USA v. Mitchell Stein (11th Cir. 2017, filed 1/18/17), Lawyer Behaving Badly, But Not THAT Badly.
The Crime: Stein was convicted after a two-week trial during which he represented himself (never, ever a good idea which Stein knows because he is a lawyer). He was convicted of securities, wire, and mail fraud. The fraud was not particularly clever– he sent three press releases to his securities lawyer regarding purported purchase agreements with non-existent customers. He also enlisted others (who testified against him at trial) to create bogus purchase orders to substantiate the press releases. All this was in support of a medical device company owned by his wife. In August 2008, this company, “Signalife” filed a quarterly SEC form that indicated the “cancellation” of one of these bogus purchases. The district court found this filing, which put investors on notice that the stock was overvalued, marked the end of the fraudulent time frame.
The Big Issue here was calculating the actual loss to investors due to the fraudulent behavior. The Government proposed, and the district court accepted, a “buyer’s only” method. Under this method, the court would consider only those customers who purchased the stock during the time frame of the fraudulent behavior, value the amount of those purchases, and then subtract the value of those shares at the end of the fraudulent period. The court found that there were 2,415 investors who purchases the stock during that period and that they lost $13,186.025.85. Understandably, Stein objected to this method. He argued there was no evidence that the 2,415 investors actually relied on his false press releases or other fraudulent information, nor did the court consider extrinsic market factors that may have also influenced the value of the stock (for example, the 2008 financial crisis). Based on the losses the court found, it sentenced Stein to 17 years in prison. In financial fraud cases, the loss calculation often drives the sentence. See, e.g., United States v. Olis, 429 F.3d 540, 545 (5th Cir. 2005)
The Court reviews “a district court’s interpretation of the Sentencing Guidelines de novo, and the determination of the amount of loss involved in the offense for clear error.” United States v. Maxwell, 579 F.3d 1282, 1305 (11th Cir. 2009). A district court’s determination that a person or entity was a victim for purposes of loss calculation is an interpretation of the guidelines, so it is reviewed de novo. United States v. Martin, 803 F.3d 581 (11th Cir. 2015). A district court’s determination of proximate cause, however, is part of the court’s determination of the amount of loss involved in the offense and, thus, is reviewed only for clear error. Id. “We will overturn a court’s loss calculation under the clear-error standard where we are left with a definite and firm conviction that a mistake has been committed.” United States v. Campbell, 765 F.3d 1291, 1302 (11th Cir. 2014).
There are two ways to measure loss under USSG §2B1.1, actual and intended loss, and the court is instructed to take the greater of the two. USSG §2B1.1, cmt. n.3(A). The Government bears the burden of proving by a preponderance of the evidence actual loss attributable to a defendant’s conduct. United States v. Rodriguez, 751 F.3d 1244, 1255 (11th Cir. 2014). Actual loss is defined as the “reasonably foreseeable pecuniary harm that resulted from the offense.” Campbell at 1302. The Government did not argue “intended loss” so the court did not address it.
Reliance (Factual causation)
The parties agreed that the Government must show that the investors relied on the fraudulent information to satisfy the “but for” causation requirement. The parties disagreed as to what the showing must entail. According to the Court, the Government can show reliance through direct or specific circumstantial evidence. Requiring individualized proof of reliance for each investor is often infeasible or impossible. See Basic Inc. v. Levinson, 485 U.S. 224, 245 (1988) (recognizing in civil securities fraud context that requiring direct proof of reliance may be “an unnecessarily unrealistic evidentiary burden on the Rule 10b-5 plaintiff who has traded on an impersonal market”). In cases involving numerous plaintiffs, the Government could, instead, offer specific circumstantial evidence from which the district court could conclude that all of the investors relied on the defendant’s fraudulent information. Here, the Government did neither.
The Court found that the record did not contain any direct, individualized evidence to demonstrate reliance for each investor, and that the circumstantial evidence in the record was far too limited to support a finding that 2,415 investors relied on the information that Stein disseminated. The evidence the Government put up was the following: 1) trial testimony from one investor that he relied on one of Stein’s false press releases, 2) a victim impact statement from another investor to the same effect, 3) a number of victim impact statements suggesting that the investors relied on press releases and other publicly available information generally, but not specifically the fraudulent information Stein disseminated, and 4) testimony that, because the only place to get information about the company’s stock was from press releases and public filings, at least some investors likely relied on this type of information. In other words, very thin record, here.
Intervening Events (Legal causation)
The causation standards for determining actual loss under the Sentencing Guidelines and for restitution purposes are similar. When calculating actual loss for either purpose, the district court should take into account intervening events contributing to the loss unless those events also were reasonably foreseeable to the defendant. Stein argued the district court erred because it failed to consider the stock devaluation caused by the short selling of the company stock and the across-the-board stock market decline of 2008. The Court agreed.
The Court upheld Stein’s conviction, but remanded on the issue of the value of the actual loss and the effect, if any, of any intervening causes in that valuation. Given how sentences, in the federal system, are nearly always a function of the pecuniary loss, it’s surprising that the Government did not take more care in presenting its case in the first place. But I think this is a very fair result. 17 years for this crime seems unjustifiably harsh. But also, it’s time for Stein to hire himself a lawyer.