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Case 3:10-cr-00237-AWT Document 89 Filed 12/14/12 Page 1 of 14


GOVERNMENTS REPLY MEMORANDUM ON GUIDELINES CALCULATION This memorandum is submitted in further aid of the sentencing of Defendant Gregory P. Loles, who stole more that $8 million from friends, clients, and the endowment fund of a Church in Orange, Connecticut, St. Barbaras Greek Orthodox Church (the Church or St. Barbaras). This memorandum is submitted in support of the Governments initial Guidelines calculation and in response to the Defendants Second Sentencing Memorandum filed December 3, 2012 captioned: Defendants Sentencing Memorandum II, (herein after Def. Mem. II), in which the Defendant argues for a lower Guidelines range and a downward departure. For the reasons set forth in the Governments original Sentencing Memorandum (Dkt. No. 80) and those set forth herein, the Government asserts that the Defendants Guidelines range should be 292-365 months and that a departure is not warranted. Sentencing is currently scheduled before this Court for February 27, 2013. I. Guideline Calculation As set forth in the Governments Sentencing Memorandum (Dkt. No. 80 Gov. Mem.), the Government asserts that as a result of the seriousness of the Defendants crimes, the more than $8 million in loss, the large number of victims, the misrepresentations made by the

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Defendant about his work on behalf of Saint Barbaras, the sophisticated means employed, the fact that the Defendant committed the scheme while acting as an investment advisor, and the fact that the Defendant laundered funds to further and perpetuate the fraud and to conceal and disguise the proceeds of the fraud, the Defendants Guidelines range is 292 - 365 months. The base offense level pursuant to the Guidelines is 7 when the offense charged has a statutory maximum of 20 years or more. See U.S.S.G. 2B1.1(a)(1). Therefore, the Defendants base offense level here is 7. 1. The Amount of Loss is Over $7 million

The amount of loss suffered as a result of the fraud clearly greater than $7,000,000. Therefore, the offense level is increased by 20 pursuant to U.S.S.G 2B1.1(b)(1)(K). (See Gov. Mem. at 29-33 and Attachment 1). At a minimum, the defendant defrauded 42 investors out of $8,037,258. (See Attachment 1). See United States v. Carboni, 204 F.3d 39, 47 (2d Cir. 2000) (quoting United States v. McCormick, 993 F.2d 1012, 1013 (2d Cir. 1992) (quoting U.S.S.G. 1B1.3(a)(2)). In his Memorandum, the Defendant argues, with no factual support that Mr. Loles believes that the amount of money he returned to the Church exceed the amount that he received. (Def. Mem. II (Dkt. No. 87) at 3.) This assertion is simply not true. As established in Attachment 1 of the Governments Sentencing Memorandum and as will be further established by witness testimony at the Defendants sentencing hearing, the Defendant stole over $8 million. The Defendant cannot seeks credit for any purported profit he may have made for the Church while working as its financial advisor. If he made money for the Church by managing


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the endowment fund prior to taking the money, he does not get to credit against a Guidelines loss calculation for any money he may have helped the church earn be fore he took it. Furthermore, the Defendant can not claim credit for any money he may have made for the church by engaging in a scheme to purchase stock of New Alliance Bank in an initial Public Offering, in violation of the securities laws. First, the conduct engaged in by the Defendant was arguably undertaken in violation of the securities laws. Second, even if his conduct were not a violation of the securities laws, the defendant can not take credit for helping the church make money when he subsequently stole the money from the Church. The Defendant does not get to claim some type of credit for helping the Church make money anymore than a bank employee could claim that he or she helped the bank underwrite some profitable consumer loans prior to stealing money from the banks vault. Simply put, the Defendant stole more than $8 million and that is an accurate measure of the loss. Moreover, as argued in the Governments Sentencing Memorandum (Dkt. No. 80), were the Court to take an aggressive posture the Court could include in the loss amount the additional $21 million taken in by the Defendant, from Milbury Holdings (Gov. Mem. (Dkt. No. 80) at Attachment 2). 2. Determination of the Number of Victims

As set forth in the Governments Sentencing Memorandum (Gov. Mem. (Dkt. No. 80) at 29-33) the specific offense characteristic for the number of victims is not a simply calculation. As explained in the Governments Sentencing Memorandum, by simply counting the names of the individuals that were defrauded and counting the Endowment fund as a single victim, the Court would conclude that there were approximately 42 victims. (See Attachment 1.) However, the number of people impacted by the fraud is not limited to just the victims in Attachment 1.

