Oregon’s First Lady Cylvia Hayes and the Law of Honest Services Fraud

The U.S. Attorney in Oregon is conducting a grand jury investigation of former Governor John Kitzhaber and his fiancé and honorary first lady, Cylvia Hayes. Hayes runs a company that focuses on clean energy and economic development issues. The investigation is focused on allegations that Hayes may have traded on her position as first lady to obtain lucrative contracts from various clean energy groups and then worked with Kitzhaber to further the interests of those groups within the state government. Kitzhaber resigned in February, on the same day that news of the federal grand jury investigation was announced.

Acceptance speech for Oregon's new Governor, John Kitzhaber

The investigation, and questions about Hayes’ role in particular, bring to mind the recently concluded corruption case involving former Virginia Governor Bob McDonnell and first lady Maureen McDonnell. The McDonnells were found guilty of accepting gifts and sweetheart loan deals from businessman Jonnie Williams in exchange for agreeing to promote his products within the state government. And as with the Oregon case, in Virginia many painted the first lady as the principal bad actor in the scheme.

A key charge in the McDonnell case was honest services fraud, a theory commonly used to prosecute bribery. The McDonnells were convicted of acting together to deprive the citizens of Virginia of their right to Bob McDonnell’s honest services by accepting bribes from Williams.

As Governor, there’s no question that McDonnell did owe a duty of honest services to the people of his state. But there was no allegation in the McDonnell indictment that the first lady, Maureen McDonnell, owed her own duty of honest services to Virginians. As far as I’m aware, throughout that case all parties took the position that Maureen McDonnell was not a public official and that her criminal liability was entirely derivative of her husband’s, based on the duty of honest services that only he owed and that she helped him violate. The implication was that if Bob were not involved, Maureen could not have been charged.

That theory worked fine for the Virginia case. The government’s argument was that the McDonnells did conspire together in the bribery scheme, so there was probably no need to consider whether there would be an independent basis for charges against the first lady alone. But now, looking at the facts in the Oregon investigation, that question is worth considering.

Suppose the Oregon investigation revealed that Hayes had secretly agreed to accept money from outside organizations in exchange for personally working within the Oregon government to further their interests – but Kitzhaber knew nothing about it and was not involved in any such deal. Would there be a basis on which to charge Hayes alone with honest services fraud?

I think the answer is yes. Before moving on, though, let me stress that this is a purely hypothetical legal analysis. We don’t know what the grand jury investigation will reveal and I’m in no way suggesting that I think any of the charges discussed below would be appropriate as a factual matter. I’m only interested in whether they would be legally sound.

The Law of Honest Services Fraud 

Honest services fraud is a popular — and controversial — white collar crime. The federal mail and wire fraud statutes prohibit using the mail or any telephone or wireless transmission in furtherance of a “scheme or artifice to defraud.” In a traditional fraud case, such as a Ponzi scheme, the object of the scheme to defraud is to deprive the victims of their money or property. But for decades, federal prosecutors also have utilized another theory of mail and wire fraud, charging defendants with schemes to defraud victims of their intangible right to the fair and honest services of a particular individual.

In an honest services fraud case there is no need to show that the victims suffered any monetary loss. The injury is simply the breach of a duty of honest services. That duty requires people in certain kinds of relationships to act with with honesty and loyalty, free from corruption, deception, and self-interest. A prerequisite for any honest services fraud case, therefore, is a finding that a duty of honest services existed in the relationship in question.

The most common type of honest services fraud case involves political corruption. Public officials are universally considered to owe a duty of honest services to their constituents and the public to exercise the powers of their office honestly and for the benefit of all, and not to use their position to line their own pockets or otherwise engage in corrupt behavior. Honest services fraud is a mainstay charge in cases involving local, state, and federal public corruption.

But the theory is not limited to public officials. Courts have also found a duty of honest services in various private sector relationships that involve fiduciary duties or other special obligations of good faith, honesty and trust. The most common private sector theory has been based on the duty that an employee owes to his or her employer to act in that employer’s best interests. For example, if an employee secretly took bribes from a contractor to steer business to that contractor, the employee could be charged with violating his duty of honest services to his employer. Other private sector relationships that involve a similar relationship of trust and loyalty may also give rise to honest services charges.

Because of its potential breadth and uncertain parameters, the doctrine of honest services fraud has had a tumultuous history. In 1987 the Supreme Court struck down the theory as too vague and amorphous, only to have Congress reinstate it by statute the following year. Finally, in 2010 the Supreme Court ruled in Skilling v. United States that only the core corrupt conduct of bribery and kickbacks amounts to honest services fraud. The Court made it clear, though, that the theory still applies to both the public and private sector (see footnote 45, for example); in fact, Skilling itself was a private sector case involving former Enron executive Jeff Skilling.

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 Hayes’ Duty of Honest Services to the People of Oregon

There’s no question that Kitzhaber, as the elected governor, owed a duty of honest services to the people of Oregon, just as Bob McDonnell did to the people of Virginia. If Kitzhaber were found to have engaged in bribery or kickbacks, he could be prosecuted on an honest services fraud theory.

