United States v. Sain

Opinions of the United
1998 Decisions States Court of Appeals
for the Third Circuit
4-10-1998
United States v. Sain
Precedential or Non-Precedential:
Docket 97-3114,97-3115
Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1998
Recommended Citation
"United States v. Sain" (1998). 1998 Decisions. Paper 78.
http://digitalcommons.law.villanova.edu/thirdcircuit_1998/78
This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova
University School of Law Digital Repository. It has been accepted for inclusion in 1998 Decisions by an authorized administrator of Villanova
University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu.
Filed April 10, 1998
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Nos. 97-3114 & 97-3115
UNITED STATES OF AMERICA
v.
SAMIR K. SAIN,
Appellant No. 97-3114
UNITED STATES OF AMERICA
v.
ADVANCED ENVIRONMENTAL CONSULTANTS, INC.,
Appellant No. 97-3115
Appeal from the United States District Court
For the Western District of Pennsylvania
D.C. Nos. 96-cr-00021-01 &
96-cr-00021-02
Argued January 22, 1998
Before: SLOVITER, LEWIS and ROSENN, Circuit Judges
(Opinion Filed April 10, 1998)
Thomas J. Farrell (argued)
Bonnie R. Schlueter
Office of United States Attorney
633 United States Post Office &
Courthouse
Pittsburgh, PA 15219
Counsel for Appellee
Bruce A. Antkowiak (argued)
One Northgate Square
Greensburg, PA 15601
Counsel for Appellants
J. Daniel Hull
Rhoda S. Neft
April L. Boyer
J.D. Hull Associates
600 Grant Street
4949 USX Tower
Pittsburgh, PA 15219
Counsel for Advanced Environmental
Consultants, Inc.
OPINION OF THE COURT
ROSENN, Circuit Judge.
This case primarily presents two questions of first
impression in this circuit relating to the interpretation of
the Major Fraud Act of 1988 (the "Act"). See 18 U.S.C.
S 1031 (West 1997). The Act makes it a federal crime to
defraud the United States in connection with a government
contract that is valued in excess of $1 million. Specifically,
we must decide whether a defendant may be charged with
a separate violation of the Act for each of numerous
executions of a single fraudulent scheme, and whether
modifications of the original government contract, each of
which have a value of less than $1 million, are within the
purview of the Act when the underlying government
contract has a value in excess of $1 million. The defendants
make other arguments relating to the sufficiency of the
evidence, the exclusion of expert testimony, whether an
individual can be convicted of aiding and abetting a
corporation he owns and controls, and alleged defects in
their sentences. The district court rejected the defendants'
arguments. We affirm as to all issues.*
_________________________________________________________________
* Although Judge Lewis heard argument in this case, he has been
unable, however, to clear this written opinion because of illness.
2
I.
A federal grand jury sitting in the Western District of
Pennsylvania indicted Samir K. Sain and his company,
Advanced Environmental Consultants, Inc. ("AEC"), on 46
counts of fraud in violation of the Act. Following trial, the
petit jury returned guilty verdicts on all counts as to both
defendants. The district court sentenced Sain to 37 months
imprisonment and three years supervised release. The court
sentenced AEC to five years probation and ordered it to pay
a special assessment. In addition, the court ordered AEC to
pay $597,124 in restitution, with any amount not paid by
AEC to be paid by Sain. The defendants appealed.1
II.
This complex fraud case arises out of an approximately
$7-million contract between the United States Army and
AEC, pursuant to which AEC built, owned, and operated a
waste-water treatment plant at the Army Depot at Tooele,
Utah. AEC is an environmental consulting company
headquartered in Pittsburgh and incorporated in
Pennsylvania. Sain has a masters degree in engineering
and several credits toward a doctorate, is a licensed
professional engineer, and is the sole shareholder and
president of AEC.2 It is well established that, because the
jury returned guilty verdicts in the district court, this Court
must construe the evidence in the light most favorable to
the Government. See, e.g., Glasser v. United States, 315
U.S. 60, 80 (1941); United States v. Cooper, 121 F.3d 130,
133 (3d Cir. 1997). Following is a statement of facts which
the jury could have found based on the trial evidence.
The Army operates a depot in Tooele, Utah, at which it
_________________________________________________________________
1. The district court had subject-matter jurisdiction of the case pursuant
to 18 U.S.C. S 3231. This Court has appellate jurisdiction pursuant to 28
U.S.C. S 1291 and 18 U.S.C. S 3742(a)(2).
2. Until several days before trial, Sain claimed to hold a Ph.D. in
engineering from the University of Pittsburgh. He made this
representation to the Army when he bid on the contract. Just prior to
trial and on cross-examination at trial, he admitted that he did not hold
such a degree.
3
services tanks and other types of military vehicles.
Sometime in the 1980s, the Army entered into a consent
decree with the State of Utah requiring the Army to treat
the waste water it was generating at the depot and
releasing into the ground water. To fulfill its obligation
under this consent decree, the Army proposed to have a
contractor build, own, and operate a plant to treat the
depot's waste water. After the bidding process, AEC was
selected. On November 30, 1987, AEC entered into the
contract with the Army. Under the contract, AEC agreed to
construct, own, and operate an industrial waste-water
treatment plant at the depot for the "firm fixed price" of
approximately $4.5 million. In a firm fixed price contract,
once the price is established by the parties, the amount
paid to the supplier of the goods or services does not vary
with its costs. In this case, the risk of cost overruns rested
with AEC. The term of the contract was for one year
followed by four one-year options. The Army exercised each
option and the contract lasted the full five years.
