FILED

United States Court of Appeals

Tenth Circuit

July 31, 2009

Elisabeth A. Shumaker

Clerk of Court

PUBLISH

UNITED STATES COURT OF APPEALS

TENTH CIRCUIT

UNITED STATES OF AMERICA,

 Plaintiff - Appellee,

v.

JOSEPH P. NACCHIO,

 Defendant - Appellant.

No. 07-1311

Appeal from the United States District Court

for the District of Colorado

(D.C. No. 05-CR-545-K)

Maureen E. Mahoney, Latham & Watkins LLP, Washington, DC (Alexandra A.E.

Shapiro, J. Scott Ballenger, and Nathan H. Seltzer, Latham & Watkins LLP,

Washington, DC; and Herbert J. Stern and Jeffrey Speiser, Stern & Kilcullen,

Roseland, NJ, with her on the briefs), for Defendant-Appellant.

Stephan E. Oestreicher, Jr., Attorney, Criminal Division, Department of Justice,

Washington, DC (Troy A. Eid, United States Attorney, and James O. Hearty and

Kevin T. Traskos, Assistant United States Attorneys, District of Colorado; and

Leo J. Wise, Attorney, Criminal Division, Department of Justice, Washington,

DC, with him on the briefs), for Plaintiff-Appellee.

Paul D. Kamenar and Daniel J. Popeo, Washington Legal Foundation,

Washington, DC; Andrew J. Levander, David S. Hoffner, Jason O. Billy, and

David P. Staubitz, Dechert LLP, New York, NY; and Michael L. Kichline,

Dechert LLP, Philadelphia, PA, filed an amicus curiae brief for the Washington

Legal Foundation in support of Defendant-Appellant.
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Andrew H. Schapiro, Mayer Brown LLP, New York, NY; Evan P. Schultz, Mayer

Brown LLP, Washington, DC; David B. Smith, English & Smith, Alexandria, VA;

and Barbara E. Bergman, National Association of Criminal Defense Lawyers,

Albuquerque, NM, filed an amicus curiae brief for the National Association of

Criminal Defense Lawyers in support of Defendant-Appellant.

Before KELLY, MCCONNELL, and HOLMES, Circuit Judges.

HOLMES, Circuit Judge.

Joseph Nacchio, the former CEO of Qwest Communications International,

Inc. (“Qwest”), was convicted of nineteen counts of insider trading in federal

district court. A divided panel of this court affirmed on several issues but held

that certain expert testimony had been improperly excluded. On rehearing en

banc, this court changed course, holding that the expert testimony was properly

excluded, and affirmed Mr. Nacchio’s conviction. See United States v. Nacchio,

519 F.3d 1140 (10th Cir. 2008), rev’d and vacated in part on rehearing en banc,

555 F.3d 1234 (10th Cir. 2009), petition for cert. filed, 77 U.S.L.W. 3559 (U.S.

Mar. 20, 2009) (No. 08-1172). Now before the court are Mr. Nacchio’s

challenges to the district court’s gain and forfeiture determinations. With regard

to both, we hold that the district court erred. Consequently, we REVERSE the

district court’s sentencing order and REMAND for further proceedings consistent

with this opinion.
1 The indictment charged that Mr. Nacchio was aware of material,

nonpublic information, including:

(a) that Qwest’s publicly stated financial targets, including its targets

for 2001, were extremely aggressive and a “huge stretch”; (b) that in

order to achieve its publicly stated financial targets for 2001, Qwest

would be required to significantly increase its recurring revenue

business during the first few months of 2001; (c) that Qwest’s past

experience or “track record” in growing recurring revenue at a

sufficient rate to meet its publicly stated financial targets was poor;

(d) that Qwest’s recurring revenue business was underperforming

from early 2001 and was not growing at a sufficient rate to meet

Qwest’s publicly stated financial targets; (e) that there were material

undisclosed risks relating specifically to Qwest’s recurring and nonrecurring revenue streams that put achievement of Qwest’s 2001

publicly stated financial targets in jeopardy; (f) that the gap between

Qwest’s publicly stated financial targets and Qwest’s recurring

revenue was increasing, thus increasing Qwest’s reliance on risky

and unsustainable one-time transactions; and (g) that there would be

insufficient non-recurring revenue sources to close the gap between

Qwest’s publicly stated financial targets and its actual performance.

(continued...)

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I. BACKGROUND

In December 2003, Mr. Nacchio was indicted and charged with forty-two

counts of insider trading. The government alleged that Mr. Nacchio had made

sales of shares of Qwest stock from January to May 2001 on the basis of material,

nonpublic information. Specifically, the government alleged that Mr. Nacchio

knew that Qwest was relying heavily on IRU (indefeasible rights of use) sales—a

nonrecurring source of revenue—to meet its first- and second-quarter public

guidance and that the company had not made the necessary shift to recurring

revenue and, thus, it was at substantial risk of not meeting its year-end guidance.1
1

(...continued)

Aplt. App. at 65-66.

2 See generally Kevin J. Murphy, Explaining Executive Compensation:

Managerial Power Versus the Perceived Cost of Stock Options, 69 U. Chi. L.

Rev. 847, 847 (2002) [hereinafter Murphy, Explaining Executive Compensation]

(noting that “the increase in CEO pay in S&P 500 Industrials during the 1990s

primarily reflects a dramatic growth in stock options”); Fischer Black & Myron

Scholes, The Pricing of Options and Corporate Liabilities, 81 J. Pol. Econ. 637,

637 (1973) [hereinafter Black, Pricing of Options] (“An option is a security

giving the right to buy or sell an asset, subject to certain conditions, within a

specified period of time. . . . The simplest kind of option is one that gives the

right to buy a single share of common stock.”).

3 In exercising an option, the amount the holder pays for the stock

technically is called the “exercise price.” Black, Pricing of Options, supra, at

637; see Greene v. Safeway Stores, Inc., 210 F.3d 1237, 1243 (10th Cir. 2000)

(“A stock option gives the option holder the right to buy a share of stock at a

fixed ‘exercise price’ . . . .”). In practical terms, this price is the cost to the

holder of exercising the option. The district court referred to “the cost of the

stock” to Mr. Nacchio. Aplt. App. at 1241-42. And the parties have not

quarreled with this verbal formulation. See, e.g., Aplt. Opening Br. at 54

(referring to “the cost of exercising the options”); Aplee. Br. at 69 n.42 (noting

“the option costs”). Therefore, for purposes of this opinion, we adopt this

formulation.

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As thoroughly outlined in our initial panel opinion, since beginning as

Qwest’s CEO in 1997 Mr. Nacchio, who also was a member of the Board of

Directors, had received a substantial portion of his compensation in Qwest stock

options.2

 Except for sales according to an approved, fixed sales plan, Qwest

policy only permitted officers to sell stock during short “trading windows” each

quarter immediately after quarterly earnings were announced. At the beginning of

2001, Mr. Nacchio held just over 4.4 million vested options with an exercise cost3
4

 Mr. Nacchio also held a large quantity of $28.50 options, which are

not at issue here.

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of $5.50 each.4

 In 2001, the second-quarter trading window began on April 26,

with Qwest’s stock at $38.86 per share. Between April 26 and May 15 of that

year, Mr. Nacchio exercised some of his options and sold an average of 105,000

shares per trading day—totaling 1,255,000 shares—as the price fluctuated from

about $37 to about $42 a share.

At the close of the second-quarter trading window in May, Mr. Nacchio

entered into an automatic sales plan, approved by Qwest’s general counsel, to

exercise 10,000 options—i.e., sell 10,000 shares—a day as long as the stock price

was at least $38 per share. Between May 15 and May 29, Mr. Nacchio sold

another 75,000 shares pursuant to this plan. On May 29, 2001, Qwest’s stock

price dropped below $38 and remained there; Mr. Nacchio sold no more shares

after that. During this April to May period and thereafter, Mr. Nacchio continued

to decline to disclose information regarding the breakdown of Qwest’s revenue

between IRU sales and recurring sources.

On July 24, 2001, Qwest issued a press release reporting its financial

results for the second quarter of 2001 and the company hosted a conference call

with investors in which it announced that its expected revenue for 2001 would be

near the lower end of previously announced ranges. On August 7, 2001, Mr.

Nacchio gave a presentation in which he showed a slide reporting Qwest’s annual
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actual and estimated IRU sales as a percentage of revenue from 1996 to 2001; this

presentation was filed publicly with the U.S. Securities and Exchange

Commission (“SEC”). Then on August 14, 2001, Qwest for the first time

disclosed the magnitude of its 2000 and 2001 IRU sales in a filing with the SEC. 

Qwest’s vice-president of investor relations testified that “there had been . . .

some disclosure after the first quarter” that some of Qwest’s revenue was onetime rather than recurring, “[b]ut . . . the magnitude was not known,” until the

August 14, 2001, filing. Aplt. App. at 1673. On September 10, 2001, Mr.

Nacchio issued a press release lowering Qwest’s public revenue targets for 2001

and for 2002.

Mr. Nacchio ultimately was convicted on nineteen counts of insider trading

covering the trades that he had made from April 26, 2001, to May 29, 2001; he

was acquitted of twenty-three counts covering earlier trades. The district court

sentenced Mr. Nacchio to seventy-two months’ imprisonment on each count, to

run concurrently, and two years of supervised release on each count, also to run

concurrently. The district court additionally assessed a $19 million fine and

ordered him to forfeit approximately $52 million.

II. SENTENCING

A. STANDARD OF REVIEW

On appeal, Mr. Nacchio alleges that the district court committed procedural

error in calculating his sentence because the district court incorrectly calculated
5 All references are to the 2000 version of the Guidelines, which is the

version used by the district court in sentencing Mr. Nacchio, unless otherwise

specified. In 2001, §§ 2F1.1 and 2F1.2 were deleted by consolidation with §

2B1.1; U.S.S.G. § 2B1.4 now contains the same language as former § 2F1.2

regarding gain that is relevant to this analysis.

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his “gain resulting from the offense” under U.S. Sentencing Guidelines Manual

(“U.S.S.G.”) § 2F1.2 (2000).5

 See Gall v. United States, 128 S. Ct. 586, 597

(2007) (describing procedural errors “such as failing to calculate (or improperly

calculating) the Guidelines range” and “selecting a sentence based on clearly

erroneous facts”). Since United States v. Booker, 543 U.S. 220 (2005), this court

has reviewed sentences for reasonableness, as informed by the 18 U.S.C. §

3553(a) sentencing factors. See, e.g., United States v. Munoz-Tello, 531 F.3d

1174, 1181 (10th Cir. 2008), cert. denied, 129 S. Ct. 1314 (2009). “When

evaluating the district court’s interpretation and application of the Sentencing

Guidelines, we review legal questions de novo and factual findings for clear error,

giving due deference to the district court’s application of the [G]uidelines to the

facts.” Id. (internal quotation marks omitted).

We interpret the Sentencing Guidelines according to accepted

rules of statutory construction. In interpreting a guideline, we

look at the language in the guideline itself, as well as at the

interpretative and explanatory commentary to the guideline

provided by the Sentencing Commission. [C]ommentary in the

Guidelines Manual that interprets or explains a guideline is

authoritative unless it violates the Constitution or a federal

statute, or is inconsistent with, or a plainly erroneous reading

of, that guideline.
-8-

United States v. Robertson, 350 F.3d 1109, 1112-13 (10th Cir. 2003) (alteration in

original) (citations and internal quotation marks omitted). Guidelines

commentary is “treated as an agency’s interpretation of its own legislative rule,”

i.e., “it must be given controlling weight unless it is plainly erroneous or

inconsistent with the regulation.” Stinson v. United States, 508 U.S. 36, 44-45

(1993) (internal quotation marks omitted).

