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White Collar Defense & Compliance

Developments in Criminal Law, Federal Case Law and Statutory Developments

Alain Leibman’s Law360 Article About Justice Department’s Partial Retreat On Appeal Waivers

Posted in Constitutional law, Sentencing

Alain Leibman writes:

We recently blogged here  and here about the DOJ’s blatant and increasingly harsh use of leverage against pleading defendants to force their waiver of important rights attendant to the sentencing and appeal process.  A fuller treatment of this issue, and of the recently-announced change in DOJ policy intended to partially ameliorate this unfairness, is found in my article today for Law360, which may be read here.

(Alain Leibman, Esq., the author of this entry and a co-editor of this blog, 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.)

Federal Prosecutors May No Longer Be Able To Demand Blanket Appeal Waivers

Posted in Sentencing

Alain Leibman writes:

Two weeks ago we posted here about a recent, fairly awful Third Circuit decision, United States v. Erwin, upholding boilerplate waiver-of-appeal clauses to the point of punishing a wayward appellant — who took a sentencing appeal in apparent violation of his waiver agreement — by setting his case down for resentencing and releasing the Government from its obligation to file a downward departure motion for cooperation.  Now it appears that the Department of Justice is rethinking its prosecutors’ insistence on broad waiver clauses which bar defendants from appealing at all.

In its September 27-28, 2014 edition, the Wall Street Journal reported in a story entitled “U.S. Moves to Curb Use of Waivers in Guilty Pleas” (Section A4) that the DOJ is finally considering amending its policy.  The Journal reports that fully a third of the 94 U.S. Attorneys’ Offices have moved to a standard waiver-of-appeal provision in all plea agreements.  The story further reports that bar associations in twelve states have condemned the practice as unethical and improper.  Normally, the DOJ does not much care what positions state bar associations take on a given subject, believing associations to be populated with criminal defense attorneys acting in their own clients’ interests.  But the Journal reports that, drawing upon such bar association positions, federal judges are becoming increasingly critical of the widespread use of waivers.   The DOJ cares a great deal more about what judges do, of course, than about what defense lawyers think.

The DOJ, according to the Journal, will this week announce that it will no longer allow its prosecutors to require defendants to waive all appeals, instead preserving for appeal any claim of ineffective assistance, presumably whether it occurs in the plea negotiation and hearing process or at sentencing.  Mr. Erwin would not himself have benefited from this change, since his appeal issues did not encompass poor attorney performance.  But this change, if it comes as reported, may at least stanch the momentum across the federal landscape in favor of standardized waivers.

(Alain Leibman, Esq., the author of this entry and a co-editor of this blog, 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.)

Third Circuit Holds That Breach Of Agreement Not To Appeal Justifies Government’s Withdrawal Of 5K Motion

Posted in Sentencing

Alain Leibman writes:

It has become the norm for the Government to insist in plea agreements, cooperating or otherwise, that the defendant waive his/her right to appeal the resulting sentence, as long as the sentence is no more severe than augured by the applicable advisory Sentencing Guidelines range.  So, if the facts of the case stipulated by the parties in the plea agreement point to a 12-18 months Guidelines range, then the defendant can only appeal if his/her sentence ends up being more than 18 months in jail; anything less is deemed within the pre-sentencing expectations of the defendant and non-appealable.  This now-form provision has its roots in efforts by the Department of Justice to reduce sentencing appeals, and is no longer even capable of being bargained out of a plea agreement.  It comes with the territory.

So, it is remarkable that the Third Circuit recently held that not only had the Government in United States v. Erwin, 2014 WL 4194129 (3rd Cir., Aug. 26, 2014) bargained for inclusion of an appeal waiver, but that bargain was so material to the agreement that when the defendant improperly filed an appeal contrary to its provisions, his breach freed the Government from its (actually-bargained for and truly important) commitment to file a U.S.S.G. 5K1.1 cooperation downward-departure motion for Erwin.  In addition to the usual argument that the appeal should be dismissed as improper, the Government had argued to the Court of Appeals that mere dismissal was not enough of a sanction — dismissal would not “make the Government whole for the costs it has incurred because of Erwin’s breach ….” Id., at *6.  The Court agreed, finding that the Government had “devoted valuable resources to litigating an appeal that should never have been filed in the first place.”  Id., at 8.

