United States v. Stamatios Kousisis ( 2023 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________
Nos. 19-3679 & 19-3774
_____________
UNITED STATES OF AMERICA
v.
STAMATIOS KOUSISIS,
a/k/a Tom Kousisis,
Appellant in No. 19-3679
UNITED STATES OF AMERICA
v.
ALPHA PAINTING & CONSTRUCTION CO., INC.,
Appellant in No. 19-3774
______________
On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(District Court Nos. 2:18-cr-00130-001 &
2:18-cr-00130-003)
District Judge: Honorable Wendy Beetlestone
______________
Argued August 18, 2021
______________
(Filed: April 21, 2023)
Before: McKEE, GREENAWAY, Jr., and RESTREPO,

Judge McKee assumed senior status on October 21, 2022.
Circuit Judges
Paul G. Shapiro [ARGUED]
Office of United States Attorney
615 Chestnut Street
Suite 1250
Philadelphia, PA 19106
David E. Troyer
Office of United States Attorney
615 Chestnut Street
Suite 1250
Philadelphia, PA 19106
Attorneys for Appellee
Lisa A. Mathewson [ARGUED]
Suite 1320
123 South Broad Street
Philadelphia, PA 19109
Attorney for Appellants
Lawrence S. Lustberg
Gibbons
One Gateway Center
Newark, NJ 07102
Attorney for Amicus Appellants
____________
OPINION OF THE COURT
____________
McKEE, Circuit Judge.
On August 30, 2018, a jury convicted Stamatios
Kousisis and Alpha Painting & Construction Co., Inc.
(“Alpha”) of, among other things, one count of conspiracy to
commit wire fraud, in violation of 18 U.S.C. § 1349, and three
2
counts of wire fraud, in violation of 18 U.S.C. § 1343. Kousisis
and Alpha appeal the District Court’s (1) denial of their motion
for judgment of acquittal, (2) jury instructions, and (3) loss
calculations at sentencing. In addition, Alpha appeals the
District Court’s forfeiture order. We will affirm the
convictions. Given the complex nature of the fraud in this case,
we commend the District Court for its attempt to determine the
amount of loss for sentencing purposes, as well as the amount
to be forfeited. However, we must vacate the loss calculation
and the forfeiture order and remand for further proceedings
consistent with this opinion.
I. Background
A. Disadvantaged Business Enterprises
“The United States Department of Transportation
provides funds to state transportation agencies to finance
transportation projects. These funds often go towards highway
construction, provided through the Federal Highway
Administration (‘FHWA’). In Pennsylvania, the FHWA
provides such funds to the Pennsylvania Department of
Transportation (‘PennDOT’).”1
Federal regulations require states that receive federal
transportation funds to set participation goals for
disadvantaged business enterprises (“DBEs”) 2 in
transportation construction projects. This is intended to
promote the participation of minority and disadvantaged
businesses in these federally financed Department of
Transportation (“DOT”) contracts. A DBE is defined as a for-
profit small business “[t]hat is at least 51 percent owned by one
or more individuals who are both socially and economically
disadvantaged” and “[w]hose management and daily business
operations are controlled by one or more of the socially and
economically disadvantaged individuals who own it.”3
The DBE program has “an aspirational goal” of having
ten percent of DOT’s infrastructure project funds expended on
1
United States v. Nagle, 803 F.3d 167, 171 (3d Cir. 2015).
2
49 C.F.R. § 26.21.
3
49 C.F.R. § 26.5.
3
DBEs.4 When state agencies solicit bids for DOT-financed
contracts, they announce DBE participation goals for those
contracts; responsive bids must explain how the contractors
will meet those goals.5 If the prime contractor is not itself a
DBE, this goal can be satisfied by including one or more DBEs
as subcontractors. 6 “States themselves certify businesses as
DBEs. A business must be certified as a DBE before it or a
prime contractor can rely on its DBE status in bidding for a
contract.”7
When a DBE participates in a contract, that DBE must
perform a “commercially useful function.”8 “A DBE performs
a commercially useful function when it is responsible for
execution of the work of the contract and is carrying out its
responsibilities by actually performing, managing, and
supervising the work involved.”9 A DBE whose “role is
limited to that of an extra participant in a transaction, contract,
or project through which funds are passed in order to obtain the
appearance of DBE participation” does not perform a
commercially useful function.10
B. Factual and Procedural History
On April 3, 2018, Kousisis, Emanouel Frangos, and
their respective companies, Alpha and Liberty Maintenance,
Inc. (“Liberty”) were indicted for (1) conspiracy to commit
wire fraud, in violation of § 1349, (2) wire fraud, in violation
of § 1343, and (3) false statements, in violation of 18 U.S.C. §
1001.
The indictment charged the Defendants with conspiring
to defraud DOT and PennDOT by exploiting DOT’s DBE
program. The charges arose out of two DOT-financed contracts
for work in Philadelphia: the Girard Point Project and the 30th
Street Project (together, the “Philadelphia Projects” or the
4
49 C.F.R. § 26.41.
5
See Nagle, 803 F.3d at 171.
6
Id.7
Id. (citations omitted).
8
49 C.F.R. § 26.55(c).
9
49 C.F.R. § 26.55(c)(1).
10
49 C.F.R. § 26.55(c)(2).
4
“Projects”). The Girard Point Project involved a $70.3 million
contract to perform painting and repairs on the Girard Point
Bridge over the Schuylkill River. It was awarded to Alpha,
Liberty, and another entity, Buckley, Inc., in 2009. The 30th
Street Project involved a $50.8 million contract to perform
repairs at the Amtrak 30th Street Train Station in Philadelphia.
That contract was awarded to Buckley and another entity,
Cornell and Company (“Cornell”) in 2010, and it included a
$15 million painting subcontract awarded to Alpha and Liberty
in 2011.
Both contracts for the Philadelphia Projects included
DBE requirements. The Girard Point Project required the
successful bidder to commit to contracting with a DBE for at
least six percent of the contract amount. The 30th Street Project
had a DBE requirement equal to seven percent of the contract
amount. The Defendants submitted bids in which they
committed to working with Markias, Inc. on the Philadelphia
Projects. Markias, Inc. was a company that had prequalified as
a DBE in Pennsylvania. The Defendants’ bids stated that they
would obtain $4.7 million in paint supplies from Markias for
the Girard Point Project and $1.7 million for the 30th Street
Project. The terms of the Philadelphia Projects’ contracts
provided that failure to comply with DBE regulations would
be a material breach.
During the performance of these contracts, the
Defendants periodically submitted false documentation
regarding Markias’ role in the Philadelphia Projects. That
documentation was a condition precedent to obtaining credit
towards the DBE goals and, therefore, to complying with the
contracts’ terms. Each of those submissions falsely certified
that Markias acted as a “regular dealer” in supplying products.
In reliance on these misrepresentations, PennDOT awarded the
Defendants DBE credits and paid the Defendants based on
their asserted compliance with the Projects’ DBE
requirements. As established at trial, failure to certify
compliance with the DBE requirements could have led to
debarment, financial penalties, or withholding of progress
payments.
Rather than supplying products or performing some
other commercially useful function as required by the explicit
5
terms of the contracts, Markias served merely as a pass-
through for Alpha-Liberty. Markias did not do any work on the
Projects or supply any of the materials for them, despite the
Defendants’ certifications to the contrary.
