United States v. Sokolow ( 1996 )

Opinions of the United
1996 Decisions States Court of Appeals
for the Third Circuit
7-26-1996
United States v. Sokolow
Precedential or Non-Precedential:
Docket 95-1292,95-1367
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
___________
No. 95-1367
(Consolidated with No. 95-1292)
___________
UNITED STATES OF AMERICA
vs.
CRAIG B. SOKOLOW,
Appellant
___________
Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. Crim. No. 93-cr-394)
___________
Argued
January 22, 1996
BEFORE: MANSMANN and SCIRICA, Circuit Judges,
and RESTANI, Judge, Court of International Trade.
(Filed July 26, 1996)
___________
John Rogers Carroll
Johanna E. Markind
Carroll & Carroll
400 Market Street, Suite 850
Philadelphia, PA 19106
Peter Goldberger (Argued)
Anna M. Durbin
Pamela A. Wilk
50 Rittenhouse Place
Ardmore, PA 19003-2276
COUNSEL FOR APPELLANT
Michael R. Stiles
United States Attorney
Walter S. Batty, Jr.
Chief of Appeals
Joseph T. LaBrum, III (Argued)
Maryanne Donaghy (Argued)
Sarah L. Grieb
Assistant United States Attorneys
615 Chestnut Street, Suite 1250
Philadelphia, PA 19106-4476
COUNSEL FOR APPELLEE
___________
OPINION OF THE COURT
___________
RESTANI, Judge.
Defendant Craig B. Sokolow ("Sokolow") appeals from his
conviction in the United States District Court for the Eastern
District of Pennsylvania following a two month jury trial. On
March 18, 1994, Sokolow was convicted of 107 counts of mail fraud
in violation of 18 U.S.C. 1341 (1988), 17 counts of money
laundering in violation of 18 U.S.C. 1957 (1988), and one count
of criminal forfeiture in violation of 18 U.S.C. 982 (1988).
Following several sentencing hearings, the district judge
sentenced Sokolow to 92 months in prison, to be followed by three
years supervised release, and ordered a $50,000 fine, $6200 in
special assessments, $690,246.34 in restitution, and the
forfeiture of $2.1 million. On appeal, defendant challenges both
his conviction and sentencing. For the reasons stated herein, we
will affirm the conviction, sentencing, and the order of
forfeiture, but remand for reconsideration of the restitution
order.
I. BACKGROUND
The events leading to Sokolow's indictment and subsequent
conviction occurred between May 1, 1987 and July 23, 1990.
Sokolow, an attorney and licensed insurance agent, offered health
benefits plans to the public in Pennsylvania and several other
states through a series of corporations that he established and
controlled, but primarily through the National Independent
Business Association, Inc. ("NIBA"). The plans were marketed to
small business employers, their employees, and their families.
Association Insurance Marketing, Inc. ("AIM"), a corporation
established and controlled by Sokolow, served as the primary
marketing arm of NIBA. Through AIM, Sokolow received commissions
on all premiums received for the sale of NIBA policies.
Prior to May 1987, NIBA members were fully insured by NIBA's
group insurance contract with World Life and Health Insurance
Company ("World Company"). On May 1, 1987, Sokolow replaced
World Life with Independence Blue Cross and Pennsylvania Blue
Shield to administer and process NIBA's health care claims.
Sokolow purchased stop-loss coverage from Blue Cross, whereby
NIBA assumed responsibility for the payment of NIBA members'
medical care claims up to the first $25,000. Blue Cross would
pay any remaining claims in excess of $25,000. The indictment
charged that Sokolow falsely represented to the public that NIBA
was fully-insured by Blue Cross, when, in fact, it was a self-
funded plan, thus defrauding members of their premiums. In
addition, Sokolow allegedly used the Blue Cross logo on marketing
and billing materials, in violation of NIBA's agreement with Blue
Cross, to foster the impression that NIBA was the equivalent of a
Blue Cross fully-insured health benefits plan.
On June 30, 1988, Blue Cross terminated its service plan
with NIBA when Sokolow failed to pay approximately $2 million in
claims for which Blue Cross sought reimbursement. Sokolow then
contracted with another company for higher stop-loss coverage
that required NIBA to pay the first $50,000 of a member's medical
care claims. The indictment alleged that Sokolow again
misrepresented that NIBA was fully insured by the new coverage,
when, in fact, it was self-funded.
After receiving complaints concerning NIBA's claims
administration in late 1988, the Pennsylvania Insurance
Department (the "Department") began to investigate NIBA's
operations. The Department determined that Sokolow had been
operating NIBA as an illegal, unlicensed insurer in Pennsylvania.
Sokolow objected to the Department's inquiries on the basis that
NIBA was a Multi-Employer Welfare Arrangement ("MEWA") that could
file a benefits plan under ERISA and, thus, was not subject to
state regulation. The Department disagreed with Sokolow's
contentions and, on May 2, 1989, suspended NIBA's operations. On
August 31, 1989, the Commonwealth Court of Pennsylvania ruled
that NIBA did not constitute a valid MEWA plan, but was a
commercial enterprise "marketing insurance, without the benefit
of a licensed company status, while purporting to be a valid
ERISA plan, such that state licensing would not be necessary."
Appellant's App. [hereinafter "App."] at 1193. Consequently,
NIBA was ordered liquidated by the commonwealth court on February
15, 1990.
Sokolow collected more than $34 million in premiums from
NIBA plan members who were allegedly defrauded by Sokolow during
the period covered by the indictment. The indictment alleged
that Sokolow converted approximately $4 million of the premiums
for his personal benefit. He received $2,239,575.67 in
commissions through AIM and two other related insurance
companies ($1,837,152.30 of those commissions went to AIM) and
$1,806,259.23 in salary, officer's loans, and other
disbursements. These monies were deposited into AIM and NIBA
accounts. The indictment alleged that Sokolow laundered these
funds through a number of bank and brokerage accounts, as well as
real property and mortgages.
The jury trial commenced on January 10, 1994, and concluded
on March 18, 1994, with the return of guilty verdicts on all
counts considered by the jury. Sentencing proceedings were held
on January 6 and 11, and February 6, 1995, during which
sentencing issues were argued, and evidence of forfeiture, loss
calculations, and restitution was presented. On March 14, 1995,
the district court filed three separate Memorandum Opinions and
Orders, inter alia, determining the Sentencing Guidelines
calculations, and ordering the restitution and forfeiture
obligation. Following entry of judgment, Sokolow filed this
timely appeal challenging both his conviction and sentence.
