Our Federal Prisons Are Fueled By Drugs

That’s the takeaway from this report by the federal courts and U.S. Sentencing Commission.

To summarize, there are almost 200,000 people in federal prison today, and almost half of them (or 48%) are there for drugs. Almost all of them (93%) are men, and the vast majority are young, minority men. The breakdown is 35% Hispanic, 35% black, and 27% white.

Here are the top five types of cases:

  1. Drugs (48%)
  2. Guns (19%)
  3. Immigration (8%)
  4. Child pornography and sex offenses (7%)
  5. Major frauds (5.8%)

For fraud cases, the median dollar loss was $800,000, in case you were wondering.

For the drug cases, here’s the breakdown among drugs:

  1. Methamphetamine (32.8%)
  2. Powder cocaine (24.2%)
  3. Crack cocaine (20.9%)
  4. Heroin (9.5%)
  5. Marijuana (8.4%)

Finally, the report shows how often people are sentenced below, above, or within the range that’s recommended by the federal sentencing guidelines. Here’s a crash course on the guidelines if you want to know how they work.

  • Half were sentenced within the guideline range (50.4%)
  • A quarter were sentenced below the range with the government’s support (24.7%)
  • One-fifth were sentenced below the range without the government’s support (21%)
  • Relatively few were sentenced above the guideline range (3.9%)

What Are Your Intentions?

In most white-collar cases, the main driver at sentencing is the dollar amount of the victim’s loss, and in federal cases, the rule is that you’re responsible for either the actual loss or your intended loss, whichever is greater. We touched on the difference between actual and intended loss in this post from last spring.

But recently, an influential federal court of appeals had to decide a case in which the defendant stole his employers’ trade secrets but didn’t actually cause or intend any loss.

How so?

The defendant was a young financial analyst who, over a two-year period, worked for two securities firms. Both firms had created computer software to engage in high-frequency trading, where a computer trades at lightning-fast speed in response to market events. Each firm had invested time and money to develop the algorithms behind its software.

The defendant pleaded guilty to copying their computer programs for his own use, but he didn’t sell them, publish them, or take them to a competitor.

Instead, he used them to start making computerized trades himself, and he lost $40,000 in the process. There was no evidence he had any bigger plans for them than that. He got caught when the second firm grew suspicious of the activity on his work computer, which led to his being indicted for wire fraud, computer hacking, and theft of trade secrets.

At sentencing, everyone agreed that the two firms had suffered no actual loss, and there was no evidence the guy intended to cause them any loss at all.

The trial court, however, found that he intended to cause a loss of $12 million because that was the total labor cost that the firms incurred in developing their software.

That number made a big difference. Under the federal sentencing guidelines, it jacked up the guy’s suggested sentence from probation, which may have included some time in home detention or a halfway house, to a sentence of seven to nine years in prison. Based on that, the court sentenced him to three years in prison.

And yet, there was no evidence that the guy intended to cause the victims any loss, let alone a loss that equaled their internal cost of development. Although the trial court could consider such costs under the sentencing guidelines, it could not base its loss estimate on those costs alone without any proof of the defendant’s intent.

So the court of appeals sent the case back for resentencing.

SCOTUS Stands Up for the Sixth Amendment

We’ve asked this question before. What if the government charged you with a crime, and you wanted to defend yourself but couldn’t—not because you didn’t have any money, but because the government had blocked all access to it?

Twenty-five years ago, the U.S. Supreme Court said the government can freeze your money before trial if there’s probable cause to believe the money’s traceable to the alleged crime, even if you have no other funds for legal fees.

Tough cookies if the government can drive trucks through a hole the size of probable cause. That’s your problem; the presumption of innocence be damned.

But last month, the Court was called on to decide whether the government could take the extra step of freezing assets that you need to fund a defense even if they’re not traceable to the alleged crime.

This time, the answer was no. Here’s how it went down.

The government had accused the defendant of a $45 million Medicare fraud, but when she was indicted, she had a mere $2 million to her name, which (the government agreed) included clean funds unrelated to the alleged fraud. The defendant wanted to use some of that money to pay for her defense.

