Government’s Sentencing Memorandum — United States v. Stephen Smith, No. 20-CR-196-2 (Dkt. 138, E.D. Wis.)

Summary

The Justice Department's Fraud Section asks the Eastern District of Wisconsin to sentence Stephen Smith at the low end of a 41-51-month guideline range, with two years of supervised release and $730,000 in restitution. The memorandum calls Smith a co-leader, with brother Thomas Smith, of a scheme behind five fraudulent PPP applications to Financial Institution 1 seeking $960,000. It says Smith and Thomas Smith built an application for the defunct CFA Auto Transport with fake tax forms showing 38 employees; the $242,500 loan was funded on May 6, 2020 and Smith paid Thomas Smith $65,000 of it. It adds seven EIDL applications, all declined, and false statements to the bank and to FBI agents. Smith pleaded guilty to one count of bank fraud on February 23, 2021.

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UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WISCONSIN

UNITED STATES OF AMERICA,
Plaintiff,
v. Case No. 20-CR-196-2

STEPHEN SMITH,

Defendant.

GOVERNMENT’S SENTENCING MEMORANDUM

Stephen Smith (the “Defendant”) was the co-leader of a scheme to defraud the

Paycheck Protection Program (“PPP”) and was involved in the submission of five

fraudulent loan applications seeking $960,000 to Financial Institution 1. For his

conduct, the Defendant faces a guideline sentencing range of 41-51 months’

incarceration as recommended by the Plea Agreement (Dkt. 73) and a statutory

maximum sentence of 30 years’ incarceration. In light of the factors in 18 U.S.C. § 3553

and for the reasons set forth below, the United States respectfully requests that this

Court impose a term of imprisonment at the low end of the United States Sentencing

Guidelines (the “Guidelines” or “U.S.S.G.”) range and two years of supervised release.

The United States also asks that the Court order the Defendant to pay $730,000 in

restitution.

I. FACTUAL BACKGROUND

In early 2020, as the COVID-19 pandemic spread across the country causing

death and economic distress, the U.S. government assembled relief programs to help

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those whose livelihoods were jeopardized. Against this backdrop, the Defendant

engaged in a cash grab to fraudulently obtain money through these programs. The

Defendant sought to enrich himself by getting involve in multiple fraudulent loan

applications, seeking $960,000, using two of his own defunct companies and companies

owned by his friends and acquaintances.

A. The CARES Act

In March 2020, in response to the many challenges presented by the pandemic,

Congress passed the CARES ACT, Pub. L. 116-136, which created the PPP. The PPP

authorized $349 billion in forgivable loans to small businesses to be used for payroll,

mortgage interest, rent/lease payments, or utilities. In April 2020, Congress authorized

an additional $310 billion for PPP funding. These funds were designed to address the

unprecedented crisis facing Americans—especially business owners whose livelihoods

were threatened by the public health emergency. PPP funds were designed as a lifeline.

The program was designed to provide funds quickly and easily to qualifying

individuals. PPP loans were not dispensed through any government bureaucracy;

funds were distributed by banks who had existing relationships with many of the

people in need. To apply, individuals submitted an application to a participating

financial institution along with supporting documentation as to the business’s payroll

expenses. The supporting documentation requirement was minimal, and could be

satisfied with one years’ worth of the company’s tax records. If a PPP loan application

was approved, the participating financial institution funded the PPP loan using its own

monies, which were 100% guaranteed by the Small Business Administration (“SBA”).

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B. Overview of the Scheme

A more detailed recitation of the facts relating to the scheme are detailed in the

Defendant’s plea agreement (Dkt No. 73), the plea agreements of his co-defendants and

co-schemers, the PSR, and the government’s submission regarding restitution. (Dkt. No.

87.)

In April 2020, the Defendant learned that his brother, Thomas Smith, had

received legitimate PPP loans for two of his businesses, and asked Thomas Smith to

help him get a PPP loan for his business, CFA Auto Transport. The Defendant wanted

this loan even though CFA was defunct and was not eligible for a PPP loan.

