No Pro Rata Requirement for “Common Enterprise” and Clarified Ponzi-Scheme Loss/Restitution Methodologies: United States v. Maldonado‑Vargas (1st Cir. 2025)

No Pro Rata Requirement for “Common Enterprise” and Clarified Ponzi-Scheme Loss/Restitution Methodologies: United States v. Maldonado‑Vargas (1st Cir. 2025)

Introduction

United States v. Maldonado‑Vargas, No. 22-1735 (1st Cir. Nov. 14, 2025), arises from a multi-year securities-fraud prosecution against Carlos Maldonado in the District of Puerto Rico. Maldonado created Business Planning Resource International Corporation (BPRIC) and sold “Productive Development Contracts” to clients, promising high, fixed returns purportedly generated by investments in various ventures (e.g., Datavos, Pet Card Systems, and “Chinese bonds”). The government’s theory was that BPRIC functioned as a Ponzi scheme: funds from later participants were used to pay earlier ones while actual investment activity was minimal.

After a nine-day trial involving 23 government witnesses (including 15 individuals who provided money to BPRIC and an FBI forensic accountant), the jury convicted Maldonado of securities fraud and bank fraud. On appeal, he challenged:

  • The admission of Rule 1006 summary exhibits allegedly laced with hearsay and improper “investor” labeling;
  • The sufficiency of the evidence that the BPRIC contracts were “securities” (as “investment contracts”) and that he acted “willfully”;
  • The sentencing court’s loss and victim-count calculations (including reliance on non-testifying individuals); and
  • The restitution order that extended to individuals not named in the indictment.

Shortly before oral argument, the government wrote to the court under Rule 28(j) requesting vacatur of the bank-fraud counts; the First Circuit ultimately vacated those counts while affirming the securities-fraud conviction, sentence, and restitution order. The opinion delivers notable clarifications in four areas: (1) the proper use and limits of Rule 1006 summaries and harmless error; (2) the “common enterprise” requirement under Howey, explicitly rejecting any pro rata or uniform-distribution requirement in the First Circuit; (3) application of the Ponzi-scheme loss rule under U.S.S.G. § 2B1.1 cmt. n.3(F)(iv); and (4) restitution to non-indicted, scheme victims as a supervised-release condition under § 3583(d).

Summary of the Opinion

  • Rule 1006 Summaries: The court acknowledged that the FBI accountant’s categorizations (e.g., “Investor”) may have improperly relied on interview hearsay, but held any evidentiary error harmless because the unchallenged portions of the bank records and other neutral summaries overwhelmingly established the Ponzi scheme.
  • “Investment Contract” and Common Enterprise: The First Circuit reaffirmed Howey’s flexible test, emphasized that Ponzi schemes “typically satisfy horizontal commonality,” and expressly rejected any requirement that profits be distributed on a pro rata or uniform basis to demonstrate a “common enterprise.” Labels in the contracts (calling clients “creditors”) did not control.
  • Willfulness: The court rejected the argument that § 78ff(a) requires knowledge that the instruments were “securities,” and in any event found the evidence sufficient to show Maldonado acted willfully by intentionally operating a pooled enterprise promising profits from his efforts.
  • Sentencing Loss and Victim Count: Applying the Ponzi-scheme guideline rule, the court approved a loss exceeding $3.5 million without offsetting gains to some participants against losses to others and upheld the finding of 25+ victims suffering substantial financial hardship, relying on the PSR and the government’s forensic analysis as sufficiently reliable.
  • Restitution: Although the MVRA did not apply to the affirmed securities-fraud count, the court upheld restitution for non-indicted, directly harmed scheme victims as a supervised-release condition under 18 U.S.C. § 3583(d), reviewing for plain error in light of forfeiture and finding none.
  • Procedural Note: The court vacated the bank-fraud counts at the government’s request and deemed Maldonado’s “spillover prejudice” theory waived for being raised only in a Rule 28(j) letter.

