United States v. Iannone ( 1999 )

Opinions of the United
1999 Decisions States Court of Appeals
for the Third Circuit
7-12-1999
USA v. Iannone
Precedential or Non-Precedential:
Docket 98-3373,98-3374
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Recommended Citation
"USA v. Iannone" (1999). 1999 Decisions. Paper 197.
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Filed July 12, 1999
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
NOS. 98-3373 and 98-3374
UNITED STATES OF AMERICA
v.
JOHN MICHAEL IANNONE,
Appellant
On Appeal From the United States District Court
For the Western District of Pennsylvania
(D.C. Crim. Nos. 97-4 and 98-1)
District Judge: Honorable Robert J. Cindrich
Argued: December 10, 1998
Before: BECKER, Chief Judge, STAPLETON, Circuit Judge,
and HARRIS* District Judge.
(Filed: July 12, 1999)
LINDA L. KELLY, ESQUIRE
United States Attorney
BONNIE R. SCHLUETER, ESQUIRE
Assistant United States Attorney
PAUL E. HULL, ESQUIRE (ARGUED)
Assistant United States Attorney
U.S. Attorney's Office
633 U.S. Post Office and Courthouse
Pittsburgh, PA 15219
Counsel for Appellee
_________________________________________________________________
* Honorable Stanley S. Harris, United States District Judge for the
District of Columbia, sitting by designation.
STANLEY W. GREENFIELD,
ESQUIRE (ARGUED)
Greenfield, Brewer, Bailor & Kay
Greenfield Court
1035 Fifth Avenue
Pittsburgh, PA 15219
Counsel for Appellant
OPINION OF THE COURT
HARRIS, District Judge:
Defendant-appellant John Michael Iannone ("Iannone")
appeals from the sentence imposed after his guilty plea to
six counts of interstate transportation of property taken by
fraud, one count of mail fraud, and one count of wire fraud.
In determining Iannone's sentence pursuant to the United
States Sentencing Guidelines ("U.S.S.G."), the district court
applied several enhancements to the offense level. Iannone
challenges two actual and one de facto enhancements: (1)
a two-level increase pursuant to S 3A1.1 for a vulnerable
victim; (2) a two-level increase pursuant to S 3B1.3 for
abuse of a position of private trust; and (3) an upward
departure, achieved via a two-level increase, pursuant to
S 5K2.0 for conduct outside the "heartland" of the fraud
guideline. We affirm the sentence.
I. FACTUAL BACKGROUND
Essentially, Iannone defrauded people by encouraging
them to invest in oil and gas drilling ventures, but then
using the investors' money for his personal expenses rather
than for the promised purposes. Iannone committed these
frauds against several victims, living in different states, over
the course of several years. The total of the funds Iannone
fraudulently obtained amounted to more than $600,000.
A. The Pennsylvania Frauds
In 1991 or 1992, Iannone started his own company,
Horizon Natural Resources ("HNR"), after leaving his job as
an executive at Consolidated Natural Gas. HNR was an oil
2
exploration and natural gas tract leasing company, with an
office in Wexford, Pennsylvania. At least initially, HNR was
a legitimate business.1 Iannone was HNR's sole owner and
operator, giving himself the title of Chief Executive Officer
("CEO").
In early 1992, Iannone secured several leaseholds and
two contractual farm-out arrangements with Exxon
Corporation to drill and operate oil wells. Pursuant to the
Exxon arrangement, Iannone contracted to drill a test well,
Horizon No. 1, by a stated deadline. Despite two or three
extensions of the deadline, Iannone never drilled the test
well. By November 1992, Iannone's business appeared to be
failing. He had not drilled any wells, all but one of his
leaseholds had expired, and Exxon had terminated one of
the two farm-out arrangements.2
In December 1992, Iannone began to solicit investment
monies from his neighbors, ostensibly for the purpose of
drilling and operating two wells, Horizon Nos. 1 and 2.
Unaware of the precarious state of Iannone's business, his
neighbors invested approximately $320,000 with him.
Included among those investors were several members of
one family, the Stringerts. Iannone had been a friend and
neighbor of the Stringerts for several years. Iannone sold
the Stringerts what he labeled "interests" or"shares" in
Horizon Nos. 1 and 2 and entered into contracts with the
Stringerts on behalf of HNR. However, rather than investing
the money in the drilling project, Iannone used it for his
own personal expenses.
Having spent all of that money by the end of October
1993, Iannone began to solicit further investments in the
Horizon drilling project. Iannone told his victims various
lies in order to encourage their investment. For example, he
told one investor that the wells already were drilled and
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1. The district court made a factual finding, at defendant's request, that
HNR began as a legitimate business venture. ("I think then that what we
need to do is make a finding . . . that this was not a fraud in the whole
cloth[,] meaning that the entire venture from its inception was not
created for the purpose of committing a fraud. That, originally, there was
some legitimate business function . . . .").
2. Exxon terminated the remaining farm-out arrangement in April 1993.
3
producing and told others that the wells were going to be
drilled in December 1993 and that he had acquired Exxon's
overriding royalty interest in the wells. As a result of these
solicitations, Iannone received another $170,000 in
investment monies from neighbors and acquaintances in
October, November, and December 1993. As with the prior
investments, Iannone used this money for personal
expenses.
From the time Iannone received the first investment
monies in December 1992 until he absconded in January
1994, Iannone continually lied to the Stringerts and the
other investors in order to conceal his conversion of their
money to his personal use. He told some investors that he
had used their money to hire a drilling company and that
he was in contact with Exxon about a process that would
increase their yield from the wells. When one investor --
Howard Stringert -- became suspicious, Iannone agreed to
buy back his $100,000 investment in the oil well project
once he received a settlement from a pending suit against
Consolidated Natural Gas. However, those representations
were false. Iannone had not hired a drilling company, was
not in contact with Exxon about a process to increase the
wells' yield, and had already settled the litigation with
Consolidated Natural Gas over a year-and-a-half earlier for
only $17,000. Iannone did not use any of the investment
monies for the drilling project; he took it all for his personal
use.
Throughout the period in which Iannone was soliciting
his neighbors to invest in the Horizon project, he was
falsely posing as a decorated Vietnam veteran. This adopted
military hero persona helped Iannone gain the trust of the
Stringert family. He provided some members of the
Stringert family with a resume falsely indicating that he
had spent three years in Vietnam as a Captain in the U.S.
Army Special Forces and that he had been awarded several
medals, including the Purple Heart and the Silver Star, and
he represented that he had received a recommendation for
the Congressional Medal of Honor. He provided the
Stringerts with a false citation recounting the heroic acts
for which he supposedly received the Silver Star. Howard
Stringert described the story recounted in the citation as
4
"Ramboesque."3 One member of the family, Janice
Stringert-Streich, visited Iannone's home where he had a
Silver Star medal prominently displayed. Janice and her
brother Howard Stringert both testified at the sentencing
hearing that their family had great respect for military
veterans and that this influenced their decisions to invest
with Iannone.
By October 1993, some investors had become suspicious
of Iannone, and he prepared for his disappearance, buying
a truck under a false name with some of the investment
money. On January 11, 1994, Iannone disappeared, leaving
his wife and three children behind. Approximately $70,000
to $110,000 in investment funds were unaccounted for at
the time of his abscondance. In order to avoid being
pursued, Iannone faked his own death. He left behind a
letter claiming that he had left on a secret mission for a
government "alphabet agency" and that he feared it might
result in his death. He then left his van, splattered with
blood and littered with shell casings from a weapon, parked
at the Greater Pittsburgh International Airport. Local police
quickly realized both that the scene had been fabricated
and that Iannone had not been the victim of a crime.
B. The Colorado Frauds
After his disappearance from Pennsylvania, Iannone
settled in Colorado where he adopted the alias Wayne D.
Hamilton, the name of a deceased Vietnam veteran. He
continued to masquerade as a Vietnam war hero and told
acquaintances that his family had been killed by a drunk
driver. Posing as a Vietnam veteran, he befriended several
people, including Clancy O'Dowd and Diana Hegler,
through an America Online chat room for veterans. He
developed a close friendship with O'Dowd, based on their
supposed shared combat experiences in Vietnam.
Apparently, Iannone lived off the Pennsylvania fraud
proceeds for about three years. When he ran low on money,
Iannone essentially repeated his Pennsylvania scheme. As
_________________________________________________________________
3. The citation recounts a bold, dramatic tale in which Iannone, as the
commanding officer of a Special Forces A-Team, rescued four American
prisoners of war held captive deep within enemy territory.
