Misappropriation of Intermediary Project Funds as Wire Fraud: Sixth Circuit’s New Rule on Payment Schemes

Introduction

The Sixth Circuit’s decision in United States v. Arthur Fayne, 25a0259n.06 (6th Cir. May 21, 2025), clarifies the scope of wire-fraud liability when a defendant occupies an intermediary role in disbursing grant or contract funds. Arthur Fayne, owner of Business Development Concepts, LLC (“BDC”), was hired by Northeast Ohio Neighborhood Health Services, Inc. (“NEON”) to oversee a federally subsidized community redevelopment project (the East Side Market). Fayne received nearly $3 million in grant‐backed payments from NEON, purportedly to fund subcontractors (AMHigley and Crescent Digital), but diverted substantial sums for personal use and failed to remit the full amounts to the intended payees. A jury convicted Fayne on nine counts of wire fraud under 18 U.S.C. § 1343. On appeal, Fayne challenged evidentiary rulings, the sufficiency of the evidence, and the restitution order. The Sixth Circuit affirmed in full, creating binding precedent on intermediary misrepresentations in invoice-driven payment chains.

Summary of the Judgment

The court addressed three main issues:

Evidentiary Rulings – The district court’s exclusion of certain evidence (e.g., untimely expert disclosures, proof that AMHigley eventually received full payment) was within its discretion and, in any event, harmless error. (citing Hazelwood, Ralston, Fisher, Kettles, Lang).
Sufficiency of the Evidence – Viewing all evidence in the light most favorable to the government, the record warranted convictions for nine counts of wire fraud. Fayne’s diversion of funds contradicted his material representations on invoices and demonstrated intent to deprive NEON and Crescent Digital of money or property. (citing Shanklin, Musacchio, Ledbetter, Vichitvongsa, Daniel, Robinson, Bravata, Hopkins, Rathburn, Graham).
Restitution – Under the Mandatory Victims Restitution Act (18 U.S.C. §§ 3663A, 3664), the court properly ordered $840,074.96 in restitution: $759,105.92 for losses caused by Fayne’s diversion of AMHigley funds (assumed by Cleveland and Cuyahoga County grants) and $32,364.44 for Crescent Digital. (citing Church, Ruiz-Lopez, Patel).

The Sixth Circuit found no reversible error and affirmed the conviction, sentence, and restitution order.

Analysis

Precedents Cited and Their Influence

United States v. Hazelwood (979 F.3d 398): Established the abuse‐of‐discretion standard for evidentiary rulings.
United States v. Ralston (110 F.4th 909): Clarified limits on cross‐examination and scope of testimony.
United States v. Fisher (648 F.3d 442) and United States v. Kettles (970 F.3d 637): Defined harmless‐error review under Federal Rule of Criminal Procedure 52(a).
United States v. Lang (717 F. App’x 523): Upheld exclusion of untimely expert reports under Rule 16(b)(1)(C).
Shanklin, Musacchio, Ledbetter, Vichitvongsa: Set forth the de novo sufficiency‐of‐the‐evidence standard and the “rational trier of fact” test.
Daniel (329 F.3d 480): Defined “scheme to defraud” and material misrepresentation principles.
Robinson (99 F.4th 344): Articulated three elements of wire fraud: scheme, use of wires, intent.
Bravata (636 F. App’x 277) and Hopkins (357 F.2d 14): Confirmed that short‐term intent to deprive suffices and intent questions are for the jury.
Rathburn (771 F. App’x 614) and Van Dyke (605 F.2d 220): Applied a “common‐sense” standard to find material misrepresentations in professional and commercial settings.
Graham (622 F.3d 445): Emphasized drawing all reasonable inferences in favor of the verdict.
Church (731 F.3d 530), Ruiz-Lopez (53 F.4th 400), and Patel (711 F. App’x 283): Govern restitution under the MVRA, including direct victims and substitute payees under § 3664(j)(1).

Legal Reasoning

The Sixth Circuit’s reasoning pivots on two core principles:

Material Misrepresentation by Intermediary
Fayne’s role as a conduit did not excuse him from accurately conveying payment obligations. By billing NEON for amounts attributed to AMHigley or Crescent Digital and then diverting those funds elsewhere, Fayne made false representations that induced NEON to transmit money via interstate wires (Daniel; Rathburn).
Intent to Deprive
Even a temporary intent to divert or “float” funds—without a genuine plan to repay—satisfies the intent element. Fayne’s substantial personal expenditures immediately after receiving grant payments, plus his inability to repay the subcontractors on demand, supported a finding of fraudulent intent (Bravata; Hopkins).

In rejecting Fayne’s installment‐payment arguments, the court emphasized that NEON’s grant funding structure created a contractual and equitable obligation: any invoice marked for AMHigley must reach that payee. Fayne’s diversion contravened NEON’s clear expectations and constituted actionable fraud.

Potential Impact on Future Cases

Contract‐and‐grant administrators will scrutinize intermediary payment chains more closely, ensuring safeguards (escrow, joint checks) to prevent misappropriation.
Defense challenges to wire‐fraud charges based on subsequent full payment will face a high bar: post‐hoc remediation does not negate earlier misrepresentations or intent.
Courts will apply the common‐sense “material misrepresentation” test to various commercial contexts where intermediaries handle third‐party funds.
Restitution analyses will treat public grants and subsidies exactly like private insurance or surety payments: grantor entities that step into the victim’s shoes may recover as substitute payees under § 3664(j)(1).

Complex Concepts Simplified

Scheme to Defraud: Any plan, however informal, that uses lies or deception to get someone’s money or property (Daniel).
Interstate Wire Communications: Any use of telephone, email, fax, or electronic funds transfer crossing state lines. NEON’s payments triggered this element.
Material Misrepresentation: A false statement that would influence a reasonable person’s decision. Billing NEON for AMHigley work and then not paying AMHigley was “material.”
Harmless Error: A trial mistake that did not influence the outcome. Here, excluded evidence about full payment was repeatedly placed before the jury by Fayne himself.
Restitution Substitute Payee: If a victim is reimbursed by another party (e.g., a government grantor), that party can claim restitution in place of the original victim.

Conclusion

The Sixth Circuit’s ruling in United States v. Fayne establishes a clear precedent: when a contractor or intermediary invoices for third‐party work funded by grant or loan proceeds, any diversion of those funds constitutes wire fraud if the intermediary’s representations on the invoice induced the transfer. The decision underscores the judiciary’s commitment to fundamental honesty in business dealings and affirms robust restitution remedies for victims, including public entities that assume private losses. Practitioners should advise clients handling pass‐through funds to implement stringent controls and timely disclosures to avoid the serious consequences of misappropriation under 18 U.S.C. § 1343 and the MVRA.