272 F.3d 159 (2nd Cir.

2001)

UNITED STATES OF AMERICA, APPELLEE,

v.
JAMES MANAS, DEFENDANT,
JOHN FASANO, JOSEPH PIGNATIELLO, DEFENDANTSAPPELLANTS.
Docket Nos. 00-1006, 00-1109
August Term, 2000

UNITED STATES COURT OF APPEALS FOR THE SECOND

CIRCUIT
Argued May 25, 2001
Decided November 27, 2001
1

Defendants appeal the judgments of conviction entered and sentences imposed

on December 29, 1999 and February 8, 2000 in the United States District Court
for the Southern District of New York (Sand, J.), following a jury verdict
convicting them on one count of conspiracy to commit securities fraud, wire
fraud, and commercial bribery, and separate substantive counts of wire fraud
and commercial bribery. In this opinion, we address the district court's loss
calculation pursuant to United States Sentencing Guidelines Manual 2F1.1(b)
(1) (1998). In a summary order filed separately, we affirm with respect to all
other issues raised on appeal. Loss calculation affirmed.

Francisco E. Celedonio, New York, New York, for Defendant-Appellant

Joseph Pignatiello.

Joshua L. Dratel, New York, New York (Joshua L. Dratel, P.C., New York,
New York; Martin J. Siegel, Marshal A. Mintz, New York, New York, of
counsel), for Defendant-Appellant John Fasano.

Timothy J. Coleman, Assistant United States Attorney, New York, New York
(Richard M. Strassberg, James J. Benjamin, Jr., Assistant United States
Attorneys, Mary Jo White, United States Attorney for the Southern District of
New York, New York, New York, of counsel), for Appellee United States of
America.

Before: Cardamone, F. I. Parker, Circuit Judges, and MURTHA* , District

Before: Cardamone, F. I. Parker, Circuit Judges, and MURTHA* , District

Judge.
Cardamone, Circuit Judge

Defendants John Fasano and Joseph Pignatiello (defendants or appellants)

appeal the judgments of conviction entered following a jury trial and sentences
imposed on December 29, 1999 and February 8, 2000, respectively, in the
United States District Court for the Southern District of New York (Sand, J.).
Each was found guilty of one count of conspiracy to commit securities fraud,
wire fraud, and commercial bribery, in violation of 18 U.S.C. 371 (1994); one
substantive count of wire fraud, in violation of 18 U.S.C. 1343, 1346 (1994);
and one substantive count of commercial bribery, in violation of 18 U.S.C.
1952(a)(3) (1994). In a separate summary order we affirm the judgments of
conviction with respect to all of these counts. We also affirm the sentences
imposed, and write to discuss one issue raised on appeal with respect to those
sentences that questions whether the sentencing court properly calculated the
loss resulting from defendants' criminal conduct under the United States
Sentencing Guidelines Manual (U.S.S.G. or Sentencing Guidelines) 2F1.1(b)
(1) (1998).

Defendants' conduct came to light in a government sting operation. A "sting" is

an elaborate confidence game worked by undercover police to catch criminals
red-handed. The sting here was set up so that the intended victims of
defendants' fraud never actually suffered an economic loss. Yet, as we have
previously ruled, the test for calculating a loss for sentencing purposes is
whether defendants intended that others suffer a loss, regardless of the
likelihood of success of their fraudulent scheme. See United States v. Klisser,
190 F.3d 34, 35-36 (2d Cir. 1999), cert. denied, 592 U.S. 1112 (2000).

When the government in a sting operation holds itself out as a thief in order to
catch a thief, we need to assure ourselves that the government has not exceeded
its lawful authority. Here, the defendants do not allege that the police conduct
was unconstitutional or arbitrary or otherwise beyond the authority of the
police. Indeed, nothing in the record suggests any police misbehavior. Rather,
the defendants raise several sentencing issues on appeal, and we find one
particularly troubling.

