United States v. Kosth, Daniel A. ( 2001 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 00-1215
United States of America,
Plaintiff-Appellee,
v.
Daniel A. Kosth,
Defendant-Appellant.
Appeal from the United States District Court
for the Central District of Illinois.
No. 98-40028-001--Michael M. Mihm, Judge.
Argued November 13, 2000--Decided July 18, 2001
Before Harlington Wood, Jr., Kanne, and
Diane P. Wood, Circuit Judges.
Diane P. Wood, Circuit Judge. Daniel
Kosth was convicted on four counts of
making false statements in violation of
18 U.S.C. sec. 1001 in connection with
loans from the Small Business
Administration (SBA). His appeal rests
principally on a claim that the evidence
was insufficient to support those
convictions, although he also raises a
few other arguments and he claims error
in the trial court’s application of the
Sentencing Guidelines. We find that the
evidence was adequate to support the
jury’s conclusions and that no other
reversible error occurred, and we
therefore affirm the convictions.
I
The genesis of this case can be found in
Kosth’s plans to convert an abandoned 40-
acre golf course and recreation area in
Orion, Illinois, into the Hillcrest
Resort. In the summer of 1992, he
approached Charles Azzaline and Peter
Gray about purchasing the land and
becoming partners in Hillcrest Resort,
Inc. He described his idea for the
resort, but he did not tell Azzaline and
Gray about his own dubious background.
Kosth had recently been released from
federal prison after serving time on a
financial fraud conviction. One of the
conditions of his supervised release was
that he notify any financial institution
with which he did business of his
previous offense, his conviction, and his
supervised release status. Kosth, aware
that his new venture was not likely to
succeed if he complied with the terms of
his supervised release, hatched a plan.
Part one of the plan called for him to
avoid disclosing his past to his partners
and any financial institutions that he
dealt with by concealing his ownership
interest in Hillcrest. Part two, which he
also implemented, required him to place
his one-third stock interest in the
Hillcrest Resort, Inc. in his wife
name, alleging that he was doing so for
tax purposes.
These arrangements did not change the
fact that Kosth enjoyed all the rights
and benefits that come with having a
substantial ownership interest in a
closely held corporation. His wife, Terri
Kosth, had none of them. Terri Kosth’s
Hillcrest stock was acquired almost
exclusively with in-kind contributions of
building supplies; supplies which a
reasonable jury could have concluded came
from Daniel Kosth’s construction
business. It was Kosth who incorporated
Hillcrest. He co-signed the deed to
purchase the Hillcrest property with
Azzaline and Gray. He was named vice
president and was empowered to write
checks and enter into contracts on
Hillcrest’s behalf. He ran Hilcrest
monthly board meetings and he regularly
voted Terri’s ownership interest.
Hillcrest implemented a stock reversion
agreement under which, upon the death of
any stockholder, the stock would revert
to the corporation rather than to the
stockholder’s heir. But the agreement
included a special provision for the
stock held by Terri; her stock was to
revert to the corporation upon Daniel
Kosth’s death. Finally, when itsuited
his purposes, Kosth publicly held himself
out to be a one-third owner of Hillcrest.
In 1992, Hillcrest Resort Inc. purchased
the golf course and recreation area
property for $170,000. Kosth negotiated
this transaction and subsequently
negotiated additional financing for the
renovation of the property with Orion
Bank. In keeping with his plan, Kosth
relied on his nominal non-ownership of
Hillcrest to avoid his obligation to
disclose his criminal past to Orion Bank.
During 1992 and 1993, Orion loaned
Hillcrest $70,000 and took a security
interest in private property owned by
Azzaline, Gray, and Terri Kosth. For
Terri, this included a real estate
business that she owned, named Quad
Cities Property Management, as well as
several pieces of real property. Using
the proceeds of this initial loan,
Hillcrest hired Bi-State Construction to
begin the renovation of the golf course.
Daniel Kosth was the sole owner and
President of Bi-State.
