No.

00-10399 J

IN THE UNITED STATES COURT OF APPEAI_S i

FOR THE NINTH CIRCUIT v.

UNITED STATES OF AMERICA,

Plaintiff-Appellant,

V•

CONNIE C. ARMSTRONG JR.,

Defendant-Appellee•

BRIEF OF APPELLEE

APPEAL FROM
THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
DISTRICT COURT NO. CR-94-276-CAL

ROBERT S. MUELLER, III

United States Attorney
Northern District of California

J. DOUGLAS WILSON
Chief, Appellate Section

BARBARA J. VALLIERE
Assistant Umted States Attroney
450 Golden Gate Ave.
San Francisco, CA 94102
Telephone: (415) 436-7183
Attorneys for Plaintiff-Appellee
UNITED STATES OF AMERICA
 No. 00-10399

IN THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

UNITED STATES OF AMERICA,

Plaintiff-Appellant,

V.

CONNIE C. ARMSTRONG JR.,

Defendant-Appellee.

BRIEF OF APPELLEE

APPEAL FROM
THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
DISTRICT COURT NO. CR-94-276-CAL

ROBERT S. MUELLER, III

United States Attorney
Northern District of California

J. DOUGLAS WILSON
Chief, Appellate Section

BARBARA J. VALLIERE
Assistant Umted States Attroney
450 Golden Gate Ave.
San Francisco, CA 94102
Telephone: (415) 436-7183
Attorneys for Plaintiff-Appellee
UNITED STATES OF AMERICA
 TABLE OF CONTENTS

Page No.

