PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
v. No. 07-4310
KENNETH N. HARVEY,
Defendant-Appellant.
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
v. No. 07-4311
MICHAEL G. KRONSTEIN,
Defendant-Appellant.
Appeals from the United States District Court
for the Western District of Virginia, at Charlottesville.
Norman K. Moon, District Judge.
(3:06-cr-00023-nkm)
Argued: March 19, 2008
Decided: July 14, 2008
Before WILLIAMS, Chief Judge, WILKINSON, Circuit Judge,
and Irene M. KEELEY, United States District Judge
for the Northern District of West Virginia, sitting by designation.
Affirmed in part, vacated in part, and remanded by published opinion.
Judge Keeley wrote the opinion, in which Chief Judge Williams and
Judge Wilkinson joined.
2 UNITED STATES v. HARVEY
COUNSEL
ARGUED: Christopher M. Choate, MCNABB ASSOCIATES, P.C.,
Houston, Texas; Franklin B. Reynolds, Jr., Washington, Virginia, for
Appellants. M. Kendall Day, Public Integrity Section, UNITED
STATES DEPARTMENT OF JUSTICE, Washington, D.C., for
Appellee. ON BRIEF: William M. Welch, II, Chief, Public Integrity
Section, UNITED STATES DEPARTMENT OF JUSTICE, Washing-
ton, D.C., for Appellee.
OPINION
KEELEY, District Judge:
Following their convictions of two counts of honest services wire
fraud and one count each of bribery, Appellants Kenneth Harvey
("Harvey") and Michael Kronstein ("Kronstein") (from time to time
"Appellants"), appeal their convictions and sentences, including the
trial court’s orders of restitution. We affirm their convictions and sen-
tences of incarceration. Because the district court’s restitution orders
were not based on findings of actual loss, however, we vacate those
orders and remand for further proceedings as discussed below.
I.
Harvey, a civilian employee with U.S. Army Intelligence and
Security Command ("INSCOM"), engineered the award of a non-
competitive, "sole-source" contract to Program Contract Services, Inc.
("PCS"), a closely-held corporation wholly owned and controlled by
Kronstein, who had been a close friend of Harvey’s for over twenty
years. At trial, the government established that, in justifying the sole-
source award, Harvey made numerous false statements to contracting
officials at INSCOM regarding PCS’s ability to handle the job. Spe-
cifically, Harvey represented to INSCOM that PCS had highly spe-
cialized personnel available to commence work immediately when, in
fact, PCS lacked the minimum number of employees the contract
required. He further led INSCOM to believe that no other firm was
qualified to perform the contract. At trial, however, the government
UNITED STATES v. HARVEY 3
established that there were approximately one hundred other qualified
companies in the immediate area. Based on Harvey’s misleading rep-
resentations, INSCOM awarded the contract to PCS in January 1999.
As the Contracting Officer Representative on the PCS contract,
Harvey oversaw performance of the contract through July 1999, after
which he recused himself, citing a possible conflict of interest due to
a business relationship with a PCS employee named Peckham.
According to the evidence at trial, however, even after recusing him-
self, Harvey continued to be involved in the contract by recommend-
ing modifications and "add-ons," and by approving payments to PCS.
During the first year of services, INSCOM paid PCS over
$1,250,000.00. It then renewed the contract in 2000 and 2001, pursu-
ant to a contractual renewal option. The evidence at trial was incon-
clusive as to what role, if any, Harvey may have played in obtaining
those renewals. Ultimately, PCS received approximately
$4,795,265.79 in payments from INSCOM, which were electronically
wired to a PCS bank account in Front Royal, Virginia. The contract
designated an eight percent profit margin for PCS.
Beginning in the fall of 1999, a series of monetary transactions
occurred between businesses owned by Kronstein, including PCS and
a convenience store called Foodway Supermarket, and businesses
owned by Harvey, including several tobacco outlets and a franchise
of the Johnny Appleseed restaurant chain. Kronstein and Harvey
never exchanged money directly. Instead, they utilized employees and
family members as intermediaries, most frequently their wives, Karla
Kronstein and Samra Harvey. At trial, the government provided spe-
cific examples of at least seven transactions in which money was fun-
neled from PCS to Harvey’s businesses, each of which was designed
to obscure the money trail. This evidence supported the government’s
theory at trial that the payments from Kronstein to Harvey were
bribes made in remuneration for the award of the PCS contract.
