U.S. v. Bakhit, SA CR 00-138 DOC.

• Decision Date: 28 August 2002
• Docket Number: No. SA CR 00-138 DOC.,SA CR 00-138 DOC.
• Citation: 218 F.Supp.2d 1232
• Court: U.S. District Court — Central District of California
• Parties: UNITED STATES of America, Plaintiff, v. Osamah S. BAKHIT, Defendant.

218 F.Supp.2d 1232

UNITED STATES of America, Plaintiff, v. Osamah S. BAKHIT, Defendant.

No. SA CR 00-138 DOC.

United States District Court, C.D. California.

August 28, 2002.

COPYRIGHT MATERIAL OMITTED

Peter J. Shakow, O'Melveny & Myers, Los Angeles, CA, for defendant.

Randall R. Lee, AUSA-Office of U.S. Attorney, Los Angeles, CA, for U.S.

LOSS CALCULATION IN RE SENTENCING

CARTER, District Judge.

Before the Court is an issue raised during the sentencing of Defendant Osamah S. Bakhit on eighteen counts of securities fraud, bank fraud and related violations in connection with the accounting practices of his company, Aviation Distributers, Inc. (ADI). The Government and the United States Probation Officer have put forth two separate theories for calculating the loss attributable to Defendant's fraudulent activity and Defendant counters with his own theory and expert testimony.

The base offense level for fraud is fixed at 6, but can increase by as much as three times, to 24, when loss is taken into account. See generally U.S.S.G. § 2F1.1 (Nov.1997). Under this offense level range, Defendant's sentence could vary by as much as five years. Yet, the basis for this vast disparity in sentence is governed only by the United States Sentencing Commission Guideline's (Guidelines) vague standards of loss. This Court's order illustrates the myriad approaches to, and the numerous obstacles that come with, finding the loss attributable to harm at the sentencing stage.

After reviewing the papers submitted in this matter, and for the reasons set forth below, the Court finds the loss to be $2,884,200, resulting in a 13 level upward adjustment.

I. BACKGROUND

Defendant is the founder and former CEO, President, and Chairman of the Board of Directors of ADI, headquartered in Orange County, California. ADI is a supplier, distributor and broker of used and new commercial aircraft parts and supplies and its customers include commercial airlines around the world.

Beginning in 1994, and continuing into 1997, Defendant was involved in fraudulent billing practices at ADI. The fraudulent billing included bogus invoices, rebilling, and fraudulent inventory exchanges which resulted in falsely inflated revenue. In order to finance its operations, ADI maintained a borrowing relationship with Far East National Bank (FENB) and the fraudulent billing allowed ADI to obtain cash from FENB on its line of credit earlier than it would otherwise have been available. Additionally, the fraudulent statements were included in ADI's 1994, 1995 and 1996 financial statements. As a result of these practices, ADI appeared to have attained and maintained a healthier financial condition than in actuality.

In 1996, Defendant and ADI began planning to take the company public. ADI retained Cruttendon-Roth (CR) to underwrite the initial public offering (IPO) and in February 1997, ADI filed a registration statement with the Securities Exchange Commission (SEC). The registration statement sought approval for the sale of 1,380,000 shares of common stock to the public and it included the financial statements for 1994, 1995, and 1996 that reflected Defendant's fraudulent billing practices. Relying upon these statements, the SEC authorized the IPO.

On March 3, 1997, ADI conducted its IPO, selling 1,380,000 shares of common stock to the public at a price of $5.00 per share. The total proceeds of the IPO were approximately $6,900,000 and ADI used a substantial portion of the money to repay amounts outstanding with FENB. As a result of the IPO, ADI's common stock began public trading on the National Association of Securities Dealers Automated Quotation (NASDAQ). Over the next several months, the price of ADI's shares increased steadily, reaching a high of approximately $12.00 per share in August 1997. During this time period, Defendant did not sell a single share of ADI stock.

In early August 1997, ADI's auditor, Arthur Andersen, discovered a falsified invoice in ADI's books and records. On August 29, 1997, Arthur Andersen resigned as ADI's independent auditors and withdrew its audit reports for ADI's 1994, 1995 and 1996 financial statements. In its resignation letter, Arthur Andersen stated that it believed that ADI had prepared false sales invoices and documents, providing them to FENB for financing as well as to Arthur Andersen. Arthur Andersen further noted that "we believe that the foregoing matters have occurred with the knowledge and involvement of the highest levels of management in the company." On August 30, 1997, trading in the company's stock was halted and, in October 1997, NASDAQ delisted ADI. In November 1997, ADI retained Gram Grant Thornton LLP as its new auditor and Grant Thornton LLP required Defendant to resign as Chairman, CEO and President. Despite the resignation, Defendant continued, and continues to date, to work for ADI as a consultant, salesman, and rainmaker.

