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Money Laundering Defense Aftei,...Santos and Re.galado CuellarGetting the Upper Hand in ArguingLoss in Securities Fraud CasesThe Antitrust Division's CorporateLeniency Policy: A Deal Is a DealDefending White CollarCrime in State CourtA Very Brief History of theCriminalization of EverythingInterview With a FormerUSSC

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Gaining the Upperliand in Artuing Loss inSecurities Fraud Cases

S

ince the Supreme Court's decision in United States v.Booker,' sentencing courts are no longer bound bythe U.S. Sentencing Guidelines. Although their sub-

stantial sentencing discretion was recently reaffirmed inGall v. United States,' they nonetheless remain obligated tocalculate and consider the applicable sentencing rangeunder the Guidelines. Thus the calculation of "loss" underSection 2B1.1 of the Guidelines remains a critical issue atsentencing in many white collar crime cases.' This articleexamines some arguments and strategies that defensecounsel might consider in preparing loss arguments for asecurities fraud sentencing.

loss' Under GuidelineSection 2B1.1

The loss adjustment in Section2B1.1 of the Guidelines may lead toharsh sentences in fraud cases. TheGuidelines include an expansivedefinition of loss that applies inmost financial cases, includingthose involving securities, bank,mail and wire fraud, money laun-dering, and conspiracy. Typical

defendants are the principals or executives of issuers orbrokerages, traders or other investment services employ-ees, lawyers, investment advisors, or other professionals.Wrongdoing may include misleading investors or clients,backdating, cooking the books, pump-and-dumpschemes, false filings with the SEC, misstatements to regu-lators, and an array of other misconduct.

Loss calculations can generate particularly draconianresults in securities fraud cases. Consider, for example,WorldCom's Bernie Ebbers (25 years), Enron's Jeff Skilling(over 24 years) and Andrew Fastow (six years), Dynergy'sJamie Olis (24 years, reduced to six years on resentencing),Adelphia's Timothy Rigas (17 years), Qwest's JosephNacchio (six years), and Canadian CEO Conrad Black (oversix years). These sentences are unfair and irrational. Someappellate courts disfavor an unbridled construction of lossin securities cases, and their opinions invite a fresh evalua-tion of the issue in preparing for sentencing proceedings.

In securities fraud cases, the loss up-tick is often thegreatest single factor in determining a sentence. As theSecond Circuit has noted, the Guidelines "are a sentencingregime in which the amount of loss caused by a fraud is a

critical determinant of the length ofa defendant's sentence.' 5 This may betrue even for a defendant who prof-ited little or not at all from a fraudu-lent scheme. In the typical case inwhich an "oversimplified.., measureof damages [is] proffered by the gov-ernment,"6 the defense may be ableto improve its position by proposinga more sophisticated loss calculationmethodology. A lower loss adjust-ment, of course, means a lower"starting point" or "initial bench-

BY EVAN A. JENNESS

20 WWW.NACDL.ORG THE CHAMPION

White Collar Crime Series

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mark"' from which the sentencing courtwill determine the applicable sentence.

The Government'sBurden of Proof

The government bears the burden ofproving the facts underlying any upwardadjustment.' Ordinarily the standard is apreponderance of the evidence, butwhere a potentially disproportionateadjustment is at issue, due process mayrequire the prosecution to satisfy aheightened burden.'

The clear and convincing standardmay apply — at least in some jurisdic-tions.'' Where the government proposes aloss adjustment that is greater than fourlevels and would have a substantial impacton the sentence, the clear, and convincingstandard may be appropriate." There is no"bright line" rule, however, and the "total-ity of the circumstances" will determinewhether the heightened standard of proofapplies. 12 Relevant considerations in asecurities fraud case ordinarily will sup-port an argument that the clear and con-vincing standard should be applied."Given the challenges of calculating securi-ties fraud losses, convincing a sentencingcourt to hold the government to thisheightened standard may benefit thedefense substantially.

Satisfying the clear and convincingstandard may be a problem for the gov-ernment when it comes to assessing secu-rities losses in complex cases. Complexcases include those involving multiplestocks, numerous investors, multipledefendants, stocks with a long trading his-tory or substantial residual value, a gener-ally turbulent market at the time in ques-tion, an intricate scheme, or a lengthyperiod of fraudulent conduct. The pres-ence of several of these factors may com-pound the government's challenge.

