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White Collar Defense & Compliance Developments in Criminal Law, Federal Case Law and Statutory Developments

Complications In Loss Analysis Lead Sentencing Judge To Abandon Restitution Altogether And To Eschew Victim Loss In Favor Of Lesser Defendant Gain In Calculating The Sentencing Guidelines

Posted in Sentencing

Alain Leibman writes:

In bank fraud cases, sentencing courts are obliged under the advisory Sentencing Guidelines to fix the "loss" at the greater of actual or intended loss to the victim, and to resort to the (usually more defendant-friendly) lesser gain from the offense only if that loss "reasonably cannot be determined." U.S.S.G. § 2B1.1, cmt. n. 3(B). The difference is often dramatic and resort to a gain-based sentence almost always greatly benefits the defendant, frequently reducing or eliminating the potential for a jail sentence.

So, defense counsel is well-advised to make every effort to persuade the sentencing court that an actual/intended loss calculation is exceedingly difficult (as when many witnesses would have to testify), problematic (because of causation or intervening-event principles), or unproven by the government, pushing the judge toward a gain-based calculation. The recent case of United States v. Martinez, 690 F.3d 1083 (8th Cir. 2012), shows both how it is done and why it matters. Martinez was the CFO of a food distributor dependent on a large line of credit from its bank, secured by accounts receivable and inventory. To stave off the company’s financial difficulties, Martinez inflated the value of the collateral for the line of credit, leaving the company’s debt at $55 million when the bank discovered the fraud. That debt had dropped to $20 million by the time the company later filed for bankruptcy, and to $2.8 million after the sale of some collateral in bankruptcy. During the one-year period of the actual fraud, Martinez received $48,000 in salary.

At a sentencing hearing, the district court took testimony from a number of bank officials, trying to determine the value of any remaining collateral and the effect of future collection activity against that collateral, a complex endeavor, and to determine if the loss resulted from Martinez’s actions. The court held that it could not reasonably determine the amount of actual loss (higher than the intended loss, because Martinez did not truly intend a loss at all), and so resorted to Martinez’s meager gain to calculate the Guidelines range. The Eighth Circuit affirmed on the ground that the calculation of actual/intended loss could not reasonably be made; the government had failed to provide a basis for estimating the value of the remaining collateral and the bank’s testimony on this point was unhelpful.

As a further victory for the defense, the court of appeals also upheld the lower court’s decision to award no restitution to the bank. The Mandatory Victims Restitution Act, 18 U.S.C. § 3663(A), while generally requiring restitution to be ordered in such property crimes, pegs the restitution amount to the provable loss to the victim. But if arriving at this calculation requires the court to determine complex issues of fact and threatens to so prolong the sentencing process as to raise the burden on that process over the need to provide restitution, then the court need not order restitution. Ibid. The Eighth Circuit read this provision, as has the Second Circuit, to reflect a Congressional intent to streamline sentencing processes to prevent courts from being entwined in intricate issues of proof.

Moreover, giving some credence to a causation argument made by the defense, the court of appeals noted that since the company was going out of business regardless of the fraud and since the lower court would have had to hear from numerous additional witnesses, it did not abuse its discretion in deciding to deny restitution.
 

(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)