U.S. v. Davis Casts Doubt on the Future of (Some) DBE Fraud Cases

Disadvantaged business enterprise (DBE) fraud in the construction industry is a topic frequently covered on this blog. My posts on DBE fraud are some of my most read posts and the ones that generate the most questions from readers and inquiries. Many of the posts cover the increased pace of criminal prosecutions involving DBE fraud. One case I blogged about involved the indictment of the steel erection contractor on the new World Trade Center project, DCM Erectors, Inc.

Earlier this month, a federal jury found the defendant in that case and DCM’s owner, Larry Davis, guilty of one count of wire fraud and one count of conspiracy to commit wire fraud for allegedly operating a DBE pass-through scheme for steel erection services on the WTC project. Then, in a remarkable (to say the least) turn of events, the Judge granted the defense’s motion for acquittal and overturned the jury’s guilty verdict against Mr. Davis.

The Judge’s decision to acquit Mr. Davis hinged on the nuisances required to prove a wire fraud and conspiracy to commit wire fraud. The case also cast doubt on the ability to prosecute individuals for DBE fraud not involving federally funded projects, like DOT, FTA, FAA, and VA projects.

I. The Background

The scheme Davis was alleged to have engaged in was a fairly straightforward DBE pass through scheme. As I have talked about before, a pass through scheme is where a certified DBE does not perform any commercially useful function and the work is actually performed by a non-DBE firm. That is what prosecutors alleged Davis did.

The WTC project was subject to the New York and New Jersey Port Authority’s DBE program. Like most DBE programs, the Port Authority’s program had a goal of seeing that DBE firms performed a certain percentage of the overall dollar value of the prime contract.

DCM executed two separate steel erection subcontracts for two different buildings at the project. DCM was not a DBE firm. However, on one contract it certified that it had subcontracted with a DBE firm to perform its payroll and survey services. On the other contract, it entered into a joint venture with a DBE firm.

According to the indictment, no employees of the DBE firm performed work on the JV project. On the other project, the indictment alleged that the DBE firm performed no survey work and the work and DCM employees actually performed the work.

The indictment alleged DCM and Davis defrauded the Port Authority by “fraudulently claimed MBE credit for One WTC and the WTC Hub in excess of $70 million based on the value of work Solera/DCM purportedly performed” on the World Trade Center project; and b) “fraudulently claimed WBE credit for $6.3 million of surveying and payroll management work GLS purportedly was performing as a subcontractor to DCM on One WTC and the WTC Hub.”

II. The Wrinkle

There are some critical wrinkles in case that ultimately were important in the Judge acquitting Davis. First, unlike the DOT’s program, the Port Authority’s DBE program was not the law, i.e. a legislative mandate. Rather, the Port Authority’s program was its own self-created independent program. Second, unlike many DOT contracts, compliance with the DBE program was not expressly made a material term of DCM’s contract. The consequences of a contractor’s failure to comply with the program were apparently limited to potentially not being invited to bid on future projects or having its bid rejected as non-responsive.

III. The Decision

The Court began its analysis by laying out the elements of a wire fraud claim: “(1) a scheme to defraud, (2) money or property as the object of the scheme, and (3) use of the mails or wires to further the scheme.” The Court focused on what Courts have determined amounts to a “scheme to defraud” that satisfies the first element and its nuisances. The Court concluded that “where the purported victim received the full economic benefit of its bargain, an essential element of the bargain is not implicated, and thus the wire fraud statute does not apply.” Therefore, the Court’s decision hinged on is whether DCM’s compliance with the Port Authority’s DBE requirements “was an essential element of the contracts.”

The Court then stated that wire fraud goes to an essential element of the contract when (a) the fraud causes economic harm, or (b) where defendant fails to comply with an underlying law. The Court cited several cases where the defendant’s conduct violated a law independent of the mail and wire fraud statues and where compliance with that law was incorporated into the contract. The Court also cited several cases where the counter party “did not get what they paid for.”

The Court then noted that in contrast convictions for wire fraud have typically been reversed where “purported victim[s] received the full economic benefit of [their] bargain,”

Against this frame work, the Court analyzed the DBE fraud in question. First, the Court looked to whether compliance with the Port Authority’s DBE program was an essentially element of the contract. The Court concluded that it was undisputed that DCM had in fact performed all of its work under the contracts in a satisfactory manner. Therefore, the the Port Authority got exactly what it paid for.

Next, the Court determined that compliance with the Port Authorities DBE program was not an essential element of the contracts because the Port Authority’s program “is not the law.” The Court also noted that the parties stipulated that failing to comply with the Port Authority’s program was not a violation of the law by itself. On this point, the Court noted its analysis might be different if the DBE program was the law or DCM’s violation of the program subjected the Port Authority to liability.

On this basis, the Court concluded the government’s evidence was insufficient to prove a wire fraud or conspiracy to commit wire fraud.

IV. The Impact

The decision in U.S. v. Davis is interesting in two regards. First, it provides one of the most thorough analysis of wire fraud as it related to DBE fraud that I have seen. Second, it is a bit of an outliner. Indeed, it is in opposite to Circuit Court opinions that have concluded that non-compliance with a DBE program, by itself, can satisfy the essential element prong of a wire fraud count. However, those cases provide a much less detailed discussion than Davis. And, those cases involved DBE programs that fell under the DOT’s DBE program, which, unlike the Port Authority’s program, is the law or where the contracts made compliance a material term of the contract. Then again, those cases conclude “you used deceit to obtain the contract and payment and therefore the evidence is sufficient for a conviction.” But, as Davis makes clear the analysis is more nuisanced.

While the Davis decision is significant, it still is only a District Court opinion. So, it has no precedential value. Furthermore, it would appear to be limited to cases alleging DBE fraud involving a independent DBE program administered by a regional transportation authority, like the Port Authority, a county government, or local municipal government. Those programs are not typically the result of some legislative action requiring them.

Also, even where program is not the result of a legislative mandate the contract language itself is important because the contract may still made compliance with a DBE program an essential element of the contract. Many contracts do make compliance a material term. Also, most construction contracts contain some general duty clause that states the contractor will perform its work according to all applicable codes, laws, and regulations. It would be interesting to see if the Davis Court would reach the same decision if the DBE fraud were pursuant to a contract which made compliance mandatory (I think it would) or if the prosecution raised a the contract’s general duty clause, which I am sure existed.

It is nonetheless important for attorneys representing defendants in DBE fraud cases to (a) understand the legislative scheme (or lack thereof) giving rise to the program; and (b) to understand whether the contract or subcontract makes compliance with the program a material term.

It is also important, perhaps, more important, for appellate lawyers arguing that a conviction under for wire fraud is not supported by sufficient evidence where the defendant provided the essential services that were bargained for, which in mostly what happens in DBE fraud cases.

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