UNITED STATES OF AMERICA v. JOHN MICHAEL IANNONE
NOS. 98-3373 and 98-3374
UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
July 12, 1999
1999 Decisions. Paper 197
District Judge: Honorable Robert J. Cindrich
On Appeal From the United States District Court For the Western District of Pennsylvania (D.C. Crim. Nos. 97-4 and 98-1). Argued: December 10, 1998. Before: BECKER, Chief Judge, STAPLETON, Circuit Judge, and HARRIS* District Judge.
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* Honorable Stanley S. Harris, United States District Judge for the District of Columbia, sitting by designation.
STANLEY W. GREENFIELD, ESQUIRE (ARGUED) Greenfield, Brewer, Bailor & Kay Greenfield Court 1035 Fifth Avenue Pittsburgh, PA 15219 Counsel for Appellant
OPINION OF THE COURT
HARRIS, District Judge:
Defendant-appellant John Michael Iannone (“Iannone“) appeals from the sentence imposed after his guilty plea to six counts of interstate transportation of property taken by fraud, one count of mail fraud, and one count of wire fraud. In determining Iannone‘s sentence pursuant to the United States Sentencing Guidelines (“U.S.S.G.“), the district court applied several enhancements to the offense level. Iannone challenges two actual and one de facto enhancements: (1) a two-level increase pursuant to
I. FACTUAL BACKGROUND
Essentially, Iannone defrauded people by encouraging them to invest in oil and gas drilling ventures, but then using the investors’ money for his personal expenses rather than for the promised purposes. Iannone committed these frauds against several victims, living in different states, over the course of several years. The total of the funds Iannone fraudulently obtained amounted to more than $600,000.
A. The Pennsylvania Frauds
In 1991 or 1992, Iannone started his own company, Horizon Natural Resources (“HNR“), after leaving his job as an executive at Consolidated Natural Gas. HNR was an oil exploration and natural gas tract leasing company, with an office in Wexford, Pennsylvania. At least initially, HNR was a legitimate business.1 Iannone was HNR‘s sole owner and operator, giving himself the title of Chief Executive Officer (“CEO“).
In early 1992, Iannone secured several leaseholds and two contractual farm-out arrangements with Exxon Corporation to drill and operate oil wells. Pursuant to the Exxon arrangement, Iannone
In December 1992, Iannone began to solicit investment monies from his neighbors, ostensibly for the purpose of drilling and operating two wells, Horizon Nos. 1 and 2. Unaware of the precarious state of Iannone‘s business, his neighbors invested approximately $320,000 with him. Included among those investors were several members of one family, the Stringerts. Iannone had been a friend and neighbor of the Stringerts for several years. Iannone sold the Stringerts what he labeled “interests” or “shares” in Horizon Nos. 1 and 2 and entered into contracts with the Stringerts on behalf of HNR. However, rather than investing the money in the drilling project, Iannone used it for his own personal expenses.
Having spent all of that money by the end of October 1993, Iannone began to solicit further investments in the Horizon drilling project. Iannone told his victims various lies in order to encourage their investment. For example, he told one investor that the wells already were drilled
From the time Iannone received the first investment monies in December 1992 until he absconded in January 1994, Iannone continually lied to the Stringerts and the other investors in order to conceal his conversion of their money to his personal use. He told some investors that he had used their money to hire a drilling company and that he was in contact with Exxon about a process that would increase their yield from the wells. When one investor -- Howard Stringert -- became suspicious, Iannone agreed to buy back his $100,000 investment in the oil well project once he received a settlement from a pending suit against Consolidated Natural Gas. However, those representations were false. Iannone had not hired a drilling company, was not in contact with Exxon about a process to increase the wells’ yield, and had already settled the litigation with Consolidated Natural Gas over a year-and-a-half earlier for only $17,000. Iannone did not use any of the investment monies for the drilling project; he took it all for his personal use.
Throughout the period in which Iannone was soliciting his neighbors to invest in the Horizon project, he was falsely posing as a decorated Vietnam veteran. This adopted military hero persona helped Iannone gain the trust of the Stringert family. He provided some members of the Stringert family with a resume falsely indicating that he had spent three years in Vietnam as a Captain in the U.S. Army Special Forces and that he had been awarded several medals, including the Purple Heart and the Silver Star, and he represented that he had received a recommendation for the Congressional Medal of Honor. He provided the Stringerts with a false citation recounting the heroic acts for which he supposedly received the Silver Star. Howard Stringert described the story recounted in the citation as “Ramboesque.”3 One member of the family, Janice Stringert-Streich, visited Iannone‘s home where he had a Silver Star medal prominently displayed. Janice and her brother Howard Stringert both testified at the sentencing hearing that their family had great respect for military veterans and that this influenced their decisions to invest with Iannone.
