American prosecutors will find it more difficult to secure guilty verdicts in corporate fraud trials after the U.S. Supreme Court weakened a law that helped convict former newspaper baron Conrad Black and former Enron chief executive officer Jeffrey Skilling.
In a series of decisions, Supreme Court judges ruled that Mr. Skilling, Lord Black and two of his former executives at Hollinger International Inc. were wrongly convicted of so-called "honest services" fraud. The men have been convicted of a number of fraud charges and their cases have been sent to lower courts to consider whether their convictions should stand.
The "honest services" doctrine has been used for decades to convict public officials, and more recently corporate executives, on the basis that they schemed to deprive their constituencies or companies of the right to honest conduct. Canada has no such law.
Business groups and defence lawyers have criticized the fraud concept, arguing that it is so vague that it allows judges to convict executives for minor ethical transgressions. The Supreme Court decision substantially narrows the scope of the law by requiring prosecutors to show evidence that defendants received bribes or kickbacks as part of their schemes.
Legal experts said the ruling is a big blow to white collar prosecutions because the cases are often complex and difficult to prove.
"Prosecutors have just lost an important part of their arsenal," said Jacob Frenkel, a Washington-based partner with law firm Shulman Rogers Gandal Pordy & Ecker and a former enforcement lawyer with the Securities and Exchange Commission.
"This ruling is an admonition to the government to be careful how it extends theories of prosecution beyond traditional applications."
Paul Schoeman, former chief assistant U.S. Attorney for the Eastern District of New York and a partner in the litigation practice at Kramer Levin Naftalis & Frankel, said he expects prosecutors will be more cautious after the ruling.
"I think that what this shows is that prosecutors pushed the envelope for a number of years and applied the statute very aggressively and the Supreme Court has cut that back."
Honest services convictions date back to the 1940s, but initially applied almost exclusively to politicians. Such schemes typically do not meet the test of conventional fraud, which require evidence that someone has suffered an economic loss. To win these cases, prosecutors developed a legal theory, later backed by federal law, that it was a crime to defraud the public and companies of their right to honest services.
The first businessmen to be convicted of honest services fraud were a group of employees at Procter & Gamble Co. who paid competitors at Lever Brothers in the mid-1940s to hand over secret soap formulas.
Since then, most of the honest services cases involved elected officials, judges and political party officials who were convicted of accepting money, business opportunities and other incentives for using their influence to help special interests.
In the past decade, the use of the honest services doctrine was broadened to help white collar prosecutors land convictions in high profile corporate cases such Enron and Hollinger, which involved complex allegations of inflated accounting and unauthorized executive payments.
With files from reporter Paul Waldie