United States v. Crummy

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

)

UNITED STATES OF AMERICA, )

)

Plaintiff, )

)

v. ) No. 16–cr-133 (KBJ)

)

WALTER CRUMMY, )

)

Defendant. )

)

MEMORANDUM OPINION

The loss calculation that is required in Section 2B1.1(b)(1) of the Guidelines

Manual is often vigorously disputed, and this is so even in cases in which the parties

agree upon the ultimate sentence recommendation. See U.S. Sentencing Guidelines

(“U.S.S.G.”) §2B1.1(b)(1); id. §2B1.1 cmt. n.3. In the instant case, for example, both

the prosecution and the defense maintained that a probationary sentence was

appropriate for Defendant Walter Crummy, who illegally conspired with others to

obtain access to government contracts that his company was not entitled to receive

because the contracts were subject to certain “contracting preferences” that the Small

Business Administration administers. (Statement of Offense (“SOF”), ECF No. 6, at 6

(admitting to the fraudulent procurement of contracts that had been set aside for small,

disadvantaged businesses); see Gov’t’s Mem. in Aid of Sentencing (“Gov’t’s Mem.”),

ECF No. 15, at 33 (recommending probation); Def.’s Mem. in Aid of Sentencing

(“Def.’s Mem.”), ECF No. 14, at 1 (same).) 1 But the parties had radically different

positions as to the proper method of calculating the relevant loss in a case involving the

fraudulent procurement of set-aside contracts. (Compare Gov’t’s Mem. at 17 (“[L]oss

[is] $1,631,377, which is the total price of the contracts misappropriated[.]”), with

Def.’s Mem. at 4 (“The loss amount in the PSR should be reduced by the value of the

services provided to the Government, which results in a loss amount of zero” because

both “contracts resulted in an actual loss to [Crummy’s company]”).)

On April 11, 2017, this Court sentenced Crummy to twelve months of probation,

following its resolution of the loss dispute, and in particular, its determination that the

credits-against-loss provision in section 2B1.1 Application Note 3(E)(i) applied to both

of the contracts at issue, and that the resulting total loss amount was zero under the

circumstances presented in this case. This Memorandum Opinion explains the basis for

that conclusion.

I. BACKGROUND

On August 23, 2016, Walter Crummy pled guilty to conspiracy to commit wire

fraud, in violation of Sections 371 and 1343 of Title 18 of the United States Code. (See

Plea Agreement, ECF No. 5, at 1.) According to the statement of offense filed in

connection with Crummy’s guilty plea, Crummy and others conspired to perpetrate a

fraud that benefitted a company that Crummy partly owned—MCC Construction

Corporation (“MCC”)—by improperly procuring certain restricted contracts from a

number of government agencies, including the Small Business Administration ( “SBA”)

and the United States Coast Guard. (See SOF at 4–6.) In essence, Crummy knowingly

1

Page-number citations to documents the parties have filed refer to the page numbers that the Court’s

electronic filing system assigns.

2

and voluntarily joined a pre-existing scheme in which false representations were made

so that MCC could obtain certain federal contracts that had been set aside for small,

disadvantaged businesses under the SBA’s Section 8(a) program. ( See id. at 1, 56.)

A. The Basics Of The SBA’s Section 8(a) Program

The Section 8(a) program is a business development program designed to help

small, disadvantaged businesses compete in the American economy and access the

federal procurement market. See Rothe Dev., Inc. v. DOD, 107 F. Supp. 3d 183, 188

(D.D.C. 2015), aff’d, 836 F.3d 57 (D.C. Cir. 2016), petition for cert. filed, (U.S. April

13, 2017) (No. 16-1239). “Under the program, the SBA contracts to provide goods or

services to other government agencies and then subcontracts performance of these

contracts to eligible firms.” Minority Bus. Legal Def. & Educ. Fund, Inc. v. SBA, 557

F. Supp. 37, 38 (D.D.C. 1982). Businesses that qualify for the Section 8(a) program are

eligible for an award of both set-aside contracts (i.e., contracts awarded following

competitive bidding among similarly eligible firms) or sole-source contracts (i.e.,

contracts awarded without competitive bidding) from participating government

agencies. See 13 C.F.R. § 124.501(b).

In order to qualify for the Section 8(a) program, a business must, inter alia, be “a

small business[,]” 13 C.F.R. § 124.101, and “must be at least 51 percent

unconditionally and directly owned by one or more socially and economically

disadvantaged individuals who are citizens of the United States,” 13 C.F.R. § 124.105.

In addition, an applicant must demonstrate both its ability “to perform contracts which

may be awarded” pursuant to the program, and also its “reasonable prospects for

success in competing in the private sector.” 15 U.S.C. § 637(a)(7)(A). An applicant is

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deemed to possess reasonable prospects for success competing in the private sector if it

has been “in business in its primary industry classification for at least two full years

immediately prior to the dates of its 8(a) BD application[,]” 13 C.F.R. § 124.107, or

must seek a waiver of this requirement by establishing, inter alia, “demonstrated

technical experience to carry out its business plan with substantial likelihood for

success[,]” “adequate capital to sustain its operations and carry out its business plan[,]”

and the fact that the individual “upon whom eligibility is based ha[s] substantial

business management experience[.]” 13 C.F.R. § 124.107(b)(1).

