1995 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

12-19-1995

United States of America v. Neadle

Precedential or Non-Precedential:

Docket 94-7417

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Recommended Citation

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1 

UNITED STATES COURT OF APPEALS 

FOR THE THIRD CIRCUIT 

 

No. 94-7417 

 

UNITED STATES OF AMERICA 

v. 

LAWRENCE NEADLE, JR., 

 Appellant. 

 

 

On Appeal from the District Court of the Virgin Islands, 

Division of St. Croix 

(D.C. Criminal Action No. 92-cr-00113-2) 

 

Argued April 17, 1995 

Before: BECKER, NYGAARD and ROTH, Circuit Judges

(Opinion Filed December 19, l995) 

 

Thurston T. McKelvin, Esq. (Argued) 

Federal Public Defender 

Stephen A. Brusch, Esq. 

Assistant Federal Public Defender 

P.O. Box 3450 

Christiansted, U.S. Virgin Islands 00822-3450 

 

 Attorneys for Appellant 

W. Ronald Jennings 

United States Attorney 

James R. Fitzner (Argued) 

Assistant U.S. Attorney 

1108 King Street - Suite 201 

Christiansted, St. Croix 

U.S. Virgin Islands 00820 
2 

 Attorneys for Appellee 

 

OPINION OF THE COURT 

 

ROTH, Circuit Judge:

 Appellant Lawrence Neadle, Jr., pled guilty to one 

count of mail fraud. At sentencing, the district court imposed a 

sixty-month term of imprisonment and a three-year term of 

supervised release. On appeal, Neadle contends that the district 

court misapplied the United States Sentencing Guidelines 

("Guidelines") in its calculation of the victims' loss under 

U.S.S.G. § 2F1.1(b) and its upward departure based on the amount 

of that loss. He also alleges that the court erred in granting 

an upward departure based on psychological harm to the victims 

and on loss of confidence in the insurance industry. We hold 

that the district court properly calculated the loss arising from 

the appellant's fraud and that it did not err in its upward 

departure based on the amount of loss. We find, however, that 

the district court erred in its conclusion to depart upward for 

psychological harm/loss of confidence. We will, therefore, for 

the reasons stated below, vacate defendant's sentence and remand 

for resentencing pursuant to this opinion. 

I.
3 

A.

 The appellant, Lawrence M. Neadle, Jr., and two codefendants were indicted on one count of conspiracy and eight 

counts of mail and wire fraud on November 18, 1992. After one 

co-defendant was acquitted, a superseding indictment charged 

Neadle and the other co-defendant with substantially the same 

offenses. Count I of the Superseding Indictment charged them 

with a conspiracy in violation of 18 U.S.C. § 371; Counts II and 

III charged them with mail fraud in violation of 18 U.S.C. §1341; 

and Counts IV through IX charged them with wire fraud in 

violation of 18 U.S.C. § 1343. 

 In October 1993, Neadle changed his plea to Count II of 

the superseding indictment (mail fraud) from not guilty to 

guilty. Pursuant to the plea agreement, the remaining counts 

against him were dismissed at sentencing. On July 6, 1994, the 

district court sentenced Neadle to sixty months imprisonment and 

placed him under supervised release for a three-year period upon 

his release from prison. Neadle was released pending appeal and 

filed his notice of appeal the next day. 

 The charges against Neadle arose from his creation of 

the American Property and Casualty Insurance Company ("AMPAC"). 

Neadle was chief executive officer of the company. In late 1987, 

he applied to the Division of Banking and Insurance of the Virgin 

Islands ("Insurance Division") for a license to form AMPAC. At 

that time, the Insurance Division required an insurance company 

to have a minimum capital of $450,000, an initial surplus capital 

of $250,000, and a bond of $500,000. Neadle provided the 
4 

Insurance Commissioner with a surety bond for $500,000 but 

misrepresented the amount of the company's initial capital.0 

 On January 5, 1988, Neadle caused a letter to be sent 

through the United States mail to the Insurance Division, stating 

that AMPAC had unencumbered certificates of deposit in the sum of 

$700,000 in the Naples Federal Savings and Loan Association 

("Naples Federal") in Naples, Florida. In fact, however, the 

certificates were encumbered, as Neadle was fully aware. Unaware 

of the deception, the government of the Virgin Islands in January 

1988 issued AMPAC a license to do business in that territory. 

 After obtaining the loan for the certificates of 

deposit, AMPAC paid interest on the loan of $2,300 a month. 

AMPAC's quarterly reports to the Insurance Division, however, 

listed the $700,000 in encumbered certificates as an asset but 

did not list that amount as an offsetting liability, and the 

reports did not include the interest payments. 

 In September 1989, Hurricane Hugo hit the Virgin 

Islands. AMPAC was unable to meet the resulting claims of its 

policyholders. The Virgin Islands government established the 

Hurricane Hugo Fund Program to pay the claims for AMPAC and 

American Alliance, the other Virgin Islands insurance company 

that failed as a result of claims arising out of the hurricane. 

B.

 

0 Subsequently, the Insurance Division became concerned 

about the surety company, which had issued the bond, and required 

Neadle to post the $500,000 in cash. Neadle complied. 
5 

 At the July 12, 1993, pre-trial hearing in this matter, 

witnesses testified regarding the Insurance Division's capital 

requirements. Derek Hodge, the Lieutenant Governor and Insurance 

Commissioner of the Virgin Islands at that time, testified that 

he would not have certified a company to do business without the 

$700,000 minimum in capital and paid-in surplus. Hodge also 

stated that he followed guidelines, promulgated by the National 

Association of Insurance Commissioners, requiring all insurance 

companies to maintain a solvency ratio of three to two in 

premiums to surplus. He further testified regarding the methods 

he used to ensure that insurance companies doing business in the 

Virgin Islands complied with the requirements. He stated that, 

among other things, he reviewed audits conducted by Insurance 

Commission examiners, who reviewed quarterly financial statements 

submitted by the companies. 

 Deverita Sturdivant, Director of the Insurance Division 

from January 1987 through the end of 1989, testified that the 

$700,000 minimum capital requirement applied to new businesses. 

She stated that once a company started writing policies, the 

company might need to increase its capital to ensure the proper 

premium dollars to surplus ratio. Sturdivant testified further 

that had she discovered that AMPAC did not meet the minimum 

capital requirement, the Insurance Division could have demanded 

that unencumbered assets be infused into the company or, in the 

alternative, that the company be liquidated. 

 In May 1994, the district court held a hearing to 

address the defense objections to the Presentence Investigation 
6 

and Report. Ricardo Luaces, a claims examiner employed by the 

Insurance Division from 1989 to 1993, testified that the gross 

figure for Hurricane Hugo losses incurred on property insured by 

AMPAC was $37,655,038. The adjusted Hurricane Hugo claims of 

AMPAC policyholders amounted to $24,438,748. Roland Riviere, an 

independent insurance adjuster retained to assist in adjusting 

the claims of AMPAC's insureds for Hugo-related damage, quoted 

the same figure. 

 John McDonald, the Chief Examiner for the Insurance 

Division during the time that the Insurance Division compiled 

Hugo-related claims, testified that the best estimate of non-Hugo 

related claims on AMPAC was $500,000. He further testified that, 

in early 1988, the Insurance Division had discovered that AMPAC 

had no general ledger -- the basic accounting format in which 

debits and credits are captured -- so that AMPAC's assets and 

liabilities could not be determined. At that time, the 

Commission also detected a commingling of funds between AMPAC and 

Caribbean Mutual, another of Neadle's companies. McDonald 

testified that the Commission directed Neadle to correct these 

accounting problems but that by the time of the hurricane, there 

were still no accounting records from which AMPAC's assets could 

be determined. McDonald confirmed, however, that one of Neadle's 

accountants, Norman Erasso, had begun implementing the requested 

accounting procedures. Erasso, however, left the territory when 

Hugo struck and did not return. 

 Neadle testified that, as of the date of the hurricane, 

he had reinsurance of $4 million. He contended the reinsurer had 
7 

assured him that this amount would be adequate, based on previous 

hurricane damage in the Virgin Islands. 

C.

 At sentencing, the district court applied the 1988 

edition of the Sentencing Guidelines, the version in effect on 

the date of the offense.0 The court found that because Neadle 

"obtained his license [to issue insurance] by fraud and 

trickery," he was responsible for a loss of $20,438,748, which 

represented the adjusted claims of $24,438,748, less AMPAC's $4 

million in reinsurance. Appendix ("App.") at 399-400. Pursuant 

to § 2F1.1(b)(L) of the 1988 Guidelines, the base level for fraud 

offenses was 6; if the loss exceeded $5,000,000, an eleven level 

increase was to be added to the base. The court granted this 

eleven level increase. 

