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Calculating Actual Loss: Causation Standard

2001 - 2003 editions (App Note 2, 3):

“‘Actual loss’ means the reasonably foreseeable pecuniary harm that resulted from the offense.”
[emphasis added]

"reasonably foreseeable pecuniary harm" means pecuniary harm that the defendant knew or, under the circumstances, reasonably should have known, was a potential result of the offense.

Calculating Actual Loss: Causation Standard

KEY: Not simply a “but-for” standard

The old 2F1.1 used “reasonably foreseeable” language only in limited context (e.g., product substitution)

* reliance on case law re: causation / circuit split

IRONY: 2001-2003 guidelines incorporate RF standard

• provide stricter causation standard
• better for defense re: loss if no other enhancements

Foreseeability, cont’d

Practice Pointer: the 2-step process under USSG 1B1.3 (this is a link you can click)

Argue reasonable foreseeability under 2B1.1 in conjunction with the 2-step process set forth under the Relevant Conduct guideline, 1B1.3(a)(1)(B), pertaining to vicarious liability for the conduct of co-participants.

Application Note 2 to 1B1.3 (this is a link you can click) teaches that a defendant is accountable for the conduct (acts and omissions) of others that was both: (i) in furtherance of the jointly undertaken criminal activity; and (ii) reasonably foreseeable in connection with that criminal activity.

The application note explains that the first step is to "determine the scope of the criminal activity the particular defendant agreed to jointly undertake (i.e., the scope of the specific conduct and objectives embraced by the defendant’s agreement). The conduct of others that was both in furtherance of, and reasonably foreseeable in connection with, the criminal activity jointly undertaken by the defendant is relevant conduct under this provision. The conduct of others that was not in furtherance of the criminal activity jointly undertaken by the defendant, or was not reasonably foreseeable in connection with that criminal activity, is not relevant conduct under this provision."

Applying these points to fraud cases, it is advantageous for the defense to argue that before even addressing reasonable foreseeability, the Court should find that the loss amount at issue falls outside the scope of the criminal activity which your client agreed to jointly undertake. If the Court agrees with that, then it is not necessary to reach the issue of reasonable foreseeability.

Because certain circuits had applied a “but for” causation standard prior to the November 2001 amendments, the government could meet its burden on proving fraud loss under the old 2F1.1 without being subject to the 2-step analysis of the Relevant Conduct guideline. The November 2001 amendments brought the standard of causation under 2B1.1 in line with the Relevant Conduct guideline.

Jointly undertaken activity: 1B1.3(a)(1)(B)

    Practice Pointer: better to go with 1B1.3(a)(1)(A) rather than (a)(1)(B)

In negotiating plea deals, try to get the government to agree to limit the loss amount to the monetary loss caused as a direct result of the client's onduct. This avoids the Relevant Conduct analysis discussed above, and thus avoids having to address “reasonable foreseeability”, because loss caused by the client’s conduct does not pertain to losses generated by co-participants.

Limiting loss in a plea deal to monetary loss caused by the client’s conduct brings into play a different subsection of the Relevant Conduct guideline, 1B1.3(a)(1)(A), which makes the defendant liable at sentencing for "all acts and omissions committed, aided, abetted, counseled, commanded, induced, procured, or willfully caused by the defendant".

If you achieve an (a)(1)(A) plea deal, don’t argue reasonable foreseeability in your sentencing memorandum because it’s irrelevant.
See, U.S. v. Barclay, 2004 U.S. Dist. LEXIS 10513 (SDNY, June 8, 2004)(plea deal limited loss amount to loss caused by defendant's conduct, thus making reasonable foreseeability moot).

Bottom line: in handling causation issues, aim for a loss amount under 1B1.3(a)(1)(A), rather than 1B1.3(a)(1)(B).
If gov will agree to this, an important objective has been met.

Exception To Reasonable Foreseeability Standard:
Computer Crimes: 18 U.S.C. 1030

App Note 3(A)(v)(III):
Actual loss includes the following pecuniary harm, regardless whether it was reasonably foreseeable:

Reasonable cost to any victim:

• cost of responding to offense
• cost of conducting damage assessment
• cost of restoring data, program, system, or information to its condition prior to the offense

Any revenue lost, cost incurred, or other damages incurred because of interruption of service

Calculating Actual Loss: App. Note 3(A)(iii)

KEY FOR DEFENSE: Definition of Pecuniary Harm

* means harm that is monetary or that otherwise is readily measurable in money.