JURISDICTION AND BAIL STATUS ................................. 1

ISSUES PRESENTED .............................................. 1

STATEMENT OF THE CASE ........................................ 2

STATEMENT OF FACTS ........................................... 3

o The trial evidence ......................................... 3

2. The first sentencing ....................................... 5

3. The direct appeal ......................................... 7

4. The resentencing ........................................ 7

SUMMARY OF ARGUMENT ....................................... 11

ARGUMENT ..................................................... 13

I. THE DISTRICT COURT DID NOT CLEARLY ERR IN

CALCULATING THE AMOUNT OF LOSS AT
APPELLANT'S RESENTENCING .............................. 13

A. Standard of Review ................................ 14

B. The district court properly calculated the amount of loss ... 14

II. THE SENTENCE DOES NOT VIOLATE APPRENDL ................ 22

A. Standard of Review ................................. 22

 B. Apprendt does not apply to a sentence below the statutory
maximum ........................................ 23

CONCLUSION ................................................... 28

STATEMENT OF RELATED CASES ................................. 28

CERTIFICATE OF COMPLIANCE .................................. 29

CERTIFICATE OF SERVICE ....................................... 30

, ii
 TABLE OF AUTHORITIES

FEDERAL CASES

Apprendi v. United States, 530 U.S. 466 (2000) ......................... 22

Edwards v. United States, 523 U.S. 511 (1998) ......................... 25

Mistretta v. United States, 488 U.S. 361 (1989) ......................... 27

In re Sealed Case, 246 F.3d 696, (D.C. Cir. 2001) ....................... 25

Talbott v. Indiana, 226 F.3d 866 (7th Cir. 2000) ........................ 24

Umted States v. Armstrong, 2000 WL 425007 (9th Cir. April 19, 2000) ....... 2

United States v Caba, 241 F.3d 98 (lst Cir. 2001) ....................... 24

United States v. Carrozzella, 105 F.3d 796 (2d Cir. 1997) .............. 17, 18

United States v. Deavours, 219 F.3d 400 (5th Cir. 2000) ............... 17, 20

United States v. Doggett, 230 F.3d 160 (5th Cir. 2000),

cert. denied, 121 S. Ct. 1152 (2001) ............................. 24

United States v. Egge, 223 F.3d 1128 (9th Cir. 2000) .................. 23, 24

United States v. Garcia, 240 F.3d 180 (2d Cir. 2001) ..................... 24

United States v. Garcia-Guizar,

227 F.3d 1125 (9th Cir. 2000), as amended,
234 F.3d 483, cert. denied, 121 S. Ct. 1629 (2001 ) .............. 14, 23

United States v. Hernandez-Guardado, 228 F.3d 1017 (9th Cir. 2000) ....... 25

United States v. Hohusa, 13 F.3d 1043 (7th Ctr. 1994) ................... 17

111
United States v. Jackson, 240 F.3d 1245 (10th Cir. 2001) ................. 25

United States v. Janusz, 135 F.3d 1319 (10th Cir. 1998) ............... 17, 18

Umted States v. Johansson, 2001 WL 468413 (9th Cir. May 4, 2001) ....... 22

United States v. King, 246 F.3d 1166 (9th Cir. 2001) ..................... 14

United States v. Kinter, 235 F.3d 192 (4th Cxr. 2000),

cert denied, 121 S. Ct. 1393 (2001) ............................. 24

United States v. LaBonte, 520 U.S. 751 (1997) .......................... 27

United States v. Lauer, 148 F.3d 766 (7th Cir. 1998) ..................... 17

United States v. Loayza, 107 F.3d 257 (4th Cir. 1997) ................. 17, 17

United States v. Matsumaru, 244 F.3d 1092 (9th Cir. 2001) ............... 14

United States v. (David)Munoz, 233 F.3d 1117 (9th Cir. 2000) ...... 16, 17,21

United States v. (Zafori) Munoz, 233 F.3d 410 (6th Cir. 2000) ............. 24

United States v. Nachamie, 121 F. Supp. 2d 285 (S.D.N.Y. 2000) ........... 25

United States v. Nordby, 225 F.3d 1053 (9th Cir. 2000) ................ 22, 23

United States v. Orton, 73 F.3d 331 (11th Cir. 1996) ..................... 17

United States v. Pacheco-Zepada, 234 F.3d 411 (9th Cir. 2000),

cert. denied, 121 S. Ct. 1503 (2001) ............................. 22

United States v. R.L.C., 503 U.S. 291 (1992) ........................... 26

United States v. Sanchez, 242 F.3d 1294 (1 lth Cir. 2001) ................. 25

United States v. Scrivener, 189 F.3d 944 (9th Cir. 1999) .................. 14

IV
United States v. Smith, 240 F.3d 732 (8th Cir. 2001) ..................... 24

United States v. Williams, 235 F.3d 858 (3d Cir. 2000) ................... 24

United States v. Wills, 881 F.2d 823 (9th Cir. 1989) ...................... 14

FEDERAL STATUTES

18 U.S.C. § 1343 .................................................. 2

18 U.S.C. § 2314 .................................................. 2

18 U.S.C. § 3231 .................................................. 1

18 U.S.C. § 3742(a) ................................................ 1

18 U.S.C. § 5037(c)(1)(B) .......................................... 26

28 U.S.C. § 1291 .................................................. 1

Fed. R. Cnm. P. 52(b) ............................................. 22

U.S.S.G § 2Fl.1 ........................................ 5, 6, 14, 15, 16

U.S.S.G. § 3D1.2 .................................................. 8

U.S.S.G. § 4Bl.1 ................................................. 27

V
 No. 99-10399

IN THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

UNITED STATES OF AMERICA,

Plaintiff-Appellant,

V.

CONNIE C. ARMSTRONG, JR.,

Defendant-Appellee.

APPELLEE'S BRIEF

JURISDICTION AND BAIL STATUS

This is an appeal from a resenterlcing on August 15, 2000. The dlsmct court

had juris&ction pursuant to 18 U.S.C. § 3231. On August 17, 2000, Armstrong filed

a timely notice of appeal from his sentence. This Court has jurisdiction pursuant to

18 U.S.C. § 3742(a) and 28 U.S.C. § 1291. Armstrong is incarcerated serving the

sentence imposed in this case.

ISSUES PRESENTED

Whether the district court (1) clearly erred m calculating the amount of loss

used to enhance appellant's base offense level, and (2) plainly erred by including the

amount of loss suffered by victims not named in the in&ctment in violation of the
pnnclples announced in Apprendt.

STATEMENT OF THE CASE

On June 27, 1994, a federal grand jury returned a twenty-one count indictment

charging Armstrong and a co-defendant with causing travel m interstate commerce

to execute a scheme to defraud (18 U.S.C. § 2314) (Counts 1-3); wire fraud (18

U.S.C. § 1343) (Counts 4-14, 19-21); and mterstate transportation of secunties

traceable to fraudulently obtained funds (18 U.S.C. § 2314) (Counts 15-18). The

charges all related to the operanon of Hamilton Taft & Company, Inc. ("Hamilton

Taft"), a payroll tax service company headquartered m San Francisco, Cahfornla.

A jury trial before the Honorable Charles A. Legge began on December 3,

1996, and ended on February 26, 1997, w_th guilty verdicts as to Armstrong on all

counts. On August 29, 1997, the district court sentenced Armstrong to 108 months

of imprisonment, followed by three years of supervised release, an order to pay

restltunon m the amount of $62,750,000, and a fine.

Armstrong appealed his conviction (No. 97-10392). In a Memorandum

Opinion (hereafter referred to as Armstrong 1), the Court affirmed all but counts 15-

18 (reversing on sufficiency grounds), and remanded for a resentenclng. See United

States v. Armstrong, 2000 WL 425007 (9th Cm April 19, 2000). The parties

subrnltted resentenclng memoranda and the district court held two resentencing

2
hearings before imposing a 108-month term of incarceration, tl-n'ee years of

supervised release, and restitution in the amount of $1,000,000. Armstrong timely

appealed.

STATEMENT OF FACTS

1. The trial evidence.

An overview of the trial evidence _ shows that Hamilton Taft - a service

company that assisted large companies by calculating, collecting, and paying their

payroll taxes to federal, state, and local taxing entitles - had long been in existence

when Armstrong acquired it in March of 1989 (GER:60). Until that time, Hamilton

Taft had derived its income from the investment of client funds (employee and

employer tax payments collected for payment to taxing authorities) froln the time of

receipt until the checks to the taxing agencies cleared (GER:60).

In March of 1991, Hamilton Taft was forced into involuntary bankruptcy by

some of _ts chents (GER:60). Afterward, a trustee in bankruptcy determined that

although under Armstrong's stewardship Hamilton Taft had collected $91 million

from its clients to pay various taxing agencies, it had only $5.8 million on hand

(GER:60). The trustee also discovered that over a two-year period, Hamilton Taft

' The government submitted a lengthy statement of facts in its brief in

Armstrong L the details of which it hereby incorporates by reference. See
Government's Excerpt's of Record ("GER'):60-80.
had been preparing tax payment checks but then "pulhng" some of them and thus not

making timely payment to taxing authorities (GER:60-61). Because th_s created a

perpetual and mcreaslng shortfall, each quarter more checks had to be pulled to make

the tax payments and to pay penalties that accrued when taxes due were not paid on

txme (GER:61).