Although "some estimate must bemade for Guidelines' purposes, or per-petrators of fraud would get a wind-fall," the benefit of any doubt shouldbe given the defense where the court isestimating loss.'

Factors to Consider inEvaluating Loss

A number of arguments may supporta more reasonable loss adjustment thanthat proposed by the government. In devel-oping a position, consider the following:

+ Should victims' losses be market-adjusted to reflect any overall drop inthe relevant market at the time in ques-tion (for example, the dot-corn bust inthe high tech market, or distress in themortgage-backed securities market)?"

+ Should a victim's losses be adjusted toreflect any drop in the value of a stockthat was caused by factors unrelated tothe fraud (for example, unfavorableearnings releases), or extrinsic condi-tions (for example, exchange rate fluc-tuations, increasing energy costs, orgeneral economic conditions)?

• Where the facts support the use ofvarious different time periods forassessing loss, should the client begiven the benefit of the doubt byselecting the time period that mini-mizes the loss adjustment?

Would the client's personal gain pro-vide a suitable alternative because thegovernment's evidence is not clearand convincing or does not enablevictims' losses to be assessed withreasonable certainty?

• Should sophisticated victims' losses beadjusted to reflect the degree of risk thatthey knowingly assumed, so that a lossadjustment is based only on that por-tion of a loss resulting from investors'unwitting assumption of risk?

• Was a large portion of victims' lossescaused by the "intervening, independ-ent, and unforeseeable criminal mis-conduct" of a third party?

• Where a fraudulent scheme involvesmultiple stocks, should a victim'saggregate losses be offset by the victim'sgains on all stocks (i.e., does the calcu-lation of net loss on a stock-by-stockbasis result in a loss greater than thevictim's out-of-pocket loss because thevictim made money on some stocks inthe victim's portfolio)?

• Do victims' losses overstate a client'sculpability based on any other factors?For example, was the client unaware ofthe fraudulent scheme when victimsfirst purchased stocks? Did the clienttake steps to avoid or mitigateinvestors' losses? Did the client attemptto withdraw from a conspiracy? Wereany victims on notice of irregularitieswhen they invested in a stock, and thuspartially to blame for their losses? Did astock broker/client intend for his cus-tomers to be among those who profit-ed from a scheme? Was a scheme sim-ply "puffery or cheerleading or even amisguided effort to protect the compa-ny, its employees, and its cheerleadersfrom the capital-impairing effects ofwhat was believed to be a temporarydownturn in business"?"

Notwithstanding "the time and evi-dentiary constraints on the sentencingprocess," some courts considering loss havebeen amenable to a "nuanced approachmodeled upon loss causation principles."This may substantially benefit the defensein a thorny securities fraud case.

Actual Loss vs. Intended Loss vs.Alternate Measures

The Guidelines commentary statesthat "loss" is the "greater of actual loss orintended loss.' 20 "Actual loss" — oftenreferred to as "but for" loss — means "thereasonably foreseeable pecuniary harmthat resulted from the offense." Itincludes both losses directly attributableto acts of the defendant and acts of co-conspirators that were reasonably foresee-able to the defendant."

"Intended loss" means "the pecu-niary harm that was intended to resultfrom the offense" "Intended loss" is notsimply the maximum potential loss froman offense, and a "court errs when it sim-ply equates potential loss with intendedloss without deeper analysis." However,there is no "economic reality principle"under the Guidelines, and intended lossesmay include losses that would have been"impossible or unlikely to occur?"

The Guidelines "do not present a sin-gle universal method" for loss calculation,and a "fact-intensive and individualized... inquiry" may be required to make areasonable estimate of loss." There are"several possible approaches to this calcu-lation: the greater of actual loss or intend-ed loss" or, where these figures cannot bedetermined "with sufficient certainty ...the defendant's personal gain from thefraud as an alternate measure."

The Guidelines suggest two loss cal-culation methods that may be particular-ly relevant to securities fraud cases: "theapproximate number of victims multi-plied by the average loss to each victim?'and "the reduction that resulted from theoffense in the value of equity securities orother corporate assets?" Often neithermethod will result in a loss adjustmentthat fairly reflects the economic reality ofa client's wrongdoing or bears any reason-able relationship to the client's conduct.

