United States v. Timothy Durham

In the

United States Court of Appeals

For the Seventh Circuit

Nos. 12-3819, 12-3833 & 12-3867

UNITED STATES OF AMERICA,

Plaintiff-Appellee,

v.

TIMOTHY S. DURHAM, JAMES F.

COCHRAN, and RICK D. SNOW,

Defendants-Appellants.

Appeals from the United States District Court

for the Southern District of Indiana, Indianapolis Division.

No. 1:11CR00042 — Jane Magnus-Stinson, Judge.

ARGUED JANUARY 21, 2014 — DECIDED SEPTEMBER 4, 2014

Before KANNE and SYKES, Circuit Judges, and GILBERT,

District Judge.*

*

Of the Southern District of Illinois, sitting by designation.

2 Nos. 12-3819, 12-3833 & 12-3867

SYKES, Circuit Judge. Timothy Durham, James Cochran, and

Rick Snow were convicted of perpetrating a widespread

financial fraud that caused more than $200 million in losses to

thousands of victims, many of them elderly or living on

modest incomes. After taking control of Fair Finance Com-

pany, a previously well-established and respected business, the

trio quickly turned it into their personal piggy bank. They used

money invested in Fair to support their lavish lifestyles and to

fund loans to related parties that would never be repaid. When

the company’s auditors raised red flags about its financial

status, the auditors were fired. When Fair experienced cash-

flow problems, it misled investors and regulators so it could

keep raising capital.

Eventually the scheme began to unravel. One of the

company’s directors, himself under investigation in a separate

matter, alerted the FBI that Fair was being operated as a Ponzi

scheme. After an investigation, the FBI seized Fair’s computer

servers and arrested Durham, Cochran, and Snow. A jury

convicted them on various counts of conspiracy, securities

fraud, and wire fraud.

They now appeal their convictions and sentences on several

grounds. We reject all of their challenges save one. The

government failed to enter into the trial record key documen-

tary evidence supporting two counts of wire fraud against

Durham. It was clearly an oversight, but the mistake leaves a

crucial gap in the evidence on those counts. Accordingly, we

reverse Durham’s convictions on Counts 2 and 5 of the

indictment and remand for resentencing without those counts

Nos. 12-3819, 12-3833 & 12-3867 3

in the mix. In all other respects, we affirm the defendants’

convictions and sentences.

I. Background

Before the events in this case transpired, Fair Finance was

a respectable company and had been in the business of

providing financial services since the Great Depression. By the

early 2000s, the company primarily focused on purchasing

consumer receivables. Fair would purchase installment

contracts from businesses with a single, up-front payment at a

discounted rate. This arrangement provided working capital

for the business and a profit for Fair—the difference between

what it paid for the contract and what it ultimately collected on

it.

Fair raised money to purchase these receivables by selling

what it called “investment certificates”—a form of subordinate

debenture that essentially functioned as a certificate of deposit

without FDIC insurance. Certificate holders were paid interest

at regular intervals. When a certificate came due, Fair sent a

check to the holder for the interest earned before maturity. At

that point the holder could redeem the original face value of

the certificate or renew it, which involved redeeming an old

certificate and purchasing a new one. If a holder took no action

at expiration, the certificate would continue earning interest at

a set rate. Before 2002 most certificates were offered for a six-

month term and were no larger than $50,000 in value. The

latter limitation was meant to ensure that the company could

redeem the certificates without encountering liquidity prob-

lems.

4 Nos. 12-3819, 12-3833 & 12-3867

Certificates were sold exclusively to consumers in Ohio,

and authorization by the Ohio Department of Securities was

required. With each request for authorization, Fair needed to

submit an offering circular disclosing its financial status and

the investment’s risks. The circular would then be distributed

to potential investors once the new issuance received regula-

tory approval. According to data gathered by Fair, a majority

of its investors were elderly and many lived on modest

incomes. By all accounts, Fair was a trusted Ohio financial

institution.

Timothy Durham and James Cochran bought the business

in 2001 through a holding company formed for that purpose

and named Fair Holdings, Inc. Durham was its CEO, Cochran

was its COO and chairman of the board, and Rick Snow was its

CFO. Snow already had been working at Fair and soon became

CFO for another Durham-owned company, a private equity

fund called Obsidian Enterprises. At the time of the acquisition,

Fair had assets of $50 million in receivables and liabilities of

$38 million in certificates.

Fair soon dramatically increased its sale of certificates and

offered them for longer terms (up to 5 years), higher amounts

(up to $200,000), and at higher interest rates. Within a year and

a half, its certificate liabilities doubled. The increased capital,

however, was not used to expand its receivables business,

which grew slightly after the purchase but soon started to

taper off. Instead, the money raised was used to fund millions

of dollars in loans, often made through Fair Holdings, to

Durham and Cochran, their relatives, and related companies

Nos. 12-3819, 12-3833 & 12-3867 5

(particularly Obsidian and another Durham-owned holding

company named DC Investments).

Much of this money funded Durham’s and Cochran’s

extravagant lifestyles. Loan proceeds paid for their homes,

cars, and parties. For example, Durham hosted a Playboy-

themed party using $110,000 of Fair money. Likewise, Cochran

used $783,867 to fund a real-estate purchase. Even loans to

other companies served to support Durham and Cochran’s

spending habits; for example, a Fair circular reflected a loan of

more than $9 million to the company that held Durham’s

personal car collection. Fair rarely received any payments on

these loans, most of which were not made on commercially

available terms, were poorly documented, and were amended

as time went on to increase the debtor’s borrowing limit. Yet

Fair’s circulars continued to list these loans as assets support-

ing the sale of certificates.

