Former Enron executive Jeffrey Skilling reportedly has negotiated a deal with federal prosecutors that is likely to result in a significant reduction of the prison sentence he will serve for his role in the collapse of Enron. Under the new agreement, Skilling faces between 14 and 17.5 years in prison — a 27 to 42 percent reduction relative to his previous sentence of 24 years. Apparently, Skilling’s aggressive defense wore prosecutors down in such a way that they are now willing to give up almost half of Skilling’s prison sentence to resolve the case once and for all.
In May 2006, Skilling was convicted on one count of conspiracy, 12 counts of securities fraud, five counts of making false statements to auditors, and one count of insider trading. As a result, he was sentenced to roughly 24 years in prison and ordered to pay $45 million in restitution.
Skilling appealed the convictions and sentence with some success. First, the U.S. Court of Appeals for the 5th Circuit vacated his sentence on the grounds that the U.S. Sentencing Guidelines had been misapplied. Then, the U.S. Supreme Court held that the trial record did not support his conviction for conspiracy to commit “honest services” wire fraud. On remand, the 5th Circuit found the “honest services” error to be harmless and upheld the conviction so all that remained was for Skilling to be resentenced.
Skilling’s attorneys were preparing to request a second trial based on newly discovered evidence, but the prosecutors evidently decided that the fight was not worth it. According to prosecutors, the government has invested extraordinary resources in bringing Skilling to justice, and a second round would impose even greater costs, delay resolution, and delay restitution payments to Skilling’s victims.
The parties’ agreement will facilitate closure by stipulating that a sentence in the range of 14 to 17.5 years is reasonable. Both parties have agreed not to contest a sentence within that range and have reserved their right to contest a sentence outside that range.
U.S. District Judge Sim Lake, the sentencing judge, is likely to agree with the parties, as a sentence outside the agreed-upon range would burden the parties with costs they would rather avoid.
Skilling is scheduled to be resentenced in the Southern District of Texas on June 21.
The U.S. Court of Appeals for the 3rd Circuit is currently considering a sentencing issue of great significance in cases in which a number of individuals work together to bring about a financial fraud. The question posed is the extent to which a defendant can and/or should be punished based on the profits made through the fraud when the defendant did not receive as much money from the fraud as his co-conspirators.
In Kluger v. United States, the appeals court must determine whether former attorney Matthew Kluger’s sentence was unduly harsh. Kluger was one of three men who pleaded guilty to insider trading last year in federal district court in Newark, New Jersey. In his plea, Kluger, who is 51, admitted that he stole data on about 30 transactions during 17 years at law firms that included Skadden, Arps, Slate, Meagher & Flom and Wilson Sonsini Goodrich & Rosati. The companies involved include Sun Microsystems, 3Com Corp., and Acxiom Corp. Kluger gave that information to his co-defendant, Kenneth Robinson, who in turn gave them to trader Garrett Bauer, who traded on the information and then sold at a great profit when the deals went public. Following the scheme, Bauer then distributed the money to his partners. Over the last four years of this arrangement, according to prosecutors, Bauer made about $32 million in illicit profits, while Robinson made more than $875,000. Kluger claims to have made more than $500,000.
The sentences that were meted out to Kluger and Bauer did not track this huge disparity in the benefit that each received from their illegal activities. Bauer was sentenced to nine years imprisonment. Kluger received a sentence of 12 years – the longest prison sentence ever given for insider trading, eclipsing the 11-year sentence received by Galleon Group co-founder Raj Rajaratnam. In sentencing Kluger, Judge Katherine Hayden said that she wanted to send a strong message about the “radiating effect of the loss of confidence in the market” caused by insider trading. Judge Hayden also emphasized Kluger’s abuse of trust given his position as a lawyer. Robinson, who cooperated with authorities and secretly recorded the other men for the FBI, received a sentence of only 27 months.
