After Gupta’s Insider-Trading Conviction, What’s Next?

Yet another shoe has dropped in the long-running investigation and the series of prosecutions arising from allegations of insider trading in the stocks of Goldman Sachs and other companies. In May 2011, Raj Rajaratnam was convicted of insider trading and ultimately sentenced to 11 years in prison. On June 15, 2012, Rajat Gupta, a former director at Goldman Sachs, was convicted in the U.S. District Court for the Southern District of New York on four of six counts of an indictment that charged him with a conspiracy that included feeding inside tips to Rajaratnam in September and October 2008 about developments at Goldman Sachs.

As with the trial of Rajaratnam, the key pieces of evidence against Gupta appear to have been wiretapped conversations. The four charges on which Gupta was convicted all related to trades in support of which the government presented recorded conversations as evidence (though the government played only three recordings in the Gupta trial). The jury acquitted Gupta of two charges arising from other trades for which the government presented no such evidence. The jury clearly was influenced by hearing Rajaratnam on the recordings referring to his source on the Goldman Sachs board – powerful evidence that gave increased persuasive power to the government’s reliance on phone records showing substantial contacts between the two men.

Rajaratnam has appealed his conviction to the U.S. Court of Appeals for the Second Circuit, and one significant issue he has raised is whether the government improperly sought authority to wiretap the conversations that were the cornerstone of his conviction. That ruling will be very significant, both because a decision in Rajaratnam’s favor is likely to result in a reversal of Gupta’s conviction as well, and because the Second Circuit’s ruling may have a major impact on the future ability of prosecutors to continue to use wiretaps against white-collar targets.

While Gupta is likely to receive a prison sentence for his conviction, it seems likely that he will receive a lower sentence that Rajaratnam, who engaged in the trades in question and reaped the benefits of those trades – estimated at trial to have generated $16 million in gains or in avoided losses from Rajaratnam’s fund. While prosecutors may seek a higher sentence based on acquitted conduct, Gupta’s advisory range calculated under the U.S. Sentencing Guidelines may be as much as eight years in prison. There is also a significant question whether Judge Jed Rakoff, who has expressed frustration with what he calls “the guidelines’ fetish with abstract arithmetic,” will sentence Gupta to a shorter term than the one calculated under the Guidelines.

Sentencing Panel Amends Guidelines for Mortgage Fraud

Responding to a requirement in the Dodd-Frank Act that it review, and if appropriate, amend, the federal sentencing guidelines for mortgage fraud, the U.S. Sentencing Commission set forth on April 13, 2012, two new provisions that will affect sentencing for this type of crime.

Mortgage fraud became a significant issue in the recent financial crisis and the housing downturn, so the Commission’s changes are being closely watched in the financial services industry.

First, the Commission’s proposals, which will take effect on November 1, 2012, if not disapproved by Congress, add language to the “credits against loss” rule that affects the amount of loss to be considered for sentencing purposes in mortgage fraud cases. The determination of loss must be reduced by any money returned to the victim before the offense was detected and by the fair market value of any collateral that may not have been disposed of at the time of sentencing.

The problem is that often, if the collateral has not been disposed of by the time of sentencing, its fair market value may be hard to determine, and the absence of a uniform process for determining the value may result in disparities in sentencing.

The Commission decided that the value of the collateral should be determined as of the date on which the guilt of the defendant was established, and it established a rebuttable presumption that the most recent tax assessment value of the collateral constitutes a reasonable estimate of its fair market value. The commission said its intent is to provide a uniform practicable method for determining the fair market value of undisposed collateral while providing sufficient flexibility for courts to address differences among jurisdictions regarding how closely the most recent tax assessment tracks the fair market value.

Second, the Commission amended the application of an existing four-level increase in sentence if the offense involved specific types of financial harms such as jeopardizing the safety and soundness of a financial institution – such as making the institution insolvent, forcing it to reduce its benefits to pensioners or insureds, and the like.

The amendment adds as a new consideration whether one of the listed harms was likely to result from the offense, but did not in fact occur because of federal government intervention, such as a bailout. The Commission took the view that a defendant should not avoid the application of the four-level increase merely because the harm that was otherwise likely to result from the conduct did not occur because of fortuitous federal government intervention.

