Opinion
00 Cr. 45 (RWS)
October 18, 2002
SENTENCING OPINION
On March 13, 2002, Patrick Savin ("Savin") pled guilty to one count of wire fraud in violation of 18 U.S.C. § 1343 and one count of perjury in violation of 18 U.S.C. § 1623.
The Offense Conduct
The investigation was conducted by the Federal Bureau of Investigation.
Mezzonen, S.A. ("Mezzonen") was a private corporation organized and existing under the laws of the Duchy of Luxembourg, with its principal place of business in Luxembourg.
Savin Carlson Investment Corporation ("SCIC") and Janless Corp. ("Janless") were California corporations, which were wholly owned and/or controlled by Savin.
Mezzonen retained Savin and SCIC to provide Mezzonen with investment advisory and portfolio management services for high yield securities (the "Portfolio"). Under the terms of the investment advisory agreement, Savin and SCIC were required to provide Mezzonen with monthly reports regarding the condition and performance of the portfolio, and any additional reports requested by Mezzonen, including periodic "independent" portfolio valuations. In return for Savin's and SCIC's services, Mezzonen agreed to and did pay Savin and SCIC a quarterly management fee equal to one quarter of 25% of the total value of the portfolio at the end of that quarter.
Savin and SCIC, as investment advisors and portfolio managers, purported to act in the best interests of Mezzonen and to disclose fully all facts and circumstances material to Mezzonen's investments and Savin's and SCIC's management decisions on behalf of Mezzonen.
Leon Wright, an alleged co-conspirator ("Wright"), controlled a group of corporations (collectively, the "Wright corporations"), which included, inter alia: Levmark Corporation ("Levmark"); Levmark Capital Corporation ("Levmark Capital"); NDI, Inc.; NDI Foods, Inc.; A/R Resources, Inc. ("A/R Resources"); Consumer Commodities Corporation of America; Consumer Development Corporation ("CDC"), Entre Trading Corporation ("ETC"); and International Company for Business Options ("ICBO"). Wright controlled the Wright corporations from his offices in New Rochelle, New York.
The Investments
In late January 1991 through August 1991, Savin caused Mezzonen to invest approximately $15 million in two Wright corporations — $7.5 million in Levmark and $7.5 million in A/R Resources — via wire transfers from Luxembourg to New York in exchange for preferred stock in these companies with fixed dividend and interest payments.
In mid-1991, Savin, Wright and an investment business associate (the "Banker") discussed and agreed to embark on a project to acquire a substantial interest for themselves in a large multi-million dollar Japanese company (the "Project"). As the Project progressed, Savin and Wright agreed that it required, among other things, substantial funds, including: (a) approximately $1.5 million to secure an extension of time to complete the Project; and (b) approximately $5 million to induce the Banker to leave his position at a large bank and to work on the Project.
In August and September 1991, Savin caused Mezzonen to invest approximately $9 million in CDC and $4 million in ETC, via wire transfers from Luxembourg to New York in exchange for preferred stock in these companies with fixed dividend and interest payments. At the time that CDC and ETC received the $9 million from Mezzonen, CDC, ETC and A/R Resources transferred (a) approximately $1.5 million to SCIC, Savin's company, to make the $1.5 million payment necessary to continue to pursue the Project; and (b) approximately $5 million to the Banker to induce the Banker to leave his job and begin to work on the Project. Thus, within weeks of Mezzonen's $9 million investment into CDC and ETC, a substantial portion of that amount had been siphoned out of the companies for the benefit of Savin, Wright and others, all without the knowledge of Mezzonen.
In September 1992, Savin caused Mezzonen to loan one of Wright's companies, CDC, approximately $1.5 million., In the months following this loan, unbeknownst to Mezzonen, Savin received from CDC approximately $600,000.
Beginning in early 1991, when Savin began to invest Mezzonen's money in the Wright corporations, he started to receive, unbeknownst to Mezzonen, substantial amounts of money disguised as consultant fees' and other fees from Wright and his companies. In 1991 alone, Savin received approximately $500,000 in "fees" from Wright and his companies.
