United States v. Cefaratti

Opinions of the United
2000 Decisions States Court of Appeals
for the Third Circuit

8-14-2000

United States v. Cefaratti
Precedential or Non-Precedential:

Docket 99-3455

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Filed August 14, 2000

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 99-3455

UNITED STATES OF AMERICA

v.

FRANK CEFARATTI,
Appellant

On Appeal from the United States District Court
for the Middle District of Pennsylvania
(D.C. No. 98-cr-00212)
District Judge: Honorable Sylvia H. Rambo

Argued February 9, 2000

BEFORE: SLOVITER, SCIRICA, and McKEE,
Circuit Judges

(Filed: August 14, 2000)

Joshua D. Lock
Goldberg, Katzman & Shipman
Harrisburg, PA l7l08

Peter Goldberger (Argued)
James H. Feldman, Jr.
Pamela A. Wilk
Law Office of Peter Goldberger
Ardmore, PA l9003-2276

Attorneys for Appellant
 David M. Barasch
United States Attorney
Sally A. Lied
Theodore B. Smith, III (Argued)
Assistant United States Attorney
Office of United States Attorney
Harrisburg, PA 17108

Attorneys for Appellee

OPINION OF THE COURT

SLOVITER, Circuit Judge.

Frank Cefaratti, who pleaded guilty to four counts arising
from his execution of a scheme to defraud the United States
Department of Education (DOE) out of student financial
assistance funds, now appeals, arguing that the District
Court erred in accepting his plea to the count charging him
with engaging in monetary transactions in the proceeds of
specified unlawful activity in violation of 18 U.S.C. S 1957.
He also challenges his sentence of 51 months
imprisonment.

I.

BACKGROUND

A.

Procedural History

On September 8, 1998, a grand jury returned a 27-count
indictment against Cefaratti charging him as follows:
Counts I through XX with mail fraud in violation of 18
U.S.C. S 1341, Counts XXI and XXII with wire fraud in
violation of 18 U.S.C. S 1343, Count XXIII with fraudulently
obtaining student financial aid funds in violation of 20
U.S.C. S 1097(a), Count XXIV with conducting a series of
financial transactions in violation of 18 U.S.C.

2
S 1956(a)(1)(A)(i) and S 1956(a)(1)(B)(i), and Counts XXV
through XXVII with offenses relating to obstruction of
justice in violation of 18 U.S.C. S 1512(b)(1), 18 U.S.C.
S 1503, and 18 U.S.C. S 2232(a), respectively.

At his arraignment on September 25, 1998, Cefaratti
pleaded not guilty and was released after executing an
unsecured bond. Thereafter, he entered into a plea
agreement with the government, filed on October 28, 1998,
to plead guilty to Count IV, one of the mail fraud counts, to
Count XXIII, the student loan fraud count, and to Count
XXVII, charging destruction of property to prevent seizure.1
Cefaratti also agreed to waive indictment and plead guilty
to a superseding information charging him with engaging in
monetary transactions in property derived from specified
unlawful activity in violation of 18 U.S.C. S 1957(a). The
S 1957 charge is of a lesser offense than theS 1956 charge
in the original indictment, as conviction of S 1957 carries a
maximum sentence of ten years imprisonment instead of
the twenty years maximum for S 1956. In return the
government agreed, inter alia, to move for dismissal of the
remaining counts, bring no further charges (other than
criminal tax charges) related to Cefaratti's offense conduct,
recommend a sentence within the applicable guideline
range, and, if Cefaratti adequately demonstrated his
acceptance of responsibility, recommend a three-point
reduction on that basis.

Cefaratti entered his guilty plea at a hearing on October
30, 1998. The presentence report (PSR) calculated a total
offense level of 24 and, based on Cefaratti's criminal history
category of I, set the applicable guideline range of 51 to 63
months. Cefaratti objected to the PSR on two grounds: that
the report erroneously applied a two-level leadership
adjustment under U.S.S.G. S 3B1.1(c) and that the
sentencing range of 51 to 63 months was
unconstitutionally disproportionate to the sentences
_________________________________________________________________

1. The plea agreement mistakenly designates this count as Count 28. JA
at 50. The underlying conduct involves Cefaratti's seizure of a tape
recording and an original transcript of an incriminating conversation
between him and his sister Carole from the office of the Postal Inspection
Service, and his subsequent destruction of those materials.

3
imposed on other participants in his offenses. At sentencing
the District Court overruled Cefaratti's objections to the
PSR as well as his requests for downward departure,
referring to the matter before it as "typical . .. . [of a] fraud
offense . . . ." JA at 145. The court found that the two-level
adjustment for playing a leadership role was warranted and
imposed a sentence of 51 months, the low end of the
guideline range, to be followed by a two year period of
supervised release. The court also imposed $350 in special
assessments and restitution of $846,000 to the DOE.

Cefaratti appealed. We have jurisdiction pursuant to 28
U.S.C. S 1291 and 18 U.S.C. S 3742(a).

B.

The Offense Conduct

According to the indictment and the PSR, Cefaratti was
an owner and also the president of the Franklin School of
Cosmetology and Hair Design in Elizabeth, New Jersey ("the
Franklin School" or "Franklin"), one of two vocational
schools for aspiring beauticians formerly owned by
Cefaratti's mother. The Franklin School participated in
federal student financial assistance programs, which
authorized it to act as a disbursing agent for federally
funded Pell Grants and to receive Stafford loan checks. The
Pell Grant program provides needy students with
educational grant funds without need for repayment, and
the Stafford Loan program provides for federal
reimbursement of defaulted student loans, thereby enabling
students to obtain low-interest loans from private lenders.

Cefaratti, on behalf of the Franklin School, entered into
program participation agreements with the DOE agreeing to
comply with all program statutes and regulations, to use
the funds solely for specified educational purposes, and to
properly account for the funds the school received. Under
DOE regulations, students were eligible for federalfinancial
assistance only if they had a high school diploma, a general
education development certificate (GED), or passed a test
demonstrating their ability to benefit from the training
offered by the school (ATB test). The DOE could terminate

4
a school's participation in federal student assistance
programs if the school's students defaulted at excessive
rates. A student was considered to be in default after a 180
day grace period if the student failed to make payments
unless the student was granted a deferment or forbearance
for his or her repayment obligations. Default rates in excess
of 25 percent for three consecutive years could result in a
school's termination from the Stafford Loan program, and a
default rate in excess of 40 percent in a single year could
result in termination from the Pell Grant program.

