United States v. Rosby, Thomas J. ( 2006 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
Nos. 05-2270 & 05-2483
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
v.
THOMAS J. ROSBY and JOHN M. FRANKLIN,
Defendants-Appellants.
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Appeals from the United States District Court for the
Northern District of Indiana, Hammond Division.
No. 2:01 CR 13—James T. Moody, Judge.
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ARGUED JUNE 2, 2006—DECIDED JULY 19, 2006
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Before POSNER, EASTERBROOK, and ROVNER, Circuit
Judges.
EASTERBROOK, Circuit Judge. Monon Corporation once
was among the largest manufacturers of over-the-road
semi-trailers, containers, and container chassis, producing
about 150 units a day. Early in 1996, however, Monon’s
principal customer cut back on orders and the lost business
could not be replaced. Production fell to about 100 units a
day in January 1996, dropping to 60 in April and 50 in
August. This decline in sales produced a liquidity crisis, as
the firm’s fixed obligations and payroll could not be cut as
fast as the order book shriveled. Thomas Rosby, Monon’s
CEO and holder of 72% of its equity, and John Franklin, its
CFO and holder of 14%, watched the finances closely.
2 Nos. 05-2270 & 05-2483
Much of Monon’s working capital came from Congress
Financial Corporation, a factor that advanced credit on the
security of Monon’s inventory and receivables. Monon could
draw on the credit as soon as it started production of each
new unit. During 1996 Monon began a bill-ahead fraud. It
would, for example, report starting 60 units on a day when
only 50 actually entered production. As sales continued to
decrease, however, Monon had to report more and more
early starts, so that it could retire older advances. Congress
was left unsecured for the difference between actual and
reported production. The unsecured draw against the
revolving credit increased from about $2 million in March
1996 to $5.9 million in August, when Congress discovered
the fraud. After Monon filed for bankruptcy on September
1996, Congress completed many of the falsely reported
units at its own expense and risk. Its net loss was about
$1.8 million.
Monon also borrowed from A.I. Credit Corporation and
Anthem Premium Finance. These firms made loans that
Monon was supposed to use to prepay insurance policies;
Monon agreed to retire the loans with monthly payments
roughly equal to the cost of insurance for that month, and
the balance was secured by the policies’ cash value. (For
simplicity we refer to all of this as “insurance” even though
some workers’ compensation coverage was arranged
through other devices.) If, for example, Monon secured
workers’ compensation coverage for $5 million a year, the
premium finance company would advance that money; the
unearned portion of the premium (that is, the premium
attributable to future months) would be returned if
Monon should cancel the policy and thus could be used as
security for the loans. During 1996 Monon reported making
larger prepayments than it actually had done. This left A.I.
Credit and Anthem unsecured for the difference, and after
Monon’s bankruptcy Anthem was saddled with net losses of
about $4.9 million and A.I. Credit about $2 million.
Nos. 05-2270 & 05-2483 3
A grand jury charged Rosby and Franklin with mail and
wire fraud for making (or causing to be made) the misrepre-
sentations that persuaded the lenders to advance funds
without the promised security. Michael Peterson, Monon’s
insurance broker, was indicted at the same time and
pleaded guilty; he testified for the prosecution. Following
the jury’s guilty verdict, both Rosby and Franklin were
sentenced to 87 months in prison plus restitution of about
$8.7 million (the sum of the three lenders’ net losses).
Defendants’ principal arguments in this court collapse
to a single contention: that the false representations were
not material because, by making prudent inquiries, the
lenders could have figured out what Monon was doing. (To
the extent defendants maintain that they did not know
what the lenders were being told, the jury’s contrary
conclusion is unimpeachable.) They do not contend that
the jury was bound to find that the lenders actually under-
stood the truth, and they did not ask for an instruction
presenting the knowledge question to the jury, but they do
say that even taken in the light most favorable to the
prosecution the evidence compels a conclusion that cautious
lenders ought to have done more, or better, checking, and
that these inquiries would have turned up the truth.
