United States v. Schaefer, Ronald T. ( 2002 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 01-1837
United States of America,
Plaintiff-Appellee,
v.
Ronald T. Schaefer,
Defendant-Appellant.
Appeal from the United States District Court
for the Southern District of Indiana, Indianapolis Division.
No. IP99-CR-109-01 D/F--S. Hugh Dillin, Judge.
Argued October 23, 2001--Decided May 28, 2002
Before Harlington Wood, Jr., Cudahy, and
Kanne, Circuit Judges.
Cudahy, Circuit Judge. A jury convicted
Ronald Schaefer of three counts of mail
fraud and two counts of wire fraud, 18
U.S.C. sec.sec. 1341, 1343, arising from
the sale of Walt Disney animation art.
One count of wire fraud was subsequently
thrown out by the district court. The
convictions carry a six (6) Base Offense
Level under U.S.S.G. sec. 2F1.1(a)
(2000). The district court adopted the
Pre-Sentence Report, which prescribed
several upward adjustments, and sentenced
Schaefer to 37 months on each count, to
be served concurrently. Schaefer now
appeals, claiming that the district judge
improperly calculated the amount of the
financial loss under sec. 2F1.1(b)(1).
Because the district court did not make
specific findings of fact that would
allow us to conclude with confidence that
the relevant conduct relied upon to make
the sec. 2F1.1(b)(1) calculation of loss
consisted of unlawful conduct, we vacate
and remand for further proceedings.
I.
On August 25, 1999, a federal grand jury
indicted Ronald Schaefer on eight counts
of mail fraud and six counts of wire
fraud, in violation of 18 U.S.C. sec.sec.
1341, 1343. The alleged crimes occurred
through Schaefer’s business activities as
an art dealer, though he often presented
himself to his customers as a collector
who did not derive his livelihood from
the sale of art. Schaefer’s specialty was
animation art associated with the
production and promotion of various Walt
Disney movies. At issue in all of the
charges are "cels," which are painted
drawings of popular cartoon characters on
clear plastic or acetates. The most
valuable of these for collectors are
"production cels." These pieces are one-
of-a-kind artwork that are photographed
and used as actual frames in an animation
film. There are various other categories
of cels, such as limited edition,
publicity and sericels, which command
less money than production cels as
collectibles. Whether the cels are matted
and framed may also affect their value.
Because the true market value of his
wares varied according to their specific
characteristics, Schaefer made it a habit
to be purposefully ambiguous about the
proper classification of his cels, often
referring to publicity cels as "original
hand-painted cels." He also boasted about
the windfalls they would generate for
their buyers as investments. On some
occasions, he actually reduced to writing
claims that certain publicity or
counterfeit cels were production cels.
Moreover, he often resorted to the ruse
that he was selling art from his dead
mother’s estate at below-market prices
that were mandated by her will, a story
that was found to be a total fabrication
at trial. Schaefer’s deceptive business
practices eventually included a scheme
that involved an Indianapolis school
teacher, Greg Shelton, who created cels
depicting Mickey Mouse drawing a picture
of Walt Disney. Schaefer portrayed
Shelton to his customers as a former
Disney animator and persuaded Shelton to
author a letter that falsely touted the
distribution and value of these
paintings.
Eventually, Schaefer’s sharp business
practices attracted the attention of
federal investigators, including the
Federal Trade Commission (FTC) and the
Indianapolis office of the FBI.
Conversations recorded by undercover
agents revealed additional lies and
misrepresentations by Schaefer. Federal
authorities subsequently seized
Schaefer’s art inventory. In turn,
Schaefer sought relief through an action
filed under the Federal Tort Claims Act.
Although Schaefer has often presented
himself as a private collector, or as a
faithful son discharging duties for his
dead mother’s estate, he submitted
documents to federal officials as
evidence that selling art was his
"business" and that he earned between
$5,000 and $10,000 per month through this
activity. These figures were relied on by
the government in making the sec.
2F1.1(b)(1) loss calculation, which was
included in the Pre-Sentence Report (PSR)
and later adopted by the district court.
The present case is not Schaefer’s first
run-in with the law. In 1992, the FTC
filed a complaint against Schaefer and
others, alleging that they engaged in
deceptive practices in the promotion and
sale of collectibles. The Final Judgment
and Order for Permanent Injunction
arising out of those proceedings
prohibited Schaefer from engaging in
deceptive practices in the sale of
"investment offerings," including
animation art. See Federal Trade
Commission v. World Wide Classics, Inc.,
Civ. No. 92-3363TJH (EEX), at 4-6 (C.D.
Cal., Dec. 15, 1993) (hereinafter the
"1993 Order"). The 1993 Order also
required that Schaefer post a $200,000
bond before engaging in the "business of
telemarketing," which was broadly defined
as any business that employed telephone
presentations, "either exclusively or in
conjunction with the use of the mails or
any commercial parcel delivery service."