The trustee's accountant determined that, by the last quarter of 1990, $57

million in checks had been withheld (GER:61). In fact, the accountant determined

that during Armstrong's ownership of Hamilton Taft the company was not only not

profitable, its shortfall continually increased because of operating losses, large

penalties for late tax payments, the transfer of chent funds from Hamilton Taft to

Armstrong's compames (used to purchase real estate and oll wells), and

enhancements to Armstrong's lifestyle such as a multi-million dollar ranch, a

hehcopter, luxury cars, and the lease of an airplane (GER:61). Specifically, the

accountant determined that dunng Armstrong's ownership, Hamilton Taft: (1) spent

more than $14 million to cover the cost of its operations; (2) paid more than $8.5

milhon in penalties and interest to tax agencies for dehnquent taxes and accrued (but

did not pay) additional penalties of $8 to $9 milhon; (3) transferred more than $55.1

million to Armstrong's compames; and (4) spent more than $16.5 milhon on

Armstrong personally (i.e., $9.2 mllhon for his ranch, $965,000 in polmcal and

4
charitable contributions, $735,000 for a criminal defense retainer, $1.7 milhon for a

hehcopter, $352,000 for cars, $217,000 for a Fourth of July party, and $1.4 mllhon

in other personal expen&tures including $98,392 for furs and Christmas presents)

(GER:61).

2. The first sentencing.

At the initial sentencing, the government recommended that the district court

set the amount of loss for purposes of U.S.S.G § 2Fl.1 at $69.1 million, a figure

representing the $55.2 rmllion Armstrong diverted from Hamilton Taft to his own

businesses and personal use, and the $13.9 mllhon ofchent funds Hamilton Taft was

reqmred to use to pay penalties and cover operating losses during his tenure (GER:8-

9). The government also submitted a schedule compiled by the trustee which

reflected the amounts due to each Hamilton Taft client (GER:23-28). Using that

figure, the government recorrunended that Arn_strong be required to pay restitution

in the amount of $62,753,160 (GER:27).

Armstrong argued that the intended and the actual loss was zero because all of

the taxes due had been pald at the t_me the fraud was &scovered (the last quarter of

1990) and because, although there was an existing significant shortfall, no taxes were

yet due for the first quarter of 1991 (GER:36). Alternatively, Armstrong claimed that

even if the &strict court deterrmned that the actual loss was the $55 million he
diverted from the chent's funds to his compames, "_t was appropriate to offset the $55

million deficit by the value of Hamilton Taft's investments" and "by the net amounts

recovered from the estate's sale of assets" (GER:37). Employing these "offset"

strategies, Armstrong claimed that the actual loss was either $27.4 or $49.35 mflhon

(GER:37). Armstrong also claimed that the loss amount should be offset by the

payments he made out of pocket to the estate in bankruptcy, further reducing the total

by $2 milhon (GER:37).

The district court, eschewing both the government's and Armstrong's

approaches, grouped all of the fraud convictions together, found that the amount of

actual loss was the amount of restitution owed to the victims, $62,750,000, and, using

that figure, enhanced Armstrong's baseoffense level under U.S.S.G. § 2F 1.1(b)(1)(R)

by 17 points (Appellant's Excerpt's of Record ("AER"):76). 2 Adding other

enhancements, the district court set the offense level at 31, which, w_th a Criminal

History Category of I, placed the sentencing range at 108-135 months. The d_stnct

court then sentenced Armstrong to a 108-month term of incarceration and ordered

him to pay $62,750,000 m restitution (AER:78-79).

2 The base offense level under U.S.S.G. § 2Fl.l(a) is six. The court is
directed to enhance that level by 17 if the loss exceeds $40 mllhon. See U.S.S.G.
§ 2FI.I(b)(1)(R).
 3. The direct appeal.

Armstrong raised five issues on appeal, none relating to his sentence and only

one of which is relevant to this appeal. Specifically, Armstrong claimed that the

government had failed to offer sufficient evidence of his fraudulent intent with

respect to all 21 counts of the m&ctment. Rejecting this claim, the Court explicitly

found that the trial evidence showed that Armstrong "repeatedly was warned that his

use of chent funds was likely improper or Illegal, .... directed the plans to withhold

chent checks, and actively sought to cover up the diversion and withholding ofchent

funds," "failed to fulfill client expectataons and specific contractual obligations

regarding use of their funds," and used client funds for "risky, long-term

investments," as well as "extensive personal use" (AER:100-103). This evidence,

the Court concluded, was more than sufficient to estabhsh that he "had the intent and

developed a scheme to defraud" (AER:102). The Court then affirmed 17 of the 21

counts, reversed Counts 15-18 on sufficiency grounds, and remanded the case for

resentencing.

4. The resentencing.

The parties' resentenclng memoranda focused on the method used to calculate

the amount of loss and whether the ultimate calculation should materially change
because of the reversal of Counts 15-18.3 Although Armstrong had not challenged

the district court's loss calculation in hls first appeal, he reiterated the points made

at the first sentencing hearing - that there was no actual or intended loss - and

claimed that his base offense level should be set at six (AER:38). Alternatively,

Armstrong claimed that because this Court had found that the checks in Counts 15-18

were drawn from "funds remitted by non-victim companies that were Hamilton Taft

chents before Armstrong ever even came into the picture and whose taxes were

properly paid," _t"found as a matter of fact that clients of Hamilton Taft that predated

Armstrong's ownership of the company were not victims of the scheme to defraud

alleged in the indictment" (AER:38-39). For that reason, he claimed that only the

"loss" sustained by the seven VlCtlmS named in the indictment could be used to

calculate his offense level. The result, he concluded, would reduce the actual loss

and his offense level by two levels (AER:39).

The government subrrutted that, despite the reversal of Counts 15-18, the

amount of loss remained materially unchanged and that the district court should again

3 The parties agreed that Counts 1 and 7 could not be included in the
grouping of the other fraud counts under U.S.S.G. § 3D1.2 because of an expost
facto problems (AER: 110, 138). The district court also agreed, and thus did not
include Counts 1 and 7 in its loss calculation (AER: 171). Instead, the court
sentenced Armstrong to a concurrent term of 15 months incarceration on those
counts (AER: 171, 187). Armstrong does not appeal that sentence.
add 17 levels. Specifically, it claimed that the $55 rmlllon figure was the amount that

Armstrong intentionally caused to be transferred from Hamilton Taft to his owm

pocket and h_s controlled companies and thus remained the operative figure for the

intended loss (AER:I 11). As to actual loss, the government argued that the figure

remained between $57 rmllion (the amount taken from clients in January of 1991

presumably to pay their taxes but that was applied instead to delinquent taxes of of

other clients) and $68.1 million (the amount due in the first quarter of 1991 that

remained unpaid) (AER: 112). Moreover, the government suggested that the district

court assessthe amount of actual loss by totaling the amount still owed the victims,

or $67.9 million (AER:112-113).

