The Senate Judiciary Committee heard testimony regarding proposed legislation to amend the honest services fraud statute in the wake of the Supreme Court’s decision last term in Skilling v. U.S., 130 S. Ct. 2896 (2010)(here). There, the Court limited the concept of honest services fraud under Section 1346 to bribes and kickbacks as defined in earlier case law. The Court rejected the government’s suggestion that the Section should also include undisclosed conflicts of interest. Honest services fraud is a charge frequently included in criminal securities fraud cases.

Witnesses appearing before the Committee agreed that the government needs new tools in the aftermath of Skilling. They also agreed that drafting legislation which would address some private conduct reached prior to Skilling presents a difficult problem. The government, however, urged the Committee to enact legislation which addresses certain public official conduct centered on undisclosed conflicts. Other testimony counseled caution and more study to avoid past difficulties.

Assistant Attorney General Lanny Breuer urged the Committee to move forward with a legislative fix to Skilling. Mr. Breuer began by telling the Committee that for decades the federal mail and wire fraud statutes were used to reach not just crimes aimed at depriving victims of money or property, but also honest services of public and private officials who owed a fiduciary duty of loyalty. The “core examples” of honest services fraud have been public officials and corporate officers “(1) accepting bribes or kickbacks, or (2) engaging in undisclosed self-dealing” according to Mr. Breuer.

After recounting the history of honest services fraud, Mr. Breuer told the Committee that Skilling is having a significant impact on the Department’s law enforcement efforts. Accordingly, he urged that new legislation be enacted to bridge the gap. Specifically, he requested that the Committee move forward with legislation which would cover a situation where a “public official who conceals his financial interests an then takes official action to advance those interest . . .” The need for this legislation is “urgent” Mr. Breuer noted.

In drafting new legislation, the Committee should be cognizant of four points in the wake of Skilling: 1) the need to provide adequate notice of what is prohibited; 2) the new statute should be tied to the wire and mail fraud statutes; 3) to ensure specificity, the section should draw content from the “well-established federal conflict of interest statute, 18 U.S.C. § 208, which currently applies to the federal Executive Branch;” and 4) the statute should specify that “no public official can be prosecuted unless he or she knowingly conceals, covers up, or fails to disclose material information that he or she is already required by law or regulation to disclose.” While the Department is also interested in addressing corruption in the private sector, it is not at this point prepared to offer proposed legislation in that area, Mr. Breuer noted.

Former Deputy Attorney General George Terwilliger III offered the Committee a different prospective. Mr. Terwilliger agreed that federal prosecutors need the proper tools to address corruption. At the same time, he told the Committee that passing ambiguous statutes presents significant interpretative problems that may require substantial judicial and other resources to resolve. The need for clarity is essential. Yet to date, Congress, in drawing the line between lawful and unlawful conduct, has written statutes with a broad and generalized brush in some instances.

In addressing the issues presented by Skilling, two key points should be considered. First, “part of the fundamental difficulty with adding deprivation of intangible rights to the fraud statute . . . is that it is somewhat inconsistent with the established element of fraud as grounded in an economic loss by a victim.” Second, since there are two different sets of interest as stake as to self-dealing by federal as opposed to state and local officials, “separating them in the criminal code may be well-advised.” In view of these difficulties, it would be prudent for the Committee to defer legislation now pending further study and consideration Mr. Terwilliger noted.

Program: Webcast Wednesday at noon: “The Supreme Court And Securities Litigation: A Review of Last Year A Look At The Coming Term” by Tom Gorman.
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