United States v. Varnador Sutton

In the

United States Court of Appeals

For the Seventh Circuit

No. 08-3370

U NITED S TATES OF A MERICA,

Plaintiff-Appellee,

v.

V ARNADOR S UTTON,

Defendant-Appellant.

Appeal from the United States District Court for the

Southern District of Indiana, Indianapolis Division.

No. 1:07-cr-086-M/F—Larry J. McKinney, Judge.

A RGUED M AY 29, 2009—D ECIDED S EPTEMBER 28, 2009

Before R IPPLE, R OVNER, and S YKES, Circuit Judges.

R OVNER, Circuit Judge. A jury convicted Varnador

Sutton of a single count of violating 18 U.S.C. § 1347

(prohibiting health care fraud) for his role in perpetrating

a fraudulent scheme to collect money from Indiana

Medicaid. The district court sentenced Sutton to the

statutory maximum of ten years’ imprisonment to be

followed by two years of supervised release. Sutton

appeals, challenging the district court’s calculation of his

sentence.

2 No. 08-3370

I.

In May 2005, Sutton created a business called

Regenerations, Inc., which purported to provide psycho-

logical counseling services reimbursable by Indiana

Medicaid. Over the course of the next two years, Sutton

billed Medicaid over $9 million for alleged psychological

counseling that was never provided. Although many of

the claims were denied, Medicaid did pay Sutton ap-

proximately $3.2 million for the alleged services provided

by Regenerations. Sutton used his millions to buy,

among other things, seven properties, several new cars,

and $33,000 worth of apparel from Vincent’s Furs and

Leathers.

Sutton’s scheme was relatively straightforward. He

created Regenerations, Inc., and enrolled the company as

a Medicaid provider in Indianapolis, Indiana. Sutton

identified himself on the application as the owner, CEO,

and President of Regenerations. By enrolling in the

Indiana Medicaid program, Sutton set himself up to be

automatically reimbursed for providing eligible services

to Medicaid recipients. The enrollment application listed

one individual qualified to oversee the counseling

services—Dr. Ruth Haggerty, a PhD in clinical psychology.

Dr. Haggerty’s signature appeared on the application,

but she testified at trial that she neither signed the ap-

plication nor authorized anyone to do so on her behalf.1

1

Dr. Haggerty did work with Sutton in an unrelated capacity

for a Medicaid “waiver” program providing behavior manage-

(continued...)

No. 08-3370 3

Despite a nonexistent staff of therapists, on paper

Regenerations, Inc. ran an exceedingly brisk counseling

business. For instance, in January 2006 alone, Regenera-

tions billed Medicaid for 4749 individual psychotherapy

sessions, a figure that would require a staff of twenty-nine

therapists to work six days a week, eight hours per day.

Although the numbers varied slightly from month-to-

month, the general pattern was the same: all twenty

counseling sessions allowed under Medicaid in a twelve-

month period without preauthorization would be ex-

hausted, and when a new twelve-month period began all

twenty sessions would again be exhausted. Sutton billed

Medicaid for over 84,000 counseling sessions using the

Medicaid identification numbers of over 2500 individual

Medicaid recipients, unbeknownst to those individuals

whose numbers he used.

Eventually this suspicious pattern raised red flags, and

an audit was scheduled. In April 2007, a Medicaid

auditor called Sutton and arranged to meet him later that

month for an audit of Regenerations at its listed place

of business in Indianapolis. That very same day, Sutton

terminated his Medicaid provider status and closed the

bank account where he had been receiving the Medicaid

reimbursements via direct deposit. Not surprisingly,

when the auditor arrived at the scheduled date and time

later that same month, neither Sutton nor his business

were anywhere to be found.

1

(...continued)

ment services for individuals who would otherwise be

ineligible for Medicaid.

4 No. 08-3370

Despite its diligent efforts, the government was unable

to locate any records to support the 84,000 claims for

counseling that Sutton submitted to Medicaid. At trial, the

jury heard testimony from ten individuals, selected

essentially at random, whose Medicaid numbers had

been used by Sutton to bill for counseling services. None

of the individuals had received counseling services

through Regenerations, nor had they ever heard of

Sutton or Dr. Haggerty. The Medicaid numbers for nine

of the ten who testified had been used as described above.