In the plant, AEC installed four large metal tanks called
"adsorbers." Each of the tanks was designed to hold
approximately 5,000 pounds of filtering carbon. Waste
water would be pumped through the tanks with the carbon
filtering out much of the water's pollutants. Periodically, as
pollutants built up in the carbon, the carbon would become
ineffective and have to be replaced. The process of replacing
the carbon was called a "change out." The contract provided
for two of these change outs per year at AEC's expense and
did not specify the type of carbon to be used.
After the Army and AEC entered into the contract, but
before AEC began operating the plant, the Army modified
the contract to incorporate the City of Tooele's water purity
standards which were more strict than those imposed by
the consent decree. The Army requested that AEC submit a
cost proposal providing for the Army to reimburse AEC for
its increased costs resulting from these stricter water purity
standards. Ultimately, AEC submitted four cost proposals,
none of which were approved by the Army. Instead, on April
11, 1989, the Army unilaterally imposed a modification of
the contract pursuant to which AEC would receive
approximately $682,000 in addition to the original contract
price.
4
In the spring of 1989, before the Army had acted on
AEC's fourth cost proposal, AEC claimed that the waste
water generated by the Army consistently contained a
higher level of pollutants than the amounts specified in the
contract. According to AEC, this higher level of pollutants
required more than the two carbon change outs per year
allowed by the contract. In an attempt to recoup these
additional costs, AEC began submitting claims to the Army
for reimbursement for costs associated with the additional
change outs. On May 5, 1989, May 26, 1989, and June 20,
1989, AEC submitted claims. Each claim was for $27,500
and purported to represent the costs associated with a
complete change out of the four tanks plus a 10-percent
profit for AEC. According to the claims, AEC installed 5,000
pounds of carbon in each of the four tanks at a cost of
$1.25 per pound of carbon, a price which corresponded to
the market price for virgin carbon.
The Army agreed that these changed conditions
warranted an equitable adjustment of the contract to
compensate AEC for the costs of some of the additional
carbon change outs. Lieutenant Colonel K. L. Andrews, the
Army officer responsible for administering the AEC contract
during most of the relevant time, notified Sain in a letter
dated April 25, 1989 that no money would be paid to AEC
by the Army for the additional carbon change outs unless
AEC first submitted "documentation necessary to support a
claim." Andrews advised that such documentation include
"cost invoices, time sheets, and any other [necessary]
documentation." Also, at trial, Andrews testified that, in
addition to the notification letter, he told Sain numerous
times that supporting documentation was required in order
for AEC to receive payment. At trial, Sain reluctantly
conceded that Andrews had required this documentation.
According to the testimony of Andrews and Robert
Kinsinger, the Army's technical representative at the waste-
water plant, prior to agreeing to reimburse AEC for the
additional change outs, Sain insisted to them that the
heavy pollutant levels in the waste water required the use
of virgin carbon, a more expensive type of carbon than
reactivated carbon.3 Sain also insisted that 5,000 pounds of
this carbon per tank, or 20,000 pounds total, must be used
_________________________________________________________________
3. Virgin carbon has not been previously used in water purification.
Reactivated carbon has been previously used to filter water and heated
to high temperatures in order to rid the carbon of the impurities and re-
open its pores.
5
in each change out.
To substantiate the initial costs associated with the
additional change outs, Sain submitted to the Army a copy
of an invoice numbered "326" and dated January 9, 1989
which purported to show that AEC had purchased 100,000
pounds of carbon from a company called Encotech for
$1.25 per pound. This price corresponded to the market
price for virgin carbon and included a charge for
installation. Sain also submitted to the Army a September
5, 1989 letter on Encotech letterhead which stated that
AEC had previously purchased the 100,000 pounds of
carbon for the price stated in invoice number 326.
It is undisputed that the invoice and letter were false.
Both Sain and Encotech's owner, Bernard Lalli, testified
that the carbon order had been canceled on January 15,
1989 and that the carbon was not delivered. Sain also
admitted "whiting out" the portion of the original invoice
which contained a notation that the order had been
canceled and that he had assisted Lalli in drafting the
September 5 letter. Sain claimed that the invoice
represented future costs. Sain had, however, purchased
some carbon from Encotech during this time, although it
was not virgin carbon. AEC initially ordered 50,000 pounds
of virgin carbon at $1.18 per pound. AEC never took
delivery of this virgin carbon. Instead, Sain asked Lalli to
substitute 100,000 pounds of the less expensive,
reactivated carbon, which Lalli did for a price of $.59 per
pound. On other occasions, Sain similarly represented to
the Army that he had purchased virgin carbon. He did not
take delivery of this carbon and substituted cheaper,
reactivated carbon without informing Army officials.