In 1993, the DOE determined that Franklin's default
rates for 1991 and 1992 had exceeded 50 percent.
Sometime prior to 1994 and continuing to about July 7,
1997, Cefaratti implemented a scheme to manipulate
Franklin's default rate by submitting false deferment and
forbearance forms to student loan lenders and by making
payments on behalf of student borrowers who were on the
verge of defaulting. To accomplish this, Cefaratti directed
Gloria Malavet, Franklin's Director of Admissions, and
Modesta Perez, its Director of Financial Aid, to monitor the
loan repayment status of former students and to prepare
falsified, forged forbearance or deferment forms when a
student was near defaulting. These forms were then mailed
to lenders, including the Pennsylvania Higher Education
Assistance Agency (PHEAA) and the Student Loan
Marketing Association (SALLIE MAE). For example, Count
IV of the indictment, the mail fraud count to which
Cefaratti pleaded guilty, charged that between November 4,
1994 and November 7, 1994, Cefaratti caused the mailing
of a falsified, forged Unemployment Deferment Request
Form to SALLIE MAE on behalf of a former Franklin
student.

Cefaratti also directed Malavet and Perez to make
payments on behalf of student borrowers who were near
default (without the student borrowers' knowledge) and had
Jackie Lopez, Franklin's Secretary, open a post office box in
her name to which lenders could send mail addressed to
students for whom false forbearance and deferment forms
had been submitted. In addition, Cefaratti had Franklin
employees "clean and organize" the school'sfiles so that a
DOE audit would not discover that many of Franklin's

5
students had excessive absences or that Franklin had
submitted loan applications from students who did not
have a high school diploma, a GED, or a passing ATB test
score.

These activities kept the Franklin School's default rate
artificially low, ensuring the school's continuing eligibility to
receive federal funding and permitting Franklin to retain
funds it would otherwise have had to return. From July
1994 to July 1997, over 90 percent of Franklin's revenues
came from these federal assistance programs. Had Cefaratti
not manipulated Franklin's default rate in this manner, the
DOE would have terminated the school's participation in
federal student assistance programs no later than February
of 1996 rather than, as eventually happened, in July 1997.
Between February 1996 and July 1997, Franklin received
over $840,000 in federal funds to which it was not entitled.

II.

DISCUSSION

Cefaratti states three issues on appeal. First, he
contends, admittedly for the first time, that the superseding
information charging that he engaged in monetary
transactions in property derived from specified unlawful
activity failed to charge, and the record did not establish a
factual basis to show, that the funds involved in the
transactions constituted "proceeds" of mail or wire fraud.
Second, he contends that his sentence for engaging in such
monetary transactions should have been calculated using
the fraud guidelines rather than the money laundering
guidelines. Finally, he contends that his guideline range
was improperly adjusted upwards two levels under U.S.S.G.
S 3B1.1(c) for a leadership role in the offenses. Our
standard of review for each claim varies and will be noted
in each discussion.

A.

Money Laundering Under 18 U.S.C. S 1957

Count XXIV of the indictment charged Cefaratti with
violations of S 1956 of the Money Laundering Control Act of

6
1986. As explained in an opinion from the Tenth Circuit,
that statute criminalizes "money laundering as that activity
is commonly understood. . . . [by punishing] conducting a
financial transaction with the proceeds of specified
unlawful activity knowing that the transaction is designed
to conceal or disguise the nature, location, source,
ownership or control of the proceeds, or intending that the
transaction be so designed." United States v. Allen, 129
F.3d 1159, 1164-65 (10th Cir. 1997). The government
agreed to drop this count in exchange for Cefaratti's guilty
plea to the superseding information, which charged him
with violating S 1957 of the same act. Section 1957 "is
similar to 18 U.S.C. S 1956, but does not require that the
recipient exchange or `launder' the funds, that he have
knowledge that the funds were proceeds of a specified
unlawful activity, nor that he have any intent to further or
conceal such an activity." U.S.S.G. S 2S1.2, Commentary.
Instead, "[a] defendant must know only that she is engaging
in a transaction and that the subject of the transaction is
criminally derived property." Allen, 129 F.3d at 1165.

Specifically, S 1957 makes it illegal to"knowingly
engage[ ] or attempt[ ] to engage in a monetary transaction
in criminally derived property that is of a value greater than
$10,000 and is derived from specified unlawful activity
. . . ." 18 U.S.C. S 1957(a); see also United States v.
Sokolow, 91 F.3d 396, 408 (3d Cir. 1996) (listing elements
of S 1957 offense). The statute defines a"monetary
transaction" as "the deposit, withdrawal, transfer, or
exchange, in or affecting interstate or foreign commerce, of
funds or a monetary instrument . . . by, through, or to a
financial institution . . . ." 18 U.S.C. S 1957(f)(1).
"Criminally derived property" is "any property constituting,
or derived from, proceeds obtained from a criminal offense
. . . ." 18 U.S.C. S 1957(f)(2). Section 1957 incorporates the
definition of "specified unlawful activity" in 18 U.S.C.
S 1956, which includes, inter alia, those acts that constitute
"racketeering activity" under the Racketeer Influenced &
Corrupt Organizations Act (RICO). See 18 U.S.C.
SS 1956(c)(7)(A) & 1957(f)(3). Wire and mail fraud constitute
racketeering activity and therefore are "specified unlawful
activities." See 18 U.S.C. S 1961(1)(B).

