filed: December 7, 1992; As Corrected December 14, 1992. Second Correction April 12, 1993.
Appeal from the United States District Court for the Western District of Pennsylvania. (D.C. Crim. No. 90-00217-2). (D.C. Crim. No. 90-00217-1. (D.C. Crim. No. 90-00217-1).
Before: Becker, Mansmann and Nygaard, Circuit Judges.
Michael E. Katora and Daniel A. Squire appeal from judgments in a criminal case after a jury convicted them of wire fraud and other related interstate offenses. We are called upon to decide whether subsection 3B1.1(c) of the United States Sentencing Guidelines, which increases a person's offense level for his role as an organizer, can apply when the only participants in an offense have shared equal responsibility. We are also called upon to determine whether the district court followed the correct legal standard in calculating the amount of loss resulting from the fraud. Because we conclude that subsection 3B1.1(c) does not apply unless a defendant has organized, led, managed or supervised another participant, (i.e., another legally culpable person), we will remand the case for resentencing.
After full consideration, we have concluded that the other arguments advanced by Katora and Squire are without merit.*fn1 We will therefore confine our Discussion to the applicability of subsection 3B1.1(c) and to the calculation of loss.
In essence, Katora and Squire telephoned their own phone service thousands of times so as to create the illusion that the service had large, bona fide accounts receivable, and then they sold those illusory accounts.
First, Katora and Squire, as officers of a corporation called Jobs 900, contracted with MCI to obtain several 900-prefix telephone numbers. The 900-prefix telephone service would allow Jobs 900, as a subscriber, to provide information to callers for a fee. MCI would collect the fee from the caller, subtract service charges, then forward the balance to the subscriber (Jobs 900).
In the same office as Jobs 900, Katora and Squire connected automatic dialing equipment to four telephone lines. Renaissance Marketing, a company that Squire controlled, subscribed to regular MCI long-distance service on these four lines. Although Renaissance Marketing and Jobs 900 shared an office, Squire gave a different billing address for Renaissance Marketing.
Meanwhile, Katora and Squire negotiated a contract with James Janota of Commercial Factors. A factor is a firm that buys accounts receivable at a discount.*fn2 As part of Janota's due diligence, he visited the Jobs 900 office where he observed equipment, a receptionist, and other employees. Janota, Katora, Squire and Katora's attorney then reviewed the contract, line by line.
In the contract, Katora and Squire gave personal guarantees and warranted that:
16. Each account offered for sale to FACTOR is an accurate statement of a bona fide sale, delivery and acceptance of merchandise or performance of service by CLIENT to customer.
17. CLIENT does not own, control or exercise dominion over, in any way whatsoever, the business of any account/customer to be factored by CLIENT to FACTOR.
R. at 866-69. The contract also set a $250,000 limit, subject to increase at Commercial Factors' discretion. After reviewing the contract, Katora's attorney warned him in a letter that paragraph 16 "could pose some problems for you." He also addressed Katora's personal guarantee and whether a bankruptcy creditor could reach Katora's personal income, which consists of tax-free disability pay.
On October 2, 1990, Katora and Squire began using the automatic dialer to call one of the 900-prefix numbers. MCI would bill Renaissance Marketing for the calls. Except for MCI's service charges, the amount due from Renaissance Marketing (Squire's company) would become an account receivable for Jobs 900 (Katora's and Squire's company). Each call was the equivalent of an I.O.U., written on MCI stationery, from Renaissance Marketing to Jobs 900.
In the first seven days, Renaissance Marketing's bill totalled over $200,000, and correspondingly, Jobs 900 had accounts receivable for almost the same amount (after MCI's service charges). Katora and Squire then raised rates on some of the other 900-prefix numbers. They eventually made some 350,000 calls, worth about $3.6 million. Most of the $3.6 million would appear to be bona fide accounts receivable for Jobs 900; MCI's service charges on the calls totalled less than $130,000.
On October 22, Katora and Squire gave Janota an MCI report showing receivables due from some of Renaissance Marketing's calls to Jobs 900. They did not tell Janota that they controlled Renaissance Marketing. Nor did they tell Janota that they had made the calls themselves.