B. ENHANCEMENT ON THE BASIS OF GAIN RESULTING FROM THE OFFENSE 

1. Insider Trading and U.S.S.G. § 2F1.2

Mr. Nacchio was convicted under 15 U.S.C. §§ 78j and 78ff and 17 C.F.R.

§§ 240.10b-5 and 240.10b5-1. The statutes delegate the power to define criminal

liability to the SEC by forbidding anyone from willfully using, “in connection

with the purchase or sale of any security . . . , any manipulative or deceptive

device or contrivance in contravention of such rules and regulations as the [SEC]

may prescribe.” 15 U.S.C. § 78j(b). Those rules and regulations in turn prohibit

purchasing or selling “a security of any issuer, on the basis of material nonpublic

information about that security or issuer, in breach of a duty of trust or

confidence.” 17 C.F.R. § 240.10b5-1(a). In other words, it is a crime for a

corporate insider to “trade[] in the securities of his corporation on the basis of

material, nonpublic information.” United States v. O’Hagan, 521 U.S. 642, 651-

52 (1997).

Section 2F1.2 of the Guidelines specifically applies to insider trading
6 A common definition for a “short sale” is the following: “A sale of a

security that the seller does not own or has not contracted for at the time of the

sale, and that the seller must borrow to make delivery.” Black’s Law Dictionary

1366 (8th ed. 2004).

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offenses and instructs that such an offense receives a base offense level of 8. 

This base level is then increased according to “the gain resulting from the

offense.” U.S.S.G. § 2F1.2(b)(1). The increase is calculated by reference to a

table found in § 2F1.1(b)(1), which prescribes progressively greater increases to

the offense level based on the relevant amount of gain. The language of §

2F1.1—a guideline covering fraud, deceit, and counterfeiting offenses—actually

specifies that the monetary amount is the amount of “loss” identified in the

offense. The commentary to § 2F1.2, however, notes that “[b]ecause the victims

and their losses are difficult if not impossible to identify” in insider trading cases,

“the gain, i.e., the total increase in value realized through trading in securities by

the defendant . . . is employed instead of the victims’ losses.” Id. § 2F1.2 cmt.

background.

2. The District Court’s Gain Calculation

For each act of insider trading for which Mr. Nacchio was convicted, the

following actions took place: (1) Mr. Nacchio made a command to exercise a

certain number of options; (2) his broker short sold that same number of shares6

and forwarded the proceeds to Qwest less a commission and fees; (3) Qwest

issued a corresponding number of shares, which were transferred to the broker;
7 See generally United States v. Grabske, 260 F. Supp. 2d 866, 867

(N.D. Cal. 2002) (“Economists often determine the amount of stock price

inflation due to fraud through an ‘event study.’ An event study looks to how the

(continued...)

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(4) Qwest deducted both the exercise cost ($5.50 per share) and taxes from the

proceeds of the sale; and (5) Qwest deposited the balance into Mr. Nacchio’s

bank account. The parties do not dispute that: Mr. Nacchio’s gross proceeds from

the relevant stock sales were $52,007,545.47; the cost of exercising the options

was $7,315,000.00; the brokerage commissions and fees paid were $60,081.09;

and the taxes paid were $16,078,147.81.

Prior to sentencing, the parties presented arguments to the district court

regarding the appropriate amount that should be considered “gain” for purposes of

increasing Mr. Nacchio’s offense level under § 2F1.2(b)(1). The government

argued to the district court that Mr. Nacchio’s “gain resulting from the offense”

pursuant to § 2F1.2(b)(1) was at least $44.6 million, i.e., the net profit Mr.

Nacchio received from his stock sales during the April-May 2001 time period. 

That figure would equate to a 17-level increase to Mr. Nacchio’s base offense

level and a Guidelines range sentence of 70-87 months. U.S.S.G. §

2F1.1(b)(1)(R).

Mr. Nacchio asserted that his gain was much lower. As part of his response

to the presentence report, Mr. Nacchio submitted an economic study by Professor

Daniel Fischel—more specifically, an “event study”7

—that estimated the portion
7

(...continued)

price of the stock changed after the fraud was disclosed as evidence of the amount

by which it was inflated prior to disclosure.”); Kevin P. McCormick, Untangling

the Capricious Effects of Market Loss in Securities Fraud Sentencing, 82 Tul. L.

Rev. 1145, 1163-79 (2008) [hereinafter McCormick, Untangling Capricious

Effects] (noting the use of event studies that “focus[] on the reaction that the

market had to the revelation of the fraud”).

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of Mr. Nacchio’s proceeds from the sale of Qwest stock during the insider trading

period that was attributable to inside information concerning Qwest’s financial

guidance and IRU issues. In the study, Professor Fischel analyzed the disclosures

that were made after the time frame for which Mr. Nacchio was convicted—April

2001 to May 2001—and attempted to determine the effect of these disclosures on

the price of Qwest stock. Professor Fischel’s report outlined the financial

economics techniques he applied and found that of the relevant disclosures only

two events related to the disclosures, on August 22, 2001, and September 10,

2001, were statistically significant. Professor Fischel concluded that “the

maximum portion of Mr. Nacchio’s sales proceeds that would be attributable to

inside information is $1,832,561 (i.e., 3.52 percent of $52,007,549).” Aplt. App.

at 802. Thus, Mr. Nacchio argued for calculation of gain at $1.8 million, which

would translate to a 12-level increase under § 2F1.1(b)(1)(M) and a Guidelines

range of 41-51 months. The government responded that Mr. Nacchio’s approach

was contrary to that outlined in § 2F1.2 and that Professor Fischel’s study was

flawed.
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The district court rejected both of these arguments and instead calculated

Mr. Nacchio’s gain to be approximately $28 million. As described further below,

in calculating Mr. Nacchio’s gain the district court primarily relied on the

language of the commentary to § 2F1.2 and on the en banc holding of United

States v. Mooney, 425 F.3d 1093 (8th Cir. 2005) (en banc). The district court

rejected Mr. Nacchio’s argument that the gain resulting from the offense should

comprise only the proceeds that were attributable to Mr. Nacchio having traded

on the basis of inside information. The district court also disagreed with the

government’s view that Mr. Nacchio’s gain should include the amount that was

put toward paying the taxes on the trades.

The district court noted that Mr. Nacchio’s total net profit—i.e., his gross

proceeds minus the cost to purchase the shares (i.e., the cost to exercise the

options)—totaled $44,692,545.47, and it used that figure as a starting point. 

Next, the district court reasoned that the amount withheld for taxes was not

“realized,” as it was “not converted into money, cash or the equivalent.” Aplt.

App. at 1242.

Thus the district court subtracted this amount—totaling $16,078,147.81—to

arrive at the conclusion that Mr. Nacchio’s “true gain,” “i.e., the total increase in

value realized through trading,” was approximately $28 million. Id.; U.S.S.G. §

2F1.2 cmt. background. Under § 2F1.1(b)(1)(Q), this gain calculation resulted in
8 Though not entirely clear, the district court’s rationale suggests that

it also wished to exclude from the gain calculation the amount paid in

commissions and fees on the trades. The district court pointed out that the PSR

calculation did not exclude this amount, but the district court considered the

commissions and fees, like the money withheld for taxes, to be “withheld and not

received by defendant.” Aplt. App. at 1242 & n.3. As the court pointed out,

though, such a small discrepancy is immaterial under the ranges provided by §

2F1.1. In light of our disposition, we need not determine where any discrepancies

in the calculation lie; the district court will determine the gain anew under a

different analytic framework that is focused on Mr. Nacchio’s criminally culpable

conduct.

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a 16-level increase to Mr. Nacchio’s base offense level.8

 Together with a 2-level

increase due to Mr. Nacchio’s abuse of a position of trust under U.S.S.G. § 3B1.3,

the district court determined that the total offense level was 26, resulting in an

applicable Guidelines range of 63 to 78 months. The district court imposed a

sentence of 72 months’ imprisonment for each count, to be served concurrently.

3. Discussion

Mr. Nacchio argues that to include for sentencing purposes the total amount

he made on the stock sales as gain is punishing him “for the normal appreciation

in Qwest’s shares from 1997 to 2001, which had nothing to do with the offense

charged.” Aplt. Opening Br. at 10. Thus, Mr. Nacchio asserts that a “market

absorption” approach should be utilized. The district court rejected that

approach, relying on (a) its interpretation of § 2F1.2 and the accompanying

commentary; (b) its agreement with the rationale of the Eighth Circuit’s majority

approach in Mooney; and (c) its understanding of the offense and nature of the
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harm of insider trading. For the reasons outlined below, we disagree with the

district court’s analysis and hold that Mr. Nacchio’s gain should be calculated in

a manner that is more narrowly focused on producing a figure that reflects, in at

least approximate terms, the proceeds related to his criminally culpable conduct

(i.e., trading on material, nonpublic information).

a. United States v. Mooney

United States v. Mooney appears to be the only circuit decision squarely

deciding the issue of gain under the insider trading sentencing guideline, and a

discussion of that case is useful for understanding the dispute over the district

court’s gain calculation. 425 F.3d 1093. There, Mr. Mooney was convicted on

securities fraud, mail fraud, and money laundering charges involving his

participation in a scheme to defraud the company of which he was vice president

and its shareholders while in possession of material, nonpublic information. Id. at

1095-97. Mr. Mooney purchased call options, i.e., options to buy shares of his

company’s stock at a fixed price, during his company’s negotiations to acquire

another company. He then sold the options at a profit following the public

announcement of the acquisition. Id. at 1096.

The district court, relying on the commentary to the insider trading

guideline, calculated Mr. Mooney’s gain as the total amount realized from the

sale of his options minus the amount he spent to purchase the options. Id. at 1096

& n.2, 1098. On appeal, Mr. Mooney argued that his gain amount under the
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insider trading guideline should be computed based on the increase in the market

value of the call options in the period before his inside information became public

and was absorbed by the market. According to Mr. Mooney, proceeds for sales he

made after the inside information was absorbed should not be included in the gain

amount. Id. at 1098-99. Thus, his formula for gain regarding his criminal

prosecution would apply the same type of disgorgement remedy sought by the

SEC in the civil case against him. Id. at 1098.

A divided en banc Eighth Circuit, relying on its interpretation of the

guideline and commentary, rejected a market absorption approach to defining

“gain resulting from the offense” under § 2B1.4 (the current version of § 2F1.2). 

The Mooney majority first examined the “gain resulting from the offense”

language of the guideline and opined that the phrase

refers to the defendant’s gain, not to market gain, and it ties

gain to the defendant’s offense. It speaks of gain that has

resulted, not of potential gain. The guideline does not say “the

gain in market value that has resulted from the offense”; such a

phrase might support Mooney’s theory, but that is not the

language used.

Id. at 1099.

Next, the court stated that any question about the meaning of the guideline

could be resolved by referring to the commentary, which describes “gain” as “the

total increase in value realized through trading in securities by the defendant.” 

U.S.S.G. § 2F1.2 cmt. background; see Mooney, 425 F.3d at 1099 (citing U.S.S.G.
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§ 2B1.4 cmt. background (2002)). The court stated that “the commentary uses

common words with widely understood meanings” and determined that “[b]y use

of the word realized, the commentary makes clear that gain is the total profit

actually made from a defendant’s illegal securities transactions.” Mooney, 425

F.3d at 1100. The court reasoned that the proper measure of Mr. Mooney’s gain

“was the amount he actually realized by his trading in call options while he had

material inside information”: the entire profit he received when he sold the

options less the purchase price of those options, with no consideration of when

the market absorbed the inside information (or other extrinsic factors). Id.

