In the Courts

The Fifth Circuit went on to analyze the trial court's calculation of loss. Twenty-six of the 34 levels of enhancement resulted from the district court's calculation of $105 million in loss. In arriving at this figure, the trial court relied principally on the testimony of the head of investments for a major Dynegy shareholder, the University of California. The circuit court explained that this reliance overemphasized the court's “discretion as fact finder at the expense of economic analysis.” The trial court ascribed all of UC's Dynergy losses to Olis' alleged fraud. The court noted that in this case much of the drop in price occurred before, or well after, the fraud was revealed. The court went on to explain that when faced with “cook the books” fraud, a trial court must take into account the effect of other factors on the stock price, and may not simply ascribe all reductions in stock price to the alleged fraud.

Eighth Circuit Applies Booker Analysis to Fines

In United States v. Meyer, 427 F.3d 558 (8th Cir. 2005), the Eighth Circuit remanded, for Booker error, a case to the Northern District of Iowa to reconsider the fine imposed, while upholding the term of imprisonment.

Meyer pled guilty in district court to a single count of possession of child pornography and was sentenced to 33 months' imprisonment and a fine of $7500. He appealed, arguing that the trial court treated the sentencing guidelines as mandatory. The circuit court agreed, but held that the error was harmless as to the imprisonment because the trial court also announced an identical alternate sentence based on the court's discretion. The court did not announce an alternate fine, however. The Eighth Circuit held that under United States v. Booker, 125 S.Ct. 738 (2005), it is error to treat not only the prison terms derived from the sentencing guidelines as mandatory, but also error to treat guideline-derived fines as mandatory.

Second Circuit Affirms Willfulness Requirement for Securities Crimes

In United States v. Cassese, ___ F.3d ___, 2005 WL 2715856 (2d Cir. Oct 24, 2005), the Second Circuit upheld a judgment of acquittal because the government had not presented sufficient evidence that the defendant had willfully violated the securities laws.

Cassese was the Chairman and President of an information technology services company. In 1999, his company was engaged in merger talks with a larger company. In the course of these negotiations Cassese learned that the larger company would not purchase his business, but that it would purchase a certain third company. The next day, Cassese purchased shares in the third company using two different brokerage accounts, selling the stock shortly after the merger was publicly announced. Later, Cassese attempted to reverse the transactions, telling his broker he had “made a stupid mistake.” When the transactions came to light, Cassese consented to disgorge over $150,000 to the SEC and to pay a penalty in the same amount. Cassese was then indicted under Section 14(e) of the securities laws.

Although convicted at trial, the trial court granted a motion for judgment of acquittal ruling that the facts presented were not sufficient to establish criminal intent. On appeal the government argued that it need not show that Cassese knew he was violating any particular law, but merely that he realized he was committing a wrongful act. The Second Circuit declined to decide whether that formulation was correct, instead ruling that even under that standard, and given that there was no evidence that Cassese knew the company was the subject of a tender offer, there was insufficient evidence of willfulness. The court noted that after the fact statements of guilt and admissions of civil liability could not sustain a criminal conviction as they are insufficient to prove criminal intent at the time of the crime.

Court Declines to Award Fees Despite Lack of Direct Evidence of Crime

In United States v. Carlson, 2005 WL 2989761 (E.D. Pa. Nov. 2, 2005), the District Court for the Eastern District of Pennsylvania declined to award a prevailing criminal defendant attorneys fees and costs pursuant to 18 U.S.C. ' 3006A, the Hyde Amendment, despite a lack of direct evidence and despite the court's acknowledgement that the government may have put “spin on the evidence.” This is the first opportunity that an Eighth Circuit court has had to interpret and apply the Hyde Amendment.

Carlson was charged with making false statements to the FBI in the course of a public corruption investigation. After his acquittal, Carlson charged that the FBI indicted him only as a tactic to pressure him to testify against others. He then asked the court to award him fees and costs under the Hyde Amendment, which allows such award where the United States has taken a position that is vexatious, frivolous, or in bad faith. The court ruled that the lack of direct evidence was in itself insufficient to establish the claim as baseless. The court also found that Carlson had presented no evidence of malice on the government's part, and denied him an opportunity to conduct discovery to produce such evidence. Although the court stated that its own denial of Carlson's Rule 29 motion was not in itself dispositive, it also noted that in allowing the case to move forward it had necessarily found that the government's case was not groundless and therefore could not be frivolous.

Fifth Circuit Vacates Sentence for Unproven Enhancements, Improper Loss Calculations

In United States v. Olis, 2005 WL 2842077 (5th Cir. Oct. 31, 2005), the Fifth Circuit vacated the defendant's sentence as the sentencing enhancements had not been proven to the jury beyond a reasonable doubt. The court also criticized the method used to calculate the loss caused by the defendant's crime, and provided guidance on the proper calculation of loss in “cook the books” securities fraud cases.

