United States v. Krenning

UNITED STATES COURT OF APPEALS
FIFTH CIRCUIT

____________

No. 94-30726
____________

UNITED STATES OF AMERICA,

Plaintiff-Appellee,
Cross-Appellant,

versus

EARL W. KRENNING, RICHARD P. RUSHTON,
and STEVEN L. SCHMITTZEHE,

Defendants-Appellants,
Cross-Appellees.

Appeal from the United States District Court
for the Eastern District of Louisiana

August 22, 1996

Before REAVLEY, KING, and EMILIO M. GARZA, Circuit Judges.

EMILIO M. GARZA, Circuit Judge:

Defendants Earl W. Krenning, Richard P. Rushton, and Steven L.

Schmittzehe appeal their convictions for multiple counts of mail

fraud and for conspiracy to commit mail fraud. The Government

appeals the sentences imposed by the district court. We affirm the

Defendants’ convictions, vacate their sentences, and remand for

resentencing.

I
 In late 1987, Krenning and a group of investors formed a new

Louisiana insurance company called Sovereign Fire and Casualty

Insurance Company (“Sovereign Insurance”). The investors also set

up a holding company, Sovereign Holding, Inc., which owned 100% of

the stock in Sovereign Insurance. The Commissioner of Insurance at

that time required a new domestic casualty insurance company to

have an initial reserve surplus of $1,500,000. In return for a

contribution of certain assets from a prior company and $150,000

cash, Krenning received a twenty-five percent interest in the

holding company, equal in value to $500,000. Krenning also allowed

one of the investors, Robert Dutschke, to contribute, in lieu of

cash, a building whose stated value, $685,000, was greatly

exaggerated.1 Finally, in order to obtain the certificate of

authority to operate an insurance company from the Commissioner of

Insurance, who retained discretion to deny an application even

after the $1,500,000 minimum had been met, Krenning delivered to

the Commissioner’s home in New Orleans an envelope containing

$10,000 in cash.2 The Commissioner of Insurance signed the

certificate of authority four days later.

Sovereign Insurance began operating in early 1988, with

1
In fact, the building had no net equity value once the mortgages were
subtracted from its true value. Dutschke was convicted of conspiracy and mail
fraud in March of 1995.
2
In an attempt to cover up the obvious bribe, Krenning later submitted
a letter to the Deputy Commissioner falsely naming a number of individuals who
supposedly contributed portions of the $10,000 to the Insurance Commissioner’s
campaign fund.

-2-
Krenning as president and chief executive officer. Rushton was a

senior financial officer and headed up the claims department. The

company sold primarily “10/20/10" automobile insurance, which was

the minimum liability insurance required under Louisiana law. From

the beginning, there was considerable internal dissention between

Krenning and his fellow investors regarding the running of the

company. Sovereign Insurance’s performance suffered, and the

company’s inability to maintain adequate reserves meant that it

would soon not be permitted to sell further insurance policies. By

the end of 1988, the shareholders in Sovereign Holding had reached

a consensus that Krenning should be forced to resign. Instead,

Krenning and two other shareholders, including Rushton, offered to

purchase the entirety of the dissatisfied shareholders’ stock and

debentures for roughly $1,500,000. After an initial attempt to

purchase the stock using stolen bank drafts, Krenning eventually

successfully executed the transaction using approximately $900,000

of Sovereign Insurance’s own funds.

Having depleted the company’s reserve fund, Krenning and

Rushton immediately began to experience difficulties in making

timely claims payments. At this time, Sovereign Insurance had

close to a $1 million reserve deficiency which needed to be

addressed before the annual statement was prepared as of the year’s

end. Without an adequate reserve surplus, the Commissioner of

Insurance would soon take control of the company and shut it down.

Accordingly, Krenning and Rushton carried out the first of several

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schemes designed to place worthless or overvalued assets on the

books of Sovereign Insurance in order to conceal the deficiency

from the Department of Insurance, and thereby continue to operate

as an insurance company.

In what became known as the “Falcon Pipeline Deal,” a

promissory note was executed indicating that Sovereign Insurance

loaned Falcon Pipeline Company, Inc. (“Falcon”) $500,000, although

no loan was actually made. The loan was collateralized by a

mortgage on a pipeline owned by Falcon and valued by Krenning and

Rushton on Sovereign Insurance’s quarterly and annual financial

statement at over $750,000. The pipeline had not been in use since

1984, and the estimated salvage value of the pipeline and attached

easements, leases, compressors and dehydration facility was put at

$18,000. At the same time, Falcon purchased a two-year 9%

debenture note from Sovereign Holdings on basically the same terms

and conditions as the promissory note between Falcon and Sovereign

Insurance.

A side agreement was created between Sovereign Insurance and

Falcon which indicates the true nature of the transaction between

the parties. Falcon paid Sovereign Holdings nothing for the

debenture note. Instead, Sovereign Holding made two monthly

payments to Falcon. The first, an interest payment, was

immediately retransmitted from Falcon to Sovereign Insurance under

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the first loan agreement.3 The second, a $5,000 monthly management

