Third Circuit Limits Amount of Loss in Wire Fraud Case Involving Disadvantaged Business Enterprises
In United States v. Kousisis, the Third Circuit Court of Appeals issued another important and precedent-setting ruling and further clarified its decision in United States v, Banks, holding that even where government contracts are procured by misrepresentations or fraud, only the profits that relate to the fraud should be considered as the loss for sentencing purposes. The decision is another victory for defendants accused of fraud and clarifies that courts should use the actual loss incurred when calculating loss for sentencing purposes. The court’s decision Kousisis extends this reasoning to cases involving government contracts that were allegedly procured through fraud.
Philly Bridge Project Fraud
In Kousisis, prosecutors alleged that defendants Stamatios Kousisis and Alpha Painting & Construction Co. deprived the Pennsylvania Department of Transportation (PennDOT) of property by misrepresenting their compliance with a bidding contract’s requirements that at least 6% of the job be completed by a qualified, minority-owned business.
According to the government’s allegations, in 2011, Hercules-Vimas Joint Venture, LLC, was awarded a $42.7 million contract to paint the Platt Bridge. The federal government funded the contract and required that a percentage of the work be performed by a Disadvantaged Business Enterprise (DBE).
The DBE program provides opportunities for small businesses owned by socially and economically disadvantaged individuals to work on federally funded projects by requiring that government contracts set goals for DBE participation. To meet this requirement, Hercules-Vimas subcontracted with Vertech International, Inc., a DBE certified in Pennsylvania, to supply materials.
The government contends the arrangement was fraudulent because, while Hercules-Vimas represented that Vertech was the paint supplier, the paint was actually supplied by Sherwin-Williams, a non-disadvantaged business. The government contends that Vertech merely created the invoices to conceal the fraud in exchange for a nominal fee.
In 2016, the owner of Vertech pled guilty to criminal charges associated with the fraudulent scheme, and in 2017 the government reached a settlement to resolve allegations of False Claims Action violations against Sherwin-Williams.
According to the charges, Sherwin-Williams maintained the supplies in storage and delivered them directly to the Hercules-Vimas job site, then submitted invoices for paint and supplies to Vertech. Vertech, in turn, would create invoices, add a 1.75% markup, and submit those invoices to Hercules-Vimas. The scheme enabled Hercules-Vias to submit a substantially lower bid than competing bidders.
According to US Attorney Jacqueline C. Romero, “Because of this scheme, legitimate disadvantaged business owners were deprived of the very opportunities the DBE program was designed to create.”
The Third Circuit’s Decision
In April, the Third Circuit upheld the fraud convictions but found that the lower court’s method of calculating the government’s losses was incorrect.
Citing its recent decision in Banks, the court noted that, when calculating loss under the United States Federal Sentencing Guidelines, the “focus is limited to the ‘actual loss’ suffered by the victim. ‘Actual loss’ is defined as ‘the reasonably foreseeable pecuniary harm that resulted from the offense.’”
The court acknowledged that the defendants deprived PennDOT of property using false pretenses but found that, even though the conviction stood, the lower court should not have based its calculation of the government’s losses on Alpha’s “ill-gotten profits.”
"The District Court rightly reasoned that 'as a result of Alpha's deception, the DBE program provided profit opportunities to entities not entitled to them.’ We do not trivialize this. Nevertheless, Alpha always stood to lawfully profit from the work that it was contractually obligated to perform. All its gains were not 'ill-gotten…Thus, it cannot fairly be said that the government's loss here equals Alpha's profits."
The Third Circuit remanded the case to the lower court for resentencing, noting that “Procurement contracts are different. Here, the government is not just bestowing a benefit. Rather, it expects something in return for its payment. It expects, and is entitled to, a repaired bridge, highway, etc.’ The mere fact that a government contract furthers some public policy objective apart from the government’s procurement needs is not enough to transform the contract into a government benefit’ akin to a grant or an entitlement program payment.”
The court instructed the lower court to recalculate the loss, offsetting the government’s loss by the fair market value of the services rendered, which, in this case, is the fair market value of the non-DBE provisioned paint supplies.
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