Many criminal securities cases include a count of “honest services” fraud under 18 U.S.C. § 1346. That Section was added to the criminal code in 1988 after the Supreme Court limited wire and mail fraud crimes to the theft of property and excluded violations of intangibles such as the right to honest services. McNally v. U.S., 483 U.S. 350 (1987). Prior to that decision, a substantial body of law had been developed attempting to define precisely what constituted honest services in both the private and public sector. In the wake of McNally and against that backdrop to those cases, Congress passed Section 1346. It criminalizes a scheme or artifice to defraud, a phrase from Section 1341, but adds to “deprive another of the intangible right of honest services.” Nine words for which there is no definition. Again, the courts struggled to give the words content as evidenced by the Fifth Circuit’s decision in Brown, the Enron barge case discussed here.

Tuesday, the Supreme Court heard argument on two cases in which the parties attempted to give definition the nine words. Black v. U.S., Docket No. 08-876; Weyhrauch v. U.S., Docket No. 08-1196. In the first case, defendant Conrad Black was convicted of three counts of mail and wire fraud, as well as one count of obstruction. Mr. Black was the CEO of Hollinger International. The honest services issues arose from the sale of a small community newspaper owned by a subsidiary of Hollinger. When the agreements for the sale were prepared, Mr. Black had a non-compete provision included under which he was paid directly several million dollars. The money, according to Mr. Black, were compensation, but was characterized as non-compete payments to provide him with Canadian tax benefits.

The government claimed that receipt of the payments constituted an unauthorized appropriation of funds. That occurred through a misuse by Mr. Black of his position since he directed the preparation of the agreement under which he obtained the payments. This led to a false 10-K filing which misled shareholders. The theory was accepted by the district court, the jury and the Seventh Circuit.

Weyhrauch is a public sector case brought against Bruce Weyhrauch, a lawyer elected to the Alaska House of Representatives in 2002. As his term drew to an end, he solicited a job from VECO, an oil field services company. After the end of the term, Mr. Weyhrauch met with the company about a possible job during which there was a discussion of draft energy legislation which had not passed and his support for it.

Subsequently, the governor extended the term of the legislature by calling a special session to consider the energy legislation. Mr. Weyhrauch told VECO about this and promised to study a new proposed energy bill and report back. The bill was passed with a rate provision not favored by VECO.

The honest services fraud claim arose in part from a charge that Mr. Weyhrauch failed to disclose the conflict of interest. The district court ruled that, absent a provision in Alaska law requiring disclosure, the failure to do so was insufficient to support a violation of Section 1346. The Ninth Circuit reversed, holding that there was no proof Congress intended to base honest services on state law.

Before the Supreme Court, the parties focused on principles which they claimed define and limit the scope of the open-ended language of the statute. In Black, Petitioner keyed his argument to the theory that honest services fraud required a demonstration of economic harm on the victim as well as intent to obtain personal gain. In Weyhrauch, Petitioner focused on the question of duty, that is, whether there was a clear legal duty to disclose the conflict.

The Government in both cases advanced essentially the same theory. Specifically, the Government claimed that since Congress passed Section 1346 against a backdrop of honest services case law developed before McNally, it is clear that the Section should be interpreted in the context of those decisions.

The parties did not focus on the constitutionality of the statute and whether it is so open-ended and vague that it does not give adequate notice of what constitutes criminal conduct. Yet, this is the issue which dominated the arguments in both cases. The debate on this issue began during Petitioner’s argument in Black and a comment from Justice Kennedy that Mr. Black should have asked to have the statute struck down. That statement led to Justice Alito inquiring as to whether the pre-McNally case law provided a workable definition.

Following comments from Justices Sotomayor, Ginsburg and Scalia, Chief Justice Roberts returned to the question of whether Petitioner had adequately raised the issue as to the constitutionality of the statute. Petitioner, in comments that were later reflected in remarks by Justice Scalia, argued that the question was implicit in his argument and thus adequately raised. At the same time, Petitioner focused most of his argument on the narrower issue of limiting the statute in a manner which avoided the constitutional question.

The Government tried to key its presentation to the pre-McNally case law as the defining principles for the statute. Justice Ginsburg appeared skeptical of this notion, calling that case law “massively confused,” a comment picked up on by others. When Justice Sotomayor inquired about the source of the law to define the nine words of the statute, the Government returned to the pre-McNally theory as it would throughout both arguments.

The arguments in Weyhrauch were dominated by similar themes. Petitioner tried to avoid the constitutional issue by focusing on the question of duty, arguing that there was no source for the obligation. The Government continued to center its arguments on the pre-McNally case law, focusing on bribes, kickbacks and undisclosed conflicts as the definitional elements to the statute. At one point, when discussing Court precedent defining elements in other statutes, the Chief Justice drew a distinction between using standard legal concepts and precedents rejected by McNally.

Repeatedly throughout the arguments, most of the Justices expressed skepticism about the open-ended nature of the statute. Justices Scalia, Breyer, Kennedy and Sotomayor each inquired at various times about the source for the definitions counsel for the Petitioners and the Government tried to ascribe to the words in the statute. Time after time these Justices, along with the Chief Justice, and even at times Justice Alito, raised questions which expressed concern about the open-ended nature of the section. These repeated questions lead to a comment from Justice Scalia at one point which seemed to sum up the situation. After the Government reiterated its claim that bribes, kickbacks and undisclosed conflict were the key, Justice Scalia asked, in a clearly rhetorical question, why Congress just didn’t stay that in those same words.

The end point for both arguments may have come when the Government was asked if it would have an adequate opportunity to brief the constitutional question in the up coming Skilling case. That case, which also raises a question about the scope of the honest services fraud theory, is in briefing before the Court at the moment as discussed here. The question presented for resolution there includes the issue of the constitutionality of the statute. It seems likely that the decision of all three cases will not come until after the constitutional issue is fully briefed and argued later this term.