United States v. John Steven LeRose

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
UNITED STATES OF AMERICA,
Plaintiff-Appellant,
v. No. 99-4886
JOHN STEVEN LEROSE,
Defendant-Appellee.
Appeal from the United States District Court
for the Southern District of West Virginia, at Charleston.
Robert J. Staker, Senior District Judge.
(CR-99-80)
Argued: May 3, 2000
Decided: July 13, 2000
Before MOTZ and TRAXLER, Circuit Judges, and
Frank W. BULLOCK, Jr., United States District Judge for the
Middle District of North Carolina, sitting by designation.
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Vacated and remanded by published opinion. Judge Traxler wrote the
opinion, in which Judge Motz and Judge Bullock joined.
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COUNSEL
ARGUED: Susan Marie Arnold, Assistant United States Attorney,
Charleston, West Virginia, for Appellant. Benjamin Lee Bailey, BAI-
LEY & GLASSER, L.L.P., Charleston, West Virginia, for Appellee.
ON BRIEF: Rebecca A. Betts, United States Attorney, Charleston,
West Virginia, for Appellant.
_________________________________________________________________
OPINION
TRAXLER, Circuit Judge:
The United States appeals the district court's downward sentencing
departure in the case of John Steven LeRose ("LeRose"). We vacate
the sentence and remand for resentencing.
I.
On June 10, 1999, LeRose pled guilty to a two-count information.
Count One accused LeRose of executing, aiding and abetting a
scheme and artifice to defraud a financial institution in violation of 18
U.S.C.A. § 1344 (West 2000). Count Two accused LeRose of filing
a false income tax return in violation of 26 U.S.C.A. § 7206(1) (West
1989). These charges stemmed from an elaborate check-kiting
scheme in which three of LeRose's brothers also participated.1
As the owners of several automobile dealerships and other business
interests, the LeRose family occupied a prominent position in the
community of Summersville, West Virginia. LeRose served as mayor
of the town from 1985 until his conviction in 1999. However, evi-
dence presented to the grand jury indicated that the LeRose brothers
frequently used corporate funds to pay for extravagant personal
expenses. As the businesses became less profitable, the LeRose broth-
ers concocted a check-kiting scheme, involving personal and business
checking accounts, in order to keep the businesses afloat. The three
banks used by the LeRoses were First Community Bank, Inc. ("First
Community" or "the Bank"), United National Bank, and Bank One.
The kiting scheme began on a small scale in January 1995 and grew
to such an extent that the massive number of checks involved gener-
ated approximately $64,000 in insufficient funds fees per year at First
Community alone. Unaware of the scope of the scheme and believing
that the LeRose family would eventually rectify the problems with
their accounts, the chief executive officer of the Summersville branch
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1 "Check kiting, at root, is a plan designed to separate the bank from
its money by tricking it into inflating bank balances and honoring checks
drawn against accounts with insufficient funds." United States v.
Doherty, 969 F.2d 425, 428 (7th Cir. 1992).
2
of First Community avoided a confrontation with the LeRoses over
their irregular banking practices. The kiting scheme was eventually
uncovered by accident when a United National Bank employee incor-
rectly coded a LeRose check which led to an internal review. United
National Bank and Bank One then returned checks written on other
LeRose accounts, primarily accounts at First Community, and thus
protected themselves from loss. In the end, First Community suffered
a loss of $3,364,958.
In sentencing LeRose, the district court adopted the guideline
application in the presentence report, which imposed a base offense
level of six for the kiting scheme, see U.S. Sentencing Guidelines
Manual ("U.S.S.G.") § 2F1.1(a) (1998), increased by thirteen levels
based upon the $3,364,958 loss to First Community. See U.S.S.G.
§ 2F1.1(b)(1)(N). LeRose received an additional two-level enhance-
ment because the fraud involved more than minimal planning, see
U.S.S.G. § 2F1.1(b)(2), resulting in a total offense level of twenty-one
for Count One. LeRose's base offense level for Count Two, which
resulted in a $7,678.24 tax loss to the federal government, was nine.
See U.S.S.G. §§ 2T1.1(a)(1), 2T4.1(D). However, because the two
offenses were closely related, they were grouped pursuant to U.S.S.G.
§ 3D1.2 for an offense level of twenty-one. LeRose then received a
three-level decrease for acceptance of responsibility, see U.S.S.G.
