Free Sentencing Memorandum - District Court of Arizona - Arizona

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PAUL K. CHARLTON United States Attorney District of Arizona Richard I. Mesh Assistant U.S. Attorney Arizona State Bar No. 02716 Two Renaissance Squares 40 N. Central Avenue, Suite 1200 Phoenix, Arizona 85004-4408 Telephone: (602) 514-7500 [email protected]

UNITED STATES DISTRICT COURT DISTRICT OF ARIZONA United States of America CR-04-0276-01-PHX-SMM Plaintiff, v. Robert C. Hazlett, Defendants. The United States of America through its undersigned attorneys, hereby submits this memorandum in support of the government's request that the defendant be held accountable for restitution in the total amount of $744,376.00 incident to his conviction for Conspiracy to Commit in Bank Fraud and Student Loan Fraud, as alleged in count 33 of the Superseding Indictment. A. Law Title 18, United States Code (U.S.C.) § 3663(a), Mandatory Restitution to Victims of Certain Crimes, requires this Court when sentencing a defendant convicted of an offense against property under Title 18, to include an order that the defendant make restitution to the victim of the offense. A conviction pursuant to Title 18, U.S.C. § 371, Conspiracy to commit any offense against the United States, or defraud the United States, is subject to the application of the Mandatory Victim Restitution Act, 18 U.S.C. § 3663(a), United States v. Kubick, 205 F.3d 1117 (9 th Cir. 1999), United States v. Einstman, 325 F. Supp. 2d 373 (S.D.N.Y., 2004). The government is a "victim" that can be awarded restitution under the Mandatory Victim Restitution GOVERNMENT'S SENTENCING RECOMMENDATION RE: RESTITUTION

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Act. United States v. Dickerson, 370 F.3d 1330 (11 th Cir. 2004); United States v. Ekamem, 383 F.3d 40 (2 nd Cir. 2004). Each member of a conspiracy is responsible for the actions of the other conspirators performed during the course and in furtherance of the conspiracy. If one member of a conspiracy commits a crime in furtherance of a conspiracy, the other members have also, under the law, committed that crime. Pinkerton v. United States, 328 U.S. 640 (1946), United States v. Alvarez-Valenzuela, 231 F.3d 1198, 1202 (9 th Cir. 2000). United States Sentencing Guideline (U.S.S.G.), Section 5E1.1 directs that in the case of an identifiable victim the Court shall enter a restitution order for the full amount of the victim's loss if such order is authorized under 18 U.S.C. § 3663(a). In the Hazlett case, the indictment lists the conspiracy arising at least as earlier as April 1999 and continuing through June 2000. Hence, the 1998 U.S.S.G. edition in effect at that time should control the award of restitution in this case.

B. Facts The investigation into the fraudulent activities of Valley Acceptance Corporation (VAC) was initiated based upon information provided during December 1999 to the Federal Bureau of Investigations (FBI) by co-defendant, James Stevens. In the course of the ensuing joint investigation conducted by the FBI and United States Department of Education, Office of Inspector General, it was determined that 537 fraudulent student consolidation loans had been presented to SunTrust Bank through the efforts of debt collectors employed at Valley Acceptance Corporation. The collectors had misrepresented that the students had made six payments on their previously defaulted college issued loans so that the debtors would qualify for new replacement loans issued by SunTrust Bank and insured by the United States Department of Education through its agent, the Educational Credit Management Corporation (ECMC). The evidence presented at trial revealed that the defendant not only encouraged this practice, but also participated in the processing of the fraudulent loans by signing off on the loan verification 2

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forms which were needed to complete the loan packages being forwarded to SunTrust Bank. The defendant was the President and sole owner of VAC, which received the lion's share of the commissions for the new loans. Many of the fraudulent loans procured from SunTrust Bank by VAC went into a default status almost immediately due to the former student borrowers' inability to make their payments while others defaulted after having made some payments. The students whose loans were consolidated opted for a VAC promised improvement of their credit ratings and in some cases, lower monthly payments, without knowledge of the frauds being perpetrated in their names. The SunTrust Bank was insured against losses from defaulting consolidated student loans via a contract with ECMC. During 2000 to 2003, SunTrust Bank presented to ECMC, 229 VAC consolidated loans which were in default, for which the ECMC then paid to the bank the outstanding principal balance, accumulated interest and fees on those accounts. The

investigation revealed that these 229 loans had been procured by fraud. ECMC declined as of October 2003, to accept any additional defaulted loans from SunTrust Bank that had been placed by VAC because of the extent of the fraud. The bank is presently holding 49 loans originated by VAC and were procured by fraud but will not be accepted by ECMC under the insurance contract. These loans are in a default status and the debtors are not making payments on the outstanding balance. The total amount of outstanding principal sought by the SunTrust Bank for restitution on these 49 defaulted loans is $313,138.00 (A detailed analysis of this amount follows in Attachments 1-9 of this memorandum) The Educational Credit Management Corporation is currently holding 54 loans which are in a default status and have an outstanding principal balance in the total amount of $381,116.00 the Educational Credit Management Corporation seeks restitution from the defendant in that total amount. (A detailed analysis of this amount follows in Attachment 1-7) The United States Department of Education, pursuant to an agreement with the Educational Credit Management Corporation, has assumed the responsibility for 8 loans previously procured through fraudulent means by Valley Acceptance Corporation from SunTrust Bank. The principal outstanding balance on these loans is $50,122.00 for which the United

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States Government now seeks restitution from the defendant. (A detailed analysis of this amount follows in Attachments (1-9) The total amount of restitution currently due the three victims is $744,376.00.

