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Financial Crimes/Fraud FAQs

How is 'actual loss' calculated in a fraud case in federal court?

Answer:

One would think that in a case involving the theft of money or a financial fraud, the 'actual loss' would be the amount of money taken or stolen, right? It's not. 'Actual loss' is a term of art and it means not just real loss, but intended loss. Why does this matter? Because, under the Federal Sentencing Guidelines, the more the actual loss (or intended loss), the higher the sentence. But what if the actual loss is zero, that is, what if no one lost any money or had any money actually taken from them? As a Jacksonville criminal attorney, I have seen cases where prosecutors try to inflate loss figures, even when the real loss is minimal.

Consider the case of U.S. v. Markert, decided by the Eight Circuit Court of Appeals on Decenber 18, 2014. John Markert, while president of a bank, approved five nominee loans by the bank to friends and family of George Wintz, a good bank customer. The loan proceeds were used to cover a nearly $1.9 million overdraft in Wintz's checking account at the bank. Wintz borrowed more money from the bank than he could pay back and so persuaded five friends and family members to sign documents obligating them to repay all the money. Each nominal borrower understood that Wintz was the real borrower and would be responsible for principal and interest payments. So, in essence, the loans were not real loans. Furthermore, the loans were documented by Markert as investments in Wintz's business. While this practice was not legal, the bank was covered and suffered no losses.

A jury convicted Markert of willful misapplication of bank funds by a bank officer, because of the way he disguised the true nature of the loans and covered up the $1.9 million overdraft without informing the bank's board of trustees. Even though the bank didn't lose any money, the court found that Markert caused an 'actual loss' to the bank equal to the total amount of the nominee loans, that is, $1.9 million. That resulted in a staggering 16 level enhancement of Markert's sentence and a range of 87 to 108 months in prison. That's a long prison sentence (7-9 years) for someone who didn't actually steal any money!

Markert appealed his sentence and the higher court asked the prosecutors to prove actual loss, which they have the burden of doing. The prosecutors were unable to show an actual loss. Since the prosecutors couldn't prove any actual loss, the court determined that the actual loss to the bank was zero. It noted that actual loss is reasonably foreseeable pecuniary harm, that is, harm that is monetary. While the bank was caused to disburse loan proceeds to a borrower who defaulted (Wintz), the money never left the bank. The higher court thus reduced Markert's sentencing range to 12-18 months.

Lesson Learned:

Prosecutors always attempt to assert the highest loss figures possible in any fraud or theft case, because that means a longer prison sentence. This was a well thought out, reasoned and common sense decision by a higher court that realized a bank officer who mislabels loans to cover a potential bank loss of $1.9 million is not the same as a bank officer who steals $1.9 million. The prosecutors attempted to come up with a ridiculous loss figure which they were unable to prove.


Is credit given if some of the money is paid back to defrauded investors?

Answer:

Yes, the court should. Ponzi schemes seem to stand the test of time. There never seems to be a shortage of people willing to invest in a so-called 'sure thing'. And people continue to perpetrate these crimes without the thought of the prison time they risk going forward with these schemes. As a Jacksonville criminal lawyer, I have seen many such schemes.

Consider the recent decision in U.S. v. Snelling, decided September 22, 2014 by the sixth Circuit Court of Appeals. Jasen Snelling defrauded investors in a classic Ponzi scheme by soliciting funds for two fictitious financial companies. These companies supposedly invested their clients ' money in overseas mutual funds and promised investors an annual return of 10-15%. In reality, Snelling and his partner simply paid back earlier investors with a portion of the new investor's money The remainder of the new deposits were used by Snelling and his partner to live extravagantly. They issued false quarterly statements and submitted false trading-account statements to a federal grand jury. The documents reflected a balance of $8.5 million in their accounts when, in fact, they held just $995.88.

Snelling plead guilty to conspiracy to commit mail and wire fraud, tax evasion and obstruction of justice ( he could have avoided the obstruction count had he not submitted false documents to the grand jury). The only real issue was how much prison time Snelling would get. The federal sentencing guidelines take into account the overall amount of money that was taken. The more money taken, the more prison time.

In federal court, a probation office prepares a Presentence Investigation Report (PSR) which contains, among other things, a calculation reflecting a total loss figure (in cases of theft). And, as you might think, the higher the calculation, the more prison time one faces. While these reports are supposed to be objective, they are, in my opinion, often skewed to support the prosecutors viewpoint and seek to calculate the highest amount of prison time possible. Judges consider these PSR's very carefully and give them great weight.

