(Fortune Magazine) -- The Enron case keeps offering up surprises. When a federal appeals court overturned the Enron-related convictions of four Merrill Lynch officials last month, it triggered two lines of reflexive punditry: The Enron Task Force had been slapped once again for overreaching (just as in the Arthur Andersen case), and the outcome boded ill for its convictions of Enron CEO Jeffrey Skilling.

The first conclusion is premature at best, and the second is mistaken.

The case was U.S. v. James A. Brown, known among Enron junkies as the "Nigerian barge case" because it involved Enron's allegedly phony sale of a power-generating barge to Merrill Lynch in 1999 to goose its year-end numbers.

But the reversal really had little to do with overreaching and nearly nothing to do with Skilling. Moreover, there's a real possibility that the ruling won't stand and that at least three of the Merrill Lynch (Charts) defendants (Brown, Daniel Bayly, and Robert Furst) may have their convictions reinstated. (The fourth, William Fuhs, had his conviction reversed on sturdier grounds.)

The case is about a crucial category of fraud in which the victim is deprived not of money but of the "honest services" of an employee. If one imagines the federal judiciary as running a vast, multi-topic blog - which is not a bad way to view Anglo-American common-law adjudication - the Nigerian-barge ruling would be the latest posting in a lively thread that's been going on for more than a generation. (Since honest-services fraud comes up in only one of Skilling's 19 convictions, the barge case has little bearing on his appeals.)

When federal prosecutors go after a fraud, their main weapons are the mail - and wire-fraud statutes. (It's rare that a modern-day fraud won't involve use of the mails or interstate wires - e.g., telephone, fax, e-mail, or electronic funds transfers.)

In a classic fraud, the criminal steals money from the victim. But decades ago federal prosecutors began using the mail- and wire-fraud statutes to prosecute categories of corruption that don't work that way, including bribery of state officials and commercial bribery (e.g., paying kickbacks to a corporate officer to win a contract from the corporation).

In such cases the corrupt official doesn't take money from the victim; he takes it from the guy bribing him, who is also committing a crime. The victim of these frauds, prosecutors theorized, was the official's employer - the corporation or the public - which was being defrauded of the intangible right to the honest services of its employee.

Honest-services frauds are ubiquitous. They were among the charges that former HealthSouth (Charts) CEO Richard Scrushy and former Alabama governor Don Siegelman were convicted of in June, for instance, and what lobbyist Jack Abramoff and Congressman Randall "Duke" Cunningham pled to before that.

In fact, the breadth of the concept has always been its problem. In the 1980s some protested that it was ensnaring people who had committed minor ethical breaches or misdemeanors - not federal felonies carrying potential 20-year sentences.

Suppose, for instance, I call in sick at work when I'm not really sick. Suppose, further, that I live in New Jersey and work in Manhattan. Well, I may have committed federal wire fraud.

In 1987 an honest-services case finally reached the U.S. Supreme Court, with a shocking outcome. Though every federal appeals court had green-lighted the theory until then, the High Court rejected it, 7 to 2.

Liberals worried that it could tar as felons people who had no idea that their conduct could be considered a federal crime; conservatives worried that the feds were usurping state authority. Without deciding its constitutionality, the court banned further use of the theory, ruling that Congress simply never intended the mail- or wire-fraud laws to reach honest-services fraud.

The following year, Congress passed a law that said, in essence, "Oh, yes, we did." But while it restored honest-services fraud, it didn't define the term, so the contours of the crime remained as murky as ever.

In the 20 years since, many appeals courts have imposed interpretive glosses on the concept in an effort to curb its apparent boundlessness. Nevertheless, a significant minority of appeals judges remain hostile to it, viewing it as hopelessly vague and therefore unconstitutional.

Two of the most hostile have been judges E. Grady Jolly of Jackson, Miss., and Harold R. DeMoss Jr. of Houston, both of the U.S. Court of Appeals for the Fifth Circuit.

Ten years ago, for instance, they reversed, over the dissent of a third judge, the garden-variety fraud conviction of a Texas state official, Michael Brumley. Giving the concept an extremely narrow reading, they found that it couldn't ever be used against state officials. The full appeals court then took the rare step of rehearing the case. They resoundingly reinstated the conviction, 14 to 3, with just one judge joining DeMoss and Jolly in dissent.

As luck had it, judges Jolly and DeMoss also wound up composing two-thirds of the panel assigned to hear the appeals in the Nigerian-barge case. There, prosecutors had charged that Enron officials' phony sale of the barge to inflate earnings had defrauded the company and its shareholders of honest services. Since the Merrill Lynch defendants knowingly aided this scheme, prosecutors argued, they were guilty as conspirators and abettors.

On Aug. 1, the panel rejected the government theory by a 2-to-1 vote. Judge Jolly, in an opinion joined by DeMoss, basically forged a brand new limitation on honest-services fraud, which I'll call the too-crooked-to-defraud rule.

Since high Enron officials like CFO Andrew Fastow were in on the scheme, and since their bonuses were linked to quarterly earnings results, Enron wasn't defrauded, Jolly said.

"The employer itself," he wrote, "created among its employees an understanding of its interest that, however benighted ... was thought to be furthered by a scheme involving a fiduciary breach." (In a separate opinion, Judge DeMoss added that honest-services fraud was unconstitutionally vague.)

The problem with Judge Jolly's theory, as dissenting judge Thomas Reavley noted, is that corporate executives are distinct from the corporation, which is owned by shareholders. Executives owe honest services to those shareholders, and one of the most basic is to report finances accurately.

Frankly, I don't expect the too-crooked-to-defraud rule to last very long, and I don't think the Enron Task Force should or could have foreseen its adoption.

The Task Force has said it will seek a rehearing by the full court and has till Sept. 14 to do so. In fairness, though, a rehearing would carry risks for the government too. It would stir up the whole honest-services-fraud hornets' nest, possibly spurring the U.S. Supreme Court to revisit the issue. And if that happens, as prosecutors learned in 1987, all bets are off.

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