USA v. Shulick

Sentencing Memorandum

Eastern District of Pennsylvania, paed-2:2016-cr-00428-522892

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4 IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA UNITED STATES OF AMERICA:: v.: CRIMINAL NO. 16-428: DAVID T. SHULICK: DEFENDANT'S MEMORANDUM AS TO AMOUNT OF LOSS INTRODUCTION Defendant David Shulick respectfully submits this Memorandum addressing loss pursuant to the Court's June 25, 2018 Order. Mr. Shulick respectfully requests leave to supplement this Memorandum with briefing responsive to any submission of the government, and with post-hearing briefing. ARGUMENT I. The Government Miscalculates the Loss Applicable to Counts One and Two. A. The loss to the victim is zero because DVHS's failure to make budgeted expenditures caused the School District of Philadelphia no pecuniary harm. 4 The government contends that the fraud loss1 is equal to the amount of "appropriated funds" that Mr. Shulick "failed to spend … in conformity with the budget for either [academic] year." Government's Memorandum Regarding Loss Amount ("Gov. Mem.") at 3. It baldly states, without citing legal authority, that "the loss caused to the SDP should be calculated by reference to the contract budgets." Id. But that analysis founders on a crucial fact: Mr. Shulick's failure to spend funds in conformity with the budgets caused no pecuniary harm to the School District of Philadelphia ("SDP"), for the reasons explained below and to be further addressed at the loss hearing.2 Mr. Shulick hastens to assure the Court that this contention – and the reasoning discussed below − is absolutely consistent with the jury's verdict. Without waiving any challenges to the validity of that verdict, he accepts at this stage that the jury found that his misrepresentations about the budget were material to the SDP. But a fraud can exist without pecuniary harm; a conviction with zero loss is a coherent concept. And that is what the record reflects here. The Guidelines define "actual loss" as the "reasonably foreseeable pecuniary harm that resulted from the offense." U.S.S.G. § 2B1.1 cmt. n.3(A)(iv). Two concepts underpin 1 Because the same loss calculation applies to the embezzlement and fraud counts, for ease of reference counsel will use the term "fraud loss" to refer to this analysis and distinguish it from "tax loss" and "bank fraud loss." 2 The defense has proposed to the government that the parties make reciprocal disclosure of proposed exhibits and opinion testimony prior to the loss hearing, in response to a government request that the defense make those disclosures. The defense also proposed that the parties attempt to resolve prior to the hearing any disagreements about admissibility, in the hope of streamlining the hearing itself. The government has not responded to these proposals. 4 this analysis: causation and pecuniary harm. Combining the two yields the controlling inquiry: what pecuniary harm did the SDP actually – and foreseeably ‒ suffer as a result of Mr. Shulick's "fail[ure to] spend the appropriated funds in conformity with the budgets"? The answer is none. The SDP paid DVHS per pupil, in an amount negotiated long before the budgets were even created. That is, the "deliverable" for which DVHS was compensated was the administration of a school with a certain number of pupils. DVHS was not paid to provide, e.g., "six teachers," such that providing five teachers would reduce its compensation – and thus the SDP's expenditures − in some measurable way.3 See Exhibit "A" hereto, Government Exhibit 255 (DVHS Invoice to SDP, marked but not admitted at trial); Exhibit "B" hereto, Government Exhibit 159, p. 65. Because DVHS's compensation was controlled by the number of students, not by any fact that Mr. Shulick misrepresented, the analysis of what pecuniary harm "resulted from" the misrepresentations differs from the typical fraud case. In the typical fraud case there is a causal relationship between the wrongdoing and the value that the victim delivered to the defendant. For example, compensation may be linked to a specific deliverable that was not delivered, or expenditure that was not made. E.g., United States v. Dickler, 64 F.3d 818 (3d Cir. 1995) (actual loss to banks was fair market value of repossessed vehicles minus the fraudulently reduced price defendants paid victim banks for them); United States v. Monaco, 23 F.3d 793 (3d Cir. 1994) (defendants submitted payment requests for costs not 3 Indeed, the DVHS work plan that the SDP had in hand when negotiating the per- pupil price called for five teachers, not six, at Southwest. See Exhibit "B" hereto, Government Exhibit 159, pp. 93-94. 4 actually incurred); United States v. Foster, 728 Fed. App'x 112 (3d Cir. 2018) (defendant retained cash due to victim for which defendant was selling goods, by falsely underreporting sale prices and remitting reduced amount); United States v. Castner, 50 F.3d 1267 (4th Cir. 1995) (defendants' company inflated cost of materials and retained profit due to the victim). And in a typical embezzlement case, the defendant takes something of value that the victim would not have given him at all. See Dickler, 64 F.3d at 825 (contrasting theft with fraud); see, e.g., United States v. Brann, 990 F.2d 98 (3d Cir. 1993) (defendant, a narcotics agent, orchestrated fictitious drug transactions and retained cash intended for undercover enforcement efforts). Here, nothing in the record would permit an inference that the SDP would have paid less − to DVHS or to a substitute provider − had DVHS disclosed its actual expenditures during the course of the contract.4 Nor could the Court infer, without impermissible speculation, that the SDP would have negotiated a lower per-pupil price to DVHS had it known that DVHS would eventually pay out less money than it would budget months after the price was set. Simply put, there is no connection between how DVHS used the previously-"appropriated" funds and how much money the SDP paid it to run the Southwest School. Had Mr. Shulick misrepresented the number of students attending 4 As the Court knows, the government always bears the burden of proving loss. When it has presented a prima facie case of pecuniary harm (which, for the reasons explained above, it has not here), the defendant assumes the burden of production only – not the burden of persuasion – as to the infirmities in the government's showing. See, e.g., United States v. Jimenez, 513 F.3d 62, 86 (3d Cir. 2008). And even that burden of production assumes that the proof in question is within the defendant's control. Mr. Shulick has no burden of producing evidence relevant to credits against loss – or otherwise undermining the government's position on loss – that is not in his control. See United States v. Foster, 728 Fed. App'x 112, 188 n.6 (3d Cir. 2018). Indeed, Brady v. Maryland, 373 U.S. 83 (1963), applies at sentencing. 