                                                                                                                           Opinions of the United
1995 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


12-19-1995

United States of America v. Neadle
Precedential or Non-Precedential:

Docket 94-7417




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                 UNITED STATES COURT OF APPEALS
                     FOR THE THIRD CIRCUIT



                          No. 94-7417



                    UNITED STATES OF AMERICA

                                v.

                     LAWRENCE NEADLE, JR.,

                                        Appellant.



    On Appeal from the District Court of the Virgin Islands,
                      Division of St. Croix
            (D.C. Criminal Action No. 92-cr-00113-2)



                     Argued April 17, 1995

        Before: BECKER, NYGAARD and ROTH, Circuit Judges

               (Opinion Filed   December 19, l995)



Thurston T. McKelvin, Esq. (Argued)
Federal Public Defender
Stephen A. Brusch, Esq.
Assistant Federal Public Defender
P.O. Box 3450
Christiansted, U.S. Virgin Islands 00822-3450

          Attorneys for Appellant

W. Ronald Jennings
United States Attorney
James R. Fitzner (Argued)
Assistant U.S. Attorney
1108 King Street - Suite 201
Christiansted, St. Croix
U.S. Virgin Islands 00820


                                1
          Attorneys for Appellee




                        OPINION OF THE COURT



ROTH, Circuit Judge:



          Appellant Lawrence Neadle, Jr., pled guilty to one

count of mail fraud.   At sentencing, the district court imposed a

sixty-month term of imprisonment and a three-year term of

supervised release.    On appeal, Neadle contends that the district

court misapplied the United States Sentencing Guidelines

("Guidelines") in its calculation of the victims' loss under

U.S.S.G. § 2F1.1(b) and its upward departure based on the amount

of that loss.   He also alleges that the court erred in granting

an upward departure based on psychological harm to the victims

and on loss of confidence in the insurance industry.   We hold

that the district court properly calculated the loss arising from

the appellant's fraud and that it did not err in its upward

departure based on the amount of loss.   We find, however, that

the district court erred in its conclusion to depart upward for

psychological harm/loss of confidence.   We will, therefore, for

the reasons stated below, vacate defendant's sentence and remand

for resentencing pursuant to this opinion.
                                 I.



                                                                   2
                                 A.

            The appellant, Lawrence M. Neadle, Jr., and two co-

defendants were indicted on one count of conspiracy and eight

counts of mail and wire fraud on November 18, 1992.    After one

co-defendant was acquitted, a superseding indictment charged

Neadle and the other co-defendant with substantially the same

offenses.    Count I of the Superseding Indictment charged them

with a conspiracy in violation of 18 U.S.C. § 371; Counts II and

III charged them with mail fraud in violation of 18 U.S.C. §1341;

and Counts IV through IX charged them with wire fraud in

violation of 18 U.S.C. § 1343.

            In October 1993, Neadle changed his plea to Count II of

the superseding indictment (mail fraud) from not guilty to

guilty.   Pursuant to the plea agreement, the remaining counts

against him were dismissed at sentencing.    On July 6, 1994, the

district court sentenced Neadle to sixty months imprisonment and

placed him under supervised release for a three-year period upon

his release from prison.    Neadle was released pending appeal and

filed his notice of appeal the next day.

            The charges against Neadle arose from his creation of

the American Property and Casualty Insurance Company ("AMPAC").

Neadle was chief executive officer of the company.    In late 1987,

he applied to the Division of Banking and Insurance of the Virgin

Islands ("Insurance Division") for a license to form AMPAC.       At

that time, the Insurance Division required an insurance company

to have a minimum capital of $450,000, an initial surplus capital

of $250,000, and a bond of $500,000.    Neadle provided the


                                                                       3
Insurance Commissioner with a surety bond for $500,000 but

misrepresented the amount of the company's initial capital.0

           On January 5, 1988, Neadle caused a letter to be sent

through the United States mail to the Insurance Division, stating

that AMPAC had unencumbered certificates of deposit in the sum of

$700,000 in the Naples Federal Savings and Loan Association

("Naples Federal") in Naples, Florida.   In fact, however, the

certificates were encumbered, as Neadle was fully aware.     Unaware

of the deception, the government of the Virgin Islands in January

1988 issued AMPAC a license to do business in that territory.

           After obtaining the loan for the certificates of

deposit, AMPAC paid interest on the loan of $2,300 a month.

AMPAC's quarterly reports to the Insurance Division, however,

listed the $700,000 in encumbered certificates as an asset but

did not list that amount as an offsetting liability, and the

reports did not include the interest payments.

           In September 1989, Hurricane Hugo hit the Virgin

Islands.   AMPAC was unable to meet the resulting claims of its

policyholders.   The Virgin Islands government established the

Hurricane Hugo Fund Program to pay the claims for AMPAC and

American Alliance, the other Virgin Islands insurance company

that failed as a result of claims arising out of the hurricane.
                                B.




0
          Subsequently, the Insurance Division became concerned
about the surety company, which had issued the bond, and required
Neadle to post the $500,000 in cash. Neadle complied.

                                                                   4
          At the July 12, 1993, pre-trial hearing in this matter,

witnesses testified regarding the Insurance Division's capital

requirements.   Derek Hodge, the Lieutenant Governor and Insurance

Commissioner of the Virgin Islands at that time, testified that

he would not have certified a company to do business without the

$700,000 minimum in capital and paid-in surplus.    Hodge also

stated that he followed guidelines, promulgated by the National

Association of Insurance Commissioners, requiring all insurance

companies to maintain a solvency ratio of three to two in

premiums to surplus.   He further testified regarding the methods

he used to ensure that insurance companies doing business in the

Virgin Islands complied with the requirements.     He stated that,

among other things, he reviewed audits conducted by Insurance

Commission examiners, who reviewed quarterly financial statements

submitted by the companies.

          Deverita Sturdivant, Director of the Insurance Division

from January 1987 through the end of 1989, testified that the

$700,000 minimum capital requirement applied to new businesses.

She stated that once a company started writing policies, the

company might need to increase its capital to ensure the proper

premium dollars to surplus ratio.   Sturdivant testified further

that had she discovered that AMPAC did not meet the minimum

capital requirement, the Insurance Division could have demanded

that unencumbered assets be infused into the company or, in the

alternative, that the company be liquidated.

          In May 1994, the district court held a hearing to

address the defense objections to the Presentence Investigation


                                                                     5
and Report.   Ricardo Luaces, a claims examiner employed by the

Insurance Division from 1989 to 1993, testified that the gross

figure for Hurricane Hugo losses incurred on property insured by

AMPAC was $37,655,038.   The adjusted Hurricane Hugo claims of

AMPAC policyholders amounted to $24,438,748.    Roland Riviere, an

independent insurance adjuster retained to assist in adjusting

the claims of AMPAC's insureds for Hugo-related damage, quoted

the same figure.

          John McDonald, the Chief Examiner for the Insurance

Division during the time that the Insurance Division compiled

Hugo-related claims, testified that the best estimate of non-Hugo

related claims on AMPAC was $500,000.    He further testified that,

in early 1988, the Insurance Division had discovered that AMPAC

had no general ledger -- the basic accounting format in which

debits and credits are captured -- so that AMPAC's assets and

liabilities could not be determined.    At that time, the

Commission also detected a commingling of funds between AMPAC and

Caribbean Mutual, another of Neadle's companies.    McDonald

testified that the Commission directed Neadle to correct these

accounting problems but that by the time of the hurricane, there

were still no accounting records from which AMPAC's assets could

be determined.   McDonald confirmed, however, that one of Neadle's

accountants, Norman Erasso, had begun implementing the requested

accounting procedures.   Erasso, however, left the territory when

Hugo struck and did not return.

          Neadle testified that, as of the date of the hurricane,

he had reinsurance of $4 million.   He contended the reinsurer had


                                                                     6
assured him that this amount would be adequate, based on previous

hurricane damage in the Virgin Islands.
                                  C.

          At sentencing, the district court applied the 1988

edition of the Sentencing Guidelines, the version in effect on

the date of the offense.0    The court found that because Neadle

"obtained his license [to issue insurance] by fraud and

trickery," he was responsible for a loss of $20,438,748, which

represented the adjusted claims of $24,438,748, less AMPAC's $4

million in reinsurance.     Appendix ("App.") at 399-400.   Pursuant

to § 2F1.1(b)(L) of the 1988 Guidelines, the base level for fraud

offenses was 6; if the loss exceeded $5,000,000, an eleven level

increase was to be added to the base.     The court granted this

eleven level increase.