The Challenge of CalculatingLoss With Reasonable Certainty

The Guidelines require only that asentencing court "make a reasonable esti-mate of ... loss." In cases involving mul-tiple victims, determining loss "is not eas-ily quantifiable." Where a stock is a com-plete sham, determining loss may be rela-tively straightforward." However, theanalysis is "considerably more complex"

SEPTEMBER 2008WWW.NACDL.ORG 21

where a scheme involved an "otherwiselegitimate company," or a company that isnot an "entirely sham" operation." This isbecause the government may be unable toprove loss causation — that the stockwould be worthless but for the scheme, orthat the drop in stock price resultedentirely from the fraudulent scheme."

Substantial challenges face the gov-ernment where: (1) a stock has some valueapart from the effect of a fraudulentscheme; (2) a stock had a long trading his-tory or substantial residual market valuefollowing the conclusion of a scheme; (3)market forces or other factors unrelated tothe fraud contributed to the drop in astock's price; or (4) the price of the stockrebounded significantly at some pointafter disclosure of the fraud. One or moreof these factors will often be present wherea scheme causes investor losses regardingan otherwise legitimate stock.

An example of the potential com-plexity of assessing loss is a "pump-and-dump" scheme, which involves "the tout-ing of a company's stock ... through falseand misleading statements to the market-place. After pumping the stock, fraudstersmake huge profits by selling their cheapstock to the market."" As the NinthCircuit held in Zolp, unless the govern-ment can prove by clear and convincingevidence that the stock is a completesham, a loss assessment requires it to "dis-entangle the underlying value of the stock,inflation of that value due to the fraud,and either inflation or deflation ... due tounrelated causes."" The way to calculateloss in such circumstances is not set forthin the Guidelines. In this type of situation,the defense may benefit greatly from asophisticated loss analysis.

Market CapitalizationTheory of Loss

A market capitalization theory ofloss is a crude but easy-to-apply methodof calculating loss. It measures thedecline in a stock's value between thetime when a fraudulent scheme wasgoing on and the time when investorsfirst learned about the scheme. Thismeasure bases "loss on a gross correla-tion between stock price decline and therevelation of a fraudulent action."'

A market capitalization measure ofloss is often a poor proxy for victims' actu-al injury because the dates selected for val-uation of the stock may have "no particu-lar relevance to the offense conduct," andthe method will attribute the totalamount of a decline in the price of a stockto the offense conduct even though otherfactors may have contributed to the loss."This is particularly true in the case of a

long-running scheme because " [ o] therthings being equal, the longer the timebetween purchase and sale ... the morelikely that other factors caused the loss."

Moreover, a market capitalizationmeasure of loss overstates a victim's losseswhere the victim bought the stock at aprice that was lower than the inflated pricethat resulted from the fraudulent scheme.The over-inflation of loss using thismethodology may be very substantialwhere a stock has a lengthy trading histo-ry and its price has increased continuallyover time. In such cases, early purchasersmay have lost little or nothing, yet a highloss could be attributed to them."

A market capitalization calculationalso overstates victims' losses where thestock price plummeted immediately afterinvestors learned of the fraud, but thenrebounded at a later point in time."

An example of the defects in loss cal-culations proposed by the government isdescribed in Zolp. The sentencing courthad adopted the government's positionthat the loss for Guidelines purposes wasthe "intended loss."' The district court cal-culated loss as the difference between thepurchase price of the stock and what itassumed to be its true value (nothing). TheNinth Circuit reversed, ruling that the gov-ernment had not met its "burden to estab-lish, by clear and convincing evidence, thatthere was 'no market' for ... [the] sharesafter the fraud came to light.'42

Analogizing to CivilSecurities Fraud

Analogizing to civil law may be help-ful because civil securities law encom-passes a loss causation standard that issimilar to the common law theory ofproximate cause — a concept largely lostin Section 2B1.1 of the Guidelines." InRutkoske, a stock manipulation caseagainst a brokerage firm owner, theSecond Circuit remanded for resentenc-ing, noting "no reason why considera-tions relevant to loss causation in a civilfraud case should not apply" to loss cal-culations under the Guidelines."

When considering the bounty of civilsecurities fraud cases examining loss cau-sation and calculating damages, defensecounsel should be cognizant of the signif-icant impact of the Supreme Court's 2005decision in Dura Pharmaceuticals.45 InDura, a case cited in many securities fraudcases, the Court held that a civil securitiesfraud plaintiff must plead and prove losscausation, i.e., that there was a "causalconnection between the material misrep-resentation and the loss," in order to satis-fy the element of "loss causation." Casespredating Dura may adopt a broader con-

cept of loss than that which applies fol-lowing Dura, as reflected in its progeny.

