3rd Circ. 'Loss' Definition Is A Win For White Collar Defendants

• Published date: 08 December 2022
• Subject Matter: Litigation, Mediation & Arbitration, Criminal Law, Trials & Appeals & Compensation, White Collar Crime, Anti-Corruption & Fraud
• Law Firm: Sheppard Mullin Richter & Hampton
• Author: Mr Bill Mateja, Kathryn Rumsey and Jason C. Hoggan

On Nov. 30, the U.S. Court of Appeals for the Third Circuit published a potential watershed decision in U.S. v. Banks,¹ holding for the first time that the definition of "loss" in fraud cases does not include "intended" loss under the sentencing guidelines.

Thus, the government may only use evidence of "actual" loss to establish an appropriate punishment for fraudulent conduct ' a huge win for defendants that could have massive ramifications in white collar cases going forward.

Prosecutors exploit "intended loss" in order to manufacture higher sentences in white collar matters, a tool that has been greatly questioned and diminished. The Banks decision is a fatal blow to this unwieldy analysis, which may result in fewer white collar matters and smaller sentences.

Understanding how the Third Circuit arrived at this important decision requires significant context. In all federal cases, a district judge must calculate a defendant's guidelines for purposes of sentencing.

Calculating the guidelines produces a range of punishment that the district judge may consider when imposing a sentence. In fraud cases, Section 2B1.1 of the guidelines dictates that a higher loss amount increases a defendant's guidelines range ' and thus their potential prison term.

Notably, the guidelines do not define loss, much less specify that intended loss factors into that definition. Instead, the guidelines' commentary section states that loss can be the greater of actual or intended loss.

Prosecutors often rely on this commentary to increase a potential sentence using intended loss figures, especially in conspiracy cases where the fraud may not have been completed.

While Congress reviews and approves the guidelines and its amendments, it has no power or authority over the commentary notes, which merely reflect the U.S. Sentencing Commission's interpretation of the guidelines.

In 1993, the Supreme Court held in Stinson v. United States that an application note "that interprets or explains a guideline is authoritative unless it ... is inconsistent with, or a plainly erroneous reading of, that guideline."²

According to the U.S. Court of Appeals for the Ninth Circuit's 2019 decision in U.S. v. PrienPrinto, courts "ascribe somewhat less legal weight to the Application Notes than to the Guidelines proper: if the Guideline and Application Note are inconsistent, the Guideline prevails."³

But the Supreme Court still gave deference to the commentary, viewing it like an agency's interpretation of its own regulation ' a concept now known as Auer deference.⁴

Recently, the Supreme Court narrowed the circumstances in which Auer deference could apply. Specifically, in Kisor v. Willkie, the Supreme Court set forth a multifactor test in 2019 that an agency's...