Sentencing Commission Shifts Focus on Fraud Punishments

Any number of accounting scandals in the 2000s—either in the first wave of Enron, WorldCom, and Adelphia; or the second wave of Bernard Madoff, Lehman Bros., and others from the financial crisis—drove calls from Washington to Main Street that white-collar criminals be found, prosecuted, and jailed. To this day, plenty of people say the number of such criminals who do end up in jail is not large enough.

Well, on April 9 the U.S. Sentencing Commission adopted changes to its sentencing guidelines for financial fraud that both do and do not answer that simmering public outrage. On one hand, the Commission increased the recommended penalties for crimes perpetrated by “sophisticated means.” At the same time, the changes also reduce penalties for most participants in a fraud scheme, since most people aren’t the ringleaders using those sophisticated means to scam the public.

The grunts in a boiler room selling fake stocks, for example, won’t face the same mandatory sentence as the plot’s mastermind. “Intent” will now trump unintended consequences—which means that a victim’s suffering unexpected hardship is separate from the initially contemplated financial damage. Ill-gotten gains will no longer be adjusted upward to account for inflation.

In a “fraud on the market” case—an offense involving the submission of false information in a filing with the Securities and Exchange Commission, or manipulating the value of a publicly traded security or commodity—judges will have more flexibility with the difficult calculation of what the actual losses were from changes in the value of a security or commodity. Courts may use “any method that is appropriate and practicable under the circumstances.”

The consequences of the changes to the fraud guidelines could be far-reaching. More than 30 other sentencing guidelines—including those covering money laundering, public corruption and identity theft—either reference the fraud portion, or have a relationship with it. The proposed amendments will be transmitted to Congress on May 1; barring objections, they go into effect Nov. 1.

The changes beg an important question: Why reduce all but the most egregious white-collar crime sentences, when many want larger punishments and greater culpability for white-collar criminals?

“I have mixed feelings,” says Mark Harris, a partner with the law firm Proskauer Rose. “It is definitely encouraging that the Commission thought the topic of white collar sentencing deserved review. At the same time, I’m disappointed there wasn’t a more wholesale revision. I hope this is the first step in the process and not the last.”

The Dodd-Frank Act directed the U.S. Sentencing Commission to review its guidelines for securities fraud, fraud on financial institutions, and mortgage fraud. That review coincided with outcry from defense lawyers and federal judges that the current sentencing formulas are overly harsh and contribute to overcrowded prisons.

Harris elaborates on concerns with the previous guidelines. “They were too focused on one factor, loss amount, almost to the exclusion of everything else,” he says. “None of us really believes that a person involved in a $100 million loss is twice as bad as someone involved in a $50 million loss.”

“It wasn’t that long ago that people thought five years in a federal prison for a crime that’s about money, but doesn’t involve violence or loss of life, was a really stiff penalty,” he adds. “Now, it seems like a slap on the wrist. We are now used to talking about 10- and 15-year sentences, and even 20-year sentences. Sentences of that length were extremely rare 15 years ago, not everyday occurrences. I don’t know if there is any empirical support for the idea that you get more deterrence out of a 20-year sentence than a 10-year sentence.”

“It is definitely encouraging that the Commission thought the topic of white-collar sentencing deserved review. At the same time, I’m disappointed there wasn’t a more wholesale revision.”
Mark Harris, Partner, Proskauer Rose

Discretion vs. Uniform Justice

The problem, others say, is that current sentencing guidelines don’t give judges enough flexibility to consider the facts of each case.

“This same guideline applies to Madoff and the employee who falsifies their timesheet to get two weeks of sick leave,” says Randall Eliason, a former U.S. attorney who now lectures on white-collar crime at George Washington University. “The problem is that if judges start disregarding the guidelines because they think they are out of whack in big cases, they might start disregarding them in a lot of other cases as well. They will get more comfortable with the idea that they don’t have to follow the guidelines.”

