ARGUMENT ANALYSIS

Justices split on white-collar fraud conviction for government contractor

At oral arguments on Monday it was not clear how the Supreme Court will rule in the case of a Philadelphia-area government contractor found guilty of fraud after it failed to comply with a contract provision intended to promote diversity. In Kousisis v. United States, the justices are considering whether the federal wire fraud laws apply to cases in which the defendant uses deception to enter into a transaction that doesn’t harm the victim financially.

The case arises from two major government construction projects in the Philadelphia area. Stamatios Kousisis, Alpha Painting and Construction, and their business partners submitted the lowest bids for both projects.

The contracts required the winning bidders to spend part of their earnings on contractors that were “disadvantaged business enterprises.” The prime contractor on the projects reported payments to a DBE, a paint supplier. But the DBE was actually just a pass-through that did not supply any paint. Instead, suppliers sent invoices to the DBE, which then sent its own invoices (with a small mark-up) to Alpha.

Federal prosecutors charged Kousisis and Alpha with wire fraud, conspiracy to commit wire fraud, and causing the submission of false statements. The government relied on a theory of fraudulent inducement – the idea that Kousisis and Alpha got the contracts by making deceptive promises.

Kousisis and Alpha argued that the “fraudulent inducement” theory requires the government to show that there was a scheme to harm the victim financially – a harm that they say was absent from their case.

The lower courts rejected that theory, with the U.S. Court of Appeals for the 3rd Circuit explaining that participation by the DBE was “an essential part of the contract.”

Kousisis and Alpha were convicted. Kousisis was sentenced to 70 months in prison, while Alpha as required to forfeit its profits and pay a $500,000 fine.

Representing the defendants, Jeffrey Fisher emphasized that the fraud statutes under which Kousisis and Alpha were convicted require a scheme to defraud a traditional property interest. There is no harm, he stressed, if – as in this case – someone pays money and gets the full economic value of that bargain.

The government’s contrary theory, Fisher told the justices, would be almost limitless, and would extend to people who use white lies or puffery to entice people to enter into transactions. Such conduct, he said, might be the basis for a civil lawsuit or even a “low-level criminal violation,” but it is not property fraud.

But Deputy Solicitor General Eric Feigin, representing the federal government, countered that Fisher and his clients were asking the court to read into the property fraud statute a financial-loss element that is “nowhere to be found in the text.” Such a rule, he maintained, would bar the government from prosecuting “paradigmatic fraud.”

The justices spent much of the argument peppering both lawyers with hypotheticals to test the limits of each side’s rule. Justice Sonia Sotomayor, for example, asked Fisher about a scenario in which she hired a certified plumber to fix her toilet, but a handyman (who was not certified) showed up instead.

That scenario would be fraud, Fisher allowed, because the service provider “would be promising services that were more valuable” – those of a certified plumber, who “presumably would charge more per hour.”

But Sotomayor said she did not necessarily “understand what the difference between that” scenario and “this case is.” In this case, she said, “[t]he services the government contracted for was to have a particular type of vendor sell me something.”

Feigin countered that the whole point of hiring a certified plumber was to obtain his additional qualifications. Fisher, he suggested, would argue that no fraud occurred as long as the toilet was properly fixed, but he would want “the peace of mind of knowing it was a certified plumber.”

Justice Ketanji Brown Jackson offered another hypothetical, asking Fisher about a scenario in which a family believed it was very important to have a Christian babysitter and hired someone who held herself out as a Christian, when in fact she was not.

Fischer acknowledged that the babysitter’s behavior would be “egregious.” But, he said, it was not property fraud if the babysitter is otherwise fully qualified and performs the services that the family requests. The family may also have grounds for a civil suit or other charges, he added. However, although it is “tempting to use criminal fraud to cover lots of dishonesty or deceit,” the government’s rule runs the risk of casting too broad a net.

Gorsuch asked Feigin about a variation on the babysitter hypothetical – a babysitter who promises to use the money for college and provides excellent services, but then uses the money for a trip to Mexico instead of college tuition. Is that, Gorsuch queried, mail fraud?

Feigin conceded that a “subjective wish” by the parents hiring the babysitter would not be enough to support a fraud conviction. But if the babysitter knows that the couple hires her because of her plans to use the money for college and lies about it, he agreed, then it would be fraud under the government’s theory.

Sotomayor later emphasized (and Feigin agreed) that the case before the justices was an even narrower one than the babysitter scenario, because the babysitter’s plans to use the money for college likely were not part of her contract with the parents. But here, Sotomayor stressed, the use of DBEs was a provision of the contract with the Pennsylvania Department of Transportation.