Fair Holdings’s accountants soon began questioning its

financial statements, raising numerous concerns about the

third-party loans and noting that they lacked sufficient

collateral. The auditors also had doubts about the holding

company’s viability as a going concern. The defendants

terminated the services of two different accounting firms that

refused to issue unqualified audit reports. After that the

holding company’s financial statements were unaudited and

replete with misrepresentations.

Things began to fall apart after the financial crisis in the fall

of 2008. In Durham’s words, “every company” in his organiza-

tion was “running on vapor.” Facing cash shortfalls, Fair

delayed payments of interest and principal to investors,

6 Nos. 12-3819, 12-3833 & 12-3867

blaming computer and banking issues. It fell behind on

payments to dealers and vendors as well. Investors began to

worry; Fair had historically made interest payments on time,

and the financial press started criticizing Durham’s manage-

ment. In February 2009 the Ohio Department of Securities

opened an investigation. By this time Fair’s 2008 authorization

to issue $250 million in certificates was almost used up.

Without the ability to sell more certificates, Fair was unable to

generate new income. Desperate for cash, Fair sought regula-

tory authorization to issue another $250 million in certificates

in October 2009. It would never be granted.

As problems mounted, the FBI began a criminal investiga-

tion into Fair’s activities after receiving a proffer from a Fair

board member who was targeted in a separate investigation.

The board member disclosed that Fair was being operated as

a Ponzi scheme. The FBI investigated for approximately eight

months, then sought and obtained authorization to tap

Durham’s phone. Recorded phone calls revealed many

discussions about how to hide Fair’s true financial status from

regulators and investors. In one conversation Cochran advised

against letting any employees go because they “know a little

bit too much” that could be used to “bust” them. The three

executives discussed plans to “vanish,” “disappear,” “vapor-

ize[],” and “wipe[] off” bad debts from the company’s regula-

tory disclosures. The FBI used this evidence to obtain a warrant

to search Fair’s office and seize its computer servers, effectively

shutting the company down. The warrant was executed on

November 24, 2009. Fair’s operations ceased, and it soon went

into bankruptcy. More than 5,000 investors filed claims totaling

Nos. 12-3819, 12-3833 & 12-3867 7

approximately $215 million. The trustee recovered only

$5.6 million in assets.

Durham, Cochran, and Snow were charged with conspiracy

to commit wire fraud and securities fraud, 18 U.S.C. § 371

(Count 1); wire fraud, 18 U.S.C. § 1343 (Counts 2–11); and

securities fraud, 15 U.S.C. §§ 78j(b), 78ff; 17 C.F.R. § 240.10b-5

(Count 12). All three were convicted of conspiracy and

securities fraud. Durham was found guilty on all ten counts of

wire fraud, Cochran on six wire-fraud counts (4, 6, and 8–11),

and Snow on three wire-fraud counts (4, 6, and 7). Durham and

Cochran received within-guidelines sentences of 50 years and

25 years, respectively. Snow was sentenced to a below-guide-

lines term of 10 years. The court also ordered the defendants to

pay $208,830,082.27 in restitution, for which they are jointly

and severally liable.

II. Discussion

The defendants attack their convictions and sentences on

multiple grounds. Durham challenges the sufficiency of the

evidence on two counts of wire fraud. All three defendants

challenge the sufficiency of the wiretap application. They also

argue that the district court erroneously refused to give their

proposed theory-of-defense jury instruction on the securities-

fraud count. They claim that the prosecutor committed

misconduct during his rebuttal closing argument. Finally, they

raise several sentencing errors.

8 Nos. 12-3819, 12-3833 & 12-3867

A. Sufficiency of the Evidence on Counts 2 and 5

Durham argues that the evidence was insufficient on

Counts 2 and 5, two of the ten counts of wire fraud of which he

stands convicted. Count 2 involved a transfer of $250,000 from

Fair to Fair Holdings on February 13, 2007; Count 5 concerned

a transfer of $50,000 from Fair to Fair Holdings on

November 10, 2008. To prove that these transfers constituted

wire fraud, the government needed to establish that Durham:

(1) was involved in a scheme to defraud; (2) had an intent to

defraud; and (3) used the wires in furtherance of that scheme.

See United States v. Leahy, 464 F.3d 773, 786 (7th Cir. 2006). We

review the evidence “in the light most favorable to the govern-

ment and ask whether any rational trier of fact could have

found the essential elements of the crime beyond a reasonable

doubt.” United States v. Love, 706 F.3d 832, 837 (7th Cir. 2013).

Durham moved for judgment of acquittal on these counts, so

our review is de novo. United States v. Claybrooks, 729 F.3d 699,

704 (7th Cir. 2013).

We agree with Durham that there was insufficient evidence

in the record to establish that these particular wire transfers

were made in furtherance of the fraudulent scheme. The

government introduced single-page printouts reflecting each

transfer. As to Count 5, the government also introduced an

email indicating that an Obsidian employee asked a Fair

employee to wire $50,000 to Fair Holdings. At most, this

evidence shows that the wire transfers were in fact made; it

does not establish that the transfers were made in furtherance

of the fraudulent scheme.