This line of argument starts with Neder v. United States,
527 U.S. 1, 20-25 (1999), which held that materiality is
an element of the mail-fraud offense under 18 U.S.C. §1341.
The Court observed that “fraud” is a staple term of the
common law and should be read to include its common-law
constituents, including materiality, unless Congress
provides otherwise (which it did not in §1341). See also, e.g.,
Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976) (securities
fraud entails proof of scienter, because this is required at
common law); TSC Industries, Inc. v. Northway, Inc., 426
U.S. 438 (1976) (discussing the materiality requirement);
Dirks v. SEC, 463 U.S. 646 (1983) (drawing on common law
to conclude that securities fraud entails proof of duty to
4 Nos. 05-2270 & 05-2483
disclose). Having established that materiality is essential,
defendants maintain that at common law a party cannot
close his eyes to a known risk or act with indifference to
that risk but must make reasonable attempts at self-
protection. (For this proposition defendants cite only cases
in the Illinois state courts; the significance of that choice
will become clear later.) According to defendants, some of
the lenders’ employees had their suspicions yet failed to
follow up. This means, defendants insist, that the represen-
tations were not material.
Defendants recognize that under other federal statutes a
representation may be material even though the hearer
strongly suspects that it is false. A witness commits the
crime of perjury, for example, if he lies under oath about a
subject important to the proceeding, even though the grand
jury believes that it knows the truth. United States v. Kross,
14 F.3d 751, 755 (2d Cir. 1994); United States v. Goguen,
723 F.2d 1012, 1019 (1st Cir. 1983); United States v.
Richardson, 596 F.2d 157, 165 (6th Cir. 1979). See also, e.g.,
United States v. R. Enterprises, Inc., 498 U.S. 292 (1991)
(that grand jury already thinks it knows the truth is no
defense to a subpoena, for evidence may be material if it
can corroborate or refute existing beliefs); Kungys v. United
States, 485 U.S. 759, 776-80 (1988) (false statement to
immigration officials violates 8 U.S.C. §1451(a) even
if agency readily could have discovered the truth); United
States v. Whitaker, 848 F.2d 914, 918 (8th Cir. 1988)
(material false statement to investigating agency vio-
lates 18 U.S.C. §1001 even if agency knows the truth). A
representation is material if it has a tendency to influence
the decision of the audience to which it is addressed. See
Neder, 527 U.S. at 22-23, citing Restatement (2d) of Torts
§538 (1977); Basic Inc. v. Levinson, 485 U.S. 224, 231-32
(1988). By referring to the common law, however, Neder
departed from the approach of perjury and other false-
statement statutes by imposing on the audience a duty to
Nos. 05-2270 & 05-2483 5
investigate for its self-protection—or so defendants main-
tain.
This confuses materiality with reliance. At common law,
both materiality (in the sense of tendency to influence) and
reliance (in the sense of actual influence) are essential
in private civil suits for damages. That’s why, if the issuer
of securities furnishes an investor with the truth in writing,
the investor cannot claim to have been defrauded by an oral
misrepresentation: whether the writing actually conveys
the truth or just calls the oral statement into question, the
investor is on notice. See, e.g., Acme Propane, Inc. v.
Tenexco, Inc., 844 F.2d 1317 (7th Cir. 1988). It is also why
an investor’s disclaimer of reliance on certain representa-
tions, as part of a declaration that the investor has done
and is relying on his own investigation, defeats a private
damages action for securities fraud. See, e.g., Rissman v.
Rissman, 213 F.3d 381 (7th Cir. 2000); Jackvony v. RIHT
Financial Corp., 873 F.2d 411, 415-17 (1st Cir. 1989)
(Breyer, J.); One-O-One Enterprises, Inc. v. Caruso, 848
F.2d 1283, 1286-87 (D.C. Cir. 1988) (R.B. Ginsburg, J.).
