Mitigating Loss Amounts and Restitution Judgments in Fraud CasesDecember 3, 2018 5:20 pm
In fraud cases, loss amount is treated as a proxy for the seriousness of the offense, and is the primary driver of the sentencing guideline range, having the potential to increase a sentence by decades. The United States Sentencing Guidelines provide for an increase in offense level based on either the actual or intended pecuniary loss resulting from an offense. But even in a case where the government or the court determines that intended loss, i.e., the amount of money the defendant put at risk, should be used to calculate offense level, it is important for practitioners to calculate the actual loss caused by an offense. While it may not affect the guideline range, actual loss is also generally used to determine a defendant’s restitution obligation under the Mandatory Victims Restitution Act (MVRA). Importantly, in calculating this number, losses caused by forces other than a defendant’s criminal conduct must be excluded.
Two causation requirements lie at the heart of all actual-loss calculations. The first, and broader, of the two is factual, or “but for,” causation: But for the fraud or other criminal act, would the loss have occurred? In fraud cases, “but for” causation often takes the form of a victim’s reliance on a defendant’s false statements. The second requirement is legal causation. This requires proof that the illegal act or acts proximately caused the loss. The relevant inquiry here is foreseeability; that is, whether the loss was reasonably foreseeable to the defendant.
In certain cases, a victim’s conduct may undermine a claim of factual causation. Consider the behavior of “victim” banks during the mortgage crisis. Banks had little incentive to vet the information furnished on loan applications because, in most cases, they did not intend to keep the loans on their books. Rather, the toxic mortgages were sold and securitized. In light of the banks’ failure to scrutinize applications, many have questioned the legitimacy of the banks’ alleged reliance on false statements contained in them. Accordingly, when those loan applications are the subject of a federal fraud case, factual causation may also called into question.
A case from the United States Court of Appeals for the Seventh Circuit, United States v. Litos, involved a typical mortgage fraud scheme: the defendants transferred down payment funds to straw buyers and arranged for them to enter in mortgages with various banks, including Bank of America (BoA). The defendants walked away with the mortgage proceeds, minus the amount of the down payments, and let the loans go into default. In assessing restitution under the MVRA, the district court credited a BoA representative’s affidavit stating that, had the bank known the true source of the straw buyers’ down payments, it would not have issued the loans.
The Seventh Circuit Court of Appeals, however, found that this affidavit carried little weight in light of BoA’s lending practices. “Had the bank done any investigating at all,” the court wrote, “rather than accept at face value the obviously questionable claims that the mortgagors were solvent, it would have discovered that none of them could make the required down payments let alone pay back the mortgages.”
The court vacated the restitution award entered in favor of BoA, finding that the bank’s “reckless” behavior broke the chain of causation. While the court acknowledged that other circuits had declined to do the same in similar cases, it reasoned that Litos was different because there was evidence that BoA’s approval of the “palpably phony” loans exceeded “mere negligence.” BoA was “deliberately indifferent to the risk of losing its own money.”
Although the court in Litos suggested the district court impose a fine in lieu of restitution on remand, this result would still be advantageous to the defendants. Unlike restitution under the MVRA, the imposition of a fine, and its amount, is discretionary. There may be good reason to impose a fine significantly lower than what a restitution award would have entailed if the defendant is insolvent or otherwise unable to pay a hefty sum.
Litos’s reasoning applies only to factual causation and thus will not apply in cases involving “intended” loss under the guidelines. Intended loss requires no actual harm or victim. That being said, in cases where it is plain that a victim contributed to its own loss, there may be a compelling argument that its recklessness mitigates the seriousness of the offense, and that a variation from the guideline range is therefore warranted under 18 U.S.C. § 3553(a)(2)(A).
Once factual causation has been established, the analysis moves to legal causation. Arguments that an intervening event, such as market fluctuation, caused or worsened loss amounts fall under this component of the causation analysis.
