Comes now the United States of America, through Ronald G. Woods, the United States Attorney for the Southern District of Texas, by and through the undersigned attorneys, and would show the Court as follows:
The United States Probation Office issued its Presentence Report in this case on July 29, 1992. On August 13, 1992, the defendant filed his objections to that report. The United States hereby replies to those objections as they relate to the issues determinative of XXXX's offense level.
XXXXX's primary dispute with the Presentence Report ("PSR") concerns the amount of loss to consumers as computed under Guideline 2F1.1. The PSR computes this loss by determining the number of cars XXXXX handled and the percentage of those cars whose odometers XXXXX altered, and then multiplying the resulting number (i.e., the total number of cars with altered odometers, sometimes called "clocked" cars) by a figure representing the average loss to consumers per vehicle. XXXXX does not quarrel with this methodology, but disputes the PSR's estimate of the number of cars involved, and also may contest the figure used for loss per vehicle.[FN1] However, the figures used were reasonable, and the resulting amount of loss is supported by the evidence.
FNX. XXXXX does not appear, however, to contest the rollback rate used in the PSR.
I. COMPUTATION OF THE LOSS UNDER GUIDELINE 2F1.1.
The PSR (¶¶ 37-38) correctly identifies Guideline 2F1.1 as the appropriate guideline, and XXXXX does not dispute its applicability. 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.[FN2] Further, the "loss need not be determined with precision." Application Note 8. Rather, a "reasonable estimate" is contemplated, given "available information." Id.
FN2. 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."
The Guidelines specifically contemplate a calculation based on the "approximate number of victims and an estimate of the average loss to each victim." Application Note 8. That Note also states that an offender's gain from the fraud "ordinarily will underestimate the loss." The PSR, ¶ 38, adopts this methodology.
A. XXXXX PURCHASED AND SOLD APPROXIMATELY 4,500 VEHICLES DURING THE RELEVANT TIME PERIOD.
The PSR found that XXXXX handled 4,500 cars over the course of the scheme to defraud charged in Count I of the information and calculated the amount of loss under Guideline 2F1.1 using that figure (PSR ¶ 25, 38). PSR, ¶¶ 17, 39. XXXXX objects to these findings, and claims that he handled only 1,825 cars during the period he actively rolled back odometers. XXXXX's objection is contradicted by documents obtained during the investigation and the statements of witnesses.
The available evidence establishes that 4,500 vehicles is "a reasonable estimate of the [number of cars involved in the] loss, given the available information." Guideline 2F1.1, Application Note 8. This evidence was gathered from various persons and entities with whom XXXXX did business.
The government obtained information from "floorplanners"[FN3] and banks with which XXXXX did business, from parties who sold XXXXX vehicles, as well as from some of the businesses XXXXX ran. These sources of information, and the number of vehicles documented through each, are listed in Exhibit 1. As set out in that exhibit, the United States has proof that XXXXX handled approximately 3,288 vehicles between 1987 and 1990.[FN4] This figure, however, does not represent a truly reasonable estimate of the total number of cars purchased and sold by XXXXX between 1987 and 1990. The documentation does not cover the entire period of the scheme, but represents only what the investigation was able to piece together for the years 1987 through 1990. Because the United States could not determine all of XXXXX's sources of financing, it has been unable to obtain records for all of the vehicles XXXXX purchased. In particular, it has obtained only scant documentation for the years 1988 and 1989.
FN3. A "floorplanner" is an individual who finances a used car wholesaler's business by providing a bank account or line of credit that the wholesaler can access in purchasing and selling cars.
FN4. This number is not precise because there may be some overlap between the various sources listed in Exhibit 1. However, staff at the National Highway Traffic Safety Administration ("NHTSA") have reviewed the records to identify and eliminate double counting. This review has confirmed that there is no significant overlap between the sources included in the count. Thus, the 3,331 vehicle figure remains an approximation of the number of documented vehicles, albeit an accurate one.
Rather, the evidence taken as a whole shows that the 4,500 car figure used in the PSR is a reasonable estimate. This figure is based on an estimate that XXXXX handled 100 vehicles a month during a 45 month period beginning in September 1987 and ending in May 1991.
This estimate is in turn based first on statements made by witnesses, including XXXXX himself, estimating XXXXX's volume at 100 cars per month.[FN5] In addition, the figure is corroborated by the documents discussed above. During the periods for which the government has been able to obtain full documentation, XXXXX sold well over 100 cars a month. Specifically, the government has obtained documents from XYZ Resources, one of XXXXX's floorplanners, that cover the period from March 1987 to January 1988. Those documents show that during this 10 month period, XXXXX bought and sold over 1,200 cars, an average of over 120 per month.
