United States: U.S. Sentencing Commission Approves Major Changes To Fraud Guidelines

The Updates Could Significantly Affect White Collar Criminal Defendants

Vince Farhat is a Partner and Robert Barton is an Associate in the Los Angeles office.

Timothy Belevetz is a Partner in the Washington D.C. office.

HIGHLIGHTS:

  • Recent changes to the federal sentencing guidelines would lead to a number of major revisions to the law, including updates to the definition of "intended loss," the victims table and the meaning of "sophisticated means."
  • The proposed white collar amendments follow criticism from defense lawyers and some judges who maintain that the sentencing guidelines have led to unduly harsh punishments. Although the guidelines are only advisory, federal judges must consider them in sentencing white collar defendants. Assuming Congress does not block them, the proposed amendments could have important implications for those charged with white collar offenses.

On April 9, 2015, the United States Sentencing Commission voted to approve changes to §2B1.1 of the sentencing guidelines.1 The changes will take effect on Nov. 1, 2015, unless Congress objects. If they go into effect, these proposed amendments could have important implications for those facing criminal fraud charges.

§2B1.1 includes "basic forms of property offenses: theft, embezzlement, fraud, forgery, counterfeiting ..., insider trading, transactions in stolen goods, and simple property damage or destruction."2

In short, these changes would:

  1. revise the definition of "intended loss" at §2B1.1, comment (n.3(A)(ii)) to mean the pecuniary harm "that the defendant purposely sought to inflict"
  2. revise the victims table at §2B1.1(b)(2) to incorporate "substantial financial hardship" as a sentencing enhancement factor
  3. revise the meaning of the specific offense characteristic for "sophisticated means" contained in §2B1.1(b)(10)(C) to apply to the defendant's individual conduct, rather than the overall scheme
  4. revise Application Note 3(F)(ix), which sets forth a method for calculating loss in cases involving securities fraud; the revised guidelines provide that the formula set forth in the note is no longer a rebuttable presumption in calculating loss and allows the court to use any method that is appropriate and practicable under the circumstances, including the formula3

Reasons for the Proposed Changes

According to the Sentencing Commission, the proposed revisions to the sentencing guidelines are meant to address "longstanding concerns that the guidelines do not appropriately account for harm to victims, individual culpability, and the offender's intent."4 These concerns have been voiced by lawyers, judges and the commentariat. The proposed changes follow many years of criticism from the white collar defense bar and some judges who believe the guidelines have led to unduly severe punishments by over-emphasizing financial losses and under-emphasizing the offender's intent.

Notably, the U.S. Department of Justice (DOJ) has opposed the proposed changes to the Economic Crimes Guidelines nearly in their entirety.5 However, the DOJ did agree that the victims table should include financial loss as a consideration.6

"Intended Loss" Now Means "Harm the Defendant Sought to Inflict"

The most significant change in the proposed amended guidelines is that "intended loss" is now limited to the pecuniary harm "that the defendant purposely sought to inflict."

The amount of loss produced by the offense is the biggest single factor driving the sentencing range for economic crimes. The guidelines generally define loss as the greater of actual loss or intended loss.7 Intended loss means "pecuniary harm that was intended to result from the offense," including "intended pecuniary harm that would have been impossible or unlikely to occur (e.g., as in a government sting operation or an insurance fraud in which the claim exceeded the insured value)."8

Courts are split as to whether to interpret a defendant's intent subjectively or objectively. Reacting to "concern[s] regarding the operation of intended loss, including suggestions that the Commission consider certain revisions to better reflect a defendant's culpability" and "disagreement in the case law regarding whether intended loss requires a subjective or objective inquiry," the Sentencing Commission adopted the Tenth Circuit's analysis in United States v. Manatau.9 This case held that the appropriate standard in calculating intended loss is the "subjective intent to cause the loss," which may be based on making "reasonable inferences about the defendant's mental state from the available facts."10

Thus, while the general definition of loss (along with the definition of actual loss) remains unchanged, the proposed amendment would narrow the understanding of intended loss by applying a subjective standard. This takes into account only the loss the defendant specifically intended to cause, rather than an objective standard looking at the loss a person in the defendant's position reasonably should have expected.

Victims Table Revised to Consider Victims' "Financial Hardship"

The victims table in the sentencing guidelines provides sentence enhancements to a defendant based on the number of victims. For instance, under the current guidelines, a defendant receives a two-level enhancement for 10 or more victims, four levels for 50 or more victims, and six levels for 250 or more victims. Each level increase corresponds to a longer recommended prison term.

In the only change to the fraud guidelines supported by the Department of Justice, the victims table contained in the sentencing guidelines would be amended to include not only the number of victims but also whether the victim(s) suffered financial hardship in determining the defendant's applicable sentence enhancements.

Under the revised guidelines, "financial hardship" would be determined by a variety of factors, including whether the victim(s): (i) became insolvent; (ii) filed for bankruptcy; (iii) suffered substantial loss of a retirement, education, or other savings or investment fund; (iv) made substantial changes to his or her employment, such as postponing his or her retirement plans; (v) made substantial changes to his or her living arrangements, such as relocating to a less expensive home; or (vi) suffered substantial harm to his or her ability to obtain credit.11

Under the proposed revised guidelines, a defendant would receive a two-level enhancement where the "offense involved 10 or more victims or mass-marketing, or if the offense resulted in substantial financial hardship to one or more victims." In addition, a four-level sentence enhancement would apply "if the offense resulted in substantial financial hardship to five or more victims" and a six-level enhancement would apply where the offense "resulted in substantial financial hardship to 25 or more victims."

