                                                                                                                           Opinions of the United
2001 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


3-30-2001

United States v. Diaz
Precedential or Non-Precedential:

Docket 00-3168




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Filed March 30, 2001

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 00-3168

UNITED STATES OF AMERICA

v.

CAROLE DIAZ, aka
CAROLE M. CEFARATTI

       Carole Cefaratti-Diaz,

       Appellant

Appeal from the United States District Court
for the Middle District of Pennsylvania
(D.C. Criminal Action No. 99-cr-00065)
District Judge: Honorable Sylvia H. Rambo

Argued September 14, 2000

Before: ROTH, MCKEE and RENDELL, Cir cuit Judges

(Opinion filed: March 30, 2001)

       David M. Barasch
       United States Attorney

       Theodore B. Smith, III (Argued)
       Assistant U.S. Attorney
       228 Walnut Street
       Harrisburg, PA 17108

        Attorneys for Appellee
       Edna Ball Axelrod, Esquire (Argued)
       76 South Orange Avenue
       Suite 305
       South Orange, NJ 07079

        Attorney for Appellant

OPINION OF THE COURT

ROTH, Circuit Judge:

Defendant, Carole Diaz, a/k/a Carole M. Cefaratti
("Diaz"), pled guilty to a four-count information that
included charges of fraud, in violation of 18 U.S.C. SS 1341
and 1342, and money laundering, in the form of engaging
in a monetary transaction in property derived from
specified unlawful activity, in violation of 18 U.S.C.
S 1957(a). She was sentenced under the federal Sentencing
Guidelines to a term of 33 months in prison,fined, and
ordered to pay restitution to the United States Department
of Education ("DOE") in the amount of $846,000.

On appeal, Diaz challenges two aspects of her sentence.
First, she argues that the District Court err ed in computing
her prison term based on the sentencing guideline
applicable to the money laundering charge, U.S.S.G.
S 2S1.2, rather than the guideline applicable to the fraud
charge, U.S.S.G. S 2F1.1. The latter guideline would have
resulted in 6-12 fewer months in prison. This issue
requires us to consider whether Amendment 591 to the
Sentencing Guidelines, effective on November 1, 2000,
should apply retroactively to Diaz's sentence and whether
our decision in United States v. Smith, 186 F.3d 297 (3d
Cir. 1999) remains good law, at least for sentences imposed
prior to the effective date of the amended guidelines. If
Smith is still applicable to Diaz's situation, we must also
review and reconcile several recent opinions interpreting
Smith and the "heartland" of the money laundering
guideline, including United States v. Mustafa , 238 F.3d 485
(3d Cir. 2001), United States v. Bockius , 228 F.3d 305 (3d
Cir. 2000), and a decision involving the same issue from
Diaz's brother and co-misfeasor, United States v. Cefaratti,

                                 2
221 F.3d 502 (3d Cir. 2000). Second, Diaz challenges the
amount of restitution she was order ed to pay.

For the reasons that follow, we hold that Diaz should
have been sentenced under the fraud guideline rather than
the money laundering guideline, and we will vacate the
sentence and remand this case to the District Court for
resentencing under S 2F1.1. We will affirm the decision of
the District Court with regard to the amount of restitution
that Diaz must pay.

I. FACTS AND PROCEDURAL HISTOR Y

Diaz, along with her brother, Frank Cefaratti ("Cefaratti"),
and her sister, owned the Franklin School of Cosmetology
and Hair Design ("Franklin School"), a for -profit vocational
school for aspiring beauticians. Diaz and Cefaratti were
responsible for day-to-day operations, with Diaz primarily
in charge from 1992 through July 1994, when her siblings
bought her out and Cefaratti assumed control of the school.

The Franklin School participated in federal student
financial assistance programs, including the Pell Grant
Program, in which financially needy students obtained
grants to cover tuition and expenses,1 and the Federal
Stafford Loan Program, through which students could
obtain federally guaranteed, low-interest loans from private
lenders.2 The Franklin School was authorized to act as a
_________________________________________________________________

1. Pell Grant funds are transferred fr om the United States Treasury
directly to the school's trust account, wher e they are held in trust
until
the school is authorized to transfer the money into its operating account
to pay the student's bills for tuition and other expenses. Students need
not repay Pell Grant funds.

2. Stafford loans are guaranteed against default by state and private not-
for-profit guarantee agencies. In the event of default by the student-
borrower, the lender may file a default claim against the guarantee
issued by the guarantee agency, which, if unable to recover from the
student, in turn is authorized to seek r eimbursement for the loss from
the DOE. Stafford funds are mailed by the private lender to the school
in the form of a check made payable to the student and the school. Once
the student endorses the check, the school deposits it into its account
to cover the student's expenses.

                               3
disbursing agent for Pell Grants and to receive Stafford loan
checks.

In order to participate in the programs, Diaz and others,
on behalf of the Franklin School, agreed with the DOE that
the school would comply with all program rules and
regulations, would use the funds advanced solely for the
specified educational purposes, and would pr operly account
for the funds received. DOE regulations limit eligible
students to those who had a high school diploma or a
general educational development program diploma ("GED")
or had passed a test demonstrating their ability to benefit
from the training offered by the school. The DOE may limit
or terminate a school's participation in federal student
financial assistance programs if the school's students
default at excessive rates. A student is consider ed in
default if, after 180 days, the student has not made
repayments on the loan and has not requested and been
granted deferment, forbearance, or some other temporary
postponement of repayment obligations. Repayment
obligations begin six months after a student has left school.
The DOE determines default rates accor ding to the
percentage of students who must begin r epayment in a
given fiscal year and who default prior to the end of the
following year. Under the regulations, default rates
exceeding 25 percent for three consecutive years may result
in a school's automatic termination fr om the Stafford Loan
Program and default rates in excess of 40 per cent for one
year make a school subject to termination fr om the Pell
Grant Program.

Beginning in or around October 1992, Diaz dir ected
employees of the Franklin School to prepar e and mail
falsified forbearance and deferment for ms to lenders in the
name of former Franklin School students who had obtained
financial assistance and were close to defaulting. These
employees, at Diaz's direction, forged student signatures on
these forms, used language given to them by Diaz in
completing the forms, and falsely repr esented themselves,
in telephone conversations with lenders, as for mer Franklin
School students needing deferment or forbearance forms.3
_________________________________________________________________

3. Only former students could request and receive such forms.

                               4
Diaz then caused the Pell funds received fr om the Treasury
and the Stafford funds received fr om private lenders to be
transferred from Virginia and Pennsylvania to the school's
account in New Jersey. During the time that Diaz dir ected
the school and used these funds for its operation, the
school was a legitimate enterprise.