In one such example, on October 5, 1999, Kronstein wrote a check
for $7,500 from a PCS account to Foodway Supermarket. An
employee of Foodway then wrote a $7,500 check from Foodway to
Samra Harvey, who deposited the check into a Johnny Appleseed
account. Other examples abound. On January 5, 2000, Kronstein
4 UNITED STATES v. HARVEY
wrote a $15,000 check from PCS to Foodway. On the same day, a
Foodway employee wrote a $5,000 check from Foodway to Samra
Harvey. In still another example, on May 8, 2000, Kronstein hired a
plumber to perform maintenance work at Harvey’s Johnny Appleseed
restaurant. Several days later, a Foodway employee wrote a check for
$2,136 from Foodway to the plumber to pay for the work done at
Johnny Appleseed. And, on February 17, 2001, Kronstein endorsed
a check made payable to PCS in the amount of $47,005.50 over to
Karla Kronstein’s father. On the same day he deposited the check into
his personal account, Mrs. Kronstein’s father withdrew $8,578.91
from that account in the form of a cashier’s check, and delivered it
to Samra Harvey, who used it to pay an overdue electric bill for
Johnny Appleseed.
Ultimately, the evidence at trial established that, from the fall of
1999 through the spring of 2001, a total of $43,000 was funneled
from PCS to Harvey’s businesses. The evidence further established
that Harvey concealed these payments from INSCOM, despite
requirements that he disclose them. Finally, in May 2001, Harvey
resigned from INSCOM, telling his supervisors that he was taking a
position with a company called AAR Cadillac. Although he worked
with AAR Cadillac, in truth Harvey was actually employed by PCS.
Had his supervisor at INSCOM known of Harvey’s employment with
PCS, he testified that he would have suspended Harvey immediately
and referred the matter to INSCOM’s legal department for investiga-
tion.
In April 2006, the government indicted Harvey and Kronstein on
two counts of honest services wire fraud, alleging that, between
November 1998 and March 2002, they aided and abetted each other
in a scheme to defraud the United States and the Army in violation
of 18 U.S.C. §§ 1343, 1346 and 2. The indictment further named Har-
vey in one count of bribery in violation of 18 U.S.C. § 201(b)(2)(A),
which applies to public officials who accept bribes, and Kronstein in
one count of bribery in violation of 18 U.S.C. § 201(b)(1)(A), which
applies to those who bribe public officials.
At a jury trial in December 2006, the government presented evi-
dence that Harvey and Kronstein defrauded the government by form-
ing PCS for the sole objective of obtaining the INSCOM contract. In
UNITED STATES v. HARVEY 5
exchange for being awarded the contract, Kronstein funneled earnings
from PCS to Harvey via various family members and employees, pri-
marily in the form of financial assistance to Johnny Appleseed, Har-
vey’s restaurant. While admitting that Kronstein and his wife had
given Harvey money to keep the restaurant afloat, the defendants
characterized those transactions as mere business loans between old
friends.
Following their convictions on all counts, on March 6, 2007 the
district court sentenced Harvey to 72 months of incarceration and
Kronstein to 70 months. It also ordered each, jointly and severally, to
pay $383,621.00 in restitution to INSCOM.
Harvey and Kronstein appeal their convictions, sentences and the
orders of restitution.
II.
A.
Initially, Appellants contend that the government presented insuffi-
cient evidence for a jury to convict them of honest services wire fraud
and bribery. In reviewing the sufficiency of the evidence in the con-
text of these convictions, we ask "whether, viewing the evidence in
the light most favorable to the government, any rational trier of facts
could have found the defendant guilty beyond a reasonable doubt."
U.S. v. Tresvant, 677 F.2d 1018, 1021 (4th Cir. 1982) (citing U.S. v.
Shaver, 651 F.2d 236, 238 (4th Cir. 1981)). We consider both circum-
stantial and direct evidence, and allow the government all reasonable
inferences that could be drawn in its favor. Id. "Where there are con-
flicts in the testimony, it is for the jury and not the appellate court to
weigh the evidence and judge the credibility of the witnesses." Id. at
1021-22 (citing U.S. v. Fisher, 484 F.2d 868, 869-70 (4th Cir. 1973),
cert. denied, 415 U.S. 924 (1974)).
1.
Harvey and Kronstein were convicted under 18 U.S.C. §§ 1343 and
1346. Section 1343 provides, in relevant part:
6 UNITED STATES v. HARVEY
Whoever, having devised or intending to devise any scheme
or artifice to defraud, or for obtaining money or property by
means of false or fraudulent pretenses, representations, or
promises, transmits or causes to be transmitted by means of
wire . . . in interstate or foreign commerce, any writings . . .
for the purpose of executing such scheme or artifice, shall
be fined under this title or imprisoned not more than 20
years or both.