5
head of W. D. H. Associates, a sham oil and gas company,
Iannone offered his new friends and neighbors the
opportunity to invest in oil and/or gas wells in Texas and
Nebraska. Several of his friends and neighbors acquiesced,
buying percentage shares of oil and/or gas well leases from
Iannone. As with the Pennsylvania frauds, Iannone did not
invest this money for the purpose that it was entrusted to
him, but used it for personal expenses. He received
approximately $115,500 from the Colorado frauds.
Again, Iannone lied to the investors in order to conceal
his fraud. Iannone told investors that the wells were
producing and that they should expect their first royalty
checks to arrive in March or April of 1997. When the
checks did not materialize, Iannone again disappeared. On
or around June 3, 1997, Iannone left Colorado, falsely
informing most investors that he was going to Texas to
check on the wells. He told one investor, O'Dowd, a
different lie: that he was going to confront the drunk driver
who had killed his family. When some of the investors
began to communicate with each other and became
suspicious, Iannone sent them an electronic message
claiming to be an employee of an "alphabet agency" in the
witness protection program. Iannone was arrested by the
Federal Bureau of Investigation in July 1997.
C. The District Court's Sentence
Iannone pled guilty to six counts of interstate
transportation of property taken by fraud, one count of mail
fraud, and one count of wire fraud. The district court
conducted a two-day sentencing hearing at which four of
Iannone's victims testified: O'Dowd, Hegler, Janice
Stringert-Streich, and Howard Stringert. The court found
several Guidelines enhancements to be applicable. Based
on O'Dowd's testimony, the court determined that he was a
vulnerable victim and increased Iannone's offense level by
two points pursuant to S 3A1.1 of the Guidelines. The court
also determined that Iannone occupied a position of private
trust vis-a-vis his victims and abused this trust, and
therefore increased the offense level by two points pursuant
to S 3B1.3 of the Guidelines. The court increased Iannone's
offense level by an additional two points consistent with
S 5K2.0 of the Guidelines, finding that, based on a
6
combination of factors, Iannone's conduct was sufficiently
outside the "heartland" of the fraud guideline to warrant an
upward departure. Based on a total guidelines offense level
of 21 and a criminal history category of I, which provided
a range of imprisonment of 37 to 46 months, the court
sentenced Iannone to 46 months of imprisonment. See
United States Sentencing Commission, Guidelines Manual,
Ch. 5, Pt. A (Nov. 1997).4
II. DISCUSSION
Iannone argues that the increases in his offense level
were improper and that he should have been sentenced
based on a offense level of 15, which established a range of
18 to 24 months of imprisonment. See U.S.S.G. Ch.5, Pt. A
(Nov. 1997).
A. Vulnerable Victim Adjustment
Iannone challenges the district court's decision to apply
a two-level "vulnerable victim" offense level adjustment
pursuant to S 3A1.1(b), claiming that the victim on which
the court based its decision -- O'Dowd -- was not a
vulnerable victim within the meaning of the provision. He
also argues that, even if O'Dowd was a vulnerable victim,
there was no demonstrated nexus between his vulnerability
and the fraud. A district court's factual findings concerning
the vulnerable victim adjustment are reversible only for
clear error. See United States v. Monostra, 125 F.3d 183,
188 (3d Cir. 1997) (citing United States v. Hillstrom, 988
F.2d 448, 450 (3d Cir. 1993)). Because we find the district
court did not clearly err in determining that O'Dowd was a
vulnerable victim and that Iannone exploited this
vulnerability to aid in his commission of the fraud, we
affirm the district court's two-level enhancement under
S 3A1.1(b).
_________________________________________________________________
4. We apply the November 1997 edition of the Guidelines Manual, as
that was the version in effect on the date of Iannone's sentencing --
June 19, 1998. See U.S.S.G. S 1B1.11(a) (Nov. 1997) ("The court shall
use the Guidelines Manual in effect on the date that the defendant is
sentenced."); 18 U.S.C. S 3553(a)(4).
7
Section 3A1.1(b) provides that:
If the defendant knew or should have known that a
victim of the offense was unusually vulnerable due to
age, physical or mental condition, or that a victim was
otherwise particularly susceptible to the criminal
conduct, increase by 2 levels.
U.S.S.G. S 3A1.1(b) (Nov. 1997).5 Application Note 2 to
subsection (b) provides a useful example of when this
enhancement is appropriately applied:
The adjustment would apply, for example, in a fraud
case where the defendant marketed an ineffective
cancer cure or in a robbery where the defendant
selected a handicapped victim. But it would not apply
in a case where the defendant sold fraudulent
securities by mail to the general public and one of the
victims happened to be senile. Similarly, for example, a
bank teller is not an unusually vulnerable victim solely
by virtue of the teller's position in a bank.
U.S.S.G. S 3A1.1, comment. (n.2) (Nov. 1997). Thus, the
note suggests that this enhancement is designed to apply
where a defendant knowingly or recklessly exploits a
victim's vulnerability in order to facilitate his commission of
the crime.
In accordance with S 3A1.1 and its corresponding
application note, this Court applies a three-step analysis to
a decision to apply the vulnerable victim enhancement. The
enhancement may be applied where: (1) the victim was
particularly susceptible or vulnerable to the criminal
conduct; (2) the defendant knew or should have known of
this susceptibility or vulnerability; and (3) this vulnerability
or susceptibility facilitated the defendant's crime in some
manner; that is, there was "a nexus between the victim's
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5. While it does not affect our analysis, we note that S 3A1.1(b) recently
has been amended. The new provision states that"[i]f the defendant
knew or should have known that a victim of the offense was a vulnerable
victim, increase by 2 levels." U.S.S.G. S 3A1.1(b)(1) (Nov. 1998). The
amended provision also adds a subsection increasing the offense level by
an additional two levels if the offense "involved a large number of
vulnerable victims." U.S.S.G. S 3A1.1(b)(2) (Nov. 1998).
8
vulnerability and the crime's ultimate success." Monostra,
125 F.3d at 190 (quoting United States v. Lee , 973 F.2d
832, 834 (10th Cir. 1992) (internal quotation marks
omitted)).
1. O'Dowd Was Particularly Vulnerable to Iannone's
Criminal Conduct
Iannone argues that the district court improperly found
O'Dowd was a vulnerable victim based merely on his status
as a Vietnam veteran. This argument is without merit, as it
is abundantly clear from the record that the court did not
base its finding of O'Dowd's vulnerability merely on broad,
unsupported generalizations relating to his veteran status.
O'Dowd testified at length at the sentencing hearing, and,
based on his testimony, the court made express, specific
findings as to his particular susceptibility as well as
Iannone's knowledge of this susceptibility. In rendering its
sentencing decision as to the S 3A1.1 enhancement, the
court noted:
[The question is whether] O'Dowd [was] particularly
vulnerable in some way different from the general
public, and I have no problem in saying[ ] yes. Just
because he's a big strong man and a veteran of combat
doesn't mean that he [was not] vulnerable in a very,
very tragic way[,] and that is just as he described it so
beautifully in his testimony. He developed a belief that
people who share combat are brothers-in-arms and can
be believed. He made that [belief] known to the
defendant. So, [I find that] he was vulnerable in that he
was more susceptible to be deluded [and] cheated by
someone who represented himself to be a brother-in-
arms. . . . O'Dowd was vulnerable in the way he
described he was vulnerable, and it was a particular
vulnerability because it wouldn't apply to the general
public but only to someone who expressed himself as
he did.
Thus, contrary to Iannone's assertions, the district court
did not find that Vietnam veterans are per se vulnerable to
persons claiming to be fellow veterans and then rely solely
on O'Dowd's veteran status to find that he was a vulnerable
victim. Rather, the court based its determination that
9
O'Dowd was a vulnerable victim on his individual
personality traits and characteristics, as testified to by
O'Dowd at the sentencing hearing. Only after this specific
inquiry did the court find that O'Dowd was particularly
vulnerable to one representing himself as a fellow combat
veteran. Thus, the district court did not clearly err in
determining that O'Dowd was "particularly susceptible" to
Iannone's fraud.
2. Iannone Knew or Should Have Known of O'Dowd's
Vulnerability
The district court specifically found that Iannone knew or
had reason to know of O'Dowd's vulnerability to fellow
Vietnam veterans. ("I find by a preponderance of the
evidence that the defendant knew or had reason to know
that . . . O'Dowd[ ] [was] vulnerable to a predation by
somebody who purported to be a colleague at war[ ] [and] a
brother-at-arms."). The record provides ample evidence to
support this finding. O'Dowd's testimony, supported by
correspondence between O'Dowd and Iannone introduced
into evidence at the sentencing hearing, demonstrates that
Iannone actively encouraged and developed a friendship
with O'Dowd, based in large part on their supposed shared
combat experiences in Vietnam. The friendship between the
two men began through an America Online chat room for
military veterans and progressed to telephone calls,
electronic messages, and meeting in person on
approximately three occasions. During the course of their
friendship, Iannone and O'Dowd discussed their feelings
about honor, duty, and the bonds between fellow combat
veterans on several occasions. In many of their
communications, Iannone and O'Dowd used the phrase
"back to back," which, according to O'Dowd's testimony, is
a phrase derived from his Vietnam experience that
essentially means "I would put my life in your hands and
trust you to use it properly." Similarly, O'Dowd and
Iannone often referred to one another as "brother" in their
correspondence. O'Dowd testified that Iannone was aware
of his feelings of trust and loyalty towards fellow combat
veterans generally and towards Iannone in particular. Thus,
the record provides sufficient evidence that Iannone was
aware of O'Dowd's vulnerability.
