Opinion ID: 2723829
Heading Depth: 4
Heading Rank: 2

Heading: Loss Calculation and Restitution

Text: The Sentencing Guidelines provide for an increase in offense level based on either the actual or intended pecuniary loss resulting from an offense. U.S.S.G. § 2B1.1 cmt. n.3(A). In this case, both loss calculations were in the $200-million to 26 Nos. 12-3819, 12-3833 & 12-3867 $400-million range, resulting in the application of a 28-point enhancement. Id. § 2B1.1(b)(1)(O). A district court “need only make a reasonable estimate of the loss, not one rendered with scientific precision.” United States v. Gordon, 495 F.3d 427, 431 (7th Cir. 2007); see also U.S.S.G. § 2B1.1 cmt. n.3(C). The government bears the burden of proof on the loss amount. United States v. Vivit, 214 F.3d 908, 916 (7th Cir. 2000). To challenge that amount, the defendant must provide “substantiated evidence … to counter the government’s explicit proof of loss.” Gordon, 495 F.3d at 432. The defendants challenge both the intended and actual loss amounts. As a threshold matter, the defendants claim that the judge failed to adequately address their specific objections to the loss amount in violation of Rule 32(i)(3)(B) of the Federal Rules of Criminal Procedure, which generally requires the district court to rule on disputed factual issues. “[W]e have characterized the requirement outlined in Rule 32(i)(3)(B) as one imposing a minimal burden.” United States v. Brown, 716 F.3d 988, 994 (7th Cir. 2013) (internal quotation marks omitted). As long as the judge’s treatment of factual disputes at sentencing gives us an adequate record to enable appellate review, Rule 32(i)(3)(B) is satisfied. See id. at 995; United States v. Cunningham, 429 F.3d 673, 679 (7th Cir. 2005). Here, the judge made specific findings on the intended and actual loss amounts, explained her findings, and rejected the defense evidence and objections. Nothing more is required. Nos. 12-3819, 12-3833 & 12-3867 27
Actual loss is the “reasonably foreseeable pecuniary harm that resulted from the offense.” U.S.S.G. § 2B1.1 cmt. n.3(A)(i). The district court concluded that the actual loss resulting from the defendants’ fraud was $202 million. This calculation was based on a report from Fair’s trustee in bankruptcy. After a thorough review of Fair’s books and the claims submitted by investors, the trustee reported that Fair’s investors were owed more than $208 million (excluding claims for $7 million in interest payments) and that around $5.6 million in assets were recovered, resulting in a net loss of $202 million. (The government notes the arithmetic here is off and the net loss should have been a bit higher, but that does not affect the analysis.) This evidence is easily sufficient on its own to support the judge’s finding of actual loss. In addition to the trustee’s calculation, the judge heard substantial evidence at trial that the money from the certificates issued by Fair ended up in the pockets of the defendants and related parties. The defendants contend that their fraud did not cause the full $202 million in losses. Instead, they cast partial blame on the effects of the 2008 financial crisis and the ensuing recession. But they did not substantiate that claim. The only hard evidence they submitted consisted of an affidavit of a former Obsidian employee attributing Fair’s declining value to market forces and valuations generated by Fair itself reporting that it had more assets than liabilities in November 2009. But Fair’s own internal accounting could not be trusted; the evidence established widespread manipulation of its financial information. And the affidavit from the former Obsidian employee is 28 Nos. 12-3819, 12-3833 & 12-3867 very general; it does not indicate how much of the loss in value was attributable to broader problems affecting the American economy. While it is certainly possible that the recession compounded the effects of the defendants’ fraud, there is no reliable evidence establishing whether and to what extent it actually impacted Fair’s business. The restitution order was premised on the court’s finding of actual loss, and appropriately so. See Allen, 529 F.3d at 396–97. Because we find no error in the judge’s actual-loss finding, the defendants’ challenge to the restitution order necessarily fails.
