'Honest Services' Law Must Be Restrained, Says Former Federal Prosecutor

HOUSTON, Feb. 9 /PRNewswire/ -- The current interpretation of "honest services" fraud must be revised to avoid needless prosecutions, says Thomas A. Hagemann, a partner in the Houston office of Gardere Wynne Sewell LLP.

The U.S. Supreme Court is currently considering two cases of honest services fraud and will hear a third – the case of former Enron CEO Jeffrey Skilling – this term. These cases allow the High Court to rethink and reinterpret a statute that critics have called vague and limitless.

The law prohibits public or private employees from depriving their employer "of the intangible right of honest services" – a phrase that Mr. Hagemann, a former Assistant U.S. Attorney in Los Angeles, says gives the government almost unbridled prosecutorial power.

Mr. Hagemann is in good company. Justice Antonin Scalia, in a dissent early last year, issued a broadside against the law. In Sorich v. United States, Justice Scalia said the "honest services" provision invites abuse "by headline-grabbing prosecutors" and that "it seems to me quite irresponsible to let the current chaos prevail."

In the private sector, a remedy would be simple enough to enact, Mr. Hagemann asserts.

First, the Court should amend the guidance issued in U.S. v. Rybicki by the 2nd U.S. Circuit of Appeals in 2003, Mr. Hagemann says. He recommends that the elements of a conviction include that the defendant acted solely in his or her own interests – that is, not to benefit the corporation at all.

Second, Mr. Hagemann recommends that the U.S. Department of Justice's U.S. Attorney's Manual include the following provision regarding honest services fraud and any other potential crime where the corporation is the alleged victim:

"If the corporation may be held liable for such agent's actions, ordinarily that agent should not be charged with any crime against the corporation, including but not limited to honest services fraud. In other words, the imputation rule that applies to whether a corporation may be held criminally liable applies to whether the corporation may be a victim."

In a nutshell, Mr. Hagemann says, there should be a higher, more clearly defined standard for prosecutors looking to bring honest services fraud cases.

"They should ask what purportedly was done for the employer's benefit? How secretly did the employee act? How did those actions further the employee's interests? How egregious were the misrepresentations or omissions? And how, if at all, was the employer harmed or potentially harmed, and how much did the employee gain?" he says. "While a higher standard may mean fewer prosecutions for honest services fraud, that result is long overdue."

Mr. Hagemann's article containing a complete assessment of honest services fraud, and his recommendations for revising the statute, were recently published by the Berkeley Center for Law, Business and the Economy: The Sea and the Mirror: Some Reflections on Corporate Honest Services Fraud and the (Hypothetically) Innocent Corporation.

Gardere Wynne Sewell LLP, an AmLaw 200 firm founded in 1909 and one of the Southwest's largest full-service law firms, has offices in Austin, Dallas, Houston and Mexico City. Gardere provides legal services to private and public companies and individuals in areas of government affairs, energy, litigation, corporate, tax, environmental, labor and employment, intellectual property and financial services.

SOURCE Gardere Wynne Sewell