10
3. O'Dowd's Vulnerability Facilitated Iannone's Crime
The district court also found that O'Dowd's vulnerability
facilitated Iannone's fraud, noting the link between
839O'Dowd's vulnerability, Iannone's awareness of that
vulnerability, and Iannone's fraud. ("It [is] clear that
[O'Dowd's] vulnerability was made known to the defendant.
That's why it was so easy for the defendant to extract these
funds from [O'Dowd] . . . without much in the way of proof
of what he was going to get for it."). Iannone disputes this
finding, arguing that, even if O'Dowd was a vulnerable
victim, there was no demonstrated nexus between this
vulnerability and Iannone's crime. However, the record
supports the court's finding. According to O'Dowd's
testimony, Iannone framed his investment offer as a plea
for help. Iannone initially asked O'Dowd for a loan, claiming
that an investor had backed out of one of his investments
and that he was going to lose the entire investment. Only
later did Iannone suggest that O'Dowd invest in the project
himself, rather than lend him money. O'Dowd testified that
he invested primarily because he was concerned that his
"brother" was in trouble and he would do anything he could
to assist him. He also testified that he made this known to
Iannone. Thus, based on the evidence before it, the district
court did not err -- much less "clearly"-- in determining
that O'Dowd's vulnerability facilitated Iannone's fraud.
In sum, we find that the district court did not clearly err
in finding: (1) that O'Dowd was particularly vulnerable to
Iannone's fraud; (2) that Iannone was, or should have been,
aware of his vulnerability; and (3) that O'Dowd's
vulnerability facilitated Iannone's crime. We therefore affirm
the decision to enhance the offense level underS 3A1.1(b).
B. Abuse of a Position of Trust Enhancement
Iannone claims that the district court erred in applying a
two-level enhancement to his offense level pursuant to
S 3B1.3 of the Guidelines for his abuse of a position of
private trust. Section 3B1.3 provides in part that:"If the
defendant abused a position of public or private trust . . .
in a manner that significantly facilitated the commission or
concealment of the offense, increase by 2 levels." U.S.S.G.
S 3B1.3 (Nov. 1997). In applying S 3B1.3, a court must
11
initially determine whether the defendant occupied a
position of public or private trust. If he did occupy such a
position, then the court must determine whether the
defendant abused this position of trust in a way that
significantly facilitated his crime. See United States v.
Craddock, 993 F.2d 338, 340 (3d Cir. 1993). Because
Iannone challenges only the initial determination of
whether he held a position of trust, we devote most of our
discussion to this issue. We review de novo a district
court's determination that a defendant occupied a position
of trust within the meaning of S 3B1.3, as this is a legal
question. See United States v. Sokolow, 91 F.3d 396, 412
(3d Cir. 1996) (citing Craddock, 993 F.2d at 340). We review
a district court's finding that a defendant abused a position
of trust for clear error, as this is a factual question. Id.
Iannone argues that he did not occupy a position of trust
with respect to his victims, and therefore the district court
should not have enhanced his offense level pursuant to
S 3B1.3. Determining what constitutes a position of trust
for the purposes of S 3B1.3 is not a simple task. Neither
S 3B1.3 nor its applicable Commentary clearly defines what
is meant by a "position of trust." United States v. Smaw,
993 F.2d 902, 905 (D.C. Cir. 1993). "Position of trust" could
be defined narrowly to encompass only formal fiduciary or
employment relationships. Or, the concept could be defined
broadly to include any relationship in which a victim places
his trust in the defendant. The Commentary to S 3B1.3
indicates that the Sentencing Commission ("Commission")
did not intend for the term "position of trust" to be
interpreted too narrowly, as the Commentary does not limit
the phrase's application only to formal fiduciary or
employment relationships. See U.S.S.G. S 3B1.3, comment.
(n.1) (Nov. 1997). However, a court should hesitate before
defining the concept too broadly, as "there is a component
of misplaced trust inherent in the concept of fraud." United
States v. Garrison, 133 F.3d 831, 838 (11th Cir. 1998)
(quoting United States v. Mullens, 65 F.3d 1560, 1567 (11th
Cir. 1995) (internal quotation marks omitted)); see also
United States v. Trammell, 133 F.3d 1343, 1355 (10th Cir.
1998) ("The [S 3B1.3] guideline enhancement requires more
than a mere showing that the victim had confidence in
defendant.") (citing United States v. Brunson, 54 F.3d 673,
12
678 (10th Cir. 1995)); United States v. Koehn, 74 F.3d 199,
201 (10th Cir. 1996) ("In every successful fraud the
defendant will have created confidence and trust in the
victim, but the sentencing enhancement is not intended to
apply in every case of fraud.").
Application Note 1 of the Commentary to S 3B1.3
provides some guidance as to what is considered a position
of public or private trust for the purposes of this guideline
provision. It states in part:
"Public or private trust" refers to a position of public or
private trust characterized by professional or
managerial discretion (i.e., substantial discretionary
judgment that is ordinarily given considerable
deference). Persons holding such positions ordinarily
are subject to significantly less supervision than
employees whose responsibilities are primarily non-
discretionary in nature.
U.S.S.G. S 3B1.3, comment. (n.1) (Nov. 1997). The
application note also provides specific examples explaining
when S 3B1.3 should or should not be applied:
This adjustment, for example, would apply in the case
of an embezzlement of a client's funds by an attorney
serving as a guardian, a bank executive's fraudulent
loan scheme, or the criminal sexual abuse of a patient
by a physician under the guise of an examination. This
adjustment would not apply in the case of an
embezzlement or theft by an ordinary bank teller or
hotel clerk . . . .
Id.
In accordance with the Commission's guidance, this
Court has developed a "position of trust" analysis that
"look[s] to the essence of the meaning of a position of
trust." United States v. Pardo, 25 F.3d 1187, 1191 (3d Cir.
1994); see also United States v. Boyle, 10 F.3d 485, 489
(7th Cir. 1993) (stating that, in determining whether a
defendant occupies a "position of trust," a court "must look
beyond descriptive labels to the actual nature of the
relationship and the responsibility the defendant is given").
We consider three factors in determining whether a
13
defendant occupies a position of trust for the purposes of
S 3B1.3: "(1) whether the position allows the defendant to
commit a difficult-to-detect wrong; (2) the degree of
authority which the position vests in the 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." Pardo, 25 F.3d at 1192. These matters "should be
considered in light of the guiding rationale of[S 3B1.3]--to
punish `insiders' who abuse their positions rather than
those who take advantage of an available opportunity." Id.
This Court has expressly refused to "draw a bright line
limiting the abuse of trust increase to the employment
relationship." Id. at 1190-1191. A defendant may occupy a
position of trust outside the traditional employment
context. Id.
Based on our consideration of S 3B1.3 and the case law
interpreting the provision, we agree with the district court's
conclusion that Iannone occupied a position of private trust
vis-a-vis his Pennsylvania victims.6 The facts of this case
_________________________________________________________________
6. Because we find that Iannone occupied a position of trust vis-a-vis his
Pennsylvania victims, it is not necessary to decide whether he also
occupied a position of trust vis-a-vis his Colorado victims. Iannone's
conduct with respect to the Pennsylvania frauds, by itself, justifies
application of the S 3B1.3 enhancement. The record does not provide as
much information about Iannone's Colorado frauds. Apparently, his
Colorado frauds were committed in a very similar fashion as his
Pennsylania frauds, with one significant difference. In connection with
the Colorado frauds, Iannone solicited investments in drilling projects in
his capacity as head of W.D.H. Associates ("WDH"), a sham oil and gas
company. Unlike HNR, which was a legitimate company at one time,
WDH was apparently a sham company from the start. Thus, Iannone
never occupied any legitimate position of trust with respect to his
Colorado victims.
Although the issue is not of dispositive significance, we note that the
majority of circuits that have addressed it have held that a defendant
occupying a sham position of trust is subject to theS 3B1.3
enhancement. See United States v. Deal, 147 F.3d 562, 563 (7th Cir.
