United States v. Leahy, John J.

In the

United States Court of Appeals

For the Seventh Circuit

____________

Nos. 05-2639, 05-2652, 05-2692 & 06-1485

UNITED STATES OF AMERICA,

Plaintiff-Appellee,

v.

JOHN J. LEAHY, WILLIAM E. STRATTON,

JAMES M. DUFF, and TERRENCE DOLAN,

Defendants-Appellants.

____________

Appeals from the United States District Court

for the Northern District of Illinois, Eastern Division.

No. 03 CR 922—Elaine E. Bucklo, Judge.

____________

ARGUED JUNE 9, 2006—DECIDED OCTOBER 4, 2006

____________

Before RIPPLE, MANION, and SYKES, Circuit Judges.

MANION, Circuit Judge. This appeal stems from James

Duff’s admitted, successful schemes to cheat the City of

Chicago out of funds slotted for minority- and women-

owned businesses and to swindle various workers compen-

sation insurance providers out of proper premiums. Duff’s

expansive plots swept up many of his business associates

and family members, and this appeal consolidates a broad

range of challenges (by him and them) to pleas, jury convic-

tions, and sentences. We affirm in part and reverse in part.

2 Nos. 05-2639, 05-2652, 05-2692 & 06-1485

I.

Two complex fraud schemes hatched by James Duff, a

Chicago businessman, are at the heart of this case. Despite

the significant overlap between the participants and compa-

nies that figure in the two plots, we will discuss the facts of

each separately in the interest of clarity.

A. City Scheme

In 1990, the City Council of Chicago passed an ordinance

to grant an advantage to select businesses owned by

minorities (“MBEs”) and women (“WBEs”) in the award of

city contract money. Specifically, Chicago’s Purchasing

Agent had to “establish a goal of awarding not less than

25% of the annual dollar value of all Contracts to qualified

M.B.E.s and 5% of the annual dollar value of all Contracts to

qualified W.B.E.s.” In addition to requiring the heads

of departments and agencies to work with the Purchasing

Agent to meet this goal, the ordinance also contained an

explicit provision setting aside certain contracts for qualified

MBEs and WBEs that met “target market requirements.”

Companies that wished to obtain a contract with the city,

but which were neither MBEs nor WBEs, had to commit to

expend 25% of the value of the contract with MBEs and 5%

with WBEs. The ordinance included subcontracting as one

of the various ways to fulfill this requirement. Penalties for

a contractor’s failure to meet the appropriate percentages

ranged from liquidated damages to termination.

While the ordinance provided substantial assistance to

MBEs and WBEs, it imposed heavy restrictions on which

companies qualified. In particular, it limited its applica-

tion based both on owner involvement in the business and

the level of success achieved by the business. For a business

Nos. 05-2639, 05-2652, 05-2692 & 06-1485 3

to qualify as an MBE, one or more members of a minority

group must have ownership of 51% of the company, and

one or more members of a minority group must have day-

to-day management and control. The ordinance defined a

WBE in like manner, substituting women for minorities. A

figurehead minority or woman owner, therefore, would not

be enough for certification; a member of one of these select

groups must own and, for all practical purposes, run the

business.

There was an additional limitation. Chicago prohibited

any “Established Business” from gaining this favored status.

According to the ordinance, an established business was one

which, “by virtue of its size and capacity . . . does not need

to be a participant in the Program in order to effectuate the

purposes of the Program . . . .” Giving further guidance, the

ordinance presumed a business met this definition if it (and

any affiliates) totaled $17 million in average annual gross

receipts over a three-year period. This restriction indicates

that Chicago was not interested in subsidizing entrenched,

successful businesses, even if the businesses were owned by

women or minorities. As a former city official put it at trial,

“it was a program to assist those companies to win contracts

with the City in a competitive situation and become eco-

nomically viable so that they, in fact, could compete as

prime contractors.” In other words, this was an affirmative

action program whose fruits were reserved for fledgling

minority and women businesses.

When Chicago passed the ordinance, James Duff, a

white man, controlled numerous businesses in the city. For

purposes of the present discussion, we focus our attention

on two of those businesses. First, he controlled Windy City

Maintenance (“Windy Maintenance”), a company providing

janitorial services, which Duff incorporated in 1989. While

4 Nos. 05-2639, 05-2652, 05-2692 & 06-1485

his mother, Patricia Green Duff (“Green Duff”), was Windy

Maintenance’s sole shareholder, this was an empty for-

mality as she had no real involvement with the business,

exercising no control over its affairs and spending con-

siderable time in vacation homes in Florida and Wisconsin.

Duff himself actually ran Windy Maintenance, making

all substantive financial and business decisions, including

hiring employees and negotiating contracts. Second,

Duff controlled a company named Remedial Environmental

Manpower (“Remedial”), which “manage[d] and provide[d]

manpower for environmental cleanup.” Remedial was

incorporated in 1988, and its purported owners were

William Stratton (“Stratton”), who owned fifty-five percent

of the stock, and Green Duff, who owned the remaining

forty-five percent. Stratton, a black man, acted as the

occasional driver and companion of Duff’s father,

a friendship dating back to earlier union days. Stratton

routinely came to the Remedial office (space shared with a

number of other Duff businesses) shortly before lunch in the

company of Duff’s father and, while there, mainly played

cards with members of the Duff family and watched

television. For the early part of its existence, Remedial was

more of an empty shell than a thriving concern, or as Duff

himself put it, “a company that didn’t work out.” To the

extent that Remedial was an actual company, however, Duff

was in charge.

With Green Duff and Stratton in the ownership positions

of these companies, Windy Maintenance and Remedial

appeared, at least superficially, well-positioned to obtain

WBE and MBE certification after the passage of the ordi-

nance. Of course, for either to gain such a status, Duff

would need to obscure his kingship over the companies.

Windy Maintenance was the first to try to take advantage

of the ordinance. In 1991, it applied for certification as

Nos. 05-2639, 05-2652, 05-2692 & 06-1485 5

a WBE, claiming in the application that Green Duff, who

used her maiden name, Patricia Green, both owned and

ran the company. Green Duff repeated this representation to

city officials during a subsequent certification interview,

and Windy Maintenance obtained the desired certification

as a WBE. Windy Maintenance retained this position for

several years, with corporate officers, such as Terrence

Dolan, submitting annual renewal applications that reiter-

ated the false description of Green Duff’s role.

Windy Maintenance’s certification allowed it to win

lucrative contracts with Chicago and subcontracts with City

contractors specifically because of its WBE status. In

particular, Windy Maintenance entered into subcon-

tracts to provide janitorial services for a terminal at

O’Hare International Airport and the Harold Washing-

ton Library. Windy Maintenance also contracted directly

with Chicago for similar services at the city’s 911 Center and

a district of the Chicago Police Department. In 1999, Windy

Maintenance informed the city that it would no longer

apply for WBE certification as it had reached the maximum

dollar limits it could obtain under the program. Over the

years in which Windy Maintenance was certified as a WBE,

it obtained $37,512,279 from these contracts

and subcontracts. Throughout this time, Duff was totally

in charge at Windy Maintenance.

Remedial’s big break came slightly later than that of

its sister company. In approximately 1991, Duff was ap-

proached by James Barry, a long-time friend and business

associate, to discuss providing the labor portion of a bid that

Barry’s company, Waste Management of Illinois (“Waste

Management”), was submitting to Chicago. Chicago was

looking for a company to provide construction, administra-

tion, and labor services for four new recycling centers as

6 Nos. 05-2639, 05-2652, 05-2692 & 06-1485

part of the city’s Blue Bag recycling program. Of course,

Chicago’s involvement meant that the winning bid had to

comply with the strictures of the 1990 ordinance. Duff

responded to Barry’s solicitation that he could not only

fulfill Waste Management’s labor needs, but could do so

using a company that could achieve MBE

certification—Remedial. Remedial’s lack of work experience

did not faze Barry. He was selecting Duff, a friend and

established businessman who had consistently met Barry’s

expectations in past projects, while getting credit for hiring

an MBE. As Barry put it at trial, “it was my understanding

that no matter what the ownership structure of the company

would be, that I was going to continue to deal with Jimmy

and rely on Jimmy to operate and control.” After eventually

winning the Blue Bag contract, Waste Management desig-

nated Remedial as its MBE subcontractor in its 1993 plan to

the city.

Obtaining certification as an MBE turned out to be a much

trickier proposition for Remedial than it had been for Windy

Maintenance. In 1993, Remedial submitted its initial certifi-

cation affidavit to the city’s purchasing agent for approval.

This application revealed that Ellen Niemeier was the sole

minority shareholder and contained no references to Duff’s

mother, Green Duff. Duff’s influence had not diminished, as

Ellen Niemeier happened to be his wife. Nonetheless, the

application raised a variety of concerns with the relevant

Chicago officials. In particular, they had questions about the

roles of Stratton and Niemeier, as well as Remedial’s overall

viability and independence, worries prompted by several

allusions to Duff and his companies on the application.

