Opinion ID: 6500514
Heading Depth: 2
Heading Rank: 1

Heading: Pelullo’s Sentencing Challenges81

Text: Pelullo complains of his thirty-year sentence, although his crimes exposed him to a potentially lengthier period of incarceration.82 When reviewing a sentence, we “first consider whether the district court committed procedural error, such as ‘improperly calculating[] the Guidelines range[,]’” and then we assess whether the sentence was substantively reasonable. United States v. Seibert, 971 F.3d 396, 399 (3d Cir. 2020) (first alteration in original) (quoting United States v. Tomko, 562 81 We review the District Court’s factual findings for clear error, its interpretation of the guidelines de novo, and its application of the guidelines for abuse of discretion. United States v. Seibert, 971 F.3d 396, 399 (3d Cir. 2020); United States v. Tomko, 562 F.3d 558, 567-68 (3d Cir. 2009) (en banc). 82 The guidelines recommended a life sentence, but the District Court could not have set that lengthy a sentence for any one count because the highest maximum sentence for any of Pelullo’s convictions was thirty years. U.S.S.G. § 5G1.1(c). In theory, the Court could have set Pelullo’s individual sentences on his various counts to run consecutively rather than concurrently, id. § 5G1.2(b)-(d), which would have authorized a sentence as high as 445 years. 125 F.3d 558, 567 (3d Cir. 2009) (en banc)). Pelullo insists that the District Court committed three “significant procedural errors” in its analysis, and he critiques the substantive reasonableness of his sentence as well.83 (SP Opening Br. at 106.)
Calculation Pelullo argues that the Court erred in calculating his guidelines range, claiming that it applied the over-$14 million securities fraud loss to punish him for the bank fraud count.84 83 Pelullo adds another objection in his reply brief, alleging that the District Court failed to conduct his sentencing in “the proper order[.]” (SP Reply Br. at 39-41.) But he did not raise that issue in his opening brief, so it is forfeited. United States v. Pelullo, 399 F.3d 197, 222 (3d Cir. 2005). 84 Scarfo specifically adopts Pelullo’s argument as to this issue. See supra note 19. The District Court calculated Scarfo’s total offense level following the same grouping approach that it took in sentencing Pelullo and reached a level of 43, the same one that applied to Pelullo. We thus treat Pelullo’s argument as applying to Scarfo as well. Nonetheless, that argument fails for the reasons discussed herein, so Scarfo, like Pelullo, is not entitled to relief. Scarfo also attributes error to what he says was the District Court’s failure to “consider either of his sentencing memoranda[.]” (NS Opening Br. at 183 n.61.) The record reflects that the Court was unable to review, ahead of Scarfo’s sentencing hearing, a submission from his counsel that only came in earlier that day. The Court, however, gave Scarfo’s 126 Those assertions reflect a miscomprehension of the guidelines. To calculate the guidelines range “[w]hen a defendant has been convicted of more than one count,” the sentencing court must assemble closely related counts into what are called “Groups.” U.S.S.G. § 3D1.1(a). The court then “[d]etermine[s] the offense level applicable to each Group” and “the combined offense level applicable to all Groups taken together[.]” Id. “The combined offense level is determined by taking the offense level applicable to the Group with the highest offense level” and then increasing that offense level based on the number of “Units.” U.S.S.G. § 3D1.4. A Unit is a sentencing construct that, according to § 3D1.4 of the guidelines, functions like this: the court “[c]ount[s] as one Unit the Group with the highest offense level” and adds “one additional Unit for each Group that is equally serious or from 1 to 4 levels less serious” than the highest-level Group and “one-half Unit [for] any Group that is 5 to 8 levels less serious[,]” while “any Group that is 9 or more levels less serious than the Group with the highest offense level” does not generate any Units. Id. The total number of Units thus informs how many extra levels are added to the offense level of the highest-level Group, based on a formula in § 3D1.4, to arrive at a combined offense level.85 counsel an opportunity to raise the issues from that memorandum at the hearing and said that counsel could “put anything you want on the record and if I can respond, I will.” (JAF at 6-7.) 