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July 31, 2009

Tenth Circuit reverses Nacchio's sentence while thoughtfully discussing federal fraud sentencing

Though a thoughtful ruling in a major case, the Tenth Circuit today has reversed the sentence imposed on former Qwest CEO Joe Nacchio following his conviction for insider trading.  The unanimous panel opinion in US v. Nacchio, No. 07-1311 (10th Cir. July 31, 2009) (available here), is a must-read for everyone involved or interested in white-collar sentencing issues.  

The full opinion runs 59 pages and has lots of notable quotes.  Here is one of many sections (with important cites and footnotes left out) that should whet the appetite of sentencing fans:

Contrary to the district court’s net-profit approach, a disgorgement approach is entirely consonant with central principles of federal sentencing policy in that it endeavors to hold the defendant accountable for the portion of the increased value of the stock that is related to his or her criminally culpable conduct. Consequently, it militates against the creation of unwarranted sentencing disparities among similarly situated defendants.

Federal sentencing is individualized sentencing: the sentencing court seeks to craft a sentence that fully reflects a particular defendant’s criminally culpable conduct, including the harm caused by it, and the defendant’s personal circumstances....

However, if the impact of unrelated twists and turns of the market is ignored in the sentencing calculus then an insider trading defendant is likely to suffer a sentence that is detached from his or her individual criminal conduct and circumstances.  And this detachment can have a profound, detrimental impact onanother objective of federal sentencing — the elimination of unwarranted disparities between similarly situated defendants.

Therefore, from a policy perspective, it makes sense to adopt a sentencing approach that is focused on a defendant’s criminally culpable conduct and has the effect of excising — even if not completely — unrelated market forces from the sentencing calculus, thereby narrowing the zone of unpredictability in sentencing.  Such is the disgorgement approach we adopt here: it takes into consideration the fact that stocks have inherent value (quite apart from criminally fraudulent conduct) and seeks to exclude that unrelated value from the computation of a defendant’s punishment, and it sets a logical, temporal cutoff point for assessing the gain of the illegal conduct, i.e., the point when the information is disclosed and absorbed by the market.

As this excerpt spotlights, this big sentencing opinion from the Tenth Circuit in the Nacchio case covers matters of great interest and importance to both sentencing theorists and practicing corporate lawyers.  And how often do I get to say that?

July 31, 2009 at 12:03 PM | Permalink


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Looks like he gains by about $7.4 million and cuts his seven year sentence by about two years.


The sentence reduction might be a bit less if the Governor hires an expert that attributes more of the gain to insider information.

Posted by: ohwilleke | Jul 31, 2009 4:33:50 PM

Correction "cuts his six year sentence"

Posted by: ohwilleke | Jul 31, 2009 6:50:21 PM

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