Another Example of Tougher Sentences in White Collar Cases

Today the New York Times reported an 11 year prison sentence for convicted insider trader, Raj Rajaratman, which according to the Times is “the longest prison sentence ever for insider trading.”   In handing down the stiff sentence, Judge Richard Howell said insider trading was “an assault on the free markets . . . a virus in our business culture that needs to be eradicated.”

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To read the NYT article visit:
New York Times Article

Calculating Loss in Mortgage Fraud Case -- I Still Think I'm Right

I know I have lost the argument that in a mortgage fraud case, calculating the “actual loss” under the federal sentencing guidelines should include a reasonably foreseeable analysis, but it makes me feel better to continue to beat the drum on the argument that there is a better approach.

Generally, “’actual loss’ means the reasonably foreseeable pecuniary harm that resulted from the offense.”  USSG § 2B1.1, App. Notes 3(A)(i).  Unfortunately, in a mortgage fraud case, the reasonable foreseeably language has been given an unreasonably narrow interpretation.  This narrow interpretation results from the use of a two step approach. In step one, the court determines the reasonably foreseeable amount of loss at the time the crime was committed with no consideration for market conditions or other external factors. It appears that that in a mortgage fraud case the reasonably foreseeable amount of the loss will always be the amount of the loan. The second step requires the court to credit the defendant for the market value at the time of sentence of any collateral sold.  The value given to this offset amount carries with it no consideration that it be reasonably foreseeable to the defendant.  In other words, the credit is whatever the value of the collateral is at the time of sentencing with no further analysis.  In essence, this approach, in my opinion, renders the “reasonably foreseeable pecuniary harm” language of USSG § 2B1.1, App. Notes 3(A)(i) completely meaningless; in this analysis the total amount of the unpaid principal is always the “actual loss” – period. 

To fully appreciate the unforeseeable nature of the real estate market collapse, it may be helpful to explore what was happening in Wall Street during the last 15 to 20 years and the effect that those events had on real estate prices.  Historically, the American public and the institutional investors that manage large retirement instruments have largely relied on the stock market as its principal place for investments.  In the mid-to late 1990s, institutional investors began to shift their portfolios to include newly created bond instruments, which promised a reasonable rate of return with the low level of risk usually associated with government bonds.  These bonds were largely backed by corporate debt.  At its simplest form, these bonds were made up of the obligation instruments of American corporations.  As corporations paid their debts, bondholders received the benefit of those returns.  Given their safety and attractive rates of return, the appetite for these instruments grew exponentially.  The problem was that once the available corporate debt was absorbed and repackaged by these new investment instruments, the availability of new bonds was practically nonexistent. 

Wall Street dealt with this dilemma by looking for other historically safe debt whose returns could be packaged into AAA rated bonds and sold to investors in much the same fashion as the corporate debt backed bonds had been.  Because the default rate in American home mortgages was historically very low, home mortgage backed bonds became an ideal product to satisfy investors’ desire for this type of investment.  However, like the corporate debt backed bonds, there was a finite number of American home mortgages available to be purchased and repackaged. 

The seemingly insatiable appetite in Wall Street for purchasing mortgage debt led commercial banks to make more and more loans to an ever-increasing group of less credit worthy debtors, knowing that they would not have to bear the risk for these loans since the debt obligation would be purchased by Wall Street investment banks and sold to investors in the form of bonds.  With more and more banks lending money for the purchase of real estate and more and more Americans taking advantage of what seemed like favorable market conditions, real estate prices continued their upward climb.

Of course as the credit worthiness of home purchasers decreased, one would expect the rating of the bonds to likewise decrease.  Wall Street investment banks sidestep this problem by creating bonds, which packaged the mortgages of credit worthy homeowners with a sprinkling of riskier mortgages.  Eventually the percentage of riskier mortgages packaged with those of credit worthy homeowners shifted radically but the rating of the bonds never did.  By this time, the rating agencies and institutional investors were so enamored with these instruments and so convinced of their safety that they failed to carefully scrutinize them.  In fact, insurance giants like AIG felt so confident of the soundness of these mortgage-backed bonds that, to their demise, they insured billions of dollars in these ultimately risky instruments.