Even so, the government moved for an order freezing all of it, and the court granted it. The government argued that the forfeiture statute authorized a freeze of both property traceable to the alleged crime and “property of equivalent value.” The defendant countered that, for God’s sake, she had a constitutional right to use her own money to fund a defense. The court, however, concluded that there was “no Sixth Amendment right to use untainted, substitute assets to hire counsel.”

The trial court’s order was affirmed on appeal, but the Supreme Court reversed, ruling that the government violated the defendant’s right to counsel when it restrained her legitimate, untainted assets in a way that deprived her of the ability to retain her counsel of choice.

Otherwise, the Court noted, the government could effectively prevent people from hiring private lawyers and law firms to defend them.

Then everyone would have to rely on a public-defense system that included “overworked and underpaid public defenders.”

Imagine that.

Federal Healthcare Fraud Is A Continuing Offense

Which means the statute of limitations won’t matter if the government can characterize your conduct as one, continuous scheme that extended into the limitations period.

So held a decision last week by the U.S. Court of Appeals for the Ninth Circuit, which covers California and eight other states.

The decision affirmed a podiatrist’s conviction for violating the federal healthcare fraud statute, 18 U.S.C. § 1347. That statute punishes you for knowingly executing, or attempting to execute, a scheme to defraud a federal healthcare benefit program like Medicare. If convicted, you face up to ten years in prison, a $250,000 fine, or both. That maximum sentence rises to twenty years if your conduct results in serious bodily injury, and it rises to life in prison if your conduct results in death. This doctor saw his patients through Medicare and Medicaid as well as workers’ compensation and private insurance programs.

After he was indicted, he moved to dismiss sixteen of the counts against him because they were based on allegedly false bills from a single date of service (at a nursing home) that fell outside the five-year statute of limitations.

The court agreed that all but one of the counts fell outside the five-year statute, so it dismissed those counts, but it preserved the one count because the doctor hadn’t submitted and received payment on that bill until a year later, on dates within the five-year period.

The government then returned to the grand jury and got a new indictment—called a superseding indictment—that combined the one surviving count and the several dismissed counts into one count alleging a continuous scheme that extended into the five-year period.

The doctor moved to dismiss this superseding indictment on the same ground, but the court denied his motion this time, and after a seven-day trial, a jury convicted him on multiple counts, including that one.

So can the government do that? Can it simply rewrite an indictment like that to avoid the statute of limitations? Can it simply re-file multiple counts as one continuing offense when it charged them the first time as separate counts?

In this case, the answer was yes.

The court of appeals held that healthcare fraud under section 1347 is a “continuing offense” that punishes each fraudulent scheme as a whole, rather than each act in furtherance of the scheme. The court reasoned that section 1347 was modeled after the federal bank-fraud statute, which is section 1344, so it should be interpreted the same way.

The court did note that, in a prior case, it had permitted the government to charge each bill as a separate execution of a fraudulent scheme on the ground that, with each bill, the defendant owed the insurer an independent obligation to be truthful.

But just because the government could’ve charged the case that way—and even did so, initially—didn’t mean that it had to do it that way. As long as the new indictment alleged one execution of a single, ongoing scheme, the government could charge it that way even though several acts in furtherance of the scheme fell outside the statute of limitations.

But You Promised!

File this one under, #CallYourLawyerFirst.

Two weeks ago, a federal court of appeals reversed a man’s conviction for mortgage fraud and ordered the case dismissed because the government had broken its promise not to prosecute him in exchange for his cooperation.

The case presents a strange but interesting set of facts.

From 2006 to 2007, the man worked for a real-estate firm that came to be investigated for mortgage fraud. In November 2007, he and his girlfriend, who also worked at the firm, actually contacted the FBI on their own to provide information about the company.

Four months later, the couple was formally interviewed by the government, and at the end of the interview, the man expressed concern about their own legal exposure, but the prosecutor assured them that they wouldn’t be prosecuted as long as they cooperated.

Fast-forward to February 2011: The government had indicted the owners of the real-estate firm and was preparing for trial. The prosecutor called the man to go over his testimony, and they were joined on the call by another prosecutor and an FBI agent. The call lasted an hour, and the agent prepared a report on it. Then the trial got postponed for unrelated reasons, and ultimately, the man wasn’t called on to testify in it.

