White Collar Crime Timeline Included! T H E National Association of Criminal Defense Lawyers

SEE PAGE 32-33 September 2008

Annual White Collar Crime Issue REGISTER TODAY! NACDL and the Georgetown University Law Center Present Money Laundering Defense Aftei,... "Defending the White Collar Case: Santos and Re.galado Cuellar In and Out of Court" Getting the Upper Hand in Arguing November 6 - 7, 2008 • Washington, DC Loss in Securities Cases SEE BROCHURE INSIDE The Antitrust Divisions Corporate Leniency Policy: A Deal Is a Deal Defending White Collar Crime in State Court A Very Brief History of the Criminalization of Everything Interview With a Former USSC

TAMPA, / October 23-26 / NACDL 2008 Fall Meeting g Seminar SEE PAGE 3 HOUSTON, TX / November ]3-34 / NACDL's ist Annual Defending Drug Cases Seminar SEE BROCHURE INSIDE defendants are the principals or executives of issuers or Gaining the Upper brokerages, traders or other investment services employ- ees, lawyers, investment advisors, or other professionals. liand in Artuing Loss in Wrongdoing may include misleading or clients, backdating, cooking the books, pump-and-dump schemes, false filings with the SEC, misstatements to regu- Cases lators, and an array of other misconduct. Loss calculations can generate particularly draconian results in securities fraud cases. Consider, for example, WorldCom's Bernie Ebbers (25 years), 's Jeff Skilling (over 24 years) and Andrew Fastow (six years), Dynergy's ince the Supreme Court's decision in United States v. Jamie Olis (24 years, reduced to six years on resentencing), Booker, sentencing courts are no longer bound by Adelphia's Timothy Rigas (17 years), Qwest's Joseph S the U.S. Sentencing Guidelines. Although their sub- Nacchio (six years), and Canadian CEO Conrad Black (over stantial sentencing discretion was recently reaffirmed in six years). These sentences are unfair and irrational. Some Gall v. United States, they nonetheless remain obligated to appellate courts disfavor an unbridled construction of loss calculate and consider the applicable sentencing range in securities cases, and their opinions invite a fresh evalua- under the Guidelines. Thus the calculation of "loss" under tion of the issue in preparing for sentencing proceedings. Section 2B1.1 of the Guidelines remains a critical issue at In securities fraud cases, the loss up-tick is often the sentencing in many white collar crime cases.' This article greatest single factor in determining a sentence. As the examines some arguments and strategies that defense Second Circuit has noted, the Guidelines "are a sentencing counsel might consider in preparing loss arguments for a regime in which the amount of loss caused by a fraud is a securities fraud sentencing. critical determinant of the length of a defendant's sentence.'5 This may be loss Under Guideline White Collar Crime Series true even for a defendant who prof- Section 2B1.1 ited little or not at all from a fraudu- The loss adjustment in Section lent scheme. In the typical case in 2B1.1 of the Guidelines may lead to IrE which an "oversimplified.., measure harsh sentences in fraud cases. The of damages [is] proffered by the gov- Guidelines include an expansive ernment,"6 the defense may be able definition of loss that applies in to improve its by proposing most financial cases, including a more sophisticated loss calculation those involving securities, bank, methodology. A lower loss adjust- mail and wire fraud, money laun- ment, of course, means a lower dering, and conspiracy. Typical "starting point" or "initial bench-

BY EVAN A. JENNESS 20 WWW.NACDL.ORG THE CHAMPION mark"' from which the sentencing court + Should a victim's losses be adjusted to Notwithstanding "the time and evi- will determine the applicable sentence. reflect any drop in the value of a dentiary constraints on the sentencing that was caused by factors unrelated to process," some courts considering loss have The Governments the fraud (for example, unfavorable been amenable to a "nuanced approach Burden of Proof earnings releases), or extrinsic condi- modeled upon loss causation principles." The government bears the burden of tions (for example, exchange rate fluc- This may substantially benefit the defense proving the facts underlying any upward tuations, increasing energy costs, or in a thorny securities fraud case. adjustment.' Ordinarily the standard is a general economic conditions)? preponderance of the , but Actual Loss vs. Intended Loss vs. where a potentially disproportionate • Where the facts support the use of Alternate Measures adjustment is at issue, due process may various different time periods for The Guidelines commentary states require the prosecution to satisfy