Judges split on white-collar fraud conviction for government contractor

ARGUMENT ANALYSIS

At oral arguments 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 Statesthe justices consider whether the federal statutes of fraud apply to cases where the defendant uses deception to enter into a transaction that does not harm the victim financially.

The case stems from two large public 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 a portion of their earnings on contractors who were “disadvantaged.” The general contractor on the projects reported payments to a DBE, a paint supplier. But the DBE was actually just a pass through that didn’t deliver any paint. Instead, the suppliers sent invoices to DBE, which then sent its own invoices (with a small surcharge) to Alpha.

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

Kousisis and Alpha argued that the “fraudulent inducement” theory requires the government to show there was a plan to harm the victim financially — an harm they say was absent in their case.

The lower courts rejected this theory, with the US Court of Appeals for the Third Circuit explaining that participation by DBE was “an essential part of the contract.”

Kousisis and Alpha were convicted. Kousisis was sentenced to 70 months in prison, while Alpha was ordered to forfeit his earnings and pay a $500,000 fine.

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

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

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

The justices spent much of the argument peppering both attorneys with hypotheses to test the limits of each side’s rule. Justice Sonia Sotomayor, for example, asked Fisher about a scenario where 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 from a certified plumber who “would probably charge more per hour.”

But Sotomayor said she didn’t necessarily “understand what the difference between that” scenario and “this case is.” In this case, she said:[t]The services contracted by the government were to get a certain type of salesperson to sell me something.”

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

Judge Ketanji Brown Jackson offered another hypothetical, asking Fisher about a scenario where a family thought it was very important to have a Christian babysitter and hired someone who pretended to be a Christian when she actually wasn’t.

Fischer acknowledged that the babysitter’s behavior would be “cruel.” But, he said, it was not property fraud if the babysitter is otherwise fully qualified and performing the services requested by the family. The family may also have grounds for a civil suit or other charges, he added. But while it’s “tempting to use criminal fraud to cover up lots of dishonesty or deception,” the government’s rule risks casting too wide a net.

Gorsuch asked Feigin about a variation of the babysitting 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 this, Gorsuch asked, mail fraud?

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

Sotomayor later emphasized (and Feigin agreed) that the case before the courts was an even narrower case than the babysitting scenario because the babysitter’s plans to use the money for college were likely not part of her contract with the parents. But here, Sotomayor emphasized, 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 which someone thinks he gets a million dollars in gold bullion, but instead receives a million dollars in 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. Even if the recipient of the coal “really wouldn’t have 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 loss” it would be covered under Fisher’s rule.

Fisher backed down, telling Kagan that the government’s theory has no limitations. He acknowledged that the judges pressed him with “hard hypotheses”, but he argued that such cases do not actually happen in the real world. The whole point of a common real estate scam, he suggested, is that the victim of the scam receives something of lesser value. In the scenario involving replacing coal with gold, he noted, the recipient can simply sell it to someone who wants coal for a million dollars.

Justice Clarence Thomas asked about another hypothetical, often cited by the government as an example of the “paradigmatic” fraud that would be difficult to prosecute under Fisher’s rule. What if, asked Thomas Fisher, as part of its efforts to get your company to promise it will donate services to veterans, it actually doesn’t?

Fisher again reiterated that it would not be fraud because the consumer had suffered no property or financial loss.

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

Fisher responded that there would not be, pointing out that in his clients’ case the contract was 1,100 pages long. Under the government’s theory, he told the judges, “any 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 another scenario involving veterans: Someone who lies about being a veteran to obtain veterans benefits.

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

Kagan then asked about a program to give contracts to veterans. Would someone who lied about being a veteran to get a contract be committing fraud, she asked, since the purpose of the program was to give contracts to veterans instead of “getting the painting job of your dreams?”

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

Some judges focused on broader concerns. Jackson told Fisher that she “wrestled” with the idea that the statute of frauds at the center of this case requires some form of economic or property loss, noting that the text of the statute itself contains no such requirement. This is a criminal statute, she said, where Congress has focused on the harm that results from the defendants’ wrongful conduct.

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

Both Chief Justice John Roberts and Justice Samuel Alito raised concerns that the justices in other recent cases have expressed narrowing of the scope of federal fraud laws. Roberts advanced the idea that we need not federalize “every jot and tittle of a great contract,” while Alito argued that such an argument “hangs over this case like a cloud or a fog.”

Feigin countered that skepticism is not a “stand-alone reason” for creating an exception to 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’ policy choices about how broadly to write the statute of frauds.”

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 actually lost money: It had paid more for the contract because it is more expensive to use DBEs.

Fisher insisted that the government had lost its opportunity to make such an argument because (among other things) it had said in the lower courts that it did not know whether PennDOT would have paid more to use DBEs.

Feigin countered that the government had indeed continued to make that argument, prompting Gorsuch to ask why the justices should even decide the issue at the heart of the case. However, Feigin opposed this proposal and emphasized that the issue will also arise in other cases.

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

Feigin asked if Alito wanted him to answer “as him or as me?” When Alito allowed Feigin to do “whatever you want,” Feigin shot back: “It could be fraud, Your Honor.”

Kousisis and Alpha will have to wait until next year to hear if the judges agree that their behavior is also fraudulent.

This article was originally published on Howe on the Court.