Nos. 12-3819, 12-3833 & 12-3867 9

The government apparently intended to introduce addi-

tional evidence regarding the circumstances of these transfers

but neglected to do so. The single-page printouts were meant

to be the first pages of much larger exhibits. The complete

exhibits were transmitted to us in connection with this appeal;

they include financial records tracing the money and docu-

menting how it was used. (For what it’s worth at this too-late

stage of the case, the additional documentation shows that the

$250,000 wire transfer paid for a luxury garage and the $50,000

transfer was used to pay dues at a country club.) But the trial

record contains only the single-page printouts showing that the

two wire transfers were made. Without the additional docu-

mentary evidence, the jury had no evidence about how the

money was used.

The government offers up a Hail Mary in an attempt to

salvage these two convictions. Its theory is that the trial

evidence was sufficient to show that the modus operandi of the

entire scheme involved wire transfers between Fair and Fair

Holdings. Money from investments in Fair would fund phony

insider loans after being moved around by wire. These “loans”

would usually start with a wire transfer from Fair to Fair

Holdings, just like these two, and the transfers were typically

requested via email, as the $50,000 transfer was. In other

words, there was a stream of money going from Fair to Fair

Holdings and not coming back. Thus, the jury could conclude

that these two transfers were used to originate fraudulent loans

even without the additional documentary evidence.

This argument is problematic for a couple of reasons. It

essentially transforms every wire transfer from Fair to Fair

10 Nos. 12-3819, 12-3833 & 12-3867

Holdings into a criminal act. To be sure, the evidence amply

supports the basic theory that Fair Holdings was used to

further the defendants’ illicit scheme, but the government has

not established that fraud was its exclusive function. Moreover,

because this argument was not raised at trial, Durham was

unable to defend against it.

At bottom the government introduced no evidence from

which a jury reasonably could conclude that these particular

wire transfers were made in furtherance of the fraudulent

scheme. The gap in the trial record, though inadvertent, leaves

us no choice but to reverse Durham’s conviction on Counts 2

and 5 based on insufficient evidence.

B. Proof of Necessity for the Wiretap

In order to obtain authorization for a wiretap, the govern-

ment must make “a full and complete statement as to whether

or not other investigative procedures have been tried and

failed or why they reasonably appear to be unlikely to succeed

if tried or to be too dangerous.” 18 U.S.C. § 2518(1)(c). The

government’s burden “is not great,” and compliance with this

requirement is analyzed in a “practical and common-sense

fashion.” United States v. Campos, 541 F.3d 735, 746 (7th Cir.

2008) (internal quotation marks omitted). The statute does not

require the government to show absolute necessity, id.; the

point is to ensure that wiretaps are not used routinely as the

first step in an investigation, United States v. Thompson, 944 F.2d

1331, 1340 (7th Cir. 1991).

Nos. 12-3819, 12-3833 & 12-3867 11

The defendants claim that evidence gathered from the

wiretap should have been excluded because the government

failed to demonstrate the necessity of tapping Durham’s

phone. We review the finding of necessity for abuse of discre-

tion. United States v. McLee, 436 F.3d 751, 763 (7th Cir. 2006).

To obtain authorization to tap Durham’s phone, the

government submitted a 45-page affidavit summarizing

evidence gathered over the course of a nearly eight-month

investigation. The government began looking into Fair after a

board member advised the FBI that Durham had been running

the company as a Ponzi scheme, had made more than

$100 million in loans from Fair to related companies, and had

made misrepresentations to investors. That was the extent of

the board member’s cooperation, however. The subsequent

investigation involved gathering information through a variety

of channels. The FBI contacted the SEC, which was conducting

its own investigation of Fair. The FBI also reviewed records in

the public domain and subpoenaed from the Federal Reserve

Bank of New York. An FBI agent posing as a potential investor

spoke with Fair sales representatives over the phone, met with

them twice in person, and ultimately purchased a certificate in

an effort to gather relevant information about the scheme. The

FBI also interviewed two confidential informants who pro-

vided some useful information but were not close enough to

the scheme to provide current information about Durham’s

activities. Agents also used a pen register to monitor Durham’s

phone calls.

The affidavit went on to explain that these measures had

not yielded enough evidence to successfully prosecute Durham

12 Nos. 12-3819, 12-3833 & 12-3867

or reveal other guilty parties; it also explained that other

standard investigative techniques were not viable under the

circumstances. If Fair was operating as a Ponzi scheme, the

investigation needed to move quickly in order to protect

investors. Subpoenaing and sifting through volumes of

financial records looking for proof would be too slow. So too

would attempting to infiltrate the scheme’s inner circle; that

would require getting an undercover agent in place and

allowing time to penetrate what was likely to be a cautious

group of fraudsters. On the other hand, if the company was

merely undercapitalized, secrecy was vital, and word of a

criminal investigation could provoke a run causing Fair to

collapse when it otherwise could be saved. So subpoenaing

witnesses and internal records or executing a search warrant

would be unwise. Other methods of investigation had ex-

hausted their utility. The FBI had no further leads on infor-

mants with more direct knowledge of the scheme, and pen

registers had revealed all they could.

This thorough affidavit easily established the necessary

foundation for the wiretap. Far from asking for a wiretap after

little conventional investigation, the government first used a

variety of other techniques to gather information. And the

wiretap application provided a reasonable explanation as to

why other standard investigative techniques would not be

appropriate.

