Court Tackles Difficult Loss Calculation

United States v. Kozerski

Case No. 19-3949

969 F.3d 310 (6th Cir. 2020)

Decided: August 6, 2020

William Kozerski obtained six government construction contracts by impersonating a disabled veteran.  Unsurprisingly, he got caught.  His scheme was simple.  Kozerski formed a construction company, CA Services, to bid on Veterans Administration contracts set aside for small businesses owned by service-disabled veterans.  Kozerski does not have a service-related disability, but he convinced J.R., a service-disabled veteran, to pretend to be the company’s “owner,” in return for a cut of each awarded contract.  Ultimately, Kozerski was awarded six contracts by using J.R.’s identity, forging his signature, and sending emails to the government posing as J.R.

After being caught, Kozerski pled guilty to wire fraud.  At sentencing, Kozerski objected to the government’s proposed Sentencing Guidelines based on the calculation of loss to the United States.

In prosecutions involving stolen money or property, the Sentencing Guidelines create a structure whereby a defendant’s offense level varies depending on the “loss” caused by the defendant’s conduct.  See U.S.S.G. § 2B1.1(b)(1).  One of two general principles is usually applied by courts when calculating loss: (1) loss may refer to the pecuniary harm to the victim, i.e. the economic harm; or (2) loss may turn on adding up the crime’s face value and subtracting any value returned to the victim.  In this case, the district court chose to follow the second principle, which allowed Mr. Kozerski to receive credit for the work his company performed on the construction contracts.  The government appealed, and the Sixth Circuit affirmed.

Mr. Kozerski argued that the loss to the government was $248,206, the amount reflecting the profit a qualifying veteran-owned business would have received from the contract.  Taking all other sentencing factors into account, this loss amount resulted in a recommended sentence for Kozerski of eight to fourteen months.  The government determined the loss amount to be much larger, exceeding $11 million without crediting the value of the work performed on the contracts.  This loss calculation would have increased Kozerski’s offense level by twenty points – resulting in an imprisonment range from thirty-seven to forty-six months.

In support of its’ position, the government pointed to the “government benefits rule” found in the commentary of the Sentencing Guidelines.  It says:

In a case involving government benefits (e.g., grants, loans, entitlement program payments), loss shall be considered to be not less than the value of the benefits obtained by unintended recipients or diverted to unintended uses, as the case may be. For example, if the defendant was the intended recipient of food stamps having a value of $100 but fraudulently received food stamps having a value of $150, loss is $50.

See U.S.S.G. § 2B1.1 cmt. n.3(F)(ii).  For reasoning discussed below, the district court rejected applying the “government benefits rule” to this case.

The commentary of the Sentencing Guidelines describes that government benefits include “grants, loans, [and] entitlement program payment.”  See U.S.S.G. § 2B1.1 cmt. n.3(F)(ii).  The district court noted that a construction contract does not fit naturally on that list, and the other examples in the commentary do not encompass conventional government procurements such as the one in this case.  Although this construction contract contains a social-benefit overlay of a set-aside program that would fit within the government benefit rule, to submit that this construction contract itself fits within the government benefits rule would simply go beyond the scope of the benefits outlined in the commentary.  Moreover, a different comment to the Sentencing Guidelines specifically notes “fraud affecting a defense contract award” as an example of procurement fraud, directing courts to conduct a general loss calculation.  The Court points out that this comment more directly applies to Kozerski, rather than the government benefit rule.

The appellate court also dismissed the government’s argument that 15 U.S.C. § 632(w)(1) establishes a presumption of loss to the United States based on the total amount expended on the [fraudulently obtained] contract.  The Sixth Circuit noted that this provision was not enacted until after Kozerski committed the crime.  Moreover, Kozerski’s business would not be considered a business concern to which the statute is applicable.

Ultimately, the Sixth Circuit held that there has been no acknowledgment of the effect of the offset rule or the background principle against which it operates.  The Court declined to side with the government’s position that it should not offset the contract price by the value of Kozerski’s performance.  The offset rule generally requires a deduction for services received only for the value returned to the victim.  The government asserted that the “victim” here was not a small business program nor a properly qualified bidder for the project as required by commentary, thus there was nothing to offset.  The Court recognized that this assertion merely confirms the reality that set-aside programs like this one involve more than one victim, and that the district court should not ignore the effect of the offset rule on the entity that received the services.

This issue of offsetting losses is one that has resulted in differing results across the country.  Loss calculations are very important because of the bearing that loss amounts have on a defendant’s offense level, recommended Guidelines range, and the amount of time a defendant is sentenced to serve.  In this case, the Sixth Circuit affirmed the district court’s holding to offset the loss, resulting in a total of $248,206 and a sentence of a year and a day.