United States v. Brooks

PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

UNITED STATES OF AMERICA,
Plaintiff-Appellee,

v. No. 95-5728

EDWIN HAWLEY BROOKS, JR.,
Defendant-Appellant.

UNITED STATES OF AMERICA,
Plaintiff-Appellee,

v. No. 95-5729

JOHN RUSSELL BROOKS,
Defendant-Appellant.

UNITED STATES OF AMERICA,
Plaintiff-Appellee,

v. No. 95-5730

STEPHEN KENT BROOKS,
Defendant-Appellant.

UNITED STATES OF AMERICA,
Plaintiff-Appellee,

v. No. 95-5790

B & D ELECTRIC SUPPLY, INC.,
Defendant-Appellant.
UNITED STATES OF AMERICA,
Plaintiff-Appellant,

v. No. 95-5803

EDWIN HAWLEY BROOKS, JR.,
Defendant-Appellee.

UNITED STATES OF AMERICA,
Plaintiff-Appellant,

v. No. 95-5804

JOHN RUSSELL BROOKS,
Defendant-Appellee.

Appeals from the United States District Court
for the Eastern District or Virginia, at Norfolk.
Richard L. Williams, Senior District Judge.
(CR-95-26)

Argued: October 30, 1996

Decided: April 16, 1997

Before MURNAGHAN, NIEMEYER, and MOTZ, Circuit Judges.

_________________________________________________________________

Affirmed in part, reversed in part, and remanded by published opin-
ion. Judge Niemeyer wrote the opinion, in which Judge Murnaghan
and Judge Motz joined.

_________________________________________________________________

COUNSEL

ARGUED: John Edward Ackerman, Houston, Texas, for Appellants.
Robert Charles Erickson, Jr., Assistant United States Attorney,

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OFFICE OF THE UNITED STATES ATTORNEY, Alexandria, Vir-
ginia, for Appellee. ON BRIEF: Helen F. Fahey, United States Attor-
ney, OFFICE OF THE UNITED STATES ATTORNEY, Alexandria,
Virginia, for Appellee.

_________________________________________________________________

OPINION

NIEMEYER, Circuit Judge:

This case requires us to interpret for the first time the $1 million
jurisdictional amount requirement of 18 U.S.C. § 1031(a), criminaliz-
ing "major fraud" against the United States.

Defendants Edwin Brooks, his sons John and Stephen Brooks, and
their company, B&D Electric Supply, Inc., were charged with several
crimes in relation to two subcontracts to provide electrical compo-
nents to prime contractors engaged in refitting ships for the United
States Navy. All four defendants were convicted of trafficking in
counterfeit goods, in violation of 18 U.S.C. § 2320(a), and of conspir-
acy to defraud the United States and to traffic in counterfeit goods,
in violation of 18 U.S.C. § 371. Edwin Brooks, John Brooks, and
B&D Electric were also convicted of "major fraud" against the United
States in violation of 18 U.S.C. § 1031(a). And Edwin Brooks was
convicted of obstruction of justice, in violation of 18 U.S.C.
§ 1503(a). On appeal, the defendants challenge the district court's
interpretation of the major fraud statute as well as several evidentiary
rulings, a jury instruction, and the sufficiency of the evidence sustain-
ing several of their convictions. On cross-appeal, the government
raises two sentencing issues. Finding none of the defendants' argu-
ments persuasive, we affirm their convictions. Because we agree that
the district court erred in one aspect of Edwin Brooks' sentence, how-
ever, we remand his cases for resentencing. We affirm the judgments
against the other defendants.

I

The three Brooks defendants were operators of B&D Electric Sup-
ply, Inc., a marine electrical supply business which sold electrical

3
parts to both civilian and military customers. The majority of B&D
Electric's business consisted of reselling new components produced
by well-established manufacturers of electrical parts. But B&D Elec-
tric also sold some electrical components which it custom-assembled,
often out of used parts.

