In The Courts

U.S. Law Prevails over 'Foreign Investment Company'

The Second Circuit Holds That Whether a Crime Victim Is a “Foreign Investment Company” under the Sentencing Guidelines Depends on United States Law, and Not the Law of the Fraud Victim's Location

In United States v. Savin, 2003 WL 22481035 (2d Cir. Nov. 4, 2003), Patrick Savin pleaded guilty to one count of wire fraud and one count of perjury arising out of his alleged misrepresentations to a Luxembourg company, Mezzonen S.A., during the course of providing investment advisory and portfolio management services. By agreement of the parties, the district court applied the 1995 version of the Sentencing Guidelines to Savin's sentence. The parties disputed the applicability of ' 2F1.1(b)(6)(B), which provided for a four-level sentence enhancement “if the offense affected a financial institution and the defendant derived more than $1 million in gross receipts from the offense.” This section has since been amended and moved to ' 2B1.1(12)(A), and now provides for a two-level sentence enhancement “if the defendant derived more than $1 million in gross receipts from one or more financial institutions as a result of the offense.”

Under the 1995 version of the Sentencing Guidelines (and the substantially identical definition contained in the Nov. 1, 2003 version of the guidelines), a “financial institution” is defined by the application notes “to include any institution described in 18 U.S.C. 20, 656, 657, 1005-1007, and 1014; any state or foreign bank, trust company, credit union, insurance company, investment company, mutual fund, savings (building and loan) association, union or employee pension fund …; and any similar entity, whether or not insured by the federal government.” The district court held that this financial institution sentence enhancement did not apply to Savin, because under the laws of Luxembourg, Mezzonen S.A. was not an “investment company,” and so did not satisfy any of the categories of victims that would trigger the enhancement. The government appealed, as permitted by the plea agreement.

The court of appeals reversed and remanded to the district court, holding that: 1) United States law, not foreign law, should determine whether a crime victim is classified as a “financial institution” to trigger the sentence enhancement; 2) under United States law, the term “foreign investment company” should be defined not by reference to the Internal Revenue Code or Investment Company Act, but rather by its common meaning; and 3) the clause applying the enhancement where the victim is a “similar entity” to one of the enumerated entities would not be unconstitutionally vague as applied in Savin's case.

In holding that the district court erred by looking to the laws of Luxembourg to determine whether Mazzonen was an investment company, the Second Circuit reasoned that the Guidelines' objective of promoting uniformity in sentencing would not be served if defendants like Savin were sentenced differently based on nothing more than the geographic location of their victims. The court stated that “[a]bsent a plain indication to the contrary, the Guidelines should be applied uniformly to those convicted of federal crimes irrespective of how the victim happens to be characterized by its home jurisdiction,” and cited other provisions of the Guidelines, eg, U.S.S.G. ' 2T1.1, Application Note 3 (2002), to show that the Sentencing Commission has specifically referenced foreign law when it has intended to incorporate that law. The court therefore agreed with the government that a “foreign investment company” is an “investment company” located outside of the United States, and not an investment company as defined by foreign law.

Next, the panel considered the definition of an “investment company” under the Guidelines. The court rejected the government's arguments that it should look to the Internal Revenue Code and Investment Company Act definitions of an “investment company,” concluding that the definitions contained in the two statutes were too specific to their context to serve a reliable guide in interpreting the guidelines. Instead, the court applied “traditional statutory interpretation rules” to define the phrase according to its common meaning, after looking to dictionary definitions and the glossary from the Series 7 Study Manual. Applying these definitions, the court defined an “investment company” as “includ[ing] a company substantially engaged in the business of investing in securities of other companies.” The court of appeals left it to the district court, on remand, to determine whether Mazzenon was an investment company.

Finally, the court of appeals considered and rejected Savin's argument that if, on remand, the district court determined that Mazzonen was not an actual “investment company,” the “any similar entity clause” of the enhancement provision was unconstitutionally vague. The court stated that even if the Guidelines are subject to an attack for unconstitutional vagueness, a question that it did not reach, a reasonable person would understand which entities are “similar” to a “state or foreign investment company.” Therefore, the district court could permissibly determine on remand whether Mazzonen was an entity similar to an investment company, if it were necessary to reach that issue.

