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Imagine the following scenario: The CEO of a large public company (with approximately 1 billion shares outstanding, considerably fewer than General Electric, Microsoft or General Motors) pleads guilty to a material misrepresentation in the company's financial reports, which, according to the government, when disclosed caused the company's stock to drop 50 cents per share.
Just 16 months ago, that CEO would be facing, under the federal sentencing guidelines as they then existed, a sentence in the range of 7 to 9 years. A hefty sentence. But nothing remotely like the CEO would face today. As a result of 'emergency guidelines' promulgated last month by the Sentencing Commission, for the identical crime committed after January 25, 2003, the same CEO would face a mandatory life sentence, even after pleading guilty. In contrast, if a top executive killed someone and was convicted of voluntary manslaughter, he or she would receive less than 6 years in jail under the guidelines, and no more than 14 years for second-degree murder.
In short, the Sentencing Commission, the Department of Justice, and Congress, as a result of political grandstanding, have lost all sense of proportion when it comes to sentencing in white-collar matters. Worse, the policies they have created are demonstrably counter-productive because they will lead to more, not fewer, trials; will cause taxpayers to incur enormous expenses for the housing, feeding and care of individuals who do not need these lengthy sentences to be deterred or incapacitated; and will result in the loss to society of individuals who could be contributing, productive citizens earning sums that could be applied towards restitution of victims instead of becoming wards of the government for life.
Let's start with the basic conditions as they existed in October 2001, before Enron and other corporate scandals hit the press. Under the fraud guidelines then existing, the government's calculations would be roughly as follows: Base offense, six points; add 18 points if the alleged amount of loss exceeded $80 million (a point that might well be contested); add four points because the defendant was the organizer of a criminal activity that had an extensive organization; add two points for abuse of trust; add two points for the number of victims, and deduct three points for acceptance of responsibility. Without a departure for factors that are not considered by the guidelines, the result would be a level 29, which has a range of 87 to 108 months or approximately 7 to 9 years.
As of November 1, 2001, for crimes committed after that date, the Sentencing Commission had already made draconian changes. For the same conduct, even assuming a guilty plea, the defendant in 2002 was facing a sentence of between 20 and 25 years. That is because there was a ten-point increase in the offense level relating to the amount of the alleged loss and the number of victims. The enormous increase, effective in November 2001, does not appear to be based on any empirical evidence that a term of 7 to 9 years would be insufficient for deterrence or incapacitation. Still, without even allowing the imposition of the exceptionally harsh penalties of 2002 to work, the Sentencing Commission, under pressure from the Administration and Congress, ratcheted up the penalties even more, effective January 25, 2003.
The latest increase stems from adjustments made for the amount of loss, the impact on the institution, the number of victims and the position of the defendant. Under the new 'emergency' guidelines, a loss in excess of $400 million results in 30 points added to the base offense level of six; if there are more than 250 victims, six points are added; there is a four-level increase if the offense 'endangered the solvency or financial security' of a publicly traded company; and there is an additional four-level increase if the defendant is an officer or a director of a publicly traded company. By the way the government calculates, under the 'emergency' guidelines the CEO in our opening hypothetical would be facing a total offense level of at least 50. Even assuming the maximum three-point deduction for acceptance of responsibility, the resulting score would be far above the maximum level of 43. At level 43, which is the level previously reserved for treason and first-degree murder, the defendant, even one with no criminal record, receives a mandatory life sentence.
While there is a question whether a life sentence is available in a securities case where the maximum statutory violation carries a sentence of 25 years, presumably with multiple counts a court could impose a sentence for a number of years that would be the equivalent of a life sentence. That is exactly the result the Fourth Circuit recently reached in a drug and money-laundering conspiracy case, where the trial court imposed a life sentence under the guidelines even though no count, under the proof presented, authorized a life sentence, and the Court of Appeals remanded for a sentence for a term of years, aggregating counts that would exceed the actuarial life span (U.S. v. Mackins, No. 99-4786, 4th Cir., January 17, 2003).
The emergency guidelines would also result in draconian punishments for fraud on a much smaller scale. For any fraud that might result in a loss of more than $1 million, the defendant would be facing a sentence of more than 10 years. In short, all fraud sentences are likely to be more than double the sentence facing such a defendant only 16 months ago.
The Sentencing Commission never explains the 'emergency' that led to the new guidelines, apart from the fact that the Sarbanes-Oxley law required the Commission to review, but not necessarily change, the fraud guidelines. However, it has established a comment period that expires on March 17, 2003 to deal with the question of whether the new guidelines should become permanent. Without extension, they will expire in November 2003.
