United States v. Varnador Sutton ( 2009 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 08-3370
U NITED S TATES OF A MERICA,
Plaintiff-Appellee,
v.
V ARNADOR S UTTON,
Defendant-Appellant.
Appeal from the United States District Court for the
Southern District of Indiana, Indianapolis Division.
No. 1:07-cr-086-M/F—Larry J. McKinney, Judge.
A RGUED M AY 29, 2009—D ECIDED S EPTEMBER 28, 2009
Before R IPPLE, R OVNER, and S YKES, Circuit Judges.
R OVNER, Circuit Judge. A jury convicted Varnador
Sutton of a single count of violating 18 U.S.C. § 1347(prohibiting health care fraud) for his role in perpetrating
a fraudulent scheme to collect money from Indiana
Medicaid. The district court sentenced Sutton to the
statutory maximum of ten years’ imprisonment to be
followed by two years of supervised release. Sutton
appeals, challenging the district court’s calculation of his
sentence.
2 No. 08-3370
I.
In May 2005, Sutton created a business called
Regenerations, Inc., which purported to provide psycho-
logical counseling services reimbursable by Indiana
Medicaid. Over the course of the next two years, Sutton
billed Medicaid over $9 million for alleged psychological
counseling that was never provided. Although many of
the claims were denied, Medicaid did pay Sutton ap-
proximately $3.2 million for the alleged services provided
by Regenerations. Sutton used his millions to buy,
among other things, seven properties, several new cars,
and $33,000 worth of apparel from Vincent’s Furs and
Leathers.
Sutton’s scheme was relatively straightforward. He
created Regenerations, Inc., and enrolled the company as
a Medicaid provider in Indianapolis, Indiana. Sutton
identified himself on the application as the owner, CEO,
and President of Regenerations. By enrolling in the
Indiana Medicaid program, Sutton set himself up to be
automatically reimbursed for providing eligible services
to Medicaid recipients. The enrollment application listed
one individual qualified to oversee the counseling
services—Dr. Ruth Haggerty, a PhD in clinical psychology.
Dr. Haggerty’s signature appeared on the application,
but she testified at trial that she neither signed the ap-
plication nor authorized anyone to do so on her behalf.1
1
Dr. Haggerty did work with Sutton in an unrelated capacity
for a Medicaid “waiver” program providing behavior manage-
(continued...)
No. 08-3370 3
Despite a nonexistent staff of therapists, on paper
Regenerations, Inc. ran an exceedingly brisk counseling
business. For instance, in January 2006 alone, Regenera-
tions billed Medicaid for 4749 individual psychotherapy
sessions, a figure that would require a staff of twenty-nine
therapists to work six days a week, eight hours per day.
Although the numbers varied slightly from month-to-
month, the general pattern was the same: all twenty
counseling sessions allowed under Medicaid in a twelve-
month period without preauthorization would be ex-
hausted, and when a new twelve-month period began all
twenty sessions would again be exhausted. Sutton billed
Medicaid for over 84,000 counseling sessions using the
Medicaid identification numbers of over 2500 individual
Medicaid recipients, unbeknownst to those individuals
whose numbers he used.
Eventually this suspicious pattern raised red flags, and
an audit was scheduled. In April 2007, a Medicaid
auditor called Sutton and arranged to meet him later that
month for an audit of Regenerations at its listed place
of business in Indianapolis. That very same day, Sutton
terminated his Medicaid provider status and closed the
bank account where he had been receiving the Medicaid
reimbursements via direct deposit. Not surprisingly,
when the auditor arrived at the scheduled date and time
later that same month, neither Sutton nor his business
were anywhere to be found.
1
(...continued)
ment services for individuals who would otherwise be
ineligible for Medicaid.
4 No. 08-3370
Despite its diligent efforts, the government was unable
to locate any records to support the 84,000 claims for
counseling that Sutton submitted to Medicaid. At trial, the
jury heard testimony from ten individuals, selected
essentially at random, whose Medicaid numbers had
been used by Sutton to bill for counseling services. None
of the individuals had received counseling services
through Regenerations, nor had they ever heard of
Sutton or Dr. Haggerty. The Medicaid numbers for nine
of the ten who testified had been used as described above.