Initially, merely positing that an intervening event, such as a stock drop, affected loss amount is insufficient to reduce a restitution judgment or knock a few levels off a defendant’s offense level. Courts have rejected defense arguments that outside forces necessarily exacerbated loss amount because the offense occurred during a recession. Accordingly, practitioners must be prepared to “show their work” and separate losses caused by the financial crisis from the overall loss amount.
One way to do this is through a comparative analysis. For example, when the appropriate measure of loss is the decline in a company’s share price, the share prices of similar companies should also be examined. If these comparable share prices also dropped during the relevant time period, then it can be inferred that criminal conduct is not entirely to blame for a decline in the value of the first company’s stock. An even simpler analysis can be undertaken in cases involving brokerage accounts. If the measure of loss is the decline in value of a brokerage account, historical price data can be used to determine whether, and to what extent, the investments would have increased or decreased in value independent of the criminal activity. Any net decrease should be subtracted from the restitution figure.
The counter argument to this approach is that market volatility is itself foreseeable, and is therefore insufficient to break the chain of causation. Courts tend to agree with this view in cases where a defendant’s fraud has caused a victim to enter the market in the first place. In such cases, courts have reasoned that, by fraudulently inducing a victim to purchase something that he would otherwise not have, “the defendant assumes responsibility for [the victims’] losses, including those resulting from market forces.”
However, defendants are not responsible for losses stemming from a victim’s failure to mitigate damages. A victim left with securities or collateral must make a good faith effort to sell the item or items at fair market value. Restitution will not compensate for losses due to nominal sales or donations. Moreover, significant delay in selling the items may “evince the victim’s choice to hold [the securities or collateral] as an investment rather than reducing it to cash.” In such a situation, “it would be wrong for the court to make the defendant bear that loss.” Because it appears that the exercise of choice may function as an intervening event in certain cases, practitioners should not only scrutinize the actions of victims in relation to their investments, but also the actions of trustees and receivers, who are entrusted to manage assets and exercise independent judgment about how to proceed.
 United States v. Stein, 846 F.3d 1135, 1152 (11th Cir. 2017); see U.S.S.G. §2B1.1(b)(1) (loss table).
 U.S.S.G. §2B1.1 cmt. n. 3(A).
 18 U.S.C. § 3663A.
 United States v. Rutkoske, 506 F.3d 170, 179 (2d Cir. 2007); see also United States v. Marlatt, 24 F.3d 1005, 1007 (7th Cir. 1994).
 Stein, 856 F.3d at 1153; see also Rutkoske, 506 F.3d at 179.
 Stein, 846 F.3d at 1154-55; see also United States v. Martin, 803 F.3d 581, 594 (11th Cir. 2015); U.S.S.G. §2B1.1 cmt. n. 3(A)(i) (“Actual loss means the reasonably foreseeable pecuniary harm that resulted from the offense.”).
 United States v. Litos, 847 F.3d 906, 907 (7th Cir. 2017).
 Id. at 907-08.
 Id. at 908.
 Id. at 909-10.
 United States v. Betts-Gaston, 860 F.3d 525, 539 (7th Cir. 2017); United States v. Tartareanu, 884 F.3d 741, 744-45 (7th Cir. 2018).
 Stein, 846 F.3d at 1154-55.
 United States v. Durham, 766 F.3d 672, 687 (7th Cir. 2014).
 United States v. Gushlak, 2011 WL 3159170 at *6 (E.D.N.Y. July 26, 2011).
 See, e.g., United States v. Lohmeier, No. 12 CR 1005 (N.D. Ill.), Docket Nos. 123 & 123-1 (sentencing position paper and chart analyzing historical price data in mutual funds held by defendants’ trust company).
 United States v. Lundstrom, — F.3d —-, 2018 WL 475122 at *16 (8th Cir. Jan. 19, 2018), citing Robers v. United States, 134 S.Ct. 1854 (2014).
 Robers, 134 S. Ct. at 1859.
 Id. at 1860 (Sotomayor, concurring).