Opinion ID: 3011717
Heading Depth: 1
Heading Rank: 1

Heading: facts and procedural histor y

Text: Diaz, along with her brother, Frank Cefaratti (Cefaratti), and her sister, owned the Franklin School of Cosmetology and Hair Design (Franklin School), a for -profit vocational school for aspiring beauticians. Diaz and Cefaratti were responsible for day-to-day operations, with Diaz primarily in charge from 1992 through July 1994, when her siblings bought her out and Cefaratti assumed control of the school. The Franklin School participated in federal student financial assistance programs, including the Pell Grant Program, in which financially needy students obtained grants to cover tuition and expenses,1 and the Federal Stafford Loan Program, through which students could obtain federally guaranteed, low-interest loans from private lenders.2 The Franklin School was authorized to act as a _________________________________________________________________ 1. Pell Grant funds are transferred fr om the United States Treasury directly to the school's trust account, wher e they are held in trust until the school is authorized to transfer the money into its operating account to pay the student's bills for tuition and other expenses. Students need not repay Pell Grant funds. 2. Stafford loans are guaranteed against default by state and private notfor-profit guarantee agencies. In the event of default by the studentborrower, the lender may file a default claim against the guarantee issued by the guarantee agency, which, if unable to recover from the student, in turn is authorized to seek r eimbursement for the loss from the DOE. Stafford funds are mailed by the private lender to the school in the form of a check made payable to the student and the school. Once the student endorses the check, the school deposits it into its account to cover the student's expenses. 3 disbursing agent for Pell Grants and to receive Stafford loan checks. In order to participate in the programs, Diaz and others, on behalf of the Franklin School, agreed with the DOE that the school would comply with all program rules and regulations, would use the funds advanced solely for the specified educational purposes, and would pr operly account for the funds received. DOE regulations limit eligible students to those who had a high school diploma or a general educational development program diploma (GED) or had passed a test demonstrating their ability to benefit from the training offered by the school. The DOE may limit or terminate a school's participation in federal student financial assistance programs if the school's students default at excessive rates. A student is consider ed in default if, after 180 days, the student has not made repayments on the loan and has not requested and been granted deferment, forbearance, or some other temporary postponement of repayment obligations. Repayment obligations begin six months after a student has left school. The DOE determines default rates accor ding to the percentage of students who must begin r epayment in a given fiscal year and who default prior to the end of the following year. Under the regulations, default rates exceeding 25 percent for three consecutive years may result in a school's automatic termination fr om the Stafford Loan Program and default rates in excess of 40 per cent for one year make a school subject to termination fr om the Pell Grant Program. Beginning in or around October 1992, Diaz dir ected employees of the Franklin School to prepar e and mail falsified forbearance and deferment for ms to lenders in the name of former Franklin School students who had obtained financial assistance and were close to defaulting. These employees, at Diaz's direction, forged student signatures on these forms, used language given to them by Diaz in completing the forms, and falsely repr esented themselves, in telephone conversations with lenders, as for mer Franklin School students needing deferment or forbearance forms.3 _________________________________________________________________ 3. Only former students could request and receive such forms. 4 Diaz then caused the Pell funds received fr om the Treasury and the Stafford funds received fr om private lenders to be transferred from Virginia and Pennsylvania to the school's account in New Jersey. During the time that Diaz dir ected the school and used these funds for its operation, the school was a legitimate enterprise. Diaz also directed that a Franklin School employee prepare and mail a false federal student loan application, in the name of Carole Diaz, to several private banks to determine whether they would make loans to Franklin School students. In early 1994, a bank in Wilkes Barre, Pennsylvania, made a loan to Carole Diaz and mailed a check in the amount of $2,625, payable to the Franklin School and Carole Diaz, which Diaz deposited into her personal account. Franklin School employees, again at Diaz's direction, completed and submitted false attendance status reports for Carole Diaz to the New Jersey Higher Education Assistance Authority. Finally, Diaz dir ected employees to officially register Car ole Diaz as a student and to create a file in that name, in the event of an audit. In 1993, the DOE determined that the Franklin School's default rates for 1991 and 1992 had exceeded 50 per cent; the school therefore faced termination from the federal assistance programs if its default rate was again excessive in 1993. Ninety percent of the Franklin School's revenues came from federal student financial assistance funds; thus, the school would likely have been forced to close if it were