These concerns were heightened when the city contacted

clients of Remedial who indicated that they only dealt with

James Duff. Faced with a variety of red flags, the city issued

a preliminary denial of MBE status in 1993.

Nos. 05-2639, 05-2652, 05-2692 & 06-1485 7

For his part, Stratton immediately and vigorously op-

posed this ruling in meetings and through a number

of filings, including an affidavit from Duff expressly

denying his involvement with Remedial. Still, the city

held strong. In 1994, however, Remedial submitted an

entirely new application that reported Stratton was the

sole owner of the business and that removed all of the

troubling references to Duff and his companies. After

another review, the city changed course and approved

Remedial as an MBE. Obtaining MBE status, Remedial

officially became an MBE subcontractor in the city’s

Blue Bag program, providing the labor for Waste Manage-

ment at the four recycling centers. During the life of its

contract with Waste Management, Remedial received

approximately $74,849,310 from the city program.

During the 1990s, money often flowed through Windy

Maintenance and Remedial (and other Duff-controlled

companies) to American Management and Consulting

(“American”). While American was supposedly a consulting

company, in actuality Duff, its owner, basically used it as a

payroll company. Duff would instruct his payroll specialist

to transfer money from a company like Remedial to Ameri-

can, then make payments to family members and others out

of that account. Moreover, Stratton and other employees

would often receive and cash large checks, and, on Duff’s

instructions, would return the entirety of the proceeds to

Duff for his use.

Duff’s shenanigans eventually garnered media scrutiny,

which led to a city investigation into the propriety of the

certifications. In order to evade city investigators, Duff

had office personnel spend weeks tutoring Green Duff

so that she could give the impression that she actually

ran Windy Maintenance. To complete the illusion, Duff

8 Nos. 05-2639, 05-2652, 05-2692 & 06-1485

installed Green Duff in his actual office, going so far as to

change the buttons on the switchboard to reflect that the

main office was hers. While Green Duff had a rocky inter-

view with city inspectors, Duff convinced his employees

and business associates to corroborate the story that she was

in charge. In particular, Duff’s primary insurance agent,

John Leahy, told Adrienne Hiegel, an assistant state’s

attorney, that he met solely with Green Duff on insurance

matters for Windy Maintenance and that he had no contact

with Duff on these matters. The ruse worked, and Chicago’s

investigation faltered. Likewise, Stratton convinced city

investigators he actually ran Remedial.

While the city could not pierce the conspiratorial curtain,

federal investigators eventually did. As will be ex-

plained further in conjunction with the insurance scheme, in

2003, Duff, Stratton, Green Duff, and Dolan were

each indicted for offenses arising out of their actions in

the city scheme.

B. Insurance Scheme

We now shift our attention to Duff’s endeavors to cheat

his insurers, a fraud of even longer duration. This

scheme introduces yet another company controlled by Duff:

Windy City Labor Service (“Windy Labor”). Windy Labor

provided temporary employees to various liquor ware-

houses and other clients.

Before detailing the scheme, a working knowledge of the

mechanics of the Illinois workers compensation system is

necessary. Illinois generally requires employers to have

workers compensation insurance. Because some em-

ployers with high risk histories would be unable to obtain

Nos. 05-2639, 05-2652, 05-2692 & 06-1485 9

insurance in the open, voluntary market, Illinois created

an assigned risk pool to provide insurance to these busi-

nesses. While all insurance companies providing workers

compensation insurance contribute to the assigned risk

pool, a small subset actually administer the insurance

policies in the assigned risk pool, charging higher premiums

(because of higher risks) and obtaining reimbursements for

their costs. A business can apply for assigned risk insurance

only after receiving two rejections on the voluntary market.

When a business applies, Illinois itself actually does not

decide upon the carrier but farms this task out to the

National Council on Compensation Insurance (the “Insur-

ance Council”). The Insurance Council assigns applicants to

participating insurance companies and sets advisory rates

for the calculation of premiums.

Premiums for workers compensation insurance are

calculated using three independent factors. First, the

insurance company must determine the correct classifica-

tions for the various jobs performed by the insured’s

employees. Each type of job has an advisory rate set by the

Insurance Council, which reflects the relative riskiness of

that position. The second factor is the amount of payroll in

each job classification. The premium’s final element is the

experience modifier, a number determined by the Insurance

Council that compares an employer’s past claim history to

the past claim history of the average employer in that job

classification. If a company has a claims history that is

average in its field, the experience modifier will be one. As

the number of claims increases, so does the modifier (and by

extension, the premium). However, an extremely high

modifier, for example one reflecting double or triple the

average amount of claims, might instead indicate improper

classification of employees. The insurance company calcu-

10 Nos. 05-2639, 05-2652, 05-2692 & 06-1485

lates the premium by multiplying the job classification rate

by the payroll and that amount by the experience modifier.

With this background, we now examine Duff’s insurance

fraud. Windy Labor first applied for placement in the

assigned risk market through its insurance broker, John

Leahy of Leahy & Associates, in 1982. In the initial ap-

plication, Leahy described Windy Labor as a company

that “will provide various labor type jobs as they arise.

The work will vary, will include janitorial work, truck

helpers, warehousing, bottling. It is a temporary service

for labor-type work.” The initial classification codes

submitted—warehousing, bottling, janitorial, and truck

helper employees—were consistent with this information.

A report from later in the year was even more blunt in its

assessment of the Windy Labor work force: “As mentioned,

these are usually people out of work or skid row bums

working for drinking money.” The Insurance Council

assigned Windy Labor to Casualty Insurance (“Casualty”)

as its workers compensation insurance provider.

Casualty provided Windy Labor with insurance from the

assigned risk pool until 1995. During this time, Windy

Labor applied annually for renewal of this insurance,

sending updated payroll and classification numbers. These

renewals were largely automatic between Windy Labor and

the insurance provider, but Casualty continued to

send Leahy & Associates copies of policies and applications.

For the first few years, the classifications remained constant,

but in 1985, a drastic shift occurred. The application intro-

duced a clerical workers category and, from the start, this

new classification included the largest portion of payroll,

dwarfing other more established categories such as ware-

housing and janitorial. Again, Leahy & Associates received

a copy of the policy reflecting this change from Casualty.

Nos. 05-2639, 05-2652, 05-2692 & 06-1485 11

Throughout the remainder of Windy Labor’s relationship

with Casualty, the clerical category continued to dominate

the other classifications, ending with over $1.7 million out

of a total payroll of approximately $2.1 million in that

category. While the categories had changed on paper,

Windy Labor had not actually shifted its operations from

labor to clerical work. Duff had decided to keep the premi-

ums down by making what would turn out to be massive

and long-term misrepresentations.

To effectuate this scheme, Duff wove an intricate web of

lies using employees and business associates. Duff met with

auditors, giving fake figures regarding the business, and

initiated his office manager in the ways of falsely represent-

ing the employees as clerical. Windy Labor provided client

lists with false designation and engaged in delay and

suppression of payroll records.

Red flags flew. Casualty obtained loss runs, which are

summaries of the injury claims, and showed nearly all

Windy Labor injuries coming from the warehousing

class, even though clerical was dominant. Casualty also sent

multiple notices of cancellation during the period of cover-

age because of Casualty’s inability to complete audits. While

the policy was never cancelled, Casualty transmitted these

notices to Leahy & Associates. Casualty did not catch on to

the fraud before it left the assigned risk pool in 1995.

When Casualty left the assigned risk pool in 1995, Windy

Labor had to apply for a new assigned risk carrier. This

became a familiar refrain, as Windy Labor was left search-

ing for carriers in 1998, 1999, and 2000.1 The person at Leahy

1

For purposes of completeness, the relevant carriers were

(continued...)

12 Nos. 05-2639, 05-2652, 05-2692 & 06-1485

& Associates responsible for the account was Edward

Wisniewski, who assumed this duty in 1989. Wisniewski’s

primary role was completing insurance applications and

contracts, though he also interfaced between Windy Labor

and the relevant insurer, passing along any concerns or

questions from one to the other.

Despite the frequent turnover in insurance companies, the

scheme continued. Duff remained resolute in his belief that

the premiums were too high and continued to have his

office employees overstate the clerical portion of the

workforce. Complicating matters for Windy Labor,

the insurance companies expected to conduct routine audits

to verify the information on the policies. Rather than giving

the information, which would reveal the plot, Windy Labor

employees stonewalled auditors, submitted false worker

information and client lists, and even forged a letter suppos-

edly from an outside accountant that confirmed the lies.

Windy Labor’s actions did not go completely unno-

ticed. Both USF&G and Kemper threatened to cancel their

policies for failure to submit to audits. Wisniewski was

informed and often worked with Windy Labor employees

to avert this possibility by revealing some information that

would satisfy the insurer without endangering the scheme.

This worked to some extent. For example, USF&G left the

assigned risk pool in 1998 without ever completing its final

audit. For its part, the Insurance Council tried to untangle

the disconnect between the small number of warehouse

workers and the huge number of claims emanating from

1

(...continued)

USF&G (1995-1998), Kemper (1998-1999), Amcorp (1999-2000),

and Travelers (2000-present). We will discuss each as necessary to

illuminate the fraud.

