11-2404-cr(L)
United States v. Lacey, Henry
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
August Term, 2011
(Submitted: May 17, 2012 Decided: November 7, 2012)
Docket Nos. 11-2404-cr(L), 11-2406-cr(Con)
UNITED STATES OF AMERICA,
Appellee,
— v. —
KIRK LACEY, OMAR HENRY,
Defendants-Appellants,
LAVETTE M. BILLS, PETER CHEVERE, WAYNE GREEN, SHERESE GLENN, REVLON HINDS,
JOSEPH EVANS, JERRY CALONGE, MARK BARNETT,
Defendants.
B e f o r e:
WINTER, STRAUB, and LYNCH, Circuit Judges.
__________________
Defendants-appellants Kirk Lacey and Omar Henry were convicted by jury on
charges stemming from their involvement in a fraudulent mortgage scheme. They appeal
only from the sentences and restitution orders imposed by the district court. We hold that
the district court interpreted U.S. Sentencing Guidelines § 2B1.1(b)(2)(A)(ii), which
increases an offense by two levels if it was “committed through mass-marketing,” too
broadly, and remand for the district court to make additional findings. We find no error
in the district court’s calculation of the loss amount for sentencing guidelines purposes.
Finally, we agree with the parties that the district court’s restitution calculation was
erroneous. Therefore, we vacate the sentences and restitution orders and remand for
further proceedings.
VACATED and REMANDED.
Judge STRAUB dissents in part in a separate opinion.
Avraham C. Moskowitz, M. Todd Parker, Moskowitz & Book, LLP, New
York, NY, for Defendant-Appellant Kirk Lacey.
John M. Burke, Brooklyn, NY, for Defendant-Appellant Omar Henry.
Amy Lester, Iris Lan, Assistant United States Attorneys, for Preet Bharara,
United States Attorney for the Southern District of New York, New
York, NY.
GERARD E. LYNCH, Circuit Judge:
Defendants-appellants Kirk Lacey and Omar Henry were convicted by jury in the
United States District Court for the Southern District of New York (Kimba M. Wood, J.)
on charges stemming from their involvement in a fraudulent mortgage scheme. They
2
appeal their sentences and restitution orders but not their convictions. We hold that U.S.
Sentencing Guidelines § 2B1.1(b)(2)(A)(ii), which increases an offense by two levels if it
was “committed through mass-marketing,” applies only if the audience of the mass-
marketing was in some sense victimized by the scheme; because the record is unclear in
this case, we remand for the district court to make additional findings. We find no error,
however, in the district court’s calculation of loss amount for sentencing. Finally, we
agree with the parties that the district court’s restitution calculation was erroneous.
Therefore, we VACATE the sentences and restitution orders and REMAND the cases for
further proceedings consistent with this opinion.
BACKGROUND
I. Facts
Because the defendants were convicted after trial, we recite the facts taking the
evidence in the light most favorable to the verdict. See, e.g., United States v. Hsu, 669
F.3d 112, 114 (2d Cir. 2012).
Lacey and Henry participated in a fraudulent mortgage scheme operated by MTC
Real Estate, Inc (“MTC”). The chief executive officer of MTC was co-defendant Lavette
Bills, a licensed real estate broker. The contours of the scheme were simple. In the
typical case, MTC purchased a property at a favorable price in a “short sale” from a
financially distressed homeowner by negotiating with the homeowner’s mortgage lender.
The defendants then typically resold (“flipped”) the property at a higher price to a “straw
3
buyer” who had no intention of actually living at the property or making all of the loan
payments.1
MTC engaged in extensive radio advertisements featuring Lavette Bills. The
advertisements produced potential straw buyers, or “radio leads,” and MTC employees
followed up with the leads to find buyers. The advertisements told buyers they could
receive up to $50,000 for buying a house with MTC, and some straw buyers actually did
receive such payments. The ads also helped MTC find financially distressed homeowners
willing to sell their homes in short sales.
MTC employees worked with straw buyers to submit false mortgage applications
and documentation in order to make it more likely that loans would be approved. If the
mortgage was approved and the sale went forward, MTC sometimes made a few
payments on the straw buyer’s behalf so that the loan did not immediately go into default,
to avoid setting off a “red flag” with the lending bank. When the straw buyer did
ultimately default, the lending bank typically obtained title to the property by foreclosing
on its mortgage.
After a three-week jury trial, both Lacey and Henry were found guilty on
December 21, 2010. Lacey was convicted of conspiracy to commit bank and wire fraud,
1
An MTC employee testified at trial that MTC permitted sale to a legitimate buyer if one could
be found, but he also testified that he could not recall a case in which a legitimate buyer had
actually been used.
4
in violation of 18 U.S.C. §§ 1343, 1344, and 1349 and of substantive bank and wire fraud
in violation of 18 U.S.C. §§ 1343, 1344, and 2; Henry was convicted only of conspiracy.
II. Sentencing
At sentencing, the government sought a two-level increase in both defendants’
Guidelines range under U.S.S.G. § 2B1.1(b)(2)(A)(ii) because, it argued, the scheme
“was committed through mass-marketing” within the meaning of that provision.
Defendants argued that the enhancement should not apply because the radio
advertisements were directed at potential property sellers and straw buyers, not at the
banks who were the victims of the fraud. The district court agreed with the government,
noting that “the MTC marketing campaign was critical to the success of the fraud”
because the marketing was “how MTC found people with distressed properties that could
be exploited.” The district court therefore held that although the mass-marketing was not
directed at the victims of the fraud (that is, the banks that made the mortgage loans), the
mass-marketing was still “relevant conduct” to the offense and so the enhancement
should apply.
