High Court May Limit the Reach of the Wire Fraud Statute

By Harry Sandick and Caitlyn Wigler

On Dec. 9, 2024, the Supreme Court will hear argument in Kousisis v. United States, O.T. 2024, No. 23-909, a case that will again review the reach of the federal mail and wire fraud statutes. These “property fraud” statutes have long been among the favorite tools of federal prosecutors investigating white-collar crime and have also been the subject of repeated limitation by the Supreme Court. At issue this time is the so-called “fraudulent inducement” theory of property fraud — namely, whether deception to induce a commercial exchange can constitute mail or wire fraud, even if the infliction of economic harm on the alleged victim was not the object of the scheme. The Court’s grant of certiorari in a case from the Third Circuit that affirmed a conviction based on this theory suggests that it may reverse, continuing its decade-long trend of narrowing the scope of broadly worded criminal statutes (like wire fraud), and reining in the prosecutorial discretion that comes with them.
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Decade-Long Pushback Against Overcriminalization

The Supreme Court’s pushback against overcriminalization dates back at least as far as 2014, when the Court declined to interpret the Chemical Weapons Convention Implementation Act of 1998 to cover “an amateur attempt by a jilted wife to injure her husband’s lover” by putting lab chemicals on a doorknob, reasoning that a holding to the contrary would “convert an astonishing amount of traditionally local criminal conduct into a matter for federal enforcement,” Bond v. United States, 572 U.S. 844, 852, 862 (2014).
In 2015, the Court applied similar reasoning in Yates v. United States, when it rejected the argument that throwing undersized fish off a boat, which had previously been caught in violation of federal conservation regulations, amounted to the destruction of a “record, document, or tangible object” under the Sarbanes-Oxley Act, reasoning that such a reading would “cut [the statute] loose from its financial-fraud mooring.” 574 U.S. 528, 531-52 (2015). Even the dissenting judges, led by Justice Kagan, acknowledged that the case presented “the real issue [of] overcriminalization and excessive punishment in the U.S. Code,” and criticized the statute as “too broad and undifferentiated, with too-high maximum penalties,” making it “not an outlier, but an emblem of a deeper pathology in the federal criminal code.” Id. at 569-70 (Kagan, J., dissenting).
This trend continued in 2018, when the Court limited the scope of the tax obstruction statute by requiring the government to prove, among other things, that the defendant’s obstructive conduct had a “nexus” to a particular proceeding. Marinello v. United States, 584 U.S. 1, 13 (2018). The Court reasoned that a broader reading would transform misdemeanors under the Internal Revenue Code, such as “pay[ing] a babysitter $41 per week in cash without withholding taxes” into a federal crime, id. at 9-10, and “place[] great power in the hands of the prosecutor …, which could result in the nonuniform execution of that power across time and geographic location,” id. at 11.
In 2021, the Court limited the scope of the Computer Fraud and Abuse Act, to reach only those “who obtain information from particular areas in the computer … to which their computer does not extend.” Van Buren v. United States, 593 U.S. 374, 378 (2021). The Court explained that the government’s preferred interpretation — which sought to punish a defendant with “improper motives for obtaining information that is otherwise available to them” — would “criminalize everything from embellishing an online-dating profile to using a pseudonym on Facebook[.]” Id. at 394.
This broad trend has extended into the interpretation of the mail and wire fraud statutes. For example, the Court cabined the scope of the wire fraud statute and reversed the convictions in the so-called “Bridgegate” scandal, reasoning that the scheme was not “directed at the [government’s] property” because the traffic lane reduction was “a quintessential exercise of regulatory power,” and “a scheme to alter such a regulatory choice is not one to appropriate the government’s property.” Kelly v. United States, 590 U.S. 391, 400 (2020). The Court continued that to hold otherwise would be “a sweeping expansion of federal criminal jurisdiction.” Id. at 404.
