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'
misdemeanor convictions. That is because those offenses were
in furtherance of and to conceal the felony violations of XXX, XXX,
XXX XXXX, and in furtherance of and to conceal the conspiracy and
fraud violations of those defendants. Following this cross
would lead to sentencing the XXXXXXs with the additions from the
table. Because this would lead to an offense level significantly
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
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
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
The guidelines specifically contemplate an estimate based on
"general factors, such as the nature and duration of the fraud and
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
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
concerning the quality of a consumer product, the loss is the
between the amount paid by the victim for the product and the
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
evaluated in a variety of ways. For example, if a customer
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,
entire $200 could be viewed as fraudulently obtained, and the loss
thus be $200. However, application note 7(a) suggests that the
should somehow be given credit for value given, so that analysis is
If the concentrate in our example was in fact 20% sugar, then
customer received 80 pounds of concentrate, for which the customer
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
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.
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
8, which states that the offender's gain is an alternative
albeit one that ordinarily understates the loss. In this case, the
defendants substituted sugar for orange concentrate in products
unsweetened. The gain to them was the difference between the cost
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
This methodology is essentially what the government proposes
For the pounds of sugar sold as concentrate, the loss is the value
concentrate minus the value of the sugar. In Strassburger
loss was the market value of choice meat minus the market value of
Putting a value on the fraud in this fashion thus requires
reasonable estimate of the amount of sugar used as an adulterant,
reasonable estimate of the difference in cost between the two
1. The amount of sugar was approximately 18,056,217
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
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,
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
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
from industry sources. Moon Down's records of purchases for the
period are not available, as they were apparently among the records
destroyed after the search at Moon Down. However, enclosed as
is the Declaration of DX. XXXXXX X. XXXX. Dr. XXX is an economist
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
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
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
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
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
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]