           Pursuant to U.S.S.G. § 2F1.1(b)(2), the court also

awarded a two level increase on the alternative grounds that the

crime involved more than minimal planning or more than one

victim.   The court concluded
           that the offense was by its nature more complex than
           simple; that the defendant did take significant
           affirmative steps to conceal the offense; that the
0
The district court properly applied the version of the
Guidelines in effect at the date of the offense because, at the
time of sentencing, § 2F1.1 of the Guidelines had been amended by
adding four new offense level increases for losses exceeding 10,
20, 40 and 80 million dollars. This amendment would call for a
16 level increase over the base offense level for the loss as
calculated here, rather than the 11 level increase which had been
in effect until November 1989. See, e.g., United States v.
Corrado, 53 F.3d 620, 622-23 (3d Cir. 1995) (if application of
guidelines in effect at sentencing results in more severe penalty
than that in effect at time of offense, earlier version controls;
applying a guideline amendment that enhances the penalty offends
the ex post facto clause of the United States Constitution).


                                                                       7
            offense itself required planning and the falsification
            of a series of documents; and that these acts involved
            a series of discrete decisions, clearly not opportune
            in nature.


App. at 404-05.   Moreover, the court stated "that the hundreds of

policyholders and the government comprise the victims of the

offense."    App. at 405.   The court granted a two level decrease

for Neadle's acceptance of responsibility.

            The court then departed upward from the guideline

offense level on two grounds.    First, pursuant to U.S.S.G.

§2F1.1, comment 10, the court found that the fact that the loss

amounts were substantially above the highest amount listed in the

Guidelines ($5,000,000) warranted an upward departure.     Looking

by analogy to the 1993 amendments to the Guidelines, the court

departed upward a further five levels (from level 11 to 16),

which corresponded to the increase under the 1993 version of the

Guidelines for a loss exceeding $20,000,000.    Second, the court

found U.S.S.G. § 2F1.1, comment 9, to warrant an upward departure

of one level for the "psychological harm risked or caused by the

offense" and one level for "the loss of confidence in an

important institution."

            In sum, the court departed upward seven levels from an

offense level of 17 to an offense level of 24, which corresponded

to a guideline sentencing range of from 51 to 63 months.     The

court then imposed a sentence of 60 months.
                                 II.

            The District Court of the Virgin Islands had

jurisdiction pursuant to 18 U.S.C. § 3241.     We have jurisdiction,


                                                                     8
pursuant to 28 U.S.C. § 1291, to review a final order of a

district court and, pursuant to 18 U.S.C. § 3742, to review a

sentence imposed under the United States Sentencing Guidelines.

We exercise plenary review over legal questions concerning the

meaning of sentencing guidelines but apply the clearly erroneous

standard to factual determinations underlying their application.

United States v. Daddona, 34 F.3d 163 (3d Cir.), cert. denied, __

U.S. __, 115 S. Ct. 515 (1994); United States v. Katora, 981 F.2d

1398, 1401 (3d Cir. 1992).
                                III.

            We first address Neadle's challenge to the district

court's interpretation of "loss" as it is calculated pursuant to

U.S.S.G. § 2F1.1(b), an issue over which this court exercises

plenary review.   See United States v. Badaracco, 954 F.2d 928 (3d

Cir. 1992).    We conclude that the district court properly

calculated the loss, arising from the appellant's fraud, to be

$20,438,748, that figure being the net, adjusted $24,438,748 loss

to victims whose property was insured with AMPAC at the time that

Hurricane Hugo struck St. Croix, reduced by the amount of AMPAC's

reinsurance ($4 million).

            In his appeal, Neadle raises two grounds for

challenging the district court's calculation of the amount of

loss.    First, he argues that, after obtaining the license to form

AMPAC, he intended to run the company in a proper, business-like

way.    Second, he contends that the property losses suffered by

AMPAC policy holders resulted from an unforeseeable act of God,

so that he would have been unable to pay the claims even in the


                                                                   9
absence of his fraud.   Therefore, he maintains, the loss figure

should not be used to increase his sentence pursuant to U.S.S.G.

§ 2F1.1.

           The district court based its computations upon the

actual loss suffered by the AMPAC policyholders, rather than upon

the loss which Neadle intended to inflict, see U.S.S.G. § 2F1.1,

comment 7 (1993) ("if an intended loss that the defendant was

attempting to inflict can be determined, this figure will be used

if it is greater than the actual loss)0 or upon the offender's

gross gain from committing the fraud, see Badaracco, 954 F.2d at

936 (breach of fiduciary duty by officer of a financial

institution may justify using the "gross gain" alternative to

estimate loss).   The court also sentenced Neadle based on the

loss as of the date of sentencing, see United States v. Kopp, 951

F.2d 521, 531 (3d Cir. 1991), rather than the loss as of the date

of the offense, see Shaffer, 35 F.3d at 115, so that the

reinsurance Neadle had contracted for was subtracted from the

loss.

           Neadle characterizes the case as analogous to a

contract case in which he was planning to perform, albeit after

obtaining the contract by fraudulent means.0   He argues that

0
In a fraud case, the intended loss may be no loss at all, when
fraud is committed to obtain a contract or a license or a loan to
do business which the offender hopes will succeed -- as the
defendant here claims was his intent. See e.g. United States v.
Shaffer, 35 F.3d 110, 113 (3d Cir. 1994). However, under the
Guidelines, intended loss is relevant in the loss computation
only if the intended loss is greater than the actual loss.
0
          The government portrays this fraud case as analogous to
a simple theft case, arguing that the "property" taken was the

                                                                   10
because he did not intend to inflict any loss, no dollar amount

is attributable to him.   App. at 397.   He emphasizes that when

the government requested that he provide $500,000 cash in lieu of

the $500,000 bond required by law, he complied.   Moreover, he

notes that his accountant, Erasso, had begun to comply with the

government's accounting suggestions but left the Virgin Islands

when Hugo struck.   Finally, he maintains that he attempted to get

adequate reinsurance coverage and that he did not engage in, and

the government did not prove that he engaged in, day-to-day fraud

in the operation of AMPAC.

          Contrary to Needle's argument, however, there is strong

record support that Neadle not only misrepresented the amount of

his initial capital investment but also engaged in fraudulent

conduct to perpetuate his business.   During the eighteen month

period in which AMPAC sold insurance policies, the Insurance

Division could not locate basic accounting records from which it

could assess the company's assets and liabilities.    Moreover,

examiners found a commingling of funds between AMPAC and another

of Neadle's companies, Caribbean Mutual.   In addition, the

company continued to file financial statements that fraudulently

concealed the fact that AMPAC's $700,000 in certificates of


receipt of the license to sell casualty insurance in the Virgin
Islands, which resulted in the Hugo-related losses. The
Government argues that "the sentencing court could properly have
assessed the loss occasioned by the appellant's fraud as being
the value of all property insured by AMPAC, including property
that was not damaged by Hurricane Hugo." Even if we were to
accept the Government's position, this court has held that "[t]he
fraud guideline . . . has never endorsed sentencing based on the
worst-case scenario potential loss." Kopp, 951 F.2d at 529.


                                                                   11
deposit at Naples Federal were encumbered assets.000 in

certificates of deposit at Naples Federal were not unencumbered

assets.   Finally, although Neadle obtained reinsurance, no

reinsurer could adequately assess AMPAC's true reinsurance

requirements unless the reinsurer was provided with basic records

indicating AMPAC's assets and liabilities.    The deceitful and

slipshod way in which Neadle ran the business supports the

district court's attribution of responsibility to him for the

losses.   We conclude that the actual loss caused to AMPAC

policyholders by the fraud was the proper basis for the loss

computation under § 2F1.1(b).0

             We also find Neadle's argument that Hurricane Hugo was

an act of nature beyond his control and that the property losses

occasioned thereby should not be used in calculating his sentence

to be without force.    Hurricanes are a continuing threat in the

Caribbean.    Coverage for hurricane damage is a type of coverage

which is often specifically sought, albeit not always easily

found, in that area.    Moreover, the insurance policies at issue

contained express coverage of hurricane-related property losses.



0
          We do not agree with the dissent that the loss to the
policyholders here was not caused, at least in part, by Neadle's
fraud in obtaining the license to do business. The dissent
implies that the individuals, who purchased policies from AMPAC,
could not have purchased insurance coverage from any other source
and for that reason did not suffer any loss from the damage done
by Hurricane Hugo which they would not otherwise have suffered.
However, despite the tightness of the insurance market in the
Virgin Islands, the record before us does not support the
supposition, and Neadle does not claim, that there was no other
insurance coverage available in the Virgin Islands market for the
AMPAC policy holders.


