Loss in Real Estate Fraud Scheme Not Offset by Value of Homes; Mass-Marketing Enhancement Applies if Advertisement Reaches Large Number of Persons

United States v. Morrison, No. 11-50614 (5th Cir. Apr. 4, 2013) (Stewart, Garza, Elrod)

Jason Heath Morrison, indicted for his part in a real estate scheme designed to defraud multiple parties, appealed his sentence, challenging the district court’s calculation of the loss amount and its application of the sentencing enhancement for “mass-marketing.” Morrison, who fled to Washington and attempted to change his identity, also challenged the sentencing enhancements for sophisticated means and obstruction of justice, as well as the PSR’s failure to reduce his sentencing level for acceptance of responsibility. The panel affirmed.

The PSR recorded an intended loss of $769,365 after totaling all the mortgages involved in the scheme and subtracting what was paid to the lenders. Morrison objected, citing Application Note 3(E) of U.S.S.G. § 2B1.1—which provides that in calculating the victims’ pecuniary losses for fraud offenses, that amount shall be reduced by the value of the collateral—and arguing that the loss should be reduced by the value of the underlying property to $111,912.96. In response to Morrison’s invocation of Application Note 3(E) of U.S.S.G. § 2B1.1, the district court mistakenly deemed the guideline inapplicable to the case, claiming that “the credits against loss only apply where the property is returned prior to detection by law enforcement.” The panel acknowledged that the district court’s interpretation of Application Note 3(E) of U.S.S.G. § 2B1.1 may have been error but held that any error was harmless. The evidence suggesting that the defendants did not intend to repay the mortgage loans was sufficient to support the district court’s decision to ignore collateral value when calculating the financial damages and its discretion to employ an intended loss calculation in lieu of an actual loss calculation.     

Morrison also contested the methods used by the district court to increase his offense level by two for the “mass-marketing” enhancement. Morrison argued that the intended number of victims was nine, one purchaser for each property, and nothing more. The panel disagreed with Morrison’s reasoning, citing United States v. Magnuson, 307 F.3d 333, 335 (5th Cir. 2002), which ruled that the mass-marketing enhancement “merely requires advertising that reaches a large number of persons.” The panel found no error in the district court’s application of the mass-marketing enhancement.

2001 Amendment to 2B1.1 Loss-Amount Definition Supercedes Prior Fifth Circuit Law on Calculation of Losses From Ponzi Scheme

United States v. Setser, No. 07-10199 (5th Cir. May 12, 2009) (Smith, Southwick, Rodriguez, D.J.)

Deborah Setser, along with her brother Gregory, "were convicted of involvement in a Ponzi scheme focused on soliciting funds from Christian groups for largely mythical deals involving real estate and retail products." During the course of the scheme, some of the existing investors reinvested funds that had been returned to them as profits. Deborah evidently got involved in the scheme sometime after it had begun.

Deborah appealed her sentence, arguing that the district court got the loss calculation wrong.

The question at the core of the loss-calculation dispute is whether it was appropriate to consider as new losses the funds from existing investors that were reported or returned to them as profits and then reinvested in the scheme. For those situations in which the original investments occurred before Deborah Setser’s involvement, but the reinvestments occurred during her involvement, the effect of including the reinvestments was to increase the loss amount and number of victims attributed to her. Using this methodology, with credit given for money returned to original investors (but not “profits” received by investors), the district court concluded that the loss amount attributable to Setser was $61,601,032.

The Fifth Circuit addressed a similar issue in its 2000 decision in United States v. Deavours, 219 F.3d 400, which held that

no credit should be given for money returned to investors, because money in a Ponzi scheme is returned “not to compensate the victims for their losses,” but “to extend the defendants’] criminal activities and the profitability thereof” by prolonging the life of the scheme. Id. In fact, repayment of invested funds in a Ponzi scheme serves to “increase the total returns from [the] criminal activity, and endanger yet more victims.” Id. at 404.

Deborah argued that Deavours' "reasoning prevents a late-arriving conspirator from being made responsible for losses that occurred from money invested before joining the scheme. Just as a defendant cannot receive credit for returning money to an investor, she cannot be subject to 'double counting' when an investor chooses to reinvest profits in the scheme."

The Government countered that a 2001 amendment to guideline §2B1.1's loss-amount definition supercedes Deavors. The amendment provided that "[l]oss shall be reduced by the . . . money returned . . . by the defendant, to the victim before the offense was detected[.]"