 Pursuant to U.S.S.G. § 2F1.1(b)(2), the court also 

awarded a two level increase on the alternative grounds that the 

crime involved more than minimal planning or more than one 

victim. The court concluded 

that the offense was by its nature more complex than 

simple; that the defendant did take significant 

affirmative steps to conceal the offense; that the 

 

0The district court properly applied the version of the 

Guidelines in effect at the date of the offense because, at the 

time of sentencing, § 2F1.1 of the Guidelines had been amended by 

adding four new offense level increases for losses exceeding 10, 

20, 40 and 80 million dollars. This amendment would call for a 

16 level increase over the base offense level for the loss as 

calculated here, rather than the 11 level increase which had been 

in effect until November 1989. See, e.g., United States v. 

Corrado, 53 F.3d 620, 622-23 (3d Cir. 1995) (if application of 

guidelines in effect at sentencing results in more severe penalty 

than that in effect at time of offense, earlier version controls; 

applying a guideline amendment that enhances the penalty offends 

the ex post facto clause of the United States Constitution). 
8 

offense itself required planning and the falsification 

of a series of documents; and that these acts involved 

a series of discrete decisions, clearly not opportune 

in nature. 

App. at 404-05. Moreover, the court stated "that the hundreds of 

policyholders and the government comprise the victims of the 

offense." App. at 405. The court granted a two level decrease 

for Neadle's acceptance of responsibility. 

 The court then departed upward from the guideline 

offense level on two grounds. First, pursuant to U.S.S.G. 

§2F1.1, comment 10, the court found that the fact that the loss 

amounts were substantially above the highest amount listed in the 

Guidelines ($5,000,000) warranted an upward departure. Looking 

by analogy to the 1993 amendments to the Guidelines, the court 

departed upward a further five levels (from level 11 to 16), 

which corresponded to the increase under the 1993 version of the 

Guidelines for a loss exceeding $20,000,000. Second, the court 

found U.S.S.G. § 2F1.1, comment 9, to warrant an upward departure 

of one level for the "psychological harm risked or caused by the 

offense" and one level for "the loss of confidence in an 

important institution." 

 In sum, the court departed upward seven levels from an 

offense level of 17 to an offense level of 24, which corresponded 

to a guideline sentencing range of from 51 to 63 months. The 

court then imposed a sentence of 60 months. 

II.

 The District Court of the Virgin Islands had 

jurisdiction pursuant to 18 U.S.C. § 3241. We have jurisdiction, 
9 

pursuant to 28 U.S.C. § 1291, to review a final order of a 

district court and, pursuant to 18 U.S.C. § 3742, to review a 

sentence imposed under the United States Sentencing Guidelines. 

We exercise plenary review over legal questions concerning the 

meaning of sentencing guidelines but apply the clearly erroneous 

standard to factual determinations underlying their application. 

United States v. Daddona, 34 F.3d 163 (3d Cir.), cert. denied, __ 

U.S. __, 115 S. Ct. 515 (1994); United States v. Katora, 981 F.2d 

1398, 1401 (3d Cir. 1992). 

III.

 We first address Neadle's challenge to the district 

court's interpretation of "loss" as it is calculated pursuant to 

U.S.S.G. § 2F1.1(b), an issue over which this court exercises 

plenary review. See United States v. Badaracco, 954 F.2d 928 (3d 

Cir. 1992). We conclude that the district court properly 

calculated the loss, arising from the appellant's fraud, to be 

$20,438,748, that figure being the net, adjusted $24,438,748 loss 

to victims whose property was insured with AMPAC at the time that 

Hurricane Hugo struck St. Croix, reduced by the amount of AMPAC's 

reinsurance ($4 million). 

 In his appeal, Neadle raises two grounds for 

challenging the district court's calculation of the amount of 

loss. First, he argues that, after obtaining the license to form 

AMPAC, he intended to run the company in a proper, business-like 

way. Second, he contends that the property losses suffered by 

AMPAC policy holders resulted from an unforeseeable act of God, 

so that he would have been unable to pay the claims even in the 
10 

absence of his fraud. Therefore, he maintains, the loss figure 

should not be used to increase his sentence pursuant to U.S.S.G. 

§ 2F1.1. 

 The district court based its computations upon the 

actual loss suffered by the AMPAC policyholders, rather than upon 

the loss which Neadle intended to inflict, see U.S.S.G. § 2F1.1, 

comment 7 (1993) ("if an intended loss that the defendant was 

attempting to inflict can be determined, this figure will be used 

if it is greater than the actual loss)0 or upon the offender's 

gross gain from committing the fraud, see Badaracco, 954 F.2d at 

936 (breach of fiduciary duty by officer of a financial 

institution may justify using the "gross gain" alternative to 

estimate loss). The court also sentenced Neadle based on the 

loss as of the date of sentencing, see United States v. Kopp, 951 

F.2d 521, 531 (3d Cir. 1991), rather than the loss as of the date 

of the offense, see Shaffer, 35 F.3d at 115, so that the 

reinsurance Neadle had contracted for was subtracted from the 

loss. 

 Neadle characterizes the case as analogous to a 

contract case in which he was planning to perform, albeit after 

obtaining the contract by fraudulent means.0 He argues that 

 

0In a fraud case, the intended loss may be no loss at all, when 

fraud is committed to obtain a contract or a license or a loan to 

do business which the offender hopes will succeed -- as the 

defendant here claims was his intent. See e.g. United States v. 

Shaffer, 35 F.3d 110, 113 (3d Cir. 1994). However, under the 

Guidelines, intended loss is relevant in the loss computation 

only if the intended loss is greater than the actual loss. 

0 The government portrays this fraud case as analogous to 

a simple theft case, arguing that the "property" taken was the 
11 

because he did not intend to inflict any loss, no dollar amount 

is attributable to him. App. at 397. He emphasizes that when 

the government requested that he provide $500,000 cash in lieu of 

the $500,000 bond required by law, he complied. Moreover, he 

notes that his accountant, Erasso, had begun to comply with the 

government's accounting suggestions but left the Virgin Islands 

when Hugo struck. Finally, he maintains that he attempted to get 

adequate reinsurance coverage and that he did not engage in, and 

the government did not prove that he engaged in, day-to-day fraud 

in the operation of AMPAC. 

 Contrary to Needle's argument, however, there is strong 

record support that Neadle not only misrepresented the amount of 

his initial capital investment but also engaged in fraudulent 

conduct to perpetuate his business. During the eighteen month 

period in which AMPAC sold insurance policies, the Insurance 

Division could not locate basic accounting records from which it 

could assess the company's assets and liabilities. Moreover, 

examiners found a commingling of funds between AMPAC and another 

of Neadle's companies, Caribbean Mutual. In addition, the 

company continued to file financial statements that fraudulently 

concealed the fact that AMPAC's $700,000 in certificates of 

 

receipt of the license to sell casualty insurance in the Virgin 

Islands, which resulted in the Hugo-related losses. The 

Government argues that "the sentencing court could properly have 

assessed the loss occasioned by the appellant's fraud as being 

the value of all property insured by AMPAC, including property 

that was not damaged by Hurricane Hugo." Even if we were to 

accept the Government's position, this court has held that "[t]he 

fraud guideline . . . has never endorsed sentencing based on the 

worst-case scenario potential loss." Kopp, 951 F.2d at 529. 
12 

deposit at Naples Federal were encumbered assets.000 in 

certificates of deposit at Naples Federal were not unencumbered 

assets. Finally, although Neadle obtained reinsurance, no 

reinsurer could adequately assess AMPAC's true reinsurance 

requirements unless the reinsurer was provided with basic records 

indicating AMPAC's assets and liabilities. The deceitful and 

slipshod way in which Neadle ran the business supports the 

district court's attribution of responsibility to him for the 

losses. We conclude that the actual loss caused to AMPAC 

policyholders by the fraud was the proper basis for the loss 

computation under § 2F1.1(b).0

 We also find Neadle's argument that Hurricane Hugo was 

an act of nature beyond his control and that the property losses 

occasioned thereby should not be used in calculating his sentence 

to be without force. Hurricanes are a continuing threat in the 

Caribbean. Coverage for hurricane damage is a type of coverage 

which is often specifically sought, albeit not always easily 

found, in that area. Moreover, the insurance policies at issue 

contained express coverage of hurricane-related property losses. 

 

0 We do not agree with the dissent that the loss to the 

policyholders here was not caused, at least in part, by Neadle's 

fraud in obtaining the license to do business. The dissent 

implies that the individuals, who purchased policies from AMPAC, 

could not have purchased insurance coverage from any other source 

and for that reason did not suffer any loss from the damage done 

by Hurricane Hugo which they would not otherwise have suffered. 

