FOR THE FOURTH CIRCUIT
FOR THE DISTRICT OF MARYLAND
(Judge William M. Nickerson)
TABLE OF CONTENTS
United States v. Bota, No. 92-5530, 1993 WL 321585 (4th Cir. Aug. 23, 1993) (unpublished)
United States v. James, No. 92-5344, 1993 WL 174140 (4th Cir. May 25, 1993) (unpublished)
TABLE OF AUTHORITIES
Gall v. United States, 128 S. Ct. 586 (2007)
United States v. Bota, No. 92-5530, 1993 WL 321585 (4th Cir. Aug. 23, 1993)
United States v. Ekanem, 383 F.3d 40 (2d Cir. 2004)
United States v. Green, 436 F.3d 449 (4th Cir. 2006)
United States v. Hankton, 432 F.3d 779 (7th Cir. 2005)
United States v. Harris, 128 F.3d 850 (4th Cir. 1997)
United States v. Hudson, 272 F.3d 260 (4th Cir. 2001)
United States v. James, No. 92-5344, 1993 WL 174140 (4th Cir. May 25, 1993)
United States v. Juvenile Male, 554 F.3d 456 (4th Cir. 2009)
United States v. Love, 134 F.3d 595 (4th Cir. 1998)
United States v. Matamoros-Modesta, 523 F.3d 260 (4th Cir. 2008)
United States v. Montes-Pineda, 445 F.3d 375 (4th Cir. 2006)
United States v. Rothberg, 954 F.2d 217 (4th Cir. 1992)
United States v. Silver, 245 F.3d 1075 (9th Cir. 2001)
United States v. Vinyard, 266 F.3d 320 (4th Cir. 2001)
FEDERAL STATUTES AND RULES
28 U.S.C. § 1291
4th Cir. R. 32.1
Fed. R. App. P. 32.1
U.C.C. § 2-712
United States Sentencing Commission, Guidelines Manual (2007)
Application Note 3(C)
United States Sentencing Commission, Guidelines Manual (2000)
The district court had jurisdiction pursuant to 18 U.S.C. § 3231. The final judgment of the district court was entered on December 4, 2008. The United States filed a notice of appeal of the final judgment on December 31, 2008. This Court has jurisdiction pursuant to 28 U.S.C. § 1291 and 18 U.S.C. § 3742(b).
Application Note 3(A)(v)(II) to § 2B1.1 of the United States Sentencing Guidelines ("U.S.S.G.") provides that, in procurement fraud cases, the "loss" to the government includes the "administrative costs . . . of repeating or correcting the procurement action affected, plus any increased costs to procure the product or service involved," if those costs were reasonably foreseeable. Here, appellee pleaded guilty to procurement fraud, and the government presented evidence of $592,922 in such costs, but the district court found no loss to the government.
This appeal presents three related issues:
On December 5, 2007, the United States filed a three-count indictment against Paul M. Wilkinson, charging him with one count of conspiring to defraud the United States in violation of 18 U.S.C. § 371, one count of conspiring to commit wire fraud in violation of 18 U.S.C. § 1349, and one count of conspiring to steal trade secrets in violation of 18 U.S.C. § 1832(a)(5). The charged offenses involved the theft of confidential bid information from Avcard, LLC ("Avcard"), pertaining to certain fuel-supply contracts used to service United States military and civilian activities in Eastern Europe and Asia.
Wilkinson pled guilty to all three counts and was sentenced on November 26, 2008, to three-years probation, 800 hours of community service, a $20,000 fine, and a $300 special assessment. The court also ordered Wilkinson to pay restitution to Avcard but ordered no restitution to the government, finding that the government suffered no loss from the fraud.
This appeal is limited in scope. The sentencing proceedings in the district court raised several complex economic issues regarding the amount of actual and intended loss to Avcard under U.S.S.G. § 2B1.1. This appeal does not challenge the district court's resolution of any of those issues. Instead, this appeal focuses solely on the district court's failure to apply Application Note 3(A)(v)(II) in determining the government's loss from the fraud and its clear error in finding no loss to the government in this case.
