Kousisis v. United States

LII note: The U.S Supreme Court has now decided Kousisis v. United States

    Issues

    Does a private contractor cause “harm” as required for mail or wire fraud when it fraudulently misrepresents to the government that it hired a socially disadvantaged business as promised?

    Oral argument:
    December 09, 2024
    Court below:
    United States Court of Appeals for the Third Circuit

    This case asks the Court to determine whether a private contractor’s fraudulent misrepresentation to a government agency regarding the contractor’s subcontracting duties causes harm sufficient for a conviction of wire fraud under 18 U.S.C. § 1343. Kousisis argues that the fraudulent-inducement theory that formed the basis for his conviction expands the notion of a property interest beyond the language of § 1343. Kousisis claims that expansion would convert all purposeful breaches of contract into federal crimes with harsh sentences, increasing the size of the federal prison population. The United States argues that the fraudulent-inducement theory fits within the statute and the Court’s precedent. In any event, the United States claims that the government agency overspent on the project because of Kousisis’s misrepresentations, and the government has an interest in protecting against such harms.  The United States asserts that overcriminalization is not an issue, and that contractors should not escape prosecution for misrepresentations to obtain government contracts.

    Questions as Framed for the Court by the Parties

    (1) Whether deception to induce a commercial exchange can constitute mail or wire fraud, even if inflicting economic harm on the alleged victim was not the object of the scheme; (2) whether a sovereign’s statutory, regulatory, or policy interest is a property interest when compliance is a material term of payment for goods or services; and (3) whether all contract rights are “property.”

    Facts

    The federal Department of Transportation (“DOT”) funds infrastructure projects overseen by state agencies throughout the country. DOT also operates a program to increase the participation of businesses run by the socially and economically disadvantaged—called “Disadvantaged Business Enterprises” (“DBEs”)—in federally funded projects. As part of the program, state agencies receiving DOT funds for a project set a DBE-participation goal for any portion of the work that is contracted out, and they do so with the DOT’s “aspirational goal” of ten percent DBE participation in mind. For a DBE’s work on a contract to count towards a project’s participation goal, the DBE must perform a “commercially useful function.” Being a mere “extra participant . . . through which funds are passed in order to obtain the appearance of DBE participation” is not performing a commercially useful function.

    Stamatios Kousisis, the petitioner, co-ran a joint venture between two companies, Alpha and Liberty Maintenance, Inc., in the infrastructure contracting industry (“Alpha-Liberty”). In 2009, Alpha-Liberty bid on and won from the Pennsylvania Department of Transportation (“PennDOT”) a $70.3 million contract to paint and repair a bridge. Two years later, Alpha-Liberty won another contract, this time to make repairs at an Amtrak station for $50.8 million. For both contracts, PennDOT set DBE-participation goals—six and seven percent, respectively. When Alpha-Liberty bid on the projects, it promised to meet those requirements by purchasing the paint needed for the projects from Markias, Inc., a DBE.

    That never happened. Alpha-Liberty instead bought the paint needed for the projects from other, non-DBE suppliers while still regularly certifying to PennDOT that Markias was its paint supplier. To cover up this discrepancy, Kousisis arranged a scheme. The actual paint suppliers sent their invoices to Markias, rather than Alpha-Liberty. Markias then issued its own invoices to Alpha-Liberty, adding a markup fee. Finally, Alpha-Liberty forwarded these invoices to PennDOT to create the false appearance that it was buying paint from Markias and therefore meeting its contractual promises.

    In April 2018, Kousisis and Alpha Painting & Construction Co. (“Kousisis”) were indicted in the United States District Court for the Eastern District of Pennsylvania for wire fraud, among other federal charges. The wire fraud statute, 18 U.S.C. § 1343, criminalizes any “scheme or artifice to defraud” by use of the interstate wires, such as radio, television, and the internet. To engage in a scheme or artifice to defraud, one must intend to deprive another of a property right. At trial, the district court instructed the jury that contract rights, such as PennDOT’s contractual right to receive work performed in some part by a DBE, are property rights. The jury convicted Kousisis on three counts of wire fraud. Kousisis appealed, but the United States Court of Appeals for the Third Circuit upheld the district court’s jury instruction and thus Kousisis’s wire fraud convictions. 

    On February 20, 2024, Kousisis petitioned the United States Supreme Court for a writ of certiorari, which it granted on June 17, 2024.

