96 Pages Posted: 23 Feb 2010
Date Written: February 22, 2010
This article examines the federal government's growing use of 18 U.S.C. § 1346 to prosecute public company executives for breaching their fiduciary duties. Section 1346 is a controversial but under-examined statute making it a felony to engage in a scheme "to deprive another of the intangible right of honest services." Although enacted by Congress over twenty years ago, the Supreme Court repeatedly declined to review the statute, until now. In 2009, Justice Antonin Scalia pointed to the numerous interpretive questions dividing the federal appellate courts and proclaimed that it was "quite irresponsible" to let the "current chaos prevail." Since then, the Court has granted certiorari in no fewer than three separate cases construing the honest services law.
The questions before the Supreme Court are of particular interest to public company executives and their professional advisers. Following revelations of massive fraud and management wrongdoing at Enron and other public companies, the Justice Department employed § 1346 to indict executives accused of breaching their fiduciary duties. Former Enron CEO Jeffrey Skilling and former Hollinger CEO Conrad Black are just two of the corporate fiduciaries found guilty of breaching their duties and convicted under the statute. Traditionally, Delaware law has governed the content and enforcement of executives' legal duties, largely protecting public company fiduciaries from civil liability. Now, with the emergence of honest services fraud as a weapon against corporate wrongdoing, and pressure from Congress for more prosecutions, civil and criminal law are trending in opposite directions. Corporate fiduciaries may become criminally liable for conduct that would not subject them to civil sanctions. Furthermore, because these fiduciaries look to state law for the standards governing their conduct, this anomalous development has profound implications for public company governance.
This article analyzes the issues before the Supreme Court in light of these contradictory enforcement trends. Spill-over from federal criminal jurisprudence to state fiduciary duty doctrine is one concern, but over-criminalization and prosecutorial abuse also must be considered. I conclude this article by proposing a statutory amendment that may advance Congress's interest in prosecuting public company executives for serious fraud while limiting federal interference with potentially conflicting fiduciary obligations arising under state law.
Keywords: Delaware, Journal, Corporate, Law, 18, 1346, honest services, fraud. Supreme Court, Scalia
Suggested Citation: Suggested Citation
Casey, Lisa L., Twenty-Eight Words: Enforcing Corporate Fiduciary Duties Through Criminal Prosecution of Honest Services Fraud (February 22, 2010). Delaware Journal of Corporate Law (DJCL), Vol. 35, No. 1, 2010. Available at SSRN: https://ssrn.com/abstract=1557351