Unfortunately, in the summer of 1993
severe rains caused significant damage to
the Hillcrest property. Kosth initially
requested an additional $400,000 loan
from Orion on behalf of Hillcrest. Orion
denied his request. It agreed instead
that it would loan Hillcrest the money to
pay off the $130,000 still owed on the
original contract for the property
andextend an additional $70,000 in
credit, provided that Hillcrest paid off
its outstanding debt on the original
$70,000 loan. This offer appealed to
Kosth, but he needed to find someone to
loan him the money to pay off the
outstanding debt to Orion. His eye fell
on the SBA, which, because of the heavy
rains in the area including Hillcrest,
had decided thatresidents there were
eligible for its low interest disaster
assistance loans.
Kosth completed preliminary paperwork
for the Federal Emergency Management
Agency, met with the local SBA
representative, and then filled out the
SBA disaster loan application. That
application required Kosth to identify
all the managers of Hillcrest Resort,
Inc., and defined a manager as anyone
with an ownership interest in the company
of greater than 20%. Kosth put down
Azzaline, Gray, and Terri Kosth. The
application then required Kosth to
disclose whether any of the managers had
ever been convicted of a crime. None of
the managers he had listed ever had, so
he put "no."
Shortly after he submitted the
application, an SBA loss verifier visited
the Hillcrest property. Following an
inspection of the damage, the loss
verifier prepared an estimate for the
repairs of $151,000. This estimate had as
a built-in component a standard 15%
profit margin. The catch was that under
the terms of the SBA’s loan agreement
with Hillcrest, this profit could not be
enjoyed by companies affiliated with
Hillcrest (without prior permission of
the SBA) or by the immediate family
members of Hillcrest’s principals. The
language of the agreement to this effect
was clear:
Borrower will not use any proceeds of
this Loan to pay wages or any other
compensation for repair work performed by
Borrower or members of Borrower’s
immediate family.
The loan agreement also specified that
loan proceeds could be used only to pay
for disaster repairs and that any money
not needed to complete the repairs had to
be returned.
Despite this language, Kosth thought he
saw a way around it. He submitted a
financing proposal to Orion Bank in which
he declared that, using his company
Bi-State, he could complete all the
repairs at Hillcrest and retain a $70,000
profit. He would then take this profit
and give it to his wife. She in turn
would loan it to Hillcrest, as an officer
loan, and Hillcrest would use the loan to
pay off its outstanding obligation to
Orion. Once this was done, Orion would
pay off the $130,000 mortgage on the
Hillcrest property and extend a new
$70,000 loan to Hillcrest.
Recognizing the potential problem
created by the terms of the SBA loan
agreement, Orion approved the financing
proposal contingent upon receipt of a
letter from the SBA "evidenc[ing] their
full knowledge and approval of the method
you plan to use to make the necessary
repairs to the resort and retire
Hillcrest’s existing indebtedness to the
bank." Kosth consulted an attorney to
determine what kind of disclosure would
satisfy the terms of the loan agreement.
Although Kosth gave the attorney all of
the relevant documents, he somehow
neglected to inform him that he (Kosth)
intended to take $70,000 of the $151,000
loan as profit and not to return it to
the SBA. Based on the information he had,
Kosth’s attorney advised Kosth that
everything should be fine if Hillcrest
disclosed that one of its partners was
married to the owner of Bi-State.
Azzaline and Gray--also unaware of
Kosth’s plan to take $70,000 profit from
the loan--were satisfied with this
advice.
Kosth then carried out the master plan.
Acting on behalf of Hillcrest, he sent a
letter stating Hillcrest’s desire to
"continue its business relationship" with
Bi-State and disclosing that Terri Kosth
was married to Bi-State’s owner. With the
letter, Kosth enclosed Bi-State’s
"Construction Agrement [sic]" with
Hillcrest, which included its "bid, work
schedule agrement [sic] with payment
requirements." This document itemized the
proposed repairs and, without indicating
any profit line item, projected a total
project cost of $151,000. The SBA
received the letter and began making
disbursements payable to Hillcrest and
Bi-State in March of 1994.
Between April and November 1994, the SBA
approved $190,000 in disaster loan funds
for Hillcrest and actually disbursed
$176,000 of that total. The increase over
the original $151,000 came as a result of
several "urgent" requests from Kosth
claiming that he needed additional
funding to complete the Hillcrest
repairs. The SBA also gave Kosth a
$15,900 loan for a separate economic
injury.