§ 3E1.1, yielding a total offense level of eighteen. With a Category
I criminal history, LeRose's guideline range was twenty-seven to
thirty-three months incarceration. See U.S.S.G. Ch.5, Pt.A (Sentenc-
ing Table).
Departing from the guidelines, the district court sentenced LeRose
to only twelve months and one day in prison. The court gave two rea-
sons for its action. First, the court was of the opinion that the
$3,364,958 loss to First Community overstated the seriousness of the
offense. See U.S.S.G. § 2F1.1, comment. (n.11). Second, the court
decided that LeRose was entitled to a reduction for substantial assis-
tance under U.S.S.G. § 5K1.1 even though the government declined
to make such a motion. The government appeals both grounds for
departure.
II.
We review the sentencing court's downward departure for abuse of
discretion. See Koon v. United States, 518 U.S. 81, 91 (1996) (holding
3
that "appellate court[s] should not review the departure decision de
novo, but instead should ask whether the sentencing court abused its
discretion"); see also United States v. Barber, 119 F.3d 276, 283 (4th
Cir. 1997) (en banc) (observing that the Supreme Court in Koon
"made clear that it intended to adopt a traditional abuse of discretion
standard").
A.
First, the government alleges that the district court abused its dis-
cretion when it departed from the guidelines on the belief that the cal-
culation of loss overstated the seriousness of LeRose's fraudulent
conduct. The commentary to U.S.S.G. § 2F1.1 provides:
In a few instances, the loss determined under subsection
(b)(1) may overstate the seriousness of the offense. This
may occur, for example, where a defendant attempted to
negotiate an instrument that was so obviously fraudulent
that no one would seriously consider honoring it. In such
cases, a downward departure may be warranted.
U.S.S.G. § 2F1.1, comment. (n.11). In determining that the
$3,364,958 loss to First Community overstated the seriousness of the
offense, the district court cited four factors:
- the Bank, upon discovering that something was amiss
with the LeRoses' checking accounts, delayed taking
effective action because it believed the LeRoses had the
financial wherewithal to pay;
- the Bank's conduct led the LeRoses to believe that their
actions were "less unlawful and involving far less culpa-
bility than the law attributes to check kiting";
- the Bank's chief executive officer mistakenly believed
that the Bank profited from the fees generated by over-
drafts; and
- the Bank reached a settlement with the LeRoses on
repayment.
4
J.A. 261. At the outset we note that despite the district court's dis-
agreement with the Bank's handling of the LeRoses' accounts, there
is absolutely no evidence that anything done by the Bank affected the
amount of its loss. In fact, there is no dispute that prompter action by
First Community once the scheme was discovered would not have
affected the amount of loss. See United States v. Carey, 895 F.2d 318,
323 (7th Cir. 1990) (holding that when "defendant individually
orchestrated and carried out the fraud on the bank," departure for the
loss overstating the seriousness of the offense was unwarranted
because defendant's "actions were the sole cause of the loss to the
bank"). The $3,364,958 loss was real, not inflated, and in no way
overstated the seriousness of the LeRoses' intricate scheme. More-
over, the LeRoses' kiting bears no resemblance to the example given
in the guideline where "no one would seriously consider honoring" an
obviously fraudulent instrument. U.S.S.G. § 2F1.1, comment. (n.11).
The various checks were drawn on accounts at three reputable finan-
cial institutions and were facially valid. Consequently, the district
court's reliance upon U.S.S.G. § 2F1.1, comment. (n.11) to depart
was without foundation.
However, our inquiry does not end here. The district court enumer-
ated four specific reasons why a downward departure was warranted.
Though used by the district court to support departure based on an
overstatement of the seriousness of the offense, the enumeration more
accurately reflects a belief that there was victim misconduct and
extraordinary restitution. Accordingly, we will examine these grounds
to determine if they afford a basis for departure.
