Sentencing in Fraud Cases Guideline Amendments Below-Guideline Sentences

1. Sentencing in Fraud CasesGuideline AmendmentsBelow-Guideline Sentences Wrightsville Beach, North Carolina March 14, 2013 Jennifer Niles Coffin Sentencing Resource Counsel Federal Public and Community Defenders

2. FRAUD – FY 2011

3. The Guidelines Are Not “Heartlands”

4. To Get the Lowest Sentence • Low-as-Possible Guideline Range • Structural problems with the guidelines: • GLs do not include factors bearing on culpability (e.g., motive, mens rea), or any mitigating circumstances bearing on the need to incapacitate or deter • Range is flawed – e.g., it has increased 500% since 1987 for no reason related to sentencing purposes • Individualized mitigating circumstances • E.g., motive, age, education, family, etc.

5. Structural problems – Rita, Kimbrough: • Guideline recommends punishment greater than necessary to satisfy sentencing purposes aside from special mitigating facts • Mitigating facts -- Pepper, Gall: • The mitigating facts in this case are relevant to the purposes of sentencing and the parsimony command. • Departure if available – e.g., offense level overstates seriousness, 2B1.1, note 19 • Do not argue for a departure alone.

6. Guideline Range

7. Amendments Nov. 1, 2011 Specific congressional directive in Patient Protection and Affordable Care Act -- § 10606 • “aggregate dollar amount of fraudulent bills” submitted to government health care program is “prima facie evidence of the amount of the intended loss by the defendant” – • D has to rebut it • “loss plus” -- extra 2-, 3-, and 4-level increases for loss of $1mm-$7mm, $7mm-$20mm, over $20mm • if health care offense related to government health care program

8. Amendments Nov. 1, 2012 • Two general directives in the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, secs. 1079A(a)(1) & (a)(2) (2010). • Review, and if appropriate, amend. • 5 amendments to commentary to § 2B1.1, including two new rebuttable presumptions. • 1 amendment to § 2B1.4 and 2 amendments to commentary to § 2B1.4.

9. USSG § 2B1.1 – Securities Fraud • Rebuttable presumption that “modified rescissory method” provides “reasonable estimate of the actual loss.” • Difference in average price of security during period fraud occurred and average price during 90-day period after disclosure of the fraud. • NOT “market adjusted method” as in Olis (5th Cir.) and Rutkoske (2d Cir.) • But D can show change in value was caused by external forces not caused, foreseen, or intended by D

10. USSG § 2B1.1 – Securities Fraud • New downward departure example of offense level overstates seriousness of offense. • “A securities fraud involving a fraudulent statement made publicly to the market may produce an aggregate loss amount that is substantial but diffuse, with relatively small loss amounts suffered by a relatively large number of victims” • “In such a case, the loss table in subsection (b)(1) and the victims table in subsection (b)(2) may combine to produce an offense level that substantially overstates the seriousness of the offense.”

11. USSG § 2B1.1- Mortgage fraud • Rule for determining credit against loss where collateral has not been disposed of at the time of sentencing. Rebuttable presumption that the most recent tax assessment is a “reasonable assessment of the fair market value,” with factors for the court to consider. • Where tax assessed value is much lower than FMV, will lower presumptive credit and increase presumptive loss amount • Burden on D to show tax assessed value is not a reasonable estimate of FMV • Government said this method, though easy, “is not always a just statement of the value of the property.”

12. USSG § 2B1.1 • +4 for substantially endangering the solvency or financial security of an organization • Still get it if one or more criteria listed “was likely to result from the offense but did not because of a federal government intervention, such as a bailout.” • New upward departure example if offense created risk of substantial loss beyond loss determined under loss table: • “Such as a risk of significant disruption of a national financial market.”

