Appealed from for the United States Court of Appeals for the Fifth Circuit (Jan. 6, 2009)
Oral argument: March 1, 2010
HONEST SERVICES FRAUD, SECURITIES FRAUD, JURY PREJUDICE, ENRON
Former Enron Corporation executive Jeffrey K. Skilling was convicted by a federal jury in Houston, Texas of numerous counts of conspiracy, securities fraud and insider trading relating to Enron’s bankruptcy. After the Fifth Circuit upheld Skilling’s conviction, the Supreme Court granted certiorari to resolve two key issues. First, the court will determine the scope and constitutionality of 18 U.S.C. § 1346, which makes it a crime for an employee of a corporation to fraudulently deprive the corporation of that employee’s “intangible honest services.” Second, the Court will determine whether and to what extent the government was required to prove—to the satisfaction of the parties and the district court—that no member of the Houston jury that convicted Skilling was actually prejudiced by the widespread negative media attention the Enron bankruptcy received in the Houston area before and during Skilling’s initial trial. The rulings on these issues may give much needed guidance to the lower courts in dealing with vague statutes, and may affect the scope of Sixth Amendment rights for every criminal defendant.
1. Whether the federal "honest services" fraud statute, 18 U.S.C. § 1346, requires the government to prove that the defendant's conduct was intended to achieve "private gain" rather than to advance the employer's interests, and, if not, whether § 1346 is unconstitutionally vague.
2. When a presumption of jury prejudice arises because of the widespread community impact of the defendant's alleged conduct and massive, inflammatory pretrial publicity, whether the government may rebut the presumption of prejudice, and, if so, whether the government must prove beyond a reasonable doubt that no juror was actually prejudiced.
Is the federal statute making it a crime for someone to “deprive another of the intangible right of honest services” unconstitutionally vague?
When an entire community is outraged by the events giving rise to a criminal trial, is it possible to draw a jury that does not share the community’s presumed prejudice? If so, what standard should a court use to determine if the presumption of prejudice has been overcome?
Jeffrey K. Skilling, former President, COO and CEO of the now-defunct Enron Corporation, was convicted by a federal jury in the United States District Court for the Southern District of Texas on numerous counts of conspiracy, securities fraud, making false representations to auditors, and insider trading, all relating to his role in the highly-publicized failure of Enron. See U.S. v. Skilling, 554 F.3d 529, 534 (5th Cir. 2009). When Enron collapsed in late 2001, a president-appointed Task Force began an investigation and ultimately concluded that Skilling and other Enron leaders engaged in a conspiracy to overstate the value of the company in order to maintain artificially high stock prices. See id. The investigation culminated in criminal charges against Skilling and several other Enron executives; he received an enormous amount of unfavorable press, including in Houston, Texas. See id.
Initially, fearing that he would be unable to receive a fair trial in Houston because of the impact of the Enron bankruptcy in the Houston area, Skilling attempted to relocate his trial to another district court. See Appendix, Brief of Respondent United States at 1a. However, reasoning that actual jury prejudice could be addressed during jury selection, the district court denied Skilling’s request. See id. at 19a. The trial proceeded in Houston. See 554 F.3d at 559.
At trial, the government alleged that Skilling had committed honest services fraud, in violation of 18 U.S.C. § 1346, among other charges. The government introduced evidence that Skilling improperly manipulated accounting rules to ensure that losses incurred by certain less-profitable divisions of Enron were placed on the books of more profitable divisions, thereby allowing failing divisions to appear profitable on paper. See 559 F.3d at 535. Despite being aware that certain units were failing, the Government argued, Skilling nonetheless made representations to investors and analysts that the divisions were prospering. See id. at 536. Additionally, the Government argued that Skilling and others conspired to create third-party shell companies in order to hide Enron’s troubled assets. See id. at 538.