Significantly for present purposes, participants in the Section 8(a) program are

subject to strict regulatory limits on subcontracting the work that Section 8(a) set-aside

contracts require. See 13 C.F.R. § 125.6(a). Among other things, pursuant to SBA

regulations, a Section 8(a) participant must agree that it will use its own employees to

perform at least 15 percent of the cost of an awarded construction contract. See 13

C.F.R. § 125.6(a)(3).

B. MCC’s Fraudulent Procurement Of Section 8(a) Contracts

MCC Construction Company is a construction management company and general

contractor that provides a variety of building and renovation services. (See SOF at 4.)

MCC is not a Section 8(a) program participant, and thus, is ineligible for the

aforementioned SBA contracting preferences. (See id. at 6.) Nevertheless, in 2008,

MCC developed a business relationship with Company 1 (hereinafter r eferred to as

“C1”)—a business that was “certified to participate in the 8(a) program” and that

purported to specialize in “design build services of energy and renewable programs” as

well as “general contracting and construction staffing services[.]” (Id. at 4.) It was

through this relationship that MCC was able to obtain government contracts that the

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SBA intended to award to Section 8(a) program participants. (See id. at 6.)

The scheme to defraud was relatively straightforward. MCC and C1 entered into

“teaming agreement[s]” in connection with a number of government contracts, pursuant

to which C1 would (nominally) serve as the prime contractor, while MCC would act as

the subcontractor. (Id. at 7.) Although the MCC/C1 teaming agreements were crafted

on paper to comply with SBA rules and regulations (see id.), the two companies in fact

implemented various “operating procedures that made [C1] nothing more than a pass

through for the contracts [C1] subcontracted to MCC” (id. at 8). Indeed, Crummy and

others acting on behalf of MCC exerted impermissible actual control over C1,

concealed this control from the SBA, and facilitated the misrepresentation that C1 was

in compliance with SBA regulations when it fact it was not. (See id. at 6.)

For example, Crummy “set up a bank account in the name of [C1]”—an account

over which both MCC and C1 had joint signatory authority—and this account was used

“to receive all payments from [C1’s] government” contracts and to distribute any

profits. (Id. at 8.) Moreover, on January 19, 2010, Crummy drafted an addendum to

the profit-and-cost-reimbursement agreement that MCC and C1 had entered into; the

addendum provided that C1 would award MCC a full 97 percent of the contract amount

of any task order, and in exchange, MCC would provide all of the labor, equipment, and

supervision needed to perform the task order. (See id. at 1213.) Crummy took this

action notwithstanding his knowledge that C1 would be violating the SBA’s

requirement that C1 perform at least 15 percent of the cost of the contract with its own

employees. (See id. at 12, 13.) In addition, when interacting with the government on

behalf of C1, Crummy used an email account that had C1’s name in the address, and

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that contained a signature block identifying Crummy as a C1 employee, despite the fact

that Crummy was an officer and partial-owner of MCC. (See id. at 1314.)

As relevant here, once Crummy knowingly and voluntarily joined the MCC/C1

contracting scheme, MCC obtained two government contracts through its improper

control over C1: (1) the Coast Guard North contract, valued at $842,482; and (2) the

Coast Guard South contract, valued at $788,895. (See id. at 14.) Consequently,

Crummy’s false and misleading conduct contributed to a total award of approximately

$1,631,377 in Section 8(a) program contract funds to a non-Section 8(a) program

participant. (See id. at 14.) MCC anticipated a 10-percent profit margin on these two

contracts (i.e., $163,137); however, notably, MCC’s anticipated profit never

materialized, because ultimately “both contracts resulted in an actual loss to MCC.”

(Id. at 15.)

C. Procedural History

Crummy was charged by information with one count of conspiracy to commit

wire fraud wire on July 22, 2016 (see Information, ECF No. 1, at 1); he pled guilty to

this one count on August 23, 2016 (see Plea Agreement at 1; Min. Entry of Aug. 23,

2016). Following the entry of Crummy’s guilty plea, the parties submitted sentencing

memoranda addressing the appropriate Guidelines range and sentence in this matter.

(See generally Gov’t’s Mem.; Def.’s Mem.; Gov’t’s Reply Mem. in Aid of Sentencing

(“Gov’t’s Reply”), ECF No. 16; Def.’s Resp. to Gov’t’s Mem. (“Def.’s Reply”), ECF

No. 17.) The parties agreed that section 2B1.1(a)(2) of the Guidelines Manual provided

a base offense level of six, but disagreed about the application of the loss table in

section 2B1.1(b)(1), which provides for escalating offense-level increases depending on

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the amount of pecuniary harm, in dollars, that resulted from the defendant’s offense.