Let’s pause for a moment.  These statements by the Court and the Government are nonsense.  As noted above, the appeal waiver is not even a subject of bargaining, and is now as boilerplate as any standard clause.   Also, the notion that a U.S. Attorney’s Office, with a cadre of attorneys dedicated entirely to handling appeals, has incurred material costs or lost valuable resources in moving to dismiss an appeal on procedural grounds is absurd.

What’s worse is the remedy sought by the Government and granted by the Court: a de novo sentencing with the Government freed of its obligation to re-file a downward-departure motion.  That motion, in contrast to the appeal waiver, was explicitly bargained for and is the sine qua non of the plea, without which the defendant may well have gone to trial rather than plead.  Conversely, the actual measure of the bargain obtained by the Government in exchange for that motion was (a) a guilty plea and (b) cooperation from Erwin, both of which were seemingly received in full measure.  Not only did the court get it wrong in terms of appreciating the true nature of the parties’ exchange of commitments, but it did not even apply contracts law correctly.  It is not every breach by one party which justifies a failure to materially perform by the other; it is only the most material of breaches which carry that consequence.  So, a defendant’s failure to enter the guilty plea or failure to fully cooperate and stay out of trouble would have been material breaches, justifying the Government’s non-performance of its essential promise to seek a reduced sentence.  But a defendant taking a frivolous appeal?  Not material by any measure.

(Alain Leibman, Esq., the author of this entry and a co-editor of this blog, 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.)

FBI Agent Cannot Testify As Human Lie Detector, Opining On Defendant’s Truthfulness

Posted in Evidence

Alain Leibman writes:

Sometimes, a court opinion reveals the prosecutorial tactic under scrutiny, the lower court’s endorsement of the same and defense attorney’s failure to object to the same, to be a real head-scratcher, a kind of “what in the world could they have been thinking?” experience.  The Tenth Circuit recently had such an experience involving a federal prosecutor’s decision to call an FBI agent as an expert witness on truth detection and to have the agent opine as to the deceptiveness of a defendant during a custodial interview; a defense lawyer’s inexplicable failure to object contemporaneously to any portion of that remarkable testimony; and the trial court’s allowance of clearly impermissible opinion testimony in contravention of its Federal Rule of Evidence 702 gateway function.

In United States v. Hill, 749 F.3d 1250 (10th Cir. 2014), a bank robbery suspect gave a custodial interview to FBI Agent Jones, in which the defendant made exculpatory statements challenged by the interviewer.  At trial, the videotaped statement was played, although the defendant unsurprisingly did not take the stand.  Agent Jones was called as the final witness on the government’s case, qualified as an expert interviewer based on his FBI training and allowed by the trial court, in the face of absolutely no objection to qualifications or the helpfulness of the testimony, to opine on all the ways in which the defendant had revealed himself in the interview to be untruthful: his mumbling; his avoiding certain questions; his use of the phrase “to my knowledge” in answering other questions; his invocation of religious belief; and the like.  (For fans of Monty Python, the recap of this testimony is worth reading, if only because its absurdity invokes the “Witch or not a witch” flotation test employed in a skit based on a fictitious version of medieval England).

The Tenth Circuit pointed out that not only was expert testimony on credibility ruled out by its own precedent as to Rule 702, but that every court of appeals to have considered the question had come to the same conclusion.  So awfully impermissible was this testimony that even on plain error review, necessitated because defense counsel had lodged no objection at trial, the conviction had to be reversed, making Hill “one of the exceptional cases in which we exercise our discretion to notice the plain error ….”  Id. at 1252.

(Alain Leibman, Esq., the author of this entry and a co-editor of this blog, 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.)