Diaz also directed that a Franklin School employee
prepare and mail a false federal student loan application, in
the name of Carole Diaz, to several private banks to
determine whether they would make loans to Franklin
School students. In early 1994, a bank in Wilkes Barre,
Pennsylvania, made a loan to Carole Diaz and mailed a
check in the amount of $2,625, payable to the Franklin
School and Carole Diaz, which Diaz deposited into her
personal account. Franklin School employees, again at
Diaz's direction, completed and submitted false attendance
status reports for "Carole Diaz" to the New Jersey Higher
Education Assistance Authority. Finally, Diaz dir ected
employees to officially register "Car ole Diaz" as a student
and to create a file in that name, in the event of an audit.

In 1993, the DOE determined that the Franklin School's
default rates for 1991 and 1992 had exceeded 50 per cent;
the school therefore faced termination from the federal
assistance programs if its default rate was again excessive
in 1993. Ninety percent of the Franklin School's revenues
came from federal student financial assistance funds; thus,
the school would likely have been forced to close if it were
terminated from the programs. In February 1996, the DOE
determined the school's 1993 default rate to be 9.5 percent,
a falsely and artificially low figure that was based on the
false forbearance and deferment forms submitted at Diaz's
instruction between 1992 and July 1994. The false forms
made it appear that numerous former Franklin School
students had received deferment or forbearance, when in
fact they were in default. The true default rate was much
higher than 25 percent and, but for the fraudulent
deferment and forbearance forms, would have resulted in
the school being terminated from the federal student
financial assistance programs in February 1996. The
submission of the false forms enabled the school to remain
in the programs and therefore to continue operating

                               5
through and beyond July 1994, when Diaz was r emoved
from her position and replaced by Cefaratti. The school
continued to receive Stafford and Pell funds until July
1997, when it was terminated from thefinancial assistance
programs. Between February 1996 and July 1997, the
school received and deposited approximately $846,000 in
funds from the Pell and Stafford pr ograms. The school was
not legally entitled to these funds and it would not have
received them but for the use of false forbearance and
deferment forms.

Diaz was charged in a four-count infor mation, filed on
March 11, 1999, in the United States District Court for the
Middle District of Pennsylvania. Count I char ged mail
fraud, in violation of 18 U.S.C. SS 1341 and 1342, based on
the mailing of falsified forbearance forms in April 1994;
Count II charged federal student assistance fraud, in
violation of 20 U.S.C. S 1097(a), based on the school's
receipt of student loan and grant funds fr om October 1992
until July 1997; Count III charged money laundering under
18 U.S.C. S 1957(a),4 based on the deposit of the Stafford
and Pell funds into the school's accounts, again covering
the period from 1992 until July 1997; and Count IV
charged making a false statement, in violation of 18 U.S.C.
S 1014, based on the loan application submitted in the
name of "Carole Diaz." Also on Mar ch 11, Diaz entered into
a plea agreement, waiving indictment and pleading guilty to
the four counts in the information. The United States
agreed not to bring any other criminal char ges, other than
possible criminal tax charges, against Diaz based on her
involvement in these offenses. It also agr eed to recommend
a prison sentence within the guideline range and to
recommend that Diaz receive a three-point reduction in her
offense level if she clearly demonstrated acceptance of
responsibility for her conduct. The District Court accepted
Diaz's guilty plea at a hearing on May 18, 1999.
_________________________________________________________________

4. That section provides that whoever "knowingly engages or attempts to
engage in a monetary transaction in criminally derived property that is
of a value greater than $10,000 and is derived from specified unlawful
activity" may be subject to fine and imprisonment for up to ten years.
See 18 U.S.C. SS 1957(a), (b).

                                6
The presentence investigation report ("PSI") computed a
total offense level under the sentencing guidelines of 22.
The report calculated a base offense level of 17, applying
U.S.S.G. S 2S1.2, the guideline applicable to a S 1957(a)
offense. The PSI increased this by four levels because the
value of the funds was between $600,000 and $1 million,
pursuant to U.S.S.G. SS 2S1.2(b)(2) and 2S1.1(b)(2)(E); by
two levels because the funds were proceeds of specified
unlawful activity, pursuant to U.S.S.G. S 2S1.2(b)(1)(B); and
by another two levels based on Diaz's managerial r ole with
respect to other participants in the criminal conduct,
pursuant to U.S.S.G. S 3B1.1(c). The PSI then
recommended a three-level downward adjustment for
acceptance of responsibility, pursuant to U.S.S.G.
SS 3E1.1(a), (b). Diaz had no prior criminal record, giving
her a criminal history category of I. The guideline range
under the PSI was 41 to 51 months. The PSI also
determined that the government was entitled to restitution,
pursuant to the Mandatory Victims Restitution Act
("MVRA"), 18 U.S.C. S 3663A and 18 U.S.C. S 3664(f)(1)(A),
in the amount of $846,000 and that Diaz was liable for full
restitution.

Diaz objected to three aspects of the PSI. First, she
argued that, under our decision in United States v. Smith,
186 F.3d 290 (3d Cir. 1999), her conduct was outside the
heartland of the money laundering guideline and she
therefore should have been sentenced under the fraud
guideline, U.S.S.G. S 2F1.1. This would have r esulted in a
base offense level of six, a total offense level of 18, and a
prison range of 27 to 33 months. Second, Diaz ar gued that
some of the $846,000 received by the Franklin School from
the DOE, and therefore ordered in restitution, was not
improperly used and that any amounts legitimately used
should be deducted from the restitution amount. Finally,
Diaz sought an additional downward departur e for
diminished capacity.

At sentencing on February 4, 2000, the District Court
heard testimony and arguments on those objections. The
Court rejected Diaz's argument as to the appropriate
guideline, stating that this was a money laundering offense.
The Court granted a two-level departure for diminished

                               7
capacity, reducing the offense level to 20, a custody range
of 33 to 41 months; the court sentenced Diaz to 33 months,
the bottom of that range.5 The Court ordered that Diaz pay
restitution in the amount of $846,000, although the Court
allowed credit for any amounts that Diaz could show had
been paid back.

Diaz timely appealed.

II. JURISDICTION

The District Court had original jurisdiction over an
offense against the United States, pursuant to 18 U.S.C.
S 3231. We have appellate jurisdiction over an appeal of a
final decision by a District Court, pursuant to 28 U.S.C.
S 1291, and over an appeal of a final sentence in a criminal
case, pursuant to 18 U.S.C. S 3742(a).

III. APPLICABLE GUIDELINE

We first address Diaz's argument, based upon our
decision in Smith, supra, that the District Court erred in
computing her sentence by applying the money laundering
guideline, U.S.S.G. S 2S1.2, rather than the fraud guideline,
U.S.S.G. S 2F1.1. Diaz was convicted of four separate
offenses, including fraud under 18 U.S.C.SS 1341 and
1342, and money laundering, under S 1957(a), for engaging
in a monetary transaction in criminally derived pr operty
from specified unlawful activity.

