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November 16, 2011

Notable sentencing reversal by Seventh Circuit in mortgage fraud sentencing

For understandable reasons, mortgage fraud crimes and punishments are generating more controversies in the federal courts these days.  Consequently, I suspect lots of folks for lots of reasons may be interested in today's sentencing work by a Seventh Circuit panel in US v. Robertson, No. 11-1651 (7th Cir. Nov. 16, 2011) (available here).  Robertson gets started this way: 

In the late 1990s, Henry and Elizabeth Robertson were involved in a Chicagoland mortgage fraud scheme.  Through their company, Elohim, Inc., the Robertsons bought residential properties and then sold those properties to nominee buyers at inflated prices.  Along the way they provided lenders with false information about the buyers’ finances, sources of down payments, and intentions to occupy the residences.  The scheme involved 37 separate fraudulent transactions and resulted in a net loss of more than $700,000 to various lenders.

After the scheme collapsed, the Robertsons went bankrupt but were not charged with any crimes. They went about the laudable business of rebuilding their lives and rehabilitating themselves.  Elizabeth continued to work as a full-time nurse in a hospital’s pediatric intensive care unit.  Henry worked as a full-time cable installer and technician.  They raised their three children and became fully engaged in their community.  Each volunteered as a coach in youth sports, and Henry assisted in fighting crime in their neighborhood by serving as president of their block club.  Neither Henry nor Elizabeth engaged in any criminal activity from 1999 to 2010, apart from a reckless driving offense by Henry in 2002.

But the Robertsons could not escape their past. On the day before the ten-year statute of limitations for one crime would have expired, the government charged the Robertsons with one count of wire fraud, 18 U.S.C. § 1343, and two counts of bank fraud, 18 U.S.C. § 1344.  The Robertsons both pled guilty to a single count of wire fraud, and both were sentenced on March 2, 2011.  The sentencing court based their sentences on the 2010 United States Sentencing Guidelines that were then in effect.  Elizabeth was sentenced to 41 months in prison, and Henry was sentenced to 63 months. They were also ordered to pay more than $700,000 in restitution.

The Robertsons appeal from their sentences on several grounds. First, they argue that the district court’s use of the more severe 2010 Sentencing Guidelines violated the ex post facto clause of the Constitution, and they urge us to overrule United States v. Demaree, 459 F.3d 791 (7th Cir. 2006), which held that the ex post facto clause does not apply to changes in the now-advisory federal Sentencing Guidelines.  They also argue that their roles in the mortgage fraud scheme did not warrant a 2-level guide line enhancement imposed by the sentencing court pursuant to U.S.S.G. § 3B1.1(c) for their roles in organizing the scheme.  We reject these arguments.  But we agree with the Robertsons’ final argument, that the sentencing judge failed to consider adequately their unusually strong evidence of self-motivated rehabilitation.  For this reason, we vacate their sentences and remand for resentencing.  Because we remand, we do not address the Robert sons’ additional argument that their sentences were substantively unreasonable.

November 16, 2011 at 12:17 PM | Permalink

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Comments

i have to agree with the family. what a crock! doesnt' sound like they hid or moved or anyting. so to wait to the point it was down to days before the whole think would be dead...THEN to hit them with the rules put in place A DECADE AFTER the crime is just CRIMINAL.

Posted by: rodsmith | Nov 16, 2011 1:25:24 PM

I am puzzled by the restitution amount of 700K. I read the opinion, but it doesn't discuss in enough detail the underlying offense conduct to make sense of the restitution amount.

If these mortgages were securitized, the originating lenders probably lost nothing. They collected generous origination fees and then quickly, probably in a matter of days, sold the mortgages to other lenders. This removed the loans from their balance sheets and the risk of default.

These mortgages were then resold several times until they were transferred to a trust which then issued mortgage backed securities. These securites were then marketed and sold by investment banks to institutional investors.

So which institutions along the way, either alone or collectively, suffered 700K in losses? I acknowledge that the defendants received 700K from the originating lenders (although the opinion is not clear on this), which needs to be paid back. But to whom?

Depending on the originating lenders' role in the securitization of the mortgages, the originating lenders may have lost nothing. Moreover some of the originating lenders may have been complicit in the fraud or at least recklessly indifferent.

Absent proof of real loss by the originating lenders along with affirmative evidence of clean hands, it would seem to me that the 700K should be treated as a fine rather than restitution.

Posted by: Fred | Nov 16, 2011 1:52:07 PM

Fred, if you're interested in the issue, see United States v. James, 592 F.3d 1109 (10th Cir. 2010) (reversing the district court’s actual loss calculation because it did not account for the fact that the original lender sold the mortgage to a successor lender).

Posted by: anon | Nov 16, 2011 2:33:50 PM

Anon at 2:33:50 PM:

Thank you.

Posted by: Fred | Nov 16, 2011 5:09:14 PM

First, a caveat: I do not know all the facts of the case. I am commenting based on what I read in the Opinion.

This opinion entirely misses the point on the "severity of penalty." I do not know why the defendants did not allege ineffective assistance of councel for failing to object. However, based on the Seventh Circuit's incredibly dense opinion, that objection might have been overruled, anyway. I would think that the defendants should have at the very least preserved that issue for further review. Furthermore, it does not even advert to Glover vs. United States, 531 US, 198 (2001). (Incidentally, this was also a Seventh Circuit case!) The US Supreme Court has repeatedly affirmed - in almost ALL of the guidelines cases - that the Guidelines must be correctly calculated and then the judge can depart/vary (for stated reasons) from THAT figure. If the Guidelines figure were erroneous ab initio, then how could one presume that the resulting final sentence would be correct? In Glover, the Court stated: "The Seventh Circuit's rule is not well considered in any event, because there is no obvious dividing line by which to measure how much longer a sentence must be for the increase to constitute substantial prejudice." It also stated: "Quite to the contrary, our jurisprudence suggests that any amount of actual jail time has Sixth Amendment significance." The same is true in this instant case. What the Seventh Circuit is saying is that it is up to the sentencing judge how much of an increase in sentence poses "significant risk" under the ex post facto clause. Come now! Is the Seventh Circuit panel that stupid? Then, why should we even abide by the ex post facto clause? It is time for the Seventh Circuit to categorically overrule the Demaree precedent. If not, then this issue is ripe for US Supreme Court review.

Also, the standard of review applied by the 7th Circuit, in my opinion, is wrong.

I can expand on this issue along until hell freezes over, but verbum sapienti sat est!

Posted by: John Marshall | Nov 17, 2011 3:43:55 PM

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