In its ruhng, the district court addressed both intended and actual loss:

I'll first address the intended loss. Mr. Armstrong

contends that he intended no loss because he wanted to
save the company, but that really is not an answer. He
can't save his company by improperly taking in other
people's money at risk, and xt is apparent that the earher
taxes were being paid only by taking in later and additional
money from others, and the deficit continued to grow from
the time that Mr. Armstrong took over the company until
the time of the discovery; and tremendous sums of money
went out of the company for Mr. Armstrong's personal
spending and other investments.

In addition, I beheve that the Ninth Circuit itself

addressed, in connection with its analysis of the mental
element of the offense, numerous factors where the court
found that Mr. Armstrong did, in essence, intend the loss,
and this appears on page 5 of the court's opinion, that
"given the evidence presented at trial, a jury reasonably
could have found that the defendant had the intent and
developed a scheme to defraud"...

So how do we measure intended loss? I suppose it

could be measured through the growth of the deficit from
the time Mr. Armstrong took over the company until early
'91, or it could be determined from the sum of money that
went out for h_s personal spending and other investments,
but however we calculate that, it is still in the range of 40
to 80 million dollars, so an appropriate adjustment is still
a 17-point increase, under guidehnes section 2Fl.1
([b])O)(R).

Now, I might also add here that even if I were to

attempt a mathematical deduction m the amounts charged
in counts 1 and 7, that the number we amve at is still in
that 40 to 80 million dollar bracket. (AER:173-174.)

On actual loss, the court added:

I do not agree with the defense that it's hmlted to the seven
transactions listed m the Indictment. I beheve the
obligation of the guidehnes is for me to take into
consideration the entire scheme, bringing in lots of
people's money and in greater amounts to pay earher taxes
that were due, and paying money out of the company for
Mr. Armstrong's personal use.

So I believe that the actual loss can, again be

measured by the later money that came in early 1991 and
was unpaid, or by the growth m the deficit that I've already
menuoned, or the actual sums not recovered, that is, the
loss to the people who paid the money m and were not
ultimately repaid.

, 10
 And, again, that all puts us still in this category of
actual losses of at least 40 malhon. So whether viewed
under the rubric of the intended loss or the actual loss, I
beheve the loss factor is between 40 and 80 rmlhon dollars,
and reqmres a 17-point enhancement. (AER: 174-175.)

The court then added 17 points for the amount of loss, and adding other

enhancements, again set the offense level at 31(AER:178). Again, _t sentenced

Armstrong to the low end of the apphcable gmdehne range, or 108 months

(AER: 178).4

SUMMARY OF ARGUMENT

Armstrong's challenges to his sentence should be rejected. First, his claim

that the amount of loss should have been zero because he never intended that the

company lose money is both factually and legally insupportable. This and other

courts of appeals have held that where a defendant perpetrates a so-called "Ponzi"

scheme, d_verting funds from their proper to has personal use, the amount of loss

intended is the amount he put at "risk" through &version. For purposes of the

calculating the amount of loss "intended," therefore, the fact that money was not in

fact lost, or was eventually repaid, _s irrelevant. Since the record shows that

4 The court noted that it had failed to take into account Armstrong's ability
to pay restitution at the first sentencing hearing (AER: 178). Doing so at the
resentencing, it reduced the amount to $1 rmlhon (AER: 178). Armstrong does not
appeal the restitution order.

11
Armstrong intentionally diverted in excess of $55 million dollars for his own use, the

dismct court did not clearly err m applying the 17-point enhancement for losses

greater than $40 million.

Second, the dismct court did not err in finding that the amount of actual loss

hkewisejustlfied a 17- point enhancement. The government's evidence showed that,

at the time the fraud was discovered, Armstrong's clients had spent more than $57

million in the expectation that their taxes would be timely paid (they were not), and

that Hamilton Taft had been required to pay out more than $12 million in fines and

penalties and overhead. In the circumstances, the dlsmct court did not clearly err in

finding that the actual amount of loss attributable to the fraud was in excess of the

$40 million required to add 17 levels.

Moreover, m setting his offense level, the district court properly took into

account Armstrong's relevant conduct which included the loss atmbutable to all

potential wctlms of the scheme, not only those hsted m the indictment. Where, as

here, the government's evidence showed that Armstrong relied on an increasing

number of new clients to pay off (overdue) old debts and thereby keep the business

alive and the fraud undetected, the d_stnct court properly could take into account the

scope of the entire fraud. Since the entire fraud included losses to victims not named

in the indictment whose taxes had been paid (late), the total loss should reflect that

, 12
amount as well as the funds contributed by the victims named m the indictment.

Finally, none of the courts of appeals interpretang Apprendi has, as Armstrong

suggests, determined that the maximum "statutory" sentence is the sentence

prescribed by the Sentencing Guidehnes. Rather, these courts have held that where,

as here, Armstrong's sentence fell below the maximum sentence prescribed m the

statute for the offense of conviction, the district court may rely on facts not found by

the jury to enhance his base offense level.