terminated from the programs. In February 1996, the DOE determined the school's 1993 default rate to be 9.5 percent, a falsely and artificially low figure that was based on the false forbearance and deferment forms submitted at Diaz's instruction between 1992 and July 1994. The false forms made it appear that numerous former Franklin School students had received deferment or forbearance, when in fact they were in default. The true default rate was much higher than 25 percent and, but for the fraudulent deferment and forbearance forms, would have resulted in the school being terminated from the federal student financial assistance programs in February 1996. The submission of the false forms enabled the school to remain in the programs and therefore to continue operating 5 through and beyond July 1994, when Diaz was r emoved from her position and replaced by Cefaratti. The school continued to receive Stafford and Pell funds until July 1997, when it was terminated from thefinancial assistance programs. Between February 1996 and July 1997, the school received and deposited approximately $846,000 in funds from the Pell and Stafford pr ograms. The school was not legally entitled to these funds and it would not have received them but for the use of false forbearance and deferment forms. Diaz was charged in a four-count infor mation, filed on March 11, 1999, in the United States District Court for the Middle District of Pennsylvania. Count I char ged mail fraud, in violation of 18 U.S.C. SS 1341 and 1342, based on the mailing of falsified forbearance forms in April 1994; Count II charged federal student assistance fraud, in violation of 20 U.S.C. S 1097(a), based on the school's receipt of student loan and grant funds fr om October 1992 until July 1997; Count III charged money laundering under 18 U.S.C. S 1957(a),4 based on the deposit of the Stafford and Pell funds into the school's accounts, again covering the period from 1992 until July 1997; and Count IV charged making a false statement, in violation of 18 U.S.C. S 1014, based on the loan application submitted in the name of Carole Diaz. Also on Mar ch 11, Diaz entered into a plea agreement, waiving indictment and pleading guilty to the four counts in the information. The United States agreed not to bring any other criminal char ges, other than possible criminal tax charges, against Diaz based on her involvement in these offenses. It also agr eed to recommend a prison sentence within the guideline range and to recommend that Diaz receive a three-point reduction in her offense level if she clearly demonstrated acceptance of responsibility for her conduct. The District Court accepted Diaz's guilty plea at a hearing on May 18, 1999. _________________________________________________________________ 4. That section provides that whoever knowingly engages or attempts to engage in a monetary transaction in criminally derived property that is of a value greater than $10,000 and is derived from specified unlawful activity may be subject to fine and imprisonment for up to ten years. See 18 U.S.C. SS 1957(a), (b). 6 The presentence investigation report (PSI) computed a total offense level under the sentencing guidelines of 22. The report calculated a base offense level of 17, applying U.S.S.G. S 2S1.2, the guideline applicable to a S 1957(a) offense. The PSI increased this by four levels because the value of the funds was between $600,000 and $1 million, pursuant to U.S.S.G. SS 2S1.2(b)(2) and 2S1.1(b)(2)(E); by two levels because the funds were proceeds of specified unlawful activity, pursuant to U.S.S.G. S 2S1.2(b)(1)(B); and by another two levels based on Diaz's managerial r ole with respect to other participants in the criminal conduct, pursuant to U.S.S.G. S 3B1.1(c). The PSI then recommended a three-level downward adjustment for acceptance of responsibility, pursuant to U.S.S.G. SS 3E1.1(a), (b). Diaz had no prior criminal record, giving her a criminal history category of I. The guideline range under the PSI was 41 to 51 months. The PSI also determined that the government was entitled to restitution, pursuant to the Mandatory Victims Restitution Act (MVRA), 18 U.S.C. S 3663A and 18 U.S.C. S 3664(f)(1)(A), in the amount of $846,000 and that Diaz was liable for full restitution. Diaz objected to three aspects of the PSI. First, she argued that, under our decision in United States v. Smith, 186 F.3d 290 (3d Cir. 1999), her conduct was outside the heartland of the money laundering guideline and she therefore should have been sentenced under the fraud guideline, U.S.S.G. S 2F1.1. This would have r esulted in a base offense level of six, a total offense level of 18, and a prison range of 27 to 33 months. Second, Diaz ar gued that some of the $846,000 received by the Franklin School from the DOE, and therefore ordered in restitution, was not improperly used and that any amounts legitimately used should be deducted from the restitution amount. Finally, Diaz sought an additional downward departur e for diminished capacity. At sentencing on February 4, 2000, the District Court heard testimony and arguments on those objections. The Court rejected Diaz's argument as to the appropriate guideline, stating that this was a money laundering offense. The Court granted a two-level departure for diminished 7 capacity, reducing the offense level to 20, a custody range of 33 to 41 months; the court sentenced Diaz to 33 months, the bottom of that range.5 The Court ordered that Diaz pay restitution in the amount of $846,000, although the Court allowed credit for any amounts that Diaz could show had been paid back. Diaz timely appealed.