Reforming the Federal Criminal Code Within the Context of White Collar Crime
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Reforming the Federal Criminal Code
Within the Context of White Collar Crime
FRANK C. RAZZANO*
INTRODUCTION
In 2003, a Federalist Society study estimated that there were more than
4000 federal crimes scattered throughout the fifty titles of the U.S. Code. 1
That number jumps to 10,000 if criminal enforcement of federal regulations
is included.2 While the numbers are astounding, what is even more
disturbing for members of a democratic society is the fact that the majority
of these laws are vague and ambiguous. For example, there are more than
100 different types of mens rea in these statutes.3 Even the commonly used
term ‚willfully‛ has many meanings in federal criminal law.4
This Article illustrates this fatal flaw of American criminal law by
analyzing two of the Department of Justice’s favorite tools for combatting
white collar crime: the honest services fraud statute, 18 U.S.C. § 1346, and
the securities fraud statute, 15 U.S.C. § 10(b). As shown below, these two
statutes are so vague, ambiguous, and overly broad that even the U.S.
Supreme Court has had difficulty figuring out what they mean—ultimately
engaging in judicial legislation to add some measure of specificity to these
* Mr. Razzano is a partner in Pepper Hamilton LLP’s Washington, D.C. office, and
focuses his practice on all areas of civil, commercial, and criminal litigation, with an emphasis
on U.S. Securities and Exchange Commission enforcement. He secured an acquittal in a
criminal insider trading case for a tippee, despite the fact that the tipper was convicted. He is
also an Adjunct Professor at the University of Maryland Law School, where he has taught
courses on white-collar crime, international criminal law, securities litigation, broker-dealer
regulation, and evidence.
1 Julie R. O’Sullivan, The Federal Criminal “Code” is a Disgrace: Obstruction Statutes as Case
Study, 96 J. CRIM. L. & CRIMINOLOGY 643, 648-49 (2006).
2 Id. at 649 (stating that if all federal regulations in force as of 1998 were included, the
number of criminal offenses would top 10,000).
3 William S. Laufer, Culpability and the Sentencing of Corporations, 71 NEB. L. REV. 1049, 1064-
65 (1992).
4 See Spies v. United States, 317 U.S. 492, 497 (1943) (‚*W+illful, as we have said, is a word
of many meanings, its construction often being influenced by its context.‛).
702012 Reforming the Federal Criminal Code 71
hopelessly overbroad laws. As proud as we may be of our nine Supreme
Court justices, they are not our elected representatives and should not be
making up the law as they go along because that clearly is the task of
Congress.
I. Honest Services Fraud
As the country industrialized after the Civil War, Congress passed the
mail-fraud statute. Embodied in its current form at 18 U.S.C. § 1341, the
statute outlaws any scheme or artifice to defraud another of money or
property. Around the time of World War II, courts began to develop a
theory of mail fraud known as ‚honest services‛ fraud. Under that theory,
one could violate the mail-fraud statute by engaging in a scheme or artifice
to defraud another of the right to ‚honest services.‛ By the 1970s, federal
prosecutors around the country had begun to use this theory to prosecute
state and local officials who took bribes, arguing that the corrupt officials
had deprived citizens of ‚honest services.‛5 Prosecutors also began to
apply the theory of honest services fraud in the private sector, to
employees who breached fiduciary duties owed to their employer.6
Although the mail-fraud statute gave no textual indication that it
encompassed breaches of fiduciary duty owed by state or local officials to
their constituents or by private employees to their employer, courts
nevertheless began to utilize the statute to prosecute such breaches of
fiduciary duty as mail fraud.7
In 1987, the Supreme Court attempted to put an end to the judicial
development of honest services fraud in McNally v. United States.8 In that
case, Howard Hunt, who as chairman of the Kentucky Democratic Party,
had de facto control over selecting insurance agencies for the state, entered
into an agreement with an insurance agency to share commissions of more
than $50,000 from the state with a company controlled by Hunt and
operated by his business partner, Charles J. McNally.9 The indictment
alleged that McNally had entered into a scheme to obtain money by false
pretenses and to defraud the citizens and government of Kentucky of the
5 See, e.g., United States v. Mandel, 862 F.2d 1067, 1074 (4th Cir. 1988) (discussing the
government’s theory of the case that ‚the State of Maryland and its citizens were defrauded of
the honest and faithful service of Mandel . . . .‛).
