U.S. v. Baretz

• Decision Date: 21 June 2005
• Docket Number: No. 03-3332.,03-3332.
• Citation: 411 F.3d 867
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Lloyd J. BARETZ, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

411 F.3d 867

UNITED STATES of America, Plaintiff-Appellee, v. Lloyd J. BARETZ, Defendant-Appellant.

No. 03-3332.

United States Court of Appeals, Seventh Circuit.

Argued June 7, 2004.

Decided June 21, 2005.

COPYRIGHT MATERIAL OMITTED

Rick D. Young (argued), Office of the United States Attorney, Chicago, IL, for Plaintiff-Appellee.

Marc W. Martin (argued), Chicago, IL, for Defendant-Appellant.

Before POSNER, RIPPLE and ROVNER, Circuit Judges.

RIPPLE, Circuit Judge.

Lloyd J. Baretz was charged in a twenty-two-count indictment and pleaded guilty, in accordance with a plea agreement, to three counts of wire fraud, in violation of 18 U.S.C. § 1343, and to one count of conspiracy to commit money laundering, in violation of 18 U.S.C. § 1956(h). The district court, applying the 1997 version of the United States Sentencing Guidelines ("1997 Guidelines"), sentenced him to 151 months in prison on the conspiracy count and to 60 months in prison on each count of wire fraud; these sentences were to run concurrently. Mr. Baretz appeals his sentence. We held this case in abeyance pending the decision of the Supreme Court of the United States in United States v. Booker, ___ U.S. ___, 125 S.Ct. 738, 160 L.Ed.2d 621 (2005), and we then invited the parties to file supplemental memoranda presenting their views on the application of Booker to this case. For the reasons set forth in the following opinion, we now vacate the sentence and remand for further proceedings consistent with this opinion.

I BACKGROUND

A. Facts

The wire fraud scheme to which Mr. Baretz pleaded guilty involved the sale of telephone-call accounts receivable to the Royal Bank Export and Finance Corporation ("REFCO"). Mr. Baretz was the president and principal shareholder of Oxford Capital Corporation ("Oxford") and the president of Plymouth Capital Corporation ("Plymouth"). Both of these corporations were engaged in the business of factoring accounts receivable. Factoring is the purchase of a company's invoices at a discount.

The scheme at issue here involved the factoring of telephone-call receivables. A telephone-call receivable is the debt created when an individual places a telephone call to receive certain information at a price (such as a call to a 1-900 number) and agrees to pay for the receipt of that information at a later date. The debt created by this transaction is an account receivable to the Information Provider ("IP"), the company that provided the information in the call.

Integretel Inc. ("Integretel") was a corporation engaged in the business of servicing and purchasing telephone-call receivables. Integretel serviced IPs by sorting their records and collecting the receivables from each caller's telephone company. Integretel then would remit the collected revenue, minus a service fee, to the IP. Integretel also offered its customers an "early pay" program. Under this program, Integretel would purchase, at a discount, the telephone-call receivables from the IP. This arrangement allowed the IP to receive revenue immediately rather than wait for the debt to be collected.

Integretel had a contract with Plymouth, one of Mr. Baretz' companies. This arrangement was called a master factoring agreement. Under this agreement, Plymouth would purchase, at a discount, specific telephone-call receivables from Integretel Plymouth thus assumed actual ownership of those receivables. In order to finance its purchase of receivables from Integretel, Plymouth had a further agreement with REFCO, under which REFCO would purchase, at a discount, from Plymouth the receivables that Plymouth had purchased earlier from Integretel.

Under this agreement, there were limitations with respect to the receivables purchased by REFCO. REFCO would purchase only certain identified receivables from Plymouth. The agreement also limited, by dollar amount, the receivables that REFCO would purchase from any one telephone company. The contract also capped REFCO's outstanding balance to Plymouth at any one time at $75 million. Plymouth warranted to REFCO that it had good title, free of encumbrances, to all of the receivables that it sold to REFCO. REFCO had the right to compel Plymouth to repurchase any telephone-call receivable that remained unpaid after 90, and later, 120 days.

Oxford, Mr. Baretz' other company, acted as Plymouth's agent in purchasing telephone-call receivables from Integretel, assigning them to telephone companies for collection and selling them to REFCO. Periodically, Oxford would fax to REFCO an "advance request," which listed the receivables to be purchased by REFCO, the outstanding balance on receivables already sold to REFCO, and the number of months those receivables had been outstanding. Based on the advance request, REFCO would wire payment to Oxford's bank account for the purchase of the agreed upon receivables. Oxford then would deduct its fee and wire the balance to Integretel's bank account.