13. USSG § 2B1.4 – Insider trading • Minimum offense level 14 if offense involved “an organized scheme to engage in insider trading.” • Comm’n’s “view” that such Ds (as opposed to opportunists) “warrant[], at a minimum, a short but definite period of incarceration.” • Ensures that GL “requires” prison even if little gain. • Abuse of position of trust • +2 under §3B1.3 “should be applied” if D was employed in a position creating, issuing, buying, selling, or trading securities or commodities • Examples • “would apply” (e.g., hedge fund professional) • “ordinarily would not apply” (e.g., clerical worker in investment firm)

14. Loss • actual or intended (the greater) • relevant conduct: reasonably foreseeable and within scope of D’s agreement • “credits” and other ways to mitigate loss • gain only if there is a loss (can’t be no loss) but it can’t reasonably be determined

15. Decisions on Loss US v. Manatau , 647 F.3d 1048 (10th Cir. 2011) • “[T]o be included in an advisory guidelines calculation the intended loss must have been an object of the defendant’s purpose.” • “We hold that ‘intended loss’ means a loss the defendant purposely sought to inflict. ‘Intended loss’ does not mean a loss that the defendant merely knew would result from his scheme or a loss he might have possibly and potentially contemplated.”

16. Exclude loss caused by other factors - in securities cases – overcome new rebuttable presumption and use this method • US v. Olis, 429 F.3d 540 (5th Cir. 2005) • US v. Rutkoske, 506 F.3d 170 (2d Cir. 2007) • US v. Nacchio, 573 F.3d 1062 (9th Cir. 2009) • Actual loss must have causal link to D’s conduct • US v. Whiting, 471 F.3d 792 (7th Cir. 2006) • US v. Rothwell, 387 F.3d 579 (6th Cir. 2004) • US v. Allmendinger, 706 F.3d 330 (4th Cir. 2013) (downward departure may be appropriate “where actual loss caused by the defendant’s fraud has other causes more proximate than the fraud”) • Mortgage fraud – actual loss unless D intended lenders would not be repaid • Goss, 549 F.3d (5th Cir. 2008)

17. Mortgage fraud – use actual loss unless D intended lenders would not be repaid US v. Goss, 549 F.3d 1013 (5th Cir. 2008)

18. US v. Crandall, 525 F.3d 907 (9th Cir. 2008) - error not to reduce loss by value of properties • US v. Leonard, 529 F.3d 83 (2d. Cir. 2008) - error not to reduce “loss” by investment’s value to victims • US v. Goss, 549 F.3d 1013 (5th Cir. 2008) - loss must be reduced by value of collateral returned

19. US v. Staples, 410 F.3d 484 (8th Cir. 2005) - loss should be reduced by FMV of collateral at time of sentencing • US v. Redemann, 295 F. Supp. 2d 887 (E.D. Wis. 2003) - downward departure where loss was caused by multiple factors and defendant’s gain was miniscule • Note – this should be framed as a variance or variance and departure today

20. US v. Coghill, 204 Fed. Appx. 328 (4th Cir. 2006) - loss = outstanding principal less amount victim recovers from liquidation • US v. Confredo, 528 F.3d 143 (2d Cir. 2008) - defendant entitled to show he subjectively intended loss less than face amount of loan application

21. No “economic reality” principle under the guidelines” – loss includes amounts “impossible or unlikely to occur” • Grounds for departure if impossible or unlikely -- variance or variance plus departure today • US v. McBride, 362 F.3d 360 (6th Cir. 2004)

22. Evidentiary Hearings • United States v. Thomas, Criminal Action No. 11–10172 • Government proffered “loss” in excess of $1,300,000 in mortgage fraud scheme • Evidentiary hearing “winnowed [it] down” to $350,408.88. • Government filed motion to add back loss of $185,267.87 from a particular sale • Even if successful, will be less than half the government's claimed “loss” Described in US v. Gurley, 860 F. Supp.2d 95 (D. Mass. 2012)

23. Some offender characteristics now “may be” relevant as grounds for departure • Age • Mental and emotional conditions • Physical condition including physique • Military service If “present to an unusual degree and distinguish the case from the typical cases covered by the guidelines” Same standard as “not ordinarily relevant” – “present to an exceptional degree” • Drug or alcohol dependence or abuse now “ordinarily not relevant” rather than “not relevant”

24. If Judge Likes Departures • Check Compilation of Departure Provisions • http://www.ussc.gov/Guidelines/2011_Guidelines/Manual_PDF/Compilation_of_Departure_Provisions.pdf • Also listed in back of 2012 Manual • 35 downward departure provisions Often subject to narrow restrictions and limitations • 23 neutral departure provisions (up or down) 12 of which appear in rarely used GLs • Watch out -- 166 upward departure provisions Often very broadly stated • Never argue for a departure alone.

