In the
United States Court of Appeals
For the Seventh Circuit
No. 11-2459
U NITED S TATES OF A MERICA,
Plaintiff-Appellee,
v.
S TEVEN F ENZL,
Defendant-Appellant.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
09 CR 376-1—Ruben Castillo, Judge.
A RGUED D ECEMBER 6, 2011—D ECIDED F EBRUARY 23, 2012
Before P OSNER, F LAUM, and S YKES, Circuit Judges.
P OSNER, Circuit Judge. Douglas Ritter and Steven Fenzl
were the principals of a waste-management company
called Urban Services of America, Inc. Charged with
mail and wire fraud relating to a bid by Urban in Janu-
ary 2005 for a contract to refurbish garbage carts for the
City of Chicago, Ritter pleaded guilty, while Fenzl, the
appellant, was tried by a jury, convicted, and sentenced
to 16 months in prison and to pay a fine of $40,000
and make restitution of $35,302.18.
2 No. 11-2459
Urban had won similar bids in the past. But in July 2004
the City had opened an investigation of Ritter and
Urban on the basis of an anonymous tip that Ritter
had cashed checks that the City had written to other
contractors. The Chicago Tribune published an article
about the investigation. Four months earlier, in April,
when Urban and one other company had bid for the
contract that was rebid in January 2005, no award had
been made. Ritter and Fenzl were afraid that even if
Urban submitted the lowest qualified bid in the new
round of bidding, it wouldn’t be awarded the contract,
because of the investigation and the bad press and the
City’s refusal to award the contract the previous April.
Although no reason for that refusal had been announced,
Ritter and Fenzl may have thought that the City either
considered two bidders too few or was hostile to Urban
because of the investigation—had it refused to consider
Urban’s bid there would have been no contest and the
City might have been stuck with the other bidder.
The same month as the rebidding, the City closed its
investigation without finding any wrongful conduct.
But it didn’t bother to inform anyone connected with
Urban that it had closed the investigation, and Ritter
and Fenzl didn’t learn it had been closed until months
after the new round of bidding.
Urban took measures to improve its chances in the
new round. It slashed its bid, and it also sought to
interest three companies in submitting bids that would
not have done so had it not been for Urban’s encourage-
ment (or command: one of the companies was owned
No. 11-2459 3
by Ritter and Fenzl). The hope was that if one of those
companies won the contract it would subcontract the
fulfillment of it to Urban, either directly or by leasing
Urban’s facilities for refurbishing garbage carts. One of
the companies, Roto Industries, had no facilities for
doing such work in Chicago, and so it agreed to use
Urban’s facilities if it was the winning bidder, and of
course to compensate Urban for that use. Fenzl ex-
plained what the cost to Roto would be of using Urban’s
facilities; Roto tacked a profit margin onto that cost; and
the sum of cost and profit margin was the amount
Roto bid.
There were seven bidders in all—Urban and the
three companies Urban had contacted, plus three com-
pletely independent bidders. Urban was the low bidder
and won the contract. The City was unaware of Urban’s
having communicated with other bidders.
To be allowed to bid, each bidder had to certify that
it hadn’t “entered into any agreement with any other
bidder . . . or prospective bidder . . . relating to the price
named in [the bid], nor any agreement or arrangement
under which any act or omission in restraining of [sic] free
competition among bidders . . . and has not disclosed to
any person, firm or corporation the terms of this bid . . . or
the price named herein.” Ritter signed the certification
on behalf of Urban. Urban also promised, as required by
the City, that if it was the winning bidder and got
the contract it would subcontract pieces of it to both a
minority business enterprise and a women-owned busi-
ness enterprise. That was not done, although the judge
4 No. 11-2459
ordered Fenzl acquitted of fraud regarding the failure
to subcontract to a women-owned, as distinct from a
minority-owned, business enterprise.
The prosecutors came from the Antitrust Division of
the Justice Department because the Division had
originally believed that Ritter and Fenzl had engaged in
bid rigging, a form of price fixing in which bidders
agree, usually by rotating bids, to eliminate competition
among the bidders. James Cape & Sons Co. v. PCC Con-
struction Co., 453 F.3d 396, 398 (7th Cir. 2006); United States
v. Heffernan, 43 F.3d 1144 (7th Cir. 1994); U.S. Dept. of
Justice, “Price Fixing, Bid Rigging, and Market Allocation
Schemes: What They Are and What to Look For,” pp. 2-3,
w w w .ju s t ic e .g o v / a t r / p u b l i c / g u i d e l i n es /2 1 1 5 7 8 .p d f
(visited Jan. 4, 2012). The Division intended to prosecute
Ritter and Fenzl for a criminal violation of section 1 of
the Sherman Act. But at some point it realized it didn’t
have an antitrust case. Urban had been the low bidder
and its aim in “colluding” with other potential bidders
had not been to prevent them from underbidding it
but merely to buy insurance against its bid’s being
rejected because of false accusations against Ritter and
Urban; if Urban lost the bid, at least it would be able to
obtain some refurbishing work as a subcontractor of the
winning bidder. The bidders invited by Urban were
almost certain to submit higher bids because Urban
would be doing the actual work and charging for it and
the bidders would be repricing Urban’s work in their bids.