(See Gov’t’s Mem. at 1732; Def.’s Mem. at 310.) See also U.S.S.G. §2B1.1(b)(1);

id. §2B1.1 cmt. n.3(A)(i)(ii) (defining actual or intended loss in relation to “pecuniary

harm”).

The crux of the parties’ dispute centered on the question of whether the loss

amount under section 2B1.1(b)(1) should reflect the total value of the two Coast Guard

contracts at issue, or whether this amount should be reduced by the value of the services

MCC provided to the government. (See Gov’t’s Mem. at 17 (arguing that the loss “is

the total price of the contracts misappropriated”); Def.’s Mem. at 4 (maintaining that

“[t]he loss amount in the PSR should be reduced by the value of the services provided

to the Government”).) This disagreement potentially implicated various application

notes in the Guidelines Manual and, in essence, raised two questions: (1) which

Guidelines rule provides the appropriate baseline from which to measure loss in the

first instance? and (2) does the credits-against-loss rule—which directs that loss be

reduced by, inter alia, “the fair market value of the property returned and the services

rendered[,]” U.S.S.G. §2B1.1 cmt. n.3(E)(i)—apply to that governing provision?

The government forcefully maintained in its memoranda and at the sentencing

hearing that the special rule for “government benefits” applies to the loss calculation in

this matter because “the government-administered [Section] 8(a) program provides a

series of benefits to those business organizations that establish that they are intended

recipients of benefits[.]” (Gov’t’s Mem. at 20.) In addition, with respect to the Coast

Guard South contract, which was awarded after Congress’s enactment of the Small

Business Jobs Act of 2010, Pub. L. No. 111-240, 124 Stat. 2504 (2010) (“the SBJA”),

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the government contended that there is “a statutory presumption that loss in such a

scheme is equal to the full value of the contracts obtained.” (Gov ’t’s Mem. at 18

(citing 15 U.S.C. § 632(w)); see also id. at 19.) And with respect to the credits-against-

loss rule, the government maintained that “there should be no reduction for services

provided under the wrongfully obtained contract.” (Id. at 28.) By contrast, Crummy

asserted that the government benefits rule and the SBJA provision are both inapplicable

(see Def.’s Mem. at 59), such that the general rule for loss calculation outlined in

Application Note 3(A) governs this matter. Moreover, Crummy contended that, under

any rule, the loss must be reduced by the fair market value of the services rendered to

the government. (See id. at 410.)

During Crummy’s sentencing hearing on April 11, 2017, this Court concluded

that Crummy’s position prevailed, because the Section 8(a) contracts at issue do not

qualify as government benefits for the purpose of the loss calculation, and the cr edits-

against-loss rule in Application Note 3(E) applies under these circumstances.

Analyzing the facts of Crummy’s case in light of that legal framework, t he Court

concluded that the appropriate loss amount was zero, and indicated that it would issue

the instant Memorandum Opinion detailing its full reasoning regarding these loss

calculation issues. (See April 11, 2017 Sentencing Hr’g Tr. (“Hr’g Tr.”), ECF No. 24,

at 3336.)

II. LEGAL STANDARDS

“[A] district court should begin all sentencing proceedings by correctly

calculating the applicable Guidelines range[,]” which the court then treats as “the

starting point and the initial benchmark” for the sentence to be imposed. Gall v. United

8

States, 552 U.S. 38, 49 (2007). “Then, ‘after giving both parties an opportunity to

argue for whatever sentence they deem appropriate,’ the court considers all of the

section 3553(a) sentencing factors and undertakes ‘an individualized assessment based

on the facts presented.’” United States v. Akhigbe, 642 F.3d 1078, 1084 (D.C. Cir.

2011) (quoting Gall, 552 U.S. at 4950). When the Guidelines range is calculated, the

“commentary 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.” Stinson v. United States, 508

U.S. 36, 38 (1993).

Section 2B1.1 of the Guidelines Manual governs the calculation of the offense

level for crimes involving, among other things, fraud, theft, and deceit. See U.S.S.G.

§2B1.1. Subsection (a) provides the base offense level, while subsection (b)

enumerates a list of adjustments for offense-specific characteristics. The loss-based

adjustment at issue here is located in subsection 2B1.1(b)(1), which provides a table of

escalating offense-level increases based upon the total dollar loss resulting from the

underlying offense. See, e.g., id. §2B1.1(b)(1) (“If the loss exceeded $6,500, increase

the offense level as follows[.]”).