1. The Offenses
Wilkinson and Christopher Cartwright co-founded and operated two companies, Far East Russia Aircraft Services ("FERAS") and Aerocontrol, Ltd. ("Aerocontrol"), which competed with Avcard for certain "into-plane" and Posts, Camps & Stations fuel-supply ("PC&S fuel-supply") contracts in Asia and Eastern Europe. A8-A10.(1) These contracts are administered by the Defense Energy Support Center ("DESC"), an agency of the Department of Defense ("DOD"), through a competitive bidding procedure. A8-A9 (¶¶1, 2). The into-plane contracts require the supplier to deliver aviation fuel into authorized aircraft, including military and civilian DOD aircraft, at particular commercial airports. Id. (¶1). The PC&S fuel-supply contracts require fuel delivery to various authorized storage facilities. A9 (¶2). The bidding process for such contracts has two stages: an initial bid and a revised "best and final" bid. Id. Offerors are not allowed to view other companies' initial bids in preparing their best and final bids. Id.
The indictment charged that, beginning in February 2005, Wilkinson and Cartwright entered into a conspiracy with Matthew Bittenbender, the contract fuel manager for Avcard, to share with them Avcard's bid information (including initial bids and best and final bids) for various solicitations and the data underlying those bids. A11-A13 (¶¶9, 12, 13). The conspirators agreed to pay Bittenbender "a flat fee, plus a commission of 10% of the profits at every into-plane location where" FERAS or Aerocontrol bid successfully and Bittenbender was also "to be paid a percentage of the fuel sales for PC&S fuel supply contracts won by" FERAS or Aerocontrol. A13 (¶13D).
The indictment charged that Bittenbender conveyed Avcard's bid information to Wilkinson and Cartwright on multiple occasions. A13-A17 (¶14). On some occasions, Wilkinson and Cartwright used the misappropriated information to lower their bid and beat Avcard. A16 (¶14M). However, on other occasions, Bittenbender told Wilkinson and Cartwright that they could increase their bid and that "even Wilkinson's increased bid would defeat [Avcard's] bid at [a particular] location." A16 (¶¶14N, O); see also A15 (¶14G).
The indictment contained three counts: Count One charged Wilkinson with conspiring "to defraud the United States and an agency thereof, to wit, DESC, by impeding, impairing, obstructing, and defeating the lawful function of DESC's full and open competitive procurement process for into-plane and PC&S fuel supply contracts" in violation of 18 U.S.C. § 371. A11-A12 (¶¶11-12). Count Two charged Wilkinson with conspiring to commit wire fraud in violation of 18 U.S.C. § 1349 by depriving Avcard of the intangible right of Bittenbender's honest services and by using false pretenses to obtain the bid information. A17-A18 (¶¶15-19). Count Three charged Wilkinson with conspiring to steal Avcard's confidential bid information (and the underlying data) in violation of 18 U.S.C. §§ 1832(a)(1), (3), (5). A20-A22 (¶¶22-26).
2. The Plea Agreement
The United States and Wilkinson entered into a plea agreement on July 29, 2008. A25-A36. Wilkinson pled guilty to all three counts, "admit[ting] as fact the allegations contained in the Indictment." A26-A28 (¶¶2-4). The plea agreement provided that the November 2007 edition of the Guidelines applies. A30 (¶10(a)).(2) The parties also agreed that the controlling Guideline was U.S.S.G. §2B1.1, that the base offense level is 7, and on various adjustments to that base offense level. A30-A32 (¶¶10-12). In addition, the parties "agree[d] to contest the amount of loss intended or occasioned by this conduct, and thus leave to the judgment of the Court the appropriate Guidelines enhancement under U.S.S.G. §2B1.1(b)(1)," and that the United States "will not argue that the loss results in more than an eighteen-level increase pursuant to U.S.S.G. §2B1.1(b)(1)(J)." A30-A31 (¶10(e)). Finally, Wilkinson agreed to provide restitution for the full amount of the victims' actual losses pursuant to 18 U.S.C. §§ 3556, 3663A(c)(1)(A)(ii), 3664(f)(1)(A), as determined by the district court at sentencing. A32-A33 (¶15).