Throughout his trial, Skilling did not deny the charges against him, but rather insisted that none of his conduct was illegal because he had acted at all times in the company’s best interest. See id. at 542. Furthermore, Skilling asserted his allegedly false statements were taken out of context. See id. Finally, Skilling attacked the credibility of the Government’s witnesses. See id. The jury acquitted Skilling of insider trading charges, but ultimately convicted him of nineteen separate counts of conspiracy, fraud and making false statements; he was sentenced to 292 months in prison. See id.
Skilling appealed to the United States Court of Appeals for the Fifth Circuit, alleging a variety of claims, two of which are relevant here. First, Skilling argued he did not commit honest services fraud because his fraud “was in the corporate interest and therefore was not self-dealing.” See id. at 545. The Fifth Circuit dismissed Skilling’s interpretation of 18 U.S.C. § 1346, concluding that the applicable elements of honest services fraud, (1) a breach of material state-law fiduciary duty, that (2) results in a detriment to the employer, were met in this case, and the jury’s verdict should stand. See id. at 547. Second, Skilling argued that the community’s “acrimony was so vitriolic” in the wake of the Enron bankruptcy that it was impossible for him to receive a fair trial in Houston. See id. at 557. The Fifth Circuit agreed with Skilling that prejudice should have been presumed. See id. at 561. However, after conducting a review of the extensive voir dire conducted by the district judge at trial, the Fifth Circuit concluded these procedures mitigated any prejudicial effect, and thus reversal on these grounds was unwarranted. See id. at 564–565. The Supreme Court granted certiorari on May 13, 2009. See Docket No. 08-1394
There are two issues in this case: whether 18 U.S.C. § 1346, which criminalizes honest services fraud, is unconstitutionally vague, and what standard to use in determining that the presumption of jury prejudice has been overcome. The Supreme Court’s decision will affect businesses and give guidance to the lower courts on statutory interpretation; a ruling on the presumption of jury prejudice could also touch on every criminal defendant’s Sixth Amendment rights.
Honest Services Fraud
The concept of honest services fraud developed in the common law and refers to the idea that a corporate officer or elected official owes a duty to the public to perform his or her job honestly. See McNally v. United States, 483 U.S. 350, 371 (1987) (Stevens, J., dissenting). Failure to do so defrauds the public of the “intangible” value of those services. See id. This view of honest services fraud as applied to the federal mail fraud statute was specifically repudiated in McNally, where the Supreme Court held that 18 U.S.C. § 1341 applied only to frauds involving “tangible” money or property. See 483 U.S. at 351. In response, congress enacted 18 U.S.C. § 1346, which specifically criminalizes “honest services fraud.”
Since enacting § 1346, courts have struggled to develop a workable definition of the statute, which has resulted in a “kaleidoscope of inconsistent and inconclusive tests.” See Brief of Pacific Legal Foundation and Cato Institute as Amicus Curiae in Support of Neither Party (“PCL”) at 11. In an apparent effort to resolve these inconsistencies, the Supreme Court has granted certiorari in three different honest services fraud cases this term. See generally Skilling v. United States (No. 08-1394); Black v. United States (No. 08-876); Weyhrauch v. United States (No. 08-1196). Many commentators agree that § 1346 raises serious constitutional concerns and is likely unconstitutionally vague. See David G. Savage, The Supreme Court Critical of Honest Services Fraud, L.A. Times, Dec. 9, 2009; Gary S. Chafetz, The Fraud of Honest Services Fraud, Huffington Post, June 22, 2009.
Without taking a position on the outcome of Skilling’s appeal, amici the Pacific Legal Foundation, et al. (“PCL”), argue that § 1346 should be held unconstitutional because of the dangers associated with vague statutes. See Brief of PCL at 15. PCL points out that generally speaking, vague statutes offend the Due Process clause of the Fifth Amendment, because they fail to provide adequate notice of prohibited conduct. See Brief of PCL at 4. PCL contends that this leads to three basic problems: first, reasonable people may be unaware of what conduct a vague law actually prohibits; second, vague laws can be arbitrarily enforced because they do not provide prosecutors, judges or juries with specific guidance; third, they can interfere with basic freedoms by causing people to be over-cautious out of fear of violating the law. See id. at 5 (internal citation omitted). PCL contends that such statutes also raise significant concerns in a democracy: voters — whom elected officials must be accountable to — will not be able to understand, and therefore discipline, government officials’ conduct. See id. at 6-7.