Section 1346 clarifies that "the term ‘scheme or artifice to defraud’
includes a scheme or artifice to deprive another of the intangible right
of honest services."
The "intangible right of honest services" refers to the public’s right
to a government official’s "honest, faithful, and disinterested ser-
vices." U.S. v. Mandel, 591 F.2d 1347, 1362 (4th Cir. 1979), aff’d in
relevant part, 602 F.2d 653 (1979) (en banc), cert. denied, 445 U.S.
961 (1980). When a government official accepts a bribe, he under-
mines this public right because, although the official is "outwardly
purporting to be exercising independent judgment in passing on offi-
cial matters," in fact, the official has been paid for his decisions and,
perhaps, has not even considered the merits of the matter. Id.
Thus, in order to convict Appellants of honest services wire fraud,
the government was required to prove beyond a reasonable doubt that
Harvey and Kronstein engaged in (1) a scheme or artifice to defraud
another of the intangible right of honest services, (2) that involved a
material misrepresentation or concealment of fact, (3) undertaken
with the specific intent to defraud, and (4) furthered by the use of
interstate wire communications. See 18 U.S.C. §§ 1343, 1346 (2000);
Neder v. U.S., 527 U.S. 1, 25 (1999) (materiality of falsehood is an
element of the federal wire fraud statute); U.S. v. Godwin, 272 F.3d
659, 666 (4th Cir. 2001) (the government must prove specific intent
to defraud).
Despite Appellants’ protests to the contrary, we have no doubt that
the government presented sufficient evidence to establish that each
was involved in a scheme or artifice to defraud, which included a
UNITED STATES v. HARVEY 7
material misrepresentation or concealment of fact, and that they acted
with specific intent to defraud.1
Although Harvey and Kronstein contend that the government
lacked direct evidence of a scheme to defraud, such evidence is not
necessary to convict because "the specific intent to defraud . . . ‘may
be inferred from the totality of the circumstances and need not be
proven by direct evidence.’" Godwin, 272 F.3d at 666 (quoting U.S.
v. Ham, 998 F.2d 1247, 1254 (4th Cir. 1993). Because the govern-
ment presented sufficient circumstantial evidence of a scheme to
defraud, including (1) evidence of misrepresentations Harvey made to
INSCOM regarding PCS’ performance capabilities, (2) evidence of
Harvey’s ongoing involvement in the PCS contract, and (3) evidence
of the subsequent money transfers from PCS to Harvey’s businesses,
a lack of direct evidence does not undermine the jury’s verdict.
Appellants next argue that the government failed to sufficiently
prove that they concealed material facts from INSCOM. Again, the
evidence presented at trial amply supported such a finding. The gov-
ernment established that Harvey had failed to report the "gifts" from
Kronstein to his employers, despite a requirement that he do so on an
annual financial disclosure form. It also established that Harvey mis-
represented to INSCOM his subsequent employment with PCS.
Failure to report income, including gifts, on a required financial
disclosure form, and failure to report the conflict of interest associated
with it, constitute significant evidence of concealment of material
facts. See U.S. v. Woodward, 149 F.3d 46, 62 (1st Cir. 1998)
("[N]ondisclosure of a conflict of interest is a second way in which
a public official can steal his honest services."); U.S. v. Espy, 23
F.Supp.2d 1, 6 (D.D.C. 1998) ("[A] public official who solicited gifts
from entities over which he held decision-making discretion and later
concealed receipt of those gifts, exhibited elements of dishonesty suf-
ficient to support a charge he breached a fiduciary duty owed to the
United States and its citizens.").
1
The use of interstate wire communications in connection with the
alleged scheme was not disputed.
8 UNITED STATES v. HARVEY
Finally, although Appellants contend that they lacked specific
intent to defraud, "a bribery-like, corrupt intent to influence official
action necessarily is an intent to deprive the public of an official’s
honest services." Woodward, 149 F.3d at 55. Because the government
presented sufficient evidence that Harvey and Kronstein not only had
engaged in a scheme to defraud but also had actively concealed mate-
rial facts from the government, a reasonable jury could have found
that these acts were undertaken with specific intent to influence an
official action, which, in turn, would indicate a specific intent to
deprive the public of honest services.
We therefore affirm Appellants’ convictions for honest services
wire fraud. When viewed in the light most favorable to the govern-
ment, sufficient evidence existed for a rational trier of fact to convict
them of these crimes.
2.