To hide the fact that Markias was doing no work on the
Philadelphia Projects, the Defendants arranged for the true
paint suppliers to send their invoices to Markias. Markias then
issued its own invoices, added a 2.25% fee, and forwarded the
pass-through invoices to Alpha-Liberty. Alpha-Liberty then
forwarded those fraudulent invoices to PennDOT. This
arrangement was detailed in a letter from Kousisis to Markias.
The letter specified that Alpha-Liberty would identify the
actual suppliers for the products that it needed. Alpha-Liberty
would then negotiate prices and terms with those suppliers and
create fraudulent purchase orders in Markias’ name. In turn,
the Defendants issued two sets of checks to Markias. One
check paid Markias its 2.25% fee for acting as a pass-through.
Markias forwarded the other check to the actual suppliers to
pay for the materials that the Defendants ordered directly from
them. The Defendants also routed invoices related to supplies
used on projects outside Pennsylvania through Markias. This
made it appear that the materials were used on the Philadelphia
Projects.
The jury returned a mixed verdict based on this
evidence. It acquitted Kousisis and Alpha on two of the wire
fraud counts, but convicted them of false statements, in
violation of § 1001, conspiracy to commit wire fraud, in
violation of § 1349, and wire fraud, in violation of § 1343.
Furthermore, the District Court issued a $10,906,553 forfeiture
order against Alpha. This appeal followed.
II. Discussion
Kousisis and Alpha (together, “Appellants”) raise three
main issues on appeal. First, they claim that the government
failed to prove the “property” element of wire fraud. They also
challenge the District Court’s jury instructions and loss
calculations at sentencing. In addition, Alpha contests the
District Court’s forfeiture order. We address each argument in
turn.
6
A. The Property Element of Wire Fraud
The federal wire fraud statute, 18 U.S.C § 1343,
criminalizes “any scheme or artifice to defraud, or for
obtaining money or property by means of false or fraudulent
pretenses, representations, or promises,” that uses wires. It is
now well established that the federal wire fraud provision only
extends to property rights.11 Moreover, for the government to
establish wire fraud, the property involved “must play more
than some bit part in a scheme: It must be an ‘object of the
fraud.’”12 This must be evaluated from the victim’s
perspective. Thus, the victim’s loss must have been an
objective of the fraudulent scheme; it is insufficient if that loss
is merely an incidental byproduct of the scheme. 13
Appellants claim that the District Court erred in denying
judgment of acquittal because the government failed to prove
beyond a reasonable doubt that they defrauded PennDOT out
of property, as required by the wire fraud statute. We exercise
plenary review over a District Court’s denial of a motion for
judgment of acquittal and use “the same standard the district
court uses in deciding the motion.”14 We review the record “in
the light most favorable to the prosecution to determine
whether any rational trier of fact could have found proof of
guilt beyond a reasonable doubt based on the available
evidence.”15
Appellants argue that the fraudulent misrepresentation
that Markias was the required DBE does not implicate the
property interest needed to establish a § 1343 violation. They
rely on the fact that they fully discharged their painting and
repair obligations in the Philadelphia Projects. More
11
Carpenter v. United States, 484 U.S. 19, 25 (1987).
12
Kelly v. United States, 140 S. Ct. 1565, 1573 (2020)
(quoting Pasquantino v. United States, 544 U.S. 349, 355
(2005)).
13
Id. at 1573 n.2.
14
United States v. Caraballo-Rodriguez, 726 F.3d 418, 424
(3d Cir. 2013) (en banc).
15
United States v. Smith, 294 F.3d 473, 476 (3d Cir. 2002)
(quoting United States v. Wolfe, 245 F.3d 257, 262 (3d Cir.
2001)).
7
specifically, they contend that their “offense conduct[]
involve[d] high quality, timely and fully performed work by
[Appellants] that saved PennDOT millions of dollars.”16
Though they concede that Markias did not perform as
promised, they characterize the presence of a true DBE as an
“intangible interest” that cannot equate with the property or
pecuniary loss required by the statutes of conviction. 17 They
therefore maintain that the government was not deprived of any
property.
At first, this argument has superficial appeal; however,
it does not survive closer scrutiny. It requires that we ignore
the text of the statutes that Appellants were convicted of
violating, as well as Supreme Court decisions interpreting
those statutes. The contextual background of the wire fraud
statute illustrates the weaknesses in Appellants’ arguments.
i. Evolution of Federal Wire Fraud
“Some decades ago, courts of appeals often construed
the federal fraud laws to ‘proscribe[ ] schemes to defraud
citizens of their intangible rights to honest and impartial
government.’”18 The Supreme Court limited those decisions in
McNally v. United States19 by holding that the federal mail
fraud statute is limited to the protection of money or property
rights.20
16
Alpha Opening Br. at 55.
17
Kousisis Opening Br. at 19.
18
Kelly, 140 S. Ct. at 1571 (quoting McNally v. United States,
483 U.S. 350, 355 (1987)).
19
483 U.S. 350 (1987).
20
The federal wire fraud statute, 18 U.S.C. § 1343, is nearly
identical to the federal mail fraud statute, 18 U.S.C. § 1341.
As we have explained, “the cases construing the mail fraud
statute are applicable to the wire fraud statute as well.” United
States v. Tarnopol, 561 F.2d 466, 475 (3d Cir. 1977),
abrogated on other grounds by Griffin v. United States, 502
U.S. 46 (1991); United States v. Yusuf, 536 F.3d 178, 188
n.14 (3d Cir. 2008) (same). Thus, as the “statutes differ only
in form, not in substance,” mail and wire fraud are treated the
same in our analysis. United States v. Morelli, 169 F.3d 798,
806 n.9 (3d Cir. 1999); see also United States v. Frey, 42 F.3d
8In McNally, a Kentucky official and an insurance
company made the following arrangement—the state would
continue its agency relationship with the company in exchange
for the company sharing some of its commissions with other
insurance agencies specified by the official, including an entity
that he controlled. 21 In the ensuing prosecution, the
government did not attempt to prove that the Commonwealth
would have “paid a lower premium or secured better
insurance” absent the fraud.22 Rather, the prosecution’s theory
was that the scheme “defraud[ed] the citizens and government
of Kentucky of their right to have the Commonwealth’s affairs
conducted honestly.”23
The Supreme Court rejected this theory and held that
“honest services” fraud was not mail fraud under 18 U.S.C. §
1341. The Court relied on both the statute’s legislative history
and its prior decision in Durland v. United States,24 a case it
had decided a century earlier. Durland was the first case in
which the Supreme Court interpreted the phrase “any scheme
or artifice to defraud.”25 The Court there held that the mail
fraud statute covered fraudulent schemes involving not only
“representations as to the past or present,” but also included
“suggestions and promises as to the future.”26 However, a few
years later, in 1909, Congress codified Durland’s holding by
adding the phrase “‘or for obtaining money or property by
means of false or fraudulent pretenses, representations, or
promises’ after the original phrase ‘any scheme or artifice to
defraud.’”27
795, 797 (3d Cir. 1994) (“The wire fraud statute, 18 U.S.C. §
1343, is identical to the mail fraud statute except it speaks of
communications transmitted by wire.”).
21
McNally, 483 U.S. at 352.
22
Id. at 360.
23
Id. at 353.
24
Id. at 356–60 (citing Durland v. United States, 161 U.S.
306 (1896)).
25
Id. at 356.
26
Id. at 357.
27
Id. (emphasis added) (quoting Act of Mar. 4, 1909, ch. 321,
§ 215, 35 Stat. 1130).