    Analysis

    FRAUDULENT INDUCEMENT AS A SCHEME TO DEFRAUD

    Kousisis argues that to obtain a conviction under 18 U.S.C. § 1343, the prosecution must show that a defendant has defrauded a victim out of a traditional property interest or money. Kousisis asserts that when the mail fraud statute was enacted in 1872, harm to property was required to meet the definition of fraud.  Kousisis argues that more recent cases also require a scheme that did result, or would if completed, in the victim’s loss of a property or pecuniary interest.

    Kousisis contends that under Ciminelli v. United States—which held that withholding valuable economic information is not harm to property—the Court will not accept theories that attempt to work around the requirement of an injury to a property or pecuniary interest. Kousisis argues that there is little to no difference between the theory that prosecutors attempted to make in that case and the fraudulent-inducement theory that the United States forwards here. According to Kousisis, a fraudulent-inducement theory relieves the prosecutor from having to prove economic harm to secure a conviction by only requiring that the defendant induced the victim into a contract through false statements. Here, Kousisis posits, PennDOT received exactly what they contracted for: Kousisis painted and repaired bridges in Philadelphia for the agreed amount. Kousisis argues that his services were materially what the parties agreed on, so he lived up to the “essence” of the contract and PennDOT did not suffer harm in any traditional property interest.

    The United States counters that inducing another to enter into a contract using fraudulent misrepresentations is sufficient to prove the element “any scheme or artifice to defraud” in § 1343. Therefore, the United States contends that it does not need to show that the victim suffered a net pecuniary loss.The United States argues that by rejecting the fraudulent-inducement theory, Kousisis attempts to add a pecuniary-loss requirement to § 1343, even though that element is not in the text of the statute.  Furthermore, the United States points to case law when the statute was enacted and more recent case law, neither requiring the victim to lose money because of a fraudulent misrepresentation. For example, the United States cites Carpenter v. United States, under which harm to a newspaper’s right to exclusively use information is sufficient, and a monetary loss is not required. The United States asserts that non-pecuniary and sentimental harms can still be “material,” such as when one is induced to buy a photograph by a misrepresentation that it portrays the buyer’s great-grandfather—even if the pecuniary value of the photograph is the same.

    The United States posits that in common-law torts, which help interpret the fraud statute, a plaintiff without pecuniary loss could still hold a defendant liable; they just would not get a damages remedy, but rescission.. The United States points to the traditional and common law understanding of fraud to reinforce the lack of pecuniary-loss requirement in the 18 U.S.C. § 1343. For example, the United States points to an old case in which the seller of a horse harmed another’s property when he misrepresented the horse’s identity, even though the monetary value was the same. Additionally, the United States argues that in Ciminelli the Court rejected the right to control, not the fraudulent-inducement theory.

    WHETHER KOUSISIS OBTAINED PROPERTY THROUGH ITS SCHEME

    Kousisis argues that Respondent has failed to show that a traditional property interest was affected. Kousisis asserts that a frustration of a regulatory interest, as here, is not a harm to a traditional property interest. As Kousisis puts it, a regulatory interest is a non-traditional-property interest that seeks to advance policy, such as helping historically and economically disadvantaged communities, as here.  Kousisis contends that other statutes, such as 18 U.S.C. § 371 and § 1001, and state common law already protect regulatory interests, and those statutes are more appropriate to prosecute crimes that involve frustration of a regulatory interest. Kousisis claims that a maximum sentence of twenty years under § 1343 would be too harsh because Congress, through § 371 and § 1001, only intended a maximum sentence of five years for misrepresentations that lead to regulatory harms.

    Kousisis also claims that PennDOT has not suffered a pecuniary loss because it did not pay more to cover Markias’s markup fee—it simply accepted a lump-sum bid and left Kousisis to determine internal costs. Kousisis adds that the prosecution did not raise this contention at trial and cannot raise it now. Kousisis also asserts that there is no evidence that PennDOT would have paid more to secure its regulatory interest.

    The United States argues that because Kousisis’ object in misrepresenting its subcontracting duties was to get a monetary award from the PennDOT contract, and he did get that money, PennDOT suffered harm to a property interest sufficient for § 1343. The United States contends that the harm PennDOT suffered was not just a pure regulatory interest, as Kousisis asserts; rather, PennDOT’s interest in ensuring the involvement of DBEs was an essential and material part of the bargain. The United States argues that PennDOT signified the importance of the DBE provision of the contract by requiring the DBE provision at the bidding stage and by emphasizing that a breach of the DBE provision would be material and allow PennDOT to terminate the contract. The United States also points out that PennDOT could have been liable if the project went ahead without the DBE requirements. The United States argues that just because the prosecution could have used other statutes to charge Kousisis, that does not preclude a conviction under § 1343.

