[Senate Hearing 111-906]
[From the U.S. Government Publishing Office]
S. Hrg. 111-906
RESTORING KEY TOOLS TO COMBAT FRAUD AND CORRUPTION AFTER THE SUPREME
COURT'S SKILLING DECISION
=======================================================================
HEARING
before the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 28, 2010
__________
Serial No. J-111-111
__________
Printed for the use of the Committee on the Judiciary
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COMMITTEE ON THE JUDICIARY
PATRICK J. LEAHY, Vermont, Chairman
HERB KOHL, Wisconsin JEFF SESSIONS, Alabama
DIANNE FEINSTEIN, California ORRIN G. HATCH, Utah
RUSSELL D. FEINGOLD, Wisconsin CHARLES E. GRASSLEY, Iowa
ARLEN SPECTER, Pennsylvania JON KYL, Arizona
CHARLES E. SCHUMER, New York LINDSEY GRAHAM, South Carolina
RICHARD J. DURBIN, Illinois JOHN CORNYN, Texas
BENJAMIN L. CARDIN, Maryland TOM COBURN, Oklahoma
SHELDON WHITEHOUSE, Rhode Island
AMY KLOBUCHAR, Minnesota
EDWARD E. KAUFMAN, Delaware
AL FRANKEN, Minnesota
Bruce A. Cohen, Chief Counsel and Staff Director
Matthew S. Miner, Republican Chief Counsel
C O N T E N T S
----------
STATEMENTS OF COMMITTEE MEMBERS
Page
Feingold, Hon. Russell D., a U.S. Senator from the State of
Wisconsin, prepared statement.................................. 44
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont. 1
prepared statement........................................... 45
Sessions, Hon. Jeff, a U.S. Senator from the State of Alabama.... 3
WITNESSES
Breuer, Lanny A., Assistant Attorney General, Criminal Division,
U.S. Department of Justice, Washington, DC..................... 5
Buell, Samuel W., Professor, Duke University School of Law,
Durham, North Carolina......................................... 13
Seigel, Michael L., University of Florida Research Foundation,
Professor of Law, Fredic G. Levin College of Law, Gainesville,
Florida........................................................ 16
Terwilliger, George J., III, Partner, White & Case, Washington,
DC............................................................. 18
QUESTIONS AND ANSWERS
Responses of Lanny A. Breuer to questions submitted by Senator
Leahy.......................................................... 28
SUBMISSIONS FOR THE RECORD
Breuer, Lanny A., Assistant Attorney General, Criminal Division,
U.S. Department of Justice, Washington, DC, statement.......... 31
Buell, Samuel W., Professor, Duke University School of Law,
Durham, North Carolina, statement.............................. 39
Lowell, Abbe David, Potomac, Maryland, letter.................... 48
National Association of Criminal Defense Lawyers, Timothy P.
O'Toole, Washington, DC, statement............................. 55
Seigel, Michael L., University of Florida Research Foundation,
Professor of Law, Fredic G. Levin College of Law, Gainesville,
Florida, statement............................................. 62
Terwilliger, George J., III, Partner, White & Case, Washington,
DC, statement.................................................. 65
RESTORING KEY TOOLS TO COMBAT FRAUD AND CORRUPTION AFTER THE SUPREME
COURT'S SKILLING DECISION
----------
TUESDAY, SEPTEMBER 28, 2010
U.S. Senate
Committee on the Judiciary,
Washington, DC.
The Committee met, pursuant to notice, at 10:07 a.m., in
room SD-226, Dirksen Senate Office Building, Hon. Patrick J.
Leahy, Chairman of the Committee, presiding.
Present: Senators Leahy, Whitehouse, Kaufman, and Sessions.
OPENING STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM
THE STATE OF VERMONT
Chairman Leahy. Good morning. Good morning, Mr. Breuer.
We are going to consider another in a series of recent
cases in which the Supreme Court appears to have undermined
Congressional efforts to protect hardworking Americans from
powerful interests. In Skilling v. United States, the Court
sided with an Enron executive who had been convicted of fraud
and gutted a statute vital to combating public corruption,
corporate fraud, and self-dealing.
Now we have to explore the kinds of problematic conduct
that may go unchecked in the wake of the Skilling decision and
consider what Congress should do or could do to fill those gaps
and bring strong enforcement against corrupt and fraudulent
conduct. I thank Assistant Attorney General Lanny Breuer for
coming in to share the Justice Department's focus on this
important case, and I look forward to hearing from our panel of
experts.
In recent years, the stain of corruption has spread to all
levels of Government. It is an issue that both parties have to
address. This is a problem that victimizes every American by
chipping away at the foundations of our democracy and the faith
that Americans have in their Government.
Too often, loopholes in existing laws have meant that
corrupt conduct goes unchecked. Senator Cornyn and I introduced
the Public Corruption Prosecution Improvements Act last year to
try to address some of these gaps. Obviously, a bipartisan
piece of legislation, with Senator Cornyn of Texas and myself
introducing it. And it was passed by this Committee, and I
would hope the Senate would pass it now. The honest services
fraud statute has in the past served to fill in some of the
gaps in corruption laws, but with the Skilling case, of course,
it is greatly limited. I think we have to act aggressively but
we also have to act very carefully to strengthen our laws to
root out the kind of public corruption that resulted in
convictions of high State officials, Members of Congress, and
many others.
We have seen in recent years a plague of financial and
corporate frauds. They have robbed people of their savings,
their retirement accounts, college funds for their children,
and so forth. Congress acted by passing the Fraud Enforcement
and Recovery Act to give prosecutors and investigators more
tools. The honest services fraud statute has allowed
prosecutors the flexibility to keep up with corporate
criminals.
For decades, courts and prosecutors agreed that the Federal
mail and wire fraud laws could be used to prosecute individuals
for ``deprivation of honest services,'' including cases in
which public officials acted to benefit their own hidden
financial interests or in cases in which corporate executives
secretly enriched themselves at the expense of their own
corporations.
In 1987, the Supreme Court, over Justice Stevens' dissent,
overturned those decades of case law, and the Congress
responded quickly, explicitly adding in 1989 a provision for
prosecuting deprivations of honest services under the mail and
wire fraud cases. In the 21 years following that action, every
single circuit court upheld the honest services fraud statute.
No court limited it in the sweeping way the Supreme Court chose
to in Skilling.
The honest services statute was used to prosecute lobbyist
Jack Abramoff, Congressman Bob Ney, many corrupt State and
local officials, and corporate wrongdoers like Enron executive
Jeff Skilling and multi-millionaire Canadian publisher Conrad
Black, whose conviction for blatant self-dealing was called
into question by the Supreme Court's decision.
The Court in Skilling ruled that the honest services fraud
statute may be used to prosecute only bribery and kickbacks,
but no other conduct. Of course, there were already statutory
tools to go after bribery and kickbacks, so the honest services
fraud statute was more important in other areas.
It allowed prosecutors to go after corporate executives who
acted to benefit themselves financially at the expense of the
shareholders and the employees of their company. But those
cases now are at risk. I understand the concerns in many
circles about vague or undefined Federal laws which could leave
some public officials or executives uncertain about what kind
of conduct could leave them susceptible to criminal charges.
But that is no reason to let corrupt or fraudulent conduct go
unchecked. So let us identify the gaps in current law after
Skilling.
We should be clear about what conduct is unacceptable. I
would hope we could all agree that undisclosed self-dealing by
public officials and corporate executives is not acceptable. We
should figure out the best way to fill in those gaps, and I
thank the Senators, both Republican and Democratic Senators,
who have been working with me to find the best way to restore
our fraud and corruption laws. And because I know we have a
vote coming up, I will put my whole statement in the record.
[The prepared statement of Chairman Leahy appears as a
submission for the record.]
Chairman Leahy. Senator Sessions.
STATEMENT OF HON. JEFF SESSIONS, A U.S. SENATOR FROM THE STATE
OF ALABAMA
Senator Sessions. Thank you, Mr. Chairman, and thank you
for this hearing. I do believe it is an important hearing, and
we are wrestling with very significant issues. I prosecuted
public officials personally for weeks at a time. They probably
took a year off my life, those cases. One good criminal lawyer
who was representing one of the witnesses said, ``Jeff, if you
lose this case, you and I are both going to have to leave
town.''
So these are very important tough cases with powerful
forces out there, but the Supreme Court I do not think is
trying to further illegal activity when they have rendered
several cases that tell us that you have got to have criminal
statutes that are clear and mean something and have real
definitions.
When I go back and look at it, when I was a prosecutor,
perhaps I did not think it particularly bad. We will see what
Mr. Terwilliger used to think when he was a prosecutor. He
probably thought this was a good statute. He may have helped
write it. But I see now he is not so happy with it. But it says
a ``scheme or artifice deprives''--an amendment to the mail
fraud statute ``includes a scheme or artifice to deprive
another of the intangible right of honest services.''
