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Web address: http://www.law.com/ny
VOLUME 231—NO. 7
MONDAY, JANUARY 12, 2004
OUTSIDE COUNSEL
BY DANIEL RICHMAN AND ALAN VINEGRAD
‘Rybicki’: The Intangible Rights Theory of Criminal Fraud
that it was beyond the scope of the mail fraud
statute. It noted, “If Congress desires to go
further, it must speak more clearly than it has.”
O
n Dec. 29, the U.S. Court of
Appeals for the Second Circuit
issued its long-awaited decision in
United States v. Rybicki.1 In it, the
circuit held that the part of the federal mail
fraud statute allowing prosecutions of schemes
to “deprive another of the intangible right of
honest services” was not unconstitutionally
vague — at least as applied in this case. It also
charted a path through the thicket of one of
the more daunting areas of federal criminal law.
The mail fraud statute, 18 U.S.C. §1341,
broadly allows the prosecution of schemes or
artifices “to defraud” or “for obtaining money
or property by means of false or fraudulent
pretenses, representations, or promises.” The
wire fraud statute, 18 U.S.C. §1343, is identical
in scope.
In the 1970s and early 1980s, federal
prosecutors going after payers and recipients of
bribes and kickbacks in the public and private
sectors put a new gloss on the statutes.2 Such
payments generally are concealed efforts to get
favorable treatment from some agent who has
been endowed by his or her principal with
decisional power.
Instead of alleging that a defendant had
defrauded his or her victim out of money or
property, the government alleged that the
payment or receipt of the bribe had defrauded
the principal (some state or local electorate or
government, or private firm) of the right to the
agent’s “honest services.”
However baroque the theory sounded, it
offered a huge advantage to prosecutors by
freeing them of the obligation of proving that,
as a result of the bribe, a decision was made that
was economically damaging to the principal.
All the government had to prove — besides the
mailing — was that the official or agent had
been given the improper bribe or kickback.
Daniel Richman, a former chief of appeals in
the U.S. Attorney’s Office for the Southern
District of New York, is a professor at Fordham
University Law School. Alan Vinegrad, former U.S. attorney for the Eastern District of New
York, is a partner at Covington & Burling.
Intangible Rights Statute
Daniel Richman
Alan Vinegrad
‘Honest Services’ Theory
This “honest services” theory flourished
in the Second Circuit, and indeed reached
what some consider its disturbing high-water
mark there.
In United States v. Bronston,3 a partner in a
------------------------------------------------
The “honest services” theory
flourished in the Second
Circuit, and indeed reached
what some consider its
disturbing high-water
mark there.
------------------------------------------------
New York law firm took on, as a personal
client, an entity bidding for a city franchise
that also was being sought by a client of
his firm. Although he neither personally
represented the firm’s client nor used any
confidential information acquired from it to
help his own client, his conduct was enough,
the circuit found in 1981, to support a mail
fraud conviction. His “fraud” lay in his breach
of the fiduciary duty that he, as a partner, owed
to his firm’s clients.4
Suddenly in 1987, the U.S. Supreme
Court held this entire cottage industry to be
misbegotten. In McNally v. United States,5 the
Court, reading §1341 “as limited in scope to
the protection of property rights,” rejected the
entire “honest services” doctrine on the ground
Congress spoke one year later. In 1988, it
passed 18 U.S.C. §1346, which explicitly
allowed mail and wire fraud prosecutions in
which the alleged “scheme to defraud” was a
scheme “to deprive another of the intangible
right of honest services.”
This legislation made some things clear, but
others not. McNally was certainly not good law,
and mail fraud prosecutions based on the loss of
“the right of honest services” could go forward.
But neither the text of §1346 nor its scant
legislative history offered much guidance on
who really had a “right to honest services” and
what those services entailed.
Employees have always been thought to owe
their employers such services, and fiduciaries as
well. But what about parties to a contract? And
would it be enough that someone owing
“honest services” was simply not forthright?
Or would there also have to be some actual or
likely harm?