As we all know now, the day of reckoning came -- despite predictions to the contrary by legions of highly trained, well regarded analysts, Americans failed to make mortgage payments in record numbers; this caused billions of dollars in mortgage backed bonds to fail and become worthless.  In the process the demand for real estate came to a screeching halt, which sent values tumbling down. 


It is difficult to conceive how anyone could reasonably suggest that the collapse of the mortgage backed bond market, and with it the real estate market, was reasonably foreseeable to any real estate investor.  That is precisely what the test should be – “whether market factors and the resulting loss were reasonably foreseeable.”  United States v. Parish, 565 F.3rd 528, 535 (8th Cir. 2009). How could a real estate investor had foresee this market collapse when in early 2007, the time frame of the loans in question, respected Wall Street giants like “Bear Stearns and Lehman Brothers continued to publish bond market research reaffirming the strength of the market.”  Michael Lewis, The Big Short 165 (First Edition, W. W.  Norton & Company, Inc., 2010).

A sentencing court should employ a mechanism that “incorporates a causation standard that, at a minimum, requires factual causation (often called `but for' causation) and provides a rule for legal causation." United States v. Olis, 429 F.3d 540, 545 (5th Cir. 2005).  In other words, a sentencing court should determine those reasonably foreseeable losses caused by the fraud, as opposed to those losses caused by independent factors and therefore not reasonably foreseeable.

The mechanism for determining actual loss -- deducting the fair market value of the real estate at the time of sentencing from the amount of the loan would be appropriate except for the unprecedented, unforeseen collapse in real estate values, which occurred in 2007 and thereafter.  Because this collapse is unrelated to the vast majority of the garden variety mortgage fraud crimes and not reasonably foreseeable, courts should adopt a more sophisticated approach in order to segregate those losses that are completely unrelated to the defendant’s conduct.   As articulated by the Ninth Circuit, this Court, “must take a realistic, economic approach to determine what losses the defendant truly caused or intended to cause." United States v. West Coast Aluminum Heat Treating Co., 265 F.3d 986, 991 (9th Cir. 2001).

As previously noted, since the end of Great Depression, real estate values in the United States have remained constant or steadily increased.  The chart below provides clear evidence of the systematic .

Given the clear escalation of real estate prices throughout the last 50 years, the current method for calculating the loss would have been appropriate for a sentencing taking place prior to February of 2007 and in fact, in certain cases, may have provide a benefit to the defendant.  For example, a defendant who committed bank fraud related to a real estate transaction and sentenced several years after the loan secured by the real estate was obtained would almost certainly have received the benefit of the appreciation of the real estate during those years. 

As demonstrated by the chart above, from 1963 until early 2007, any defendant who obtained a loan by fraudulent means, collateralized by real estate, reasonably expected that the value of that collateral would remain the same or increase and as a result would have been able to reasonably foresee the potential pecuniary effect of his crime to the lender. 

This necessarily means that the current mechanism for determining loss, if used in a sentencing hearing anytime after the Great Depression but before 2007, would have provided a sentencing court with the type of “a realistic, economic approach” discussed in West Coast Aluminum Heat Treating Co. Id.  However, as seen in the chart below, beginning in approximately February of 2007, radical unforeseen depreciation of real estate values across the United States renders this approach inappropriate, in that it fails to account for losses in the value of real estate that are completely unrelated to the crime before the court for sentencing.

As depicted in the chart above, since 2007 average real estate prices across the United States have dropped in value by nearly 40%; in some instances the decline has been even greater with some Sarasota real estate parcels experiencing a loss in value of as much as 90%.

