Court's `Honest Services' Ruling Won't Help Madoff, Lawyers Say

Neither a convicted con artist like Bernard Madoff nor a jailed chief executive like WorldCom Inc.‘s Bernard Ebbers will benefit from today’s U.S. Supreme Court ruling that narrowed the federal “honest services” law used by prosecutors to target corporate wrongdoing, lawyers said.

Siding with former Enron Corp. Chief Executive Officer Jeffrey Skilling and ex-Hollinger International Inc. Chairman Conrad Black, the court said a law that makes it a crime to “deprive another of the intangible right to honest services” may be used only in cases involving bribery or kickbacks. The Supreme Court returned their cases to a lower court to determine whether some or all of the charges should be tossed out.

“Every defendant will raise it for a while,” said Peter Henning, a law professor at Wayne State University Law School in Detroit. “But no, I don’t expect to see a rash of reversals.”

The decision likely won’t apply in cases where the appeals are completed, and it definitely won’t in state corporate fraud cases -- like the one against Ex-Tyco International Ltd. CEO L. Dennis Kozlowski -- or where the defendant waived his right to appeal as part of a guilty plea, the professor said.

Nor will it have bearing in cases where the conviction was for a white-collar offense that didn’t involve “honest services,” such as the insider trading conviction of former Qwest Communications International Inc. chief Joseph Nacchio, Henning said.

Public Corruption

Usually when the honest services law is used -- mostly in public corruption cases -- there is also an allegation of bribery or kickbacks, he added.

Even in white-collar cases like Skilling’s and Black’s, courts may uphold the convictions if there’s proof the executives stole money or property or cheated investors along with depriving others of their honest services.

“What the ruling doesn’t apply to is thieves -- boiler rooms, Internet scams,” he said.

Among the beneficiaries of today’s ruling may be David Wittig and Douglas Lake, who are accused in federal court in Kansas of conspiring to steal millions of dollars from Westar Energy Inc. Wittig, the former chief executive officer, and Lake, the former executive vice president, face their third trial in the case after an appeals court in 2007 reversed their convictions for looting Kansas’s largest public utility.

‘Significant Chunk’

Patrick McInerney, the lawyer for Wittig, said in an interview that today’s decision may force prosecutors to abandon their claim that his client breached his fiduciary duty to the company. He said a “significant chunk” of the government’s case is based on the “honest services” theory -- but not all.

“The case won’t get tossed but the ruling will significantly impact the government’s theory,” he said.

Tracy Schmaler, a Justice Department spokeswoman, said prosecutors, while disappointed the justices narrowed the statute, is “pleased that the court upheld many of the core provisions that have been used for decades to prosecute corrupt public officials and corporate executives who have breached their duties to their constituents, clients and investors.”

William Devaney, a former federal prosecutor in New Jersey who is now at Venable LLP in New York, said he expects prosecutors to turn to other legal provisions to target corporate wrongdoing. “The government has plenty of arrows in its quiver,” Devaney said in a telephone interview. “This took one of them away.”

Defense Attorneys

The ruling nonetheless cheered defense attorneys who have viewed prosecutions based on the honest services theory as an attempt to criminalize wrongs previously addressed through civil litigation.

“In recent years, it has been popular with prosecutors in white-collar cases, especially when they were addressing generalized crimes like looting of the company, conflict of interest, not acting in the interest of shareholders, excessive compensation,” said Adam Hoffinger, a former federal prosecutor in New York who is now at Morrison & Foerster LLP in Washington.

Glenn Colton, who heads the white-collar crime practice at Sonnenschein Nath & Rosenthal in New York, said “everyone benefits” from the ruling because the vague and ill-defined statute rendered criminal actions that shouldn’t be.

Immediately after today’s ruling, the lawyer for former New York State Senate Republican leader Joseph Bruno, who was sentenced in May to two years in prison after his conviction of two counts of honest services fraud, said he will seek a dismissal of the charges.

Senator Bruno

“We argued when the charges against Senator Bruno were first brought and many times since, that the honest service statute, under which he was indicted, was not constitutional,” attorney Abbe Lowell said in a statement. “The Supreme Court has now agreed. We look forward to pressing our claim again with the Justice Department and with the judge who tried the case.”

The lawyer for former Illinois Governor Rod Blagojevich asked to pause his client’s corruption trial after today’s decision in order to study the ruling’s implications. Eleven of the 24 counts against the twice-elected former governor rely in part on the honest services fraud statute. Prosecutors previously amended their indictment, which had relied heavily on honest services fraud, to include other allegations based on other laws. U.S. District James Zagel denied the request.

Former HealthSouth Corp. CEO Richard Scrushy was convicted of defrauding taxpayers of his honest services at a 2006 trial after prosecutors said he bribed the governor of Alabama. His lawyer, Carmen Hernandez, didn’t immediately return a call.

Today’s Supreme Court ruling is Skilling v. United States, 08-1394.

To contact the reporters on this story: David Glovin in Manhattan federal court at dglovin@bloomberg.net.

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