U.S. v. Aptt

• Citation: 354 F.3d 1269
• Decision Date: 21 January 2004
• Docket Number: No. 02-1555.,No. 03-1028.,02-1555.,03-1028.
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. John F. APTT and Douglas M. Murphy, Defendants-Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (10th Circuit)

354 F.3d 1269

UNITED STATES of America, Plaintiff-Appellee, v. John F. APTT and Douglas M. Murphy, Defendants-Appellants.

No. 02-1555.

No. 03-1028.

United States Court of Appeals, Tenth Circuit.

January 21, 2004.

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Brian K. Holland, Holland & Pagliuca, P.C., Denver, CO, for Defendant-Appellant John F. Aptt.

Sean Connelly, Hoffman Reilly Pozner & Williamson LLP, Denver, CO, for Defendant-Appellant Douglas M. Murphy.

James C. Murphy, Assistant United States Attorney (John W. Suthers, United States Attorney; John M. Haried and Valeria Spencer, Assistant United States Attorneys with him on the brief), Denver, CO, for Plaintiff-Appellee.

Before EBEL, ANDERSON, and McCONNELL, Circuit Judges.

McCONNELL, Circuit Judge.

This is the consolidated appeal of two criminal defendants, John Aptt and Douglas Murphy, who were convicted in 2001 on various counts of conspiracy, fraud, and money laundering. From March 1994 to May 1997, Mr. Aptt ran an investment business, Financial Instruments Corporation. Starting in the summer of 1995 and until the two had a falling-out in 1996, Mr. Murphy was his right-hand man. The company took in almost $14 million from investors by promising them exorbitant returns, including periodic "Double Your Money" offerings bearing a staggering 100% interest rate. They actually did pay the promised returns to earlier investors, thus instilling confidence in the company and spurring further investment. According to the company's business plan, the high returns were made possible because of Mr. Aptt's "exemplary" business judgment, and because Financial Instruments had the "mechanisms in place ... [to] keep [it] in touch with developments as they happen," thus making it possible to "seek investment opportunities and potential on a global scale." Trial Ex. 358, at 2, 4. Unfortunately for the later investors, though, the more immediate reason for Financial Instruments Group's prodigious "success" was that it paid former investors with later investors' money, in a classic Ponzi scheme.

Early in 1995, some of Mr. Aptt's promotional materials attracted the attention of Donald Deagle, an attorney in the Enforcement Division of the Securities and Exchange Commission. Mr. Deagle brought Mr. Aptt in for an informal discussion in which he told Mr. Aptt that Financial Instruments' activities constituted an offer to sell an unregistered security, and that Mr. Appt would need to work with a securities lawyer if he wanted to make a legal offering. Mr. Deagle also intimated that given the high yields Mr. Aptt was promising, and given the small amount of seed money ("about $4,000") with which he was starting, Mr. Aptt must be contemplating a Ponzi scheme. Mr. Deagle explained to Mr. Aptt what a Ponzi scheme was, and warned him that such a scheme would be illegal. Though he had in fact already raised more than $180,000 from investors, Mr. Aptt assured Mr. Deagle that he was not operating a Ponzi scheme, that he had not yet made any sales, and that the process was so complicated that he intended to give up the whole idea of offering an investment. Based on those misrepresentations, the SEC dropped its investigation.

But Mr. Aptt did not do as he had promised. Instead, he continued to solicit investments in Financial Instruments at an ever-increasing pace, still with no real business activity to generate the profits needed to repay investors. He knew that he had to find a source of profits quickly, and brought on Mr. Murphy in the summer of 1995 to help him do so.

In October of 1995, Mr. Aptt's continued solicitations came to the attention of Mr. Deagle, and he again met with Mr. Aptt. This time Mr. Aptt was represented by counsel, Bob Lees, who assured Mr. Deagle that Mr. Aptt's violations to that point had been a result of a misunderstanding. The SEC again agreed not to pursue an enforcement action, but only because Mr. Aptt and his attorney assured Mr. Deagle that all sales activity would stop until Mr. Lees had been able to perform the due diligence necessary for a legal offering. Mr. Lees also promised that, if there were any further compliance problems, he would withdraw as Mr. Aptt's attorney and notify Mr. Deagle of his withdrawal. Mr. Lees testified at trial that both before and after the October meeting with the SEC, he discussed with Mr. Murphy (his initial contact at Financial Instruments) the need for all investor activity to cease pending such an investigation, with no objection from Mr. Murphy. As a result of his due diligence investigation, Mr. Lees concluded in early 1996 that because neither the company nor Mr. Aptt could pass due diligence, the freeze on soliciting new investment would have to remain in place until Mr. Aptt could find a legitimate joint venturer who could qualify to make the offering.

