Filed: Dec. 19, 1995
Latest Update: Mar. 02, 2020
Summary: Opinions of the United 1995 Decisions States Court of Appeals for the Third Circuit 12-19-1995 United States of America v. Neadle Precedential or Non-Precedential: Docket 94-7417 Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1995 Recommended Citation "United States of America v. Neadle" (1995). 1995 Decisions. Paper 312. http://digitalcommons.law.villanova.edu/thirdcircuit_1995/312 This decision is brought to you for free and open access by the Opinion
Summary: Opinions of the United 1995 Decisions States Court of Appeals for the Third Circuit 12-19-1995 United States of America v. Neadle Precedential or Non-Precedential: Docket 94-7417 Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1995 Recommended Citation "United States of America v. Neadle" (1995). 1995 Decisions. Paper 312. http://digitalcommons.law.villanova.edu/thirdcircuit_1995/312 This decision is brought to you for free and open access by the Opinions..
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Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit
12-19-1995
United States of America v. Neadle
Precedential or Non-Precedential:
Docket 94-7417
Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1995
Recommended Citation
"United States of America v. Neadle" (1995). 1995 Decisions. Paper 312.
http://digitalcommons.law.villanova.edu/thirdcircuit_1995/312
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 94-7417
UNITED STATES OF AMERICA
v.
LAWRENCE NEADLE, JR.,
Appellant.
On Appeal from the District Court of the Virgin Islands,
Division of St. Croix
(D.C. Criminal Action No. 92-cr-00113-2)
Argued April 17, 1995
Before: BECKER, NYGAARD and ROTH, Circuit Judges
(Opinion Filed December 19, l995)
Thurston T. McKelvin, Esq. (Argued)
Federal Public Defender
Stephen A. Brusch, Esq.
Assistant Federal Public Defender
P.O. Box 3450
Christiansted, U.S. Virgin Islands 00822-3450
Attorneys for Appellant
W. Ronald Jennings
United States Attorney
James R. Fitzner (Argued)
Assistant U.S. Attorney
1108 King Street - Suite 201
Christiansted, St. Croix
U.S. Virgin Islands 00820
1
Attorneys for Appellee
OPINION OF THE COURT
ROTH, Circuit Judge:
Appellant Lawrence Neadle, Jr., pled guilty to one
count of mail fraud. At sentencing, the district court imposed a
sixty-month term of imprisonment and a three-year term of
supervised release. On appeal, Neadle contends that the district
court misapplied the United States Sentencing Guidelines
("Guidelines") in its calculation of the victims' loss under
U.S.S.G. § 2F1.1(b) and its upward departure based on the amount
of that loss. He also alleges that the court erred in granting
an upward departure based on psychological harm to the victims
and on loss of confidence in the insurance industry. We hold
that the district court properly calculated the loss arising from
the appellant's fraud and that it did not err in its upward
departure based on the amount of loss. We find, however, that
the district court erred in its conclusion to depart upward for
psychological harm/loss of confidence. We will, therefore, for
the reasons stated below, vacate defendant's sentence and remand
for resentencing pursuant to this opinion.
I.
2
A.
The appellant, Lawrence M. Neadle, Jr., and two co-
defendants were indicted on one count of conspiracy and eight
counts of mail and wire fraud on November 18, 1992. After one
co-defendant was acquitted, a superseding indictment charged
Neadle and the other co-defendant with substantially the same
offenses. Count I of the Superseding Indictment charged them
with a conspiracy in violation of 18 U.S.C. § 371; Counts II and
III charged them with mail fraud in violation of 18 U.S.C. §1341;
and Counts IV through IX charged them with wire fraud in
violation of 18 U.S.C. § 1343.
In October 1993, Neadle changed his plea to Count II of
the superseding indictment (mail fraud) from not guilty to
guilty. Pursuant to the plea agreement, the remaining counts
against him were dismissed at sentencing. On July 6, 1994, the
district court sentenced Neadle to sixty months imprisonment and
placed him under supervised release for a three-year period upon
his release from prison. Neadle was released pending appeal and
filed his notice of appeal the next day.
The charges against Neadle arose from his creation of
the American Property and Casualty Insurance Company ("AMPAC").
Neadle was chief executive officer of the company. In late 1987,
he applied to the Division of Banking and Insurance of the Virgin
Islands ("Insurance Division") for a license to form AMPAC. At
that time, the Insurance Division required an insurance company
to have a minimum capital of $450,000, an initial surplus capital
of $250,000, and a bond of $500,000. Neadle provided the
3
Insurance Commissioner with a surety bond for $500,000 but
misrepresented the amount of the company's initial capital.0
On January 5, 1988, Neadle caused a letter to be sent
through the United States mail to the Insurance Division, stating
that AMPAC had unencumbered certificates of deposit in the sum of
$700,000 in the Naples Federal Savings and Loan Association
("Naples Federal") in Naples, Florida. In fact, however, the
certificates were encumbered, as Neadle was fully aware. Unaware
of the deception, the government of the Virgin Islands in January
1988 issued AMPAC a license to do business in that territory.
After obtaining the loan for the certificates of
deposit, AMPAC paid interest on the loan of $2,300 a month.
AMPAC's quarterly reports to the Insurance Division, however,
listed the $700,000 in encumbered certificates as an asset but
did not list that amount as an offsetting liability, and the
reports did not include the interest payments.
In September 1989, Hurricane Hugo hit the Virgin
Islands. AMPAC was unable to meet the resulting claims of its
policyholders. The Virgin Islands government established the
Hurricane Hugo Fund Program to pay the claims for AMPAC and
American Alliance, the other Virgin Islands insurance company
that failed as a result of claims arising out of the hurricane.
B.
0
Subsequently, the Insurance Division became concerned
about the surety company, which had issued the bond, and required
Neadle to post the $500,000 in cash. Neadle complied.
4
At the July 12, 1993, pre-trial hearing in this matter,
witnesses testified regarding the Insurance Division's capital
requirements. Derek Hodge, the Lieutenant Governor and Insurance
Commissioner of the Virgin Islands at that time, testified that
he would not have certified a company to do business without the
$700,000 minimum in capital and paid-in surplus. Hodge also
stated that he followed guidelines, promulgated by the National
Association of Insurance Commissioners, requiring all insurance
companies to maintain a solvency ratio of three to two in
premiums to surplus. He further testified regarding the methods
he used to ensure that insurance companies doing business in the
Virgin Islands complied with the requirements. He stated that,
among other things, he reviewed audits conducted by Insurance
Commission examiners, who reviewed quarterly financial statements
submitted by the companies.
Deverita Sturdivant, Director of the Insurance Division
from January 1987 through the end of 1989, testified that the
$700,000 minimum capital requirement applied to new businesses.
She stated that once a company started writing policies, the
company might need to increase its capital to ensure the proper
premium dollars to surplus ratio. Sturdivant testified further
that had she discovered that AMPAC did not meet the minimum
capital requirement, the Insurance Division could have demanded
that unencumbered assets be infused into the company or, in the
alternative, that the company be liquidated.
In May 1994, the district court held a hearing to
address the defense objections to the Presentence Investigation
5
and Report. Ricardo Luaces, a claims examiner employed by the
Insurance Division from 1989 to 1993, testified that the gross
figure for Hurricane Hugo losses incurred on property insured by
AMPAC was $37,655,038. The adjusted Hurricane Hugo claims of
AMPAC policyholders amounted to $24,438,748. Roland Riviere, an
independent insurance adjuster retained to assist in adjusting
the claims of AMPAC's insureds for Hugo-related damage, quoted
the same figure.
John McDonald, the Chief Examiner for the Insurance
Division during the time that the Insurance Division compiled
Hugo-related claims, testified that the best estimate of non-Hugo
related claims on AMPAC was $500,000. He further testified that,
in early 1988, the Insurance Division had discovered that AMPAC
had no general ledger -- the basic accounting format in which
debits and credits are captured -- so that AMPAC's assets and
liabilities could not be determined. At that time, the
Commission also detected a commingling of funds between AMPAC and
Caribbean Mutual, another of Neadle's companies. McDonald
testified that the Commission directed Neadle to correct these
accounting problems but that by the time of the hurricane, there
were still no accounting records from which AMPAC's assets could
be determined. McDonald confirmed, however, that one of Neadle's
accountants, Norman Erasso, had begun implementing the requested
accounting procedures. Erasso, however, left the territory when
Hugo struck and did not return.
