United States v. Yeaman ( 1999 )

Opinions of the United
1999 Decisions States Court of Appeals
for the Third Circuit
10-15-1999
United States v Yeaman
Precedential or Non-Precedential:
Docket 98-1102
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Filed October 15, 1999
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
NOS. 98-1102 and 98-1146
UNITED STATES OF AMERICA
Appellant in No. 98-1146
v.
DAVID REX YEAMAN
Appellant in No. 98-1102
On Appeal From the United States District Court
For the Eastern District of Pennsylvania
(D.C. Crim. Action No. 96-cr-00051-3)
District Judge: Honorable Clarence C. Newcomer
Argued July 30, 1999
BEFORE: SLOVITER, NYGAARD and STAPLETON,
Circuit Judges
(Opinion Filed: October 15, 1999)
Frank C. Razzano (Argued)
Eric A. Bensky
Dickstein, Shapiro, Morin
& Oshinsky
2101 L Street, N.W.
Washington, D.C. 20037
Attorneys for David Yeaman
Appellant in No. 98-1102
Michael R. Stiles
U.S. Attorney
Walter S. Batty, Jr.
Assistant U.S. Attorney
Robert E. Courtney, III
Deputy U.S. Attorney
Andrea G. Foulkes (Argued)
Assistant U.S. Attorney
Thomas V. Sjoblom
Special Assistant U.S. Attorney
Office of U.S. Attorney
615 Chestnut Street, Suite 1250
Philadelphia, PA 19106
Attorneys for United States
of America
Appellant in No. 98-1146
Paul A. Tufano, General Counsel
Commonwealth of Pennsylvania
330 Market Street
Harrisburg, PA 17120
and
Alan C. Kessler
Andrew W. Allison (Argued)
Buchanan Ingersoll
Eleven Penn Center, 14th Floor
1835 Market Street
Philadelphia, PA 19103
Attorneys for Amicus
M. Diane Koken
Insurance Commissioner of the
Commonwealth of Pennsylvania
OPINION OF THE COURT
STAPLETON, Circuit Judge:
David Rex Yeaman, along with four other defendants,
was convicted of various counts of conspiracy, wire fraud,
and securities fraud. His conviction resulted from his
involvement in a complex scheme involving the leasing of
worthless stocks of three public companies, U.S. Card
2
Investors, Inc. ("U.S. Card"), Omega Power ("Omega"), and
American Family Services ("AFS"), to the Teale Network
("Teale"), a fraudulent network of offshore and domestic
companies.1 Teale represented these leased stocks as assets
available to pay claims pursuant to reinsurance contracts
entered into with a Pennsylvania-based insurance
company, World Life and Health Insurance Co. ("World
Life"). When these assets were called upon to pay
outstanding medical reinsurance claims, the stocks were
deemed worthless.
Yeaman has appealed from the jury's verdict and a
sentencing adjustment. The government has cross-appealed
the sentence imposed by the District Court.
I.
World Life became insolvent at some point in or before
1988. It hid its insolvency from regulators and its insureds,
however, by placing a piece of land valued at $60,000 on its
books as worth several million dollars. World Life issued
the four group medical policies involved in this case in late
1989, in the spring of 1990, in the summer of 1990, and on
December 1, 1990. Teale's contracts reinsuring these
policies were entered on November 16, 1989, May 30, 1990,
June 28, 1990, November 10, 1990, and November 11,
1990. Pursuant to these agreements, Teale assumed 100%
of the liability under the four group medical insurance
policies issued by World Life in exchange for 92% of the
premiums paid by World Life's insureds on those policies.
These reinsurance transactions allowed World Life to reflect
a reserve credit of approximately $6 million. Teale received
total premiums from World Life of approximately $7 million
under its reinsurance contracts. The indictment alleged
that the conspiracy among Teale and the defendants
existed from about May of 1990 to June of 1992.
In 1990, Philip Rennert created Forum Rothmore, which
acted as an intermediary between Teale and publicly traded
_________________________________________________________________
1. The Teale Network was organized and controlled by Alan Teale. Neither
is a party to these proceedings but both are alleged to be unindicted co-
conspirators. We will refer to both collectively as "Teale."
3
corporations that desired to lease their stock. Forum
Rothmore entered into "surplus contribution agreements,"
known as RENN contracts, with Teale. The first RENN
contract involving one of the defendants was executed on
September 1, 1990. Yeaman was involved in a series of
RENN contracts entered between December 1, 1990, and
April 1, 1991.
Under the terms of these contracts, corporations leased
their stock to Teale and authorized the sale of the stock if
necessary to pay claims under insurance policies that Teale
had reinsured. The value of the stock leased was calculated
by multiplying the number of shares by the market price.
Teale then listed these shares at the same value on the
financial statements presented to World Life. In exchange,
Teale paid a percentage of the monthly leasing fees it
received from World Life to Forum Rothmore, which in turn
split the fees with the stock providers. Of the approximately
$7 million Teale received, about $3.3 million was
distributed to the defendants as rental fees for the leased
securities.
Yeaman was president of Capital General Corporation
("Capital General"). Capital General assisted other
companies in going public through mergers with existing
shell corporations that had previously completed their SEC
registration. After the merger, Capital General retained
some interest in the corporations, and Yeaman handled the
registration and promotion of the stock. National Stock
Transfer ("NST"), a subsidiary of Capital General, was the
transfer agent and performed the record keeping functions
for the public corporations with whom Capital General
dealt.
U.S. Card, Omega, and AFS were formed via mergers
orchestrated by Yeaman and Capital General. U.S. Card
was a small baseball card business operated in the home of
the father of one of Yeaman's associates in Hull,
Massachusetts. Its total inventory was less than $50,000.
Omega was a nearly insolvent business that bought and
sold surplus high voltage power line equipment. Omega had
minimal operations conducted by a sole proprietor who was
desperately seeking capital for his business. AFS also had
4
no significant assets or profit making activity. Yeaman was
an officer and director of these three corporations.
In spite of the minimal value of these corporations,
Yeaman purported to lease $8 million of U.S. Card stock,
$2 million of Omega stock, and $2 million of AFS stock to
Teale. In order to be able to attribute such high values to
these stocks, Yeaman manipulated the market quotes and
inflated the financial statements of these corporations.
Moreover, while certain of these stocks were restricted, they
were represented to be marketable and were transferred
without any indication of their restricted status. Forum
Rothmore assisted Yeaman in leasing these falsely-valued
and restricted stocks. In short, securities were falsely held
out by the defendants and Teale to be marketable and
valuable, when, in fact, they were not marketable and were
virtually without value.
In January 1991, the Pennsylvania Insurance
Department began to investigate World Life's financial
condition. On July 28, 1991, the Pennsylvania Insurance
Commissioner declared World Life insolvent and ordered its
liquidation. Since Teale had been paying insurance claims
with recently received premiums and had no other
significant assets to draw upon, this liquidation deprived
Teale of the ability to pay further claims.
The Pennsylvania Life and Health Insurance Guarantee
Fund is a state fund authorized by statute to pay
outstanding liabilities of licensed Pennsylvania companies
that become insolvent. The Guarantee Fund is financed by
Pennsylvania insurance companies. When World Life was
liquidated, the Guarantee Fund paid the outstanding group
medical reinsurance claims left unpaid as a result of the
fraud. The unpaid claims totaled over $6 million.
In February 1996, Yeaman was indicted in the Eastern
District of Pennsylvania and charged with one count of
conspiracy and multiple counts of wire and securities
fraud. The conspiracy charge included an allegation that
Yeaman failed to disclose in SEC and NASD filings that he
"previously had been found to have violated the securities
laws." (A.116, Count 1 P 6(o)(2)). This allegation was
incorporated into the wire and securities fraud counts.
5
Yeaman moved to strike this language from the indictment
on the ground that he had no duty to disclose former
securities law violations and/or that he did disclose the
information required by law.