Eleventh Circuit Broadly Defines FCPA “Instrumentality” To Include Commercial Businesses

Posted in Foreign Corrupt Practices Act

Christopher M. Varano writes:

At long last, a federal circuit court has stepped forward to provide guidance as to when an entity is an “instrumentality,” such that its employees are “foreign officials” under the FCPA.  In a recent ruling, the Eleventh Circuit held that it is a violation to bribe an employee of a commercial business if that commercial business is controlled by foreign state and performs a function that the foreign government treats as its own.  United States v. Esquenazi, 2014 WL 1978613 (11th Cir., May 16, 2014)

In Esquenazi, the Eleventh Circuit reviewed the conviction of the two co-owners of Terra Telecommunications Corp., a Florida company which purchased phone time from foreign vendors and resold the minutes to customers in the United States, for violations of the FCPA.  The defendants were found to have bribed the Director of International Relations of Telecommunications D’Haiti, S.A.M. (Teleco), a Haitian company with connections to the Haitian government.  The relationship between Teleco and the Haitian government was a disputed issue in the case.

The FCPA prohibits bribery of a “foreign official”, which is defined as “any officer or employee of a foreign government or any department, agency, or instrumentality thereof.”  15 U.S.C. §§ 78dd-2(h)(2)(A) (emphasis added).  At issue in Esquenazi was whether Teleco was an “instrumentality” under the FCPA.  The FCPA does not define “instrumentality,” and according to the Esquenazi court, no previous circuit court had defined it, either.

Thus, the Eleventh Circuit in Esquenazi undertook to define an “instrumentality” under section 78dd-2(h)(2)(A) of the FCPA as “an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.”  Thus, a commercial business becomes an “instrumentality” subject to the FCPA when it is controlled by a foreign state and serves a public purpose.

The DOJ failed to convince the court to automatically convert any business with government ownership into an instrumentality.  Instead, the Eleventh Circuit proffered a multi-factor test to determine whether a commercial enterprise should be considered an “instrumentality” under the FCPA.  First, according to the court in Esquenazi, the entity must be “under the control or dominion of the government to qualify as an ‘instrumentality’ within the FCPA’s meaning . . . and must be doing business with the government.”  The Eleventh Circuit provided the following factors to consider when deciding if the foreign government “controls” an entity:

To decide if the government “controls” an entity, courts and juries should look to the foreign government’s formal designation of that entity; whether the government has a majority interest in the entity; the government’s ability to hire and fire the entity’s principals; the extent to which the entity’s profits, if any, go directly into the governmental fisc, and, by the same token, the extent to which the government funds the entity if it fails to break even; and the length of time these indicia have existed.

The second element of the “instrumentality” test in Esquenazi is whether “the entity performs a function the government treats as its own.”  For this prong, the Eleventh Circuit provided the following factors to consider:

Courts and juries should examine whether the entity has a monopoly over the function it exists to carry out; whether the government subsidizes the costs associated with the entity providing services; whether the entity provides services to the public at large in the foreign country; and whether the public and the government of that foreign country generally perceive the entity to be performing a governmental function.

The Esquenazi court found that Teleco met the test for an “instrumentality” under the FCPA, and affirmed the convictions of the co-owners of Terra.

The takeaway here is that companies that deal with commercial businesses with close ties to foreign governments should ensure that proper FCPA compliance measures are in place.  Those compliance measures should take into account that employees of entities which meet the Eleventh Circuit’s “instrumentality” test could rise to the level of “foreign officials” under the FCPA, and thus dealings with those employees should be FCPA compliant.

(Christopher M. Varano, Esq., is an associate in the Philadelphia office of Fox Rothschild.  Chris  has guided clients through complex disputes involving white collar and securities issues, breach of contract claims, partnership rights and interests, unfair and deceptive business practices, employment issues, and administrative investigations.  He is adept at translating for his clients’
action the many nuances of business, partnership, and employment agreements and has experience in representing companies and individuals in these areas.)

