United States v. Joseph Nagle , 803 F.3d 167 ( 2015 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
______
Nos. 14-3184 and 14-3422
______
UNITED STATES OF AMERICA
v.
JOSEPH W. NAGLE,
Appellant, No. 14-3184
ERNEST G. FINK,
Appellant, No. 14-3422
______
On Appeal from United States District Court
for the Middle District of Pennsylvania
(M.D. Pa. No. 1-09-cr-00384-001)
(M.D. Pa. No. 1-09-cr-00384-002)
District Judge: Honorable Sylvia H. Rambo
______
Argued April 27, 2015
Before: FISHER, HARDIMAN, and ROTH, Circuit Judges.
(Filed: September 30, 2015)
William M. Kent, Esq. ARGUED
1932 Perry Place
Jacksonville, FL 32207
Counsel for Joseph W. Nagle
Ellen C. Brotman, Esq. ARGUED
Griesing Law
1717 Arch Street
Suite 3630
Philadelphia, PA 19103
Erin C. Dougherty, Esq.
Montgomery, McCracken, Walker & Rhoads
123 South Broad Street
28th Floor
Philadelphia, PA 19109
Counsel for Ernest G. Fink
Bruce Brandler, Esq. ARGUED
Office of United States Attorney
228 Walnut Street, P.O. Box 11754
220 Federal Building and Courthouse
Harrisburg, PA 17108
Jenny C. Ellickson, Esq. ARGUED
United States Department of Justice
Appellate Section
950 Pennsylvania Avenue, N.W., #1264
Washington, DC 20530
Counsel for Appellee
______
2
OPINION OF THE COURT
______
FISHER, Circuit Judge.
Joseph Nagle and Ernest Fink were co-owners and
executives of concrete manufacturing and construction
businesses. The businesses entered into a relationship with a
company owned by a person of Filipino descent. His
company would bid for subcontracts on Pennsylvania
transportation projects as a disadvantaged business enterprise.
If his company won the bid for the subcontract, Nagle and
Fink’s businesses would perform all of the work.
Fink pled guilty to one count of conspiracy to defraud
the United States. Nagle proceeded to trial, where a jury
found him guilty of a myriad of charges relating to the
scheme. Both defendants filed timely appeals. Nagle
challenges the District Court’s order denying his motion to
suppress electronic evidence discovered during searches of
the businesses’ offices. Both defendants challenge the
amount of loss the District Court found they were responsible
for in calculating the appropriate Sentencing Guidelines
range. We will affirm Nagle’s conviction, vacate Nagle’s and
Fink’s sentences, and remand for resentencing.
I.
A.
The United States Department of Transportation
provides funds to state transportation agencies to finance
transportation projects. These funds often go towards
highway construction, provided through the Federal Highway
Administration (“FHWA”), or towards mass transit systems,
3
provided through the Federal Transit Administration
(“FTA”). In Pennsylvania, the FHWA provides funds to the
Pennsylvania Department of Transportation (“PennDOT”),
and the FTA provides funds to the Southeastern Pennsylvania
Transportation Authority (“SEPTA”).
Federal regulations require states that receive federal
transportation funds to set annual goals for participation in
transportation construction projects by disadvantaged
business enterprises (“DBEs”). 49 C.F.R. § 26.21. A DBE is
a for-profit small business that is at least 51% owned by an
individual or individuals who are both socially and
economically disadvantaged and whose management and
daily operations are controlled by one or more of the
disadvantaged individuals who own it. Id. § 26.5. A state
agency will announce a DBE-participation goal when
soliciting bids for a contract, and bids for the contract must
show how the contractor will meet the goal. If the prime
contractor is not a DBE, this is usually demonstrated by
showing that certain subcontractors that will work on a
contract are DBEs. States themselves certify businesses as
DBEs. Id. § 26.81. A business must be certified as a DBE
before it or a prime contractor can rely on its DBE status in
bidding for a contract. Id. § 26.81(c).
Most importantly here, in order to count towards a
contract’s DBE participation, a DBE must “perform[] a
commercially useful function on [the] contract.” Id.
§ 26.55(c). Therefore, a certified DBE whose “role is limited
to that of an extra participant in a transaction, contract, or
project through which funds are passed in order to obtain the
appearance of DBE participation” cannot be counted towards
DBE participation. Id. § 26.55(c)(2).
B.
In the 1950’s Joseph Nagle’s grandfather established
4
Schuylkill Products Inc. (“SPI”), a Pennsylvania-incorporated
S-corporation, in Cressona, Pennsylvania. SPI manufactured
concrete beams that are used in highway construction
projects. In the 1980’s, the Nagle family also established
CDS Engineers, Inc. (“CDS”), to operate as a construction
company for the concrete beams SPI manufactured. By 2004,
CDS was a wholly-owned subsidiary of SPI. Neither SPI nor
CDS qualified as or was certified as a DBE in any state.
In 1993, SPI was owned by two people: Nagle’s father,
Gordon, who owned 50.1% of SPI, and Fink, Nagle’s uncle
by marriage, who owned 49.9%. Gordon Nagle was the
President and Chief Executive Officer of SPI, while Fink
served as Vice-President and General Manager of SPI. That
year, SPI entered into an arrangement with a company called
Marikina Engineers and Construction Corp. (“Marikina”).
