Federal Sentencing Tips

May

The U.S. Sentencing Commission Votes for Fundamental Fixes to the Sentencing Guidelines – Part III

By Alan Ellis and Mark H. Allenbaugh

This is the third newsletter in a four-part series regarding the April 9, 2015, vote by the U.S. Sentencing Commission to fundamentally fix some portions of the U.S. Sentencing Guidelines. These fixes will become final on November 1, 2015 if Congress does not act to the contrary. The prior newsletters reviewed Jointly Undertaken Criminal Activity, Mitigating Role, the Inflationary Adjustments to the loss and fine tables, as well as changes to the definition of Sophisticated Means. This newsletter addresses intended loss, number-of-victims table, and securities fraud. The final newsletter will discuss the difference between clarifying amendments and substantive amendments and how to put this to your use.

Revisions to “Intended Loss”

For economic crimes, the guidelines look primarily to the amount of “loss” to determine offense seriousness. For example, in a typical Ponzi scheme, loss generally is equivalent to the total amount of money all investors lost, i.e., “actual loss.” However, loss also can include so-called “intended loss.” Returning to the Ponzi scheme example, intended loss thus would be equivalent to the money the offender intended investors to lose, e.g., where the offender was arrested before he could cash an investor’s check. If the intended loss is greater than the actual loss, then the guidelines direct a sentencing judge to use the amount of intended loss.

The concern has been how to measure intended loss. Is it a subjective or objective measure? Consistent with its focus on the actual culpability of the offender reviewed in the sections above, the Commission now has clarified that intended loss is to be measured by the defendant’s subjective intent. In short, the proposed amendment would provide that intended loss means the pecuniary harm “that the defendants purposefully sought to inflict.” (Emphasis added). This reflects certain principles discussed in the Tenth Circuit’s decision in United States v. Manatau, 647 F.3d 1048 (10th Cir., 2011). In Manatau the defendant was convicted of bank fraud and aggravated identity theft. The District Court determined that the intended loss should be determined by adding up the credit limits of the stolen convenience checks because a loss up to those credit limits was “both possible and potentially contemplated by the defendant’s scheme.” On appeal the Tenth Circuit reversed holding that “intended loss” contemplates “a loss the defendant purposefully sought to inflict,” and that the appropriate standard was one of “subjective intent to cause the loss.” Such an intent, the Court held, may be based on making “reasonable inferences about the defendant’s mental state from the available facts.” 647 F.3d at 1056. This standard has now been embodied by the proposed amendment.

The New Number-of-Victims Table

The Commission has expanded the enhancement by adding an either/or element of “substantial financial hardship.” While the government must now prove in certain cases that victims of the offense suffered substantial financial hardship, this alone can lead to an enhancement in some cases, even if the number of victims is below the threshold, for example, if the offense involved less than ten victims. Currently, there is no such enhancement. Under the proposed amendment, if the offense involved less than ten victims but resulted in substantial financial hardship to one or more, there is a two level increase.

A four-level enhancement is mandated where the offense resulted in substantial hardship to five or more victims. If the offense resulted in substantial hardship to 25 or more victims, the increase is six levels. The revised victim table is below:

Number of Victims - Prison Sentencing Guidelines

Calculating Loss in Securities Fraud Cases

On November 1, 2012, in response to a Congressional directive set forth in Section 1079A(a)(1)(A) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, the Commission adopted a novel method for estimating actual loss in cases “involving the fraudulent inflation or deflation in the value of a publicly traded security or commodity.” According to the Commission, “Case law and comments received by the Commission indicate that determinations of loss in cases involving securities fraud and similar offenses are complex and that a variety of different methods are in use, possibly resulting in unwarranted sentencing disparities.” The Commission therefore adopted a then-new rule for estimating loss in securities fraud cases, specifically, the “modified rescissory method” (MRM).

Under this method “there shall be a rebuttable presumption that the actual loss attributable to the change in value of the security or commodity is the amount determined by—

  1. calculating the difference between the average price of the security or commodity during the period that the fraud occurred and the average price of the security or commodity during the 90-day period after the fraud was disclosed to the market, and
  2. multiplying the difference in average price by the number of shares outstanding.

Determining whether and to what extent a defendant’s conduct may have caused a publicly traded security to increase or decrease in value, is, to be sure, no easy task especially given the vagaries and unpredictability of market dynamics. Thus, the Commission was careful to also note that when using this loss methodology, “the court may consider, among other factors, the extent to which the amount so determined includes significant changes in value not resulting from the offense (e.g., changes caused by external market forces, such as changed economic circumstances, changed investor expectations, and new industry-specific or firm-specific facts, conditions, or events).”

Nevertheless, as it turned out, no one ever actually used this methodology. This is so because MRM necessarily glosses over the very extrinsic factors the Commission otherwise believes a court should consider when applying that method for calculating loss. Taking the average stock price over two arbitrary time periods, subtracting the two, and then multiplying by the number of outstanding shares simply cannot take into account other causal factors; indeed, the entire method merely assumes a causal connection between the defendant’s conduct and changes to the security’s value.

Not surprisingly, therefore, when the Commission published MRM for comment, there was near-uniform opposition to it. Both the Practitioners Advisory Group to the U.S. Sentencing Commission as well as the National Association of Criminal Defense Lawyers urged the Commission to decline adopting this method for estimating loss. In fact, anecdotal evidence suggests that even the Government, the only champion of the MRM to the Commission, does not utilize MRM, but instead has been advancing a crude “buyers only method” that not only suffers from the same problems as MRM, but has the added fundamental flaw of relying on arbitrary data (as opposed to objective, independently verifiable data such as share price and volume as reported by the major exchanges). The “buyers only method” determines which investors were net losers within an arbitrary time period, and then adds up all the net losses for a total loss amount.

The Commission now has recognized that, at least in the case of securities fraud, MRM just doesn’t fit. While the Commission was considering a wholesale deletion of MRM (or any other measure of loss) and using “gain” instead, the Commission ultimately decided to leave in MRM but emphasize that “the court may use any method that is appropriate and practicable under the circumstances.” While the Commission declined to expressly adopt the empirical based method as set forth by the U.S. Supreme Court in civil securities fraud cases, the Dura method likely will evolve into the primary method for determining loss in such cases. See Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005).

So, at least for now, the rebuttable presumption in favor of the (overly-simplistic) MRM method has been removed from the Guidelines thereby allowing counsel to litigate loss under the far more appropriate methodology of Dura Pharmaceutical.

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About Alan Ellis
Alan Ellis is a criminal defense lawyer with offices in San Francisco and New York, and over 47 years of experience as a practicing lawyer, law professor and federal law clerk. He is a nationally recognized authority in the fields of federal plea bargaining, sentencing, prison matters, appeals, habeas corpus 2255 motions and international criminal law.

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