The District Court denied Yeaman's motion because it
determined that if certain predicate facts could be
established, Yeaman had a duty to disclose five securities-
related administrative proceedings. The government later
introduced two of these proceedings into evidence. One
proceeding was a 1988 SEC administrative action against
NST that resulted in a censure order. See In the Matter of
National Stock Transfer, Inc., 41 S.E.C. Docket 1219 (1988).
The other proceeding was an SEC investigation that began
in 1987 and culminated in a cease and desist order entered
against Yeaman and Capital General in 1993. See In the
Matter of Capital General Corp., 54 S.E.C. Docket 1322(1993). A third proceeding, in which the Oregon
Department of Insurance and Finance entered a cease and
desist order against Yeaman and Capital General, was
admitted by stipulation of the parties. See In the Matter of
Capital General Corp. and David Yeaman, E7-49 (Oregon
Dept. of Ins. & Finance, April 28, 1988).
After a four week trial, the jury, by general verdict,
convicted Yeaman of the one count of conspiracy,five
counts of wire fraud, and three counts of securities fraud.
At the sentencing hearing, the District Court assigned
Yeaman an offense level of 11, which included a one-point
upward departure for causing a loss of confidence in an
important institution. The District Court found no
monetary loss attributable to Yeaman and refused to
impose adjustments for jeopardizing the safety of a
financial institution and use of special skills. The District
Court sentenced Yeaman to 14 months imprisonment and
a $20,000 fine.
II.
Yeaman first contends that his conviction must be
reversed because the jury's general verdict may have been
based on an improper legal theory. Yeaman argues that the
District Court erred in concluding that he had a duty to
6
disclose the 1988 SEC censure order entered against NST
and the SEC's investigation that began in 1987 and led to
a 1993 cease and desist order entered against Capital
General and Yeaman. The admission at trial of evidence of
these proceedings allowed the jury to consider Yeaman's
nondisclosure of them in determining whether he was guilty
of conspiring, wire fraud, and securities fraud. Yeaman
seeks reversal and a new trial in which such evidence
would be excluded. The District Court's legal conclusions
with respect to these two proceedings are subject to plenary
review.
A. 1988 SEC Administrative Proceeding against NST
Regulation S-K, 17 C.F.R. S 229.401, mandates that
certain information pertaining to corporate management
and control persons be included in the periodic reports that
public companies file with the SEC. Item 401(f) of that
regulation requires disclosure of certain legal proceedings
that occurred in the past five years and that are"material
to an evaluation of the ability or integrity of any director,
person nominated to become a director or executive officer
of the registrant." Item 401(f)'s six subparagraphs list the
types of legal proceedings that must be disclosed. Items
401(f)(3) and (4) require disclosure when "[s]uch person was
the subject of any order, judgment, or decree, not
subsequently reversed, suspended, or vacated" of a court of
competent jurisdiction or federal or state authority, and the
order, judgment, or decree was related to certain specified
behaviors. 17 C.F.R. S 299.401(f)(3)-(4) (emphasis added).
Since Yeaman was an officer and director of U.S. Card
and Omega, the government alleged that Item 401(f) of
Regulation S-K required the 1989 and 1990 Form 10-K
reports of these companies to disclose the 1988 SEC order
entered against NST.2 The 1988 order found that NST had
violated various securities laws on a number of occasions,3
_________________________________________________________________
2. Because AFS was a non-registrant and non-reporting company under
the federal securities laws, Regulation S-K does not apply to it. (A.159
n.16)
3. In the course of the administrative proceeding against NST, the
Commission found that NST willfully violated Sections 17(a)(3), 17(f)(1),
(2), and (3), 17A(c), 17A(d) and Rules 17f-1, 17f-2, 17Ac2-1, 17Ac2-2,
17Ad-6, 17Ad-10, 17Ad-11, 17Ad-13 thereunder. (A.235-36)
7
censured NST, directed it to take corrective measures,
ordered it to retain an independent outside accountant to
report on the implementation of those measures, and
required NST's president to execute an affidavit verifying
that the services of an independent accountant had been
engaged. Yeaman was not a named party to the proceeding.
Before the District Court, Yeaman contended that Items
401(f)(3) and (4) only refer to persons who were "named" in
the proceedings and thus that he had no duty to disclose
the 1988 proceeding against NST. Concluding that this
argument had no merit, the District Court contrasted the
text of Items 401(f)(3) and (4) with that of Item 401(f)(2) in
the same regulation. Item 401(f)(2) requires disclosure if the
director or control person "was convicted in a criminal
proceeding or is a named subject of a pending criminal
proceeding." See 17 C.F.R. S 299.401(f)(2) (emphasis added).
The District Court observed: "Although Item 401(f)(2) refers
to ``named subject,' Item 401(f)(3) and (4) merely refer to ``the
subject of,' which connotes a broader meaning than``named
subject.' Surely, if (f)(3) and (f)(4) meant only``named
subject,' the SEC could have explicitly stated so, as it did
in (f)(2)." (A.150)
The District Court went on to note that the government
had alleged that it possessed evidence demonstrating that:
(1) Yeaman was the director and president of Capital
General; (2) Yeaman owned more than 90% of Capital
General's stock; (3) Yeaman owned and controlled NST
through Capital General; (4) Yeaman was president of NST
in 1988 and already was or became its director; and (5)
NST and Capital General were affiliates as defined in Rule
405 of the Securities Act, 17 C.F.R. S 230.405. (A.150-51)
The Court held that if the government could prove these
allegations at trial, "then there would be no question that
Yeaman was the ``subject of' [the 1988 order entered
against NST]." (A.151)
On appeal, Yeaman continues to assert that he was not
"the subject of" the 1988 proceeding within the meaning of
17 C.F.R. S 229.401(f)(3) and (4) because he was not a
named party to that proceeding. In support of this
argument, he cites to the Uniform and Integrated Reporting
Requirements: Directors and Executive Officers, Securities
8
Act Release No. 33-5949, 1978 SEC LEXIS 1031, at *24
(July 28, 1978), which states:
Item 3 [now known as Item 401, or 17 C.F.R.
S 229.401] makes it clear that disclosure of criminal
convictions, criminal proceedings, orders, judgments,
etc. is required only where the executive officer,
director, or nominee for election as a director is a
named party in the legal proceeding.
Yeaman avers that the word "criminal" in this SEC release
does not modify the terms "orders" or "judgments," and that
the "named party" limitation therefore applies equally to
civil orders and judgments. He concludes that we should
defer to this interpretation of S 229.401(f)(3) and (4) by the
Commission.
In order to understand what Item 3 "makes clear," we
must examine the above-quoted statement in context. Prior
to 1978, Regulation S-K contained only Items 1 and 2. In
1976, the Commission proposed several amendments to
Regulation S-K, including a new section requiring
disclosures concerning directors and officers. Section (f) of
this amendment as originally proposed is substantially
similar to the current version of Item 401(f), except that
Section (f)(2) required disclosure if "[s]uch person was
convicted in a criminal proceeding . . . or is the subject of
a criminal proceeding which is presently pending."
Disclosure of Management Background: Uniform Reporting
Requirements, Exchange Act Release No. 34-12946, 10
S.E.C. Docket 834, 1976 WL 15989, at *10 (Nov. 2, 1976)
(emphasis added). In response to comments received on
this proposed amendment, Item 3(f)(2), as it was known
upon its adoption in 1978, was amended to read: "[s]uch
person was convicted in a criminal proceeding or is a
named subject of a pending criminal proceeding." Securities
Act Release No. 33-5949, 1978 SEC LEXIS 1031, at *40
(emphasis added). The SEC's statement in the release cited
by Yeaman is thus explaining a change in the originally
proposed section dealing solely with criminal proceedings. It
is accordingly clear that the word "criminal" was intended
to modify "orders, judgments, etc." as well as "convictions"
and "proceedings." We find it equally clear that the District
Court properly regarded the difference between "named
9
subject" in Item 401(f)(2) and "subject" in Item 401(f)(3) and
(4) as deliberate and significant and properly concluded
that the latter term is a broader concept. We thus reject
Yeaman's reading of Item 401(f)(3) and (4).
