AMENDMENT 761
The Commentary to §2B1.1 captioned “Application Notes” is amended in Note 3(E) by adding at the end the following:
“(iii) Notwithstanding clause (ii), in the case of a fraud involving a mortgage loan, if the collateral has not been disposed of by the time of sentencing, use the fair market value of the collateral as of the date on which the guilt of the defendant has been established, whether by guilty plea, trial, or plea of nolo contendere.
In such a case, there shall be a rebuttable presumption that the most recent tax assessment value of the collateral is a reasonable estimate of the fair market value. In determining whether the most recent tax assessment value is a reasonable estimate of the fair market value, the court may consider, among other factors, the recency of the tax assessment and the extent to which the jurisdiction’s tax assessment practices reflect factors not relevant to fair market value.”;
in Note 3(F) by adding at the end the following:
“(ix) Fraudulent Inflation or Deflation in Value of Securities or Commodities.—In a case involving the fraudulent inflation or deflation in the value of a publicly traded security or commodity, there shall be a rebuttable presumption that the actual loss attributable to the change in value of the security or commodity is the amount determined by—
(I) calculating the difference between the average price of the security or commodity during the period that the fraud occurred and the average price of the security or commodity during the 90-day period after the fraud was disclosed to the market, and
(II) multiplying the difference in average price by the number of shares outstanding.
In determining whether the amount so determined is a reasonable estimate of the actual loss attributable to the change in value of the security or commodity, the court may consider, among other factors, the extent to which the amount so determined includes significant changes in value not resulting from the offense (e.g., changes caused by external market forces, such as changed economic circumstances, changed investor expectations, and new industry-specific or firm-specific facts, conditions, or events).”;
in Note 12(A) by adding at the end the following:
“(v) One or more of the criteria in clauses (i) through (iv) was likely to result from the offense but did not result from the offense because of federal government intervention, such as a ‘bailout’.”;
in Note 12(B)(ii) by adding at the end the following:
“(VII) One or more of the criteria in subclauses (I) through (VI) was likely to result from the offense but did not result from the offense because of federal government intervention, such as a ‘bailout’.”;
in Note 19(A)(iv) by inserting before the period at the end the following: “, such as a risk of a significant disruption of a national financial market”;
and in Note 19(C) by adding after the first paragraph the following new paragraph:
“For example, a securities fraud involving a fraudulent statement made publicly to the market may produce an aggregate loss amount that is substantial but diffuse, with relatively small loss amounts suffered by a relatively large number of victims. In such a case, the loss table in subsection (b)(1) and the victims table in subsection (b)(2) may combine to produce an offense level that substantially overstates the seriousness of the offense. If so, a downward departure may be warranted.”.
Section 2B1.4(b) is amended by striking “Characteristic” and inserting “Characteristics”; and by adding at the end the following:
“(2) If the offense involved an organized scheme to engage in insider trading and the offense level determined above is less than level 14, increase to level 14.”.
The Commentary to §2B1.4 captioned “Application Note” is amended in the caption by striking “Note” and inserting “Notes”; by redesignating Note 1 as Note 2 and inserting before Note 2 (as so redesignated) the following:
“1. Application of Subsection (b)(2).—For purposes of subsection (b)(2), an ‘organized scheme to engage in insider trading’ means a scheme to engage in insider trading that involves considered, calculated, systematic, or repeated efforts to obtain and trade on inside information, as distinguished from fortuitous or opportunistic instances of insider trading.
The following is a non-exhaustive list of factors that the court may consider in determining whether the offense involved an organized scheme to engage in insider trading:
(A) the number of transactions;
(B) the dollar value of the transactions;
(C) the number of securities involved;
(D) the duration of the offense;
(E) the number of participants in the scheme (although such a scheme may exist even in the absence of more than one participant);
(F) the efforts undertaken to obtain material, nonpublic information;
(G) the number of instances in which material, nonpublic information was obtained; and
(H) the efforts undertaken to conceal the offense.”;
in Note 2 (as so redesignated) by striking “only”; and by adding at the end the following new paragraph:
“Furthermore, §3B1.3 should be applied if the defendant’s employment in a position that involved regular participation or professional assistance in creating, issuing, buying, selling, or trading securities or commodities was used to facilitate significantly the commission or concealment of the offense. It would apply, for example, to a hedge fund professional who regularly participates in securities transactions or to a lawyer who regularly provides professional assistance in securities transactions, if the defendant’s employment in such a position was used to facilitate significantly the commission or concealment of the offense. It ordinarily would not apply to a position such as a clerical worker in an investment firm, because such a position ordinarily does not involve special skill. See §3B1.3, comment. (n. 4).”.
