Indiana Law Review


Indiana Law Review
Volume 35 2001 Number 1

ARTICLES

The 2001 Federal Economic Crime Sentencing
Reforms: An Analysis and Legislative History

Frank O. Bowman, III*

Table OF Contents

Introduction 7

I. The General Structure of the Guidelines and Their Original Approach
to Sentencing Economic Crimes 9

A. The Structure ofthe Federal Sentencing Guidelines 9
B. The Federal Sentencing Guidelinesfor the Economic Offender ... 12

1

.

Sentencing the Economic Criminal: Some History 12
2. The Original Guidelines' Approach to Economic Crimes 20

II. The Case for Reform 24
A. Consolidation ofthe Former Theft and Fraud Guidelines 24
B. The "Loss " Conundrum .25
C Sentencing Severity in Economic Offenses 29
D. Money Laundering 31

III. A Procedural History of the 2001 Economic Crime Package:
The Amendments to the Former Theft and Fraud Guidelines 32

* Associate Professor ofLaw, Indiana University School ofLaw—Indianapolis. Formerly
Assistant U.S. Attorney, Southern District of Florida (1989-96); Trial Attorney, U.S. Department

of Justice, Criminal Division (1979-82); and Special Counsel, United States Sentencing

Commission, (1995-96, on loan from U.S. Department of Justice). I am indebted for many
kindnesses to the Sentencing Commission and its staff, particularly the former Chair, Judge Richard

Conaboy, the current Chair, Judge Diana E. Murphy, former General Counsel and now
Commissioner John R. Steer, former Commissioner Michael Goldsmith, and ChiefDeputy General

Counsel Donald A. Purdy. I am likewise profoundly grateful for the generosity of Judge George
P. Kazen, former Chair of the Criminal Law Committee (CLC) of the U.S. Judicial Conference,
Judge William W. Wilkins, current Chair of the CLC, Judge J. Phil Gilbert, former Chair of the
Sentencing Guidelines Subcommittee of the CLC, Judge Sim Lake, current Chair of the
Subcommittee, and Catharine Goodwin, Assistant General Counsel, Administrative Office of the

U.S. Courts, in inviting me to assist the CLC in its work. I am similarly grateful to James E.
Felman, Barry Boss, and the other representatives of the defense community who serve on the
Sentencing Commission's Practitioner's Advisory Group forwelcoming me into their deliberations,
and to the many dedicated Justice Department professionals with whom I worked on economic
crime reform both during and after my own service in the Department.



INDIANA LAW REVIEW [Vol. 35:5

IV. An Analysis and Critique of the Most Important Provisions ofthe
2001 Economic Crime Package 38

A. The Fundamental Choices 38
1

.

The Retention of "Loss" as the Core Measurement of Offense
Severity 38

2. The Decision to Define "Loss" in Terms of Causation 41
a. Leaving causation undefined was not a viable option 43
b. Reasonable forseeability is the best available causation

standard 43

c. The criminal law traditionally imposes punishments for
reasonably forseeable harms caused by a defendant's
criminal conduct 45

d. A reasonable forseeability standard requires an assessment
ofthe defendant's blameworthiness by requiring a nexus
between the defendant's state of mind and harms
counted as loss 47

B. The Details ofthe New Definition ofActual Loss 47
1

.

The Limitation to Harm That "Resulted fi-om" the Offense ... 48
a. "But for" causation 48
b. Temporal limitations on includable losses 48

2. The Meaning of "the Offense" 48
3. The Limitation to Pecuniary Harm 49
4. Product Substitution, Procurement Fraud, and Protected

Computer Cases—Specific Examples of Reasonably
Forseeable Pecuniary Harms or Special Cases? 50

C Pecuniary Harms Excludedfrom Actual Loss 52
1

.

