United States v. Orton

United States Court of Appeals,

Eleventh Circuit.

No. 94-6708.

UNITED STATES of America, Plaintiff-Appellee,

v.

James Glenn ORTON, Defendant-Appellant.

Jan. 23, 1996.

Appeal from the United States District Court for the Northern
District of Alabama. (No. CR-94-AR-44-S), William M. Acker, Jr.,
Judge.

Before HATCHETT, DUBINA and BLACK, Circuit Judges.

BLACK, Circuit Judge:

James Glenn Orton pled guilty to four counts of wire fraud,

in violation of 18 U.S.C. § 1343, and three counts of mail fraud,

in violation of 18 U.S.C. § 1341. He was sentenced to 33 months'

incarceration to be followed by 3 years' supervised release. He

appeals his sentence, objecting to the way the district court

calculated the amount of the loss used to determine the offense

level enhancement pursuant to U.S.S.G. § 2F1.1(b)(1).1 This appeal

raises the issue of how "loss" should be determined under § 2F1.1

for cases involving a "Ponzi" or pyramid scheme,2 where a defendant

1
Orton also raises the issues of whether the sentencing
court erred in finding that (1) Bill Downey was a vulnerable
victim; (2) Sandra Anthony suffered foreseeable psychological
harm and danger of insolvency; and (3) Orton used a special
skill in committing the crimes. These issues are without merit.
2
The "modus operandi of a Ponzi scheme is to use newly
invested money to pay off old investors and convince them that
they are "earning profits rather than losing their shirts.' "
United States v. Holiusa, 13 F.3d 1043, 1048 n. 1 (7th Cir.1994)
(Manion, J. dissenting) (citing Bosco v. Serhant, 836 F.2d 271,
274 (7th Cir.1987), cert. denied, 486 U.S. 1056, 108 S.Ct. 2824,
100 L.Ed.2d 925 (1988)). The scheme takes its name from "the
has partially repaid fraudulently obtained funds before discovery

of the scheme. We hold that a sentencing court, in determining the

amount of loss caused by a Ponzi scheme, must estimate the actual,

attempted, or intended loss and that the estimated loss must be

reasonably based on the information available to the court.

I. BACKGROUND

Orton was an employee of BP Oil Company (BP Oil). When he

fell behind in making payments on the American Express account

provided to him by the company, he instigated a Ponzi scheme to

make money. He began the scheme in early 1988 and continued it

until March 1993, well after the time he left BP Oil in September

1988.

Orton told friends, relatives, and acquaintances that, as an

employee of BP Oil, he could invest in an incentive program BP Oil

had for its executives. He further told them that the investments

would mature in a few months and would yield a high rate of return.

He persuaded 44 victims to purchase investment "units." As part of

the scheme, Orton used money "invested" by later victims to pay

"interest" to earlier victims, providing the successful image

necessary to entice new victims and to encourage additional

"investments" by other victims. Orton was not an executive of BP

Oil; BP Oil did not have an executive investment program; and

Orton did not use the money to make investments. The scheme ended

in 1993 when the FBI, following an initial investigation, obtained

notorious swindler, Charles Ponzi, who, starting in 1919,
received $9,582,000 within a period of eight months by inducing
investors to give him $100 for the promised repayment of $150."
Id. (citing United States v. Boula, 932 F.2d 651, 652 n. 1 (7th
Cir.1991)).
a warrant and searched Orton's residence and business.

The total amount Orton received from all victims was

$525,865.66. The total amount he returned to the victims was

$242,513.65. The net amount lost by all victims was, therefore,

$283,352.01, which was also the total amount gained by Orton. Only

12 of Orton's victims received back more money than they invested.

The total amount lost by the other victims, those who suffered

individual net losses, was $391,540.01.3

A Presentence Investigation report (PSI) was prepared, and

sentencing hearings were held on June 23, 1994, and July 21, 1994.