Based on Sain's representations regarding the price of
the carbon used in the additional change outs, the Army
agreed to reimburse AEC $1.2455 per pound of carbon for
the 20,000 pounds used per change out, plus 10-percent
profit for a total of $27,401 per change out. AEC and the
Army memorialized this agreement in Contract Modification
14 which reimbursed AEC for the three claims previously
submitted. In part, the modification stated: "The costs
associated with this claim are a replacement of 60,000 lbs.
of virgin carbon (3 change outs/20,000 lbs. per change)
6
and the labor and fees involved. ... All other terms and
conditions in the contract remain the same." Sain
acknowledged on cross-examination that he understood the
purpose of the modification was to reimburse him for the
three change outs using 60,000 pounds of virgin carbon.
Sain made an additional 43 claims for reimbursement for
costs associated with the additional carbon change outs. To
support these claims, he submitted false and canceled
supplier invoices. He concealed from the Army invoices
showing the purchase of reactivated carbon, and he falsely
certified that AEC had used 20,000 pounds of virgin carbon
per change out when, in fact, it had not done so. In
connection with Contract Modification 20, which covered
the six claims following the original three, Sain submitted
a purchase order from Encotech which showed the
purchase of 100,000 pounds of virgin carbon for $99,000
and a copy of a $99,000 check from an AEC checking
account. Sain, however, canceled the invoice, voided the
check, and never took delivery of this carbon. He also
included in the supporting documentation an invoice for
25,000 pounds of virgin carbon priced at $1.18 per pound
which AEC never received. Instead, AEC substituted 50,000
pounds of reactivated carbon. He also admitted to failing to
submit documentation showing that he had used
reactivated carbon.
Sain supported an additional 10 of the claims by using
checks and purchase orders relating to a different supplier,
Water Equipment Supply ("WES"), which was a sole
proprietorship that Sain created. WES had no operations or
employees. Sain instructed Lalli to bill WES for reactivated
carbon that Encotech had shipped to AEC. WES then billed
AEC for the carbon at highly inflated prices, misdescribing
the carbon in the invoice. In these transactions, WES
purchased 155,768 pounds of reactivated carbon from
Encotech at prices ranging from $.32 to $.50 per pound.
WES then billed AEC for 238,000 pounds of carbon at $.93
per pound and for another 100,000 at $.87 per pound. AEC
paid these amounts to WES, but WES transferred the funds
back to AEC and Sain. Sain instructed an AEC employee to
describe the carbon on the WES invoices as "Iodine 1000
and up 10/40(v)." "Iodine 1000" refers to the density of the
7
carbon. The iodine level of carbon is determined by a
standardized test. Reactivated carbon of this iodine level
would have been very expensive and very rare. The carbon
provided by Encotech did not have this high iodine number
when supplied to AEC and the standard test had not been
performed on it, although Sain testified that he used his
own "test" to determine the iodine level.
In 1991, Army officials began to suspect that Sain was
not using the quantity and quality of carbon called for in
the contract modifications. They conducted an investigation
which appeared to confirm their suspicions that Sain was
using fewer than five of the 1,000-pound bags of carbon per
tank. When confronted, Sain stated that each 1,000-pound
bag contained 1,400 pounds. He testified to the same at
trial, but admitted never calculating the exact weight of the
bags. He also claimed that he had estimated how much
volume 5,000 pounds would occupy and used that amount.
Sain called this method "volumetric calculation." At this
time, despite its investigation, the Army was unable to
uncover sufficient evidence of Sain's fraud. However, on
September 29, 1992, the Army added language to Contract
Modification 33 which reaffirmed that payment of the
$27,401 was contingent on Sain's use of 5,000 pounds of
"pure, virgin activated carbon" per tank. 4 Sain signed that
modification.
On December 14, 1992, the Army withheld payment of
$211,800 that Sain had previously claimed and requested
that AEC account for all of the carbon purchased and
installed at the plant. Sain told the Army's representatives
that his attorney, Keith Baker, would provide the requested
information. Baker supplied a letter, a summary, and 18
_________________________________________________________________
4. The modification read:
The unit pricing for the above identified claims is based on the
quantities (5,000 pounds) and quality (pure, virgin activated
carbon)
which formed the mutual agreement in Modification Number
P00014. In the event the quantity and/or quality of carbon material
used in these carbon changes is found to be less than that upon
which Modification Number P00014 is based, the Government
reserves the right to adjust the Contract Amount to reflect such
cost
difference.
8
invoices to the Army which purported to show that AEC
had purchased and used 1,056,050 pounds of carbon. This
matched almost exactly the amount of carbon which would
have been used if AEC had installed 5,000 pounds per tank
for the 212 change outs it had performed. In reliance on
the representations in the summary submitted to it, the
Army paid Sain much of the money he requested, reducing
the payment for the last nine change outs to $16,409.67
per change out because the AEC-supplied documents
showed that AEC paid only $.72 per pound of carbon
during this time. At trial, Sain conceded that the numbers
Baker supplied were incorrect. The Government established
that AEC had actually purchased only 795,818 pounds of
carbon and 24 of the 1,000-pound bags remained unused.
Sain claimed that the omissions and misstatements in the
letter, summary, and supporting documents were mistakes
and denied that he intended to defraud the Army.
After an investigation, the grand jury indicted Sain and
AEC for engaging in a scheme to defraud the Army. The
indictment alleged that Sain and AEC falsely represented
that only virgin carbon in 5,000-pound amounts was
capable of properly cleaning the water. The indictment
further alleged that AEC and Sain represented that they
used this type and amount of carbon although oftentimes
they were using reactivated carbon in lesser amounts and
pocketing the difference in price. There is no dispute that
the reactivated carbon in amounts of less than 5,000 used
by AEC treated the waste water to the satisfaction of the
Army and in compliance with the consent decree.