FNX. XXXXX estimated that he handled between 75 and 150 vehicles a month during the relevant time period. In addition, XXXXXXX XXXXXX, a "spinner" who worked for XXXXX for approximately two years estimated that, during six to eight months of that period, he rolled back approximately 200 cars a month for XXXXX. He further indicated that in the last six months of his employment with XXXXX, when XXXXX's volume diminished somewhat, he still rolled back approximately 20 cars a week for XXXXX. These statements confirm 100 cars a month as a reasonable estimate.
The documents obtained by the government and the statements of witnesses, including XXXXX himself, show that XXXXX handled an average of 100 cars per month during the relevant 45 month time period. The PSR's estimate that XXXXX handled 4,500 cars is reasonable and supported by the evidence.
B. XXXXX DIRECTED ODOMETER ROLLBACKS ON 70 PERCENT OF THE VEHICLES HE HANDLED.
XXXXX does not contest the finding in the PSR that he rolled back the odometers of 70 percent of the cars he bought and sold. The government checked for mileage discrepancies on a random sample of 400 of the vehicles it documented,[FN6] and found that 271[FN7] of those cars had been sold with altered mileages, a "rollback rate" of slightly less than 70 percent. The finding in the PSR that XXXXX rolled back the odometers of 70 percent of the cars he bought and sold is reasonable, well documented, and uncontested. Applying a seventy percent rollback rate to the total number of cars handled by XXXXX (4,500) yields a rollback total of 3,150.
FN6. The checks for mileage discrepancies were accomplished by comparing mileage from state registration files or title histories showing mileage after XXXXX's organization sold the vehicles to other evidence of mileage on the vehicles before XXXXX acquired them. The comparisons were done by Special Agent Robert Eppes of the Department of Transportation or someone acting under his direct supervision. Investigator Eppes checked for "pre-XXXXX" mileage by examining documents obtained from persons who sold to XXXXX, or obtained from their financial institutions; by checking mileages stored in a computer system used to track vehicle titles and mileages; by examining other title history documents; or by orally contacting an owner prior to XXXXX to inquire as to the mileage at which the vehicle was sold to XXXXX. In all cases the identity of the vehicle was verified by "VIN," or vehicle identification numbers, which are unique to each vehicle.
FN7. At the time the PSR was prepared, NHTSA indicated to the probation office that 286 out of 400 cars had been rolled back. Since that time, NHTSA has re-examined the documentation for these vehicles in preparation for sentencing, and determined that the records for 15 of these vehicles contain anomalies that raise some doubt about whether they were rolled back by XXXXX. In an effort to be conservative, the government has removed these vehicles from its rollback count.
C. THE AMOUNT OF LOSS, AS DETERMINED UNDER THE GUIDELINES, YIELDS AN OFFENSE LEVEL INCREASE OF 15.
XXXXX's written objections do not directly dispute the loss estimate per car of $4,000 contained in the PSR. However, based upon conversations with counsel, it appears that XXXXX may dispute this figure. In any event, that figure is well supported by the evidence and by the guidelines.
1. THE AVERAGE ROLLBACK ON VEHICLES XXXXX SOLD WAS OVER 40,000 MILES.
The government has calculated the average amount of the mileage discrepancies it has documented. These calculations yielded an average rollback of 42,973 miles. See Exhibit 2.[FN8] XXXXX does not appear to contest this figure.
FN8. The government will be prepared, if necessary, to present testimony regarding the preparation and accuracy of each of the summary exhibits to this memorandum at the sentencing hearing.
2. THE AVERAGE CONSUMER LOSS PER VEHICLE, AS DETERMINED UNDER THE GUIDELINES, EXCEEDED $4,000 YIELDING AN OFFENSE LEVEL INCREASE OF 15.
There are two possible methods for estimating the loss per vehicle in this case: that suggested by an application note to Guideline 2F1.1 (and referenced in ¶ 33 of the PSR) and that actually used by the PSR to calculate the total loss figure. Both methods demonstrate that the $4,000 per car figure used by the PSR is a conservative and reasonable estimate.
As indicated above, the guidelines contemplate determining the amount of loss on the basis of reasonable estimates of loss per victim. Guideline 2F1.1, Application Note 8. Since November 1, 1991, the guidelines have clarified how this estimate is to 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."[FN9]
FN9. 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 XXXXX, 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).