The parties also disputed the amount of loss caused by the scheme. Under
U.S.S.G. § 2B1.1(b)(1), the base offense level for various crimes resulting in financial
loss is enhanced based on the amount of loss. The government argued that the loss in this
case should be calculated as the total of the differences between what MTC paid for each
property at short sale and the value of the mortgage loan ultimately made on each
property. This calculation resulted in losses of $731,077 attributable to Henry and
5
$536,077 attributable to Lacey; both figures result in a 14-level enhancement under
§ 2B1.1(b)(1). Defendants argued principally that because the banks had received title to
the properties after default, the court should use the appraised value of the property that
formed the basis for the fraudulent mortgage, rather than the short-sale price. Defendants
also proposed that since the loss amount was difficult to ascertain, the court should
instead base its sentence on the amount of financial gain to defendants, a mechanism
described in Application Note 3(B) to U.S.S.G. § 2B1.1. Defendants asserted that the
evidence at trial had shown that Lacey gained approximately $15,000 through the
scheme, which would produce a 4-level enhancement.2 The district court, however,
accepted the government’s loss calculation and the corresponding 14-level enhancement
for each defendant.
The court sentenced Henry principally to a term of imprisonment of one year and
one day and Lacey to a term of 46 months. The district court also ordered that Henry and
Lacey, along with their codefendants Bills and Peter Chevere, be jointly and severally
liable for restitution in the amount of $411,161.52 to OneWest Bank, one of the victims
of the scheme. Defendants jointly moved to vacate the restitution orders because they did
not account for the value of the collateral OneWest received.3 This appeal followed.
2
Henry did not (and does not now) specify how much he gained from the scheme.
3
It does not appear from the docket that the district court ever ruled on this motion.
6
DISCUSSION
We review a district court’s sentencing decision for procedural and substantive
reasonableness. See United States v. Cavera, 550 F.3d 180, 189-90 (2d Cir. 2008) (en
banc). “A district court commits procedural error where it makes a mistake in its
Guidelines calculation, does not consider the § 3553(a) factors, or rests its sentence on a
clearly erroneous finding of fact.” Hsu, 669 F.3d at 120 (internal quotation marks and
alterations omitted); see also Gall v. United States, 552 U.S. 38, 51 (2007). We review
the district court’s legal determinations de novo. Hsu, 669 F.3d at 120.
Defendants make three arguments, which largely repeat those made to the district
court at sentencing: that the two-level enhancement for mass-marketing was erroneously
imposed; that the 14-level loss enhancement was based on an incorrect calculation of
loss; and that the amount of restitution was incorrectly calculated.
I. Mass-marketing enhancement
Defendants argue first that the district court erred by applying a two-level
enhancement to their sentences for an offense “committed through mass-marketing.” See
U.S.S.G. § 2B1.1(b)(2)(A)(ii). After a careful reading of the Guidelines and other
relevant authority, we hold that the mass-marketing enhancement is properly applied only
when the targets of the mass-marketing are also in some way victims of the scheme.
Because it is not clear on the current record whether the straw buyers who were the
targets of the mass-marketing in this case were in some sense victims, we will remand to
the district court for further factfinding.
7
To interpret the Guideline, we look first to its text. Section 2B1.1(b)(2) reads:
If the offense –
(A) (i) involved 10 or more victims; or (ii) was
committed through mass-marketing, increase by 2
levels;
(B) involved 50 or more victims, increase by 4 levels;
or
(C) involved 250 or more victims, increase by 6 levels.
The Guideline applies to an offense “committed through mass-marketing.” As at least
one other Circuit has recognized, an offense is “committed through mass-marketing”
when mass-marketing is used to recruit or deceive victims of the offense, not when mass-
marketing targeted at audiences other than victims is used in connection with the fraud in
some other, more tangential manner. See United States v. Miller, 588 F3d. 560, 568 (8th
Cir. 2009). It is not enough that a scheme may be advanced by the use of mass marketing
techniques; a scheme is committed through mass-marketing only when the mass
marketing is directed toward individuals who will be harmed by the scheme.
This reading is bolstered by the surrounding text. Cf. Rowland v. Cal. Men’s
Colony, Unit II Men’s Advisory Council, 506 U.S. 194, 199-200 (1993) (noting that the
Dictionary Act, 1 U.S.C. § 1, directs a court to look to “context,” which includes “the text
of the Act of Congress surrounding the word at issue, or the texts of other related
congressional Acts”). All the other subsections of § 2B1.1(b)(2) base enhancements on
the number of victims. Indeed, the mass-marketing enhancement is posed as an
alternative to the smallest number of victims in an escalating series of adjustments based
on rising numbers of victims. The pattern thus strongly suggests that the enhancement
8
scheme is designed to measure the scope of the wrong by the number of victims, and that
the use of mass-marketing is relevant even when the number of actual victims is small,
because fraudulent mass-marketing creates a large number of potential victims. Given
this context, it is logical to interpret § 2B1.1(b)(2)(A)(ii) as applying only when the mass-
marketing is directed at individuals who may be victimized by the scheme.
Finally, the Guidelines’ definition of “victim” supports our reading. As relevant
for this case, a “victim” is defined as “any person who sustained any part of the actual
loss determined under subsection (b)(1),” U.S.S.G. § 2B1.1 app. note 1, while “actual
loss” is in turn defined as “the reasonably foreseeable pecuniary harm that resulted from
the offense,” id. § 2B1.1 app. note 3(A)(i). If a mortgage fraud scheme predictably
results in pecuniary harm to unwitting, deceived straw buyers, the straw buyers have
sustained “actual loss” and are therefore “victims” within the meaning of the Guidelines.
They are therefore properly considered under the mass-marketing enhancement.
Returning to the facts of the instant case, it is not clear on the present record
whether at least some of the consumers who were the targets of mass marketing were in
some sense victimized, notwithstanding that the main thrust of the fraud was directed at
banks. To the extent that any straw buyer was in on the scheme or received the promised
$50,000 payment, such a buyer could not be seen as a victim. But some straw buyers
testified that their credit scores were ruined. Others testified that they intended in good
faith to purchase the property and pay the mortgage, and that Bills misled them into
believing that they would be able to pay the mortgages on the properties through rental
9
income. One straw buyer had to retain an attorney to deal with the legal consequences of
foreclosure. Thus, there is evidence that at least some straw buyers were harmed by the
scheme.