Reliance is not, however, an ordinary element of federal
criminal statutes dealing with fraud. Neder so holds for
§1341 in particular. “[T]he Government is correct that the
fraud statutes did not incorporate all the elements of
common-law fraud. The common-law requirements of
‘justifiable reliance’ and ‘damages,’ for example, plainly
have no place in the federal fraud statutes.” 527 U.S. at 24-
25 (emphasis in original). Once the Supreme Court excludes
reliance as a separate element of the mail-fraud offense, it
will not do for appellate judges to roll reliance into materi-
ality; that would add through the back door an element
barred from the front. Reliance is not an aspect of the
materiality element in mail-fraud prosecutions. Accord,
United States v. Fernandez, 282 F.3d 500, 508 (7th Cir.
2002); United States v. Gee, 226 F.3d 885, 891 (7th Cir.
2000).
6 Nos. 05-2270 & 05-2483
Defendants do not argue that by extending credit, despite
Monon’s noncompliance with some of the contracts’ written
terms, the lenders agreed to modify their arrangements and
forego the promised security. Maybe such an argument has
been withheld because those employees of the lenders who
suspected (or should have suspected) what was afoot lacked
authority to change the deal. Episodes modeled on
Potemkin villages suggest as much: whenever lenders’
senior personnel or auditors called to check on their
collateral, Monon scurried to convey the appearance
(though not the reality) of extra production starts or
insurance with cash value. That Monon continued making
misrepresentations demonstrates its belief that truth would
have altered its creditors’ behavior. Low-level employees’
interests may not have been aligned with those of the
lenders’ investors; employees paid by the hour, or by the
amount of credit under their purview, may be inclined to
avert their gaze lest they learn of problems, for the costs
fall elsewhere. At all events, defendants do not argue that
any employee of the lenders with actual authority to
approve a change in the contracts’ terms by reducing the
amount of collateral ever had actual knowledge of what
Monon was doing. (Cindy Carroll, a branch manager who
knew that A.I. Credit had advanced too much against
Monon’s 1995 insurance premiums—the principal event
that defendants say should have alerted lenders not to trust
what Monon was saying in 1996—never told John Rago, A.I.
Credit’s vice-president of credit and the only person autho-
rized to make lending decisions on its behalf.)
As for defendants’ argument that the prosecutor violated
the due process clause by withholding exculpatory evidence,
see Brady v. Maryland, 373 U.S. 83 (1963): the evidence
was not even relevant, let alone exculpatory. Before we take
this up, however, there is a jurisdictional detour. Before
their sentencing both Rosby and Franklin filed motions
seeking new trials because of the non-disclosures. The
Nos. 05-2270 & 05-2483 7
sentencing occurred as scheduled in April 2005; the district
court entered final judgments without mentioning the
motions. Some months later, however, while the appeals
were pending, the district judge entered an order denying
the motions. Defendants did not file new notices of appeal,
and the United States contends that this lapse deprives us
of jurisdiction.
A district court’s action on a Rule 33 motion for a new
trial filed after sentencing is a new final decision that
requires a new notice of appeal. See, e.g., United States v.
Hocking, 841 F.2d 735, 736 (7th Cir. 1988). But a new-trial
motion filed before sentencing must be resolved before
sentencing as well. Under the Sentencing Reform Act of
1984 and Fed. R. Crim. P. 35, a district judge lacks author-
ity to retain control of a criminal case for more than seven
days after imposing sentence. See United States v. Smith,
438 F.3d 796 (7th Cir. 2006). Any pre-sentencing motions
must be resolved at or before sentence is imposed—for
otherwise the sentence is not a final judgment and the
defendants will be frustrated in their attempts to appeal it,
at the same time as the district judge retains
an unauthorized measure of control over events after
sentencing. If the district judge neglects to rule on pending
motions, we treat all as denied automatically by the
imposition of sentence. See United States v. Van Wyhe, 965
F.2d 528, 530 n.2 (7th Cir. 1992). That understanding ends
the district judge’s role when sentencing occurs, as the
Sentencing Reform Act demands, and ensures that the
judgment is final so that defendants may press their
contentions in a new forum. It also means that there is
never a need for an additional notice of appeal to contest
rulings (or inaction) on pre-sentencing motions. The district
court lost its authority over these cases when the sentences
were imposed, and the defendants’ notices of appeal brought
up all issues—including those that the district court failed
to address before sentencing.
