142.

Sample Analysis Estimating Loss Based on Savings to Defendants

NOTE: United States v. Kohlbach, 38 F.3d 832 (6th Cir. 1994), contains an analysis of the loss issue in another case involving orange concentrate adulteration under the FDCA. What follows is from another prosecution involving similar facts: IV. Guidelines Calculations A. The Food and Drug (§ 2N2.1) or Fraud (§ 2F1.1) Guidelines -- Base Offense Level Each defendant was convicted of one or more of the following offenses: conspiracy; violating the FDCA; mail fraud. The XXXXXs pled guilty to misdemeanor violations of the FDCA, while XXXXXX and the defendants who stood trial were convicted of FDCA felonies. The difference between the felony and misdemeanor FDCA violations is the presence or absence of intent to defraud or mislead as an element. 21 U.S.C. §§ 333(a)(1) and (2). The FDCA violations all took place in the first half of 1990. The conspiracy lasted until at least spring 1991. The mailings charged in the mail fraud counts took place between November 22, 1988 (count 2), and August 17, 1990 (count 13). Changes in the guideline for FDCA violations, § 2N2.1, between November 1989 and the present are pertinent to determining the correct offense level for the XXXXXXs. They pled guilty to misdemeanor violations of the FDCA. Section 2N2.1 has always encompassed 21 U.S.C. §§ 331 and 333, the pertinent FDCA provisions. In addition, both in 1989 and currently, felony violations of the FDCA were sentenced under the fraud guideline, § 2F1.1.[FN1] Thus, the guideline for the FDCA felonies, which include as an element "intent to defraud or mislead," is 2F1.1. These include the FDCA verdicts against all three defendants who stood trial, and XXXX XXXXXX. A difference in treatment appears to arise for the XXXXXXs' misdemeanor offenses depending on whether the guideline in effect in 1990 (when their offenses took place) or the current guideline is applied, however. FN1. Guideline 2N2.1(b)(1) currently provides an explicit cross reference to § 2F1.1 "If the offense involved fraud[.]" In the November 1, 1989, version, § 2N2.1, application note 2, provided: "If the offense involved . . . fraud . . . apply the guideline applicable to the underlying conduct, rather than this guideline." The guideline applicable to fraud was then, as it is now, 2F1.1, so this application note required applying § 2F1.1 and the fraud table in sentencing FDCA felonies. See United States v. Arlen, 947 F.2d 139, 146 (5th Cir. 1991) (§ 2F1.1 is the proper guideline for FDCA violations involving intent to defraud or mislead), cert. denied, ___ U.S. ___, 112 S.Ct. 1480 (1992); United States v. Cambra, 933 F.2d 752, 755 (9th Cir. 1991) (same). Section 2N2.1 provides for a base offense level of 6. While the XXXXXXs' behavior was fraudulent, their offense of conviction did not have fraud as an element, so the 1989 application note requiring use of the fraud guideline for offenses involving fraud appears not to apply to their offenses.[FN2] Thus, their offense level, before adjustments, would be 6. FN2. If the probation office and Court disagree and apply the fraud table as a result of the XXXXXXs' fraudulent intent, the government intends to file a 5K1.1 departure motion to allow the Court to credit the XXXXXXs for their substantial assistance to the prosecution. Guideline 2N2.1(b)(2) currently provides a cross reference that was not present in 1990: If the offense was committed in furtherance of, or to conceal, an offense covered by another offense guideline, apply that other offense guideline if the resulting offense level is greater than that determined above. If applied, this cross reference would apply to the XXXXXXs' FDCA misdemeanor convictions. That is because those offenses were committed in furtherance of and to conceal the felony violations of XXX, XXX, and XXX XXXX, and in furtherance of and to conceal the conspiracy and mail fraud violations of those defendants. Following this cross reference would lead to sentencing the XXXXXXs with the additions from the fraud table. Because this would lead to an offense level significantly higher than 6, the 1989 guideline must be applied for the XXXXXXs. Because no other defendant would benefit from application of the 1989 guidelines, it is not necessary to consider the dates of the other offenses, and the current guideline should be applied to them. (Indeed, the other defendants all have guideline totals that exceed 16, so applying the 1989 guidelines to defendants who pled guilty would be to their disadvantage, because current guideline § 3E1.1 allows for a three level reduction for timely acceptance of responsibility, rather than just two levels in the 1989 guideline.)The mail fraud convictions, 18 U.S.C. § 1341, are subject to analysis under § 2F1.1. Section 1341 is one of the statutes directly subject to § 2F1.1. The conspiracy convictions require application of the conspiracy guideline, § 2X1.1(a). That guideline provides for use of the guideline and adjustments for the object offense. Since the object offenses were FDCA and mail fraud violations, § 2X1.1(a) also requires consideration of the guideline for fraud, § 2F1.1. Thus, for all the felony violations, § 2F1.1 is the appropriate guideline. Finally, all counts of conviction should be grouped under guideline §§ 3D1.2(b) or (d). This is because all counts of conviction were part of a common scheme or plan (§ 3D1.2(b)), and, for the felonies, because the fraud guideline applies to each count and determines an offense level largely on the basis of total loss (§ 3D1.2(d)). Thus, § 2F1.1 applies, with a base offense level of six. For the XXXXXXs, § 2N2.1 provides a base offense level of 6. B. Amount of Loss Increase Guideline 2F1.1(b)(1) provides for an increase in offense level based on the amount of loss contemplated by a scheme or course of conduct such as that here.