United States Supreme Court Primed To Stop the Wave Of COVID-19 Fraud Cases in Washington State Federal Courts and Elsewhere

As of early October 2024, the United States Attorneys’ Offices in Washington State’s two federal districts, based in Seattle and Spokane, have issued over 80 press releases relating to fraud in connection with federal coronavirus programmes. Although the pipeline for these cases will dry up with the passage of time, there is no end in sight at present. In March 2022, the Spokane office announced the creation of an interagency strike force to investigate and prosecute COVID-19 fraud cases. The work of that strike force – as well as of prosecutors and agents on the western side of the state – continues, and the statute of limitations for loans made in 2022 will not expire until 2027. The focus on COVID-19 programme fraud has been and will likely continue to be intense for at least a few more years.

Some COVID-19 fraud cases involve defendants who applied for loan funds using fictitious businesses or false identities, or with other methodologies evidencing an intent to take the money and never repat it. But not all. Other cases involve defendants who ran afoul of the various programme requirements specifying how COVID-19 loan funds should be used. For example, the Paycheck Protection Program (PPP) required borrowers to use funds only for payroll costs, interest on mortgage obligations and utilities. The programme carried additional restrictions within those requirements. The federal Economic Disaster Injury Loan programme required borrowers to certify that they would use funds only as “working capital” to make previously planned, regular payments for operating expenses, including payroll, rent/mortgage, utilities and other ordinary business expenses, and to pay business debts. Commonly, defendants accused of falsely certifying that they would stick to these uses of PPP loan funds are charged under the federal wire fraud statute, 18 U.S.C. § 1343.

The government’s prosecution of defendants who used COVID-19 programme loan funds for purposes not authorised by the agency, but otherwise intended to pay and even did pay back the loans, is a highly questionable use of the wire fraud statute in view of a long line of cases from the United States Supreme Court. This line has significantly narrowed, and likely will continue to narrow, the scope of section 1343 and similar fraud statutes in Title 18, Chapter 63 (including the federal mail fraud statute, 18 U.S.C. § 1341). The common thread in the Supreme Court’s wire fraud jurisprudence over the past several decades is that a scheme to defraud must be designed and intended to deprive a victim of money or property, as opposed to an intangible item such as a government agency’s policy interests. Thus, a defendant who deprives the government only of a programmatic interest in how business loan funds are used, but otherwise evidences an intent to comply with the obligation to pay back a loan with interest, would not seem to fall with the scope of the wire fraud statute as the Supreme Court has been construing it. Prominent Supreme Court cases in this area include McNally v United States, 483 U.S. 350 (1987); Cleveland v United States, 531 U.S. 12 (2000); Kelly v United States, 590 U.S. 391 (2020); and Ciminelli v United States, 598 U.S. 306, 316 (2023).Kelly is notable as the case involving defendants who allegedly committed fraud by removing traffic lanes on the George Washington Bridge connecting New Jersey and New York City and falsely claiming the closures were for a traffic study when they were actually for purposes of political retribution. The Court held that the principal object of the scheme was not to deprive any victim of money or property, even if it had some financial impact, and reversed the defendants’ convictions as result.

The Supreme Court confirmed decades ago that an agency’s programmatic or regulatory interests in controlling the use of funds is not a pecuniary property interest within the scope of wire fraud. Starting with McNally v United States, 483 U.S. 350 (1987), where the Court limited the mail fraud statute to the protection of property rights rather than intangible interests in conducting affairs honestly, the Supreme Court has rejected one creative prosecution theory after another. Just last year, the Court held in Ciminelli v United States, 598 U.S. 306, 316 (2023) that the so-called right-to-control theory cannot form the basis for a conviction under section 1343. In Ciminelli, the government charged defendants with wire fraud based on an alleged scheme to deprive a governmental contracting authority of potentially valuable economic information – namely, that the defendant contractor had an inside contact helping to give the contractor favourable treatment as a bidder. The contractor was awarded the contract and completed the work. In these circumstances, the Supreme Court held that “the wire fraud statute reaches only traditional property interests, and the right to valuable economic information needed to make discretionary economic decisions is not a traditional property interest... and cannot form the basis for a conviction under the federal fraud statutes”.

