â€œHonest servicesâ€ fraud: Round 3
on Feb 26, 2010 at 5:32 pm
At 1 p.m. on Monday, the Supreme Court will hear one hour of oral argument in Skilling v. U.S. (08-1394). Arguing for former Enron executive Jeffrey K. Skilling will be Sri Srinivasan of Oâ€™Melveny & Myers in Washington. Representing the United States will be Deputy Solicitor General Michael R. Dreeben. Documents filed in the case are available on this page at ScotusWiki.
For the third time this Term, the Supreme Court will examine the scope of the controversial 1988 law that makes it a crime to commit fraud that deprives someone, such as oneâ€™s company, of â€œthe intangible right of honest services.â€ It does so in the leading criminal case growing out of the Enron business scandal. This time, however, the Court may confront the constitutionality of that law, since the new case involves a claim that the law is so broadly worded that no one can know what it outlaws, thus making it unconstitutionally vague. The case has an added dimension: the Court is asked to spell out how trial judges should deal with massive negative publicity that surrounds a criminal case.
In October 2001, the giant energy company, Enron Corp. â€” the nationâ€™s seventh largest business firm â€” suddenly collapsed and soon was in bankruptcy, wiping out workersâ€™ jobs and retireesâ€™ savings, and devastating the entire local economy in Houston. After the companyâ€™s fall, the economic and personal disaster was often compared locally to the devastation of the Sept. 11, 2001, terrorist attacks on the U.S. The scandal mushroomed, and President George W. Bush named a special task force to track down any criminality. Three years after the fall, a major show trial started, after a wave of fevered calls for revenge for what had been done to Houston, and after other prosecutions for Enron-related crimes had raised expectations over what was called the â€œmain event.â€ The flow of negative news stories dogged that trial. Now, nearly six years later, in the quiet, decorous chamber of the Supreme Court, the Justices take their first full-scale look at that trial, its outcome, and the publicity.
The appeal the Justices will hear focuses on Jeffrey K. Skilling, a longtime executive of Enron who resigned as CEO shortly before the scandal broke into public view. Skilling is now in prison, initially sentenced to 24 years and four months and ordered to pay $45 million in restitution. Although his sentence is scheduled to be reviewed anew in lower courts, that review would not directly affect his conviction. His appeal, though, seeks an entirely new trial, to be held somewhere other than Houston.
On May 25, 2006, after the four-month trial, Skilling was convicted of one count of conspiracy to commit securities fraud and wire fraud (the “honest services” charge is keyed to that count), 12 counts of securities fraud, five counts of making false statements to accountants, and one count of insider trading. The jury found him not guilty of nine counts of insider trading in Enron stock. His conviction was upheld by the Fifth Circuit Court, but that Court ordered a new sentencing because of a flaw in calculating the sentence due under federal Sentencing Guidelines.
Prosecutors charged that Skilling was at the center of an elaborate plot to deceive investors about the state of Enronâ€™s fiscal health. The plot allegedly included over-statement of the companyâ€™s financial condition for more than two years in an attempt to keep the companyâ€™s stock price high and rising. (Convicted along with Skilling was his predecessor as CEO, Kenneth Lay, who died before he could be sentenced. Others in the case have pleaded guilty.)
Skillingâ€™s challenge to his trial in Houston and to his conviction and sentence wound through lower courts for more than two years, then reached the Supreme Court in May of last year. It arrived on the Courtâ€™s docket just shortly before the Court on May 18 agreed to hear two other cases testing the federal â€œhonest servicesâ€ fraud law. Those cases are Black v. U.S. (08-876) and Weyhrauch v. U.S. (08-1196), both heard by the Justices on Dec. 8 and now awaiting decisions. Neither involves a direct constitutional challenge to that law. The Black case tests whether that law applies to a private individual whose alleged fraud did not result in any economic harm to his company. The Weyhrauch case tests whether the law applies to a state official if that official did not violate any state law.