The Exclusion from Loss of Forseeable Investigative Costs
of the Government, and Costs Incurred by Victims in

Aiding the Government 52
2. The Exclusion from Loss of Interest 53

a. An analysis of the arguments for inclusion of interest .... 54
b. "Bargained-for" interest 54

c. Additional arguments for total exclusion of interest 56

d. The Commission's decision to exclude interest 56
e. The upward departure for interest 56

D. ''Net " vs. "Gross " Loss: The Problem ofAccountingfor Things

of Value Transferred to the Victim by the Defendant 57
1

.

The Law Under the Former Theft and Fraud Guidelines 57
2. The New Economic Crime Guide Guidelines Adopt a Net

Approach to Loss 61
3. The Language of the New Crediting Rule 62
4. Investment Fraud Cases 63

5. Regulatory Offenses and Unlicensed Professionals 65

6. Items of de minimis Value 67
E. Time-of'Measurement 68

1 . The New Time-of-Measurement Rules for Crediting 68
a. Precious metals/rare coins boiler room 69



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM

b. Stock fraud 69
2. Timing Issues Left to the Courts 70

F. Gain 72
1

.

The New Economic Crime Guideline Retains "Gain" as a
Method of Estimating Loss 73

2. Gain and Regulatory Fraud 74

3. The Rejected Downward Departure for "Gain" 74
G. Intended Loss 75

1

.

The Theory of Including Intended Loss in Economic Crime
Sentencing 75

2. The Language of the New Intended Loss Rule 77
3. Impossibility and "Economic Reality" 78

a. "Sting" operations 78

b. General impossibility or improbability 80

H. Enhancements 81
/. Departures 83

1

.

Upward Departures 83
2. Downward Departures 84

J. Ex Post Facto Considerations 84
K. Changes in Money Laundering Guidelines 84

Conclusion 85

Appendix A 86
Appendix B 96

Introduction

On April 6, 2001, the United States Sentencing Commission approved a
group ofamendments to guidelines governing the sentencing ofeconomic crimes.
These measures, known collectively as the "economic crime package," were the
culmination of some six years of consultation and debate by the Sentencing
Commission, the defense bar, the Justice Department, probation officers, the
Criminal Law Committee of the U.S. Judicial Conference (CLC), and the
occasional academ ic commentator. The package contains four basic components.
First, the formerly separate theft and fraud guidelines have been consolidated

into a single guideline.^ Second, the "loss table" in the consolidated guideline

has been simplified and also substantively modified to reduce the sentences of
some low-loss offenders while increasing the sentences of some high-loss
offenders.^ Third, the troublesome term "loss" has, at long last, been redefined.^

1

.

Compare U.S. SENTENCING GUIDELINES MANUAL § 2B1 . 1 and § 2FL 1 (2000) (former
theft and fraud guidelines) [hereinafter U.S.S.G.], with U.S.S.G. § 2BL 1 (2001) (new consolidated
economic crime guideline).

2. Compare U.S.S.G. § 2B1. 1(b)(1) and § 2F1. 1(b)(1) (2000) (former theft and fraud

guidelines loss tables), with U.S.S.G. § 2B1. 1(b)(1) (2001) (new consolidated economic crime

guideline loss table).

3. See U.S.S.G. § 2B1.1, app. n.2 (2001) (defining "loss" in new consolidated economic



8 INDIANA LAW REVIEW [Vol. 35:5

Fourth, the Commission approved changes to the money laundering guidelines
that tied offense levels for money laundering more closely to the offense levels
of the underlying crime from which the illegal funds were derived/

