The New Sentencing Guideline for Fraud Cases

Update: the proposed amendments to the fraud sentencing guideline discussed in this article took effect on November 1, 2015. On April 30 the United States Sentencing Commission formally submitted to Congress its annual proposed amendments to the Federal Sentencing Guidelines. Unless Congress intervenes, the amendments will take effect on November 1st. Several amendments affect the guideline for economic crimes and fraud cases, § 2B1.1, probably the most commonly-used guideline for white collar crimes. The fraud sentencing guideline has been criticized for years for being too driven by loss amounts that may be a poor measure of culpability or difficult to calculate, and for calling for unreasonably high sentences. The proposed amendments seek to address some of those concerns, but stop short of the wholesale overhaul that some had hoped for. The overall effect of the amendments will be to reduce the recommended sentence in many fraud cases, particularly those involving large dollar amounts. At a public hearing on March 12, the U.S. Department of Justice opposed most of the proposals, arguing that any move to reduce the sentences in fraud cases would be bad policy and would ignore the “overwhelming societal consensus” in favor of harsh punishment for these crimes. Given the current realities of federal sentencing, I believe DOJ’s opposition was misplaced.   There are legitimate concerns about the effect of the fraud guideline in some cases. If those concerns are not addressed within the guidelines structure, the guidelines will become increasingly irrelevant to the real world situations faced by sentencing judges and their force and influence will continue to wane. In the long run, that's a far more serious concern.

The Proposed Amendments

There are five key proposed amendments affecting § 2B1.1: Inflation Adjustment: The guidelines operate by calculating an offense level, ranging from 1 to 43, for every criminal conviction. That offense level, along with the defendant’s criminal history, is used in the Sentencing Table to find the recommended sentencing range. The greater the offense level, the greater the sentence. In any fraud case the single biggest driver of the offense level is the loss caused by the defendant’s conduct. That amount is plugged into the “fraud table” in § 2B1.1(b)(1) and the corresponding number of offense level points is added; if the loss exceeds $5,000.00 two points are added, if it exceeds $10,000.00 four points, and so on. At the top of the fraud table, for losses exceeding $400 million, thirty points are added to the offense level. Since the fraud table was last revised in 2001, inflation has led to “bracket creep.” A crime that caused $100,000.00 in damage in 2001 would cause more than $130,000.00 in damage today, simply due to the effect of inflation. That would place it higher in the fraud table and result in a greater sentence for the identical crime. The Commission proposes using a multiplier based on the Consumer Price Index to adjust the amounts in the table that define the different levels and bring them back into line with what they represented in 2001. Because of its potential to affect almost any case under § 2B1.1, the inflation adjustment is probably the most far-reaching of the proposed amendments. According to the Commission’s research, this modification of the fraud table alone will reduce the average sentence under § 2B1.1 by more than 20%. Victims Table: The “victims table” in § 2B1.1(b)(2) provides a two level enhancement if the offense affected ten or more victims, four levels if it affected fifty or more victims, and six levels if it affected 250 or more. This focus on the number of victims may lead to inappropriate results in some cases. For example, suppose a defendant in a penny stock scheme defrauds 500,000 people of only $5.00 each. Another defendant in a different kind of scheme defrauds five people of $500,000.00 each, devastating them and wiping out their life savings. The total loss is identical and so each would receive the same increase from the fraud table. But the first would receive an additional six levels based on the number of victims while the second, who caused far greater harm to his individual victims, would not. Six additional levels may lead to a doubling or more of the recommended sentence, but probably few would argue that the first defendant deserves twice the jail time of the second. The proposed amendment shifts the focus away from the number of victims and toward the seriousness of the harm caused. The two level enhancement remains for offenses that affect 10 or more victims, and also applies if the offense resulted in substantial financial hardship (such as bankruptcy or loss of retirement savings) to one or more victims. If the offense resulted in substantial financial hardship to five or more victims there is a four level increase, and substantial financial hardship to 25 or more victims results in a six level increase. The four and six level increases based solely on the number of victims are eliminated. Sophisticated Means: The fraud guideline contains a two level enhancement for offenses that involved multiple jurisdictions, overseas bank accounts, shell corporations, or other types of “sophisticated means.” § 2B1.1(b)(10). Some have criticized this provision for failing to distinguish offenses that truly were unusually sophisticated from those that merely employ devices that have now become commonplace. There was also some concern about courts applying this enhancement to a defendant when it was other participants in the scheme, and not that defendant, who actually employed the sophisticated means in question. The Commission ultimately addressed only the latter concern. It proposes modifying the enhancement to specify that it should apply only if the particular defendant “intentionally engaged in or caused the conduct constituting sophisticated means.” The rest of the enhancement remains intact. Intended Loss: The loss caused by the defendant’s behavior that is plugged into the fraud table is the greater of either the actual or the intended loss. There has been some dispute in the courts over whether “intended loss” means all losses that are reasonably foreseeable based on the nature of the defendant’s conduct (objective standard) or only those losses that the defendant actually and purposely sought to inflict (subjective standard). The Commission proposes revising the commentary in the fraud guideline to adopt the subjective standard and define intended loss as the loss the defendant “purposely sought to inflict.” Fraud on the Market: “Fraud on the market” cases are those that involve the fraudulent increase or decrease in the price of a publicly traded security. The amendment removes language in the commentary providing a rebuttable presumption that the proper way to calculate loss is the change in the actual value of the security, which can be extremely difficult to calculate and lead to astronomical sentences. The new commentary states that a court may use any method for calculating loss that is appropriate and practical under the circumstances.

