United States v. Frith, James

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 04-2364
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
v.
JAMES FRITH, JR.,
Defendant-Appellant.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 01 CR 502—Rebecca R. Pallmeyer, Judge.
____________
ARGUED DECEMBER 5, 2005—DECIDED AUGUST 29, 2006
____________
Before POSNER, KANNE, and SYKES, Circuit Judges.
SYKES, Circuit Judge. A jury convicted James Frith, Jr.
of two securities law violations (out of twenty-three charges)
for operating his registered broker-dealership without
enough money in its reserve accounts. His convictions, the
result of financial shortfalls on a single day in 1997, were
the culmination of a broader, seventeen-month charade
during which Frith manipulated millions of dollars on his
firm’s books and filed false reports with regulators to
conceal the true financial status of his firm. The district
court sentenced Frith to 97 months in prison and ordered
that he pay restitution of roughly $1.2 million.
On appeal Frith challenges both his sentence and the
restitution order. He argues that the district court miscalcu-
2 No. 04-2364
lated the Sentencing Guidelines range based on losses
attributable to noncriminal conduct and improperly applied
enhancements. He also contends the restitution order was
based on losses from relevant conduct (rather than the
offenses of conviction), which is not a permissible basis for
restitution.
We affirm the district court’s loss calculation and applica-
tion of the guidelines. Frith’s guidelines range was based on
properly applied enhancements and losses attributable to
his crimes of conviction and relevant criminal conduct. We
remand, however, for limited proceedings pursuant to
United States v. Paladino, 401 F.3d 471, 484 (7th Cir. 2005)
because Frith was sentenced prior to the Supreme Court’s
decision in United States v. Booker, 543 U.S. 220 (2005) and
the district judge applied the guidelines as mandatory. We
vacate the restitution order and remand for further proceed-
ings. Restitution must be based on the offense of conviction,
not relevant conduct, and in this case the government did
not link the restitution amount to the specific conduct for
which Frith was convicted.
I. Background
James Frith was the sole shareholder of Chicago Partner-
ship Board (“CPB”), a broker-dealer firm that matched
buyers and sellers of limited partnership interests. Federal
securities law requires firms like CPB to keep at least
$250,000 in a net capital account and enough in a Special
Reserve Account to cover the debts owed to customers. To
assure investors and regulators of its compliance, CPB had
to file monthly reports with the National Association of
Securities Dealers (“NASD”), a private body empowered by
the Securities and Exchange Commission to oversee the
activities of broker-dealers.
Sometime in the mid-1990s, CPB began having difficulty
maintaining its net capital and Special Reserve require-
No. 04-2364 3
ments. Frith manipulated millions of dollars on CPB’s
books to hide the shortfalls. He personally assumed debts
CPB owed to its customers by having CPB write him checks
for the amount of the debt and executing broker-dealer
liability assumption agreements. Once CPB had the debt off
its books, the amount needed to satisfy its Special Reserve
requirements decreased correspondingly. Frith then would
write CPB a check for the same amount—or almost the
same amount (he put some of the money into his other
companies)—which made it appear as though Frith had
infused capital into CPB.
This activity came to an end in late 1997. Regulators
caught CPB without enough money in its net capital and
Special Reserve accounts on September 30, 1997, and
shut it down by early December. CPB’s customers and
creditors lost millions. During ensuing bankruptcy proceed-
ings, clients recovered some of what they were owed, but
the Securities Investor Protection Corporation (“SIPC”),
which guarantees customers’ claims with failed brokerage
firms up to $500,000 (much the same way the Federal
Deposit Insurance Corporation guarantees bank deposits up
to $100,000), had to make up much of the shortfall. It
kicked in some $632,000 to make good on its guarantees.
The bankruptcy estate also received a $450,000 payout from
CPB’s fidelity insurer and a $190,000 payout from Conti-
nental Casualty, the malpractice carrier for CPB’s auditor.
These proceeds went to compensate CPB clients for their
losses.
A grand jury indicted Frith on twenty-three counts:
eighteen counts of making false statements in filings to
regulatory authorities, 15 U.S.C. §§ 78q(a)(1), 78ff; 17
C.F.R. § 240.17a-5(a); 18 U.S.C. § 1001; one count of
willfully violating net capital requirements on or about
September 30, 1997, 15 U.S.C. §§ 78o(c)(3), 78ff; 17 C.F.R.
§ 240.15c3-1; one count of willfully violating Special Reserve
requirements on or about September 30, 1997, 15 U.S.C.