In cases involving odometer rollbacks, this application note requires estimating the value of cars with rolled odometers, and essentially giving the defendant a "credit" for this amount when compared to the consumer price. (The consumer is the victim because, even when XXXXX initially sold vehicles to other car dealers, those dealers merely passed the vehicles along as low mileage vehicles.)
When the odometer on a motor vehicle is altered, and the vehicle resold, it becomes impossible to know the vehicle's true mileage. As a result, such vehicles must be sold with notice to the buyer of an odometer discrepancy. See 15 U.S.C. § 1988(a).[FN10] Consumers resist purchasing cars branded as having an odometer discrepancy, which diminishes their value.[FN11] Because there is little market for such cars, a precise value the defrauded consumer might obtain for a "clocked" car cannot be determined. However, the Guidelines do not require a precise evaluation. United States v. Wilson, 900 F.2d 1350, 1356 (9th Cir. 1990); United States v. Lohan, 945 F.2d 1214, 1219 (2d Cir. 1991).[FN12]
FN10. The regulations implementing 15 U.S.C. § 1988(a) are found in 49 C.F.R. 580. The regulation requires that the odometer disclosure statement for a vehicle whose odometer does not have the vehicle's true mileage must state "that the odometer reading does not reflect the actual mileage, and should not be relied upon. This statement shall also include a warning notice to alert the transferee that a discrepancy exists between the odometer reading and the actual mileage." 49 C.F.R. 580.5(e)(3). "True Mileage Unknown," or "TMU," is an industry colloquialism that refers to vehicles that must be sold with this disclosure.
FN11. Many consumers interpret a mileage discrepancy as connoting that a car's odometer has been "clocked" or "spun." Once a consumer believes that one aspect of a car has been misrepresented, the consumer's confidence in the reliability of all other aspects of the vehicle (e.g., roadworthiness, engine condition, etc.) naturally are diminished as well.
FN12. Application Note 7, Guideline 2F1.1, notes that the valuation of loss discussion in the Commentary to Guideline 2B1.1 applies. See Wilson, 900 F.2d at 1356. Guideline 2B1.1, Application Note 2, notes that ordinarily fair market value of property taken is used to evaluate a loss. However, where the "market value is difficult to ascertain or inadequate to measure harm to the victim, the court may measure loss in some other way, such as reasonable replacement cost to the victim." Thus, the Court is not obligated to calculate a precise fair market value for the TMU cars, and may consider replacement cost.
NHTSA has contacted a number of dealers in the Houston area and elsewhere to evaluate the difficulties a purchaser of a clocked car may encounter attempting to re-sell that vehicle, and to estimate what they would receive in such a sale. See Declaration of Robert Eppes ("Eppes Declaration"), Exhibit 3 at ¶ 9. Many dealers simply will not purchase cars with rolled back odometers. Those that do purchase cars acknowledged as rollbacks indicated that they would pay a maximum of 50 percent of the value of the car. See Id. Given that many defrauded purchasers will be unable to sell their rolled back cars at all, subtracting 50 percent of the value of the car from the retail price paid represents a conservative means of calculating the loss under Application Note 7(a).
These calculations reflect the reality that clocked vehicles have but a fraction of the value of a car with known low mileage, which is what the consumer paid for. A consumer with a clocked car is in a poor position to discover the true mileage of the vehicle, and faces the fact that dealers simply do not want to purchase clocked cars at all.[FN13]
FN13. Dealers holding a clocked vehicle may have the knowledge and resources to determine the vehicle's approximate actual mileage. This, along with their business contacts, may allow them to resell the vehicle at a price resulting in less than a total loss. Most consumers trying to "unload" a clocked vehicle will not have the resources and knowledge to research the mileage and find a buyer willing to pay more than a fraction of what the consumer had paid for the vehicle.
The average retail price of 38 rolled back vehicles for which the government has full consumer information was slightly over $9,000. See Exhibit 4. Based on the 50 percent figure discussed above, the government estimates that the purchasers of these cars could resell them for an average of, at most, $4,500. In addition, the purchasers of those cars paid an average of more than $3,000 in interest to finance their purchases, for an average total cost of over $12,000. See Id. These figures produce a total loss estimate of $7,500 per vehicle, by subtracting the $4,500 resale "credit" from total out of pocket cost. In the alternative, if one does not include the interest in calculating the cost of the car to the defrauded purchaser, and subtracts the resale "credit" from the average retail price of the car, the average loss figure is $4,500.
