Two Sentencing Points From The Second Circuit

United States v. Byors, Docket No. 08-4811-cr (2d Cir. Oct. 29, 2009) (found here)

On appeal, Byors argued that the district court erred in: (1) not offsetting the loss attributable to his fraud by amounts that represented legitimate investment in his business; and (2) applying a two-level enhancement for obstruction of justice relating to an offense underling his money laundering offense but not the money laundering offense itself (an issue of first impression in the Second Circuit).

With regard to the first issue, the Second Circuit found that the "plain language of Application Note 3(E) [of Section 2B1.1] readily disposes of defendant's argument."  Specifically, the "Guidelines do not require a loss to be offset by any legitimate expenditures . . . but rather [only] by 'value' that has been conferred on victims in the form of money or property returned or services rendered" (emphasis in original).

With regard to the second issue, the Second Circuit found that the issue revolved around the question of what to do "where a defendant has obstructed the investigation or prosecution of an underlying offense but has not obstructed the investigation or prosecution of a subsequent money laundering offense."  The Second Circuit solved that riddle by closely reading Sections 3C1.1 and 2S1.1 together, leading it to conclude that the defendant's obstructive conduct related not only to the offense of conviction, but also to relevant conduct or at least an offense that was closely related to the money laundering offense.

Possible Signal Concerning Higher Level Of Scrutiny For Restitution Orders From The Second Circuit?

United States v. Pearson, No. 07-0142-cr (2d Cir. July 2, 2009) (found here)

Pearson appealed from a judgment convicting him, following a guilty plea, of multiple counts of producing, transporting, receiving and possessing child pornography.  He was sentenced to fifteen years imprisonment and ordered to pay $974,902 in restitution to the child victims of his crime to account for future medical expenses.  On appeal, Pearson challenged whether a restitution order pursuant to 18 U.S.C. § 2259 may include an amount for future estimated medical expenses and, if so, whether the amount of restitution ordered was reasonable.  The Second Circuit answered "yes" to the first question (future medical expenses are authorized by the statute), but concluded "no" on the second question (the amount of the restitution ordered was not reasonable).

The Second Circuit acknowledged that it had not yet addressed the question of whether Section 2259 authorizes compensation for future medical expenses.  Relying on the conclusions of three of its sister circuits, the Second Circuit agreed that future medical expenses are contemplated by Section 2259 because "the amount of loss is too difficult to confirm or calculate."

But the Second Circuit also concluded that the district court failed to properly estimate those future medical expenses.  Specifically, "although the record contains evidence of the victims' need for long-term counseling and of the cost of that counseling, the district court did not explain how it estimated the victims' future expenses. . . . [W]ithout more information as to how the district court reached the lower figure, we are unable to conduct even deferential review of whether the final restitution order reflect a reasonable estimate of the cost of future counseling."  Accordingly, the Second Circuit remanded "to secure a more thorough explanation from the district court as to the basis for its restitution determination."

Could this have wide implications for, say, restitution in financial fraud cases in circumstances in which a district court does not build a sufficient record concerning restitution?  With United States v. Rutkoske in mind, is the Second Circuit signaling increased interest and awareness of restitution decisions?

Second Circuit: Investment Loss Includes Potential Gain

United States v. Scott, No. 08-1489-cr (2d Cir. April 14, 2009) (found here)

On appeal Scott contended that the district court incorrectly calculated the amount of restitution he owed his victims because it had included "lost investment returns, calculated as of the date of sentencing from funds that when stolen were invested in either a variable annuity or an IRA."  More specifically, Scott argued that "his victims' losses would be fully compensated by an award of the nominal value of the property he stole from their accounts and that the district court therefore erred by including lost investment earnings in the restitution award."

The Second Circuit disagreed.  It found that Scott had stolen from customer retirement accounts, and that "[h]ad the assets remained in those accounts, two of the three accounts would have increased in value by the date of sentencing. . . .  Accordingly, the actual value of the stolen property, the funds in the retirement accounts, at the time of sentencing was the nominal value of the stolen funds plus the subsequent investment gains lost as a result of the theft."