The majority further reasoned that Mr. Mooney had not demonstrated why a

civil law approach should be “substituted for the guidance of the commentary,”

particularly as the guideline employs the concept of gain and “thus rejects the

kind of remedy used in . . . the civil securities laws which [is] based on victim

losses rather than the defendant’s gain.” Id. at 1100-01. The court additionally

reasoned that Mr. Mooney’s approach would be difficult to apply and that an

imprecise standard is inappropriate in the criminal context. Id. at 1101 (“The

focus in § 2B[]1.4 [formerly § 2F1.2] on the increase in value realized by the

defendant’s trades provides a simple, accurate, and predictable rule . . . . The rule

is also consistent with the guideline commentary.” (citation omitted)). Thus, the

court held that the district court had correctly interpreted and applied the insider

trading guideline. Id.
9 Judge Bright’s dissent from the majority’s interpretation of § 2B1.4

was joined by two other judges. See Mooney, 425 F.3d at 1104-05 (Bye, J.,

concurring in part and dissenting in part) (“I am persuaded by Judge Bright’s

dissent as its reasoning appears to more effectively ensure against disparate

sentencing for defendants convicted of identical offenses. While mindful of the

strong arguments advanced by the majority, I am convinced § 2B1.4’s use of the

term ‘gain’ was not intended to subject defendants facing a loss of liberty to an

unpredictable and erratic sentencing scheme driven by so fluid a marker as stock

prices.” (citation omitted)).

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The dissenting opinion would have applied a market absorption approach in

calculating gain under the insider trading provision. Id. at 1106 (Bright, J.,

dissenting).9

 The dissent also focused on the guideline phrase “gain resulting

from the offense,” but it stated that the offense of insider trading “is not the

purchase of stock itself, but the use of a manipulative or deceptive contrivance in

connection with the purchase. The offense inheres not in the purchase itself, but

in any deception that may be entwined with the purchase.” Id. (citing 15 U.S.C. §

78j(b); 17 C.F.R. § 240.10b-5). According to the plain language of the insider

trading statute, the dissent reasoned:

The offense is not the purchase, but the deception. The “gain

resulting from the offense” is not the gain resulting from the

purchase. It is, rather, the gain resulting from the deception.

The gain resulting from the deception stops when the

deception stops, though there may be later gain (or loss) as the

stock market gyrates along, unmolested by any deception. If

someone buys stock illegally on the basis of insider

knowledge, there may be an increase in the stock’s value when

the insider knowledge is made public. That increase is illicit,

resulting from a kind of deception to the other buyers and

sellers of the stock. After the market adjusts to this
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information and the deception is ended, the value of the stock

will, of course, continue to fluctuate according to the ordinary,

legitimate vagaries of the market—with no deception—and

thus, no offense under 15 U.S.C. § 78j—involved. Thus, if the

person holds the stock for another five years after the insider

knowledge has been made public, the value of the stock will

continue to rise or fall regardless of the prior deception.

Id.

The dissent further argued that even if the plain language of the insider

trading statute did not explain what “gain resulting from the offense” is, the

majority’s interpretation would be unreasonable as it does not promote uniformity

in sentences for similarly situated defendants. Id. at 1106-07. The dissent

offered a hypothetical—discussed in detail infra in Part II(B)(3)(b)(v)—of three

insiders who made their profits trading in stock at different times to show how the

majority’s approach “means unequal justice for equal crimes.” Id. at 1107. The

dissent cited Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005), to point

out that “the ups and downs of the stock market are not causative of loss to the

deceived parties.” Mooney, 425 F.3d at 1108 (Bright, J., dissenting). Relatedly,

noting that the “terms gain and loss are ordinary words with meanings that are

similar whether they are used in a civil or a criminal context,” the dissent

reasoned that if the kind of gains related to the ups and downs of the market “are

not a causative factor in a civil fraud or deception case, that obvious concept

should not apply in a criminal case, where the stakes for a defendant relate not to

money but to freedom from incarceration.” Id.
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b. Our Approach

Having considered not only the contrasting interpretations in Mooney, but

also the parties’ arguments, relevant statutes, case law, and other authorities, we

conclude that the district court’s gain computation approach does not square with

the plain language of the relevant guideline, U.S.S.G. § 2F1.2, and its

commentary; therefore, we reject it. We further determine that it was incumbent

upon the district court to adopt a realistic, economic approach (1) that would take

into account that Mr. Nacchio’s offense did not inhere in his sale of the shares

itself, but in the deception intertwined with the sales due to his possession of

insider knowledge, and (2) that consequently would endeavor to compute his gain

for sentencing purposes based upon the gain resulting from that deception. 

In an effort to provide guidance to the court on remand, we note that it is

appropriate in some situations, including this one, to look to civil jurisprudence

for guidance concerning the appropriate criminal sentencing approach. And

thereafter we specifically conclude that the civil disgorgement remedy provides

an appropriate guidepost for sentencing in criminal insider trading cases. Lastly,

we highlight that our conclusions on these points are consonant with key

objectives of federal sentencing policy.

i. Insider Trading and the Language of the Guidelines

The plain language of § 2F1.2 supports the notion that an insider trading
-20-

defendant’s “gain” should not consist of the total amount that the defendant

realized from his or her stock sales, but should be limited more specifically to the

gain that resulted from trading with insider knowledge. Section 2F1.2(b)(1)

prescribes an increase corresponding to “the gain resulting from the offense.” 

The essence of the offense of insider trading is not the trading itself—standing

alone, a lawful act—but trading on the basis of insider information. 15 U.S.C. §

78j(b); 17 C.F.R. § 240.10b5-1(a); cf. Mooney, 425 F.3d at 1105 n.9 (Bright, J.,

dissenting) (“[T]he plain language of the statute makes it clear what ‘the offense’

is.”).

In other words, a corporate insider who trades without knowledge of

material, nonpublic information is not committing the offense; nor is a corporate

insider who has such inside information but does not trade while possessing it. 

Both elements—knowledge and deceptive action—are necessary to complete the

offense. Cf. Mooney, 425 F.3d at 1105 n.9, 1106 (Bright, J., dissenting) (“The

offense inheres not in the purchase itself, but in any deception that may be

entwined with the purchase.”); SEC v. Happ, 392 F.3d 12, 32 (1st Cir. 2004)

(“[The insider trader]’s impropriety . . . consisted of selling his shares upon

learning of the as yet unspecified difficulties.”); 3 Alan R. Bromberg & Lewis D.

Lowenfels, Bromberg and Lowenfels on Securities Fraud & Commodities Fraud

§ 6:128, at 6-391 (2d ed. 2009) [hereinafter Bromberg, Securities Fraud]

(discussing an insider’s duty “to disclose or abstain” from trading while
-21-

possessing material, nonpublic information).

Because mere trading does not constitute criminal insider trading, it

logically follows that any gain associated with lawful trading should not be

considered gain as used to increase a prison sentence. Cf. United States v.

Yeaman, 194 F.3d 442, 456-57 (3d Cir. 1999) (“[T]he plain meaning of ‘resulted

from’ connotes causation.” (alteration in original) (internal quotation marks

omitted) (discussing the Guidelines calculation of a loss amount under § 2F1.1

based on “‘all harm that resulted from the acts and omissions specified’” (quoting

U.S.S.G. § 1B1.3 (1997)))). As the Mooney dissent explained:

[I]t is not enough to define “gain.” We then must know what

“the offense” is, because the guideline does not look to “gain”

simply, but to the “gain resulting from the offense.” Indeed,

simply to take the definition of gain without limiting it to gain

“resulting from the offense” would lead to absurd results. It is

not all the defendant’s stock gains—over an entire lifetime of

stock trading, perhaps—that count[], but only the stock gains

“resulting from the offense.”

Mooney, 425 F.3d at 1105 n.9 (Bright, J., dissenting).

Moreover, in the Guidelines general application instructions, the

commentary specifies that “‘offense’ means the offense of conviction [i.e., insider

trading] and all relevant conduct.” U.S.S.G. § 1B1.1 cmt. n.1(l). The relevant

conduct guideline indicates that specific offense characteristics, such as the

increase in offense level for gain under § 2F1.2(b)(1), are determined on the basis

of factors including “all acts and omissions committed . . . or willfully caused by
-22-

the defendant . . . that occurred during the commission of the offense of

conviction.” Id. § 1B1.3(a)(1) (emphasis added). Thus, the general application

instructions support the circumscription of the gain computation to that gain

resulting from the deceptive nature of the action.

When properly interpreted, the commentary of the insider trading

guideline—which describes gain as being “the total increase in value realized

through trading”—does not support a different conclusion. See United States v.

Clayton, 172 F.3d 347, 355 (5th Cir. 1999) (“In short, the commentary properly

interpreted creates no conflict with the guideline.” (emphasis added)). Of course,

if the legally operative language of the guideline itself is clear, “it is not

necessary to look beyond the plain language” of that guideline provision. 

Robertson, 350 F.3d at 1116. However, even if we do, as we explained in United

States v. Farnsworth, “commentary should not be found to contradict the

guideline” unless the “commentary and the guideline it interprets are inconsistent

in that following one will result in violating the dictates of the other.” 92 F.3d

1001, 1007 (10th Cir. 1996) (internal quotation marks omitted).

“[T]he proper application of the commentary depends upon the limits—or

breadth—of authority found in the guideline that the commentary modifies and

seeks to clarify.” Clayton, 172 F.3d at 355; accord United States v. Stolba, 357

F.3d 850, 853 (8th Cir. 2004) (finding that application of the guideline to an

example of conduct listed in the commentary is warranted only when that example
10 Even assuming that the two were inconsistent, the Supreme Court has

made it clear that we must comply with the guideline rather than the commentary. 

See Stinson, 508 U.S. at 43.

11 This approach comports with another reference to “gain” in the

Guidelines. Chapter 8 prescribes that in sentencing of organizations “[t]he

seriousness of the offense generally will be reflected by the greatest of the

pecuniary gain, the pecuniary loss, or the amount in a guideline offense level fine

table.” U.S.S.G. ch. 8 introductory cmt. (2008). “Pecuniary gain” is then

described as “the additional before-tax profit to the defendant resulting from the

relevant conduct of the offense.” Id. § 8A1.2 cmt. n.3(h) (emphasis added). The

application note provides the example of automobiles that are sold after having

their odometers tampered with. “In such a case, the pecuniary gain is the

additional revenue received because the automobiles appeared to have less

mileage, i.e., the difference between the price received or expected for the

automobiles with the apparent mileage and the fair market value of the

automobiles with the actual mileage.” Id. Although clearly not an exact

analogue, in that example as here “gain” would not include the underlying

(continued...)

-23-

also fits within the specific temporal limits of the guideline). Here, the insider

trading guideline specifically limits the gain to that “resulting from the offense”;

the “total increase in value” commentary language specifies how to calculate that

gain. The commentary’s calculation instruction is thus applicable to the narrowly

defined “gain” that falls within the § 2F1.2(b)(1) definition. See Clayton, 172

F.3d at 355. Thus, no contradiction between the insider trading guideline

provision and its commentary arises: following the guideline will not result in

violating the dictates of the commentary, nor vice versa.10 Gain should be

calculated as the commentary directs, i.e., as “the total increase in value realized

through trading in securities,” but that calculation is applicable properly only to

“the gain resulting from the offense” specified in the guideline provision itself.11
11(...continued)

inherent value of the item, be it a car or a share of stock. Just as the fair market

value of a car free from tampering would not be attributed to the gain of a

defendant convicted of odometer tampering, the underlying value of the share of

stock, which is separable from the deceptive practice accompanying its purchase

or sale, should not be attributed to an inside trader.