Olis was convicted at trial and sentenced to 292 months in prison for securities fraud, mail fraud and wire fraud charges stemming from his work as Director of Tax Planning and later as Vice President of Finance at Dynegy Corporation. At sentencing, the trial court applied a 34-level enhancement resulting in a total offense level of 40. None of the enhancements were proven to the jury, and Olis preserved a Booker objection. Finding that the failure to require the enhancements be proven beyond a reasonable doubt was error, and that the error was not harmless, the circuit court vacated the sentence and remanded for new sentencing.

The Fifth Circuit went on to analyze the trial court's calculation of loss. Twenty-six of the 34 levels of enhancement resulted from the district court's calculation of $105 million in loss. In arriving at this figure, the trial court relied principally on the testimony of the head of investments for a major Dynegy shareholder, the University of California. The circuit court explained that this reliance overemphasized the court's “discretion as fact finder at the expense of economic analysis.” The trial court ascribed all of UC's Dynergy losses to Olis' alleged fraud. The court noted that in this case much of the drop in price occurred before, or well after, the fraud was revealed. The court went on to explain that when faced with “cook the books” fraud, a trial court must take into account the effect of other factors on the stock price, and may not simply ascribe all reductions in stock price to the alleged fraud.

Eighth Circuit Applies Booker Analysis to Fines

In United States v. Meyer , 427 F.3d 558 (8th Cir. 2005), the Eighth Circuit remanded, for Booker error, a case to the Northern District of Iowa to reconsider the fine imposed, while upholding the term of imprisonment.

Meyer pled guilty in district court to a single count of possession of child pornography and was sentenced to 33 months' imprisonment and a fine of $7500. He appealed, arguing that the trial court treated the sentencing guidelines as mandatory. The circuit court agreed, but held that the error was harmless as to the imprisonment because the trial court also announced an identical alternate sentence based on the court's discretion. The court did not announce an alternate fine, however. The Eighth Circuit held that under United States v. Booker , 125 S.Ct. 738 (2005), it is error to treat not only the prison terms derived from the sentencing guidelines as mandatory, but also error to treat guideline-derived fines as mandatory.

Second Circuit Affirms Willfulness Requirement for Securities Crimes

In United States v. Cassese , ___ F.3d ___, 2005 WL 2715856 (2d Cir. Oct 24, 2005), the Second Circuit upheld a judgment of acquittal because the government had not presented sufficient evidence that the defendant had willfully violated the securities laws.

Cassese was the Chairman and President of an information technology services company. In 1999, his company was engaged in merger talks with a larger company. In the course of these negotiations Cassese learned that the larger company would not purchase his business, but that it would purchase a certain third company. The next day, Cassese purchased shares in the third company using two different brokerage accounts, selling the stock shortly after the merger was publicly announced. Later, Cassese attempted to reverse the transactions, telling his broker he had “made a stupid mistake.” When the transactions came to light, Cassese consented to disgorge over $150,000 to the SEC and to pay a penalty in the same amount. Cassese was then indicted under Section 14(e) of the securities laws.

Although convicted at trial, the trial court granted a motion for judgment of acquittal ruling that the facts presented were not sufficient to establish criminal intent. On appeal the government argued that it need not show that Cassese knew he was violating any particular law, but merely that he realized he was committing a wrongful act. The Second Circuit declined to decide whether that formulation was correct, instead ruling that even under that standard, and given that there was no evidence that Cassese knew the company was the subject of a tender offer, there was insufficient evidence of willfulness. The court noted that after the fact statements of guilt and admissions of civil liability could not sustain a criminal conviction as they are insufficient to prove criminal intent at the time of the crime.

Court Declines to Award Fees Despite Lack of Direct Evidence of Crime

In United States v. Carlson, 2005 WL 2989761 (E.D. Pa. Nov. 2, 2005), the District Court for the Eastern District of Pennsylvania declined to award a prevailing criminal defendant attorneys fees and costs pursuant to 18 U.S.C. ' 3006A, the Hyde Amendment, despite a lack of direct evidence and despite the court's acknowledgement that the government may have put “spin on the evidence.” This is the first opportunity that an Eighth Circuit court has had to interpret and apply the Hyde Amendment.

Carlson was charged with making false statements to the FBI in the course of a public corruption investigation. After his acquittal, Carlson charged that the FBI indicted him only as a tactic to pressure him to testify against others. He then asked the court to award him fees and costs under the Hyde Amendment, which allows such award where the United States has taken a position that is vexatious, frivolous, or in bad faith. The court ruled that the lack of direct evidence was in itself insufficient to establish the claim as baseless. The court also found that Carlson had presented no evidence of malice on the government's part, and denied him an opportunity to conduct discovery to produce such evidence. Although the court stated that its own denial of Carlson's Rule 29 motion was not in itself dispositive, it also noted that in allowing the case to move forward it had necessarily found that the government's case was not groundless and therefore could not be frivolous.