The government and Wilkinson submitted sentencing memoranda on October 20, 2008. A48-A268. The government calculated the actual losses to DESC itemized as follows:
The government used Application Note 3(A)(v)(II) to U.S.S.G. § 2B1.1 to calculate loss to DESC. A53. First, the government calculated DESC's costs in correcting the procurement action affected. Id. It calculated $26,813 in such costs, "consist[ing] largely of personnel costs in preparing new solicitation packages and in evaluating and re-awarding contracts at each of the seven infected locations." Id.; A65 (Table 1). Second, the government calculated DESC's increased costs in reprocuring fuel. A53. The government calculated both the increased costs from purchasing fuel on the spot market, because "DESC had no competitively bid procurement vehicle in place at these locations" when cancelling the tainted contracts, and the increased costs from purchasing fuel under the reawarded contracts. Id. For the increased costs from spot purchases, the government multiplied "the difference between the spot price and the [contract] price [on the date of the transaction]" by "the number of gallons uplifted." Id.; A66 (Table 2). For the increased costs under the reawarded contracts, the government multiplied the difference between "the re-awarded contract delta and the original contract delta" with "delta" equal to the difference between the contract price for fuel and the indexed price of fuel on a particular date by the amount of fuel under the new contracts (using actual fuel liftings for FY 2008 and estimated fuel liftings for FY 2009 and 2010). A54; A67 (Table 3).(4)
Wilkinson's sentencing memorandum, by contrast, estimated no loss to DESC. A84. He presented no evidence regarding losses to DESC. Instead, he argued that it was reasonable to assume that DESC incurred no loss from the fraud because fuel prices were indexed and that the cost to reawarding the affected contracts was "de minimis," because "it did not involve additional overtime or other avoidable costs attributable solely to the offense conduct." Id. He also argued that the government was not overcharged because DESC received the lowest cost bid. Id. n.3.
Wilkinson expanded on some of his arguments in a subsequent response to the government's sentencing memorandum. A269-A290. He argued, inter alia, that the court should disregard DESC's administrative costs of $26,813, because the government "submit[ted] no evidence, such as time and wage reports, to support this figure. In the absence of evidence of outlays for overtime or temporary employees, the Court should presume that this administrative agency had the extra capacity to perform the modest quantity of work required and did so at no additional cost to the government." A273. He also denied that any increased costs from spot purchases should be attributed to the conspiracy, because "[t]he relevant contracts were mutually terminated by DESC and FERAS/AC," and the claimed spot purchases in Burgas, Bulgaria and in Kuwait were "hard to square with what is known about these locations." A273-A274 (citing A349-A366). He also argued that the government made a calculation error regarding the reawarded contracts at Burgas and that correcting for the error reduced the loss to DESC from higher contract prices from $474,686 to $50,246. A274 (citing A367-A370).
The court held a two-day sentencing hearing on November 25-26, 2008. Dr. Charles Untiet testified for the United States. A435. He first discussed the loss to DESC, using information provided to him by DESC personnel. A438. He explained that DESC "terminated a number of contracts held by Aerocontrol [and] FERAS" after learning of the criminal activity because of DESC's "policy not to deal with criminals whenever possible." A439. Thus, "DESC needed to resolicit and rebid and reaward those contracts." Id. Using information from DESC, he testified that "each solicitation would cost about $5,000[, and] each location would cost about $2,400" based on "[t]he wage value of the man hours entailed in issuing a new solicitation and a new location award." A440.
Dr. Untiet also computed the higher cost for DESC to reprocure fuel on the spot market "[i]n the interim period between the termination of the contract and the eventual reaward." A440-A441. He testified that "I got data on spot sales from the DESC. I asked them for each spot sale record. What was the date, what was the quantity. What was the spot price the DESC paid. And what would have been the Aerocontrol FERAS contract price had it still been enforced." A441.
Dr. Untiet also testified about the increased cost of procuring fuel under the reawarded contracts. A442. To calculate that increase, he computed "the difference between the reaward price and the original price" and multiplied that difference by actual fuel liftings for FY 2008 and projected liftings for FY 2009 and 2010. A442-A443. He explained that Wilkinson was wrong in suggesting that the government made an error with respect to the reawarded contract at Burgas. A445. Dr. Untiet noted that "there were two reaward contracts" at Burgas: one from March 2008 to April 2008, another starting sometime in April 2008. Id. Dr. Untiet testified that, while Wilkinson appeared to rely on the award prices from the first reaward contract in claiming the government erred, the government's loss calculations were based on the second reaward contract. A445-A449.