Each Appellant was also convicted of one count of bribery under
18 U.S.C. § 201(b). Pursuant to that statute, a person who, directly or
indirectly, corruptly gives, offers or promises anything of value to a
public official, with intent to influence an official act, is guilty of
bribery. Id. at § 201(b)(1)(A). Similarly, any public official who, "di-
rectly or indirectly, corruptly demands, seeks, receives, accepts, or
agrees to receive or accept anything of value personally or for any
other person or entity, in return for being influenced in the perfor-
mance of any official act" is also guilty of bribery. Id. at
§ 201(b)(2)(A). A "public official" includes "an officer or employee
. . . of the United States, or any department, agency or branch of the
Government thereof." Id. at § 201(a)(1). An "official act" includes
"any decision or action on any question, matter, cause, suit, proceed-
ing, or controversy, which may at any time be pending . . . in such
official’s official capacity, or in such official’s place of trust or
profit." Id. at § 201(a)(3).
"Not every gift, favor or contribution to a government or political
official constitutes bribery. It is universally recognized that bribery
occurs only if the gift is coupled with a particular criminal intent."
U.S. v. Arthur, 544 F.2d 730, 734 (4th Cir. 1976). The requirement
of "corrupt intent," simply means "the intent to receive a specific ben-
UNITED STATES v. HARVEY 9
efit in return for the payment." U.S. v. Jennings, 160 F.3d 1006, 1013
(4th Cir. 1998).
The intent to receive a "specific benefit," however, is not as limit-
ing as it first appears; it is "sufficient that the gift is made on the con-
dition ‘that the offeree act favorably to the offeror when necessary.’"
Arthur, 544 F.2d at 734 (quoting U.S. v. Isaacs, 493 F.2d 1124, 1145
(7th Cir. 1974)). Thus,
[t]his requirement of criminal intent would, of course, be
satisfied if the jury were to find a ‘course of conduct of
favors and gifts flowing’ to a public official in exchange for
a pattern of official actions favorable to the donor even
though no particular gift or favor is directly connected to
any particular official act.
Id. (quoting U.S. v. Baggett, 481 F.2d 114, 115 (4th Cir. 1973), cert.
denied, 414 U.S. 1116 (1973)).
The only contested issue here is whether Harvey and Kronstein
acted with corrupt intent in their dealings. Because the alleged money
transfers all took place after Harvey helped engineer the contract
award to PCS, Appellants strenuously contend that no bribe can be
inferred. We have previously observed, however, that "[b]ribes often
are paid before the fact, but ‘it is only logical that in certain situations
the bribe will not actually be conveyed until the act is done.’" Jen-
nings, 160 F.3d at 1014 (quoting U.S. v. Campbell, 684 F.2d 141, 148
(D.C. Cir. 1982)). Thus, Appellants’ reliance on the timing of the
alleged bribes is misplaced.
As the government has argued, the same evidence that supported
the charges of honest services wire fraud also supported the bribery
convictions. "Corrupt intent" can be inferred from the circumstances
surrounding the award of the contract to PCS and the payments from
Kronstein to Harvey’s businesses. Thus, there is no question that a
rational trier of fact could have found that the evidence at trial estab-
lished a course of conduct in which Harvey, a public official, engaged
in a series of official acts in exchange for a series of payments that
Kronstein made through third parties for Harvey’s benefit, and that
10 UNITED STATES v. HARVEY
each undertook such actions with corrupt intent. Accordingly, we
affirm Appellants’ convictions for bribery.
B.
Although they failed to object at trial, Appellants now assert that
the district court made several antagonistic comments in the presence
of the jury that prejudiced them and the outcome of their cases. In cir-
cumstances of alleged judicial interference, "we may not intervene
unless the ‘judge’s comments were so prejudicial as to deny [the
defendants] an opportunity for a fair and impartial trial.’" Godwin,
272 F.3d at 673 (alteration in original) (quoting U.S. v. Gastiaburo,
16 F.3d 582, 589-90 (4th Cir. 1994)). Moreover, where, as here, a
defendant fails to timely object to the alleged interference, we only
review such claims for plain error. Id. (citing U.S. v. Castner, 50 F.3d
1267, 1272 (4th Cir. 1995)). After a thorough review of the transcript,
we cannot conclude that any of the district court’s comments rise to
such a level.
