United States v. Deavours

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_______________
m. 99-20906
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UNITED STATES OF AMERICA,
Plaintiff-Appellee,
VERSUS
HAROLD DEAVOURS,
Defendant-Appellant.
_________________________
Appeal from the United States District Court
for the Southern District of Texas
_________________________
July 13, 2000
Before JOLLY, SMITH, and BARKSDALE,
Circuit Judges.
JERRY E. SMITH, Circuit Judge:
Harold Deavours pleaded guilty to wire
fraud and aiding and abetting related to his in-
volvement in a “Ponzi scheme.” He challenges
the method by which the district court calcu-
lated the amount of total loss and objects to
the failure to find that he played only a minor
role in the scheme. Finding no merit in Dea-
vours’s challenges, we AFFIRM.
I.
Deavours worked as a financial consultant
for Smith Barney, Inc., and helped to open an
account at Smith Barney in the name of Elder-
way Investments, Ltd. (“Elderway”), into
which foreign investors wired money. When
an investor transferred money into the Smith
Barney account, Deavours signed a “receipt-
of-funds” letter; he knew he lacked authority
to sign the letters and knew that his co-defen-
dants were using these letters to cause inves-
tors to transfer money for participation in what
the investors believed to be an investment pro-

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gram backed by Smith Barney.
Smith Barney’s credit department ordered
a halt to all transfers coming into Elderway’s
account. Deavours, however, continued there-
after to sign receipt-of-funds letters on behalf
of Smith Barney. The letters signed by Dea-
vours after that date induced investors to
transfer approximately $40 million to bank
accounts, allegedly for the benefit of Smith
Barney. Deavours knew that Smith Barney
did not have any connection to the accounts
and was not receiving any of the $40 million.
Deavours pleaded guilty to wire fraud and
aiding and abetting. The court held, over Dea-
vours’s objection, that his crime occasioned
the loss of about $53 million, representing the
amount fraudulently received from “clients,”
not reduced by the amount paid back as a con-
tinuation of the scheme. The court found this
to be the “intended loss” of the scheme. The
court also rejected Deavours’s request that the
offense level be decreased by two in recogni-
tion of his allegedly minor role in the offense.
The government then asked for, and the court
granted, a four-level downward departure.
II.
“Review of sentences imposed under the
guidelines is limited to a determination wheth-
er the sentence was imposed in violation of
law, as a result of an incorrect application of
the sentencing guidelines, or was outside of
the applicable guideline range and was unrea-
sonable.” United States v. Matovsky, 935 F.2d
719, 721 (5th Cir. 1991). “We accept district
court fact findings relating to sentencing unless
clearly erroneous, but review de novo applica-
tion of the Guidelines.” United States v. Fitz-
hugh, 984 F.2d 143, 146 (5th Cir. 1993).
III.
The court determined that the amount of
“intended loss” was $52,954,538, the total
amount of 235 wire transfers received by the
defendants. Accordingly, under the sentencing
guidelines, the base offense level of six was
increased by seventeen. See United States
Sentencing Commission, GUIDELINES MAN-
UAL, § 2F1.1(b)(1)(R). Deavours objects that
the amount of the loss should be reduced by
$29,375,666SSthe sum returned to investors in
the form of payments, represented as profits to
further promote the Ponzi schemeSSto approx-
imately $24,000,000, and that, under U.S.S.G.
§ 2F1.1(b)(1)(Q), his offense level should be in
creased by only sixteen.
Although the determination of loss is a fac-
tual finding reviewed for clear error, the
court’s choice of the method by which losses
are determined involves an application of the
sentencing guidelines, which is reviewed
de novo. United States v. Saacks, 131 F.3d
540, 542-43 (5th Cir. 1997). As we have
explained,
[i]n a Ponzi scheme, a swindler promises
a large return for investments made with
him. The swindler actually pays the
promised return on the initial invest-
ments in order to attract additional in-
vestors. The payments are not financed
through the success of the underlying
venture but are taken from the corpus of
the newly attracted investments. The
swindler then takes an appropriate time
to abscond with the outstanding invest-
ments.
United States v. Cook, 573 F.2d 281, 282 n.3
(5th Cir. 1978). For sentencing-guideline pur-
poses, “‘[l]oss’ means the value of the prop-
erty taken. . . .” U.S.S.G. § 2B1.1, comment.
(n.2); see § 2F1.1, comment. (n.8).

