1999 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

10-15-1999

United States v Yeaman

Precedential or Non-Precedential:

Docket 98-1102

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Recommended Citation

"United States v Yeaman" (1999). 1999 Decisions. Paper 284.

http://digitalcommons.law.villanova.edu/thirdcircuit_1999/284
Filed October 15, 1999 

UNITED STATES COURT OF APPEALS 

FOR THE THIRD CIRCUIT 

NOS. 98-1102 and 98-1146 

UNITED STATES OF AMERICA 

Appellant in No. 98-1146 

v. 

DAVID REX YEAMAN 

Appellant in No. 98-1102 

On Appeal From the United States District Court 

For the Eastern District of Pennsylvania 

(D.C. Crim. Action No. 96-cr-00051-3) 

District Judge: Honorable Clarence C. Newcomer 

Argued July 30, 1999 

BEFORE: SLOVITER, NYGAARD and STAPLETON, 

Circuit Judges 

(Opinion Filed: October 15, 1999) 

 Frank C. Razzano (Argued) 

 Eric A. Bensky 

 Dickstein, Shapiro, Morin 

 & Oshinsky 

 2101 L Street, N.W. 

 Washington, D.C. 20037 

 Attorneys for David Yeaman 

 Appellant in No. 98-1102 
 Michael R. Stiles 

 U.S. Attorney 

 Walter S. Batty, Jr. 

 Assistant U.S. Attorney 

 Robert E. Courtney, III 

 Deputy U.S. Attorney 

 Andrea G. Foulkes (Argued) 

 Assistant U.S. Attorney 

 Thomas V. Sjoblom 

 Special Assistant U.S. Attorney 

 Office of U.S. Attorney 

 615 Chestnut Street, Suite 1250 

 Philadelphia, PA 19106 

 Attorneys for United States 

 of America 

 Appellant in No. 98-1146 

 Paul A. Tufano, General Counsel 

 Commonwealth of Pennsylvania 

 330 Market Street 

 Harrisburg, PA 17120 

 and 

 Alan C. Kessler 

 Andrew W. Allison (Argued) 

 Buchanan Ingersoll 

 Eleven Penn Center, 14th Floor 

 1835 Market Street 

 Philadelphia, PA 19103 

 Attorneys for Amicus 

 M. Diane Koken 

 Insurance Commissioner of the 

 Commonwealth of Pennsylvania 

OPINION OF THE COURT 

STAPLETON, Circuit Judge: 

David Rex Yeaman, along with four other defendants,

was convicted of various counts of conspiracy, wire fraud, 

and securities fraud. His conviction resulted from his 

involvement in a complex scheme involving the leasing of 

worthless stocks of three public companies, U.S. Card 

 2 
Investors, Inc. ("U.S. Card"), Omega Power ("Omega"), and 

American Family Services ("AFS"), to the Teale Network 

("Teale"), a fraudulent network of offshore and domestic 

companies.1 Teale represented these leased stocks as assets 

available to pay claims pursuant to reinsurance contracts 

entered into with a Pennsylvania-based insurance 

company, World Life and Health Insurance Co. ("World 

Life"). When these assets were called upon to pay 

outstanding medical reinsurance claims, the stocks were 

deemed worthless. 

Yeaman has appealed from the jury's verdict and a 

sentencing adjustment. The government has cross-appealed 

the sentence imposed by the District Court. 

I. 

World Life became insolvent at some point in or before 

1988. It hid its insolvency from regulators and its insureds, 

however, by placing a piece of land valued at $60,000 on its 

books as worth several million dollars. World Life issued 

the four group medical policies involved in this case in late 

1989, in the spring of 1990, in the summer of 1990, and on 

December 1, 1990. Teale's contracts reinsuring these 

policies were entered on November 16, 1989, May 30, 1990, 

June 28, 1990, November 10, 1990, and November 11, 

1990. Pursuant to these agreements, Teale assumed 100% 

of the liability under the four group medical insurance 

policies issued by World Life in exchange for 92% of the 

premiums paid by World Life's insureds on those policies. 

These reinsurance transactions allowed World Life to reflect 

a reserve credit of approximately $6 million. Teale received 

total premiums from World Life of approximately $7 million 

under its reinsurance contracts. The indictment alleged 

that the conspiracy among Teale and the defendants 

existed from about May of 1990 to June of 1992. 

In 1990, Philip Rennert created Forum Rothmore, which 

acted as an intermediary between Teale and publicly traded 

_________________________________________________________________ 

1. The Teale Network was organized and controlled by Alan Teale. Neither 

is a party to these proceedings but both are alleged to be unindicted coconspirators. We will refer to both collectively as "Teale." 

 3 
corporations that desired to lease their stock. Forum 

Rothmore entered into "surplus contribution agreements," 

known as RENN contracts, with Teale. The first RENN

contract involving one of the defendants was executed on 

September 1, 1990. Yeaman was involved in a series of 

RENN contracts entered between December 1, 1990, and 

April 1, 1991. 

Under the terms of these contracts, corporations leased 

their stock to Teale and authorized the sale of the stock if 

necessary to pay claims under insurance policies that Teale 

had reinsured. The value of the stock leased was calculated 

by multiplying the number of shares by the market price. 

Teale then listed these shares at the same value on the 

financial statements presented to World Life. In exchange, 

Teale paid a percentage of the monthly leasing fees it 

received from World Life to Forum Rothmore, which in turn 

split the fees with the stock providers. Of the approximately 

$7 million Teale received, about $3.3 million was 

distributed to the defendants as rental fees for the leased 

securities. 

Yeaman was president of Capital General Corporation

("Capital General"). Capital General assisted other

companies in going public through mergers with existing 

shell corporations that had previously completed their SEC 

registration. After the merger, Capital General retained 

some interest in the corporations, and Yeaman handled the 

registration and promotion of the stock. National Stock 

Transfer ("NST"), a subsidiary of Capital General, was the 

transfer agent and performed the record keeping functions 

for the public corporations with whom Capital General 

dealt. 

U.S. Card, Omega, and AFS were formed via mergers 

orchestrated by Yeaman and Capital General. U.S. Card 

was a small baseball card business operated in the home of 

the father of one of Yeaman's associates in Hull, 

Massachusetts. Its total inventory was less than $50,000. 

Omega was a nearly insolvent business that bought and 

sold surplus high voltage power line equipment. Omega had 

minimal operations conducted by a sole proprietor who was 

desperately seeking capital for his business. AFS also had 

 4 
no significant assets or profit making activity. Yeaman was 

an officer and director of these three corporations. 

In spite of the minimal value of these corporations, 

Yeaman purported to lease $8 million of U.S. Card stock, 

$2 million of Omega stock, and $2 million of AFS stock to 

Teale. In order to be able to attribute such high values to 

these stocks, Yeaman manipulated the market quotes and 

inflated the financial statements of these corporations. 

Moreover, while certain of these stocks were restricted, they 

were represented to be marketable and were transferred 

without any indication of their restricted status. Forum 

Rothmore assisted Yeaman in leasing these falsely-valued 

and restricted stocks. In short, securities were falsely held 

out by the defendants and Teale to be marketable and 

valuable, when, in fact, they were not marketable and were 

virtually without value. 

In January 1991, the Pennsylvania Insurance 

Department began to investigate World Life's financial 

condition. On July 28, 1991, the Pennsylvania Insurance 

Commissioner declared World Life insolvent and ordered its 

liquidation. Since Teale had been paying insurance claims 

with recently received premiums and had no other 

significant assets to draw upon, this liquidation deprived 

Teale of the ability to pay further claims. 

The Pennsylvania Life and Health Insurance Guarantee 

Fund is a state fund authorized by statute to pay 

outstanding liabilities of licensed Pennsylvania companies 

that become insolvent. The Guarantee Fund is financed by 

Pennsylvania insurance companies. When World Life was 

liquidated, the Guarantee Fund paid the outstanding group 

medical reinsurance claims left unpaid as a result of the 

fraud. The unpaid claims totaled over $6 million. 

In February 1996, Yeaman was indicted in the Eastern 

District of Pennsylvania and charged with one count of 

conspiracy and multiple counts of wire and securities 

fraud. The conspiracy charge included an allegation that 

Yeaman failed to disclose in SEC and NASD filings that he 

"previously had been found to have violated the securities 

laws." (A.116, Count 1 P 6(o)(2)). This allegation was 

incorporated into the wire and securities fraud counts. 