4 DVHS, this case would be like the United States v. Ali, 508 F.3d 136 (3d Cir. 2007) (defendants submitted false student registration forms to obtain federal funds for classes that were never conducted). But he didn't, and it is not. The failure of the causation element of loss (App. Note 3(A) to 2B1.1) means that the Court need not even grapple with calculating the "value" of the services that DVHS failed to provide – because the failure to provide them caused the SDP no pecuniary harm. But if the Court chooses to reach that issue, it must recognize that valuing the services is more complex than the mathematical formula that the government proposes –because the numbers in the budget do not measure the value of the services that DVHS was to provide. As the Third Circuit has explained, "fair market value" is not necessarily equivalent to the contract price. E.g., United States v. Nagle, 664 Fed. App'x 212, 215 & n.7 (3d Cir. 2016) ("Nagle II"); accord United States v. Bryant, 655 F.3d 232, 254 n.24 (3d Cir. 2011). And here, the budget was not the contract price at all. It represented what DVHS expected to spend in order to run the Southwest school; it did not represent the value of DVHS's services to the SDP. The government's theory of loss assumes that, for example, a full-time teacher earning a $36,000 salary rendered less "value" to the SDP than a full-time teacher earning a $45,000 salary would have. See Gov. Br. at 3-4. That is patently unsustainable on this record. Indeed, given the proof in the record about the educational model at the Southwest School, the Court cannot even infer that five teachers delivered 16.6 percent5 less "education" than six teachers would have. To the contrary, the testimony of all of the 5 That is, 100 divided by 6. 4 teachers at trial proved that each and every one of them was hardworking, qualified and certified. The government adduced no evidence at trial to prove that by reason of the lower salary that they were paid, their performance was inadequate and/or their performance substandard. Moreover, the trial record demonstrates that the Southwest School was a computer-based program wherein numerous grade levels were combined in each subject matter classroom, and the teachers' role was to supervise the learning program for each student according to each student's grade level. From the trial testimony, it is unclear what "value," if any, a sixth teacher would have delivered to the SDP. As explained further below (Section I.B.), "valuing" services provided requires qualitative analysis, not just quantitative. The government falsely equates the two, and in so doing abnegates its burden of proving loss. In any event, the Guidelines are clear that pecuniary harm is the only relevant measure of loss. Any non-pecuniary harm that the government may identify ‒ from the violated expectations of the SDP about the use of the funds it had already "appropriated" ‒ is irrelevant to the loss calculation, even if (as Mr. Shulick concedes for sentencing) it supports a conviction. See United States v. Free, 839 F.3d 308 (3d Cir. 2016). B. Even If The Court Finds A Pecuniary Loss, Mr. Shulick Is Entitled To Credit For All Expenditures For The Benefit Of The SDP. For the reasons explained above, the Court's analysis should stop at the question of "pecuniary harm that resulted from" the offense conduct. Because that analysis yields zero loss, there is no need to consider "credits" against it (see App. Note 3(E) to Section 2B1.1). If the Court disagrees, however, then it must decide "the fair market value of the property returned and the services rendered, by the defendant or other persons acting 4 jointly with the defendant, to the victim before the offense was detected." U.S.S.G. § 2B1.1 cmt. n.3(E)(i). Yet the government's analysis of credit against loss founders in several respects. First, ascertaining the value rendered to the victim requires a qualitative evaluation, not just a quantitative one. Indeed the Third Circuit recently reversed a district court for using a salary figure as a proxy for loss instead of making a qualitative evaluation of the defendant's work for the victim. The defendant in United States v. Morales, 664 Fed. App'x 228 (3d Cir. 2016), drew two full-time salaries simultaneously, one from a private contracting firm and the other from the victim, the National Guard, while performing services for both employers during the work week. Morales, 664 Fed. App'x at 229. Having made a factual finding that the defendant did not work eighty hours per week, the sentencing court used her National Guard salary as the measure of the "value" of her services to the Guard, crediting her with half of the salary (because she held two jobs) and finding the other half "loss." Id. at 231. The Third Circuit reversed. Id. at 231-232. While upholding the district court's finding that the defendant did not work eighty hours per week, the circuit reversed its finding that one-half of the defendant's salary measured the value that she rendered to the Guard. Id. at 231. The circuit discussed the trial testimony about the qualitative value of the d