The notion that a defendant may be sentenced based on the aggregated gains of his co-conspirators is nothing new. Section 1B.1.3(1)(a)(1)(B) of the U.S. Sentencing Guidelines expressly provides that, “in the case of a jointly undertaken criminal activity,” relevant conduct (which sets the amount to be used to calculate upward adjustments in the loss table of Section 2B1.1) includes “all reasonably foreseeable acts and omissions of others in furtherance of the jointly undertaken criminal activity . . .” But the acceptance of this approach may be strained by cases of insider trading and other white-collar crimes that increasingly involve astronomical amounts of money, and therefore expose all participants to draconian criminal sentences.
In appealing Kluger’s sentence, his attorneys stressed that the district court appeared not to have considered the disparity in the amount of money that Kluger actually received as a result of the insider trading compared with at least one of his co-conspirators. This argument echoes some of the reasoning of Judge Jed Rakoff in his sentencing of Rajat Gupta, who likewise received far less benefit from insider trading than his co-conspirator, Rajaratnam. The issue raises an interesting question: Should a defendant’s sentence be commensurate only with his or her own personal gain? Or is the measure of the proper severity of a sentence the total gain obtained by all of the participants – an approach that appears to be more in step with the concept of “relevant conduct” that plays an important role in calculating advisory ranges under the Sentencing Guidelines?
The Third Circuit’s determination on this issue may signal the direction that the courts take on this issue, or may be just the first ruling in what becomes a split among the circuits. The resolution of this issue will be particularly important in cases in which Section 2B1.1 (the loss value table) plays a critical role in determining Guidelines sentences.
Justice may or may not be blind; but she can buckle under pressure. It may take years, millions of dollars and armies of attorneys, but if you have the resources to test her mettle, you too may tip the balance in your favor.
Almost seven years after his conviction on fraud and other charges, former Enron executive Jeffrey Skilling may finally be succeeding in his effort to cut down his prison sentence that was originally set at more than 24 years. His investment in his battle is nothing short of impressive. He apparently spent some $70 million on his defense in the underlying trial that ended in 2006 … and that doesn’t include the subsequent seven years of activity, which involves more than 1300 docket entries as of March 2013.
Skilling’s persistence may be paying off. The Department of Justice recently issued a notice on a proposed sentencing agreement with Skilling. (The notice provided that victims have until April 17, 2013, to express their views on the prospective agreement. No further timetables have been officially set.)
It may seem surprising that the Justice Department would consider entering a sentencing agreement with someone who has already been convicted and sentenced and is serving time. But this is a product of Skilling’s aggressive efforts since his conviction, which have resulted in several appearances before the U.S. Court of Appeals for the Fifth Circuit and in one successful trip to the U.S. Supreme Court.
In 2009, the Fifth Circuit vacated Skilling’s sentence – which is where the recently announced sentencing agreement comes into play. In 2010, the Supreme Court ruled that one of the legal theories behind Skilling’s conviction (the honest-services fraud theory) was unconstitutionally vague and remanded the case to the Fifth Circuit to decide whether any of the charges should be invalidated.
After more yo-yoing between courts (the Fifth Circuit upheld the conviction in 2011, the Supreme Court declined to hear a second subsequent appeal in 2012, and Skilling renewed his request for a new trial based on new evidence after the failed Supreme Court appeal), the Justice Department may be raising a white flag of sorts and opting to settle upon a sentence that is mutually acceptable to Skilling and prosecutors. The DOJ may be unwilling to spend more public resources on a man who won’t go away until he gets his way.
It is hard to say what the sentencing agreement will provide. We previously opined that in resentencing, the judge could sentence Skilling to somewhere between 15 and 30 years under the sentencing guidelines. Obviously a more stringent sentence than the previous 24-year sentence is not going to be the result of the prospective agreement between Skilling and the DOJ. Regardless of the terms, the agreement will need to be approved by the sentencing judge. And he will invariably have to balance, along with the scales of justice, the public outcry if the sentence is too light and the costs of continuing to do battle with Skilling.
A Nevada man now has a criminal record – simply because he placed a bet in a casino in Las Vegas and a casino employee didn’t ask him enough questions.
Robert Walker recently pleaded guilty in federal court to one misdemeanor count involving a record-keeping violation and was sentenced to one year of unsupervised probation. He was also ordered to pay a $250 fine and agreed to forfeit a $32,400 bet he made in March 2011.