The charges at issue in this case arose from supply contracts that
B&D Electric had with two prime contractors engaged by the United
States Navy to refit several ships. B&D Electric contracted with the
Jonathan Corporation to supply fourteen shipboard motor controllers
meeting military specifications for a total price of $51,544. B&D
Electric itself assembled these controllers from components but
affixed to the controllers trademarks of the Cutler-Hammer Company,
an approved military supplier of controllers. B&D Electric also sup-
plied Ingalls Shipbuilding, Inc., with six rotary switches for a total
price of $1,470, representing the switches as new when B&D Electric
actually had assembled or rebuilt them. The dollar amount of the
prime contract between Jonathan Corporation and the Navy was
greater than $9 million, and prime contract between Ingalls Shipbuild-
ing and the Navy was greater than $5 million.

II

Edwin Brooks, John Brooks, and B&D Electric challenge their
convictions for major fraud against the United States in violation of
18 U.S.C. § 1031(a), on the jurisdictional ground that their two sub-
contracts did not satisfy the $1 million value prescribed by the statute.
While the government does not dispute that the defendants' subcon-
tracts were for amounts less than $1 million, it argues that the stat-
ute's jurisdictional requirement is established so long as the prime
contract with the United States or any part thereof is worth $1 million.
The issue is one of first impression for us.

As with all questions of statutory interpretation, we begin with the
language of the statute, which provides:

Whoever knowingly executes, or attempts to execute, any
scheme or artifice with the intent--

(1) to defraud the United States; or

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 (2) to obtain money or property by means of
false or fraudulent pretenses, representations,
or promises,

in any procurement of property or services as a prime con-
tractor with the United States or as a subcontractor or sup-
plier on a contract in which there is a prime contract with
the United States, if the value of the contract, subcontract,
or any constituent part thereof, for such property or services
is $1,000,000 or more shall, subject to the applicability of
subsection (c) of this section, be fined not more than
$1,000,000, or imprisoned not more than 10 years, or both.

18 U.S.C. § 1031(a) (emphasis added). From a straightforward read-
ing of this statute, we conclude that regardless of its privity with the
United States, any contractor or supplier involved with a prime con-
tract with the United States who commits fraud with the requisite
intent is guilty so long as the prime contract, a subcontract, a supply
agreement, or any constituent part of such a contract is valued at $1
million or more.

This reading recognizes that the seriousness of this species of fraud
is measured not merely by the out-of-pocket financial loss incurred on
a particular subcontract, but also by the potential consequences of the
fraud for persons and property. In military contracts in particular,
fraud in the provision of small and inexpensive parts can have major
effects, destroying or making inoperable multi-million dollar systems
or equipment, injuring service people, and compromising military
readiness. By extending the statute's coverage even to minor contrac-
tors and suppliers whose fraudulent actions could undermine major
operations, Congress enabled prosecutors to combat effectively the
severe procurement fraud problem that Congress identified.

We understand that our reading is contrary to that espoused in dic-
tum by the Second Circuit in United States v. Nadi, 996 F.2d 548 (2d
Cir. 1993), the only other court to have interpreted the jurisdictional
amount requirement of the major fraud statute. That court stated that
for purposes of ascertaining the jurisdictional amount requirement of
18 U.S.C. § 1031(a), "the value of the contract is determined by look-
ing to the specific contract upon which the fraud is based." Id. at 551

5
(emphasis added). It explained that "[t]his reading avoids the potential
anomaly of small subcontractors whose subcontracts are valued at far
less than $1,000,000 being prosecuted under the Act simply because
the prime contract is for $1,000,000 or more." Id. But the jurisdic-
tional amount requirement of the major fraud statute, like any bright
line rule, dictates that some cases will fall outside of the scope of the
law. We believe that our reading of the statute is no more anomalous
than one which allows small subcontractors to escape prosecution
under the provision, regardless of the cost of the overall project which
their fraud affects, simply by ensuring that their own subcontract
stays below the $1 million jurisdictional amount. The Nadi court's
interpretation could significantly undermine the purpose of the statute
because pervasive fraud on a multi-million dollar defense project
would be unreachable under the statute, despite Congress' intent, if
it were perpetrated in multiple separate subcontracts, each involving
less than the jurisdictional amount.