For Orton's violation of 18 U.S.C. §§ 1343 and 1341, the PSI found

a Base Offense Level of 6 pursuant to U.S.S.G. § 2F1.1(a) (Fraud

and Deceit). The PSI recommended that the offense level be

enhanced: (1) by 9 levels pursuant to § 2F1.1(b)(1)(J) for an

offense involving a loss of more than $350,000; (2) by 2 levels

pursuant to § 2F1.1(b)(2)(A) and (B) for an offense involving more

than minimal planning and more than one victim; and (3) by 2

levels pursuant to § 3A1.1 for an offense involving a vulnerable

victim. The PSI also recommended that the offense level be reduced

by 3 levels pursuant to § 3E1.1(b) for acceptance of

responsibility. Prior to the sentencing hearing, Orton filed

objections to the PSI. At the sentencing hearing, the court,

finding that Orton used his specialized knowledge of the oil

3
The presentence investigation report erroneously shows this
amount to be $389,800.85. Apparently the $1,740.00 lost by Kim
Simmons was omitted from the total because of a clerical error.
For purposes of sentencing in this case, the difference is
insignificant as both amounts fall within § 2F1.1(b)(1)(J), "More
than $350,000."
business to entice victims, enhanced the offense level by 2 levels

pursuant to § 3B1.3 for use of a special skill to facilitate the

offense. Otherwise, the court adopted the recommendations in the

PSI.

II. DISCUSSION

Section 2F1.1(b)(1) of the Sentencing Guidelines requires that

the offense level for an offense involving fraud or deceit be

enhanced if the loss exceeded $2,000 and specifies the appropriate

enhancement based on the amount of loss. U.S.S.G. § 2F1.1(b)(1).

Application Note 7 defines "loss" as "the value of the money,

property, or services unlawfully taken" and indicates how loss

should be calculated for certain types of fraud. Id. at comment.

(n. 7). It does not, however, suggest a method for calculating

loss in a Ponzi scheme where part of the scheme itself is to pay

"interest" to early victims from the money "invested" by later

victims in order to create the illusion of a successful investment

program.

As a general matter, § 2F1.1 applies to a wide variety of

fraud cases. U.S.S.G. § 2F1.1, comment. (backg'd). The Sentencing

Guidelines make clear that "loss" under § 2F1.1(b) is a specific

offense characteristic intended to measure the actual, attempted,

or intended harm of the offense. Id. § 1B1.3, comment. (n. 5);

Id. § 2F1.1, comment. (n. 7). This measure of harm focuses on the

victim's loss. See United States v. Wilson, 993 F.2d 214, 217

(11th Cir.1993) ("victim's direct loss" is a primary determinant of

the appropriate sentence under § 2F1.1).

When considering the loss or harm caused by the fraudulent
conduct, the sentencing court must make a reasonable estimate,

given the available information. U.S.S.G. § 2F1.1, comment. (n.

8). Fraudulent schemes, however, come in various forms, and we

must consider the nature of the scheme in determining what method

is to be used to calculate the harm caused or intended.4 With

these general considerations in mind, we proceed to consider the

Ponzi scheme in the case sub judice.

If one were to set out the different types of fraud, at one

end of the scale would be theft-like fraud where the perpetrator

intends to keep the entire amount fraudulently obtained. 5 On the

other end of the scale would be contract fraud where the

perpetrator, while fraudulently obtaining the contract, intends to

perform the contract and to cause no loss to the victim. See

generally United States v. Kopp, 951 F.2d 521, 529 (3d Cir.1991)

