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U.S. v. Sokolow

April 18, 1996





Appeal from the United States District Court for the Eastern District of Pennsylvania

(D.C. Crim. No. 93-cr-00394)

BEFORE: MANSMANN and SCIRICA, Circuit Judges, and RESTANI, Judge, Court of International Trade. *fn*


Argued January 22, 1996

Filed April 18, 1996)


Defendant Craig B. Sokolow ("Sokolow") appeals from his conviction in the United States District Court for the Eastern District of Pennsylvania following a two month jury trial. On March 18, 1994, Sokolow was convicted of 107 counts of mail fraud in violation of 18 U.S.C. Section(s) 1341 (1988), 17 counts of money laundering in violation of 18 U.S.C. Section(s) 1957 (1988), and one count of criminal forfeiture in violation of 18 U.S.C. Section(s) 982 (1988). Following several sentencing hearings, the district judge sentenced Sokolow to 92 months in prison, to be followed by three years supervised release, and ordered a $50,000 fine, $6200 in special assessments, $690,246.34 in restitution, and the forfeiture of $2.1 million. On appeal, defendant challenges both his conviction and sentencing. For the reasons stated herein, we will affirm the conviction, sentencing, and the order of forfeiture, but remand for reconsideration of the restitution order.


The events leading to Sokolow's indictment and subsequent conviction occurred between May 1, 1987 and July 23, 1990. Sokolow, an attorney and licensed insurance agent, offered health benefits plans to the public in Pennsylvania and several other states through a series of corporations that he established and controlled, but primarily through the National Independent Business Association, Inc. ("NIBA"). *fn1 The plans were marketed to small business employers, their employees, and their families. Association Insurance Marketing, Inc. ("AIM"), a corporation established and controlled by Sokolow, served as the primary marketing arm of NIBA. Through AIM, Sokolow received commissions on all premiums received for the sale of NIBA policies.

Prior to May 1987, NIBA members were fully insured by NIBA's group insurance contract with World Life and Health Insurance Company ("World Company"). On May 1, 1987, Sokolow replaced World Life with Independence Blue Cross and Pennsylvania Blue Shield to administer and process NIBA's health care claims. Sokolow purchased stop-loss coverage from Blue Cross, whereby NIBA assumed responsibility for the payment of NIBA members' medical care claims up to the first $25,000. Blue Cross would pay any remaining claims in excess of $25,000. The indictment charged that Sokolow falsely represented to the public that NIBA was fully-insured by Blue Cross, when, in fact, it was a self-funded plan, thus defrauding members of their premiums. In addition, Sokolow allegedly used the Blue Cross logo on marketing and billing materials, in violation of NIBA's agreement with Blue Cross, to foster the impression that NIBA was the equivalent of a Blue Cross fully-insured health benefits plan.

On June 30, 1988, Blue Cross terminated its service plan with NIBA when Sokolow failed to pay approximately $2 million in claims for which Blue Cross sought reimbursement. Sokolow then contracted with another company for higher stop-loss coverage that required NIBA to pay the first $50,000 of a member's medical care claims. The indictment alleged that Sokolow again misrepresented that NIBA was fully insured by the new coverage, when, in fact, it was self-funded.

After receiving complaints concerning NIBA's claims administration in late 1988, the Pennsylvania Insurance Department (the "Department") began to investigate NIBA's operations. The Department determined that Sokolow had been operating NIBA as an illegal, unlicensed insurer in Pennsylvania. Sokolow objected to the Department's inquiries on the basis that NIBA was a Multi-Employer Welfare Arrangement ("MEWA") that could file a benefits plan under ERISA and, thus, was not subject to state regulation. *fn2 The Department disagreed with Sokolow's contentions and, on May 2, 1989, suspended NIBA's operations. On August 31, 1989, the Commonwealth Court of Pennsylvania ruled that NIBA did not constitute a valid MEWA plan, but was a commercial enterprise "marketing insurance, without the benefit of a licensed company status, while purporting to be a valid ERISA plan, such that state licensing would not be necessary." *fn3 Appellant's App. [hereinafter "App."] at 1193. Consequently, NIBA was ordered liquidated by the commonwealth court on February 15, 1990.