The economic crime package is a milestone in the history of the Federal
Sentencing Guidelines. Its provisions are substantively important because

economic crimes comprise between one-fifth and one-quarter of all federal
sentencings.^ The economic crime package represents the first occasion in the
nearly fifteen-year history ofthe Guidelines that the Sentencing Commission has
thoroughly rewritten the guidelines governing a major crime category. Of
perhaps even greater long-term significance than the substance of the 2001

economic crime amendments is the process that produced them. One ofthe most
persistent criticisms ofthe Sentencing Commission has been that, to those in the
legal community, guidelines' amendments have often seemed to appear out of
nowhere, generated with little or no prior public debate and accompanied by no
meaningful explanation. Historically, the Commission has used its anomalous
status as a quasi-judicial body exempt from the Administrative Procedures Act
to conduct much of its work out of the public eye. However, beginning with the
term of Chairman Richard Conaboy and continuing under the leadership of the
current chair. Judge Diana E. Murphy, the Commission has moved towards a
more open and inclusive deliberative process. The economic crime package is
the first federal sentencing reform initiative in the guidelines era to have been

conducted in the public eye from its inception.

As a participant throughout the long gestation of the economic crime
package,^ 1 hope that the judges and lawyers who use the new economic crime

crime guideline).

4. See id. § 2S1.1. Although the money laundering amendments were not originally

conceived as part ofthe economic crime package, they are important not only in themselves but also

insofar as they reduce the incentive ofprosecutors to trump the otherwise applicable fraud guideline

by adding a money laundering charge. See infra notes 146-51 and accompanying text.

5. In 1999, 22.6% of federal criminal defendants were sentenced for fraud, larceny,

embezzlement, auto theft, robbery, burglary, forgery, or counterfeiting. U.S. SENTENCING

CoMM'N, 1999 Sourcebook of Federal Sentencing Statistics 12, tbl. 3 (1999) [hereinafter

1 999 Sourcebook]. The percentage ofeconomic crimes as a proportion ofall federal offenses has

declined slightly in the last few years, although the absolute number ofsuch offenses has increased.

For example, in fiscal year 1995, 26.5% of the federal sentences imposed were for auto theft,

larceny, fraud, embezzlement, forgery, or counterfeiting. U.S. SENTENCING COMM'N, ANNUAL

REPORT 1995 43, tbl. 10 (1995) [hereinafter 1995 Annual Report].

6. From 1995 to 1996, when work on the economic crime package began, 1 was Special

Counsel to the U.S. Sentencing Commission, on detail from the Justice Department, and served as

a member ofthe Sentencing Commission staffworking group on economic crime. During that same

period, I participated in the work of the Sentencing Subcommittee of the Attorney General's

Advisory Committee (a group of U.S. Attorneys who, as the name implies, advise the Attorney

General on matters of policy). After I left the Commission and the Justice Department to teach law

in 1996, I began writing about economic crime sentencing reform and became a member of

Sentencing Commission's Practitioner's Advisory Group. Beginning in 1998, 1 was privileged to



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM

guidelines will conclude that the more open and participatory process generated

high quality sentencing rules. At any event, the process generated a rich and

unprecedented "legislative history" that should be of great interpretive value to

the bench and bar, particularly when addressing the nuances of the revised
definition of"loss." The purpose ofthis Article is simple—^to assist lawyers and
judges in understanding and applying the new consolidated economic crime
guideline, set out in Section 2B 1 . 1 . It will also comment briefly on the revisions
to the money laundering guidelines, insofar as those revisions impact economic
crime sentencing.

This Article has four parts. First, it describes the general structure of the

Federal Sentencing Guidelines and the approach to sentencing economic crimes

in effect between 1987 and 2001 . Second, it outlines the defects in the former

economic crime guidelines that led to the call for reform. Third, it describes the

process undertaken by the Sentencing Commission that led to the passage ofthe

2001 economic crime amendments and, in so doing, provides a roadmap to

sources oflegislative history. Fourth, it explains and analyzes the new guidelines
in light of their legislative history, with primary emphasis on the consolidated

economic crime guideline and its redefinition of "loss." This fourth section

highlights issues that remain unaddressed by the new guidelines and discusses
provisions that may be particularly productive of future litigation.

For purposes of comparison and ease of reference, the text of the new
economic crime guideline, Section 2B1.1 of the 2001 Federal Sentencing

Guidelines, is set out in Appendix A, and the provisions of the former theft and

fraud guidelines relating to loss are gathered in Appendix B.