The new excessive fraud guidelines, resulting from political posturing in Congress and at the Department of Justice, make no sense from a policy perspective, other than to express the blind rage of the body politic and to create the illusion of Congressional and other governmental response to the business scandals. If an executive faces a sentencing range that exceeds the maximum guideline offense level, even with a guilty plea, what incentive is there for the executive to plead rather than to take a chance on going to trial? If most major fraud defendants opt for trial, there will be tremendous burdens on the courts as well as on federal prosecutors, investigators, and the Bureau of Prisons.
As to the defendant, there is absolutely no evidence that deterrence is served by the length of the sentence. Deterrence is largely served by the humiliation and economic, professional and social disabilities that stem from the charges and a conviction. While incarceration is certainly a legitimate punishment for significant white-collar offenses, studies have demonstrated that the length of a sentence is not likely to have much impact on deterrence of others. What deters is the likelihood of being caught. This suggests that it is more important to put resources into investigations than into housing costs for prisoners. Nor does such a defendant have to be incapacitated by incarceration since a conviction is likely to be disabling for any future employment by the defendant with a public corporation, and the defendant is likely to be saddled with other civil sanctions.
As a society, we have to decide how much we are willing to pay for the retribution achieved by inordinately long sentences. We have to consider not only the direct costs incurred by housing, feeding and maintaining convicted white-collar felons, but also the indirect loss from broken families and the loss to society for lengthy periods of otherwise productive individuals.
The basic problem, as the late Arthur Liman once said, is that there is no constituency for proportionality. There are essentially no effective organizations that can lobby the Sentencing Commission to leaven its increasingly harsh penalties with common sense and fairness. No businesses or associations of business want to suggest that they are even concerned about the possibility of criminal charges, much less the length or severity of sentences or fines. As a result, politicians and political institutions playing to the crowd, such as the Department of Justice, have an unopposed field to continue to pressure the Sentencing Commission to exceed any reasonable limits.
The defense bar, the academic community, the judiciary and others who have a front-line opportunity to observe the real-world impact of these increasingly harsh and counter-productive sentencing policies need to speak out and bring their experiences to bear as a counterweight to the one-sided dialogue that has led to the current state of affairs. At the very least, in light of the potentially extreme sentences, the guidelines should be relaxed to grant courts more discretion to make downward departures so that sentences imposed in the next few years are not so radically out of line with those imposed for the same offenses only a few years ago.
Irvin B. Nathan is the chair of the white-collar criminal defense practice at Arnold & Porter in Washington, D.C., and previously served in the U.S. Department of Justice as Principal Associate Deputy Attorney General.
Imagine the following scenario: The CEO of a large public company (with approximately 1 billion shares outstanding, considerably fewer than
Just 16 months ago, that CEO would be facing, under the federal sentencing guidelines as they then existed, a sentence in the range of 7 to 9 years. A hefty sentence. But nothing remotely like the CEO would face today. As a result of 'emergency guidelines' promulgated last month by the Sentencing Commission, for the identical crime committed after January 25, 2003, the same CEO would face a mandatory life sentence, even after pleading guilty. In contrast, if a top executive killed someone and was convicted of voluntary manslaughter, he or she would receive less than 6 years in jail under the guidelines, and no more than 14 years for second-degree murder.
In short, the Sentencing Commission, the Department of Justice, and Congress, as a result of political grandstanding, have lost all sense of proportion when it comes to sentencing in white-collar matters. Worse, the policies they have created are demonstrably counter-productive because they will lead to more, not fewer, trials; will cause taxpayers to incur enormous expenses for the housing, feeding and care of individuals who do not need these lengthy sentences to be deterred or incapacitated; and will result in the loss to society of individuals who could be contributing, productive citizens earning sums that could be applied towards restitution of victims instead of becoming wards of the government for life.
Let's start with the basic conditions as they existed in October 2001, before Enron and other corporate scandals hit the press. Under the fraud guidelines then existing, the government's calculations would be roughly as follows: Base offense, six points; add 18 points if the alleged amount of loss exceeded $80 million (a point that might well be contested); add four points because the defendant was the organizer of a criminal activity that had an extensive organization; add two points for abuse of trust; add two points for the number of victims, and deduct three points for acceptance of responsibility. Without a departure for factors that are not considered by the guidelines, the result would be a level 29, which has a range of 87 to 108 months or approximately 7 to 9 years.
As of November 1, 2001, for crimes committed after that date, the Sentencing Commission had already made draconian changes. For the same conduct, even assuming a guilty plea, the defendant in 2002 was facing a sentence of between 20 and 25 years. That is because there was a ten-point increase in the offense level relating to the amount of the alleged loss and the number of victims. The enormous increase, effective in November 2001, does not appear to be based on any empirical evidence that a term of 7 to 9 years would be insufficient for deterrence or incapacitation. Still, without even allowing the imposition of the exceptionally harsh penalties of 2002 to work, the Sentencing Commission, under pressure from the Administration and Congress, ratcheted up the penalties even more, effective January 25, 2003.