II. CHALLENGES TO THE CONVICTION
A. Evidentiary Challenges
Sokolow challenges three evidentiary rulings made by the
district court. Sokolow claims that the district court (1) erred
in admitting into evidence Government Exhibit B-110 ("Gov't Ex.
B-110"), a summary of unpaid insurance claims of NIBA members;
(2) improperly allowed evidence of NIBA's alleged operation as an
unlicensed insurance company; and (3) abused its discretion in
admitting irrelevant and highly prejudicial victim impact
testimony. To the extent the district court's admission of
evidence was based on an interpretation of the Federal Rules of
Evidence, our standard of review is plenary. See United States
v. Furst, 886 F.2d 558, 571 (3d Cir. 1989), cert denied, 493 U.S.
1062 (1990). Our review of a district court's ruling to admit or
exclude evidence, if premised on a permissible view of the law,
however, is only for an abuse of discretion. See id.; see alsoUnited
States v. Versaint, 849 F.2d 827, 831 (3d Cir. 1988). We
will address each of Sokolow's evidentiary challenges in turn.
1. Government Exhibit B-110
Sokolow contends that Gov't Ex. B-110 is inadmissible
hearsay. Gov't Ex. B-110 is a compilation and summary of over $7
million in unpaid insurance claims of NIBA members. The document
was prepared for the Department in July 1992 by Inservco, a
third-party administrator hired to adjust the unpaid claims after
the commonwealth court ordered the liquidation of NIBA.
Originally, NIBA members' claims were documented in the course of
regularly conducted business by NIBA's third party administrators
-- National Benefits Corp., Insurance Benefits Services ("IBS"),
and Independent Insurance Administrators ("IIA"). The companies
processed NIBA claims and kept records on behalf of NIBA, which
Sokolow later authorized to be turned over to the Department's
Statutory Liquidator in connection with NIBA's liquidation. As
custodian of the NIBA plan records, the Statutory Liquidator made
the records available to Inservco for the adjustment of unpaid
claims.
Over Sokolow's objection, the district court admitted the
exhibit as an admission by Sokolow, under Federal Rule of
Evidence 801(d)(2)(C). The district court reasoned:
Inservco summarized information held by the Statutory
Liquidator, who in turn obtained the information from
another administrator hired by Sokolow. Each entity
that held the information had the express authorization
of [Sokolow]. As such, Exhibit B-110 is a party
admission . . . .
United States v. Sokolow, No. 93-394-01, 1994 WL 613640, at *5
(E.D. Pa. Nov. 1, 1994). We disagree with the district court's
reasoning.
Rule 801(d)(2)(C) specifically excludes from the definition
of hearsay any statements used against a party which were made by
another person authorized by the party to make a statement
concerning the subject. Fed. R. Evid. 801(d)(2)(C); Lightning
Lube, Inc. v. Witco Corp., 4 F.3d 1153, 1198 (3d Cir. 1993). We
find, and the government admits, that Inservco's adjustments to
the NIBA members' claims were not "done with Sokolow's consent or
at his direction," and, thus, are not admissions by Sokolow.
SeeAppellee's Br. at 23. The government continues to assert,
however, that the collection of these claims by NIBA's third-
party administrators constitutes an admission by Sokolow, and
are, thus, not hearsay. This argument is untenable. Rule
801(d)(2)(C) requires that the declarant be an agent of the
party-opponent against whom the admission is offered. Kirk v.
Raymark Indus., Inc., 61 F.3d 147, 164 (3d Cir. 1995), cert.
denied, 116 S.Ct. 1015 (1996). We find that neither the
underlying claims submitted by NIBA insurance beneficiaries to
NIBA's third-party administrators nor Sokolow's subsequent
release of these records to the Department constitutes an
admission by Sokolow. Thus, Gov't Ex. B-110 is hearsay because
the entries of NIBA members' claims, whether or not adjusted by
Inservco, were written out-of-court statements offered to prove
not merely the existence but the genuineness of the claims, and
ultimately, the underfunding of Sokolow's enterprise.
We now turn to whether Gov't Ex. B-110 falls within one of
the exceptions to the hearsay exclusion. The government argues
that Gov't Ex. B-110 is admissible under the business records
exception to the hearsay rule. This exception allows the
admission of hearsay documents provided a foundation is laid by
"the custodian or other qualified witness" that:
(1) [t]he declarant in the records had personal
knowledge to make accurate statements; (2) the
declarant recorded the statements contemporaneously
with the actions that were the subject of the reports;
(3) the declarant made the record in the regular course
of the business activity; and (4) such records were
regularly kept by the business.
United States v. Pelullo, 964 F.2d 193, 200 (3d Cir. 1992).
We find that Gov't Ex. B-110 is admissible under the
business records exception. Contrary to Sokolow's contentions,
the NIBA members' claims were collected in the course of
regularly conducted business of NIBA's original claims
administrators. IIA initially received NIBA plan member
information from IBS, a prior third party administrator, with
Sokolow's consent and authorization. Pursuant to the liquidation
order, Sokolow specifically authorized the IIA to "release any
and all data base information as required concerning [NIBA] on
the in-house history tapes and claims system to the
[Department]." App. at 826. Joseph DiMemmo testified that as
the representative of the Statutory Liquidator, he took custody
of all NIBA records. We find that a clear chain of custody and
foundation for this data, upon which Inservco based its claims
adjustment, was established.
As to the claim adjustments made by Inservco, and summarized
in Gov't Ex. B-110, we find that this data also falls within the
business records exception. As a third party administrator,
Inservco contracted with the Department to administer NIBA health
insurance claims. The claims adjustments made by Inservco were
the same type of adjustments NIBA's third party administrators
would have had to make if NIBA had stayed in business. Margaret
Lee attested to the authenticity of Gov't Ex. B-110 and laid the
foundation for its admission. Lee testified that Gov't Ex. B-110
was derived from Inservco's claims processing system and that
these records were made and kept in Inservco's regular course of
business.
Although the Inservco business records were derived in part
from information provided by outside persons not under a business
compulsion, the business records exception may still apply "[i]f
the business entity has adequate verification or other assurance
of accuracy of the information provided by the outside person."
See United States v. McIntyre, 997 F.2d 687, 700 (10th Cir.
