The United States, by and through its attorneys, the United States Attorney's Office and the U.S. Department of Justice Office of Consumer Litigation, hereby submits its reply to the sentencing memorandum filed by defendant XXXX X. XXXXX. This memorandum addresses the defendant's objections to the presentence report set forth in his sentencing memorandum. By his absence of objections as to certain guidelines issues, there remains no disagreement between the parties that the presentence report is accurate in its determination that upward adjustments apply for XXXX's role as the organizer/leader of the conspiracy, and for obstruction of justice. The United States respectfully recommends that the Court accept the facts, offense level computations, and guidelines range contained in the revised presentence report and addendum thereto.
I. Factual Background
On December 12, 1994, the United States filed an Information against defendant XXXXX X. XXXXX, Sr., and seven other defendants involved in the same conspiracy. The Informations were filed incident to plea agreements signed between these defendants and the United States. All charges stemmed from an odometer rollback scheme. XXXXX X. XXXXX, the mastermind of the conspiracy, was charged with four felony counts:
(1) one count of conspiracy to violate the laws of the United States, in violation of 18 U.S.C. § 371, by
(a) knowingly and willfully resetting and altering, and causing to be reset and altered, the odometers of used motor vehicles, with the intent to change the number of miles indicated on those odometers, in violation of 15 U.S.C. §§ 1984 and 1990c,
(b) knowingly making, uttering, and possessing forged securities of a State, with the intent to deceive other persons, organizations, and governments, in violation of 18 U.S.C. § 513(a), and
(c) knowingly providing false and fictitious odometer disclosure statements to the buyers of used motor vehicles, in violation of 15 U.S.C. §§ 1988 and 1990c;
(2) two counts of knowingly and willfully causing the resetting and altering of the odometers of certain motor vehicles, with the intent to change the number of miles indicated thereon, in violation of 15 U.S.C. §§ 1984 and 1990c, and 18 U.S.C. § 2; and
(3) one count of knowingly making and possessing a forged security of a State, with the intent to deceive other persons, organizations, and governments, in violation of 18 U.S.C. §§ 513 (a) and 2.
On January 4, 1995, the defendant pled guilty to the counts charged in the Information.
XXXXX X. XXXXX, has been in the used car business in New Jersey and Pennsylvania for over thirty years. He has conducted business under a variety of names, including XXXX XXXXX Autos, XXXXX XXXXX Leasing, and XXX Motors. Off and on for the past twenty years, XXXXX has not dealt directly with the public, but has purchased and sold vehicles at wholesale.
Since 1988, XXXXX recruited various individuals to set up "straw" dealerships, through which he would buy high-mileage vehicles, roll back their odometers, and resell them. By hiring these other individuals, XXXXX sought to insulate himself from prosecution. These "straw" dealerships included XXXXXX Motors, XXXXXX Motors, XXX Motors, XXX Motors, XXXX XXXXXX XXXXX, and XX Leasing. The sole purpose of the dealerships set up by XXXXX was to sell cars with altered odometers and, with very few exceptions, the cars bought and/or sold by these dealerships were sold with altered odometers.
The used motor vehicles were purchased from leasing companies, wholesale car dealers, or at wholesale automobile auctions in a number of states, including New Jersey, Pennsylvania, and Maryland. Similarly, the vehicles were sold at auctions or to car dealerships in these and other states. The used cars sold by XXXXX have ended up in Pennsylvania, New Jersey, New York, Connecticut, Maryland, Virginia, Ohio, and as far away as Kentucky.
XXXXX gave direction to his co-conspirators, deciding what cars to purchase, how much to pay for them, and how far to roll back their odometers. He also recruited individuals to roll back the odometers of these vehicles and to falsify the title documents to show false low mileage on the titles. He directed these co-conspirators and paid them for their work. In short, he was in control of the conspiracy.
XXXXX's basic scheme was to recruit individuals to apply for an automobile dealership license, open a bank account, rent office space, and set up a telephone line. XXXXX financed these dealerships. He controlled the bank accounts by having the "straws" sign blank checks and turn them over to him. The "straws" bought cars, often with very close supervision from XXXXX, and took those cars to an individual who took mileage off (i.e., "spun" or "clocked") the odometers. The titling documents were generally taken to XXXXX himself, who altered them to reflect the new, false low-mileage on the odometers. This work was essential to business, because mileage is recorded on the title or title reassignment upon sale of a car. Thus, when an odometer is rolled back, title documents relating to the car have to be altered to reflect the false low mileage.