Trading resumed in January 1998, with ADI's stock selling at approximately $6.00 per share after a single, initial drop to $3.00 per share. On April 20, 1998, ADI restated its 1996 financial statements. ADI's 1996 net income was reduced from a profit of $315,000 (net profit of $0.18 per share) to a loss of $1,566,000 (net loss of $0.88 per share). Also in April, ADI announced its settlement of a securities fraud class action lawsuit. The settlement consisted of $740,000 in cash and 210,000 shares of stock. Defendant's contributed stock to the settlement fund and this contribution was his first disbursement of any of his ADI holdings. Trading remained steady at approximately $5.00-6.00 per share through the earnings restatement and through ADI's announced settlement with class members, until mid-May 1998. The next marked drop in stock price occurred about May 17, 1998, when ADI announced its first quarter 1998 earning results.

On February 11, 2002, Defendant pleaded guilty to Counts 1 through 13, 16, and 18 through 21 of the Indictment, including multiple counts of fraud and false statements in relation to securities and accounting practices. On July 15, 2002, the United States Probation Officer disclosed the Presentence Report (PSR), recommending a fourteen level enhancement pursuant to Section 2F1.1(b)(1)(O) based upon a loss of $6,900,000.¹ The Government concurs but Defendant objects, claiming that the PSR's calculation of loss overstates the actual loss attributable to the fraud. Defendant argues that there is actually no loss and that there should be no enhancement. A fourteen level enhancement could add as much as three years to Defendant's sentence.

II. DISCUSSION

A. Section 2F1.1(b)(1)

Pursuant to Section 2F1.1(b)(1) of the Guidelines, the base offense level for fraud is increased according to the amount of loss attributable to the fraud. As a potentially disproportionate enhancement is involved, the burden is on the government to prove by clear and convincing evidence the amount of "harm that resulted from the acts or omissions" of the defendants. See United States v. Munoz, 233 F.3d 1117 (9th Cir.2000); see also United States v. Hicks, 217 F.3d 1038, 1049 (9th Cir.2000); U.S.S.G. § 2B1.1. The Guideline's comments emphasize that the court need not determine the loss with precision. Instead, "the court need only make a reasonable estimate of the loss, given the available information." U.S.S.G. § 2F1.1 cmt. 8. In addition, the court may take either the intended loss or the actual loss, whichever is greater. See U.S.S.G. § 2F1.1 cmt. 7 ("[I]f an intended loss that the defendant was attempting to inflict can be determined, this figure will be used if it is greater than the actual loss."); see also United States v. Joetzki, 952 F.2d 1090, 1096 (9th Cir.1991). The Ninth Circuit, specifically, instructs district courts "to take a realistic, economic approach to determine what losses the defendant truly caused or intended to cause." E.g., United States v. W. Coast Aluminum Heat Treating Co., 265 F.3d 986, 991 (9th Cir.2001). Simply put, the district court is not obligated to find "the perfect theoretical or statistical fit." Id. The Guidelines do, however, contemplate a causation requirement and the government must therefore prove that the defendant's conduct was the proximate cause of the loss. Hicks, 217 F.3d at 1048-49.

B. IPO Theory

The PSR assumes, and the Government contends, that the total proceeds from ADI's IPO are an accurate representation of the amount of loss attributable to Defendant's fraud. The Government argues that if the fraud had been disclosed prior to the IPO, the IPO would not have occurred and, thus, the full proceeds are the investors' "loss." The PSR more fully explains that if the SEC had known the statements were fraudulent, it would have invalidated the IPO and, therefore, the amount of loss is $6,900,000, the total proceeds of the IPO.

The Court finds several problems with this theory. Most importantly, the objective evidence of ADI's stock price indicates that the initial shareholders' investment was not completely worthless. To attribute the total proceeds of the IPO to Defendant's conduct, would require that the Court assume that this is the case. Yet, after the fraud was fully disclosed and absorbed by the market, ADI stock continued to trade at around $5.00 per share. This is not a situation where the shareholders received worthless stock, but rather received stock worth less than they anticipated. In fact, Section 2F1.1 explicitly contemplates its application to an offense involving securities fraud and among the factors offered for consideration, is whether the fraud merely misrepresents the value of an item that does have some value. See generally U.S.S.G. § 2F1.1 cmt. 7, 7(a). "Where, for example, a defendant fraudulently represents that stock is worth $40,000 and the stock is worth only $10,000, the loss is the amount by which the stock was overvalued (i.e. $30,000)." U.S.S.G. § 2F1.1 cmt. 7(a). In accordance with the...