85 Specifically, if the total number of Units is 1, no extra levels are added; if it is 1.5, one level is added; if it is 2, two 127 Here, the District Court split the twenty-four counts of which Pelullo was convicted into five Groups: Offense Group Description Level Takeover of FirstPlus and accompanying 86 1 43 securities fraud 2 Bank fraud 23 3 Obstruction of justice 23 4 Extortion 31 5 Firearm transfer and possession 24 Although Pelullo focuses on the fact that his Group 2 convictions had a lower offense level than Group 1, the District Court correctly looked for the Group with the highest offense level, consistent with the guidelines’ instructions, and that was Group 1. See U.S.S.G. §§ 3D1.1(a), 3D1.4. Since all the other Groups’ offense levels were at least 9 levels below that of Group 1, the number of Units was just one, which did not levels are added; if it is 2.5-3, three levels are added; if it is 3.5- 5, four levels are added; and if it exceeds 5, five levels are added. U.S.S.G. § 3D1.4. 86 While the PSR erroneously calculated Pelullo’s Group 1 offense level as 42, the District Court applied the correct level of 43. The sentencing hearing transcript suggests that the Court mistakenly stated (or a transcription error stated) a level of 33, but the Court’s calculation of a recommended sentence of life imprisonment reflects that it understood the total offense level to be 43. 128 require additional level increases. Id. § 3D1.4. Accordingly, Pelullo’s total offense level was correctly calculated as 43. Pelullo’s claim that the District Court somehow crossapplied the securities-related loss to the bank fraud claim is spurious. The Court appropriately divided the offenses into Groups and took the offense level of the highest-scoring Group – which itself factored in an enhancement for the $14 million loss FirstPlus suffered – as Pelullo’s total offense level. That number, “a single offense level that encompasse[d] all the counts of which [Pelullo was] convicted[,]” U.S.S.G. ch.3, pt. D, introductory cmt., was then used to generate a single recommended sentencing range covering all of Pelullo’s offenses. 87 There was no error in how the District Court applied the guidelines’ provisions governing cases with convictions on multiple counts.
Next, Pelullo objects to the District Court’s calculation of the loss amount. The Court adopted the presentence report’s recommendation and found that the securities fraud offense Group – on which the Court based the total offense level – 87 After argument, Pelullo brought to our attention United States v. Okulaja, 21 F.4th 338, 347-50 (5th Cir. 2021), which addressed whether relevant conduct for which the defendant was not indicted could be considered in calculating offense levels. Here, though, the District Court did not rely on any conduct that was irrelevant to the Group 1 securities fraudbased offenses that Pelullo was convicted of when determining the total offense level. 129 resulted in more than $14 million in loss, triggering a 20-level enhancement under U.S.S.G. § 2B1.1(b)(1)(K). Pelullo claims that finding a loss amount of more than $14 million was a factual error, that “he received far less” than $14 million from his participation in the scheme, and that the calculation did not account for the benefits he conferred on FirstPlus. (SP Opening Br. at 113-15, 118-24.) Calculated correctly, Pelullo says, the loss amount would have instead led to only a 16-level enhancement. In theft cases, of which this case is one variety, a court calculates the offense level by looking to the “loss” to victims, U.S.S.G. § 2B1.1(b)(1), which the government must prove by a preponderance of the evidence. United States v. Evans, 155 F.3d 245, 253 (3d Cir. 1998). The court “need only make a reasonable estimate of the loss.” U.S.S.G. § 2B1.1 cmt. n.3(C). Here, the District Court chose to calculate the loss by calculating the change in FirstPlus’s value caused by the conspirators. FirstPlus started with roughly $10 million in its bank accounts; received $4.4 million in bankruptcy payments over the course of the scheme; and had less than $2,000 left when law enforcement arrived, resulting in a net loss of almost $14.2 million, once a loan Pelullo made to the company is taken into account.88 The cash outflows included the millions 88 According to the PSR, the total diminution in the value of FirstPlus’s accounts was $14,440,798. The discrepancy between that amount and the nearly $14.2 million final loss amount is due, it seems, to a $260,000 loan Pelullo made to the company, for which he received a credit in the lossamount calculation. The record is not entirely clear as to how the $14.44 million diminution was calculated, but no party has 130 that FirstPlus paid to Seven Hills and LANA for low- or novalue assets, as well as the fraudulent consulting and legal fees it paid to Seven Hills, LANA, and William Maxwell. Those losses were supported by