Radio Smack

United States v. Lacey, No. 11-2404-cr (2d Cir. November 7, 2012) (Winter, Straub, Lynch, CJJ)

Defendants Lacey and Henry were convicted after a jury trial of various offenses resulting from their involvement in a mortgage fraud scheme. In the scheme a real estate company, MTC,  would purchase “short-sale” properties from distressed homeowners, then resell them to straw buyers, who would obtain mortgages on the properties, without intending to live in them or make payments. MTC helped the straw buyers complete fraudulent mortgage applications to ensure that they would be approved, and sometimes made a few payments on the loans to further deceive the banks, but eventually the loans defaulted and the lending banks took title to the properties through foreclosure.

One component of the fraud involved radio ads, through which MTC recruited straw buyers. Those ads told buyers that they could earn a fee by buying a house through MTC - some actually did receive a fee - and also recruited distressed homeowners looking to sell.

On appeal, the defendants argued that these radio ads should not have triggered the “mass-marketing” enhancement of § 2B1.1(b)(2)(A)(ii), and a divided panel agreed. The majority concluded that the enhancement is “properly applied only when the targets of the mass-marketing are also in some way victims in the scheme.” This is so because the guideline applies to an offense “committed through mass-marketing.” As the Eighth Circuit has already observed, an offense is “committed through mass- marketing” only when mass-marketing is used to recruit or commit victims. It is not enough for the scheme to be advanced by mass-marketing.

This interpretation is also bolstered by the surrounding text; the enhancement is surrounded by provisions that relate to the number of victims; thus it is designed to measure “the scope of the wrong by the number of victims.” The use of mass-marketing is relevant to this calculus because it provides for an enhancement when the number of actual victims is small, but the marketing creates a large number of potential victims. 

Here, the record was unclear whether some of the consumers targeted by the radio ads were “in some sense victimized,” even though the “main thrust of the fraud was directed at banks.” Obviously, any buyer who was in on the scheme or who received payment from MTC could not be seen as a victim. But some straw buyers complained that their credit scores were ruined, and others complained that MTC misled them into believing that the scheme would result in a legitimate sale and that they would be able to pay for the properties through rental income. 

The record was also unclear whether the radio ads even constituted mass-marketing at all.  The relevant provision applies to a scheme intended to “induce a large number of persons to ... invest for financial profit.” Here, while the record contained some evidence that this was true, it did not establish it sufficiently clearly. 

The court accordingly vacated the sentence and remanded to the district court for findings on whether the defendants engaged in “mass-marketing” at all, and if so, whether the targets of the marketing were “also in some sense victims” of the scheme, in that they were injured by it. 

Judge Straub, in dissent, believed that the enhancement was properly applied because the “offense” - using the relevant conduct definition - employed mas-marketing. He disagreed that the enhancement applies only where the victim is targeted by the mass-marketing. 

The panel was unanimous, however, in concluding that the restitution order erroneously failed to credit the value of the collateral underlying the foreclosed loans.

Trace Amounts

United States v. Gonzalez, 10-2202-cr (2d Cir. July 22, 2011) (Kearse, Miner, Chin, CJJ)

Former state senator Efrain Gonzalez, Jr., pled guilty to various fraud-related charges in connection with two sham charities that he set up while in office. This opinion contains an interesting discussion of the concept of “tracing” criminal proceeds. In it, the court concludes that tracing is not required to determine the number of victims under § 2B1.1, but is required, to some degree at least, to calculate the actual loss for restitution purposes.

The case arose from the actions of two supposed charities, West Bronx Neighborhood Association (WBNA) and United Latin American Foundation (ULAF). Each received both public money and private donations, and each - although supposed to be engaged in charitable activities - instead spent most of its money enriching Gonzalez by paying his personal bills - and those of some of his cronies - and funding a lavish lifestyle.

Gonzalez ultimately pled guilty to mail fraud, federal-program fraud, wire fraud and conspiracy. He later tried, unsuccessfully, to take the plea back - the circuit’s rejection of that issue, while very long, is straightforward and is not summarized here - and ultimately received a below-guideline 84-month sentence and restitution.