In some circumstances, this amendment could have the result of significantly increasing an offender’s sentence. We would expect prosecutors to argue that many interventions by the government, short of a fully announced “bailout,” should be taken into account and that sentences should be increased because of the “but-for” aspect of the defendant’s conduct: Had the government not stepped in, the defendant’s actions would have jeopardized a financial institution.

Brief Urges Supreme Court to Accept Rubashkin Sentencing Appeal

On May 3, 2012, Ifrah Law filed an amicus curiae brief in the U.S. Supreme Court on behalf of the Justice Fellowship and a group of law professors who practice in the areas of criminal law and sentencing. The brief was filed in the case of Rubashkin v. United States, a highly publicized case in which Sholom Rubashkin, the former operator of a kosher slaughter house, was sentenced to 27 years in prison in 2009 for 86 counts of financial fraud.

Rubashkin’s bid for a new trial after his conviction in federal court in Iowa was denied by the U.S. Court of Appeals for the 8th Circuit in 2011. Earlier this year, he filed a petition to the Supreme Court for certiorari.

The brief filed by Ifrah Law contends that that principles applied by the 8th Circuit in affirming Rubashkin’s sentence “are at odds with the principles applied by at least three other Circuit Courts of Appeal” and “could have a very negative impact on the law and policy of federal sentencing under advisory guidelines.”

Federal appeals courts, the brief contends, have the duty to ensure that all criminal sentences are “procedurally reasonable,” which includes the idea that sentences must not include unwarranted disparities with the sentences imposed for similar defendants who committed similar crimes.

Appeals courts, the brief says, have uniformly held that in order to permit meaningful appellate review on this issue, trial judges need to state on the record their reasons for accepting or rejecting the arguments that were made for or against the sentence that they imposed. “There is no way for the appellate court to determine whether the trial court considered [an] argument if the court does not address it explicitly,” the Ifrah brief said.

In the Rubashkin case, the trial court “failed to make any record that it considered the defendant’s non-frivolous argument regarding the need to avoid unwarranted sentencing disparities,” the brief points out. This failure, the brief says, is at variance with the rule in at least three other federal circuit courts of appeal.

Accordingly, the brief urges the Supreme Court to accept the case and to resolve the circuit conflict.

In addition, Rubashkin is also seeking Supreme Court review on a different issue – that the federal trial judge, Linda Reade, had in effect become part of the prosecution team by actively engaging in the planning of a raid on Rubashkin’s facility by federal agents and helping the agents plan their strategy. The “Sentencing Law and Policy” blog has used the term “prosecutorial and judicial misconduct” to refer to the judge’s alleged activity and the prosecution’s failure to inform the defendants about it.

We hope that the Supreme Court accepts this case and takes a step toward curbing the excessive concentration of power in the hands of federal prosecutors and judges.

Ifrah Law Blog Wrap-Up for November 2011

In November 2011, we at Ifrah Law expressed our views on a number of current issues in our blogs, Crime in the Suites and FTC Beat. This post summarizes and wraps up our thoughts from the month.

ACLU Wins FOIA Appeal on Prosecutors’ Use of Cell Phone Location Data

The Justice Department must turn over the names and docket numbers of numerous cases in which the government accessed cell phone location data without probable cause or a warrant.

Read the full post here on the Crime in the Suites blog.

Options for Suing the Federal Government Under Bivens Unlikely to Expand

U.S. Supreme Court argument indicates that the Justices are unlikely to extend Bivens to cover cases against private employees.

Read the full post here on the Crime in the Suites blog.

Judge Imposes 15-Year Sentence in FCPA Case; Appeal to Follow

This case will test the Justice Department’s expansive definition of “foreign official” under the statute.

Read the full post here on the Crime in the Suites blog.

High Court Hears Argument in GPS Fourth Amendment Case

The Justices grapple with issues of search and seizure in an online, wired world.

Read the full post here on the Crime in the Suites blog.

In Appeal of Construction Fraud Case, DOJ Seeks Tougher Sentences

This case, arising from Boston’s “Big Dig” project, will test the limits of a trial judge’s sentencing discretion.

