IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_______________
m. 99-20906
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UNITED STATES OF AMERICA,
Plaintiff-Appellee,
VERSUS
HAROLD DEAVOURS,
Defendant-Appellant.
_________________________
Appeal from the United States District Court
for the Southern District of Texas
_________________________
July 13, 2000
Before JOLLY, SMITH, and BARKSDALE, I.
Circuit Judges. Deavours worked as a financial consultant
for Smith Barney, Inc., and helped to open an
JERRY E. SMITH, Circuit Judge: account at Smith Barney in the name of Elder-
way Investments, Ltd. (“Elderway”), into
Harold Deavours pleaded guilty to wire which foreign investors wired money. When
fraud and aiding and abetting related to his in- an investor transferred money into the Smith
volvement in a “Ponzi scheme.” He challenges Barney account, Deavours signed a “receipt-
the method by which the district court calcu- of-funds” letter; he knew he lacked authority
lated the amount of total loss and objects to to sign the letters and knew that his co-defen-
the failure to find that he played only a minor dants were using these letters to cause inves-
role in the scheme. Finding no merit in Dea- tors to transfer money for participation in what
vours’s challenges, we AFFIRM. the investors believed to be an investment pro-
gram backed by Smith Barney. The court determined that the amount of
“intended loss” was $52,954,538, the total
Smith Barney’s credit department ordered amount of 235 wire transfers received by the
a halt to all transfers coming into Elderway’s defendants. Accordingly, under the sentencing
account. Deavours, however, continued there- guidelines, the base offense level of six was
after to sign receipt-of-funds letters on behalf increased by seventeen. See United States
of Smith Barney. The letters signed by Dea- Sentencing Commission, GUIDELINES MAN-
vours after that date induced investors to UAL, § 2F1.1(b)(1)(R). Deavours objects that
transfer approximately $40 million to bank the amount of the loss should be reduced by
accounts, allegedly for the benefit of Smith $29,375,666SSthe sum returned to investors in
Barney. Deavours knew that Smith Barney the form of payments, represented as profits to
did not have any connection to the accounts further promote the Ponzi schemeSSto approx-
and was not receiving any of the $40 million. imately $24,000,000, and that, under U.S.S.G.
§ 2F1.1(b)(1)(Q), his offense level should be in
Deavours pleaded guilty to wire fraud and creased by only sixteen.
aiding and abetting. The court held, over Dea-
vours’s objection, that his crime occasioned Although the determination of loss is a fac-
the loss of about $53 million, representing the tual finding reviewed for clear error, the
amount fraudulently received from “clients,” court’s choice of the method by which losses
not reduced by the amount paid back as a con- are determined involves an application of the
tinuation of the scheme. The court found this sentencing guidelines, which is reviewed
to be the “intended loss” of the scheme. The de novo. United States v. Saacks, 131 F.3d
court also rejected Deavours’s request that the 540, 542-43 (5th Cir. 1997). As we have
offense level be decreased by two in recogni- explained,
tion of his allegedly minor role in the offense.
The government then asked for, and the court [i]n a Ponzi scheme, a swindler promises
granted, a four-level downward departure. a large return for investments made with
him. The swindler actually pays the
II. promised return on the initial invest-
“Review of sentences imposed under the ments in order to attract additional in-
guidelines is limited to a determination wheth- vestors. The payments are not financed
er the sentence was imposed in violation of through the success of the underlying
law, as a result of an incorrect application of venture but are taken from the corpus of
the sentencing guidelines, or was outside of the newly attracted investments. The
the applicable guideline range and was unrea- swindler then takes an appropriate time
sonable.” United States v. Matovsky, 935 F.2d to abscond with the outstanding invest-
719, 721 (5th Cir. 1991). “We accept district ments.
court fact findings relating to sentencing unless
clearly erroneous, but review de novo applica- United States v. Cook, 573 F.2d 281, 282 n.3
tion of the Guidelines.” United States v. Fitz- (5th Cir. 1978). For sentencing-guideline pur-
hugh, 984 F.2d 143, 146 (5th Cir. 1993). poses, “‘[l]oss’ means the value of the prop-
erty taken. . . .” U.S.S.G. § 2B1.1, comment.
III. (n.2); see § 2F1.1, comment. (n.8).
2
We know of no case from this circuit dis- Lauer can be distinguished, because the
cussing calculation of losses related to a Ponzi sums returned to investors were returned after
scheme for purposes of § 2F1.1(b)(1). In the scheme was detected, see 148 F.3d at 768,
United States v. Lauer, 148 F.3d 766 (7th Cir. but the court’s logic applies just as forcefully
1998), however, the court undertook the rele- to this case, despite the distinction. Deavours
vant inquiry: and the other defendants returned money to
those they had defrauded, not to compensate
[T]he author of a Po nzi scheme might the victims for their losses, or to extricate
not intend that any of his investors lose themselves from wrongdoing, but conversely
anythingSSmight intend that the scheme to extend their criminal activities and the pro-
continue until the end of the world, in fitability thereofSSand to place yet more prop-
which event there would be no losers. erty of innocent victims at risk.