By October 1993, some investors had become suspicious of Iannone, and he prepared for his disappearance, buying a truck under a false name with some of the investment money. On January 11, 1994, Iannone disappeared, leaving his wife and three children behind. Approximately $70,000 to $110,000 in investment funds were unaccounted for at the time of his abscondance. In order to avoid being pursued, Iannone faked his own death. He left behind a letter claiming that he had left on a secret mission for a government “alphabet agency” and that he feared it might result in his death. He then left his van, splattered with blood and littered with shell casings from a weapon, parked at the Greater Pittsburgh International Airport. Local police quickly realized both that the scene had been fabricated and that Iannone had not been the victim of a crime.
B. The Colorado Frauds
After his disappearance from Pennsylvania, Iannone settled in Colorado where he adopted the alias Wayne D. Hamilton, the name of a deceased Vietnam veteran. He continued to masquerade as a Vietnam war
Apparently, Iannone lived off the Pennsylvania fraud proceeds for about three years. When he ran low on money, Iannone essentially repeated his Pennsylvania scheme. As head of W. D. H. Associates, a sham oil and gas company, Iannone offered his new friends and neighbors the opportunity to invest in oil and/or gas wells in Texas and Nebraska. Several of his friends and neighbors acquiesced, buying percentage shares of oil and/or gas well leases from Iannone. As with the Pennsylvania frauds, Iannone did not invest this money for the purpose that it was entrusted to him, but used it for personal expenses. He received approximately $115,500 from the Colorado frauds.
Again, Iannone lied to the investors in order to conceal his fraud. Iannone told investors that the wells were producing and that they should expect their first royalty checks to arrive in March or April of 1997. When the checks did not materialize, Iannone again disappeared. On or around June 3, 1997, Iannone left Colorado, falsely informing most investors that he was going to Texas to check on the wells. He told one investor, O‘Dowd, a different lie: that he was going to confront the drunk driver who had killed his family. When some of the investors began to communicate with each other and became suspicious, Iannone sent them an electronic message claiming to be an employee of an “alphabet agency” in the witness protection program. Iannone was arrested by the Federal Bureau of Investigation in July 1997.
C. The District Court‘s Sentence
Iannone pled guilty to six counts of interstate transportation of property taken by fraud, one count of mail fraud, and one count of wire fraud. The district court conducted a two-day sentencing hearing at which four of Iannone‘s victims testified: O‘Dowd, Hegler, Janice Stringert-Streich, and Howard Stringert. The court found several Guidelines enhancements to be applicable. Based on O‘Dowd‘s testimony, the court determined that he was a vulnerable victim and increased Iannone‘s offense level by two points pursuant to
II. DISCUSSION
Iannone argues that the increases in his offense level were improper and that he should have been sentenced based on a offense level of 15, which established a range of 18 to 24 months of imprisonment. See
Iannone challenges the district court‘s decision to apply a two-level “vulnerable victim” offense level adjustment pursuant to
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Section 3A1.1(b) provides that:
If the defendant knew or should have known that a victim of the offense was unusually vulnerable due to age, physical or mental condition, or that a victim was otherwise particularly susceptible to the criminal conduct, increase by 2 levels.
The adjustment would apply, for example, in a fraud case where the defendant marketed an ineffective cancer cure or in a robbery where the defendant selected a handicapped victim. But it would not apply in a case where the defendant sold fraudulent securities by mail to the general public and one of the victims happened to be senile. Similarly, for example, a bank teller is not an unusually vulnerable victim solely by virtue of the teller‘s position in a bank.