testimony and evidence admitted at trial. Indeed, Pelullo’s own expert witness assumed that the $14 million amount was correct – describing it as “a conservative number” for the total amount of money that “walked out the door” – and Pelullo never presented any alternative loss calculations. (JAE at 186, 222.) Pelullo nevertheless challenges that finding by asserting that the FBI agent who provided evidence of the loss at trial only accounted for roughly $11.2 million withdrawn from FirstPlus’s accounts. But any distinction between $11 and $14 million would not help Pelullo, as the guidelines impose a 20level enhancement for all thefts of between $9.5 and $25 million. U.S.S.G. § 2B1.1(b)(1)(K); cf. United States v. Isaac, 655 F.3d 148, 158 (3d Cir. 2011) (holding that error in calculating defendant’s criminal history score was harmless because “the same Guideline range would have applied” with the correct number). In any event, because $14 million is a fair estimate of the amount FirstPlus “actually ended up losing[,]” United States v. Kopp, 951 F.2d 521, 531 (3d Cir. 1991), abrogated on other grounds as recognized by United States v. Corrado, 53 F.3d 620 (3d Cir. 1995), and was backed up by largely uncontested evidence at trial, we cannot say that the District Court clearly erred in selecting that figure. argued that the District Court clearly erred in accepting that amount as the change in value of FirstPlus’s accounts over the course of the conspiracy. 131 Pelullo next suggests that he should only have been held liable for the approximately $2.6 million he personally gained from the scheme. That theory, though, is a nonstarter, as the guidelines expressly advise courts to not rely on a defendant’s gain, unless unable to calculate the victim’s loss. U.S.S.G. § 2B1.1 cmt. n.3(B). Third, Pelullo contends that he was entitled to credit, and an accompanying reduction in the loss amount, for the services he provided FirstPlus. While a $260,000 loan that Pelullo made to FirstPlus was credited as an offset to the total loss amount, supra note 88, he says his loss amount should have been reduced further, down to $8.8 million. He rightly points out that a defendant can have the amount of loss from a theft reduced by the fair market value of any legitimate services he rendered to his victim. See U.S.S.G. § 2B1.1 cmt. n.3(E). At trial, Pelullo sought to establish the value of his work through the expert testimony of an accountant who calculated various offsets. The District Court, however, rejected those calculations, which were based on FirstPlus’s SEC filings from 2007 and 2008 and on the faulty assumption that FirstPlus was operated as a legitimate business. There was “no question[,]” as the Court saw it, that the fraudulent SEC filings were “phony from day one[,]” and so it refused to “credit [the expert’s] testimony … because he relie[d] on phony information.” (JAE at 239.) Pelullo offers us no reason to disturb that finding. See Ramsay v. Nat’l Bd. of Med. Exam’rs, 968 F.3d 251, 261 (3d Cir. 2020) (findings of fact are only clearly erroneous if they are “completely devoid of minimum evidentiary support displaying some hue of credibility” or they “bear[] no rational relationship to the supportive evidentiary data” (citation omitted)). And since he could not provide “estimates of the value of [his] work” other than those based on the fraudulent 132 SEC filings, the District Court properly declined to reduce the loss amount. United States v. Washington, 715 F.3d 975, 985 (6th Cir. 2013). Finally, Pelullo also says that his loss amount should have been reduced to account for business expenses he incurred while running the company. A defendant may receive a credit for expenses he incurred while providing “legitimate” services, “even amid [his] fraudulent conduct[.]” United States v. Blitz, 151 F.3d 1002, 1012 (9th Cir. 1998) (citation omitted). He may not, however, receive “a credit for money spent perpetuating a fraud.” United States v. Whatley, 133 F.3d 601, 606 (8th Cir. 1998). That was the case here, as the takeover of FirstPlus “was a complete and utter fraud from day one.” (JAE at 240.) The scheme sought to bleed FirstPlus dry but to keep the company going just long enough to collect a few more bankruptcy payments. Any real work Pelullo performed amid those efforts served solely to give the operation a patina of legitimacy so as to keep the scheme running. That was no “service[]” rendered to the company by the conspirators; it was all just “part of the fraudulent scheme.” United States v. Lacerda, 958 F.3d 196, 215 (3d Cir. 2020); accord Blitz, 151 F.3d at 1012. The District Court did not err in refusing to lower the loss amount.