The Commentary to §2B1.4 captioned “Background” is amended by adding at the end the following new paragraph:
“ Subsection (b)(2) implements the directive to the Commission in section 1079A(a)(1)(A) of Public Law 111–203.”.
Reason for Amendment: This amendment responds to the two directives to the Commission in the Dodd–Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111–203 (the “Act”). The first directive relates to securities fraud and similar offenses, and the second directive relates to mortgage fraud and financial institution fraud.
Securities Fraud and Similar Offenses
Section 1079A(a)(1)(A) of the Act directs the Commission to “review and, if appropriate, amend” the guidelines and policy statements applicable to “persons convicted of offenses relating to securities fraud or any other similar provision of law, in order to reflect the intent of Congress that penalties for the offenses under the guidelines and policy statements appropriately account for the potential and actual harm to the public and the financial markets from the offenses.” Section 1079A(a)(1)(B) provides that in promulgating any such amendment the Commission shall—
(i) ensure that the guidelines and policy statements, particularly section 2B1.1(b)(14) and section 2B1.1(b)(17) (and any successors thereto), reflect—
(I) the serious nature of the offenses described in subparagraph (A);
(II) the need for an effective deterrent and appropriate punishment to prevent the offenses; and
(III) the effectiveness of incarceration in furthering the objectives described in subclauses (I) and (II);
(ii) consider the extent to which the guidelines appropriately account for the potential and actual harm to the public and the financial markets resulting from the offenses;
(iii) ensure reasonable consistency with other relevant directives and guidelines and Federal statutes;
(iv) make any necessary conforming changes to guidelines; and
(v) ensure that the guidelines adequately meet the purposes of sentencing, as set forth in section 3553(a)(2) of title 18, United States Code.
The amendment responds to this directive in two ways. First, the amendment amends the fraud guideline, §2B1.1 (Theft, Property Destruction, and Fraud), to provide a special rule for determining actual loss in cases involving the fraudulent inflation or deflation in the value of a publicly traded security or commodity. Case law and comments received by the Commission indicate that determinations of loss in cases involving securities fraud and similar offenses are complex and that a variety of different methods are in use, possibly resulting in unwarranted sentencing disparities.
The amendment amends §2B1.1 to provide a special rule regarding how to calculate actual loss in these types of cases. Specifically, the amendment creates a new Application Note 3(F)(ix) which establishes a rebuttable presumption that “the actual loss attributable to the change in value of the security or commodity is the amount determined by (I) calculating the difference between the average price of the security or commodity during the period that the fraud occurred and the average price of the security or commodity during the 90-day period after the fraud was disclosed to the market, and (II) multiplying the difference in average price by the number of shares outstanding.” The special rule further provides that, “[i]n determining whether the amount so determined is a reasonable estimate of the actual loss attributable to the change in value of the security or commodity, the court may consider, among other factors, the extent to which the amount so determined includes significant changes in value not resulting from the offense (e.g., changes caused by external market forces, such as changed economic circumstances, changed investor expectations, and new industry-specific or firm-specific facts, conditions, or events).”
The special rule is based upon what is sometimes referred to as the “modified rescissory method” and should ordinarily provide a “reasonable estimate of the loss” as required by Application Note 3(C). This special rule is intended to provide courts a workable and consistent formula for calculating loss that “resulted from the offense.” See §2B1.1, comment. (n.3(A)(i)). By averaging the stock price during the period in which the fraud occurred and a set 90-day period after the fraud was discovered, the special rule reduces the impact on the loss calculation of factors other than the fraud, such as overall growth or decline in the price of the stock. See, e.g., United States v. Bakhit, 218 F. Supp. 2d 1232 (C.D. Cal. 2002); United States v. Snyder, 291 F.3d 1291 (11th Cir. 2002); United States v. Brown, 595 F.3d 498 (3d Cir. 2010); see also 15 U.S.C. § 78u-4(e) (statutorily setting forth a similar method for loss calculation in the context of private securities litigation). Furthermore, applying this special rule could “eliminate[], or at least reduce[], the complexity, uncertainty, and expense inherent in attempting to determine out-of-pocket losses on a case-by-case basis.” See United States v. Grabske, 260 F. Supp. 2d. 866, 873–74 (N.D. Cal. 2002).