ARGUMENT

I. THE DISTRICT COURT DID NOT CLEARLY ERR IN

CALCULATING THE AMOUNT OF LOSS AT APPELLANT'S
RESENTENCING

Armstrong claims that the dlsmct court misstated the "actual" and "intended"

loss attributable to him under the Sentencing Gmdehnes and thereby miscalculated

his sentence. Specifically, he claims that the district erred because: (1) the trial

evidence showed that he intended "to make Hamilton Taft a successful company,"

and thus "the record clearly establishes that [he] intended no loss" (AOB:12); (2)

actual loss is determined at the time the offense was discovered and since Hamilton

Taft had then paid the outstanding taxes for the fourth quarter of 1990 and "quarterly

tax payments were not yet due" for the first quarter of 1991, it "amounted to nothing"

(AOB: 13); and (3) it Included in its calculanon alleged loss to victims who were not

13
named in the indictment (AOB: 14-15). These arguments are without merit and the

Court should affirm Armstrong's sentence.

A. Standard of Review

This Court reviews a district court's determinanon of the amount of loss for

clear error. United States v. King, 246 F.3d 1166, 1177 (9th Cir. 2001); United States

v. Matsumaru, 244 F.3d 1092, 1106 (9th Cir. 2001); United States v. Scrivener, 189

F.3d 944, 949 (9th Cir. 1999). An error in the court's loss calculation is harmless if

the distract court "would have imposed the same sentence absent the errors." United

States v. Garcia-Guizar, 227 F.3d 1125, 1132 (9th Cm 2000) (internal quotation

omitted), as amended, 234 F.3d 483, cert. denied, 121 S. Ct. 1629 (2001).

B. The district court properly calculated the amount of loss.

The "amount of loss" in a fraud case _s the actual loss to the victim or the

intended loss, whichever is greater. See U.S.S.G. § 2FI.1, comment (n.7); United

States v. Wills, 881 F.2d 823,827 (9th Cm 1989). Before a sentencing court decides

whether the intended loss is greater than the actual loss, it must first decide "if an

intended loss that the defendant was attempting to inflict can be determined." Where

the intended loss cannot be determined, the district court must sentence the defendant

by using the actual loss. U.S.S.(3. § 2F 1.1, comment. (n.7). In any event, neither the

actual nor the intended loss need be determined with precision; rather, the court need

14
only make a reasonable estimate of the loss on the basis of the available information.

U.S.S.G. § 2F1.1, appllcaUon note 8.

Armstrong claims that regardless of the method used to calculate the loss, the

result is zero (AOB: 13). Specifically, he claims that the evidence demonstrated that

his intent "was to make Hamilton Taft a successful company" and thus nothing

supports the conclusion that he intended the company to suffer "loss" (AOB: 12-13).

Moreover, he claims that because the actual loss is to be measured at the time when

the offense was discovered and since, at that time, quarterly tax payments were not

yet due and past tax payments had been made, "no Hamilton Taft client had suffered

an actual loss" (AOB:13).

Both claims are flawed and using either the intended or actual loss results in

a finding that the loss exceeded $40 mllhon. First, Armstrong's claim that evidence

that wanted Harmlton Taft to succeed shows that he could not have intended "loss"

is offset by the ewdence that he perpetrated a fraudulent scheme that, as the Court

found in Armstrong I, allowed him to divert "client funds for risky, long-term

investments," and "extensive personal use" (AER: 102-103; see AER: 173-174). The

district court did not err in finding, as did the Court in affirming in Armstrong I, that

th_s scheme demonstrated Armstrong's fraudulent intent and thus his intent to cause

a loss (AER:102-103).

, 15
 More Importantly, Armstrong's claim that his wish that Harmlton Taft succeed

through his use ofa Ponzl scheme somehow undercuts a finding that he intended any

loss has already been rejected by this and other clrcmts. In United States v. (Davtd)

Munoz, 233 F.3d 1117 (9th Cir. 2000), the defendants -- convicted of participating

as sales representatives in a Ponz_ investment scheme developed by a company that

sold bus stop shelters as investments to the public 5 - contended that the &strict court

erroneously sentenced them according to intended rather than actual loss, a figure

they claim should have been offset by the lease payments made to the victims over

the course of the scheme and by the sale of the company after it declared

bankruptcy. 6 ReJecting the defendant's arguments, the Court agreed w_th the several

5 During the five years of its operation, although the company sold
approximately 4,600 bus stop shelters to 1,442 investors, it installed no more than
2,600. Since the company's advertising revenues were insufficient to cover the
lease payments and overhead, it used the capital investments from new investors to
cover those expenses. The company eventually agreed to stop selhng the bus stop
investments and the investment scheme inevitably collapsed. Thereafter, the
company declared bankruptcy with $100 mllhon m debt and less than $1 million
m assets. The company subsequently reorganized and was taken over by an
investor who, with the help of other victim investors, rebuilt the company into a
legitimate, profit-generating business. It was later sold to a bona fide purchaser
and $37 million in proceeds from that sale was deposited in escrow as restitution
for the victim investors. /d. at 1123.

6 Using the "intended loss" standard under U.S.S.G. § 2FI.1, comment n.8,
the probation officer calculated the loss as the total amount of investment money
generated by the individual companies which resulted in 14-level and 17-level
upward adjustments to the defendant's sentences. Id. at 1123-1125. The district

16
other circuits to find that, m a Ponzl scheme case,v "the gravity of the crime should

be measured by the entire sum of money that the schemers put at risk through the

misappropriation regardless of whether some v_ctims were fortunate enough to

recover part of their loss." Id. at 1125 (citingLauer, 148 F.3d at 768); seeLauer, 148

F.3d at 768 ("the amount of the intended loss, for purposes of sentencing, is the

amount that the defendant placed at risk by misappropriating money or other

property"); United States v. Janusz, 135 F.3d 1319, 1324 (10th Cv. 1998) (adopting

th_s hne of reasoning in fraud case where financaal consultant misappropriated chents'

funds, most of which were recovered by clients when consultant's accounts were

frozen). In other words, because the schemers typically return money to investors

to perpetuate the fraud and ensnare new investors, and not to mitigate damages to the

court adopted that finding and refused to offset the loss as the defendants had
suggested. Id. at 1124.