In accordance with
1. O‘Dowd Was Particularly Vulnerable to Iannone‘s Criminal Conduct
Iannone argues that the district court improperly found O‘Dowd was a vulnerable victim based merely on his status as a Vietnam veteran. This argument is without merit, as it is abundantly clear from the record that the court did not base its finding of O‘Dowd‘s vulnerability merely on broad, unsupported generalizations relating to his veteran status. O‘Dowd testified at length at the sentencing hearing, and, based on his testimony, the court made express, specific findings as to his particular susceptibility as well as Iannone‘s knowledge of this susceptibility. In
[The question is whether] O‘Dowd [was] particularly vulnerable in some way different from the general public, and I have no problem in saying[ ] yes. Just because he‘s a big strong man and a veteran of combat doesn‘t mean that he [was not] vulnerable in a very, very tragic way[,] and that is just as he described it so beautifully in his testimony. He developed a belief that people who share combat are brothers-in-arms and can be believed. He made that [belief] known to the defendant. So, [I find that] he was vulnerable in that he was more susceptible to be deluded [and] cheated by someone who represented himself to be a brother-in-arms. . . . O‘Dowd was vulnerable in the way he described he was vulnerable, and it was a particular vulnerability because it wouldn‘t apply to the general public but only to someone who expressed himself as he did.
Thus, contrary to Iannone‘s assertions, the district court did not find that Vietnam veterans are per se vulnerable to persons claiming to be fellow veterans and then rely solely on O‘Dowd‘s veteran status to find that he was a vulnerable victim. Rather, the court based its determination that O‘Dowd was a vulnerable victim on his individual personality traits and characteristics, as testified to by O‘Dowd at the sentencing hearing. Only after this specific inquiry did the court find that O‘Dowd was particularly vulnerable to one representing himself as a fellow combat veteran. Thus, the district court did not clearly err in determining that O‘Dowd was “particularly susceptible” to Iannone‘s fraud.
2. Iannone Knew or Should Have Known of O‘Dowd‘s Vulnerability
The district court specifically found that Iannone knew or had reason to know of O‘Dowd‘s vulnerability to fellow Vietnam veterans. (“I find by a preponderance of the evidence that the defendant knew or had reason to know that . . . O‘Dowd[ ] [was] vulnerable to a predation by somebody who purported to be a colleague at war[ ] [and] a brother-at-arms.“). The record provides ample evidence to support this finding. O‘Dowd‘s testimony, supported by correspondence between O‘Dowd and Iannone introduced into evidence at the sentencing hearing, demonstrates that Iannone actively encouraged and developed a friendship with O‘Dowd, based in large part on their supposed shared combat experiences in Vietnam. The friendship between the two men began through an America Online chat room for military veterans and progressed to telephone calls, electronic messages, and meeting in person on approximately three occasions. During the course of their friendship, Iannone and O‘Dowd discussed their feelings about honor, duty, and the bonds between fellow combat veterans on several occasions. In many of their communications, Iannone and O‘Dowd used the phrase “back to back,” which, according to O‘Dowd‘s testimony, is a phrase derived from his Vietnam experience that essentially means “I would put my life in your hands and trust you to use it properly.” Similarly, O‘Dowd and Iannone often referred to one another as “brother” in their correspondence. O‘Dowd testified that Iannone was aware of his feelings of trust and loyalty towards fellow combat veterans generally and towards Iannone in particular. Thus, the record provides sufficient evidence that Iannone was aware of O‘Dowd‘s vulnerability.
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3. O‘Dowd‘s Vulnerability Facilitated Iannone‘s Crime
The district court also found that O‘Dowd‘s vulnerability facilitated Iannone‘s fraud, noting the link between O‘Dowd‘s vulnerability, Iannone‘s awareness of that vulnerability, and Iannone‘s fraud. (“It [is] clear that [O‘Dowd‘s] vulnerability was made known to the defendant. That‘s why it was so easy for the defendant to extract these funds from [O‘Dowd] . . . without much in
In sum, we find that the district court did not clearly err in finding: (1) that O‘Dowd was particularly vulnerable to Iannone‘s fraud; (2) that Iannone was, or should have been, aware of his vulnerability; and (3) that O‘Dowd‘s vulnerability facilitated Iannone‘s crime. We therefore affirm the decision to enhance the offense level under
B. Abuse of a Position of Trust Enhancement
Iannone claims that the district court erred in applying a two-level enhancement to his offense level pursuant to
Iannone argues that he did not occupy a position of trust with respect to his victims, and therefore the district court should not have enhanced his offense level pursuant to
Application Note 1 of the Commentary to
“Public or private trust” refers to a position of public or private trust characterized by professional or managerial discretion (i.e., substantial discretionary judgment that is ordinarily given considerable deference). Persons holding such positions ordinarily are subject to significantly less supervision than employees whose responsibilities are primarily non-discretionary in nature.