6 See, e.g., United States v. George, 477 F.2d 508, 513 (7th Cir. 1973) (‚Here the fraud
consisted in Yonan’s holding himself out to be a loyal employee, acting in Zenith’s best
interest, but actually not giving his honest and faithful services, to Zenith’s real detriment.‛).
7 See United States v. Siegel, 717 F.2d 9, 23-25 (2d Cir. 1983) (Winter, J., dissenting in part &
concurring in part).
8 483 U.S. 350, 361 (1987).
9 Id. at 352-53.72 New England Law Review v. 46 | 70
right to have their governmental affairs conducted honestly. 10 The judge
charged the jury that the defendants could be found guilty of fraud if the
government proved that Hunt had directed commissions to his company
without disclosing that fact to the public and the state government, whose
actions could have been affected by such disclosure.11 Although Hunt did
not hold public office, the Sixth Circuit found that Hunt could make, and
had made, decisions as a result of his special relationship with the
government.12 The court therefore concluded that Hunt was guilty of
honest services fraud. On review, the Supreme Court reversed, holding
that the mail fraud statute protects only property rights, not the intangible
‚right to good government.‛ This holding narrowed the mail-fraud statute
to cover only schemes and artifices to defraud another of money or
property by means of false or fraudulent pretense, representations, and
promises.13
In Carpenter v. United States, the Court elaborated on McNally’s holding
that the mail-fraud statute applies only to protected property rights, as
opposed to the unprotected intangible right to honest and impartial
government.14 In Carpenter, a writer at the Wall Street Journal provided
friends with advance copies of the ‚Heard on the Street‛ column, which
was contrary to the newspaper’s policy by depriving it of confidential
business information.15 The writer’s friends then traded on the basis of the
yet-to-be-published articles.16 The Court made clear that the newspaper’s
right to maintaining the confidentiality of its business information was a
tangible property right, unlike the intangible right to good government,
which was not a property right per McNally.17 The Court further held that
the mailing element of the fraud statute had been satisfied based on the
circulation of the Wall Street Journal through the mail, which was an
essential part of the writer’s scheme to defraud his employer of the right to
protect its confidential business information before publication. 18
In the wake of McNally and Carpenter, Congress passed 18 U.S.C. §
1346, which provides that ‚the term ‘scheme or artifice to defraud’ includes
10 Id. at 353.
11 Id. at 354-55.
12 Id. at 355.
13 In the wake of McNally, the Fourth Circuit granted former Maryland Governor Marvin
Mandel, who had served a prison sentence in connection with his mail fraud racketeering
conviction, a writ of coram nobis, available to remedy errors of the most fundamental character
where a defendant is not in custody, but the conviction has some lingering effect beyond its
mere stigma. United States v. Mandel, 862 F.2d 1067, 1070, 1075 (4th Cir. 1988).
14 484 U.S. 19, 19, 25 (1987).