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The Government contends that the Court should count as victims the hundreds of parishioners who donated to the endowment fund and who were relying on the health and security of the endowment fund. The Defendant argues that some parishioners because they are young and may cry during services are too young to be considered a victim as defined in the Guidelines as any person who sustained any part of the actual loss . . . U.S.S.G. 2B1.1, App. Note 1. (See Def. Mem. II at 3-5). The Defendant goes on to cite cases addressing tax liability and then argues that the Governments argument would mean all citizens of the United States are victims when the Government is defrauded. In short, the Defendant contends that the St. Barbaras endowment fund, no matter how many people contributed to it and no matter how many people will suffer as a result of its depletion, should only be considered as one victim. The defendant misses the point. The question here becomes largely a factual one, in that the Second Circuit has stated that victims of fraud counts are those persons who have lost money or property as a direct result of the fraud. United States v. Napoli, 179 F.3d 1, 7 (2d Cir. 1999). Here, the members of Saint Barbaras Church have indeed lost money and property as a result of the fraud. As explained in detail on the Churchs web-site at www.saintbarbara.org the endowment fund was established to support and sustain the church. The Endowment Fund of Saint Barbara Greek Orthodox Church was established in 1963 with the vision to enable our community to become financially independent and provide necessary funding to allow our church to better serve its communicants in the religious, educational and ethnic fields of endeavor. As is traditional with all endowment funds, only the income from donor gifts is used for the needs of the community. Gifts from parishioners to the Endowment Fund ensure a strong permanent endowment, and help to expand and sustain the objectives of Saint Barbara Greek Orthodox Church. Endowment opportunities include college scholarships, community development, landscaping maintenance and improvement, church infrastructure, and funds in support of the Churchs educational activities for members of all ages.


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Gifts made to the endowment are invested by the Endowment Fund Board. Since it is only the income from the principal that is expended, the donors gift remains invested in perpetuity, helping to safeguard the Saint Barbara Church tradition of excellence in serving its community and its outreach. In certain circumstances, the income from their endowed gift is donor-restricted for a particular purpose, otherwise, the Endowment Fund Board determines the distribution of earnings. In 1997, the Endowment Fund Board adopted a spending policy that provided a total of $20,000 a year towards four community development goals: Clergy Development, Parent Teacher Organization (PTO) activities, Community Development and Saint Barbara Scholarships. http://www.saintbarbara.org/ministries/organizations/endowment.php; (See Attachment 6 at 1 describing how the endowment fund was set up to fund the retirement of the priests and clergy, as a scholarship fund children of the Parish, for community outreach and development, and to fund a Greek language school for children). See also United States v. Longo, 184 Fed.Appx. 910, 2006 WL 1674267 (11th Cir. 2006) (unpublished per curiam); United States v. Gonzalez, 647 F.3d 41, 64 (2d Cir. 2011) (finding there to be more than 50 victims and noting that while a not-for-profit organization rather than the donors is generally considered the victim, when donors to a non-profit relied on misrepresentations as to the intended uses of the funds they were therefore considered the victims). The Defendant cites United States v. Arnaout 431 F.3d 994, 999(7th Cir 2005) for the assertion that the enhancement for more than 250 victims should not apply. However, the Seventh Circuit in Arnaout did not hold that a specific offense characteristic for more than 50 or more than 250 for that matter could never apply when a charity is defrauded. In fact the Arnaout Court found that the amount of loss attributable to Arnaout, however, was approximately $300,000.... [and that] [i]t is entirely conceivable that of the over 17,000 potential victims, more than fifty contributed to the $300,000, but we cannot find proof by a preponderance of the evidence in the record that at least fifty donors contributed the amount attributable to Arnaout.


