Repackaging Skilling-Barred Fraud Theories: A Form of Damage Control That Goes Too Far

In Skilling v. United States
¹Skilling v. United States, 130 S. Ct. 2896 (2010) (5 WCR 459). the U.S. Supreme Court held that the “honest-services fraud” statute, 18 U.S.C. §1346, criminalizes only “bribe or kickback schemes” that violate a “fiduciary duty.” To satisfy constitutional requirements like fair notice, the statute cannot be applied to other “amorphous” theories based on, for example, undisclosed “conflicts of interest” or “self dealing.” Thus, after Skilling, most commentators quite reasonably concluded that mail and wire fraud charges based on such “amorphous” theories were a thing of the past.

Wishful thinking. Some prosecutors (and one district court) have taken the approach that the honest-services theories Skilling invalidated are perfectly valid when repackaged as “intangible property” theories under the “traditional” mail and wire fraud statutes, 18 U.S.C. §§ 1341 and 1343. Before analyzing this approach, some context is helpful.

A Brief History
Of Mail and Wire Fraud

In isolation, the traditional mail and wire fraud statutes expressly apply only to “schemes to defraud” victims of “money or property.” Prior to the enactment of the honest-services fraud statute, all federal courts eventually adopted a broader, nontextual interpretation of the traditional fraud statutes, which also covered schemes to defraud victims of their “intangible right to honest services.” But in McNally v. United States, ²McNally v. United States, 483 U.S. 350 (1987). the Supreme Court overturned this interpretation and limited the traditional fraud statutes to what they expressly cover—schemes to deprive victims of money or property.

Congress responded swiftly to McNally by enacting Section 1346, a definitional statute stating that the phrase “scheme to defraud” in the traditional fraud statutes includes a scheme to “deprive another of the intangible right of honest services.” Then finally, after decades of debate over the boundaries of “honest-services fraud,” Skilling limited the universe of actionable honest-services fraud schemes to one: a “bribe or kickback scheme” in violation of a “fiduciary duty.”

Lower courts are now dealing, on a very large scale, with the effects of Skilling.

Damage Control

Some attempt at damage control by the government after Skilling is not just expected, but likely legitimate. For example, courts now must deal with issues such as these: What kind of “fiduciary duty” is required after Skilling—one created by state or federal law, contract, or simply a relationship of trust? ³Compare United States v. Brumley, 116 F.3d 728 (5th Cir. 1997) (fiduciary duty under state law required), and United States v. Murphy, 323 F.3d 102 (3d Cir. 2003) (state or federal law sufficient), with United States v. Rybicki, 354 F.3d 124 (2d Cir. 2003) (en banc) (special relationship sufficient). What is the definition of “bribe or kickback” after Skilling—a quid pro quo, or something less? ⁴See United States v. Sun-Diamond Growers of California, 526 U.S. 389 (1999) (bribery under 18 U.S.C. §201(b) requires a quid pro quo); compare United States v. Jennings, 160 F.3d 1006 (4th Cir. 1998) (bribery under 18 U.S.C. §666 requires a quid pro quo), with United States v. Abbey, 560 F.3d 513 (6th Cir. 2009) (bribery under Section 666 does not require a quid pro quo); see also United States v. Whitfield, 590 F.3d 325, 5 WCR 19 (5th Cir. 2009) (declining to decide whether an honest-services charge based on bribery requires a quid pro quo because the jury instruction at issue required one). How do convictions invalidated by Skilling affect other convictions from the same trial—are they harmless beyond a reasonable doubt or harmful? ⁵In Skilling, a Fifth Circuit panel will address this issue at a special hearing Nov. 1 (5 WCR 705). Though some might disagree with the government’s position on these issues, regardless of their resolution Skilling will remain a significant victory for the criminal defense bar.

Beyond Damage Control

United States v. Queri.

But prosecutors in at least one case—United States v. Queri
⁶United States v. Queri, No. 5:09-cr-00418 (N.D.N.Y Aug. 5, 2009)., filed in the Northern District of New York—appear to have gone far beyond damage control to arguably nullifying Skilling.