Read the full post here on the Crime in the Suites blog.

Self-Regulation Reigns, for Now, on Consumer Data Privacy Issues

The online advertising industry is inching its way to more comprehensive policies regarding the collection of consumer data.

Read the full post here on the FTC Beat blog.

Google, Microsoft Assume Roles of Judge, Jury and Executioner on the Web

The Internet giants cancel the Web connections of companies that are accused by the government of mortgage fraud but have not been convicted.

Read the full post here on the FTC Beat blog.

New House Hearing Shows Strength of Hill Support for Legal Online Gaming

Many members of Congress remain serious that legal and technical obstacles can be overcome and that legislation can be passed in this area.

Read the full post here on the Crime in the Suites blog.

Convicted of Fraud but Changed Their Lives; Appeals Court Takes Note

A couple committed mortgage fraud back in the late ‘90s. The 7th Circuit gives them sentencing credit for self-rehabilitation.

Read the full post here on the Crime in the Suites blog.

More Big Pharma Companies Cough Up Big Dollars in DOJ Settlements

How high will these settlements go? The government has the power to strong-arm drug companies into settlements. How much will it demand?

Read the full post here on the Crime in the Suites blog.

Convicted of Fraud but Changed Their Lives; Appeals Court Takes Note

The U.S. Court of Appeals for the 7th Circuit recently issued a notable decision in the case of United States v. Robertson, vacating and remanding the sentences of two defendants convicted of a mortgage fraud scheme because the sentencing judge failed to consider unusually strong evidence of self-motivated rehabilitation.

In the late 1990’s, Henry and Elizabeth Robertson were involved in a mortgage fraud scheme through their company Elohim, Inc. The Robertsons bought residential properties and then sold those properties to buyers at inflated prices. They would provide lenders with false information about the buyers’ finances, sources of down payments, and intentions to occupy the properties. In total, the scheme involved 37 separate transactions and a net loss of more than $700,000 to various lenders.

The scheme eventually collapsed and the Robertsons went bankrupt and moved on with their lives. They were not charged with any crimes at the time. They began to rebuild their lives, with Elizabeth working full time as a hospital nurse and Henry working full time as a cable technician. They raised their three children and volunteered in the community. Neither of them engaged in any criminal activity from 1999 to 2010, apart from a reckless driving offense by Henry in 2002.

One day before the 10-year statute of limitations for one of their crimes would have expired, the government charged the Robertsons with one count of wire fraud and two counts of bank fraud. They both pleaded guilty to one count of wire fraud and were sentenced in March 2011. Elizabeth was sentenced to 41 months in prison, and Henry received 63 months in prison. They were also ordered to pay more than $700,000 in restitution.

On appeal, the Robertsons argued that the district court failed to adequately consider their unusually strong evidence of self-rehabilitation. The appeals court agreed.

The Supreme Court noted in Gall v. United States in 2007 that it was reasonable for the district court to attach “great weight” to a defendant’s decision to withdraw from a drug distribution conspiracy and on his own initiative change his life. The Court in Gall said it was not an abuse of discretion by the district court to sentence a man to probation who had pleaded guilty to conspiracy to distribute Ecstasy when the recommended guidelines range was 30-37 months imprisonment. The 7th Circuit found in this case, just as in Gall, that self-motivated rehabilitation “lends strong support to the conclusion that imprisonment [is] not necessary to deter [a defendant] from engaging in future criminal conduct or to protect the public from his future criminal acts.”

The 7th Circuit noted that 18 U.S.C § 3553(a) requires that any sentence imposed consider “the history and characteristics of the defendant.” The court stated that “[d]emonstrated self-motivated rehabilitation is direct and relevant evidence” of the characteristics of a defendant that should be considered in crafting a sentence.

Interestingly, the appeals court remanded the case to the district court for resentencing, but did not reach a finding that the sentence was substantively unreasonable. The district court was instructed to carefully weigh the evidence of the defendants’ self-motivated rehabilitation, but this leaves open the possibility that the district court could again issue a substantial prison sentence. No date has been set yet for re-sentencing.