III.
On appeal, Sain and AEC make several arguments why
their convictions should be reversed or sentences modified.
We address each in turn. AEC did not file a separate brief
and, where appropriate, has adopted Sain's arguments.
A.
Sain first argues that the district court erred in denying
his motion for a judgment of acquittal on the ground that
the evidence did not prove that he engaged in a fraudulent
9
scheme. We address Sain's sufficiency of the evidence
argument first because, if he is correct, we would be
required to order the district court to enter a judgment of
acquittal on all counts, eliminating the need to consider
any of his other arguments. See Burks v. United States, 437
U.S. 1, 17-18 (1977).
Sain contends that his misrepresentations to the Army
were not "material." According to Sain, regardless of what
the documents he submitted reflected, the Army did not
make payment of the 46 claims based on the actual
expenses incurred in the carbon change outs. Instead, the
Army agreed to pay AEC the fixed price of $27,401 for each
change out over the two change outs allowed in the
contract regardless of whether AEC used virgin or
reactivated carbon or in what amount, as long as the plant
properly treated the depot's waste water. Hence, Sain
argues, because the Army received what it bargained for--
namely, clean waste water--and did not rely on his false
statements, his claims were not fraudulent.
Initially, we note that this court has not explicitly ruled
that misrepresentations must be material in order to be
actionable under the federal fraud statutes, although our
cases strongly suggest that we would not so hold. See
United States v. Coyle, 63 F.3d 1239, 1244 (3d Cir. 1995)
("The negligence of the victim in failing to discover a
fraudulent scheme is not a defense to criminal conduct.")
(citation omitted). We need not decide this issue because,
as explained below, the evidence that the Army reasonably
relied on Sain's misrepresentations is substantial. Hence,
we leave the issue for another day.
A criminal defendant seeking reversal of his conviction
based on a claim of insufficiency of the evidence bears a
very heavy burden. Cooper, 121 F.3d at 133; Coyle, 63 F.3d
at 1243. This Court must "affirm the convictions if a
rational trier of fact could have found the defendant guilty
beyond a reasonable doubt, and the verdict is supported by
substantial evidence." Coyle, 63 F.3d at 1243 (citations
omitted). If there is substantial evidence to support the
jury's verdict, we will not reverse even though we might
have made a different decision based on the evidence.
10
Cooper, 121 F.3d at 133; United States v. Hannigan, 27
F.3d 890, 892 (3d Cir. 1994).
According to the indictment, the defendants engaged in
the following fraudulent scheme: Sain represented to Army
officials that the waste-water treatment plant would only
produce sufficiently pure water if each carbon change out
consisted of 5,000 pounds of virgin carbon per tank. Based
on these representations, the Government agreed to
reimburse AEC for the costs of this type of change out. The
contract modifications provided that the Army would
reimburse AEC for the amounts it actually spent. Sain's
representations were false; he knew that the plant would
operate effectively even if he used less expensive,
reactivated carbon in amounts of fewer than 5,000 pounds.
Most of the time, AEC used less than 5,000 pounds of less
expensive, reactivated carbon in the change outs, with Sain
keeping the difference between the amount he claimed he
spent and the amount he actually spent. To execute the
scheme, Sain made false statements in the claim forms and
hid from the Government information that he was using
reactivated carbon and less than 5,000 pounds per tank
per change out.
Our review of the record convinces us that there is more
than substantial evidence supporting the Government's
charge and establishing that Sain and AEC violatedS 1031.
First, ample evidence establishes that Sain represented to
the Army that 20,000 pounds of virgin carbon per change
out must be used to treat the waste water effectively. Army
technical representative Kinsinger and Lieutenant Colonel
Andrews testified that Sain repeatedly told them that only
virgin carbon would properly filter the water and that each
tank must be filled with 5,000 pounds in order to operate
effectively. Further, both Kinsinger and Andrews testified
that the Army relied on Sain's representations. Contrary to
Sain's argument, the Army required more than just the
purification of its waste water. Each time Sain made a
claim for expenses related to a change out, the Army
required him to certify that he was using 20,000 pounds of
virgin carbon per change out. Virtually all of the documents
Sain provided to the Army purported to show that AEC
either was using virgin carbon in 5,000-pound amounts or
11
using carbon with a price generally corresponding to the
then-market price of virgin carbon. It would not have been
necessary for Sain to submit such detailed documentation
containing such representations if the Army did not care
about the amount, type of carbon used and cost, and was
only concerned with clean waste water.
Second, the evidence establishes that the Army agreed to
pay AEC the full amount of the claim only if AEC used
20,000 pounds of virgin carbon per change out. According
to Contract Modification 14, AEC was entitled to an
adjustment of the original contract because of "costs
associated with the excessive polluent (sic) level." Contract
Modification 33 reaffirmed that language, providing that
payment was predicated on AEC's using the quantity and
quality of carbon described in Modification 14. Similarly,
the claim forms and accompanying certifications and
supporting documents submitted to the Army by AEC
represented that AEC used carbon costing $1.25 per
pound, the approximate market price of virgin carbon. If
the contract modifications allowed AEC to recoup afixed
amount regardless of his expenses, as Sain claims they did,
there would have been little need to submit certifications
and supporting documents. Further, Andrews testified that
he advised Sain both orally and in writing that AEC would
be reimbursed only if AEC provided sufficient evidence that
it actually expended the money claimed.
