Court Opinion

ID: 168506
Source: CourtListenerOpinion
Date Created: 2010-08-14 16:34:09+00
Date Added: 2024-06-11T08:06:36.441283
License: Public Domain

F I L E D
                                                                United States Court of Appeals
                                                                        Tenth Circuit
                      UNITED STATES CO URT O F APPEALS
                                                                     December 19, 2006
                                   TENTH CIRCUIT                    Elisabeth A. Shumaker
                                                                        Clerk of Court

 U N ITED STA TES O F A M ER ICA,

          Plaintiff - Appellee,
                                                        No. 06-1102
 v.                                             (D.C. No. 04-CR-00153-LTB)
                                                          (D . Colo.)
 GERALD P. SM ALL, III,

          Defendant - Appellant.

                              OR D ER AND JUDGM ENT *

Before KELLY, M cKA Y, and LUCERO, Circuit Judges. **

      Defendant-Appellant Gerald P. Small, III, pled guilty to three counts of a

twenty-two-count indictment charging him with illegal activities relating to

millions in fraudulent loans he received through mortgage companies he owned or

controlled. Specifically, M r. Small pled guilty to count 2, making a false claim

against the government in violation of 18 U.S.C. § 287; count 4, bank fraud in

      *
        This order and judgment is not binding precedent, except under the
doctrines of law of the case, res judicata, and collateral estoppel. It may be cited,
however, for its persuasive value consistent with Fed. R. App. P. 32.1 and 10th
Cir. R. 32.1.
      **
         After examining the briefs and the appellate record, this three-judge
panel has determined unanimously that oral argument would not be of material
assistance in the determination of this appeal. See Fed. R. App. P. 34(a); 10th
Cir. R. 34.1(G). The case is therefore ordered submitted without oral argument.
violation of 18 U.S.C. § 1344; and count 8, wire fraud affecting a financial

institution in violation of 18 U.S.C. § 1343. He also admitted to count 22, which

sought forfeiture of certain property pursuant to 18 U.S.C. § 982. The district

court sentenced M r. Small to 60 months in prison on count 2, and 101 months on

counts 4 and 8, all to be served concurrently. He was further sentenced to three

years of supervised release on count 2, and five years on counts 4 and 8, all

concurrent. The district court also imposed restitution in the amount of

$35,279,440.27.

      On appeal, M r. Small challenges his sentence. Specifically, he contends

that the district court erred by: (1) considering facts proven only by a

preponderance of the evidence; (2) failing to offset the collateral pledged against

the loss proven by the government; (3) applying a two-level sophisticated means

enhancement to a crime that merely used fictitious financial statements and

several sham companies and that was so unsophisticated that a loan processor

with only a high school education detected it; (4) applying a four-level

enhancement for M r. Small’s role as an organizer or leader of an extensive

criminal operation; (5) failing to depart in recognition of the cumulative nature of

the aforementioned enhancements; and (6) failing to credit M r. Small for the 20

months he spent in home detention during the pendency of his case. Our

jurisdiction arises under 28 U.S.C. § 1291 and 18 U.S.C. § 3742(a), and we affirm

in part and reverse in part.

                                         -2-
                                    Background

I.    The Scheme

      M r. Small, through companies he owned or controlled, devised and

perpetrated two separate schemes by which he fraudulently obtained over $255

million in loans from U.S. financial institutions. In the first scheme, which was

the subject of counts 4-7 of the indictment, M r. Small and his associate, Robert

Bichon, induced “investors” to submit materially false mortgage loan applications

to lenders such as W ashington M utual, Inc., and Colonial Savings, F.A. M r.

Small and M r. Bichon promised the investors that, if they supplied their good

credit, M r. Small and M r. Bichon or the entities they controlled would provide a

down payment. Once the property was purchased in the investors’ names, a

“contract for deed” would be executed whereby these entities would manage the

properties for two years, guaranteeing that rent payments would satisfy the

mortgage obligations. At the end of the two years, the investors would be bought

out. M any of the homes purchased were structurally damaged but had been

repaired cosmetically for the purpose of obtaining inflated appraisals.

      In the specific fraud charged in count 4, an “investor” named Ryan Hall

applied for a $680,000 loan to fund the purchase of a home in Greenwood

Village, Colorado. M r. Small assisted M r. Hall in preparing the loan application,

which included a W-2 form falsely indicating that M r. Hall was employed by

Turner Group at a high salary as w ell as a false bank statement indicating that M r.

                                        -3-
Hall had a high account balance. At M r. Small’s request, Robert Sigg falsely

confirmed M r. Hall’s employment when contacted by the lender, Long Beach

M ortgage.