The broader the interpretation, the more
easily prosecutors could charge any instance of
deceit in the public or private sectors as mail
fraud, and the more susceptible §1346 was to
claims that it lacked sufficient specificity to
pass constitutional muster — that prosecutors
had been given too much power to decide, and
defendants too little notice of, precisely what
the statute condemned.
Over time, federal courts throughout the
nation have stepped into the breach and
given content to §1346 — content that
somewhat limited prosecutorial theories and
that allowed §1346 to survive challenges
alleging unconstitutional vagueness.
In 2002, however, a panel of the Second
Circuit, in United States v. Handakas,6 held
the statute unconstitutional as applied to a
defendant whose duty to render honest services
arose only out of a contract — specifically, a
contractual obligation to comply with state
prevailing wage laws when his company paid
NEW YORK LAW JOURNAL
employees to do construction work on behalf of
the city’s School Construction Authority.
Shortly thereafter, another Second Circuit
panel, in United States v. Rybicki,7 upheld the
mail fraud convictions of two prominent
Staten Island-based personal injury lawyers
who had improperly given money to insurance
adjusters to induce them to expedite settlements with the lawyers’ clients. The government did not contend that the scheme resulted
in any economic harm to the adjusters’ employers — the insurance companies that paid the
settlements. Nevertheless, the panel held that
the insurance companies’ loss of the honest
services of their adjusters was sufficient to
sustain the convictions under §1346.
The Rybicki panel distinguished Handakas,
noting that the lawyers in Rybicki had induced
the adjusters’ breach of a duty enforceable in
tort, not merely a contractual obligation. But
the tension between the two decisions — and
the consequent uncertainty about how
§1346 applied in the private sector — was
evidently troubling enough for a majority of the
active judges of the circuit to vote to rehear
Rybicki in banc.
In Banc Decision
In its in banc decision, the full Second
Circuit, by a 7-4 vote, held that despite its
ostensible breadth, §1346 was sufficiently
specific in its coverage to pass constitutional
muster.
“There is no reason to think that Congress
sought to grant carte blanche to federal prosecutors, judges and juries to define ‘honest services’ from case to case for themselves,” Judge
Robert Sack, writing for the majority, asserted.
All a court, or prospective defendant seeking
to understand what Congress meant, has to
do is look at the “honest services” case law
before McNally.
Having grounded §1346 in pre-McNally law,
the Court explained precisely what this law had
been in the private sector context. To be sure,
it did not embrace all the prior case law, and
simply interred Bronston in a footnote. But it
then sought to harmonize the rest of the circuit
courts’ honest services precedents: All involved
officers or employees, or people “in a relationship that gives rise to a duty of loyalty
comparable to that owed by employees to
employers,” who, “while purporting to act for
and in the interests” of the entity to which they
owed that loyalty, secretly acted in their own
interests instead.
With the scope of criminal fraud liability
under §1346 so set, the court upheld the
prosecution theory in Rybicki but rejected the
one used (unsuccessfully) in Handakas. As for
Rybicki, the majority concluded that “[a]t the
end of the day, we simply cannot believe that
Messrs. Rybicki and Grae did not know that
MONDAY, JANUARY 12, 2004
they were courting prosecution and conviction
for mail and wire fraud when they undertook to
use the wires and the mails, in effect, to pay off
insurance adjustors, while assiduously covering
their tracks.” And although the majority
upheld the result in Handakas insofar as
holding that the case was beyond the reach
of the mail fraud statute, the majority did
overrule Handakas’ ruling that the statute was
unconstitutionally vague.
This reaffirmation of Handakas attracted a
special concurrence from Judge Reena Raggi,
who would have defined the “right to honest
services” more broadly, looking to any “legally
enforceable claim to have another person
provide labor, skill, or advice without fraud or
deception.”
Judge Raggi questioned whether there was
“any principled reason to distinguish between
an employee and an arms-length contractor
when they engage in identical fraud schemes
with the specific intent to deprive a victim
of services whose value depends on honest
performance.”