Marikina was a Connecticut corporation owned and managed
by Romeo P. Cruz, an American citizen of Filipino descent.
Because Cruz was of Filipino descent, Marikina qualified as a
DBE for FHWA and FTA projects. Marikina was certified as
a DBE in Connecticut and Pennsylvania, among other states.
SPI and Marikina agreed that Marikina would bid to
serve as a subcontractor for PennDOT and SEPTA contracts
that had DBE participation requirements. If Marikina was
selected for the subcontracts, SPI and CDS would perform all
of the work on those contracts. SPI and CDS would pay
Marikina a fixed fee for its participation but otherwise keep
the profits from the scheme.
In practice, SPI identified subcontracts that SPI and
CDS could fulfill, prepared the bid paperwork, and submitted
the information to prime contractors in Marikina’s name. SPI
used stationery and email addresses bearing Marikina’s name
to create this correspondence. It also used Marikina’s log-in
information to access PennDOT’s electronic contract
5
management system. CDS employees who performed
construction work on site used vehicles with magnetic
placards of Marikina’s logo covering SPI’s and CDS’s logos.
SPI and CDS employees used Marikina business cards and
separate cell phones to disguise whom they worked for. They
also used a stamp of Cruz’s signature to endorse checks from
the prime contractors for deposit into SPI’s bank accounts.
Although Marikina’s payroll account paid CDS’s employees,
CDS reimbursed Marikina for the labor costs.
In 2004, Gordon Nagle passed away. Joseph Nagle
inherited his father’s 50.1% stake in SPI and assumed the
titles of President and Chief Executive Officer. At that time,
Fink became the Chief Operating Officer and Chairman of the
Board. SPI’s relationship with Marikina lasted until March
2008. Between 1993 and March 2008, Marikina was awarded
contracts under the PennDOT DBE program worth over $119
million and contracts under the SEPTA DBE program worth
over $16 million. Between 2004 and March 2008, Marikina
was awarded contracts under the DBE programs worth nearly
$54 million.
C.
SPI’s and CDS’s offices were all located in the same
compound in Cressona. None of the offices was open to the
public. SPI’s administrative office was a converted, two-
story white house. The house was subdivided into offices and
cubicles. Between twelve and fifteen people worked in the
building, as well as Nagle and Fink. CDS’s administrative
office was also a converted house, owned by Fink and leased
to CDS. The compound contained a transportation building, a
production building, and various parking lots. In total, SPI
and CDS employed around 140 individuals who worked in
the compound.
SPI and CDS purchased a computer for nearly every
6
employee who required one. They also created a shared
network over a server. The twenty-five employees who had
access to the network needed a user identification and
password to access it. The network itself was
compartmentalized into drives. Only five people, including
Nagle and Fink, had access to all of the drives on the
network. Emails sent from or received by SPI or CDS
accounts were stored on the network as well. Nagle received
a company computer, which he took home every night and
used for business and personal purposes. He never used any
other employee’s computer.
In October 2007, the Federal Bureau of Investigation
(“FBI”) executed two search warrants at SPI’s and CDS’s
offices. The warrants authorized agents to seize “business
records of [Marikina] and all predecessors and affiliated
operating entities, [SPI,] and CDS . . . including any and all”
financial documents; contracts and invoices; payroll
documents and personnel files; email and correspondence;
phone records and calendars; and “[c]omputers and computer
equipment.” Nagle Supp. App. at 5, 65. During their search
of SPI’s and CDS’s offices pursuant to the warrants, agents
found eleven computers and the shared network server. The
agents imaged the computers on site. Nagle had brought his
computer home with him before the search, so it was not
seized and imaged.
D.
In November 2009, a federal grand jury in the Middle
District of Pennsylvania returned an indictment against Nagle
and Fink. The indictment charged them with one count of
conspiracy to defraud the United States, in violation of 18
U.S.C. § 371; eleven counts of wire fraud, in violation of 18
U.S.C. § 1343; six counts of mail fraud, in violation of 18
U.S.C. § 1341; one count of conspiracy to engage in unlawful
7
monetary transactions, in violation of 18 U.S.C. § 1956(h);
and eleven counts of engaging in unlawful monetary
transactions, in violation of 18 U.S.C. § 1957. Cruz, the
owner of Marikina; Dennis Campbell, an SPI executive; and
Timothy Hubler, a CDS executive, were indicted separately,
pled guilty to the charges, and agreed to cooperate against
Nagle and Fink.
Nagle and Fink jointly moved to suppress the
electronic evidence that the FBI agents had imaged from
SPI’s and CDS’s computers and network server during the
October 2007 search. They argued (1) that the warrants were
unconstitutional general warrants, (2) that the warrants were
unconstitutionally overbroad, and (3) that the agents had
executed the warrant in an unreasonable manner. The United
States opposed the motion, contesting each of the arguments
and also suggesting that Nagle and Fink lacked the requisite
privacy interest to challenge the searches. The District Court
held a hearing and took evidence. Two FBI agents and an
FBI employee testified about the preparation and execution of
the warrants as well as the FBI’s review and analysis of the
imaged data. Nagle and Fink testified about the history and
structure of SPI and CDS, the two companies’ computers and
network use, and their own use of the companies’ computer
infrastructure.
