United States v. Hernandez ( 1999 )

Filed: December 14, 1999
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
Nos. 98-4776(L)
(CR-98-153-A)
United States of America,
Plaintiff - Appellee,
versus
Jose Luis Hernandez, etc., et al,
Defendants - Appellants.
O R D E R
The court amends its opinion filed November 1, 1999, as
follows:
On page 22 -- the second full paragraph is deleted, and is
replaced with the following:
Recognizing, however, that certain costs associated with
performing the contract might properly have been passed
along to the Army, we remand for the district court to
determine the amount of loss in light of this opinion.
During resentencing, of course, the government bears the
burden of proving the amount of loss by the preponderance
of the evidence. See United States v. Davis, 184 F.3d
366, 368 (4th Cir. 1999).
For the Court - By Direction
/s/ Patricia S. Connor
Clerk
UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
v.
No. 98-4776
JOSE LUIS HERNANDEZ, a/k/a Luis
Hernandez; COMPUTER SYSTEMS
DEVELOPMENT CORPORATION,
Defendants-Appellants.
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
v.
No. 98-4777
ARASELIA HERNANDEZ, a/k/a Ary
Hernandez,
Defendant-Appellant.
UNITED STATES OF AMERICA,
Plaintiff-Appellant,
v.
JOSE LUIS HERNANDEZ, a/k/a Luis
No. 98-4856
Hernandez; COMPUTER SYSTEMS
DEVELOPMENT CORPORATION;
ARASELIA HERNANDEZ,
Defendants-Appellees.
Appeals from the United States District Court
for the Eastern District of Virginia, at Alexandria.
Claude M. Hilton, Chief District Judge.
(CR-98-153-A)
Argued: June 11, 1999
Decided: November 1, 1999
Before MURNAGHAN and TRAXLER, Circuit Judges,
and BUTZNER, Senior Circuit Judge.
_________________________________________________________________
Affirmed in part, vacated in part, and remanded by unpublished per
curiam opinion.
_________________________________________________________________
COUNSEL
ARGUED: Nathan Z. Dershowitz, Amy Adelson, DERSHOWITZ &
EIGER, P.C., New York, New York, for Appellants. Major Mark Tel-
litocci, Special Assistant United States Attorney, Thomas Higgins
McQuillan, Assistant United States Attorney, OFFICE OF THE
UNITED STATES ATTORNEY, Alexandria, Virginia, for Appellee.
ON BRIEF: Victoria B. Eiger, DERSHOWITZ & EIGER, P.C., New
York, New York; Frank W. Dunham, Jr., Michael S. Nachmanoff,
COHEN, GETTINGS & DUNHAM, P.C., Arlington, Virginia; R.
Kenly Webster, SHAW, PITTMAN, POTTS & TROWBRIDGE,
Washington, D.C., for Appellants. Helen F. Fahey, United States
Attorney, OFFICE OF THE UNITED STATES ATTORNEY, Alex-
andria, Virginia, for Appellee.
_________________________________________________________________
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
_________________________________________________________________
OPINION
PER CURIAM:
Defendants Computer Systems Development Corporation
("CSDC") and two of its principals, Jose Luis Hernandez ("Luis") and
2
Araselia Hernandez ("Ary"), appeal their convictions for conspiracy
to defraud the United States and to commit various offenses against
the United States, see 18 U.S.C.A. § 371 (West 1966 & Supp. 1999),
major fraud against the United States, see 18 U.S.C.A. § 1031 (West
Supp. 1999), and obstruction of a proceeding pending before an
agency of the United States, see 18 U.S.C.A.§ 1505 (West 1984 &
Supp. 1999). We affirm the convictions and reject Ary's challenge to
her sentence. We agree, however, with the government, which cross-
appeals, that the district court improperly determined the amount of
loss sustained by the Army under the United States Sentencing Guide-
lines Manual ("U.S.S.G.") § 2F1.1(b)(1) (1997). Accordingly, we
remand for resentencing in light of this opinion.
I.
This appeal arises from a contract for workplace automation and
telecommunications services between CSDC and the United States
Army Communications-Electronics Command (the "Army"). In June
1998, the government filed a 39-count superseding indictment in the
district court naming Luis, Ary, and CSDC as defendants, as well as
Luis's brother Jose Jesus Hernandez ("Jesse"). Count one alleged that
the defendants engaged in a conspiracy to defraud the United States
and to commit various offenses against the United States in violation
of 18 U.S.C.A. § 371. Counts 2 through 37 alleged that the defendants
committed individual acts of major fraud against the United States in
violation of 18 U.S.C.A. § 1031. Count 38 charged that the defen-
dants obstructed the Inspector General's investigation of CSDC in
violation of 18 U.S.C.A. § 1505, and Count 39 charged that Jesse
tampered with a witness in violation of 18 U.S.C.A.§ 1512(b)(2)
(West Supp. 1999).1 Following a jury trial, Luis, Ary, and CSDC
were convicted on all counts of the superseding indictment against
them. The district court subsequently sentenced Luis and Ary to
imprisonment for a 27-month term and a 21-month term, respectively.
Viewed in a light most favorable to the government, the facts are
these. The Army Communications-Electronics Command researches,
_________________________________________________________________
1 Jesse entered a plea of guilty on the § 1505 charge contained in Count
38 and the government dismissed the remaining counts against him.
Accordingly, Jesse is not a party to the present appeal.