U.S. Law Prevails over 'Foreign Investment Company'

The Second Circuit Holds That Whether a Crime Victim Is a “Foreign Investment Company” under the Sentencing Guidelines Depends on United States Law, and Not the Law of the Fraud Victim's Location

In United States v. Savin, 2003 WL 22481035 (2d Cir. Nov. 4, 2003), Patrick Savin pleaded guilty to one count of wire fraud and one count of perjury arising out of his alleged misrepresentations to a Luxembourg company, Mezzonen S.A., during the course of providing investment advisory and portfolio management services. By agreement of the parties, the district court applied the 1995 version of the Sentencing Guidelines to Savin's sentence. The parties disputed the applicability of ' 2F1.1(b)(6)(B), which provided for a four-level sentence enhancement “if the offense affected a financial institution and the defendant derived more than $1 million in gross receipts from the offense.” This section has since been amended and moved to ' 2B1.1(12)(A), and now provides for a two-level sentence enhancement “if the defendant derived more than $1 million in gross receipts from one or more financial institutions as a result of the offense.”

Under the 1995 version of the Sentencing Guidelines (and the substantially identical definition contained in the Nov. 1, 2003 version of the guidelines), a “financial institution” is defined by the application notes “to include any institution described in 18 U.S.C. 20, 656, 657, 1005-1007, and 1014; any state or foreign bank, trust company, credit union, insurance company, investment company, mutual fund, savings (building and loan) association, union or employee pension fund …; and any similar entity, whether or not insured by the federal government.” The district court held that this financial institution sentence enhancement did not apply to Savin, because under the laws of Luxembourg, Mezzonen S.A. was not an “investment company,” and so did not satisfy any of the categories of victims that would trigger the enhancement. The government appealed, as permitted by the plea agreement.

The court of appeals reversed and remanded to the district court, holding that: 1) United States law, not foreign law, should determine whether a crime victim is classified as a “financial institution” to trigger the sentence enhancement; 2) under United States law, the term “foreign investment company” should be defined not by reference to the Internal Revenue Code or Investment Company Act, but rather by its common meaning; and 3) the clause applying the enhancement where the victim is a “similar entity” to one of the enumerated entities would not be unconstitutionally vague as applied in Savin's case.

In holding that the district court erred by looking to the laws of Luxembourg to determine whether Mazzonen was an investment company, the Second Circuit reasoned that the Guidelines' objective of promoting uniformity in sentencing would not be served if defendants like Savin were sentenced differently based on nothing more than the geographic location of their victims. The court stated that “[a]bsent a plain indication to the contrary, the Guidelines should be applied uniformly to those convicted of federal crimes irrespective of how the victim happens to be characterized by its home jurisdiction,” and cited other provisions of the Guidelines, eg, U.S.S.G. ' 2T1.1, Application Note 3 (2002), to show that the Sentencing Commission has specifically referenced foreign law when it has intended to incorporate that law. The court therefore agreed with the government that a “foreign investment company” is an “investment company” located outside of the United States, and not an investment company as defined by foreign law.

Next, the panel considered the definition of an “investment company” under the Guidelines. The court rejected the government's arguments that it should look to the Internal Revenue Code and Investment Company Act definitions of an “investment company,” concluding that the definitions contained in the two statutes were too specific to their context to serve a reliable guide in interpreting the guidelines. Instead, the court applied “traditional statutory interpretation rules” to define the phrase according to its common meaning, after looking to dictionary definitions and the glossary from the Series 7 Study Manual. Applying these definitions, the court defined an “investment company” as “includ[ing] a company substantially engaged in the business of investing in securities of other companies.” The court of appeals left it to the district court, on remand, to determine whether Mazzenon was an investment company.

Finally, the court of appeals considered and rejected Savin's argument that if, on remand, the district court determined that Mazzonen was not an actual “investment company,” the “any similar entity clause” of the enhancement provision was unconstitutionally vague. The court stated that even if the Guidelines are subject to an attack for unconstitutional vagueness, a question that it did not reach, a reasonable person would understand which entities are “similar” to a “state or foreign investment company.” Therefore, the district court could permissibly determine on remand whether Mazzonen was an entity similar to an investment company, if it were necessary to reach that issue.