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November 9, 2010

"How a Fraud's Value Affects Prison Time"

The title of this post is the headline of this new Wall Street Journal article.  Here are excerpts:

When Bruce Karatz was running KB Home, the giant home builder pulled in billions of dollars a year in revenue.  But now, a mere $11 million could help determine whether Mr. Karatz spends more than a half decade in prison....

The U.S. Probation Office, an arm of the courts, has recommended that Judge Otis Wright give Mr. Karatz probation and eight months of home confinement. The U.S. Attorney's office here wants a 6.5-year prison sentence.  In a filing, the prosecutors argue that confining Mr. Karatz in his "24-room Bel-Air mansion," would suggest "a two-tiered criminal justice system, one for the affluent ... and a second for ordinary citizens."

In a federal court filing, Mr. Karatz's lawyers support the Probation Office's sentence recommendation.  The filing adds that of 11 individuals around the country found guilty of crimes related to options backdating, six have received probation and none has been sentenced to more than two years in prison.

The key issue in the case revolves around how much financial loss KB Home and its shareholders suffered. The Probation Office believes there was no loss. Prosecutors argue that the $11 million, representing gains Mr. Karatz made or hoped to make at KB Home's expense, qualifies him for a multiyear prison term.

The dispute is part of a growing debate over whether the sentencing system for white-collar crimes has come to rely too heavily on calculations of financial losses to fraud victims.  Under the sentencing guidelines, legal experts say, an executive of a large public company convicted of a crime like securities fraud could be sentenced to life imprisonment on a first offense.

Loss calculations have "become the single most significant driving factor" in white-collar sentencing, says James Felman, a Tampa, Fla., co-chairman of the American Bar Association's committee on sentencing.  The ABA is looking at recommending guideline revisions to lessen the influence of such calculations.

It can also be tricky to quantify some losses, critics argue, such as trying to determine how much impact financial manipulations had on a company's stock price.  Even critics acknowledge there has been a logic to the increasing white-collar-crime penalties.  With sharp rises in sentences for drug-related crime there was a feeling that swindlers shouldn't be treated better than dope dealers.  Public outrage over scandals, such as Enron Corp., also played a role.

But some judges are balking. Last month in New York, U.S. Judge John Gleeson gave a convicted securities swindler five years even though the guidelines called for 17 to 22 years.  "Here in the trenches where fraud sentences are actually imposed, there is a more nuanced reality," he wrote.

In June, the Justice Department wrote to the U.S. Sentencing Commission, which oversees the guidelines, that "we have seen with increasing frequency district courts sentencing fraud offenders — especially high-loss fraud offenders — inconsistently and without regard to the federal sentencing guidelines." It recommended a review and possible revision of the rules.

November 9, 2010 at 08:04 AM | Permalink


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You know somethings wrong when 11 million dollars is called a mere 11 million dollars without quotation marks in sight.

Where do I get my mere 11 million.

Posted by: Matt | Nov 9, 2010 2:40:40 PM

Let's agree that a human life is worth $6 million, using the market value approach, as opposed to the lifetime earning approach.

If a fraud has caused more than $6 million in harm or damage, it has killed the economic value or output of a human life. Thus, the count should start in 123D.

Posted by: Supremacy Claus | Nov 9, 2010 5:33:28 PM

There is no tenuous extrapolation in this loss calculation. It seems clear that the intended loss (what he would have realized had not the authorities intervened) was $11 million.

No guilded, home confinement cage for this greedy executive.

Posted by: mjs | Nov 9, 2010 7:08:02 PM

Bruce Karatz crimes will be felt by my grandchildren and great grandchildren not by his grandchildren. As the homes he built fall into the ground from shoddy, deceptive building practices accepted as the norm by United States politicians. Bruce has lined his pockets and his close circle of friends. Even Michael Milken the junk bond king did 4 years came down with cancer and paid $500 Million for his crimes. Stealing is not a crime to while collar criminals. Getting caught is the real crime. http://www.akbhomesucks.com


Posted by: LemonMeister | Nov 9, 2010 10:57:35 PM

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