Nos. 05-2639, 05-2652, 05-2692 & 06-1485 13

this class. In response, Wisniewski and Windy Labor offered

a compelling mix of rationalizations and false information,

including doctored client lists, to defuse the inquiry.

Circumstances surrounding Kemper’s response to its

unsatisfying audit cast some additional light on the fraud.

Receiving a cancellation notice in 1999, Duff instructed his

office manager, Cathy Martinez, to call Leahy to sort out the

problem. Martinez and another Windy Labor employee,

Heather Placek, had a conference call with Leahy and

Wisniewski shortly thereafter. Without going into the

details of the situation, Martinez told Leahy that Duff asked

her to talk to him. According to Martinez, Leahy’s response

was “you know, you got to do whatever you got to do to get

this done or you’re not going to have insurance.” At this

point, Placek, who had limited exposure to the insurance

scheme, pointedly stated, “Has this occurred to anyone that

this is insurance fraud?” According to Martinez, after a

pause, Leahy again responded that Windy Labor had to do

whatever it took to get this done, or they would not have

insurance. Eventually, the plotting was rendered irrelevant

when Illinois would not let Kemper terminate the insurance

contract for procedural reasons. Still, Windy Labor’s actions

had significant repercussions. As Kemper had not been able

to complete its audit, Windy Labor was barred from

placement in the assigned risk pool. Moreover, Kemper re-

ferred Windy Labor to the Insurance Council, alerting

that organization to its belief that Windy Labor was engag-

ing in premium misrepresentation.

The failure to complete audits, however, was not the

only red flag. Windy Labor had an extremely high ex-

perience modifier during this time because of its rampant

misclassification of its work force. At one point, the experi-

ence modifier reached 3.23, which meant that Windy Labor

14 Nos. 05-2639, 05-2652, 05-2692 & 06-1485

had more than three times as many accidents as the average

employer in its category. As one USF&G employee testified

at trial, “this mod actually is extremely high, considering

that . . . most of the employees were clerical . . . [b]ecause

clerical positions normally don’t generate a high percentage

of loss or injury on the job.” Later, when Windy Labor was

barred from the assigned risk pool in 1999, Leahy & Associ-

ates turned to another broker, Vincent Braband, to help with

obtaining insurance in the voluntary market. While review-

ing the file, Braband immediately noticed the extremely

high experience modification factor (2.78), which was the

highest he had seen and which he took as a signal of

misclassification. This notion was confirmed when he

sent the numbers to Amcorp Insurance, whose agent also

noted the modification factor and felt that it was a clear sign

of misclassification.

Leahy & Associates, uniformly in the person of

Wisniewski, repeatedly learned of these red flags. At one

point, USF&G contacted a Windy Labor client who actu-

ally spoke candidly (and truthfully) about what Windy

Labor workers did at his company. Upon learning of this

conversation, Wisniewski responded that the information

was wrong and relayed the issue to Duff, who pressured the

client into retracting. A few years later when Braband was

attempting to find a voluntary carrier for Windy Labor, he

inspected the file and spotted the small labor classification

with an extremely high number of manual accidents.

Together with the experience modification issue, Braband

felt the clerical was grossly overestimated and told

Wisniewski as much, explaining that he needed correct

classifications for any possibility of placement. Faced with

these objections, Wisniewski immediately submitted new

numbers to Braband, flipping the clerical payroll from $1.2

million to $600,000, the warehousing amounts from $75,000

Nos. 05-2639, 05-2652, 05-2692 & 06-1485 15

to $1.2 million, and the janitorial amounts from $91,000 to

$800,000. Eventually, Amcorp agreed to insure Windy

Labor, but the premium was more than three times what

Windy Labor had been paying.

In 2000, after Amcorp declined to renew Windy Labor’s

voluntary policy because of the high rate of claims, Duff

decided to combine Windy Labor with a different Duff

company that had a good insurance track record, Remedial.

Hoping to avoid revealing Windy Labor’s experience

modifier (and take advantage of Remedial’s low modifica-

tion factor), this transaction was styled as a purchase and

not disclosed as required. Despite repeated requests by

insurance providers for information about the combination,

Wisniewski and Windy Labor/Remedial employees (includ-

ing Stratton) stonewalled and responded that no such

information was needed. On account of this tactic, Remedial

had problems obtaining insurance for the Windy Labor

portion of the business. Eventually, however, it contracted

with Travelers, which forced Remedial/ Windy Labor to

send, in 2001, a form acknowledging the merger after

Travelers threatened cancellation of its policy. Travelers

continues to provide workers compensation insurance to

Remedial, though the Insurance Council adjusted the

experience modifier based on the completed form.

Through this extensive scheme to hide the true nature

of Windy Labor’s business, the company paid approxi-

mately $1.09 million less in premiums than it should have.

C. Trial

In 2003, the federal government charged the major players

in the Duff frauds in a thirty-three count indictment cover-

ing both schemes. Basically, the indictment charged the

16 Nos. 05-2639, 05-2652, 05-2692 & 06-1485

various defendants with violations of RICO, mail and wire

fraud statutes, money laundering, and tax offenses. Shortly

before trial, Duff pleaded guilty to all counts. Dolan fol-

lowed suit. Although Green Duff was indicted, prosecutors

declined to try Green Duff because of a rapid decline in her

mental health. Wisniewski, Leahy, Stratton, and a Remedial

supervisor, Starling Alexander, went to trial. After a month-

long trial, the jury returned guilty verdicts for all the

defendants except for Alexander, who was only tangentially

involved in the scheme.

The district court sentenced Duff to 118 months’ imprison-

ment and ordered restitution in the amount of

$12,026,582.02. The district court sentenced Stratton to

seventy months’ imprisonment and restitution in the

amount of $7,370,739.00. The district court sentenced Dolan

to twenty-one months’ imprisonment. The district court

sentenced Leahy to forty-six months’ imprisonment and

ordered restitution in the amount of $1,093,566.00.

Wisniewski received a sentence of a year and a day and

chose not to appeal.

II.

In this consolidated appeal, the defendants attack jury

convictions, pleas, and sentences. For Duff, Dolan, and

Stratton, the centerpiece of their appeals challenges the

sufficiency of the indictment, alleging that the fraud on the

city could not meet the requirements of mail or wire fraud.

Building from this foundation, Stratton, joined by Duff,

argues that, if the mail and wire fraud counts do not

constitute crimes, the money laundering charges, which rely

on them, necessarily falter. Stratton also challenges

the prejudicial spillover effect of this allegedly improper city

Nos. 05-2639, 05-2652, 05-2692 & 06-1485 17

scheme evidence, which he believes led to his conviction on

the RICO conspiracy and the insurance fraud counts.

In addition to the major argument concerning the wire

and mail fraud counts, Duff raises a number of challenges to

his sentence. He first contends that the district court should

not have calculated his guidelines offense level using a $10

million loss to the city since, he claims, the city actually lost

nothing on the contracts. Duff also asserts that the district

court erred by not awarding him a full three-point reduction

for acceptance of responsibility and by applying several

improper enhancements. Finally, Duff argues that restitu-

tion to Chicago was improper, returning to his theme that

the city suffered no loss.

Leahy, for his part, begins with a sufficiency of the

evidence challenge and also contends that the district court

erred by delivering an “ostrich” jury instruction. Leahy also

faults the district court for a range of evidentiary decisions.

He proceeds to argue that the district court erred by not

severing the trial of the insurance fraud counts from the trial

of those counts involving the city scheme. Leahy concludes

his challenges by asserting that the district court improperly

calculated the period of his involvement in the conspiracy,

which redounded to his detriment at sentencing.

STRATTON, DUFF, AND DOLAN’S TRIAL, PLEA, AND

SENTENCING ISSUES

A.

We first consider Duff, Dolan, and Stratton’s argument

that the city scheme referenced in the indictment cannot

support a conviction under the applicable mail and wire

fraud statutes. Specifically, they contend that the only loss

Chicago suffered was to its regulatory interests—an intangi-

18 Nos. 05-2639, 05-2652, 05-2692 & 06-1485

ble right unprotected by these statutes. We review a chal-

lenge to the sufficiency of an indictment de novo. See United

States v. Gee, 226 F.3d 885, 891 (7th Cir. 2000); United States

v. Briscoe, 65 F.3d 576, 582 (7th Cir. 1995).

We begin our evaluation of the indictment’s validity by

examining the words of the relevant statutes, the first be-

ing mail fraud.

Whoever, having devised or intending to devise any

scheme or artifice to defraud, or for obtaining money or

property by means of false or fraudulent pretenses,

representations, or promises . . . for the purpose of

executing such scheme or artifice or attempting so to do,

places in any post office or authorized depository for

mail matter, any matter or thing whatever to be sent or

delivered by the Postal Service, . . . shall be fined under

this title or imprisoned not more than 20 years, or both.