But six months later, the other shoe dropped; in August, the man received a target letter from the government telling him that he was next. He hired a lawyer at that point, but negotiations failed, and he was indicted, too. All the while, the government never mentioned the immunity deal to his lawyer, but neither did the defendant, apparently, and it’s not clear why. Perhaps he simply didn’t understand the situation, or perhaps he was trying to protect his girlfriend, who testified in the main case later that year and was never prosecuted.

Now fast-forward to March 2013 and the defendant’s own trial. His girlfriend took the stand as a witness, and she testified to the prosecutor’s promise to them. That surprised the man’s defense lawyer, who promptly filed a motion to dismiss the indictment (after picking up his jaw from the floor, probably), and the court suspended the trial to hear the motion.

At the hearing, the government acknowledged the immunity deal but argued that the defendant had breached it by not continuing to cooperate. Both prosecutors testified that they issued the August target letter because they had called the defendant again in July 2011, but unlike in February 2011, he was suddenly uncooperative.

There was one problem, though: the August letter didn’t refer to any July call. Nor did it refer to any other failure to cooperate or otherwise explain why the government now considered the defendant a target. The defendant denied that a July call even took place.

The prosecutors’ story was suspect for other reasons as well. They testified they made the July call from a conference room in the U.S. Attorney’s office, but they couldn’t produce any notes, logs, or records of the call. They testified they called the defendant at the same phone number they had from his prior interviews, but they couldn’t point to any logs or records on that end, either. They testified that an FBI agent was present for the call, but they couldn’t recall which one it was, except for one who testified that he couldn’t remember such a call.

Despite all that, the trial court denied the defendant’s motion to dismiss and let the trial resume, whereupon he was convicted.

But the court of appeal reversed the case because the government hadn’t proven any breach of the immunity deal, given that the prosecutors’ testimony was directly contradicted by the phone records, and there was a total absence of other notes, logs, or records to support their version of the facts. The court offered to send the case back for an evidentiary hearing to help sort things out, but the government liked that idea even less, so the court dismissed the case.

Get it in writing, then, or better yet, call your lawyer first.

U.S. Sentencing Commission Amends Guidelines for White-Collar Fraud Cases

Any day now, the U.S. Sentencing Commission will submit to Congress a set of proposed amendments to the federal sentencing guidelines that it voted to approve three weeks ago. That matters because, in federal court, the guidelines drive most sentences and influence nearly all of them. If Congress doesn’t object to the amendments, they will go effective on November 1. Here’s a copy of the April 9 press release, and here’s a link to the text of the amendments on the Sentencing Commission’s website.

In particular, the proposed amendments will affect the main sentencing guideline that governs white-collar fraud cases. See U.S.S.G. § 2B1.1. Let us count the ways.

First, the amendments will change the definition of a defendant’s “intended loss,” which is important because § 2B1.1 punishes you based on the amount of loss you cause, and it defines “loss” as the greater of the actual loss or the intended loss. Currently, the guideline defines “intended loss” as the monetary harm that “was intended to result from the offense,” but the amendments would define it as the monetary harm that “the defendant purposely sought to inflict.” The aim of the new language is to align your punishment more with your specific intent and mental state.

Second, the amendments will change the way § 2B1.1 accounts for the number of victims. Right now, the guideline punishes you at progressively higher levels if your offense involved ten or more victims, fifty or more victims, or 250 or more victims. The amendments will shift the emphasis away from just the number of victims, which can include people whose losses were negligible, and toward the number of victims who suffered “substantial financial hardship” as a result. With this change, if even one victim suffered substantial financial hardship from the offense, the guideline will punish you for it, and it will punish you at progressively higher levels if you’re deemed to have caused such hardship for five or more victims or 25 or more victims. So what qualifies as substantial financial hardship? The court will decide that based on whether your victims became insolvent, had to file for bankruptcy, lost a big chunk of their savings, or other such factors.

Third, the amendments will revise the enhancement for offenses that involve the so-called use of “sophisticated means.” Right now, you get a bump in your sentence if the court concludes that your offense involved especially complex or intricate conduct. The amended guideline will clarify that this enhancement doesn’t apply unless you personally engaged in or caused the conduct that constituted the sophisticated means.

The proposed amendments include other important or interesting changes. They will affect how the guidelines compute your criminal history and how they assess the scope of your liability for the acts of others. They will adjust the various monetary tables in the guidelines to account for inflation. And they will make changes associated with the reclassification of hydrocodone from a Schedule III to a Schedule II controlled substance.