The indictment in Queri—returned before Skilling—alleged that a Dick’s Sporting Goods executive and an outside attorney represented to landowners and real estate developers that certain payments were for consulting and brokerage services related to projects for new stores. But the executive and the attorney defendants controlled the consulting and brokerage companies and allegedly took some of the money. Prosecutors alleged that the defendants hid all this from Dick’s Sporting Goods. The indictment charged the defendants with honest-services fraud (Section 1346) and money and property fraud (Sections 1341 and 1343), naming Dick’s Sporting Goods as the victim.

Before trial, however, the Supreme Court decided Skilling. This presented obvious problems for the government. The indictment indicated that the landowners and developers didn’t know the defendants were taking a cut of the payments. Thus, a Skilling “bribe or kickback scheme” wasn’t plausible, and the government dropped its honest-services charges.

Additionally, the indictment named Dick’s Sporting Goods as the victim. But Dick’s Sporting Goods didn’t appear to have lost any money or tangible property.

Intangible Property Theory.

As a result, the government argued that the defendants’ undisclosed self-dealing and conflicts of interest (familiar honest-services fraud theories invalidated by Skilling) deprived Dick’s Sporting Goods of its “intangible property” under the traditional fraud statutes: the right to information that “could impact financial decisions” or cause a “change in business conduct.” The district court agreed, and the case will now proceed to trial on an intangible property theory.

While it is debatable whether the facts in Queri, if pleaded differently in another hypothetical indictment (e.g., one naming the landowners or developers as the victims of money fraud), could support traditional fraud charges, the broad language and approach the court adopted appear to go too far.

Flaws in Queri Approach

The broad language and approach in Queri are suspect for at least three reasons. But before analyzing each, two clarifications will help crystallize the issues and bring meaning to the discussion.

First, here’s the definition of “the Queri approach” for purposes of this discussion (and according to the broad language in Queri): Undisclosed conflicts or self-dealing support traditional fraud charges because they deprive victims of an intangible property right to information that could impact business decisions or change business conduct.

Second, here’s why the Queri approach threatens to nullify Skilling’s holding: An employer may always claim that disclosure of a conflict or self-dealing would have impacted its business decisions or caused it to change its business conduct (e.g., investigate, demote, suspend, or terminate the employee or avoid a deal altogether if tainted by “misconduct”). Thus, if the right to such information is intangible property, all undisclosed conflicts and self-dealing arguably are property frauds under the traditional fraud statutes.

Put in this light, the Queri approach suffers from three major flaws.

Flaw One: Missing Skilling‘s Point.

First, the Queri approach is based on an overly narrow view of Skilling’s holding that ignores its constitutional reasoning. It is, of course, true that Skilling is a Section 1346 honest-services fraud case. But Skilling should (some would argue must) have meaning outside that precise context, especially to traditional money or property fraud. After all, Section 1346 is merely a definitional statute, adding deprivations of “honest services” to the universe of actionable schemes previously limited to deprivations of money and property. Thus, right out of the gate, it is troubling to render Skilling meaningless by repackaging as intangible property theories the same honest-services theories that Skilling invalidated. ⁷In Skilling’s three opinions and 67 pages, no justice hinted that the honest-services theories at issue were viable intangible property theories under the traditional fraud statutes. Of course, an approach that permits repackaging every Skilling-barred honest-services theory into an intangible property theory is inconsistent with the government’s assertion in Skilling that Section 1346 is a crucial enforcement tool that catches many schemes that fall through the cracks of Sections 1341 and 1343. Since Skilling, the government has stood by this assertion (outside of court) in an attempt to persuade Congress to amend Section 1346 to counteract the effects of Skilling. See, e.g., testimony of Assistant Attorney General Lanny A. Breuer before the Senate Judiciary Committee, Sept. 28, available at http://www.justice.gov/criminal/pr/testimony/2010/crm-testimony-100928.html (“The Department believes that the Court’s decision [in Skilling] has created a gap in our ability to address the full range of fraudulent and corrupt conduct by public officials and corporate executives, and we urge Congress to pass legislation to fill the void.”)