Neadle testified that, as of the date of the hurricane,
he had reinsurance of $4 million. He contended the reinsurer had
6
assured him that this amount would be adequate, based on previous
hurricane damage in the Virgin Islands.
C.
At sentencing, the district court applied the 1988
edition of the Sentencing Guidelines, the version in effect on
the date of the offense.0 The court found that because Neadle
"obtained his license [to issue insurance] by fraud and
trickery," he was responsible for a loss of $20,438,748, which
represented the adjusted claims of $24,438,748, less AMPAC's $4
million in reinsurance. Appendix ("App.") at 399-400. Pursuant
to § 2F1.1(b)(L) of the 1988 Guidelines, the base level for fraud
offenses was 6; if the loss exceeded $5,000,000, an eleven level
increase was to be added to the base. The court granted this
eleven level increase.
Pursuant to U.S.S.G. § 2F1.1(b)(2), the court also
awarded a two level increase on the alternative grounds that the
crime involved more than minimal planning or more than one
victim. The court concluded
that the offense was by its nature more complex than
simple; that the defendant did take significant
affirmative steps to conceal the offense; that the
0
The district court properly applied the version of the
Guidelines in effect at the date of the offense because, at the
time of sentencing, § 2F1.1 of the Guidelines had been amended by
adding four new offense level increases for losses exceeding 10,
20, 40 and 80 million dollars. This amendment would call for a
16 level increase over the base offense level for the loss as
calculated here, rather than the 11 level increase which had been
in effect until November 1989. See, e.g., United States v.
Corrado, 53 F.3d 620, 622-23 (3d Cir. 1995) (if application of
guidelines in effect at sentencing results in more severe penalty
than that in effect at time of offense, earlier version controls;
applying a guideline amendment that enhances the penalty offends
the ex post facto clause of the United States Constitution).
7
offense itself required planning and the falsification
of a series of documents; and that these acts involved
a series of discrete decisions, clearly not opportune
in nature.
App. at 404-05. Moreover, the court stated "that the hundreds of
policyholders and the government comprise the victims of the
offense." App. at 405. The court granted a two level decrease
for Neadle's acceptance of responsibility.
The court then departed upward from the guideline
offense level on two grounds. First, pursuant to U.S.S.G.
§2F1.1, comment 10, the court found that the fact that the loss
amounts were substantially above the highest amount listed in the
Guidelines ($5,000,000) warranted an upward departure. Looking
by analogy to the 1993 amendments to the Guidelines, the court
departed upward a further five levels (from level 11 to 16),
which corresponded to the increase under the 1993 version of the
Guidelines for a loss exceeding $20,000,000. Second, the court
found U.S.S.G. § 2F1.1, comment 9, to warrant an upward departure
of one level for the "psychological harm risked or caused by the
offense" and one level for "the loss of confidence in an
important institution."
In sum, the court departed upward seven levels from an
offense level of 17 to an offense level of 24, which corresponded
to a guideline sentencing range of from 51 to 63 months. The
court then imposed a sentence of 60 months.
II.
The District Court of the Virgin Islands had
jurisdiction pursuant to 18 U.S.C. § 3241. We have jurisdiction,
8
pursuant to 28 U.S.C. § 1291, to review a final order of a
district court and, pursuant to 18 U.S.C. § 3742, to review a
sentence imposed under the United States Sentencing Guidelines.
We exercise plenary review over legal questions concerning the
meaning of sentencing guidelines but apply the clearly erroneous
standard to factual determinations underlying their application.
United States v. Daddona, 34 F.3d 163 (3d Cir.), cert. denied, __
U.S. __,
115 S. Ct. 515 (1994); United States v. Katora,
981 F.2d
1398, 1401 (3d Cir. 1992).
III.
We first address Neadle's challenge to the district
court's interpretation of "loss" as it is calculated pursuant to
U.S.S.G. § 2F1.1(b), an issue over which this court exercises
plenary review. See United States v. Badaracco, 954 F.2d 928 (3d
Cir. 1992). We conclude that the district court properly
calculated the loss, arising from the appellant's fraud, to be
$20,438,748, that figure being the net, adjusted $24,438,748 loss
to victims whose property was insured with AMPAC at the time that
Hurricane Hugo struck St. Croix, reduced by the amount of AMPAC's
reinsurance ($4 million).
In his appeal, Neadle raises two grounds for
challenging the district court's calculation of the amount of
loss. First, he argues that, after obtaining the license to form
AMPAC, he intended to run the company in a proper, business-like
way. Second, he contends that the property losses suffered by
AMPAC policy holders resulted from an unforeseeable act of God,
so that he would have been unable to pay the claims even in the
9
absence of his fraud. Therefore, he maintains, the loss figure
should not be used to increase his sentence pursuant to U.S.S.G.
§ 2F1.1.
The district court based its computations upon the
actual loss suffered by the AMPAC policyholders, rather than upon
the loss which Neadle intended to inflict, see U.S.S.G. § 2F1.1,
comment 7 (1993) ("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)0 or upon the offender's
gross gain from committing the fraud, see Badaracco, 954 F.2d at
936 (breach of fiduciary duty by officer of a financial
institution may justify using the "gross gain" alternative to
estimate loss). The court also sentenced Neadle based on the
loss as of the date of sentencing, see United States v. Kopp,
951
F.2d 521, 531 (3d Cir. 1991), rather than the loss as of the date
of the offense, see
Shaffer, 35 F.3d at 115, so that the
reinsurance Neadle had contracted for was subtracted from the
loss.
Neadle characterizes the case as analogous to a
contract case in which he was planning to perform, albeit after
obtaining the contract by fraudulent means.0 He argues that
0
In a fraud case, the intended loss may be no loss at all, when
fraud is committed to obtain a contract or a license or a loan to
do business which the offender hopes will succeed -- as the
defendant here claims was his intent. See e.g. United States v.
Shaffer, 35 F.3d 110, 113 (3d Cir. 1994). However, under the
Guidelines, intended loss is relevant in the loss computation
only if the intended loss is greater than the actual loss.
0
The government portrays this fraud case as analogous to
a simple theft case, arguing that the "property" taken was the
10
because he did not intend to inflict any loss, no dollar amount
is attributable to him. App. at 397. He emphasizes that when
the government requested that he provide $500,000 cash in lieu of
the $500,000 bond required by law, he complied. Moreover, he
notes that his accountant, Erasso, had begun to comply with the
government's accounting suggestions but left the Virgin Islands
when Hugo struck. Finally, he maintains that he attempted to get
adequate reinsurance coverage and that he did not engage in, and
the government did not prove that he engaged in, day-to-day fraud
in the operation of AMPAC.
Contrary to Needle's argument, however, there is strong
record support that Neadle not only misrepresented the amount of
his initial capital investment but also engaged in fraudulent
conduct to perpetuate his business. During the eighteen month
period in which AMPAC sold insurance policies, the Insurance
Division could not locate basic accounting records from which it
could assess the company's assets and liabilities. Moreover,
examiners found a commingling of funds between AMPAC and another
of Neadle's companies, Caribbean Mutual. In addition, the
company continued to file financial statements that fraudulently
concealed the fact that AMPAC's $700,000 in certificates of
receipt of the license to sell casualty insurance in the Virgin
Islands, which resulted in the Hugo-related losses. The
Government argues that "the sentencing court could properly have
assessed the loss occasioned by the appellant's fraud as being
the value of all property insured by AMPAC, including property
that was not damaged by Hurricane Hugo." Even if we were to
accept the Government's position, this court has held that "[t]he
fraud guideline . . . has never endorsed sentencing based on the
worst-case scenario potential loss." Kopp, 951 F.2d at 529.
11
deposit at Naples Federal were encumbered assets.000 in
certificates of deposit at Naples Federal were not unencumbered
assets. Finally, although Neadle obtained reinsurance, no
reinsurer could adequately assess AMPAC's true reinsurance
requirements unless the reinsurer was provided with basic records
indicating AMPAC's assets and liabilities. The deceitful and
slipshod way in which Neadle ran the business supports the
district court's attribution of responsibility to him for the
losses. We conclude that the actual loss caused to AMPAC
policyholders by the fraud was the proper basis for the loss
computation under § 2F1.1(b).0
We also find Neadle's argument that Hurricane Hugo was
an act of nature beyond his control and that the property losses
occasioned thereby should not be used in calculating his sentence
to be without force. Hurricanes are a continuing threat in the
Caribbean. Coverage for hurricane damage is a type of coverage
which is often specifically sought, albeit not always easily
found, in that area. Moreover, the insurance policies at issue
contained express coverage of hurricane-related property losses.