Now, what kind of statute is that? I mean, think about
that. The United States Congress--and we are all, I know proud
of what we do, and if a court sometimes overturns it, we think
they have overreached. But we wrote a statute that is going to
make it a Federal crime to deprive somebody of an intangible
right of honest services. I do not know what that means.
Historically, robbery was the taking of a thing of value from a
person with force or violence. The elements were crystal clear,
and a prosecutor knew precisely what had to be proven, and
precisely the defendant knew what he could or could not do.
So I am worried about that. I think Justice Ginsburg was
correct in saying that if Congress were to take up the
enterprise of criminalizing ``undisclosed self-dealing by a
public official or private employee,'' it ``would have to
employ standards of sufficient definiteness and specificity to
overcome due process concerns.''
I think that is a legitimate observation by the Supreme
Court. You have got to be careful when you write these kinds of
statutes. And when I see Mr. Breuer from the Department of
Justice's opinion, I am little bit concerned. I think it is
more specific than the mail fraud statute. The Supreme Court
has found that insufficiently broad, too broad. It seems to me
it is sort of taking a State ethics law that may be a 1- or 2-
year penalty, converting it to a Federal--converting the State
ethics law into a Federal offense. And if you do not disclose--
undisclosed self-dealing, that is a pretty broad statute. Give
me a break. It really is.
So I think ``undisclosed self-dealing by a public official
or a private employee'' I think is the phrase that is being
suggested as an appropriate statute here, well, let us talk
about it. Let us see where we go from here. But you are tying,
I think, Mr. Chairman, an awful lot to the exact language that
a State may have in their ethics law. You have got the Hobbs
Act, 1951, where a politician extorts a kickback or a thing of
value for themselves or another in exchange for doing their
official duty, that is a pretty broad statute in itself, and it
has got more seriousness to it. I always felt that you needed a
clear threat and a clear benefit, and I prosecuted a number of
those cases, and sometimes you live and die by the words in a
statute. You have to argue to the judge. If you do not meet the
statute definition, you are out. You are done. And you have to
know that.
So I believe it is an important issue. The Supreme Court
has raised these issues. I do not think they were trying to
benefit criminals and crooked politicians or crooked CEOs, but
I do think that they correctly raise a concern that a Federal
criminal statute should be clear; it should tell the court
precisely what it is the prosecutor must prove; and the rights
of defendant certainly depend on clarity in knowing what they
are charged with and what the law is.
Thank you.
Chairman Leahy. Thank you, Senator Sessions. It is helpful
in this Committee that we have a number of former prosecutors
like Senator Sessions, Senator Cornyn, Senator Whitehouse,
Senator Klobuchar, and others, and it is very helpful.
We have a number of statements, one from Senator Feingold,
which will be placed in the record, and I will keep the record
open all day for any other statements that will automatically
without objection be placed in the record.
[The prepared statement of Senator Feingold appears as a
submission for the record.]
Chairman Leahy. Mr. Breuer is the Assistant Attorney
General for the Criminal Division at the Department of Justice.
He started his career as an assistant district attorney in New
York City, prosecuted offenses ranging from violent crime to
white-collar crime, later joined Covington & Burling where he
served as co-chair of the White-Collar Defense Investigations
Group. He served as Special Counsel to President Clinton from
1997 to 1999; undergraduate degree from Columbia, a law degree
from Columbia Law School, well known to this Committee.
Please, Mr. Breuer, go ahead. And your whole statement will
be made part of the record, but go ahead and emphasize whatever
you would like.
Senator Sessions. Mr. Chairman, could I just say one more
thing I forgot to mention.
Chairman Leahy. Sure, of course.
Senator Sessions. I do believe that anyone who is familiar
with the reality of criminal prosecutions knows that it is very
difficult for a local district attorney to bring a complex case
against a bank or financial institution or powerful politicians
in the community. They are, you know, overwhelmed with murders
and robberies and that kind of things, and it takes months
preparing a case frequently as not. So I do believe a
legitimate Federal role in prosecutions and a dramatic
limitation on the ability of the Federal Government to
prosecute clear criminal acts by State and local officials
would be bad policy for the country.
Thank you.
Chairman Leahy. Thank you.
Mr. Breuer.
STATEMENT OF HON. LANNY A. BREUER, ASSISTANT ATTORNEY GENERAL,
CRIMINAL DIVISION, U.S. DEPARTMENT OF JUSTICE, WASHINGTON, DC
Mr. Breuer. Thank you, Mr. Chairman and Senator Sessions,
and thank you for this opportunity to speak with you about the
Supreme Court's recent decision in Skilling v. United States
and its impact on the Justice Department's ability to prosecute
certain honest services fraud cases.
Protecting the integrity of our Government institutions and
the American marketplace is among the highest priorities for
the Department of Justice. The Department is committed to using
all available tools to combat fraud and corruption in the
public and private sectors, and our enforcement efforts in
these areas are vigorous.
The Supreme Court's recent decision in Skilling, however,
has without doubt impacted our ability to prosecute certain
honest services fraud cases. In order to restore our ability to
prosecute the full range of public corruption and fraud cases,
we believe that legislation to remedy the effects of Skilling
is needed, and we urge Congress to pass such legislation
quickly.
As early as the 1940s, Federal prosecutors began to use the
mail and wire fraud statutes to charge public and private
officials who acted in their own financial interests rather
than in the interests of their constituents. These officials
were prosecuted on the theory that they were defrauding the
public of its right to their honest services. That is back
since the 1940s.
In 1987, however, the Supreme Court in McNally v. United
States held that the mail and wire fraud statutes do not cover
honest services fraud schemes and instead apply only to schemes
to deprive victims of money or property. The next year, in
response to the legislative gap created by McNally, Congress
enacted what we now know as the honest services fraud statute,
18 U.S.C. 1346, which expressly criminalized schemes, as
Senator Sessions said, to deprive another of the intangible
right to honest services.
Between the enactment of the honest services fraud statute
in 1988 and the Supreme Court's recent decision in Skilling,
the statute has proved extremely valuable to the Justice
Department's efforts to attack corruption and fraud.
Congressmen William Jefferson and Robert Ney, Illinois Governor
George Ryan, and lobbyist Jack Abramoff, among others, were all
convicted of honest services fraud or conspiracy to commit
honest services fraud.
The honest services fraud statute has been valuable because
it gets at two core types of corrupt behavior by public
officials and corporate officers; one, accepting bribes or
kickbacks and, two, engaging in undisclosed self-dealing. In
Skilling, however, the Supreme Court limited the reach of the
statute to bribery and kickback schemes only. Simply put, after
Skilling, the statute can no longer be used to prosecute
undisclosed self-dealing, thereby, in our view, leaving a gap
that must be filled.
Let me provide you with a concrete example of what this
means. After Skilling, if a corrupt mayor solicits bribes in
return for giving out city contracts to unqualified bidders,
our prosecutors could still charge that mayor with bribery
under Section 1346. But if that same mayor created his own
company and then used his office to funnel city contracts to
that company without disclosing his financial interest in that
company, we would no longer be able to charge the mayor with
honest services fraud even though his undisclosed self-dealing
is every bit as corrupt as bribe taking. Furthermore, I am
unaware of another criminal statute that we could use to reach
that mayor's conduct.
In light of Skilling's impact on our efforts to combat this
particular type of criminal conduct, the Department urges
Congress to pass legislation that would restore our ability to
prosecute officials who engage in such undisclosed self-
dealing.
I have provided suggestions for such legislation in my
accompanying written testimony, emphasizing in particular the
public sector remedy. We believe that legislation along the
lines described in my written testimony would restore our
ability to address the full range of corrupt conduct by
Federal, State, and local officials. The Department is also
open to a private sector remedy, and we would be happy to work
with the Committee in finding an appropriate legislative
solution.
The Department of Justice is committed to protecting the
integrity of our Government institutions and our markets. Our
citizens are entitled to know that their public servants are
making decisions based upon the best interests of the citizens
who elect them rather than for their own personal gain.
Likewise, investors and shareholders are entitled to know that
corporate officers and fiduciaries are acting in the investors'
and shareholders' best interests and not attempting to secretly
benefit themselves.
Thank you for this opportunity to address the Committee,
and I would, of course, be happy to answer any questions that
you may have.
[The prepared statement of Mr. Breuer appears as a
submission for the record.]
Chairman Leahy. Thank you, Mr. Breuer.
You know, my concern, the reason we have these hearings, is
that for decades we have used the honest services fraud
provision. As I mentioned earlier, circuit courts have always
upheld it, and it was a major tool in a prosecutor's ability to
go after criminals. And one of the key types of conduct that
may be difficult to go after now is what you and others call
undisclosed self-dealing.