Likewise an embezzler might not intend
to impose a loss on his employer, might Deavours’s punishment should not be less
instead intend to use the money to gam- if he were arrested on Saturday, having on Fri-
ble and win and thus be able to replace day mailed out “profits” in continuation of his
every penny he had taken. Suppose that scheme, than if he were arrested on Friday, be-
he is caught before he has a chance to fore that additional act of fraud and deceit had
gamble with any of the money, and ev- occurred. On each of those days, he had en-
ery cent is recovered. He is nevertheless dangered by fraud the same amounts of victim
an embezzler to the full extent of the money, and had exhibited equally little intent
amount he took, no matter how golden to end the scheme or mitigate the wrongdoing.
his intentions or happy the consequences
.... In an opinion pre-dating Lauer, upon which
Deavours relies, that court reasoned that a de-
We may put it this way: the amount fendant involved in a Ponzi scheme should not
of the intended loss, for purposes of be held accountable for sums returned to in-
sentencing, is the amount that the de- vestors before detection of the Ponzi scheme:
fendant placed at risk by misappropriat-
ing money or other property. That The full amount invested was not the
amount measures the gravity of his probable or intended loss because [the
crime; that he may have hoped or even defendant] did not at any point intend to
expected a miracle that would deliver his keep the entire sum. Indeed, return of
intended victim from harm is both im- the moneySSthat is payment of earlier
possible to verify and peripheral to the investors with the funds of later inves-
danger that the crime poses to the com-
munity.
1
(...continued)
Id. at 767-68 (internal citations omitted; em- 1228, 1237-38 (2d Cir. 1994); cf. United States v.
phasis added).1 Loayza, 107 F.3d 257, 266 (4th Cir. 1997) (refus-
ing to credit sums paid as interest to earlier inves-
tors because court found that the appellant had
1
See United States v. Mucciante, 21 F.3d never intended that his victims should ultimately
(continued...) keep the sums paid as interest).
3
torsSSwas an integral aspect of [the de- The court reasoned that individuals who re-
fendant’s] scheme, essential to its con- ceive a return or break even on their invest-
tinuation. ment are not “victims” for purposes of
§ 2F1.1. Id.2
United States v. Holiusa, 13 F.3d 1043, 1046-
47 (7th Cir. 1994). The court analogized the It is uncertain whether this methodology
situation to cases involving fraudulent loan ap- could be employed in the instant case, because
plications for loans the borrower intends to re- the losses suffered by the individual investors
pay. In the latter situation, the commentary to are not known.3 Even could we use the Orton
§ 2F1.1 provides that the loss is equal to the method, however, we would not. It, like the
“amount of the loan not repaid at the time the Holiusa approach, fails to recognize that all
offense is discovered, reduced by the amount those defrauded are victims, because their as-
the lending institution has recovered, or can sets were placed at risk by the schemers, and
expect to recover, from any assets pledged to that the mitigation of that risk by the schemers
secure the loan.” Id. at 1047 (citing § 2F1.1, arose not as penance or extrication but as am-
comment. (n.7(b)) (now note 8(b)) (quotation plification of the fraudulent scheme.
marks omitted).
IV.
The court’s comparison, though, is inappo- Deavours contends the district court erred
site. A fraudulent borrower who has pledged in failing to reduce his offense level because of
collateral to secure a loan has never deprived his minor role in the offense. The determina-
the lender of more than the total of the amount tion that a defendant did not play a minor role
of the loan less the value of the pledge; the is a finding of fact that we review for clear
pledge is always available for recovery. The error. United States v. Brown, 54 F.3d 234,
Ponzi schemer, however, initially risks every 240 (5th Cir. 1995).
penny, with no guarantee of any return if the
scheme falls apart at the start. Section 3B1.2(b) of the sentencing guide-
lines provides for a two-level reduction for a
Moreover, as the fraudulent borrower pays minor participant. A minor participant is one
back his loan, he progressively makes good the less culpable than most other participants, but
lender, reduces overall risk, and mitigates the
damage of his crime. The Ponzi schemer, on
2
the other hand, as the Holiusa court recog- The court reasoned that crediting the defen-
nized, makes only those payments of “profit” dant for excess returns paid to those individuals,
necessary to continue his scheme, increase the i.e., using the “net loss” method employed by the
total returns from his criminal activity, and court in Holiusa, would tend to understate the total
endanger yet more victims. loss.
3
The court stated that detailed findings of loss-
Deavours also points to United States v. es to individual victims would not be required in
Orton, 73 F.3d 331, 334 (11th Cir. 1996), every case involving a Ponzi scheme and that the
holding that losses relating to a Ponzi scheme court was required only to make a “‘reasonable
should be determined by conducting an ac- estimate of the loss, given the available informa-
counting of the losses incurred by each victim. tion.’” Orton, 73 F.3d at 334-35 (quoting § 2F1.1,
comment. (n.8) (now note 9)).
4
whose role could not be described as minimal.
See U.S.S.G. § 3B1.2, comment. (n.3); United
States v. Zuniga, 18 F.3d 1254, 1260 n.10 (5th
Cir. 1994). Deavours “bears the burden of
proving his minor role in the offense by a pre-
ponderance of the evidence.” Brown, 54 F.3d
at 241.
Deavours seizes on the government’s state-
ment in its U.S.S.G. § 5K1.1 motion that he
was duped and did not know his co-defendants
were running a Ponzi scheme. The govern-
ment also stated, however, that Deavours’s
deception in signing hundreds of fraudulent re-
ceipt letters “directly caused” the investors to
lose millions of dollars: “If Deavours had re-
fused to sign the letters, few of the victims
would have invested and lost money. In some
cases, as the Court knows, many victims lost
their entire life savings or more.” The decision
to sentence Deavours at the bottom of the
guideline range was based, in part, on the level
of his involvement. There is no clear error.
AFFIRMED.
5