3
tests, and develops technology designed to promote electronic war-
fare, superior communications, and intelligence capability. In Septem-
ber 1993, the Army awarded CSDC a time-and-materials contract for
workplace automation and telecommunications services (the "Con-
tract") to be performed at Fort Monmouth, New Jersey ("Fort Mon-
mouth").
At the time, Luis was the President and sole owner of CSDC. Ary,
Luis's wife, served as CSDC's Chief Financial Officer, and in that
capacity oversaw administration and finance. Jesse, Luis's brother,
served as its Director of Purchasing. Jesse later became Vice-
President and General Manager of Comtel, a subsidiary of CSDC that
would eventually be used to purchase materials in connection with the
Contract.
Time-and-materials contracts awarded by the Army are signed and
administered by a Contracting Officer employed by the Army, who
receives assistance from Contracting Officer's Representatives and
Contracting Officer's Technical Representatives. Joseph Brady
("Brady"), the Contracting Officer with respect to the Contract, testi-
fied that a time-and-materials contract is one in which a private con-
tractor is compensated for labor based upon fixed hourly rates and
reimbursed for the materials required to perform the work based upon
the cost of acquisition. With respect to materials, a private contrac-
tor's cost of acquisition normally consists of the price paid to a sup-
plier to procure the materials plus a fixed percentage to cover the
contractor's general and administrative ("G&A") expenses. Consistent
with this framework, Barry Bendel ("Bendel"), CSDC's Vice-
President of Operations during the term of the Contract, testified at
trial that his understanding was that CSDC would be reimbursed on
materials purchased in connection with the Contract"for their cost of
the materials plus their G&A burden." J.A. 93. The G&A rate applica-
ble to the Contract was ten percent.
CSDC was expressly obligated under the Contract to purchase
materials at the most advantageous price to the Army and to solicit
bids from multiple suppliers prior to acquisition. Specifically, the
Contract provided that "[i]n obtaining equipment and software,
[CSDC] shall ensure that the most cost effective method of acquisi-
tion is used and that any and all discounts available to [CSDC] are
4
taken." J.A. 859. The Contract directed that CSDC "solicit multiple
vendors through telephone conversations, fax, face to face communi-
cations, etc., to determine the best price for delivery within the allot-
ted time frame." J.A. 859.
When the Army required materials in connection with the Contract,
Brady, the Contracting Officer, would provide CSDC with a state-
ment of work setting forth the requirements. After receiving the state-
ment of work, CSDC would develop a Task Execution Plan, listing
the required materials with corresponding estimated costs. If the esti-
mated costs were reasonable, the Army would approve the Task Exe-
cution Plan. The estimated costs, however, were not necessarily the
costs that the Army agreed to pay. Rather, an estimated cost was
"kind of a ceiling," J.A. 86, requiring CSDC to obtain the Army's
approval prior to purchasing materials at a cost exceeding the esti-
mate. Moreover, CSDC Vice-President Bendel testified that CSDC
could not charge the Army an estimated cost "[b]ecause that, first of
all, that was a ceiling. Second of all, the idea was. . . what you
charged the Government for was what you paid, plus your burden
rate." J.A. 99.
After the Task Execution Plan was approved, the Army would
issue CSDC a delivery order. In response, CSDC prepared an internal
form known as a purchase request, which provided descriptions of the
required materials, the desired quantities, and the estimated costs.
Norm Kelly ("Kelly"), who served as CSDC's Manager of Contracts
and later succeeded Jesse as Director of Purchasing, explained at trial
that CSDC would use the purchase requests to solicit bids from "three
different vendors to get the best value to the Government." J.A. 124.
Laura Bakken ("Bakken"), who served under Kelly as Purchasing
Coordinator, elaborated on the process employed in obtaining those
bids. Bakken would photocopy a purchase request only after folding
over or covering up the estimated costs, and then she would send the
photocopy of the purchase request to suppliers. When asked at trial
why she sent the suppliers a purchase request that omitted the esti-
mated costs, Bakken explained that "I just figured if you were going
to get a fair bid, you don't tell everybody what you were willing to
pay." J.A. 174. Suppliers would then "pen and ink" their bids in the
spaces where the estimated costs had been omitted and return the
forms to CSDC. J.A. 181. After CSDC issued an order to a particular
5
supplier, CSDC would submit vouchers for payment to the United
States Defense Finance and Accounting Service, an agency of the
United States Department of Defense.
Prior to a quarterly review of the Contract scheduled for January
1995, the Army informed CSDC that it was interested in learning how
CSDC intended to cope with the surge in work created by various
military base closings and a subsequent consolidation at Fort Mon-
mouth. In response, Bendel prepared a presentation, which was
reviewed by Luis prior to being delivered by Bendel at the quarterly
review. During the presentation, Bendel explained that employees of
Comtel, CSDC's subsidiary, could be used to augment CSDC's staff
with regard to the wiring of various buildings at Fort Monmouth that
were undergoing renovation. Bendel also explained that CSDC would
continue to purchase materials in connection with the Contract only
after soliciting bids from three suppliers.
Subsequent to this meeting, procedures at CSDC began to change,
leading eventually to the charges in this case. In April 1995, Kelly
requested that Luis provide him with an experienced individual in the
Purchasing Department to assist him in meeting the demands of the
Contract. Several days later, Luis, whom Bendel described as an
astute businessman who was very familiar with the Federal Acquisi-
tion regulations, informed Kelly in the presence of Ary and Jesse that,
for purposes of the Contract, Comtel would be used as Kelly's "pur-
chasing arm." J.A. 126. In other words, Kelly explained at trial, "Jesse
would place all the purchases for the . . . [Army] contract." J.A. 126.