The government has conceded that the person who manipulated the stock price
at defendants' behest -- conduct for which defendants were charged -- was not a
participant in any criminal activity with regard to the stock. Because the
government took this somewhat anomalous position, it opened the door for

defendants to challenge their sentences on the ground that the sentencing court's
consideration of the conduct of this unwitting individual in their conspiracy
unfairly penalizes them insomuch as that person's conduct resulted in
meaningfully heavier sentences for each of them. We agree that in some
situations it would not be appropriate for a court to enhance a sentence because
of the conduct of an unwitting individual. In the end, however, we are satisfied
that the conduct in this case was both directed by the defendants and integral to
their criminal scheme. Hence, we affirm the loss calculation.
BACKGROUND
A. The Conspiracy
10

In light of the narrow issue to be resolved, our recitation of the facts will be
brief. At trial the government sought to prove that defendants Fasano and
Pignatiello engaged in a scheme to manipulate the stock of a publicly traded
company called Spaceplex International Amusement Centers, Ltd. (Spaceplex).
Its principal was James Manas, a named defendant, who entered a guilty plea
pursuant to a cooperation agreement with the government. Spaceplex's primary
asset was the Spaceplex indoor amusement center in St. James, Long Island,
which boasted video games, a snack bar, a laser game, and rides. At all relevant
times, Spaceplex common stock was a "penny stock" valued at less than $5 per
share and traded on the OTC Bulletin Board, a securities quotation system
operated by the National Association of Securities Dealers (NASD).

11

In the fall of 1995 Manas approached Fasano for help in "obtaining market
support" for Spaceplex stock. Fasano introduced Manas to Pignatiello, a stock
promoter. In a series of meetings and conversations conducted through early
January 1996, the three men developed a strategy to raise the price of
Spaceplex stock, which in December 1995 was trading at about $0.25 per
share. This strategy called for a 30-for-1 reverse stock split that would reduce
the number of shares available on the market, increase the price per share, and
make it easier to control that price in the future. The scheme also called for the
services of a market maker, defined by a federal statute to include as "any
dealer who, with respect to a security, holds himself out [in the interdealer
market] as being willing to buy and sell such security for his own account on a
regular or continuous basis." 15 U.S.C. 78c(a)(38) (1994); see SEC v. First
Jersey Sec., Inc., 101 F.3d 1450, 1469 (2d Cir. 1996).

12

It was envisioned that the market maker would manipulate the price of the
stock by placing bids and making numerous trades that would give the
appearance that the stock had an active market. The three men further planned

to enlist the services of a broker who would sell Spaceplex shares to investors
in a private placement once the price had risen to $3 per share, as a means of
solidifying the stock price and of generating profits for themselves. When the
stock price had grown sufficiently high, ideally $8 to $10 per share, they hoped
to launch a secondary public offering to generate further profits.
13

Pignatiello enlisted Peter Mazzeo to act as market maker. Mazzeo is a stock

trader in Jericho, Long Island who, in Pignatiello's words, was willing to "do
whatever we need done" but "[d]oesn't want to know anything." Thereafter,
acting on Pignatiello's directions, Mazzeo posted a bid of $2.50 per share for
Spaceplex stock at 1:56 p.m. on January 5, 1996. That quote represented a new
high bid and raised the market price for the stock from its opening high bid of
$2 the previous day. Over the next several weeks, Pignatiello asked Mazzeo's
firm to enter the high opening bid for Spaceplex stock in 42 out of 64
consecutive trading days. In following Pignatiello's instructions, Mazzeo by the
end of February 1996 had accumulated 7000 shares of Spaceplex stock, which
he held in several nominee accounts under Pignatiello's control in anticipation
of later sales.

14

Pignatiello also solicited and secured the brokerage services of an individual

who in fact was an undercover FBI agent posing as a corrupt stock broker
through a fictional firm with an office in Manhattan. Pignatiello explained to
the government agent his plans to raise the price of Spaceplex stock, secured
the agent's agreement to participate in return for a share of the profits, and
introduced the agent to Fasano and Manas as his partners in the scheme. On
January 17, 1996 Fasano hand delivered to the agent a certificate for 40,000
shares of Spaceplex stock that the agent was to sell to his fictitious brokerage
customers, and Pignatiello also instructed the agent to arrange a sale to his
customers of the 7000 shares that Mazzeo had accumulated.