I. The General Structure of the Guidelines and Their Original
Approach to Sentencing Economic Crimes

A. The Structure ofthe Federal Sentencing Guidelines

The Federal Sentencing Guidelines adopted in 1987^ are, in a sense, nothing
more than a set of instructions for one chart—^the Sentencing Table.^ The goal
of guidelines calculations is to arrive at numbers for the vertical (offense level)

and horizontal (criminal history category) axes on the Sentencing Table grid,

which in turn generate an intersection in the body of the grid. Each such

serve as an academic advisor to the Criminal Law Committee of the U.S. Judicial Conference

(CLC).

7. For a discussion of the federal sentence reform movement that, in general, rejected the

rehabilitative model of sentencing and produced the Federal Sentencing Guidelines, see Frank O.

Bowman, III, The Quality ofMercy Must Be Restrained, and Other Lessons in Learning to Love

the Federal Sentencing Guidelines, 1996 WiSC. L.R. 679, 680-92; Stephen Breyer, The Federal

Sentencing Guidelines and the Key Compromises Upon Which They Rest, 1 7 Hofstra L. Rev. 1

( 1 988); and Kate Stith & Steve Y. Koh, The Politics ofSentencing Reform: The Legislative History
ofthe Federal Sentencing Guidelines, 28 WAKE FOREST L. Rev. 223 (1993).

8. U.S.S.G., ch. 5, pt. A (2000).



10 INDIANA LAW REVIEW [Vol. 35:5

intersection designates a sentencing range expressed in months. For example, a
defendant whose offense level is 26, and whose criminal history category is I, is
subject to a sentencing range of sixty-three to seventy-eight months.^

The criminal history calculation reflected on the horizontal axis of the
Sentencing Table is a rough effort to determine the defendant's disposition to

criminality, as reflected in the number and nature of his prior contacts with the
criminal law. The basic unit ofmeasurement in this calculation is prior sentences
imposed for misdemeanors and felonies.

'°

The offense level reflected on the vertical axis of the Sentencing Table is a
measurement of the seriousness of the present crime. The offense level
calculation begins with the crime ofwhich the defendant was actually convicted.
The court must determine, primarily by reference to the "Statutory Index,""
which guideline in Chapter Two ("Offense Conduct") applies to that crime.
Most Chapter Two offense conduct guidelines contain two basic components:
a "base offense level"—a seriousness ranking based purely on the fact of
conviction of a particular statutory violation—and a set of "specific offense
characteristics." The "specific offense characteristics" are an effort to categorize
and account for commonly occurring factors that cause us to think of one crime
as worse than another. They "customize" the crime. For example, the guidelines
differentiate between a theft of $1000 and a theft of $1 million, ^^ or between a
bank robbery where the robber hands the teller a note, and a robbery where the

robber pistol whips the teller and shoots the bank guard.
^^

Once the court determines an offense level by applying the offense conduct
rules from Chapter Two, it considers a series of other possible adjustments
contained in Chapter Three. Increases in the offense level may be based on
factors such as the defendant's role in the offense,'"* whether the defendant

engaged in obstruction ofjustice,'^ whether the defendant committed an offense

9. Id. By statute, the top end of the range can be no more than twenty-five percent higher

than the bottom end. 28 U.S.C. § 994(b)(2) (1994); U.S.S.G. ch. 1, pt. A. For discussion of the

"twenty-five percent rule," see Bowman, supra note 7, at 691 n.49.

10. For the rules regarding calculation of criminal history category, see U.S.S.G. ch. 4

(2000).

11. Id. app. A.

12. This was true under the former separate guidelines for theft and fraud. See, e.g., id. §

2B 1.1 (b)(1) (reflecting an increase in offense level of two for a theft of $1000 and increase of

thirteen for a theft of $1 million). It remains the case under the recently adopted consolidated

economic crime guideline. Id. (reflecting no increase in offense level for a theft or fraud loss of

$1000 2md an increase of sixteen offense levels for a loss of $1 million).

