MVA White Collar Defense, Investigations, and Regulatory Advice Blog

Moore & Van Allen (MVA) Litigation Member Tanisha Palvia and Litigation Associate Darby Festa co-authored the article, “Diversity, Equity, Indictment? Contractor Risks After Kousisis,” published by Law360. 

By eliminating the need to prove either actual harm or intent to cause actual harm, the U.S. Supreme Court's May decision in Kousisis v. U.S. opens the door to increased criminal wire fraud prosecutions of individuals and organizations that make material misrepresentations when entering into transactions.[1] 

This opening arguably extends to potential criminal liability for government contractors that falsely certify that they do not run illegal diversity, equity and inclusion programs — a certification required in government contracts after President Donald Trump's January Executive Order No. 14173 on illegal discrimination.[2]

In Kousisis, the Supreme Court upheld the wire fraud conviction of government contractor Stamatios Kousisis and his company, Alpha Painting and Construction Co. Inc., for falsely certifying that it would subcontract a percentage of its work to a disadvantaged business enterprise in a restorations contract for two Philadelphia landmarks. 

As the decision notes, a disadvantaged business enterprise is a "'small business' that is majority owned and controlled by 'one or more individuals who are both socially and economically disadvantaged.'" Although the contractor completed the landmark restorations, the disadvantaged business enterprise operated "as a mere 'pass-through' entity" that did not actually do any work on the project. 

Typically, false certifications to the government about compliance with certain requirements when submitting a claim for payment are combated through civil enforcement of the False Claims Act. The FCA prohibits the submission of false claims for government funds and may result in treble damages. 

In May, the U.S. Department of Justice announced that it had formed the Civil Rights Fraud Initiative, which would use the FCA to pursue individuals and organizations that receive federal funds by falsely certifying they do not maintain DEI programs that violate antidiscrimination laws.[3] 

In so doing, the DOJ also signaled potential criminal liability for false certifications when it noted that the Civil Rights Fraud Initiative "will ... engage with the Criminal Division." 

While criminal liability for false certifications is possible, it has been generally reserved for the most egregious cases, likely because it requires proof of specific intent to defraud the government. 

Although the FCA is primarily thought of as a civil statute, criminal prosecutions of false government certifications are possible. Specifically, criminal prosecution can be brought pursuant to Title 18 of the U.S. Code, Section 287, which is part of the FCA;[4] as well as Section 1001, which targets false claims made to the government and can result in up to five years in prison;[5] and Section 1343, a catchall fraud statute that prohibits schemes to defraud that involve interstate commerce and can result in up to 20 years in prison.[6]

After Kousisis, does economic loss matter in DEI certification prosecutions given the fraudulent inducement theory? 

Prior to Kousisis, five circuit courts of appeal required proof of economic harm to the government for a successful wire fraud prosecution, making wire fraud an unlikely choice to criminally prosecute false DEI certifications that resulted in no economic harm to the government. 

By contrast, in Kousisis, the Supreme Court utilized a fraudulent inducement theory of wire fraud, determining that if a defendant makes a material misrepresentation that induces a party to enter into a transaction, it does not matter whether the defendant did not intend to cause that party any economic harm. Nor does it matter whether the defendant actually caused the party economic harm. Having fraudulently induced the party to enter the transaction, the defendant would still be liable for criminal wire fraud. 

In the DEI certification context, this means that even if a party fulfills a contract according to the government's specifications and causes no economic harm, that party could be liable for criminal wire fraud if it materially misrepresented its DEI program compliance to the government to land the contract in the first place. 

While such prosecutions are now possible, whether they will be undertaken or successful is unclear. First, the economic loss amount continues to influence the severity of a criminal sentence under federal law. If the actual and intended economic loss is $0, thereby minimizing the criminal sentence, would it be worth it to the government to pursue such a charge?

It depends. If the associated conduct or the criminal history of the defendant is particularly offensive, the government may nevertheless pursue the case and request a court to vary upward from the sentencing guidelines to impose a harsher sentence, such as jail time, where none is recommended. 

The question of materiality as it relates to DEI certifications still looms large after opposing concurrences from two justices. 

Still, to successfully prosecute a wire fraud case, the government must also prove that the misrepresentation was material. Notably, in Kousisis, the majority opinion declined to define "materiality" in the context of federal wire fraud because the defendants did not contest that element. 

