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.

The Court states the defendant's and resolves argument based on Neder as follows:

The appellants argue that this test requires a jury to conduct a subjective inquiry. According to the appellants, Neder requires a jury to assess whether a person with characteristics similar to the targeted victim would have been convinced by the defendants' false statement. And in this case, appellants posit, no reasonable investment professional would have bought the conspirators' absurd story; any broker would have laughed in disbelief the moment he opened an email from a wealthy bank sent from an AOL email address, found doctored copies of T-notes, and learned that a long-disbanded Native American tribe owned them. n3 Thus, the argument goes, because no potential victim of this particular fraud would have ever fallen for it, the appellants' lies were not "capable of influencing the decision of [any] decisionmaking body."
   n3 Defendants also suggest that every bank has a duty to engage in due diligence, so that no bank could ever be induced to loan money without first checking out a potential client. In this case, any bank that researched the appellants' backgrounds would have backed out of a deal. Appellants, however, do not point to any decision that conditions a finding of fraud on some affirmative step that a victim might take. The question is not whether victims might smell a rotten deal before they hand over money. See United States v. Gotti, 459 F.3d 296, 331 (2d Cir. 2006) ("[I]n wire fraud cases, it is the scheme itself, rather than its success, that is the required element for conviction."). Instead, a misrepresentation is material if it is capable of influencing the decision-maker, no matter what the victim decides to do. 

We have not directly addressed whether Neder requires something more than an objective assessment of whether a defendant's lies were believable. In a related context, we have held that a defendant is liable for an objectively absurd lie if a subjectively foolish victim believes it. Otherwise "the legality of a defendant's conduct would depend on his fortuitous choice of a gullible victim." United States v. Thomas, 377 F.3d 232, 243 (2d Cir. 2004) (citations omitted). Appellants aim to flip this rule so that a defendant is not liable for an objectively absurd lie if a subjectively sophisticated victim would never believe it. But no court has ever extended "the gullible victim" doctrine in this way, and we need not reach the question whether we should. 

Taking the facts in the light most favorable to the government, we conclude that a reasonable jury could find that appellants' misrepresentations were material, regardless of whether Re, or others like him, should have heeded them or not. Appellants engaged in an illegal conspiracy to defraud potential investors the moment that Corsey offered Re billions of dollars in fake T-notes as collateral for a large loan. Re testified that he was convinced enough by Corsey's statements to vet the deal with his colleagues. Corsey's misrepresentation, then, actually influenced Re to investigate the proposal. And Re testified that his colleagues quickly performed Google searches to see if Re should explore the deal. Everything that followed that conversation and that initial internet search — the analogy to Christopher Columbus, the promised 171% rate of return, the crudely doctored certificates of authenticity — made Corsey's lie on behalf of the conspirators seem ridiculous in retrospect. But the initial misrepresentation remains material; a reasonable jury could find that a promise of five billion dollars in collateral could persuade Re, his colleagues, and reasonable lenders to make a three-billion-dollar loan. n4
   n4 In fact, appellants completed the crime of conspiracy the minute they agreed among themselves to offer five billion dollars in collateral for a loan and took a step in furtherance of that plan using the mail or wires. In other words, even if they never actually influenced anyone they could still have been found guilty of the crime of conspiracy to commit mail or wire fraud.

Sentencing  

The defendants urged on appeal that their 20-year sentences were erroneous, both procedurally and substantively.

At the sentencing, the court and the parties identified an error in the sentencing calculations.  Even if the error were corrected, the low end of the sentencing range was still well above the maximum for the count of conviction.  SG § 5G1.1(a), here. So, without revising the calculations, the sentencing court sentenced the defendants to the maximum - 20 years.  The Court of Appeals said:

The District Court technically may have cut a corner when it glossed over the calculation of appellants' precise adjusted offense level, but that shortcut had no effect on appellants' ultimate Guidelines range. In each case, the amount of intended loss catapulted appellants' offense levels to 37, a number yielding a suggested period of incarceration above the statutory maximum of 20 years. Once the offense level crossed that threshold, any additional enhancement would have had at most an academic impact on the Guidelines range; the recommended term of incarceration would have always reverted back to twenty years. U.S.S.G. § 5G1.1(a) ("[w]here the statutorily authorized maximum sentence is less than the minimum of the applicable guideline range, the statutorily authorized maximum sentence shall be the guideline sentence."). Rather than resolve technical arguments about each enhancement, the District Court chose a more pragmatic approach — it calculated the Guidelines in sufficient detail to know that the resulting sentencing range would inevitably equal 20 years regardless whether certain additional enhancements applied. 