Analysis

Precedents Cited and Their Influence

  • Rule 1006 Summaries and Harmless Error: United States v. Milkiewicz (1st Cir. 2006) and United States v. Kumar (1st Cir. 2024) require that Rule 1006 summaries accurately reflect admissible source materials. United States v. Appolon (1st Cir. 2012) illustrates that summaries may rely on statements not offered for truth. Here, the court flagged a risk that interview hearsay informed categorizations, but, guided by harmless-error principles in United States v. Abdelaziz (1st Cir. 2023) and United States v. Kilmartin (1st Cir. 2019), upheld the verdict due to overwhelming, properly admitted bank-record evidence and neutral summaries.
  • Investment Contracts and Common Enterprise: SEC v. W.J. Howey Co. (U.S. 1946) supplies the three-part test: investment of money; common enterprise; expectation of profits from others’ efforts. SEC v. SG Ltd. (1st Cir. 2001) emphasizes horizontal commonality and that Ponzi schemes typically satisfy it. Rodriguez v. Banco Central Corp. (1st Cir. 1993) supports viewing the instruments collectively when “most of the potential gain” depends on pooled development. The court distinguished out-of-circuit suggestions (e.g., Goldberg v. 401 N. Wabash Venture LLC (7th Cir. 2014) and SEC v. Infinity Group (3d Cir. 2000)) that might imply a pro rata distribution requirement—rejecting any such requirement in the First Circuit.
  • Sufficiency and Willfulness: United States v. Falcón‑Nieves (1st Cir. 2023) and United States v. Woodward (1st Cir. 1998) supply the sufficiency standard. United States v. Bailey (1st Cir. 2005) and Rehaif v. United States (U.S. 2019) inform the meaning of “willfully” as acting with a bad purpose to disobey or disregard the law. The First Circuit found no authority compelling knowledge that the instruments were “securities,” and saw ample evidence of knowing participation in a pooled, promoter-driven profit scheme.
  • Sentencing Loss and Evidentiary Reliability: U.S.S.G. § 2B1.1 and its commentary (n.3(A), n.3(F)(iv)) govern loss, including Ponzi-scheme rules. United States v. Naphaeng (1st Cir. 2018) and United States v. Flete‑Garcia (1st Cir. 2019) confirm considering relevant and uncharged conduct. United States v. Mills (1st Cir. 2013), United States v. Flores‑Seda (1st Cir. 2005), and related cases permit reliance on hearsay at sentencing if it has sufficient indicia of reliability. United States v. Curran (1st Cir. 2008) supports considering non-testifying victims when consistent with the proven scheme.
  • Restitution and Scheme Victims as Supervised-Release Conditions: 18 U.S.C. §§ 3583(d), 3563(b)(2), and 3663(a)(2) authorize restitution to any person directly harmed by an offense that involves a scheme, conspiracy, or pattern. United States v. Acosta (1st Cir. 2002) recognizes the post-Hughey expansion to scheme victims. United States v. Batson (9th Cir. 2010) supports the same principle. Hughey v. United States (U.S. 1990) is limited by subsequent statutory amendments; Paroline v. United States (U.S. 2014) is inapposite. United States v. Prochner (1st Cir. 2005), United States v. Cyr (1st Cir. 2003), and United States v. Vaknin (1st Cir. 1997) approve reliance on the PSR at sentencing where reliable. United States v. Sansone (1st Cir. 2024), United States v. Langston (1st Cir. 2024), and United States v. Walker (1st Cir. 2008) guide plain-error review and forfeiture.
  • Appellate Practice and Waiver: Stauffer v. IRS (1st Cir. 2019) underscores that Rule 28(j) letters cannot introduce new arguments; thus, Maldonado’s “spillover prejudice” was waived.

Legal Reasoning Explained

1) Rule 1006 Summaries and Harmless Error

Rule 1006 permits summary evidence of voluminous writings “that cannot be conveniently examined in court,” provided the underlying materials are admissible and the summary faithfully reflects them. The government’s analyst created a master spreadsheet of approximately 10,000 transactions with categorical labels (e.g., “Investor,” “Promoter”), drawing on bank records and—by her own account—interviews with putative victims. That raised a real risk of hearsay infiltration and “double hearsay” where interview statements were used to prove the truth of categorizations presented to the jury.