After the hearing, Fink pled guilty to one count of
conspiracy to defraud the United States, in violation of 18
U.S.C. § 371. Nagle, however, continued his challenge to the
search. In September 2010, the District Court denied Nagle’s
suppression motion. The District Court concluded that Nagle
failed to show he had a personal expectation of privacy in the
electronic information that the agents had imaged from SPI’s
and CDS’s computers and network server. The District Court
reasoned that Nagle never used the other employees’
8
computers and that “[w]hile [Nagle] may have had the
expectation that, as President and CEO of SPI and CDS, the
contents of the companies’ server would remain private, he
had this expectation in his official capacity as an executive
and officer of these corporations as opposed to himself as an
individual.” Nagle App. at 21-22. Therefore, the District
Court held that “Defendant has not demonstrated that any of
his Fourth Amendment rights were violated, and thus his
ownership of the companies whose records were seized is
irrelevant.” Nagle App. at 23-24.
On April 5, 2012, after a trial, a jury found Nagle
guilty on all of the charges presented in the indictment except
for four of the wire fraud charges.
E.
Before deciding Nagle’s motion to suppress, the
District Court began the process of sentencing Cruz,
Campbell, and Hubler. As part of that process, the District
Court issued an opinion on the amount of loss they were
responsible for, under U.S.S.G. § 2B1.1, in order to calculate
the appropriate Guidelines range. See United States v.
Campbell, No. 08-cr-7, 2010 WL 2650541 (M.D. Pa. July 1,
2010) [hereinafter “the Campbell loss opinion”]. The District
Court concluded that Application Note 3(F)(ii) to § 2B1.1
was the appropriate legal standard to calculate the amount of
loss; that under Note 3(F)(ii) the amount of loss was the face
value of the contracts Marikina received; and that the
defendants were not entitled to a credit against the loss for the
work performed because they had not refunded the contract
price to allow a legitimate DBE to perform the work. Id. at
*3-6.
After Fink pled guilty and before Nagle’s trial, a
Presentence Report (“PSR”) was prepared for him. The PSR
relied on the Campbell loss opinion to conclude that the loss
9
Fink was responsible for was the face value of the PennDOT
and SEPTA contracts Marikina received while he was an
executive: $135.8 million. Under § 2B1.1(b), this amounted
to a twenty-six-level increase in the Guidelines offense level.
With other enhancements and adjustments, the PSR
calculated Fink’s total offense level to be thirty-five and
assigned him a criminal history category of I. This
corresponded to a Guidelines range of 168 to 210 months of
incarceration, which was reduced to 60 months pursuant to 18
U.S.C. § 371. See U.S.S.G. § 5G1.1(a).
Fink objected to the loss calculation in the PSR on the
basis that the proper loss amount was the pecuniary harm
suffered by an actual DBE that did not receive the contracts—
in other words, the profit an actual DBE would have received
on the contracts. The District Court reserved ruling on the
objection until after Nagle’s trial.
After the jury’s verdict, a PSR was prepared for Nagle
as well. The PSR relied on the Campbell loss opinion to
conclude that the loss Nagle was responsible for was the face
value of the PennDOT and SEPTA contracts Marikina
received while he was an executive: $53.9 million. This
amounted to a twenty-four-level increase in the Guidelines
offense level. With other enhancements, the PSR calculated
Nagle’s total offense level to be forty and assigned him a
criminal history category of I. This corresponded to a
Guidelines range of 292 to 365 months of incarceration.
Nagle objected to the loss calculation in the PSR on
the grounds that (1) there was no evidence another DBE was
willing to perform the contracts, (2) PennDOT and SEPTA
received what they paid for under the contracts, and (3) the
largest conceivable actual loss was the value of the contracts
less overhead and expenses.
In February 2014, the District Court held a joint
10
hearing to address the issue of the amount of loss for both
defendants. At the hearing, in addition to arguing that the
proper loss amount was the face value of the Marikina
contracts, the Government introduced evidence pertaining to
the gross profits earned by SPI and CDS on the Marikina
contracts during Fink’s and Nagle’s respective tenures as
executives. Fink and Nagle both contested the profit
amounts, which the Government asserted were several
million dollars.
On May 7, 2014, the District Court held that Nagle
was responsible for $53.9 million in losses and that no credit
was permitted. On May 16, 2014, the District Court held that
Fink was responsible for $135.8 million and that no credit
was permitted.
The District Court then requested briefing on the
appropriate amount of restitution. After briefing, the District
Court rejected the Government’s argument that the
appropriate amount of restitution was the same as the amount
of loss under the Guidelines. The District Court reasoned that
SPI and CDS fully performed the contracts, so the
Government received what it paid for. The District Court
held that the Government was only entitled to the difference
between the face value of the contracts and what it would
have paid SPI and CDS knowing that they were not DBEs.
However, because the Government failed to prove what this
difference was, the District Court found that no restitution
was appropriate.
The District Court sentenced Nagle first. He requested
a ten-level downward departure in his offense level. Under
the Guidelines, this corresponded to a loss amount of between
$400,000 and $1 million. The District Court granted the
departure and additionally lowered another enhancement by
one level. With a final offense level of twenty-nine, the
11
District Court calculated Nagle’s Guidelines range to be 87 to
108 months of incarceration. The District Court sentenced
him to 84 months of incarceration, one year of supervised
release, a $25,000 fine, a $2,600 special assessment, and no
restitution.
