UNITED STATES OF AMERICA v. STAMATIOS KOUSISIS, a/k/a Tom Kousisis; UNITED STATES OF AMERICA v. ALPHA PAINTING & CONSTRUCTION CO., INC.
Nos. 19-3679 & 19-3774
UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
April 21, 2023
PRECEDENTIAL. Argued August 18, 2021.
Before: McKEE,* GREENAWAY, Jr., and RESTREPO, 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
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 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
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
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 “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 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
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
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.
A. The Property Element of Wire Fraud
The federal wire fraud statute,
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
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
In 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
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
Soon after McNally was decided, Congress responded by enacting
It seemed apparent that, in enacting
The Court reinforced this point in Cleveland v. United States.41 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
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
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 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
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 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
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
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’
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
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
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
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,
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
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
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
component of these contracts.90 Accordingly, the jury instruction accurately explained that breach
C. Loss Calculation
Pursuant to
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
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, 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 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
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
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 determination, we partly relied on
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
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 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
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 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
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
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
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 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
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 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.
III. Conclusion
For the foregoing reasons, we will affirm Kousisis and Alpha‘s convictions under