Two Courts Decline to Limit the Reach of the Honest Services Theory of Fraud in Cases Involving Public Officials
Guest contributor Justin Sher writes:
In two recent cases involving former public officials – Joseph Bruno, the former majority leader of the New York State Senate, and Bernard Kerik, the former police commissioner of New York City – federal courts in New York declined to narrow the scope of the “honest services” theory of fraud. In United States v. Bruno, the court reaffirmed the principle that a state official may commit the federal crime of honest services fraud even if his conduct is legal under state law. In United States v. Kerik, the court ventured further by holding that a public official could commit the crime of honest services fraud by engaging in influence peddling even when the influence is directed at areas that are beyond the scope of the official’s authority. Both decisions highlight the difficulty many courts have had applying this vague and controversial statute, which Justice Scalia has described as “nothing more than an invitation for federal courts to develop a common-law crime of unethical conduct.” They also raise some of the same issues that are likely to be addressed by the Supreme Court this term in Weyhrauch v. United States.
Background on Honest Services Fraud
The honest services theory of fraud is codified in 18 U.S.C. § 1346. It provides that the federal statutes prohibiting mail and wire fraud extend to schemes that “deprive another of the intangible right of honest services.” Congress enacted section 1346 in 1988 in response to McNally v. United States, in which the Supreme Court ruled that the scope of the mail and wire fraud statutes was limited to the deprivation of tangible property rights. Since Congress’s abrogation of McNally through the adoption of section 1346, courts have struggled to define the honest services theory of fraud so that it applies to cases of clear corruption, such as those involving bribery and kickbacks, without applying to every instance of unethical or dishonest conduct.
United States v. Bruno
Facts
Joseph Bruno, the former Majority Leader of the New York State Senate, was charged with honest services fraud for failing to disclose conflicts of interest. The indictment alleged that Mr. Bruno had accepted employment that impaired his independent judgment, used his official position to secure unwarranted privileges and accepted unauthorized gifts. Mr. Bruno sought to dismiss the indictment on the grounds that the honest services statute is unconstitutionally vague both on its face and as applied. Mr. Bruno also argued that the charges violated principles of federalism because they served as a mechanism through which the federal government could regulate the ethical conduct of state officials. As part of his federalism argument, Mr. Bruno maintained that, as in other circuits, the government should be required to allege and prove an underlying state violation in order to charge a state official with honest services fraud. Finally, Mr. Bruno sought a stay pending the Supreme Court’s decision in Weyhrauch, where the Court is expected to address this very issue.
Holding
In a decision dated August 21, 2009, the court rejected all of Mr. Bruno’s arguments. United States v. Bruno, 2009 WL 2601249, No. 09 Cr. 29 (N.D.N.Y. Aug. 21, 2009). The court reaffirmed the pre-McNally rule announced in United States v. Margiotta, 688 F.2d 125 (2d Cir. 1982), that the government was not required to demonstrate a violation of a New York statute or a duty imposed by New York law in order to convict a state official of honest services fraud. The Court also held that the statute was neither unconstitutionally vague on its face nor as applied. Finally, noting that the law on these issues was “clear” in the Second Circuit and declining to speculate as to what the Supreme Court might do, the court refused to issue a stay.
Mr. Bruno’s trial is currently underway in the Northern District of New York.
United States v. Kerik
Facts
Bernard Kerik was charged with committing honest services fraud while he held the positions of Commissioner of the New York City Department of Corrections from 1998 through 2000 and New York City Police Commissioner from 2000 through 2002. The omnibus indictment also included charges, which are not relevant here, of tax fraud, mortgage fraud and making false statements to the federal government in connection with his nomination for the position of Secretary of the Department of Homeland Security.
The government alleged that Mr. Kerik used his influence as Commissioner of Corrections and subsequently as Police Commissioner, to “vouch” for XYZ Company, a construction company with ties to organized crime, in order to influence regulators and other public officials who were considering whether XYZ should be permitted to do certain municipal-regulated business in New York City. In return, Mr. Kerik received approximately $255,000 in renovations to his apartment in Riverdale.
