This article first appeared February 29, 2016, on FEE.org – you can access this version here.
Remember Martin Shkreli, the “pharma bro” notorious for raising the price of his company’s life-saving drug by some 5,000 percent? Did you know he was recently arrested for securities fraud (completely unrelated to the drug hike)? It didn’t take long for the Justice Department to go after the universally unpopular rapscallion.
Big government gets a bad rap for being inefficient, but it can cut to the chase rather swiftly when it wants to. In order to stop, or at least dramatically curb, behavior that goes against law or policy — or perhaps just opinion — government enforcement agents know how to employ a show of force and to make an example of someone they deem a wrongdoer. The punishment is public and can be severe.
Setting an Example
A recent show of force can be seen in federal actions against the dietary supplement industry. The industry has exploded in recent years, thanks in large part to the public’s growing love for health and homeopathy. The popularity has, predictably, attracted moneymakers of both the scrupulous and unscrupulous kind.
The government wants to rein in the industry, so to set an example it has come down hard on one company. USPlabs was one of more than 100 makers and marketers of dietary supplements against whom the Justice Department announced it was pursuing civil and criminal cases. But the company had the unfortunate luck to become the government’s example of what it can do to wrongdoers. Not only did the DOJ charge the company; it also indicted several of its executives and froze their assets — from investment accounts to homes to automobiles.
Do the Ends Justify the Meanness?
The government’s heavy hand on USPlabs is the kind of crackdown you expect against organized crime or large drug rings. What were the criminal defendants at USPlabs alleged to have done? Not exactly Sopranos-level stuff: importing ingredients with false certificates of analysis and false labeling, misrepresenting the source and nature of product ingredients, selling products without determining safety, and continuing to sell products after they told agents they would stop.
If the allegations are true, the defendants’ actions were wrong. But public arrests and asset seizure are extreme. How often do people accused of false labeling get perp walked? The DOJ’s tactics look like shock-and-awe theater for the benefit of others.
If there is any doubt whether the government wanted to use its hard-line approach against USPlabs as an example for other companies, look no further than this statement by FDA Deputy Commissioner Howard Sklamberg: “The criminal charges against USPlabs should serve as notice to industry that if products are a threat to public health, the FDA will exercise its full authority under the law to bring justice.”
In other words, makers and marketers of dietary supplements: beware!
You may think the Justice Department performed a public service by coming down so hard on Shkreli and USPlabs. Why should we care if the government crushes some scalawags and discourages others in the process?
What if the government’s show of force comes at the cost of a defendant’s due process rights? Shkreli has said that the feds targeted him because of the drug price hike, looking for anything to stop him. Now he’s been fired and his company has filed for bankruptcy. That’s a pretty high price to pay for being obnoxious.
While deterrence may be an acceptable basis for punishment, it doesn’t justify punishment that exceeds the crime. Arresting executives and seizing their personal bank accounts, homes, and cars in an instance like this is excessive. More commonly in cases like USPlabs, prosecutors will settle with the company, levy a fine against it, require it to institute controls to avoid further wrongdoing, and perhaps require it to be monitored for a while to ensure controls are being observed.
Going after the individual executives as if they were Mafia kingpins goes beyond the pale. Freezing or seizing assets is something that prosecutors more commonly do when those assets are being used to carry out criminal behavior, or when there is a great risk those assets will be disposed of before judicial proceedings. Chances are slim that the executives in the USPlabs matter were planning on liquidating their family homes or cars.
Yet Another Slippery Slope
For those who think the government is on the right side in its show of force, ask yourselves whether the government isn’t pursuing its initiatives (even reasonable initiatives like reining in fraud) a bit brutishly. Making an example of an alleged wrongdoer even before the wrongdoer’s day in court harkens back to techniques used by conquerors in days of old who put heads on pikes to show the subjugated just who was in charge.
And what if the government decides to crack down on behavior not so clearly reprehensible? Say the government decides to put speeding in check by jailing a few folks going modestly over the limit. How many of us would feel safer?
