United States v. Iannone

Opinions of the United

1999 Decisions States Court of Appeals

for the Third Circuit

7-12-1999

USA v. Iannone

Precedential or Non-Precedential:

Docket 98-3373,98-3374

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Recommended Citation

"USA v. Iannone" (1999). 1999 Decisions. Paper 197.

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Filed July 12, 1999

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

NOS. 98-3373 and 98-3374

UNITED STATES OF AMERICA

v.

JOHN MICHAEL IANNONE,

Appellant

On Appeal From the United States District Court

For the Western District of Pennsylvania

(D.C. Crim. Nos. 97-4 and 98-1)

District Judge: Honorable Robert J. Cindrich

Argued: December 10, 1998

Before: BECKER, Chief Judge, STAPLETON, Circuit Judge,

and HARRIS* District Judge.

(Filed: July 12, 1999)

LINDA L. KELLY, ESQUIRE

United States Attorney

BONNIE R. SCHLUETER, ESQUIRE

Assistant United States Attorney

PAUL E. HULL, ESQUIRE (ARGUED)

Assistant United States Attorney

U.S. Attorney's Office

633 U.S. Post Office and Courthouse

Pittsburgh, PA 15219

Counsel for Appellee

_________________________________________________________________

* Honorable Stanley S. Harris, United States District Judge for the

District of Columbia, sitting by designation.

STANLEY W. GREENFIELD,

ESQUIRE (ARGUED)

Greenfield, Brewer, Bailor & Kay

Greenfield Court

1035 Fifth Avenue

Pittsburgh, PA 15219

Counsel for Appellant

OPINION OF THE COURT

HARRIS, District Judge:

Defendant-appellant John Michael Iannone ("Iannone")

appeals from the sentence imposed after his guilty plea to

six counts of interstate transportation of property taken by

fraud, one count of mail fraud, and one count of wire fraud.

In determining Iannone's sentence pursuant to the United

States Sentencing Guidelines ("U.S.S.G."), the district court

applied several enhancements to the offense level. Iannone

challenges two actual and one de facto enhancements: (1)

a two-level increase pursuant to S 3A1.1 for a vulnerable

victim; (2) a two-level increase pursuant to S 3B1.3 for

abuse of a position of private trust; and (3) an upward

departure, achieved via a two-level increase, pursuant to

S 5K2.0 for conduct outside the "heartland" of the fraud

guideline. We affirm the sentence.

I. FACTUAL BACKGROUND

Essentially, Iannone defrauded people by encouraging

them to invest in oil and gas drilling ventures, but then

using the investors' money for his personal expenses rather

than for the promised purposes. Iannone committed these

frauds against several victims, living in different states, over

the course of several years. The total of the funds Iannone

fraudulently obtained amounted to more than $600,000.

A. The Pennsylvania Frauds

In 1991 or 1992, Iannone started his own company,

Horizon Natural Resources ("HNR"), after leaving his job as

an executive at Consolidated Natural Gas. HNR was an oil

2

exploration and natural gas tract leasing company, with an

office in Wexford, Pennsylvania. At least initially, HNR was

a legitimate business.1 Iannone was HNR's sole owner and

operator, giving himself the title of Chief Executive Officer

("CEO").

In early 1992, Iannone secured several leaseholds and

two contractual farm-out arrangements with Exxon

Corporation to drill and operate oil wells. Pursuant to the

Exxon arrangement, Iannone contracted to drill a test well,

Horizon No. 1, by a stated deadline. Despite two or three

extensions of the deadline, Iannone never drilled the test

well. By November 1992, Iannone's business appeared to be

failing. He had not drilled any wells, all but one of his

leaseholds had expired, and Exxon had terminated one of

the two farm-out arrangements.2

In December 1992, Iannone began to solicit investment

monies from his neighbors, ostensibly for the purpose of

drilling and operating two wells, Horizon Nos. 1 and 2.

Unaware of the precarious state of Iannone's business, his

neighbors invested approximately $320,000 with him.

Included among those investors were several members of

one family, the Stringerts. Iannone had been a friend and

neighbor of the Stringerts for several years. Iannone sold

the Stringerts what he labeled "interests" or"shares" in

Horizon Nos. 1 and 2 and entered into contracts with the

Stringerts on behalf of HNR. However, rather than investing

the money in the drilling project, Iannone used it for his

own personal expenses.

Having spent all of that money by the end of October

1993, Iannone began to solicit further investments in the

Horizon drilling project. Iannone told his victims various

lies in order to encourage their investment. For example, he

told one investor that the wells already were drilled and

_________________________________________________________________

1. The district court made a factual finding, at defendant's request, that

HNR began as a legitimate business venture. ("I think then that what we

need to do is make a finding . . . that this was not a fraud in the whole

cloth[,] meaning that the entire venture from its inception was not

created for the purpose of committing a fraud. That, originally, there was

some legitimate business function . . . .").

2. Exxon terminated the remaining farm-out arrangement in April 1993.

3

producing and told others that the wells were going to be

drilled in December 1993 and that he had acquired Exxon's

overriding royalty interest in the wells. As a result of these

solicitations, Iannone received another $170,000 in

investment monies from neighbors and acquaintances in

October, November, and December 1993. As with the prior

investments, Iannone used this money for personal

expenses.

From the time Iannone received the first investment

monies in December 1992 until he absconded in January

1994, Iannone continually lied to the Stringerts and the

other investors in order to conceal his conversion of their

money to his personal use. He told some investors that he

had used their money to hire a drilling company and that

he was in contact with Exxon about a process that would

increase their yield from the wells. When one investor --

Howard Stringert -- became suspicious, Iannone agreed to

buy back his $100,000 investment in the oil well project

once he received a settlement from a pending suit against

Consolidated Natural Gas. However, those representations

were false. Iannone had not hired a drilling company, was

not in contact with Exxon about a process to increase the

wells' yield, and had already settled the litigation with

Consolidated Natural Gas over a year-and-a-half earlier for

only $17,000. Iannone did not use any of the investment

monies for the drilling project; he took it all for his personal

use.

Throughout the period in which Iannone was soliciting

his neighbors to invest in the Horizon project, he was

falsely posing as a decorated Vietnam veteran. This adopted

military hero persona helped Iannone gain the trust of the

Stringert family. He provided some members of the

Stringert family with a resume falsely indicating that he

had spent three years in Vietnam as a Captain in the U.S.

Army Special Forces and that he had been awarded several

medals, including the Purple Heart and the Silver Star, and

he represented that he had received a recommendation for

the Congressional Medal of Honor. He provided the

Stringerts with a false citation recounting the heroic acts

for which he supposedly received the Silver Star. Howard

Stringert described the story recounted in the citation as

4

"Ramboesque."3 One member of the family, Janice

Stringert-Streich, visited Iannone's home where he had a

Silver Star medal prominently displayed. Janice and her

brother Howard Stringert both testified at the sentencing

hearing that their family had great respect for military

veterans and that this influenced their decisions to invest

with Iannone.

By October 1993, some investors had become suspicious

of Iannone, and he prepared for his disappearance, buying

a truck under a false name with some of the investment

money. On January 11, 1994, Iannone disappeared, leaving

his wife and three children behind. Approximately $70,000

to $110,000 in investment funds were unaccounted for at

the time of his abscondance. In order to avoid being

pursued, Iannone faked his own death. He left behind a

letter claiming that he had left on a secret mission for a

government "alphabet agency" and that he feared it might

result in his death. He then left his van, splattered with

blood and littered with shell casings from a weapon, parked

at the Greater Pittsburgh International Airport. Local police

quickly realized both that the scene had been fabricated

and that Iannone had not been the victim of a crime.

B. The Colorado Frauds

After his disappearance from Pennsylvania, Iannone

settled in Colorado where he adopted the alias Wayne D.

Hamilton, the name of a deceased Vietnam veteran. He

continued to masquerade as a Vietnam war hero and told

acquaintances that his family had been killed by a drunk

driver. Posing as a Vietnam veteran, he befriended several

people, including Clancy O'Dowd and Diana Hegler,

through an America Online chat room for veterans. He

developed a close friendship with O'Dowd, based on their

supposed shared combat experiences in Vietnam.

Apparently, Iannone lived off the Pennsylvania fraud

proceeds for about three years. When he ran low on money,

Iannone essentially repeated his Pennsylvania scheme. As

_________________________________________________________________

3. The citation recounts a bold, dramatic tale in which Iannone, as the

commanding officer of a Special Forces A-Team, rescued four American

prisoners of war held captive deep within enemy territory.

5

head of W. D. H. Associates, a sham oil and gas company,

Iannone offered his new friends and neighbors the

opportunity to invest in oil and/or gas wells in Texas and

Nebraska. Several of his friends and neighbors acquiesced,

buying percentage shares of oil and/or gas well leases from

Iannone. As with the Pennsylvania frauds, Iannone did not

invest this money for the purpose that it was entrusted to

him, but used it for personal expenses. He received

approximately $115,500 from the Colorado frauds.