Although section 2B1.1(b)(1) does not itself explain how the loss amount should

be calculated, Application Note 3 provides rules that govern “the determination of loss

under subsection (b)(1).” Id. §2B1.1 cmt. n.3. As a general rule, “loss is the greater of

actual loss or intended loss[,]” id. §2B1.1 cmt. n.3(A), and both of these terms are

defined as forms of “pecuniary harm”—that is, “harm that is monetary or that otherwise

is readily measurable in money[,]” id. §2B1.1 cmt. n.3(A)(iii). See also id. §2B1.1

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cmt. n.3(A)(i) (“‘Actual loss’ means the reasonably foreseeable pecuniary harm that

resulted from the offense.”); id. §2B1.1 cmt. n.3(A)(ii) (“‘Intended loss . . . means the

pecuniary harm that the defendant purposely sought to inflict [.]”). It is clear, then, that

“the Guidelines define loss as ‘pecuniary harm.’” United States v. Martin, 796 F.3d

1101, 1108 (9th Cir. 2015). In addition, “[t]he general rule contains a rule of

construction that dictates how the general rule should be construed ‘[i]n the case of a

procurement fraud, such as a fraud affecting a defense contract award.’” United States

v. Harris, 821 F.3d 589, 603 (5th Cir. 2016) (second alteration in original) (qu oting

U.S.S.G. §2B1.1 cmt. n.3(A)(v)(II)); see also U.S.S.G. §2B1.1 cmt. n.3(a)(v)(II) (“In

the case of a procurement fraud . . . reasonably foreseeable pecuniary harm includes the

reasonably foreseeable administrative costs to the government and other participants of

repeating or correcting the procurement action affected,” among other things) .

Notwithstanding this general rule outlined in subdivision (A), the Application

Note also provides a number of “special rules” that displace this general rule where

applicable. Id. §2B1.1 cmt. n.3(F). One of these special rules applies in cases

“involving government benefits (e.g., grants, loans, entitlement program payments)[.]”

Id. §2B1.1 cmt. n.3(F)(ii). In such cases, the Application Note specifies that “loss shall

be considered to be not less than the value of the benefits obtained by unintended

recipients or diverted to unintended uses[.]” Id.

Finally, a different provision within the Application Note requires a court to

afford certain credits against the total loss amount. See id. §2B1.1 cmt. n.3(E) (“Loss

shall be reduced by the following[.]” (emphasis added)). As relevant here, this note

provides that “loss shall be reduced by . . . the fair market value of the property

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returned and the services rendered, by the defendant or other persons acting jointly with

the defendant, to the victim before the offense was detected.” Id. §2B1.1 cmt. n.3(E)(i).

The precise manner in which the foregoing application notes apply to defendants

engaged in Section 8(a) (or a similar program) procurement fraud has been a source of

disagreement among various circuits. See, e.g., Harris, 821 F.3d at 604 (“Our sister

circuits are split on whether the government benefits rule applies to procurement frauds

involving contracts awarded under affirmative action programs.”). However, the D.C.

Circuit has yet to opine on this issue.

III. ANALYSIS

On April 11, 2017, this Court sentenced Crummy to twelve months of probation

for his role in the Section 8(a) fraud conspiracy described above, after the Court

concluded that the total loss amount for the purpose of section 2B1.1(b)(1) was zero

because the credits-against-loss provision in Application Note 3(E) applied to both of

the contracts at issue in this case. As explained below, the Court reached this

conclusion (over the government’s objection) because it believes the Fifth Circuit’s

recent reasoning regarding the appropriate loss calculation in Section 8(a) fraud cases is

exceedingly persuasive, which means that the government’s contention that Section 8(a)

contracts are government benefits that are not subject to the credits -against-loss rule

has to be rejected. Furthermore, in this Court’s view, the statutory provision to which

the government points—15 U.S.C. § 632(w)(1)—does little to alter the Fifth Circuit’s

cogent analysis, even assuming that provision applies at sentencing, because, at most,

section 632(w)(1) merely establishes a presumption of the loss amount in the first

instance, and it says nothing about whether that loss amount should be subject to the

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credits-against-loss rule for the purpose of the actual loss calculation that section

2B1.1(b)(1) requires.

A. The Loss That Results From The Fraudulent Procurement Of A

Section 8(a) Contract Is Properly Calculated Pursuant To The

General Rule Rather Than The Government Benefits Rule, And Is

Also Subject To The Credits-Against-Loss Rule

As noted, the D.C. Circuit has not addressed how loss should be calculated for

the purpose of section 2B1.1(b)(1) when the offense of conviction is a procurement

fraud scheme such as the one Crummy was convicted of conspiring to commit.

However, a number of other circuits have addressed this issue, and the Fifth Circuit in

particular has recently and persuasively concluded, first, that the government benefits

rule does not apply to procurement frauds involving contracts awarded under the

Section 8(a) program, and second, that the loss amount with respect to such contracting

fraud cases must be reduced by the fair market value of the services rendered. See

Harris, 821 F.3d at 60203, 605. Both of these conclusions are well-founded and

unassailable as a matter of law and logic.