fee, was retained by Falcon as its payment for the insurance

company’s use of the pipeline asset. In essence, Sovereign

Insurance “rented” the asset from Falcon. The debt appeared only

on Sovereign Holding’s balance sheet, while Sovereign Insurance was

able to show an asset, falsely valued at $500,000. The side

agreement also provided that the pipeline mortgaged to Sovereign

Insurance under the first loan agreement was not at risk if the

insurance company should become impaired or insolvent. Finally,

the entire series of transactions were then backdated to December

of 1988, in order to allow Sovereign Insurance to claim the asset

on its 1988 annual statement to the Commissioner of Insurance.4

Before Sovereign Insurance was finally liquidated in May of

1991, several similar deals were executed placing overvalued or

nonexistent assets on the books of Sovereign Insurance. All of

these subsequent deals took place after Schmittzehe joined

Sovereign Insurance in April of 1989 as comptroller and, later, as

treasurer. The “Marble Falls Deal” involved the “renting” of a

$450,000 mortgage secured by a convention center in Arkansas, the

appraisal value of which, $1.9 million, was based on conditions

which were never fulfilled. Here too a side agreement was executed

3
Sovereign Holding also made principal payments to Falcon four times
a year, which were similarly retransmitted to Sovereign Insurance under the first
loan agreement.
4
There was also evidence that the 1988 annual statement was
manipulated to further obscure the reserve deficiency.

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explaining the true nature of the transaction, and assurances were

given that the property was not at risk in the event of foreclosure

on the underlying note. As the situation grew more dire, the

Defendants resorted to listing four mortgage-backed debenture notes

totalling $1.28 million (the “Torrey Deal”). Although the Torrey

Deal was in fact never completed, the Defendants specifically

stated on the 1990 annual statement that it had been “consummated.”

The Defendants also listed four short-term promissory notes

supposedly collateralized by Bay Agency/Sunbelt property, totalling

$720,000. These notes, which had no real economic substance, were

backdated for purposes of listing them on the 1990 annual

statement, and were then later canceled by Schmittzehe. In this

manner Sovereign Insurance continued to operate, selling insurance

policies until the company finally collapsed in May of 1991.

Several thousand unpaid claims totalling an estimated $9 million

remained unpaid following the liquidation of Sovereign Insurance.

A grand jury issued a fifteen count indictment charging

Krenning, Rushton, Schmittzehe, Robert V. Bishop, Sr., and George

C. Cavin, Jr., with mail fraud, in violation of 18 U.S.C. § 1341

(counts one through thirteen); and with conspiracy to commit mail

fraud, in violation of 18 U.S.C. § 371 (count fifteen).5 A jury

returned a verdict of guilty as to Krenning, Rushton, and

5
Count fourteen charged all the defendants except for Cavin with money
laundering, in violation of 18 U.S.C. § 1957, and was dismissed shortly before
trial.

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Schmittzehe on all counts. Bishop and Cavin were acquitted on all

counts. Krenning received a sentence of seventy-one months, and

was ordered to pay $100,000 in restitution. Schmittzehe received

a sentence of thirty-seven months, and was ordered to pay $50,000

in restitution. Rushton received a sentence of forty-six months,

and was ordered to pay $10,000 in restitution. All defendants

filed timely notices of appeal. The Government also filed a timely

notice of appeal, alleging errors in sentencing.

II

All three Defendants challenge their convictions on

sufficiency of the evidence grounds. Accordingly, we must

determine “whether, after viewing the evidence and all inferences

that may reasonably be drawn from it in the light most favorable to

the prosecution, any reasonably minded jury could have found that

the defendant was guilty beyond a reasonable doubt.” United States

v. Leahy, 82 F.3d 624, 633 (5th Cir. 1996) (internal quotation

marks omitted). The evidence need not exclude every reasonable

theory of innocence or be entirely inconsistent with every

conclusion except that of guilt. Id. If a reasonable trier of

fact could find the defendant guilty beyond a reasonable doubt

based on the evidence presented at trial, we will affirm the

conviction. United States v. Smith, 930 F.2d 1081, 1085 (5th Cir.

1991); United States v. Triplett, 922 F.2d 1174, 1177 (5th Cir.),

cert. denied, 500 U.S. 945, 111 S. Ct. 2245, 114 L. Ed. 2d 486

-7-
(1991).

A

Krenning contends that there was insufficient evidence to

support his convictions for mail fraud and conspiracy to commit

mail fraud. A conviction for conspiracy under 18 U.S.C. § 371

requires the Government to prove beyond a reasonable doubt (1) an

agreement between two or more persons, (2) to commit a crime

against the United States, and (3) an overt act in furtherance of

the agreement committed by one of the conspirators. United States

v. Mackay, 33 F.3d 489, 493 (5th Cir. 1994). A conviction for mail

fraud under 18 U.S.C. § 1341 requires the Government to prove

beyond a reasonable doubt (1) a scheme to defraud, (2) which

involved use of the mails, and (3) that the mails were used for the

purpose of executing the scheme. United States v. Pazos, 24 F.3d

660, 665 (5th Cir. 1994). Each use of the mails to further a

scheme to defraud constitutes a separate offense under the statute.

Id.

Krenning concedes that there was sufficient evidence presented

at trial from which a reasonable jury could find beyond a

reasonable doubt that he participated in a scheme to defraud and

that he had the specific intent to commit fraud. Krenning argues,

however, that there was no evidence that the mailings were made for

the purpose of executing the scheme to defraud because the jury

never had the opportunity to actually read the mailings which

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formed the basis for the mail fraud conviction. We find no merit

to this argument.