In the current action, Schaefer was
indicted on charges of federal mail and
wire fraud. Although Schaefer was
released on his own recognizance, his
pretrial release stipulated that he could
not travel outside the Southern District
of Indiana. On December 22, 1999, the
U.S. Parole and Probation Office filed a
Notice of Violation of Order Setting
Release Conditions, alleging that
Schaefer had violated the terms of his
release. In fact, Schaefer had traveled
to Nashville, Tennessee and sold an
animation cel for $27,000. In addition,
Schaefer had also contacted other
potential customers and advised them of
the dates he planned to be in their area.
On January 4, 2000, a federal magistrate
judge ruled that Schaefer had violated
the terms of his release and further
restricted Schaefer’s ability to travel.
Schaefer then made a motion to the court
requesting that the new pretrial terms be
modified in order to permit him to make
artwork sales though reputable gallery
and auction houses. After another hearing
on February 9, 2000, the magistrate judge
denied Schaefer’s motion. The magistrate
judge also noted the likelihood that
Schaefer had lied under oath during the
earlier January 4, 2000 proceedings.
At the subsequent criminal trial,
Schaefer was convicted on five counts of
mail and wire fraud and acquitted on nine
others. One count of conviction was
eventually vacated by the district court
for a possible retrial because there was
some reason to believe that the
government had improperly withheld
exculpatory evidence in violation of
Brady v. Maryland, 373 U.S. 83 (1963). Of
the four remaining counts, both mail and
wire fraud qualify as a six (6) Base
Offense Level under U.S.S.G. sec. 2F1.1
(1997)./1 The PSR recommended a two (2)
level increase for "more than minimal
planning," see sec. 2F1.1(b)(2)(A); a two
(2) level increase for violation of a
judicial order, see sec. 2F1.1(b)(3)(B);
a two (2) level increase for obstruction
of justice, see sec. 3C1.1; and an eight
(8) level increase for a total loss to
victims in excess of $200,000, see sec.
2F1.1(b)(1)(I). The specific loss
calculation provided in the PSR is
$231,000, which was based on a
purportedly representative sample of
Schaefer’s business activities that was
then extrapolated over a five-year
period. The district court adopted the
PSR recommendations and sentenced
Schaefer to thirty-seven months of
incarceration. The court also ordered
Schaefer to pay restitution in the amount
of $41,574.
On a motion for reconsideration,
Schaefer requested that the district
court substantially reduce its loss
calculation. Although Schaefer submitted
a verified statement, which was offered
to rebut the government claims that
Schaefer knowingly deceived a large
number of his customers, the district
court ruled that Schaefer’s past
courtroom testimony demonstrated that he
was not a credible witness. The district
court’s sentencing order did not,
however, include any specific findings
that Schaefer, under a more lenient
preponderance of evidence standard,
committed most or all of the crimes
charged in the indictment, or was guilty
of other uncharged criminal conduct.
Schaefer now appeals only from the
$231,000 calculation of loss. Schaefer
contends that the maximum loss stemming
from the crimes of which he was convicted
amounts to $1,875. This relatively small
sum would not warrant any increase from
the Base Offense Level. Under Schaefer’s
method of calculation, he would receive a
six to twelve month sentence.
II.
The sole issue in this case is whether
the district court erred in adopting the
loss calculation of the PSR. The meaning
of "loss" under sec. 2F1.1(b)(1) presents
a question of law that is subject to de
novo review. See United States v. Lopez,
222 F.3d 428, 436 (7th Cir. 2000).
However, when analyzing the district
court’s calculation of loss caused by a
defendant’s fraudulent conduct, we review
the calculations for clear error. See
United States v. Vivit, 214 F.3d 908, 914
(7th Cir. 2000). Reversal is warranted
only if the district court’s loss
calculation evokes a "definite and firm
conviction that a mistake has been made."
Id. (citing United States v. Strache, 202
F.3d 980, 984-85 (7th Cir. 2000)).
In order to support the calculation of
a $231,000 loss from fraudulent activity,
the PSR estimated that approximately 55
percent of Schaefer’s $420,000 in
business receipts from 1994 to 1999 was
attributable to fraudulent sales
practices. The 55 percent figure was
derived from a sample of three sales made
to customers in which 55 percent of the
purchase price was attributable to false
representations made by Schaefer. Since
these sales provided approximately 20
percent of Schaefer’s total receipts
during this five-year period and were
therefore asserted to be representative
of the total, and since there was reason
to believe that all of Schaefer’s sales
of animated art were shot through with
deceptive business practices, the
government reasoned that approximately 55
percent of all of Schaefer’s receipts was
attributable to an ongoing fraudulent
scheme (i.e., 55% x $420,000 =
$231,000)./2
The government maintains that the
entirety of Schaefer’s artwork business
represents "relevant conduct" under
U.S.S.G. sec. 1B1.3(a)(2); it therefore
argues that all of Schaefer’s business
receipts from 1994 to 1999 can be relied
upon to support the $231,000 loss
calculation. Under U.S.S.G. sec.