      To understand the fraudulent wire transfer charged in count 8, some

background is necessary. This scheme involved efforts by M r. Small and his

employees to induce Flagstar Bank, FSB (“Flagstar”) and IM PAC W arehouse

Lending Group (“IM PAC”) to provide initial funding for fictitious loans. This

scheme began in February of 2003, when M r. Small obtained a multi-million-

dollar w arehouse line of credit from Flagstar in the name of Amerifunding, a

company that his wife, Kelli Small, nominally owned but he controlled. Flagstar

approved the credit line and several increases to it based on personal guarantees

from M rs. Small, which w ere backed by false financial statements prepared at M r.

Small’s direction. IM PA C issued a separate line of credit to Amerifunding based

on similar misrepresentations.

      Later in 2003, M r. Small directed Chad Heinrich to purchase Twentieth

Century M ortgage, Inc. (“Tw entieth Century”), using the proceeds of the fraud

against Flagstar. Using the false financial statements that had been prepared for

M rs. Small as a template, M r. Heinrich obtained a $25 million line of credit from

Flagstar at M r. Small’s behest. Then, M r. Small directed M r. Heinrich, Charles

W innett, and others of his employees to submit fraudulent home loan applications

to Flagstar and IM PA C on behalf of Amerifunding and Tw entieth Century. The

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loan applications used either wholly fictitious names or the names of people who

were neither applying for loans nor purchasing the homes listed in the

applications.

      M r. Small also directed the creation of several shell corporations to

perpetrate this fraud. First, he had M r. W innett incorporate TD F M ortgage

Funding, Inc (“TDF”). Amerifunding and Twentieth Century represented to

Flagstar and IM PA C that TDF w ould purchase many of the fraudulent loans once

Flagstar and IM PAC provided the initial funding. M r. Small also directed his

subordinates to incorporate Security National Title, Inc., and Chicago Title

Guarantee, Inc., using fictitious names. These purportedly independent title

companies, which had names very similar to those of two established title

companies, were actually controlled by M r. Small and his associates and acted

merely as conduits for funds received from Flagstar and IM PAC.

      In December of 2003, a Flagstar loan processor became suspicious of some

of the loan applications coming from M r. Small’s companies. After she brought

her concerns to the attention of her superiors, Flagstar began requiring

Amerifunding to provide copies of applicants’ driver’s licences along with the

loan applications. M r. Small and his subordinates thereafter began collecting

driver’s licenses from Twentieth Century employee files and submitting loan

applications in those names. Once they had used all of those names, M r. Small

instructed an Amerifunding employee to place false newspaper advertisements for

                                         -5-
a position at the company that paid $100,000 per year to applicants with no

previous experience. M r. Small and his subordinates then used the personal

information provided by the applicants, who were required to provide copies of

their driver’s licenses, to obtain more fraudulent loans.

      In the specific fraud charged in Count 8, M r. Small caused or aided and

abetted a w ire transfer of $460,000 from Flagstar to Security National Title’s

account at First National Bank of Colorado in D enver. Flagstar provided these

funds in response to a loan application submitted in the name of Jeffrey Todd

Hood. M r. Hood had applied for a job at Amerifunding but had no intent to apply

for a loan. He discovered that a loan application had been submitted in his name

when the loan processor telephoned him to confirm her belief that the loan was

fraudulent.

      The government calculated that the total loss to Flagstar and IM PA C from

the fraudulent scheme directed by M r. Small was $35,032,080.64. M r. Small

reserved his right to challenge that figure. W ith respect to the other scheme, the

parties agreed that the actual loss was $2,473,597.14. There was no evidence that

M r. Small intended a greater loss than the actual loss in either circumstance.

II.   The Sentence

      For counts 4 and 8, 1 the Presentence Report (“PSR”) as adopted by the

district court concluded that the applicable guideline range was 151 to 188

      1
          M r. Small challenges only his sentences for counts 4 and 8.

                                         -6-
months and that the sentences should run concurrently, pursuant to U.S.S.G. §

5G1.2(c). It arrived at this calculation as follows. First, the PSR determined that

the base offense level for each crime was 7. U.S.S.G. § 2B1.1(a)(1). Second, it

determ ined that a 22-level enhancement applied, pursuant to U.S.S.G.