By applying a rebuttable presumption, however, the amendment also provides sufficient flexibility for a court to consider the extent to which the amount determined under the special rule includes significant changes in value not resulting from the offense (e.g., changes caused by external market forces, such as changed economic circumstances, changed investor expectations, and new industry-specific or firm-specific facts, conditions, or events).
The amendment also responds to the first directive by amending the insider trading guideline, §2B1.4 (Insider Trading). First, it provides a new specific offense characteristic if the offense involved an “organized scheme to engage in insider trading.” In such a case, the new specific offense characteristic provides a minimum offense level of 14. The commentary is also amended to provide factors the court may consider in determining whether the new minimum offense level applies.
The amendment reflects the Commission’s view that a defendant who engages in considered, calculated, systematic, or repeated efforts to obtain and trade on inside information (as opposed to fortuitous or opportunistic instances of insider trading) warrants, at minimum, a short but definite period of incarceration. Sentencing data indicate that when a defendant engages in an organized insider trading scheme, the gain from the offense ordinarily triggers an enhancement under §2B1.4(b)(1) of sufficient magnitude to result in a guideline range that requires a period of imprisonment. The amendment, however, ensures that the guidelines require a period of incarceration even in such a case involving relatively little gain.
The amendment also amends the commentary to §2B1.4 to provide more guidance on the applicability of §3B1.3 (Abuse of Position of Trust or Use of Special Skill) in insider trading cases. In particular, the new commentary in Application Note 2 provides that §3B1.3 should be applied if the defendant’s employment in a position that involved regular participation or professional assistance in creating, issuing, buying, selling, or trading securities or commodities was used to facilitate significantly the commission or concealment of the offense. The commentary further provides examples of positions that may qualify for the adjustment, including a hedge fund professional who regularly participates in securities transactions or a lawyer who regularly provides professional assistance in securities transactions. Individuals who occupy such positions possess special knowledge regarding the financial markets and the rules prohibiting insider trading, and generally are viewed as more culpable. See §3B1.3, comment. (backg’d.). The commentary also provides as an example of a position that would not qualify for the adjustment in §3B1.4 a clerical worker in an investment firm. Such a position ordinarily does not involve special skill and is not generally viewed as more culpable.
Mortgage Fraud and Financial Institution Fraud
Section 1079A(a)(2)(A) of the Act directs the Commission to “review and, if appropriate, amend” the guidelines and policy statements applicable to “persons convicted of fraud offenses relating to financial institutions or federally related mortgage loans and any other similar provisions of law, to reflect the intent of Congress that the penalties for the offenses under the guidelines and policy statements ensure appropriate terms of imprisonment for offenders involved in substantial bank frauds or other frauds relating to financial institutions.” Section 1079A(a)(2)(B) of the Act provides that, in promulgating any such amendment, the Commission shall—
(i) ensure that the guidelines and policy statements reflect—
(I) the serious nature of the offenses described in subparagraph (A);
(II) the need for an effective deterrent and appropriate punishment to prevent the offenses; and
(III) the effectiveness of incarceration in furthering the objectives described in subclauses (I) and (II);
(ii) consider the extent to which the guidelines appropriately account for the potential and actual harm to the public and the financial markets resulting from the offenses;
(iii) ensure reasonable consistency with other relevant directives and guidelines and Federal statutes;
(iv) make any necessary conforming changes to guidelines; and
(v) ensure that the guidelines adequately meet the purposes of sentencing, as set forth in section 3553(a)(2) of title 18, United States Code.
The amendment responds to this directive in two ways.
First, the amendment adds language to the credits against loss rule, found in Application Note 3(E) of the commentary to §2B1.1. Application Note 3(E)(i) generally provides that the determination of loss under subsection (b)(1) shall be reduced by the money returned and the fair market value of the property returned and services rendered to the victim before the offense was detected. In the context of a case involving collateral pledged or otherwise provided by the defendant, Application Note 3(E)(ii) provides that the loss to the victim shall be reduced by either “the amount the victim has recovered at the time of sentencing from disposition of the collateral, or if the collateral has not been disposed of by that time, the fair market value of the collateral at the time of sentencing.”