The Chamber of Commerce of the United States, as amicus for Skilling, argues that the unconstitutional vagueness of § 1346 has implications for the business community as a whole. See Brief of Chamber of Commerce of the United States as Amicus Curiae in Support of Petitioner at 12. According to the Chamber, because the prohibitions of § 1346 are so poorly defined, the statute deters legitimate business dealings because of the fear of prosecution. See id. Furthermore, because the statute can give rise to both civil and criminal racketeering liability under RICO (18 U.S.C. §§ 1961–1962), the Chamber argues that it unduly empowers plaintiffs’ attorneys and prosecutors to bring claims based on “nebulous but far-reaching theories of liability” and thus imposes substantial and “unwarranted” burdens on American business. Id. at 13–14.
The United States responds to these claims by defending the overall constitutionality of § 1346. See Brief for Respondent United States at 37. Besides citing to court precedent, it also argues that Congress saw fit to protect “the intangible right of honest services,” which a ruling finding the statute unconstitutionally vague would harm. See id. at 38. The United States argues that limiting the interpretation of the statute would allow “core” honest services frauds to occur. See id. at 45.
This cases also raises significant concerns about the risk of jury prejudice. As such, the Texas Criminal Defense Lawyers Association and the Harris County Criminal Lawyers Association have joined as amici arguing that empirical social science data contradict the Fifth Circuit’s claim that voir dire can effectively cure a presumption of a biased jury. See Brief of Texas Criminal Defense Lawyers Association and Harris County Criminal Lawyers Association as Amici Curiae in Support of Petitioner at 9. Furthermore, the Texas CDL amici argue that when there is substantial community pressure to reach a particular outcome in a case, as they assert there was here, studies suggest that jurors will reach that verdict regardless of their personal beliefs. See id. at 12. The National Association of Criminal Defense Lawyers agrees, arguing that in this case especially, the community here “so strongly and uniformly viewed itself as the victim of the offenses to be tried.” Brief of National Association of Criminal Defense Lawyers as Amicus Curiae in Support of Petitioner at 18.
The United States responds by arguing that any risk of presumed juror prejudice was irrelevant because of the District Court’s finding that the jury was, in fact, impartial. See Brief for Respondent United States at 18. Furthermore, the United States contends there was ample evidence introduced at trial to support Skilling’s conviction. See id. at 49.
There are two issues in this case that will require the lower court judgment against the petitioner to be vacated and the case to be remanded for further proceedings. First is the standard that should be used to determine whether a presumption of juror prejudice has been overcome; secondly is whether 18 U.S.C. § 1346, which criminalizes honest services fraud, is unconstitutionally vague.
I. Presumption of Juror Prejudice
Petitioner Jeffery K. Skilling (“Skilling”) contends that his conviction should be reversed because “inflammatory pretrial publicity and the nearly unprecedented community passion aroused by Enron’s collapse” created a substantial presumption of prejudice that denied him of his Sixth Amendment right to trial by an impartial jury. See Brief for Petitioner Jeffery K. Skilling at 23–24. Skilling points to Supreme Court precedent that hold that voir dire alone is often insufficient to overcome a presumption of prejudice. See id. at 25. Skilling argues the Court has instead applied a categorical approach requiring change of venue or reversal per se whenever “the community passion or trial taint” is so severe as to give rise to a presumption of juror prejudice. See id. at 29. Skilling argues that voir dire alone is insufficient to overcome the presumption of juror prejudice. See id. at 29-30. He contends first that community pressure can be so strong at times that a juror can become “infused with biases they cannot recognize or will not disclose.” Id. Second, Skilling argues that even if jurors feel impartial at a trial’s outset, they can adopt a particular bias out of a “fear of ‘returning to his neighbors’ with anything other than a guilty verdict.” Id. at 31. Finally, Skilling asserts that when “inflammatory publicity” continues throughout a trial, an initially impartial juror can develop biases after the jury is empanelled. See id. Skilling buttresses these arguments with empirical studies supporting the conclusion that voir dire can be an insufficient tool to disclose deeply rooted prejudices. See id.