Hmmm...In light of the performance of the financial markets in the past year, the Second Circuit's analysis begs an interesting question.  Say a defendant steals money from a client's IRA account last June, and say that IRA account had a value of $100,000 on the date of the theft.  Say further that the defendant is coming up for sentencing today, when the value of that IRA account -- if no theft had occurred -- would have dropped 40% because of the turmoil in the financial markets.  Would that individual be responsible for: (A) the value of the account on the date of the theft ($100,000); or (B) the value of the account on the date of sentencing ($60,000)?  In other words, is the Second Circuit giving an inadvertent windfall to those who have committed financial frauds in the past twelve months?

A Little Somthing On Loss Estimates

United States v. Iqbal, No. 08-2262-cr (2d Cir. March 31, 2009) (found here)

On appeal, Iqbal challenged his 24 month sentence, asserting that the district court's loss calculation was erroneous. Specifically, the district court determined that the loss amount exceeded 400,000 based on testimony provided at a Fatico hearing that the fraud at issue involved fraudulent credit card charges of $413,838.02.

It is well established that a court "need only make a reasonable estimate of loss."  U.S.S.G. § 2B1.1 cmt. 3(C).  And to that the Second Circuit added the following nugget: "We have never required that a district court find a loss amount to the penny, so long as the amount it estimates based on the record is not clearly erroneous."

The Ethical Entrepreneur

United States v. Alatsas, No. 06-CR-473 (JBW), 2008 WL 238559 (E.D.N.Y. Jan. 16, 2008)

Notwithstanding a loss figure of $450,000 and an advisory Guidelines range of 24 to 30 months imprisonment, the Court imposed a probationary sentence based on: (1) Alatsas' substantial cooperation with the Government; (2) the good relationship he had with his wife and three children; and (3) most significantly from a defense perspective, his status as "an ethical entrepreneur except for this one aberrant offense."

A solid argument for counsel representing defendants convicted of financial frauds.

Losses Caused By Market Forces Must Be Excluded From Calculation Of Securities Fraud Losses

United States v. Rutkoske, Docket No. 06-4067-cr (2d Cir. Oct. 25, 2007) (found here)

Rutkoske had the general guts to challenge the Government's loss calculation, which the district court accepted for purposes of sentencing.  And he won based on a very simple principle: A defendant can only be held accountable for the losses that he caused; he cannot be held accountable for "[l]osses from causes other than the fraud," which "must be excluded from the loss calculation."  As the Second Circuit held, the "District Court's basic failure at least to approximate the amount of the loss caused by the fraud without even considering other factors relevant to a decline in [] share price requires a remand to redetermine the amount of the loss . . . ." 

Significantly for those of us whose practice frequently involves charges of securities fraud, the Second Circuit noted that these principles apply even to thinly traded stocks, like those upon which Rutkoske's conviction were based.

Non-Guidelines Sentence As The Best Means For Fulfilling Restitution Order

United States v. Villela, No. 07 Cr. 287-02 (RWS), 2007 WL 2845290 (S.D.N.Y. Sept. 25, 2007)

Villela, a Brown University graduate, pled guilty to one count of tax evasion.  Based on a total offense level of 12 and a criminal history category if I, the court concluded that the applicable Guidelines offense level was 12, indicating a range of imprisonment of between 10 and 16 months.  The court, however, imposed a non-Guidelines sentence of 60 months probation.  Why?  Simply put, the Probation Department recommended that probationary sentence, and the court found that Villela had "been convicted of a non-violent crime and has no prior criminal record.  Furthermore, his continued employment will aid in the collection of restitution payments to the victims of the offense."

Villela points up an argument that I have always found persuasive and that has been successful in persuading courts in this post-Booker era to impose non-Guidelines sentences on offenders convicted of non-violent, economic crimes -- to wit, the best means for making the victims whole is a non-custodial sentence.  Restitution should be the court's primary concern in fraud-type cases, and non-Guidelines sentences are often the best means for achieving same (particularly for offenders who have low Guidelines offense levels -- it's a more difficult goal to achieve in large-scale frauds involving losses in the millions).