Mr. Kerik moved to dismiss the honest services fraud on the ground that the alleged conduct – influence peddling where the public official was acting outside the context of his official duties – does not constitute honest services fraud. Mr. Kerik’s attorneys attempted to draw a “sharp distinction between the use, or even misuse, of the influence of office in activities falling outside a defendant’s official duties – which cannot support a prosecution for federal honest services fraud – and corruption in connection with the performance of a defendant’s official duties – which can.”
Holding
In a decision in May 2009, Judge Stephen Robinson acknowledged that the honest services fraud crime is “nebulous” and that the court was not the first to struggle with its scope. United States v. Kerik, 615 F. Supp. 2d 256, 263 (S.D.N.Y. 2009). In fact, the court admitted that it “desire[d] to cabin the breadth of section 1346.” Id. at 265. Nonetheless, the court determined that the indictment alleged that Kerik had used his office to vouch for XYZ Company and would not have been able to do so but for his official status. Quoting United States v. Bloom, a Seventh Circuit case, the court explained that, “misuse of office (more broadly, misuse of position) for private gain is the line that separates run of the mill violations of state-law fiduciary duty . . . from federal crime.” Although the case “teeter[ed] on the boundaries of 18 U.S.C. § 1346,” the Court concluded that the indictment charged a colorable allegation of honest services fraud.
On November 5, 2009, Bernie Kerik pled guilty to eight felonies, including charges of tax fraud relating to his acceptance of $255,000 of renovations from XYZ Company. As part of the plea agreement, the government dropped the charges that were based on honest services fraud. Thus, while Kerik’s plea led to his release for the holidays, his case will not lead to any further clarification of the honest services fraud theory.
Conclusion
In both Bruno and Kerik, the courts declined to limit the reach of the honest services theory of fraud. As the law currently stands in the Second Circuit, a state official may be convicted of depriving citizens of their intangible right of honest services even if the official is not acting within the scope of his or her duties and even if his or conduct is perfectly legal under state law. It remains to be seen whether the Supreme Court will come out differently in Weyhrauch.
In two recent cases involving former public officials – Joseph Bruno, the former majority leader of the New York State Senate, and Bernard Kerik, the former police commissioner of New York City – federal courts in New York declined to narrow the scope of the “honest services” theory of fraud. In United States v. Bruno, the court reaffirmed the principle that a state official may commit the federal crime of honest services fraud even if his conduct is legal under state law. In United States v. Kerik, the court ventured further by holding that a public official could commit the crime of honest services fraud by engaging in influence peddling even when the influence is directed at areas that are beyond the scope of the official’s authority. Both decisions highlight the difficulty many courts have had applying this vague and controversial statute, which Justice Scalia has described as “nothing more than an invitation for federal courts to develop a common-law crime of unethical conduct.” They also raise some of the same issues that are likely to be addressed by the Supreme Court this term in Weyhrauch v. United States.
Background on Honest Services Fraud
The honest services theory of fraud is codified in 18 U.S.C. § 1346. It provides that the federal statutes prohibiting mail and wire fraud extend to schemes that “deprive another of the intangible right of honest services.” Congress enacted section 1346 in 1988 in response to McNally v. United States, in which the Supreme Court ruled that the scope of the mail and wire fraud statutes was limited to the deprivation of tangible property rights. Since Congress’s abrogation of McNally through the adoption of section 1346, courts have struggled to define the honest services theory of fraud so that it applies to cases of clear corruption, such as those involving bribery and kickbacks, without applying to every instance of unethical or dishonest conduct.
United States v. Bruno
Facts
Joseph Bruno, the former Majority Leader of the New York State Senate, was charged with honest services fraud for failing to disclose conflicts of interest. The indictment alleged that Mr. Bruno had accepted employment that impaired his independent judgment, used his official position to secure unwarranted privileges and accepted unauthorized gifts. Mr. Bruno sought to dismiss the indictment on the grounds that the honest services statute is unconstitutionally vague both on its face and as applied. Mr. Bruno also argued that the charges violated principles of federalism because they served as a mechanism through which the federal government could regulate the ethical conduct of state officials. As part of his federalism argument, Mr. Bruno maintained that, as in other circuits, the government should be required to allege and prove an underlying state violation in order to charge a state official with honest services fraud. Finally, Mr. Bruno sought a stay pending the Supreme Court’s decision in Weyhrauch, where the Court is expected to address this very issue.
