Transcript Slide 1

Honest Services Fraud: A Thin
Line Between Innocent Conduct
and Criminal Conduct
New York
American Inn of
Court
October 28, 2009
At the offices of Willkie
Farr & Gallagher
Theft of honest services applies to
private employees too:
 Plain
language of the “honest services”
doctrine codified in § 1346:
 The use of the mails/wires + employee
dishonesty is a crime.
 U.S. v. Vinyard, 266 F.3d 320 (4th Cir.
2001) (citing U.S. v. Frost, 125 F.3d 246
(6th Cir. 1997)
Limiting § 1346 when applied to
private employees:
 Broad
application could make an
employee criminally liable for any
misstatement or breach of contract with
his or her employer.
 Courts have been hesitant to apply § 1346
this broadly, and have crafted limitations.
Something beyond mere
dishonesty
 Proof
that the employer simply suffered
only the loss of loyalty and fidelity of the
employee is insufficient to convict.
 U.S. v. Sun-Diamond Growers, 138 F.3d
961 (D.C. Cir. 1998)
Two standards:
Use of the mails or wires
Employee dishonesty: misstatements or omissions
Something more:
Reasonably foreseeable harm
Material misstatement or omission
MaterialityTest
 Focus
on the employer’s response
 Would the misstatement or omission
naturally tend to lead or be capable of
leading a reasonable employer to change
its conduct?
 U.S. v. Jain: “When there is not tangible
harm to the victim of a private scheme, it is
hard to discern what intangible ‘rights’
have been violated.”
Reasonably Foreseeable Harm
Test
Focus on employee’s intent
Defendant reasonably should have foreseen that
the breach of duty to his or her employer would
create an identifiable economic risk to the victim.
 U.S. v. Vinyard: the test is met if “the employee
could foresee that the scheme potentially might
be detrimental to the employer’s economic wellbeing.”
 The government need not prove actual harmmerely that employee anticipated or intended
such harm.


Employer’s Incenting
 A private
employee does not commit
honest services fraud where the employer
“intentionally aligns the interests of the
employee with a specific corporate goal
where the employee perceives his pursuit
of that goal as mutually benefiting him and
the employer,” and conducts himself
accordingly. U.S. v. Brown, 459 F.3d 509
United States v. Skilling
in Brown, the 5th circuit in Skilling
affirmed Jeffrey Skilling’s honest services
fraud conviction. Skilling’s employer
incenting argument failed, because no one
senior to Skilling at Enron approved of or
directed his conduct.
 Unlike
Theft of Honest Services

18 USC § § 1341 and 1343 – Mail and wire
fraud statutes:
“Whoever, having devised or intending to devise
any scheme or artifice to defraud…”

18 USC § 1346 – Honest Services fraud:
“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.”
U.S. v. Thompson
(7th Cir. 2007)

A state government employee awarded a
contract to a company that was not initially the
lowest bidder.
 Three months later the employee received a
$1,000 increase in her annual salary.
 The 7th Circuit reversed the conviction finding
that the increase in salary which was approved
through above-board channels was not a
“private gain” that makes an act criminal under
18 USC § 1346.
U.S. v. Kincaid-Chauncey
(9th Cir. 2009)
 County
commissioner was given cash
bribes in exchange for votes on various
ordinances.
 The commissioner did not reveal the
conflict of interest to the commission.
 The court ruled that there can be a
violation of 18 USC § 1346 if there is a
failure to disclose a conflict of interest
even if there is no quid pro quo.
U.S. v. Sorich
(7th Cir. 2008)
 Defendants
worked for the City of Chicago
and arranged for jobs to be given to
“political cronies.”
 The court determined that the “private
gain” does not have to be the wrongdoer’s gain – instead it can be a benefit
given to a third party.
U.S. v. Thompson
(7th Cir. 2007)

A state government employee awarded a
contract to a company that was not initially the
lowest bidder.
 Three months later the employee received a
$1,000 increase in her annual salary.
 The 7th Circuit reversed the conviction finding
that the increase in salary which was approved
through above-board channels was not a
“private gain” that makes an act criminal under
18 USC § 1346.
U.S. v. Weyhrauch
9th Cir. 2008