In Ohs," the Fifth Circuit cited Durain stating that "there is no loss attributableto a misrepresentation unless and until thetruth is subsequently revealed and theprice of the stock accordingly declines andthe portion of a price decline caused byother factors must be excluded from theloss calculation:' If a fraudulent schemecorresponded with general turbulence inthe stock market, or with depression in aparticular segment of the market, loss cau-sation may prove a substantial challengefor the government. If extrinsic factors im-pacted a stock's price, or players other thanthe client (or even co-conspirators actingoutside of the conspiracy) contributed tovictims' losses, the requisite causal linkmay be weak. Similar problems may facethe government where victims knowinglyassumed a high degree of risk by investingin speculative or volatile securities.

Another illustration of the more rea-sonable approach to investors' lossesunder civil securities law is the PrivateSecurities Litigation Reform Act of 1995."That statute provides for damages to becomputed based on the differencebetween the purchase price paid by aninvestor and the mean trading price of thestock during the 90-day period followingpublic disclosure of a fraudulent scheme."This methodology will result in a moreaccurate assessment of damages — or, byanalogy, loss — where the market has anextreme but temporary reaction to disclo-sure of a fraudulent scheme.

The government may object to con-sidering civil law in calculating loss underthe Guidelines because most criminal casesreflect a broader concept of loss. However,the argument that civil securities law doesnot apply to loss calculations under theGuidelines was explicitly rejected by theSecond Circuit in Rutkoske." The commonsense reasons for considering civil law inRutkoske and Ohs may appeal to sentenc-ing courts, in light of the similarity betweencivil damages and loss to investors in acriminal securities fraud case.'

Market-Adjusted LossA market-adjusted analysis of loss

reduces investors' losses by any decreasein the value of a security that resultedfrom market factors that were unrelatedto a fraudulent scheme. Market adjust-ment makes economic sense and is con-sistent with the Guidelines since a losscaused by extrinsic factors is "not a 'loss'attributable to the fraud." 52 A loss compu-tation that is not market-adjusted willoften overstate the loss under theGuidelines." Thus, the government must

THE CHAMPION22 WWW.NACDL.ORG

prove — perhaps by clear and convincingevidence — the amount of investors' loss-es that resulted exclusively from thefraudulent activities of the defendants.

Where a security is not a completesham, a large portion of the diminution inits value may have been caused by factorsother than a fraudulent scheme.Accordingly, it may behoove defensecounsel to establish that the security wasnot a total sham. Consider questions suchas: How long had the security been trad-ing before the claimed fraud? Did it con-tinue trading after the fraud was exposed?Was it traded on the NYSE, AMEX, NAS-DAQ, or another NASD-regulatedexchange? Was it widely traded?" Was itrated by Morningstar, Lipper, or anotherpopular rating system? Was it included inthe Russell 20000, NASDAQ-100 ® oranother market index? Did the issuer havebusiness premises? rid 't have substantialtangible or others assets? Did it havenumerous employees or extensive busi-ness operations? Did it submit timely andcomplete SEC filings?

While the factors establishing legiti-macy will differ depending on the circum-stances, the more indicia of bona fidebusiness operations that can be estab-lished, the more likely it is that a court willconsider the impact of extraneous factorson the drop in stock price following reve-lation of a fraud.

Assessing the appropriate amount ofmarket adjustment "inevitably cannot bean exact science," and ordinarily expertanalysis and consideration of the generaland particular segment of the securitiesmarket is necessary for a court "to approx-imate the extent of loss caused by a defen-dant's fraud."55 Because market-adjustedfigures will often be more accurate thanthose mechanically generated from rawtrading data, it may benefit the defense tohave an expert prepare a market-adjustedanalysis of loss. At a minimum, raising thepossibility of market influences oninvestors' losses may discredit crude andinflated government loss estimates, andsupport the position that the governmenthas failed to meet its burden of establish-ing loss with reasonable certainty."

