United States v. Pena ( 2001 )

Opinions of the United
2001 Decisions States Court of Appeals
for the Third Circuit
10-10-2001
USA v. Pena
Precedential or Non-Precedential:
Docket 00-5169
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Recommended Citation
"USA v. Pena" (2001). 2001 Decisions. Paper 231.
http://digitalcommons.law.villanova.edu/thirdcircuit_2001/231
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Filed October 10, 2001
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
NO. 00-5169
UNITED STATES OF AMERICA
v.
ARTHUR PENA,
Appellant
On Appeal from the United States District Court
for the District of New Jersey
(D.C. Criminal No. 98-cr-00022-4)
District Judge: Honorable Jerome B. Simandle
Argued July 20, 2001
Before: SCIRICA, RENDELL, and ROSENN, Circuit Judges,
(Filed October 10, 2001)
Anthony J. Iacullo, Esq. [ARGUED]
Iacullo & Saluti
103 Park Street, 3rd Floor
Montclair, NJ 07042
Counsel for Appellant
Arthur Pena
Elizabeth S. Ferguson, Esq.
[ARGUED]
George S. Leone, Esq.
Office of United States Attorney
970 Broad Street, Room 700
Newark, NJ 07102
Counsel for Appellee
United States of America
OPINION OF THE COURT
RENDELL, Circuit Judge.
Arthur Pena was a veteran police officer of the West New
York, New Jersey, Police Department ("WNYPD"), who, along
with other officers, accepted bribes in return for permitting
illegal poker video gambling machines to operate without
interference in certain areas of New Jersey. At issue on
appeal is the proper application of S 2C1.1 of the United
States Sentencing Guidelines to the facts of this case, and,
specifically, the propriety of the District Court's 13-level
increase in Pena's offense level based on the benefit
received by the payor of the bribes from Pena's illegal
conduct between 1989 and 1992. He contends that,
because the government failed to prove the "net benefit" to
the gambling machine distributors who paid the bribes at
issue, he should have been sentenced based on the
aggregate amount of the bribes. As a part of this argument,
he urges that the "net benefit" calculation requires a
showing of the net profit to the distributor. The District
Court correctly rejected his arguments based on our prior
decision in United States v. Schweitzer, 5 F.3d 44 (3d Cir.
1993). We will affirm.
Pena was convicted by a jury in the United States District
Court for the District of New Jersey of conspiracy to commit
extortion in violation of 18 U.S.C. S 1951(a) for "protection"
payments made between 1989 and 1996 by one of the
distributors of the machines at issue, GMOG.1 GMOG was
owned by George Riveiro, who operated it with the help of
his brother Luis. GMOG placed the machines in
establishments such as bars and restaurants, maintained
the machines, and split the profits with the establishments'
owners. Patrons would deposit money into the machines for
game credits on which they made wagers; at the end of the
game, the credits would be exchanged for cash. GMOG
_________________________________________________________________
1. The jury also found Pena guilty on two counts of an indictment
charging him with subscribing false 1991 and 1992 tax returns in
violation of 26 U.S.C. S 7206(1).
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collected the money from the machines weekly, figured out
the credits, reimbursed the establishment for the money
paid out to winners, and then split the profit with the
establishment on a 50:50 basis.
The evidence at trial revealed routine payments had been
made by GMOG to Pena in the amount of $2,000 each
month from 1989 through April 1993. At sentencing, the
government introduced the affidavit of FBI Special Agent
Kenneth O'Connor recounting interviews he had with Luis
Riveiro on December 3 and 7, 1999, regarding the m onies
derived from the operations. The affidavit contained the
following evidentiary averments:
4. During the above-described conversation,[Luis]
Riveiro told me, in substance and in part, that
approximately two years ago he totaled the weekly
figures and determined how much GMOG collected on
a yearly basis from 1988 through 1995. Riveiro stated
that in 1988 they earned $323,000, in 1989 the
amount was $986,300, in 1990 the amount was
$1,021,700, in 1991 they earned $726,800, in 1992
they earned $452,110, in 1993 they earned $302,630,
in 1994 they earned about $158,290, and in 1994 they
earned about $41,380. He further told me that about
ten to fifteen percent of these figures were derived from
legal activity such as children's games and juke boxes
and that about ninety-five percent of these earnings
were from machines in West New York, New Jersey.
5. In December 1999 I spoke to George Riveiro, the
owner of GMOG. He told me in substance and in part,
that GMOG earned an average of $5,000-$6,000 in
profit per week during the most profitable years.