0
We do not agree with the dissent that the loss to the
policyholders here was not caused, at least in part, by Neadle's
fraud in obtaining the license to do business. The dissent
implies that the individuals, who purchased policies from AMPAC,
could not have purchased insurance coverage from any other source
and for that reason did not suffer any loss from the damage done
by Hurricane Hugo which they would not otherwise have suffered.
However, despite the tightness of the insurance market in the
Virgin Islands, the record before us does not support the
supposition, and Neadle does not claim, that there was no other
insurance coverage available in the Virgin Islands market for the
AMPAC policy holders.
12
Neadle did not attempt to sell hurricane coverage in Chicago or
in Wichita; he sold it in the Caribbean, a hurricane zone.
Moreover, as we have previously held in Kopp, it is not
appropriate to reduce the amount of the loss, as computed under
the Guidelines, in order to reflect other causes of the loss
which were beyond the defendant's control. 951 F.2d at 531. See
U.S.S.G. § 2F1.1(b), comment 11. An intervening force that
increases a fraud-related loss will not decrease the loss
valuation but will only provide possible grounds for a downward
departure.
Kopp, 951 F.2d at 531.
To the extent that the defendant's objection to the
loss computation in this case can be construed to be a request
for a downward departure based on the nature of the risk
involved, the district court clearly rejected that request in the
court's determination to depart upward in computing the amount of
the loss. The district court, in determining to depart upward
due to the underrepresentation of the loss in the 1988 version of
the Guidelines, cited United States v. Monaco, 23 F.3d 793 (3d
Cir. 1994). App. at 411. In that case, we vacated the district
court's judgment and remanded for resentencing after clarifying
the scope of the court's power to depart downward based on
application note 11 to U.S.S.G. § 2F1.1. We stated that "a
wrongdoer should [not] completely escape a sentencing enhancement
if his scheme involved a substantial risk of loss merely because,
under his own rosy scenario, no loss was intended."
Monaco, 23
F.3d at 799 n.10. We held that the court's discretion to depart
downward pursuant to application note 11 is limited by the
13
inherent risk of loss in the perpetrator's fraud, explaining that
"risk is one of the losses that a perpetrator of fraud imposes on
his victims." Id.
We believe that the district court properly considered
the risk, in this case of a hurricane, an act of God, imposed on
AMPAC's insureds because of the defendant's fraudulent conduct.
Had Neadle expressly made a request for a downward departure for
an act of God, the court would have been proper in denying it. In
holding AMPAC out as insuring against a known risk, defendant
extracted premiums from unsuspecting policyholders who believed
that they were securing protection when in fact that protection
was an empty shell. Moreover, defendant's misrepresentations
persisted throughout the period AMPAC was operating.
Neadle's arguments obscure the fact that but for his
fraud, he would not have been in the insurance business. By
deceiving the government concerning the $700,000 certificates of
deposit, by submitting fraudulent quarterly financial statements,
and by failing to maintain financial records, Neadle misled the
government for approximately a year and a half. Had such
fraudulent conduct not occurred, AMPAC would not have begun to
operate as an insurance broker in the Virgin Islands and would
not have continued to do so without maintaining adequate
accounting records. The district court recognized a clear causal
connection between the fraud and the policy holders losses. See
App. at 399-400.
Our decision finds support in United States v.
Robichaux, 995 F.2d 565 (5th Cir.), cert. denied, __ U.S. __, 114
14
S. Ct. 322 (1993). In Robichaux, the Fifth Circuit addressed a
similar case in which mail and wire fraud led to the failure of
an insurance company. The defendant, Edward Robichaux,
misrepresented that securities he had assigned to an insurance
company were unencumbered assets. Without the assets, the
company "would have been undercapitalized and thus barred from
any further insurance business."
Id. at 567. The Louisiana
Insurance Commission retained an independent firm to audit the
company. Robichaux verified to that firm the company's ownership
of the securities in question. Relying on the verification, the
auditors issued a favorable report. Approximately two years
later, the insurance company was declared insolvent.
Id.
Robichaux argued that, for purposes of the Sentencing
Guidelines, he should be held responsible only for the
commissions he had been paid by the insurance company after he
had made the fraudulent assignment of assets to it. The district
court, however, held him responsible for the losses attributable
to the company's failure. The Fifth Circuit agreed, holding that
it was not clearly erroneous for the district court to find that
the losses attributable to the insurance company's failure
resulted from the defendant's actions in placing fraudulent
securities on the company's books.
Id. at 571. The court
concluded that it was
not clearly erroneous to assume that if [the
independent auditor] had not issued a favorable audit
for [the insurer], which only occurred because of [the
insurer's] fraudulently inflated balance sheet, the
Commission would have acted to liquidate the firm at an
earlier date and minimized the losses.
15
Id.. The court upheld the district court's loss estimate -- an
estimate of the loss that the state of Louisiana suffered as a
result of the insurance company's failure -- as reasonable and
not clearly erroneous. Id.
Similarly, we find not clearly erroneous the district
court's conclusion that Neadle's inadequate financing and
recording at AMPAC caused the government of the Virgin Islands to
license AMPAC and to permit it to remain in business which in
turn caused the policy holders' Hugo-related losses. We will
affirm the district court's loss figure, because it is a
reasonable estimate of the harm which resulted from Neadle's
fraudulent scheme and which reasonably could be expected to
result from a scheme which insured for hurricane damage in the
Caribbean hurricane zone.
IV.
We next must consider whether the court erred by
reading U.S.S.G. § 2F1.1, Application Note 9, to warrant an
upward departure of one level for the "psychological harm risked
or caused by the offense" and one level for "the loss of
confidence in an important institution." Since we are reviewing
the district court's application of particular facts to a
departure approved by the Sentencing Commission, we review only
for clear error. United States v. Astorri, 923 F.2d 1052, 1058
(3d Cir.), cert. denied,
502 U.S. 970 (1991). We conclude that
the evidence is insufficient to warrant an upward departure on
either ground.
16
A district court may impose a sentence outside the
sentence range prescribed by the Sentencing Guidelines where "the
court finds that there exists an aggravating or mitigating
circumstance of a kind, or to a degree, not adequately taken into
consideration by the Sentencing Commission in formulating the
guidelines that should result in a sentence different from that
described." 18 U.S.C. § 3553(b). Application Note 9 to U.S.S.G.
§ 2F1.1 provides a nonexclusive list of circumstances in which
the loss calculated pursuant to U.S.S.G. § 2F1.1 -- the provision
establishing the base level for offenses involving fraud or
deceit -- "does not fully capture the harmfulness and seriousness
of the conduct." Among the examples of circumstances in which
upward departures may be warranted are those on which the
district court relied, instances in which "the offense caused or
risked physical or psychological harm"0 and instances in which
"the offense caused a loss of confidence in an important
institution."
At sentencing, the court granted a one point upward
departure based on "the psychological and social impact [of
Neadle's offense] on the people of the Virgin Islands." An
0
Neadle argues that the district court improperly
applied the 1988 edition of the Guidelines to this ground of
departure. The 1993 edition of the Guidelines provides that an
upward departure may be warranted where "the offense caused
reasonably foreseeable, physical or psychological harm or severe
emotional trauma." U.S.S.G. § 2F1.1, comment 10(c). Neadle
suggests that the 1993 provision should apply, because it
clarifies, rather than substantively changes, the 1988 language.
We need not consider this argument, because we do not find
evidence of psychological harm within the meaning of the
Guidelines in any event.
17
upward departure based on psychological harm is appropriate only
"[i]f a victim or victims suffered psychological injury much more
serious than that normally resulting from the commission of the
offense." U.S.S.G. § 5K2.3. The Guidelines state that
[n]ormally, psychological injury would be sufficiently
severe to warrant application of this adjustment only
when there is a substantial impairment of the
intellectual, psychological, emotional, or behavioral
functioning of a victim, when the impairment is likely
to be of an extended or continuous duration, and when
the impairment manifests itself by physical or
psychological symptoms or by changes in behavior
patterns.
Id.
