### In the 

# United States Court of Appeals For the Seventh Circuit

____________________ No. 18-2169

U NITED S TATES OF A MERICA, Plaintiff-Appellee,

v.

I SHAIHU H ARMELECH, Defendant-Appellant

.

____________________ Appeal from the United States District Court for the Northern District of Illinois, Eastern Division.

No. 15-CR-724 — Elaine E. Bucklo

, Judge

.

____________________

A RGUED N OVEMBER 28, 2018

— D ECIDED J UNE 24, 2019

____________________

Before R OVNER, H AMILTON , and B RENNAN , Circuit Judges

. B RENNAN , Circuit Judge . A federal grand jury indicted Ishaihu Harmelech on two coun ts of mail fraud under 18 U.S.C. § 1341. Harmelech pleaded guilty to the fi rst count, and the government dismissed the remaining count. In pleading guilty, Harmelech, who owned and operated multiple cable installation companies, admi tt ed to se tt ing up hundreds of DIRECTV accounts under a fraudulent scheme and pocketing the money that should have been paid for servicing those2 No. 18-2169

accounts. He now appeals his se ntence, arguing the district court erred in calculating DIRECTV’s losses and in applying a four-level sentencing enhancement pursuant to Sentencing Guideline § 3B1.1(a). Because we see no error in the district court’s loss calculation and sent encing determination, we affi rm. I. The Scheme Between 2005 and 2011, Harmel ech owned and operatedthree companies that installed cable television services at single-family residences and in multi-dwelling unit properties, such as hospitals, nursing home s, motels, senior living facilities, and apartment buildings. Harmelech managed nine di ff erent employees across his three companies, and he was responsible for the day-to-day operations. He continuously held himself out as an authoriz ed dealer and distributor of cable installation services, despite his authorization havinglapsed in 2005. As an “authorized” dealer, Harmelech contracted directly with cable providers—including DIRECTV— to install receivers in over 150 multi-dwelling unit properties. Unlike single-family residenc es, multi-dwelling units typically have one master antenna system with multiple cable receivers placed in a rack called a “headend.” Each receiver in the headend is tuned to one channel, and the signal is then distributed throughout the building. Each television set in the building may access multiple channels through the headend. For multi-dwelling unit buildings, it is usually the building owner or manager (rather than in dividual unit residents) whocontracts with a cable provider for the entire building’s service. A multi-dwelling receiver is generally more expensive than the same receiver installed in a single-family residence because it provides service to the entire building.No. 18-2169 3

DIRECTV provides satellite television programming to single-family and multi-dwelling customers by installing a satellite receiver on the cust omer’s property and charging a subscription fee. Each receiver bears a unique identi fi cation code, which helps tie that receiver to an individual account. The cost of a subscription depe nds on the type of account (single-family or multi-dwelling) and the channels provided. As is standard industry practice, DIRECTV charges more for multi-dwelling subscriptions thanfor single-family subscriptions. This rate structure re fl ects the di ff erent installation andservice requirements for multi-dwelling unit buildings described above. Authorized dealers and distributors routinely contract with DIRECTV to install receivers in multi-dwelling unit buildings. Despite lacking authorization, Harmelech installed DIRECTV receivers and exploited the multi-dwelling receiver

con fi guration to commit fraud. Harmelech misrepresented his authority to customers to gain their trust and access their personal information to set up fraudulent accounts, as well as used fi ctitious names, to open approximately 384 single-family residential accounts. Once a fraudulent single-family account was created, he would place the receiver meant for that account into the headend at a multi-dwelling building, tuningthe receiver to a channel not already included in the building’s subscription—usually a premium channel with a higher price. Harmelech would then charge the building customer for the fraudulently-installed cha nnel as part of a multi-dwelling subscription. The building customer would payHarmelech directly for all channels installed under a multidwelling subscription, despite being billed by DIRECTV (through Harmelech) at a single-family rate. Harmelech would then pay DIRECTV the lower-billed rate, pocketing the4 No. 18-2169

