United States District Court, M.D. Pennsylvania
SYLVIA H. RAMBO, Sr., District Judge.
As a result of his participation in a fraudulent scheme to obtain federally funded highway construction contracts set aside for socially and economically disadvantaged enterprises, Defendant Joseph W. Nagle was convicted by a jury in the United States District Court for the Middle District of Pennsylvania of 26 counts, including several counts of wire fraud, in violation of 18 U.S.C. § 1343, mail fraud, in violation of 18 U.S.C. § 1341, and engaging in unlawful monetary transactions, in violation of 18 U.S.C. § 1957. The jury also found that Defendant knowingly participated in a conspiracy to commit these acts, in violation of 18 U.S.C. §§ 371 and 1956(h). Presently before the court are Defendant's objections to the Presentence Investigation Report, in which he disputes, inter alia, the proper method of calculating loss pursuant to Section 2B1.1 of the Sentencing Guidelines and the applicability of Application Note 3(F)(ii) to that section, which addresses loss in connection with the fraudulent receipt of government benefits. For the following reasons, the court concludes that the loss attributable to Defendant's conduct is $53.9 million, which represents the amount of federal funds received by Schuylkill Products Inc. on the fraudulently obtained DBE contracts while Defendant was president. Accordingly, the court will overrule Defendant's objection in this regard and impose a 24-level increase pursuant to U.S.S.G. § 2B1.1.
The factual background presented at trial was set forth at length in this court's memorandum accompanying its order denying Defendant's post-trial motions and is incorporated herein. For purposes of the matter sub judice, the following general background is sufficient. During a period of nearly fifteen years, Schuylkill Products Inc. ("SPI") used Marikina Construction Corporation ("Marikina"), an entity certified as a disadvantaged business enterprise ("DBE"),  to serve as a "front" on bids for numerous highway construction projects sponsored by the Pennsylvania Department of Transportation ("PennDOT") and the Southeastern Pennsylvania Transportation Authority ("SEPTA"), and partially funded by the federal government. The fraud was extensive, and between 1993 and 2007, Marikina received approximately 336 federally assisted subcontracts from general contractors to furnish and install bridge beams, which were valued in excess of $119 million, making it PennDOT's largest recipient of DBE-designated funds. Most of the bridge beams used by Marikina on these projects were manufactured by SPI, but some required Marikina to install non-SPI products. Although the extensive evidence presented at trial established the existence of this scheme during the course of the fifteen years, Defendant first became president of SPI in April of 2004.
Although Marikina was the subcontractor of record, it did not perform a commercially useful function and, in reality, the subcontracts were found, negotiated, coordinated, performed, managed, and supervised by personnel employed by SPI and CDS, a wholly owned subsidiary that operated as the erection division of SPI. Profits for the jobs flowed through Marikina to CDS and SPI, less a "fixed fee" that was paid to Marikina. For example, if an SPI beam was used, Marikina remitted all of the funds received pursuant to the contracts to SPI. If a third-party's beam was used, Marikina submitted the funds less the cost of the third party beam to SPI. In either case, SPI gave Marikina a fixed fee and internally retained the balance of the total subcontract payment. Although laborers received paychecks from Marikina when they worked on "Marikina" jobs, Marikina sent invoices to CDS for the amount paid to the workers, and CDS reimbursed Marikina from its operating account for those amounts. Ultimately, the profits on erection work performed by CDS on Marikina's subcontracts went to CDS's bottom line in exchange for Marikina receiving the fixed fee. Thus, the scheme resulted in money, which the government had intended to go to legitimate DBEs performing commercially useful functions, being funneled through Marikina directly to SPI, a non-DBE. Ultimately, this arrangement resulted in increased profits for SPI.
Revenue generated by the fraud was a substantial part of SPI's business, and during Defendant's tenure as president, which began following the death of his father, both SPI and CDS experienced increased profits due, at least in part, to the companies' receipt of numerous subcontracts through Marikina, which SPI was otherwise ineligible to receive. During the relevant time, SPI/CDS's aggregate annual revenue was between 18 million and 26 million dollars, with 20- to 25-percent of that amount being attributed to the erection division.