Wilkinson cross-examined Dr. Untiet about why DESC paid more for fuel under the reawarded contracts if fuel prices were indexed and why his "calculation [as to those losses was based on] the defendant's award bid, instead of the bid that [Avcard] originally made." A494. Dr. Untiet responded by explaining that the indexing did not prevent losses because the reawarded contracts had different deltas from the original contracts, id., and that, under the Guidelines' methodology, "the loss to the DESC is the per gallon increase in price the DESC must pay for contract fuel," which could only be determined by using the previous contract price as a baseline, A497. Wilkinson asked Dr. Untiet no questions about the administrative costs DESC incurred or its spot purchases.
Dr. Glenn Meyers testified in support of Wilkinson's loss calculations. A505-A558. To the limited extent he testified about DESC's losses, he opined that the government miscalculated DESC's increased fuel costs under the reawarded contracts by assuming, unrealistically, that "Avcard would have performed under the contract, but at Aerocontrol's prices." A512.
The parties argued about the amount of loss the next morning. The government noted that it had introduced evidence that DESC incurred administrative costs of around $27,000. A607. "There's no contrary testimony on that point and there were no questions asked of Mr. Untiet on cross-examin[ation]. I think that that number is basically uncontested." Id. "Similarly, uncontested is the fact that the government bought spot fuel between the time that it canceled the contracts held by FERAS and Aerocontrol, and the time they reawarded the contracts. . . . Again, no contrary evidence put on by the defense and no questions [were] asked of Dr. Untiet on cross-examin[ation on the subject]." Id. Turning to higher contract prices to DESC, the government pointed out that "Dr. Untiet testified and we submitted to the Court amendment 005, which showed that, in fact, his calculation [regarding Burgas] was correct. [Again,] there were no questions asked about that in cross-examin[ation]." A608. Thus, there was no "serious dispute" that "the total loss to DESC is $592,922." Id.
Wilkinson responded by arguing that, "[w]ith respect to actual loss to DESC, the Government has given no evidence whatsoever, just conclusions and argument." A637. "DESC is a government agency on a fixed budget. Its employees get paid the same whether they're working on one project or another. Its budget doesn't change. The only way that DESC could have had extra costs is if they paid overtime for the resolicitation or hired new temporary employees specifically for that one project. There's no evidence [such as wage reports and overtime sheets] that DESC did any of that." Id. Wilkinson also argued that the administrative and spot market costs were not attributable to the conspiracy because "[t]he defendants had already started to transition out of these contracts before they were arrested, before they found out about this indictment." A638. Wilkinson criticized the government for relying on "hearsay" instead of introducing actual fuel uplift tickets and invoices, and reiterated his challenge to the spot fuel charges at Burgas and Kuwait. A639-A641; see also p. 9, supra.
The court then announced its conclusions on the amount of loss. The court stated that it found both of the expert witnesses "knowledgeable" and "credible" but that it agreed with Dr. Meyers that "the defendant's calculations [on Avcard's losses] are probably as accurate as one could hope for in situations like this" and therefore accepted Wilkinson's calculations on the losses to Avcard. A657-A659.
The court then turned to losses to DESC. A659. The court held:
Based on these conclusions, the district court determined that the amount of loss under U.S.S.G. § 2B1.1 was $39,741, the intended loss to Avcard, which "adjust[ed] the base offense level upward by six levels" to 13 and corresponded to a Guidelines sentencing range of 12 to 18 months. A659-A660. The court ordered Wilkinson to pay restitution to Avcard. A663. The court did not order any restitution to DESC, however, having found no loss to DESC. Id.
The government objected to "the Court's findings of no loss to DESC" and to the court's "application of the guidelines to the evidence presented." A664-A665. Both sides then argued about the appropriate sentence and presented additional testimony. A665-A727. After considering the factors listed in 18 U.S.C. § 3553, the district court imposed a non-Guidelines sentence of three-years probation, 800 hours of community service, a $20,000 fine, and a $300 special assessment. A735-A737; see also A794-A798 (Judgment).
