### In the 

# United States Court of Appeals For the Seventh Circuit

____________________ No. 13

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U NITED S TATES OF A MERICA , Plaintiff

- Appell ee ,

v.

M ICHAEL M ORAWSKI , Defendant

- Appell ant

.

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

.

No. 11 C R 342

— Gary S. Feinerman , Judge

.

____________________
A RGUED A PRIL 14, 2014

— D ECIDED J UNE 12, 2014

____________________

Before W OOD , Chief Judge , and P OSNER and F LAUM , Ci r cuit Judges

. P OSNER , Circ uit Judge

. The defendant pleaded guilty to using the mails to i mplement a fraud consisting mainly of a Ponzi scheme. 18 U.S.C. § 1341. He was sentenced to 120 months in prison and to pay restitution of slightly more than $18 million. The appeal challenges only the prison se n tence. The principal ground of appeal and the only one with suff icient merit to warrant discussion is , in the words of the2 No. 13

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opening brief, “the government’s failure to adequately de m onstrate [the defendant’s] responsibility for a large po rtion of the loss to investors. Mr. Morawski contends that a po r tion of the loss, for which he was held responsible, o ccurred as a result of market cond i tions.”
The defendant and another person (a codefendant but not an appellant) owned and operated Michae l Franks, LLC, a company that invested in real estate. To finance the bus iness , the company solicited investments both in particular apar t ment buildings that it represented would yield between a 7 and a 9 percent annual return on inves t ment and in “real

es tate

- based funds” (a form of real estate investment trust ( REIT ) ) that it promised would yield between 14 and 30 pe rcent on the investment annually

— a return that the defe n dants told prospective investors would be “ guaranteed ” by the defendants’ “personal n et worth into the mi l lions.” The parties are vague about dates, but apparently the company began operating in 2006 and collapsed in 201 1 , having raised more than $ 21 million from a total of 267 i nves tors . About $2.4 million of that amount had been raised

a f ter the Illinois Department of Securities had in December 2009 ordered the defendant s to stop selling investment co ntracts.
The investors recovered only about $ 3.2 million . The d efendants paid themselves $ 2 million , enabling them to i ndulge such typical f raudsters’ e x travagances as country club expenditures amounting to $78,000, a brand

- new BMW, se ason tickets to the Chicago White Sox, and a “life coach” for whose services each defendant had paid $5,000 a month. The
rest of th e $ 21 mi l lion was lost, the sc heme having straddled the real estate bubble and bust

— housing prices had peakedNo. 13

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in March 2006 and immediately begun to fall

. The defe n dant s realized that the properties they had bought would no longer generate sufficient revenue to pay the i n vestors in tho se properties their promised return s . So early in 2008, the year of the financial crash that precipitated the general ec onomic dow n turn from whi ch the nation is still recovering, the company began u s ing the new investment money that it

was raising not to i nvest in real estate but to pay the earlier i n vestors so they wouldn’t realize that their investment was imperiled and so new money would co n tinue flowing in to Michael Franks, LLC

. That was the Ponzi part of the fraud

. Through quarterly newsletters and ot her methods of co mmunication, notably a video by the defendant ironically ent itled “ Tran s parency, ” www.youtube.com/ watch? v= Igdrt 97IW5k (visited June 12 , 2014), the compa n y told the inve stors that all was well. The defendant even o f fered them an “inspirational quote” : “We are guided by our belief that trust starts with honesty, and that integrity prevails in all bus iness transa c tions.” The judge found that the defendant ( along with his par tner, their liability being joint and several ) was responsible for an “a c tual loss” to the investors of between $7 million and $20 million. A loss in excess of $7 million adds 20 o ffense levels to a d e fendant’s base offense level for fraud, see U.S.S.G. § 2B1.1(b)(1)(K), and so jacked up the defendant’s offense level to 34 and his guidelines range to 151 to 188 months . The 120

