USAO SDNY Sentencing Memo for Michael Cohen for Tax and Other Crimes (12/9/18)

The USAO SDNY sentencing memo for Michael Cohen, former attorney for President Donald J. Trump (identified in the memo as "Individual-1"), is linked, here, and excerpted in the following:  Paul Caron, Michael Cohen And Theories Of Deterrence In Tax Evasion Cases (TaxProf Blog 12/7/18), here.

The TaxProf Blog excerpts are good. 

For the benefit of readers, I would flesh out the quote from U.S.S.G. Ch. 2, Part T, intro. Cmt. here.  Here is the entire commentary:

The criminal tax laws are designed to protect the public interest in preserving the integrity of the nation's tax system.  Criminal tax prosecutions serve to punish the violator and promote respect for the tax laws.  Because of the limited number of criminal tax prosecutions relative to the estimated incidence of such violations, deterring others from violating the tax laws is a primary consideration underlying these guidelines.  Recognition that the sentence for a criminal tax case will be commensurate with the gravity of the offense should act as a deterrent to would-be violators.

There is a lot for tax crimes fans to unpack in that short statement.  I will not try to do that here.

I point to some cases where courts have referred to this commentary:

U.S. v. Engle, 592 F.3d 495, 501-2 (4th Cir. 2010), here.

As the government notes, the policy statements issued by the Sentencing Commission make it clear that the Commission views tax evasion as a serious crime and believes that, under the pre-Guidelines practice, too many probationary sentences were imposed for tax crimes. See U.S.S.G. Ch. 1, Pt. A, introductory cmt. 4(d) (1998) ("Under pre-guidelines sentencing practice, courts sentenced to probation an inappropriately high percentage of offenders guilty of certain economic crimes, such as theft, tax evasion, antitrust offenses, insider trading, fraud, and embezzlement, that in the Commission's view are `serious.'"). The policy statements also reflect the Commission's view that general deterrence — that is, deterring those other than the defendant from committing the crime — should be a primary consideration when sentencing in tax cases. As the Commission has explained, 

The criminal tax laws are designed to protect the public interest in preserving the integrity of the nation's tax system. Criminal tax prosecutions serve to punish the violator and promote respect for the tax laws. Because of the limited number of criminal tax prosecutions relative to the estimated incidence of such violations, deterring others from violating the tax laws is a primary consideration underlying these guidelines. Recognition that the sentence for a criminal tax case will be commensurate with the gravity of the offense should act as a deterrent to would-be violators. 

U.S.S.G. Ch. 2, Pt. T, introductory cmt. (1998). The policy statements likewise make it clear that the Commission believes that there must be a real risk of actual incarceration for the Guidelines to have a significant deterrent effect in tax evasion cases. The Guidelines therefore 

classify as serious many offenses for which probation was frequently given and provide for at least a short period of imprisonment in such cases. The Commission concluded that the definite prospect of prison, even though the term may be short, will serve as a significant deterrent, particularly when compared with pre-guidelines practice where probation, not prison, was the norm. 

Id. at Ch. 1, Pt. A, introductory cmt. 4(d) (1998) (emphasis added). Given the nature and number of tax evasion offenses as compared to the relatively infrequent prosecution of those offenses, we believe that the Commission's focus on incarceration as a means of third-party deterrence is wise. The vast majority of such crimes go unpunished, if not undetected. Without a real possibility of imprisonment, there would be little incentive for a wavering would-be evader to choose the straight-and-narrow over the wayward path.

United States v. Snipes, 611 F.3d 855, 872 (11th Cir. 2010), here:

Attorney Sentence Properly Considered Attorney Status and Deterrence in Tax Cases (7/3/14)

In United States v. McCord, 2014 U.S. Dist. LEXIS 86436 (SD OH 6/25/14) [no link available], the defendant, an attorney, was sentenced by a Magistrate Judge to 60-days incarceration and 1-year of supervised release.  The defendant appealed to the District Judge, alleging various grounds on why the sentence was too harsh.  In one ground, he urged that the Magistrate Judge improperly considered his profession as an attorney in sentencing; in another ground, he urged that the Magistrate Judge improperly considered deterrence of others.  The district judge rejected all of the claims, along with his other arguments.  Here is what the district court said about the two claims specified:

a. Attorney Status 

McCord argues that "[n]either the statute nor the Sentencing Guidelines take[] into account [McCord's] professional status for sentencing purposes . . ." and therefore, by implication, neither should the sentencing court. Id. at 11. However: 

No limitation shall be placed on the information concerning the background, character, and conduct of a person convicted of an offense which a court of the United States may receive and consider for the purpose of imposing an appropriate sentence. 