1998); United States v. Barnes, 125 F.3d 1287, 1292 (9th Cir. 1997);
United States v. Gill, 99 F.3d 484, 488-89 (1st Cir. 1996); United States
v. Queen, 4 F.3d 925, 929 (10th Cir. 1993). But see United States v.
Echevarria, 33 F.3d 175, 181 (2d Cir. 1994). According to the majority
14
show that all three Pardo factors have been met: Iannone's
position as head of the company in which the victims
invested made his fraud difficult to detect, vested him with
significant authority over the victim's investment monies,
and encouraged his victims to rely on his perceived
integrity.
_________________________________________________________________
view, where a defendant provided his victims with sufficient, objective
indicia that he occupied a position of trust, it is appropriate to hold
him
accountable under S 3B1.3. From the perspective of the victim, the
threat posed is the same whether the defendant occupies a legitimate or
sham position of trust: the position facilitates the crime and reduces the
chance of detection. See Gill, 99 F.3d at 489.
We also note that the Commentary to S 3B1.3 recently has been
amended to clarify that defendants holding sham positions of trust are
within the purview of the enhancement:
This adjustment also applies in a case in which the defendant
provides sufficient indicia to the victim that the defendant
legitimately holds a position of private or public trust when, in
fact,
the defendant does not. For example, the adjustment applies in the
case of a defendant who (A) perpetrates a financial fraud by
leading
an investor to believe the defendant is a legitimate investment
broker; or (B) perpetrates a fraud by representing falsely to a
patient
or employer that the defendant is a licensed physician. In making
the misrepresentation, the defendant assumes a position of trust,
relative to the victim, that provides the defendant with the same
opportunity to commit a difficult-to-detect crime that the
defendant
would have had if the position were held legitimately.
U.S.S.G. S 3B1.3, comment. (n.2) (Nov. 1998). With limited exception,
Guidelines commentary is binding on courts. See Stinson v. United
States, 508 U.S. 36, 38 (1993) ("[C]ommentary in the Guidelines Manual
that interprets or explains a guideline is authoritative unless it
violates
the Constitution or a federal statute, or is inconsistent with, or a
plainly
erroneous reading of, that guideline."); see also U.S.S.G. S 1B1.7 (Nov.
1997) ("Failure to follow . . . commentary could constitute an incorrect
application of the guidelines . . . .") (citing 18 U.S.C. S 3742). An
amendment to Guidelines commentary that merely "clarifies" the
meaning of a guideline is given great weight, unless its application would
be unconstitutional. See United States v. Menon, 24 F.3d 550, 567 (3d
Cir. 1994); cf. U.S.S.G. S 1B1.11(b)(2) ("[I]f a court applies an earlier
edition of the Guidelines Manual, the court shall consider subsequent
amendments, to the extent that such amendments are clarifying rather
than substantive changes.").
15
First, Iannone's position allowed him to commit a
difficult-to-detect wrong. Iannone primarily argues that his
fraud was easily detectable, but was not discovered due to
his victims' lack of diligence. Iannone's argument evinces a
misunderstanding of the first Pardo consideration. That
prong of the Pardo analysis is not a due diligence
requirement. Iannone's victims did not have to be experts
in the oil and gas industry or conduct an extensive
investigation into Iannone's business for the S 3B1.3
enhancement to be applicable. In fact, one rationale for a
S 3B1.3 enhancement is that, where the defendant occupies
a position of trust, his victims are less likely to discover his
fraud because they will not investigate the matter as
thoroughly as they would in an arm's-length transaction.
The focus of the first Pardo prong is on the defendant, not
his victims, and requires the court to determine whether
the position the defendant occupied allowed him to commit
a difficult-to-detect crime.
In connection with his Pennsylvania frauds, Iannone
solicited investors in his capacity as the owner and CEO of
HNR, an oil and gas drilling/leasing company. Iannone
solicited investment monies for the express purpose of
financing an exploratory drilling venture, selling the victims
"interests" or "shares" of HNR's Horizon projects and
signing contracts with the victims on behalf of the
company. Thus, Iannone occupied a "managerial" position,
in which he expectedly was entrusted with the task of using
the investors' money to complete a drilling project. By
contrast, his victims were merely passive investors with
little, if any, knowledge of the oil and gas industry. These
facts indicate that Iannone's relationship with his
Pennsylvania victims was analogous to the fiduciary
relationship that exists between a corporate officer or
director and the corporation's shareholders.
This fiduciary-like relationship allowed Iannone to
commit a difficult-to-detect wrong. His managerial position
allowed him to conceal his personal use of the victims'
investment money. In order to prevent his fraud from being
detected, he provided the victims with false reports on the
progress of the drilling project and his use of their
investment money. Because Iannone was the sole owner
16
and operator of HNR, he was the victims' only source of
information about the status of their investment and was
not subject to any supervision that would have uncovered
his fraud.
Iannone's position also satisfies the second Pardo
criterion, as it provided him unfettered authority over the
victims' investment money. As sole owner and operator of
HNR, he alone was entrusted with the proper use of the
investment money to complete the drilling project. This
total lack of supervision allowed Iannone to spend the
investment money freely. Once his victims invested in HNR,
no one but Iannone had access to, or supervisory power
over, HNR's financial records and bank accounts.
Finally, the evidence demonstrates the victims' reliance
on Iannone's perceived integrity as owner and CEO of HNR.
Iannone gave some of his victims his resume listing years
of experience in the oil and gas industry and providing
detailed descriptions of that experience. Iannone further
fostered reliance on his integrity by posing as a decorated
Vietnam veteran. Some of his victims indicated that they
decided to invest with Iannone because he was both a
veteran and an experienced businessperson offering what
seemed to be a great investment opportunity. Based on
Iannone's representations, his victims believed they were
investing in a genuine drilling project.
Thus, application of the three Pardo considerations to
Iannone's case demonstrates that, as CEO of HNR, he
occupied a position of private trust vis-a-vis his
Pennsylvania victims.7 The foregoing analysis accords with
our decisions in recent cases involving similar factual
situations. See United States v. Bennett, 161 F.3d 171, 195-
96 (3d Cir. 1998); Sokolow, 91 F.3d at 412-13. Having
found that Iannone occupied a position of private trust, we
also conclude (and appellant does not challenge) that the
_________________________________________________________________
7. Iannone also argues that the S 3B1.3 enhancement is inapplicable
because his friendship with the victims did not constitute a position of
trust. This argument ignores a critical fact of this case: Iannone
solicited
investments from his friends and neighbors in his capacity as head of a
company. The position of trust at issue is not Iannone's friendship with
the victims, but his position as owner and CEO of HNR.
17
district court did not clearly err in finding Iannone abused
his position of trust in a manner that significantly
facilitated his crime. Therefore, we affirm the district court's
decision to enhance Iannone's offense level pursuant to
S 3B1.3.
C. Section 5K2.0 Departure
Finally, Iannone challenges the district court's decision to
impose an upward departure (set at two levels) pursuant to
S 5K2.0, based on a combination of factors that took the
case out of the "heartland" of the fraud guideline. A district
court's decision to depart from the applicable guideline
range is subject to review for abuse of discretion. See Koon
v. United States, 518 U.S. 81, 99-100 (1996); United States
v. Jacobs, 167 F.3d 792, 798 (3d Cir. 1999). Wefind the
district court did not abuse its discretion by departing from
the Guidelines in this case.
The Commission conceives of each offense guideline as
"carving out a `heartland,' a set of typical cases embodying
the conduct that each guideline describes." U.S.S.G., Ch.1,
Pt. A, intro. p.s. 4(b) (Nov. 1997). In the unusual case in
which a defendant's conduct falls outside the typical
"heartland," the court may consider a departure from the
Guidelines sentence. See id.; United States v. Baird, 109
F.3d 856, 870 (3d Cir.), cert. denied, 118 S. Ct. 243 (1997)
(citing Koon, 518 U.S. at 93-94). Section 5K2.0 provides
that a court may impose a sentence outside the applicable
guideline range "if the court finds `that there exists an
aggravating or mitigating circumstance of a kind, or to a
degree, not adequately taken into consideration by the
Sentencing Commission in formulating the guidelines that
should result in a sentence different from that described.' "
U.S.S.G. S 5K2.0, p.s. (Nov. 1997) (quoting 18 U.S.C.
S 3553(b)). The Commentary to S 5K2.0 adds that a court
may also depart in the "extraordinary case that, because of
a combination of such characteristics or circumstances,
differs significantly from the `heartland' cases covered by
the guidelines in a way that is important to the statutory
purposes of sentencing, even though none of the
characteristics or circumstances individually distinguishes
the case," but also notes that these departures "will be
extremely rare." Id., comment.; see also Koon, 518 U.S. at
18
113-114 (noting that departure is possible based on a
combination of factors, even though none of the factors
standing alone would justify a departure). Outside of a
limited number of prohibited factors that a court may never
consider as grounds for departure, the Guidelines do not
"limit the kinds of factors . . . that could constitute grounds
for departure in an unusual case."8 U.S.S.G., Ch.1, Pt. A,
intro. p.s. 4(b) (Nov. 1997); see also Koon, 518 U.S. at 106;
Baird, 109 F.3d at 870.