George Riveiro also told me that his brother Luis
Riveiro actually collected the revenues from the
locations where they placed machines and thus, would
be in a better position to provide a more accurate
recollection of GMOG's revenues.
App. at 107.
Pena argued at sentencing that the government had
failed to prove the specific "net profit" or"net benefit" and
that the court must sentence him based on the aggregate
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bribe amount proven -- $96,000. The government argued
that it had in fact proven the benefit received by GMOG,
namely, the revenues GMOG realized from the illegal
operation.
The District Court considered the parties' arguments and
adjourned the hearing in order to consider the issue in the
context of a recent split in the rulings of the courts of
appeals as to the meaning of "net benefit" under the
sentencing guidelines.
The District Court reconvened the sentencing hearing two
months later and ruled that, consistent with our opinion in
United States v. Schweitzer, "net benefit" in this situation
was the monies realized from the illegal operation, quoting
our statement in Schweitzer that "net benefit . . . has
nothing to do with expense incurred by the wrongdoer in
obtaining the net value received" where the transaction was
wholly illegal. 5 F.3d at 47.
The District Court then relied on the revenues shown to
have been received by GMOG for the 50:50 split from illegal
operations. Then, based on the information Luis Riveira
provided O'Connor, the Court netted out 20% to account
for business outside of West New York and the proceeds
from the few legitimate machines, and therefore made a fact
finding of $2,573,000 as "GMOG's net benefit received for
the years 1989 through 1997." App. at 81-82.
The District Court noted that the government had offered
two different calculation methods, but both arrived at
approximately the same number.2 Based on this finding,
Pena's offense level was 25, and with a Criminal History
_________________________________________________________________
2. The District Court explained:
The amounts of winnings are about as precise as we can determine
them in hindsight. This figure is also supported by a completely
different method, namely, if we had taken the probation
department's estimates of 16,000 a month in `89 and 70,000 a
month in `90, `91 and `92, we get a figure of approximately 2.7
million dollars, those are figures that come from paragraph 146. So
the two sums are quite consistent by either method of calculation.
App. at 82.
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level of 1, the guideline range was 57 to 71 months. The
District Court sentenced Pena to 57 months.
The District Court had jurisdiction pursuant to 18 U.S.C.
S 3231. We exercise jurisdiction over this appeal of the
Court's sentencing determination based on 28 U.S.C.
S 1291 and 18 U.S.C. S 3742(a)(2).
We begin our review by examining the guideline
provisions at issue found at S 2C1.1, which states that the
base offense level of 10 is to be increased in certain
circumstances:
Offering, Giving, Soliciting, or Receiving a Bribe;
Extortion Under Color of Official Right
. . . .
(A) If the value of the payment, the benefit received
or to be received in return for the payment, or the
loss to the government from the offense,
whichever is greatest, exceeded $2,000, increase
by the corresponding number of levels from the
table in S 2F1.1 (Fraud and Deceit).
U.S. Sentencing Guidelines Manual S 2C1.1(b)(2)(A) (2000)
(emphasis added).
It is conceded that, here, the value of the "benefit
received in return for the payment" was greater than the
value of the payment, or the loss to the government.
Accordingly, we look to Application Note 2, which explains:
. . . The value of "the benefit received or to be received"
means the net value of such benefit. Examples : (1) A
government employee, in return for a $500 bribe,
reduces the price of a piece of surplus property offered
for sale by the government from $10,000 to $2,000; the
value of the benefit received is $8,000. (2) A $150,000
contract on which $20,000 profit was made was
awarded in return for a bribe; the value of the benefit
received is $20,000. Do not deduct the value of the
bribe itself in computing the value of the benefit
received or to be received. In the above examples,
therefore, the value of the benefit received would be the
same regardless of the value of the bribe.
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U.S. Sentencing Guidelines S 2C1.1, cmt. n. 2 (2000).
The "Background" section of the Application Notes states,
further:
Where the value of the bribe exceeds the value of the
benefit or the value of the benefit cannot be
determined, the value of the bribe is used because it is
likely that the payer of such a bribe expected
something in return that would be worth more than
the value of the bribe. Moreover, for deterrence
purposes, the punishment should be commensurate
with the gain to the payer or the recipient of the bribe,
whichever is higher.
U.S. Sentencing Guidelines S 2C1.1, cmt. background
(2000).
While Pena criticizes the vague nature of the numbers
contained in the O'Connor affidavit as a basis for
calculating the dollar amounts for purposes of sentencing,
he does not challenge its sufficiency or the court's factual
finding as such.3 Rather, he attacks the District Court's
ruling that the revenues, rather than the net profits, are the
proper measure of "net value" of the benefit. He complains
that the District Court has misinterpreted the guidelines.