1993), cert. denied, 114 S. Ct. 736 (1994); see also United
States v. Console, 13 F.3d 641, 657-58 (3d Cir. 1993) (under Rule
803(6), person transmitting recorded information not required to
be under business duty to provide accurate information if
"standard practice was to verify the information provided.")
(internal quotes omitted), cert. denied, 114 S. Ct. 160 and 115
S. Ct. 64 (1994). In this case, a proof of claim procedure was
utilized whereby the beneficiaries would reverify their claims
and submit supporting provider documentation through the
Department. The beneficiaries were under a duty to submit
accurate proof of claims in order to be entitled to payment, and
subject to criminal and/or civil penalties for submitting
fraudulent claims. See 18 Pa. Cons. Stat. 4117 (criminal/civil
liability for insurance fraud).
Inservco would then begin its own verification procedure.
Ms. Lee testified that Inservco set up the processing of the
proof of claim forms submitted by each claimant. Inservco
received database information from NIBA's prior third party
administrators regarding NIBA members. With this information
placed into Inservco's claims processing system, Inservco
verified the information submitted on the proof of claim forms.
Ms. Lee and her staff evaluated each proof of claim for correct
benefits, according to NIBA guidelines and benefit plans, and
submitted a notice of explanation of benefits and a notice of
claim evaluation to each claimant. There were roughly 4,600
policy holder claims against the NIBA estate. Ms. Lee audited
between 10 and 30 percent of each benefit amount less than
$1,000. Also, Ms. Lee, in coordination with the statutory
liquidators, audited any claim that had a benefit amount of over
$1,000.
In sum, we find that because the claims audit performed here
was unique, the government properly established the admissibility
of Gov't Ex. B-110 under the business records exception to the
hearsay rule.
Defendant asserts, however, that the methods and
circumstances under which Inservco prepared the summary of claims
were untrustworthy and unreliable. Sokolow argues that many
claims were not checked for pre-existing conditions, double
submissions, or the timeliness of the claims. We disagree.
Inservco adjusted the claims according to NIBA policy guidelines,
and these adjustments were subject to committee review and
oversight by the Department. Final approval of the claim
adjustments was made by the Department. Although the adjustments
made by Inservco did not take into account the timeliness of
claims, trial testimony indicated that this information could not
be determined from the submissions made to the Department.
Further, Sokolow offers no specific evidence that the claims were
not properly inspected by Inservco. Much of the evidence
indicates the contrary. In any event, such questions go to the
weight to be given to Gov't Ex. B-110, and not its admissibility.
Finally, Sokolow claims that Gov't Ex. B-110 is a public
report under Federal Rule of Evidence 803(8)(C), and, thus,
should be excluded under the rationale set forth in United States
v. Oates, 560 F.2d 45 (2d Cir. 1977). There the court held that,
"police and evaluative reports not satisfying the standards of
[Federal Rules of Evidence] 803(8)(B) and (C) may not qualify for
admission under [Rule] 803(6) or any of the other exceptions to
the hearsay rule." Id. at 77. Generally, a public report
consisting of "factual findings resulting from an investigation
made pursuant to authority granted by law," is not admissible
against a criminal defendant under Rule 803(8)(C). We agree with
Sokolow that Gov't Ex. B-110 contains some indicia of a public
report under Rule 803(8)(C). In processing NIBA members' claims,
Inservco was performing a fact-finding function and acting
essentially as the agent of the Department, which was required to
liquidate NIBA pursuant to state law. We disagree, however, with
Sokolow's contention that the findings made by the Department,
i.e. Inservco's adjustments, were inadmissible under the Oatesrule.
Criticizing Oates as an unduly broad interpretation of Rule
803(8), many courts have declined to import the limitations of
Rule 803(8)(B) and (C) into other hearsay exceptions. See,
e.g., United States v. Picciandra, 788 F.2d 39, 44 (1st Cir.)
(upholding admission of DEA report against criminal defendants
under Rule 803(5) (past recollection recorded)), cert. denied,
479 U.S. 847 (1986); United States v. Metzger, 778 F.2d 1195,
1201 (6th Cir. 1985) (declining to read Rule 803(8)(C)
limitations into Rule 803(10) (absence of public record or
entry)), cert. denied, 477 U.S. 906 (1986). Although we have not
specifically addressed this issue, the Seventh and Tenth
Circuits have held that Rule 803(8)(C) does not compel the
exclusion of documents properly admitted under Rule 803(6) where
the author testifies. See United States v. Hayes, 861 F.2d 1225,
1230 (10th Cir. 1988); United States v. King, 613 F.2d 670, 672-
73 (7th Cir. 1980). The Hayes court stated that the Oates rule
does not apply in such circumstances "because such [investigator]
testimony protects against the loss of an accused's confrontation
rights, the underlying rationale for Rule 803(8) and the basis of
the court's concern in Oates." 861 F.2d at 1230 (citation
omitted). We reach the same conclusion here.
Here, Margaret Lee, the Inservco employee who supervised the
claims adjustments, testified and was cross-examined at some
length. Lee personally audited many of the submitted claims and
stated that Gov't Ex. B-110 represented the results of Inservco's
processing of the NIBA members' claims. We find that the
circumstances surrounding the preparation of Gov't Ex. B-110 were
probed and there was no loss of confrontation rights. Thus,
Gov't Ex. B-110 was properly admissible under the business
records exception of Rule 803(6), and we will affirm on that
basis.
2. Evidence of NIBA's Non-Licensure
At trial, the district court permitted the reading into
evidence of portions of a ruling made by the Commonwealth Court
of Pennsylvania upholding the NIBA suspension order entered by
the Department. Denying Sokolow's motion to strike, the
district court ruled that "the probative value [of the opinion]
outweigh[ed] the prejudicial value." App. at 608. In addition,
various testimony regarding the non-licensure of NIBA was
permitted to be addressed.
Sokolow asserts that the district court erred in admitting
this evidence. He argues that (1) the allegations of violations
of state law were confusing and unduly prejudicial, (2) NIBA's
alleged non-licensure was not an element of the mail fraud scheme
alleged in the indictment, (3) prejudicial effect is highlighted
by the fact that the deliberating jury requested Judge Colins's
opinion, and (4) the groundlessness of Judge Colins's opinion is
supported by an en banc decision in a related case by the
commonwealth court, which found NIBA was a MEWA and not an
insurance entity under state law. See supra note 3.