The First Circuit did not bless that approach; it assumed potential error but found it harmless. Why? Because the underlying bank records and unchallenged, neutral summaries (without categorical labels)—including specific transactional “snapshots” around deposits from testifying individuals and summaries of the Datavos, Glorimar Fashions, and Pet Card Systems accounts—independently and overwhelmingly showed a classic Ponzi dynamic: customer funds flowed in and quickly flowed out to other customers or personal/retail expenditures, while purported “investment” accounts showed negligible legitimate business activity. In short, even without the contentious categorical labels, the paper trail proved the scheme.

2) “Investment Contract,” Horizontal Commonality, and the Rejection of Any Pro Rata Requirement

Applying Howey, the court addressed the “common enterprise” element through the First Circuit’s established lens of horizontal commonality—pooling funds from multiple participants so they share profits and risks. Two clarifications are central:

  • The court reaffirmed that Ponzi schemes “typically satisfy” horizontal commonality (SG Ltd.).
  • Importantly, the court explicitly rejected the argument that a pro rata or uniform distribution system is necessary to prove a common enterprise, distinguishing out-of-circuit suggestions to the contrary and grounding its view in First Circuit precedent (Rodriguez, SG Ltd.).

The evidence showed pooling plainly: deposits from different clients were commingled in BPRIC accounts; the fortunes of all clients turned on Maldonado’s management of that pool; and the supposed business ventures received little to no operational funding. Contract labels calling clients “creditors” did not change that reality because Howey focuses on economic substance, not nomenclature.

On willfulness, the court rejected the notion that § 78ff(a) requires proof that the defendant knew the instruments legally qualified as “securities.” It emphasized that willfulness requires voluntary, intentional conduct with a bad purpose to disobey or disregard the law. In any event, the jury could readily find Maldonado knew he operated a pooled enterprise promising profits from his efforts, satisfying the scienter requirement.

3) Sentencing Loss and Victim Count in a Ponzi Scheme

Two key sentencing rulings are instructive:

  • Loss Calculation Over $3.5 Million: The district court’s adoption of a $3.7 million loss figure comported with U.S.S.G. § 2B1.1 cmt. n.3(F)(iv): in a Ponzi scheme, gains paid to some participants cannot offset losses suffered by others. After removing offsetting gains, the loss exceeded $3.5 million, supporting an 18-level enhancement.
  • Victim Count and Substantial Financial Hardship: The court upheld the finding that 25+ victims suffered “substantial financial hardship,” relying on the PSR and the analyst’s financial synthesis. Even non-testifying individuals could be included where the loss findings were supported by reliable indicia and consistent with the proven scheme.

Critically, the First Circuit reemphasized that sentencing courts may rely on relevant information—including hearsay and uncharged conduct—so long as it bears sufficient indicia of reliability. Defendants who offer only general objections, without countervailing evidence, face an uphill battle.

4) Restitution to Non-Indicted Scheme Victims as a Condition of Supervised Release

Because the MVRA applied to bank fraud (later vacated) but not to the securities-fraud count, the district court imposed restitution for securities fraud as a supervised-release condition under § 3583(d) by reference to § 3563(b)(2). That framework adopts the Victim and Witness Protection Act’s definition of “victim”—including “in the case of an offense that involves as an element a scheme, conspiracy, or pattern of criminal activity, any person directly harmed by the defendant’s criminal conduct in the course of the scheme” (§ 3663(a)(2)).

Maldonado failed to object at sentencing to the scope of restitution, so the First Circuit reviewed only for plain error and found none. It was not “indisputable” error for the district court to conclude that the charged securities-fraud offense involved a “scheme” and to order restitution to directly harmed scheme victims beyond those named in the indictment. The court also approved reliance on the PSR’s victim list as sufficiently reliable for restitution purposes.