Application Note 3(A)(v)(II) to U.S.S.G. § 2B1.1 governs the calculation of "loss" to the government for sentencing purposes in procurement fraud cases, "such as a fraud affecting a defense contract award," as here. That Application Note provides that loss to the government includes the "administrative costs . . . of repeating or correcting the procurement action affected, plus any increased costs to procure the product or service involved," if those costs were reasonably foreseeable. Though the government brought Application Note 3(A)(v)(II) to the district court's attention and clearly described its application to this case, the district court does not appear to have applied this Application Note: the court did not reference the Application Note or discuss either of its enumerated types of costs. While it is possible that the district court applied this Application Note implicitly, it is difficult to believe that the court could have done so yet still concluded that the government suffered no loss from the admitted fraud given the evidence that DESC had to reaward the tainted contracts because of its policy not to deal with criminals, thus incurring costs "of repeating or correcting the procurement action affected," and that DESC had to pay more for fuel under the reawarded contracts (and in spot purchases) than before, thus incurring "increased costs to procure the product or service involved." The court's failure to apply this Application Note constitutes "significant procedural error," Gall v. United States, 128 S. Ct. 586, 597 (2007), requiring resentencing.
The district court also committed significant procedural error by finding that DESC incurred no loss from the fraud. That finding is clearly erroneous. The government presented evidence of $592,922 in such costs to DESC $26,813 in administrative costs and $566,109 in increased reprocurement costs ($91,423 from fuel purchases on the spot market and $474,686 from fuel purchases under the reawarded contracts) and they were attested to and clearly explained by Dr. Untiet, whom the district court found both "knowledgeable" and "credible."
Though Wilkinson criticized Dr. Untiet's testimony as "hearsay," Dr. Untiet testified about his own calculations and conversations based on data and records provided to him. Even if some parts of his testimony were hearsay because they were not based on personal knowledge, that fact is irrelevant. Hearsay evidence is commonplace in sentencing proceedings.
Wilkinson could have asked questions testing the reliability of the information Dr. Untiet provided but did not do so except for a few questions about why DESC incurred increased reprocurement costs if fuel prices were indexed and why the government used the former FERAS or Aerocontrol contract price as the baseline in determining the amount of increased reprocurement costs instead of Avcard's previous bid. Neither of these sets of questions undermined the government's evidence in any way: DESC had to pay more for fuel under the reawarded contracts, even though fuel prices were indexed, because the "delta" on the contract (the margin added to the indexed price) changed between the reawarded and original contracts. In addition, commentary to a prior edition of the Guidelines and case law demonstrates that the increased reprocurement costs to the government under Application Note 3(A)(v)(II) are a form of consequential damages that should be calculated by comparing the replacement and contract price. Resentencing is required because the district court's failure to apply Application Note 3(A)(v)(ii) and its clear error in finding no loss to DESC affected its determination of Wilkinson's offense level and Guidelines sentencing range and its decision not to award restitution to DESC.
In reviewing a sentence, an appellate court must "ensure that the district court committed no significant procedural error, such as failing to calculate (or improperly calculating) the Guidelines range, . . . selecting a sentence based on clearly erroneous facts, or failing to adequately explain the chosen sentence . . . ." Gall, 128 S. Ct. at 597. If the district court committed a "significant procedural error," resentencing is required. United States v. Matamoros-Modesta, 523 F.3d 260, 265 (4th Cir. 2008).(5)
The Court reviews a decision not to award restitution for abuse of discretion. See United States v. Vinyard, 266 F.3d 320, 333 (4th Cir. 2001). Reliance on a clearly erroneous factual finding is an abuse of discretion. United States v. Juvenile Male, 554 F.3d 456, 465 (4th Cir. 2009).
Application Note 3(A)(v)(II) to U.S.S.G. § 2B1.1 provides that loss to the government in procurement fraud cases, "such as a fraud affecting a defense contract award," includes the "administrative costs . . . of repeating or correcting the procurement action affected, plus any increased costs to procure the product or service involved," if those costs were reasonably foreseeable. The evidence in the record clearly establishes that (i) Wilkinson and his co-conspirators defrauded DESC; (ii) after learning of the fraud, DESC had to rebid and reaward several contracts FERAS or Aerocontrol previously won because of DESC's policy not to deal with criminals; and (iii) DESC paid more for fuel under the reawarded contracts (and spot purchases in the interim) than under the prior contracts. While the opacity of the district court's opinion makes it impossible to know precisely why it found no loss to the government in this case, the only reasonable conclusions are that the court did not apply Application Note 3(A)(v)(II) or applied it incorrectly. Either way, the district court committed "significant procedural error," Gall, 128 S. Ct. at 597, and resentencing is required.