The Supreme Court provided additional guidance on
departures in Koon, instructing courts to apply the
following analysis when considering a S 5K2.0 departure.
First, identify the factor or factors that potentially take the
case outside the Guidelines' "heartland" and make it special
or unusual. Koon, 518 U.S. at 95. Second, determine
whether the Guidelines forbid departures based on the
factor, encourage departures based on the factor, or do not
mention the factor at all.9 Id. at 94-95. Third, apply the
appropriate rule: (1) if the factor is forbidden, the court
cannot use it as a basis for departure; (2) if the factor is
encouraged, the court is authorized to depart if the
applicable guideline does not already take it into account;
(3) if the factor is discouraged, or encouraged but already
taken into account by the applicable guideline, the court
should depart only if the factor is present to an exceptional
degree, or in some other way makes the case different from
the ordinary case in which the factor is present; or (4) if the
factor is unmentioned, "the court must, after considering
the structure and theory of both relevant individual
guidelines and the Guidelines taken as a whole, decide
whether [the factor] is sufficient to take the case out of the
_________________________________________________________________
8. The prohibited factors that a court may never consider are listed in
SS 5H1.10 (race, sex, national origin, creed, religion, socio-economic
status), 5H1.12 (lack of guidance as a youth and similar circumstances),
part of 5H1.4 (drug or alcohol dependence or abuse), and part of 5K2.12
(personal financial difficulties and economic pressures upon a trade or
business). See U.S.S.G. Ch. 1, Pt. A, intro. p.s. 4(b) (Nov. 1997).
9. For example, the Guidelines discourage departure based on the
defendant's educational and vocational skills, see U.S.S.G. S 5H1.2 (Nov.
1997), and encourage departure based on victim provocation. See
U.S.S.G. S 5K2.10 (Nov. 1997).
19
Guideline's heartland." Id. at 95-96 (internal citation and
quotation marks omitted); see also United States v.
Abuhouran, 161 F.3d 206, 210-211 (3d Cir. 1998), cert.
denied, 119 S. Ct. 1479 (1999) (restating the third step of
the Koon analysis). Koon adds that departures based on
unmentioned factors will be "highly infrequent." 518 U.S. at
96 (quoting U.S.S.G. Ch. 1, Pt. A (Nov. 1995)); see also
United States v. Haut, 107 F.3d 213, 218 (3d Cir.), cert.
denied, 117 S. Ct. 2528, and cert. denied, 118 S. Ct. 130
(1997).
Before reviewing the district court's application of the
Koon analysis, we note the substantial deference that we
owe the decision to depart from the Guidelines. See Koon,
518 U.S. at 98; United States v. Sally, 116 F.3d 76, 81 (3d
Cir. 1997). While we must also bear in mind that both the
Guidelines and Koon indicate that S 5K2.0 departures will
be highly infrequent, it was within the district court's
discretion to determine whether the facts of this case
involved aggravating circumstances of such an exceptional
degree that they took the case out of the "heartland" of
ordinary fraud cases. See S 5K2.0, comment. (Nov. 1997);
Koon, 518 U.S. at 96-98. Koon emphasizes the institutional
advantage that district courts have over appellate courts in
determining whether the facts of a given case take it out of
the "heartland" of Guidelines cases, noting that "[w]hether
a given factor is present to a degree not adequately
considered by the Commission . . . [is a] matter[ ]
determined in large part by comparison with the facts of
other Guidelines cases" and that the district courts "see
many more Guidelines cases than appellate courts do." Id.
at 98; cf. Sally, 116 F.3d at 81 (stating that departure
determinations should be left to sentencing courts to make
"on a case-by-case basis, relying on the particular facts and
circumstances of each case.").
The district court found that several aggravating factors
relating to Iannone's criminal conduct, taken collectively,
constituted sufficient grounds for an upward departure
(which, as noted, the court permissibly achieved by the
device of a two-level offense level increase) underS 5K2.0.
The court identified the following factors: (1) Iannone's
masquerade as a decorated Vietnam combat veteran, a
20
person in the witness protection program, and a
government agent on a secret mission; (2) Iannone's
misrepresentation that he had received several combat
medals as well as a recommendation for the Congressional
Medal of Honor; (3) Iannone's attempt to conceal his fraud
by faking his own death; (4) Iannone's fabricated story
about his family's having been killed by a drunk driver; and
(5) the severe psychological harm Iannone's fraud caused
his victims. Finding that these factors were not adequately
considered by the Guidelines and that they "take[ ] this
case outside of the heartland of the [fraud] guideline[ ]," the
court departed upwards by two levels. The court noted that
it found none of these factors justified departure by itself;
but, in combination, the factors made the case very
unusual.
The Guidelines neither forbid nor discourage departures
based on the factors enumerated by the district court.10 Nor
are the factors encouraged bases for departure under the
Guidelines.11 Thus, the factors should be classified as
"unmentioned" by the Guidelines.12 As unmentioned
_________________________________________________________________
10. The forbidden bases for departure are listed supra in note 8. The
discouraged bases for departure are a defendant's: (1) age; (2) education
and vocational skills; (3) mental and emotional conditions; (4) physical
condition or appearance; (5) employment record; (6) family ties and
responsibilities, and community ties; (7) military, civic, charitable, or
public service, employment-related contributions, and similar prior good
works; and (8) subjection to coercion or duress. See SS 5H1.1-5H1.6,
5H1.11, and 5K2.12.
11. Encouraged bases for departure are listed in Chapter Five, Part K of
the Guidelines Manual. See, e.g., S 5K2.2 (significant physical injury).
12. One of the factors the district court relied upon as a basis for its
S 5K2.0 "combination" departure was the psychological harm Iannone's
fraud caused his victims. Notably, "extreme psychological injury" is an
encouraged basis for departure under S 5K2.3. However, based on the
district court's factual findings, we classify this factor as
"unmentioned"
by the Guidelines, rather than as an encouraged basis for departure.
While the court found that Iannone's victims suffered more psychological
harm than a typical fraud victim ("I would [not] equate the kind of harm
that was caused here with the typical kind of harm. . . . [T]he emotional
and psychiatric trauma that is attendant not only to losing your money
but [also] . . . what you thought was a friendship[ ] . . . [is] a severe
21
factors, a court must "consider[ ] the structure and theory
of both relevant individual guidelines and the Guidelines
taken as a whole, [and] decide whether [the factors are]
sufficient to take the case out of the Guideline's heartland,"
before departing pursuant to S 5K2.0. Koon, 518 U.S. at 95-
96 (internal citation and quotation marks omitted); see also
United States v. Nolan-Cooper, 155 F.3d 221, 244 (3d Cir.
1998) (restating the Koon analysis of unmentioned factors).
Considering the "structure and theory" of the fraud
guideline and the Guidelines as a whole, as Koon instructs,
we find that the district court acted within its discretion in
concluding that this combination of five unmentioned
factors was sufficient to take Iannone's case out of the
Guidelines' heartland. 518 U.S. at 96. The Commentary to
the fraud guideline expressly provides for upward
departures based on factors not listed in the guideline text.
In order to remedy the fraud guideline's predominant focus
on the monetary amount of the victims' loss, the
Commentary states that upward departures may be
warranted "[i]n cases in which the loss . . . does not fully
capture the harmfulness and seriousness of the conduct."
U.S.S.G. S 2F1.1, comment. (n.10) (Nov. 1997). By
departing upwards, the district court demonstrated its
belief that the harmfulness and seriousness of Iannone's
conduct was not adequately captured by the offense level
increases for the amounts of the victims' losses. In fact, the
court believed that no existing guideline enhancement
adequately captured the conduct upon which it based the
S 5K2.0 departure. We do not disagree with the district
court's conclusion.
Furthermore, while no existing guideline enhancement
covers Iannone's conduct, two areas of the Guidelines
provide specific bases for upward departures based on
conduct similar to his. Subsection (b)(3)(A) of the fraud
_________________________________________________________________
harm"), the court also specifically found that there was not sufficient
evidence to support an upward departure under S 5K2.3. Thus, because
the district court did not depart based on "extreme psychological harm,"
but rather, based on a combination of circumstances which included a
lesser psychological harm component, we classify the factor as
"unmentioned" by the Guidelines.
22
guideline provides for a two-level increase in offense level
where the offense involved "a misrepresentation that the
defendant was acting on behalf of a charitable, educational,
religious or political organization, or a government agency."