We find that the district court did not abuse its discretion
in admitting this evidence. Under Federal Rule of Evidence 403,
"[relevant] evidence may be excluded if its probative value is
substantially outweighed by the danger of unfair prejudice,
confusion of the issues, or misleading the jury." Fed. R. Evid.
403. According to the government, the evidence of non-licensure
and the reading of Judge Colins's opinion was for the purpose of
providing background information regarding the suspension and
liquidation of NIBA. The non-licensure of NIBA was a factual
allegation in the indictment which would demonstrate the nature
of the fraud scheme and show the factual predicate for NIBA's
suspension and liquidation.
Sokolow asserts that the evidence of non-licensure was
unduly prejudicial and confusing, as evidenced by the jury's
request for Judge Colins's opinion. We disagree. In responding
to the jury's request, the district judge submitted the following
instruction, agreed to by the parties, rather than the requested
opinion:
[Judge Colins's opinion] was referred to in the
evidence to give a historical background of the
proceedings. The opinion of Judge Collins [sic] is
just that, an opinion. Judge Collins [sic] was not a
witness to the facts. You have seen and heard the
witnesses. You must make your decision on the basis of
the witnesses['] testimony, exhibits relating to facts
and the stipulations of counsel - pursuant to my
instructions on the law.
App. at 1203. We find that any prejudicial effect was remedied
by this instruction. Additionally, as indicated, Judge Colins's
ruling formed the basis for the liquidation of NIBA, and although
non-licensure was not an element of the mail fraud or money
laundering charges, it was a necessary factual predicate to the
mail fraud scheme. Sokolow claimed to have created a valid
health benefits plan filed with the Department of Labor and
operating under ERISA, when in fact, no such filing was ever
made. Accordingly, we find the district court did not abuse its
discretion in admitting evidence of NIBA's non-licensure.
3. Victim Impact Testimony
Sokolow asserts that the district court abused its
discretion in permitting highly prejudicial victim impact
testimony to be admitted at trial. The district court allowed 20
NIBA members to testify that they were denied payment of their
claims. Some witnesses were also permitted to testify as to
collateral losses that they suffered. One witness, Kenneth
Harris, who was injured in an auto race, was permitted to testify
as to $238,111.46 in unpaid claims, and to his long
hospitalization and prolonged rehabilitation. Additionally, he
was permitted to testify as to problems with collection agencies.
A year after the jury's verdict, the district court found that
Harris's claims were "caused by non-covered activity," and, thus,
he was not entitled to restitution. Sokolow also points to the
testimony of Frank Yeager, who became a quadriplegic as a result
of a gunshot wound. Sokolow asserts that collateral testimony as
to this witness's injury, and repeated reference to the injury by
government counsel in closing arguments, were unduly prejudicial.
In general, to satisfy the elements for mail fraud, "[p]roof
of actual loss by the intended victim is not necessary." United
States v. Copple, 24 F.3d 535, 544 (3d Cir.), cert. denied, 115
S.Ct. 488 (1994). Evidence of loss, however, may be treated as
evidence of the schemer's intent to defraud. See id. at 545. In
Copple, we found that extensive victim impact testimony as to
collateral losses "went beyond anything that was reasonable to
prove [defendant's] specific intent to defraud." Id. In that
case, some of the objectionable collateral impact testimony
included testimony that money used to pay back losses came from
savings for children's college educations, that paying back the
money had affected the witnesses' health, caused weight loss, and
required depletion of all personal savings. Id. at 545-46.
Accordingly, the court found that the district court erred in
allowing the testimony as the "[t]estimony was designed to
generate feelings of sympathy for the victims and outrage toward
[defendant] for reasons not relevant to the charges [defendant]
faced." Id. at 546.
In the case before us, the victims testified to a careful
account of the dollar value of the loss suffered as a result of
the fraud. Many of the victims also provided significant
embellishment concerning adverse personal consequences, similar
to the victims in Copple. By asking every victim who testified
whether he or she suffered any adverse consequences from the
unpaid claims, the government was attempting to highlight the
personal tragedies of the victims.
Such testimony has little, if any, probative value and may
be unfairly prejudicial. While normally the balancing under
Federal Rule of Evidence 403 is done by the district court, for
purposes of this discussion, we can assume, arguendo, that the
testimony was in fact prejudicial because we believe that its
admission was harmless. "Trial error is harmless if it is
highly probable that the error did not affect the judgment." Id.(citing
United States v. Simon, 995 F.2d 1236, 1244 (3d Cir.
1993)). We stated in Simon that a high probability exists where
the court has a "'sure conviction that the error did not
prejudice the defendant.'" 995 F.2d at 1244 (quoting United
States v. Asher, 854 F.2d 1483, 1500 (3d Cir. 1988) (citation
omitted), cert. denied, 488 U.S. 1029 (1989)). In making this
determination, we are not required to "disprov[e] every
'reasonable possibility of prejudice.'" Id. (citations omitted).
Here the error of admitting the adverse consequences
testimony was harmless because, as in Copple, 24 F.3d at 526-47,
the evidence of the scheme to defraud and of Sokolow's specific
intent was overwhelming. As we have set forth above, the record
is replete with proof of Sokolow's intentional misrepresentations
to small business employers and employees and concealment of
material facts which induced them to purchase what they believed
to be fully insured health care coverage. Substantial evidence
of the actual scheme to defraud was also presented at trial.
Eighteen of the twenty victim-witnesses who testified were
improperly denied coverage even though they paid premiums for
what they believed to be a fully insured health care plan.
Sokolow was forced to deny claims to make up for a shortage in
the claims reserve fund, since he diverted a large portion of the
collected premiums to his personal bank accounts. Thus, it is
"highly probable" that Sokolow would have been convicted of mail
fraud even without adverse consequences testimony. Any error,
therefore, was harmless.
B. Defendant's Challenges to Jury Instructions
1. Scienter Element for Violation of Money Laundering
Under 18 U.S.C. 1957
Sokolow asserts that the district court improperly
instructed the jury on the scienter element of 18 U.S.C.
1957. That section makes it unlawful for a person to "
knowingly engage[] or attempt[] to engage in a monetary
transaction in criminally derived property of a value greater
than $10,000 and is derived from specified unlawful activity."