Adelson Redux

United States v. Adelson, Nos. 06-2738-cr(L), 06-3179 (XAP) (2d Cir. Aug. 16, 2007) (found here)

As set forth in this detailed post, Judge Rakoff imposed a 41 month sentence on Richard Adelson notwithstanding a Guidelines offense level that indicated lifetime imprisonment.  The decision remains a "must read."  If you haven't checked it out, you should.

Adelson appealed his conviction and the Government cross-appealed on the sentence.  What did the Second Circuit do?  It punted -- to wit, it reserved judgment on the Government's cross-appeal pending the outcome of the Supreme Court's decision in United States v. Gall, which will be heard next term.  (If, however, Gall is not decided by the end of the year, the Second Circuit generously granted the parties permission to request reconsideration of its decision to hold the cross-appeal.)

This is a supremely disappointing result on at least two fronts.  From Adelson's viewpoint, he has to go to prison not knowing how long he'll be there -- 41 months or, potentially, the rest of his life.  It must be awful to walk in his shoes.  From a jurisprudence perspective, what does this mean for sentencing appeals in the Second Circuit?  Will it punt on all substantial sentencing decisions while it waits for the Supreme Court to decide Gall?

Second Circuit Reverses Large Downward Departure (And Makes New Law?)

United States v. Canova, Docket No. 05-6439-cr, 2007 WL 1321286 (2d Cir. May 8, 2007) (found here)

In sum, Canova "concerns the reasonableness of a downward departure from a Sentencing Guidelines calculation and the reasonableness of the resulting sentence."  In a word, the Second Circuit reversed the downward depature and remanded the case for resentencing.  As always, however, the devil is in the details.

Canova was convicted of a series of fraud offenses.  At his original senetencing (this, after all, was his second appeal), the district court determined to impose a Guidelines sentence.  The PSR calculated an advisory Guidelines range of 57 to 71 months imprisonment based largely on a loss of $5,000,000.  The district court, however, conducted its own factual and Guidelines analysis, and determined an advisory Guidelines offense level of 8 (0-6 months imprisonment) based on an absence of loss.  And then the district court departed downward by 6 offense levels based on Sanova's "extraordinary record of civil and public service."  In the end, the district court imposed a sentence of one year probation.

The Government -- as would be expected -- appealed Canova's sentence, challenging the district court's loss calculation and charitable service departure.  (The Government also challenged the district court's denial of an obstruction of justice enhancement.)  The Second Circuit reversed the district court, finding the sentence to have been erroneous because of its failure to consider loss, and stated that the district court could consider the extent of its "charitable services" departure based on the higher advisory Guidelines range dictated by proper consideration of loss. 

At resentencing, the district court calculated the advisory Guidelines offense level using a loss figure of $5,000,000.  But -- in what can only be described as a single-finger salute to the Second Circuit -- it then departed by 15 offense levels on the ground that the monetary loss overstated the seriousness of the offense and bceause "the previous departure for public service [did] not fully reflect the Court's sentencing objectives in light of the newly imposed loss enhancement."  As the district court explained: "[T]he higher guideline range calls for a more extended downward depature for the defendant's service to the country and community."  After applying the 15 level departure, the district court -- no surprise here -- arrived at the same offense level and imposed the same one year probationary sentence. 

The Government appealed.  Again.  And the Second Circuit reversed.  Again.  Why?  Because the sentence was both procedurally and substantively unreasonable.

Procedural Reasonableness -- The Second Circuit found that the probationary sentence was procedurally unreasonable for three reasons.  First, the Second Circuit found that the 15 level departure was procedurally unreasonable because the "District Judge exceeded his discretion in deciding that the $5 million loss overstated the seriousness of the offense."  Specifically, the Second Circuit found (among other things) that the the district court considered only actual harm and failed to consider intended loss.  Second, the Second Circuit found that the district court's reliance on the victim's conduct as a gorund for departure was procedurally unreasonable because it is not a permissible ground for a departure.  Third, the Second Circuit found that the sentence was procedurally unreasonable because it relied on another party's restitution payment as a basis for depature (not a terribly important point for the decision and therefore just noted here).

