United States District Court, D. Oregon
Billy J. Williams, Acting United States Attorney, Allan M. Garten and Michelle Holman Kerin, Assistant United States Attorneys, Of Attorneys for United States of America.
Christopher J. Schatz, Assistant Federal Public Defender, Robert B. Hamilton, Attorney at Law, Emily E. Elison, CASTLEBERRY & ELISON, P.C., Of Attorneys for Defendant.
FINDINGS OF FACT AND CONCLUSIONS OF LAW AT PHASE I OF DEFENDANT'S SENTENCING PROCEEDING
MICHAEL H. SIMON, District Judge.
On January 8, 2015, Defendant, Jon Michael Harder ("Harder" or "Defendant"), pleaded guilty to two counts of a 56-count amended indictment, alleging mail fraud, wire fraud, and unlawful monetary transactions in connection with the operation of Sunwest Management, Inc. ("SMI") and its affiliated businesses (collectively, "Sunwest" or the "Sunwest Enterprise"). Dkt. 107. The Court accepted Defendant's plea. Id. As set forth in the plea agreement, the parties agreed that Defendant's sentencing shall occur over two separate proceedings. Dkt. 109, ¶ 4. In the first proceeding, the Court must determine: (1) whether Defendant's scheme to defraud exceeded the two counts of conviction ( i.e., the two counts to which Defendant pleaded guilty); and (2) all "relevant conduct" related to Defendant's scheme to defraud. Id. After the Court makes these "Phase I" determinations, the parties, the United States Probation Office, and ultimately the Court will be in a better position correctly to determine the applicable advisory sentencing guideline range under the United States Sentencing Guidelines. In the second proceeding (Phase II), the Court will determine and impose an appropriate sentence, considering the applicable advisory sentencing guidelines and all other sentencing factors set forth in 18 U.S.C. § 3553(a). Id. At each of these two proceedings, appropriate evidence shall be received.
The hearing in Phase I began on May 12, 2015. Both sides together submitted more than 400 pages of memoranda before the hearing began. Counsel for the Government called 14 witnesses, and offered more than 200 exhibits. Dkt. 151. Defense counsel called seven witnesses, including Defendant, and offered more than 400 exhibits. Id. On May 28, 2015, the parties presented closing argument lasting approximately five hours. These Findings of Fact and Conclusions of Law are based on the testimony and exhibits received and constitute the Court's Phase I determination of Defendant's scheme to defraud and relevant conduct. For the reasons stated below, the Court finds that the scope of Defendant's scheme to defraud exceeds the two counts of conviction and that the relevant conduct includes all Sunwest senior housing facility and senior housing development investments sold by Defendant, directly or indirectly by persons acting under his control, supervision, or direction, to investors from January 1, 2006, through July 7, 2008, regardless of the specific form of those investments.
A. Amended Indictment
The Amended Indictment (Dkt. 74) charges as follows: "Beginning not later than 2006 and continuing until mid-2008, " Defendant "defrauded more than 1, 000 investors out of approximately $130 million." Am. Indict., ¶ 1. Defendant, both directly and through other persons and entities under his employ, supervision, or control, solicited investments across the United States in various Sunwest-affiliated businesses. Id. at ¶ 2. These businesses were all controlled by Defendant and operated "for the purpose of acquiring, managing, and constructing senior housing facilities, known as assisted living facilities (ALFs')." Id. As part of Defendant's alleged scheme and artifice to defraud, investors were enticed with materially false promises, fraudulent representations, omissions, and misleading half-truths, including, among others: (l) that investor funds would be invested in a specific ALF or individual senior housing facility, rather than in the Sunwest Enterprise as a whole; (2) that any return on an investor's investment, which would be paid to the investor in the form of "rent" from the specific facility into which the investor decided to invest, would be based solely on the financial performance of that individual facility and be independent of the success or failure of other Sunwest properties; (3) that Sunwest was a financially strong and successful company; (4) that Sunwest had a history of never missing a "rent" payment to an investor; and (5) that reserve accounts would cover expenses for a specific facility, including "rent" payments, until that facility became profitable. Id. at ¶¶ 3, 11, 12, 16, 25, and 26. In truth and fact, however, according to the Amended Indictment: (1) an investor's money in a particular ALF, or senior housing facility, was commingled with investments from all investors in all ALFs as well as with bank loans for these ALFs; and (2) at least as far back as 2006, Sunwest was losing millions of dollars each year. Id. at ¶ 3. Through Sunwest, Defendant raised more than $300 million from more than 1, 000 investors in Oregon and throughout the United States. Id. at ¶ 4. As Sunwest began to collapse and as its losses mounted, Defendant "went on an acquisition binge to fund his business empire and to mask losses and the commingling of funds." Id. During the period 2006-2008, Defendant acquired more than 100 facilities, buying them at the rate of approximately one per week. Sunwest, at its height, had acquired approximately three hundred senior housing facilities (or ALFs), serving more than 15, 000 residents, whose average age was 85. Id.