13. Id. ^ 2B3. 1(b) (reflecting possible increases of up to eleven offense levels for the use of

a weapon and causing injuries in the course of a robbery).

14. /<i. § 3B 1 . 1 . The defendant's offense level can be enhanced by either two, three, or four

levels depending on the degree ofcontrol he exercised over the criminal enterprise and on the size

of that enterprise.

15. Id. § 3C1.1. Obstruction of justice includes conduct such as threatening witnesses,

suborning perjury, producing false exculpatory documents, destroying evidence, and failing to



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 1

1

against a government official'^ or particularly vulnerable victim,'^ whether the

offense was a hate crime/* and the existence of multiple counts of conviction.'^

The court may also reduce the offense level based on a defendant's "mitigating
role" in the offense^^ or on his so-called "acceptance of responsibility."^'

Once the court has determined the offense level on the vertical axis and the
criminal history category on the horizontal axis, it can determine the sentencing

range. The judge retains largely unfettered discretion to sentence within that

rangeP However, in order to "depart" from the range, that is, go above or below
it, the judge must explain the reason for the departure, and the explanation must

be couched in terms of factors for which the guidelines do not adequately

account already.^^ Moreover, except in unusual circumstances, the guidelines

specifically exclude fi*om consideration for purposes of departing outside the

guideline range most factors, such as age, employment record, or family ties,
which judges formerly used to individualize sentences.^"*

Finally, the Sentencing Commission created "relevant conduct."^^ A

appear as ordered for trial. Id. § 3C1 . 1 , app. 4.

16. M§3A1.2.

17. /<i. § 3A 1 . 1 (b)( 1 ) (creating an enhancement where a victim was selected based on "race,
color, religion, national origin, ethnicity, gender, disability, or sexual orientation" and in the case

of a victim "unusually vulnerable due to age, physical or mental condition").

18. /^. §3Al.l(a).

19. W. ch.3,pt.D.

20. Id. § 3B 1 .2 (allowing decreases in offense level oftwo or four levels ifdefendant is found

to be a "minor participant" or "minimal participant" in the criminal activity).

21. Id. § 3E1.1 (allowing reduction of two offense levels where defendant "clearly

demonstrates acceptance ofresponsibility," and three offense levels ifotherwise applicable offense

level is at least 16 and defendant has "assisted authorities in the investigation or prosecution ofhis

own misconduct" by taking certain steps). Despite the euphemism "acceptance of responsibility,"

Section 3E1.1 is nothing more nor less than an institutionalized incentive for guilty pleas.

22. Id. ^5C\.\ (a) ("A sentence conforms with the guidelines for imprisonment if it is within

the minimum and maximum terms of the applicable guideline range.").

23. 18 U.S.C. § 3553(c) (1994); U.S.S.G. § 5K2.0 (2000).

24. Chapter 5, Part H of the Guidelines lists factors that the Commission determined to be
"not ordinarily relevant in determining whether a sentence should be outside the applicable

guideline range." These include age, id. § 5H1.1; educational and vocational skills, id. § 5H1.2;

mental and emotional conditions, id. § 5H1.3; physical condition, id. § 5H1.4; history ofsubstance

abuse, id. § 5H 1 .4; employment record, id. § 5H1 .5; family or community ties, id. § 5H1 .6; socio-

economic status, id. § 5H1 . 10; military record, id. § 5H1 . 1 1 ; history of charitable good works, id.

§ 5H1.1 1; and "lack of guidance as a youth," id. §5 HI. 12. In theory, most of these factors

nonetheless can justify a departure, but such a departure is permissible only where the excluded

factor is present to a degree so unusual that the Commission would not have anticipated its impact

and thus did not "adequately [take it] into consideration," when formulating the guidelines. 18

U.S.C. § 3553(b) (1994).

