Opinion ID: 623036
Heading Depth: 3
Heading Rank: 1

Heading: Calculating Loss in Ponzi Schemes

Text: The Sentencing Guidelines define loss stemming from criminal fraud as the greater of actual loss or intended loss, the latter including the pecuniary harm that was intended to result from the offense whether or not the intended pecuniary harm . . . would have been impossible or unlikely to occur ( e.g., as in a government sting operation, or an insurance fraud in which the claim exceeded the insured value). U.S.S.G. § 2B1.1, Application Note 3(A)(ii). Moreover, such losses, whether actual or intended, shall not include . . . [i]interest of any kind, finance charges, late fees, penalties, amounts based on an agreed-upon return or rate of return, or other similar costs. U.S.S.G. § 2B1.1, Application Note 3(D)(i). Hsu argues that the district court's calculation of loss included such interest or agreed-upon returns in violation of the Guidelines' instruction. The question, therefore, is whether a federal sentencing court can include as part of its intended loss determination those earnings that victims reinvested in a Ponzi scheme, even though those earnings were invented as part of the scheme itself. [3] We agree with the district court that it can. The guidelines provide that when an investor puts money into a fraudster's hands, and ultimately receives nothing of value in return, his loss is measured by the amount of principal invested, not by the principal amount plus the promised interest or return that was never received. The situation is different, however, in a case in which an investor is told not simply that his investment will grow, but that it has grown, and that the total of his original investment and the accrued interest or other gain is now available to be withdrawn or reinvested in the scheme, depending on the investor's preference. When an investor in a Ponzi scheme faces the choice either to withdraw or to reinvest, the choice to reinvestan act frequently necessary to maintain the scheme itselftransforms promised interest into realized gain that can be used in the computation of loss for the purposes of federal sentencing. In such a case, only the most recent promised or reported interest gains are excluded from sentencing consideration as per the Guidelines' exclusion of interest or rates of return from the loss calculation. [4] The rule proposed by Hsu, which would calculate losses only by looking at the money actually invested by victims, would fail to take into account the natural and indeed desired reactions that investors will have to Ponzi schemes as they unfold. Victims' behavior necessarily changes in the face of the fraudulent reports of the success of their investments. That the purported proceeds from such success are maintained in accounts under the defendant's control, and not withdrawn by the investors, is essential to the very purpose of the Ponzi scheme. Nevertheless, when the victims are given the option of withdrawing the proceeds, and when the perpetrator induces them not to do so, but instead to reinvest the money and again put it at risk, the victims have suffered further loss. Reinvested historical gains which, as the district court noted, were part of a malicious effort to maintain [investors'] confidence and lure other victimshave become part of the investors' expected gains and wealth, altering their decision-making, encouraging trust in the scheme, and thus inviting the infusions of capital that any Ponzi scheme needs to survive. In some instances, the task of defining reinvestment will be a difficult factual inquiry that district courts will have to pursue with care. While the basic architecture of a Ponzi scheme is consistent from one scheme to the next, see, e.g., Eberhard, 530 F.3d at 132 n. 7, the details in each case will vary. What constitutes interest precluded from consideration during sentencing in one context may be the very loss intended in another. The district court must necessarily consider the structure of the scheme to determine the extent to which promised returns were projected interest payments or realized gains. The task in Hsu's case, however, is straightforward. Hsu's victims frequently returned post-dated checks to him for reinvestment, thereby relinquishing the opportunity to cash those checks and withdraw from the scheme. When this occurred, the reinvested checksincluding the previously promised returnsbecame part of their principal investment, and therefore constitute the very losses that Hsu intended to inflict upon his victims. The fact that such money may never have existed, or that the scheme may have collapsed sooner if all investors had attempted to withdraw their purported gains at once, does not affect the loss calculation. On the facts of this case, the investors were given a clear opportunity to withdraw the total amount of their principal and accrued interest, and were induced not to do so by fraudulent promises of continued gain. The reinvestments were thus appropriately counted as loss. Hsu's argument that the gains did not exist, and that there was no money to pay the investors, reduces to the claim that the victims' losses do not count because he was unable to pay them back. We do not say that the method chosen by the district court was the only way to measure loss in a Ponzi scheme case. Since, under the guidelines, the district court is required only to make a reasonable estimate of loss, see, e.g., United States v. Rigas, 583 F.3d 108, 120 (2d Cir.2009), other methodologies might have been appropriate in this case, and might even be preferable in other cases depending on the particular facts of the case. We hold only that Application Note 3(D)(i)'s exclusion of interest from loss calculations does not apply here, and that the district court's calculation is otherwise reasonable and appropriately measures the scope of the harm done to victims. We therefore have no reason to disturb it.