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U.S. v. Sain

April 10, 1998


Appeal from the United States District Court For the Western District of Pennsylvania D.C. Nos. 96-cr-00021-01 & 96-cr-00021-02 Argued January 22, 1998

Before: Sloviter, Lewis and Rosenn, Circuit Judges

The opinion of the court was delivered by: Rosenn, Circuit Judge.

(Opinion Filed April 10, 1998)


This case primarily presents two questions of first impression in this circuit relating to the interpretation of the Major Fraud Act of 1988 (the "Act"). See 18 U.S.C. § 1031 (West 1997). The Act makes it a federal crime to defraud the United States in connection with a government contract that is valued in excess of $1 million. Specifically, we must decide whether a defendant may be charged with a separate violation of the Act for each of numerous executions of a single fraudulent scheme, and whether modifications of the original government contract, each of which have a value of less than $1 million, are within the purview of the Act when the underlying government contract has a value in excess of $1 million. The defendants make other arguments relating to the sufficiency of the evidence, the exclusion of expert testimony, whether an individual can be convicted of aiding and abetting a corporation he owns and controls, and alleged defects in their sentences. The district court rejected the defendants' arguments. We affirm as to all issues.*fn1


A federal grand jury sitting in the Western District of Pennsylvania indicted Samir K. Sain and his company, Advanced Environmental Consultants, Inc. ("AEC"), on 46 counts of fraud in violation of the Act. Following trial, the petit jury returned guilty verdicts on all counts as to both defendants. The district court sentenced Sain to 37 months imprisonment and three years supervised release. The court sentenced AEC to five years probation and ordered it to pay a special assessment. In addition, the court ordered AEC to pay $597,124 in restitution, with any amount not paid by AEC to be paid by Sain. The defendants appealed.*fn2


This complex fraud case arises out of an approximately $7-million contract between the United States Army and AEC, pursuant to which AEC built, owned, and operated a waste-water treatment plant at the Army Depot at Tooele, Utah. AEC is an environmental consulting company headquartered in Pittsburgh and incorporated in Pennsylvania. Sain has a masters degree in engineering and several credits toward a doctorate, is a licensed professional engineer, and is the sole shareholder and president of AEC.*fn3 It is well established that, because the jury returned guilty verdicts in the district court, this Court must construe the evidence in the light most favorable to the Government. See, e.g., Glasser v. United States, 315 U.S. 60, 80 (1941); United States v. Cooper, 121 F.3d 130, 133 (3d Cir. 1997). Following is a statement of facts which the jury could have found based on the trial evidence.

The Army operates a depot in Tooele, Utah, at which it services tanks and other types of military vehicles. Sometime in the 1980s, the Army entered into a consent decree with the State of Utah requiring the Army to treat the waste water it was generating at the depot and releasing into the ground water. To fulfill its obligation under this consent decree, the Army proposed to have a contractor build, own, and operate a plant to treat the depot's waste water. After the bidding process, AEC was selected. On November 30, 1987, AEC entered into the contract with the Army. Under the contract, AEC agreed to construct, own, and operate an industrial waste-water treatment plant at the depot for the "firm fixed price" of approximately $4.5 million. In a firm fixed price contract, once the price is established by the parties, the amount paid to the supplier of the goods or services does not vary with its costs. In this case, the risk of cost overruns rested with AEC. The term of the contract was for one year followed by four one-year options. The Army exercised each option and the contract lasted the full five years.

In the plant, AEC installed four large metal tanks called "adsorbers." Each of the tanks was designed to hold approximately 5,000 pounds of filtering carbon. Waste water would be pumped through the tanks with the carbon filtering out much of the water's pollutants. Periodically, as pollutants built up in the carbon, the carbon would become ineffective and have to be replaced. The process of replacing the carbon was called a "change out." The contract provided for two of these change outs per year at AEC's expense and did not specify the type of carbon to be used.