7
Cefaratti argues that the superseding information was
deficient because it failed to charge an essential element of
a S 1957 offense -- that the funds involved in the monetary
transaction constituted or were derived from proceeds
obtained from specified unlawful activity. Although he did
not raise this argument before the District Court, we will
consider it in light of our prior holding that a defendant
may challenge an indictment for failure to charge an offense
for the first time on appeal. See United States v. Spinner,
180 F.3d 514, 516 (3d Cir. 1999); see also United States v.
Cabrera-Teran, 168 F.3d 141, 143 (5th Cir. 1999).2
However, when a challenge is urged for the first time on
appeal we will construe the indictment liberally in favor of
validity. See United States v. Ross, 206 F.3d 896, 899 (9th
Cir. 2000); United States v. Sutton, 961 F.2d 476, 479 (4th
Cir. 1992).

The superseding information charged that:

Beginning prior to on or about July 1994 and
continuing up to on or about July 7, 1997 . . .
CEFARATTI, and others known, but not named
herein, did knowingly engage and attempt to engage in
monetary transactions affecting interstate commerce,
in criminally derived property of a value greater than
$10,000, that is, [Cefaratti] caused the transfer of both
Federal Pell Grant Program funds from the Federal
Reserve Bank . . . and the transfer of Federal Stafford
Loan Program funds from a federally-insured bank . ..
to the bank account of the Franklin Beauty School . . .
in an amount in excess of $840,000, such criminally
derived property having been derived from a specified
unlawful activity, that is, mail fraud and wire fraud,
and did aid and abet.

JA at 47-48. Cefaratti reads the information to charge
merely that some form of "criminally derived property" was
_________________________________________________________________

2. Here, Cefaratti pleaded guilty to an information charging the S 1957
offense and, in doing so, waived his right to indictment by grand jury.
That fact, however, is immaterial to this issue. See Government of the
Virgin Islands v. Moolenar, 133 F.3d 246, 247 (3d Cir. 1998) ("The
sufficiency of an information, like the sufficiency of an indictment,
presents a question of law over which our review is plenary.").

8
"derived from a specified unlawful activity," and argues that
in contrast the statute requires that the criminally derived
property "constitute or `be derived from, proceeds obtained
from a criminal offense.' " Appellant's Br. at 17 (quoting 18
U.S.C. S 1957(f)(2)).

An indictment (for our purposes, an information) to be
sufficient must contain all essential elements of the
charged offense. See Spinner, 180 F.3d at 515. However, an
indictment may "set forth the offense in the words of the
statute itself, as long as `those words of themselves fully,
directly, and expressly, without any uncertainty or
ambiguity, set forth all the elements necessary to constitute
the offence intended to be punished.' " Hamling v. United
States, 418 U.S. 87, 117 (1974) (quoting United States v.
Carll, 105 U.S. 611, 612 (1882)). Furthermore, an
indictment that charges a legal term of art "sufficiently
charges the component parts of the term." United States v.
Wicks, 187 F.3d 426, 429 (4th Cir. 1999); see also United
States v. Kovach, 208 F.3d 1215, 1219 (10th Cir. 2000)
(indictment that alleged defendant possessed forged
security of an "organization" adequately alleged interstate
commerce element where statutory definition of
"organization" expressly incorporated that element);
Hamling, 418 U.S. at 118-19 (indictment alleging material
was "obscene" was adequate although it did not set forth
the components of the obscenity test).

As we construe the information liberally, we reject
Cefaratti's contention that it fails to allege each element of
the offense. The information tracks the statutory language
by alleging that Cefaratti knowingly engaged and attempted
to engage in monetary transactions affecting interstate
commerce in criminally derived property valued over
$10,000, that property having been derived from the
specified unlawful activity of wire and mail fraud. Cefaratti
argues that the term "criminally derived property" in the
information could be read to include property that is
neither proceeds nor derived from proceeds of a criminal
offense. But the statute specifically defines the term, and
Cefaratti had only to read the statutory section under
which he was charged to understand that the "criminally
derived property" at issue -- Federal Pell Grant and

9
Stafford loan funds -- was alleged to "constitut[e], or [be]
derived from, proceeds obtained from a criminal offense
. . . ." 18 U.S.C. S 1957(f)(2).

Cefaratti also contends that he was not informed of the
nature of the charges against him because neither the
District Court nor the prosecutor explained the elements of
an offense under S 1957. He relies on Fed. R. Crim. P.
11(c)(1), which requires the court, before accepting a guilty
plea, to address the defendant personally in open court and
inform the defendant of, and determine that the defendant
understands, "the nature of the charge to which the plea is
offered . . . ." Rule 11, however, "is not to be read as
requiring a litany or other ritual," and "should not be given
such a crabbed interpretation that ceremony [is] exalted
over substance." Fed. R. Crim. P. 11 advisory committee
note (1983) (Rule 11(h)). Indeed, most courts look to the
totality of the circumstances to determine whether a
defendant was informed of the nature of the charges
against him, considering factors such as the complexity of
the charge, the age, intelligence, and education of the
defendant, and whether the defendant was represented by
counsel. See, e.g., United States v. Fernandez, 205 F.3d
1020, 1025 (7th Cir. 2000); United States v. Mosley, 173
F.3d 1318, 1322-23 (11th Cir. 1999); United States v.
Marks, 38 F.3d 1009, 1012 (8th Cir. 1994).

Cefaratti acknowledges that the elements of the offense
"need not be recited in any ritualistic fashion." Appellant's
Br. at 19. He nevertheless argues that the District Court
failed to ensure he understood the S 1957 offense, relying
on statements in our prior cases urging the district courts
of this circuit to "maintain strict observance to the
requirements specified in Rule 11 in order to assure the
integrity and finality of the plea process." United States v.
Carter, 619 F.2d 293, 296 (3d Cir. 1980), superseded by
statute as stated in United States v. Fulford, 825 F.2d 3, 7
(3d Cir. 1987). We agree with the articulated principle, but
it is inapplicable here because any deviation from those
requirements, if it occurred, was harmless. Rule 11 itself
provides that "[a]ny variance from the procedures required
by this Rule 11 which does not affect substantial rights
shall be disregarded." Fed. R. Crim. P. 11(h). This harmless

10
error standard "permit[s] rejection of a Rule 11(c) challenge
where the record plainly shows that the defendant
understood the nature of the charges despite a flawed
inquiry by the court." United States v. Maher , 108 F.3d
1513, 1521 (2d Cir. 1997); see also United States v. Liboro,
10 F.3d 861, 864 (D.C. Cir. 1993) (question is whether the
defendant "was sufficiently apprised of the charges and
comprehended them").