In response, Kelly inquired whether Comtel "would be taking an addi-
tional pass-through other than what was given to us in the Contract,
which was 10 percent." J.A. 126. When Jesse responded "yes," Kelly
reacted in the following manner:
I said, turned to Luis and I said, I believe this is illegal, I
don't think you can do this. And he said why? I said,
because you own both companies.
J.A. 126-27. In turn, Luis responded by stating,"okay, go out and get
your three quotes. Let COMTEL be one of the people that quotes to
you, but in the end give the order to COMTEL." J.A. 127. Jesse sub-
sequently transferred from his position as Director of Purchasing at
6
CSDC to Vice-President and General Manager of Comtel. At that
time, Comtel and CSDC had adjoining offices allowing unobstructed
access from one to the other. Moreover, Jesse remained on CSDC's
payroll.
Andrea Montedoro ("Montedoro"), who assisted the Contracting
Officer, testified that Jesse informed her that CSDC was using Comtel
to purchase materials in connection with the Contract. Jesse explained
that, by using Comtel to purchase materials in connection with vari-
ous government contracts, CSDC was able to provide quantity dis-
counts to the government. Montedoro testified that she perceived
Comtel as nothing more than CSDC's purchasing department for pur-
poses of the Contract:
Jesse was the head of the Purchasing Department before
they became COMTEL. Jesse was head of the Purchasing
Department as COMTEL. So, to me it was transparent. It
was like a division that was going to handle their purchases.
J.A. 112. Therefore, Montedoro testified, she was under the impres-
sion that Comtel, as CSDC's Purchasing Department, was soliciting
bids from three suppliers prior to making purchases in connection
with the Contract as CSDC had previously done.
Kelly's testimony at trial indicates that he did not initially comply
with Luis's directive to issue Comtel all purchase orders pertaining to
the Contract. Rather, on certain purchases, Kelly and Bakken contin-
ued to solicit bids from three suppliers and to issue orders to the low-
est bidder. This led to several situations in which CSDC and Comtel
were soliciting bids from the same suppliers with respect to the same
purchase request. As Bakken explained at trial,"I would call to get
quotes, and someone would say on the phone, well, gee, we just heard
from Jesse about this, it sounds like a similar order." J.A. 176. On
cross-examination, Luis acknowledged that Comtel was buying from
the very same suppliers that CSDC had used before Comtel was
established. Luis further acknowledged that Jesse could have per-
formed the same purchasing functions for CSDC as he did for Com-
tel.
In May 1995, Kelly contacted Agent Timothy Gallagher ("Agent
Gallagher") of the Defense Criminal Investigation Service, which
7
conducts criminal investigations on behalf of the Office of the Inspec-
tor General for the United States Department of Defense. Kelly told
Agent Gallagher that "I was doing something illegal, and I wasn't
comfortable with it." J.A. 129. After meeting with Kelly, Agent Gal-
lagher initiated a criminal investigation of the matter with the assis-
tance of Agent Thomas Gribben ("Agent Gribben") of the Naval
Criminal Investigative Service.
Kelly's refusal to issue Comtel all orders pertaining to the Contract
eventually provoked a reaction from Jesse. According to Kelly's testi-
mony at trial, in July 1995 Jesse "came into my office and slammed
the door, with profanity, told me I was holding out on him and he
knew it." J.A. 131. On the following day, Luis sent the following e-
mail to Kelly and Bakken:
Please make sure that Jesse gets a copy of the PRs for equip-
ment/material orders for [the Contract] as soon as they come
in. Orders should not be issued to other sources unless Jesse
agrees to do so. Give him any advance notice you get for
anticipated purchases. This also applies to any other major
EQUIPMENT/SOFTWARE PURCHASES on any other
contracts. Let me know if you have any questions about this.
J.A. 920. Kelly construed Luis's e-mail to mean that "I follow the
orders or I get fired." J.A. 132. Bakken left her position with CSDC
several months later, explaining at trial that "I was really upset. I fig-
ured if not illegal, it was immoral what was going on, and I didn't
want to be any part of it." J.A. 176. On cross-examination, Luis
acknowledged that Comtel would have access to the estimated costs
of materials by virtue of his mandate that Jesse review all purchase
requests.
CSDC subsequently hired Jeanna Elliot ("Elliot") to replace Bak-
ken in the Purchasing Department. Elliot testified at trial as to her
concerns about the number of orders that CSDC had issued Comtel
and the validity of the prices that Comtel had been charging for mate-
rials. When Elliot alerted Ary to her concerns about Comtel, Ary
instructed her "to just go ahead and process the orders as they stood."
J.A. 192. Elliott testified that she "went into some detail about com-
petitive bidding and the things that needed to be done in order to com-
8
ply with federal regulations and things like that." J.A. 192. Ary's
response to her was to "just place the orders as they are." J.A. 192.
Despite Ary's instructions, Elliot decided to solicit bids from vari-
ous suppliers, including Comtel, in an effort to demonstrate the avail-
ability of lower pricing on materials being purchased in connection
with the Contract. In so doing, Elliot learned that Comtel tended to
have higher prices and longer delivery times than the other suppliers.