A jury convicted Defendant of the numerous charges related to his participation in the foregoing fraud. This necessitated the jury's finding that Marikina did not perform a commercially useful function in connection with any of the PennDOT DBE subcontracts and that Defendant knowingly participated in the fraud that resulted in the non-DBEs receiving funds earmarked for legitimate DBEs. The propriety of the jury's judgment has been discussed at length in a previous memorandum of this court (Doc. 259) and is beyond the scope of this opinion.
In the Presentence Investigation Report, the Government calculated the amount of loss attributable to the overall conspiracy to defraud and commit mail and wire fraud to be $135.8 million; however, because the evidence demonstrated that Defendant joined the conspiracy in 2004, the amount of loss attributable to his conduct was $53.9 million, which, pursuant to U.S.S.G. § 2B1.1(b)(1)(M), resulted in a 24-level increase to the Offense Level Computation. Defendant objects to the method utilized by the probation officer and the Government in reaching this calculation.
Specifically, Defendant argues that the Government incorrectly measured the pecuniary harm caused by his conduct and contends that, rather than the entire face value of the contract payments received by Marikina, the proper measure of loss is the amount of actual profits CDS received during the relevant time period, i.e., from 2004 through 2008, which is a methodology consistent with the United States District Court of the Southern District of New York's 2012 opinion in United States v. White, No. 10-cr-516, 2012 WL 4513489 (S.D.N.Y. Oct. 2, 2012), a factually analogous case. Using the White court's methodology, Defendant calculates the total profit to be $850, 931.20, which, pursuant to U.S.S.G. § 2B1.1(b)(1)(H), would result in a 14-level increase to the Offense Level Calculation. The court rejects Defendant's argument and the reasoning employed by the White court.
Section 2B1.1 of the Sentencing Guidelines provides the base offense level for defendants convicted of crimes involving fraud and deceit, and various increases in the offense level depending on the amount of money at issue. In determining the loss attributable to the relevant conduct, the Government bears the burden of proving loss with reliable and specific evidence. The Sentencing Guidelines define actual loss as "the reasonably foreseeable pecuniary harm that resulted from the offense." U.S.S.G. § 2B1.1 cmt. n. 3(A)(i). Pecuniary harm "means harm that is monetary or that otherwise is readily measurable in money." Id. at cmt. n.3(A)(iii). If a loss cannot be reasonably determined, the Guidelines instruct the courts to "use the gain that resulted from the offense as an alternative measure of loss." Id. at cmt. n.3(B).
The section also contains a specific provision that addresses how loss is to be calculated when the fraud or deceit involves a government benefits program. The applicable Application Note, titled "Government Benefits, " provides, in pertinent part, as follows:
In a case involving government benefits ( e.g., grants, loans, entitlement program payments), loss shall be considered to be not less than the value of the benefits obtained by unintended recipients or diverted to unintended uses, as the case may be.
U.S.S.G. § 2B1.1 cmt. n.3(F)(ii). Consistent with several other circuits, and as recognized by the district court in White, 2012 WL 4513489 at *3, the Third Circuit has held that the DBE program is a government benefits program for purposes of Section 2B1.1 and is subject to Application Note 3(F)(ii). See, e.g., United States v. Tulio, 263 F.App'x 258, 263 (3d Cir. 2008) (holding Government Benefits provision of Section 2B1.1 applies to DBE funded contracts); United States v. Campbell, No. 08-cr-0007, 2010 WL 2650541, *3 (M.D. Pa. July 1, 2010) (finding Application Note 3(F)(ii) applicable to the calculation of loss in a companion case to the instant matter and citing support from the Fourth, Seventh, and Eleventh Circuits). Thus, in a case such as this, where an "unintended recipient, " i.e., someone not socially or economically disadvantaged, obtained government benefits, i.e., construction contracts set aside for disadvantaged business enterprises, the ...