di ff erence between what was charged and what the building customer paid. Ultimately, Harmelech’s scheme caused DIRECTV to provide multi-dwel ling buildings with channels for which neither Harmelech nor the customers were paying. This scheme continued for over six years and involved several other participants who acted at Harmelech’s direction. For instance, Harmelech’s secret ary assisted him in opening fraudulent accounts and used her personal credit card to make payments for those acco unts on Harmelech’s behalf. Another employee aware of the fraud also opened fraudulent accounts for Harmelech and inst alled single-family receivers in multi-dwelling buildings under Harmelech’s control.Harmelech also directed the activities of seven other employees and convinced four separate companies that were authorized DIRECTV dealers to provide additional receivers to increase the number of fraudulent accounts he could open. In August 2009, suspecting Harmelech was commi tt ing fraud, DIRECTV opened an inte rnal investigation, and hired an outside fi rm, Signal Audit, to assist. As part of the investigation, DIRECTV and Signal Audit a tt empted to locate and access the headend at each multi-dwelling building thatHarmelech serviced. Once inside a building, investigators inspected each receiver in the headend to determine which type of account (single-family or multi-dwelling) was associated with the unique identi fi cation code on the receiver. This allowed investigators to determine whether receivers tied tosingle-family accounts were being used to provide programming for the entire building. DIRECTV and Signal Audit were able to inspect fi ve multidwelling buildings in the Chicago area. For those fi ve buildings, investigators identi fi ed the account type tied to eachNo. 18-2169 5

receiver in the headends and found the receivers did not correspond to the buildings’ DIRECTV accounts. Investigators also obtained from each building manager a list of the channels the building’s resident s received. The investigation produced no evidence that residents were aware of any fraud occurring on their accounts.Once Harmelech learned of the investigation, he instructed the building managers to not cooperate and directed his employees to remove receiv ers from the remaining buildings he serviced before they could be inspected. Harmelech eventually stopped making paym ents to DIRECTV on behalf of all buildings with fraudulent accounts, causing hundreds of accounts to become delinquent. Within three to four months, DIRECTV terminated programming for all accounts serviced by Harmelech.Although Harmelech prevented DIRECTV from inspecting all impacted buildings, the fi ve buildings it did inspect were used to determine the quanti fi able value of its losses. At sentencing, a DIRECTV representative testi fi ed its investigators compared the large numbers of channels the fi ve building managers reported that residents actually received with the smaller numbers of channels for which DIRECTV received subscription payments. This comparison showed DIRECTV should have been paid $2,006 per building per month for the full programming provided. In its internal calculations, DIRECTV credited Harmelech for all monthly payments made on behalf of the fi ve buildings, resulting in a loss to DIRECTV of approximately $1,477 per month per building. Altogether, DIRECTV’s investigat ion revealed an average annual loss in programming costs of approximately $20,000 for each of the fi ve buildings.6 No. 18-2169

II. District Court Proceedings Harmelech pleaded guilty to de frauding DIRECTV and, in his plea declaration, acknowledged the charge of mail fraud carries a maximum sentence of 20 years’ imprisonment.Harmelech also agreed to pay “any other penalties or restitution” imposed by the judge, but he did not stipulate to a restitution amount. At sentencing, the court and the parties discussed how to calculate DIRECTV’s losses. Harmelech argued he should be credited with all payments made, and he should not owe anyrestitution because he brought customers to DIRECTV. Although he admi tt ed DIRECTV was not paid what it should have been because of his fraudulent scheme, Harmelech claimed his scheme bene fi ted the company, and any losses

su ff ered were a result of additional business he brought. Instead of proposing a calculat ion method, Harmelech argued DIRECTV su ff ered zero losses. The government, in contrast, proposed two di ff erent loss calculation methods. The fi rst was an estimate of the value of the programming Harmelech’s customers received, but for which DIRECTV was never paid. That required taking the average monthly cost of the stolen channels from the fi ve inspected buildings and multiplying it by 150, the number ofmulti-dwelling buildings that Harmelech serviced. This calculation yielded a total loss of approximately $3,511,917 ayear, or $21,071,502 for years 2005-2010. The government conceded, though, that “[w]hile the value of those stolen channels would best capture the true loss su ff ered by DIRECTV,” the $21 million estimate was speculat ive because it was based on a small sample size of only the fi ve inspected buildings.No. 18-2169 7