In challenging the length of his prison sentence, Gonzalez argued that the district court erred in concluding that the offense involved 50 or more victims under § 2B1.1(b)(2)(B). He claimed that, although more than 50 individuals donated money to WBNA, the government had not traced back the misappropriated funds to those particular donors. The circuit rejected this argument. It is not true that “before a person who has made a charitable contribution can be considered a victim within the meaning of § 2B1.1(b)(2)(B), his donation must be traced to a particular misallocation by the defendant.” Rather, a victim is a person who sustained any part of the actual loss, with no need that he be “linked with a specific part of the loss.” Such a holding is particularly apt given the specific instruction in the commentary to § 2B1.1 that defendants who exploit victims’ charitable impulses “create particular social harm.”

Interestingly, the court reached a somewhat different conclusion with respect to the restitution amount. In fixing restitution, the district court relied on WBNA’s donor lists. While it is true that any such donor could be a victim for restitution purposes, the circuit disagreed that each donor should be compensated for the full amount donated, since some of them “received value in return for their donations.” Some donated to and attended a WBNA gala that offered a “Buffet Supper” and an “Open Bar,” and others donated money for advertisements that appeared in the event’s program. The district court’s view that these donors expected that 100 per cent of their contributions would be used for charitable purposes was sufficient to make the determination that they were victims for restitution purposes, but was not sufficient to order full restitution of the amounts they gave. The circuit remanded the restitution order for “further proceedings to determine to what extent donors suffered [actual] losses.”

Rook and Role

United States v. Skys, No. 09-5204-cr (2d Cir. February 23, 2011) (Jacobs, Kearse, Straub, CJJ)

In August of 2007, Eric Skys approached Citigroup and claimed that his company, Kaiser-Himmel Corp., owned 13.4 million shares of Sprint Nextel Corp. stock, with a market value of approximately $240 million. He told Citigroup that transfer of the shares was restricted for another fourteen months, but that he wanted to raise immediate cash by pledging the shares to Citigroup in exchange for an $83 million dollar loan. Citigroup’s due diligence revealed that Skys’ claims were false and that the documents he had presented were forgeries. Skys approached three other financial institutions with the same scheme, again without success. He ultimately pled guilty to securities, wire and bank fraud.

At sentencing, his presentence report described additional, albeit uncharged, fraudulent conduct. Skys solicited investments in a fake software company and also cheated a Florida dentist out of $300,000, then tried to take him for another $2 million, again claiming he owned 13.4 million shares of Sprint stock.

At sentencing, over objection, the district court included a two-level enhancement for ten or more victims and a four-level enhancement for aggravating role. These contributed to a final range of 235 to 293 months. The district court varied downward, and imposed a below-Guideline prison term of 130 months.

On appeal, Skys raised the same sentencing issues, and the circuit agreed with him to some extent. While it did not hold that the court should not have applied the enhancements, it concluded that the district court’s findings were insufficient. It accordingly vacated the sentence and remanded the case so that the district court could supplement the record and, if necessary, resentence Skys.

For the ten-victim enhancement, only victims that suffer an actual loss qualify. Here, the district court did little more than adopt the fact findings in the presentence report, which indicated only that Skys tried to defraud four financial institutions, none of which suffered an actual financial loss. And, while some of the individuals victimized by the uncharged conduct suffered an actual loss, there was no evidence that there were ten or more of them. Thus, the court of appeals concluded that there was no way it could engage in “meaningful review” of the enhancement.

It reached a similar conclusion for the role enhancement. The aggravating role enhancement applies where the defendant was an organizer or leader of a criminal activity that involved five or more participants or was “otherwise extensive.” Here, the district court applied only the “otherwise extensive” theory, concluding that “this was an extensive scheme.” Here, again, the circuit found the findings to be insufficient.

The circuit has interpreted the “otherwise extensive” language to refer primarily to the number of persons involved, either knowing or unknowing, and the extent to which the the unknowing participants were necessary to the success of the scheme. Here, the district court did not identify a single other “participant” - a person with criminal responsibility for the commission of the offense - and gave no “objectively reviewable explanation” for its conclusion that Skys’ criminal activity was “extensive.”