7 The Second, Fourth, Fifth, and Seventh Circuits have held all that the loss
calculation in a Ponzi scheme should not be offset by the amount of the victims'
recovery. See United States v. Carrozzella, 105 F.3d 796, 805 (2d Cir. 1997);
United States v. Loayza, 107 F.3d 257, 265 (4th Cir. 1997); United States v.
Deavours, 219 F.3d 400,403 (5th Cv. 2000); Umted States v. Lauer, 148 F.3d
766, 768 (7th Cir. 1998); but see United States v. Holiusa, 13 F.3d 1043,
1046-1047 (7th Cir. 1994) (holding that intended loss in Ponzl scheme case did
not include amounts ulnmately returned to Investors). Although the Eleventh
Circmt has not adopted a "risk" theory of loss calculanon, see United States v.
Orton, 73 F.3d 331,334 (1 lth Cir. 1996), it has not yet been directly presented
with the issue.

, 17
current investors, this Court concluded they should be held accountable for all of the

funds that are misappropriated regardless of whether the v_ctims eventually recovered

some of the money. Id. See also Carrozzella, 105 F.3d at 805 (challenge to loss

calculation that it should be no greater than "'ending balance amount'" without merit

because loss in fraud cases is amount of property taken, even if all or part has been

retumed). In short, th_s Court concluded that the "risk" theory of loss calculation

achieved the goal of deterring criminals from "engaging in illegal behavior, such as

making fraudulent or misleading statements, that deliberately leads unwitting

investors to put their money at risk." Munoz, F.3d at 1126; see id. ("a Ponzi

scheme, in whach new investor funds are used to pay returns to prior investors, creates

a situation where the business will inevitably collapse at the expense of the investors.

If it does not collapse, it is usually by luck alone. Thus, whether a Ponzi scheme

produces some value for the investors is irrelevant to calculating the intended loss.")

As in Munoz, the evidence here showed that Armstrong diverted at least $55

million of the victims' money from its intended purpose (t_mely payment of their

taxes) for his own use and thereby placed all of it at risk. Regardless of his fanciful

view that, eventually, Hamilton Taft could earn money using this scheme, 8 the

8 Armstrong's behavior is similar to a person who embezzles money from

his employer, planning to gamble with it and put the embezzled money back
before he is discovered. See Lauer, 48 F.3d at 768. As the Seventh Circuit noted,

, 18
evidence showed that at the tame the fraud was discovered, Hamilton Taft, like the

company in Munoz, was operating at a gross and growing shortfall that resulted in

bankruptcy. On this record, therefore, the district court did not clearly err in finding

that, by diverting the $55 mllhon he had received from new clients to improper uses,

he placed that money at "nsk" and thereby intended that it be lost. See supra p. 9

(district court concluding that Axmstrong's contention that "he intended no loss

because he wanted to save the company" is "not an answer" because "[h]e can't save

his company by improperly taking m other people's money at risk" and then using

"tremendous sums of money" for his "personal spending and other investments").

Second, as to actual loss, the evidence showed that at roughly the time of the

fraud's discovery, Armstrong had taken in approximately $57 million from new

clients to cover old debts (AER:156), and that the trustee's records revealed that

$68.1 million was due on taxes to be pald in the first quarter that had not and could

not be paid because the $57 rmlhon taken in was, m fact, used to cover these old

debts (AER:156-157). In short, even if the district court were to agree with

Armstrong that no taxes were technically "due" at the time the fraud was discovered

if the embezzler is caught prior to placing any bets, and the company recovers all
of its money, he should still be held accountable for the money he stole. Id.
Likewise, if the theft is discovered after the embezzler gambled the money, won,
and replaced the embezzled money, he should still be held accountable for the
amount embezzled. Id.

, 19
and that the taxes for the last quarter of 1990 had been paid, it did not clearly err m

finding that the scheme itself created a perpetual and demonstrable shortfall.

Consequently, "actual" loss could be calculated by either by deterrmnlng the amount

Armstrong fraudulently had caused new clients to pay Hamilton Taft, or the amount

of taxes next due that, given the shortfall, could not timely be paid. In other words,

because it was clear that g_ven the shortfall the company could not meet _ts next

obligations for 1991, at the time the fraud was discovered the payments made for

1990 were plainly a means to keep the company afloat and the fraud undetected and

thus did not offset the actual loss. See Deavours, 219 F.3d at 403 (defendants

returned money to those they had defrauded, not to compensate victims for their

losses, or to extricate themselves from wrongdoing, but to extend their criminal

activities and profitability and to place yet more property of innocent victims at risk);

Loayza, 107 F.3d at 265-266 (returns are typical ingredient of Ponzi schemes, but as

lure rather than sign of repentance). The reality was that there existed an actual

shortfall well m excess of the $40 million needed to justify the 17-level enhancement.

Finally, regarding Armstrong's claim that the d_stnct court could not base its

calculation on potential losses to victims not listed m the indictment, it is well settled

that"[t]he distr_ct court _s entitled to take into account all relevant conduct, charged

and uncharged, prowded that the relevant conduct findings are supported by

20
sufficient evidence." Munoz, 233 F.3d at 1117 (citing United States v. Amlani, 111

F.3d 705, 719 (9th Cir. 1997)). Here, the government submitted evidence that

Hamilton Taft was continuing to sohclt funds from clients to pay the taxes of prior

clients whose taxes had not been timely paid. In such a situation - where the new

clients' funds are being used to pay the older clients' taxes - both sets ofchents are

victims of the scheme because none of the clients' taxes were properly paid. The loss

attributable to the entire scheme, therefore, is the amount all of the Hamilton Taft

clients lost minus any shortfall in existence before Armstrong acquired the company,

or the amount reflected by the original resututlon order. See Amlani, 111 F.3d at 719

(upholding loss calculation based on total amount of revenue generated by entire

telemarketmg fraud). It is simply immaterial that some of the defrauded clients

whose taxes had not yet been paid when the company filed for bankruptcy were not

actually named as victims an the indictment.

