did not convert her state regulatory violation into a federal mail fraud offense.

United States v. Turner, 465 F.3d 667 (6th Cir. 2006)

A candidate for public office does not violate § 1346 (honest services mail fraud) by buying votes and engaging in illicit campaign contribution schemes. The Sixth Circuit held that this conduct does not violate the honest services provision because a candidate (unlike an officeholder) does not have a fiduciary duty to the public. Additionally, a candidate does not provide a “service” to the public.

United States v. Brown, 459 F.3d 509 (5th Cir. 2006)

The Fifth Circuit reversed the honest services fraud conviction of certain Enron employees. The employees engaged in a scheme to overstate corporate earnings and received a bonus for their efforts. The conduct benefited Enron and the employees. The Fifth Circuit held that although the conduct was illegal, it did not violate the defendants’ honest services obligation to their employer in a manner that is covered by § 1346. Unlike most private honest services fraud cases, this case did not involve any self-dealing, or the receipt of kickbacks from a customer. The court wrote, “Where an employee intentionally aligns the interests of the employee with a specified corporate goal, where the employee perceives his pursuit of that goal as mutually benefiting him and his employer, and where the employee’s conduct is consistent with that perception of the mutual interest, such conduct is beyond the reach of the honestservices theory of fraud as it has hitherto been applied.” 459 F.3d at 522.

United States v. Murphy, 323 F.3d 102 (3rd Cir. 2003)

The defendant was a political party official, but was not a public official. He took bribes and steered business in the direction of the bribe-payer. However, he owed no duty of honest service to the public and could not be prosecuted, therefore, under § 1346.

United States v. Handakas, 286 F.3d 92 (2d Cir. 2002)

18 U.S.C. § 1346 is unconstitutionally void for vagueness as applied in this case in which the defendant was charged with mail fraud in connection with his breach of a nonfiduciary obligation under a contract with a state governmental entity. The defendant submitted false reports regarding the wages he was paying workers on state construction sites. The state was not deprived of property or money, so the government pursued the defendant on an intangible rights / honest services theory under § 1346. The Second Circuit held that applying the statutes to this conduct violated due process, because the statute does not sufficiently identify the prohibited conduct. The court reasoned that under the state’s theory, filing a false state tax return would amount to federal mail fraud. Even the breach of a contract “in the vicinity of a telephone” would suddenly amount to a federal felony. In a subsequent decision, the Handakas decision was overruled. United States v. Rybicki, 354 F.3d 124 (2d Cir. 2003) (en banc). The Rybicki en banc decision held the conduct of the defendant in Handakas did not amount to a violation of § 1346, because he was not an employee of a private entity purporting to act for and in the interest of his employer and he was not rendering services in which the relationship between him and the person to whom the service was rendered gave rise to a duty of loyalty comparable to that owed by employees to employers. Thus, the defendant in Handakas, according to the Rybicki court was not guilty of a § 1346 offense and the court should never have reached the constitutional issue. This decision, of course, pre-dates Skilling.

United States v. Rybicki, 287 F.3d 257 (2d Cir. 2002)

The defendants – personal injury lawyers – paid insurance adjustors to settle their claims quickly. However, the settlement amounts were reasonable. The Second Circuit considered whether this qualified as honest services fraud. Every breach of fiduciary duty does not rise to the level of § 1346 mail fraud. In addition, there must be proof that there is some kind of foreseeable economic harm that results from the conduct. Additionally, the harm must be more than de minimis. In this case, the original panel opinion concluded that the evidence was sufficient, because the quick settlement deprived the insurance company of the money that would have remained in the insurance company due to typical delays in settling a case. Also, the adjustors presumably offered more money to succeed in quickly settling the case. Finally, the jury could have concluded that the plaintiffs would have accepted a lower settlement that did not include the kickback to the adjustor. The en banc court affirmed. 354 F.3d 124 (2d Cir. 2003) (en banc). The en banc decision contains an extensive review of the history of the intangible rights / honest services theory of mail fraud and sets forth certain limitations of that section. Finally, the en banc opinion reversed the panel opinion’s conclusion that there must be proof of a foreseeable economic harm. Instead, the en banc opinion held that there must be proof that the misrepresentation (or omission) has the natural tendency to influence or is capable of influencing the employer to change his behavior. This decision pre-dates Skilling.

United States v. Bloom, 149 F.3d 649 (7th Cir. 1998)

The defendant, a lawyer, was also a City Alderman for Chicago. Advice that he gave to a client operated to the financial detriment of the City. The Seventh Circuit upheld the lower court’s dismissal of this aspect of the mail fraud indictment. Not every breach of a fiduciary duty works a criminal fraud. In the intangible rights context, there must be a showing that the defendant’s conduct of depriving his employer of his honest services was part of a scheme to secure some type of private gain. This decision, like so many others, needs to be re-examined in light of Skilling.