Total Value of Loss Calculation in Federal Sentencing

The federal sentencing guidelines are a complex set of congressional mandates and instructions identifying for federal judges all factors to be considered when sentencing a federally convicted felon to prison. The federal government is one of the largest contractors and employers in the country, engaging in a substantial amount of business that affects all aspects of the economy. Section 2B1.1, note 3(F)(ii) addresses sentencing guideline calculations associated with fraudulent receipt of government benefits; allegations of fraud and conspiracy related to receipt of any government contract or benefit from those contracts or programs.

The recent case of U.S. v Nagel, 212014 U.S. District Lexis 63033 (M.d.Pa. May 2014), addresses Section 2B1.1, note 3(F)(ii), which resulted in a 24 level increase to the base sentencing guideline calculation for Mr. Nagle. The court applied this note in sentencing Nagle after he was convicted of participating in a fraud scheme to secure federal transportation contracts.

Defendant Nagle was the president of the corporation that masked itself as a disadvantaged business enterprise (“DBE”). Nagle assisted in submitting bids for numerous highway construction projects sponsored by PennDOT and SEPTA but funded by the federal government. With Nagle’s assistance, his company received 336 general and/or subcontracts valued in excess of $119 million. Nagle was accused and eventually found guilty of conspiring to engage in a mail fraud scheme to misrepresent his entity’s disadvantaged business qualifications in order to receive federal highway construction contracts that his company was “otherwise ineligible” to receive.

The presentence investigation report (the “PRS”) valued the entire fraud scheme in excess of $135.8 million. Because Nagle join the conspiracy after its initiation, the loss value attributed to him was $53.9 million. Sentencing guidelines provision 2B1.1(b) increased Nagle’s offense level calculation 24 levels.

Nagle objected to the PSR’s value of loss calculation being determined by the gross value of the contracts awarded and not deducting for the actual value of goods and services provided. This argument was based upon U.S. v White, 2012 WL 4513489 (SDNY Oct 2, 2012), and its interpretation of U.S.S.G. §2B1.1(1)(h). There the court allowed for such a deduction, which resulted in a 14 level, not 24, increase in sentencing exposure.

The Nagle Court reviewed both sentencing provisions and rejected White. The court held that the government bears the burden of proving the loss with specific and reliable evidence. The Sentencing Guideline note at issue defines actual loss as the reasonably foreseeable pecuniary harm that resulted from the offense. The United States Sentencing Commission drafted comment note 3(A)(iii) to U.S.S.G. §2B1.1 , allowing courts to use “gain resulted from the offense” as an alternate measure of loss.

The Nagle court held that the government loss attributed to Nagle’s fraud shall equal the total dollar amount of money the otherwise ineligible defendant receives regardless of benefit or goods provided. The note reads “in a case involving government benefits (grants, loans, entitlement program payments), the loss shall be considered to be not less than the value of the benefits obtained by the unintended recipient. U.S.S.G. § section 2B 1.1 cmt.n.3(F)(ii).

Courts have defined unintended recipient someone who is not socially or economically disadvantaged (otherwise eligible) for whom the set-aside government program is designed to benefit. In White, the defendant certified that he was a service-disabled veteran when he was not. In Nagle, he certified that his company was a disadvantaged business enterprise when it was not.

This case makes clear that Congress, the U.S.S.G., and the courts take a dim view of defendants that “fraudulently certify they are a disadvantage business enterprise” when they are not.   Proper and appropriate construction work (both the services and material provided) become irrelevant in the sentencing scheme. The U.S.S.G. comments and notes address this specific type of fraud scheme in the context of the standard “calculation of loss” issue.

These cases are brought against these defendants (corporate officers and companies) who divert federal funds from their intended use — to help disadvantaged business enterprises secure their congressional mandated percentage of federal contract dollars. To discourage such fraud, the courts are instructed to value of the total loss equal to the face value of the contract fraudulently obtained. This practice lets these corporate entities know that no matter what, their will be no profit available for stealing this contract money from otherwise eligible competitors. Your corporation will lose all of the expenses it incurred in building the road because it will have to disgorge the entire contract value.

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