Can Violating a Work Rule Make You a Criminal? Part I

Posted by Chris Morales on Fri, Dec 06, 2013 @ 01:58 PM

Every workplace has its own rules regulating employee behavior. Some have formal progressive discipline policies calling for increasingly serious punishment for repeated instances of unacceptable behavior. While deviations from employment policies routinely result in discipline or even discharge, it is universally understood that violating a work rule does not make an employee a criminal. Prosecutors, however, continue to rely on alleged violations of workplace rules as the premise of bringing criminal charges against employees in both the public and private sectors. The theory is that workplace rules establish expected standards of conduct and, when those standards are breached, the employer is defrauded or suffers a theft.

But work rules are not crimes. And skilling firmly closed the door on the attempt to criminalize employee breaches of the duty of faithful and loyal service. Moreover, because there is no warning that departures from employment policies subject employees to criminal punishment, basing criminal charges on those policies violates the due process guarantee of fair notice. In addition, as breaches of employment polices are may subject employees to criminal punishment, basing criminal charges on those policies violates the due process guarantee of fair notice. In addition, as breaches of employment policies are common and routinely result in no discipline at all, empowering prosecutors to determine which policy violates warrant criminal prosecution invites selective enforcement and abuse of government power.

Simply stated, Congress - not an individuals’s boss - determines what conduct deserves criminal punishment. The government should not be allowed to tun employee misconduct into a federal offense. This article explores the history of federal prosecution of work rule violations and offers defense strategies for challenging the misuse of workplace rules as a basis for criminal prosecution against public and private sector employees.

The Rise and Fall of Honest Services Fraud

The criminalization of workplace misconduct has its origins in the tortured history of the honest services theory of mail fraud.

The “go to” statute for Federal prosecutors has long been the mail fraud statute.” As originally enacted in 1872, scheme or artifice to defraud.” The intent was to protect the post office from fraudulent interstate lottery schemes. In 1909, Congress codified the Supreme Court”s decision in Durland that the mail fraud statute protects property rights and amended the statute to prohibit, as it does today, “any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations or promises.” The same language appears in the wire fraud statue, and schemes charged under the mail fraud and wire fraud statutes are subject to the same analysis.

Subsequent court decision endorsed the notion that deprivation of the honest and faithful services owned by a fiduciary is the equivalent of fraudulent taking and therefore constitutes a scheme to defraud within the meaning of the mail and wire fraud statutes. The Shushan case from the Fifth Circuit is credited with giving rise to the honest services theory in 1941. The defendant in Shushan was a public official who allegedly accepted bribes from entrepreneurs in exchange for urging official city action that was beneficial to the bribe payers. The defendant in Shushan argued that there was no fraud since the city realized cost savings from the project. The Fifth Circuit disagreed and held that “[a] scheme to get a public contract on more favorable terms that would likely be got otherwise by bribing a public official would not only be a plan to commit the crime of bribery, but would also be a scheme to defraud the public.”

The honest services doctrine cultivated in Shushan solved a thorny problem for prosecutors unable to establish that the victim of the alleged fraud suffered a loss of money or property. Unlike, traditional fraud in which the victim’s loss of money or property supplies the defendant’s gain, the honest services theory targeted corruption that results in no tangible loss to the victim. For example, consider a situation in which an employee accepts a payment from a third party in exchange fro awarding that party a contract, yet the contract terms are the same as any that could have been negotiated at arm’s length. The honest services theory came to be applied broadly to a wide variety of public and private sectors breaches of loyalty. Public officials were convicted of defrauding citizens of the right to the honest services where they made governmental decisions with the secret objective of benefitting themselves or promoting their own interests or used the mails or wires to falsify votes that resulted in the officials being elected. In the private sector, purchasing agents, brokers, union leaders and others with fiduciary duties to their employers or unions were found guilty of defrauding their employers or unions by accepting kickbacks or selling confidential information.

In 1997, the Supreme Court in McNally “stopped the development of the intangible-rights doctrine in its tracks” by declaring that the statute applies only where money or property rights are at issue. The defendant in McNally was a state official who arranged with a state contractor for the payment of kickbacks to companies that the official partially controlled. The state did not pay a higher price or secure less favorable terms as a result of the kickback scheme. Instead, the prosecutor maintained that the kickback scheme “ defrad[ed] the citizens and government of their right to have the Commonwealth’s affairs conducted honestly.” The Supreme Court rejected the government’s honest services and held that the mail fraud statute reaches only schemes designed to deprive victims or money or property and not intangible rights “such as the right to have public officials perform their duties honestly.”

In the wake of McNally, and in an effort to limit its effects, prosecutors attempted to characterize the salary paid to employees as the “money or property” required for a mail or wire fraud conviction. The “salary theory” of mail fraud originated from the suggestion by Justice Stevens in his dissent in McNally that a deprivation of the right in McNally that a deprivation of the right of honest services also constitutes a deprivation of money or property when an employee’s salary is at issue. Justice Stevens wrote:
“When a person is being paid a salary for his loyal services, any breach of that loyalty would appear to carry with it some loss of money to the employer - who is not getting what he paid for . . . This . . . may fulfill the Court’s “money or property” requirement . . .

The “salary theory: was not endorsed by a majority of the court and has since been rejected as a basis for pursuing mail fraud charges on the ground that the property interest that is alleged to have been denied - the salary - is indistinguishable from the intangible right to honest services described in McNally.

In 1998, Congress reinstated the honest service theory by enacting 18 U.S.C. §1346. Section 1346 provides that the phrase “scheme or artifice to defraud” in the mail and wire fraud statutes includes “a scheme or artifice to deprive another of the intangible right of honest services.” As before McNally , the honest services.” As before McNally, the honest service statute came to be used by federal prosecutors to pursue public corruption as well as breaches of fiduciary duty and corporate fraud by public and private employees.

In 2010, the Supreme Court once again narrowed the scope of the honest services statute in Skilling argued that §1346 was unconstitutionally vague because the phrase “intangible right to honest services”did not adequately define the conduct proscribed by the provision and the language was so broad that it allowed for arbitrary prosecutions. The Supreme Court agreed and held that §1346 can only be read as criminalizing bribery and kick-back schemes. The Court specifically rejected the government’s argument that the statue should be read more broadly to include “undisclosed self-dealing by a public official or private employee - i.e., the taking of official action by the employee that furthers his own undisclosed financial interest while purporting to act in the interest of those to whom he owes a fiduciary duty.” The Court held that “ a reasonable limiting construction of §1346 must exclude his amorphous category of cases.”

The Morales Law Firm would like to thank The national Association of Criminal Defense Lawyers CHAMPION for sharing this article with us.

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Tags: Criminal Charges, punishment, prosecutors, criminalize employee, criminal