                                                                    12
Neadle did not attempt to sell hurricane coverage in Chicago or

in Wichita; he sold it in the Caribbean, a hurricane zone.

            Moreover, as we have previously held in Kopp, it is not

appropriate to reduce the amount of the loss, as computed under

the Guidelines, in order to reflect other causes of the loss

which were beyond the defendant's control.       951 F.2d at 531.   See

U.S.S.G. § 2F1.1(b), comment 11.       An intervening force that

increases a fraud-related loss will not decrease the loss

valuation but will only provide possible grounds for a downward

departure.    Kopp, 951 F.2d at 531.

            To the extent that the defendant's objection to the

loss computation in this case can be construed to be a request

for a downward departure based on the nature of the risk

involved, the district court clearly rejected that request in the

court's determination to depart upward in computing the amount of

the loss.    The district court, in determining to depart upward

due to the underrepresentation of the loss in the 1988 version of

the Guidelines, cited United States v. Monaco, 23 F.3d 793 (3d

Cir. 1994).    App. at 411.   In that case, we vacated the district

court's judgment and remanded for resentencing after clarifying

the scope of the court's power to depart downward based on

application note 11 to U.S.S.G. § 2F1.1.       We stated that "a

wrongdoer should [not] completely escape a sentencing enhancement

if his scheme involved a substantial risk of loss merely because,

under his own rosy scenario, no loss was intended."       Monaco, 23
F.3d at 799 n.10.    We held that the court's discretion to depart

downward pursuant to application note 11 is limited by the


                                                                       13
inherent risk of loss in the perpetrator's fraud, explaining that

"risk is one of the losses that a perpetrator of fraud imposes on

his victims."   Id.

          We believe that the district court properly considered

the risk, in this case of a hurricane, an act of God, imposed on

AMPAC's insureds because of the defendant's fraudulent conduct.

Had Neadle expressly made a request for a downward departure for

an act of God, the court would have been proper in denying it. In

holding AMPAC out as insuring against a known risk, defendant

extracted premiums from unsuspecting policyholders who believed

that they were securing protection when in fact that protection

was an empty shell.   Moreover, defendant's misrepresentations

persisted throughout the period AMPAC was operating.

          Neadle's arguments obscure the fact that but for his

fraud, he would not have been in the insurance business.     By

deceiving the government concerning the $700,000 certificates of

deposit, by submitting fraudulent quarterly financial statements,

and by failing to maintain financial records, Neadle misled the

government for approximately a year and a half.   Had such

fraudulent conduct not occurred, AMPAC would not have begun to

operate as an insurance broker in the Virgin Islands and would

not have continued to do so without maintaining adequate

accounting records.   The district court recognized a clear causal

connection between the fraud and the policy holders losses.       See

App. at 399-400.

          Our decision finds support in United States v.
Robichaux, 995 F.2d 565 (5th Cir.), cert. denied, __ U.S. __, 114


                                                                    14
S. Ct. 322 (1993).   In Robichaux, the Fifth Circuit addressed a

similar case in which mail and wire fraud led to the failure of

an insurance company.   The defendant, Edward Robichaux,

misrepresented that securities he had assigned to an insurance

company were unencumbered assets.    Without the assets, the

company "would have been undercapitalized and thus barred from

any further insurance business."     Id. at 567.   The Louisiana

Insurance Commission retained an independent firm to audit the

company.   Robichaux verified to that firm the company's ownership

of the securities in question.     Relying on the verification, the

auditors issued a favorable report.    Approximately two years

later, the insurance company was declared insolvent.      Id.

           Robichaux argued that, for purposes of the Sentencing

Guidelines, he should be held responsible only for the

commissions he had been paid by the insurance company after he

had made the fraudulent assignment of assets to it.      The district

court, however, held him responsible for the losses attributable

to the company's failure.   The Fifth Circuit agreed, holding that

it was not clearly erroneous for the district court to find that

the losses attributable to the insurance company's failure

resulted from the defendant's actions in placing fraudulent

securities on the company's books.    Id. at 571.    The court

concluded that it was
          not clearly erroneous to assume that if [the
          independent auditor] had not issued a favorable audit
          for [the insurer], which only occurred because of [the
          insurer's] fraudulently inflated balance sheet, the
          Commission would have acted to liquidate the firm at an
          earlier date and minimized the losses.



                                                                   15
Id..   The court upheld the district court's loss estimate -- an

estimate of the loss that the state of Louisiana suffered as a

result of the insurance company's failure -- as reasonable and

not clearly erroneous.   Id.

          Similarly, we find not clearly erroneous the district

court's conclusion that Neadle's inadequate financing and

recording at AMPAC caused the government of the Virgin Islands to

license AMPAC and to permit it to remain in business which in

turn caused the policy holders' Hugo-related losses.   We will

affirm the district court's loss figure, because it is a

reasonable estimate of the harm which resulted from Neadle's

fraudulent scheme and which reasonably could be expected to

result from a scheme which insured for hurricane damage in the

Caribbean hurricane zone.
                               IV.

          We next must consider whether the court erred by

reading U.S.S.G. § 2F1.1, Application Note 9, to warrant an

upward departure of one level for the "psychological harm risked

or caused by the offense" and one level for "the loss of

confidence in an important institution."   Since we are reviewing

the district court's application of particular facts to a

departure approved by the Sentencing Commission, we review only

for clear error.   United States v. Astorri, 923 F.2d 1052, 1058

(3d Cir.), cert. denied, 502 U.S. 970 (1991).   We conclude that

the evidence is insufficient to warrant an upward departure on

either ground.




                                                                   16
          A district court may impose a sentence outside the

sentence range prescribed by the Sentencing Guidelines where "the

court finds that there exists an aggravating or mitigating

circumstance of a kind, or to a degree, not adequately taken into

consideration by the Sentencing Commission in formulating the

guidelines that should result in a sentence different from that

described."   18 U.S.C. § 3553(b).   Application Note 9 to U.S.S.G.

§ 2F1.1 provides a nonexclusive list of circumstances in which

the loss calculated pursuant to U.S.S.G. § 2F1.1 -- the provision

establishing the base level for offenses involving fraud or

deceit -- "does not fully capture the harmfulness and seriousness

of the conduct."   Among the examples of circumstances in which

upward departures may be warranted are those on which the

district court relied, instances in which "the offense caused or

risked physical or psychological harm"0 and instances in which

"the offense caused a loss of confidence in an important

institution."

          At sentencing, the court granted a one point upward

departure based on "the psychological and social impact [of

Neadle's offense] on the people of the Virgin Islands."     An


0
          Neadle argues that the district court improperly
applied the 1988 edition of the Guidelines to this ground of
departure. The 1993 edition of the Guidelines provides that an
upward departure may be warranted where "the offense caused
reasonably foreseeable, physical or psychological harm or severe
emotional trauma." U.S.S.G. § 2F1.1, comment 10(c). Neadle
suggests that the 1993 provision should apply, because it
clarifies, rather than substantively changes, the 1988 language.
We need not consider this argument, because we do not find
evidence of psychological harm within the meaning of the
Guidelines in any event.

                                                                  17
upward departure based on psychological harm is appropriate only

"[i]f a victim or victims suffered psychological injury much more

serious than that normally resulting from the commission of the

offense."    U.S.S.G. § 5K2.3. The Guidelines state that
            [n]ormally, psychological injury would be sufficiently
            severe to warrant application of this adjustment only
            when there is a substantial impairment of the
            intellectual, psychological, emotional, or behavioral
            functioning of a victim, when the impairment is likely
            to be of an extended or continuous duration, and when
            the impairment manifests itself by physical or
            psychological symptoms or by changes in behavior
            patterns.


Id.

            A district court is to be given considerable deference

in assessing psychological impact on victims.   United States v.