Do you want to just explain it in layman's language what is
undisclosed self-dealing Why is it important for prosecutors to
be able to go after it.
Mr. Breuer. Absolutely, Mr. Chairman. So under a typical
example of money or property fraud, the fraudster has a victim,
and that victim loses money or property because of the fraud.
So his intention is directed at his victim.
In honest services fraud, the victim is not necessarily
himself or herself out money. What the victim is out is the
honest services of the public official. So if I am a public
official, that mayor who I referred to in my opening, and I
receive bribes for taking official conduct, the citizens
themselves are not necessarily out any money, but I have
benefited, I have profited because I have received money. And
by doing so, I have corrupted the system, and the citizenry has
been defrauded in that circumstance.
Chairman Leahy. What we have is pretty clear--no, not
bribery. I mean, we have statutes, specifically statutes on
bribery. Those have not been touched by Skilling. But if you
have this undisclosed self-dealing--and just so we can maybe be
more specific in my question, how do we go about prosecuting
that? But, also, how do we make sure that we are not just going
after an inadvertent oversight or somebody does not do their
paperwork correctly? They were perfectly honest, but they just
did not fill out the papers properly.
Mr. Breuer. I will. And, Mr. Chairman, just for 30 more
seconds on what I was saying, we do have a bribery statute.
But, of course, our Federal bribery statute deals with Federal
employees. And in my example, we were talking about a local
mayor. And so I think we have to have an interest in reaching
that.
But the second part of it, Mr. Chairman, is the
circumstance where I am not receiving a bribe, but I have an
undisclosed interest. I have created my own company or I have a
company that my spouse has an interest in, and I take an
official action not for the benefit of my constituents in my
city, but I take an official action that benefits my wife's or
my own secret company. That, too, corrupts the process, and
that, too, is a fraud. It is a fraud on my citizens and my
constituents because I am not doing something for the purpose
of serving them. I am personally benefiting from my official
conduct. And if we do not have an honest services statute that
addresses this self-dealing, Mr. Chairman, then, of course,
that kind of conduct is absolutely right now something that we
cannot reach.
Chairman Leahy. You know, most of our public servants--and
you are talking beyond the Federal area, but into State and
local. A lot of local governments, the mayor, the board, are
either paid a nominal amount or nothing in a lot of small
towns. It is not like the community in California where the
chief of police is paid, I think, two or three times what the
President of the United States is paid. But, I mean, those are
pretty obvious on the point. But if you have got somebody who
owns a local car dealership and serves on the board of aldermen
and gets paid $100 a year, is he precluded from voting on
anything if the city is buying a fleet of cars?
Mr. Breuer. Well, if the mayor has a car----
Chairman Leahy. I am assuming everybody knows he is the
local----
Mr. Breuer. Right. So the mayor of a small community is
also a car dealer, and it is known that he is a car dealer, and
he has not surreptitiously hid the fact that he has an
ownership interest, then there is absolutely nothing wrong,
presumably, with what he is doing.
Chairman Leahy. So what you are saying, however, if he
was--but if he was a privately--or he was a silent partner in
that car dealership and all of a sudden the cars being bought
by the city at his direction went only there, that would be a
different situation. Am I correct?
Mr. Breuer. It could be a different situation. To address
Senator Sessions' excellent points, I think what we have to do
after Skilling is to address this conduct, but to address it in
a way that is fair and gives notice.
So in the first instance in your hypothetical, there needs
to be some sort of pre-existing requirement that the mayor
disclose his interest. It can be a city ordinance. It can be a
State statute. It can be a regulation. But there has to be
something in this situation that there is notice that there is
a pre-existing disclosure requirement, and that I think is
essential.
And then, second, I think we have to show, if we were to go
forward, that that mayor knowingly concealed his interest--not
that he forgot. It should be the burden of the Government to
prove in addressing Skilling that it was a knowing concealment,
he did it on purpose; and in addition, we believe, that we have
to establish that that mayor had the specific intent to
defraud.
So it cannot be accidental that he forgot. It must be the
purpose for what he was doing. But our view is if there is a
pre-existing requirement and we can show that the mayor in your
case knowingly concealed his interest and specifically intended
to defraud because he took an official action not for the
benefit of the people of his city but, frankly, to benefit his
or his wife's private interests, that is the kind of conduct
that we think goes to the core of the integrity of Government
and we think needs to be addressed.
Chairman Leahy. My time is up, but we are trying and we
will try to get a bipartisan piece of legislation out of here.
I would urge you and the Department to work closely with both
Republicans and Democrats in our effort to draft such
legislation. I assume that you have no problem with working
with us on that.
Mr. Breuer. Mr. Chairman, we are absolutely committed to
working with both sides of the aisle on bringing forth this
kind of legislation as quickly as we can.
Chairman Leahy. Thank you.
Senator Sessions.
Senator Sessions. Well, thank you.
Mr. Breuer, if a mayor takes a series of bribes and, that
is, bribery being a predicate act under RICO, the mayor can be
charged with RICO--right?--a racketeering charge, which I have
prosecuted before. And two is generally sufficient if there is
a pattern shown. So that is prosecuted. Well, what about if a
mayor on his way to work goes by a local grocery store and
steals groceries That is not a Federal offense, is it
Mr. Breuer. I do not think it is. I do not think----
Senator Sessions. You would not make that a Federal
offense, would you
Mr. Breuer. I do not think in your scenario we would,
Senator. I do not think we would do that.
Senator Sessions. Well, let us go beyond ``think.'' If an
individual, the mayor, picks up a rock in Alabama and murders
someone, that is just not a Federal crime, is it?
Mr. Breuer. That is not a Federal crime, Senator.
Senator Sessions. It cannot be prosecuted in Federal court.
Mr. Breuer. Well, based on the limited facts you have given
me, I think that is right.
Senator Sessions. Right, cannot be prosecuted in Federal
court. One of the things we need to understand and I have
always learned from being a Federal prosecutor is that every
crime is not a Federal crime. Every crime is just not a Federal
crime. Interstate transportation of stolen motor vehicles has
to be interstate transportation of the vehicle, interstate
shipment. The Mann Act is taking a person in interstate
commerce for the purpose of prostitution, not a local
prostitute. This is one of the things we do have to recognize.
There are limits on Federal reach historically and
constitutionally, I think, but certainly historically.
Now, this is a pretty broad phrase, would you not agree,
that a public official can go to jail for undisclosed self-
dealing All right. So that is the broad--so you define that in
your legislation. I do not know that--it did not say willfully.
The public official knowingly fails to disclose material
information regarding the financial interest, that is required
to be disclosed by Federal, State, or local statute, rule, or
regulation. So let us say we are having a tax debate. I put
money in a dividend fund, and the question is: Should the
dividends be taxed at 15 percent or normal income rate of 35
percent? And if I failed to disclose that on my ethics form
somehow, would that be a violation by a State legislator or a
U.S. Senator?
Mr. Breuer. Senator, in your hypothetical I think not. But
if I could work with you on that for a moment or two, I could
share my thinking.
If you were a State legislator, and you were supposed to
disclose your interest in some sort of a fund, and we could
establish that you knowingly failed to do that on purpose, and,
moreover, you took an official action that was----
Senator Sessions. Well, knowingly is just--you just--that
is not with intent to defraud. Knowingly is just----
Mr. Breuer. Well, I was going to take----
Senator Sessions. [continued] That you did not mistake--you
did not see the form somehow. I do not----
Mr. Breuer. So I have two parts to it. The first part is
simply I think it would be our obligation in the first instance
to establish, right, that you knew that you had this
obligation, the local official knew he had the obligation, we
would have to establish, and knowingly did not fulfill that
obligation. And then, in addition, we would have to show that
that same person, that same official had the specific intent to
defraud, that he took an official action, let us say, to
support the fund somehow. He did some----
Senator Sessions. Where is that specific intent to defraud
element in the legislation?
Mr. Breuer. Well, Senator, we have not proposed yet
specific legislation; rather, we have discussed principles that
we think are required in any kind of legislation that we think
would address your concerns, which is not to be overly broad
and to survive the test of time. And so we are very much
guided, I should say, by what you referred to, Justice
Ginsburg's footnote in the Skilling decision. And there the
Justice, I think, gives us all guidance that if we are not
going to have the same problem that we have had with the former
honest services fraud statute, we need to address those due
process concerns. And in doing that, I think we tried very much
to narrow it and be very, very specific. I can go into it if
you want, but it is really more principles----
Senator Sessions. OK. Well, let us stay at the larger
principle question, and the panelists maybe should also discuss
this. Let us take a situation in which a State has said you
should disclose certain things in order for an individual city
councilperson to be able to perform their duties, and they set
a penalty for that. Let us say it is 6 months in jail. And so
the person violates that. They do not disclose an interest.