Appellants concede that the statements of the trial judge they con-
sider most prejudicial actually were made outside the presence of the
jury. The remaining comments, concerning the length of the testi-
mony of a particular witness and the admissibility of another wit-
ness’s statements, do not constitute plain error because "‘[a] judge’s
ordinary efforts at courtroom administration — even a stern and
short-tempered judge’s ordinary efforts at courtroom administration
— remain immune’ and do not establish bias or partiality." Castner,
50 F.3d at 1274 (quoting Liteky v. U.S., 510 U.S. 540, 555-56 (1994)).
Here, the trial judge was merely acting on his "crucial duty to ensure
‘that the facts are properly developed and that their bearing upon the
question at issue are clearly understood by the jury.’" Id. at 1272
(quoting U.S. v. Seeright, 978 F.2d 842, 847 (4th Cir. 1992)).
We further note that any influence the trial judge’s comments may
have had on the jury was neutralized by the court’s instruction to the
jury at the beginning of the trial, and repeated again at the close of
trial, that "[n]othing the Court may say or do during the course of the
trial is intended to indicate or should be taken by you as indicating
what your verdict should be." We therefore decline to find that any
UNITED STATES v. HARVEY 11
comments made by the trial judge in the jury’s presence were infected
by plain error.
C.
Having disposed of Appellants’ arguments about their convictions,
we turn next to their claims that the district court incorrectly applied
the Sentencing Guidelines to their cases. The district court calculated
a total offense level 27 and criminal history category I for each defen-
dant, which resulted in an advisory sentencing range of 70 to 87
months of incarceration for each of them. Harvey received a sentence
of incarceration of 72 months while Kronstein received a sentence of
70 months. Each now contends that the district court erred in applying
(1) a two-level enhancement for more than one bribe pursuant to the
U.S. Sentencing Guidelines Manual ("U.S.S.G.") § 2C1.1(b)(1), (2) a
four-level enhancement for role in the offense pursuant to U.S.S.G.
§ 3B1.1, and (3) a nine-level enhancement for amount of loss pursu-
ant to U.S.S.G. § 2C1.1(b)(2)(A).
Pursuant to Gall v. U.S., ___ U.S. ___, 128 S.Ct. 586, 590 (2007),
we review the sentences imposed by the district court under a defer-
ential abuse of discretion standard. Initially, we "ensure that the dis-
trict court committed no significant procedural error, such as . . .
improperly calculating . . . the Guidelines range." U.S. v. Osborne,
514 F.3d 377, 387 (4th Cir. 2008) (quoting Gall, 128 S.Ct. at 590).
"In assessing whether a sentencing court properly applied the Guide-
lines, ‘we review the court’s factual findings for clear error and its
legal conclusions de novo.’" Id. (quoting U.S. v. Allen, 446 F.3d 522,
527 (4th Cir. 2006)). Clear error occurs "when, ‘although there is evi-
dence to support it, the reviewing court on the entire evidence is left
with the definite and firm conviction that a mistake has been commit-
ted.’" In re Mosko, 515 F.3d 319, 324 (4th Cir. 2008) (quoting U.S.
v. U.S. Gypsum Co., 333 U.S. 364, 395 (1948)). With these principles
in mind, we consider each of the alleged sentencing errors in turn.
1.
Under U.S.S.G. § 2C1.1(a), the base offense level for bribery is 10.2
2
The district court properly calculated the guideline range using the
2000 edition of the Sentencing Guidelines Manual, the edition in effect
12 UNITED STATES v. HARVEY
Section 2C1.1(b)(1) provides that "[i]f the offense involved more than
one bribe or extortion, increase by two levels." The district court,
therefore, straightforwardly applied a two-level increase to each
defendant’s base offense level.
Harvey and Kronstein each claim that because the jury made no
specific findings about which payments were bribes and which may
have been legitimate gifts or loans, the court clearly erred in finding
that more than one bribe existed. To the extent this argument raises
a question of law, specifically whether the district court impermiss-
ibly made factual findings regarding the number of bribes, it is well-
settled that a sentencing judge may, indeed frequently must, make
findings of fact in order to appropriately calculate the advisory guide-
line range, and may do so as long as such findings are supported by
a preponderance of the evidence. E.g. U.S. v. Battle, 499 F.3d 315,
322-23 (4th Cir. 2007) ("When applying the Guidelines in an advisory
manner, the district court can make factual findings using the prepon-
derance of the evidence standard."). We therefore review the factual
findings of the district court regarding the application of this enhance-
ment for clear error. See Osborne, 514 F.3d at 387.
In considering whether to apply this enhancement, the district court
found that the benefits provided in exchange for the bribes included
the issuance of the PCS contract, the subsequent add-ons to that con-
tract, and the payments authorized by Harvey. In return, Harvey
received numerous payments from Kronstein as well as employment
with PCS. In making these findings, the court cited the testimony and
evidence at trial, and noted that significant circumstantial evidence
supported its conclusions.