The defendants counter that the stated reasons for the

wiretap were too generic and relied on inherent limitations in

other investigative techniques that could apply to any investi-

gation of large-scale financial fraud. But the affidavit did not

Nos. 12-3819, 12-3833 & 12-3867 13

merely state the limitations of a given alternative in general

terms—it did not say, for example, that a pen register only

showed the phone numbers called but not the contents of those

conversations. Instead, the affidavit tied the limitations to the

particular investigation at hand. That the justifications might

apply in other, similar investigations is not fatal to an applica-

tion for a wiretap; a particular kind of crime may pose com-

mon, recurring problems for investigators. What matters is that

other available investigative procedures had been tried, or

were inadvisable or unlikely to succeed under the circum-

stances. The government’s application established the neces-

sary foundation for the wiretap as required by § 2518(1)(c).

The defendants rely on some authority from other circuits,

but the cases are distinguishable. For example, United States v.

Blackmon, 273 F.3d 1204, 1207–08 (9th Cir. 2001), applied de

novo review, not review for abuse of discretion, the standard

used in our circuit. Moreover, the wiretap affidavit in Blackmon

was highly generic and also riddled with errors. Finally, the

majority opinion in Blackmon drew a strong dissent arguing

that abuse of discretion was the correct legal standard and

explaining that the affidavit was sufficient under that standard.

See id. at 1211–12 (Wardlaw, J., dissenting). United States v. Lilla,

699 F.2d 99 (2d Cir. 1983), is likewise distinguishable. It

involved an affidavit containing a bare conclusion that no other

investigative techniques would suffice without explaining

“what, if any, investigative techniques were attempted prior to

the wiretap request.” Id. at 104. In contrast, the affidavit here

contained many pages of information detailing the govern-

ment’s previous efforts and a reasoned explanation of why

other techniques would be inadvisable or likely unproductive.

14 Nos. 12-3819, 12-3833 & 12-3867

The government met its burden of showing necessity for the

wiretap.

C. Securities-Fraud Jury Instruction

The defendants also challenge the district court’s refusal to

give their proposed securities-fraud jury instruction, which

described their theory of defense by defining the phrase “in

connection with the purchase or sale of any security” under

§ 10(b) of the Securities and Exchange Act of 1934. 15 U.S.C.

§ 78j(b). A defendant is entitled to a theory-of-defense jury

instruction if:

(1) the instruction represents an accurate state-

ment of the law; (2) the instruction reflects a

theory that is supported by the evidence; (3) the

instruction reflects a theory which is not already

part of the charge; and (4) the failure to include

the instruction would deny the [defendant] a fair

trial.

United States v. Walker, 746 F.3d 300, 307 (7th Cir. 2014) (inter-

nal quotation marks omitted).

Section 10(b) of the Act makes it a crime “[t]o use or

employ, in connection with the purchase or sale of any

security … [,] any manipulative or deceptive device or contriv-

ance in contravention of such rules and regulations as the

[SEC] may prescribe as necessary or appropriate in the public

interest or for the protection of investors.” 15 U.S.C. § 78j(b).

The SEC implements this provision through Rule 10(b)-5, see

17 C.F.R. § 240.10b-5, which “is coextensive with the coverage

Nos. 12-3819, 12-3833 & 12-3867 15

of § 10(b).” S.E.C. v. Zandford, 535 U.S. 813, 816 n.1 (2002). The

defendants’ proposed instruction sought to define the scope of

liability under § 10(b) to advance their theory of defense that

“a scheme to delay is not a scheme to defraud.”1 The district

1

The entire proposed instruction reads:

The fifth element that the government must prove

beyond a reasonable doubt is that a subordinated lender (a

Fair Finance Investment Certificate purchase) purchased or

sold investment securities from Fair Finance and that the

purchase or sale of the interests was made in connection

with the alleged untrue statements of material fact.

First, there must be a purchase or sale of a security.

This means that the transfer of ownership of an asset is

required for a purchase and sale. Simply continuing to

holding [sic] a security does not qualify. Furthermore,

delaying an interest payment or redemption of an Invest-

ment Certificate is not a purchase or sale of a security.

Second, to satisfy the “in connection with” require-

ment, the government must prove beyond a reasonable

doubt that there was some nexus or relationship between

the alleged untrue statements of material fact and the

purchase or sale of interests in Fair Finance. The misrepre-

sentations must have some direct pertinence to a securities

transaction. Evidence that defendants made untrue

statements or omissions of material fact following the

purchase of an Investment Certificate is inadequate.

Likewise, evidence that investors purchased or sold

interests in spite of defendants’ alleged untrue statements

of material fact is insufficient. Instead, the government

must prove beyond a reasonable doubt that investors

actually purchased or sold some or all of their Investment

(continued...)

16 Nos. 12-3819, 12-3833 & 12-3867

court rejected the proposed instruction, opting instead to give

one that mirrored the statutory language. We review that

decision de novo. Love, 706 F.3d at 838.2

The defendants’ proposed instruction runs into trouble

both in its statement of the law and its fit with the facts of the

case. At the outset we note that the instruction takes a too-

narrow view of the “in connection with” language in § 10(b).

When the Supreme Court has “sought to give meaning to the

phrase [‘in connection with’] in the context of § 10(b) and

Rule 10b-5, it has espoused a broad interpretation.” Merrill

Lynch, Pierce, Fenner & Smith Inc. v. Dabit (“Merrill Lynch”),

547 U.S. 71, 85 (2006).3 The defendants asked the court to

1

(...continued)

Certificates in Fair in connection with the defendants’

alleged untrue statements of material fact.

2

The government argues that we should review for plain error because the

defendants forfeited this claim. We disagree. At the instruction conference,

Durham’s counsel submitted and argued for the proposed instruction,

which the judge then denied. That is enough to preserve the issue for

review. Counsel did not need to object immediately after this colloquy to

avoid forfeiture. See United States v. James, 464 F.3d 699, 707 n.1 (7th Cir.