The Court of Appeals did reiterate that normally good calculations of the guidelines are required in order for the Court to apply them and then make the required section 3553(a), here, determinations.

[W]e have never held that a court commits procedural error where it bypasses a minefield of tricky determinations and still arrives at the correct Guidelines recommended sentencing range. To do so would be the equivalent of docking a test grade even though a student found a quicker route to the right answer. Cf. Cruz v. Miller, 255 F.3d 77, 86 (2d Cir. 2001) ("[W]e are determining the reasonableness of the state courts' 'decision' . . . not grading their papers."). Here, the District Court fulfilled its duty to calculate the Sentencing Guidelines sufficiently fully to determine the correct recommended period of incarceration, 20 years, and its particular method of arriving at that determination under the circumstances of these sentencings did not constitute reversible error.

But the District Court still had an obligation to weigh the factors listed in section 3553(a), and we are not certain that occurred. See Fernandez, 443 F.3d at 28 (declining to hold within-Guidelines sentence presumptively reasonable). Here, appellants' maximum sentences had an air of inevitability. Because appellants' Guidelines ranges prior to application of the section 5G1.1 limit soared past the statutory maximum, the District Court seemed to assume that imposing a statutory maximum sentence reflected a per se reasonable sentence. At Campbell's hearing, the District Court chastened the defense attorney by noting that "even without [an] enhancement there would still be a maximum of a life sentence. Correct?" J. App'x at 1373. After a confusing colloquy with the probation officer and the prosecutor, the Court then correctly noted that as a technical matter the Guidelines range would revert back to the statutory maximum. That unavailable life sentence, however, hung in the air and framed the Court's perfunctory analysis of the section 3553(a) factors. A similar dynamic occurred during Sampson and Juncal's sentencing hearings. See Sampson Hearing (noting that enhancement "really has no effect" because court was forced to ratchet Guidelines range down to a twenty-year sentence); Juncal Hearing (skipping independent Guidelines analysis and imposing statutory maximum). The record, then, is muddied by the District Court's elision of two questions—how to understand the reversions of the Guidelines range to the statutory maximum of 240 months, and whether a statutory maximum sentence was sufficient but not greater than necessary to serve the purposes of sentencing enunciated in section 3553(a). 

If in fact the District Court treated 240 months as the only reasonable sentence (because the statutory maximum prohibited imposition of a true Guidelines sentence closer to life), then it committed procedural error. Even when section 5G1.1(a) ratchets down a range, the lower Guidelines range is still the recommendation, and should be treated as a starting point in a deeper analysis, not a revision that obviates the need to consider further what sentence to impose. See Cavera, 550 F.3d at 189-90 (stating that our review for procedural reasonableness "requires that we be confident that the sentence resulted from the district court's considered judgment as to what was necessary to address the various, often conflicting, purposes of sentencing"). If, however, the District Court understood the effect of section 5G1.1(a), and still chose to impose the maximum sentence after considering the commands of section 3553(a), then the sentence may have been procedurally sound. But the record here is ambiguous, and we have often vacated and remanded sentences where a "the judge's sentencing remarks create ambiguity as to whether the judge correctly understood an available option." United States v. Thorpe, 191 F.3d 339, 342 (2d Cir. 1999) (citations omitted); see also United States v. Jones, 531 F.3d 163, 181 (2d Cir. 2008) (vacating sentence where "district court's explanation for its decision to impose a Guidelines sentence is ambiguous as to its understanding of an area of law"); United States v. Toohey, 448 F.3d 542, 545 (2d Cir. 2006) (counseling that remand is appropriate  [*26] where record reflects "misunderstanding by a district court as to the statutory requirements and the sentencing range . . . or misperception about their relevance"). In a case clouded by the possibility of error, we feel it appropriate to give the District Court an opportunity to clarify its thinking.

In other words, the court found a nuanced procedural error that gave it no confidence that the judge had properly considered and applied section 3553(a).  Remand for resentencing was required.