They vote on a matter that has some potential, even a small
part of it could impact them favorably. You now could prosecute
it as a mail fraud Federal felony of 5 years in jail. Is that
right?
Mr. Breuer. So the way I would address that, Senator, is
the following: That disclosure requirement simply in your
hypothetical situation is a disclosure requirement that says
that something needs to be disclosed.
Senator Sessions. This is what the local people have felt
public officials, standards they ought to be held to, and they
set a penalty.
Mr. Breuer. Exactly. But that is just a disclosure
requirement. We are not going to prosecute the mere failure to
disclose. That is a local or a State decision that the mayor or
the legislator has to disclose something.
What we will prosecute is if that person, one, does not
fulfill or disclose what is required, that deals with our
notice requirement. That deals with our goal of fairness
because that local official knew that he or she had to disclose
because the municipality or the State required it.
We then are going to look to see if there is a scheme or
artifice to defraud under the mail and wire fraud statutes. And
in looking at that, in looking to see if there is a scheme or
artifice to defraud, we both have, first, a failure in the
first instance to disclose, but now what we look for is to see
did you knowingly do that and did you specifically intend to
defraud by on purpose taking advantage of your concealed
interest. That is the difference. And if you took advantage of
your concealed interest by engaging in a scheme to defraud by,
let us say, acting on legislation that benefited you that no
one knew about, that would be the circumstance very
specifically where we would want to address that component of
honest services fraud. And that is why we think we are not
simply duplicating or Federalizing a local or a State statute.
Senator Sessions. So you have a different element, an
additional element.
Mr. Breuer. Yes, exactly, Senator.
Chairman Leahy. Thank you. Thank you very much.
Senator Kaufman.
Senator Kaufman. Thank you, Mr. Chairman. Welcome.
Mr. Breuer. Thank you, Senator.
Senator Kaufman. You talked about the problems with
prosecuting under security law. Can you go through some of the
problems with using security laws to prosecute the honest
services fraud?
Mr. Breuer. So in the private situation, Senator, we do
believe that, unlike in the public sector, we probably have
more resources to go after securities fraud. Where we have
concerns about honest services being used in the securities
fraud setting is that if I am a mayor, I am a local official,
my official actions are not intended to benefit me personally.
They are just not. They are meant 100 percent to benefit the
people who elected me.
But if I am a corporate official, it is part of the free
enterprise system that if I take steps that benefit my company,
they inure to my own personal benefit as well. So it is just
something that if we do have a private sector fix, I think we
have to address.
And, similarly, we have to--so that is the first. And the
second issue is I just think we have to look very hard at what
the securities laws require with respect to disclosure. And
some disclosure requirements are more disclosure requirements
that are aimed at the corporation as opposed to the individual.
That is not to say that there cannot be a private sector piece.
It is just we think that there are more issues involved. And as
of now, we feel for the most part--for the most part--we have
been able to address most circumstances in the private sector
where we see a wider gap of circumstances post Skilling that we
cannot address in the public sector.
Senator Kaufman. But what about the case--just like the
mayor, the mayor is really 100 percent right to help the
citizens of the town that he or she represents. What about the
case where you have someone in a corporation Aren't they there
to represent the shareholders? So, really, if they do something
that benefits themselves but disadvantages the shareholders,
wouldn't that be a similar case
Mr. Breuer. It would. The difference is that in most
circumstances we looked at--and, again, I do not want to be
exhaustive, but in most circumstances that we have looked at,
those actions, if they inure to the personal benefit of, let us
say, the officer, there is more likely a chance that it is a
direct money or property fraud in a sense and that it has hurt
directly the shareholders; whereas, in the mayor's context it
is harder typically to find that direct nexus. And it could
very well be that the mayor benefits, but we cannot show a
money or property loss to the constituents.
Senator Kaufman. All right. For a legislative fix to
Skilling, it is important as a matter of constitutional law to
place a significant minimum monetary value in order to
constitute fraud. Do you agree with that?
Mr. Breuer. I do think that if we put a monetary limit with
respect to the private sector, that helps to address that
issue, yes.
Senator Kaufman. And do you have a preference as to whether
Congress enacts this legislative response to Skilling in the
fraud statute, Section 1346, as opposed to the conflict of
interest statute, Section 208?
Mr. Breuer. So, yes, we do. We really would urge the
Congress to deal with this under 1346. First, there is now
quite a bit of case law with respect to dealing with honest
services in the context of wire and mail fraud, and so we do
think 1346 is appropriate.
Also, it gives us as prosecutors a greater ability to
describe and prosecute the crimes because, of course, we are
talking about a scheme or artifice to defraud, and those are
well-understood terms.
And, last, frankly, we just think it more appropriately
deals with the gravamen of the situation. The penalties are
higher, and we think they are more appropriate in that context
than in the conflict of interest.
Having said that, though, we do think the conflict of
interest statute, 208, addressing Senator Sessions' point, is a
very good way of dealing with the issue of notice or the scope.
Justice Ginsburg asks, ``So what is going to be the scope of
this? Who is involved?'' And 208, I mean, obviously Congress
might decide to change it, but 208 right now tells us who are
the people who a Federal employee cannot take actions on behalf
of because of conflict of interest. And so we think that is
well established, too, and would give the kind of notice that
we think after Skilling is required.
Senator Kaufman. Great. Thank you.
Thank you, Mr. Chairman.
Chairman Leahy. Senator Sessions, do you have anything
further?
Senator Sessions. Well, I think before we go forward, we
would like to see statutory language, and I think the
fundamental question we all need to ask is: Is this an area of
prosecution that the Federal Government needs to prosecute We
have certain other tools in statutes that allow prosecutions.
There are no problems, Mr. Breuer, are there, with regard to
Federal officials who violate the laws, because we have ethics
and other statutes that cover this kind of self-dealing and
conflicts of interest and Senate ethics rules that apply. It is
only a weakness you find as a result of this opinion in
Skilling. It eliminated some ability to prosecute State and
local officials. Is that right
Mr. Breuer. That is correct, Senator.
Senator Sessions. Thank you, Mr. Chairman.
Chairman Leahy. Thank you. I will probably have some
follow-up questions for the record, but we are somewhat limited
in time with the votes coming up, and many of us are going to
the burial ceremony at Arlington for our former colleague Ted
Stevens. I especially want to be there. Senator Stevens was not
only a very, very close friend; he was one who followed the old
school. He always kept his word. I mentioned to Senator
Sessions last night on the floor that he follows that rule,
too, but I recall when I first came to the Senate, the first
thing that Senator Mansfield, who was then the Leader, Mike
Mansfield, told me, he said, ``We may disagree on issues, and
that is fine. Just keep your word.'' And Senator Stevens was
the epitome of that. You could go to the bank with whatever he
told you, and I think it is good that--I understand there is
going to be a very large number of Senators from both parties
who will be at the burial. I served with him for 36 years, and
we will be there.
Anything further?
Senator Sessions. No. Thank you.
Chairman Leahy. Mr. Breuer, thank you very much. I just
would add, as we said, we are trying to put together statutes
which address what I think all of us instinctively know is
criminal conduct, and we will look forward to working with the
Department of Justice in doing that.
I am also well aware of those things that should be handled
by the local authorities, and I do not want to go to a
situation where we are taking on things that local authorities
should be able to do. But there are some major areas where only
the Federal Government has the ability to do it, and we will
work with you on that.
Mr. Breuer. Well, thank you, Mr. Chairman. Thank you,
Senator Sessions. We very much at DOJ look forward to working
with you. Thank you.
Chairman Leahy. Thank you.
Chairman Leahy. Good morning. We are joined first by Samuel
Buell, who is a professor of law at Duke Law School. Prior to
that he was lead prosecutor for the Department of Justice's
Enron Task Force. During his time at the Department, he also
served as a prosecutor in New York, Boston, Washington, and
Houston. He twice received the Attorney General's Award for
Exceptional Service that I would note for others is the
Department's highest honor. Immediately prior to coming to
Duke, he was a visiting assistant professor at the University
of Texas School of Law and an associate professor at the
Washington University School of Law. He received his
undergraduate degree from Brown University and his law degree
from New York University School of Law.
Following our normal procedure, we will hear from each of
you, and then we will ask questions. Professor Buell, please go
ahead, and your full statement will be made part of the record.
STATEMENT OF SAMUEL W. BUELL, PROFESSOR, DUKE UNIVERSITY SCHOOL
OF LAW, DURHAM, NORTH CAROLINA
Mr. Buell. Chairman Leahy, Ranking Member Sessions, members
of the Committee, and staff, I will express two points this
morning.