2F1.1(b)(1) of the sentencing guidelines,
which deals with loss arising from fraud
or deceit, this amount of financial harm
warrants an eight-level increase. Under
the prevailing case law of this circuit,
a determination of relevant conduct is a
finding of fact disturbed only if clearly
erroneous. United States v. Ofcky, 222
F.3d 428, 438 (7th Cir. 2000), cert.
denied, 121 S. Ct. 1601 (2001). In the
present case, the PSR relies on an
estimate of Schaefer’s artwork
transactions from 1994 to 1999 to
calculate the sec. 2F1.1(b)(1) loss; the
district court in turn adopted the
recommendations of the PSR.
To attack the government’s loss
calculation, Schaefer makes three
arguments on appeal. First, the
government failed to prove that any of
the losses incurred by Schaefer’s
customers were the result of criminal
conduct, and therefore these losses
cannot be considered relevant conduct
under the Sentencing Guidelines. Second,
the government improperly relied on
unreliable hearsay to determine the scope
of the relevant conduct that allegedly
produced the $231,000 loss. Third, the
government’s methodology for
extrapolating the loss was improper and
grossly inflates the victim impact that
can be fairly attributed to Schaefer.
Each of these arguments will be addressed
in order.
A.
Schaefer claims that "relevant conduct"
under sec. 1B1.3, which specifies the
conduct to be relied upon for sentencing
determinations under the Guidelines, is
necessarily limited to criminal conduct.
To buttress this assertion, he cites case
law from the Third, Fourth, Fifth, and
Eight Circuits that have adopted this
standard. See, e.g., United States v.
Dove, 247 F.3d 152, 155 (4th Cir. 2001)
(rejecting argument that "non-benign"
rather than illegal conduct "may properly
be considered as relevant conduct");
United States v. Peterson, 101 F.3d 375,
385 (5th Cir. 1996) ("For conduct to be
considered ’relevant conduct’ for the
purpose of establishing one’s offense
level that conduct must be criminal.");
United States v. Dickler, 64 F.3d 818,
830 (3d Cir. 1995) (agreeing with other
circuits that relevant conduct must be
criminal); United States v. Sheahan, 31
F.3d 595, 600 (8th Cir. 1994) (noting
that government has burden of proving by
a preponderance of evidence that
defendant’s conduct was criminal in
nature before the district court can rely
on it as relevant conduct). To further
support his position, Schaefer points to
the commentary to sec. 2F1.1, which
states that "loss is the value of the
money, property, or services unlawfully
taken." sec. 2F1.1, comment. (n. 8)
(emphasis added).
In deciding whether conduct under the
Sentencing Guidelines to be relevant must
be criminal or unlawful, we have not been
much helped by the government. In its
brief, the government has failed to cite,
let alone distinguish, the cases on the
criminal nature of relevant conduct from
the Third, Fourth, Fifth, and Eighth
Circuits. Instead, the government has
attempted to justify the loss calculation
by relying on generalized allegations of
continuing fraud. While we agree with the
government’s comment that Schaefer’s
entire artwork business was "permeated
with fraud," that characterization may
have both civil and criminal aspects. As
the cases cited by Schaefer make clear,
only the latter category implicates sec.
1B1.3 of the Guidelines. The simplest and
most direct way for the government to
support its theory of the case is to
point out how the specific elements of
mail and wire fraud, which were the
crimes specified in the fourteen-count
indictment, were an integral part of
Scheafer’s artwork business from 1994 to
1999. It might also be possible to
justify the $231,000 loss calculation by
demonstrating that Schaefer’s business
practices routinely violated other
criminal statutes (e.g., the criminal
fraud provisions of Indiana law).
However, the government has failed to
direct this court, or the district court,
to any additional statutory authority
criminalizing Schaefer’s conduct. Here,
the government’s briefing style is a bit
long on evidence, but a bit short on
analysis./3
In addition, the district court
summarily adopted the PSR without making
any specific findings with respect to the
relevant conduct relied on to make the
sec. 2F1.1(b)(1) loss calculation. Here,
a fourteen-count indictment resulted in
an acquittal on nine charges and a
conviction on only four. One count was
set aside for retrial because of a
possible Brady violation. Although
relevant conduct for sentencing purposes
can certainly include uncharged conduct,
see United States v. Smith, 218 F.3d 777,
782 (7th Cir. 2000), and even conduct
that forms the basis of an acquittal, see
United States v. Banks, 964 F.2d 687, 692
(7th Cir. 1992) (citing United States v.
Fonner, 920 F.2d 1330, 1333 (7th Cir.
1990)), the district court must still
make findings clearly identifying the
relevant conduct and explaining how that
conduct leads to a particular sentencing
determination. The transparency of this
process is especially important in a case
such as this one, where the $231,000 loss
calculation adopted by the district court
is far in excess of the $1,875 loss that
flows from the counts of conviction.