U.S.S.G. S 2F1.1(b)(3)(A) (Nov. 1997). The applicable
Commentary indicates that the rationale for this
enhancement is that "defendants who exploit victims'
charitable impulses or trust in government create particular
social harm." U.S.S.G. S 2F1.1, comment. (backg'd P 4).
Although the S 2F1.1(b)(3)(A) enhancement does not apply
to Iannone's conduct, its rationale does: Iannone's
misrepresentations that he was a Vietnam veteran, combat
medal recipient, government agent, and widower who had
lost his family to a drunk driver, created a particular social
harm that the Guidelines do not explicitly take into account.13
Iannone's misrepresentations about being a Vietnam
veteran and recipient of several medals exploited his
victims' trust in and respect for Vietnam war heroes.
Iannone's claim to have been recommended for the
Congressional Medal of Honor was particularly exploitive,
as this is the nation's highest and most revered military
award.14 His misrepresentation that he worked for a
government agency also encouraged his victims' trust.
Finally, his misrepresentation that his family had been
killed by a drunk driver exploited his victims' charitable
impulses. Another area of the Guidelines that provides for
an upward departure based on conduct similar to Iannone's
is S 5K2.3. It specifically encourages courts to depart
upwards if the defendant's conduct caused his victim
extreme psychological injury. While the district court did
not find that Iannone's victims had suffered extreme
psychological injury, it did find that they had suffered a
psychological injury more severe than that occurring in a
_________________________________________________________________
13. Though Iannone falsely claimed to be a government agent, this
conduct did not qualify for a S 2F1.1(b)(3)(A) enhancement because he
never claimed to be selling HNR or WDH investment opportunities on
behalf of a government agency.
14. Of the more than two million military personnel who served in
Vietnam during the period 1964-1973, only 239 have been awarded the
Congressional Medal of Honor. See The World Almanac and Book of Facts
1998 158 (Robert Famighetti et al. eds., 1997).
23
typical fraud case and included this as a reason for a
departure. These two analogies to conduct similar to
Iannone's further support the district court's finding that a
S 5K2.0 departure was appropriate.
These analogies also demonstrate that the extent of the
district court's departure -- two offense levels-- was
reasonable. A district court in determining the extent of a
departure should generally do so by analogizing to existing
Guidelines provisions. See United States v. Kikumura, 918
F.2d 1084, 1110-14 (3d Cir. 1990) (establishing this Court's
standard for determining the proper extent of departure);
Baird, 109 F.3d at 872 (applying Kikumura). See also United
States v. Adelman, 168 F.3d 84, 87 (2d Cir. 1999)
(analogizing to another Guidelines provision was an
appropriate method for determining the extent of an
upward departure). We review this determination
deferentially. See Baird, 109 F.3d at 872. In this case, the
district court did not expressly undertake the analogic
reasoning that this court generally requires in determining
the extent of an upward departure. However, by couching
the departure as a two-level increase in the offense level,
the district court implicitly did so. As noted above, there is
a reasonable analogy in the Guidelines that justifies the
extent of the court's departure: subsection (b)(3)(A) of the
fraud guideline, which provides for a two-level increase in
offense level. See S 2F1.1(b)(3)(A) (Nov. 1997).
We briefly address Iannone's arguments in support of his
challenge to the district court's S 5K2.0 departure. Iannone
argues that the base offense level for fraud adequately took
into account all of his relevant misconduct; that is, both his
misrepresentations and the psychological damage to his
victims. As to his misrepresentations, Iannone argues in
his brief that the Guidelines "obviously contemplated
fraudulent misrepresentations . . . as integral to the
commission of a fraud" and thus they did not warrant an
upward departure under S 5K2.0. Iannone claims that his
misrepresentations were either incidental to his fraud or
mere acts of concealment and therefore were not
sufficiently offensive or unique to "suggest a factor `present
in a degree which the Commission did not consider'. . . .
[or] `substantially in excess of that which is ordinarily
24
involved in the offense of conviction.' " (Quoting United
States v. Uca, 867 F.2d 783, 783 (3d Cir. 1988).) He argues
that faking his death, falsely claiming to work for a federal
"alphabet agency," and falsely stating that his family had
been killed by a drunk driver were merely creative
concealment stories invented only to avoid detection, and
therefore that those misrepresentations do not warrant
an upward departure. He also claims that his
misrepresentations of himself as a Vietnam veteran and
recipient of combat medals were not part of his fraud.
Rather, these misrepresentations had begun years before
the frauds and were a result of "his own psychological
needs[.]" Finally, the brief asserts that these were "garden
variety" fraudulent misrepresentations and were already
used as the basis for the vulnerable victim departure.
Iannone correctly points out that fraudulent
misrepresentations were an inherent part of his offense and
therefore, to a certain degree, are included in the base
offense level for fraud. However, the district court found
that Iannone's misrepresentations went beyond the usual
"heartland" and as such were not adequately taken into
account by the Guidelines. Iannone falsely stated to his
Colorado victims that he had lost his family to a drunk
driver, and the court found that this was done in order to
exploit his victims' charitable impulses and encourage their
investment. Similarly, the court found that the false
persona that Iannone created as a decorated Vietnam
veteran and government agent was adopted in order to take
advantage of his victims. The court found Iannone's
repeated misrepresentations that he had received combat
medals particularly offensive, noting that misrepresentation
of the ownership of a combat medal may violate federal law.15
_________________________________________________________________
15. 18 U.S.C. S 704(a) provides that "[w]hoever knowingly wears . . . any
decoration or medal authorized by Congress for the armed forces of the
United States, or any of the service medals or badges awarded to the
members of such forces, or the ribbon, button, or rosette of any such
badge, decoration or medal, or any colorable imitation thereof, except
when authorized under regulations made pursuant to law, shall be fined
under this title or imprisoned not more than six months, or both."
Section 704(b) provides additional punishment if the decoration or medal
involved in the offense is the Congressional Medal of Honor.
25
The court also cited Iannone's elaborately staged death at
the Pittsburgh airport, the grief this conduct caused his
family, and its cost to his creditors. In sum, the court
found some of Iannone's misrepresentations to have been
particularly egregious and calculated, clearly disagreeing
with his contention that they were mere acts of
concealment or incidental to his fraud. More importantly,
the court found that those misrepresentations were
aggravating factors not adequately reflected by any existing
guideline provision.16 We find that the district court acted
within its discretion in reaching this conclusion.
With respect to the psychological damage to his victims,
Iannone claims that the district court abused its discretion
by including this as a reason for departure, for two reasons:
(1) the psychological harm he caused his victims had
already been included in the base offense level for fraud;
and (2) the record demonstrates that the four victims who
testified at the sentencing hearing are mentally and
physically healthy. The Guidelines contradict Iannone's
claim that the psychological harm he caused his victims
already has been included in the base offense level for
fraud. The Commentary to the fraud guideline specifically
provides that an upward departure may be appropriate
where "the offense caused reasonably foreseeable . . .
psychological harm or severe emotional trauma."S 2F1.1,
comment. (n.10(c)) (Nov. 1997). While Iannone correctly
points out that the record demonstrates that the four
victims who testified are mentally and physically healthy,
the record also supports the district court's conclusion that
the psychological damage suffered by them exceeded that of
_________________________________________________________________
16. The court noted that it is not double-counting to subject Iannone to
the vulnerable victim enhancement due to O'Dowd's vulnerability as a
Vietnam veteran and also include Iannone's masquerade as a Vietnam
veteran as one of the reasons for the S 5K2.0 departure. We agree with
the district court's conclusion. The enhancements are designed to
punish different conduct. The vulnerable victim enhancement, as its
name indicates, focuses on the nature of the victim. In contrast, a
S 5K2.0 upward departure based in part on Iannone's Vietnam veteran
masquerade is based on the rationale that the masquerade itself --
regardless of the nature of the victim -- is an"unmentioned" aggravating
factor.
26
the typical fraud case. Most of Iannone's victims were
Iannone's friends and/or neighbors. The district court
found this circumstance not typical of a fraud case, noting
the significant difference between being defrauded by
someone you do not know and being defrauded by someone
you thought was a friend. The court found that the loss of
friendship that accompanied Iannone's fraud inflicted
severe harm on his victims. The testimony of Iannone's
victims at the sentencing hearing supports the district
court's finding. Janice Stringert-Streich, for example,
testified that she felt an extremely deep sense of loss and
betrayal as a result of Iannone's fraud, and that the fraud
destroyed her family. As we stated in United States v.
Astorri, "[i]f there is any place in sentencing guidelines
analysis where a fact-finder is to be given considerable
deference, it is here where the district court is called upon
to assess the psychological impact upon victims." 923 F.2d
1052, 1058 (3d Cir. 1991).