Twenty counseling sessions—the maximum allowed in a
twelve-month period—had been billed in just one
month, a pattern that was repeated as soon as the first
twelve-month period had passed and another twenty
sessions could be billed without preauthorization.
Sutton testified at trial on his own behalf. He
explained that although he received all of the money in
his own accounts, he had contracted out the operation of
the business to a woman named Paula Morton. Sutton
claimed that he authorized Morton to use his Medicaid
number to bill for the counseling services, and that he
intended to pay Morton a share of the money when
she provided him with records to substantiate the coun-
seling sessions. According to Sutton, Morton never pro-
vided him with any records, and so he never bothered to
pay her; nor did he ever bother to question the receipt of
over $3 million in his personal accounts. At the time of
trial, Sutton denied having any idea where Morton was
or how she could be contacted.
The jury convicted Sutton on the single count of health
care fraud, see 18 U.S.C. § 1347, contained in the indict-
No. 08-3370 5
ment. At sentencing, the district court increased Sutton’s
base offense level of six, see U.S.S.G. § 2B1.1(a)(2), by
twenty levels because the total intended loss exceeded
$7 million, see U.S.S.G. § 2B1.1(b)(1)(K), and added
another six levels based on its conclusion that there
were more than 250 victims, see U.S.S.G. § 2B1.1(b)(2)(C).
On this point the court accepted the government’s argu-
ment that each individual whose Medicaid number had
been fraudulently used by Sutton should be counted as a
victim under the guidelines. The court also concluded
that Sutton testified falsely and added two levels for
obstruction of justice. See U.S.S.G. § 3C1.1. Although the
resulting adjusted offense level of thirty-four combined
with Sutton’s criminal history of I resulted in a guideline
range of 151 to 188 months, the statutory maximum
under § 1347 is 120 months. The district court sentenced
Sutton to the statutory maximum.
II.
On appeal, Sutton maintains that the district court erred
in its loss calculation under U.S.S.G. § 2B1.1(b)(1)(K) and
also erred by concluding that his offense had more than
250 victims under U.S.S.G. § 2B1.1(b)(2)(C). We review the
district court’s interpretation and application of the
guidelines de novo and its findings of fact for clear error.
E.g., United States v. Hill, 563 F.3d 572, 577 (7th Cir. 2009).
Sutton claims that the government failed to adequately
prove the amount of loss. The government maintained
in the district court that because Sutton’s entire business
was a fraud, he should be accountable for the full
6 No. 08-3370
$9 million he billed to Medicaid. Sutton argues that such
a loss calculation is unreliable because the government
failed to review all of the claims and prove that they
were fraudulent. He also claims that some “legitimate
services” were performed, and thus the district court
erred by treating the entire amount as fraudulent. We
review the district court’s loss calculation, which need
only be “a reasonable estimate of the loss,” U.S.S.G. § 2B1.1
cmt. 3(C), for clear error. See, e.g., United States v. Watts,
535 F.3d 650, 658 (7th Cir. 2008).
The district court’s conclusion that Sutton bore responsi-
bility for the entire $9 million is not clearly erroneous.
Sutton suggests that the loss calculation should be based
only on those services that the government individually
“verified” as fraudulent—a number that he estimates at
400 of the 84,000 claims. Such an approach would yield a
loss of either $32,000 (the amount Regenerations actually
received for those 400 claims) or $42,700 (the amount
Regenerations billed for those 400 claims). But Sutton’s
argument ignores the compelling evidence presented at
trial that Regenerations’ entire existence was fraudulent.
Despite fairly exhaustive efforts to uncover any records
or patients associated with the claims, the government
came up empty-handed. All of the enrollment documents
filed with Medicaid list Sutton as the only owner or
manager of Regenerations. Sutton received all of the
money himself. The only individual listed to supervise
counseling services was Dr. Ruth Haggerty, and she
testified that she had never overseen such services and
that she had not signed the enrollment form. Finally, the
implausibility of the claims Sutton submitted buttresses
No. 08-3370 7
the district court’s conclusion. For example, from Novem-
ber 2005 through January 2006 alone, Sutton billed for
over 11,000 individual counseling services per month. It
strains reason to believe that a business with no business
records, no physical location, and no employees pro-
vided services that could not be completed without an
entire staff of therapists consistently working eight
hours a day for six days a week.