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Arnaout, 431 F.3d at 999. Accordingly, assuming that the rationale of the Arnaout Court were to apply here, the Court would merely have to engage in a factual determination and determine by a preponderance of the evidence that the approximately $1.4 million that the Defendant took from St. Barbaras can be attributed to more than 50 or more than 250 victims. Finally, as previously argued, if the Court determines that a mere two-level increase is appropriate based on the 42 discrete victims, the Government will argue for an upward departure so that the losses suffered by the parishioners as members of the church are considered by the Court. 3. Acting on Behalf of a Charitable or Religious Organization

As set out in the Governments Sentencing Memorandum (Dkt. No. 80 at 33-37) the Defendant represented himself as acting on behalf of the Church and should receive an additional 2 points pursuant to Section 2B1.1(b)(8)(A) which provides for a 2-point enhancement to the base offense level if the offense involved a misrepresentation that the defendant was acting on behalf of a charitable, educational, religious, or political organization, or a government agency. The Defendant seeks to argue that this specific offense characteristic does not apply because the Defendant enticed a victim to loan the money to St. Barbaras so that he could purportedly trade on the Churchs behalf but then his intentions changed. (Def. Mem. II at 6). This argument makes no sense. In fact, the case of United States v. Kinney, 211 F.3d 13, 19-21 (2d Cir. 2000) cited by the Government and again by defendant, defeats the Defendants argument. See, e.g. United States v. Berger, 224 F.3d 107 (2d Cir. 2000); United States v. Kinney, 211 F.3d 13 (2d Cir. 2000).


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The facts regarding this specific offense characteristic seem generally uncontested. The Defendant asked a parishioner to loan money, approximately $700,000, to the Defendant himself or to the Church, so that the money could be used by the Defendant to finance stock trades for the benefit of the Church. Both the Defendant and the parishioner have told ostensibly the same story. Then, having convinced the parishioner to loan the money for the benefit of the Church, the Defendant stole the money. Thus the additional two points apply because the Defendant used his charitable ties to further his own ends, while falsely purporting to act for the Church. See, e.g. United States v. Reasor, 541 F.3d 366 (5th Cir. 2008); United States v. Wiant, 314 F.3d 826 (6th Cir. 2003); United States v. Marcum, 16 F.3d 599 (4th Cir. 1994). Thus, 2 points should be added. 4. Use of Sophisticated Means to Carry Out and Conceal the Offense

The Defendant next argues that the two-level enhancement which applies [if] the offense otherwise involved sophisticated means. pursuant to 2B1.1(b)(10) is not applicable. This specific offense characteristic is clearly applicable as the Guidelines state that [c]onduct such as hiding assets or transactions, or both, through the use of fictitious entities . . . also ordinarily indicates sophisticated means. U.S.S.G. 2B1.1 app. n. 8(B). That is exactly what the Defendant did. The Defendant seems to argue that the scheme was not particularly sophisticated and that all he did was would move money from account to account. (Def. Mem. at 7). This movement of money from entity to fictitious entity is precisely the type of conduct covered by this Guidelines provision. See United States v. Regensberg, 2010 WL 2501042, 1 (2d Cir. 2010) (where the Court applied the enhancement when a defendant ran a Ponzi scheme and the execution of the scheme included creation of fraudulent [ ] documents, detailed reporting of

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fake earnings, use of Ponzi scheme payments to lull his investors, and alteration of an account statement to make it appear as if he had not lost his investors' money). See also United States v. Cole, 296 Fed. Appx. 195 (2d Cir. 2008); United States v. Kostakis, 364 F.3d 45 (2d Cir. 2004) (altering entries in an official log book on a repeated basis was found to be sophisticated means.) In this case, the Defendants conduct was quite sophisticated, more so than the conduct in Kostakis and remarkably similar to Regensberg. Here the Defendant falsified hundreds of documents, opened up numerous bank accounts, controlled what proved to be shell companies in Apeiron and Kinghtsbridge Holdings, and did so for nearly eight years. This conduct clearly constitutes sophisticated means for the purpose of the enhancement. 5. Violation of Securities Law While An Investment Advisor

