Appeals from the United States District Court for the Eastern District or Virginia, at Norfolk.
Richard L. Williams, Senior District Judge. (CR-95-26)
Before MURNAGHAN, NIEMEYER, and MOTZ, Circuit Judges.
Affirmed in part, reversed in part, and remanded by published opinion.
Judge Niemeyer wrote the opinion, in which Judge Murnaghan and Judge Motz joined.
This case requires us to interpret for the first time the $1 million jurisdictional amount requirement of 18 U.S.C. Section(s) 1031(a), criminalizing "major fraud" against the United States.
Defendants Edwin Brooks, his sons John and Stephen Brooks, and their company, B&D Electric Supply, Inc., were charged with several crimes in relation to two subcontracts to provide electrical components to prime contractors engaged in refitting ships for the United States Navy. All four defendants were convicted of trafficking in counterfeit goods, in violation of 18 U.S.C. Section(s) 2320(a), and of conspiracy to defraud the United States and to traffic in counterfeit goods, in violation of 18 U.S.C. Section(s) 371. Edwin Brooks, John Brooks, and B&D Electric were also convicted of "major fraud" against the United States in violation of 18 U.S.C. Section(s) 1031(a). And Edwin Brooks was convicted of obstruction of justice, in violation of 18 U.S.C. Section(s) 1503(a). On appeal, the defendants challenge the district court's interpretation of the major fraud statute as well as several evidentiary rulings, a jury instruction, and the sufficiency of the evidence sustaining several of their convictions. On cross-appeal, the government raises two sentencing issues. Finding none of the defendants' arguments persuasive, we affirm their convictions. Because we agree that the district court erred in one aspect of Edwin Brooks' sentence, however, we remand his cases for resentencing. We affirm the judgments against the other defendants.
The three Brooks defendants were operators of B&D Electric Supply, Inc., a marine electrical supply business which sold electrical parts to both civilian and military customers. The majority of B&D Electric's business consisted of reselling new components produced by well-established manufacturers of electrical parts. But B&D Electric also sold some electrical components which it custom-assembled, often out of used parts.
The charges at issue in this case arose from supply contracts that B&D Electric had with two prime contractors engaged by the United States Navy to refit several ships. B&D Electric contracted with the Jonathan Corporation to supply fourteen shipboard motor controllers meeting military specifications for a total price of $51,544. B&D Electric itself assembled these controllers from components but affixed to the controllers trademarks of the Cutler-Hammer Company, an approved military supplier of controllers. B&D Electric also supplied Ingalls Shipbuilding, Inc., with six rotary switches for a total price of $1,470, representing the switches as new when B&D Electric actually had assembled or rebuilt them. The dollar amount of the prime contract between Jonathan Corporation and the Navy was greater than $9 million, and prime contract between Ingalls Shipbuilding and the Navy was greater than $5 million.
Edwin Brooks, John Brooks, and B&D Electric challenge their convictions for major fraud against the United States in violation of 18 U.S.C. Section(s) 1031(a), on the jurisdictional ground that their two subcontracts did not satisfy the $1 million value prescribed by the statute. While the government does not dispute that the defendants' subcontracts were for amounts less than $1 million, it argues that the statute's jurisdictional requirement is established so long as the prime contract with the United States or any part thereof is worth $1 million. The issue is one of first impression for us.
As with all questions of statutory interpretation, we begin with the language of the statute, which provides:
Whoever knowingly executes, or attempts to execute, any scheme or artifice with the intent--
(1) to defraud the United States; or
(2) to obtain money or property by means of false or fraudulent pretenses, representations, or promises, in any procurement of property or services as a prime contractor with the United States or as a subcontractor or supplier on a contract in which there is a prime contract with the United States, if the value of the contract, subcontract, or any constituent part thereof, for such property or services is $1,000,000 or more shall, subject to the applicability of subsection (c) of this section, be fined not more than $1,000,000, or imprisoned not more than 10 years, or both. 18 U.S.C. Section(s) 1031(a) (emphasis added).
From a straightforward reading of this statute, we conclude that regardless of its privity with the United States, any contractor or supplier involved with a prime contract with the United States who commits fraud with the requisite intent is guilty so long as the prime contract, a subcontract, a supply agreement, or any constituent part of such a contract is valued at $1 million or more.
This reading recognizes that the seriousness of this species of fraud is measured not merely by the out-of-pocket financial loss incurred on a particular subcontract, but also by the potential consequences of the fraud for persons and property. In military contracts in particular, fraud in the provision of small and inexpensive parts can have major effects, destroying or making inoperable multi-million dollar systems or equipment, injuring service people, and compromising military readiness. By extending the statute's coverage even to minor contractors and suppliers whose fraudulent actions could undermine major operations, Congress enabled prosecutors to combat effectively the severe procurement fraud problem that Congress identified.
We understand that our reading is contrary to that espoused in dictum by the Second Circuit in United States v. Nadi, 996 F.2d 548 (2d Cir. 1993), the only other court to have interpreted the jurisdictional amount requirement of the major fraud statute. That court stated that for purposes of ascertaining the jurisdictional amount requirement of 18 U.S.C. Section(s) 1031(a), "the value of the contract is determined by looking to the specific contract upon which the fraud is based." Id. at 551 (emphasis added). It explained that "[t]his reading avoids the potential anomaly of small subcontractors whose subcontracts are valued at far less than $1,000,000 being prosecuted under the Act simply because the prime contract is for $1,000,000 or more." Id. But the jurisdictional amount requirement of the major fraud statute, like any bright line rule, dictates that some cases will fall outside of the scope of the law. We believe that our reading of the statute is no more anomalous than one which allows small subcontractors to escape prosecution under the provision, regardless of the cost of the overall project which their fraud affects, simply by ensuring that their own subcontract stays below the $1 million jurisdictional amount. The Nadi ...