CORPORATE CRIME REPORTER
Thomas
Hagemann, Honest Services Fraud and the Hypothetically Innocent Corporation
24 Corporate Crime Reporter 8(12), February 19, 2010
Thomas Hagemann is an honest services fraud junkie.
And for honest services fraud junkies, this is an extraordinary time.
In December, the Supreme Court heard appeals of two honest services fraud cases – the Conrad Black case from Illinois and the Bruce Weyhrauch case from Alaska.
And next week, it will hear a third – the appeal of former Enron CEO Jeffrey Skilling.
Hagemann is a partner at Gardere Wynne in Houston.
He flew up to the hear the Supreme Court arguments in December.
And he’ll be there to hear the arguments in the Skilling case on March 1.
The Court is expected to issue a decision in the honest services fraud cases sometime in June.
Hagemann was the attorney for Enron’s general counsel.
And he has successfully beat back honest services fraud charges against executives he has represented in the Enron and Duke Energy cases.
He’s just had published an article on the subject – The Sea and the Mirror: Some Reflections On Corporate Honest Services Fraud and the (Hypothetically) Innocent Corporation, (UC Berkeley Center for Law, Business & the Economy, January 2010).
Hagemann was an assistant U.S. Attorney in Los Angeles in the 1980s.
At the time, the office was prosecuting a slew of honest services fraud cases – primarily against defense contracting employees.
A vendor would give the employee some money on the side.
The employee would put in an order to buy a product from the vendor.
Prosecutors would charge the employee with defrauding the corporation out of his “honest services.”
Nothing wrong with the product that the vendor delivered.
The employee didn’t steal any property from the corporation.
But employee still went to jail.
Then in 1987, the Supreme Court said in McNally – honest services fraud is not covered by the federal mail fraud statute.
The Department of Justice raised the red flag.
And Congress reacted by passing the honest services fraud statute.
And prosecutors started bringing honest services fraud cases once again.
“The government starts prosecuting honest services fraud,” Hagemann told Corporate Crime Reporter last week.”The convictions build up. But the exact parameters of it are pretty vague.”
“There is nothing evil about this at all – but prosecutors will take advantage of the statutes they have when they see something they don’t like.”
“That’s a basic way to describe how federal prosecutors and agents think. They are going to push the envelope when they see a situation when they think – that feels criminal.”
“And so, the envelope of honest services fraud is expanding throughout the 1990s.”
“In the Nigerian barge case, the government alleged that Enron and Merrill Lynch got together and did a transaction that Enron had designed that was utterly designed to benefit Enron – booking a gain at the end of 1999 relating to the sale of a piece of the Nigerian barges to Merrill Lynch.”
“It was utterly Enron’s deal. Everyone at Enron knew about the deal. They knew about the parameters of the deal – including these various alleged oral side conversations that occurred.”
“And yet, the Merrill Lynch employees and some Enron employees were indicted for honest services fraud against Enron.”
“The case was based on what I have come to call in this article ‘the hypothetically innocent corporation.’”
“And that is – yes, the Enron that existed utterly wanted this deal. But that was obviously a bad thing to do. And no legitimate corporation would have wanted that. And that corporation is the one you deprive of honest services.”
Good Enron.
Bad Enron.
Hagemann represented one of the Merrill defendants.
His client and others in the Nigerian barge cases were convicted of honest services fraud at trial.
But the Fifth Circuit threw out the honest services fraud convictions.
“The record is clear that from Jeffrey Skilling on down, everyone wanted the Nigerian barge transaction to occur,” Hagemann said. “There was no allegation that some employee or group of employees hid something from some other group of employees at Enron about the deal.”
The Fifth Circuit ruled there was a breach of fiduciary duty against a legitimate Enron – yet a noncriminal breach because the real Enron “intentionally aligned the interests of the employee with a specified corporate goal.”
Good Enron – the hypothetical Enron.
Bad Enron – the Enron on the ground.
Both Conrad Black and Jeffrey Skilling argue on their appeals that the honest services fraud statute is hopelessly vague and ought to be tossed.
“But if it survives, what everyone is waiting for – and that would be federal prosecutors and defense lawyers – what everyone is waiting for is – what are the parameters of this statute?” Hagemann says.
“I would have no real problem if the Supreme Court would say – for the private sector, honest services is gone,” Hagemann says.
Go back to McNally?
“Not exactly. It’s more – we as a country don’t need to spend a lot of time protecting corporations from their employees when nothing has been stolen or taken from them.”
“Those corporations can help themselves.”
How does that change the practice for a prosecutor?
“Let’s say you have an employee going to the best vendor, getting the best widgets he can find. But out of that vendors profits, that vendor is paying the employee some money.”
“That could become a more complicated case to prosecute.”
“If there is any showing that the product is defective, then the corporation is a victim.” “I’m trying to kill the hypothetically innocent corporation.”
“And it’s not just the Nigerian barge cases.”
“I had another case. The top two traders at Duke Energy were indicted for activities that were absolutely disclosed to bosses and anybody else who cared at Duke Energy.”
“Who was the Duke that got defrauded? A Duke that existed separate and apart from the officers, employees, the board of the corporation.”
“The government literally set up a good Duke. I’m just trying to kill that nonsense. Let’s not have any more talk about a good Duke or a good Enron. What matters is what was the real company that existed. And did someone lie to someone at that real company?”
[For a complete transcript of the Interview with Thomas Hagemann, see 24 Corporate Crime Reporter 8(12), February 22, 2010, print editon only.]
Corporate
Crime Reporter
1209 National Press Bldg.
Washington, D.C. 20045
202.737.1680