Petition for Certiorari
Much of Skillingâ€™s challenge deals with his claim that he could not possibly have gotten a fair trial in Houston amid what his lawyers call the â€œdevastating impactâ€ of the scandal on the entire city and region, and the resulting â€œvitriolicâ€ and â€œblisteringâ€ publicity about the accused executives. His attorneys claimed in the petition that â€œthe community passionâ€ stirred up by the case â€œwas as dramatic as any in U.S. criminal trial history.â€
But, among those who specialize in criminal law, the case has a higher profile because of its broad challenge to the constitutionality of the federal law that criminalizes any form of fraud, if the misconduct deprived another of â€œthe intangible right of honest services.â€ That law, enacted by Congress 22 years ago to overturn a Supreme Court decision (McNally v. U.S., 1987), is a favorite tool of federal prosecutors, especially in public and private corruption cases. Its undefined language has led to countless efforts by federal judges to give it some particular meaning in order to save its constitutionality. Skillingâ€™s appeal assailed that effort, arguing that the resulting array of lower-court rulings â€œis a hodgepodge of oft-conflicting holdings, statements, and dictaâ€ that â€œonly the most discriminating lawyer or judgeâ€ could understand.
In Skillingâ€™s case, the â€œhonest servicesâ€ fraud law was invoked by prosecutors to bolster their overall charge of a conspiracy to commit securities and wire fraud. One aim of his wire fraud, prosecutors said, was to deprive Enron of his â€œhonest services.â€ They had other theories for the conspiracy count; those are at most implicitly at issue. The focus of Skillingâ€™s petition, on this point, was that the â€œhonest servicesâ€ theory cannot be applied to an individual who did not make any private gain; his lawyers contended that his only purpose was to benefit Enron, by boosting the value of its stock. If the law does not exclude those who had not pursued personal gain, then it should be struck down as too vague, the petition argued. The Court should clear up lower-court confusion on the gain issue, the petition asserted, since three appeals courts allow the law to be applied even when there was no such gain, while two others do not.
The petition raised the constitutional argument in a somewhat subtle way. While implying that excluding from the law cases that do not involve private gain might save the law from being struck down, it suggested that â€œeven that limitation may not suffice to save the statute from unconstitutional vagueness.â€ The implication, of course, was that the Court would have to strain to uphold the statute whether or not it narrowed it as Skilling had suggested.
The â€œhonest servicesâ€ issue was the petitionâ€™s first question. In its second, Skilling asked the Court to rule that, if negative publicity about a criminal case is so widespread and inflammatory that it creates â€œa presumptionâ€ that no jury could be fair, then the conviction must be overturned and a new trial automatically ordered. The problem cannot be cured, it argued, by questioning potential jurors to see if they can show that they would be fair and impartial. If juror questioning might be a remedy for such an indication of prejudice, the petition argued, the Court should rule that it actually is a remedy only if prosecutors prove â€œbeyond a reasonable doubtâ€ that no juror was actually prejudiced.
The Justice Department, in response, urged the Justices to bypass Skillingâ€™s case or, at most, to hold it for action until after it decided the Black case on the scope of the â€œhonest servicesâ€ law. The governmentâ€™s first argument against review was that, since the Fifth Circuit had ordered a new sentencing, the case was not really final at this stage and thus the Court should not get involved. Moreover, it noted that Skillingâ€™s lawyers were intending to file a new motion for a new trial.
In seeking to counter his challenge regarding the absence of any proof of â€œprivate gain,â€ the Department said that the prosecutorâ€™s claim of denying â€œhonest servicesâ€ to Enron was only one of three theories used to support the fraud conspiracy count against Skilling. Thus, it contended, the jury verdict on that count would have been the same even without that theory. On Skillingâ€™s prejudical publicity claim, the government said that his would not be a good case to use to review what must be done if publicity has created â€œa presumption of jury prejudiceâ€ since that presumption was unwarranted in this case. Such a presumption exists, it argued, only in an extreme situation, and this case does not meet that standard. Although the Fifth Circuit had found such a presumption to exist (but allowed it to be overcome during juror question), the government contended that any such presumption was overcome in this case by questioning jurors to check for prejudice. A finding of a presumption of juror bias can be cured without resorting to automatic reversal and a new trial, it concluded.