While it is certainly possible that the
PSR contains sufficient evidence of
uncharged and acquitted conduct to
support the much larger loss calculation,
it is very difficult for us to sift
through the contents of the PSR to
determine whether there is a sufficient
legal and factual basis for a particular
criminal sentence. Although a district
court’s findings as to relevant conduct
are reviewed for clear error, see Ofcky,
22 F.3d at 438, even such deference will
not cure an absence of findings.
In attempting to distill what must be
determined here, we turn first to the
text of sec. 1B1.3, which is entitled
"Relevant Conduct (Factors that Determine
the Guideline Range)." Section sec.
1B1.3(a) defines relevant conduct for the
purposes of Chapters Two and Three./4
Subsections (a)(1) and (a)(2) of sec.
1B1.3 refer to activity that is clearly
criminal in nature./5 Subsection (a)(3)
includes as relevant conduct all harm
that flows from the criminal activities
described in subsections (a)(1) and
(a)(2). Finally, subsection (a)(4)
defines as relevant conduct "any other
information specified in the applicable
guideline." In short, sec. 1B1.3(a)
explicates the fundamental rule that
relevant conduct must be criminal in
nature, though subsection (a)(4)
indicates that each applicable guideline
may also specify additional relevant fac
tors.
Since sec. 2F1.1 is in Chapter Two, this
framework necessarily applies to a sec.
2F1.1(b)(1) loss calculation. Therefore,
in addition to crimes that were committed
in connection with the offense of
conviction, see sec. 1B1.3(a)(1), or
criminal acts or omissions that were part
of the same course of conduct or common
scheme as the offense of conviction, see
sec. 1B1.3(a)(2), a loss calculation
under sec. 2F1.1(b)(1) also involves "the
value of the money, property, or services
unlawfully taken." sec. 2F1.1, comment.
(n. 8). Arguably, there may be instances
in which "unlawful" conduct is a slightly
broader category than criminal conduct,
but neither Schaefer nor the government
has attempted to claim or explain such a
distinction.
Although the government in this case has
convincingly demonstrated that Schaefer’s
routine dealings were, at a minimum,
disreputable and unethical, the plain
terms of the Guidelines make clear that
such a showing is not enough. For all of
Schaefer’s business receipts to be
included in a sec. 2F1.1(b)(1) loss
calculation, the government must
demonstrate, by a preponderance of
evidence, that all of Schaefer’s business
activities were unlawful. Moreover, if
the loss calculation is not based
entirely on the counts of conviction, the
district court must make specific
findings on the relevant conduct (i.e.,
unlawful conduct) on which it relies to
make its sec. 2F1.1(b)(1) calculation of
loss.
Our holding that relevant conduct under
sec. 1B1.3 of the Guidelines is limited
to criminal conduct is amply supported by
the case law in other circuits. For
example, in Petersen, supra, the Fifth
Circuit vacated a sec. 2F1.1(b)(1) loss
calculation in a securities fraud case
because the district court "made no
determination as to whether the
defendant’s conduct with regard to the
$1.3 million loss to the ABFL was
actually criminal conduct rather than a
violation of the fiduciary agreement
making the defendant civilly liable." 101
F.3d at 385. The Fifth Circuit expressed
concern that if relevant conduct were not
limited to criminal conduct, defendants
could be more severely punished by
"having their guideline range increased
for activity which is not prohibited by
law but merely morally distasteful or
viewed as simply wrong by the sentencing
court." Id.; accord United States v.
Dove, 247 F.3d 152, 155 (4th Cir. 2001)
(rejecting argument that "non-benign"
conduct "may properly be considered as
relevant conduct" and following
Petersen).
Similarly, in Dickler, supra, the Third
Circuit reviewed a sec. 2F1.1(b)(1) loss
calculation that was based on a long-
running scheme to submit false bids for
the purchase of repossessed cars. The
defendants had submitted false bids to
the Resolution Trust Corporation (RTC),
which had been appointed custodian of two
failed banks. The defendants were
subsequently charged with concealing
assets from the RTC, in violation of 18
U.S.C. sec. 1032(2). However, this
statute was not enacted until November
29, 1990. From 1985 to 1990, the
defendants had been submitting false bids
to the predecessor banks. Without citing
any statutory basis to demonstrate that
the defendant’s pre-1990 conduct was
unlawful, the government attempted to
include at sentencing the 1985 to 1990
time period as relevant conduct. Although
the Third Circuit observed that "it is
highly likely that the defendants’
conduct during the challenged period did
violate some criminal statute," it
determined that "[d]ue process requires
that the defendants have fair notice of
exactly why the government believes their
conduct during this period was criminal
and a fair opportunity to counter the
government’s case on that score." 64 F.3d
at 831. It therefore remanded the matter
to the district court with instructions
to require the government to identify
"the statute or statutes its relies upon
and to identify the record evidence that
satisfies each element of the offense
proscribed." Id.Finally, in Sheahan, supra, the Eighth
Circuit upheld a sec. 2F1.1(b)(1) loss
calculation in a case involving bank
fraud despite the fact that a substantial
portion of the total loss was attributed
to nine criminal counts that had been
dismissed as part of the defendant’s plea
bargain. 31 F.3d at 600. The court
emphasized that the dismissed counts
"clearly alleged offenses that are
subject to prosecution under 18 U.S.C.