15

Fortunately, out of concern for the danger of loss to innocent investors, the
undercover agent's superiors at the FBI instructed him not to sell Spaceplex
shares. Instead, he was told to complain that the certificate bore a restrictive
legend preventing sale of the stock, that he was subject to an NASD
examination, and later that he had already committed his available funds to
another transaction. As a result of the agent's ruses, Fasano and Pignatiello
arranged for the sale of Spaceplex stock through another company, and in
March 1996 Manas caused Spaceplex to issue 129,404 additional shares to
compensate the two of them (as well as Fasano's partner) for their services.
B. Prior Proceedings

16

On April 3, 1997 Pignatiello, Fasano, and Manas were indicted in the Southern
District of New York on one count of conspiracy to commit securities fraud,
wire fraud, and commercial bribery, as well as separate substantive counts of
wire fraud and commercial bribery. As noted, Manas entered a guilty plea.
Fasano and Pignatiello were tried as co-defendants by a jury before district
court Judge Leonard B. Sand from late June to July 15, 1999. The government
contended at trial that these two defendants had conspired with Manas to
defraud the agent's fictitious customers of the value of an honest broker's
services by agreeing to pay the agent a kickback in exchange for his sale of
Spaceplex stock to such customers at an artificially inflated price. The
government presented, among other evidence, taped recordings of numerous
conversations involving the co-defendants and the testimony of the undercover
agent and defendant Manas. Neither Fasano nor Pignatiello presented any
evidence. The jury convicted both of them on all three counts on July 15, 1999.

17

On December 29, 1999 and February 8, 2000, the district court sentenced
Fasano and Pignatiello to 37 months and 71 months of imprisonment,
respectively. In calculating each sentence, the district court imposed an 11-level
increase in the base offense level in light of its estimation that the loss from
defendants' criminal conduct was $900,000, pursuant to U.S.S.G. 2F1.1(b)(1)
(L). The sentencing court arrived at this figure by multiplying the number of
shares of Spaceplex stock implicated in the scheme (300,000) by the intended
increase in the price per share (from $2 in January 1996 to $5, for a total
increase of $3), as recommended by the presentence report for each defendant.

18

Pignatiello objected to the determination that $2 per share was the appropriate
bottom limit for measuring the intended increase. He reasoned that because the
increase from $2 to $3 per share was due solely to Mazzeo's conduct, and
because the undercover agent was to start selling shares to innocent customers
only when Mazzeo had raised the price to $3 per share, the "contemplated
benefit" of the illegal scheme was, at most, an increase of $3 to $5 per share.
Under this reasoning, the 300,000 shares should have been multiplied by a $2
increase per share, for a total loss of $600,000, yielding only a 10- level
increase pursuant to U.S.S.G. 2F1.1(b)(1)(K).

19

By the time of Pignatiello's sentencing, the government had conceded that

Mazzeo was not a participant in the criminal scheme and that he "did not
engage in any criminal activity with regard to the Spaceplex stock."
Nonetheless, the government contended that the price of Spaceplex stock
should be measured starting from a price of $2 per share, because the increase
from $2 to $3 per share resulted from actions Mazzeo had taken pursuant to
Pignatiello's instructions and was specifically intended by defendants as an

integral step in the larger scheme to raise the price as high as $10 per share. The
district court adopted the government's position, reasoning that "the record fully
supports the computation reflected in the presentence report" and that "we are
dealing... not with mathematical precision, but [with] what was intended and
what was expected... with respect to the stock of Spaceplex."
20

On appeal, Pignatiello asserts the district court's loss calculation was in error,
and Fasano incorporates this argument by reference.