Because the district court considered that Harvey had undertaken
multiple acts for Kronstein’s benefit, and that Kronstein had made
multiple payments to Harvey in return, it did not clearly err in finding,
on the date the crime ended, which provides a lower base offense level
(10 as opposed to 12 or 14) than does the 2006 edition, which was in
effect on the date of sentencing. See Elliott v. U.S., 332 F.3d 753, 767
n. 12 (4th Cir. 2003).
UNITED STATES v. HARVEY 13
by a preponderance of the evidence, that this case involved multiple
bribes.
2.
Pursuant to U.S.S.G. § 3B1.1(a), the district court also enhanced
each defendant’s guideline calculation by four levels based on their
roles as leaders or organizers in the offense. Under § 3B1.1(a), a court
may increase a defendant’s offense level by four if the defendant "was
an organizer or leader of a criminal activity that involved five or more
participants or was otherwise extensive." Harvey and Kronstein dis-
pute this enhancement, arguing they were not leaders or organizers
because they exercised no authority over any other participant in the
scheme. Failing that, they claim the criminal activity involved fewer
than five participants.
Because Appellants are challenging the factual findings the district
court made in applying this enhancement, we again review for clear
error, and again find none. As an initial matter, we note that Appel-
lants’ focus on whether there were fewer than five participants is mis-
placed; the district court clearly based its decision to apply the
enhancement on the fact that the criminal activity was "otherwise
extensive." The Application Note to U.S.S.G. § 3B1.1 explains that,
in determining if a criminal activity is "otherwise extensive," all per-
sons involved during the course of the entire offense are to be consid-
ered, including outsiders who provided unwitting services and thus do
not qualify as "participants." U.S.S.G. § 3B1.1 cmt. n.3 (2000). "Par-
ticipants" are persons involved in the criminal activity who are crimi-
nally responsible, not innocent bystanders used in the furtherance of
the illegal activity. Id. at cmt. n.1. The district court specifically noted
that Harvey and Kronstein used a number of persons, both knowing
and unknowing, in their scheme, including family members and vari-
ous employees of their businesses. Based on this, we cannot say that
the district court plainly erred in finding that the criminal activity was
sufficiently "otherwise extensive."
The remaining question, whether Harvey and Kronstein were "or-
ganizers or leaders" in the criminal activity, requires a determination
of whether they were organizers, leaders, managers, or supervisors of
one or more other "participants." Id. at § 3B1.1(a). In this case, the
14 UNITED STATES v. HARVEY
district court specifically found that Samra Harvey and Karla Kron-
stein, both of whom testified at trial, were participants in the criminal
activity, and that Harvey and Kronstein were their organizers, leaders,
managers or supervisors. Accordingly, we affirm the district court’s
four-level enhancement for role in the offense.
3.
Appellants also challenge the district court’s application of a nine-
level enhancement pursuant to U.S.S.G. § 2C1.1(b)(2)(A) for the
amount of loss suffered by the government as a result of their offense.
The sentencing guideline governing this enhancement provides:
If the value of the payment, the benefit received or to be
received in return for the payment, or the loss to the govern-
ment from the offense, whichever is greatest, exceeded
$2,000, increase by the corresponding number of levels
from the table in §2F1.1 (Fraud and Deceit).
U.S.S.G. § 2C1.1(b)(2)(A) (2000). In this case, the district court cal-
culated the total loss as $383,621.00, an amount equivalent to the
eight percent profit margin in PCS’s contract with INSCOM. This
amount equates to a nine-level increase on the table found at U.S.S.G.
§ 2F1.1.
At sentencing, Appellants argued that there was no actual loss
because PCS had adequately performed its obligations to INSCOM
under the contract and the government presented no evidence at trial
indicating that the profit PCS earned was unreasonable for this type
of contract. The government, however, contended that INSCOM had
suffered an actual loss because PCS had not met certain contractual
expectations.
Pursuant to the plain language of U.S.S.G. § 2C1.1(b)(2)(A), a
finding of either actual loss or the amount of the benefit received may
support such enhancement. The Application Note accompanying
U.S.S.G. § 2C1.1 states:
"Loss" . . . includes both actual and intended loss. The value
of "the benefit received or to be received" means the net
UNITED STATES v. HARVEY 15
value of such benefit. Examples: . . . (2) A $150,000 con-
tract on which $20,000 profit was made was awarded in
return for a bribe; the value of the benefit received is
$20,000. Do not deduct the value of the bribe itself in com-
puting the value of the benefit received or to be received. In
the above example[ ], therefore, the value of the benefit
received would be the same regardless of the value of the
bribe.
