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03/10/2010

Disparities Seen in Federal Securities Fraud Sentences


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In every criminal case, the defendant must make a critical decision: go to trial or plead guilty. A slew of factors go into that decision. Three questions loom largest: how likely will the defense prevail at trial, what sentence do we anticipate if the defendant pleads guilty, and what is the likely sentence if the defendant is found guilty after trial? Here, we will concentrate on the latter two questions, which touch on the vagaries of sentences in securities fraud cases in the post-guidelines world.

When the Federal Sentencing Guidelines virtually mandated certain sentences, the outcome was far more predictable, albeit harsh. District judges almost uniformly disliked the restrictive nature of the guidelines and how it usurped judicial prerogatives, and defense counsel viewed the guidelines as unduly severe. The consistency, however, allowed practitioners and defendants to make informed choices about going to trial.

Greater uncertainty reigns now that the guidelines are advisory. Because anecdotal evidence indicates that district courts are now more frequently imposing sentences below the guidelines range, it falls to practitioners to look for patterns in what appears to be a fairly random imposition of below-guidelines sentences. Recognizing these patterns is critical because having a sense of a likely sentence plays an important role in the decision of whether to go to trial or plead guilty.

Several trends appear in recent securities fraud cases:

  • Defendants convicted after trial are more likely to receive sentences within the guidelines range. 
  • Defendants who plead guilty well before trial are more often receiving sentences below the guidelines range, meaning that they receive much greater “credit” for accepting responsibility than the three-level reduction provided by U.S.S.G. § 3E1.1.
  • The disparities between the sentences for those who go to trial and are convicted, and those who plead guilty to the same conduct, have increased.
  • The X-factor is the judge. Because the assignment wheel is random, one cannot control what judge will be assigned to a case. But knowing the court and its tendencies helps in prognosticating what sentence awaits post-trial or post-plea.

None of the above is absolute. Counsel must also factor in the possibility of negotiating with prosecutors a lower guidelines range in a plea agreement, and the likely success in providing the court with compelling circumstances warranting a lower sentence under Title 18, United States Code, Section 3553(a).

A review of some sentences imposed in recent securities fraud prosecutions is instructive. A caveat: there are outliers and anomalies that make predicting outcomes much more art than science.

Sentenced to the Top of the Guidelines After Trial

In May, following a three-week trial in United States v. Naseem, S1 07 Cr. 610 (RMB) (S.D.N.Y), Judge Robert P. Patterson sentenced Hafiz Muhammed Zubair Naseem to 10 years’ imprisonment. Mr. Naseem, who worked at J.P. Morgan and Credit Suisse, obtained inside information about nine pending deals and passed the information to a co-conspirator who traded on it. The men reaped at least $7.8 million.

At sentencing, the government represented that Mr. Naseem faced a guidelines range of 97 to 121 months’ imprisonment, and requested “a substantial period of incarceration.” Judge Patterson sentenced Mr. Naseem to 120 months’ imprisonment, near the top of the range.

In this matter, as in others where a judge has an extended opportunity to focus on -- and perhaps develop a distaste for -- the defendant and his conduct, it appears that having gone to trial cost Mr. Naseem a substantial sentence. If Mr. Naseem had pleaded guilty and obtained a three-level reduction for acceptance of responsibility, he might well have received a sentence at the bottom of the guidelines range -- about 70 months, or 40 percent less time than he received. Rather than emphasizing a convincing basis for leniency using the 18 U.S.C. § 3553(a) factors, Mr. Naseem’s choice to go to trial, and the resultant information Judge Patterson learned about him, apparently motivated the court to sentence Mr. Naseem to a much harsher sentence than he likely otherwise would have received.

Different Approach, Different Outcome

Compare Mr. Naseem’s sentence -- 120 months at top of the guidelines range for a $7.8 million insider trading scheme -- with that of Mitchel Guttenberg, whose insider trading scheme produced double the profits but whose sentence was one-third less severe. In November, in United States v. Guttenberg, 07 Cr. 41 (DAB) (S.D.N.Y.), Judge Deborah A. Batts sentenced Mr. Guttenberg to 78 months’ imprisonment for his participation in a multi-year, $15 million insider trading scheme. Mr. Guttenberg, an executive director in the equity research department for UBS Securities, sold nonpublic information concerning UBS analysts’ upcoming stock recommendations to two individuals in exchange for hundreds of thousands of dollars. 

About a week before trial in late February, Mr. Guttenberg pleaded guilty to multiple counts of conspiracy to commit securities fraud and insider trading. Because he waited until the eleventh hour to plead, Mr. Guttenberg received only a two-point reduction for acceptance of responsibility, not the usual three points off. Mr. Guttenberg faced a guidelines range of 78 to 97 months’ imprisonment. Judge Batts sentenced him to 78 months’ imprisonment, at the bottom of the range.