a assessing loss, should the client be that "loss" is the "greater of actual loss or heightened burden.' given the benefit of the doubt by intended loss.'20 "Actual loss" — often The clear and convincing standard selecting the time period that mini- referred to as "but for" loss — means "the may apply — at least in some jurisdic- mizes the loss adjustment? reasonably foreseeable pecuniary harm tions.'' Where the government proposes a that resulted from the offense." It loss adjustment that is greater than four Would the client's personal gain pro- includes both losses directly attributable levels and would have a substantial impact vide a suitable alternative because the to acts of the defendant and acts of co- on the sentence, the clear, and convincing government's evidence is not clear conspirators that were reasonably foresee- standard may be appropriate." There is no and convincing or does not enable able to the defendant." "bright line" rule, however, and the "total- victims' losses to be assessed with "Intended loss" means "the pecu- ity of the circumstances" will determine reasonable certainty? niary harm that was intended to result whether the heightened standard of proof from the offense" "Intended loss" is not applies. 12 Relevant considerations in a • Should sophisticated victims' losses be simply the maximum potential loss from securities fraud case ordinarily will sup- adjusted to reflect the degree of risk that an offense, and a "court errs when it sim- port an argument that the clear and con- they knowingly assumed, so that a loss ply equates potential loss with intended vincing standard should be applied." adjustment is based only on that por- loss without deeper analysis." However, Given the challenges of calculating securi- tion of a loss resulting from investors' there is no "economic reality principle" ties fraud losses, convincing a sentencing unwitting assumption of risk? under the Guidelines, and intended losses court to hold the government to this may include losses that would have been heightened standard may benefit the • Was a large portion of victims' losses "impossible or unlikely to occur?" defense substantially. caused by the "intervening, independ- The Guidelines "do not present a sin- Satisfying the clear and convincing ent, and unforeseeable criminal mis- gle universal method" for loss calculation, standard may be a problem for the gov- conduct" of a third party? and a "fact-intensive and individualized ernment when it comes to assessing secu- ... inquiry" may be required to make a rities losses in complex cases. Complex • Where a fraudulent scheme involves reasonable estimate of loss." There are cases include those involving multiple multiple , should a victim's "several possible approaches to this calcu- stocks, numerous investors, multiple aggregate losses be offset by the victim's lation: the greater of actual loss or intend- defendants, stocks with a trading his- gains on all stocks (i.e., does the calcu- ed loss" or, where these figures cannot be tory or substantial residual value, a gener- lation of net loss on a stock-by-stock determined "with sufficient certainty ... ally turbulent market at the time in ques- basis result in a loss greater than the the defendant's personal gain from the tion, an intricate scheme, or a lengthy victim's out-of-pocket loss because the fraud as an alternate measure." period of fraudulent conduct. The pres- victim made money on some stocks in The Guidelines suggest two loss cal- ence of several of these factors may com- the victim's portfolio)? culation methods that may be particular- pound the government's challenge. ly relevant to securities fraud cases: "the Although "some estimate must be • Do victims' losses overstate a client's approximate number of victims multi- made for Guidelines' purposes, or per- culpability based on any other factors? plied by the average loss to each victim?' petrators of fraud would get a wind- For example, was the client unaware of and "the reduction that resulted from the fall," the benefit of any doubt should the fraudulent scheme when victims offense in the value of equity securities or be given the defense where the court is first purchased stocks? Did the client other corporate assets?" Often neither estimating loss.' take steps to avoid or mitigate method will result in a loss adjustment investors' losses? Did the client attempt that fairly reflects the economic reality of Factors to Consider in to withdraw from a conspiracy? Were a client's wrongdoing or bears any reason- Evaluating Loss any victims on notice of irregularities able relationship to the client's conduct. A number of arguments may support when they invested in a stock, and thus