All the parties stipulated at trial that the mailings

described in counts one through thirteen of the indictment did

occur on or about the dates indicated therein.6 The indictment

stated that the Defendants caused to be mailed “insurance policies,

applications, finance agreements, claims, premium payments, premium

deposits, and insurance related materials” to the thirteen

individuals listed in counts one through thirteen.7 These

documents were essential to Sovereign Insurance’s task of selling

insurance. By “renting” overvalued assets and reporting them on

the annual statements to the Commissioner of Insurance, the

Defendants were able to disguise the insolvent nature of their

insurance company. Without these mailings to the insureds,

however, the Defendants would equally not have been able to

continue selling worthless insurance policies, the financial object

of their scheme.8 Accordingly, we conclude that there was

6
The parties further stipulated that the individuals named in counts
one through eight and ten through thirteen were policy holders with Sovereign
Insurance, and that claims submitted by those policyholders to Sovereign
Insurance remained unpaid.
7
See United States v. Green, 494 F.2d 820, 824 (5th Cir.) (“One
'causes' the mails to be used when one does an act with knowledge that the use
of the mails will follow in the ordinary course of business, or where such use
can reasonably be foreseen, even though not actually intended . . . .”) (internal
citation and quotation marks omitted), cert. denied, 419 U.S. 1004, 95 S. Ct.
325, 42 L. Ed. 2d 280 (1974).

8
See Pereira v. United States, 347 U.S. 1, 8, 74 S. Ct. 358, 363, 98
L. Ed. 435 (1954) (holding that the mailing element is satisfied by a mailing
which is “incident to an essential part of the scheme”).

-9-
sufficient evidence for the jury to conclude that the mailings in

counts one through thirteen were in furtherance of the Defendants’

scheme to defraud.

Alternatively, Krenning argues that these mailings fall within

the “innocent mailings” or “statutory duty” exception to the mail

fraud statute first recognized by the Supreme Court in Parr v.

United States, 363 U.S. 370, 80 S. Ct. 1171, 4 L. Ed. 2d 1277

(1960). There is no general rule that innocent or routine mailings

cannot supply the mailing element under the statute. Schmuck v.

United States, 489 U.S. 705, 714-15, 109 S. Ct. 1443, 1450, 103 L.

E. 2d 734 (1989). Rather, the exception in Parr applies only where

the mailings are both not themselves false or fraudulent, and their

mailing is required by law. United States v. Curry, 681 F.2d 406,

412 (5th Cir. 1982). Parr involved the mailing of legitimate tax

notices and receipt of tax payments by a Texas school board engaged

in embezzling some of the tax money collected by the school

district. The Supreme Court reversed the defendants’ mail fraud

convictions based on these mailings, in part because the defendants

were required by state law to cause the tax related mailings.

Parr, 363 U.S. at 390-91, 80 S. Ct. at 1183-84.

This Court has previously noted, however, that in Parr the tax

mailings would have occurred irrespective of the defendants’ scheme

to embezzle the school district’s money. United States v. Bright,

588 F.2d 504, 509 (5th Cir.), cert. denied, 440 U.S. 972, 99 S. Ct.

-10-
1537, 59 L. Ed. 2d 789 (1979). In Bright, we concluded that the

“innocent mailings” exception does not apply where the legal

requirement to make the mailings is triggered by the fraudulent

scheme. See id. at 509-10 (“If [the defendants] had not decided to

defraud the estate of their late cousin, they would not have had to

comply with the state law requiring them to file the creditors’

notice.”); see also Schmuck, 489 U.S. at 713 n.7, 109 S. Ct. at

1449 n.7 (distinguishing Parr by noting that the mailing of the tax

documents “would have been made regardless of the defendants’

fraudulent scheme,” whereas the mailings at issue were “derivative”

of Schmuck’s fraudulent scheme and “would not have occurred but for

that scheme”).

Even assuming there existed a statute requiring Sovereign

Insurance to mail the policies and related documents to the

insureds, we conclude that none of the mailings would have occurred

but for the Defendants’ scheme to fraudulently disguise the

insurance company’s reserve deficiency. Absent this scheme,

Sovereign Insurance would have been shut down by the Commissioner

as early as the beginning of 1989. The continuing need to mail

policies out to new customers was therefore entirely derivative of

the Defendants’ decision to fraudulently operate an insolvent

insurance company. Accordingly, we find that the “innocent

mailings” exception to the mail fraud statute does not apply to the

Defendants’ conduct. Having reviewed the record, we conclude that

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there was sufficient evidence from which a reasonable jury could

have found Krenning guilty of mail fraud and conspiracy to commit

mail fraud.

B

Rushton argues that there was insufficient evidence to

establish that he had the requisite intent under both the

conspiracy and substantive mail fraud counts. A conviction for

conspiracy under 18 U.S.C. § 371 requires that the Government prove

beyond a reasonable doubt that “the defendant knew about the

conspiracy and that he voluntarily became part of it.” United

States v. Mackay, 33 F.3d 489, 493 (5th Cir. 1994) (internal

quotation marks omitted). The Government may prove the conspiracy

through circumstantial evidence, and the agreement need not be

formal or spoken. Id. The Government must do more, however, than

merely “pile inference upon inference upon which to base the

conspiracy charge.” Id. (internal quotation marks omitted).

Likewise, the mail fraud conviction requires that the Government

prove “not only that there was fraudulent activity but also that

the defendant had a conscious knowing intent to defraud.” United

States v. Kreimer, 609 F.2d 126, 128 (5th Cir. 1980) (internal

quotation marks omitted).

Evidence presented at trial established that Rushton

participated in the formation of Sovereign Insurance and was

involved in the buy out of the dissatisfied investors which led to

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the insurance company’s insolvency. Rushton warned the investors

that Krenning was trying to use the company’s own money to buy them

out, and yet he later joined Krenning in the buy out and signed

documents detailing the true nature of the transaction. As

corporate secretary for both Sovereign Holdings and Sovereign

Insurance, Rushton signed the debenture note given to Falcon, as

well as several checks making payment of the debt service and

management fees. Rushton also signed the 1988 annual statement

listing the falsely inflated Falcon Pipeline mortgage.