In its explanation of the change to the application note, the Sentencing Commission contrasted Deavours with cases from other circuits that had permitted offsetting of payments to investors up to the amount they had invested. It stated explicitly that the “amendment adopt[ed] the approach of the Eleventh Circuit” in order to “resolve[] a circuit split.”

The court agreed with the Government, holding that "the district court’s method of loss calculation was correct. Deborah Setser was given credit for money that was returned to investors, but such credits were offset when the money was reinvested into the scheme." The court further held that

[u]nder this loss calculation method, it also was reasonable to conclude that investors became “victims” again when they reinvested, thus explaining the district court’s conclusion about the number of victims for whom Deborah Setser was responsible. . . . [T]he rationale for counting the victims a second time is that a new offense occurred when the investors’ money was plowed back into the conspiracy, justifying the different outcome.

Finally, the court rejected Deborah's "'as applied' Sixth Amendment challenge to the district court’s calculation of loss amount and number of victims at her sentencing, and a Fifth Amendment challenge with regard to acquitted conduct for which she claims she was held responsible at sentencing."

Erroneous Relevant Conduct Finding Requires Vacation of Sentence, Even Though Defendant Received Downward Departure

United States v. Ekanem, No. 06-11407 (5th Cir. Jan. 7, 2009) (Wiener, Garza, DeMoss)

As this case nicely illustrates, relevant conduct liability is broad, but not unlimited, and must be supported by reliable evidence. But perhaps more importantly, the case shows that a sentence may be vacated due to a guidelines calculation error---a "significant procedural error" according to Gall---even though the defendant received a downward departure to a point falling within what would have been the correctly calculated range.

Ekanem, who owned and operated a medical supplies company, "engaged in a fraudulent scheme to provide patients with motorized scooters while billing Medicare for more expensive motorized wheelchairs." For that, he was convicted of five counts of health care fraud, in violation of 18 U.S.C. § 3147.

In determining the Guidelines loss-amount at sentencing, the district court found Ekanem responsible not only for the losses he directly caused, but also for the losses caused by a similar scheme orchestrated by the man who, among other things, helped Ekanem set up his supply business:

Here, the district court found that Ekanem entered into “a jointly undertaken criminal activity with Mendus Medical which is owned by Mr. Usanga.” Thus, the court determined that the financial losses caused by Mendus Medical were relevant conduct attributable to Ekanem and increased Ekanem’s offense level accordingly. . . . The government points to the following record evidence in support of the district court’s finding: (1) Usanga helped Ekanem set up and establish Rooster; (2) Usanga allowed Ekanem to use Mendus Medical’s supplier number when Rooster’s was temporarily revoked; (3) Rooster issued checks to Usanga for “appreciation,” “finder’s fee,” and “assistance” totaling approximately $18,000; (4) Rooster and Mendus Medical used some of the same doctors in their schemes; and (5) on at least one occasion the two companies “swapped” Certificates of Medical Necessity (“CMN’s”).

Ekanem successfully challenged that relevant conduct finding on appeal:

Our review of these facts and the record as a whole persuades us that the district court erred in determining that Ekanem entered into a jointly undertaken criminal activity regarding Mendus Medical. At most, the evidence establishes that Usanga provided start-up and operational support to Rooster, for which Ekanem compensated Usanga with “appreciation” fees, and that Rooster and Mendus Medical ran similar schemes. However, there is no indication that Ekanem agreed to jointly undertake in the distinct business of Mendus Medical. There is no evidence that Ekanem assisted in the planning, provided material support, or shared in the profits of Mendus Medical. No payments were made from Mendus Medical to Ekanem. Moreover, the investigating agent specifically acknowledged that the government lacked any evidence that Ekanem was “in anyway responsible for the operation of Mendus or of Mr. Usanga.”

As a nearly identical example from the relevant conduct guideline's commentary explains, mere knowledge of another's identical criminal scheme is not sufficient to hold the defendant responsible for that other person's actions. Thus, the district court's finding was erroneous.

And now for the "perhaps more importantly" part that I mentioned at the beginning. The district court's findings produced an advisory Guidelines range of 121 to 151 months. Ekanem was the beneficiary of a downward departure to 120 months, which fell within the correctly calculated range of 97 to 121 months. So, no harm no foul, right? Wrong: "as we cannot 'discern from the record whether the sentencing judge would have imposed the same sentence had he been departing from the [properly calculated] range,' we are required to remand." (alteration in Ekanem). Or, to put it in Gall terms, the district court's erroneous Guidelines calculation was a "significant procedural error" that prevented the court of appeals from being able to review the substantive reasonableness of the sentence, thus requiring remand.

