USA v. L. Knox

• Citation: 624 F.3d 865
• Decision Date: 10 November 2010
• Docket Number: No. 08-1571.,08-1571.
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Gary L. KNOX, Defendant-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

624 F.3d 865

UNITED STATES of America, Plaintiff-Appellee,

v.Gary L. KNOX, Defendant-Appellant.

No. 08-1571.

United States Court of Appeals,Seventh Circuit.

Argued Oct. 9, 2009.

Decided Nov. 10, 2010.

COPYRIGHT MATERIAL OMITTED.

Joseph H. Hartzler, Attorney (argued), Office of the United States Attorney, Springfield, IL, for Plaintiff-Appellee.

Carol A. Dison, Attorney, Elisabeth R. Pollock, Attorney (argued), Beckett & Webber, Urbana, IL, for Defendant-Appellant.

Before POSNER, ROVNER, and WILLIAMS, Circuit Judges.

WILLIAMS, Circuit Judge.

Gary Knox was the mastermind of an extensive real estate scheme using grossly inflated property appraisals and false loan applications. Using the fraudulent appraisals, Knox convinced buyers to purchase properties at exorbitant prices and then duped lending institutions into extending mortgages based on the trumped up values. As a result, Knox was charged with and pleaded guilty to multiple counts of bank fraud, wire fraud, mail fraud, and money laundering. At sentencing, the district court applied several enhancements to Knox's offense level based on Knox's use of sophisticated means, having ten or more victims, receipt of more than $1 million from financial institutions, and role as organizer of a scheme involving five or more participants. On appeal, Knox challenges the district court's application of these sentencing enhancements. He also attempts to challenge the district court's loss calculation in a pro se supplemental brief. We find that the district court properly applied all of the enhancements and that Knox waived his argument as to the court's loss calculation by making and then withdrawing the very same objection at the sentencing hearing. Therefore, we affirm Knox's sentence.

I. BACKGROUND

From 1998 to 2005, Knox orchestrated a multifaceted real estate “flipping” scheme in central Illinois. The scheme was carried out in various ways but remained the same at its core. Knox would procure a property at a nominal price ($100 to $5,000) either by buying it himself or causing it to be purchased under someone else's name, usually without their knowledge or consent. He would then “flip” the property by selling it to an unwitting buyer at an exorbitant price supported by fraudulent property appraisals that grossly inflated the property's value. Knox defrauded every party involved in these real estate transactions: he would tell property owners that he intended to sell their properties at their asking price, but would then turn around, jack up the price, and use the falsified appraisals to convince buyers to buy and lenders to extend mortgages on the substantially inflated property value. Knox would then pocket the difference between the seller's true asking price and the grossly exaggerated purchase price he had represented to the buyer, and pay kickbacks to his accomplices, which included Knox's codefendants Dennis Wiese, Jr., who conducted most of the appraisals, and Frank Kelly Ciota, who assisted Knox with finding unwitting buyers to defraud.

The most common type of fraudulent transaction in the scheme involved Knox and Ciota locating owners of distressed rental properties in Springfield and Decatur, Illinois, who were interested in selling their properties. Posing as an agent for a group of real estate investors, Knox would promise the sellers that he could sell their properties for a price much higher than their asking price. Knox would then go about finding prospective buyers-many of whom were of modest means and lacked real estate experience-and present them with an opportunity to increase their monthly income with little effort: at a discounted price, with no down payment required, the buyer could purchase a rental property in an economically depressed area that would generate a considerable monthly income from the rent payments. Knox also used other strategies to lure buyers into the scheme, such as offering a $5,000 cash incentive for each property purchased, assuring the buyers that he would buy back the property if the buyer was later unsatisfied with the purchase, and promising to act as the property manager, including locating tenants, collecting rents, and making the loan payments directly to the lenders. ¹

Unbeknownst to the buyers, however, this was not such a great deal. Knox would never follow through on any of his property management or buy-back promises, and the appraisals that Knox used to convince the buyers that they were getting a steal (e.g., by telling them that the asking price was lower than the inflated property valuation) were phony. The appraisals were usually created by Wiese, a licensed real estate appraiser whom Knox recruited to join the scheme. Wiese's appraisals were based on allegedly comparable sales data provided by Knox, who also gave Wiese a target price which was substantially marked up over the property's actual value. Knox calculated the target price by using information from Knox's wife, Vicki, who was a licensed real estate agent and had access to real estate databases and sales data. Knox would obtain information about sales of properties in better condition or outside the market area and pass this information along to Wiese with a suggestion that he use it to appraise the property at the elevated target price.