Alternate Loss Measures— A Defendant's Gain

If neither "intended" nor "actual" losscan be reasonably ascertained, a defen-dant's "personal gain from the fraudulentscheme" is an appropriate alternativemethod of calculating Guidelines loss." Aclient's gain could be diverted funds,inflated trading profits, or the bonuses,kickbacks or other remuneration receivedbecause of participation in a scheme."

Using the gains to a client rather thanvictims' losses may benefit the defensesubstantially where a client profited littlefrom a fraud, or ended up being amongthe losers when the scheme belly-floppedor the leading perpetrators scooped all ofthe gains. Regardless of the circumstances,it also is the alternate method prescribedby the Guidelines when no reasonablyaccurate assessment of intended or actualloss can be made. In Zolp, for example, thedefendant was a "major participant in a'pump-and-dump' scheme," who, intercilia, convinced an issuer to hire a bogusinvestment advisory firm, which generat-ed false press releases, thereby driving upthe price of the stock. When the price waselevated, he told his broker to sell his troveof stock." The presentence report "foundthat actual loss to the investors could notbe determined, and, accordingly, recom-mended a calculation based on [thedefendant's] personal gain from thefraudulent scheme.'6°

Of course, a client's gain may be dis-proportionately large relative to actual orintended loss. For example, in a sting oper-ation law enforcement may be responsiblefor the amount paid in bribes or kick-backs." In such cases, the governmentholds the keys to a defendant's gain, and itcould be unfair to use such figures as the"loss" amount for sentencing purposes.

Novel GovernmentTheories of Loss

Government efforts to calculate lossbased on novel theories (for example, avictim's expectations of profit, or theopportunity cost of funds invested by vic-tims) have been unpopular in somecourts." As the Fifth Circuit stated in Ohs,the "government does not further thegoals of sentencing uniformity or fairnesswhen, as seems to be happening in thesecases, the government persistently adoptsaggressive, inconsistent, and unsupport-able theories of loss:'

Exclusions From, andCredits Against, Loss

Exclusions from, and creditsagainst, loss may provide good opportu-nities for a lower loss adjustment. Forexample, amounts based upon anagreed-upon return, the costs of prose-cution, and a victim's expenses in aidingprosecutors are not included in loss cal-culations." Loss will also be reduced bymoney or property returned to victimsbefore an offense is exposed, or a defen-dant knows, or reasonably should haveknown, that the scheme was about to bedetected." An exception to this exclu-sion, however, is a Ponzi or other schemein which payments to victims are rou-tinely made to some or all victims."

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A victim's losses also should bereduced by the victim's gains, and courtscould consider a victim's net losses on theentire portfolio of stocks that wereimpacted by a fraudulent scheme. Asexplained by the Seventh Circuit in UnitedStates v. Mount:"

[The Guidelines], and thiscourt's cases ... call for the courtto determine the net detrimentto the victim rather than thegross amount of money thatchanges hands. So a fraud thatconsists in promising 20 ouncesof gold but delivering only 10produces as loss of the value of10 ounces of gold, not 20.

This may be helpful where a victim with-drew some trading profits on a fraudulentstock before the scheme came to light andits value plummeted. Likewise, this maybe helpful where a scheme involved mul-tiple stocks and an investor lost money onsome, but profited on others.

To make a reasonably accurate assess-ment of loss that takes into accountinvestors' gains, a court must evaluate anindividual investor's trading history andthe residual value of a stock at some pointin time following the exposure of a fraud-ulent scheme. Where an investor hadextensive in-and-out trading over alengthy period of time, or where thenature of the stock invited extensive trad-ing (for example, penny stocks or com-modities), it may be very challenging tooffset victims' losses with their gains. Iffeasible, however, it may result in a lowerloss adjustment where a victim enjoyedprofits on stocks at various times duringthe course of a scheme, or enjoyed profitson some, but not all, stocks that wereaffected by a fraud.

ConclusionComputing loss with reasonable cer-

tainty in securities fraud cases presentssubstantial legal and practical challenges.Identifying a methodology that is feasibleunder the circumstances, consistent withthe Guidelines, and generates a fair sen-tence may be particularly problematic.However, a number of cases create oppor-tunities to avoid some of the distortioncreated by the broad concept of loss underthe Guidelines. In light of the severe sen-tences often generated by rote loss calcula-tions, exploring these issues may help toobtain more just sentences for clients con-victed of securities fraud.

Notes1.543 U.S. 220 (2005).