Compelling Personal Circumstances Result in Probation

The Naseem and Guttenberg cases can be contrasted with the sentences imposed in United States v. Collotta, 07 Cr. 143 (VM) (S.D.N.Y.), by Judge Victor Marrero. Randi Collotta worked in Morgan Stanley’s global compliance division, and her husband Christopher was a lawyer in private practice. The Collottas avoided trial by pleading guilty to participating in an insider trading conspiracy that resulted in profits of more than $600,000. Importantly, the government viewed the gain attributable to the Collottas as only $40,000, as the direct recipient of their tips netted approximately $40,000. (The information was passed on to others, however, resulting in more than $550,000 in additional gains). Because their direct tippee obtained about $40,000, the Government calculated a guidelines range of 12 to 18 months’ imprisonment.

Usually, when a defendant is a lawyer, judges find illegal conduct more egregious. But because Christopher Collotta suffered from a severe illness that required constant medical attention, Judge Marrero sentenced him in October 2007 to three years’ probation. Judge Marrero sentenced Randi Collotta to four years’ probation, with the requirement that she serve 60 days of home confinement and 60 days of weekend imprisonment -- minimal jail time. The Collottas’ sentences demonstrate that counsel should make full use of the Section 3553(a) factors to present circumstances supporting a below-guidelines sentence.

U.S. v. Pickens: Probation

Another defendant who pleaded guilty and used personal circumstances to obtain probation -- a sentence far more lenient than the guidelines advised -- was Michael O. Pickens, the son of oil financier T. Boone Pickens. In United States v. Pickens, 05 Cr.793 (LAP) (S.D.N.Y.), a pump-and-dump case, Mr. Pickens was charged with securities fraud and related charges. These arose from his efforts to manipulate three penny stocks by distributing bogus tout sheets and fake stock tips in the form of faxes that he made look to be misdirected. After the fraudulent tips caused the prices and volume of the stocks to increase, Mr. Pickens sold his own holdings and reaped substantial gains. Mr. Pickens pleaded guilty to three counts of securities fraud resulting in more than $1.2 million in losses to investors.

At sentencing, Mr. Pickens faced a guidelines range of approximately four to five years’ imprisonment. Defense counsel made great beneficial use of the Section 3553(a) factors, however, to demonstrate to Judge Loretta A. Preska that Mr. Pickens had a long history of alcoholism but had turned a corner after extended time in an in-patient program. Judge Preska determined that imprisonment would be inappropriate and sentenced Mr. Pickens to five years’ probation.

Small loss, Long Sentence

In contrast to probation for a $1.2 million pump-and-dump scheme in Pickens, Judge William H. Pauley III imposed a 97 month sentence on Ulysses Thomas Ware in a smaller pump-and-dump a scheme that cost investors $395,000, or about a third of the investor losses in Pickens. Mr. Ware was a securities lawyer who purported to provide investment banking and public relations services to companies. He was charged with conspiracy and securities fraud in schemes involving two penny stocks. Mr. Ware represented himself pro se at trial.

The evidence showed that Mr. Ware caused bogus press releases to be distributed over wire services. When the press releases caused the demand for the two penny stocks to increase, he sold shares and obtained about $200,000. The jury convicted Mr. Ware on both counts.

At sentencing, Judge Pauley found that Mr. Ware had attempted to obstruct justice by procuring a false affidavit to submit to the Securities and Exchange Commission (SEC) and abused his position as an attorney. Mr. Ware did not emphasize mitigating factors under Section 3553(a). Judge Pauley concluded that the applicable guidelines range was 97 to 121 months’ imprisonment, and sentenced Mr. Ware to 97 months, the bottom of the range.

Large Loss, Shorter Sentence

Outliers and anomalies make it difficult for counsel to identify patterns or draw big-picture inferences with certainty. United States v. Parris is just such an outlier, featuring significant losses by investors, defendants who were convicted at trial after attempting to obstruct the SEC’s investigation, and the fortuitous assignment of a judge who viewed the guidelines as draconian.

In United States v. Parris, S2 05 Cr. 636 (FB) (E.D.N.Y.) -- a pump-and-dump case with a similar fact pattern to Ware but a vastly different outcome -- brothers Lennox and Lester Parris were convicted of securities fraud and witness tampering.

As in Ware, the Parrises issued false press releases -- this time concerning a penny stock company in which they were the sole directors. Following the issuance of the press releases, the stock price nearly doubled and volume surged. The Parrises profited by causing their company to issue unregistered shares to two stock-promotion firms that, in turn, sold the newly issued stock to the public for a total of approximately $4.9 million. Those companies then transferred $2.56 million to a bank account controlled by Lester Parris. Similar to Ware, when the SEC began investigating, the Parrises were involved with submitting a false statement in an effort to cover up their activities.