Astorri, 923 F.2d at 1058-59.    However, the court must not merely

speculate regarding psychological harm.    In the instant case, the

record is barren of evidence regarding physical or psychological

harm sustained by the victims.    We do not find any evidence of

the sort of "chronic substantial impairment of a victim's mental

functioning" upon which this court has relied in upholding upward

departures based on psychological injury.    See id. at 1059

(upholding upward departure for psychological harm where evidence

showed, among other things, that victim suffered from high blood

pressure and remained under doctor's care as a result of

defendant's actions).    Therefore, we cannot find that the victims

suffered psychological or physical harm, which exceeded that




                                                                   18
occurring in the heartland of fraud offenses, to such a degree as

to justify an upward departure.0

          The court also granted a one point upward departure on

the grounds that "[t]he offense itself contributed materially to

the destruction of the reputation of the insurance industry in

the territory."   App. at 410.   The court stated that "[t]here is

no doubt in the court's mind that Neadle's acts contributed

substantially to a loss of confidence in an important

institution."   App. at 411.   Again, the court based the upward

departure not on sworn testimony but on an unsupported judicial

conclusion.0    Such judicial speculation cannot provide the basis

for an upward departure.
                                   V.



0
          See United States v. Pelkey, 29 F.3d 11, 15-16 (1st
Cir. 1994) (finding that victims' feelings of lack of trust,
frustration, shock, and depression were not "so far beyond the
heartland of fraud offenses as to constitute psychological harm
within the meaning of the Policy Statement in § 5K2.3 or" the
application note to § 2F1.1); United States v. Mandel, 991 F.2d
55, 58-59 (2d Cir. 1993) (finding psychological injuries of
victims insufficient to warrant upward departure from base
offense level where "both the base offense level for fraud and
the vulnerable-victim adjustment had already taken into account
the harm to the victims").
0
          The lack of evidence supporting this ground for
departure is evident from the record of the hearing at which
Neadle raised his objections to the Presentence Report. Asked
for evidence regarding loss of confidence in the industry, the
government attorney merely cited conversations with fifteen AMPAC
insureds who "did not hold the insurance industry in very high
regard," meetings "with people on the street," and evidence from
"reading newspapers." App. at 230-31. Indeed, based on the
hearing, the court weakened the original language of the report
to state broadly that the offense "contributed to the general
decline in the confidence and esteem held for the insurance
industry." App. at 231.

                                                                   19
          We conclude that the district court correctly

calculated the loss arising from Neadle's fraud as the net,

adjusted loss to those victims whose property was insured with

AMPAC at the time Hurricane Hugo struck St. Croix, reduced by the

amount of the company's reinsurance.   Nevertheless, we will

vacate the judgment of sentence and remand this case for

resentencing, because the district court improperly increased

Neadle's guideline sentence by two levels, based on caused or

risked physical or psychological harm and on loss of confidence

in the insurance industry.




United States of America v. Lawrence Neadle, Jr., Appellant

No. 94-7417




                                                                  20
BECKER, Circuit Judge, concurring and dissenting.

          This appeal presents an important question regarding

the definition of "loss" under the fraud section of the United

States Sentencing Guidelines ("Guidelines" or "USSG"), USSG

§2F1.1(b).   We must determine whether this definition

incorporates a causation requirement, and if so, what that

requirement entails.   Because the majority fails to explicitly

address this issue, and because I disagree with the majority's

conclusion as to the determination of loss, I do not join in

Parts III and V of the majority opinion.   I do join, however, in

Parts I, II, and IV.

          The majority affirms the district court's calculation

of loss without giving sufficient attention to the nexus between

Lawrence Neadle's illegal conduct -- misrepresentations that

AMPAC had complied with the requirement that insurance companies

have $700,000 in unencumbered assets -- and the $20 million in

unpaid AMPAC claims.   This inattention is not surprising given

the Guidelines' lack of guidance on the definition of loss.

Indeed, USSG § 2F1.1 seems to envision loss as a readily apparent

financial harm existing independent of legal definitions.

          While the amount of unpaid AMPAC claims may, at first

glance, seem to be the relevant financial harm, the severe

consequences of criminal penalties impose on courts the duty to

undertake a more searching inquiry.   Legal concepts must be

susceptible to definition, and it is our duty to explicate these

definitions.   We have performed this task before, see, e.g.,
United States v. Kopp, 951 F.2d 521 (3d Cir. 1991) (defining loss


                                2
under USSG § 2F1.1), and it is now necessary to do it again.       The

Guidelines' language, its commentary, the caselaw, and sound

sentencing policy all lead me to conclude that a financial harm

is loss under section 2F1.1 only if it was caused by the

defendant's illegal conduct.    This causation requirement demands,

at the least, that the defendant's conduct be a "cause in fact"

of the harm at issue, i.e., that the harm would not have occurred

but for the defendant's conduct.

          I dissent because, applying the "but for" standard, the

record contains insufficient evidence to find that Neadle's fraud

was a cause of the $20 million in unpaid claims.       Because of this

error in loss calculation, I would vacate and remand for

resentencing.


                  I. Causation as an Element of Loss

          In my view, the Guidelines require a finding of

causation before a harm may be used as loss for purposes of

section 2F1.1.    The causation requirement, pervasive in the

criminal law, see infra part II, is made explicit in the language

of the Guidelines and is buttressed by caselaw and policy

considerations.


          A. The Language of the Sentencing Guidelines

          The plain language of the Guidelines dictates that

courts must make a finding of causation before assigning some

harm as loss under section 2F1.1.      Although the text of section

2F1.1 contains no definition of the specific offense


                                   3
characteristic loss, the Guidelines provide for such deficiencies

by establishing default rules that govern, inter alia, what

conduct and harms are relevant to determining specific offense

characteristics.   One of these default rules makes clear that

courts may consider only those harms that were caused by the

defendant's conduct.   Because no other provision of the

Guidelines provides instructions to the contrary, this default

rule governs the determination of loss under section 2F1.1.

          Because the loss table in effect at the time of

sentencing -- the 1993 loss table -- would provide for a greater

penalty than would the loss table in effect at the time of the

offense -- the 1988 loss table -- the 1988 Guidelines apply in

their entirety.0   Thus, except where noted, my discussion is

based on the 1988 Guidelines.

0
USSG § 1B1.11(b)(1) (1994) states that "[i]f the court
determines that use of the Guidelines Manual in effect on the
date that the defendant is sentenced would violate the ex post
facto clause of the United States Constitution, the court shall
use the Guidelines Manual in effect on the date that the offense
of conviction was committed." USSG § 1B1.11(b)(2) (1994) then
states that "[t]he Guidelines Manual in effect on a particular
date shall be applied in its entirety." See generally United
States v. Corrado, 53 F.3d 620 (3d Cir. 1995) (explaining this
"one book rule"). Because the loss table in effect at the time
of sentencing provides for more jail time per dollar of loss than
do earlier versions of the loss table, see majority opinion note
3, the Guidelines applicable at the time of the offense apply in
their entirety.

          The question then is: what version of the Guidelines
was in effect at the time of Neadle's offense? The majority and
the district court apply the 1988 edition of the Guidelines,
which incorporates amendments effective October 15, 1988. They
do this despite the fact that there is a strong argument that the
offense for which Neadle was convicted occurred on January 5,
1988. Pursuant to a plea agreement, Neadle was convicted of only
the mail fraud charge alleged in count two of the indictment.


                                 4
                          1. Section 1B1.3

           The text of section 2F1.1 provides no definition of the

term loss.   It simply states that "[i]f the loss exceeded $2,000,

increase the offense level as follows," and then provides a table

of sentencing increases based on different amounts of loss.      See

USSG § 2F1.1(b).    Thus, we must look elsewhere for the definition

of loss.

           The first place to look is Chapter 1, Part B of the

Guidelines, which provides guidance on how to interpret the

Guidelines' sometimes sparse provisions.      Within this chapter,

USSG § 1B1.3 specifies what information courts may consider in

determining, inter alia, specific offense characteristics such as

loss under 2F1.1.    See USSG § 1B1.3(a).    The information

specified in section 1B1.3(a) is the only information relevant to

determining specific offense characteristics "[u]nless otherwise

specified" by another provision of the Guidelines.      Id.; see also

USSG § 1B1.3 Background ("Subsection (a) establishes a rule of

construction by specifying, in the absence of more explicit


Count two charges that the crime of mail fraud occurred on
January 5, 1988, when Neadle mailed a letter to the Insurance
Division stating that its assets were unencumbered.
Nevertheless, the district court's judgment states that the
offense was concluded on October 31, 1989. The district court's
finding as to the duration of the offense seems justified by the
fact that Neadle concealed his initial mail fraud by continuously
filing false quarterly reports. Although it is unclear whether
Neadle accepts the district court's finding as to the duration of
his offense, he seems to acquiesce in the use of the 1988
Guidelines. Because of Neadle's acquiescence and the agreement
of the government, the district court, and the majority that the
1988 Guidelines apply, I will use the 1988 Guidelines as well.