Again, Iannone lied to the investors in order to conceal

his fraud. Iannone told investors that the wells were

producing and that they should expect their first royalty

checks to arrive in March or April of 1997. When the

checks did not materialize, Iannone again disappeared. On

or around June 3, 1997, Iannone left Colorado, falsely

informing most investors that he was going to Texas to

check on the wells. He told one investor, O'Dowd, a

different lie: that he was going to confront the drunk driver

who had killed his family. When some of the investors

began to communicate with each other and became

suspicious, Iannone sent them an electronic message

claiming to be an employee of an "alphabet agency" in the

witness protection program. Iannone was arrested by the

Federal Bureau of Investigation in July 1997.

C. The District Court's Sentence

Iannone pled guilty to six counts of interstate

transportation of property taken by fraud, one count of mail

fraud, and one count of wire fraud. The district court

conducted a two-day sentencing hearing at which four of

Iannone's victims testified: O'Dowd, Hegler, Janice

Stringert-Streich, and Howard Stringert. The court found

several Guidelines enhancements to be applicable. Based

on O'Dowd's testimony, the court determined that he was a

vulnerable victim and increased Iannone's offense level by

two points pursuant to S 3A1.1 of the Guidelines. The court

also determined that Iannone occupied a position of private

trust vis-a-vis his victims and abused this trust, and

therefore increased the offense level by two points pursuant

to S 3B1.3 of the Guidelines. The court increased Iannone's

offense level by an additional two points consistent with

S 5K2.0 of the Guidelines, finding that, based on a

6

combination of factors, Iannone's conduct was sufficiently

outside the "heartland" of the fraud guideline to warrant an

upward departure. Based on a total guidelines offense level

of 21 and a criminal history category of I, which provided

a range of imprisonment of 37 to 46 months, the court

sentenced Iannone to 46 months of imprisonment. See

United States Sentencing Commission, Guidelines Manual,

Ch. 5, Pt. A (Nov. 1997).4

II. DISCUSSION

Iannone argues that the increases in his offense level

were improper and that he should have been sentenced

based on a offense level of 15, which established a range of

18 to 24 months of imprisonment. See U.S.S.G. Ch.5, Pt. A

(Nov. 1997).

A. Vulnerable Victim Adjustment

Iannone challenges the district court's decision to apply

a two-level "vulnerable victim" offense level adjustment

pursuant to S 3A1.1(b), claiming that the victim on which

the court based its decision -- O'Dowd -- was not a

vulnerable victim within the meaning of the provision. He

also argues that, even if O'Dowd was a vulnerable victim,

there was no demonstrated nexus between his vulnerability

and the fraud. A district court's factual findings concerning

the vulnerable victim adjustment are reversible only for

clear error. See United States v. Monostra, 125 F.3d 183,

188 (3d Cir. 1997) (citing United States v. Hillstrom, 988

F.2d 448, 450 (3d Cir. 1993)). Because we find the district

court did not clearly err in determining that O'Dowd was a

vulnerable victim and that Iannone exploited this

vulnerability to aid in his commission of the fraud, we

affirm the district court's two-level enhancement under

S 3A1.1(b).

_________________________________________________________________

4. We apply the November 1997 edition of the Guidelines Manual, as

that was the version in effect on the date of Iannone's sentencing --

June 19, 1998. See U.S.S.G. S 1B1.11(a) (Nov. 1997) ("The court shall

use the Guidelines Manual in effect on the date that the defendant is

sentenced."); 18 U.S.C. S 3553(a)(4).

7

Section 3A1.1(b) provides that:

If the defendant knew or should have known that a

victim of the offense was unusually vulnerable due to

age, physical or mental condition, or that a victim was

otherwise particularly susceptible to the criminal

conduct, increase by 2 levels.

U.S.S.G. S 3A1.1(b) (Nov. 1997).5 Application Note 2 to

subsection (b) provides a useful example of when this

enhancement is appropriately applied:

The adjustment would apply, for example, in a fraud

case where the defendant marketed an ineffective

cancer cure or in a robbery where the defendant

selected a handicapped victim. But it would not apply

in a case where the defendant sold fraudulent

securities by mail to the general public and one of the

victims happened to be senile. Similarly, for example, a

bank teller is not an unusually vulnerable victim solely

by virtue of the teller's position in a bank.

U.S.S.G. S 3A1.1, comment. (n.2) (Nov. 1997). Thus, the

note suggests that this enhancement is designed to apply

where a defendant knowingly or recklessly exploits a

victim's vulnerability in order to facilitate his commission of

the crime.

In accordance with S 3A1.1 and its corresponding

application note, this Court applies a three-step analysis to

a decision to apply the vulnerable victim enhancement. The

enhancement may be applied where: (1) the victim was

particularly susceptible or vulnerable to the criminal

conduct; (2) the defendant knew or should have known of

this susceptibility or vulnerability; and (3) this vulnerability

or susceptibility facilitated the defendant's crime in some

manner; that is, there was "a nexus between the victim's

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5. While it does not affect our analysis, we note that S 3A1.1(b) recently

has been amended. The new provision states that"[i]f the defendant

knew or should have known that a victim of the offense was a vulnerable

victim, increase by 2 levels." U.S.S.G. S 3A1.1(b)(1) (Nov. 1998). The

amended provision also adds a subsection increasing the offense level by

an additional two levels if the offense "involved a large number of

vulnerable victims." U.S.S.G. S 3A1.1(b)(2) (Nov. 1998).

8

vulnerability and the crime's ultimate success." Monostra,

125 F.3d at 190 (quoting United States v. Lee , 973 F.2d

832, 834 (10th Cir. 1992) (internal quotation marks

omitted)).

1. O'Dowd Was Particularly Vulnerable to Iannone's

Criminal Conduct

Iannone argues that the district court improperly found

O'Dowd was a vulnerable victim based merely on his status

as a Vietnam veteran. This argument is without merit, as it

is abundantly clear from the record that the court did not

base its finding of O'Dowd's vulnerability merely on broad,

unsupported generalizations relating to his veteran status.

O'Dowd testified at length at the sentencing hearing, and,

based on his testimony, the court made express, specific

findings as to his particular susceptibility as well as

Iannone's knowledge of this susceptibility. In rendering its

sentencing decision as to the S 3A1.1 enhancement, the

court noted:

[The question is whether] O'Dowd [was] particularly

vulnerable in some way different from the general

public, and I have no problem in saying[ ] yes. Just

because he's a big strong man and a veteran of combat

doesn't mean that he [was not] vulnerable in a very,

very tragic way[,] and that is just as he described it so

beautifully in his testimony. He developed a belief that

people who share combat are brothers-in-arms and can

be believed. He made that [belief] known to the

defendant. So, [I find that] he was vulnerable in that he

was more susceptible to be deluded [and] cheated by

someone who represented himself to be a brother-in-

arms. . . . O'Dowd was vulnerable in the way he

described he was vulnerable, and it was a particular

vulnerability because it wouldn't apply to the general

public but only to someone who expressed himself as

he did.

Thus, contrary to Iannone's assertions, the district court

did not find that Vietnam veterans are per se vulnerable to

persons claiming to be fellow veterans and then rely solely

on O'Dowd's veteran status to find that he was a vulnerable

victim. Rather, the court based its determination that

9

O'Dowd was a vulnerable victim on his individual

personality traits and characteristics, as testified to by

O'Dowd at the sentencing hearing. Only after this specific

inquiry did the court find that O'Dowd was particularly

vulnerable to one representing himself as a fellow combat

veteran. Thus, the district court did not clearly err in

determining that O'Dowd was "particularly susceptible" to

Iannone's fraud.

2. Iannone Knew or Should Have Known of O'Dowd's

Vulnerability

The district court specifically found that Iannone knew or

had reason to know of O'Dowd's vulnerability to fellow

Vietnam veterans. ("I find by a preponderance of the

evidence that the defendant knew or had reason to know

that . . . O'Dowd[ ] [was] vulnerable to a predation by

somebody who purported to be a colleague at war[ ] [and] a

brother-at-arms."). The record provides ample evidence to

support this finding. O'Dowd's testimony, supported by

correspondence between O'Dowd and Iannone introduced

into evidence at the sentencing hearing, demonstrates that

Iannone actively encouraged and developed a friendship

with O'Dowd, based in large part on their supposed shared

combat experiences in Vietnam. The friendship between the

two men began through an America Online chat room for

military veterans and progressed to telephone calls,

electronic messages, and meeting in person on

approximately three occasions. During the course of their

friendship, Iannone and O'Dowd discussed their feelings

about honor, duty, and the bonds between fellow combat

veterans on several occasions. In many of their

communications, Iannone and O'Dowd used the phrase

"back to back," which, according to O'Dowd's testimony, is

a phrase derived from his Vietnam experience that

essentially means "I would put my life in your hands and

trust you to use it properly." Similarly, O'Dowd and

Iannone often referred to one another as "brother" in their

correspondence. O'Dowd testified that Iannone was aware

of his feelings of trust and loyalty towards fellow combat

veterans generally and towards Iannone in particular. Thus,

the record provides sufficient evidence that Iannone was

aware of O'Dowd's vulnerability.