8 Nos. 05-2270 & 05-2483
Brady offers the defendants no assistance, however. They
complain that the prosecutor withheld two tidbits that did
not come out until shortly before sentencing: first, Anthem
Insurance Company had insured the loans that Anthem
Premium Finance, its subsidiary, had made to Monon;
second, in July 1996 the parent corporation sold its stock in
the premium-finance subsidiary to Newcourt Credit Group
USA, Inc. How either of these facts could assist the defen-
dants eludes us. That the victim was insured does not make
the loss any less; who ultimately bears a loss does not
matter in a fraud prosecution. A bank executive who
embezzled from his employer could not defend by noting
that the bank had been reimbursed by an insurer; no more
does reimbursement matter here.
Defendants tell us that the impending sale gave Anthem
(the parent) a reason to want its subsidiary to build up its
book of business, to make the subsidiary more attractive,
and that the subsidiary therefore ignored the risks of
nonpayment. But the insurance issued by the parent
corporation makes hash of this contention; why would a
parent want a subsidiary to throw away money that the
parent would have to repay in order to make the subsidiary
(and thus Newcourt) whole? Anyway, the possibility that
Anthem may have been trying to bamboozle Newcourt does
not provide a defense for fraud committed against Anthem.
Nor does this explain why Congress and A.I. Credit were
taken in. Anthem behaved no differently from the other
victims. To return to our theme: Defendants do not contend
that the record demonstrates Anthem’s actual knowledge
that Monon’s representations were false; arguments pro and
con about how attentive the lenders’ staff may have been to
the possibility that Monon was lying are not relevant,
because reliance is not an element of the mail-fraud offense.
Defendants’ remaining arguments about the convic-
tions do not require discussion, so we arrive at sentencing.
The loss calculation was correct—in particular, the district
Nos. 05-2270 & 05-2483 9
judge rightly concluded that the loss Congress suffered was
$5.9 million (the unsecured advances outstanding when the
fraud came to light) rather than $1.8 million (Congress’s net
loss after it took over Monon’ production in bankruptcy in
order to minimize its injury). As a result the total loss
exceeded $10 million and defendants received the increase
provided by U.S.S.G. §2F1.1(b)(1)(P) (1995). (By the parties’
agreement the district court used the 1995 Guidelines.
Whether this was appropriate is a question that the parties
have not addressed. See United States v. Roche, 415 F.3d
614, 619 (7th Cir. 2005).) When the intended loss exceeds
the realized loss, the former prevails under the Guidelines.
See §2F1.1 Application Note 7(b). Congress took an eco-
nomic risk after Monon’s bankruptcy by producing addi-
tional units, and it made a profit; there’s no reason why
Rosby and Franklin should benefit by Congress’s entrepre-
neurial activity, which does not diminish the seriousness of
their offense.
After calculating a sentencing range according to the
Guidelines, the district judge stated: “Even though depar-
ture is authorized in this case, in the exercise of its discre-
tion, the Court will not depart, because, I believe, departure
is not warranted under the facts and circumstances of this
case.” Although sentence was imposed after United States
v. Booker, 543 U.S. 220 (2005), which made the departure
terminology obsolete, see United States v. Laufle, 433 F.3d
981, 986-87 (7th Cir. 2006); United States v. Johnson, 427
F.3d 423, 426 (7th Cir. 2005), defendants did not object to
the judge’s explanation. Now, however, they contend that it
was plain error for the judge to talk (and perhaps to think)
in terms of departures. Booker gives district judges more
discretion than the old departure framework did; to ensure
that the district judge knows about and uses this discretion,
defendants insist, they must be resentenced.