 5 
Yeaman moved to strike this language from the indictment 

on the ground that he had no duty to disclose former 

securities law violations and/or that he did disclose the 

information required by law. 

The District Court denied Yeaman's motion because it 

determined that if certain predicate facts could be

established, Yeaman had a duty to disclose five securitiesrelated administrative proceedings. The government later 

introduced two of these proceedings into evidence. One 

proceeding was a 1988 SEC administrative action against 

NST that resulted in a censure order. See In the Matter of 

National Stock Transfer, Inc., 41 S.E.C. Docket 1219 (1988). 

The other proceeding was an SEC investigation that began 

in 1987 and culminated in a cease and desist order entered 

against Yeaman and Capital General in 1993. See In the 

Matter of Capital General Corp., 54 S.E.C. Docket 1322 

(1993). A third proceeding, in which the Oregon 

Department of Insurance and Finance entered a cease and 

desist order against Yeaman and Capital General, was 

admitted by stipulation of the parties. See In the Matter of 

Capital General Corp. and David Yeaman, E7-49 (Oregon 

Dept. of Ins. & Finance, April 28, 1988). 

After a four week trial, the jury, by general verdict, 

convicted Yeaman of the one count of conspiracy,five 

counts of wire fraud, and three counts of securities fraud. 

At the sentencing hearing, the District Court assigned 

Yeaman an offense level of 11, which included a one-point 

upward departure for causing a loss of confidence in an 

important institution. The District Court found no 

monetary loss attributable to Yeaman and refused to

impose adjustments for jeopardizing the safety of a

financial institution and use of special skills. The District 

Court sentenced Yeaman to 14 months imprisonment and 

a $20,000 fine. 

II. 

Yeaman first contends that his conviction must be 

reversed because the jury's general verdict may have been 

based on an improper legal theory. Yeaman argues that the 

District Court erred in concluding that he had a duty to 

 6 
disclose the 1988 SEC censure order entered against NST 

and the SEC's investigation that began in 1987 and led to 

a 1993 cease and desist order entered against Capital 

General and Yeaman. The admission at trial of evidence of 

these proceedings allowed the jury to consider Yeaman's 

nondisclosure of them in determining whether he was guilty 

of conspiring, wire fraud, and securities fraud. Yeaman 

seeks reversal and a new trial in which such evidence 

would be excluded. The District Court's legal conclusions 

with respect to these two proceedings are subject to plenary 

review. 

A. 1988 SEC Administrative Proceeding against NST 

Regulation S-K, 17 C.F.R. S 229.401, mandates that 

certain information pertaining to corporate management 

and control persons be included in the periodic reports that 

public companies file with the SEC. Item 401(f) of that 

regulation requires disclosure of certain legal proceedings 

that occurred in the past five years and that are"material 

to an evaluation of the ability or integrity of any director, 

person nominated to become a director or executive officer 

of the registrant." Item 401(f)'s six subparagraphs list the 

types of legal proceedings that must be disclosed. Items 

401(f)(3) and (4) require disclosure when "[s]uch person was 

the subject of any order, judgment, or decree, not 

subsequently reversed, suspended, or vacated" of a court of 

competent jurisdiction or federal or state authority, and the 

order, judgment, or decree was related to certain specified 

behaviors. 17 C.F.R. S 299.401(f)(3)-(4) (emphasis added). 

Since Yeaman was an officer and director of U.S. Card 

and Omega, the government alleged that Item 401(f) of 

Regulation S-K required the 1989 and 1990 Form 10-K

reports of these companies to disclose the 1988 SEC order 

entered against NST.2 The 1988 order found that NST had 

violated various securities laws on a number of occasions,3 

_________________________________________________________________ 

2. Because AFS was a non-registrant and non-reporting company under 

the federal securities laws, Regulation S-K does not apply to it. (A.159 

n.16) 

3. In the course of the administrative proceeding against NST, the 

Commission found that NST willfully violated Sections 17(a)(3), 17(f)(1), 

(2), and (3), 17A(c), 17A(d) and Rules 17f-1, 17f-2, 17Ac2-1, 17Ac2-2, 

17Ad-6, 17Ad-10, 17Ad-11, 17Ad-13 thereunder. (A.235-36) 

 7 
censured NST, directed it to take corrective measures, 

ordered it to retain an independent outside accountant to 

report on the implementation of those measures, and

required NST's president to execute an affidavit verifying 

that the services of an independent accountant had been 

engaged. Yeaman was not a named party to the proceeding. 

Before the District Court, Yeaman contended that Items 

401(f)(3) and (4) only refer to persons who were "named" in 

the proceedings and thus that he had no duty to disclose 

the 1988 proceeding against NST. Concluding that this 

argument had no merit, the District Court contrasted the 

text of Items 401(f)(3) and (4) with that of Item 401(f)(2) in 

the same regulation. Item 401(f)(2) requires disclosure if the 

director or control person "was convicted in a criminal 

proceeding or is a named subject of a pending criminal 

proceeding." See 17 C.F.R. S 299.401(f)(2) (emphasis added). 

The District Court observed: "Although Item 401(f)(2) refers 

to `named subject,' Item 401(f)(3) and (4) merely refer to `the 

subject of,' which connotes a broader meaning than`named 

subject.' Surely, if (f)(3) and (f)(4) meant only`named 

subject,' the SEC could have explicitly stated so, as it did 

in (f)(2)." (A.150) 

The District Court went on to note that the government 

had alleged that it possessed evidence demonstrating that: 

(1) Yeaman was the director and president of Capital 

General; (2) Yeaman owned more than 90% of Capital 

General's stock; (3) Yeaman owned and controlled NST 

through Capital General; (4) Yeaman was president of NST 

in 1988 and already was or became its director; and (5) 

NST and Capital General were affiliates as defined in Rule 

405 of the Securities Act, 17 C.F.R. S 230.405. (A.150-51) 

The Court held that if the government could prove these 

allegations at trial, "then there would be no question that 

Yeaman was the `subject of' [the 1988 order entered

against NST]." (A.151) 

On appeal, Yeaman continues to assert that he was not 

"the subject of" the 1988 proceeding within the meaning of 

17 C.F.R. S 229.401(f)(3) and (4) because he was not a 

named party to that proceeding. In support of this 

argument, he cites to the Uniform and Integrated Reporting 

Requirements: Directors and Executive Officers, Securities 

 8 
Act Release No. 33-5949, 1978 SEC LEXIS 1031, at *24 

(July 28, 1978), which states: 

 Item 3 [now known as Item 401, or 17 C.F.R. 

 S 229.401] makes it clear that disclosure of criminal 

 convictions, criminal proceedings, orders, judgments, 

 etc. is required only where the executive officer, 

 director, or nominee for election as a director is a 

 named party in the legal proceeding. 

Yeaman avers that the word "criminal" in this SEC release 

does not modify the terms "orders" or "judgments," and that 

the "named party" limitation therefore applies equally to 

civil orders and judgments. He concludes that we should 

defer to this interpretation of S 229.401(f)(3) and (4) by the 

Commission. 

In order to understand what Item 3 "makes clear," we 

must examine the above-quoted statement in context. Prior 

to 1978, Regulation S-K contained only Items 1 and 2. In 

1976, the Commission proposed several amendments to

Regulation S-K, including a new section requiring 

disclosures concerning directors and officers. Section (f) of 

this amendment as originally proposed is substantially 

similar to the current version of Item 401(f), except that 

Section (f)(2) required disclosure if "[s]uch person was 

convicted in a criminal proceeding . . . or is the subject of 

a criminal proceeding which is presently pending." 

Disclosure of Management Background: Uniform Reporting 

Requirements, Exchange Act Release No. 34-12946, 10

S.E.C. Docket 834, 1976 WL 15989, at *10 (Nov. 2, 1976) 

(emphasis added). In response to comments received on 

this proposed amendment, Item 3(f)(2), as it was known 

upon its adoption in 1978, was amended to read: "[s]uch 

person was convicted in a criminal proceeding or is a 

named subject of a pending criminal proceeding." Securities 

Act Release No. 33-5949, 1978 SEC LEXIS 1031, at *40 

(emphasis added). The SEC's statement in the release cited 

by Yeaman is thus explaining a change in the originally 

proposed section dealing solely with criminal proceedings. It 

is accordingly clear that the word "criminal" was intended 

to modify "orders, judgments, etc." as well as "convictions" 

and "proceedings." We find it equally clear that the District 

Court properly regarded the difference between "named 

 9 
subject" in Item 401(f)(2) and "subject" in Item 401(f)(3) and 

(4) as deliberate and significant and properly concluded 

that the latter term is a broader concept. We thus reject 

Yeaman's reading of Item 401(f)(3) and (4). 

