Justices’ Fraud Ruling Invites Fights Over Unresolved Issues

The US Supreme Court’s ruling affirming a state contractor’s convictions for wire fraud is a victory for the government—but it also provides new fodder for defendants battling similar charges.

The high court made clear that prosecutors need not show economic harm to prove wire fraud, reversing a decades-long trend of the Supreme Court siding with defendants and winnowing the federal fraud statutes.

But white collar attorneys say the more interesting part of the decision might be the legal issues the majority didn’t resolve: materiality and injury.

Justices Neil M. Gorsuch and Clarence Thomas both wrote concurrences that read more like dissents, highlighting gaps in the majority opinion that prosecutors will need to contend with going forward, said Brandon Essig, a former prosecutor who’s now a partner at Lightfoot, Franklin & White LLC.

Gorsuch’s concurrence, which addresses injury to the victim, is particularly notable because it gives a new, compelling framework for distinguishing everyday misrepresentations from actionable lies through a new, benefit-of-the-bargain injury standard, Essig said.

The majority suggests in dicta that the injury requirement is met if the defendant deprived the victim of property via deception. But Gorsuch said that formulation “needlessly risks turning the federal wire-fraud statute into a weapon for punishing victimless crimes.”

Rather, the injury requirement is only satisfied when the victim hasn’t received the benefit of his bargain, Gorsuch said.

“I don’t think Gorsuch’s standard makes the lower courts’ decisions any easier,” Essig said. “What it does is give them a new framework to use if a prosecution doesn’t pass the smell test.”

Limitations of Materiality

The majority relied on materiality, rather than injury, to ensure prosecutors don’t pursue cases outside of the wire fraud statute’s purview. Generally, a representation is considered material if a reasonable person would find it important in deciding whether to proceed with a given transaction.

But materiality won’t always serve as a sound measure of whether a lie is actionable, according to Sheppard Mullin partner Elisha Kobre, a former federal prosecutor.

It’s a relatively low bar, Kobre said.

Gorsuch used a hypothetical of a babysitter who lies about her criminal record to obtain a gig but provides exemplary child care. The misrepresentation may have been material to reasonable parents, but surely the babysitter’s lie doesn’t warrant a fraud prosecution.

Lower courts may have to rely on Gorsuch’s benefit-of-the-bargain injury discussion where the misrepresentations are clearly material, but charges shouldn’t be brought, Kobre said.

While the justices’ decision affirming a fraud conviction may have been unexpected for many, it wasn’t for former US Attorney for the Eastern District of Pennsylvania Bill McSwain.

Now a partner at Duane Morris LLP, McSwain was sworn in just three days after Stamatios Kousisis and the construction company he helped manage, Alpha Painting and Construction Co., were indicted in his district in 2018. He oversaw the case from that point through the completion of trial.

“I believe then as I believe now that the government has a right to get what it paid for,” he said. “That right includes not just the services, but who will provide those agreed upon services.”

Different Priorities

Kousisis and Alpha were convicted on the theory that they induced the Pennsylvania Department of Transportation to award them multi-million dollar contracts by lying about their compliance with disadvantaged business enterprise requirements.

A federal prosecutor “would probably get some pushback now” if he or she tried to pursue a similar case, said McSwain, a Republican who was appointed by President Donald Trump during his first term. At its core, “it’s a DEI case,” he said, referring to diversity, equity, and inclusion initiatives—something the administration has taken a strong stance against.

“It will be interesting to see if there are any cases like it under Trump 2.0,” he said. “Hopefully there will be principled US attorneys who say ‘it’s not my job to make political value judgments.’”

And while the government might now have the ability to go farther in prosecuting fraud cases than it would have before Kousisis, that doesn’t mean it will.

Prosecutors may feel emboldened by the high court’s decision, they have limited resources and are going to be guided by the administration’s priorities, said Bracewell LLP partner David Shargel.

Those priorities include protecting the public fisc, and Shargel believes the government will likely keep its focus on cases where, unlike here, there was a monetary loss.