Accordingly, we will review the District Court's ruling under
a de novo standard. United States v. Geevers, 226 F.3d 186,
189 (3d Cir. 2000).
Pena relies to a great extent on the decision of the
Seventh Circuit Court of Appeals in United States v.
Sapoznik, 161 F.3d 1117 (7th Cir. 1998), decided after our
ruling in Schweitzer. Pena limits his discussion to the
consideration of these two cases. We note that if we were to
follow Sapoznik, Pena might in fact succeed, while, under
Schweitzer, he clearly will not.
Sapoznik also involved illegal gambling operations, and
the court there held that the government had failed to prove
net profit. Interestingly, Chief Judge Posner, in his opinion,
notes:
_________________________________________________________________
3. Pena attacks the substance of O'Connor's affidavit based only on his
view that specific net revenue needed to be shown and that, lacking such
proof, the bribe amount should be used. Appellant's Brief at 18-20.
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The government concedes that the relevant "benefit
received" is indeed profit (net revenue) and not (gross)
revenue. U.S.S.G. S 2C1.1, Application Note 2; United
States v. Glick, 142 F.3d 520, 525-26 (2d Cir. 1998);
United States v. Schweitzer, 5 F.3d 44, 47 (3d Cir.
1993); but cf. United States v. McAlpine , 32 F.3d 484,
489 (10th Cir. 1994).
161 F.3d at 1119. Given this concession, the court
examined the record and held that the case should be
remanded for resentencing, because the record contained
no proof by the government regarding the costs of the illegal
enterprise. While we understand that the government's
concession may have misdirected that court, we reject the
notion that profit is relevant for a consideration of "net
value" of "benefit." We also reject the thought that our
decision in Schweitzer, or the Second Circuit's decision in
Glick, stood for such a conclusion, as the Seventh Circuit's
reference seems to indicate. Although in certain cases the
profit may be equal to the net value, as illustrated by
Application Note 2, and as we discuss in more detail below,
the concept of netting out costs to arrive at profit is
inappropriate under the Guidelines section when the
transactions are entirely illegitimate.
Pena argues that Sapoznik requires us to consider only
GMOG's net profit by subtracting out costs related to the
illegal activity, and he tries to find in Schweitzer some
further support. In Schweitzer we first considered the
meaning of "net value" of benefit. Schweitzer was a private
investigator who bribed former and current employees of
the Office of Inspector General for confidential information
that he then supplied to others for a fee. After paying
$4,680 for the information, he sold it for roughly two times
that amount. We rejected Schweitzer's contention that the
$4,680 should be deducted -- his cost for conducting the
illegal activity -- noting that the cases he relied upon allow
for the deduction of the value that would be derived in a
legitimate transaction not induced by a bribe, whereas he
was arguing not that value derived, but rather expenses
incurred, should be deducted. We noted that the concept of
value had nothing to do with costs incurred. In Schweitzer
we did not specifically address the issue of net profit or the
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deduction of costs of operation, because the "amount paid"
appears to have been the bribe amount specifically not
deductible under the guidelines.
Nonetheless, we think that our focus in Schweitzer was
entirely correct. Application Note 2 actually provides the
proper focus. U.S. Sentencing Guidelines, S 2C1.1, cmt.
n.1 (2000). It speaks in terms of "net value" of benefit. Id.
The examples it recites clearly demonstrate that, to arrive
at the proper amount, we are to deduct the value
legitimately and actually given, from the value received, to
arrive at the "net value" of the benefit caused by the bribe.
Id. Thus, if a $10,000 piece of property is sold for $2,000,
the bribe caused an $8,000 benefit -- the purchaser
received a $10,000 piece of property for only $2,000.
Similarly, if a $20,000 profit is made on a $150,000
contract, the contract provided $130,000 of services and/or
product -- value given -- so the benefit caused by the bribe
was $20,000. In both examples, there was, as we noted in
Schweitzer, "a sale item" that "had a value that a purchaser
in a legitimate transaction would receive," and"that value
was not received as a result of the bribe and should not be
considered in determining the degree of the bribe giver's
culpability." We stated, in clear terms: "This concept of `net
value received' has nothing to do with the expense incurred
by the wrongdoer in obtaining the net value received. This
is clear from the Note's instruction that the value of the
bribe is not to be deducted in calculating the `net value.' "
5 F.3d at 47.
We were entirely correct in Schweitzer, and when we
apply this reasoning to the case at hand it is apparent that
the illegal gambling operations involved no legitimate object
or service of value, and that every dollar received by GMOG
was received because of the bribe -- not because of the
intrinsic value of anything being provided. As a result, the
entire amount of the revenue was the benefit. Unlike a
situation where something of legitimate value was provided
to an individual, or for the benefit of society, such as
services or a physical item of value, the operations here
were wholly illegal and therefore there was no other value to
"net out."
