United States District Court, M.D. Pennsylvania
May 7, 2014
UNITED STATES OF AMERICA,
JOSEPH W. NAGLE
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 court's calculation of loss is guided by Application Note 3(F)(ii) to Section 2B1.1, which instructs the court to determine the loss which is "not less than the value of the benefits obtained by the unintended recipients." U.S.S.G. § 2B1.1 cmt.n.3(F)(ii).
Defendant adopts the White court's interpretation of the term "benefits" as the basis for his argument. See White, 2012 WL 4513489 at *4. In White, the defendant was convicted of, among other things, fraudulently certifying that he was a service-disabled veteran, which made him and his company eligible for certain small-business set-aside contracts. Id. at *1. The government argued that the loss amount was the face value of the contracts that the defendant fraudulently obtained, i.e., $16.7 million. Id. The district court disagreed and held that, pursuant to Application Note 3(F)(ii), the profits obtained by the defendant for fraudulently set-aside contracts was the proper measure of loss. Id. at *5.
The White court reached this conclusion after interpreting the phrase "value of the benefits obtained" by looking to the ordinary meaning of "benefit, " which it defined as "[p]ecuniary advantage, profit, gain, ... or a payment, [or] gift." Id. at *4 (alterations in original and internal citations omitted). Based on this definition, the court substituted "profits" for "benefits" and computed the loss caused by the defendant to be the actual or intended profit rather than the face value of the set-aside contracts fraudulently procured. Id. at *5. This court rejects the White court's interpretation of the Application Note.
The meaning of "benefits" under Application Note 3(F)(ii) does not require the court to turn to the dictionary as the White court did because the term must be read in context of the entire Application Note. Significantly, Application Note 3(F)(ii) is titled "Government Benefits" and contains a non-exhaustive list of examples of types of benefits subject to the provision. The Note provides that, where the defendant is an "unintended recipient [of the government benefits at issue], " the loss amount is considered to be "not less than the value of the [government] benefits obtained." In this context, "benefits" refers to the type of government benefit ( see, e.g., grants, loans, entitlement program payments, DBE funded contracts) that the defendant improperly obtained. The term is an internal reference to the subject matter fraudulently obtained to which the Application Note applies. Redefining the term is unnecessary.
Here, the entire DBE portions of the contracts were diverted to unintended recipients, i.e., Marikina,  CDS, and SPI. Although the contracted-for work was actually performed, the money was not put to its intended use - to pay for work by a DBE on the highway construction projects. The Government paid $53.9 million to Marikina during Defendant's tenure as president of SPI. The proceeds of the DBE contracts should have, but did not, go to a certified DBE contractor that completed a commercially useful function. Accordingly, the value of the government benefits obtained by the unintended recipient, i.e., payments on the DBE contracts received by Marikina, is the proper measure of loss.
Based on the foregoing, the court concludes that, in light of Application Note 3(F)(ii) to Section 2B1.1, the amount of loss in this case involving a government benefits programs equals the entire value of the government benefits obtained by Marikina as a result of the fraudulent contracts at issue. Therefore, Defendant's objections to the loss amount in this regard will be overruled and the court will apply a corresponding 24-level increase to Defendant's offense level.