The evidence also established that in April of 1989, Rushton

requested a real estate appraisal for the Dutschke building, which

has been listed on the 1988 annual statement as having a gross

value of $685,000 and a net equity value of $250,000. The

appraisal, sent to Rushton the following month, valued the Dutschke

building at $305,000, which meant that it had no net equity value.

Nonetheless, Rushton continued to sign quarterly statements and the

1989 annual statement declaring the Dutschke building to have a net

equity value of $250,000.

Finally, Rushton was an active participant in the Torrey Deal;

his sale of stock and his signature on the documents were required

to complete the deal. Even though the documents were never signed,

and the deal was never completed, Rushton signed the 1990 annual

statement to the Commissioner of Insurance attesting that the

Torrey Deal had been completed and listing related mortgages

totalling $1.28 million. In May of 1991, Rushton signed an amended

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1990 annual statement removing the Torrey mortgages.

Based on this evidence, we find that Rushton’s involvement in

the fraud conspiracy is neither so slight nor so tenuous as to make

unreasonable an inference of knowing complicity. Accordingly, we

conclude that there was sufficient evidence for the jury to find

beyond a reasonable doubt that Rushton knew about the conspiracy

and voluntarily became a part of it. We also conclude that there

was sufficient evidence from which a reasonable jury could find

that Rushton had a conscious knowing intent to defraud.

C

Schmittzehe contends that there was insufficient evidence to

support his convictions for mail fraud and conspiracy to commit

mail fraud. Once the Government has produced evidence of an

illegal conspiracy, “it need only introduce ‘slight evidence’ to

connect an individual defendant to the common scheme.” United

States v. Leahy, 82 F.3d 624, 633-34 (5th Cir. 1996) (internal

quotation marks omitted); United States v. Duncan, 919 F.2d 981,

991 (5th Cir. 1990), cert. denied, 500 U.S. 926, 111 S. Ct. 2036,

114 L. Ed. 2d 121 (1991). The evidence, however, must be

sufficient for a reasonable jury to infer that the defendant knew

about the conspiracy and voluntarily agreed to join. Duncan, 919

F.2d at 991.

Schmittzehe, who was a CPA, joined Sovereign Insurance in

April of 1989 as its comptroller; by the filing of the September

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1989 quarterly statement, he was acting as treasurer, a position he

maintained until the insurance company was liquidated. In the

middle of May that year, Schmittzehe signed, as assistant

treasurer, the March 31, 1989 quarterly statement declaring the

Falcon Pipeline to be valued at $750,000. He also signed as

treasurer the 1989 and 1990 annual statements listing the Falcon

Pipeline mortgage as a valid asset.

Schmittzehe was the sole representative of Sovereign Holdings

and Sovereign Insurance present at the closing of the Marble Falls

Deal in July of 1989. During the closing, Schmittzehe affirmed to

John Nielsen, whose company owned the Marble Falls mortgaged

property, that the debenture would offset the note and mortgage

held by Sovereign Insurance if Sovereign Holdings stopped paying,

and that therefore the property was not at risk of foreclosure.9

The Government also submitted a letter and some handwritten notes

written by Schmittzehe which established that he was intimately

familiar with the structure and purpose of these “renting”

9
Nielsen had also insisted that an additional paragraph to this effect
be inserted in the mortgage agreement:

It is understood and agreed that upon termination of this agreement
and tender of Sovereign Holdings, Inc.’s 10 (ten) year 12% (twelve
per cent) [sic] Debenture by Marble Falls Resort and Campground,
Inc., Sovereign Holdings, Inc. shall satisfy the debt of Marble
Falls Resort and Campground, Inc. then owing to Sovereign Fire and
Casualty Insurance Company and cause the release of any property
securing said debt.

At the closing, Schmittzehe signed the mortgage agreement on behalf of Sovereign
Holdings. Although the closing took place during the first week of July, the
documents were all backdated to June 30, 1989.

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transactions.10 In reviewing the proposed documents for the Torrey

Deal, Schmittzehe noted several problems, including the fact that

Sovereign Insurance’s legal counsel was uncomfortable giving any

legal opinion regarding the transaction since he had knowledge of

potential backdating of documents and felt such conduct could be an

ethics violation. Schmittzehe’s suggested “Remedy” was: “Get rid

of all these requirements, get an unethical lawyer, or get a lawyer

who doesn’t know the entire transaction.”11 Finally, Schmittzehe

also signed the 1990 annual return listing the Torrey Deal

mortgages as “consummated” even though the deal was never

completed.

Viewing the record in the light most favorable to the jury

verdict, we find that there is ample evidence from which a

reasonable jury could infer that Schmittzehe knew about the

10
The letter concluded, “The net result of this transaction was to
create $400,000 of additional capital in the insurance company without requiring
additional funds.”
11
Schmittzehe argues that the district court erred in admitting his
handwritten notes regarding problems with the proposed Torrey Deal documents.
We review a district court’s decision that evidence is relevant and admissible
for abuse of discretion. United States v. Castillo, 77 F.3d 1480, 1496 (5th Cir.
1996). In addition to the problem of Sovereign Insurance’s legal counsel feeling
uncomfortable giving legal opinions regarding the transaction, the notes also
address various other aspects of the initial debenture purchase agreement,
including the fact that, as drafted, it did not maintain the fiction that the
Torrey Deal consisted of separate agreements. The district court concluded that
the handwritten notes were admissible to demonstrate Schmittzehe’s state of mind,
that is, his specific intent to defraud. The district court also concluded that
the evidence was relevant to rebut Schmittzehe’s defense that he relied on advice
of counsel. We agree. See, e.g., United States v. Cohen, 544 F.2d 781, 786 (5th
Cir.) (concluding letter was admissible to show state of mind), cert. denied, 431
U.S. 914, 97 S. Ct. 2175, 53 L. Ed. 2d 224 (1977); United States v. Baumgarten,
517 F.2d 1020, 1027-28 (8th Cir.) (same), cert. denied, 423 U.S. 878, 96 S. Ct.
152, 46 L. Ed. 2d 111 (1975). Accordingly, we find that the district court did
not abuse its discretion in admitting Schmittzehe’s handwritten notes.