Elliot also learned from a representative of one of those suppliers that
Jesse had instructed him not to bid on any purchase order sent by
CSDC without his approval. Elliot eventually left her position with
CSDC after having worked there only two months.
Elliot's suspicion concerning the prices that Comtel had been
charging CSDC turned out to be well-founded. Debra Noviello
("Noviello"), who served as Jesse's executive assistant at Comtel, tes-
tified at trial that the purchase orders that CSDC sent to Comtel con-
tained the typewritten estimated costs. As a consequence, Comtel was
made aware of the maximum price that the Army was willing to pay
for each set of requested materials. Comtel would then solicit bids
from multiple suppliers, select the supplier that offered the lowest bid,
and mark up the price using the estimated cost as a guideline. Nov-
iello elaborated as follows:
[I]t really wasn't a flat percent. It was up until a certain
point, and then there was a point where they changed to like
a flat 10 percent if I remember correctly. But we definitely
just used whatever prices were there as a guideline, and we
just marked up accordingly. There wasn't any percentage
magic formula. They were just marked up.
J.A. 238-39. To accomplish this Comtel used CSDC's purchase
requests to prepare worksheets which would contain three columns of
prices: (1) the estimated price of the materials, (2) the price at which
Comtel would purchase the materials from an outside supplier; and
(3) the price at which Comtel would sell the materials to CSDC,
including the mark up. After the billing went from Comtel to CSDC,
these worksheets were filed in purchase log books at Comtel.
On October 31, 1995, Agent Gallagher contacted CSDC's office
and spoke with Luis. Agent Gallagher testified at trial that he
9
informed Luis that he was a Special Agent with the Defense Criminal
Investigation Service ("DCIS") and that he needed to meet with him.
The government offered evidence tending to prove that this phone call
precipitated some changes at Comtel and CSDC. Specifically, the
government introduced evidence at trial that, between October 15,
1995 and November 2, 1995, two employees, including Jesse, were
added to the Comtel payroll. The government also elicited testimony
from Luis to the effect that, during the first week of November 1995,
a wall was erected between the adjoining offices of CSDC and Com-
tel, which had previously been unobstructed.
On November 8, 1995, Agents Gallagher and Gribben appeared at
CSDC's office and personally served Luis with a subpoena for vari-
ous documents pertaining to CSDC's purchase of materials in connec-
tion with the Contract. According to Agent Gallagher's testimony at
trial, Luis explained that CSDC purchased materials only after solicit-
ing three bids from suppliers, and that Comtel was simply one such
supplier. Luis further explained that Comtel "received a markup
because the transaction between CSDC and COMTEL was an arm's-
length transaction." J.A. 215.
Meanwhile, Jesse directed Noviello to replace Comtel's original
worksheets with photocopies which omitted the information showing
the Army's price ceiling. In performing this task, Noviello explained
that she "went to a copier and just made copies of these sheets, just
put little pieces of paper over the typed prices, and replaced the origi-
nal that had the prices with the one that didn't have the prices in the
book." J.A. 241. Accordingly, the information regarding price ceilings
was effectively blanked out in Comtel's records.
On November 22, 1995, CSDC responded to the government's
subpoena. This subpoena had directed the production of nine catego-
ries of documents in the custody of CSDC. According to Agent Gal-
lagher, the submissions by CSDC in response to the subpoena could
be contained in a small box "about as thick as a Northern Virginia
phone book." J.A. 217. In January or February 1996, Agent Thomas
Gibson ("Agent Gibson") of the DCIS succeeded Agent Gallagher as
the case agent for the investigation of CSDC. Upon reviewing the
case file, Agent Gibson determined that CSDC had not produced
many of the documents subpoenaed in November 1995. Agents Gib-
10
son and Gribben subsequently visited CSDC's office and met with
Luis, Ary, and Smith. After some discussion, an agreement was
reached whereby Agent Gibson would return to CSDC's office in
April 1996 to personally review the pertinent documents.
When Agent Gibson returned to CSDC's office in April 1996, he
and Ary discussed the nature of the Contract. With regard to pur-
chases of materials, Ary mentioned that "the contract required that
they would go and get three quotes" in order to "get the best price for
the Government." J.A. 258. Agent Gibson thereafter requested to
review an order for a purchase of materials that included three such
quotes. Ary did not, however, retrieve such an order for Agent Gib-
son's review. Rather, Ary merely explained that "there [were] two
employees in the CSDC Purchasing Department, Laura Bakken and
Norm Kelly, and that they didn't follow instructions, that they didn't
get three quotes, and that they would only buy from Computerware."
J.A. 259. Her explanation for CSDC's use of Comtel was that it was
good business "as it might eliminate a middleman and thereby save
the Government money." J.A. 260.
In July 1996, Agent Gibson served subpoenas upon CSDC and
Comtel in an effort to obtain the same type of documents sought by
the November 1995 subpoena. In response to these subpoenas, the
defendants produced to the Inspector General purchase requests
which had been altered to conceal two columns of listing price esti-
mates which CSDC had provided to CECOM. After examining the
documents that were eventually produced in connection with the July
subpoena, Agent Gibson concluded that the July subpoenas had also
not been complied with. Agent Gibson eventually approached the
United States Attorney's Office and, in June 1997, obtained a sub-
poena from the federal grand jury mandating that CSDC produce the
same type of documents sought by the previous departmental subpoe-
nas. Again, Agent Gibson concluded that CSDC's production did not
comply with the subpoena.