Whether To Deduct Value of Collateral From Loan Amount, and Whether to Use Actual or Intended Loss Calculation, Depends on Specific Facts of Case

United States v. Goss, No. 07-60699 (5th Cir. Nov. 21, 2008) (Barksdale, Benavides, Dennis)

It's loss-amount time again. This time, the question is how to determine the loss amount in a mortgage-fraud scheme. The answer: it depends.

Here's the ripped-from-the-headlines conduct:

From about 1999 to 2002, Goss, a mortgage lender, conspired with others to commit mail and wire fraud by preparing and submitting false documents to induce lenders to make loans totaling over $2 million to 35 borrowers who may not have been qualified for them otherwise. Goss and his co-conspirators created false verifications of deposit and rent, IRS W-2 forms, and Social Security benefit letters and provided them to lenders to obtain the mortgages.

Additionally, they conspired to launder money by converting some of the mortgage-loan proceeds for their own use and benefit. An unindicted coconspirator issued checks to fictitious creditors for some of the fraudulently obtained loans and forwarded them to Goss. Goss also received mortgage-broker fees for each fraudulently obtained loan.

Goss wound up pleading guily to a variety of mail and wire fraud and money laundering counts. At sentencing, the district court determined that the §2B1.1 loss amount should be calculated on the basis of the intended loss, and that "the entire amount of the fraudulent loans was the appropriate amount of intended loss," without any offset for the value of the collateral.

And that was the basis for Goss's appeal. He argued that "the district court erred by not deducting the collateral value in its intended-loss calculation, resulting in an inflated loss amount . . . , and thus an inflated offense level[,]" for all the charges. The court agreed, but declined to adopt a bright-line rule, instead going for a case-by-case approach in an effort to harmonize a specific application note with broader considerations involved in loss-amount determinations.

One the one hand, Application Note 3(E)(ii) to §2B1.1 provides that, “In a case involving collateral pledged or otherwise provided by the defendant, [loss shall be reduced by] the amount the victim has recovered at the time of sentencing from disposition of the collateral, or if the collateral has not been disposed of by that time, [loss shall be reduced by] the fair market value of the collateral at the time of sentencing.” (alterations in Goss). One secondary authority* reads the application note to mean "that 'immovable collateral such as real estate properly pledged to the victim will virtually always be credited against loss . . . .'"

Then again, the Fifth Circuit "has recognized . . . that there are situations where the deduction of collateral may not provide the most fair loss assessment. For example, . . . if a defendant’s intent to avoid repaying a loan is sufficiently clear, and recovery of the collateral is problematic, these factors might preclude deduction of the collateral involved." In one such case, "the collateral consisted of movable, highly depreciable property (mobile homes); and the underlying facts made the defendants’ lack of control over the collateral an item of concern." In another, the court found it unlikely that the defendant intended for his clients to repay vehicle and mortgage loans that he helped them obtain with false social security numbers.

Thus, the court held that "in the light of the direction provided by the advisory guidelines, it becomes apparent that whether to deduct collateral—whether to employ an actual or an intended loss calculation—will depend upon the specific facts at hand." That means that "it is necessary to examine each loan individually in order to determine the fair market value of the loan’s collateral and whether it should be deducted." This inquiry "should be shaped by weighing the appropriate factors in determining, at the time of sentencing, what, in the event of a default, would be the fair market value of any recovered collateral." A non-exhaustive list of such factors includes whether "the collateral is immovable; whether third parties exercise control over the collateral; whether, in the event of default, the collateral is, or might be, damaged before recovery; whether the collateral’s value was appraised or assessed at the time of sentencing; and whether there are financial or practical risks inherently associated with the collateral." And as always, the district court may estimate the loss amount.

All that said, the court strongly implies that, in cases involving immovable, real property---as in mortgage fraud---calculating the actual loss, including an offset for the value of the collateral, will almost always be the correct approach. And so it was in Goss's case, hence a remand for resentencing.