This adjustment, for example, would apply in the case of an embezzlement of a client‘s funds by an attorney serving as a guardian, a bank executive‘s fraudulent loan scheme, or the criminal sexual abuse of a patient by a physician under the guise of an examination. This adjustment would not apply in the case of an embezzlement or theft by an ordinary bank teller or hotel clerk . . . .
In accordance with the Commission‘s guidance, this Court has developed a “position of trust” analysis that “look[s] to the essence of the meaning of a position of trust.” United States v. Pardo, 25 F.3d 1187, 1191 (3d Cir. 1994); see also United States v. Boyle, 10 F.3d 485, 489 (7th Cir. 1993) (stating that, in determining whether a defendant occupies a “position of trust,” a court “must look beyond descriptive labels to the actual nature of the relationship and the responsibility the defendant is given“). We consider three factors in determining whether a defendant occupies a position of trust for the purposes of
Based on our consideration of
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First, Iannone‘s position allowed him to commit a difficult-to-detect wrong. Iannone primarily argues that his fraud was easily detectable, but was not discovered due to his victims’ lack of diligence. Iannone‘s argument evinces a misunderstanding of the first Pardo consideration. That prong of the Pardo analysis is not a due diligence requirement. Iannone‘s victims did not have to be experts in the oil and gas industry or conduct an extensive investigation into Iannone‘s business for the
In connection with his Pennsylvania frauds, Iannone solicited investors in his capacity as the owner and CEO of HNR, an oil and gas drilling/leasing company. Iannone solicited investment monies for the express purpose of financing an exploratory drilling venture, selling the victims “interests” or “shares” of HNR‘s Horizon projects and signing contracts with the
This fiduciary-like relationship allowed Iannone to commit a difficult-to-detect wrong. His managerial position allowed him to conceal his personal use of the victims’ investment money. In order to prevent his fraud from being detected, he provided the victims with false reports on the progress of the drilling project and his use of their investment money. Because Iannone was the sole owner and operator of HNR, he was the victims’ only source of information about the status of their investment and was not subject to any supervision that would have uncovered his fraud.
Iannone‘s position also satisfies the second Pardo criterion, as it provided him unfettered authority over the victims’ investment money. As sole owner and operator of HNR, he alone was entrusted with the proper use of the investment money to complete the drilling project. This total lack of supervision allowed Iannone to spend the investment money freely. Once his victims invested in HNR, no one but Iannone had access to, or supervisory power over, HNR‘s financial records and bank accounts.
Finally, the evidence demonstrates the victims’ reliance on Iannone‘s perceived integrity as owner and CEO of HNR. Iannone gave some of his victims his resume listing years of experience in the oil and gas industry and providing detailed descriptions of that experience. Iannone further fostered reliance on his integrity by posing as a decorated Vietnam veteran. Some of his victims indicated that they decided to invest with Iannone because he was both a veteran and an experienced businessperson offering what seemed to be a great investment opportunity. Based on Iannone‘s representations, his victims believed they were investing in a genuine drilling project.
Thus, application of the three Pardo considerations to Iannone‘s case demonstrates that, as CEO of HNR, he occupied a position of private trust vis-a-vis his Pennsylvania victims.7 The foregoing analysis accords with our decisions in recent cases involving similar factual situations. See United States v. Bennett, 161 F.3d 171, 195-96 (3d Cir. 1998); Sokolow, 91 F.3d at 412-13. Having found that Iannone occupied a position of private trust, we also conclude (and appellant does not challenge) that the district court did not clearly err in finding Iannone abused his position of trust in a manner that significantly facilitated his crime. Therefore, we affirm the district court‘s decision to enhance Iannone‘s offense level pursuant to
C. Section 5K2.0 Departure
Finally, Iannone challenges the district court‘s decision to impose an upward departure (set at two levels) pursuant to
The Commission conceives of each offense guideline as “carving out a `heartland,’ a set of typical cases embodying the conduct that each guideline describes.”