In order to resell a car with falsified documents, XXXXX went to great lengths to provide documentation in order to retitle a car in New Jersey with low mileage. For example, he used a typewriter with many different removable typeface elements, possessed phony notary seals, and printed letterhead stationery in the names of legitimate leasing companies. This enabled him to request duplicate titles from the State of New Jersey as if he were a previous owner of the car who had lost or accidentally destroyed the original title. Because these duplicate titles had no entries to indicate that ownership had been transferred, XXXXX could "jump," or eliminate, companies he controlled from the title history. Most importantly, a false low mileage could be entered, eliminating the need to alter a printed odometer figure on a title. However, most titles were in fact physically altered, using erasers, correction fluid, pens, or the typewriter. XXXXX also used a sales tax stamp to obliterate the last number on mileage placed on a vehicle's title, then added a new number to the front of the mileage number. For example, a vehicle purchased by one of the entities XXXXX controlled had 60,360 miles when it was purchased, but when the title was surrendered to the State of New Jersey, it reflected 16,036 miles.[FN1]
FN1. This forgery was overt act (e) set forth in paragraph 4 of the Information (Count One), and also the basis for Count Four, the forged securities charge.
Another way XXXXX sold clocked cars was to retitle vehicles purchased by his companies in the names of other dealers, from whom he leased dealer tags, or simply used their names. In some of these instances, XXXXX would pay another dealer for the use of its dealer tags, so that a vehicle could be retitled, and resold at auction, in that dealer's name. On other occasions, XXXXX used another dealer's name to retitle cars, but not necessarily with its permission or knowledge. Examination of title records for vehicles purchased by XXXXX's companies, as well as the bank records for those companies, show XXXXX retitling and selling vehicles in the names of XXX Motors, XXX XXXX's Auto Service, XXX Automotive Specialists, Inc., XXX Motor Sales, and XX Car Sales, among others.
After a new title was obtained, the cars were then resold by the "straws," who falsely represented to the buyers that the false, low mileage was the vehicles' true mileage. XXXXX's link to these dealerships is confirmed by bank and telephone records and by testimony and information from witnesses.
In his plea agreement, XXXXX stipulated that he was involved with the purchase and sale of at least 1600 "clocked" cars. This is a conservative estimate of the cars involved in the conspiracy.
II. There is Ample Support for the Fraud Loss Amount Set Forth in the Presentence Report
Section 2F1.1(b)(1) provides for an increase in the offense level based on the amount of loss contemplated by a scheme or course of conduct such as that here.[FN2] Further, the amount of "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." 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 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."
In this case, the amount of loss is estimated by multiplying a figure representing the average loss per victim by the number of cars with rolled back odometers.
A. Average Loss Per Victim - $4,000
The loss to the ultimate purchaser of each car defendants sold with a rolled odometer can be conservatively estimated as $4,000.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; see, e.g., United States v. Tardiff, 969 F.2d 1283, 1288 (1st Cir. 1992). 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."[FN3]
FN3. 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).
In cases involving odometer rollbacks, Application Note 8 requires estimating the value of cars with rolled odometers, and essentially giving the defendants a "credit" for this amount when compared to the consumer price. (The consumer is the victim because, even when the defendant initially sold vehicles to other car dealers, those dealers passed the fraud on to the consumers who bought these vehicles in the belief that they were truly low-mileage vehicles when, in fact, they were not.) As discussed below, however, "clocked" cars are difficult to sell, so this "credit" could be viewed as zero.
1. Odometer Fraud Robs Consumers of Much of the Value of a Vehicle for Which the Consumers Paid
a. Loss of the Opportunity for Resale
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) [amended and recodified after July 5, 1994, at 49 U.S.C. § 32705(a)], and 49 C.F.R. Part 580.[FN4] Not surprisingly, consumers resist purchasing cars branded as having an odometer discrepancy, which diminishes their value dramatically. 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 naturally are diminished as well.
FN4. The federal regulations implementing 15 U.S.C. § 1988 require that the odometer disclosure statement for a vehicle whose odometer does not display 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.
Car dealers also state that it is extremely difficult for a purchaser of a clocked car to resell that vehicle once the odometer rollback is made known, and that it is even more difficult to estimate what such an individual would receive in such a sale. See Att. A, Declaration of Richard Morse, ¶ 6 n.2. For that reason, many dealers simply will not purchase cars with rolled back odometers.
Application Note 7, U.S.S.G. § 2F1.1, notes that the valuation of loss discussion in the Commentary to U.S.S.G. § 2B1.1 applies. See United States v. Wilson, 900 F.2d 1350, 1356 (9th Cir. 1990). 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.
By way of example, the government is aware of several cars involved in this case where, once notified that their car had an altered odometer, the consumer victims returned to the retail dealer. In some cases, the dealers bought back the cars; in others the dealers and consumers negotiated a price for compensation, sometimes as high as $6,000. Where the dealer purchased the car back from the consumer, the car was usually resold "TMU" at auction, for a price substantially less than the wholesale price when the car was offered at its rolled-back mileage.