Here, the District Court conducted a detailed inquiry into
whether Cefaratti's plea was knowing and voluntary.
During that inquiry, Cefaratti stated that he had reviewed
the information and plea agreement with his retained
counsel, that he was satisfied with his counsel's
performance, that he did not wish to have the superseding
information read to him in open court, and that he wished
to waive indictment on the S 1957 offense. Finally, the
prosecutor summarized the evidence supporting each
offense, and Cefaratti informed the court that he had no
substantial dispute with the summary. The court accepted
his plea and entered an order finding that Cefaratti
understood "his rights [and] the consequences of his plea"
and stating that "[t]he Court is satisfied that the plea has
a basis in fact and contains all the elements of the crime
charged." JA. at 82.

As this recitation of the events shows, although the
District Court did not specifically inform Cefaratti of the
elements of an offense under S 1957, it conducted an
otherwise extensive inquiry at the plea hearing. Although
Cefaratti complains that "nothing was done . . . to ensure"
that he understood S 1957's requirement that criminally
derived property "constitute or be `derived from, proceeds
obtained from a criminal offense,' " Appellant's Br. at 20
(quoting 18 U.S.C. S 1957(f)(2)), he does not explicitly state
that he misunderstood any aspect of the S 1957 charge.
Given the facts of this case, such a claim would be dubious
at best.

Cefaratti reviewed the S 1957 charge in the superseding
information with his retained counsel, see United States v.
Andrades, 169 F.3d 131, 135 (2d Cir. 1999) (noting
presumption that defense counsel routinely explain the
offense in sufficient detail to give the accused notice of what

11
he is being asked to admit), and listened to and acquiesced
in the government's summary of facts supporting that
charge. As we conclude above, the information alleged each
element of the S 1957 offense, and S 1957 defines
"criminally derived property" to mean property
"constituting, or derived from, proceeds obtained from a
criminal offense." 18 U.S.C. S 1957(f)(2). Moreover, Cefaratti
was reasonably sophisticated, having obtained a bachelor's
of science degree in accounting and having successfully
managed another beauty school without incident for sixteen
years. See Liboro, 10 F.3d at 864-65 (harmless error to omit
"one of Rule 11's many `warnings' " where, inter alia,
defendant "held a responsible position requiring
considerable sophistication"). On these facts, any deviation
from Rule 11(c)(1) was harmless.

Cefaratti's final contention with respect to his plea
agreement is that the District Court erred under Fed. R.
Crim. P. 11(f) by entering judgment when there was no
factual basis to support the S 1957 count. Rule 11(f)
provides that "[n]otwithstanding the acceptance of a plea of
guilty, the court should not enter a judgment . . . without
making such inquiry as shall satisfy it that there is a
factual basis for the plea." Fed. R. Crim. P. 11(f). The court
may make that inquiry by looking to the defendant's own
admissions, the government's proffer of evidence, the
presentence report, or "whatever means is appropriate in a
specific case -- so long as the factual basis is put on the
record." United States v. Smith, 160 F.3d 117, 121 (2d Cir.
1998) (quotation omitted); see also United States v. Allen,
804 F.2d 244, 245 (3d Cir. 1986). The court " `need not be
convinced beyond a reasonable doubt tha[t] an accused is
guilty. It need only be convinced that there is sufficient
evidence to justify the reaching of such a conclusion.' "
United States v. Alber, 56 F.3d 1106, 1110 (9th Cir. 1995)
(quoting United States v. Neel, 547 F.2d 95, 96 (9th Cir.
1976) (per curiam)).

Here, the District Court specifically found that Cefaratti's
"plea has a basis in fact," although it did not spell out the
basis for that finding. United States v. Cefaratti, No. 98-cr-
00212 (M.D. Pa. Oct. 30, 1998) (order accepting guilty
plea). A district court's finding of a factual basis for a plea

12
is reviewed for an abuse of discretion. See Smith, 160 F.3d
at 122; United States v. Mitchell, 104 F.3d 649, 652 (4th
Cir. 1997); United States v. Bernaugh, 969 F.2d 858, 865
(10th Cir. 1992).3 Furthermore, although courts have held
that "an insufficient factual basis can never be harmless
error" under Rule 11(h), United States v. Tunning, 69 F.3d
107, 114-15 (6th Cir. 1995), they have refused to set aside
a guilty plea where the record as a whole, including
evidence not presented to the district court at the plea
hearing, demonstrates a factual basis for the defendant's
plea, see United States v. Zorrilla, 982 F.2d 28, 30-31 (1st
Cir. 1992); United States v. Adams, 961 F.2d 505, 512 (5th
Cir. 1992).

Cefaratti argues that the only allegation of "money
laundering" in this case is that he caused "the Franklin
Beauty School to receive, in its own bank accounts, the
loan moneys which it had fraudulently sought" from the
DOE. Appellant's Br. at 21. He argues that these funds
were not proceeds until they came into Franklin's
possession and that neither the information nor the
government's summary of evidence at the plea hearing
alleged that he conducted any monetary transactions with
the funds after that point.

Cefaratti relies on United States v. Johnson, 971 F.2d 562
(10th Cir. 1992), which involved a defendant who defrauded
investors into wiring funds directly to his account,
ostensibly for him to buy Mexican pesos at a discount rate
and later resell them at a profit. The indictment in that
case charged numerous counts of money laundering in
_________________________________________________________________

3. The government maintains that Cefaratti's failure to raise this issue
before the District Court necessitates plain error review -- an issue on
which there is some disagreement in the courts. Compare United States
v. James, 210 F.3d 1342, 1343 (11th Cir. 2000) (per curiam) (plain error
review), United States v. Angeles-Mascote, 206 F.3d 529, 530 (5th Cir.
2000) (same), and United States v. Akinsola, 105 F.3d 331, 333 (7th Cir.
1997) (same), with United States v. Glinsey, 209 F.3d 386, 394 & n.8
(5th Cir. 2000) (no plain error review, variance from Rule 11 reversible
unless harmless), United States v. Odedo, 154 F.3d 937, 940 (9th Cir.
1998) (same), and United States v. Lyons, 53 F.3d 1321, 1322 n.1 (D.C.
Cir. 1995) (same). We need not decide this issue in light of our
disposition.

