221 F.3d 502 (3rd Cir. 2000), 99-3455, United States v Cefaratti

Docket Nº:99-3455
Citation:221 F.3d 502
Case Date:August 14, 2000
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit

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221 F.3d 502 (3rd Cir. 2000)




No. 99-3455

United States Court of Appeals, Third Circuit

August 14, 2000

Argued February 9, 2000

On Appeal from the United States District Court for the Middle District of Pennsylvania (D.C. No. 98-cr-00212), District Judge: Honorable Sylvia H. Rambo

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Attorneys for Appellant: Joshua D. Lock Goldberg, Katzman & Shipman Harrisburg, PA 17108, Peter Goldberger (Argued) James H. Feldman, Jr. Pamela A. Wilk Law Office of Peter Goldberger Ardmore, PA 19003-2276

Attorneys for Appellee: David M. Barasch United States Attorney Sally A. Lied Theodore B. Smith, III (Argued) Assistant United States Attorney Office of United States Attorney Harrisburg, PA 17108


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SLOVITER, Circuit Judge.

Frank Cefaratti, who pleaded guilty to four counts arising from his execution of a scheme to defraud the United States Department of Education (DOE) out of student financial assistance funds, now appeals, arguing that the District Court erred in accepting his plea to the count charging him with engaging in monetary transactions in the proceeds of specified unlawful activity in violation of 18 U.S.C. S 1957. He also challenges his sentence of 51 months imprisonment.




Procedural History

On September 8, 1998, a grand jury returned a 27-count indictment against Cefaratti charging him as follows: Counts I through XX with mail fraud in violation of 18 U.S.C. S 1341, Counts XXI and XXII with wire fraud in violation of 18 U.S.C. S 1343, Count XXIII with fraudulently obtaining student financial aid funds in violation of 20 U.S.C. S 1097(a), Count XXIV with conducting a series of financial transactions in violation of 18 U.S.C. S 1956(a)(1)(A)(i) and S 1956(a)(1)(B)(i), and Counts XXV through XXVII with offenses relating to obstruction of justice in violation of 18 U.S.C. S 1512(b)(1), 18 U.S.C. S 1503, and 18 U.S.C. S 2232(a), respectively.

At his arraignment on September 25, 1998, Cefaratti pleaded not guilty and was released after executing an unsecured bond. Thereafter, he entered into a plea agreement with the government, filed on October 28, 1998, to plead guilty to Count IV, one of the mail fraud counts, to Count XXIII, the student loan fraud count, and to Count XXVII, charging destruction of property to prevent seizure.1 Cefaratti also agreed to waive indictment and plead guilty to a superseding information charging him with engaging in monetary transactions in property derived from specified unlawful activity in violation of 18 U.S.C. S 1957(a). The S 1957 charge is of a lesser offense than the S 1956 charge in the original indictment, as conviction of S 1957 carries a maximum sentence of ten years imprisonment instead of the twenty years maximum for S 1956. In return the government agreed, inter alia, to move for dismissal of the remaining counts, bring no further charges (other than criminal tax charges) related to Cefaratti's offense conduct, recommend a sentence within the applicable guideline range, and, if Cefaratti adequately demonstrated his acceptance of responsibility, recommend a three-point reduction on that basis.

Cefaratti entered his guilty plea at a hearing on October 30, 1998. The presentence report (PSR) calculated a total offense level of 24 and, based on Cefaratti's criminal history category of I, set the applicable guideline range of 51 to 63 months. Cefaratti objected to the PSR on two grounds: that the report erroneously applied a two-level leadership adjustment under U.S.S.G. S 3B1.1(c) and that the sentencing range of 51 to 63 months was unconstitutionally disproportionate to the sentences imposed on other participants in his offenses. At sentencing the District Court overruled Cefaratti's objections to the PSR as well as his requests for downward departure, referring to the matter before it as "typical . .. . [of a] fraud offense . . . ." JA at 145. The court found that the two-level adjustment for playing a leadership role was warranted and imposed a sentence of 51 months, the low end of the guideline range, to be followed by a two year period of supervised release. The court also imposed $350 in special assessments and restitution of $846,000 to the DOE.

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Cefaratti appealed. We have jurisdiction pursuant to 28 U.S.C. S 1291 and 18 U.S.C. S 3742(a).