The first two SBA disbursement checks,
totaling $130,000, were deposited into
Bi-State’s account in April and May of
1994. Using this money, Kosth wrote
checks totaling $118,800 to Quad Cities
Property Management. Terri Kosth then
transferred $70,000 of this money to
Orion Bank to pay off Hillcrest’s
outstanding debt. Orion in turn loaned
Hillcrest the $200,000 as promised and
released its security interest in the
Hillcrest partners’ private property.
Terri Kosth then wrote two checks for
$45,000 from her Quad Cities account to
Hillcrest. Through this money-shuffling,
the Kosths managed to use the SBA loan
proceeds to put Hillcrest in debt to
Terri Kosth and Quad Cities to the tune
of $115,000. Shortly after the third loan
disbursement check for $21,000 was
deposited in Bi-State’s account, Kosth
made out several checks for cash. He also
paid off over $5,000 in gambling and
credit card debts with checks drawn on
Bi-State’s account.
Things began unraveling in late 1994,
when the U.S. Attorney’s office sent a
letter to the SBA expressing concern
about Kosth’s receipt of SBA funds. That
letter prompted the SBA to send an
inspector, Karl Dietz, to Hillcrest on
November 16, 1994. In preparation for
Dietz’s visit, Kosth prepared an
accounting of Bi-State’s use of SBA
funds. This accounting contained a line
item indicating that Bi-State had made
$13,275 in profit and incurred $5000 in
administrative costs to date. Dietz,
seeing the line items, crossed them out
and wrote "not eligible."
As a result of the information Dietz
gathered, the SBA halted any further
disbursements of funds to Hillcrest. On
June 18, 1998, the grand jury returned a
four count indictment against Kosth
alleging that he had made numerous false
statements to the SBA, all in violation
of 18 U.S.C. sec.1001. As we have already
noted, a jury convicted Kosth on all four
counts. Following his conviction, Kosth
moved for a judgment of acquittal and for
a new trial, under Fed. R. Crim. P. 29(c)
and 33 respectively. The district court
denied both motions. On January 13, 2000,
Kosth was sentenced to 46 months’
imprisonment and required to pay $128,593
in restitution. Kosth appeals both his
conviction and his sentence.
II
A. Evidentiary Challenges
Kosth raises a number of challenges to
his conviction. We can dispose quickly of
his evidentiary claims, which challenge
the district court’s decision to admit
evidence of his prior conviction, the
terms of his supervised release, and his
gambling. These kinds of decisions are
reviewed for abuse of discretion. United
States v. Van Dreel, 155 F.3d 902, 905
(7th Cir. 1998). In this case, there was
none. The government wanted to use, as
part of its proof on Count I of the
indictment, the fact of Kosth’s prior
conviction to show that Kosth lied when
he stated on the SBA loan application
that none of Hillcrest’s managers had
criminal records. It sought to introduce
the terms of his supervised release to
establish Kosth’s motive for originally
establishing the sham ownership
arrangement with his wife. Both of these
are proper bases for admitting what would
otherwise arguably fall within the scope
of Fed. R. Evid. 404(b)’s prohibition
against the use of other wrongful acts
evidence. The court also issued
appropriate cautionary instructions that
prohibited the government from telling
the jury the nature of the previous
conviction and clearly delimited the
purposes for which the evidence could be
considered. The government’s evidence
that Kosth spent part of the SBA loan
money on gambling was also properly
admitted as direct evidence relating to
the charges in Count III, which asserted
that Kosth falsely represented to the SBA
that he would use the SBA loan money only
for repairs of the Hillcrest property.
B. Jury Instructions
Kosth next argues that the district
court’s instruction to the jury regarding
the government’s "sham ownership" theory
was erroneous. We review the district
court’s decisions regarding jury
instructions for abuse of discretion.
United States v. Neville, 82 F.3d 750,
759 (7th Cir. 1996). If jury instructions
fairly and accurately summarize the law
and have support in the record they will
not be disturbed on appeal. United States
v. Wimberly, 79 F.3d 673, 676 (7th Cir.
1996).