But the amendments to the fraud guideline have made the biggest splash, even as the defense bar continues to debate and analyze their sweep and significance.

Will they apply retroactively? Here’s a report that suggests the answer may be no.

New Wine In Old Wineskins

Mail fraud, wire fraud, … wine fraud? More like highfalutin wine fraud.

Last month, a federal district court in New York issued a 10-year sentence to a renowned wine dealer, collector, and connoisseur who was convicted of running a multimillion-dollar counterfeiting operation. The defendant sold and consigned his counterfeit wine to auction houses, wine enthusiasts, and some of the wealthiest people in the country—billionaires, I tell you—and he sold them millions of dollars’ worth of wine he concocted in his home. He must have had a good nose for it, too, because the operation was elaborate: he reportedly took empty bottles of rare and expensive wines, blended his own brew until it resembled the good stuff, poured the new wine into the old wineskins, so to speak, and even created fake labels that fooled a lot of people.

At sentencing, his lawyer argued for a lower sentence in part because the fraud caused less harm than others since the victims were exceedingly wealthy. Taking a million dollars from a billionaire, in other words, is not the same as stripping a senior citizen of his million-dollar life savings. Prosecutors, in fact, argue a similar point everyday when they prosecute fraud cases involving vulnerable victims.

In response, this prosecutor expressed shock that a lawyer would argue a double standard for theft from the rich than from the poor, and ultimately, the lawyer’s argument didn’t carry the day.

But the argument was picked up by other members of the criminal defense bar, one of whom authored a spirited defense of it, including these lines:

“At the sentencing hearing, [defendant’s] attorney argued, reasonably I believe, that his client should be treated somewhat less severely since the victims were exceedingly wealthy.

That argument provoked the prosecutor to the Captain Renault-like response that it was ‘quite shocking’ for a lawyer to argue for a different standard for theft from the rich than from the poor.

That retort reminded me of Anatole France’s immortal line … ‘The law, in its majestic equality, forbids rich and poor alike to sleep under bridges, beg in the streets, or steal loaves of bread.'”

Federal Court of Appeals Vacates Lenient White-Collar Sentence

The overriding directive of federal sentencing law is to impose a sentence that is sufficient but not greater than necessary to accomplish the goals of sentencing: that is, to reflect the seriousness of the offense, promote respect for the law, provide just punishment, deter crime, protect the public, and rehabilitate the defendant. 18 U.S.C. § 3553(a).

Usually, the trial judges who preside over criminal cases get the benefit of the doubt when it comes to what’s a reasonable sentence. After all, they’re the ones who can size up defendants and witnesses personally and weigh the evidence firsthand.

But last week, a federal court of appeals sent a case back for resentencing because it questioned the reasonableness of the trial court’s sentence. A jury had convicted the defendant of wire fraud, bank fraud, and conspiracy, and based on the $1.7 million loss, the federal sentencing guidelines called for a range of 57 to 71 months in prison. The prosecutor had asked for 30 months in prison, but instead, the judge sentenced the defendant to one day in prison, three years’ probation, and $1.7 million in restitution.

At first blush, a one-day sentence may seem unreasonable in the case of a $1.7 million fraud, but as usual, the devil’s in the details, and in this case, the details that follow come straight from the appellate court’s opinion.

The defendant was a 60-year-old accountant who got involved in a business venture to recycle tires. Auspiciously, he was referred to a guy whose Australian company could supply and install the necessary equipment, though inauspiciously, he didn’t know that the other guy had failed in nine prior tire-recycling ventures. The two men eventually formed a new company that was owned 81% by the defendant and 19% by another one of the other guy’s companies. Their new company then set out to build a tire-recycling plant, and to that end, it entered into a $2.3 million contract with the other guy’s supply company to provide the equipment and installation. To fund the $2.3 million, the defendant invested $300,000 of his own money, while the other guy invested $300,000 by agreeing to discount the price of his equipment by that much. Their joint company then obtained the $1.7 million balance through a small-business loan, and that’s where the alleged fraud took place.

To obtain the small-business loan, the defendant applied for a bank letter of credit in order to disburse the loan proceeds to the other guy’s bank in Australia, but in the application, he specified that if all of the equipment were not delivered in one shipment, the new company would not have to pay.