sec.sec. 1344 and 1346." Id. The sole
remaining issue, therefore, was whether
the government had demonstrated the
unlawfulness of the defendant’s relevant
conduct by a preponderance of the
evidence. The Eighth Circuit went on to
rule that the government had met this
burden. See id.Limiting sec. 1B1.3 relevant conduct to
criminal activity, with appropriate
modifications based on specific
provisions contained elsewhere in the
Guidelines, can be easily reconciled with
the single case in this circuit which has
touched on the distinction between
illegal and legal conduct for sentencing
purposes. In United States v. Marvin, 28
F.3d 663 (7th Cir. 1994), the defendant
in a wire fraud scheme argued that the
district court erred when it refused to
grant him a sec. 3E1.1 sentence reduction
for acceptance of responsibility. After
the defendant entered a guilty plea but
before his sentence was imposed, the
district court determined that the
defendant had engaged in several acts of
deceit, including renting a residence
under a false name and writing checks
from an overdrawn account, which were
inconsistent with acceptance of
responsibility. Id. at 665. On appeal,
the defendant contended that this
activity could not be relied upon for a
sentencing determination because it could
not be properly characterized as
"illegal." Id. at 666. Relying on the
commentary to sec. 3E1.1, we ruled:
A sentencing judge may properly consider
any "conduct of the defendant that is
inconsistent with such acceptance of
responsibility" which would outweigh the
defendant’s earlier guilty pleas as a
proxy for acceptance of responsibility.
U.S.S.G. sec. 3E1.1, comment. (n. 3).
Therefore, although possibly relevant, it
is not necessary that the sentencing
judge consider only illegal or criminal
activity. The sentencing judge may
consider other conduct which is
inconsistent with the defendant’s
acceptance of responsibility.
Id. at 666.
Marvin is entirely consistent with the
framework that we have discussed. The
language of sec. 1B1.3 clearly limits
relevant conduct, for the purposes of
Chapters Two and Three sentencing
determinations, to criminal conduct.
However, an additional relevant criterion
is "any other information specified in
the application guideline." sec.
1B1(a)(4). Therefore, in Marvin, this
court properly looked to the commentary
to sec. 3E1.1 to determine the range of
evidence, beyond sec. 1B1.3 relevant
conduct, that could be considered in an
acceptance of responsibility ruling. As a
result, Marvin is distinguishable from
the rulings by the Third, Fourth, Fifth,
and Eight Circuits that have limited sec.
1B1.3 relevant conduct to criminal
activities.
In the case now before us, the
government has provided us with no basis
for departing from the clear weight
ofauthority. Under the circumstances, we
must remand to the district court with
instructions to require the government to
identify the specific unlawful conduct
relied upon to justify the sec.
2F1.1(b)(1) loss calculation. In
addition, to justify the $231,000 loss
calculation recommended by the PSR, the
district court must make specific
findings, based on a preponderance of
evidence, that all of Schaeffer’s artwork
business from 1994 to 1999 constituted
unlawful conduct.
B.
In this case, there is a significant gap
between the loss that flows from the
counts of conviction ($1,875) and the
loss calculated by the PSR ($231,000),
which was subsequently adopted by the
district court. In order to support this
much larger loss calculation, the
government submitted a sworn affidavit
from FBI Special Agent Robert Brouwer
(Brouwer declaration), which provided a
detailed summary of a lengthy joint
investigation of Schaeffer conducted by
the FBI, the Federal Trade Commission
(FTC) and the Department of Justice
(DOJ). The Brouwer declaration recounted
the facts and circumstances surrounding a
variety of attempted and completed
artwork sales by Schaefer, including
several transactions that did not form
the basis of the criminal indictment.
Although the district court never made
any explicit findings on relevant
conduct, the order rejecting Schaefer’s
motion for reconsideration of the loss
calculation ruled that it had relied, in
part, on the Brouwer declaration. This
document arguably provides the district
court with a basis to expand the scope of
Schaefer’s relevant (unlawful) conduct
beyond the counts of conviction.
Schaefer argues that the district court
erred when it relied on the Brouwer
declaration to adopt the loss calculation
in the PSR. Schaefer states that some of
the information in the declaration was
based on evidence collected by other
government investigators, which in turn
was summarized by Brouwer. Schaefer
asserts that this evidence constitutes
highly unreliable "hearsay on hearsay"
testimony. Although this case will be
vacated and remanded to the district
court for further proceedings, we will
address the hearsay issue now because it
is also relevant to a proper resolution
of the loss calculation.