A district court must "impose a sentence of the kind, and within the
range" resulting from a proper application of the guidelines "unless
the court finds that there exists an aggravating or mitigating circum-
stance of a kind, or to a degree, not adequately taken into consider-
ation by the Sentencing Commission in formulating the guidelines
that should result in a sentence different from that described." 18
U.S.C.A. § 3553(b) (West Supp. 2000). In analyzing the consider-
ation given by the Commission to a potential ground for departure, "a
sentencing court must focus on whether the factor is taken into
account by the guidelines, policy statements, or commentary and
whether it is encompassed within the heartland of situations to which
the applicable guideline was intended to apply." Barber, 119 F.3d at
5
280. The heartland, crucial to a proper analysis, is defined as "a set
of typical cases embodying the conduct that each guideline
describes." U.S.S.G. Ch.1, Pt.A, intro. comment. 4(b). In deciding
whether a factor is an appropriate ground for departure, a sentencing
court must ascertain whether the factor is forbidden, encouraged, dis-
couraged, or unmentioned by the Sentencing Commission as a ground
for departure. See Koon, 518 U.S. at 94-95; see also Barber, 119 F.3d
at 280. If the factor is encouraged, as are victim misconduct and resti-
tution, see U.S.S.G. §§ 5K2.10, 3E1.1, comment. (n.1(c)), "the court
is authorized to depart if the applicable Guideline does not already
take it into account." Koon, 518 U.S. at 96. However, if the applicable
guideline has taken the encouraged factor into account, a court may
depart "only if the factor is present to an exceptional degree or in
some other way makes the case different from the ordinary case
where the factor is present." Id.
1. Victim Misconduct
The conduct of First Community was central to the district court's
determination that a departure in sentencing was warranted. Accord-
ing to the guidelines, "[i]f the victim's wrongful conduct contributed
significantly to provoking the offense behavior, the court may reduce
the sentence below the guideline range to reflect the nature and cir-
cumstances of the offense." U.S.S.G. § 5K2.10. The factors enumer-
ated in § 5K2.10 are tailored to crimes involving violence, and the
guideline makes clear that only in unusual cases will victim miscon-
duct "warrant a reduced penalty in the case of a non-violent offense."
Id. By way of example of an appropriate non-violent case warranting
departure, the guideline states that "an extended course of provocation
and harassment might lead a defendant to steal or destroy property in
retaliation." Id. In interpreting § 5K2.10, we have emphasized that not
only must the victim's conduct be provocative, but"the victim must
actually have done something wrong." United States v. Morin, 80
F.3d 124, 128 (4th Cir. 1996).
The allegations of misconduct in the present case were based on
the Bank's delay in confronting the LeRoses and the chief executive
officer's mistaken belief that fees generated by overdrafts were profit-
able. Finding that "the so-called and alleged victim invited what hap-
pened to it," the district court concluded that the case fell outside the
6
heartland of U.S.S.G. § 2F1.1. J.A. 220. We believe that the district
court abused its discretion in departing from the guidelines based on
the Bank's handling of the LeRose accounts. The Bank was not a "so-
called and alleged victim," but an actual victim that lost $3,364,958
because of an elaborate check-kiting scheme. In cases of non-violent
offenses, the guideline provides that "provocation and harassment" of
the defendant may warrant a departure for victim misconduct.
U.S.S.G. § 5K2.10. Provocation necessarily involves deliberate con-
duct that stirs a defendant to action, and such misconduct is simply
absent from the present case--the Bank in no way goaded the
LeRoses into launching the kiting operation. On the contrary, the
record reveals that the LeRoses spent a great deal of time planning
and coordinating their efforts to defraud the three banks.
Labeling First Community as a provocateur also ignores the fact
that kiting schemes work because the different banks involved do "not
see what [is] going on with each of the other . . . accounts--that [is]
how the kite [is] able to fly." United States v. Yoon, 128 F.3d 515, 525
(7th Cir. 1997). We find completely unavailing the argument by
LeRose that the Bank's inaction somehow lessens his culpability so
as to entitle him to a reduction in sentence. Clearly, the LeRoses'
mastery of manipulation rather than the Bank's conduct accounts for
the enormous loss.