Even when we dislike the targets of prosecutorial zeal, supporting justice is in our self-interest. When the government sets aside due process and proportionality to set an example of other would-be wrongdoers, they are sacrificing justice for the sake of regulatory expediency.
Beating their chests and breathing fire to rouse the polity, the Department of Justice recently came out with an announcement as earth shattering as the sun rising. The DOJ proclaimed it has adopted new policies to prioritize the prosecution of individuals for white-collar crime.
Deputy Attorney General, Sally Q. Yates, was quoted in the New York Times: “It’s only fair that the people who are responsible for committing those crimes be held accountable. The public needs to have confidence that there is one system of justice and it applies equally regardless of whether that crime occurs on a street corner or in a boardroom.”
What’s the hoped-for public response? Probably something like this: “And the crowd goes wild. Finally, after years of corporate executives sporting Teflon and sliding past investigators, the government is going to put its fist down and make the wrongly rich execs pay for their nefarious acts of fraud, insider trading, embezzling, racketeering, and tax evasion! “
But things look a little different in the actual world of white-collar criminal investigations and defense. In fact, prosecutors from the Southern District of New York and across the country are zealously prosecuting employees accused of white-collar offenses, and their companies are never shy about providing the backup data regulators request.. What’s more, convicted offenders are often subject to penalties far exceeding their crimes, as U.S. District Judge Jed Rakoff noted in the 2012 sentencing of Rajat Gupta.
The fact of the matter is that the DOJ doesn’t need to announce a new policy to go after individuals for white-collar crimes. The reality on the ground is we deal with employees being investigated and indicted all the time.
So why did Washington make the announcement? It sounds more like a PR stunt than anything else. Perhaps the Administration is gearing up for the next election cycle, which includes some obvious key elections. The DOJ wants to have a strong response to public outcries for accountability at the opportune time of impending regime change. In prior election cycles, administrations have taken some sort of hard stance on crime and punishment, whether it is increasing sentencing guidelines or messaging prosecutors about white-collar plea agreements.
From our viewpoint, it’s a little hard to take the DOJ’s new policy announcement at face value. We don’t see any recent motivation (outside PR). However, it’s also true that the wheels of Justice move slowly and this may just be a reflection from public dissatisfaction after the 2008 economic crisis, which saw corporations, but few Wall Street execs, held accountable. Regardless, we see the DOJ’s announcement much ado about nothing.
This week, the United States Supreme Court resolved some fishy matters on which prosecutors sought to base a federal felony conviction.
The case, Yates v. United States, arose from a offshore inspection of a commercial fishing vessel in the Gulf of Mexico. During the inspection, a federal agent found that the ship’s catch contained undersized red grouper, in violation of federal conservation regulations. The agent instructed the ship’s captain, Mr. Yates, to keep the undersized fish segregated from the rest of the catch until the ship returned to port. But after the officer left, Yates instead told a crew member to throw the undersized fish overboard. Yates was subsequently charged with destroying, concealing and covering up undersized fish, in violation of Title 18, United States Code, section 1519. That section provides that a person may be fined or imprisoned for up to 20 years if he “knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence” a federal investigation.
At trial, Yates moved for a judgment of acquittal on this charge, noting that the provision was part of the Sarbanes-Oxley Act of 2002. That law was designed to protect investors and restore trust in financial markets after the collapse of Enron Corporation. Yates argued that the reference to “tangible object” was meant to refer to objects that store information, such as computer hard drives, and did not refer to fish. The Court denied the motion and the jury convicted Yates, and the Eleventh Circuit Court of Appeals affirmed the conviction, finding that fish are objects having physical form, and therefore fall within the dictionary definition of a “tangible object.”