The legislative history also supports our interpretation that the stat-
ute reaches fraud where any part of the prime contract or subcontract
is valued at $1 million or more. In discussing the steady increase in
procurement fraud losses, the Senate described its broad range of con-
cern:

Procurement fraud is the most costly kind of fraud,
accounting for about 18 percent of total losses. The Depart-
ment of Defense reports losses of $99.1 million due to pro-
curement fraud for fiscal years 1986 and 1987.

Prosecutions of individual companies reveal other dis-
turbing facts:

Two corporate officials of Spring Works, Inc.,
were convicted of deliberately providing defective
springs for installation in critical assemblies of the
CH-47 helicopters, the Cruise Missile and the F-18
and B-1 aircraft.

Two corporate officials of MKB Manufacturing
were sentenced for their role in the deliberate pro-
vision of defective gas pistons for installation in

6
 the M60 machine gun. Installation of the defective
part would cause the machine gun to jam.

Thus, the evidence shows that besides causing financial
losses, procurement fraud could cause the loss of life of
American soldiers and could threaten national security.

These facts compel a legislative response.

S. Rep. No. 100-503, at 2 (1988), reprinted in 1988 U.S.C.C.A.N.
5969, 5969-70 (citations omitted). The parts at issue in the Spring
Works case were 21-cent springs, and the total value of the subcon-
tract was $160.25. Yet, it was fraud like that perpetrated by Spring
Works to which Congress was responding in 1988 with enactment of
the major fraud statute. Undoubtedly, Congress was concerned with
more than the most direct and narrow financial effects of fraud com-
mitted against the United States.

The legislative history also illuminates the meaning of the phrase
in § 1031(a) at issue here, "value of the contract." In the section-by-
section analysis, the Senate report states:

Section 1031(a) applies to procurement fraud"if the value
of the contract, subcontract, or any constituent part thereof
. . . is $1,000,000 or more." The phrase "value of the con-
tract" refers to the value of the contract award, or the
amount the government has agreed to pay to the provider of
services whether or not this sum represents a profit to the
contracting company. Furthermore, a subcontractor awarded
a subcontract valued at $1,000,000 or more is covered by
this section, regardless of the amount of the contract award
to the contractor or other subcontractors.

S. Rep. No. 100-503, at 12 (1988), reprinted in 1988 U.S.C.C.A.N.
5969, 5975-76. Thus, for example, if a prime contractor had entered
into three separate contracts, agreeing under each to supply the United
States with $750,000 worth of equipment, but entered into a single
supply contract with a subcontractor for $1 million worth of parts, the
subcontractor would be covered by the Act. This Senate report expla-

7
nation supports the interpretation that the statute applies to the entire
procurement effort where any contractual component has a value of
$1 million or more, so that a court should not confine its inquiry with
regard to the jurisdictional amount of § 1031(a) to the value of the
subcontract under which the fraud was perpetrated. As § 1031(a) pro-
vides, the statute applies to a government contractor, subcontractor,
or supplier if "any constituent part" of the contract is worth more than
$1 million.

Accordingly, the district court in this case did not err in taking into
account the contract values of the Navy's prime contracts with Jona-
than Corporation and Ingalls Shipbuilding.

III

The defendants also challenge the sufficiency of the evidence on
the major fraud counts, arguing that the final value of the prime con-
tracts was not established. Their challenge, however, has no merit. At
trial, the government produced the original prime contracts, as well
as testimony, all of which demonstrate prime contract values well in
excess of $1 million. The evidence shows that the prime contract of
Jonathan Corporation, while not final because of modifications occur-
ring during performance, well exceeded $9 million and, with options,
could have reached $35 million. The prime contract of Ingalls Ship-
building exceeded $5.5 million. While the government did not pro-
duce evidence regarding the final cost of these projects upon their
completion, or even whether they were ultimately completed, it was
not required to do so in order to establish the $1 million jurisdictional
amount.

IV

Defendants next challenge the district court's jury instruction with
respect to Count I of the indictment which charged them with conspir-
acy to defraud the United States and to violate 18 U.S.C. § 2320(a)
(trafficking in counterfeit goods or services). They contend that the
court's jury instruction constructively amended the indictment --
which, they interpret, rested solely on the substantive offense of traf-
ficking in counterfeit goods -- to charge conspiracy to commit major
fraud.

