Federal Honest Services Prosecutions
The current trial of former Enron executives Kenneth Lay and Jeffrey Skilling illustrates how the Justice Department has increased its reliance on conflict of interest violations in white collar prosecutions generally and securities fraud prosecutions in particular. In a case alleging massive securities fraud and byzantine accounting improprieties, the Justice Department "dummied down" its cross examination and focused instead, for example, on small investments that both defendants made in a relatively minor Enron vendor. Those investments admittedly violated the Enron Corporate Code of Conduct, and on cross examination left Mr. Lay in the position of arguing that "no one should be a slave to the rules." Expect to hear that testimony quoted back by the government during closing argument as the public debate over Enron's collapse concludes.
Although not charged in the Enron case itself, 18 U.S.C. § 1346 prohibits use of the mails or interstate wire transmissions, such as electronic mail, "to deprive another of the intangible right of honest services." Although this broad reaching prohibition has been the subject of numerous constitutional challenges, it remains substantially intact as federal law today. As the government continues its priority enforcement against corporate crime, expect the government to utilize provisions from conflict of interest policies and compliance manuals in bringing these so-called "honest services" prosecutions. In the securities industry, outside affiliations and cross trading are likely to be subjects of special interest. Broker dealers and their employees should review their existing conflict of interest policies. Further, given the Justice Department's increasing willingness to equate conflicts of interests with federal crimes, this is a fine time for everyone in the securities industry to enhance compliance with internal conflict of interest policies.