Sokolow collected more than $34 million in premiums from NIBA plan members who were allegedly defrauded by Sokolow during the period covered by the indictment. The indictment alleged that Sokolow converted approximately $4 million of the premiums for his personal benefit. He received $2,239,575.67 in commissions through AIM and two other related insurance companies *fn4 ($1,837,152.30 of those commissions went to AIM) and $1,806,259.23 in salary, officer's loans, and other disbursements. These monies were deposited into AIM and NIBA accounts. The indictment alleged that Sokolow laundered these funds through a number of bank and brokerage accounts, as well as real property and mortgages.

The jury trial commenced on January 10, 1994, and concluded on March 18, 1994, with the return of guilty verdicts on all counts considered by the jury. Sentencing proceedings were held on January 6 and 11, and February 6, 1995, during which sentencing issues were argued, and evidence of forfeiture, loss calculations, and restitution was presented. On March 14, 1995, the district court filed three separate Memorandum Opinions and Orders, inter alia, determining the Sentencing Guidelines calculations, and ordering the restitution and forfeiture obligation. Following entry of judgment, Sokolow filed this timely appeal challenging both his conviction and sentence.


A. Evidentiary Challenges

Sokolow challenges three evidentiary rulings made by the district court. Sokolow claims that the district court (1) erred in admitting into evidence Government Exhibit B-110 ("Gov't Ex. B-110"), a summary of unpaid insurance claims of NIBA members; (2) improperly allowed evidence of NIBA's alleged operation as an unlicensed insurance company; and (3) abused its discretion in admitting irrelevant and highly prejudicial victim impact testimony. To the extent the district court's admission of evidence was based on an interpretation of the Federal Rules of Evidence, our standard of review is plenary. See United States v. Furst, 886 F.2d 558, 571 (3d Cir. 1989), cert denied, 493 U.S. 1062 (1990). Our review of a district court's ruling to admit or exclude evidence, if premised on a permissible view of the law, however, is only for an abuse of discretion. See id.; see also United States v. Versaint, 849 F.2d 827, 831 (3d Cir. 1988). We will address each of Sokolow's evidentiary challenges in turn.

1. Government Exhibit B-110

Sokolow contends that Gov't Ex. B-110 is inadmissible hearsay. Gov't Ex. B-110 is a compilation and summary of over $7 million in unpaid insurance claims of NIBA members. The document was prepared for the Department in July 1992 by Inservco, a third-party administrator hired to adjust the unpaid claims after the commonwealth court ordered the liquidation of NIBA. Originally, NIBA members' claims were documented in the course of regularly conducted business by NIBA's third party administrators -- National Benefits Corp., Insurance Benefits Services ("IBS"), and Independent Insurance Administrators ("IIA"). The companies processed NIBA claims and kept records on behalf of NIBA, which Sokolow later authorized to be turned over to the Department's Statutory Liquidator in connection with NIBA's liquidation. As custodian of the NIBA plan records, the Statutory Liquidator made the records available to Inservco for the adjustment of unpaid claims.

Over Sokolow's objection, the district court admitted the exhibit as an admission by Sokolow, under Federal Rule of Evidence 801(d)(2)(C). *fn5 The district court reasoned:

Inservco summarized information held by the Statutory Liquidator, who in turn obtained the information from another administrator hired by Sokolow. Each entity that held the information had the express authorization of [Sokolow]. As such, Exhibit B-110 is a party admission . . . .

United States v. Sokolow, No. 93-394-01, 1994 WL 613640, at *5 (E.D. Pa. Nov. 1, 1994). We disagree with the district court's reasoning.