Id. The elements necessary to prove a violation of 1957 are
that
(1) the defendant engage or attempt to engage (2) in a
monetary transaction (3) in criminally derived property
that is of a value greater than $10,000 (4) knowing
that the property is derived from unlawful activity,
and (5) the property is, in fact, derived from
'specified unlawful activity.'
United States v. Johnson, 971 F.2d 562, 567 n.3 (10th Cir. 1992).
Defendant contends that the knowledge requirement of 1957
requires "proof that Sokolow knew his conduct was prohibited by
law." As Sokolow never objected to the instructions at issue,
the court's review is limited to plain error, that is, the error
must be "plain" and "affect[] substantial rights." See United
States v. Retos, 25 F.3d 1220, 1228-29 (3d Cir. 1994) (quotingUnited
States v. Olano, 113 S.Ct. 1770, 1777 (1993); see alsoFed. R. Crim. P.
52(b) ("Plain errors or defects affecting
substantial rights may be noticed although they were not brought
to the attention of the court.").
In support of his argument, Sokolow relies primarily upon
the Supreme Court decision in Ratzlaf v. United States, 114 S.Ct.
655 (1994). In Ratzlaf, the defendant was charged with violating
31 U.S.C. 5324, which makes it unlawful for a person to
"structure" numerous transactions with several banks to evade the
banks' obligation to report cash transactions exceeding $10,000.
See id. at 658. Section 5322(a), Title 31, United States Code,
imposes criminal penalties for a "person willfully violating" the
antistructuring provision. At issue was the trial court's
instruction that the government did not have to prove the
defendant knew the "structuring" in which he engaged was
unlawful, but only that the defendant knew of the reporting
obligation and attempted to evade that obligation. In reversing
the court of appeals, which upheld the conviction, the Supreme
Court held that in order to give effect to 5322(a)'s
"willfulness" requirement, the government must prove that the
defendant knew the structuring in which he was engaged was
unlawful. 114 S.Ct. at 663. The Court was unpersuaded by
arguments that the offense of structuring is "so obviously 'evil'
or inherently 'bad' that the 'willfulness' requirement [of 5324
is] satisfied irrespective of the defendant's knowledge of the
illegality of structuring." Id. at 662.
Sokolow claims that the offense of money laundering is
analogous to the offense at issue in Ratzlaf. He argues that
engaging in monetary transactions, such as bank depositing, with
known criminal proceeds is not conduct that is "obviously evil or
inherently bad." Sokolow contends the jury must find that he
knew his spending and regular bank transactions were prohibited
by law.
Absent a "willfulness" requirement, however, we will not
require proof of knowledge of illegality to sustain a conviction
under the money laundering provision of 18 U.S.C. 1957. In
United States v. Zehrbach, 47 F.3d 1252, 1261 (3d Cir.), cert.
denied, 115 S.Ct. 1699 (1995), in discussing the proof necessary
for bankruptcy fraud, we stated that "[t]he statutory requirement
that the underlying acts be performed 'knowingly' requires only
that the act be voluntary and intentional and not that a person
knows that he is breaking the law." In Zehrbach, we
distinguished Ratzlaf on the basis of the "willfulness" element
required under the structuring offense. Id.; see also United
States v. Hilliard, 31 F.3d 1509, 1518 (10th Cir. 1994) (Ratzlafproof of
knowledge of illegality requirement not applicable to,
inter alia, 1957 money laundering provision); United States v.
Santos, 20 F.3d 280, 284 n.3 (7th Cir. 1994) (Ratzlaf not
applicable to 1956 money laundering provision because of
absence of willfulness requirement). Similarly, as 1957 does
not contain a willfulness requirement, we decline to adopt
Ratzlaf for the money laundering provision at issue in this case.
Moreover, Sokolow's citation to our decision in United
States v. Curran, 20 F.3d 560 (3d Cir. 1994), is distinguishable.
In Curran, we followed Ratzlaf in construing the "willfulness"
component of 18 U.S.C. 2(b), which makes it unlawful to
deliberately cause another person to perform an act that would
violate federal criminal law. 20 F.3d at 566-68. In that case,
defendant was charged with causing election campaign treasurers
to submit false reports to the Federal Election Commission in
violation of 18 U.S.C. 2(b) and 1001, the false statement
statute. Id. at 562. Thus, unlike the money laundering statute
involved here, "willfulness" was an element of the crime at issue
in Curran. See id. at 567-68. In sum, we find the district
court properly instructed the jury on the scienter element of
Sokolow's money laundering violation.
2. Criminally Derived Property Element of 1957
Sokolow asserts that the district court committed plain
error in the jury instruction as to the element of 1957 that
requires the criminally derived property in a monetary
transaction to have a value in excess of $10,000. Specifically,
Sokolow asserts that in the court's explanation of "tracing"
criminal proceeds, the district court erred in stating the
following:
[T]he Government need not prove that there [sic] $20,000
came from this sale over here, because as I understand it,
the Government's theory is these different sums -- they have
to initially prove they came from NIBA. It has to prove
that it came from NIBA, initially, but not what NIBA
account.
So the matter goes from $20,000 from NIBA to Sokolow &
Associates and then Sokolow & Associates spends the money or
spends a similar sum of money some places. They don't have
to prove it's the same $20,000 that went from Sokolow's
[account] to Sokolow & Associates. The Government need not
prove that all the property involved in the transaction was
the proceeds of the money laundering. It is sufficient if
the Government proves at least part of the property
represents such proceeds.
App. at 945 (emphasis on alleged error). Sokolow alleges that
the instruction "allowed the jury to convict simply on a showing
that even $1 of the proceeds of fraud were deposited into a
Sokolow account and later used to pay, in part, for the items
charged [in the counts] of the indictment." We find this
contention is without merit.
It is clear from the full context of the district judge's
explanation of the concept of proceeds that he is addressing the
absence of a legal requirement that the government trace the
funds constituting criminal proceeds when they are commingled
with funds obtained from legitimate sources. See United States
v. Johnson, 971 F.2d at 570 (noting that there is no requirement
that government "show that funds withdrawn from the defendant's
account could not possibly have come from any source other than
the unlawful activity."). We find no error in the district
court's jury instructions in this regard.