                                 5
instructions in the context of a specific guideline, the range of

conduct that is relevant to determining the offense level . . .

.").

           Section 1B1.3(a) establishes several important

interpretive rules.   Subsection (a)(1) states that specific

offense characteristics will be based only on the following

conduct:   acts and omissions committed, aided and abetted by the

defendant, or for "which the defendant would be otherwise

accountable" (defined as conduct counseled, commanded, induced,

procured, or willfully caused by the defendant, reasonably

foreseeable acts in furtherance of a conspiracy, or, conduct

underlying a conviction for solicitation, misprision or accessory

after the fact that reasonably should have been known by the

defendant)0 "that occurred during the commission of the offense

0
Application Note 1 defines "conduct 'for which the defendant is
otherwise accountable'" as follows:

           Conduct "for which the defendant is otherwise
           accountable," as used in subsection (a)(1),
           includes conduct that the defendant
           counseled, commanded, induced, procured, or
           willfully caused. If the conviction is for
           conspiracy, it includes conduct in
           furtherance of the conspiracy that was known
           to or was reasonably foreseeable by the
           defendant. If the conviction is for
           solicitation, misprision or accessory after
           the fact, it includes all conduct relevant to
           determining the offense level for the
           underlying offense that was known to or
           reasonably should have been known by the
           defendant.

USSG § 1B1.3 Application Note 1 (citations omitted). This
definition has been, for the most part, incorporated into the
text of the current version of section 1B1.3. See USSG §
1B1.3(a)(1) (1994). We may consider subsequent amendments to the


                                6
of conviction, in preparation for that offense, or in the course

of attempting to avoid detection or responsibility for that

offense, or that otherwise were in furtherance of that offense."

USSG § 1B1.3(a)(1).   Except for a special class of offenses --

"offenses of a character for which § 3D1.2(d) would require

grouping of multiple counts" -- this is the only conduct courts

may consider absent an expression of contrary intent.0

          More importantly, subsection (a)(3) establishes a

causation requirement with respect to harms.   Unless otherwise

specified, the only harm that is to be taken into account in

determining a specific offense characteristic is harm "that

resulted from" the acts and omissions identified above "if the

harm . . . was caused" with the requisite level of intent, and

harm that was "the object of such acts and omissions."    USSG

§1B1.3(a)(3) (emphasis added).0   That the harm must be caused

with some bad intent necessitates that the harm be caused in the


Guidelines "to the extent that such amendments are clarifying
rather than substantive changes." USSG § 1B.11(b)(2) (1994).
0
 "Solely with respect to offenses of a character for which
§3D1.2(d) would require grouping of multiple counts," courts may
also take into account "all such acts and omissions that were
part of the same course of conduct or common scheme or plan as
the offense of conviction." USSG § 1B1.3(a)(2).
0
 In full, Section 1B1.3(a)(3) states that courts may consider

          all harm or risk of harm that resulted from
          the acts and omissions specified in
          subsections (a)(1) and (a)(2) above, if the
          harm or risk was caused intentionally,
          recklessly or by criminal negligence, and all
          harm or risk that was the object of such acts
          or omissions.

USSG § 1B1.3(a)(3).



                                  7
first place.   Furthermore, the plain meaning of "resulted from"

connotes causation.   Indeed, Webster's Third New International

Dictionary defines the verb "result" as follows:   "to proceed,

spring, or arise as a consequence, effect, or conclusion."

Webster's Third International Dictionary of the English Language

1937 (Philip Babcock Gove ed., 1966).   Thus, absent an expression

to the contrary, a court may take into account only harm that

"arose as a consequence" of the defendant's conduct -- and only

if that harm was "caused" with some bad intent -- and (perhaps

for offenses that were thwarted prior to their completion) harm

that was "the object" or purpose of the defendant's conduct.0

0
I recognize that subsequent versions of the Guidelines have
deleted the requirement that the harm be caused with bad intent,
as well as the "risk of harm" language. In the 1994 Guidelines,
for example, section 1B1.3(a)(3) states that courts may consider
"all harm that resulted from the acts and omissions specified in
subsections (a)(1) and (a)(2) above, and all harm that was the
object of such acts and omissions." The Committee explained
these changes as follows:

          The purpose of this amendment is to delete
          language pertaining to "risk of harm" and
          "state of mind" as unnecessary. Cases in
          which the guidelines specifically address
          risk of harm or state of mind are covered in
          the amended guideline under subsection (a)(4)
          [formerly subsection (a)(5)]. In addition,
          the amendment deletes reference to harm
          committed "intentionally, recklessly, or by
          criminal negligence" as unnecessary and
          potentially confusing.

USSG Appendix C, Amendment 76, p. 86 (1994). To the extent these
changes can be characterized as "clarifying rather than
substantive changes," which we are invited to take into account
in understanding an earlier version of the Guidelines, see USSG
§1B.11(b)(2) (1994), they do not change my view that the
Guidelines establish a causation requirement. Section
1B1.3(a)(3) retains the "resulted from" language, which, as I
state in the text, connotes causation.


                                8
          Because loss under section 2F1.1 is clearly a "harm"

within the meaning of section 1B1.3, see USSG § 1B1.3 Application

Note 3 (defining "harm" as "bodily injury, monetary loss,

property damage and any resulting harm" (emphasis added)),

section 1B1.3's requirement of causation applies.   Thus, if no

other Guideline provisions addressed the definition of loss, the

bare statement in the text of section 2F1.1 to increase the

defendant's sentence on the basis of loss must be read to include

a requirement of causation.


                 2. Other Guidelines Provisions

          Turning now to other provisions of the Guidelines that

address the issue of loss, the question is not whether they

explicitly state a causation requirement, but whether they

contradict the rule of causation established by section 1B1.3.     I

conclude that the Application Notes to section 2F1.1, and the

materials referenced therein, only reinforce 1B1.3's causation

requirement.

          Application Note 7 to section 2F1.1 deals specifically

with the definition of loss, but it provides little guidance.     It

states as follows:
          Valuation of loss is discussed in the
          Commentary to § 2B1.1 (Larceny, Embezzlement,
          and Other Forms of Theft). In keeping with
          the Commission's policy on attempts, if a
          probable or intended loss that the defendant
          was attempting to inflict can be determined,
          that figure would be used if it was larger
          than the actual loss. For example, if the
          fraud consisted of attempting to sell $40,000
          in worthless securities, or representing that
          a forged check for $40,000 was genuine, the


                               9
          "loss" would be treated as $40,000 for
          purposes of this guideline.

USSG § 2F1.1 Application Note 7.

          The Commentary to section 2B1.1 (the Guideline for

"Larceny, Embezzlement, and Other Forms of Theft"), referenced

above, provides slightly more guidance:
          "Loss" means the value of the property taken,
          damaged or destroyed. Ordinarily, when
          property is taken or destroyed the loss is
          the fair market value of the particular
          property at issue. Where the market value is
          difficult to ascertain or inadequate to
          measure harm to the victim, the court may
          measure loss in some other way, such as
          reasonable replacement cost to the victim.
          When property is damaged, the loss is the
          cost of repairs, not to exceed the loss had
          the property been destroyed.

USSG § 2B1.1 Application Note 2.    Thus, for theft and similar

crimes, the Guidelines state that "'[l]oss' means the value of

the property taken, damaged, or destroyed."

          This definition certainly does not negate section

1B1.3's background rule of causation.   If anything, the

definition itself suggests a causation requirement.     Implicit in

this definition is that loss means the value of the property

taken, damaged, or destroyed by the defendant.     The terms

"taken," "damaged," and "destroyed" have meaning only insofar as

there is a subject -- a taker, damager, or destroyer.    In this

context, the subject must be the defendant -- the person being

sentenced for taking, damaging, or destroying some property.       In

other words, loss for purposes of section 2B1.1 is the value of




                               10
the property that the defendant caused to be taken, damaged, or

destroyed.0

             Another provision touching on the concept of loss is

Application Note 8 to section 2F1.1, which deals with loss

estimation. It states:
          The amount of loss need not be precise. The
          court is not expected to identify each victim
          and the loss he suffered to arrive at an
          exact figure. The court need only make a
          reasonable estimate of the range of loss,
          given the available information. The
          estimate may be based on the approximate
          number of victims and an estimate of the
          average loss to each victim, or on more
          general factors, such as the nature and
          duration of the fraud and the revenues
          generated by similar operations. Estimates
          based upon aggregate "market loss" (e.g., the
          aggregate decline in market value of a stock
          resulting from disclosure of information that
          was wrongfully withheld or misrepresented)
          are especially appropriate for securities
          cases. The offender's gross gain from
          committing the fraud is an alternative
          estimate that ordinarily will underestimate
          the loss.