Skilling argues that a per se transfer/dismissal rule, which should be used in such high profile cases as this one, would not be unduly costly to the judicial system. See Brief for Petitioner at 33. Unlike an exclusionary rule, he asserts, a per se transfer rule would not interfere with a court’s truth-seeking function, and because of the uniform nature of the federal courts in particular, it would not impose substantial difficulties on litigants. See id. at 34.
Finally, Skilling argues that even if the Court refuses to adopt a per se rule requiring transfer or reversal upon a finding of presumed prejudice, it should nonetheless hold that the United States failed to overcome the presumption of juror prejudice in this case. See Brief for Petitioner at 34. According to Skilling, the proper standard for determining whether prejudice has been overcome is beyond a reasonable doubt, and here the United States fell far short of meeting that standard. See id. at 35. Because the district court failed to apply a presumption of prejudice initially, Skilling argues, it conducted the entire voir dire under an erroneous legal standard by failing to assume the juror’s statements were inherently unreliable. See id. at 37. Because of this error, Skilling concludes, his trial was constitutionally defective and reversal is required. See id. at 34.
The United States responds to Skilling’s juror bias arguments by asserting that no Supreme Court holding requires an irrebuttable presumption of jury prejudice. See Brief for Respondent United States at 18. Further, the United States asserts that because the lower court determined that the jury that decided Skilling’s case was actually impartial, Skilling has suffered no constitutional injury. See id. at 19. According to the United States, all the Constitution requires is a panel of impartial jurors, not a venue where the populace has not been affected by the defendant’s crime or publicity about it. See id. Furthermore, the United States asserts that Supreme Court precedent establishes it is a defendant’s burden to show the impartiality of a jury “‘not as a matter of speculation but as a demonstrable reality.’” See id. at 20 (internal citation omitted). Applying this standard, the United States argues Skilling has failed to demonstrate that his jury was actually biased. See id. at 21.
The United States contends that Skilling’s proposed per se rule based on “pretrial publicity” is a mischaracterization of Supreme Court precedent. See Brief for Respondent at 25. According to the United States, the Court has only required such an extraordinary remedy once: where a small-town murder defendant’s jailhouse confession was repeatedly televised throughout the community. See id. This holding, the United States asserts, does not rise to a general rule. See id. at 26. In addition to characterizing Skilling’s proposed rule as contrary to precedent, the United States argues that a per se reversal rule would conflict with the Court’s “structural error” doctrine which broadly disfavors any automatic reversal without a showing of actual prejudice. See id. at 29. Imposing a per se rule, according to the United States, would create “serious obstacles to trial in prominent cases” especially when publicity is widespread. See id. at 31.
Finally, the Untied States contends that even if the court adopts a rule presuming prejudice, the presumption should not apply here. See Brief for Respondent at 32. Skilling’s jury was drawn from a potential pool of 4.5 million people in the Houston metropolitan area, which the United States argues is sufficiently large to overcome any particular presumptions. See id. Second, the United States points to the fact that the district court judge presiding over Skilling’s trial was the third district court judge hearing an Enron-related case in the Houston area to independently conclude that it was possible to draw an impartial jury. See id. at 33. Third, by comparing the varied outcomes of the Enron-related cases tried in Houston, the United States contends that the various juries were able to correctly apply the law to the specific facts before them. See id. at 34. Ultimately, the United States argues that even if the Fifth Circuit was correct to conclude there was a presumption of prejudice, the record demonstrates that it was successfully rebutted in this case. See id. at 35.