Under the sentencing guidelines, the District Court must
group the counts into a single unit when ther e are multiple
counts all involving substantially the same har m to the
same victim and two or more acts or transactions
connected by a common criminal objective or constituting
part of a common scheme or plan. See U.S.S.G. S 3D1.2(b);
see also Smith, 186 F.3d at 297. The victim in all of Diaz's
_________________________________________________________________

5. During the sentencing hearing, the parties discussed what the
guideline range would have been had the District Court accepted Diaz's
argument and sentenced under the fraud guideline. After the two-level
reduction for diminished capacity, the total of fense level would be 16,
resulting in a custody range of 21 to 27 months.

                               8
offenses was the same, the DOE. All of her acts were part
of a common plan: to keep the Franklin School eligible for,
and continuing to receive, Pell and Staf ford funds by
reducing the school's student default rates. After grouping
the offenses, the District Court must apply to the entire
group the highest offense level applicable to the counts in
the unit. See U.S.S.G. SS 3D1.3(a), 3D1.4; see also Smith,
186 F.3d at 297. In the instant case, S 2S1.2, the money
laundering guideline, carried a base offense level of 17,
while S 2F1.1, for fraud, carried a base of fense level of 6;
therefore, the District Court applied the higher guideline for
money laundering to the entire unit. The initial choice of
guideline is a legal question that, having been raised by
Diaz before the District Court, is subject to plenary review
on appeal. See Smith, 186 F.3d at 297.

A

We first must consider whether to apply the pre-
amendment sentencing guidelines, as we interpr eted them
in Smith, or the sentencing guidelines as amended by
Amendment 591, effective November 1, 2000. 6 The general
rule is that a defendant should be sentenced under the
guideline in effect at the time of sentencing. See United
States v. Menon, 24 F.3d 550, 566 (3d Cir . 1994) (citations
omitted); U.S.S.G. S 1B1.11(a). Diaz was sentenced in
February 2000, prior to the effective date of Amendment
591. But an amended guideline may be applied
retroactively if it merely clarifies the law in existence at the
time of sentencing. See United States v. Mar molejos, 140
F.3d 488, 490 (3d Cir. 1998). The question, therefore, is
whether Amendment 591 clarifies the prior version of the
guidelines so that it can be applied retr oactively to Diaz's
sentence. If it can be applied retroactively, we must affirm
the sentence.

We avoided the question of retroactivity in Mustafa, 238
F.3d at 496, because we concluded that the District Court's
_________________________________________________________________

6. Note that Amendment 591 was not yet ef fective when we heard oral
argument in this appeal on September 14, 2000. If our opinion had been
issued before November 1, 2000, the above discussion of the effect of the
Amendment would not be necessary.

                               9
decision to sentence under the money laundering guideline
was appropriate either under the amended guidelines or
under the Smith framework. By contrast, because the Smith
approach may produce a differ ent result than will the
amended guidelines in the instant case, the issue of
retroactivity is squarely befor e us for resolution. To answer
this question, we must compare the sentencing approach
under Smith with the approach r equired under the
amended guidelines. Smith, like the pr esent case involved
multiple counts of conviction; in Smith, embezzlement and
money laundering. As we note above, S 3D1.3 pr ovides that
in a group of closely related counts, the offense level
applicable to the group is that of the count with the highest
offense level. The applicable offense level is found by
referring to the Statutory Index (Appendix A).

In Smith, we instructed the District Court to consult
Appendix A for a list of guidelines that corr espond to the
statute of conviction (the count with the highest of fense
level, i.e., money laundering). The Intr oduction to the
Statutory Index (Appendix A) provided, however , that, if " `in
an atypical case' the guideline indicated for the statute of
conviction is `inappropriate because of the particular
conduct involved,' the court is instructed to use the
guideline `most applicable to the nature of the offense
conduct charged.' " Smith, 186 F .3d at 297 (quoting U.S.
Sentencing Manual App. A at 417 (Introduction)); see U.S.
Sentencing Manual app. A Intro. at 425 (1998). We
concluded that the guidelines required the sentencing court
to perform a heartland analysis in making the initial choice
of the appropriate guideline to apply in or der to determine
whether the conduct being punished falls within a set of
typical cases embodying the conduct described in each
guideline.7 See id. at 297-98 (citations and internal
quotation marks omitted); see also Koon v. United States,
518 U.S. 81, 94 (1996) (discussing heartland analysis and
the power of district courts in imposing sentence to
consider circumstances not considered by the Sentencing
Commission in creating the guidelines). W e created a two-
_________________________________________________________________

7. This heartland analysis was identical to that performed in the context
of a request for a departure from the guidelines. See Smith, 186 F.3d at
298.

                               10
step approach, with a court first deciding whether the
conduct is "atypical" of the conduct usually punished
under the statute of conviction (money laundering) and,
second, if it is atypical, determining what other guideline
would be more appropriate for sentencing. See Smith, 186
F.3d at 297 (citing United States v. V oss, 956 F.2d 1007,
1009 (10th Cir. 1992)).

Amendment 591 changed U.S.S.G. SS 1B1.1 and 1B1.2,
the Application Note to S 1B1.2, and the Intr oduction to the
Statutory Index (Appendix A), and in doing so, appar ently
abrogates the Smith analysis. See Mustafa, 238 F.3d at 496
(suggesting, but not deciding, that "the continued relevance
of Smith is open to question"). Section 1B1.1(a) was
amended to delete language providing that the Statutory
Index (Appendix A) "provides a listing to assist" in
determining the applicable offense guideline. See U.S.
Sentencing Manual app. C at 29 (Supp. 2000).8 Section
1B1.2(a) was amended to replace the phrase"most
applicable" with "applicable" in instructing courts to
determine the guideline to be applied to the offense of
conviction. See U.S. Sentencing Manual app. C at 29
(Supp. 2000).9 The Amendment also deleted language in
Application Note 1 to S 1B1.2 providing that, "as a general
rule," the sentencing court was to use the guideline "most
applicable" to the offense of conviction and that the
Statutory Index (Appendix A) would "assist" in this
determination. See U.S. Sentencing Manual S 1B1.2,
Application Note 1, at 16 (1998). The new Application Note
unequivocally provides that the "court is to use" the
guideline provided in the Statutory Index (Appendix A) for
_________________________________________________________________

8. Compare U.S.S.G. S 1B1.1(a) (1998) ("Determine the applicable offense
guideline section from Chapter Two. . . . The Statutory Index (Appendix
A) provides a listing to assist in this determination.") (emphasis added)
with U.S.S.G. S 1B1.1(a) (2000) ("Deter mine, . . . the offense guideline
section from Chapter Two (Offense Conduct) applicable to the offense of
conviction.").