-24-

ii. The Need to Exclude Unrelated Market Factors from the Gain 

Computation

An approach that focuses on arriving at a figure that approximates the gain

specifically resulting from Mr. Nacchio’s offense would better recognize “the

tangle of factors affecting price” that the Supreme Court addressed in Dura

Pharmaceuticals. 544 U.S. at 343. That is not the approach taken by the district

court here: its focus on the net profit Mr. Nacchio received from trading in

securities during the fraud period effectively ignored the myriad of factors

unrelated to his criminal fraud that could have contributed to the increase in the

value of the securities. Cf. 4 Thomas Lee Hazen, The Law of Securities

Regulation § 12.12[3], at 195 (6th ed. 2009) (“When dealing with publicly-traded

securities, many factors exist during the period in which violations take place that

may affect the market price of the securities. These factors include general

market or financial conditions, industry-wide conditions, or issuer problems

unrelated to the violations in question. In these situations, courts try to establish

the value of the defendant’s misrepresentation.” (emphasis added and footnotes

omitted)).
-25-

In Dura Pharmaceuticals, the Supreme Court held in a civil securities fraud

case that a private plaintiff cannot prove that a defendant’s fraud caused an

economic loss simply by demonstrating that the price of the security was inflated

on the date that he or she purchased the security. 544 U.S. at 342. The Supreme

Court indicated that the variations of the stock market do not themselves cause

fraud-related economic loss to such a plaintiff:

For one thing, as a matter of pure logic, at the moment

the transaction takes place, the plaintiff has suffered no loss;

the inflated purchase payment is offset by ownership of a share

that at that instant possesses equivalent value. Moreover, the

logical link between the inflated share purchase price and any

later economic loss is not invariably strong. Shares are

normally purchased with an eye toward a later sale. But if,

say, the purchaser sells the shares quickly before the relevant

truth begins to leak out, the misrepresentation will not have led

to any loss. If the purchaser sells later after the truth makes its

way into the marketplace, an initially inflated purchase price

might mean a later loss. But that is far from inevitably so. 

When the purchaser subsequently resells such shares, even at a

lower price, that lower price may reflect, not the earlier

misrepresentation, but changed economic circumstances,

changed investor expectations, new industry-specific or firmspecific facts, conditions, or other events, which taken

separately or together account for some or all of that lower

price. (The same is true in respect to a claim that a share’s

higher price is lower than it would otherwise have been—a

claim we do not consider here.) Other things being equal, the

longer the time between purchase and sale, the more likely that

this is so, i.e., the more likely that other factors caused the

loss.

Id. at 342-43.

Similarly, in a criminal securities fraud case, the Fifth Circuit cited Dura
-26-

Pharmaceuticals and recognized that stock price movements based upon factors

unrelated to the defendant’s offense should be excluded from a Guidelines loss

determination. See United States v. Olis, 429 F.3d 540, 545-49 (5th Cir. 2005). 

In Olis, the defendant, a corporate executive, had been convicted of a massive

accounting fraud. The district court calculated the loss using the testimony of

only one witness regarding a single major shareholder’s purchase price and sales

price of the stock of defendant’s company. Id. at 548. On appeal, the Fifth

Circuit held that other factors should have been considered by the court.

The Olis court highlighted the value of “thorough analyses grounded in

economic reality” in determining loss. Id. at 547. It held that the loss calculation

could not be based simply on the absolute stock price decline, because stock has

an inherent value and the district court’s approach “did not take into account the

impact of extrinsic factors” (unrelated to defendant’s fraudulent conduct) on the

decline in the stock’s price. Id. at 548-49. Because the district court had failed

to quantify or even consider other significant causes of the economic loss, the

Fifth Circuit vacated the sentence. Id. at 546, 549 (“[T]here is no loss

attributable to a misrepresentation unless and until the truth is subsequently

revealed and the price of the stock accordingly declines. Where the value of a

security declines for other reasons, however, such decline, or component of the

decline, is not a loss attributable to the misrepresentation.” (emphasis added)).

Mr. Nacchio’s increased prison sentence should be linked to the gain
-27-

actually resulting from the offense, not to gain attributable to legitimate price

appreciation and the underlying inherent value of the Qwest shares. The language

of the guideline commentary supports the view that a stock’s inherent value—i.e.,

the market’s assessment of the stock’s value, reflecting primarily the value of the

firm’s net assets and operations and its potential earnings and growth

prospects—should not be a component of the gain amount: rather than “total

value realized,” the commentary describes gain as the “total increase in value

realized”—contemplating that there is a baseline stock value from which the gain

(i.e., increase) is measured. U.S.S.G. § 2F1.2 cmt. background (emphasis added);

see also SEC v. MacDonald, 699 F.2d 47, 52-54 (1st Cir. 1983) (en banc)

(holding that illicit gain in civil insider trading case is “increase in value”

“causally related to the fraud”); cf. Dura Pharm., 544 U.S. at 345 (noting that the

federal securities statutes make private securities fraud actions available “not to

provide investors with broad insurance against market losses, but to protect them

against those economic losses that misrepresentations actually cause”); United

States v. Bakhit, 218 F. Supp. 2d 1232, 1237 (C.D. Cal. 2002) (noting in criminal

securities fraud prosecution that “[t]his is not a situation where the shareholders

received worthless stock, but rather received stock worth less than they

anticipated”).

In United States v. Leonard, the Second Circuit vacated and remanded a

criminal fraud loss calculation because the district court had computed the loss
-28-

amount as the entire cost of the securities sold by the defendants. 529 F.3d 83, 85

(2d Cir. 2008). There, the court reasoned that although investors might not have

purchased the securities had they known certain information, that did not by itself

“mean that the securities the investors received in exchange for their

contributions were entirely without value. After all, the investors did obtain an

interest in a company . . . . Accordingly, the district court erred in not deducting

from the purchase price the actual value of the instruments.” Id. at 93.

And in United States v. Zolp, in calculating loss for a securities fraud

defendant, the Ninth Circuit held that the district court’s factual finding that

shares of stock were “worthless” after the fraud came to light was clearly

erroneous “because the stock continued to have value during the fraud and even

after the fraud came to light.” 479 F.3d 715, 719-20 (9th Cir. 2007) (“[T]he court

must disentangle the underlying value of the stock, inflation of that value due to

the fraud, and either inflation or deflation of that value due to unrelated causes.”);

cf. United States v. Marcus, 82 F.3d 606, 610 (4th Cir. 1996) (approving a gross

sales measure of loss in an FDA fraud case when the district court had determined

that the drugs affected by the fraud were worthless and consumers would not have

purchased them at any price).

Likewise, here there is no indication that Mr. Nacchio’s deception rendered

Qwest’s stock worthless. See Aplt. App. at 4763 (Qwest stock price on Sept. 21,

2001, closed at $19/share); cf. U.S. SEC v. Maxxon, Inc., 465 F.3d 1174, 1178 n.8
12 We note that viewed from another perspective, such insider sales

could be considered a form of “loss avoidance”—i.e., the insider is selling on the

basis of inside information that he or she anticipates, once disclosed, will result in

lower stock prices. Cf. SEC v. Patel, 61 F.3d 137, 139 (2d Cir. 1995) (noting that

defendant in a SEC civil suit “agree[d] that he should disgorge his ill-gotten gains

on the basis of the losses he avoided by selling his shares before the public

announcement of the negative information known to him”); SEC v. Shah, No. 92

Civ. 1952 (RPP), 1993 WL 288285, at *4 (S.D.N.Y. July 28, 1993) (“[T]he SEC

alleges that Shah profited during this period by engaging in insider trading and

seeks recoupment of the losses Shah avoided by making those trades.” (emphasis

added)); 3 Bromberg, Securities Fraud, supra, § 6:335, at 6-894 (“The logical

measure of insider trading disgorgement is the amount of profit made (or loss

avoided) by the use of MNPI (material nonpublic information).” (emphasis

added)). When seen through a loss-avoidance lens, it becomes even more

apparent that the “total increase in value realized” language of the § 2F1.2

(continued...)

-29-

(10th Cir. 2006) (noting that the SEC sought disgorgement not of the entire

proceeds of defendant’s stock gain but instead the proceeds minus the market

value of the stock at the time the market adjusted to disclosure of the inside

information). Mr. Nacchio’s benefit stemmed from the illicit, though speculative,

effect of the material inside information on the value of Qwest stock. Under the

government’s prosecution theory, the market would have viewed the inside

information in a negative light, and disclosure of that information would have

detrimentally impacted the value of Qwest stock. Therefore, the nondisclosure of

the information allowed the stock to maintain an artificially high value and

allowed Mr. Nacchio to benefit from that value when he traded in the stock. It is

that illicit, artificially high value that should be reflected in the gain calculation,

not the underlying value of the stock.12 Cf. United States v. Snyder, 291 F.3d
12(...continued)

commentary must be viewed as operating within the parameters established by the

“gain resulting from the offense” language of the guideline provision itself, as

discussed supra in Part II(B)(3)(b)(i). An insider trading defendant, for example,

who possesses material, negative nonpublic information and sells her stock to

avoid losses that she expects to come when the information is disclosed and the

stock price declines gains from her deceit by receiving an additional increment of

sales proceeds that does not reflect the inherent value of the stock. Interpreting

the commentary’s reach with reference to that gain, the value from trading would

be the portion of the gross proceeds from the defendant’s stock sales that reflects

the inherent value of the stock and the increase in that value would be the

additional portion of the sales proceeds that actually is a product of the deceit

(i.e., the nondisclosure of the inside information).

-30-

1291, 1296 (11th Cir. 2002) (“[T]he stock here was not totally worthless after the

conspiracy was discovered. Thus, not every shareholder suffered a loss.”);

U.S.S.G. § 2F1.1 cmt. n.8(a) (noting that when a fraud involves misrepresentation

of the value of an item—such as stock—that does have some value, as opposed to

an item that is worthless, “the loss is the amount by which the stock was

overvalued” as opposed to the entire fraudulently represented amount of its

worth).

To be sure, as the reasoning of Mooney’s majority suggests, due to its

simplicity, a net-profit approach like the district court’s here, which “[does] not

take into account the impact of extrinsic [market] factors,” Olis, 429 F.3d at 548,

is likely to result in more certain outcomes—in the individual case and in criminal

sentencing proceedings viewed nationwide and in the aggregate. See Mooney,

425 F.3d at 1101 (reasoning that “[t]he use of actual sales to calculate gain
-31-

provides a clear and coherent bright[-]line rule”). However, the greater certainty

that presumably would be the product of such a simplistic approach is not a

cardinal objective of federal sentencing in financial fraud cases. Indeed, the

Guidelines expressly contemplate that sentencing computations in financial fraud

cases may involve some element of imprecision. See U.S.S.G. § 2F1.1 cmt. n.9

(“[T]he loss need not be determined with precision. The court need only make a

reasonable estimate of the loss, given the available information.”); see also Olis,

429 F.3d at 547 (noting that “methods adopted in [criminal] cases are necessarily

less exact than the measure of damage applicable in civil securities litigation”);

United States v. W. Coast Aluminum Heat Treating Co., 265 F.3d 986, 991 (9th

Cir. 2001) (“[T]he district court [is not] obligated to search for the perfect

theoretical or statistical fit. . . . [T]he district court’s obligation is to adopt a

reasonable realistic, economic projection of loss based on the evidence

presented.” (internal quotation marks omitted)). Therefore, it stands to reason

that, operating within a wide range of discretion in the financial fraud context,

courts likely will arrive at different sentencing outcomes on roughly similar facts

and that, consequently, certainty of result cannot be a controlling objective of the

Guidelines.