9
The McNally Court reasoned that the 1909 amendment
was enacted to make it “unmistakable that the [mail fraud]
statute reached false promises and misrepresentations as to the
future as well as other frauds involving money or property.”28
It determined that reading the concept of “honest services”
fraud into a federal fraud statute would result in the federal
government establishing codes of conduct for public
officials.29 Accordingly, the Court rejected a statutory
construction that “involves the Federal Government in setting
standards of disclosure and good government for local and
state officials,” and instead held that § 1341 is “limited in scope
to the protection of property rights.”30
Soon after McNally was decided, Congress responded
by enacting 18 U.S.C. § 1346, the “honest-services” fraud
provision. That statute provides: “For the purposes of th[e]
chapter [of the U.S. Code that prohibits, inter alia, mail fraud,
§ 1341, and wire fraud, § 1343], the term ‘scheme or artifice to
defraud’ includes a scheme or artifice to deprive another of the
intangible right of honest services.” 31 As the Supreme Court
later explained, McNally “presented a paradigmatic kickback
fact pattern” and Congress undoubtedly sought to reverse the
case on its facts by enacting § 1346.32
It seemed apparent that, in enacting § 1346, Congress
intended to criminalize fraudulent schemes aimed at
“depriv[ing] another of the intangible right of honest services,”
regardless of whether the scheme sought to divest the victim of
any property.33 Nevertheless, in Skilling v. United States, the
Court concluded that § 1346 was so vague that it had to be
limited to classic bribes or kickbacks.34 That case involved the
former C.E.O. of Enron Corporation, Jeffrey Skilling. He was
convicted of, among other things, conspiracy to commit
honest-services wire fraud for participating in a scheme to
deceive investors about Enron’s true financial performance by
28
Id. at 359.
29
Id. at 360.
30
Id.
31
Skilling v. United States, 561 U.S. 358, 402 (2010).
32
Id. at 407–08, 410.
33
Id. at 402.
34
Id. at 408–10.
10
manipulating its publicly reported financial results and making
false and misleading statements. 35 On appeal, Skilling argued
that § 1346’s prohibition of honest-services fraud was
unconstitutionally vague.36 The Supreme Court agreed and
limited the reach of the statute to conduct amounting to bribes
and kickbacks,37 thus providing an unambiguous limitation on
the fraudulent deprivation of “honest services.” In doing so, the
Court relied heavily on the holdings of several Courts of
Appeals in cases decided before its decision in McNally.38 The
Court explained that it was necessary to limit § 1346’s reach
because “[r]eading the statute to proscribe a wider range of
offensive conduct . . . would raise the due process concerns
underlying the vagueness doctrine.”39 Thus, the Court again
clarified that federal fraud statutes do not reach strictly
intangible interests. 40
The Court reinforced this point in Cleveland v. United
41
States. There, the government charged a defendant with
various counts of money laundering, racketeering, and
conspiracy in connection with a “scheme to bribe [Louisiana]
state legislators to vote in a manner favorable to the video
poker industry.” 42 One of the predicate acts supporting these
charges was § 1341 mail fraud, because the defendant
fraudulently concealed key information in his application for a
state video poker license. 43 The government argued that the
defendant thereby deprived it of property because he had
“frustrated the State’s right to control the issuance, renewal,
35
Id. at 369, 375.
36
Id. at 399.
37
Id. at 408–09.
38
Id. at 408 (“Both before McNally and after § 1346’s
enactment, Courts of Appeals described schemes involving
bribes or kickbacks as ‘core . . . honest services fraud
precedents [.]’ . . . In view of this history, there is no doubt
that Congress intended § 1346 to reach at least bribes and
kickbacks.” (collecting cases)).
39
Id.
40
Id. at 404, 408–09.
41
531 U.S. 12 (2000).
42
Id. at 16.
43
Id. at 16–17.
11
and revocation of video poker licenses.”44 The Supreme Court
disagreed. It held that the federal mail fraud statute does not
encompass fraudulent schemes to obtain a state license,
because a license is not property in the government’s hand. 45
As the Court explained, the State’s “core concern” in issuing
the licenses was regulatory.46 Licensing is a “paradigmatic
exercise[] of the States’ traditional police powers” concerning
who should get a benefit and who should not.47 That power did
not relate to the government’s interests as a property holder.
Since the object of the fraud was not property in the victim’s
hands, the defendant’s dishonest conduct was not property
fraud.48 “[S]aid another way: The defendant’s fraud
‘implicate[d] the Government’s role as sovereign’ . . . . And so
his conduct, however deceitful, was not property fraud.”49
More recently, in Kelly, the Court similarly vacated a
federal wire fraud conviction based on the distinction between
governmental property interests and its regulatory power.
There, public officials ordered an unannounced realignment of
toll lanes on the George Washington Bridge connecting New
Jersey and Manhattan. 50 The Court described the bridge as “the
busiest motor-vehicle bridge in the world.”51 The closure
caused four days of gridlock in Fort Lee, New Jersey.52 The
defendants sought to justify the closure by claiming that it was
part of a traffic study. 53 “In fact, they did so for a political
reason—to punish the mayor of Fort Lee for refusing to
support the New Jersey Governor’s reelection bid.”54 The
Supreme Court reversed the public officials’ federal wire fraud
convictions. It explained that their scheme fell outside the
scope of the federal statutes prohibiting wire fraud:
44
Id. at 23.
45
Id. at 23–24.
46
Id. at 20.
47
Id. at 23.
48
Id. at 26–27.
49
Kelly, 140 S. Ct. at 1572 (quoting Cleveland, 531 U.S. at23–24).
50
Id. at 1568.
51
Id. at 1569.
52
Id. at 1568.
53
Id.
54
Id.
12
Under settled precedent, the officials could
violate those laws only if an object of their
dishonesty was to obtain the Port Authority’s
money or property. The Government contends it
was, because the officials sought both to
“commandeer” the Bridge’s access lanes and to
divert the wage labor of the Port Authority
employees used in that effort. We disagree. The
realignment of the toll lanes was an exercise of
regulatory power—something this Court has
already held fails to meet the statutes’ property
requirement. And the employees’ labor was just
the incidental cost of that regulation, rather than
itself an object of the officials’ scheme. 55
In reversing the convictions, the Court emphasized that
“the loss to the victim [cannot be] only an incidental byproduct
of the scheme.”56 The Court reasoned that such a rule is
necessary to ensure that the property fraud statutes do not make
a federal crime of every deceit. 57
ii. Appellants’ Scheme
Kelly and Cleveland instruct that when the victim’s
damages are incidental to the object of the fraudulent scheme
(i.e., toll worker labor costs in Kelly and fees associated with
issuing licenses in Cleveland), there is an insufficient property
interest to sustain a wire fraud conviction. Appellants rely on
this line of cases to argue that any loss by PennDOT here
cannot be classified as pecuniary because, as we have
explained, PennDOT received the repairs it paid for. This
argument ignores the Supreme Court’s explicit declaration to
the contrary. The Court has unambiguously held that there
could have been no fraud in those cases unless “an object of
the[] dishonesty was to obtain the [government]’s money or
property.”58 Here, obtaining the government’s money or
55
Id. at 1568–69 (citation omitted).
56
Id. at 1573.
57
Id. at 1573 n.2 (“Without that rule, . . . even a practical joke
could be a federal felony.”).
58
Id. at 1568.
13
property was precisely the object of Appellants’ fraudulent
scheme.