8
A comparison of the indictment and the district court's instruction,
however, discloses that the defendants' contention is without merit.
Count I of the indictment charged the defendants with conspiring "to
defraud the United States, and to commit an offense against the
United States," specifically, trafficking in counterfeit goods, in viola-
tion of 18 U.S.C. § 2320(a). (Emphasis added); see 18 U.S.C. § 371
(criminalizing conspiracy to commit offense against United States or
to defraud United States). The district court instructed the jury that the
government had the burden of proving that "two or more persons con-
spired or agreed to commit the crime of defrauding the United
States." Although defendants contend that this instruction impermiss-
ibly altered the charged crimes to include conspiracy to defraud, the
indictment on its face charges conspiracy to defraud and to commit
an offense against the United States. Accordingly, the court acted
properly in instructing the jury on conspiracy to defraud.

V

Defendants also challenge two evidentiary rulings by the district
court. We review evidentiary rulings for abuse of discretion, and such
rulings are subject to harmless error review under Federal Rule of
Criminal Procedure 52. See United States v. Heater, 63 F.3d 311, 325
(4th Cir. 1995). "[I]n order to find a district court's error harmless, we
need only be able to say `with fair assurance, after pondering all that
happened without stripping the erroneous action from the whole, that
the judgment was not substantially swayed by the error.'" Id. (cita-
tions omitted).

A

Defendants contend that the district court erred in admitting into
evidence at one time 375 of the government's pretrial exhibits, con-
sisting of numerous pages from a "tag order book" of other manufac-
turers' trademarks as well as some of the motor controllers allegedly
sold by the defendants under the contract in question. In the interests
of judicial efficiency, the district court instructed the government to
move the exhibits into evidence but made clear that the items were
not automatically available for publication to the jury. The defendants
objected on the grounds that the various items of evidence were not
properly authenticated or were hearsay lacking the foundation neces-

9
sary to establish their admissibility under any exception. The court
invited the defense counsel at that time, as well as at the close of the
evidence, to make specific objections to any particular items of evi-
dence. But even when specifically requested by the court to present
particularized objections, defense counsel merely reiterated their gen-
eral objections.

While the district court may have employed an unorthodox and
perhaps somewhat impatient method of processing the evidence,
absent a more particularized objection to specific evidence and a dem-
onstration of prejudice, we can find no error.

The defendants' sole claim of prejudice comes not from the method
of admitting evidence but from the government's effort to prove the
inferior quality of the controllers despite its failure to establish that
the controllers in evidence were in substantially the same condition
as they had been when they were sold to the Navy. The defendants'
cross examination, however, effectively revealed the lack of informa-
tion about the maintenance of the controllers between their sale and
the date of trial. More importantly, the Navy's fraud claim did not
depend upon the inferiority of the B&D Electric components. The
United States Navy had contracted for approved military parts and
had a contractual right to receive them regardless of whether or not
falsely labeled substitutes were equivalent in quality. See United
States v. Castner, 50 F.3d 1267, 1275-76 (4th Cir. 1995). Because the
defendants did not receive any sentence enhancements based on a
finding that their parts were inferior and dangerous, even if the admis-
sion of these controllers without further foundation were error, we can
find no harm.

B

The defendants also challenge the district court's evidentiary ruling
that excluded from evidence the results of shock and vibration testing
which defendants had performed on motor controllers that they had
assembled for trial. While defendants were attempting to demonstrate
the quality of their controllers, again we note that the quality of the
motor controllers was not material to their culpability on the charges
and did not form the basis for any sentencing enhancement. Accord-

10
ingly, we find that no harm resulted from the court's exclusion of
these test results.

VI

Finally, defendants challenge the sufficiency of evidence to support
several of the convictions. In a criminal case,"[t]he verdict of a jury
must be sustained if there is substantial evidence, taking the view
most favorable to the Government, to support it," Glasser v. United
States, 315 U.S. 60, 80 (1942), or likewise,"we shall reverse a verdict
if the record demonstrates a lack of evidence from which a jury could
find guilt beyond a reasonable doubt." United States v. Burgos, 94
F.3d 849, 862 (4th Cir. 1996) (en banc).