On the other hand, it is axiomatic that a critical objective of federal

sentencing is the imposition of punishment on the defendant that reflects his or

her culpability for the criminal offense (rather than for the unrelated gyrations of
13 In the en banc First Circuit’s notable MacDonald decision, the court

examined whether the defendant should be required to disgorge the entire profits

from the sale of securities purchased on the basis of insider knowledge or only

(continued...)

-32-

the market). See, e.g., United States v. Martinez-Barragan, 545 F.3d 894, 904

(10th Cir. 2008) (noting that “when crafting a sentence, the district court must be

guided by the ‘parsimony principle’—that the sentence be ‘sufficient, but not

greater than necessary, to comply with the purposes’ of criminal punishment, as

expressed in § 3553(a)(2)” (quoting 18 U.S.C. § 3553(a))). That objective

requires, irrespective of the likely greater complexity and imprecision, that

district courts undertake “thorough analyses grounded in economic reality,” Olis,

429 F.3d at 547, when imposing sentences in insider trading cases.

iii. Finding Guidance in the Civil Sphere

Mr. Nacchio’s argument is adopted from the civil disgorgement remedy

applied in insider trading enforcement cases by the SEC. “In [a civil] insider

trading case, the proper amount of disgorgement is generally the difference

between the value of the shares when the insider sold them while in possession of

the material, nonpublic information, and their market value ‘a reasonable time

after public dissemination of the inside information.’” Happ, 392 F.3d at 31

(quoting MacDonald, 699 F.2d at 55); see, e.g., SEC v. Chester Holdings, Ltd., 41

F. Supp. 2d 505, 528 (D.N.J. 1999) (reciting the MacDonald disgorgement

formulation).13
13(...continued)

“an amount representing the increased value of the shares at a reasonable time

after the public dissemination of the information.” MacDonald, 699 F.2d at 52-55

(internal quotation marks omitted). The court disagreed with the district court’s

decision that the defendant should have to disgorge his entire profits, reasoning

that defrauded sellers should recover only the amount they lost before they

reasonably could have obtained access to the material nonpublic information at

issue. The court thus remanded for the district court to determine a disgorgement

figure based upon the price of the stock a reasonable time after dissemination of

the inside information to the public. Id. at 55. The MacDonald court provided

the district court a formula for analyzing this market absorption date: “[I]n

determining what was a reasonable time after the inside information had been

generally disseminated, the court should consider the volume and price at which

[the] shares were traded following disclosure, insofar as they suggested the date

by which the news had been fully digested and acted upon by investors.” Id.; see

also Maxxon, 465 F.3d at 1179 (approving the date that the company first

attempted to correct the misleading statements as a cutoff date for disgorgement).

-33-

Generally speaking, we agree that it is not inappropriate in some situations

for sentencing courts to look to the civil sphere for guidance in fashioning a

proper criminal sentence. Courts in criminal cases have sought guidance from

civil damage measures in considering an estimate of loss from the defendant’s

unlawful conduct. See McCormick, Untangling Capricious Effects, supra, at

1153 (“Faced with a myriad of new issues never encountered before in the

criminal context, the courts have turned to civil jurisprudence for answers.”). In

Olis, which as discussed above highlighted the value of a realistic approach based

upon sound economic principles, the court specifically approved of relying on the

methodology used to calculate damages in a civil securities fraud case in a

criminal fraud case in part “because it is attuned to stock market complexities.” 
-34-

Olis, 429 F.3d at 546.

In United States v. Rutkokse, the Second Circuit, citing Dura

Pharmaceuticals, explained that it saw “no reason that the considerations relevant

to loss causation in a civil fraud case should not apply, at least as strongly, to a

sentencing regime in which the amount of loss caused by a fraud is a critical

determinant of the length of a defendant’s sentence.” 506 F.3d 170, 179 (2d Cir.

2007) (citing United States v. Ebbers, 458 F.3d 110, 128 (2d Cir. 2006)), cert.

denied, 128 S. Ct. 2488 (2008). It remanded so that the district court could

redetermine the sentence with consideration of the extent to which the defendant’s

fraud—rather than market or other forces—caused shareholders’ losses. Id. at

179-80; see also Leonard, 529 F.3d at 93 n.11 (“[T]he district court may look to

principles governing recovery of damages in civil securities fraud cases for

guidance in calculating the loss amount for purposes of the Guidelines.”).

Criminal cases have the same “tangle of factors affecting price,” Dura

Pharm., 544 U.S. at 343, that is found in civil cases. It therefore appears to us

equally important in criminal cases as in civil cases “to examine the movement of

a stock’s price after the relevant information is made public in order to determine

the proper measure of the illicit profit . . . to be charged to one who traded

illegally while in possession of the material, non-public information.” Patel, 61

F.3d at 140 (calculating losses avoided by defendant due to his selling shares

prior to public dissemination of inside information).
14 Consequently, we reject the government’s argument that under an

approach that takes extrinsic factors such as market absorption into account,

“criminal punishment would turn on experts hypothesizing ‘what ifs’” and that

“‘[g]ain’ would depend as much on the expert retained and the guesswork

permitted as on actual conduct.” Aplee. Br. at 65. Like sentencing courts

computing monetary measures of culpability in cases involving other types of

financial fraud, we nevertheless recognize that in criminal insider trading cases

district courts must be sensitive to and appropriately control the institutional costs

of sentencing proceedings, with a recognition that the Guidelines expressly

contemplate that loss computations will not reflect optimal precision. Cf. Bakhit,

218 F. Supp. 2d at 1240 (“Although it may be preferable for the district court to

(continued...)

-35-

iv. A Disgorgement Approach

Although we consider it to be appropriate in some situations to seek

guidance from civil jurisprudence in performing the criminal sentencing function,

and do not hesitate to do so in this case, we must be constrained by the nature of

our undertaking in a criminal insider trading matter—that is, determining the gain

resulting from the offense. It is not our task to determine loss to victims from

Mr. Nacchio’s crimes. The insider trading guideline commentary expressly

rejects victim loss as a metric of culpability. See U.S.S.G. § 2F1.2 cmt.

background (“Because the victims and their losses are difficult if not impossible

to identify, the gain . . . by the defendant . . . is employed instead of the victims’

losses.”). Therefore, we do not consider it appropriate in a criminal insider

trading case to rely upon any of the sophisticated strategies for determining

damages for civil plaintiffs, which may be worthy of examination in analogous

criminal cases assessing loss.14 See Buell, Reforming Punishment, supra, at 1613-
14(...continued)

have the benefit of dueling experts and an extensive tutorial to determine the

actual loss with exactitude, that is simply not practical in the vast majority of

criminal fraud cases. Most defendants do not have the resources to hire an

independent expert and the government has similar financial constraints. Further,

when expert testimony involves complicated algorithms, a court may place too

much emphasis on a single expert’s opinion if it is not also presented with an

opposing or independent expert to explain and counter the conclusions.”);

U.S.S.G. § 2F1.1 cmt. n.9 (“[T]he loss need not be determined with precision. 

The court need only make a reasonable estimate of the loss, given the available

information.”); see also Leonard, 529 F.3d at 93 (“Determination of the extent to

which the misrepresentations here resulted in an overvaluation of the securities

‘cannot be an exact science’ . . . .” (quoting Rutkokse, 506 F.3d at 179)); Samuel

W. Buell, Reforming Punishment of Financial Reporting Fraud, 28 Cardozo L.

Rev. 1611, 1638 (2007) [hereinafter Buell, Reforming Punishment] (noting that,

inter alia, “empirical limitations of the litigation process . . . and the impetus to

avoid burdening the public fisc with expensive and often inconclusive expert

contests in criminal cases necessitate compromising some precision”).

-36-

14, 1628-42 (detailing at great length the strengths and weaknesses of

methodologies for computing loss in criminal cases); McCormick, Untangling the

Capricious Effects, supra, at 1163-79 (describing various methodologies (and

their flaws) that courts have used to compute loss and noting that the formula and

variables applied “can translate into decades of a defendant’s life”).

Because it seeks to strip the wrongdoer of ill-gotten gains and deter

improper conduct, disgorgement provides an appropriate, close-fitting civil

analogue. See Mooney, 425 F.3d at 1107 n.11 (Bright, J., dissenting) (noting that

“‘profits and interest wrongfully obtained’ from insider trading [in civil cases]

clearly bear[] a close relationship to the ‘gain resulting from the offense’ of

insider trading,” and so the defendant’s gain or profits should be the same
15 For example, in his briefing and supplemental authority submission,

(continued...)

-37-

whether disgorged in a civil case or used to calculate prison time in a criminal

case); see also SEC v. First Pac. Bancorp, 142 F.3d 1186, 1191 (9th Cir. 1998)

(“Disgorgement is designed to deprive a wrongdoer of unjust enrichment, and to

deter others from violating securities laws by making violations unprofitable.”); 3

Bromberg, Securities Fraud, supra, § 6:334, at 6-892 (“Disgorgement takes away

from a violator the benefits of the violation, sometimes referred to as ‘illegal

profits.’”). The district court will be afforded considerable discretion in applying

the approach. Cf. Maxxon, 465 F.3d at 1179 (“‘Disgorgement is by nature an

equitable remedy as to which a trial court is vested with broad discretionary

powers.’ So long as the end date chosen results in a ‘reasonable approximation’

of illegal profits there is nothing wrong with the court itself determining that

date.” (citations omitted) (quoting Arnold S. Jacobs, Disclosures and Remedies

Under the Securities Laws § 20:109)). Compare Basic Inc. v. Levinson, 485 U.S.

224, 248 n.28 (1988) (declining, in discussing the presumption of reliance on the

integrity of the market price, “to adopt any particular theory of how quickly and

completely publicly available information is reflected in market price”), with 3

Bromberg, Securities Fraud, supra, § 6:338, at 6-898 (“There is considerable

variability in determining what is a reasonable time after disclosure and in

choosing the specific market price at that time.”).15 However, in doing so, the
15(...continued)

Mr. Nacchio embraces the straightforward disgorgement approach of the Mooney

dissent. See, e.g., Aplt. Opening Br. at 52 (“The Mooney dissent was correct.”). 

However, the $ 1.8 million gain figure that Mr. Nacchio advances as the correct

one is based upon a considerably more complex event study by Professor Fischel,

which among other things endeavors to track the historical movement of Qwest

stock relative to a designated market index. See Aplt. App. at 798 (“It is standard

practice in event studies to take into account the effect of market factors on stock

returns. This is typically done by estimating the historical relationship between

changes in a company’s stock price and changes in the performance of a market

index . . . .”). We appropriately leave it to the district court in the first instance

to determine the extent to which such an analysis comports with the disgorgement

approach adopted here and the overarching goal of having the gain figure reflect,

to the extent possible within the constraints of criminal sentencing, Mr. Nacchio’s

criminally culpable conduct.

-38-

court’s focus should be on ensuring that the gain figure resulting from the offense

excludes to the extent possible, within the institutional constraints of criminal

sentencing, factors unrelated to the defendant’s criminally culpable conduct.

v. Policy Considerations

Contrary to the district court’s net-profit approach, a disgorgement

approach is entirely consonant with central principles of federal sentencing policy

in that it endeavors to hold the defendant accountable for the portion of the

increased value of the stock that is related to his or her criminally culpable

conduct. Consequently, it militates against the creation of unwarranted

sentencing disparities among similarly situated defendants.