Put simply, Appellants set out to obtain millions of
dollars that they would not have received but for their
fraudulent misrepresentations. Depriving PennDOT of DBE
performance was incidental to that scheme. A hypothetical
employed by the Supreme Court in Kelly illustrates this point.
There, the Court explained that “a city parks commissioner
induc[ing] his employees into doing gardening work for
political contributors” would meet the federal fraud statute’s
property requirement since “[t]he entire point of the fraudsters’
plans was to obtain the employees’ services” and “[a]
government’s right to its employees’ time and labor . . . can
undergird a property fraud prosecution.”59 Likewise, the
“entire point” of Appellants’ scheme was to obtain PennDOT’s
money.
In contrast, consider another example set forth by the
Seventh Circuit Court of Appeals in United States v. Walters.60
Suppose “A [e-mails] B an invitation to a surprise party for
their mutual friend C. B drives his car to the place named in the
invitation [thus expending the cost of gasoline]. But there is no
party; the address is a vacant lot; B is the butt of a joke.” 61 Wire
fraud? No. The victim’s loss in this scenario was merely
incidental to the scheme which, on its own, cannot sustain a
wire fraud conviction. But that is not the case here.
Although Appellants’ scheme could not have been
consummated without falsely certifying the DBE participation,
those false certifications were merely incidental to the true
purpose of the fraudulent agreement—obtaining millions of
dollars from PennDOT. Appellants’ attempts to have us
exclusively fixate on the absence of a DBE would require us to
ignore that the Court reversed the convictions in Skilling and
Cleveland exactly because the object of the fraudulent schemes
in those cases was something other than the government’s
money. That the misrepresentations about DBE participation
were not the objective of the scheme distinguishes this case
59
Id. at 1573.
60
997 F.2d 1219 (7th Cir. 1993).
61
Id. at 1224.
14
from the “intangible interest” scenarios that were at the heart
of the fraudulent schemes in Skilling and Kelly. PennDOT’s
dollars establish the requisite property interest here, not the
socially laudable objective of ensuring participation by a
DBE.62
Moreover, there was clearly a kickback here and thus
economic harm sufficient to sustain wire fraud convictions.
This is true even though the government does not allege
economic net loss. The jury convicted the Defendants for
paying Markias a 2.25% fee for acting as a pass-through.
Unlike in McNally, here, the fee Markias received was the
government’s money. 63 The money was not an amount
62
Though Appellants’ misrepresentations about DBE
participation were collateral to their scheme, the importance
of DBE programs more generally cannot be understated.
DOT’s DBE program strives, in part, to prevent
discrimination against DBEs in the award and administration
of “DOT-assisted contracts” and to provide DBEs an equal
opportunity to compete for such contracts. 49 C.F.R. § 26.1.
The agency explicitly states that the initiative aims to
“remedy ongoing discrimination and the continuing effects of
past discrimination in federally-assisted highway, transit,
airport, and highway safety financial assistance transportation
contracting markets nationwide.” Disadvantaged Business
Enterprise (DBE) Program, U.S. DEPARTMENT OF
TRANSPORTATION, https://perma.cc/SGW8-HMET (last
visited April 4, 2023). To that end, state and local recipients
of DOT funding frequently ensure DBE participation in their
contracts. For instance, 879 of the 1,402 contracts awarded by
PennDOT in the second half of Fiscal Year 2020 required
DBE participation. See Uniform Report of DBE
Commitments/Awards and Payments, PENNSYLVANIA
DEPARTMENT OF TRANSPORTATION, https://perma.cc/YD3N-
DUWZ (last visited April 4, 2023).
63
McNally, 483 U.S. at 360–61 (“[The state officers] received
part of the commissions but those commissions were not the
Commonwealth’s money. Nor was the jury charged that to
convict it must find that the Commonwealth was deprived of
control over how its money was spent. Indeed, the premium
for insurance would have been paid to some agency, and what
[the state officers] did was to assert control that the
15
PennDOT would have paid regardless of which contractor
performed the work.
In United States v. Wheeler,64 the Eleventh Circuit
Court of Appeals found that a defendant’s “misrepresentations
or fail[ure] to disclose information that a reasonable jury could
find affected the nature of the bargain” may provide a basis for
a wire fraud conviction.65 There, the defendants misled
investors by misrepresenting their company’s “profits, its
association with a famous executive and a globally recognized
technology company, . . . a potential listing on a major stock
exchange,” and their commissions. 66 The Court held that these
misrepresentations involved “essential characteristics of the
stock that would alter the nature of the bargain.” 67 Therefore,
“the evidence provided a basis for a reasonable jury to
conclude that [the defendants] schemed to defraud
investors.”68 Here, PennDOT’s willingness to pay a premium
to involve a DBE in the Projects establishes that DBE
participation was an essential component of the contract.
Without it, the nature of the Parties’ bargain would have been
different. This is sufficient evidence to support a federal fraud
conviction given all of the circumstances surrounding that
misrepresentation and the millions of dollars it caused
PennDOT to pay to Appellants.69
Amici caution that our holding today “would turn
essentially every purposeful breach of contract into a potential
violation of the federal criminal property fraud statutes.”70 That
argument inappropriately minimizes the nature of Appellants’
Commonwealth might not otherwise have made over the
commissions paid by the insurance company to its agent.”).
64
16 F.4th 805 (11th Cir. 2021).
65
Id. at 820.
66
Id.67
Id.68
Id. at 821.
69
To be sure, we do not suggest that without the premium
PennDOT paid for the Projects, the government would have
been unable to establish wire fraud. Even without the
premium, Appellants’ primary fraudulent objective to obtain
PennDOT’s funds remains.
70
Amici Br. at 4.
16
scheme. Again, Appellants did not merely scheme to deprive
PennDOT of the contractual requirement of DBE participation.
Rather, they schemed to have PennDOT pay them millions of
dollars that they were clearly not entitled to given their material
breach of the contracts. Thus, to the extent that Amici raise a
valid concern, the concern is with the text of the statute and the
Supreme Court’s interpretation of it, not its application to
Appellants’ actions. As noted above, Congress intended for §
1343 to criminalize “any scheme or artifice to defraud, or for
obtaining money or property by means of false or fraudulent
pretenses, representations, or promises.”71 If “any” is to be read
out of the statute, as is required by Amici’s argument, that must
be by congressional initiative, not by this Court.
Finally, we note that, contrary to Appellants’ assertions,
the disputed contracts themselves do indeed constitute
“property.” We have previously concluded that “to determine
whether a particular interest is property for purposes of the
fraud statutes, we look to whether the law traditionally has
recognized and enforced it as a property right.”72 It is well
settled that “the privilege of contracting is a property right,
without which there cannot be full and free use and enjoyment
of property.” 73 Our holding today falls squarely within the
historic understanding of traditional forms of “property.” We
merely acknowledge that tens of millions of dollars constitutes
property.
Appellants secured PennDOT’s money using false
pretenses and the value PennDOT received from the partial
performance of those painting and repair services is no defense
to criminal prosecution for fraud.74
B. Jury Instructions
71
18 U.S.C. § 1343 (emphasis added).
72
United States v. Henry, 29 F.3d 112, 115 (3d Cir. 1994).
73
Adinolfi v. Hazlett, 88 A. 869, 870 (Pa. 1913); see also U.S.
Tr. Co. of N.Y. v. New Jersey, 431 U.S. 1, 19 n.16 (1977)
(explaining that “[c]ontract rights are a form of property”).
74
Based on the foregoing, we need not address Appellants’
argument regarding the false statement convictions.