First, the problem of defining criminal fraud is both
difficult and important. This is not a new problem, and it is
not limited to the particular formulation that Congress chose
when it enacted the honest services statute.
Second, the worries raised by the Court's narrowing of the
mail and wire fraud statutes in the Skilling decision include
the possible loss of serious cases of fraud involving breaches
of fiduciary duty.
Allow me to begin with a quote: ``[B]ecause fraud and
deceit abound in these days more than in former times . . .
all statutes made against fraud should be liberally and
beneficially expounded to suppress . . . fraud.'' The date of
this quote? 1601. Its author? The famous English jurist Sir
Edward Coke, reporting a decision interpreting an Elizabethan
statute.
Fraud is, by definition, a form of wrongdoing that evolves
rapidly and is committed by actors who design their behaviors
with one eye on the constraints of the law. This was true in
the 1600s--at the dawn of the Anglo-American legal system and
the beginnings of modern markets. It has never been more true
than now after we have witnessed a decade marked by massive and
elaborate financial deceptions.
Current U.S. law is, without controversy, full of highly
general prohibitions against fraud, nowhere more prominently
than in our law of securities regulation--a pillar of which is
Rule 10(b)(5)'s edict against any and all schemes to defraud in
connection with the purchase or sale of a security.
There is thus a somewhat unrealistic quality to what the
Supreme Court said in the Skilling case. There is nothing
novel, or unworkable, or imprudent about the idea of Congress
passing general prohibitions on fraud and the courts working
out how to apply those general concepts to new forms of harmful
deception as they arise.
What, then, explains the particular controversy over the
honest services statute? This brings me to the second point.
What has distinguished this statute is its effort to target
frauds that involve less tangible harm than simple and direct
deprivations of money or property.
This legislative effort alone should not be especially
controversial. As our society and economy have become more
sophisticated and complex, it has become more and more apparent
that information is critical and valuable, and that fiduciary
and other trust relationships are both essential to the
functioning of a highly specialized economy and subject to
harmful abuse. The legal concept of fraud must be permitted to
adapt, as it always has, with such changes in society.
The Court's somewhat arbitrary decision in Skilling that
frauds inflicting less tangible or less measurable harms can
only be prosecuted when they involve a bribe or kickback
payment risks leaving important forms of abusive deception
outside the scope of Federal criminal law.
Suppose a senior officer of a company uses a loan program,
approved in general terms by the board of directors, to spend
lavishly and abusively on real estate, art, and luxury goods
for him and his family. I am thinking here of the former Tyco
chief Dennis Kozlowski.
Or suppose that the financial officer of a large public
company obtains general approval to run a private investment
partnership in order to engage in hedging transactions with the
company, and then arranges those transactions to line his own
pockets, often with undisclosed and mischaracterized payments.
I am thinking, of course, of former Enron CFO Andrew Fastow.
How are these cases to be prosecuted? One might say these
are securities frauds because they involve public companies.
But these are not traditional accounting fraud cases. They are
cases of self-dealing, hidden conflicts of interest, and
looting of corporations.
Some of the requirements of the law of securities fraud,
such as its particular doctrine of materiality, could pose
problems for prosecutors in such cases.
Perhaps more significantly, the law of securities fraud is
limited to fraud in connection with the purchase or sale of a
security. These forms of harmful and deceptive self-dealing and
looting can arise, with equal seriousness, in institutions and
relationships ranging from law firms to hospitals to accounting
firms to major nonprofit organizations.
One might also argue that these kinds of cases can be
reached through property theories under the mail and wire fraud
statutes and are thus unaffected by the Skilling case. But a
prosecutor can often be confronted in such cases with defenses
asserting that the general form of the conduct had been
approved and that any property obtained by the defendant was
within the bounds of such approval.
In addition and as importantly, abusive self-dealing is not
always engaged in directly for profit. A defendant's objective
may be to enhance his power or prestige or his control over an
institution or relationship in which others are depending
importantly on him not to engage in abuse and are counting on
transparency to allow them to prevent and sanction such abuse
if it occurs.
The honest services statute became controversial not so
much for its conceptual structure but because of the occasional
but worrisome exercise of prosecutorial discretion to apply the
statute to marginal cases that most people would readily
identify as not belonging in Federal court.
The concern about vagueness, I submit, was really a concern
about overbreadth. I thus want to conclude by suggesting some
ways Congress might retain a fraud prohibition flexible enough
to deal with serious, novel forms of intangible harm but
confined enough to allay fears about overbroad application in
the hands of imprudent prosecutors.
First, it has long been a hallmark of criminal fraud
prohibitions that they have demanding mental state
requirements. Not only do such laws generally require proof
beyond a reasonable doubt of the defendant's specific intent to
defraud, but they have often been interpreted to require that
the defendant act with consciousness of wrongdoing.
One might draft a statute that applies only to willful
violations and include within the statute an explicit
definition of willfulness that embodies the requirement that
violators must know that what they are doing is wrongful.
Second, a new statute might be limited to important
fiduciary and trust relationships and made inapplicable, for
example, to ordinary employment and contractual relationships.
Third, and finally, Congress might consider thresholds for
identifying serious cases of harm. One might choose, for
example, to require that the relationship in which the
intangible harm occurs be one involving a single transaction or
a course of conduct in which the victim had at risk something
of value of at least $50,000.
I urge this Committee and Congress to uphold the centuries-
long commitment of our legislatures, courts, and other legal
institutions to deal with the ever challenging and evolving
problem of fraud.
Thank you for the opportunity to testify today.
[The prepared statement of Mr. Buell appears as a
submission for the record.]
Senator Whitehouse [Presiding.] Thank you very much,
Professor Buell. I did not have the chance to be here when you
began your testimony, so let me highlight the most important
part of the materials that I have on you, which is you were
born in Rhode Island.
[Laughter.]
Senator Whitehouse. Delighted to have you with us.
Mr. Buell. I was raised in the great State of Rhode Island,
yes, Senator.
Senator Whitehouse. Thank you.
Professor Michael Seigel is professor of law at the
University of Florida's Levin College of Law, where he
specializes in criminal law and white-collar crime. Mr. Seigel
has also served as an AUSA in Tampa, Florida, and Philadelphia.
During his time in Philadelphia, Mr. Seigel worked on the
Department of Justice's Organized Crime Strike Force. Mr.
Seigel received his bachelor's degree from Princeton University
and his law degree from Harvard Law School, and we are
delighted to have him with us today.
Professor Seigel.
STATEMENT OF MICHAEL L. SEIGEL, UNIVERSITY OF FLORIDA RESEARCH
FOUNDATION AND PROFESSOR OF LAW, FREDRIC G. LEVIN COLLEGE OF
LAW, GAINESVILLE, FLORIDA
Mr. Seigel. Thank you, Senator Whitehouse, Senator
Sessions, and distinguished members of the Committee. I am
going to limit my remarks to issues surrounding the impact of
Skilling on the prosecution of public sector honest services
fraud only.
I do not take issue with the Supreme Court's conclusion in
Skilling that the concept of honest services found in Section
1346 was unconstitutionally vague. As the Court held, the term
was so general that it did not provide citizens with fair
notice of potential criminal conduct; it allowed for the
potential abuse of prosecutorial discretion, both by vindictive
prosecution and by the waste of precious resources, law
enforcement resources, on trivial cases; and it risked
intrusion, as Senator Sessions has indicated, on the rights of
States to regulate their own politics.
However, the solution that the Court devised--it was really
limited in devising because it cannot legislate--limiting the
application of the statute to cases involving bribery and
kickbacks is far from ideal. In fact, the newly narrowed
statute suffers from the very same ills as before. One example
will suffice to prove this point. Even after Skilling, Federal
prosecutors could charge a State Department of Motor Vehicles
employee with honest services fraud for taking a $20 bribe to
allow a driver's license applicant to cut in line. I think we
would all agree that making a Federal case out of such minor
conduct would be an improvident use of DOJ's resources in an
area in which the State would surely be equipped to handle the
infraction itself.
At the same time, the Skilling limitation has made the
scope of honest services fraud considerably too narrow, causing
serious malfeasance meriting the attention of Federal law
enforcement to be beyond its reach. As noted by Assistant
Attorney General Breuer and also by Professor Buell, one of
those main areas is failure to capture undisclosed self-dealing
by a public official. But it has other failures as well that I
would like to point out.
I think one of its greatest failures is in not defining
bribery and kickbacks. Lacking direct guidance, lower courts
are likely to import the definitions of these terms from the
Federal bribery statute, 18 U.S.C. Section 201. According to
the Supreme Court's decision in the Sun Diamond Growers case,
conviction for an illegal bribe or gratuity requires proof of a
quid pro quo--in other words, proof that the bribe or gratuity
was paid in connection with a specific official act. Sometimes,
despite obviously corrupt behavior, this element is impossible
to prove beyond a reasonable doubt.