2.128 S. Ct. 586,596 (2007).3. For offenses before November 1,2001,

see USSG § 2F1.1 (providing lower loss adjust-ments).

4. See Stuart Taylor, Jr., IrrationalSentencing, Top to Bottom, NAT'L LAW J.

(February 12, 2007) (comparing sentencingproceedings in such cases to"Roman emper-ors throwing criminals to the lions and bearsto gratify circus crowds").

5. United States v. Rutkoske, 506 F.3d 170,179 (2d Cir. 2007),

6. United States v. Ohs, 429 F.3d 540, 547(5th Cir. 2005).

7. Ga11,128 S. Ct. at 596.8. United States v. Zolp, 479 F.3d 715,718

(9th Cir. 2007).9. See McMillan v. Pennsylvania, 477

U.S. 79 (1986) (higher standard of proofthan a preponderance of the evidencemay apply where sentencing enhance-ment is the "tail which wags the dog of thesubstantive offense").

10.See United States v. Gonzalez, 492 F.3d1031, 1039 (9th Cir. 2007) (clear and convinc-ing standard applies to 9-level increase to theoffense level, which increased Guidelinerange from 0-6 months to 21-27 months,since adjustment had "extremely dispropor-tionate effect on the sentence relative to theoffense of conviction"), cert. denied, 128 S. Ct.1093 (2008); Zolp, 479 F.3d at 718; UnitedStates v. Okai, 454 F.3d 848,852 (8th Cir.) (rec-ognizing in dicta that due process mayrequire sentencing courts to apply a higherstandard of proof where the sentencingenhancement becomes the "tail which wagsthe dog of the substantive offense"), cert.denied, 127 S. Ct. 697 (2006). Cf United States v.Grier, 475 F.3d 556, 566 (3d Or.) (en banc)(declining to consider status of prior holdingthat sentencing enhancements tharcan fair-ly be characterized as a 'tail which wags thedog of the substantive offense' must beproved by clear and convincing evidence")(citations omitted), cert. denied, 128 S. Ct. 106(2007); but see United States v. Scroggins, 485F.3d 824 (5th Cir.) (rejecting argument thatany standard of proof greater than a prepon-derance applies where relevant conduct isthe"tail that wags the dog"of the substantiveoffense), cert denied, 128 S. Ct. 324 (2007).

11. See United States v. Jordan, 256 F.3d922, 929 (9th Cir. 2001) (clear and convinc-ing standard applies where 9-level adjust-ment would approximately doubleGuideline range); id. at 934 ("[W]e appear tohave consistently held that when theenhancement is greater than four levelsand more than doubles the applicable sen-tencing range, then the enhancementsmust be proved under 'clear and convinc-ing' standard of proof.") (O'Scannlain, J.,

concurring); Zolp, 479 F.3d at 718 (govern-ment concedes clear and convincing stan-

dard applies to 20-level loss adjustment).12. United States v. Pike, 473 F.3d 1053,

1057-58 (9th Cir.) (error to apply heightenedstandard to 5-level adjustment without firstconsidering "totality of circumstances"), cert.denied, 128 S. Ct. 256 (2007).

13.See id. (enumerating relevant factors);USSG § 2B1.1(b)(1) (prescribing 4- to 30-leveladjustments for losses exceeding $5,000).

14. United States v. Ebbers, 458 F.3d 110,127 (2d Cir. 2006), cert. denied, 127 S. Ct. 1483(2007).

15. See United States v. Kilby, 443 F.3d1135, 1141 (9th Cir. 2006) (where "sentencedepend[ed] in large part upon the amount ofdrugs,"court"must err on the side of caution"in approximating quantity).

16.See, e.g., Rutkoske, 506 F.3d at 180 ("afraud disclosed just as the dot-corn bubbleburst might cause most, but not necessarilyall, of the decline in previously high-flyingtechnology stocks"); Emergent Capital Inv.Mgmt., LLC v. Strmepa-h Group, Inc., 343 F.3d189, 197 (2d Cir. 2003) (where "loss wascaused by an intervening event, like a gener-al fall in the price of Internet stocks, the chainof causation will not have been established").

17.United States v. Hooker, 217 F.3d 1038,1049 (9th Cir.), cert. denied, 531 U.S. 1037(2000).