13
violation of SS 1956 and 1957, some of which were based on
the wiring of funds from the investors directly to the
defendant's account and some of which were based on the
wiring of funds from the defendant's bank to the investors.
The funds involved in all of the transactions were alleged to
be proceeds of wire fraud, and the defendant was convicted
on all but one of the counts. The court affirmed some of the
convictions and reversed others. It reversed the convictions
based on the wire transfers from the investors to the
defendant on the ground that the defendant "cannot be
said to have obtained the proceeds of the wire fraud until
the funds were credited to his account." Id. at 570. By
contrast, the court upheld the defendant's convictions
based on the wire transfers from the defendant's bank to
the investors, which occurred after the wire fraud took
place.

Our precedent is consistent with the court's decision in
Johnson. For example, in discussing the term"proceeds" in
the context of S 1956 (the same term as inS 1957), we have
stated that "[a]lthough [the section] does not define when
money becomes `proceeds,' it is obvious to us that proceeds
are derived from an already completed offense, or a
completed phase of an ongoing offense, before they can be
laundered." United States v. Conley, 37 F.3d 970, 980 (3d
Cir. 1994). However, this does not help Cefaratti. The
counts in Johnson that were insufficient were those where
"the only use of the wires alleged . . . to prove the predicate
wire fraud crimes were the very wire transfers that allegedly
[violated S 1957]." United States v. Kennedy, 64 F.3d 1465,
1478 (10th Cir. 1995). Thus, in those instances, the
government failed to prove a monetary transaction
occurring "after the completion" of criminal activity. Id. By
contrast, the mail fraud to which Cefaratti pleaded guilty
was completed when he mailed fraudulent materials in
furtherance of his scheme to defraud. See id. ; see also JA
at 78-79 (prosecutor's statement that Cefaratti submitted
fraudulent materials by wire as well as by mail). Thus,
when he engaged in monetary transactions with proceeds of
the criminal activity after the completion of the mail fraud,
Cefaratti's actions fell within the statute.

As explained in the government's brief and as set forth in

14
the indictment, which was before the District Court at the
plea hearing, the Stafford Loan checks were mailed to
Franklin and made payable to both the student borrower
and the school. These checks had to be endorsed by both
the borrower and a representative of Franklin before they
could be deposited into the school's account. We agree with
the government that, at the latest, the checks became
criminally derived property when they were endorsed by the
student borrowers and that any subsequent monetary
transactions, including deposits, violated S 1957. See 18
U.S.C. S 1957(f)(1) (monetary transactions include deposit).
This provides an adequate basis for Cefaratti's plea. We see
no legal basis for Cefaratti's argument that "[a] check, as
such, cannot be `proceeds' . . . ." Appellant's Reply Br. at 4;
see United States v. Haun, 90 F.3d 1096, 1100 (6th Cir.
1996) (where automobile dealer applied for false titles and
used titles to defraud purchasers, purchasers' checks
represented proceeds under S 1956); United States v.
Hemmingson, 157 F.3d 347, 355 (5th Cir. 1998) (rejecting
argument that the funds from a check, rather than the
check itself, were proceeds of interstate transportation of
stolen property); Kennedy, 64 F.3d at 1477-78 (rejecting
position that deposit of checks received from defrauded
investors did not violate S 1956).4

Furthermore, there is little question that the funds
Franklin unlawfully obtained were subsequently re-invested
in the Franklin School. As we have stated, Franklin
operated during the three year period between July 1994
and July 1997 while receiving over 90 percent of its
revenues from Stafford Loan and Pell Grant funds.
Moreover, in a letter Cefaratti submitted to the probation
officer who was preparing the PSR, Cefaratti specifically
acknowledged "that the money received through the
[fraudulent activities] . . . was used to enable me to
continue to operate and expand the Franklin Beauty School
and thereby permit me the continuation of the frauds in
which I was engaged. Among other things, the improperly
_________________________________________________________________

4. Cefaratti has not argued that the deposit of these checks failed to
meet the requirement that the monetary transaction involve criminally
derived property valued greater than $10,000.

15
received proceeds were used to build an addition onto the
Franklin Beauty School." PSR at 7.

Cefaratti argues that his letter to the probation officer,
despite its clear admission, cannot support his guilty plea
for two reasons. First, he argues that there is no reason to
think that the PSR "was using the term [proceeds] in the
technical sense defined by this Court . . . ." Appellant's
Reply Br. at 5. However, it was Cefaratti himself, while
represented by counsel, who used the term "proceeds," and
he did so in a letter describing his offense conduct. We
have no reason to interpret it to mean anything other than
what it says. In any event, Cefaratti admitted the
underlying facts which demonstrate that the transactions
at issue involved proceeds in the technical sense.

Second, Cefaratti argues that the District Court did not
rely upon his statement quoted in the PSR when it accepted
his guilty plea and that "this Court cannot find and rely on
a different" factual basis on appeal. Id. However, Cefaratti's
admission of the use of proceeds was before the District
Court at the time of sentencing, and he never sought to
explain or withdraw his statement.5 Nor did he seriously
argue that the expansion of Franklin with funds obtained
from the mail fraud could not constitute a monetary
transaction with proceeds of the mail fraud.

Cefaratti has failed to show prejudice from the failure to
articulate all of the details of the factual basis supporting
his guilty plea to a violation of S 1957. See Fed. R. Crim. P.
11(h); Zorrilla, 982 F.3d at 30.6 We reject his challenge on
appeal to his conviction on the counts to which he pled
guilty.
_________________________________________________________________

5. Unlike the situation in Allen, 804 F.2d at 247, on which Cefaratti
relies, in this case the District Court did not proceed under "a
misunderstanding of what the defendant ha[d] admitted."

6. Our disposition makes it unnecessary to decide the government's
contention that Cefaratti may not raise this challenge to his guilty plea
on appeal.