In finding no loss to DESC, the district court explained:
A659. There is nothing in this discussion expressly indicating or even indirectly implying that the district court applied Application Note 3(A)(v)(II): the district court did not mention the Application Note by name or discuss either of its two enumerated types of costs "administrative costs . . . of repeating or correcting the procurement action affected" and the "increased costs to procure the product or service involved." While it is of course possible that the district court applied this Note implicitly without signaling that application in any way, that possibility is highly implausible in light of the evidence in this case (discussed below).
Application Note 3(A)(v)(II) is "binding" on the calculation of loss to the government in procurement fraud cases, and its enumerated costs must be considered in calculating the offense level and Guidelines sentencing range. See, e.g., United States v. Hudson, 272 F.3d 260, 263 (4th Cir. 2001) ("the Application Notes in the Sentencing Guidelines are binding"); United States v. Harris, 128 F.3d 850, 852 (4th Cir. 1997) ("we accept the Application Notes as authoritative"); U.S.S.G. § 1B1.7 ("Failure to follow [Application Notes] could constitute an incorrect application of the guidelines, subjecting the sentence to possible reversal on appeal."). The district court's failure to apply Note 3(A)(v)(II) is a "significant procedural error," Gall, 128 S. Ct. at 597, requiring resentencing. Cf. United States v. Green, 436 F.3d 449, 458-60 (4th Cir. 2006) (holding that misapplication of Guidelines was a "legal error" and vacating a sentence that was "imposed as the result of an incorrect application of [the Guidelines]").
The government presented evidence of $592,922 in losses to DESC from the fraud pursuant to Application Note 3(A)(v)(II): $26,813 in "administrative costs" "repeating [and] correcting the procurement action affected" and $566,109 in "increased costs to procure the product or service involved" ($91,423 from fuel purchases on the spot market and $474,686 from fuel purchases under the reawarded contracts). See pp. 6-8, supra. Dr. Untiet clearly testified as to each of these costs and how they were derived: for the administrative costs, he used DESC data concerning "[t]he wage value of the man hours entailed in issuing a new solicitation and a new location award"; for the spot purchases, he used DESC records from actual spot sales; and for the higher costs under the reawarded contracts, he multiplied the volume of fuel needed (using actual liftings for FY 2008 and estimated liftings for FY 2009 and 2010) by the difference between the contract and replacement price. See pp. 9-11, supra.
The district court concluded that there was inadequate factual basis to conclude that these costs "constitute losses that more likely than not were caused by this defendant's conduct." A659. But it provided no explanation for that conclusion. Cf. United States v. Montes-Pineda, 445 F.3d 375, 380 (4th Cir. 2006) (district courts "are obligated to explain their sentences" in sufficient detail to allow for meaningful appellate review).
While Wilkinson criticized the government's evidence as "hearsay," see p. 12, supra, Dr. Untiet testified about his own calculations and conversations based on data and records provided to him. Even if some parts of his testimony were hearsay because they related to facts for which he did not have personal knowledge, "it is well-settled law that 'hearsay is not only an acceptable basis for a sentencing determination,' it is often an 'integral part of the sentencing process.'" United States v. Hankton, 432 F.3d 779, 790 (7th Cir. 2005) (citations omitted). Reliance on hearsay evidence is commonplace at sentencing. See, e.g., United States v. Love, 134 F.3d 595, 607 (4th Cir. 1998) (noting that "there is no bar to the use of hearsay in sentencing" and relying on hearsay evidence). Here, the district court expressly found Dr. Untiet to be "knowledgeable" and "credible." A657-A659. If Wilkinson doubted the veracity or reliability of Dr. Untiet's testimony, Wilkinson should have questioned Dr. Untiet about that testimony on cross-examination.