In one instance, a 1992 Ford Taurus with 60,089 miles was purchased by B&R Leasing in April 1993 for $9,000. A dealer in New York purchased the vehicle at auction for $11,100, purportedly with 16,217 miles. That dealer retailed it to a customer for $12,975. When the customer discovered that the odometer had been rolled back, the dealer bought it back, and the vehicle was returned to the auction where it had been sold by XXXXX's co-conspirators. In July 1994 it was resold at the same auction "TMU," and was purchased there for $6,500. On another occasion, in June 1993 B&R Leasing purchased a 1992 Dodge Caravan with 60,360 miles for $11,300. XXXXX's co-conspirators sold the Caravan at a wholesale auction to a dealer for $12,850, and it was subsequently retailed for $15,495. Shortly after the consumer purchased the vehicle it was discovered that the odometer had been rolled back, and the vehicle was returned to the auction. The auction reimbursed the dealer, then resold the Caravan "TMU" to another dealer for $9,450. Thus it can be seen that a "TMU" car's value is greatly diminished due to the questionable mileage.
Given that many defrauded purchasers of cars with rolled-back odometers could be unable to sell their cars at all, this would translate into a consumer loss figure that equals the consumer's full purchase price of the used vehicle.[FN5] In comparison to this amount, a loss figure of only $4,000 as offered by the government is an extremely conservative means of calculating loss under Application Note 7(a).
FN5. This analytical framework to calculate loss is applied by some state courts. See, e.g., People v. Ross, 25 Cal. App. 3d 190, 195, 100 Cal. Rptr. 703 (1972) (treating odometer fraud as theft and holding that proper determination of theft amount is full purchase price paid by the victim).
b. Loss of the Vehicle's Use
The average life of a car typically is approximately 113,000 miles.[FN6] A consumer purchasing a used vehicle, based on experience, expects that the life of the vehicle will be in this range, and believes that he or she is purchasing the remaining miles in the car's life. An odometer rollback, therefore, effectively defrauds the consumer of a significant portion of the apparent remaining life of the car.
FN6. See Attachment B, Declaration of Stacy C. Davis.
Based on the 257 vehicles for which the United States has specific high-and low-mileage information, the average rollback in this case was 38,823 miles. A typical consumer in this case thought he or she was purchasing a vehicle with about 28,923 miles (and thus about 84,000 useful miles remaining), when in fact the vehicle had about 67,746 miles (and thus only about 46,000 useful miles remaining) (See Ex. A-2 to Morse Declaration).
Consumers were paying on average approximately $10,206 for these cars. This is based on retail price information on 113 of the 257 vehicles sampled. In most, but not all cases, the price does not include sales tax, dealer prep charges, extended warranty plans, or other extra charges a consumer may have incurred when purchasing the vehicle. In addition, this information spans a time frame of five years, the earliest sales data being from November 1988, and the most recent from July 1993. As with most retail purchases, prices increase from year to year.
Thus, since consumers were receiving only a small percentage of the useful miles that appeared from the false odometer reading to be remaining before the car reached life expectancy, it follows that a large percentage of their purchase price was fraudulently obtained.
c. Actual Expenses
One approach to showing consumer loss is to look at the types of actual expenses a consumer pays as a direct result of this type of fraud. A typical rollback in this scheme was 38,823 miles. The impact of such a rollback on the wholesale price of a vehicle of the type defendants bought and sold (generally large American made cars) alone totals nearly $4,000.[FN7] The cost of the fraud to consumers who paid retail prices for these cars was even greater.
FN7. See Att. A, Morse Declaration, ¶ 5. That declaration contains a table showing the effect on wholesale values of used cars of a 40,000 mile rollback, based on Galves Auto Price Lists. The wholesale price impact is between $3,400 to $4,000, depending upon the type of car involved.
The consumers who purchased these vehicles with rolled back odometers also incurred costs which were not reflected in the purchase price itself, but which nonetheless stemmed directly from the fraud perpetrated by the defendants. These increased costs included the following:[FN8]
FN8. See Att. A, Morse Declaration, ¶ 7.
(i) Maintenance Costs: increased maintenance costs are not always reflected in purchase price considerations, as some owners have vehicles that are virtually worthless as the result of a rollback;
(ii) Lost Time: buyers of high mileage vehicles frequently spend considerable time dealing with unexpected maintenance; often time is lost from work when a car is the person's method of transport to his or her employment;
(iii) Taxes: the sales tax imposed on the inflated purchase price attributable to the rollback, and annual property taxes imposed based on a falsely inflated purchase price;
(iv) Finance Charges: the cost of financing the portion of a vehicle's cost that stems from the rollback; and
(v) Insurance Costs: unnecessary insurance carried due to a false belief that a vehicle is low mileage.
When viewed in light of all of these factors[FN9]--some of which (e.g., property taxes and insurance costs) are recurring--it is apparent that $4,000 per vehicle is an extremely conservative estimate of the average loss per vehicle caused by the defendant's fraudulent scheme.
FN9. Consideration of comparable factors affecting the victim's loss are frequently considered in determining total monetary loss attributable to a defendant's criminal conduct. See United States v. Curran, 967 F.2d 5, 6 (1st Cir. 1992) (victim's lost interest income considered as part of loss caused by defendant's embezzlement scheme); United States v. Pavao, 948 F.2d 74, 77 (1st Cir. 1991) (defendant's fraud contributed to victim's failure to keep up mortgage payments).
NOTE: The balance of this memorandum is Civil Resource Manual 184 Civil Resource Manual at 184.