For example, a State legislator might secretly be on the
payroll of a corporation that has an interest in a wide variety
of matters that are the constant subject of legislation. The
employer and employee use all kinds of deception to conceal the
illicit income, which, say, adds up to half a million dollars a
year. Although the legislator is a routine champion of causes
that benefit the company, there is no evidence of a direct link
between any particular official act and his undisclosed
conflict of interest. Under the post Skilling status quo, this
arrangement, so obviously antithetical to a healthy political
environment, lacks a Federal criminal remedy.
Unless Congress acts, two other categories of public sector
honest services fraud cases will likewise go unaddressed. The
first is composed of cases involving a public employee or
official who receives a non-monetary benefit as a result of an
undisclosed conflict of interest. Cases falling into this
category might include a prosecutor whose purposeful failure to
reveal his ties to the victim in a murder investigation leads
to an overturned conviction requiring retrial at taxpayer
expense; or a legislator--and, unfortunately, this is alleged
in Florida, my home State--who secretly directed an
appropriation to his alma mater by disguising the recipient's
identity through deceptive language in the legislation that was
buried pretty deep; or a judge who failed to disclose that he
was negotiating with a party to a case that is before him while
the case is going on if that relationship never comes to
fruition.
The last type of undesirable conduct that is now beyond the
reach of the mail and wire fraud statutes is a public
employee's use of outright deception to obtain something other
than money or property. Consider, for example, a disturbed
employee of the Department of Homeland Security who exaggerates
a threat for the sheer evil pleasure of causing a public panic;
or a civil servant who has repeatedly falsified test scores to
secure the promotion of one racial or ethnic group over
another. It might be that these actions violate some other
Federal law, but honest services fraud, properly construed,
would be a useful and straightforward means of punishing and
deterring this antisocial conduct.
Congress should, when it enacts legislation in reaction to
the Skilling case, follow the principles suggested by Justice
Ginsburg, Justice Scalia, and others here to make sure that the
legislation is not vague.
In short, the new legislation should define each of its
terms with precision; it should require that, to be cognizable,
the conduct of the public official must violate a Federal,
State, or local law, rule, or regulation; it should impose a
minimum, though flexibly measured, level of intended or caused
benefit or harm; it should spell out in clear terms the mens
rea involved, whether it be willful or some other kind of
specific intent. And this all should be done before the
prosecution can prove that the statute was breached.
Properly redrafted, the mail and wire fraud statutes can
continue to serve a very important role in the constant battle
against serious and corrosive public corruption.
Thank you.
[The prepared statement of Mr. Seigel appears as a
submission for the record.]
Senator Whitehouse. Thank you very much, Professor Seigel.
Our final witness in this panel is George J. Terwilliger
III. Mr. Terwilliger is currently a partner at White & Case,
LLP, where he is head of the white-collar practice group.
Previously, Mr. Terwilliger served for 5 years as the United
States Attorney in Vermont and as Deputy Attorney General of
the United States. Mr. Terwilliger received his undergraduate
degree from Seton Hall University and his law degree from
Antioch School of Law, and we are delighted to have him here
today.
Mr. Terwilliger.
STATEMENT OF GEORGE J. TERWILLIGER III, PARTNER, WHITE & CASE,
WASHINGTON, DC
Mr. Terwilliger. Thank you, Senator Whitehouse. I
appreciate that. Senator Sesions.
Public corruption investigations and prosecutions continue
to deserve to be among the highest priorities of Federal
prosecutors. Public corruption is an insidious wrong that
engenders in our citizens disrespect for the rule of law and
cynicism about the rectitude of public institutions. When the
legislative process is corrupted by personal financial gain or
the deliberative process is warped by corrupt practices,
fundamental guarantees made to the people by law are thwarted
and the democratic process itself is undermined.
To briefly relate some aspects of my professional
experience that inform my testimony today, during the time that
I was privileged to serve as Deputy Attorney General of the
United States, I was called upon on several occasions to make
final judgments concerning recommended prosecutions of Members
of this body and other public officials. In private practice, I
have been counsel to Members of this body and the other House
of Congress, as well as for appointed officials in the
executive branch and high-ranking State officials.
I have seen firsthand the toll that investigations and
accusations alone, short of indictment, can exact on an
individual. I am thus especially grateful to have the
opportunity you have afforded me today to participate in the
Committee's consideration of further anti-corruption
legislation.
I agree with the Committee's apparent goal of providing
Federal prosecutors the tools they need to address certain
conduct by corporate and other private officers and employees.
When such persons deal to themselves under the table, all the
attributes of a free market are put in jeopardy.
As to all aspects of the matter under discussion, I
respectfully urge the utmost care in defining clearly that
conduct which is to be proscribed by Federal law. Justice
Ginsburg's observation concerning the need for clarity I think
is indeed a warning. Ambiguous statutory terms and requirements
present interpretive problems that can require substantial
judicial and other resources to resolve and, frankly, are
unfair to public officials and others who deserve to be able to
refer to and abide by clear lines between what is lawful and
unlawful behavior.
Perhaps most relevant to the legislation on the table for
discussion today are issues that arise where public or
corporate officials have private or personal financial
interests which may affect, or be affected by, their execution
of their official duties. These circumstances present an even
greater challenge in trying to write clear laws that both
recognize the complex financial and regulatory world we live in
today and nonetheless provide the clarity necessary to
delineate conduct which could subject individuals to criminal
conviction. Given the complexity of determining corporate and
other disclosure obligations, heeding Justice Ginsburg's
admonition may well suggest that further study and
consideration be taken before the legislative action goes
forward on this type of activity.
While I urge the Committee to defer this legislation
pending further study and consideration, I thank it for the
opportunity to appear. I have more specific observations in my
prepared statement, which Senator Leahy has said would be
accepted for the record. I have just two comments on the
testimony that the Committee has heard thus far.
First, I appreciate very much and agree I think with about
90 percent with what we heard from Assistant Attorney General
Breuer. The one question that I think lingers after his
formulation of principles for a testimony is when he talks
about a specific intent to defraud. I think one has to ask the
question: Defraud whom and for what? And if that gets us back
to defrauding the citizens or the people from their honest
services that they have a right to or some other intangible, I
think it continues to beg the question.
In terms of Professor Buell's testimony, I would only
observe that Coke was talking about common law fraud, and one
of the elements of common law fraud has always been the
occasion of economic injury to someone. When we went beyond
economic injury into the concept of the deprivation of
intangible rights, I think this became a very difficult
endeavor.
Senator Sessions mentioned the importance of clarity. I
think it was Judge Learned Hand who once wrote, or words to the
effect, that the true dimensions of fraud are only limited by
the human imagination. Fraud is in and of itself a very
expansive concept. Adding onto it concepts of intangible rights
as deprivations that can support an allegation of fraud I think
is very difficult.
The bottom-line problem with all of that has come down to--
and I think the Court will never accept going back to this, and
that is that it puts prosecutors in the position of setting the
standards instead of the legislature writing what they may be,
or at least writing what they may be by reference to some other
disclosure obligation that already exists.
Thank you very much, Senator Whitehouse, Senator Sessions.
[The prepared statement of Mr. Terwilliger appears as a
submission for the record.]
Senator Whitehouse. Thank you, Mr. Terwilliger. We
appreciate your testimony.
I will defer to the Ranking Member, Senator Sessions.
Senator Sessions. Well, thank you, Senator Whitehouse, and
I know as a former United States Attorney you are familiar with
these issues.
I do think the Supreme Court has raised an important issue.
This is not something we can just respond to in a knee-jerk
fashion. Apparently, the new version of the mail fraud statute
as a result of the McNally decision, we just promptly came in
and passed 1346 that said, well, you struck that down, so we
now make it a crime to deprive a person of an intangible right
of honest services.
Now, that is a bit of a stretch, I got to tell you. That is
all it takes to do that consistent with the traditional mail
fraud statute. Now that is not holding up, so we say we want to
redo it to respond to the Supreme Court in Skilling and make it
a crime to undisclosed self-dealing, which is a bit nervous to
me.
And then, Professor Buell, I do not think you were
suggesting this, but some might think it appropriate that a
judge develop the law as it goes forward and just case by case
decide what a statute means. But I do think it is incumbent on
Congress to pass a law that means what it says and is clear so
a person can adjust their conduct to it. If they do not have
internal moral standards that would otherwise cause them to
behave better, they at least know what the law is and where the
line is. And when you leave it vague for a judge to decide,
obviously the defendant did not have a very good chance to know
what it was either before he or she committed the crime.
Professor Seigel, with regard to the McNally standard that
the Supreme Court struck down, I am not sure when that
developed. That was not really in the original understanding of
mail fraud when I was prosecuting cases, I do not think.
