Elusive Middle Ground in Punishment of White-Collar Criminals


Elusive Middle Ground in Punishment of White-Collar Criminals


JANUARY 12, 2015 3:27 PM January 12, 2015 3:27 pm 1 Comment

The punishment meted out to criminals convicted of white-collar crimes like fraud and tax evasion can seem confusing to the public. A low-level accountant once received nearly 25 years for inflating with the company’s revenue while a wealthy entrepreneur received probation for hiding millions of dollars in a secret Swiss bank account.

To help judges make decisions that don’t seem so arbitrary, federal sentencing guidelines are in place to provide a structure for determining an appropriate sentence. Judges have the final say about what punishment to give, yet even with the guidelines, there is persistent criticism that they need to be overhauled to better fit the crimes.Defense lawyers have been pushing back against the guidelines, which can call for heavy sentences for convicted criminals who are usually first-time offenders and unlikely to pose any future threat to society. Prosecutors, naturally, often seek to extract the maximum possible sentences. Thus, the two sides are often far apart about what is the appropriate sentence for a violation.

The sentencing of the former Gov. Bob McDonnell of Virginia last week after his conviction on corruption charges illustrates the gulf. The Justice Department recommended a prison term of six and a half years, while the defense sought probation and community service. Mr. McDonnell received a two-year term. The New York Times reported that the prosecutor’s face was twisted in anger as he left the courtroom after the sentencing.

The federal guidelines are the starting point in the sentencing process, and most federal district judges follow their recommendations in deciding how much prison time to impose.

The guidelines’ provision for economic crimes has been a particularly contentious point of debate. It relies on calculating the amount of a defendant’s gain from the crime or the losses inflicted on others in order to determine how much time a defendant should serve in prison. Under the guidelines, a significant loss can result in a recommended sentence of life in prison, such as for Bernard L. Madoff as a result of his Ponzi scheme that cost investors billions of dollars.

Judges have criticized the focus on gains and losses. Judge Jed S. Rakoff of the United States District Court in Manhattan has been outspoken in criticizing the overreliance on vague numbers to impose significant sentences. He told Newsweek last June that “the arithmetic behind the sentencing calculations is all hocus-pocus — it’s nonsensical, and I mean that sincerely. It gives the illusion of something meaningful with no real value underneath.”

Cases involving accounting fraud at publicly traded companies can result in particularly severe punishments under the economic crimes provision. Even if a company survives after an accounting scandal, shareholders can lose millions of dollars as a result of declines in a company’s stock price.

When those losses are attributed to a defendant responsible for the false entries or improper reporting to the Securities and Exchange Commission, the sentencing guidelines recommend a double-digit prison sentence after a conviction, even if the defendant did not personally make any money off the violation.

The American Bar Association has appointed a task force to recommend changes to the sentencing guidelines. A final reportissued in November seeks a significant overhaul of the economic crimes provision by putting the emphasis on determining the defendant’s personal culpability in committing the crime.

Under the task force’s recommendations, a court could consider the defendant’s motive and level of participation in the crime, along with the correlation between the losses caused and a defendant’s profit from the misconduct. Although a court would still take into account the gain or loss as a result of the crime, it would be a secondary factor.

Such a change would, in all likelihood, result in lesser sentences for many white-collar defendants. Defense lawyers would be able to point to a wider range of circumstances to try to help their clients serve less time.

Congress has shown much less interest in reducing prison terms for white-collar criminals. A section of the Dodd-Frank Act instructed the federal sentencing commission to adopt amendments to the guidelines for securities fraud to reflect “the need for an effective deterrent and appropriate punishment to prevent the offenses.” Without saying it directly, Congress wanted longer sentences for securities fraud. That was a push that dates back to the Sarbanes-Oxley Act a decade earlier, which increased the maximum prison term for a number of statutes used to prosecute white-collar crimes.

The sentencing commission, which has seven members with three appointed from the federal judiciary, is stuck in the middle. On one side are judges and defense lawyers questioning the value of relying almost completely on calculations of gains and losses to drive up sentences. On the other, Congress (and the public in general) wants stiffer punishments for securities fraud.

The current guideline requires judges to make complex calculations of the difference between the average share price when the fraud occurred and the average price over a 90-day period after disclosure of the accounting issues to determine how much harm was caused. That approach ignores how various external factors can affect a company’s stock, such as a change in commodity prices or fluctuations in interest rates.

On Friday, the sentencing commission released its latest amendments to the economic crimes guideline that tries to strike a balance between the two sides. The amendments do not modify the loss table or shift the focus toward assessing individual culpability. But they do address how accounting fraud that affects share prices should be assessed. As a result, that would protect some convicted defendants from being subjected to recommended sentences of 20 years or more.

The commission’s proposal would instead use a defendant’s gain from the securities fraud as the starting point in calculating the recommended sentence. Corporate executives often do not profit directly from an accounting fraud because it is usually intended to keep revenue and profit afloat, not necessarily to let them enrich themselves by sell shares ahead of an impending drop in the stock price. Indeed, many lose money when the fraud comes to light because they maintained their stock ownership to avoid sending a negative signal to the market.

If the defendant made no gain, that would help reduce the sentence even if the fraud resulted in a significant loss in the company’s share price. To keep executives from getting a free pass for accounting fraud, the amendment requires that the starting point for sentences should fall between three and nine years in prison, regardless of whether the defendant profited from the fraud.

The sentencing commission’s proposal seeks a middle ground between being too draconian and not tough enough.
There has been a push recently to reduce harsh sentences and lower the incarceration rate in the United States, which is one of the highest in the world. But that has not filtered down to white-collar crimes, for which there is little sympathy in the public for reducing punishment. Indeed, the perception is quite the opposite, that corporate executives have largely escaped accountability because of their privileged position.

In that light, the sentencing commission may have gone about as far as it can in minimizing the potentially severe sentences for white-collar criminals convicted of securities fraud.


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