16
B.

The Application of U.S.S.G. S 2S1.2

Cefaratti also challenges his sentence, arguing that the
District Court erred by applying U.S.S.G. S 2S1.2, the
guideline applicable to a money laundering conviction
under S 1957. Cefaratti argues that his is an"atypical case
[in which] the guideline section indicated for the statute of
conviction is inappropriate . . . ." U.S.S.G. Introduction to
App. A. He contends that he should have been sentenced
under U.S.S.G. S 2F1.1, the fraud guideline. Cefaratti's
argument is based on United States v. Smith, 186 F.3d 290,
300 (3d Cir. 1999), a recent case in which we concluded
that "the heartland of U.S.S.G. S 2S1.1 is the money
laundering activity connected with extensive drug
trafficking and serious crime." Because he did not raise this
objection to his sentence before the District Court we will
review for plain error, see United States v. Knobloch, 131
F.3d 366, 370 (3d Cir. 1997), although we note that our
decision in Smith was filed on August 9, 1999, more than
two months after Cefaratti was sentenced.

The defendants in Smith had been convicted of four
offenses -- conspiracy to defraud, interstate transportation
of stolen property, causing unlawful interstate travel with
intent to distribute stolen property, and money laundering
-- arising out of an embezzlement/kickback scheme.
GTECH, a lottery service company that sought help in
obtaining lottery contracts, hired a consultingfirm which
submitted inflated invoices to GTECH for its services and,
in return, the consulting firm gave kickbacks to defendant
Smith, GTECH's national sales manager. At leastfifteen
checks were made payable directly to Smith's creditors.
Based on those payments to Smith's creditors, the
defendants were convicted of money laundering under 18
U.S.C. S 1956.

The district court in Smith calculated the defendants'
sentences based on U.S.S.G. S 2S1.1, which applies to
convictions under S 1956. On appeal, we held that the
court erred in using S 2S1.1 rather than U.S.S.G. S 2F1.1,
the fraud guideline. We noted that the Sentencing

17
Commission originally established high base offense levels
for the money laundering guidelines to penalize the conduct
that had concerned Congress: "1) situations in which the
`laundered' funds derived from serious underlying criminal
conduct such as a significant drug trafficking operation or
organized crime; and, 2) situations in which thefinancial
transaction was separate from the underlying crime and
was undertaken to either: a) make it appear that the funds
were legitimate, or b) promote additional criminal conduct
by reinvesting the funds in additional criminal conduct."
Smith, 186 F.3d at 298 (quoting United States Sentencing
Commission, Report to the Congress: Sentencing Policy for
Money Laundering Offenses, including Comments on
Department of Justice Report at 4 (Sept. 18, 1997)).

We concluded that the defendants' conduct in Smith
which was the basis of the money laundering charges, the
15 checks sent to Smith's creditors, did not implicate these
concerns and was merely an "incidental by-product of the
kickback scheme." Id. at 300 (quotation omitted). Because
the "root of the defendants' activity" was fraud, we stated
that "[t]o use the money laundering guideline in this
routine fraud case would let the `tail wag the dog.' " Id.
Moreover, by sending the checks directly to defendant
Smith's creditors, the defendants left a paper trail that was
"inconsistent with planned concealment." Id.

Cefaratti's argument assumes that our holding in Smith
regarding the applicability of U.S.S.G. S 2S1.1 to the Smith
defendants' S 1956 convictions pertains equally to U.S.S.G.
S 2S1.2, which applied to Cefaratti's conviction under 18
U.S.C. S 1957. We will assume arguendo that it does.7 This
case, however, does not require us to determine the
circumstances under which a defendant's conduct will fall
_________________________________________________________________

7. Our holding in Smith concerning sentencing under U.S.S.G. S 2S1.1
implicitly echoed a concern expressed by other courts when evaluating
a defendant's S 1956 conviction over transforming that section from a
money laundering statute into a "money spending statute." See United
States v. Sanders, 928 F.2d 940, 946 (10th Cir. 1991). That concern may
be implicated to a lesser degree by S 1957. See D. Randall Johnson, The
Criminally Derived Property Statute: Constitutional and Interpretive
Issues Raised by 18 U.S.C. S 1957, 34 Wm. & Mary L. Rev. 1291, 1302
(1993) (unlike S 1956, S 1957 "is indeed a `money spending statute' ").

18
outside the heartland of U.S.S.G. S 2S1.2, because it is
clear that Cefaratti was appropriately sentenced under that
guideline.

Cefaratti contends that the District Court should have
based his sentence on the fraud guideline because his
conduct did not involve large scale drug trafficking or
organized crime. However, nothing in Smith states or
suggests that S 2S1.1 or S 2S1.2 can be used only for
defendants who have engaged in such conduct. Prior to
Smith, many of our decisions applied U.S.S.G.SS 2S1.1 and
2S1.2 in situations involving conduct similar to Cefaratti's
and did not question the propriety of that application of the
guidelines. See, e.g., United States v. Morelli, 169 F.3d 798,
809 n.13 (3d Cir. 1999) (sentencing under S 2S1.1;
proceeds of scheme to embezzle excise taxes on fuel sales
laundered by wiring funds between companies controlled by
defendants); United States v. Cocivera, 104 F.3d 566, 570
n.2 (3d Cir. 1996) (summarily rejecting argument that
S 2F1.1 rather than S 2S1.2 should have been applied
where defendant who had committed medicare fraud and
other crimes was also convicted of 22 counts underS 1957);
United States v. Conley, 92 F.3d 157, 162-63 (3d Cir. 1996)
(sentencing under S 2S1.1; defendant convicted of running
illegal gambling scheme and conspiring to do the same and
to launder the proceeds); United States v. Sokolow, 91 F.3d
396, 410-13 (3d Cir. 1996) (defendant sentenced under
S 2S1.2 for, inter alia, misrepresenting the nature of his
benefits plan and defrauding plan members of insurance
premiums; indictment alleged defendant laundered funds
through a series of accounts, property, and mortgages);
United States v. Thompson, 40 F.3d 48, 50 (3d Cir. 1994)
(defendants who intercepted and diverted funds mailed to
securities firm sentenced under S 2S1.1); United States v.
Cusumano, 943 F.2d 305, 312-14 (3d Cir. 1991)
(sentencing under S 2S1.1 where underlying conduct was
embezzlement/kickback scheme involving employee benefit
plan; rejecting argument that "core" offense of conviction
was kickback scheme rather than money laundering).