DOJ’s Opposition: Fighting the Wrong Guidelines Battles

At the March 12 hearing the Department of Justice opposed the inflation adjustment; opposed the amendments concerning sophisticated means, intended loss, and fraud on the market; and supported the new enhancement based on causing victims substantial hardship. In other words, DOJ opposed virtually any amendment that could lead to lower sentences while supporting changes that could lead to higher ones. DOJ was a lonely voice at the hearing and is definitely swimming against the tide by opposing these amendments. There is a widespread and growing belief that guidelines sentences in major fraud cases have become excessive. More broadly, there is an emerging bipartisan movement in the country favoring criminal justice reform, including measures to reduce skyrocketing sentences (particularly for non-violent offenders) and our enormous prison population. There aren’t many causes today on which conservatives like Senator Ted Cruz and liberals like Senator Dick Durbin can find common ground, but this appears to be one of them. Law professor Frank Bowman provided some compelling hearing testimony tracing the history of the fraud guideline and demonstrating how various forces, both intentional and unintentional, have combined over the years to escalate the sentences in such cases dramatically. As he pointed out, given the large dollar values involved in some recent Wall Street frauds and the multiple enhancements that have been added over the years to § 2B1.1, it’s relatively easy for a white-collar defendant to rocket to the top of the sentencing table and end up with a recommended sentence of 30 years or even life in prison – on a par with sentences recommended for homicide, treason, or a major armed bank robbery. It’s hard to see what criminal justice purpose is being served by the ever-escalating sentences in fraud cases. The prospect of prison does have a powerful and important deterrent effect that is unique to criminal law. But for a typical business executive it’s hard to believe there’s much additional marginal deterrent value in a possible twenty or twenty-five year sentence as opposed to, say, a ten or fifteen year one. By appearing almost reflexively to oppose any amendment that might lead to lower sentences, DOJ risks losing credibility and being marginalized in the broader conversation about sentencing reform. For example, the inflation adjustment should have been relatively uncontroversial. There’s no logical reason why a crime today should result in a higher sentence than the identical crime fifteen years ago, simply due to the increased cost of living. Yet DOJ opposed the adjustment, largely because it would result in lower sentences – which is, of course, precisely the point. Members of the Commission pronounced themselves “baffled” by DOJ’s position. What’s more, legal developments have rendered DOJ’s position in favor of higher guidelines sentences increasingly beside the point. It’s been ten years since the Supreme Court ruled in United States v. Booker that the mandatory sentencing guidelines were unconstitutional and the guidelines must be advisory only. Later in Kimbrough v. United States the Court made it clear that a judge is free to depart from the recommended sentence if the judge disagrees with a policy decision underlying the guidelines. In this legal environment, DOJ’s continued push for higher guidelines looks like a struggle to keep the barn door closed when the horse left for greener pastures long ago. In the post-Booker/Kimbrough world, if judges believe a sentence called for by the guidelines is out of whack they will simply reduce it. For example, in the recent public corruption case involving former Virginia Governor Robert McDonnell, the judge called the recommended guidelines sentence of six to eight years in prison “ridiculous” and proceeded to sentence McDonnell to only two years. There’s substantial evidence that the same thing is already happening in fraud cases. According to the Sentencing Commission’s data, judges sentence below the recommended guidelines range in about 28% of fraud cases (not counting those cases where the government itself requests a reduced sentence). But in the Southern District of New York, home to Wall Street and many of the big-dollar fraud cases, judges depart below the guidelines in more than 48% of such cases. It does little good for DOJ to push for extremely high guidelines numbers only to have judges ignore the guidelines and impose the lower sentences that they feel are just and reasonable. But DOJ’s advocacy for higher guidelines sentences in fraud cases is worse than futile: it’s counter-productive. The more that judges come to regard the guidelines as calling for inappropriate sentences, the more comfortable they may become not following them. This could lead to even more widespread departures from the guidelines not merely in fraud cases but in cases across the board, accelerating a decline in the force and influence of the guidelines that so far has been held relatively in check since Booker. Guidelines amendments that may result in lower sentences do not tie a prosecutor’s hands. In truly extraordinary cases the government is always free to ask the judge to exceed the recommended guidelines sentence and depart upward. This would achieve DOJ’s goal of seeking enhanced punishment in cases where it may truly be called for while still promoting greater overall respect for the guidelines in the average case. DOJ would be better served by adopting such an approach while still supporting modest sentencing reforms for the majority of cases.

The Future of the Fraud Guideline

The proposed amendments reflect some tinkering around the edges of § 2B1.1, but won’t have a dramatic impact on many of the very large fraud cases that have prompted the most concern. None of the Commissioners appeared completely satisfied with the amendments, and it appears the Commission considers them to be merely a first step. The April 9 meeting where the amendments were formally adopted revealed some disagreement, though, over whether the best course in the future would be additional tweaks to the fraud guideline or a more fundamental reform of the entire sentencing system. The latter could include working with Congress to implement a completely new system of mandatory guidelines that would satisfy Booker. Following the post-Enron hysteria of more than a decade ago, the pendulum swung too far in the direction of severe sentences for fraud cases. The proposed amendments represent a welcome step back towards sentencing sanity, but more remains to be done if the guidelines are not to become virtually irrelevant in major fraud prosecutions.

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