An Alaska state representative, also a practicing
attorney, was accused of soliciting future legal work
from an oil services company in exchange for voting
a certain way on proposed oil tax legislation.
The defendant argued that because he did not
violate state law – Alaska did not require disclosure
of the potential conflict – the conduct could not form
the basis of a federal violation.
The Court rejected this “state law limiting principle”,
holding that 18 USC § 1346 does not require a state
law violation.
U.S. v. Brumley
5th Cir. 1997



Texas state official who was responsible for handling
workers’ compensation claims received $100K + in
“loans” from local attorneys representing applicants.
The loans were never repaid.
The Court held that a violation of 18 USC § 1346 by
a public official requires that services were owed
under state law and not delivered.
Since the “loans” violated several state laws,
Brumley’s conviction was affirmed.
United States v.
Conrad Black
Black was a publishing magnate.
He controlled Hollinger International, which owned over 400
newspapers in North America. Most of them were small,
community papers but a few were large and well-known, like the
Chicago Sun Times.
I LOVE
buying the
newspaper
Ravelston
Private Canadian company
65% owned by Black
Hollister
Public U.S. company
Chairman/CEO = Black
APC
U.S. subsidiary
One newsweekly in CA
Mammoth Lakes, CA
Population: 7,093
The Conduct
Hollinger's general counsel prepared and
signed on behalf of APC an agreement to
pay Black and others $5.5 million in
exchange for promises not to compete with
APC for three years after leaving Hollinger.
The Defense
•The $5.5 million
represented management
fees owed to Ravelston.
• The fees had been
characterized as
compensation for noncompete agreements in the
hope of avoiding Canadian
income tax.
• The fees were legitimate,
and Hollinger suffered no
economic harm.
Jury Instructions
The jury was permitted to convict of honest services
fraud if it found that defendant:
•“misused his position for private gain for himself and/or
a co-schemer” and
•“knowingly and intentionally breached his duty of
loyalty” under Delaware law
The jury was NOT required to find that there was any
foreseeable harm to Hollinger
Convicted
✗ 3 counts of mail
fraud and wire
fraud
✗ 1 count
obstruction of
justice
will spend 6.5 years in
“On the eve of his incarceration, Black continued to protest his
innocence and said that going to jail is "not the end of the
world".
He claimed: "There's no violence there. I expect it to be
somewhat boring."
On a lighter note, he added: "It's a hell of a way to lose weight
but I'll lose weight.”
He threw a going away party at his
Miami mansion.
The Daily Mail
What did they mean by honest
services?
According to Judge Posner and the 7th Circuit,
“honest services fraud” occurs when corporate
executives misuse their positions for private
gain.
They affirmed Black’s conviction because, by
misappropriating millions for themselves, Black
and his co-defendants "deliberately failed to
render honest services" to the company they
owed their honest services to - Hollinger
International.
Question Presented
Whether 18 U.S.C. § 1346 applies to the conduct
of a private individual whose alleged "scheme to
defraud" did not contemplate economic or other
property harm to the private party to whom honest
services were owed.
In Justice Colton’s chambers ...
His law clerk, Michelle, briefs him on the upcoming
case, US v. Weyhrauch.
United States Court of Appeals
For the Ninth Circuit
____________________________________________
United States of America,
v.
Bruce Weyhrauch.
____________________________________________
Filed November 26, 2008.
In the Alaska House of
Representatives . . .
State Representative Bruce Weyhrauch
In 2006 VECO Corp., an oil field services
company, is particularly interested in
legislation that would alter how Alaska taxed
oil production . . .
Bruce makes some friends in the oil
field . . .
Two VECO execs have a series of
contacts with Bruce regarding the
pending legislation. . .
Bruce is a lawyer . . .
Bruce wants legal work. Suddenly, he has a bright
idea.
He solicits VECO executives via mail, phone, and
in-person.
THE PROBLEM
Veco gives legal work to Bruce Weyhrauch’s firm in
exchange for voting on the oil tax legislation as VECO
instructs.
Bruce Gets Indicted
United States District Court
District of Alaska
September 2007
United States of America,
v.
Bruce Weyhrauch
Defendant.
I N D I C T M E N T
The Grand Jury Charges:
COUNT SEVEN
1. Weyhrauch devised a scheme and
artifice to defraud and deprive the State of
Alaska of its intangibe right to [his] honest
