April 9, 2019
Appeals from the United States District Court for the
Northern District of Illinois, Eastern Division. No.
l:12-cr-00109-l - Sharon Johnson Coleman, Judge.
Kanne, Barrett, and Brennan, Circuit Judges.
BRENNAN, CIRCUIT JUDGE.
in hand, U.S. Customs Officer Jorge Parra spent December 8,
2010 "cracking open containers" at a warehouse near
the Los Angeles seaport. Parra pried open one from South
Korea to inspect its freight. Inside he found a fully
assembled, five-foot tall industrial fan called a turbo
blower. A placard riveted to the side read, "Assembled
with a fully assembled machine fresh off the boat from South
Korea, which brazenly advertised its assembly in the United
States, little sleuthing was required to determine something
was amiss. Parr a's discovery kicked off a federal
investigation that traced back to the defendant in this case,
Heon Seok Lee. Prosecutors eventually charged Lee with
executing a scheme to defraud local governments by falsely
representing that his company manufactured its turbo blowers
in the United States.
jury indicted Lee on five counts of wire fraud and three
counts of smuggling. After a trial, the jury found Lee guilty
on all counts. Lee now appeals his convictions and the
restitution ordered, and the government cross-appeals
Lee's prison sentence. We find no fault in the trial or
The Recovery Act
criminal case has an atypical origin: an economic stimulus
package. Congress passed the American Recovery and
Reinvestment Act, Pub. L. No. 111-5, 123 Stat. 115
(2009)-which we will simply call the "Recovery
Act"-to jumpstart the flagging domestic economy during
the Great Recession. See Kameron Hillstrom, The
American Recovery and Reinvestment Act: A Fitting Future for
Recovery Legislation, 44 Pub. Contract L. J. 285, 288
(2015). The Recovery Act earmarked billions to fund public
infrastructure projects. Id. at 289 (noting the
Recovery Act made $261.2 billion available for such
to this case, Congress allocated $6.4 billion to the EPA for
water-infrastructure improvements. The EPA did not spend the
money directly; instead it awarded grants to "revolving
funds" administered by the States. After receiving EPA
grants, the revolving funds then issued low-interest loans to
local municipalities or agencies sponsoring specific
projects. Those local governments were then responsible for
hiring contractors to perform the work.
achieve Congress's objective of bolstering the American
economy, the Recovery Act included the following domestic
purchasing requirement, commonly known as the "Buy
None of the funds appropriated or otherwise made available by
this Act may be used for a project for the construction,
alteration, maintenance, or repair of a public building or
public work unless all of the iron, steel, and manufactured
goods used in the project are produced in the United States.
Recovery Act § 1605(a), 123 Stat. 303.
first glance, this requirement seems straightforward. But
federal agencies struggled to pin down what it means for a
product to have been "produced in the United
States." Different agencies used different tests.
See Thomas D. Blanford, Navigating the Recovery
Act's Buy American Rule in State and Local Government
Construction, 46 Procurement Lawyer 3, 4 (Fall 2010)
(listing five tests used by different agencies). The EPA
adopted the "substantial transformation" standard
to administer the Recovery Act, and it developed a three-part
test to assess whether a manufacturer substantially
transformed a product within the United States.
condition to receiving Recovery Act funding, local
governments and their contractors were required to abide by
the Buy American provision. Federal agencies like the EPA
audited projects to ensure compliance. Local governments
required their suppliers to complete "Buy American
certifications" representing that their products
complied with the statute.
KTurbo's Initial Plan
Seok Lee founded KTurbo Inc. in his homeland of South Korea.
KTurbo manufactures centrifugal turbo blowers-large
industrial fans used to provide oxygen for biological water
treatments in wastewater facilities. Turbo blowers are
sophisticated and expensive pieces of equipment, requiring
on-site programming, testing, and calibration.
the Recovery Act as a growth opportunity for KTurbo, whose
penetration into the United States market was limited at the
time. The Recovery Act earmarked billions for products like
KTurbo's turbo blowers. But KTurbo would be unable to tap
into those funds unless it demonstrated compliance with the
Buy American provision. So, Lee and his sister, Trinity Lee,
developed a Recovery Act plan. They researched regulatory
guidance from the EPA and monitored larger competitors'
responses. KTurbo leadership discussed Buy American
compliance for months, with several in-depth meetings that
enlisted independent sales representatives around the country
to market its turbo blowers to local governments pursuing
Recovery Act projects. KTurbo also consulted with several
sales representatives in the early stages of its Buy American
planning. One sales representative, Dick Koch, discouraged
KTurbo from pursuing a plan to make turbo blowers in South
Korea, ship them to the United States, take them apart, and
then reassemble stateside. Koch warned Lee and KTurbo in an
email that such evasive practices could be deemed criminal:
The [EPA] webcast specifically excludes Heon Seok's idea
of sending the equipment to the U.S. and taking it apart and
putting it back together. In fact the webcast says that if
you say that is [Buy American] you are committing criminal
Lee reassured Koch that KTurbo would use components from both
South Korea and the United States and assemble the turbo
blowers in greater Chicago. Other sales representatives who
inquired about KTurbo's Buy American compliance plan were
told the same thing, including by Lee himself.
point, KTurbo formed an Illinois subsidiary, KTurbo USA Inc.,
leased a warehouse in Batavia, Illinois, and hired three
American technicians. KTurbo's sales representatives
landed several contracts for Recovery Act projects. In its
bids, KTurbo highlighted its domestic presence and promised
Buy American compliance. For example, KTurbo submitted a bid
to South Burlington, Vermont in the summer of 2009, which
included the following Buy American certification:
By this letter, KTurbo USA certifies that it will manufacture
and deliver KTurbo brand blower packages and equipment in
compliance with the final requirements of the 2009 U.S.
