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August 29, 2014

Based on additional 3553(a) justifications, Eighth Circuit affirms "profound downward variance to a sentence of probation" in multi-million dollar fraud

Especially in the years right after after Booker, the Eighth Circuit garnered a (seemingly well-deserved) reputation as one of the circuits most likely to reverse below-guideline sentences as too lenient.  But after a number of those reversals were thereafter reversed by the Supreme Court in cases like Gall and Pepper, it seemed the Eighth Circuit became somewhat more willing to uphold below-guideline sentences, and today in US v. Cole, No. 11-1232 (8th Cir. Aug. 29, 2014) (available here), a unanimous panel has upheld a probation sentence in a high-loss, white-collar case that in the past I would expect to see reversed based on the government's appeal.

The Cole decision from the Eighth Circuit is relatively short, and it is today's must-read for any and all white-collar practitioners.   Here are snippets that help highlight why:

A jury found Abby Rae Cole guilty of conspiracy to commit mail and wire fraud, tax evasion, and conspiracy to commit tax fraud.  The district court sentenced Cole to three years probation, a downward variance from the advisory Guidelines range of 135 to 168 months imprisonment.  The government appealed the sentence as substantively unreasonable, and Cole cross-appealed her convictions.  We affirmed the convictions but declined to reach the issue of whether the sentence is substantively unreasonable, finding procedural error in the lack of an adequate explanation by the district court for the sentence and the substantial downward variance.  We remanded the case to afford the district court a chance to supply an adequate explanation....

In our previous opinion, we noted that before reaching the substantive reasonableness of a sentence “‘[w]e must first ensure that the district court committed no significant procedural error,’” such as “failing to adequately explain the chosen sentence—including an explanation for any deviation from the Guidelines range.” Id. (quoting United States v. Feemster, 572 F.3d 455, 461 (8th Cir. 2009) (en banc)). We noted that Cole and her co-conspirators’ convictions were based on the theft of approximately $33 million from Best Buy over a four-year period and the evasion of over $3 million in taxes, Cole’s sentencing Guidelines range was 135 to 168 months imprisonment, and Cole’s co-conspirators, her husband and a Best Buy employee, received sentences of 180 and 90 months respectively. Despite these facts, the district court provided scant explanation for the profound downward variance to a sentence of probation.

On remand, the district court received additional briefing from the parties, conducted a hearing in which it heard additional argument with respect to sentencing, and then announced its reasons for the downward variance and the probationary sentence in a lengthy and comprehensive analysis concluding with the observation that this is an “unusual, extraordinary case in which a sentence of three years probation was appropriate.”  In the additional analysis, the district court touched on all of the section 3553(a) factors in explaining the rationale behind the sentence it imposed upon Cole. The district court recognized the numerous restrictions Cole endured while on probation and the “lifelong restrictions” she faces as a federal felon, see 18 U.S.C. § 3553(a)(2)(A)&(B); the court stressed that, with the probationary sentence, Cole would be less likely to commit further crimes as she “has a far greater likelihood of successful rehabilitation with family support and stable employment,” see 18 U.S.C. § 3553(a)(2)(C). The court also explained that while “[t]his was one of the largest corporate frauds in Minnesota history and was also a significant tax fraud,” Cole served a more minor role as, in the court’s judgment, she was “mostly a passive, although legally responsible, participant.” See 18 U.S.C. § 3553(a)(1).  The court focused on Cole’s history and characteristics, emphasizing that she had no prior contact with law enforcement and was “markedly different” than “most of the fraudsters who appear before th[e] Court” in that Cole “is not a consummate fraudster, she is not a pathological liar.” See 18 U.S.C. § 3553(a)(6). Finally, the district court explained that the probationary sentence would allow Cole to work and earn money to make restitution to the victims of the fraud.  See 18 U.S.C. § 3553(a)(7).

The United States persists in its appeal, contending that the district court improperly based the sentence on Cole’s socioeconomic status, her restitution obligations, and her loss of criminally derived income.  However, the facts of Cole’s fall from an industrious and highly successful entrepreneur to convicted felon and the loss of the bulk of her legitimately acquired assets cannot be denied.  We find no error in the district court’s reference to these events....