While the drastic drop of real estate value is fairly recent, the issue of determining loss based on instruments that suffer rapid devaluation from conditions unrelated to the criminal conduct involved is not unprecedented. A number of sentencing courts have dealt with this type of issue. This is often seen in securities or commodities cases; the value of these types of instruments is often influenced by a universe of factors, often unrelated to the criminal conduct.  The methods used by courts in these types of cases are instructive because they must undertake the process of determining the amount of the loss to the value of the security, which resulted from the fraud as opposed to unrelated market conditions.  See generally, Olis, 429 F.3d 540 (5th Cir. 2005), United States v. Ebbers, 458 F3rd 110 (2nd Cir. 2006) and United States v. Rutkoske, 506F.3d 170 (2nd Cir. 2007).  In Ebbers, the court insisted that those losses ‘from causes other than the fraud must be excluded from the loss calculation.” Ebbers at 128.

The Ninth Circuit in wrestling with the proper calculation of the loss figure in a securities fraud case stated that a sentencing court “must disentangle the underlying value of the stock inflation of that value due to the fraud and either inflation of deflation of that value due to unrelated causes.”  United States v. Zoplin, 479 F3rd 715,719 (9th Cir. 2007).  The disentanglement discussed in Zoplin in precisely the type that must be done here since the reason for drop in value was not reasonably foreseeable or related to fraud.  Fortunately there are several reliable methods that do just that.

One such method is to rely on an independent appraiser to determine the true market value of the condominiums at the time the loans were obtained (as opposed to the inflated purchase prices used in the transactions) and then deducting the amount of the true market value from the amount of the loans (Appraiser Method). 

Another reasonable alternative for determining the loss would be to examine the sale prices of the comparable, unrelated units purchased around the same as the defendat’s purchases.  From that, one can determine the average sales price for that type of unit and compare it to the amount financed by the defendant for a comparable unit and the multiply the difference by the number of units financed. 

While these two approaches result in different loss figures, they both provide the court with mechanisms, which yield reasonably foreseeable loss figures and which exclude the totally unrelated precipitous real estate market collapse and will necessarily yield a more just sentence.

If you have been arrested for a white collar or financial crime and need more information, contact the Law Offices of Ed Suarez, P.A.

www.SuarezLawFirm.com

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www.TampaArrested.com

What to Do if You Are Stopped for DUI in Florida

(This article was originally published 3 years ago).


When stopped by a police officer for suspicion of DUI the first things you should consider are simple. First, pull over as soon as it is safe; remember to be polite and respectful. Be prepared to produce your driver license and registration; most DUI officers consider difficulty in producing those documents as a clue that the driver is impaired.


Be Careful What You Say


The officer may ask you if you have been drinking; consider your answer carefully. If you have in fact been drinking, it is highly likely that the officer will smell the odor of alcohol on your breath; if you deny drinking you will lose all credibility with the officer and later, if your case goes to trial, and you admit that you in fact had consumed alcohol, you will have to acknowledge to the jury that you lied to the police officer. Keep in mind that asking if you've been drinking, is not the same as asking you how much you've had to drink. You should not volunteer that information to the officer. Remember he is conducting a criminal investigation; this is not the time for chitchat.

Field Sobriety Exercises - should you do them?


The officer is likely to ask you to step out of the vehicle and perform Field Sobriety Exercises (FSEs). Getting out of the vehicle may be of some significance; officers often look to see if you use the vehicle for support when exiting and will note that in his report as a clue of impairment. Whether or not to perform FSEs is a difficult question. If you elect not to perform such exercises, you will be giving the officer and ultimately the prosecutor very little evidence with which to obtain a conviction. Obviously, this is helpful. On the other hand, it is highly likely that your refusal to perform FSEs will be admitted at trial and the prosecutor will argue to a jury that this is evidence of your guilt. Additionally, if you refuse to perform FSEs it is nearly certain that the officer will arrest you.


What should you do if you agree to do FSEs?