18 U.S.C. § 1341.

“The elements of wire fraud under 18 U.S.C. § 1343 di-

rectly parallel those of the mail fraud statute, but require the

use of an interstate telephone call or electronic communica-

tion made in furtherance of the scheme.” Briscoe, 65 F.3d at

583. The requisite elements of these offenses, therefore, are

three: (1) a scheme to defraud; (2) an intent to defraud; and

(3) use of the mails or wires in furtherance of the scheme.

See United States v. Henningsen, 387 F.3d 585, 589 (7th Cir.

2004); United States v. Britton, 289 F.3d 976, 981 (7th Cir.

2002). Cases construing one are equally applicable to the

other. See United States v. Stephens, 421 F.3d 503, 507 (7th Cir.

2005). To show the intent to defraud, we have consistently

required a “wilful act by the defendant with the specific

intent to deceive or cheat, usually for the purpose of getting

financial gain for one’s self or causing financial loss to

Nos. 05-2639, 05-2652, 05-2692 & 06-1485 19

another.” Britton, 289 F.3d at 981. See also United States v.

Davuluri, 239 F.3d 902, 906 (7th Cir. 2001); United States v.

Hickok, 77 F.3d 992, 1003 (7th Cir. 1996) (stating that mail

and wire fraud are specific intent crimes). These statutes do

not require the government to prove either contemplated

harm to the victim or any loss. See United States v. Vincent,

416 F.3d 593, 600-01 (7th Cir. 2005) (addressing loss); United

States v. Fernandez, 282 F.3d 500, 507 (7th Cir. 2002) (discuss-

ing contemplated harm). Moreover, a defendant’s honest

belief that his actions will ultimately result in a profit and

not a loss is irrelevant for determining whether a violation

has occurred. See Davuluri, 239 F.3d at 906; United States v.

Masquelier, 210 F.3d 756, 759 (7th Cir. 2000).

The mail and wire fraud counts of the indictment dedi-

cated to the city scheme (Counts 2-15) charged that

Duff, Stratton, Dolan, and others hatched and executed

a plan to obtain fraudulently over $100 million in con-

tracts and subcontracts from the city of Chicago by lying

about the Windy Maintenance and Remedial ownership

structure. The indictment goes on to detail precisely how

Duff and the others used or caused to be used the mails and

wires in furtherance of this scheme.

The defendants, however, believe that, despite its ex-

press references to the money they obtained, the indictment

did not allege a deprivation of money or property. They

arrive at this interesting conclusion by positing that Windy

Maintenance and Remedial fulfilled their obligations under

the relevant contracts or subcontracts. The argument

continues that because the city would ostensibly have paid

the same for the provided services regardless, Chicago lost

no money. According to the defendants, Chicago only lost

a regulatory interest in controlling exactly where its money

went. They conclude, therefore, that the mail and wire fraud

20 Nos. 05-2639, 05-2652, 05-2692 & 06-1485

counts of the indictment charged an intangible rights

scheme, which cannot survive under Supreme Court

precedent like McNally v. United States, 483 U.S. 350 (1987)

and, more recently, Cleveland v. United States, 531 U.S. 12

(2000).

Despite the defendants’ contortions to squeeze this case

into the intangible rights category, we cannot agree that it is

such a case. The mail and wire fraud statutes require that

the object of the fraud is money or property, rather than an

intangible right.2 See Cleveland, 531 U.S. at 15 (stating that

“for purposes of the mail fraud statute, the thing obtained

must be property in the hands of the victim”); McNally, 483

U.S. at 360. In Cleveland, the scheme turned on defrauding

the government out of a video poker license by making false

statements on the licensing application. Id. at 15-17. The

Supreme Court indicated that a violation of § 1341 or § 1343

must implicate a government’s role as a property holder, not

just its role as sovereign. Id. at 23-24. In Cleveland, the Court

found that falsely obtaining a license did not. Id. at 21-23.

The Court noted that the licenses sought “do not generate

an ongoing stream of revenue” and, importantly for the

present case, “the Government nowhere alleges that Cleve-

land defrauded the State of any money to which the State

was entitled by law.” Id. at 22. Turning its attention to the

government’s argument that the state had a right to

choose to whom it would award a license, the Court re-

sponded that this was not a property right, but an intangible

right—the power to regulate. Id. at 23.

2

We, of course, acknowledge a limited exception to this rule for

the deprivation of the “intangible right of honest services.” 18

U.S.C. § 1346. Congress grafted this additional ground for mail

and wire fraud on to the money and property requirement

in response to McNally. See Cleveland, 531 U.S. at 19-20.

Nos. 05-2639, 05-2652, 05-2692 & 06-1485 21

In our case, however, the scheme precisely and directly

targeted Chicago’s coffers and its position as a contract-

ing party. As opposed to the situation in Cleveland, the

indictment here alleges a plot with an aim different from

obtaining licenses or certifications. Cleveland addresses a

situation in which a defendant commits fraud against a

governmental body only acting as regulator; here the

fraud was committed both against Chicago as regulator and

also against the city as property holder. The certifications

were necessary steps, but they were not the object of the

long-ranging fraud. That object was money, plain and

simple, taken under false pretenses from the city in its role

as a purchaser of services.

We cannot agree with the defendants that previous

cases from our court aid their quest to remove the present

fraud from the reach of the federal mail and wire fraud

statutes. In United States v. Ashman, 979 F.2d 469, 479 (7th

Cir. 1992), we found that one aspect of a fraudulent trad-

ing scheme did not qualify as mail or wire fraud under

the federal statutes because there was no possibility of a loss

given the structure of the daily trading rules. Put another

way, while fraud occurred, no money or property was

possibly at issue, so these limited segments of Ashman’s

overarching fraud could not be punished under § 1341 or

§ 1343. See id. The defendants try to fit the present case

under Ashman by arguing that Waste Management and

other such general contractors had agreed with Chicago for

a price for labor or janitorial services, and the price was

inflexible, regardless of the fraud. This is a much different

case from Ashman, which involved a complete physical

impossibility of loss due to the way that the trading market

was set up. In this case, Chicago simply received one type

of services it contracted for through these

subcontracts—cleaning and janitorial services. Chicago

22 Nos. 05-2639, 05-2652, 05-2692 & 06-1485

completely lost the other type of services for which it was

paying the contractors and the Duff companies—services

performed by an MBE or an WBE precisely because the

company is a qualified MBE or WBE. Windy Maintenance

and Remedial would not have received the subcontracts,

and the general contractors ostensibly would not have won

the bids, without the fraudulently gained certifications.

Chicago suffered a loss of money in that it paid for a service

provided by an MBE or WBE that it did not receive, and

Ashman does not compel us to conclude otherwise.

Nor do we believe this case similar to United States v.

Walters, 997 F.2d 1219 (7th Cir. 1993). In that case, a sports

agent signed secret contracts to become the agent for a

variety of athletes while they were still in college and

receiving scholarship money. See id. at 1221. The govern-

ment’s theory was that Walters committed fraud by causing

the universities to pay scholarship money to students who

were ineligible, thus resulting in a loss of money to the

universities. See id. We found the prosecution defective

because the universities “were not out of pocket to Walters.”

Id. at 1224 (emphasis in original). Walters did not obtain any

money from the universities as part of his scheme to

defraud. In this case, Duff and his cronies engaged in a

fraud directly targeting the city and, unlike Walters, obtain-

ing money from Chicago through the fraudulent scheme.

Looking at the requirements for mail and wire fraud, the

indictment establishes each element. First, it alleges a

scheme to defraud the city of money by obtaining con-

tracts through false pretenses. Both the direct contracts with

Chicago and the various subcontracts would not have been

awarded in the absence of the MBE/WBE certifications

obtained through fraud. Second, the indictment shows an

intent to defraud Chicago out of its money by engaging in

Nos. 05-2639, 05-2652, 05-2692 & 06-1485 23

this practice. As stated above, it does not matter that Duff

and his cronies thought that Chicago was getting a service

worth every dime in the contracts.3 All that is required is a

wilful act with the intent to deceive or cheat by each of the

defendants, which the indictment demonstrates. Specifi-

cally, Duff deceived Chicago regarding the true status of his

companies. Finally, the mails and wires were used in

furtherance of the scheme. Therefore, we conclude that the

district court correctly rejected the defendants’ argument

challenging the sufficiency of the indictment.4

3

As the government clearly stated at oral argument, Chicago

was aware that the services rendered by the MBEs or WBEs

would not be the most efficient or the lowest-priced possible.

Nonetheless, the “city was willing to pay these premiums [ ] to

these MBE/WBE contractors in order to foster their growth and

to permit them to earn a profit that they would otherwise not

have access to on a purely open bidding system.” A corollary

of this proposition is that an efficient, established business, given

the advantage of MBE/WBE status, would earn more than it

would normally receive under a truly open bidding system,

in which it would compete against similarly established com-

panies with the same experience and efficiencies of scale. Duff

was a highly experienced businessman who easily made substan-

tial profits off the MBE/WBE contracts and paid the surplus to

family members and associates who performed little or no work

for the various entities under contract. At sentencing, the district

court emphasized that the goal of Chicago’s program was

fundamentally frustrated, remarking “it’s a double loss, the loss

that we computed and the real loss to all the people that didn’t

get this business, that didn’t get a chance to build their busi-

nesses, . . . that didn’t get a chance to become successful minority-

and women-owned businesses, because this huge amount was

diverted.”