Thereafter, Luis was subpoenaed to appear before the grand jury in
his capacity as CSDC's custodian of records. Although scheduled to
appear on November 12, 1997, Luis did not appear until November
19, 1997. Several months later, in February 1998, CSDC was served
with another subpoena from the grand jury. Then, in March 1998,
11
additional subpoenas from the grand jury were served upon CSDC,
Comtel, and Luis in his capacity as custodian of Comtel's records.
In June 1998, a set of documents was produced in connection with
the foregoing subpoenas which included several Comtel purchase
request forms. One such form contained a piece of paper taped over
two columns of typewritten prices. This form was similar to one pro-
duced earlier by the defendants which did not reflect the Army's price
limits but on which the outline of the covering over the two columns
of prices could be seen. Agent Gibson testified as to his belief that
this particular document would have been responsive to the original
subpoena that was served upon CSDC in November 1995. A compari-
son of the two documents produced strong evidence that the original
submission had been purposely altered to hide the fact that the pricing
limits had been disclosed to Comtel. This view was substantiated by
the testimony of Noviello who was told to make such copies.
Robert Silverstein ("Silverstein"), an auditor in the Inspector Gen-
eral's office, reviewed documents produced by CSDC "to determine
the amount of money, costs that were incurred from CSDC, from
COMTEL to CSDC versus the amount of costs from the vendor
invoices to COMTEL." J.A. 285. Silverstein eventually identified
numerous transactions in which Comtel purchased materials from an
outside supplier at a particular price and then sold those same materi-
als to CSDC at a higher price. In one such transaction that the govern-
ment highlighted at trial, Comtel purchased materials from a supplier
for $77,806.38 and then sold those materials to CSDC for
$104,264.72, resulting in a mark up of 34 percent. Silverstein con-
cluded that the total amount of overcharges to the Army was
$506,799.52.
II.
On appeal, the defendants pose challenges to the district court's
decision to give the jury a "willful blindness" instruction, to the suffi-
ciency of the evidence at trial supporting their convictions under 18
U.S.C.A. § 1505, and to certain statements that the government made
to the jury during summation. Moreover, Ary challenges the calcula-
tion of her sentence, arguing that she was entitled to a reduction of
her offense level because she had a mitigating role in the offenses.
12
The government cross-appeals from the defendants' sentences, how-
ever, contending that the district court erroneously calculated the
amount of loss sustained by the Army as a result of the defendants'
offenses.
A.
First, the defendants challenge the district court's decision to
instruct the jury that "a defendant's knowledge of a particular fact
may be inferred from a deliberate or an intentional ignorance or delib-
erate or intentional blindness to the existence of that fact." J.A. 730.
Such an instruction, which is commonly known as a"willful blind-
ness" instruction, is appropriate "when the defendant asserts a lack of
guilty knowledge but the evidence supports an inference of deliberate
ignorance." United States v. Ruhe, No. 98-4731, 1999 WL 674758, at
*5 (4th Cir. August 31, 1999) (internal quotation marks omitted). We
conclude that the district court's decision to give the "willful blind-
ness" instruction, which we review for an abuse of discretion, see id.,was proper. As we previously discussed in detail, the government's
evidence was that Luis was put on notice by subordinates about the
probable illegality of the Comtel purchasing scheme; Luis, however,
testified that he was not told the plan was illegal, that he did not sus-
pect that such a scheme was illegal, and that he depended on Kelly,
the CSDC employee who was familiar with the applicable regula-
tions. If the jury believed Luis was warned by Kelly, Luis clearly
made no effort to learn whether Comtel's involvement was, in fact,
illegal. Likewise, the government presented evidence that Ary, who
supervised accounting and invoicing, attended a meeting during
which Kelly told Luis that the scheme was illegal and, on another
occasion, was herself told by Elliott that the use of Comtel in the pur-
chasing process was not in compliance with the regulations. In light
of the record, the district court's decision to charge willful blindness
was perfectly appropriate.
We also reject the defendants' argument to the extent it challenges
the substance of the instruction. Specifically, the defendants suggest
that the court's instruction misled the jury into believing that the gov-
ernment did not need to establish specific intent to defraud on the part
of the defendants, i.e., that all the government needed to prove was
that the defendants should have known their conduct was illegal. We
13
disagree. The court's jury instructions must be viewed in their entirety
and, as a whole, the jury instructions were not misleading. The district
court charged each element of each crime and instructed the jury that
the government bore the burden of establishing each element beyond
a reasonable doubt. We are satisfied that the district court did not
abuse its discretion in deciding to give the jury a"willful blindness"
instruction, and that the jury was properly charged.
B.
The defendants next challenge their convictions for obstruction
based on the alteration of the purchase orders produced pursuant to
the subpoenas. See 18 U.S.C.A. § 1505. First, they claim the evidence
at trial was insufficient to support their convictions. Second, they con-
tend the district court improperly permitted evidence of other acts of
obstruction, which inevitably resulted in the convictions.
1.
The district court charged the jury that the government had to
establish three elements beyond a reasonable doubt in order to convict
defendants of violating section 1505: (1) that "a proceeding was pend-
ing before an agency of the United States"; (2) "that the defendant
knew that a proceeding was pending before an agency of the United
States," i.e., that "the defendant knew that on or about November,
1995 through May, 1996 that a criminal investigation was being con-
ducted by the Department of Defense"; and (3) "that the defendant
corruptly endeavored to influence, obstruct, or impede the due and
proper administration of the law under which the proceeding was
being conducted." J.A. 724. The district court defined "corruptly" as
"having the improper motive or purpose of obstructing justice." J.A.