17
Appellants next argue that the District Court erred in its
jury instructions when it “permitted conviction on multiple
invalid theories of ‘property fraud,’ none of which required
proof of economic harm.”75 Where, as here, a party has
properly objected to a jury instruction, “we exercise plenary
review to determine whether the instruction misstated the
applicable law.”76 Appellants specifically take issue with the
following instructions:
Property for purposes of wire fraud is defined to
include money, property rights, or both.
Deprivation of a property right may include
depriving an agency of a fundamental basis of its
bargain. An agency has a property right to
purchase goods and services in the open market.
Furthermore, contract rights can be considered
property rights for purposes of wire fraud. An
agency may be deprived of its contract rights if a
defendant misuses money given to it under a
contract. If an agency intends to enable a DBE
to provide services, a defendant promises that a
DBE will provide those services, but no such
services are rendered under the contract, you
may find the loss of property. Deprivation of
property may also include loss of money based
on services paid for that an agency did not
receive.77
Appellants contend that the instructions were faulty
because they did not “require[] the ‘economic harm’ that
characterizes a property deprivation; [or the] proof that the
scheme contemplated obtaining property of which the victim
was deprived.”78 The crux of their argument rests on Kelly’s
reasoning “that interfering with a government’s allocation of
resources—‘its prerogatives over who should get a benefit and
who should not’—is not property fraud.”79 While this is true,
75
Kousisis Opening Br. at 13.
76
Franklin Prescriptions, Inc. v. New York Times Co., 424
F.3d 336, 338 (3d Cir. 2005).
77
A3473–74.
78
Kousisis Opening Br. at 62.
79
Id. at 65 (quoting Kelly, 140 S. Ct. at 1572).
18
as explained above, interfering with a victim’s property (i.e.,
obtaining a contract and thereby money) by means of false and
fraudulent representations constitutes property fraud.80
Appellants’ insinuation that the District Court’s
instructions equated credits towards DBE participation with
property is therefore incorrect. The Court instructed the jury
that “[d]eprivation of a property right may include depriving
an agency of a fundamental basis of its bargain.”81 It also
correctly stated the applicable law when it noted that contract
rights are traditionally understood to be property rights, and
there is no question that breach of a material term in a
contract—a fundamental basis of a bargain 82—by fraudulent
means results in economic harm to the victim and deprives that
victim of her property rights.83 Here, PennDOT was partially
deprived of the benefit of its bargain when it paid the full
contract price because of a false pretense. As we have
explained, PennDOT’s receipt of material components of the
80
Kousisis claims that the District Court erred by not
providing the jury with an instruction that the victim must
have suffered a net economic loss. He argues that
dispensing with this instruction “permitted conviction on
the very ‘unauthorized use’ theory Kelly rejected.” Kousisis
Opening Br. at 65. While economic harm is required for wire
fraud, economic loss is not. See supra, Section II(A)(ii). Also,
Kousisis waived this argument at trial by only objecting to the
property definition of wire fraud. In any event, the District
Court’s decision not to provide the jury with a loss instruction
was not plain error.
81
A3473.
82
See Nagle, 803 F.3d at 182 (“They did not receive the
entire benefit of their bargain, in that their interest in having a
DBE perform the work was not fulfilled, but they did receive
the benefit of having the building materials provided and
assembled.”).
83
See Gillard v. Martin, 13 A.3d 482, 487 (Pa. Super. Ct.
2010) (“When one party commits a material breach of
contract, the other party [may] . . . elect to keep the contract
in force, declare the default only a partial breach, and recover
those damages caused by that partial breach . . . .”) (quoting
13 Williston on Contracts § 39:32, 4th ed.).
19
contract does not negate the fact that the contract was based on
fraudulent misrepresentations that triggered payment of
millions of dollars that would not have been paid absent the
fraud.
Appellants’ challenge to the jury instruction is further
undermined by the fact that the District Court refused the
government’s proposed instruction that would have allowed
the jury to find “that DBE credits constitute property.” 84
Indeed, the instruction the District Court ultimately gave did
not turn on DBE “credits.” Rather, the Court instructed: if “a
defendant promises that a DBE will provide those services, but
no such services are rendered under the contract, you may find
the loss of property.”85 Assuming arguendo that we agree with
Kousisis’ contention that “services performed by a non-DBE
have no less pecuniary value than otherwise-identical services
performed by a DBE,”86 the misrepresentation here still
resulted in the loss of millions of dollars. That is most certainly
“property” as required by § 1343. Moreover, even if we also
agreed that the entire contract was not property loss due to the
satisfactory completion of the Philadelphia Projects, PennDOT
still suffered some property loss because some of the money
paid to Appellants was used to pay the kickback to Markias. 87
The jury was instructed that contract rights are property
rights. That is clearly correct. 88 “When one party commits a
material breach of contract, the other party” may “declare the
default only a partial breach and recover damages caused by
that partial breach.”89 The DBE provision was a material
84
A3237, 3473–74.
85
A3473–74.
86
Kousisis Opening Br. at 66.
87
In McNally, the money was going to be used to purchase
insurance regardless of the public official’s choices and the
agency did not have control over that. See supra, note 63.
Here, the breach of the DBE clause involved a fundamental
basis of the bargain, and PennDOT did have control during
the negotiations over whether it paid money for DBE
services.
88
See Adinolfi, 88 A. at 870 (noting that the common law of
Pennsylvania recognizes contract rights as property rights).
89
Gillard, 13 A.3d at 487.
20
component of these contracts.90 Accordingly, the jury
instruction accurately explained that breach of that provision
resulted in loss of property. And again, at the very least, the
property here was the loss of the 2.25% fee “kicked back” to
Markias.
C. Loss Calculation
Pursuant to Section 2B1.1(b) of the Sentencing Guidelines,
the District Court considered the extent to which Appellants’
base offense level should be adjusted to account for the
government’s losses. It determined that their “ill-gotten
profits”91 were the appropriate measure of loss. Appellants
claim that this was error. “When the calculation of the correct
Guidelines range turns on an interpretation of ‘what constitutes
loss’ under the Guidelines, we exercise plenary review.”92
As a threshold matter, we emphasize that the District
Court had a very difficult and unenviable task in arriving at a
loss determination because Appellants delivered the requested
work, and the quality of the workmanship and materials is
uncontested. Still, we conclude that the Court’s loss calculation
was erroneous. The approach used by the District Court is
inappropriate where, as here, the defrauded party contracted
for work to be done by both DBE and non-DBE entities. That
distinguishes this case from United States v. Nagle.93 Before
we discuss the correct method of calculating the loss, it will be
helpful to provide an overview of the applicable Sentencing
Guidelines provisions and our decisions in Nagle.
i. Loss Calculation Under the Sentencing
Guidelines
U.S.S.G. § 2B1.1 governs loss calculations for crimes
involving fraud and deceit. Section 2B1.1(a) provides that the
base offense level for crimes, “is either seven, if the offense
has a maximum term of imprisonment of twenty years or more,
90
See supra, Section I(B).
91
A3721.
92
Nagle, 803 F.3d at 179 (quoting United States v. Fumo, 655
F.3d 288, 309 (3d Cir. 2011)).
93
Id. at 170.