Had it felt sufficiently liberated from
traditional rule of law concerns to speak in
pragmatic terms, the circuit might have had a
ready answer both to Judge Raggi’s concurrence
and to Judge Dennis Jacobs’ dissenting opinion,
which, like his Handakas opinion, decried
§1346’s lack of legislative specificity: For
better or worse, criminal fraud law has long
been characterized by judicial lawmaking,
with a twist.
Congress does intervene from time to time,
but only to take the initiative to expand fraud
liability (as it did when it expanded the mail
fraud statute to reach schemes using private
mail carriers) or to reject judicial decisions
(such as McNally) limiting such liability.8
For its part, the Supreme Court has shown
considerable tolerance for a proliferation of
diverse circuit court approaches to the statute.
In the absence of authoritative texts, the
challenge for each circuit has been to devise
limiting principles, with the clarity of a line
as important as its precise placement. As
Judge Jacobs’ dissent makes clear, the circuit
courts have, to put it plainly, drawn these lines
all over the place, with no overarching or
unifying principle other than to limit a very
broad statute.
Quietly embracing its law-making role, the
circuit also used Rybicki to clarify what it takes
for an employee, or person owing a similar duty
of honest services, to violate that duty within
the meaning of §1346.
The panel opinion had required that it be
“reasonably foreseeable that the scheme could
cause some economic or pecuniary harm to the
victim that is more than de minimus.”
The in banc court rejected this test as
“something of an ipse dixit designed simply to
limit the scope of section 1346.” Instead, it
opted for a somewhat broader “materiality”
test, which, the court noted, “has the virtue
of arising out of fundamental principles of the
law of fraud.”
Under this test, the government must show
that the employee’s misinformation or omission
“would naturally tend to lead or is capable of
leading a reasonable employer to change its
conduct.” This approach, the court assured,
would screen out petty derelictions of duty in
much the same way as the panel’s standard was
intended to do. Thus, the giver or recipient of
a “modest Christmas present” to an employee
that has not been disclosed to his or her
employer probably need not fear a mail fraud
prosecution. But not definitely.
Conclusion
The Rybicki decision is unlikely to open the
proverbial floodgates to criminal prosecution of
trivial deceits or fiduciary breaches. Prosecutors
already have pushed to the outer limits of the
statute — and beyond, as in Handakas — and
have little incentive to expend limited
resources on prosecuting insignificant frauds.
Nevertheless, numerous courts interpreting
§1346 have felt compelled — as in Rybicki —
to do what Congress did not do: to craft limitations onto this exceptionally broad statute.
A potpourri of seemingly irreconcilable
precedents has proliferated. It will be interesting to see if the Supreme Court chooses to
address this extensive body of judge-made law,
just as it did in McNally nearly 17 years ago.
••••••••••••••
•••••••••••••••••
(1) 2003 WL 23018917 (2003) (in banc).
(2) See Charles F. C. Ruff, Federal Prosecution of Local
Corruption: A Case Study in the Making of Law
Enforcement Policy, 65 Geo. L. J. 1171 (1977); Note, The
Intangible-Rights Doctrine and Political Corruption
Prosecutions Under the Federal Mail Fraud Statute, 47 U.
Chi. L. Rev. 562 (1980).
(3) 658 F.2d 920 (2d Cir. 1981), cert. denied, 456 U.S.
915 (1982).
(4) For criticism of the decision, see John C. Coffee, Jr.,
From Tort to Crime: Some Reflections on the
Criminalization of Fiduciary Breaches and the Problematic
Line Between Law and Ethics, 19 Am. Crim. L. Rev. 117,
130-34 (1981).
(5) 483 U.S. 350 (1987).
(6) 286 F.3d 92 (2d Cir.), cert. denied, 123 S. Ct. 168
(2002).
(7) 287 F.3d 257 (2d Cir. 2002) (panel opinion).
(8) See Daniel C. Richman, Federal Criminal Law,
Congressional Delegation, and Enforcement Discretion, 46
UCLA L. Rev. 757, 763-64 (1999).
This article is reprinted with permission from the
January 12, 2004 edition of the NEW YORK LAW
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