In a majority opinion authored by Justice Ginsburg (and joined by the Chief Justice, Justice Breyer and Justice Sotomayor), the Court relied upon “[f]amiliar interpretive guides” in ruling that the “tangible object” to which section 1519 referred was indeed used to record or preserve information. In so ruling, the Court placed significant emphasis on context – in particular, the other parts of Title 18, Chapter 73. The Court noted Congress placed section 1519 at the end of that chapter immediately after pre-existing specialized provisions expressly aimed at corporate fraud and financial audits. The Court also noted the contemporaneous passage of section 1512(c)(1), which prohibits a person from “alter[ing], destroy[ing], mutilat[ing], or conceal[ing] a record, document or other object . . . with the intent to impair the object’s integrity or availability for use in an official proceeding” – a provision that would be unnecessary if section 1519’s reference to “tangible object” already included all physical objects. The Court also applied the statutory interpretation canons of noscitur a scoiis (“it is known from its associates”) and ejusdem generis(“of the same kind”), noting that beginning the provision with “any record [or] document” directs that the “tangible object” later referenced must be one used to record or preserve information. The Court also noted that the rule of lenity required that it resolve the dispute against finding criminal liability here. Justice Alito filed a concurring opinion relying on a narrower basis, while Justices Kagan, Scalia, Kennedy and Thomas dissented from the Court’s ruling.
The Court’s opinion in Yates makes for good reading for aficionados of classic statutory interpretation, and the Court’s decision to find that the scope of the statute was narrower than suggested by the government is a welcome respite from the seemingly ever-increasing scope of crimes in the U.S. Code. Congress could certainly pass legislation to make clear if it intended to include other tangible objects in the scope of this provision. But for now, tossing back the little ones does not constitute a SOX crime.
In an effort to reinstate powers stripped from them by the Court of Appeals in U.S. v. Newman and Chiasson, prosecutors have sought a rehearing of the landmark Second Circuit decision which severely curtailed the scope of insider trading cases.
The case is one which has already seen a dramatic reversal, so it is perhaps no surprise that prosecutors are hoping for the tide to turn in their favor. In trial court, the jury heard evidence that financial analysts received insider information from sources at two companies, Dell and NVIDIA, disclosing the companies’ earnings before those numbers were publicly released. The financial analysts in turn passed that information along to hedge fund traders Todd Newman and Anthony Chiasson, who executed trades in the companies’ stock.
Those transactions earned Newman’s funds approximately $4 million and Chiasson’s funds approximately $68 million. The prosecution charged both defendants with insider trading based on the trades they made with early knowledge of the earnings reports. The trial judge instructed the jury that the defendants could be found guilty if they had knowledge that the information “was originally disclosed by the insider in violation of a duty of confidentiality.” On December 12, 2012, the jury returned guilty verdicts for both defendants on all counts.
Newman and Chiasson appealed their convictions, arguing among other things that the prosecution had failed to present evidence that they had engaged in insider trading and that the trial judge improperly instructed the jury as to the level of knowledge required to sustain a conviction. Newman and Chiasson argued that the government must prove beyond a reasonable doubt not only that the information was originally disclosed by the insider in violation of the duty of confidentiality, but that the insider disclosed the information in exchange for personal benefit.
The Court of Appeals agreed with their arguments, and found that the government had failed to present sufficient evidence that the insider received any personal benefit from sharing the information, or that Newman and Chiasson had knowledge of any such personal benefit an insider received from sharing the tip.
The Second Circuit’s December 10, 2014 opinion clearly lays out the requirements for “tippee liability,” that is, liability for one who received a tip originating from a corporate insider:
(1) The corporate insider was entrusted with a fiduciary duty; (2) the corporate insider breached the fiduciary duty by (a) disclosing confidential information to a tippee (b) in exchange for personal benefit; (3) the tippee knew of the tipper’s breach, that is, he know the information was confidential and divulged for personal benefit; and (4) the tippee still used that information to trade in a security or tip another individual for personal benefit.
Based on this standard, the Court of Appeals concluded that “without establishing that the tippee knows of the personal benefit received by the insider in exchange for the disclosure, the Government cannot meet its burden of showing that the tippee knew of a breach.”
The opinion also issued a stern rebuke of “recent insider trading prosecutions, which are increasingly targeted at remote tippees many levels removed from corporate insiders.” This admonition could be fairly interpreted as being directed toward Manhattan United States Attorney Preet Bharara, who has been aggressively prosecuting Wall Street insider trading cases and has obtained approximated 85 convictions so far. Mr. Bharara issued a statement saying that the decision “interprets the securities law in a way that will limit the ability to prosecute people who trade on leaked inside information.”