Sure enough, when the equipment arrived, it was missing the tire shredder, which was a vital piece, and the defendant was apparently so angry that he complained to Australian authorities as well as the FBI, the SEC, and the SBA’s Office of Inspector General. This prompted the FBI to open an investigation.

In the meantime, however, the other guy falsified a packing slip to show that the shredder would ship, and as a result, the bank honored the letter of credit and transferred $1.7 million to the guy’s bank.

When the money arrived, half of it immediately went to cover an overdraft of the supply company’s account, and the rest was appropriated by the other guy to pay other creditors. Poof! Just like that, the $1.7 million was gone, and the defendant lost his $300,000 investment in the failed venture.

Both men got indicted, but the government made a deal with the other guy, who testified against the defendant and got three years’ probation in return. The defendant went to trial and was convicted on four of ten counts. Among other things, the other guy testified that the defendant had told him to falsify the packing slip. Who knows. Perhaps that was part of the defendant’s master plan to lose $300,000.

At the defendant’s sentencing, the trial judge acknowledged that the defendant had “cut some corners in the heat of the moment,” but he also expressed his belief that the defendant did not go into the venture to rip someone off. By contrast, the judge was “offended to [his] very core” by the other guy’s conduct, whom he viewed as “by far the principal wrong-doer.”

Noting that the defendant, who had no criminal history, was now a convicted felon who would lose his accounting license, and noting further that the defendant had lost his own shirt in the ordeal and could not pay any restitution if he were sitting in prison, the judge imposed a sentence that he thought was sufficient but not greater than necessary to do the job.

But apparently, it wasn’t punishment enough for the court of appeals.

Bank Fraud. Even If You’re Not Trying to Defraud a Bank.

Two days before the Supreme Court’s watershed opinion on cell phones, it published another unanimous opinion on a more esoteric topic: bank fraud. Yeah, that’s right, bank fraud.

In Loughrin v. United States, the Court held that the federal bank-fraud statute can cover cases in which you intend to defraud someone or something other than a bank. How can that be?

The Court began with the text of the statute. It punishes anyone who knowingly executes or attempts to execute a scheme to do one of two things: (1) defraud a financial institution; or (2) obtain money or property owned by, or in the custody or control of, a financial institution “by means of false or fraudulent pretenses, representations, or promises.” 18 U.S.C. § 1344. The defendant was convicted under the second clause.

So what did the defendant do? First, he pretended to be a Mormon missionary going door to door in a residential neighborhood. When people weren’t looking, he’d raid their mailboxes and steal any checks he could find. Next, he’d alter the checks, either by washing, bleaching, ironing, and drying them until they were blank and fit to use or by simply crossing out the name of the payee. Then he’d take the checks to a store, pose as the accountholder, and use them to buy stuff. Lastly, he’d return to the store and return the merchandise for cash.

At trial, the defendant requested a jury instruction that, to be guilty of bank fraud, he must have intended to defraud a bank, not just a store or accountholder. The trial court denied that instruction, and the defendant was convicted under § 1344(2).

On appeal, he argued that if the statute were not read to require a specific intent to defraud a bank then it could potentially apply to every run-of-the-mill fraud that happened to involve a check. In fact, it would even apply if the check itself were perfectly valid, as when a guy sells you a knock-off handbag that you think is Louis Vuitton, and you hand him a check. This result, the defendant argued, would greatly expand the criminal jurisdiction of the federal government into areas traditionally reserved to the states.

The Court disagreed. It ruled that the statute had two clauses for a reason, and defendant’s interpretation would make them redundant because § 1344(1) already required a specific intent to defraud a bank. The Court agreed that § 1344(2) was not a “plenary ban on fraud” that applied to every “pedestrian swindle,” but it held that the statute was limited to cases in which a defendant schemed to obtain money or property “by means of” a misrepresentation, so that his false statement was “the mechanism naturally inducing a bank” (or its custodian) to part with money. The false statement, in other words, must “reach the bank,” which would not happen in the knock-off-handbag example.

That’s all good and well, but the Court’s decision still potentially converts every bad-check case into a federal offense. Despite the Court’s consensus that § 1344 should not be read that way, the only things standing in the way may be the resources and discretion of federal prosecutors.

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