Skillingâ€™s brief on the merits represented some new strategic calculations by his attorneys. They put their initial emphasis on the prejudicial publicity issue, thus giving it more prominence â€” perhaps reflecting the fact that, if this succeeded, it could overturn all of the conviction, not just the conspiracy count keyed to â€œhonest servicesâ€ (although the brief does contend that the problem with the â€œhonest servicesâ€ charge infected the entire verdict.)Â Just as significantly, the brief makes an unmistakable constitutional attack on the â€œhonest servicesâ€ law, contending that it simply cannot be saved no matter how it might be narrowed, because that would not be a legitimate judicial effort.
The challenge to the publicity surrounding the case begins at the top of the brief: â€œSkillingâ€™s trial never should have proceeded in Houston.â€ Once it was allowed to go forward there, his lawyers argued, a conviction was assured. Houston, they contended, was â€œrife with the anger and pain engendered by Enronâ€™s collapse,â€ and â€œthere was no legitimate justificationâ€ for not transferring the case to a place â€œwhere jurors could be presumed impartial, instead of the opposite.â€
Once defense lawyers had demonstrated the effect of the Enron collapse and the ensuing publicity on the trial, the brief asserted, there was no way to cure it by asking jurors to confess to their bias â€” something they could not be expected to do. In fact, the juror questioning that did occur came during a â€œtruncatedâ€ five-hour session, â€œwith no individual questioningâ€ of jurors, according to the brief; that process, it added, â€œdid almost nothing to weed out prejudices exposedâ€ on the questionnaires the jurors had filled out before being questioned.
Moving on to the â€œhonest servicesâ€ issue, the Skilling brief said that, if the negative publicity was not enough to assure a conviction, then the prosecutorsâ€™ use of a vague statute cemented their prospect of guilty verdicts for the top Enron brass. That led into the frontal challenge to the lawâ€™s constitutionality, citing again the â€œmorass of conflict and confusionâ€ about the lawâ€™s meaning. It noted that, while the McNally case had sought to force Congress to clarify the â€œhonest servicesâ€ concept, Congress did not do so. The brief then made a sharp new thrust: â€œIt is beyond the judicial function to identifyâ€¦the crime that Congress failed to define.â€
As a fallback, the brief suggested that, if the Justices â€œwere inclined to complete Congressâ€™s work,â€ they should limit the â€œhonest servicesâ€ law to bribes and kickbacks. Going further, the brief said that the Court, if inclined to read the statute as encompassing anything beyond bribes and kickbacks, should not include the kind of conduct in which Skilling was accused of engaging: â€œpursuing his normal compensation schemeâ€ without harm to Enron. Only in the briefâ€™s concluding point did it suggest that the Court should put outside the lawâ€™s scope any conduct that did not involve direct personal gain at the companyâ€™s expense.
The Justice Departmentâ€™s brief on the merits accepted the Skilling challenge of putting the prejudicial publicity issue first, and sought to refute it by contending that it is the defense counselâ€™s task to show juror bias, not the prosecutorsâ€™ to refute it. An accused individual, it argued, â€œis not deprived of a constitutional right unless he can show that a selected juror was biased”Â In the Skilling case, it insisted, the questioning of jurors about the effect of the publicity was not inadequate; rather, it argued, the trial judge did a â€œmeticulous and carefulâ€ job that, in fact, â€œproduced an unbiased jury.â€ The government relied upon the Courtâ€™s 1991 decision in Muâ€™min v. Virginia for the proposition that â€œa trial judgeâ€™s vigilance in voir dire is fully capable of ferreting out bias and that the judgeâ€™s decisions to seat a juror are entitled to deference on appeal.â€
Moreover, the Departmentâ€™s brief argued that the Court has repeatedly shown that it regards the remedy of automatic reversal of a conviction because of trial error as being available â€œonly in a very limited class of cases.â€
On Skillingâ€™s description of the impact of Enronâ€™s collapse on the Houston area, the government brief contended that the Constitution does not guarantee â€œa trial in a venue whose populace has no exposure to the effects of the defendantâ€™s crime or adverse pretrial publicity about it.â€