As a threshold matter, Schaefer
correctly observes that hearsay testimony
can be utilized for sentencing purposes
if it is "reliable." United States v.
Morrison, 207 F.3d 962, 967 (7th Cir.
2000). However, his underlying argument
is flawed because the legal authorities
he relies on to impugn Brouwer’s
declaration as unreliable hearsay are a
series of Seventh Circuit cases in which
the amount of drugs for sentencing
purposes was adduced from the hearsay
testimony of other criminal defendants
who failed to testify at trial. See,
e.g., United States v. Palmer, 248 F.3d
569, 571 (7th Cir. 2001) (rejecting
hearsay statements made by individual two
years after the alleged drug transaction;
noting that no testimony was available at
the sentencing hearing because the
declarant cited his Fifth Amendment
rights); United States v. Robinson, 164
F.3d 1068, 1071 (7th Cir. 1999)
(rejecting hearsay statements made by
another criminal defendant involved in
the same drug transaction because
statements were internally inconsistent
and lacked "the kind of ’indicia of
reliability’ upon which a sentencing
judge could comfortably rely").
In contrast, the information collected
by Special Agent Brouwer was obtained
from several of Schaefer’s customers who
did not testify at trial. In addition,
many the transactions included in the
Brouwer declaration did not serve as the
basis for the fourteen-count federal
indictment. Nonetheless, the examples of
fraud and misrepresentation summarized by
Brouwer were consistent with live
testimony from other Schaefer customers
that described Schaefer’s modus operandi.
The Brouwer declaration therefore further
corroborated the overall picture of
Schaefer’s conduct that emerged at trial.
Schaefer also claims that Brouwer relied
on the work of other FBI agents in
preparing his declaration, thus resulting
in "hearsay on hearsay." Our review of
Brouwer declaration suggests that Special
Agent Brouwer conducted many of these
interviews personally, and that during
this process, the FBI was working closely
with other investigators from the FTC and
the DOJ./6 But Brouwer states the basis
for his information in considerable
detail, which conveys a strong impression
of exhaustive and well-documented police
work. Although the declaration does
constitute hearsay, it nonetheless
appears to have sufficient indicia of
reliability to permit its use for
sentencing purposes.
Schaefer’s "hearsay on hearsay" argument
also falters for lack of legal support.
Schaefer has failed to direct this court
to any legal authority which suggests
that more than one layer of hearsay in an
affidavit by a law enforcement agent
summarizing the findings of a
comprehensive investigation conducted by
himself and other agents (1) precludes
its use for sentencing purposes, or (2)
is of dubious reliability and, therefore,
should be weighed accordingly. Certainly,
Schaefer’s counsel had the opportunity to
make the latter case. Brouwer was present
during Schaefer’s sentencing hearing. If
Schaefer wanted to impeach Brouwer’s
methods of investigation or his
truthfulness, Schaefer was free to put
him on the stand, but he elected not to
do so. Hence, we see no error in reliance
on Special Agent Brouwer’s statements.
Finally, Schaefer’s Verified Statement,
which was submitted to the district court
for sentencing purposes, attacks the
accuracy of the Brouwer declaration.
However, in denying Schaefer’s motion for
reconsideration of the sec. 2F1.1(b)(1)
loss calculation, the district court
specifically determined that Schaefer’s
Verified Statement could not be relied
upon. Based on Schaefer’s pretrial
testimony and overwhelming evidence from
the government that Schaefer committed
perjury, the district court ruled that
"the defendant is not a credible
witness." In contrast, the district court
noted that Special Agent Brouwer
"testified at the trial of this cause,
and is a credible witness." Assessing the
credibility of witnesses is a matter
uniquely within the province of the fact
finder. Absent a showing of clear error,
we will not reverse a district court on
matters that hinge on the credibility of
witnesses. See United States v. Lindsey,
123 F.3d 978, 980 (7th Cir. 1997).
Schaefer’s hearsay argument is therefore
unavailing because it is inextricably en
meshed with issues of credibility. On
remand, the district court may rely on
Brouwer’s testimony and affidavit in
making its loss calculation.
C.
Schaefer’s last argument in challenging
his sec. 2F1.1(b)(1) loss calculation is
that the extrapolation method followed in
the PSR is flawed to the point of being
clearly erroneous. Part of this argument
is essentially a rehash of the relevant
conduct and hearsay issues we have
already discussed. However, Schaefer adds
the additional claim that the
government’s loss calculation failed to
consider that the majority of Schaefer’s
artwork was sold at fair market value.
Even if the value of this work had been
misrepresented to his customers, Schaefer
asserts that the district court erred in
accepting the testimony of expert witness
Lentz, who assigned a value of zero to
many pieces of art despite the fact that
they had been professionally matted and
framed. Schaefer also points out that he
was acquitted on nine out of fourteen
counts of the indictment. Since these
acquittals suggest that many of his
artwork transactions were untainted by
fraud, Schaeffer argues that a loss
calculation based on all of his business
receipts is over-inclusive and grossly
inflates the total amount of the loss.