In performing FSEs the first thing you must do is to listen carefully to the officer's instructions. Any deviation from his instructions will be seen as a clue of impairment. His instructions however, are likely to be somewhat confusing. The first thing he will tell you is to stand with one foot in front of the other, with the heel of one foot touching the toe of the other foot. You are to stand in that position while listening to his instructions with your arms by your side. This is in an uncomfortable position to maintain and you're likely to want to change to a more natural and comfortable position; however if you do so, the officer is likely to say that you failed to follow instructions or had difficulty maintaining your balance.


Do not begin any exercise until told to do so


It is human nature in a situation like this to be eager to show your ability to do what you're being asked and, as a result, you are likely to attempt to begin the exercises before the officer instructs you to do so. This is confounded by the fact that the officer is likely to pause his instructions in a way that may lead you to think that he is done instructing you. Be careful; do not begin the exercise until he explicitly instructs you to do so. If you begin before he instructs you to do so, he will note that as a clue of impairment.


Remember, it's all on video


Generally, DUI investigations, particularly the performance of FSEs are videotaped; as a result you must be mindful of everything you do and say.
What to do if the officer reads you your constitutional rights -- do you answer?
Generally, it is better to decline to answer officer's questions and assert your right to counsel. This is especially true if answering the officer's questions means admitting to drinking alcoholic beverages or providing him with additional details such as how much you had to drink, when and where.


Breathalyzer - to blow or not to blow?

Whether or not to submit a breathalyzer test may be the most important decision you make in the course of a DUI investigation and under Florida law, a citizen arrested for DUI does not have the right to consult with an attorney prior to making that decision. Breathalyzer results are powerful evidence. A refusal to submit to a breathalyzer test can also be used to show a consciousness of guilt; however this argument is not nearly as strong as a breathalyzer result above the legal limit. Juries often do not see a refusal as evidence of guilt; particularly if the citizen accused can articulate a reasonable basis for their refusal. For example, drivers are often confused as to what a breathalyzer entails and ask to speak to a lawyer prior to making the decision. As explained above, the law does not require this and officers are almost certain to deny such requests. This is a situation where a jury is likely to understand the refusal as something other than consciousness of guilt.

Breathalyzer - to blow or not to blow? Wait ... there's more


Under Florida law, the Florida Department of Highway Safety and Motor Vehicles (" DHSMV") will suspend your license upon your arrest for DUI. The first 10 days after your arrest, you're allowed to drive with no restrictions; however, on the 11th day you will begin a 30 day period where you will not be allowed to drive for any purpose ("the hard suspension period"). After the 30 day hard suspension period, you will be eligible to obtain a Business Purposes License (“BPO”). If you refuse to submit to a breathalyzer however, the hard suspension period triples and you will not be eligible for a BPO for 90 days. The significance of this is clear; while it is likely to be helpful, in defending your criminal case not to have a breathalyzer result, you should consider the practical effect of not being able to drive for 90 days and while you can request an administrative challenge of the DHMV's administrative suspension of your driver license, such challenges are seldom successful.
Breathalyzer - to blow or not to blow? A little more ...
Effective of October 1, 2008, Florida law requires that a driver convicted of DUI, with a breathalyzer result .15 or higher, place an interlock device in their vehicle for a period of six months. This is something else that a citizen arrested for DUI should consider in deciding whether or not to submit a breathalyzer.


Conclusion


Needless to say, this guide is intended to provide the reader with some general guidelines and limited information regarding Florida DUI law; it is not intended to be legal advice. Many of the decisions that need to be made by a citizen charged with DUI, particularly decisions relating to the administrative suspension of his license, are time sensitive -- meaning that if the individual charged does not assert certain rights within a specified period of time, some as little as 10 days, his ability to assert these rights is deemed waived. The consequences of a DUI conviction are significant and should not be taken lightly. An individual arrested for any criminal offense, particularly DUI, should seek quality legal representation.
Additional Resources
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