Most recently, the Court further narrowed the scope of the wire fraud statute in Ciminelli v. United States, when it rejected the “right to control” theory of liability, under which the government sought to hold the defendant liable for depriving a nonprofit of “potentially valuable economic information necessary to make discretionary decisions” during their bidding process. 598 U.S. 306, 310, 316 (2023). The Court reasoned that the “right to valuable economic information needed to make discretionary economic decisions is not a traditional property interest,” based on the structure and history of the statute, and explained that embracing such a theory would “vastly expand federal jurisdiction without statutory authorization,” and “make[] a federal crime of an almost limitless variety of deceptive actions traditionally left to state contract and tort law.” Id. at 315.
Throughout all of these cases, common themes emerge. First, the Court will not adhere to a literal, plain text meaning of a criminal statute when the results of such an interpretation are unworkable. Second, the Court is mindful of federalism concerns, seeking to avoid a broad federalization of all criminal law. Third, the Court is concerned about entrusting prosecutors with the authority to decide which prosecutions are fair. Fourth, with respect to the wire fraud statute, the Court looks to traditional principles of fraud law, focusing on whether the object of the scheme is harm to another individual’s property, rather than something less than this.
Kousisis now presents the Court with another opportunity to limit overcriminalization and also to define the metes and bounds of the mail and wire fraud statutes.
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Kousisis v. United States

Kousisis is a case that involves allegations of fraud in connection with bidding for contracts with state governments. In particular, the United States Department of Transportation (USDOT) provides funding to state transportation agencies for transportation projects. United States v. Kousisis, 82 F.4th 230 (3d Cir. 2023), cert. granted, No. 23-909. Federal regulations require recipients of such funds to set participation goals for disadvantaged business enterprises (DBEs). Id. at 234 n.3 (citing 49 C.F.R. §26.21). Any DBE participating in a contract must perform a “commercially useful function,” rather than have a “role [] limited to that of an extra participant,” for example, that “through which funds are passed in order to obtain the appearance of DBE participation.” Id. at 234 n.10, 11 (citing 49 C.F.R. §26.55(c)(1)-(2)).
Here, Petitioners Kousisis and Alpha Paint and Construction Co, Inc., were awarded two federally-funded contracts from the Pennsylvania Department of Transportation (PennDOT) after submitting the lowest bids. Id. at 234. To comply with the DBE requirements in these contracts, Petitioners represented that they would engage Markias, a DBE-certified paint supplier. Id. But Markias did not perform a commercially useful function as required. Id. at 235. Instead, Markias “served merely as a pass-through,” to falsely appear complaint with the DBE requirement, Petitioners arranged for the true paint suppliers to send their invoices to Markias, which then issued its own invoices, adding a 2.25% fee. Id.
Petitioners were charged with conspiracy to commit wire fraud and wire fraud, among other charges. Id. at 233. The federal wire and mail fraud statutes criminalize “any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises” that uses mail or wires. 18 U.S.C. §§1341, 1343. The government here relied on the “fraudulent inducement” theory to argue that Petitioners obtained PennDOT’s “money or property” by means of materially false or fraudulent representations about compliance with the DBE requirement, with an intent to defraud. Cf. Kousisis, 82 F.4th at 234; Brief for Petitioners at 4, Kousisis v. United States, O.T. 2024, No. 23-909 (Pet. Brief). There was no question that the government contractors provided services that were satisfactory and in compliance with the contracts. Kousisis, 82 F.4th at 236.
Petitioners were convicted at trial and appealed, arguing that the government was not deprived of property under the meaning of the statues because their painting and repair obligations were fully discharged, and the presence of the DBE requirement was an “intangible interest” that did not amount to the property loss required under the statutes. Id.
The Court of Appeals for the Third Circuit affirmed the convictions, reasoning that: 1) the object of the fraudulent scheme was to obtain PennDOT’s money, which satisfied the statutes’ property requirement, id. at 240; 2) depriving PennDOT of DBE performance was incidental to that scheme, even if that scheme could not have been consummated without the false certification, id.; 3) “Markias’ 2.25% fee constitute[d] economic harm sufficient to sustain [the] wire fraud convictions. … even though the government does not allege economic net loss,” id. at 241; and 4) DBE participation was an “essential component of the contract,” because “[w]ithout it, the nature of the [p]arties’ bargain would have been different,” id. at 241.