The instruction at issue was worded as
follows:
Also as to Count I, if the defendant
made or used, or caused to be made or
used a document containing a statement
and that statement represented as true a
false front or sham ownership arrangement
in an effort to qualify to receive a
government loan, such conduct would be
unlawful provided the government proves,
in connection with that statement, each
of the five [elements of a false
statement offense]. It is for you to
determine whether the ownership
arrangements regarding Hillcrest Resorts,
Inc. constituted a false front or sham.
Kosth contends that this instruction was
erroneous because it failed to specify
the "elements" of a sham ownership
arrangement. In support of this argument,
he cites a number of tax liability cases
involving sham ownership allegations.
See, e.g., Sacks v. Commissioner, 69 F.3d
982, 986 (9th Cir. 1995). The doctrine of
sham ownership in the context of tax
liability determinations, however, is at
most a useful indicator that judges and
juries may look beyond formalities to
determine questions of income and, in
this case, ownership. See, e.g., Buelow
v. Commissioner, 970 F.2d 412 (7th Cir.
1992) (noting tax court’s decision that
property assigned by defendant to sham
trust remained his property for tax
purposes). The specific elements of this
tax liability doctrine are not applicable
here.
The government’s theory in this case was
straightforward: Kosth was the true owner
of the shares in Hillcrest but he used
his wife Terri as the paper owner in
order to gain access to and control over
government benefits to which he otherwise
would not have been entitled. The
impropriety of this kind of evasion has
long been well established in the case
law. United States v. Kingston, 971 F.2d
481 (10th Cir. 1992) (defendant who paid
sham-buyers to be title-holders in order
to get access to HUD and VA loans induced
false statements in violation of sec.
1001); Harrison v. United States, 279
F.2d 19 (5th Cir. 1960) (entries in
bank’s books indicating loan to city were
false statements where mayor was true
beneficiary of the loans); United States
v. Swaim, 757 F.2d 1530 (5th Cir. 1985)
(affirming conviction for scheme to
conceal purchase price of building in
order to acquire federal loan); Ehrlich
v. United States, 238 F.2d 481 (5th Cir.
1956) (scheme to use veterans’ names to
obtain subsidized price for properties
supported conviction under sec. 1001).
Even if the instruction could have been
more detailed with respect to the
relevant indicia of ownership (an issue
Kosth has not raised and thus has
waived), the concepts of "sham" and
"false front" did not require any further
specification to state the law adequately
for the jury’s purposes. This
instruction, in short, did not give rise
to reversible error.
C. Sufficiency of the Evidence
We come, then, to Kosth’s principal
argument, which attacks the sufficiency
of the evidence on all four counts.
Although Kosth properly preserved both
his argument for acquittal as a matter of
law and for a new trial in the procedural
sense, see United States v. Griffin, 194
F.3d 808, 816-18 (7th Cir. 1999), from a
substantive standpoint it is exceedingly
difficult to succeed on either ground. On
this type of review, the appellate court
must consider the evidence in the light
most favorable to the verdict. Only if,
from this vantage point, the record
contains no evidence from which the jury
could have found guilt beyond a
reasonable doubt, is reversal
appropriate. E.g., United States v.
Hickok, 77 F.3d 992, 1002 (7th Cir.
1996). Our review of the district court’s
denial of the Rule 33 new trial motion is
also deferential; as the late Professor
Charles Alan Wright’s respected treatise
puts it, "[t]he appellate court properly
defers to the view of the trial court [on
the denial of a Rule 33 motion], and will
affirm unless there has been error as a
matter of law or a clear and manifest
abuse of judicial discretion." 3 Charles
Alan Wright, Federal Practice and Procedure:
Criminal (2d), sec. 559 at 368 (1982).
1. Count I
Count I of the indictment charged Kosth
with making a false statement on the SBA
disaster loan application in violation of
18 U.S.C. sec. 1001. To convict under
this statute the government must prove
beyond a reasonable doubt that (1) the
defendant made a statement, (2) the
statement was false, (3) the statement
was material, (4) the statement was made
knowingly and willfully, and (5) the
statement concerned a matter within the
jurisdiction of a federal department or
agency. United States v. Ross, 77 F.3d
1525, 1543-44 (7th Cir. 1996).
The government alleged that Kosth
knowingly made a material false statement
when he indicated on the disaster relief
application that Terri was a manager of
Hillcrest and that no Hillcrest manager
had a criminal record. According to
Kosth, the government’s case founders on
the second and third of the sec.1001
requirements--falsehood and materiality.