[FN3] Further, the amount of "loss need not be determined with precision." Application Note 8. Rather, a "reasonable estimate" is contemplated, given "available information." Id. FN3. Application Note 6 provides: "The cumulative loss produced by a common scheme or course of conduct should be used in determining the offense level, regardless of the number of counts of conviction." Application Note 7 provides: "if an intended loss that the defendant was attempting to inflict can be determined, this figure will be used if it is greater than the actual loss." The guidelines specifically contemplate an estimate based on "general factors, such as the nature and duration of the fraud and the revenues generated by similar operations." Application Note 8. In addition, application note 8 states that "the offender's gain from committing the fraud is an alternative estimate that ordinarily will understate the loss." Since November 1, 1991, the guidelines have clarified how loss estimates may be accomplished in consumer fraud cases as this. Application note 7(a) provides: "In a case involving a misrepresentation concerning the quality of a consumer product, the loss is the difference between the amount paid by the victim for the product and the amount for which the victim could resell the product received."[FN5] FN5. This Application Note was effective November 1, 1991. Prior to that date, the Application Notes were silent on how to estimate the loss in consumer fraud cases. The clarification in Application Notes 7(a) and (b) operates to give the defendant credit for value given in fraud cases, contrary to developing case law that did not give such credit. See, e.g., United States v. Johnson, 908 F.2d 396, 398 (8th Cir., 1990) (amount of loss incurred by a bank making a loan on false representations was the entire value of loan without credit for value of collateral); United States v. Brach, 942 F.2d 141, 143 (2d Cir., 1991) (same). Accordingly, Application Note 7(a) merely clarifies the Guideline and benefits the defendant, so no ex post facto concern inhibits its consideration. See 18 U.S.C. § 3553(a)(4) (defendant to be sentenced pursuant to guideline in effect at sentencing). The loss defendants caused through their offenses could therefore be evaluated in a variety of ways. For example, if a customer purchased 100 pounds of purported "unsweetened" concentrate from Moon Down at $2.00/pound, the price was $200. Because the customer wanted "unsweetened" product, but in fact received sugared concentrate, the entire $200 could be viewed as fraudulently obtained, and the loss would thus be $200. However, application note 7(a) suggests that the defendant should somehow be given credit for value given, so that analysis is incomplete. If the concentrate in our example was in fact 20% sugar, then the customer received 80 pounds of concentrate, for which the customer would have paid $160 at $2/pound. The loss could then be viewed as $40. Because Moon Down's customers did not want to purchase any sugar from Moon Down, this analysis would be justified. However, to be conservative, the government suggests that the cost of the sugar be credited to the defendants. In this example, if the sugar cost 25›/pound, the 20 pounds of sugar would have cost defendants $5. The loss would then be $35.[FN6] FN6. This was essentially the method used to determine loss in a recent orange juice adulteration scheme similar to this case that was prosecuted in Michigan. The Sixth Circuit currently has pending three appeals stemming from that case, two of which involve the propriety of this method of valuation of the amount of fraud under the guidelines. United States X. XXXXXX, Nos. 93-2531 and 93-2550 (Sixth Circuit, argued June 23, 1994); United States v. Marshall, No. 93-2564 (Sixth Circuit, argued June 23, 1994). This method of loss valuation is that suggested by application note 8, which states that the offender's gain is an alternative estimate, albeit one that ordinarily understates the loss. In this case, the defendants substituted sugar for orange concentrate in products sold as unsweetened. The gain to them was the difference between the cost of the sugar, and the cost of genuine orange concentrate. In United States v. Strassburger, No. 93-3039 (8th Cir., June 16, 1994) (copy enclosed), the court determined loss under guideline § 2F1.1 in the context of misrepresentation of a food product. The defendants had represented that they were selling U.S.D.A. "choice" meat to retailers. In fact, they sold lesser quality ungraded or "no-roll" meat. Once shipped, it was not possible to tell the difference between choice and no-roll meat. One witness testified that on average, choice meat sold for 5›/pound more than no-roll meat. The Eighth Circuit upheld the district court's finding that the loss under § 2F1.1 was 5› times the number of pounds of misrepresented meat the defendants had sold. This methodology is essentially what the government proposes here. For the pounds of sugar sold as concentrate, the loss is the value of concentrate minus the value of the sugar. In Strassburger the loss was the market value of choice meat minus the market value of no-roll meat. Putting a value on the fraud in this fashion thus requires only a reasonable estimate of the amount of sugar used as an adulterant, and a reasonable estimate of the difference in cost between the two products. 