In August, Judge Frederic Block determined that the offenses resulted in a gain of more than $2.5 million, involved 250 or more victims, employed sophisticated means, and involved obstruction of justice. Because the Parrises went to trial, they did not receive any reduction for acceptance of responsibility. The advisory guidelines range was extreme: 30 years to life in prison.

Judge Block rejected the guidelines and sentenced each defendant to five years’ imprisonment. The court said the offense was “simply not of the same character and magnitude” as securities cases where defendants were “responsible for wreaking unimaginable losses on major corporations . . . employees and stockholders, many of whom lost their pensions and were financially ruined.” Judge Block called the guidelines range “draconian” and complained that the guidelines did “not provide realistic guidance.” Notably, the government agreed that an appropriate sentence might be “significantly less” than the applicable guidelines range.

In an attempt at creativity, Judge Block directed the parties to search nationwide for the sentences ordered in similar cases. Based on his analysis of these cases, Judge Block concluded that defendants in securities fraud cases responsible for losses of $100 million or less generally received sentences of less than 10 years, and defendants responsible for “enormous losses” received more than 10 years. After considering this formula, along with various other factors, Judge Block sentenced the Parrises to five years’ imprisonment. Interestingly, the list of cases on which Judge Block relied was incomplete. For example, none of the cases discussed in this article was included, even though all but Guttenberg were decided before Parris.

Judge Block’s five-year sentences in Parris are difficult to reconcile with Judge Pauley’s 97 month sentence in Ware. Mr. Ware’s gains were approximately $225,000; the Parrises, approximately $2.5 million, or 10 times greater. Both Ware and Parris involved obstruction of justice, both involved abuse of positions of trust, and both cases went to trial. Thus, the primary reason for a 97 month sentence in Ware, in contrast to the 60 month sentences in Parris, apparently was simply the judge who imposed sentence.

Practice Pointers

With the guidelines no longer binding, it is harder to predict the likely outcome from a particular strategy. More now than in the prior 20 years, it matters who the judge is. A defendant’s sentence may vary simply based on the judge. Accordingly, defense counsel needs to know the judge’s history, views, and approach to sentencing.

The guidelines, though advisory, still matter. It is essential that defense attorneys fight for the lowest possible guideline ranges for their clients, either in the context of plea agreements or in pre-sentence reports. Defense attorneys must know the guidelines to convince prosecutors and probation officers to calculate the lowest possible range. This range will often act as a starting point from which defense counsel will seek a lower sentence from the court.

Counsel must offer the court compelling circumstances under Section 3553(a) in mitigation of sentence. These circumstances are wide-ranging and go far beyond the limited bases for downward departures permitted under the guidelines. By emphasizing compelling circumstances, counsel may convince the court to impose a sentence much lower than the guidelines advise.

--Steven D. Feldman 

Feldman is the lead partner in the White Collar Defense Practice at Herrick, Feinstein LLP. Prior to joining Herrick, Steven spent more than six years as an Assistant United States Attorney for the Southern District of New York, where he was assigned for four years to the Securities and Commodities Fraud Task Force. While at the U.S. Attorney’s Office, Steven worked on the Pickens and Ware cases discussed in this article.

Mr. Naseem's case is currently on appeal to the Second Circuit.

These factors include the nature and circumstances of the offense; the history and characteristics of the defendant; the need to promote respect for the law and provide just punishment; the need to afford adequate deterrence; the need to protect the public from further crimes of the defendant; and the need to avoid unwarranted sentence disparities among defendants with similar records guilty of similar conduct. 18 U.S.C. § 3553(a).

United States v. Ulysses Thomas Ware, S1 05 Cr. 1115 (WHP) (S.D.N.Y. Oct. 26, 2007). Mr. Ware’s case is currently on appeal to the Second Circuit.

United States v. Parris, S2 05 Cr. 636 (FB), 2008 WL 3540151, at *2-*4 (E.D.N.Y. Aug. 14, 2008).

2008 WL 3540151, at *1.

2008 WL 3540151, at *5.

2008 WL 3540151, at *5.

Reprinted with permission from the March 20, 2009 edition of the New York Law Journal © 2009 Incisive Media Properties, Inc. All rights reserved. Further duplication without permission is prohibited. Incisive Media is one of the world's fastest growing B2B information providers, serving the financial and professional services markets globally. For a full list of titles visit www.incisivemedia.com. Reprint information for the legal properties relative to content searches and copyright clearance is available at www.imreprints.com. For questions contact, reprintscustomerservice@incisivemedia.com or 347-227-3382.

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In previous posts in this series, I've discussed the role of FINRA as a private, non-government self-regulatory organization, as well as the basic types of examinations that is conducts (routine and cause). Today, as promised, I'll address the consequences of not cooperating with a FINRA examination.

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