B. SEC Investigation of Capital General and Ye aman

between 1987-1990 

The anti-fraud provisions of the securities laws impose a 

duty to disclose material facts that are necessary to make 

disclosed statements, whether or not mandatory, not

misleading. See 15 U.S.C. SS 77q(a), 77x. The District Court 

held that Yeaman violated this duty by failing to disclose, in 

the Form 10-K reports filed by Omega and U.S. Card in 

March 1990, that he and Capital General had been the 

subject of an SEC investigation since 1987.4 

The 10-K reports of these companies made no reference 

to this investigation and affirmatively asserted the 

following: 

 Other than described above, neither the Registrant nor 

 any of its officers or directors, to their best knowledge, 

 is a party to any material legal proceeding or litigation 

 which would impact the operations or the Registrant, 

 and such persons know of no material legal 

 proceedings, judgments entered, legal actions or 

 litigation contemplated, or threatened which would 

 impair operation of the Registrant in the future. 

(A.152 (quoting 10-K reports)). The Court found that 

disclosure of the investigation was necessary in order to 

make not misleading the disavowal of knowledge of 

threatened proceedings that would impair the operations of 

the corporation. As a result of its holding, the Court 

allowed evidence of the investigation to be admitted at trial. 

While the Court's opinion stated that it found the relevant 

statements to be material and misleading, and thus 

_________________________________________________________________ 

4. In 1993, after a five year investigation, the SEC ordered Yeaman and 

Capital General to cease and desist from committing or causing further 

violations of Sections 5(a) and (c) and 17(a) of the Securities Act, and 

Sections 10(b) and 13(g) of the Securities Exchange Act, and Rules 10b5, 12b-20, and 13d-1(c) promulgated thereunder. See In the Matter of 

Capital General Corp., 54 S.E.C. Docket 1322 (1993). 

 10 
violative of the securities laws, the jury instructions 

indicate that the jury was properly charged to make its own 

determinations in these respects. 

On appeal, Yeaman insists that he did not know at the 

time of filing the 10-K reports that the SEC planned to 

commence litigation. He notes that the administrative 

proceeding that resulted from this investigation was not 

instituted until June 22, 1992, and did not result in a 

cease and desist order until July 23, 1993. He insists that, 

while he knew of the investigation at the time offiling the 

March 1990 reports, he did not know that the investigation 

was focused on or might impact U.S. Card or Omega. As a 

result, he disagrees that a duty to disclose the investigation 

existed or that the affirmative statements contained in the 

10-K reports were misleading in any respect. In response, 

the government points out, inter alia, that the investigation 

had been ongoing since 1987, that it instituted suit against 

Yeaman and Capital General in June of 1990 to enforce a 

subpoena duces tecum theretofore issued to them, and that 

the Court ordered compliance in July of 1990. Taken as a 

whole, the government argues, the evidence compelled the 

conclusion that Yeaman must have been aware of the scope 

and gravity of the investigation prior to March of 1990 and, 

given his knowledge of his own activities prior to March 

1990, he must have known of the probability of a 

proceeding that would implicate U.S. Card or Omega.

We conclude that the government's evidence regarding 

the investigation was properly submitted to the jury for 

consideration as to whether the 10-K reports were 

materially misleading in light of the affirmative statement 

quoted above. While Yeaman argues that the District Court 

committed a legal error, his claim properly characterized is 

that the evidence was insufficient to support a conviction 

on the theory that the reports were materially misleading. 

When reviewing the sufficiency of the evidence, we view the 

evidence in the light most favorable to the government and 

ask whether a "rational trier of fact could have found the 

essential elements of the crime beyond a reasonable doubt." 

United States v. Dent, 149 F.3d 180, 187 (3d Cir. 1998) 

(internal citations omitted). Under this standard, we believe 

the government has tendered sufficient evidence to support 

 11 
this theory. We need not base our rejection of Yeaman's 

argument on this ground, however. 

We have concluded that 15 U.S.C. SS 77q(a) and 77x 

provide a solid legal foundation for the government's theory 

of liability based on failure to disclose the SEC 

investigation. Assuming that there were insufficient 

evidence to support this theory, Yeaman nevertheless would 

not be entitled to a new trial because the government 

advanced other alternative, legally valid theories at trial 

that were supported by sufficient evidence. Under the 

teachings of Griffin v. United States, 502 U.S. 46 (1991), we 

are required in such circumstances to presume that the 

jury found the defendant guilty beyond a reasonable doubt 

on a theory supported by the evidence. 

III. 

Yeaman also requests reversal based on two challenges to 

the jury instructions. Review of the legal standard

enunciated in a jury instruction is plenary, see United 

States v. Johnstone, 107 F.3d 200, 204 (3d Cir. 1997), but 

review of the wording of the instruction, i.e. , the expression, 

is for abuse of discretion. See United States v. Zehrbach, 47 

F.3d 1252, 1264 (3d Cir. 1995) (en banc). This Court 

reviews jury instructions to determine whether,"taken as a 

whole, they properly apprized the jury of the issues and the 

applicable law." Dressler v. Busch Entertainment Corp., 143 

F.3d 778, 780 (3d Cir. 1998) (internal quotation omitted). 

A. Unanimity Instruction 

Section 17(a) of the 1933 Act, 15 U.S.C. S 77q(a), makes 

it unlawful for any person "in the offer or sale of securities 

by the use of any means or instruments of transportation 

or communication in interstate commerce or by the use of 

the mails, directly or indirectly," to do any of the following: 

 (1) to employ any device, scheme, or artifice to defraud, 

 or 

 (2) to obtain money or property by means of any 

 untrue statement of a material fact or any omission to 

 state a material fact necessary in order to make the 

 12 
 statements made, in the light of the circumstances 

 under which they were made, not misleading, or 

 (3) to engage in any transaction, practice, or course of 

 business which operates or would operate as a fraud or 

 deceit upon the purchaser. 

15 U.S.C. S 77q(a). The indictment alleged in the 

conjunctive that Yeaman engaged in conduct that came 

within all three of these subsections. At the conclusion of 

trial, the District Court declined to give the following 

instruction that Yeaman insisted should follow immediately 

after the Court read subsections (1)-(3) of Section 17(a): 

 It is not necessary for the government to establish all 

 three types of unlawful conduct in connection with the 

 offer or sale of securities; any one will be sufficient for 

 a conviction if you so find. However, you must 

 unanimously agree upon which of the types of unlawful 

 conduct the defendant engaged in. If you cannot agree 

 on any one or more of the means, you must find the 

 defendant not guilty. 

 The District Court instead charged as follows: 

 The second element that the government must prove 

 beyond a reasonable doubt is that in the offer or sale 

 of the particular security the defendants did any one or 

 more of the following: 

 (1) employed a device, scheme, or artifice to de fraud, 

 or 

 (2) made an untrue statement of a material fact or 

 omitted to state a material fact which made what 

 was said, under the circumstances, misleading, or 

 (3) engaged in an act, practice, or course of busi ness 

 that operated, or would operate, as a fraud or deceit 

 upon a purchaser, seller, or other person. 

 It is not necessary for the government to establish all 

 three types of unlawful conduct in connection with the 

 offer, sale, or purchase of the particular security. Any 

 one type of unlawful conduct will be sufficient for a 

 conviction, if you so find such unlawful conduct. 

 13 
Yeaman suggests that this instruction constitutes reversible 

error.5 

It is well settled that a defendant in a federal criminal 

trial has a constitutional right to a unanimous verdict. See 

United States v. Edmonds, 80 F.3d 810, 814 (3d Cir. 1996). 

This includes the right to have the jury instructed that in 

order to convict, it must reach unanimous agreement on 

each element of the offense charged. It is equally well 

settled, however, that this does not mean one has a right to 

insist on an instruction requiring unanimous agreement on 

the means by which each element is satisfied. When a 

statute enumerates alternative routes for its violation, it 

may be less clear, however, whether these are mere means 

of committing a single offense (for which unanimity is not 

required) or whether these are independent elements of the 

crime (for which unanimity is required). In making this 

determination, Edmonds teaches that two questions must 

be addressed: 

 First, did the legislature intend the different routes to 

 establish separate "offenses," for which unanimity is 

 required as to every fact constituting the offense, or 

 different "means" of violating a single offense, for which 

 unanimity is not required? Second, if the legislature 

 intended the alternative routes to be mere means of 

 violating a single statute, is the statute's definition of 

 the crime unconstitutional under the Due Process 

 clause? 