Rule 801(d)(2)(C) specifically excludes from the definition of hearsay any statements used against a party which were made by another person authorized by the party to make a statement concerning the subject. Fed. R. Evid. 801(d)(2)(C); Lightning Lube, Inc. v. Witco Corp., 4 F.3d 1153, 1198 (3d Cir. 1993). We find, and the government admits, that Inservco's adjustments to the NIBA members' claims were not "done with Sokolow's consent or at his direction," and, thus, are not admissions by Sokolow. See Appellee's Br. at 23. The government continues to assert, however, that the collection of these claims by NIBA's third-party administrators constitutes an admission by Sokolow, and are, thus, not hearsay. This argument is untenable. Rule 801(d)(2)(C) requires that the declarant be an agent of the party-opponent against whom the admission is offered. Kirk v. Raymark Indus., Inc., 61 F.3d 147, 164 (3d Cir. 1995), cert. denied, 116 S.Ct. 1015 (1996). We find that neither the underlying claims submitted by NIBA insurance beneficiaries to NIBA's third-party administrators nor Sokolow's subsequent release of these records to the Department constitutes an admission by Sokolow. Thus, Gov't Ex. B-110 is hearsay because the entries of NIBA members' claims, whether or not adjusted by Inservco, were written out-of-court statements offered to prove not merely the existence but the genuineness of the claims, and ultimately, the underfunding of Sokolow's enterprise.

We now turn to whether Gov't Ex. B-110 falls within one of the exceptions to the hearsay exclusion. The government argues that Gov't Ex. B-110 is admissible under the business records exception to the hearsay rule. *fn6 This exception allows the admission of hearsay documents provided a foundation is laid by "the custodian or other qualified witness" that:

(1) [t]he declarant in the records had personal knowledge to make accurate statements; (2) the declarant recorded the statements contemporaneously with the actions that were the subject of the reports; (3) the declarant made the record in the regular course of the business activity; and (4) such records were regularly kept by the business.

United States v. Pelullo, 964 F.2d 193, 200 (3d Cir. 1992).

We find that Gov't Ex. B-110 is admissible under the business records exception. Contrary to Sokolow's contentions, the NIBA members' claims were collected in the course of regularly conducted business of NIBA's original claims administrators. IIA initially received NIBA plan member information from IBS, a prior third party administrator, with Sokolow's consent and authorization. Pursuant to the liquidation order, Sokolow specifically authorized the IIA to "release any and all data base information as required concerning [NIBA] on the in-house history tapes and claims system to the [Department]." App. at 826. Joseph DiMemmo testified that as the representative of the Statutory Liquidator, he took custody of all NIBA records. We find that a clear chain of custody and foundation for this data, upon which Inservco based its claims adjustment, was established.

As to the claim adjustments made by Inservco, and summarized in Gov't Ex. B-110, we find that this data also falls within the business records exception. As a third party administrator, Inservco contracted with the Department to administer NIBA health insurance claims. The claims adjustments made by Inservco were the same type of adjustments NIBA's third party administrators would have had to make if NIBA had stayed in business. Margaret Lee attested to the authenticity of Gov't Ex. B-110 and laid the foundation for its admission. Lee testified that Gov't Ex. B-110 was derived from Inservco's claims processing system and that these records were made and kept in Inservco's regular course of business. In sum, we find that the government properly established the admissibility of Gov't Ex. B-110 under the business records exception to the hearsay rule.

Defendant asserts, however, that the methods and circumstances under which Inservco prepared the summary of claims were untrustworthy and unreliable. Sokolow argues that many claims were not checked for pre-existing conditions, double submissions, or the timeliness of the claims. We disagree. Inservco adjusted the claims according to NIBA policy guidelines, and these adjustments were subject to committee review and oversight by the Department. Final approval of the claim adjustments was made by the Department. Although the adjustments made by Inservco did not take into account the timeliness of claims, trial testimony indicated that this information could not be determined from the submissions made to the Department. Further, Sokolow offers no specific evidence that the claims were not properly inspected by Inservco. Much of the evidence indicates the contrary. In any event, such questions go to the weight to be given to Gov't Ex. B-110, and not its admissibility.

Finally, Sokolow claims that Gov't Ex. B-110 is a public report under Federal Rule of Evidence 803(8)(C), *fn7 and, thus, should be excluded under the rationale set forth in United States v. Oates, 560 F.2d 45 (2d Cir. 1977). There the court held that, "police and evaluative reports not satisfying the standards of [Federal Rules of Evidence] 803(8)(B) and (C) may not qualify for admission under [Rule] 803(6) or any of the other exceptions to the hearsay rule." Id. at 77. Generally, a public report consisting of "factual findings resulting from an investigation made pursuant to authority granted by law," is not admissible against a criminal defendant under Rule 803(8)(C). We agree with Sokolow that Gov't Ex. B-110 contains some indicia of a public report under Rule 803(8)(C). In processing NIBA members' claims, Inservco was performing a fact-finding function and acting essentially as the agent of the Department, which was required to liquidate NIBA pursuant to state law. We disagree, however, with Sokolow's contention that the findings made by the Department, i.e. Inservco's adjustments, were inadmissible under the Oates rule.