A district court is to be given considerable deference
in assessing psychological impact on victims. United States v.
Astorri, 923 F.2d at 1058-59. However, the court must not merely
speculate regarding psychological harm. In the instant case, the
record is barren of evidence regarding physical or psychological
harm sustained by the victims. We do not find any evidence of
the sort of "chronic substantial impairment of a victim's mental
functioning" upon which this court has relied in upholding upward
departures based on psychological injury. See
id. at 1059
(upholding upward departure for psychological harm where evidence
showed, among other things, that victim suffered from high blood
pressure and remained under doctor's care as a result of
defendant's actions). Therefore, we cannot find that the victims
suffered psychological or physical harm, which exceeded that
18
occurring in the heartland of fraud offenses, to such a degree as
to justify an upward departure.0
The court also granted a one point upward departure on
the grounds that "[t]he offense itself contributed materially to
the destruction of the reputation of the insurance industry in
the territory." App. at 410. The court stated that "[t]here is
no doubt in the court's mind that Neadle's acts contributed
substantially to a loss of confidence in an important
institution." App. at 411. Again, the court based the upward
departure not on sworn testimony but on an unsupported judicial
conclusion.0 Such judicial speculation cannot provide the basis
for an upward departure.
V.
0
See United States v. Pelkey, 29 F.3d 11, 15-16 (1st
Cir. 1994) (finding that victims' feelings of lack of trust,
frustration, shock, and depression were not "so far beyond the
heartland of fraud offenses as to constitute psychological harm
within the meaning of the Policy Statement in § 5K2.3 or" the
application note to § 2F1.1); United States v. Mandel,
991 F.2d
55, 58-59 (2d Cir. 1993) (finding psychological injuries of
victims insufficient to warrant upward departure from base
offense level where "both the base offense level for fraud and
the vulnerable-victim adjustment had already taken into account
the harm to the victims").
0
The lack of evidence supporting this ground for
departure is evident from the record of the hearing at which
Neadle raised his objections to the Presentence Report. Asked
for evidence regarding loss of confidence in the industry, the
government attorney merely cited conversations with fifteen AMPAC
insureds who "did not hold the insurance industry in very high
regard," meetings "with people on the street," and evidence from
"reading newspapers." App. at 230-31. Indeed, based on the
hearing, the court weakened the original language of the report
to state broadly that the offense "contributed to the general
decline in the confidence and esteem held for the insurance
industry." App. at 231.
19
We conclude that the district court correctly
calculated the loss arising from Neadle's fraud as the net,
adjusted loss to those victims whose property was insured with
AMPAC at the time Hurricane Hugo struck St. Croix, reduced by the
amount of the company's reinsurance. Nevertheless, we will
vacate the judgment of sentence and remand this case for
resentencing, because the district court improperly increased
Neadle's guideline sentence by two levels, based on caused or
risked physical or psychological harm and on loss of confidence
in the insurance industry.
United States of America v. Lawrence Neadle, Jr., Appellant
No. 94-7417
20
BECKER, Circuit Judge, concurring and dissenting.
This appeal presents an important question regarding
the definition of "loss" under the fraud section of the United
States Sentencing Guidelines ("Guidelines" or "USSG"), USSG
§2F1.1(b). We must determine whether this definition
incorporates a causation requirement, and if so, what that
requirement entails. Because the majority fails to explicitly
address this issue, and because I disagree with the majority's
conclusion as to the determination of loss, I do not join in
Parts III and V of the majority opinion. I do join, however, in
Parts I, II, and IV.
The majority affirms the district court's calculation
of loss without giving sufficient attention to the nexus between
Lawrence Neadle's illegal conduct -- misrepresentations that
AMPAC had complied with the requirement that insurance companies
have $700,000 in unencumbered assets -- and the $20 million in
unpaid AMPAC claims. This inattention is not surprising given
the Guidelines' lack of guidance on the definition of loss.
Indeed, USSG § 2F1.1 seems to envision loss as a readily apparent
financial harm existing independent of legal definitions.
While the amount of unpaid AMPAC claims may, at first
glance, seem to be the relevant financial harm, the severe
consequences of criminal penalties impose on courts the duty to
undertake a more searching inquiry. Legal concepts must be
susceptible to definition, and it is our duty to explicate these
definitions. We have performed this task before, see, e.g.,
United States v. Kopp, 951 F.2d 521 (3d Cir. 1991) (defining loss
2
under USSG § 2F1.1), and it is now necessary to do it again. The
Guidelines' language, its commentary, the caselaw, and sound
sentencing policy all lead me to conclude that a financial harm
is loss under section 2F1.1 only if it was caused by the
defendant's illegal conduct. This causation requirement demands,
at the least, that the defendant's conduct be a "cause in fact"
of the harm at issue, i.e., that the harm would not have occurred
but for the defendant's conduct.
I dissent because, applying the "but for" standard, the
record contains insufficient evidence to find that Neadle's fraud
was a cause of the $20 million in unpaid claims. Because of this
error in loss calculation, I would vacate and remand for
resentencing.
I. Causation as an Element of Loss
In my view, the Guidelines require a finding of
causation before a harm may be used as loss for purposes of
section 2F1.1. The causation requirement, pervasive in the
criminal law, see infra part II, is made explicit in the language
of the Guidelines and is buttressed by caselaw and policy
considerations.
A. The Language of the Sentencing Guidelines
The plain language of the Guidelines dictates that
courts must make a finding of causation before assigning some
harm as loss under section 2F1.1. Although the text of section
2F1.1 contains no definition of the specific offense
3
characteristic loss, the Guidelines provide for such deficiencies
by establishing default rules that govern, inter alia, what
conduct and harms are relevant to determining specific offense
characteristics. One of these default rules makes clear that
courts may consider only those harms that were caused by the
defendant's conduct. Because no other provision of the
Guidelines provides instructions to the contrary, this default
rule governs the determination of loss under section 2F1.1.
Because the loss table in effect at the time of
sentencing -- the 1993 loss table -- would provide for a greater
penalty than would the loss table in effect at the time of the
offense -- the 1988 loss table -- the 1988 Guidelines apply in
their entirety.0 Thus, except where noted, my discussion is
based on the 1988 Guidelines.
0
USSG § 1B1.11(b)(1) (1994) states that "[i]f the court
determines that use of the Guidelines Manual in effect on the
date that the defendant is sentenced would violate the ex post
facto clause of the United States Constitution, the court shall
use the Guidelines Manual in effect on the date that the offense
of conviction was committed." USSG § 1B1.11(b)(2) (1994) then
states that "[t]he Guidelines Manual in effect on a particular
date shall be applied in its entirety." See generally United
States v. Corrado, 53 F.3d 620 (3d Cir. 1995) (explaining this
"one book rule"). Because the loss table in effect at the time
of sentencing provides for more jail time per dollar of loss than
do earlier versions of the loss table, see majority opinion note
3, the Guidelines applicable at the time of the offense apply in
their entirety.
The question then is: what version of the Guidelines
was in effect at the time of Neadle's offense? The majority and
the district court apply the 1988 edition of the Guidelines,
which incorporates amendments effective October 15, 1988. They
do this despite the fact that there is a strong argument that the
offense for which Neadle was convicted occurred on January 5,
1988. Pursuant to a plea agreement, Neadle was convicted of only
the mail fraud charge alleged in count two of the indictment.
4
1. Section 1B1.3
The text of section 2F1.1 provides no definition of the
term loss. It simply states that "[i]f the loss exceeded $2,000,
increase the offense level as follows," and then provides a table
of sentencing increases based on different amounts of loss. See
USSG § 2F1.1(b). Thus, we must look elsewhere for the definition
of loss.
The first place to look is Chapter 1, Part B of the
Guidelines, which provides guidance on how to interpret the
Guidelines' sometimes sparse provisions. Within this chapter,
USSG § 1B1.3 specifies what information courts may consider in
determining, inter alia, specific offense characteristics such as
loss under 2F1.1. See USSG § 1B1.3(a). The information
specified in section 1B1.3(a) is the only information relevant to
determining specific offense characteristics "[u]nless otherwise
specified" by another provision of the Guidelines. Id.; see also
USSG § 1B1.3 Background ("Subsection (a) establishes a rule of
construction by specifying, in the absence of more explicit
Count two charges that the crime of mail fraud occurred on
January 5, 1988, when Neadle mailed a letter to the Insurance
Division stating that its assets were unencumbered.
