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U.S. v. Monaco

filed: May 10, 1994.



Before: Becker and Nygaard, Circuit Judges, and Yohn, District Judge*fn*

Author: Nygaard


NYGAARD, Circuit Judge.

The government appeals from Thomas L. Monaco's sentence, contesting both the district court's application of, and its downward departure from the United States Sentencing Guidelines. For the reasons that follow, we will vacate the sentence and remand the cause to the district court.

The Oxy-Comm Contract

In July 1986, the Department of Defense ("DoD") awarded Northern Precision Laboratories, Inc. ("NPL") a contract to produce a test set for an aircraft pilot's oxygen/communications mask ("Oxy-Comm"). Payments were to be by periodic reimbursement for a fixed percentage of costs, overhead and other expenses incurred, with the balance of the fixed price to be paid upon completion. NPL's computerized accounting system was designed to track all costs incurred and assign them to the proper contract so progress payment request forms could be automatically generated. To receive a progress payment, these forms merely had to be submitted to the DoD. Although documentation for costs incurred was necessary in case of an audit, the form itself was sufficient for payment.

When NPL was awarded the Oxy-Comm contract, it was experiencing cash flow problems which made it difficult to satisfy NPL's working capital and net worth requirements under its loan agreements. To keep NPL's credit intact, its president and founder, Thomas L. Monaco, contacted the Cortec Group, an investment banking firm. In 1985, Cortec loaned $250,000 to NPL in return for a $50,000 annual management consulting fee and stock warrants exercisable within five years.

Monaco decided that by billing labor to the Oxy-Comm contract before it was actually performed, he could improve NPL's cash flow situation. To receive accelerated payments, Monaco had NPL's Accounting Department change his son's department number from Administration to Engineering, a direct labor classification. Monaco directed his son to prepare labor sheets falsely indicating that he worked 1,000 hours on job number 845 since August 1986. Job number 845 corresponded to the Oxy-Comm contract, but Monaco's son did not know that. The elder Monaco gave the labor sheets to NPL's Production Control Manager to be put into the computer system. Monaco then submitted a false progress payment request to the DoD which included the extra hours reported by his son. Monaco and his son generated four additional progress payment requests by simply repeating the procedure. As a result of these false hours, NPL received approximately $140,000 in accelerated payments.

The DESI Contract

NPL had earlier been awarded a subcontract from Sperry Corporation to produce a tracking system for NASA. It had received most of the payments under this fixed price contract. Unfortunately for NPL, because of technical problems with the system, more work remained to be done. Hoping to renegotiate the Sperry contract and get paid for this work, NPL set up job number 1040 to track the additional expenses it incurred.

Later, the DoD awarded NPL a contract to develop a digital end speed indicator ("DESI") to monitor the speed of naval aircraft taking off from carriers. This fixed price contract was also payable under the progress payment system. For reasons that are unclear, the DESI contract was also assigned job number 1040.*fn1 Because of this numerical duplication, charges related to the Sperry overrun were billed to the DESI contract and resulted in improper progress payments. A year later, Monaco discovered the error. By then, NPL's financial condition had deteriorated to the point that it could not repay the money and Monaco permitted NPL to keep the unearned progress payments.

These acts nevertheless failed to help NPL's financial condition. Monaco realized that NPL would need additional backing to successfully bid on upcoming contracts and again sought help from Cortec. At Monaco's request, Cortec exercised the previously issued warrants. After assuming control over NPL Cortec immediately ousted Monaco. It then discovered the billing discrepancies and notified the authorities. A few months later, Cortec placed NPL in Chapter 7 bankruptcy. As a result of the bankruptcy, what would have been merely an interest free loan from early payments ripened into a loss of over $381,000 to the United States.


Monaco and his son were indicted. Monaco pleaded guilty to conspiracy, 18 U.S.C. § 371, and his son pleaded guilty to aiding and abetting a false statement. Because part of Monaco's offense conduct took place after October 31, 1987,*fn2 sentence was imposed under the 1988 Sentencing Guidelines.*fn3 Beginning with a base offense level of six, the district court first added seven points under U.S.S.G. § 2F1.1(b)(1)(H) (1988) to reflect the size of the government's loss, then subtracted two points under section 3E1.1(a) for acceptance of responsibility. The court refused to apply the two-level enhancement for more than minimal planning, leaving Monaco with an offense level of eleven, which, with Monaco's criminal history category of I, would have resulted in a sentence of eight to fourteen months.

The district court then departed downward one additional level, making the following observations:

There is some substance to what [defense counsel] says when he speaks of the essence of the offense was not to take money that NPL or Mr. Monaco was not entitled to, but to expedite payment and cut a corner. Well, I don't know if I accept that analogy in that form; but what really happened here is, Mr. Monaco fraudulently borrowed the Government's money without paying any interest on it, hoping that in the end, things would work out, complete the work, keep his company afloat. And he got a bad result; not something that is uncommon. . . . I believe Mr. Monaco's motives in this case were pure. I don't believe that he did this to place money in his own pocket. . . . Basically, Mr. Monaco is a good person, probably the type of neighbor anyone would want. . . .

But in any event, but for this mistake, we have a very decent human being standing before the Court. And so once again, this Court must strike a difficult balance in figuring out, well, what are we going to do with this decent human being who made a mistake, not that he could siphon off money for his own needs, but for his corporation? Is this the type of person that we want to put in a prison and a prison environment? . . . I'm satisfied from the totality of the events here that I'm not going to send Thomas L. Monaco to a prison setting. . . .

I'm going to depart downward . . . for all the reasons that [defense counsel] outlined. And the strongest reason, I think, is the fact that I wouldn't want to have to reflect that I engaged in conduct that caused my son to stand before this Court and be criminalized. The emotions and feelings that you're going to live with and the peace that you're going to have to make with yourself ...

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