§2B1.1(b)(1)(L), because the loss caused by M r. Small’s offenses was more than

$20 million but less than $50 million. Third, the PSR added a 2-level

enhancement for sophisticated means, pursuant to U.S.S.G. § 2B1.1(b)(9)(C),

because M r. Small had used fictitious entities and corporate shells to perpetrate

the frauds. Fourth, the PSR added a 2-level enhancement, pursuant to U.S.S.G. §

2B1.1(b)(13), because M r. Small received $1 million or more in gross receipts

from one or more of the financial institutions that he defrauded. Fifth, it added a

4-level enhancement for M r. Small’s role as the organizer of the offense, pursuant

to U.S.S.G. § 3B1.1(a). Sixth, the PSR declined to increase for obstruction of

justice despite evidence that M r. Small lied to investigators before his arrest and

then lied to his probation officer about his compliance with the conditions of his

pre-trial release. Finally, the PSR deducted 3 levels, pursuant to U.S.S.G. §

3E1.1(a), because M r. Small accepted responsibility for his crimes and cooperated

with investigators. These calculations led to a total offense level of 34. Because

M r. Small had no criminal history points, the PSR determined that his criminal

history category was I, resulting in a guideline range of 151-188 months.

      As part of its plea agreement, the government agreed to move for a 25

                                         -7-
percent downward departure, and it did so at the sentencing hearing. A departure

of 25 percent below the guideline range as calculated by the PSR would have left

M r. Small with a sentence of between 113 and 141 months. However, M r. Small

registered several objections to the calculations in the PSR that he now raises in

this appeal. According to his calculations, the total offense level should have

been 28, which, with a criminal history category of I, would have led to a

guideline range of 78 to 97 months. A 25 percent departure below this range

would have resulted in a sentence between 59 and 73 months.

      The district court rejected M r. Small’s arguments, determining that the

proper offense level was 34, as calculated in the PSR, and that the appropriate

sentencing range w as 151 to 188 months. The court also decided to depart

downward; in fact, the court departed 33 percent, resulting in a sentence of 101

months. However, M r. Small has appealed, arguing that a proper calculation of

the guideline range would have resulted in an even lower sentence.

                                      Discussion

      “W hen reviewing a district court’s application of the Sentencing

Guidelines, we review legal questions de novo and we review any factual findings

for clear error, giving due deference to the district court’s application of the

guidelines to the facts.” United States v. M artinez, 418 F.3d 1130, 1133 (10th

Cir. 2005), cert. denied, 126 S. Ct. 841 (2005). Our review of M r. Small’s

                                          -8-
contentions w as aided because the government provided some of the materials

that should have been–but were not–included in his appendix.

I.    Evidentiary Standard

      M r. Small first asserts that the district court erred by enhancing his

sentence based on facts proven only by a preponderance of the evidence. He

contends that it is unconstitutional for a court to enhance a sentence by using

facts not proven beyond a reasonable doubt after the Supreme Court’s decision in

United States v. Booker, 543 U.S. 220 (2005). This contention has been

examined and rejected in several cases–suffice it to say that the post-Booker

advisory guideline regime permits judicial factfinding by a preponderance of the

evidence. United States v. Bustamante, 454 F.3d 1200, 1202 (10th Cir. 2006).

II.   Collateral Offset

      M r. Small next argues that the district court erred by failing to reduce the

amount of loss caused by his fraudulent activities by the amount of collateral

pledged to secure the loans. He contends that the loss amount is below $20

million, which results in an enhancement of 20 levels rather than 22. Aplt. Br. at

16. Both parties agree that the district court correctly interpreted U.S.S.G. §

2B1.1 cmt. n.3(E)(ii), when it held that it “must consider collateral that benefits

Flagstar in determining the amount of loss. Simply put, for any collateral value

that Flagstar may be entitled to claim, the amount of loss should be reduced by

that collateral.” A plee. Supp. App. at 62. Notwithstanding, the district court

                                         -9-
made no adjustment for the value of any collateral because it deemed the

collateral to be worthless. The district court held that Flagstar’s security interest

in the mortgage loans, related documents, payments, purchase commitments, and

any proceeds thereof were all valueless because the mortgages were obtained by

fraud and wholly fictitious. Id. at 63-66. The district court acknowledged that

Flagstar claimed a senior security interest in many of the assets purchased by M r.

Small, notwithstanding that many of those assets were then subject to a forfeiture

proceeding by the government and claims by others. Id. at 63.

        W e think the district court’s methodology is plainly incorrect–Flagstar

and IM PA C have argued all along that they have a security interest in not only the

funds provided to Amerifunding conspirators but also Amerifunding’s negotiable

instruments, notes, mortgage loans, accounts, intangibles, receivables, both then-

existing and after-acquired, as well as proceeds therefrom. Aplt. A pp. at 41-45.