2006).

3

Merrill Lynch interpreted the key phrase “in connection with” the purchase

or sale of a security in the context of the Securities Litigation Uniform

Standards Act of 1998, which

prohibits securities class actions if the class has more than

50 members, the suit is not exclusively derivative, relief is

sought on the basis of state law, and the class action suit is

(continued...)

Nos. 12-3819, 12-3833 & 12-3867 17

instruct the jury that a misrepresentation is made “in connec-

tion with” the purchase or sale of a security if it has “some

direct pertinence” to the transaction. The Supreme Court, on

the other hand, has treated the in-connection-with requirement

as merely requiring a misrepresentation “coincid[ing]” with,

Zandford, 535 U.S. at 822, or “touching,” Superintendent of Ins.

v. Bankers Life & Casualty Co., 404 U.S. 6, 12 (1971), a securities

transaction.

Moreover, the core theory reflected in the defendants’

proposed instruction—that “a scheme to delay is not a scheme

to defraud”—is problematic as a legal matter and in the context

of the evidence in this case. Many, though not all, of the

misrepresentations in this case were statements falsely explain-

ing the delayed interest payments or encouraging investors to

delay redemption of their investment certificates. The defen-

dants urged the court to instruct the jury that “[s]imply

continuing to hold[] a security does not qualify” as a purchase

or sale of a security. This argument was premised on civil cases

involving the judicially created private cause of action under

§ 10(b) and Rule 10b-5, but the “rules governing private

3

(...continued)

brought by “any private party alleging a misrepresentation

or omission of a material fact in connection with the

purchase or sale of a covered security.”

Brown v. Calamos, 664 F.3d 123, 124 (7th Cir. 2011) (quoting 15 U.S.C.

§ 78bb(f)(1)). Though appearing in different statutory sections, the Supreme

Court has treated the in-connection-with language appearing in both

provisions as having the same meaning. See Merrill Lynch, Pierce, Fenner &

Smith Inc. v. Dabit, 547 U.S. 71, 85–86 (2006).

18 Nos. 12-3819, 12-3833 & 12-3867

Rule 10b–5 actions … developed differently from the law

defining what constitute[s] a substantive violation of

Rule 10b–5.” Merrill Lynch, 547 U.S. at 80.

More specifically, in Blue Chip Stamps v. Manor Drug Stores,

421 U.S. 723, 749 (1975), the Supreme Court concluded that

only plaintiffs who were themselves purchasers or sellers of a

security had standing to sue for securities fraud, a requirement

often referred to as the “purchaser-seller” rule or “Birnbaum

Rule.” See Merrill Lynch, 547 U.S. at 80. This rule is meant to

cabin the reach of private actions for securities fraud. The

defendants’ argument for their proposed instruction is based

on cases drawn from that context. For example, the defendants

cite Abrahamson v. Fleschner, 568 F.2d 862, 868 (2d Cir. 1977),

which relied on Blue Chip Stamps—not the text of § 10(b)—to

conclude that “fraud in connection with the purchase or sale of

a security is not satisfied by an allegation that plaintiffs were

induced fraudulently not to sell their securities.” Another

example is Krim v. BancTexas Group, Inc., 989 F.2d 1435, 1443

n.7 (5th Cir. 1993), which also involved a private cause of

action. Krim cited Blue Chip Stamps for the proposition that “[i]t

is well established that mere retention of securities in reliance

on material misrepresentations or omissions does not form the

basis for a § 10(b) or Rule 10b-5 claim.”

But what matters in this context is the scope of substantive

criminal liability under § 10(b), not the judicially created rules

for private civil actions. See Merrill Lynch, 547 U.S. at 84 (“Blue

Chip Stamps … purported to define the scope of a private right

of action under Rule 10b-5—not to define the words ‘in

connection with the purchase or sale.’”); see also Blue Chip

Nos. 12-3819, 12-3833 & 12-3867 19

Stamps, 421 U.S. at 751 n.14 (“[T]he purchaser-seller rule

imposes no limitation on the standing of the SEC to bring

actions for injunctive relief under § 10(b) and Rule 10b-5.”).

This line of cases does not provide a defense to criminal

liability for securities fraud. The proposed instruction thus

would have misled the jury about the scope of § 10(b).

Moreover, the proposed instruction lacked an adequate

foundation in the evidence. In the context of the broader

scheme at issue here, the defendants’ misrepresentations did

not merely induce investors to “continue to hold” their

investment certificates. Fair’s investors made decisions to buy,

renew, or redeem their certificates based on a massive fraud

that included lulling statements about the delayed interest

payments as well as misrepresentations intended to induce

delayed redemptions. The reliable payment of interest was

precisely what gave the investment certificates value and

would have played a large role in an investor’s decision to cash

out an existing certificate, renew that certificate (which itself

involved issuance of a new certificate), or buy one for the first

time. In addition, the defendants made misrepresentations in

Fair circulars about the general financial status of the company

and how it used investors’ money.

Finally, the judge’s decision to instruct the jury using the

statutory language hardly deprived the defendants of a fair

trial. They were free to argue their theory that a scheme to

delay is not a scheme to defraud, and in fact did so. Accord-

ingly, the district court did not err in rejecting the defendant’s

proposed instruction; neither the law nor the evidence sup-

ported it.