Other than distinguishing our decision in United States v.
Cusumano on the basis that it was issued prior to the
Sentencing Commission's report to Congress, our opinion

19
in Smith gave no indication that it intended a radical
departure from this precedent. The authority relied upon in
Smith did not suggest the restrictive application of S 2S1.1,
let alone S 2S1.2, that Cefaratti urges. Although we held in
Smith that the heartland of S 2S1.1 was"money laundering
activity connected with extensive drug trafficking and
serious crime," we relied particularly on language in a
report of the House Judiciary Committee explaining
Congress' rejection of proposed amendments to the money
laundering guidelines. We quoted the statement in the
report that, "the application of the current guidelines to
receipt-and-deposit cases, as well as to certain other cases
that do not involve aggravated money laundering activity,
may be problematic." Smith, 186 F.3d at 299 (quoting H.R.
Rep. No. 104-272, at 14-15, reprinted in 1995 U.S.C.C.A.N.
335, 348-49) (emphasis added in Smith). 8 The House Report
continued that "past sentencing anomalies arising from
relatively few cases do not justify a sweeping downward
adjustment in the money laundering guidelines." Id.
(quoting Report) (emphasis added in Smith).

Smith also relied on the Justice Department's less-than-
uniform adherence to its stated policy that the money
laundering statutes "should not be used in cases where the
money laundering activity is minimal or incidental to the
underlying crime." Id. at 299 (quotation omitted). Both the
Justice Department and the House Report were concerned
that application of the money laundering guidelines may be
problematic in anomalous cases, such as where the
defendant simply deposits the proceeds of crime or where
the laundering activity is minimal or incidental to the
underlying crime. Neither the House Report nor the Justice
Department policy suggest that sentencing under the
money laundering guidelines is appropriate only when the
_________________________________________________________________

8. In Morelli, which was decided several months before Smith, a
defendant sentenced under the money laundering guidelines argued that
he was entitled to a downward departure on the basis of the proposed
amendments that had been rejected by Congress. In rejecting that
argument, we stated that "proposed amendments to the Sentencing
Guidelines do not provide independent legal authority for a downward
departure," although we did not mention the House Report. Morelli, 169
F.3d at 809 n.13.

20
defendant has engaged in drug trafficking or organized
crime.

The facts in Smith suggest that we too were particularly
concerned that the money laundering at issue there--
simply sending checks to the defendant's creditors--
amounted to little more than receipt and deposit of funds
obtained by fraud. We therefore read Smith, in conjunction
with our prior cases, to stand for the unremarkable
principle that in certain cases "strict focus on the
technicalities of the sentencing process obscures the
overarching directive to match the guideline to the offense
conduct . . . ." Id. at 300 (quotation omitted). In Smith, the
overarching offense conduct was "routine fraud," and the
money laundering, though technically a violation ofS 1956,
was merely an "incidental by product" of that fraud. Id.

Cefaratti next argues that the money laundering he
engaged in was at most part and parcel of his student loan
fraud scheme. This equates to an argument that his
conduct as a whole was little more than routine fraud to
which the money laundering was incidental. See Appellant's
Br. at 31 & n.8 (referring to Cefaratti's fraud as"garden
variety fare" in federal court).

Cefaratti notes that the parties and the court at
sentencing seemed to view his conduct as typical of a fraud
case. He points to his counsel's argument that Cefaratti
only continued the fraudulent activities begun by his sister
Carole, who had formerly operated Franklin, because he
hoped to revitalize the school and eventually to legitimize
its practices. See JA at 117-21. Likewise, the prosecutor
referred to Cefaratti's case as "a typical fraud case made a
bit atypical because of efforts made to destroy evidence
. . . ." JA at 122. And the District Court, in denying
Cefaratti's request for a downward departure, stated: "[T]his
is a typical thing. I mean I have more fraud offenses for
people who are trying to salvage businesses . . . ." JA at
145.

Nonetheless, we cannot agree that the District Court
committed plain error in sentencing Cefaratti under
U.S.S.G. S 2S1.2. Cefaratti characterizes the money
laundering in this case as simply the "receipt of the funds

21
from the government, which did not aggravate or conceal
the fraud offense in any way." Appellant's Br. at 26. To be
sure, the deposit of the fraudulently-obtained Stafford loan
checks can be characterized in this manner. However, in
Smith we emphasized the concern of Congress and the
Sentencing Commission with separate financial
transactions undertaken to legitimize illegally-obtained
funds or to promote additional criminal conduct. Smith,
186 F.3d at 298. The evidence in this case demonstrates
that Cefaratti used the proceeds of his mail and wire fraud
to promote further acts of fraud.

As we have said, over 90 percent of Franklin's revenues
during a three year period came from Pell Grant and
Stafford loan funds. Although the record does not make
clear what percentage of these funds were obtained by
fraud, Cefaratti does not argue that the percentage was
insubstantial or that he only reinvested in Franklin the
funds he had obtained legally. See United States v.
Threadgill, 172 F.3d 357, 377-78 (5th Cir. 1999) (affirming
downward departure in S 1956 case where defendants
laundered only around three percent of illegal gambling
revenues and did not use laundered money to finance other
criminal activity). In fact, Cefaratti specifically admitted
that he used the proceeds of his crimes to continue"the
frauds in which [he] was engaged," for example by building
an addition to the Franklin School. PSR at 7. Significantly,
Cefaratti also admitted to making payments to various
lenders so "that it would appear as if the students . . . were
not in default," PSR at 6, and does not suggest that he
never used proceeds of his fraud for this purpose.

As it is clear Cefaratti used criminally derived property to
promote further fraud, we cannot say that such conduct is
minimal or incidental to the underlying fraud, and we
therefore conclude that the District Court did not commit
plain error in sentencing Cefaratti under U.S.S.G.S 2S1.2.
See, e.g., United States v. Ross, 210 F.3d 916, 928 (8th Cir.
2000) (downward departure from U.S.S.G. S 2S1.1
inappropriate where defendant led scheme to defraud
investors and reinvested virtually all of the proceeds in the
scheme); United States v. Woods, 159 F.3d 1132, 1136 (8th
Cir. 1998) (stating "[w]e believe [departure from U.S.S.G.

