The Supreme Courthanded down a setback to the government’s convictions of Enron's Jeffrey Skilling and former media mogul Conrad Black, dealing a blow to prosecutors who have popularized the use of a statute since 2000 for corporate fraud cases that is normally used in public corruption cases.
And the high court's ruling could affect dozens of other cases involving executives who purportedly engaged in accounting frauds and were charged with the same statute that Skilling was charged with.
“Many of these defendants were former executives of companies that were the subjects of well-publicized frauds, including Enron, Adelphia, Rite Aid, AOL, and Qwest,” says Notre Dame legal expert Lisa L. Casey. “In addition to Conrad Black and Jeff Skilling, the defendants included other now well-known executives: Enron's Andrew Fastow and Richard Causey, Adelphia's John Rigas.”
MaryJeannette Dee, a white collar criminal defense attorney and a partner at Richards Kibbe & Orbe in New York, concurs. "Many pending prosecutions and appeals will be affected," Dee says.
In returning the case to the lower courts, the Supreme Courtruled that prosecutors overreached when they said Skilling violated the “honest services” statute, which essentially says that Skilling deprived his company, Enron, of the "intangible right” of his “honest services.”
The statute, which dates back to 1988, is typically used in public corruption cases involving kickbacks or bribery. In writing for the majority, Supreme CourtJustice Ruth Bader Ginsburgessentially said the law specifically covered those two crimes, which Skilling didn't commit. In Skilling's case, Solicitor General Elena Kagan, now a Supreme Courtnominee, had argued that the law was properly applied, and that Skilling would have been convicted without it.
But Skilling’s defense team had argued whether the law requires proof of personal gain, since there essentially was no proof he actually stole money from the company, that instead he lied in the economic interests of the company, and that the prosecution didn't prove Skilling personally benefited from his alleged fraudulent act. Yes, thunderous hairsplitting here.
About a month after quitting Enron in 2001, Skilling sold almost $60 million worth of stock—overall for that year, Skilling walked away with an estimated $132 million in compensation. Enron later collapsed after it was revealed Skilling, Enron executive Andrew Fastow and others had committed a massive accounting fraud involving fake bookkeeping and off-balance sheet vehicles used to propel profits higher.
Enron at its peak had a $60 billion market capand more than $110 billion in revenues, most of which was proved later to have been concocted out of thin air. Skilling’s top lawyer, Daniel Petrocelli, has garnered kudos for having won the civil case against O.J. Simpson on behalf of his client, Fred Goldberg, father of murder victim Ronald Goldman.
Another famous case, the Enron-Merrill Lynch Nigeria Barge case, also saw the use of the "honest services" statute overturned, says Fox News analyst James Farrell.
In the Nigerian Barge case, (United States v. Brown, 459 F.3d 509, 5th Cir. 2006), the Fifth Circuit reversed convictions of former Enron and Merrill Lynchexecutives who allegedly participated in a sham transaction designed to create artificial revenues to help Enron meet its earnings goals, Farrell says.
Although no bribery or kickbacks were involved, the prosecutors charged that the defendants breached their fiduciary duties to disclose that the deal was not a "true sale." The court held that the defendants were acting in Enron’s economic interests, and therefore did not deprive Enron of their "honest services."
Justice Antonin Scalia had criticized the use of the “honest services” law saying it "invites abuse by headline-grabbing prosecutors in pursuit of local officials, state legislators and corporate CEOswho engage in any manner of unappealing or ethically questionable conduct."
In the case of Lord Black, the former chairman of Hollinger International as well as a cohort of executives were charged with embezzling millions of dollars to support a sumptuous lifestyle. Black's counsel had argued that he could have been convicted under the "honest services" fraud statute even if he did not steal a dime.
Dee at Richards Kibbe & Orbe says: "One of the reasons the statute has been attractive to prosecutors is that it has been interpreted not to require any direct monetary benefit, such as a bribe or kickback, to the defendant. Thus it is likely that for many cases on appeal, there is no monetary harm at all, much less a bribe or kickback." Dee adds: "The Court has squarely rejected this use of the statute. Accordingly, many cases are likely to be overturned," as the statute "lacked clear parameters--hence its popularity with prosecutors."
How comprehensive is the federal government's use of the "honest services" wire fraud charges?
The Justice Dept. does not maintain statistics on charges based on this particular theory of wire / mail fraud, but Notre Dame law professor Casey says that, "federal prosecutors charged at least 113 corporate officers, directors, and other senior corporate officers with violating § 1346. Among the indicted were at least 25 chief executiveofficers, about a third of whom served as chairmen of the board."
Casey adds: "Also charged were at least six non-chair directors, five presidents, four chief operating officers, 15 chief financial officers, and 26 vice-presidents and executive vice presidents."
And the legal expert notes: "Also convicted of honest services fraud were many professionals who advised top management, such as attorneys and investmentbankers."
Fox News' Farrell says: "Where have some courts tried to draw a dividing line? Where the employee clearly acted contrary to the company's economic interests, courts generally permit private sector honest services convictions."