20 Nos. 12-3819, 12-3833 & 12-3867

D. Prosecutorial Misconduct

The defendants next argue that the prosecutor’s comment

on an argument made by Cochran’s counsel, William Dazey,

constituted prosecutorial misconduct. In closing argument

Dazey said the following:

[T]here may have been some reference today [by

Durham’s counsel in closing] of Mr. Durham

having a right hand and a left hand that per-

formed various functions along the way. And I

hope for Mr. Durham’s sake, and I hope for

Mr. Cochran’s sake, that his counsel’s presenta-

tion is persuasive. And I hope that your finding

might be that there is a reasonable doubt as to

whether Mr. Durham participated in a scheme to

defraud. That is none of my business.

The answer is, no, I think there was a scheme to

defraud. The question is, was there anybody else

that was let in on that scheme?

(Emphasis added.) In rebuttal the prosecutor briefly referred

to Dazey’s statement: “Let’s talk about Mr. Cochran. Now, you

heard Mr. Cochran’s attorney tell you that there was a scheme

to defraud but that Mr. Cochran didn’t have a role in it. Well,

Mr. Cochran’s role was absolutely critical to making this thing

happen.” Neither Durham’s nor Snow’s lawyer objected.

The day after closing arguments, counsel for Durham and

Snow moved for a mistrial, arguing that Dazey’s comment

amounted to an improper expression of personal opinion

about the guilt of their clients in violation of ethical rules. In

Nos. 12-3819, 12-3833 & 12-3867 21

response Dazey told the judge that he had heard a report about

his comment on National Public Radio that morning and

realized that he had misspoken. He explained that he had

intended to argue in the alternative—that there was no scheme,

but if there was, his client played no part in it. But he inadver-

tently omitted the qualifier “if.” After replaying the audio of

Dazey’s closing argument, the judge accepted this explanation

and concluded that Dazey had not improperly offered his

personal opinion about the guilt of the other defendants but

had simply misspoken.

The defendants do not challenge that characterization of

Dazey’s comment. Instead, they focus for the first time on the

prosecutor’s response to Dazey’s misstatement, insisting that

it amounted to prosecutorial misconduct. We review a claim of

prosecutorial misconduct in two steps. First, we determine

whether the prosecutor’s comments were improper standing

alone. United States v. Bell, 624 F.3d 803, 811 (7th Cir. 2010).

Second, we ask whether the remarks in the context of the

whole record denied the defendants the right to a fair trial. Id.

We note for starters that this argument was forfeited below.

Although the judge mentioned in passing that the prosecutor’s

comment did not amount to misconduct, the defendants never

raised or developed such a claim, instead focusing only on

Dazey’s error. Accordingly, our review is for plain error only,

which in this context requires the defendants to demonstrate

“that the comments at issue were obviously or clearly

improper,” and “not only [were the defendants] deprived of a

fair trial, but also that the outcome of that trial probably would

have been different absent the prosecution’s remarks.” United

22 Nos. 12-3819, 12-3833 & 12-3867

States v. Hills, 618 F.3d 619, 640 (7th Cir. 2010) (internal quota-

tion marks omitted). This is a steep hill to climb.

First, the prosecutor’s statement in rebuttal was not clearly

or obviously improper. Though Dazey’s argument was made

in the alternative when viewed with the benefit of hindsight,

the prosecutor’s characterization of it was, in a strict sense,

accurate. And the prosecutor was not given the benefit of

hindsight or an opportunity to review a transcript of Dazey’s

closing—he was speaking in rebuttal and had to craft his

argument in real time. Even the defendants’ counsel did not

realize a mistake had been made. Dazey needed a reminder

brought to him courtesy of NPR, and no one else from the

defense table objected during the prosecutor’s rebuttal.

Second, even assuming for the sake of argument that the

prosecutor’s statement was improper, it did not deny the

defendants a fair trial. To determine prejudice, we consider the

following factors:

(1) whether the prosecutor misstated the evi-

dence; (2) whether the remark implicated a

specific right; (3) whether the defendant invited

the remark; (4) whether the district court pro-

vided (and the efficacy of) a curative instruction;

(5) whether the defendant had an opportunity to

rebut the remark; and (6) the weight of the

evidence against the defendant.

United States v. Clark, 535 F.3d 571, 580–81 (7th Cir. 2008). Most

of these considerations weigh against a finding of prejudice.

First, the prosecutor did not misstate the evidence. If there was

an error at all, Dazey invited it by misspeaking, and again none

Nos. 12-3819, 12-3833 & 12-3867 23

of the defendants objected during the prosecutor’s rebuttal. As

such, any lack of opportunity to take corrective action falls on

the defendants.

Finally, the government’s evidence was very strong. It’s

highly implausible that this single, passing remark during the

prosecutor’s rebuttal affected the jury’s verdict. Finding

prejudice on plain-error review requires that the outcome of

the trial probably would have been different without the

prosecutor’s remark. That standard is not remotely satisfied

here.

E. Sentencing

Finally, the defendants raise several challenges to their

sentences and the restitution order. We review the district

court’s factual findings at sentencing for clear error; claims of

procedural or legal error are reviewed de novo. United States

v. Mei, 315 F.3d 788, 792 (7th Cir. 2003). Restitution orders are

reviewed for abuse of discretion. United States v. Allen, 529 F.3d

390, 394 (7th Cir. 2008).

1. Unwarranted Sentencing Disparities

Before imposing a sentence, the district court is required to

consider the sentencing factors in 18 U.S.C. § 3553(a) and

address any substantial arguments made by the defendant.