They also urged a constructive trust theory. Id. at 45 n.9. Subsequently, it

appears that the government settled the multi-million dollar forfeiture action in

favor of various creditors of Amerifunding (including Flagstar and IM PAC),

retaining only $283,000. Aplt. Br. at Ex. 2 at 2. W e do not think that the

collateral argument can be dismissed so easily.

      M r. Small is correct that the government had the burden of proving the

amount of loss, see U nited States v. Rockey, 449 F.3d 1099, 1005 (10th Cir.

2006), and he is also correct that the loss amount should have been reduced by the

                                         - 10 -
value of any collateral. An incorrect application of the guidelines requires a

remand unless we can determine that the error did not affect the sentence

imposed. W illiams v. United States, 503 U.S. 193, 203 (1992). Although M r.

Small’s explanation of how the collateral will bring the loss below the threshold

of $20,000,000 is certainly lacking, the government bears the burden of showing

that the error in disregarding the collateral was harmless–viz., of showing by a

preponderance of evidence that substantial rights were not affected. M artinez,

418 F.3d at 1135-36. W e note that one Flagstar estimate of the net loss to all the

victims was $22,625,000, Aplt. App. at 37, but in light of the importance of

quantifying the amount of loss, we cannot say confidently that the error was

harmless given the attendant standard or review. On remand, the district court

should quantify the loss reduced by any collateral and, if necessary, resentence

M r. Small. W e consider the balance of the sentencing issues in the appeal

because they are likely to arise on remand.

III.   Sophisticated M eans Enhancement

       M r. Small next argues that the 2-level sophisticated means enhancement

was not applicable to him. The district court rejected this argument, finding that

the enhancement applied because the scheme employed shell companies,

fraudulent financial statements, and other false information. Aplee. Supp. App. at

67. M r. Small argues that, although the fraud was large, it was unsophisticated,

particularly given that it was detected by a loan processor. He refers us to the

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Guidelines’s definition of sophisticated means–“especially complex or especially

intricate offense conduct pertaining to the execution or concealment of an

offense,” U.S.S.G. § 2B1.1, cmt. n.8(B)–contending that the definition indicates

that “the enhancement is designed to cover a strictly limited subset of fraud

offenses and requires the level of means sophistication to be much higher than

average for that type of offense.” Aplt. Br. at 17.

      In response, the government directs us to the rest of Application Note 8,

which includes the observation that “[c]onduct such as hiding assets or

transactions, or both, through the use of fictitious entities, corporate shells, or

offshore financial accounts also ordinarily indicates sophisticated means.”

U.S.S.G. § 2B1.1, cmt. n.8(B). W e agree that M r. Small’s conduct, which

employed such devices as shell corporations, false financial statements and

fictitious persons, plainly falls within the definition of “sophisticated.” W e also

reject M r. Small’s contention that the fraud could not be sophisticated because it

was detected by a loan processor who noticed unusual patterns and relationships

in the data. To the contrary, we think that this case was tailor-made for a

sophisticated means enhancement even though the fraud was readily-detectible

once the pieces of the puzzle were put together.

IV.   Organizer or Leader Enhancement

      M r. Small next asserts that the district court erred by applying a 4-level

enhancement for his role as an organizer or leader of an extensive criminal

                                         - 12 -
activity rather than a 2-level enhancement for being the manager or supervisor of

non-extensive criminal activity. In order to apply the 4-level enhancement, the

court must find that the “criminal activity . . . involved five or more participants

or was otherwise extensive,” and that the defendant was an organizer or leader

thereof. U.S.S.G. § 3B1.1(a). M r. Small challenges both determinations,

contending that “[t]he government did not prove the requisite level of control,

organization, and responsibility for the actions of others,” necessary to establish

his role, Aplt. Br. at 25, and that the “single-digit figure of Amerifunding

employees whose ‘unknowing services’ were involved in the commission of the

fraud is surely not” sufficient to qualify the criminal activity as otherwise

extensive, id. at 26. 2

       The A pplication Notes provide guidance to courts assessing whether a

defendant should qualify for the 4-level enhancement. W ith respect to the

defendant’s role in the offense:

       Factors the court should consider include the exercise of decision
       making authority, the nature of participation in the commission of the
       offense, the recruitment of accomplices, the claimed right to a larger
       share of the fruits of the crime, the degree of participation in
       planning or organizing the offense, the nature and scope of the illegal
       activity, and the degree of control and authority exercised over
       others.