Nevertheless, the district court's judgment states that the
offense was concluded on October 31, 1989. The district court's
finding as to the duration of the offense seems justified by the
fact that Neadle concealed his initial mail fraud by continuously
filing false quarterly reports. Although it is unclear whether
Neadle accepts the district court's finding as to the duration of
his offense, he seems to acquiesce in the use of the 1988
Guidelines. Because of Neadle's acquiescence and the agreement
of the government, the district court, and the majority that the
1988 Guidelines apply, I will use the 1988 Guidelines as well.
5
instructions in the context of a specific guideline, the range of
conduct that is relevant to determining the offense level . . .
.").
Section 1B1.3(a) establishes several important
interpretive rules. Subsection (a)(1) states that specific
offense characteristics will be based only on the following
conduct: acts and omissions committed, aided and abetted by the
defendant, or for "which the defendant would be otherwise
accountable" (defined as conduct counseled, commanded, induced,
procured, or willfully caused by the defendant, reasonably
foreseeable acts in furtherance of a conspiracy, or, conduct
underlying a conviction for solicitation, misprision or accessory
after the fact that reasonably should have been known by the
defendant)0 "that occurred during the commission of the offense
0
Application Note 1 defines "conduct 'for which the defendant is
otherwise accountable'" as follows:
Conduct "for which the defendant is otherwise
accountable," as used in subsection (a)(1),
includes conduct that the defendant
counseled, commanded, induced, procured, or
willfully caused. If the conviction is for
conspiracy, it includes conduct in
furtherance of the conspiracy that was known
to or was reasonably foreseeable by the
defendant. If the conviction is for
solicitation, misprision or accessory after
the fact, it includes all conduct relevant to
determining the offense level for the
underlying offense that was known to or
reasonably should have been known by the
defendant.
USSG § 1B1.3 Application Note 1 (citations omitted). This
definition has been, for the most part, incorporated into the
text of the current version of section 1B1.3. See USSG §
1B1.3(a)(1) (1994). We may consider subsequent amendments to the
6
of conviction, in preparation for that offense, or in the course
of attempting to avoid detection or responsibility for that
offense, or that otherwise were in furtherance of that offense."
USSG § 1B1.3(a)(1). Except for a special class of offenses --
"offenses of a character for which § 3D1.2(d) would require
grouping of multiple counts" -- this is the only conduct courts
may consider absent an expression of contrary intent.0
More importantly, subsection (a)(3) establishes a
causation requirement with respect to harms. Unless otherwise
specified, the only harm that is to be taken into account in
determining a specific offense characteristic is harm "that
resulted from" the acts and omissions identified above "if the
harm . . . was caused" with the requisite level of intent, and
harm that was "the object of such acts and omissions." USSG
§1B1.3(a)(3) (emphasis added).0 That the harm must be caused
with some bad intent necessitates that the harm be caused in the
Guidelines "to the extent that such amendments are clarifying
rather than substantive changes." USSG § 1B.11(b)(2) (1994).
0
"Solely with respect to offenses of a character for which
§3D1.2(d) would require grouping of multiple counts," courts may
also take into account "all such acts and omissions that were
part of the same course of conduct or common scheme or plan as
the offense of conviction." USSG § 1B1.3(a)(2).
0
In full, Section 1B1.3(a)(3) states that courts may consider
all harm or risk of harm that resulted from
the acts and omissions specified in
subsections (a)(1) and (a)(2) above, if the
harm or risk was caused intentionally,
recklessly or by criminal negligence, and all
harm or risk that was the object of such acts
or omissions.
USSG § 1B1.3(a)(3).
7
first place. Furthermore, the plain meaning of "resulted from"
connotes causation. Indeed, Webster's Third New International
Dictionary defines the verb "result" as follows: "to proceed,
spring, or arise as a consequence, effect, or conclusion."
Webster's Third International Dictionary of the English Language
1937 (Philip Babcock Gove ed., 1966). Thus, absent an expression
to the contrary, a court may take into account only harm that
"arose as a consequence" of the defendant's conduct -- and only
if that harm was "caused" with some bad intent -- and (perhaps
for offenses that were thwarted prior to their completion) harm
that was "the object" or purpose of the defendant's conduct.0
0
I recognize that subsequent versions of the Guidelines have
deleted the requirement that the harm be caused with bad intent,
as well as the "risk of harm" language. In the 1994 Guidelines,
for example, section 1B1.3(a)(3) states that courts may consider
"all harm that resulted from the acts and omissions specified in
subsections (a)(1) and (a)(2) above, and all harm that was the
object of such acts and omissions." The Committee explained
these changes as follows:
The purpose of this amendment is to delete
language pertaining to "risk of harm" and
"state of mind" as unnecessary. Cases in
which the guidelines specifically address
risk of harm or state of mind are covered in
the amended guideline under subsection (a)(4)
[formerly subsection (a)(5)]. In addition,
the amendment deletes reference to harm
committed "intentionally, recklessly, or by
criminal negligence" as unnecessary and
potentially confusing.
USSG Appendix C, Amendment 76, p. 86 (1994). To the extent these
changes can be characterized as "clarifying rather than
substantive changes," which we are invited to take into account
in understanding an earlier version of the Guidelines, see USSG
§1B.11(b)(2) (1994), they do not change my view that the
Guidelines establish a causation requirement. Section
1B1.3(a)(3) retains the "resulted from" language, which, as I
state in the text, connotes causation.
8
Because loss under section 2F1.1 is clearly a "harm"
within the meaning of section 1B1.3, see USSG § 1B1.3 Application
Note 3 (defining "harm" as "bodily injury, monetary loss,
property damage and any resulting harm" (emphasis added)),
section 1B1.3's requirement of causation applies. Thus, if no
other Guideline provisions addressed the definition of loss, the
bare statement in the text of section 2F1.1 to increase the
defendant's sentence on the basis of loss must be read to include
a requirement of causation.
2. Other Guidelines Provisions
Turning now to other provisions of the Guidelines that
address the issue of loss, the question is not whether they
explicitly state a causation requirement, but whether they
contradict the rule of causation established by section 1B1.3. I
conclude that the Application Notes to section 2F1.1, and the
materials referenced therein, only reinforce 1B1.3's causation
requirement.
Application Note 7 to section 2F1.1 deals specifically
with the definition of loss, but it provides little guidance. It
states as follows:
Valuation of loss is discussed in the
Commentary to § 2B1.1 (Larceny, Embezzlement,
and Other Forms of Theft). In keeping with
the Commission's policy on attempts, if a
probable or intended loss that the defendant
was attempting to inflict can be determined,
that figure would be used if it was larger
than the actual loss. For example, if the
fraud consisted of attempting to sell $40,000
in worthless securities, or representing that
a forged check for $40,000 was genuine, the
9
"loss" would be treated as $40,000 for
purposes of this guideline.
USSG § 2F1.1 Application Note 7.
The Commentary to section 2B1.1 (the Guideline for
"Larceny, Embezzlement, and Other Forms of Theft"), referenced
above, provides slightly more guidance:
"Loss" means the value of the property taken,
damaged or destroyed. Ordinarily, when
property is taken or destroyed the loss is
the fair market value of the particular
property at issue. Where the market value is
difficult to ascertain or inadequate to
measure harm to the victim, the court may
measure loss in some other way, such as
reasonable replacement cost to the victim.
When property is damaged, the loss is the
cost of repairs, not to exceed the loss had
the property been destroyed.
USSG § 2B1.1 Application Note 2. Thus, for theft and similar
crimes, the Guidelines state that "'[l]oss' means the value of
the property taken, damaged, or destroyed."
This definition certainly does not negate section
1B1.3's background rule of causation. If anything, the
definition itself suggests a causation requirement. Implicit in
this definition is that loss means the value of the property
taken, damaged, or destroyed by the defendant. The terms
"taken," "damaged," and "destroyed" have meaning only insofar as
there is a subject -- a taker, damager, or destroyer. In this
context, the subject must be the defendant -- the person being
sentenced for taking, damaging, or destroying some property. In
other words, loss for purposes of section 2B1.1 is the value of
10
the property that the defendant caused to be taken, damaged, or
destroyed.0
Another provision touching on the concept of loss is
Application Note 8 to section 2F1.1, which deals with loss
estimation. It states:
The amount of loss need not be precise. The
court is not expected to identify each victim
and the loss he suffered to arrive at an
exact figure. The court need only make a
reasonable estimate of the range of loss,
given the available information. The
estimate 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. Estimates
based upon aggregate "market loss" (e.g., the
aggregate decline in market value of a stock
resulting from disclosure of information that
was wrongfully withheld or misrepresented)
are especially appropriate for securities
cases. The offender's gross gain from
committing the fraud is an alternative
estimate that ordinarily will underestimate
the loss.