10

3. O'Dowd's Vulnerability Facilitated Iannone's Crime

The district court also found that O'Dowd's vulnerability

facilitated Iannone's fraud, noting the link between

839<!>O'Dowd's vulnerability, Iannone's awareness of that

vulnerability, and Iannone's fraud. ("It [is] clear that

[O'Dowd's] vulnerability was made known to the defendant.

That's why it was so easy for the defendant to extract these

funds from [O'Dowd] . . . without much in the way of proof

of what he was going to get for it."). Iannone disputes this

finding, arguing that, even if O'Dowd was a vulnerable

victim, there was no demonstrated nexus between this

vulnerability and Iannone's crime. However, the record

supports the court's finding. According to O'Dowd's

testimony, Iannone framed his investment offer as a plea

for help. Iannone initially asked O'Dowd for a loan, claiming

that an investor had backed out of one of his investments

and that he was going to lose the entire investment. Only

later did Iannone suggest that O'Dowd invest in the project

himself, rather than lend him money. O'Dowd testified that

he invested primarily because he was concerned that his

"brother" was in trouble and he would do anything he could

to assist him. He also testified that he made this known to

Iannone. Thus, based on the evidence before it, the district

court did not err -- much less "clearly"-- in determining

that O'Dowd's vulnerability facilitated Iannone's fraud.

In sum, we find that the district court did not clearly err

in finding: (1) that O'Dowd was particularly vulnerable to

Iannone's fraud; (2) that Iannone was, or should have been,

aware of his vulnerability; and (3) that O'Dowd's

vulnerability facilitated Iannone's crime. We therefore affirm

the decision to enhance the offense level underS 3A1.1(b).

B. Abuse of a Position of Trust Enhancement

Iannone claims that the district court erred in applying a

two-level enhancement to his offense level pursuant to

S 3B1.3 of the Guidelines for his abuse of a position of

private trust. Section 3B1.3 provides in part that:"If the

defendant abused a position of public or private trust . . .

in a manner that significantly facilitated the commission or

concealment of the offense, increase by 2 levels." U.S.S.G.

S 3B1.3 (Nov. 1997). In applying S 3B1.3, a court must

11

initially determine whether the defendant occupied a

position of public or private trust. If he did occupy such a

position, then the court must determine whether the

defendant abused this position of trust in a way that

significantly facilitated his crime. See United States v.

Craddock, 993 F.2d 338, 340 (3d Cir. 1993). Because

Iannone challenges only the initial determination of

whether he held a position of trust, we devote most of our

discussion to this issue. We review de novo a district

court's determination that a defendant occupied a position

of trust within the meaning of S 3B1.3, as this is a legal

question. See United States v. Sokolow, 91 F.3d 396, 412

(3d Cir. 1996) (citing Craddock, 993 F.2d at 340). We review

a district court's finding that a defendant abused a position

of trust for clear error, as this is a factual question. Id.

Iannone argues that he did not occupy a position of trust

with respect to his victims, and therefore the district court

should not have enhanced his offense level pursuant to

S 3B1.3. Determining what constitutes a position of trust

for the purposes of S 3B1.3 is not a simple task. Neither

S 3B1.3 nor its applicable Commentary clearly defines what

is meant by a "position of trust." United States v. Smaw,

993 F.2d 902, 905 (D.C. Cir. 1993). "Position of trust" could

be defined narrowly to encompass only formal fiduciary or

employment relationships. Or, the concept could be defined

broadly to include any relationship in which a victim places

his trust in the defendant. The Commentary to S 3B1.3

indicates that the Sentencing Commission ("Commission")

did not intend for the term "position of trust" to be

interpreted too narrowly, as the Commentary does not limit

the phrase's application only to formal fiduciary or

employment relationships. See U.S.S.G. S 3B1.3, comment.

(n.1) (Nov. 1997). However, a court should hesitate before

defining the concept too broadly, as "there is a component

of misplaced trust inherent in the concept of fraud." United

States v. Garrison, 133 F.3d 831, 838 (11th Cir. 1998)

(quoting United States v. Mullens, 65 F.3d 1560, 1567 (11th

Cir. 1995) (internal quotation marks omitted)); see also

United States v. Trammell, 133 F.3d 1343, 1355 (10th Cir.

1998) ("The [S 3B1.3] guideline enhancement requires more

than a mere showing that the victim had confidence in

defendant.") (citing United States v. Brunson, 54 F.3d 673,

12

678 (10th Cir. 1995)); United States v. Koehn, 74 F.3d 199,

201 (10th Cir. 1996) ("In every successful fraud the

defendant will have created confidence and trust in the

victim, but the sentencing enhancement is not intended to

apply in every case of fraud.").

Application Note 1 of the Commentary to S 3B1.3

provides some guidance as to what is considered a position

of public or private trust for the purposes of this guideline

provision. It states in part:

"Public or private trust" refers to a position of public or

private trust characterized by professional or

managerial discretion (i.e., substantial discretionary

judgment that is ordinarily given considerable

deference). Persons holding such positions ordinarily

are subject to significantly less supervision than

employees whose responsibilities are primarily non-

discretionary in nature.

U.S.S.G. S 3B1.3, comment. (n.1) (Nov. 1997). The

application note also provides specific examples explaining

when S 3B1.3 should or should not be applied:

This adjustment, for example, would apply in the case

of an embezzlement of a client's funds by an attorney

serving as a guardian, a bank executive's fraudulent

loan scheme, or the criminal sexual abuse of a patient

by a physician under the guise of an examination. This

adjustment would not apply in the case of an

embezzlement or theft by an ordinary bank teller or

hotel clerk . . . .

Id.

In accordance with the Commission's guidance, this

Court has developed a "position of trust" analysis that

"look[s] to the essence of the meaning of a position of

trust." United States v. Pardo, 25 F.3d 1187, 1191 (3d Cir.

1994); see also United States v. Boyle, 10 F.3d 485, 489

(7th Cir. 1993) (stating that, in determining whether a

defendant occupies a "position of trust," a court "must look

beyond descriptive labels to the actual nature of the

relationship and the responsibility the defendant is given").

We consider three factors in determining whether a

13

defendant occupies a position of trust for the purposes of

S 3B1.3: "(1) whether the position allows the defendant to

commit a difficult-to-detect wrong; (2) the degree of

authority which the position vests in the defendant vis-a-vis

the object of the wrongful act; and (3) whether there has

been reliance on the integrity of the person occupying the

position." Pardo, 25 F.3d at 1192. These matters "should be

considered in light of the guiding rationale of[S 3B1.3]--to

punish `insiders' who abuse their positions rather than

those who take advantage of an available opportunity." Id.

This Court has expressly refused to "draw a bright line

limiting the abuse of trust increase to the employment

relationship." Id. at 1190-1191. A defendant may occupy a

position of trust outside the traditional employment

context. Id.

Based on our consideration of S 3B1.3 and the case law

interpreting the provision, we agree with the district court's

conclusion that Iannone occupied a position of private trust

vis-a-vis his Pennsylvania victims.6 The facts of this case

_________________________________________________________________

6. Because we find that Iannone occupied a position of trust vis-a-vis his

Pennsylvania victims, it is not necessary to decide whether he also

occupied a position of trust vis-a-vis his Colorado victims. Iannone's

conduct with respect to the Pennsylvania frauds, by itself, justifies

application of the S 3B1.3 enhancement. The record does not provide as

much information about Iannone's Colorado frauds. Apparently, his

Colorado frauds were committed in a very similar fashion as his

Pennsylania frauds, with one significant difference. In connection with

the Colorado frauds, Iannone solicited investments in drilling projects in

his capacity as head of W.D.H. Associates ("WDH"), a sham oil and gas

company. Unlike HNR, which was a legitimate company at one time,

WDH was apparently a sham company from the start. Thus, Iannone

never occupied any legitimate position of trust with respect to his

Colorado victims.

Although the issue is not of dispositive significance, we note that the

majority of circuits that have addressed it have held that a defendant

occupying a sham position of trust is subject to theS 3B1.3

enhancement. See United States v. Deal, 147 F.3d 562, 563 (7th Cir.