Intended loss refers to the pecuniary harm that was intended to result from an offense and includes “harm that would have been impossible or unlikely to occur.” U.S.S.G. § 2B1.1 cmt. n.3(A)(ii). To calculate the intended loss, the district court looked to the amount placed at risk by the scheme. See United States v. Lauer, 148 F.3d 766, 768 (7th Cir. 1998). At the time Fair collapsed, nearly all of its approved $250 million offering from 2008 had been issued, and it was seeking (though never received) approval for another offering of the same size. Based on the size of Fair’s most recent certificate offering, the district court concluded that the defendants’ scheme placed $250 million at risk. The defendants argue that the “placed at risk” standard fails to account for the defendant’s subjective intent. But this standard is well established in this circuit. Id. (“[T]he amount Nos. 12-3819, 12-3833 & 12-3867 29 of the intended loss, for purposes of sentencing, is the amount that the defendant placed at risk by misappropriating money or other property.”); see also United States v. Brownell, 495 F.3d 459, 463 (7th Cir. 2007); United States v. Swanson, 483 F.3d 509, 513 (7th Cir. 2007); United States v. Lane, 323 F.3d 568, 585 (7th Cir. 2003). The rule is particularly well suited for application to Ponzi schemes. Ponzi schemes themselves generate no legitimate gains; they “will inevitably collapse at some point, when the volume of new money from new investors/victims is no longer sufficient to meet the demands and expectations of the earlier investor/victims.” United States v. Castaldi, 743 F.3d 589, 597 (7th Cir. 2014). After money is raised through investment, the question is not whether it will be lost but when and by whom. It’s worth noting that none of the authorities cited by the defendants in their attempt to undercut Lauer involved a Ponzi scheme. Nor is the placed-at-risk standard necessarily inconsistent with this court’s general position that “[i]n determining the intended loss amount, the district court must consider the defendant’s subjective intent.” United States v. Middlebrook, 553 F.3d 572, 578 (7th Cir. 2009). For instance, in Mei we upheld the use of the placed-at-risk standard to determine intended loss in a scheme involving credit-card fraud. 315 F.3d at 793. The evidence in Mei established that the defendant intended to use each credit card to its limit; we held that the district court properly estimated intended loss by multiplying the average maximum credit limit of the recovered cards by the total number of cards used in the conspiracy. Id. 30 Nos. 12-3819, 12-3833 & 12-3867 Similarly here, the evidence established that the defendants intended to place the full value of their certificate authorization at risk. For example, in discussing the ramifications of the state agency’s refusal to authorize the fall 2009 offering, Cochran said, “[I]f the[y’re] gonna blow us up, we’re gonna blow them up. … Fifty four hundred investors aren’t gonna fckin[,] I mean it would be a catastrophic event in the [S]tate of Ohio.” Durham also told Snow, I mean, [we’re] betting obviously on a renewal … of our offering certificate, if the renewal doesn’t happen all bets are off (laughs) anyway, for everything … either the renewal happens and we[’]re able to kick back up invest- ment deposits [or] it doesn’t and then we[’]re all fcked anyway, we just kind of go into liquida- tion mode of everything anyways. The defendants also argue that the district court erred in not accounting for money from the $250 million 2008 offering that was repaid to investors. The sentencing guidelines allow the application of a “credit against loss” when money is repaid before discovery of a crime. Brownell, 495 F.3d at 463–64 (citing U.S.S.G. § 2B1.1 cmt. n.3(E)). The defendants concede that they adduced no evidence of repayment in the district court. Instead, they argue from inferences drawn from the trustee’s report. Approximately $250 million worth of certificates were issued, yet investors only claimed $208 million in losses from those investments, suggesting that $42 million must have been repaid. Or so the argument goes. Nos. 12-3819, 12-3833 & 12-3867 31 Nothing supports the inference of repayment. It’s speculative at best; we simply do not know whether the holders of the unaccounted-for $42 million in certificates were repaid or merely did not file claims in the bankruptcy. The defendants also cannot demonstrate whether the supposed “repayments” occurred before or after their criminal conduct was uncovered—a necessary finding in order to apply the credit. See id. at 463. Finally, any error related to intended loss is harmless. The district court’s actual loss finding is independently sufficient to support the sentencing enhancement.