Yet there is no doubt that the district judge knew about
Booker (which had been decided more than three months
10 Nos. 05-2270 & 05-2483
before sentencing) and its significance. The judge discussed
not only the Guidelines but also the sentencing criteria in
18 U.S.C. §3553(a). Since 1987 judges have been explaining
their sentences in terms of departures (or decisions not to
depart) from the Guidelines. Habits take time to shake off;
it is inevitable that some of the old terminology will linger
for a few years. Unless there is reason to think that the
choice of words made a substantive difference, there is no
error at all, let alone a “plain” error—which entails a
serious risk that an injustice has been done. See United
States v. Olano, 507 U.S. 725, 734-37 (1993); United States
v. Dominguez Benitez, 542 U.S. 74, 80-84 (2004). It is hard
to see how the terminology mattered—and easy to see why
the district judge discussed departures. The defendants’
own motions had asked the judge to “depart” from the
Guideline range! The judge used the word “departure” to
explain why he was denying a motion for a departure. It is
hardly sporting for someone who invites a judge to use a
word to complain after he does so. An invited error does not
work to the benefit of the litigant who issued the invitation.
The 87-month sentences are reasonable, so there is no basis
for resentencing.
Restitution is the final issue. The judge ordered defen-
dants to reimburse the lenders for their net losses. Here, at
last, reliance could be important—for restitution is funda-
mentally a civil remedy administered for convenience in the
criminal case, see United States v. George, 403 F.3d 470,
473 (7th Cir. 2005), and as we have mentioned reliance is
essential to damages for fraud in private litigation. For one
last time, therefore, we reiterate that defendants have not
even argued that the people who made business decisions
on behalf of the lenders had actual knowledge that Monon
was lying about its production starts or insurance pur-
chases.
Lenders and other investors need not look behind repre-
sentations made to them. See, e.g., Teamsters Local 282
Nos. 05-2270 & 05-2483 11
Pension Trust Fund v. Angelos, 762 F.2d 522 (7th Cir.
1985); Astor Chauffeured Limousine Co. v. Runnfeldt
Investment Corp., 910 F.2d 1540 (7th Cir. 1990); In re
Mayer, 51 F.3d 670 (7th Cir. 1995). Fraud is an intentional
tort, and the common law does not require victims of
intentional torts to take precautions. See Restatement (2d)
of Torts §481 (1965). Telling the truth is cheap, while nosing
out deceit is expensive. Requiring all lenders, investors, and
so on to investigate every representation made to them
would be extravagantly wasteful, compared with a legal
regime that unconditionally requires speakers to tell the
truth on every material topic if they speak at all. Thus
investors’ gullibility and carelessness do not excuse wilfully
false statements or reduce the damages available to the
victims. “The recipient of a fraudulent misrepresentation of
fact is justified in relying upon its truth, although he might
have ascertained the falsity of the representation had he
made an investigation.” Restatement (2d) of Torts §540
(1977). That rule makes promises credible by making it
costly for liars to escape liability later. This gives truth-
tellers a commercial advantage, for their costs of doing
business are lower than the liars’ costs.
A reliance requirement prevents recovery when the truth
is known or the risk of an investment (or loan) is apparent;
a risky investment that goes bad differs from fraud. See
Mayer, 51 F.3d at 676. Our opinion in Angelos discusses
several decisions in Illinois that appear to treat the reliance
requirement as obliging investors to investigate the veracity
of representations made to them, as a condition of obtaining
damages for fraud. This, we assume, is why defendants
concentrate on Illinois law when discussing what “the”
common law requires in fraud actions. Yet Angelos con-
cluded that Illinois appears to be an outlier (if investigation
really is essential in Illinois, whose case law is not uniform
on the issue); we held that such a requirement would not be
incorporated into federal law. It would be no more appropri-
12 Nos. 05-2270 & 05-2483
ate to do so in a mail-fraud action than in a securities-fraud
action. So the restitution award is appropriate under civil-
fraud principles.
AFFIRMED
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—7-19-06