Twenty counseling sessions—the maximum allowed in a

twelve-month period—had been billed in just one

month, a pattern that was repeated as soon as the first

twelve-month period had passed and another twenty

sessions could be billed without preauthorization.

Sutton testified at trial on his own behalf. He

explained that although he received all of the money in

his own accounts, he had contracted out the operation of

the business to a woman named Paula Morton. Sutton

claimed that he authorized Morton to use his Medicaid

number to bill for the counseling services, and that he

intended to pay Morton a share of the money when

she provided him with records to substantiate the coun-

seling sessions. According to Sutton, Morton never pro-

vided him with any records, and so he never bothered to

pay her; nor did he ever bother to question the receipt of

over $3 million in his personal accounts. At the time of

trial, Sutton denied having any idea where Morton was

or how she could be contacted.

The jury convicted Sutton on the single count of health

care fraud, see 18 U.S.C. § 1347, contained in the indict-

No. 08-3370 5

ment. At sentencing, the district court increased Sutton’s

base offense level of six, see U.S.S.G. § 2B1.1(a)(2), by

twenty levels because the total intended loss exceeded

$7 million, see U.S.S.G. § 2B1.1(b)(1)(K), and added

another six levels based on its conclusion that there

were more than 250 victims, see U.S.S.G. § 2B1.1(b)(2)(C).

On this point the court accepted the government’s argu-

ment that each individual whose Medicaid number had

been fraudulently used by Sutton should be counted as a

victim under the guidelines. The court also concluded

that Sutton testified falsely and added two levels for

obstruction of justice. See U.S.S.G. § 3C1.1. Although the

resulting adjusted offense level of thirty-four combined

with Sutton’s criminal history of I resulted in a guideline

range of 151 to 188 months, the statutory maximum

under § 1347 is 120 months. The district court sentenced

Sutton to the statutory maximum.

II.

On appeal, Sutton maintains that the district court erred

in its loss calculation under U.S.S.G. § 2B1.1(b)(1)(K) and

also erred by concluding that his offense had more than

250 victims under U.S.S.G. § 2B1.1(b)(2)(C). We review the

district court’s interpretation and application of the

guidelines de novo and its findings of fact for clear error.

E.g., United States v. Hill, 563 F.3d 572, 577 (7th Cir. 2009).

Sutton claims that the government failed to adequately

prove the amount of loss. The government maintained

in the district court that because Sutton’s entire business

was a fraud, he should be accountable for the full

6 No. 08-3370

$9 million he billed to Medicaid. Sutton argues that such

a loss calculation is unreliable because the government

failed to review all of the claims and prove that they

were fraudulent. He also claims that some “legitimate

services” were performed, and thus the district court

erred by treating the entire amount as fraudulent. We

review the district court’s loss calculation, which need

only be “a reasonable estimate of the loss,” U.S.S.G. § 2B1.1

cmt. 3(C), for clear error. See, e.g., United States v. Watts,

535 F.3d 650, 658 (7th Cir. 2008).

The district court’s conclusion that Sutton bore responsi-

bility for the entire $9 million is not clearly erroneous.

Sutton suggests that the loss calculation should be based

only on those services that the government individually

“verified” as fraudulent—a number that he estimates at

400 of the 84,000 claims. Such an approach would yield a

loss of either $32,000 (the amount Regenerations actually

received for those 400 claims) or $42,700 (the amount

Regenerations billed for those 400 claims). But Sutton’s

argument ignores the compelling evidence presented at

trial that Regenerations’ entire existence was fraudulent.

Despite fairly exhaustive efforts to uncover any records

or patients associated with the claims, the government

came up empty-handed. All of the enrollment documents

filed with Medicaid list Sutton as the only owner or

manager of Regenerations. Sutton received all of the

money himself. The only individual listed to supervise

counseling services was Dr. Ruth Haggerty, and she

testified that she had never overseen such services and

that she had not signed the enrollment form. Finally, the

implausibility of the claims Sutton submitted buttresses

No. 08-3370 7

the district court’s conclusion. For example, from Novem-

ber 2005 through January 2006 alone, Sutton billed for

over 11,000 individual counseling services per month. It

strains reason to believe that a business with no business

records, no physical location, and no employees pro-

vided services that could not be completed without an

entire staff of therapists consistently working eight

hours a day for six days a week.