a more reasonable loss adjustment than partially to blame for their losses? Did a The Challenge of Calculating that proposed by the government. In devel- stock broker/client intend for his cus- Loss With Reasonable Certainty oping a position, consider the following: tomers to be among those who profit- The Guidelines require only that a ed from a scheme? Was a scheme sim- sentencing court "make a reasonable esti- + Should victims' losses be market- ply "puffery or cheerleading or even a mate of ... loss." In cases involving mul- adjusted to reflect any overall drop in misguided effort to protect the compa- tiple victims, determining loss "is not eas- the relevant market at the time in ques- ny, its employees, and its cheerleaders ily quantifiable." Where a stock is a com- tion (for example, the dot-corn bust in from the capital-impairing effects of plete sham, determining loss may be rela- the high tech market, or distress in the what was believed to be a temporary tively straightforward." However, the mortgage-backed securities market)?" downturn in business"?" analysis is "considerably more complex" WWW.NACDL.ORG SEPTEMBER 2008 21 where a scheme involved an "otherwise long-running scheme because " [ o] ther cept of loss than that which applies fol- legitimate company," or a company that is things being equal, the longer the time lowing Dura, as reflected in its progeny. not an "entirely sham" operation." This is between purchase and sale ... the more In Ohs," the Fifth Circuit cited Dura because the government may be unable to likely that other factors caused the loss." in stating that "there is no loss attributable prove loss causation — that the stock Moreover, a to a misrepresentation unless and until the would be worthless but for the scheme, or measure of loss overstates a victim's losses truth is subsequently revealed and the that the drop in stock price resulted where the victim bought the stock at a price of the stock accordingly declines and entirely from the fraudulent scheme." price that was lower than the inflated price the portion of a price decline caused by Substantial challenges face the gov- that resulted from the fraudulent scheme. other factors must be excluded from the ernment where: (1) a stock has some value The over-inflation of loss using this loss calculation:' If a fraudulent scheme apart from the effect of a fraudulent methodology may be very substantial corresponded with general turbulence in scheme; (2) a stock had a long trading his- where a stock has a lengthy trading histo- the stock market, or with depression in a tory or substantial residual market value ry and its price has increased continually particular segment of the market, loss cau- following the conclusion of a scheme; (3) over time. In such cases, early purchasers sation may prove a substantial challenge market forces or other factors unrelated to may have lost little or nothing, yet a high for the government. If extrinsic factors im- the fraud contributed to the drop in a loss could be attributed to them." pacted a stock's price, or players other than stock's price; or (4) the price of the stock A market capitalization calculation the client (or even co-conspirators acting rebounded significantly at some point also overstates victims' losses where the outside of the conspiracy) contributed to after disclosure of the fraud. One or more stock price plummeted immediately after victims' losses, the requisite causal link of these factors will often be present where investors learned of the fraud, but then may be weak. Similar problems may face a scheme causes losses regarding rebounded at a later point in time." the government where victims knowingly an otherwise legitimate stock. An example of the defects in loss cal- assumed a high degree of risk by investing An example of the potential com- culations proposed by the government is in speculative or volatile securities. plexity of assessing loss is a "pump-and- described in Zolp. The sentencing court Another illustration of the more rea- dump" scheme, which involves "the tout- had adopted the government's position sonable approach to investors' losses ing of a company's stock ... through false that the loss for Guidelines purposes was under civil securities law is the Private and misleading statements to the market- the "intended loss."' The district court cal- Securities Litigation Reform Act of 1995." place. After pumping the stock, fraudsters culated loss as the difference between the That provides for damages to be make huge profits by selling their cheap purchase price of the stock and what it computed based on the difference stock to the market."" As the Ninth assumed to be its true value (nothing). The