The court has yet to rule on the prosecution’s January 23, 2015 request for a rehearing of the case. Until any modification is issued, the Newman ruling remains the controlling law of the Second Circuit and it will affect other cases. Already, at least a dozen criminal defendants in the Southern District of New York have cited to the case in requesting to overturn their conviction or vacate their guilty pleas.
For instance, soon after the Second Circuit issued its ruling in Newman, a federal judge in Manhattan vacated the guilty pleas of four men charged with insider trading related to IBM: Daryl Payton, Thomas Conradt, David Weishaus, and Trent Martin. Instead of bringing the case to trial, the prosecutors instead asked Judge Andrew Carter to dismiss the indictment. However, the prosecutors indicated that if the Newman decision is altered on rehearing or appeal, they might consider bringing the charges again. Appeals of previously convicted defendants will likely remain on hold pending the court’s decision on the requested Newman rehearing. Regardless of the outcome on rehearing, the Newman decision is a strong indication that courts are making a concerted effort to rein in prosecutorial overreach.
Photo Credit: Steve Helber, AP
This afternoon, the long-running saga of Robert McDonnell came to what may be the end (not counting appeals) when the former Virginia Governor was sentenced to serve two years in prison after a jury convicted him of bribery while in office. As with many cases, this one has lessons to teach for those of us who carefully follow sentencing advocacy in federal criminal cases.
One lesson that we have observed before – but is worth repeating – is how powerful it can be to present a sentencing judge with written or spoken testimonials about the otherwise good character of the defendant. In the presentence report, the Probation Department had recommended an advisory sentencing range under the U.S. Sentencing Guidelines of more than ten years, though the judge concluded that the proper advisory range was 6-1/2 to 8 years. But the defense presented some 440 letters in support of the former Governor, as well as live testimony from a number of witnesses. Even the Assistant United States Attorney, who asked for a harsh sentence to be imposed on Mr. McDonnell, conceded that the letters and testimony were moving.
That, of course, is the point: When a criminal defendant – especially one convicted by a jury that rejected his testimony – comes before a judge for sentencing, all that the judge knows about him is that he has committed a crime. Letters and testimony help the defense to present the judge with a three dimensional human being, and facilitate the judge’s fuller consideration of the imposition of a fair and just sentence. In the case of Rajat Gupta, Judge Jed Rakoff was moved by the letters of hundreds of supporters to sentence him to a two-year sentence despite prosecutors’ calls for a sentence of ten years in prison. Here, Judge James Spencer was likewise motivated by evidence of Mr. McDonnell’s character to find that a sentence of eight years “would be unfair, it would be ridiculous, under these facts.”
But there is also a second lesson to be learned from Mr. McDonnell’s sentencing, and it is also one that is often repeated: No one is above the law, and indeed, we may hold our public officials to a higher moral standard in their conduct. Judge Spencer’s comments at sentencing reflected this view: “A price must be paid,” he said. “Unlike Pontius Pilate, I can’t wash my hands of it all. A meaningful sentence must be imposed.” For that reason, among others, Judge Spencer rejected defense lawyers’ calls for a non-incarceration sentence that they had suggested, which could have included thousands of hours of community service.
On April 28, 2014, Ifrah Law attorneys Jeff Hamlin and Casselle Smith attended a symposium on incarceration presented by The Johns Hopkins University and its Urban Health Institute. The day–long program focused on adverse impacts of mass incarceration and potential strategies for mitigating them and reversing trends toward continued prison growth. Throughout the day, panels comprised of medical professionals, sociologists, legal scholars, and ex–offenders took the stage to address issues bearing on their areas of expertise.
Panelists discussed the effects of over–incarceration on individual liberty, family cohesion, and economic inequality, among other things. Many speakers emphasized the critical importance of upstream intervention. To this point, House Representative Elijah Cummings (D-Md) challenged communities to provide children with opportunities in sports, scouts, band, and other activities that can offer a positive sense of belonging. Others emphasized the value of post-incarceration solutions, including decarceration, education, and re–entry assistance.
