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Gary S. Chafetz

Gary S. Chafetz

Posted: June 24, 2010 08:08 PM

SUPREME COURT FINALLY GUTS HONEST-SERVICE FRAUD

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Today, in a unanimous decision, the Supreme Court gutted the honest-services fraud statute --"depriv[ing] another of the intangible right of honest services"--declaring it unconstitutionally vague. The decision severely limits this controversial statute to matters involving bribery and/or "classic" kickbacks. And as a result, tens of thousands of federal prisoners--both former public officials and private citizens--may have to be immediately set free.

This decision, which will have a dramatic effect on corruption cases across the nation, impacts the convictions of former Enron CEO Jeffrey Skilling, former media mogul Conrad Black, former Alabama Gov. Don Siegelman, and former Washington lobbyist Jack Abramoff, as well as the ongoing trial of former Illinois Gov. Rod Blagojevich.

For years, federal prosecutors have aggressively exploited the honest-services fraud statute, charging public officials and private citizens with denying their "honest services" to taxpayers, stockholders, or business clients. In an overwhelming majority of the cases, these white-collar defendants have been pressured into pleading guilty in order to receive a much-reduced sentence in a minimum-security prison camp.

I conducted a thorough investigation of the Abramoff scandal, and wrote a book about it, not to conduct a partisan judgment of his alleged immorality or sleaziness--it so happens I disagree with his politics--but to objectively analyze whether he was guilty of any crimes of such magnitude as to warrant universal and virulent denunciation, not to mention a five-year sentence in federal prison.

What had first caught my attention was the fact that the Abramoff story seemed too good to be true.

What had captured the public's attention--especially its fury--were allegations that Abramoff had defrauded his "unsophisticated and gullible" tribal clients of millions of dollars by accepting secret "kickbacks" from public-relations specialist Michael Scanlon, whom Abramoff had recommended to his tribal clients.

To me, it appeared that this was merely a contract dispute that should have been handled in civil court, not a violation of a vaguely worded and selectively imposed federal statute, punishable by five years in prison, a $250,000 fine, or both.

Justice Ruth Bader Ginsburg, writing for the court, stated that the honest-services fraud statute should criminalize "only schemes to defraud that involve bribes or kickbacks." However, in reading the decision, it seems clear that Abramoff's so-called "kickbacks" were not criminal, but were instead perfectly legal referral fees.

A classic kickback is one in which a state or municipal official awards a contract to a company, which then kicks back a sum of money to that official for awarding the contract to that company. Abramoff did not do that. He simply suggested to his tribal clients that they hire Michael Scanlon, an independent public-relations specialist. Abramoff's tribal clients were free to hire whomever they wanted. The fact that Abramoff received an undisclosed referral fee from Scanlon may seem sleazy, but it is not illegal. Indeed, some might argue that this kind of "sleaziness" is the pillar of capitalism: Never disclose the size of your profit. In other words, never disclose how much you're "ripping off" your clients or your customers.

Undisclosed referral fees are routinely given to lawyers, doctors, and other professionals every day of the week. For example, your real-estate closing attorney does not disclose that he is accepting a "kickback" from the title insurer he has hired to safeguard the home you are purchasing. Your orthopedic surgeon does not disclose that the knee replacement device he is using to repair your painful and arthritic knee is manufactured by a company which pays him substantial consulting fees. Same is true with mortgage brokers who steer you toward the product of a particular mortgage company, from whom he is receiving a secret finder's fee. And let's not even bring up all the hidden and misleading fees imposed on the car buyer that flow back into the pocket of the car dealer. All of these undisclosed "kickbacks" may seem sleazy, but they are perfectly legal referral fees.

In fact, a footnote in the Supreme Court decision addressed this particular concern: "If Congress were to take up the enterprise of criminalizing 'undisclosed self-dealing by a public official or private employee...' it would have to employ standards of sufficient definiteness and specificity to overcome due process concerns." *

In light of today's long-overdue Supreme Court decision, Abramoff's conviction for honest-services fraud should be immediately vacated. Similarly, tens of thousands of other such convictions--especially of private citizens--should be overturned. Some behaviors may seem distasteful, but they are certainly not criminal.

It comes as no surprise that the court essentially overturned the honest-services fraud statute not by a narrow vote, but unanimously.

And it is unconscionable that federal prosecutors have imprisoned tens of thousands of people, ruining their lives and reputations, based on what those prosecutors had to know--or at least strongly suspect--was an unconstitutionally vague statute.

Gary S. Chafetz is the author of The Perfect Villain: John McCain and the Demonization of Lobbyist Jack Abramoff.

* Footnote 45: "If Congress were to take up the enterprise of criminalizing "undisclosed self-dealing by a public official or private employee," Brief for United States 43, it would have to employ standards of sufficient definiteness and specificity to overcome due process concerns. The Government proposes a standard that prohibits the "taking of official action by the employee that furthers his own undisclosed financial interests while purporting to act in the interests of those to whom he owes a fiduciary duty," so long as the employee acts with a specific intent to deceive and the undisclosed conduct could influence the victim to change its behavior. Id., at 43-44. See also id., at 40-41. That formulation, however, leaves many questions unanswered. How direct or significant does the conflicting financial interest have to be? To what extent does the official action have to further that interest in order to amount to fraud? To whom should the disclosure be made and what information should it convey? These questions and others call for particular care in attempting to formulate an adequate criminal prohibition in this context.