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United States v. McCloskey

United States District Court, Third Circuit

November 26, 2013



JOY FLOWERS CONTI, Chief District Judge.

I. Introduction

Pending before the court are several disputes with respect to the appropriate advisory guidelines sentence applicable to defendant David McCloskey ("defendant"). On August 23, 2010, the Probation Office prepared and filed a Final Presentence Investigation Report ("PIR") (ECF No. 36), which outlined the advisory sentencing guidelines range applicable to defendant. The government filed objections to the PIR (ECF No. 41), as did defendant (ECF No. 46). The government supplemented its objections (ECF No. 73), defendant responded (ECF No. 75), the government filed a further reply (ECF No. 76), and the government filed a second revised set of objections to the PIR (ECF No. 85). On March 19 and 20, 2012, the court conducted an evidentiary hearing with respect to the correct application of the sentencing guidelines. During that hearing, the court heard testimony from witnesses and admitted evidence. The government filed proposed findings of fact and conclusions of law (ECF No. 109) on February 15, 2013, and defendant filed the same (ECF No. 111) on March 20, 2013.

The parties identify six separate issues that remain to be addressed with respect to the appropriate guidelines sentencing range: (1) the amount of loss; (2) whether to apply a number of victims enhancement; (3) whether to apply a sophisticated means enhancement; (4) whether to apply a leadership role enhancement; (5) whether to apply an obstruction of justice enhancement; and (6) whether to reduce the offense level for acceptance of responsibility. The matter now being fully briefed and ripe for disposition, the court makes the following findings of fact and conclusions of law with respect to the application of the sentencing guidelines.

II. Findings of Fact

A. Offense Background

1. On July 14, 2009, a federal grand jury returned a one-count indictment charging defendant with Conspiracy to Commit Wire Fraud, a violation of 18 U.S.C. § 1349. (ECF No. 1.)

2. On June 8, 2010, defendant withdrew his plea of not guilty and pleaded guilty to the offense charged at count 1 of the indictment. (ECF No. 28.) During the hearing at which defendant entered a plea of guilty, he agreed with part of the government's factual basis for the charge set forth at count 1 of the indictment and acknowledged that those factual statements he agreed with "satisf[y] the elements of wire fraud." (Change of Plea Hr'g Tr. 17-20, ECF No. 78.) The court accepted defendant's entry of a guilty plea as being knowing and voluntary. ( Id. at 20-21.)

3. The PIR summarized the offense as follows:

(a) Ken Cowden ("Cowden"), an unlicensed real estate appraiser, provided fraudulent appraisals to numerous mortgage brokers using the names and appraiser license numbers of licensed appraisers. (ECF No. 36, ¶ 4.) Cowden provided this fraudulent information so that individuals could qualify for mortgage loans for which they would not otherwise be approved. After the execution of a search warrant at his residence, where thousands of falsely inflated appraisals were discovered, Cowden began cooperating with investigators. One of the individuals to whom Cowden provided fraudulent appraisals was defendant, who operated a mortgage brokerage firm called First Atlantic Financial ("First Atlantic"). Information received from cooperators indicated that defendant was aware that Cowden was not licensed and that he provided fraudulent appraisals.
(b) First Atlantic employees Erika Stanford ("Stanford") and Daniel Gillen ("Gillen") also participated in the scheme. (ECF No. 36, ¶ 4.) Gillen admitted to agents that he created false documentation to submit to lenders in support of mortgage loan applications, including fake bank account statements, W-2 forms, and paystubs. Gillen worked with defendant at Century III Home Equity prior to working for First Atlantic. Gillen indicated that defendant, his employer at First Atlantic, was aware that he created false documents to support loan applications and asked Gillen to create them for defendant's use.
(c) Defendant was interviewed by the case agent about loan files listing defendant as the loan officer and Cowden as the appraiser. (ECF No. 36, ¶ 5.) At that time, defendant gave a full confession acknowledging that he knew Cowden was not licensed and was providing fraudulent appraisals.

4. Defendant objected to portions of the PIR dealing with offense conduct and the application of sentencing enhancements. The court held an evidentiary hearing on March 19 and 20, 2012, to determine the correct application of the sentencing guidelines in this case.