25. 18 U.S.C. 3553(a) • Shall impose a sentence sufficient but not greater than necessary to satisfy the need for just punishment in light of the seriousness of the offense, deterrence, incapacitation, rehabilitation in the most effective manner • In light of all offense and offender circumstances, all kinds of sentences available by statute, and avoiding unwarranted disparities.

26. Courts Must Consider All Mitigating Factors, Ignore Contrary Policy Statements • Gall v. United States, 552 U.S. 38, 50 n.6, 56-60 (2007) • 3553(a)(1) is a “broad command to consider . . . the history and characteristics of the defendant” • Court approved variance based on factors the policy statements deem “not” or “not ordinarily relevant” and ignored the policy statements

27. Question is Whether the Facts are Relevant to Purposes and Parsimony Pepper v. United States, 131 S. Ct. 1229, 1242-43 (2011) “No question” that Pepper’s • remaining drug-free for five years • attending college and achieving high grades • succeeding at work • re-establishing a relationship with his father • marrying and supporting a family Are “highly relevant” to the need for deterrence, incapacitation, and treatment and training And “bear directly on the District Court’s overarching duty to ‘impose a sentence sufficient, but not greater than necessary’ to serve the purposes of sentencing”

28. Policy statement prohibiting consideration of these factors was not a reason to uphold 8th Circuit’s judgment • “the Commission’s views rest on wholly unconvincing policy rationales not reflected in the sentencing statutes Congress enacted.” Id. at 1247. • Policy statements that conflict with § 3553(a) may not be elevated above relevant factors. Id. at 1249. • Judge must instead give appropriate weight to relevant factors. Id. at 1250.

29. Courts Must Consider All Kindsof Available Sentences, May Ignore Zones • Must consider all “kinds of sentences available” by statute, § 3553(a)(3), even if the “kinds of sentence . . . established [by] the guidelines” recommend only prison. Gall, 552 U.S. at 59 & n.11. • Probation authorized for any offense with a statutory maximum below 25 years unless expressly precluded. See 18 USC § 3561(a); 18 USC § 3559(a).

30. Courts May Vary From Guidelines That Lack Empirical Basis and Recommend Punishment Greater Than Necessary • Rita, 551 U.S. at 351, 357 • Judge may find the “Guidelines sentence itself fails properly to reflect § 3553(a) considerations,” or “reflects an unsound judgment” • Kimbrough v. United States, 552 U.S. 85, 101 (2007) • “courts may vary [from Guideline ranges] based solely on policy considerations, including disagreements with the Guidelines.” (citing Rita) • not an abuse of discretion to conclude that a guideline that is not the product of “empirical data and national experience . . . yields a sentence ‘greater than necessary’ to achieve §3553(a)’s purposes, even in a mine-run case.”

31. Support Arguments with Evidence • Not much explanation required for a GL sentence if it is “clear” the sentence is based on USSC’s “own reasoning” and you did not contest the GL sentence. Rita, 551 U.S. at 357. • Judge need not address “frivolous” arguments. Id. • Judge must consider nonfrivolous arguments and must explain why if he rejects them. Id. at 351, 357. • If fails to explain how the sentence complies with 3553(a) or fails to address your arguments and evidence, reverse for procedural error. Gall, 552 U.S. at 51.

32. Procedural Error • “Significant procedural error” • Fail to calculate the guidelines correctly • Treat the guidelines as mandatory • Fail to consider 3553(a) factors • Fail to address parties’ arguments • Fail to adequately explain • Comes before review for substantive reasonableness.

33. Frequent Reversals on D’s Appeal for Procedural Error • At least 81 within, 29 below, and 11 above guideline sentences reversed for failing to explain why sentence is SBNGTN in light of the arguments and evidence presented. • Only 5 within, 10 above, and 2 below guideline sentences reversed as substantively unreasonable on D’s appeal • See http://www.fd.org/docs/select-topics---sentencing/app_ct_decisions_list.pdf

34. When courts of appeals reverse for inadequate explanation or failure to adequately address a nonfrivolous argument, the sentence on remand is different in the majority of cases. Jennifer Niles Coffin, Where Procedure Meets Substance: Making the Most of the Need for Adequate Explanation (Nov. 2011), http://www.fd.org/pdf_lib/Procedure_Substance.pdf; CHAMPION, MAR. 2012, at 36.