18.Ebbers, 458 F.3d at 129-30.19. 0/is, 429 F.3d at 547 (citations omit-

ted). An example of this is the analysis of thedistrict court considering the sentencing ofBrocade Communications' CEO GregoryReyes. See United States v. Reyes, et al., CR 06-556-CRB (N.D. Cal.) (CR 737, Order Re:Sentencing dated November 27,2007 ("ReyesOrder")).

20. USSG § 2B1.1, cmt. n.3(A).21. Id. at § 2B1.1, cmt. n.3(A)(i); see also

U.S. Sentencing Commission, Office ofGeneral Counsel, An Overview of Loss in USSG§ 281.7 (March 2007), available at http://www.ussc.gov/training/loss-March%202007.pdf ("Loss Overview").

22. See Loss Overview, at 1.23. USSG § 2B1.1, cmt. n.3(A)(ii).24. United States v. Geevers, 226 F.3d 186,

192 (3d Cir. 2000).25.Loss Overview, at 4.26.Zo/p, 479 F.3d at 718.27. Id. at 719; see USSG § 2B1.1, cmt.

n.3(B).28. USSG § 2B1.1, cmt. n.3(C)(iii), (iv).29. USSG § 2B1.1, cmt. n.3(C).30.Ebbers, 458 F.3d at 127.31.Olis, 429 F.3d at 546-47.32.See Zolp,479 F.3d at 719.33.See id.; Ebbers, 458 F.3d at 128 ("Many

factors causing a decline in a company's per-formance may become publicly knownaround the time of [a] fraud and be one causein the [drop] in price. ...").

34. Zolp, 479 F.3d at 717, n.1 (citation

THE CHAMPION24 WWW.NACDL.ORG

FROM THE PRESIDENTContinued from page 6

tal torture, nor any other form of coercion, maybe inflicted on prisoners of war to secure fromthem information of any kind whatever.").

13.The Department of Justice Office ofLegal Counsel has issued the "torture mem-orandum" that justifies what would other-wise be a crime. Is this a legal defense? Whoknows now? See 2 Paul Robinson, CRIMINALLAW DEFENSES S 183(0(3):

Potential for abuse is also often cit-ed as a rationale for limiting thereasonable reliance excuse to offi-cial misstatements. A client mightseek, or a counsel might intention-ally give, erroneous advice thatwould then permit the client to un-dertake criminal activity with im-punity.The objection is not withoutbasis, but the requirement of thedefense that there be actual andreasonable reliance seems suffi-cient to effectively exclude suchfraudulent excuses. ...It should be noted as well that wherefabricated reliance upon a calculatedmisstatement is a concern, officialsthemselves have no special immuni-ty from the temptations of briberyand corruption. Thus, if abuse is asufficient concern to bar the de-fense,the defense might properly bebarred for reliance upon official mis-statement as well.14. Starting, of course, with the Geneva

Convention and all its amendments.15. United States v. Lee, 106 U.S. 196,220

(1882):No man in this country is so highthat he is above the law. No officer ofthe law may set that law at defiancewith impunity. All the officers of thegovernment from the highest to thelowest, are creatures of the law, andare bound to obey it.

NACDL Sentencing Committee- Call to Action

Mark Rankin and Mark Allenbaugh arethe new co-chairs of the NACDLSentencing Committee and seek yourinvolvement. The Committee will focuson state, federal, and internationalsentencing policy and procedure. Thefirst meeting of the newly constitutedcommittee will be on Sunday morningat the Fall Meeting in Tampa. Please e-mail the co-chairs at mrankin@carltonfields.com and mallenbaugh@alsalaw.com to express your interest inbeing involved and attending themeeting in person or by phone.

I-

0

-Z

"71

About the AuthorEvan A. Jenness is a criminal defense at-

torney whose of-fices are in SantaMonica, Calif. She isan NACDL BoardMember and fre-quent author onfederal criminallaw and procedure.

Evan A. JennessMain Street Law Building2115 Main StreetSanta Monica, CA 90405310-399-3259Fax 310-392-9029rump evan@jennesslaw.com

omitted).35. Id. at 719; see also Ebbers, 458 F.3d at

128 ("The loss must be the result of thefraud.").

36. 0/is, 429 F.3d at 546-47 (citing casesrejecting market capitalization calculations ofloss).

37.See Rutkoske, 506 F.3d at 178.38. Duty Pharmaceuticals, Inc. v. Broudo,

544 U.S. 336,343 (2005); cf. Ebbers, 458 F.3d at127 ("The loss to investors who hold duringthe period of an ongoing fraud is not easilyquantifiable because we cannot accuratelyassess what their conduct would have beenhad they known the truth.").