between the purchase price paid by an Circuit held in Zolp, unless the govern- Ninth Circuit reversed, ruling that the gov- investor and the mean trading price of the ment can prove by clear and convincing ernment had not met its "burden to estab- stock during the 90-day period following evidence that the stock is a complete lish, by clear and convincing evidence, that public disclosure of a fraudulent scheme." sham, a loss assessment requires it to "dis- there was 'no market' for ... [the] shares This methodology will result in a more entangle the underlying value of the stock, after the fraud came to light.'42 accurate assessment of damages — or, by inflation of that value due to the fraud, analogy, loss — where the market has an and either inflation or deflation ... due to Analogizing to Civil extreme but temporary reaction to disclo- unrelated causes."" The way to calculate Securities Fraud sure of a fraudulent scheme. loss in such circumstances is not set forth Analogizing to civil law may be help- The government may object to con- in the Guidelines. In this type of situation, ful because civil securities law encom- sidering civil law in calculating loss under the defense may benefit greatly from a passes a loss causation standard that is the Guidelines because most criminal cases sophisticated loss analysis. similar to the common law theory of reflect a broader concept of loss. However, proximate cause — a concept largely lost the argument that civil securities law does Market Capitalization in Section 2B1.1 of the Guidelines." In not apply to loss calculations under the Theory of Loss Rutkoske, a stock manipulation case Guidelines was explicitly rejected by the A market capitalization theory of against a brokerage firm owner, the Second Circuit in Rutkoske." The common loss is a crude but easy-to-apply method Second Circuit remanded for resentenc- sense reasons for considering civil law in of calculating loss. It measures the ing, noting "no reason why considera- Rutkoske and Ohs may appeal to sentenc- decline in a stock's value between the tions relevant to loss causation in a civil ing courts, in light of the similarity between time when a fraudulent scheme was fraud case should not apply" to loss cal- civil damages and loss to investors in a going on and the time when investors culations under the Guidelines." criminal securities fraud case.' first learned about the scheme. This When considering the bounty of civil measure bases "loss on a gross correla- securities fraud cases examining loss cau- Market-Adjusted Loss tion between stock price decline and the sation and calculating damages, defense A market-adjusted analysis of loss revelation of a fraudulent action."' counsel should be cognizant of the signif- reduces investors' losses by any decrease A market capitalization measure of icant impact of the Supreme Court's 2005 in the value of a security that resulted loss is often a poor proxy for victims' actu- decision in Dura Pharmaceuticals.45 In from market factors that were unrelated al injury because the dates selected for val- Dura, a case cited in many securities fraud to a fraudulent scheme. Market adjust- uation of the stock may have "no particu- cases, the Court held that a civil securities ment makes economic sense and is con- lar relevance to the offense conduct," and fraud plaintiff must plead and prove loss sistent with the Guidelines since a loss the method will attribute the total causation, i.e., that there was a "causal caused by extrinsic factors is "not a 'loss' amount of a decline in the price of a stock connection between the material misrep- attributable to the fraud." 52 A loss compu- to the offense conduct even though other resentation and the loss," in order to satis- tation that is not market-adjusted will factors may have contributed to the loss." fy the element of "loss causation." Cases often overstate the loss under the This is particularly true in the case of a predating Dura may adopt a broader con- Guidelines." Thus, the government must 22 WWW.NACDL.ORG THE CHAMPION prove — perhaps by clear and convincing Using the gains to a client rather than Novel Government evidence — the amount of investors' loss- victims' losses may benefit the defense Theories of Loss es that resulted exclusively from the substantially where a client profited little Government efforts to calculate loss fraudulent activities of the defendants. from a fraud, or ended up being among based on novel theories (for example, a Where a security is not a complete the losers when the scheme belly-flopped victim's expectations of profit, or the sham, a large portion of the diminution in or the leading perpetrators scooped all of opportunity cost of