1998); United States v. Barnes, 125 F.3d 1287, 1292 (9th Cir. 1997);

United States v. Gill, 99 F.3d 484, 488-89 (1st Cir. 1996); United States

v. Queen, 4 F.3d 925, 929 (10th Cir. 1993). But see United States v.

Echevarria, 33 F.3d 175, 181 (2d Cir. 1994). According to the majority

14

show that all three Pardo factors have been met: Iannone's

position as head of the company in which the victims

invested made his fraud difficult to detect, vested him with

significant authority over the victim's investment monies,

and encouraged his victims to rely on his perceived

integrity.

_________________________________________________________________

view, where a defendant provided his victims with sufficient, objective

indicia that he occupied a position of trust, it is appropriate to hold

him

accountable under S 3B1.3. From the perspective of the victim, the

threat posed is the same whether the defendant occupies a legitimate or

sham position of trust: the position facilitates the crime and reduces the

chance of detection. See Gill, 99 F.3d at 489.

We also note that the Commentary to S 3B1.3 recently has been

amended to clarify that defendants holding sham positions of trust are

within the purview of the enhancement:

This adjustment also applies in a case in which the defendant

provides sufficient indicia to the victim that the defendant

legitimately holds a position of private or public trust when, in

fact,

the defendant does not. For example, the adjustment applies in the

case of a defendant who (A) perpetrates a financial fraud by

leading

an investor to believe the defendant is a legitimate investment

broker; or (B) perpetrates a fraud by representing falsely to a

patient

or employer that the defendant is a licensed physician. In making

the misrepresentation, the defendant assumes a position of trust,

relative to the victim, that provides the defendant with the same

opportunity to commit a difficult-to-detect crime that the

defendant

would have had if the position were held legitimately.

U.S.S.G. S 3B1.3, comment. (n.2) (Nov. 1998). With limited exception,

Guidelines commentary is binding on courts. See Stinson v. United

States, 508 U.S. 36, 38 (1993) ("[C]ommentary in the Guidelines Manual

that interprets or explains a guideline is authoritative unless it

violates

the Constitution or a federal statute, or is inconsistent with, or a

plainly

erroneous reading of, that guideline."); see also U.S.S.G. S 1B1.7 (Nov.

1997) ("Failure to follow . . . commentary could constitute an incorrect

application of the guidelines . . . .") (citing 18 U.S.C. S 3742). An

amendment to Guidelines commentary that merely "clarifies" the

meaning of a guideline is given great weight, unless its application would

be unconstitutional. See United States v. Menon, 24 F.3d 550, 567 (3d

Cir. 1994); cf. U.S.S.G. S 1B1.11(b)(2) ("[I]f a court applies an earlier

edition of the Guidelines Manual, the court shall consider subsequent

amendments, to the extent that such amendments are clarifying rather

than substantive changes.").

15

First, Iannone's position allowed him to commit a

difficult-to-detect wrong. Iannone primarily argues that his

fraud was easily detectable, but was not discovered due to

his victims' lack of diligence. Iannone's argument evinces a

misunderstanding of the first Pardo consideration. That

prong of the Pardo analysis is not a due diligence

requirement. Iannone's victims did not have to be experts

in the oil and gas industry or conduct an extensive

investigation into Iannone's business for the S 3B1.3

enhancement to be applicable. In fact, one rationale for a

S 3B1.3 enhancement is that, where the defendant occupies

a position of trust, his victims are less likely to discover his

fraud because they will not investigate the matter as

thoroughly as they would in an arm's-length transaction.

The focus of the first Pardo prong is on the defendant, not

his victims, and requires the court to determine whether

the position the defendant occupied allowed him to commit

a difficult-to-detect crime.

In connection with his Pennsylvania frauds, Iannone

solicited investors in his capacity as the owner and CEO of

HNR, an oil and gas drilling/leasing company. Iannone

solicited investment monies for the express purpose of

financing an exploratory drilling venture, selling the victims

"interests" or "shares" of HNR's Horizon projects and

signing contracts with the victims on behalf of the

company. Thus, Iannone occupied a "managerial" position,

in which he expectedly was entrusted with the task of using

the investors' money to complete a drilling project. By

contrast, his victims were merely passive investors with

little, if any, knowledge of the oil and gas industry. These

facts indicate that Iannone's relationship with his

Pennsylvania victims was analogous to the fiduciary

relationship that exists between a corporate officer or

director and the corporation's shareholders.

This fiduciary-like relationship allowed Iannone to

commit a difficult-to-detect wrong. His managerial position

allowed him to conceal his personal use of the victims'

investment money. In order to prevent his fraud from being

detected, he provided the victims with false reports on the

progress of the drilling project and his use of their

investment money. Because Iannone was the sole owner

16

and operator of HNR, he was the victims' only source of

information about the status of their investment and was

not subject to any supervision that would have uncovered

his fraud.

Iannone's position also satisfies the second Pardo

criterion, as it provided him unfettered authority over the

victims' investment money. As sole owner and operator of

HNR, he alone was entrusted with the proper use of the

investment money to complete the drilling project. This

total lack of supervision allowed Iannone to spend the

investment money freely. Once his victims invested in HNR,

no one but Iannone had access to, or supervisory power

over, HNR's financial records and bank accounts.

Finally, the evidence demonstrates the victims' reliance

on Iannone's perceived integrity as owner and CEO of HNR.

Iannone gave some of his victims his resume listing years

of experience in the oil and gas industry and providing

detailed descriptions of that experience. Iannone further

fostered reliance on his integrity by posing as a decorated

Vietnam veteran. Some of his victims indicated that they

decided to invest with Iannone because he was both a

veteran and an experienced businessperson offering what

seemed to be a great investment opportunity. Based on

Iannone's representations, his victims believed they were

investing in a genuine drilling project.

Thus, application of the three Pardo considerations to

Iannone's case demonstrates that, as CEO of HNR, he

occupied a position of private trust vis-a-vis his

Pennsylvania victims.7 The foregoing analysis accords with

our decisions in recent cases involving similar factual

situations. See United States v. Bennett, 161 F.3d 171, 195-

96 (3d Cir. 1998); Sokolow, 91 F.3d at 412-13. Having

found that Iannone occupied a position of private trust, we

also conclude (and appellant does not challenge) that the

_________________________________________________________________

7. Iannone also argues that the S 3B1.3 enhancement is inapplicable

because his friendship with the victims did not constitute a position of

trust. This argument ignores a critical fact of this case: Iannone

solicited

investments from his friends and neighbors in his capacity as head of a

company. The position of trust at issue is not Iannone's friendship with

the victims, but his position as owner and CEO of HNR.

17

district court did not clearly err in finding Iannone abused

his position of trust in a manner that significantly

facilitated his crime. Therefore, we affirm the district court's

decision to enhance Iannone's offense level pursuant to

S 3B1.3.

C. Section 5K2.0 Departure

Finally, Iannone challenges the district court's decision to

impose an upward departure (set at two levels) pursuant to

S 5K2.0, based on a combination of factors that took the

case out of the "heartland" of the fraud guideline. A district

court's decision to depart from the applicable guideline

range is subject to review for abuse of discretion. See Koon

v. United States, 518 U.S. 81, 99-100 (1996); United States

v. Jacobs, 167 F.3d 792, 798 (3d Cir. 1999). Wefind the

district court did not abuse its discretion by departing from

the Guidelines in this case.

The Commission conceives of each offense guideline as

"carving out a `heartland,' a set of typical cases embodying

the conduct that each guideline describes." U.S.S.G., Ch.1,

Pt. A, intro. p.s. 4(b) (Nov. 1997). In the unusual case in

which a defendant's conduct falls outside the typical

"heartland," the court may consider a departure from the

Guidelines sentence. See id.; United States v. Baird, 109

F.3d 856, 870 (3d Cir.), cert. denied, 118 S.Ct. 243 (1997)

(citing Koon, 518 U.S. at 93-94). Section 5K2.0 provides

that a court may impose a sentence outside the applicable

guideline range "if the court finds `that there exists an

aggravating or mitigating circumstance of a kind, or to a

degree, not adequately taken into consideration by the

Sentencing Commission in formulating the guidelines that

should result in a sentence different from that described.' "

U.S.S.G. S 5K2.0, p.s. (Nov. 1997) (quoting 18 U.S.C.

S 3553(b)). The Commentary to S 5K2.0 adds that a court

may also depart in the "extraordinary case that, because of

a combination of such characteristics or circumstances,

differs significantly from the `heartland' cases covered by

the guidelines in a way that is important to the statutory

purposes of sentencing, even though none of the

characteristics or circumstances individually distinguishes

the case," but also notes that these departures "will be

extremely rare." Id., comment.; see also Koon, 518 U.S. at

18

113-114 (noting that departure is possible based on a

combination of factors, even though none of the factors

standing alone would justify a departure). Outside of a

limited number of prohibited factors that a court may never

consider as grounds for departure, the Guidelines do not

"limit the kinds of factors . . . that could constitute grounds

for departure in an unusual case."8 U.S.S.G., Ch.1, Pt. A,

intro. p.s. 4(b) (Nov. 1997); see also Koon, 518 U.S. at 106;

Baird, 109 F.3d at 870.