Our Court has not previously interpreted the mass-marketing enhancement,
although two other Circuits, the Fifth and Eighth, have. Our reading of the rule is
consistent with that of the Eighth Circuit. In United States v. Miller, a case very similar
to this one, the Eighth Circuit upheld the district court’s rejection of an enhancement
under § 2B1.1(b)(2)(A)(ii) for a defendant convicted of wire fraud. 588 F.3d at 568.
Although the Miller defendant “engage[d] in mass-marketing to consumers via television
commercials,” the court noted that his offense “involve[ed] fraud on financial institutions,
not consumers,” and so the targets of the mass marketing (the consumers) were not the
victims of the fraud (the banks). Id. The Eighth Circuit’s holding is consistent with our
own reading of the Guideline, although we note that the court in Miller apparently was
not faced with evidence that some or all of the consumers were also injured or defrauded.
Id. at 567-68.
By contrast, in a pair of medical device fraud cases, United States v. Mauskar, 557
F.3d 219, 232-33 (5th Cir. 2009) and United States v. Isiwele, 635 F.3d 196, 203-05 (5th
Cir. 2011), the Fifth Circuit upheld application of the mass-marketing enhancement. In
those cases, mass-marketing techniques were directed at Medicare and Medicaid
recipients to induce them either to visit a doctor to obtain a prescription for motorized
wheelchairs that they did not need, Mauskar, 557 F.3d at 224, 233, or to provide a
10
fraudster with their billing information, which was used to file fraudulent claims for such
wheelchairs that were neither needed nor provided, Isiwele, 635 F.3d at 198. In these
cases, although those persons did not sustain any actual financial loss under the
Guidelines definition, see U.S.S.G. § 2B1.1 app. note 3(A)(i), and were thus not
“victims” as defined by the Guidelines, see U.S.S.G. § 2B1.1 app. note 1, they were
deceived into ordering unneeded and in some cases unprovided goods or services. They
avoided financial loss only because the government as their insurer ultimately bore the
cost of the deception. We need not decide whether the enhancement would properly
apply in situations more closely analogous to the Fifth Circuit cases. We note, however,
that a plausible argument can be made that the deceived patients were victimized by the
scheme.
It is also not clear on this record whether the defendants’ activities are properly
deemed “mass-marketing” under the relevant Guideline. The Sentencing Commission
has defined “mass-marketing,” and this Court must give the Commission’s interpretation
of its own Guideline “‘controlling weight unless it is plainly erroneous or inconsistent
with the regulation’” or violates the Constitution or a federal statute. Stinson v. United
States, 508 U.S. 36, 45 (1993), quoting Bowles v. Seminole Rock & Sand Co., 325 U.S.
410, 414 (1945). “Mass-marketing” is defined by Application Note 4(A) to § 2B1.1:
For purposes of subsection (b)(2), “mass-marketing” means a
plan, program, promotion, or campaign that is conducted
through solicitation by telephone, mail, the Internet, or other
means to induce a large number of persons to (i) purchase
goods or services; (ii) participate in a contest or sweepstakes;
11
or (iii) invest for financial profit. “Mass-marketing” includes,
for example, a telemarketing campaign that solicits a large
number of individuals to purchase fraudulent life insurance
policies.
U.S.S.G. § 2B1.1 app. note 4. The three categories enumerated in the definition all
describe common frauds in which fraudsters use mass media to attract victims to buy into
fraudulent schemes that will separate the victims from their money. The categories,
moreover, are apparently intended to be jointly exhaustive – the application note defines
what mass-marketing “means,” not merely what it “includes.”
Defendants’ behavior clearly does not fall into either of the first two categories.
First, neither the straw buyers nor the initial homeowners were solicited to “purchase
goods or services,” since real estate is not “goods.” See Black’s Law Dictionary (9th ed.
2009) (defining “goods” as “[t]angible or movable personal property other than money,”
and citing U.C.C. § 2-105(1)). Second, this case does not involve a contest or
sweepstakes. It is not clear, however, whether the radio and television ads fall into the
third category, because the record does not clearly establish whether the straw buyers
were invited to “invest for financial profit.” As defendants now describe the scheme, the
straw buyers were never genuinely solicited to invest in property; rather, they were
recruited to lend their names to a paper transaction in which they simply purchased and
flipped the property in a way that purportedly would earn them a risk-free fee. Moreover,
defendants’ scheme does not fit the typical mold in which advertisements or sales calls
12
use false representations induce victims to invest money in high-risk or nonexistent
ventures, leading to the loss of their investments.
Nevertheless, the record contains evidence that could be found to meet the
Sentencing Commission’s definition. At least some advertisements and follow-up calls
advised the targeted consumers that they could obtain a financial profit. Moreover, at
least some straw buyers put their own credit at risk, which might be deemed an
investment. Indeed, at trial, one witness testified that after hearing the various radio and
television advertisements, a number of potential buyers called MTC and specifically
expressed an interest in buying houses for investment purposes.
On remand, therefore, the district court should consider two questions: first,
whether the defendants engaged in “mass-marketing” within the meaning of the relevant
Guideline, as interpreted by the commentary; and second, if the defendants did engage in
“mass-marketing,” whether the consumers who were the target of that mass-marketing
were also in some sense victims of the overall criminal scheme, i.e., whether they were
injured by the scheme.4
We add one final observation. The application of the mass-marketing
enhancement presents significant issues of interpretation about which reasonable people
can disagree, as evidenced by Judge Straub’s thoughtful dissent. The Sentencing
4
We note that defendants have not challenged the substantive reasonableness of their sentences.
On remand, whether nor not the mass-marketing enhancement technically applies, the district
court remains free to impose whatever sentence it finds is the lowest sentence necessary to
accomplish the purposes of sentencing, after considering the factors set forth in 18 U.S.C.
§ 3553(a), including the correct Guidelines range.