3. Sokolow's Responsibility for Actions of His Agents
Sokolow alleges error in the district court's jury
instructions as to Sokolow's responsibility for actions of his
agents, particularly as it relates to "insurance agents' improper
use of the Blue Cross logo on advertisements as part of the fraud
scheme." The instruction read as follows:
In order to sustain the burden of proof in this
matter, it is not necessary in either of these counts
to prove -- these types of crimes -- to prove that the
defendant did everything, every act. A person can act
through his agent, and therefore, if the acts or
conduct of another were ordered by the defendant or
directed by the defendant or authorized by the
defendant, the law holds the defendant responsible for
the acts, just as if he had personally done them. That
includes both human beings and corporate agents.
App. at 945. According to Sokolow, the jury instruction is
erroneous in that
the jury could have found Sokolow guilty of mail fraud
if he authorized employees to prepare marketing
materials for his plan, and those employees on their
own misrepresented the extent of Blue Cross
underwriting in such materials. No proof that Sokolow
directed the misrepresentations with an intent to
defraud was demanded.
Appellant's Br. at 26. Sokolow quotes the court in Curran, 20
F.3d at 567, which stated that, "Section 2(b) [of Title 18,
United States Code] imposes criminal liability on those persons
who possess the mens rea to commit an offense and cause others to
violate a criminal statute."
As defendant did not object to the jury instruction, we
review the district court's failure to provide a specific
instruction for plain error only. See United States v. Xavier, 2
F.3d 1281, 1287 (3d Cir. 1993). Reading the jury instructions in
context, the district judge clearly explains the scienter
requirements to convict Sokolow of both the mail fraud and money
laundering offenses. See App. at 941 ("[T]he defendant, Mr.
Sokolow, is charged with knowingly and unlawfully devising and
intend[ing] to defraud the members of [NIBA] . . . and that he
knowingly caused the United States [mails] to be used to execute
these schemes or this scheme."); App. at 944 ("[T]he Government
must prove beyond a reasonable doubt that there was -- that not
only was there a fraudulent activity, but the defendant had a
conscious intent to defraud. . . . [T]he defendant himself did
not have to mail anything. He may or he can order someone to do
it."); App. at 945 ("The Government must prove that the
defendant knew that property involved in the money transaction
constituted or was derived, either directly or indirectly from a
criminal offense . . . . [H]e has to know he received this money
through fraudulent means. He has to be conscious of that.").
The jury was instructed properly that intent to defraud was
required. Thus, we find no plain error in the district court's
instruction and we affirm Sokolow's conviction.
III. CHALLENGES TO SENTENCING
A. Calculation Under the Sentencing Guidelines
In determining the Sentencing Guideline range, the district
court grouped together Sokolow's mail fraud and money laundering
counts pursuant to U.S.S.G. 3D1.2(c). The higher offense
level for the two groups, the money laundering offense, was used
for computing the sentence. Sokolow does not contest the
grouping of the counts.
1. The "value of funds"
Sokolow asserts that the district court incorrectly applied
the Sentencing Guidelines to determine the "value of funds"
involved in the money laundering offense. The "value of funds"
involved in a money laundering offense is a specific offense
characteristic. U.S.S.G. 2S1.2(b). Under 1B1.3, specific
offense characteristics are determined by "relevant conduct,"
defined, inter alia, as
(1) all acts and omissions committed or aided and
abetted by the defendant, or for which the
defendant would be otherwise accountable, that
occurred during the commission of the offense of
conviction, in preparation for that offense, or in
the course of attempting to avoid detection or
responsibility for that offense, or that otherwise
were in furtherance of that offense;
(2) solely with respect to offenses of a character for
which 3D1.2(d) would require grouping of multiple
counts, all such acts and omissions that were part
of the same course of conduct or common scheme or
plan as the offense of conviction.
U.S.S.G. 1B1.3(a)(1)-(2). When reviewing a district court's
sentencing decisions, the court has plenary review over questions
as to the meaning of the Sentencing Guidelines. United States v.
Edmonds, 52 F.3d 1236, 1244 (3d Cir. 1995). Factual
determinations underlying the application of the guidelines are
reviewed under the clearly erroneous standard. Id.As to the money laundering counts, the presentence
investigation report ("PSR") determined that over $2.2 million in
proceeds from the unlawful mail fraud scheme had been laundered
by Sokolow. PSR at 6. This amount represented the commissions
received by Sokolow through AIM, and the related insurance
agencies, Sokolow & McMillan, and Sokolow, McMillan & O'Leary.
In addition to this amount, the district court added the
additional $1.8 million Sokolow received in salary, officer's
loans, and other disbursements to calculate the "value of funds"
involved in the money laundering offenses under the Sentencing
Guidelines. The district court concluded that Sokolow had
converted $4 million from the mail fraud scheme for personal
benefit, and, therefore, this amount represented the "accurate
measure of harm from Defendant's money laundering offenses."
See Appellant's Br., Addendum D, at 13. Sokolow argues the
district court erroneously included the $1.8 million as relevant
conduct of the money laundering offense, without determining
whether that amount independently satisfied the elements of
1957, namely, that Sokolow engaged in monetary transactions in
criminally derived property of a value greater than $10,000. We
disagree with Sokolow's contention.
We have previously noted that the commentary to U.S.S.G.
2S1.1 does not define "the value of funds." United States v.
Thompson, 40 F.3d 48, 51 (3d Cir. 1994), cert. denied, 115 S.Ct.
1390 (1995). In Thompson, we stated that "[the Commentary]
states that '[t]he amount of money involved is included as a
factor because it is an indicator of the magnitude of the
criminal enterprise, and the extent to which the defendant aided
the enterprise.'" Id. In United States v. Johnson, 971 F.2d
562, 576 (10th Cir. 1992), the court stated that "the measure of
harm under 2S1.1 is the total amount of the funds involved."
In dicta, the Johnson court noted that
[F]unds associated with uncharged instances of money
laundering can be added in to determine the offense
level under 2S1.1 if those acts are within the scope
of relevant conduct under 1B1.3(a)(2). Thus, in
determining the 'value of funds' under 2S1.1, the
district court is not necessarily limited only to the
funds identified with the counts of conviction.
Id. at 576 n.10.