In addition, Savin and SCIC received the $1.5 million that was used to pursue the Project as well as $600,000 from CDC. In total, from 1991 through 1996, Savin received more than $3 million from Wright and the Wright corporations, without disclosing these payments, or Savin's personal business or financial relationship with Wright and certain of the Wright corporations, to Mezzonen.
The Coverup
Sometime after Savin caused Mezzonen to invest in various of the Wright corporations, these corporations became either non operational or were in poor financial condition, in part because of the money siphoned off to fund the Project and to pay Savin's "fees."
From November 1993 through 1996, in order to conceal the condition of various of the Wright corporations, and thereby the true financial worth of Mezzonen's investments in these companies, Levmark, A/R Resources, ETC and CDC issued payments in kind ("PIKs") to Mezzonen, which consisted of additional shares of preferred stock, rather than cash payments. By utilizing these PIKs, Savin and Wright gave the false impression to Mezzonen and its agents that the corporations were financially healthy and were able to, and did, make the required dividend/interest payment to Mezzonen.
On the rare occasion that the dividend/interest payments were made in cash to Mezzonen, the source of the money used for the payments was misrepresented so as to continue to conceal the true financial state of the Wright corporations in which Mezzonen had invested. For example, in July 1995, Savin and Wright made a $2 million redemption of PIKs to Mezzonen appear to be a $1 million payment from A/R Resources when the $2 million was generated solely from a sale of a Levmark subsidiary. A/R Resources had, by that time, been defunct for years.
From 1991 through the beginning of 1997, Savin and SCIC prepared and sent monthly reports to Mezzonen and its agents that included false and fraudulent valuations for Mezzonen's investments in certain of the Wright corporations designed to disguise the fact that the value of Mezzonen's interests in the Wright corporations were far lower than Savin represented.
These false and fraudulent reports were used by Savin, through SCIC, as a basis to inflate the quarterly fees that Savin and SCIC received from Mezzonen, which fees were based on the total value of the portfolio. From 1991 through 1996, Savin received more than $1 million in management fees from Mezzonen based on these falsely-inflated reports.
In addition to false monthly reports, Savin caused purportedly "independent" valuations of the portfolio to be sent by business acquaintances of Savin and/or Wright to Mezzonen and its agents, knowing full well that these valuations were not, in fact, independent. In fact, these valuations were not independent at all, but were primarily prepared by Savin, or were based on materials and/or information provided by Savin, and contained false and fraudulent information with respect to the portfolio, and provided valuations for Mezzonen's investments in the Wright corporations that were false and were designed to disguise the fact that the value of Mezzonen's interests in the Wright corporations were far lower than Savin had represented.
In late 1996 and early 1997, when Savin learned that Mezzonen was investigating the investments that Savin caused it to make in certain of the Wright corporations, Savin, Wright and others attempted to make it appear that there Wright corporations were operating and viable businesses by, among other things, soliciting and causing third parties to pretend that they were employed by these corporations and that these corporations were operating, when they had effectively ceased doing business years before, and Mezzonen' s investments in these companies were worthless or close to worthless.
Savin is held responsible for receiving approximately $1.5 million in kickbacks, disguised as consultant fees or other fees paid by Wright and/or his companies. Savin received $1.5 million from CDC to further his and Wright's plan to buy a large Japanese company. Lastly, Savin received from $1.5 to $1.75 million from the $5 million payment that Wright's company paid to an investment banker hired to assist with financing work and to do work on the Project. In total, Savin caused a loss to Mezzonen, without disclosure to Mezzonen, in the amount of $4.5 to $4.75 million.