Much of the afternoon discussion revolved around underreported effects of incarceration, including the lifelong consequences of a felony record. Too often, criminal defendants serve their time only to face a new set of challenges upon their release. Ex–offenders typically lack meaningful options for lawful employment outside of prison. The structural barriers to prosperity erected in the aftermath of incarceration can be as confounding as the time served—especially for those stationed on the lower rungs of socioeconomic stratification. This lack of opportunity is a catalyst for recidivism and ends up perpetuating the cycle of crime.
In his keynote address, Rep Elijah Cummings lamented that the real sentence is not the incarceration, but the criminal record that follows you until you die. The day after Cummings’ address, the Baltimore City Council passed legislation to address that problem. The “Ban the Box” bill—named for the criminal history checkbox that has become commonplace on job applications—makes it a crime for private businesses (with at least 10 employees) to “require an applicant to disclose or reveal whether he or she has a criminal record” before a conditional job offer has been made. The bill has teeth. Failure to comply is a misdemeanor violation that can result in fines up to $500 and up to ninety days in jail.
According to local reports, Baltimore Mayor Stephanie Rawlings-Blake strongly supports the bill. It will take effect 90 days after she signs it into law. The next test will be effective implementation and enforcement to ensure its success. We will continue to monitor its evolution and report on major developments.
The Urban Health Institute plans to upload video clips of the panel discussions and speeches. Video clips of panel discussions and speeches can be viewed at the Urban Health Institute’s YouTube channel.
In a key sentencing decision handed down this year, the United States Supreme Court held that the Ex Post Facto Clause is violated when a defendant is sentenced under provisions of the Federal Sentencing Guidelines promulgated after he committed the crime and those new provisions result in an increased risk of greater punishment. In addition to clarifying the proper application of different versions of the Sentencing Guidelines, this is a particularly significant decision because the Supreme Court has now held that even post-Booker, an error in calculating merely advisory guidelines ranges still invalidates the sentence.
Marivn Peugh and his cousin Steven Hollewell were charged in 2008 with nine counts of bank fraud in connection with a check kiting scheme from 1999 to 2000 that allegedly caused the bank to suffer over $2 million in losses. Hollewell pleaded guilty to one count of bank fraud and was sentenced to one year and one day imprisonment. Peugh pleaded not guilty and went to trial where he testified that he had not intended to defraud the banks. Peugh was nonetheless convicted by the jury of five counts of bank fraud, although he was acquitted of the remaining counts.
At the time of Peugh’s offense (in 1999 and 2000), the 1998 Guidelines were in effect. Under the 1998 Guidelines, the base offense level applicable to his offense was six, and thirteen levels were added for a loss amount of over $2.5 million, creating a total offense level of nineteen. The government argued for an additional two level enhancement for obstruction of justice, which brought the total offense level to 21. Since Peugh was a first time offender in criminal history category I, he had an advisory sentencing range of 37-46 months under the 1998 Guidelines.
When Peugh was sentenced in 2010, the district court applied the 2009 Guidelines which were then in effect. Under the 2009 Guidelines, the base offense level applicable to Peugh’s conduct was now seven, and the enhancement for a loss value of over $2.5 million added an additional eighteen levels. After adding the two level enhancement for obstruction of justice, Peugh’s total offense level under the 2009 Guidelines was 27 – six levels higher than under the 1998 Guidelines. With a criminal history category of I, the advisory range for sentencing was 70-87 months – roughly double the range under the earlier version of the Guidelines. The district court sentenced Peugh to 70 months imprisonment, at the low end of the advisory Guidelines and he appealed the decision.
The U.S. Court of Appeals for the Seventh Circuit affirmed the sentence from the district court and quickly dismissed Peugh’s argument that the sentence violated the Ex Post Facto Clause. Relying on its own 2006 decision in United States v. Demaree, the Court held that the advisory nature of the Sentencing Guidelines post-Booker makes moot any argument that the application at sentencing of an increased Guidelines range at sentencing was not in effect at the time of the offense violates the Ex Post Facto Clause. This ruling was no surprise given that the Seventh Circuit has reaffirmed this proposition twice since it issued its 2006 ruling in Demaree.