9. Compare U.S.S.G. S 1B1.2(a) (1998) ("Determine the offense guideline
section in Chapter Two (Offense Conduct) most applicable to the offense
of conviction[.]") (emphasis added) with U.S.S.G. S 1B1.2(a) (2000)
("Determine the offense guideline section in Chapter Two (Offense
Conduct) applicable to the offense of conviction[.]") (emphasis added).

                               11
the offense of conviction. See U.S. Sentencing Manual
S 1B1.2, Application Note 1, at 16 (2000); see also U.S.
Sentencing Manual app. C at 30 (Supp. 2000) (explaining
changes to Application Note). Finally, and most importantly,
Amendment 591 removed from the Intr oduction to the
Statutory Index (Appendix A) the language on which we
relied in Smith, 186 F.3d at 297, instructing courts to, "in
an atypical case," where "the guideline section indicated for
the statute of conviction is inappropriate because of the
particular conduct involved, use the guideline section most
applicable to the nature of the offense conduct charged in
the count of which the defendant was convicted." See U.S.
Sentencing Manual app. A Intro. at 425 (1998); see also
U.S. Sentencing Manual app. C at 30-31 (Supp. 2000)
(describing changes to Statutory Index).

The amendment reflects a change from the permissive to
the mandatory. The sentencing court no longer uses the
Statutory Index (Appendix A) as an aid in finding the most
applicable guideline among several possibilities; the
Statutory Index (Appendix A) now conclusively points the
court to the one guideline applicable in a given case.

The Sentencing Commission specifically cited Smith in
explaining that the Amendment was intended, in part, to
overturn case law which permitted the courts in multiple
count cases to select a guideline based on factors other
than the conduct charged in the offense of conviction which
carries the highest offense level. See U.S. Sentencing
Manual app. C at 31 (Supp. 2000). The Amendment sought
"to emphasize that the sentencing court must apply the
offense guideline referenced in the Statutory Index for the
statute of conviction," unless the case falls within a narrow
exception not applicable to the instant case. See U.S.
Sentencing Manual app. C at 32 (Supp. 2000) (emphasis
added). The Commission particularly noted that some
courts had declined to use the offense guidelines referenced
in the Statutory Index (Appendix A) in cases that were
atypical or outside the heartland of a guideline, again citing
Smith. See U.S. Sentencing Manual app. C at 32 (Supp.
2000).

The only fair reading of the Amendment and of the
amended guidelines is that Smith, and its approach to

                                12
applying the guidelines, is no longer good law. In cases,
such as the instant one, in which several counts, including
fraud and money laundering, have been grouped pursuant
to U.S.S.G. S 3D1.2(b), the count carrying the highest
applicable offense level must apply to the entire group for
sentencing purposes. See U.S.S.G. SS 3D1.3(a), 3D1.4; see
also Smith, 186 F.3d at 297. Under the guidelines as
amended, sentencing courts may not conduct an inquiry
into the heartland of S 2S1.2 and courts have no discretion
to decide that the money laundering guideline is
inappropriate or not the most applicable guideline on the
facts of a given case.

A post-sentencing amendment to a guideline, or to its
comments, should be given retroactive ef fect only if the
amendment "clarifies" the guideline or comment in place at
the time of sentencing; the amendment may not be given
retroactive effect if it effects a substantive change in the
law. See Marmolejos, 140 F.3d at 490.

Although there is no bright line for distinguishing
between a substantive and clarifying amendment, we have
suggested that courts should look to the language of the
amendment, its purpose and effect, and whether the
guideline and commentary in effect at the time of
sentencing is consistent with the amended sentencing
manual. See id. at 491; United States v. Bertoli, 40 F.3d
1384, 1405 (3d Cir. 1994). Generally, if the amended
guideline and commentary overrules a prior judicial
construction of the guidelines, it is substantive; if it
confirms our prior reading of the guidelines and does not
disturb prior precedent, it is clarifying. See id. This analysis
may also implicate constitutional concerns because the
retroactive application of a sentencing pr ovision will violate
the Constitution's prohibition against ex post facto laws,
see U.S. Const. art. I, S 9, cl. 3, when such application
would "disadvantage" the defendant affected by it. See
United States v. Bogusz, 43 F.3d 82, 93 (3d Cir. 1994);
Bertoli, 40 F.3d at 1405; Menon, 24 F.3d at 566.

With this standard and the contours of the pre-
amendment and amended guidelines in mind, it is clear
that Amendment 591 effects a substantive change to the
Sentencing Guidelines as we interpreted them in Smith. For

                                13
that reason, it cannot be applied retr oactively to Diaz's
sentence. The amendment plainly abrogates and overrules
our prior construction of the guidelines in Smith and its
progeny. The Sentencing Commission explicitly cited Smith
as a court decision improperly choosing a guideline based
on considerations other than the statute of conviction,
strongly suggesting that the very purpose of the
amendment was to eliminate Smith. The amendment
deleted language from the Introduction to the Statutory
Index (Appendix A) on which we relied for our approach.

The amendment also alters courts' actual practice in
sentencing. Smith and its progeny wer e in agreement that
the guidelines required a sentencing court to conduct a
heartland analysis in selecting the most appr opriate
guideline for sentencing in the first instance, considering
whether the conduct at issue is "atypical;" if the court
concluded that the conduct was atypical or anomalous, it
was to sentence under a more appropriate guideline. See
Bockius, 228 F.3d at 311-12; Smith , 186 F.3d at 297. Thus,
conduct outside the heartland of money laundering was to
be sentenced under a different guideline, such as the fraud
guideline. See Smith, 186 F.3d at 300 (holding that
sentence in anomalous case of money laundering and fraud
should be under fraud guideline, rather than money
laundering guideline).10

Retroactive application raises ex post facto problems in
the instant case because Diaz potentially would be
disadvantaged by such retroactivity. Under Smith and its
progeny, Diaz could have been sentenced under the fraud
guideline rather than the money laundering guideline,
resulting in a sentence of 6-12 fewer months in prison,
were a court to find that her primary of fense conduct was
fraud, with money laundering only a minor, incidental part
of that overall conduct. See infra Part III.B. She therefore
_________________________________________________________________

10. The only difference in the later cases applying Smith was our
determination of the contours of the heartland of the money laundering
guidelines and our conclusion in those cases that the conduct at issue
was, in fact, within the heartland of money laundering. See Bockius, 228
F.3d at 313 (holding that conduct at issue constitutes typical money
laundering and therefore was in the heartland of that guideline for
sentencing purposes); Cefaratti, 221 F .3d at 514-15 (same).

                                14
may be entitled to be resentenced under S 2F1.1, depending
on the facts of her case and whether or not her conduct
falls within the heartland of money laundering. See infra
Part III.C. On the other hand, under the guidelines as
amended, no heartland analysis is necessary or pr oper and
Diaz would not have an opportunity to receive the lesser
sentence; she must be sentenced under the money
laundering guideline and we would be compelled to affirm
her sentence without further analysis. The Constitution
does not, however, permit retr oactive application of an
amended sentencing guideline where, as her e, a harsher
penalty might result. See Menon, 24 F .3d at 566.