Walker was a member of Acme Trading Group, a company whose members placed bets for several years at a number of casinos on Acme’s behalf. Acme is structured in a way that allows individuals to invest in the company, and bets are made on behalf of the company.
Messenger betting is a crime under Nevada law that occurs when wagers are placed at sports books by individuals on behalf of others. Thus far, Acme Trading Group has not been prosecuted for messenger betting, although Walker and others have clearly been subject to law enforcement scrutiny.
In November 2011, Walker was indicted on four felony counts under 31 U.S.C. 5313(a) for causing a domestic financial institution to fail to file an accurate currency transaction report. Walker faced a maximum of 20 years in prison and a $1 million fine if convicted of all charges.
The indictment alleged that on four occasions, Walker went to the Golden Nugget Casino Race & Sports Book and placed a bet of more than $10,000, and that when he was asked by the employee taking the bet if he was gambling on behalf of anyone else, he said that he was not.
Under federal law, all financial institutions, which include casinos, must file reports of any currency transactions over $10,000. The casino must also verify the name and the address of the individual placing the bet and the taxpayer identification information of the person on whose behalf the bet is being placed.
Walker’s attorneys contended in court filings that the burden is on the casinos, and not the individual bettor, to determine whether the individual is placing the bet on behalf of himself or a third party. Walker’s attorneys stated that Golden Nugget personnel never asked him if he was placing bets on behalf of someone else, and if they had asked him, he would have informed them that he was wagering on behalf of Acme. He had been instructed by his employer, he said, that if asked, he should reply to casino personnel that he was placing the bet on behalf of Acme.
Attorneys for Walker also stated in court papers that they hired an investigator who went to the Golden Nugget and engaged in at least seven transactions that required reporting under federal law. In none of those transactions did casino personnel ever ask the investigator if he was placing the wager for himself or on behalf of someone else.
This is a case that simply did not need to be prosecuted. Factually, there were very serious questions raised regarding the role that the casino played in trying to obtain the information necessary to file the reports and regarding the issue of who is responsible for making sure that information is reported.
Walker accepted a plea that would grant him a year of unsupervised probation; the indictment he was originally facing had a maximum sentence of 20 years in prison. Walker now has a criminal record as the result of very aggressive and unnecessary prosecution. Is this the type of case that the government’s limited prosecutorial resources should be focused on?
Federal Criminal (Other)
In a January 23, 2013, ruling, the U.S. Court of Appeals for the 7th Circuit held that an Indiana law that prohibited most registered sex offenders from using social media websites was unconstitutional because it was “not narrowly tailored to protect the state’s interest.” The decision was restricted to the Indiana statute on sex offenders and did not extend its reasoning to another, related issue – whether courts can permissibly, as a condition of probation or supervised release, restrict white-collar criminals from using the Internet.
The fatal flaw of the Indiana law, the appeals court held, was that it was overbroad because it targeted substantial protected speech, rather than retaining a narrow focus on the specific evil of improper communication to minors.
The 7th Circuit noted that the Indiana statute affected First Amendment rights because it controlled expression via social media and limited the ability to receive information and ideas.
In recent cases of various sorts, including e-commerce cases, federal courts have proved all too willing to imposed Internet bans that trample on various constitutional rights. We focused on this problem in a National Law Journal article a couple of years ago that argued that courts go too far when they impose a broad ban on the use of the Internet against a defendant who had committed online fraud.
In the sex-offender case, Doe v. Marion County Prosecutor, the 7th Circuit acknowledged the strong state interest in protecting minors from harmful online communication, but explained that the ban must be narrowly tailored to target only the appropriate evil. All parties agreed that there is nothing inherently dangerous about using social media – except when a sex offender communicates with minors, which is only a “minuscule subset of the universe of social network activity.”
The same principle ought to be applied to restrictions on Internet use placed upon those who have been found guilty of fraud in e-commerce. Not all Internet usage should be treated as suspect.