Katora did tell Janota that MCI had approved the factoring arrangement in writing, even though MCI had not. At first, Katora claimed that MCI's signature on the approval did not come through on a fax. Finally, Katora produced a faxed acknowledgement from MCI that it had received the approval agreement for purposes of review. Janota faxed the acknowledgment to his supervisor, who authorized him to send a $123,390 check by Federal Express. FBI agents picked up the check at the Federal Express Office and delivered it to Jobs 900.
During a jury trial, Katora and Squire asserted that they made the 350,000 phone calls to test MCI's ability to generate billing information. They also asserted that they intended to pay MCI with the check from Commercial Factors and to pay Commercial Factors with Katora's own funds, if necessary. Despite these assertions, the jury convicted each defendant of five counts of wire fraud in violation of 18 U.S.C. § 1343, and four counts of related acts in violation of 18 U.S.C. § 2314 (interstate travel in connection with, and transportation of, a fraudulently obtained check) and 18 U.S.C. § 371 (conspiracy).
In calculating the offense level for both Katora and Squire, the district court began with a base level of 6 pursuant to subsection 2F1.1(a) of the United States Sentencing Guidelines. The district court increased the base offense level by 2 because the offense required more than minimal planning, see U.S.S.G. § 2F1.1(b)(2)(A), and again by 2 for their roles as organizers, see U.S.S.G. § 3B1.1(c).
In support of its Conclusion that both were organizers, the district court found that "Katora both conceptualized and created Jobs 900 and shared much if not most of the final decision making authority that led to the implementation of the fraud . . . ." (R. at 2298.) The district court also concluded that "Squire shared most of the final decision making authority that lead to the creation and implementation of the fraud . . . . His role in organizing and staffing [Renaissance Marketing], along with his numerous directives to MCI and Commercial Factors representatives, highlight his role in the offense as an organizer, leader and manager." (R. at 2229.)
With respect to the amount of loss, the presentence reports had set the amount of loss at $3,615,838, the total bill generated by Renaissance Marketing's calls. The district court rejected that calculation, recognizing that the $3.6 million figure overstated the amount of loss. (R. at 2306.) Instead, the district court found that the actual or intended loss was $373,600, an amount slightly less than the sum of MCI's loss ($126,190) plus the factor's self-imposed limit ($250,000). The court thus increased the offense level by 9 under subsection 2F1.1(b)(1)(J) for an offense resulting in loss between $350,000 and $500,000.
The court thus set each defendant's offense level at 19. The resulting sentence range for each was 30-37 months. Consistent with its view that neither defendant was more culpable than the other, the district court sentenced each defendant to the identical term of imprisonment, 34 months.
Katora and Squire offer two challenges to their sentences. First, they argue that the district court should not have applied subsection 3B1.1(c) of the sentencing guidelines to them. Second, they argue that the district court calculated loss (pursuant to U.S.S.G. § 2F1.1(b)) under the wrong legal standard. We address each of these challenges in turn.
We have jurisdiction of these appeals from judgments in a criminal case. 18 U.S.C. § 3742(a); 28 U.S.C. § 1291. The district court had subject matter jurisdiction of the prosecution pursuant to 18 U.S.C. § 3231.
We "exercise plenary review over legal questions about the meaning of the sentencing guidelines, but apply the deferential clearly erroneous standard to factual determinations underlying their application." United States v. Inigo, 925 F.2d 641, 658 (3d Cir. 1991).
Part 3B1 of the guidelines directs a sentencing court to adjust a defendant's offense level based on his role in the offense. See U.S.S.G. Part 3B1, Introductory Commentary. Section 3B1.2 directs the court to decrease the offense level for a minor role. Pursuant to section 3B1.1, the section involved here, the court may increase the offense level for an aggravating role. It provides:
Based on the defendant's role in the offense, increase the offense level as follows:
If the defendant was an organizer or leader of a criminal activity that involved five or more participants or was otherwise extensive, increase by 4 levels.
If the defendant was a manager or supervisor (but not an organizer or leader) and the criminal activity involved five or more participants or was otherwise extensive, increase by 3 levels.
If the defendant was an organizer, leader, manager or supervisor in any criminal activity other than described in ...