35. Fourth Circuit Has reversed 24 within-guideline sentences and 6 above-guideline sentences on D’s appeal for failure to address a nonfrivolous argument or failure to explain the sentence imposed in terms of 3553(a). United States v. Lynn, 592 F.3d 572 (4th Cir. 2010) No reversals for substantive unreasonableness on D’s appeal.

36. What Kind of Evidence? • Facts showing the guideline itself • recommends a sentence greater than necessary to achieve sentencing purposes • was not developed based on empirical data and national experience • Facts about the defendant and the offense + empirical evidence showing why those facts are relevant to purposes and parsimony • Tie the evidence to purposes and parsimony

37. Seriousness of Offense Should = Harm + Culpability • Nature and Seriousness of Harm • Offender’s Degree of Blameworthiness, e.g., • Mens rea • Motive • Role • Mental illness • Other diminished capacity Richard S. Frase, Excessive Prison Sentences, Punishment Goals, and the Eighth Amendment: “Proportionality” Relative to What?, 89 Minn. L. Rev. 571, 590 (February 2005)

38. Guidelines One Dimensional • Constructed solely of aggravating factors said to reflect “harm” --- Loss + Enhancements • Fail to include intent, motive, capacity, any mitigating offender characteristics; small effect for role • “wide variety of culpability” among Ds with same amount of “loss.” US v. Cavera, 550 F.3d 180, 192 (2d Cir. 2008) (en banc) • Numerous mitigating factors bearing on culpability not included in the guidelines. US v. Ovid, 2010 WL 3940724 (E.D.N.Y. 2010)

39. Guidelines do not address, or reject, other § 3553(a) purposes and factors • No attempt to reflect “need” for deterrence, incapacitation, rehabilitation • Mitigating factors required to be considered under § 3553(a)(1) prohibited or discouraged as grounds for “departure” • “Kinds” of sentences permitted by statute other than prison, § 3553(a)(3), generally not recommended GUIDELINES = MATH WITHOUT SUBTRACTION.

40. Loss not a good measure of offense seriousness • Loss “is not a fair representation of the defendant’s culpability” where “[t]here is no evidence that the defendant intended to enrich himself personally or intended to harm the [] project or the taxpaying public.” US v. Prosperi, 686 F.3d 32 (1st Cir. 2012) (affirming downward variance from GL range of 87-108 mos. to 6 mos. home detention + 1,000 hours community service). • Amount of loss is often “a kind of accident” and thus “a relatively weak indicator of [ ] moral seriousness . . . or the need for deterrence.” US v. Emmenegger, 329 F.Supp.2d 416 (S.D.N.Y. 2004). • The “Guidelines . . . in an effort to appear ‘objective,’ tend to place great weight on putatively measurable quantities, such as . . . the amount of financial loss in fraud cases, without, however, explaining why it is appropriate to accord such huge weight to such factors.” US v. Adelson, 441 F.Supp.2d 506 (S.D.N.Y. 2006), aff’d, 301 Fed. Appx. 93 (2d Cir. 2008). • Loss “is not always a reliable proxy for the culpability of an individual defendant.” United States v. Lenagh, 2009 WL 296999, *3-4, 6 (D. Neb. Feb. 6, 2009). • Gain to an insider trader is “[a]t best . . . a very rough surrogate for the harm to . . . the institution that owned the information.” US v. Gupta, __ F. Supp. 2d __ (SDNY 2012).

41. Relevant Conduct John Steer, former Commissioner and co-author of “Relevant Conduct: The Cornerstone of the Federal Sentencing Guidelines,” now says: uncharged conduct “is the aspect of the guideline that I find most difficult to defend.” acquitted conduct should not be used to calculate range. See An Interview with John Steer, CHAMPION, Sept. 2008, at 40, 42. See also Deconstructing the Relevant Conduct Guideline, http://www.fd.org/navigation/select-topics-in-criminal-defense/sentencing-resources/subsections/deconstructing-the-guidelines 41

