Last month, Deputy Attorney General Sally Q. Yates issued a memorandum entitled “Individual Accountability for Corporate Wrongdoing” (Yates Memo). The Yates Memo directs federal prosecutors across the nation to “hold to account the individuals responsible for illegal corporate conduct.” The memo details six steps that the DOJ will undertake in this renewed mission to prosecute individual corporate executives. The guidance includes the mandate that corporations must give the government “all relevant facts” pertaining to the individuals that were involved in the alleged corporate misconduct in order for the corporation to be eligible for “any cooperation credit.” Additionally, the Yates Memo reiterates the importance of collaboration between civil and criminal investigations and other ways for the government to maximize their likelihood of convicting individuals. Although this focus on individuals is not completely novel, the Yates Memo includes a significant directive to the department’s line prosecutors that a corporation resolution will not protect culpable individuals from civil or criminal liability “absent extraordinary circumstances.”
DOJ’s newly-touted emphasis on prosecuting individuals in corporate cases happens to coincide with several changes to the federal sentencing guidelines for white collar crimes. The amendments were adopted due to a concern by at least some members of the Sentencing Commission that the guideline sentencing ranges in white collar cases with high loss amounts, i.e., the types of cases the Yates Memo implores federal prosecutors to bring, were too high. First announced back in April of this year, the U.S. Sentencing Commission has adopted several amendments to the Federal Sentencing Guidelines that will impact white collar cases beginning on November 1, 2015. Though not nearly as sweeping as the changes proposed by the ABA Criminal Justice Section’s Task Force on the Reform of Federal Sentencing for Economic Crimes, the amendments do contain several changes that could benefit the individual defendant in a white collar prosecution. Furthermore, the undeniable message sent by the Commission is that the status quo was producing unreasonably high sentencing guideline ranges in many white collar cases.
Amended Loss Computations
For most economic crimes prosecuted in federal court, the most significant factor impacting the sentencing guidelines is the loss resulting from the offense, as defined in U.S.S.G. § 2B1.1. There are a few exceptions to this general rule such as bribery or kickback cases where the value of the benefit conferred may drive the sentencing guidelines. In other cases, the guidelines may be driven by a gain computation as an alternative. However, the guideline range a defendant faces in most white collar cases, including health care fraud, certain securities fraud cases, and mortgage fraud cases, will be determined by the greater of “actual loss” or “intended loss.” Under the soon to be obsolete fraud guidelines, the average sentence for offenses sentenced under § 2B1.1 in 2014 was 24 months of imprisonment.
The amendments impact loss computations in three ways. First, the loss tables for fraud, bribery, and tax offenses were adjusted for the first time ever to reduce the impact of inflation. Second, the definition of intended loss has been changed from “pecuniary harm that was intended to result from the offense” to “pecuniary harm that the defendant purposely sought to inflict.” Time will tell how judges will apply this change, but according to the Commission it reflects their judgment that intended loss computations should involve a subjective rather than objective analysis of the intended harm. This may be beneficial to some health care fraud defendants, as just one example, if they can demonstrate prior knowledge that the actual Medicare reimbursement for their claims would be substantially lower than the total amount billed.
Third, the method for determining “relevant conduct” under U.S.S.G. § 1B1.3 was also amended. Much to the dismay of the federal criminal defendant, relevant conduct allows the sentencing judge to consider conduct in addition to the conduct covered by the counts of conviction and in some cases to include conduct committed by others. The amendment installs a three-step process which includes a determination of the scope of the jointly undertaken criminal activity. Thus, defendants can now argue with direct textual support from the guidelines that loss caused by others, even if reasonably foreseeable, should not be used in their guidelines computation if the conduct exceeded the scope of that particular defendant’s criminal agreement.
Amended Enhancements for Victims and Use of Sophisticated Means
The changes to § 2B1.1’s victim enhancements may be the most significant amendment in terms of potential impact on total offense level. Currently, a defendant’s offense level can be increased by 2 levels if the government can prove 10 or more victims or the offense was committed through mass-marketing, increased by four levels with 50 or more victims, and increased by six levels with 250 or more victims. The amended § 2B1.1 keeps the two level enhancement for 10 or more victims and cases involving mass marketing. The two level victim enhancement can also be applied if the offense resulted in substantial financial hardship to one or more victims. The amended four level enhancement will require proof of substantial financial hardship to five or more victims. Similarly, the amended six level enhancement will now require proof of substantial financial hardship to 25 or more victims.
This new standard of “substantial financial hardship” reflects “the Commission’s conclusion that the guideline should place greater emphasis on the extent of harm that particular victims suffer as a result of the offense.” In practice, this change will impose an additional burden on the government to prove actual, measurable harm to any alleged victims, rather than what amounted to “head-counting” under the current regime. This change could impact the offense level of defendants convicted of offenses involving identity theft for the purpose of defrauding the federal government, such as Medicare/Medicaid fraud or tax fraud. In many of those cases, the only measurable financial harm is suffered by the government, not the victims of identity theft. Indeed, the commentary to the amended § 2B1.1 provides a list of factors to be considered by the sentencing judge in determining whether a given victim suffered a substantial financial hardship:
(i) becoming insolvent;
(ii) filing for bankruptcy under the Bankruptcy Code (title 11, United States Code);
(iii) suffering substantial loss of a retirement, education, or other savings or investment fund;
(iv) making substantial changes to his or her employment, such as postponing his or her retirement plans;
(v) making substantial changes to his or her living arrangements, such as relocating to a less expensive home; and
(vi) suffering substantial harm to his or her ability to obtain credit.
In many cases where victim enhancements would have previously applied, the government may not be able demonstrate substantial financial harm necessary to trigger the four or six level increases, at least using these factors.
Another important amendment to common § 2B1.1 enhancements, is the change to the two level increase for the use of “sophisticated means.” Under current law, the defendant’s offense level would be increased by two levels if the government could prove that the offense involved sophisticated means. This concept has acquired an expansive interpretation by federal courts and includes conduct committed by people other than the defendant. The current interpretation of this enhancement typically results in Courts applying the enhancement so long as the totality of the scheme involved sophisticated means, even if a particular defendant’s role could not be described as involving sophisticated means.
The amended enhancement adds an additional layer before the two level increase is triggered, that is, the sentencing judge will have to find not only that the offense involved sophisticated means but also that “the defendant intentionally engaged in or caused the conduct constituting sophisticated means.” This change should benefit defendants who were convicted based on their role in a sophisticated fraud scheme, but who did not engage in or cause the “sophisticated” aspect of the scheme.
The pre-amendment application of the sentencing guidelines to the typical federal white collar case was not an easy task, even for experienced attorneys, probation officers, and judges. With the new amendments, effective sentencing advocacy will continue to be a vital part of defending a white collar case. This importance is underscored by data published by the Sentencing Commission: for the 2014 fiscal year, only 5.9% of “fraud” cases nationwide proceeded to trial. Similarly, only 6.6% of “tax” cases proceeded to trial nationwide during the 2014 fiscal year based on sentencing data.
The best outcomes for an individual targeted in a corporate criminal investigation are clearly either to avoid being charged altogether or to successfully defend the charges at trial. However, for the over 90% of fraud and criminal tax defendants that pled guilty, their punishment hinged upon how effective their lawyer was in obtaining charge or sentencing guideline concessions from the government at the plea stage and further mitigating the client’s exposure during the presentence investigation and at the sentencing hearing. Officers, directors, and other employees caught up in this gathering storm to send corporate individuals to prison need counsel experienced in navigating these waters.