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conspiracy and voluntarily decided to join.12 Accordingly, we hold

that there was sufficient evidence from which a reasonable jury

could conclude that Schmittzehe was guilty beyond a reasonable

doubt of mail fraud and conspiracy to commit mail fraud.

III

Rushton and Schmittzehe both contend that the district court

erred in not granting their motion for severance, pursuant to FED.

R. CRIM. P. 14. When defendants have been properly joined under

FED. R. CRIM. P. 8(b), “a district court should grant a severance

under Rule 14 only if there is a serious risk that a joint trial

would compromise a specific trial right of one of the defendants,

or prevent the jury from making a reliable judgment about guilt or

innocence.” Zafiro v. United States, 506 U.S. 534, ___, 113 S. Ct.

933, 938, 122 L. Ed. 2d 317 (1993). Accordingly, where joinder is

proper in the first instance, we will review only for abuse of

discretion. United States v. McCord, 33 F.3d 1434, 1452 (5th Cir.

1994), cert. denied, __ U.S. __, 115 S. Ct. 2558, 132 L. Ed. 2d 812

(1995).

Rule 8(b) provides that “[t]wo or more defendants may be

charged in the same indictment or information if they are alleged

12
Schmittzehe argues that he at all times merely relied on the advice
of Sovereign Insurance’s legal counsel and other experts involved in structuring
these deals. The evidence presented at trial on this issue was conflicting,
however, and the jury was entitled to reject Schmittzehe’s defense. Likewise,
the jury was entitled to credit the testimony of Nielsen as to what Schmittzehe
represented at the closing of the Marble Falls Deal, even though the Defendants
presented substantial impeachment evidence with respect to this witness.

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to have participated in the same act or transaction or in the same

series of acts or transactions constituting an offense or

offenses.” FED. R. CRIM. P. 8(b). Furthermore, “Such defendants

may be charged in one or more counts together or separately and all

of the defendants need not be charged in each count.” Id. The

interests of efficiency and justice have led to a preference in the

federal system for joint trials of defendants who are indicted

together. Zafiro, 506 U.S. at ___, 113 S. Ct. at 937.

Schmittzehe argues that because he joined Sovereign Insurance

well after the $10,000 bribe and the stock buy out of the

dissatisfied investors had taken place, neither of these events had

any probative bearing on any crimes alleged against him personally.

Schmittzehe also contends that the indictment alleged, and the

proof submitted at trial established, multiple conspiracies: (1) to

obtain a certificate of authority to sell insurance; (2) to gain

control of the company through the buy out; and (3) to provide for

the continued operation of the insurance company through fraudulent

reporting. Rule 8(b) does not require, however, that each

defendant have participated in the same act or acts. United States

v. Dennis, 645 F.2d 517, 520 (5th Cir. Unit B), cert. denied, 454

U.S. 1034, 102 S. Ct. 573, 70 L. Ed. 2d 478 (1981); see also United

States v. Lindell, 881 F.2d 1313, 1318 (5th Cir. 1989) (“The fact

that an indictment does not charge each appellant with active

participation in each phase of the conspiracy does not constitute

-18-
misjoinder.”), cert. denied, 496 U.S. 926, 110 S. Ct. 2621, 110 L.

Ed. 2d 1056 (1990). All that is required is “a series of acts

unified by some substantial identity of facts or participants.”

Dennis, 645 F.2d at 520 (internal quotation marks omitted). The

indictment did not allege multiple conspiracies, but rather a

single scheme with multiple purposes.13 Moreover, the evidence of

how Sovereign Insurance was established and Krenning and Rushton

gained control through the buy out was relevant to establishing the

overall scheme to defraud. Accordingly, we find that joinder was

proper under Rule 8(b).

Relief from prejudicial joinder may be had under Rule 1414 if

the defendant can demonstrate “specific and compelling prejudice.”

McCord, 33 F.3d at 1452. In order to demonstrate that the district

court abused its discretion by failing to grant a motion for

13
The indictment charged:

The primary objects and purposes of the conspiracy, among
others, were:
1. To obtain a certificate of authority to sell insurance
within the State of Louisiana.
2. To provide for the continued operation of Sovereign Fire
even though Sovereign Fire was unable to timely pay valid claims
submitted to the company.
14
Rule 14 states in pertinent part:

If it appears that a defendant or the government is prejudiced
by a joinder of offenses or of defendants in an indictment or
information or by such joinder for trial together, the court may
order an election or separate trials of counts, grant a severance of
defendants or provide whatever other relief justice requires.

FED. R. CRIM. P. 14. As the Supreme Court has noted, “Rule 14 does not require
severance even if prejudice is shown; rather, it leaves the tailoring of the
relief to be granted, if any, to the district court’s sound discretion.” Zafiro,
506 U.S. at __, 113 S. Ct. at 938.