DISCUSSION
I. Standard of Review
21

"On appeal from a sentence, we uphold the sentencing court's factual findings
unless they are clearly erroneous, and review its legal determinations de novo,
while giving due deference to its application of the Sentencing Guidelines to
the facts." United States v. Berg, 250 F.3d 139, 142 (2d Cir. 2001). Although
the computation of the loss is a question of fact reviewed for clear error, the
meaning of "loss" as the term is used in the Sentencing Guidelines is a legal
question that is reviewed de novo. United States v. Mucciante, 21 F.3d 1228,
1237 (2d Cir. 1994).

22

Since Fasano failed to raise his objection to the loss calculation before the
district court, we may vacate his sentence only if its imposition was the result
of a plain error affecting substantial rights. See Fed. R. Crim. P. 52(b); United
States v. Caban, 173 F.3d 89, 92 (2d Cir. 1999). Inasmuch as we ultimately find
no error in the trial court's loss calculation, we need not undertake a separate
plain-error analysis in order to rule on Fasano's challenge to that calculation.
See United States v. Olano, 507 U.S. 725, 732 (1993) ("The first limitation on
appellate authority under Rule 52(b) is that there indeed be an 'error.'"); United
States v. Gitten, 231 F.3d 77, 79 (2d Cir. 2000).
II. Loss Calculation
A. General Principles

23

Because Fasano and Pignatiello were sentenced in December 1999 and January
2000, we turn to the 1998 version of the Sentencing Guidelines then in effect
for guidance in reviewing the loss calculation. See United States v. Karro, 257
F.3d 112, 120 & n.2 (2d Cir. 2001); Gitten, 231 F.3d at 79.

24

The 1998 Sentencing Guidelines set forth a base offense level of six for
offenses involving fraud or deceit, and provide for an increase in the base
offense level "[i]f the loss exceeded $2,000." U.S.S.G. 2F1.1(a), (b)(1). This
increase ranges anywhere from one level, if the loss was more than $2,000 but
not more than $5,000, up to 18 levels, if the loss was more than $80 million. Id.
2F1.1(b)(1)(B)-(S). Implicated here are the 11-level increase for a loss of
$900,000 that the district court imposed, and alternatively, the 10-level increase
for a loss of $600,000 that appellants seek. See id. 2F1.1(b)(1)(K), (L).

25

The Commentary to the Sentencing Guidelines explains that "[a]s in theft cases,
loss is the value of the money, property, or services unlawfully taken." Id.
2F1.1, cmt. n.8 (citing U.S.S.G. 2B1.1, cmt. n.2); see also id. 2F1.1, cmt.
n.8(a) ("Where, for example, a defendant fraudulently represents that stock is
worth $40,000 and the stock is worth only $10,000, the loss is the amount by
which the stock was overvalued (i.e., $30,000)."). Consistent with the
provisions applicable to conspiracy cases, the Commentary states that "if an
intended loss that the defendant was attempting to inflict can be determined,
this figure will be used if it is greater than the actual loss." Id. 2F1.1, cmt. n.8
(citing U.S.S.G. 2X1.1). The Commentary elaborates

26

For the purposes of subsection (b)(1), the loss need not be determined with
precision. The court need only make a reasonable estimate of the loss, given the
available information. This estimate, for example, may be based on the
approximate number of victims and an estimate of the average loss to each
victim, or on more general factors, such as the nature and duration of the fraud
and the revenues generated by similar operations. The offender's gain from
committing the fraud is an alternative estimate that ordinarily will
underestimate the loss.

27

Id. 2F1.1, cmt. n.9; see also United States v. Pedragh, 225 F.3d 240, 243-45
(2d Cir. 2000) (explaining role of Commentary in interpretation of Sentencing
Guidelines).
B. The Present Dispute

28

Although appellants first challenge as excessive the district court's factual

finding that 300,000 shares were at stake, we see no clear error in that finding.
The record contains ample evidence of the 47,000 shares that the undercover
agent was to sell (40,000 represented by the certificate delivered by Fasano plus
7000 of the shares held by Mazzeo), an additional 50,000 shares issued to
Fasano's brother that remained under Fasano's control, and 207,000 to 227,000

shares that had been issued or were to be issued to Manas and another
Spaceplex officer. Hence, the total number of shares at stake exceeds 300,000.
29