Towards the end of its opinion, the court discussed Internet restrictions in the context of conditions of probation or supervised release. The court distinguished between a criminal statute, as in Indiana, that governs the protected speech of the general populace (including registered sex offenders) and the sentences imposed by district courts that may govern Internet usage.
The court said its opinion “should not be read to affect district courts’ latitude in fashioning terms of supervised release.” It elaborated that “Our penal system necessarily implicates various constitutional rights . . . a court could conceivably limit a defendant’s Internet access if full access posed too high a risk of recidivism.”
Somewhat ironically, the court noted that “The alternative to limited Internet access may be additional time in prison, which is surely more restrictive of speech than a limitation on electronics.” Although the 7th Circuit was not willing to expand its protection of Internet usage to the sentencing and probation context, we still think that its strong protection of Internet usage in the First Amendment context bodes well for future challenges in that context.
There can be no dispute that the death of Aaron Swartz – the Internet activist who took his own life on Friday, January 11 – is tragic. There can also be no dispute that the grief and anger his family feel is very real. The question is what the appropriate focus for that anger should be in order to give meaning to Swartz’s life – and death.
Swartz, who had blogged about his own battles with depression, was a leading activist involved with the movement to make information freely available on the internet, and is credited with helping to lead the protests that ultimately defeated the Stop Online Piracy Act (SOPA) – a statute that would have significantly broadened law enforcement powers in policing internet content that may violate U.S. copyright laws. Swartz’s suicide came as he faced federal charges of wire fraud and computer fraud arising from his alleged efforts to make freely available an enormous archive of research articles and similar documents offered by JSTOR, an online academic database, through computers at the Massachusetts Institute of Technology. The allegations in the indictment he faced were a tribute to Swartz’s computer acumen, describing the technological means that Swartz had used to access and download approximately 2 million documents from the JSTOR subscription archive by unauthorized access to the computers at MIT.
Swartz’s family has released a statement in which they blame his death on the decision by federal prosecutors in the District of Massachusetts to pursue “an exceptionally harsh array of charges, carrying potentially over 30 years in prison, to punish an alleged crime that had no victims.” Contrary to the family’s assertion that the prosecution caused Swartz to take his own life, we suggest that the appropriate focus here is not on prosecutorial overreaching, but rather on Congress’s decision to criminalize certain conduct and to set sentencing guidelines that would likely have led to imprisonment if Swartz were convicted.
It is true that the maximum statutory sentence of imprisonment for the wire fraud charge in the indictment against Swartz is 30 years. But there is no question that the likely sentence that Swartz would have faced if convicted of wire fraud and/or the other charges in the indictment would have been far less than that. The advisory range under the U.S. Sentencing Guidelines would have depended on the loss (or intended loss) suffered, among other things, but Swartz likely faced (based on back of the envelope calculations) a sentence of no more than two to four years in prison – a fact that he almost certainly knew from the lawyer who represented him. While four years in federal prison is significant, it is much less than the 30-year sentence mentioned by the family.
It is also not entirely clear that the prosecutors’ decision to pursue charges against Swartz was unreasonable. This is not just a case alleging the distribution of materials protected by copyright law – an issue on which there is fair debate as to whether conduct should be criminalized. Rather, in this case, Swartz was accused of having accessed the MIT computer systems and the JSTOR subscription (for which MIT paid approximately $50,000) through illicit means. There were also allegations that Swartz’s computer intrusions crashed some computers and caused some legitimate subscribers to the JSTOR service to lose access for a period of time. Thus, assuming the truth of the allegations in the indictment, the alleged crime here was not entirely victimless. Moreover, everyone agrees that illegally accessing a computer system is not conduct that should be condoned. For these reasons, Swartz’s family’s attacks on the prosecutors as overreaching – while understandable given their grief and anger – may actually be misplaced.
On the other hand, there is a fair question whether the conduct with which Swartz was charged is really the kind of conduct for which we need to send a person with no other criminal record to prison for a period of years. That, however, is not an issue of decision-making by the prosecutor’s office. Rather, that is a question for Congress, both in terms of establishing criminal liability and in terms of setting astronomical maximum statutory sentences (which increased the base offense level for this crime). And it is a question for the U.S. Sentencing Commission, which has raised Guidelines levels over the years. It is also a question for Congress in terms of setting Guidelines scoring that increasingly fails to reflect any expertise of the Sentencing Commission, but rather reflects only a congressional mandate to support increasingly harsh advisory sentences under the Guidelines for white-collar offenses.