13
Commission can easily clarify whether it intends the enhancement to apply whenever
techniques of mass solicitation are employed in some way in connection with a scheme,
or whether it is intended to apply in a narrower category of consumer/investment/lottery
frauds in which a fraudulent scheme is marketed to large numbers of potential victims.
We urge the Commission to do so.
II. Loss amount
Defendants also argue that the district court erroneously calculated the amount of
loss attributable to the fraud, resulting in an inaccurately high Guideline recommendation.
In reviewing the district court’s loss calculation, we “must determine whether the trial
court’s method of calculating the amount of loss was legally acceptable.” United States
v. Rutkoske, 506 F.3d 170, 178 (2d Cir. 2007) (internal quotation marks and brackets
omitted). We review legal conclusions, such as interpretations of the Guidelines, de novo
and findings of fact for clear error. United States v. Turk, 626 F.3d 743, 747 (2d Cir.
2010).
Defendants raise four arguments against the district court’s loss amount
calculation. We find none of them persuasive.
Defendants first argue that the district court erred by failing to calculate both the
intended and actual loss from the scheme. This argument misapprehends the district
court’s duty at sentencing. Guidelines § 2B1.1(b)(1) provides for stepped, cumulative
two-level enhancements based on the amount of loss attributable to a scheme.
Application Note 3(A) to that section (which, under Stinson, is binding unless an
14
unreasonable interpretation of the Guideline or contrary to law, see 508 U.S. at 45)
defines “loss” as “the greater of actual loss or intended loss.” U.S.S.G. § 2B1.1 app. note
3(A)(i). “‘Actual loss’ means the reasonably foreseeable pecuniary harm that resulted
from the offense,” id., while “‘[i]ntended loss’ (I) means the pecuniary harm that was
intended to result from the offense; and (II) includes intended pecuniary harm that would
have been impossible or unlikely to occur (e.g., as in a government sting operation, or an
insurance fraud in which the claim exceeded the insured value),” id. app. note 3(A)(ii).
Given that the court must apply the greater of the actual or intended loss amount,
defendants have not explained how the district court’s alleged failure to calculate actual
loss could have prejudiced them. Either the actual loss would have been less than the
intended loss, and therefore irrelevant, or the actual loss would have been greater than the
intended loss, in which case the court’s failure redounded to defendants’ benefit. Without
deciding whether the court’s procedure might in some abstract sense constitute “error,”
we note that procedural error in sentencing is subject to harmless error analysis, see
United States v. Jass, 569 F.3d 47, 68-69 (2d Cir. 2009), and any such error would
certainly be harmless here.
Second, and relatedly, defendants argue that at least in a case involving fraudulent
loans secured by collateral, the sentencing court must use the actual loss rather than the
intended loss. This contention is directly contrary to the Guidelines commentary, which,
as set forth above, defines loss as the greater of the actual or intended loss. See U.S.S.G.
§ 2B1.1 app. note 3(A)(i). Nothing in the text or application notes gives the slightest
15
indication that a special exception applies in mortgage fraud cases. Defendants argue,
however, that our decision in Turk and the Fifth Circuit’s decision in United States v.
Goss, 549 F.3d 1013, 1016-19 (5th Cir. 2008), establish such an exception. Defendants
misread those cases.
In Turk, the defendant falsely told individual investors that she would record
mortgages against property she owned in order to secure large loans, but in fact she did
not record the mortgages, leaving the investors’ loans unsecured. 626 F.3d at 745. She
also took out bank loans that were secured by recorded mortgages in the same property.
Id. When the properties were later sold in bankruptcy, the unsecured investors lost
virtually all of their money. Id. at 745-46. As a result, the investors’ actual losses were
nearly the full value of the loans, and the key question on appeal was whether the losses
to the investors were foreseeable. Id. at 748-51. The value of the property was irrelevant:
either the investors’ unrecorded mortgages constituted no interest in the property at all, or
that interest was essentially worthless. Id. at 748-49. Thus, it was clear that the actual
loss was the full loan value, which was necessarily at least as great as the intended loss.
The court therefore did not have occasion to consider the intended loss. Id. at 748 n.3.
Turk therefore does not establish defendants’ proposed rule.
While the Goss court appears at one point to equate deduction of the value of
collateral with an “actual loss” calculation,5 the case holds simply that a sentencing court
5
See Goss, 549 F.3d at 1018 (“[W]hether to deduct collateral – whether to employ an actual or
an intended-loss calculation – will depend upon the specific facts at hand.”).
16
must deduct the value of real-property collateral from loss and cannot ignore that value,
as the sentencing court had done in that case. See 549 F.3d at 1015-17. Here, of course,
the sentencing court did reduce the loss amount by what it found to be the value of the
collateral: The court deducted the price at which defendants had purchased each property
in the short sale transactions. It is clear, then, that Goss does not alter the general rule
that the greater of actual or intended loss is the appropriate measure of loss for purposes
of the Guidlines, and equally clear that the district court’s calculation here was fully
consistent with Goss.
Third, defendants argue that the district court’s calculation of intended loss was
erroneous because it failed to account for defendants’ subjective expectations and intent.
Defendants rely principally on United States v. Confredo, in which this Court held that a
defendant must be permitted “to persuade the sentencing judge that the loss he intended
was less than the face amount of the loans.” 528 F.3d 143, 152 (2d Cir. 2008). Initially,
we note that Confredo dealt with fraud in unsecured loans, id. at 151, so the district court
in that case had no occasion to deduct the value of retained security from the amount of
loss. At any rate, the district court in this case did not prevent Henry or Lacey from
introducing evidence that he subjectively intended a lesser quantum of loss. To the extent
that defendants argued that they intended or expected a lesser loss, however, the district
court was entitled to find them not credible. While defendants are entitled to present
evidence of their intentions, Confredo in no way limits the role of objective evidence of
intended loss. As the First Circuit noted in United States v. McCoy, which approved a
17
similar loss calculation on similar facts, the term “intended loss” may fairly be read to
encompass a defendant’s reasonable expectation of loss. 508 F.3d 74, 79 (1st Cir. 2007).