Substantive Unreasonableness -- Making what seems like new law, the Second Circuit found that:

In many cases involving a departure, it would be appropriate to consider separately the reasonableness of the extent of the depature and the reasonableness of the resulting sentence.  In this case, however, where the departure resulted in a sentence of no imprisonment at all, the considerations that bear on the reasonableness of the extent of the departure apply equally to the reasonableness of the sentence, and at this point we need only consider the reasonableness of the extent of the departure.

Hmmm...  If procedural reasonableness involves consideration of error in a Guidelines calculation (inclusive of any Guideline departures that are necessarily part of the Guidelines calculation) and substantive reasonabless involves the actual reasonableness of the ultimate sentence imposed, what is the Second Circuit doing in considering the reasonableness of the extent of the depature when considering whether or not the sentence is substantively reasonable?  Why is the Second Circuit blurring the lines between what it has clearly set forth in numerous other opinions as the distinctions between procedural and substantive reasonableness?  This question in this case is particularly peculiar since the Second Circuit's decision on the first appeal in this matter specifically stated that the district court could consider the extent of its "charitable services" departure based on the higher advisory Guidelines range dictated by proper consideration of loss. 

But that's not all.  The Second Circuit went on to consider the "method for assessing the extent of a departure in order to determine its reasonableness."  The Second Circuit considered two "plausible" methods for that assessment.  First, an absolute assessment, which "would gage the extent of the departure, measured in levels, without regard to the starting point from which the departure was made."  Second, a relative assessment, which "would gage the extent of the departure either by the increase or decrease in the resulting prison time . . . or by the percentage of increase or decrease of either prison time or levels."  Although the Second Circuit declined to expressly adopt either measure, it expressed a preference for one or more of the relative assessment methods because "[w]henever the extent of a decrease (or increase) is assessed for reasonableness, it seems evident that the starting point should be considered."

And that's not even all.  The Second Circuit went on to state that "[t]randscending the numbers in this case, however, is the blunt fact that the effect of the departure and resulting sentence was to treat Canova as though he had intended to cause no loss at all."  Even if it matched the first sentence (as the Second Circuit noted), so what?  Isn't it at least possible that a departure under the Guidelines could completely counter an increase in an advisory Guidelines offense level due to some other factor, such as loss?  And what business does the Second Circuit have in second-guessing the district court's determination of how much impact a ground for a downward depature should have?

As Fielding Melish (Woody Allen's character in Bananas) said: "I object, your honor! This trial is a travesty. It's a travesty of a mockery of a sham of a mockery of a travesty of two mockeries of a sham."  Well, maybe that's going too far.  But Canova is surely a bit of a mystery.

What Is A Reasonable Estimate Of Loss?

United States v. Abiodun, et al., No. S7 CR. 1316 (DC), 2006 WL 2092468 (S.D.N.Y. July 20, 2006)

The defendants pleaded guilty to participating in a massive identity theft ring that was responsible for the theft of credit information for tens of thousands of individuals and the loss of tens of millions of dollars.  At sentencing, the court was required to determine the amount of loss attributable to each of three defendants.  But the court had some problems in doing the math. 

Specifically, to identify victims, the Government conducted a survey.  The court, however, concluded that number of individuals who responded to the survey was "understated."  Similarly, information provided by financial institutions was "grossly understated" because it did not include information from all affected financial institutions.  Moreover, the Government was "not able to prove that specific credit reports resulted in specific fraudulent purchases that can be tied to a particular defendant."  And, the court knew neither "which credit reports were specifically purchased by" each defendant, nor "the precise losses attributable to the credit reports purchased by" each defendant. 

The court did, however, know how many credit reports each defendant had purchased.  And the Government offered an "average loss sustained per credit report."  So, the court did simple math to determine loss figures -- it multiplied the number of credit reports purchased by each defendant by the average loss per credit report offered by the Government. 

Seems to me that the defense attorneys were right on this one when they argued that the approach adopted by court "relies on speculation."  Indeed, it does not go without noting that the court cited no authority for the means it applied in calculating loss.

Loss cannot always be calculated with absolute certainty.  And the Guidelines do not require absolute certainty.  Indeed, they only require a reasonable estimate.  But there must be a line between a reasonable estimate and pure speculation.  Did the foregoing analysis cross that line?  Or, put another way, did the defendants here suffer because neither the court nor the Government could accurately calculate loss?