Nor are we persuaded by Sutton’s claim that

Regenerations provided some legitimate services. Sutton

claims in his brief that the evidence at trial established

that “some services were provided by Darren Green

under the supervision [of] Dr. Ruth Haggerty,” and that

the loss calculation should be offset by these legitimate

services. But the services Sutton refers to were provided in

conjunction with an entirely different business. Darren

Green provided “coping skills” for between ten and

twelve individuals and Sutton received $34,000 from

Medicaid as a result, but this business was unrelated to

his fraud through Regenerations. Moreover, deducting

that $34,000 would leave Sutton with a total loss calcula-

tion of just under $9 million, still well over the $7 million

needed to trigger the 20-level adjustment under

§ 2B1.1(b)(1)(K). Given the convincing evidence that all of

the claims billed were fraudulent, the $9 million loss

calculation was not “outside the realm of permissible

computations.” United States v. Wheeler, 540 F.3d 683, 694

(7th Cir. 2008) (quoting United States v. Radziszewski, 474

F.3d 480, 486 (7th Cir. 2007)).

Sutton also argues in passing that even assuming all of

the claims were fraudulent, the loss calculation should

8 No. 08-3370

be 25% lower. Sutton points out that although he

billed Medicaid $2135 per twenty counseling sessions,

Medicaid never paid more than $1600 for the claims—a

25% reduction from the amount he billed. This argu-

ment goes nowhere. There is nothing in the record to

suggest that Sutton did not hope to recover the full

amount that he billed. The fact that Medicaid denied

some claims or that he overbilled for the “services” pro-

vided sheds no light on his intention to bilk Medicaid

for the full amounts billed. See United States v. Mikos,

539 F.3d 706, 714 (7th Cir. 2008) (Whether Medicaid paid

all (or any) of claims billed by defendant irrelevant to

loss calculation under § 2B1.1 “because that section

deals with intended loss”) (emphasis in original).

That leaves Sutton’s challenge to the upward adjust-

ment based on the number of victims. At sentencing, the

government argued that Sutton’s crime had over 250

victims. It reached this figure by treating all of the 2000-

plus individuals whose Medicaid numbers had been used

by Sutton as victims of his fraud. Sutton maintained,

however, that the only victims were the two entities that

sustained monetary loss—Indiana Medicaid and the

Centers for Medicare and Medicaid Services. As relevant

here, the application note to § 2B1.1(b)(2)(C) defines a

“victim” as “any person who sustained any part of the

actual loss determined under subsection (b)(1).” U.S.S.G.

§ 2B1.1 cmt. n.1. Subsection (b)(1), in turn, refers exclu-

sively to the monetary loss occasioned by the crime, and

the relevant application notes explain that the actual loss

must be “pecuniary harm . . . that is monetary or that

otherwise is readily measurable in money.” Id. at cmt.

n.3(A)(i), (iii).

No. 08-3370 9

Given this, Sutton insists that those individuals whose

Medicaid numbers were used to bill for counseling

services were not “victims” under § 2B1.1. Although he

used their Medicaid numbers to dupe Indiana Medicaid

and the Centers for Medicare and Medicare Services into

paying for services that were never rendered, none of

the individuals actually paid for a service they did not

receive. Instead, Sutton simply appropriated their

Medicaid numbers in order to bill Indiana Medicaid for

services that were never rendered. Indeed, until the

government began investigating the fraud, presumably

the victims had no reason to know that their Medicaid

numbers had been used.