He claims that he was not required to
identify himself as one of Hillcrest’s
managers or to disclose his criminal his
tory on the SBA disaster relief
application because the SBA application
defined "manager" as any person owning at
least 20% of the company’s stock, and it
was Terri who owned 30% of the shares in
Hillcrest Resort, Inc.
This position implies that the jury was
required to accept the superficial
arrangements Kosth had made as reality.
The government, however, presented
evidence intended to convince the jury
that Terri Kosth was merely a sham or
straw owner of Hillcrest. Although Kosth
attacks the sufficiency of the evidence
of sham ownership, we are satisfied that
there was enough evidence in the record
to support the jury’s decision to accept
the government’s version of events. There
was ample evidence to support findings
that Hillcrest Resorts, Inc., was Kosth’s
idea; that because of the terms of his
probation, he needed a way to conceal his
ownership interest in Hillcrest when
dealing with financial institutions and
the SBA; and that he used his wife for
this purpose. Among the most compelling
evidence that he was the true owner of
the stock was the stock reversion
agreement that provided that Terri
Kosth’s stock would revert to the
corporation in the event of Daniel
Kosth’s death. It was also telling that
Daniel Kosth regularly voted his wife’s
shares, that Terri played no role in the
management of the business, and that she
acquired 90% of "her" stock interest
through in-kind contributions of building
materials, goods which Daniel Kosth, as
owner of a construction company, was well
positioned to supply. This evidence, when
considered in conjunction with the
extensive evidence of Kosth’s control
over the day-to-day operations of
Hillcrest, supports the jury’s conclusion
that Kosth was the true part-owner and
manager of Hillcrest, that he knew this
to be the case when he filled out the SBA
loan application, and that he made the
false statement with the intention of
obtaining an SBA loan which he realized
he was otherwise unlikely to get. Cf.
Ehrlich, 238 F.2d at 483-84 (whether
veterans’ statements were true depended
on jury’s determination of the nature of
the defendant’s scheme).
Perhaps recognizing the problem the
evidence presented at trial created for
his claim of innocence, Kosth tried
tointroduce two affidavits with his Rule
29 and 33 motions whose purpose was to
buttress the bona fides of Terri’s
separate ownership. He has continued to
rely heavily on these affidavits in his
arguments on appeal. But the district
court, while allowing the affidavits to
be filed, made clear that they would be
considered only for the limited purpose
of one of the specific claims of error in
Kosth’s motion for a new trial. Kosth did
not argue that they were pertinent to the
government’s sham ownership claim in that
motion, nor were they admitted for that
purpose. We therefore do not consider
them to be part of the record and decline
Kosth’s invitation to treat them as if
they were evidence before the jury. We
note in addition that they would not have
anything like the dispositive effect
Kosth attributes to them, even if they
were properly here.
Kosth stresses, and we agree, that he
cannot be convicted under sec.1001 for
statements that are literally true, see
United States v. Lozano, 511 F.2d 1 (7th
Cir. 1975), and that there is no "sham"
if the owner of property transfers his
entire interest in the property to a
third party and then denies ownership of
that property. See United States v.
Gahagan, 881 F.2d 1380 (6th Cir. 1989).
We note at the outset that Kosth did not
request a "literal truth" instruction or
otherwise assert this defense at trial.
Even if it was not waived, a full review
of the record shows that the jury did not
convict Kosth for literally true
statements. The whole point of the
government’s evidence was that, unlike
the defendant in Gahagan, Kosth had not
relinquished the benefits of owning the
property at the time he completed the SBA
application. To the contrary, he enjoyed
all the real indicia of share ownership
and he was actively managing both the
board and the operations of the company.
If, as we conclude it reasonably could
have done based on the evidence before
it, the jury determined that Terri
Kosth’s nominal stock ownership was
simply part of Daniel Kosth’s scheme to
conceal the fact that he was the part-
owner of Hillcrest Resort, Inc., then
neither his claim that Terri Kosth was
the owner of 30% of the Hillcrest stock,
nor his claim that no Hillcrest manager
had a criminal record was literally true.
