Honest Services Fraud

The honest services fraud statute, 18 U.S.C. § 1346, merely extends the reach of the mail and wire fraud statutes to protect against deprivations of certain “intangible rights” held by members of the public. This theory was historically used to prosecute defendant’s accused of government corruption, characterizing the loss suffered by taxpayers as a deprivation of the honest and faithful services of their government.

Today, the honest services statute has been found to extend well beyond public officials, covering most fiduciary, privileged, and employment relationships. The statute’s text makes clear that a “scheme to defraud” includes a scheme or artifice to deprive another of the intangible right of honest services.

Honest services fraud is now embodied in its own statutory provision, but the theory of prosecution was successfully utilized long before the law, 18 U.S.C. § 1346, was passed. The idea of honest services fraud is rooted in what is known as the intangible rights doctrine, and was used by prosecutors to combat political corruption. So, for example, suppose a Senator uses his political influence to persuade otherwise reluctant wealthy businesses to become clients of his consulting firm. These clients either mail or wire their payments to the consulting firm, triggering the federal jurisdictional element. It would be argued that such a corrupt use of official power bears all the markings of a traditional wire fraud or mail fraud “scheme.”

However, the problem in such cases was this: The traditional interpretation of “scheme to defraud” prosecuted under the wire fraud and mail fraud statutes meant a scheme to deprive another of money or property. In our example the Senator is not necessarily using taxpayer dollars to perpetuate the scheme, but instead is merely leveraging his considerable influence as a public official.

Enter the intangible rights doctrine. Focusing on the deprivation suffered by the public as a consequence of such bureaucratic corruption, prosecutors formulated the theory that taxpayers were deprived of the intangible right to have government affairs handled honestly and openly. A prevailing characterization of the deprivation is a “loss of control” by the public over their democratic government. Extending the mail and wire fraud statutes beyond deprivations of money and property to reach “intangible rights” proved enormously successful for prosecutions of public corruption, but also further cast the dragnet of an already ill-defined criminal prohibition. Soon the intangible rights doctrine was being used to prosecute actions that would have been civil torts a decade earlier, such as breaches of fiduciary duty and privileged relationships. Without the need for a prospect of pecuniary or financial deprivation, suddenly a failure to disclose a conflict of interest could support a charge of wire fraud, even though a defendant neither intended to effect nor stood to gain any illicit benefit.

Eventually, as vagueness and overbreadth concerns began to plague the laws application to such intangible rights, the Supreme Court in McNally v. United States, 483 U.S. 350 (1987) declared an end to the intangible rights doctrine, holding that a scheme to defraud did not include the deprivation of the right to honest services by the public.

The intangible rights doctrine did not die so easily, however, and within the year of the decision Congress expressly overruled McNally by enacting the aforementioned 18 U.S.C. § 1346, which states that a “scheme to defraud” includes a scheme or artifice to deprive another of the intangible right of honest services.

Almost immediately, pre-McNally-style prosecutions resumed in their typically unpredictable fashion. Attorneys who failed to disclose their representation of a competitor to a client business could be prosecuted along with a hedge fund manager who neglected to mention his large holding of a particular company’s stock to his client whose portfolio contains such shares. Even with the broad application, honest services fraud was most effective and consistently successful in the arena of public corruption.