White Collar Defense Update

In federal court, a defendant is entitled to pre-trial discovery under Rule 16 of the Federal Rules of Criminal Procedure. This is an important due process protection that allows a defendant to know what he will be facing at trial. But what about at sentencing? Since most federal cases are resolved through guilty pleas, isn't it equally important to get copies of what the prosecutor provides to the probation officer to determine the Guidelines range? One would think so, but in most federal courts such disclosure during the sentencing phase is not required. Fortunately, a slow change seems to be underway, led by the Middle District of Pennsylvania.

Unlike Rule 16, Rule 32 of the Federal Rules, which governs the sentencing procedure, does not require the disclosure of any material to the defense. The rule merely states that the probation officer must conduct a pre-sentence investigation and prepare a pre-sentence report. Some districts' local rules provide further guidance. For instance, the Eastern District of Pennsylvania Local Criminal Rules require the government to make available to the probation officer "all investigative and file material relevant to the case," but do not require that the material be disclosed to the defendant or his attorney. In practice, the probation officer typically relies upon evidence collected by the prosecution in the investigation to provide the factual support for such critical determinations as drug quantity, loss amount, the defendant's role in the offense, etc. The probation officer's decision on such determinations can have a significant effect on the Guidelines calculation, and ultimately the sentence. It seems natural, then, that the defense should have access to the documents that support the factual basis for such determinations.

So far, in Pennsylvania at least, only the Middle District of Pennsylvania has decided to change the rules to require reciprocal discovery during the pre-sentence investigation phase of a case. As explained by former Eastern District U.S. Attorney Peter F. Vaira in a recent article, the Middle District has amended its Local Rules to require mutual discovery of all material supplied to the probation officer for use in the pre-sentence report. The new rule (LCrR 32.1) states that "[t]he government shall provide to the defendant's counsel a copy of any documentary information provided to the probation officer to be considered in the preparation of the pre-sentence report at the same time as it is provided to the probation officer." The rule is reciprocal: "[t]he defendant or the defendant's counsel may submit documentary information to the probation officer and shall provide a copy to the attorney for the government at the same time as it is provided to the probation officer."

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Most of us in the criminal defense bar have been pleased that recent federal decisions have expanded the role of a judge's discretion in federal sentencing. After all, the thinking went, most judges think the Sentencing Guidelines are too harsh, and, once freed from those constraints, will lower sentences in most cases. But more discretion is a two-edged sword, as was demonstrated in a recent decision from the Eighth Circuit in a case from South Dakota.

Boyd William White Twin, a Native American, was admittedly not the most sympathetic defendant. He pled guilty in federal court to assault with a dangerous weapon. The assault was on his companion at home in front of their children, all of whom were under the age of nine. When the children intervened to help their mother, he assaulted them.

The district court granted four upward departures--for inadequacy of criminal history, extreme psychological injury, extreme conduct (the defendant had asked the victim, in front of their children, to choose which child he should kill first), and the use at sentencing of dismissed and uncharged conduct. The court pronounced a sentence of 78 months imprisonment. But then things got worse for the defendant.

After pronouncing the sentence, the district court noticed a smile on the defendant's face. The court stated "You think that's humorous, sir? Let the record show that the Defendant is smiling." To which the defendant immediately responded "I am not smiling." Unconvinced, the court added another six months to the sentence, stating that the 84-month sentence was based upon the upward departures and the "[p]sychological injury, unusual cruelty, torture, and other reasons listed by the probation officer in the presentence report."

On appeal the defendant argued that the district court had abused its discretion by considering an improper factor--his smile. But the Eighth Circuit found no abuse of discretion, stating "[a] district court may consider a defendant's attitude and demeanor when exercising its sentencing discretion. ...The district court did not abuse its discretion in considering White Twin's smile."

Is it possible the defendant was not in fact smiling and the judge misread his demeanor? Was the defendant indeed making light of a very serious crime, or was he so outraged by the case he was looking for another opportunity to increase the sentence? The decision provides no clue, since the defendant did not challenge the judge's impression on appeal. If it was a smile, it probably did not last long. In any event, the next time a client asks you why you are telling him that he must be contrite and respectful at sentencing, tell him this story.

On April 18, 2012, the Second Circuit, joining several other circuits, decided that when calculating criminal restitution, substituting a defendant's gain for the victim's losses is inappropriate under the Mandatory Victim's Restitution Act ("MVRA"). The Second Circuit found that the express language of the MVRA limited restitution to "the full amount of each victim's loss." 18 U.S.C. § 3664(f)(1)(A). Therefore the restitution order must be tied to a victim's "actual, provable, loss" not a defendant's gain.

In U.S. v. Zangari, No. 10-4546, the defendant, a securities broker in the securities lending departments at Morgan Stanley and then Bank of America, received kickbacks in exchange for entering into stock-loan transactions. A stock-loan transaction is one where securities are temporarily transferred from the lender to a borrower. The borrower is obliged to return the securities at some future point. During the period of the securities loan, the lender is secured by collateral delivered by the borrower usually in the form of cash, government securities, or a letter of credit. The borrower's motivation is to either cover a short position, sell the borrowed securities in the hopes of purchasing it back in the future at a lower price, or gain a tax advantage from temporarily owning the borrowed security. The lender's motivation is to earn a return on the collateral, either from the fees paid by the borrower when the collateral is not cash, reinvesting the cash collateral, or loaning the cash collateral at a higher interest rate than that paid to the borrowers.

Because there is no direct correlation between the kickbacks paid to Zingari and to his employers' opportunity cost in lending the securities, the Second Circuit determined that ordering restitution equal to the kickbacks received by Zingari was inappropriate. In order to determine the amount of the victim's losses, the MVRA allows courts to: (1) require additional documentation or testimony; (2) allow additional time for final determination of the victim's losses, not to exceed 90 days after sentencing, and (3) refer the matter for a magistrate judge or special matter for a recommendation. Further, if the court determines that the complexity of determining the amount of the victim's losses would complicate or prolong sentencing and the need to provide restitution is outweighed by the burden on the sentencing process, the court may decline to order any restitution.

Although the court concluded that restitution order in Zangari was inappropriate, the court did not reverse the restitution order because the defendant failed to object to the restitution calculation before the District Court. Zangari is a good reminder that in cases where the victim's loss is difficult to determine, counsel should argue that no restitution should be imposed.