The Fraud of Honest-Services Fraud

On June 22, The Boston Globe reported that the now disgraced, former Massachusetts House Speaker Salvatore DiMasi announced that he would challenge the legal and intellectual validity of the controversial and nebulous honest-services fraud statute, for which he had been recently indicted. Windmill tilting notwithstanding, his challenge is both welcomed and justified.

One of the cardinal rules of a grade-school vocabulary test is this: the word that the student must define cannot be used in its definition. However, honest-services fraud -- "a scheme or artifice to deprive another of the intangible right of honest services" -- is a term that no one seems able to define without using "honest-services" in its definition. Which a priori implies that because it cannot be defined, it is unconstitutionally vague.

Making matters murkier and more unreasonable, the law is divided into two categories: public and private honest-services fraud. The public version involves elected or appointed public officials who allegedly have not provided their honest services to their constituents. The second version involves private citizens who have allegedly failed to provide their honest services in their dealings with other citizens. For example, who has not failed to provide his or her honest services as a friend, lover, father, mother, husband, wife, brother, sister, co-worker, boss, or subordinate? Hence, private honest-services is a universal crime, of which every man, woman, and child is guilty. A dispute between a contractor and a homeowner -- ordinarily settled in civil court -- may be a federal felony, private honest-services fraud, punishable by five years in prison, a $250,000 fine, or both.

This raises the additionally thorny issue of selective prosecution. Why is only a microscopic fraction of the guilty population indicted, condemned, and imprisoned for private honest-services fraud?

Essentially, honest-services fraud makes prosecutors omnipotent, because they can charge anybody they want with a federal felony. Prosecutors already have unlimited resources and leverage. More often than not, they threaten a defendant with a lengthy sentence in a maximum-security prison with violent offenders. This terrifies virtually any white-collar defendant into pleading guilty to honest-services fraud, in return for a reduced sentence in a relatively cushy prison camp -- even if the defendant does not necessarily believe that he or she is guilty. This means prosecutors are routinely committing a felony called suborning perjury, in addition to another felony called honest-services fraud.

Even U.S. Supreme Court Justice Antonin Scalia has expressed his concerns. In a recent dissenting opinion, he wrote, "Without some coherent limiting principle to define what 'the intangible right of honest services' is, whence it derives, and how it is violated, this expansive phrase invites abuse by headline-grabbing prosecutors in pursuit of local officials, state legislators, and corporate CEOs who engage in any manner of unappealing or ethically questionable conduct.''

As unappealing as this may sound, even the much maligned, now imprisoned, former Washington lobbyist Jack Abramoff was actually not guilty of anything much at all, except private honest-services fraud. I spent two years secretly and exclusively interviewing Abramoff before and after he went to prison. I also had access to thousands of documents never released to the public. For the first time, he was afforded an opportunity to give his side of the story. As a liberal, I was not inclined to give Abramoff, an arch conservative, much slack. But in the final analysis, the evidence was clear and convincing. He never defrauded his wealthy and sophisticated tribal clients, all of whom ran very lucrative casinos and therefore could hire the best lawyers, accountants, and consultants. His infamous "kickback scheme" with public-relations specialist Michael Scanlon was a perfectly legal undisclosed referral fee, enjoyed daily by mortgage brokers, orthopedic surgeons, and lawyers.* Abramoff did not bribe a single elected or appointed official. There were no "quid pro quos." And the "favors" he obtained for his clients did not corrupt the democratic process or undermine the integrity of America's foreign or domestic policy. These frivolous favors included remarks placed in the Congressional Records Extensions, a publication that virtually no one reads; or his persuading the federal government to sell back to an Indian tribe (a) 8,000 acres of land that it had originally owned, and (b) for which it had applied to the Bureau of Indian Affairs in 1927, upon which no action had ever been taken until Abramoff came along and asked House Majority Leader Tom DeLay to help out his long-suffering client.

Abramoff's capital crimes included common lobbying practices: providing some free sports tickets and meals to and subsidizing a few golf trips for some elected and appointed federal officials. And for these minor offenses, he was terrorized into pleading guilty to private honest-services fraud, for which he is spending nearly six years in prison.

I doubt former Massachusetts House Speaker Salvatore DiMasi will succeed in persuading the courts to throw out his indictment (and almost-certain conviction) for honest-services fraud. But if you ask most defense attorneys and many constitutional law professors across the land, they will tell you that honest-services fraud is the kind of law that Nazi Germany would have enthusiastically embraced.