USSG § 2F1.1 Application Note 8. This provision's discussion of
loss estimation does not undercut the background requirement of
causation.
The only provision that explicitly mentions the issue
of causation is Application Note 11. It states:
In a few instances, the total dollar loss
that results from the offense may overstate
0
As I explain below, see infra section I.B, we have held that
loss for purposes of section 2B1.1 is not identical to loss for
purposes of section 2F1.1, despite the latter's reference to the
former's definition. My point here is simply that nothing in the
commentary to section 2B1.1 undercuts the rule that only harms in
some sense caused by the defendant can be assigned as loss under
section 2F1.1.
11
its seriousness. Such situations typically
occur when a misrepresentation is of limited
materiality or is not the sole cause of the
loss. Examples would include understating
debts to a limited degree in order to obtain
a substantial loan which the defendant
genuinely expected to repay; attempting to
negotiate an instrument that was so obviously
fraudulent that no one would seriously
consider honoring it; and making a
misrepresentation in a securities offering
that enabled the securities to be sold at
inflated prices, but where the value of the
securities subsequently declined in
substantial part for other reasons. In such
instances, a downward departure may be
warranted.
USSG § 2F1.1 Application Note 11.
The phrase "when a misrepresentation is . . . not the
sole cause of the loss" might suggest that the loss figure can
include harms not caused by the defendant. But this is a
misreading of the Application Note. That the defendant's conduct
need not be the sole cause of the loss in no way excuses that
conduct from being a cause.0 The availability of a downward
0
My view is not changed by subsequent amendments to the
Application Notes to section 2F1.1. Even if these amendments are
given weight as "clarifying" changes, I do not find them
sufficient to overcome the background rule of causation. In lieu
of Application Note 11, Application Note 7 to section 2F1.1,
which deals specifically with the definition of "loss," now
contains an additional paragraph:
There are, however, instances where
additional factors are to be considered in
determining the loss or intended loss:
. . . .
(b) Fraudulent Loan Application and Contract
Procurement Cases
In fraudulent loan application cases and
contract procurement cases, the loss is
the actual loss to the victim (or if the
12
loss has not yet come about, the
expected loss). For example, if a
defendant fraudulently obtains a loan by
misrepresenting the value of his assets,
the loss is the amount of the loan not
repaid a the time the offense is
discovered, reduced by the amount the
lending institution has recovered (or
can expect to recover) from any assets
pledged to secure the loan. However,
where the intended loss is greater than
the actual loss, the intended loss is to
be used.
In some cases, the loss determined above
may significantly understate or
overstate the seriousness of the
defendant's conduct. For example, where
the defendant substantially understated
his debts to obtain a loan, which he
nevertheless repaid, the loss determined
above (zero loss) will tend not to
reflect adequately the risk of loss
created by the defendant's conduct.
Conversely, a defendant may understate
his debts to a limited degree to obtain
a loan (e.g., to expand a grain export
business), which he genuinely expected
to repay and for which he would have
qualified at a higher interest rate had
he made truthful disclosure, but he is
unable to repay the loan because of some
unforeseen event (e.g., an embargo
imposed on grain exports) which would
have caused a default in any event. In
such a case, the loss determined above
may overstate the seriousness of the
defendant's conduct. Where the loss
determined above significantly
understates or overstates the
seriousness of the defendant's conduct,
an upward or downward departure may be
warranted.
USSG § 2F1.1 Application Note 7 (1994). In the second example in
this note -- the grain exporter example -- the Guidelines seem to
assign as "loss" a harm that would have occurred regardless of
the defendant's fraud. The example assumes that the grain
exporter would have (1) obtained the loan whether or not he
13
departure for situations in which a misrepresentation is not the
"sole cause" of the loss simply accounts for the fact that some
events have multiple causes. If causes beyond the defendant's
control played a large role in the loss, a downward departure may
be justified. If anything, the Note's discussion of a
misrepresentation that is not the "sole cause" of the loss
implies that such misrepresentation is a cause of the loss, and
the Note thus supports the need for a finding of causation. See
United States v. Kopp, 951 F.2d 521, 531 (3d Cir. 1991)
("Application Note 11 made it clear that actual loss was how much
better off the victim would be but for the defendant's fraud. To
the extent actual loss had other, more proximate causes, a
discretionary downward departure . . . might be appropriate."
(emphasis added)).0
committed fraud; and (2) defaulted on the loan whether or not he
committed fraud. Nevertheless, the example suggests that the lack
of causation is a ground for downward departure, and thus, the
argument goes, the lack of causation should not be factored into
"loss" in the first instance.
I reject this argument for the same reasons that I
state in the text. In addition, I note that the grain exporter
example is stated under the heading "Fraudulent Loan Application
and Contract Procurement Cases," of which the present case is
neither.
0
The statements from Kopp quoted in the text shed light on some
other confusing language from that case. Language in Kopp
arguably suggests that Application Note 11 mandates taking
account of the lack of causation only by way of making a downward
departure, and not by adjusting the amount of loss:
The government is correct on one point,
however: Application Note 11 definitively
rejected adjusting the "loss" itself downward
to reflect other causes beyond the
defendant's control. As an example of when
the dollar loss may overstate the seriousness
14
In the end, the Application Notes to section 2F1.1, and
the materials referenced therein, only reinforce 1B1.3's
causation requirement. Reading these materials together with the
background rule of causation, the Guidelines seem to contemplate
the following approach: The court should first make an estimate
of the loss, i.e., the financial harm caused by the defendant. If
the harm caused by the defendant was also caused by other factors
beyond the defendant's control, the court should consider making
a downward departure to better reflect the seriousness of the
defendant's offense.
B. Caselaw
This Court's caselaw also suggests the presence of a
causation requirement in the definition of loss. In United
States v. Kopp, 951 F.2d 521, we exhaustively analyzed the
definition of loss under section 2F1.1. We concluded that the
definition of loss for fraud sentencing under section 2F1.1 is
not the same as section 2B1.1's "amount taken" rule even though
section 2F1.1 makes reference to section 2B1.1's definition of
loss. See
id. at 529 ("Application Note 7 to USSG § 2F1.1 does
not say that the definitions of 'loss' for theft and fraud cases
of the defense and hence a downward departure
may be appropriate, Application Note 11
included situations where the
"misrepresentation . . . is not the sole
cause of the loss."
951 F.2d at 531. However, this language was followed immediately
by the statements quoted in the text, which make clear that we
were speaking of situations in which the defendant caused the
loss, but where other factors also played a causal role.
15
are identical, just that '[v]aluation of loss is discussed in the
Commentary to § 2B1.1 . . . ."). In Kopp, the defendant procured
a bank loan by means of fraudulent misrepresentations. The
district court calculated loss as the full amount of the loan,
despite the fact that the victim of the fraud -- the bank --
recovered most of the loan amount by selling the property
securing the loan. In rejecting the government's argument that
loss was appropriately calculated because the face value of the
loan was the amount "taken," USSG § 2B1.1 Note 2, we sought to
develop a sensible definition of loss for the fraud context.
Thus, we defined "fraud 'loss' as . . . the amount of money the
victim has actually lost." Id. at 536.0
Although we were not directly confronted with the
causation issue we face here, we suggested that our definition of
fraud loss as "the amount of money the victim has actually lost"
incorporates a causation requirement. We stated, in response to
the government's argument, that "Application Note 11 [of the
original Guidelines] made it clear that actual loss was how much
better off the victim would be but for the defendant's fraud."
Id. at 531 (emphasis added). This "but for" statement is a
classic articulation of the causation requirement. See infra
part II. More importantly, the fairness concerns that drove Kopp
are very much present in this case. In Kopp, we were concerned
with the district court's assignment as loss a financial harm
that had not occurred. Although the issue here -- the district
0
The current Guidelines incorporate this definition of fraud
loss. See USSG § 2F1.1 Application Note 7 (1994).