B. SEC Investigation of Capital General and Ye aman
between 1987-1990
The anti-fraud provisions of the securities laws impose a
duty to disclose material facts that are necessary to make
disclosed statements, whether or not mandatory, not
misleading. See 15 U.S.C. SS 77q(a), 77x. The District Court
held that Yeaman violated this duty by failing to disclose, in
the Form 10-K reports filed by Omega and U.S. Card in
March 1990, that he and Capital General had been the
subject of an SEC investigation since 1987.4
The 10-K reports of these companies made no reference
to this investigation and affirmatively asserted the
following:
Other than described above, neither the Registrant nor
any of its officers or directors, to their best knowledge,
is a party to any material legal proceeding or litigation
which would impact the operations or the Registrant,
and such persons know of no material legal
proceedings, judgments entered, legal actions or
litigation contemplated, or threatened which would
impair operation of the Registrant in the future.
(A.152 (quoting 10-K reports)). The Court found that
disclosure of the investigation was necessary in order to
make not misleading the disavowal of knowledge of
threatened proceedings that would impair the operations of
the corporation. As a result of its holding, the Court
allowed evidence of the investigation to be admitted at trial.
While the Court's opinion stated that it found the relevant
statements to be material and misleading, and thus
_________________________________________________________________
4. In 1993, after a five year investigation, the SEC ordered Yeaman and
Capital General to cease and desist from committing or causing further
violations of Sections 5(a) and (c) and 17(a) of the Securities Act, and
Sections 10(b) and 13(g) of the Securities Exchange Act, and Rules 10b-
5, 12b-20, and 13d-1(c) promulgated thereunder. See In the Matter of
Capital General Corp., 54 S.E.C. Docket 1322 (1993).
10
violative of the securities laws, the jury instructions
indicate that the jury was properly charged to make its own
determinations in these respects.
On appeal, Yeaman insists that he did not know at the
time of filing the 10-K reports that the SEC planned to
commence litigation. He notes that the administrative
proceeding that resulted from this investigation was not
instituted until June 22, 1992, and did not result in a
cease and desist order until July 23, 1993. He insists that,
while he knew of the investigation at the time offiling the
March 1990 reports, he did not know that the investigation
was focused on or might impact U.S. Card or Omega. As a
result, he disagrees that a duty to disclose the investigation
existed or that the affirmative statements contained in the
10-K reports were misleading in any respect. In response,
the government points out, inter alia, that the investigation
had been ongoing since 1987, that it instituted suit against
Yeaman and Capital General in June of 1990 to enforce a
subpoena duces tecum theretofore issued to them, and that
the Court ordered compliance in July of 1990. Taken as a
whole, the government argues, the evidence compelled the
conclusion that Yeaman must have been aware of the scope
and gravity of the investigation prior to March of 1990 and,
given his knowledge of his own activities prior to March
1990, he must have known of the probability of a
proceeding that would implicate U.S. Card or Omega.
We conclude that the government's evidence regarding
the investigation was properly submitted to the jury for
consideration as to whether the 10-K reports were
materially misleading in light of the affirmative statement
quoted above. While Yeaman argues that the District Court
committed a legal error, his claim properly characterized is
that the evidence was insufficient to support a conviction
on the theory that the reports were materially misleading.
When reviewing the sufficiency of the evidence, we view the
evidence in the light most favorable to the government and
ask whether a "rational trier of fact could have found the
essential elements of the crime beyond a reasonable doubt."
United States v. Dent, 149 F.3d 180, 187 (3d Cir. 1998)
(internal citations omitted). Under this standard, we believe
the government has tendered sufficient evidence to support
11
this theory. We need not base our rejection of Yeaman's
argument on this ground, however.
We have concluded that 15 U.S.C. SS 77q(a) and 77x
provide a solid legal foundation for the government's theory
of liability based on failure to disclose the SEC
investigation. Assuming that there were insufficient
evidence to support this theory, Yeaman nevertheless would
not be entitled to a new trial because the government
advanced other alternative, legally valid theories at trial
that were supported by sufficient evidence. Under the
teachings of Griffin v. United States, 502 U.S. 46 (1991), we
are required in such circumstances to presume that the
jury found the defendant guilty beyond a reasonable doubt
on a theory supported by the evidence.
III.
Yeaman also requests reversal based on two challenges to
the jury instructions. Review of the legal standard
enunciated in a jury instruction is plenary, see United
States v. Johnstone, 107 F.3d 200, 204 (3d Cir. 1997), but
review of the wording of the instruction, i.e. , the expression,
is for abuse of discretion. See United States v. Zehrbach, 47
F.3d 1252, 1264 (3d Cir. 1995) (en banc). This Court
reviews jury instructions to determine whether,"taken as a
whole, they properly apprized the jury of the issues and the
applicable law." Dressler v. Busch Entertainment Corp., 143
F.3d 778, 780 (3d Cir. 1998) (internal quotation omitted).
A. Unanimity Instruction
Section 17(a) of the 1933 Act, 15 U.S.C. S 77q(a), makes
it unlawful for any person "in the offer or sale of securities
by the use of any means or instruments of transportation
or communication in interstate commerce or by the use of
the mails, directly or indirectly," to do any of the following:
(1) to employ any device, scheme, or artifice to defraud,
or
(2) to obtain money or property by means of any
untrue statement of a material fact or any omission to
state a material fact necessary in order to make the
12
statements made, in the light of the circumstances
under which they were made, not misleading, or
(3) to engage in any transaction, practice, or course of
business which operates or would operate as a fraud or
deceit upon the purchaser.
15 U.S.C. S 77q(a). The indictment alleged in the
conjunctive that Yeaman engaged in conduct that came
within all three of these subsections. At the conclusion of
trial, the District Court declined to give the following
instruction that Yeaman insisted should follow immediately
after the Court read subsections (1)-(3) of Section 17(a):
It is not necessary for the government to establish all
three types of unlawful conduct in connection with the
offer or sale of securities; any one will be sufficient for
a conviction if you so find. However, you must
unanimously agree upon which of the types of unlawful
conduct the defendant engaged in. If you cannot agree
on any one or more of the means, you must find the
defendant not guilty.
The District Court instead charged as follows:
The second element that the government must prove
beyond a reasonable doubt is that in the offer or sale
of the particular security the defendants did any one or
more of the following:
(1) employed a device, scheme, or artifice to de fraud,
or
(2) made an untrue statement of a material fact or
omitted to state a material fact which made what
was said, under the circumstances, misleading, or
(3) engaged in an act, practice, or course of busi ness
that operated, or would operate, as a fraud or deceit
upon a purchaser, seller, or other person.
It is not necessary for the government to establish all
three types of unlawful conduct in connection with the
offer, sale, or purchase of the particular security. Any
one type of unlawful conduct will be sufficient for a
conviction, if you so find such unlawful conduct.
13
Yeaman suggests that this instruction constitutes reversible
error.5
It is well settled that a defendant in a federal criminal
trial has a constitutional right to a unanimous verdict. See
United States v. Edmonds, 80 F.3d 810, 814 (3d Cir. 1996).
This includes the right to have the jury instructed that in
order to convict, it must reach unanimous agreement on
each element of the offense charged. It is equally well
settled, however, that this does not mean one has a right to
insist on an instruction requiring unanimous agreement on
the means by which each element is satisfied. When a
statute enumerates alternative routes for its violation, it
may be less clear, however, whether these are mere means
of committing a single offense (for which unanimity is not
required) or whether these are independent elements of the
crime (for which unanimity is required). In making this
determination, Edmonds teaches that two questions must
be addressed:
First, did the legislature intend the different routes to
establish separate "offenses," for which unanimity is
required as to every fact constituting the offense, or
different "means" of violating a single offense, for which
unanimity is not required? Second, if the legislature
intended the alternative routes to be mere means of
violating a single statute, is the statute's definition of
the crime unconstitutional under the Due Process
clause?