The primary defect in the district
court’s loss calculation is that it
failed to make explicit findings
identifying with specificity the relevant
unlawful conduct that allegedly caused
the $231,000 loss. However, Schaefer’s
argument with respect to the actual
mechanics of the loss calculation lacks
merit. Since sentencing determinations,
as opposed to criminal convictions, are
made under the preponderance of evidence
standard, see United States v. Gee, 226
F.3d 885, 898 (7th Cir. 2000) (citing
United States v. Watts, 519 U.S. 148, 157
(1997)), the district court may consider
uncharged conduct or even conduct that
was acquitted. Moreover, the commentary
to the Guidelines specifically addresses
the use of estimates in making loss
calculations:
For the purposes of subsection (b)(1),
the loss need not be determined with
precision. The court need only make a
reasonable estimate of the loss, given
the available information. This estimate,
for example, may be based on the
approximate number of victims and an
estimate of the average loss to each
victim, or on more general factors, such
as the nature and duration of the fraud
and the revenues generated by similar
operations.
U.S.S.G. sec. 2F1.1(b)(1), comment. (n.
9). In this case, the $231,000 loss
figure was determined by multiplying
total business receipts during the last
five years ($420,000) by 55 percent. The
figure of 55 percent is derived from
sales to three of Schaefer’s customers
that formed the basis for the indictment
on multiple counts of wire and mail
fraud. As discussed earlier, these three
customers accounted for approximately 20
percent of Schaefer’s total receipts from
1994 to 1999. If the district court
concludes, under a preponderance of
evidence standard, that all of Schaefer’s
artwork business was unlawful, this
extrapolation method may not be
unreasonable.
The sampling technique set forth in the
PSR and adopted by the district court
also finds support in the case law. In
United States v. Austin, 54 F.3d 394, 402
(7th Cir. 1995), this court upheld a loss
calculation for the sale of art forgeries
despite the fact that government experts
inspected only a fraction of the artwork
involved in the disputed sales. In
Austin, a value of zero was imputed to
every sale of art made by the defendant
over a six-year period, since government
experts determined that his current
inventory was comprised entirely of
counterfeits. We concluded that, even if
the pieces Austin sold between 1984 and
1990 were not completely worthless, as
the defendant maintained, $0 was the best
estimate of their worth. See id.Here, the loss calculation adopted by
the district court was based on the
apparently reasonable premise that 55
percent of Schaefer’s business receipts
were tainted with fraudulent
misrepresentations. Although this
sampling method did not "credit" Schaefer
for the value of misrepresented artwork
that had been matted and framed, the dec
laration by expert witness Lentz
concluded that "the frame and matting
surrounding counterfeit or misrepresented
cheap cels have no market value other
than scrap value." In denying Schaefer’s
motion to reconsider the loss
calculation, the district court cited
both Lentz’s testimony at trial and his
declaration submitted during the
sentencing proceeding to conclude that
Lentz was a credible witness. As stated
earlier, this court will not reverse a
credibility finding by a district court
absent a showing of clear error. See
Lindsey, 123 F.3d at 980. Schaefer has
not undermined Lentz’s credibility in any
way. Moreover, there is no basis for
demanding that Schaefer be given full
credit for the cost of matting and
framing artwork, when the art itself has
been misrepresented to the consumer. Cf.
United States v. Saykhom, 186 F.3d 928,
947 (9th Cir. 1999) (observing that
defendant should not be given credit for
business services that were merely part
of a fraudulent scheme).
Finally, Schaefer maintains that $1,875
is the proper loss calculation because
this is the amount that can be attributed
to the counts of conviction, and the nine
acquittals cast doubt on Schaefer’s
overall culpability. However, the
commentary to the Guidelines specifically
states that the "offender’s gain from
committing the fraud is an alternative
estimate that ordinarily will
underestimate the loss." U.S.S.G. sec.
2F1.1(b)(1), comment. (n. 9) (emphasis
added). In the present case, if the
district court determines by a
preponderance of the evidence that all of
Schaefer’s transactions from 1994 to 1999
were tainted with unlawful conduct, there
is ample evidence that a loss calculation
limited to the counts of conviction would
substantially understate the total loss
to Schaefer’s customers.
Finally, the district court may have
been correct when it characterized its
loss estimate as "conservative." The loss
calculation did not include any "intended
loss" that might be ascribed to
Schaefer’s entire $500,000 art inventory
that was seized by government officials.