The second loss calculation was based on actual losses from identi fi ed fraudulent accounts. Under this method, the government identi fi ed the fraudulent accounts and calculated the losses associated with those accounts based on three categories: (1) the cost of account delinquencies for fraudulent accounts that became delinqu ent when Harmelech stopped making payments; (2) the value of DIRECTV receivers that were not returned to DIRECTV when it terminated service on fraudulent accounts; and (3) th e value of promotional credits that DIRECTV gave to fraudulent accounts that would not have otherwise quali fi ed for such credits but for Harmelech’s fraudulent scheme. This second calculation did not consider the value of the stolen channels ; it focused only on accountdelinquencies, lost equipment, and promotional credits, making it conservative even in Harmelech’s view. The district court rejected Harmelech’s position, characterizing the relevant question as whether DIRECTV was paidwhat it should have been for the services provided. The district court adopted the government’s second, conservative loss calculation and found Harmelech owed: (1) $108,000 in account delinquencies; (2) $39,00 0 in unrecovered DIRECTV receivers; and (3) $29,600 in promotional customer credits. The court also assessed $166,000 1 in stolen channels for the fi ve inspected buildings and $35,000 for the price DIRECTV

1 To accurately calculate DIRECTV’s known programming losses, thedistrict court began with the $20,000 baseline estimate for annual programming costs per account. It then considered the account opening dates for each of the five buildings; the lo nger an account was open, the greater the programming costs. Based on the age of each account, the district court estimated the total programming loss for the audited buildings as $166,000.8 No. 18-2169

paid to Signal Audit to assist inthe internal investigation. In sum, the district court ordered $372,600 in restitution. 2 After calculating DIRECTV’s losses, the court considered Harmelech’s sentencing range. The court assessed a four-level sentencing enhancement for H armelech’s role as the organizer and leader of an otherwis e extensive fraudulent scheme. U.S.S.G. § 3B1.1(a). Combined with his category II criminal history, the sentencing range came out between 46 to 57 months. The court sentenced Harmelech to 48 months. While Harmelech conceded he acted as the manager of the scheme, he argued he should have received only a two-level enhancement under the Guidelines because the scheme involved fewer than fi ve participants 3 and was not otherwise extensive. U.S.S.G. § 3B1.1(c). In response, the government conceded they had identi fi ed only two employees who knew of the scheme, but that it was otherwise extensive based on several factors: (1) it spanned six years and involved 384 fraudulent accounts across 150 multi-dwelling buildings; (2) the number of people Harmelech needed to maintain the scheme—nine employees, four separate authorized dealers, DIRECTV representatives, building owners and managers, and hundreds of unknowing residents; and (3) the dishonest conduct Harmelech displayed in using unknowing

2 The district court’s calculation wa s $5,000 less than what the figuresadd up to, but neither party noticed or corrected the district court’s mathematical error at sentencing. Because the error did not affect the court’s sentencing calculation under the Guidelines, and because neither party seeks to correct the court’s error on appeal, we accept the restitution amount as calculated.

3 SeeU.S.S.G. § 3B1.1, cmt. n.1 (defining a “participant” as someone who is “criminally responsible for the commission of the offense”).No. 18-2169 9

participants to further his sch eme, including in some cases stealing their identities. On appeal, Harmelech pursues two principal arguments: (1) the district court erred incalculating DIRECTV’s loss amount when it declined to assess zero losses; and (2) thedistrict court erred in applying a four-level sentencing enhancement instead of a two-level enhancement. 4 For the reasons below, we reject these arguments and a ffi rm the district

court.