Nevertheless, the Government argues that the
Amendment is clarifying and therefore capable of
retroactive application. It points to the Sentencing
Commission's characterization of the Amendment as
intended to "clarify" the inter-r elationship among SS 1B1.1
and 1B1.2 and the Statutory Index (Appendix A) and as
being a "clarification" intended to "emphasize that the
sentencing court must apply the offense guideline
referenced in the Statutory Index." See U.S. Sentencing
Manual app. C at 31-32 (Supp. 2000). The Sentencing
Commission's characterization of an amendment as
"clarifying" is not, however, binding on us, nor even entitled
to substantial weight. See Bertoli, 40 F .3d at 1407 n.21
(citing Menon, 24 F.3d at 567); see also Marmolejos, 140
F.3d at 493 ("[T]he mere fact that an amendment is referred
to as a clarification or a revision is or dinarily of slight
import to our analysis."). Rather, it is our own
interpretation of the pre-amendment guidelines that
determines whether the Amendment clarified that
interpretation or substantively changed it. See Marmolejos,
140 F.3d at 493; Bertoli, 40 F .3d at 1407 n.21.

Moreover, a "clarifying" amendment cannot be used to
interpret an earlier guideline when the r esult would be to
punish the defendant more harshly, as might be the case
here. See Menon, 24 F.3d at 567. Thus, the Commission's
characterization of Amendment 591 does not af fect our
conclusion that the Amendment is, in fact, substantive and
incapable of retroactive application. For the same reason,
we disapprove the decision from the Middle District of

                               15
Pennsylvania in United States v. Bifield, 124 F. Supp. 2d
307, 311 (M.D. Pa. 2000), in which the court held that
Amendment 591 was clarifying, based on nothing mor e
than acceptance of the Sentencing Commission's
characterization of the Amendment as such.

Our independent interpretation and analysis of
Amendment 591 establishes that it substantively changed
the sentencing guidelines as we interpreted them in Smith
and its progeny and its application in the instant case
would raise ex post facto problems. The amended guidelines
cannot constitutionally be applied to Diaz's sentence. We
therefore will apply the pre-amendment guidelines,
meaning the analysis established in Smith and its progeny,
to the instant case.

B

We turn now to the application of the pre-amendment
guidelines, as we interpreted them in Smith and its
progeny. The Smith approach r equires that we conduct a
heartland analysis of the money laundering guidelines,
determine whether Diaz's conduct is atypical of cases
ordinarily sentenced under that guideline, and, if so,
determine what guideline would be more appropriate given
her offense conduct. There are several decisions from this
Circuit, involving convictions for both fraud and money
laundering, that affect our analysis.

In Smith, we first suggested that District Courts should
not automatically apply the money laundering guideline to
a group of offenses that includes a money laundering
charge, where the overall conduct is not in the heartland of
the money laundering guideline and its application
"obscures the overarching directive to match the guideline
to the offense conduct which formed the basis of the
underlying conviction." Smith, 186 F .3d at 300. In Smith,
the defendants were convicted of four of fenses: conspiracy
to defraud, interstate transportation of stolen pr operty,
causing unlawful interstate transportation with intent to
distribute stolen property, and money laundering under 18
U.S.C. S 1956. See id. at 296-97. In the embezzlement-and-
kickback scheme at work in Smith, the money laundering

                                16
was based on the fact that defendant Dandrea wr ote out
checks on the proceeds of kickbacks and defendant Smith
ordered that many of these checks be made payable to his
creditors rather than directly to Smith. See id. at 300. The
District Court grouped the four offenses and calculated the
sentence under S 2S1.1, the guideline applicable to the
money laundering count.

On appeal, we vacated the sentences of both defendants
and remanded for resentencing under the fraud guideline,
rather than the money laundering guideline. See id. at 300.
We relied on a 1997 report to Congr ess by the Sentencing
Commission, in which the Commission stated that the high
base offense levels for money laundering r eflected an effort
to punish the activities which aroused Congr essional
concern: "1) situations in which the `laundered' funds
derived from serious underlying criminal conduct such as
a significant drug trafficking operation or or ganized crime;
and, 2) situations in which the financial transaction was
separate from the underlying crime and was undertaken to
either: a) make it appear that the funds wer e legitimate, or
b) promote additional criminal conduct by r einvesting the
funds in additional criminal conduct." Smith , 186 F.3d at
298 (quoting United States Sentencing Commission, Report
to Congress: Sentencing Policy for Money Laundering
Offenses, including Comments on Department of Justice
Report 4 (1997) [hereinafter "Report to Congress"]). This
type of conduct, then, was the heartland of the money
laundering guidelines.

We also noted that the money laundering guideline had
been roundly criticized by judges concer ned with the
unwarranted harshness of sentences imposed under the
money laundering guideline in particular cases and that
judges routinely granted downward departur es to avoid
such harsh results. See Smith, 186 F .3d at 298-99. The
Commission in 1995 proposed amendments to the money
laundering guideline, designed to provide penalties more
proportionate to " `both the seriousness of the underlying
criminal conduct' and to `the nature and seriousness of the
laundering conduct itself.' " Id. at 299 (quoting United
States v. Woods, 159 F.3d1132, 1135 (8th Cir. 1998)). But
the amendments were not approved by Congr ess. The

                               17
House Judiciary Committee did acknowledge, however , that
"the application of the current guidelines to receipt-and-
deposit cases, as well as to certain other cases that do not
involve aggravated money laundering activity, may be
problematic." See id. at 299 (quoting H.R. Rep. 104-272, at
14-15, reprinted in 1995 U.S.C.C.A.N. 335, 348-49)
(internal quotation marks and emphasis in Smith omitted).
However, "past sentencing anomalies arising from relatively
few cases do not justify a sweeping downward adjustment
in the money laundering guidelines." See Smith, 186 F.3d at
299 (quoting H.R. Rep. 104-272, at 15, r eprinted in 1995
U.S.C.C.A.N. at 349) (internal quotation marks and
emphasis in Smith omitted)). To do otherwise, the
Committee suggested, would send the dangerous message
that money laundering associated with drug and other
serious crimes was not viewed as a grave offense. See
Smith, 186 F.3d at 299 (quoting H.R. Rep. 104-272, at 15,
reprinted in 1995 U.S.C.C.A.N. at 349).