economic stimulus law, The American Recovery and Reinvestment
Act of 2009.
sent nearly identical compliance letters for projects in
California, Massachusetts, Nevada, and Oregon.
representations -a South Korean company certifying its
product was "produced in the United States"-did not
go unnoticed. A competitor that lost a bid to KTurbo filed a
complaint with the EPA in the fall of 2009. In response, EPA
officials visited KTurbo's Batavia facility on October
30, 2009. During that visit, Lee gave a PowerPoint
presentation detailing KTurbo's plans to comply with the
Buy American provision. He represented that KTurbo would
assemble its turbo blowers at the Batavia facility. Slides in
Lee's presentation indicated fifty percent of the total
input costs would be attributable to American components,
assembly, and testing. Trinity Lee sent the EPA a letter
confirming these details a few weeks later.
manufactured its first turbo blower at the Batavia facility
in January 2010. It built nine more there over the next three
months, at a rate of one to two weeks per blower.
The Revised Plan
not take long for Lee to abandon that original plan to
produce turbo blowers in Batavia. By April 2010, Lee
concluded production costs in the United States were
prohibitively expensive, and he decided to go back to
importing turbo blowers from South Korea. Employees pushed
back with concerns about KTurbo's Recovery Act
compliance, but Lee forged ahead. At trial, one of
KTurbo's technicians explained how the component parts
from South Korea began arriving more and more fully
assembled, until completely assembled blowers started showing
up. No new components were added to the turbo blowers once
they reached Batavia. Technicians simply plugged them in and
ran performance efficiency tests.
revised plan depended on its secrecy. He instructed KTurbo
employees not to disclose to customers the fact that their
turbo blowers were made in South Korea. To evade detection,
KTurbo (with Lee's knowledge) went out of its way to
avoid shipping the machines from South Korea directly to
customers. When municipalities questioned KTurbo about
Recovery Act compliance, KTurbo simply lied. Take
KTurbo's May 20, 2010 response to Lowell, Massachusetts:
"The blower will be assembled and tested at KTurbo's
Chicago location." Lee himself participated, emailing a
sales representative similar misrepresentations in September
2010: "We assemble and test in Chicago. Only motor and
VFD comes from Korea. It is almost Made In USA."
this scheme unraveled quickly. Jorge Parra's shipyard
discovery in December 2010 was the beginning of the end. When
U.S. Customs detained KTurbo's products at the border,
the company fell behind on its deliveries. This required more
lies to hide that the turbo blowers were coming from overseas
and needed to clear U.S. Customs. When a Lowell,
Massachusetts general contractor contacted KTurbo about the
delays, Joel Schomo (a KTurbo engineer) told him the Batavia
facility was waiting for parts to begin final assembly, even
though KTurbo had discontinued all assembly operations in
Batavia months earlier. At trial, Schomo testified he told
this lie because the Recovery Act funded Lowell's project
and he did not want to raise any "red flags" that
KTurbo "might not be complying with the Recovery Act
two months, federal investigators executed a search warrant
at the Batavia facility. Lee was present. During the search,
Lee admitted he was aware that the turbo blowers were for
Recovery Act projects, that KTurbo shipped them fully
assembled from South Korea, and that it was "wrong"
to do so.
year later, a grand jury returned an indictment against Lee.
It alleged he falsely represented that KTurbo's turbo
blowers complied with the Buy American provision when Lee
knew KTurbo "did not perform and did not intend to
perform substantial transformation of the turbo blowers at
the KTURBO facility in Batavia, Illinois, before delivery of
the turbo blowers to municipal wastewater treatment
facilities receiving Recovery Act stimulus funds." The
indictment also charged Lee "knew that turbo blowers
were substantially assembled before their arrival in the
United States and did not require meaningful assembly or
manufacturing in the United States."
point, Lee had fled the country. It took three years to
extradite him from South Korea. When the government finally
brought Lee back to appear, he responded to the indictment
with a series of motions to dismiss, each of which the
district court denied.
an eight-day trial, the government presented dozens of
witnesses: U.S. Customs officers, federal agents, KTurbo
employees, sales representatives, general contractors, and
employees of municipal customers. Lee elected to take the
stand, and he adamantly denied any knowledge that KTurbo
imported fully assembled blowers into the United States. On
cross-examination, the government battered Lee's
credibility, impeaching him with documentary evidence and
other witnesses' testimony. The jury ultimately convicted
Lee on all counts.
filed a series of post-trial motions seeking to vacate the
jury's verdict; the district court denied each. The
district court held three sentencing hearings over several
months, which centered on the parties' dispute about how
to calculate Lee's guideline range. For wire fraud
convictions, the Sentencing Guidelines instruct district
courts to begin with a base offense level of seven and then
to add levels based on the amount of the "loss"
caused by the defendant. U.S. Sentencing Guidelines Manual
§ 2Bl.l(a)-(b) (U.S. Sentencing Comm'n Nov. 2018).
In this case, the parties disputed whether Lee should receive
credit in the loss calculation for the market value of KTurbo
blowers sold to customers.
district court initially ruled that the loss equaled the
total amount KTurbo received from defrauded municipalities
(about $180, 000), putting Lee's guideline range at 46-57
months. But the court gave Lee a below-guidelines prison
sentence of 20 months, plus restitution. Two weeks later, Lee
filed a notice of appeal and a motion asking the district
court to correct its judgment under Fed. R. Crim. P. 35(a).
The district court held a hearing on Lee's Rule 35(a)
motion, where it agreed with Lee's argument on the
guideline calculation and resentenced Lee to 12 months. After
the district court entered its final judgment on March 14,
2018, Lee filed a second notice of appeal on March 28, 2018.
Thirty days later, the government cross-appealed Lee's