III. Loss Calculation

We review the district court’s loss calculation for clear error. United States v. Rosen , 726 F.3d 1017, 1024 (7th Cir. 2013). Clear error exists only when we are “left with the de fi nite and fi rm conviction that a mistake has been made.” United States v. Vivit, 214 F.3d 908, 914 (7th Cir. 2000). The loss calculationmust be “not only inaccurate but outside the realm of permissible computations.” See United States v. Gumila , 879 F.3d 831, 834 (7th Cir. 2018) (quoting United States v. Li tt rice, 666 F.3d 1053, 1060 (7th Cir. 2012)).Harmelech fails to make such a showing. He does not argue the court’s calculation was inaccurate or outside the realm of permissible computations; indeed, he admits that thecalculation is accurate and even produces a conservative estimate of DIRECTV’s losses. Ra ther, Harmelech objects to

4 Harmelech’s brief also notes his opposition to the inclusion of evidence at sentencing showing his pers onal finances. The district judgenoted she had either not seen the relevant evidence or it had not influenced her calculations. Because neither party asserts this evidence was the reason for the district court’s loss and sentencing determinations, we do not address it on appeal.10 No. 18-2169

calculating anyloss at all. He argues that all payments he made to DIRECTV on the frau dulent accounts should be“fully credited” to him—without further calculation—because “[l]oss cannot include the value of services a defendant legitimately performed for the victims of his fraud.” United States v. Swanson , 483 F.3d 509, 513 (7th Cir. 2007). This reasoning overlooks a critical step in analyzing loss. “Nominally legitimate payments are not o ff set against intended loss when they are ‘intertwined with and an ingredient of [an] overall fraudulent scheme.’” United States v. Stochel , 901 F.3d 883, 890 (7th Cir. 2018) (quoting United States v. Marvin , 28 F.3d 663, 665 (7th Cir. 1994)). When reviewing a loss calculation this court does not credit payments made in furtherance of the scheme. See Stochel , 901 F.3d at 890 (holdingthat defendant should not receive a credit against loss for payments covering legitimate expenses because the payments made were “essentially the cost of perpetuating the scheme,” “designed to lull his victims so he could avoid detection.”). We decline to adopt Harmelec h’s position which would require us to skip this step in our review of the district court’s loss calculation.While Harmelech admits he made payments in furtherance of the scheme, he claims the payments were nevertheless “legitimate” because DIRECTV fi nancially bene fi tt ed. We again reject his argument. In United States v. Lane , 323 F.3d 568, 585 n. 4 (7th Cir. 2003), we dec lined to credit “gains made by successful investors in a fraudulent investing scheme, as those gains [were] only intend ed to lure and defraud other investors.” And in Stochel , 901 F.3d at 890, we refused to credit a defendant who “stole receiv ership funds and covered his tracks with money from other sources for the purpose ofNo. 18-2169 11

throwing the [victims] o ff his scent and keeping the scam alive.” Notably, in Stochel , we relied on the district court’s fi nding that the defendant was not entitled to anycredit “for the value of the services he provided” regardless of the “substantial fi

nancial bene fi t” the victims gained. Id. Here, the district court didcredit Harmelech for the value of the payments he made to DIRECTV over the course of the scheme (based on the fi gures produced by the internal investigation), but those payments were less than the full amount owed. That was, in fact, the entire structure of Harmel ech’s scheme: make less-thanfull payments to skim money o ff the top without DIRECTVnoticing. Harmelech now asks this court to apply an unprecedented and extraordinary remedy, beyond what we contemplated in Stochel . He asks the court to fi nd not only that his payments were legitimate (as they may be credited without being legitimate), but also that they were su ffi cient to fully compensate DIRECTV for its losses such that no further loss calculation is required. Harmelech’s request con fl icts with applicable case law and fails to acknowledge the extent of the harm he caused DIRECTV. Here, the district court calcul ated DIRECTV’s losses by assessing whether “DIRECTV was ge tt ing paid what it shouldhave been paid.” In calculating this amount, the parties presented the court three alternative theories: (1) Harmelech’s theory that DIRECTV’s loss wa s zero; (2) the government’s fi rst proposal calculating losses for all impacted buildings by projecting costs across the board based on a sample size of fi ve buildings; and (3) the government’s second proposal adding together the concrete losses for all known fraudulent