II. Constitutionality of Honest Services Fraud
Skilling contends his conviction cannot stand because 18 U.S.C. § 1346 is unconstitutionally vague, as it fails to give “‘the person of ordinary intelligence a reasonable opportunity to know what is prohibited.’” Brief for Petitioner at 38 (internal citations omitted). Though acknowledging that by enacting § 1346 Congress intended to overrule McNally v. United States, which held that a previous law only applied fraud to ‘tangible’ money, and codify the body of pre-McNally case law, Skilling contends that the body of law is so “hopelessly confusing” that it fails to provide sufficient “fair notice” as required by the Constitution. See id. at 39. The fundamental ambiguity of the statute, Skilling contends, is evidenced by the way the United States has applied it to prosecute “whatever defendant happens to be in the government’s sights.” Id. at 43. According to Skilling, by failing to proscribe specific conduct, § 1346 allows prosecutors impermissibly broad, essentially arbitrary discretion that runs afoul of the constitutional scheme. See id. at 44.
Furthermore, Skilling asserts that applying common law tradition—i.e., lending meaning to § 1346 from pre-McNally cases dealing with honest services fraud—to cure a vague statute is contrary to precedent and “exceeds the judicial function.” See Brief for Petitioner at 45. According to Skilling, within our constitutional system, it is the role of Congress—and not the courts—to create specific laws that the courts can then apply. See id. at 46.
Alternatively, Skilling argues that if § 1346 could be constructed in a way that passes constitutional muster, the Court should only apply it to scenarios where a defendant has received personal bribes and kickbacks. See Brief for Petitioner at 48. According to Skilling, this view is more consistent with pre-McNally cases, and makes more sense in light of existing prohibitions on money and property fraud. See id. at 49. At a bare minimum, Skilling argues that for a conviction to stand under § 1346, a jury must be required to find that the defendant engaged in some sort of conduct resulting in private gain independent from his regular compensation. See id. at 53. Under any of these proposed formulations, Skilling contends, his conviction must be reversed. See id. at 57.
The United States counters that § 1346 is not unconstitutionally vague because the pre-McNally definition of honest services fraud was well-established amongst the courts of appeals. See Brief for Respondent at 37. According to the United States, when Congress enacted § 1346, it simply intended to reinstate the long line of cases which had criminalized fraudulent deprivation of “honest services” in addition to fraudulent deprivation of money and property. See id. at 38. “Honest services,” the United States contends, is a term of art that is clearly defined in case law, and is well understood by courts and prosecutors alike. Id. at 39. Following McNally, the United States contends honest services wire fraud has three distinct elements: “(1) a breach of the duty of loyalty, undertaken with (2) an intent to deceive, that also is (3) material.” Id. Because honest services fraud requires “an intent to deceive,” the United States argues that the statute adequately protects defendants who honestly believe they have no conflict or disclosure duty. See id. at 41.
Applying these three elements, the United States concludes § 1346 covers any situation where a defendant receives bribes or kickbacks or fails to disclose a financial conflict of interest when engaging in an official action. See Brief for Respondent at 42. Under this formulation, the United States argues Skilling’s contention that § 1346 is redundant in light of existing prohibitions of money and property fraud is refuted by pre-McNally case law, where there were clearly situations involving no actual deprivation of money and property that fell within the reach of the wire fraud statute. See id. at 45. Furthermore, the United States contends that Skilling “significantly overstates” the degree to which lower courts were in disagreement about the scope of the honest services doctrine pre-McNally. See id. at 46. According to the United States, the fact that prosecutors have sought over time to adopt varying theories of honest services fraud does not indicate the statute is vague, but instead shows that this follows lower courts resolving issues of statutory construction, to which the government may eventually respond. See id. at 49.
Finally, the United States submits that even if the Court were to find § 1346 unconstitutionally vague, any error is harmless, because the evidence at trial provided ample support for Skilling’s conviction solely on the basis that he committed securities fraud. See Brief for Respondent at 52.
Ultimately, this case presents the Supreme Court with an opportunity to answer two distinct and important constitutional questions touching on the constitutionality of § 1346 and the right to an impartial jury under the Sixth Amendment.
Prepared by: Tom Kurland
Edited by: Lara Haddad