2. Count II
Count II charged Kosth with submitting
a construction agreement to the SBA that
indicated that Bi-State developers (his
company) would generate no profit from
the proceeds of the SBA loan, even though
he knew that Bi-State would reap
approximately $70,000 from the Hillcrest
loan. Once again, this was alleged to
violate the false statement statute, 18
U.S.C. sec. 1001. Kosth submitted the
construction agreement at issue together
with his letter seeking permission to
have loan proceeds go to Bi-State. Kosth
argues that nothing he said in the
contract made any promises about profits,
because the contract simply indicated the
total amount that would be necessary for
the repairs--$151,000 initially--and that
all such estimates include some
percentage mark-up for profit. He reasons
that the SBA must have known that some
part of that $151,000 represented profit,
and supports his argument with testimony
from SBA estimators who confirmed that it
is standard practice to build a profit
figure into the projected cost for each
item of repair in the estimate. The
contract Kosth submitted reproduced the
SBA estimator’s figures and made no
mention of Bi- State’s expected profits.
The government’s case, however, rested
on the fact that Kosth was not just an
ordinary borrower. Kosth submitted his
estimate as part of a request to be
exempted from the express terms of the
SBA loan agreement. That agreement
specifically prohibited use of loan funds
to pay the borrower or members of the
borrower’s family and it required the
loan recipient to retain only those funds
needed to make the necessary repairs. The
jury heard considerable evidence that,
given these terms, Kosth was required not
only to get permission from the SBA to
have loan proceeds go to Bi-State, but
also to have Bi-State take a profit.
Moreover, there was evidence that Kosth
was well aware that the SBA loan
agreement created such a requirement.
After evaluating the loan agreement,
Orion Bank informed Kosth that he needed
to disclose both Bi-State’s relationship
to Hillcrest and that he intended to use
$70,00 of the loan proceeds to pay off
his existing debt to Orion. The fact that
Kosth intentionally withheld from his
attorney and his partners the fact that
he intended to take a profit on the loan,
and the fact that he prepared one
estimate for Orion with a profit line,
and a "carbon copy" for the SBA without
one, was also evidence that he understood
the SBA’s expectations under the terms of
the loan agreement. Instead of requesting
permission to retain a portion of the
loan proceeds as profit, however, Kosth’s
letter to the SBA seeking an exemption
only disclosed that Bi-State would be
receiving the proceeds of the loan.
Absent a disclosure of Kosth’s intent to
take a profit, the SBA assumed that Kosth
would only request the amount Bi-State
actually needed to complete the repairs,
and a reasonable jury could conclude that
Kosth knew it. Thus, when he submitted to
the SBA an estimate for $151,000 without
an indication that he would be taking a
profit, knowing that in fact this was
$70,000 more than what he would need and
would be entitled to under the terms of
the loan agreement, Kosth made a false
statement to the SBA.
In sum, while we consider this to be a
close call, we believe the jury could
reasonably have concluded that, in the
context of Kosth’s negotiations with the
SBA to escape the prohibitions in the SBA
loan agreement, he knew the estimate that
he submitted would be assumed by the SBA
not to contain a profit and that this was
clearly false. Kosth attempts to portray
the government’s theory as absurd,
suggesting that the government thinks the
SBA assumed he would do the work for
"free." What the SBA assumed, absent any
contrary indication from Kosth, was that
Kosth would comply with the terms of the
loan agreement and do the work without
any additional profit but with all costs
covered.
3. Count III
This count charged that Kosth made false
statements in violation of sec.1001 when
he signed the SBA loan agreement and
thereby represented that "the proceeds of
the loan would be used solely to
rehabilitate and replace Hillcrest
property damaged and destroyed by
disaster flooding," when he knew that "a
purpose of the application for an SBA
disaster loan was to generate financial
profit for Bi-State Developers . . . so
that the profit could be used to pay off
preexisting debt of Hillcrest." Once
again, from the perspective we are
required to use in evaluating a jury’s
verdict and a district court’s denial of
a motion for new trial, we see nothing
that requires reversal.
According to Kosth, it was just the
government’s misfortune that the loan
money it gave Bi-State to perform the re
pairs was substantially in excess of the
amount actually required to do the work.