Nor are we persuaded by Sutton’s claim that
Regenerations provided some legitimate services. Sutton
claims in his brief that the evidence at trial established
that “some services were provided by Darren Green
under the supervision [of] Dr. Ruth Haggerty,” and that
the loss calculation should be offset by these legitimate
services. But the services Sutton refers to were provided in
conjunction with an entirely different business. Darren
Green provided “coping skills” for between ten and
twelve individuals and Sutton received $34,000 from
Medicaid as a result, but this business was unrelated to
his fraud through Regenerations. Moreover, deducting
that $34,000 would leave Sutton with a total loss calcula-
tion of just under $9 million, still well over the $7 million
needed to trigger the 20-level adjustment under
§ 2B1.1(b)(1)(K). Given the convincing evidence that all of
the claims billed were fraudulent, the $9 million loss
calculation was not “outside the realm of permissible
computations.” United States v. Wheeler, 540 F.3d 683, 694
(7th Cir. 2008) (quoting United States v. Radziszewski, 474
F.3d 480, 486 (7th Cir. 2007)).
Sutton also argues in passing that even assuming all of
the claims were fraudulent, the loss calculation should
8 No. 08-3370
be 25% lower. Sutton points out that although he
billed Medicaid $2135 per twenty counseling sessions,
Medicaid never paid more than $1600 for the claims—a
25% reduction from the amount he billed. This argu-
ment goes nowhere. There is nothing in the record to
suggest that Sutton did not hope to recover the full
amount that he billed. The fact that Medicaid denied
some claims or that he overbilled for the “services” pro-
vided sheds no light on his intention to bilk Medicaid
for the full amounts billed. See United States v. Mikos,
539 F.3d 706, 714 (7th Cir. 2008) (Whether Medicaid paid
all (or any) of claims billed by defendant irrelevant to
loss calculation under § 2B1.1 “because that section
deals with intended loss”) (emphasis in original).
That leaves Sutton’s challenge to the upward adjust-
ment based on the number of victims. At sentencing, the
government argued that Sutton’s crime had over 250
victims. It reached this figure by treating all of the 2000-
plus individuals whose Medicaid numbers had been used
by Sutton as victims of his fraud. Sutton maintained,
however, that the only victims were the two entities that
sustained monetary loss—Indiana Medicaid and the
Centers for Medicare and Medicaid Services. As relevant
here, the application note to § 2B1.1(b)(2)(C) defines a
“victim” as “any person who sustained any part of the
actual loss determined under subsection (b)(1).” U.S.S.G.
§ 2B1.1 cmt. n.1. Subsection (b)(1), in turn, refers exclu-
sively to the monetary loss occasioned by the crime, and
the relevant application notes explain that the actual loss
must be “pecuniary harm . . . that is monetary or that
otherwise is readily measurable in money.” Id. at cmt.
n.3(A)(i), (iii).
No. 08-3370 9
Given this, Sutton insists that those individuals whose
Medicaid numbers were used to bill for counseling
services were not “victims” under § 2B1.1. Although he
used their Medicaid numbers to dupe Indiana Medicaid
and the Centers for Medicare and Medicare Services into
paying for services that were never rendered, none of
the individuals actually paid for a service they did not
receive. Instead, Sutton simply appropriated their
Medicaid numbers in order to bill Indiana Medicaid for
services that were never rendered. Indeed, until the
government began investigating the fraud, presumably
the victims had no reason to know that their Medicaid
numbers had been used.