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113-114 (noting that departure is possible based on a combination of factors, even though none of the factors standing alone would justify a departure). Outside of a limited number of prohibited factors that a court may never consider as grounds for departure, the Guidelines do not “limit the kinds of factors . . . that could constitute grounds for departure in an unusual case.”8
The Supreme Court provided additional guidance on departures in Koon, instructing courts to apply the following analysis when considering a
Before reviewing the district court‘s application of the Koon analysis, we note the substantial deference that we owe the decision to depart from the Guidelines. See Koon, 518 U.S. at 98; United States v. Sally, 116 F.3d 76, 81 (3d Cir. 1997). While we must also bear in mind that both the Guidelines and Koon indicate that
The district court found that several aggravating factors relating to Iannone‘s criminal conduct, taken collectively, constituted sufficient grounds for an upward departure (which, as noted, the court permissibly achieved by the device of a two-level offense level increase) under
The Guidelines neither forbid nor discourage departures based on the factors enumerated by the district court.10 Nor are the factors encouraged bases for departure under the Guidelines.11 Thus, the
Considering the “structure and theory” of the fraud guideline and the Guidelines as a whole, as Koon instructs, we find that the district court acted within its discretion in concluding that this combination of five unmentioned factors was sufficient to take Iannone‘s case out of the Guidelines’ heartland. 518 U.S. at 96. The Commentary to the fraud guideline expressly provides for upward departures based on factors not listed in the guideline text. In order to remedy the fraud guideline‘s predominant focus on the monetary amount of the victims’ loss, the Commentary states that upward departures may be warranted “[i]n cases in which the loss . . . does not fully capture the harmfulness and seriousness of the conduct.”
Furthermore, while no existing guideline enhancement covers Iannone‘s conduct, two areas of the Guidelines provide specific bases for upward departures based on conduct similar to his. Subsection (b)(3)(A) of the fraud guideline provides for a two-level increase in offense level where the offense involved “a misrepresentation that the defendant was acting on behalf of a charitable, educational, religious or political organization, or a government agency.”
These analogies also demonstrate that the extent of the district court‘s departure -- two offense levels-- was reasonable. A district court in determining the extent of a departure should generally do so by analogizing to existing Guidelines provisions. See United States v. Kikumura, 918 F.2d 1084, 1110-14 (3d Cir. 1990) (establishing this Court‘s standard for determining the proper extent of departure); Baird, 109 F.3d at 872 (applying Kikumura). See also United States v. Adelman, 168 F.3d 84, 87 (2d Cir. 1999) (analogizing to another Guidelines provision was an appropriate method for determining the extent of an upward departure). We review this determination deferentially. See Baird, 109 F.3d at 872. In this case, the district court did not expressly undertake the analogic reasoning that this court generally requires in determining the extent of an upward departure. However, by couching the departure as a two-level increase in the offense level, the district court implicitly did so. As noted above, there is a reasonable analogy in the Guidelines that justifies the extent of the court‘s departure: subsection (b)(3)(A) of the fraud guideline, which provides for a two-level increase in offense level. See
We briefly address Iannone‘s arguments in support of his challenge to the district court‘s
Iannone correctly points out that fraudulent misrepresentations were an inherent part of his offense and therefore, to a certain degree, are included in the base offense level for fraud. However, the district court found that Iannone‘s misrepresentations went beyond the usual “heartland” and as such were not adequately taken into account by the Guidelines. Iannone falsely stated to his Colorado victims that he had lost his family to a drunk driver, and the court found that this was done in order to exploit his victims’ charitable impulses and encourage their investment. Similarly, the court found that the false persona that Iannone created as a decorated Vietnam veteran and government agent was adopted in order to take advantage of his victims. The court found Iannone‘s repeated misrepresentations that he had received combat medals particularly offensive, noting that misrepresentation of the ownership of a combat medal may violate federal law.15
The court also cited Iannone‘s elaborately staged death at the Pittsburgh airport, the grief this conduct caused his family, and its cost to his creditors. In sum, the court found some of Iannone‘s misrepresentations to have been particularly egregious and calculated, clearly disagreeing with his contention that they were mere acts of concealment or incidental to his fraud. More importantly, the court found that those misrepresentations were aggravating factors not adequately reflected by any existing guideline provision.16 We find that the district court acted within its discretion in reaching this conclusion.
With respect to the psychological damage to his victims, Iannone claims that the district court abused its discretion by including this as a reason for departure, for two reasons: (1) the psychological harm he caused his victims had already been included in the base offense level for fraud; and (2) the record demonstrates that the four victims who testified at the sentencing hearing are mentally and physically healthy. The Guidelines contradict Iannone‘s claim that the psychological harm he caused his victims already has been included in the base offense level for fraud. The Commentary to the fraud guideline specifically provides that an upward departure may be appropriate where “the offense caused reasonably foreseeable . . . psychological harm or severe emotional trauma.”