The Defendant argues that United States Sentencing Guidelines 2B1.1(b)(17)(A)(iii) which provides for a four-level enhancement to the offense level [i]f the offense involved a violation of securities law and, at the time of the offense, the defendant was . . . an investment adviser, or a person associated with an investment adviser does not apply because the defendant was not compensated for his advice and did not charge a fee. This argument is wholly without merit and entirely disregards the facts of this case and the relevant case law. The Defendant likens his conduct to that of a golfing buddy or a barber giving advice and argues albeit unpersuasively that he was under no obligation to his victims. This is simply wrong. Courts have repeatedly upheld this enhancement in cases where defendants sold fabricated investments that were actually Ponzi schemes, see, e.g., United States v. Ogale, 2010 WL 1857351 (11th Cir. 2010); United States v. Ramunno, 289 Fed. Appx. 359 (11th Cir. 2008) (background in 599 F.3d 1269). Courts have also upheld this enhancement in cases where the

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defendants drained funds from previously legitimate investments. See, e.g., United States v. Kelley, 305 Fed. Appx. 705 (2d Cir. 2009) (background in 551 F.3d 171); United States v. Longo, 184 Fed. Appx. 910 (11th Cir. 2006). Based on the facts before the Court, including the attachments to the Governments original sentencing memorandum, this enhancement applies. However, the Government anticipates calling witnesses before the Court to establish that the Defendant provided the services of an investment advisor to the Church and took as compensation approximately $1.4 million in church funds and that he acted as a financial advisor to his other victims and took their funds.


No Departures Are Appropriate The Defendant has argued that the Court should depart because, in essence, all of the

specific offense characteristics and relevant Guideline enhancements result in a Guidelines range that is in his opinion too high. However, each of the various adjustments and enhancements that are applicable to the Defendant account for a different societal harm. Thus, a departure is not warranted. The Defendant's argument that the amount of loss, number of victims, sophisticated means, committing a fraud while serving as an investment advisor, defrauding a charitable or religious organization, and money laundering causes there to be overlapping enhancements to a degree not adequately considered by the Commission, should be rejected. Each of the referenced Specific Offense Characteristics would be correctly applied in this case and do not overlap.


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The Defendant's argument that a departure is warranted conflicts directly with the purpose, history and plain language of 2B1.1. The Sentencing Guidelines Commission placed each of the specific offense characteristics and each enhancement into the Guidelines and has systematically and repeatedly reviewed the Guidelines. Congress and the Guidelines Commission recognized that financial frauds, in particular large fraud where there are large number of victims who are vulnerable to fraud, merit additional punishment. Accordingly, in the wake of the large scale frauds at the beginning of the last decade, Congress passed legislation in the form of Sarbanes-Oxley that was specifically intended to increase Guideline Levels for large scale frauds. As there are separate societal harms for each of the enhancements, it simply does not amount to over-lapping or double-counting. Furthermore, the Defendant relies primarily on the case of United States v. Laurenson, 362 F.3d at 167 (2d Cir. 2004) that was decided with respect to a previous version of the Guidelines and vacated by Lauersen v. United States, 543 U.S. 1097 (2005) in light of Booker. Laurenson, was decided using the 2000 version of the Guidelines, prior Booker and prior to the recent amendments to the Fraud Guidelines. Moreover, the Laurenson, Court did not indicate that such a departure was required or even encouraged, but clearly stated that the decisions whether to depart, and the extent of the departure, if made at all, remain within the discretion of the sentencing judge. Laurenson, 362 F.3d at 167 (2d Cir. 2004). Subsequently, the Second Circuit in the unreported case of United States v. Philips, 256 Fed. Appx. 415 (2d Cir. 2007) 2007 WL 4233406 emphasized that reliance on Laurenson by the defendant in that case was unavailing because [i]n Lauersen we held that a district court could (although need not) mitigate the effect of cumulative sentencing enhancements by downwardly departing in some instances. Philips, 256 Fed. Appx. at 417.