Nonetheless, the Defendant and Thomas Smith worked together and created a

fraudulent PPP loan application for CFA, which included fake tax forms purporting to

show that CFA had 38 employees. The application sought a $242,500 loan. The

Defendant dropped off the application at Financial Institution 1 on May 1, 2020, and the

loan was funded in full on May 6, 2020. The Defendant then paid Thomas Smith

$65,000 of the fraudulent loan proceeds for his assistance in preparing the fraudulent

loan paperwork.

After seeing how easy it was to get the money for CFA, the Defendant continued

to find other ways to get PPP loans along with his brother. The Defendant was

involved to various degrees in the submission the four other fraudulent PPP loans listed

below:

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Loan
Individuals Approx. Date
Applicant Company Amount
Involved in of Loan
Company Owner (Applied
Obtaining Loan Application
For)
Davis Samuel Davis
Development Samuel Davis Thomas Smith $177,500 April 26, 2020
Group Inc. Stephen Smith
Glory Robert Hamilton
Robert
Transportation Thomas Smith $155,000 May 1, 2020
Hamilton
Services LLC Stephen Smith
Deon Petty
Rebels Paris Thomas Smith
Deon Petty $155,000 May 8, 2020
LLC Stephen Smith
Marvin Fitzgerald
New
Stephen Smith Marvin Fitzgerald
Beginnings $230,000
/ Marvin Thomas Smith May 24, 2020
Family Services (not funded)
Fitzgerald Stephen Smith
LLC

After applying for a loan for CFA, the Defendant, Thomas Smith, and Deon Petty

agreed to get a fraudulent loan for Petty’s company, Rebels. The Defendant, with help

from Thomas Smith, created a fraudulent loan application package for Rebels seeking a

$155,000 loan. Petty submitted it to Financial Institution 1, and the loan was funded.

After the loan was funded, Petty paid the Defendant $30,000 of the fraudulent loan

proceeds.

The Defendant did not stop with the fraudulent CFA and Rebels loans. The

Defendant was the registered agent of a second company, New Beginnings, that was

also defunct. In order to conceal his involvement with New Beginnings, the Defendant

directed Marvin Fitzgerald to file paperwork with the State of Wisconsin establishing

Fitzgerald as the registered agent of New Beginnings. The Defendant then created a

fraudulent loan application package seeking $230,000 with help from Thomas Smith

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and directed Fitzgerald to submit it to Financial Institution 1. The application was

denied, and the loan was not funded.

While the Defendant was not involved in creating the loan applications for Davis

Development Group or Glory Transportation, he was involved in certain aspects of the

loans. Samuel Davis worked with Thomas Smith to get a loan for Davis Development

Group and gave Thomas Smith a cashier’s check for $75,000 after the loan was funded.

Davis understood that the money was going to be split with the Defendant, and the

Defendant drove to Chicago with Thomas Smith to pick up the check. (Davis Plea

Agreement, Dkt. No. 25, ¶¶ 12, 20.) After the bank accounts were frozen, the Defendant

called Davis to suggest that Davis should protect Thomas Smith for directing the

fraudulent scheme. (Id. at ¶ 24.)

As to the Glory Transportation loan, the Defendant approached Robert Hamilton

to suggest he get a loan. The Defendant told Hamilton that Thomas Smith could help

him with the paperwork to get the PPP loan. (Hamilton Plea Agreement, Dkt. No. 38,

¶ 11.) After the Glory Transportation loan was funded and Hamilton paid a portion of

the proceeds to Thomas Smith, Thomas Smith told Hamilton to also pay the Defendant

$10,000 for suggesting Hamilton get the loan. (Id. at ¶ 17.)

The easy money the Defendant and his co-schemers received raised concerns at

Financial Institution 1, the bank handling all of the loan applications in the scheme. A

representative from Financial Institution 1 reached out to the Defendant on June 8, 2020.

He lied about the payment he made to Thomas Smith. He claimed that the $65,000 he

paid to Thomas Smith was for equipment and a trailer. He claimed that he paid himself

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cashier’s checks in order to pay CFA employees in cash, and that CFA had 35 or 36

employees.