Edmonds, 80 F.3d at 815.
We begin our analysis by noting that Section 17(a)first
focuses on an historic event -- the offer or sale of a security
utilizing an instrument of interstate commerce. It then
requires that the defendants' conduct with respect to that
offer or sale fall within one or more of three closely related
_________________________________________________________________
5. Although the government contends that this issue was waived, we
note that defense counsel submitted the above-quoted proposed jury
instruction indicating the need for unanimous agreement as to which
subsection of Section 17(a) was violated and objected, both at the
instruction hearing and at the conclusion of trial, to the District
Court's
instructions to the extent that they deviated from their proposed
instructions.
14
categories -- a "device, scheme or artifice to defraud,"
an obtaining of money or property by material
misrepresentation, or a transaction that operates as a fraud
or deceit on a purchaser. While each category has its own
parameters, see United States v. Naftalin, 441 U.S. 768(1979), they are largely overlapping categories and all fall
within the traditional understanding of the concept of
fraud. Most conduct that falls within one is likely to satisfy
another as well.
These characteristics of the relevant statute and the
nature of the specific unanimity charge requested here
distinguish this case from the situation involved in
Edmonds and Richardson v. United States, 119 S. Ct. 1707(1999). The statute involved in those cases, the Continuing
Criminal Enterprise Statute ("CCE"), requires that the
defendant have engaged in a "continuing series of
violations" of a broad range of specified criminal statutes.
The indictments there charged numerous such violations
and the defendants asked that the jury be instructed that
it must unanimously agree on each violation it relied upon
as satisfying the requirement of a "continuing series of
violations." In both cases, the Courts declined to find that
Congress intended "CCE predicate offenses to constitute
mere means of [committing] a single CCE offense" and
suggested that such a finding would raise serious questions
under the Due Process Clause. Edmonds, 80 F.3d at 819.
Both courts stressed that the "statute's word ``violations'
covers many different kinds of behaviors of varying degrees
of seriousness" and that failing to treat each violation as a
separate element would create substantial risk that a guilty
verdict might mask "wide disagreement among the jurors
about what the defendant did, or did not, do." Richardson,
119 S. Ct. at 1711.
Section 17(a) does not cover "many different kinds of
behavior of varying degree of seriousness" and the
requested charge was not directed at the same concern
identified in Edmonds and Richardson. The statute is
limited to fraud in connection with an offer and sale of
securities in interstate commerce. The requested charge did
not seek to require jury unanimity with respect to whether
Yeaman engaged in the alleged market manipulation, the
15
alleged representation of restricted securities as
unrestricted, or the alleged failure to disclose material SEC
proceedings. Thus its function would not have been to
increase the assurance that Yeaman committed specific
criminal conduct. Its only function would have been to
require jury unanimity on whether Yeaman's conduct
constituted a scheme to defraud, an obtaining of money by
material misrepresentation, or a transaction that operated
as a fraud on a purchaser, as those concepts are used in
Section 17(a).
We are confident that the District Court's denial of the
requested instruction did not in any way frustrate
Congress's intent in passing Section 17(a) or jeopardize any
fairness concept embodied in the Due Process Clause. 6
Indeed, we perceive no purpose that would have been
served by putting the jurors to the task Yeaman's charge
would impose on them -- a task that would require them
not only to determine what Yeaman did but also to agree
upon the outer limits of each of the subsections of Section
17(a) in this factual context.
We find the most helpful precedent to be the decision of
the Court of Appeals for the Ninth Circuit in United States
v. UCO Oil Co., 546 F.2d 833 (9th Cir. 1976). The statute
there, 18 U.S.C. S 1001, provided:
"Whoever, in any matter within the jurisdiction of any
department or agency of the United States knowingly
and willfully falsifies, conceals or covers up by any
trick, scheme, or device a material fact, or makes any
false, fictitious or fraudulent statements or
representations, or make or uses any false writing or
document knowing the same to contain any false,
fictitious or fraudulent statement or entry, shall be
fined not more than $10,000 or imprisoned not more
than five years, or both."
_________________________________________________________________
6. In order to comport with due process, we have indicated that different
means for committing an offense "must reflect notions of ``equivalent
blameworthiness or culpability.' " Edmonds, 80 F.3d at 820 (quoting
Schad, 501 U.S. at 643). In light of the similarity of these three
alternatives and the fact that each alternative has the same mental state
requirement, we conclude that this requirement is met.
16
546 F.2d at 836. Each relevant count of the indictment was
based on an identified document and charged the
defendants both with having "made . . . false writings . . .
knowing the same to contain false . . . statements" and
with having "falsified, concealed and covered up by trick,
scheme and device material facts." The Court concluded
that Section 1001 specified alternative means for
committing a single offense and that, as a result, it was not
necessary for "the jury, in arriving at a unanimous verdict,
[to] agree on the particular means by which the offense was
committed." The Court explained:
On the face of it, the statute, framed in a single
paragraph and providing a single penalty, does not
suggest Congressional purpose to create more than one
offense. Moreover, the statute is directed at a single
evil, i.e., the "perversion" of "the authorized functions
of governmental departments and agencies . . . which
might result from the deceptive practices described."
United States v. Gilliland, 312 U.S. 86, 93, 61 S.Ct.
518, 522, 85 L.Ed. 598 (1941). The types of conduct
enumerated all fall within the general understanding of
what constitutes fraud. As the court put it in Charles
Hughes & Co. v. Securities and Exchange Comm'n, 139
F.2d 434, 437 (2d Cir. 1943):
"The law of fraud knows no difference between
express representation on the one hand and implied
misrepresentation or concealment on the other."
See also, Gusow v. United States, 347 F.2d 755, 756
(10th Cir. 1965).
It is reasonable to conclude, therefore, that Congress
was concerned with proscribing the prohibited result
rather than particular kinds of conduct. That being so,
consistency calls for interpreting the enumeration of
different kinds of conduct in the statute as reflecting
different modes of achieving that result, not separate
and distinct offenses. . . .
546 F.2d at 836. We find this reasoning equally cogent
here.
B. Restricted Stock Instruction
Yeaman also argues that the District Court improperly
instructed the jury that it could find a Securities Act
17
violation based solely on his having held and transferred
restricted stock. According to Yeaman, the charge relieved
the government of its burden of proving that Yeaman
engaged in fraud by misrepresenting the restricted stock as
free-trading stock.
After instructing the jury on the elements of Section
17(a), the judge noted that "the government contends that
certain of the defendants engaged in the fraudulent sale of
restricted stock." (A.4159) The judge informed the jury that
restricted stock is stock acquired directly or indirectly from
an issuer in a transaction not involving any public offering;
and that such stock is deemed "restricted" because there
are restrictions on its resale to the public. See 17 C.F.R.
S 230.144. The judge then gave the instruction we have set
forth in the margin.7
_________________________________________________________________
7. Now, the Government contends that the defendants made use of
certain restricted securities in furtherance of some fraudulent acts and
practices by distributing and contributing those stocks to the off-shore
reinsurance companies. I have already defined for you what a restricted
stock is and the requirements under the law if and when the restricted
stock is going to be sold. If you find that the defendants held restricted
stock, then you may find the defendants engaged in acts, practices and
courses of business that operated as a fraud and deceit. And that they
made material misrepresentations by manipulating the price of the
stocks by contributing them to the off-shore reinsurers who placed them
on their financial statements to give the appearance of highly valued
assets, by participating in the misrepresentations made by their co-
conspirators who used those financial statements to misrepresent the
financial well being of the off-shore reinsurers when contracting with a
primary insurance company in Pennsylvania. And by misrepresenting
that these stocks could be liquidated to meet claims when they could
not.