After the Army and AEC entered into the contract, but before AEC began operating the plant, the Army modified the contract to incorporate the City of Tooele's water purity standards which were more strict than those imposed by the consent decree. The Army requested that AEC submit a cost proposal providing for the Army to reimburse AEC for its increased costs resulting from these stricter water purity standards. Ultimately, AEC submitted four cost proposals, none of which were approved by the Army. Instead, on April 11, 1989, the Army unilaterally imposed a modification of the contract pursuant to which AEC would receive approximately $682,000 in addition to the original contract price.

In the spring of 1989, before the Army had acted on AEC's fourth cost proposal, AEC claimed that the waste water generated by the Army consistently contained a higher level of pollutants than the amounts specified in the contract. According to AEC, this higher level of pollutants required more than the two carbon change outs per year allowed by the contract. In an attempt to recoup these additional costs, AEC began submitting claims to the Army for reimbursement for costs associated with the additional change outs. On May 5, 1989, May 26, 1989, and June 20, 1989, AEC submitted claims. Each claim was for $27,500 and purported to represent the costs associated with a complete change out of the four tanks plus a 10-percent profit for AEC. According to the claims, AEC installed 5,000 pounds of carbon in each of the four tanks at a cost of $1.25 per pound of carbon, a price which corresponded to the market price for virgin carbon.

The Army agreed that these changed conditions warranted an equitable adjustment of the contract to compensate AEC for the costs of some of the additional carbon change outs. Lieutenant Colonel K. L. Andrews, the Army officer responsible for administering the AEC contract during most of the relevant time, notified Sain in a letter dated April 25, 1989 that no money would be paid to AEC by the Army for the additional carbon change outs unless AEC first submitted "documentation necessary to support a claim." Andrews advised that such documentation include "cost invoices, time sheets, and any other [necessary] documentation." Also, at trial, Andrews testified that, in addition to the notification letter, he told Sain numerous times that supporting documentation was required in order for AEC to receive payment. At trial, Sain reluctantly conceded that Andrews had required this documentation.

According to the testimony of Andrews and Robert Kinsinger, the Army's technical representative at the waste-water plant, prior to agreeing to reimburse AEC for the additional change outs, Sain insisted to them that the heavy pollutant levels in the waste water required the use of virgin carbon, a more expensive type of carbon than reactivated carbon.*fn4 Sain also insisted that 5,000 pounds of this carbon per tank, or 20,000 pounds total, must be used in each change out.

To substantiate the initial costs associated with the additional change outs, Sain submitted to the Army a copy of an invoice numbered "326" and dated January 9, 1989 which purported to show that AEC had purchased 100,000 pounds of carbon from a company called Encotech for $1.25 per pound. This price corresponded to the market price for virgin carbon and included a charge for installation. Sain also submitted to the Army a September 5, 1989 letter on Encotech letterhead which stated that AEC had previously purchased the 100,000 pounds of carbon for the price stated in invoice number 326.

It is undisputed that the invoice and letter were false. Both Sain and Encotech's owner, Bernard Lalli, testified that the carbon order had been canceled on January 15, 1989 and that the carbon was not delivered. Sain also admitted "whiting out" the portion of the original invoice which contained a notation that the order had been canceled and that he had assisted Lalli in drafting the September 5 letter. Sain claimed that the invoice represented future costs. Sain had, however, purchased some carbon from Encotech during this time, although it was not virgin carbon. AEC initially ordered 50,000 pounds of virgin carbon at $1.18 per pound. AEC never took delivery of this virgin carbon. Instead, Sain asked Lalli to substitute 100,000 pounds of the less expensive, reactivated carbon, which Lalli did for a price of $.59 per pound. On other occasions, Sain similarly represented to the Army that he had purchased virgin carbon. He did not take delivery of this carbon and substituted cheaper, reactivated carbon without informing Army officials.

Based on Sain's representations regarding the price of the carbon used in the additional change outs, the Army agreed to reimburse AEC $1.2455 per pound of carbon for the 20,000 pounds used per change out, plus 10-percent profit for a total of $27,401 per change out. AEC and the Army memorialized this agreement in Contract Modification 14 which reimbursed AEC for the three claims previously submitted. In part, the modification stated: "The costs associated with this claim are a replacement of 60,000 lbs. of virgin carbon (3 change outs/20,000 lbs. per change) and the labor and fees involved. ... All other terms and conditions in the contract remain the same." Sain acknowledged on cross-examination that he understood the purpose of the modification was to reimburse him for the three change outs using 60,000 pounds of virgin carbon.