1. The amount of sugar was approximately 18,056,217 pounds As discussed above in the section of this letter dealing with the magnitude of the fraud, the defendants acquired approximately 20,156,217 pounds of sugar during the conspiracy. The vast majority of this was used as an adulterant. Approximately 2,100,000 pounds was used in product labelled as containing sugar (see § II A 3, above). This leaves approximately 18,056,217 pounds that was used to stretch orange concentrate illegally. 2. The loss per pound was more than $1.00 At trial, various witnesses who were familiar with the market for orange juice and the price of sugar testified concerning the price difference between those commodities. XXXXXX XXXX, for example, testified that he was familiar with orange juice concentrate pricing throughout his 1985 - 1991 tenure at Moon Down. He testified that concentrate prices fell as low as 88›/pound briefly one time, and went as high as $2.18/pound. He said that $1.38 to $1.42 was more typical, and that Moon Down paid about 35›/pound for sugar.[FN7] Thus, XXXXXXX XXXX said that Moon Down gained about $1.00/pound for every pound of sugar it used to stretch concentrate, which was the reason for the stretch. (V. 7, pp. 110-12). FN7. XXXXXXX XXXX was correct regarding the apparent price per pound that Moon Down paid for sugar, 35›. However, part of that 35› was kickbacks or "commissions" for XXXXX XXXX, XXXXX XXXX, and the XXXXXXs. Moon Down's actual cost of sugar was the price it paid for invoices from Sugar Base, minus these kickbacks. XXXXX XXXXXX bought and sold both orange concentrate and sugar during the 1986 - 1990 time period. XXXXXX testified that the most common price for concentrate during those years was in the $1.30 to $1.60/pound range. He testified that sugar cost about 20›/pound during those years. (V. 11, p. 118). The price Moon Down paid for sugar is shown in invoices from Sweet Sugars, Moon Down's main source of supply, to Sugar Base, the company the XXXXXX's operated to launder paper for Moon Down. The invoices are in the trial evidence, GX 300-676. The price varied over the years between about 19.5› and 32.5›/pound. The most common prices were at the middle to lower end of this range. The price of concentrate during this entire period is available from industry sources. Moon Down's records of purchases for the entire period are not available, as they were apparently among the records destroyed after the search at Moon Down. However, enclosed as Exhibit B is the Declaration of DX. XXXXXX X. XXXX. Dr. XXX is an economist with the Florida Department of Citrus. The declaration bears the caption United States X. XXXXXX XXXXX XXXXXXX, No. 1:93-CR-19 (W.D. Mich.), as the information was collected for use in that case. It is equally useful here. As discussed above and as DX. XXXX explains, "Orange juice is bought and sold on the basis of the price per pound of soluble solids that the juice contains." (XXXX declaration, ¶ 2). DX. XXXX collected price information for frozen concentrated orange juice ("FCOJ"). FCOJ is the commodity that Moon Down purchased, blended, stretched with sugar, and sold as unsweetened concentrated orange juice for manufacturing. The prices per pounds solids he collected are consistent with the trial testimony cited above. For the years 1985 to 1990, the lowest average annual price for orange solids from the three sources compiled by DX. XXXX were as follows: Year Source Price per pound 1985 Futures $1.42 1986 Futures $1.03 1987 Brazilian $1.39 1988 Futures $1.76 1989 Futures $1.54 1990 Futures $1.68 Even using these figures, which are the lowest prices from the sources DX. XXXX examined for each year, and comparing them to Moon Down's sugar cost of 19 - 32›/pound, the loss per pound of stretch, even giving defendants "credit" for the sugar, exceeded $1.00 in every year except 1986. 3. The loss caused by defendants' fraud was approximately $22,000,000 To calculate the total loss in this case using the methodology discussed above, the government calculated the approximate number of pounds of sugar used in the stretch each year.[FN8] It then multiplied this number by the difference between 30› (a high value to ascribe to Moon Down's cost of sugar) and the price per pound of concentrate for that year, derived from the table immediately above. The annual sums were then added. The total figure derived by this process is $22,131,324.12. FN8. To estimate the number of pounds of sugar used in the stretch each year, the government calculated a percentage based on the suppliers whose sales of sugar to Moon Down are summarized in GX 3403, and multiplied that percentage by the 18,056,217 pounds of sugar used in the stretch (see section IV B 1 above for the source of the 18,056,217 pound figure). The percentages for each of the years 1985 - 1990 were 3.7%, 9.3%, 18.6%, 23.2%, 34.9%, and 10.3%. [cited in USAM 4-8.250]