Prosecutors may have been justified in seeking charges against Swartz for his conduct. But if his family, friends and supporters wish Swartz’s death to have as much meaning as his life, they should focus instead on the decisions that created the harsh potential penalties that Swartz faced.
Andrew Strempler, a Canadian citizen who helped to pioneer the cross-border online pharmacy industry, was sentenced on January 9, 2013, to four years in prison in connection with allegations that his former company sold fake and misbranded drugs to U.S. citizens.
The sentence follows Strempler’s guilty plea in October in federal court in Miami to a charge of conspiracy to commit mail fraud. Strempler also agreed to forfeit $300,000 and pay a $25,000 fine. A hearing will be held to determine if Strempler will also need to pay restitution.
Strempler operated companies that sold foreign pharmaceuticals to consumers in the United States, where drug costs are significantly higher than in other countries. The drugs were obtained in markets with lower prices on drugs, but the U.S. government has long taken the stance that selling these drugs is illegal because the sources of the drugs could not be assured.
Under the plea agreement, the guidelines range for Strempler’s sentence would be 46 to 57 months, on a charge that carries no mandatory minimum sentence. The government recommended a sentence of 57 months. Prosecutors had originally sought up to 20 years in prison and the forfeiture of $95 million.
Counsel for Strempler asked the court for a downward variance and a sentence of 24 months. Strempler’s attorneys argued that since he is a Canadian citizen, any sentence imposed on him would be more difficult and onerous than an identical sentence imposed on an American citizen. They contended that he would likely not be assigned to a minimum security prison, even though he would likely otherwise qualify based on the nature of the offense and his lack of criminal history. Additionally, as a Canadian citizen Strempler would not be allowed to participate in an early release to a community corrections facility. After he serves his sentence he will be sent to immigration custody, where he will likely be held until his removal from the country.
Strempler’s attorneys also noted that the pre-sentence investigation report states that “there is no evidence that any victim sustained an actual loss or physical injury as a result of this offense.” Additionally, the forfeiture judgment of $300,000 to the government that Strempler agreed to pay prior to sentencing was nearly doubled the agreed-to loss amount.
According to court papers, Strempler believed that the drugs his company was selling were “safe and effective,” and his attorneys noted that he purchased the same drugs for his family and had sample drugs tested by a lab in Canada. His attorneys argued that he did not act with malice and had no actual belief that the drugs were fake and ineffective. He believed that the drugs were safe because they were purchased in accordance with the regulations of foreign countries.
The court essentially rejected the arguments by Strempler for a more lenient sentence and went along with the government’s request for a lengthy sentence. It appears to us that Strempler received a long sentence for a first-time nonviolent offender who did not act with malice. It seems that this is more of a regulatory violation parading in the clothing of a criminal case.
By asking for such a significant sentence, the government may have been trying to serve notice that this type of case will not be taken lightly. Given the stance taken by the prosecution in this case, it will be interesting to see if this leads to further prosecutions for related offenses.
On November 9, 2012, in a unanimous opinion in United States v. Fair, the U.S. Court of Appeals for the D.C. Circuit found that the district court had abused its discretion in ordering restitution in the amount of $743,000 in a criminal copyright infringement case. The appeals court vacated the lower court’s restitution order, finding that the order was based on “a clear legal and factual error.”
The appeals court emphasized that a restitution order may not be based solely on the ill-gotten gain of the defendant but must be directly related to the victim’s actual loss, which is not always the same thing.
In this case, Gregory Fair had offered customers an appealing but illegal way to acquire up-to-date Adobe software at less than half the retail price. Fair’s company sold outdated Adobe software (Photoshop and PageMaker) on eBay and included numerical codes that the buyers could use to purchase an update of the same software directly from Adobe. This scheme lasted from February 2001 until September 2007, when Fair was shut down by the United States Postal Inspection Service.