However, despite the tightness of the insurance market in the 

Virgin Islands, the record before us does not support the 

supposition, and Neadle does not claim, that there was no other 

insurance coverage available in the Virgin Islands market for the 

AMPAC policy holders. 
13 

Neadle did not attempt to sell hurricane coverage in Chicago or 

in Wichita; he sold it in the Caribbean, a hurricane zone. 

 Moreover, as we have previously held in Kopp, it is not 

appropriate to reduce the amount of the loss, as computed under 

the Guidelines, in order to reflect other causes of the loss 

which were beyond the defendant's control. 951 F.2d at 531. See

U.S.S.G. § 2F1.1(b), comment 11. An intervening force that 

increases a fraud-related loss will not decrease the loss 

valuation but will only provide possible grounds for a downward 

departure. Kopp, 951 F.2d at 531. 

 To the extent that the defendant's objection to the 

loss computation in this case can be construed to be a request 

for a downward departure based on the nature of the risk 

involved, the district court clearly rejected that request in the 

court's determination to depart upward in computing the amount of 

the loss. The district court, in determining to depart upward 

due to the underrepresentation of the loss in the 1988 version of 

the Guidelines, cited United States v. Monaco, 23 F.3d 793 (3d 

Cir. 1994). App. at 411. In that case, we vacated the district 

court's judgment and remanded for resentencing after clarifying 

the scope of the court's power to depart downward based on 

application note 11 to U.S.S.G. § 2F1.1. We stated that "a 

wrongdoer should [not] completely escape a sentencing enhancement 

if his scheme involved a substantial risk of loss merely because, 

under his own rosy scenario, no loss was intended." Monaco, 23 

F.3d at 799 n.10. We held that the court's discretion to depart 

downward pursuant to application note 11 is limited by the 
14 

inherent risk of loss in the perpetrator's fraud, explaining that 

"risk is one of the losses that a perpetrator of fraud imposes on 

his victims." Id. 

 We believe that the district court properly considered 

the risk, in this case of a hurricane, an act of God, imposed on 

AMPAC's insureds because of the defendant's fraudulent conduct. 

Had Neadle expressly made a request for a downward departure for 

an act of God, the court would have been proper in denying it. In 

holding AMPAC out as insuring against a known risk, defendant 

extracted premiums from unsuspecting policyholders who believed 

that they were securing protection when in fact that protection 

was an empty shell. Moreover, defendant's misrepresentations 

persisted throughout the period AMPAC was operating. 

 Neadle's arguments obscure the fact that but for his 

fraud, he would not have been in the insurance business. By 

deceiving the government concerning the $700,000 certificates of 

deposit, by submitting fraudulent quarterly financial statements, 

and by failing to maintain financial records, Neadle misled the 

government for approximately a year and a half. Had such 

fraudulent conduct not occurred, AMPAC would not have begun to 

operate as an insurance broker in the Virgin Islands and would 

not have continued to do so without maintaining adequate 

accounting records. The district court recognized a clear causal 

connection between the fraud and the policy holders losses. See

App. at 399-400. 

 Our decision finds support in United States v. 

Robichaux, 995 F.2d 565 (5th Cir.), cert. denied, __ U.S. __, 114 
15 

S. Ct. 322 (1993). In Robichaux, the Fifth Circuit addressed a 

similar case in which mail and wire fraud led to the failure of 

an insurance company. The defendant, Edward Robichaux, 

misrepresented that securities he had assigned to an insurance 

company were unencumbered assets. Without the assets, the 

company "would have been undercapitalized and thus barred from 

any further insurance business." Id. at 567. The Louisiana 

Insurance Commission retained an independent firm to audit the 

company. Robichaux verified to that firm the company's ownership 

of the securities in question. Relying on the verification, the 

auditors issued a favorable report. Approximately two years 

later, the insurance company was declared insolvent. Id. 

 Robichaux argued that, for purposes of the Sentencing 

Guidelines, he should be held responsible only for the 

commissions he had been paid by the insurance company after he 

had made the fraudulent assignment of assets to it. The district 

court, however, held him responsible for the losses attributable 

to the company's failure. The Fifth Circuit agreed, holding that 

it was not clearly erroneous for the district court to find that 

the losses attributable to the insurance company's failure 

resulted from the defendant's actions in placing fraudulent 

securities on the company's books. Id. at 571. The court 

concluded that it was 

not clearly erroneous to assume that if [the 

independent auditor] had not issued a favorable audit 

for [the insurer], which only occurred because of [the 

insurer's] fraudulently inflated balance sheet, the 

Commission would have acted to liquidate the firm at an 

earlier date and minimized the losses. 
16 

Id.. The court upheld the district court's loss estimate -- an 

estimate of the loss that the state of Louisiana suffered as a 

result of the insurance company's failure -- as reasonable and 

not clearly erroneous. Id.

 Similarly, we find not clearly erroneous the district 

court's conclusion that Neadle's inadequate financing and 

recording at AMPAC caused the government of the Virgin Islands to 

license AMPAC and to permit it to remain in business which in 

turn caused the policy holders' Hugo-related losses. We will 

affirm the district court's loss figure, because it is a 

reasonable estimate of the harm which resulted from Neadle's 

fraudulent scheme and which reasonably could be expected to 

result from a scheme which insured for hurricane damage in the 

Caribbean hurricane zone. 

IV.

 We next must consider whether the court erred by 

reading U.S.S.G. § 2F1.1, Application Note 9, to warrant an 

upward departure of one level for the "psychological harm risked 

or caused by the offense" and one level for "the loss of 

confidence in an important institution." Since we are reviewing 

the district court's application of particular facts to a 

departure approved by the Sentencing Commission, we review only 

for clear error. United States v. Astorri, 923 F.2d 1052, 1058 

(3d Cir.), cert. denied, 502 U.S. 970 (1991). We conclude that 

the evidence is insufficient to warrant an upward departure on 

either ground. 
17 

 A district court may impose a sentence outside the 

sentence range prescribed by the Sentencing Guidelines 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. § 3553(b). Application Note 9 to U.S.S.G. 

§ 2F1.1 provides a nonexclusive list of circumstances in which 

the loss calculated pursuant to U.S.S.G. § 2F1.1 -- the provision 

establishing the base level for offenses involving fraud or 

deceit -- "does not fully capture the harmfulness and seriousness 

of the conduct." Among the examples of circumstances in which 

upward departures may be warranted are those on which the 

district court relied, instances in which "the offense caused or 

risked physical or psychological harm"0 and instances in which 

"the offense caused a loss of confidence in an important 

institution." 

 At sentencing, the court granted a one point upward 

departure based on "the psychological and social impact [of 

Neadle's offense] on the people of the Virgin Islands." An 

 

0 Neadle argues that the district court improperly 

applied the 1988 edition of the Guidelines to this ground of 

departure. The 1993 edition of the Guidelines provides that an 

upward departure may be warranted where "the offense caused 

reasonably foreseeable, physical or psychological harm or severe 

emotional trauma." U.S.S.G. § 2F1.1, comment 10(c). Neadle 

suggests that the 1993 provision should apply, because it 

clarifies, rather than substantively changes, the 1988 language. 

We need not consider this argument, because we do not find 

evidence of psychological harm within the meaning of the 

Guidelines in any event. 
18 

upward departure based on psychological harm is appropriate only 

"[i]f a victim or victims suffered psychological injury much more 

serious than that normally resulting from the commission of the 

offense." U.S.S.G. § 5K2.3. The Guidelines state that 

[n]ormally, psychological injury would be sufficiently 

severe to warrant application of this adjustment only 

when there is a substantial impairment of the 

intellectual, psychological, emotional, or behavioral 

functioning of a victim, when the impairment is likely 

to be of an extended or continuous duration, and when 

the impairment manifests itself by physical or 

psychological symptoms or by changes in behavior 

patterns. 

Id. 

 A district court is to be given considerable deference 

in assessing psychological impact on victims. United States v. 

Astorri, 923 F.2d at 1058-59. However, the court must not merely 

speculate regarding psychological harm. In the instant case, the 

record is barren of evidence regarding physical or psychological 

harm sustained by the victims. We do not find any evidence of 

the sort of "chronic substantial impairment of a victim's mental 

functioning" upon which this court has relied in upholding upward 

departures based on psychological injury. See id. at 1059 

(upholding upward departure for psychological harm where evidence 

showed, among other things, that victim suffered from high blood 

pressure and remained under doctor's care as a result of 

defendant's actions). Therefore, we cannot find that the victims 

suffered psychological or physical harm, which exceeded that 
19 

occurring in the heartland of fraud offenses, to such a degree as 

to justify an upward departure.0

 The court also granted a one point upward departure on 

the grounds that "[t]he offense itself contributed materially to 

the destruction of the reputation of the insurance industry in 

the territory." App. at 410. The court stated that "[t]here is 

no doubt in the court's mind that Neadle's acts contributed 

substantially to a loss of confidence in an important 

institution." App. at 411. Again, the court based the upward 

departure not on sworn testimony but on an unsupported judicial 

conclusion.0 Such judicial speculation cannot provide the basis 

for an upward departure. 

