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Sentences Reversed for Parties in $100 Million Fraud Scheme
New York Law Journal
March 18, 2008
Prosecutors have persuaded a federal appeals court to reverse the low sentences given a hotel group's former general counsel and its chief financial officer in connection with a $100 million bank fraud scheme.
The 2nd U.S. Circuit Court of Appeals on Monday threw out the term of probation for one-time Days Inn general counsel Sanford Freedman and the sentence of one year and one day meted out to the hotel chain's former CFO, James Cutler. One of several reasons that Freedman initially received a lower sentence was the public humiliation he suffered, including the loss of his law license, but the circuit found that was "hardly unusual."
The 2nd Circuit reversed the sentences in United States v. Cutler, 05-2516. Judges Dennis Jacobs, Amayla Kearse and Rosemary Pooler decided the consolidated appeals. Kearse wrote the panel's 77-page opinion.
Both Friedman and Cutler were convicted in the bank fraud scheme in connection with the rapid expansion of a hotel network that included Days Inn and several independent hotels run by Stanley S. Tollman and Monty D. Hundley.
Hundley was tried and convicted along with Cutler, Freedman and another co-defendant. Tollman fled the United States on the eve of his arraignment and remains at large.
Freedman, who owned between 2.5 percent and 4.7 percent of the business entities controlled by Tollman and Hundley, was convicted of 12 counts, including bank fraud, making false statements and perjury. Cutler was convicted of seven counts, including bank fraud and tax fraud.
Freedman was accused of handling negotiations for the owners as they fell deeply into debt; restructured; sold some of the Days Inn assets to what would later become Cendent Corp.; moved to invest in a Mississippi riverboat casino operation while inflating their net worth; and defrauded creditors by using sham foreign investors and by dramatically understating the owners' personal net worth.
Before Southern District of New York Judge Loretta Preska, prosecutors argued that the proper calculation under the U.S. Sentencing Guidelines would have Cutler serving a prison sentence of between 6 1/2 years to eight years, one month; and Freedman a sentence of between nine years and 11 years, three months.
Preska departed downwardly from the guidelines ranges for both defendants. She also ordered Cutler to pay restitution of $29.8 million and forfeit $1.4 million. Freedman was ordered to pay $14.6 million in restitution and forfeit $3 million.
The government claimed Preska underplayed the seriousness of the bank offenses based on the amount of money Cutler and Freedman personally received by finding that the loss amount overstated their culpability.
In addition, prosecutors said the judge erred in finding that sentencing Freedman to prison would be a "death sentence" because of his serious health problems, which included a heart condition.
The circuit agreed with several of these arguments.
'DISRESPECT FOR THE LAW'
Judge Kearse said that "the sentences imposed did not properly interpret certain of the sentencing factors that the court was required to consider under 18 U.S.C. §3553(c), such as 'punishment' and deterrence of others; and ... some of the court's rationales would promote disrespect for the law."
For Cutler, the circuit said, "The magnitude of the losses suffered by the defrauded banks was precisely what the coconspirators intended, and there can be no doubt that Cutler knew the goal and took significant steps to achieve it."
The circuit said the lower court sentenced Cutler as if the frauds resulted in a loss of "little more than $70,000," and that it was concerned about the need to promote the perception of fairness in sentencing.
On top of finding that downward departures were not merited for Cutler's family circumstances or his ability to pay restitution, the court said the prison term of one year and one day "was not commensurate with the seriousness of the offense, would not act as a deterrent to would-be violators, did not promote respect for the tax laws and was substantively unreasonable."
In Freedman's case, the circuit said the lower court erred by not adding a two-step increase to his offense level for obstruction of justice for false statements he made to IRS investigators.
And as in Cutler's case, it found error in the lower court's decision that the loss attributed to Freedman overstated his culpability.
"Here, the massive losses incurred by the banks not only were foreseeable, they were the express goal of a highly orchestrated conspiracy," Kearse said. "Further, Freedman's participation in that conspiracy was pervasive."
Judge Preska had found that a prison term would ordinarily be merited, but that Freedman had already received "just punishment" because of "the public nature of the prosecution, the public humiliation" he suffered, "the loss of his law license" and other consequences.
But the circuit said "the consequences listed by the court are hardly unusual."
The lower court granted a departure for Freedman's age (69 at the time of sentencing) and health -- his heart condition and what the court said was a "near-fatal" bout with urosepsis.
"This departure is most troublesome because of the implications of the court's findings with respect to the Bureau of Prisons to care for prisoners who have heart conditions and because the evidence as to the ailment on which the court principally relied indicated that the ailment was not caused by Freedman's heart condition and was neither permanent nor constant," Kearse said.
The circuit remanded the case for resentencing.
Assistant U.S. Attorneys Justin Weddle and Stanley J. Okula represented the government.
William J. Schwartz of Cooley Godward Kronish represented Cutler.
Audrey Strauss of Fried Frank represented Freedman.