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severance, the defendant must show that: “(1) the joint trial

prejudiced him to such an extent that the district court could not

provide adequate protection; and (2) the prejudice outweighed the

government’s interest in economy of judicial administration.” Id.

Both Schmittzehe and Rushton have failed to make the necessary

showing.

Rushton essentially argues that the disparity between his own

culpability and that of his co-defendants, along with the

complexity of the case, prejudiced him to such an extent that his

trial was rendered unfair. However, “A quantitative disparity in

the evidence does not by itself warrant severance nor does the mere

presence of a spillover effect.” United States v. Mitchell, 31

F.3d 271, 277 (5th Cir.), cert. denied, __ U.S. __, 115 S. Ct. 455,

130 L. Ed. 2d 363 (1994). We also find that the district court

cured whatever risk there was of prejudice with proper jury

instructions.15 See Zafiro, 506 U.S. at __, 113 S. Ct. at 939

15
Among other things, the district court carefully instructed the jury
that it must give separate consideration to the evidence as to each defendant,
that each charge and the evidence pertaining to it should be considered
separately, and the fact that the jury may find a particular defendant guilty or
not guilty as to one of the offenses charged should not control the jury’s
verdict as to any other offense charged. The district court also instructed the
jury that the mere fact that Defendants Schmittzehe, Rushton, and Krenning
operated and managed Sovereign Insurance together, and associated with others
employed there, and discussed common aims and interests with others, did not
necessarily establish proof of a conspiracy.
Moreover, we note, without expressing any approval, that at the specific
request of Schmittzehe, the district court also instructed the jury that it could
not consider against Schmittzehe, Bishop, or Cavin any of the evidence of the
$10,000 payment to the Commissioner of Insurance, or the alleged stock purchase
from the other shareholders. Cf. United States v. Netterville, 553 F.2d 903, 912
(5th Cir. 1977) (holding that once a defendant becomes associated with a
conspiracy he is responsible for all of the acts of the conspiracy, even those
which occurred before or after his association with the conspiracy), cert.

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(concluding that similar instructions were sufficient to cure any

possibility of prejudice); Mitchell, 31 F.3d at 276 (same).

Finally, the acquittal of Bishop and Calvin supports the inference

that the jury was able to sort and consider separately the evidence

against each of the defendants. See McCord, 33 F.3d at 1452

(concluding that the acquittal of each of the defendants on at

least one count reflected that the jury was able to consider the

evidence separately as to each defendant and each count). Rushton

and Schmittzehe have failed to demonstrate specific and compelling

prejudice. Accordingly, we hold that the district court did not

abuse its discretion in denying their Rule 14 motion for severance.

IV

Schmittzehe argues that district court erred by denying his

motion for a new trial based on newly discovered evidence. Such

motions are generally disfavored by the courts, and we view them

with great caution. United States v. Pena, 949 F.2d 751, 758 (5th

Cir. 1991). We will reverse the district court’s denial of a

motion for a new trial only when there is a “clear abuse of

discretion.” Id. Newly discovered evidence may warrant a new

trial if: (1) the evidence was discovered after trial; (2) the

failure to discover the evidence was not due to lack of diligence

by the defendant; (3) the evidence is material, and not merely

cumulative or impeaching; and (4) the evidence would probably lead

denied, 434 U.S. 1009, 98 S. Ct. 719, 54 L. Ed. 2d 752 (1978).

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to an acquittal. United States v. Williams, 985 F.2d 749, 757 (5th

Cir.), cert. denied, 510 U.S. 950, 114 S. Ct. 148, 126 L. Ed. 2d

110 (1993).

Schmittzehe contends that the settlement documents in a

separate lawsuit filed by the Commissioner of Insurance against

John Nielsen, seeking to enforce Sovereign Insurance’s mortgage and

foreclose on the Marble Falls property, reveal that the Government

took a position contrary to the one they asserted at trial.

Schmittzehe claims that these documents disclose for the first time

that the Internal Revenue Service took the position that Sovereign

Insurance had a valid first lien and mortgage on the Marble Falls

property. Contrary to what Schmittzehe argues, however, the

Government argued at his trial that the Marble Falls deal was

fraudulent, not because the insurance company had failed to obtain

a first lien on the property, but because the parties agreed that

the property was not at risk, and because the value of the property

was overstated. Moreover, the Defendants presented evidence that

Sovereign Insurance had obtained a valid first lien on the

property. They also brought out on cross-examination that the IRS

had filed an answer in the aforementioned lawsuit acknowledging

that its tax lien was inferior to the Commissioner of Insurance’s

lien on the property. Although Schmittzehe could not have

discovered the settlement documents prior to trial, we find that

this evidence of the Government’s position with respect to

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Sovereign Insurance’s lien on the Marble Falls property is merely

cumulative and would not likely result in an acquittal for

Schmittzehe if he were given a new trial. Accordingly, we hold

that the district court did not abuse its discretion in denying

Schmittzehe’s motion for a new trial based on newly discovered

evidence.16

V

The Government cross-appeals from the district court’s loss

calculation for purposes of sentencing under U.S.S.G. § 2F1.1.17

The Presentence Report (“PSR”) recommended that the base offense

level for each Defendant be increased by 15 levels based on a

calculated loss of $14,867,934.26.18 The district court rejected

the PSR’s recommendation and instead appeared to calculate the loss

attributable to each defendant based on the false or inflated value

of the “rented” or nonexistent asset reported on Sovereign

16
Finally, Schmittzehe and Rushton contend that the district court
lacked subject matter jurisdiction in this case because of § 2(b) of the
McCarran-Ferguson Act, 15 U.S.C. § 1012(b). This argument is foreclosed by
United States v. Cavin, 39 F.3d 1299, 1305 (5th Cir. 1994) (holding that the
preemption provision of the Act does not apply to a fraud prosecution because
there is no conflict with state insurance regulation).
17
In cases involving fraud or deceit, the Sentencing Guidelines provide
for a graduated increase in the base offense level according to the amount of the
loss. See U.S.S.G. § 2F1.1.
18
Defense counsel stipulated at trial that this loss amount included
the entire projected loss to the Louisiana Insurance Guarantors Association,
including outstanding claims, unpaid premiums and estimated settlements on future
claims.