The shift in focus from victim headcount to victim impact leads to some interesting results. For example, assuming no other enhancements, a first-time defendant pleading guilty to a wire fraud offense involving $300,000 and 25 victims affected in one of the ways set forth in the amendment currently would face an advisory sentence of up to 33 months. However, under the new amendment, the defendant would face as many as 51 months. If that same defendant defrauded 250 victims without causing financial hardship as defined in the amendment, the high end of the range would be only 33 months instead of 51.

The "Sophisticated Means" Enhancement Would Apply Only When the Defendant Intended the Offense to be Committed by "Sophisticated Means"

Under the existing guidelines, a defendant receives a sentence enhancement where the offense involves generally "sophisticated means."12

However, citing United States v. Green,13 United States v. Bishop-Oyedepo14 and United States v. Jenkins-Watt,15 the Sentencing Commission found the enhancement was applied by courts irrespective of whether the defendant's own conduct was "sophisticated."

Under the proposed new guidelines, the scope of "sophisticated means" is clarified to mean whether "the defendant intentionally engaged in or caused (rather than the offense involved) sophisticated means."

Flexible Approach to Calculating Loss in Securities Fraud Cases

Under the existing guidelines, Application Note 3(F)(ix) sets forth a method for calculating loss in securities fraud cases. This formula is a rebuttable presumption of the actual loss and calculates the loss as "the difference between the average price of the security or commodity during the period that the fraud occurred and the average price of the security or commodity during the 90-day period after the fraud was disclosed to the market ... and multipl[ies] the difference in average price by the number of shares outstanding."

The proposed revised guidelines provide that this formula is no longer a rebuttable presumption, and allows the district court to use any method that is appropriate and practicable under the circumstances, including the formula.

Other Proposed Changes to the Guidelines

In addition to the foregoing amendments, the Sentencing Commission has proposed a variety of other changes to the guidelines. These include:

  • an adjustment of the monetary tables in the guidelines to account for inflation since 2001, the last time the fraud loss and tax tables were revised
  • a proposed amendment responding to a circuit conflict regarding the meaning of the "single sentence" rule and its implications for the career offender guideline and other guidelines that use predicate offenses and a variety of technical amendments16
  • a proposed amendment providing more guidance on the use of "jointly undertaken criminal activity" in determining relevant conduct under the guidelines17
  • a proposed amendment discussing the "mitigating role" guideline that provides a reduction in offense levels for a defendant who plays a part in committing the offense that makes him substantially less culpable than the average participant18
  • an increase in penalties associated with hydrocodone drugs
  • a variety of technical amendments

Potential Implications for White Collar Defense

As previously noted, the proposed white collar amendments follow criticism from defense lawyers and some judges who maintain that the sentencing guidelines have led to unduly harsh punishments. Although the guidelines are only advisory, federal judges must consider them in sentencing white collar defendants. Assuming Congress does not block them, the proposed amendments could have important implications for those charged with white collar offenses. Viewed broadly, the proposed amendments would allow for harsher sentences where a victim suffers serious financial harm and would encourage federal courts to take into greater consideration a white collar defendant's individual intent. Through these proposed amendments, the U.S. Sentencing Commission appears to be shifting the emphasis away from severely punishing those who caused a large group of victims to lose a small amount of money and toward those who meant to cause "substantial" financial harm to even one victim.

The proposed amendments would also give more weight to a white collar offender's individual intent and role within a fraud scheme, a move that could help low-level participants receive lighter sentences. The U.S. Sentencing Commission clearly wants to encourage federal judges 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."19

Taken together, the proposed amendments would give district courts more latitude to impose sentences grounded in individualized determinations based on the facts of the alleged fraud scheme and a defendant's specific role in the offense. As such, white collar practitioners should welcome these proposed changes to the extent the amendments will encourage federal judges to sentence defendants based on their individual intent and specific role within a fraud scheme.

Footnotes

1 Press Release, U.S. Sentencing Commission, U.S. Sentencing Commission Adopts Economic Crime Amendments, (April 9, 2015). Available at http://www.ussc.gov/sites/default/files/pdf/news/press-releases-and-news-advisories/press-releases/20150409_Press_Release.pdf

2 Sentencing Guidelines, Part B - Basic Economic Crimes (November 1, 2014). Available at http://www.ussc.gov/sites/default/files/pdf/guidelines-manual/2014/2B1.1.pdf

3 Amendments to the Sentencing Guidelines (Preliminary) (April 9, 2015). Available athttp://www.ussc.gov/sites/default/files/pdf/amendment-process/reader-friendly-amendments/20150409_PRELIM_RF_Amendments.pdf

4 See Note 1.

5 U.S. Department of Justice Views on the Proposed Amendments to the Federal Sentencing Guidelines and Issues for Comment Published by the U.S. Sentencing Commission in the Federal Register on January 16, 2015 (March 9 2015) at pp. 27-35. Available at http://www.ussc.gov/sites/default/files/pdf/amendment-process/public-hearings-and-meetings/20150312/DOJ.pdf

6 Id. at p. 29.

7 §2B1.1, comment n.3(A).

8 §2B1.1, comment n.3(A)(ii).

9 647 F.3d 1048 (10th Cir. 2011).

10 647 F.3d at 1056-57.

11 §2B1.1, comment (4)(F)(i)-(vi).

12 §2B1.1 (b)(10)(C).

13 648 F.3d 569, 576 (7th Cir. 2011).

14 480 Fed. App'x 431, 433-34 (7th Cir. 2012).

15 574 F.3d 950, 965 (8th Cir. 2009).

16 §4A1.2(a)(2).

17 See §1B1.3(a)(1)(B).

18 §3B1.2.

19 See Note 1.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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