Thus, does NOT include:

• emotional distress
• harm to reputation
• other non-economic harm

Non-Monetary Harm: Risk of Upward Departure

App. Note 18(A): examples of reasons to depart:

• primary objective of offense was aggravating, non-monetary goal, eg, inflict emotional harm
• offense caused / risked substantial non-monetary harm, eg, caused physical harm, psychological harm, or severe emotional trauma, or resulted in substantial invasion of privacy interest

Calculating Actual Loss: Estimate
App. Note 3(C):

 “The court need only make a reasonable estimate of the loss”

Calculating Actual Loss: Estimate: App. Note 3(C)

In 1995, District Judge Jack Weinstein wrote a very detailed opinion addressing the standards for making the estimations under the sentencing guidelines. The case involved drug smuggling and thus specifically dealt with the estimation of drug quantities; however, the analysis in the opinion branches out to discuss non-drug cases, specifically fraud cases under the old 2F1.1.

U.S. v. Shonubi, 895 F. Supp 460, 474-75 (EDNY 1995), cited with approval in
U.S. v. Emmenegger, 2004 U.S. Dist. LEXIS 15142 (SDNY, August 4, 2004)

Factors Include
(focus on valuation methodology):

• fair market value of property taken or destroyed
• cost of repairs to damaged property
• approx # of victims X average loss to each victim
• reduced value of equity securities or other corporate assets

Calculating Intended Loss: App. Note 3(A)(ii)
Key addition in 2001 amendments

“ ‘Intended loss’ (I) means the pecuniary harm that was intended to result from the offense; and (II) includes intended pecuniary harm that would have been impossible or unlikely to occur (e.g., as in a government sting operation, or an insurance fraud in which the claim exceeded the insured value).”

Calculating Intended Loss:
App. Note 3(A)(ii)
Change Brought By 2001 Amendments

Pre-November 2001: Circuit split

Some circuits had vacated sentences where "the total intended loss bore no relation to “economic reality” if defendant’s plan had no chance of success.
Case to note:
United States v. Fleming, 128 F.3d 285 (6th Cir. 1997)

Intended loss and Blakely:

United States v. Penaranda, 2004 U.S. App. LEXIS 14268 (2d Cir., July 12,2004, en banc) (Circuit certifies three questions to the Supreme Court per Blakely. Opinion recognizes that among the myriad of guideline factors that are affected by Blakely is the issue of intended loss).

Calculating Intended Loss

App. Note 3(A)(ii)

“(II) includes intended pecuniary harm that would have been impossible or unlikely to occur”

Section II sets an explicit rule on this hotly-contested issue under old 2F1.1

New rule: impossibility of success is irrelevant

Intended loss and bank fraud:

U.S. v. Munoz-Franco, 307 F. Supp. 2d 340 (D.P.R. 2004)

Calculating Intended Loss: health care fraud

U.S. v. Miller, 316 F.3d 495 (4th Cir. 2003)
(intended loss is amounts billed to Medicare-aid, regardless of whether it was possible to be paid under the program; case decided under 2F1.1)
U.S. v. Raithatha, 368 F.3d 618, 629 (6th Cir. 2004)
(Convicted under 18 USC 1347: defrauding insurers / Medicare-aid) (intended loss is amount of personal expenses passed off as legitimate patient-related expenses)

Note: possible downward departure re: impossibility

example: U.S. v. Nachamie, 121 F. Supp. 2d 285 (SDNY 2000)
(doctors indicted for fraudulent billing scheme against Medicare; intended loss calculated based on what was billed, regardless of what Medicare actually paid; but court departs downward. NOTE: the case was decided under the old 2F1.1).

Calculating Intended Loss: App. Note 3(A)(ii)
Change Brought By 2001 amendments

Practice Pointer:

(We will discuss this departure theory a bit later)

Calculating Actual Loss: Amounts Excluded

* Note 3(A)(iii): pecuniary harm: “measurable in money”

* Note 3(D): Even if measurable, these expense categories are excluded from loss analysis:

(i) Interest of any kind, finance charges, late fees, penalties, amounts based on an agreed-upon return or rate of return, or other similar costs.
(ii) Costs to the government of, and costs incurred by victims primarily to aid the government in, the prosecution and criminal investigation of an offense.

U. S. v. Morgan, 2004 U.S. App. LEXIS 15286 (9th Cir., July 23, 2004)
(per 2B1.1, district court district court erred in including interest and finance charges in its calculation of actual loss for sentencing purposes).

Calculating Actual Loss: Amounts Credited

Note 3(E):

To credit: to reduce loss figure by the amount of the credit.

Different from excluding a cost/expense category

Focus on benefits to victim prior to detection

• money returned
• FMV of property returned
• services rendered
• collateral pledged