United States v. Adelson, No. S2 05 CR. 325 (JSR), 2006 WL 2008727 (S.D.N.Y. July 20, 2006)
"This is one of those cases in which calculations under the Sentencing Guidelines lead to a result so patently unreasonable as to require the Court to place greater emphasis on other sentencing factors to derive a sentence that comports with federal law"
That's how Judge Rakoff begins his astonishing sentencing memorandum for Richard P. Adelson, who was convicted for his role (as Chief Operating Officers and eventually President) in materially overstating the financial results of Impath, Inc., a cancer diagnosis testing company. In sum, Judge Rakoff imposed a 42 month sentence, which represented a huge variance from the Guidelines recommended by the Government (which amount to life imprisonment). The devil, as always, is in the details. And the details are below.
A little background to start. The Government alleged that the conspiracy in which Adelson participated began in late 1999, that Adelson joined it in 2001, and that it continued until mid-2003. At trial, however, Adelson was convicted only of those counts of the indictment relating to certain false filings made in the latter half of 2002. Adelson was acquitted of all counts related to earlier conduct. According to Judge Rakoff, the "most likely reading of the jury's verdict -- and one that the Court accepted at sentencing -- was that Adelson only joined the conspiracy toward its end."
Notwithstanding the nature of Adelson's conviction, the Government argued at sentencing that the Guidelines, if properly calculated, called for a sentence of life imprisonment cabined only by the maximum of 85 years permitted under the counts for which Adelson was convicted. And, "[s]hort of that" the Government argued that "the court should at least impose a sentence somewhere in the range of 15 to 30 years' imprisonment." Adelson, by contrast, argued that the proper Guidelines calculation resulted in a Guidelines range of 21 to 27 months' imprisonment. To say the least, the Government and Adelson saw the situation differently.
The Court ultimately imposed a sentence of 42 months imprisonment. And, at the time of sentence, the Court set forth on the record numerous reasons for its determinations, which were reflected in the 69 page transcript of the sentencing hearing. The Court, however, felt it necessary to issue a written opinion reflecting the reasoning for the sentence imposed because of the Second Circuit's subsequent decision in Rattoballi (discussed and critiqued here), "which indicated, albeit in dictum, an intention to strictly enforce the requirement of 18 U.S.C. § 3553(c) that the specific reasons for the imposition of a non-guideline sentence not only must be stated in open court at the time of sentencing, but must also be stated with specificity in the written order of judgment and commitment." In sum, Rattoballi "left in doubt the adequacy of the Court's simple cross-reference" in the paperwork it completed in connection with Adelson's sentence "to the sentencing transcript." Thus, Judge Rakoff felt obliged to issue a written sentencing memorandum, and we are all thankful that he did.
First, Judge Rakoff tackled the question of loss which, as any defense attorney knows, drives the Guidelines analysis in any case involving fraud. And Judge Rakoff does a nice job of articulating the problems associated with loss as a measuring factor for purposes of the Guidelines. Initially, Judge Rakoff noted that the Government suggested an offense level of 55, which he described as "a level normally only seen in cases involving major international narcotics traffickers, Mafia dons, and the like. How could it possibly apply here?" Well, its "the inordinate emphasis that the Sentencing Guidelines place in fraud cases on the amount of actual or intended financial loss. More specifically, since "successful public companies typically issue millions of publicly traded shares . . . the precipitous decline in stock price that typically accompanies a revelation of fraud generates a multiplier effect that may lead to guideline offense leveles that are, quite literally, off the chart." (Offense level 55 does not even exist on the sentencing chart.)
But that is not the only problem with loss as a measuring factor for purposes of the Guidelines. According to Judge Rakoff, the "problem is further exacerbated by the fact that the ordinary measure of loss in a criminal securities fraud case is the decline in the price of stock when the fraud is revealed. Since this occurs at the end of the conspiracy, even someone like Adelson who had no role in originating the conspiracy but only joined it in its latter stages will still be legally responsible under the guidelines for the full loss amount that he could reasonably foresee."
Thus, Judge Rakoff held Adelson only responsible for that amount of loss that he was able to reasonably foresee from his participation in the conspiracy. After all, "Adelson was a johnny-come-lately to the conspiracy." This analysis seems correct. While the caselaw surely (and necessarily) requires holding all participants to a conspiracy equally liable for the conspiracy, the same should not apply with regard to the calculation of loss under the Guidelines, where "intended loss" is an alternative measure available to sentencing courts for calculating loss.
Second, Judge Rakoff addressed the sentencing enhancements sought by the Government, including: (A) 6 offense levels because the offense involved more than 250 victims; (B) 4 offense levels because Adelson was an officer of a public company; (C) 4 offense levels because Adelson played a leadership role in the fraud; (D) 2 offense levels because the offense endangered the financial security of a publicly traded company; and (E) 2 offense levels because the fraud involved sophisticated means. Grand total? 20 offense levels for sentencing enhancements. And Judge Rakoff was none too happy about it, describing the combined effect of the 20 offense levels as "ill fit[ing] the situation of someone like Adelson. It represents, instead, the kind of 'piling-on' of points for which the guidelines have frequently been criticized." Notwithstanding his objections, Judge Rakoff felt constrained to include all but 2 of the offense levels (for endangering the financial security of a publicly-traded company) to the Guidelines calculation.
