Opinion ID: 39694
Heading Depth: 2
Heading Rank: 3

Heading: Loss Calculation under the Sentencing Guidelines

Text: 21 The most significant determinant of Olis's sentence is the guidelines loss calculation. By the district court's reasoning, this added twenty-six levels to his base offense level and alone placed Olis in a punishment range exceeding fifteen years' imprisonment. 22 This court reviews a district court's factual findings at sentencing for clear error and its legal analysis de novo. Nixon v. Epps, 405 F.3d 318, 322 (5th Cir.2005). While the district court need only make a reasonable estimate of loss, U.S.S.G. § 2B1.1 APP. NOTE TO (C)(2002), this court first determines whether the trial court's method of calculating the amount of loss was legally acceptable. United States v. Saacks, 131 F.3d 540, 542-43 (5th Cir.1997); United States v. Krenning, 93 F.3d 1257, 1269 (5th Cir.1996). 23 Although otherwise amended in 2001, the guideline covering securities fraud has continuously provided that a sentencing court should use the greater of actual or intended loss. § 2B1.1, cmt. n 2.2(a) (2001). The guidelines measure criminal culpability in theft and economic crimes according to their pecuniary impact on victims. Actual loss, which is at issue here, means the reasonably foreseeable pecuniary harm that resulted from the offense. § 2B1.1, cmt. n. 2(a)(i). Moreover, actual loss incorporates [a] causation standard that, at a minimum, requires factual causation (often called `but for' causation) and provides a rule for legal causation (i.e., guidance to courts regarding how to draw the line as to what losses should be included and excluded from the loss determination). U.S.S.G. SUPP 2 APP. C, AMENDMENT 617 (NOVEMBER 1, 2001). This explanation does not, contrary to the Government's argument in brief, lessen the preexisting standards that held a defendant responsible at sentencing only to the extent that losses are caused directly by the offense conduct. See, e.g., United States v. Hicks, 217 F.3d 1038, 1048-49 (9th Cir.2000); United States v. Marlatt, 24 F.3d 1005, 1007 (7th Cir.1994) ([there is a] difference between `but for' causation and the causation — for which the presence of but-for causation is ordinarily a necessary condition but rarely a sufficient one — that imposes legal liability. The distinction runs throughout the law. Criminal law is no exception). 6 District courts must take a realistic, economic approach to determine what losses the defendant truly caused or intended to cause. United States v. West Coast Aluminum Heat Treating Co., 265 F.3d 986, 991 (9th Cir.2001). 24 The loss guideline is skeletal because it covers dozens of federal property crimes. Some flesh can be added, however, where the gravamen of the offense conduct is securities fraud perpetrated on an established market. Useful guidance appears in the applicable principles for recovery of civil damages for securities fraud. The civil damage measure should be the backdrop for criminal responsibility both because it furnishes the standard of compensable injury for securities fraud victims and because it is attuned to stock market complexities. In civil cases, the principle of loss causation is well established. See Dura Pharmaceuticals, Inc. v. Broudo, ___ U.S. ___, 125 S.Ct. 1627, 1631-32, 161 L.Ed.2d 577 (2005); see generally Greenberg v. Crossroads Systems, Inc., 364 F.3d 657 (5th Cir.2004); Private Securities Litigation Reform Act, 15 U.S.C. § 78u-4(b). 7 Thus, there 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. See also United States v. Grabske, 260 F.Supp.2d 866, 869-71 (N.D.Cal.2002). 8 25 Although cases applying the guidelines to securities fraud convictions at first blush yield no consistent rule analogizing criminal responsibility with civil loss causation, disparity is often more apparent than real. In cases where defendants promoted worthless stock in worthless companies, measuring the loss as the entire amount raised by the schemes is neither surprising nor complex, and is fully consistent with civil loss causation. See, e.g., United States v. Hedges, 175 F.3d 1312, 1314-15 n. 6 (11th Cir.1999)(noting that the corporation's stock became worthless when the conspiracy was discovered). A few cases appear to rely on a market capitalization approach, basing loss on a gross correlation between stock price decline and the revelation of a fraudulent transaction. See, e.g., United States v. Eyman, 313 F.3d 741 (2d Cir.2002); United States v. Moskowitz, 215 F.3d 265 (2d Cir.2000). Because the courts' underlying reasoning is sparse and supporting facts are few, their methodology, which might be at odds with the greater precision required in civil loss causation, is unenlightening. 