18 U.S.C. § 3661 (2012); see also U.S.S.G. § 1B1.4 (2013). Thus, the Magistrate Judge was permitted to consider McCord's "background" as an attorney for the purpose of imposing an appropriate sentence." Id.; see also United States v. Saperstein, No.: 94-5275, 1994 U.S. App. LEXIS 36153, *5-6 (6th Cir. Dec. 19, 1994) (approving some upward departure for a lawyer's violation of 26 U.S.C. § 7203 but reversing on grounds that the district court did not consider each incremental step of the departure imposed); United States v. Barbara, 683 F.2d 164, in passim (6th Cir. 1982) (upholding a more-severe-than-otherwise sentence imposed upon a lawyer and citing other cases doing the same). Moreover, McCord's background as an attorney does, in this Court's opinion, make his offense more worthy of punishment than were he not an attorney. 

McCord has consistently claimed, presumably in an attempt at mitigation, that his failure to file income tax returns for five straight years was a "product of his persistent negligence." (Doc. 40, Appellant's Brief at 15). But most people in the United States are at least peripherally aware that the government has bills and occasionally, at least once a year, expects citizens to ante-up in order to help pay them. Attorneys, who must obtain an undergraduate degree, a Juris Doctor degree, and who, therefore, typically spend 7 years at university before even attempting to pass a multi-day bar exam, are expected to (and generally do) know more about the laws and governance of the United States than the general public. Thus, it is a cringe-worthy absurdity when an attorney, who has been practicing for nearly 20 years, claims that his failure to file taxes for five-consecutive years is a matter of negligence. McCord's status as an attorney destroys his attempt to mitigate and was a perfectly reasonable thing for the Magistrate Judge to have considered. 

* * * * 

c. The Need to Deter Others

2d Circuit Majority and Concurring Opinions of Fraud and Sentencing (7/28/13)

In United States v. Corsey, ___ F.3d ___, 2013 U.S. App. LEXIS 14897 (2d Cir. 2013), here, a per curiam decision, the Second Circuit opens its opinion:

This appeal principally raises two issues: (1) whether the misrepresentations underlying these convictions were not material because no reasonable financial professional would have believed them, and (2) whether the sentences imposed on appellants are procedurally unreasonable. 

The Fraud Issue 

In an FBI directed sting operation, the defendants attempted to sell the FBI informant in the financial brokerage industry on a laughable financial scheme.  I won't get into the details of it since they are well summarized in the opinion linked above.  The opinion later captures the flavor of this comical adventure in a question posed by defendant's counsel at sentencing:

"[W]hat hedge fund would fall prey to a purported coalition of Buryatian nationals and Yamasee tribesmen using AOL email accounts to offer five billion dollars in collateral for a loan to build a pipeline across Siberia? 

Buryatia is a federal republic of Russia, in the south central area of Siberia.  Yamasee is a confederation of native Americans.

But, the scheme, if anyone would have believed it and acted on it, could have defrauded a lender of over $3 billion. The problem in the case was that no lender with that kind of resources would have been defrauded because minimum due diligence would have easily uncovered the Three Stooges transparency of the fraud. That set the stage for the defendants claim that they should not have been convicted of a fraud that could not occur.

The Court of Appeals first states the test of fraud:

Fraud requires more than deceit. A person can dissemble about many things, but a lie can support a fraud conviction only if it is material, that is, if it would affect a reasonable person's evaluation of a proposal. "In general, a false statement is material if it has a natural tendency to influence, or is capable of influencing, the decision of the decision-making body to which it was addressed." Neder v. United States, 527 U.S. 1, 16 (1999)  (internal quotation marks and brackets omitted).

I should note that Neder involved convictions for mail fraud, wire fraud, bank fraud and tax perjury (Section 7206(1)).  Each of the fraud statutes involved explicit textual requirement of fraud.  Tax perjury does not require fraud, but it does require materiality as to the perjury.  And, the fraud statutes of conviction were read as having an element of materiality -- that is, there is no fraud unless there is the fraud is material.

Booker Variances - How Far Can a Sentencing Court Go? (7/18/12)

Since Booker, white collar crime practitioners -- including tax crime practitioners -- have devoted much creative time to Booker variances from the rigidity of the Sentencing Guidelines.  See, for example, my blog on Major 3d Circuit En Banc Decision on Booker Sentencing in Tax Case (4/17/09), here, discussing a major Booker downward variance in a tax case.

Doug Berman, the sentencing guru, has a posting about a significant 1st Circuit decision, United States v. Prosperi, 686 F.3d 32 (1st Cir. 2012), here.  Berman's posting, First Circuit affirms (way-)below-guideline sentence for Big Dig white-collar offenders, is here.