The difference between the short-sale price and the mortgage amount constitutes
objective evidence of the amount that a reasonable defendant might expect a bank would
lose in the transaction.
Fourth, defendants contend that the district court erroneously evaluated the
collateral. Instead of relying on the short-sale price, defendants argue that the court
should have valued each property according to appraisals submitted to the lender banks
when the straw buyers purchased the properties and obtained mortgages. Because the
short-sale prices were affected by the sellers’ distressed circumstances, defendants argue,
those prices do not represent the true market value of the properties, and so should not be
used in calculating the loss intended in each transaction.
In support of this argument, defendants point to Application Note 3(E)(ii) to
U.S.S.G. § 2B1.1, which states that “[i]n a case involving collateral pledged or otherwise
provided by the defendant,”
[l]oss shall be reduced by . . . the amount the victim has
recovered at the time of sentencing from disposition of the
collateral, or if the collateral has not been disposed of by that
time, the fair market value of the collateral at the time of
sentencing.
Defendants argue that the short-sale price is not “the fair market value of the collateral at
the time of sentencing,” since it represents a fire-sale price.
18
As with any finding of fact, this Court reviews the district court’s loss
determination for clear error, United States v. Uddin, 551 F.3d 176, 180 (2d Cir. 2009),
and we find none here. The sentencing court is only required to make a “reasonable
estimate of the loss.” U.S.S.G. § 2B1.1 app. note 3(C); see also United States v. Coppola,
671 F.3d 220, 249-50 (2d Cir. 2012). Furthermore, because the sentencing court “is in a
unique position to assess the evidence and estimate the loss based upon that evidence,”
the sentencing court’s “loss determination is entitled to appropriate deference.” U.S.S.G.
§ 2B1.1 app. note 3(C). That observation is certainly applicable where, as here, the
sentencing judge also presided over a weeks-long trial and heard a great deal of live
testimony.
As an initial matter, we agree with several of our sister Circuits that although
Application Note 3(E)(ii) “accurately describes the calculation of actual loss,” the note
“cannot be mechanically followed where intended loss is higher,” since the larger
intended amount is a better “measure for the defendant’s culpability” than is the actual
loss. McCoy, 508 F.3d at 79, citing United States v. McCormac, 309 F.3d 623, 628-29
(9th Cir. 2002) and United States v. Williams, 292 F.3d 681, 686 (10th Cir. 2002); see
also United States v. Innarelli, 524 F.3d 286, 290-91 (1st Cir. 2008). Thus, a sentencing
court need not apply the fair market value as an offset in calculations of intended loss; it
need only offset the loss amount by however much it finds the defendant did not intend
loss. In the case of a loan secured by an interest in real property, the sentencing court
may – given appropriate evidence – draw the inference that the intended loss should
19
include an offset for the value of the property. But that is because it would be unlikely
for even a nefarious defendant to intend the improbable result that real property be
destroyed or otherwise rendered valueless.
Here, the district court’s method was a reasonable estimate of the intended loss.
The district court was entitled to find that the short-sale prices, rather than the appraisals
made for the mortgages, were an appropriate offset for at least two reasons: First, the
short-sale prices were negotiated, not fraudulent; second, evidence showed that the
appraisals at the time of the fraudulent mortgages may not have been reliable.
First, at sentencing, the government argued that the trial evidence supported the
view that the short-sale prices represented a negotiated, arm’s-length price. For example,
Mosheh Flowers, an MTC employee, testified that the short-sale prices were themselves
based on third-party appraisals of the properties. He also testified that the sellers
sometimes rejected MTC’s initial offers, requiring MTC to increase the price. While a
fact-finder would be entitled to take into account the distressed circumstances of
“underwater” property owners in deciding whether a short-sale price accurately reflects
the fair market value of the property, no rule of law disqualifies such a sale as evidence of
the fair market value. It is hardly clear error for a sentencing judge to conclude that a
price negotiated by a willing buyer and a willing seller is better evidence of the property’s
value than an appraisal by a purported expert.
Second, there was evidence that the appraisals that MTC submitted to obtain the
mortgages may have been unreliable. For example, Flowers testified that MTC
20
employees sometimes paid off appraisers in order to persuade them to raise the assessed
value of the properties, increasing the mortgage value and thus MTC’s fraudulent
proceeds. In the case of one of the properties, 1236 Tinton Avenue, the bank found
MTC’s appraisal was inaccurate and required a new assessment which revised the value
downward. The appraisals also left out the short-sale price that MTC had just paid to
obtain the property, even though the appraisal forms required the appraiser to include all
transactions on the property within the last 12 months. The district court was entitled to
assess the credibility of the appraisals, and to make its own determination of the fair
market value of the properties.
We need not decide whether the district court’s method would be appropriate in
every similar fraud case. Here, based on the record before the court, we find no error in
its loss calculation.
III. Restitution
The government concedes that the district court erred by failing to credit any of the
value of the collateral in formulating its restitution orders. We agree, and will remand the
case for a recalculation of the restitution amount. We note that unlike the loss calculation
for the purposes of sentencing, which may incorporate a merely intended loss in order to
punish a culpable defendant, restitution is designed to make the victim whole, see
Innarelli, 524 F.3d at 293-94, and must therefore be based only on the actual loss caused
by the scheme. See 18 U.S.C. § 3663A(b)(1); see also United States v. Marino, 654 F.3d
310, 319-20 (2d Cir. 2011) (“[R]estitution is authorized . . . only for the victim’s actual
21
loss.” (internal citation and quotation marks omitted)). To determine restitution, the
district court will therefore have to make a new loss calculation based only on the banks’
actual losses.
CONCLUSION
For the foregoing reasons, the sentences and restitution orders are VACATED.
The cases are REMANDED to the district court for further proceedings consistent with
this opinion.