With respect to the choice between the ‘government benefits’ special rule versus

the ‘general’ loss rule, there is a clear distinction between the types of government

benefits that the Sentencing Commission is addressing in the government benefits rule,

see U.S.S.G. §2B1.1 cmt. n.3(F)(ii) (listing “grants, loans, [and] entitlement program

payments” as examples of “government benefits”), and the Section 8(a) contracts at

issue in this and other procurement fraud cases, as the Fifth Circuit rightly noted. See

Harris, 821 F.3d at 603. In this regard, the Harris court emphatically rejected the

government’s contention that a contract secured pursuant to the Section 8(a) program

constitutes a “government benefit” for the purpose of Application Note 3(F)(ii),

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explaining that “[w]hile a government contract awarded under an affirmative action

program may be, in some sense, a ‘benefit’ to the company awarded the contract, it

does not share the common features of grants, loans, and entitlement program

payments.” Id.; see also id. at 604 (“The mere fact that a government contract furthers

some public policy objective apart from the government’s procurement needs is not

enough to transform the contract into a ‘government benefit’ akin to a grant or an

entitlement program payment.”).

Furthermore, insofar as fraudulent procurement of a Section 8(a) program

contract is functionally indistinguishable from other types of procurement fraud, it is

clear to this Court (as it was to the Fifth Circuit) that the credits-against-loss rule

applies in these circumstances, such that the loss amount is not the total contract price,

but the contract price less the fair market value of the services that the defendant

rendered. See id. at 60508; see also id. at 605 (“[T]he Sentencing Commission speaks

clearly when it wants to exempt specific types of cases from the default practice of

crediting against loss the value of services rendered by the defendant.” (citing U. S.S.G.

§2B1.1 cmt. n.3(F)(v))). To conclude otherwise would be to ignore the fact that the

Commission defines “actual loss” for section 2B1.1(b)(1) purposes as the “reasonably

foreseeable pecuniary harm that resulted from the offense,” U.S.S.G. §2B1.1 cmt.

n.3(a)(i) (emphasis added), and accordingly, “[t]reating the loss amount under these

circumstances as the difference between the contract price and the fair market value of

services provided properly focuses the loss inquiry on the pecuniary impact on

victims[.]” Harris, 821 F.3d at 606. Harris also rightly reasons that, without the

reduction for the value of the services rendered, section 2B1.1 would operate to treat

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theft and fraud as equivalents as far as loss to the victim is concerned, which is not

always the case, and is certainly not so with respect to the type of fraud at issue here.

See id. at 607 (observing that applying the credits-against-loss rule when determining

the actual loss for Section 8(a) fraud “‘is consistent with the idea that fraud is not

always the same as theft’” (quoting Martin, 796 F.3d at 1108)).

This Court need not recite the Harris court’s reasoning further; at this point, it

suffices to note that this Court finds the Fifth Circuit’s reasoning on these issues

persuasive in its entirety, and thus, the Court likewise concludes that both the general

rule and the credits-against-loss provision apply to contracts that, like Crummy’s, were

awarded under the Section 8(a) program. See also Martin, 796 F.3d at 110910; cf.

United States v. Nagle, 803 F.3d 167, 18183 (3d Cir. 2015) (declining to decide

whether the government benefits rule applies to affirmative action contracting

programs, but concluding that, “regardless of which application note is used, the

District Court should calculate the amount of loss” by “taking the face value of the

contracts and subtracting the fair market value of the services rendered unde r those

contracts”). 2

2

The government points out that other circuits have concluded under similar circumstances that the loss

amount is equal to the full amount of the fraudulently-obtained contracts. (See Gov’t’s Mem. at 2225

(citing, inter alia, United States v. Maxwell, 579 F.3d 1282 (11th Cir. 2009); United States v. Leahy,

464 F.3d 773 (7th Cir. 2006); United States v. Bros. Constr. Co. of Ohio, 219 F.3d 300 (4th Cir.

2000)).) However, two of these cases were decided using a version of the Guidelines that did not

contain any language requiring that loss be reduced by the fair market value of the services rendered.

See Bros. Constr. Co., 219 F.3d at 31617 (applying 1997 Guidelines); Leahy, 464 F.3d at 789

(applying 1998 Guidelines). Thus, neither the Fourth nor Seventh Circuits had occ asion to consider the

impact of Application Note 3(E)(i). What is more, although the Eleventh Circuit concluded that

contracting-preference programs constitute “entitlement program payments” because they are “aimed at

giving exclusive opportunities to certain women and minority businesses,’” Maxwell, 579 F.3d at 1306

(citation omitted), “that court merely relied on Leahy and Brothers Construction and did not consider

whether Note 3(E)(i) made a difference in the analysis.” Nagle, 803 F.3d at 182. Thus, this Court is

most persuaded by the Fifth Circuit’s recent and cogent analysis of the relevant provisions of the

Guidelines Manual.