V. 

 

0 See United States v. Pelkey, 29 F.3d 11, 15-16 (1st 

Cir. 1994) (finding that victims' feelings of lack of trust, 

frustration, shock, and depression were not "so far beyond the 

heartland of fraud offenses as to constitute psychological harm 

within the meaning of the Policy Statement in § 5K2.3 or" the 

application note to § 2F1.1); United States v. Mandel, 991 F.2d 

55, 58-59 (2d Cir. 1993) (finding psychological injuries of 

victims insufficient to warrant upward departure from base 

offense level where "both the base offense level for fraud and 

the vulnerable-victim adjustment had already taken into account 

the harm to the victims"). 

0 The lack of evidence supporting this ground for 

departure is evident from the record of the hearing at which 

Neadle raised his objections to the Presentence Report. Asked 

for evidence regarding loss of confidence in the industry, the 

government attorney merely cited conversations with fifteen AMPAC 

insureds who "did not hold the insurance industry in very high 

regard," meetings "with people on the street," and evidence from 

"reading newspapers." App. at 230-31. Indeed, based on the 

hearing, the court weakened the original language of the report 

to state broadly that the offense "contributed to the general 

decline in the confidence and esteem held for the insurance 

industry." App. at 231. 
20 

 We conclude that the district court correctly 

calculated the loss arising from Neadle's fraud as the net, 

adjusted loss to those victims whose property was insured with 

AMPAC at the time Hurricane Hugo struck St. Croix, reduced by the 

amount of the company's reinsurance. Nevertheless, we will 

vacate the judgment of sentence and remand this case for 

resentencing, because the district court improperly increased 

Neadle's guideline sentence by two levels, based on caused or 

risked physical or psychological harm and on loss of confidence 

in the insurance industry. 

United States of America v. Lawrence Neadle, Jr., Appellant

No. 94-7417 
2 

BECKER, Circuit Judge, concurring and dissenting. 

 This appeal presents an important question regarding 

the definition of "loss" under the fraud section of the United 

States Sentencing Guidelines ("Guidelines" or "USSG"), USSG 

§2F1.1(b). We must determine whether this definition 

incorporates a causation requirement, and if so, what that 

requirement entails. Because the majority fails to explicitly 

address this issue, and because I disagree with the majority's 

conclusion as to the determination of loss, I do not join in 

Parts III and V of the majority opinion. I do join, however, in 

Parts I, II, and IV. 

 The majority affirms the district court's calculation 

of loss without giving sufficient attention to the nexus between 

Lawrence Neadle's illegal conduct -- misrepresentations that 

AMPAC had complied with the requirement that insurance companies 

have $700,000 in unencumbered assets -- and the $20 million in 

unpaid AMPAC claims. This inattention is not surprising given 

the Guidelines' lack of guidance on the definition of loss. 

Indeed, USSG § 2F1.1 seems to envision loss as a readily apparent 

financial harm existing independent of legal definitions. 

 While the amount of unpaid AMPAC claims may, at first 

glance, seem to be the relevant financial harm, the severe 

consequences of criminal penalties impose on courts the duty to 

undertake a more searching inquiry. Legal concepts must be 

susceptible to definition, and it is our duty to explicate these 

definitions. We have performed this task before, see, e.g., 

United States v. Kopp, 951 F.2d 521 (3d Cir. 1991) (defining loss 
3 

under USSG § 2F1.1), and it is now necessary to do it again. The 

Guidelines' language, its commentary, the caselaw, and sound 

sentencing policy all lead me to conclude that a financial harm 

is loss under section 2F1.1 only if it was caused by the 

defendant's illegal conduct. This causation requirement demands, 

at the least, that the defendant's conduct be a "cause in fact" 

of the harm at issue, i.e., that the harm would not have occurred 

but for the defendant's conduct. 

 I dissent because, applying the "but for" standard, the 

record contains insufficient evidence to find that Neadle's fraud 

was a cause of the $20 million in unpaid claims. Because of this 

error in loss calculation, I would vacate and remand for 

resentencing. 

I. Causation as an Element of Loss

 In my view, the Guidelines require a finding of 

causation before a harm may be used as loss for purposes of 

section 2F1.1. The causation requirement, pervasive in the 

criminal law, see infra part II, is made explicit in the language 

of the Guidelines and is buttressed by caselaw and policy 

considerations. 

A. The Language of the Sentencing Guidelines

 The plain language of the Guidelines dictates that 

courts must make a finding of causation before assigning some 

harm as loss under section 2F1.1. Although the text of section 

2F1.1 contains no definition of the specific offense 
4 

characteristic loss, the Guidelines provide for such deficiencies 

by establishing default rules that govern, inter alia, what 

conduct and harms are relevant to determining specific offense 

characteristics. One of these default rules makes clear that 

courts may consider only those harms that were caused by the 

defendant's conduct. Because no other provision of the 

Guidelines provides instructions to the contrary, this default 

rule governs the determination of loss under section 2F1.1. 

 Because the loss table in effect at the time of 

sentencing -- the 1993 loss table -- would provide for a greater 

penalty than would the loss table in effect at the time of the 

offense -- the 1988 loss table -- the 1988 Guidelines apply in 

their entirety.0 Thus, except where noted, my discussion is 

based on the 1988 Guidelines. 

 

0USSG § 1B1.11(b)(1) (1994) states that "[i]f the court 

determines that use of the Guidelines Manual in effect on the 

date that the defendant is sentenced would violate the ex post 

facto clause of the United States Constitution, the court shall 

use the Guidelines Manual in effect on the date that the offense 

of conviction was committed." USSG § 1B1.11(b)(2) (1994) then 

states that "[t]he Guidelines Manual in effect on a particular 

date shall be applied in its entirety." See generally United 

States v. Corrado, 53 F.3d 620 (3d Cir. 1995) (explaining this 

"one book rule"). Because the loss table in effect at the time 

of sentencing provides for more jail time per dollar of loss than 

do earlier versions of the loss table, see majority opinion note 

3, the Guidelines applicable at the time of the offense apply in 

their entirety. 

 The question then is: what version of the Guidelines 

was in effect at the time of Neadle's offense? The majority and 

the district court apply the 1988 edition of the Guidelines, 

which incorporates amendments effective October 15, 1988. They 

do this despite the fact that there is a strong argument that the 

offense for which Neadle was convicted occurred on January 5, 

1988. Pursuant to a plea agreement, Neadle was convicted of only 

the mail fraud charge alleged in count two of the indictment. 
5 

1. Section 1B1.3 

 The text of section 2F1.1 provides no definition of the 

term loss. It simply states that "[i]f the loss exceeded $2,000, 

increase the offense level as follows," and then provides a table 

of sentencing increases based on different amounts of loss. See

USSG § 2F1.1(b). Thus, we must look elsewhere for the definition 

of loss. 

 The first place to look is Chapter 1, Part B of the 

Guidelines, which provides guidance on how to interpret the 

Guidelines' sometimes sparse provisions. Within this chapter, 

USSG § 1B1.3 specifies what information courts may consider in 

determining, inter alia, specific offense characteristics such as 

loss under 2F1.1. See USSG § 1B1.3(a). The information 

specified in section 1B1.3(a) is the only information relevant to 

determining specific offense characteristics "[u]nless otherwise 

specified" by another provision of the Guidelines. Id.; see also

USSG § 1B1.3 Background ("Subsection (a) establishes a rule of 

construction by specifying, in the absence of more explicit 

 

Count two charges that the crime of mail fraud occurred on 

January 5, 1988, when Neadle mailed a letter to the Insurance 

Division stating that its assets were unencumbered. 

Nevertheless, the district court's judgment states that the 

offense was concluded on October 31, 1989. The district court's 

finding as to the duration of the offense seems justified by the 

fact that Neadle concealed his initial mail fraud by continuously 

filing false quarterly reports. Although it is unclear whether 

Neadle accepts the district court's finding as to the duration of 

his offense, he seems to acquiesce in the use of the 1988 

Guidelines. Because of Neadle's acquiescence and the agreement 

of the government, the district court, and the majority that the 

1988 Guidelines apply, I will use the 1988 Guidelines as well. 
6 

instructions in the context of a specific guideline, the range of 

conduct that is relevant to determining the offense level . . . 