U.S.S.G. § 3B1.1 cmt. n.4. W ith respect to the size of the offense:

       2
         Both parties agree that neither of the criminal activities at issue involved
five or more criminally responsible participants.

                                         - 13 -
      In assessing whether an organization is “otherwise extensive,” all
      persons involved during the course of the entire offense are to be
      considered. Thus, a fraud that involved only three participants but
      used the unknowing services of many outsiders could be considered
      extensive.

Id. cmt. n.3. The district court properly acknowledged the factors contained in

these provisions, and it evaluated them in determining that the 4-level

enhancement applied to M r. Small. See Aplee. Supp. App. at 68. However, M r.

Small has failed to provide us with the district court’s factual findings. W ithout

more, we lack the capacity to review the district court’s application of the

Guidelines to the facts, and, accordingly, we affirm. W e also note that the facts

admitted in M r. Small’s plea are more than sufficient to establish his eligibility

for the 4-level enhancement.

V.     Failure to Depart for Cumulative Enhancements

      M r. Small also asserts that the district court should have departed

downward to counteract the cumulative enhancements it had applied. M r. Small

sought this departure because, he argued, the four enhancements applied by the

district court–for the amount of loss, the gross receipts over $1 million, the

defendant’s role as organizer and leader of the offense, and the defendant’s

sophisticated means–punish substantially the same conduct. See Aplt. Br. at 27-

28. The district court rejected his argument, stating that, as a matter of law, the

departures in this case were not cumulative. W e review this purely legal

interpretation of the guidelines de novo. See United States v. Duran, 127 F.3d

                                         - 14 -
911, 916 (10th Cir. 1997).

      W e reject the contention that the application of the sophisticated means

enhancement in tandem with the amount of loss and gross receipts enhancements

constituted double counting. The conduct that qualified M r. Small for the

sophisticated means enhancement was his “hiding assets or transactions, or both,

through the use of fictitious entities [and] corporate shells . . . .” U.S.S.G.

§ 2B1.1, cmt. n.8(B). Thus, it was his method of hiding the assets that mattered.

The other two enhancements are concerned solely with amounts of money; the

method by which the money was obtained or concealed is irrelevant. Clearly,

then, these enhancements do not overlap, are not indistinct, and do not serve the

same purpose.

      Likewise, the enhancement for M r. Small’s role in the offense is not

cumulative. It does not overlap with the others because a defendant could

certainly qualify for an enhancement based on his role in the offense even if his

means were not sophisticated and he did not qualify for enhancements based on

the amount of loss. The organizer or leader enhancement targets conduct–for

example, the defendant’s decision making authority–that is not contemplated by

the other enhancements. Similarly, it serves a distinct purpose from the other

enhancements applied to M r. Small in this case.

      Finally, we conclude that the amount of loss and gross receipts

enhancem ents are not cumulative. Although both are concerned w ith amounts,

                                         - 15 -
one focuses on the overall size of the fraud while the other targets the effect on

financial institutions in particular. Therefore, the conduct at issue is not

indistinct. M oreover, a fraud could be large enough to call for a 22-level amount

of loss enhancement but not qualify for the gross receipts enhancement if the

victims were not financial institutions. Thus, the two do not necessarily overlap.

They also do not serve identical purposes: one considers the overall damage done

by the perpetrator whereas the other considers the degree of damage done to

particular victims.

VI.   Failure to Credit Twenty M onths of Home Detention

      Finally, M r. Small argues that the district court should have given an

additional reduction in light of the twenty months he spent in home detention

while awaiting his trial and sentencing. M r. Small apparently did not raise this

objection at sentencing, so our review is for plain error, and we find none.

Nothing in the Guidelines requires a departure for time spent in home detention,

and M r. Small can point to no case–in this circuit or anywhere else–endorsing the

proposition that a district court must consider pre-trial detention in arriving at a

reasonable sentence. Instead, he points to two subsections of 18 U.S.C.

§ 3553(a)(2), which directs the district court to consider “the need for the

sentence imposed (A) to reflect the seriousness of the offense, to promote respect

for the law , and to provide just punishment for the offense; [and] (B) to afford

adequate deterrence to criminal conduct.” W e find no indication that the court

                                         - 16 -
failed to consider these factors. Indeed, it is possible that the lengthy home

detention could have been the reason why the district court departed even further

than the government recommended. Regardless, the court was not required to

reduce M r. Small’s sentence by the amount of time he spent in home detention.

      AFFIRM ED in part, REVERSED in part, and REM ANDED for

resentencing.

                                       Entered for the Court

                                       Paul J. Kelly, Jr.
                                       Circuit Judge

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