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Pena attempts to address this aspect of Schweitzer by
arguing that the government should have netted out
monies that the machines generated that may have been
legitimate. But the District Court already took into account
Riveiro's estimate of legitimate proceeds from legitimate
machines or other locations, and Pena's counsel admitted
that all revenues from the gambling machines were illegal.
To require that other monies be deducted would convert the
test into one in which the government must investigate
whether any legitimate value had been given in an illegal
operation. While the government does have the burden to
establish the value, United States v. McDowell , 888 F.2d
285, 291(3d Cir. 1989), we are not prepared to impose on
the government the onerous task of proving that each
separate expense transaction in an illegal operation had
absolutely no legitimate value or benefit. Pena asks us to
read too much into the concepts of "value" and"benefit."
We believe it more appropriate to limit the exercise to an
assessment of what is obvious in the fact pattern. In both
of the examples in the guidelines it is quite apparent that
something legitimate was in fact provided in the
transaction, and the bribe-caused portion easily
identifiable. Here, it is just as easily seen that nearly all the
revenues were derived from the illegal operation of the
machines and were directly attributable to, and derived on
account of, the bribes in question.
We also note that the notion of deducting costs
associated with furthering purely illegal activity, as the
reasoning of Sapoznik would call for, is simply illogical.
First, it would be nearly impossible to establish because
most criminals do not keep detailed records regarding the
costs of maintaining their illegal business. Second, these
expenses were tainted because they were incurred in
furthering the criminal activity.
Thus, we have held, and we reiterate, that "net value" of
the "benefit" received does not mean "net proceeds." Rather,
it means benefit received after netting out the value of what
-- if anything -- of legitimate value, was provided.
It is interesting to note that the case law reference to net
profit, or netting out costs, may have arisen due to the fact
that, in some instances, the two concepts -- deducting
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value given and deducting direct costs -- may be somewhat
the same. For instance, consider the case of the doctor who
bribes an official and, as a result, obtains many referrals
for the sale of lymphodema pumps, as in United States v.
Leon, 2 F. Supp. 2d 592 (D.N.J. 1998). If the doctor has
sold the pumps for $100, but they were worth $60-- which
he did pay, and which value the purchaser did receive --
there are two ways of looking at the fact that the net benefit
was $40. Perhaps a court might describe the underlying
principle in terms of permitting the deduction of direct
costs, i.e., a cost of goods sold. Based on our reading of the
guidelines, however, we view this in terms of "netting out"
the legitimate value given, i.e., the portion that was received
not as a result of the bribe, but rather in return for the
product's intrinsic value. There is simply no such value in
this case.
We note that, as we mentioned above, the District Court
here took extra time to examine this issue and "got it right."
The court drew on Schweitzer and its obvious implications
in this case, correctly reasoning:
As applied to the present case, Schweitzer teaches that
where the object of the conspiracy, namely, the
protection of illegal gambling, is illegitimate, all
proceeds flowing to the conspirators -- here, GMOG--
are to be regarded as the benefit received in return for
the extortion payment. The "net value" of the benefit
received by Pena's coconspirators at GMOG is the gross
revenues they derived from the protected illegal
gambling in West New York in the relevant time period.
App. at 72.
The District Court then noted that the proper analysis
had been similarly conducted in United States v. Leon,
summarizing the court's explanation in that case:
The Court's task is to determine the difference between
what did happen as a result of the bribe and what
would have happened if not [for] the bribe. The Court
would permit the deduction of legitimate costs that
would have been incurred in a legitimate transaction
regardless of a bribe payment, and the Court would not
10
deduct illegitimate costs that would not have occurred
in the absence of a bribe payment.
App. at 72 (paraphrasing Leon, 2 F. Supp. 2d at 597).
The District Court concluded:
I hold that in calculating the "benefit received" from
payment of extortion to protect illegal gambling, the
proper figure equals the revenues received by the bribe
payors (here, the GMOG owners) derived from the
illegal gambling operations which were being protected,
unreduced by the amount of the bribes themselves or
by the other costs of maintaining the illegal gambling
business.
App. at 75.
Accordingly, the District Court committed no error in its
reasoning and ruling, and we will affirm its judgment of
conviction and sentence.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
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