services . . . performed free from deceit,
self-dealing, bias and concealment and
attempting to execute this scheme by
mailing his resume to VECO.
Bruce goes to trial ...
And the District Court lets him off the
hook . . .
 The
District Court finds that the
evidence only related to duties to
disclose a conflict of interest under
state law, and that “state law did not
require Weyhrauch to disclose the
conflict of interest he faced in
discharging his duties while
negotiating for future employment
with a company affected by the
pending legislation.”
 Thus,
“any duty to disclose sufficient to
support the [honest services fraud]
charges here must be a duty imposed
by state law.”
Bruce leaves the courthouse a free
man!
The Government Appeals . . .
The Ninth Circuit hears the State’s
Appeal . . .
“Because Weyhrauch’s conduct falls
comfortably within the two categories
long recognized as the core of honest
services fraud [(1)an undisclosed
conflict of interest and (2) an inference
of a quid pro quo arrangement], we need
not define the outer limits of public
honest services fraud in this case. . . . “
“Accordingly, the government
may proceed on its theory that
Weyhrauch committed honest
services fraud by failing to
disclose a conflict of interest of
by taking official actions with
the expectation that he would
receive future legal work for
doing so. . . .”
Bruce is not happy . . .
Justice Sarafa says: Try Again,
Congress
“Rather than construe the statute in a manner
that leaves its outer boundaries ambiguous and
involves the Federal Government in setting
standards of disclosure and good government for
local and state officials, we read § 1341 as limited
in scope to the protection of property rights. If
Congress desires to go further, it must peak more
clearly than it has.”
McNally v. United States, 483 US 350 (1987)
Justice Sarafa says: Try Again, Congress
Vagueness / Notice Concerns
“If the ‘honest services theory . . . is taken seriously and carried to its
logical conclusion, presumably the statute also renders criminal a state
legislator’s decision to vote for a bill because he expects it will curry
favor with a small minority essential to his reelection . . . . Indeed, it
would seemingly cover a salaried employee’s phoning in sick to go to a
ball game.”
“It is simply not fair to prosecute someone for a crime that has not been
defined until the judicial decision that sends him to jail.”
Federalism Concerns
“Is it the role of Federal Government to define the fiduciary duties that a
town alderman or school board trustee owes to his constituents?”
Justice Scalia, dissenting from denial of cert in Sorich v. United States
50
Justice Perlman supports the statelaw-limiting principle:
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.
Justice Perlman supports the statelaw-limiting principle:
Avoids
creating new federal common
law
Provides fair notice of illegal conduct
Firm boundaries of what are dishonest
acts/violations
Guards against potential selective
enforcement, especially when the
statute is applied to public officials who
engage in partisan political activity
Justice Smith reads in an economic
harm requirement:
The principal question in the Black case is
whether a mail fraud charge based on a
private individual’s alleged scheme to
defraud a private entity of ‘honest services’
can be sustained without a jury finding
that the defendant contemplated some
economic harm to the victim.
Can it? Justice Smith says NO!!
Justice Smith reads in an economic
harm requirement:
Section
1346 states that the term “scheme
or artifice to defraud includes a scheme
or artifice to deprive another of the
intangible right of honest services.”
It has long been recognized that one
essential element of fraud is pecuniary
loss to another.
Thus, it follows that “honest services fraud”
requires some contemplation of economic
harm on the part of the defendant.
Justice Colton is leaning toward holding that
the state-law-limiting requirement and
economic harm requirement are both
unnecessary:
And Justice Colton doesn’t exactly agree
with Justice Sarafa either . . .
The Honest Services Team
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Hon. Richard
Sullivan
Richard Zabel
Steven Tugander
Lani Perlman
Harry Sandick
James Benjamin
Mei Lin Kwan-Gett
Glenn Colton
Michelle Smith
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
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Melinda Sarafa
Justin Sher
Steven Molo
Diana Haladey
Robert Boller
Elizabeth Young
Edward Daniels
Jeff Williams
The Theft of Honest Services
Theory of Mail and Wire Fraud
New York
American Inn of
Court
October 28, 2009
At the offices of Willkie
Farr & Gallagher