It’s difficult to see what’s wrongful about such a
“scheme.” Suppose in despair of ever doing work for the
No. 11-2459 5
City again Urban had sold its assets to another company
and told it, “You go bid on the refurbishing contract.”
Would anyone think such conduct improper? How dif-
ferent is that from what Urban planned to do in case it
was denied the contract even if it was the low bidder?
Misconduct in bidding involves trying to reduce rather
than increase the competition among bidders. See, e.g.,
Habitat Education Center v. U.S. Forest Service, 607 F.3d 453
(7th Cir. 2010).
So the prosecutors decided to charge fraud rather
than an antitrust violation. But consistent with the puz-
zlement that we’ve just expressed, the theory behind
the charge of fraud for misleading the City by inflating
the number of bids was never made clear at trial. No
evidence was presented that the more bidders there
were, the more likely Urban’s bid was to be accepted and
that this would result in a higher price to the City for
getting its garbage carts spruced up. Had there been
four bidders rather than seven, Urban would still have
been the low bidder, and there is no indication that
the City would have cancelled the auction on the
ground that there were too few bidders. Even Urban’s
fear that the City would not award a contract if there
were only two bidders turns out to have been unfounded.
The government’s principal witness, a City investigator
named Kristopher Brown, testified that the reason the
contract hadn’t been awarded back in April 2004 was not
the fewness of the bidders but the fact that the City
had botched its specifications for the bids. It had re-
quired the contractor to use “Polywelding” (polyethylene
welding, a method of molding plastic) to refurbish the
6 No. 11-2459
garbage carts, not realizing that only Urban could
Polyweld, which would preclude competition for the
refurbishing contract. Urban hadn’t known that this
was the reason no contract had been awarded.
It is conceivable that the City would not have
awarded Urban the contract in the second round of
bidding had it known the company was trying to insure
itself against the consequences of failing to land the
contract by encouraging other companies to bid that
would subcontract the actual work to Urban. But since
we know that the City was willing to award the contract
to Urban if Urban was the low bidder, as it was—that
any animosity toward Urban was insufficient to induce
it to exclude Urban from the bidding process—why
would it have balked at Urban’s attempt to retain a role
in the performance of the contract if someone else was
the low bidder? Especially since that someone else
couldn’t have performed the contract without incurring
either large upfront costs because it lacked the necessary
facilities in Chicago or large two-way shipping costs
if it did the refurbishing elsewhere, and so it couldn’t
have been the low bidder without enlisting Urban’s
participation in performing the contract.
Did the garbled certification statement that we
quoted forbid what we are calling Urban’s effort to
insure against failing to win the contract? Read literally,
maybe. But really it seems aimed at bid rigging rather
than at anything to do with Urban’s scheme.
Critical would have been testimony by the employees
of the City’s Department of Procurement who were
responsible for administering the bidding process, and
No. 11-2459 7
specifically for deciding who could be awarded the con-
tract and whether Urban’s machinations if disclosed
would have precluded the award of the contract to
Urban even though it was the low bidder. If they would
not have precluded its obtaining the contract, then
any fraud involved in its lining up additional
bidders was immaterial, and therefore not criminal.
Neder v. United States, 527 U.S. 1, 25 (1999); United States
v. Rosby, 454 F.3d 670, 673 (7th Cir. 2006); United States v.
Fernandez, 282 F.3d 500, 508 (7th Cir. 2002).
But rather than calling any employee of the Depart-
ment of Procurement to testify, the prosecutors built
their case entirely on the testimony of Brown, the City
investigator, who was permitted (over objection) to
testify—crucially—that had the Department known
about Urban’s behind-the-scenes activity to insure
itself against the consequences of not being awarded the
contract it would have disqualified the company from
bidding.
Brown’s testimony about what the Department would
have done had it known what Urban was doing behind
the scenes should not have been admitted—certainly not
as lay testimony; and no effort was made to qualify
Brown as an expert witness, which would have permit-
ted him to give opinion evidence based on hearsay if it
was the kind of hearsay on which an expert in his field
bases professional opinions unrelated to litigation. Fed.
R. Evid. 703. His testimony was hearsay of a peculiarly
unreliable sort. He was part of the prosecution team,
testifying to impressions gleaned from discussions and
observations. Apparently he was not even repeating
8 No. 11-2459
what someone had told him, but rather was drawing
inferences from stray comments and from things he’d
learned in previous investigations. The government
argues that he was testifying from his personal knowl-
edge because he knows the practices of the Department
of Procurement first hand. But he was unable to point
to any rule or policy governing the award of the con-
tract for which Urban and its friendly companies were
bidding, and he admitted on cross-examination that he
had not been “involved in any discussions whatsoever
with anybody in procurement at the time these bids
were being considered.” Yet his testimony was crucial to
the prosecution.