Furthermore, LeRose can take no solace in the fact that the chief
executive officer of the Summersville branch believed that overdraft
fees were profitable. Bank officers from First Community testified
before the grand jury that overdraft fees represented "reimbursement
for overhead that a bank must utilize to return checks" and in no way
represented profit to the bank. J.A. 84. In fact, one officer testified
that the $64,000 assessed in fees during the last year of the check-
kiting scheme was inadequate and that the Bank actually lost $44,000
in the wash because it was forced to borrow money to fund the
LeRose accounts. Morever, undue emphasis on the chief executive
officer's attitude toward fees gives the illogical appearance that the
bank gladly exchanged $3 million for $64,000 in fees. Again, this
ignores the deception employed by the LeRoses and the efficacy of
a kiting scheme which defrauds multiple banks having no knowledge
of account activity at the other financial institutions. See Yoon, 128
7
F.3d at 525. Thus, the chief executive officer's misconception con-
cerning overdraft fees is of no help to LeRose.
In sum, the evidence did not establish that First Community's lack
of action provoked or led to the fraud. Consequently, there was no
"misconduct" by the victim as contemplated by the guidelines and
therefore no grounds for departure based on the Bank's conduct.
Hence, the district court abused its discretion in basing its decision to
depart on the Bank's response to the problem LeRose created.
2. Restitution
The district court also relied for its departure on the July 29, 1999
final settlement with the Bank which entailed the LeRoses executing
a note and agreeing to repay the $3,364,958. If all payments are made
as scheduled, the Bank will be made whole in approximately four or
five years. This court has stated that "restitution, although taken into
account in the guideline permitting a reduction for acceptance of
responsibility [U.S.S.G. § 3E1.1, comment. (n.1(c))], can provide a
basis for a departure when present to such an exceptional degree that
it cannot be characterized as typical or `usual.'" United States v. Hair-
ston, 96 F.3d 102, 108 (4th Cir. 1996).
In Hairston, we held that restitution equaling less than half of the
embezzled funds and resulting from the generosity of friends was not
exceptional. Id. at 108-09. We further noted that payment of such a
small percentage of the sum owed normally does not"constitute an
exceptional circumstance meriting departure." Id. at 108. Indeed,
extraordinary efforts at making restitution are readily apparent when
they occur. For example, the Eighth Circuit recently upheld a depar-
ture when the defendant began making restitution one year before the
indictment, worked sixteen hours per day to maintain the value of his
assets, relinquished his life insurance policy and his wife's certificate
of deposit, gave up his home, and paid nearly ninety-four percent of
the amount owed to the victim before sentencing. See United States
v. Oligmueller, 198 F.3d 669, 672 (8th Cir. 1999). In the present case,
the LeRoses have merely promised to make full restitution to First
Community by some date four or five years in the future. Though we
have no reason to doubt that the LeRoses will eventually make full
restitution, there is nothing exceptional about the settlement agree-
ment with the Bank. The LeRoses fraudulently obtained from the
8
Bank in excess of $3 million and have agreed to repay the funds. This
shows some responsibility with regard to their obligations, but not to
a degree "that is truly extraordinary and substantially in excess of that
which is ordinarily present." United States v. Weinberger, 91 F.3d
642, 645 (4th Cir. 1996) (internal quotation marks omitted). Hence,
the district court abused its discretion in departing downward based
on the restitution agreement.
B.
The district court also departed from the guidelines because it con-
cluded that LeRose "was entitled to a motion for substantial assis-
tance on his behalf from the Government." J.A. 247.2 The guidelines
provide that "[u]pon motion of the government stating that the defen-
dant has provided substantial assistance in the investigation or prose-
cution of another person who has committed an offense, the court
may depart from the guidelines." U.S.S.G. § 5K1.1 (emphasis added).
As a general rule, "[t]he government has the power to make such
motions, but not a duty to do so." United States v. Maddox, 48 F.3d
791, 796 (4th Cir. 1995); see also United States v. Schaefer, 120 F.3d
505, 508 (4th Cir. 1997) ("Unlike all other grounds for departure, in
order for a district court to base a departure upon a defendant's sub-
stantial assistance to law enforcement authorities, the Government
must first move the district court to do so."). Nonetheless, courts may
review a prosecutor's refusal to file a motion for substantial assistance
and grant relief if the refusal is based on an unconstitutional motive
such as race or religion, or is not rationally related to a permissible
government objective. See Wade v. United States , 504 U.S. 181, 185-
86 (1992); Maddox, 48 F.3d at 795.
