U.S. v. Frith

• Decision Date: 29 August 2006
• Docket Number: No. 04-2364.,04-2364.
• Citation: 461 F.3d 914
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. James FRITH, Jr., Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 914

461 F.3d 914

UNITED STATES of America, Plaintiff-Appellee, v. James FRITH, Jr., Defendant-Appellant.

No. 04-2364.

United States Court of Appeals, Seventh Circuit.

Argued December 5, 2005.

Decided August 29, 2006.

Joel R. Levin (argued), Office of the United States Attorney, Chicago, IL, for Plaintiff-Appellee.

Robert A. Handelsman (argued), Chicago, IL, for Defendant-Appellant.

Before POSNER, KANNE, and SYKES, Circuit Judges.

SYKES, Circuit Judge.

A jury convicted James Frith, Jr. of two securities law violations (out of twentythree charges) for operating his registered broker-dealership without enough money in its reserve accounts. His convictions, the result of financial shortfalls on a single day in 1997, were the culmination of a broader, seventeen-month charade during which Frith manipulated millions of dollars on his firm's books and filed false reports with regulators to conceal the true financial status of his firm. The district court sentenced Frith to 97 months in prison and ordered that he pay restitution of roughly $1.2 million.

On appeal Frith challenges both his sentence and the restitution order. He argues that the district court miscalculated the Sentencing Guidelines range based on losses attributable to noncriminal conduct and improperly applied enhancements. He also contends the restitution order was based on losses from relevant conduct (rather than the offenses of conviction), which is not a permissible basis for restitution.

We affirm the district court's loss calculation and application of the guidelines. Frith's guidelines range was based on properly applied enhancements and losses attributable to his crimes of conviction and relevant criminal conduct. We remand, however, for limited proceedings pursuant to United States v. Paladino, 401 F.3d 471, 484 (7th Cir. 2005) because Frith was sentenced prior to the Supreme Court's decision in United States v. Booker, 543 U.S. 220, 125 S.Ct. 738, 160 L.Ed.2d 621 (2005) and the district judge applied the guidelines as mandatory. We vacate the restitution order and remand for further proceedings. Restitution must be based on the offense of conviction, not relevant conduct, and in this case the government did not link the restitution amount to the specific conduct for which Frith was convicted.

I. Background

James Frith was the sole shareholder of Chicago Partnership Board ("CPB"), a broker-dealer firm that matched buyers and sellers of limited partnership interests. Federal securities law requires firms like CPB to keep at least $250,000 in a net capital account and enough in a Special Reserve Account to cover the debts owed to customers. To assure investors and regulators of its compliance, CPB had to file monthly reports with the National Association of Securities Dealers ("NASD"), a private body empowered by the Securities and Exchange Commission to oversee the activities of broker-dealers.

Sometime in the mid-1990s, CPB began having difficulty maintaining its net capital and Special Reserve requirements. Frith manipulated millions of dollars on CPB's books to hide the shortfalls. He personally assumed debts CPB owed to its customers by having CPB write him checks for the amount of the debt and executing broker-dealer liability assumption agreements. Once CPB had the debt off its books, the amount needed to satisfy its Special Reserve requirements decreased correspondingly. Frith then would write CPB a check for the same amount—or almost the same amount (he put some of the money into his other companies)— which made it appear as though Frith had infused capital into CPB.

This activity came to an end in late 1997. Regulators caught CPB without enough money in its net capital and Special Reserve accounts on September 30, 1997, and shut it down by early December. CPB's customers and creditors lost millions. During ensuing bankruptcy proceedings, clients recovered some of what they were owed, but the Securities Investor Protection Corporation ("SIPC"), which guarantees customers' claims with failed brokerage firms up to $500,000 (much the same way the Federal Deposit Insurance Corporation guarantees bank deposits up to $100,000), had to make up much of the shortfall. It kicked in some $632,000 to make good on its guarantees. The bankruptcy estate also received a $450,000 payout from CPB's fidelity insurer and a $190,000 payout from Continental Casualty, the malpractice carrier for CPB's auditor. These proceeds went to compensate CPB clients for their losses.

A grand jury indicted Frith on twenty-three counts: eighteen counts of making false statements in filings to regulatory authorities, 15 U.S.C. §§ 78q(a)(1), 78ff; 17 C.F.R. § 240.17a-5(a); 18 U.S.C. § 1001; one count of willfully violating net capital requirements on or about September 30, 1997, 15 U.S.C. §§ 78o(c)(3), 78ff; 17 C.F.R. § 240.15c3-1; one count of willfully violating Special Reserve requirements on or about September 30, 1997, 15 U.S.C. §§ 78o(c)(3), 78ff; 17 C.F.R. §§ 240.15c3-3, 240.15c3-3a; two counts of making false statements to a bank, 18 U.S.C. § 1014; and one count of bank fraud, 18 U.S.C. § 1344. The case proceeded to a jury trial and Frith was convicted on just two of the twenty-three counts: willfully violating net capital and Special Reserve requirements on September 30, 1997.