Paper Records HIPAA Violation Results in $800,000 Payment under HHS Resolution Agreement

Posted in HHS Resolution Agreement, HIPAA Violation

Michael J. Kline writes:

My partner Elizabeth Litten was quoted at length by Alexis Kateifides in his recent article in DataGuidance entitled “USA: ‘Unique’ HIPAA violation results in $800,000 settlement.”  While the full text can be found in the June 26, 2014 article in DataGuidance.com, the following considerations are based upon points discussed in the article.  (Elizabeth herself has written many entries on the Fox Rothschild  HIPAA, HITECH and Health Information Technology blog relating to the topic of large breaches of protected health information (“PHI”) under HIPAA.)

The article discusses the U.S. Department of Health and Human Services (“HHS”) press release on June 23, 2014 that it had reached a Resolution Agreement (the “Resolution Agreement”) with Parkview Health System, Inc. d/b/a Parkview Physicians Group, f/k/a Parkview Medical Group, a nonprofit Indiana health provider (“Parkview”).  Pursuant to the Resolution Agreement, Parkview has agreed to pay $800,000 as a “Resolution Amount” and to enter a corrective action plan to address its HIPAA compliance issues.

There are several interesting aspects to the Parkview incident and Resolution Agreement, including those in Elizabeth’s comments quoted below.  The Resolution Agreement recites that it relates to an incident that was reported in a complaint to HHS on June 10, 2009 by Dr. Christine Hamilton, a physician.  Dr. Hamilton apparently asserted that Parkview failed to appropriately and reasonably safeguard the PHI of thousands of her patients in paper medical records that had been in the custody of Parkview from September, 2008 when Dr. Hamilton had retired.  The Resolution Agreement alleged that

Parkview employees, with notice that Dr. Hamilton had refused delivery and was not at home, delivered and left 71 cardboard boxes of these medical records unattended and accessible to unauthorized persons on the driveway of Dr. Hamilton’s home, within 20 feet of the public road and a short distance away (four doors down) from a heavily trafficked public shopping venue.

Elizabeth pointed out in the DataGuidance article, “The fact that Parkview left such a large volume of medical records in an unsecured location suggests that Parkview acted with ‘willful neglect’ as defined by the HIPAA regulations.”  Elizabeth went on to say in the article,

Although the resolution amount of $800,000 seems high given the fact that the records were, apparently, intended to be transferred from one covered entity to another, the circumstances suggest that Parkview was intentionally or recklessly indifferent to its obligation to secure the records. Second, the incident underscores the risks attendant to paper records. A majority of large breaches involve electronic records, but paper PHI is also vulnerable to breach and covered entities and business associates need to realize that large fines and penalties are also likely to be imposed for failure to secure PHI contained in paper form. . . .  While the Resolution Agreement does not provide very much information as to the events leading up to the ‘driveway dumping’ event, its recitation of the facts raises the possibility that Parkview may not have had proper authorization to hold the records in the first place. . . .  Parkview ‘received and took control’ of the records of 5,000 to 8,000 of the physician’s patients in September of 2008, because it was ‘assisting’ the physician with transitioning the patients to new providers and was ‘considering the possibility of purchasing’ the records from the physician, who was retiring and closing her practice. The ‘driveway dumping’ did not occur until June of 2009. It is not clear from the Resolution Agreement when the physician retired, whether Parkview ever treated the patients, and/or whether Parkview was otherwise appropriately authorized under HIPAA to receive, control and hold the records for this 10-month period.

In addition to the incisive analysis by Elizabeth in the DataGuidance article, there are a few other points worth making relative to the Resolution Agreement.  First, the incident is not posted on the HHS “Wall of Shame” for large PHI breaches affecting 500 or more individuals because it occurred several months before the effective date in September 2009 for such posting.  Second, it is noteworthy that it took almost five years after the incident for the Resolution Agreement to be signed between Parkview and HHS.  Third, the Web site of Parkview appears to be notably void to this point in time of any reference to the Resolution Agreement or payment of the Resolution Amount, although there is a report in the News Articles tab on the Parkview Web site dated as recently as July 2014 that “Parkview Receives Excellence in Healthcare Awards.”