In any event, even if the d_stnct court erred m failing to distinguish between

the "loss" attributable to victims hsted in the indictment and those not listed in the

indictment, the error was harmless. The government's trial evidence showed that two

of the clients hsted in the indictment - Scott Paper and Federal Express - alone had

losses that exceeded $40 million (see GER: 21 (Federal Express had losses of $30.4

million and Scott Paper $10.4 1Trillion)). Contrary to Armstrong's claim (AOB: 14-

, 21
 15), therefore, the losses attributable to only those vlcums named in the indictment

still justafied a 17 level increase m has base offense level.

II. THE SENTENCE DOES NOT VIOLATE APPRENDI. 9

Although Armstrong argued to the das_ct court that it could consider only

those victims specafically listed m the indictment in calculating the amount of loss

under § 2F 1.1 (AER:39), he did not claim that the district court should do so because

of the Supreme Court's decasion m Apprendi. For the first time on appeal, Armstrong

argues that thus relevant conduct under the Sentencing Guidehnes must be proven to

the jury beyond a reasonable doubt before it can be used to increase has sentence.

Every Circuit (including this one) that has considered thus issue has rejected his

position.

A. Standard of Review.

Because Armstrong dad not raise the Apprendi issue m the district court, thus

Court rewews zt for "plato error." United States v. dohansson, 2001 WL 468413 (9th

Cir. May 4, 2001); United States v. Pacheco-Zepada, 234 F.3d 411,413 (9th Cir.

2000), cert. denied, 121 S. Ct. 1503 (2001); Fed.R.Crlm.P. 52(b). Under the plain-

error doctrine, Armstrong must show that (I) an error was committed, (2) the error

was "plain," and (3) the error affected his substantial rights. See Umted States v

9 Apprendi v. United States, 530 U.S. 466 (2000).

22
Nordby, 225 F.3d 1053, 1059 (9th Cir. 2000). If these conditions are met, the Court

may exercise its discretion to review the error only if it "'seriously affect[s] the

fairness, integrity, or public reputation ofju&cial proceedings.'" Id. (c_tatlon omitted).

B. Apprendi does not apply to a sentence below the statutory maximum.

In Apprendt, the Supreme Court held that "[o]ther than the fact of a prior

conviction, any fact that increases the penalty for a crime beyond the prescribed

statutory maximum must be subrrutted to a jury, and proved beyond a reasonable

doubt." 120 S. Ct. at 2362-2363. Armstrong was sentenced to 108 months

incarceration. The prescribed statutory maximum sentence for v_olat_ons of § 2314

is ten years. Because Armstrong recewed less than the prescribed statutory maximum

sentence allowed under § 2314, there was no Apprendi error. See Garcia-Guizar, 234

F.3d at 488-489 (Apprendi en'or as harmless if defendant is sentenced to less than

statutory maximum); Umted States v. Egge, 223 F.3d 1128, 1132 n. 1 (9th Cir. 2000)

(Apprendi does not apply where maxlrnum sentence appellant could have received

was 20 years imprisonment and he was sentenced to only 41 months).

Armstrong, however, claims that "prescribed statutory maximum," is not the

term defined by the statute under which he was convxcted, but the term "defined by

the Sentencing Gmdelines" (AOB:16). He claims, therefore, that the "maximum

sentence" he may receive is the base offense level listed for the particular offense of

23
conviction, or, in this case, the "offense level set by section 2Fl.1, or Level Six"

(AOB:17). In other words, under Armstrong's interpretation of Apprendi, a base

offense level may not be enhanced unless the sentencing court rehes on facts found

by a jury to do so (AOB:16).

This argument is insupportable for _,o reasons. F_rst, courts overwhelming

have found that Apprendi does not apply to Sentencing Gmdeline enhancements that

result in a sentence below the maximum penalty prescribed by statute. See Egge, 223

F.3d at 1131; see also United States v. Caba, 241 F.3d 98, 101 (lst Cir. 2001);

United States v. Garcia, 240 F.3d 180, 182-184 (2d Car. 2001); United States v.

Williams, 235 F.3d 858,862 (3d Cir. 2000) ("Apprendi does not apply to the increase

in Williams' sentence under the Sentencing Guldehnes"); United States v. Kinter, 235

F.3d 192, 198-202 (4th Cir. 2000), cert. denied, 121 S. Ct. 1393 (2001 ); United States

v. Doggett, 230 F.3d 160, 166 (5th Car. 2000) CYo the extent that Doggett argues

Apprendi prohibits the trial court from determining the amount of drugs for relevant

conduct purposes under the Sentencing Guidelines, that argument is rejected."), cert.

denied, 121 S. Ct. 1152 (2001); United States v (Zafori) Munoz, 233 F.3d 410,413-

414 (6th Cir. 2000); Talbott v. Indtana, 226 F.3d 866, 869-870 (7th Cir. 2000) (even

post-Apprendi, "the judge alone determines drug types and quantities when imposing

sentences short of the statutory maximum"); United States v. Smith, 240 F.3d 732,

, 24
737 (8th Cir. 2001); United States v Hernandez-Guardado, 228 F.3d 1017, 1026-

1027 (9th Cir. 2000); United States v Jackson, 240 F.3d 1245, 1249 ( 10th Cir. 2001 );

United States v. Sanchez, 242 F.3d 1294, 1300 (11th Cir. 2001) ("the Sentencing

Guidelines are not subject to the Apprendt rule"); bz re Sealed Case, 246 F.3d 696,