21
or six” if it is less. 94 Section 2B1.1(b)(1) allows for several
adjustments to the base offense level, based on the amount of
the victim’s loss. “As the loss increases, the offense level
increases: for example, if the loss is more than $70,000, the
court adds eight to the offense level; if the loss is more than
$100 million, the court adds twenty-six to the offense level.” 95
In United States v. Banks,96 we recently concluded that
in calculating the loss under the Sentencing Guidelines, our
focus is limited to the “actual loss” suffered by the victim.97
“Actual loss” is defined as “the reasonably foreseeable
pecuniary harm that resulted from the offense.”98 Additionally,
Note 3(F)(ii) provides an alternative framework for measuring
loss under the “government benefits rule”:
In a case involving government benefits (e.g.,
grants, loans, entitlement program payments),
loss shall be considered to be not less than the
value of the benefits obtained by unintended
recipients or diverted to unintended uses, as the
case may be. For example, if the defendant was
the intended recipient of food stamps having a
value of $100 but fraudulently received food
stamps having a value of $150, loss is $50. 99
Controlling precedent and the Sentencing Guidelines
make clear that “[e]ven where value flows in both directions,
94
Id. at 179.
95
Id.
96
55 F.4th 246 (3d Cir. 2022).
97
In Banks, we specifically considered the commentary in
Application Note 3(A) of Section 2B1.1, which provides that
loss is generally determined to be the greater of the actual
loss or the intended loss. We noted that the Guidelines
themselves make no reference to “intended” loss; rather, it is
only mentioned in the commentary. Id. at 257. We explained
that standard dictionary definitions of “loss” only pertain to
“actual loss.” Id. at 257–58. As a result, we concluded that
Note 3(A) “impermissibly expands the word ‘loss’ to include
both intended loss and actual loss.” Id. at 250.
98
§ 2B1.1 cmt. n.3(A)(i).
99
§ 2B1.1 cmt. n.3(F)(ii).
22
if it is not feasible to estimate with reasonable accuracy the
victim’s loss…, [then] a sentencing court may look to the
perpetrator’s gain as a surrogate for the victim’s loss.”100 In
such situations where it is not feasible to estimate the victim’s
loss, there must exist “some logical relationship between the
victim’s loss and the defendant’s gain so that the latter can
reasonably serve as a surrogate for the former.”101
Moreover, Note 3(E)(i) allows for credits against the
initial loss. It requires that the loss be reduced by “the fair
market value of the property returned and the services
rendered, by the defendant or other persons acting jointly with
the defendant, to the victim before the offense was
detected.”102
ii. United States v. Nagle
In Nagle, Schuylkill Products Inc. (“SPI”) and CDS
Engineers, Inc. (“CDS”) conspired with Marikina Engineers
and Construction Corp. (“Marikina”) to be awarded
government contracts. Neither SPI nor CDS was a DBE. 103
However, the owner of Marikina was of Filipino descent and
Marikina was a DBE-certified firm. 104 Pursuant to their
arrangement, Marikina bid for subcontracts on government
projects requiring DBE participation. 105 However, SPI and
CDS “would perform all of the work on those contracts.” 106 In
turn, SPI and CDS paid Marikina a fixed fee for its assistance
in getting the subcontracts for them.107 Absent the fraudulent
agreement with Marikina, SPI and CDS would not have been
qualified to perform the subcontracts at issue. However,
pursuant to their illicit agreement:
SPI identified subcontracts that SPI and CDS
100
United States v. Dickler, 64 F.3d 818, 825–26 (3d Cir.
1995); U.S.S.G. § 2B1.1 cmt. n.3(B).
101
Id. at 826.
102
§ 2B1.1 cmt. n.3(E)(i).
103
Nagle, 803 F.3d at 172.
104
Id.105
Id.106
Id.107
Id.23
could fulfill, prepared the bid paperwork, and
submitted the information to prime contractors in
Marikina's name. SPI used stationery and email
addresses bearing Marikina’s name to create this
correspondence. It also used Marikina’s log-in
information to access PennDOT’s electronic
contract management system. CDS employees
who performed construction work on site used
vehicles with magnetic placards of Marikina’s
logo covering SPI’s and CDS’s logos. SPI and
CDS employees used Marikina business cards
and separate cell phones to disguise whom they
worked for. They also used a stamp of [the
Marikina owner’s] signature to endorse checks
from the prime contractors for deposit into SPI's
bank accounts. Although Marikina's payroll
account paid CDS’s employees, CDS
reimbursed Marikina for the labor costs. 108
Eventually, a jury in the Middle District of
Pennsylvania found two owners of SPI and CDS guilty of,
among other things, 11 counts of wire fraud in violation of §
1343.109 At sentencing, the District Court concluded that
“under Note 3(F)(ii) the amount of loss was the face value of
the contracts Marikina received; and that the defendants were
not entitled to a credit against the loss for the work
performed.”110 The defendants appealed this loss calculation.
On appeal (“Nagle I”), we declined to explicitly decide
whether the government benefits rule under Note 3(F)(ii)
applies in DBE procurement fraud cases. Instead, we held that
in such cases, regardless of whether Note 3(A) or 3(F)(ii) is
used to determine the initial loss, the actual loss is calculated
by subtracting the fair market value of the services rendered
from the face value of the contracts (i.e., the credits against the
loss).111 In doing so, we stated that “[i]f possible and when
108
Id.
109
Id. at 173.
110
Id. at 174.
111
Id. at 180 (“We need not decide whether the DBE program
is a ‘government benefit’ and, therefore, whether Note 3(A)
or Note 3(F)(ii) applies; we conclude that under either
24
relevant, the District Court should keep in mind the goals of
the DBE program that have been frustrated by the fraud.”112
We then remanded the matter to the District Court for
resentencing consistent with that guidance.
On remand, the District Court was mindful of the crucial
goals of the DBE program. It found that SPI and CDS
erroneously “earned a profit and formed or strengthened
valuable industry connections” in place of a true DBE. 113
Therefore, the District Court concluded that “the amount of
profits diverted from legitimate DBEs” was the correct
measure of the loss.114 There, that was the entire amount of the
contract because there was no DBE involvement and SPI and
CDS performed all work under the contract.115 The defendants
again appealed, asserting that the final loss amount should have
been zero because ‘“the fair market value of the services
rendered is by definition the stated contract price,’ and that
such measure necessarily includes any profits accruing to [the
defendants], as the service provider.” 116
In the second appeal (“Nagle II”), we affirmed the
District Court’s decision, albeit in a non-precedential opinion.
We held that it was appropriate for the District Court to use the
defendants’ wrongly obtained profits as the measure of loss,
particularly because “other measures for loss in this case
[were] unduly complex to calculate.”117 In making this
application note, the amount of loss [the defendants] are
responsible for is the face value of the contracts Marikina
received minus the fair market value of the services they
provided under the contracts.”).
112
Id. at 183.
113
United States v. Nagle, No. 1:09-CR-384, 2015 WL
7710467, at *4 (M.D. Pa. Nov. 30, 2015), aff'd, United States
v. Nagle, 664 F. App'x 212 (3d Cir. 2016).
114
Id. at *5.
115
The District Court concluded that “the amount of loss for
each defendant in this case equals the amount of profits
diverted from legitimate DBEs as a result of the fraudulent
contracts at issue .…” Id.116
Nagle, 664 F. App'x at 215 (citation omitted).
117
Id. at 216.
25
determination, we partly relied on Section 2B1.1 Note 3(B).118
iii. The Instant Appeal
Here, the District Court similarly explained that the
actual loss to the government from breach of the DBE
provision in the Philadelphia Projects’ contracts was not
measurable at the time of sentencing. In accordance with Note
3(B), it also concluded that Alpha’s “ill-gotten profits”
represent an appropriate measure of loss. After applying the
applicable taxes to Alpha’s profits, the District Court imposed
a 20-point sentencing enhancement under Section 2B1.1(b)(1),
which corresponds to a loss between $9.5 million and $25
million.