4

Given our decision that the indictment properly alleged

(continued...)

24 Nos. 05-2639, 05-2652, 05-2692 & 06-1485

B.

We proceed to Duff’s contention that the district court

improperly calculated his offense level on the fraud convic-

tions because Chicago suffered no loss. Both parties agree

that Guideline § 2F1.1 applies to this case. This guideline

provides a base offense level for crimes involving fraud and

deceit, then increases the offense level depending on the

amount of money at issue. U.S.S.G. § 2F1.1(1998). We review

the definition of loss de novo, and the district court’s

calculation of the amount of loss for clear error. See United

States v. Vivit, 214 F.3d 908, 914 (7th Cir. 2000). Here, the

district court determined that the amount of loss was the

amount of profits that Duff gained from the city scheme.

We agree with Duff that the district court incorrectly

calculated the amount of loss, but this result will likely not

mollify him because we further believe that the district

court’s figure was too low, not too high. Generally, loss

under § 2F1.1 “is the value of the money, property, or

services unlawfully taken.” U.S.S.G. § 2F1.1 application note

8. As the district court concluded, however, a different,

4

(...continued)

offenses under § 1341 and § 1343, Duff and Stratton’s challenge

to the money laundering convictions also must fail as it is

based solely on the alleged impropriety of the mail and wire

fraud charges. Stratton further claims that evidence of the

city scheme had an improper prejudicial spillover effect that led

to his conviction on both the RICO count (Count 1) and a count of

mail fraud relating to his limited participation in the insurance

scheme (Count 22). This argument hinges on the contention that

the mail and wire fraud charges should have been dismissed and

the evidence should not have been presented. As we have ruled

that Chicago’s scheme charges were proper, this argument

likewise must fail.

Nos. 05-2639, 05-2652, 05-2692 & 06-1485 25

more specific, application note applies in this situation.

Application note 8(d) provides: “In a case involving diver-

sion of government program benefits, loss is the value of the

benefits diverted from intended recipients or uses.” Duff

argues that this is not a case of “government program

benefits” and that the application note governing contract

procurement should apply. Duff is wrong. As the ordinance

itself states, “[a]n effort to direct contracts to minority- and

women-owned businesses is required to eradicate the effects

of discrimination.” This was an affirmative action program

aimed at giving exclusive opportunities to certain women

and minority businesses. The contracts which these busi-

nesses received pursuant to this type of program constitute

government benefits. We are not alone in this conclusion.

See United States v. Bros. Constr. Co. of Ohio, 219 F.3d 300,

317-18 (4th Cir. 2000). Application note 8(d), therefore,

applies.

The district court, however, erred when it did not calcu-

late the loss under application note 8(d). Instead of comput-

ing the total “value of the benefits diverted from intended

recipients or uses” in its analysis, it used the contract loss

formula of “contract price minus the benefit provided.”

Once the district court determined that this was a case

involving diversion of government benefits, however, it was

bound to follow the application note that governed this

situation. See United States v. Sorensen, 58 F.3d 1154, 1158-59

(7th Cir. 1995). The correct amount under application note

8(d) is the value of the benefits diverted, which was over

$100 million.5

5

To its credit, the district court itself expressed reservations

about using the contract method of evaluating loss, stating “[i]n

(continued...)

26 Nos. 05-2639, 05-2652, 05-2692 & 06-1485

Nonetheless, a remand is unwarranted because the

government did not cross-appeal on this issue. Moreover,

the fraud counts were grouped with the money launder-

ing counts pursuant to Guideline § 3D1.2(d), and Duff

was sentenced based on the money laundering convic-

tions, as they carried the highest offense level. U.S.S.G.

§ 3D1.3. Even including the proper amount of the loss

attributable to the wire and mail fraud, it appears that the

money laundering offense level would still be higher, so

a remand would change nothing.

C.

Turning to Duff’s next challenge, he believes that he

was entitled to a three-point reduction in his offense

level because of his acceptance of responsibility. As this

is a factual finding, we review the district court’s deci-

sion not to award any points for clear error. See United States

v. Gilbertson, 435 F.3d 790, 798 (7th Cir. 2006); United States

v. McIntosh, 198 F.3d 995, 999 (7th Cir. 2000). The defendant

bears the burden of proving that he deserves such a reward.

See McIntosh, 198 F.3d at 999. We afford the district court

large discretion in making this determination because the

sentencing “judge is in a ‘unique position to evaluate a

defendant’s acceptance of responsibility.’ ” Gilbertson, 435

F.3d at 799 (quoting U.S.S.G. § 3E1.1, cmt. 5). We allow

district courts to exercise common sense when evaluating

the testimony and the defendants. See McIntosh, 198 F.3d at

999. An appellate court is inherently ill-equipped to make

5

(...continued)

writing this opinion, I am less convinced that I was correct in

determining ‘loss’ not to be the entire amount of the contract.”

Nos. 05-2639, 05-2652, 05-2692 & 06-1485 27

this determination by the very nature of our review, as we

face a cold record, while the district court actually heard the

tenor of the defendant’s words and studied his attitude. See

Gilbertson, 435 F.3d at 799.

Guideline § 3E1.1 provides that a court is to give a two-

point reduction if the defendant “clearly demonstrates

acceptance of responsibility for his offense,” and that a court

may give an additional point if the acceptance is timely. The

application notes to this guideline lay out a variety of

factors that a court should consider when making this

determination. Among these factors are whether the

defendant truthfully admitted the conduct, whether the

defendant voluntarily made restitution prior to adjudication

of guilt, whether the defendant gave voluntary assistance in

the recovery of the fruits of his offenses, whether the

defendant underwent post-offense rehabilitative efforts, and

the timeliness of the defendant’s acceptance of responsibil-

ity. U.S.S.G. § 3E1.1 application note 1.

The district court did not clearly err when it refused

to decrease Duff’s offense level. Duff suggests that the

district court did not attach enough weight to his factual

basis, plea of guilty, and expressions of remorse, while

emphasizing too greatly his less-than-forthcoming atti-

tude at the plea hearing. Given the amount of latitude

we afford to the district courts in this arena, we disagree.

First, the district court judged that Duff’s plea did not

reflect a true belief that he was culpable, but a calculated

decision to gain the advantage of the reduction. Acceptance

of responsibility usually will be awarded after a guilty plea,

but such a plea does not transform this reduction into a

matter of right. See United States v. Willis, 300 F.3d 803, 807

(7th Cir. 2002); United States v. Bothun, 424 F.3d 582, 586 (7th

Cir. 2005). Looking at the factual basis and plea hearing,

28 Nos. 05-2639, 05-2652, 05-2692 & 06-1485

Duff made halting admissions, even to simple questions,

and refused to go beyond the bare bones of the indictment,

making the government and the district court struggle to

obtain many crucial answers about the city scheme. Duff did

accept and admit many of the non-critical portions of the

indictment, but consistently fought to reframe the city

scheme in his own best interests. While a “ ‘defendant is not

required to volunteer, or affirmatively admit, relevant

conduct beyond the offense of conviction in order to obtain

a reduction,’ ” United States v. Carroll, 346 F.3d 744, 750 (7th

Cir. 2003) (quoting U.S.S.G. § 3E1.1 application note 1(a)),

this does not mean that the district court must blind itself to

a defendant’s conduct and attitude when pleading guilty,

especially as here when the defendant seems to be using the

plea hearing to minimize his activity to evade future

scrutiny. If the defendant takes an overly aggressive

posture, this could mean that he does not actually accept his

fault. We cannot categorically say that a district court must

ignore such indications simply because a guilty plea is

involved.

Still, if Duff’s conduct at the plea hearing constituted the

district court’s only justification for denying this reduc-

tion, we would be faced with a very close case. But here, the

district court went further both at the sentencing hearing

and in its sentencing memorandum and catalogued addi-

tional support for its conclusion that Duff did not really

think he was not to blame, no matter his mouthed words of

remorse. Specifically, the district court mentioned that

Duff’s contention that “no one else could have done the

contracts” showed no appreciation for the harm he caused.

The district court was also disturbed by Duff’s failure to

acknowledge a fact conclusively demonstrated at trial—that

Duff used his companies to pay Stratton and family mem-

bers even though they did no work. As application note 1(a)

Nos. 05-2639, 05-2652, 05-2692 & 06-1485 29

states, “a defendant who falsely denies, or frivolously

contests, relevant conduct that the court determines true has

acted in a manner inconsistent with acceptance of responsi-

bility.” U.S.S.C. § 3E1.1 application note 1(a). The district

court had extensive opportunities to observe and listen to

Duff and determine whether he was sincerely contrite or

engaged in spin. Based on our searching review of the plea

hearing, the sentencing hearing, and the sentencing memo-

randum, we cannot say that the district court abused its

discretion in concluding that Duff had failed to accept

“moral responsibility” for his crimes.