We concluded that Congress intended that those
"anomalies" should be controlled by the courts. See Smith,
186 F.3d at 299. And the courts should deal with such
cases fairly, not with a strict focus on the technicalities of
sentencing, but with an eye towards matching the guideline
to the underlying criminal conduct. See id. at 300 (quoting
United States v. Kuko, 129 F.3d 1435, 1440 (11th Cir.
1997)). To apply the money laundering guideline in a
routine fraud case would be, we held, to "let the `tail wag
the dog.' " See Smith, 186 F.3d at 300. In Smith, we decided
that the money laundering guideline was inappr opriate
because the defendants left a paper trail, conduct
inconsistent with concealment, because any ef forts at
concealment were disingenuous, and because, when
evaluated against the entire course of conduct, the money
laundering was an incidental by-product of r outine fraud.
See id. The overall conduct at issue was not in the
heartland of the money laundering guideline and that
guideline was not to be used in sentencing.

Our first opportunity to apply Smith came several months
ago in the case involving Diaz's brother, Frank Cefaratti,11
_________________________________________________________________

11. Cefaratti was charged separately fr om his sister, Diaz, and the other
parties involved in the criminal conduct. He was indicted on 27 counts

                               18
and his role in the same scheme to fraudulently obtain
student financial assistance funds on behalf of the Franklin
School. Cefaratti was sentenced under the money
laundering guideline but argued on appeal that, under
Smith, he should have been sentenced under the fraud
guideline.12 We affir med the sentence, rejecting Cefaratti's
suggestion that Smith had limited the money laundering
guideline only to large-scale drug trafficking and organized
crime. See Cefaratti, 221 F.3d at 513. In particular, we
noted that, in numerous pre-Smith decisions, we did not
question the propriety of sentencing under the money
laundering guideline in cases involving both a scheme to
defraud and the laundering of the proceeds of that scheme.
See id. (citing cases). We held that the Smith court "gave no
indication that it intended a radical departur e from this
precedent." Id. Rather, we interpreted Smith as requiring
use of the fraud guideline where the money laundering,
although technically a violation of the statute, was merely
an "incidental by product" of otherwise r outine fraud. See
id. at 514 (citing Smith, 186 F.3d at 300).

In particular, Cefaratti clarified a key point underlying
our decision in Smith: that the Sentencing Commission in
its report to Congress had suggested that the heartland of
money laundering included not only the proceeds of serious
drug trafficking and organized crime but also situations in
which separate financial transactions were undertaken
either to legitimize illegally obtained funds or to promote
additional criminal conduct. See Cefaratti, 221 F.3d at 514
(citing Smith, 186 F.3d at 298 (citing, in turn, Report to
_________________________________________________________________

in September 1998. In October 1998 he entered a plea agreement in
which he pled guilty to four counts, including one count of mail fraud,
one count of student loan fraud, one count of destruction of property to
prevent seizure, and one count of money laundering under S 1957. He
pled guilty in October 1998 and was sentenced in 1999, inter alia, to 51
months in prison and ordered to pay r estitution in the amount of
$846,000, the DOE's full loss. See Cefaratti, 221 F.3d at 504.

12. Unlike Diaz in the instant case, Cefaratti did not object to the use
of
the money laundering guideline before the District Court. Therefore we
reviewed his sentence under the plain err or standard. See Cefaratti, 221
F.3d at 512 (citing United States v. Knobloch, 131 F.3d 366, 370 (3d Cir.
1997)).

                               19
Congress at 4)). Therefore, the heartland of U.S.S.G.
S 2S1.2 included separate monetary transactions designed
to conceal past criminal conduct or to promote further
criminal conduct.

The evidence in that case demonstrated that Cefaratti
reinvested the proceeds of the mail and wire fraud in the
school and therefore used the proceeds to continue the
fraud. He continued the operation of the school, which only
survived by receiving 90 percent of its r evenue from student
financial assistance program funds. See Cefaratti, 221 F.3d
at 514-15. The continued operation of the school enabled it
to receive Pell and Stafford funds to which it was not
entitled after February 1996 (the point at which the 1993
default rate was calculated). This was differ ent than Smith,
which involved only routine fraud and the r eceipt, deposit,
and use of the proceeds of that fraud without serious
attempts to fund further criminal activity.

A short time later, in Bockius, we held that the District
Court erred in sentencing the defendant under the fraud
guideline rather than the money laundering guideline. The
defendant there stole more than $600,000 from an
insurance brokerage firm, wired it to several accounts,
converted the money to cash, gambled some of it away,
then went to the Cayman Islands with the remainder. Once
there, he formed a corporation and bought a house in the
name of the corporation using some of the cash. He
planned to deposit the remainder in dif ferent banks in
deposits of less than $10,000 in order to avoid reporting
requirements. See Bockius, 228 F .3d at 307-08. Instead, he
formed a partnership with another individual, who in turn
stole the remainder of the money from the defendant. See
id. at 308. The defendant pled guilty to, inter alia, wire
fraud and money laundering under 18 U.S.C. S 1956. His
initial sentence, calculated under S 2S1.1, was vacated; on
resentencing, the District Court sentenced him under
S 2F1.1. The court read Smith as limiting the money
laundering guideline only to drugs and serious, meaning
organized, crime, not the kind of conduct at issue in that
case. See id. at 309.

We reversed, holding that the District Court had
misinterpreted Smith. We r ecognized that there was

                               20
language at one point in the Smith decision to support the
narrow reading urged by the defendant;13 we held, however,
that Smith makes clear that the heartland of money
laundering also includes "typical money laundering in
which a defendant knowingly conducted a financial
transaction to conceal tainted funds or funnel them into
additional criminal conduct." Bockius, 228 F.3d at 312
(citing Smith, 186 F.3d at 298). Further review of the
comments by the Sentencing Commission and Congr ess,
discussed in Smith, reinforced our view that "S 2S1.1 is
intended to apply to defendants who knowingly conduct
financial transactions apart from an underlying criminal
offense to conceal that the proceeds involved are tainted.
We held no differently in Smith." Bockius, 228 F.3d at 311.
We also pointed to cases from other cir cuits supporting the
proposition that, while the heartland of the money
laundering guideline is narrower than the money
laundering statute, its scope is not limited only to drug
trafficking and organized crime. See id. at 312-13 (citing
cases). The defendant in Bockius acknowledged engaging in
several separate acts designed to conceal the illegal source
of the money and his ownership of it, including multiple
wire transfers, conversion of the funds to cash, deposits in
multiple bank accounts in amounts small enough to avoid
reporting requirements, formation of a corporate fiction,
and placement of the funds in a partnership with another
individual. See id. at 313. We r emanded for the District
Court to determine whether these actions constituted
typical money laundering so as to fall within the heartland
of the money laundering guideline.