funds invested by vic- its value may have been caused by factors the gains. Regardless of the circumstances, tims) have been unpopular in some other than a fraudulent scheme. it also is the alternate method prescribed courts." As the Fifth Circuit stated in Ohs, Accordingly, it may behoove defense by the Guidelines when no reasonably the "government does not further the counsel to establish that the security was accurate assessment of intended or actual goals of sentencing uniformity or fairness not a total sham. Consider questions such loss can be made. In Zolp, for example, the when, as seems to be happening in these as: How long had the security been trad- defendant was a "major participant in a cases, the government persistently adopts ing before the claimed fraud? Did it con- 'pump-and-dump' scheme," who, inter aggressive, inconsistent, and unsupport- tinue trading after the fraud was exposed? cilia, convinced an issuer to hire a bogus able theories of loss:' Was it traded on the NYSE, AMEX, NAS- investment advisory firm, which generat- DAQ, or another NASD-regulated ed false press releases, thereby driving up Exclusions From, and exchange? Was it widely traded?" Was it the price of the stock. When the price was Credits Against, Loss rated by Morningstar, Lipper, or another elevated, he told his broker to sell his trove Exclusions from, and credits popular rating system? Was it included in of stock." The presentence report "found against, loss may provide good opportu- the Russell 20000, NASDAQ-100 ® or that actual loss to the investors could not nities for a lower loss adjustment. For another market index? Did the issuer have be determined, and, accordingly, recom- example, amounts based upon an business premises? rid 't have substantial mended a calculation based on [the agreed-upon return, the costs of prose- tangible or others assets? Did it have defendant's] personal gain from the cution, and a victim's expenses in aiding numerous employees or extensive busi- fraudulent scheme.'6° prosecutors are not included in loss cal- ness operations? Did it submit timely and Of course, a client's gain may be dis- culations." Loss will also be reduced by complete SEC filings? proportionately large relative to actual or money or property returned to victims While the factors establishing legiti- intended loss. For example, in a sting oper- before an offense is exposed, or a defen- macy will differ depending on the circum- ation law enforcement may be responsible dant knows, or reasonably should have stances, the more indicia of bona fide for the amount paid in bribes or kick- known, that the scheme was about to be business operations that can be estab- backs." In such cases, the government detected." An exception to this exclu- lished, the more likely it is that a court will holds the keys to a defendant's gain, and it sion, however, is a Ponzi or other scheme consider the impact of extraneous factors could be unfair to use such figures as the in which payments to victims are rou- on the drop in stock price following reve- "loss" amount for sentencing purposes. tinely made to some or all victims." lation of a fraud. Assessing the appropriate amount of market adjustment "inevitably cannot be Brager an exact science," and ordinarily expert Tax analysis and consideration of the general Law and particular segment of the securities Group market is necessary for a court "to approx- imate the extent of loss caused by a defen- A Professional Corporation dant's fraud."55 Because market-adjusted Tax Controversy Law CRIMINAL TAX CASE? Tax Controversy Law figures will often be more accurate than Tax Lontroversy Law those mechanically generated from raw CIVIL TAX CASE? Tax Controversy Law trading data, it may benefit the defense to have an expert prepare a market-adjusted analysis of loss. At a minimum, raising the Former IRS attorneys can provide possibility of market influences on advice, expert witness testimony investors' losses may discredit crude and www.bragertaxiaw.com inflated government loss estimates, and or representation Tel: 310.208.6200 support the position that the government Fax: 310.208.6262 has failed to meet its burden of establish- ing loss with reasonable certainty." 10940 Wilshire Blvd 18th Floor Alternate Loss Measures Los Angeles CA 90024 A Defendants Gain Tax Defense If neither "intended" nor "actual" loss Payroll Tax Problems can be reasonably ascertained, a defen- Tax Litigation in All Federal Courts dant's "personal gain from the fraudulent scheme" is an appropriate alternative Innocent Spouse Defenses method of calculating Guidelines loss." A Offers in Compromise client's gain could be diverted funds, Wrongful Disclosure Suits inflated trading profits, or the bonuses, Jeopardy Assessments kickbacks or other remuneration received because of participation in a scheme."