The District Court then sentenced Fink. The
Government moved for Fink to receive a ten-level downward
departure in his offense level. Under the Guidelines, this
corresponded to a loss amount of between $1 million and $2.5
million. The District Court granted the departure and lowered
another enhancement by one level. With a final offense level
of twenty-four, the District Court calculated Fink’s
Guidelines range to be 51 to 60 months of incarceration. The
District Court sentenced him to 51 months of incarceration,
one year of supervised release, a $25,000 fine, a $100 special
assessment, and no restitution.
Nagle and Fink filed timely appeals. 1
II.
We first consider Nagle’s challenge to the District
Court’s order denying his motion to suppress the electronic
evidence seized from SPI’s and CDS’s offices. The District
Court denied the motion because it concluded that Nagle did
not show that he had a reasonable expectation of privacy in
the places searched or items seized. We exercise plenary
review over the District Court’s legal conclusions but review
its factual findings for clear error. United States v. Silveus,
542 F.3d 993, 999 (3d Cir. 2008).
A defendant who seeks to suppress evidence allegedly
seized or discovered in violation of the Fourth Amendment
1
The District Court had jurisdiction under 18 U.S.C.
§ 3231. We have jurisdiction under 18 U.S.C. § 3742(a) and
28 U.S.C. § 1291.
12
must first demonstrate that the Government physically
occupied his property for the purpose of obtaining
information or that he had “a legitimate expectation of
privacy that has been invaded by government action.” Free
Speech Coal., Inc. v. Att’y Gen., 677 F.3d 519, 543 (3d Cir.
2012) (internal quotation marks omitted); cf. Rakas v. Illinois,
439 U.S. 128, 133-34 (1978) (“Fourth Amendment rights are
personal rights which, like some other constitutional rights,
may not be vicariously asserted.” (internal quotation marks
omitted)). To have a legitimate expectation of privacy, the
defendant must show “an actual or subjective expectation of
privacy in the subject of the search or seizure” and show that
“this expectation of privacy is objectively justifiable under
the circumstances.” United States v. Donahue, 764 F.3d 293,
298-99 (3d Cir. 2014) (internal quotation marks omitted). In
other words, the expectation of privacy must be “one that
society is prepared to recognize as reasonable.” Smith v.
Maryland, 442 U.S. 735, 740 (1979) (internal quotation
marks omitted). 2
No one disputes that SPI and CDS, as corporate
entities, could challenge the search of their respective offices,
whether through a motion to suppress—had they been
2
This initial showing—that the defendant’s property
or legitimate expectation of privacy has been invaded—has
been frequently referred to as “Fourth Amendment standing,”
to differentiate it from jurisdictional, Article III standing.
See, e.g., United States v. Kennedy, 638 F.3d 159, 163 (3d
Cir. 2011). However, “this aspect of the analysis belongs
more properly under the heading of substantive Fourth
Amendment doctrine than under the heading of standing.”
Rakas, 439 U.S. at 429.
13
charged with a crime—or through a Bivens3 action. Nagle
argues that because he is the majority owner of the small,
family-operated corporations, he should have the same ability
to challenge the searches that the corporations do. In other
words, Nagle says, because the Government physically
intruded on the corporations’ property and otherwise invaded
their legitimate expectations of privacy, and because he is the
majority owner of the corporations, the Government
physically intruded on his property and otherwise invaded his
legitimate expectation of privacy. In support of that
argument, Nagle cites a line from New York v. Burger: “An
owner or operator of a business . . . has an expectation of
privacy in commercial property, which society is prepared to
consider to be reasonable.” 482 U.S. 691, 699 (1987).
But that expectation of privacy “is different from, and
indeed less than, a similar expectation in an individual’s
home.” Id. at 700. Although the Supreme Court has not
clarified precisely how much “less” of an expectation of
privacy a business owner has in commercial premises, we see
a consensus among the Courts of Appeals that a corporate
shareholder has a legitimate expectation of privacy in
corporate property only if the shareholder demonstrates a
personal expectation of privacy in the areas searched
independent of his status as a shareholder.
In United States v. SDI Future Health, Inc., the
defendants were part-owners of an incorporated business and
sought to challenge a warrant authorizing a search of the
corporation’s premises. 568 F.3d 684, 691, 694 (9th Cir.
2009). The Ninth Circuit rejected their argument that “mere
ownership and management of” the corporation allowed them
3
Bivens v. Six Unknown Named Agents, 403 U.S. 388
(1971).
14
to challenge the search of the corporation’s premises. Id. at
694. This was because “a reasonable expectation of privacy
does not arise ex officio, but must be established with respect
to the person in question.” Id. at 696. However, the
defendants could still show a legitimate expectation of
privacy in the corporation’s property if they “show[ed] some
personal connection to the places searched and the materials
seized” and “took precautions on [their] own behalf to secure
the place searched or things seized from any interference
without [their] authorization.” Id. at 698. The court
remanded the matter for further fact finding.
In United States v. Mohney, the defendant was the sole
owner of an incorporated business and sought to challenge the
search of the business’s headquarters. 949 F.2d 1397, 1399,
1403 (6th Cir. 1991). The Sixth Circuit concluded that the
defendant failed to show he had a reasonable expectation of
privacy. Id. at 1404. The court concluded,
Where the documents seized were
normal corporate records not personally
prepared by the defendant and not taken
from his personal office, desk, or files, in
a search that was not directed at him
personally, the defendant cannot
challenge a search as he would not have
a reasonable expectation of privacy in
such materials.