Now, the Government also contends that the defendants made use of
certain restricted securities in furtherance of the fraudulent acts and
practices by distributing and pledging these restricted stocks to the
banks which held and maintained the escrow accounts. If you find that
the defendants held restricted stock, then you mayfind that the
defendants engaged in acts, practices and courses of business that
operated as a fraud and deceit and made material misrepresentations in
connection with the deposit of those stocks into the escrow accounts, if
you find one or more of the following.
18
We do not find this jury instruction to be legally
inaccurate or improper in any respect. The purpose of the
Court's instruction was to provide examples of the way that
the defendants may have violated Section 17(a), assuming
that the defendants used restricted stock in the course of
their dealings. To find defendants guilty under one of these
possible scenarios, the jury first had to find that defendants
held restricted stock. The implication of the Court's
statement "[i]f you find that the defendants held restricted
stock," is that if the jury did not so find, then their
consideration of this theory was precluded. If the jury did
find that the defendant held restricted stock, then the jury
was obliged to consider whether the evidence supported a
finding that the defendants engaged in transactions with
these stocks that would operate as a fraud or deceit. Thus,
we find no error in the Court's restricted stock instruction.
IV.
In combination, the parties raise four sentencing issues.
The government finds three flaws in the District Court's
application of the Sentencing Guidelines: (1) the finding of
no loss under U.S.S.G. S 2F1.1; (2) the failure to impose a
_________________________________________________________________
First, if you find that the defendants contributed through Forum
Rothmore and World Re and into the escrow accounts stock positions
they controlled in one or more of the five companies. And at the time
they did so, they had not held the Rule 144 stock long enough to meet
the two or three year holding I described previously. Or secondly, Forum
Rothmore became an underwriter and was thus engaged in an unlawful
distribution. An underwriter is defined by statute to mean any person
who either has purchased from an issuer, with a view to or offers or sells
for an issuer in connection with the distribution of any security. Or any
person who participates or has a direct or indirect participation in any
such undertaking. Or third, they engaged in acts, practices or courses of
business that operated as a fraud on the escrow accounts when they
engaged in an unlawful distribution and had violated the rules
concerning the sale of restricted stock.
It's not necessary you find the defendants engaged in all three of these
courses of business or conduct. Anyone (sic) is sufficient.
(A-4164-4166).
19
four-level increase under U.S.S.G. S 2F1.1(b)(6) for a
substantial effect on a financial institution; and (3) the
rejection of a special skills enhancement under U.S.S.G.
S 3B1.3. Yeaman challenges the District Court's upward
departure based on its finding that Yeaman's fraudulent
acts resulted in loss of confidence in an important
institution.
The standard of review of a district court's interpretation
and application of the Sentencing Guidelines is plenary.
See United States v. Hallman, 23 F.3d 821, 823 (3d Cir.
1994). Findings of facts are measured by the clearly
erroneous test. See United States v. Hillstrom, 988 F.2d
448, 450 (3d Cir. 1993). This Court's review of a district
court's decision to depart upward is plenary as to whether
the increase was permissible. We review the reasonableness
of the degree of the departure for an abuse of discretion.
See United States v. Kikumura, 918 F.2d 1084, 1098, 1110
(3d Cir. 1990).
A. Calculation of Fraud Loss under U.S.S.G.S 2F1.1
Section 2F1.1(a) of the Sentencing Guidelines establishes
a base offense level of six for offenses involving fraud and
deceit. See U.S.S.G. S 2F1.1.8 Pursuant to Section 2F.1.1(b),
the base offense level must be increased according to the
size of the loss. This Court's precedents establish that
" ``fraud loss is, in the first instance, the amount of money
the victim has actually lost,' " United States v. Coyle, 63
F.3d 1239, 1250-51 (3d Cir. 1995) (quoting United States v.
Kopp, 951 F.2d 521, 523, 536 (3d Cir. 1991)). However, "if
an intended loss that the defendant was attempting to
inflict can be determined, this figure will be used if it is
greater than actual loss." Application Note 7 to U.S.S.G.
S 2F1.1. While the greater of actual loss and intended loss
is the preferred measure, there are situations in which the
defendant's gain can appropriately be used as a
measurement of loss. A court may look to a defendant's
gain as an alternative measure but only "[w]hen if it is not
feasible to estimate with reasonable accuracy the victim's
loss [or intended loss] and where there is some logical
relationship between the victim's loss and the defendant's
_________________________________________________________________
8. All references to the Sentencing Guidelines are to the 1997 version.
20
gain so that the latter can reasonably serve as a surrogate
for the former." United States v. Dickler, 64 F.3d 818, 826
(3d Cir. 1995) (indicating, by way of example, that proceeds
from resale of object taken could provide estimate of loss
because sale would establish approximate market value of
object). Additionally, "the loss need not be determined with
precision. The Court need only make a reasonable estimate
of the loss given the available information." Application
Note 8 to U.S.S.G. S 2F1.1.
The relevant conduct provision of the Sentencing
Guidelines, S 1B1.3, provides that specific offense
characteristics, -- in this instance the loss amount that
should be attributed to the defendant under S 2F1.1, -- are
to be determined on the basis of the following:
(1) (A) all acts and omissions committed, aided,
abetted, counseled, commanded, induced, procured, or
willfully caused by the defendant; and
(B) 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), all
reasonably foreseeable acts and omissions of others in
furtherance of the jointly undertaken criminal activity,
that occurred during the commission of the offense of
conviction, in preparation for that offense, or in the
course of attempting to avoid detection or responsibility
for that offense;
* * *
(3) all harm that resulted from the acts and omissions
specified in [the above ] subsections. . . , and all harm
that was the object of such acts and omissions.
U.S.S.G. S 1B1.3. In the context of a jointly undertaken
criminal activity, Application Note 2 indicates that the
conduct attributable to a defendant does not include the
conduct of other participants prior to defendant's joining
the activity, even if the defendant knows of that conduct.
See Application Note 2 to U.S.S.G. S 1B1.3. On the other
hand, one who commits to a scheme to defraud already in
progress is responsible from that point on for all reasonably
21
foreseeable loss occasioned by other participants acting in
furtherance of the scheme.
We have previously held that Section 1B1.3(a)(3)
establishes a causation requirement when determining
actual loss. See United States v. Neadle, 72 F.3d 1104,
1114-15 (3d Cir. 1996) (Becker, J., concurring in part and
dissenting in part) ("[T]he plain meaning of``resulted from'
connotes causation."), opinion amended by 79 F.3d 14 (3d
Cir. 1996); United States v. Evans, 155 F.3d 245, 253 (3d
Cir. 1998) ("[T]he actual loss determination must be
predicated on the harm caused by [defendant's] offenses.").
Where the defendant takes something without giving
anything to the victim in return, the value of the thing
taken reflects the victim's loss. However, where the
defendant gave something of value in exchange for what
was fraudulently taken, the victim's loss is the difference
between the value of what he or she gave up and the value
received in exchange. See United States v. Dickler, 64 F.3d
818, 825 (3d Cir. 1995).
In the Pre-Sentence Investigation Report, the Probation
Office recommended a loss calculation of $6.4 million and
the addition of 14 levels pursuant to Section 2F1.1(b)(1).
The $6.4 million amount reflects the unpaid medical
reinsurance payments owed by Teale to World Life
pursuant to the terms of the reinsurance contracts and
ultimately paid by the Guarantee Fund. Nonetheless, in
sentencing the defendants, the District Court determined
that the offense involved no loss. The government contends
that the Court erred in several ways: (1) by determining
that the offense involved no actual loss; (2) by failing to
consider the loss that Yeaman and his business associates
intended to impose; and (3) by failing to account for the fact
that Yeaman and his co-defendants collectively reaped $3.3
million as a result of the offense.
In determining that no actual loss occurred, the District
Court focused on the $6.4 million loss figure contained in
the sentencing report. The Court concluded:
The indisputable fact is that [the] overwhelming
majority of harm or loss to the victims occurred prior
to any of the defendants joining the conspiracy. Indeed
22
the evidence shows that the loss that the Government
is claiming, namely $6.4 million in unpaid claims,[on
the insurance policies], was incurred as liabilities by
World Life prior to any conduct by the defendants here.