."). 

 Section 1B1.3(a) establishes several important 

interpretive rules. Subsection (a)(1) states that specific 

offense characteristics will be based only on the following 

conduct: acts and omissions committed, aided and abetted by the 

defendant, or for "which the defendant would be otherwise 

accountable" (defined as conduct counseled, commanded, induced, 

procured, or willfully caused by the defendant, reasonably 

foreseeable acts in furtherance of a conspiracy, or, conduct 

underlying a conviction for solicitation, misprision or accessory 

after the fact that reasonably should have been known by the 

defendant)0 "that occurred during the commission of the offense 

 

0Application Note 1 defines "conduct 'for which the defendant is 

otherwise accountable'" as follows: 

Conduct "for which the defendant is otherwise 

accountable," as used in subsection (a)(1), 

includes conduct that the defendant 

counseled, commanded, induced, procured, or 

willfully caused. If the conviction is for 

conspiracy, it includes conduct in 

furtherance of the conspiracy that was known 

to or was reasonably foreseeable by the 

defendant. If the conviction is for 

solicitation, misprision or accessory after 

the fact, it includes all conduct relevant to 

determining the offense level for the 

underlying offense that was known to or 

reasonably should have been known by the 

defendant. 

USSG § 1B1.3 Application Note 1 (citations omitted). This 

definition has been, for the most part, incorporated into the 

text of the current version of section 1B1.3. See USSG § 

1B1.3(a)(1) (1994). We may consider subsequent amendments to the 
7 

of conviction, in preparation for that offense, or in the course 

of attempting to avoid detection or responsibility for that 

offense, or that otherwise were in furtherance of that offense." 

USSG § 1B1.3(a)(1). Except for a special class of offenses --

"offenses of a character for which § 3D1.2(d) would require 

grouping of multiple counts" -- this is the only conduct courts 

may consider absent an expression of contrary intent.0

 More importantly, subsection (a)(3) establishes a 

causation requirement with respect to harms. Unless otherwise 

specified, the only harm that is to be taken into account in 

determining a specific offense characteristic is harm "that 

resulted from" the acts and omissions identified above "if the 

harm . . . was caused" with the requisite level of intent, and 

harm that was "the object of such acts and omissions." USSG 

§1B1.3(a)(3) (emphasis added).0 That the harm must be caused

with some bad intent necessitates that the harm be caused in the 

 

Guidelines "to the extent that such amendments are clarifying 

rather than substantive changes." USSG § 1B.11(b)(2) (1994). 

0"Solely with respect to offenses of a character for which 

§3D1.2(d) would require grouping of multiple counts," courts may 

also take into account "all such acts and omissions that were 

part of the same course of conduct or common scheme or plan as 

the offense of conviction." USSG § 1B1.3(a)(2). 

0In full, Section 1B1.3(a)(3) states that courts may consider 

all harm or risk of harm that resulted from 

the acts and omissions specified in 

subsections (a)(1) and (a)(2) above, if the 

harm or risk was caused intentionally, 

recklessly or by criminal negligence, and all 

harm or risk that was the object of such acts 

or omissions. 

USSG § 1B1.3(a)(3). 
8 

first place. Furthermore, the plain meaning of "resulted from" 

connotes causation. Indeed, Webster's Third New International 

Dictionary defines the verb "result" as follows: "to proceed, 

spring, or arise as a consequence, effect, or conclusion." 

Webster's Third International Dictionary of the English Language

1937 (Philip Babcock Gove ed., 1966). Thus, absent an expression 

to the contrary, a court may take into account only harm that 

"arose as a consequence" of the defendant's conduct -- and only 

if that harm was "caused" with some bad intent -- and (perhaps 

for offenses that were thwarted prior to their completion) harm 

that was "the object" or purpose of the defendant's conduct.0

 

0I recognize that subsequent versions of the Guidelines have 

deleted the requirement that the harm be caused with bad intent, 

as well as the "risk of harm" language. In the 1994 Guidelines, 

for example, section 1B1.3(a)(3) states that courts may consider 

"all harm that resulted from the acts and omissions specified in 

subsections (a)(1) and (a)(2) above, and all harm that was the 

object of such acts and omissions." The Committee explained 

these changes as follows: 

The purpose of this amendment is to delete 

language pertaining to "risk of harm" and 

"state of mind" as unnecessary. Cases in 

which the guidelines specifically address 

risk of harm or state of mind are covered in 

the amended guideline under subsection (a)(4) 

[formerly subsection (a)(5)]. In addition, 

the amendment deletes reference to harm 

committed "intentionally, recklessly, or by 

criminal negligence" as unnecessary and 

potentially confusing. 

USSG Appendix C, Amendment 76, p. 86 (1994). To the extent these 

changes can be characterized as "clarifying rather than 

substantive changes," which we are invited to take into account 

in understanding an earlier version of the Guidelines, see USSG 

§1B.11(b)(2) (1994), they do not change my view that the 

Guidelines establish a causation requirement. Section 

1B1.3(a)(3) retains the "resulted from" language, which, as I 

state in the text, connotes causation. 
9 

 Because loss under section 2F1.1 is clearly a "harm" 

within the meaning of section 1B1.3, see USSG § 1B1.3 Application 

Note 3 (defining "harm" as "bodily injury, monetary loss, 

property damage and any resulting harm" (emphasis added)), 

section 1B1.3's requirement of causation applies. Thus, if no 

other Guideline provisions addressed the definition of loss, the 

bare statement in the text of section 2F1.1 to increase the 

defendant's sentence on the basis of loss must be read to include 

a requirement of causation. 

2. Other Guidelines Provisions

 Turning now to other provisions of the Guidelines that 

address the issue of loss, the question is not whether they 

explicitly state a causation requirement, but whether they 

contradict the rule of causation established by section 1B1.3. I 

conclude that the Application Notes to section 2F1.1, and the 

materials referenced therein, only reinforce 1B1.3's causation 

requirement. 

 Application Note 7 to section 2F1.1 deals specifically 

with the definition of loss, but it provides little guidance. It 

states as follows: 

Valuation of loss is discussed in the 

Commentary to § 2B1.1 (Larceny, Embezzlement, 

and Other Forms of Theft). In keeping with 

the Commission's policy on attempts, if a 

probable or intended loss that the defendant 

was attempting to inflict can be determined, 

that figure would be used if it was larger 

than the actual loss. For example, if the 

fraud consisted of attempting to sell $40,000 

in worthless securities, or representing that 

a forged check for $40,000 was genuine, the 
10 

"loss" would be treated as $40,000 for 

purposes of this guideline. 

USSG § 2F1.1 Application Note 7. 

 The Commentary to section 2B1.1 (the Guideline for 

"Larceny, Embezzlement, and Other Forms of Theft"), referenced 

above, provides slightly more guidance: 

"Loss" means the value of the property taken, 

damaged or destroyed. Ordinarily, when 

property is taken or destroyed the loss is 

the fair market value of the particular 

property at issue. Where the market value is 

difficult to ascertain or inadequate to 

measure harm to the victim, the court may 

measure loss in some other way, such as 

reasonable replacement cost to the victim. 

When property is damaged, the loss is the 

cost of repairs, not to exceed the loss had 

the property been destroyed. 

USSG § 2B1.1 Application Note 2. Thus, for theft and similar 

crimes, the Guidelines state that "'[l]oss' means the value of 

the property taken, damaged, or destroyed." 

 This definition certainly does not negate section 

1B1.3's background rule of causation. If anything, the 

definition itself suggests a causation requirement. Implicit in 

this definition is that loss means the value of the property 

taken, damaged, or destroyed by the defendant. The terms 

"taken," "damaged," and "destroyed" have meaning only insofar as 

there is a subject -- a taker, damager, or destroyer. In this 

context, the subject must be the defendant -- the person being 

sentenced for taking, damaging, or destroying some property. In 

other words, loss for purposes of section 2B1.1 is the value of 
11 

the property that the defendant caused to be taken, damaged, or 

destroyed.0

 Another provision touching on the concept of loss is 

Application Note 8 to section 2F1.1, which deals with loss 

estimation. It states: 

The amount of loss need not be precise. The 

court is not expected to identify each victim 

and the loss he suffered to arrive at an 

exact figure. The court need only make a 

reasonable estimate of the range of loss, 

given the available information. The 

estimate may be based on the approximate 

number of victims and an estimate of the 

average loss to each victim, or on more 

general factors, such as the nature and 

duration of the fraud and the revenues 

generated by similar operations. Estimates 

based upon aggregate "market loss" (e.g., the 

aggregate decline in market value of a stock 

resulting from disclosure of information that 

was wrongfully withheld or misrepresented) 

are especially appropriate for securities 

cases. The offender's gross gain from 

committing the fraud is an alternative 

estimate that ordinarily will underestimate 

the loss. 