In 2009 Fair pleaded guilty to charges in exchange for a reduced sentence. Although Fair admitted to receiving roughly $1.4 million in revenue from the sale of pirated software on eBay, his plea agreement was based on an infringement category of greater than $400,000 but less than $1 million. Based on the Sentencing Guidelines for that category, Fair was sentenced to 41 months in prison followed by three years of supervised release. At sentencing, the prosecution also insisted that the court order the maximum restitution. The district judge ordered restitution of $743,000 to Adobe, based on prosecutors’ calculations of Fair’s ill-gotten gains.
At first blush that makes sense, right? Not so quick; there is a fatal flaw. Under federal law, restitution is not based on what the defendant gained; it’s based on what the victim actually lost. In many cases those are the same, but here it certainly was not.
At sentencing, Fair’s attorney raised this point in several different ways, emphasizing that the prosecution had completely failed to prove any actual harm to Adobe. This was a critical issue in this case, because Fair was actually directing each of his buyers to make a legitimate $200 purchase from Adobe. Fair’s attorney argued, correctly, that the burden was on the prosecution to show actual, provable loss (i.e., that purchasers of Fair’s outdated material, which Adobe no longer offered for sale, would have actually purchased the full-price, up-to-date merchandise from Adobe AND that the aggregate sales that Fair directed to Adobe were less than the sales that he supposedly thwarted).
The trial judge ignored Fair’s arguments, referred to the prosecution’s unsubstantiated calculation as “hard proof,” and fallaciously based the restitution order on his belief that it was “undisputed that Fair’s revenue from the sale of pirated products was at least $767,000.”
In so doing, the trial judge overstated the weight of the prosecution’s evidence and misinterpreted the law regarding restitution. As the appeals court explained, the purpose of the Mandatory Victim Restitution Act (MVRA) is “to compensate victims for the loss caused by the defendant’s criminal conduct.” Thus the trial court’s restitution order must be “limited to the actual, provable loss suffered by the victim” at the hands of the defendant. The appeals ruling made it clear that the prosecution must “articulate specific factual findings underlying its restitution order,” and it “may not substitute the defendant’s ill-gotten gains for the victim’s actual, provable loss.”
Prosecutors and judges must not lose sight of the fact that victims are free to seek full restitution in separate civil lawsuits. In fact, civil restitution suits actually allow for the disgorgement of all of the defendant’s profits, including those in excess of the victim’s loss. The Fair case is a perfect example of federal prosecutors and criminal trial courts losing sight of their role in the justice system. Fortunately, the appeals court stepped up to rein them in. In the words of D.C. Circuit Judge Judith Rogers, “the abuse-of-discretion standard may be generous, but it is not one that will countenance the clear legal and factual error present here.”
Earlier this summer, a U.S. district judge in Denver rejected a plea bargain in a child pornography case because the defendant had agreed to waive his right to appeal. The decision sheds new light on the extent of prosecutorial power in the practice of negotiating plea agreements and the need for checks and balances to maintain a level of consistency in sentencing.
The concept of appellate waiver is simple. At the sentencing phase, the defendant gives up his right to appeal, simply because the prosecutors ask him to do so.
Timothy Vanderweff, the defendant in the Denver case, entered into such an agreement with the prosecutors. Facing up to 20 years in prison for the most serious of three charges against him, Vanderweff agreed to plead guilty to one of those charges and face no more than 10 years in prison. While agreeing in the deal not to ask for a sentence of less than five years, Vanderweff also agreed to waive his right to appeal, so long as the judge didn’t sentence him to more than the negotiated range.
It was this final detail of the plea agreement that gave Senior U.S. District Judge John Kane pause. Rejecting the plea deal — a rare occurrence in itself — Judge Kane noted that such waivers can do serious damage to the justice system.
Specifically, Judge Kane wrote: “Indiscriminate acceptance of appellate waivers undermines the ability of appellate courts to ensure the constitutional validity of convictions and to maintain consistency and reasonableness in sentencing decisions.”