In sum, we find that the court did not abuse its discretion in concluding that this combination of misrepresentations and psychological harm to the victims was sufficiently unusual to take Iannone‘s case out of the heartland of the Guidelines and, as a means of departure, to justify a two-level increase in his offense level.
III. CONCLUSION
We conclude that the district court appropriately enhanced Iannone‘s offense level pursuant to
BECKER, Chief Judge, concurring:
I join the majority opinion, as I am constrained to agree that Iannone‘s abuse of trust enhancement is justified given our decisions in United States v. Bennett, 161 F.3d 171 (3d Cir. 1998); United States v. Sokolow, 91 F.3d 396 (3d Cir. 1996); and United States v. Pardo, 25 F.3d 1187 (3d Cir. 1994). I write separately to express my concern that the current drafting of the abuse of a position of trust guideline is flawed insofar as it has engendered convoluted caselaw in which the concept of a “position of trust” has expanded far beyond the general understanding of that term, making an abuse of trust enhancement a virtual concomitant of a fraud conviction. I therefore urge the Commission to rework the guideline so as to confine “abuse of a position of trust,” in fraud cases, to situations more closely approximating traditional trust relationships.1 If it then appears that fraud is not being sufficiently punished, the appropriate remedy would be for the Commission to increase the underlying offense levels, rather than to dilute the concept of “position of trust.”
I.
Fraud inherently involves some exploitation of trust. See United States v. Koehn, 74 F.3d 199, 201 (10th Cir. 1996) (“In every successful fraud the defendant will have created confidence and trust in the victim . . . .“); United States v. Mullens, 65 F.3d 1560, 1567 (11th Cir. 1995) (“[T]here is a component of misplaced trust inherent in the concept of fraud . . . .“); United States v. Hathcoat, 30 F.3d 913, 915 (7th Cir. 1994) (“By its definition, embezzlement requires a finding of a breach of trust.“). While it is possible in theory to exclude some frauds from “abuse of trust” as defined in Guideline 3B1.3, it seems that our jurisprudence does not do so in practice with any degree of consistency. The contention that “the sentencing enhancement
In Pardo, we identified three elements to consider in determining whether a position constitutes a position of trust:
(1) whether the position allows the defendant to commit a difficult-to-detect wrong; (2) the degree of authority which the position vests in defendant vis-a-vis the object of the wrongful act; and (3) whether there has been reliance on the integrity of the person occupying the position.
Pardo, 25 F.3d at 1192. Pardo stated that “[T]hese factors should be considered in light of the guiding rationale of the section--to punish `insiders’ who abuse their positions rather than those who take advantage of an available opportunity.” Id. The difficulty is that the literal application of the three-part test in fraud cases undermines Pardo‘s limitation to “insiders.” Where a defendant orchestrates a fraud, particularly a fraud of the kind prosecuted in federal court, he will almost always be a sufficient “insider” under the Pardo test, even if he is at the same time taking advantage of the opportunity that his acts made available.
A fraudulent scheme ordinarily contains all three Pardo elements: difficulty of detection, authority, and reliance. First, people who commit fraud do not do it overtly; they conceal it. Efforts to make the fraud look legitimate are a necessary part of fraud. Even in a simple scam--e.g., a door-to-door solicitation for a fictitious charity--it is difficult to verify a claim of charitable purpose. Fraud is therefore by its nature difficult to detect. Second, even the average fraud vests a high degree of authority in a defendant vis-a-vis the object of his wrongful act. Fraud consists of getting a victim to give to a criminal authority over items of value, however fleeting or illegitimate. See, e.g., United States v. Sokolow, 91 F.3d 396, 413 (3d Cir. 1996) (defendant had the requisite degree of authority because he was authorized to withdraw victims’ funds from his company). And finally, it is difficult to imagine a fraud in which a victim does not rely on the integrity of the defendant; again, that is the very point of fraud. See Agathos v. Starlite Motel, 60 F.3d 143, 147 (3d Cir. 1995) (explaining that the elements of fraud are knowing misrepresentation, intent to induce reliance, and reliance); cf. United States v. Pelkey, 29 F.3d 11, 16 (1st Cir. 1994) (discussing the abuse of trust enhancement and noting that “[s]ome degree of consequential trust and reliance by the victim is to be expected in the majority of fraud cases involving false pretenses“).