699 (D.C. Cir. 2001 ) (appellant cannot win on his Apprendi claim because Apprendi

does not apply to Guidelines enhancement that results m sentence within statutory

range). In fact, the Apprendi Court itself specifically distinguished, and found

perrmssible, the practice of authorizing "judges to exercise discretion -- taking into

consideration various factors relating both to offense and offender - in imposing a

judgment within the range prescribed by statute." 120 S. Ct. at 2358 (citing Williams

v. New York, 337 U.S. 241,246 (1949)). _° In fact, a Guidelines determination can

never transgress that principle because the Gmdehnes sentence on a count may never

exceed the maximum sentence authorized by statute on that count. See Guidelines

§§ 5Gl.l(a), 5G1.2(b); Edwards v Umted States, 523 U.S. 511. 515 (1998)

("petitioners' statutory and constitutional claims would make a difference if it were

_0At least one court has expressly rejected a claim that Apprendi applies to
the amount of loss calculation. See United States v. Nachamie, 121 F. Supp. 2d
285, 291 (S.D.N.Y. 2000) (defendant's claim that Apprendi requires government
to prove facts supporting loss calculation beyond reasonable doubt because it had
slgmficant impact on sentence without merit because Apprendi dealt with
sentencing enhancement that increased potential sentence beyond the statutory
maximum and did not impact sentence that did not exceed statutory maximum).

25
possible to argue, say, that the sentences imposed exceeded the maximum that the

statutes permit" but "a maximum sentence set by statute trumps a higher sentence set

forth in the Guidelines").

Second, Armstrong's reliance on United States v R.L.C., 503 U.S. 291 (1992),

as support for the proposition that the maximum term of imprisonment is the term

authorized by the Guidelines is misplaced. In R.L.C., the Supreme Court interpreted

a specific provision of the Juvenile Dehnquency Act - 18 U.S.C. § 5037(c)(1)(B) -

the predecessor of which (z.e., § 5037(b)), provided that a juvenile could be sentenced

to "the maximum term which could have been imposed on an adult convicted of the

same offense." A plurality of the Court reasoned that the focus of § 5037(c)(1)(B)'s

new language was on the particular defendant, while the focus of its predecessor was

on the offense in general: "[T]he current language suggests a change in reference

from abstract consideration of the penalty permitted in punishment of the adult

offense, to a focused enquiry into the maximum that would be available in the

circumstances of the particular juvenile before the court." R.L.C., 503 U.S. at 299.

For that reason, the Court concluded that plain-meaning analysis does not compel

adoption of the construction that the word "authorized" refers to the maximum term

of imprisonment provided for by the statute defining the offense, but rather the §

5037(c)(1)(B) limitation refers to the maximum sentence that could be imposed if the

, 26
juvenile were being sentenced after apphcation of the Guidehnes. As a result of this

reasoning, supported by the rule of lenity, the Court interpreted the language of §

5037(c)(1)(B) as referring to the maximum sentence that could be maposed if the

juvenile was sentenced after apphcatlon of the Guldehnes. See id. at 306.

R.L.C. is plainly hmited to sentences imposed under the Juvenile Dehnquency

Act. Contrary to Armstrong's wew, therefore, there remains no doubt that the highest

possible sentence that can be imposed under the Guidelines is the statutory maximum,

seeMistretta v. United States, 488 U.S. 361,374-375 (1989), and that the "maximum

term authorized" refers to the maximum term authorized by statute. See United States

v. LaBonte, 520 U.S. 751,757 (1997) (Congress directed m 28 U.S.C. § 994(h) that

Sentencing Commission "assure" that for adult offenders who cormmt their third

felony drug offense or crime of violence, Guidelines prescribe sentence of

imprisonment "at or near the maximum term authorized": "phrase 'maxlmum term

authorized' should be construed as the maximum term authorized by statute"); see

also U.S.S.G. § 4B1.1.

In sum, there is simply no authority for the proposition that the sentencing

court is precluded from considering the government's evidence of Armstrong's

relevant conduct - i e., the loss to v_ctims other than those listed in the indictment-

in setting his Guidelines sentence, and nothing in Apprendi, or the cases interpreting

27
it, suggests otherwise.

CONCLUSION

The sentence of the dlsmct court should be affirmed.

DATED: May 29, 2001 Respectfully submitted,

ROBERT S. MUELLER, III

Umted States Attorney

J. DOUGLAS WILSON
Chief, Appellate Section
/
/ Jl

BARBARA J. VALLIERE
Assistant Umted States Attorney

STATEMENT OF RELATED CASES

The United States is not aware of any pending appeals related to this case.

28
 CERTIFICATE OF COMPLIANCE

Pursuant to Ninth Circuit Rule 32(e)(4), I cemfy that the appellant's brief is

X Propomonately spaced, has a typeface of 14 points or more and

contains 6,646 words, or is

__ Monospaced, has 10.5 or less characters per inch

and

Does not exceed 40 pages (opening and answering briefs) or 20

pages (reply briefs), or

Contains __ words

_-,) i /i

May 29, 2001 I. / _ v._ I -_E '_

BARBARA J. VALLIERE
Assistant United States Attorney

29
 CERTIFICATE OF SERVICE

The undersigned hereby cemfies that two copies of the foregoing BRIEF

OF APPELLEE and the accompanying EXCERPTS OF RECORD m the case of

UNITED STATES OF AMERICA v. CONNIE ARMSTRONG, JR., 00-10399 was

this date sent to:

David A. Nickerson, Esq.

454 Las Galhnas Avenue, Suite 183
San Rafael, CA 94903-3618

I certify under penalty of perJury that the foregoing is true and correct.

Executed on May 29, 2001 at San Francisco Cahfomia.

, . /7 .

KATHLEEN M. CANNULI
Legal Asslstant
U.S. Attorney's Office
San Francisco, Cahfornia

30