Which leads to another question, with another it-depends answer. On remand, should "the district court’s loss calculation should be based on the fair market value of the collateral at the time of the original sentencing or, rather, at the time of resentencing[?]" The court declined to adopt a "blanket rule," instead concluding, "only for this appeal and based on the facts at hand, that focusing on the value at the time of the initial sentencing best comports with the guidelines’ plain language." (Why just for this case? Probably because the parties didn't address the issue in their briefing. This way, the district court has guidance, but the court of appeals avoids resolving the issue---and binding future panels---without full briefing and argument.)

*That source was the Federal Sentencing Guidelines Handbook: Text and Analysis, by Roger W. Haines, Jr. et al. (You may recognize it as the one with the light grey cover and greenish-blue stripes.) As a footnote explains, although the tome is no more than secondary authority, the Fifth Circuit and other courts tend to view it as persuasive. For that reason alone, you should consult it. But don't rely solely on Haines. Federal Sentencing Law and Practice, by Thomas Hutchinson et al. (electric blue with gold lettering), also has very good commentary.

Fives Affirm Questionable 404(b) and Loss-Amount Determinations in Union Voter Fraud Case

United States v. Crawley, No. 07-20461 (5th Cir. June 27, 2008) (Jones, Barksdale, Stewart)

Crawley was elected president of a Teamsters local in Louisiana in 1997, 1999, and 2002. Irregularities in the 2002 election prompted an investigation which revealed that Crawley falsified voter ballots, and that he received a $20,000 kickback in connection with a contract for telephone services at the union hall. Crawley was eventually convicted of mail fraud, and several Title 29 embezzlement and false record offenses. In addition to sentencing him to 78 months' imprisonment, the district court ordered him to pay the union local a little over $120,000 in restitution. Crawley appealed his conviction and sentence.

Crawley's challenge to his conviction concerned 404(b) evidence that he argued was improperly admitted. At trial, a union member testified that

[i]n September 2002, Crawley invited Kyle to his home after work hours. There, the two men engaged in an “assembly-line” process: using several different pens, Crawley marked and folded each ballot; he then handed it to Kyle, who placed and sealed the ballot in the return envelope. Crawley used the Union’s membership roster to decide which members were unlikely to vote in the election, such as part-time UPS employees. Kyle testified that peel-and-stick labels generated by the Union’s computer were used on the envelopes to avoid their being challenged. Thereafter, the completed ballots were separated by the zip codes for the “voters” and mailed from various post offices.

Not content to rely on this testimony, the Government called another witness who testified, over Crawley's objection, that Crawley "committed similar acts of voter fraud [in the 1999 election, as well]; and devised the strategy of duplicating ballots for those members least likely to vote." Following that testimony, the district court instructed the jury that "the evidence of the 1999 voter fraud could be considered only for determining Crawley’s 'motive, intent, identity, knowledge, opportunity, plan, preparation, and the absence of mistake or accident in engaging in' the 2002 voter fraud."

Applying the Fifth Circuit's two-prong Beechum test, the court of appeals found no error in admission of the testimony concerning the 1999 election. Under the first prong, the court held that the evidence was relevant to Crawley's intent, insofar as it showed that Crawley "acted with the same specific intent in 2002 as he had in 1999." The court rejected Crawley's argument that the evidence was not in fact relevant to intent because his defense was that someone else submitted the fake ballots:

Regardless of the defenses asserted by Crawley, the Government was required to prove specific intent as an essential element of the charged offenses. Therefore, the extrinsic evidence was offered to demonstrate Crawley acted with the requisite intent to commit those offenses. Based on the testimony regarding the 1999 fraud, the jury could rationally conclude that, “because the defendant had unlawful intent in the extrinsic offense [1999 fraud], it is less likely that he had lawful intent in the present offense [2002 fraud]”. Gordon, 780 F.2d at 1173. The testimony, therefore, was offered for a legitimate purpose under Rule 404(b). (Because the evidence was properly offered to show intent, we need not decide whether, in addition, it was admissible to demonstrate motive, as was also held by the district court.)

The court then concluded, as to the second Beechum prong, that the prejudicial impact of the evidence did not substantially outweigh its probative value, because the district court instructed the jury "that the 1999 voter-fraud evidence could only be considered for the limited purpose of determining motive, intent, identity, knowledge, opportunity, plan, preparation, and the absence of mistake or accident in engaging in the 2002 voter fraud. Even assuming, therefore, that admission of the extrinsic evidence posed a risk of undue prejudice, that risk was greatly minimized by the court’s limiting instruction."