Berman quotes the opening paragraphs of Prosperi and then concludes:  "Prosperi is a must-read not just for white-collar federal sentencing practitioners, but for all those still unsure about the scope of sentencing discretion in the post-Booker world."  So, I offer the opening and the closing paragraphs of the opinion.

The United States challenges the sentences imposed on appellees Robert Prosperi and Gregory Stevenson after their conviction of mail fraud, highway project fraud, and conspiracy to defraud the government. Both appellees were employees of Aggregate Industries NE, Inc. ("Aggregate"), a subcontractor that provided concrete for Boston's Central Artery/Tunnel project, popularly known as the "Big Dig." The government charged that over the course of nine years Aggregate knowingly provided concrete that failed to meet project specifications and concealed that failure by creating false documentation purporting to show that the concrete provided complied with the relevant specifications. Several employees of Aggregate, including Prosperi and Stevenson, were convicted of criminal offenses for their roles in the scheme. 

At sentencing, the district court calculated the guidelines sentencing range ("GSR") for Prosperi and Stevenson as 87- to 108-months incarceration. Then, explaining fully its rationale for a below-guidelines sentence, the court sentenced Prosperi and Stevenson to six months of home monitoring, three years of probation, and 1,000 hours of community service. The government now appeals, arguing that under Gall v. United States, 552 U.S. 38 (2007), the sentences imposed by the district court were substantively unreasonable and that the appellees' crimes warrant incarceration.

We affirm. Although the degree to which the sentences vary from the GSR gives us pause, the district court's explanation ultimately supports the reasonableness of the sentences imposed. The district court emphasized that its finding on the loss amount caused by the crimes, the most significant factor in determining the GSR, was imprecise and did not fairly reflect the defendants' culpability. Hence it would not permit the loss estimate to unduly drive its sentencing decision. Relatedly, it found that there was insufficient evidence to conclude that the defendants' conduct made the Big Dig unsafe in any way or that the defendants profited from the offenses. The court then supplemented these critical findings with consideration of the individual circumstances of the defendants and concluded that probationary sentences were appropriate. We cannot say that it abused its discretion in doing so. 

Sentencing Case on Emphasis on Restitution Rather than Incarceration in Financial Crimes Cases (11/10/10)

In United States v. Ciccolini, 2010 U.S. Dist. LEXIS 120292 (N.D. OH 11/11/10), here, a sentencing opinion, the defendant pled guilty to two felony counts -- 1 each of structuring transactions and tax perjury (Section 7206(1)). The defendant, a 68 year old ordained priest, embezzled substantial monies from a residential drug and rehabilitation center. The following are some key points of the decision:

1. The counts were grouped under S.G. 3D1.4. The structuring count produced that highest offense level (22), so 4 levels were added for the tax count, producing an offense level of 26, The offense level of 26 produced a Guidelines sentencing range of 63 - 87 months incarceration.

2. In reaching the offense level of 26, the court rejected an acceptance of responsibility downward adjustment. Although Ciccolini pled guilty, he equivocated about his guilt and some elements (amounts involved, etc.).

3. The Court then moved to a consideration which it labeled "3553(a) Factors and Payment of Restitution." Under Booker and progeny, the Guidelines calculation of a sentencing range is only advisory. The court noted that the defendant had repaid the charity the $1,288,263 he admitted embezzling (although the court noted earlier in the opinion that he had embezzled substantially more) and that he had made substantial payments toward the tax liability. Nevertheless, the Court moved to a philosophical discussion of the interplay between sentencing and restitution in financial crime cases, reasoning:

Fourth Circuit Cites S.G. Tax Sentencing Policy in Reversing Sentencing Variance (1/16/10)

In United States v. Engle, 592 F.3d 495 (4th Cir. 2010), here, decided 1/13/10, cert. den. 131 S. Ct. 165 (2010), the Fourth Circuit remanded an exceptional sentencing variance emphasizing the Sentencing Commission's introductory comment in S.G. Ch. 2, Pt. T:

The criminal tax laws are designed to protect the public interest in preserving the integrity of the nation's tax system. Criminal tax prosecutions serve to punish the violator and promote respect for the tax laws. Because of the limited number of criminal tax prosecutions relative to the estimated incidence of such violations, deterring others from violating the tax laws is a primary consideration underlying these guidelines. Recognition that the sentence for a criminal tax case will be commensurate with the gravity of the offense should act as a deterrent to would-be violators.

The Court also noted the following policy statement that the Guidelines

classify as serious many offenses for which probation was frequently given and provide for at least a short period of imprisonment in such cases. The Commission concluded that the definite prospect of prison, even though the term may be short, will serve as a significant deterrent, particularly when compared with pre-guidelines practice where probation, not prison, was the norm.