In this case, the probation officer came up with a total loss figure of $7,000,000. (a figure likely supplied by the prosecutor). Snelling, on the other hand, took the position that he should receive credit for the money he returned to the victims (the earlier investors) during the scheme and came up with his own loss figure, that is, $5,336,187.78. The prosecutors believed that Snelling should not receive credit for the money he paid back to the earlier investors because this was done only to perpetuate the scheme. The court came up with it's own, even higher loss calculation of $8,924,451.46, based on total amount of money taken in by the Ponzi scheme from its investor victims. As a result, this high loss figure translated into a prison sentence of 121-151 months (the court settled on 131 months), significantly higher than Snelling's calculations of a range of 97-121 months. Snelling appealed his sentence.

The appeals court agreed with Snelling, that the loss figure the district court came up with should be reduced by the amount of money he returned to the earlier investors. Snelling's case will be sent back to the district court, where he will be re-sentenced to less prison time.

Lesson Learned:

Since the massive Ponzi scheme orchestrated by Bernard Madoff, in which thousands of investors lost their life savings (see my blog of July 3 ,2014), the courts have treated white collar schemers of this type with little sympathy. Judges will try to find a way to throw the book at these individuals. In any case regarding the theft of money, a good criminal defense lawyer must carefully scrutinize any loss figures calculated by the courts and be ready to calculate their own realistic loss figures in order to have their clients avoid unnecessarily lengthy prison sentences.


Can I pay older investors with new investor money, just to cover my losses?

Answer:

No, you cannot, and if you get caught doing this, you'll be accused by the government of running a

Ponzi scheme

. A Ponzi scheme is a financial fraud, whereby an individual (usually a stockbroker or someone with some background in the financial markets) lures investors in by guaranteeing unusually high returns. These high return schemes are as old as the hills and will never go away; the schemer prays upon people's greed and their belief that they can get something for nothing. Sometimes, the schemer starts off with the best of intentions by trying to dig their way out of losses by covering them up, thinking all the while that they will eventually replace all the money lost. And then they get into a hole from which there is no turning back. As a Jacksonville criminal attorney, I have seen financial planners with the best of intentions get caught up paying off older investors with new investor money. Take the case of Bernie Madoff, probably the biggest Ponzi scheme ever orchestrated to date. Some say he started off with the intention of running a legitimate investment firm. Five years ago, Madoff was sentenced to 150 years in prison for running the biggest fraudulent scheme in U.S. history. A well respected financier, Madoff convinced thousands of investors to hand over their savings, falsely promising consistent profits in return. He was finally caught in December of 2008 and charged with 11 counts of fraud, money laundering, perjury and theft. Incredibly, Madoff conned his investors out of $65 billion and went undetected for decades.

The Ponzi scheme was named for Charles Ponzi, who promised 50% returns on investments in only 90 days. Does this seem to good to be true? Well it is, and it continues to be. It's a wonder people still fall for these promises. Ponzi schemes are run by a central operator who uses the money from new income investors to pay off the promised returns to older ones. This makes the operation seem profitable and legitimate, even though no actual profit is being made. Meanwhile, the person behind the scheme pockets the extra money or uses it to expand the operation (or both). To avoid having too many investors reclaim their "profits", Ponzi schemes encourage them to stay in the game (or investment fund) and earn even more money.

This is precisely what Bernie Madoff did, successfully convincing investors to keep their money with him, while showing them ever increasing paper profits over the years. Madoff also expertly used the other part of any good Ponzi scheme: he made sure the "investment strategies" used were vague and secretive, which schemers claim is necessary to protect their business model. Ponzi schemes aren't usually very sustainable. The setup eventually falls apart after (1) the operator takes the remaining investment money and runs or (2) new investors become harder to find, meaning the flow of cash dies out or (3) too many current investors begin to pull out and request their profits and returns. In Madoff's case, things began to deteriorate after clients requested a total of $7 billion back in returns.

Unfortunatley, Madoff had only $200-$300 million left to give. Madoff was able to fly under the radar for so long (despite multiple reports to the SEC about suspicions of a Ponzi scheme) because he was a well respected member of the financial community. He started his investment firm in 1960, helped launch the Nasdaq stock market, sat on the board of the National Association of Securities Dealers and advised the SEC on trading securities. No wonder the SEC didn't want to investigate him.

Lesson Learned:

If you're involved in the securities industry as a broker/dealer, financial planner or the like, it's not worth it to try and cover up your losses, no matter how tempting and easy it seems. You will almost certainly leave a paper trail (or computer trading trail), that will lead prosecutors to the conclusion that you've committed fraud. Your best intentions won't matter. And after the Madoff case, prosecutors are hyper-sensitive to any allegations of wrongdoing on the part of those entrusted with investing the monies of others. When in doubt. disclose your actions, and your losses, even if it might cost you the client (or your job). Every broker at one time or another will make an honest mistake in judgment and lose an investor's money. That's the nature of investing. There is risk involved. But losing the occasional client is a lot better than ending up behind bars.

Madoff speaks out and says, incredibly, that his investors should have known better than to invest with him.

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