[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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