Alain Leibman writes:

Under Section 2B1.1 of the Sentencing Guidelines, the sentencing section applicable in most fraud cases, the biggest driver of the advisory sentencing range is the "loss" occasioned by the defendant's conduct, with the Court instructed to apply the greater of actual or intended loss.  Courts have held that Section 2B1.1 requires that the accused's conduct be both the factual cause of the loss and that the loss be foreseeable, and not too collateral or incidental to the conduct.

Many defendants have argued in mortgage fraud cases — where the victim's losses are measured by their lost principal and contractually-promised rates of return, if any, and reduced only by the value of the mortgage collateral which remains – that the net losses were to one extent or another aggravated by deteriorating economic conditions and, so, exaggerated as a basis for calculating a sentencing range.  Courts, however, have routinely rejected the argument that "the economy did it."

But a new opening to such arguments was presented in a recent Tenth Circuit decision, United States v. Evans, 744 F.3d 1192 (10th Cir. 2014).  Evans managed real estate limited partnerships formed to acquire and operate rental housing in Texas.  Beginning in 2003 and continuing until Evans' ouster in 2007, he solicited $16 million from investors who thus acquired interests in the partnerships.  After Evans' removal, a court-appointed receiver assumed control and tried to salvage some of the projects, giving up in 2009 when they all fall into foreclosure.  Evans agreed to plead guilty to conspiracy to commit mail and wire fraud, because two years into the investment activity he began to send investors falsified statements, which overstated the rents and understated vacancy rates and the like.

At sentencing, the Government argued for loss figures ranging up to $12 million, calculated simply by subtracting amounts returned to investors from the amounts they originally invested, a formula adopted by the district court.  But Evans argued that intervening events, notably the Great Recession, had contributed mightily to the loss in value of the underlying properties, and so this simplistic formula was inaccurate and did not observe the requirement that his actions be the factual cause of foreseeable losses.

The Tenth Circuit agreed with Evans and vacated his sentence.  Acknowledging cases, including one of its own, which in the mortgage fraud area refused to take account of ambient economic conditions as causal factors in losses, the court of appeals held that this investment fraud case was different.  In the mortgage fraud cases, the defrauded lenders were simply promised loan payments; the underlying mortgaged properties — which suffered catastrophic devaluations due to economic conditions — were simply insulation against loss.  Here, Evans' investors actually purchased interests of fluctuating value in real properties, and were not promised any particular return on their investments.  So, any loss calculation here must account for the forces which acted on the securities, i.e., the low-income rental buildings, independent of anything Evans said or did.

The task for practitioners is to thread this narrow aperture.  A garden-variety bank loan fraud may not allow for this economic-forces argument, but any syndicate lending or private party lending case which can be presented to look more like an acquisition of a partnership interest in substance may benefit from the Evans analysis and precedent.

(Alain Leibman, Esq., the author of this entry, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office.  A former decorated federal prosecutor, he practices both criminal defense and commercial litigation in federal and state courts)

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