15 Id. at 22-23.
16 See United States v. Carpenter, 791 F.2d 1024, 1026-27 (2d Cir. 1986).
17 Carpenter, 484 U.S. at 25, 28.
18 Id. at 29.2012 Reforming the Federal Criminal Code 73
a scheme or artifice to deprive another of the intangible right of honest
services.‛19 The statute passed as part of the Omnibus Drug Bill with
virtually no legislative history.20 Its language was not the subject of any
committee report or floor debate. 21 Indeed, Representative John Conyers
stated that the statute was intended merely to overturn the McNally
decision.22 Following final passage, the Senate Judiciary Committee entered
into the congressional record a report stating that § 1346 ‚overturns the
decision in McNally v. United States.‛23
By overturning McNally, Congress invited the courts to reenter the
field of judicial legislation by grappling with what it means to ‚deprive
another of the intangible right of honest services.‛24 In the ensuing years,
when dealing with public officials, some courts held that the services owed
by a public official must be due under state law.25 Other courts required the
public official to have breached a fiduciary duty established by state or
federal law.26 Yet other circuits rejected a state-law limiting principle and
held that honest services were governed by a uniform federal standard. 27
In the private sector, the meaning of honest services fraud was even
more confused. Some courts held that a fiduciary duty was required to
establish honest services fraud. 28 Not all agreed, however. In United States
v. Ervasti, the Eighth Circuit held that a breach of fiduciary duty is not a
necessary element, because nothing in § 1346 suggests that it is. 29 In United
States v. Rybicki, the Second Circuit held that a personal injury lawyer
violated § 1346 by participating in a scheme involving payments made to
insurance adjusters who, in turn, failed to report them to their employer in
19 18 U.S.C. § 1346 (2006).
20 United States v. Brumley, 116 F.3d 728, 742 (5th Cir. 1997) (Jolly & DeMoss, JJ.,
dissenting).
21 Id.
22 134 CONG. REC. 33,297 (1988).
23 134 CONG. REC. S17,360, S17376 (Daily Ed. Nov. 10, 1988) (statement of Sen. Joe Biden).
24 See 134 CONG. REC. 33,250 (1988).
25 See, e.g., Brumley, 116 F.3d at 739.
26 See, e.g., United States v. Murphy, 323 F.3d 102, 116-17 (3d Cir. 2003) (‚We thus endorse
(and are supported by) the decisions of other Courts of Appeals that have interpreted § 1346
more stringently and required a state law limiting principle for honest services fraud . . . .‛).
27 See, e.g., United States v. Sorich, 523 F.3d 702, 712 (7th Cir. 2008); United States v.
Urciuoli, 513 F.3d 290, 298-99 (1st Cir. 2008); United States v. Walker, 490 F.3d 1282, 1299 (11th
Cir. 2007); United States v. Sawyer, 239 F.3d 31, 41-42 (1st Cir. 2001); United States v. Bryan, 58
F.3d 933, 942 (4th Cir. 1995).
28 See, e.g., United States v. Hausmann, 345 F.3d 952, 956 (7th Cir. 2003); United States v.
Martin, 228 F.3d 1, 17 (1st Cir. 2000); United States v. Frost, 125 F.3d 346, 368 (6th Cir. 1997);
United States v. Gray, 96 F.3d 769, 774 (5th Cir. 1996).
29 201 F.3d 1029, 1036 (8th Cir. 2000).74 New England Law Review v. 46 | 70
contravention of company policy.30 Affirming the conviction, the court
noted that, ‚in a relationship that gives rise to a duty of loyalty comparable
to that owed by employees to employers,‛ honest services fraud could
exist.31
Some courts required a showing that a defendant’s conduct resulted in
reasonably foreseeable economic harm in order for the offense to fall
within the honest services fraud statute.32 The District of Columbia Circuit,
on the other hand, required only that it be reasonably foreseeable that the
economic harm could have resulted from a breach of fiduciary duty. 33 But
the Tenth Circuit required no such showing of economic harm. 34 The Fifth
Circuit, while requiring some detriment, believed that the detriment could
be established by the breach of fiduciary duty itself.35 In contrast, the
Seventh Circuit rejected a reasonably-foreseeable-harm test, and required
the breach of fiduciary duty be for personal gain at the expense of the party
to whom the duty was owed.36 The Second Circuit rejected any
requirement of harm or gain and instead required only a showing of
materiality (i.e., that the defendant’s misrepresentation or omission
naturally tended to influence—or was capable of influencing—a change in
conduct).37 Thus, the elements of honest services fraud differed in each
circuit, as courts—rather than Congress—tried to define the crime.