The Commission received comment that, in cases involving mortgage fraud where the collateral has not been disposed of by the time of sentencing, the fair market value of the collateral may be difficult to determine and may require frequent updating, especially in cases involving multiple properties. The comments further indicate that the lack of a uniform process may result in unwarranted sentencing disparities.
The amendment responds to these concerns by establishing a new Application Note 3(E)(iii) applicable to fraud cases involving a mortgage loan where the underlying collateral has not been disposed of by the time of sentencing. In such a case, new Application Note 3(E)(iii) makes two changes to the calculation of credits against loss. First, the note changes the date on which the fair market value of the collateral is determined, from the time of sentencing to the date on which the guilt of the defendant has been established. This change is intended to avoid the need to reassess the fair market value of such collateral on multiple occasions up to the date of sentencing. Second, it establishes a rebuttable presumption that the most recent tax assessment value of the collateral is a reasonable estimate of the fair market value. In determining whether the tax assessment is a reasonable estimate of fair market value, the note further provides that the court may consider the recency of the tax assessment and the extent to which the jurisdiction’s tax assessment practices reflect factors not relevant to fair market value, among other factors.
By structuring the special rule in this manner, the amendment addresses the need to provide a uniform practicable method for determining fair market value of undisposed collateral while providing sufficient flexibility for courts to address differences among jurisdictions regarding how closely the most recent tax assessment correlates to fair market value. The Commission heard concerns, for example, that, in some jurisdictions, the most recent tax assessment may be outdated or based upon factors, such as the age or status of the homeowner, that have no correlation to fair market value.
The amendment also responds to the second directive by amending the commentary regarding the application of §2B1.1(b)(15)(B), which provides an enhancement of 4 levels if the offense involved specific types of financial harms (e.g., jeopardizing a financial institution or organization). This commentary, contained in Application Note 12 to §2B1.1, provides a non-exhaustive list of factors the court shall consider in determining whether, as a result of the offense, the safety and soundness of a financial institution or an organization that was a publicly traded company or that had more than 1,000 employees was substantially jeopardized. For example, in the context of financial institutions, the court shall consider whether the financial institution became insolvent, was forced to reduce benefits to pensioners or insureds, was unable on demand to refund fully any deposit, payment, or investment, or was so depleted of its assets as to be forced to merge with another institution. Similarly, in the context of a covered organization, the court shall consider whether the organization became insolvent or suffered a substantial reduction in the value of its assets, filed for bankruptcy, suffered a substantial reduction in the value of its equity securities or its employee retirement accounts, or substantially reduced its workforce or employee pension benefits.
The amendment amends Application Note 12 to add as a new consideration whether one of the listed harms was likely to result from the offense, but did not result from the offense because of federal government intervention, such as a “bailout.” This amendment reflects the Commission’s intent that §2B1.1(b)(15)(B) account for the risk of harm from the defendant’s conduct and its view that a defendant should not avoid the application of the enhancement because the harm that was otherwise likely to result from the offense conduct did not occur because of fortuitous federal government intervention.
Departure Provisions
Finally, the amendment also responds to the Act’s directives by amending the departure provisions in §2B1.1 to provide two examples of cases in which a departure may be warranted.
First, the amendment amends Application Note 19(A)(iv), which provides that an upward departure may be warranted if the offense created a risk of substantial loss beyond the loss determined for purposes of subsection (b)(1). The amendment adds “risk of a significant disruption of a national financial market” as an example of such a risk. This part of the amendment responds to the requirement in the Act to consider whether the guidelines applicable to the offenses covered by the directives appropriately “account for the potential and actual harm to the public and the financial markets[.]”
The amendment also amends Application Note 19(C), which provides that a downward departure may be warranted if the offense level substantially overstates the seriousness of the offense, by adding an example of a case in which such a departure may be appropriate. The example provides that “a securities fraud involving a fraudulent statement made publicly to the market may produce an aggregate loss amount that is substantial but diffuse, with relatively small loss amounts suffered by a relatively large number of victims,” and that, “in such a case, the loss table in subsection (b)(1) and the victims table in subsection (b)(2) may combine to produce an offense level that substantially overstates the seriousness of the offense.” This part of the amendment responds to concerns raised in comment and case law that the cumulative impact of the loss table and the victims table may overstate the seriousness of the offense in certain cases.
Effective Date: The effective date of this amendment is November 1, 2012.