Similarly, if Hayes were conspiring with Kitzhaber in a bribery or kickback scheme, she could be liable for taking part in the scheme to deprive the public of Kitzhaber’s honest services. In that case, her liability would depend on Kitzhaber’s duty. This is the theory under which Maureen McDonnell was prosecuted along with her husband.

But what if Kitzhaber was not involved? Then the question would be whether Hayes owed her own duty of honest services to the people of Oregon.

There is no uniform definition of who qualifies as a state or local “public official” for purposes of honest services fraud. Those who are elected to office or are employed and paid by the government certainly qualify. But the definition likely is not limited to those who are on the government payroll.

If we look to the federal bribery statute for guidance, “public official” is defined to include not only federal government employees and elected officials but also any individual acting “for or on behalf of the United States.” 18 U.S.C. § 201(a)(1). The Supreme Court has held that this encompasses anyone exercising a position of public trust with official federal responsibilities. For example, a private contractor responsible for awarding federal housing grants or a guard at a private correctional facility that contracts to house federal prisoners may be considered a public official under the bribery statute due to the nature of their responsibilities. The same principle should apply at the state level.

The facts suggest that Ms. Hayes should be considered a public official, as one who acted for and on behalf of the state of Oregon. When he was first elected in 2011, Kitzhaber announced that Hayes would serve not only in the role of first lady but also as an advisor to the governor on clean energy and development issues. By all accounts, Hayes played a significant policy role in Kitzhaber’s administration.

The Oregonian newspaper has been reviewing some 94,000 of Hayes’ e-mails that were recently released as part of a public records request. They reveal that Hayes was an active participant in the administration, attending top-level meetings, directing the activities of aides, making use of the governor’s staff, and participating in various state government programs and initiatives. She traveled on state business, and at state expense, to various events where she appeared in an official capacity as first lady.

Significantly, the Oregon Attorney General herself recently determined that Hayes was a public official for purposes of the state’s public records law. That ruling came when the Oregonian requested copies of Hayes’ aforementioned e-mails. Hayes and Kitzhaber resisted that request, arguing that she was a private citizen not covered by the law. The Attorney General disagreed, finding Hayes had “extensive, high-level involvement in the executive branch,” and that she had “a significant amount of authority over government employees.”

Hayes and Kitzhaber themselves have taken somewhat conflicting positions on the question of Hayes’ status. Last summer the governor’s counsel announced that they considered Hayes to be a public official for purposes of the state’s ethics rules, and Hayes apparently has in the past filed financial disclosure paperwork that is required of state officials. On the other hand, when resisting the order to turn over her e-mails and the power of the state ethics commission to investigate her, Hayes and the governor claimed she was a private citizen, not a public official. More recently, though, she argued (unsuccessfully) that the state should pay her attorney’s fees, citing the Attorney General’s finding that she is a public official.

Putting all these facts together, there’s a compelling argument that Hayes should be considered a state public official for purposes of honest services law. She certainly was acting “for or on behalf of” the state in a number of ways. And the finding of the state’s own highest legal official, while not binding for purposes of interpreting a federal law, is certainly entitled to some deference.

This is not to say the same would necessarily be true for every first lady in every case. As my students are tired of hearing me say, everything depends on your facts. It’s possible that a first lady who played a much less active policy role in the administration and performed only ceremonial functions would not be considered a public official. But Hayes, who was so involved that the Oregonian has dubbed her a “deputy governor,” seems to qualify.

But in the end, I don’t think it really matters whether or not Hayes is formally deemed to be a public official. As noted above, honest services fraud can also apply to private sector individuals. The key is the presence of a duty of special trust and confidence that arises from the nature of the relationship between the parties.

All of the same factors described above suggest that Hayes had a duty of honest services to the people of Oregon, even if she is considered a private citizen. Hayes was acting on behalf of the state, speaking in the name of the state, directing the activities of state employees, and working on policy initiatives within the state government. The taxpayers were not paying her a salary, but were supporting her in a number of ways including providing travel, security, staff, and living quarters. It would be strange indeed if the law held that someone who plays such a role within the government assumes no duty to the public to act with honesty and loyalty and free from corruption.

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I believe a court would conclude that Cylvia Hayes owed a duty of honest services to the people of Oregon while she was acting as first lady. As a result, if the investigation revealed that she received bribes in connection with her state work, there would be a basis for honest services fraud charges regardless of whether Governor Kitzhaber was involved. This would require evidence of a corrupt deal, or quid pro quo, where Hayes agreed to take particular actions in exchange for contracts or other things of value.  A mere conflict of interest, or appearance of one, would not be enough.

Again, I have no idea whether Hayes committed any crimes and am not suggesting that she did. But anyone who believes that any potential criminal liability for Hayes depends on whether the governor was involved in the scheme is probably mistaken.

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