Id. at 1403.
Mohney, in turn, relied on a decision of the Second
Circuit in Lagow v. United States, 159 F.2d 245 (2d Cir.
1946) (per curiam). Lagow was the “sole shareholder and
officer of [his] corporation” and sought an order forbidding
the use of evidence seized from the corporation in any future
15
trial against him. Id. at 246. The court rejected his claim,
reasoning that Lagow chose “to avail himself of the privilege
of doing business as a corporation” and, therefore, “he may
not vicariously take on the privilege of the corporation under
the Fourth Amendment . . . . Its wrongs are not his wrongs;
its immunity is not his immunity.” Id.
Finally, in Williams v. Kunze, one of the plaintiffs was
the sole shareholder and president of a corporation and
brought a Bivens action against an IRS agent who searched
the company’s records pursuant to a warrant. 806 F.2d 594,
597 (5th Cir. 1986). The Fifth Circuit found that summary
judgment was properly granted to the federal agent because
the shareholder could not challenge the search of the
business’s premises. Id. at 599. “An individual’s status as
the sole shareholder of a corporation is not always sufficient
to confer upon him standing[ 4] to assert the corporation’s
[F]ourth [A]mendment rights. Unless the shareholder . . . can
demonstrate a legitimate and reasonable expectation of
privacy in the records seized,” he cannot challenge the search.
Id. (citation omitted). The court concluded that the
shareholder could not show such a legitimate expectation of
privacy in records seized from the common file room. Id. at
599-600.
These decisions all support a common proposition: a
shareholder may not challenge a search of corporate property
merely because he is a shareholder, but he may challenge the
search if he “show[ed] some personal connection to the places
searched and the materials seized,” SDI Future Health, 568
F.3d at 698, and protected those places or materials from
outside intrusion.
Even the cases in which a shareholder was permitted to
4
See supra note 2.
16
challenge the search of corporate offices fall within this
paradigm. In United States v. Gonzalez, Inc., the
shareholders of a corporation wished to challenge recordings
from a wiretap placed in their corporation’s office. 412 F.3d
1102, 1116 (9th Cir. 2005). The Ninth Circuit observed that
“owners of the premises where an illegal wiretap occurs have
standing[5] to challenge the interception, even if the owners
did not participate in the intercepted conversations.” Id.
Because the shareholders owned the office themselves
directly—and not indirectly through the corporation—the
court found that they had the reasonable expectation of
privacy necessary to challenge the wiretaps. Id. at 1116-17.
The shareholders in Gonzalez showed a personal connection
to the place searched in that they were the actual, direct
owners of the property, and they showed effort to keep the
conversations there private. Thus, Gonzalez falls within the
larger circuit consensus.
So does Henzel v. United States, 296 F.2d 650 (5th
Cir. 1961). The defendant in Henzel was also the sole
shareholder and president of his business, and he sought to
challenge evidence seized from the corporation. Id. at 650.
The evidence seized was the corporation’s business records,
which were located in his office and most of which he
personally created. Id. at 653. The Fifth Circuit concluded
that he, therefore, “had an interest in the property seized and
premises searched.” Id. Again, Henzel showed a personal
connection to the place searched—his office—and the items
seized—records he personally created—and showed an effort
to keep both private.
We find this line of authority persuasive and adopt it.
To show he can challenge the search of SPI’s and CDS’s
5
See supra note 2.
17
offices and the seizure of the employees’ computers and
network server as a shareholder and executive, Nagle must
show a personal connection to the place searched or to the
item seized and that he attempted to keep the place and item
private. Nagle has failed to meet this standard.
The employees’ computers that were seized and
imaged were discovered in the employees’ offices. Nagle did
not show that he used these employees’ offices, nor that he
used their computers or accessed their files. Accordingly, he
failed to show a personal connection to the computers or the
place where they were discovered.
The server is, however, slightly more complicated.
The server was not seized from his office. Therefore, Nagle
must show a personal connection to the electronic files
located on the server and that he kept them private in order to
demonstrate a reasonable expectation of privacy. Nagle
failed to show that he ever accessed other employees’ files
and emails on the server and, therefore, failed to establish a
personal connection to their files. Although Nagle certainly
had a personal connection to his own files and emails located
on the server, he failed to show what efforts he made to keep
his materials private from others. Although the server was
password protected and only five individuals, including
Nagle, had access to every drive on the server, Nagle did not
establish where his files and emails were located on the server
and how many people had access to those drives. Thus,
Nagle did not meet his burden of proof to demonstrate a
subjective expectation of privacy in his files and emails on
the server.
For these reasons, we conclude that Nagle failed to
establish that he had a reasonable expectation of privacy in
the places searched and items seized or that the Government
intruded onto his property. See Free Speech Coal., 677 F.3d
18
at 543. Therefore, the District Court properly denied the
motion to suppress.
III.
A.
Both Nagle and Fink challenge the District Court’s
calculation of the amount of loss they were responsible for
under the Sentencing Guidelines. The District Court found
that, under U.S.S.G. § 2B1.1, they were responsible for the
face value of the contracts Marikina received without any
credit for work done on the contracts. We review a criminal
sentence for procedural and then substantive reasonableness.
United States v. Tomko, 562 F.3d 558, 567 (3d Cir. 2009) (en
banc). Procedural reasonableness requires the District Court
to calculate the correct advisory Guidelines sentencing range.