22
STRAUB, Circuit Judge, concurring in part and dissenting in part:
I respectfully dissent from the majority’s holding that the mass-marketing
enhancement under U.S. Sentencing Guidelines § 2B1.1(b)(2)(A)(ii) “applies only if the
audience of the mass-marketing was in some sense victimized by the scheme,” Maj. Op. at 3, and
therefore also dissent from the majority’s remand to the District Court for further consideration
of potential victimization of the audience of the mass-marketing in this case.1
The District Court imposed a two-level mass-marketing enhancement because the
offense employed radio and television marketing to recruit straw buyers and owners of distressed
properties and because the use of such marketing was integral to the success of the scheme. The
majority concludes that such application was proper only if the targets of the mass-marketing
were also somehow victimized by the offense.
I disagree and conclude that if the “offense”—all acts that occurred during its
commission or in its preparation—employed mass-marketing, then the enhancement under
U.S.S.G. § 2B1.1(b)(2)(A)(ii) applies. See U.S.S.G. § 1B1.3(a)(1) (defining “offense” to include
“all acts” . . . “that occurred during the commission of the offense of conviction, [or] in
preparation for that offense”). Because the radio and television advertisements here were acts
that occurred “in preparation for” and “during the commission” of the “foreclosure rescue
scheme,” I conclude the mass-marketing enhancement applies. The majority’s interpretation—
requiring that the victim of the fraud also be the target of the mass-marketing—adds a condition
that is not directly grounded in the text of the Guidelines.
1
Because the District Court should pass on the issue in the first instance, I join the majority’s instruction that, on
remand, the District Court should determine “whether the defendants engaged in ‘mass-marketing’ within the
meaning of the relevant Guideline, as interpreted by the commentary.” (Maj. Op. at 14.) However, I also note (and
agree with) the majority’s observation that “the [trial] record contains evidence that could be found to meet the
Sentencing Commission’s definition” of mass-marketing, Maj. Op. at 14, under the third enumerated category listed
in the Guidelines commentary (“invest for financial profit”). See U.S.S.G. § 2B1.1 cmt. n.4(A).
DISCUSSION
The majority concludes that “[i]t is not enough that a scheme may be advanced by
the use of mass marketing techniques; a scheme is committed through mass-marketing only
when the mass marketing is directed toward individuals who will be harmed by the scheme.”
(Maj. Op. at 9 (emphases in original).) The majority arrives at this conclusion by arguing that
the text surrounding § 2B1.1(b)(2) focuses on victims, and therefore the mass-marketing
enhancement must apply only when the marketing is targeted to victims. (Maj. Op. at 9–10.)
For the reasons stated below, I disagree that it was error for the District Court to
apply the mass-marketing enhancement without first determining that the straw buyers were
victims of defendants’ mass-marketing.
A. Applicable Law
Under the Sentencing Guidelines, “if the offense . . . was committed through
mass-marketing,” the offense level is increased two levels. See U.S.S.G. § 2B1.1(b)(2)(A)(ii).
“Mass-marketing,” in turn, means “a plan, program, promotion, or campaign that is conducted
through solicitation by telephone, mail, the Internet, or other means to induce a large number of
persons to (i) purchase goods or services; (ii) participate in a contest or sweepstakes; or
(iii) invest for financial profit.” Id. § 2B1.1 cmt. n.4(A). The Sentencing Commission intended
this enhancement to “apply in cases in which mass-marketing has been used to target a large
number of persons, regardless of the number of persons who have sustained an actual loss or
injury” as a result of the offense. See U.S.S.G. app. C, amend. 617 (2003).
Significantly, the Guidelines provide a broad definition of “offense.” According
to Section 1B1.1, Application Note 1(H), “‘Offense’ means the offense of conviction and all
2
relevant conduct under § 1B1.3 (Relevant Conduct) . . . .” U.S.S.G. § 1B1.1 cmt. n.1(H)
(emphasis added). Section 1B1.3 defines “Relevant Conduct” and reads as follows:
Unless otherwise specified, (i) the base offense level where the guideline specifies
more than one base offense level, (ii) specific offense characteristics and (iii)
cross references in Chapter Two, and (iv) adjustments in Chapter Three, shall be
determined on the basis of the following:
(1)(A) all acts and omissions committed, aided, abetted, counseled,
commanded, induced, procured, or willfully caused by the defendant; and
(B) in the case of a jointly undertaken criminal activity (a criminal plan,
scheme, endeavor, or enterprise undertaken by the defendant in concert
with others, whether or not charged as a conspiracy), all reasonably
foreseeable acts and omissions of others in furtherance of the jointly
undertaken criminal activity,
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. § 1B1.3(a) (emphases added).
Two other Circuits have addressed the issue of whether, in order for the mass-
marketing enhancement to apply, the mass-marketing must target victims of the offense.
Defendants cite to United States v. Miller, where the Eighth Circuit upheld the sentencing court’s
determination that the mass-marketing enhancement did not apply because the victims of the
defendant’s scheme were the lenders—i.e., financial institutions that issued loans based on
fraudulent documents submitted by the defendant—and not the consumers to whom the
defendant’s television commercials were directed. See 588 F.3d 560, 568 (8th Cir. 2009). The
Eighth Circuit reasoned that
[i]n sustaining [defendant’s] objection to the mass-marketing enhancement, the
district court explained, “I don’t think the crime itself was committed through
mass-marketing. The crime was the fraud that was committed on the lenders.
And there was no[ ] mass-marketing involved in that. . . . ” The language of the
enhancement clearly states that the offense itself must involve mass-marketing in
order for the enhancement to apply. See USSG § 2B1.1(b)(2)(A)(ii). [Defendant]
3
participated in a mortgage fraud conspiracy involving fraud on financial
institutions, not consumers, thus, we find no error in the district court’s analysis.
Accordingly, the district court did not err in denying the mass-marketing
enhancement under USSG § 2B1.1(b)(2)(A)(ii).
Id. (internal citation omitted)
By contrast, the Fifth Circuit concluded that the mass-marketing enhancement
applies as long as mass-marketing was used in the perpetration of the “offense.” United States v.