Criticizing Oates as an unduly broad interpretation of Rule 803(8), many courts have declined to import the limitations of Rule 803(8)(B) *fn8 and (C) into other hearsay exceptions. See, e.g., United States v. Picciandra, 788 F.2d 39, 44 (1st Cir.) (upholding admission of DEA report against criminal defendants under Rule 803(5) (past recollection recorded)), cert. denied, 479 U.S. 847 (1986); United States v. Metzger, 778 F.2d 1195, 1201 (6th Cir. 1985) (declining to read Rule 803(8)(C) limitations into Rule 803(10) (absence of public record or entry)), cert. denied, 477 U.S. 906 (1986). Although we have not specifically addressed this issue, *fn9 the Seventh and Tenth Circuits have held that Rule 803(8)(C) does not compel the exclusion of documents properly admitted under Rule 803(6) where the author testifies. See United States v. Hayes, 861 F.2d 1225, 1230 (10th Cir. 1988); United States v. King, 613 F.2d 670, 672-73 (7th Cir. 1980). The Hayes court stated that the Oates rule does not apply in such circumstances "because such [investigator] testimony protects against the loss of an accused's confrontation rights, the underlying rationale for Rule 803(8) and the basis of the court's concern in Oates." 861 F.2d at 1230 (citation omitted). We reach the same conclusion here.

Here, Margaret Lee, the Inservco employee who supervised the claims adjustments, testified and was cross-examined at some length. Lee personally audited part or all of each submitted claim and stated that Gov't Ex. B-110 represented the results of Inservco's processing of the NIBA members' claims. We find that the circumstances surrounding the preparation of Gov't Ex. B-110 were probed and there was no loss of confrontation rights. Thus, Gov't Ex. B-110 was properly admissible under the business records exception of Rule 803(6), and we will affirm on that basis.

2. Evidence of NIBA's Non-Licensure

At trial, the district court permitted the reading into evidence of portions of a ruling made by the Commonwealth Court of Pennsylvania upholding the NIBA suspension order entered by the Department. *fn10 Denying Sokolow's motion to strike, the district court ruled that "the probative value [of the opinion] outweigh[ed] the prejudicial value." App. at 608. In addition, various testimony regarding the non-licensure of NIBA was permitted to be addressed.

Sokolow asserts that the district court erred in admitting this evidence. He argues that (1) the allegations of violations of state law were confusing and unduly prejudicial, (2) NIBA's alleged non-licensure was not an element of the mail fraud scheme alleged in the indictment, (3) prejudicial effect is highlighted by the fact that the deliberating jury requested Judge Colins's opinion, and (4) the groundlessness of Judge Colins's opinion is supported by an en banc decision in a related case by the commonwealth court, which found NIBA was a MEWA and not an insurance entity under state law. See supra note 3.

We find that the district court did not abuse its discretion in admitting this evidence. Under Federal Rule of Evidence 403, "[relevant] evidence may be excluded if its probative value is substantially outweighed by the danger of unfair prejudice, confusion of the issues, or misleading the jury." Fed. R. Evid. 403. According to the government, the evidence of non-licensure and the reading of Judge Colins's opinion was for the purpose of providing background information regarding the suspension and liquidation of NIBA. The non-licensure of NIBA was a factual allegation in the indictment which would demonstrate the nature of the fraud scheme and show the factual predicate for NIBA's suspension and liquidation.

Sokolow asserts that the evidence of non-licensure was unduly prejudicial and confusing, as evidenced by the jury's request for Judge Colins's opinion. We disagree. In responding to the jury's request, the district judge submitted the following instruction, agreed to by the

parties, rather than the requested opinion: *fn11<--text-->

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