Kousisis v. U.S.:  Wire-fraud conviction for fraudulent inducement doesn’t require victim suffer pecuniary loss

By Greg Mermelstein, Deputy Director & General Counsel, Missouri Public Defender

           Making a materially false statement to obtain money or property violates the federal wire fraud statute even if the victim – who receives goods or services in return –doesn’t suffer pecuniary loss, the U.S. Supreme Court held May 22 in Kousisis v. United States.

           Stamatios Kousisis and the company he managed were awarded two government contracts for large-scale painting projects in Philadelphia.

           Both contracts required Kousisis to buy some percentage of materials from “disadvantaged” small businesses, which were owned by “socially and economically disadvantaged” persons.

Kousisis represented that his company would buy $6.4 million in painting supplies from “Markias, Inc.”, a “disadvantaged business.”

           That representation was false.

           Markias, Inc. was merely a pass-through entity and scheme that allowed Kousisis to buy supplies from non-disadvantaged suppliers.    

           Kousisis ultimately completed the painting jobs, and the government – satisfied with the work – paid Kousisis accordingly.

           Later, the government discovered Kousisis’ scheme to avoid using disadvantaged businesses. 

           He was charged and convicted at trial of wire fraud under 18 U.S.C. Sec. 1343.

That statute prohibits using the wires to execute a “scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises.”

           Despite the use of the disjunctive “or” in the statute, the Supreme Court had previously held that it does not create two alternative pathways to conviction, but that the “money or property requirement” limits the scheme or artifice clause.

           Kousisis moved for judgment of acquittal, arguing that because the actual paintwork met the government’s expectations for the job, the government had received the full economic benefit of its bargain and had not lost any “money or property”, as required by the statute.

           The District Court and Third Circuit rejected Kousisis’ argument.

           The Supreme Court granted cert. to resolve a circuit split on whether the statute requires a defendant to have intended the victim to suffer pecuniary loss.

Holding

           The Court affirmed Kousisis’ conviction, in a unanimous opinion by Justice Barrett.

           Kousisis’ argument “rests on the premise that a scheme cannot constitute wire fraud if, as here, the defendant provides something – be it money, property, or services == of equal value in return”, the Court said.  “But the statute says otherwise.”

           “A thing is no less ‘obtained’ simply because something else is simultaneously given in return”, the Court said.

           “To be guilty of wire fraud, a defendant must (1) ‘devis[e]’ or ‘inten[d] to devise’ a scheme (2) to ‘obtai[n] money or property’ (3) ‘by means of false or fraudulent pretenses, representations, or promises”, the Court said. 

           “No matter how long we stare at it, the broad, generic language of Sec. 1343 leaves us struggling to see any basis for excluding a fraudulent-inducement scheme” as here, the Court said.

           “In short, the wire fraud statute is agnostic about economic loss”, the Court said.  “The statute does not so much as mention loss, let alone require it.”

           “Instead, a defendant violates Sec. 1343 by scheming to ‘obtain’ the victim’s ‘money or property,’ regardless of whether he seeks to leave the victim economically worse off”, the Court said.  “A conviction based on fraudulent inducement thus comports with Sec. 1343.”

           The Court noted, however, the “‘demanding’ materiality requirement substantially narrows the universe of actionable misrepresentation.”

           Fraudulent inducement “criminalizes a particular species of fraud:  intentionally lying to induce a victim into a transaction that will cost her money or property”, the Court said.  “As Judge Learned Hand put it, ‘[a] man is none the less cheated out of his property, when he is induced to part with it by fraud, because he gets a quid pro quo of equal value.”

           “The language of the wire fraud statute is undeniably broad”, the Court concluded.  “But Congress enacted the wire fraud statute, and it is up to Congress – if it so chooses – to change it.”

Concurring opinions

           Justice Gorsuch concurred, but wrote separately to express concern the Cout was expanding liability for fraud too broadly.

“This case touches on an old question:  What is the difference between a lie and a criminal fraud?” Gorsuch said.

Gorsuch offered as an example a babysitter who tells parents that she has no criminal convictions when, in fact, she does.  Even though the babysitter performs her services competently and without incident, there is little doubt the parents would not have hired her if they knew she had lied to them about her criminal past.

Upon learning the truth, the parents might be upset and not hire the babysitter again.

“But should the babysitter face federal fraud charges?” Gorsuch asked.  “Of course not.  While ‘intentional deceit for purposes of gain ought to sometimes be punished,’ if all misrepresentations amounted to criminal fraud, ‘thousands of buyers and sellers’ would be felons.”

“How do courts police the line between mere lies and criminal frauds warranting the law’s attention?  One important tool is fraud’s injury requirement”, Gorsuch said.

Some of the Court’s opinion “appears to spurn fraud’s historic injury rule,” he said.  That “is a startling suggestion, one with no mooring in the common law of fraud or the wire fraud statute, and one that risks turning victimless lies like our babysitter’s into federal felonies.”

Gorsuch said the actual question before the Court was far narrower, and although Gorsuch agreed with the case’s outcome, he believed the opinion went beyond what was necessary.

“In the process, the Court needlessly risks turning the federal wire-fraud statute into a weapon for punishing victimless crimes,” Gorsuch said.  “I can only trust that future courts will recognize that aside for what it is – unsound dicta.”

           Justice Thomas wrote separately to emphasize that false statements must also be “material” to be actionable under the statute.

           “When the Government prosecutes a defendant for wire fraud under a theory of fraudulent inducement, the requirement of ‘materiality’ provides ‘the principled basis for distinguishing everyday misstatements from actionable fraud”, Thomas said.

           Thomas questioned whether Kousisis’ statements were “material,” though he noted the parties had not contested materiality in this case.

           Among other reasons for lack of materiality, Thomas expressed his view that the disadvantaged business program at issue may violate the Equal Protection Clause because it is race-based.

           “It is implausible to think that a ‘reasonable person’ would ‘attach importance’ to contract provisions that mandate constitutional violations”, Thomas said.  “Thus, if the Government cannot demonstrate the constitutionality” of the disadvantaged business program, “I doubt that a provision requiring compliance with the program could go to the essence of the parties’ bargain”.

           Thomas also said the fact the Government is aware of “prevalent” fraud in disadvantaged business programs “is very ‘strong evidence that those requirements are not material’”.

           Justice Sotomayor also concurred.  Like Gorsuch, she, too, was concerned that the Court’s opinion “speak[s] more broadly” about fraud than necessary to resolve the case.

           The Court “has no reason to opine on a class of fraudulent-inducement cases distinct from this one: those in which a defendant provides exactly the goods or services that they promised to deliver, but lies in other ways to induce the transaction,” Sotomayor said. 

           “Future cases presenting such fact patterns will require the Court to confront the outer limits of the federal wire fraud statute’s reach and to decide what satisfies its materiality element”, she said.

           Sotomayor also took issue with portions of Justice Thomas’ opinion.

           Just because the disadvantaged business requirement might be found unconstitutional in the future doesn’t make lying about the requirement non-material, Sotomayor said.  “It should go without saying that the law should not provide a shield from criminal liability based upon personal and unspoken predictions of a law’s constitutionality”, she said.

           Similarly, just because the government may be aware of fraud in the disadvantaged business program doesn’t make lying about it non-material either, she said.

           “‘Lots of people do it’ has never been, nor should be, a defense to criminal liability without more”, Sotomayor said.