Because fraud normally includes all three factors, our description of abuse of trust works equally well as a description of fraud: “[I]f one party is able to take criminal advantage of the relationship without fear of ready or quick notice by the second party, the second party has clearly placed a level of trust in the first.” United States v. Lieberman, 971 F.2d 989, 993 (3d Cir. 1992) (quoting United States v. Hill, 915 F.2d 502, 506 (9th Cir. 1990)). In United States v. Bennett, 161 F.3d 171 (3d Cir. 1998), the defendant ran a Ponzi scheme in the guise of a charity, defrauding many victims out of substantial sums. We found that:
Bennett‘s authority allowed him to disseminate falsehoods about trust agreements and anonymous benefactors, misrepresent that he received no compensation for his charitable efforts, create a phony board of directors made up of prominent individuals, deceive investors that funds deposited with New Era organizations were held in escrow or quasi-escrow accounts, and provide false information to the I.R.S. and investors.
In all of these undertakings, it was Bennett‘s position of trust that cloaked him with the requisite authority to deceive. . . .
Furthermore, it is clear the victims relied on Bennett‘s integrity when making donations. They believed, based on
his representations, that their money would be held in low-risk accounts to be matched by anonymous donors and ultimately used for charitable purposes.
Id. at 195-96. As soon as the abuse of trust has been described, so has the fraud.
Likewise, describing fraud, or its “cousin,” theft by deceit, describes an abuse of trust because fraud is the culpable exploitation of trust:
By viewing as especially culpable persons who “abuse” their positions of trust, the guideline also recognizes the time-honored legal concept that theft by deceit is to be dealt with more harshly than simple theft. Whereas ordinary theft is by and large an impersonal act, theft by deceit, like its cousin fraud, is entirely personal. Where an individual makes himself particularly vulnerable by entrusting another with substantial authority and discretion to act on his behalf and then relies upon and defers to that person, a decision to take advantage of that trust and vulnerability is particularly abhorrent, as it undermines faith in one‘s fellow man in a way that the ordinary pick-pocket simply cannot.
United States v. Ragland, 72 F.3d 500, 503 (6th Cir. 1996).
II.
The preceding discussion demonstrates that our tripartite test is better at detecting abuses of trust--including frauds--than it is in defining a true “position” of trust. Thus, garden-variety fraud as well as exotic schemes will ordinarily qualify for the enhancement, even though the Sentencing Guidelines were not supposed to work this way.
True, an occasional exceptional case may not qualify for the enhancement. Pardo is one of the increasingly rare cases to reject an abuse of trust enhancement for fraud. In that case, we found the enhancement unjustified where formal checks against bank fraud were in place, but the defendant‘s friend, a bank manager, bypassed them (without apparent criminal intent) to help her friend. We found that there was no position of trust because the safeguards were designed so that the bank would not need to rely on borrowers’ credibility; the crime should not have been difficult to detect.
Judge Harris‘s opinion distinguishes Iannone‘s situation from that in Pardo because the difficult-to-detect element does not require due diligence by the victim:
Iannone‘s victims did not have to be experts in the oil and gas industry or conduct an extensive investigation into Iannone‘s business for the
§ 3B1.3 enhancement to be applicable. In fact, one rationale for a§ 3B1.3 enhancement is that, where the defendant occupies a position of trust, his victims are less likely to discover his fraud because they will not investigate the matter as thoroughly as they would in an arm‘s-length transaction. The focus of the first Pardo prong is on the defendant, not his victims, and requires the court to determine whether the position the defendant occupied allowed him to commit a difficult-to-detect crime.
Slip Op. at 16.
While I agree that Pardo is distinguishable, I disagree that we can “focus” on the defendant to the exclusion of victims. In Pardo, for example, if there had been no formal safeguards against bank fraud, and the bank had relied on managers’ assessments of clients’ trustworthiness, then the defendant‘s fraud would have been difficult to detect. Cf. United States v. Sherman, 160 F.3d 967, 969-70 (3d Cir. 1998) (insurance fraud by a doctor abused a position of trust because the victim-insurer used an honor system). But a decision to ignore the victims’ level of care does not obviate the need to look at the victims to see whether, under the circumstances, the defendant occupied a position of trust with respect to them.
Pardo is almost unique because the defendant used informal, personal ties to subvert standard, formalized safeguards.
[O]ne has been placed in a position of trust when, by virtue of the authority conferred by the employer and the lack of controls imposed on that authority, he is able to commit an offense that is not readily discoverable. In such cases, the employer, by choice or necessity, is relying primarily on the integrity of the employee to safeguard against the loss occasioned by the offense.
