Fraud Without Financial Injury

If a liar lies to induce someone into a deal and the other person suffers no monetary loss, is it still a fraud? Yes, under the federal “wire fraud” statute, the U.S. Supreme Court decided today in Kousisis v. United States, No. 23-909. The high court was unanimous as to that basic rule, but there were some disagreements on scope and the underlying issue in the fraudulent inducement.

The Pennsylvania Dept. of Transportation needed some restoration work done, and the federal government was picking up part of the tab. Federal regulations required a “disadvantaged-business program.” Kousisis represented that he would obtain painting supplies from a “disadvantaged” business, but that business was just a pass-through that got paid a fee for processing paperwork for supplies actually purchased elsewhere.

So PennDOT got the services it paid for, but it didn’t get the boost to supposedly disadvantaged business that was expressly made a material term of the contract. Is that fraud? Of course. Regardless of what one thinks of such clauses in government contracts, it was part of the deal. In order to get money, Kousisis made a fraudulent inducement on a term that was material to the other party, and that is all the law requires.

So where is the disagreement?

Justice Thomas is skeptical that the disadvantaged-business part of the contract is actually material. The majority opinion says little about that because the defendants did not contest it. Justice Thomas has never liked programs such as this, and he further believes that “a demanding approach to materiality is all that prevents an ‘extraordinarily expansive view of liability’ from rendering the federal wire-fraud statute nearly limitless in scope.”

Justice Gorsuch is appalled by footnote 5 of the majority opinion, which says, among other things, “To reject that pecuniary loss is an element of fraud is to accept—as common-law courts long have—that a fraud is complete when the defendant has induced the deprivation of money or property under materially false pretenses.”

Justice Gorsuch thinks this goes too far. He presents a hypothetical of a babysitter who lied in a phone call about a prior burglary conviction but still did a good job (and presumably didn’t steal anything).

While right about much else, the Court’s decision today contains a footnote that appears to spurn fraud’s historic injury rule. Under the federal wire-fraud statute, the Court suggests, it does not matter if the putative victim receives all he was promised. So long as he parts with any money or property because of the defendant’s misrepresentation, the Court seems to say, that is injury enough to sustain a federal wire-fraud conviction. Ante, at 11, n. 5. It is a startling suggestion, one with no mooring in the common law of fraud or the wire-fraud statute, and one that risks turning victimless lies like our babysitter’s into federal felonies. Respectfully, that cannot be the law.

Overfederalization is indeed a problem, but the solution lies elsewhere, in my opinion. I don’t agree with Justice Gorsuch’s babysitter hypothetical. The hiring parents did not want the risk of having a convicted felon in their home while they were away. They incurred that risk due to the babysitter’s lie, even if she didn’t steal anything or cause any other harm. That is fraud. It should not be a federal crime, of course, but that is because the federal statute is too broad in federalizing every fraud that involves telephones. Congress needs to limit the statute to cases that actually impact federal interests.

Justice Sotomayor agrees that the loss under the federal statute need not be monetary, but she also thinks that the majority goes too far and comes up with a babysitter hypothetical of her own.

Consider, for instance, a babysitter who lands a job by fibbing about how she will use the money (for college savings, rather than a spring break trip), but otherwise fully and satisfactorily takes care of the child … or a prospective housing developer who beats out competing bidders by lying about wanting to raise a family in the home, but pays the full amount of his bid.

Actually, I don’t see any difference between these hypotheticals and the case before the court. In all three cases, the other parties got what they bargained for but were deceived into thinking the transaction would support what they considered good causes, when it actually did not.

On the Government’s view, each of those cases may well give rise to federal fraud liability, punishable by up to 20 years in prison, so long as the jury deems the lie “material.”

True, but again the overfederalization problem is the excessive reach of the statute into frauds that should be purely state law matters, not the injury requirement.

In my view, the decision is correct on existing law, but the law needs work that only Congress can do.