His ability to complete the job while
retaining a profit of $70,000 entitled
him to a windfall that he could use to
retire Hillcrest’s $70,000 debt. Even if
we indulge in the economically reasonable
assumption that part of the cost of
performing work is a profit to the
contractor, however, that does not answer
the question whether Kosth was entitled
to tell the SBA that he needed $151,000
to do the work when he knew all along
that he needed only $81,000. As the
government argued and the evidence
showed, he took the extra money knowing
that he (through Bi-State) would spend
the excess proceeds to benefit Hillcrest
in a manner not permitted by the terms of
the loan agreement. Furthermore, the loan
agreement itself required him to return
any funds that were not required for
doing the repair work. The evidence is
crystal clear that Kosth planned from the
start to use almost half of the loan to
pay the Hillcrest debt; his
correspondence with Orion leaves no doubt
on the point. And this was indeed what he
did, along with using other parts of the
money for a variety of personal
expenditures. It is difficult to see how
the jury could have come to any other
conclusion on this part of the case.
4. Count IV
Last, Count IV charged Kosth with making
a materially false statement in violation
of sec. 1001 when he submitted a report
to the SBA indicating that Bi-State had
generated $13,275 in profit from the
repair work supported by the loan, when
he "well knew, Bi-State Developers
already had generated a profit of
approximately $70,000" from the loan. The
jury had ample evidence before it to
support the conviction on this count, for
both Rule 29 and Rule 33 purposes.
When Kosth was preparing for SBA
Inspector Dietz’s visit on November 16,
1994, he prepared an accounting of his
use of the SBA funds that included a line
item indicating that Bi-State had earned
just over $13,275 in profit. He did so at
a time after he had already taken $70,000
of the SBA loan proceeds and deposited
them in Terri’s account to use for the
repayment of the debt Hillcrest owed to
Orion Bank. Dietz, seeing the $13,275
line item, crossed it off and wrote "not
eligible."
The jury saw this as a false statement,
and Kosth is hard pressed to challenge
that characterization. He does, however,
urge that it was not "material" for
purposes of sec. 1001, citing United
States v. Gaudin, 515 U.S. 506 (1995).
His misstatement, he claims, had no
"natural tendency to influence" the SBA’s
decision, nor was it capable of
influencing the agency’s decision. Any
profit at all was impermissible under the
government’s theory, so why should
$13,275 be any different from $70,000?
We see no merit to this line of
argument. Although the government was
alleging that Kosth was not entitled to
any profit, it was also asserting that he
was using the proceeds of the loan for
impermissible purposes. A claim that he
was earning approximately 8.8% profit on
the work would have made his story of the
inclusion of an ordinary profit in the
line items far more plausible than a
claim that he was earning more than 46%
profit on the same work. Moreover, Dietz
was there to find out how the money was
being used, period: telling him that only
$13,275 was profit when the real number
was $70,000 changed the entire picture.
The district court committed no error
when it rejected Kosth’s challenges to
his conviction on Count IV.
III
Kosth has also raised several challenges
to his sentence. The district court gave
him a two-level enhancement for more than
minimal planning, under U.S.S.G. sec.
2F1.1(b) and sec. 1B1.1; it found that he
was a leader or organizer under sec.
3B1.1(c); it enhanced his sentence based
on the amount of the fraud eight levels
under sec. 2F1.1 (finding that $200,000
was involved); and it required him to pay
restitution in the amount of $128,593 to
the SBA. We find no reversible error in
any of the district court’s actions. The
district court’s findings about the
amount of planning and Kosth’s leadership
role were not clearly erroneous. It
explained the $200,000 figure by noting
that Kosth received or had commitments to
receive $205,000 from the SBA when all
was said and done. Relying on note 8(d)
to sec. 2F1.1, the court found that Kosth
diverted the full $205,000 from the
intended recipients of SBA loans, even
though the agency had not gotten around
to disbursing everything by the time the
scheme unraveled. We agree that this is
the proper way to interpret that
guideline. And there is no merit at all
to his challenge to the restitution
amount, which could have been even higher
than the level the court imposed.
As for the remaining issues Kosth has
raised, suffice it to say that we find
nothing that requires reversal, or that
merits discussion here. The judgment of
the district court is Affirmed.