A

All four defendants contend that the evidence was insufficient to
sustain their convictions under Count V, charging them with violating
18 U.S.C. § 2320(a) which penalizes any person who "intentionally
traffics or attempts to traffic in goods or services and knowingly uses
a counterfeit mark on or in connection with such goods or services."
The statute defines "counterfeit mark" as"a spurious mark -- (i) that
is used in connection with trafficking in goods or services; (ii) that is
identical with, or substantially indistinguishable from, a [registered]
mark . . . in use, whether or not the defendant knew such mark was
so registered; and (iii) the use of which is likely to cause confusion,
to cause mistake, or to deceive." 18 U.S.C. § 2320(d)(1)(A).

Defendants contend that the evidence does not support their con-
viction on this count because they demonstrated that the motor con-
trollers to which the Cutler-Hammer trademarks were attached on the
outside also contained an interior label stating that they were custom
assembled by B&D Electric. They also introduced evidence that the
defense contractors with whom B&D Electric contracted were aware
that B&D Electric custom assembled the components that it sold to
them. Thus, as the defendants summarize their argument, there was
"no evidence that the Appellants used counterfeit marks for the pur-
pose of deception or to cause confusion or mistake." The defendants'
contention, however, misconceives the requirements of the statute.
The government did not have to prove either actual confusion or an

11
intent to mislead. Rather, the government was required to prove that
the defendant knowingly used a counterfeit mark that was likely to
cause confusion or to mislead. See 18 U.S.C.§ 2320(d)(1)(A)(iii). In
this case, Edwin Brooks himself testified that B&D Electric used
trademarks identical to those of the Cutler-Hammer Company in
order to identify B&D Electric's parts. While Brooks explained that
he used Cutler-Hammer marks so that the Navy could reorder authen-
tic parts and use authentic repair manuals, this explanation does not
justify the defendants' false use of the marks, nor does it negate the
likelihood of confusion caused by the defendants' false labeling.

B

Edwin Brooks challenges the sufficiency of the evidence to support
his conviction for obstruction of justice under 18 U.S.C. § 1503(a),
arguing that the evidence fails to support a finding of a specific intent
to obstruct justice.

The obstruction of justice statute provides:

Whoever corruptly . . . endeavors to . . . impede any grand
or petit juror, or officer in or of any court of the United
States . . . in the discharge of his duty . . . or corruptly . . .
influences, obstructs, or impedes, or endeavors to influence,
obstruct, or impede, the due administration of justice, shall
be punished . . . .

18 U.S.C. § 1503(a). And we have summarized its requirements as
follows: "To be guilty of obstructing justice under § 1503, a defen-
dant must have knowledge or notice of a pending judicial proceeding,
and must have acted with the intent to influence, obstruct, or impede
that proceeding in its due administration of justice." United States v.
Littleton, 76 F.3d 614, 619 (4th Cir. 1996). Because evidence of intent
will almost always be circumstantial, we have held that a defendant
may be found culpable where the reasonable and foreseeable conse-
quences of his acts are the obstruction of justice, concluding that
"when a defendant intentionally seeks to corrupt, the foreseeable con-
sequence of which is to obstruct justice, he has violated § 1503."
United States v. Neiswender, 590 F.2d 1269, 1274 (4th Cir. 1979).
The Supreme Court has held similarly that in order to convict under

12
§ 1503, the government need not demonstrate that justice was in fact
obstructed but must prove only that "the endeavor[has] the natural
and probable effect of interfering with the due administration of jus-
tice." United States v. Aguilar, 115 S. Ct. 2357, 2362 (1995) (internal
quotes omitted).

