Kousisis v. United States: What is Fraud?

November 2024

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If a company wins a contract through deception, is that fraud? That may sound like a rhetorical question, but the Supreme Court stands ready to answer the question, albeit with one twist: what if the company never intended to cause any economic harm?

On December 9, 2024, the Supreme Court will hear oral argument on that question in Kousisis v. United States, No. 23-909.

I.             The Case

Around 2010, the petitioners submitted two bids for major bridge-repair projects in Philadelphia. The Pennsylvania Department of Transportation accepted both bids, which meant the petitioners were required to show they could fulfill the contracts.

Those contracts were voluminous—more than 1,100 pages each—and one of their requirements was that winning contractors must make good-faith efforts to spend some of their earnings with disadvantaged business enterprise (“DBE”) subcontractors. [1]

In the petitioners’ submissions, their DBE plans included an intent to buy paint supplies from a Pennsylvania company they said was a DBE. The government accepted both proposals, and the parties executed the two contracts.

But as it turned out, the alleged DBE company was only a “pass-through” or a shell company, with no active operations. That company “did not do any work on the projects or supply any of the projects’ materials.” In reality, the petitioners bought the supplies directly from non-DBE companies, but they paid the DBE company a 2.25% markup for the supplies to make that company look like their supplier.

Notwithstanding that deception, the petitioners completed both projects successfully, and “the quality of the workmanship and materials is uncontested.” The Pennsylvania government received “the repairs it paid for” and suffered no economic harm, and according to the petitioners, it never even suffered a risk of harm. In other words, the deception was in the application and more like a white lie—it didn’t financially harm the purported victim.

Nevertheless, a jury convicted the petitioners of wire fraud, and Kousisis was sentenced to 70 months in prison. On appeal, the Third Circuit upheld the convictions, saying that “DBE participation was an essential component of the contract,” without which “the nature of the Parties’ bargain would have been different.”

Now before the Supreme Court, the petitioners argue that the so called “fraudulent inducement” theory is not a valid theory of wire fraud. Kousisis concedes that the Government need not prove a “realized injury in every case,” but he argues that it must at least prove a scheme that would have caused economic injury if completed. [2] The Government disagrees, arguing that the petitioners “fraudulently caused a state agency to pay them millions of dollars by lying” about “an essential condition” of the contracts. [3]

II.             Recent History of Fraud Prosecutions

In what has begun to feel like a regular occurrence, the Supreme Court seems poised to strike down another overbroad Government interpretation of the federal fraud statutes.

Exactly two years ago, we wrote that “if this all sounds familiar, you’re not wrong. For decades, the Supreme Court has taken steps to limit federal fraud statutes and reduce the overcriminalization of non-property fraud.” That term, in Ciminelli v. United States, the Court rejected the so-called “right-to-control” theory of fraud, which had previously allowed the Government to prove wire fraud any time a defendant “schemed to deprive a victim of potentially valuable economic information necessary to make discretionary economic decisions.”

And Ciminelli was only the most recent in a long line of similar cases. For four decades, the Supreme Court has uniformly rebuffed the Government’s arguments for overbroad interpretations of the federal mail and wire fraud statutes. In McNally (1987), the Court held that those statutes must be “limited in scope to the protection of property rights,” and if “Congress desires to go further, it must speak more clearly.” [4]

In Cleveland (2000), the Court wrote: “We resist the Government’s reading … because it invites us to approve a sweeping expansion of federal criminal jurisdiction in the absence of a clear statement by Congress.” [5] More recently, in Skilling (2010), it repeated: “We resist the Government’s less constrained construction [of the statute] absent Congress’ clear instruction otherwise.” [6]

In the last decade, the Court’s language has become more emphatic. In McDonnell (2016), it wrote: “We cannot construe a criminal statute on the assumption that the Government will use it responsibly.” [7] And in Kelly (2020), the Court stressed: “Federal prosecutors may not use property fraud statutes to set standards of disclosure and good government for local and state officials.” [8]

As we see, for almost 40 years the Court has not wavered in its desire to interpret the federal fraud statutes narrowly. Little surprise, then, that the Court repeated the refrain in 2022, when it decided Ciminelli: “The right to valuable economic information needed to make discretionary economic decisions is not a traditional property interest,” and “the wire fraud statute reaches only traditional property interests.” [9]

If that four-decade history is any indication, expect the Government to face a skeptical Court during oral argument on December 9th.

[1] A DBE is a business that is majority-owned and controlled by “one or more individuals who are both socially and economically disadvantaged.” 49 C.F.R. § 26.5.

[2] Pet. Merits Br. at 11–12 (Aug. 19, 2024).

[3] Gov’t Merits Resp. at 3 (Oct. 2, 2024).

[4] McNally v. United States, 483 U.S. 350, 360 (1987).

[5] Cleveland v. United States, 531 U.S. 12, 24 (2000).

[6] Skilling v. United States, 561 U.S. 358, 411 (2010).

[7] McDonnell v. United States, 579 U.S. 550, 576 (2016).

[8] Kelly v. United States, 590 U.S. 391, 403 (2020).

[9] Ciminelli v. United States, 598 U.S. 306, 316 (2023).

KHALIL LAW PPLC is a white-collar litigation boutique focusing on federal criminal law, appeals, and complex investigations in a variety of business sectors. If you have any questions about these issues, or if you would like a copy of any materials mentioned here, please let us know.