WWW.NACIDLORG SEPTEMBER 2008 23 A victim's losses also should be 2.128 S. Ct. 586,596 (2007). dard applies to 20-level loss adjustment). reduced by the victim's gains, and courts 3. For offenses before November 1,2001, 12. United States v. Pike, 473 F.3d 1053, could consider a victim's net losses on the see USSG § 2F1.1 (providing lower loss adjust- 1057-58 (9th Cir.) (error to apply heightened entire portfolio of stocks that were ments). standard to 5-level adjustment without first impacted by a fraudulent scheme. As 4. See Stuart Taylor, Jr., Irrational considering "totality of circumstances"), cert. explained by the Seventh Circuit in United Sentencing, Top to Bottom, NATL LAW J. denied, 128 S. Ct. 256 (2007). States v. Mount:" (February 12, 2007) (comparing sentencing 13.See id. (enumerating relevant factors); proceedings in such cases to"Roman emper- USSG § 2B1.1(b)(1) (prescribing 4- to 30-level [The Guidelines], and this ors throwing criminals to the lions and bears adjustments for losses exceeding $5,000). court's cases ... call for the court to gratify circus crowds"). 14. United States v. Ebbers, 458 F.3d 110, to determine the net detriment 5. United States v. Rutkoske, 506 F.3d 170, 127 (2d Cir. 2006), cert. denied, 127 S. Ct. 1483 to the victim rather than the 179 (2d Cir. 2007), (2007). gross amount of money that 6. United States v. Ohs, 429 F.3d 540, 547 15. See United States v. Kilby, 443 F.3d changes hands. So a fraud that (5th Cir. 2005). 1135, 1141 (9th Cir. 2006) (where "sentence consists in promising 20 ounces 7. Ga11,128 S. Ct. at 596. depend[ed] in large part upon the amount of of gold but delivering only 10 8. United States v. Zolp, 479 F.3d 715,718 drugs,"court"must err on the side of caution" produces as loss of the value of (9th Cir. 2007). in approximating quantity). 10 ounces of gold, not 20. 9. See McMillan v. Pennsylvania, 477 16.See, e.g., Rutkoske, 506 F.3d at 180 ("a U.S. 79 (1986) (higher standard of proof fraud disclosed just as the dot-corn bubble This may be helpful where a victim with- than a preponderance of the evidence burst might cause most, but not necessarily drew some trading profits on a fraudulent may apply where sentencing enhance- all, of the decline in previously high-flying stock before the scheme came to light and ment is the "tail which wags the dog of the technology stocks"); Emergent Capital Inv. its value plummeted. Likewise, this may substantive offense"). Mgmt., LLC v. Strmepa-h Group, Inc., 343 F.3d be helpful where a scheme involved mul- 10.See United States v. Gonzalez, 492 F.3d 189, 197 (2d Cir. 2003) (where "loss was tiple stocks and an investor lost money on 1031, 1039 (9th Cir. 2007) (clear and convinc- caused by an intervening event, like a gener- some, but profited on others. ing standard applies to 9-level increase to the al fall in the price of Internet stocks, the chain To make a reasonably accurate assess- offense level, which increased Guideline of causation will not have been established"). ment of loss that takes into account range from 0-6 months to 21-27 months, 17.United States v. Hooker, 217 F.3d 1038, investors' gains, a court must evaluate an since adjustment had "extremely dispropor- 1049 (9th Cir.), cert. denied, 531 U.S. 1037 individual investor's trading history and tionate effect on the sentence relative to the (2000). the residual value of a stock at some point offense of conviction"), cert. denied, 128 S. Ct. 18.Ebbers, 458 F.3d at 129-30. in time following the exposure of a fraud- 1093 (2008); Zolp, 479 F.3d at 718; United 19. 0/is, 429 F.3d at 547 (citations omit- ulent scheme. Where an investor had States v. Okai, 454 F.3d 848,852 (8th Cir.) (rec- ted). An example of this is the analysis of the extensive in-and-out trading over a ognizing in dicta that due process may district court considering the sentencing of lengthy period of time, or where the require sentencing courts to apply a higher Brocade Communications CEO Gregory nature of the stock invited extensive trad- standard of proof where the sentencing Reyes. See United States v. Reyes, et al., CR 06- ing (for example, penny stocks or com- enhancement becomes the "tail which wags 556-CRB (N.D. Cal.) (CR 737, Order Re: modities), it may be very challenging to the dog of the substantive offense"), cert. Sentencing dated November 27,2007 ("Reyes offset victims' losses with their gains. If denied, 127 S. Ct. 697 (2006). Cf United States v. Order")). feasible, however, it may result in a lower Grier, 475 F.3d 556, 566 (3d Or.) (en banc) 20. USSG § 2B1.1, cmt. n.3(A). loss adjustment where