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Insurance’s annual and quarterly statements.19 We give considerable

deference to a district court’s factual findings at sentencing, and

we will reverse only if they are clearly erroneous. United States

v. Robichaux, 995 F.2d 565, 571 (5th Cir.), cert. denied, 510 U.S.

922, 114 S. Ct. 322, 126 L. Ed. 2d 268 (1993). A factual finding

is not clearly erroneous as long as it is plausible in light of the

record read as a whole. Id. The commentary to § 2F1.1 states that

“the loss need not be determined with precision. The court need

only make a reasonable estimate of the loss, given the available

information.” U.S.S.G. § 2F1.1, comment. (n.8).

In deciding whether the district court arrived at a reasonable

estimate of the loss attributable to the Defendants’ fraud scheme,

we must first determine whether the court used an acceptable method

of calculating the amount of loss. See United States v. Henderson,

19 F.3d 917, 927-29 (5th Cir.) (remanding for resentencing because

19
In its “Statement of Reasons for Imposing Sentence,” the district
court merely stated that as to loss amount, “the Court determines that Mr.
Krenning should be held liable for losses stemming from the Marble Falls
transaction, the Bay-Sunbelt transaction, the Falcon Pipeline transaction, the
Dutschke building, and the Torrey Group mortgages, for a total of $2.8 million
losses to the company.” Based on this loss amount, the district court added 13
levels to Krenning’s base offense level.
The district court determined that “Mr. Rushton should be held liable for
losses stemming from the Marble Falls transaction, the Bay-Sunbelt transaction,
the Falcon Pipeline transaction, the Dutschke building, and the Torrey Group
Mortgages, for a total of $2.8 million in losses to the company.” Based on this
loss amount, the district court added 13 levels to Rushton’s base offense level.
Finally, the district court determined that “Mr. Schmittzehe should be held
liable only for losses stemming from the Marble Falls transaction and the Bay-
Sunbelt transaction, for a total of $850,000 losses to the company.” Based on
this loss amount, the district court added 11 levels to Schmittzehe’s base
offense level. We note that the district court did not explain why, based on its
method of calculating loss, it decided not to attribute the Torrey Group
transaction “losses” to Schmittzehe as well.

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the district court used a legally flawed method of calculating the

loss), cert. denied, __ U.S. __, 115 S. Ct. 207, 130 L. Ed. 2d 137

(1994). The Sentencing Guidelines clearly contemplate that the

method used to calculate the amount of loss will vary according to

the type of fraud at issue in the case. See U.S.S.G. § 2F1.1,

comment. (n.7) (providing examples of fraud where additional

factors are to be considered in determining the loss or intended

loss).20 The method used to calculate the amount of loss, however,

must bear some reasonable relation to the actual or intended harm

of the offense.21 Whatever method is employed, the focus of the

loss calculation should be on the harm caused to the victim of the

fraud. United States v. Orton, 73 F.3d 331, 333 (11th Cir. 1996).

Having carefully reviewed the record, we conclude that the

20
The commentary to the Sentencing Guidelines also provides that the
reasonable estimate of loss:

for example, may be based on the approximate number of victims and
an estimate of the average loss to each victim, or on more general
factors, such as the nature and duration of the fraud and the
revenues generated by similar operations. The offender’s gain from
committing the fraud is an alternative estimate that ordinarily will
underestimate the loss.

U.S.S.G. § 2F1.1, comment. (n.8)
21
See U.S.S.G. § 2F1.1, comment. (n.7) (stating that “if an intended
loss that the defendant was attempting to inflict can be determined, this figure
will be used if it is greater than the actual loss”); see also Henderson, 19 F.3d
at 928 (concluding that the Sentencing Guidelines refer to actual intent, not
constructive intent); United States v. Tedder, 81 F.3d 549, 551 (5th Cir. 1996)
(“Where the defendant intends to repay the loans, then actual loss, rather than
intended loss, is the appropriate basis for calculating loss under § 2F1.1.”).
Although the Sentencing Guidelines recognize the offender’s gain from committing
the fraud as a possible alternative method of calculating the loss amount, see
United States v. Smithson, 49 F.3d 138, 143 (5th Cir. 1995), the commentary to
the Guidelines also states, “The offender’s gain from committing the fraud is an
alternative estimate that ordinarily will underestimate the loss.” U.S.S.G.
§ 2F1.1, comment. (n.8).

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district court’s method of calculating the amount of loss in this

case bears no reasonable relation to the actual or intended harm of

the offense. In its “Statement of Reasons for Imposing Sentence,”

the district court stated that it was holding the Defendants liable

for “losses to the company.”22 The district court does not explain

how the “losses to the company” are related to the harm inflicted

on the insureds. Moreover, we are unable to determine how the

falsely inflated values of the “rented” assets))which the district

court appears to equate with “losses to the company”))relate to the

loss caused by the Defendants’ fraud scheme. Defendants argue that

the district court’s calculation method was consistent with

Application Note 7(a) to § 2F1.1 for “Fraud Involving

Misrepresentation of the Value of an Item or Product Substitution.”