While we do not minimize the seriousness of the crimes perpetrated by Cole and the staggering nature of the fraudulent scheme in which Cole was a participant, the district court here, unlike in Dautovic, has adequately explained the sentence and appropriately considered the section 3553(a) factors in varying downward to a probationary sentence, making “precisely the kind of defendant-specific determinations that are within the special competence of sentencing courts.”  Feemster, 572 F.3d at 464 (quotation omitted).  For instance, the district court noted that Cole’s role in the offense was mostly as a passive participant and Cole was not the typical white collar defendant the court had observed in similar criminal schemes.  We find no error in the weighing of the section 3553(a) factors, and thus the district court did not abuse its substantial discretion in sentencing Cole to probation.

This ruling strikes me a one-in-a-million outcome: I cannot recall another case (out of the nearly million cases that have been sentenced in the federal system since Booker) in which the defendant faced a guideline range of 11 to 14 years and received a sentence of probation.  This outcome seems all that much more remarkable given that this huge (and now declared reasonable) variance was in a case in which the defendant did not plead guilty or provide substantial assistance to the government and involved "one of the largest corporate frauds in Minnesota history and was also a significant tax fraud."

Because this Cole case seems remarkable in many ways, and because it likely will be (and should be) cited by nearly every white-collar offender facing federal sentencing in the months and years ahead, it would not shock me if the Justice Department seriously considers pursuing an appeal up to the Supreme Court. 

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" The district court recognized the numerous restrictions Cole endured while on probation and the “lifelong restrictions” she faces as a federal felon"

Why just white collar? Equally applicable to any non violent first time felons. Except if the defendant happens to be poor (and so doesn't have the luxury of losing all of her assets) and engaged in only a hundred thousand dollar fraud, then the Judge finds a need to send a message. Glad for this defendant but unfortunate that Judges give leniency to those with whom they can identify. A working class or middle class white or black woman engaging in fraud where the guidelines call for 3-4 years imprisonment has no chance at probation, in my experience.

Posted by: Jay | Aug 29, 2014 2:42:10 PM

Jay, unfortunately I agree with you on middle class getting hosed and those made out of money get a much better deal. The middle class and the poor are feral whipping pists.

Its really pretty much the outcome.

Posted by: Midwest Guy | Aug 29, 2014 9:27:59 PM

All value ever created in history has come from the time and labor of a human being. So even if you find a $million diamond after walking on the beach for 10 minutes, while on vacation, that is very valuable 10 minutes of labor.

Assume, it is settled that the value of a human life is $6 million.

If a defendant has committed a crime causing $6 million in damages or more, not including investigatory or legal costs, then that defendant has murdered an economic person. This is a fictitious person, but the money value of the person is real.

Above $6 million in damages all economic crimes should carry the death penalty.

Posted by: Supremacy Claus | Aug 30, 2014 2:35:01 PM

The death penalty for economic crimes beyond the value of a human life would balance the racial disparity abolitionists complain about. I am betting their enthusiasm for abolition will be muted when it is rich white business men getting the needle. They do not generate government make work jobs, and have private, highly effective lawyers, not the losers on the government payroll. Because of this effectiveness, all death penalties for the murder of an economic person should be automatic, mandatory, and summarily carried out.

Posted by: Supremacy Claus | Aug 30, 2014 6:01:46 PM

Would never happen in the 8th in a drug case. Classic double standard.

Posted by: Steve Prof | Sep 1, 2014 5:52:08 PM

This is one of the worst sentencing opinions I have read in recent memory. There's no analysis whatsoever, no efforts to address the government's arguments, and a complete abdication from its role as an appellate court. Although Gall rejects a strict proportionality test, it does require that extraordinary departures/variances be justified by extraordinary reasons. The district court did not identify anything on remand that makes this defendant so extraordinarily unique that she deserves no jail time. You cannot be a passive participant in a criminal scheme and be convicted of numerous federal felonies. That flies in the face of the jury's verdict. There is also nothing unique that a defendant will face collateral consequences as a result of criminal conviction, or that she will be forced to make restitution. Indeed, the reasons offered by the district court are already taken into consideration by the Guidelines (e.g., lack of criminal history) or otherwise disfavored (e.g., familial status - being a parent and single mom). What the district court judge said about this defendant could be said to virtually every defendant - regardless of their criminal history - that this is going to impact your family and cost you monetarily. I am at a loss to explain how someone who was convicted of tax evasion (a federal offense that requires a showing of "willfulness") and conspiracy in a $40 million scheme can walk away without a custodial sentence. Here we have the founder and CEO of a company involved in a massive fraud and tax evasion scheme. And she received no punishment. Amazing.

Posted by: BearsLikeHoney | Sep 4, 2014 1:44:24 AM

I am responding to Steve Prof. I think your statement that "she received no punishment" is far from accurate and misleading. In your view, is prison the only way the criminal justice system can punish a defendant? So anything less than prison is not punishment in your view?