Impact and Forward-Looking Significance

  • Common Enterprise Proof Eased: The court’s express rejection of any pro rata/uniform distribution requirement for horizontal commonality in the First Circuit reduces artificial barriers to proving a “common enterprise.” Prosecutors can focus on showing pooling and shared fortunes—particularly potent in Ponzi contexts—without litigating proportional distribution mechanisms.
  • Substance over Labels: The opinion reinforces that contract nomenclature (“creditor,” “capital accumulation,” disclaimers of “investment”) does not control Howey analysis. Economic reality governs.
  • Blueprint for Proving Ponzi with Bank Records: The ruling showcases how neutral, well-constructed bank-record summaries (bereft of hearsay-driven labels) can carry the day. It also serves as a cautionary tale to avoid hearsay-driven categorizations in Rule 1006 summaries—errors may be harmless in a strong record, but they remain risky.
  • Sentencing in Ponzi Schemes: The decision underscores correct loss mechanics: do not offset one participant’s gains against others’ losses. Meticulous forensic accountings, even if partly hearsay-informed, can support Guideline enhancements if they possess sufficient indicia of reliability and defendants do not produce contrary evidence.
  • Restitution to Scheme Victims via Supervised Release: While reviewed for plain error, the court’s reasoning provides a roadmap for restitution to non-indicted, directly harmed scheme victims as a supervised-release condition under § 3583(d)—especially where the indictment and trial establish a “scheme.”
  • Appellate Practice Reminder: New arguments cannot be smuggled into Rule 28(j) letters. Issues like spillover prejudice must be raised in opening briefs.

Complex Concepts Simplified

  • Rule 1006 Summaries: A way to present digestible charts and tables when the underlying documents are too voluminous. The summaries must be accurate, neutral reflections of admissible source materials—not vehicles for hearsay or argumentative labeling.
  • Howey “Investment Contract”: A security exists when a person invests money in a common enterprise expecting profits from the promoter’s or others’ efforts. Courts look at economic substance, not labels in the paperwork.
  • Horizontal Commonality: A “pooling” concept—multiple participants’ funds are commingled and their fortunes rise or fall together based on the promoter’s efforts. In the First Circuit, there is no requirement that profits be distributed pro rata or via a uniform algorithm to establish commonality.
  • Ponzi-Scheme Loss Rule (Guidelines): When calculating loss for sentencing, you cannot net one participant’s “gains” (typically earlier payouts funded with later deposits) against others’ losses. That avoids understating the scheme’s aggregate harm.
  • Restitution as a Supervised-Release Condition: Even if the MVRA does not apply to a given offense, a court may order restitution under § 3583(d) by cross-referencing § 3563(b)(2). Where the offense involves a “scheme,” restitution may cover any person “directly harmed” in the course of that scheme—even if not named in the indictment.
  • Harmless Error: An error that likely did not contribute to the verdict, often because the remaining, properly admitted evidence independently and overwhelmingly proves guilt.

Conclusion

United States v. Maldonado‑Vargas stakes out several important points in First Circuit law and practice. Most salient is the court’s explicit rejection of any pro rata or uniform-distribution requirement to prove a “common enterprise” under Howey. That clarification, together with the reaffirmation that Ponzi schemes typically satisfy horizontal commonality, solidifies the circuit’s flexible, substance-over-form approach to investment-contract analysis.

The opinion also offers a prosecutorial blueprint for Ponzi cases: neutral, bank-record-based summaries can effectively demonstrate pooling and the recycling of funds; the sentencing loss must reflect the Ponzi rule prohibiting offsets; and reliable forensic analyses may justify including non-testifying individuals as victims. For restitution, the court’s plain-error holding still furnishes practical guidance: when the offense is charged and proved as a scheme, courts may order restitution to directly harmed, non-indicted victims as a supervised-release condition.

Finally, the case cautions litigants on evidentiary discipline (avoid hearsay contamination in Rule 1006 summaries), on strategic completeness (introduce contrary evidence to challenge PSR-based findings), and on appellate preservation (do not rely on Rule 28(j) to debut major theories). In total, Maldonado‑Vargas strengthens the First Circuit’s doctrinal clarity on investment contracts and provides operational guidance on proving, sentencing, and remedying fraudulent, investor-facing schemes.

Case Details

Year: 2025
Court: Court of Appeals for the First Circuit

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