Judging Federal White-Collar Fraud Sentencing: An Empirical Study Revealing the Need for Further Reform

Judging Federal White-Collar Fraud Sentencing: An Empirical Study Revealing the Need for Further Reform Mark W. Bennett, Justin D. Levinson, & Koichi Hioki* ABSTRACT: White-collar federal fraud sentencing has long been fraught with controversy and criticism. As a result, the U.S. Sentencing Commission’s intensive multi-year examination of sentencing for fraud crimes generated tremendous interest among the Department of Justice, criminal defense organizations, the academy, and a wide range of advocacy groups. In November 2015, the Commission’s publicly announced proposed amendments became law without Congressional change. These amendments, while commendable in process and purpose, fall short of sorely needed reforms that would serve to realign white-collar fraud punishments with legitimate, empirically based penal justifications. This Article portrays the historical tension between the Federal Sentencing Commission and federal judges, presents the results of an original empirical study that demonstrates clearly the continuing need for significant reforms, and includes specific recommendations to reform the current sentencing scheme for these crimes. I. INTRODUCTION ............................................................................. 941 II. A BRIEF HISTORY OF FEDERAL SENTENCING, JUDICIAL DISCRETION, AND WHITE-COLLAR FRAUD CRIME………………….945 A. S ENTENCING B EFORE THE S ENTENCING R EFORM A CT OF 1984 AND THE S ENTENCING G UIDELINES ........................................... 946 B. T HE S ENTENCING R EFORM A CT OF 1984 AND THE S ENTENCING G UIDELINES ............................................................................ 949 1. Introduction ................................................................ 949 * Mark W. Bennett is in his 23rd year as a U.S. District Court Judge in the Northern District of Iowa. Justin D. Levinson is a Professor of Law and Director, Culture and Jury Project at the University of Hawaii William S. Richardson School of Law. Koichi Hioki is an Assistant Professor at Kobe University Graduate School of Business Administration. The authors would like to thank Krysti Uranaka for outstanding research assistance. 940 IOWA LAW REVIEW [Vol. 102:939 2. Pre- Koon and the Creation of the SRA and the Guidelines .................................................................... 949 3. Koon , the PROTECT Act, and the Standard of Review ........................................................................... 953 4. Booker Guideline Sentencing—the Current Federal Sentencing Regime ..................................................... 954 5. The Overlay of Gall and the Booker Advisory Guidelines .................................................................... 956 6. Summary ...................................................................... 957 III. A LOOK AT CURRENT FEDERAL FRAUD OFFENDER SENTENCING DATA ............................................................................................. 958 A. O VERVIEW OF O FFENDERS ’ S ENTENCES U NDER THE U.S. S ENTENCING F RAUD G UIDELINES —2014 ................................. 958 B. O VERVIEW OF T RENDS FOR O FFENDERS S ENTENCED U NDER THE U.S. S ENTENCING F RAUD G UIDELINE ................................. 959 1. Number of Fraud Offenders Increased ..................... 959 2. Average Guideline Increase Outpaces Minimum Sentence Increase........................................................ 960 3. Amount of Loss Increased .......................................... 961 4. Average Guideline Minimum Exceeds Sentence Length, Especially for Huge Offenders ..................... 961 5. Summary ...................................................................... 964 IV. THE EMPIRICAL STUDY .................................................................. 964 A. I NTRODUCTION ....................................................................... 964 B. P ARTICIPANTS ......................................................................... 965 C. M ATERIALS ............................................................................. 965 D. S TUDY L IMITATIONS ................................................................ 967 E. R ESULTS .................................................................................. 968 1. Judges Regularly Sentenced at the Exact Bottom of the Range ....................................................................... 968 2. Older Federal Judges Gave Shorter Sentences ........... 969 3. Federal District Court Judges (Marginal Significance) Gave Longer Sentences to Jewish (vs. Christian) Defendants; State Court Judges Gave Longer Sentences to White (vs. Asian) Defendants ................. 969 4. State Judges Self-Reported More Retributive Sentencing Philosophies ............................................... 970 5. Republican Judicial Appointees Were More Supportive of Retribution, but Did Not Sentence Differently ...................................................................... 