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United States v. Lee

United States Court of Appeals, Seventh Circuit

August 21, 2019

United States of America, Plaintiff-Appellee/ Cross-Appellant,
v.
Heon Seok Lee, Defendant-Appellant/ Cross-Appellee.

          Argued 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.

          Before Kanne, Barrett, and Brennan, Circuit Judges.

          BRENNAN, CIRCUIT JUDGE.

         Crowbar 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 in USA."

         Presented 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.

         A grand 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 sentence.

         I. Background

         A. The Recovery Act

         This 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 projects).

         Relevant 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.

         To achieve Congress's objective of bolstering the American economy, the Recovery Act included the following domestic purchasing requirement, commonly known as the "Buy American" provision:

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.[1]

         At 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.

         As a 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.

         B. KTurbo's Initial Plan

         Heon 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.

         Lee saw 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, [2] 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 lasted hours.

         KTurbo 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 fraud.

         Trinity 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.

         At that point, KTurbo formed an Illinois subsidiary, KTurbo USA Inc., [3] 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.

         KTurbo sent nearly identical compliance letters for projects in California, Massachusetts, Nevada, and Oregon.

         These 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.

         KTurbo 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.

         C. The Revised Plan

         It did 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.

         Lee's 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."

         But 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 requirements."

         Within 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.

         D. Lee's Prosecution

         About a 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."

         By this 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.

         During 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.

         E. Post-Trial Proceedings

         Lee 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.

         The 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 sentence.

         II. Discussion

         A. Wire ...


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