Finally, the Supreme Court entered the fray in Skilling v. United States.38
The Court, however, simply engaged in further judicial legislation,
ostensibly to save the statute from being declared unconstitutional. The
Court acknowledged the statute’s vagueness but chose to save the statute
by limiting it to the core bribery and kickback offenses, which the majority
asserted these offenses constituted the extent of the statute’s application
before McNally.39
Skilling’s judicial legislation does not truly resolve the matter. Now that
honest services fraud has been interpreted to cover bribes and kickback
30 354 F.3d 124, 126-27 (2d Cir. 2003).
31 Id.
32 See, e.g., United States v. Serafino, 281 F.3d 327, 332 (1st Cir. 2002); United States v.
Vinyard, 266 F.3d 320, 327-28 (4th Cir. 2001); Martin, 228 F.3d at 17; United States v.
Pennington, 168 F.3d 1060, 1065 (8th Cir. 1999); United States v. Devegter, 198 F.3d 1324, 1329-
30 (11th Cir. 1999); Frost, 125 F.3d at 368-69.
33 See, e.g., United States v. Sun-Diamond Growers of Cal., 138 F.3d 961, 973-74 (D.C. Cir.
1998); United States v. Lemire, 720 F.2d 1327, 1337 (D.C. Cir. 1983).
34 See, e.g., United States v. Welch, 327 F.3d 1081, 1104 (10th Cir. 2003).
35 See, e.g., United States v. Brown, 459 F.3d 509, 519 (5th Cir. 2006).
36 See, e.g., United States v. Hausmann, 345 F.3d 952, 956, 959 (7th Cir. 2003).
37 United States v. Rybicki, 354 F.3d 124, 145, 162 (2d. Cir. 2003).
38 130 S. Ct. 2896 (2010).
39 Id. at 2928-31 (discussing the court’s decision to apply the statute only to bribery and
kickbacks under a pre-McNally rationale).2012 Reforming the Federal Criminal Code 75
cases, must the bribe or kickback violate a fiduciary duty? For example, if
an employee favors a supplier that takes him golfing, is that a breach of
fiduciary duty owed to his employer? And, if so, what is its source of the
duty—state law, federal law, or the employer’s company ethics rules?
In the wake of Skilling, the Third Circuit held that in order to prove
honest services fraud, the government must establish an overt act in
furtherance of a quid pro quo, such as mutual and contemporaneous
benefits.40 In other words, the government must prove that ‚the payor
provided a benefit to a public official intending that he will thereby take
favorable [action] that he would not otherwise take‛ and that ‚the official
accepted the benefit with the intent to take official [action] to benefit the
payor.‛41 This merely creates more judicial legislative gloss in an attempt to
define what is a ‚bribe‛ or ‚kickback‛ in the absence of a congressional
definition in 18 U.S.C. § 1346.
While Skilling sought to confine honest services fraud to bribes and
kickbacks, holding it does not apply to self-dealing or failure to disclose,
there is an easy way around this. The government can avoid this limitation
by merely alleging that a financial-disclosure form required by government
or a private employer was mailed or sent over the wires via the Internet,
and that such transmission was an act in furtherance of a ‚bribe‛ or a
‚kickback‛ scheme in violation of 18 U.S.C. § 1346. Thus, the Skilling
decision, while potentially helpful in limiting an overly broad statute,
creates as many issues in application as it resolves in theory. Public officials
and employees will undoubtedly have to brave numerous future
prosecutions until the Supreme Court further refines the meaning of the
statute.
II. Insider Trading
Section 10(b) of the Securities and Exchange Act was first passed in
1934. But no one believed at that time that Section 10(b), which outlawed
the use of manipulative or deceptive devices or contrivances in violation of
SEC rules, covered insider trading. In fact, it was not until the 1940s that
the SEC promulgated Rule 10b-5, which outlawed: employing any device,
scheme or artifice to defraud; the making of an untrue statement of a
material fact; or engaging in acts, practices or courses of business which
would operate as a fraud or deceit upon any person. 42 It then took the SEC
another twenty years to suggest in Cady, Roberts & Co., that Section 10(b)
40 United States v. Wright, 665 F.3d 560, 568 (3d Cir. 2012) (‚In the honest services fraud
context, the Government must prove overt acts in furtherance of a quid pro quo, such as
mutual and contemporaneous benefits.‛).
