The opinion of the court was delivered by: LUDWIG
On September 22, 1997 defendant John G. Bennett, Jr. was sentenced to 144 months of custody, followed by three years of supervised release. On March 26, 1997 he had entered a conditional plea
of nolo contendere to an 82-count indictment. The charges were fraud and related offenses arising from his conduct as president and sole director of the not-for-profit corporation known as the Foundation of New Era Philanthropy. Revised PSR P 1.
The specific charges were one count of bank fraud, 18 U.S.C. § 1344; 16 counts of mail fraud, 18 U.S.C. § 1341; 18 counts of wire fraud, 18 U.S.C. § 1343; one count of false statements, 18 U.S.C. § 1001; three counts of filing false tax returns, 26 U.S.C. § 7206; one count of impeding the administration of revenue laws, 26 U.S.C. § 7212; 15 counts of money laundering, 18 U.S.C. § 1957; and 27 counts of money laundering to promote unlawful activity, 18 U.S.C. § 1956(a)(1)(A)(I). Id.
After an evidentiary hearing, the total offense level was fixed at 38, which, taken with a Criminal History Category of I, produced a Guidelines range of 235 to 293 months. A downward departure of 91 months measured from the bottom of the Guidelines range was granted.
Defendant's request for a downward adjustment for acceptance of responsibility was denied. Certain downward departure requests also were rejected. This memorandum amplifies findings on which offense level and downward departure rulings were based.
From 1989 to 1995, defendant was the president and sole director of the Foundation for New Era Philanthropy,
one of seven entities
that he controlled during this period of time. Revised PSR P 7; gov't organizational chart. Within New Era, there were a number of "programs," one of which was called "New Concepts in Philanthropy."
Tr. Sept. 16 at 15. The operating principle of "New Concepts" involved "matching funds." Initially, individuals were solicited to become "beneficiary donors" whose contributions would be doubled within a set period of time and then given to the charity of the "donor's" choice. Revised PSR PP 16, 25, 26.
Later, defendant advised
religious groups, schools, museums, and other not-for-profit organizations that he could double their money usually in a period of six months.
His explanation was that there were extremely wealthy philanthropists who wanted him to distribute their charitable giving anonymously.
See gov. exh. 149. They also desired to "leverage" their contributions by requiring the money to be matched - which would encourage organizations to do fundraising on their own. The interest earned on the funds deposited with New Era would pay for its scholarship grants to deserving students, and New Era's overhead would be defrayed by the alleged "anonymous benefactors." Revised PSR P 53.
However, in May of 1995, when the matching funds program collapsed, defendant admitted that there were no "anonymous benefactors." Organizations that had doubled their money had done so almost entirely out of funds sent in by other would-be "investors."
In its relatively short life span, the magnitude of the enterprise became enormous - the largest charity fraud in history. At the end, there was a shortfall in excess of $ 100 million in monies paid in by "investors." New Era had received and churned over $ 350 million. Substantial amounts went to defendant's other corporations and also to defendant and members of his family.
More particularly, the fact basis for the charges of bank fraud (count 1), mail or wire fraud (counts 2 - 35), and filing false statements charge (count 36) was as follows. In inducing prospective investors
to believe that New Era would double their money, defendant represented that the "benefactors" had "guaranteed" their contributions with "trust agreements" that were kept in his sole possession. Revised PSR P 28. The benefactors - eventually, there were as many as nine, he said - were known only to him, and he had given them his pledge not to reveal their identities. He also informed investors that their monies would be securely held in escrow accounts in a well-known financial institution. Id. P 36. All of these representations were false.
During the heyday of New Era, defendant repeatedly gave assurances to investors that the program was continuing to be operated with "trust agreements" and escrow accounts. Id. PP 57-61. He also went to considerable lengths to deter investors from finding out the true nature of the money doubling scheme - i.e., that it was other investors' money - or funds borrowed against investors' deposits, tr. Sept. 16 at 22 - and not that of anonymous philanthropists. He restricted the flow of information that could tip off the public or an inquisitive investor.
While some contributions were received from genuine donors, 97 percent of the funds received in the matching program came from investors. Tr. Sept. 17 at 98.