Most recently, in Mustafa, we held that the District Court
had not committed plain error in sentencing a defendant to
135 months imprisonment, applying S 2S1.1, where the
defendant had pled guilty to, inter alia, 40 counts of money
_________________________________________________________________

13. The defendant and the District Court r elied on the following
language:

       Ultimately, we conclude that the Sentencing Commission itself has
       indicated that the heartland of U.S.S.G. S 2S1.1 is the money
       laundering activity connected with extensive drug trafficking and
       serious crime. Smith 186 F.3d at 300.

                               21
laundering, as well as counts of mail fraud, food stamp
fraud, and making false statements in obtaining a bank
loan. See Mustafa, 238 F.3d at 488. The defendant had
deposited more than $1.5 million worth of fraudulently
obtained food stamps in a bank account. See id. We
discussed at length our prior circuit case law and
recognized that the conduct involved was less akin to
traditional notions of money laundering than the conduct
at issue in Bockius. See id. at 495. Nevertheless, we held
that the deposits were intended to disguise the source and
nature of the proceeds and to create an appearance of their
legitimacy, making sentencing under S 2S1.1 appropriate.
See id. The deposits, necessary to give the food stamps any
value, were intended to effectuate the concealment of the
original source of those funds. See id. at 495-96.

The United States in its briefs relies on another case,
United States v. Morelli, 169 F.3d 798 (3d Cir. 1999),
decided several months prior to Smith. The United States
believes Morelli is significant because we stated, in dictum,
that the proposed, but disapproved, amendments to the
Sentencing Guidelines did not provide independent legal
authority for a downward departure. See Morelli, 169 F.3d
at 809 n.13. We rejected the defendant's arguments
because the defendant was challenging the District Court's
exercise of its discretion in denying a downward departure,
a claim that we were without jurisdiction to consider. See
id.; see also United States v. Khalil, 132 F.3d 897, 898 (3d
Cir. 1997) (holding that there was no jurisdiction on appeal
to review a discretionary downward departure). Morelli
involved a scheme to avoid the payment of excise taxes on
the sale of certain fuels. The defendants or ganized a group
of companies into a "daisy chain," in which oil would be
sold down the chain in a series of paper transactions, sold
by the company at the bottom of the chain to a legitimate
retailer, and the money sent back up the chain in a series
of wire transfers, with one of the companies, the so-called
"burn company," collecting the taxes, then disappearing.
See Morelli, 169 F.3d at 803. W e held that the tax money
was the proceeds of the entire ongoing wir e fraud venture,
consisting of all the individual series of transactions. See
id. at 806. The entire program constituted one large,
ongoing wire fraud scheme and each wiring up and down

                               22
the chain furthered the execution of each individual act of
tax fraud. See id. at 806-07. Therefor e, the money gained in
each series of transactions (except the first one) was the
proceeds of wire fraud, because it was pr oceeds of a fraud
furthered by the prior wire transfers. See id. at 807. Thus,
there was sufficient evidence to convict the defendant of
money laundering and to sentence him under the money
laundering guideline. See id. at 809.

C

We now must apply those legal principles to the instant
case. In doing so, and in exercising plenary r eview, we
conclude that Diaz should have been sentenced under the
fraud guideline and she therefore is entitled to a new
sentencing hearing.

We first reject the government's contention that Morelli
controls or even is relevant to the instant case. The issue
that we addressed in Morelli was whether the government
had presented sufficient evidence to support a conviction
for money laundering and therefore to support use of the
money laundering guideline in sentencing; we concluded
that it indeed had presented sufficient evidence. See Morelli,
169 F.3d at 809. We did not addr ess the issue of whether
that conduct was typical, or in the heartland, of the money
laundering guideline for sentencing purposes. In fact, we
could not analyze that issue at all because the defendant
was challenging the District Court's exercise of its
discretion in declining to depart downwar d, a decision that
we did not have jurisdiction to review. See id. at 809 n.13.
By contrast, the precise question presented in the instant
case is whether the District Court erred in its initial choice
of guideline, a question that we do have jurisdiction to
consider and resolve.

We also reject, as we did in Mustafa , Bockius, and
Cefaratti, a reading of Smith that would limit the use of the
money laundering guidelines, U.S.S.G. SS 2S1.1 and 2S1.2,14
_________________________________________________________________

14. U.S.S.G. S 2S1.1 is the guideline applicable to money laundering
convictions under 18 U.S.C. S 1956; U.S.S.G.S 2S1.2 is the guideline
applicable to money laundering convictions under 18 U.S.C. S 1957.
Smith, Bockius, and Mustafa involved convictions under S 1956 and
sentencing under S 2S1.1; Cefaratti and the instant case involve
convictions under S 1957 and sentencing underS 2S1.2.

                               23
only to cases involving the proceeds of lar ge-scale drug
trafficking and organized crime. See Bockius, 228 F.3d at
309; Cefaratti, 221 F.3d at 513. Rather, Mustafa, Bockius,
Cefaratti, and Smith all are in accord that the heartland of
the money laundering guidelines includes, in addition to
drugs and organized crime, cases involving typical money
laundering, financial transactions that ar e separate from
the underlying crime and that are designed either to make
illegally obtained funds appear legitimate, to conceal the
source of some funds, or to promote additional criminal
conduct by reinvesting the funds in additional criminal
conduct. See Mustafa, 238 F.3d at 495; Bockius, 228 F.3d
at 312; Cefaratti, 221 F.3d at 514; Smith, 186 F.3d at 298.

However, in those cases not governed by the Sentencing
Guidelines as amended in November 2000, the money
laundering guidelines are not applicable to or dinary cases
of routine fraud, to the simple receipt and deposit or use of
illegally obtained funds, or to cases in which any money
laundering is not separate from the underlying fraud, but
merely an "incidental by product" of that underlying fraud.
See Mustafa, 238 F.3d at 494-95; Bockius, 228 F.3d at 311;
Cefaratti, 221 F.3d at 514; Smith, 186 F.3d at 300.
Sentencing under the money laundering guidelines is not
appropriate in cases in which the money laundering is
minimal when evaluated against the overall of fense
conduct. See Bockius, 228 F.3d at 313; Cefaratti, 221 F.3d
at 515; Smith, 186 F.3d at 300.

We conclude that where the defendant has not made a
serious, concerted effort to conceal or to legitimize the
funds or to reinvest them in additional criminal activity, it
is not appropriate to sentence that defendant under the
money laundering guideline. Congress and the Sentencing
Commission considered such cases anomalous fr om the
standpoint of S 2S1.2 and left it to the courts to deal with
such atypical cases fairly, by focusing not on the strict
technicalities of the sentencing process, but on matching
the appropriate guideline to the nature of the offense
conduct. See Smith, 186 F.3d at 300. We believe that
sentencing in such cases is more appropriately controlled
by the guideline applicable to the underlying criminal
conduct, such as fraud.