a victim enjoyed (declining to consider status of prior holding 21. Id. at § 2B1.1, cmt. n.3(A)(i); see also profits on stocks at various times during that sentencing enhancements tharcan fair- U.S. Sentencing Commission, Office of the course of a scheme, or enjoyed profits ly be characterized as a tail which wags the General Counsel, An Overview of Loss in USSG on some, but not all, stocks that were dog of the substantive offense must be § 281.7 (March 2007), available at http:// affected by a fraud. proved by clear and convincing evidence") www.ussc.gov/training/loss-March% (citations omitted), cert. denied, 128 S. Ct. 106 202007.pdf ("Loss Overview"). Conclusion (2007); but see United States v. Scroggins, 485 22. See Loss Overview, at 1. Computing loss with reasonable cer- F.3d 824 (5th Cir.) (rejecting argument that 23. USSG § 2B1.1, cmt. n.3(A)(ii). tainty in securities fraud cases presents any standard of proof greater than a prepon- 24. United States v. Geevers, 226 F.3d 186, substantial legal and practical challenges. derance applies where relevant conduct is 192 (3d Cir. 2000). Identifying a methodology that is feasible the"tail that wags the dog"of the substantive 25.Loss Overview, at 4. under the circumstances, consistent with offense), cert denied, 128 S. Ct. 324 (2007). 26.Zo/p, 479 F.3d at 718. the Guidelines, and generates a fair sen- 11. See United States v. Jordan, 256 F.3d 27. Id. at 719; see USSG § 2B1.1, cmt. tence may be particularly problematic. 922, 929 (9th Cir. 2001) (clear and convinc- n.3(B). However, a number of cases create oppor- ing standard applies where 9-level adjust- 28. USSG § 2B1.1, cmt. n.3(C)(iii), (iv). tunities to avoid some of the distortion ment would approximately double 29. USSG § 2B1.1, cmt. n.3(C). created by the broad concept of loss under Guideline range); id. at 934 ("[W]e appear to 30.Ebbers, 458 F.3d at 127. the Guidelines. In light of the severe sen- have consistently held that when the 31.Olis, 429 F.3d at 546-47. tences often generated by rote loss calcula- enhancement is greater than four levels 32.See Zolp,479 F.3d at 719. tions, exploring these issues may help to and more than doubles the applicable sen- 33.See id.; Ebbers, 458 F.3d at 128 ("Many obtain more just sentences for clients con- tencing range, then the enhancements factors causing a decline in a companys per- victed of securities fraud. must be proved under clear and convinc- formance may become publicly known ing standard of proof.") (OScannlain, J., around the time of [a] fraud and be one cause Notes concurring); Zolp, 479 F.3d at 718 (govern- in the [drop] in price. ..."). 1.543 U.S. 220 (2005). ment concedes clear and convincing stan- 34. Zolp, 479 F.3d at 717, n.1 (citation

24 WWW.NACDL.ORG THE CHAMPION omitted). 479 F.3d at 719. FROM THE PRESIDENT 35. Id. at 719; see also Ebbers, 458 F.3d at 58. See, e.g., United States v. West, 2 F.3d Continued from page 6 128 ("The loss must be the result of the 66, 71 (4th Cir. 1993) (brokerage fees paid by fraud."). government is appropriate loss where bro- tal torture, nor any other form of coercion, may 36. 0/is, 429 F.3d at 546-47 (citing cases kers fraudulently obtained under-secured be inflicted on prisoners of war to secure from rejecting market capitalization calculations of bonds for government). them information of any kind whatever."). loss). 59./d.479 F.3d at 717. 13.The Department of Justice Office of 37.See Rutkoske, 506 F.3d at 178. 60. Id. at 720; cf., e.g., United States v. Legal Counsel has issued the "torture mem- 38. Duty Pharmaceuticals, Inc. v. Broudo, Munoz, 430 F.3d 1357, 1371 (11th Cir. 2005) orandum" that justifies what would other- 544 U.S. 336,343 (2005); cf. Ebbers, 458 F.3d at (sentencing court would be justified in using wise be a crime. Is this a legal defense? Who 127 ("The loss to investors who hold during defendant's gain to assess loss given that it knows now? See 2 Paul Robinson, CRIMINAL the period of an ongoing fraud is not easily was arguably difficult to determine cus- LAW DEFENSES S 183(0(3): quantifiable because we cannot accurately tomers' loss in misbranding case), cert. denied, Potential for abuse is also often cit- assess what their conduct would have been 126 U.S. 2305 (2006); United States v. Yeager, ed as a rationale for limiting the had they known the truth."). 