Edmonds, 80 F.3d at 815. 

We begin our analysis by noting that Section 17(a)first 

focuses on an historic event -- the offer or sale of a security 

utilizing an instrument of interstate commerce. It then 

requires that the defendants' conduct with respect to that 

offer or sale fall within one or more of three closely related 

_________________________________________________________________ 

5. Although the government contends that this issue was waived, we 

note that defense counsel submitted the above-quoted proposed jury 

instruction indicating the need for unanimous agreement as to which 

subsection of Section 17(a) was violated and objected, both at the 

instruction hearing and at the conclusion of trial, to the District 

Court's 

instructions to the extent that they deviated from their proposed 

instructions. 

 14 
categories -- a "device, scheme or artifice to defraud," 

an obtaining of money or property by material 

misrepresentation, or a transaction that operates as a fraud 

or deceit on a purchaser. While each category has its own 

parameters, see United States v. Naftalin, 441 U.S. 768 

(1979), they are largely overlapping categories and all fall 

within the traditional understanding of the concept of 

fraud. Most conduct that falls within one is likely to satisfy 

another as well. 

These characteristics of the relevant statute and the 

nature of the specific unanimity charge requested here 

distinguish this case from the situation involved in 

Edmonds and Richardson v. United States, 119 S. Ct. 1707 

(1999). The statute involved in those cases, the Continuing 

Criminal Enterprise Statute ("CCE"), requires that the 

defendant have engaged in a "continuing series of 

violations" of a broad range of specified criminal statutes. 

The indictments there charged numerous such violations 

and the defendants asked that the jury be instructed that 

it must unanimously agree on each violation it relied upon 

as satisfying the requirement of a "continuing series of 

violations." In both cases, the Courts declined to find that 

Congress intended "CCE predicate offenses to constitute 

mere means of [committing] a single CCE offense" and 

suggested that such a finding would raise serious questions 

under the Due Process Clause. Edmonds, 80 F.3d at 819. 

Both courts stressed that the "statute's word `violations' 

covers many different kinds of behaviors of varying degrees 

of seriousness" and that failing to treat each violation as a 

separate element would create substantial risk that a guilty 

verdict might mask "wide disagreement among the jurors 

about what the defendant did, or did not, do." Richardson, 

119 S. Ct. at 1711. 

Section 17(a) does not cover "many different kinds of 

behavior of varying degree of seriousness" and the 

requested charge was not directed at the same concern 

identified in Edmonds and Richardson. The statute is 

limited to fraud in connection with an offer and sale of 

securities in interstate commerce. The requested charge did 

not seek to require jury unanimity with respect to whether 

Yeaman engaged in the alleged market manipulation, the 

 15 
alleged representation of restricted securities as 

unrestricted, or the alleged failure to disclose material SEC 

proceedings. Thus its function would not have been to 

increase the assurance that Yeaman committed specific 

criminal conduct. Its only function would have been to 

require jury unanimity on whether Yeaman's conduct 

constituted a scheme to defraud, an obtaining of money by 

material misrepresentation, or a transaction that operated 

as a fraud on a purchaser, as those concepts are used in 

Section 17(a). 

We are confident that the District Court's denial of the 

requested instruction did not in any way frustrate 

Congress's intent in passing Section 17(a) or jeopardize any 

fairness concept embodied in the Due Process Clause. 6 

Indeed, we perceive no purpose that would have been

served by putting the jurors to the task Yeaman's charge 

would impose on them -- a task that would require them 

not only to determine what Yeaman did but also to agree 

upon the outer limits of each of the subsections of Section 

17(a) in this factual context. 

We find the most helpful precedent to be the decision of 

the Court of Appeals for the Ninth Circuit in United States 

v. UCO Oil Co., 546 F.2d 833 (9th Cir. 1976). The statute 

there, 18 U.S.C. S 1001, provided: 

 "Whoever, in any matter within the jurisdiction of any 

 department or agency of the United States knowingly 

 and willfully falsifies, conceals or covers up by any 

 trick, scheme, or device a material fact, or makes any 

 false, fictitious or fraudulent statements or 

 representations, or make or uses any false writing or 

 document knowing the same to contain any false, 

 fictitious or fraudulent statement or entry, shall be 

 fined not more than $10,000 or imprisoned not more 

 than five years, or both." 

_________________________________________________________________ 

6. In order to comport with due process, we have indicated that different 

means for committing an offense "must reflect notions of `equivalent 

blameworthiness or culpability.' " Edmonds, 80 F.3d at 820 (quoting 

Schad, 501 U.S. at 643). In light of the similarity of these three 

alternatives and the fact that each alternative has the same mental state 

requirement, we conclude that this requirement is met. 

 16 
546 F.2d at 836. Each relevant count of the indictment was 

based on an identified document and charged the 

defendants both with having "made . . . false writings . . . 

knowing the same to contain false . . . statements" and 

with having "falsified, concealed and covered up by trick, 

scheme and device material facts." The Court concluded 

that Section 1001 specified alternative means for 

committing a single offense and that, as a result, it was not 

necessary for "the jury, in arriving at a unanimous verdict, 

[to] agree on the particular means by which the offense was 

committed." The Court explained: 

 On the face of it, the statute, framed in a single 

 paragraph and providing a single penalty, does not 

 suggest Congressional purpose to create more than one 

 offense. Moreover, the statute is directed at a single 

 evil, i.e., the "perversion" of "the authorized functions 

 of governmental departments and agencies . . . which 

 might result from the deceptive practices described." 

 United States v. Gilliland, 312 U.S. 86, 93, 61 S.Ct. 

 518, 522, 85 L.Ed. 598 (1941). The types of conduct 

 enumerated all fall within the general understanding of 

 what constitutes fraud. As the court put it in Charles 

 Hughes & Co. v. Securities and Exchange Comm'n, 139 

 F.2d 434, 437 (2d Cir. 1943): 

 "The law of fraud knows no difference between 

 express representation on the one hand and implied 

 misrepresentation or concealment on the other." 

 See also, Gusow v. United States, 347 F.2d 755, 756 

 (10th Cir. 1965). 

 It is reasonable to conclude, therefore, that Congress 

 was concerned with proscribing the prohibited result 

 rather than particular kinds of conduct. That being so, 

 consistency calls for interpreting the enumeration of 

 different kinds of conduct in the statute as reflecting 

 different modes of achieving that result, not separate 

 and distinct offenses. . . . 

546 F.2d at 836. We find this reasoning equally cogent 

here. 

B. Restricted Stock Instruction 

Yeaman also argues that the District Court improperly 

instructed the jury that it could find a Securities Act 

 17 
violation based solely on his having held and transferred 

restricted stock. According to Yeaman, the charge relieved 

the government of its burden of proving that Yeaman

engaged in fraud by misrepresenting the restricted stock as 

free-trading stock. 

After instructing the jury on the elements of Section 

17(a), the judge noted that "the government contends that 

certain of the defendants engaged in the fraudulent sale of 

restricted stock." (A.4159) The judge informed the jury that 

restricted stock is stock acquired directly or indirectly from 

an issuer in a transaction not involving any public offering; 

and that such stock is deemed "restricted" because there 

are restrictions on its resale to the public. See 17 C.F.R. 

S 230.144. The judge then gave the instruction we have set 

forth in the margin.7 

_________________________________________________________________ 

7. Now, the Government contends that the defendants made use of 

certain restricted securities in furtherance of some fraudulent acts and 

practices by distributing and contributing those stocks to the off-shore 

reinsurance companies. I have already defined for you what a restricted 

stock is and the requirements under the law if and when the restricted 

stock is going to be sold. If you find that the defendants held restricted 

stock, then you may find the defendants engaged in acts, practices and 

courses of business that operated as a fraud and deceit. And that they 

made material misrepresentations by manipulating the price of the 

stocks by contributing them to the off-shore reinsurers who placed them 

on their financial statements to give the appearance of highly valued 

assets, by participating in the misrepresentations made by their coconspirators who used those financial statements to misrepresent the 

financial well being of the off-shore reinsurers when contracting with a 

primary insurance company in Pennsylvania. And by misrepresenting 

that these stocks could be liquidated to meet claims when they could 

not. 

