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How are losses calculated in federal wire fraud cases?
Contents
Introduction
When someone is convicted of federal wire fraud, one of the most important factors in determining their sentence is the amount of loss caused by the fraud. But calculating losses in fraud cases can be tricky. There’s often debate over whether to use the amount of money the fraudster intended to take or the actual financial harm caused to victims.
Recently, an appeals court ruled that only actual losses – not intended or hypothetical losses – should be used in fraud sentencing. This could lead to much lower sentences in some fraud cases. Let’s take a closer look at how losses get calculated and why it matters so much.
Why Loss Amounts Matter in Fraud Sentencing
In the federal system, sentencing guidelines recommend prison terms based mainly on two things:
- The defendant’s criminal history
- The severity of the crime, which usually means the financial loss caused
So if a fraudster is convicted of stealing $1 million, the guidelines will call for a much longer sentence then if he stole $10,000 – even if everything else about the crimes is identical.
This makes sense up to a point. We want penalties to fit the crime, and someone who swindles victims out of their life savings deserves sterner punishment than someone running a petty scam.
But it also creates an incentive for prosecutors to inflate the loss numbers, because that drives up the sentencing range. Defense lawyers, meanwhile, fight to lower the loss estimates.
The Debate Over “Intended” vs “Actual” Loss
Here’s where things get messy. The federal sentencing guidelines say judges can consider either actual losses or intended losses.
So if a fraudster tries to steal $5 million but only manages to get away with $100,000, should he be sentenced based on the full amount he hoped to take? Or just the actual losses to victims?
Until recently, most courts went with intended losses, often leading to sky-high guidelines ranges. But defense attorneys have argued more and more strongly that only the real damages should count.
And they seem to be making headway. As one lawyer told me, “saying someone intended to cause a massive loss is easy for the government. Proving money was actually lost is much harder.”
An Appeals Court Chooses “Actual” Over “Intended”
Just last month, the Third Circuit Court of Appeals – which handles federal cases in Pennsylvania, New Jersey and Delaware – issued a ruling that came down firmly on the side of actual loss amounts.
The case involved Frederick Banks, convicted of defrauding people he promised to help with debt and credit problems. Prosecutors claimed he intended to cause $400,000 in losses. The defense said the real loss amount was less than $500.
The trial judge went with the government’s intended loss figure, resulting in Banks getting over 8 years in prison. But the appeals court overturned this, saying hypothetical intended losses shouldn’t be used. Since the victims’ actual losses were so small, Banks’ sentence was cut to just 1 year.
This is a big deal, because the Third Circuit becomes the first federal appeals court to explicitly reject intended loss amounts. The ruling cited a recent Supreme Court decision questioning the broad use of hypothetical losses in fraud cases.
So while not binding on other circuits, legal experts say the Third Circuit’s opinion gives momentum to the movement to consider only actual losses in fraud sentencing.
The Problems With “Intended” Loss
At first blush, intended loss seems to make sense: shouldn’t fraudsters be sentenced based on what they were trying to steal, not just what they happened to get away with?
As one prosecutor told me, “you don’t sentence bank robbers only for the cash they actually took if the vault was empty that day.”
But estimates of intended loss have led to some eye-popping, and questionable, numbers. Defense lawyers cite cases where government claims about intended losses seemed pulled out of thin air, with no evidence to back them up.
And even conservative estimates can ratchet up sentences dramatically. Say a crooked investor illegally uses $100,000 of other people’s money and loses it all. Under actual loss, that’s all he’d be tagged with. But if he told folks he was aiming for 10% monthly returns, prosecutors could claim he intended to make $1.6 million for his victims.
See how the hypothetical intended loss is 16 times higher than the real-world damages? And that difference has huge sentencing implications.
There are other problems too. Two fraudsters could commit the exact same crimes causing the exact same harm, but if one talked bigger about ambitious plans for his scheme, intended loss can make his sentence far longer.
Also, inflated intended loss figures can give cooperating fraudsters incentives to exaggerate in proffer sessions – if they say they planned to steal absurd amounts, the government may agree to bigger sentencing reductions.
The Challenges of Calculating Actual Loss
Requiring actual losses avoids these issues, which is why defense lawyers are pushing for it. But it does make calculating fraud sentences more complex.
For one thing, you need to pin down specific, provable losses suffered by identifiable victims. Estimates and hypotheticals no longer cut it.
And in cases with multiple victims, the losses each one suffered must be totaled up. If the fraud involved various forms of damages, like financial harm plus credit issues or emotional distress, quantifying all that can get murky.
With intended loss, prosecutors can gloss over these nitty gritty details and just pick a huge round number they claim the defendant hoped to steal. Having to drill down on actual losses blows up that shortcut.
It also makes trial prosecutors work more closely with agents to dig into the facts of how much individuals lost. And if the investigation didn’t focus on documenting damages from the outset, scrambling to make up ground later can be tough.
But most legal scholars argue that doing the hard work of proving actual losses is necessary to keep fraud sentences from spiraling out of control. Relying too heavily on hypothetical intended losses risks dramatically overstating both the seriousness of the offense and the danger posed by the criminal.
The Game Has Changed: Brace for Court Fights Over Loss Amounts
It’s unlikely the Supreme Court will resolve the circuit split over intended vs. actual loss anytime soon. And some circuits may stick with the old intended loss standard.
But the Third Circuit’s strong stance gives defense lawyers everywhere an opening to fight loss amounts and seek below-guideline sentences in fraud cases.
That means prosecutors should brace themselves for more contentious court battles over their loss calculations. Agents and auditors will need to thoroughly document financial damages to victims. And plea agreements may get more complex as both sides argue over the impact of actual loss stipulations.
Meanwhile, judges in some districts will find themselves refereeing intense evidentiary disputes over loss amounts in fraud sentencings, hearing expert testimony on complex financial records.
But if it leads to greater precision and fairness in fraud sentences, the extra work could pay valuable dividends. Our criminal justice system works best when penalties truly fit the crime. Rethinking how we calculate losses is a healthy step in that direction.