Third, Sain conceded a key aspect of the Government's
case. He admitted that the plant operated effectively even
though he used reactivated carbon and less than 20,000
pounds per change out. Indeed, in his defense he
contended that the jury should acquit him because he
properly purified the Army's waste water and that his use
of reactivated carbon in less than 20,000-pound lots was
irrelevant to his arrangement with the Army. The
effectiveness of reactivated carbon in amounts of less than
20,000 pounds was critical to the scheme because it
permitted Sain to pocket the price difference between the
quality and quantity of the carbon he told the Army he was
using and the quantity and quality he in fact used.
Finally, there was substantial evidence that Sain
submitted numerous false documents and hid from the
12
Government the truth that he was not using the quality
and quantity of carbon that he had represented. For
example, Sain provided to the Army Encotech invoice 326
and an accompanying letter which falsely claimed that AEC
had purchased carbon for the approximate market price of
virgin carbon when in fact it did not purchase that carbon;
caused his attorney, Keith Baker, to submit a false
summary of carbon usage and expenditures; and made
several other purchases of reactivated carbon from
Encotech, all the while representing to the Army that he
was using virgin carbon.
At trial, the lynchpin of Sain's defense was that he and
the Army negotiated a fixed price for each carbon change
out. He claimed that he was entitled to use whatever type
of carbon in whatever amount regardless of what the
documents showed and the representations he made. The
jury simply rejected Sain's characterization of his
contracted obligations with the Army. There was
substantial evidence to support the jury's verdict in light of
the documents, the testimony of the Government's
witnesses, and Sain's concessions in his testimony.
B.
Sain next argues that his convictions should be vacated
because the Government failed to establish that he devised
and executed a fraudulent scheme in connection with a
contract valued at more than the $1 million minimum
specified in the Act. See 18 U.S.C. S 1031(a) (outlawing
fraud in connection with government contract "if the value
of the contract ... is $1,000,000 or more"). He argues that
the evidence established that each of the contract
modifications was a separate contract and distinct from the
main contract. Thus, he claims, any fraud he may have
committed was in connection with each of the individual
contract modifications and not the main contract.
According to Sain, because the contract modifications were
valued at less than $1 million each, his fraud in connection
with them did not violate the Act. We disagree.
The Act provides:
13
Whoever knowingly executes, or attempts to execute,
any scheme or artifice with the intent--(1) to defraud
the United States; or (2) to obtain money or property
by means of false or fraudulent pretenses,
representations, or promises, in any procurement or
property or services as a prime contractor with the
United States or as a subcontractor 8 if the value of
the contract, subcontract, or any constituent part
thereof, for such property or services is $1,000,000 or
more shall ... be fined not more than $1,000,000 or
imprisoned not more than 10 years, or both.
18 U.S.C. S 1031(a).
Sain relies on United States v. Nadi, 996 F.2d 548 (2d
Cir. 1993), which holds that "the value of the contract
[under the Act] is determined by looking to the specific
contract upon which the fraud is based." Id. at 551. In
Nadi, the government awarded two contracts for the
production of individual salt and pepper packets for
American troops in the Persian Gulf. The defendants were
hired to perform the contracts as the only subcontractor.
Under the contracts, the government was permitted to
terminate performance unilaterally. If performance was
unilaterally terminated, the defendants retained the right to
claim reimbursement for out-of-pocket expenses associated
with their performance of the contract. The defendants
purchased extra equipment in anticipation of producing the
salt and pepper packets. The government, however,
exercised its right to terminate the contract and invited the
defendants to submit a claim for their out-of-pocket
expenses. The defendants submitted inflated and
fraudulent claims. They were indicted and convicted of
violating the Act.
On appeal, they challenged their convictions on the
ground that the Act was void for vagueness because it did
not define the phrase "value of the contract." The
government argued that, for purposes of the Act, the prime
contract is always the contract to which the courts should
look when determining whether the $1 million minimum is
met even when the defendant is a party, and commits a
fraud with respect only to a subcontract. The United States
Court of Appeals for the Second Circuit disagreed. After
14
examining the legislative history, it rejected the general rule
proferred by the government, reasoning that the contract
on which the fraud is based is the relevant contract,
whether it be a prime contract or a subcontract.
Sain acknowledges that the United States Court of
Appeals for the Fourth Circuit's holding in United States v.
Brooks, 111 F.3d 365 (4th Cir. 1997), is to the contrary. In
Brooks, the court held that "regardless of its privity with the
United States, any contractor or supplier involved in a
prime contract with the United States who commits a fraud
... is guilty so long as the prime contract, a subcontract, a
supply agreement, or any constituent part of such a
contract is valued at $1 million or more." Id. at 368-69.
We need not decide whether to follow Brooks or Nadi,
because we conclude that there was only one contract in
this case. The contract modifications pointed to by Sain
were simply that--modifications of the approximately $4.5
million original contract which ultimately increased in value
to approximately $7 million. As modifications, they were not
separate contracts and did not stand on their own; they
merely changed some of the terms of the original contract.