United States v. Panice, 598 F.3d 426, 443 (7th Cir. 2010). At

sentencing Durham raised an argument about unwarranted

sentencing disparities. See 18 U.S.C. § 3553(a)(6) (requiring the

24 Nos. 12-3819, 12-3833 & 12-3867

sentencing court to consider the need to avoid unwarranted

sentencing disparities). He cited several cases from other

districts—including some from New York—in which the

defendant received a shorter sentence than the guidelines

called for in his case. The district court rejected this argument,

saying:

I don’t know about what goes on in the Southern

District of New York. I visit there only rarely.

This is the Heartland. This is where we work

hard. We work hard to put our kids through

school, which is what a lot of these folks wanted

to do, to pay for our houses, to get them paid off

by the time that we retire so that we can maybe

take some trips or buy a little place in Florida.

We drive Chevies and Buicks and Fords, not

Bugattis.

The judge continued in a similar vein when sentencing

Cochran:

You need to understand there have been

some arguments made in the case that talk about

whether white-collar criminals are punished too

severely or too lightly. I can’t look to cases from

other districts, and your lawyers haven’t really

made that argument to me. But as I said before,

this case involves people in the Heartland of

America.

These are people who worked very hard and

saved because they wanted to be secure in their

retirement, because they wanted to pay off their

Nos. 12-3819, 12-3833 & 12-3867 25

homes, because they wanted to send their kids to

college, because in many circumstances they

wanted to have enough money to be able to

supplement whatever kind of healthcare might

be provided.

The defendants now argue that the judge’s comments

suggest that she mistakenly believed that she lacked the

authority to consider cases from outside the Southern District

of Indiana or the American “heartland” more generally. That’s

implausible, and in any event, we disagree. Considered in

context, the judge’s remarks do not suggest that she thought

she was legally barred from considering the other sentences but,

rather, that she was exercising her discretion not to consider

them in light of the particularly severe consequences of the

fraud in this case. The judge focused on the victims of the

defendants’ scheme, many of whom were elderly and working

class, and declined to give weight to sentences imposed

elsewhere. Nor did the judge claim to be following a binding

legal rule. Cf. United States v. Prado, 743 F.3d 248, 252 (7th Cir.

2014) (finding procedural error after the sentencing judge

stated incorrectly that “the Seventh Circuit has stated that any

argument relating to unwarranted sentence disparities has to

be presented on a national basis”). We find no error.

2. Loss Calculation and Restitution

The Sentencing Guidelines provide for an increase in

offense level based on either the actual or intended pecuniary

loss resulting from an offense. U.S.S.G. § 2B1.1 cmt. n.3(A). In

this case, both loss calculations were in the $200-million to

26 Nos. 12-3819, 12-3833 & 12-3867

$400-million range, resulting in the application of a 28-point

enhancement. Id. § 2B1.1(b)(1)(O). A district court “need only

make a reasonable estimate of the loss, not one rendered with

scientific precision.” United States v. Gordon, 495 F.3d 427, 431

(7th Cir. 2007); see also U.S.S.G. § 2B1.1 cmt. n.3(C). The

government bears the burden of proof on the loss amount.

United States v. Vivit, 214 F.3d 908, 916 (7th Cir. 2000). To

challenge that amount, the defendant must provide “substan-

tiated evidence … to counter the government’s explicit proof

of loss.” Gordon, 495 F.3d at 432. The defendants challenge both

the intended and actual loss amounts.

As a threshold matter, the defendants claim that the judge

failed to adequately address their specific objections to the loss

amount in violation of Rule 32(i)(3)(B) of the Federal Rules of

Criminal Procedure, which generally requires the district court

to rule on disputed factual issues. “[W]e have characterized the

requirement outlined in Rule 32(i)(3)(B) as one imposing a

minimal burden.” United States v. Brown, 716 F.3d 988, 994 (7th

Cir. 2013) (internal quotation marks omitted). As long as the

judge’s treatment of factual disputes at sentencing gives us an

adequate record to enable appellate review, Rule 32(i)(3)(B) is

satisfied. See id. at 995; United States v. Cunningham, 429 F.3d

673, 679 (7th Cir. 2005). Here, the judge made specific findings

on the intended and actual loss amounts, explained her

findings, and rejected the defense evidence and objections.

Nothing more is required.

Nos. 12-3819, 12-3833 & 12-3867 27

(i) Actual loss

Actual loss is the “reasonably foreseeable pecuniary harm

that resulted from the offense.” U.S.S.G. § 2B1.1 cmt. n.3(A)(i).

The district court concluded that the actual loss resulting from

the defendants’ fraud was $202 million. This calculation was

based on a report from Fair’s trustee in bankruptcy. After a

thorough review of Fair’s books and the claims submitted by

investors, the trustee reported that Fair’s investors were owed

more than $208 million (excluding claims for $7 million in

interest payments) and that around $5.6 million in assets were

recovered, resulting in a net loss of $202 million. (The govern-

ment notes the arithmetic here is off and the net loss should

have been a bit higher, but that does not affect the analysis.)

This evidence is easily sufficient on its own to support the

judge’s finding of actual loss. In addition to the trustee’s

calculation, the judge heard substantial evidence at trial that

the money from the certificates issued by Fair ended up in the

pockets of the defendants and related parties.

The defendants contend that their fraud did not cause the

full $202 million in losses. Instead, they cast partial blame on

the effects of the 2008 financial crisis and the ensuing recession.