In effect, the defendants could not have made the
liabilities greater. The stock they contributed merely
failed to cover the liabilities incurred . . . .
(A.658-59). The Court did not explicitly make anyfindings
with respect to intended loss. The District Court also did
not address the gain acquired by Yeaman and the other
participants in the scheme.
The District Court found no actual loss because it
concluded that World Life had issued the policies, and was
thus committed to pay the $6.4 million in claims, prior to
the defendant's misrepresentations. We find the District
Court's analysis flawed for several reasons.
Yeaman and his co-defendants agreed to participate in a
scheme that would enable Teale to collect millions of dollars
in premiums from World Life in exchange for virtually
worthless reinsurance. The victims of the scheme were
World Life and the beneficiaries of the group medical
policies. The record demonstrates that the defendants were
fully aware of the use to be made of their
misrepresentations in the stock leasing agreements and it
strongly suggests that these misrepresentations were
essential to Teale's continued collection of those premiums.
The reinsurance contracts provided for their termination in
the event of the reinsurer's insolvency. Without the assets
of the defendants and the resulting appearance of solvency,
the most reasonable inference is that World Life would have
ceased paying premiums to Teale long before it eventually
did. The District Court failed to make any finding, however,
as to the likelihood of a causal connection between the
misrepresentations of the defendants and Teale's collection
of premiums after the defendants committed themselves to
support the scheme.
If there was a causal connection between the
misrepresentations of Teale, Yeaman, and the other
conspirators and the continued receipt by Teale of
premiums after Yeaman joined the scheme, Yeaman is
23
responsible for an actual loss equal to the premiums
received after he joined the scheme less any amount paid
by Teale in satisfaction of policy claims out of those
premiums or the sale of the reinsurance assets. Yeaman
would be responsible in this event for an actual loss
whether or not World Life issued its group policies or
entered into its reinsurance contract prior to Yeaman's
entry on the scene. See United States v. Dickler, 64 F.3d at
825.
Because Teale collected the premiums from World Life as
a result of jointly undertaken criminal activity, neither we
nor the District Court on remand need determine whether
Yeaman in particular caused World Life to cede these
amounts to Teale. Under Section 1B1.3(a)(1), Yeaman is
accountable, not only for his own acts, but also for the
conduct of others that was: (1) in furtherance of the jointly
undertaken criminal activity; (2) within the scope of the
criminal activity Yeaman agreed to jointly undertake; and
(3) reasonably foreseeable in connection with that criminal
activity. See U.S.S.G. S 1B1.3(a)(1)(B); Application Note 2;
United States v. Evans, 155 F.3d 245, 253-54 (3d Cir.
1998). The record contains ample evidence demonstrating
that Yeaman understood the extent of Teale's scheme,
including the roles of other parties to the scheme and the
need to place a diversity of stocks on Teale's financial
record in order to pass muster with World Life and
insurance regulators. Accordingly, we have no difficulty
concluding that Yeaman is responsible for the acts of all
others involved in the scheme that occurred after he
entered the conspiracy, and thus all of the premiums ceded
by World Life as a result of their combined acts.
The record indicates that Yeaman entered into hisfirst
RENN contract on December 1, 1990. On remand, if the
District Court finds a causal connection between the
conduct of Teale and the other co-conspirators and Teale's
continued receipt of premiums, it will determine when
before December 1, 1990, Yeaman committed himself to the
conspiracy and will calculate the amounts received by Teale
in premiums under the reinsurance contracts after that
date. It should then reduce that amount by the total claims
paid by Teale. If these amounts cannot be calculated with
precision, reasonable estimates will suffice.
24
The premiums paid by World Life after Yeaman's decision
to enter the scheme may not, however, be the only actual
loss measure that this record will support. In United States
v. Neadle, 72 F.3d 1104 (3d Cir. 1995), we upheld a district
court's determination that the actual loss caused by a
defendant who issued fraudulent insurance policies was the
amount of unpaid claims of policyholders. The record
revealed that the defendant misrepresented the amount of
his initial capital in order to get into the insurance
business and engaged in fraudulent conduct to perpetuate
his business. We determined that, but for his fraudulent
acts, the defendant would not have been able to enter and
remain in the insurance business. We concluded that the
insureds' unpaid claims provided a reasonable estimate of
the harm resulting from the defendant's fraudulent scheme.
See also United States v. Krenning, 93 F.3d 1257, 1270 (5th
Cir. 1996)(holding that actual loss caused by defendant
who disguised the insolvency of his insurance company and
continued to sell policies was losses of policyholders). We
see no reason why the Neadle analysis should not similarly
apply where reinsurance is sold based on a fraudulent
inflation of the value of the reinsurer's assets.
In this case, Teale could not have entered and remained
in the business of reinsuring World Life but for its
fraudulent misrepresentations. Although the District Court
made no finding on the issue, the record would also appear
to us to support the proposition that World Life was not
capable of insuring any of the four group medical policies
without having received a commitment for 100%
reinsurance. It follows that if the Teale fraudulent
reinsurance contracts had not been available, World Life
would either have secured other reinsurance or would not
have issued the group policies involved. If reinsurance from
a solvent reinsurer had been obtained, all claims under the
policies would have been paid to the reinsurer; if the group
policies had not been issued, the employers who purchased
the policies from World Life would have obtained group
medical coverage from another source and all claims of the
beneficiaries would have been paid in full. In either event,
under the teachings of Neadle, there would have been a
causal nexus between the fraud and all unpaid claims.
25
While it is true, as Yeaman stresses, that he cannot be
held responsible for the consequences of Teale's
misrepresentations before he joined the conspiracy, he
would be responsible for all loss under a group policy
reinsured by Teale after he committed to the scheme. The
timing of Yeaman's own misrepresentation would be
immaterial. While Yeaman's initial RENN contract was
entered into on December 1, 1991, a few weeks after the
last of the reinsurance contracts, the record suggests that
his decision to join the fraudulent scheme may have
predated at least some of those reinsurance contracts.
By identifying these ways in which the record suggests
that Yeaman may be responsible for an actual loss suffered
by World Life and the beneficiaries of its group medical
policies, we do not foreclose the District Court from
concluding, after an analysis consistent with this opinion,
that the government has failed to carry its burden of
proving a causal nexus by a preponderance of the evidence.
Neither do we intend to indicate that a careful analysis of
the voluminous record here could not find support for other
theories involving such a nexus. Even if Yeaman joined the
scheme after all of the reinsurance contracts had been
entered, for example, it does not necessarily follow that he
is not responsible for any of the unpaid claims arising
under the group policies. Neadle emphasizes that an
insurer's continued fraud may allow it to remain in
business longer than it otherwise would. Here, in the
absence of Yeaman's participation in the scheme, Teale's
insolvency may have surfaced earlier than it did and less
loss may have been occasioned to World Life and the
beneficiaries of its group policies than was in fact
occasioned by the end of the conspiracy. We do not mean
to foreclose the District Court on remand from pursuing
this or any other theory of actual loss suggested by the
record. We hold only that the District Court's limited
factual findings do not support its conclusion that no
actual loss was occasioned.
The government also contends that the intended loss in
this case exceeds the actual loss and should, therefore, be
used in applying U.S.S.G. S 2F1.1. It argues that the
intended loss is the face value of the stock provided by
26
Yeaman and others under the RENN contracts and reported
in Teale's financial statements. We do not agree that
Yeaman and his co-conspirators intended to cause a loss
equal to the amount of the represented value of the leased
stocks. Intended loss refers to the defendant's subjective
expectation, not to the risk of loss to which he may have
exposed his victims. United States v. Kopp, 951 F.2d 521,
529-531 (3d Cir. 1991). Here, Yeaman and the others
undoubtedly hoped that their fraudulently inflated
securities would never have to be sold and that the scheme
would continue for the indefinite future. The loss that they
intended was the premiums Teale would receive less any
payment of claims necessary to keep the scheme alive. We
express no view at this juncture as to whether the current
record will support a finding of an intended loss in excess
of the actual loss.
