3rd Circuit Rules That Fraudsters Can Offset Their Liabilities
The Third Circuit Court of Appeals all but sided with a pair of Pennsylvania construction businessmen by vacating their sentences and overruling the sentencing court. To their credit, however, the panel was simply applying court rules.
The case involved defrauding the government by taking advantage of government benefits outlined in the Disadvantaged Business Enterprise Act. The Court's ruling clarifies how damages are to be properly calculated when funds are illicitly secured and work is actually completed.
The DBE Program
The Disadvantaged Business Enterprise Program is a child of the Department of Transportation. It requires that states who receive federal funding for construction projects provide set goals of set aside numbers for certified DBEs. In order to receive DBE certification, a small business must be majority owned and controlled by minorities or women.
Enter the Defendants
Joseph Nagle and Ernst Fink of Schuylkill Products Inc. (SPI) were not minorities or women. However they entered into a fraud scheme, certified DBE Marikina. The plan was that, for a fixed fee, Marikina would bid on construction projects, SPI would swoop in, complete the work, and SPI would retain all profits. The two defendants went through long lengths to conceal their plan which included magnetic logos for SPI's vehicles. The fraud scheme lasted for a year during which time SPI completed numerous projects. The issue at bar was the fraudulent use of DBE status.
Lower Court Ruling
A dispute arose about the damages SPI ought to be forced to pay. The government argued, in essence, that the loss amount should be the entire face value of the contracts because they ought to be characterized as "government benefits" under Application note 3(F)(ii) of U.S.S.C. 2B1.1(b). Since SPI were clearly "unintended recipients" of the contracts, the whole face value was the proper damage amount. SPI balked at this characterization and pointed out that they had completed the work in full and thus damages should be zero dollars.
3rd Circuit Appeal
The 3rd Circuit was persuaded by the government's reasoning and noted that the intent of the DBE was aimed at benefitting certified DBE's, not schemers. Nonetheless, it ruled in favor of SPI on the grounds that the government could not have its cake and eat it too: Application note 3(F)(i) states that a defendant is allowed to offset the fair market value of the loss with the "services rendered" by it. Thus, SPI was entitled to reduce its damages even though the contracts fell under the banner of "government benefits."
The case in Nagle is very limited in that it is directly on point only for DBE controversies; but it could have implications for other fraud cases as well. It also underscores the importance for attorneys to note that statutes are to be read in their entirety and that one cannot so easily cherry pick the choicest parts of the law to fit a given litigation strategy.
- Former President and Owner of Schuylkill Products Sentenced in Largest DBE Fraud in Nation's History (FBI)
- Online Get Rich Quick Scam Leads to $26 Million Judgment (FindLaw's Ninth Circuit)
- Can I Sue for Mortgage Fraud? (FindLaw's Law and Daily Life)
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