22
S 2S1.2 was appropriate] because . . . deposit of the check
had the effect of concluding, rather than promoting, the . . .
fraud").9

C.

The Leadership Adjustment

The District Court calculated Cefaratti's sentence by
grouping counts IV (the mail fraud count) and XXIII (the
student loan fraud count) of the indictment with theS 1957
(money laundering) count in the information pursuant to
U.S.S.G. S 3D1.2(b), because the counts involved the same
victim and two or more acts constituting a common
scheme, and also included in that group count XXVII of the
indictment (for destruction of property) pursuant to
U.S.S.G. S 3D1.2(c). Neither party challenges this method of
grouping. After grouping, the court added two levels based
on the PSR's finding that Cefaratti "had a managerial role
over at least three other criminal participants (Gloria
Malavet, Modesta Perez and Jackie Lopez)." PSR at 8. The
court added "that there was a point in time where Malavet
and Perez attended a conference on funding and realized
that what they were doing was wrong. . . . [Cefaratti advised
them] not to worry about it and to continue their practice."
JA at 144.

Cefaratti's primary contention, and the only one that
merits discussion, is that when "counts are grouped under
U.S.S.G. S 3D1.2(a), (b), or (c), the guideline level [including
any adjustments] for each count is first to be determined
separately" before grouping. Appellant's Br. at 34. When
counts are grouped under these sections, the defendant's
sentence is based on "the highest offense level of the counts
in the Group." U.S.S.G. S 3D1.3(a). In this case, the court,
applying that instruction, based Cefaratti's sentence on the
offense level applicable to the S 1957 count.
_________________________________________________________________

9. In keeping with our standard practice, we decline to consider
Cefaratti's claim that his trial counsel was ineffective for failing to
raise
this issue at sentencing. See Cocivera, 104 F.3d at 570.

23
Cefaratti argues that even if he had been a leader in the
fraud, which he disputes, he played no leadership role in
the money laundering, and that the offense level applicable
to the fraud count, even when adjusted for the leadership
role, would have been less than that for the (unadjusted)
S 1957 count. The offense level applicable to the group
would therefore have been two levels lower. Cefaratti
objected to the leadership adjustment in the District Court,
but not on this basis. Because Cefaratti never presented
the District Court with any variant of the technical
argument he now raises, we review for plain error. See
Knoblach, 131 F.3d at 370.

We cannot find error, much less plain error, in the
District Court's sentence. Even if Cefaratti is correct that
the court should have determined the applicability of the
adjustment before grouping, there was sufficient evidence
to support a leadership adjustment on both the fraud and
the money laundering count. "The determination of a
defendant's role in the offense is to be made on the basis of
all conduct within the scope of [U.S.S.G.]S 1B1.3 (Relevant
Conduct) . . . and not solely on the basis of elements and
acts cited in the count of conviction." U.S.S.G. Ch. 3 pt. B,
introductory commentary. Relevant conduct includes, inter
alia, "all acts and omissions committed, . . . commanded,
. . . or willfully caused by the defendant . . . . that occurred
during the commission of the offense of conviction, in
preparation for that offense, or in the course of attempting
to avoid detection or responsibility for that offense."
U.S.S.G. S 1B1.3(a).

Here, the record contains ample evidence that Cefaratti
played a leadership role with respect to the money
laundering. At sentencing Cefaratti's counsel specifically
admitted that Cefaratti "did exercise a managerial function
with respect to the secretarial staff," JA at 132, and did not
qualify this admission by stating that the managerial
function extended only to the fraud. Instead, his counsel
argued that the ultimate goal of Cefaratti's leadership was
to cease Franklin's unlawful practices and that, in order to
accomplish that goal, Cefaratti had to "run the business.
. . ." JA at 132. But, counsel further stated that Cefaratti's
conduct in running Franklin "did include acts of

24
wrongdoing. There is no question about it. So he exercised
leadership." JA at 132. Cefaratti was, of course, present at
the hearing and did not object to these statements.

Furthermore, the record demonstrates that Cefaratti
instructed Malavet and Perez to submit fraudulent
deferment and forbearance forms and to mail checks on
behalf of student borrowers who were nearing default. It
was the funds derived from those fraudulent activities that
were "laundered" within the meaning of S 1957 and used to
promote additional fraud. Cefaratti's leadership in
instructing his employees to continue their fraudulent
practices was relevant conduct that supported an
adjustment on the money laundering count. Without his
ongoing leadership of the fraud over a period of at least
three years, "there would have been no ill-gotten gains to
launder." United States v. Nicolaou, 180 F.3d 565, 574 (4th
Cir. 1999) (leadership of illegal gambling relevant conduct
that could support adjustment to money laundering count);
United States v. Savage, 67 F.3d 1435, 1443 (9th Cir. 1995)
(defendant's role in mail and wire fraud scheme is relevant
conduct for purposes of determining his aggravating role in
money laundering). It follows that the District Court did not
err in imposing the adjustment for leadership.

III.

CONCLUSION

Cefaratti, who negotiated an advantageous plea
agreement with the Justice Department for the dismissal of
24 counts, including one charging violation of 18 U.S.C.
S 1956 (a money laundering offense), in return for his
agreement to plead guilty to four counts charging, inter
alia, violation of 18 U.S.C. S 1957 (a different money
laundering offense with a lesser penalty) in the superseding
information, and who raised no objection to the factual
recitations made by the government at the hearings on the
plea agreement and the sentencing, now appeals raising
highly technical arguments never raised in the District
Court. The government argues that this represents an
impermissible disavowal of the plea agreement. We have,

25
nonetheless, reviewed the arguments on their merits and
conclude that they are not persuasive.

For the reasons set forth above, we will affirm the
judgment of conviction and sentence.

A True Copy:
Teste:

Clerk of the United States Court of Appeals
for the Third Circuit

26