The evidence in this case showed that Edwin Brooks received a
grand jury subpoena on January 19, 1993, that demanded business
records or documents concerning the sale and/or purchase of electri-
cal components. While he produced many documents in response to
the subpoena, he later testified that he did not include general corpo-
rate minutes because he did not understand the subpoena to require
their production. In October 1993, Brooks received a letter stating that
the grand jury had demanded to see the corporate minute books as
well, and he produced these books in early November 1993. The gov-
ernment discovered, however, that the minutes had been altered or
amended. When asked for the original versions, Brooks stated that he
believed they had been destroyed. Over a year later, Brooks produced
a portion of the original minutes, stating that he had recently found
them under a rug in his home.

At trial, the government produced testimony indicating that the
minutes had been altered after the date of the original subpoena and
suggesting that some of the original minutes remained missing. Edwin
Brooks explained the alterations in the minutes as having been
undertaken in order to make corrections for purposes of an unrelated
civil suit. The evidence presented, while not uncontradicted, was nev-
ertheless sufficient to sustain a conviction for obstruction of justice.
A reasonable jury was entitled to believe the government's circum-
stantial evidence and disbelieve Edwin Brooks.

VII

The government cross-appeals, raising two sentencing issues. First,
the government contends that the district court erred in failing to
enhance Edwin Brooks' offense level for obstruction of justice as pro-
vided by U.S.S.G. § 3C1.1. The government maintains that Brooks
should have received a two-level enhancement because of his convic-
tion for obstruction of justice. We agree.

13
In rejecting the enhancement at sentencing, the district court relied
solely on its finding that Edwin Brooks had not perjured himself at
trial, failing to recognize that U.S.S.G. § 3C1.1 instructs that a two-
level increase should be imposed for a broader range of obstruction
or attempted obstruction of justice. Application note 3(i) to U.S.S.G.
§ 3C1.1 specifically lists as conduct meriting this enhancement that
conduct which is prohibited by 18 U.S.C. §§ 1501-1516. The note
goes on to state that the adjustment applies to"any other obstructive
conduct in respect to the official investigation, prosecution, or sen-
tencing of the instant offense where there is a separate count of con-
viction for such conduct." And finally, the application makes clear its
applicability to the circumstances in this case:

Where the defendant is convicted both of the obstruction
offense and the underlying offense, the count for the
obstruction offense will be grouped with the count for the
underlying offense under subsection (c) of §3D1.2 (Groups
of Closely Related Counts). The offense level for that group
of closely related counts will be the offense level for the
underlying offense increased by the 2-level adjustment spec-
ified by this section, or the offense level for the obstruction
offense, whichever is greater.

U.S.S.G. § 3C1.1, comment. (n.6) (emphasis added). Accordingly,
Edwin Brooks will have to be resentenced.

Second, the government contends that the district court erred in
calculating the government's loss in determining the offense level for
the fraud and counterfeiting claims. The amount of the government's
loss is a factual finding which we review for clear error.

Although the government intimated on appeal that its ability to
prove its loss had been handicapped by the district court's refusal to
permit a witness to testify at sentencing, our review of the transcript
indicates that the government conceded that the witness would add
nothing to the written information contained in the government's loss
calculation report. Accordingly, it cannot now complain that the dis-
trict court acted improperly at the sentencing hearing when the court
concluded that the witness' testimony would only be repetitious.

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The government's loss calculation report, which the district court
considered, used the number of counterfeit trademark tags that
remained unaccounted for by B&D Electric as the basis of an elabo-
rate reconstruction of the numbers of electrical components the gov-
ernment believed the Navy to have purchased from B&D Electric.
B&D Electric countered, however, that the government's calculation
resulted in nothing more than a gross sales number which did not take
into account sales to customers other than the United States. Accept-
ing this explanation, the district court concluded that the govern-
ment's method of proving loss in this case was simply too
speculative. The court confined its finding of loss to those items for
which invoices and other direct evidence of government sales were
provided. We cannot say that the district court's finding was clear
error.

VIII

In conclusion, we affirm the defendants' convictions and affirm the
judgments against defendants John Brooks, Stephen Brooks, and
B&D Electric. We remand Edwin Brooks' cases for resentencing in
accordance with this opinion.

Case Nos. 95-5729, 95-5730, 95-5790, and 95-5804-- AFFIRMED
Case Nos. 95-5728 and 95-5803 -- AFFIRMED IN PART AND
REMANDED FOR RESENTENCING

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