Now, the Government also contends that the defendants made use of 

certain restricted securities in furtherance of the fraudulent acts and 

practices by distributing and pledging these restricted stocks to the 

banks which held and maintained the escrow accounts. If you find that 

the defendants held restricted stock, then you mayfind that the 

defendants engaged in acts, practices and courses of business that 

operated as a fraud and deceit and made material misrepresentations in 

connection with the deposit of those stocks into the escrow accounts, if 

you find one or more of the following. 

 18 
We do not find this jury instruction to be legally 

inaccurate or improper in any respect. The purpose of the 

Court's instruction was to provide examples of the way that 

the defendants may have violated Section 17(a), assuming 

that the defendants used restricted stock in the course of 

their dealings. To find defendants guilty under one of these 

possible scenarios, the jury first had to find that defendants 

held restricted stock. The implication of the Court's 

statement "[i]f you find that the defendants held restricted 

stock," is that if the jury did not so find, then their 

consideration of this theory was precluded. If the jury did 

find that the defendant held restricted stock, then the jury 

was obliged to consider whether the evidence supported a 

finding that the defendants engaged in transactions with 

these stocks that would operate as a fraud or deceit. Thus, 

we find no error in the Court's restricted stock instruction. 

IV. 

In combination, the parties raise four sentencing issues. 

The government finds three flaws in the District Court's 

application of the Sentencing Guidelines: (1) the finding of 

no loss under U.S.S.G. S 2F1.1; (2) the failure to impose a 

_________________________________________________________________ 

First, if you find that the defendants contributed through Forum 

Rothmore and World Re and into the escrow accounts stock positions 

they controlled in one or more of the five companies. And at the time 

they did so, they had not held the Rule 144 stock long enough to meet 

the two or three year holding I described previously. Or secondly, Forum 

Rothmore became an underwriter and was thus engaged in an unlawful 

distribution. An underwriter is defined by statute to mean any person 

who either has purchased from an issuer, with a view to or offers or sells 

for an issuer in connection with the distribution of any security. Or any 

person who participates or has a direct or indirect participation in any 

such undertaking. Or third, they engaged in acts, practices or courses of 

business that operated as a fraud on the escrow accounts when they 

engaged in an unlawful distribution and had violated the rules 

concerning the sale of restricted stock. 

It's not necessary you find the defendants engaged in all three of these 

courses of business or conduct. Anyone (sic) is sufficient. 

(A-4164-4166). 

 19 
four-level increase under U.S.S.G. S 2F1.1(b)(6) for a 

substantial effect on a financial institution; and (3) the 

rejection of a special skills enhancement under U.S.S.G. 

S 3B1.3. Yeaman challenges the District Court's upward 

departure based on its finding that Yeaman's fraudulent 

acts resulted in loss of confidence in an important

institution. 

The standard of review of a district court's interpretation 

and application of the Sentencing Guidelines is plenary. 

See United States v. Hallman, 23 F.3d 821, 823 (3d Cir. 

1994). Findings of facts are measured by the clearly 

erroneous test. See United States v. Hillstrom, 988 F.2d 

448, 450 (3d Cir. 1993). This Court's review of a district 

court's decision to depart upward is plenary as to whether 

the increase was permissible. We review the reasonableness 

of the degree of the departure for an abuse of discretion. 

See United States v. Kikumura, 918 F.2d 1084, 1098, 1110 

(3d Cir. 1990). 

A. Calculation of Fraud Loss under U.S.S.G.S 2F1.1 

Section 2F1.1(a) of the Sentencing Guidelines establishes 

a base offense level of six for offenses involving fraud and 

deceit. See U.S.S.G. S 2F1.1.8 Pursuant to Section 2F.1.1(b), 

the base offense level must be increased according to the 

size of the loss. This Court's precedents establish that 

" `fraud loss is, in the first instance, the amount of money 

the victim has actually lost,' " United States v. Coyle, 63 

F.3d 1239, 1250-51 (3d Cir. 1995) (quoting United States v. 

Kopp, 951 F.2d 521, 523, 536 (3d Cir. 1991)). However, "if 

an intended loss that the defendant was attempting to 

inflict can be determined, this figure will be used if it is 

greater than actual loss." Application Note 7 to U.S.S.G. 

S 2F1.1. While the greater of actual loss and intended loss 

is the preferred measure, there are situations in which the 

defendant's gain can appropriately be used as a 

measurement of loss. A court may look to a defendant's 

gain as an alternative measure but only "[w]hen if it is not 

feasible to estimate with reasonable accuracy the victim's 

loss [or intended loss] and where there is some logical 

relationship between the victim's loss and the defendant's 

_________________________________________________________________ 

8. All references to the Sentencing Guidelines are to the 1997 version. 

 20 
gain so that the latter can reasonably serve as a surrogate 

for the former." United States v. Dickler, 64 F.3d 818, 826 

(3d Cir. 1995) (indicating, by way of example, that proceeds 

from resale of object taken could provide estimate of loss 

because sale would establish approximate market value of 

object). Additionally, "the loss need not be determined with 

precision. The Court need only make a reasonable estimate 

of the loss given the available information." Application 

Note 8 to U.S.S.G. S 2F1.1. 

The relevant conduct provision of the Sentencing 

Guidelines, S 1B1.3, provides that specific offense

characteristics, -- in this instance the loss amount that 

should be attributed to the defendant under S 2F1.1, -- are 

to be determined on the basis of the following: 

 (1) (A) all acts and omissions committed, aided, 

 abetted, counseled, commanded, induced, procured, or 

 willfully caused by the defendant; and 

 (B) in the case of a jointly undertaken criminal 

 activity (a criminal plan, scheme, endeavor, or 

 enterprise undertaken by the defendant in concert with 

 others, whether or not charged as a conspiracy), all 

 reasonably foreseeable acts and omissions of others in 

 furtherance of the jointly undertaken criminal activity, 

 that occurred during the commission of the offense of 

 conviction, in preparation for that offense, or in the 

 course of attempting to avoid detection or responsibility 

 for that offense; 

 * * * 

 (3) all harm that resulted from the acts and omissions 

 specified in [the above ] subsections. . . , and all harm 

 that was the object of such acts and omissions. 

U.S.S.G. S 1B1.3. In the context of a jointly undertaken 

criminal activity, Application Note 2 indicates that the 

conduct attributable to a defendant does not include the 

conduct of other participants prior to defendant's joining 

the activity, even if the defendant knows of that conduct. 

See Application Note 2 to U.S.S.G. S 1B1.3. On the other 

hand, one who commits to a scheme to defraud already in 

progress is responsible from that point on for all reasonably 

 21 
foreseeable loss occasioned by other participants acting in 

furtherance of the scheme. 

We have previously held that Section 1B1.3(a)(3) 

establishes a causation requirement when determining 

actual loss. See United States v. Neadle, 72 F.3d 1104, 

1114-15 (3d Cir. 1996) (Becker, J., concurring in part and 

dissenting in part) ("[T]he plain meaning of`resulted from' 

connotes causation."), opinion amended by 79 F.3d 14 (3d 

Cir. 1996); United States v. Evans, 155 F.3d 245, 253 (3d 

Cir. 1998) ("[T]he actual loss determination must be 

predicated on the harm caused by [defendant's] offenses."). 

Where the defendant takes something without giving 

anything to the victim in return, the value of the thing 

taken reflects the victim's loss. However, where the 

defendant gave something of value in exchange for what 

was fraudulently taken, the victim's loss is the difference 

between the value of what he or she gave up and the value 

received in exchange. See United States v. Dickler, 64 F.3d 

818, 825 (3d Cir. 1995). 

In the Pre-Sentence Investigation Report, the Probation 

Office recommended a loss calculation of $6.4 million and 

the addition of 14 levels pursuant to Section 2F1.1(b)(1). 

The $6.4 million amount reflects the unpaid medical

reinsurance payments owed by Teale to World Life 

pursuant to the terms of the reinsurance contracts and 

ultimately paid by the Guarantee Fund. Nonetheless, in 

sentencing the defendants, the District Court determined 

that the offense involved no loss. The government contends 

that the Court erred in several ways: (1) by determining 

that the offense involved no actual loss; (2) by failing to 

consider the loss that Yeaman and his business associates 

intended to impose; and (3) by failing to account for the fact 

that Yeaman and his co-defendants collectively reaped $3.3 

million as a result of the offense. 

In determining that no actual loss occurred, the District 

Court focused on the $6.4 million loss figure contained in 

the sentencing report. The Court concluded: 

 The indisputable fact is that [the] overwhelming 

 majority of harm or loss to the victims occurred prior 

 to any of the defendants joining the conspiracy. Indeed 

 22 
 the evidence shows that the loss that the Government 

 is claiming, namely $6.4 million in unpaid claims,[on 

 the insurance policies], was incurred as liabilities by 

 World Life prior to any conduct by the defendants here. 