The Supreme Court granted certiorari to resolve a Circuit split on this issue. On appeal, the focus of the Court’s analysis was on whether the Guidelines – which, post-Booker, are admittedly advisory – are sufficiently material to judges’ decisions about sentencing to warrant application of the Ex Post Facto Clause. In support of his argument, Peugh relied upon empirical evidence showing the judges are indeed influenced in their sentencing decision making by the Guidelines even if those Guidelines are not binding. On the other hand, the government argued that there was no precedential basis for the application of the Ex Post Facto Clause to a provision of law that is merely advisory.
In its holding the Court emphasized that the intent of the Ex Post Facto Clause was that it “ensures that individuals have fair warning of applicable laws and guards against vindictive legislative action.” Even where these concerns are not implicated, the Court held that the Ex Post Facto Clause also “safeguards a fundamental fairness interest.” The Court noted that, while the Guidelines are advisory, judges are still required, under Gall and by statute to begin their sentencing determination by correctly calculating the applicable Sentencing Guidelines range. The Court noted that continued vitality of the Guidelines in encouraging uniformity in sentencing by creating procedural hurdles that make the imposition of a sentence outside the guidelines range less likely. In doing so, the majority rejected the argument in Justice Thomas’ dissent that the advisory nature of the Guidelines means that do not “meaningfully constrain” a judges’ discretion.
The ruling in Peugh provides clear guidance to district judges that the version of the Sentencing Guidelines to be applied is the one in place at the time that the defendant committed his or her conduct constituting an offense. Of course, the Court’s ruling does not resolve how that principle will apply in cases involving charges such as conspiracy that may occur over a substantial period of time during which there may be multiple versions of the Guidelines. That issue and others will undoubtedly be the subject of litigation to come.
A $3 billion fraud scheme, more farcical than dangerous and in any case doomed to fail, led to 20-year sentences in federal prison for all four conspirators. The U.S. Court of Appeals for the 2nd Circuit, however, vacated the sentences on procedural grounds, and U.S. District Judge Stefan R. Underhill of the District of Connecticut, sitting by designation, wrote a concurrence that drew back the procedural curtain to shed light on what he saw as a fundamentally flawed corner of the administration of justice. This was the U.S. Sentencing Guidelines’ loss table, which he said was “divorced from its own objectives and from common sense” in this case.
The case, United States v. Juncal, came to the court on appeal from the District Court for the Eastern District of New York. The appellants – James Campbell, John Juncal, and Rodney Sampson – and their codefendant Emerson Corsey had been convicted of conspiracy to commit mail and wire fraud. The four men, posing as officers of a (fictional) Wyoming-based multinational bank and its client in Buryatia, an obscure region of Siberia, attempted to extract a $3 billion loan from a hedge fund to finance an (imaginary) Siberian oil pipeline. In exchange for the loan, they offered to assign to the hedge fund $5 billion in U.S. Treasury notes, which they claimed would generate a $14 billion return in just five short years. When a broker asked for physical evidence of the T-notes, the defendants explained that they had hidden the notes in Austria for safe keeping. The defendants did, however, send the broker copies of T-notes from their AOL account.
The absurd nature of these facts notwithstanding, the defendants’ offense levels were calculated based on an intended loss amount of $3 billion, and each received the statutory maximum sentence for fraud: 20 years in prison. At sentencing and on appeal, counsel for the defendants highlighted the significant flaws in the loss calculation, arguing that the “30-point mega-enhancement vastly overstated both the seriousness of the offense, and the danger of appellants to their community.
At sentencing, their arguments fell on deaf ears. On appeal, they did not. The Second Circuit questioned the lower court’s failure to apply (or even address the merits of) a reduced sentence and remanded the case for resentencing. Because the case was “clouded by the possibility of error,” the appeals court “felt it appropriate to give the District Court an opportunity to clarify its thinking.” The case was remanded on procedural grounds, and the appeals court declined the appellants’ request to consider whether the sentences were substantively unreasonable.
