Jan M. Folena

In a key decision on the scope of the federal wire fraud statute, the U.S. Supreme Court held on May 22 that a defendant who induces a party to enter into a transaction under materially false pretenses commits wire fraud pursuant to 18 U.S.C. § 1343 even if the defendant did not seek to cause the victim pecuniary loss. The Kousisis v. United States decision resolves a 6-5 circuit split, affirming the “fraudulent inducement” theory under the federal wire fraud statute. 

Decision Clarifies Circuit Split on Interpretation of Wire Fraud Statute

The charges in Kousisis arose out of misrepresentations made by an industrial painting company, Alpha Painting & Construction Co., to secure government contracts. The Pennsylvania Department of Transportation (PennDOT) awarded Alpha and its project manager Stamatios Kousisis (together, “petitioners”) two contracts related to the restoration of two Philadelphia landmarks. PennDOT received significant project funding from the U.S. Department of Transportation (DOT), which required bidders to subcontract a percentage of the projects to a disadvantaged business enterprise (DBE). Under the rule, the DBE must be involved in the project such that it “perform[s] a commercially useful function” (49 CFR § 26.55(c)). Failure to properly involve a DBE in the project constituted a material breach of the contract.

In an effort to win the bid, Kousisis represented to PennDOT that Alpha planned to purchase $6.4 million in painting supplies from a prequalified DBE, Markias Inc. However, this was never Alpha’s true plan. Instead, the petitioners employed Markias as a “pass-through” entity, facilitating a scheme in which a separate entity supplied the paint while Markias pushed checks to and from the supplier and received a markup on the paint. By completing the projects, Alpha secured a gross profit of over $20 million while Markias collected approximately $170,000 for serving as a pass-through entity fronting as the DBE.

A jury found the petitioners guilty of three counts of wire fraud and one count of conspiracy to commit the same under 18 U.S.C. §§ 1343 and 1349. The petitioners moved for acquittal, arguing that the government could not prove a scheme to defraud PennDOT, which had “received the full economic benefit of [the] bargain.” The U.S. District Court for the Eastern District of Pennsylvania rejected the petitioners’ argument. On appeal, the U.S. Court of Appeals for the Third Circuit affirmed the conviction, aligning with the Seventh, Eighth and Tenth circuits by finding fraud where the defendant did not intend to cause net economic harm or loss.

Justices Affirm Fraudulent Inducement Theory

In an opinion authored by Justice Amy Coney Barrett, the Supreme Court affirmed, finding that a defendant commits wire fraud by inducing transactions based on materially false representations even in the absence of economic loss. The court found that the fraudulent inducement theory is consistent with both the plain text of the wire fraud statute and the court’s precedent.

Plain Language of the Statute: The court found that the prototypical fraudulent-inducement scheme clearly satisfies each element of federal wire fraud under the “broad, generic language” of Section 1343. Pursuant to the plain language of the statute, a defendant must devise or intend to devise a scheme to obtain money or property by false or fraudulent pretenses or representations. In a straight textual analysis, the court found that the petitioners’ intent to provide false information to PennDOT claiming that it would use disadvantaged subcontractors to secure the painting contract was consistent with the statute’s prohibition on obtaining money or property by means of a false statement. Notably, the court stated, the statute is “agnostic about economic loss.” The court acknowledged that although pecuniary loss is often involved in actions pursuant to Section 1343, it is not an independent element of the offense.

Materiality as a Limiting Factor: Although the opinion may be interpreted to significantly broaden the reach of the wire fraud statute, the court made clear that the materiality standard serves as the “basis for distinguishing everyday misstatements from actionable fraud.” The petitioners argued that the fraudulent inducement theory would open up the possibility of fraud to “every intentional misrepresentation designed to induce someone to transact in property.” The court answered, stating, “The ‘demanding’ materiality requirement substantially narrows the universe of actionable misrepresentations.” The court emphasized that if the scope of the statute is too broad, Congress has the authority to change it. 

Key Takeaways

Kousisis marks a change in the law in the Second, Sixth, Ninth, Eleventh and D.C. circuits, which previously had required the government to prove that defendants caused the victim a net pecuniary loss to sustain a conviction pursuant to the wire fraud statute. Thus, these jurisdictions will feel the impact of the expansion in the scope of white collar prosecutions precipitated by this decision.

Additionally, Kousisis is the most recent example of the court’s application of the traditional canons of statutory interpretation and the strict adherence to the plain language of federal statutes, leaving overly broad statutory language and any unacceptable consequences of such language to be handled by Congress. This court has reiterated that it will continue to read statutes in accordance with their plain language as written by Congress.