C. Methodology The restitution amounts presented above have been calculated from only the principal outstanding balance due in whole dollar amounts on the 111 fraudulently procured loans currently in default. The listed amounts have taken into account any reduction in principal attributable to previous payments made by the debtors which reduced the principal outstanding balance prior to the default of the loan. Eliminated from this analysis is any amounts from the173 previously defaulted loans which in the interim have been paid in full, returned to a payment status or otherwise retired by the debtors. The interest due on the original loans or other fees occasioned by the default or other collection efforts have not been included in the restitution amounts. In United States v. Davoudi, 172 F.3d 1130 (9 th Cir. 1999), the Court held that interest on fraudulently obtained loans should be treated the same for restitution and fraud loss purposes, but such interest is an "all or nothing proposition" so that "(e)ither both the interest due and the interest paid at the time of the offense is discovered should be considered, or neither should be considered." The government has elected not to include interest because to do so would raise complex issues in the calculation of future interest. Subsequent to the Davoudi decision, the 9 th Circuit held that restitution for bank fraud may include interest and finance charges that directly resulted from the offense. United States v. Morgan, 376 F.3d 1002 (9 th Cir. 2004). The government has elected not to urge Davoudi, id, because it was decided four years after the offenses involved in this case and to do so would involve ex post facto implications. The investigation revealed that out of 640 consolidated loans placed by Valley Acceptance Corporation with SunTrust, 537 of those loans had been procured through fraudulent means. As of April 27, 2006, a total of 426 of those fraudulently procured loans had either been paid off by the debtors or are now in a performing status with either SunTrust Bank or ECMC.

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When a party to a bilateral contract is induced to make it by fraudulent representations, he has the power of avoidance of the contract or the power to ratify it. Corbin on Contracts, West Publishing Co., Section 146. The government has elected to treat the continuing receipt of payments from the debtors whose contracts were procured by fraud as a form of ratification of their contracts on the part of SunTrust Bank and ECMC. All of these contracts arose more than five years ago. Practical necessity in order to establish a sum certain for restitution, requires a cut off of potential future claims as to the restitution issue. In the event of a subsequent default on one of these still performing loans, the creditors will have to seek their remedy for such a breach of the contract through a civil judgement and enforcement rather than restitution in this criminal case. The government in the course of its prosecution with the other co-defendants, agreed via their plea agreements, that each of those codefendants would be held responsible only for the losses arising from their personal participation in the conspiracy rather than through the concept of vicarious liability. Therefore, the government has previously sought restitution orders against defendants Prather, Stevens, Evans, and Honderd which represented the then known losses arising from their fraudulent processing of applications for consolidation loans to be issued by SunTrust Bank. Attachments 2-5 lists the current outstanding restitution to be paid by each of these codefendants and will be the subject of separate motions to modify restitution in their cases. As a matter of law, the amount that each other codefendant is responsible for paying should be considered a joint and several obligation between each of them and defendant Hazlett. It should be remembered by the Court that the lion's share of the commissions earned from the fraudulent loans, went to Valley Acceptance Corporation, which provided the source for Hazlett's handsome bonuses as the company's sole owner. Additionally, defendant Hazlett should be held responsible for the four defaulted loans in the amount of $20,114.00 that were processed by other collectors employed by Valley Acceptance Corporation but who were not subject of criminal prosecution.

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D. Attachments Attachment 1 represents a recapitulation of the defaulted loans sought for restitution, listed according to victim and as to each defendant. Attachments 2-5 is a detailed list of loans, currently in a default status, that were processed by each specific codefendant while employed as a debt collector at Valley Acceptance Corporation. Attachment 6 is a list of 8 loans originated at VAC and procured by fraud which were obtained by collectors who were not individually prosecuted. These loans are currently in default and held by ECMC and SunTrust Bank. Attachment 7 is the chart prepared by ECMC of subrogated loans as of April 27, 2006, which were received from SunTrust Bank. The list includes the outstanding principal balance for each defaulted loan. Attachment 8 is the chart prepared by SunTrust Bank of 55 VAC originated loans which were procured by fraud. Currently, 49 of these loans are held in a default status by the bank. An additional six defaulted loans appearing on the list have been returned to a repayment status. ECMC has declined since October 2003 to accept the bank's claims for payment for any of these loans. Attachment 9 is the chart prepared by SunTrust Bank of 229 VAC originated loans procured by fraud and that subsequently entered a default status. The bank has been paid by ECMC for all these defaulted loans. Attachment 10 is a chart of the VAC conspirators and their photographs. Respectfully submitted this 7 th day of June, 2006. PAUL K. CHARLTON United States Attorney Districts of Arizona S/Richard I. Mesh Richard I. Mesh Assistant U.S. Attorney

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I hereby certify that on June 7, 2006, I electronically transmitted the attached document to the Clerk's Office using the CM/ECF System for filing and transmittal of a Notice of Electronic Filing to the following CM/ECF registrant(s): Honorable Stephen M. McNamee United States District Judge Booker T. Evans, Jr. Attorney at Law Greenberg Traurig, LLP 2375 E. Camelback Rd., Suite 700 Phoenix, AZ 85012 Attorney for Defendant Hazlett Shawn T. Shear Senior U.S. Probation Officer 401 W . W ashington Street, Suite 160 Phoenix, AZ 85003 S/Richard I. Mesh

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