Id. at § 2C1.1 cmt. n.2.
The facts here mirror the example in this Application Note. Kron-
stein bribed Harvey in exchange for obtaining a contract with
INSCOM for PCS; the profit PCS made on that contract,
$383,621.00, is therefore the "value of the benefit received." To the
extent that the district court mischaracterized its findings about loss
as "actual loss," rather than the value of the benefit received, such
error is clearly harmless and did not affect Appellants’ substantive
rights. We therefore affirm the district court’s nine-level enhancement
for this specific offense characteristic.
D.
Lastly, Appellants claim that the district court’s restitution order
directing them to pay, jointly and severally, $383,621.00 to INSCOM
was erroneous because (1) no actual loss to the government could be
calculated in this case; (2) the court failed to take into account the fac-
tors set forth in 18 U.S.C. § 3663(b), and failed to "key its findings"
to these factors; and (3) the court imposed a payment schedule with-
out taking into account their finances and ability to pay pursuant to
18 U.S.C. § 3664(f)(2). We review the trial court’s restitution orders
for abuse of discretion. See U.S. v. Vinyard, 266 F.3d 320, 325 (4th
Cir. 1996).
The district court ordered Appellants to pay restitution pursuant to
18 U.S.C. § 3663, the Victim and Witness Protection Act ("VWPA"),
which permits, but does not require, a court to order restitution when
there is an identifiable victim. This section differs from 18 U.S.C.
§ 3663A, the Mandatory Victim Restitution Act ("MVRA"), which
requires a court to order restitution when a victim has been identified
16 UNITED STATES v. HARVEY
and the count of conviction falls into one of four categories of cases,
none of which is applicable here.
Both the VWPA and the MVRA direct that any order of restitution
made under either statute be issued and enforced in accordance with
18 U.S.C. § 3664, which sets forth procedures for calculating and
ordering restitution. Thus, once a court determines that restitution is
appropriate, whether under either the VWPA or the MVRA,
§ 3664(f)(1)(A) provides that "the court shall order restitution to each
victim in the full amount of each victim’s losses as determined by the
court and without consideration of the economic circumstances of the
defendant." (emphasis added).
We and other circuits have interpreted this language to require that
an order of restitution be based on "actual loss," rather than "intended
loss." See U.S. v. Adams, 2001 WL 733504, at *1 (4th Cir. June 29,
2001) (unpublished) (citing U.S. v. Messner, 107 F.3d 1448, 1455
(10th Cir. 1997)); U.S. v. Barnes, 1997 WL 337454, at *4 (4th Cir.
June 19, 1997) (unpublished); U.S. v. Innarelli, 524 F.3d 286, 294-95
(1st Cir. 2008); U.S. v. Boccagna, 450 F.3d 107, 119 (2d Cir. 2006);
U.S. v. Beydoun, 469 F.3d 102, 108 (5th Cir. 2006); U.S. v. Quillen,
335 F.3d 219, 226 (3d Cir. 2003); U.S. v. Menza, 137 F.3d 533, 538
(7th Cir. 1998). The government bears the burden of proving actual
loss by a preponderance of the evidence. 18 U.S.C. § 3664(e); U.S.
v. Ubakanma, 215 F.3d 421, 428 (4th Cir. 2000).
We agree with Appellants that the government failed to present
sufficient evidence of actual loss at either trial or sentencing. Rather,
it relied on testimony indicating that PCS had failed to comply with
certain aspects of its contract, for example, failing to hire the contrac-
tually required number of employees, and employing individuals who
lacked the requisite level of security clearance called for in the con-
tract.
While these violations may have seriously impaired PCS’s perfor-
mance of the contract, they do not establish the amount of loss
INSCOM actually suffered. For example, the government offered no
facts evincing either how INSCOM was injured by these contractual
failures or, if so, in what amount. Indeed, at trial, during the defense’s
UNITED STATES v. HARVEY 17
cross-examination of two INSCOM officials, those officials admitted
that they had no complaints about PCS’s performance of the contract.
Because there was no evidence of actual loss, to calculate restitu-
tion the district court looked to the measure of loss under U.S.S.G.
§ 2C1.1, specifically the eight percent profit margin earned by PCS
pursuant to its contract. In ordering that amount in restitution, the
court stated:
I think 8% is actually a conservative figure. . . the govern-
ment was just ripped off terribly. I mean, they had — I
mean, the contract called for 11 people. And I think five to
six was the most they ever had. And they didn’t have the
security clearances, as I recall, that they should have had.