The Supreme Court provided additional guidance on

departures in Koon, instructing courts to apply the

following analysis when considering a S 5K2.0 departure.

First, identify the factor or factors that potentially take the

case outside the Guidelines' "heartland" and make it special

or unusual. Koon, 518 U.S. at 95. Second, determine

whether the Guidelines forbid departures based on the

factor, encourage departures based on the factor, or do not

mention the factor at all.9 Id. at 94-95. Third, apply the

appropriate rule: (1) if the factor is forbidden, the court

cannot use it as a basis for departure; (2) if the factor is

encouraged, the court is authorized to depart if the

applicable guideline does not already take it into account;

(3) if the factor is discouraged, or encouraged but already

taken into account by the applicable guideline, the court

should depart only if the factor is present to an exceptional

degree, or in some other way makes the case different from

the ordinary case in which the factor is present; or (4) if the

factor is unmentioned, "the court must, after considering

the structure and theory of both relevant individual

guidelines and the Guidelines taken as a whole, decide

whether [the factor] is sufficient to take the case out of the

_________________________________________________________________

8. The prohibited factors that a court may never consider are listed in

SS 5H1.10 (race, sex, national origin, creed, religion, socio-economic

status), 5H1.12 (lack of guidance as a youth and similar circumstances),

part of 5H1.4 (drug or alcohol dependence or abuse), and part of 5K2.12

(personal financial difficulties and economic pressures upon a trade or

business). See U.S.S.G. Ch. 1, Pt. A, intro. p.s. 4(b) (Nov. 1997).

9. For example, the Guidelines discourage departure based on the

defendant's educational and vocational skills, see U.S.S.G. S 5H1.2 (Nov.

1997), and encourage departure based on victim provocation. See

U.S.S.G. S 5K2.10 (Nov. 1997).

19

Guideline's heartland." Id. at 95-96 (internal citation and

quotation marks omitted); see also United States v.

Abuhouran, 161 F.3d 206, 210-211 (3d Cir. 1998), cert.

denied, 119 S.Ct. 1479 (1999) (restating the third step of

the Koon analysis). Koon adds that departures based on

unmentioned factors will be "highly infrequent." 518 U.S. at

96 (quoting U.S.S.G. Ch. 1, Pt. A (Nov. 1995)); see also

United States v. Haut, 107 F.3d 213, 218 (3d Cir.), cert.

denied, 117 S.Ct. 2528, and cert. denied, 118 S.Ct. 130

(1997).

Before reviewing the district court's application of the

Koon analysis, we note the substantial deference that we

owe the decision to depart from the Guidelines. See Koon,

518 U.S. at 98; United States v. Sally, 116 F.3d 76, 81 (3d

Cir. 1997). While we must also bear in mind that both the

Guidelines and Koon indicate that S 5K2.0 departures will

be highly infrequent, it was within the district court's

discretion to determine whether the facts of this case

involved aggravating circumstances of such an exceptional

degree that they took the case out of the "heartland" of

ordinary fraud cases. See S 5K2.0, comment. (Nov. 1997);

Koon, 518 U.S. at 96-98. Koon emphasizes the institutional

advantage that district courts have over appellate courts in

determining whether the facts of a given case take it out of

the "heartland" of Guidelines cases, noting that "[w]hether

a given factor is present to a degree not adequately

considered by the Commission . . . [is a] matter[ ]

determined in large part by comparison with the facts of

other Guidelines cases" and that the district courts "see

many more Guidelines cases than appellate courts do." Id.

at 98; cf. Sally, 116 F.3d at 81 (stating that departure

determinations should be left to sentencing courts to make

"on a case-by-case basis, relying on the particular facts and

circumstances of each case.").

The district court found that several aggravating factors

relating to Iannone's criminal conduct, taken collectively,

constituted sufficient grounds for an upward departure

(which, as noted, the court permissibly achieved by the

device of a two-level offense level increase) underS 5K2.0.

The court identified the following factors: (1) Iannone's

masquerade as a decorated Vietnam combat veteran, a

20

person in the witness protection program, and a

government agent on a secret mission; (2) Iannone's

misrepresentation that he had received several combat

medals as well as a recommendation for the Congressional

Medal of Honor; (3) Iannone's attempt to conceal his fraud

by faking his own death; (4) Iannone's fabricated story

about his family's having been killed by a drunk driver; and

(5) the severe psychological harm Iannone's fraud caused

his victims. Finding that these factors were not adequately

considered by the Guidelines and that they "take[ ] this

case outside of the heartland of the [fraud] guideline[ ]," the

court departed upwards by two levels. The court noted that

it found none of these factors justified departure by itself;

but, in combination, the factors made the case very

unusual.

The Guidelines neither forbid nor discourage departures

based on the factors enumerated by the district court.10 Nor

are the factors encouraged bases for departure under the

Guidelines.11 Thus, the factors should be classified as

"unmentioned" by the Guidelines.12 As unmentioned

_________________________________________________________________

10. The forbidden bases for departure are listed supra in note 8. The

discouraged bases for departure are a defendant's: (1) age; (2) education

and vocational skills; (3) mental and emotional conditions; (4) physical

condition or appearance; (5) employment record; (6) family ties and

responsibilities, and community ties; (7) military, civic, charitable, or

public service, employment-related contributions, and similar prior good

works; and (8) subjection to coercion or duress. See SS 5H1.1-5H1.6,

5H1.11, and 5K2.12.

11. Encouraged bases for departure are listed in Chapter Five, Part K of

the Guidelines Manual. See, e.g., S 5K2.2 (significant physical injury).

12. One of the factors the district court relied upon as a basis for its

S 5K2.0 "combination" departure was the psychological harm Iannone's

fraud caused his victims. Notably, "extreme psychological injury" is an

encouraged basis for departure under S 5K2.3. However, based on the

district court's factual findings, we classify this factor as

"unmentioned"

by the Guidelines, rather than as an encouraged basis for departure.

While the court found that Iannone's victims suffered more psychological

harm than a typical fraud victim ("I would [not] equate the kind of harm

that was caused here with the typical kind of harm. . . . [T]he emotional

and psychiatric trauma that is attendant not only to losing your money

but [also] . . . what you thought was a friendship[ ] . . . [is] a severe

21

factors, a court must "consider[ ] the structure and theory

of both relevant individual guidelines and the Guidelines

taken as a whole, [and] decide whether [the factors are]

sufficient to take the case out of the Guideline's heartland,"

before departing pursuant to S 5K2.0. Koon, 518 U.S. at 95-

96 (internal citation and quotation marks omitted); see also

United States v. Nolan-Cooper, 155 F.3d 221, 244 (3d Cir.

1998) (restating the Koon analysis of unmentioned factors).

Considering the "structure and theory" of the fraud

guideline and the Guidelines as a whole, as Koon instructs,

we find that the district court acted within its discretion in

concluding that this combination of five unmentioned

factors was sufficient to take Iannone's case out of the

Guidelines' heartland. 518 U.S. at 96. The Commentary to

the fraud guideline expressly provides for upward

departures based on factors not listed in the guideline text.

In order to remedy the fraud guideline's predominant focus

on the monetary amount of the victims' loss, the

Commentary states that upward departures may be

warranted "[i]n cases in which the loss . . . does not fully

capture the harmfulness and seriousness of the conduct."

U.S.S.G. S 2F1.1, comment. (n.10) (Nov. 1997). By

departing upwards, the district court demonstrated its

belief that the harmfulness and seriousness of Iannone's

conduct was not adequately captured by the offense level

increases for the amounts of the victims' losses. In fact, the

court believed that no existing guideline enhancement

adequately captured the conduct upon which it based the

S 5K2.0 departure. We do not disagree with the district

court's conclusion.

Furthermore, while no existing guideline enhancement

covers Iannone's conduct, two areas of the Guidelines

provide specific bases for upward departures based on

conduct similar to his. Subsection (b)(3)(A) of the fraud

_________________________________________________________________

harm"), the court also specifically found that there was not sufficient

evidence to support an upward departure under S 5K2.3. Thus, because

the district court did not depart based on "extreme psychological harm,"

but rather, based on a combination of circumstances which included a

lesser psychological harm component, we classify the factor as

"unmentioned" by the Guidelines.

22

guideline provides for a two-level increase in offense level

where the offense involved "a misrepresentation that the

defendant was acting on behalf of a charitable, educational,

religious or political organization, or a government agency."