In sum, we find that the court did not abuse its
discretion in concluding that this combination of
misrepresentations and psychological harm to the victims
was sufficiently unusual to take Iannone's case out of the
heartland of the Guidelines and, as a means of departure,
to justify a two-level increase in his offense level.
III. CONCLUSION
We conclude that the district court appropriately
enhanced Iannone's offense level pursuant to SS 3A1.1,
3B1.3, and 5K2.0 of the Sentencing Guidelines, and affirm
the sentencing judgment.
27
BECKER, Chief Judge, concurring:
I join the majority opinion, as I am constrained to agree
that Iannone's abuse of trust enhancement is justified given
our decisions in United States v. Bennett, 161 F.3d 171 (3d
Cir. 1998); United States v. Sokolow, 91 F.3d 396 (3d Cir.
1996); and United States v. Pardo, 25 F.3d 1187 (3d Cir.
1994). I write separately to express my concern that the
current drafting of the abuse of a position of trust guideline
is flawed insofar as it has engendered convoluted caselaw
in which the concept of a "position of trust" has expanded
far beyond the general understanding of that term, making
an abuse of trust enhancement a virtual concomitant of a
fraud conviction. I therefore urge the Commission to rework
the guideline so as to confine "abuse of a position of trust,"
in fraud cases, to situations more closely approximating
traditional trust relationships.1 If it then appears that fraud
is not being sufficiently punished, the appropriate remedy
would be for the Commission to increase the underlying
offense levels, rather than to dilute the concept of"position
of trust."
I.
Fraud inherently involves some exploitation of trust. See
United States v. Koehn, 74 F.3d 199, 201 (10th Cir. 1996)
("In every successful fraud the defendant will have created
confidence and trust in the victim . . . ."); United States v.
Mullens, 65 F.3d 1560, 1567 (11th Cir. 1995) ("[T]here is a
component of misplaced trust inherent in the concept of
fraud . . . ."); United States v. Hathcoat , 30 F.3d 913, 915
(7th Cir. 1994) ("By its definition, embezzlement requires a
finding of a breach of trust."). While it is possible in theory
to exclude some frauds from "abuse of trust" as defined in
_________________________________________________________________
1. "[F]rom its earliest days, the Commission has urged the federal
judiciary to make suggestions for Guideline revision, viewing them as a
means of implementing the ongoing monitoring process." United States v.
Rudolph, 137 F.3d 173, 181 (3d Cir. 1998) (Becker, J., concurring); see
also U.S.S.G. ch. 1 pt. A, at 4(b) (stating that the Commission will
analyze judicial decisions to determine how to refine the Guidelines);
United States v. Woods, 24 F.3d 514, 518 n.4 (3d Cir. 1994) (discussing
same).
28
Guideline 3B1.3, it seems that our jurisprudence does not
do so in practice with any degree of consistency. The
contention that "the sentencing enhancement is not
intended to apply in every case of fraud," Koehn, 74 F.3d at
201, is easier to promise than to enforce.
In Pardo, we identified three elements to consider in
determining whether a position constitutes a position of
trust:
(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.
Pardo, 25 F.3d at 1192. Pardo stated that "[T]hese factors
should be considered in light of the guiding rationale of the
section--to punish `insiders' who abuse their positions
rather than those who take advantage of an available
opportunity." Id. The difficulty is that the literal application
of the three-part test in fraud cases undermines Pardo's
limitation to "insiders." Where a defendant orchestrates a
fraud, particularly a fraud of the kind prosecuted in federal
court, he will almost always be a sufficient "insider" under
the Pardo test, even if he is at the same time taking
advantage of the opportunity that his acts made available.
A fraudulent scheme ordinarily contains all three Pardo
elements: difficulty of detection, authority, and reliance.
First, people who commit fraud do not do it overtly; they
conceal it. Efforts to make the fraud look legitimate are a
necessary part of fraud. Even in a simple scam--e.g., a
door-to-door solicitation for a fictitious charity--it is
difficult to verify a claim of charitable purpose. Fraud is
therefore by its nature difficult to detect. Second, even the
average fraud vests a high degree of authority in a
defendant vis-a-vis the object of his wrongful act. Fraud
consists of getting a victim to give to a criminal authority
over items of value, however fleeting or illegitimate. See,
e.g., United States v. Sokolow, 91 F.3d 396, 413 (3d Cir.
1996) (defendant had the requisite degree of authority
because he was authorized to withdraw victims' funds from
29
his company). And finally, it is difficult to imagine a fraud
in which a victim does not rely on the integrity of the
defendant; again, that is the very point of fraud. See
Agathos v. Starlite Motel, 60 F.3d 143, 147 (3d Cir. 1995)
(explaining that the elements of fraud are knowing
misrepresentation, intent to induce reliance, and reliance);
cf. United States v. Pelkey, 29 F.3d 11, 16 (1st Cir. 1994)
(discussing the abuse of trust enhancement and noting that
"[s]ome degree of consequential trust and reliance by the
victim is to be expected in the majority of fraud cases
involving false pretenses").
Because fraud normally includes all three factors, our
description of abuse of trust works equally well as a
description of fraud: "[I]f one party is able to take criminal
advantage of the relationship without fear of ready or quick
notice by the second party, the second party has clearly
placed a level of trust in the first." United States v.
Lieberman, 971 F.2d 989, 993 (3d Cir. 1992) (quoting
United States v. Hill, 915 F.2d 502, 506 (9th Cir. 1990)). In
United States v. Bennett, 161 F.3d 171 (3d Cir. 1998), the
defendant ran a Ponzi scheme in the guise of a charity,
defrauding many victims out of substantial sums. We found
that:
Bennett's authority allowed him to disseminate
falsehoods about trust agreements and anonymous
benefactors, misrepresent that he received no
compensation for his charitable efforts, create a phony
board of directors made up of prominent individuals,
deceive investors that funds deposited with New Era
organizations were held in escrow or quasi-escrow
accounts, and provide false information to the I.R.S.
and investors.
In all of these undertakings, it was Bennett's position
of trust that cloaked him with the requisite authority to
deceive. . . .
Furthermore, it is clear the victims relied on
Bennett's integrity when making donations. They
believed, based on his representations, that their
money would be held in low-risk accounts to be
matched by anonymous donors and ultimately used for
charitable purposes.
30
Id. at 195-96. As soon as the abuse of trust has been
described, so has the fraud.
Likewise, describing fraud, or its "cousin," theft by deceit,
describes an abuse of trust because fraud is the culpable
exploitation of trust:
By viewing as especially culpable persons who "abuse"
their positions of trust, the guideline also recognizes
the time-honored legal concept that theft by deceit is to
be dealt with more harshly than simple theft. Whereas
ordinary theft is by and large an impersonal act, theft
by deceit, like its cousin fraud, is entirely personal.
Where an individual makes himself particularly
vulnerable by entrusting another with substantial
authority and discretion to act on his behalf and then
relies upon and defers to that person, a decision to
take advantage of that trust and vulnerability is
particularly abhorrent, as it undermines faith in one's
fellow man in a way that the ordinary pick-pocket
simply cannot.
United States v. Ragland, 72 F.3d 500, 503 (6th Cir. 1996).
II.
The preceding discussion demonstrates that our tripartite
test is better at detecting abuses of trust--including frauds
--than it is in defining a true "position" of trust. Thus,
garden-variety fraud as well as exotic schemes will
ordinarily qualify for the enhancement, even though the
Sentencing Guidelines were not supposed to work this way.
True, an occasional exceptional case may not qualify for
the enhancement. Pardo is one of the increasingly rare
cases to reject an abuse of trust enhancement for fraud. In
that case, we found the enhancement unjustified where
formal checks against bank fraud were in place, but the
defendant's friend, a bank manager, bypassed them
(without apparent criminal intent) to help her friend. We
found that there was no position of trust because the
safeguards were designed so that the bank would not need
to rely on borrowers' credibility; the crime should not have
been difficult to detect.
31
Judge Harris's opinion distinguishes Iannone's situation
from that in Pardo because the difficult-to-detect element
does not require due diligence by the victim:
Iannone's victims did not have to be experts in the oil
and gas industry or conduct an extensive investigation
into Iannone's business for the S 3B1.3 enhancement
to be applicable. In fact, one rationale for a S 3B1.3
enhancement is that, where the defendant occupies a
position of trust, his victims are less likely to discover
his fraud because they will not investigate the matter
as thoroughly as they would in an arm's-length
transaction. The focus of the first Pardo prong is on the
defendant, not his victims, and requires the court to
determine whether the position the defendant occupied
allowed him to commit a difficult-to-detect crime.
Slip Op. at 16.