Id. When the calculation of the correct Guidelines range
turns on an interpretation of “what constitutes loss” under the
Guidelines, we exercise plenary review. United States v.
Fumo, 655 F.3d 288, 309 (3d Cir. 2011) (internal quotation
marks omitted).
Section 2B1.1 of the Guidelines governs the
calculation of the offense level for crimes involving, among
other things, fraud and deceit. Subsection (a) provides the
base offense level, which is either seven, if the offense has a
maximum term of imprisonment of twenty years or more, or
six. Subsection (b) provides an extensive list of adjustments
for offense-specific characteristics. The first of these
adjustments—and the one relevant to this appeal—is the
adjustment for the amount of loss. As the loss increases, the
offense level increases: for example, if the loss is more than
$70,000, the court adds eight to the offense level; if the loss is
more than $100 million, the court adds twenty-six to the
offense level.
The main text of the Guidelines does not define “loss.”
19
Instead, we turn to the application notes that accompany
§ 2B1.1. We “keep in mind that [G]uidelines commentary,
interpreting or explaining the application of a guideline, is
binding on us when we are applying that guideline because
we are obligated to adhere to the Commission’s definition.”
United States v. Savani, 733 F.3d 56, 62 (3d Cir. 2013) (citing
Stinson v. United States, 508 U.S. 36, 43 (1993)).
Note 3(A) to § 2B1.1 states that “loss is the greater of
actual loss or intended loss.” “‘Actual loss’ means the
reasonably foreseeable pecuniary harm that resulted from the
offense”; intended loss “means the pecuniary harm that was
intended to result from the offense.” U.S.S.G. § 2B1.1 cmt.
n.3(A)(i)-(ii). In addition to this general definition, Note 3(F)
gives some “special rules [to] be used to assist in determining
loss” “[n]otwithstanding subdivision (A).” Id. cmt. n.3(F).
One of these “special rules” is for “a case involving
government benefits (e.g., grants, loans, entitlement program
payments).” Id. cmt. n.3(F)(ii). In such a case,
loss shall be considered to be not less
than the value of the benefits obtained by
unintended recipients or diverted to
unintended uses, as the case may be. For
example, if the defendant was the
intended recipient of food stamps having
a value of $100 but fraudulently received
food stamps having a value of $150, loss
is $50.
Id.
Nagle and Fink insist that the amount of loss they are
responsible for is not the face value of the contracts Marikina
received; instead, they say that they are at least entitled to a
credit for the services they performed on the contracts or that
20
the loss is $0. They argue that the District Court should have
used Note 3(A) to calculate the amount of loss instead of
Note 3(F)(ii) because the DBE program is not a “government
benefit” and that under Note 3(A) they should receive a credit
for completing the subcontracts. In the alternative, they argue
that they are nonetheless entitled to a credit under Note
3(F)(ii). We need not decide whether the DBE program is a
“government benefit” and, therefore, whether Note 3(A) or
Note 3(F)(ii) applies; we conclude that under either
application note, the amount of loss Nagle and Fink are
responsible for is the face value of the contracts Marikina
received minus the fair market value of the services they
provided under the contracts. 6
1.
Our case law makes clear that, in a normal fraud case,
“where value passes in both directions [between defrauded
and defrauder] . . . the victim’s loss will normally be the
difference between the value he or she gave up and the value
he or she received.” United States v. Dickler, 64 F.3d 818,
825 (3d Cir. 1995). 7 For example:
We have repeatedly emphasized that the
amount of loss in a fraud case, unlike
6
Nagle and Fink rely heavily on the District Court’s
restitution order to argue that the amount of loss is $0. The
Government did not file a cross-appeal for the restitution
order, so it is not properly before us to determine whether it is
correct or not. The restitution order does not affect our
analysis of how to calculate the amount of loss under the
Guidelines.
7
Dickler interpreted § 2F1.1 of the Guidelines, which
at the time was a separate section concerning fraud and
deceit. However, in 2001, § 2F1.1 was merged into § 2B1.1.
21
that in a theft case, often depends on the
actual value received by the defrauded
victim. Thus, when a defendant obtains
a secured loan by means of fraudulent
representations, the amount of loss is the
difference between what the victim paid
and the value of the security, because
only that amount was actually lost.
United States v. Nathan, 188 F.3d 190, 210 (3d Cir. 1999)
(Becker, C.J.) (citation omitted). Relying on that logic, we
concluded in Nathan that “[i]n a fraudulent procurement
case” we calculate the amount of loss by “offset[ting] the
contract price by the actual value of the components
provided.” Id. This loss calculation is similar to a classic
method of remedying fraud: rescission of any agreements and
restitution of the reasonable value of what the parties
exchanged. See Schwartz v. Rockey, 932 A.2d 885, 889 (Pa.
2007); Boyle v. Odell, 605 A.2d 1260, 1265 (Pa. Super. Ct.
1992).
Applying this well-established principle here, the
defrauded parties—the transportation agencies—gave up the
price of the contracts and received the performance on those
contracts. Therefore, we conclude that, if the standard
definition of “loss” in Note 3(A) applies, the amount of loss
Nagle and Fink are responsible for is the value of the
contracts Marikina received less the value of performance on
the contracts—the fair market value of the raw materials SPI
provided and the labor CDS provided to transport and
assemble those materials.
