In both Skilling v. United States and Black et al. v. United
States, federal prosecutors had relied upon what was known
as the “honest services fraud” statute, 18 USC 371, to secure
convictions of corporate executives it alleged had engaged
in undisclosed self-dealing. On the books in its current form
since 1988, the statute made it a federal crime “to deprive
another of the intangible right of honest services.” As a New
York Times editorial archly noted, “Intangible was right; al-
most no one knew what the phrase actually meant.”
In Skilling’s case, the government alleged that he and two
other top Enron executives had engaged in a scheme to de-
ceive investors about Enron’s true financial performance by
manipulating its publicly reported financial results and mak-
ing false and misleading statements. Skilling was charged
with over 25 counts of securities fraud, wire fraud, making
false representations to Enron’s auditors, and illegal insider
trading. The first count of the indictment, though, alleged
a conspiracy to commit “honest services” wire fraud. After
a four-month trial, a jury found Skilling guilty of 19 counts,
including the hones services fraud conspiracy charge, and
not guilty of nine insider trading counts.
Black and other executives of Hollinger were indicted for
mail fraud and honest services fraud. At trial, prosecutors
alleged that the defendants had stolen millions of dollars
from Hollinger by paying themselves what the court labeled
“bogus noncompetition fees” in a series of sales of commu-
nity newspapers to third parties. By failing to disclose their
receipt of those fees, the defendants had “deprived Hollinger
of their honest services as managers of the company.”
Over the objections of the defendants’ lawyers, the jury
was instructed that a person commits honest services fraud if
he “misuse[s] his position for private gain for himself and/or
a co-schemer” and “knowingly and intentionally breach[es]
his duty of loyalty.” In a process not employed in Canada,
before jury deliberations began, prosecutors asked the court
to use a special verdict form that would require the jury to
reveal the theory or theories they relied on in the event they
voted to convict on a particular count. The defense objected
to this and after some wrangling, the mail fraud charges were
submitted to the jury for its decision by “general verdict.”
The jury found all of the defendants guilty on three mail
fraud counts and Black himself guilty on one additional
count of obstruction of justice.
Under a rule articulated in the U.S. Supreme Court in
1957, a general verdict may be set aside “where the verdict
is supportable on one ground, but not on another, and it is
impossible to tell which ground the jury selected.” Black’s
lawyers argued that the mail fraud convictions should be re-
versed because the honest services fraud instructions were
invalid; because the jury hadn’t been asked specifically what
theory they had relied upon to convict, it was impossible to
tell whether or not the verdicts had thus been “tainted.”
Both cases thus put the “honest services fraud” statute
squarely in the headlights. There were two problems: the
vague language in the statute, and its use by prosecutors to
go after alleged corporate self-dealing as well as the bribery
of public officials. Skilling’s lawyers argued that the provi-
sion’s “standardless sweep allows policemen, prosecutors
and juries to pursue their personal predilections,” thereby
“facilitat[ing] opportunistic and arbitrary prosecutions.”
While U.S. Supreme Court Justice Scalia and two others
would have struck the whole statute down as unconstitu-
tionally vague, the majority in the Skilling decision construed
it as criminalizing “only schemes to defraud that involve
bribes or kickbacks.”

Paul Paton is a professor and director of the Ethics Across the
Professions Initiative at the University of the Pacific, McGeorge
School of Law in Sacramento, Calif. A Canadian lawyer and
academic, he is a frequent commentator on issues facing in-
house counsel.

About this publication

fullscreen

subscribe

article text for page

< previous story | next story >

add comment | read comments

Share this page with a friend
Save to “My Stuff”
Subscribe to this magazine
Search
Help