But they did not substantiate that claim. The only hard

evidence they submitted consisted of an affidavit of a former

Obsidian employee attributing Fair’s declining value to market

forces and valuations generated by Fair itself reporting that it

had more assets than liabilities in November 2009. But Fair’s

own internal accounting could not be trusted; the evidence

established widespread manipulation of its financial informa-

tion. And the affidavit from the former Obsidian employee is

28 Nos. 12-3819, 12-3833 & 12-3867

very general; it does not indicate how much of the loss in value

was attributable to broader problems affecting the American

economy. While it is certainly possible that the recession

compounded the effects of the defendants’ fraud, there is no

reliable evidence establishing whether and to what extent it

actually impacted Fair’s business.

The restitution order was premised on the court’s finding

of actual loss, and appropriately so. See Allen, 529 F.3d at

396–97. Because we find no error in the judge’s actual-loss

finding, the defendants’ challenge to the restitution order

necessarily fails.

(ii) Intended loss

Intended loss refers to the pecuniary harm that was

intended to result from an offense and includes “harm that

would have been impossible or unlikely to occur.” U.S.S.G.

§ 2B1.1 cmt. n.3(A)(ii). To calculate the intended loss, the

district court looked to the amount placed at risk by the

scheme. See United States v. Lauer, 148 F.3d 766, 768 (7th Cir.

1998). At the time Fair collapsed, nearly all of its approved

$250 million offering from 2008 had been issued, and it was

seeking (though never received) approval for another offering

of the same size. Based on the size of Fair’s most recent

certificate offering, the district court concluded that the

defendants’ scheme placed $250 million at risk.

The defendants argue that the “placed at risk” standard

fails to account for the defendant’s subjective intent. But this

standard is well established in this circuit. Id. (“[T]he amount

Nos. 12-3819, 12-3833 & 12-3867 29

of the intended loss, for purposes of sentencing, is the amount

that the defendant placed at risk by misappropriating money

or other property.”); see also United States v. Brownell, 495 F.3d

459, 463 (7th Cir. 2007); United States v. Swanson, 483 F.3d 509,

513 (7th Cir. 2007); United States v. Lane, 323 F.3d 568, 585 (7th

Cir. 2003). The rule is particularly well suited for application to

Ponzi schemes. Ponzi schemes themselves generate no legiti-

mate gains; they “will inevitably collapse at some point, when

the volume of new money from new investors/victims is no

longer sufficient to meet the demands and expectations of the

earlier investor/victims.” United States v. Castaldi, 743 F.3d 589,

597 (7th Cir. 2014). After money is raised through investment,

the question is not whether it will be lost but when and by

whom. It’s worth noting that none of the authorities cited by

the defendants in their attempt to undercut Lauer involved a

Ponzi scheme.

Nor is the placed-at-risk standard necessarily inconsistent

with this court’s general position that “[i]n determining the

intended loss amount, the district court must consider the

defendant’s subjective intent.” United States v. Middlebrook,

553 F.3d 572, 578 (7th Cir. 2009). For instance, in Mei we upheld

the use of the placed-at-risk standard to determine intended

loss in a scheme involving credit-card fraud. 315 F.3d at 793.

The evidence in Mei established that the defendant intended to

use each credit card to its limit; we held that the district court

properly estimated intended loss by multiplying the average

maximum credit limit of the recovered cards by the total

number of cards used in the conspiracy. Id.

30 Nos. 12-3819, 12-3833 & 12-3867

Similarly here, the evidence established that the defendants

intended to place the full value of their certificate authorization

at risk. For example, in discussing the ramifications of the state

agency’s refusal to authorize the fall 2009 offering, Cochran

said, “[I]f the[y’re] gonna blow us up, we’re gonna blow them

up. … Fifty four hundred investors aren’t gonna f*ckin[,] I

mean it would be a catastrophic event in the [S]tate of Ohio.”

Durham also told Snow,

I mean, [we’re] betting obviously on a

renewal … of our offering certificate, if the

renewal doesn’t happen all bets are off (laughs)

anyway, for everything … either the renewal

happens and we[’]re able to kick back up invest-

ment deposits [or] it doesn’t and then we[’]re all

f*cked anyway, we just kind of go into liquida-

tion mode of everything anyways.

The defendants also argue that the district court erred in

not accounting for money from the $250 million 2008 offering

that was repaid to investors. The sentencing guidelines allow

the application of a “credit against loss” when money is repaid

before discovery of a crime. Brownell, 495 F.3d at 463–64 (citing

U.S.S.G. § 2B1.1 cmt. n.3(E)). The defendants concede that they

adduced no evidence of repayment in the district court.

Instead, they argue from inferences drawn from the trustee’s

report. Approximately $250 million worth of certificates were

issued, yet investors only claimed $208 million in losses from

those investments, suggesting that $42 million must have been

repaid. Or so the argument goes.

Nos. 12-3819, 12-3833 & 12-3867 31

Nothing supports the inference of repayment. It’s specula-

tive at best; we simply do not know whether the holders of the

unaccounted-for $42 million in certificates were repaid or

merely did not file claims in the bankruptcy. The defendants

also cannot demonstrate whether the supposed “repayments”

occurred before or after their criminal conduct was uncov-

ered—a necessary finding in order to apply the credit. See id. at

463.

Finally, any error related to intended loss is harmless. The

district court’s actual loss finding is independently sufficient to

support the sentencing enhancement.

III. Conclusion

For the foregoing reasons, we REVERSE Durham’s convic-

tions on Counts 2 and 5 and REMAND for resentencing without

those counts. In all other respects, the defendants’ convictions

and sentences are AFFIRMED.