726. Defendants did not object to the content of the court's instruc-
tion, and they do not challenge its substance on appeal.
The defendants believe the evidence was insufficient to support a
conviction for obstruction because the only witness who testified
about the alteration of the purchase orders claimed that Jesse Her-
nandez -- not the defendants -- directed her to obscure the estimated
equipment costs on the documents to be produced pursuant to the sub-
poenas. Defendants also highlight Luis's testimony that he did not
14
examine the documents before they were turned over to the govern-
ment. There is simply no evidence, they maintain, to suggest that the
defendants knowingly or purposely altered the documents.
In response, the government stresses that the record contains suffi-
cient evidence that, although circumstantial in nature, supports the
obstruction convictions for each of the defendants. CSDC's chief
operating officer testified that Ary Hernandez was principally respon-
sible for CSDC's compliance with the subpoenas and Luis testified
that he shared responsibility. Prior to producing the documents, Luis
and Ary had the documents stored at CSDC's facility. And, of course,
it is undisputed that the documents eventually produced by Ary con-
tained purchase orders that had been altered. Therefore, the altered
documents were in the defendants' possession and were produced by
the defendants. These facts are compelling when coupled with the
nature of the criminal endeavor being committed by a husband and
wife (and the husband's brother) in business together as principals in
the operation, and the obvious utility to everyone in the conspiracy of
concealing the information involved.
In reviewing a challenge to the sufficiency of the evidence, we
view the evidence in the light most favorable to the government to
determine whether a reasonable factfinder could find the defendants
guilty of the offense beyond a reasonable doubt. See Glasser v.
United States, 315 U.S. 60, 80 (1942); United States v. Burgos, 94
F.3d 849, 862 (4th Cir. 1996) (en banc). Viewed in the light most
favorable to the government, this evidence was sufficient to permit a
rational trier of fact to draw the inference that defendants knowingly
endeavored to obstruct the investigation.
2.
Additionally, the government contends that the evidence is suffi-
cient to sustain the defendants' convictions on this count pursuant to
Pinkerton v. United States, 328 U.S. 640 (1946). Pinkerton estab-
lished "that where substantive offenses have been committed by a
coconspirator in furtherance of a proven conspiracy, fellow conspira-
tors can be found guilty on that basis of the substantive offenses."
United States v. Chorman, 910 F.2d 102, 110 (4th Cir. 1990). Under
a Pinkerton theory, the government contends there was direct evi-
15
dence that Jesse ordered the alteration of the purchase order docu-
ments, which were an integral part of the scheme to defraud the
Army. The jury could reasonably conclude from the evidence that
Jesse was a co-conspirator in the scheme to defraud the government
and that he ordered Noviello to obscure the prices on the purchase
orders to conceal the conspiracy.
The defendants, on the other hand, claim that Pinkerton does not
apply here because the conspiracy and the substantive obstruction
count are too attenuated. We disagree. The government's theory at
trial was that CSDC was using Comtel to unlawfully inflate the cost
of materials and equipment to be reimbursed by the government.
Indisputably, a key piece of evidence to support this theory was
CSDC's use of purchase orders to pass along to Comtel information
to enable Comtel to inflate the cost as much as possible. Rather than
attenuated, this evidence is directly connected to the conspiracy, and,
we believe, it is certainly foreseeable that in these particular circum-
stances, a co-conspirator would attempt to conceal the conspiracy by
altering the documents.
3.
Finally, the defendants argue that their conviction for obstruction
should be reversed because the district court allowed the introduction
of obstructive behavior by the defendants in addition to their redac-
tion of the documents produced in response to the subpoenas. The
defendants were charged with falsifying documents produced in
response to the departmental subpoenas served in November 1995
and July 1996, which were issued by the Inspector General. On direct
examination, Agent Gibson testified that after the defendants failed to
comply with the subpoenas served by the Inspector General in July
1996, he obtained a grand jury subpoena that requested essentially the
same documents as the previous subpoenas. In particular, the defen-
dants object both to Agent Gibson's testimony that the defendants did
not immediately comply with the grand jury subpoenas and to evi-
dence suggesting that Ary Hernandez refused to cooperate with agents.2
_________________________________________________________________
2 At trial, the defendants did not object to the testimony regarding
Ary's failure to cooperate fully. Accordingly, to the extent Ary objects
to the admission of this specific testimony, we review it only for plain
error. See United States v. Olano, 507 U.S. 725, 731-32 (1993). Clearly,
the district court committed no plain error here.
16
The defendants contend that evidence of obstructive conduct other
than the alteration of documents in response to the Inspector Gener-
al's subpoenas is evidence of "other crimes, wrongs, or acts" offered
to establish consciousness of guilt and must therefore comply with
Rule 404(b) of the Federal Rules of Evidence. See United States v.
Hayden, 85 F.3d 153, 159 (4th Cir. 1996). Rule 404(b) permits the
introduction of such evidence, as long as the government "provide[s]
reasonable notice in advance of trial, or during trial if the court
excuses pretrial notice on good cause shown, of the general nature of
any such evidence it intends to introduce at trial." Fed. R. Evid.
404(b). Because the government did not provide adequate notice
under the rule, the defendants argue that the evidence of other
obstructive behavior was inadmissible. Moreover, the defendants
assert that the government's closing argument highlighted this evi-
dence in support of the obstruction charge, necessarily leading the
jury to convict based on this evidence.
