The U.S. Sentencing Commission is considering changes to how securities-related crimes are punished, potentially imposing less jail time upon defendants in securities fraud cases.
The Commission, which sets guidelines used by judges during sentencing hearings, plans to rely on gains obtained by a participant, rather than the traditional assessment of the losses suffered by individual fraud victims or multiple shareholders in a “fraud on the market” case, an offense involving the fraudulent inflation or deflation in the value of a publicly traded security or commodity. The guidelines would also apply to those accused of submitting false information in a public filing with the Securities and Exchange Commission or similar regulator.
The amendment, if approved, would be a step towards resolving a practical concern (overcrowded prisons) and issues raised within the legal community, notably the American Bar Association, about the fairness of current guidelines. Jed Rakoff, senior judge for the Southern District of New York, is among those who have spoken out against guidelines that lack nuance and may be too harsh. “Insider trading is a serious offense, and it is very important there is prison time to send a strong message,” he told Newsweek this past summer. “But the arithmetic behind the sentencing calculations is all hocus-pocus—it’s nonsensical, and I mean that sincerely. It gives the illusion of something meaningful with no real value underneath.”
A 2013 proposal from an American Bar Association encouraged judges to place less emphasis on monetary losses and more on the duration of the scheme, motive, culpability, and whether the defendant actually profited.
In its proposal, the Commission noted that while cases involving this conduct occur infrequently (just seven such cases in fiscal years 2012 and 2013), it has “has received comment that these cases are complex, resulting in courts applying a variety of methods” to determine an appropriate sentence. In 2012 and 2013, the average sentence was 48 months. Currently, the statutory maximum term of imprisonment for an offense related to securities fraud is 25 years.
At Friday’s hearing, the Commission released its preliminary proposal, including a chart that may be used when assessing the nature of a crime and its financial repercussions. Ultimately, Congress will decide on whether or not to approve the recommendation.
Among the questions posed to the public: Is gain, rather than loss, is a more appropriate method for determining the harm accountable to the defendant in “fraud on the market” cases? What are the advantages and disadvantages of using gain to measure harm in such cases? Are there application issues that would arise in determining gain in such cases? If so, what are the issues and how, if at all, should the Commission address them?