In addition to Gall, the appeals court relied on the 2011 Supreme Court decision in Pepper v. United States. In Pepper, the Court held that when a defendant’s sentence has been set aside on appeal, a district court at resentencing may consider evidence of the defendant’s rehabilitation after the initial sentence, and if appropriate, may use this in support of a downward variance from the guidelines. This is in stark contrast to USSG § 5K2.19, which had been the dominant jurisprudence on the issue and stated that post-sentencing rehabilitation should not be considered. In Pepper, the Supreme Court stated that “the punishment should fit the offense and not merely the crime.” Here, the 7th Circuit is clearly taking much more than the loss amount into consideration in suggesting how a sentence should be crafted.

This is an important decision. It shows that courts must assess all important factors in the defendants’ lives in crafting a just sentence, even beyond the crimes of which they were convicted.

In Appeal of Construction Fraud Case, DOJ Seeks Tougher Sentences

In a very rare case in which the government argued that it viewed criminal sentences as too lenient, the U.S. Department of Justice contended in an appeal to the U.S. Court of Appeals for the 1st Circuit on Nov. 7, 2011, that the sentences handed out to two government contractors convicted of fraud did not accurately reflect the seriousness of their crimes.

Robert Prosperi, the former general manager of Aggregate Industries, N.E. Inc., and Gregory Stevenson, a former district operations manager for the company, were convicted of a total of 135 felony counts, including conspiracy to commit highway-project fraud, conspiracy to defraud the government with respect to claims, and making false statements in connection with highway projects. Aggregate Industries was a major concrete supplier for the $15 billion “Big Dig” tunnel project in Boston.

The charges arose out of a scheme to supply substandard or out-of-specification concrete to the federally financed project. The project specifications required that the concrete be installed within 90 minutes of being mixed and that “batch reports” be submitted recording the times of mixing and pouring to comply with this requirement. Approximately 500,000 concrete loads were delivered by Aggregate Industries during the period covered by the indictment, and the jury found that the defendants delivered about 5,000 of these loads knowing that they failed to conform to contract specifications.

The U.S. attorney’s office in Boston estimated that the government’s losses associated with the defendant’s fraud were nearly $5.2 million, and the judge in the case accepted that calculation.

The judge, however, sentenced Prosperi and Stevenson to three years’ probation with six months’ electronic home monitoring and 1,000 hours of community service. Prosperi was also fined $15,000 plus a $13,500 special assessment. Stevenson was fined $5,000.

The government had asked for 70-month sentences for each defendant. The guideline range for the defendants was a range of 87 to 108 months.

Explaining the lenient sentences, the district judge stated that although the value of the loss is important, the conduct at issue did not fit the usual white-collar crime profile. The judge said he did not think there was any intent on the defendants’ part to enrich themselves personally or to do harm to the project or the taxpaying public. The judge wrote, “What appears to have been at play was a corporate culture in which pressure, much of it self-generated, was exerted on defendants to perform service for the short-term benefit of the organization without heed to the moral consequences or public harm.”

Two other defendants — Gerard McNally, a former quality control manager, and Keith Thomas, a former dispatch manager — pleaded guilty before trial to 12 charges, including two conspiracy counts, five mail fraud counts, and five courts of filing false reports in connection with a federal highway project. Those defendants received probation and community service. They also agreed to testify against the other four defendants.

Two other defendants — John Farrar and Marc Blais, former dispatch managers — were sentenced to probation, community service, and fines. Farrar was convicted of one count of conspiracy to commit highway project fraud and mail fraud, 13 counts of false statements, and 37 counts of mail fraud. Blais was convicted of five counts of false statements and three counts of substantive mail fraud. The government only appealed the sentences handed out to Prosperi and Stevenson.

In 2007, the Supreme Court held in Gall v. United States that courts need to review reasonableness of sentences under a deferential abuse of discretion standard, regardless of whether that sentence is inside or outside the guidelines range. In Gall, the Supreme Court upheld a sentence of 36 months’ probation for a defendant who pleaded guilty to conspiracy to distribute ecstasy when the recommended guidelines range was 30-37 months imprisonment.

It will be interesting to see what the First Circuit will decide. In a post-Booker world, the sentencing judge has a great deal of discretion to determine the appropriate sentence. Here, the First Circuit will have the opportunity to define the broad outlines of what constitutes an abuse of discretion in sentencing.