On October 27, 1998, in connection with the Wright Bankruptcy proceeding in the Southern District of New York, Savin gave false testimony under oath in a Bankruptcy Rule 2004 Examination in response to questions asked of him concerning his provision of investment activities on behalf of Mezzonen, his financial dealings with Wright and various of the Wright corporations, and related subjects. Specifically, Savin testified that he "never received any compensation" from Wright "for bringing money from Mezzonen." Further, Savin testified that he "had no idea" that the entities in which he invested were controlled by Wright until "years later" and that he only learned of this "after the Swedes sued" him.
Savin voluntarily surrendered on January 27, 2000.
Victim Impact
Mezzonen lost approximately $4.5 to $4.75 million as a result of Savin's actions and is now bankrupt.
Adjustment for Obstruction of Justice
There is no information to suggest that Savin impeded or obstructed justice at the time of his arrest.
Adjustment for Acceptance of Responsibility
Savin has provided a written statement of acceptance of responsibility in which he stated that he "deeply regret[s]" his actions and "only wish [he] could undo them."
The Guidelines Offense Level
The November 1, 1995 edition of the Guidelines Manual was used in this case, pursuant to § 1B1.11(b)(1), because it was in effect at the time the offense was committed.
The two counts (wire fraud and perjury) do not involve substantially the same harm and thus cannot be grouped together pursuant to any of the grouping rules contained in § 3D1.2. AS such, the wire fraud count will be referred to as "Group I" and the perjury count will be referred to as "Group II."
Group I
The guideline level for a violation of 18 U.S.C. § 1343 and 1346 is found in § 2F1.1, which provides for a base offense level of 6.
The offense level is increased 13 levels to 19, pursuant to § 2F1.1 (b)(1)(N), because the total amount of funds taken was approximately $4.5 million.
Because the offense involved a complicated scheme which took place over six years and included numerous investments and wire transfers, the offense involved more than minimal planning and the offense level is increased two levels to 21, pursuant to § 2F1.1(b)(2)(A)
The offense level is enhanced by two levels to 23 pursuant to § 3B1.3, because Savin held an independent fiduciary duty to his client.
Although it has been recommended that an additional four step increase apply pursuant to § 2F1.1 (b)(6)(B), that enhancement will not be applied. Savin has two persuasive arguments.
Savin first argues that this Court should follow the reasoning of the Honorable Richard Posner of the Seventh Circuit and the Honorable William H. Pauley of this district in finding that the definition of "financial institutions" should be limited to those found in 18 U.S.C. § 20, rather than the broader definition promulgated in the Guidelines Application Note 14. See United States v. Tomasino, 230 F.3d 1034, 1035 (7th Cir. 2000); United States v. Laurenson, 98 Cr. 1134, hearing transcript (S.D.N.Y. Oct. 15, 2000) (unpublished). The Second Circuit, however, has held that the Sentencing Commission was "fully empowered" to adopt the broader definition of "financial institution."United States v. Ferrarini, 219 F.3d 145, 160 (2d Cir. 2000). As a result, Savin' s argument must be rejected.
Tomasino involved the question of whether the definition of "financial institution" in the 1998 version of § 2F1.1(b)(6)(B) included "pension funds." Pension funds, like the term "investment companies"' at issue here — are expressly listed in the Application note 14, but not included in the definition of "financial institution" set forth in 18 U.S.C. § 20. Tomasino, 206 F.3d at 740-41. A divided panel of the Seventh Circuit held that § 2F1.1(b)(6)(B) should not be applied to pension funds without further clarification from the Sentencing Commission because Application Note 14 may have mistakenly broadened the definition of "financial institution" beyond that set forth in 18 U.S.C. § 20. Id. at 741-42. The majority remanded the case, instructing the district court to resentence the defendant after seeking clarification from the Sentencing Commission. Id. at 743. On remand, the Commission declined to state its intentions, and the Seventh Circuit thus affirmed the sentenced that did not include the enhancement. United States v. Tomasino, 230 F.3d 1034, 1035 (7th Cir. 2000).
In a ruling from the bench, Judge Pauley adopted the reasoning ofTomasino, and refused to apply the provisions of subsection (b)(6)(B) where insurance companies — also expressly listed in Application Note 14 but not included in 18 U.S.C. § 20 were victimized by a defendant's fraud.