We find that the district court did not err in finding the
additional $1.8 million as "relevant conduct" within the meaning
of the Sentencing Guidelines. As previously noted, this amount
was derived from Sokolow's unlawful mail fraud scheme. Further,
Sokolow's accountant testified that the $4 million represented
the total amount of funds disbursed from NIBA to Sokolow during
the period relevant to the mail fraud scheme. As such acts were
"part of the same course of conduct or common scheme or plan as
the offense of conviction," U.S.S.G. 1B1.3(a)(2), we find that
the $1.8 million was properly considered "relevant conduct" under
the Sentencing Guidelines even though this amount was not charged
in the money laundering counts. See United States v. Rose, 20
F.3d 367, 372-73 (9th Cir. 1994) (finding that uncharged acts of
money laundering may be considered in determining appropriate
sentence under Sentencing Guidelines).
2. Abuse of position of trust enhancement.
Sokolow received a two-level enhancement for abuse of
position of trust under U.S.S.G. 3B1.3. That section states,
in relevant part:
If the defendant abused a position of public or private
trust, or used a special skill, in a manner that
significantly facilitated the commission or concealment
of the offense, increase by 2 levels.
U.S.S.G. 3B1.3. At the time of the relevant offenses,
Application Note 1 in the commentary to this section stated the
following:
The position of trust must have contributed in some
substantial way to facilitating the crime and not
merely have provided an opportunity that could as
easily have been afforded to other persons. This
adjustment, for example, would not apply to an
embezzlement by an ordinary bank teller.
U.S.S.G. 3B1.3, comment. (n.1). In applying this section, "a
sentencing court must determine whether a defendant was placed in
a position of trust, and if he was, whether he abused that
position in a way that significantly facilitated his crime."
United States v. Craddock, 993 F.2d 338, 340 (3d Cir. 1993). The
inquiry into whether someone obtains a position of trust
approaches a purely legal determination for which de novo review
is appropriate. Id.; see also United States v. Lieberman, 971
F.2d 989, 993 (3d Cir. 1992). Whether or not a defendant abuses
a position of trust more closely resembles a question of fact and
is reviewed for clear error. Craddock, 993 F.2d at 340. Sokolow argued
before the district court, as he does here on
appeal, that enhancement for abuse of position of trust is
inappropriate because Sokolow was not in a position of trust and
because there were no "victims" to the money laundering counts.
Relying upon United States v. Lowder, 5 F.3d 467, 473 (10th Cir.
1993), the district court rejected Sokolow's argument. In
Lowder, the Tenth Circuit upheld an enhancement for abuse of
position of trust for a money laundering conviction where (1) as
a CPA, defendant provided tax and financial advice to elderly and
unsophisticated clients; (2) he advised his clients to place
their money with him and promised them security; and (3) as
president of the fraudulent investment corporations, he was free
to spend that money, without oversight. Id. In this case, the
district court determined that Sokolow, as CEO and President of
NIBA, abused a position of trust in facilitating the commission
of the money laundering offenses. The court relied upon the fact
that Sokolow marketed his insurance plans to small-business
owners and self-employed persons, and was freely able to spend
the derived monies as he wished.
We agree with the district court's conclusion. In United
States v. Pardo, 25 F.3d 1187, 1192 (3d Cir. 1994), we explained
that in determining whether a position constitutes a position of
trust for purposes of 3B1.3, a court must consider:
(1) whether the position allows the defendant to commit
a difficult-to-detect wrong; (2) the degree of
authority which the position vests in defendant vis-a-
vis the object of the wrongful act; and (3) whether
there has been reliance on the integrity of the person
occupying the position.
Id. The court further stated that, "[t]hese factors should be
considered in light of the guiding rationale of the section--to
punish 'insiders' who abuse their position rather than those who
take advantage of an available opportunity." Id.Applying the Pardo factors to this case, we find that
Sokolow held a position of trust under U.S.S.G. 3B1.3. First,
as President of NIBA, Sokolow was able to commit difficult-to-
detect wrongs, as he had sole control over NIBA's accounts
without oversight or supervision. Second, Sokolow exercised the
requisite degree of authority over the object of his wrong. It
was within Sokolow's authority to withdraw funds from NIBA and
that authority was necessary for the commission of the money
laundering offenses. Finally, as the district court noted, the
funds to be laundered were derived from Sokolow's marketing of
NIBA insurance plans to small business owners and self-employed
persons. In selecting the NIBA health benefits plan for their
employees and families, these members clearly placed a measure of
reliance on the integrity of Sokolow in his position as President
of NIBA. NIBA members testified to receiving materials regarding
the health benefits plan, signed by Sokolow in his capacity as
President.
Sokolow argues that no fiduciary relationship existed with
NIBA members in connection with the submission of premiums.
Unlike in Lowder, where the defendant induced elderly and
unsophisticated clients to entrust money to him to invest
securely on their behalf, Sokolow contends that NIBA members had
no similar expectation with premiums entrusted to NIBA. We
disagree. NIBA members submitted premiums with the expectation
that their health care claims would be covered by NIBA. As
president of NIBA, Sokolow was entrusted with the proper use of
those funds. Thus, Sokolow held a formal position of trust vis-
a-vis NIBA members.
As Sokolow occupied a position of trust, it must be
determined whether he abused this position "in a manner that
significantly facilitated the commission or concealment of the
offense." U.S.S.G. 3B1.3. As indicated, the district court
found that Sokolow's role as president facilitated the commission
of the money laundering offenses. Sokolow had significant
authority over the distribution of NIBA funds. As the district
court noted, Sokolow was "free to spend the money as he wished."
Accordingly, we find that the district court did not clearly err
in finding an abuse of position of trust. In sum, we will affirm
the district court's application of the Sentencing Guidelines.
B. The Restitution Order
The district court ordered Sokolow to pay $690,246 in
restitution to 17 NIBA members in the amount of unpaid claims for
medical care and treatment. According to the government, the
basis for calculating the losses was Gov't Ex. B-110, the
Inservco compilation of adjusted, unpaid claims. The restitution
amount excluded $238,111.46 claimed by Kenneth Harris for
uncovered medical care claims. The district court stated that
"[t]he evidence at trial and the sentencing hearing does not
support any other reductions in the amount of restitution."
Generally, the "district judge must point to evidence in the
record supporting the calculation of loss to the victims."
Copple, 24 F.3d at 549-50. Sokolow argues that other factual
evidence in the record warrants further adjustment to many of the
alleged unpaid claims. Sokolow cites five examples of NIBA
members whose alleged unpaid claims should have been reduced.
(1) Martha Mosher submitted a $12,000 claim,
which was valued by the liquidator at $512. The court
awarded her $51,834.99. In Gov't Ex. B-110, this
amount is listed as an adjusted unpaid claim for Shawn
Mosher.
