The Supreme Court partially decriminalizes agency costs

Cite this Article
Larry Ribstein, The Supreme Court partially decriminalizes agency costs, Truth on the Market (June 24, 2010),

In the Skilling-Black case, the Court struck down “honest services” wire fraud under 18 U.S.C. 1346 in the absence of bribery/kickback allegations and remanded for determinations whether the errors in applying the statute justify reversals. But the Court also held that adverse pretrial publicity and community prejudice did not prevent Skilling from obtaining a fair trial.

The Court’s ruling strikes a huge blow against a significant weapon in the criminalization of agency costs which I’ve been criticizing since the beginning of my blogging days. I noted back in December that this result could be coming based on the oral argument, in which Justice Breyer asked why the “honest services” theory wouldn’t criminalize the acts of an employee getting his supervisor to “leave the room so that the worker can continue to read the Racing Form.” Breyer added: “Explain it to me how your test does not make this statute potentially criminalizing 100 million workers in the United States.”

As I said at the time:

That discussion gets to what I think the central problem is here: distinguishing between ordinary agency costs, which are pervasive in firms, and which firms have a wide range of contractual devices to deal with, and the agency costs that should trigger jail time.

Notably, all of the justices agreed that the statute should be struck down, at least in part. Justices Scalia and Thomas thought that the Court should have gone further and not attempted, as did the majority, to preserve the validity of the statute as to bribery and kickback allegations. These justices concluded that the statute was simply unconstitutionally unclear as to what it prohibited, and the Court should not have attempted to judicially construct a suitably clear statute.

This gets back to the basic problem noted above of trying to identify which part of agency costs should be criminalized. Whether you call it bribery or serious loafing, it’s all agency costs. Particularly since there is no coherent federal law of fiduciary duties – it’s all state law – Congress can’t assume that the courts will have any idea what it’s talking about when talks about “honest services.”

One reason why the majority may have declined to follow these dissenters’ suggestion lies in a Law Blog comment I quoted in my December post:

Expect defendants convicted under the law to rush the courthouse door. Striking down the honest-services crime would trigger “an earthquake within the criminal justice community,” said David Seide, a former federal prosecutor now with Curtis Mallet-Prevost Colt & Mosle LLP in Washington. Defendants convicted under the statute “will be able to say their convictions need to be reversed,” he said.

The Court avoided a serious earthquake by holding that the statute could be interpreted to support the bulk of honest services prosecutions involving bribery and kickback allegations.

As a result of this approach, prosecutors will still be able to use the honest services statute in future cases. However, one hopes that this case, plus revelations of what I’ve called “the real backdating scandal,” will throw a dose of cold water on the whole enterprise of criminalizing agency costs.

The Court’s refusal to throw out the convictions on pretrial publicity and community prejudice grounds drew a stinging dissent from Justice Sotomayor which remarkably evokes the atmosphere that accompanied the trial. From her opinion (references and footnote omitted):

The accompanying barrage of local media coverage was massive in volume and often caustic in tone. As Enron’s one-time CEO, Skilling was at the center of the storm. * * *

While many of the stories were straightforward news items, many others conveyed and amplified the community’s outrage at the top executives perceived to be responsible for the company’s bankruptcy. A [Houston] Chronicle report on Skilling’s 2002 testimony before Congress is typical of the coverage. It began, “Across Houston, Enron employees watched former chief executive Jeffrey Skilling’s congressional testimony on television, turning incredulous, angry and then sarcastic by turns, as a man they knew as savvy and detail-oriented pleaded memory failure and ignorance about critical financial transactions at the now-collapsed energy giant.” “‘He is lying; he knew everything,’ said [an employee], who said she had seen Skilling frequently over her 18 years with the firm, where Skilling was known for his intimate grasp of the inner doings atthe company. ‘I am getting sicker by the minute.'” A companion piece quoted a local attorney who called Skilling an “idiot” who was “in denial”; he added,” I’m glad [Skilling’s] not my client.”

Articles deriding Enron’s senior executives were juxtaposed with pieces expressing sympathy toward and solidarity with the company’s many victims. * * * The conventional wisdom that blame for Enron’s devastating implosion and the ensuing human tragedy ultimately rested with Skilling and former Enron Chairman Kenneth Lay became so deeply ingrained in the popular imagination that references to their involvement even turned up on the sports pages: “If you believe the story about [Coach Bill Parcells] not having anything to do with the end of Emmitt Smith’s Cowboys career, then you probably believe in other far-fetched concepts. Like Jeff Skilling having nothing to do with Enron’s collapse.”

When a federal grand jury indicted Skilling, Lay, and Richard Causey—Enron’s former chief accounting officer—in 2004 on charges of conspiracy to defraud, securities fraud, and other crimes, the media placed them directly in its crosshairs. In the words of one article, “there was one thing those whose lives were touched by the once-exalted company all seemed to agree upon: The indictment of former Enron CEO Jeff Skilling was overdue.” Scoffing at Skilling’s attempts to paint himself as “a ‘victim’ of his subordinates,” id., at 1394a, the Chronicle derided “the doofus defense” that Lay and Skilling were expected to offer, id., at 1401a.1 The Chronicle referred to the coming Skilling/Lay trial as “the main event” and “The Big One,” which would finally bring “the true measure of justice in the Enron saga.” On the day the superseding indictment charging Lay was issued, “the Chronicle dedicated three-quarters of its front page, 2 other full pages, and substantial portions of 4 other pages, all in the front or business sections, to th[e] story.”

There’s much more. Sotomayor’s opinion will help preserve for posterity the infamous mainstream press coverage of Enron. It was bloggers, notably including Tom Kirkendall, who told the real story.

The whole opinion is a suitable epitaph to this misguided prosecution, and to the hopefully bygone heyday of criminalizing agency costs.

Updates: Christine Hurt on honest services and prejudice issues; Bainbridge on honest services; Ted Frank with other links; and Tom Kirkendall with much more, particularly including a reminder about Skilling’s new trial motion. A WSJ editorial has a fitting epilogue on the media’s role which I discuss above:

The Black and Skilling cases are precisely the kind involving high-profile, unsympathetic defendants in which willful prosecutors like Mr. Fitzgerald are inclined to abuse the honest services law. They know the media won’t write about the legal complexities, and they know juries are often inclined to find a rich CEO guilty of something. We regret that in the case of Mr. Black, that failure of media oversight included us.