Sain made an additional 43 claims for reimbursement for costs associated with the additional carbon change outs. To support these claims, he submitted false and canceled supplier invoices. He concealed from the Army invoices showing the purchase of reactivated carbon, and he falsely certified that AEC had used 20,000 pounds of virgin carbon per change out when, in fact, it had not done so. In connection with Contract Modification 20, which covered the six claims following the original three, Sain submitted a purchase order from Encotech which showed the purchase of 100,000 pounds of virgin carbon for $99,000 and a copy of a $99,000 check from an AEC checking account. Sain, however, canceled the invoice, voided the check, and never took delivery of this carbon. He also included in the supporting documentation an invoice for 25,000 pounds of virgin carbon priced at $1.18 per pound which AEC never received. Instead, AEC substituted 50,000 pounds of reactivated carbon. He also admitted to failing to submit documentation showing that he had used reactivated carbon.

Sain supported an additional 10 of the claims by using checks and purchase orders relating to a different supplier, Water Equipment Supply ("WES"), which was a sole proprietorship that Sain created. WES had no operations or employees. Sain instructed Lalli to bill WES for reactivated carbon that Encotech had shipped to AEC. WES then billed AEC for the carbon at highly inflated prices, misdescribing the carbon in the invoice. In these transactions, WES purchased 155,768 pounds of reactivated carbon from Encotech at prices ranging from $.32 to $.50 per pound. WES then billed AEC for 238,000 pounds of carbon at $.93 per pound and for another 100,000 at $.87 per pound. AEC paid these amounts to WES, but WES transferred the funds back to AEC and Sain. Sain instructed an AEC employee to describe the carbon on the WES invoices as "Iodine 1000 and up 10/40(v)." "Iodine 1000" refers to the density of the carbon. The iodine level of carbon is determined by a standardized test. Reactivated carbon of this iodine level would have been very expensive and very rare. The carbon provided by Encotech did not have this high iodine number when supplied to AEC and the standard test had not been performed on it, although Sain testified that he used his own "test" to determine the iodine level.

In 1991, Army officials began to suspect that Sain was not using the quantity and quality of carbon called for in the contract modifications. They conducted an investigation which appeared to confirm their suspicions that Sain was using fewer than five of the 1,000-pound bags of carbon per tank. When confronted, Sain stated that each 1,000-pound bag contained 1,400 pounds. He testified to the same at trial, but admitted never calculating the exact weight of the bags. He also claimed that he had estimated how much volume 5,000 pounds would occupy and used that amount. Sain called this method "volumetric calculation." At this time, despite its investigation, the Army was unable to uncover sufficient evidence of Sain's fraud. However, on September 29, 1992, the Army added language to Contract Modification 33 which reaffirmed that payment of the $27,401 was contingent on Sain's use of 5,000 pounds of "pure, virgin activated carbon" per tank. *fn5 Sain signed that modification.

On December 14, 1992, the Army withheld payment of $211,800 that Sain had previously claimed and requested that AEC account for all of the carbon purchased and installed at the plant. Sain told the Army's representatives that his attorney, Keith Baker, would provide the requested information. Baker supplied a letter, a summary, and 18 invoices to the Army which purported to show that AEC had purchased and used 1,056,050 pounds of carbon. This matched almost exactly the amount of carbon which would have been used if AEC had installed 5,000 pounds per tank for the 212 change outs it had performed. In reliance on the representations in the summary submitted to it, the Army paid Sain much of the money he requested, reducing the payment for the last nine change outs to $16,409.67 per change out because the AEC-supplied documents showed that AEC paid only $.72 per pound of carbon during this time. At trial, Sain conceded that the numbers Baker supplied were incorrect. The Government established that AEC had ...

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