More fundamentally, by morphing Skilling-barred honest-services theories into intangible property theories, the Queri approach leads to the same constitutional problems Skilling sought to remedy: wishy-washy theories based on misconduct like undisclosed self-dealing and conflicts of interest that are too “amorphous” to provide fair notice to criminal defendants. It is difficult to perceive how removing the “honest-services” label and replacing it with “intangible property” provides any additional notice of what conduct is criminal. To the contrary, the relabeling appears constitutionally insignificant. In the end, courts will be faced (as the court in Queri was) with the same theories Skilling deemed too “amorphous” to provide fair notice—this time under more narrow statutes (Sections 1341 and 1343) that Section 1346 was meant to expand.

Similarly, Queri seems to ignore the very real federalism concerns that led to and appear throughout both Skilling and McNally. Queri mentions no limiting principle to its holding, arguably bringing the mail and wire fraud precedent back to its troublesome pre-Skilling state—where there is a good chance that just about every instance of workplace misconduct is a federal crime.

Scalia’s Hypothetical.

One example demonstrates the possible absurdity better than most—Justice Antonin Scalia’s hypothetical in his dissent from denial of certiorari in Sorich v. United States
⁸Sorich v. United States, 129 S. Ct. 1308 (2009) (Scalia, J., dissenting) (4 WCR 147).: A salaried employee calls in sick to catch a ball game. The teaching of McNally and Skilling is that if Congress wants to criminalize such conduct, it must speak more clearly than “honest services.” Without more clarity, federalism concerns counsel against an interpretation that makes most Americans federal felons. ⁹The “rule of lenity,” a close cousin to “fair notice,” similarly counsels against interpretations that criminalize conduct when statutory text is not clear. In addition to ignoring federalism concerns and fair notice, the Queri approach fails to consider the Rule of Lenity.

Of course, one could argue that the same set of hypothetical facts Scalia described in Sorich constitute a wire fraud under Queri’s intangible property theory: The employer had a right to know its employee was not sick but instead was going to a ball game. Had the employer known of this selfish act, it would have stopped it, disciplined the employee, warned others not to fake sick, or even instituted a new sick-day policy requiring a doctor’s note. In short, this was information that could have “changed its business conduct.”

Another example: An employee surfs the internet all day instead of working and doesn’t tell the employer. Had the employer known of this, some would argue, it could have taken action against the employee. Indeed, if prevalent enough, the employer could have limited the internet access of all its employees. Again, the information could have caused the employer to “change its business conduct.”

In sum, the Queri approach not only threatens to make Skilling meaningless in application but leads to the same constitutional problems of lack of fair notice and federal over-criminalization.

Flaw Two: Relying on Shaky Precedent.

Second, Queri cites distinguishable and arguably invalid precedent to support its intangible property approach. It is a fairly complicated tracing exercise, but here it is in simple terms: Queri cites cases from three circuits for the proposition that, under Sections 1341 and 1343, a scheme to defraud is actionable if it deprives another of information that could “impact financial decisions” or lead to a “change in business conduct.” ¹⁰See, e.g., United States v. Dinome, 86 F.3d 277 (2d Cir. 1996); United States v. Shyres, 898 F.2d 647 (8th Cir. 1990); United States v. Fagan, 821 F.2d 1002 (5th Cir. 1987). All this precedent can be traced to a 1981 Fifth Circuit decision, United States v. Ballard. ¹¹United States v. Ballard, 663 F.2d 534 (5th Cir. 1981). But Ballard was a pre-McNally honest-services fraud decision, not a traditional money or property fraud decision.