Before a court may order discovery or hold an evidentiary hearing
on the government's refusal to make the motion, the defendant must
first make a "substantial threshold showing" that the refusal resulted
from improper or suspect motives. Wade, 504 U.S. at 186 (internal
quotation marks omitted). Mere allegations of unconstitutional
motives on behalf of the prosecutor are not enough to carry this bur-
den. See United States v. Wallace, 22 F.3d 84, 87 (4th Cir. 1994)
(explaining that "Wade imposes upon a defendant the burden to do
_________________________________________________________________
2 LeRose does not argue that he was entitled to the substantial assis-
tance motion because of a provision in the plea agreement.
9
more than merely allege unconstitutional motive in order to require
judicial inquiry").
In attempting to make a threshold showing, LeRose argued that the
assistance he provided to the government was almost identical to that
provided by his brother Rodney who received a substantial assistance
motion. LeRose averred that he and Rodney were directed by the
same federal agents, approached many of the same suspects, sub-
jected their families to similar dangers, and performed their assigned
duties in good faith. Based on these assertions, LeRose contended that
the government's refusal to make a substantial assistance motion for
him was not rationally related to a legitimate government end.
As an initial matter the proffer by LeRose was clearly insufficient
to identify and demonstrate any improper basis for the government's
decision, and at this point the court's inquiry should have ended.
However, instead of deciding whether LeRose had made a "substan-
tial threshold showing," the district court impermissibly shifted to the
hearing portion of the Wade framework and directed the government
to respond with reasons for refusing to make the motion on LeRose's
behalf. The government explained that it had evaluated the assistance
of both brothers and concluded that LeRose's assistance was not as
substantial as Rodney's. The government pointed out that LeRose's
cooperation, though undertaken in good faith, did not lead to any
charges, arrests, or filings of informations. The government further
observed that LeRose never testified at trial or in front of a grand jury.
As for the comparison with Rodney's efforts, the government noted
that Rodney offered extensive assistance in an investigation of a cor-
rupt state senator who later pled guilty to various charges. In the
course of the investigation, Rodney participated in the taping of
approximately thirty-five or forty meetings with the senator. While
LeRose also played a role in the investigation of the senator, the
materials submitted by LeRose to the district court indicated that this
was limited to "telephone tag" and that LeRose never made contact
with the senator.
After hearing the government, the district court concluded that the
government's conduct deprived LeRose of "due process and equal
protection under the specific facts of this case, and . . . no legitimate
government objective is served by such disparate treatment of
[LeRose]." J.A. 234. We disagree. First, as previously stated, LeRose
10
failed to make a substantial threshold showing as required by Wade.
The lion's share of the information provided to the district court sim-
ply cataloged LeRose's efforts. Explanations of the extent of a defen-
dant's assistance do not entitle a defendant to a hearing. See Wade,
504 U.S. at 187. Nor does the mere fact that the government made the
motion for one brother, but refused to make it for the other brother,
absent a suspect reason, establish a substantial threshold showing.
"[M]otions for substantial assistance do not require the government to
reward the least culpable or the most helpful codefendant." Maddox,
48 F.3d at 796. When a defendant does not demonstrate an improper
refusal by the government to make a § 5K1.1 motion, the inquiry
comes to an end. Second, even if we were to conclude that LeRose
carried his burden and made a substantial threshold showing, the gov-
ernment's decision was clearly rationally related to a legitimate gov-
ernment end. Rodney's significant efforts in obtaining the conviction
of the state senator obviously played a large part in the government's
decision to make a motion for substantial assistance and cannot be
compared to LeRose's unsuccessful attempts to establish contact with
the senator. In this important regard, LeRose's assistance simply did
not match that of his brother. See United States v. Doe, 170 F.3d 223,
224 (1st Cir. 1999) (noting that when the government receives no
benefit from a defendant's efforts or information, the government's
refusal to make a substantial assistance motion is rationally related to
a legitimate government end). Affirmation of the district court's
departure based on LeRose's assistance would encourage criminal
defendants to challenge the government's refusal to make such a
motion on the mere ground that they cooperated, a result contrary to
the established law of this circuit. See Wallace , 22 F.3d at 87 (con-
cluding that full and truthful cooperation does not by itself entitle a
defendant to a substantial assistance motion).
In sum, the district court erred in departing from the guidelines on
the ground that LeRose was entitled to a substantial assistance motion
from the government.
III.
For the foregoing reasons, we vacate LeRose's sentence and
remand for resentencing in accordance with this opinion.
VACATED AND REMANDED
11