In Skilling Case Supreme Court Oral Argument, Government Limits Theft of Honest Services Crime to Company Fiduciaries

In the oral argument before the US Supreme Court in Skilling v. US, 08-1394, the government asserted that the theft of honest services crime is limited to company fiduciaries and does not extend to all employees. In responding to Justice Scalia’s inquiry of where he got the fiduciary limitation, government counsel said that it was inherent in the statute, adding that not all employees are fiduciaries. Noting that all the statute says is "honest services," Justice Scalia thought that any employee has the obligation to provide honest services.

Section 1346 of the US Code prohibits schemes to deprive another of the intangible right of honest services, thereby defining a fraud offense in the deprivation of the right to honest services. In similar cases, the government has pointed out honest services fraud requires a breach of the duty of loyalty, carried out with an intent to deceive, on a material matter. Under Delaware law, the duty of loyalty requires that a corporate fiduciary act with undivided and unselfish loyalty, with no conflict between duty and self-interest. The duty of loyalty mandates that the best interest of the company and its shareholders take precedence over any interest of an officer or director.

In the government’s view, the essence of the fraud was that Petitioner Skilling had a fiduciary duty to the Enron shareholders to act in their best interest and he betrayed that by acting contrary to the best interests of the shareholders, fraudulently upholding the price, and ultimately that constituted the crime. This case doesn't involve any subtle or arcane fiduciary duty, said counsel. This is one of the basic fiduciary duties that any chief executive has, not to lie to shareholders about the financial condition of the firm.

Justice Kennedy asked what authority he should look to in determining which employees are fiduciaries and which are not. The government replied that standard agency law principles would be applied, but that the Court could decide this case without introducing such complexities because the core duties of loyalty that have formed the core of the honest services prosecutions are universal.

To Justice Kennedy’s comment that even a low level employee could be given corporate property to protect, government counsel said that scenario would not be an honest services case since honest services cases are about conflicting interests and the misuse of official position.

When an investor buys a share of stock in a company, said government counsel, they buy the right to hear and receive truth from the chief executive officer. And importantly, they buy the right to have their interests placed ahead of the chief executor officer every day of the week. So baked into this case at the outset was the notion that these officials were not acting in the best interest of the shareholders, the government emphasized, rather they were furthering their own interest by maintaining a high stock price so that they could profit from it.

The petitioner counsel was concerned with the sweep of the government's theory impacting the workplace. Counsel’s understanding is that the duty of loyalty extends to all employees. Thus, upholding the government’s theory would have devastating implications for workplace relations since it would threaten to convert almost any lie in the workplace into an honest services fraud prosecution, a federal felony.

Chief Justice Roberts asked petitioner’s counsel why the issue is so difficult. The statute rohibits a scheme to deprive another of the in tangible right of honest services, reasoned the Chief, Skilling owed the Enron shareholders honest services and he acted dishonestly in a way that harmed them.

.