Additionally, while we do not foreclose the District Court
from considering the gain of Yeaman and the others on
remand, their gain would not appear to us to be a helpful
alternative in this factual context. That gain would appear
to be limited to an amount equal to the minimum actual
loss we have held to be appropriate, i.e., to the premiums
received by Teale after Yeaman's joinder, less any claims
paid in order to maintain the scheme, including any
amounts paid by Teale in satisfaction of the outstanding
claims upon liquidation.
B. Failure to Apply Four Level Increase Under Section
2F1.1(b)(6)
Section 2F1.1(b)(6) of the United States Sentencing
Guidelines provides:
If the offense--
(A) substantially jeopardized the safety and soundness
of a financial institution; or
(B) affected a financial institution and the defendant
derived more than $1,000,000 in gross receipts from
the offense,
increase by 4 levels. If the resulting offense level is less
than level 24, increase to level 24.
27
U.S.S.G. S 2F1.1(b)(6). Application Note 15 states:
An offense shall be deemed to have "substantially
jeopardized the safety and soundness of a financial
institution" if, as a consequence of the offense, the
institution became insolvent; substantially reduced
benefits to pensioners or insureds; was unable on
demand to refund fully any deposit, payment, or
investment; was so depleted of its assets as to be
forced to merge with another institution in order to
continue active operations; or was placed in
substantial jeopardy of any of the above.
In the course of rejecting an enhancement under Section
2F1.1(b)(6), the District Court explained:
Based on the evidence the Court finds that the
defendants did not substantially jeopardize the safety
or soundness of World Life. As with respect to the loss
calculation, the Government must demonstrate a
causal connection between the defendants' conduct
and the safety and soundness of the institution.
In this case the conduct of the defendants could not
have caused World Life to become insolvent. World Life
had been insolvent as a matter of pure accounting long
before any of the defendants charged conduct. Clearly
the conduct of the defendants could not have caused
World Life to become insolvent because it already was.
Finally, the evidence does not establish that
defendants' conduct caused any of the other
consequences in application note 15.
(A. 659-60).
While the government concedes that the reinsurers did
not cause World Life's insolvency, they nonetheless contend
that the Court erred in refusing to order an enhancement
under Section 2F1.1(b)(6)(A).9 The government maintains
that the conduct of Yeaman and the other parties to the
scheme substantially reduced benefits to insureds and "left
the company ``unable on demand to refund fully any
_________________________________________________________________
9. The government has not raised the issue of whether an enhancement
was appropriate under Section 2F1.1(b)(6)(B).
28
deposit, payment, or investment' or meet its obligations to
insureds." Government Br. at 117.
Consistent with our previous conclusion that the District
Court's factual findings do not support its holding of no
actual loss, we conclude that the District Court also erred
in holding that Yeaman did not substantially jeopardize the
safety and soundness of World Life by (1) substantially
reducing benefits to World Life's insureds and (2) placing
World Life in a position such that it was unable to refund
premiums that were paid in exchange for non-existent
coverage. Yeaman and the others received several million
dollars of premiums from World Life that should have gone
towards paying insureds' claims or refunding their
premiums. See United States v. McDermott, 102 F.3d 1379(5th Cir. 1996) (holding that, even though victim
corporation was insolvent independent of fraud,finding of
actual loss of $5-10 million caused by defendants' fraud
was irreconcilable with finding that defendants did not
substantially reduce benefits to insureds or cause
corporation to be unable to refund deposit, payments, or
investments).
Accordingly, we will remand for application of Section
2F1.1(b)(6)(A).
C. Upward Departure for Loss of Confidence i n Important
Institution
Yeaman appeals the District Court's decision to impose a
one-level upward departure based on the loss of confidence
in an important institution that resulted from his
fraudulent acts. Yeaman's challenge is two-fold. He argues
that the Court abused its discretion by both (1) concluding
that this case fell outside the "heartland" of typical fraud
cases; and (2) determining that the record supported the
imposed departure.
We begin our analysis by noting that the Commission
conceives of each offense guideline as "carving out a
``heartland,' a set of typical cases embodying the conduct
that each guideline describes." U.S.S.G., Ch. 1, Pt. A intro.
p.s. 4(b). In the unusual case where a defendant's conduct
falls outside the typical "heartland," the court may consider
a departure from the guidelines range. Id. A district court
29
may impose a sentence outside the guideline range where
"the court finds that there exists an aggravating or
mitigating circumstance of a kind, or to a degree, not
adequately taken into consideration by the Sentencing
Commission in formulating the guidelines that should
result in a sentence different from that described." 18
U.S.C. S 3553(b); see U.S.S.G. S 5K2.0.
As this Court explained in United States v. Iannone, 184
F.3d 214, 226 (3d Cir. 1999):
The Supreme Court provided additional guidance on
departures in Koon v. United States, 518 U.S. 81, 95
(1996), instructing courts to apply the following
analysis when considering a S 5K2.0 departure. First,
identify the factor or factors that potentially take the
case outside the Guidelines' "heartland" and make it
special or unusual. Id. at 95. Second, determine
whether the Guidelines forbid departures based on the
factor, encourage departures based on the factor, or do
not mention the factor at all. Id. at 94-95. Third, apply
the appropriate rule: (1) if the factor is forbidden, the
court cannot use it as a basis for departure; (2) if the
factor is encouraged, the court is authorized to depart
if the applicable guideline does not already take it into
account; (3) if the factor is discouraged, or encouraged
but already taken into account by the applicable
guideline, the court should depart only if the factor is
present to an exceptional degree, or in some other way
makes the case different from the ordinary case in
which the factor is present; or (4) if the factor is
unmentioned, "the court must, after considering the
structure and theory of both relevant individual
guidelines and the Guidelines taken as a whole, decide
whether [the factor] is sufficient to take the case out of
the Guideline's heartland." Id. at 95-96 (internal
citation and quotation marks omitted).
In the instant case, the District Court concluded that a
resulting loss of confidence in an important institution took
this case out of the "heartland" of fraud cases. The
Commission has explicitly encouraged departures based on
this factor. Application Note 10 to U.S.S.G. S 2F.1.1
provides a nonexclusive list of circumstances in which the
30
loss calculated pursuant to Section 2F1.1 "does not fully
capture the harmfulness and seriousness of the conduct."
Application Note 10 to U.S.S.G. S 2F1.1 (1997). Causing a
loss of confidence in an important institution is identified
as one such circumstance. See Application Note 10(e).
Because the Guidelines suggest that a finding of loss of
confidence in an important institution is sufficient by itself
to place a case outside the "heartland" of typical fraud
cases, we limit our examination to whether the Court
properly considered the evidence put forth by the
government and whether this evidence was sufficient to
support a finding of loss of confidence in an important
institution.10
At sentencing, the government argued that the
defendants' scheme had caused a loss of confidence in both
the insurance industry and the stock market. In support of
its arguments, the government submitted a series of letters
from policyholders of World Life and a letter from William
McLucas, the Director of Enforcement at the SEC. Although
it granted the departure, the Court did not state whether it
based the departure on a finding of loss of confidence in the
insurance industry, the stock market, or both.
Yeaman relies on this Court's holding in United States v.
Neadle, 72 F.3d 1104 (3d Cir. 1996) to support his
argument that the District Court departure has inadequate
record support. In Neadle, the defendant, as we have noted,
had been convicted of mail fraud in connection with the
formation and maintenance of an insurance company. The
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10. In Yeaman's reply brief, he asserted for thefirst time that Section
2F.1.1(b)(6) of the Guidelines already takes loss of confidence into
account, at least when the important institution at issue is a financial
institution. As a result, Yeaman contends that the Court cannot grant an
upward departure based on Application Note 10(e) unless the instant
offense involved exceptional aggravating circumstances. While Yeaman
has waived this argument by failing to raise it sooner, we nonetheless
note that it has no merit in this particular case where the financial
institution at issue for purposes of Section 2F1.1(b)(6), World Life, is
an
institution separate and distinct from the "important institution"
supporting the Court's decision to upwardly depart pursuant to Section
5K2.0. See discussion infra.
