Case Summary
In Kousisis v. United States, the Supreme Court addressed whether a defendant can be convicted under the federal wire fraud statute without causing the victim a net pecuniary loss. The case involved Stamatios Kousisis (“Kousisis”) and the industrial painting company he helped manage, Alpha Painting and Construction Co. (“Alpha”), which secured government contracts by falsely representing compliance with disadvantaged business enterprise (DBE) requirements.
What You Need to Know:
- Focus on Deception: The ruling underscores that the wire fraud statute targets schemes to obtain money or property through deception, not just schemes causing or intending to cause financial loss. Indeed, economic loss to the victim is not an element of the wire fraud statute, while a misrepresentation intended to induce a victim to enter into a transaction goes to the heart of the offense.
- Material Misrepresentation Without Loss Suffices: The Court reaffirmed that a material misrepresentation that induces a transaction can constitute wire fraud, regardless of whether the victim suffers a net pecuniary loss. This holding broadens the scope of potential liability under the wire fraud statute (and similar or related statutes, such as the False Claims Act), especially where no settled test exists for what makes a misrepresentation “material.”
- Implications for Compliance: Corporate clients must ensure strict compliance with all material contractual and regulatory requirements, particularly those policy-based requirements that seek to advance an important government interest that may not be reflected monetarily (such as disadvantaged business participation). As shown in this case, misrepresentations can lead to significant legal consequences, not only for the corporation but for the individual people obtaining and performing contracts under materially false pretenses.
Specifically, the Pennsylvania Department of Transportation (PennDOT) awarded contracts to Alpha and Kousisis (as Alpha’s project manager) for painting projects as part of an effort to restore two landmarks in Philadelphia: the Girard Point Bridge and 30th Street Station. Conditions on federal grants from the U.S. Department of Transportation (DOT), which accounted for a large part of the PennDOT restoration projects’ funding, mandated that grant recipients establish and actively implement a program to support disadvantaged business enterprises (DBEs). To comply with DOT’s requirements, PennDOT implemented a requirement for both projects that bidders must commit to subcontracting a certain percentage of each contract to a DBE, which must in turn provide a “commercially useful function” in support of the restorations.
During the bidding process, Kousisis falsely claimed that Alpha would source its paint supplies from Markias, Inc. (“Markias”), a pre-certified DBE. In reality, Markias acted merely as a “pass-through” entity, not supplying any paint but simply facilitating the exchange of checks and invoices between Alpha and its actual suppliers, and retaining a small portion of the funds that changed hands. Because DOT’s regulation is clear that a DBE “does not perform a commercially useful function if its role is limited to that of an extra participant in a transaction, contract, or project through which funds are passed,” it would have been obvious to Alpha that its use of Markias as a “pass-through” entity would not satisfy the requirements of the DBE program. Moreover, PennDOT clarified that failure to comply with the DBE requirement would constitute a “material breach” of the contract and could result in its termination. Despite its then-concealed noncompliance with the DBE requirement, Alpha otherwise completed the projects to PennDOT’s satisfaction, providing workmanlike painting services and earning over $20 million in gross profit.
Once the DBE noncompliance came to light, the Government charged Alpha and Kousisis with wire fraud and conspiracy to commit wire fraud under 18 U.S.C. §§1343 and 1349, based on a fraudulent inducement theory. Under this theory, “a defendant (1) devises a scheme (2) to induce the victim into a contract to obtain her money or property (3) by means of false or fraudulent pretenses.” Alpha and Kousisis were defendants who (1) devised the scheme to falsely state a DBE would be awarded a commercially useful subcontract to (2) induce PennDOT to award contracts worth tens of millions of dollars by (3) filing false “pass-through” invoices and fraudulently claiming compliance with the DBE requirement. After a jury convicted them, Alpha and Kousisis sought acquittal, arguing that PennDOT received the full economic benefit of the contracts, and thus, the Government could not prove a scheme to defraud PennDOT of “money or property” as required by §1343. They further argued that a federal fraud conviction could not stand without economic loss under §1343.
The Court held that a defendant can be convicted of wire fraud if they induce a victim to enter into a transaction under materially false pretenses, even if the victim does not suffer an economic loss. Pointing to the precedent in Ciminelli v. United States and §1343, the Court found there is no mention of or requirement for economic loss in §1343, and the common law also does not require economic loss in all fraud cases. Because Alpha and Kousisis had materially misrepresented the character of the services they were providing to PennDOT—namely, that the services would be substantially assisted by a DBE—to obtain money or property from PennDOT, they had committed wire fraud under §1343. It did not matter that PennDOT was satisfied with Alpha’s painting services or that such services provided fair economic value when a material element of the services provided was different from what PennDOT bargained for. The Court offered the following illustration: “If someone contracts for a painting of her grandfather, and instead winds up with a portrait of Grover Cleveland,” the recipient of the painting may not have suffered economic loss, but clearly has received something different than what was promised. The same goes, the Court reasoned, for “services performed with materials from a non-disadvantaged supplier when the government demanded a disadvantaged one[.]”
The Supreme Court’s decision underscores that the wire fraud statute does not require proof of economic loss or an intention by the defendant to cause pecuniary harm, focusing instead on whether the defendant sought to obtain the victim’s “money or property” through fraudulent means. Whether the defendant’s misrepresentation is tantamount to fraud turns on its materiality to the agreement between the parties, which the Court measures by “the effect on the likely or actual behavior of the recipient of the alleged misrepresentation.” In this case, Alpha and Kousisis did not contest that their misrepresentation was a material one. As such, the Court did not go as far as to define the bounds of materiality or to prescribe a test for determining whether, under other circumstances, a misrepresentation is material. Yet, the Court reiterated its landmark decision and discussion of materiality in Universal Health Services v. United States ex rel. Escobar, noting that it “substantially narrow[s] the universe of actionable misrepresentation” by ensuring that minor, insubstantial, or acceptable errors, noncompliance, or misstatements are not the basis for fraud enforcement actions.
Finally, the Court acknowledged that the wire fraud statute as currently written and interpreted is “undeniably broad,” noting that Congress was the author of the statute and that it is up to Congress, rather than the Court, to change its language—if Congress should want to so change it.
Key Takeaways
Corporate clients should review their compliance programs, contractual representations, and actual courses of performance to ensure they align with the Supreme Court’s interpretation of the wire fraud statute. Legal counsel should be consulted to assess potential risks and implement strategies to mitigate exposure to fraud allegations. This decision highlights the importance of transparency and accuracy in all business dealings, especially those involving government contracts and inducements of counter-parties on values- or policy-based reasons beyond mere economic calculations.
