On Appeal from the District Court of the Virgin Islands, Division of St. Croix (D.C. Criminal Action No. 92-cr-00113-2)
Before: BECKER, NYGAARD and ROTH, Circuit Judges
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. Section(s) 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.
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. Section(s) 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. Section(s) 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 Insurance Commissioner with a surety bond for $500,000 but misrepresented the amount of the company's initial capital. *fn1
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.
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 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 assured him that this amount would be adequate, based on previous hurricane damage in the Virgin Islands.
At sentencing, the district court applied the 1988 edition of the Sentencing Guidelines, the version in effect on the date of the offense. *fn2 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 Section(s) 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. Section(s) 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 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. Section(s) 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. Section(s) 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.
The District Court of the Virgin Islands had jurisdiction pursuant to 18 U.S.C. Section(s) 3241. We have jurisdiction, pursuant to 28 U.S.C. Section(s) 1291, to review a final order of a district court and, pursuant to 18 U.S.C. Section(s) 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).
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 absence of his fraud. Therefore, he maintains, the loss figure should not be used to increase his sentence pursuant to U.S.S.G. Section(s) 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. Section(s) 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) *fn3 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. *fn4 He argues that 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
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 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 Section(s) 2F1.1(b). *fn5
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 hurricanerelated property losses. 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 ...