Notably, testimony at trial had indicated that eight percent is a stan-
dard profit margin for this type of contract.
Pursuant to 18 U.S.C. § 3664, we must determine whether the eight
percent paid to PCS as profit under the contract may properly be used
as a proxy for actual loss. While we have not previously specifically
addressed whether gain can be used as an approximation of actual
loss for the purpose of ordering restitution, two of our sister circuits
have held that a defendant’s gain cannot be used as a proxy for actual
loss.
In United States v. Chalupnik, 514 F.3d 748 (8th Cir. 2008), a case
arising under the MVRA,3 the Eighth Circuit stated:
[T]he amount of restitution that may be awarded is limited
to the victim’s provable actual loss, even if more punitive
remedies would be available in a civil action. Thus, while
the fact that a defendant profited from the crime without
3
The fact that Chalupnik arose under the MVRA does not undercut its
relevance to this issue. As noted above, 18 U.S.C. § 3664, which is
widely interpreted as requiring that an order of restitution be based on
actual loss, governs restitution orders under both the VWPA and the
MVRA. See 18 U.S.C. §§ 3663(d), 3663A(d); U.S. v. Adams, 2001 WL
733504, at *1 (4th Cir. June 29, 2001) (unpublished).
18 UNITED STATES v. HARVEY
causing actual loss to an identifiable victim may be an
appropriate reason to increase his punishment, Petruk and
the plain language of the MVRA confirm that punishment
of a federal criminal defendant must be imposed by means
of criminal penalties — fines, criminal forfeitures, and
imprisonment. Restitution to MVRA victims ‘must be based
on the amount of loss actually caused by the defendant’s
offense.’
Id. at 754 (quoting U.S. v. Petruk, 484 F.3d 1035, 1036 (8th Cir.
2007)) (emphasis added).
The Tenth Circuit has also concluded that a defendant’s gain in
undertaking criminal activity is not an appropriate estimate of loss for
purposes of calculating the amount of restitution. In United States v.
Galloway, 509 F.3d 1246 (10th Cir. 2007), a case also arising under
the MVRA, the Tenth Circuit vacated and remanded the trial court’s
restitution order, observing:
It is well settled that a restitution order must be based on
actual loss. As we explained in Quarrell, although gain may
be used to determine a defendant’s offense level under the
Guidelines (if it more closely reflects actual harm than
actual loss does), it is not an appropriate estimate of loss
when determining the amount of restitution under § 5E1.1
or the MVRA.
Galloway, 509 F.3d at 1253-54 (citing U.S. v. Quarrell, 310 F.3d 664,
679-80 (10th Cir. 2002)) (emphasis added).
Here, the district court erroneously used gain to approximate the
amount of actual loss. While we agree that INSCOM can and should
be considered a victim in this case, any order of restitution neverthe-
less must be based on sufficient evidence of the amount of actual loss
incurred as a result of the fraudulently obtained contract. Profit gained
by the defendants may not be used in its stead.
Notably, the probation officers who prepared the Appellants’ pre-
sentence investigation reports predicted this legal dilemma. In
UNITED STATES v. HARVEY 19
responding to the government’s objection to their decision not to rec-
ommend restitution, the officers wrote:
The probation office concurs the government can and should
be considered a victim if an offense results in financial
harm. In determining whether there is restitution in this
case, the probation office considered that PCS provided
"suspect" services, however the services provided from 1999
through 2001 were as required by contract. The profit mar-
gin for the contract awarded PCS was calculated at 8%
which provided an estimated profit of $383,621.26. The
government agrees that PCS fulfilled at least some of the
services paid for under the contract, and does not contend
that the contract was not needed and simply manufactured
by Harvey and Kronstein. Understanding there were issues
with the performance of PCS, it would be difficult at best to
calculate a percentage of restitution based on which ser-
vices were acceptable and which were not.
(emphasis added).
We do not doubt the district court’s finding that Harvey and Kron-
stein "ripped off" the government and profited unjustly. Because it
failed to make appropriate findings as to the actual loss incurred by
the government, however, the district court abused its discretion in
ordering Appellants to pay $383,621.26 in restitution to INSCOM.
We therefore vacate the district court’s restitution orders and remand
the case so that it may determine whether the amount of actual loss
can be calculated. If so, the district court is free to decide whether,
in light of the statutory dictates of 18 U.S.C. §§ 3663 and 3664, new
restitution orders should issue and in what amount and form.
III.
For the foregoing reasons, the judgment of the district court is
affirmed in part, vacated in part, and remanded.
AFFIRMED IN PART,
VACATED IN PART,
AND REMANDED