These calculations demonstrate the conservative nature of the loss calculations in the PSR. The PSR calculated the loss based on comparing the value of high and low mileage vehicles with accurate odometers, and adding in estimates of expenses incurred by the buyers of "clocked" cars, without factoring in the "taint" caused by a rolled back odometer. While this methodology is not that contemplated by Application Note 7(a), it demonstrates losses of 4,000 dollars per vehicle, and is well supported by the evidence.
These loss calculations are reflected in PSR ¶¶ 26-30, and are documented by Exhibits 3-5. Exhibit 3 shows that the average difference between XXXXX's purchase price for high mileage vehicles, and the price consumers paid for what they thought were low mileage vehicles, was over $4,000. In addition, Exhibit 5, the Declaration of Richard Morse, shows that a 40,000 mile rollback diminishes the wholesale value of the types of cars sold by XXXXX by between $3,000 and $4,000. Additional costs incurred by the purchaser of a rolled back vehicle approach $1,000. See PSR ¶¶ 27-30; Eppes Declaration, Exhibit 4 at ¶ 9. The difference in value between a high mileage car and a low mileage car (using an average rollback of 40,000 miles), combined with the additional costs incurred by the purchasers of a rolled back car, in most cases will exceed $4,000, and in all cases will at least approach $4,000. An estimate of $4,000 per vehicle is therefore a reasonable estimate of the losses suffered by a consumer who purchases a rolled back car, without factoring in the "taint" of the rollback and the resulting lack of a resale market.
As discussed above, the PSR properly attributed 3,150 rollbacks to XXXXX. The PSR assigns a loss per vehicle of $4,000, resulting in a 15 level increase under Guideline 2F1.1(b)(1)(P). Because this guideline covers losses in the $10,000,000 to $20,000,000 range, it is the correct one to apply to a 3,150 vehicle rollback scheme where the loss per vehicle is in the range of $3,175 to $6,439.[FN14] The PSR's loss figure is within this range, and is reasonable, reflecting difference in value between a high mileage car and a low mileage car, and taking into account the additional expenses incurred by the purchaser of a rolled back vehicle.[FN15] A more precise calculation is neither possible nor required. Wilson, Lohan.
FN14. $3,175 x 3,150 vehicles = $10,001,250. $6,349 x 3,150 vehicles = $19,999,350.
FN15. In the alternative, a loss figure of 7,500 per car is supported by the evidence, and would result in a 16 level increase under Guideline 2F1.1(b)(1)(P).
II. XXXXX'S OTHER OBJECTIONS ARE UNFOUNDED.
A. XXXXX'S ODOMETER ROLLBACK SCHEME INVOLVED MORE THAN FIVE PERSONS
XXXXX objects to the PSR's conclusion that a four level upward adjustment in his offense level is required because he was the "organizer or leader of a criminal activity that involved five or more participants." Guideline § 3B1.1(a); PSR ¶ 42. XXXXX's objection is unfounded.
The PSR identifies five different individuals who performed rollbacks for him. PSR ¶¶ 19, 23. In addition, XXXXX directed two individuals to perform the work of altering titles to reflect the low mileages, and employed at least one other individual to obtain blank, certified copies of titles to be filled in with false low mileages. Finally, he employed at least one person to perform errands related to the odometer rollback scheme, such as driving vehicles to the location where the actual rollbacks were performed.
The evidence supports a four-level upward adjustment under Guideline § 3B1.1(a).
B. GUIDELINE 5G1.2 AUTHORIZES CONSECUTIVE SENTENCES ON THE TWO COUNTS OF CONVICTION.
XXXXX appears to argue that Guideline 5G1.1(a) requires that the statutory maximum on Count I (five years) is the ceiling for his sentence even if the guidelines sentence exceeds five years. Sentencing on multiple counts, however, is governed by Guideline 5G1.2, which requires that if the guidelines sentence exceeds the statutory maximum on any one count, the court must order that sentences on multiple counts be served consecutively, to the extent necessary to produce the appropriate sentence under the guidelines. See U.S.S.G. § 5G1.2(d).
The method of determining amount of loss employed in the PSR is dictated by the Guidelines. The loss figure used in the PSR is a reasonable estimate supported by the evidence, and the offense level determined in the PSR is appropriate.
Dated: August 26, 1992 Respectfully submitted,
Ronald G. Woods United States Attorney
EDWARD F. GALLAGHER, III
Assistant United States Attorney
LEON F. SZEPTYCKI
Office of Consumer Litigation
U.S. Department of Justice
P.O. Box 386
Washington, D.C. 20044
[cited in Civil Resource Manual 170]