Ultimately, however, even if we believed that the dis-

trict court committed some error regarding acceptance of

responsibility, it was harmless. In its sentencing memoran-

dum, the district court stated “[s]ince this sentence, under

Booker, is not limited to consideration of a narrow range

following a strict determination of points under a particular

Guidelines Manual, however, I considered the sentencing

range that would be applicable with or without acceptance

of responsibility.” The transcript from the sentencing

hearing also shows the district court properly calculated

guideline ranges both with and without the acceptance of

responsibility points. The court then decided upon a

sentence of 118 months and gave a lengthy explanation both

at the hearing and in the memorandum regarding its

decision. As the sentence would have been imposed no

matter the ruling on acceptance of responsibility, Duff

suffered no harm.6

6

In the event that we had ruled in his favor on the fraud and

money laundering counts, Duff presented several additional

arguments regarding enhancements. As we did not agree with his

(continued...)

30 Nos. 05-2639, 05-2652, 05-2692 & 06-1485

D.

Moving to his actual sentence, Duff mounts a reasonable-

ness challenge. After Booker, a district court must “first

consult a properly calculated advisory Guidelines range and

then, by reference to the factors specified in § 3553(a), select

a sentence either inside or outside the advisory range.” See

United States v. Walker, 447 F.3d 999, 1007 (7th Cir. 2006).

This is a distinction with a difference in our post-Booker

world, since a sentence within the guideline range is

presumptively reasonable, see United States v. Owens, 441

F.3d 486, 490 (7th Cir. 2006), while a sentence outside the

guideline range requires more explanation based on the

§ 3553(a) factors, see Walker, 447 F.3d at 1007. The parties

agreed at the sentencing hearing that without the acceptance

of responsibility reduction the guidelines range would be

108-135 months and if acceptance of responsibility was

counted, the range would drop to 78-97 months. Taking the

district court at its word that the 118-month sentence

applied with or without the acceptance of responsibility

points, this sentence could be deemed either outside the

guideline range or within. We will only examine the

sentence as one outside the range since if the sentence

survives this more searching review, it would obviously

suffice if within the range (and presumptively reasonable).

The district court adequately explained the reasons for

its sentence, examining the various § 3553(a) factors in

detail. In particular, the district court mentioned the severity

of the offenses, which defrauded victims of over one

hundred million dollars. The offenses were not one-time

affairs, but the long-term duping of the victims by flooding

6

(...continued)

various positions, these arguments are moot.

Nos. 05-2639, 05-2652, 05-2692 & 06-1485 31

them with a coordinated attack of falsehoods. Even more

troubling, Duff used and corrupted his employees and his

own family, particularly his mother and wife, to satisfy his

greed. Moreover, the district court also laid emphasis on

Duff’s ready willingness to flout laws to gain his criminal

objectives and the apparent difficulty in deterring a man

who would engage in these types of dealings for over a

decade. The district court then assessed the nature and

circumstances of Duff’s character, which further condemned

him. He acted out of avarice, not necessity, and, as became

clear at trial, threatened and bullied others to get his way.7

In short, the district court had a thoughtful and meaningful

analysis regarding why Duff’s crimes merited 118 months

of imprisonment. Our review is deferential, as the district

court was in the best position to judge. See Walker, 447 F.3d

at 1008. The district court’s evaluation gave a mountain of

reasons for a sentence outside the guidelines range, and we

find the sentence reasonable.

E.

Duff finally argues that the district court’s restitution

order in the amount of $10,933,016.02 for Chicago was

improper as Chicago did not lose any money under the

contracts. Again, we reject Duff’s contention. We review the

amount of restitution for abuse of discretion. See United

7

The trial provided a particularly insightful glance into Duff’s

personality through the testimony of his own employees,

auditors, and clients, which demonstrated his willingness to

scream, bully, and threaten (including threats of harm against

another’s family) to get his way.

32 Nos. 05-2639, 05-2652, 05-2692 & 06-1485

States v. Brierton, 165 F.3d 1133, 1139 (7th Cir. 1999). The

Mandatory Victims Restitution Act (“MVRA”) provides that

restitution will be ordered to any victim for “an offense

against property under this title, including any offense

committed by fraud or d ecei t.” 18 U.S.C.

§ 3663A(c)(1)(A)(ii). The MVRA defines a victim as any

person directly harmed by a defendant’s criminal conduct

in the course of a scheme, see United States v. Belk, 435 F.3d

817, 820 (7th Cir. 2006); 18 U.S.C. § 3663A(a)(2), and a

government agency can be a victim for these purposes,

see United States v. Sapoznik 161 F.3d 1117, 1121 (7th Cir.

1998). To calculate the restitution amount, the district

court must determine the loss caused by the crime, which is

the greater of (1) the value of the property on the date of the

damage, loss, or destruction, or (2) the value of the property

on the date of sentencing. Belk, 435 F.3d at 819; 18 U.S.C.

§ 3663A(b)(1)(B). The court then subtracts from that amount

the value of any returned property. Id. Duff contends that

since his companies performed the contracts, and performed

them well, the companies returned full value to Chicago for

its money and that restitution should not be required.8

Again, Duff misses the point. The contracts were not

simply for cleaning and labor services but for rendering

services by legitimate MBE/WBEs. While Duff’s com-

panies provided valuable cleaning services, they could

not possibly return Chicago’s property because they

8

Duff also suggests, without developing the argument, that it is

in some way inequitable for a district court to order restitu-

tion and forfeiture in the same amount. While we recognize to the

untrained eye, this might appear to be a “double dip,” restitution

and forfeiture serve different goals, and we have approved of this

practice in the past. See United States v. Emerson, 128 F.3d 557, 566-

67 (7th Cir. 1997).

Nos. 05-2639, 05-2652, 05-2692 & 06-1485 33

could not achieve Chicago’s desired goal of developing

and sustaining an emerging minority business. As the

government mentioned at oral argument, Chicago was not

looking for the best deal possible on these contracts pre-

cisely because it wanted to give the money to nurture

particular recipients—MBEs and WBEs. Therefore, perform-

ing the contract adequately did not provide the consider-

ation for which Chicago bargained: it did not support the

proper minority or women businesses.

The question then becomes whether the district court’s

restitution amount was a correct approximation of the

difference between the services rendered and what the

city anticipated from a contract with a proper MBE or WBE.

We find some guidance from the Sapoznik case

cited previously. Sapoznik was a suburban police chief who

received $500 per month for four years from the Mafia to

shield its gambling interest in his town. See Sapoznik, 161

F.3d at 1118. The district court ordered restitution to the

town in the amount of one year’s salary as police chief. See

id. at 1121. We recognized that the town likely would

have never hired Sapoznik had it known of his easy

virtue, which would mean that it would not have paid

him salary for any of his four years as chief. Id. However,

we also understood that the town would not have saved the

entire amount of his salary, as the government suggested,

because “it would have hired an honest police chief and

paid him the same.” Id. After noting that most of his work

was exemplary, we found that the restitution order, which

generously credited Sapoznik for providing value to his

employer for three-quarters of his salary despite his infidel-

ity was proper. Id. at 1122. “Given the difficulty of estimat-

ing the loss that he actually imposed on the city (as opposed

to the gain that he conferred on the gambling dens and the

34 Nos. 05-2639, 05-2652, 05-2692 & 06-1485

Mafia), we think the district judge acted within the limits of

her discretion.” Id.

In the present case, we confront a similar situation in

which the actual loss to Chicago from not enlisting a true

MBE or WBE for these contracts is inherently difficult

to quantify. Faced with this situation, we determine that the

loss amount calculated by the district court, which effec-

tively credits the Duff companies as being worth to Chicago

approximately 90% of a proper MBE/WBE, is a generous

credit in favor of Duff. Given the wide latitude we afford a

district court in this situation, we conclude that the district

court did not abuse its discretion when calculating the

restitution amount.

LEAHY’S TRIAL AND SENTENCING ISSUES

F.

We now address the issues arising from Leahy’s trial

and sentencing. First among these is his belief that the

government did not produce sufficient evidence to convict

him of mail and wire fraud in connection with the insurance

scheme. Closely tied to this assertion is Leahy’s theory that,

given the paucity of the evidence against him, the district

court should not have given an ostrich instruction, which

allowed the jury to convict him despite the insufficient

evidence.

Turning first to the sufficiency of the evidence, Leahy, like

all such challengers, carries a heavy burden. We view the

evidence in the light most favorable to the prosecution. See

United States v. Tadros, 310 F.3d 999, 1005-06 (7th Cir. 2002).

We find the evidence insufficient only if no rational trier of

fact could have found guilt beyond a reasonable doubt. See

id. at 1006. As Leahy was convicted of multiple counts of

Nos. 05-2639, 05-2652, 05-2692 & 06-1485 35

mail and wire fraud arising out of the insurance scheme, we

examine any evidence of a scheme to defraud, an intent to

defraud, and use of mails and wire to further it. See United

States v. Seward, 272 F.3d 831, 835 (7th Cir. 2001).