In December 1995, Mr. Baretz caused Plymouth/Oxford to begin submitting to REFCO fraudulent or wholly fictitious advance requests. In some cases, if Plymouth had purchased receivables from Integretel that exceeded REFCO's agreed limits from a specific telephone company, Plymouth would substitute a false receivable for another telephone company. In other cases, Plymouth simply submitted fictitious receivables. Generally, Mr. Baretz misappropriated the excess funds paid by REFCO but not used to offset Plymouth's payments to Integretel for personal and other business uses. From August 1997 until April 1998, when the fraud scheme was discovered, Plymouth/Oxford stopped purchasing accounts receivable from Integretel and sold only fictitious receivables to REFCO.

In order to fund and conceal his fraud, Mr. Baretz engaged in "weekend sweeps." To run these sweeps, at the end of each week Oxford would borrow money from Integretel (which, unknown to REFCO, Mr. Baretz owned as of January 1996) and forward that money to REFCO. The funds thus remitted to REFCO were represented to be payments on genuine receivables. This misrepresentation concealed that REFCO previously had been sold fictitious receivables that could not generate receipts. In addition, the weekend sweeps funds were identified to REFCO as payments on older receivables that Mr. Baretz wanted to retire. This scheme avoided REFCO's right to compel Plymouth to repurchase receivables that remained unpaid for more than 120 days.

At the same time, in order to keep REFCO's investment at approximately $75 million, Plymouth/Oxford would send an advance request to REFCO for further purchases. This resulting cash infusion allowed Plymouth/Oxford to repay, early the following week, the loan received from Integretel and gave Mr. Baretz funds with which to make personal expenditures and to pay other outstanding debts.

The extent of this deception was grand: Plymouth/Oxford never owned more than $25 million in early-pay receivables from Integretel; yet, Plymouth/Oxford had a receivables balance with REFCO of $75 million. The Government submits, and Mr. Baretz has not disputed, that, over the course of this scheme, he and his co-defendants submitted to REFCO more than $400 million in fictitious receivables for purchase. The sweep transactions from Integretel to Plymouth/Oxford involved more than $290 million.

B. District Court Proceedings

Because it is central to the contentions of the parties on appeal, we shall set forth in some detail the methodology employed by the district court in sentencing Mr. Baretz.

1.

The presentence investigation report ("PSR") calculated Mr. Baretz' recommended sentence for the wire fraud counts as follows. The probation officer applied the 1997 Guidelines, the version of the guidelines in effect at the time of the offense. The probation officer used this version rather than the version in effect at the time of sentencing to avoid what she perceived to be a violation of the Ex Post Facto Clause. See U.S.S.G. § 1B1.11(b). In her view, the 1997 version of the guidelines was more beneficial to Mr. Baretz. In applying the guidelines, the officer grouped Counts One, Four and Seven because the offense level for each largely was determined by the total amount of loss. The base offense level was 6 under § 2F1.1.

Section 2F1.1(b) directed that, if the fraud loss amount exceeded $2,000, the offense level should be increased according to the loss table in that section. Turning to the loss table, the probation officer first determined that REFCO had forwarded $75 million to Plymouth/Oxford for the purchase of telephone-call receivables. The officer then subtracted from this figure $21 million that REFCO had recovered from the sale of collateral pledged by Mr. Baretz.

Mr. Baretz disputed this calculation; he submitted that REFCO's loss was collateralized in full; therefore the fraud loss amount was $0. Specifically, he urged that, at the time the fraud was discovered, REFCO had a perfected security interest in the billed and unbilled accounts receivables to be paid by the telephone companies and that this collateral adequately covered all of REFCO's financial exposure. See U.S.S.G. § 2F1.1, application note 7(b) (instructing that, if the defendant fraudulently obtained a loan by misrepresenting the value of his assets, the loss equals the amount of the loan not repaid at the time the offense is discovered, reduced by the amount the lending institution has recovered, or can expect to recover, from any asset pledged to secure the loan). The probation officer, however, recommended that none of this collateral reduce the loss amount, because REFCO had not been able to liquidate these receivables and had not received any of the purported assets to reduce the amount owed.

The probation officer also identified another factor relevant to sentencing — relevant conduct. Based on information submitted by the Government, the probation officer noted that Mr. Baretz had committed fraud against other banks....