(2) Patricia and Gerald Ferrier's claims were valued
by the statutory liquidator at zero. This amount is
reflected in Gov't Ex. B-110. Yet, the district court
granted them $3492 in restitution.
(3) Olivia Anderson submitted no documents in support
of her claim, and a letter from the statutory liquidator
stated that all her bills had been paid but one. The court
granted her $47,654. Further, she is not listed in the
excerpts of Gov't Ex. B-110, and the parties have not
indicated from where this amount derives.
(4) David Ahakinian and William Vincent Bradford were
allegedly not paid claims because they misrepresented
preexisting conditions. They disputed these allegations on
the witness stand. The district court awarded them $45,450
and $277,377 respectively.
See Appellant's Br. at 39-40.
Sokolow correctly contends that the basis upon which the
restitution awards was granted is unclear from Gov't Ex. B-110,
and often contradicted by trial testimony. We will remand the
restitution order for the district court to make specific factual
findings regarding the actual amount of recoverable loss
sustained by these claimants.
C. The Forfeiture Order
The district court ordered Sokolow to forfeit $2,141,108.67,
plus the contents of a Commonwealth Federal Savings and Loan
Account, all to be satisfied from substitute assets.
1. Identifiable Forfeitable "Property"
Sokolow challenges the validity of the special verdict forms
used by the jury with regard to 17 money laundering counts. As
an example, the verdict forms for the counts read as follows:
ITEM 1. $125,000.00
We the jury find that the property identified as Item 1 is:
a) Property involved in the violation of money laundering
(18 U.S.C. 1957) charged in Count 126 of the
Indictment and[/]or property traceable to such
property.
YES ________
NO ________
App. at 974. The jury marked "YES" for each of the monetary
amounts listed for the money laundering counts. The criminal
forfeiture provision provides as follows:
The court, in imposing sentence on a person convicted
of an offense in violation of [inter alia, 18 U.S.C.
1957], shall order that the person forfeit to the
United States any property, real or personal, involved
in such offense, or any property traceable to such
property.
18 U.S.C 982(a) (1994). Sokolow argues that the special
verdict forms are invalid because they failed to identify
specifically the property involved. We disagree. Federal Rule
of Criminal Procedure 7(c)(2) provides that
[n]o judgment of forfeiture may be entered in a
criminal proceeding unless the indictment or the
information shall allege the extent of the interest or
property subject to forfeiture.
Fed. R. Crim. P. 7(c)(2). Further, Rule 31(e) provides that
[i]f the indictment or the information alleges that an
interest or property is subject to criminal forfeiture,
a special verdict shall be returned as to the extent of
the interest or property subject to forfeiture, if any.
Fed. R. Crim. P. 31(e). The indictment specifically alleges the
amounts involved, and from where the amounts are derived. We
find that the special verdict forms elicited the proper findings
from the jury.
2. Substitutable Assets
Sokolow argues that the forfeiture of substitute assets on
the basis of the invalid special verdict forms was improper. As
noted above, however, the verdict forms were appropriate, and,
thus, Sokolow's argument on this ground is without merit.
Sokolow also challenges the order of forfeiture of
substitute assets on the basis that the government failed to
demonstrate that this action was appropriate. In general, we may
not set aside the district court's factual findings unless they
are clearly erroneous. United States v. One 1973 Rolls Royce, 43
F.3d 794, 804 (3d Cir. 1994). Forfeiture of substitute assets
may be ordered if the property traceable to money laundering, as
a result of any act or omission of the defendant,
(1) cannot be located upon the exercise of due
diligence; (2) has been transferred or sold to, or
deposited with, a third party; (3) has been placed
beyond the jurisdiction of the court; (4) has been
substantially diminished in value, or (5) has been
commingled with other property which cannot be divided
without difficulty.
21 U.S.C. 853(p) (1994). In this regard, the district court
found that Sokolow diminished the value of certain real estate
property owned by him, and transferred much of his assets to
other parties and family members, over whom he still exercised
control. We find no clear error in the district court's order of
forfeiture of substitute assets.
3. Criminal Forfeiture Under Count 126
Count 126 charged Sokolow with a money laundering
transaction involving $125,000 made on October 4, 1988. The most
recent amendment to the forfeiture statute, however, became
effective on November 18, 1988. Sokolow asserts that, on ex post
facto grounds, this forfeiture should be vacated.
Prior to November 18, 1988, 18 U.S.C. 982 permitted the
forfeiture of
any property, real or personal, which represents the
gross receipts the person obtained, directly or
indirectly, as a result of such offense, or which is
traceable to such gross receipts.
18 U.S.C. 982(a) (Supp. V 1987) (emphasis added). The
legislative history of the statute suggested a narrow reading of
the statute stating that "gross receipts" meant "only the
commission earned by the money launderer . . ., and not the
corpus laundered itself." S. Rep No. 433, 99th Cong., 2d Sess.
23 (1986). According to Sokolow, only later was the statute
amended to cover "any property, real or personal, involved in
such offense, or any property traceable to such property."
Appellant's Br. at 48-49 (quoting Anti-Drug Abuse Act of 1988,
Pub. L. No. 100-690 6463, 102 Stat. 4374 (1988)).
Neither party has cited any case law interpreting "gross
receipts" to mean the "corpus laundered." The government argues,
however, that where, as here, the defendant committed the
specified unlawful activity as well as the money laundering
violation, the corpus of the money is the "gross receipts" to the
defendant and is thus forfeitable. We agree.
As Sokolow was the person committing the unlawful activity
of mail fraud and also laundering money derived from that
unlawful activity, it is clear that he obtained the total
$125,000 as the "gross receipts" of the money laundering offense.
There is no need for a finding that "Sokolow paid himself a
commission for laundering his own money." See Appellant's Br. at
49. The money was derived from unlawful activity, and there is
no evidence indicating that this does not represent the "gross
receipts" of his money laundering scheme. As review by this
court is for plain error (Sokolow did not challenge this issue at
trial), we find that the district court did not err in
instructing the jury to determine whether the $125,000 was the
amount "involved in the violation of money laundering."
IV. CONCLUSION
In light of the foregoing, we will affirm the judgment of
conviction and sentence, and the forfeiture order. We will
remand for entry of a new restitution order in accordance with
this opinion.