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It was a strikingly long sentence-24 years and four months-imposed on a lawyer/accountant who was a first offender and a mid-level participant in a “cooking the books” securities fraud that the district court calculated had caused pecuniary harm of $105 million. The court said it took “no pleasure” in imposing the sentence, and that it was merely following the 2001 Federal Sentencing Guidelines, which it treated as mandatory. The guidelines calculation was: a base offense level of 6, and increases of two levels for use of sophisticated means (� 2B1.1(b)(8)(C)), two for use of special skill (� 3B1.3), four for harming 50 or more victims (� 2B1.1(b)(2)(B)), and 26 for causing a loss of more than $100 million (� 2B1.1(b)(1)(N)). The resulting total offense level of 40, combined with a criminal history category of 1, led to a sentencing range of 292 to 365 months (U.S.S.G. Ch. 5, pt. A). The sentence was at the very bottom of the guidelines’ range. The top was 30 years and five months. The 5th U.S. Circuit Court of Appeals has now vacated the sentence and remanded. U.S. v. Olis, No. 04-20322 (5th Cir. Oct. 31, 2005). The court of appeals held, among other things, that Olis had preserved his Sixth Amendment objection to the sentencing procedure; that, under U.S. v. Booker, 542 U.S. 296 (2005), the district court should have treated the guidelines as advisory, not mandatory; and that its error was not harmless. The court of appeals went on to give guidance for the district court’s calculation of loss at the resentencing. Taking a look at the5th Circuit’s analysis At issue was actual, rather than intended, loss. See � 2B1.1, cmt. n.2(A) (2001) (for the 2004 version, see � 2B.1.1, cmt. n.3(A)). Actual loss is “the reasonably foreseeable pecuniary harm that resulted from the offense,” � 2B1.1, n.2(A)(i) (2001), i.e., pecuniary “harm that the defendant knew or, under the circumstances, reasonably should have known was a potential result of the offense,” id. at n.2(A)(iv). Moreover, the harm must have been caused directly by the offense, Olis at 12; and the judicial approach to the issue of causation must be economically realistic, id. at 12-13. In Olis, the effect of the fraud was to inflate artificially the value of the stock of a publicly held corporation. When the fraud was publicly disclosed, the value of the stock fell. The sentencing court, however, must “correlate the defendant’s sentence with the actual loss caused in the marketplace, exclusive of other sources of stock price decline.” Id. at 15. Although the methods of loss calculation for purposes of sentencing are “less exact than the measure of damages applicable in civil litigation,” id. at 15-16, the court must apply a “nuanced approach modeled upon loss causation principles,” id. at 16. The 5th Circuit criticized the government’s approach because it “measured paper losses in the company’s value, which have no correlation with losses to actual shareholders who bought or sold based on fraudulent information.” Id. It chided the Justice Department for “persistently adopt[ing] aggressive, inconsistent, and unsupportable theories of loss.” Id. at 16 n.11. The court also criticized the district court’s calculation for failing to “take into account the impact of extrinsic factors on [the] stock price decline.” Id. at 18. On the basis of an expert report submitted by Olis, but rejected by the district court, the court of appeals also made it clear that “attributing to Olis the entire stock market decline suffered by one large or multiple shareholders . . . would greatly overstate his personal criminal culpability.” Id. Consequently, on remand, Olis’ sentence is likely to be significantly shorter. (A finding that he caused only, say, $50 million of the loss, rather than $105 million, however, would save him only two offense levels, and would reduce the bottom of the guidelines range to 19 years and seven months. Nevertheless, under Booker the sentencing judge is required only to consider the guidelines, not to follow them.) In sum, in determining loss, the need is for “thorough analyses grounded in economic reality.” Id. at 16. Thus, in cases of this type, the number of years the guidelines suggest that a defendant should spend in prison will commonly depend on the outcome of a battle between economists applying their expertise to what in some cases will be a difficult and arcane task: teasing out the portion of a stock price decline attributable to the defendant’s conduct from the portions attributable to other factors. This result seems a logical application of the guidelines. Much is wrong with the guidelines. See generally the October 2005 issue of the Stanford Law Review, devoted entirely to articles relating to the guidelines. Olis illustrates some particular problems. The guidelines give far