My question is this:

Why do we sentence white collar offenders to prison in the first place (this can apply equally to other offenders but I’ll focus on the fraudsters in this post)? And I have not seen a good enough justification so far.

The original father of the sentencing guidelines would turn over in his grave if he saw what takes place today. Sentences of 15, 20, 30, 112, 150, 840 years etc are common place and today there is no parole, which means defendants will actually serve at least 85% of the sentence imposed.

The loss tables in 2B1.1 often produce a distorted picture of what actually took place. Ponzi schemes, bank fraud schemes, corporate schemes etc. certainly do lead to substantial losses, but the loss figure is usually not what the defendant personally profited from the offense. It is not the same as robbing a bank of $10,000 and driving away in a getaway car.

And, more often than not, fraud cases have relevant and acquitted conduct thrown in to boost the figures. A recent example is the case of Jess Litvak sentenced by Judge Janet Hall in the District of Connecticut. The indictment charged a handful of instances where he cheated his counter-parties (he acted like a used car salesman), yet in the PSR the Government alleged 76 uncharged instances of the same conduct.

So, turning to 3553(a)(1) & (2)

(1) the nature and circumstances of the offense and the history and characteristics of the defendant;

(2) the need for the sentence imposed—

(A) to reflect the seriousness of the offense, to promote respect for the law, and to provide just punishment for the offense;

In my view, just punishment needs to focus less on retribution and punitiveness and more on restitution (I’ll write more on that below).

It was not that long ago that white collar offenses in the US almost always attracted a sentence of less than 10 years. This was considered enough to provide just punishment for the offense and promote respect for the law. For most white collar offenders who have education, family, etc., key indicators that lower the chance of recidivism, a criminal conviction of any sort is a wake up call. It rules out most jobs, is a permanent stain on their lives, and will never ever go away (there are countless stories on this point and I am not going to list them here). Why is a criminal conviction and the attendant shaming and humiliation not enough? Moreover, is probation, itself, not a restriction on a person’s liberty?

Yet, thanks to politicization of numerous corporate scandals, white collar offenders these days face years, decades to potentially centuries in prison in the US.

My question is this: is this new approach better serving the aims of 3553(a)? No. And I think it is far from rational, it is irrational.

In Europe, life sentences (or the equivalent of life sentences) where there was no physical injury or risk of physical injury are unheard of. And still the justice systems operate just fine. Why is the US so systematically more punitive? I have read some research by Prof. Richard Fraser, amongst others, and they attribute it, in part at least, to the media and the politicization of the criminal justice process.

Jerome Kerviel, who cost Societe General, 4.9 billions of euros in losses was sentenced to 3 years in prison with two suspended.

Kweku Adoboli, who cost UBS over $2 billion was sentenced to 7 years in prison (of which he has to serve 50%).

As it stands, restitution orders, I believe, are also excessive. Since the MVRA, there is no longer any assessment of whether a defendant can pay. A cursory research of the outstanding restitution orders revealed that a majority are unpaid because the defendants lack any means to pay them. Again, defendants who have criminal convictions (and who are usually older) are not going to stage a come around or a come back. There is a way to address this, but it might sound to liberal, to European! In many European countries, after a certain amount of time has passed, they are considered automatically rehabilitated and can’t be denied a job (except in positions of trust etc such as lawyers, banks etc). There is also a proposal on the table in the US, the Sens. Paul and Booker inspired “REDEEM Act.”

I think any attempt to reform the fraud/loss guidelines vis-a-vis 3553(a) has to also look at how restitution orders are administered and where to draw the line. At present, most defendants who lead a company into bankruptcy, their only hope is their actions can be undone through the bankruptcy court process (trustee initiates adversary actions to recover the misappropriated funds), yet so much is lost and dissipated (look at the Lehman or Enron bankruptcy) through the process that only pennies are left for the victims.

I just would not be surprised if I saw a white collar defendant who stole millions having to steal from a Walmart one day just to get by and then hearing a judge say at sentencing “why didnt you get a job?”

We have had almost 3 decades of trying this tough on crime, no the stain must stay, it is all your fault…surely, there has to be some other way.