* If you've ever purchased a house or a condo, your closing attorney urges (if it's an all-cash deal) and the lender requires that you buy something expensive called title insurance, which essentially covers your attorney's liability in case he erred in conducting the title search. But what no one knows is that the title insurance company, whom your attorney has hired, kicks back a large undisclosed referral fee to your attorney. (In a sense, you unwittingly pay your attorney's fee twice.) Although it's all perfectly legal, it would also appear to be a blatant example of private honest-services fraud, for which no closing attorney has ever been charged.

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

Comments

[mosharif]

Part II

Now that I think about it, you and Abramoff sound just like Perez Hilton. He was recently punched in the face for being a mean and vulgar loudmouth. Mr. Hilton is contending that he shouldn't have been punched in the face and that he is completely against violence. How convenient! A man who goes out of his way to make fun of and denigrate others in such a vile and pathetic way has a standing philosophy against physical violence! In effect saying, "I can say whatever I want and you can't hurt me because it's illegal and it's not right."

A person who engages in behavior that is hurtful or harmful to others in either thought, word, or deed, should know that they will HAVE TO SUFFER the consequences for doing so. And you don't always get to choose the way that you are going to suffer.

But, all in all, none of this keeps you, Abramoff, or Perez Hilton from crying foul. It's part of the whole drama I guess.

[mosharif]

Part I

The fees that Scanlon paid Abramoff were not referral fees. You can call them that until the end of time, but it's not the whole truth; which makes it a lie. This whole "referral fee" thing was a very valuable and necessary part of the whole scheme. It was a loophole, a get out of jail free card. Calling it a referral fee doesn't make it a referral fee. That's Abramoff's defense, it's not the truth and HE knows that it isn't the truth. But that doesn't stop him from saying that it is the truth. People can make their mouth's say anything.

Abramoff willingly, willfully, and tenaciously decieved his CLIENTS. He KNOWS that this is the truth. It's no surprise that he is now suffering the consequences to the degree that he is and in the way that he is. He treated many people unfairly, now he is being treated, as you say, unfairly and unjustly.

The "law" doesn't always have the last say on matters like this. Or on any other matter, for that matter. Justice doesn't depend on or need the United States of America in order to work itself out. How is it not perfect, that Mcain, of all people, is the one that is in charge of dishing out a major portion of Abramoff's unjust pain and suffering?

[garychafetz]

[PART II]
Also, at the time the first story broke, I assumed that the reason Sen. John McCain jumped on this story by instantly launching his Senate Indian Affairs Committee investigation was due to his high principles. Like many liberals, I thought McCain wasn't all that bad. I later discovered I was wrong. His 378-page report, published a couple of years later, is one of the most tendentious documents I have ever analyzed. Cagily, he selectively released only 1 % of the documents, mostly Abramoff e-mails, that he had subpoenaed. There was not a single kind word about Abramoff in the entire report. Indians who wanted to testify on his behalf were rebuffed. I later realized there were two reasons that this was such an un-evenhanded document.

First, from the deepest depths of his very being, McCain hated Abramoff, because it was he who had unwittingly funded the notorious "black baby" smear campaign in the 2000 South Carolina Republican primary. (Abramoff told me that after McCain's surprise 19-point victory in the New Hampshire primary on February 2, 2000, he'd gotten a call from Ralph Reed, one of his dearest friends, who was also Bush's Southern Chairman. Reed begged Abramoff to raise money as fast as possible to help stop McCain in the South Carolina primary that would be held 17 days later. Abramoff dutifully raised nearly $3 million from his clients and handed it over to Reed.

[garychafetz]

[PART III]
As everyone knows, what Reed and Karl Rove did with that money was quite despicable. Abramoff claims he had no inkling that a smear campaign would result. Understandably, four years later, McCain was still livid.)

Second, McCain saw an opportunity to neuter his right-wing political enemies in the Republican Party--Abramoff, Reed, Grover Norquist, Tom DeLay, James Dobson, Pat Robertson, etc--who would impede any presidential aspirations McCain still might have had.

Finally, I had always held federal prosecutors in the highest esteem. As an investigative reporter, they had once protected me when a target of a story I was writing threatened my life. But my views, sadly, changed in researching this book. I discovered what so many defense attorneys already knew. Prosecutors exploited derivative crimes--like conspiracy, wire/mail fraud, and honest-services fraud, in which no "real" crimes had been committed--so that they could get easy indictments and then bully white-collar defendants into pleading guilty. (In a Sunday front-page story in November 2007, the New York Times reported that nearly 30% of all convicted rapists and murderers later exonerated by DNA evidence had pleaded guilty.)