2.
We next turn to calculating the amount of loss
assuming that the DBE program is a “government benefit”
22
and, therefore, the special rule of Note 3(F)(ii) applies. Under
Note 3(F)(ii), the “loss” is “not less than the value of the
benefits obtained by unintended recipients or diverted to
unintended uses.” U.S.S.G. § 2B1.1 cmt. n.3(F)(ii). An
example of this rule follows: “if the defendant was the
intended recipient of food stamps having a value of $100 but
fraudulently received food stamps having a value of $150,
loss is $50.” Id. The Government argues that the “benefits”
are the face value of the contracts that Marikina improperly
received. Nagle and Fink argue that the “benefits” are only
the moneys that they “g[ot] and retain[ed] possession of,” that
is, the profit SPI and CDS earned on the contracts. Fink
Reply Br. at 10 (internal quotation marks and emphasis
omitted).
We find the Government’s position persuasive,
particularly in light of the goals of the DBE program. The
DBE program cares about who performs the work. It
assumes that performance of a contract allows a DBE to not
only earn a profit on the deal but also to form connections
with suppliers, labor, and others in the industry. The profit
earned, therefore, is not the only benefit the DBE obtains
when it receives the contract. Therefore, when SPI and CDS
fraudulently received the transportation contracts, the DBE
program assumed that all of the contract price was going
towards benefiting a true DBE. Instead, the entire contract
price was put towards a different use: profiting SPI and CDS
and improving their business connections.
Nagle’s and Fink’s arguments to the contrary lose.
They ask us to consider the definition of “benefit” under a
different section of the Guidelines, § 2C1.1, governing
offenses involving bribes in interpreting the term “benefit”
for Note 3(F)(ii). We disagree that the appropriate
comparison for the term “government benefit” is the benefit
23
that is offered as a bribe to an official. They also argue that
the legislative history of § 2B1.1 shows that “benefit” means
“net loss.” See U.S.S.G. app. C, vol. II at 180-81 (2003). We
find that the reference to “net loss” in this history refers to the
example given at the end of the application note: the loss is
the difference between the benefits they were intended to
receive and the benefits they fraudulently received. Cf.
United States v. Tupone, 442 F.3d 145, 153-54 (3d Cir. 2006).
Here, as explained above, SPI and CDS were not intended to
receive the subcontracts, so the loss is the difference between
the intended benefits—$0—and the actual benefits
received—the full contract price. Finally, they suggest that
“benefit” only refers to the things got and retained and so
means “profit.” The DBE program allows true DBEs to form
lasting relationships with suppliers, labor, and the broader
industry; those relationships are things received and retained
as a result of the program. Therefore, we agree with the
Government that, if Note 3(F)(ii) applies, the benefits
diverted from their intended use or obtained by unintended
recipients is the entire value of the contracts Marikina
received.
However, a different provision of the Guidelines
requires a credit against the full face value of the contracts.
Application Note 3(E)(i) to § 2B1.1 states that “the fair
market value of the property returned and the services
rendered, by the defendant or other persons acting jointly
with the defendant, to the victim before the offense was
detected” shall be credited against the loss. Id. § 2B1.1 cmt.
n.3(E)(i). Here, Note 3(E)(i) means that we must subtract the
“fair market value” of the “services rendered” by SPI and
CDS on the contracts before arriving at a final loss value.
The Government’s argument that Nagle and Fink are
not entitled to a credit under Note 3(E)(i) because as non-
24
DBEs they did not “render any valuable services,” Fink Gov’t
Br. at 35, is unpersuasive. Although the DBE program cares
about who performs the work, it also requires that the work
be completed. The transportation agencies required—and
received—the construction of concrete materials. They did
not receive the entire benefit of their bargain, in that their
interest in having a DBE perform the work was not fulfilled,
but they did receive the benefit of having the building
materials provided and assembled.
The Government also argues that Note 3(E)(i) does not
apply to the “special rule” of Note 3(F)(ii), but we disagree
for two reasons. First, the special rules of Note 3(F) apply
“[n]otwithstanding subdivision (A).” Id. § 2B1.1 cmt. n.3(F).
Thus, Note 3(F) only supplants Note 3(A) when it applies; it
does not supplant the other subsections of Note 3. Second,
the drafters of Note 3 knew how to indicate that no credits
would be permitted. Note 3(F)(v), which governs certain
types of misrepresentation schemes, specifically states that
“loss shall include the amount paid for the property, services
or goods transferred, rendered, or misrepresented, with no
credit provided for the value of those items or services.” Id.
§ 2B1.1 cmt. n.3(F)(v). Had the Sentencing Commission
intended to preclude crediting services rendered against loss
for Note 3(F)(ii), it would have used similar language as it
used in Note 3(F)(v). 8
The Government’s primary argument is that other
courts to have considered the issue of DBE fraud before us
have not allowed a credit against the face value of the
contracts received in calculating the loss. We do not find
8
At argument, the Government suggested we apply
Note 3(F)(v) to calculate the loss on this appeal. We decline
to address an argument raised for the first time at argument.