Federal sentencing is individualized sentencing: the sentencing court seeks

to craft a sentence that fully reflects a particular defendant’s criminally culpable
16 We acknowledge that a defendant’s sentence may be influenced

sometimes by factors outside of the defendant’s knowledge and control. Indeed,

happenstance and sheer luck (or lack thereof) may play a part in a defendant’s

sentence for certain crimes under the Guidelines. For example, two otherwise

equally culpable bank robbers may face different sentences based solely on the

different amounts of money that tellers happened to place in their bags; and two

otherwise equally culpable drug trafficking mules may face different sentences

based only on the different quantities of drugs that unbeknownst to them were

given to them for transport. See, e.g., U.S.S.G. § 2B3.1(b)(7), § 2B3.1 cmt. n.3

(2008) (increasing the offense level for robbery based on the value of the property

taken); id. § 2D1.1(c) (prescribing the increase in base offense level depending

upon the quantity and type of controlled substance). However, that does not mean

that federal sentencing is not focused upon imposing punishment based upon an

(continued...)

-39-

conduct, including the harm caused by it, and the defendant’s personal

circumstances. See United States v. Smart, 518 F.3d 800, 808 (10th Cir. 2008)

(discussing the proper methodology for sentencing courts to “perform their

individualizing role”); 18 U.S.C. § 3553(a) (noting the factors that a sentencing

court is obliged to consider including “the nature and circumstances of the

offense and the history and characteristics of the defendant”); U.S.S.G. §

1B1.3(a)(3) (noting that relevant conduct used to determine the Guidelines range

includes “all harm that resulted from the acts and omissions” of the defendant and

“all harm that was the object of such acts and omissions”).

However, if the impact of unrelated twists and turns of the market is

ignored in the sentencing calculus then an insider trading defendant is likely to

suffer a sentence that is detached from his or her individual criminal conduct and

circumstances.16 And this detachment can have a profound, detrimental impact on
16(...continued)

individual defendant’s criminally culpable conduct. Although the different

circumstances that produce these disparate sentencing outcomes may not have

been within the control of the defendants or even within their ken, those

circumstances nonetheless stem from, and are closely tied to, their individual

criminal activity and the resulting harm—that is, their acts of robbing a bank and

demanding money from the teller, and their acts of taking delivery of and ferrying

illegal drugs.

Crimes like bank robbery and drug trafficking are thoroughly permeated

with illegality. In contrast, the act of trading in securities—in itself—is entirely

lawful. As relevant here, what makes the act illegal is trading while in possession

of material, nonpublic information. Consequently, a whole host of factors can

contribute to the gains or losses that a defendant incurs from trading in stock that

have nothing to do with the criminal dimensions of his or her activity—factors

that relate simply to the ordinary economics and psychology of the marketplace. 

A sentencing approach that ignores this distinguishing aspect of the insider

trading context would be at odds with the individualized sentencing objective of

federal sentencing and the related concern pertaining to unwarranted sentencing

disparities. In effectuating these aspects of federal sentencing policy in the

insider trader context, sentencing courts must proceed with great care to ensure

that the gain attributed to a defendant actually stems from the criminal

dimensions of his or her stock trading.

17 We recognize that the objective of individualized sentencing in some

contexts may be viewed as being in tension with the objective of avoiding

unwarranted sentencing disparities. See, e.g., United States v. Evans, 526 F.3d

155, 167 (4th Cir.) (Gregory, J., concurring) (noting the “analytical tension”

involved in “ensur[ing] that the sentence caters to the individual circumstances of

a defendant, yet retains a semblance of consistency with similarly situated

defendants”), cert. denied, 129 S. Ct. 476 (2008). In pursuing the former (i.e.,

individualized sentencing), a sentencing court may mistakenly predicate a

sentence on features of an individual defendant that do not actually separate him

or her in any meaningful way from the mine-run of defendants who have

committed the same or a similar offense, thereby creating unwarranted sentencing

disparities among what are in fact similarly situated defendants. However, the

(continued...)

-40-

another objective of federal sentencing—the elimination of unwarranted

disparities between similarly situated defendants.17 See, e.g., Booker, 543 U.S. at
17(...continued)

concern here is the imposition of sentences based upon factors completely

unrelated to an individual defendant’s criminal culpability. In that situation, there

is a danger that others who share the same or a similar degree of criminal

culpability will not receive like sentences because the court’s sentences are not in

significant part actually predicated on criminal culpability at all—thus, creating

unwarranted sentencing disparities.

18 It is not possible to entirely exclude chance market forces from an

inside trader’s gain calculation. As discussed further below, see infra note 23, a

disgorgement approach cannot insulate itself from this reality.

-41-

253-54 (noting that the sentencing statutes’ goal of increased uniformity consists

not just of similar sentences for violations of the same statute but also “of similar

relationships between sentences and real conduct”).

Therefore, from a policy perspective, it makes sense to adopt a sentencing

approach that is focused on a defendant’s criminally culpable conduct and has the

effect of excising—even if not completely—unrelated market forces from the

sentencing calculus, thereby narrowing the zone of unpredictability in

sentencing.18 Such is the disgorgement approach we adopt here: it takes into

consideration the fact that stocks have inherent value (quite apart from criminally

fraudulent conduct) and seeks to exclude that unrelated value from the

computation of a defendant’s punishment, and it sets a logical, temporal cutoff

point for assessing the gain of the illegal conduct, i.e., the point when the

information is disclosed and absorbed by the market.

A hypothetical offered in the Mooney dissent, which is paraphrased here, 

provides a clear example of how the district court’s interpretation of the insider
-42-

trading guideline—calculating gain as total value realized, absent consideration of

how much is tied to unrelated market forces—can yield sentences that are

detached from defendants’ individual criminal culpability and, relatedly, can give

rise to undesirable and unwarranted sentencing disparities. See Mooney, 425 F.3d

at 1107 (Bright, J., dissenting). We are asked to imagine three corporate

executives who each, simultaneously and with the same material, positive

nonpublic information, buy 1,000 shares of stock at $5 per share. The stock

purchases are the criminally culpable conduct, that is, the acts of insider trading. 

The information is disclosed four weeks later; after the fifth week, the

information has been absorbed by the market and is reflected in the stock price. 

Id. On the day that it can be said that the positive information has been absorbed,

the stock price has risen to $15 per share.

On the market-absorption day, Officer A sells his 1,000 shares, making

$10,000—“all of which is illicit gain, [as it arose] entirely from his exploitation

of insider knowledge.” Id. Officers B and C retain their shares. Three months

later, the stock price has risen to $50 per share. Officer B sells and pockets total

gains of $45,000—$10,000 of which is attributable to his exploitation of the

insider knowledge, and $35,000 “owing to the ordinary vagaries of the market,

untainted by any deception.” Id. Six months later, the market crashes, and

Officer C sells out for $2 a share, sustaining a loss. Id.

Each officer “committed the same crime, with the same effect on the
19 Although the government argues that in a situation such as the

Mooney hypothetical, a sentencing court could depart or vary from the Guidelines

as needed to impose a reasonable sentence, it is troublesome to accept a reading

of the Guidelines that requires the court to take such action simply to fulfill the

mandate of providing an individualized, reasonable sentence. Cf. United States v.

Nichols, 376 F.3d 440, 443 (5th Cir. 2004) (rejecting the district court’s reliance

on the disparity between the sentence of an insider trading defendant and his

codefendants’ as the grounds for a departure because the disparity resulted from

factors already taken into consideration by the Guidelines). The suggestion that a

variance or departure would be the way to adjust for situations such as the

hypothetical is additionally problematic in that having multiple defendants in an

(continued...)

-43-

market.” Id. Under the district court’s interpretation, however, each officer

would receive a different gain calculation under the insider trading guideline. 

The proceeds (i.e., gain) from their insider trading would be assessed at the time

they sold their shares. Officers A and B would receive different increases to their

offense levels, and Officer C would receive no increase at all. As the

hypothetical illustrates, the district court’s interpretive approach would produce

sentences divorced from individual criminal culpability. The sentences imposed

on Officers B and C would not take into account the fact that stocks have inherent

value; the purported gain amounts attributable to them actually were the product

of the ordinary gyrations of the market in valuing their stock, not their criminal

conduct in trading on inside information—as the information had long since been

disclosed. Furthermore, the hypothetical demonstrates that a consequence of the

delinking of the sentence from individual criminal culpability is undesirable and

unwarranted sentencing disparities as to otherwise equally culpable defendants.19
(...continued)

insider trading case is hardly an exceptional situation and thus resort to such

adjustments necessarily would not be an infrequent occurrence.

20 The Mooney hypothetical illustrates in very stark fashion the flaws in

the district court’s approach, which permits unrelated market gyrations to

significantly impact sentencing outcomes. The starkness of the hypothetical is at

least partly a product of the type of insider trading at issue—the buying of

company stock while in the possession of material, nonpublic information. In

such a situation, the proceeds (i.e., the effects) of the already completed criminal

conduct ordinarily would be assessed when the stock is sold. As the Mooney

hypothetical demonstrates, that assessment could take place long after the

information had been disclosed and absorbed by the market and the crime has

ended. Consequently, under the district court’s approach, at the time that the

proceeds of the insider trading are measured, the value of the stock could have

been almost entirely determined by market movements unrelated to the insider

trading itself. Arguably, the flaws of the district court’s approach are not in such

high relief here, where the insider trading relates to the sale of company stock

while possessing material, nonpublic information. In order to be a crime at all,

the sales must take place before the information is fully disclosed to the public. 

See, e.g., United States v. Libera, 989 F.2d 596, 601 (2d Cir. 1993) (“It is, of

course, axiomatic that trading on public information does not violate Section

10(b) . . . . Once the information is fully impounded in price, such information

can no longer be misused by trading because no further profit can be made.”). 

Therefore, even under the district court’s approach, the factual scenario here

would not give rise to a situation where sentencing computations were based upon

sales after the information was disclosed and absorbed by the market. Such sales

would not be illegal; nor would their proceeds be ill-gotten gains. However, as

demonstrated in text, a hypothetical based upon a situation like Mr. Nacchio’s is

nonetheless instructive concerning the weaknesses of the district court’s

approach.

-44-

Moreover, examined in a context like this one where an insider sells stock

on the basis of material, nonpublic information, important weaknesses of the

district court’s approach also are clear.20 Take for example a scenario involving

three corporate officers who are in possession of the same material, negative
21 The hypothetical sketched here is quite simple. We intend for it to

illustrate in a very general way some of the weaknesses of the district court’s gain

calculation approach and the reasons that we consider our approach to be a better

one when viewed in light of federal sentencing policy. Our analysis related to the

hypothetical is not aimed at creating an inflexible playbook to control the district

court’s gain analysis upon remand. Once the focus is properly centered upon the

gain resulting from Mr. Nacchio’s insider trading offense (i.e., upon the increase

in value realized due to the criminal dimensions of his stock trading), then the

district court will have considerable discretion to consider a number of variables

in arriving at an appropriate gain figure. We do not establish an exact formula

here for arriving at that figure.

-45-

nonpublic information while their company’s stock is selling at $35 a share.21

Assume that each received 1000 stock options as part of their compensation, with

an exercise cost of $10 per share. Officer X elected to exercise her 1000 options

and sell her shares while the stock was selling at $35, making a profit of $25,000. 

Aware that the stock had been experiencing an upward trend and, hopeful that it

would continue, Officer Y delayed exercising her options. However, because of

negative industry developments (unrelated to the officers’ criminally fraudulent

conduct), the stock price actually took a nose dive. While it was at $20 per share,

Officer Y exercised her options and sold her shares, making a profit of $10,000. 