Counts 1-25 of the Amended Indictment charge mail fraud in violation of 18 U.S.C. § 1341, Counts 26-36 charge wire fraud in violation of 18 U.S.C. §1343, and Counts 37-56 charge the crime of engaging in monetary transactions in property derived from specific unlawful activity in violation of 18 U.S.C. § 1957. Id. at pp. 12-21. Defendant pleaded guilty to Counts 13 and 51. In Count 13, the Amended Indictment charges that, for the purpose of executing and attempting to execute the scheme and artifice to defraud as alleged, Defendant knowingly caused to be delivered by the United States Postal Service or a commercial interstate carrier on December 21, 2007, matter sent from Sherwood, Oregon to Portland, Oregon, consisting of "L.H. and J.H. investment documents for Clovis Senior Living." Id. at pp. 12-14. In Count 51, the Amended Indictment charges that on January 30, 2008, Defendant withdrew funds derived from his scheme and artifice to defraud in order to pay for Defendant's beach home. Id. at pp. 18-20.
B. Plea Agreement: Defendant's Factual Statement
In the written plea agreement, Defendant admitted that Sunwest "solicited and received investor funds through two different types of investment offering structures, the tenancy in common (TIC') investment and the preferred membership interest (PMI') investment." Dkt. 109, at ¶ 5(A)(2) (Defendant's Factual Statement). Defendant further admitted that with respect to the PMI investments, Defendant, through written private placement memoranda ("PPMs"), "represented to investors that their funds would be used for a specific property, and for specified purposes." Id. Defendant adds that between December 2007 and February 2008, Defendant and others under his control "offered PMI investments in two separate LLCs [limited liability companies] that were developing assisted living facilities located in Clovis and Hobbs, New Mexico." Id. These two facilities are referred to as "Clovis Assisted Living, LLC" and "Hobbs Assisted Living, LLC, " respectively. The PMI investment documents for these two facilities represented to investors that their funds would be used to complete construction of these facilities, respectively. Id.
As Defendant further admitted, these representations were knowingly fraudulent. According to Defendant's factual statement in the plea agreement:
Concurrently with the issuance of the Clovis and Hobbs PPMs, Defendant Harder decided to use investor funds raised through the Clovis and Hobbs offerings to meet certain Sunwest business expenses and as well certain of his own personal financial obligations. Defendant Harder knew that this use of investor funds was not contemplated by the Clovis and Hobbs PMI investors. Neither defendant nor his agents or employees informed the Clovis and Hobbs PMI investors of his intent to use their investment funds in a manner different from what the PPMs had advised, and in a manner that increased the risk of potential investment loss associated with the Clovis and Hobbs investments.
As the first Clovis and Hobbs investor funds were received in late December of 2007 they were diverted at defendant's direction and used to meet payroll and other Sunwest-related financial obligations. The Clovis and Hobbs PMI investors were not notified of this misuse of their funds. Defendant continued to solicit investors for the Clovis and Hobbs projects throughout January and February of 2008. As PMI investor funds were received, they were diverted by defendant to address Sunwest-incurred financial obligations, cash shortfalls of Sunwest affiliates, and his personal financial obligations. The misstatements made and facts omitted as part of this scheme were material to the investment decisions made by the Clovis and Hobbs PMI investors. For Clovis, the PMI investment offering raised a total of $3, 225, 000. For Hobbs, the PMI investment offering raised a total of $2, 000, 000. Although construction continued at Clovis and Hobbs, neither facility was fully completed by Sunwest.
Thus, according to Defendant, the scheme to defraud and related scope of "relevant conduct" for purposes of determining the applicable advisory sentencing guidelines is limited to the PMI investments for the Clovis and Hobbs facilities sold to investors between December 2007 and February 2008. These two facilities raised a total of $5.225 million from investors in what Defendant admits was a scheme and artifice to defraud.