USSG § 2F1.1 Application Note 8. This provision's discussion of 

loss estimation does not undercut the background requirement of 

causation. 

 The only provision that explicitly mentions the issue 

of causation is Application Note 11. It states: 

In a few instances, the total dollar loss 

that results from the offense may overstate 

 

0As I explain below, see infra section I.B, we have held that 

loss for purposes of section 2B1.1 is not identical to loss for 

purposes of section 2F1.1, despite the latter's reference to the 

former's definition. My point here is simply that nothing in the 

commentary to section 2B1.1 undercuts the rule that only harms in 

some sense caused by the defendant can be assigned as loss under 

section 2F1.1. 
12 

its seriousness. Such situations typically 

occur when a misrepresentation is of limited 

materiality or is not the sole cause of the 

loss. Examples would include understating 

debts to a limited degree in order to obtain 

a substantial loan which the defendant 

genuinely expected to repay; attempting to 

negotiate an instrument that was so obviously 

fraudulent that no one would seriously 

consider honoring it; and making a 

misrepresentation in a securities offering 

that enabled the securities to be sold at 

inflated prices, but where the value of the 

securities subsequently declined in 

substantial part for other reasons. In such 

instances, a downward departure may be 

warranted. 

USSG § 2F1.1 Application Note 11. 

 The phrase "when a misrepresentation is . . . not the 

sole cause of the loss" might suggest that the loss figure can 

include harms not caused by the defendant. But this is a 

misreading of the Application Note. That the defendant's conduct 

need not be the sole cause of the loss in no way excuses that 

conduct from being a cause.0 The availability of a downward 

 

0My view is not changed by subsequent amendments to the 

Application Notes to section 2F1.1. Even if these amendments are 

given weight as "clarifying" changes, I do not find them 

sufficient to overcome the background rule of causation. In lieu 

of Application Note 11, Application Note 7 to section 2F1.1, 

which deals specifically with the definition of "loss," now 

contains an additional paragraph: 

There are, however, instances where 

additional factors are to be considered in 

determining the loss or intended loss: 

 . . . . 

(b) Fraudulent Loan Application and Contract 

Procurement Cases

In fraudulent loan application cases and 

contract procurement cases, the loss is 

the actual loss to the victim (or if the 
13 

 

loss has not yet come about, the 

expected loss). For example, if a 

defendant fraudulently obtains a loan by 

misrepresenting the value of his assets, 

the loss is the amount of the loan not 

repaid a the time the offense is 

discovered, reduced by the amount the 

lending institution has recovered (or 

can expect to recover) from any assets 

pledged to secure the loan. However, 

where the intended loss is greater than 

the actual loss, the intended loss is to 

be used. 

In some cases, the loss determined above 

may significantly understate or 

overstate the seriousness of the 

defendant's conduct. For example, where 

the defendant substantially understated 

his debts to obtain a loan, which he 

nevertheless repaid, the loss determined 

above (zero loss) will tend not to 

reflect adequately the risk of loss 

created by the defendant's conduct. 

Conversely, a defendant may understate 

his debts to a limited degree to obtain 

a loan (e.g., to expand a grain export 

business), which he genuinely expected 

to repay and for which he would have 

qualified at a higher interest rate had 

he made truthful disclosure, but he is 

unable to repay the loan because of some 

unforeseen event (e.g., an embargo 

imposed on grain exports) which would 

have caused a default in any event. In 

such a case, the loss determined above 

may overstate the seriousness of the 

defendant's conduct. Where the loss 

determined above significantly 

understates or overstates the 

seriousness of the defendant's conduct, 

an upward or downward departure may be 

warranted. 

USSG § 2F1.1 Application Note 7 (1994). In the second example in 

this note -- the grain exporter example -- the Guidelines seem to 

assign as "loss" a harm that would have occurred regardless of 

the defendant's fraud. The example assumes that the grain 

exporter would have (1) obtained the loan whether or not he 
14 

departure for situations in which a misrepresentation is not the 

"sole cause" of the loss simply accounts for the fact that some 

events have multiple causes. If causes beyond the defendant's 

control played a large role in the loss, a downward departure may 

be justified. If anything, the Note's discussion of a 

misrepresentation that is not the "sole cause" of the loss 

implies that such misrepresentation is a cause of the loss, and 

the Note thus supports the need for a finding of causation. See

United States v. Kopp, 951 F.2d 521, 531 (3d Cir. 1991) 

("Application Note 11 made it clear that actual loss was how much 

better off the victim would be but for the defendant's fraud. To 

the extent actual loss had other, more proximate causes, a 

discretionary downward departure . . . might be appropriate." 

(emphasis added)).0

 

committed fraud; and (2) defaulted on the loan whether or not he 

committed fraud. Nevertheless, the example suggests that the lack 

of causation is a ground for downward departure, and thus, the 

argument goes, the lack of causation should not be factored into 

"loss" in the first instance. 

 I reject this argument for the same reasons that I 

state in the text. In addition, I note that the grain exporter 

example is stated under the heading "Fraudulent Loan Application 

and Contract Procurement Cases," of which the present case is 

neither. 

0The statements from Kopp quoted in the text shed light on some 

other confusing language from that case. Language in Kopp

arguably suggests that Application Note 11 mandates taking 

account of the lack of causation only by way of making a downward 

departure, and not by adjusting the amount of loss: 

The government is correct on one point, 

however: Application Note 11 definitively 

rejected adjusting the "loss" itself downward 

to reflect other causes beyond the 

defendant's control. As an example of when 

the dollar loss may overstate the seriousness 
15 

 In the end, the Application Notes to section 2F1.1, and 

the materials referenced therein, only reinforce 1B1.3's 

causation requirement. Reading these materials together with the 

background rule of causation, the Guidelines seem to contemplate 

the following approach: The court should first make an estimate 

of the loss, i.e., the financial harm caused by the defendant. If 

the harm caused by the defendant was also caused by other factors 

beyond the defendant's control, the court should consider making 

a downward departure to better reflect the seriousness of the 

defendant's offense. 

B. Caselaw

 This Court's caselaw also suggests the presence of a 

causation requirement in the definition of loss. In United 

States v. Kopp, 951 F.2d 521, we exhaustively analyzed the 

definition of loss under section 2F1.1. We concluded that the 

definition of loss for fraud sentencing under section 2F1.1 is 

not the same as section 2B1.1's "amount taken" rule even though 

section 2F1.1 makes reference to section 2B1.1's definition of 

loss. See id. at 529 ("Application Note 7 to USSG § 2F1.1 does 

not say that the definitions of 'loss' for theft and fraud cases 

 

of the defense and hence a downward departure 

may be appropriate, Application Note 11 

included situations where the 

"misrepresentation . . . is not the sole 

cause of the loss." 

951 F.2d at 531. However, this language was followed immediately 

by the statements quoted in the text, which make clear that we 

were speaking of situations in which the defendant caused the 

loss, but where other factors also played a causal role. 
16 

are identical, just that '[v]aluation of loss is discussed in the 

Commentary to § 2B1.1 . . . ."). In Kopp, the defendant procured 

a bank loan by means of fraudulent misrepresentations. The 

district court calculated loss as the full amount of the loan, 

despite the fact that the victim of the fraud -- the bank --

recovered most of the loan amount by selling the property 

securing the loan. In rejecting the government's argument that 

loss was appropriately calculated because the face value of the 

loan was the amount "taken," USSG § 2B1.1 Note 2, we sought to 

develop a sensible definition of loss for the fraud context. 

Thus, we defined "fraud 'loss' as . . . the amount of money the 

victim has actually lost." Id. at 536.0

 Although we were not directly confronted with the 

causation issue we face here, we suggested that our definition of 

fraud loss as "the amount of money the victim has actually lost" 

incorporates a causation requirement. We stated, in response to 

the government's argument, that "Application Note 11 [of the 

original Guidelines] made it clear that actual loss was how much 

better off the victim would be but for the defendant's fraud." 

Id. at 531 (emphasis added). This "but for" statement is a 

classic articulation of the causation requirement. See infra

part II. More importantly, the fairness concerns that drove Kopp

are very much present in this case. In Kopp, we were concerned 

with the district court's assignment as loss a financial harm 

that had not occurred. Although the issue here -- the district 

 

0The current Guidelines incorporate this definition of fraud 

loss. See USSG § 2F1.1 Application Note 7 (1994). 
17 

court's assignment as loss a financial harm that did occur but 

which may not have been caused by the defendant -- is perhaps 

analytically distinct, it shares the same basic problem: 

punishing the defendant for harm that he or she did not cause. 