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We know of no case from this circuit dis-
cussing calculation of losses related to a Ponzi
scheme for purposes of § 2F1.1(b)(1). In
United States v. Lauer, 148 F.3d 766 (7th Cir.
1998), however, the court undertook the rele-
vant inquiry:
[T]he author of a Po nzi scheme might
not intend that any of his investors lose
anythingSSmight intend that the scheme
continue until the end of the world, in
which event there would be no losers.
Likewise an embezzler might not intend
to impose a loss on his employer, might
instead intend to use the money to gam-
ble and win and thus be able to replace
every penny he had taken. Suppose that
he is caught before he has a chance to
gamble with any of the money, and ev-
ery cent is recovered. He is nevertheless
an embezzler to the full extent of the
amount he took, no matter how golden
his intentions or happy the consequences
. . . .
We may put it this way: the amount
of the intended loss, for purposes of
sentencing, is the amount that the de-
fendant placed at risk by misappropriat-
ing money or other property. That
amount measures the gravity of his
crime; that he may have hoped or even
expected a miracle that would deliver his
intended victim from harm is both im-
possible to verify and peripheral to the
danger that the crime poses to the com-
munity.
Id. at 767-68 (internal citations omitted; em-
phasis added).1
Lauer can be distinguished, because the
sums returned to investors were returned after
the scheme was detected, see 148 F.3d at 768,
but the court’s logic applies just as forcefully
to this case, despite the distinction. Deavours
and the other defendants returned money to
those they had defrauded, not to compensate
the victims for their losses, or to extricate
themselves from wrongdoing, but conversely
to extend their criminal activities and the pro-
fitability thereofSSand to place yet more prop-
erty of innocent victims at risk.
Deavours’s punishment should not be less
if he were arrested on Saturday, having on Fri-
day mailed out “profits” in continuation of his
scheme, than if he were arrested on Friday, be-
fore that additional act of fraud and deceit had
occurred. On each of those days, he had en-
dangered by fraud the same amounts of victim
money, and had exhibited equally little intent
to end the scheme or mitigate the wrongdoing.
In an opinion pre-dating Lauer, upon which
Deavours relies, that court reasoned that a de-
fendant involved in a Ponzi scheme should not
be held accountable for sums returned to in-
vestors before detection of the Ponzi scheme:
The full amount invested was not the
probable or intended loss because [the
defendant] did not at any point intend to
keep the entire sum. Indeed, return of
the moneySSthat is payment of earlier
investors with the funds of later inves-
1 See United States v. Mucciante, 21 F.3d
(continued...)
1(...continued)
1228, 1237-38 (2d Cir. 1994); cf. United States v.
Loayza, 107 F.3d 257, 266 (4th Cir. 1997) (refus-
ing to credit sums paid as interest to earlier inves-
tors because court found that the appellant had
never intended that his victims should ultimately
keep the sums paid as interest).

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torsSSwas an integral aspect of [the de-
fendant’s] scheme, essential to its con-
tinuation.
United States v. Holiusa, 13 F.3d 1043, 1046-
47 (7th Cir. 1994). The court analogized the
situation to cases involving fraudulent loan ap-
plications for loans the borrower intends to re-
pay. In the latter situation, the commentary to
§ 2F1.1 provides that the loss is equal to the
“amount of the loan not repaid at the time the
offense is discovered, reduced by the amount
the lending institution has recovered, or can
expect to recover, from any assets pledged to
secure the loan.” Id. at 1047 (citing § 2F1.1,
comment. (n.7(b)) (now note 8(b)) (quotation
marks omitted).
The court’s comparison, though, is inappo-
site. A fraudulent borrower who has pledged
collateral to secure a loan has never deprived
the lender of more than the total of the amount
of the loan less the value of the pledge; the
pledge is always available for recovery. The
Ponzi schemer, however, initially risks every
penny, with no guarantee of any return if the
scheme falls apart at the start.
Moreover, as the fraudulent borrower pays
back his loan, he progressively makes good the
lender, reduces overall risk, and mitigates the
damage of his crime. The Ponzi schemer, on
the other hand, as the Holiusa court recog-
nized, makes only those payments of “profit”
necessary to continue his scheme, increase the
total returns from his criminal activity, and
endanger yet more victims.
Deavours also points to United States v.
Orton, 73 F.3d 331, 334 (11th Cir. 1996),
holding that losses relating to a Ponzi scheme
should be determined by conducting an ac-
counting of the losses incurred by each victim.
The court reasoned that individuals who re-
ceive a return or break even on their invest-
ment are not “victims” for purposes of
§ 2F1.1. Id.2
It is uncertain whether this methodology
could be employed in the instant case, because
the losses suffered by the individual investors
are not known.3 Even could we use the Orton
method, however, we would not. It, like the
Holiusa approach, fails to recognize that all
those defrauded are victims, because their as-
sets were placed at risk by the schemers, and
that the mitigation of that risk by the schemers
arose not as penance or extrication but as am-
plification of the fraudulent scheme.
IV.
Deavours contends the district court erred
in failing to reduce his offense level because of
his minor role in the offense. The determina-
tion that a defendant did not play a minor role
is a finding of fact that we review for clear
error. United States v. Brown, 54 F.3d 234,
240 (5th Cir. 1995).
Section 3B1.2(b) of the sentencing guide-
lines provides for a two-level reduction for a
minor participant. A minor participant is one
less culpable than most other participants, but
2 The court reasoned that crediting the defen-
dant for excess returns paid to those individuals,
i.e., using the “net loss” method employed by the
court in Holiusa, would tend to understate the total
loss.
3 The court stated that detailed findings of loss-
es to individual victims would not be required in
every case involving a Ponzi scheme and that the
court was required only to make a “‘reasonable
estimate of the loss, given the available informa-
tion.’” Orton, 73 F.3d at 334-35 (quoting § 2F1.1,
comment. (n.8) (now note 9)).

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whose role could not be described as minimal.
See U.S.S.G. § 3B1.2, comment. (n.3); United
States v. Zuniga, 18 F.3d 1254, 1260 n.10 (5th
Cir. 1994). Deavours “bears the burden of
proving his minor role in the offense by a pre-
ponderance of the evidence.” Brown, 54 F.3d
at 241.
Deavours seizes on the government’s state-
ment in its U.S.S.G. § 5K1.1 motion that he
was duped and did not know his co-defendants
were running a Ponzi scheme. The govern-
ment also stated, however, that Deavours’s
deception in signing hundreds of fraudulent re-
ceipt letters “directly caused” the investors to
lose millions of dollars: “If Deavours had re-
fused to sign the letters, few of the victims
would have invested and lost money. In some
cases, as the Court knows, many victims lost
their entire life savings or more.” The decision
to sentence Deavours at the bottom of the
guideline range was based, in part, on the level
of his involvement. There is no clear error.
AFFIRMED.

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