    The United States argues that even if the Court does not accept a theory of fraudulent inducement to satisfy § 1343, PennDOT still suffered harm to a property interest.  The United States claims that PennDOT suffered a pecuniary harm because it was willing to pay more for a contractor that was compliant with the DBE provisions set out in the contract. The United States argues that by not complying with the provision, Kousisis misrepresented the value of the service Petitioner provided and thus gained from the pecuniary loss suffered by PennDOT. The United States also argues that because Kousisis used a pass-through company to misrepresent their compliance with the DBE provision, and the pass-through company charged a markup on the supplies provided for the contract, PennDOT paid more for the service it contracted for then it received.

    Discussion

    OVERCRIMINALIZATION IN FEDERAL LAW

    The National Association of Criminal Defense Lawyers and the Cato Institute (“Cato”), in support of Kousisis, urge that the United States’s fraudulent-inducement theory “would make a bad problem”—overcriminalization—worse. Cato first notes the proliferation of federal crimes, increases in criminal penalties, and expansion of the prison population in recent decades. Cato then claims that the fraudulent-inducement theory would exacerbate these issues by criminalizing a wide swath of conduct. If fraudulent inducement could support a wire fraud conviction, Cato posits, then lying on a college application, concealing information in a background check, and dishonest sales tactics would all become criminal conduct punishable by up to twenty in federal prison. And even in cases of nonmaterial misrepresentation, prosecutors could still bring charges and press innocent defendants to plead guilty, Cato argues, because fraud defendants who go to trial receive sentences three times longer than those who plead guilty.

    The United States counters the argument that its theory would make any overcriminalization problem worse by asserting that its theory is nothing new. And in any case, the United States maintains, its fraudulent-inducement theory does not allow just any petty lie to support a conviction for wire fraud because the theory requires that the relevant misrepresentation be material—that is, about something essential to the bargain. . Going on offense, the United States asserts that Kousisis’s net pecuniary-loss theory would have “highly destabilizing effects” on the prosecution of everyday frauds. Because that theory would exempt misrepresentations in “any public preference program” from criminal liability, the United States argues, a contractor could with impunity win a contract meant for veterans by lying about being veteran-owned even though it deprived the public entity of the “work by a veteran” that it desired.

    UNDERMINING CONSTITUTIONAL VALUES OF DUE PROCESS AND FEDERALISM

    Cato also charges the United States’s fraudulent-inducement theory with violating due process values. Cato argues that the fraudulent-inducement theory would give the wire fraud statute a vague, “shapeless” scope, providing people too little notice of potential criminal liability. Cato adds that this vagueness would risk enabling “the greatest risk of prosecuting power”—selective prosecution—by allowing prosecutors to find somebody they dislike and then wait until that person tells a lie that ends up in a contract. Striking a similar chord, the Due Process Institute (“the Institute”) alleges in support of Kousisis that the fraudulent-inducement theory is just another of many attempts by prosecutors to circumvent the Supreme Court’s restrictions on the wire fraud statute. But this game of “whack-a-mole” between the Court and prosecutors is far from a game for those who are convicted of a crime they did not really commit, the Institute stresses.  Additionally, Moshe Porat, who was convicted of wire fraud on a similar theory, argues in support of Kousisis that adopting the United States’s theory would risk jeopardizing federalism principles. By expanding the wire fraud statute’s scope to cover deceitful conduct that causes no economic injury, the fraudulent-inducement theory would “effectively supplant” States’ policy decisions about how to regulate conduct such as false advertising, Porat contends.

    The United States responds first that Kousisis’s net pecuniary loss theory is the vague one. The United States points out that that theory has no “clear and principled line” and that Kousisis would inexplicably criminalize lying about the identity of an artwork’s creator, but not lying about the color of a car. By contrast, the United States maintains, the fraudulent-inducement theory’s materiality standard is widely used in fraud law—dispelling vagueness concerns—and forecloses the possibility of prosecution for “minor or insubstantial contract conditions”—dispelling selective-prosecution concerns. The United States also contests characterizing the fraudulent-inducement theory as an attempt at circumventing the Court’s precedent. In fact, the United States notes, the Court allowed the prosecution to advance a fraudulent-inducement theory on remand in an earlier case even as the Court rejected a different theory of wire fraud. Finally, the United States attempts to parry federalism concerns with a constitutional value of its own, the separation of powers. Asserting that Congress passed the wire fraud statute because it judged that tamping down on a wide range of fraud is an “important federal interest,” the United States urges that “[t]hat judgment should be respected.”

    Conclusion

    Written by:   

    Domnick Q. Raimondo

    Andrew W. Carpenter

    Edited by:     

    Gijs de Bra

    Additional Resources