(discussing intents involved in different frauds). A Ponzi scheme

4
Application note 8 specifically authorizes the
consideration of the nature and extent of the fraud. U.S.S.G. §
2F1.1, comment. (n. 8). The Sentencing Commission is clearly
aware that different types of fraud may call for different
methods of calculation. See U.S.S.G. § 2F1.1, comment. (n. 7)
(setting forth additional factors to be considered in determining
the loss or intended loss in various types of fraud). Thus,
while § 2F1.1 sets forth the general framework for calculating
loss, we will examine the nature of this particular offense to
determine what method and factors are to be used. See United
States v. Shaffer, 35 F.3d 110, 114 (3d Cir.1994) (indicating
that a court is compelled to estimate the loss based on the
particular offense); United States v. Dickler, 64 F.3d 818, 825
(3d Cir.1995) (holding that § 2F1.1 and commentary require the
method of calculating victim's loss to correspond to the nature
of the defendant's conduct).
5
Application Note 7 indicates that frequently loss in fraud
cases will be the same as the loss in a theft case. U.S.S.G. §
2F1.1, comment. (n. 7). This observation is most accurate where
the fraudulent intent is to retain the entire amount as would be
the intent in theft cases.
falls somewhere in between. While the perpetrator fraudulently

obtains the full amount of the "investment," he or she has no

intent to keep the entire amount. Indeed, the very nature of the

scheme contemplates payments to earlier victims in order to sustain

and conceal the fraudulent conduct.

In this case, the sentencing court conducted a detailed

accounting of the losses incurred by each victim—a method which we

shall call the "loss to losing victims" method. The amount of loss

was calculated by totaling the net losses of all victims who lost

all or part of the money they invested. This method takes into

consideration the nature of a Ponzi scheme by holding a defendant

fully accountable for all losses suffered by those victims who lose

money, but does not allow the defendant to fully benefit from

payments made to others. It does not reward a defendant who

returns money in excess of an individual's initial "investment"

solely to entice additional investments and conceal the fraudulent

conduct.

Appellant Orton advocates the "net loss" method, which

estimates loss as the net loss to victims as a group.6 Under this

method, the defendant will, for sentencing purposes, receive the

full benefit of all of his return payments. The "net loss" method,

however, focuses on the gain to the defendant, which ordinarily

underestimates the loss. U.S.S.G. § 2F1.1, comment. (n. 8).

The "loss to losing victims" method, on the other hand,

correctly focuses on the harm to the victims. The individuals who

6
The "net loss" method also measures the "net gain" to the
defendant.
receive a "return" or break even on their "investment" are not

victims for purposes of § 2F1.1. At most, they are unwilling pawns

in the Ponzi scheme. These individuals may be exposed to a risk of

harm by the Ponzi scheme, but the risk of harm should not be

considered in estimating the loss under § 2F1.1. Under § 2F1.1,

"the risk created enters into the determination of the offense

level only insofar as it is incorporated into the base offense

level. Unless clearly indicated by the guidelines, harm that is

merely risked is not to be treated as the equivalent of harm that

occurred." U.S.S.G. § 1B1.3, comment. (n. 5).

Consistent with § 2F1.1, the sentencing court estimated the

actual losses caused by the Ponzi scheme. In this case, the "loss

to losing victims" method employed by the court results in a more

accurate estimate of loss to victims, and we therefore reject the

"net loss" method advocated by Appellant. We hold that the

district court's estimate of loss was reasonable and thus affirm.

We take this opportunity to address our concern that the

Court's opinion today might be read to require the "loss to losing

victims" method in every Ponzi scheme case. This opinion does not

stand for that proposition. While the district court's detailed

investigation is commendable, such an exhaustive inquiry is not

required in every case involving a Ponzi scheme. The information

available in this case allowed the sentencing court to accurately

calculate the loss to each individual victim. Nonetheless, in

estimating the loss in a Ponzi scheme, a sentencing court is not

generally required to make detailed findings of individualized

losses to each victim in every case. There are cases where it
would be unduly cumbersome, potentially requiring large

expenditures of time and resources to determine large amounts of

detailed information. Such a rigid rule is not required by the

Guidelines. All that is required is that the court "make a

reasonable estimate of the loss, given the available information."

U.S.S.G. § 2F1.1, comment. (n. 8) (emphasis added). Where detailed

information is not available, a detailed estimate is not required.

III. CONCLUSION

We hold that the sentencing court's estimate of losses was

correct. In cases where a defendant has committed fraud by using

a Ponzi or pyramid scheme, taking money from victims and giving

part of it to other victims in order to further the scheme, the

sentencing court must estimate the actual or intended loss to the

victims.

AFFIRMED.