Defendant also misrepresented the composition of New Era's board of directors, both to investors and to the I.R.S., and submitted false information to the I.R.S. concerning the program and its operation. Id. PP 74-86. This conduct, in part, was the basis of the charges of false statement, filing false tax returns, and obstruction of the administration of the I.R.S. (counts 36-40). Given his personal control of New Era and his intimate management of its small staff, his defense that he did not knowingly make misrepresentations and false statements or was unaware of them was not worthy of belief.
Transfers of funds from New Era to defendant's other entities were the gravamen of the money laundering charges (counts 41-55). Id. PP 87-102.
The charges of money laundering to promote unlawful activity (counts 56-82) consisted of the use of mail and wire fraud proceeds to promote the ongoing New Concepts fraud. Id. PP 103-113.
Defendant's plea of nolo contendere was entered after rulings were made on the admissibility of certain mental health evidence. See Pretrial Rulings entered March 17 and Memorandum of March 18, 1997. Those rulings precluded the introduction of testimony from mental health experts as to ultimate opinions on defendant's lack of mens rea. F.R.E. 704(b). It also outlined the evidentiary issues, utilizing United States v. Pohlot, 827 F.2d 889 (3d Cir. 1987), cert. denied, 484 U.S. 1011, 108 S. Ct. 710, 98 L. Ed. 2d 660 (1988),
and deferred decision on the government's relevance objections so as to give defendant "a further opportunity, within the guidelines set forth in this memorandum, to develop the mental health theory of his case." Memorandum, March 18, 1997, at 13. It described the potential admissibility of mental health evidence as follows: "In order to have probative value as to mens rea, defendant's expert testimony must relate to the particular misrepresentations attributed to him in the indictment [footnote omitted]. If his clinical condition and symptomology can be logically connected to his subjective belief that his assertions were not false, baseless, or reckless vis-a-vis the truth, such evidence is admissible to show lack of mens rea." Id. at 11. Thereafter, defendant did not come forward with any additional proffer or request for further pretrial rulings.
II - Sentencing Guidelines
A. Specific Offense Characteristics
1. Amount of loss: 18 levels were added to the undisputed base level of six for the fraud group because of the amount of the loss. U.S.S.G. § 2F1.1(b)(1)(S). The adjustment was in dispute. The government's position was that the amount of the loss should equal either the amount owed to victims at the time of the collapse of New Era ($ 133 million) less cash on hand ($ 30 million), a net of $ 103 million, or the total amount of the investors' (victims') payments ($ 354 million). Government's proposed findings P 29; gov. exh. 53-55.
Defendant maintained that the amount of the loss should not exceed $ 21 million, largely because of the restitution of $ 334 million accomplished by the U.S. Bankruptcy Trustee
- which included sizable sums returned by investors that had doubled their money. Government's statement of material facts with defendant's objections at P 128. A $ 21 million loss would have increased the base offense level by four levels instead of 18. U.S.S.G. § 2F1.1(b)(1)(E).
As to a check-kite or bank fraud scheme, loss ordinarily should be calculated at the time when the fraud is detected - not at time of sentencing. United States v. Shaffer, 35 F.3d 110, 111 (3d Cir. 1994). Under the Guidelines, loss in a fraud scheme arises from the impact on the victim, which is not necessarily related to defendant's gain.
See United States v. Wolfe, 71 F.3d 611, 617 (6th Cir. 1995). A defendant's claimed lack of intent to cause any loss also is not determinative: "A wrongdoer should [not] completely escape a sentence enhancement if his scheme involved a substantial risk of loss merely because, under his own rosy scenario, no loss was intended." United States v. Monaco, 23 F.3d 793, 799 n.10 (3d Cir. 1994).
As Shaffer emphasized, in a check-kite scheme, there is no collateral security to redress monies taken from victims. 35 F.3d at 114. The same principle pertains to New Era's "matching funds" program. A lack of collateral usually means a substantial risk of loss. This approach comports with the policy behind the Sentencing Guidelines - i.e. to "limit the wait-and-see approach to calculating actual loss [at sentencing] to secured loans because with unsecured loans, like ...