Indeed, while Wilkinson raised a number of theories in his sentencing memoranda, see pp. 8-9, supra, he cross-examined Dr. Untiet only on two points with respect to DESC's losses: (i) why fuel prices increased under the new contracts if fuel prices were indexed; and (ii) why Dr. Untiet compared the new contract price for fuel to the price of fuel under the former contract, instead of using Avcard's previous bid as the baseline. See pp. 10-11, supra.(6) Neither set of questions undermined Dr. Untiet's testimony in any way.
First, as Dr. Untiet explained, prices increased under the reawarded contracts despite being indexed because DESC paid "the value of the price index plus the delta," and almost all the reawarded contracts had higher deltas. A494; see also A67. "It's the incremental delta that would be bottom line cost to DESC." A494.(7) In the aggregate, these increased reprocurement costs were substantial.
Second, the government correctly used the former contract price, instead of Avcard's prior bid, in calculating the amount of increased fuel costs from higher contract prices under Application Note 3(A)(v)(II). The commentary to a former edition of the Guidelines makes clear that the "increased costs to procure the product or service involved" are a form of "consequential damages" that are included in the "actual loss" calculation in addition to the "direct damages" caused by the fraud. Application Note 8(c) to U.S.S.G. § 2F1.1 (2000 ed.);(8) see also United States v. Silver, 245 F.3d 1075, 1081-82 (9th Cir. 2001) (noting that losses to the government in procurement fraud cases "'frequently are substantial'" and include consequential damages "over and above [the government's] expectation damages") (quoting Application Note 8(c)).(9) These costs represent the consequence of DESC having to find a replacement for fuel (the contracted good) after learning that the former contract was tainted; they are calculated, as a contractual measure of damages, by comparing the contract and cover price. Cf. U.C.C. § 2-712(2), "Cover"; Buyer's Procurement of Substitute Goods ("The buyer may recover from the seller as damages the difference between the cost of cover and the contract price, together with any incidental or consequential damages [as defined in a separate section] less expenses saved in consequence of the seller's breach."). It was reasonably foreseeable to Wilkinson at the time of the fraud that DESC would have to rebid the contracts if the fraud were uncovered because of DESC's policy not to deal with criminals and that the subsequent contract price would be higher, and indeed Wilkinson never argued to the contrary.
Wilkinson's other challenges to the government's evidence of loss to DESC were either belied by the evidence (e.g., his claim that FERAS or Aerocontrol started to transition out of the contracts before the indictment, see p. 12, supra), or defied common sense (e.g., his claim that the administrative costs in rebidding and reawarding the tainted contracts should not count because the government is "presumed" to have extra capacity, see pp. 8, 12, supra). Thus, they do not reasonably support the district court's finding of no loss to DESC.(10)
As an alternative holding, the district court stated: "Even assuming that loss was caused to the Government, my conclusion is that I would have to engage in speculation to assess any dollar value to it." A659. But this Court has emphasized that "[a] court should not refuse to calculate the loss because it appears to be too speculative to resolve." United States v. Bota, No. 92-5530, 1993 WL 321585, at *7 (4th Cir. Aug. 23, 1993) (unpublished); see also United States v. James, No. 92-5344, 1993 WL 174140, at *2 (4th Cir. May 25, 1993) (unpublished) ("Calculating the amount of loss is not abandoned because it may appear too speculative an exercise.").(11) Application Note 3(C) to U.S.S.G. § 2B1.1 states that "[t]he court need only make a reasonable estimate of the loss." The amount and quality of the evidence of loss to DESC presented at the sentencing hearing was more than sufficient for the court to make a reasonable estimate of DESC's loss from the fraud. Accordingly, resentencing is required. Cf. United States v. Rothberg, 954 F.2d 217, 219 (4th Cir. 1992) (remanding for resentencing because the district court erred in concluding that "actual loss" was too speculative; the evidence "was sufficient to permit the district court to calculate 'a reasonable estimate of [loss]'") (citation omitted).