- month sentence that the judge imposed was thus below the range; in giving the defendant this se ntencing di s count the judge appears to have been motivated mainly by the defendant’s age (561⁄2 at sentencing ). The go vernment asked for a sentence “ closer to 20 years , ” which would have been i n appropriate given the def endant’s age4 No. 13

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and that he had no criminal history

. In fairness to the go vernment, it made a strong argument in the district court , though the argument was rejected by the judge, that the d efendant should not receive an acceptance of responsibility discount , because he’d refused to tell the government when the Ponzi scheme had b e gun , blamed others for the fraud rather than himself, and had stalled in turning over all of his financial records to the government. Had the government’s

a r gument been accepted, ther eby increasing the defendant’s

o f fense level from 34 to 37, his guidelines range would have soared to 210 to 262 months. Nevertheless, f e d eral prisons should not be made to double as old

- age homes. See United States v. Johnson , 685 F.3d 660 , 662 (7th Cir. 2012)

. Anyway the government hasn’t appealed from the se n tence. When the judge said that the actual loss to the investors had been between $7 million and $20 million, he didn’t mean that he was uncertain what the loss had been ; he thought it had been $18 .2 million

. He mentioned the $7 mi llion to $ 20 million range because had the loss exceeded $20 million it would have added 22 rather than 20 offense levels to the defe n dant’s base level. U.S.S.G. § 2B1.1(b)(1)(L). “Actual loss” is defined as “reasonably fore seeable pec uniary harm that resulted from the offense ,” and “reason a bly foreseeable pecuniary harm” is defined in turn as “pecun iary harm that the defendant knew or, under the circu mstances, reasonably should have known, was a potential r esult of the o f fen se.” § 2B1.1 , Application Note s 3(A)(i), (iv). What may have b e gun as a bona fide real estate investment company in 2006 mo r phed into a Ponzi scheme by 2008 , and most of the losses to investors occurred between then and the company’s co l lapse in 2011

. But $18 .2 million was theNo. 13

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district judge’s est i mate of the total loss to investors, all of which he attributed to fraud , and that was a mistake , a l though an inconseque n tial one. Remember that the defendant offered two kinds of i nvestment opportunity : invest men t in particular apartment buil d ings, and investment in a kind of REIT , the “Michael Franks Alternative Fund , ” that held $5.9 mi l lion of the $ 21.4 million in total investments. The “Alternative Fund” was a fraud from the out set. To attract investment in it, the d efe n dant falsely assured potential investors that the pro m ised 14 percent return was guaranteed (or as his adve r tising put it, “ GUARANTEED!!! ”) by his “personal net worth in to the millions.” The defendants collected $16.8 million from inve stors after Michael Franks, LLC became a Ponzi scheme in 2008, and there was also the $2 million the defendants had pocketed. Some of the $5.9 million, and also some of the $2 million, is included in the $16.8 million figure

— but not all of it. So the actual loss was more than $16.8 million, but we don’t know how much more , the recalcitrant defendant ha ving refused to submit sufficiently detailed financial records
to enable either the district judge or us to determine the pr ecise loss in e x cess of $16.8 million.

Now it ’s true that having correctly calculated the guid elines sentencing range , the sentencing judge must go on and apply the sentencing facto rs in 18 U.S.C. § 3553(a). O nly a f ter doing that may he decide what sentence to give within the statutory, not the guide lines, sentencing range for the d efe n dant’s crime. And the amount of loss caused by a defen dant, even if not germane to his guidelines range, is germane to the sentence that the judge will give after evaluating the d e fendant’s criminal conduct in light of the statutory se n-6 No. 13

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ten c ing factors. But the difference between a $ 16.8 million
est i m ate of loss (and remember the actual loss is more than that) and an $18 .2 million estimate is too small to have a ffected the sentence in this case . It had no e f fect on the guid elines sentencing range and the defendant has not challenged the award of $18 .2 million in restitution

. The judgment is ther e fore
A FFIRMED

.