Longer Prison Sentences Coming For Financial Fraud?

Bill Kelleher, a partner in the Stamford, Connecticut, office of Robinson & Cole LLP and a member of the Board of Editors of the Financial Fraud Law Report, recently spoke with us about the likelihood of insider trading and financial fraud cases coming to Connecticut. Kelleher also has some interesting thoughts on the increased federal sentences that are being proposed for securities fraud, insider trading and financial institution fraud – and the implications for officers, directors and investment advisers: 

“That Dodd-Frank law again.  Buried deep in the Dodd-Frank Wall Street Reform Act enacted in 2010, Section 1079A required the U.S. Sentencing Commission, the agency that recommends penalties and adopts policy for federal criminal sentences, to review its Guidelines to reflect Congressional intent that securities fraud and financial institution fraud sentences ‘appropriately account for’ the severity of the offense, and the potential and actual harm to the public and the financial markets.  In other words, under Dodd-Frank, Congress wanted tougher sentences for securities fraud, similar offenses including insider trading, mortgage fraud and frauds relating to financial institutions.
 
“On January 19, 2012, the Sentencing Commission proposed changes to (and requested comment on related issues in) the U.S. Sentencing Guidelines for financial fraud, insider trading and securities fraud.  In line with Congress’ encouragement, the changes ratchet up the stakes in these cases.  Under the proposed Sentencing Guidelines, applicable to criminal charges brought in federal court by the Department of Justice around the country, the starting point for computing criminal sentences is the ‘base offense level.’  The proposals would impose an ‘enhancement’ or increase of:  two points to the base offense level if the conduct involved ‘sophisticated insider trading’ and four points if the defendant was in one of several positions of trust.  Sophisticated insider trading would be determined by factors such as the number of transactions, dollar amount involved, duration of the offense, whether fictitious entities were used, and importantly for companies and organizations, whether internal monitoring and auditing systems were circumvented to avoid detection.  Positions of trust would include a defendant who was an officer or director of a publicly traded company, a registered broker-dealer or an investment adviser. 
 
“In general, the higher a defendant’s total ‘offense level’ on the sentencing table, the longer the sentence imposed, subject to a judge’s decision and any downward departures.  Although the Sentencing Guidelines are advisory, and are no longer mandatory on federal courts, sentences that are within the Guidelines are generally presumed to be reasonable and most judges still usually follow them or do not depart from them significantly.
 
“In combination with Dodd-Frank’s requirement that most hedge funds, private equity and investment firms register with the SEC as investment advisers, offenses originating from the financial services sector and the C-level suite and Boardroom will be subject to the enhanced sentences.  If adopted, these changes may dramatically increase sentences for the specific defendants to which they apply and continue the recent trend of stiff sentences in significant cases of securities fraud, insider trading and financial institution fraud.  The changes will also likely give federal prosecutors more leverage to obtain guilty pleas and to foster cooperation from other defendants, which assistance is often key in making these types of charges stick due to the nature of the conduct.  They reflect the current regulatory climate.  There is one piece of potential good news for defendants to come out of the proposed sentencing changes.  In response to concern about sentencing disparities and long sentences which may overstate the culpability of a defendant due to the Guidelines’ calculation of the amount of loss, the Sentencing Commission is seeking comment on how best to determine the amount of the loss in securities fraud and similar cases.
 
“Public comments on the proposed Guidelines are due by March 19, 2012 (coincidentally, just before the SEC’s March 30, 2012 deadline for registration as an investment adviser).   If approved by the Sentencing Commission, they would likely go into effect later in 2012 at the earliest.”