Pelullo also argues that the District Court erred in treating each FirstPlus shareholder as a victim of Pelullo’s offenses. Because FirstPlus had 1,254 shareholders when the Defendants’ fraudulent scheme took place, Pelullo received a six-level enhancement for offenses “involv[ing] 250 or more victims[.]” U.S.S.G. § 2B1.1(b)(2)(C). He claims, however, 133 that the FirstPlus shareholders were not victims, since the government did not prove that the fraud made them lose money or made the stock price drop. That argument is spectacularly wrong. A victim is “any person who sustained any part of the actual loss determined under subsection (b)(1).” U.S.S.G. § 2B1.1 cmt. n.1. A person counts as a victim if he “suffer[ed] permanent ‘pecuniary harm,’” which is “harm that is monetary or that otherwise is readily measurable in money.” United States v. Smith, 751 F.3d 107, 118 (3d Cir. 2014) (quoting U.S.S.G. § 2B1.1 cmt. n.3(A)(iii)). FirstPlus’s shareholders easily fit that definition. After its subsidiary emerged from bankruptcy, FirstPlus was receiving substantial periodic payments based on those proceedings. When the Defendants took over the company, they diverted and appropriated the funds for themselves, depriving the shareholders “of the waterfall payments that they were entitled to[.]” (JAF at 44.) As the District Court observed, once the fraud was revealed, FirstPlus fell into bankruptcy and its shares were left with “no value whatsoever.” (JAF at 45.) Pelullo quarrels with those findings by parsing the timeline finely. He notes that FirstPlus’s stock price was higher when he resigned than when he first joined, and he faults the District Court for failing to compare the stock price before and after the fraud. Neither of those points acknowledges the fundamental effect that the fraudulent scheme had on FirstPlus and its shareholders. The Defendants extracted millions of dollars from a public company, all the while covering up their fraud. All “who bought or held stock when the false information was disseminated by [Pelullo] suffered a loss,” United States v. Peppel, 707 F.3d 627, 647 (6th Cir. 2013), 134 especially once the scheme rendered FirstPlus “insolven[t]” and forced it into bankruptcy. (JAF at 45.) No creative measurement of the stock price at different times, no willful ignorance of the effect that the misrepresentations had on the stock price, and no attempts to blame the company’s downfall on the government’s discovery of the fraudulent scheme can rewrite reality. Pelullo fails to identify any errors at all, let alone clear errors, in the District Court’s findings of fact.89 Finally, Pelullo claims that the shareholders “acquiesce[d]” in the conspirators’ misdeeds. (SP Opening Br. at 125.) During the Defendants’ tenure, the shareholders let FirstPlus sue to terminate a trust that allocated more than 50% of the waterfall payments to them, and they later voted against issuing dividends. Pelullo says those actions amounted to acquiescence in the fraudulent enterprise he and his coconspirators ran. But people can’t consent to something they don’t know is happening. The conspirators kept investors in the dark, hiding Pelullo’s and Scarfo’s involvement, William Maxwell’s hefty fees, and the sham character of the 89 Pelullo objects that the government only called one shareholder to testify at trial. That did not prevent the District Court from also counting as victims the rest of the shareholders who bought or held stock while the scheme was ongoing. Other evidence in the record showed that they suffered loss, as their shares became worthless and they were deprived of their portion of the waterfall payments. See, e.g., United States v. Naranjo, 634 F.3d 1198, 1206, 1214 (11th Cir. 2011) (affirming district court’s “reli[ance] at sentencing on estimates of the number of victims and amount of losses” based on investigator’s testimony). 135 transactions FirstPlus was forced to enter. The District Court did not err in counting FirstPlus’s shareholders as victims. They obviously were.
Finally, Pelullo attacks the substantive reasonableness of his sentence, arguing that the District Court imposed “a 30year sentence for what amounted to, at most, a $2,921.14 loss to [a] bank.” 90 (SP Opening Br. at 109.) That grossly mischaracterizes and minimizes the nature of Pelullo’s misconduct. He was found guilty of twenty-four different offenses that harmed more than 1,000 victims and cost a public company many millions of dollars. A thirty-year sentence was eminently reasonable, given the breadth and seriousness of the criminal conduct of which he was convicted. Pelullo’s assertion to the contrary has plenty of brass but no merit.