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B. The Court Rejects The Suggestion That Its Refusal To Calculate Loss

As The Full Amount Of The Section 8(a) Contracts Is Inconsistent

With The Guidelines Or Otherwise Conceptually Problematic

In its sentencing memorandum, the government emphasized that the Section 8(a)

fraud scheme at issue in this case resulted in the “misappropriat[ion] [of] over $1.6

million worth of contracts that were set aside for small, disadvantaged firms, ” (Gov’t’s

Mem. at 32), thereby “undermin[ng]” the “reputation of the 8(a) program and the public

perception of it[,]” and “preventing deserving and eligible firms from receiving the

contract[s]” (id. at 21). No one denies that the procurement fraud that Crummy and his

co-conspirators engaged in resulted in real harm to the government and to other

potential recipients of the contracts at issue, nor do the Guidelines ignore that harm

when they are properly construed. Rather, the Guidelines appropriately relegate this

type of injury—i.e., the harm to the government’s programmatic interests, which is

undoubtedly non-pecuniary harm—to its appropriate classification, and various

Guidelines provisions specifically prescribe methods to account for the nature and

extent of such non-pecuniary harm.

For example, in “cases in which the offense level determined under [section

2B1.1] substantially understates the seriousness of the offense[,]” because, inter alia,

an offense “caused or risked substantial non-monetary harm[,]” the commentary to

section 2B1.1 specifically notes that an upward departure may be warranted. U.S.S.G.

§2B1.1 cmt. n.20(A)(ii). Similarly, to the extent that the offense level does not reflect

the full extent of the harm suffered, a court may depart on that basis alone, see id.

§5K2.0(a), and would be justified in so doing on the basis of factors that section 2B1.1

does not appear to take into account, such as the number of contracts the defendant

fraudulently obtained, or the length of time during which the defendant participated in

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the scheme. Cf. United States v. Nawaz, 555 F. App’x 19, 30 (2d Cir. 2014) (noting

that the district court reduced the applicable Guidelines range in light of, inter alia,

“the duration of [the defendant’s] involvement in the conspiracy”). The Guidelines thus

provide alternative mechanisms to account for much of the non-pecuniary harm that the

government emphasizes, and unlike the government’s insistence that the entire value of

a fraudulently-obtained Section 8(a) contract is its loss, these alternative methods are

consistent with the Commission’s directive that the only loss considered under section

2B1.1(b)(1) is loss that “is monetary or that otherwise is readily measureable in

money.” U.S.S.G. §2B1.1 cmt. n.3(A)(iii).

It is also important to debunk the mistaken belief that the credits-against-loss

rule should not be deemed applicable in these kinds of fraud cases because, if that rule

is applied, the loss amount for section 2B1.1(b)(1) purposes will always be zero, no

matter how extensive the fraud. This is simply not so. Courts have recognized that

“[i]t is conceivable that the government paid a premium contract price above what it

would pay for other contracts under normal competitive bidding procedures[,]” and that

“[a]ny such difference would be an actual loss resulting from [the] fraud.” Martin, 796

F.3d at 1111; see also Harris, 821 F.3d at 605 n.10. In addition, “the procurement

fraud rule, which falls within the general rule for loss calculation,” Martin, 796 F.3d at

111011, specifies that loss “[i]n the case of a procurement fraud” also includes

“reasonably foreseeable administrative costs” to correct the procurement action

affected, U.S.S.G. §2B1.1 cmt. n.3(A)(v)(II). Notably, and perhaps unfortunately, there

is no evidence in the instant matter of any of these types of losses, but the Guidelines

and various precedents do clearly indicate that there can be pecuniary loss under these

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circumstances, and therefore, the loss amount need not always be zero once it is

reduced by the value of the services rendered in Section 8(a) procurement fraud cases.

Finally, even when the loss amount is zero and there is no basis for any upward

departure or variance, it is not necessarily troubling that the loss amount in cases such

as this one is not the entire amount of the Section 8(a) contract; after all, a defendant

who commits procurement fraud of this nature (i.e., one who steers Section 8(a)

contracts to a non-section 8(a) business on fraudulent terms) has committed a federal

offense and on that basis alone is subject to a range of at least 0-to-6 months of

imprisonment under the Guidelines. See id. §2B1.1(a)(2) (prescribing a minimum base

offense level of six, which corresponds to a range of 0–6 months for an offender in

Criminal History Category I). Put another way, sections 2B1.1(a) and 2B1.1(b)(1)

plainly perform different functions in the Guidelines calculus: the court applies section

2B1.1(a) in response to the defendant’s admittedly fraudulent conduct, but the sole

question under section 2B1.1(b)(1) is whether the defendant’s fraudulent conduct

resulted in pecuniary loss warranting a further increase in his base offense level. And

as the Guidelines make clear, to identify the actual pecuniary loss to a victim under

section 2B1.1(b)(1), the Court must subtract from the total contract price the value of

the services that the defendant rendered. See id. §2B1.1 cmt. n.3(E)(i).

In short, the record establishes (and the government concedes) that it was MCC

that suffered a pecuniary loss on both of the Coast Guard contracts at issue here, and

there is no evidence before the Court that would allow it to compare the fair market

value of the services that MCC provided on the contracts to the contract price.

Furthermore, the government has not itemized its administrative costs, nor has it argued

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that an upward departure or variance is warranted to capture the full extent of the non -

pecuniary harm done to the integrity of the Section 8(a) program in this and similar

cases. Thus, this Court finds that the loss amount in this matter for the purpose of

section 2B1.1(b)(1) is zero, and thus, with respect to the loss table, there is no basis for

increasing Crummy’s base offense level above six.