We disagree that the evidence in question was 404(b) evidence.
The government introduced evidence of the defendants' failure to
immediately comply with the grand jury subpoenas as evidence of
their participation in the conspiracy -- that they were aware of their
wrongdoing in connection with the conspiracy -- not that the defen-
dants had committed other acts of obstruction. The district court did
not abuse its discretion in admitting this evidence. See United States
v. Dozie, 27 F.3d 95, 97 (4th Cir. 1994).
C.
The defendants claim that certain statements that the government
made to the jury during summation warrant reversal of their convic-
tions. Specifically, the government argued to the jury:
If the Hernandez[es] and CSDC had done what they were
supposed to do, they would have gotten the best price for the
government and not for themselves. The Hernandez[es] are
lying, they're lying to you when they say they didn't under-
stand what was going on and that they didn't understand
what they were doing. They understood they were supposed
to get the best advantageous price for the government and
they didn't do it. They understood that they were making
17
money with Comtel. They understood that they were steal-
ing from the government and they understood that because
there was no other reason to use Comtel.
J.A. 636-37 (emphasis added).
At the conclusion of the government's summation, counsel for Ary
moved for a mistrial. In support of the motion, counsel contended that
Ary did not testify at trial and thus the government's statement that
"[t]he Hernandez[es] are lying, they're lying to you" adversely impli-
cated Ary's Fifth Amendment right not to testify. No other basis was
offered for the motion. Counsel for Ary further suggested that "the
government ought to stand up there and acknowledge that any refer-
ence to lying referred only to Mr. Hernandez." J.A. 639. The district
court refused to grant a mistrial, but indicated that it would be appro-
priate for the prosecutor to explain to the jury that her comments were
directed at Luis. The government then made the following statement
to the jury:
Ladies and gentlemen, there is one additional thing I would
like to say in reference to the Hernandez[es]-- Luis Her-
nandez was the only one that testified in court.
J.A. 640. The defendants did not object to this comment by the gov-
ernment.
On appeal, Ary argues that her Fifth Amendment rights were
abridged by the prosecutor's initial comment and that her attempt to
clarify that the comment was directed at Luis only compounded the
error by emphasizing that Ary did not testify. The government's ini-
tial comment that the "Hernandez[es] are lying, they're lying to you"
runs afoul of the Fifth Amendment if "the language used [was] mani-
festly intended to be, or was . . . of such a character that the jury
would naturally and necessarily take it to be a comment on the failure
of the accused to testify." United States v. Francis, 82 F.3d 77, 78
(4th Cir. 1996). Although we have castigated prosecutors in the past
for making similar remarks, we cannot perceive how such a remark
amounts to an intentional comment on Ary's failure to testify in con-
travention of the Fifth Amendment.
18
As for the government's attempt to clarify the remark, which pur-
portedly compounded the error, Ary was apparently satisfied because
she did not object to it. Accordingly, to the extent that Ary takes
exception to the final remark by the prosecution-- that only Luis tes-
tified -- we review it for plain error. See Olano, 507 U.S. at 731-32.
Under this standard of review, even if an error has occurred, and it
is a plain one, we will not reverse unless the error affects Ary's sub-
stantial rights, see id. at 734, i.e., unless the error affects the outcome
of the case, see United States v. David, 83 F.3d 638, 647 (4th Cir.
1996). We conclude that this comment did not affect the outcome of
the case, in light of the evidence in its entirety and the district court's
admonishment to the jurors that they not consider whether a defen-
dant testified. Furthermore, we will not exercise our discretion to
reverse a plain error unless it "seriously affect[s] the fairness, integrity
or public reputation of judicial proceedings." Olano, 507 U.S. at 732(alteration in original) (internal quotation marks omitted). This is not
such an error.
With respect to Luis, we note that the basis offered for the objec-
tion and motion for a mistrial derived only from the Fifth Amend-
ment. However, Luis testified and thus the Fifth Amendment grounds
for appeal do not apply to him. Therefore, to the extent that Luis
appeals the district court's refusal to grant a mistrial, it is because he
was labeled a liar by the prosecutor. Of course, no one objected at
trial to the use of this term -- only its application to Ary. Again, our
review is for plain error. And, for the reasons stated above, we are sat-
isfied that the district court did not commit a plain error requiring
reversal with respect to Luis. See United States v. Moore, 11 F.3d
475, 481-82 (4th Cir. 1993).
D.
The Presentence Investigation Report prepared by the United States
Probation Office in connection with Ary's convictions calculated an
offense level of 16 and a criminal history category of I, resulting in
an imprisonment range of 21 to 27 months. The district court adopted
the preceding calculations and ultimately sentenced Ary to a 21-
month term of imprisonment. In so doing, the district court rejected
Ary's contention that she was entitled to a reduction of her offense
level under U.S.S.G. § 3B1.2, which mandates such a reduction when
19
a defendant had a mitigating role in an offense. We review a district
court's determination under section 3B1.2 for clear error. See United
States v. Terry, 86 F.3d 353, 358 (4th Cir. 1996).
We cannot conclude that the district court clearly erred here.