                               24
We agree with the application of this legal standard to the
facts in Cefaratti, Bockius, and Mustafa and our conclusion
in all three cases that money laundering was the
appropriate guideline. The evidence showed that Cefaratti
received federal student financial assistance funds on
behalf of the Franklin School after February 1996, when,
but for the fraud, the school probably would have been
terminated from the Pell and Staf ford programs. Cefaratti
used the fraudulently derived proceeds to pr omote further
fraud, by continuing to receive federal funds to operate the
school after it otherwise would have been shut down,
including building an addition to the school with the federal
funds and making payments to some lenders so it would
appear that students were not in default. See Cefaratti, 221
F.3d at 215. Such conduct was not incidental to or a
minimal aspect of the underlying fraud.

Similarly, the defendant in Bockius admitted that he
engaged in several acts designed to conceal the illegal
source of the money and his ownership and possession of
it, including multiple wire transfers, conversion to cash,
and deposits of small amounts of money in multiple bank
accounts. See Bockius, 228 F.3d at 307-08, 313. We agree
that such typical money laundering, designed to conceal
the source of, and thereby legitimize, the funds is within
the heartland of the guideline. In the same way, in Mustafa
the defendant's deposits of food stamps "wer e intended to
disguise the source and nature of the pr oceeds of his
fraudulent activity" and to "effectuate" concealment of that
original source. See Mustafa, 238 F .3d at 495-96.

We believe, however, that under the facts of the instant
case, the District Court erred in sentencing Diaz under the
money laundering guideline rather than under the fraud
guideline. The instant case demonstrates how dif ferent
situations, even those involving the participants in the
same criminal conduct, may require dif ferent results. Diaz
never used the proceeds of her fraudulent activities to
promote additional criminal conduct by r einvesting in
further criminal conduct. The Franklin School was a
legitimate enterprise during the period from 1992 and July
1994, when Diaz submitted false forbearance and
deferment forms. The 1993 default rate had not been

                               25
calculated during this time; therefore, the school was not
yet subject to termination from the financial assistance
programs, even absent Diaz's fraud. When Diaz transferred
the Pell Grant and Stafford loan funds into the school's
account, that monetary transaction maintained and
promoted a legitimate enterprise, not further criminal
conduct. We deal with a simple receipt-and-deposit case to
which S 2S1.2 should not apply. Diaz made no efforts to
disguise the source of the student assistance funds that the
Franklin School received and deposited or to conceal the
fact that the deposits were federal student assistance
funds.

Diaz did violate S 1957(a) because she engaged in a
monetary transaction in criminally derived pr operty: She
transferred funds, derived from fraud, into the school's
account. See 18 U.S.C. S 1957(a) (making it illegal to
"knowingly engage[ ] . . . in a monetary transaction in
criminally derived property . . . derived fr om specified
unlawful activity"). Having engaged in the fraud, Diaz used
the proceeds to cover school expenses. Of course, the
purpose of fraud, in almost all cases, is to obtain money or
other property and to put it to some use. AS 1957(a)
violation almost always will accompany the commission of
such routine fraud. The deposit of the student assistance
funds in the instant case accompanied the fraud that was
used to obtain those funds; the deposits should not be
viewed as separate from the underlying fraud, but as an
inseparable and incidental by-product of that fraud. To
sentence under S 2S1.2 in a case such as this one would
indeed allow the money laundering guideline to swallow
whole the fraud guideline or, as we said in Smith, "let the
`tail wag the dog.' " See Smith, 186 F.3d at 300.

The deposit of the funds also was minimal when
evaluated against the totality of Diaz's unlawful conduct. At
its heart, Diaz's offense conduct consisted of the
preparation and submission of fraudulent defer ment and
forbearance documents and submission of fraudulent
student loan applications. This is a clear example of routine
fraud. Any proceeds that were deposited prior to July 1994
(the point at which Diaz stopped her involvement in the
school) represented a small part of her conduct and a small

                               26
percentage of the moneys obtained from the DOE by the
fraud. Diaz's fraud therefore is the appr opriate conduct to
be considered for sentencing purposes and it should
provide the guideline under which she should be sentenced.

We believe that this is the anomalous case that Congress
and the Sentencing Commission found "problematic," see
Smith, 186 F.3d at 298 (quoting H.R. Rep. 104-272, at 14-
15, reprinted in 1995 U.S.C.C.A.N. 335m 347-49), at least
under the law prior to the amendments to the Statutory
Index-Appendix A. Diaz's conduct, although a violation of
S 1957(a), is atypical and therefor e not in the heartland of
S 2S1.2, as we understood and applied that guideline prior
to the recent amendments. Under these facts, she should
not be subject to punishment under the higher guideline.
We therefore will vacate Diaz's sentence and remand for
resentencing pursuant to U.S.S.G. S 2F1.1.

IV. RESTITUTION

Diaz also challenges the order to pay r estitution of
$846,000, the full amount of the DOE's loss, less any
amounts Diaz could show had been paid. Diaz ar gues that
Cefaratti also was made to pay the full amount in
restitution and that two other people convicted in this
scheme each were ordered to pay $1,000 in restitution.
Diaz suggests that the District Court therefor e might have
ordered restitution in an amount gr eater than the actual
loss, which it cannot do. See United States v. Gottlieb, 140
F.3d 865, 873-74 (10th Cir. 1998) (citation omitted). This
objection was not raised below and we review only for plain
error. Cefaratti, 221 F.3d at 512, Knobloch, 131 F.3d at
370; see also United States v. Thompson, 113 F.3d 13, 15
(2d Cir. 1997) (holding that improperly ordered restitution
constitutes an illegal sentence amounting to plain error).

The purpose of restitution under the MVRA is to
compensate the victim for its losses and, to the extent
possible, to make the victim whole. See United States v.
Kress, 944 F.2d 155, 159-60 (3d Cir. 1991). It follows,
therefore, that a District Court cannot or der multiple
defendants to pay restitution in amounts that will result in
the payment to the victim of an amount greater than the

                               27
victim's loss. See Gottlieb, 140 F.3d at 873-74. A District
Court may, however, impose joint and several liability on
multiple defendants for restitution, per mitting the victim to
recover its losses from all or some of the wrongdoers. See
United States v. Hunter, 52 F.3d 489, 494-95 (3d Cir. 1995).
It appears that is what the District Court did, or intended
to do, in the instant case. We therefor e affirm the order of
restitution and the amount to be paid by Diaz. However, on
remand, the lower court should clarify that the restitution
obligations of Diaz, Cefaratti, and the other people involved
in this scheme are joint and several.

V. CONCLUSION

For the foregoing reasons, Diaz's sentence is vacated and
this matter is remanded for resentencing under the fraud
guideline, U.S.S.G. S 2F1.1. The order of restitution is
affirmed, although on resentencing the District Court shall
clarify that Diaz's liability is joint and several.

A True Copy:
Teste:

       Clerk of the United States Court of Appeals
       for the Third Circuit

                               28