The modifications incorporated and referred back to the
terms of the original contract, explicitly stating that that
contract remained in effect. Each modification states that it
is a "modification of contract/order no. DAAC89-88-C-0008
[the original contract]," but did not reduce the
Government's financial liability under the contract. To the
contrary, the modifications increased the total liability to
almost $7 million. The modifications also state that "[a]ll
other terms and conditions in the contract remain[sic] the
same." Thus, the jury reasonably relied on this language in
the modifications in concluding that even though Sain used
the modifications to defraud the Army, the fraud
intrinsically involved the approximately $7 million contract.
C.
Sain next argued that the indictment improperly charged
him with a separate violation of the Act for each false claim
he submitted. He claims he should have been charged only
with a single count predicated on his devising the overall
15
fraudulent scheme. Because this claim requires
interpretation of a statute, we exercise plenary review. See
United States v. Cross, 128 F.3d 145, 147 (3d Cir. 1997).
By its plain language, the statute criminalizes each
knowing "execution" of the fraudulent scheme and not
simply devising the fraudulent scheme itself. (Emphasis
added). The statute's contemplation that defendants could
be convicted of "multiple counts" supports this reading. See
18 U.S.C. S 1031(c) (providing for a maximumfine of $10
million for defendants convicted of "multiple counts"). Our
reading of the statute is consistent with this and other
circuits' interpretation of the bank fraud statute, 18 U.S.C.
S 1344,5 which contains language virtually identical to the
Major Fraud Act. "The circuits that have addressed
multiplicity in the context of bank fraud have consistently
held that the ... statute `punishes each execution of a
fraudulent scheme rather than each act in furtherance of
such a scheme.' " United States v. Harris, 79 F.3d 223, 232
(2d Cir. 1996) (collecting cases from the Third, Fifth,
Seventh, Ninth, and Tenth circuits), cert. denied, 117 S. Ct.
223 (1996); See United States v. Schwartz, 899 F.2d 243,
248 (3d Cir. 1990); United States v. Rimell, 21 F.3d 281,
287 (8th Cir. 1994).
Our determination that a defendant may be punished for
each knowing execution of the fraudulent scheme does not
end the inquiry, however. Not every act in furtherance of a
fraudulent scheme is a separate "execution" of the scheme.
In determining whether an action is a separate execution of
a fraudulent scheme, courts look to whether the actions are
substantively and chronologically independent from the
overall scheme. See Harris, 79 F.3d at 232. In the instant
case, each of the 46 false claims constituted a separate
_________________________________________________________________
5. The bank fraud statute provides:
"Whoever knowingly executes, or attempts to execute, a scheme or
artifice--(1) to defraud a financial institution; or (2) to obtain
any of
the moneys, funds, credits, assets, securities, or other property
owned by, or under the custody or control of, afinancial
institution,
by means of false or fraudulent pretenses, representations, or
promises; shall be fined not more than $1,000,000 or imprisoned
not more than 30 years or both."
16
execution of the scheme. Each was substantively
independent from the overall scheme because each sought
to obtain a separate amount of money from the government
and caused the government a distinct loss. There is no
evidence that the defendants had determined a specific
amount of money that they wanted to obtain and took
several steps to get that single amount. Rather, the
evidence established that the defendants intended to obtain
as much money as possible. Further, the false claims were
chronologically distinct from each other in that each was
submitted weeks or months apart over an approximately
three-and-one-half-year period. In sum, we hold that a
defendant may be separately punished under the Major
Fraud Act for each execution of the fraudulent scheme and
that each of Sain's false claims constituted a
chronologically and substantially separate execution of the
fraudulent scheme.
D.
Sain next argues that he cannot be convicted of violating
the Act because the Act only permits conviction of an entity
or individual that actually contracted with the United
States, and AEC, not Sain, was the contracting party. The
indictment alleged that Sain aided and abetted AEC in the
commission of the violations of the Act. See 18 U.S.C. S 2.6
Sain contends that he cannot be convicted under the theory
that he aided and abetted AEC in violating the Act because
he owned and completely controlled AEC. According to
Sain, there is no other entity for him to aid or abet because
his ownership and control of AEC merge him and
corporation into a single entity. Sain relies on United States
v. Stevens, 909 F.2d 431 (11th Cir. 1990), which holds that
an individual agent of a corporation cannot be convicted of
conspiracy when the only other possible party to the
_________________________________________________________________
6. Section 2 provides: "(a) Whoever commits an offense against the
United States or aids, abets, counsels, commands, induces or procures
its commission, is punishable as a principal[;] (b) Whoever willfully
causes an act to be done which if directly performed by him or another
would be an offense against the United States, is punishable as a
principal."
17
conspiracy is the agent's corporation. This is a legal
argument, and we exercise plenary review. See United
States v. Jefferson, 88 F.3d 240, 241 (3d Cir.), cert. denied,
117 U.S 536 (1996).
Sain's argument is pure sophistry; its fundamental
inconsistency is its fatal flaw. It is inconsistent because, on
the one hand, Sain contends that AEC, because it is a
corporation, is a separate entity that entered into the
contract with the Army, thereby insulating him personally
from any criminal liability for the fraud. On the other hand,
relying on Stevens, Sain asserts that given his stock
ownership and control of AEC, he and the corporation are
actually the same entity and, therefore, he cannot, in
essence, aid and abet himself.