41 Id. at 568.
42 17 C.F.R. § 240.10b-5 (2011).76 New England Law Review v. 46 | 70
covered insider trading.43 Thereafter, it took the Supreme Court another
thirty-six years and four separate opinions before it was able to define the
parameters of insider trading.
In 1968, the Second Circuit initially suggested that anyone who
possesses information must either disclose that information to the
investing public or be precluded from trading or recommending the stock
while the information remains undisclosed.44 But in 1980, in Chiarella v.
United States, the Supreme Court rejected that interpretation and
substituted what became known as the classical theory of insider trading. 45
Under that theory, the relationship between a corporate insider and a
shareholder of the corporation gives rise to an obligation on the part of the
insider either to disclose or refrain from trading.46 If the trader is neither an
insider nor a fiduciary, there simply is no obligation to disclose material
nonpublic information.47
Three years later, in Dirks v. SEC, the Supreme Court tackled the
scenario of a tippee who receives material nonpublic information from an
insider.48 The Court concluded that a tippee has a duty to disclose or
refrain from trading that derives from the insider’s duty. This is not
because the tippee merely received the information, but rather because the
insider improperly made the information available to the tippee in breach
of a fiduciary duty. 49 Whether improper disclosure breaches fiduciary duty
depends upon the purpose of the disclosure. If the purpose was to benefit
the person who provided the information to the tippee, then the disclosure
constitutes a breach of fiduciary duty. 50 However, as the dissent correctly
points out, this motivation requirement is blatant judicial activism with no
basis in the law of fiduciary duty. 51 The Dirks majority’s improper-purpose
requirement never was an element of a breach of fiduciary duty until the
Court judicially legislated it for insider trading cases.
In Dirks, the Supreme Court left open the question whether an
individual who does not derive nonpublic information from the
corporation whose stock he trades may be held liable for insider trading
43 Order Suspending from National Securities Exchange, 1961 WL 59902 (Nov. 8, 1961).
44 SEC v. Tex. Gulf Sulphur, 401 F.2d 833, 848 (2d Cir. 1968).
45 445 U.S. 222, 223 (1980); United States v. O’Hagan, 521 U.S. 642, 651-52 (1997) (‚Under
the ‘traditional’ or ‘classical theory’ of insider trading liability, § 10(b) and Rule 10b-5 are
violated when a corporate insider trades in the securities of his corporation on the basis of
material, nonpublic information.‛).
46 O’Hagan, 521 U.S. at 652.
47 Chiarella, 445 U.S. at 232, 235.
48 463 U.S. 646, 658 (1983).
49 Id. at 660.
50 Id. at 662.
51 See id. at 667-68 (Blackmun, J., dissenting).2012 Reforming the Federal Criminal Code 77
under Section 10(b). In Carpenter v. United States, the Court confronted the
issue of whether a person engages in insider trading by misappropriating
information in breach of fiduciary duty and trading on that information,
where the duty breached was not owed to the corporation whose stock was
traded.52 However, the Court divided four to four on the issue, and it was
not until 1997, in United States v. O’Hagan, that the Supreme Court finally
ruled that the so-called ‚misappropriation theory‛ was encompassed by
Section 10(b) and Rule 10b-5.53
Recently, there has been a great deal of controversy about whether
members of Congress are exempt from the insider-trading laws.54 While
there is obviously no exemption in the text of Section 10(b), when a
member of Congress utilizes material non-public information gained in a
legislative capacity, it is unclear whether that member could be liable
under the so-called misappropriation theory confirmed in O’Hagan.55
Under that theory, whenever someone misappropriates information in
breach of a fiduciary duty and trades on the information, the individual
has engaged in fraud in connection with the purchase or sale of a security
in violation of Section 10(b).