For whatever reason, Officer Z was late to react to the negative market

developments and did not exercise her options and sell her shares until the stock

price was $10 per share. Officer Z made no profit. When the negative

information was ultimately disclosed and absorbed by the market, the price of the

stock had settled at $5 per share.
22 Indeed, the extent to which the district court’s sentencing approach

allows for sentences that are not calibrated based upon criminal culpability is

underscored by focusing on option costs. In our hypothetical, we assumed that

the officers received stock options with the same exercise cost. However, in the

real world, this may well not be the case. The exercise cost of an option “[i]n

practice” is “almost always set equal to the grant-date market price.” Murphy,

Explaining Executive Compensation, supra, at 863; see also Greene, 210 F.3d at

1243 (noting that the option price is “typically the market price on the date the

options are granted”); Michael B. Dorff, The Group Dynamics Theory of

Executive Compensation, 28 Cardozo L. Rev. 2025, 2057 (2007) (noting that

“boards nearly universally set the options’ exercise price at the market price the

day the options are granted”). Therefore, if a given set of executives receive their

compensation-related options on different days and the market price of the

company’s stock is different on those days, then the executives are likely to have

options with different prices. It cannot be disputed that option cost is a business

variable that ordinarily is entirely unrelated to the criminal dimensions of stock

trading. Yet, under the district court’s approach, differences as to this wholly

unrelated factor could have significant sentencing consequences. For instance, in

a scenario involving two corporate officers, Officer A and Officer B, who are in

(continued...)

-46-

 Under the district court’s approach, although having committed equally

blameworthy conduct in trading on the same material, nonpublic information, their

sentences would be computed based upon very different gain figures. Officer X’s

base offense level under the Guidelines would be enhanced four levels based upon

a profit of $25,000 under § 2F1.2(b)(1) (incorporating by reference § 2F1.1(b)(1)). 

Officer Y’s would be enhanced two levels based upon a profit of $10,000. And

Officer Z’s would not be enhanced at all, because she made no profit.

By ignoring the inherent value of the stock, the district court’s approach

would divorce the sentencing assessment of gain from the defendant’s individual

culpability.22 It would, therefore, run counter to key purposes of federal 
22(...continued)

possession of the same material, negative nonpublic information, let us assume

that each received 1000 stock options as part of her compensation, but with

different exercise costs. Officer A received options with an exercise cost of $10

per share; getting hers on a different day, Officer B received options with an

exercise cost of $25 per share. Each decides to trade (i.e., exercise her options

and sell the shares) while their company’s stock is selling at $35 per share. When

the information is ultimately disclosed and absorbed by the market, the

company’s stock price drops to $5 per share. Under the district court’s

sentencing approach—which focuses on net profit—Officer A and Officer B

would be exposed to markedly different Guidelines sentencing ranges because of

this unrelated option-cost variable. With a net profit of $25,000, Officer A’s

baseline figure for gain purposes would result in a four level enhancement, while

Officer B’s $10,000 net profit would only lead to a two level enhancement. In

every material respect, however, the criminal culpability of Officer A and Officer

B would be the same; their sentences should reflect that. Under our disgorgement

approach, they would. That approach would not factor into the sentencing

equation the wholly unrelated factor of option exercise-cost differences. In each

instance, we typically would subtract the price of the stock when the information

was disclosed and absorbed by the market (i.e., $5) from the sales price of the

stock (i.e., $35 per share) and multiply by the number of shares. The equally

culpable officers, A and B, would be held accountable for the same gain resulting

from the offense and would be sentenced accordingly.

-47-

sentencing: individualized sentencing and the avoidance of unwarranted

sentencing disparities. The disgorgement approach adopted here would not have

similar effects.

For example, it would take into consideration the value of the stock after the

information was disclosed and absorbed by the market—that is, the $5 stock price. 

That $5 figure ordinarily would be the amount subtracted from the market price of

each share of stock at the respective times the officers engaged in sales

transactions; in other words, it would be the common subtractive figure. 
-48-

Consequently, our approach would better capture the increase in value received by

the defendant due to unlawful trading in securities, as directed by the relevant

guideline and its commentary. See U.S.S.G. § 2F1.2 cmt. background (calculating

gain as “the total increase in value realized” rather than just “total value

realized”—indicating that shares already have value (emphasis added)).

Furthermore, consistent with the focus on defendant culpability, the

sentencing court could properly take into consideration the unrelated negative

industry developments and their impact on the stock price. To the extent that the

stock-price effects of those negative developments could be isolated with

sufficient certainty, the sentencing court ordinarily should exercise its discretion to

exclude, to the extent feasible, those effects. See 3 Bromberg, Securities Fraud,

supra, § 6:337, at 6-897 (“Can a defendant reduce the amount of disgorgement by

demonstrating that other factors accounted for part of his or her profit? . . . [I]t

seems reasonable to allow this in insider trading disgorgement cases . . . .”); cf.

SEC v. First City Fin. Corp., Ltd., 890 F.2d 1215, 1232 (D.C. Cir. 1989) (“[W]e

believe the government’s showing of appellants’ actual profits on the tainted

transactions at least presumptively satisfied that burden [as to the amount of

disgorgement]. Appellants . . . were then obliged clearly to demonstrate that the

disgorgement figure was not a reasonable approximation. Defendants . . . may

make such a showing, for instance, by pointing to intervening events from the time

of the violation.”); Buell, Reforming Punishment, supra, at 1640 (noting that “[i]n
23 To be sure, even under a disgorgement approach, there could be

differences in sentencing outcomes due to unrelated market forces if multiple

defendants trade on inside information at different temporal points. See 3

Bromberg, Securities Fraud, supra, § 6:337, at 6-896 to -897 (“Measuring

disgorgeable profit . . . by change in the market prices assumes that all changes in

market price of the security are attributable to the material information on which

the violator traded. This, of course, may not be true. The price changes may be

influenced by, even dominated by, other factors affecting the issuer of the

security . . . .”). For example, in our hypothetical, using a common subtractive

figure of $5 per share, the gain figure would be different for the officers: Officer

X’s gain resulting from the offense would be $30,000; Officer Y’s would be

$15,000; and Officer Z’s would be $5000. (The precise gain figures used here

contemplate that the defendants (whom we may safely assume would bear the

evidentiary burden) would not be able to isolate with a sufficient degree of

certainty the stock-price effects of the unrelated negative industry developments,

such that the district court would seek to exclude those effects from the

sentencing calculus.) Consequently, the base offense levels of the officers also

would be different, increasing, respectively, by four, three, and two levels. 

Notably, the disgorgement approach still would yield a better overall result from

the perspective of federal sentencing policy than the district court’s. Each

defendant who traded on the same inside information would get at least some

enhancement; whereas under the district court’s net-profit approach, one

defendant (i.e., Officer Z) who suffered a loss would be scot-free. Nevertheless,

we accept that it is not possible to entirely exclude chance market forces from an

inside trader’s gain calculation. We do not, however, attempt to achieve this

(continued...)

-49-

cases in which an event unrelated to the fraud plainly caused a significant change

in share price, either during the fraud or in the period after revelation [but before

market absorption], the court should modify the loss figure”).

Accordingly, to a greater extent than the district court’s, our approach is

consonant with the purposes of federal sentencing. Therefore, even viewed solely

from a policy perspective, it would be a more appropriate means to determine a

defendant’s gain resulting from the offense.23
23(...continued)

unrealistic objective here. Rather, we simply seek to minimize the influence of

factors other than a defendant’s unlawful acts on the calculation of punishment,

thereby reducing unwarranted sentencing disparities between similarly situated

defendants. Like the bank robbery and drug trafficking examples discussed supra

at note 16, although the variation in the gain amounts may result in part from

some chance market developments, the sentencing analysis would be focused on

holding the individual defendants accountable for the criminal dimensions of their

stock trading. Therefore, the range of possible extraneous economic factors that

might influence the gain amount would thereby be narrowed and so would the

range of possible sentencing disparities. And, where unrelated events can be

identified and it is clear that they have affected the share price, it would be

consistent with the analytic approach we outline here for the district court, in an

exercise of its discretion, to seek to exclude those effects of those events from the

gain computation.

-50-

4. Conclusion

We conclude that the district court’s net-profit sentencing approach does not

square with the plain language of the relevant guideline, § 2F1.2; therefore, we

reject it. We further determine that district courts must undertake “thorough

analyses grounded in economic reality,” Olis, 429 F.3d at 547, when sentencing

defendants in insider trading cases and deem it appropriate to look to the civil

sphere for guidance regarding the proper approach. We conclude that the civil

disgorgement remedy provides an appropriate guidepost for sentencing in insider

trading cases. Lastly, we highlight that the conclusion we reach based upon on

reading of the text of the relevant guideline is consonant with key objectives of

federal sentencing policy. The district court’s net-profit sentencing approach

allows the extent of the punishment imposed on defendants such as Mr. Nacchio to
-51-

be figuratively imposed “on the throw of the dice—the ups and downs of the stock

market.” Mooney, 425 F.3d at 1108 n.12 (Bright, J., dissenting) (“[U]ntil today I

did not realize that sentences can rest on the gamble of the stock market . . . .”). 

This contravenes important objectives of federal sentencing—specifically,

sentences should reflect the individual criminal culpability of defendants and

avoid unwarranted sentencing disparities.

Mr. Nacchio is entitled to resentencing under the principles outlined above. 

On remand, the district court should focus on arriving at a figure that more closely

approximates Mr. Nacchio’s gain resulting from the offense of insider trading.

III. FORFEITURE

As required by Fed. R. Crim. P. 32.2, the indictment filed against Mr.

Nacchio provided notice of the government’s intention to seek forfeiture of a sum

of money “representing the amount of proceeds obtained as a result of the

offenses” “[u]pon conviction of one or more of the offenses alleged in Count(s) 1

through 42” “pursuant to 18 U.S.C. § 981(a)(1)(C), 18 U.S.C. § 1956(c)(7)(A), 18

U.S.C. § 1961(1)(D), and 28 U.S.C. § 2461(c).” Aplt. App. at 69. Mr. Nacchio

appeals the district court’s order that he forfeit approximately $52 million. He

argues that the district court erred in requiring him to forfeit his gross proceeds

rather than his net profit. According to Mr. Nacchio, under the terms of the

forfeiture statute he should be required to forfeit no more than approximately

$44.6 million, which comprises his gross proceeds from the unlawful trades less
24 Although at one point Mr. Nacchio had argued that his forfeiture

amount should be much less—the $1.8 million gain figure calculated by his expert

report—he stipulated to the district court that “the only challenges he will raise to

the forfeiture amount sought by the United States relate to the legal issue of what

deductions, if any, should be made from the $52,007,545.47 sought by the United

States—i.e., whether taxes, fees, and option costs should be deducted or not.” 

Aplt. App. at 1030 (internal quotation marks omitted).

-52-

brokerage commissions and fees and the cost of exercising the options.24 We

review questions of statutory interpretation de novo. United States v. Willis, 476

F.3d 1121, 1124 (10th Cir. 2007).

The civil forfeiture provision, made applicable here by 28 U.S.C. § 2461(c),

calls for the forfeiture of the proceeds traceable to numerous felony offenses,

including “any offense constituting ‘specified unlawful activity’ (as defined in

section 1956(c)(7) of this title).” 18 U.S.C. § 981(a)(1)(C). It is undisputed that

such “specified unlawful activity” includes, inter alia, the insider trading offenses

for which Mr. Nacchio was convicted. The parties dispute, however, how to

calculate the traceable proceeds—i.e., the amount to be forfeited. The district

court accepted the government’s view that the proceeds should be defined under

18 U.S.C. § 981(a)(2)(A), which is applied to cases involving “illegal goods,

illegal services, unlawful activities, and telemarketing and health care fraud

schemes.” Id. § 981(a)(2)(A). Under this provision, proceeds are “property of any

kind obtained directly or indirectly, as the result of the commission of the offense

giving rise to forfeiture,” and are “not limited to the net gain or profit realized
-53-

from the offense.” Id.; cf. United States v. Santos, 128 S. Ct. 2020, 2024 (2008)

(noting that Congress defined “proceeds” in § 981(a)(2)(A) to mean “receipts”). 