USSG § 2F1.1 Application Note 8.       This provision's discussion of

loss estimation does not undercut the background requirement of

causation.

          The only provision that explicitly mentions the issue

of causation is Application Note 11. It states:
          In a few instances, the total dollar loss
          that results from the offense may overstate

0
As I explain below, see infra section I.B, we have held that
loss for purposes of section 2B1.1 is not identical to loss for
purposes of section 2F1.1, despite the latter's reference to the
former's definition. My point here is simply that nothing in the
commentary to section 2B1.1 undercuts the rule that only harms in
some sense caused by the defendant can be assigned as loss under
section 2F1.1.


                                  11
          its seriousness. Such situations typically
          occur when a misrepresentation is of limited
          materiality or is not the sole cause of the
          loss. Examples would include understating
          debts to a limited degree in order to obtain
          a substantial loan which the defendant
          genuinely expected to repay; attempting to
          negotiate an instrument that was so obviously
          fraudulent that no one would seriously
          consider honoring it; and making a
          misrepresentation in a securities offering
          that enabled the securities to be sold at
          inflated prices, but where the value of the
          securities subsequently declined in
          substantial part for other reasons. In such
          instances, a downward departure may be
          warranted.

USSG § 2F1.1 Application Note 11.

          The phrase "when a misrepresentation is . . . not the

sole cause of the loss" might suggest that the loss figure can

include harms not caused by the defendant.   But this is a

misreading of the Application Note.   That the defendant's conduct

need not be the sole cause of the loss in no way excuses that

conduct from being a cause.0   The availability of a downward

0
My view is not changed by subsequent amendments to the
Application Notes to section 2F1.1. Even if these amendments are
given weight as "clarifying" changes, I do not find them
sufficient to overcome the background rule of causation. In lieu
of Application Note 11, Application Note 7 to section 2F1.1,
which deals specifically with the definition of "loss," now
contains an additional paragraph:
          There are, however, instances where
          additional factors are to be considered in
          determining the loss or intended loss:

          . . . .

          (b)   Fraudulent Loan Application and Contract
                Procurement Cases

                In fraudulent loan application cases and
                contract procurement cases, the loss is
                the actual loss to the victim (or if the


                                 12
               loss has not yet come about, the
               expected loss). For example, if a
               defendant fraudulently obtains a loan by
               misrepresenting the value of his assets,
               the loss is the amount of the loan not
               repaid a 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. However,
               where the intended loss is greater than
               the actual loss, the intended loss is to
               be used.

               In some cases, the loss determined above
               may significantly understate or
               overstate the seriousness of the
               defendant's conduct. For example, where
               the defendant substantially understated
               his debts to obtain a loan, which he
               nevertheless repaid, the loss determined
               above (zero loss) will tend not to
               reflect adequately the risk of loss
               created by the defendant's conduct.
               Conversely, a defendant may understate
               his debts to a limited degree to obtain
               a loan (e.g., to expand a grain export
               business), which he genuinely expected
               to repay and for which he would have
               qualified at a higher interest rate had
               he made truthful disclosure, but he is
               unable to repay the loan because of some
               unforeseen event (e.g., an embargo
               imposed on grain exports) which would
               have caused a default in any event. In
               such a case, the loss determined above
               may overstate the seriousness of the
               defendant's conduct. Where the loss
               determined above significantly
               understates or overstates the
               seriousness of the defendant's conduct,
               an upward or downward departure may be
               warranted.

USSG § 2F1.1 Application Note 7 (1994). In the second example in
this note -- the grain exporter example -- the Guidelines seem to
assign as "loss" a harm that would have occurred regardless of
the defendant's fraud. The example assumes that the grain
exporter would have (1) obtained the loan whether or not he


                               13
departure for situations in which a misrepresentation is not the

"sole cause" of the loss simply accounts for the fact that some

events have multiple causes.   If causes beyond the defendant's

control played a large role in the loss, a downward departure may

be justified.   If anything, the Note's discussion of a

misrepresentation that is not the "sole cause" of the loss

implies that such misrepresentation is a cause of the loss, and

the Note thus supports the need for a finding of causation.   See

United States v. Kopp, 951 F.2d 521, 531 (3d Cir. 1991)

("Application Note 11 made it clear that actual loss was how much

better off the victim would be but for the defendant's fraud.     To

the extent actual loss had other, more proximate causes, a

discretionary downward departure . . . might be appropriate."

(emphasis added)).0

committed fraud; and (2) defaulted on the loan whether or not he
committed fraud. Nevertheless, the example suggests that the lack
of causation is a ground for downward departure, and thus, the
argument goes, the lack of causation should not be factored into
"loss" in the first instance.

           I reject this argument for the same reasons that I
state in the text. In addition, I note that the grain exporter
example is stated under the heading "Fraudulent Loan Application
and Contract Procurement Cases," of which the present case is
neither.
0
 The statements from Kopp quoted in the text shed light on some
other confusing language from that case. Language in Kopp
arguably suggests that Application Note 11 mandates taking
account of the lack of causation only by way of making a downward
departure, and not by adjusting the amount of loss:

          The government is correct on one point,
          however: Application Note 11 definitively
          rejected adjusting the "loss" itself downward
          to reflect other causes beyond the
          defendant's control. As an example of when
          the dollar loss may overstate the seriousness


                                14
           In the end, the Application Notes to section 2F1.1, and

the materials referenced therein, only reinforce 1B1.3's

causation requirement.    Reading these materials together with the

background rule of causation, the Guidelines seem to contemplate

the following approach:   The court should first make an estimate

of the loss, i.e., the financial harm caused by the defendant. If

the harm caused by the defendant was also caused by other factors

beyond the defendant's control, the court should consider making

a downward departure to better reflect the seriousness of the

defendant's offense.


                             B. Caselaw

           This Court's caselaw also suggests the presence of a

causation requirement in the definition of loss.   In United

States v. Kopp, 951 F.2d 521, we exhaustively analyzed the

definition of loss under section 2F1.1.    We concluded that the

definition of loss for fraud sentencing under section 2F1.1 is

not the same as section 2B1.1's "amount taken" rule even though

section 2F1.1 makes reference to section 2B1.1's definition of

loss.   See id. at 529 ("Application Note 7 to USSG § 2F1.1 does
not say that the definitions of 'loss' for theft and fraud cases

           of the defense and hence a downward departure
           may be appropriate, Application Note 11
           included situations where the
           "misrepresentation . . . is not the sole
           cause of the loss."

951 F.2d at 531. However, this language was followed immediately
by the statements quoted in the text, which make clear that we
were speaking of situations in which the defendant caused the
loss, but where other factors also played a causal role.


                                 15
are identical, just that '[v]aluation of loss is discussed in the

Commentary to § 2B1.1 . . . .").       In Kopp, the defendant procured

a bank loan by means of fraudulent misrepresentations.      The

district court calculated loss as the full amount of the loan,

despite the fact that the victim of the fraud -- the bank --

recovered most of the loan amount by selling the property

securing the loan.   In rejecting the government's argument that

loss was appropriately calculated because the face value of the

loan was the amount "taken," USSG § 2B1.1 Note 2, we sought to

develop a sensible definition of loss for the fraud context.

Thus, we defined "fraud 'loss' as . . . the amount of money the

victim has actually lost."     Id. at 536.0

           Although we were not directly confronted with the

causation issue we face here, we suggested that our definition of

fraud loss as "the amount of money the victim has actually lost"

incorporates a causation requirement.       We stated, in response to

the government's argument, that "Application Note 11 [of the

original Guidelines] made it clear that actual loss was how much

better off the victim would be but for the defendant's fraud."

Id. at 531 (emphasis added).     This "but for" statement is a

classic articulation of the causation requirement.      See infra

part II.   More importantly, the fairness concerns that drove Kopp

are very much present in this case.       In Kopp, we were concerned

with the district court's assignment as loss a financial harm

that had not occurred.   Although the issue here -- the district

0
The current Guidelines incorporate this definition of fraud
loss. See USSG § 2F1.1 Application Note 7 (1994).


                                  16
court's assignment as loss a financial harm that did occur but

which may not have been caused by the defendant -- is perhaps

analytically distinct, it shares the same basic problem:

punishing the defendant for harm that he or she did not cause.

