New Sentencing Guidelines Could Alter Fraud Prosecutions

Several important changes to the federal Sentencing Guidelines could drastically reduce the sentences imposed for violations of fraud and anti-trust laws, even as the Department of Justice heightens its focus on prosecuting individuals in corporate misconduct cases.

The Sentencing Guidelines governing economic crimes—such as securities fraud, wire fraud, insider trading, and other offenses—have provoked significant criticism among defense lawyers, judges, and others in recent years. The central argument is that the guidelines placed too much emphasis on financial losses caused by crimes without giving enough consideration to other important factors—such as the role the defendant played in the crime or the duration of the wrongdoing—sometimes resulting in unreasonably severe sentences.

Implementation of the revised Sentencing Guidelines, which took effect Nov. 1, address these concerns. At the same time, however, the revisions also draw the ire of the Justice Department, which vociferously opposes wholesale changes to the Sentencing Guidelines, arguing in its comments to the Sentencing Commission that lessening penalties for economic crime is contrary to “overwhelming societal consensus” and the intent of Congress.

“Some of the changes in the Sentencing Guidelines are a step in the right direction from a white-collar standpoint, but you have to balance that against the fact that the Justice Department now intends to pursue individuals with greater vigor,” says Vince Farhat, a partner with law firm Holland & Knight. That means the overall environment is “more hostile to individual defendants,” he says.

Loss Calculation

The biggest driver for determining a sentence in criminal cases is the amount of loss incurred by an economic crime. That being said, one of the biggest changes to the Sentencing Guidelines is the adjustments made to the monetary loss tables to account for inflation.

Among the loss tables that have been adjusted for inflation include criminal activity related to fraud and antitrust cases. From a practical standpoint, defendants in cases involving large-dollar losses or significant ill-gotten profits could see significantly reduced criminal fines.

In a wire fraud or securities fraud case, for example, the inflation adjustment means that the lowest offense level would now be triggered at a loss of $6,500, rather than the previous $5,000 threshold. The maximum offense level would not be triggered until a loss of $550 million, up from the previous $400 million threshold.

The Justice Department heavily opposed any inflationary adjustments to the Sentencing Guidelines’ monetary tables, arguing that the purpose of the penalty amount is designed to reflect distinctions in criminal misconduct. Adjusting these amounts puts them at odds with the criminal laws that they help to enforce and would lead to an unwarranted reduction in sentences for many offenses, the Justice Department said.

“Some of the changes in the Sentencing Guidelines are a step in the right direction from a white-collar standpoint.”

Vince Farhat, Partner, Holland & Knight

For example, a defendant's sentence for a fraud offense that causes a loss of $500,000 would now be reduced to a 12-level increase, as opposed to a 14-level increase under the previous Sentencing Guidelines for the same amount of loss.

According to the Commission’s analysis, affected §2B1.1 cases would see a 26 percent average sentence reduction. The affected tax and antitrust offenses would similarly see an average reduction of about 25 percent. “These are significant changes,” the Justice Department said.

Intended Loss

The Sentencing Commission also narrowed the definition of “intended loss” to mean the monetary harm that the defendant “purposely sought to inflict,” rather than “that was intended to result.”

For example, consider a securities fraud scheme involving multiple parties, one of whom is an individual participant only engaged in a couple of transactions without having a big-picture understanding of the number of deals involved in the overall scheme. That lack of a larger understanding of the scheme could result in a reduced sentence. “Taking into account the loss that the defendant specifically intended to cause is a fairer way to evaluate sentencing exposure,” says Farhat.

The Justice Department argued, however, that basing intended loss on the subjective standard of a defendant’s intentions will “make it difficult, if not impossible, to prove any amount of intended loss, even in cases where the evidence shows grossly reckless conduct that evidences genuine culpability, and will lead to the adoption of an actual loss standard in the great majority of criminal fraud cases.”

Overall, changes to the definition of intended loss give courts “more latitude to impose sentences,” based on an individual’s subjective intentions,” says Farhat.