At the outset, we again stress that the District Court had
an unenviable task in calculating the loss here and we
commend the Court on its effort to apply Nagle’s teachings to
this situation without minimizing the economic and communal
harm that resulted from the lack of DBE participation.
Although the Nagle defendants and the Defendants here
both committed DBE fraud, the nature of the fraud differs in a
material way. In Nagle, PennDOT and the Southeastern
Pennsylvania Transportation Authority (“SEPTA”) contracted
for a DBE to perform the entire [sub]contract that was actually
performed by SPI and CDS. PennDOT and SEPTA neither
intended nor anticipated that SPI or CDS would receive any
benefit or compensation pursuant to the contracts in Nagle.
Thus, the Nagle defendants usurped all the profit intended for
a DBE, as well as the business contacts and experience that
could have better positioned a DBE to be a successful bidder
on future contracts. Accordingly, on remand in Nagle, the
District Court correctly concluded that the government’s loss
consisted of all the profits purportedly due under the contracts
at issue.
However, in this case, PennDOT never intended to have
the DBE perform the entire contract. Rather, it understood that
118
Note 3(B) states: “The court shall use the gain that resulted
from the offense as an alternative measure of loss only if
there is a loss but it reasonably cannot be determined.”
26
a DBE would provide paint supplies. The rest of the work was
to be performed by Alpha.119 Specifically, the government
understood that Alpha would play a major role in rehabilitating
the Girard Point Bridge and the 30th Street Train Station and
that contractual undertaking was part of the bargain.
In attempting to determine the amount of loss at
sentencing, the District Court rightly reasoned that “[a]s a
result of Alpha’s deception, the DBE program provided profit
opportunities to entities not entitled to them.” 120 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,” nor did its
involvement frustrate the objectives of the contract to the
extent that the involvement of SPI and CDS frustrated the
objectives of the contracts in Nagle. Thus, it cannot fairly be
said that the government’s loss here equals Alpha’s profits.
Nagle I established that loss is calculated by taking the
full face value of the contract and deducting the fair market
value of the services rendered. 121 There, we determined that,
irrespective of whether Notes 3(A) and 3(F)(ii) apply, the
resulting initial loss is the same. However, we now expressly
hold that the government benefits rule under Note 3(F)(ii) does
not apply to DBE procurement fraud cases such as the one
here.122
119
We recognize that the Projects also required performance
from Liberty, Buckley, and Cornell. However, we focus our
discussion on Alpha (and Kousisis), as it is the entity directly
involved in this appeal.
120
A3720–21.
121
Nagle, 803 F.3d at 183.
122
There is a circuit split regarding whether the government
benefits rule extends to fraud in DBE (or similar special
procurement) programs. On one hand, the Fourth, Seventh,
and Eleventh Circuits have found that the rule does apply
here. See United States v. Brothers Constr. Co. of Ohio, 219
F.3d 300, 317–18 (4th Cir. 2000); United States v. Leahy, 464
F.3d 773, 789–90 (7th Cir. 2006); United States v. Maxwell,
579 F.3d 1282, 1306 (11th Cir. 2009). Notably, the Eleventh
Circuit concluded that the rule applies because the “primary
purpose” of such “affirmative action programs” is “to help
27
The government benefits rule contemplates situations
where the benefit of the bargain was, essentially, unilateral.
Note 3(F)(ii) uses food stamps as an example, explaining that
“if the defendant was the intended recipient of food stamps
having a value of $100 but fraudulently received food stamps
having a value of $150, [the] loss is $50.” 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.”123
With the application of Note 3(F)(ii) excluded, the
remaining loss calculation analysis in Nagle I becomes our
guide. There, we observed:
the amount of loss [the defendants] are
responsible for is the value of the contracts
Marikina received less the value of performance
on the contracts—the fair market value of the
raw materials SPI provided and the labor CDS
provided to transport and assemble those
materials.124
Here, Alpha represented that Markias would receive up
small minority-owned businesses develop and grow.”
Maxwell, 579 F.3d at 1306; accord United States v. Leahy,
464 F.3d 773, 789–90 (7th Cir. 2006). On the other hand, the
Fifth, Sixth, and Ninth Circuits reached the opposite
conclusion, finding that the contracts at issue in procurement
fraud cases are unlike the benefits named in Note 3(F)(ii)—
“grants, loans, [and] entitlement program payments.” See
United States v. Harris, 821 F.3d 589, 604 (5th Cir. 2016);
United States v. Kozerski, 969 F.3d 310, 313–14 (6th Cir.
2020); United States v. Martin, 796 F.3d 1101, 1109–10 (9th
Cir. 2015). We agree with the latter group of our sister courts.
123
Harris, 821 F.3d at 604.
124
Nagle, 803 F.3d at 180–81.
28
to $1,700,000 for the 30th Street Train Station Project and
$4,689,000 for the Girard Point Project, totaling roughly $6.4
million. This $6.4 million payment thus becomes the
appropriate “starting point” for a loss determination here. 125
The record before us does not indicate whether the $6.4 million
that Alpha agreed to pay Markias is inclusive of the 2.25%
kickback fees paid to the firm. On remand, the District Court
may conduct additional fact-finding to gauge whether the
kickbacks should be added to the $6.4 million for the purposes
of measuring the loss.
Furthermore, pursuant to Nagle I, the $6.4 million must
be offset by the fair market value of the services rendered.
Here, that is the fair market value of the non-DBE-provisioned
paint supplies.126 The actual cost of the paint supplies needed
to complete the projects pursuant to these contracts is also best
determined by the District Court in the first instance. We
therefore vacate Kousisis’ sentence and remand this matter to
the District Court to recalculate the loss consistent with this
opinion. Though likely imperfect, the amount reached after the
offset is a “reasonable estimate of the loss.” 127 This satisfies the
Sentencing Guidelines’ requirements.128
125
Indeed, Alpha expressly indicated that Markias would
receive $6.4 million. Therefore, this figure is the actual
“price” that PennDOT “gave up” for the DBE component of
the contract. See id. at 180 (explaining that “the defrauded
parties—the transportation agencies—gave up the price of the
contracts and received the performance on those contracts.”).
126
It is theoretically possible to measure the loss by the
difference between Alpha-Liberty’s bids and the next lowest
bid on the Philadelphia Projects. Presumably, the difference
between these figures may better reflect the cost of genuine
DBE program compliance (and thus the government’s
pecuniary loss). However, that approach invites speculation
because there is no way of knowing the extent (if any) that
other bids may have been inflated by sham DBE participation
or other factors.
127
§ 2B1.1 cmt. n.3(C).