Holding
In a decision dated August 21, 2009, the court rejected all of Mr. Bruno’s arguments. United States v. Bruno, 2009 WL 2601249, No. 09 Cr. 29 (N.D.N.Y. Aug. 21, 2009). The court reaffirmed the pre-McNally rule announced in United States v. Margiotta, 688 F.2d 125 (2d Cir. 1982), that the government was not required to demonstrate a violation of a New York statute or a duty imposed by New York law in order to convict a state official of honest services fraud. The Court also held that the statute was neither unconstitutionally vague on its face nor as applied. Finally, noting that the law on these issues was “clear” in the Second Circuit and declining to speculate as to what the Supreme Court might do, the court refused to issue a stay.
Mr. Bruno’s trial is currently underway in the Northern District of New York.
United States v. Kerik
Facts
Bernard Kerik was charged with committing honest services fraud while he held the positions of Commissioner of the New York City Department of Corrections from 1998 through 2000 and New York City Police Commissioner from 2000 through 2002. The omnibus indictment also included charges, which are not relevant here, of tax fraud, mortgage fraud and making false statements to the federal government in connection with his nomination for the position of Secretary of the Department of Homeland Security.
The government alleged that Mr. Kerik used his influence as Commissioner of Corrections and subsequently as Police Commissioner, to “vouch” for XYZ Company, a construction company with ties to organized crime, in order to influence regulators and other public officials who were considering whether XYZ should be permitted to do certain municipal-regulated business in New York City. In return, Mr. Kerik received approximately $255,000 in renovations to his apartment in Riverdale.
Mr. Kerik moved to dismiss the honest services fraud on the ground that the alleged conduct – influence peddling where the public official was acting outside the context of his official duties – does not constitute honest services fraud. Mr. Kerik’s attorneys attempted to draw a “sharp distinction between the use, or even misuse, of the influence of office in activities falling outside a defendant’s official duties – which cannot support a prosecution for federal honest services fraud – and corruption in connection with the performance of a defendant’s official duties – which can.”
Holding
In a decision in May 2009, Judge Stephen Robinson acknowledged that the honest services fraud crime is “nebulous” and that the court was not the first to struggle with its scope. United States v. Kerik, 615 F. Supp. 2d 256, 263 (S.D.N.Y. 2009). In fact, the court admitted that it “desire[d] to cabin the breadth of section 1346.” Id. at 265. Nonetheless, the court determined that the indictment alleged that Kerik had used his office to vouch for XYZ Company and would not have been able to do so but for his official status. Quoting United States v. Bloom, a Seventh Circuit case, the court explained that, “misuse of office (more broadly, misuse of position) for private gain is the line that separates run of the mill violations of state-law fiduciary duty . . . from federal crime.” Although the case “teeter[ed] on the boundaries of 18 U.S.C. § 1346,” the Court concluded that the indictment charged a colorable allegation of honest services fraud.
On November 5, 2009, Bernie Kerik pled guilty to eight felonies, including charges of tax fraud relating to his acceptance of $255,000 of renovations from XYZ Company. As part of the plea agreement, the government dropped the charges that were based on honest services fraud. Thus, while Kerik’s plea led to his release for the holidays, his case will not lead to any further clarification of the honest services fraud theory.
Conclusion
In both Bruno and Kerik, the courts declined to limit the reach of the honest services theory of fraud. As the law currently stands in the Second Circuit, a state official may be convicted of depriving citizens of their intangible right of honest services even if the official is not acting within the scope of his or her duties and even if his or conduct is perfectly legal under state law. It remains to be seen whether the Supreme Court will come out differently in Weyhrauch.
See Archives for all posts since September 2007.
