Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 95 CR 231 Harry D. Leinenweber, Judge.
Before COFFEY, DIANE P. WOOD and EVANS, Circuit Judges.
The Government charged Eugene Gerstein with one count of bank fraud, in violation of 18 U.S.C. sec. 1344, and one count of money laundering, in violation of 18 U.S.C. sec. 1956(a)(1)(B)(i). The information alleged that during 1989 and 1990, Gerstein, with the assistance of others, engaged in a fraudulent scheme to obtain lines of credit totaling approximately $5.2 million from the First Midwest Bank of Buffalo Grove, Illinois (the "Bank"). Pursuant to a written plea agreement, Gerstein entered a plea of guilty to each of the two counts set forth in the information. In August of 1995, the defendant was sentenced to 46 months in prison and three years of supervised release on each of the counts, with the sentences to run concurrently, and ordered to pay restitution in the amount of $15,000. In imposing sentence, the district court found that the defendant was an organizer or leader of criminal activity involving five or more participants, and applied a four-level enhancement to his offense level under sec. 3B1.1(a) of the Guidelines. Gerstein appeals his sentence, arguing that the enhancement of his sentence was unwarranted. We affirm.
For many years, Eugene Gerstein was the president, owner, and operator of three businesses operating out of the same location at 4258 North Cicero Avenue in Chicago, Illinois: First Metropolitan Financial Corporation ("Financial"), an enterprise which provided financing for home remodeling projects, First Metropolitan Builders Company ("Builders"), which was in the business of building home improvements, and First Metropolitan Carpet Company ("Carpet"), which provided carpeting and carpeting installation services.
On August 23, 1989, Gerstein executed a loan and security agreement with the First Midwest Bank, and in turn provided Financial with a $4 million line of credit. The loan was secured by Financial's accounts receivable, which were assigned to the Bank and held in its vault. These accounts receivable consisted of home re-modeling finance contracts and carpet installation finance contracts that had been assigned to Financial by Gerstein's other two businesses, Builders and Carpet respectively. Financial's loan agreement with the Bank allowed Financial to withdraw as much as 75% (later increased to 80%) of the total sum of the outstanding balances on the finance contracts pledged as collateral, up to a maximum of $4 million. The terms of the agreement required Financial to submit regular reports to the Bank concerning the status of each of the finance contracts pledged as collateral. This agreement was subsequently amended to increase the credit limit to $5.15 million. On August 23, 1989, Gerstein executed a separate loan and security agreement with the same bank which provided Builders with a $600,000 line of credit. This loan contained terms similar to those in the loan to Financial and was secured by the same collateral (i.e., the previously-filed accounts receivable).
As Gerstein admitted (plea agreement), *fn1 he obtained funds pursuant to the two loan agreements by fraudulently inflating the value of Financial's accounts receivable. He was able to manipulate this fraudulent scheme by creating fictitious finance contracts to serve as collateral for the loans and at the same time by filing false and misleading reports with the Bank concerning the genuine finance contracts that comprised the accounts receivable. Gerstein was assisted by five of his employees: Marianne Davis, Stuart Krizman, Jenny Slink, Geri Andrewzuski, and Nan Kluzendoff, whose roles will be discussed in greater detail. *fn2
Initially, Gerstein directed these employees to replace a number of the genuine finance contracts held by the Bank with phony or fictitious contracts. The Bank permitted Gerstein's employees to enter its vault, where the records concerning the accounts receivable (i.e., loan collateral) were stored, allegedly for the purpose of updating the records. Unbeknownst to the Bank, however, Gerstein's employees used these visits to substitute bogus finance contracts, which they created from time to time as the need arose, for the authentic contracts held by the Bank, thereby fraudulently inflating the value of the accounts receivable. As of November 1990, a majority of the finance contracts held by the Bank as collateral were phony.
In addition to physically replacing the original, true contracts with fabricated documents, Gerstein's scheme included misrepresenting the status of genuine finance contracts in reports that Gerstein was required to submit to the Bank. These fraudulent reports, prepared by Gerstein's employees acting under his direction and control, falsely represented that work on various contracts had been completed (when in fact it had not), and also reported, falsely, that canceled or delinquent (past due) customer accounts remained current in their payments. As a result of this deception, the Bank was led to believe that certain contracts remained valid as collateral, and it therefore overestimated the total value of the accounts receivable. Under the terms of the loan agreements, the greater the value of the accounts receivable held as collateral, the more money Gerstein was permitted to draw on the lines of credit.
During the course of this scheme of defrauding the Bank, Gerstein used a portion of the funds advanced to him by the Bank to make receivables payments to the Bank, further contributing to the false impression that the various finance contracts pledged as collateral were all genuine contracts that were being paid in a timely fashion.
As Gerstein's business fortunes declined between August of 1989 and November of 1990, he and his employees continued to engage in their fraudulent scheme with the Bank, in order that Gerstein might continue to draw on the lines of credit. In late 1990, with business continuing in a downward spiral, Gerstein fell behind in his monthly bank payments, and the Bank hired an independent accountant to audit the collateral. The accountant discovered that many of the pledged finance contracts were bogus and reported his findings to the Bank. Further investigation by the Bank confirmed that 1200 of the 1600 finance contracts on file pledged as loan collateral were fraudulent. Financial and Builders filed for bankruptcy in February of 1991. *fn3 According to the defendant's Presentence Report, the net loss to the Bank, as a result of the fraudulent scheme, was approximately $4.5 million.
Federal authorities commenced an investigation of Gerstein, presumably because the Bank had alerted them to the defendant's fraudulent activities. *fn4 FBI Special Agent James Reilly investigated the bank fraud scheme for the Government, conducting interviews with two of Gerstein's employees, Marianne Davis and Stuart Krizman, in March and December of 1992 respectively. During this investigation (the precise time frame is not clear), a grand jury was convened and several of Gerstein's employees (including Geri Andrewzuski, Nan Kluzendoff, and Jenny Slink) were called as witnesses. Shortly thereafter, Gerstein agreed to cooperate with the Government and was interviewed by Agent Reilly in August 1993 and again in March 1994. After concluding each of his interviews, Reilly prepared detailed written summaries, which became a part of the record of his investigation. As recounted above, the Government and the defendant negotiated a plea agreement, under which Gerstein agreed to enter a plea of guilty to bank fraud and money-laundering, based upon an information issued by the U.S. Attorney's Office. At Gerstein's sentencing hearing, the Government called Agent Reilly as a witness and asked him to relate the content of his interviews with the defendant, and to describe his interviews with employees Davis and Krizman. Agent Reilly testified that Davis, Krizman, Slink, Andrewzuski, and Kluzendoff all took part in the defendant's fraudulent activity, under Gerstein's direction and control, and acted with full knowledge that they were ...