(Both of these conclusions are questionable. If anything, given Crawley's defense the evidence was relevant to identity, not intent. But even if, as the court says, the 1999 voter-fraud evidence was relevant to intent, it had little to no probative value in relation to the unfairly prejudicial he-did-it-before-so-he-must-have-done-it-again inference that 404(b) exists to prevent. After all, if the jury were to conclude that Crawley was behind the 2002 ballot falsification, it's all but inconceivable that they would have trouble finding that he did so with the specific intent to defraud the union. It's also hard to see how the district court's instruction to the jury minimized any prejudice, given that it was simply a boilerplate recitation of permissible 404(b) factors, some of which the Government doesn't even appear to have argued for.)

Crawley also challenged the district court's loss findings for purposes of the Guidelines calculations and the restitution award. The district court used Crawley's salary and benefits for both calculations, as well as the $20,000 kickback. To oversimplify things a bit, Crawley argued that the loss amount for both purposes should be limited to the $20,000 kickback, because the union got what it paid for in the form of his services as local president. The court of appeals disagreed, concluding that "[b]y procuring a union office by fraud," Crawley "render[ed] any service valueless ab initio." Additionally, it wasn't possible to sever Crawley's legitimate services to the union from his non-legitimate services. Thus, the district court did not clearly err in the Guidelines calculation, nor did it abuse its discretion in determining the restitution amount.

(This, too, is questionable. Is it really true that Crawley's services as union president were "valueless ab initio"? Unless everything he did as president was corrupt, the union got at least some value out of his service. Doesn't the union as victim receive a windfall by getting all of Crawley's salary and benefits back when they would have otherwise had to pay someone else to do the job? To be fair, the court addresses these points, just not convincingly in my opinion.)

Medicare Fraud and Loss Amounts

United States v. Austin, No. 05-30602 (5th Cir. Feb. 13, 2007) (Garza, Prado, Owen)

If you enjoy reading opinions about Medicare fraud and associated loss amount calculations, then you'll love Austin. Here's the court's summary:

In this Medicare fraud case, the defendant pleaded guilty to violating 18 U.S.C. § 1347. He was sentenced to 27 months imprisonment and restitution of more than $2 million. The principal issues on appeal are (1) whether assets pledged after the offense was discovered should be credited in calculating the amount of loss; (2) the effect of payments made and assets pledged as a result of bankruptcy proceedings filed before discovery of the offense; and (3) whether $643,388 representing pension plan benefits that were funded before the loss was discovered should have been credited in determining the amount of loss. Weconclude that the district court properly construed and applied the Guidelines, except for the failure to credit $643,388 in calculating the loss. We accordingly vacate the order of restitution and remand for resentencing.

Intended Loss, not Actual Loss, Governs Loss Amount Calculation Under U.S.S.G. §2T4.1

United States v. Phelps, No. 05-51279 (5th Cir. Feb. 12, 2007) (per curiam) (Reavley, Jolly, Benavides)

"Charles Phelps, Jr. (Appellant) managed various adult entertainment businesses for his codefendant, John Kenneth Coil. Over a period of several years, Appellant caused corporate monies to be falsely reported as wages paid to his family members." Slip op. at 1. Those actions led to his conviction of "one count of conspiracy to defraud the United States by impeding the IRS in its collection of revenue in violation of 18 U.S.C. § 371." Id. at 2.

The district court calculated Phelps's offense level under U.S.S.G. §2T4.1. At sentencing, Phelps presented an expert who put the tax loss amount at $80,463.64, but who also argued that "the excess social security taxes paid through [his] family members' fraudulent tax filings should be credited against that figure." The district court disagreed, finding that Phelps was responsible for a tax loss between $80,000 and $200,000 (good for a base offense level of 16). This appeal ensued.

The court held that losses under §2T4.1 must be calculated the same way that they are under 2T1.1 and 2T3.1, and under those guidelines it is the intended loss that matters, not the Government's actual loss. Accordingly, the loss amount that Phelps intended should not be offset by the extra social security taxes that his scheme generated for the Government, and the district court did not clearly err in its loss calculation.

The court also rejected Phelps's argument, which he raised for preservation purposes, that his sentence could not be enhanced on the basis of findings made on a preponderance standard rather than BRD. (Of course, considering that the loss amount centered on a legal dispute rather than a factual dispute, and that Phelps presented expert testimony supporting the district court's finding on loss amount, it's hard to see how the standard-of-proof would make a difference here.)