“If you look at the statistics, you see that for the vast majority of cases, the within-guideline sentences being imposed by federal judges are very low,” Michael Caruso, federal public defender for the Southern District of Florida, testified at a hearing in March on the proposed changes. “For the vast majority of cases, the statistics seem to indicate that the within-guideline rate is 35 percent. I don’t think any reasonable person could say that that’s a properly calibrated guideline.”

Marcos Daniel Jiménez, a trial partner at McDermott Will & Emery and a former U.S. attorney, worries that the current guidelines create judicial inconsistency. While judges in New York might be perfectly willing to disregard the sentencing recommendations, he says, many in his home state of Florida rely upon strict adherence. It is wrong, he said, for a defendant to face a harsher sentence for no other reason than where the trial is held.

The liberties some judges take with the sentencing guidelines are illustrated by the 2014 conviction of five former associates of Bernard Madoff’s Ponzi scheme. According to the guidelines, all five would have received life sentences; Southern District of New York Judge Laura Taylor Swain instead ordered sentences ranging from just two-and-a-half years to 10 years.

FRAUD ON THE MARKET

The following is the U.S. Sentencing Commission’s revised guideline regarding “fraud on the market and related offenses.”
This part of the proposed amendment addresses offenses involving the fraudulent inflation or deflation in the value of a publicly traded security or commodity. The proposed new guideline is a result of the Commission’s continued work on fraud offenses and, in particular, in the area of securities fraud and “fraud on the market” offenses.
The proposed amendment also involves the Commission’s past work in implementing the directive in section 1079A(a)(1) of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Specifically, [it] directed the Commission to “review and, if appropriate, amend” the guidelines and policy statements applicable to “persons convicted of offenses relating to securities fraud or any other similar provision of law, in order to reflect the intent of Congress that penalties for the offenses under the guidelines and policy statements appropriately account for the potential and actual harm to the public and the financial markets from the offenses.”
In addition, in promulgating any such amendment, the Commission shall:

Ensure that the guidelines and policy statements reflect… the serious nature of the offenses

The need for an effective deterrent and appropriate punishment to prevent the offenses

The effectiveness of incarceration

The extent to which the guidelines appropriately account for the potential and actual harm to the public and the financial markets resulting from the offenses;

Ensure reasonable consistency with other relevant directives and guidelines and Federal statutes;

Make any necessary conforming changes to guidelines
Source: U.S. Sentencing Commission.

While defense attorneys may appreciate the new amendments, the Justice Department has vociferously opposed them, arguing that leniency for white-collar offenders is contrary to “overwhelming societal consensus” and the will of Congress.

Those objections illustrate the predicament the Justice Department faces as advocates and lawmakers, notably Sen. Elizabeth Warren (D-Mass.), constantly blast prosecutors for not pursuing individuals as often as they could in fraud cases, relying instead on firm-wide settlements.

“Congress makes statements all the time about how harsh they want the sentences to be,” Eliason says. “The Justice Department likes to beat the drum for really serious sentences too and want Congress to see that they are not being soft.”

“In the context of much of the commentary that decries the fact that there haven’t been more individual CEOs or others sent to jail in the aftermath of the Great Recession, a lot of that has to do with the prosecution of those people, not the sentencing of them,” says Scott Coffina, a partner with Drinker Biddle’s white collar defense team, and a former federal prosecutor who worked in the George W. Bush administration.

Coffina points to the so-called Holder Memo, a call for reduced sentences for drug-related crimes that Attorney General Eric Holder issued last year. “The Justice Department’s position is that they generally want harsher sentences for fraud cases,” he says. “But, in context of marijuana, the Holder Memo talks about individualized sentencing. I don’t think that approach should be limited just to drug crimes.”

“You can’t have it both ways,” he says. “You can’t have a straight system of fill-in-the-blanks and get to a sentence through some equation for fraud, and then also profess to support individualized sentencing.”