See United States v. Strozier, 981 F.2d
281, 284-85 (7th Cir. 1992) (ruling that
a loss calculation can be based on
probable losses that would have occurred
but for the intervention of law
enforcement). The loss calculation also
did not include any adjustment for the
appreciation in value that Schaefer told
his consumers they would enjoy because he
was selling his artwork at below-market
prices under the requirements of his dead
mother’s estate. As the district court
correctly observed, such amounts can be
considered in a sec. 2F1.1(b)(1) loss
calculation. See United States v. Porter,
145 F.3d 897, 901 (7th Cir. 1998) (ruling
that misrepresentations of a rate of
return made in furtherance of fraudulent
scheme can under some circumstances be
included in a loss calculation). However,
before the district court can rely on
these additional approaches to justify
its loss calculation, it must make
specific findings as to how much of
Schaefer’s business was tainted by
unlawfulness.
III.
The relevant conduct relied upon by the
district court to make its loss
calculation under sec. 2F1.1(b)(1) has
not been adequately articulated and
justified. Therefore, we VACATE and REMAND
to the district court for further
proceedings consistent with this opinion.
FOOTNOTES
/1 The district court adopted the findings and
recommendations of the PSR. Paragraph 51 of the
PSR states that its recommendations were based on
the 1997 Guidelines Manual because the offenses
predated Nov. 1, 1998. According to the PSR, the
1998 edition contained a special offense enhance-
ment that was unfavorable to the defendant.
Although this provision is not specifically
identified by the PSR or the district court, the
version of sec. 2F1.1(b)(3) in effect at the time
of Schaefer’s sentencing authorized a new 2-level
upward adjustment for an "offense committed
through mass-marketing," which Schaefer may have
been qualified for. In addition, the text of the
obstruction of justice enhancement under sec.
3C1.1 was revised some time between the 1997 and
the 2000 Guidelines Manual. Ordinarily, "a court
imposes a sentence based upon the guidelines in
effect as of the date of sentencing." United
States v. Kosmel, 272 F.3d 501, 507 (7th Cir.
2001) (citing U.S.S.G. sec. 1B1.11(a); United
States v. Hall, 212 F.3d 1016, 1022 (7th Cir.
2000)). In this case, the 2000 Guidelines Manual
was in effect at the time of sentencing. However,
ifapplying the current guidelines would violate
the ex post facto clause of the Constitution,
"the court shall use the Guidelines Manual in
effect on the date that the offense of conviction
was committed." sec. 1B1.11(b)(1); accord Kosmel,
272 F.3d at 507; United States v. Booker, 70 F.3d
488, 490 n.3 (7th Cir. 1995). The PSR appeared to
flag a possible ex post facto problem and there-
fore relied on the 1997 Guidelines Manual. The
district court then adopted the PSR. Because
neither party has raised this issue on appeal, we
will confine our review to the 1997 Guidelines.
The loss calculation provision which is relevant
to this appeal--sec. 2F1.1(b)(1)--is the same
under both the 1997 and 2000 Guidelines Manual.
/2 The remaining 45 percent of each transaction
would therefore represent fair market value of
the goods sold.
/3 One sentence in the government’s brief seems to
suggest that the $230,000 loss calculation is
appropriate because all of Schaefer’s business
dealings from 1994 to 1999 were in violation of
the 1993 Order. Appellee’s Br. at 35. However,
premising Schaefer’s loss calculation on the
violation of the 1993 Order raises serious issues
of double counting. See United States v. Parolin,
239 F.3d 922, 928 (7th Cir. 2001) ("’Double
counting occurs when identical conduct is de-
scribed in two different ways so that two differ-
ent adjustment apply.’" (quoting United States v.
Haines, 32 F.3d 290, 293 (7th Cir. 1994))).
Schaefer has received a two-level enhancement
under sec. 2F1.1(b)(4)(C) for violation of the
1993 Order, which he has not contested on appeal.
In addition, the PSR states that the U.S. Dis-
trict Court for the Central District of Califor-
nia has issued an Order to Show Cause why Schaef-
fer should not be held in criminal contempt of
the 1993 Order. A contempt trial was supposedly
set for July 5, 2000. Because of the possible
double-counting problem and the fact that the
government did not adequately develop this argu-
ment in its brief, this court will not consider
it as a basis for affirming the district court.
/4 Under the Sentencing Guidelines, the chapter is
denoted by the first number, followed by a let-
ter, which denotes the part. Thus, sec. 1B1.1
denotes chapter one, part B, subsection 1.1.
/5 For example, sec. 1B1.3(a)(1) states that rele-
vant conduct includes "all acts and omissions
committed, aided, abetted, counseled, commanded,
induced, procured, or willfully caused by the
defendant" 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 act."
If the character of the offense requires grouping
of multiple counts, sec. 1B1.3(a)(2) includes as
relevant conduct "all acts or omissions . . .
that were part of the same course of conduct or
common scheme or plan as the offense of convic-
tion."
/6 Paragraph One of the Brouwer declaration reads in
part: "I have worked with other FBI Agents, and
officials from the Office of the United States
Attorney, the Department of Justice, and the
Federal Trade Commission . . . concerning the
subject matter of this affidavit. This affidavit
is based on my personal knowledge and information
and belief."