Tenth Circuit Reverses Enhancement Applications in "Interesting" Fraud Case: Hess/Koch

Hess and Koch are Charged and Plead Guilty to a Very Different Type of Fraud Case

Hess and Koch, persons who owned and worked at a funeral home respectively, were accused of crimes relating to owning a funeral home. Their funeral home would meet with persons seeking cremations for themselves [in the future] or loved ones who had died. However instead of directly cremating them they would donate body parts to customers who would use them for "scientific, medical, or educational purposes" as part of a separate nonprofit at the same address. The accused persons would also make materially false representations to receive remains from others. "Of the 811 individuals sold, only 42 individuals 'were procured . . . through informed consent.'" The facts are pretty rough, the rest of them you can read from the case.

Hess and Koch pled guilty to one count of mail fraud in relation to the case. The government stated their intent to seek an increase for sophisticated means, vulnerable victims and several other enhancements.

Ultimately the district court sentenced Hess to 240 months and Koch to 180 months. Hess and Koch appealed, arguing among other things that "(1) that the district court erred in its loss calculations; (2) that the district court erred in applying the large-number- of-vulnerable-victims enhancement; (3) that the district court erred by applying the sophisticated-means enhancement[.]"

The Tenth Circuit's Opinion

Pecuniary Loss Arguments

The District Court determined that the loss amount should include pecuniary loss, that is the loss equal to the money that the body-parts purchasers paid Hess. That amount was at least $500k. But the court indicated that no restitution was ordered, the body parts purchasers received a product as negotiated and derived an economic benefit from the transaction. While the district court found that the purchasers would not have purchased the remains if they knew they were stolen, there was no evidence that the purchasers suffered pecuniary harm and gave statements in the PSR to the contrary.

The Tenth circuit also indicated that the district court did not use the proper standard. "Pecuniary harm is not the money customers paid to a fraudster that they may not have paid had they known of the fraud. Instead, pecuniary harm equals the amount that the victim lost." The court indicated that the record provided no support for finding that the purchasers lost any money or suffered any financial harm. The court also rebuffed the prosecutor's arguments that district courts can use “the gain that resulted from the offense [as an alternative measure of loss]” if the loss “reasonably cannot be determined[ ]” because the district court never made a finding that the actual loss could not be determined.

Decisions Regarding Actual Loss and Offset

The Tenth Circuit also held that the district court erred by refusing to offset the actual loss with the value of legitimate goods and services provided to the next of kin victims. "The Guidelines Commentary instructs that actual '[l]oss shall be reduced by . . . the fair market value of the property returned and the services rendered.'" The Tenth circuit indicated that "When examining the value of Hess’s purportedly legitimate goods and services to the next of kin, the district court should consider which goods and services (1) derived their pecuniary value (to the next of kin) from their physical association or connection with the decedents’ remains, (2) retained their value independently from any association or connection with the decedents’ remains, or (3) were consumable or ephemeral such that their value was expended at the time of the fraud and was not subsequently diminished by the fraud’s discovery."

In finding that there were vulnerable victims, the District Court also erred "by making class determinations of vulnerability for two categories of victims: the decedents themselves and their grieving family members."

While it was true that the decedents were unable to protect themselves, there is no law that indicates that they required greater societal protection than the living, meaning that the decedents were not vulnerable victims for purpose of this enhancement. In addition, the grievers were not vulnerable victims solely because they were vulnerable in a general sense and the victim of a crime: "We do not agree that the inference of vulnerability to be drawn from those who have lost a family member is so powerful 'that there can be little doubt about [their] unusual vulnerability' to the fraud that occurred here."

Specific Means Enhancement

Finally, the Court indicated that Koch was inappropriately assessed the specific means enhancement because the district court determined that her actions were egregious or horrendous, which is not the standard. The standard is that "(1) the 'offense otherwise involved sophisticated means and (2) the defendant intentionally engaged in or caused the conduct constituting sophisticated means.'" Which was not met here.

Ultimately the district court's sentencing was reversed by the tenth circuit on several grounds and was remanded [sent back] for more review.