 In effect, the defendants could not have made the 

 liabilities greater. The stock they contributed merely 

 failed to cover the liabilities incurred . . . . 

(A.658-59). The Court did not explicitly make anyfindings 

with respect to intended loss. The District Court also did 

not address the gain acquired by Yeaman and the other 

participants in the scheme. 

The District Court found no actual loss because it 

concluded that World Life had issued the policies, and was 

thus committed to pay the $6.4 million in claims, prior to 

the defendant's misrepresentations. We find the District 

Court's analysis flawed for several reasons. 

Yeaman and his co-defendants agreed to participate in a 

scheme that would enable Teale to collect millions of dollars 

in premiums from World Life in exchange for virtually 

worthless reinsurance. The victims of the scheme were 

World Life and the beneficiaries of the group medical 

policies. The record demonstrates that the defendants were 

fully aware of the use to be made of their 

misrepresentations in the stock leasing agreements and it 

strongly suggests that these misrepresentations were 

essential to Teale's continued collection of those premiums. 

The reinsurance contracts provided for their termination in 

the event of the reinsurer's insolvency. Without the assets 

of the defendants and the resulting appearance of solvency, 

the most reasonable inference is that World Life would have 

ceased paying premiums to Teale long before it eventually 

did. The District Court failed to make any finding, however, 

as to the likelihood of a causal connection between the 

misrepresentations of the defendants and Teale's collection 

of premiums after the defendants committed themselves to 

support the scheme. 

If there was a causal connection between the 

misrepresentations of Teale, Yeaman, and the other 

conspirators and the continued receipt by Teale of 

premiums after Yeaman joined the scheme, Yeaman is 

 23 
responsible for an actual loss equal to the premiums 

received after he joined the scheme less any amount paid 

by Teale in satisfaction of policy claims out of those 

premiums or the sale of the reinsurance assets. Yeaman 

would be responsible in this event for an actual loss 

whether or not World Life issued its group policies or 

entered into its reinsurance contract prior to Yeaman's 

entry on the scene. See United States v. Dickler, 64 F.3d at 

825. 

Because Teale collected the premiums from World Life as 

a result of jointly undertaken criminal activity, neither we 

nor the District Court on remand need determine whether 

Yeaman in particular caused World Life to cede these 

amounts to Teale. Under Section 1B1.3(a)(1), Yeaman is 

accountable, not only for his own acts, but also for the 

conduct of others that was: (1) in furtherance of the jointly 

undertaken criminal activity; (2) within the scope of the 

criminal activity Yeaman agreed to jointly undertake; and 

(3) reasonably foreseeable in connection with that criminal 

activity. See U.S.S.G. S 1B1.3(a)(1)(B); Application Note 2; 

United States v. Evans, 155 F.3d 245, 253-54 (3d Cir. 

1998). The record contains ample evidence demonstrating 

that Yeaman understood the extent of Teale's scheme, 

including the roles of other parties to the scheme and the 

need to place a diversity of stocks on Teale's financial 

record in order to pass muster with World Life and 

insurance regulators. Accordingly, we have no difficulty 

concluding that Yeaman is responsible for the acts of all 

others involved in the scheme that occurred after he 

entered the conspiracy, and thus all of the premiums ceded 

by World Life as a result of their combined acts. 

The record indicates that Yeaman entered into hisfirst 

RENN contract on December 1, 1990. On remand, if the 

District Court finds a causal connection between the 

conduct of Teale and the other co-conspirators and Teale's 

continued receipt of premiums, it will determine when 

before December 1, 1990, Yeaman committed himself to the 

conspiracy and will calculate the amounts received by Teale 

in premiums under the reinsurance contracts after that 

date. It should then reduce that amount by the total claims 

paid by Teale. If these amounts cannot be calculated with 

precision, reasonable estimates will suffice. 

 24 
The premiums paid by World Life after Yeaman's decision 

to enter the scheme may not, however, be the only actual 

loss measure that this record will support. In United States 

v. Neadle, 72 F.3d 1104 (3d Cir. 1995), we upheld a district 

court's determination that the actual loss caused by a 

defendant who issued fraudulent insurance policies was the 

amount of unpaid claims of policyholders. The record 

revealed that the defendant misrepresented the amount of 

his initial capital in order to get into the insurance 

business and engaged in fraudulent conduct to perpetuate 

his business. We determined that, but for his fraudulent 

acts, the defendant would not have been able to enter and 

remain in the insurance business. We concluded that the 

insureds' unpaid claims provided a reasonable estimate of 

the harm resulting from the defendant's fraudulent scheme. 

See also United States v. Krenning, 93 F.3d 1257, 1270 (5th 

Cir. 1996)(holding that actual loss caused by defendant 

who disguised the insolvency of his insurance company and 

continued to sell policies was losses of policyholders). We 

see no reason why the Neadle analysis should not similarly 

apply where reinsurance is sold based on a fraudulent 

inflation of the value of the reinsurer's assets. 

In this case, Teale could not have entered and remained 

in the business of reinsuring World Life but for its 

fraudulent misrepresentations. Although the District Court 

made no finding on the issue, the record would also appear 

to us to support the proposition that World Life was not 

capable of insuring any of the four group medical policies 

without having received a commitment for 100% 

reinsurance. It follows that if the Teale fraudulent 

reinsurance contracts had not been available, World Life 

would either have secured other reinsurance or would not 

have issued the group policies involved. If reinsurance from 

a solvent reinsurer had been obtained, all claims under the 

policies would have been paid to the reinsurer; if the group 

policies had not been issued, the employers who purchased 

the policies from World Life would have obtained group 

medical coverage from another source and all claims of the 

beneficiaries would have been paid in full. In either event, 

under the teachings of Neadle, there would have been a 

causal nexus between the fraud and all unpaid claims. 

 25 
While it is true, as Yeaman stresses, that he cannot be 

held responsible for the consequences of Teale's 

misrepresentations before he joined the conspiracy, he 

would be responsible for all loss under a group policy 

reinsured by Teale after he committed to the scheme. The 

timing of Yeaman's own misrepresentation would be 

immaterial. While Yeaman's initial RENN contract was 

entered into on December 1, 1991, a few weeks after the 

last of the reinsurance contracts, the record suggests that 

his decision to join the fraudulent scheme may have

predated at least some of those reinsurance contracts. 

By identifying these ways in which the record suggests 

that Yeaman may be responsible for an actual loss suffered 

by World Life and the beneficiaries of its group medical 

policies, we do not foreclose the District Court from 

concluding, after an analysis consistent with this opinion, 

that the government has failed to carry its burden of 

proving a causal nexus by a preponderance of the evidence. 

Neither do we intend to indicate that a careful analysis of 

the voluminous record here could not find support for other 

theories involving such a nexus. Even if Yeaman joined the 

scheme after all of the reinsurance contracts had been 

entered, for example, it does not necessarily follow that he 

is not responsible for any of the unpaid claims arising 

under the group policies. Neadle emphasizes that an

insurer's continued fraud may allow it to remain in

business longer than it otherwise would. Here, in the 

absence of Yeaman's participation in the scheme, Teale's 

insolvency may have surfaced earlier than it did and less 

loss may have been occasioned to World Life and the

beneficiaries of its group policies than was in fact 

occasioned by the end of the conspiracy. We do not mean 

to foreclose the District Court on remand from pursuing 

this or any other theory of actual loss suggested by the 

record. We hold only that the District Court's limited 

factual findings do not support its conclusion that no 

actual loss was occasioned. 

The government also contends that the intended loss in 

this case exceeds the actual loss and should, therefore, be 

used in applying U.S.S.G. S 2F1.1. It argues that the 

intended loss is the face value of the stock provided by 

 26 
Yeaman and others under the RENN contracts and reported 

in Teale's financial statements. We do not agree that 

Yeaman and his co-conspirators intended to cause a loss 

equal to the amount of the represented value of the leased 

stocks. Intended loss refers to the defendant's subjective 

expectation, not to the risk of loss to which he may have 

exposed his victims. United States v. Kopp, 951 F.2d 521, 

529-531 (3d Cir. 1991). Here, Yeaman and the others

undoubtedly hoped that their fraudulently inflated 

securities would never have to be sold and that the scheme 

would continue for the indefinite future. The loss that they 

intended was the premiums Teale would receive less any 

payment of claims necessary to keep the scheme alive. We 

express no view at this juncture as to whether the current 

record will support a finding of an intended loss in excess 

of the actual loss. 