Finally, the Resolution Agreement took great effort to make it clear that the $800,000 payment by Parkview was not a civil monetary penalty (“CMP”) but a “resolution amount”; in the Resolution Agreement, HHS reserved the right to impose a CMP if there was noncompliance by Parkview with the corrective action plan.  The HHS Web site says the following about the relatively few cases of resolution agreements (only 21 reported to date in the almost six years since the first such agreement):

A resolution agreement is a contract signed by HHS and a covered entity in which the covered entity agrees to perform certain obligations (e.g., staff training) and make reports to HHS, generally for a period of three years. During the period, HHS monitors the covered entity’s compliance with its obligations. A resolution agreement likely would include the payment of a resolution amount. These agreements are reserved to settle investigations with more serious outcomes. When HHS has not been able to reach a satisfactory resolution through the covered entity’s demonstrated compliance or corrective action through other informal means, civil money penalties (CMPs) may be imposed for noncompliance against a covered entity. To date, HHS has entered into 21 resolution agreements and issued CMPs to one covered entity.

(Michael J. Kline, Esq., the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm’s Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics.)

Defendant Who Goes To Trial And Loses Properly Receives Higher “Loss” Calculation

Posted in Sentencing

Alain Leibman writes:

It’s old news that, generally speaking, a defendant who rolls the dice by going to trial and losing may well get a more severe sentence than a defendant who pleads guilty and saves the court from conducting a trial.  This is not just a function of the former possibly losing the reduction for acceptance of responsibility under U.S.S.G. 3E1.1, but a result of systemic and judicial imperatives which seem intended to force guilty pleas from defendants about whom there is some evidence of guilt.

So, it is often futile to argue at sentencing that your jury-convicted defendant should have his/her sentence reduced under 18 U.S.C. 3553(a)(6) in order to avoid “unwarranted sentencing disparities among defendants with similar records who have been found guilty of similar conduct” where the comparative defendants were adjudged guilty by virture of their own voluntary pleas of guilt.  Still, the operation of the Sentencing Guidelines themselves, their arithmetic formula for calculating the “loss” arising from similar conduct by different individuals, should be indifferent to the manner in which the defendant found himself at sentencing.  How else to accomplish the “pure real offense system” intended by the Sentencing Commission,which seeks to reduce the power of prosectors to “influence sentences by increasing or decreasing” the charges, as reflected in the policy pronouncements in Chapter I, Part A of the Guidelines.

The Ninth Circuit recently threw cold water even on this basic presumption, that the mathematics of loss calculation should be accomplished uniformly, even if courts could find other, discretionary ways to draw distinctions among defendants.  In United States v. Popov, 555 Fed. Appx. 671 (9th Cir., Apr. 24, 2014), the defendants were involved in a healthcare fraud scheme by which their clinics billed Medicare for non-existent patient visits and treatments.  While defendant-appellant Dr. Prakash, who went to trial and was found guilty, was sentenced based on a “loss” calculation driven by the entirely of the billings to Medicare, the Government had taken different, and lesser, views of the “loss” caused by the scheme as reflected in its plea agreements with cooperators.  Prakash made a disparity argument as a result of these inconsistent “loss” calculations, but the appeals court swatted it away in a paragraph.  Acknowledging the “dramatic” differences in loss calculation applied to various of the related parties, which led to an enormous, 120-month sentence for Prakash (Judgment, Doc. #743, Oct. 30, 2012), the Ninth Circuit blithely noted that a sentencing disparity based on cooperation is not unreasonable so long as — and here’s the important legal fiction — there is no indication that the defendant who gambled on a trial and lost is being retailiated against for exercising his constitutional right.

In other words, as long as the sentencing judge does not actually announce that he/she is punishing a defendant for going to trial, anything goes in terms of disparity — endorsing not just unequal terms of jail, but literally a different means of calculating the same “loss,” which is the single most important driver of the length of a jail sentence in fraud cases under the Sentencing Guidelines.

