Here's How to Fix the Honest-Services Fraud Law

U.S. Supreme Court

The U.S. Supreme Court declared the federal honest-services fraud law unconstitutionally vague in late June, and a move already is afoot to reinvent the statute.

Based on early reports, it appears the Justice Department and Congress are taking the wrong approach. Anyone who has followed either of those institutions in recent years should not be surprised by that. But this is an important issue, and the fix on the fraud law needs to be done the right way.

We don't claim to be experts on the crafting of federal statutes. But we have studied the honest-services issue extensively, and we have some ideas on how the law should be worded.

First, we have conflicted feelings about the honest-services law. On the one hand, we are pleased that the Supreme Court's ruling in a case involving former Enron executive Jeffrey Skilling means the defendants in the Don Siegelman and Paul Minor cases have an enhanced chance to get their convictions overturned. Those two cases never should have come down to a technicality on the honest-services law; appellate courts should have overturned the convictions on numerous other grounds. But the Siegelman and Minor defendants could benefit from the high court's finding that the law now applies only in cases involving bribes and kickbacks--and we are all for anything that allows innocent people to go free.

The down side, however, is that the Skilling ruling essentially makes the honest-services law worthless. Other federal law already covers bribes and kickbacks, so the honest-services law--as it stands now--is pretty much unnecessary.

While prosecutors unquestionably used the old honest-services law in an abusive fashion, such a statute is needed. The point of the law is to punish misconduct where there is a non-financial motive--or where a financial motive cannot be proven.

Scott Horton, of Harper's, reports that the Senate Judiciary Committee is considering a revision that would allow the prosecution of "undisclosed self-dealing." That language, Horton points out, is just as vague as the old language.

What to do? Here are a couple of Schnauzer suggestions. We certainly do not present these as any sort of "final word" on the subject. But we think they might be a starting point toward forming an honest-services law that passes the constitutional vagueness test and punishes the kind of non-financial crimes the statute was designed to address:

Our research indicates the honest-services law is needed in at least two key areas:

* Political appointments--This was at the heart of the Siegelman case. The former Alabama governor accepted a contribution to an education-lottery campaign and then appointed the donor (former HealthSouth CEO Richard Scrushy) to a hospital-regulatory board. It's undisputed that the contribution itself was legal. It's also undisputed that Scrushy was qualified to serve on the board; he had served on the same board under three previous governors. Because of that, the public was not actually deprived of Siegelman's honest services, and he and Scrushy did not violate the old law. To understand that, however, you have to dig into the case law. And the Supreme Court has found that the statute itself needs to be clear about what is criminal activity and what is not. So we propose that the new law include language that goes something like this: "An official deprives the public of its intangible right to honest services when he or she appoints individuals to positions for which they clearly are not qualified. A public official who accepts a donation and then appoints the donor to a position has not violated the statute--as long as the appointee has professional credentials that make him/her qualified to hold the position."

* Nondiscretionary Decision-Making--This was at the heart of the Minor case. Three former state judges, who had received campaign support from attorney Paul Minor, were found to have corruptly ruled on cases involving Minor's clients. There was only one problem, however, for the prosecution: All three judges had either recused themselves from the matters involving Minor, or they ruled correctly based on the facts and law in front of them. The public was not deprived of the judges' honest services because they ruled correctly in the cases, meaning Minor did not receive any improper benefit. Our research indicates that honest-services law often can come into play when an official is required to follow certain laws, procedures, rules, and regulations--but does not follow them. So we propose that the new law includes language that goes something like this: "An official deprives the public of its intangible right to honest services when he or she makes nondiscretionary decisions that violate applicable laws, procedures, rules, and regulations. An official who is required to act in a certain way and fails to do so violates the statute." 


This language would be aimed squarely at some of my favorite people--corrupt judges. I have repeatedly witnessed both state and federal judges who ignored black-letter law in order to rule in a way that unlawfully favors certain parties. In the cases I've seen, I don't know if the judges have received bribes or kickbacks--and that might be difficult for prosecutors to prove. But they clearly have violated the old honest-services law, especially when you dig into the case law. A provision such as the one above would make it clear, in the statute, that such dishonest dealings are criminal in nature.

Judges are not the only officials who violate the law in their nondiscretionary decision-making. But they are among the worst offenders. And the new law needs to have the kind of teeth that will make judges think twice before they cheat the parties who come before them.

Consider other kinds of bad actors who need to be subject to a new honest-services fraud law. Imagine a small-town mayor who is having an affair with a woman who owns several pieces of property along the town's main commercial strip. The mayor violates local zoning laws in order to give his paramour variances that allow her businesses a leg up on competitors. The woman has not paid the mayor a bribe or kickback, but she has provided another form of "benefit." The variances allow her to rake in cash, while depriving other businesses of a level playing field. In a broad sense, the public at large is deprived of the mayor's honest services, even though no bribe or kickback is involved.

The town almost certainly receives federal funds in some form, so that makes this a case for U.S. prosecutors. This is the kind of situation the honest-services fraud statute needs to address.

Should our Schnauzer suggestions be the final word on the subject? Of course not. But hopefully, we've provided the beginnings of a road map for a new honest-services law that will be less prone to abuse and more prone to punish the many bad actors who hold positions of trust.