B. Hearing Testimony

5. At the evidentiary hearing, the government offered testimony from FBI Special Agent Joseph M. Bieshelt ("Special Agent Bieshelt"), who stated that investigators executed a consent search of Cowden's residence and discovered a "rack sheet, " which was a handwritten list of all the requests for appraisals he was asked to do by various mortgage brokers. The rack sheet included the name of the borrower, the property, and the brokerage firm that requested the appraisal. (Evidentiary Hr'g Tr. 6, Mar. 19, 2012, ECF No. 102.) An electronic form of the rack sheet created by the FBI was admitted into evidence as Exhibit A. The total amount of the requested appraisals on the rack sheet is approximately $323.6 million. ( Id. at 7.) The FBI also prepared a separate electronic version of the rack sheet, admitted as Exhibit B, that included only those appraisals requested by First Atlantic, which totaled more than $33 million. ( Id. at 8-9.)

6. Special Agent Bieshelt testified that he interviewed Gillen as part of his investigation of mortgage fraud activities.[1] ( Id. at 10.) Gillen worked at various mortgage brokerages that requested appraisals from Cowden, including First Atlantic and First Capital Home Equity. ( Id. at 10-11.) Gillen was adept at creating false documents to support loan applications, including W-2 tax statements, pay stubs, bank statements, retirement account statements, and documents verifying borrowers' assets. ( Id. at 11.) Special Agent Bieshelt testified that Gillen was employed at First Atlantic and that defendant was his boss. ( Id. at 13.) Special Agent Bieshelt also testified that, based upon his interviews of Gillen, everyone at First Atlantic, including defendant, knew that Cowden and Gillen were not licensed to prepare appraisals. ( Id. at 13-14.) Special Agent Bieshelt conceded that he did not know whether defendant knew that Cowden did not have a license to prepare appraisals. ( Id. at 22.)

7. The government called Cowden, who testified that he prepared fraudulent appraisals for First Atlantic beginning in 2001 or 2002 until May 27, 2005, when the FBI searched his home. ( Id. at 36-40.) Cowden testified that defendant knew he did not have a license. ( Id. at 39.) Cowden also testified that defendant knew he performed appraisals under approximately six different names, and that ninety-nine percent of the time, if a certain value was requested by the brokerage firm, Cowden would perform the appraisal and would give the brokerage firm the value requested. ( Id. at 41, 46-47.) Cowden typically overstated the value of properties appraised by approximately twenty to forty percent. ( Id. at 48.) According to Cowden, defendant originally paid him $300 per appraisal, but increased that amount to $400 so that defendant's appraisal requests "moved to the top of the list." ( Id. at 47.)

8. Cowden testified that he could not recall having any specific conversation with defendant about the fraudulent appraisals that he prepared, or his unlicensed status, but he reported that his fraudulent practices were "just the talk in the business." ( Id. at 80-82.) Upon further questioning, Cowden testified that approximately sixty percent of his appraisals were overstated, while others were appropriately valued. ( Id. at 83.)

9. The government presented testimony from Stanford, who worked at First Atlantic as a loan officer during the early 2000s. ( Id. at 85.) Stanford testified that she, defendant, and other employees at First Atlantic all knew that Cowden and another individual, Eugene Parise, provided fraudulently inflated appraisals and that Cowden did not have a license. ( Id. at 88, 90-92.) According to Stanford, if she or other loan officers requested an appraisal for a property with a certain value, Cowden would provide that appraisal value "every time, " and that loans based upon a Cowden appraisal would close every time. ( Id. at 90-92.) Stanford recalled an instance in which a fraudulent appraiser's license was used in which the license clearly had a new date cut and pasted over the old date. ( Id. at 90-91.) Stanford indicated that defendant "laughed at how bad it was." ( Id. at 118.)

10. Stanford testified that it was a common practice at First Atlantic to misrepresent borrowers' financial conditions by providing fraudulent documents in support of loan applications, including false bank statements, 401K statements, checks, W-2 statements, and paystubs, which were typically created by Gillen. ( Id. at 102-06.) Defendant knew about and participated in these misrepresentations by actually requesting false documents from Gillen. ( Id. ) Stanford described defendant as "running the show" at First Atlantic, including running the day-to-day activities of the office, and she noted that defendant's nickname in the office was "King." ( Id. at 103-04, 115.) Stanford testified that defendant used cocaine and was involved in gambling. ( Id. at 135.)