After the Defendant was contacted by Financial Institution 1, the Defendant also

made false statements to law enforcement officers with the Federal Bureau of

Investigation. He told them that he used the loan on payroll, operating expenses, and

to buy equipment for CFA and that he learned about the PPP program from Google.

He also falsely said that he had not helped Petty fill out the application for Rebels.

In the midst of attempting to fraudulently obtain money through the PPP, the

Defendant also submitted seven fraudulent applications to the EIDL program, which

was another SBA program authorized by the CARES Act to provide low-interest

financing to small businesses, renters, and homeowners in regions affected by declared

disasters. All of his applications contained false information about the number of

employees and gross revenues of these businesses, as detailed below:

# Employees
Approx. Gross Revenue
Name of Business Applicant (As of Jan.
Date (Jan. 31, 2019 – Jan. 31, 2020)
31, 2020)

4/2/2020 $85,000 9
Complete Fundamentals
6/24/2020 $150,000 10
Lyft / Stephen Smith 6/24/2020 $3,599 1
Uber / Stephen Smith 6/24/2020 $4,000 2
6/23/2020 $25,000 10
New Beginnings
6/24/2020 $35,000 10
CFA 7/3/2020 $25,000 9

All of the Defendant’s EIDL loan applications were declined.

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II. PROCEDURAL BACKGROUND

A more detailed recitation of the procedural history of this case can be found in

the Government’s Position on Restitution. (Dkt. 87.) To summarize, on October 20,

2020, a grand jury returned an indictment charging the Defendant, Thomas Smith,

Davis, Hamilton, and Henley for participating in a bank fraud scheme between April

2020 and July 2020, in violation of Title 18, United States Code, Section 1344, and for

engaging in money laundering, in violation of Title 18, United States Code, Section

1957. (Dkt. 1.)

The Defendant pled guilty to Count Two of the Indictment (Bank Fraud, in

violation of Title 18, United States Code, Section 1344) pursuant to a written plea

agreement on February 23, 2021. (Dkt. 53.) Sentencing is scheduled for June 2, 2021.

III. SENTENCING GUIDELINES CALCULATIONS

The Final Presentence Investigation Report, filed on July 7, 2021, determined that

the total offense level was 22 and that the Defendant’s criminal history category was I,

which corresponds to an advisory Guidelines range of 41 to 51 months’ imprisonment.

(PSR ¶¶ 91, 127.) The Probation Officer found that the Defendant was subject to a Base

Offense Level of seven under U.S.S.G. § 2B1.1(a)(1). (Id. at ¶ 81.) The Defendant then

received a 14-level enhancement for a loss exceeding $550,000 but less than $1,500,000

under U.S.S.G. § 2B1.1(b)(1)(H). (Id. at ¶ 82.) The Defendant received a two-level

enhancement because the offense involved sophisticated means under U.S.S.G.

§2B1.1(b)(10)(C). (Id. at ¶ 83.) The Defendant also received a two-level enhancement

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for his role as an organizer, leader, manager, or supervisor of a scheme involving five or

more individuals under U.S.S.G. §3B1.1(c). (Id. at ¶ 85.)

The parties and the Probation Office agree that the Defendant is entitled to a two-

level reduction for acceptance of responsibility. The Defendant has assisted authorities

in the investigation and prosecution of his own misconduct by pleading guilty prior to

indictment, thereby permitting the United States to avoid preparing for trial and

permitting the United States and the Court to allocate their resources efficiently.

Therefore, the United States moves the Court, under Section 3E1.1(b), to grant the

Defendant an additional one-level reduction in the offense level for acceptance of

responsibility if the Defendant receives the two-level reduction for acceptance of

responsibility.

With a Total Offense Level as Level 22, and a Criminal History Category of I, the

Sentencing Guidelines recommend a sentence between 41- and 51-months’

imprisonment.

IV. CONSIDERATION OF FACTORS UNDER SECTION 3553(A)

A. Nature and Circumstances of the Offense

As the government, nonprofits, and businesses worked to try and help small

businesses suffering from the effects of the unprecedented COVID-19 pandemic, the

Defendant engaged in a cash grab to exploit the programs. While the offense period

was short, spanning only three months from April to June 2020, it was extensive. The

Defendant was involved in the submission of over ten fraudulent applications to the

PPP and EIDL programs. This was not a one-time error in judgment, but rather a

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calculated attempt to take advantage of the relief systems set up for businesses that

needed a lifeline because of the pandemic.