SENTENCES FOR FRAUD & OTHER OFFENSES

Below is a list of recommended sentencing levels under §2B1.1 in the federal Sentencing Guidelines, covering fraud and deceit, forgery, embezzlement, theft, and other offenses.
(b) Specific Offense Characteristics
(1) If the loss exceeded $6,500, increase the offense level as follows:
(A) $6,500 or less [no increase]
(B) More than $6,500 add [2]
(C) More than $15,000 add [4]
(D) More than $40,000 add [6]
(E) More than $95,000 add [8]
(F) More than $150,000 add [10]
(G) Morethan$250,000 add [12]
(H) More than $550,000 add [14]
(I) Morethan$1,500,000 add [16]
(J) More than $3,500,000 add [18]
(K) More than $9,500,000 add [20]
(L) More than $25,000,000 add [22]
(M) More than $65,000,000 add [24]
(N) More than $150,000,000 add [26]
(O) More than $250,000,000 add [28]
(P) More than $550,000,000 add [30].

(2) (Apply the greatest) If the offense—
(A) (i) involved 10 or more victims;
(ii) was committed through mass-marketing; or
(iii) resulted in substantial financial hardship to one or more victims, increase by 2levels;
      (B ) resulted in substantial financial hardship to five or more victims, increase by 4 levels; or
      (C) resulted in substantial financial hardship to 25 or more victims, increase by 6 levels.
Source: Sentencing Commission

Culpability and Victim Impact

The Sentencing Commission further revised the guidelines to clarify when a defendant is eligible to receive a reduced sentence for playing a minor or minimal role in criminal activity relative to the “average participant.” Under this benchmark, a defendant’s relative culpability will generally be determined in relation to the defendant’s co-participants, and not to offenders who commit similar crimes.

“This change is intended to encourage courts to ensure that the least culpable offenders, such as those who have no proprietary interest in a fraud, receive a sentence commensurate with their own culpability without reducing sentences for leaders and organizers,” Chief Judge Patti Saris, chair of the Commission said in a statement.

The amendments also provide a non-exhaustive list of factors for courts to consider when determining whether to apply a mitigating role adjustment, including:

The degree to which the defendant understood the scope and structure of the criminal activity

The degree to which the defendant participated in planning or organizing the criminal activity

The degree to which the defendant exercised decision-making authority or influenced the exercise of decision-making authority

The nature and extent of the defendant’s participation in the commission of the criminal activity, including the acts the defendant performed and the responsibility and discretion the defendant had in performing those acts

The degree to which the defendant stood to benefit from the criminal activity

In addition to clarifying when a defendant is eligible for a reduced sentence, the loss table in the Sentencing Guidelines under §2B1.1(b)(2) now also incorporate “substantial financial hardship” as a sentencing enhancement factor. This change effectively allows for harsher punishment for financial crimes where even one defendant suffers substantial financial hardship, rather than sentence levels being determined by the number of victims, as previously was the case.

The overall idea is that a $10,000 crime committed against one individual whose life savings has been depleted by the criminal activity is a far more severe offense than thousands of people individually suffering a small amount of loss.

The Sentencing Commission has also increased the recommended penalties for crimes perpetrated by “sophisticated means” under §2B1.1(b)(10)(C), defined as “especially complex or especially intricate offense conduct pertaining to the execution or concealment of an offense.” This includes, for example, hiding assets or transactions, or both, through the use of fictitious entities, corporate shells, or offshore financial accounts. 

Courts often apply the “sophisticated means” enhancement regardless of the defendant’s own conduct, says Farhat. Under the revised guidelines, the “sophisticated means” enhancement now applies only when the defendant intentionally engaged in, or caused, the conduct constituting sophisticated means.

Case in point: Four people face charges in a scheme, but only one ringleader set up the shell entities and the bank accounts while the other participants ran checks back and forth to the bank. A scenario such as this opens up the argument that such conduct, other than the ringleader’s actions, doesn’t constitute a sophisticated act.

Although the Sentencing Guidelines are only advisory, federal judges must consider them in sentencing defendants, including senior officers and directors, in white-collar crimes. Moving forward, the new amendments give courts and judges far more latitude to sentence defendants based on their individual intent and specific role within a fraud scheme.