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The fact that multiple Guidelines adjustments can be found to be applicable in a situation where a defendant acted as an investment advisor, used sophisticated means, defrauded a large number of victims out of a large sum of money and laundered the proceeds was no doubt considered by the Commission when the various provisions were included in the Guidelines. Notably, the societal harm caused by fraudulently obtaining more that $8 million is a separate and distinct harm from the specific offense conduct of causing loss to large number of victims or representing oneself to be acting on behalf of a charity or religious organization or even laundering the funds. There simply is no double counting or no need to depart. Contrary to defendants contentions here, this sort of aggregation would not constitute illicit double counting. Impermissible double counting occurs when one part of the guidelines is applied to increase a defendant's sentence to reflect the kind of harm that has already been fully accounted for by another part of the guidelines. United States v. Napoli, 179 F.3d 1, 12 fn 9 (2d Cir. 1999) (quoting United States v. Dudley, 102 F.3d 1184, 1186 (11th Cir. 1997). Similarly, in United States v. Samet, 200 Fed. Appx. 15, 24 (2d Cir. 2006) (unpublished), the Second Circuit rejected the argument that a sophisticated means enhancement was double counting where the Court already considered money laundering in the calculation. The Second Circuit rejected the argument because the sophisticated means applied to distinct harm from the underlying wire fraud conduct. As the Second Circuit stated in Samet [t]he imposition of somewhat overlapping enhancements does not necessarily mean double counting has occurred. Indeed, [d]ouble counting is legitimate where a single act is relevant to two dimensions of the Guidelines analysis. There was no impermissible double counting here because the sophisticated means enhancement was relevant to more than one aspect of [defendants]


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conduct. Samet, 200 Fed. Appx. at 24 (quoting United States v. Jackson, 346 F.3d 22, 25 (2d Cir. 2003) and United States v. Campbell, 967 F.2d 20, 25 (2d Cir. 1992)). Moreover, in the Samet case, the defendant Samet also challenged the enhancement that was imposed because of the fact that he was misrepresenting that he was acting on behalf of a charitable organization. The Second Circuit found that this enhancement did not substantially overlap with the other offense level adjustments. Samet, 200 Fed. Appx. at 24. Here as in Samet, the Defendant used sophisticated means unrelated to his misrepresenting that he was acting on behalf of a charitable organization which was in turn unrelated to his abuse of his position as a financial advisor. Similarly, in United States v. Allen, the Second Circuit reaffirmed its holding in United States v. Marsh that abuse of trust and more than minimal planning are necessarily or inherently duplicative enhancements. The Allen Court found [w]e previously have rejected the argument that abuse of a position of trust and more than minimal planning are necessarily or inherently duplicative enhancements. Allen, 201 F.3d 163, 167 (2d Cir. 2000) (citing United States v. Marsh, 955 F.2d 170, 171 (2d Cir. 1992)). It is telling that in Samet the Second Circuit rejected the defendants appeal and stated that Samet, merely seeks to eliminate the effect of the enhancement based on the significant effect it would have on his sentence, which the district court did not have to do. Samet, 200 Fed. Appx. at 24. Precisely the same can be said here. Defendant Loles merely seeks to eliminate the effect of the numerous enhancements based on the significant effect they will have on his sentence, which the District Court does not have to do. The Government asserts that the Court should not depart, especially when the Court considers that the Defendant himself employed all the tools at his disposal to commit this significant financial crime.

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Conclusion For the foregoing reasons, and those set forth in the Governments Sentencing

Memorandum, the Government respectfully submits that, under the circumstances of this case the Defendants Offense level is a level 40, resulting in a Guidelines range of 292-365 months.

Respectfully submitted, DAVID FEIN UNITED STATES ATTORNEY /S/ MICHAEL S. MCGARRY ASSISTANT U.S. ATTORNEY Federal Bar No. CT25713 157 Church Street, 23rd Floor New Haven, CT 06510 Tel.: (203) 821-3751 Fax: (203) 773-5378 Michael.McGarry@usdoj.gov


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CERTIFICATION I hereby certify that on December 14, 2012 a copy of foregoing Governments Sentencing Memorandum was filed electronically and served by hand on anyone unable to accept electronic filing. Notice of this filing will be sent by e-mail to all parties by operation of the Courts electronic filing system or by mail to anyone unable to accept electronic filing as indicated on the Notice of Electronic Filing. Parties may access this filing through the Courts CM/ECF System.