Further, the Defendant was involved an organizer of the scheme along with his

brother, Thomas Smith. This is evidenced by the fact that the Defendant recruited

people to the scheme, including Petty, Fitzgerald, and Hamilton, and put together some

of the fraudulent loan paperwork. While his co-schemers have fully admitted that they

willingly went along with the Defendant’s scheme, it should not be overlooked that the

Defendant recruited people that looked to him as a mentor, like Marvin Fitzgerald,

someone who he had coached in basketball since Fitzgerald’s youth. Most of his co-

schemers had not heard of the PPP before the Defendant or his brother approached

them.

Finally, the offense was not limited to obtaining funds fraudulently. It also

involved significant efforts towards concealing the true nature of the offense. When the

bank started to inquire about the loans, the Defendant lied to bank representatives and

then FBI agents. When offered a chance to change course and come clean to either the

bank or agents, the Defendant instead chose to press forward with his scheme.

B. History and Characteristics of the Defendant

The Defendant is a 42-year-old man with certain health conditions. (PSR ¶¶ 101,

112.) He grew up in a stable family and has close relationships with an extended

family. (Id. ¶¶ 102-108.) The Defendant married his wife in 2015, but they separated in

2020. (Id. ¶ 109.) The Defendant currently resides with his mother. (Id. ¶ 111.) The

Defendant is the stepfather to his wife’s two adult children. (Id. ¶ 109.) The Defendant

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graduated with a Master of Business Administration in 2005. (Id. ¶ 118.) He has been

employed as a substitute special education teacher since 2006 and also works as a

basketball coach. (Id. ¶ 120.) He operates a non-profit, Complete Fundamentals, that

organizes basketball games and clinics in the Milwaukee area. (Id. ¶ 121.)

The Defendant appears to have committed this offense due to a desire to provide

for his family, as he was unemployed as a result of the pandemic. See e.g. United States

v. Eggleston, 347 F.Supp.3d 381, 384 (E.D. Wisc. 2018) (in bank fraud case, noting as a

mitigating factor that embezzlement offense was committed to support business rather

than for personal enrichment).

C. Need for the Sentence to Afford Adequate Deterrence to Criminal
Conduct

The government believes a serious sentence in this case is necessary for both

specific and general deterrence.

The Defendant’s actions in this case show that this was not a one-time mistake.

The sentence in this case should reflect that the Defendant repeatedly engaged in

criminal conduct. The Defendant was involved in the submission of five different

fraudulent PPP applications and personally submitted seven different fraudulent EIDL

applications. Unlike many of his co-schemers, he did not simply submit one fraudulent

loan application.

With respect to general deterrence, there is a strong need to send a message

about the significance of this type of offense. See United States v. Goss, 325 F.Supp.3d

932, 935 (E.D. Wisc. 2018) (noting “general deterrence may be more of a factor in white

collar cases, where at least some of the people tempted to commit such crimes are

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rationale actors who would be dissuaded by the prospect of prison”). Especially in a

case involving PPP fraud, it is important to put any would-be offenders on notice that

these offenses do not go unpunished. Actors like the Defendant who seek to defraud

this program make it more difficult for administrators of the program to get aid to

individuals that qualify for and need it. The Defendant’s sentence should serve as a

warning and deterrent to others inclined to exploit pandemic relief programs.

D. Consideration of the Types of Sentences Available and to Reflect Policy
Statements

In testimony on April 20, 2021 by Hannibal “Mike” Ware, the Inspector General

of the U.S. Small Business Administration, he stated, “[t]here is no higher priority for

our office than providing oversight of SBA and the taxpayer’s funds at risk through the

Coronavirus Aid, Relief, and Economic Security (CARES) Act ensuing legislation and

related pandemic response laws aimed at mitigating the pandemic.” See Statement for

the Record, April 20, 2021, U.S. House Committee on Small Business Administration,

available at https://www.sba.gov/sites/default/files/2021-

04/Statement%20for%20the%20Record%204.20.21%20-%20508.pdf. In his written

statement, Inspector General Ware described the fraud-prevention initiatives which

were designed to protect program funds from opportunistic criminals. He noted that

the PPP funding put “strain” on the SBA’s operations and revealed some of the

“systemic weaknesses” in the SBA’s programs. Id. at 4.