C. Plea Agreement: Government's Allegations Regarding Scope of Fraud
In the written plea agreement, the Government provided a summary of what it intends to prove at the Phase I sentencing proceeding regarding the scope of Defendant's scheme to defraud. According to the plea agreement, the Government did this fully to apprise Defendant of the Government's position at sentencing "to ensure his entry of guilty plea is voluntary and knowing." Dkt. 109, at ¶ 5(B) (The Government's Allegations Regarding Scope of Fraud). As stated in the Government's summary:
Beginning in 2001 and running through 2008, Sunwest offered to investors an opportunity to invest in ALFs either through the purchase of TIC or PMIs. Starting in 2006, the majority of investors were sold TIC interests; which were supposed to be a tax free exchange of the investor's previous interest in a property with an interest in a Sunwest ALF. The TIC offerings were sold in a consistent manner. Investors would buy an ownership interest in a specific ALF through a tenancy in common ownership interest, which was a way for the investor to engage in a tax free exchange of an ownership interest in one property into an ownership interest in a specific ALF. The ALF would be co-owned by a separate limited liability company that would be owned by defendant. The money invested by the TIC owners would be used as a down payment for the property purchase, with the remainder of the purchase price to be financed by a bank loan or mortgage obtained by defendant's limited liability company (the Co-Owner). Once purchased through the TIC investments and bank loans, the ALF would be leased to and managed by other companies in the Sunwest Enterprise that were owned in whole or in part by defendant and in most instances completely controlled by him.
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The investment programs were marketed through the distribution of various marketing materials, including PPMs, Executive and Offering Summaries, and Offering Memoranda, and through defendant's personal sales efforts. Defendant, engaged in a scheme and artifice to defraud and to obtain money and property through materially false and fraudulent pretenses, representations, and promises concerning the investment programs. Among the materially false and fraudulent representations were:
Investor Funds Would Be Invested In A Specific Assisted Living Facility. It was represented both orally and in writing that investor funds would be used for expenses and costs associated with a specific property. Although the investment documents changed over time, they all included specific language concerning ALF investments being single purpose entities whose sole purpose was to acquire, further develop and operate a specific property. This same single purpose representation was made orally at investment meetings. In truth and fact, defendant ran Sunwest as a single, integrated unitary enterprise, commingling investor funds from the numerous ALFs into commingled bank accounts which would then be used for operational purposes of all ALFs, among other things.
Investments Were Independent of the Success or Failure of Other Sunwest Properties. It was represented both orally and in writing that investments in a particular ALF were not impacted by the success or failure of other ALFs under management and control of Sunwest. In truth and fact, since all funds were commingled and since the Sunwest Enterprise was run as a single, integrated unitary business, money from successful facilities was diverted to unsuccessful ALFs, and each ALF became dependent on the success of the enterprise as a whole.
Sunwest Was A Successful Business. Investors were induced to invest in part on the materially false representation, made orally and in writing, that Sunwest was a financially successful business. In truth and fact, by 2006, Sunwest was losing millions of dollars each year. Facilities were only partially filled and often in disrepair. ALF vendor payments were delayed. Construction reserves from bank loans were diverted to pay operational expenses. Sunwest stayed afloat through its commingling of funds. Sunwest relied on the new cash infusion from investors and bank loans and refinancing as it acquired facilities at the rate of one a week in order to prop up its failed business practices. In addition, Sunwest relied on bank reserves from loans it obtained through misleading and often fraudulent representations and material omissions, and by relying on escalating personal loans obtained by defendant to fill cash needs.
Sunwest Never Missed a Payment to Investors. One of the critically important marketing pitches employed by defendant and those working for and with him was that Sunwest never missed a "rent" payment to an investor. In truth and fact, those rent payments often did not come from the success of the facility in which the investor invested. Instead, it came from the commingled funds, diversion of loan reserves, fraudulently obtained bank loans and personal loans taken by defendant.
Reserve Accounts Would Cover Expenses Until Profitable. Many of the ALFs were acquired at a time when the facility itself was not fully occupied. To assure investors that they would receive their "rents" while the ALF was brought up to near full occupancy, investors were told orally and in writing that reserves would be set aside to be used for rent payments until such time as the occupancy rate was sufficiently high to cover all expenses and provide a return in the form of rent to investors. In truth and fact, the reserves were often used for purposes wholly unrelated to the particular facility for which the reserve was established.