The Offense Conduct

According to the indictment and the PSR, Cefaratti was an owner and also the president of the Franklin School of Cosmetology and Hair Design in Elizabeth, New Jersey ("the Franklin School" or "Franklin"), one of two vocational schools for aspiring beauticians formerly owned by Cefaratti's mother. The Franklin School participated in federal student financial assistance programs, which authorized it to act as a disbursing agent for federally funded Pell Grants and to receive Stafford loan checks. The Pell Grant program provides needy students with educational grant funds without need for repayment, and the Stafford Loan program provides for federal reimbursement of defaulted student loans, thereby enabling students to obtain low-interest loans from private lenders.

Cefaratti, on behalf of the Franklin School, entered into program participation agreements with the DOE agreeing to comply with all program statutes and regulations, to use the funds solely for specified educational purposes, and to properly account for the funds the school received. Under DOE regulations, students were eligible for federal financial assistance only if they had a high school diploma, a general education development certificate (GED), or passed a test demonstrating their ability to benefit from the training offered by the school (ATB test). The DOE could terminate a school's participation in federal student assistance programs if the school's students defaulted at excessive rates. A student was considered to be in default after a 180 day grace period if the student failed to make payments unless the student was granted a deferment or forbearance for his or her repayment obligations. Default rates in excess of 25 percent for three consecutive years could result in a school's termination from the Stafford Loan program, and a default rate in excess of 40 percent in a single year could result in termination from the Pell Grant program.

In 1993, the DOE determined that Franklin's default rates for 1991 and 1992 had exceeded 50 percent. Sometime prior to 1994 and continuing to about July 7, 1997, Cefaratti implemented a scheme to manipulate Franklin's default rate by submitting false deferment and forbearance forms to student loan lenders and by making payments on behalf of student borrowers who were on the verge of defaulting. To accomplish this, Cefaratti directed Gloria Malavet, Franklin's Director of Admissions, and Modesta Perez, its Director of Financial Aid, to monitor the loan repayment status of former students and to prepare falsified, forged forbearance or deferment forms when a student was near defaulting. These forms were then mailed to lenders, including the Pennsylvania Higher Education Assistance Agency (PHEAA) and the Student Loan Marketing Association (SALLIE MAE). For example, Count IV of the indictment, the mail fraud count to which Cefaratti pleaded guilty, charged that between November 4, 1994 and November 7, 1994, Cefaratti caused the mailing of a falsified, forged Unemployment Deferment Request Form to SALLIE MAE on behalf of a former Franklin student.

Cefaratti also directed Malavet and Perez to make payments on behalf of student borrowers who were near default (without the student borrowers' knowledge) and had Jackie Lopez, Franklin's Secretary, open a post office box in her name to which lenders could send mail addressed to students for whom false forbearance and deferment forms had been submitted. In addition, Cefaratti had Franklin employees "clean and organize" the school's files so that a DOE audit would not discover that many of Franklin's students had excessive absences or that Franklin had submitted loan applications from students

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who did not have a high school diploma, a GED, or a passing ATB test score.

These activities kept the Franklin School's default rate artificially low, ensuring the school's continuing eligibility to receive federal funding and permitting Franklin to retain funds it would otherwise have had to return. From July 1994 to July 1997, over 90 percent of Franklin's revenues came from these federal assistance programs. Had Cefaratti not manipulated Franklin's default rate in this manner, the DOE would have terminated the school's participation in federal student assistance programs no later than February of 1996 rather than, as eventually happened, in July 1997. Between February 1996 and July 1997, Franklin received over $840,000 in federal funds to which it was not entitled.



Cefaratti states three issues on appeal. First, he contends, admittedly for the first time, that the superseding information charging that he engaged in monetary transactions in property derived from specified unlawful activity failed to charge, and the record did not establish a factual basis to show, that the funds involved in the transactions constituted "proceeds" of mail or wire fraud. Second, he contends that his sentence for engaging in such monetary transactions should have been calculated using the fraud guidelines rather than the money laundering guidelines. Finally, he contends that his guideline range was improperly adjusted upwards two levels under U.S.S.G. S 3B1.1(c) for a leadership role in the offenses. Our standard of review for each claim varies and...

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