The factual background was this (at least the parts I feel most material):

The criminal information charged Engle with tax evasion for the 1998 tax year only, although the information alleged that Engle had evaded taxes for sixteen years between 1984 and 2002 and owed taxes of more than $600,000. With interest and penalties included, Engle's total tax liability exceeded $2 million. Engle's actions to avoid taxes included providing false information to the Internal Revenue Service, placing assets in others' names, and funneling income through shell corporations that he controlled.

Engle pleaded guilty to the information in 2004 and proceeded to sentencing almost two years later, in February 2006. Based on a total offense level of 17 and a category II criminal history, the presentence report calculated Engle's advisory sentencing range as 27-33 months. The district court concluded that Engle's criminal history was overstated and therefore reduced Engle's criminal history to category I, yielding an advisory sentencing range of 24-30 months.

The sentencing court clearly wanted a variance -- granting it not once but twice and chastising the Government attorney for wanting blood rather than money. The second time the sentencing court said:

Lenient Sentencing in White Collar Crime / Tax Crime Cases (11/17/09)

I have previously noted in this blog the lenient sentencing in the offshore financial account sentences to date (see here). The concept of lenient sentencing is a relative concept; lenient means relative to the Guidelines Sentence -- i.e., downward departures and variances from the Guidelines. Booker and its progeny seem to have encouraged lenient sentencing. Sentencing judges realize that they have considerable leeway to fashion an appropriate sentence and often find some reason, particularly in white collar crime cases (of which tax crimes are a subset), to depart downwards, sometimes significantly.

In a case decided yesterday, the Eleventh Circuit reminded sentencing judges (at least those in the Eleventh Circuit) that their discretion is not boundless in white collar crime cases. In United States v. Livesay, ___ F.3d ___ (11th Cir. 2009), the defendant was a player in the "massive accounting fraud conspiracy at Healthsouth Corporation." He participated in "an illegal scheme to artificially inflate HealthSouth’s earnings and to falsely report HealthSouth’s financial condition is at the heart of the fraud." Basically, he would manipulate various financial accounts via fraudulent entries to meet senior Healthsouth officials' earnings goals and the results of these manipulations were reported in public documents filed with the SEC.

Livesay pled to three counts: (i) conspiracy to commit wire fraud, securities fraud, and falsifying books and records; (ii) falsely certifying financial information filed with the SEC; and (iii) a forfeiture count related to count one. The Government's bargain in the plea agreement was (i) to recommend the 3 level reduction for acceptance of responsibility; (ii) recommend that he be sentenced at the low end of the Guidelines range; and (iii) recommend a 5K1 departure.

The sentencing pursuant to the plea then commenced a saga involving three appeals in total in which the sentencing judges (on the third time, the original sentencing judge recused himself) were fixed upon a sentence of probation and the Eleventh Circuit saw it differently and sufficiently differently to reverse. I will let you read the short summary of that saga in the opinion.

In any event, the Guidelines calculations all along was a range of 78 to 97 months (note that this is after the acceptance of responsibility reduction but before the 5K1 departure). The sentence on this third appeal was 5 years probation. The Eleventh Circuit reversed because it found the sentence unreasonable. In a prior opinion involving another defendant from the same conspiracy, the Eleventh Circuit had said that sentencing in white collar crime cases serves important deterrence goals and that "[a] sentence of probation for a high-ranking officer in a corporation where over a billion dollars of fraud was perpetrated on an unsuspecting work force and investing public is not reasonable." The Livesay court emphasized the deterrence factor in white collar crimes and has some good language which I do not cherry pick because the opinion is short and pungent and should be read.

I think this reaction of appellate judges to the deterrence factor is a trend that may well play out in sentencing for tax crimes, which I have noted are merely a subset of white collar crime. Indeed, the Guidelines raise deterrence as a principal factor in tax crimes sentencing. The introductory commentary at S.G. 2T1 says:

The criminal tax laws are designed to protect the public interest in preserving the integrity of the nation’s tax system. Criminal tax prosecutions serve to punish the violator and promote respect for the tax laws. Because of the limited number of criminal tax prosecutions relative to the estimated incidence of such violations, deterring others from violating the tax laws is a primary consideration underlying these guidelines. Recognition that the sentence for a criminal tax case will be commensurate with the gravity of the offense should act as a deterrent to would-be violators.

Of course, if the Government does not appeal a downward variance that does not serve the deterrence purpose, then the sentencing judges do have free rein. Presumably, the Government is not appealing the lenient variance sentences in the offshore financial account pleas. But those who have cases in the pipeline (or, for that matter, in the future) should be aware of this appellate trend to view such generous downward variances with skepticism. The trend, if it continues, will not go unnoticed by sentencing judges.