Thus, according to the Government, Defendant's scheme to defraud and relevant conduct goes well beyond merely the PMI investments in Clovis and Hobbs (and even West Salem). Defendant's scheme to defraud and relevant conduct also includes, the Government contends, all of the tenancy in common, or TIC, investments, at least beginning in early 2006. The Government asserts that at least by early 2006, Sunwest was being operated as a "unitary" enterprise with rampant commingling of funds, extensive inter-facility borrowing and lending, and substantial, sustained, and widespread enterprise-level losses. Based on these facts, the Government concludes, since at least 2006 material misrepresentations and omissions (including misleading half-truths) were made by Defendant, and others acting under his control, to Sunwest investors, including those who made TIC investments, and not merely to those who made only PMI investments.
In response, Defendant's position is that the Government cannot meet its burden of showing material misrepresentations or omissions regarding TIC investments because: (1) the specific funds invested by investors in TIC facilities (as distinct from investments in PMI properties) were, for the most part, used as represented, namely to close a purchase transaction in which the investors bought a tenancy in common (TIC) interest in a specific piece of real property; and (2) no other material misrepresentations or omissions were made by Defendant or by those acting under his control. This is the essence of the parties' disagreement and the focus of the Court's determination at Phase I based on the extensive testimonial and documentary evidence received.
A. Relevant Conduct: Common Scheme or Plan
In determining an appropriate sentence, a district judge is directed under the law to impose a sentence that is sufficient, but not greater than necessary, to comply with the several purposes of sentencing established by Congress, after considering "the nature and circumstances of the offense and the history and characteristics of the defendant." 18 U.S.C. § 3553(a)(1). In evaluating the nature and circumstances of the offense, the United States Sentencing Guidelines ("USSG") directs that the calculation of the applicable offense level consider all "relevant conduct." USSG §1B1.3. The USSG defines "relevant conduct, " in part, as follows:
Relevant Conduct (Factors that Determine the Guideline Range)
(a) Chapters Two (Offense Conduct) and Three (Adjustments). Unless otherwise specified, (i) the base offense level where the guideline specifies more than one base offense level, (ii) specific offense characteristics and (iii) cross references in Chapter Two, and (iv) adjustments in Chapter Three, shall be determined on the basis of the following:
(1) (A) all acts and omissions committed, aided, abetted, counseled, commanded, induced, procured, or willfully caused by the defendant; and
(B) * * *
that occurred during the commission of the offense of conviction, in preparation for that offense, or in the course of attempting to avoid detection or responsibility for that offense;
(2) solely with respect to offenses of a character for which §3D1.2(d) would require grouping of multiple counts, all acts and omissions described in subdivisions (1)(A) and (1)(B) above that were part of the same course of conduct or common scheme or plan as the offense of conviction ;
(3) 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; and
(4) any other information specified in the applicable guideline.
USSG §1B1.3(a) (emphasis added). Thus, under subsection (a)(1), the Court must determine all acts and omissions "that occurred during the commission of the offense of conviction." In addition, with regard to subsection (a)(2), §3D1.2 directs:
All counts involving substantially the same harm shall be grouped together into a single Group. Counts involve substantially the same harm within the meaning of this rule:
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(d) When the offense level is determined largely on the basis of the total amount of harm or loss, * * *.
Offenses covered by the following guidelines are to be grouped under this subsection: * * * §2B1.1 [Fraud and Deceit] * * *.
Thus, under subsection (a)(2), the Court must determine all acts and omissions "that were part of the same course of conduct or common scheme or plan as the offense of conviction."
The Commentary provided by the United States Sentencing Commission for this subsection states: "Conduct that is not formally charged or is not an element of the offense of conviction may enter into the determination of the applicable guideline sentencing range." USSG §1B1.3, Commentary, Background. Moreover, the Sentencing Commission's Application Note 9 to this section defines "common scheme or plan" and "same course of conduct" as follows:
(A) Common scheme or plan. For two or more offenses to constitute part of a common scheme or plan, they must be substantially connected to each other by at least one common factor, such as common victims, common accomplices, common purpose, or similar modus operandi. * * *
(B) Same course of conduct. Offenses that do not qualify as part of a common scheme or plan may nonetheless qualify as part of the same course of conduct if they are sufficiently connected or related to each other as to warrant the conclusion that they are ...