Monday, January 30, 2012

US Sentencing Commission Proposes Enhanced Guidelines in Securities and Mortgage Fraud Cases Pursuant to Dodd-Frank Sec. 1079A Directives

The United States Sentencing Commission has implemented the directives of Section 1079A of the Dodd-Frank Act regarding cases involving securities fraud and cases involving mortgage fraud and financial institution fraud. Section 1079A requires the Commission to review and, if appropriate, amend the guidelines applicable to these offenses and consider whether the guidelines appropriately account for the potential and actual harm to the public and the financial markets from them.

In the course of its Section 1079A review, the Commission became aware that some insider trading defendants engage in serious offense conduct but nonetheless, because of market forces or other factors, do not necessarily realize high gains. The concern has been raised that in such cases the guidelines may not adequately account for the seriousness of the conduct and the actual and potential harm to individuals and markets, because the guidelines use gain alone as the measure of harm.

Thus, with regard to securities fraud, the Commission proposes a specific offense characteristic that applies if the offense involved sophisticated insider trading, which would be defined as an especially complex or intricate offense conduct pertaining to the execution or concealment of the offense. The Commission proposes a non-exhaustive list of factors that federal courts must consider in determining whether the offense involves sophisticated insider trading, including the number and dollar value of the transactions; the number of securities involved; the duration of the offense; whether corporate shells or offshore financial accounts were used to hide transactions; and whether internal monitoring or auditing systems or compliance and ethics program standards or procedures were subverted in an effort to prevent the detection of the offense.

The Commission also proposes an enhancement if, at the time of the offense, the insider-defendant was an officer or a director of a public company; a registered broker or dealer, or a person associated with a broker or dealer; or an investment adviser, or a person associated with an investment adviser; or an officer or a director of a futures commission merchant or an introducing broker; a commodities trading advisor; or a commodity
pool operator.

The Commission also asked for comment on whether it should provide further guidance regarding the causation standard to be applied in calculating loss in cases involving securities fraud. For example, should the Commission provide a loss causation standard similar to the civil loss causation standard articulated by the Supreme Court in Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005), where the Court held that civil securities fraud plaintiffs must prove that their economic loss was proximately caused by the defendant’s misrepresentation or other fraudulent conduct as opposed to other independent market factors.

With regard to mortgage fraud, the Commission proposes two changes to the calculation of loss in mortgage fraud cases. First, the Commission would specify that in the case of a fraud involving a mortgage loan in which the collateral was disposed of at a foreclosure sale, courts should use the amount recovered from the foreclosure sale. Second, in the case of a fraud involving a mortgage loan, reasonably foreseeable pecuniary harm would include the reasonably foreseeable administrative costs to the lending institution associated with foreclosing on the mortgaged property, provided that it exercised due diligence in the initiation, processing, and monitoring of the loan and the disposal of the collateral.

With regard to financial institution fraud generally, the Commission proposes to broadens the applicability of the guidelines, which provide an enhancement if the offense involved specific types of financial harm, such as jeopardizing a financial institution. Currently, courts are directed to consider whether the financial institution suffered one or more listed harms, such as becoming insolvent, as a result of the offense. The Commission proposes to direct federal courts to consider whether one of the listed harms was likely to result from the offense but did not result from the offense because of federal government

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