Turning to the constitutionality of the â€œhonest servicesâ€ law, the government repeated arguments that it has made in the other cases this Term involving that law â€” that is, that the body of lower court rulings that has built up over the years points in a clear direction. What those precedents mean, it asserted, is that the statute is violated if there is â€œa breach of the duty of loyalty, intent to deceive, and materiality.â€ The prosecution of Skilling, it said, satisfied all three. On the â€œpersonal gainâ€ question, the government brief said that Skilliing, even though pursuing his own compensation interests, actually was seeking personal gain. By seeking to inflate the price of Enron stock, it contended, Skilling actually was seeking â€œadditional personal benefits at the expense of stockholders.â€
Among amici briefs, Skillingâ€™s constitutional assault on the â€œhonest servicesâ€ law drew strenuous support from the U.S. Chamber of Commerce, the National Association of Criminal Defense Lawyers, and Texas defense counsel, and by two right-of-center legal advocacy groups â€” the Pacific Legal Foundation and the Cato Institute. Those two groups made a special effort to try to persuade the Court to treat the accused in complex business cases to the same protection from vague criminal laws that ordinary criminals get. The NACDL brief also sought to reinforce the Skilling challenge on the prejudicial publicity point, arguing both that jury questioning cannot cure a demonstration of likely community bias, and that the attempt to do so in this case was seriously inadequate. The governmentâ€™s challenge to the Skilling demand for automatic reversal due to a â€œpresumptionâ€ of prejudice from publicity gained the support of a host of media organizations, arguing that putting such a presumption beyond possible rebuttal would â€œcreate a significant new incentive to restrict press coverage of the most intensely followed prosecutions and thwart the value of openness.â€
It is already clear that there is, among some members of the Court (most notably, Justice Antonin Scalia), a deep skepticism about the constitutionality of the â€œhonest servicesâ€ law. The decision by Skillingâ€™s lawyers to harden their challenge to it in their merits brief, and the support that challenge gets from amici, very likely increase the chances that the Court will be prepared to rule directly on the lawâ€™s validity. The fact that Congress has made no effort to clarify the lawâ€™s scope, in the face of a widely varying array of interpretations by lower courts, may make the Court reluctant to re-craft the law itself.Â The Court has seen, in the three cases this Term testing the lawâ€™s reach, how difficult it seems to be to know what it actually covers.
There was another small hint to suggest that the Court, in fact, is quite interested in the constitutional question. Three days after the Skilling merits brief was filed, with its direct complaint about the lawâ€™s validity, the Court moved the Skilling case ahead on its docket, to give the Court an earlier chance to hear lawyersâ€™ argument on it. No one outside the Court knows why it advanced the case, but the Justices clearly were keen on getting to it.
One potential point of hesitancy, however, would be the Courtâ€™s sometime devotion to the notion that constitutional judgments should be avoided unless clearly necessary. Skillingâ€™s lawyers have given the Court a series of alternative approaches that could save the law by narrowing it. Those are ready at hand, if the Court should find it difficult to reach five votes to nullify the law outright.
The dispute in Skilling about how to deal with pervasive negative publicity before and during a criminal trial is more difficult to analyze. His lawyers have painted a vivid portrait of the virulence of the publicity surrounding the Enron trial and just as vivid a picture of the personal and economic wreckage that the scandal-driven Enron collapse did to the Houston area. Those are portrayals that the media organizations, as amici, have not been fully successful in neutralizing. But, even if the Court were moved by the recollection of the wreckage, it is by no means clear that it would be prepared to opt for automatic reversal of convictions and a new trial as the sole available remedy. Perhaps the Court might mandate a more thorough juror questioning process than was done in the Enron case, however.
The media organizations, in the most significant point in their brief, noted that the Supreme Court has not found a case of presumed prejudice by publicity about a criminal trial since the â€œwatershed case of Sheppard v. Maxwell,â€ and that was 44 years ago. (Actually, according to the Justice Department merits brief, the last instance was somewhat further in the past than that: the case of Rideau v. Louisiana in 1963, 47 years ago.)