The latest increase stems from adjustments made for the amount of loss, the impact on the institution, the number of victims and the position of the defendant. Under the new 'emergency' guidelines, a loss in excess of $400 million results in 30 points added to the base offense level of six; if there are more than 250 victims, six points are added; there is a four-level increase if the offense 'endangered the solvency or financial security' of a publicly traded company; and there is an additional four-level increase if the defendant is an officer or a director of a publicly traded company. By the way the government calculates, under the 'emergency' guidelines the CEO in our opening hypothetical would be facing a total offense level of at least 50. Even assuming the maximum three-point deduction for acceptance of responsibility, the resulting score would be far above the maximum level of 43. At level 43, which is the level previously reserved for treason and first-degree murder, the defendant, even one with no criminal record, receives a mandatory life sentence.
While there is a question whether a life sentence is available in a securities case where the maximum statutory violation carries a sentence of 25 years, presumably with multiple counts a court could impose a sentence for a number of years that would be the equivalent of a life sentence. That is exactly the result the Fourth Circuit recently reached in a drug and money-laundering conspiracy case, where the trial court imposed a life sentence under the guidelines even though no count, under the proof presented, authorized a life sentence, and the Court of Appeals remanded for a sentence for a term of years, aggregating counts that would exceed the actuarial life span (U.S. v. Mackins, No. 99-4786, 4th Cir., January 17, 2003).
The emergency guidelines would also result in draconian punishments for fraud on a much smaller scale. For any fraud that might result in a loss of more than $1 million, the defendant would be facing a sentence of more than 10 years. In short, all fraud sentences are likely to be more than double the sentence facing such a defendant only 16 months ago.
The Sentencing Commission never explains the 'emergency' that led to the new guidelines, apart from the fact that the Sarbanes-Oxley law required the Commission to review, but not necessarily change, the fraud guidelines. However, it has established a comment period that expires on March 17, 2003 to deal with the question of whether the new guidelines should become permanent. Without extension, they will expire in November 2003.
The new excessive fraud guidelines, resulting from political posturing in Congress and at the Department of Justice, make no sense from a policy perspective, other than to express the blind rage of the body politic and to create the illusion of Congressional and other governmental response to the business scandals. If an executive faces a sentencing range that exceeds the maximum guideline offense level, even with a guilty plea, what incentive is there for the executive to plead rather than to take a chance on going to trial? If most major fraud defendants opt for trial, there will be tremendous burdens on the courts as well as on federal prosecutors, investigators, and the Bureau of Prisons.
As to the defendant, there is absolutely no evidence that deterrence is served by the length of the sentence. Deterrence is largely served by the humiliation and economic, professional and social disabilities that stem from the charges and a conviction. While incarceration is certainly a legitimate punishment for significant white-collar offenses, studies have demonstrated that the length of a sentence is not likely to have much impact on deterrence of others. What deters is the likelihood of being caught. This suggests that it is more important to put resources into investigations than into housing costs for prisoners. Nor does such a defendant have to be incapacitated by incarceration since a conviction is likely to be disabling for any future employment by the defendant with a public corporation, and the defendant is likely to be saddled with other civil sanctions.
As a society, we have to decide how much we are willing to pay for the retribution achieved by inordinately long sentences. We have to consider not only the direct costs incurred by housing, feeding and maintaining convicted white-collar felons, but also the indirect loss from broken families and the loss to society for lengthy periods of otherwise productive individuals.
The basic problem, as the late Arthur Liman once said, is that there is no constituency for proportionality. There are essentially no effective organizations that can lobby the Sentencing Commission to leaven its increasingly harsh penalties with common sense and fairness. No businesses or associations of business want to suggest that they are even concerned about the possibility of criminal charges, much less the length or severity of sentences or fines. As a result, politicians and political institutions playing to the crowd, such as the Department of Justice, have an unopposed field to continue to pressure the Sentencing Commission to exceed any reasonable limits.
The defense bar, the academic community, the judiciary and others who have a front-line opportunity to observe the real-world impact of these increasingly harsh and counter-productive sentencing policies need to speak out and bring their experiences to bear as a counterweight to the one-sided dialogue that has led to the current state of affairs. At the very least, in light of the potentially extreme sentences, the guidelines should be relaxed to grant courts more discretion to make downward departures so that sentences imposed in the next few years are not so radically out of line with those imposed for the same offenses only a few years ago.
Irvin B. Nathan is the chair of the white-collar criminal defense practice at
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