The Court found two additional reasons for remand for resentencing.  "First, the sentencing court gave only a passing mention to any of the section 3553(a) factors." In this regard the court noted that defendants' counsel had raised read issues about the intended loss that drove the Guidelines calculations but that might be considered under section 3553(a).  The Court said:  

Here, appellants' lawyers highlighted significant issues with the intended loss calculation both in their briefs and at sentencing. Given the low risk that any actual loss would result — what 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? — counsel argued that a 30-point mega-enhancement vastly overstated both the seriousness of the offense, and the danger of appellants to their community. The Guidelines acknowledge that potentiality; application note 19(C) to U.S.S.G. § 2B1.1 indicates that a downward departure may be warranted where the offense level resulting from a loss calculation overstates the seriousness of an offense. But the sentencing court never resolved appellants' significant arguments. 

The second additional reason was that the Court apparently incorporated all of the sentencings into each sentencing hearing so that the record in a particular sentencing hearing was not complete as to what the court considered.

Concurring Opinion

There is a very good concurring opinion by Judge Underhill, a district judge sitting by designation.  Judge Underhill agreed that there should be a remand for the reasons the court noted, but thought that the case was a good vehicle to offer lower courts guidance on substantive reasonableness.  Judge Underhill was concerned that a 20 year sentence based upon the real nature of the crime -- rather than the Guidelines driven view of the crime -- would not support even a 20 year sentence even if the sentencing were otherwise procedurally correct.  This is probably a variation of the argument that was rejected on the merits -- i.e., no criminal fraud because of the materiality element -- nobody able to lend the amount requested would have believed it the fraudulent inducements defendants were offering.  But Judge Underhill approaches that issue from the reasonableness of the sentencing and focuses on the intended loss and how the Guidelines warp the sentencing calculation where there is, as here, a farcical intended loss.

The following gives a flavor for Judge Underhill's concerns (emphasis supplied by JAT):

The twenty-year sentences imposed on appellants are not merely harsh, they are dramatically more severe than can be justified by the crime the appellants committed. This was a clumsy, almost comical, conspiracy to defraud a non-existent investor of three billion dollars. That scheme never came close to fruition. During his first meeting with Thomas Re, Emerson Corsey described Magnolia International Bank and Trust as the central bank for scores of Native American governments, including the Yamasee Indian tribe, which a Wikipedia search would have revealed as a tribal confederation that was broken up and defeated early in the 18th century. See http://en.wikipedia.org/wiki/Yamasee. It took only a brief Google search for Re and his associates to understand that the proposal "smelled" — which is why the appellants were recorded by Re for months before their arrest. At one point, Corsey provided Re with a certificate signed by John Juncal that listed CUSIP numbers for the T-notes; when Re shared the certificate with his colleagues, they responded by bursting into laughter. Even the terms of the proposed deal itself were laughable: the lender of three billion dollars would, according to the appellants, receive fourteen billion dollars in profit over five years. This scheme amounted to a series of absurd lies piled on top of even more absurd lies. Appellants' conduct was not dangerous because they had absolutely no hope of success. 

A single factor — loss, specifically intended loss — drove the Guidelines calculation, and a single section 3553(a) factor — deterrence — provided the basis for accepting the Guidelines recommended sentence. * * * * Although the District Court used the intended loss amount correctly for purposes of calculating the Sentencing Guidelines range, the Court erred by failing to dramatically discount that calculation when weighing the section 3553(a) factors against the totality of the circumstances of this case. This conspiracy to defraud involved no actual loss, no probable loss, and no victim. The scheme was treated as sophisticated, but could be more accurately described as a comedic plot outline for a "Three Stooges" episode. Because the plan was farcical, the use of intended loss as a proxy for seriousness of the crime was wholly arbitrary: the seriousness of this conduct did not turn on the amount of intended loss any more than would the seriousness of a scheme to sell the Brooklyn Bridge turn on whether the sale price was set at three thousand dollars, three million dollars, or three billion dollars. By relying unquestioningly on the amount of the intended loss, the District Court treated this pathetic crime as a multi-billion dollar fraud — that is, one of the most serious frauds in the history of the federal courts. See United States v. Parris, 573 F. Supp. 2d 744, 753 (E.D.N.Y. 2008) (collecting sentences for major securities fraud convictions). 