(Alain Leibman, Esq., the author of this entry and a co-editor of this blog, 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)

Cellphones Are Not Cigarette Packs, And Supreme Court Holds The Former Are Not Subject To Warrantless Search Incident To Arrest

Posted in Constitutional law

Alain Leibman writes:

This space has previously addressed the difficulties inherent in applying Fourth Amendment principles designed to accommodate searches of rooms and drawers to searches of the devices of modern technology.  In April 2011, we examined whether a consent to search a dwelling could reasonably be read as a consent to rummage through a computer found in the premises.  The “incident to arrest” exception to the warrant requirement was considered in a Seventh Circuit case analyzed here in April 2012, where the argument was made that searching a file cabinet was not the same as searching a more expansive, and personal, cellphone.  Further, we looked in August 2013 at a First Circuit case, United States v. Wurie, in considering whether the “incident to arrest” doctrine which had permitted officers to conduct warrantless examinations of suspects’ cigarette packs and wallets really could justify the search of their cellphones.

These disparate discussions had in common considered the evident difficulty experienced by courts at all levels in applying principles of two hundred years’ vintage to emerging technologies and storage media.  Finally, the Supreme Court this week spoke for the first time to that conflict, or at least to one of its subsets.  In a unanimous decision in Riley v. California, No. 13-132, and its companion case, Wurie, No. 13-212, 573 U.S. ____ (June 25, 2014), the Court invalidated an “incident to arrest” search of the suspects’ cellphones.  The traditional concerns which animated this warrant exception — officer safety and the risk of evidence destruction — were not readily applicable to a device which is markedly unlike the physical objects previously considered.  “Cell phones … place vast quanities of personal information literally in the hands of individuals.  A search of the information on a cell phone bears little resemblance to the type of brief physical search considered in [previous "incident to arrest" cases].”  Slip op., at 9-10.

There is no doubt that defendants can use the Riley decision to support suppression motions involving a variety of other electronic storage media and a number of other search circumstances.  The Riley case marks a watershed in Fourth Amendment jurisprudence — what suffices as probable case for a warrant to search a file cabinet cannot any longer justify the search of a laptop possibly containing personal information found there, and circumstances which may support a consent search of a home may not allow the search of an iPad located in the home.

(Alain Leibman, Esq., the author of this entry and a co-editor of this blog, 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)

 

Government Cannot Punish Defendant Who Dares Present Sentencing Argument By Withholding Acceptance Of Responsibility Reduction

Posted in Sentencing

Alain Leibman writes:

In the recent case of United States v. Evans, 744 F.3d 1192 (10th Cir. 2014), discussed here in the context of loss calculation for sentencing purposes, the defendant had entered into a plea agreement.  In it, the Government and defendant reserved their respective rights to argue about the amount of loss at sentencing, and the Government agreed to a three-level downward adjustment for acceptance of responsibility.  The third-level reduction, awarded under Section 3E1.1(b) of the Sentencing Guidelines, is routinely agreed to as a matter of plea negotiation, but under the terms of the Section literally becomes applicable when the early guilty plea can be said to allow the Government, and the court, to allocate resources efficiently, i.e., avoid preparing for trial.  Procedurally, however, the Section requires a motion of the Government to actuate that third-level of sentence reduction.

Predictably, Evans vigorously argued about the proper calculation of “loss” in his case, even filing two sentencing memoranda to drive home his argument that, in this investment fraud case, the losses of his investors in low-income rental housing were precipitated largely by the country’s economic downturn, not by his actions.  The vindictive prosecutor then withheld the motion necessary to allow the sentencing judge to grant Evans a third-level reduction for acceptance of responsibility, thereby increasing his sentencing exposure and his ultimate sentence.

The Tenth Circuit held that the Government’s decision to withhold the motion bore no rational relationship to any resource allocation considerations.  Moreover, the defendant’s insistence on arguing about the loss calculation was not inconsistent with accepting responsibility for the crime.   Therefore, the district court’s judgment declining to award the extra level of reduction was clear error, and the sentence was vacated.

(Alain Leibman, Esq., the author of this entry and a co-editor of this blog, 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)

 

Economic Downturn May Reduce “Loss” Amount Under Frauds Guideline Section

Posted in Sentencing

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 and a co-author of this blog, 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)