Where did that leave Judge Rakoff? Level 46 -- or, in other words, still a life sentence. A reduction of 9 offense levels from the offense level suggested by the Government (level 55 to level 46) did little to reduce the ultimate effect of the Guidelines calculation. Indeed, Judge Rakoff noted that even the Government "blinked at [the] barbarity" of Adelson's Guidelines offense level, which Judge Rakoff interpreted as the Government asking the Court to not impose a Guidelines sentence and which Judge Rakoff further interpreted as exposing "the utter travesty of justice that sometimes results from the guidelines' fetish with abstract arithmetic, as well as the harm that guideline calculations can visit on human beings if not cabined by common sense." So, what did Judge Rakoff do? He turned to the provisions of 18 U.S.C. § 3553(a) to fashion a just, fair and reasonable sentence.
Initially, Judge Rakoff rejected the Government's attempts at analogizing Adelson's offense with the offenses of Bernard Ebbers (25 year sentence) (see this Blog's discussion of the affirmance of Ebbers' sentence here), John and Timothy Rigas (15 and 20 year sentences, respectively), Patrick Bennet (30 year sentence), and Steven Hoffenberg (20 year sentence). (As an aside, it is interesting that the Government made no any analogy to the controversial 20+ year sentence of Jamie Olis.) Judge Rakoff then tackled the 18 U.S.C. § 3553(a) factors, focusing "its primary attention on the non-guidelines factors set forth in § 3553(a), including both those of general applicability and those that had specific relevance to Adelson's particular circumstances." For example:
-- With regard to the "nature and circumstances of the offense," Judge Rakoff found that "the evidence showed that Adelson was sucked into the fraud not because he sought to inflate the company's earnings, but because, as President of the company, he feared the effects of exposing what he had belatedly learned was the substantial fraud perpetrated by others. While his efforts in this regard, which included signing certain false filings with the S.E.C., qualified him as a 'leader' in guidelines argot, the reality of his situation was that of an executive who, upon learning of his subordinates' misconduct at a time when, for other reasons, the company is already losing shareholder confidence, makes the improper decision to conceal what has occurred. In this sense, Adelson was closer (though not identical) to an accessory after the fact, a position that has historically been viewed as deserving lesser punishment than that accorded the instigators of the wrongdoing."
-- With regard to the "history and characteristics of the defendant," Judge Rakoff found that "it was undisputed . . . that Adelson's past history was exemplary." And Judge Rakoff added some almost poetic language, finding that "if ever a man is to receive credit for the good he has done, and his immediate misconduct assessed in the context of his overall life hitherto, it should be at the moment of his sentencing, when his very future hangs in the balance. This elementary principle of weighing the good with the bad, which is basic to all the great religious, moral philosophies, and systems of justice, was plainly part of what Congress had in mind when it directed courts to consider, as a necessary sentencing factor, 'the history and characteristics of the defendant.'"
-- With regard to "the need for the sentence imposed . . . (A) to reflect the seriousness of the offense, to promote respect for the law, and to provide just punishment for the offense," Judge Rakoff found that in "the case of a financial fraud . . . an important kind of retribution may be achieved through the imposition of financial burdens." (In this case, a $50 million restitution order.)
-- With regard to "the need for the sentence imposed . . . (B) to afford adequate deterrence to criminal conduct," Judge Rakoff found that a "meaningful" prison term was required, but also noted that "there is  considerable evidence that even relatively short sentences can have a strong deterrent effect on prospective 'white collar' offenders."
The end result? A non-Guidelines sentence of 42 months imprisonment (which was higher than the non-Guidelines 3 month term of imprisonment imposed on Adelson's co-defendant Dr. Anuradha Saad but significantly lower than the sentences imposed on Ebbers, the Rigas father/son team, or other high profile corporate offenders).
As a final note, it bears noting Judge Rakoff's final commentary in its entirety:
"To put this matter in broad perspective, it is obvious that sentencing is the most sensitive, and difficult, task that any judge is called upon to undertake. Where the Sentencing Guidelines provide reasonable guidance, they are of considerable help to any judge in fashioning a sentence that is fair, just, and reasonable. But where, as here, the calculations under the guidelines have run so amok that they are patently absurd on their face, a Court is forced to place greater reliance on the more general considerations set forth in section 3553(a), as carefully applied to the particular circumstances of the case and of the human being who will bear the consequences. This court has endeavored to do, as reflected in its reasons set forth at the time of sentencing and now in this Sentence Memorandum prompted by the dictates of Rattoballi. Whether those reasons are reasonable will be for others to decide."
Clearly, Judge Rakoff anticipates that the Government will appeal the sentence he imposed on Adelson. And given the record of the Second Circuit in reversing non-Guidelines sentences that represent significant variance from the Guidelines (such as in Rattoballi), there is at least a good chance that Adelson's sentence will be reversed upon appeal. But should it be? Or did Judge Rakoff correctly bring reason to a circumstance presented by the Guidelines that neither the Sentencing Commission nor Congress could possibly have anticipated? And, if the sentence is reversed, what length sentence would Judge Rakoff impose on remand? Or, put another way, what would be a reasonable sentence on remand that would not result in yet another reversal (if this initial sentence is reversed)? Let us know your thoughts.