331 F.3d 1216,1225-26 (11th Cir.2003) (affirm- reasonable reliance excuse to offi- 39. See In re Cedant Corp. Litig., 264 F.3d ing trial court finding that defendant's profit cial misstatements. A client might 201,242 (3d Cir.2001) (illustrating inflated loss was reasonable estimate of loss where court seek, or a counsel might intention- generated by market capitalization analysis was unable to reasonably estimate actual or ally give, erroneous advice that where an investor purchased stock at a lower intended losses due to conflicting and con- would then permit the client to un- price than that immediately preceding disclo- fusing trial testimony). dertake criminal activity with im- sure of a fraud), discussed in Reyes Order, at 5- 61.See, e.g.,6 Arrested Over Plots to Pump punity.The objection is not without 6. Up Share Prices, N.Y. TIMES, Dec. 8, 2007, at B1 basis, but the requirement of the 40.See United States v. Bakhit, 218 F.Supp. (detailing operation in which undercover FBI defense that there be actual and 2d 1232,1241-42 (C.D. Cal. 2002) (calculating agent "got word out in the com- reasonable reliance seems suffi- I- loss based on depressed stock price on date munity that he was willing to buy stocks in cient to effectively exclude such trading resumed following disclosure of fraud struggling companies in return for bribes"). fraudulent excuses. ... 0 would result in an inflated loss adjustment 62. See, e.g., Reyes Order, at 7 (rejecting It should be noted as well that where because initial price drop was temporary and government's alternate proposal of measur- fabricated reliance upon a calculated - "appear[ed] to be an anomaly, an extreme ing loss by SEC fines paid by issuer, or tax lia- misstatement is a concern, officials Z reaction to the announcement of the fraud"). bilities of victim employees that issuer volun- themselves have no special immuni- 41.479 F.3d at 720. tarily assumed). ty from the temptations of bribery 42./d.at 720; cf. Ebbers,458 F.3d at 127-28 63. 0/is, 429 F.3d at 547, n.11, cited in and corruption. Thus, if abuse is a (discussing defects in "simplistic analysis" of Reyes Order, at 7 (citation omitted). sufficient concern to bar the de- market capitalization model). 64. USSG § 2B1.1, cmt. n.3(D); United fense,the defense might properly be 43. See Rutkoske, 506 F.3d at 179, citing States v. Schuster, 467 F.3d 614,618-20 (7th Cir. barred for reliance upon official mis- 0/is, 429 F.3d at 546 (looking to civil securities 2006) (reversing loss calculation that included statement as well. fraud damages law for guidance in calculat- victims' expenses in connection with trial tes- 14. Starting, of course, with the Geneva ing Guidelines loss). timony). Convention and all its amendments. 44. Rutkoske, 506 F.3d at 179. 65.USSG § 281.1, cmt. n.3(E)(i). 15. United States v. Lee, 106 U.S. 196,220

45.544 U.S. 336. 66.Id. cmt. n.3(F)(iv); Loss Overview, at 13. (1882): "71 46. Id. at 341. 67.966 F.2d 262,265 (7th Cir.1992). No man in this country is so high 47.429 F.3d at 546. that he is above the law. No officer of 48.Pub. L. No.104-67, 109 Stat. 737 (1995) 0 Evan A. Jenness, 2008. All rights reserved. the law may set that law at defiance (codified in various sections of Title 15 U.S.C.). with impunity. All the officers of the 49.See 15 U.S.C.§ 78u-4(e); United States government from the highest to the v.Grabske, 260 F.Supp.2d 866,873-75 (N.D.Cal. About the Author lowest, are creatures of the law, and 2002); Reyes Order, at 6. Evan A. Jenness is a criminal defense at- are bound to obey it. 50.506 F.3d at 179. torney whose of- 51.See, e.g., Reyes Order, at 5-6. fices are in Santa NACDL Sentencing Committee 52.Ohs, 429 F.3d at 546. Monica, Calif. She is - Call to Action 53. See Rutkoske, 506 F.3d at 180 ("basic an NACDL Board Mark Rankin and Mark Allenbaugh are failure" for sentencing court to not even con- Member and fre- the new co-chairs of the NACDL sider factors relevant to stock price decline quent author on Sentencing Committee and seek your other than fraud). federal criminal involvement. The Committee will focus 54.Cf Rutkoske, 506 F.3d at 180 (rejecting law and procedure. on state, federal, and international government's argument that a "thin market" sentencing policy and procedure. The for a stock means that market forces could first meeting of the newly constituted not have contributed to investors' losses). Evan A. Jenness committee will be on Sunday morning 55.Rutkoske, 506 F.3d at 179-80. Main Street Law Building at the Fall Meeting in Tampa. Please e- 56. See Reyes Order, at 8-10 (rejecting 2115 Main Street mail the co-chairs at mrankin@ government calculations based on"rescissory Santa Monica, CA 90405 carltonfields.com and mallenbaugh@ loss model" because effects of defendant's 310-399-3259 alsalaw.com to express your interest in wrongdoing cannot be untangled from mar- Fax 310-392-9029 being involved and attending the ket influences on stock price). rump [email protected] meeting in person or by phone. 57. See USSG § 2B1.1, cmt. n.3(B); Zo/p,

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