The district court applied the guidelines as mandatory—this was before the Supreme Court's decision in Booker — and sentenced Frith to 97 months in prison. Frith's offense level was primarily dictated by the court's calculation of the loss amount. See U.S.S.G. § 2F1.1 (1995).¹ The court calculated the loss by adding the $632,000 paid by the SIPC, the $450,000 paid by CPB's fidelity insurer, and the $190,000 paid by the malpractice carrier for CPB's auditor—that total serving as a proxy for the losses to CPB's clients. See 18 U.S.C. § 3664(j)(1). This loss of more than $1.2 million put Frith at offense level 17. The court then increased Frith's offense level to 30 after finding the offense involved more than minimal planning, § 2F1.1(b)(2)(A); substantially jeopardized the safety and soundness of a financial institution, § 2F1.1(b)(6); and that Frith was an organizer or leader, § 3B1.1(c), abused a position of trust, § 3B1.3, and obstructed justice, § 3C1.1. The 1995 guidelines range for offense level 30, criminal history category I (applicable to Frith) was 97-121 months. Noting that even the low end of the guidelines seemed harsh, the district judge sentenced Frith to 97 months and ordered restitution in the same amount as the guidelines loss calculation, approximately $1.2 million.

II. Discussion

A. Calculation of the Guidelines Range

Frith argues on appeal that the district court miscalculated the amount of loss in determining his offense level under § 2F1.1. Loss amount for purposes of the guidelines must be calculated on the basis of the conduct of conviction and relevant conduct; relevant conduct must be criminal or unlawful conduct, though it need not have been charged. See United States v. Schaefer, 291 F.3d 932, 937-40 (7th Cir. 2002). Conduct underlying an acquitted charge may be included as long as that conduct is proved by a preponderance of the evidence. United States v. Watts, 519 U.S. 148, 157, 117 S.Ct. 633, 136 L.Ed.2d 554 (1997).

Frith argues the district court's loss calculation was based entirely on noncriminal conduct. He asserts that his alteration of CPB's books and the payouts he took for himself were "not criminal in and of themselves." Filing false reports with regulatory authorities and operating in violation of the net capital and Special Reserve requirements is criminal conduct, but according to Frith, did not cause any loss. He applies the same logic to attack the offense-level enhancement for substantially jeopardizing the safety and soundness of a financial institution, § 2F1.1(b)(6)(A), claiming he did nothing of a criminal nature to jeopardize the safety and soundness of CPB.

We review calculations of loss under the guidelines for clear error, United States v. Berheide, 421 F.3d 538, 540 (7th Cir. 2005), and application of the guidelines de novo, United States v. Ellis, 440 F.3d 434, 436 (7th Cir. 2006). The guidelines define loss as "the value of the money, property, or services unlawfully taken." U.S.S.G. § 2F1.1 cmt. n. 7. Loss is not always a precise calculation; reasonable estimates will suffice for purposes of the guidelines. U.S.S.G. § 2F1.1 cmt. n. 8. And, as we have noted, where losses are attributable to relevant conduct, the relevant conduct must be criminal or unlawful conduct. Schaefer, 291 F.3d at 937-40; see also United States v. Solis, 299 F.3d 420, 461-62 (5th Cir. 2002); United States v. Dove, 247 F.3d 152, 155 (4th Cir. 2001); United States v. Shafer, 199 F.3d 826, 831 (6th Cir. 1999); United States v. Jain, 93 F.3d 436, 443 (8th Cir. 1996); United States v. Dickler, 64 F.3d 818, 830 (3d Cir. 1995). Also, to calculate loss for purposes of § 2F1.1, the guidelines call for consideration of losses attributable to all acts and omissions that were part of the same course of conduct or general scheme of wrongdoing. U.S.S.G. § 1B1.3(a)(2).

Most of the $1.2 million in losses found by the district court are attributable to relevant conduct that was part of Frith's scheme to operate CPB without enough money on hand to comply with the applicable net capital and Special Reserve requirements of the securities laws. Frith was charged with, though ultimately not convicted of, filing eighteen false reports with regulatory authorities during 1996 and 1997 misstating the true financial status of CPB. Besides being illegal themselves, the false reports covered up the fact that Frith was operating his broker-dealership in violation of laws designed to protect his clients. For seventeen months in 1996 and 1997 Frith operated his business by criminally deceiving regulatory authorities and the public. When authorities finally shut...