The federal government should be able to provide emergency funds like PPP

loans to the deserving public without having to feel constrained by possible fraudsters

who seek to profit from the national disaster. It is important to impose a significant

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sentence on someone who did not just misrepresent himself in a loan program in the

wake of a national disaster, but who acted brazenly, getting loan after loan, and

recruiting others into his fraudulent scheme.

E. Need for the Sentence to Avoid Unwarranted Sentencing Disparities

There are two relevant points of comparison to avoid unwarranted sentencing

disparities: sentences associated with others convicted of PPP related fraud, and those

in this case. Around the country, courts have imposed meaningful jail sentences in PPP

fraud cases. See, e.g., United States v. David Hines, 21-CR-20011, S.D.FL. (imposing 78-

month sentence on an individual who fraudulently applied for multiple PPP loans with

a loss of $3.9 million and also assisted others in submitting fraudulent PPP loans);

United States v. Ganell Tubbs, 20-CR-193, E.D.AR (imposing 41-month sentence on an

individual who fraudulently applied for two PPP loans with a loss of $1.9 million);

United States v. Tarik Jaafar, 20-CR-185, E.D.V.A. (imposing 12-month sentence on an

individual who fraudulently applied for 18 PPP loans with a loss of $1.4 million); United

States v. Zhang, 20-CR-169, W.D.W.A. (imposing 60 day sentence on an individual who

fraudulently applied for multiple COVID-19 relief program loans, including four PPP

loans with a loss of over $900,000).

While the other cases around the country provide some point of reference for the

appropriate sentence, the more relevant comparison is with the other defendants

charged as part of this scheme. When comparing the Defendant to others in the

scheme, the government submits that the Defendant is one of the most culpable, second

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only to his brother, Thomas Smith. 1 This should be reflected in his sentence. The

Defendant, along with Thomas Smith, recruited others into the scheme, in some cases

created the fraudulent loan paperwork, and received money from the fraudulent loan

proceeds. Furthermore, the facts suggest that the Defendant was equally involved in

the creation of the scheme, as he approached Thomas Smith in order to get a fraudulent

loan for CFA.

V. RESTITUTION & FORFEITURE

The government incorporates its Position on Restitution for Sentencing, filed on

April 13, 2021 at Docket No. 87. For the reasons explained in that submission, the

Defendant should be ordered to pay $730,000 in restitution, based on the four funded

PPP loans that he was involved in obtaining.

The government is not seeking a separate forfeiture judgment against the

Defendant.

* * *

For the reasons stated above, the United States respectfully requests that the

Court impose a term of imprisonment at the low end of the guidelines, two years of

supervised release, and order the Defendant to pay $730,000 in restitution. The United

States submits that this sentence is sufficient, but not greater than necessary, to satisfy

the purposes of sentencing.

1 This Court sentenced Thomas Smith to 57 months’ confinement on June 2, 2021.

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Respectfully Submitted,

JOSEPH BEEMSTERBOER
Acting Chief, Fraud Section
U.S. Department of Justice

/s Laura Connelly_______________
LAURA CONNELLY
LESLIE S. GARTHWAITE
Trial Attorneys
Fraud Section
U.S. Department of Justice
1400 New York Ave. NW
Washington, DC 20005
Phone: 202-307-1423
laura.connelly@usdoj.gov

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CERTIFICATE OF SERVICE

I hereby certify that on June 7, 2021, I caused the foregoing to be electronically

filed with the Clerk of the Court using the CM/ECF system, which will provide copies

to counsel for all parties.

/s Laura Connelly_______________
LAURA CONNELLY
LESLIE S. GARTHWAITE
Trial Attorneys
Fraud Section
U.S. Department of Justice

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