970 6. Democratic Judicial Appointees Were More Supportive of Mercy ...................................................... 970 2017] FEDERAL WHITE-COLLAR FRAUD SENTENCING 941 7. Protestant State Court Judges Report More Retributive Sentencing Philosophy but Did Not Sentence Differently ...................................................................... 971 8. Judges’ Mercy Philosophies, but Not Retribution Philosophies, Predicted Sentence Length................... 971 F. D ISCUSSION .............................................................................. 972 V. THE 2015 AMENDMENTS TO THE FRAUD GUIDELINE SECTION 2B1.1 AND THE CRITICAL RESPONSE ............................................ 973 A. I NTRODUCTION ....................................................................... 973 B. T HE 2015 P ROPOSED C HANGES TO THE F RAUD G UIDELINE ....... 975 C. T HE P UBLIC C OMMENT P ERIOD AND P UBLIC H EARING .............. 977 D. T HE F RAUD G UIDELINE A MENDMENT S ENT TO C ONGRESS ON A PRIL 30, 2015 ................................................................ 978 E. ABA AND C OMMENTATOR R ESPONSES TO THE N EW F RAUD G UIDELINE .............................................................................. 978 VI. OUR SUGGESTIONS FOR ADDITIONAL NEEDED REFORMS OF THE NEW FRAUD GUIDELINE ................................................................ 980 A. I NTRODUCTION ....................................................................... 980 B. T RIM THE F RAUD L OSS T ABLE .................................................. 982 C. B UZZ -C UT THE F RAUD G UIDELINES SOC S ................................. 985 D. S IMPLIFY AND M ODIFY THE V ICTIM T ABLE ............................... 986 E. E LIMINATE THE SOC FOR S OPHISTICATED M EANS ..................... 988 F. A DOPT A D EPARTURE FOR THE L ACK OF P ECUNIARY G AIN .......... 988 VII. CONCLUSION ................................................................................ 989 APPENDIX A .............................................................................................. 990 APPENDIX B............................................................................................... 995 I. INTRODUCTION Let’s play an easy word-association game: “Bernie Madoff”—what comes to mind? We think for most it is likely some form of “massive fraud scheme.” 1 1. Mr. Madoff’s massive fraud scheme was described in the Government’s Sentencing Memorandum as follows: Defendant conceived and orchestrated a multi-billion dollar Ponzi scheme by which he defrauded thousands of investors, including individuals, non-profit organizations and for-profit institutions, who placed money directly or indirectly with his registered broker–dealer and, later, registered investment advisory firm, Bernard L. Madoff Investment Securities (“BLMIS”). For more than two decades, Madoff solicited billions of 942 IOWA LAW REVIEW [Vol. 102:939 The Assistant U.S. Attorney for the Southern District of New York prosecuting Madoff, Lisa A. Baroni, began her argument at the 2009 sentencing of Mr. Madoff this way: This defendant carried out a fraud of unprecedented proportion over the course of more than a generation. For more than 20 years he stole ruthlessly and without remorse. . . . [H]e destroyed a lifetime of hard work of thousands of victims. And he used that victims’ [sic] money to enrich himself and his family, with an opulent lifestyle, homes around the world, yachts, private jets, and tens of millions of dollars of loans to his family, loans of investors’ money that has [sic] never been repaid. 2 Considering Bernie Madoff was 71 years old at the time of his sentencing, 3 not even Rip Van Winkle would live long enough to serve Madoff’s 150-year federal prison sentence. It was, in every real sense, a slow death sentence. Was Madoff’s fraud scheme a death-worthy crime? Do other white-collar fraud offenders deserve prison sentences that can literally triple those of intentional (second-degree) murderers 4 The Federal Sentencing Guidelines 5 for economic crimes, as well as U.S. Supreme Court jurisprudence on the role of judicial discretion in sentencing, have shifted consistently and rapidly since the 1980s, and the sentences of white-collar criminals have hung in the balance. In some eras, a simple fraud crime with a medium-to-high loss dollar value (either actual or intended loss) might have been expected to culminate in a short sentence or probation; yet, in current times, it could be expected to result in much harsher sentences. dollars from investors under false pretenses, failed to invest such funds as promised, and misappropriated and converted investors’ funds for his own benefit and the benefit of others. These criminal acts caused billions of dollars of losses to investors, drove many individuals and charitable organizations to economic collapse or near collapse, and visited especially significant non-economic, emotional damage on many of Madoff’s victims. Government’s...