Court Opinion

ID: 2708571
Source: CourtListenerOpinion
Date Created: 2014-08-05 15:01:46.301625+00
Date Added: 2024-06-11T10:01:19.992806
License: Public Domain

In the

    United States Court of Appeals
                For the Seventh Circuit
                    ____________________
No. 13-2046
UNITED STATES OF AMERICA,
                                                  Plaintiff-Appellee,

                                v.

MICHAEL MORAWSKI,
                                              Defendant-Appellant.
                    ____________________

        Appeal from the United States District Court for the
          Northern District of Illinois, Eastern Division.
           No. 11 CR 342 — Gary S. Feinerman, Judge.
                    ____________________

      ARGUED APRIL 14, 2014 — DECIDED JUNE 12, 2014
                    ____________________

   Before WOOD, Chief Judge, and POSNER and FLAUM, Circuit
Judges.
   POSNER, Circuit Judge. The defendant pleaded guilty to
using the mails to implement 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 sentence.
The principal ground of appeal and the only one with suffi-
cient merit to warrant discussion is, in the words of the
2                                                No. 13-2046

opening brief, “the government’s failure to adequately
demonstrate [the defendant’s] responsibility for a large por-
tion of the loss to investors. Mr. Morawski contends that a
portion of the loss, for which he was held responsible, oc-
curred as a result of market conditions.”
    The defendant and another person (a codefendant but
not an appellant) owned and operated Michael Franks, LLC,
a company that invested in real estate. To finance the busi-
ness, the company solicited investments both in particular
apartment buildings that it represented would yield between
a 7 and a 9 percent annual return on investment and in “real
estate-based funds” (a form of real estate investment trust
(REIT)) that it promised would yield between 14 and 30 per-
cent on the investment annually—a return that the defend-
ants told prospective investors would be “guaranteed” by
the defendants’ “personal net worth into the millions.”
    The parties are vague about dates, but apparently the
company began operating in 2006 and collapsed in 2011,
having raised more than $21 million from a total of 267 in-
vestors. About $2.4 million of that amount had been raised
after the Illinois Department of Securities had in December
2009 ordered the defendants to stop selling investment con-
tracts.
    The investors recovered only about $3.2 million. The de-
fendants paid themselves $2 million, enabling them to in-
dulge such typical fraudsters’ extravagances as country club
expenditures amounting to $78,000, a brand-new BMW, sea-
son tickets to the Chicago White Sox, and a “life coach” for
whose services each defendant had paid $5,000 a month. The
rest of the $21 million was lost, the scheme having straddled
the real estate bubble and bust—housing prices had peaked
No. 13-2046                                                  3

in March 2006 and immediately begun to fall. The defend-
ants realized that the properties they had bought would no
longer generate sufficient revenue to pay the investors in
those properties their promised returns. So early in 2008, the
year of the financial crash that precipitated the general eco-
nomic downturn from which the nation is still recovering,
the company began using the new investment money that it
was raising not to invest in real estate but to pay the earlier
investors so they wouldn’t realize that their investment was
imperiled and so new money would continue flowing in to
Michael Franks, LLC. That was the Ponzi part of the fraud.
Through quarterly newsletters and other methods of com-
munication, notably a video by the defendant ironically enti-
tled “Transparency,” www.youtube.com/watch?v=Igdrt
97IW5k (visited June 12, 2014), the company told the inves-
tors that all was well. The defendant even offered them an
“inspirational quote”: “We are guided by our belief that
trust starts with honesty, and that integrity prevails in all
business transactions.”
    The judge found that the defendant (along with his part-
ner, their liability being joint and several) was responsible
for an “actual loss” to the investors of between $7 million
and $20 million. A loss in excess of $7 million adds 20 of-
fense levels to a defendant’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 sen-
tencing discount the judge appears to have been motivated
mainly by the defendant’s age (56½ at sentencing). The gov-
ernment asked for a sentence “closer to 20 years,” which
would have been inappropriate given the defendant’s age
4                                                 No. 13-2046

and that he had no criminal history. In fairness to the gov-
ernment, it made a strong argument in the district court,
though the argument was rejected by the judge, that the de-
fendant should not receive an acceptance of responsibility
discount, because he’d refused to tell the government when
the Ponzi scheme had begun, 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
argument been accepted, thereby increasing the defendant’s
offense level from 34 to 37, his guidelines range would have
soared to 210 to 262 months. Nevertheless, federal 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 sentence.
    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 mil-
lion to $20 million range because had the loss exceeded $20
million it would have added 22 rather than 20 offense levels
to the defendant’s base level. U.S.S.G. § 2B1.1(b)(1)(L).
    “Actual loss” is defined as “reasonably foreseeable pecu-
niary harm that resulted from the offense,” and “reasonably
foreseeable pecuniary harm” is defined in turn as “pecuni-
ary harm that the defendant knew or, under the circum-
stances, reasonably should have known, was a potential re-
sult of the offense.” § 2B1.1, Application Notes 3(A)(i), (iv).
What may have begun as a bona fide real estate investment
company in 2006 morphed into a Ponzi scheme by 2008, and
most of the losses to investors occurred between then and
the company’s collapse in 2011. But $18.2 million was the
No. 13-2046                                                   5

district judge’s estimate of the total loss to investors, all of
which he attributed to fraud, and that was a mistake, alt-
hough an inconsequential one.
     Remember that the defendant offered two kinds of in-
vestment opportunity: investment in particular apartment
buildings, and investment in a kind of REIT, the “Michael
Franks Alternative Fund,” that held $5.9 million of the $21.4
million in total investments. The “Alternative Fund” was a
fraud from the outset. To attract investment in it, the de-
fendant falsely assured potential investors that the promised
14 percent return was guaranteed (or as his advertising put
it, “GUARANTEED!!!”) by his “personal net worth into the
millions.” The defendants collected $16.8 million from inves-
tors 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 hav-
ing refused to submit sufficiently detailed financial records
to enable either the district judge or us to determine the pre-
cise loss in excess of $16.8 million.
    Now it’s true that having correctly calculated the guide-
lines sentencing range, the sentencing judge must go on and
apply the sentencing factors in 18 U.S.C. § 3553(a). Only after
doing that may he decide what sentence to give within the
statutory, not the guidelines, sentencing range for the de-
fendant’s crime. And the amount of loss caused by a defend-
ant, even if not germane to his guidelines range, is germane
to the sentence that the judge will give after evaluating the
defendant’s criminal conduct in light of the statutory sen-
6                                                  No. 13-2046

tencing factors. But the difference between a $16.8 million
estimate of loss (and remember the actual loss is more than
that) and an $18.2 million estimate is too small to have af-
fected the sentence in this case. It had no effect on the guide-
lines sentencing range and the defendant has not challenged
the award of $18.2 million in restitution. The judgment is
therefore
                                                     AFFIRMED.