The government insists that the six-level adjustment
should apply because the Medicaid recipients suffered
“real, tangible harm” in that their benefits were
exhausted and their identities were stolen. But it is not
immediately apparent how either of these harms
translates to the monetary harm clearly required under
§ 2B1.1. The application note further clarifies that pecuni-
ary harm “does not include emotional distress, harm to
reputation, or other non-economic harm.” U.S.S.G. § 2B1.1
cmt. n.3(A)(iii) (emphasis added). At oral argument,
counsel for the government conceded that the govern-
ment never identified a single victim who had attempted
to use her benefits and been denied. Government counsel
also acknowledged that a system had been put in place
to allow those individuals whose Medicaid numbers
had been used by Sutton to go through a process that
would waive the limits on their benefits so that Sutton’s
exhaustion of their benefits would not affect their eligi-
10 No. 08-3370
bility for services. Thus, so far as the government’s evi-
dence shows, the inchoate harm of having their benefits
wrongfully depleted never materialized into an actual
monetary loss such as having to pay for benefits that
would otherwise have been covered. Given the govern-
ment’s failure to demonstrate that any of the individuals
suffered pecuniary harm, we are hard-pressed to see
why we should treat all of those individuals as victims
under § 2B1.1.
The case cited by the government, United States v.
Curran, 525 F.3d 74 (1st Cir. 2008), does not convince us
otherwise. The defendant in Curran falsely presented
himself as a medical doctor and then proceeded to diag-
nose patients with alarming illnesses that required expen-
sive (and bogus) “cures.” Curran, 525 F.3d at 77-78. The
government contends that in treating all of the
defendant’s patients as victims, the First Circuit relied
heavily on the fact that the defendant’s charges for the
tests and medications were “inextricably linked to his
misrepresentations, malpractice, and fear-mongering.” Id.
at 81. It argues that by the same token, the funds Sutton
received from the Medicaid programs were inextricably
linked to the victimization of those individuals whose
Medicaid numbers he used. But the analogy is unhelpful,
because in Curran the victims paid for the bogus tests and
medications, and therefore suffered precisely the sort of
pecuniary harm envisioned under § 2B1.1. Because the
guidelines are clear that monetary loss (or the intent of
such loss) is required, and no such loss was suffered by
the 2000-plus individuals whose identities were used
by Sutton to perpetuate his fraud, the district court erred
No. 08-3370 11
by imposing the six-level adjustment. Because there
were in fact only two victims—Indiana Medicaid and
Centers for Medicare and Medicaid Services—no addi-
tional upward victim adjustment was warranted. See
U.S.S.G. § 2B1.1(b)(2); United States v. Icaza, 492 F.3d 967,
969-70 (8th Cir. 2007) (district court erred by treating
many individual Walgreens stores as victims when all
pecuniary harm could be traced to single parent corpora-
tion).
Finally, the government claims for the first time on
appeal that if the six-level increase for the number of
victims is inapplicable, Sutton’s guidelines calculation
should nonetheless be increased by two under U.S.S.G.
§ 2B1.1(b)(10), which applies when the offense involves
the “possession or use of an authentication feature.”
That two-level increase would put Sutton’s adjusted
guideline range at twenty-eight to thirty, a range that
would include the 120-month statutory maximum the
district court imposed. But the government neither advo-
cated imposing that adjustment in the district court nor
cross-appealed on that issue. Thus, it has waived the
argument that § 2B1.1(b)(10) applies. See United States v.
Wilson, 131 F.3d 1250, 1253 (7th Cir. 1997). Nor are we
convinced from the record that a remand is unnecessary
because the district court would have sentenced Sutton
to the statutory maximum regardless of the advisory
guidelines range. Although the district court intimated
that Sutton’s crime warranted the statutory maximum,
it did so in the context of the higher guideline range
(which exceeded the statutory maximum). The district
court may still conclude that the § 3553(a) factors support
12 No. 08-3370
sentencing Sutton to the statutory maximum (which
would be outside the properly calculated range of seventy-
eight to ninety-seven months), but such a determination
should be made only after the district court properly
calculates the guideline range. See United States v. Willis,
523 F.3d 762, 770 (7th Cir. 2008) (noting that district court
“must first properly calculate the advisory Guidelines
range” before exercising its “substantial discretion” to
choose a reasonable sentence).
III.
For the foregoing reasons, we A FFIRM Sutton’s con-
viction, but V ACATE his sentence and R EMAND for
resentencing.
9-28-09