C. Even Assuming That 15 U.S.C. § 632(w)(1) Applies Under These

Circumstances, That Statute Does Not Alter The Foregoing Analysis

Because Its Text Is Consistent With Applying The Credits-Against-

Loss Rule

The government insists that the foregoing analysis is erroneous (at least with

respect to the Coast Guard South contract, which was awarded following the passage of

the Small Business Jobs Act (see Gov’t’s Mem. at 19)) because Congress created “a

statutory presumption” that “loss” in a small-business-fraud scheme “is equal to the full

value of the contracts obtained” (id. at 18 (citing 15 U.S.C. § 632(w)). While that may

be so, it is not at all clear that Congress intended for this presumption to supplant

aspects of the Guideline calculation that the Commission has determined otherwise

apply to yield the total loss amount.

Section 632(w)(1) of Title 15 of the United States Code provides:

In every contract, subcontract, cooperative agreement, cooperative research

and development agreement, or grant which is set aside, reserved, or

otherwise classified as intended for award to small business concerns, there

shall be a presumption of loss to the United States based on the total amount

expended . . . whenever it is established that a business concern other than

a small business concern willfully sought and received the award by

misrepresentation.

15 U.S.C. § 632(w)(1). 3 As the government observes, the text of this provision plainly

3

The parties here dispute the extent to which this statutory provision applies to the sentencing of a

defendant convicted of fraud. (Compare Gov’t’s Mem. at 1819 (“The [Senate] Committee also stated

that it intended ‘that this presumption shall be applied in all manner of criminal, civil, administrative,

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establishes a presumption of “loss” based on the total amount expended on a contract or

other award whenever a non-small business receives by misrepresentation a contract or

other award that is intended for a small business. What the provision does not do,

however, is mandate that the sentencing judge ignore the Commission’s clear command

that “[l]oss shall be reduced by . . . [t]he money returned, and the fair market value of

the property returned and the services rendered, by the defendant or other persons

acting jointly with the defendant[.]” U.S.S.G. §2B1.1 cmt. n.3(E)(i) (emphasis added).

Thus, it is clear to this Court that, at most, section 632(w) (1) is best interpreted as

setting the relevant baseline for the loss calculation in Section 8(a) contract fraud cases,

and when interpreted in this manner, the statute is entirely consistent with the default

practice of treating pecuniary harm as the difference between the contract price and the

fair market value of the services rendered.

To understand why this is so, recall that the Guidelines broadly provide a two-

step framework for calculating the loss amount for section 2B1.1(b)(1) purposes, as

explained above: first, the application notes outline various rules of const ruction to

assist courts in defining “loss[,]” and second, the notes provide that the “loss shall be

reduced by” certain factors, including the fair market value of the services rendered.

U.S.S.G. §2B1.1 cmt. n.3(E)(i). In this Court’s view, rather than fundamentally

altering this framework, section 632(w)(1) fits comfortably within it, because the

provision provides an initial reference point insofar as it clarifies that the loss in the

contractual, common law, or other actions, which the United Stat es government may take to redress

such fraud and misrepresentation.’” (quoting S. Rep. No. 111 -343 at 8 (2010))), with Def.’s Mem. at 9

(“§ 632(w)(1) is not about sentencing at all.”) .) This Court will assume without deciding that this

provision is applicable under the circumstances presented here because, as explained below, even

assuming that the statute establishes the presumptive loss amount, the Court finds that this loss amount

would still have to be reduced by the value of the services rendered to t he government.

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first instance is (presumptively) the total amount expended on the contract. Notably,

the statute says nothing about whether this initial presumptive loss amount should be, or

can be, reduced pursuant to the credits-against-loss rule or otherwise, and there is

nothing to suggest that Congress intended to alter the standard practice of crediting the

value of the services rendered when the court determines the actual loss to a victim in a

procurement fraud case. Nor has the government pointed to anything in the text or

history of section 632(w)(1) that indicates that Congress intended the provision to

supplant the operation of the default credits-against-loss rule when it passed the SBJA

in 2010.

Significantly, interpreting section 632(w)(1) to permit a reduction in total loss

based on the value of the services rendered also makes eminent sense where, as here, it

is difficult to conceive of the government’s true pecuniary loss as the entire amount of a

Section 8(a) contract. Cf. Martin, 796 F.3d at 1110 (“By fully performing all of the

contracts, Martin gave the government considerable value. It would be unjust to set the

loss resulting from her fraud as the entire value of the contracts[.]”). Thus, this Court

finds that the best reading of all of the provisions at issue is to view the statute as

setting the baseline loss amount from which the remaining loss -related directives in the

Guidelines operate. In the Court’s view, this is the only reading that is consistent with

the statutory and Guideline text, as well as the overall purpose of the Guideline

calculation at issue, which is to determine the pecuniary harm to the victims that

resulted from the defendant’s fraudulent behavior.