U.S.S.G. S 2F1.1(b)(3)(A) (Nov. 1997). The applicable

Commentary indicates that the rationale for this

enhancement is that "defendants who exploit victims'

charitable impulses or trust in government create particular

social harm." U.S.S.G. S 2F1.1, comment. (backg'd P 4).

Although the S 2F1.1(b)(3)(A) enhancement does not apply

to Iannone's conduct, its rationale does: Iannone's

misrepresentations that he was a Vietnam veteran, combat

medal recipient, government agent, and widower who had

lost his family to a drunk driver, created a particular social

harm that the Guidelines do not explicitly take into account.13

Iannone's misrepresentations about being a Vietnam

veteran and recipient of several medals exploited his

victims' trust in and respect for Vietnam war heroes.

Iannone's claim to have been recommended for the

Congressional Medal of Honor was particularly exploitive,

as this is the nation's highest and most revered military

award.14 His misrepresentation that he worked for a

government agency also encouraged his victims' trust.

Finally, his misrepresentation that his family had been

killed by a drunk driver exploited his victims' charitable

impulses. Another area of the Guidelines that provides for

an upward departure based on conduct similar to Iannone's

is S 5K2.3. It specifically encourages courts to depart

upwards if the defendant's conduct caused his victim

extreme psychological injury. While the district court did

not find that Iannone's victims had suffered extreme

psychological injury, it did find that they had suffered a

psychological injury more severe than that occurring in a

_________________________________________________________________

13. Though Iannone falsely claimed to be a government agent, this

conduct did not qualify for a S 2F1.1(b)(3)(A) enhancement because he

never claimed to be selling HNR or WDH investment opportunities on

behalf of a government agency.

14. Of the more than two million military personnel who served in

Vietnam during the period 1964-1973, only 239 have been awarded the

Congressional Medal of Honor. See The World Almanac and Book of Facts

1998 158 (Robert Famighetti et al. eds., 1997).

23

typical fraud case and included this as a reason for a

departure. These two analogies to conduct similar to

Iannone's further support the district court's finding that a

S 5K2.0 departure was appropriate.

These analogies also demonstrate that the extent of the

district court's departure -- two offense levels-- was

reasonable. A district court in determining the extent of a

departure should generally do so by analogizing to existing

Guidelines provisions. See United States v. Kikumura, 918

F.2d 1084, 1110-14 (3d Cir. 1990) (establishing this Court's

standard for determining the proper extent of departure);

Baird, 109 F.3d at 872 (applying Kikumura). See also United

States v. Adelman, 168 F.3d 84, 87 (2d Cir. 1999)

(analogizing to another Guidelines provision was an

appropriate method for determining the extent of an

upward departure). We review this determination

deferentially. See Baird, 109 F.3d at 872. In this case, the

district court did not expressly undertake the analogic

reasoning that this court generally requires in determining

the extent of an upward departure. However, by couching

the departure as a two-level increase in the offense level,

the district court implicitly did so. As noted above, there is

a reasonable analogy in the Guidelines that justifies the

extent of the court's departure: subsection (b)(3)(A) of the

fraud guideline, which provides for a two-level increase in

offense level. See S 2F1.1(b)(3)(A) (Nov. 1997).

We briefly address Iannone's arguments in support of his

challenge to the district court's S 5K2.0 departure. Iannone

argues that the base offense level for fraud adequately took

into account all of his relevant misconduct; that is, both his

misrepresentations and the psychological damage to his

victims. As to his misrepresentations, Iannone argues in

his brief that the Guidelines "obviously contemplated

fraudulent misrepresentations . . . as integral to the

commission of a fraud" and thus they did not warrant an

upward departure under S 5K2.0. Iannone claims that his

misrepresentations were either incidental to his fraud or

mere acts of concealment and therefore were not

sufficiently offensive or unique to "suggest a factor `present

in a degree which the Commission did not consider'. . . .

[or] `substantially in excess of that which is ordinarily

24

involved in the offense of conviction.' " (Quoting United

States v. Uca, 867 F.2d 783, 783 (3d Cir. 1988).) He argues

that faking his death, falsely claiming to work for a federal

"alphabet agency," and falsely stating that his family had

been killed by a drunk driver were merely creative

concealment stories invented only to avoid detection, and

therefore that those misrepresentations do not warrant

an upward departure. He also claims that his

misrepresentations of himself as a Vietnam veteran and

recipient of combat medals were not part of his fraud.

Rather, these misrepresentations had begun years before

the frauds and were a result of "his own psychological

needs[.]" Finally, the brief asserts that these were "garden

variety" fraudulent misrepresentations and were already

used as the basis for the vulnerable victim departure.

Iannone correctly points out that fraudulent

misrepresentations were an inherent part of his offense and

therefore, to a certain degree, are included in the base

offense level for fraud. However, the district court found

that Iannone's misrepresentations went beyond the usual

"heartland" and as such were not adequately taken into

account by the Guidelines. Iannone falsely stated to his

Colorado victims that he had lost his family to a drunk

driver, and the court found that this was done in order to

exploit his victims' charitable impulses and encourage their

investment. Similarly, the court found that the false

persona that Iannone created as a decorated Vietnam

veteran and government agent was adopted in order to take

advantage of his victims. The court found Iannone's

repeated misrepresentations that he had received combat

medals particularly offensive, noting that misrepresentation

of the ownership of a combat medal may violate federal law.15

_________________________________________________________________

15. 18 U.S.C. S 704(a) provides that "[w]hoever knowingly wears . . . any

decoration or medal authorized by Congress for the armed forces of the

United States, or any of the service medals or badges awarded to the

members of such forces, or the ribbon, button, or rosette of any such

badge, decoration or medal, or any colorable imitation thereof, except

when authorized under regulations made pursuant to law, shall be fined

under this title or imprisoned not more than six months, or both."

Section 704(b) provides additional punishment if the decoration or medal

involved in the offense is the Congressional Medal of Honor.

25

The court also cited Iannone's elaborately staged death at

the Pittsburgh airport, the grief this conduct caused his

family, and its cost to his creditors. In sum, the court

found some of Iannone's misrepresentations to have been

particularly egregious and calculated, clearly disagreeing

with his contention that they were mere acts of

concealment or incidental to his fraud. More importantly,

the court found that those misrepresentations were

aggravating factors not adequately reflected by any existing

guideline provision.16 We find that the district court acted

within its discretion in reaching this conclusion.

With respect to the psychological damage to his victims,

Iannone claims that the district court abused its discretion

by including this as a reason for departure, for two reasons:

(1) the psychological harm he caused his victims had

already been included in the base offense level for fraud;

and (2) the record demonstrates that the four victims who

testified at the sentencing hearing are mentally and

physically healthy. The Guidelines contradict Iannone's

claim that the psychological harm he caused his victims

already has been included in the base offense level for

fraud. The Commentary to the fraud guideline specifically

provides that an upward departure may be appropriate

where "the offense caused reasonably foreseeable . . .

psychological harm or severe emotional trauma."S 2F1.1,

comment. (n.10(c)) (Nov. 1997). While Iannone correctly

points out that the record demonstrates that the four

victims who testified are mentally and physically healthy,

the record also supports the district court's conclusion that

the psychological damage suffered by them exceeded that of

_________________________________________________________________

16. The court noted that it is not double-counting to subject Iannone to

the vulnerable victim enhancement due to O'Dowd's vulnerability as a

Vietnam veteran and also include Iannone's masquerade as a Vietnam

veteran as one of the reasons for the S 5K2.0 departure. We agree with

the district court's conclusion. The enhancements are designed to

punish different conduct. The vulnerable victim enhancement, as its

name indicates, focuses on the nature of the victim. In contrast, a

S 5K2.0 upward departure based in part on Iannone's Vietnam veteran

masquerade is based on the rationale that the masquerade itself --

regardless of the nature of the victim -- is an"unmentioned" aggravating

factor.

26

the typical fraud case. Most of Iannone's victims were

Iannone's friends and/or neighbors. The district court

found this circumstance not typical of a fraud case, noting

the significant difference between being defrauded by

someone you do not know and being defrauded by someone

you thought was a friend. The court found that the loss of

friendship that accompanied Iannone's fraud inflicted

severe harm on his victims. The testimony of Iannone's

victims at the sentencing hearing supports the district

court's finding. Janice Stringert-Streich, for example,

testified that she felt an extremely deep sense of loss and

betrayal as a result of Iannone's fraud, and that the fraud

destroyed her family. As we stated in United States v.

Astorri, "[i]f there is any place in sentencing guidelines

analysis where a fact-finder is to be given considerable

deference, it is here where the district court is called upon

to assess the psychological impact upon victims." 923 F.2d

1052, 1058 (3d Cir. 1991).

In sum, we find that the court did not abuse its

discretion in concluding that this combination of

misrepresentations and psychological harm to the victims

was sufficiently unusual to take Iannone's case out of the

heartland of the Guidelines and, as a means of departure,

to justify a two-level increase in his offense level.