 I also note that this Court and others have repeatedly 

suggested the need for finding causation in making a loss 

determination. See, e.g., United States v. Daddona, 34 F.3d 163, 

170 (3d Cir.) (remanding for resentencing because the record did 

not contain any indication that the loss figure used by the 

district court "was due to the fraud of the appellants"), cert. 

denied, 115 S. Ct. 515 (1994); United States v. Marlatt, 24 F.3d 

1005, 1007 (7th Cir. 1994) (applying proximate cause analysis in 

assessing the district court's determination of loss); United 

States v. Harper, 32 F.3d 1387, 1392 (9th Cir. 1994) ("What we do 

insist upon, however, is use of a realistic, economic approach to 

determining what losses he truly caused or intended to cause . . 

. ."), cert. denied, 115 S. Ct. 1162 (1995); United States v. 

Wilson, 980 F.2d 259, 262 (4th Cir. 1992) ("When the offense 

involves making a false statement, the inquiry to determine loss 

must focus on the amount of loss related to the false 

statement."). 

C. Policy Considerations

 Finally, good sentencing policy requires that there be 

a causal link between the defendant's crime and the harm on which 

his or her sentence is based. This causation requirement effects 

two fundamental Guidelines sentencing policies: First, that 
18 

courts sentence defendants according to "the nature and degree of 

the harm caused by the[ir] offense[s]," United States v. Kopp, 

951 F.2d 521, 529 (3d Cir. 1991) (quoting 28 U.S.C.A. § 994(c)(3) 

(West Supp. 1991)) (emphasis added); and second, that courts 

sentence similarly situated defendants similarly, see id.; USSG 

Part A, section 3, p. 1.2 (1988) ("Congress sought uniformity in 

sentencing by narrowing the wide disparity in sentences imposed 

by different federal courts for similar criminal conduct by 

similar offenders.") Sentencing defendants on the basis of 

fortuitous harm that they in no sense caused would thwart both of 

these policies. 

D. Conclusion

 In summary, I am convinced that a harm cannot be 

considered loss under section 2F1.1 unless the defendant's 

conduct was a cause of that harm. The causation requirement 

emanates from the interpretive principles of section 1B1.3, the 

provisions of the fraud and theft guidelines, and is supported by 

caselaw and policy considerations. However, because of the 

sparse and sometimes confusing guidance provided by the 

Application Notes, I believe that the Sentencing Commission 

should articulate a comprehensive approach to determining loss. 

Until that time, I believe that my approach best harmonizes the 

many provisions at issue and best accords with fundamental 

sentencing policy. 

II. The Content of the Causation Requirement
19 

 Having established that the Guidelines contemplate a 

causation requirement in its definition of loss, I must now 

address the more difficult question of the content of the 

causation requirement. I need not, however, establish a 

comprehensive definition of causation under the Guidelines, for 

the figure approved by the majority -- the $20 million in unpaid 

claims -- fails even the most minimal causation test. In 

addition, it would be unwise to embark on such an ambitious task 

when subsequent cases faced with concrete problems can better 

resolve the various issues raised. 

 The notion of causation runs throughout the law --

including the criminal law -- and it is generally understood to 

encompass two concepts. A defendant's conduct must generally be 

both the "cause in fact" and the "proximate cause" of some harm 

before liability is imposed. See Wayne R. LaFave & Austin W. 

Scott, Jr., 1 Substantive Criminal Law § 3.12, at 393-99 (1986); 

Richard A. Epstein, Cases and Materials on Torts 363-64 (5th ed. 

1990); 4 Fowler V. Harper et al., The Law of Torts § 20.2, at 89-

90, § 20.4, at 130-33 (2d ed. 1986) ("Harper, James, & Gray"); W. 

Page Keeton et al., Prosser and Keeton on The Law of Torts § 41, 

at 263-65 (5th ed. 1984) ("Prosser & Keeton"). While neither of 

these concepts are susceptible to uncontroversial definitions, a 

working understanding of them is useful. 

 The requirement of cause in fact purports to be an 

empirical test of whether the defendant's conduct was a necessary 

antecedent to the harm at issue. See, e.g., Harper, James, & 

Gray, supra § 20.2, at 89-91. The most common expression of 
20 

this test is the "but for" formulation: the defendant's conduct 

is a cause in fact of some harm if the harm would not have 

occurred but for the defendant's conduct. See LaFave & Scott, 

supra, at 393-94; Harper, James, & Gray, supra, § 20.2, at 91; 

Prosser & Keeton, supra, at 265-66. LaFave and Scott note that 

the Model Penal Code and several state codes put forth the "but 

for" test explicitly. See LaFave & Scott, supra, at 394 n.11 

(stating that "Model Penal Code § 2.03(1) declares that conduct 

'is the cause of a result when . . . it is an antecedent but for 

which the result in question would not have occurred'" and citing 

similar state codes). 

 Courts sometimes apply a different test -- the 

"substantial factor" formulation -- to special causation problems 

not adequately addressed by the "but for" test. For example, 

when the conduct of each of two actors acting independently could 

have caused the harm at issue, and thus neither is the "but for" 

cause, courts generally hold both actors liable under the 

substantial factor test. See, e.g., Prosser & Keeton, supra, at 

268. 

 Proximate cause, on the other hand, is a more 

explicitly policy-based determination of whether an actor's 

conduct, despite its being a cause in fact, is too tenuously 

linked to the injury to hold the actor liable. See, e.g., 

Prosser & Keeton, supra, § 42, at 272-73 (5th ed. 1984). Courts 

have used various different tests to address this issue. See, 

e.g., id. at 273-80. 
21 

 In this case, we are concerned only with the 

requirement of cause in fact.0 Because the facts do not present 

any special causation problems, I need only apply the standard 

"but for" test. I now turn to a review of the facts and 

application of the "but for" test to them. 

III. Application of the Causation Requirement

A. The Misrepresentation 

 I take issue with the majority's assertion that on the 

facts of this case, there is a "clear causal connection between 

the fraud and the policy holders' losses." Neadle's only fraud 

was in misrepresenting that he had $700,000 of unsecured assets 

backing his insurance venture. In order to conclude, as the 

majority and district court do, that this fraud was a "but for" 

cause of the over $20 million in unpaid claims, one must make the 

following inferences: first, that had Neadle not committed 

fraud, he would not have obtained an insurance license; second, 

that the AMPAC insureds would have thus purchased insurance from 

other insurance companies; and third, that these insurance 

companies would have paid all of their Hurricane Hugo related 

claims.0 While these inferences might be plausible in theory, 

 

0It may ultimately be appropriate to hold that only harm 

proximately caused by the defendant's conduct can be deemed 

"loss." See United States v. Marlatt, 24 F.3d 1005, 1007 (7th 

Cir. 1994) (applying proximate cause analysis to a district 

court's determination of loss). However, it is unnecessary to 

reach this question on the facts of this case. 

0These inferences were explicit in the district court's opinion: 

If the defendant had not obtained his license 

by fraud, he would not have been in a 
22 

there is no evidence in the record to support them. In fact, 

record evidence undercuts the plausibility of such inferences. 

 First, there is no evidence that Neadle would have been 

unable to obtain an insurance license without committing fraud. 

Given his ability to post $500,000 in cash when his surety bond 

was called into question, he might have found backers for another 

$700,000. If Neadle had obtained a license legitimately, he 

could have issued insurance to the same policy holders, and AMPAC 

still would have been unable to meet the $24 million in Hurricane 

Hugo claims. At best, the policyholders would have obtained an 

additional $700,000.0

 Second, no record evidence supports the inference that 

had AMPAC not been in the insurance business, AMPAC policy 

holders would have purchased insurance from other companies. This 

is a striking omission given the recent history of the 

unavailability of insurance in the Virgin Islands. Indeed, the 

record shows that only local companies wrote policies for the 

same kinds of customers and coverage that AMPAC did, and that 

there were few local companies in operation. Deverita 

 

position to issue insurance coverage and 

would not have had the customers or 

policyholders he did have. Therefore, the 

policyholders would have obtained coverage 

from other insurance companies, companies 

that did meet Hurricane Hugo claims. 

0Even if AMPAC had initially held an additional $700,000 in 

unencumbered assets, it is unclear that the government or the 

policyholders would have obtained these funds. An insurance 

company, once qualified, is not required to keep the full 

$700,000 as part of its capital structure. Subject to certain 

limitations, an insurance company can "make use of its surplus 

for the development of its business." 22 V.I. Code § 465. 
23 

Sturdivant, then director of Banking and Insurance, testified 

before the grand jury as follows: 

 Considering the fact that we had very 

few companies operating in the territory at 

the time that [Neadle] came on board, as I 

said, we had a mass exodus of companies from 

the territory in '85 and we had chaos, 

basically with unauthorized companies in '87. 