11. Stanford testified that First Atlantic typically secured a loan worth approximately eighty percent of the total value of the property. ( Id. at 97.) With respect to the fees collected by First Atlantic and the various brokers working there, Stanford testified that the fee would be split evenly between First Atlantic and the broker. ( Id. at 94.) Borrowers were not informed that they were paying for appraisals from unlicensed appraisers. ( Id. at 96-98.) The standard practice at First Atlantic was to charge borrowers a fee of seven percent of the total value of the loan. ( Id. ) As part of that fee, First Atlantic collected a "yield spread premium" from the lenders, which is a fee that the lender pays to the broker for selling the borrower a loan at a higher interest rate than the lowest rate for which the borrower qualified. ( Id. at 109-15.) First Atlantic did not disclose this fee to borrowers, although it did appear on the HUD-1 form. ( Id. at 113-15.)

12. The government presented testimony from Ann Tonkovich, ("Tonkovich"), who corroborated earlier statements that defendant ran the day-to-day operations at First Atlantic. ( Id. at 149.) Tonkovich was not aware that Cowden was providing fraudulent appraisals until after she left First Atlantic and gained more experience in the mortgage industry. ( Id. at 146-49.) Tonkovich confirmed that fees were evenly split between First Atlantic and the individual loan officer. ( Id. at 149.)

13. The government presented testimony from Shawn Cupp ("Cupp"), who was employed at First Atlantic beginning in 2001 and continuing for a period of two years. ( Id. at 157.) Cupp corroborated other testimony that defendant and other employees of First Atlantic knew that Cowden did not have a license to perform appraisals. ( Id. at 159-60.) Cupp also corroborated that defendant knew that Cowden was preparing fraudulently inflated appraisals and that Gillen was preparing false documents in support of misrepresentations in loan applications. ( Id. at 159-60, 167-70.) On cross-examination, Cupp conceded that he could not specifically recall hearing a conversation in which defendant stated that he knew Cowden did not have a real estate license. ( Id. at 183.) Cupp noted, however, that defendant would occasionally write "Ken's World" on an appraisal, indicating that "it was beyond reality." ( Id. at 165.) Cupp testified that defendant said on several occasions that Gillen "had a criminal mind." ( Id. at 169.) Cupp also testified that defendant had a "tremendous" gambling addiction and spent thousands of dollars at a time on cocaine. ( Id. at 177.) Cupp corroborated other testimony indicating that when Cowden prepared an appraisal, the loan would close almost one hundred percent of the time. ( Id. at 164-65.) Cupp corroborated testimony that defendant ran the day-to-day operations of First Atlantic, dealt with the appraisers, did the hiring and firing, and made arrangements with lenders. ( Id. at 170.) With respect to fees, Cupp testified that fees were split evenly between the loan officers and First Atlantic and defendant wanted to charge the highest possible fee for each loan. ( Id. at 170-71.) Borrowers were not told that they actually qualified for a lower rate than was offered by First Atlantic. ( Id. at 172.)

14. The government presented testimony of United States Secret Service Special Agent Daniel Fisher ("Special Agent Fisher"), who prepared a spreadsheet entered as Exhibit D, which listed appraisals prepared by Cowden for First Atlantic. ( Id. at 192-94.) Special Agent Fisher identified those appraisals prepared by Cowden that were paid for by the borrower, based upon information learned from either the appraisal itself or the HUD-1 document associated with the loan. ( Id. ) Special Agent Fisher testified that borrowers paid for 133 appraisals prepared by Cowden for First Atlantic. ( Id. at 194.) Special Agent Fisher did not speak to any of the borrowers to determine whether they knew that the appraisal for their loan was fraudulent. ( Id. at 196.) According to Exhibit D, the amount paid for those appraisals was $51, 600 (116 for $400, 2 for $350, and 15 for $300). Exhibit D also indicates that three borrowers paid for more than one appraisal, for a total of 130 victims. Special Agent Fisher's testimony is creditable and corroborated by Cowden's testimony that he originally was paid $300, but later received $400 per appraisal.