Judge Underhill began his nine-page concurrence by first agreeing that the sentences should be vacated and remanded for procedural error. However, he also noted that “the real problem is that the sentences are shockingly high.” For that reason, he “would reach the question of substantive reasonableness and would reverse on the merits.” In his view, “the loss guideline is fundamentally flawed, and those flaws are magnified where, as here, the entire loss amount consists of intended loss. Even if it were perfect, the loss guideline would prove valueless in this case, because the conduct underlying these convictions is more farcical than dangerous.”
Underhill went on to explain that the current guidelines are the result of three increases in the recommended ranges for fraud crimes, each of which “was directed by Congress, without the benefit of empirical study of actual fraud sentences by the Sentencing Commission.” He also noted the common perception that the loss guidelines are broken, and highlighted their widely inconsistent implementation among the district judges. However, since this case could be decided on procedural errors, the circuit court was able to remand the case without expressing a view on the substantive issues that Underhill highlighted.
In so doing, however, the appeals court may have overlooked an opportunity to fashion a common- law reasonableness standard to protect the administration of justice in future cases.
There are many arguments to support the avoidance of knotty substantive issues when their examination will not affect the final outcome of the case. As Underhill himself pointed out, courts ordinarily examine the procedural issues first before applying an abuse-of-discretion standard to examine the substantive reasonableness of a sentence. However, that practice creates a slippery slope: district court judges are forced to proceed without meaningful guidelines, and abuses of discretion go unnoticed.
A recent D.C. Circuit Court of Appeals decision narrows the ability of the government to revisit uncharged crimes against a person whose plea has been vacated due to a change in the law.
In 2007, Russell Caso had pleaded guilty to conspiracy to commit honest-services wire fraud, in violation of 18 U.S.C. §§ 371, 1343 and 1346, based on certain conduct during his employment as U.S. Rep. Curt Weldon’s chief of staff. Caso was sentenced to three years’ probation, including a 170-day term of home confinement. In entering its plea agreement with Caso, the government had forgone the right to charge Caso also with a violation of the false statements statute for failing to include certain payments on his annual disclosure statement required by virtue of his status as a federal employee.
Shortly after Caso was sentenced, the U.S. Supreme Court handed down its decision in Skilling v. United States, 130 S. Ct. 2896 (2010) – a decision that substantially limited the permissible reach of Section 1346, the honest-services fraud statute – with the result that Caso was indisputably innocent of the crime for which he was charged and convicted. The government did not dispute this point but nevertheless opposed Caso’s motion to vacate his conviction.
The government argued that Caso had procedurally defaulted his Skilling challenge because he had not directly appealed his conviction on the ground that the conduct to which he pleaded did not constitute an offense, and therefore was barred from raising this issue on a habeas petition. The government also argued that Caso had failed to satisfy the narrow conditions for excusing such a default that the Supreme Court set out in Bousley v. United States, 523 U.S. 614 (1998): (1) “cause” for the default and “actual prejudice” resulting therefrom; or (2) that the defendant is “actually innocent.”
In denying Caso’s petition (which argued only the second of these exceptions), the District Court agreed with the government, and focused on the Bousley Court’s rule that, “[i]n cases where the Government has forgone more serious charges in the course of plea bargaining, petitioner’s showing of actual innocence must also extend to those charges.” (emphasis added) Based on that rule, the District Court held that Caso had to demonstrate his “actual innocence” not only of the crime for which he was charged and convicted (honest-services wire fraud) but also of the separate uncharged offense of making a false statement, a crime that the government argued was at least equally serious as the honest-services fraud charge. Because Caso could not show his actual innocence of the false statement charge in light of the admissions he made as part of his plea agreement, the District Court denied his motion to vacate his conviction and sentence.
The D.C. Circuit reversed this decision based its reading of what constitutes “more serious charges” under Bousley. In doing so, the appeals court rejected the government’s argument that seriousness is to be determined based on the statutory maximum sentence for each crime, and found it far more logical to base the question of seriousness on the way in which each crime is treated in the United States Sentencing Guidelines. Quoting the Supreme Court’s Gall decision, the court noted that Guidelines calculations are still “the starting point and initial benchmark” for every sentencing decision and that “district courts must begin their analysis with the Guidelines and remain cognizant of them throughout the sentencing process.”