Do members of Congress owe a fiduciary duty to Congress or to their
constituents? Before the Supreme Court’s decision in Skilling, one would
have thought that under the honest-services-fraud theory, members owe
such a fiduciary duty, either to Congress or to the people of the United
States. But the Supreme Court’s judicial legislation in Skilling limited the
honest-services-fraud theory to bribes and kickbacks. If, however, as Justice
Ginsburg suggested in Skilling, and as Justice Scalia agreed, the honest-
services-fraud theory is based fundamentally on a breach of fiduciary duty,
and that breach arises out of a duty of loyalty owed by a state or local
official to his constituency, it would seem inconceivable that members of
Congress would not owe a similar duty of loyalty. 56 One great difficulty in
sustaining such a prosecution, however, is the Speech or Debate Clause.
Under the Speech or Debate Clause, members of Congress cannot be held
52 484 U.S. 19, 22-24 (1987) (describing the issue in terms of the defendant’s duty to his
employer, a journal which published information about certain stocks).
53 United States v. O’Hagan, 521 U.S. 642, 649-50, 652 (1997) (‚The ‘misappropriation
theory’ holds that a person commits fraud ‘in connection with’ a securities transaction, and
thereby violates § 10(b) and 10b-5, when he misappropriates confidential information for
trading purposes, in breach of a duty owed to the source of the information.‛).
54 See, e.g., Andrew George, Public (Self)-Service: Illegal Trading on Confidential Congressional
Information, 2 HARV. L. & POL’Y REV., no. 1, Winter 2008, at 161, 162-63; Donna M. Nagy, Insider
Trading, Congressional Officials, and Duties of Entrustment, 91 B.U. L. REV. 1105, 1106-07 (2011).
55 See Bud W. Jerke, Comment, Cashing in on Capitol Hill: Insider Trading and the Use of
Political Intelligence for Profit, 158 U. PA. L. REV. 1451, 1485-86 (2010).
56 See Skilling v. United States, 130 S. Ct. 2896, 2930-31 (2010).78 New England Law Review v. 46 | 70
to answer for their legislative acts. 57 It would therefore be extremely
difficult, if not impossible, to prosecute a member of Congress for insider
trading. While it could be shown that the member had traded, the Speech
or Debate Clause would make it essentially impossible to show that the
member had derived the insider information motivating his trade from
information obtained during the legislative process.
CONCLUSION
The mail-fraud and insider-trading statutes, which account for most of
the ink devoted to white-collar crime in legal writing, plainly illustrate that
much of American criminal law is vague and ambiguous. Because of its
vagueness and ambiguity, criminal law does not inform prosecutors,
defendants, or the courts what it is that Congress is outlawing. In a
democratic society, laws should inform the public and the courts
specifically what is outlawed. Yet in the case of these two foundation
stones of white-collar criminal law, even the U.S. Supreme Court has
struggled for decades to ascertain what the laws prohibit and what is
allowed. And while courts were attempting to clarify these ambiguities,
numerous people were prosecuted and jailed. In a democratic society, the
existence of such ambiguity and its unjust results are intolerable.
A wholesale reform of the federal criminal code is needed to eliminate
these ambiguities so that the law clearly states what conduct is prohibited.
Such reform is, unfortunately, unlikely. Indeed, the current Congress
cannot even agree on a budget. Thus, it is unlikely that Congress will ever
expend the intellectual capital necessary to bring greater specificity to the
U.S. criminal code. We need a new Justinian or Napoleon to convene the
greatest jurists and legal thinkers of our time to come together, think
through, and accurately define the elements of our criminal statutes.
Leaving the process to piecemeal decisions by our courts is inefficient and
undemocratic. The people have a right to know the elements of a crime
when a law is enacted, not thirty years later as a result of appealed
convictions based on vague and ambiguous congressional laws.
57 United States v. Helstoski, 442 U.S. 477, 488-89 (1979).You can also read