4 No. 04-2364
§§ 78o(c)(3), 78ff; 17 C.F.R. §§ 240.15c3-3, 240.15c3-3a; two
counts of making false statements to a bank, 18 U.S.C.
§ 1014; and one count of bank fraud, 18 U.S.C. § 1344. The
case proceeded to a jury trial and Frith was convicted on
just two of the twenty-three counts: willfully violating net
capital and Special Reserve requirements on September 30,
1997.
The district court applied the guidelines as manda-
tory—this was before the Supreme Court’s decision in
Booker—and sentenced Frith to 97 months in prison. Frith’s
offense level was primarily dictated by the court’s calcula-
tion of the loss amount. See U.S.S.G. § 2F1.1 (1995).1 The
court calculated the loss by adding the $632,000 paid by the
SIPC, the $450,000 paid by CPB’s fidelity insurer, and the
$190,000 paid by the malpractice carrier for CPB’s
auditor—that total serving as a proxy for the losses to
CPB’s clients. See 18 U.S.C. § 3664(j)(1). This loss of more
than $1.2 million put Frith at offense level 17. The court
then increased Frith’s offense level to 30 after finding the
offense involved more than minimal planning,
§ 2F1.1(b)(2)(A); substantially jeopardized the safety and
soundness of a financial institution, § 2F1.1(b)(6); and that
Frith was an organizer or leader, § 3B1.1(c), abused a
position of trust, § 3B1.3, and obstructed justice, § 3C1.1.
The 1995 guidelines range for offense level 30, criminal
history category I (applicable to Frith) was 97-121 months.
Noting that even the low end of the guidelines seemed
harsh, the district judge sentenced Frith to 97 months and
ordered restitution in the same amount as the guidelines
loss calculation, approximately $1.2 million.
1
The parties agree that the 1995 guidelines apply. All citations
to the guidelines in this opinion are to that version.
No. 04-2364 5
II. Discussion
A. Calculation of the Guidelines Range
Frith argues on appeal that the district court miscalcu-
lated the amount of loss in determining his offense level
under § 2F1.1. Loss amount for purposes of the guide-
lines must be calculated on the basis of the conduct of
conviction and relevant conduct; relevant conduct must be
criminal or unlawful conduct, though it need not have been
charged. See United States v. Schaefer, 291 F.3d 932, 937-40
(7th Cir. 2002). Conduct underlying an acquitted charge
may be included as long as that conduct is proved by a
preponderance of the evidence. United States v. Watts, 519
U.S. 148, 157 (1997).
Frith argues the district court’s loss calculation was based
entirely on noncriminal conduct. He asserts that his
alteration of CPB’s books and the payouts he took for
himself were “not criminal in and of themselves.” Filing
false reports with regulatory authorities and operating
in violation of the net capital and Special Reserve require-
ments is criminal conduct, but according to Frith, did not
cause any loss. He applies the same logic to attack the
offense-level enhancement for substantially jeopardizing
the safety and soundness of a financial institution,
§ 2F1.1(b)(6)(A), claiming he did nothing of a criminal
nature to jeopardize the safety and soundness of CPB.
We review calculations of loss under the guidelines for
clear error, United States v. Berheide, 421 F.3d 538, 540
(7th Cir. 2005), and application of the guidelines de novo,
United States v. Ellis, 440 F.3d 434, 436 (7th Cir. 2006).
The guidelines define loss as “the value of the money,
property, or services unlawfully taken.” U.S.S.G. § 2F1.1
cmt. n.7. Loss is not always a precise calculation; reason-
able estimates will suffice for purposes of the guidelines.
U.S.S.G. § 2F1.1 cmt. n.8. And, as we have noted, where
losses are attributable to relevant conduct, the relevant
6 No. 04-2364
conduct must be criminal or unlawful conduct. Schaefer,
291 F.3d at 937-40; see also United States v. Solis, 299 F.3d
420, 461-62 (5th Cir. 2002); United States v. Dove, 247 F.3d
152, 155 (4th Cir. 2001); United States v. Shafer, 199 F.3d
826, 831 (6th Cir. 1999); United States v. Jain, 93 F.3d 436,
443 (8th Cir. 1996); United States v. Dickler, 64 F.3d 818,
830 (3d Cir. 1995). Also, to calculate loss for purposes of
§ 2F1.1, the guidelines call for consideration of losses
attributable to all acts and omissions that were part of the
same course of conduct or general scheme of wrongdoing.