[garychafetz]

[PART IV]
After a long letter-writing campaign, in which I finally persuaded Abramoff to meet with me, I found a man who was completely crestfallen. (As a liberal, I had no Republican contacts whatsoever. I don't think I even knew a single Republican. I certainly knew no one he knew.) He believed everything that had been written about him. He was like the battered woman who believes she must deserve the beatings. Why else would the boyfriend/husband keep beating her unless there was something truly wrong with her? And I found it particularly amazing in interviewing his wife, children, and parents that Abramoff had never defended himself to them. They too thought he was guilty.

As I obtained and plowed through all the thousands of documents, many of which had never been released to the public, and as I continued to question Abramoff, I got a clearer picture of what really transpired. Abramoff had been destroyed by Shakespearean forces that produced an astonishing perfect storm: The Washington Post wanted a Pulitzer, John McCain wanted vengeance, and the DoJ, corrupted by its absolute power, wants to put high-profile alleged villains in prison. It was not a pretty story and it certainly would not be a popular one. But I didn't care. These were my honest conclusions. I felt obliged to tell it.

[garychafetz]

[PART V]
I can't talk about whether Abramoff agrees with my conclusions. He had pleaded guilty to whatever the prosecutors had told him to plead guilty to, in return for the promise of a reduced sentence in a prison camp. He has begged the court for mercy and leniency. If he suddenly announced that he had been bullied into pleading guilty, he might be charged with perjury and his sentence might be un-reduced.

What amazes me is that Abramoff was a superb lobbyist, one of the best Indian Country ever had. And yet he was accused of defrauding his tribal clients. In the final analysis,what he won for his clients was a footnote in the story of this country. Why don't federal prosecutors go after the real villainous lobbyists, say, those who protect the tobacco industry. I shudder to think what their lobbyists must be doing to corrupt the American political system so that such lethal and deleterious products continue to be sold in every convenience store and super market in America, especially to our impressionable children. That is what's truly evil.

[mosharif]

Does Abramoff support your version of this story? Is he saying, "Yes Gary, this is exactly how thing are? Just wondering how all of this is working. Are you informing Abramoff as to the truth about things, or is Abramoff and/or somebody else informing you of how things really happened? Or are the both of you coming up with different information and just building as you go along?

"he was terrorized into pleading guilty to private honest-services fraud, for which he is spending nearly six years in prison." -- absolutely brilliant!

What an amazing position you have committed to.

[garychafetz]

It happened to a friend who purchased a condo in New York City. What's more, his attorney told him to pay the title insurance representative a "gratuity" of $150 at the closing.

[Meadow1]

In NY it would be illegal for the attorney to get a referral fee from the title insurance agency.

[Gary S. Chafetz - Huffpost Blogger]

Dear Diana Cipa,

I apologize if I implied that title insurance was honest-services fraud. The honest-services fraud is the failure of the closing attorney to disclose to his client, the home buyer, that he is receiving a referral fee from the title insurance company.

Gary S. Chafetz

[Douglas Miller]

The non-profit I volunteer for has written about the problem with attorneys collecting commissions or secret "kickbacks" as you described. Although the practice is widespread, we don't believe it is legal and we think attorneys need to stop selling title insurance to their clients.

An ethics opinion was done in Minnesota that essentially called the conduct unethical as the disclosures necessary to sell title insurance to clients are almost impossible to achieve. We believe that when an attorney sells title insurance to clients that the attorney creates such severe conflicts of interest that the attorney's purpose in the transaction becomes compromised.

Is the attorney representing the client, the title insurance underwriter or the lender? How can the attorney negotiate the terms of the policy coverage or the price of that policy? How can the attorney advise their clients on purchasing title insurance without engaging in self dealing?

Attorneys who don't sell title insurance also don't have a financial interest in seeing the transaction close. That means they won't have a problem telling you ALL the problems with the transaction. That is of course unless they receive their referrals from Realtors..­. (another story for another day).

Doug Miller
Executive Director
Consumer Advocates in American Real Estate

[Diane Cipa]

Title insurance covers must more than attorney/examiner error. It also covers items that a competent examiner could not find such as liens or conveyances hidden due indexing errors in the courthouse, fraud and municipal authority errors reporting unfiled liens such as taxes owing. I am a proponent of consumer disclosure creating a free market place for title insurance and settlement services which benefits the consumer, however, title insurance is a valuable product and ought not to be labeled as an example of honest-services fraud.