Although Ary argues that her role in the offense of conviction was a
minimal one, the record supports the district court's conclusion to the
contrary. Ary acted in a supervisory capacity over CSDC's purchas-
ing department; she oversaw the submission of claims for payment to
the government; she issued Comtel's checks for the purchase of mate-
rials in connection with the scheme; she was present when Kelley told
Luis that he harbored doubts about the legality of their use of Comtel
in performing the Contract; even after a question was raised, she
directed Jeanna Elliot to continue sending purchase requests to Com-
tel without the benefit of competitive pricing; and she was primarily
responsible for the production of documents pursuant to the depart-
mental subpoena. In view of the considerable evidence in the record
of Ary's involvement in the scheme to defraud the government, we
do not believe the district court committed clear error in its refusal to
grant a reduction of her offense level.
III.
The government cross-appeals the district court's calculation of
$100,286 as the amount of loss for sentencing purposes under
U.S.S.G. § 2F1.1(b)(1), which prescribes incremental sentence
enhancements based on the amount of loss caused by the fraud. We
review the district court's factual determination of the amount of loss
for clear error, see United States v. Brooks, 111 F.3d 365, 374 (4th
Cir. 1997), but our review of the court's legal interpretation of "loss"
under U.S.S.G. § 2F1.1(b)(1) is de novo, see United States v. Castner,
50 F.3d 1267, 1274 (4th Cir. 1995). The district court adopted the cal-
culation for the amount of loss included in the presentence report,
rejecting the government's figure of $506,000. The government
arrived at this amount based on the testimony of auditor Steven
Silverstein, who first determined the actual purchase costs and then
added a ten percent markup for CSDC, which was appropriate under
the Contract. Silverstein then subtracted this amount from the actual
amount billed to the Army to reach the total loss amount.
20
The district court concluded that the proper measure of the amount
of loss was the profit realized by Comtel -- not CSDC. In this regard,
the district court endorsed the presentence report, which explained
that the use of a subsidiary such as Comtel is permissible and that
such subsidiaries may pass along certain costs to the government.
According to the presentence report, the problem with the govern-
ment's proposed loss calculation was that it did not allow for indirect
and G&A costs that were permissible under the regulations: "[The
Federal Acquisition Regulations] permit a wholly-owned subsidiary
to increase the cost on the sale of material to its parent by an amount
equal to the cost of doing business to the subsidiary. It is not disputed
that [the regulations] . . . prohibit the charging of a profit on the sale
of materials from the subsidiary to the parent company." J.A. 1100.
The presentence report concluded that Comtel's financial records
reflected a total profit of $100,286 from sales to CSDC, and the dis-
trict court adopted this figure as the amount of loss.
On appeal, the government argues that the district court's decision
to link the amount of loss to the profit realized by Comtel was clearly
erroneous. The government argues that because the Contract required
CSDC to obtain the most advantageous price, and then bill the Army
only the actual cost plus ten percent, the loss should be the difference
between actual cost plus ten percent and the amount the Army was
ultimately billed.
We agree that simply determining how much profit Comtel made
is clearly an inappropriate method of calculating loss. Such a determi-
nation rises and falls on a defendant's efficiency or business acumen.
That is, a defendant could decrease his sentencing exposure by inflat-
ing the cost of doing business, intentionally or not. In either case,
profits are reduced and the amount of loss for sentencing purposes is
limited accordingly.
The Sentencing Guidelines define "loss" as "the value of the
money, property, or services unlawfully taken." U.S.S.G. § 2F1.1,
comment. (n.7). In cases involving fraudulent contract procurement,
"[p]ayment fraudulently obtained in excess of the amount to which a
defendant is legally entitled is a taking of property under the Guide-
lines, and thus is a proper measure of the amount of loss for sentenc-
ing purposes." Castner, 50 F.3d at 1276 (internal quotation marks
21
omitted). Here, the Contract required CSDC to obtain the most advan-
tageous price for the Army. CSDC was then entitled to reimburse-
ment for the actual cost, plus ten percent. To the extent CSDC
invoiced the Army for any amount above actual cost plus ten percent,
it obtained an amount in excess of that to which it was entitled.
We recognize, however, that the Federal Acquisition Regulations
permit the use of a subsidiary and that certain costs associated with
doing business can be passed along to the government. See 48 C.F.R.
§ 31.205-26 (1998). These costs must be "allowable" before they can
be passed along to the government. See 48 C.F.R. § 31.201-2 (1998).
In deciding that "profit" was the proper measure of loss, the district
court failed to determine which costs were allowable and could be
passed along to the government under the regulations. The calculation
adopted by the district court assumes that all of Comtel's operating
expenses were legitimate, reasonable, and allowable costs. Yet, in
rendering its verdict, the jury necessarily found that Comtel was
essentially a subterfuge employed by CSDC to fraudulently inflate
material costs. The operation of Comtel was an integral part of the
criminal enterprise, and, as a result, we do not believe that Comtel's
profits are necessarily an accurate reflection of the government's loss
here.
Recognizing, however, that certain costs associated with performing
the contract might properly have been passed along to the Army,
we remand for the district court to determine the amount of loss
in light of this opinion. During resentencing, of course, the gov-
ernment bears the burden of proving the amount of loss by the
preponderance of the evidence. See United States v. Davis, 184
F.3d 366, 368 (4th Cir. 1999).
IV.
In summary, we conclude that the defendants' challenges to their
convictions and sentences are without merit, but that the district court
improperly determined the amount of loss sustained by the Army for
22
purposes of sentencing. Accordingly, we affirm the defendants' con-
victions, but vacate their sentences and remand for resentencing.
AFFIRMED IN PART, VACATED IN PART,
AND REMANDED
23