The next step in the scheme involved helping the buyer secure a mortgage loan. Knox would assist with this process by filling out the loan applications for the buyers. In doing so, he caused several false statements to be made on the applications concerning the amount and source of the down payment, the buyer's financial liquidity, and the amount of rental payments obtained from the rental property to be purchased. Many of these loan applications were processed through State Street Mortgage Company, a mortgage brokerage owned and operated by Dennis Schneider. As the mortgage broker, Schneider sought loan approval for buyers through various lending institutions with whom he regularly worked by presenting the institutions with the loan applications and Wiese's appraisals. Lenders, in turn, relied on the false information in the applications and on the exaggerated appraisals and extended mortgage loans for the inflated purchase prices.

The final step in the scheme was the closing, during which a title company completes the real estate purchase and loan transaction. Knox often utilized Tri-County Title Services, Inc., a company owned by Michelle Miller, for closings. Initially, Miller followed standard operating procedure for real estate closings-after the lender issued a loan commitment and transferred the funds to the title company, the title company would hold the funds in escrow until the closing, compile the loan documents and mortgage agreement, conduct the settlement meeting with the buyer and seller present, and then distribute the sale proceeds after closing. Over time, however, Miller began to deviate from the standard procedure. On several occasions, she did not require the buyers or sellers to be present and would instead allow Knox to remove the loan documents from the title office under the guise of taking them to his clients for their signature. After forging the signatures of the buyer or seller, Knox would then return the documents to the title company for closing. Miller also began to distribute the closing checks (which represented the proceeds from the property sale) prior to the actual closing. Knox would then take this check to a bank and divide it into multiple cashier's checks, one of which would be made out in the buyer's name and in the amount of the down payment. ² After the closing, Knox retained the majority of the sale proceeds, paid the seller the asking price for the property (which was always substantially lower than the actual purchase price), and then paid his accomplices.

Knox's scheme began to fall apart just as the buyers' rental properties did. Knox and Ciota never followed through with their obligations to manage the properties, locate tenants, or collect rent payments. Some buyers also discovered that their properties were vacant, in disrepair, or uninhabitable. Knox and Ciota also failed to make the loan payments to the lenders as promised, which resulted in several buyers defaulting on their loans and many lenders initiating foreclosure actions. In total, Knox devised and participated in more than 150 fraudulent real estate transactions, which resulted in the lending institutions financing more than $7 million of fraudulent mortgages.

In April 2006, Knox pleaded guilty to three counts of bank fraud, in violation of 18 U.S.C. § 1344; one count of wire fraud, in violation of 18 U.S.C. § 1343; six counts of mail fraud, in violation of 18 U.S.C. § 1341; and one count of conspiracy to commit money laundering, in violation of 18 U.S.C. § 1956(a). One year after his guilty plea but before his sentencing, he filed motions to withdraw the guilty plea and to dismiss the indictment, both of which were promptly denied by the district court.

At Knox's sentencing, the government elicited testimony from Daniel Bergan, a Federal Deposit Insurance Corporation (“FDIC”) agent who was primarily responsible for the FDIC's investigation into Knox's mortgage scheme. Bergan testified that Knox received approximately $4.3 million for his part in the scheme. As part of his testimony, Bergan provided the court with a spreadsheet showing the transactions comprising Knox's gross receipt total. The spreadsheet also indicated the address of the property, the actual purchase price as displayed on the HUD-1 form, the amount mortgaged, and the amount received by Knox. Bergan also testified that the scheme had resulted in a loss of approximately $4.7 million to the financial institutions defrauded, and he presented another spreadsheet showing each of the transactions on which he relied for the loss calculation. In addition to the information listed on the gross receipts spreadsheet,...