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United States v. Walsh

United States Court of Appeals, Seventh Circuit

July 23, 2013

United States of America, Plaintiff-Appellee,
John E. Walsh and Charles Martin, Defendants-Appellants.

Argued April 22, 2013

Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. No. 1:09-cr-00005—Virginia M. Kendall, Judge.

Before Wood, Tinder, and Hamilton, Circuit Judges.

Tinder, Circuit Judge.

John E. Walsh and Charles Martin organized One World Capital Group, LLC, and devised a scheme to defraud its customers. They were caught and charged with various federal offenses. Both defendants pleaded guilty to several counts. Walsh pleaded guilty to wire fraud, tax evasion, and making false statements in a report to the Commodities Futures and Trading Commission. Martin pleaded guilty to wire fraud, tax evasion, and a Commodities Exchange Act violation. The district court sentenced Walsh and Martin to terms of imprisonment of 150 and 204 months, respectively, and ordered each of them to pay $16, 976, 554 in restitution. They appeal their sentences. Walsh challenges the district court's finding as to the amount of the loss and restitution, and both defendants challenge the application of a sentencing enhancement based upon a finding that each was an officer or director of a futures commission merchant. Finding no error, we affirm.

I. Background

Walsh and Martin were principals of One World, a futures and foreign currency trading company, formed in 2005.[1] One World acted as a "futures commission merchant" and as a "forex dealer member." A company acting as a futures commission merchant must register with the Commodities Futures and Trading Commission (CFTC), [2] 7 U.S.C. § 6d(a); and once registered, must meet registration requirements, which include maintaining net capital to cover trades and filing monthly financial reports reflecting the company's financial condition. See 17 C.F.R. § 1.17(a)(1); id. § 1.10(b)(1)(i) ("each person registered as a futures commission merchant must file a Form 1-FR-FCM as of the close of business each month"). Walsh, as owner, president, and primary manager, registered One World with the CFTC and with the National Futures Association (NFA).[3] Martin was banned from serving as a principal or "associated person" of an NFA member because of prior convictions, so the defendants concealed his position with One World from the CFTC and the NFA. One World operated until December 2007, when the CFTC obtained a temporary restraining order and shut down its operations.

As a forex dealer member, One World accepted retail customer funds for the purpose of acting as a counterparty, or offering to act as counterparty, to over-the-counter forex transactions. Customers traded forex with One World via "Metatrader 4, " an internet trading platform, which maintained records of their trading activity and calculated the changing value of their forex trading accounts. At a customer's request, the trading platform generated and distributed an electronic account statement reflecting the equity value of the customer's forex trading account. As a prerequisite to accepting trades, One World required customers to secure their forex positions by depositing funds, known as "margin funds, " with One World, but those funds remained the customers' property. Customer margin funds were to be credited or debited according to changes in the value of the customer's forex trading positions. The defendants represented to customers and prospective customers that margin funds were maintained in a separate One World customer account.

Shortly after One World's formation, Walsh and Martin began to transfer customer margin funds from One World to their own personal accounts. They used the misappropriated funds to purchase goods and services for themselves and to finance personal business ventures. They misappropriated $10, 019, 619 in One World customer funds. Walsh deposited those funds into his personal checking account and transferred $3, 771, 100 to Martin's personal checking account. Martin transferred an additional $2, 887, 776 directly from One World to his personal bank account. Walsh and Martin also charged $4.6 million to One World's corporate credit cards for various personal expenses. Their misappropriation of customer margin funds rendered One World insolvent by April 2006.

Walsh and Martin concealed One World's insolvency and their criminal conduct by misleading customers about the company's ability to meet its obligations. They allowed existing customers to continue to obtain account statements that falsely stated their available margin funds, and they solicited new customers by making false and misleading statements. They also used a Ponzilike scheme, paying existing customers' redemption requests with new customers' margin deposits. And Walsh directed One World to submit to the CFTC false and misleading monthly financial reports that understated the company's liabilities and overstated its assets.

The NFA initiated a formal action against One World and Walsh in 2007, precipitating an increase in customer redemption requests. By the fall of that year, One World had insufficient funds to honor redemption requests because of the defendants' conduct. Walsh falsely assured, and caused others to falsely assure, customers that One World would honor their redemption requests; he claimed that they just needed more time. As of November 5, 2007, about one month before the CFTC shut down One World, Metatrader's records showed that One World had $17, 654, 486 in unpaid customer liabilities and only $677, 932 in assets.

Walsh pleaded guilty to wire fraud, tax evasion, and making false statements in a report to the CFTC. In his written plea agreement, Walsh reserved the right to contest the loss amount but agreed that his offense level should be increased by 4 levels under U.S.S.G. § 2B1.1(b)(17)(B) (2010)[4] because the offense involved a violation of commodities law and, at the time of the offense, he was an officer of a futures commission merchant. The presentence report (PSR) determined that Walsh's total offense level was 38, incorporating a 20-level increase based on a loss amount of more than $7 million but less than $20 million, and a 3-level reduction for acceptance of responsibility. Walsh had 4 criminal history points, placing him in criminal history category III. Given a total offense level of 38 and a criminal history category III, his guidelines range was 292 to 365 months. Because the statutorily authorized maximum sentence was less than the upper limit of the guideline range, the guideline range was restricted to 292 to 360 months. See U.S.S.G. § 5G1.1.

At sentencing, Walsh objected to the PSR's conclusion as to the loss amount. He argued that the loss was less than $7 million, which would have yielded an 18-level increase in offense level. The government maintained that the loss was approximately $17, 654, 486, based on the Metatrader records, reflecting unpaid One World customer liabilities in that amount. The district court agreed with the government, finding that the loss amount was a "conservative $17, 654, 000." The court reduced that amount to $16, 976, 554, to account for $677, 932 in One World assets. Accordingly, the court determined that Walsh's guideline range was 292 to 360 months and imposed a term of 150 months' imprisonment, a term of supervised release, 200 hours of community service, a mandatory special assessment, and ordered restitution of $16, 976, 554. The court addressed the sentencing factors, see 18 U.S.C. § 3553(a), and ex- plained why it imposed a below-range sentence. In discussing the seriousness of the offense, the court said it was an "extensive fraud scheme" involving "an intended loss of 17 million or more." Walsh Sent. Tr. 87.

Martin pleaded guilty to wire fraud, tax evasion, and stealing money provided to a futures commission merchant. In the written plea agreement, he agreed that the loss exceeded $7 million but was less than $20 million, thus increasing his offense level by 20, but he reserved the right to contest the application of the 4-level increase under U.S.S.G. ยง 2B1.1(b)(18)(B)(i). The PSR determined that Martin should receive a 3-level reduction for acceptance of responsibility; thus, it determined that his total offense level was 38. The PSR placed Martin ...

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