To the extent that United States v. Singh, 195 F. Supp. 3d 25 (D.D.C. 2016), says

otherwise (see Gov’t’s Mem. at 3132), the undersigned respectfully disagrees with

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Singh’s analysis and conclusion. In that case, the parties disputed the total loss amount

stemming from the defendant’s fraudulent procurement of several Section 8(a) program

contracts, and the court concluded that “the amount of loss that must be used in

calculating the defendant’s guidelines is the full amount of the contracts that the

defendant fraudulently procured[.]” Singh, 195 F. Supp. 3d at 27; see also id. at 2628.

The Singh court drew upon decisions from the Fourth, Seventh, and Eleventh Circuits ,

and not only determined that the government benefits rule applies to fraud in

connection with Section 8(a) contracting programs, but further noted that this reading

“comports with the unambiguous intentions of Congress as articulated in the Small

Business Jobs Act of 2010[.]” Singh, 195 F. Supp. 3d at 29–30. In this regard, the

Singh court interpreted section 632(w)(1) as establishing a presumption of loss, and

found that “the only permissible means by which the presumption of loss may be

rebutted would be through the introduction of evidence establishing” “‘unintentional

errors, technical malfunctions, [or] other similar situations that demonstrate that a

misrepresentation of size was not affirmative, intentional, willful[,] or actionable under

the False Claims Act[.]’” Id. at 30, 31 (emphasis and second alteration in original in

original) (quoting 13 C.F.R. § 108(d)).

The undersigned is persuaded that Section 8(a) program contracts are not

properly considered “government benefits” for the purpose of the loss calculation, as

explained fully above, see supra Part II.A, although this Court acknowledges that the

circuits are currently divided on this question. Compare Bros. Constr. Co., 219 F.3d at

31718, and Leahy, 464 F.3d at 78990, and Maxwell, 579 F.3d at 130507, with

Harris, 821 F.3d at 60203, and Martin, 796 F.3d at 1110; see also supra note 2.

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Moreover, with respect to the impact of the statute, it appears that Singh was primarily

concerned about the manner in which the statutory presumption may be rebutted, while,

in this Court’s view, the manner in which the presumptive loss amount may be rebutted

is analytically distinct from the question of whether the credits-against-loss provision in

Application Note 3(E)(i) applies. That is, regardless of whether the loss is set at the

presumptive amount that Congress has identified or some other amount, the sentencing

judge must still consider whether and to what extent the loss must be “reduced” as the

application notes require. See U.S.S.G. §2B1.1 cmt. n.3(E)(i). Singh makes only

passing reference to the credits-against-loss rule, see 195 F. Supp. 3d at 28, 33, and

does not expressly consider the extent to which this provision might operate in

conjunction with the statutory presumption (whether rebutted or not). Because this

Court believes that the statutory presumption does not displace the credits -against-loss

rule, it finds the Singh court’s conclusion that loss is the entire amount of the contract

unpersuasive. 4

IV. CONCLUSION

For the reasons explained above, the Section 8(a) contracts at issue in this case

(1) do not qualify as government benefits for the purposes of loss calculation, and (2)

are subject to the credits-against-loss provision. See Harris, 821 F.3d at 60203, 605.

In addition, this Court concludes that 15 U.S.C. § 632(w)(1) does not materially alter

this Guidelines analysis, since nothing in that statute indicates that the presumptive loss

amount should not be offset by the fair market value of the property returned and the

services rendered. See U.S.S.G. §2B1.1 cmt. n.3(E)(i) (providing that loss be reduced

4

This Court takes no position on Singh’s conclusion regarding the circumstances in which the statutory

presumption that 15 U.S.C. § 632(w)(1) establishes may be rebutted. See Singh, 195 F. Supp. 3d at 31.

22

by “the fair market value of . . . the services rendered, by the defendant or other persons

acting jointly with the defendant”).

This all means that the Court rejects the government’s argument that the loss

amount in Crummy’s case is equal to the total amount of the Section 8(a) contracts, and

given that MCC made no profit on the Coast Guard contracts, the Court concludes that

the total pecuniary loss to the government resulting from Crummy’s procurement fraud

was zero. Therefore, as explained during Crummy’s sentencing hearing, the applicable

Guidelines range for the offense at issue in this case (after the deduction for acceptance

of responsibility) is zero to six months. 5

DATE: April 20, 2017 Ketanji Brown Jackson

KETANJI BROWN JACKSON

United States District Judge

5

Pursuant to section 2B1.1, Crummy’s base offense level was six, see U.S.S.G. §2B1.1(a)(2), and

Crummy received no loss-based increase pursuant to section 2B1.1(b)(1) because the total loss amount

resulting from his conduct was zero, see id. §2B1.1(b)(1). Following a two-point deduction for

acceptance of responsibility, see id. §3E1.1(a), Crummy’s total offense level was four. In addition, the

parties agreed that Crummy had a criminal history category of I. Pursuant to the Sentencing Table, a

criminal history category of I and an adjusted offense level of four result in a Guidelines range of zero

to six months.

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