Mr. Seigel. That is correct.
Senator Sessions. Somewhere along the line, prosecutors
figured out how to stretch this to include honest services, and
eventually the Supreme Court said, ``Uh-uh.'' Do you know when
it first started in----
Mr. Seigel. I believe it started somewhere in the 1920s or
1930s, maybe a little later than that. Congress had amended the
statute adding money or property for a completely different
reason, trying to make it clear that fraud was not the common
law concept of fraud but was a more modern version of fraud.
And as I understand it, Congress left a comma in there which
later on prosecutors used to argue separated out the money and
property from the notion of fraud, and that is how they
developed this intangible rights theory, which the courts let
them go along with.
But really I agree with you, Senator Sessions, I think that
not only has the law been unclear--I mean, one of the main
pieces of evidence of the lack of clarity for the law is that
most of the circuits that have--everybody has recognized that
this is way too broad, and so each circuit has tried to narrow
the concept to what they felt comfortable with in terms of
making it a Federal prosecution, and they have come up with
four, five, or six different methods of narrowing it. And I
think that is really where the Supreme Court was coming from,
saying it needs to be narrowed and it needs to be narrowed very
precisely and carefully by the legislative body, because if the
courts are doing it all over the place, there is no notice to
the citizens.
Senator Sessions. Well, Mr. Terwilliger, you were a long-
time Federal prosecutor, very familiar with these cases, and as
a Federal prosecutor, you know that certain crimes or wrongs
that you would like to vindicate did not fall within Federal
law. They just do not. And I have been there. This is horrible
and you dig into it, and it just did not violate the Federal
law. Maybe it violated State law, but maybe we do not think
they are good enough or got enough money or time or effort to
prosecute this case. And so an injustice will be done.
But perfect justice is not possible in this world. I think
it was a judge on the Supreme Court of California who said
perfect justice is a mirage, that in the pursuit of perfect
justice, we destroy what justice we can achieve.
And so where do you feel this line ought to be drawn? You
were the Deputy Attorney General, and you were a line
prosecutor, and you were a U.S. Attorney. Are we leaving too
much out, in other words, as a matter of policy, or are we
leaving too many wrongs outside of Federal prosecution, or are
we, in an attempt to eliminate all wrongs, reaching beyond the
historical role of the Federal Government and trying to
criminalize things that are too vague to criminalize?
Mr. Terwilliger. Well, Senator Sessions, I think you have
really put your finger on what the challenge here is. It
certainly is not a partisan issue. I think, to coin a phrase,
this is a post-partisan issue given the level of corruption
that exists at various levels of Government. But I think you
can parse the challenge into two parts.
One part is writing a law that is clear enough, that is
going to pass muster with the Supreme Court along the standard
that Justice Ginsburg's admonition sets; and, second, that
really does give people fair notice of what they can do and not
do.
The second, which really applies more to the issue of
dealing with State and local corruption and perhaps corruption
in the business and private world, is how far should the
Federal Government go. And the problem that we have--and I
think everybody here is a former Federal prosecutor, recognizes
that the more space that there is in a statute, the more
prosecutors will find a way to fill that space and expand
perhaps even what the Congress originally intended.
Really, I am not--I do not think anybody has all the
answers, and I know that I do not at this point. But I do think
that sort of framing the issue as let us deal with what is
appropriate to deal with Federal officials, let us deal with
what is appropriate to deal with State and local officials, and
then let us deal separately with what is appropriate in terms
of conflicts of interest and undisclosed financial interests in
the private world makes sense, because each one of those is a
different kind of wrong that offends a different notion of
justice and what the Federal Government should be doing.
For me, frankly, one thing that occurs to me on the State
and local issue, which I think is really where this is perhaps
difficult to focus, Congress passed a statute which is now 18
U.S.C. 666, bribery in Federal programs. The courts, including
the Supreme Court, have really expanded the coverage of that
statute to cover any bribery in a State or jurisdiction in a
State that gets Federal assistance, which is literally
everybody.
It seems to me that rather than grapple with this issue
that Mr. Breuer's suggestion to put this in the wire and mail
fraud statute brings up--and, that is, a scheme to defraud whom
of what--it might be easier to put this in 666 and to
criminalize conflicts of interest arising from undisclosed
financial obligations by any official in a jurisdiction that
receives Federal funds--constitutionally, then it goes right to
the spending power--and to have that dependent, as Mr. Breuer I
think rightfully suggests, on some pre-existing State or local
obligation to make that disclosure.
If you will permit me just one more minute here, when I saw
Senator Leahy, I was actually reminded we both were in Vermont
for a long period of time. We have very localized governments.
A road commissioner in Vermont is in charge of plowing the snow
and keeping the roads clean, which can be a real challenge in
Vermont. If a town were to allow a circumstance where, instead
of investing in all the heavy equipment necessary to do that,
the road commissioner was allowed to contract that service out
and he contracted that service out to a contractor who made the
capital investment in that equipment, thus saving the town
those capital costs, who happened to be his brother-in-law, or
his brother for that matter, and everybody in town knew it, one
would expect that nobody would have a problem with that,
including on the Federal level. And I think what we need to do
is make sure that when we write the standards that would govern
what can be a Federal crime under State and local law, we take
into account those very localized sets of circumstances and
keep those off limits.
Senator Sessions. Well, I think 666 is a suggestion that I
had thought might be a way to proceed also.
Well, thank you, Mr. Chairman. These are not little-bitty
matters, and I do not think that Congressmen or Senators should
be condemned if they say we do not need to Federalize every
wrong. You know, we would rather have a clear line, make sure
this line is clear on what it is that amounts to a Federal
crime. And if people can maneuver out of it on occasion and you
miss a few cases that have to be prosecuted in State court, I
do not know that the Republic will decline. Certainly we did
not have this language previously in our statutes.
Mr. Seigel. Senator Sessions, may I address that? Again, we
all are former members of the Department of Justice, and I do
think that it is important also to balance the countervailing
notion that it seems to me it has always been a special
province of the United States Department of Justice to root out
local corruption, because as we know for a wide variety of
reasons, that is a particularly difficult area for local law
enforcement to do on their own. There are lots of local
political pressures and other reasons, budget reasons, but
there are lots of reasons why it is often not done at the local
level. And it always made me proud as a Federal prosecutor that
that was one of the areas that we spent time on. And if it was
local law enforcement or local political environment or
whatever it was, it seemed to me that that was a very
legitimate area of Federal interest because, in effect, it is
the central government assuring the citizens that they are
being fairly treated by all of their governments.
So although I agree with you, you know, we do not need to
Federalize everything and maybe there are things that already
are Federal that probably ought not be, I do think we want to
make sure, as we are looking at a fix for this, that we not
leave out any significant area of corruption that will not
otherwise be addressed. And at the same time, I remind the
Congress that, as I pointed out, right now if you did nothing,
you have an honest services fraud statute that can apply to a
$20 bribery on the State level. And I am not saying a Federal
prosecutor would take that case, but there is nothing in the
law at the moment that even after Skilling would stop a Federal
prosecutor from taking that case. So I think it is both
overbroad and underinclusive.
Senator Sessions. Thank you. We need to work on it, and to
me it is a bit of a sad thing that the Federal Government has
had the burden of prosecuting more of these cases. In truth, it
would be better that they could be prosecuted locally. I think
the police departments, State investigators, State prosecutors
are more skilled than they used to be, but still they are
overworked, stressed, and often the objectivity that occurs in
a Federal courtroom as opposed to a judge and his friend who is
the mayor and he is trying the case, it just becomes very
difficult, in my personal view, and we do not want to eliminate
the Federal ability to--its historic role. But these phrases I
do not believe when I was prosecuting in the early 1980s,
particularly I tried a number of cases, I do not believe the
honest services was available, or maybe there was a case or two
that were just touching on it, and I successfully prosecuted
mayors and county commissioners and water and sewer board
people. In Georgia, I think, Mr. Terwilliger, they prosecuted
40 sheriffs over a period of years out of the 170 that I think
they have. But the result--the tools existed for pretty
effective Federal prosecution, even without these newer powers.
Senator Whitehouse. I would tend to agree with Senator
Sessions on this, and I think a lot of it has to do with
resources. I can remember as United States Attorney in Rhode
Island running a very lengthy and very complex undercover
investigation into municipal corruption in our capital city. It
involved confidential informants. It involved undercover agents
who had to be backstopped and brought in and the cover created
and all of them, you know, run as agents. It involved wiretaps
and surveillance. It involved a very complex array of
techniques and strategies, and in doing all of that, it was a
quite well established Federal process to go through all that.
If anything, the Department of Justice's role was to push back
a little bit on the U.S. Attorneys and say, Wait a minute, let
us double-check, let us take a second look, what are you doing
And, you know, you had to push for your case against that
pressure.