Even looking at the evidence in the light most favorable to

the government, this is a relatively close case. The 1999

telephone call about the Kemper notice of cancellation,

together with the circumstances surrounding this call,

were the strongest pieces of evidence tying Leahy to the

scheme. As discussed previously, Windy Labor received

a notice of cancellation from Kemper, its insurer, for fail-

ure to complete an audit. Martinez, the Windy Labor

employee who worked most closely on the insurance fraud,

turned to Duff. For his part, Duff commanded Martinez

to call Leahy. During the conference call, Leahy ex-

hibited knowledge that Kemper wanted to cancel the policy

based on an inability to complete its audit. He did not react

with surprise. Rather, he suggested that Windy Labor had

to do whatever necessary to obtain insurance. When Placek

expressed her feeling that they were perpetrating insurance

fraud, Leahy did not disagree. There was simply silence,

eventually broken by Leahy, who reiterated his feeling that

the options were either do whatever needed to be done or

have no insurance. Taking the evidence in the light most

favorable to the government, it seems unlikely that Duff

would involve Leahy in such a sensitive matter unless

Leahy knew about the scheme. Moreover, the testimony

about this phone call shows Leahy was aware of the prob-

lems with the audit and felt that anything, including

insurance fraud, was authorized to defuse the potential

bomb. This is strong evidence of Leahy’s involvement.

However, this was not the only evidence suggesting

Leahy’s role in the insurance scheme. The Windy Labor

36 Nos. 05-2639, 05-2652, 05-2692 & 06-1485

account was a haven of red flags that would be obvious

to anyone familiar with workers compensation insurance.

At trial, multiple insurance witnesses testified that the

experience modifier for Windy Labor in the 1990s was

extremely high, which was a clear tip-off that there might be

serious job misclassification. In fact, several of the witnesses,

including a Kemper auditor with over twenty years of

experience and Braband, the experienced insurance broker,

stated that they had never come across a modifier that high.

Besides the high experience modifiers, the loss-run informa-

tion constituted another red flag. As explained previously,

the loss runs showed the type of claims filed and the

classification of the employees who filed them. The loss runs

compiled for Windy Labor indicated that the injuries were

occurring almost entirely in the labor categories and

involved more employees than were actually in that cate-

gory. This takes on particular significance considering that

applications and policies sent to Leahy & Associates, and

sometimes generated by Leahy & Associates, showed that

the workforce was almost entirely clerical. Finally, insurance

companies repeatedly issued notices of cancellation to

Windy Labor, with copies to Leahy & Associates, for failure

to properly complete the audits.

Taking the evidence in the light most favorable to the

prosecution, these red flags are strong circumstantial

evidence. While there is no direct evidence that Leahy

looked at any of this information, he would have had

to completely ignore this part of his business for the

better part of a decade in order to miss it. Contradicting this

possibility, Maribel Gomez, one of his employees, described

Leahy at trial as hands-on boss who was aware of the

happenings on the policies. The chance that he simply was

not aware of the doings at his own company seems even

more unlikely when one considers that it was Leahy, not

Nos. 05-2639, 05-2652, 05-2692 & 06-1485 37

Wisniewski, who was Duff’s connection at Leahy & Associ-

ates. Moreover, it seems most improbable that Wisniewski

would cooperate in massive fraud for one of Leahy’s family

friends without Leahy having something to do with it.

Bolstering this point was Leahy’s willingness to protect

Duff’s fraud against Chicago by misleading the investiga-

tors regarding the true structure of Windy Maintenance. The

evidence of the 1999 telephone conference, combined with

numerous, significant red flags on the account and the

circumstances suggesting his involvement, provide suffi-

cient evidence to support the jury verdict.

This brings us to the propriety of the ostrich instruction,

which assumes additional significance given the relatively

thin evidence here. The ostrich—or deliberate avoidance—

instruction is used to inform the jury that the legal definition

of knowledge includes deliberate avoidance of knowledge.

United States v. Fallon, 348 F.3d 248, 253 (7th Cir. 2003). The

district court instructed the jury:

Knowledge may be proved by the defendants’ conduct

and by all the facts and circumstances surrounding

the case. You may infer knowledge from a combina-

tion of suspicion and indifference to the truth. If you

find that a person had a strong suspicion that things

were not what they seemed or that someone had with-

held some important facts yet shut his eyes for fear of

what he would learn, you may conclude that he acted

knowingly as I have used that word. You many not

conclude that the defendant had knowledge if he was

merely negligent in not discovering the truth.

This instruction was nearly identical to the pattern Seventh

Circuit jury instruction on this subject, see United States

v. Carrillo, 435 F.3d 767, 779 (7th Cir. 2006), and Leahy

does not argue that the formulation of the instruction

38 Nos. 05-2639, 05-2652, 05-2692 & 06-1485

was error. Rather, Leahy argues that evidence is insufficient

to support the ostrich instruction. We review the district

court’s decision to give this instruction for an abuse of

discretion, viewing the evidence in the light most favorable

to the government. See United States v. Craig, 178 F.3d 891,

896 (7th Cir. 1999); United States v. Trigg, 119 F.3d 493, 504

(7th Cir. 1997).

The ostrich instruction is appropriate if a defendant claims

a lack of guilty knowledge and the evidence supports an

inference of deliberate avoidance. See, e.g., Fallon, 348 F.3d

at 253. This second prong means that a defen-

dant deliberately avoided acquiring knowledge of the crime

being committed by cutting off his curiosity through an

effort of the will. Id. Inherent in this instruction is the

difficulty in distinguishing between the cutting off of

one’s curiosity and a simple lack of effort. See Carrillo,

435 F.3d at 780. The latter cannot be punished.

Leahy only attacks the second prong of the ostrich

instruction requirements, contending that the evidence

did not support an inference of deliberate avoidance but

only showed a simple lack of effort. Taking the evidence

in the light most favorable to the government, we cannot

agree and do not believe that the district court abused its

discretion when it gave this instruction. The evidence, while

not overwhelming, offers several indications that Leahy hid

his head in the sand regarding the insurance fraud. We

briefly return to ground already ploughed in our sufficiency

of the evidence discussion. During the Kemper cancellation

discussion, Leahy asked no questions about the audit

problems and did not even question the allegation that

fraud might be involved. “[F]ailure to ask questions that

would certainly arise from the circumstances . . . is evidence

that could lead a jury to determine [the defendant] deliber-

Nos. 05-2639, 05-2652, 05-2692 & 06-1485 39

ately avoided learning about the [ ] scam.” Craig, 178 F.3d

897-98. As demonstrated above, Leahy would have been

exposed to numerous red flags, obvious to someone with his

training and experience, over the duration of his business

relationship with Windy Labor. Contrast his claimed

ignorance despite years of involvement with these accounts

with the reaction of Braband, who immediately realized that

the Windy Labor numbers were misclassified after a short

review of the file. Taking the evidence in the light most

favorable to the government, we cannot say that the evi-

dence only shows a case of negligence. Rather, it

shows repeated indications of deliberate avoidance by

Leahy, and, given this conclusion, the inclusion of the

ostrich instruction was appropriate.

G.

We next turn our attention to Leahy’s various evidentiary

challenges. We review such claims for abuse of discretion.

See United States v. McGee, 408 F.3d 966, 981 (7th Cir. 2005);

United States v. Anifowoshe, 307 F.3d 643, 646 (7th Cir. 2002).

Leahy first contends that the testimony of Hiegel (the

assistant state’s attorney who investigated the city

scheme) constituted prohibited propensity evidence. Federal

Rule of Evidence 404(b) generally excludes the introduction

of bad acts “to show that a defendant has a propensity to

commit a crime and that he acted in accordance with that

propensity on the occasion in question.” United States v.

Chavis, 429 F.3d 662, 667 (7th Cir. 2005). Bad acts evidence

may be admitted, however, for other purposes, such as to

show intent, knowledge, lack of mistake, motive, or oppor-

tunity. See id. We utilize a four-part standard to assess the

admissibility of evidence under Rule 404(b):

40 Nos. 05-2639, 05-2652, 05-2692 & 06-1485

(1) the evidence is directed toward establishing a matter

in issue other than the defendant’s propensity to com-

mit the crime charged, (2) the evidence shows that the

other act is similar enough and close enough in time to

be relevant to the matter in issue, (3) the evidence is

sufficient to support a jury finding that the defendant

committed the similar act, and (4) the evidence has

probative value that is not substantially outweighed by

the danger of unfair prejudice.

Anifowoshe, 307 F.3d at 646.

Here, the district court properly admitted the evidence.

Hiegel was investigating Windy Maintenance for fraud

on the city relating to the WBE program when she discussed

Green Duff’s role with Leahy. Leahy falsely informed her

that he exclusively met with Green Duff on insurance

matters related to Windy Maintenance and he had nothing

to do with Duff himself regarding Windy Maintenance.