26 The final type of case, most analogous to the one before us, concerns fraudulent transactions that cook the books 9 and prop up a company's stock but do not, aside from the exceptional Enron or WorldCom situation, render the company worthless. Sentencing decisions in these cases acknowledge that because a company's stock price is affected before and after the fraud, by numerous extrinsic market influences as well as the soundness of other business decisions by the company, the calculation of loss attributable to securities fraud requires careful analysis. See, e.g., United States v. Snyder, 291 F.3d 1291 (11th Cir.2002); United States v. Bakhit, 218 F.Supp.2d 1232, 1238 (C.D.Cal.2002); Grabske, 260 F.Supp.2d at 869-71. Each of these cases utilized or recommended somewhat different approaches to estimating reasonably the amount of loss inflicted by a defendant's securities fraud committed within an extant company. Nevertheless, each case takes seriously the requirement to correlate the defendant's sentence with the actual loss caused in the marketplace, exclusive of other sources of stock price decline. Several features of the decisions are noteworthy. First, given the time and evidentiary constraints on the sentencing process, the methods adopted in these cases are necessarily less exact than the measure of damage applicable in civil securities litigation. 10 Second, Snyder and Bakhit rejected an oversimplified market capitalization measure of damages proffered by the Government in favor of a more nuanced approach modeled upon loss causation principles. See Snyder, 291 F.3d at 1295-96; Bakhit, 218 F.Supp.2d at 1238. As the Bakhit court noted, the Government's use of stock prices the day before and the day after the revelation of the fraud did not account either for the actual price at which most holders purchased the company's shares, or for the influence of outside factors on the change in price. Bakhit, 218 F.Supp.2d at 1239. The Government's approach measured paper losses in the company's value, which have no correlation with losses to actual shareholders who bought or sold based on fraudulent information. 11 Third, the cases rejected defendants' arguments that attempted to reason away all losses caused by the fraud. Finally, the factual variations among these cases reflect the importance of thorough analyses grounded in economic reality. 12 27 In this case, the district court, faced with a cook the books fraud, overemphasized his discretion as factfinder at the expense of economic analysis. Thus, the court elected to rely solely on the Heil testimony concerning the purchase and sale of UCRS stock as a measure of the loss caused by Olis's offense. 13 When Heil's testimony was offered at trial to prove guilt, Olis's counsel was not placed on notice that the same evidence might later pertain to the guidelines loss calculation. For that reason, other significant extrinsic causes of the UCRS loss were not explored, much less quantified, at trial. UCRS bought most of its Dynegy holdings at the top of the market. As Olis pointed out at sentencing, however, two-thirds of the drop in Dynegy's price occurred either before the revelation of Project Alpha's problems or more than a week after the announcement of the restatement of earnings caused by Project Alpha. Taken on the court's own terms, a substantial portion of the entire loss on the UCRS investment in Dynegy, over $100 million, could not have been caused by Olis's work on Project Alpha. 28 During sentencing, moreover, Olis offered the expert report of a Rice University expert, Professor Bala Dharan, which explored numerous forces at work on the Dynegy stock price during the relevant periods. The court refused to consider the report, criticizing the expert's analysis of whether Olis could have reasonably foreseen the impact of his conduct on the stock market. As the court observed, the economist was arguably stretching his expertise into an improper legal conclusion, but his statements on this matter are separate from his economic analysis of price and market movements. Professor Dharan's report demonstrates that Dynegy stock declined during the period covering Project Alpha in tandem with the stocks of other publicly traded companies in the energy marketing and trading business. Further, Dynegy's stock was negatively affected, even before the restatement of Project Alpha's cash flow impact, by the company's failed bid to acquire the faltering Enron. These factors and others cited in the report suggested that attributing to Olis the entire stock market decline suffered by one large or multiple small shareholders of Dynegy would greatly overstate his personal criminal culpability. 29 Because the district court's approach to the loss calculation did not take into account the impact of extrinsic factors on Dynegy's stock price decline, Olis is entitled to resentencing on this factor, subject to the principles just discussed.