16
court's assignment as loss a financial harm that did occur but
which may not have been caused by the defendant -- is perhaps
analytically distinct, it shares the same basic problem:
punishing the defendant for harm that he or she did not cause.
I also note that this Court and others have repeatedly
suggested the need for finding causation in making a loss
determination. See, e.g., United States v. Daddona, 34 F.3d 163,
170 (3d Cir.) (remanding for resentencing because the record did
not contain any indication that the loss figure used by the
district court "was due to the fraud of the appellants"), cert.
denied,
115 S. Ct. 515 (1994); United States v. Marlatt,
24 F.3d
1005, 1007 (7th Cir. 1994) (applying proximate cause analysis in
assessing the district court's determination of loss); United
States v. Harper,
32 F.3d 1387, 1392 (9th Cir. 1994) ("What we do
insist upon, however, is use of a realistic, economic approach to
determining what losses he truly caused or intended to cause . .
. ."), cert. denied, 115 S. Ct. 1162 (1995); United States v.
Wilson,
980 F.2d 259, 262 (4th Cir. 1992) ("When the offense
involves making a false statement, the inquiry to determine loss
must focus on the amount of loss related to the false
statement.").
C. Policy Considerations
Finally, good sentencing policy requires that there be
a causal link between the defendant's crime and the harm on which
his or her sentence is based. This causation requirement effects
two fundamental Guidelines sentencing policies: First, that
17
courts sentence defendants according to "the nature and degree of
the harm caused by the[ir] offense[s]," United States v. Kopp,
951 F.2d 521, 529 (3d Cir. 1991) (quoting 28 U.S.C.A. § 994(c)(3)
(West Supp. 1991)) (emphasis added); and second, that courts
sentence similarly situated defendants similarly, see id.; USSG
Part A, section 3, p. 1.2 (1988) ("Congress sought uniformity in
sentencing by narrowing the wide disparity in sentences imposed
by different federal courts for similar criminal conduct by
similar offenders.") Sentencing defendants on the basis of
fortuitous harm that they in no sense caused would thwart both of
these policies.
D. Conclusion
In summary, I am convinced that a harm cannot be
considered loss under section 2F1.1 unless the defendant's
conduct was a cause of that harm. The causation requirement
emanates from the interpretive principles of section 1B1.3, the
provisions of the fraud and theft guidelines, and is supported by
caselaw and policy considerations. However, because of the
sparse and sometimes confusing guidance provided by the
Application Notes, I believe that the Sentencing Commission
should articulate a comprehensive approach to determining loss.
Until that time, I believe that my approach best harmonizes the
many provisions at issue and best accords with fundamental
sentencing policy.
II. The Content of the Causation Requirement
18
Having established that the Guidelines contemplate a
causation requirement in its definition of loss, I must now
address the more difficult question of the content of the
causation requirement. I need not, however, establish a
comprehensive definition of causation under the Guidelines, for
the figure approved by the majority -- the $20 million in unpaid
claims -- fails even the most minimal causation test. In
addition, it would be unwise to embark on such an ambitious task
when subsequent cases faced with concrete problems can better
resolve the various issues raised.
The notion of causation runs throughout the law --
including the criminal law -- and it is generally understood to
encompass two concepts. A defendant's conduct must generally be
both the "cause in fact" and the "proximate cause" of some harm
before liability is imposed. See Wayne R. LaFave & Austin W.
Scott, Jr., 1 Substantive Criminal Law § 3.12, at 393-99 (1986);
Richard A. Epstein, Cases and Materials on Torts 363-64 (5th ed.
1990); 4 Fowler V. Harper et al., The Law of Torts § 20.2, at 89-
90, § 20.4, at 130-33 (2d ed. 1986) ("Harper, James, & Gray"); W.
Page Keeton et al., Prosser and Keeton on The Law of Torts § 41,
at 263-65 (5th ed. 1984) ("Prosser & Keeton"). While neither of
these concepts are susceptible to uncontroversial definitions, a
working understanding of them is useful.
The requirement of cause in fact purports to be an
empirical test of whether the defendant's conduct was a necessary
antecedent to the harm at issue. See, e.g., Harper, James, &
Gray, supra § 20.2, at 89-91. The most common expression of
19
this test is the "but for" formulation: the defendant's conduct
is a cause in fact of some harm if the harm would not have
occurred but for the defendant's conduct. See LaFave & Scott,
supra, at 393-94; Harper, James, & Gray, supra, § 20.2, at 91;
Prosser &
Keeton, supra, at 265-66. LaFave and Scott note that
the Model Penal Code and several state codes put forth the "but
for" test explicitly. See LaFave &
Scott, supra, at 394 n.11
(stating that "Model Penal Code § 2.03(1) declares that conduct
'is the cause of a result when . . . it is an antecedent but for
which the result in question would not have occurred'" and citing
similar state codes).
Courts sometimes apply a different test -- the
"substantial factor" formulation -- to special causation problems
not adequately addressed by the "but for" test. For example,
when the conduct of each of two actors acting independently could
have caused the harm at issue, and thus neither is the "but for"
cause, courts generally hold both actors liable under the
substantial factor test. See, e.g., Prosser & Keeton, supra, at
268.
Proximate cause, on the other hand, is a more
explicitly policy-based determination of whether an actor's
conduct, despite its being a cause in fact, is too tenuously
linked to the injury to hold the actor liable. See, e.g.,
Prosser & Keeton, supra, § 42, at 272-73 (5th ed. 1984). Courts
have used various different tests to address this issue. See,
e.g., id. at 273-80.
20
In this case, we are concerned only with the
requirement of cause in fact.0 Because the facts do not present
any special causation problems, I need only apply the standard
"but for" test. I now turn to a review of the facts and
application of the "but for" test to them.
III. Application of the Causation Requirement
A. The Misrepresentation
I take issue with the majority's assertion that on the
facts of this case, there is a "clear causal connection between
the fraud and the policy holders' losses." Neadle's only fraud
was in misrepresenting that he had $700,000 of unsecured assets
backing his insurance venture. In order to conclude, as the
majority and district court do, that this fraud was a "but for"
cause of the over $20 million in unpaid claims, one must make the
following inferences: first, that had Neadle not committed
fraud, he would not have obtained an insurance license; second,
that the AMPAC insureds would have thus purchased insurance from
other insurance companies; and third, that these insurance
companies would have paid all of their Hurricane Hugo related
claims.0 While these inferences might be plausible in theory,
0
It may ultimately be appropriate to hold that only harm
proximately caused by the defendant's conduct can be deemed
"loss." See United States v. Marlatt, 24 F.3d 1005, 1007 (7th
Cir. 1994) (applying proximate cause analysis to a district
court's determination of loss). However, it is unnecessary to
reach this question on the facts of this case.
0
These inferences were explicit in the district court's opinion:
If the defendant had not obtained his license
by fraud, he would not have been in a
21
there is no evidence in the record to support them. In fact,
record evidence undercuts the plausibility of such inferences.
First, there is no evidence that Neadle would have been
unable to obtain an insurance license without committing fraud.
Given his ability to post $500,000 in cash when his surety bond
was called into question, he might have found backers for another
$700,000. If Neadle had obtained a license legitimately, he
could have issued insurance to the same policy holders, and AMPAC
still would have been unable to meet the $24 million in Hurricane
Hugo claims. At best, the policyholders would have obtained an
additional $700,000.0
Second, no record evidence supports the inference that
had AMPAC not been in the insurance business, AMPAC policy
holders would have purchased insurance from other companies. This
is a striking omission given the recent history of the
unavailability of insurance in the Virgin Islands. Indeed, the
record shows that only local companies wrote policies for the
same kinds of customers and coverage that AMPAC did, and that
there were few local companies in operation. Deverita
position to issue insurance coverage and
would not have had the customers or
policyholders he did have. Therefore, the
policyholders would have obtained coverage
from other insurance companies, companies
that did meet Hurricane Hugo claims.
0
Even if AMPAC had initially held an additional $700,000 in
unencumbered assets, it is unclear that the government or the
policyholders would have obtained these funds. An insurance
company, once qualified, is not required to keep the full
$700,000 as part of its capital structure. Subject to certain
limitations, an insurance company can "make use of its surplus
for the development of its business." 22 V.I. Code § 465.