42. Factor Creep • Cumulative and overlapping increases -- Comm’n recognizes problem. See USSC, Fifteen Year Review at 137 • “This precision is false.” Breyer, Federal Sentencing Guidelines Revisited, 11 Fed. Sent. R. 180 (Jan./Feb. 1999) • Judge should vary or depart. • With 6 additional SOCs, “the calculations under the guidelines have so run amok that they are patently absurd on their face.” US v. Adelson, 441 F.Supp.2d 506 (S.D.N.Y. 2006)

43. Judges recognize 2B1.1 often recommends a sentence that is too high • “Although I began the sentencing proceeding ‘by correctly calculating the applicable Guidelines range,’ ... it is difficult for a sentencing judge to place much stock in a guidelines range that does not provide realistic guidance.” United States v. Parris, 573 F. Supp. 2d 744, 751 (E.D.N.Y. 2008) • The “Guidelines were of no help; if not for the [five-year] statutory maximum, the Guidelines for an offense level 43 and criminal history I would have called for a sentence of life imprisonment” for a defendant who made no $$. United States v. Watt, 707 F. Supp. 2d 149 (D. Mass. 2010)

44. “As has become common among district courts sentencing white-collar offenders in financial fraud cases, the Court finds that the loss calculation substantially overstates the gravity of the offensehere and declines to impose a within-Guidelines sentence.” United States v. Faulkenberry, 759 F. Supp. 2d 915, 928 (S.D. Ohio 2010), aff’d, 461 Fed. App’x 496 (6th Cir. 2012).

45. Guidelines “reflect an ever more draconian approach to white collar crime, unsupported by empirical data.” “By making a Guidelines sentence turn on this single factor [loss or gain], the Sentencing Commission ignored [3553(a)] and . . . effectively guaranteed that many such sentences would be irrational on their face.” “The numbers assigned by the Sentencing Commission . . . appear to be more the product of speculation, whim, or abstract number-crunching than of any rigorous methodology -- thus maximizing the risk of injustice.” US v. Gupta, __ F. Supp. 2d __ (SDNY Oct. 24, 2012) (Rakoff, J.)

46. “Since Booker, virtually every judge faced with a top-level corporate fraud defendant in a very large fraud has concluded that sentences called for by the Guidelines were too high.” Frank O. Bowman III, Sentencing High-Loss Corporate Insider Frauds After Booker, 20 Fed. Sent. R. 167, 169, 2008 WL 2201039, at *4 (Feb. 2008).

47. Jurors too … • Mail Fraud • GL range -- 37-46 months • Juror average – 7 months • Perjury • GL range -- 21-27 months • Juror average – 2 months Judge James S. Gwin, Juror Sentiment on Just Punishment: Do the Federal Sentencing Guidelines Reflect Community Values?, 4 Harvard Law & Policy Review 173 (2010).

48. USSC “Priority” • Multi-year study of 2B1.1 and possible amendments in response to: • high rates of below-range sentences in cases involving relatively large loss amounts in securities fraud and similar offenses • public comment and judicial opinions suggesting impact of loss table or victims table (or combined impact) may overstate culpability • Proposed Priorities (May 2012); 77 Fed. Reg. 2778, 2783-84 (Jan. 19, 2012); Priorities, 77 Fed. Reg. 51, 1113 (Aug. 23, 2013) • Will be holding a roundtable Fall 2013

49. “[T]he fraud guideline, despite its excessive complexity, still does not account for many of the myriad factors that are properly considered in fashioning just sentences, and indeed no workable guideline could ever do so.” United States v. Ovid, slip op., 2010 WL 3940724, *1 (E.D.N.Y. Oct. 1, 2010) “While the fraud guideline focuses primarily on aggregate monetary loss and victimization, it fails to measure a host of other factors that may be important, and may be a basis for mitigating punishment, in a particular case.” Alan Ellis & John Steer, At a “Loss” for Justice: Federal Sentencing for Economic Offenses, 25 Crim. Just. 34 (2011)

50. How It Happened Two reasonsit may be “fair to assume that the Guidelines, insofar as practicable, reflect a rough approximation of sentences that might achieve §3553(a)’s objectives.” Rita, 551 U.S. at 350. • Commn used “empirical approach” to develop initial guidelines, beginning “with an empirical examination of 10,000 presentence reports setting forth what judges had done in the past.” • Guidelines can “evolve” in response to judicial decisions, sentencing data, criminological research, and consultation with experts and all stakeholders (not just DOJ). Rita, 551 U.S. at 349-50.