31
district court imposed a one point upward departure on the
ground that " ``[t]he offense itself contributed materially to
the destruction of the reputation of the insurance industry
in the territory." Id. at 1112 (quoting district court). This
Court held that this upward departure was improper. We
explained: "[T]he court based the upward departure not on
sworn testimony but on unsupported judicial conclusion.
Such judicial speculation cannot provide the basis for an
upward departure." Id. We emphasized that the
government, when asked for its evidence supporting the
argument for a departure, had merely cited conversations
with fifteen insureds of the fraudulent company"who did
not hold the insurance industry in very high regard,
meetings with people on the street, and evidence from
reading newspapers." Id. at 1112 n.8 (internal quotation
omitted).
Relying on the language in Neadle, Yeaman contends that
the upward departure for loss of confidence in an
institution in this case was similarly based on unsupported
judicial conclusions rather than competent evidence. First,
he notes that none of the materials submitted by the
government in support of the upward departure consisted
of sworn testimony. Second, he argues that the letters from
policy holders tendered by the government demonstrate
nothing more than their frustration occasioned by World
Life's failure, i.e. their lack of coverage and resulting out-of-
pocket expenses or inability to receive health care services.
Finally, he observes that the SEC letter speaks generally
about the deleterious effects of fraud on the securities
market, but does not claim that Yeaman's conduct actually
contributed to a loss of public confidence in the market.
We do not understand Neadle to hold that unsworn, but
reliable and probative evidence cannot be relied upon by a
sentencing court to support a departure. The law is clearly
to the contrary. Rather "[i]n resolving any dispute
concerning a factor important to the sentencing
determination, the court may consider relevant information
without regard to its admissibility under the rules of
evidence applicable at trial, provided that the information
has sufficient indicia of reliability to support its probable
accuracy." U.S.S.G. S 6A1.3; United States v. Brothers, 75
F.3d 845, 848 (3d Cir. 1996).
32
With respect to the letters from World Life's insured, we
find ourselves in agreement with Yeaman. As he points out,
these letters demonstrate the policyholders' frustration in
the past with World Life, their inability to receive benefits
from World Life after having paid their premiums, and the
resulting financial strain as medical problems arose. None
of these letters suggest that World Life's insureds will be
unlikely to purchase medical insurance in the future.
Nonetheless, the government's evidence is sufficient to
support a finding of loss of confidence in the stock market.
The McLucas letter provides an expert opinion that
manipulation of the market through means like those
employed by Yeaman destroy confidence in the securities
market and that a fraudulent scheme with respect to a few
stocks can have a pervasive, detrimental effect. As Director
McLucas explained:
[W]hen the integrity of the secondary market is
undermined by a manipulation scheme involving even
only a few stocks, there inevitably is a more persuasive
effect on the securities markets as a whole. When
investors lose confidence in the securities markets as a
result of market manipulation of a particular stock
market integrity as a whole is diminished. When that
happens, investment in securities of other issurers is
impeded.
(A. 495).
We find that the McLucas letter along with the other
evidence concerning Yeaman's conduct provides a
satisfactory predicate for the District Court's upward
departure. It is not necessary in a situation of this kind
that the government produce someone whose confidence in
the institution has diminished as a result of the defendants'
conduct. We think it clear that a sentencing court may infer
that the requisite loss of confidence has occurred based on
the evidence concerning the character of the fraud, and
expert opinion testimony like that of Director McLucas
regarding the impact of that kind of fraud on the particular
institution involved. Moreover, where the Court can draw
the inference that some loss of confidence in the institution
occurred, that will suffice; it is not necessary that the loss
33
from this particular scheme be further quantified. See
United States v. Rowe, 999 F.2d 14 (lst Cir.
1993)(permitting inference of loss of confidence in the
health insurance industry based solely on the character of
the defendant's fraudulent scheme).
On remand, the District Court should reevaluate its
decision to impose a one level upward departure in light of
our observations concerning the letters of World Life's
insured. If it infers that some loss of confidence in the stock
market has occurred, it may reimpose its original
departure.
D. Failure to Apply Two Level Enhancement Unde r Section
3B1.3
Section 3B1.3 provides:
If the defendant abused a position of public or private
trust, or used a special skill, in a manner that
significantly facilitated the commission or concealment
of the offense, increase by 2 levels. This adjustment
may not be employed if an abuse of trust or skill is
included in the base offense level or specific offense
characteristic.
Application Note 2 states:
"Special skill" refers to a skill not possessed by
members of the general public and usually requiring
substantial education, training or licensing. Examples
would include pilots, lawyers, doctors, accountants,
chemists, and demolition experts.
The government contends that the District Court erred in
refusing to impose an enhancement on Yeaman based on
his specialized knowledge of the stock market as a prior
stock broker and his particular knowledge acquired over
decades of experience in the over-the-counter (bulletin
board) market, the inner workings of a brokeragefirm, and
use of a transfer agent. While the Guideline itself precludes
the adjustment if the abuse of skill is included in the base
offense level or specific offense characteristic, the District
Court declined to impose the enhancement because "the
basis for the proposed enhancement, constitutes part of the
elements of the offense for which he has been convicted."
34
(A.710 (emphasis added)). The District Court, believed that
an enhancement for use of special skills would amount to
"double counting."
We hold that the District Court misconstrued the
applicable law when it looked to whether the special skill
used was part of the statutory offense, rather than included
in the Guideline applicable to that offense.11 The relevant
Guideline here, which applies to all fraud cases, neither
makes reference to a special skill or directs that Section
3B1.3 not be applied. It follows that Section 3B1.3 must be
applied if its factual predicates are satisfied. Accordingly,
we will remand for initial findings as to whether Yeaman
possessed special skills within the meaning of Section
3B1.1 and, if so, whether he used these skills to
significantly facilitate the commission of the offense.12 While
Application Note 2 does not specifically recognize stock
brokers as persons possessing special skills in its list of
examples, enhancements based on a defendant's special
skills he or she developed as a broker or financier and used
in the commission of securities fraud are proper in some
circumstances. Cf. United States v. Connell, 960 F.2d 191(1st Cir. 1992) (holding that stockbroker's ability to launder
large amount of stock while shielding the true owner's
identity in a way that a lay person could not do without
attracting scrutiny supported use of special skill
_________________________________________________________________
11. Yeaman notes that the government agreed, at the sentencing hearing,
that the issue "was whether or not the special skill used his is so part
and parcel of the overall offense as to constitute an element." (A.716)
Nonetheless, we do not find that the government has waived the right to
assert the correct state of the law. The government's argument appears
to be due to mere inadvertence rather than a calculated attempt to
mislead the District Court. In fact, the government stated the law
correctly in its sentencing memorandum. See In re Chambers
Development Co., 148 F.3d 214, 229 (3d Cir. 1998) ("Asserting
inconsistent positions does not trigger the doctrine of judicial estoppel
unless intentional self-contradiction is used as a means of obtaining
unfair advantage.").
12. The government contends that the District Court made this required
factual finding. The government cites the Court's statement that "this
program . . . was not devised by Mr. Miller, but by those who were expert
in the field of manipulating the stock." (A. 718-19) We do not find this
statement to be sufficiently explicit on this point.
35
enhancement of sentence for violation of federal currency
reporting requirements).
V.
Based on the foregoing analysis, we will affirm Yeaman's
conviction on all counts and the District Court's imposition
of a one-point upward departure based on loss of
confidence in an important institution. We will remand for
application of U.S.S.G. SS 2F1.1, 2F1.1(b)(6), and 3B1.3.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
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