III. CONCLUSION

We conclude that the district court appropriately

enhanced Iannone's offense level pursuant to SS 3A1.1,

3B1.3, and 5K2.0 of the Sentencing Guidelines, and affirm

the sentencing judgment.

27

BECKER, Chief Judge, concurring:

I join the majority opinion, as I am constrained to agree

that Iannone's abuse of trust enhancement is justified given

our decisions in United States v. Bennett, 161 F.3d 171 (3d

Cir. 1998); United States v. Sokolow, 91 F.3d 396 (3d Cir.

1996); and United States v. Pardo, 25 F.3d 1187 (3d Cir.

1994). I write separately to express my concern that the

current drafting of the abuse of a position of trust guideline

is flawed insofar as it has engendered convoluted caselaw

in which the concept of a "position of trust" has expanded

far beyond the general understanding of that term, making

an abuse of trust enhancement a virtual concomitant of a

fraud conviction. I therefore urge the Commission to rework

the guideline so as to confine "abuse of a position of trust,"

in fraud cases, to situations more closely approximating

traditional trust relationships.1 If it then appears that fraud

is not being sufficiently punished, the appropriate remedy

would be for the Commission to increase the underlying

offense levels, rather than to dilute the concept of"position

of trust."

I.

Fraud inherently involves some exploitation of trust. See

United States v. Koehn, 74 F.3d 199, 201 (10th Cir. 1996)

("In every successful fraud the defendant will have created

confidence and trust in the victim . . . ."); United States v.

Mullens, 65 F.3d 1560, 1567 (11th Cir. 1995) ("[T]here is a

component of misplaced trust inherent in the concept of

fraud . . . ."); United States v. Hathcoat , 30 F.3d 913, 915

(7th Cir. 1994) ("By its definition, embezzlement requires a

finding of a breach of trust."). While it is possible in theory

to exclude some frauds from "abuse of trust" as defined in

_________________________________________________________________

1. "[F]rom its earliest days, the Commission has urged the federal

judiciary to make suggestions for Guideline revision, viewing them as a

means of implementing the ongoing monitoring process." United States v.

Rudolph, 137 F.3d 173, 181 (3d Cir. 1998) (Becker, J., concurring); see

also U.S.S.G. ch. 1 pt. A, at 4(b) (stating that the Commission will

analyze judicial decisions to determine how to refine the Guidelines);

United States v. Woods, 24 F.3d 514, 518 n.4 (3d Cir. 1994) (discussing

same).

28

Guideline 3B1.3, it seems that our jurisprudence does not

do so in practice with any degree of consistency. The

contention that "the sentencing enhancement is not

intended to apply in every case of fraud," Koehn, 74 F.3d at

201, is easier to promise than to enforce.

In Pardo, we identified three elements to consider in

determining whether a position constitutes a position of

trust:

(1) whether the position allows the defendant to

commit a difficult-to-detect wrong; (2) the degree of

authority which the position vests in defendant vis-a-

vis the object of the wrongful act; and (3) whether there

has been reliance on the integrity of the person

occupying the position.

Pardo, 25 F.3d at 1192. Pardo stated that "[T]hese factors

should be considered in light of the guiding rationale of the

section--to punish `insiders' who abuse their positions

rather than those who take advantage of an available

opportunity." Id. The difficulty is that the literal application

of the three-part test in fraud cases undermines Pardo's

limitation to "insiders." Where a defendant orchestrates a

fraud, particularly a fraud of the kind prosecuted in federal

court, he will almost always be a sufficient "insider" under

the Pardo test, even if he is at the same time taking

advantage of the opportunity that his acts made available.

A fraudulent scheme ordinarily contains all three Pardo

elements: difficulty of detection, authority, and reliance.

First, people who commit fraud do not do it overtly; they

conceal it. Efforts to make the fraud look legitimate are a

necessary part of fraud. Even in a simple scam--e.g., a

door-to-door solicitation for a fictitious charity--it is

difficult to verify a claim of charitable purpose. Fraud is

therefore by its nature difficult to detect. Second, even the

average fraud vests a high degree of authority in a

defendant vis-a-vis the object of his wrongful act. Fraud

consists of getting a victim to give to a criminal authority

over items of value, however fleeting or illegitimate. See,

e.g., United States v. Sokolow, 91 F.3d 396, 413 (3d Cir.

1996) (defendant had the requisite degree of authority

because he was authorized to withdraw victims' funds from

29

his company). And finally, it is difficult to imagine a fraud

in which a victim does not rely on the integrity of the

defendant; again, that is the very point of fraud. See

Agathos v. Starlite Motel, 60 F.3d 143, 147 (3d Cir. 1995)

(explaining that the elements of fraud are knowing

misrepresentation, intent to induce reliance, and reliance);

cf. United States v. Pelkey, 29 F.3d 11, 16 (1st Cir. 1994)

(discussing the abuse of trust enhancement and noting that

"[s]ome degree of consequential trust and reliance by the

victim is to be expected in the majority of fraud cases

involving false pretenses").

Because fraud normally includes all three factors, our

description of abuse of trust works equally well as a

description of fraud: "[I]f one party is able to take criminal

advantage of the relationship without fear of ready or quick

notice by the second party, the second party has clearly

placed a level of trust in the first." United States v.

Lieberman, 971 F.2d 989, 993 (3d Cir. 1992) (quoting

United States v. Hill, 915 F.2d 502, 506 (9th Cir. 1990)). In

United States v. Bennett, 161 F.3d 171 (3d Cir. 1998), the

defendant ran a Ponzi scheme in the guise of a charity,

defrauding many victims out of substantial sums. We found

that:

Bennett's authority allowed him to disseminate

falsehoods about trust agreements and anonymous

benefactors, misrepresent that he received no

compensation for his charitable efforts, create a phony

board of directors made up of prominent individuals,

deceive investors that funds deposited with New Era

organizations were held in escrow or quasi-escrow

accounts, and provide false information to the I.R.S.

and investors.

In all of these undertakings, it was Bennett's position

of trust that cloaked him with the requisite authority to

deceive. . . .

Furthermore, it is clear the victims relied on

Bennett's integrity when making donations. They

believed, based on his representations, that their

money would be held in low-risk accounts to be

matched by anonymous donors and ultimately used for

charitable purposes.

30

Id. at 195-96. As soon as the abuse of trust has been

described, so has the fraud.

Likewise, describing fraud, or its "cousin," theft by deceit,

describes an abuse of trust because fraud is the culpable

exploitation of trust:

By viewing as especially culpable persons who "abuse"

their positions of trust, the guideline also recognizes

the time-honored legal concept that theft by deceit is to

be dealt with more harshly than simple theft. Whereas

ordinary theft is by and large an impersonal act, theft

by deceit, like its cousin fraud, is entirely personal.

Where an individual makes himself particularly

vulnerable by entrusting another with substantial

authority and discretion to act on his behalf and then

relies upon and defers to that person, a decision to

take advantage of that trust and vulnerability is

particularly abhorrent, as it undermines faith in one's

fellow man in a way that the ordinary pick-pocket

simply cannot.

United States v. Ragland, 72 F.3d 500, 503 (6th Cir. 1996).

II.

The preceding discussion demonstrates that our tripartite

test is better at detecting abuses of trust--including frauds

--than it is in defining a true "position" of trust. Thus,

garden-variety fraud as well as exotic schemes will

ordinarily qualify for the enhancement, even though the

Sentencing Guidelines were not supposed to work this way.

True, an occasional exceptional case may not qualify for

the enhancement. Pardo is one of the increasingly rare

cases to reject an abuse of trust enhancement for fraud. In

that case, we found the enhancement unjustified where

formal checks against bank fraud were in place, but the

defendant's friend, a bank manager, bypassed them

(without apparent criminal intent) to help her friend. We

found that there was no position of trust because the

safeguards were designed so that the bank would not need

to rely on borrowers' credibility; the crime should not have

been difficult to detect.

31

Judge Harris's opinion distinguishes Iannone's situation

from that in Pardo because the difficult-to-detect element

does not require due diligence by the victim:

Iannone's victims did not have to be experts in the oil

and gas industry or conduct an extensive investigation

into Iannone's business for the S 3B1.3 enhancement

to be applicable. In fact, one rationale for a S 3B1.3

enhancement is that, where the defendant occupies a

position of trust, his victims are less likely to discover

his fraud because they will not investigate the matter

as thoroughly as they would in an arm's-length

transaction. The focus of the first Pardo prong is on the

defendant, not his victims, and requires the court to

determine whether the position the defendant occupied

allowed him to commit a difficult-to-detect crime.

Slip Op. at 16.