accounts.12 No. 18-2169

The court chose option three, plus two other known losses: the value of the stolen channels (for just the fi ve inspected buildings) and the cost of the internal investigation. By both parties’ admissions, the court’s calculation was conservative. It did not assess speculative lo sses, but instead focused on speci fi c, concrete loss fi gures: $108,000 in account delinquencies; $39,000 in unrecovered DIRECTV receivers; $29,600 in promotional customer credits; $166,000 in stolen channels for fi ve buildings; and $35,000 to compensate for the internal investigation costs. Because the district court’s loss calculation was concrete, speci fi c, conservative in its results, and consistent with this court’s existing precedent, we see no error in the calculation. We further conclude the calculation was neither inaccurate nor outside the realm of permissible computations—indeed, it was one of three alternative options the parties presented to the court, and each compon ent of the court’s chosen fi gure accounted for a known and quanti fi able loss. IV. Organizer or Leader of “Otherwise Extensive” SchemeUnder the Sentencing Guidelines, a four-level enhancement is applied to a defendant’s o ff ense level when the defendant is an “organizer or lead er” of criminal activity that “involved fi ve or more participants or was otherwise extensive.” U.S.S.G. § 3B1.1(a). If the defendant is an organizer or leader of criminal activity with fewer than fi ve participants and the activity is not considered otherwise extensive, then a two-level enhancement applies. U.S.S.G. § 3B1.1(c). On these issues, we review the district court’s factual fi ndings for clear error and legal conclusions de novo. See Stochel , 901 F.3d at 888; see also Rosen , 726 F.3d at 1024 (reviewing defendant’s role as leader or manager for clear error); United States v.No. 18-2169 13

Hussein , 664 F.3d 155, 156, 162 (7th Cir. 2011) (reviewing “otherwise extensive” element for clear error); United States v. Arojojoye , 753 F.3d 729, 737 (7th Cir. 2014) (reviewing whether § 3B1.1 applies de novo).

Harmelech admits he directed his fraudulent scheme, but claims it was not otherwise extensive. A fraudulent scheme is “otherwise extensive” if the defendant “made a substantial portion of [his] income” from the fraud scheme, the scheme “continued in operation” for an extended period, or thescheme “used many people,” including unknowing individuals “to make the pro fi t from the scheme.” United States v. Sheikh , 367 F.3d 683, 688-89 (7th Cir. 2004); see also Hussein , 664F.3d at 161-62. If the “otherwise extensive” element is satisfi ed, the defendant need only have exercised actual control over one other participant for the four-level enhancement to apply. United States v. Blaylock , 413 F.3d 616, 621 (7th Cir. 2005); see U.S.S.G. § 3B1.1, cmt. n.3 (“In assessing whether an organization is ‘otherwise extensive,’ all persons involved during the course of the entire o ff ense are to be considered. Thus, a fraud that involved only three participants but thatused the unknowing services of many outsiders could be considered extensive.”). Harmelech concedes the scheme spanned over six years and involved hundreds of fraudulent accounts from 150 multi-dwelling buildings, often us ing the personally identifying information of residents wi thout their knowledge. He personally owned the three businesses used to perpetuate the fraud and made his living op erating them. He supervised nine employees, two of whom knew of the fraud and facilitated it at Harmelech’s direction. He lied to four separate authorized dealers, DIRECTV representatives, and building14 No. 18-2169

owners and managers to open fraudulent customer accounts, gain access to the buildings, an d increase the number of receivers he could fraudulently install. His customers identi fi ed him as their sole point of contact for cable services, and they refused to work with other cable providers, or DIRECTV or Signal Audit employees. Harmelech’s scheme was for his own fi nancial bene fi t—and, for six years, he did bene fi t. Based on this evidence, we see no error inthe district court’s decision

to fi nd the scheme was otherwise ex tensive. The four-level enhancement was properly applied. For the reasons above, we AFFIRM.