While I agree that Pardo is distinguishable, I disagree
that we can "focus" on the defendant to the exclusion of
victims. In Pardo, for example, if there had been no formal
safeguards against bank fraud, and the bank had relied on
managers' assessments of clients' trustworthiness, then the
defendant's fraud would have been difficult to detect. Cf.
United States v. Sherman, 160 F.3d 967, 969-70 (3d Cir.
1998) (insurance fraud by a doctor abused a position of
trust because the victim-insurer used an honor system).
But a decision to ignore the victims' level of care does not
obviate the need to look at the victims to see whether,
under the circumstances, the defendant occupied a position
of trust with respect to them.
Pardo is almost unique because the defendant used
informal, personal ties to subvert standard, formalized
safeguards. In this case, by contrast, Iannone chose a
method whereby fraud was inherently difficult to detect--
his own representations about ownership of land, oil leases,
and the oil and gas industry. The more informal the
encounter between the defendant and his victims, the more
difficult it will be for victims to detect potential fraud; the
informality of the defendant's "position" leads to the
application of the enhancement even though it is far from
a traditional trust relationship. This result follows from our
32
decisions, which have yoked the existence of a position of
trust to the difficulty of detection under the circumstances
of the crime:
[O]ne has been placed in a position of trust when, by
virtue of the authority conferred by the employer and
the lack of controls imposed on that authority, he is
able to commit an offense that is not readily
discoverable. In such cases, the employer, by choice or
necessity, is relying primarily on the integrity of the
employee to safeguard against the loss occasioned by
the offense.
United States v. Craddock, 993 F.2d 338, 342 (3d Cir.
1993) (emphasis added). The exception carved out by Pardo
is hardly an exception at all; the game is not worth the
candle.
I believe that this difficulty has arisen because our
jurisprudence has extracted elements that characterize
traditional trust relationships and generalized from them to
define "positions of trust." While this case provides an
example of a relationship that has the requisite elements
and still seems to me to go far beyond the usual meaning
of "position of trust," there are also examples of positions of
trust without the three distilled elements. In United States
v. Claymore, 978 F.2d 421 (8th Cir. 1992), a police officer
raped a 13-year-old girl and fathered her child. This crime
may have been difficult to prevent, given the authority
delegated to police officers, but it was not difficult to detect
--particularly insofar as we look at the position of trust
from the victim's perspective, see, e.g., United States v.
Castagnet, 936 F.2d 57, 62 (2d Cir. 1991). Nevertheless, I
have no doubt that the abuse of trust enhancement was
justified in Claymore. See also United States v. Zamarripa,
905 F.2d 337, 340 (10th Cir. 1990) (abuse of trust
enhancement applicable where babysitter sexually abused
child).
Claymore is an example in which the Pardo test would be
underinclusive, though the greater danger is that our test
so closely parallels the elements of fraud that it is
overinclusive. Both the under- and overinclusiveness follow
from the fact that the elements of the Pardo test are all
33
basically about deceit, which is involved in most (but not
all) abuses of a fiduciary position of trust and is also
involved in many other crimes. Deceit occurs in many
forms, in relationships both formal and informal, casual
and longstanding. Ultimately, then, the use of the tripartite
test dilutes the concept of a "position" of trust, reducing
our inquiry in practical terms to whether there was an
"abuse of trust."
III.
Once we have expanded "abuse of trust" to cover
situations in which there is only a misrepresentation of
legitimacy that cannot be easily verified, I cannot see a
limiting principle. As far as I can discern, the only type of
fraud that might not justify the abuse of trust enhancement
is a simple "pigeon drop" scam--and that only if we choose
to impose some minimal requirement that victims take
sensible precautions against fraud.2 Yet federal fraud cases
rarely, if ever, involve defendants who commit basic frauds
like the pigeon drop. Indeed, the single federal pigeon drop
prosecution in the past fifteen years I have found in the
reported federal cases involved a feigned position of trust--
a phony "investment adviser"--not unlike Iannone's in this
case. See United States v. Jones, 648 F. Supp. 225
(S.D.N.Y. 1986), aff'd in part and rev'd in part sub nom.
United States v. Blackmon, 839 F.2d 900 (2d Cir. 1988).3
I therefore believe that the Sentencing Commission
should rethink the relationship between the abuse of trust
enhancement and fraud crimes.4 In such cases, the
_________________________________________________________________
2. A "pigeon drop" is a scheme in which the criminals convince a victim
that they have, together, stumbled upon lost riches. They "agree" to split
the windfall amongst themselves, but the criminals convince the victim
that unspecified legal or tax consequences prevent a simple split. The
perpetrators inveigle the victim into giving up her own money to show
her good faith and then disappear.
3. The only other federal "pigeon drop" cases I have uncovered predate
the Guidelines by an even longer period. See United States v. Ostertag,
619 F.2d 767 (8th Cir. 1980); Charron v. United States, 412 F.2d 657
(9th Cir. 1969); United States v. Edwards, 394 F. Supp. 1288 (E.D. Mo.
1974), aff'd, 516 F.2d 913 (8th Cir. 1975).
4. Although my discussion suggests that this court has "run too far with
the ball" in this area, we are not alone. See, e.g., United States v.
Becraft,
34
enhancement should either be limited to fiduciary or quasi-
fiduciary relationships, or the Commission should recognize
that, as expanded by the cases, abuse of trust is part of the
definition of fraud and therefore should not be applied to
fraud crimes. See U.S.S.G. S 3B1.3 ("This adjustment may
not be employed if an abuse of trust or skill is included in
the base offense level or specific offense characteristic.").
Alternatively, I would urge my colleagues to revisit the
standard for applying the enhancement to fraud cases. The
Court of Appeals for the Second Circuit has an instructive
approach that we might consider. Its standard bars the
enhancement in fraud cases where the defendant is neither
a trusted employee of the victim nor in any fiduciary or
quasi-fiduciary relationship with the victim:
Section 3B1.1 precludes an enhancement where the
abuse of trust is included in the specific offense
characteristic. Where fraud occurs in arm's-length
transactions not involving fiduciary-like relationships,
the "trust" that is "abused" is simply the reliance of the
victim on the misleading statements or conduct of the
defendant. The trust in short is a specific offense
characteristic of fraud, and a Section 3B1.3
enhancement is inappropriate. In the instant matter,
the lenders' trust in Jolly was simply their reliance on
his representations about Microtech's ongoing business
and the appearance created by the repayments. Such
reliance is the hope of every defendant who engages in
fraud.
. . . .
. . . Jolly held himself out as the president of a
company seeking capital, not as an investment advisor.
United States v. Jolly, 102 F.3d 46, 49-50 (2d Cir. 1996).
_________________________________________________________________
117 F.3d 1450 (D.C. Cir. 1997) (finding an abuse of a position of trust
where the defendant, an office manager, was given"carte blanche" by the
negligence of her immediate supervisor, permitting her to perpetrate an
otherwise blatant fraud). The problem lies in the drafting of the
Guidelines and Application Notes.
35
Under this approach, Iannone's fraud would have been
an arm's-length investment transaction, despite his
personal relationship with the victims. Friendship should
not convert a non-fiduciary relationship into afiduciary
one. See Koehn, 74 F.3d at 201 (distinguishing "arms-
length commercial relationships where trust is created by
the defendant's personality or the victim's credulity" from
"relationships in which the victim's trust is based on
defendant's position in the transaction"); United States v.
Mullens, 65 F.3d 1560, 1567 (11th Cir. 1995) (rejecting the
enhancement where the defendant befriended his victims
and touted himself as a gifted investor, but did not hold
himself out as an investment broker; holding that
"[f]raudulently inducing trust in an investor is not the same
as abusing a bona fide relationship of trust with that
investor").
If the average fraud demands a higher sentence because
of the harm inflicted upon the social fabric of trust, then
the base offense level of fraud should be increased, rather
than forcing courts in each case to identify the ways in
which each fraud was slightly easier to commit or more
difficult to detect than the average fraud. See United States
v. Gordon, 61 F.3d 263, 269 (4th Cir. 1995) (explaining that
the enhancement was designed to punish defendants who
are "more culpable" than others in similar positions who
engage in criminal acts). The abuse of trust enhancement
as applied to fraud bears some resemblance to the children
of Garrison Keillor's Lake Wobegon, all of whom are above
average. This has unnecessarily complicated the law,
stretching the conventional meaning of a position of trust to
its breaking point. And it has created a regime that may
well be under- as well as over-inclusive by substituting a
showing that the defendant deceived victims for a
requirement of a true fiduciary or quasi-fiduciary "position
of trust." Thus the better approach is for the Sentencing
Commission to revisit the area, and bring the notion of
abuse of a position of trust back to (or at least close to) its
generally understood meaning.
36
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
37