Justice Elena Kagan offered her own hypothetical – a scenario in someone believes he is getting one million dollars’ worth of gold bars but instead receives one million dollars’ worth of coal.

When Fisher insisted that the substitution would not constitute fraud under the property fraud laws, Kagan cited what she saw as an artificial distinction created by Fisher’s rule. Although the recipient of the coal would “really have totally not gotten what” he wanted, she explained, there would be no fraud because the coal had the same value as the gold. But if the same person had “a dollar’s worth of loss” it would be covered under Fisher’s rule.

Fisher pushed back, telling Kagan that the government’s theory has no limitations. He acknowledged that the justices were pressing him with “hard hypotheticals,” but he argued that such cases do not actually happen in the real world. The whole point of an ordinary property fraud, he suggested, is that the victim of the fraud receives something of lesser value. In the scenario involving the substitution of coal for gold, he observed, the recipient can simply sell it to someone who wants a million dollars’ worth of coal.

Justice Clarence Thomas asked about another hypothetical often mentioned by the government as an example of the “paradigmatic” fraud that would be difficult to prosecute under Fisher’s rule. What if, Thomas asked Fisher, as part of its efforts to get your business a company promises that it will donate services to veterans, but it does not actually do so?

Fisher again reiterated that it would not be fraud, because the consumer had not suffered any property or economic loss.

Then, Thomas asked, is there “any amount of deceit that would amount to fraud” without property or economic loss?

Fisher responded that there would not be, pointing out that the contract in his clients’ case was 1,100 pages long. On the government’s theory, he told the justices, “every regulatory interest written into a contract could give rise to” a fraud prosecution that would be punishable by 20 years in prison.

Kagan asked about a different scenario involving veterans: Someone who lies about being a veteran to obtain veterans’ benefits.

Fisher agreed that such lies would be problematic. “That’s just stealing,” he said.

Kagan next asked about a program intended to give contracts to veterans. Would someone who lied about being a veteran to get a contract commit fraud, she asked, when the point of the program was to provide contracts to veterans, rather than to “get the paint job of your dreams?”

Fisher insisted that such a scenario could be addressed by a separate statute, which criminalizes defrauding government programs. This is a “classic” violation of that law, he told Kagan.

Some justices focused on broader concerns. Jackson told Fisher that she was “struggling” with the idea that the fraud statute at the center of this case requires some sort of economic or property loss, noting that the text of the statute itself does not contain any such requirement. This is a criminal law, she said, in which Congress has focused on the harm that arises from the defendants’ wrongful conduct.

Fisher pointed to the term “defraud” in the law, arguing Congress’s use of that word incorporated a long history of cases requiring property or economic losses.

Both Chief Justice John Roberts and Justice Samuel Alito raised concerns that the justices have expressed in other recent cases narrowing the scope of federal fraud laws. Roberts advanced the idea that we don’t have to federalize “every jot and tittle in a large contract,” while Alito contended that such an argument “is hanging over this case like a cloud or a fog.”

Feigin countered that skepticism is not a “freestanding reason” to create an exception from the statute at issue in this case. The court should not “send a signal to the lower courts that it’s okay to start making things up in a statute because we disagree with Congress’s policy choices about how broad to write the fraud statutes.”

Gorsuch and Justice Amy Coney Barrett pressed both sides on whether the government could win even under Fisher’s rule on the theory that PennDOT had in fact lost money: It had paid more for the contract because it is more expensive to use DBEs.

Fisher insisted that the government had forfeited its ability to make such an argument, because (among other things) it had said in the lower courts that it didn’t know whether PennDOT would have paid more to use DBEs.

Feigin countered that the government had in fact continued to make this argument, which prompted Gorsuch to ask why the justices needed to decide the question at the center of the case at all. Feigin, however, resisted that suggestion, emphasizing that the question will arise in other cases as well.

Although the issues in the case are serious ones, the argument had occasional moments of levity, including one exchange between Alito and Feigin. Alito observed that he had a question that he wanted to ask Fisher but could not, because of the justices’ general practice of allowing advocates to speak without interruption during their rebuttals.

Feigin inquired whether Alito wanted him to respond “as him or as me?” When Alito allowed that Feigin could do “whichever you want,” Feigin shot back, “That might be fraud, Your Honor.”

Kousisis and Alpha will have to wait until sometime next year to hear whether the justices agree that their conduct is fraudulent as well.

This article was originally published at Howe on the Court.