The court also noted that the United States Attorneys’ Manual, in directing prosecutors to charge “the most serious offense that is consistent with the nature of the defendant’s conduct,” explains that “[t]he ‘most serious’ offense is generally that which yields the highest range under the sentencing guidelines.”
The court also noted that statutory maxima provide the parties with little useful information in the context of plea negotiations, in part because courts rarely sentence defendants to the statutory maxima. Because the Guidelines treat a violation of the false statements statute less seriously than honest-services fraud, the Court of Appeals held that the forgone false statement charge was not “more serious,” and that Caso need not show his innocence of that charge to support his claimed right to vacating of his conviction for honest services fraud.
The fact that that the D.C. Circuit relied upon the Guidelines as the justification for its ruling is particularly interesting given that recent attacks on the reasonableness of some of the Guidelines (particular the Section 2B1.1 loss tables) have sapped the Guidelines of some of their authority. It is possible that this ruling could change the way in which prosecutors structure their pleas, but circumstances such as this one, in which a defendant is found innocent of convicted charges because of a change in the law, are rare enough that this is not likely. To the extent that courts face similar cases, they will have to address issues left unresolved by the D.C. Circuit, such as whether there must be contemporaneous evidence that prosecutors considered the forgone charge at the time, and whether a crime of “equal seriousness” (and not “more serious”) falls within the Bousley rule.
The U.S. Court of Appeals for the 11th Circuit recently ruled on an issue lying at the intersection of fraud conspiracies and the U.S. Sentencing Guidelines: the government’s separate burden of proof against each co-defendant when multiple plea bargains are entered. Specifically, the 11th Circuit was addressing whether the government presented sufficient evidence to show, in a credit card fraud case, that the defendant’s criminal activity affected at least 250 victims. Finding that the government had come dramatically short of meeting its evidentiary burden, the appeals court opened its opinion with a flare of witty admonition: “Sometimes a number is just a number, but when the number at issue triggers an enhancement under the Sentencing Guidelines, that number matters.”
The facts of this case are as interesting as the court’s tone. The defendant was Gary Washington, who pleaded guilty to four offenses related to his role in a credit card fraud conspiracy that affected more than 6,000 individual cardholders. At first blush, it stands to reason that his sentence was calculated using a level-6 enhancement, which is reserved for crimes affecting 250 or more victims. However, there was a critical issue that the government and the district court failed to appreciate: Washington didn’t enter the conspiracy until four months after its inception, so the full victim count couldn’t be summarily applied to him.
Remarkably, before the sentencing hearing, Washington conceded that “in all probability there were more than 250 victims.” However, his sticking point was that he wanted the government to submit “hard evidence” supporting a level-6 enhancement in place of its “verbal assurances.” The government essentially ignored his requests and proceeded to the hearing without submitting additional evidence. Washington objected again at the sentencing hearing, but the district court overruled his objection and applied the level-6 enhancement, noting that the figure had been applied to the other defendants’ sentences.
On appeal, the 11th Circuit found the government’s representations insufficient and stated that “evidence presented at the trial or sentencing hearing of another may not – without more – be used to fashion a defendant’s sentence if the defendant objects.” The appeals court pointed out that it was especially inappropriate to use the other co-defendants’ sentences as a guide, because Washington joined the conspiracy well after it began. Following this reasoning, the appeals court set aside Washington’s sentence and remanded the case to the lower court for resentencing. The 11th Circuit declined the government’s request to present additional evidence on remand, because nothing had prevented it from presenting sufficient evidence at the original sentencing hearing.
This case is another example of federal prosecutors and trial courts losing sight of our system’s fundamental canon: a defendant is innocent until proven guilty. In some instances, the procedural safeguards that protect this system may seem inefficient and unnecessary. However, the alternative would beckon trial courts down the slippery slope of replacing actual evidence with assumptions. Fortunately, the appeals courts are present as a way of reining them in.