U.S.S.G. § 2F1.1, comment. (n.7). Where a fraud involves the

misrepresentation of the value of an item, the Sentencing

Guidelines suggest that the loss is the amount by which the item

was overvalued. Id. This method of loss calculation, however, is

appropriate only where the overstated value is the actual object of

the fraud, for example through a sale or exchange of the overvalued

item.23

22
See supra note 19.
23
See U.S.S.G. § 2F1.1, comment. (n.7):

Where, for example, a defendant fraudulently represents that stock
is worth $40,000 and the stock is worth only $10,000, the loss is
the amount by which the stock was overvalued (i.e., $30,000). In a
case involving a misrepresentation concerning the quality of a
consumer product, the loss is the difference between the amount paid

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 In the present case, the overvalued or nonexistent mortgage

properties were merely the mechanism through which the Defendants

disguised the insolvent condition of their insurance company and

thereby continued to sell insurance policies to the public. The

harm to the public, and ultimately the State of Louisiana, was the

losses to individual insureds caused by the sale of insurance

policies backed by an insolvent insurance company. The district

court’s method of calculating the amount of loss is therefore

flawed, in this case, to the extent that it focuses on the “losses

to the company” or the overstated value of the assets reported on

Sovereign Insurance’s annual and quarterly statements.24

Accordingly, we reverse the district court’s findings as to loss

amount and remand for resentencing.

VI

The Government also cross-appeals from the district court’s

refusal to apply, as to each defendant, a four-point enhancement

for jeopardizing the safety and soundness of a financial

institution, under U.S.S.G. § 2F1.1(b)(6). We review de novo the

by the victim for the product and the amount for which the victim
could resell the product received.
24
Cf. United States v. Hill, 42 F.3d 914, 918-19 (5th Cir.) (affirming
district court’s determination that loss amount was the fraudulent face value of
securities, rather than amount paid by victims to “rent” the worthless
securities), cert. denied, __ U.S. __, 116 S. Ct. 130, 133 L. Ed. 2d 79 (1995);
United States v. Chappell, 6 F.3d 1095, 1101 (5th Cir. 1993) (affirming the
district court’s determination that loss amount was stated value of the
fraudulent checks plus their average value times the fifty-one blank checks also
attributable to defendants), cert. denied, __ U.S. __, 114 S. Ct. 1235, 127 L.
Ed. 2d 579 (1994).

-27-
district court’s application of the Sentencing Guidelines, and we

will affirm the district court’s factual findings unless they are

clearly erroneous. United States v. Clements, 73 F.3d 1330, 1338

(5th Cir. 1996).

Section 2F1.1(b)(6) provides: “If the offense substantially

jeopardizes the safety and soundness of a financial institution .

. . increase by 4 levels. If the resulting offense level is less

than level 24, increase to level 24.” U.S.S.G. § 2F1.1(b)(6)(A).

The commentary to § 2F1.1(b)(6) provides:

An offense shall be deemed to have “substantially
jeopardized the safety and soundness of a financial
institution” if, as a consequence of the offense, the
institution became insolvent; substantially reduced
benefits to pensioners or insureds; was unable on demand
to refund fully any deposit, payment, or investment; was
so depleted of its assets as to be forced to merge with
another institution in order to continue active
operations; or was placed in substantial jeopardy of any
of the above.

U.S.S.G. § 2F1.1(b)(6), comment. (n.15). The district court,

explicitly following the reasoning of Judge Mitchell in United

States v. McDermott, declined to apply the four-point enhancement

in the context of an institution that was already insolvent when

the criminal conduct occurred. In an unpublished opinion, we

rejected the reasoning of Judge Mitchell on this issue. See United

States v. McDermott, No. 93-3603 (5th Cir. June 5, 1995) (vacating

sentence and remanding for resentencing under § 2F1.1(b)(6)).

Application note 15 to § 2F1.1(b)(6) lists four types of

damage flowing from the offense which may be deemed to constitute

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“jeopardizing the safety and soundness of a financial institution,”

only one of which is insolvency.25 From the record, it does not

appear that the district court considered the other three bases for

enhancement under § 2F1.1(b)(6). The district court’s failure to

consider all of the bases for apply § 2F1.1(b)(6) requires us to

vacate the Defendants’ sentences. For example, based on the

record, we find that there is substantial evidence to support a

finding that Defendants’ offense “substantially reduced benefits to

. . . insureds.” Because we conclude that the district court

applied the wrong legal standard, we need not at this point

consider the Government’s argument that the district court was

clearly erroneous in its implicit finding that the Defendants did

not cause the insolvency of Sovereign Insurance. Upon remand, the

district court will have another opportunity to determine whether

Defendants’ fraud scheme caused the insurance company to become

insolvent. Accordingly, we vacate the Defendants’ sentences and

remand to the district court for specific findings on the

application of § 2F1.1(b)(6) under the correct legal standard.

VII

For the foregoing reasons, we AFFIRM the Defendants’

convictions, VACATE their sentences, and REMAND for resentencing

25
Cf. United States v. Bullard, 13 F.3d 154, 158 n.10 (5th Cir. 1994)
(noting that application note 10 to § 2B1.1(b)(7)(A), which is worded identically
to note 15 to § 2F1.1(b)(6)(A), “does not limit the meaning of the terms
‘substantially jeopardizes the safety and soundness of a financial institution’
to the situation where the institution becomes insolvent as a consequence of the
defendant’s conduct”).

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consistent with this opinion.

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