Ninth Circuit Upholds Dramatic Upward Departure in Fraud Case

Last month, the U.S. Court of Appeals for the Ninth Circuit upheld a very large upward departure by a U.S. District Judge in Nevada of more than 17 years above the recommended range under the Sentencing Guidelines, based on conduct that the defendant was never convicted of or even charged with. 

In this highly unusual case, David Kent Fitch was convicted by a jury of nine counts of bank fraud, two counts of fraudulent use of an access device, two counts of attempted fraudulent use of an access device, two counts of laundering monetary instruments, and one count of money laundering. The guidelines range for the offenses was 41 to 51 months. The sentencing judge sentenced Fitch to 262 months. The statutory maximum for the nonviolent crimes that Fitch was convicted of is 360 months.

The sentencing judge relied on a finding that there was clear and convincing evidence that Fitch had murdered his wife and that her death was the means that he used to commit his crimes — by gaining access to her accounts and taking her credit cards and personal information. The judge viewed the alleged murder as a serious aggravating factor. However, Fitch was never even charged with the murder after being investigated as a suspect.

As the dissent pointed out, to increase a sentence by 17 years under U.S.S.G. § 5K2.1 based on a finding of premeditated murder, there needs to be clear and convincing evidence. The majority stated that there was clear and convincing evidence to support the upward departure.

The Sixth Amendment guarantees that a conviction must rest upon a jury determination that the defendant is guilty of every element of the crime with which he is charged. Once there is a conviction, judges have enormous power to find the facts that will drive the sentence up or down. The sentencing judge has the power to sentence a defendant based upon facts not found by a jury up to the statutory maximum and a defendant has no right to a jury determination of the facts that the judge deems relevant.

The Ninth Circuit sustained the sentence, stating that there was no procedural error and that the sentence was not substantively unreasonable. The court did not find the sentence to be substantively unreasonable even though it was five times the recommended range under the guidelines. Under current Supreme Court precedent, a sentencing judge can consider sentences based on the “real crime” that occurred. This determination is made by a judge alone at sentencing and is to be based upon “clear and convincing evidence,” which the judge found here even though the government never charged Fitch with the murder.

This enormous upward departure cannot be justified. The government investigated Fitch for the conduct that the judge used to give him an additional 17 years in prison for, but did not even find enough evidence to charge him. Yet, the Ninth Circuit was able to find that the sentence should be sustained largely because it did not exceed the very high statutory maximum sentence of 30 years. This case could present the Supreme Court with the opportunity to define the meaning of substantive unreasonableness in sentencing.

Five Years Later, Skilling’s Sentence Is Still Up in the Air

On Sunday, October 16, 2011, an op-ed article by founding partner Jeff Ifrah and associate Jeff Hamlin appeared in the Houston Chronicle. The article discusses the upcoming resentencing of former Enron CEO Jeffrey Skilling and the fact that it is now close to the fifth anniversary of his conviction.

The following is the full text of the article:

Five years later, Skilling’s sentence is still up in the air

District Judge Orders Much-Reduced Sentence in Fraud Case

A federal judge has made a major reversal in the case of Steve Warshak, the Berkeley Premium Nutraceuticals founder who was sentenced to 25 years for defrauding customers who bought his “male enhancement” pills, which were advertised in the notorious “Smiling Bob” ad campaign. We have discussed Warshak’s case in a previous blog post. Warshak had been accused of defrauding customers out of $400 million, and had been handed the lengthy sentence after being found guilty of fraud, money laundering, and conspiracy. Prosecutors said that the fraud included false advertising, lying to banks, and making unauthorized charges on consumer credit cards.

In December 2010, the U.S. Court of Appeals for the 6th Circuit ordered a new sentencing, stating that the lower court must more thoroughly examine the amount of money lost because of Warshak’s crimes. Indeed, while  federal prosecutors accused Warshak’s company of bilking customers out of $100 million through deceptive ads, unauthorized credit transactions, and refusal to cancel orders or accept returns, Judge Spiegel originally ordered Warshak and his co-defendants to forfeit $411 million— a figure apparently based on the company’s net sales.