As the Fifth Circuit stated in Ballard, “The indictment charged that the mails were used in a fraudulent scheme in which the [defendants] combined and conspired to deprive [victim companies] of their employees’ honest and faithful services.” Thus, while Ballard does support the proposition that nondisclosures of information that could change business conduct supported charges under Sections 1341 and 1343 in 1981 (when those statutes implicitly encompassed an honest-services component), Ballard does not support the proposition that such information is an intangible right outside the right to honest services.

Indeed, Ballard supports the opposite conclusion: If such information was an intangible property right, there would have been no need for an honest-services analysis. Thus, Ballard never supported the Queri approach. Furthermore, to the extent it ever did, it no longer does. Ballard’s honest-services holding undoubtedly was overturned by McNally and, even if it was temporarily reinstated by the enactment of Section 1346, Ballard was re-invalidated by Skilling, at least to the extent it approved of an approach encompassing more than bribe or kickback schemes.

In short, Queri is based on distinguishable and likely invalid precedent.

Flaw Three: Ignoring Carpenter and Cleveland.

Third and last, Queri fails to address either of the Supreme Court’s landmark decisions defining “intangible property” under the traditional fraud statutes, Carpenter v. United States
¹²Carpenter v. United States, 484 U.S. 19 (1987). and Cleveland v. United States. ¹³Cleveland v. United States, 531 U.S. 12 (2000). Read together, these landmark cases tend to show that Queri’s definition of intangible property is too broad.

In Carpenter, an employee of the Wall Street Journal, along with others, misappropriated and traded on confidential information the paper later used in an investment advice column. The individuals were charged with mail fraud under a traditional property fraud theory. The Supreme Court noted that the WSJ “was defrauded of much more than its contractual right to [ ] honest and faithful services, an interest too ethereal in itself to fall within the … mail fraud statute.” The WSJ’s “confidential business information”—though intangible—had real value: It was “gathered at the cost of enterprise, organization, skill, labor, and money, and to be sold to those who w[ould] pay money for it.” Therefore, under an intangible property theory, the WSJ’s right to use and control the release of this confidential business information fell within the protection of the mail fraud statute.

Hard Sell.

It is difficult to stretch Carpenter to support the Queri approach. Both cases involve “information,” but the analogy seems to stop there. The information in Queri fundamentally differs from the information in Carpenter. In Carpenter (1) the WSJ already had gathered the information at its own expense; (2) the WSJ’s business centered around the gathering of such information; (3) the information was generally accepted as confidential, through both contract and general practice; and, perhaps most important, (4) the information had economic value to those outside the WSJ. None of this can be said of the information in Queri. (Nor can any of this be said of the information in hypotheticals like Scalia’s “sick-day ball game” hypothetical in Sorich.)

In the second landmark intangible property case, Cleveland, an applicant lied to the State of Louisiana in a gaming license application. The applicant was charged with mail fraud under a traditional property fraud theory. The government argued, in part, that the applicant’s failure to provide truthful information in the application deprived Louisiana of its right to “control the issuance, renewal, and revocation of [gaming] licenses.” Translated into Queri terminology, Louisiana was deprived of information that could have caused it to change its conduct (in deciding whether and when to issue licenses, and to whom). The Supreme Court held that Louisiana’s right to information used to control its licensing decisions fell outside the definition of “property” under the mail fraud statute.

With these two landmark cases in mind, the Queri approach appears a far cry from the intangible property theory approved in Carpenter; but the Queri approach appears quite similar to the intangible property theory rejected in Cleveland.

Conclusion

The Queri approach is highly suspect. It is arguable whether the facts in Queri could ever support a post-Skilling mail or wire fraud charge. But the broad language and approach in Queri almost certainly go too far. This approach, which potentially could turn every Skilling-barred honest-services theory into a viable intangible property theory, is misguided because it (1) oversimplifies Skilling and ignores its constitutional reasoning; (2) relies on distinguishable and arguably invalid precedent; and (3) ignores the Supreme Court’s landmark intangible property cases.

If other courts adopt the Queri approach, we can expect more of the same academic criticism, legal uncertainty, and over-criminalization that led to Skilling.