Leahy’s description of the supposed structure of Windy

Maintenance helped derail this investigation. Each of the

Rule 404(b) requirements were met. This testimony demon-

strated Leahy’s intent to protect Duff and his fraudulent

schemes, by showing his willingness to lie to investigators

on Duff’s behalf. Leahy’s actions took place at the same time

that the insurance fraud occurred and involved lies and

subterfuge to throw off investigators, just as in the insurance

fraud scheme. Moreover, the jury easily could have con-

cluded that Leahy lied to Hiegel, and this was not such

inflammatory evidence that the probative value was

outweighed by its small prejudicial effect. The district court,

therefore, did not abuse its discretion when it admitted this

evidence.

Leahy also second-guesses the district court’s refusal

to admit certain pieces of evidence. Leahy wanted the

Nos. 05-2639, 05-2652, 05-2692 & 06-1485 41

district court to admit a letter from a USF&G investigator to

an FBI agent in which the investigator stated that she found

no premium fraud by Windy Labor. The district court

excluded the USF&G letter on hearsay grounds. The letter

constitutes hearsay, but Leahy argues that it qualifies for a

hearsay exception under Federal Rule of Evidence 804(b)(3).

Under Rule 804(b)(3), the letter may be admissible if: (1) the

declarant is unavailable; (2) the statement is against the

declarant’s penal interest; and (3) corroborating circum-

stances exist that bolster the statement’s trustworthiness.

Fed. R. Evid. 804(b)(3). Even assuming that the USF&G

investigator was unavailable, Leahy cannot satisfy the

second prong of this test. “A statement is against penal

interest if it subjects the declarant to criminal liability.”

United States v. Bonty, 383 F.3d 575, 579 (7th Cir. 2004). The

penal interest exception does not include statements that

could possibly subject the declarant to prosecution. See

United States v. Butler, 71 F.3d 243, 253 (7th Cir. 1995) (“The

hearsay exception does not provide that any statement

which ‘possibly could’ or ‘maybe might’ lead to criminal

liability is admissible”); see also Bonty, 383 F.3d at 579 (“It is

simply not enough that during the interview Bonty admit-

ted to some facts . . . that ‘possibly could’ lead to criminal

liability; to be inculpatory he must admit to criminal

behavior.”). Rather, the statement itself, taken as is, must

basically admit to criminal behavior. See Butler, 71 F.3d at

253. In this case, the USF&G letter does not inculpate the

author in any crime or subject her to liability, so the district

court properly deemed it hearsay.

Moreover, Leahy believes the court abused its discretion

by excluding certain audits from evidence. These audits

were conducted by Travelers from 2001-2003, after the

discovery of the insurance fraud scheme. Leahy thinks that

they exculpate him because they show that Windy Labor

42 Nos. 05-2639, 05-2652, 05-2692 & 06-1485

and Leahy & Associates were not responsible for any

misclassification or insurance fraud once the Windy Labor

schemers were removed. To be admissible, however, these

documents must be relevant. Fed. R. Evid. 401 (relevant

evidence is that “evidence having any tendency to make the

existence of any fact that is of consequence to the determina-

tion of the action more probable or less probable than it

would be without the evidence.”) Just because Leahy did

not continue with the fraud after the scheme had been

discovered has no bearing on whether he participated

before the fraud was out in the open. As such, the audits

were properly excluded on relevancy grounds.

Leahy finally contends that he was denied his Sixth

Amendment right of cross-examination because the dis-

trict court would not allow him to use the USF&G letter

when questioning the government’s insurance experts.

While the Sixth Amendment guarantees the right to con-

front witnesses, trial judges have broad discretion to impose

reasonable limitations. See United States v. McLee, 436 F.3d

751, 761 (7th Cir. 2006). In this instance, the district court

used its power to limit a portion of an examination that

would rely on hearsay material of marginal relevance.

Again, we find no abuse of discretion.

H.

Having dealt with Leahy’s complaints about the trial,9

we move to his sentencing and restitution objections.

9

Leahy made one additional trial complaint, that the district

court erred when it denied his motion for severance. As he did

not renew this motion at the close of the evidence, however, it

was waived. See United States v. Rollins, 301 F.3d 511, 518 (7th Cir.

2002).

Nos. 05-2639, 05-2652, 05-2692 & 06-1485 43

First, Leahy argues that the district court should not

have applied U.S.S.G. § 3B1.1, an enhancement for being

an organizer or leader in the insurance fraud. This is a

factual determination and, as such, we review for clear

error. See United States v. Wasz, 450 F.3d 720, 730 (7th Cir.

2006). Leahy specifically asserts that he did not control

Wisniewski or give orders to anyone to further the

fraud. This, however, was not required. “Organizers ‘do not

necessarily control anyone but nonetheless influence the

criminal activity by coordinating its members.’ ” United

States v. Skoczen, 405 F.3d 537, 550 (7th Cir. 2005) (quoting

United States v. Reneslacis, 349 F.3d 412, 417 (7th Cir. 2003)).

When the insurance scheme was faltering, Duff sent his

underlings to Leahy, not Wisniewski, for the solution.

Moreover, Leahy provided cover for the insurance fraud

through his brokerage firm and employees. Leahy, there-

fore, marshaled the people and instruments for this offense,

which is sufficient. See id. While there is not an abundance

of information supporting this finding, we do not believe

that the district court clearly erred in adding this upward

enhancement.

Leahy’s next challenge is to the district court’s calcula-

tion of the offense level, which hinged on the district court’s

loss determination. Leahy contends that the district court

should not have computed the amount of loss for the entire

period from 1989 through the ending of the scheme. The

definition of loss is a question of law subject to de novo

review, while the amount of loss is a finding of fact re-

viewed for clear error. See Vivit, 214 F.3d at 914. According

to U.S.S.G. § 1B1.3, application note 2, a defendant cannot be

held accountable for acts that occur before he engaged in

criminal conduct. See Nichols v. United States, 75 F.3d 1137,

1143-44 (7th Cir. 1996).

44 Nos. 05-2639, 05-2652, 05-2692 & 06-1485

The district court erred in calculating loss based on the

entirety of the scheme. While Leahy was the insurance

broker at the very start of Windy Labor, no evidence

indicated that either Leahy or Leahy & Associates became

involved with the insurance scheme until 1995. Apparently

acting alone, Windy Labor changed the classifications,

thus reducing premiums. The government and district court

assumed that Leahy would have known about the fraud

because of the changes in the payroll classifications in the

policies and his business and social interactions with Duff

and his family. Before 1995, however, the policy was

essentially self-renewing with no input from Leahy and his

company. Moreover, by the time that the fraud would have

been most obvious with high modifiers and drastically

different payroll, the file had been transferred to

Wisniewski, whom the district court found was not respon-

sible for any pre-1995 losses. The district court assumed,

unsupported by evidence, that Leahy actually was a

participant in the fraud before 1995. This does not suffice.

See McIntosh, 198 F.3d at 999 (“We will reverse [a factual]

finding only if the record contains no evidence providing a

foundation for it.”).

This conclusion also affects our last inquiry, the restitution

amount. Leahy challenges both the method used to calculate

the restitution amount, as well as the period covered. The

first is rather easily disposed of. As stated previously, we

review the amount of restitution for abuse of discretion. See

Brierton, 165 F.3d at 1139. The district court concluded the

appropriate amount of restitution to the Insurance Council

was $1.09 million, the total amount of the underpaid

premiums. Leahy argues that the Insurance Council does

not merit restitution because it received more in premiums

than it paid out in claims, so it sustained no loss for restitu-

tion purposes. We disagree. The insurance companies were

Nos. 05-2639, 05-2652, 05-2692 & 06-1485 45

entitled to the benefit of their bargains—the amount of

money they would have charged to insure the actual risk

that Windy Labor presented. See United States v. Garavaglia,

5 F. Supp. 2d 511, 520, 522 (E.D. Mich. 1998), aff’d, 178 F.3d

1297 (6th Cir. 1999). Otherwise, Windy Labor would obtain

a windfall through its fraud, receiving coverage for greater

risks than the amount of premiums merited. The district

court, therefore, did not err in the restitution order when it

calculated the entire amount Windy Labor should have paid

and subtracted what it did pay. The remainder returns the

insurance companies to the positions they would have

occupied absent the fraud. However, the restitution amount

imposed on Leahy must be reduced consistent with our

earlier finding regarding the length of his criminal participa-

tion.

III.

Duff used his associates to satiate his greed, taking

advantage of a city’s attempt to help minorities and

women and abusing the trust of his insurers. The govern-

ment properly indicted Duff, Stratton, Dolan, and Leahy for

various crimes, including wire and mail fraud, and the

district court, by and large, conducted the trial of these

complex and extensive matters admirably. We AFFIRM the

convictions of all the defendants and the district court’s

evidentiary rulings. We REVERSE the district court’s con-

clusion regarding the extent of Leahy’s involvement

with the insurance fraud and REMAND for re-calculation

of the offense level and restitution amount consistent

with this opinion.

46 Nos. 05-2639, 05-2652, 05-2692 & 06-1485

A true Copy:

Teste:

_____________________________

Clerk of the United States Court of

Appeals for the Seventh Circuit

USCA-02-C-0072—10-4-06