Appellants do not contest that: (1) their intended gain is an appropriate proxy
for estimating loss; (2) the intended increase in the price of Spaceplex stock
(multiplied by the number of shares at stake) is an appropriate gauge of the
intended gain; or (3) $5 per share is a reasonable upper limit for estimating the
intended increase in the Spaceplex stock price. Thus, the only question
remaining is whether the sentencing court correctly set the bottom benchmark
at $2 rather than $3 per share in estimating the intended increase in the
Spaceplex stock price. As noted above, Pignatiello challenges the $2
benchmark on the rationale that the undercover agent had been directed not to
commence the fraudulent sales of Spaceplex shares to his customers until Peter
Mazzeo had pushed the price up to $3 per share. Pignatiello's appeal thus raises
the question whether the term "loss" as used in U.S.S.G. 2F1.1(b)(1) may
properly include an amount attributable to what the government concedes was
lawful conduct on the part of Mazzeo. Neither appellants nor the government
has cited any authority directly on point that would resolve this question and we
have found none ourselves.
1. The Carrozzella Decision

30

Nevertheless, we find helpful guidance on this issue from our decision in

United States v. Carrozzella, 105 F.3d 796, 802-04 (2d Cir. 1997), rejected as
dicta on other grounds by United States v. Kennedy, 233 F.3d 157, 160 (2d Cir.
2000). There we addressed an increase in the base offense level premised on the
defendant's leadership "of a criminal activity that involved five or more
participants or was otherwise extensive," pursuant to U.S.S.G. 3B1.1(a).
Carrozzella, 105 F.3d at 802. Under that provision of the Sentencing
Guidelines, unknowing or unwitting participants in a criminal scheme may not
be counted in ascertaining whether the scheme "involved five or more
participants," but they may be counted in ascertaining whether it was
"otherwise extensive." Id.; accord United States v. Paccione, 202 F.3d 622, 624
(2d Cir. 2000) (per curiam). The question presented in Carrozzella was how to
count such unknowing participants under the latter prong. 105 F.3d at 802.

31

To resolve this question, we interpreted the "otherwise extensive" prong as

asking whether the criminal scheme was the "functional equivalent" of a
scheme involving five or more knowing participants. Id. at 803. We stated that
in determining functional equivalence, a sentencing court must consider the
following

32

(i) the number of knowing participants;

33

(ii) the number of unknowing participants whose activities were organized or

led by the defendant with specific criminal intent;

34

(iii) the extent to which the services of the unknowing participants were
peculiar and necessary to the criminal scheme.

35

Id. at 803-04; accord United States v. Wilson, 240 F.3d 39, 47-50 (D.C. Cir.
2001) (adopting Carrozzella standard); United States v. Helbling, 209 F.3d 226,
244-48 (3d Cir. 2000) (same). We further explained that the third factor
requires an examination of "the nature of the services provided," and that "
[l]awful services that are not peculiarly tailored and necessary to a particular
crime but are fungible with others generally available to the public are not the
functional equivalent of knowing participation." Carrozzella, 105 F.3d at 804.

36

Significantly, for purposes of resolving the issue before us today, the decision
in Carrozzella suggests that in certain instances in the calculation of a criminal
sentence, a defendant may be held responsible for the lawful activities of
unwitting participants in the criminal scheme. The last quoted statement in
particular seems to confirm this point. Admittedly, the word "[l]awful" as used
in that statement might be read as a limitation on the types of conduct that are
embraced by U.S.S.G. 3B1.1(a). But if that were the case, then one would
expect the same word to appear as a qualifier in the decision's three-prong test.
It does not, and so the import of the quoted passage must mean that lawful
services fall within U.S.S.G. 3B1.1(a) when "peculiarly tailored and
necessary to a particular crime" but not when "fungible with others generally
available to the public." In fact, subsequent case law has applied the
Carrozzella test in precisely this fashion. See, e.g., United States v. Napoli, 179
F.3d 1, 13-15 (2d Cir. 1999) (finding "loss" properly included amounts
resulting from actions of unwitting casino employees in processing transactions
requested in furtherance of defendant's money laundering scheme); United
States v. Nolan, 136 F.3d 265, 272-73 (2d Cir. 1998) (approving sentencing
court's consideration of unwitting accountants, bank officers, and lawyers used
to perpetuate embezzlement scheme).
2. Application

