Posted by: evanjdavis | October 11, 2017

[DIS]HONEST SERVICES ONLY A CRIME IF THEY ARE UNIQUELY GOVERNMENTAL SERVICES by Evan J. Davis

The dominoes continue to fall from last year’s Supreme Court reversal of former Virginia governor Bob McDonnell’s conviction for honest services fraud, for his having set up meetings in exchange for money. On July 12, 2017, the Second Circuit reversed a politician’s convictions for honest services fraud and money laundering because the jury instruction ran afoul of the Supreme Court’s McDonnell decision. United States v. Silver, No. 16-1615-cr.  This decision highlights the difference between law and morality – what we expect from our public figures isn’t the same as what the law requires them to do.

Unlike term-limited California, New York allows its Assembly members to serve forever. That system permitted Sheldon Silver, a 20-year Speaker of the Assembly, to become “the most powerful man in New York,” according to a witness in his criminal trial.  Unscrupulous businesspersons were willing to pay for this influence, and Silver was willing to sell it.  Silver was indicted for committing honest services fraud, primarily for his having engaged in a string of actions that benefitted persons who were generating business for his part-time law practice.  The most-egregious actions occurred outside the statute of limitations period, so the government’s case rested on proving that the last few actions – including obtaining Assembly accolades for one of Silver’s co-conspirators – constituted illegal conduct.  Silver caught a big break when the trial judge accepted the government’s “honest services fraud” jury instruction, which defined the fraud as involving “any action” by a politician undertaken in exchange for something of value.  The jury convicted Silver based on this broad language, but the Second Circuit decided that the language was too broad under the later-decided McDonnell because it allowed the jury to convict based on setting up meetings or performing other tasks that non-politicians can perform.  The Supreme Court limited honest services fraud to actions that only politicians can take, such as voting on legislation, instead of more-subtle exercises of power such as introducing people to each other.  Because the final few alleged criminal actions weren’t obviously illegal, the government couldn’t show that the erroneous jury instruction was harmless beyond a reasonable doubt.  Mr. Silver will get a new trial with a jury instruction consistent with McDonnell, although the evidence will be unchanged and the optics of his earlier actions – steering public funds to his co-conspirators in exchange for referral fees – remain difficult for Silver to overcome.

What does this mean for white-collar criminal defendants? The Supreme Court is requiring that prosecutors and judges be precise and not rely on bringing charges and making arguments before juries that test the outer boundaries of amorphous crimes and statutes.  Appellate courts have taken notice and are no longer turning a blind eye to unreasonably broad interpretations of criminal statutes. 

What does this mean for tax cases? The Second Circuit’s Silver decision confirms that appellate courts got the Supreme Court’s message and that McDonnell’s legacy will continue to grow.  The McDonnell case may be a gift that keeps on giving for tax defendants, particularly those charged with a violation of 26 U.S.C. Section 7212, which prohibits the interference with IRS functions and has long been an example of a troublingly broad criminal statute.  The Supreme Court recently agreed to review a Section 7212 conviction, Carlos Marinello, II, v. United States, to determine whether the statute, at least as applied to Marinello’s actions and inactions such as not maintaining books and records, runs afoul of the U.S. Constitution.  DOJ can’t be happy about the Supreme Court’s decision to grant certiorari in Marinello, a case that DOJ won.

Although Silver isn’t the sort of person who would earn my vote, his unseemly political actions don’t obviously equal criminal actions simply because they fall short of what we expect of our elected officials. Fortunately, appellate courts generally know the difference between moral corruption and criminal actions.

EVAN J. DAVIS – For more information please contact Evan Davis – davis@taxlitigator.com or 310.281.3288. Mr. Davis is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a former AUSA of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) handling civil and criminal tax cases and, subsequently, of the Major Frauds Section of the Criminal Division of the Office of the U.S. Attorney (C.D. Cal) handling white-collar, tax, and other fraud cases through jury trial and appeal. He has served as the Bankruptcy Fraud coordinator, Financial Institution Fraud Coordinator, and Securities Fraud coordinator for the USAO’s Criminal Division, and the U.S. Attorney General awarded him the Distinguished Service Award for his work on the $16 Billion RMBS settlement with Bank of America.

Mr. Davis represents individuals and closely held entities in criminal tax investigations and prosecutions, civil tax controversy and litigation, sensitive issue or complex civil tax examinations and administrative tax appeals, and federal and state white collar criminal investigations. He is significantly involved in the representation of taxpayers throughout the world in matters involving the ongoing, extensive efforts of the U.S. government to identify undeclared interests in foreign financial accounts and assets and the coordination of effective and efficient voluntary disclosures (OVDP, Streamlined Procedures and otherwise).


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