22
Sturdivant, then director of Banking and Insurance, testified
before the grand jury as follows:
Considering the fact that we had very
few companies operating in the territory at
the time that [Neadle] came on board, as I
said, we had a mass exodus of companies from
the territory in '85 and we had chaos,
basically with unauthorized companies in '87.
And so by the time Mr. Neadle and a couple of
other domestics came on the scene in '88,
late '87, we felt that perhaps the market was
turning around. The availability problem was
no longer acute because people were receiving
cover [sic]. And oftentimes the small
domestic companies were willing to provide
the kind of coverage that many of the larger
companies would not provide. [The larger
companies] often could pick and choose their
clients.
Thus, one cannot assume that the AMPAC policy holders would have
found insurance elsewhere.
Finally, the record is devoid of evidence supporting
the inference that other insurance companies would have met all
of their Hurricane Hugo claims. Rather, the record shows that at
least one insurance company that did not misrepresent the amount
of its assets, American Alliance, was unable to pay all of its
Hurricane Hugo claims. The record also shows that most of the
small domestic insurance companies -- possibly the only companies
covering the same kinds of risks and policyholders as AMPAC --
lacked the assets necessary to cover the huge Hurricane Hugo
losses. Sturdivant testified before the grand jury that "just
about all of the companies that came on board, the small domestic
companies, came with the minimum statutory capital and surplus
requirements. They came with $1.2 million and that's it." If
23
AMPAC had not obtained a license to sell insurance, its customers
may have purchased insurance from American Alliance or other
companies unable to meet Hurricane Hugo claims.
On this record, then, I cannot conclude that Neadle's
fraud was a cause in fact of AMPAC's inability to pay the over
$20 million in claims. In summary: (1) had Neadle met the
$700,000 requirement, AMPAC would still have been unable to pay
the Hugo losses; (2) the district court's (and the majority's)
intimation that other companies would have written the AMPAC
policies is purely speculative and unsupported by the record; (3)
if other companies were willing to provide the coverage AMPAC
did, they may have been similarly undercapitalized; and (4) at
least one other company that met the $700,000 requirement was
unable to pay its Hugo claims.
B. United States v. Robichaux
United States v. Robichaux, 995 F.2d 565 (5th Cir.),
cert. denied, 1
14 S. Ct. 322 (1993), which the majority cites to
support its decision, is distinguishable. In that case, the
defendant misrepresented to an auditing firm hired by the
Louisiana Insurance Commission that securities he had assigned to
an insurance company were unencumbered. The firm relied on the
defendant's statement and issued a favorable audit. Two years
later, the company was declared insolvent. The Fifth Circuit
upheld the district court's conclusion that the defendant was
responsible for all of the losses attributable to the insurance
company's failure.
24
Notably, the Fifth Circuit applied a cause in fact
analysis similar to the one I describe in this opinion. However,
it found that the district court's inferences were "plausible in
light of the record read as a whole":
It is not clearly erroneous to assume that if
[the auditor] had not issued a favorable
audit for [the insurance company], which only
occurred because of [the company's]
fraudulently inflated balance sheet, the
Commission would have acted to liquidate the
firm at an earlier date and minimized the
losses.
Id. at 571.
The Fifth Circuit's holding that the district court's
inferences were "plausible in light of the record read as a
whole" says nothing about this case, where the record casts
serious doubt on the plausibility of the district court's
inferences. To the extent Robichaux supports a relaxed inquiry
into causation -- which I do not think is the case -- I disagree
with it for the reasons expressed in Part I.
C. The Majority's Other Arguments
The remainder of the majority's reasoning fares no
better. The majority asserts that "the deceitful and slipshod
way in which Neadle ran the business" -- i.e., failure to keep
proper books and misrepresentations in quarterly reports --
"supports the district court's attribution of responsibility to
him for the [$20 million] losses." This assertion suggests two
possible arguments, neither of which is convincing.
25
First, the majority might mean that Neadle's poor
record-keeping was a cause of the unpaid AMPAC claims. Evidence
in the record suggests that beyond the minimum capital
requirements, the Insurance Division policed the funds of
insurance companies to ensure that companies maintained adequate
reserves in proportion to the coverage they wrote. Thus, if we
assume that AMPAC was inadequately capitalized,0 it is possible
that if Neadle had kept accurate books, the Insurance Division
might have discovered the inadequacy and taken remedial measures.
However, even if Neadle's poor accounting was, in some
sense, a cause of the unpaid AMPAC claims, the Guidelines do not
allow Neadle to be sentenced on the basis of this harm. Under
section 1B1.3, only certain harms sufficiently connected to the
defendant's criminal conduct can be used to calculate a specific
offense characteristic. See supra part I. On a different
record, it might be argued that Neadle's poor record-keeping was
a means of hiding his misrepresentations and thus that harms
caused by the poor record-keeping "occurred . . . in the course
of attempting to avoid detection or responsibility for th[e]
offense [of conviction]," USSG § 1B1.3(a)(1). But here no
record evidence suggests that Neadle's lax accounting was a means
of avoiding detection.
Second, the majority might be asserting that Neadle
meant to use AMPAC essentially to rob his clients, and thus that
he intended to cause some significant loss. Courts may sentence
0
This assumption is probably not justified given the $4 million
in reinsurance that AMPAC maintained. See infra.
26
defendants on the basis of "intended loss" if that figure is
greater than actual loss. USSG § 2F1.1 Application Note 7; see
also USSG § 1B1.3(a)(3) (stating that courts may consider harm
that was "the object of" the defendant's conduct).
However, once again, there is no record evidence that
Neadle intended any loss. In fact, the record is replete with
evidence to the contrary. Neadle purchased $4 million worth of
reinsurance, an amount, that according to his uncontroverted
testimony, professionals had advised was sufficient. The Virgin
Islands did not require that companies have any reinsurance, and
no one in the Virgin Islands government told Neadle how much
reinsurance AMPAC should carry. Until Hurricane Hugo, AMPAC paid
claims promptly, and was never reprimanded or sanctioned by the
Insurance Division for wrongful denial or failure to pay claims.
D. The Proper Calculation of Loss
Having concluded that the bulk of the unpaid AMPAC
claims was not caused by Neadle's misconduct and thus cannot be
assigned as loss under section 2F1.1, I feel obligated to suggest
how loss might appropriately be calculated. In so doing, I
question the basic model employed by the district court and the
majority -- that loss is based on the unmet claims of the
policyholders.
One reasonable estimation of loss in this case is the
$700,000 that Neadle misrepresented as unencumbered. Under the
majority's model, $700,000 is a sensible loss determination on
several grounds. Had Neadle not committed fraud and still
obtained an insurance license, AMPAC would probably have $700,000
27
more in assets than it does now, and the AMPAC insureds would be
that much better off. Or, had the AMPAC insureds bought
insurance from other legitimately formed insurance companies, the
evidence suggests that these companies may have been similarly
capitalized.
A different model for measuring loss that is consistent
with the text and structure of section 2F1.1 would also generate
a figure of $700,000. The indictment charged Neadle with
misrepresenting the status of the $700,000 to the Virgin Islands
government. If we focus on the Virgin Islands as the victim of
the fraud, the loss is the governmental or societal loss of the
$700,000 reserve.
Alternatively, we might measure loss in terms of what
Neadle obtained by virtue of his fraud. See USSG § 2F1.1
Application Note 8; see also Kopp, 951 F.2d at 530 (stating that
the defendant's gain can be used as a measure of loss when there
is some loss but it is not measurable). Here, Neadle obtained
the premiums of the policyholders to whom he falsely represented
were validly insured. While I cannot derive this sum from the
record, I surmise that it approaches $700,000 annually.
I do not deny that a sentence based on my suggested
loss calculations might give Neadle less time than he deserves.
To rectify this problem, the district court could depart upward
if the case meets the departure standard (although upper
calibration would have to start at the proper base offense
level). See United States v. Kikumura, 918 F.2d 1084 (3d Cir.
28
1990). If the resulting sentence is still too lenient, that is a
problem that only the Commission can address.
IV. Conclusion
For the reasons I have stated, the Guidelines require a
finding of causation before some harm is deemed loss under
section 2F1.1. This requirement demands, at the least, that the
defendant's conduct be a cause in fact of the harm. Because the
record contains insufficient evidence to find that Neadle's fraud
was a cause in fact of the $20 million in unpaid claims, I
respectfully dissent.
29