U.S.S.G. § 1B1.3(a)(2).
Most of the $1.2 million in losses found by the district
court are attributable to relevant conduct that was part
of Frith’s scheme to operate CPB without enough money
on hand to comply with the applicable net capital and
Special Reserve requirements of the securities laws. Frith
was charged with, though ultimately not convicted of, filing
eighteen false reports with regulatory authorities during
1996 and 1997 misstating the true financial status of CPB.
Besides being illegal themselves, the false reports covered
up the fact that Frith was operating his broker-dealership
in violation of laws designed to protect his clients. For
seventeen months in 1996 and 1997 Frith operated his
business by criminally deceiving regulatory authorities and
the public. When authorities finally shut CPB down, there
was not enough money to pay clients what they were owed.
The SIPC’s and fidelity insurer’s payments were made to
cover these client losses; the district court did not clearly
err by including them in the loss amount calculation.
The $190,000 payment by CPB’s auditor’s malpractice
carrier is another matter, however. It should not have
been included in the calculation of loss amount. The money
paid by the malpractice insurer for CPB’s auditor was
attributable to losses sustained by CPB’s clients as a result
of the auditor’s acts or omissions, not Frith’s. The point
is academic, however; excluding the $190,000 from the
No. 04-2364 7
calculation, Frith’s offense level remains the same. See
U.S.S.G. § 2F1.1(b)(1). Accordingly, with this (harmless)
exception, the district court did not clearly err in calculating
loss amount for purposes of Frith’s guidelines range.
Nor did the court err by applying the enhancement for
substantially jeopardizing the safety and soundness of
a financial institution. See § 2F1.1(b)(6)(A). The application
notes to § 2F1.1 provide that a financial institution has
been substantially jeopardized when “as a consequence of
the offense, the institution became insolvent . . . or was
unable on demand to refund fully any deposit, payment, or
investment . . . or was placed in substantial jeopardy of any
of the above.” U.S.S.G. § 2F1.1 cmt. n.15. The district court
need not have considered Frith’s relevant conduct to impose
this enhancement; operating CPB in violation of the net
capital and Special Reserve requirements even for a single
day meant that CPB could not pay its debts on demand. The
district court correctly increased Frith’s guidelines range
under § 2F1.1(b)(6)(A).
That is not the end of the matter, however. The district
court sentenced Frith to 97 months in prison—the low end
of the properly calculated guidelines range of
97-120 months—applying the guidelines as mandatory.
Frith did not object, so we review only for plain error.
United States v. Bonner, 440 F.3d 414, 415-16 (7th Cir.
2006). The government concedes that a Paladino limited
remand is appropriate so the district judge can advise us
whether she would have sentenced Frith differently had she
known the guidelines are advisory. Paladino, 401 F.3d at
484.
B. Restitution
The district court ordered restitution in an amount equal
to the loss it calculated—roughly $1.2 million. Frith says
the order is improper because it is based entirely on
8 No. 04-2364
relevant conduct and restitution must be based on the
conduct of conviction. We review the calculation of restitu-
tion for abuse of discretion. United States v. Danford, 435
F.3d 682, 689 (7th Cir. 2006); United States v. Dorsey, 27
F.3d 285, 291 (7th Cir. 1994). An order of restitution will be
upset only if the district court used inappropriate factors or
did not exercise discretion at all. United States v. Havens,
424 F.3d 535, 538 (7th Cir. 2005).
The parties discuss the propriety of restitution under
18 U.S.C. § 3663, the discretionary restitution statute, and
18 U.S.C. § 3663A, the mandatory restitution statute. The
discretionary restitution provision, § 3663, was enacted
in 1982 through the Victims and Witnesses Protection
Act (“VWPA”). The mandatory restitution statute,
§ 3663A, was created by the Mandatory Victim Restitution
Act (“MVRA”). Enacted in 1996, the MVRA also amended
§ 3663 and 18 U.S.C. § 3664, which governs the procedures
applicable to restitution orders. See United States v. Day,
418 F.3d 746, 751-53 (detailing the statutory history and
changes to restitution law and procedure wrought by
the MVRA). Importantly for this case, both § 3663 and
§ 3663A are limited primarily to crimes under Title 18;
§ 3663 also covers some crimes under Titles 21 and 49. See
18 U.S.C. § 3663(a) (covering restitution only for offenses
under Title 18; 21 U.S.C. §§ 841, 848(a), 849, 856, 861 &
863; and 49 U.S.C. §§ 46312, 46502 & 46504 except when
the MVRA applies); 18 U.S.C. § 3663A(c)(1) (covering
restitution only for crimes of violence under 18 U.S.C. § 16;
offenses against property under Title 18; and offenses
described in 18 U.S.C. § 1365). Frith was convicted of two
Title 15 crimes, which are not specified in either § 3663
or § 3663A. See 3 BROMBERG AND LOWENFELD ON SECURI-
TIES FRAUD & COMMODITIES FRAUD, § 6:374 at 6-1024 to 25
(2d ed. 2006).