I then was elected Attorney General for the State of Rhode
Island, and we did the first public corruption wiretap in the
State's history. As Professor Buell knows from his time growing
up there and from his time at Brown University, Rhode Island is
not a State that has been immune to political corruption. And
yet it was tradition of the State that wiretaps were used for
narcotics investigations, not for public corruption
investigations. The State police knew how to do it. It just had
never been sort of--that skill set had never been picked up
from the narcotics unit, moved over to the public corruption
unit, and deployed against public officials. And we were able
to deploy it effectively against a local public official and
get him on tape in a bribery scheme.
And so I agree that there is an important Federal role. I
think it has a lot to do with resources. I think that the idea
that the Federal Government can sometimes be the only place
that comes in to clean up a local corruption problem is one
that we have to bear keenly in mind. But I think Senator
Sessions is dead right that that goes to the definition of what
local is, and that should not be the bar. The definition of
what corruption is needs to be clear and bright, and I think
that is what we are talking about.
It strikes me that--I would like to ask you to comment on
Lanny Breuer's testimony in one respect, and here is how I read
it. The vast bulk of these public corruption cases can be
pursued under a bribery, extortion, racketeering, RICO even,
existing rubric. And in those cases, you need a payment of some
kind made, some thing of value being delivered to the principal
or to a party in interest with him or her. And then you kind of
have the law in place to go ahead and do that.
Then you have the problem of these conflicts of interest,
and what he has brought together is a notion that if two things
occur in tandem--one is somebody concealing a financial
interest, and the second is them taking official action to
benefit themselves or a party in interest with them--in
relation to or as, you know, bound together in a common scheme
with the failure to disclose, then you have a sound basis for a
Federal prosecution. You are not going to go after a public
official who has missed a contribution in a filing schedule and
4 years later voted for a bill that helps the insurance
industry, and it turns out that that contribution 4 years ago
was from an insurance executive and, boom, if you are targeting
that public official, now you have a case. It requires more
than that. It requires this common scheme that the failure to
disclose relates to the misconduct or the advancement of that
financial interest.
I think that seems like a sensible place to begin, and we
are buttressed a little bit in this, as I understand it, by--
with respect to many of the reporting statutes, particularly
those that govern public official, a willful failure to file, a
knowing failure to file has its own set of adverse
consequences. So you can pick up the filing problem on its own.
You can pick up the bribery payment extortion problem on its
own. And this seems to me like a good foundation for looking at
the remainder without getting into terms as abstruse as denial
of honest services.
I would like to have each of you just react to that
observation, you know, if you think I am off base on that, if
Assistant Attorney General Breuer is off base.
Mr. Buell. Thank you, Senator. I addressed my comments
primarily to the problem of private sector cases, but I think
part of what I said, and particularly in my written testimony--
--
Senator Whitehouse. For purposes of this question, let us
focus on public----
Mr. Buell. Yes, and what I was going to say is I think an
important part of what I had to say about that translates over
here to what I would want to stress in the public sector
context as well, which is that I do not think enough attention
has been given in this entire discussion to the importance of
mental state, mens rea in criminal statutes, and particularly
in fraud statutes. And the Assistant Attorney General kept
emphasizing you would have to have the specific intent to
defraud, that that is how we know it is more than just a non-
disclosure or even a--you knew you did not fill the form out
right. And I think Mr. Terwilliger is right to ask, well, what
do we mean by that? And maybe more thought needs to go into
what we mean by that----
Senator Whitehouse. Doesn't connecting the concealment with
the official act act as a very, very good proxy for the
adequate mental state?
Mr. Buell. I would say in general, yes, but what we really
need to be talking about--and, I mean, this really draws from
my experience as a prosecutor and will probably resonate with
others here--is the kinds of evidence that you normally look
for in a case to say what we have here is a specific intent to
defraud, isn't just the conduct itself, but it's what
traditionally we refer to as the badges of fraud. You know, it
is some kind of creation of fictitious entities, destruction of
evidence, covering up, the kind of conduct that can allow you
to say, look, this person was not just hiding something, they
knew they were doing it in a wrongful manner.
And I believe that that kind of an inquiry and how you
embody that in a statute, whether it is with a willfulness
requirement or something else, I believe that kind of an
inquiry goes a long way to guarding against the worries about
overapplication of an overly vague law. The Supreme Court has
said over and over again----
Senator Whitehouse. Professor, if you could wrap up really
quickly, I just got passed a note that says we have 10 minutes
left on the vote on the floor----
Mr. Buell. OK. Well, I was just going to say----
Senator Whitehouse [continuing]. And I would like to give
time to the other two----
Mr. Buell [continuing]. That the Supreme Court itself has
emphasized again and again that demanding mental state
requirements can go a long way to dealing with vagueness
problems in criminal statutes.
Senator Whitehouse. Very good.
Professor Seigel.
Mr. Seigel. My reaction very briefly would be I think you
are right, and I just want to point out, the reason why you
need this additional tweak after Skilling is that in these
kinds of arrangements, let us say that the decisionmaker in
Government is on the payroll secretly of the company that he
has voted to give the work to. The reason why that is not
traditional money or property fraud is the prosecutor may not
be able to prove that the taxpayers did not get their money's
worth. They may very well have gotten good services. The point
is they did not know that he was getting a cut of the pie. So
it is not traditional, you know, mail and wire fraud, and now
it is not covered because----
Senator Whitehouse. Because there is no loss.
Mr. Seigel. There is no monetary loss.
Senator Whitehouse. To the injured party.
Mr. Seigel. That is right.
Senator Whitehouse. At least not provable loss.
Mr. Seigel. Correct. Correct. And yet there is this
deception resulting in this personal gain which I think we all
agree is corruption. So I do think that is a very important
area to address, and I do think with the various safeguards
requiring some--you know, it has to be more than a trivial
amount of money and so forth that we can--and adding in the
other requirements, we can make sure that it is specific and
puts sufficient notice to the public.
Senator Whitehouse. Mr. Terwilliger.
Mr. Terwilliger. Thank you, Senator Whitehouse. I really
must say I compliment the Committee on the substantive nature
of this hearing. I do not want to say it does not happen that
often, but in my experience, this one is sort of above the line
considerably. I think it does provide a good foundation, but I
think you have just put your finger on exactly where the
problem lies and where this can go awry.
If we assume we have a local official who does his job to
the nth degree, takes care of the citizens and does everything,
and in the process finds a way to enrich himself or herself in
a way that is undisclosed, that is the problem we are talking
about. The question then becomes: Is that purely a Federal
crime And I think the answer to that is it is probably not
purely a Federal crime, unless the State or locality has set
some kind of a standard of disclosure of that very interest
that would, in fact, make it an actionable wrong under Federal
law.
The federalism issue, I could not agree with you more, and
your experience, Senator Whitehouse, in Rhode Island is
probably one of the quintessential great examples of what the
Federal role really is and needs to be. And I compliment you on
the success of that.
But I think we have to be very, very careful that we do not
have anything as amorphous, again, as honest services that lets
Federal prosecutors set the standards for what may be disclosed
or even what self-dealing is allowed. Those lines ought to be
drawn by the State and local jurisdictions, and then Federal
prosecutors are the safety net under whatever kind of
enforcement mechanism they have to make sure, if that job does
not get done on the State or local level, that it does get done
on the Federal level.
Senator Whitehouse. We are winding down toward the end of
the vote, so why don't I give Senator Sessions closing words,
and then we will adjourn, and the hearing will remain open for
an additional week if anybody wishes to add further testimony.
Senator Sessions. I think it is a good discussion. What we
do not want to get into is something like you have in Russia
with a bunch of oligarchs and one of them here takes the
President and it is easy to find he did something wrong. Most
American business and public officials try to stay within the
law, and you do not want to be in one of these situations where
the perception is among the private sector and the public
sector that anybody that wants to ``get me'' can go out and
find something and prosecute me for it. That is an overreach,
too, and we do need to think through that. Otherwise, it can
become--the prosecution can become a tool of political power
and punishment of opponents. Usually that is raised when you
prosecute somebody, as I found, but I always felt I could
defend clearly what I charged and what the law was, and that
this person violated it. The vaguer you get, the harder it is
to defend against accusations of political and abusive
prosecution.
Thank you, Mr. Chairman.
Senator Whitehouse. The hearing is adjourned. I thank very
much the witnesses for their testimony. One of the reasons that
the hearing was substantive was because you were all so expert
and helpful. Thank you.
Mr. Buell. Thank you.
Mr. Seigel. Thank you.
Mr. Terwilliger. Thank you.
[Whereupon, at 11:42 a.m., the Committee was adjourned.]
[Questions and answers and submissions for the record
follow.]
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