Although a corporation has certain limitations imposed
by the particular statute permitting its creation, it is a
separate legal entity, with an existence "independent of
individuals who compose it." William M. Fletcher, Fletcher
Cyclopedia of the Law of Private Corporations S 5, at 441
(Permanent ed. 1990); see also Wooddale, Inc. v. Fidelity
and Deposit Co. of Maryland, 378 F.2d 627, 631 (8th Cir.
1967). A corporation is not in reality a person, but the law
regards it as "distinct and separate from the individual
stockholders. It has a real existence with rights and
liabilities as a separate legal entity." Fletcher S 7, at 445.
This is true even if a single individual owns and controls all
of the corporation's stock. See id. S 14, at 463.
One of the principal reasons why individuals choose the
corporate form is that it is a separate entity and offers
protection from personal liability for its debts. See
Walkovszky v. Carlton, 223 N.E.2d 6, 7 (N.Y. 1966) ("The
law permits the incorporation of a business for the very
purpose of enabling its proprietors to escape personal
liability"). Like individuals, corporations may sue and be
sued, enter into contracts, see N.J. Stat. Ann. S 14A:3-1(1)
(listing duties and privileges of corporation); 15 Pa. Con.
Stat. Ann. S 1502(a)(2) (same), and be separately convicted
of and sentenced for criminal offenses. See United States v.
Hughes Aircraft Co., Inc., 20 F.3d 974, 978 (9th Cir. 1993).
AEC, because it is a corporation, is a separate legal entity,
even though Sain owned all the stock. Thus, it has the
18
capacity of being aided and abetted. To hold otherwise
would allow the controlling stockholder of a corporation to
enjoy the benefits of the corporate form, protection from
personal liability for corporation's debts, without accepting
the burden of assuming criminal responsibility when the
individual causes the corporation to commit a crime.
Indeed, Sain, by his conduct, recognized and exploited
AEC's existence as a separate entity; he caused AEC to sign
the contract with the Army in order to protect himself from
personal liability. If a corporation is permitted to perform
the wide range of functions listed above, we see no reason
why it cannot be used by its officers and agents to commit
a crime as contemplated by 18 U.S.C. S 2(b).
Even assuming that Sain is correct that it was impossible
for him to conspire with AEC, that conclusion does not
preclude imposition of aiding and abetting responsibility.
Arguably, Sain could not conspire with AEC because AEC
could not form the mental state required to conspire with
another. This is because a corporation is a conspirator only
pursuant to respondeat superior liability. If an agent of the
corporation conspires with another individual, the
corporation for which the individual is the agent may be
criminally liable. However, there must be at least two
natural individuals for a conspiracy involving a corporation
to exist because two entities must have the required mental
state to form a conspiracy. The aiding and abetting statute
allows for broader liability and does not require proof that
an unwitting entity being used to commit the crime
possessed any mental state. See 18 U.S.C.S 2(b) ("Whoever
willfully causes an act to be done which if directly
performed by him or another would be an offense against
the United States, is punishable as a principal."); see also
United States v. Curran, 20 F.3d 560, 567 (3d Cir. 1994) ("A
defendant charged under section 2(b) with willfully causing
another person to file a false report, can be convicted even
if that intermediary was unaware that the document was
inaccurate.") (citations omitted). Only the person causing
the unwitting entity to act must possess the knowing
mental state. See 20 F.3d at 567. Therefore, an individual
who causes a corporation to commit a crime is criminally
liable for the corporation's criminal conduct as an aider and
abettor even if the corporation does not act with a knowing
19
mental state. United States v. Dotterweich, 320 U.S. 277,
284 (1943). For that reason, conviction of Sain was proper
even assuming arguendo that Sain caused AEC to
unwittingly commit the crime. Thus, the district court
committed no error in sustaining Sain's conviction as an
aider and abettor.
E.
Sain next argues that the district court erred when it
refused to admit the testimony of defense expert Henry
Foster, a metallurgist, on the ground that Foster's
testimony was irrelevant and confusing. According to Sain's
proffer, Foster would have testified that it was against
Sain's interest to perform unnecessary carbon change outs
because the change outs damaged the adsorbers. Foster
also would have testified that he observed signs that carbon
had collected on the sides of the adsorbers and had been
scraped from that position. This second aspect of Foster's
testimony would have rebutted the Government's
suggestion that Sain allowed the carbon build up along the
inside of the tanks making his calculation of the amount of
his use of carbon based on volume inaccurate. This court
reviews the district court's conclusion to exclude evidence
for abuse of discretion. United States v. Eufrasio, 935 F.2d
553, 571-72 (3d Cir. 1991).
The district court excluded the part of Foster's testimony
dealing with Sain's disincentive to perform unnecessary
change outs, concluding that it was not relevant and was
misleading. The court reasoned that the Government had
not claimed that Sain performed unnecessary change outs
or that the type and amount of carbon that Sain used were
ineffective. Hence, the testimony was misleading and
irrelevant, according to the district court, because Sain was
improperly attempting to suggest to the jury that he was
permitted to make false claims to recoup the damages
made to the tanks.