Nonetheless, the district court had authority to order
restitution as a condition of supervised release pursuant to
No. 04-2364 9
18 U.S.C. § 3583(d) and U.S.S.G. § 5E1.1(a)(2).2 The
supervised release statute specifically authorizes the
district court to impose (among other conditions of super-
vised release) “any condition set forth as a discretionary
condition of probation in section 3563(b)(1) through (b)(10).”
18 U.S.C. § 3583(d). Discretionary conditions of probation
include “restitution to a victim of the offense under section
3556.” 18 U.S.C. § 3563(b)(2). The cross-reference here is to
the general restitution provision: “The court, in imposing
sentence on a defendant who has been found guilty of an
offense shall order restitution in accordance with section
3663A, and may order restitution in accordance with section
3663.” 18 U.S.C. § 3556. The restitution statute further
provides that “[t]he procedures under section 3664 shall
apply to all orders of restitution under this section.” Id.Accordingly, the district court’s discretionary authority to
order restitution as a condition of supervised release for a
crime not specifically covered by either § 3663 or § 3663A is
subject to the same rules and procedures that govern all
other restitution orders.
Restitution orders are limited to: (1) losses caused by
the specific conduct that is the basis of the offense of
conviction; (2) losses caused by conduct committed during
“an offense that involves as an element a scheme, conspir-
acy, or pattern”; and (3) restitution agreed to in a plea
agreement. 18 U.S.C. §§ 3663 & 3663A; Hughey v. United
States, 495 U.S. 411, 413 (1990); United States v. Belk, 435
F.3d 817, 819 (7th Cir. 2006); United States v. Randle, 324
2
Regardless of whether an offense is listed in §§ 3663-3664,
§ 5E1.1 of the guidelines directs judges to order restitution
when all other conditions of § 3663 or § 3663A are met. U.S.S.G.
§ 5E1.1(a)(2). But we have held that after United States v. Booker,
543 U.S. 220, 246, 259-60 (2005), § 5E1.1 is advisory. See United
States v. Day, 418 F.3d 746, 751 n.2 (7th Cir. 2005); United States
v. Pree, 408 F.3d 855, 876 (7th Cir. 2005).
10 No. 04-2364
F.3d 550, 556 (7th Cir. 2003). These limitations are based
on the language of the restitution statutes. Hughey, 495
U.S. at 416-20; Randle, 324 F.3d at 556. Both §§ 3663 and
3663A refer to restitution to victims of “the offense,” and
this language has been interpreted to mean the offense of
conviction. Hughey, 495 U.S. at 416; Randle, 324 F.3d at
556. Both statutes also contemplate restitution for losses
suffered during the course of a scheme, pattern, or conspir-
acy, when those are elements of the crime. See 18 U.S.C.
§§ 3663(a)(2), 3663A(a)(2). Finally, both statutes allow for
restitution as bargained for in plea agreements. 18 U.S.C.
§§ 3663(a)(3), 3663A(a)(3). Relevant conduct is not with-
in the scope of either statute. See, e.g., Belk, 435 F.3d at
819; Randle, 324 F.3d at 556; United States v. Scott, 250
F.3d 550, 553 (7th Cir. 2003).
Similarly, § 3583 authorizes restitution to “the victim of
the offense” as a condition of supervised release. Also, the
guidelines restitution provision, § 5E1.1, incorporates
§ 3663 but also specifically provides for restitution as a
condition of probation or supervised release if the offense is
not one for which restitution is authorized under § 3663.
See U.S.S.G. §§ 5E1.1(a)(1) & (a)(2). The government
concedes that in this case, only the first of the restitution
criteria noted above applies—Frith may be ordered to
pay restitution for losses caused by the conduct underly-
ing his two counts of conviction.
