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U.S. v. RHODES

May 1, 2002

UNITED STATES OF AMERICA, PLAINTIFF,
V.
BRUCE W. RHODES, DEFENDANT.



The opinion of the court was delivered by: Richard Mills, United States District Judge

OPINION

"No man profiteth but by the loss of others."

Montaigne: Essays, I.xxi.

Evidently taking Montaigne's words to heart, Bruce W. Rhodes swindled over 240 investors out of $1,104,557.39.

However, he will spend the next 37 months of his life in the custody of the Bureau of Prisons because of his actions.

I. BACKGROUND

First, Rhodes misused customers' money by directing funds which were in, or intended to be placed in, the customers' accounts to be deposited into one of his accounts so that he could use that money for personal expenses (hereinafter "the direct embezzlement victims").*fn1 Second, Rhodes misused customers' funds by directing, in certain instances, that the customers' money be used to purchase investments which the customers did not request (such as long-term callable certificates of deposit and annuities) but which paid him and Magna Investments a higher commission than would have been paid on the investments which the customers had requested (hereinafter "the unrequested investment victims").*fn2 To cause the misdirection of customers' funds, Rhodes, on several occasions, made false statements, prepared false documents, and made use of the United States mails in order to facilitate his fraudulent scheme.

On January 4, 2001, a federal grand jury returned a six count Indictment against Rhodes as a result of this conduct. Counts I through IV charged him with mail fraud in violation of 18 U.S.C. § 1341; Counts V and VI charged him with wire fraud in violation of 18 U.S.C. § 1343. On July 2, 2001, Rhodes changed his plea before United States Magistrate Judge Byron G. Cudmore from not guilty to guilty to one Count of mail fraud in violation of 18 U.S.C. § 1341.*fn3 On July 18, 2001, the Court accepted Magistrate Judge Cudmore's Report and Recommendation regarding Rhodes' adjudication of guilt. At his sentencing hearing, Rhodes raised the following unresolved objections to his Presentence Investigation Report ("PSR").

II. OBJECTIONS AND FINDINGS

A. Paragraph 21

Rhodes objects to paragraph 21because he denies that he wrongfully diverted any funds from his grandmother, Grace Shrive. In support of his argument, Rhodes points to a letter written by his grandmother to the Court wherein Mrs. Shrive denies that Rhodes ever diverted any funds from her account into his.
However, even assuming that Rhodes did divert money from his grandmother without her permission, neither paragraph 21 nor any other paragraph within the PSR employs that money in calculating the amount of loss for Sentencing Guidelines purposes or for purposes of calculating restitution. Accordingly, because Rhodes' objection to paragraph 21 does not affect his sentencing, the Court declines to make a factual finding on that objection pursuant to Federal Rule of Criminal Procedure 32(c)(1).

B. Paragraphs 105, 106, 111, & 112

Rhodes objects to paragraphs 105, 106, 111, and 112 wherein he receives an eleven level increase, pursuant to U.S.S.G. § 2F1.1(b)(1)(L), to his base offense level because the amount of loss attributable to him is more than $800,000.00 but less than $1,500,000.00. Rhodes argues that the Court should find the appropriate guideline section to be U.S.S.G. § 2F1.1(b)(1)(E) because the correct amount of loss which his fraud caused is more than $20,000.00 but less than $40,000.00, thereby adding only four additional points to his base offense level. Rhodes makes three arguments in support of this position.
First, Rhodes asserts that his offense of conviction and his alleged relevant conduct are so separate and distinct that they cannot constitute part of the same course of conduct, common scheme, or plan. Specifically, Rhodes contends that he only pleaded guilty to fraudulently converting funds from Roy Bertelli and June Myers (two of the direct embezzlement victims) which are crimes akin to theft by deception or embezzlement. Rhodes claims that this conduct is vastly different than his conduct regarding the 240 unrequested investment victims. Rhodes claims that the Government has presented no evidence that the embezzlement victims and the unrequested investment victims are in any way connected by a common factor such as a common victim, common accomplices, a common purpose, or a similar modus operandi.
Second, Rhodes argues that his conduct did not cause any loss to the 240 unrequested investment victims; rather, he suggests that the only reason that these investors lost any money at all was due to the rising interest rates which resulted in a decline in the market value of long-term certificates of deposit — a decline which was not reasonably foreseeable. In fact, Rhodes claims that, had interest rates fallen, the victims would have made more money on the investments which he made for them versus the investments which they had requested. In any event, Rhodes contends that his sentence should not depend upon the fortuity of the interest rate fluctuations because it would make one of the Sentencing Guidelines' purposes (i.e., uniformity) virtually unattainable.
Third, Rhodes argues that Magna Investments is not a "victim" for purposes of the Sentencing Guidelines. Because Magna Investments was under no legal obligation to do so but, rather, voluntarily elected to reimburse the investors for the losses which they realized on the re-sale of the long-term callable certificates of deposit in which he had invested their money and for the surrender charges incurred in connection with the rescission of the unrequested annuity contracts, Rhodes asserts that Magna Investments has only suffered "consequential damages" which are excluded from the amount of loss calculation. U.S.S.G. § 2F1.1, comment., (n. 8(c)); United States v. Marlatt, 24 F.3d 1005, 1007 (7th Cir. 1994). Rhodes claims that Magna Investments reimbursed these investors in order to protect its own business interests in fending off law suits, adverse publicity, and the wrath of regulators.
Moreover, because Magna Investments decided when to sell the victims' unrequested, long-term certificates of deposit and annuities, Rhodes argues that Magna Investments was the architect of its own losses. Had Magna waited until the interest rate market reversed itself, Rhodes claims that the amount of loss would not have been as great. As such, Rhodes contends that this reimbursement money paid by Magna Investments to its customers who received investments which they had not requested should not be considered in calculating the amount of loss for sentencing purposes.
Furthermore, Rhodes argues that Magna Investments' own conduct in failing to regulate him and by providing false and misleading monthly statements to investors caused the loss which it has suffered. In short, Rhodes asserts that his conduct did not cause investors to lose money. Rather, two extraneous events totally beyond his intent and control occurred after he had effected sales of the long-term certificates of deposit to the investors: (1) interest rates increased (an event not reasonably foreseeable) causing a decline in the market values, which in turn resulted in "unrealized" or "paper" losses and (2) Magna Investments voluntarily chose to realize those "losses" by selling the instruments for market value. Accordingly, Rhodes claims that the money paid by ...

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