Undeterred by the fact that other courts, including the 10th Circuit that includes his district court, have found appellate waivers acceptable, Judge Kane further noted: “[S]acrificing constitutional rights at the altar of efficiency is of dubious legality.”
Although Judge Kane viewed appellate waivers dimly, a 2005 study in the Duke Law Journal found that they are common across the country, occurring in as many as 90 percent of plea deals in some jurisdictions. The frequency of appellate waivers, however, is more likely a reflection of the degree of power that prosecutors wield in plea bargains than anything else. By almost any measure, prosecutors are the most powerful officials in the criminal justice system. They decide whether to institute criminal charges, what those charges should be, and whether to offer the defendant the option of pleading guilty to those charges, and they exercise virtually limitless discretion in reaching those decisions.
While charging is a quintessential prosecutorial or executive decision, that power should not encroach upon traditional judicial powers. Appellate waivers undermine the role of appellate courts to review sentences for fairness and consistency, which is especially important given the lack of transparency in closed-door plea negotiations in general. With such waivers, it is almost impossible to challenge differential treatment in the types of deals that similarly-situated defendants receive.
Moreover, certain rights should be beyond bargaining. A defendant cannot bargain away his right to counsel or his right to a jury trial, so too he should not be able to bargain away his right to appeal. Such waivers may result in judicial efficiency in the short term, but they perpetuate an unequal and unbalanced playing field in the long run.
If more judges emulate Judge Kane and reject prosecutors’ unfair tactics, prosecutors may get the hint and stop using tactics such as this one.
Successful criminal prosecutions of mortgage fraud seem to have one thing in common: a fraud figure well below $10 million. One of the recent cases that generated a fair amount of press involved the convictions of co-conspirators in a mortgage scheme carried out by an ex-NFL player. That scheme, which took place during the housing boom in the early 2000’s, resulted in 10 convictions. Former Dallas Cowboy linebacker Eugene Lockhart is facing jail time of up to 10 years. The nine other individuals are looking at sentences of roughly two to five years.
The mortgage scheme – which led to convictions for wire fraud, conspiracy to commit wire fraud, and making false statements to a federal agency – seems pretty typical of the conduct that prosecutors have been going after: the use of “straw borrowers” to apply for loans on home purchases; falsification of data on loan applications to ensure that straw borrowers would qualify for home loans; and creation of artificially high appraisal values for the homes to be purchased by the straw borrowers. In the case of Lockhart and his cohorts, the Justice Department alleges that the scheme resulted in an actual loss to lenders of roughly $3 million.
While $3 million is not a trivial sum, it is a very tiny portion of the housing industry. Even the total amount in all similar prosecutions nationwide is quite small. Recent headline prosecutions involving similar schemes include a Florida case valued at $8 million in loan proceeds, an Alabama case valued at $2 million, and a New York case valued at $82 million in loan proceeds. At least the latter is a more aggressive number (as apparently was one of the defendants in the New York case, who moonlighted as a dominatrix in a Manhattan club).
The government has been touting these prosecutions as a part of a major crackdown on the mortgage business. The DOJ press statements note that “[m]ortgage fraud is a major focus of President Barack Obama’s Financial Fraud Enforcement Task Force.” But these are comparatively minor matters if one looks to the real causes of the housing crash that led to the 2008 financial crisis. Bank of America, Goldman Sachs, JPMorgan Chase, and Wells Fargo, who were all in the business of packaging and selling subprime mortgages, have been more or less covered with Teflon.
The lack of criminal prosecutions against the big banks in the subprime crisis has been written about many times. But that doesn’t mean it’s not worth repeating. Something seems just wrong about the DOJ’s focus on the smaller fraudsters and its soft approach to the bigger players.
Hopefully, the SEC’s recent decision to send Wellsnotices to Goldman Sachs, JPMorgan Chase, and Wells Fargo indicating possible enforcement proceedings, means that at least these banks could face some civil liability for their role in the housing crash. And Bank of America recently settled a False Claims Act case with the Feds for $1 billion. But approaching the banks with civil actions, and skirting individual culpability, sends the message that once you reach a certain level of success, you are above the law.