          I also note that this Court and others have repeatedly

suggested the need for finding causation in making a loss

determination.   See, e.g., United States v. Daddona, 34 F.3d 163,

170 (3d Cir.) (remanding for resentencing because the record did

not contain any indication that the loss figure used by the

district court "was due to the fraud of the appellants"), cert.

denied, 115 S. Ct. 515 (1994); United States v. Marlatt, 24 F.3d

1005, 1007 (7th Cir. 1994) (applying proximate cause analysis in

assessing the district court's determination of loss); United

States v. Harper, 32 F.3d 1387, 1392 (9th Cir. 1994) ("What we do

insist upon, however, is use of a realistic, economic approach to

determining what losses he truly caused or intended to cause . .

. ."), cert. denied, 115 S. Ct. 1162 (1995); United States v.

Wilson, 980 F.2d 259, 262 (4th Cir. 1992) ("When the offense

involves making a false statement, the inquiry to determine loss

must focus on the amount of loss related to the false

statement.").


                     C. Policy Considerations

          Finally, good sentencing policy requires that there be

a causal link between the defendant's crime and the harm on which

his or her sentence is based.   This causation requirement effects

two fundamental Guidelines sentencing policies:   First, that


                                17
courts sentence defendants according to "the nature and degree of

the harm caused by the[ir] offense[s],"   United States v. Kopp,

951 F.2d 521, 529 (3d Cir. 1991) (quoting 28 U.S.C.A. § 994(c)(3)

(West Supp. 1991)) (emphasis added); and second, that courts

sentence similarly situated defendants similarly, see id.; USSG

Part A, section 3, p. 1.2 (1988) ("Congress sought uniformity in

sentencing by narrowing the wide disparity in sentences imposed

by different federal courts for similar criminal conduct by

similar offenders.")   Sentencing defendants on the basis of

fortuitous harm that they in no sense caused would thwart both of

these policies.


                          D. Conclusion

          In summary, I am convinced that a harm cannot be

considered loss under section 2F1.1 unless the defendant's

conduct was a cause of that harm.    The causation requirement

emanates from the interpretive principles of section 1B1.3, the

provisions of the fraud and theft guidelines, and is supported by

caselaw and policy considerations.    However, because of the

sparse and sometimes confusing guidance provided by the

Application Notes, I believe that the Sentencing Commission

should articulate a comprehensive approach to determining loss.

Until that time, I believe that my approach best harmonizes the

many provisions at issue and best accords with fundamental

sentencing policy.


          II. The Content of the Causation Requirement


                                18
          Having established that the Guidelines contemplate a

causation requirement in its definition of loss, I must now

address the more difficult question of the content of the

causation requirement.    I need not, however, establish a

comprehensive definition of causation under the Guidelines, for

the figure approved by the majority -- the $20 million in unpaid

claims -- fails even the most minimal causation test.      In

addition, it would be unwise to embark on such an ambitious task

when subsequent cases faced with concrete problems can better

resolve the various issues raised.

          The notion of causation runs throughout the law --

including the criminal law -- and it is generally understood to

encompass two concepts.   A defendant's conduct must generally be

both the "cause in fact" and the "proximate cause" of some harm

before liability is imposed.    See Wayne R. LaFave & Austin W.

Scott, Jr., 1 Substantive Criminal Law § 3.12, at 393-99 (1986);

Richard A. Epstein, Cases and Materials on Torts 363-64 (5th ed.

1990); 4 Fowler V. Harper et al., The Law of Torts § 20.2, at 89-

90, § 20.4, at 130-33 (2d ed. 1986) ("Harper, James, & Gray"); W.

Page Keeton et al., Prosser and Keeton on The Law of Torts § 41,
at 263-65 (5th ed. 1984) ("Prosser & Keeton").      While neither of

these concepts are susceptible to uncontroversial definitions, a

working understanding of them is useful.

          The requirement of cause in fact purports to be an

empirical test of whether the defendant's conduct was a necessary

antecedent to the harm at issue.      See, e.g., Harper, James, &
Gray, supra § 20.2, at 89-91.    The most common expression of


                                 19
this test is the "but for" formulation:   the defendant's conduct

is a cause in fact of some harm if the harm would not have

occurred but for the defendant's conduct.   See LaFave & Scott,

supra, at 393-94; Harper, James, & Gray, supra, § 20.2, at 91;

Prosser & Keeton, supra, at 265-66.   LaFave and Scott note that

the Model Penal Code and several state codes put forth the "but

for" test explicitly.   See LaFave & Scott, supra, at 394 n.11

(stating that "Model Penal Code § 2.03(1) declares that conduct

'is the cause of a result when . . . it is an antecedent but for

which the result in question would not have occurred'" and citing

similar state codes).

          Courts sometimes apply a different test -- the

"substantial factor" formulation -- to special causation problems

not adequately addressed by the "but for" test.   For example,

when the conduct of each of two actors acting independently could

have caused the harm at issue, and thus neither is the "but for"

cause, courts generally hold both actors liable under the

substantial factor test.   See, e.g., Prosser & Keeton, supra, at

268.

          Proximate cause, on the other hand, is a more

explicitly policy-based determination of whether an actor's

conduct, despite its being a cause in fact, is too tenuously

linked to the injury to hold the actor liable.    See, e.g.,
Prosser & Keeton, supra, § 42, at 272-73 (5th ed. 1984).       Courts

have used various different tests to address this issue.       See,
e.g., id. at 273-80.




                                20
           In this case, we are concerned only with the

requirement of cause in fact.0   Because the facts do not present

any special causation problems, I need only apply the standard

"but for" test.   I now turn to a review of the facts and

application of the "but for" test to them.


           III. Application of the Causation Requirement

                      A. The Misrepresentation

           I take issue with the majority's assertion that on the

facts of this case, there is a "clear causal connection between

the fraud and the policy holders' losses."   Neadle's only fraud

was in misrepresenting that he had $700,000 of unsecured assets

backing his insurance venture.   In order to conclude, as the

majority and district court do, that this fraud was a "but for"

cause of the over $20 million in unpaid claims, one must make the

following inferences:   first, that had Neadle not committed

fraud, he would not have obtained an insurance license; second,

that the AMPAC insureds would have thus purchased insurance from

other insurance companies; and third, that these insurance

companies would have paid all of their Hurricane Hugo related

claims.0   While these inferences might be plausible in theory,

0
 It may ultimately be appropriate to hold that only harm
proximately caused by the defendant's conduct can be deemed
"loss." See United States v. Marlatt, 24 F.3d 1005, 1007 (7th
Cir. 1994) (applying proximate cause analysis to a district
court's determination of loss). However, it is unnecessary to
reach this question on the facts of this case.
0
 These inferences were explicit in the district court's opinion:

           If the defendant had not obtained his license
           by fraud, he would not have been in a

                                 21
there is no evidence in the record to support them.      In fact,

record evidence undercuts the plausibility of such inferences.

            First, there is no evidence that Neadle would have been

unable to obtain an insurance license without committing fraud.

Given his ability to post $500,000 in cash when his surety bond

was called into question, he might have found backers for another

$700,000.    If Neadle had obtained a license legitimately, he

could have issued insurance to the same policy holders, and AMPAC

still would have been unable to meet the $24 million in Hurricane

Hugo claims.    At best, the policyholders would have obtained an

additional $700,000.0

            Second, no record evidence supports the inference that

had AMPAC not been in the insurance business, AMPAC policy

holders would have purchased insurance from other companies. This

is a striking omission given the recent history of the

unavailability of insurance in the Virgin Islands.       Indeed, the

record shows that only local companies wrote policies for the

same kinds of customers and coverage that AMPAC did, and that

there were few local companies in operation.    Deverita

            position to issue insurance coverage and
            would not have had the customers or
            policyholders he did have. Therefore, the
            policyholders would have obtained coverage
            from other insurance companies, companies
            that did meet Hurricane Hugo claims.
0
Even if AMPAC had initially held an additional $700,000 in
unencumbered assets, it is unclear that the government or the
policyholders would have obtained these funds. An insurance
company, once qualified, is not required to keep the full
$700,000 as part of its capital structure. Subject to certain
limitations, an insurance company can "make use of its surplus
for the development of its business." 22 V.I. Code § 465.