Since Urban was the low bidder, it is a matter of con-
jecture whether the relevant employees in the Depart-
ment would have awarded the contract—at a loss to the
City—to a higher bidder, in order to punish Urban
(for what exactly?). But instead of asking them what
they would have done had they known what Urban was
up to, the prosecutors asked an investigator what he
thought they would have done. What the government
dignifies by the term “personal knowledge”—for a lay
witness is permitted to base his testimony on his personal
knowledge (and on nothing else)—is the investigator’s
conjectures based on seven years of “training and ex-
perience,” an impermissible basis for lay opinion testi-
mony. When a DEA agent’s “testimony was not limited
to what he observed in the search or to other facts
derived exclusively from this particular investigation
[but] instead, he brought the wealth of his experience
as a narcotics officer to bear on those observations and
No. 11-2459 9
made connections for the jury based on that specialized
knowledge,” he was giving expert rather than lay testi-
mony. United States v. Oriedo, 498 F.3d 593, 603-04 (7th
Cir. 2007). “Inferences [to be admissible as lay testimony]
must be tethered to perception, to what the witness saw
or heard.” United States v. Santos, 201 F.3d 953, 963 (7th
Cir. 2000). The witness’s “reasoning process was not that
of an average person in everyday life; rather, it was that
of a law enforcement officer with considerable specialized
training and experience in narcotics trafficking”—and
therefore was not admissible as lay testimony. United
States v. Garcia, 413 F.3d 201, 217 (2d Cir. 2005). See
also United States v. Figueroa-Lopez, 125 F.3d 1241, 1245-46
(9th Cir. 1997).
The most plausible inference from the prosecutors’
decision to call Brown, and Brown alone, to testify to
the materiality of the alleged fraud is that they had no
confidence that the testimony of the officials actually
responsible for awarding contracts would have sup-
ported the government’s case. See 2 Wigmore on Evidence
§§ 285, 288, pp. 192, 204-09 (James H. Chadbourn rev.
1979). Putting Brown on the stand was like offering
hearsay evidence when the out-of-court declarant, though
available, is not called as a witness because the party
that would call him lacks confidence about what he
would testify to or wants to shield him from cross-exami-
nation. Bullcoming v. New Mexico, 131 S. Ct. 2705, 2714-15
(2011).
The allegation of fraud with regard to the minority-
owned business enterprise presents a different issue,
10 No. 11-2459
that of prosecutorial error in closing argument. The
prosecutor told the jury that Urban’s failure to subcon-
tract any of the refurbishing work to a minority business
enterprise was fraud, but in saying this he confused
fraud with breach of contract. The bid specifications
required the winning bidder to agree to delegate some
of the performance under the contract to a minority
business enterprise, and there was evidence that Fenzl
never intended to give any of Urban’s business to
such an enterprise. But Roto submitted its bid without
specifying a minority business enterprise to which
it would subcontract work if it won the contract,
saying it hadn’t found one yet, and Brown testified that
he couldn’t say for sure whether Roto’s bid, had it been
the low bid, would have been rejected: “Each case
would have to be decided by [the Department of Procure-
ment Services]”—this hedging shows how weak Brown’s
evidence was.
So maybe, with Urban being the low bidder, the City
would have overlooked its failure to subcontract to a
minority business enterprise, had the City learned of
that failure. But given the bid specifications and Urban’s
promise to use such an enterprise if its bid was suc-
cessful and the evidence that it never intended to do so,
there may have been fraud. United States v. Leahy, 464
F.3d 773, 787-89 (7th Cir. 2006). The evidence of fraud
was not so compelling, however, that we can dismiss
as harmless the prosecutor’s error in closing argument,
which conflated a decision made after the contract was
signed not to use a minority business enterprise with
No. 11-2459 11
an intention formed during the bidding process not to
use one. The latter decision would support a determina-
tion of fraud, but not the former.
Fenzl makes two other arguments for reversal of his
conviction. The first is that the jury should have been
instructed that an exchange of information between
competitors (in this case competing bidders) is not illegal
per se. That is true, and might be a proper instruction in
an antitrust case, but this is not an antitrust case. The
relevant question was whether the defendant was guilty
of fraud in lining up other bidders without telling
the City what it was doing.
Fenzl’s other argument is that his fraudulent conduct
(if it was fraudulent) was not actionable under the mail-
and wire-fraud statutes because there was no proof
that the City lost any money as a result. When a fraudu-
lent scheme involves depriving the victim of the fraud
of the “honest services” that the defendant owed him,
the government must prove that a bribe or kickback was
sought from the victim. But such proof has never been
required when the aim of the fraud was to enrich the
defendant; in such a case there is no requirement that
the victim have incurred, or the defendant have in-
tended him to incur, a pecuniary loss. United States v.
Joshua, 648 F.3d 547, 553 (7th Cir. 2011). If you steal
money from a person, it is theft even if you intended to,
and did, replace the money before he noticed it was
missing.
Though these two arguments by the defendant fail, our
earlier discussion shows why his conviction has to be
12 No. 11-2459
reversed and remanded with instructions to acquit him
of the charge of fraud in enlisting other bidders and to
retry him for fraud regarding the minority business
enterprise. Lockhart v. Nelson, 488 U.S. 33, 39-42 (1988);
United States v. Tranowski, 702 F.2d 668, 670-71 (7th Cir.
1983).
R EVERSED AND R EMANDED.
2-23-12