Savin also argues, however, that Mezzonen is not a "financial institution" according to Application Note 14. The
government has described Mezzonen as an "investment fund." Savin is persuasive in arguing, however, that under Luxembourg law, Mezzonen is not an investment fund. Instead, Mezzonen was structured as a private (non-listed) corporation under the local corporate form of a societe anonyme and benefitted from a tax exempt status. This structure enabled Mezzonen to avoid corporate, income, capital gains and liquidation taxes under Luxembourg law, as well as heavy regulation. As a matter of equity, Mezzonen should not be considered a financial institution for the purpose of assessing a weightier criminal punishment but not be considered as such — to its own benefit — for the purposes of domestic regulation. Because Mezzonen is not an investment fund under Luxembourg law, it will not be considered as such for the purposes of this sentence. The four-level enhancement does not apply.
The adjusted offense level for Group I is therefore 23.
Group II
The guideline for a violation of 18 U.S.C. § 1623 is found in § 2J1.3, which provides for a base offense level of 12, pursuant to § 2J1.3 (a). Because there are no other enhancements, the adjusted offense level for Group II is therefore 12.
Multiple Count Adjustment
The adjusted offense levels for Group I and Group II are, respectively, 23 and 12. The greater level is 23. There is no increase in offense level and therefore the combined adjusted offense level is 23.
Due to Savin's timely notification of his intention to plead guilty, and because the offense level is 16 or greater, he qualifies for a 3-level reduction pursuant to § 3E1.1 (a). The offense is reduced three levels to 20.
Adjusted Offense Level
Savin's adjusted offense level is 20 under the Guidelines.
Criminal History Category
Because Savin has no known prior convictions, he has zero criminal history points and a Criminal History Category of I.
Financial Condition: Ability to Pay
Savin has a net worth of $535,700. If he liquidates his assets, it appears that he can pay a fine.
Applicable Guidelines Range
The maximum term of imprisonment for a violation of 18 U.S.C. § 1343 and 1346 is five years. The maximum term of imprisonment for a violation of 18 U.S.C. § 1623 is five years. Based on a total offense level of 20 and a Criminal History Category of I, the guideline range for imprisonment is 33 to 41 months.
Supervised Release
The Court may impose a term of supervised release of not more than three years on each count, pursuant to 18 U.S.C. § 3583 (b)(2). Such terms run concurrently, pursuant to 18 U.S.C. § 3624 (e)
Probation
Because the applicable guideline range is in Zone D of the Sentencing Table, Savin is not eligible for probation, pursuant to § 5B1.1, application note #2.
Fines
For the wire fraud count, the maximum fine is $9 million, or twice the gross loss, pursuant to 18 U.S.C. § 3571. The maximum fine is $250,000 for the perjury count pursuant to 18 U.S.C. § 3571. A total special assessment of $200 is mandatory, pursuant to 18 U.S.C. § 3013. According to the Guidelines, the fine range for the instant offense is between $10,000 to $9 million, pursuant to § 5E1.2 (c)(3)(A) and (c)(4).
Restitution
Full restitution to the victim is required under 18 U.S.C. § 3663 (a) and 18 U.S.C. § 3664. Restitution in the amount of $4.5 million is owed to Mezzonen.
The Sentence
In light of the foregoing, Savin shall be sentenced to 37 months in prison, the middle of the Guideline range, in light of the serious nature of the offense. The sentence shall be followed by three years of supervised release. Savin must pay restitution in the amount of $4.5 million and a mandatory special assessment of $200.
The following conditions of supervised release are mandatory: Savin shall not (1) commit another federal, state or local crime; (2) illegally possess a controlled substance; or (3) possess a firearm or destructive device. The mandatory drug within 30 days of any change in mailing address or residence address that occurs while any portion of the restitution remains unpaid.
The sentence is subject to further hearing on October 21, 2002.