Additionally, while we do not foreclose the District Court 

from considering the gain of Yeaman and the others on 

remand, their gain would not appear to us to be a helpful 

alternative in this factual context. That gain would appear 

to be limited to an amount equal to the minimum actual 

loss we have held to be appropriate, i.e., to the premiums 

received by Teale after Yeaman's joinder, less any claims 

paid in order to maintain the scheme, including any

amounts paid by Teale in satisfaction of the outstanding 

claims upon liquidation. 

B. Failure to Apply Four Level Increase Under Section 

2F1.1(b)(6) 

Section 2F1.1(b)(6) of the United States Sentencing

Guidelines provides: 

 If the offense-- 

 (A) substantially jeopardized the safety and soundness 

 of a financial institution; or 

 (B) affected a financial institution and the defendant 

 derived more than $1,000,000 in gross receipts from 

 the offense, 

 increase by 4 levels. If the resulting offense level is less 

 than level 24, increase to level 24. 

 27 
U.S.S.G. S 2F1.1(b)(6). Application Note 15 states:

 An offense shall be deemed to have "substantially 

 jeopardized the safety and soundness of a financial 

 institution" if, as a consequence of the offense, the 

 institution became insolvent; substantially reduced 

 benefits to pensioners or insureds; was unable on 

 demand to refund fully any deposit, payment, or 

 investment; was so depleted of its assets as to be 

 forced to merge with another institution in order to 

 continue active operations; or was placed in

 substantial jeopardy of any of the above. 

In the course of rejecting an enhancement under Section 

2F1.1(b)(6), the District Court explained: 

 Based on the evidence the Court finds that the 

 defendants did not substantially jeopardize the safety 

 or soundness of World Life. As with respect to the loss 

 calculation, the Government must demonstrate a 

 causal connection between the defendants' conduct 

 and the safety and soundness of the institution. 

 In this case the conduct of the defendants could not 

 have caused World Life to become insolvent. World Life 

 had been insolvent as a matter of pure accounting long 

 before any of the defendants charged conduct. Clearly 

 the conduct of the defendants could not have caused 

 World Life to become insolvent because it already was. 

 Finally, the evidence does not establish that 

 defendants' conduct caused any of the other 

 consequences in application note 15. 

(A. 659-60). 

While the government concedes that the reinsurers did 

not cause World Life's insolvency, they nonetheless contend 

that the Court erred in refusing to order an enhancement 

under Section 2F1.1(b)(6)(A).9 The government maintains 

that the conduct of Yeaman and the other parties to the 

scheme substantially reduced benefits to insureds and "left 

the company `unable on demand to refund fully any 

_________________________________________________________________ 

9. The government has not raised the issue of whether an enhancement 

was appropriate under Section 2F1.1(b)(6)(B). 

 28 
deposit, payment, or investment' or meet its obligations to 

insureds." Government Br. at 117. 

Consistent with our previous conclusion that the District 

Court's factual findings do not support its holding of no 

actual loss, we conclude that the District Court also erred 

in holding that Yeaman did not substantially jeopardize the 

safety and soundness of World Life by (1) substantially 

reducing benefits to World Life's insureds and (2) placing 

World Life in a position such that it was unable to refund 

premiums that were paid in exchange for non-existent 

coverage. Yeaman and the others received several million 

dollars of premiums from World Life that should have gone 

towards paying insureds' claims or refunding their 

premiums. See United States v. McDermott, 102 F.3d 1379 

(5th Cir. 1996) (holding that, even though victim 

corporation was insolvent independent of fraud,finding of 

actual loss of $5-10 million caused by defendants' fraud 

was irreconcilable with finding that defendants did not 

substantially reduce benefits to insureds or cause 

corporation to be unable to refund deposit, payments, or 

investments). 

Accordingly, we will remand for application of Section 

2F1.1(b)(6)(A). 

C. Upward Departure for Loss of Confidence i n Important 

Institution 

Yeaman appeals the District Court's decision to impose a 

one-level upward departure based on the loss of confidence 

in an important institution that resulted from his 

fraudulent acts. Yeaman's challenge is two-fold. He argues 

that the Court abused its discretion by both (1) concluding 

that this case fell outside the "heartland" of typical fraud 

cases; and (2) determining that the record supported the 

imposed departure. 

We begin our analysis by noting that the Commission

conceives of each offense guideline as "carving out a 

`heartland,' a set of typical cases embodying the conduct 

that each guideline describes." U.S.S.G., Ch. 1, Pt. A intro. 

p.s. 4(b). In the unusual case where a defendant's conduct 

falls outside the typical "heartland," the court may consider 

a departure from the guidelines range. Id. A district court 

 29 
may impose a sentence outside the guideline range where 

"the court finds that there exists an aggravating or 

mitigating circumstance of a kind, or to a degree, not 

adequately taken into consideration by the Sentencing 

Commission in formulating the guidelines that should 

result in a sentence different from that described." 18 

U.S.C. S 3553(b); see U.S.S.G. S 5K2.0. 

As this Court explained in United States v. Iannone, 184 

F.3d 214, 226 (3d Cir. 1999): 

 The Supreme Court provided additional guidance on 

 departures in Koon v. United States, 518 U.S. 81, 95 

 (1996), instructing courts to apply the following 

 analysis when considering a S 5K2.0 departure. First, 

 identify the factor or factors that potentially take the 

 case outside the Guidelines' "heartland" and make it 

 special or unusual. Id. at 95. Second, determine 

 whether the Guidelines forbid departures based on the 

 factor, encourage departures based on the factor, or do 

 not mention the factor at all. Id. at 94-95. Third, apply 

 the appropriate rule: (1) if the factor is forbidden, the 

 court cannot use it as a basis for departure; (2) if the 

 factor is encouraged, the court is authorized to depart 

 if the applicable guideline does not already take it into 

 account; (3) if the factor is discouraged, or encouraged 

 but already taken into account by the applicable 

 guideline, the court should depart only if the factor is 

 present to an exceptional degree, or in some other way 

 makes the case different from the ordinary case in 

 which the factor is present; or (4) if the factor is 

 unmentioned, "the court must, after considering the 

 structure and theory of both relevant individual 

 guidelines and the Guidelines taken as a whole, decide 

 whether [the factor] is sufficient to take the case out of 

 the Guideline's heartland." Id. at 95-96 (internal 

 citation and quotation marks omitted). 

In the instant case, the District Court concluded that a 

resulting loss of confidence in an important institution took 

this case out of the "heartland" of fraud cases. The 

Commission has explicitly encouraged departures based on 

this factor. Application Note 10 to U.S.S.G. S 2F.1.1 

provides a nonexclusive list of circumstances in which the 

 30 
loss calculated pursuant to Section 2F1.1 "does not fully 

capture the harmfulness and seriousness of the conduct." 

Application Note 10 to U.S.S.G. S 2F1.1 (1997). Causing a 

loss of confidence in an important institution is identified 

as one such circumstance. See Application Note 10(e). 

Because the Guidelines suggest that a finding of loss of 

confidence in an important institution is sufficient by itself 

to place a case outside the "heartland" of typical fraud 

cases, we limit our examination to whether the Court 

properly considered the evidence put forth by the 

government and whether this evidence was sufficient to 

support a finding of loss of confidence in an important 

institution.10 

At sentencing, the government argued that the 

defendants' scheme had caused a loss of confidence in both 

the insurance industry and the stock market. In support of 

its arguments, the government submitted a series of letters 

from policyholders of World Life and a letter from William 

McLucas, the Director of Enforcement at the SEC. Although 

it granted the departure, the Court did not state whether it 

based the departure on a finding of loss of confidence in the 

insurance industry, the stock market, or both. 

Yeaman relies on this Court's holding in United States v. 

Neadle, 72 F.3d 1104 (3d Cir. 1996) to support his 

argument that the District Court departure has inadequate 

record support. In Neadle, the defendant, as we have noted, 

had been convicted of mail fraud in connection with the 

formation and maintenance of an insurance company. The 

_________________________________________________________________ 

10. In Yeaman's reply brief, he asserted for thefirst time that Section 

2F.1.1(b)(6) of the Guidelines already takes loss of confidence into 

account, at least when the important institution at issue is a financial 

institution. As a result, Yeaman contends that the Court cannot grant an 

upward departure based on Application Note 10(e) unless the instant 

offense involved exceptional aggravating circumstances. While Yeaman 

has waived this argument by failing to raise it sooner, we nonetheless 

note that it has no merit in this particular case where the financial 

institution at issue for purposes of Section 2F1.1(b)(6), World Life, is 

an 

institution separate and distinct from the "important institution" 

supporting the Court's decision to upwardly depart pursuant to Section 

5K2.0. See discussion infra. 