Building on this momentum, on 17 June 2024, the Supreme Court granted certiorari in Kousisis v United States, No 23-309. The Court will hear arguments in this case during the 2024–25 term. Stamatios Kousisis and his company, Alpha Painting & Construction (“Alpha”), sought a government bridge painting contract through the Department of Transportation’s Disadvantaged Business Enterprise programme, designed to help small businesses owned by members of historically disadvantaged groups compete for federally funded contracts. Alpha was awarded the contract and performed the bridge painting work as required, but allegedly engaged in fraud to receive the contract by engaging in a scheme to appear that it had the requisite percentage of minority-owned subcontractors. Whether such “fraud in the inducement” to obtain a contract constitutes wire fraud is the subject of a circuit split, with the Ninth Circuit aligned with four other circuits in holding that federal wire fraud does not cover fraud in the inducement. Six other circuits, including the Third Circuit in the Kousisis case itself, disagree. The Ninth Circuit case is United States v Bruchhausen, 977 F.2d 464, 467 (9th Cir. 1992). In Bruchhausen, the court vacated a wire fraud conviction on the grounds that manufacturers’ interests in not having their technology products shipped to Soviet-bloc countries, which would violate the Arms Export Control and Export Administration Acts, were not property interests within the meaning of the wire fraud statute where the manufacturers were fully paid for their products.

The questions presented in Kousisis, as stated in the petition for certiorari, are:

• whether 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;
• whether a sovereign’s statutory, regulatory, or policy interest is a property interest when compliance is a material term of payment for goods or services; and
• whether all contract rights are “property”.

These questions are directly applicable to COVID-19 loan fraud cases. There is no material difference between a contract with the government that requires the contracting party to perform work and a contract that requires a borrower to repay a loan with interest. While the defendant in Kousisis agreed to perform painting work in exchange for government funds, borrowers who participate in COVID-19 loan programmes agree to repay principal and interest in exchange for government funds. Accordingly, a decision by the Supreme Court that fraud in the inducement of a contract is not wire fraud, absent evidence that the defendant intended to deprive the government of money, should cast serious doubt on the viability of COVID-19 loan fraud prosecutions in cases where the borrower intended to repay the loans and also intended to use funds in violation of agency programmatic requirements. If the Supreme Court maintains its consistent approach to trimming the scope of the wire fraud statutes to cover only fraudulently depriving victims of traditional property interests, it should decide Kousisis in the defendants’ favour.

For its part, the government argued in a 2 October 2024 opposition brief in Kousisis that:

“Petitioners cannot avoid wire fraud liability simply by asserting that they provided something equal in pecuniary value (by some measure) to what they took. The statute’s text does not require proof of net pecuniary loss; this Court has repeatedly refused to add such a requirement; and common-law criminal and civil fraud provided remedies irrespective of whether the victim suffered net pecuniary loss. This Court should reject petitioners’ effort to superimpose a new element that threatens to carve out numerous paradigmatic frauds – such as obtaining funds by lying about veteran status, essential product features or the destination of charitable donations”.

To find a defendant guilty of wire fraud under 18 U.S.C. § 1343, the government must prove that:

• the defendant knowingly devised a scheme or plan to defraud for the purpose of obtaining money or property by means of false or fraudulent pretences, representation or promises;
• the statements made as part of the scheme were material;
• the defendant acted with the intend to defraud; and
• the defendant used interstate wire communication to carry out an essential part of the scheme.

Ninth Cir. Model Crim. Jury Instr. 15.35 (2023); see also United States v Jinian, 725 F.3d 954, 960 (9th Cir. 2013).

An agency’s regulatory authority is not a property interest encompassed in the wire fraud state.Ciminelli, 598 U.S. 306 (2023); Cleveland v United States, 531 U.S. 12 (2000); Kelly v United States, 590 U.S. 391 (2020). For example, in United States v Alladawi, 707 F. Supp. 3d 920, 925 (C.D. Cal. 2023), the defendant, a grocery store owner, admitted to intentionally deceiving the Department of Agriculture and its California counterpart into allowing it to participate as a vendor in the Special Supplemental Nutrition Program for Women, Infants, and Children (the “WIC Program”), despite having been previously disqualified from the programme, submitting claims for nearly USD10 million. The defendant’s scheme was clearly designed for his financial benefit, but there was no evidence of actual or contemplated financial harm or injury to WIC Program funds, because there was no evidence that the defendant failed to deliver WIC-approved food items to authorised recipients. The defendant argued that, at the most, he had deprived the government agencies of their interests in regulating the programme. The Alladawi court acquitted the defendant because the government failed to prove that the defendant intended to cheat it out of money or property, observing “[n]ot every tort or breach of contract claim can (or should) be prosecuted as a federal crime”.

Prosecution of defendants who obtained COVID-19 loans with the intent to repay those loans, but with false representations about how they intended to use the loan funds, is highly questionable under this line of cases. And these prosecutions may have to stop entirely if the Supreme Court continues the trend by reversing the Third Circuit in Kousisis. Defendants in these circumstances cannot be said to have deprived the government of money or property, but rather only of the government’s regulatory or programmatic interests in how the funds are used. It may well be that the government would have civil remedies in these cases, or perhaps even other criminal remedies in some circumstances. But not every case where there is some deception equates to a scheme to deprive the government of money or property to warrant a federal prosecution under the wire fraud statute and similar provisions. The Supreme Court is likely to confirm this once again when it rules in the Kousisis case.