39. See In re Cedant Corp. Litig., 264 F.3d201,242 (3d Cir.2001) (illustrating inflated lossgenerated by market capitalization analysiswhere an investor purchased stock at a lowerprice than that immediately preceding disclo-sure of a fraud), discussed in Reyes Order, at 5-6.

40.See United States v. Bakhit, 218 F.Supp.2d 1232,1241-42 (C.D. Cal. 2002) (calculatingloss based on depressed stock price on datetrading resumed following disclosure of fraudwould result in an inflated loss adjustmentbecause initial price drop was temporary and"appear[ed] to be an anomaly, an extremereaction to the announcement of the fraud").

41.479 F.3d at 720.42./d.at 720; cf. Ebbers,458 F.3d at 127-28

(discussing defects in "simplistic analysis" ofmarket capitalization model).

43. See Rutkoske, 506 F.3d at 179, citing0/is, 429 F.3d at 546 (looking to civil securitiesfraud damages law for guidance in calculat-ing Guidelines loss).

44. Rutkoske, 506 F.3d at 179.45.544 U.S. 336.46. Id. at 341.47.429 F.3d at 546.48.Pub. L. No.104-67, 109 Stat. 737 (1995)

(codified in various sections of Title 15 U.S.C.).49.See 15 U.S.C.§ 78u-4(e); United States

v.Grabske, 260 F.Supp.2d 866,873-75 (N.D.Cal.2002); Reyes Order, at 6.

50.506 F.3d at 179.51.See, e.g., Reyes Order, at 5-6.52.Ohs, 429 F.3d at 546.53. See Rutkoske, 506 F.3d at 180 ("basic

failure" for sentencing court to not even con-sider factors relevant to stock price declineother than fraud).

54.Cf Rutkoske, 506 F.3d at 180 (rejectinggovernment's argument that a "thin market"for a stock means that market forces couldnot have contributed to investors' losses).

55.Rutkoske, 506 F.3d at 179-80.56. See Reyes Order, at 8-10 (rejecting

government calculations based on"rescissoryloss model" because effects of defendant'swrongdoing cannot be untangled from mar-ket influences on stock price).

57. See USSG § 2B1.1, cmt. n.3(B); Zo/p,

479 F.3d at 719.58. See, e.g., United States v. West, 2 F.3d

66, 71 (4th Cir. 1993) (brokerage fees paid bygovernment is appropriate loss where bro-kers fraudulently obtained under-securedbonds for government).

59./d.479 F.3d at 717.60. Id. at 720; cf., e.g., United States v.

Munoz, 430 F.3d 1357, 1371 (11th Cir. 2005)(sentencing court would be justified in usingdefendant's gain to assess loss given that itwas arguably difficult to determine cus-tomers' loss in misbranding case), cert. denied,126 U.S. 2305 (2006); United States v. Yeager,331 F.3d 1216,1225-26 (11th Cir.2003) (affirm-ing trial court finding that defendant's profitwas reasonable estimate of loss where courtwas unable to reasonably estimate actual orintended losses due to conflicting and con-fusing trial testimony).

61.See, e.g.,6 Arrested Over Plots to PumpUp Share Prices, N.Y. TIMES, Dec. 8, 2007, at B1(detailing operation in which undercover FBIagent "got word out in the penny stock com-munity that he was willing to buy stocks instruggling companies in return for bribes").

62. See, e.g., Reyes Order, at 7 (rejectinggovernment's alternate proposal of measur-ing loss by SEC fines paid by issuer, or tax lia-bilities of victim employees that issuer volun-tarily assumed).

63. 0/is, 429 F.3d at 547, n.11, cited inReyes Order, at 7 (citation omitted).

64. USSG § 2B1.1, cmt. n.3(D); UnitedStates v. Schuster, 467 F.3d 614,618-20 (7th Cir.2006) (reversing loss calculation that includedvictims' expenses in connection with trial tes-timony).

65.USSG § 281.1, cmt. n.3(E)(i).66.Id. cmt. n.3(F)(iv); Loss Overview, at 13.67.966 F.2d 262,265 (7th Cir.1992).

0 Evan A. Jenness, 2008. All rights reserved.

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