25
those cases persuasive on this point. First, two of the cases
the Government relies on were decided using the previous
Guidelines provision on fraud and deceit, § 2F1.1. See
United States v. Leahy, 464 F.3d 773, 789-90 (7th Cir. 2006)
(referring to § 2F1.1); United States v. Bros. Constr. Co. of
Ohio, 219 F.3d 300, 317-18 (4th Cir. 2000) (same). This
difference is important, because the old § 2F1.1 had an
application note similar to current Note 3(F)(ii), which both
courts relied on in reaching their holdings, but no application
note similar to current Note 3(E)(i). See U.S.S.G. § 2F1.1
cmt. n.8(d) (2000). Therefore, neither the Fourth nor Seventh
Circuits had occasion to consider whether Note 3(E)(i)
required that the services rendered be credited against the
loss. Second, although the Eleventh Circuit has also said that
“the appropriate amount of loss . . . [is] the entire value of the
. . . contracts that were diverted to the unintended recipient”
under § 2B1.1,9 that court merely relied on Leahy and
Brothers Construction and did not consider whether Note
3(E)(i) made a difference in the analysis. United States v.
Maxwell, 579 F.3d 1282, 1305-07 (11th Cir. 2009).
Accordingly, we see nothing in these cases that convinces us
that Notes 3(E)(i) and (F)(ii) do not work together to allow a
credit for the fair market value of the services rendered
9
The Government relies on similar language in our
non-precedential opinion in United States v. Tulio, 263 F.
App’x 258, 263 (3d Cir. 2008). That case is, of course, not
binding on this Court, see 3d Cir. I.O.P. 5.7, and in any event
only dealt with the issue in a cursory manner.
26
against the face value of the contracts. 10
3.
We conclude that in a DBE fraud case, regardless of
which application note is used, the District Court should
calculate the amount of loss under § 2B1.1 by taking the face
value of the contracts and subtracting the fair market value of
the services rendered under those contracts. This includes,
for example, the fair market value of the materials supplied,
the fair market cost of the labor necessary to assemble the
materials, and the fair market value of transporting and
storing the materials. If possible and when relevant, the
District Court should keep in mind the goals of the DBE
program that have been frustrated by the fraud.
B.
The Government alternatively argues that the error in
calculating the amount of loss for Nagle and Fink was
harmless. In the Government’s view, the ten-level departures
that the District Court granted for both Nagle and Fink
essentially assigned them the loss figures they now ask for.
Therefore, because they were ultimately sentenced with a
Guidelines range that corresponded to the loss figures they
asked for, the Government says that the loss miscalculation
10
The Government’s reliance on a worksheet from a
Sentencing Commission training seminar is, therefore,
misplaced. The worksheet relies on Leahy and Tulio, which
we have rejected, and on our opinion in Tupone. We fail to
see how Tupone supports the Government’s position here. In
Tupone, we concluded that the loss from a worker’s
compensation fraud was the difference between what the
worker received and should have received. 442 F.3d at 153-
56. We did not address whether he was entitled to a credit for
services rendered.
27
had no effect on their sentences.
An erroneous Guidelines calculation is harmless such
that we may not grant relief if it is “clear that the error did not
affect the district court’s selection of the sentence imposed.”
United States v. Langford, 516 F.3d 205, 215 (3d Cir. 2008).
“Even when the sentence is below the Guidelines range, the
record must be unambiguous that the miscalculation of the
range had no effect.” Id. at 217. Our review of the record
indicates that the District Court’s miscalculation of the loss
amount likely affected the sentences Nagle and Fink received
even with the ten-level departures. Of principal concern to us
is that the District Court referred to the size of the loss it
incorrectly calculated in sentencing Fink as one of the reasons
for the sentence he received. See Fink App. at 249. Because
it is not clear that the incorrect loss calculations did not affect
the sentences imposed, we cannot conclude that the incorrect
loss calculations were harmless.
IV.
For these reasons, we affirm Nagle’s judgment of
conviction, vacate Nagle’s and Fink’s sentences, and remand
for resentencing.
28
HARDIMAN, Circuit Judge, concurring in part and
concurring in the judgment.
I join all but Section III-A-2 of the opinion of the
Court, and I concur in the judgment in full. Because the loss
amount calculation in a DBE fraud case of this kind is
governed by Application Note 3(A) to § 2B1.1 of the
Sentencing Guidelines, I would hold that the “government
benefits” provision does not apply here.
In United States v. Nathan, we characterized as
“fraudulent procurement” a contractor’s false statements to
the Government that it would comply with the Buy American
Act by not using foreign components in performing the
contracts at issue. 188 F.3d 190, 194, 210 (3d Cir. 1999); see
also United States v. Biberfeld, 957 F.2d 98, 99 (3d Cir.
1992) (describing as procurement fraud a contractor’s
concealment of the fact that his supplies originated in
Pakistan). As in Nathan, the defendants here conspired to lie
to the Government about their compliance with federal
regulations in order to receive contracts that otherwise would
have gone to others. This is classic procurement fraud.
The Sentencing Guidelines make clear that the loss
calculation in a procurement fraud case is covered by the
“general rule” of Application Note 3(A). A subdivision of
that note, Note 3(A)(v)(II), specifically addresses how Note
3(A) is to be applied in procurement fraud cases. This
suggests that Note 3(F)(ii), a “special rule” designed for cases
involving the fraudulent receipt of public benefits like welfare
payments, has no place in a procurement fraud case. I would
therefore vacate and remand for the District Court to apply
Note 3(A) in accordance with the guidance provided by the
Court in Section III-A-1 of its opinion.
1