128
To be sure, we foresee a potential scenario where
Appellants contend on remand that the fair market value of
the paint supplies services rendered is equal to the face value
of the DBE-designated portion of the contracts (such that the
29
We hasten to add, however, that the District Court need
not cast a “blind eye” on the full extent of the loss occasioned
by this fraud if the aforementioned metric is deemed
inadequate to capture the real harm. As the District Court noted
at sentencing, and as we stated in Nagle I: “[t]he DBE program
allows true DBEs to form lasting relationships with suppliers,
labor, and the broader industry; those relationships are things
received and retained as a result of the program.”129 This not
only benefits the individual DBE. It also benefits the
contracting governmental entity by positioning DBEs to
compete for future contracts, thereby enlarging and enriching
the universe of potential bidders. This communal benefit also
has positive implications for future contracts and the market
forces underlying the bidding process. The District Court
should therefore feel free to exercise its discretion to impose a
reasoned and appropriate upward variance if the loss
calculation understates the loss resulting from Appellants’
crimes. Indeed, as the Ninth Circuit Court of Appeals
highlighted in Martin, “district courts have the ability to base
an upward variance on a broader concept of harm than the
Guidelines contemplate.” 130 Certainly, “[n]othing in our ruling
today is meant to limit district courts' discretion to depart or
vary from the Guidelines in appropriate cases, but a sentence
must begin with a proper calculation of the Guidelines
sentencing range.”131
D. Forfeiture
Lastly, we consider Alpha’s argument that the District
Court erred in ordering forfeiture of the entire profit amount
on the contracts; more specifically, we consider whether that
order was constitutionally excessive. 132
final loss amount is zero). We doubt that this holds true,
particularly because the face value of the subcontracts likely
factored in Markias’ kickbacks, in addition to the actual cost
of the paint supplies and the true vendors’ profits.
129
Nagle, 803 F.3d at 181.
130
Martin, 796 F.3d at 1111–12.
131
Id. at 1112.
132
Alpha’s assertion that the forfeiture order violates the
Eighth Amendment is a question of law subject to plenary
30
The Court sentenced Alpha to five years of probation, a
$4,400 special assessment, and a $500,000 criminal fine. The
government also sought criminal forfeiture of Alpha’s wire
fraud proceeds under 28 U.S.C. § 2461(c) through the civil
forfeiture provision, 18 U.S.C. § 981, which does not require
any special circumstances as a prerequisite to forfeiture for
wire fraud crimes. 133 The District Court imposed forfeiture of
$10,906,553, representing one-half of the $21,813,106 gross
profits received by Appellants from the Philadelphia Projects.
As a preliminary matter, the Parties dispute the burden
of persuasion under the Court’s forfeiture order. We now
clarify that the government must prove its forfeiture allegations
by a preponderance of the evidence. As we explained in United
States v. Voigt,134 the reason the government is held to a higher
burden in RICO cases is because RICO’s forfeiture provisions
are unprecedented in their nature and breadth, “sweep[ing] far
more broadly than the elements of the substantive RICO
offense itself.”135 Therefore, “since the identity and extent of
property subject to forfeiture will not have been addressed in
the course of proving the substantive RICO charge, a
reasonable doubt burden of persuasion ensures greater
accuracy in determining the scope of property subject to
forfeiture.”136 That reasoning does not apply to prosecutions
for mail or wire fraud.
Similar to the money laundering charge in Voigt,
Alpha’s wire fraud conviction entitles the government only to
property which represents or is “traceable to” the fraudulent
activity.137 “Unlike the RICO context, we have no reason to
doubt that the amount of the transaction that forms the basis of
a substantive [wire fraud] offense . . . will have been proved
review. United States v. Various Computs. & Comput. Equip.,
82 F.3d 582, 589 (3d Cir. 1996).
133
§ 2461(c) integrates § 981 into criminal proceedings. See
United States v. Contorinis, 692 F.3d 136, 145 n.2 (2d Cir.
2012).
134
89 F.3d 1050 (3d Cir. 1996).
135
Id. at 1084.
136
Id.137
Id. at 1082.
31
beyond a reasonable doubt at trial.”138 Thus, a preponderance
of the evidence burden is appropriate in evaluating forfeiture
for wire fraud. The District Court applied the correct test.
Under § 981(a)(1)(C), when a person is convicted of
violating § 1343, the District Court is directed to order the
forfeiture of “[a]ny property, real or personal, which
constitutes or is derived from proceeds traceable to” the wire
fraud, as well as a conspiracy to commit the wire fraud under
§ 1349.139
To its credit, here, the District Court realized that its
forfeiture order may be disproportionate to the gravity of the
wire fraud offenses that forfeiture is designed to punish. The
Court stated:
I’m going to sign this forfeiture order, but I do
encourage the government to take heed of what I
have said here today, which is in essence that it
would not behoove society at large or the
individuals who work at Alpha to do anything
that would result in closure of the company. And
I know that there is flexibility in terms of
obtaining forfeiture funds, and I encourage the
government to exercise that flexibility. 140
The outer limits of forfeiture orders are circumscribed
by the Eighth Amendment’s prohibition of excessive fines.141
A civil penalty violates the Excessive Fines Clause if it is
“grossly disproportional to the gravity of the defendant’s
138
Id. at 1084.
139
In particular, § 981(a)(1)(C) directs the forfeiture of
property traceable to “specified unlawful activity” as defined
in 18 U.S.C. § 1956(c)(7). Under § 1956(c)(7)(A), “specified
unlawful activity” encompasses “any act or activity
constituting an offense listed in Section 1961(1) of this title.”
This includes wire fraud under § 1343.
140
A3848.
141
See United States v. Bajakajian, 524 U.S. 321, 327–28
(1998); United States v. Cheeseman, 600 F.3d 270, 282–83
(3d Cir. 2010) (applying Bajakajian to civil forfeiture).
32
offense.”142
In United States v. Bajakajian, a defendant pled guilty
to failing to report exported currency.143 The government
sought forfeiture of the entire currency amount that the
defendant failed to declare. 144 The Supreme Court held that,
under the circumstances there, ordering forfeiture of the entire
amount would violate the Excessive Fines Clause.145
“According to the Court, the ‘touchstone of the constitutional
inquiry . . . is the principle of proportionality: The amount of
the forfeiture must bear some relationship to the gravity of the
offense that it is designed to punish.’”146 The Bajakajian Court
considered four factors (the “Bajakajian factors”) to analyze
proportionality: (1) the essence of the crime and its relation to
other criminal activity; (2) whether the defendant fits into the
class of persons for whom the statute was principally designed;
(3) the maximum sentence and fine that could have been
imposed; and (4) the nature of the harm caused by the
defendant’s conduct. 147
Although the District Court here presciently
acknowledged the potential impact of its forfeiture order on
Alpha’s employees, it neither applied the Bajakajian factors
nor made factual findings regarding them.148 Although we
could theoretically evaluate some of these factors based on this
record (such as the maximum sentence and fine that could have
been imposed), we think it’s better for the factors to be applied
by “the district courts in the first instance.” 149 Accordingly, we
will also vacate the forfeiture order and remand to the District
Court for consideration of the Bajakajian factors.
142
Id. at 337.
143
Id. at 324–25.
144
Id. at 326, 344.
145
Id. at 324.
146
Cheeseman, 600 F.3d at 283 (quoting Bajakajian, 524
U.S. at 334).
147
See Bajakajian, 524 U.S. at 337–39.
148
See Cooper Indus., Inc. v. Leatherman Tool Grp., Inc., 532
U.S. 424 (2001) (considering the Eighth Amendment’s
prohibition against excessive fines in the context of a
damages award against a company).
149
Bajakajian, 524 U.S. at 336.
33
III. Conclusion
For the foregoing reasons, we will affirm Kousisis and
Alpha’s convictions under 18 U.S.C. §§ 1343 and 1349. We
also will not disturb the District Court’s jury instructions.
However, we will reverse the District Court’s loss calculation
and remand for resentencing. We will also vacate the District
Court’s forfeiture order and remand for additional
consideration consistent with this opinion.
34