Under the Fraud Guideline, the amount of loss caused by the fraud determines the appropriate adjustment to the offense level:
If the loss exceeded $5,000, increase the offense level as follows:
U.S.S.G. § 2B1.1(b)(1). Here, the district court added six levels to Wilkinson's offense level based on its finding of $39,841 in intended loss to Avcard, leading to an adjusted offense level of 13 and a Guidelines sentencing range of 12-18 months. Both Wilkinson's adjusted offense level and Guidelines sentencing range would likely increase by a substantial amount if this Court vacated the district court's finding of no loss to DESC and directed the district court to apply Application Note 3(A)(v)(II) on remand: If the court found $592,922 in loss to DESC on remand, for instance, Wilkinson's adjusted offense level would increase to 20,(12) and his Guidelines sentencing range would increase to 33-41 months. See U.S.S.G. Ch. 5, Pt. A.
Under the Mandatory Victim Restitution Act, 18 U.S.C. § 3663A, a district court "shall" order restitution to all "victims" of "offenses against property," including "any offense committed by fraud." Id. § 3663A(c)(1)(a)(ii). The Act defines a victim as "a person directly and proximately harmed as a result of the commission of an offense for which restitution may be ordered," id. § 3663A(a)(2), and includes the government, United States v. Ekanem, 383 F.3d 40, 43-44 (2d Cir. 2004).
In Wilkinson's plea agreement, he agreed "to the entry of a restitution order for the full amount of the victims' actual losses pursuant to [the Mandatory Victim Restitution Act and other statutes], as determined by the Court at sentencing." A32 (¶15). The district court acknowledged this requirement, A660-A661, but did not award restitution to the government because it found no loss to DESC in this case, A663. As discussed above, that finding is clearly erroneous; by relying on that finding in awarding no restitution to DESC, the district court abused its discretion. See p. 17, supra. Restitution to DESC is required so that the taxpayers do not have to bear the expense of DESC's losses from the fraud.
For the foregoing reasons, the court should reverse Wilkinson's sentence and the district court's decision not to award restitution to DESC, instruct the district court to calculate DESC's loss under Application Note 3(A)(v)(II), and order resentencing and restitution based on the amount of DESC's loss.
The United States requests oral argument in this case. The United States believes that oral argument will assist the Court in understanding the factual and legal issues presented in this appeal.
March 13, 2009
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Dated: March 13, 2009
I hereby certify that on March 13, 2009, I electronically filed the foregoing BRIEF FOR THE UNITED STATES OF AMERICA with the Clerk of the Court of the United States Court of Appeals for the Fourth Circuit by using the appellate CM/ECF system. I also filed eight copies of the brief with the Clerk of the Court by first-class mail.
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1. "A" refers to the Appendix.
2. All citations to the Guidelines are to the November 2007 edition unless otherwise designated.
3. While not at issue in this appeal, the government's sentencing memorandum also calculated the intended and actual losses to Avcard.
4. Each contract specified an index; the indexed price of fuel was the price of fuel according to that index on a particular date. The delta was a margin on top of that indexed price. For a hypothetical example, see note 7, infra.
5. Resentencing also may be required if a sentence is substantively unreasonable. Gall, 128 S. Ct. at 597.
6. Wilkinson asked Dr. Untiet no questions about the administrative costs in rebidding and reawarding the tainted contracts or about the spot fuel purchases.
7. The following hypothetical illustrates Dr. Untiet's testimony concerning the delta:
8. Section 2F1.1 of the Guidelines was consolidated with § 2B1.1 in November 2001. U.S.S.G. App. C, Amend. 617.
9. This is "[i]n contrast to [most] other types of cases," in which loss does not include consequential damages. Application Note 8(c) to U.S.S.G. § 2F1.1 (2000 ed.).
10. Indeed, some of Wilkinson's arguments presumed some loss to DESC, such as his claim that the government made a calculation error at Burgas and that correcting for the error reduced the loss to DESC from higher contract prices from $474,686 to $50,246. See p. 9, supra.
11. These unpublished opinions are included as an addendum to this brief in accordance with Federal Rule of Appellate Procedure 32.1(b) and Fourth Circuit Rule 32.1. The United States believes that they "ha[ve] precedential value in relation to a material issue in [this] case" and "no published opinion . . . would serve as well." 4th Cir. R. 32.1.
12. Wilkinson would qualify for a one-level deduction under § 3E1.1(b) because his offense level was "16 or greater." The court previously refused to grant this deduction because Wilkinson's offense level was too low. A660.