The Court of Appeals held further that disputed contracts are property, id. at 242, and rejected Petitioners’ concerns that its holding “would turn essentially every purposeful breach of contract into a potential violation,” id. at 241. The Court of Appeals noted that this concern “inappropriately minimizes the nature of [the] scheme,” and to the extent it is valid, is merely a complaint “with the text of the statute and the Supreme Court’s interpretation of it.” Id. at 241-42. In other words, the Court of Appeals was going to follow the statutory text even if it led to what might be overcriminalization, apparently content with the fairness of his prosecution and prepared to trust in the good faith of the prosecutors not to abuse this broad statute in other contexts.
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The Parties’ Arguments In the Supreme Court

On appeal to the Supreme Court, Petitioners urge the Court to reject the fraudulent inducement theory — under which deception to induce a commercial exchange can constitute mail or wire fraud, even if inflicting economic harm on the alleged victim was not the object of the scheme — arguing that it flouts text, structure, and precedent, and produces untenable consequences. See generally, Pet. Brief.
Specifically, Petitioners argue that within the meaning of the statute, “schemes to defraud” are those that, if completed, would deprive the victim of traditional property. Id. at 12, 16-25. This is distinct from the deprivation of a regulatory interest, such as at issue in Cleveland v. United States, 531 U.S. 12 (2000), a case about government licenses. Pet. Brief at 24-27. Yet under the fraudulent inducement theory, the government could circumvent this distinction and criminalize the deprivation of a regulatory interest whenever it is memorialized in a contract. Id. at 25. Moreover, this theory leaves prosecutors with the discretion to decide whether deception that frustrates a regulatory interest is punishable by 20 years under the wire fraud statute, or five years under other statues that protect the government from false statements and other regulatory harm, such as 18 U.S.C. §371 and 18 U.S.C. §1001. Id. at 25-27.
Petitioners argue further that the fraudulent inducement theory thwarts fair notice and federalism principles. See, id. at 30, 33-34, 39. Likewise, it undermines precedent advancing these principles, including decisions in which the Court has refused to: 1) “convert an astonishing amount of traditionally local criminal conduct into a matter for federal law enforcement,” id. at 39 (quoting Bond, 572 U.S. at 862-63 (internal quotations omitted)); 2) construe the wire fraud statue “in a manner that leaves its outer boundaries ambiguous,” id. (quoting McNally v. United States, 483 U.S. 350, 360 (1987)); and 3) “treat mere information as a protected interest” because this would “make[] a federal crime of almost a limitless variety of deceptive actions traditionally left to state contract and tort law,” id. at 30 (quoting Ciminelli, 598 U.S. at 315-16).
Petitioners then presented hypotheticals (discussed below), to outline the practical consequences of embracing the fraudulent inducement theory, before further emphasizing the risk of overcriminalization under this theory. See, id. at 41-49.
In its brief, the government counters that Petitioners’ scheme was classic property fraud because the object of the fraud was to obtain PennDOT’s money, and Petitioners obtained this money by depriving PennDOT of an essential aspect of their contract (DBE compliance) through knowing, material falsehoods. See, Brief for Respondents at 13-19, Kousisis v. United States, O.T. 2024, No. 23-909. In the government’s view, Petitioners cannot evade responsibility by declaring that they delivered under the contract — an argument that “engrafts[] an atextual net-pecuniary-loss requirement onto the wire fraud statute.” See, id. at 20-29. Instead, the government argues that any false statement that results in the victim parting with his property is sufficient for wire fraud, even if the false statement did not cause traditional economic injury to the victim of the scheme to defraud.