 * * * * 

In this case, it is impossible to describe the sentences imposed on appellants as substantively reasonable. In my view, none of the section 3553(a) factors, singly or in combination, can justify these shockingly high punishments, which are far greater than necessary to punish or deter appellants' conduct. The District Court provided "no reason why the maximum sentence of incarceration was required to deter [the appellants] and offenders with similar history and characteristics." Dorvee, 616 F.3d at 184. The bare assertion of the need to deter, unconnected to the background and characteristics of a defendant or the nature and circumstances of a crime, provides only superficial support for a sentence of imprisonment. Here, the factor of deterrence simply cannot "bear the weight assigned it under the totality of circumstances in the case." Cavera, 550 F.3d at 191. None of the appellants had ever served a significant term of imprisonment and two of the three had spent no time in prison whatsoever. This raised the question whether a statutory maximum sentence is necessary to deter future wrongdoing. See United States v. Mishoe, 241 F.3d 214, 220 (2d Cir. 2001) (counseling district courts to consider previous terms of incarcerations and calibrating new sentences to reflect prior time behind bars). That is especially true here because appellants are older than most defendants and, accordingly, can be expected to have a lower risk of recidivism than most. See U.S. Sentencing Commission, Measuring Recidivism: The Criminal History Computation of the Federal Sentencing Guidelines 16 (2004). Indeed, one of the appellants will surely die in prison, if required to serve a sentence anywhere close to twenty years; although an effective life sentence, by definition, provides complete deterrence, imposing such a sentence for the conduct underlying this conviction would be senseless. 

The absence of any actual loss whatsoever and especially the absence of a victim significantly undercut any argument that this crime was particularly serious. Outside the context of Sentencing Guidelines calculations, intended loss is always less serious than actual loss, so its value as a proxy for seriousness of a crime must be carefully examined. And not all actual loss is equally serious. A fraud that results in the loss of even a few thousand dollars by an elderly or sick person who, as a result of the loss, becomes unable to afford the necessities of life or medical care is much more serious than a fraud that results in ten or a hundred times that loss by a large corporation able to absorb the financial consequences without a need to close plants, fire employees, or even declare the loss as material in public financial reports. Simply put, contrary to the assumption underlying the loss guideline, not all dollars of loss are fungible. 

Moreover, the convictions in this case were for conspiracy, which proscribes an agreement to commit fraud and punishes that agreement the same whether or not a fraud was actually committed. "[W]e punish unconsummated efforts to cause harm as 'attempts' or 'conspiracies' (albeit usually less severely than completed crimes) so long as the would-be-perpetrator has come close enough to success that we can be confident his malignant designs were real and not mere fantasy, and thus that his conduct was morally blameworthy." Frank O. Bowman, III, Coping with 'Loss': A Re-examination of Sentencing Federal Economic Crimes Under the Guidelines, 51 Vand. L. Rev. 461, 559 (1998). The circumstances of these convictions put them very close to the boundary of mere fantasy (or perhaps the boundary of mental competence) and the sentences should have reflected that fact. As with most attempt crimes and unconsummated conspiracies, the actual loss here was zero. The wrongfulness of the appellants' conduct does not turn in any meaningful sense on the amount that the conspirators sought to obtain; all other things equal, an effort to secure $3 billion for construction of an imaginary pipeline is not 100 times as serious as an effort to secure $30 million for construction of an imaginary factory. Accordingly, factors other than intended loss become critical in distinguishing the seriousness of unconsummated criminal conduct.

I note to readers that, in the tax Guidelines, the intended loss is the measure of the tax loss.  See SG §2T1.1.(c)(1), here ("object of the offense (i.e., the loss that would have resulted had the offense been successfully completed.")  There are some nuanced issues with respect to the tax guidelines as well, one of which in prominence recently is whether unclaimed deductions or credits should be allowed to drive down the tax loss (the notion being that, if not claimed, the unclaimed deductions did not affect the tax loss the defendant intended).  I won't get into those issues because this blog entry is already too long.

I will say, finally, that on the general issue of intended loss (as opposed to actual loss) as a way to calibrate punishment, it seems to me that actual loss should draw more punishment than intended loss.  So, I am toying with the idea that the intended loss should be handicapped by the probability that the intended loss would have been actualized.  For example, if the intended loss is $1,000,000 but, because of the hare-brained nature of the scheme, it had only a 10% chance of becoming an actual loss, then perhaps the loss that should drive the Guidelines calculations should be $100,000 (10% X $1,000,000).  Of course, putting a percentage on the likelihood of success would be difficult, but we make similar assessments in much of what we do in life.  Maybe we would have to do it in quadrants -- e.g., the percentage choices for success are 25, 50, 75 and 100% to ease the excercise.  I don't know that, given the amount involved in the adventure in this case, using a 25% loss would have avoided the problem -- the amounts would still top the loss table.  But, I suspect, in most cases that would better calibrate the crime actually committed than full bore use of the intended loss.