This conclusion was not an abuse of discretion. The
Government's theory was not that Sain used ineffective
quantities or qualities of carbon. To the contrary, the
Government agreed that Sain had performed the number of
20
change outs claimed, had not performed any unnecessary
change outs, and agreed that the type and amount of
carbon used was entirely effective in treating the waste
water. Hence, Foster's testimony did not relate directly or
indirectly to any issue in the case or corroborate or dispute
any evidence or contention of the parties. The court also
correctly ruled that the evidence had the potential to
mislead the jury into believing that Sain was permitted to
recoup the alleged damage to AEC's tanks by submitting
false claims. In complicated cases such as this, where
jurors are required to sift through hundreds or even
thousands of documents, hear the testimony of dozens of
witness, and consider such esoteric issues as the relative
effectiveness of virgin and reactivated carbon or the level of
contaminants in waste water, the district court must be
permitted to keep the jury's attention focused on the issues
by excluding irrelevant and even misleading evidence.
As to the portion of Foster's testimony relating to his
observation that carbon had built up on the side of the
adsorbers and been scraped away, contrary to Sain's claim,
the district court specifically stated several times that
Foster would be permitted to testify as to this matter. Sain
declined to call Foster for this purpose. Hence, the district
court committed no error.
F.
Sain next argues that the district court erred when it
determined that he inflicted losses of $597,124 on the
United States as a result of his fraudulent scheme. He
argues this error affected both his base offense level under
the United States Sentencing Guidelines and the amount of
restitution imposed. The findings of fact underlying the
district court's determination of the loss for guidelines
purposes are subject to review for clear error. United States
v. Maurello, 76 F.3d 1304, 1308 (3d Cir. 1996). The
appropriateness of a particular restitution award is
reviewed for abuse of discretion. Id.
Specifically, Sain claims the district court committed two
errors. First, he argues that the court underestimated the
amount of carbon used in the change outs because the
21
court did not consider 25,000 pounds referred to in an AEC
employee's affidavit submitted by Sain prior to sentencing
and also rejected Sain's contention that the 1,000-pound
bags of carbon, in fact, contained 1,400 pounds. Second,
Sain contends that the court should have subtracted from
the loss the amounts he paid for virgin carbon when he
used virgin carbon.
The district court did not err in rejecting the affidavit
submitted by Sain, especially because the assertion in the
affidavit regarding the 25,000 pounds was uncorroborated
and had not been subjected to cross-examination. Instead,
the court based its findings on much more reliable
evidence: a government agent's testimony and the other
evidence produced at trial. Further, the district court
properly rejected the claim that the 1,000-pound bags
actually contained 1,400 pounds of carbon. There was
ample evidence introduced at trial that the bags only
contained between 1,000 and 1,075 pounds of carbon and
that any additional weight was water which could not
properly be included in the calculation. For the foregoing
reasons, the district court's findings were not clearly
erroneous and its imposition of the restitution award was
not an abuse of discretion.
The district court also committed no error in refusing to
give Sain credit for his occasional use of virgin carbon in
the change outs. Indeed, the heart of the scheme charged
and proved was that reactivated carbon worked as
effectively as virgin carbon. Thus, there was never any need
to use virgin carbon and Sain's representations that virgin
carbon had to be used allowed him to charge the
Government unnecessary sums.
G.
Finally, Sain challenges the district court's increase of his
base offense level under the sentencing guidelines based on
a finding that he possessed a special skill and used that
skill to significantly facilitate his commission of the offense.
See U.S.S.G. S 3B1.3. On the basis of this finding, the
district court increased Sain's offense level by two points.
This court reviews for clear error the district court's finding
22
that Sain possessed a special skill and used it to
significantly facilitate the offense. See Maurello, 76 F.3d at
1308. Relying on United States v. Hickman, 991 F.2d 1110,
1112-13 (3d Cir. 1993), Sain argues that his special skill
did nothing more than enable him to convince the Army to
trust him; once he gained this trust, the fraud he
perpetrated was "garden variety."
To impose this enhancement, the district court mustfind
that: (1) the defendant possessed a special skill and (2)
used it to significantly facilitate the commission of the
offense. See Maurello, 76 F.3d at 1314. Here, the district
court found that Sain possessed special skills relating to
his education as a professional engineer, his experience
with waste-water treatment, and his "intimate knowledge"
of the design and workings of the AEC waste-water
treatment plant. The court concluded that those skills gave
credence to Sain's insistence to the Army that only virgin
carbon and only 20,000 pounds of it per change out would
properly treat the waste water. The court also concluded
that Sain's skills enabled him to determine that less
expensive carbon and less of it would still clean the waste
water as effectively as the amounts and types described in
the claims he submitted to the Army.
There was ample credible evidence produced at trial to
support these findings. Without those skills and
credentials, Sain could not have gained the Army's
confidence and convinced it to use the amounts and type of
carbon upon which he insisted. Sain's skills and guile not
only influenced the Army to rely on him but also deterred
it from independently determining that less expensive and
fewer pounds of carbon would have been equally effective.
Indeed, the fraud was anything but garden variety. It is
hard to imagine how anyone without a special skill would
be capable of committing such a complex fraud as the one
in this case.
IV.
Accordingly, the judgment and sentence of the district
court will be affirmed.
23
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
24