Honest Services Fraud and the Fiduciary Relationship Requirement: How the Ninth Circuit Got It Wrong in United States v. Milovanovic

I. INTRODUCTION Honest services mail fraud1 is one of the more difficult white collar crimes to understand, mostly because, as Justice Scalia phrased it, prosecutors are "all over the place" in how they interpret it.2 Most attempts to clarify the statute's meaning have only confused the legal community more. Yet, despite its ambiguity, many describe the statute as the prosecutor's "true love" - his catch-all, go-to weapon against white collar criminals.3 The Ninth Circuit Court of Appeals recently addressed the issue of honest services fraud in United States v. Milovanovic.* After falsifying paperwork for commercial drivers licenses in exchange for bribes, the defendants in Milovmnovic were charged with honest services fraud.5 The defendants challenged the indictment, claiming that a fiduciary relationship6 between plaintiff and defendant is necessary for honest services fraud, and no such relationship existed between the defendants and their employers, the Washington State Department of Licensing.7 The Ninth Circuit ruled that a fiduciary relationship is not a sine qua non requirement of honest services fraud,8 making it the third circuit court to make this ruling.9 The case is currently set to be reheard en bane by the Ninth Circuit.10 This Note will argue that Milovanovic was decided incorrectly, as the court failed to contemplate the policy considerations of discrimination, over-criminalization, and over-regulation of the private sector. Part II of this Note provides the history of the honest services fraud statute and more recent developments in the statute's interpretation. Part III discusses the facts and procedural history of Milovanovic. In Part IV, this Note argues that the Ninth Circuit in Milovanovic disregarded several important policy considerations when eliminating the fiduciary relationship requirement - namely, discriminatory application, over-criminalization, and over-regulation of the private sector. With this recent ruling, prosecutors in the Ninth Circuit's jurisdiction will effectively have unchecked discretion to prosecute almost anyone for almost anything remotely related to fraud. This reckless expansion of the already broad honest services fraud statute should - and must - be reversed when the Ninth Circuit rehears Milovanovic en bane. II. SIGNIFICANT LEGAL BACKGROUND A. Early History The mail fraud statute, as amended in 1909, criminalized using the mail to advance "any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises."11 Over time, courts broadened the interpretation of "money or property" to include deprivation of intangible rights such as honest services, a concept officially articulated in the 1941 Fifth Circuit Court of Appeals decision of Shusban v. United, States.12 In Shushan, a public official accepted bribes in exchange for supporting a certain city contract.13 The city lost no money or property in the course of the fraud, but instead saved money.14 The public official was nevertheless convicted of mail fraud because "[n]o trustee has more sacred duties than a public official," and taking advantage of this duty meant depriving the public of its right to an official's honest services.15 Prosecutors subsequently began using deprivation of intangible rights, such as honest services, as the basis for charging defendants with fraud more frequently.16 Honest services became a catch-all deprivation when suspect behavior did not fall under the definition of another crime.17 The doctrine of intangible rights during this period was like an "exotic flower that quickly overgrew the legal landscape in the manner of the kudzu vine until . . . few ethical or fiduciary breaches seemed beyond its potential reach."18 The Supreme Court eventually addressed intangible rights in McNaUy v. United States, holding that mail and wire frauds only applied to schemes to defraud others of tangible property or money. …