too much weight to the supposedly quantifiable factor of “pecuniary harm” as compared to other aspects of offense conduct. In Olis, the 26-level enhancement from the loss calculation outweighed by far all the other aspects of the offense conduct. As the 5th Circuit noted, that one enhancement “placed Olis in a punishment range exceeding fifteen years’ imprisonment.” Id. at 11. Some types of harm are not readily quantifiable Some types of harm are not readily quantifiable (e.g., the various types of harms to numerous constituencies when revelation of a fraud causes a substantial company to become bankrupt); the apparent precision of calculations of pecuniary harm is achieved by disregarding such types of loss. Even where attention is limited to a presumably quantifiable type of harm (e.g., loss in share value attributable to revelation of a fraud), in many cases the final quantification will be subject to substantial doubt. Nevertheless, where a calculated pecuniary harm is very large, it commonly will suggest sentences that seem grossly disproportionate to culpability, as Olis illustrates. In cases involving large accounting frauds (among those likely to receive substantial public attention), the complexity, sophistication and difficulty of the loss calculation required by the guidelines are likely to produce disparate results, and thereby contribute to unpredictability and to the distancing of ultimate sentences from public understanding. The moral and educational force of the criminal law is diminished not only by unjust laws, prosecutions and convictions, but also by sentences that do not bear a relationship with the crime and the criminal that is readily understandable by and acceptable to the public. The very lengthy sentences threatened by the guidelines plainly have not deterred the large accounting frauds uncovered in recent years. What they have deterred is going to trial. The difference between the sentences imposed on defendants found guilty after trial and those imposed on defendants who plead guilty can be dramatic. Olis’ two indicted co-defendants pled guilty in exchange for a maximum sentence of five years. Id. at 4. From 1982 to 2004, of all federal criminal defendants whose cases were disposed of, the percentage convicted and sentenced has increased from 80% to 90%, and the percentage pleading guilty or nolo contendere has increased from 68% to 87%. The percentage of convictions that result from a plea of guilty or nolo contendere has increased from 85% to 96%. Among those going to trial, the acquittal rate has not changed substantially (19.3% in 1982 compared to 19.7% in 2004). (These percentages are derived from www.uscourts.gov/judicialfactsandfigures/table3.05.pdf). Legislatively mandated or encouraged provisions for extremely lengthy sentences are attempts to remedy the inadequacy of measures to prevent and detect crime. If adequate deterrence were achieved through a high likelihood of detection, the supposed need for very heavy punishments to deter (on the premise that they do deter) presumably would decline. Over time, increased success with institutional reforms designed to enhance prevention and detection (e.g., Sarbanes-Oxley and the guidelines for sentencing of organizations) is likely to relieve some of the pressure for harshness in sentencing. A revised guideline tailored for accounting fraud Given the current political constraints on public policy toward crime, what is to be done about sentencing for accounting fraud in public companies? One useful suggestion is a revised guideline tailored specifically to such cases. See John C. Coffee Jr., “Are We Really Getting Tough on White Collar Crime,” 15 Fed. Sentencing Rptr. 245, 247 (2003). As Coffee points out, in such cases, the extent of share price decline due to revelation of the fraud is generally not predictable, and “is not necessarily an accurate proxy for the ‘reasonably foreseeable pecuniary harm.’ ” And the enhancement for harming 50 or more victims is not well suited to this type of offense. Id. at 246. In cases of accounting fraud, moreover, use of sophisticated means is likely to be common; and the people who implement the fraud are likely to have some special skill or position of trust. A specially tailored guideline should fold the enhancements for these factors into the base offense level, should give greater weight, relative to the amount of the loss, to other aspects of the offense conduct (e.g., the extent to which the defendant recruited, or even pressured, others, particularly subordinates, to participate in the fraud), and should yield sentences that accord more closely to the culpability of this crime compared to other crimes. Richard Cooper is a partner at Williams & Connolly in Washington. He can be reached via e-mail at [email protected].

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