Frith’s crimes of conviction are highly specific: on Septem-
ber 30, 1997, he violated the net capital and Special
Reserve requirements of the federal securities laws. To
convict Frith of the former crime, the government had to
prove: (1) CPB was a broker-dealer; (2) on or about Septem-
ber 30, 1997, CPB was in violation of the net capital
requirements; (3) Frith knew CPB was violating the net
capital requirements; (4) Frith continued operating CPB
knowingly when it was in violation of the net capital
requirements; and (5) CPB used the mails or other instru-
No. 04-2364 11
mentalities of interstate commerce to conduct business.
Similarly, to convict Frith of the latter offense, the govern-
ment had to prove: (1) CPB was a broker-dealer; (2) on or
about September 30, 1997, CPB did not have enough money
in its Special Reserve Account; (3) Frith knew CPB did not
have enough money in the Special Reserve Account; (4)
Frith continued operating CPB knowingly when it did not
have enough money in its Special Reserve Account; and (5)
CPB used the mails or other instrumentalities of interstate
commerce to conduct business.
The government maintains that all the losses attributable
to Frith’s conduct over the course of 1996 and 1997 can be
considered part of the crimes for which Frith was convicted.
It characterizes Frith’s two September 30, 1997 crimes as
a “snapshot” of his entire course of wrongdoing. This is an
odd argument considering that the jury found Frith guilty
of two discrete offenses, both committed on one day, and
acquitted Frith on the balance of the charged counts
covering the longer time period. Frith’s wrongdoing
throughout 1996 and 1997 may properly be taken into
account as relevant conduct for purposes of the loss calcula-
tion under the guidelines, as we have noted. But as this
record stands there is no indication—no showing by the
government and no finding by the district court—that the
entire $1.2 million in losses can be attributed to Frith’s
crimes on September 30, 1997.
That is not to say that some losses cannot be attributed to
Frith’s criminal conduct on September 30, 1997. Thus far,
however, no such showing has been made. Because the
restitution order was not tied to the specific conduct of
conviction, the district court had no authority to award
it, and that is necessarily an abuse of discretion. See, e.g.,
Hobley v. Burge, 433 F.3d 946, 949 (7th Cir. 2006) (“A
district court by definition abuses its discretion when it
makes an error of law. . . .”). We vacate the restitution order
and remand for a new restitution hearing.
12 No. 04-2364
We should comment on two other matters specific to
restitution. First, roughly $360,000 of the money from the
CPB bankruptcy estate was used to pay the administra-
tive costs of liquidation in bankruptcy. Frith maintains that
if that money had gone to pay CPB’s debts, the total loss to
the victims would have been $360,000 less and that he
therefore should be given credit for this $360,000. Frith
cites no authority for the proposition that the district court
must credit him. Instead, his argument essentially is that
the district court could have credited him. Restitution
orders are reviewed for abuse of discretion; we will not
direct the district court on remand one way or another.
Second, as we have explained, the $190,000 paid by the
malpractice carrier for CPB’s auditor did not belong in the
guidelines calculation of loss; it does not belong in an award
of restitution, either. The government says that award is
supported—in fact, required—by 18 U.S.C. § 3664(j)(1),
which provides: “If a victim has received compensation from
insurance or any other source with respect to a loss, the
court shall order that restitution be paid to the person who
provided or is obligated to provide the compensation.” A
“victim” is a “person directly and proximately harmed as a
result of the commission of” a crime. 18 U.S.C.
§ 3663A(a)(2). A victim of the malpractice of CPB’s auditor
is not a victim of Frith’s crime, at least not directly. The
malpractice insurer for CPB’s auditor paid the claim to
settle issues concerning the auditor’s acts or omissions; the
$190,000 compensated victims of poor accounting practices,
not Frith’s fraud. This is the sort of indirect loss that we
have said is not appropriately included in restitution
orders. See 18 U.S.C. § 3663A(a)(2); United States v. George,
403 F.3d 470, 474 (7th Cir. 2005) (“ ‘Loss’ means direct
injury, not consequential damages.”); United States v.
Shepard, 269 F.3d 884, 887 (7th Cir. 2001).
The judgment of the district court with respect to the
order of restitution is VACATED, and the case is REMANDED
No. 04-2364 13
for further proceedings consistent with this opinion.
Restitution is not mandatory, but the district court may
in its discretion order restitution as a condition of super-
vised release. We draw the court’s attention to the proce-
dural requirements of Day, 418 F.3d at 460-61. We also
order a LIMITED REMAND consistent with this court’s opinion
in Paladino, 401 F.3d at 484.
AFFIRMED IN PART;
REVERSED and REMANDED IN PART.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—8-29-06