Thus, the district court calculated Mr. Nacchio’s forfeitable proceeds to be

$52,007,545.47—his gross proceeds from the relevant time period.

Mr. Nacchio argues on appeal, as he did to the district court, that his

proceeds should instead be calculated under 18 U.S.C. § 981(a)(2)(B), which

provides:

In cases involving lawful goods or lawful services that are sold

or provided in an illegal manner, the term “proceeds” means the

amount of money acquired through the illegal transactions

resulting in the forfeiture, less the direct costs incurred in

providing the goods or services. . . . The direct costs shall not

include any part of the overhead expenses of the entity

providing the goods or services, or any part of the income taxes

paid by the entity.

18 U.S.C. § 981(a)(2)(B).

According to Mr. Nacchio, insider trading involves “lawful goods” sold “in

an illegal manner” rather than an unlawful activity as described in § 981(a)(2)(A). 

In other words, because trading in securities is generally a lawful activity and

securities are generally lawful goods, the offense of trading based upon inside

information involves “lawful goods . . . sold in an illegal manner.” Id. Thus, Mr.

Nacchio asserts, his forfeitable proceeds should consist of “the amount of money

acquired through the illegal transactions resulting in the forfeiture, less the direct

costs incurred in providing the goods or services”—i.e., his net profit of $44.6
-54-

million, rather than his gross proceeds. Id.; cf. Santos, 128 S. Ct. at 2024 (noting

that Congress defined “proceeds” in § 981(a)(2)(B) to mean “profits”); see also

Santos, 128 S. Ct. at 2031-32 (Stevens, J., concurring) (noting that under §

981(a)(2)(B) Congress specifically provided that “‘proceeds’ must allow for the

deduction of costs”).

The district court’s determination that subsection (B) was inapplicable was

based on its determination that: (1) because the offense of insider trading is

included as a “specified unlawful activity” in § 981(a)(1)(C), it must also fall

within the “unlawful activities” of § 981(a)(2)(A); and (2) “a security is not a

good, it is a commodity.” Aplt. App. at 1231-32. We disagree with the first

conclusion and find that the second conclusion is not correct under the facts of this

case. For the reasons outlined below, we conclude that Mr. Nacchio’s forfeiture

should be calculated under § 981(a)(2)(B) as “the amount of money acquired . . .

less the direct costs incurred.” Thus, Mr. Nacchio should be required to forfeit his

net profit, rather than the gross proceeds, of his insider trading offenses.

First, we are not convinced that every “specified unlawful activity” laid out

as subject to a forfeiture order under § 981(a)(1)(C) also must be one of the

“unlawful activities” of subsection (A) to which the gross receipts definition of

“proceeds” is applied. The district court and the government rely on United States

v. All Funds on Deposit in United Bank of Switz., N.Y., 188 F. Supp. 2d 407

(S.D.N.Y. 2002), for this proposition. In All Funds, the court reasoned that the
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term “unlawful activities” in the civil forfeiture provisions “is a term of art,” such

that the “unlawful activities” in § 981(a)(2)(A) include “specified unlawful

activity” as defined in 18 U.S.C. § 1956(c)(7) and referenced in § 981(a)(1)(C). 

Id. at 410. Thus, the court reasoned, “the definition of the forfeitable proceeds”

for any of the “unlawful activities” “is solely provided by § 981(a)(2)(A), and not

in any respect by § 981(a)(2)(B).” Id. Essentially, All Funds held that the

currency transfer crimes at issue in that case—undisputedly involving “specified

unlawful activities”—automatically fell within the category of “unlawful activity,”

and only § 981(a)(2)(A) applied. See id.

However, we find the reasoning of a more recent case from another judge

from the same court to be more persuasive here.

In short, All Funds found that the term “unlawful activities” as

used in section 981(a)(2)(A) includes all “specified unlawful

activit[ies]” as defined in 18 U.S.C. § 1956(c)(7). While mail

fraud and wire fraud are “specified unlawful activities” under

sections 1956(e)(7)(A) and 1961(1)(D), this Court disagrees

with the All Funds reading of the statutes at issue. If Congress

had meant “specified unlawful activity,” a defined term in the

money laundering statute, it would have used that precise

term—as it did in section 981(a)(1)(C)—instead of the looser

term “unlawful activities” used in section 981(a)(2)(A). 

Moreover, the All Funds reading of the statutes would render

section 981(a)(2)(B) nugatory because almost every predicate

crime listed in section 981(a)(1)(C) is also a “specified

unlawful activity” listed in section 1956(c)(7), leaving only a

handful of statutes involving counterfeiting, forgery, explosive

materials, and fraudulent identification documents as possible

candidates for the definition of “proceeds” given in section

981(a)(2)(B). Sections 981(a)(2)(A) and 981(a)(2)(B) should

be read together, and both sections must have meaning.
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United States v. Kalish, No. 06 Cr. 656(RPP), 2009 WL 130215, at *7 (S.D.N.Y.

Jan. 13, 2009) (alteration in original); cf. 1 David B. Smith, Prosecution and

Defense of Forfeiture Cases, ¶ 5.03[2], at 5-62 n.8 (2008) [hereinafter Smith,

Forfeiture Cases] (“[U]nder [the Nacchio district court’s] decision the proceeds of

every section 981(a)(1) offense fall under the broad definition of subsection (A),

and subsection (B) becomes a null set . . . .”).

While Mr. Nacchio’s offense of insider trading falls within “specified

unlawful activities” pursuant to § 981(a)(1)(C), we similarly conclude that this

fact does not automatically render it an “unlawful activity” under § 981(a)(2)(A). 

Congress “would have used that precise term” (i.e., “specified unlawful

activities”) in both places if it had meant for the two provisions to be coterminous

in terms of the covered offenses. Kalish, 2009 WL 130215, at *7; see also 1

Smith, Forfeiture Cases, supra, ¶ 5.03[2], at 5-62 (“The term ‘unlawful activities’

in section 981(a)(2)(A) was meant to cover inherently unlawful activities such as

robbery that are not captured by the words ‘illegal goods’ and ‘illegal services.’”). 

Therefore, because insider trading does not by virtue of being a “specified

unlawful activit[y]” constitute an “unlawful activity” such that only § 981(a)(2)(A)

applies, the issue becomes whether this case involves “unlawful activities” as per

subsection (A) or “lawful goods” sold in an illegal manner as per subsection (B). 

As securities themselves generally are lawful, the threshold issue is whether they
25 Though the government argues that Mr. Nacchio’s interpretation

would lead to separate forfeiture schemes for inside buying and inside selling

because § 981(a)(2)(B) does not expressly extend to purchases, we note that our

holding is narrowly limited to the facts of this case and a purchasing scheme is

beyond our consideration here.

26 Moreover, “since both subsections speak . . . in terms of ‘goods’ and

‘services,’ it is not apparent how the court’s observation that a security is neither

supports the court’s conclusion that securities fraud falls under subsection (A).” 

1 Smith, Forfeiture Cases, supra, ¶ 5.03[2], at 5-62 n.8.

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can be considered goods. Under the facts of this case,25 we find that the securities

at issue are “lawful goods” that were sold in an illegal manner; thus, §

981(a)(2)(B) applies.

First, in looking at the plain language of the statute and giving “goods” its

ordinary meaning, see United States v. Plotts, 347 F.3d 873, 875-76 (10th Cir.

2003), we note that (contrary to the district court’s comments) it is far from an

“elementary observation” that “a security is not a good.”26 Aplt. App. at 1231. 

While a leading legal reference offers a definition of “goods” as “[t]hings that

have value, tangible or not,” that same reference also provides a definition of the

term, appearing in the Uniform Commercial Code, that excludes investment

securities. Black’s Law Dictionary 714. The parties’ competing definitions and

the very broad meanings associated with both “security” and “good” render these

classifications anything but elementary. Cf. id. at 1384-85 (noting that “security”

carries a “‘broad statutory definition’” and a wide range of items—including items

that clearly are goods in at least one sense, such as scotch whiskey, cosmetics,
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rabbits, cemetery lots, and fruit trees—“‘have all been held to be securities within

the meaning of federal or state securities statutes’” (quoting 1 Thomas Lee Hazen,

Treatise on the Law of Securities Regulation, § 1.5, at 28-29 (3d ed. 1995))); id. at

714 (simultaneously defining “goods” as “[t]angible or movable personal property

other than money” and as “[t]hings that have value, whether tangible or not”

(emphasis added)).

Thus, the government’s and district court’s assertion that securities cannot

be lawful goods is not supported by the plain language of the statute. Further, as

outlined above in regard to the gain calculation, the securities at issue (consonant

with the definition of the term “good”) were not inherently valueless items: rather,

they were “[t]hings that ha[d] value” and were not rendered worthless by the

offenses. Id. at 714. Mr. Nacchio was not participating in an inherently unlawful

activity by selling Qwest stock; trading, by itself, would not have been an

unlawful activity. Rather, the illegality inhered in his selling securities (“lawful

goods”) in an unlawful manner, i.e., “on the basis of material, nonpublic

information.” See O’Hagan, 521 U.S. at 651-52; 1 Smith, Forfeiture Cases,

supra, ¶ 5.03[2], at 5-62 & n.8. Therefore, we hold that under the specific facts of

this case, Mr. Nacchio’s acts of insider trading involved lawful goods sold in an

illegal manner. Thus, § 981(a)(2)(B) should be applied to calculate Mr. Nacchio’s

forfeiture amount; the proceeds subject to forfeiture are subject to deduction of
27 The government argues that even under § 981(a)(2)(B), it would be

erroneous to deduct the exercise costs of the options Mr. Nacchio received as this

amount was not “incurred” in the subsequent illegal sales. We express no opinion

on whether the costs to exercise the options should be deducted alongside

brokerage fees as the district court can revisit that issue in recalculating the

forfeiture amount under the proper provision.

28 Mr. Nacchio additionally argues that imposition of a $19 million

fine, when combined with a $44.6 million (or, ostensibly, a $52 million)

forfeiture order, raises “a serious Eighth Amendment question” because it “would

represent a penalty 35-times greater than the $1.8 million gain.” Aplt. Opening

Br. at 54 (citing Alexander v. United States, 509 U.S. 544, 558-59 (1993) (“[T]he

Excessive Fines Clause limits the government’s power to extract payments,

whether in cash or in kind, as punishment for some offense.” (internal quotation

marks omitted))). “[A] punitive forfeiture violates the Excessive Fines Clause if

it is grossly disproportional to the gravity of a defendant’s offense.” United

States v. Bajakajian, 524 U.S. 321, 334 (1998). We need not reach this

contention of error, however. In light of our earlier rulings, currently there is no

gain figure against which to measure the alleged disproportionality of the fineforfeiture pairing. The district court will determine Mr. Nacchio’s gain resulting

from the offense upon resentencing. In addition, Mr. Nacchio does not argue that

either his fine or his forfeiture, considered separately, would be unlawful; he

asserts only that the fine, taken together with the forfeiture, constitutes an

unconstitutional “excessive fine.” Assuming that the fine and forfeiture amounts

would be considered in tandem for Eighth Amendment purposes, our disposition

of Mr. Nacchio’s forfeiture order nullifies his Eighth Amendment argument; at

this time, there is no set forfeiture amount. The district court will determine the

exact forfeiture amount upon resentencing.

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direct costs.27 Because the district court applied the wrong legal framework, we

will reverse.

28

IV. CONCLUSION

Based upon the foregoing, we REVERSE the district court’s sentencing

order with respect to its gain calculation and its forfeiture determination and

REMAND for resentencing consistent with this opinion.