Mauskar, 557 F.3d 219, 233 (5th Cir. 2009). The defendant in Mauskar paid “recruiters” to
bring patients to his office so he could perform unnecessary medical procedures and falsely
certify that they needed motorized wheelchairs. Id. at 224. Durable medical equipment
companies used the certificates of medical necessity issued by Mauskar to obtain payments from
Medicare and Medicaid for medically unnecessary wheelchairs. Id. Mauskar argued that the
sentencing court erred in applying the mass-marketing enhancement because he was not
personally involved in the marketing. The Fifth Circuit rejected this argument and concluded:
The plain language of the Guidelines forecloses Mauskar’s argument that the
mass-marketing enhancement does not apply to his conduct. The mass-marketing
enhancement is applicable if an “offense . . . was committed through mass-
marketing.” U.S.S.G. § 2B1.1(b)(2)(A)(ii). “‘Offense’ means the offense of
conviction and all relevant conduct under § 1B1.3 (Relevant Conduct) unless a
different meaning is specified or is otherwise clear from the context.” U.S.S.G.
§ 1B1.1 cmt. n.1(H). And “in the case of a jointly undertaken criminal activity,”
relevant conduct includes “all reasonably foreseeable acts and omissions of others
in furtherance of the jointly undertaken criminal activity.” U.S.S.G.
§ 1B1.3(a)(1)(B).
Id. at 233.
As the Fifth Circuit subsequently elaborated, “[i]mplicit in the Mauskar court’s
holding is the determination that the mass marketing efforts of the recruiters who escorted
beneficiaries to the defendant’s medical clinic was ‘relevant conduct’ constituting part of the
‘offense’ of health care fraud, such that the mass marketing enhancement applied to the
4
recruiters’ co-defendant.” United States v. Isiwele, 635 F.3d 196, 205 (5th Cir. 2011) (rejecting
defendant’s argument “that a mass marketing enhancement should not apply because his mass
marketing efforts were not directed at the victims of the crime—here, Medicare/Medicaid.” Id.
at 204.).
B. Analysis
The majority concludes that for the mass-marketing enhancement to apply, “[i]t is
not enough that a scheme may be advanced by the use of mass marketing techniques; a scheme is
committed through mass-marketing only when the mass marketing is directed toward individuals
who will be harmed by the scheme.” (Maj. Op. at 9 (emphases in original).) According to the
majority, “an offense is ‘committed through mass-marketing’ when mass-marketing is used to
recruit or deceive victims of the offense, not when mass-marketing targeted at audiences other
than victims is used in connection with the fraud in some other, more tangential manner.” (Maj.
Op. at 9 (emphasis in original).)
This reasoning draws a distinction between an offense that is “advanced by”
mass-marketing and one “committed through” mass-marketing. The disagreement here centers
on the interpretation of the terms “offense” and “committed through.” The majority focuses on
the latter phrase, concluding that the enhancement does not apply because the offense was not
“committed through” mass-marketing. (Maj. Op. at 8-9.) If the term “offense” included only the
actual sending of false mortgage applications and defrauding the mortgage lenders, then the
mass-marketing enhancement would not apply because the “offense,” i.e., the sending of false
applications, was not accomplished by means of mass-marketing. But such an interpretation
ignores that the Guidelines define the term “offense” broadly, so as to include the entire scheme.
5
The language of the Guidelines is clear: the enhancement applies “[i]f the
offense . . . was committed through mass-marketing.” See U.S.S.G. § 2B1.1(b)(2)(A)(ii).
“‘Offense’ means the offense of conviction and all relevant conduct,” see U.S.S.G. § 1B1.1 cmt.
n.1(H) (emphasis added), including “all acts and omissions committed, aided, abetted,
counseled, commanded, induced, procured, or willfully caused by the defendant . . . that
occurred during the commission of the offense of conviction, [or] in preparation for that offense”
and “in the case of a jointly undertaken criminal activity (a criminal plan, scheme, endeavor, or
enterprise undertaken by the defendant in concert with others, whether or not charged as a
conspiracy), all reasonably foreseeable acts . . . of others in furtherance of the jointly undertaken
criminal activity.” U.S.S.G. § 1B1.3(a) (emphases added).
Here, the offense of conviction is a “foreclosure rescue scheme” that proceeded in
three steps. First, defendants used radio advertisements to attract both straw buyers and owners
of distressed properties who were facing foreclosure. MTC advertised that anyone who bought a
house through it could receive up to $50,000. Second, after locating these properties, defendants
negotiated with the homeowner’s lender to sell the distressed properties to a corporate entity at
low prices through a “short sale” transaction. Finally, defendants turned to their portfolio of
buyer profiles, created from leads from MTC’s radio advertisements, and identified buyers to
purchase the distressed properties (the straw buyers). Defendants worked with the straw buyers
to apply for mortgage loans to fund the purchases, submitting fraudulent loan applications that,
among other things, overstated the buyers’ income and assets. It was ostensibly a good deal for
all parties involved: for the straw buyers, the defendants claimed that this was a good
investment, and for the homeowners falling behind on their payments and their lenders, it was a
way to sell the distressed property, albeit at less than the balance owed on the loan.
6
Thus, defendants perpetrated their offense through the use of radio marketing.
The “commission of the offense of conviction” involved running radio advertisements to attract
straw buyers and owners of the properties, which was part and parcel of the scheme to defraud.
Indeed, the Indictment set the stage by alleging that “[a]s part of the scheme to defraud, [the
foreclosure rescue scheme] targeted homeowners who had fallen behind on their mortgage
payments and whose homes were facing foreclosure by . . . running radio advertisements and
appearing on radio programs representing that she was a foreclosure specialist and had the ability
to keep a home from going into foreclosure.” (See Indictment ¶ 8 (emphasis added)). In other
words, the use of radio advertisements to attract straw buyers and property owners was “relevant
conduct” constituting part of the “offense” of the foreclosure rescue scheme, such that the mass-
marketing enhancement applied. Not only did the use of radio advertisements occur “during the
commission of offense,” but the mass-marketing also clearly assisted defendants “in preparation
for” the ultimate fraud against the mortgage lenders because MTC built up its portfolio of buyer
profiles from leads that came from these advertisements. See U.S.S.G. § 1B1.3(a) (defining
relevant conduct to include “all acts and omissions” “that occurred during the commission of the
offense of conviction . . . [or] in preparation for that offense”).