 31 
district court imposed a one point upward departure on the 

ground that " `[t]he offense itself contributed materially to 

the destruction of the reputation of the insurance industry 

in the territory." Id. at 1112 (quoting district court). This 

Court held that this upward departure was improper. We 

explained: "[T]he court based the upward departure not on 

sworn testimony but on unsupported judicial conclusion. 

Such judicial speculation cannot provide the basis for an 

upward departure." Id. We emphasized that the 

government, when asked for its evidence supporting the 

argument for a departure, had merely cited conversations 

with fifteen insureds of the fraudulent company"who did 

not hold the insurance industry in very high regard, 

meetings with people on the street, and evidence from 

reading newspapers." Id. at 1112 n.8 (internal quotation 

omitted). 

Relying on the language in Neadle, Yeaman contends that 

the upward departure for loss of confidence in an 

institution in this case was similarly based on unsupported 

judicial conclusions rather than competent evidence. First, 

he notes that none of the materials submitted by the 

government in support of the upward departure consisted 

of sworn testimony. Second, he argues that the letters from 

policy holders tendered by the government demonstrate 

nothing more than their frustration occasioned by World 

Life's failure, i.e. their lack of coverage and resulting out-ofpocket expenses or inability to receive health care services. 

Finally, he observes that the SEC letter speaks generally 

about the deleterious effects of fraud on the securities 

market, but does not claim that Yeaman's conduct actually 

contributed to a loss of public confidence in the market. 

We do not understand Neadle to hold that unsworn, but 

reliable and probative evidence cannot be relied upon by a 

sentencing court to support a departure. The law is clearly 

to the contrary. Rather "[i]n resolving any dispute

concerning a factor important to the sentencing 

determination, the court may consider relevant information 

without regard to its admissibility under the rules of 

evidence applicable at trial, provided that the information 

has sufficient indicia of reliability to support its probable 

accuracy." U.S.S.G. S 6A1.3; United States v. Brothers, 75 

F.3d 845, 848 (3d Cir. 1996). 

 32 
With respect to the letters from World Life's insured, we 

find ourselves in agreement with Yeaman. As he points out, 

these letters demonstrate the policyholders' frustration in 

the past with World Life, their inability to receive benefits 

from World Life after having paid their premiums, and the 

resulting financial strain as medical problems arose. None 

of these letters suggest that World Life's insureds will be 

unlikely to purchase medical insurance in the future. 

Nonetheless, the government's evidence is sufficient to 

support a finding of loss of confidence in the stock market. 

The McLucas letter provides an expert opinion that 

manipulation of the market through means like those

employed by Yeaman destroy confidence in the securities 

market and that a fraudulent scheme with respect to a few 

stocks can have a pervasive, detrimental effect. As Director 

McLucas explained: 

 [W]hen the integrity of the secondary market is 

 undermined by a manipulation scheme involving even 

 only a few stocks, there inevitably is a more persuasive 

 effect on the securities markets as a whole. When 

 investors lose confidence in the securities markets as a 

 result of market manipulation of a particular stock 

 market integrity as a whole is diminished. When that 

 happens, investment in securities of other issurers is 

 impeded. 

(A. 495). 

We find that the McLucas letter along with the other 

evidence concerning Yeaman's conduct provides a 

satisfactory predicate for the District Court's upward 

departure. It is not necessary in a situation of this kind 

that the government produce someone whose confidence in 

the institution has diminished as a result of the defendants' 

conduct. We think it clear that a sentencing court may infer 

that the requisite loss of confidence has occurred based on 

the evidence concerning the character of the fraud, and 

expert opinion testimony like that of Director McLucas 

regarding the impact of that kind of fraud on the particular 

institution involved. Moreover, where the Court can draw 

the inference that some loss of confidence in the institution 

occurred, that will suffice; it is not necessary that the loss 

 33 
from this particular scheme be further quantified. See 

United States v. Rowe, 999 F.2d 14 (lst Cir. 

1993)(permitting inference of loss of confidence in the 

health insurance industry based solely on the character of 

the defendant's fraudulent scheme). 

On remand, the District Court should reevaluate its

decision to impose a one level upward departure in light of 

our observations concerning the letters of World Life's 

insured. If it infers that some loss of confidence in the stock 

market has occurred, it may reimpose its original 

departure. 

D. Failure to Apply Two Level Enhancement Unde r Section 

3B1.3 

Section 3B1.3 provides: 

 If the defendant abused a position of public or private 

 trust, or used a special skill, in a manner that 

 significantly facilitated the commission or concealment 

 of the offense, increase by 2 levels. This adjustment 

 may not be employed if an abuse of trust or skill is 

 included in the base offense level or specific offense 

 characteristic. 

Application Note 2 states: 

 "Special skill" refers to a skill not possessed by 

 members of the general public and usually requiring 

 substantial education, training or licensing. Examples 

 would include pilots, lawyers, doctors, accountants, 

 chemists, and demolition experts. 

The government contends that the District Court erred in 

refusing to impose an enhancement on Yeaman based on 

his specialized knowledge of the stock market as a prior 

stock broker and his particular knowledge acquired over 

decades of experience in the over-the-counter (bulletin 

board) market, the inner workings of a brokeragefirm, and 

use of a transfer agent. While the Guideline itself precludes 

the adjustment if the abuse of skill is included in the base 

offense level or specific offense characteristic, the District 

Court declined to impose the enhancement because "the 

basis for the proposed enhancement, constitutes part of the 

elements of the offense for which he has been convicted." 

 34 
(A.710 (emphasis added)). The District Court, believed that 

an enhancement for use of special skills would amount to 

"double counting." 

We hold that the District Court misconstrued the 

applicable law when it looked to whether the special skill 

used was part of the statutory offense, rather than included 

in the Guideline applicable to that offense.11 The relevant 

Guideline here, which applies to all fraud cases, neither 

makes reference to a special skill or directs that Section 

3B1.3 not be applied. It follows that Section 3B1.3 must be 

applied if its factual predicates are satisfied. Accordingly, 

we will remand for initial findings as to whether Yeaman 

possessed special skills within the meaning of Section 

3B1.1 and, if so, whether he used these skills to 

significantly facilitate the commission of the offense.12 While 

Application Note 2 does not specifically recognize stock 

brokers as persons possessing special skills in its list of 

examples, enhancements based on a defendant's special 

skills he or she developed as a broker or financier and used 

in the commission of securities fraud are proper in some 

circumstances. Cf. United States v. Connell, 960 F.2d 191 

(1st Cir. 1992) (holding that stockbroker's ability to launder 

large amount of stock while shielding the true owner's 

identity in a way that a lay person could not do without 

attracting scrutiny supported use of special skill 

_________________________________________________________________ 

11. Yeaman notes that the government agreed, at the sentencing hearing, 

that the issue "was whether or not the special skill used his is so part 

and parcel of the overall offense as to constitute an element." (A.716) 

Nonetheless, we do not find that the government has waived the right to 

assert the correct state of the law. The government's argument appears 

to be due to mere inadvertence rather than a calculated attempt to 

mislead the District Court. In fact, the government stated the law 

correctly in its sentencing memorandum. See In re Chambers 

Development Co., 148 F.3d 214, 229 (3d Cir. 1998) ("Asserting 

inconsistent positions does not trigger the doctrine of judicial estoppel 

unless intentional self-contradiction is used as a means of obtaining 

unfair advantage."). 

12. The government contends that the District Court made this required 

factual finding. The government cites the Court's statement that "this 

program . . . was not devised by Mr. Miller, but by those who were expert 

in the field of manipulating the stock." (A. 718-19) We do not find this 

statement to be sufficiently explicit on this point. 

 35 
enhancement of sentence for violation of federal currency 

reporting requirements). 

V. 

Based on the foregoing analysis, we will affirm Yeaman's 

conviction on all counts and the District Court's imposition 

of a one-point upward departure based on loss of 

confidence in an important institution. We will remand for 

application of U.S.S.G. SS 2F1.1, 2F1.1(b)(6), and 3B1.3. 

A True Copy: 

Teste: 

 Clerk of the United States Court of Appeals 

 for the Third Circuit 

 36