And so by the time Mr. Neadle and a couple of 

other domestics came on the scene in '88, 

late '87, we felt that perhaps the market was 

turning around. The availability problem was 

no longer acute because people were receiving 

cover [sic]. And oftentimes the small 

domestic companies were willing to provide 

the kind of coverage that many of the larger 

companies would not provide. [The larger 

companies] often could pick and choose their 

clients. 

Thus, one cannot assume that the AMPAC policy holders would have 

found insurance elsewhere. 

 Finally, the record is devoid of evidence supporting 

the inference that other insurance companies would have met all 

of their Hurricane Hugo claims. Rather, the record shows that at 

least one insurance company that did not misrepresent the amount 

of its assets, American Alliance, was unable to pay all of its 

Hurricane Hugo claims. The record also shows that most of the 

small domestic insurance companies -- possibly the only companies 

covering the same kinds of risks and policyholders as AMPAC --

lacked the assets necessary to cover the huge Hurricane Hugo 

losses. Sturdivant testified before the grand jury that "just 

about all of the companies that came on board, the small domestic 

companies, came with the minimum statutory capital and surplus 

requirements. They came with $1.2 million and that's it." If 
24 

AMPAC had not obtained a license to sell insurance, its customers 

may have purchased insurance from American Alliance or other 

companies unable to meet Hurricane Hugo claims. 

 On this record, then, I cannot conclude that Neadle's 

fraud was a cause in fact of AMPAC's inability to pay the over 

$20 million in claims. In summary: (1) had Neadle met the 

$700,000 requirement, AMPAC would still have been unable to pay 

the Hugo losses; (2) the district court's (and the majority's) 

intimation that other companies would have written the AMPAC 

policies is purely speculative and unsupported by the record; (3) 

if other companies were willing to provide the coverage AMPAC 

did, they may have been similarly undercapitalized; and (4) at 

least one other company that met the $700,000 requirement was 

unable to pay its Hugo claims. 

B. United States v. Robichaux

 United States v. Robichaux, 995 F.2d 565 (5th Cir.), 

cert. denied, 114 S. Ct. 322 (1993), which the majority cites to 

support its decision, is distinguishable. In that case, the 

defendant misrepresented to an auditing firm hired by the 

Louisiana Insurance Commission that securities he had assigned to 

an insurance company were unencumbered. The firm relied on the 

defendant's statement and issued a favorable audit. Two years 

later, the company was declared insolvent. The Fifth Circuit 

upheld the district court's conclusion that the defendant was 

responsible for all of the losses attributable to the insurance 

company's failure. 
25 

 Notably, the Fifth Circuit applied a cause in fact 

analysis similar to the one I describe in this opinion. However, 

it found that the district court's inferences were "plausible in 

light of the record read as a whole": 

It is not clearly erroneous to assume that if 

[the auditor] had not issued a favorable 

audit for [the insurance company], which only 

occurred because of [the company's] 

fraudulently inflated balance sheet, the 

Commission would have acted to liquidate the 

firm at an earlier date and minimized the 

losses. 

 Id. at 571. 

 The Fifth Circuit's holding that the district court's 

inferences were "plausible in light of the record read as a 

whole" says nothing about this case, where the record casts 

serious doubt on the plausibility of the district court's 

inferences. To the extent Robichaux supports a relaxed inquiry 

into causation -- which I do not think is the case -- I disagree 

with it for the reasons expressed in Part I. 

C. The Majority's Other Arguments

 The remainder of the majority's reasoning fares no 

better. The majority asserts that "the deceitful and slipshod 

way in which Neadle ran the business" -- i.e., failure to keep 

proper books and misrepresentations in quarterly reports --

"supports the district court's attribution of responsibility to 

him for the [$20 million] losses." This assertion suggests two 

possible arguments, neither of which is convincing. 
26 

 First, the majority might mean that Neadle's poor 

record-keeping was a cause of the unpaid AMPAC claims. Evidence 

in the record suggests that beyond the minimum capital 

requirements, the Insurance Division policed the funds of 

insurance companies to ensure that companies maintained adequate 

reserves in proportion to the coverage they wrote. Thus, if we 

assume that AMPAC was inadequately capitalized,0 it is possible 

that if Neadle had kept accurate books, the Insurance Division 

might have discovered the inadequacy and taken remedial measures. 

 However, even if Neadle's poor accounting was, in some 

sense, a cause of the unpaid AMPAC claims, the Guidelines do not 

allow Neadle to be sentenced on the basis of this harm. Under 

section 1B1.3, only certain harms sufficiently connected to the 

defendant's criminal conduct can be used to calculate a specific 

offense characteristic. See supra part I. On a different 

record, it might be argued that Neadle's poor record-keeping was 

a means of hiding his misrepresentations and thus that harms 

caused by the poor record-keeping "occurred . . . in the course 

of attempting to avoid detection or responsibility for th[e] 

offense [of conviction]," USSG § 1B1.3(a)(1). But here no 

record evidence suggests that Neadle's lax accounting was a means 

of avoiding detection. 

 Second, the majority might be asserting that Neadle 

meant to use AMPAC essentially to rob his clients, and thus that 

he intended to cause some significant loss. Courts may sentence 

 

0This assumption is probably not justified given the $4 million 

in reinsurance that AMPAC maintained. See infra. 
27 

defendants on the basis of "intended loss" if that figure is 

greater than actual loss. USSG § 2F1.1 Application Note 7; see 

also USSG § 1B1.3(a)(3) (stating that courts may consider harm 

that was "the object of" the defendant's conduct). 

 However, once again, there is no record evidence that 

Neadle intended any loss. In fact, the record is replete with 

evidence to the contrary. Neadle purchased $4 million worth of 

reinsurance, an amount, that according to his uncontroverted 

testimony, professionals had advised was sufficient. The Virgin 

Islands did not require that companies have any reinsurance, and 

no one in the Virgin Islands government told Neadle how much 

reinsurance AMPAC should carry. Until Hurricane Hugo, AMPAC paid 

claims promptly, and was never reprimanded or sanctioned by the 

Insurance Division for wrongful denial or failure to pay claims. 

D. The Proper Calculation of Loss

 Having concluded that the bulk of the unpaid AMPAC 

claims was not caused by Neadle's misconduct and thus cannot be 

assigned as loss under section 2F1.1, I feel obligated to suggest 

how loss might appropriately be calculated. In so doing, I 

question the basic model employed by the district court and the 

majority -- that loss is based on the unmet claims of the 

policyholders. 

 One reasonable estimation of loss in this case is the 

$700,000 that Neadle misrepresented as unencumbered. Under the 

majority's model, $700,000 is a sensible loss determination on 

several grounds. Had Neadle not committed fraud and still 

obtained an insurance license, AMPAC would probably have $700,000 
28 

more in assets than it does now, and the AMPAC insureds would be 

that much better off. Or, had the AMPAC insureds bought 

insurance from other legitimately formed insurance companies, the 

evidence suggests that these companies may have been similarly 

capitalized. 

 A different model for measuring loss that is consistent 

with the text and structure of section 2F1.1 would also generate 

a figure of $700,000. The indictment charged Neadle with 

misrepresenting the status of the $700,000 to the Virgin Islands 

government. If we focus on the Virgin Islands as the victim of 

the fraud, the loss is the governmental or societal loss of the 

$700,000 reserve. 

 Alternatively, we might measure loss in terms of what 

Neadle obtained by virtue of his fraud. See USSG § 2F1.1 

Application Note 8; see also Kopp, 951 F.2d at 530 (stating that 

the defendant's gain can be used as a measure of loss when there 

is some loss but it is not measurable). Here, Neadle obtained 

the premiums of the policyholders to whom he falsely represented 

were validly insured. While I cannot derive this sum from the 

record, I surmise that it approaches $700,000 annually. 

 I do not deny that a sentence based on my suggested 

loss calculations might give Neadle less time than he deserves. 

To rectify this problem, the district court could depart upward 

if the case meets the departure standard (although upper 

calibration would have to start at the proper base offense 

level). See United States v. Kikumura, 918 F.2d 1084 (3d Cir. 
29 

1990). If the resulting sentence is still too lenient, that is a 

problem that only the Commission can address. 

IV. Conclusion

 For the reasons I have stated, the Guidelines require a 

finding of causation before some harm is deemed loss under 

section 2F1.1. This requirement demands, at the least, that the 

defendant's conduct be a cause in fact of the harm. Because the 

record contains insufficient evidence to find that Neadle's fraud 

was a cause in fact of the $20 million in unpaid claims, I 

respectfully dissent.