37

The troubling aspect of this case is that the government concedes that Mazzeo
acted legally yet the defendants' sentences were enhanced on account of that
conduct. However, the defendants' control over Mazzeo and their intentions

with respect to his activities convince us that the sentencing court did not err.
By analogy to Carrozzella, we think the rule is that a defendant may be held
responsible under U.S.S.G. 2F1.1(b)(1) for the losses incurred by the lawful
activities of an unwitting participant in the criminal scheme where (1) the
activities were organized or led by the defendant with specific criminal intent,
(2) the services of the unknowing participant were peculiar and necessary to the
criminal scheme, and (3) these services were not fungible with others generally
available to the public.
38

In the ordinary case, this rule relieves the sentencing court of the onerous task
of ferreting out losses that may have been caused by the otherwise lawful acts
of unwitting participants in the criminal scheme. Adopting such a rule has the
additional advantage of construing the relevant Sentencing Guidelines as
coherent with one another. See FDA v. Brown & Williamson Tobacco Corp.,
529 U.S. 120, 133 (2000) (explaining that a statute must be interpreted "as a
symmetrical and coherent regulatory scheme," and "fit, if possible, all parts into
an harmonious whole," recognizing that the meaning of one statute may be
affected by others); United States v. Kirvan, 86 F.3d 309, 311-15 (2d Cir. 1996)
(construing Sentencing Guidelines "as if they were a statute"); see also
Carrozzella, 105 F.3d at 802-03 (noting that U.S.S.G. 3B1.1(a) and 2F1.1
play complementary roles in increasing sentences based on "head counting" and
loss, respectively).

39

When this principle is applied in the present case, we see no error in the trial
court's including in the loss calculation the increase from $2 to $3 per share in
the Spaceplex stock price attributable to Mazzeo's lawful conduct. Although
the district court made no formal, particularized findings, it specifically noted
that Pignatiello had orchestrated the entire scheme, of which Mazzeo's activities
were a part, and it further acknowledged that the purpose of the stock
manipulation was to help raise the price per share to a level that would permit a
secondary public offering at a profit to the conspirators.

40

Moreover, in adopting the $2 benchmark price, the trial court reasoned that the
increase in stock price to $3 per share that Mazzeo generated was what the
defendants intended and expected with respect to the Spaceplex stock.

41

We have recognized that particularized findings are unnecessary where the

sentencing court speaks generally to the pertinent considerations and the
specific facts are apparent from the record. United States v. Chacko, 169 F.3d
140, 150-51 (2d Cir. 1999); accord Napoli, 179 F.3d at 14-15; United States v.
Spencer, 129 F.3d 246, 253-54 (2d Cir. 1997). Here, neither appellants nor the
government disputes it was Mazzeo's market-making activities that caused the

price of Spaceplex stock to rise from $2 to $3 per share. As the record readily
demonstrates, it was Mazzeo's specific act of posting a record high bid of $2.50
per share on January 5, 1996 that provided the initial impetus for the price
increase, and it was Mazzeo's subsequent trades of Spaceplex stock, all
undertaken at Pignatiello's direction, that caused the price eventually to rise to
$3 per share.
42

As a consequence, we conclude that, with respect to the amounts attributable to

Mazzeo's lawful conduct, the district court's loss calculation was indeed "a
reasonable estimate of the loss, given the available information." U.S.S.G.
2F1.1 cmt. n.9.

CONCLUSION
43

Accordingly, for the reasons set out above, we affirm the district court's loss
calculation and the sentences imposed on defendants that resulted from it.
Because we have resolved all other issues on this appeal in the summary order
filed separately herewith, the judgments of conviction are hereby affirmed.

NOTE:
*

Hon. J. Garvan Murtha, Chief Judge, United States District Court for the
District of Vermont, sitting by designation.