United States v. John Michael Iannone

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) (“[Tjhere 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 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 *232 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 “[TJhese 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 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 “[sjome 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 *233 his representations, that their money would be held in low-risk accounts to be matched by anonymous donors and ultimately used for charitable purposes.

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 trae “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.

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 § 3B1.3 enhancement to be applicable. In fact, one rationale for a § 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 Par-do 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 224.

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. *234 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 decisions, which have yoked the existence of a position of trust to the difficulty of detection under the circumstances of the crime:

[0]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 over-inclusiveness follow from the fact that the elements of the Pardo test are all 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 *235 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 invol ved a feigned position of trust — a phony “investment adviser” — not unlike Ian-none’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, 889 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 enhancement should either be limited to fiduciary or quasifiduciary 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. § 3B1.8 (“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).

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 a fiduciary 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 “[fraudulently inducing trust in an investor is not the same as abusing a bona fide relationship of trust with that investor”).

*236 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.

. "[Fjrom 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).

. 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.

. 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); Cha rton 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).

. 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, 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.