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Sample Government Alborz Memorandum -- Ninth Circuit

From a Ninth Circuit brief, May 1994.

3. Cost of "rehabilitation" of the vehicles

Defendant sold his tampered vehicles to dealers, not to the general public. Thus, his customers were sophisticated in the trade, and never would have accepted a vehicle purporting to be low-mileage yet showing wear on tires, brake pedals and shoes, and interior fixtures. It was central to defendant's fraud that he had to make the physical appearance of the vehicles be consistent with their "new" mileage.

Recognizing this, the probation officer concluded that XXXXXXX should not be rewarded for his outlay in this regard:

Based on all of the aforementioned information, the Probation Officer believes that a loss of $3,000,000 is a realistic, yet conservative number to use to calculate the base offense level of this fraud. It seems inappropriate to the Probation Officer to reduce the defendant's estimated profit margin per vehicle based on his reconditioning costs since these improvements to the vehicles were necessary to successfully carry out this scheme.
(PSR ¶ 70.)

This conclusion was not clear error. The practice of "reconditioning" or "detailing" used cars far from being a boon to the new buyers is officially recognized by the Federal Trade Commission as a deceptive practice if used to conceal mechanical defects.[FN1]

FN1. In the Statement of Basis and Purpose for the Trade Regulation Rule; Sale of Used Cars, 49 FR 45692, 45701 (1984) (codified at 16 C.F.R. 455), the Commission finds:
One factor which facilitates a dealer's ability to make general representations about the quality of a used car without questioning by consumers is the general industry practice of appearance reconditioning known as "detailing." After dealers obtain vehicles, they routinely engage in detailing, whereby the vehicle's interior, exterior, trunk, and engine compartment are thoroughly cleaned in order the enhance the car'[s] salebility. Because many consumers rely on appearance cues in estimating a vehicle's mechanical condition, consumer injury can result when detailing obscures poor mechanical condition. . . . [S]urvey data demonstrate that consumers judge a car's mechanical condition based on appearance cues and think that "clean" cars are in substantially better mechanical condition than cars described as being somewhat less attractive.
Further, the value of the cosmetic improvements is equaled or outweighed by the additional losses to the consumers which were not levied against defendant in computation of loss, such as increased repair costs, inflated sales and property taxes, and unnecessary finance and insurance premiums. (PSR ¶¶ 63, 69.) There is also a cost to the health of the used car industry itself: odometer tampering makes it much more difficult for honest dealers to make a living. Moreover, there are costs associated with people unknowingly driving unsafe vehicles, such as vehicles having tens of thousand of miles of wear that are not known to the owner.

These considerations were left out of the computation because of difficulties of computing their value, but they do show the conservative nature of the estimate of $3,000 loss per vehicle, and more than offset any "value" in the reconditioning effort. (PSR ¶ 63.)

Nowhere in the record did defendant provide anything but his own undocumented guess at the dollars he spent on this "reconditioning." (PSR ¶ 52.) He also claimed that he did "a good job in reconditioning the vehicles he sold." (SD 40, response to PSR ¶ 57.).

He provided nothing to contradict the PSR's findings on the reasons for the "reconditioning" of the vehicles. The record on this issue thus underscores the correctness of the district court in adopting the PSR's finding that "reconditioning costs" should not be used as an offset to consumer losses.

In support of his argument on appeal, XXXXXXXX now cites United States v. Alborz, 818 F. Supp. 1306 (N.D. Cal. 1993), (Br. at 7, 26, 27) for the proposition that the value of "reconditioning" work the defendant did on his rolled-back cars must be credited to him in computing the amount of loss. However, Alborz is distinguishable on its facts. Furthermore, Alborz disregards an important Ninth Circuit principle of loss evaluation discussed above, leading to erroneous conclusions. It has no application to the instant case.

In Alborz, the court stated:

the presentence report did not consider the effect of any of this [detailing or rehabilitation] work on the value of the cars sold and thus the victims' actual losses. There is no suggestion that the detailing and rehabilitation work did not add legitimate value to the cars.
818 F. Supp. at 1308. Indeed, in Alborz this issue was not raised by the parties, but by the court. Id. at 1307-08, and n.1.

In the instant case, on the other hand, the PSR does discuss "detailing" work. As stated above, the PSR notes that the "reconditioning" costs were necessary "to successfully carry out this scheme." (PSR ¶ 70.) It is obviously necessary to disguise the vehicles so they will look like the low mileage cars they are represented to be. The PSR correctly rejects the notion that this part of the fraudulent scheme somehow inures to the defendant's benefit in calculating losses.[FN2]

FN2. If these costs were to be considered a "mitigating" item in valuation, then a defendant should be required to survey his victims to learn the "value" to them of the cosmetic improvements employed to disguise the true mileage of the vehicle. (As discussed above, the burden is on the defendant to show evidence contrary to the conclusions reached in the PSR.) The defendant's cost of obtaining the services would vastly overstate their value to the consumer who was gulled into purchasing the vehicle on the basis of its false appearance.
In addition, Alborz states that "the difference between defendant's purchase and sale prices sets an outside limit to the amount of the loss." 818 F. Supp. at 1309. The court reaches this conclusion by applying economic principles the court views as requiring giving an odometer tamperer credit for his "legitimate distributional activities", inasmuch as the criminal in Alborz is seen as "perform[ing] an important service to the economy[.]" Id.[FN3] No evidence would support such a conclusion in this case.

FN3. Alborz cites an example of a Honda with 118,810 miles which the defendant sold at wholesale for $6,400 represented as having 59,275 miles on the odometer. 818 F. Supp. at 1307. Under common markups, a consumer somewhere likely paid at least $8,000 for this vehicle which had over 118,000 miles on it. To suggest that the consumer suffered a maximum of $1,600 damage under these circumstances (the difference between defendant's purchase and sale price), demonstrates a total lack of understanding of what in all likelihood befell that consumer who thought the vehicle had, and paid $8,000 to obtain, many miles of remaining useful service.
Furthermore, the Alborz court's analysis ignores this Court's admonitions regarding loss valuation. "A strict market approach measures only the gain to the defendant while virtually ignoring the harm suffered by the victim." Wilson, 900 F.2d at 1356. "That this measure of loss exceeds [defendant's] gain from the illegal business is of no moment." Kelly, 993 F.2d at 704. Indeed, Alborz is closer to an abstract discussion of economic principles than a realistic assessment of the costs borne by victims of odometer fraud.

In sum, this case is not like Alborz because the PSR here did consider and properly reject the proposition that the defendant should get credit for the costs of disguising the true mileage of the vehicles. Moreover, Alborz is, simply put, wrongly decided.

The court below properly rejected XXXXXXXX's arguments regarding the value of his "reconditioning" efforts; it certainly was not clear error to reject those claims.

[cited in Civil Resource Manual 170]