While I agree that Pardo is distinguishable, I disagree

that we can "focus" on the defendant to the exclusion of

victims. In Pardo, for example, if there had been no formal

safeguards against bank fraud, and the bank had relied on

managers' assessments of clients' trustworthiness, then the

defendant's fraud would have been difficult to detect. Cf.

United States v. Sherman, 160 F.3d 967, 969-70 (3d Cir.

1998) (insurance fraud by a doctor abused a position of

trust because the victim-insurer used an honor system).

But a decision to ignore the victims' level of care does not

obviate the need to look at the victims to see whether,

under the circumstances, the defendant occupied a position

of trust with respect to them.

Pardo is almost unique because the defendant used

informal, personal ties to subvert standard, formalized

safeguards. In this case, by contrast, Iannone chose a

method whereby fraud was inherently difficult to detect--

his own representations about ownership of land, oil leases,

and the oil and gas industry. The more informal the

encounter between the defendant and his victims, the more

difficult it will be for victims to detect potential fraud; the

informality of the defendant's "position" leads to the

application of the enhancement even though it is far from

a traditional trust relationship. This result follows from our

32

decisions, which have yoked the existence of a position of

trust to the difficulty of detection under the circumstances

of the crime:

[O]ne has been placed in a position of trust when, by

virtue of the authority conferred by the employer and

the lack of controls imposed on that authority, he is

able to commit an offense that is not readily

discoverable. In such cases, the employer, by choice or

necessity, is relying primarily on the integrity of the

employee to safeguard against the loss occasioned by

the offense.

United States v. Craddock, 993 F.2d 338, 342 (3d Cir.

1993) (emphasis added). The exception carved out by Pardo

is hardly an exception at all; the game is not worth the

candle.

I believe that this difficulty has arisen because our

jurisprudence has extracted elements that characterize

traditional trust relationships and generalized from them to

define "positions of trust." While this case provides an

example of a relationship that has the requisite elements

and still seems to me to go far beyond the usual meaning

of "position of trust," there are also examples of positions of

trust without the three distilled elements. In United States

v. Claymore, 978 F.2d 421 (8th Cir. 1992), a police officer

raped a 13-year-old girl and fathered her child. This crime

may have been difficult to prevent, given the authority

delegated to police officers, but it was not difficult to detect

--particularly insofar as we look at the position of trust

from the victim's perspective, see, e.g., United States v.

Castagnet, 936 F.2d 57, 62 (2d Cir. 1991). Nevertheless, I

have no doubt that the abuse of trust enhancement was

justified in Claymore. See also United States v. Zamarripa,

905 F.2d 337, 340 (10th Cir. 1990) (abuse of trust

enhancement applicable where babysitter sexually abused

child).

Claymore is an example in which the Pardo test would be

underinclusive, though the greater danger is that our test

so closely parallels the elements of fraud that it is

overinclusive. Both the under- and overinclusiveness follow

from the fact that the elements of the Pardo test are all

33

basically about deceit, which is involved in most (but not

all) abuses of a fiduciary position of trust and is also

involved in many other crimes. Deceit occurs in many

forms, in relationships both formal and informal, casual

and longstanding. Ultimately, then, the use of the tripartite

test dilutes the concept of a "position" of trust, reducing

our inquiry in practical terms to whether there was an

"abuse of trust."

III.

Once we have expanded "abuse of trust" to cover

situations in which there is only a misrepresentation of

legitimacy that cannot be easily verified, I cannot see a

limiting principle. As far as I can discern, the only type of

fraud that might not justify the abuse of trust enhancement

is a simple "pigeon drop" scam--and that only if we choose

to impose some minimal requirement that victims take

sensible precautions against fraud.2 Yet federal fraud cases

rarely, if ever, involve defendants who commit basic frauds

like the pigeon drop. Indeed, the single federal pigeon drop

prosecution in the past fifteen years I have found in the

reported federal cases involved a feigned position of trust--

a phony "investment adviser"--not unlike Iannone's in this

case. See United States v. Jones, 648 F. Supp. 225

(S.D.N.Y. 1986), aff'd in part and rev'd in part sub nom.

United States v. Blackmon, 839 F.2d 900 (2d Cir. 1988).3

I therefore believe that the Sentencing Commission

should rethink the relationship between the abuse of trust

enhancement and fraud crimes.4 In such cases, the

_________________________________________________________________

2. A "pigeon drop" is a scheme in which the criminals convince a victim

that they have, together, stumbled upon lost riches. They "agree" to split

the windfall amongst themselves, but the criminals convince the victim

that unspecified legal or tax consequences prevent a simple split. The

perpetrators inveigle the victim into giving up her own money to show

her good faith and then disappear.

3. The only other federal "pigeon drop" cases I have uncovered predate

the Guidelines by an even longer period. See United States v. Ostertag,

619 F.2d 767 (8th Cir. 1980); Charron v. United States, 412 F.2d 657

(9th Cir. 1969); United States v. Edwards, 394 F. Supp. 1288 (E.D. Mo.

1974), aff'd, 516 F.2d 913 (8th Cir. 1975).

4. Although my discussion suggests that this court has "run too far with

the ball" in this area, we are not alone. See, e.g., United States v.

Becraft,

34

enhancement should either be limited to fiduciary or quasi-

fiduciary relationships, or the Commission should recognize

that, as expanded by the cases, abuse of trust is part of the

definition of fraud and therefore should not be applied to

fraud crimes. See U.S.S.G. S 3B1.3 ("This adjustment may

not be employed if an abuse of trust or skill is included in

the base offense level or specific offense characteristic.").

Alternatively, I would urge my colleagues to revisit the

standard for applying the enhancement to fraud cases. The

Court of Appeals for the Second Circuit has an instructive

approach that we might consider. Its standard bars the

enhancement in fraud cases where the defendant is neither

a trusted employee of the victim nor in any fiduciary or

quasi-fiduciary relationship with the victim:

Section 3B1.1 precludes an enhancement where the

abuse of trust is included in the specific offense

characteristic. Where fraud occurs in arm's-length

transactions not involving fiduciary-like relationships,

the "trust" that is "abused" is simply the reliance of the

victim on the misleading statements or conduct of the

defendant. The trust in short is a specific offense

characteristic of fraud, and a Section 3B1.3

enhancement is inappropriate. In the instant matter,

the lenders' trust in Jolly was simply their reliance on

his representations about Microtech's ongoing business

and the appearance created by the repayments. Such

reliance is the hope of every defendant who engages in

fraud.

. . . .

. . . Jolly held himself out as the president of a

company seeking capital, not as an investment advisor.

United States v. Jolly, 102 F.3d 46, 49-50 (2d Cir. 1996).

_________________________________________________________________

117 F.3d 1450 (D.C. Cir. 1997) (finding an abuse of a position of trust

where the defendant, an office manager, was given"carte blanche" by the

negligence of her immediate supervisor, permitting her to perpetrate an

otherwise blatant fraud). The problem lies in the drafting of the

Guidelines and Application Notes.

35

Under this approach, Iannone's fraud would have been

an arm's-length investment transaction, despite his

personal relationship with the victims. Friendship should

not convert a non-fiduciary relationship into afiduciary

one. See Koehn, 74 F.3d at 201 (distinguishing "arms-

length commercial relationships where trust is created by

the defendant's personality or the victim's credulity" from

"relationships in which the victim's trust is based on

defendant's position in the transaction"); United States v.

Mullens, 65 F.3d 1560, 1567 (11th Cir. 1995) (rejecting the

enhancement where the defendant befriended his victims

and touted himself as a gifted investor, but did not hold

himself out as an investment broker; holding that

"[f]raudulently inducing trust in an investor is not the same

as abusing a bona fide relationship of trust with that

investor").

If the average fraud demands a higher sentence because

of the harm inflicted upon the social fabric of trust, then

the base offense level of fraud should be increased, rather

than forcing courts in each case to identify the ways in

which each fraud was slightly easier to commit or more

difficult to detect than the average fraud. See United States

v. Gordon, 61 F.3d 263, 269 (4th Cir. 1995) (explaining that

the enhancement was designed to punish defendants who

are "more culpable" than others in similar positions who

engage in criminal acts). The abuse of trust enhancement

as applied to fraud bears some resemblance to the children

of Garrison Keillor's Lake Wobegon, all of whom are above

average. This has unnecessarily complicated the law,

stretching the conventional meaning of a position of trust to

its breaking point. And it has created a regime that may

well be under- as well as over-inclusive by substituting a

showing that the defendant deceived victims for a

requirement of a true fiduciary or quasi-fiduciary "position

of trust." Thus the better approach is for the Sentencing

Commission to revisit the area, and bring the notion of

abuse of a position of trust back to (or at least close to) its

generally understood meaning.

36

A True Copy:

Teste:

Clerk of the United States Court of Appeals

for the Third Circuit

37