The Supreme Court on Thursday threw into doubt the fraud convictions of former Enron Corp Chief Executive Jeffrey Skilling and ex-media baron Conrad Black, a setback for the U.S. Justice Department in two of the biggest corporate fraud prosecutions of the last decade.

The high court limited the reach of a federal fraud law that Justice Department prosecutors have used in a number of cases alleging public corruption by government officials and fraud by executives like Black and Skilling.

The ruling could make it harder for the administration of President Barack Obama to use the fraud law even as it faces rising public anger and pressure to bring major cases against corporations and top executives for wrongdoing in the wake of the financial crisis.

Justice Ruth Bader Ginsburg said the fraud law at issue only covered bribery and kickbacks, and that Skilling's alleged misconduct did not involve a bribe or kickback.

The court also ruled that the convictions of Black and two former colleagues for defrauding shareholders of former newspaper publisher Hollinger International Inc must be reviewed because of flawed jury instructions about the fraud law.

The court stopped short of overturning both convictions, and sent the cases back to lower courts for more proceedings. Both men will remain in prison.

Ginsburg said in Black's case, the lower courts must determine if the jury instruction error was harmless, while in Skilling's case, she said the conspiracy and fraud conviction was flawed, but may not have to be reversed.

The Justice Department would defend the Skilling and Black cases in the lower courts as well as other prior convictions under the law, spokeswoman Tracy Schmaler said.

While we are disappointed that today's Supreme Court decisions narrowed the honest services statute, we are pleased that the court upheld many of the core provisions that have been used for decades to prosecute corrupt public officials and corporate executives who have breached their duties to their constituents, clients and investors, she said.

The ruling significantly narrows a law crucial for holding accountable the corporate criminals whose actions did so much to contribute to the current financial crisis which has harmed so many Americans, said Vermont Democratic Senator and Judiciary Committee Chairman Patrick Leahy.

Skilling and Black had been convicted on other charges besides fraud, and the ruling ensures further legal proceedings to determine the fate of their convictions on all the charges.

Skilling as chief executive led Enron's transformation from a sleepy natural gas pipeline company into a global energy trading powerhouse. He was convicted in 2006.

The case was part of the Justice Department's crackdown early in the decade targeting top executives for their role in corporate fraud and accounting scandals in such companies as Enron and WorldCom.

Skilling is serving a prison sentence of 24 years at a minimum security facility in Littleton, Colorado.

SKILLING 'VERY HAPPY'

Defense lawyer Daniel Petrocelli said Skilling's first statement was an emotional thank you so much to the group of lawyers on the telephone line when told of the ruling. He is very happy, Petrocelli said.

Our position will be that every count of conviction is undermined because the government relied so prominently on the honest services theory at trial, he said.

Miguel Estrada, Black's attorney, said, We are obviously pleased that the Supreme Court rejected the government's argument that Conrad Black engaged in honest services fraud.

We look forward to helping Mr. Black regain his freedom, he added.

The Canadian-born Black, who had been a member of Britain's House of Lords, has been in a U.S. prison since March 2008, when he began serving a 6-1/2-year sentence for fraud and obstruction of justice.

The Supreme Court's ruling stemmed from an appeal by Black after he was found guilty by a jury in Chicago of stealing millions of dollars from Hollinger by fraudulently paying himself bogus fees. Hollinger was once the world's third-largest publisher of English-language newspapers.

In the first part of the Skilling ruling, the high court rejected his argument that his conviction should be overturned completely because his Houston jury had been tainted by prejudice and anger over the energy trader's collapse.

The court said he received a fair trial. Justices John Paul Stevens, Stephen Breyer and Sonia Sotomayor dissented from that part of the ruling.

In the second part of the ruling, the court focused on a law used by Justice Department prosecutors in Skilling's case.

At issue in the case is a 28-word law that the U.S. Congress adopted in 1988 that makes it illegal for public officials and executives to commit fraud by depriving those they work for of the right to honest services.

His attorneys said Skilling did not breach his honest services duty because he never was dishonest to his employer, he always acted in Enron's interest and prosecutors never showed he personally benefited from his allegedly fraudulent acts.

Ginsburg's opinion struck a middle ground.

She did not go as far as Skilling's lawyers wanted in seeking to get the law declared as unconstitutionally vague.

But she also did not give the Justice Department what it wanted by extending the law from bribes and kickbacks to a third category of conduct -- undisclosed self-dealing by a public official or private employee.

The Supreme Court cases are Jeffrey Skilling v. United States, No. 08-1394 and Black v. United States, No. 08-876.

(Additional reporting by Jeremy Pelofsky and Kristen Hays in Houston. Editing by Mohammad Zargham and Robert MacMillan)

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