The government insists that the six-level adjustment

should apply because the Medicaid recipients suffered

“real, tangible harm” in that their benefits were

exhausted and their identities were stolen. But it is not

immediately apparent how either of these harms

translates to the monetary harm clearly required under

§ 2B1.1. The application note further clarifies that pecuni-

ary harm “does not include emotional distress, harm to

reputation, or other non-economic harm.” U.S.S.G. § 2B1.1

cmt. n.3(A)(iii) (emphasis added). At oral argument,

counsel for the government conceded that the govern-

ment never identified a single victim who had attempted

to use her benefits and been denied. Government counsel

also acknowledged that a system had been put in place

to allow those individuals whose Medicaid numbers

had been used by Sutton to go through a process that

would waive the limits on their benefits so that Sutton’s

exhaustion of their benefits would not affect their eligi-

10 No. 08-3370

bility for services. Thus, so far as the government’s evi-

dence shows, the inchoate harm of having their benefits

wrongfully depleted never materialized into an actual

monetary loss such as having to pay for benefits that

would otherwise have been covered. Given the govern-

ment’s failure to demonstrate that any of the individuals

suffered pecuniary harm, we are hard-pressed to see

why we should treat all of those individuals as victims

under § 2B1.1.

The case cited by the government, United States v.

Curran, 525 F.3d 74 (1st Cir. 2008), does not convince us

otherwise. The defendant in Curran falsely presented

himself as a medical doctor and then proceeded to diag-

nose patients with alarming illnesses that required expen-

sive (and bogus) “cures.” Curran, 525 F.3d at 77-78. The

government contends that in treating all of the

defendant’s patients as victims, the First Circuit relied

heavily on the fact that the defendant’s charges for the

tests and medications were “inextricably linked to his

misrepresentations, malpractice, and fear-mongering.” Id.

at 81. It argues that by the same token, the funds Sutton

received from the Medicaid programs were inextricably

linked to the victimization of those individuals whose

Medicaid numbers he used. But the analogy is unhelpful,

because in Curran the victims paid for the bogus tests and

medications, and therefore suffered precisely the sort of

pecuniary harm envisioned under § 2B1.1. Because the

guidelines are clear that monetary loss (or the intent of

such loss) is required, and no such loss was suffered by

the 2000-plus individuals whose identities were used

by Sutton to perpetuate his fraud, the district court erred

No. 08-3370 11

by imposing the six-level adjustment. Because there

were in fact only two victims—Indiana Medicaid and

Centers for Medicare and Medicaid Services—no addi-

tional upward victim adjustment was warranted. See

U.S.S.G. § 2B1.1(b)(2); United States v. Icaza, 492 F.3d 967,

969-70 (8th Cir. 2007) (district court erred by treating

many individual Walgreens stores as victims when all

pecuniary harm could be traced to single parent corpora-

tion).

Finally, the government claims for the first time on

appeal that if the six-level increase for the number of

victims is inapplicable, Sutton’s guidelines calculation

should nonetheless be increased by two under U.S.S.G.

§ 2B1.1(b)(10), which applies when the offense involves

the “possession or use of an authentication feature.”

That two-level increase would put Sutton’s adjusted

guideline range at twenty-eight to thirty, a range that

would include the 120-month statutory maximum the

district court imposed. But the government neither advo-

cated imposing that adjustment in the district court nor

cross-appealed on that issue. Thus, it has waived the

argument that § 2B1.1(b)(10) applies. See United States v.

Wilson, 131 F.3d 1250, 1253 (7th Cir. 1997). Nor are we

convinced from the record that a remand is unnecessary

because the district court would have sentenced Sutton

to the statutory maximum regardless of the advisory

guidelines range. Although the district court intimated

that Sutton’s crime warranted the statutory maximum,

it did so in the context of the higher guideline range

(which exceeded the statutory maximum). The district

court may still conclude that the § 3553(a) factors support

12 No. 08-3370

sentencing Sutton to the statutory maximum (which

would be outside the properly calculated range of seventy-

eight to ninety-seven months), but such a determination

should be made only after the district court properly

calculates the guideline range. See United States v. Willis,

523 F.3d 762, 770 (7th Cir. 2008) (noting that district court

“must first properly calculate the advisory Guidelines

range” before exercising its “substantial discretion” to

choose a reasonable sentence).

III.

For the foregoing reasons, we A FFIRM Sutton’s con-

viction, but V ACATE his sentence and R EMAND for

resentencing.

9-28-09