                                 22
Sturdivant, then director of Banking and Insurance, testified

before the grand jury as follows:
               Considering the fact that we had very
          few companies operating in the territory at
          the time that [Neadle] came on board, as I
          said, we had a mass exodus of companies from
          the territory in '85 and we had chaos,
          basically with unauthorized companies in '87.
          And so by the time Mr. Neadle and a couple of
          other domestics came on the scene in '88,
          late '87, we felt that perhaps the market was
          turning around. The availability problem was
          no longer acute because people were receiving
          cover [sic]. And oftentimes the small
          domestic companies were willing to provide
          the kind of coverage that many of the larger
          companies would not provide. [The larger
          companies] often could pick and choose their
          clients.

Thus, one cannot assume that the AMPAC policy holders would have

found insurance elsewhere.

           Finally, the record is devoid of evidence supporting

the inference that other insurance companies would have met all

of their Hurricane Hugo claims.    Rather, the record shows that at

least one insurance company that did not misrepresent the amount

of its assets, American Alliance, was unable to pay all of its
Hurricane Hugo claims.   The record also shows that most of the

small domestic insurance companies -- possibly the only companies

covering the same kinds of risks and policyholders as AMPAC --

lacked the assets necessary to cover the huge Hurricane Hugo

losses.   Sturdivant testified before the grand jury that "just

about all of the companies that came on board, the small domestic

companies, came with the minimum statutory capital and surplus

requirements.   They came with $1.2 million and that's it."   If



                                  23
AMPAC had not obtained a license to sell insurance, its customers

may have purchased insurance from American Alliance or other

companies unable to meet Hurricane Hugo claims.

          On this record, then, I cannot conclude that Neadle's

fraud was a cause in fact of AMPAC's inability to pay the over

$20 million in claims.    In summary:   (1) had Neadle met the

$700,000 requirement, AMPAC would still have been unable to pay

the Hugo losses; (2) the district court's (and the majority's)

intimation that other companies would have written the AMPAC

policies is purely speculative and unsupported by the record; (3)

if other companies were willing to provide the coverage AMPAC

did, they may have been similarly undercapitalized; and (4) at

least one other company that met the $700,000 requirement was

unable to pay its Hugo claims.


                     B. United States v. Robichaux

          United States v. Robichaux, 995 F.2d 565 (5th Cir.),

cert. denied, 114 S. Ct. 322 (1993), which the majority cites to

support its decision, is distinguishable.     In that case, the

defendant misrepresented to an auditing firm hired by the

Louisiana Insurance Commission that securities he had assigned to

an insurance company were unencumbered.    The firm relied on the

defendant's statement and issued a favorable audit.    Two years

later, the company was declared insolvent.    The Fifth Circuit

upheld the district court's conclusion that the defendant was

responsible for all of the losses attributable to the insurance

company's failure.


                                  24
          Notably, the Fifth Circuit applied a cause in fact

analysis similar to the one I describe in this opinion.   However,

it found that the district court's inferences were "plausible in

light of the record read as a whole":
          It is not clearly erroneous to assume that if
          [the auditor] had not issued a favorable
          audit for [the insurance company], which only
          occurred because of [the company's]
          fraudulently inflated balance sheet, the
          Commission would have acted to liquidate the
          firm at an earlier date and minimized the
          losses.

Id. at 571.
           The Fifth Circuit's holding that the district court's

inferences were "plausible in light of the record read as a

whole" says nothing about this case, where the record casts

serious doubt on the plausibility of the district court's

inferences.   To the extent Robichaux supports a relaxed inquiry

into causation -- which I do not think is the case -- I disagree

with it for the reasons expressed in Part I.


                C. The Majority's Other Arguments

          The remainder of the majority's reasoning fares no

better.   The majority asserts that "the deceitful and slipshod

way in which Neadle ran the business" -- i.e., failure to keep

proper books and misrepresentations in quarterly reports --

"supports the district court's attribution of responsibility to

him for the [$20 million] losses."   This assertion suggests two

possible arguments, neither of which is convincing.




                                25
          First, the majority might mean that Neadle's poor

record-keeping was a cause of the unpaid AMPAC claims.    Evidence

in the record suggests that beyond the minimum capital

requirements, the Insurance Division policed the funds of

insurance companies to ensure that companies maintained adequate

reserves in proportion to the coverage they wrote.    Thus, if we

assume that AMPAC was inadequately capitalized,0 it is possible

that if Neadle had kept accurate books, the Insurance Division

might have discovered the inadequacy and taken remedial measures.

          However, even if Neadle's poor accounting was, in some

sense, a cause of the unpaid AMPAC claims, the Guidelines do not

allow Neadle to be sentenced on the basis of this harm.    Under

section 1B1.3, only certain harms sufficiently connected to the

defendant's criminal conduct can be used to calculate a specific

offense characteristic.   See supra part I.   On a different

record, it might be argued that Neadle's poor record-keeping was

a means of hiding his misrepresentations and thus that harms

caused by the poor record-keeping "occurred . . . in the course

of attempting to avoid detection or responsibility for th[e]

offense [of conviction],"   USSG § 1B1.3(a)(1).   But here no

record evidence suggests that Neadle's lax accounting was a means

of avoiding detection.

          Second, the majority might be asserting that Neadle

meant to use AMPAC essentially to rob his clients, and thus that

he intended to cause some significant loss.   Courts may sentence

0
This assumption is probably not justified given the $4 million
in reinsurance that AMPAC maintained. See infra.


                                26
defendants on the basis of "intended loss" if that figure is

greater than actual loss.   USSG § 2F1.1 Application Note 7; see

also USSG § 1B1.3(a)(3) (stating that courts may consider harm

that was "the object of" the defendant's conduct).

          However, once again, there is no record evidence that

Neadle intended any loss.   In fact, the record is replete with

evidence to the contrary.   Neadle purchased $4 million worth of

reinsurance, an amount, that according to his uncontroverted

testimony, professionals had advised was sufficient.   The Virgin

Islands did not require that companies have any reinsurance, and

no one in the Virgin Islands government told Neadle how much

reinsurance AMPAC should carry.    Until Hurricane Hugo, AMPAC paid

claims promptly, and was never reprimanded or sanctioned by the

Insurance Division for wrongful denial or failure to pay claims.
                 D. The Proper Calculation of Loss

          Having concluded that the bulk of the unpaid AMPAC

claims was not caused by Neadle's misconduct and thus cannot be

assigned as loss under section 2F1.1, I feel obligated to suggest

how loss might appropriately be calculated.    In so doing, I

question the basic model employed by the district court and the

majority -- that loss is based on the unmet claims of the

policyholders.

          One reasonable estimation of loss in this case is the

$700,000 that Neadle misrepresented as unencumbered.   Under the

majority's model, $700,000 is a sensible loss determination on

several grounds.   Had Neadle not committed fraud and still

obtained an insurance license, AMPAC would probably have $700,000


                                  27
more in assets than it does now, and the AMPAC insureds would be

that much better off.   Or, had the AMPAC insureds bought

insurance from other legitimately formed insurance companies, the

evidence suggests that these companies may have been similarly

capitalized.

          A different model for measuring loss that is consistent

with the text and structure of section 2F1.1 would also generate

a figure of $700,000.   The indictment charged Neadle with

misrepresenting the status of the $700,000 to the Virgin Islands

government.    If we focus on the Virgin Islands as the victim of

the fraud, the loss is the governmental or societal loss of the

$700,000 reserve.

          Alternatively, we might measure loss in terms of what

Neadle obtained by virtue of his fraud.   See   USSG § 2F1.1

Application Note 8; see also Kopp, 951 F.2d at 530 (stating that

the defendant's gain can be used as a measure of loss when there

is some loss but it is not measurable).   Here, Neadle obtained

the premiums of the policyholders to whom he falsely represented

were validly insured.   While I cannot derive this sum from the

record, I surmise that it approaches $700,000 annually.

          I do not deny that a sentence based on my suggested

loss calculations might give Neadle less time than he deserves.

To rectify this problem, the district court could depart upward

if the case meets the departure standard (although upper

calibration would have to start at the proper base offense

level).   See United States v. Kikumura, 918 F.2d 1084 (3d Cir.




                                 28
1990).   If the resulting sentence is still too lenient, that is a

problem that only the Commission can address.


                          IV. Conclusion

           For the reasons I have stated, the Guidelines require a

finding of causation before some harm is deemed loss under

section 2F1.1.   This requirement demands, at the least, that the

defendant's conduct be a cause in fact of the harm.   Because the

record contains insufficient evidence to find that Neadle's fraud

was a cause in fact of the $20 million in unpaid claims, I

respectfully dissent.




                                29