But Mr. Aptt and Mr. Murphy could not afford to stop solicitations. With debts to investors constantly coming due and no legitimate source of profits, to do so would be to default on, and potentially to be liable for, hundreds of thousands of dollars in debt. To avert this crisis, Financial Instruments made another "Double Your Money" offering in December of 1995, in flagrant violation of the instructions of both the SEC and Mr. Lees.

But that was merely a stopgap measure, not a permanent solution to the company's problems. In a memo apparently written to Mr. Aptt in early 1996, Mr. Murphy and his recently-hired brother Bruce, a disbarred attorney, proposed the following solution: They would migrate the business to a new corporate shell untainted by the SEC investigation, and then go back into the capital markets "with enough disclosure to keep regulators at bay" for long-term, lower-interest debt. Trial Ex. 352 at 2. The funds thus acquired would be used to retire the most onerous of the company's existing debts and acquire some profitable assets. According to their estimates, if the company could solicit $2.4 million in new investments at an 18% interest rate, it could pay off $1 million in existing debt and still repay new investors so long as it was able to get a return of around 30% on the remaining $1.4 million.

In early 1996, the three began to execute the memo's proposed plan. Behind the back of Mr. Lees, they formed several new corporate entities to be vehicles for further offerings. While they kept working with Mr. Lees on the possibility of a joint venture, Mr. Murphy contacted another securities lawyer named Peter Adolph, without mentioning the company's troubles with the SEC, about the possibility of making an unregistered offering under an exemption for commercial paper. Throughout 1996 and until the company finally closed in the spring of 1997, Financial Instruments made various debt and equity investment offerings through the new entities.

In a vain attempt to generate the income to cover its spiraling debt, Financial Instruments sank roughly $5 million of the raised funds into Costa Rican investments that Mr. Murphy had identified as promising, and Mr. Murphy continued to research other projects elsewhere in Central and South America. To run the Costa Rican operation, Mr. Aptt turned to a carpenter and friend by the name of David Gallegos, with whom he had worked on several construction projects in Colorado. The operation attempted to make the astronomical profits that were needed through two principal activities: First, it attempted to capitalize on a housing shortage in Costa Rica by building middle-income and luxury housing units and providing high-interest financing for the buyers. Second, it purchased a small company named Prestel that allowed consumers to purchase telephone service on credit, paying in installments. Both projects were abysmal failures. While the company built a total of about 200 housing units, none were sold prior to its liquidation, and indeed the company lacked clear title to many of the properties. Prestel also failed to generate significant income because many of its customers simply stopped making their payments.

Thanks to an anonymous tip that the company was running a massive Ponzi scheme, the SEC finally brought a civil enforcement action against Financial Instruments in early 1997. As a result, the federal court for the District of Colorado entered an injunction against the company's continued operation, and transferred control to a court-appointed lawyer for liquidation. That liquidation recovered only about $1.8 million of the $13.5 million in outstanding debt to investors.

The SEC subsequently referred the matter to the U.S. Attorney's office for criminal prosecution. John Aptt and Bruce Murphy pleaded guilty to counts of mail fraud and money laundering in violation of 18 U.S.C. §§ 1341 and 1956; Doug Murphy went to trial. He had been somewhat less directly involved with the sale of securities than the other two, dealing with investors only when others were out of the office, and his day-to-day involvement in the scheme ceased when he was fired in the summer of 1996 after a heated exchange with Mr. Aptt. Nevertheless, a jury convicted him of conspiracy under 18 U.S.C. § 2, five counts of mail fraud under 18 U.S.C. § 1341, two counts of securities fraud under 15 U.S.C. § 77q(a), and one count of money laundering under 18 U.S.C. § 1957. The district court sentenced John Aptt to nine years in prison, and Douglas Murphy to just over eight years.

DISCUSSION

On appeal, Mr. Aptt and Mr. Murphy raise two common challenges to the district court's sentence. First, they argue that their fraud and money laundering counts should have been grouped together under U.S.S.G. § 3D1.2. Second, they claim that the district court wrongly included interest due to investors in the amount of loss caused by the fraud.

In addition to these common challenges, each defendant raises individual grounds for appeal. Mr. Aptt argues that the criminal activity in this case was not extensive enough to qualify...