U.S. V. STEIN: GOVERNMENT’S SENTENCING BURDEN IN SECURITIES FRAUD CASES CLARIFIED
Securities Section
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The Stein case highlights
the challenges defendants
face when the government
advances speculative loss
theories in fraud cases.
T
he Eleventh Circuit
recently vacated and
remanded the sentence
of Mitchell J. Stein,
who was convicted on securities
fraud and related crimes stemming
from charges he fraudulently
inflated the stock price of Signalife
by issuing phony press releases and
purchase orders. The district court
originally imposed 204 months’
imprisonment and over $13 million
in restitution under the Mandatory
Victims Restitution Act of 1996
(“MVRA”). The Eleventh Circuit
held it was error to conclude that
more than 2,000 investors relied
on the defendant’s fraud when
“the only evidence supporting this
finding was the testimony of two
individuals that they relied on
Mr. Stein’s false press releases and
generalized evidence that some
investors may rely on some public
information.” United States v. Stein,
846 F.3d 1135, 1140 (11th Cir.
2017). The Stein case highlights the
challenges defendants face when
the government advances speculative
loss theories in fraud cases.
In criminal cases, the court’s
“loss” computation impacts both
defendants and victims. The court’s
first step is to calculate the U.S.
Sentencing Guidelines’ range,
which is merely advisory but drives
the discussion at sentencing. Loss
computed under § 2B1.1 of the
U.S. Sentencing Guidelines is the
most significant guideline factor in
these cases. With several exceptions,
the guideline range in a securities
fraud case will be determined by
the greater of “actual loss” or
“intended loss.” “Actual loss” is the
“reasonably foreseeable pecuniary
harm that resulted from the
offense.” U.S. Sentencing Guide -
lines Manual § 2B1.1 cmt. n.3(A).
Although § 2B1.1 contains guidance
on how to compute loss in cases
involving the fraudulent inflation
of a security, there is no bright-line
rule. Id. at cmt. n.3(F)(ix). In certain
situations, the court can use gain
as an alter native to loss for
guidelines purposes.
The Eleventh Circuit recognizes
that actual loss and restitution under
the MVRA are computed in similar
ways. Thus, restitution ordered
to victims often tracks actual loss.
The court may make a “reasonable
estimate of the loss.” But the
court “cannot ‘speculate about the
existence of facts and must base
its estimate on reliable and specific
evidence.’” Stein, 846 F.3d at 1152.
Moreover, the government must
prove both “but-for” and proximate
causation. Id. at 1153.
Mr. Stein argued that the
government failed to prove either
“but-for” causation (that over 2,000
investors relied on his fraudulent
information) or proximate
causation (that the loss could be
attributed to other factors). The
Eleventh Circuit agreed, instructing
that on remand the government
would have to prove reliance with
direct evidence from each investor
or with “specific circumstantial
evidence,” from which the court
could reasonably conclude that
all investors relied. Id. at 1153-54
(declining to adopt the civil
proximate cause standard from
Dura Pharm., Inc. v. Broudo, 544
U.S. 336 (2005)). The Eleventh
Circuit also held that when the
defendant argues other market
events contributed to the loss,
the district court must find by a
preponderance of evidence that the
intervening events were reasonably
foreseeable or otherwise subtract
the financial impact of those events
from the loss amount. Id. Only time
will tell whether the government
can prove actual loss under these
standards or
whether they
might rely on
an alternative,
such as gain.
Author:
Matt Mueller -
Wiand Guerra
King P.A.
To learn more about writing an article for the Lawyer magazine, contact [email protected].
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