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Practical Implications of the Fraudulent Inducement Theory

The Third Circuit and the government both downplay the practical impact of the fraudulent inducement theory. Under the fraudulent inducement theory, the mail and wire fraud statutes criminalize any sort of commercial exchange induced by deception, even if economic harm was not the object of the scheme. But not all deceitful conduct should be charged as a federal crime, particularly that which is more routinely (and appropriately) policed by state or civil laws, if at all.
The hypothetical scenarios outlined in Petitioners’ brief underscore this point. See, Pet. Brief at 40-43. For example, Petitioners explain that had they breached another one of the contract’s terms, such as its requirement to pay certain employees minimum wage, they would not merely be subject to a suit for breach of contract or wage-and-hour violations — rather, the government could prosecute them for wire fraud. Id. at 41. And in the private contract context, a recent college graduate, who represents to a prospective landlord that she will be attending graduate school (causing the landlord to believe she will be a quiet tenant), could be prosecuted for wire fraud if such claims were material to the landlord’s decision, even if there was no economic harm to the landlord. Id. at 41-42. Likewise, a company that promises, but fails to donate a certain percentage of their profits to a social cause, could be prosecuted if such claims were material to the purchaser, regardless of whether the purchaser got what they paid for, and in turn, was not financially injured. Id. at 43.
One amicus curiae brief submitted by counsel for another person who has been prosecuted in the Third Circuit for wire fraud under the fraudulent inducement theory also presents a number of hypothetical scenarios that further underscore this point. See, Brief for Moshe Porat as Amicus Curiae Supporting Petitioners at 18-23, O.T. 2024, No. 23-909. For example, imagine a restaurant owner who solicits friends to post rave reviews on Yelp, allowing the restaurant to obtain a 4.7-star average rating in contrast to its otherwise 4.1-star average rating. In the government’s view, this restaurant owner could be prosecuted if customers read the fake reviews and decided to pay at the restaurant, even if they received what they paid for: good food at a high-quality restaurant. Id. at 20. Likewise, the seller of a home who misrepresents her race or political affiliation to satisfy the preferences of the purchaser would be subject to prosecution, even if the home was worth the full amount paid by the purchaser. Id. at 23.
In short, the fraudulent inducement theory is a dangerous one that offers limitless possibilities for the government to criminalize conduct that should not be the subject of prosecution. Indeed, for many decades, federal prosecutors in the Southern District of New York — the center of business crimes prosecution in the United States — have been prohibited by the Court of Appeals for the Second Circuit from relying on this theory. See, United States v. Regent Office Supply Co., Inc., 421 F.2d 1174, 1182 (2d Cir. 1970) (“Although proof that the injury was accomplished is not required to convict under [section]1341, we believe the statute does require evidence from which it may be inferred that some actual injury to the victim, however slight, is a reasonably probable result of the deceitful representations if they are successful.”).
While false statements in government contracting or private business are not to be praised, the question is whether they should in virtually all contexts give rise to the threat of criminal conviction. If the Supreme Court’s recently expressed concerns about overcriminalization remain top of mind, the convictions here should be reversed. First, the government is offering an interpretation of the statute that exalts plain meaning over workability and statutory purpose. No one can think that Congress intended to permit the prosecution of people in the types of hypotheticals framed by the Petitioners or Amici. Second, the result of affirmance would be to displace state criminal law and civil law with federal criminal law, making nearly every type of deception in business into a federal crime. Third, as not all deception can possibly be investigated and charged, prosecutors would be able to pick and choose their defendants — proxy defendants for all of the harmless deception that goes on every day in the business world. Some of the charged defendants might be people who are targeted for expressing unpopular opinions, or people whose prosecution might bring public acclaim to the work of the local federal prosecutors. Fourth, the theory would allow prosecutions based on conduct that is nothing like traditional property fraud offenses, as the “victim” of the offense got just what they paid for. The Court should again prevent this type of misuse of the statute, as it has in the recent past, by rejecting the “fraudulent inducement” theory and reversing the convictions in this case.