The 6th Circuit said, “The district court did little to explain how it arrived at $411 million as the amount of loss, other than to suggest that the figure represented Berkeley’s net sales . . .  [T]he district court should have engaged in a more thorough explication of its calculation, and it also should have explicitly referenced the evidence upon which it relied.”

Now, three years later, in response to the Court of Appeals’ instructions, Judge S. Arthur Spiegel has slashed Warshak’s sentence by 15 years. In handing Warshak the new 10 year sentence — with credit for time served and good behavior — Judge Spiegel considered several factors that the Court of Appeals suggested warranted a shorter sentence.

First, the amount of money lost by consumers might have been vastly overstated in Warshak’s original sentencing. While the revised estimate is still a huge sum at $100 million, it is only a quarter of the previous estimate. Additionally, the significant disparity between Warshak’s 25 year sentence and those of his co-defendants — who were all sentenced to two years or less —supported a shorter sentence.

In white-collar cases, the severity of a defendant’s sentence is closely tied to the amount of loss caused by the crime, and therefore any exaggeration or miscalculation of that amount has serious implications. We applaud the 6th Circuit for refusing to allow an exaggerated loss calculation to go undisturbed.

Judge Imposes Draconian Sentences in Medicare Fraud Scheme

On Sept. 16, 2011, a federal judge in Miami sentenced Lawrence Duran to 50 years in prison, the longest sentence ever imposed in a Medicare fraud case, for his role in a massive fraud scheme that resulted in more than $205 million in losses. Duran was also ordered to pay $87 million in restitution.

Duran was co-owner of American Therapeutic Corporation with Marianella Valera, his girlfriend. Both of them pleaded guilty in April to fraud, money laundering, and conspiracy charges after being arrested in October 2010. In their pleas, Duran and Valera admitted that they executed the scheme from 2002 until their arrest in 2010. A total of 34 people, including employees of American Therapeutic, doctors, and nurses were arrested in connection with the scheme.

Prosecutors said that Duran and his co-defendants billed Medicare for hundreds of millions of dollars in mental-health services that were either unnecessary or never provided. Prosecutors also said that Duran forged patient files for mentally ill people to make them seem eligible for sleep studies that they would not actually participate in, while American Therapeutic would pay kickbacks to recruiters to supply patients suffering from Alzheimer’s disease and similar conditions. Duran admitted that the patients could not have benefited from the company’s services.

Prosecutors also took note of the fact that Duran set up an advocacy group, the National Association for Behavior Health, to lobby in Washington to make it easier for mental health centers such as the one he ran to receive federal funding.

After a three-day sentencing hearing, a federal judge accepted the government’s recommendation of a very high sentence for Duran, who had pleaded guilty to 38 felonies. The judge said there is a “critical need for deterrence against health care fraud” in Florida, where Medicare corruption is a significant issue for law enforcement.

Marianella Valera pleaded guilty to 21 felonies and was sentenced to 35 years in prison. The 35-year sentence is the second longest ever for Medicare fraud. The indictment alleged that Valera manipulated records so patients would have to stay longer at the facility, thus accumulating more expensive Medicare bills.

“[The] sentencing demonstrates to those who defraud taxpayers of millions of dollars through health care fraud schemes that the FBI and our partners remain committed to investigating and prosecuting such fraud to the fullest extent of the law,” said FBI Miami Division acting Special Agent in Charge Xanthie Mangum in a statement.

Although the government said it was trying to send a clear signal to defendants that Medicare fraud will be taken seriously, and there is no doubt that Duran and Valera committed serious crimes, this sentence is excessive. The dollar amounts of loss here do not approach the loss amounts for other defendants who have committed major financial fraud. Additionally, these defendants pleaded guilty and admitted their acts in the plea agreement, whereas many of the perpetrators of significantly larger fraud who took their cases to trial received much more lenient sentences.

The sentencing guideline range for both defendants, it is true, allowed for a life sentence, but that has never been imposed in a Medicare fraud case. It will be interesting to see whether, on appeal, the U.S. Court of Appeals for the 11th Circuit rules that this sentence is substantively unreasonable because of its length.