15. The government presented testimony from Diane Wikert ("Wikert"), a paralegal in the United States Attorney's office, who prepared a spreadsheet with a calculation of the amount of loss caused by First Atlantic's fraudulent activities. ( Id. at 202-04.) The spreadsheet was admitted as Exhibit E. In creating Exhibit E, Wikert took the electronic version of Cowden's rack sheet and sorted it to include only appraisal requests from First Atlantic. ( Id. at 203.) Wikert researched which of the First Atlantic loans went through the foreclosure process, based upon publically available records. ( Id. at 204; Exs. E-1 to E-34). For twenty of the thirty-four properties included in Exhibit E, Wikert calculated the amount of loss by adding the principal amount outstanding on the loan at the time of foreclosure to the price paid for the property at the foreclosure sale by the bank (the total amount of loss). From that total, Wickert then subtracted the total sale price after foreclosure[2] (the amount for which the bank ultimately sold the property) to arrive at the total amount of loss for each property. ( Id. at 204-07.) In other instances, Wikert was unable to obtain a foreclosure complaint and did not know the principal amount at the time of foreclosure. ( Id. at 208-09.) Wikert testified, however, that she obtained information from other publically available sources indicating that those properties had gone through foreclosure. ( Id. at 209.) In lieu of a foreclosure complaint, Wikert testified that she either (1) used the loan amount found on the HUD-1 form or (2) used a value that was eighty percent of the value requested by First Atlantic found on Cowden's rack sheet. ( Id. ) Based upon Wikert's calculations, the total amount of loss attributable to the fraudulent activities at First Atlantic was $3, 005, 077.71. ( Id. at 211; Ex. E.)

16. Wikert separately calculated the amount of loss attributable to the payment of broker fees based upon her review of the available HUD-1 forms. (ECF No. 102, at 213-14.) The total amount of that loss was $966, 262.21. ( Id.; Ex. F.)

C. Motion To Withdraw Guilty Plea

17. Defendant filed a motion to withdraw his guilty plea on May 22, 2012. (ECF No. 83.) In support of the motion to withdraw his guilty plea, defendant filed an affidavit in which he made the following sworn representations to the court: "That I have read the entirely [sic] of this motion and assert that each factual matter stated therein is true and correct to the best of my knowledge, information and belief, " and "I assert that I am innocent of the offense charged in the Indictment." ( Id. ¶¶ 2, 5.) Defendant acknowledged that his affidavit was made subject to the penalty of perjury. ( Id. ) Defendant withdrew the motion to withdraw his guilty plea at the hearing on that motion, following extensive briefing by the government (ECF No. 86) and several delays in the proceedings. ( See ECF Nos. 89, 93, 100, 104.)

18. Defendant's knowing and voluntary admission in open court, under oath, that he committed the offense charged in the indictment in this case is directly contradicted by the statements he made under penalty of perjury in the affidavit in support of his motion to withdraw his guilty plea. Defendant's sworn statement in the affidavit was further contradicted by testimony at the evidentiary hearing indicating that defendant knowingly participated in the charged conspiracy.

III. Conclusions of Law

A. Scope of Attributable Criminal Activity

19. As a threshold matter, the court must determine what conduct is attributable to defendant for the purpose of determining the guideline range. The sentencing guidelines provide that "in the case of a jointly undertaken criminal activity (a criminal plan, scheme, endeavor, or enterprise undertaken by the defendant in concert with others, whether or not charged as a conspiracy), " sentencing adjustments are determined by considering "all reasonably foreseeable acts and omissions of others in furtherance of the jointly undertaken criminal activity." U.S. SENTENCING GUIDELINES MANUAL § 1B1.3(a)(1)(B) [hereinafter U.S.S.G.]. Application note 2 adds that jointly undertaken criminal activity "is not necessarily the same as the scope of the entire conspiracy." Id. § 1B1.3 cmt. n.2.

20. The government initially sought to include losses attributable not only to the activities of First Atlantic but also to a conspiracy involving "more than a dozen other mortgage brokers." (ECF No. 41, at 2.) The government specifically pointed to former employees using the fraudulent techniques learned while working with defendant at First Atlantic at other mortgage broker companies. ( Id. ) The government asserted that under this line of reasoning "there can be no plausible argument that the damages is less than $7 million." ( Id. at 3.)

21. Defendant objected to including losses attributable to mortgage brokers who were not associated with First Atlantic at all or were terminated from their positions with First Atlantic and no longer under defendant's supervision. (ECF No. 111, ¶¶ 74-76.) Defendant argued that there is no evidence he had knowledge of the number of other brokerage firms using Cowden's appraisals, the number of appraisals Cowden performed for those brokerage firms, or whether the appraisals prepared for the other firms "were fraudulent or inflated to the same degree as the appraisals" prepared for defendant. ( Id. ¶ 75.) Accordingly, defendant argued that he cannot be held responsible for Cowden's conduct pursuant to U.S.S.G. § 1B1.3(a)(1)(B).

22. After the evidentiary hearing, the government backed away from its original position and asserted that defendant is responsible for the fraudulent activities of First Atlantic in conspiracy with Cowden. ( See ECF No. 109.) The government's ...

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