I recognize that not all fraudulent schemes will rely on mass-marketing.
However, the foreclosure rescue scheme at issue in this case did rely on mass-marketing in the
execution and preparation of the offense; the scheme was committed through and accomplished
by means of mass-marketing because the radio advertisements were an integral part of
identifying straw buyers to apply for mortgages and obtaining mortgage loans through fraudulent
loan applications. Accordingly, because the Guidelines define the term “offense” broadly, and
because the offense here was committed through mass-marketing, I conclude that the District
7
Court did not err in applying the mass-marketing enhancement without first finding that the
targets of the mass-marketing were also victims.
The majority reasons that the text surrounding § 2B1.1 supports its conclusion
that the victim must also be the recipient of the mass-marketing in order for the enhancement to
apply. Because “[a]ll the other subsections of § 2B1.1(b)(2) base enhancements on the number
of victims,” “[t]he pattern thus strongly suggests that the enhancement scheme is designed to
measure the scope of the wrong by the number of victims.” (Maj. Op. at 9.) I disagree. In
contrast to the other subsections of § 2B1.1(b)(2) that focus on the number of victims, the mass-
marketing enhancement instead focuses on the method of solicitation employed in the offense.
This is evident based on the deliberate omission of the term “victim” in § 2B1.1(b)(2)(A)(ii),
which reads as follows:
If the offense –
(A) (i) involved 10 or more victims; or (ii) was committed through mass-
marketing, increase by 2 levels;
(B) involved 50 or more victims, increase by 4 levels; or
(C) involved 250 or more victims, increase by 6 levels.
U.S.S.G. § 2B1.1(b)(2) (emphases added).
As is apparent from the text—and unlike the other subsections—the mass-
marketing enhancement at issue here does not limit its application to victims. “Applying the rule
of statutory construction ‘inclusio unius est exclusio alterius’—that to express or include one
thing implies the exclusion of the other,” United States v. Tappin, 205 F.3d 536, 540 (2d Cir.
2000), it follows that the drafters did not intend to limit the application of the mass-marketing
enhancement to offenses involving certain numbers of victims, since they omitted the term
“victims” from U.S.S.G. § 2B1.1(b)(2)(A)(ii), and included it in other subsections of that same
8
provision. Unlike the other subsections that measure harm by the number of victims, the mass-
marketing enhancement focuses on the particular solicitation method employed by defendants.
See United States v. Fredette, 315 F.3d 1235, 1244 n.4 (10th Cir. 2003) (“[T]he enhancement for
multiple victims goes to the ultimate harm caused by the defendant’s conduct, while the
enhancement for mass-marketing concerns the scope and sophistication of the defendant’s
fraud.”).
Furthermore, the history of § 2B1.1(b)(2)(A)(ii) indicates that it was intended to
apply where the mass-marketing was used to target large numbers of persons—not necessarily
just victims. The Sentencing Commission has noted that “[t]he mass-marketing alternative
enhancement also will continue to apply in cases in which mass-marketing has been used to
target a large number of persons, regardless of the number of persons who have sustained an
actual loss or injury.” U.S.S.G. app. C, amend. 617 (2003) (emphasis added); see also United
States v. Hall, 604 F.3d 539, 545 (8th Cir. 2010) (“[T]he United States Sentencing Commission
stated it intends the mass-marketing enhancement ‘to apply in cases in which mass-marketing
has been used to target a large number of persons, regardless of the number of persons who have
sustained an actual loss or injury.’” (quoting U.S.S.G. app. C, amend. 617 (2003))). Such is the
case here: defendants employed radio advertisements to target large numbers of persons as part
of their scheme to defraud, attracting straw buyers and owners of distressed properties as a result.
Accordingly, the enhancement applies “regardless of the number of persons who have sustained
an actual loss or injury.”2
2
The majority attempts to distinguish the instant case from Mauskar, where the mass-marketing enhancement was
applied in the absence of any finding that the marketing efforts were directed at Medicare/Medicaid (the victims of
the offense). The majority states that “although [Medicare and Medicaid recipients] did not sustain any actual
financial loss under the Guidelines definition, and were thus not ‘victims’ as defined by the Guidelines, . . . they
were deceived into ordering unneeded and in some cases unprovided goods or services” and therefore “a plausible
argument can be made that the deceived patients were victimized by the scheme.” (Maj. Op. at 12 (internal citations
9
CONCLUSION
For foregoing reasons, I disagree with the majority’s holding because it applies a
limitation not grounded in the text of the Guidelines. Section 2B1.1(b)(2)(A)(ii) of the
Guidelines does not require that the victim and the recipient of the mass-marketing be the same
person or entity; I fail to see—and the majority fails to cite to—any other Guidelines provision
that requires the victim of the fraud to also be the recipient of the mass-marketing. Rather, as
long as mass-marketing is used in the “offense”—meaning the offense of conviction and all
relevant conduct including “all acts . . . that occurred during the commission of the offense of
conviction . . . [or] in preparation for that offense”—then the enhancement applies. Because
radio advertisements were employed “during the commission of” and “in preparation for” the
offense, I conclude the District Court did not err in applying the mass-marketing enhancement.
Accordingly, I respectfully dissent. I join in the remainder of the Court’s opinion.
omitted.) For the reasons stated by the majority itself, see id. at 10–11, the same is true here, but I disagree that such
a finding is necessary to support application of the mass-marketing enhancement in either case.
10
United States v. Lacey, Henry
Court: Court of Appeals for the Second Circuit
Date filed: 2012-11-07
Citations: 699 F.3d 710
Copy CitationsCombined Opinion