(B) to afford adequate deterrence to criminal conduct;

The Sentencing Commission’s own research (the Fifteen Year Report) has shown that long prison sentences have very little correlation with deterrence. The moment a criminal conviction enters, there is ample deterrence. A hedge fund manager with a criminal conviction is not going to raise new funds. A bank fraudster is not going to be able to lie on a new application to get a new $1 million house, because, most probably, his credit will be ruined for at least 7 years from the last offense. A credit card fraudster, well, that maybe the exception because identity theft is easy and can be easily repeated.

Judges often fault the defendant — you were greedy, you knew no limits, you have no moral compass or you should have known better. In imposing the sentence, the Judge even may make comments to the effect that the sentence will “teach you not to do it again.” Okay. But, shouldn’t judges know better now too? After almost 30 years of guideline sentencing, rigidly passing out long sentences for white collar crime, costing the tax payer billions of dollars, this rise in sentence severity has done nothing to deter other would be white collar criminals. So, shouldn’t judges learn too? In the days before the guidelines, the question was more centered on whether a white collar criminal would go to jail, if at all, or if he would get probation. Today, the sentences can range from 1-5 years upwards of 845 (see United States v. Sholam Weiss, sentenced to 845 years, United States v. R. Allen Stanford, sentenced to 112 years, and, of course, the all time favorite, United States v. Bernard Maddoff, sentenced to 150 years). In short, I usually chuckle when I hear a judge say “x amount of years should deter other white collar offenders.”

It will do no such thing other than ruin any chances of rehabilitation for such a defendant, ruin his family (and if he has any kids, it may result in problems that are left over for society to deal with, as well as render any restitution order symbolic. Prison doesn’t pay its inhabitants very much; but it does cost the tax payer at least $150 a day to keep them in there!

There is no empirical evidence to show that sentence severity correlates to deterrence. Yet, after 30 years judges keep repeating the same mantra. This is just icing on the cake for me, aside from the usual Kantian objection to deterrence theory.

(C) to protect the public from further crimes of the defendant;

Let’s use an extreme example. Imagine if the evil and terrible Bernie Maddoff was released from prison tomorrow. Is there any chance he will get to start another fraudulent hedge fund? Would any investor give him a dime? Chances are as close to 0 as it can get.

Most white collar offenders are barred from their previous profession. They cant repeat the past because hedge funds banks etc, those circles require a clean squeaky image and name. What further crimes will they commit? Sure, they may get a DUI or some thing else, but a repeat of the past is very low on the scale of probabilities.

Again, I dont think this is so much an issue. I cant see a hedge fund manager (Bernie Maddoff), a former CEO (Jeff Skilling, Bernie Ebbers), former CFO (Andy Fastow), an insider trader (there are too many names to pick from), or the average mortgage defendant (you know, lied on the application by inflating his/her income) repeating their past. They will be shunned from those circles for life.

(D) to provide the defendant with needed educational or vocational training, medical care, or other correctional treatment in the most effective manner;

Most white collar defendants have education/vocational training. As for medical care, its on the tax payer and just imagine if such defendants were sentenced to probation, they could figure out themselves.

I might be sounding too easy on white collar defendants but they are in the least likely to re-offend category and the focus is just money – money can be replaced. Decades in prison where some defendants can’t even attend the funerals of their son (Jeff Skilling being a ready example), lose their entire lives (they get out at 80 and still have a multi-million dollar restitution order) seems absurd. It didnt use to be this way. Just go back to the 1980s, another decade that was not short on corporate and white collar crime. Why are judges and prosecutors blind to the fact that the system, as it treats white collar crime, doesn’t work? Why keep repeating the same response to white collar crime when its not working?

As for the ABA proposal. I have read it but I think it really needs to be firmed up. The trigger in the ABA proposal to require prison time for white collar offenders falls generally under seriousness of the offense, yet, there is no real guidance on what constitutes "serious." In the Jess Litvak case in Connecticut, the defense attorneys argued in their very well written sentencing memo that under the ABA guidelines, as a first time offender, he should receive only 14 months in prison because the offense was not that “serious.”

The Government countered that it was serious and requested a sentence (which they concocted by applying every enhancement in the ABA proposal), which was nearly identical to the proposed Guideline sentence (somewhere between 10-12 years). The district judge, Hon. Janet C. Hall, gave him 2 years, which was very reasonable.

I think the view that prison works and is necessary all the time is the root cause of the explosion of the prison population. A criminal conviction is, more often than not, sufficient and no more than necessary to serve all the purposes of 3553(a). Unfortunately, this would lead to disparate treatment versus those who sell drugs etc., but why is that different treatment bad? Its not.

Posted by: Anon | Sep 4, 2014 2:43:24 AM

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