United States v. Craddock, 993 F.2d 338, 342 (3d Cir. 1993) (emphasis added). The exception carved out by Pardo is hardly an exception at all; the game is not worth the candle.
I believe that this difficulty has arisen because our jurisprudence has extracted elements that characterize traditional trust relationships and generalized from them to define “positions of trust.” While this case provides an example of a relationship that has the requisite elements and still seems to me to go far beyond the usual meaning of “position of trust,” there are also examples of positions of trust without the three distilled elements. In United States v. Claymore, 978 F.2d 421 (8th Cir. 1992), a police officer raped a 13-year-old girl and fathered her child. This crime may have been difficult to prevent, given the authority delegated to police officers, but it was not difficult to detect--particularly insofar as we look at the position of trust from the victim‘s perspective, see, e.g., United States v. Castagnet, 936 F.2d 57, 62 (2d Cir. 1991). Nevertheless, I have no doubt that the abuse of trust enhancement was justified in Claymore. See also United States v. Zamarripa, 905 F.2d 337, 340 (10th Cir. 1990) (abuse of trust enhancement applicable where babysitter sexually abused child).
Claymore is an example in which the Pardo test would be underinclusive, though the greater danger is that our test so closely parallels the elements of fraud that it is overinclusive. Both the under- and overinclusiveness follow from the fact that the elements of the Pardo test are all basically about deceit, which is involved in most (but not all) abuses of a fiduciary position of trust and is also involved in many other crimes. Deceit occurs in many forms, in relationships both formal and informal, casual and longstanding. Ultimately, then, the use of the tripartite test dilutes the concept of a “position” of trust, reducing our inquiry in practical terms to whether there was an “abuse of trust.”
III.
Once we have expanded “abuse of trust” to cover situations in which there is only a misrepresentation of legitimacy that cannot be easily verified, I cannot see a limiting principle. As far as I can discern, the only type of fraud that might not justify the abuse of trust enhancement is a simple “pigeon drop” scam--and that only if we choose to impose some minimal requirement that victims take sensible precautions against fraud.2 Yet federal fraud cases rarely, if ever, involve defendants
I therefore believe that the Sentencing Commission should rethink the relationship between the abuse of trust enhancement and fraud crimes.4 In such cases, the enhancement should either be limited to fiduciary or quasi-fiduciary relationships, or the Commission should recognize that, as expanded by the cases, abuse of trust is part of the definition of fraud and therefore should not be applied to fraud crimes. See
Alternatively, I would urge my colleagues to revisit the standard for applying the enhancement to fraud cases. The Court of Appeals for the Second Circuit has an instructive approach that we might consider. Its standard bars the enhancement in fraud cases where the defendant is neither a trusted employee of the victim nor in any fiduciary or quasi-fiduciary relationship with the victim:
Section 3B1.1 precludes an enhancement where the abuse of trust is included in the specific offense characteristic. Where fraud occurs in arm‘s-length transactions not involving fiduciary-like relationships, the “trust” that is “abused” is simply the reliance of the victim on the misleading statements or conduct of the defendant. The trust in short is a specific offense characteristic of fraud, and a Section 3B1.3 enhancement is inappropriate. In the instant matter, the lenders’ trust in Jolly was simply their reliance on his representations about Microtech‘s ongoing business and the appearance created by the repayments. Such reliance is the hope of every defendant who engages in fraud.
. . . .
. . . Jolly held himself out as the president of a company seeking capital, not as an investment advisor.
United States v. Jolly, 102 F.3d 46, 49-50 (2d Cir. 1996).
Under this approach, Iannone‘s fraud would have been an arm‘s-length investment transaction, despite his personal relationship with the victims. Friendship should not convert a non-fiduciary relationship into a fiduciary one. See Koehn, 74 F.3d at 201 (distinguishing “arms-length commercial relationships where trust is created by the defendant‘s personality or the victim‘s credulity” from “relationships in which the victim‘s trust is based on defendant‘s position in the transaction“); United States v. Mullens, 65 F.3d 1560, 1567 (11th Cir. 1995) (rejecting the enhancement where the defendant befriended his victims and touted himself as a gifted investor, but did not hold himself out as an investment broker; holding that “[f]raudulently inducing trust in an investor is not the same as abusing a bona fide relationship of trust with that investor“).
A True Copy:
Teste:
Clerk of the United States Court of Appeals for the Third Circuit