However, in their concurring opinions, Justices Sonia Sotomayor and Clarence Thomas grappled with the question of whether the disadvantaged business enterprise certification in the Kousisis contract was material to the contract, which concerned restoration of two Philadelphia landmarks. Each justice reached a different conclusion. 

Justice Thomas found the certification to be immaterial under the rigorous standard applied in civil FCA cases, which requires "a misrepresentation [to go] to the very 'essence of the bargain.'" He concluded that even though the contract in Kousisis contained language suggesting that the certification was material, at bottom, the certification had nothing to do with the subject of the contract and had no impact on the final work product. 

Justice Sotomayor disagreed. She opined that the certification was material under both the essence-of-the-bargain standard and the less-demanding common law definition of materiality, which asks whether "a reasonable person would attach importance to [the certification] in deciding how to proceed, or if the defendant knew (or should have known) that the recipient would likely deem it important." 

Justice Sotomayor reasoned that it was material because the materiality language in the contract was deliberately included, the certification had been a significant part of the bidding process, and the contract required continued documentation regarding compliance with the certification throughout the project. 

The justices' vastly different approaches and opinions in Kousisis suggest that the issue of materiality will present challenges for prosecutors and defense counsel alike. 

On the one hand, it seems clear that a contractor's misrepresentation that it does not maintain a DEI program that violates antidiscrimination laws is likely immaterial to a government contract if the DEI misrepresentation has nothing to do with the subject of the contract. 

But, like the contracts at issue in Kousisis, government contracts are required by executive order to include a term requiring parties "to agree that its compliance in all respects with all applicable Federal anti-discrimination laws is material to the government's payment decisions."[7] Will this materiality language be facially dispositive? 

Probably not. Because the executive order requires insertion of the materiality term into every government contract, the certification may be viewed as boilerplate, as opposed to a deliberately included provision based on a particular contract. 

If, however, the government can present compelling evidence in addition to the contractual materiality term, this hurdle can be cleared. Based on Kousisis, relevant factors involved in this determination may include whether the DEI certification was the only one in the contract defined to be material, and if contract termination was required if the certification was false.

But what if the DEI misrepresentation has no bearing on the ability to complete the project, the contract does not require the government to withhold or deduct payment if the DEI certification is not complied with, or the government fails to act consistently with the required certification? Then there's a good argument to be made that the DEI certification is not material to a government contract.

Conclusion

For now, it remains to be seen if the DOJ will bring wire fraud charges alleging material misrepresentations to the government regarding DEI programming, even when the contract was fulfilled and the government suffered no economic harm. 

However, organizations should be aware that whether or not the DOJ brings criminal wire fraud charges in this context, the DOJ may be more likely to initiate criminal investigations related to such alleged misrepresentations. It may use its expansive grand jury power to issue broad criminal subpoenas to obtain information from government contractors it believes may be running DEI programs that violate antidiscrimination laws, resulting in potential criminal liability. 

And information obtained through federal search warrants can be shared with the Civil Fraud Section and the Civil Rights Division, potentially resulting in civil FCA liability. 

To protect against liability related to alleged DEI programming misrepresentations, organizations should carefully review any government contracts for DEI-related certifications and audit any DEI programs for legality — a complicated, comprehensive task requiring thorough analysis and readiness to remediate if necessary. 

If analyses uncover potentially discriminatory DEI programming that the contractor did not believe was illegal at the time the contract was entered into, civil liability under the FCA may nevertheless attach. While under criminal fraud, one must have known the programming was illegal, deliberate ignorance or reckless disregard of the truth is enough for FCA liability — and treble damages — to attach. 

[1] Kousisis v. United States, 145 S. Ct. 1382 (2025). 

[2] Ending Illegal Discrimination And Restoring Merit-Based Opportunity – The White House.

[3] Deputy Attorney General Blanche Memo: Civil Rights Fraud Initiative. 

[4] 18 USC § 287, False, Fictitious, and Fraudulent Claims.

[5] 18 USC § 1001, False Statements. 

[6] 18 USC §1343, Wire Fraud. 

[7] Ending Illegal Discrimination And Restoring Merit-Based Opportunity – The White House.