25. The term "relevant conduct" and its applications to guideline calculations are enumerated

in U.S.S.G. § 1B1.3 (2001). For a general discussion of relevant conduct and its function in the



12 INDIANA LAW REVIEW [Vol. 35:5

thorough discussion of"relevant conduct" is beyond the scope ofthis article, but

the essence of the concept is that the court can, indeed must, sentence each

defendant based on what he really did as part ofthe same transaction or series of
related transactions that resulted in the count of conviction, regardless of the

specific offense of which a defendant is convicted after trial or as a result of a

plea.

The inclusion in the guidelines of the "relevant conduct" concept, the
customization of sentences through "specific offense characteristics" not

included in the elements of the offense of conviction, and the rules governing

sentences for multiple counts of conviction, taken together, transformed what

would otherwise have been a predominantly "charge of conviction" system into

a "modified real offense" system.^^ The "modified real offense" character ofthe
system is ofconsiderable importance in understanding the Guidelines' approach

to sentencing economic crimes.

In general, therefore, the Federal Sentencing Guidelines focus pervasively

on offense seriousness. The explicit numerical yardstick ofoffense seriousness,

the vertical "Offense Level" axis of the sentencing grid, has forty-three levels,

while the horizontal "Criminal History" axis has only six. Because the

sentencing range increases by equal increments along either axis, offense level

customarily has a far greater effect on sentence than does criminal history.

B. The Federal Sentencing Guidelinesfor the Economic Offender

1. Sentencing the Economic Criminal: Some History.—Creating a
sentencing scheme for economic criminals prosecuted in federal courts presents

greater difficulties than assigning sentences to those who commit crimes against
persons. The first of these difficulties might be termed "historical." The
common law, and more particularly the body of Anglo-American statutory law
that evolved from it, created a plethora of legal categories for crimes against

persons that assigned offense seriousness rankings based primarily on only two

ranking factors—^the culpable mental state of the defendant and the degree of
harm caused to the victim. For example, ifMr. A strikes Mr. B, the statutory law
ofmost states stands ready to receive Mr. A into one ofnine or more pre-defined
categories ranging from capital murder to misdemeanor assault. If Mr. B dies
from the blow, there are as many as six kinds of homicide, distinguished from

guidelines system, see William W. Wilkins, Jr. & John R. Steer, Relevant Conduct: The
Cornerstone ofthe Federal Sentencing Guidelines, 41 S.C. L. REV. 495 (1990). See also Bowman,

supra note 7, at 702-04.

26. See, e.g., Daniel J. Sears, Defense Practice Under the Bail Reform Acts and the

Sentencing Guidelines—A Shifting Focus, Fed. Probation, Sept. 1 99 1 , at 3 8, 40 (categorizing the

sentencing process under the guidelines as one based on '"real offense' behavior rather than the

offense ofconviction"). Butsee Jeffrey Standen, Plea Bargaining in the Shadow ofthe Guidelines,

81 Cal.L.REV. 1471, 1505- 12 (1993) (asserting that the guidelines are actually a charged offense

system).



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 1

3

each other primarily by different culpable mental states.^^ If Mr. B lives, there
will generally be at least three types of assault charges available, usually

differentiated by the degree of physical harm caused (or sometimes merely

risked) to the victim and by the type of weapon employed.^^

By contrast, in early law there were several different crimes of dishonest
acquisition, but little or no difference in degree between them. It is generally

believed that at earliest common law, all larcenies (the only property crime
recognized for many years in England) were felony and punishable by death.^^

27. First degree murder generally involves both an intentional killing and some form of

premeditation. See. e.g., COLO. Rev. Stat. Ann. § 18-3-102(l)(a) (West Supp. 2000). Second

degree murder, where it exists, is usually either a "knowing" killing, see, e.g., Colo. Rev. Stat.

Ann. § 18-3-103(1) (West 1999), or one carried out purposefully, but without premeditation, see,

e.g. Wash. Rev. Code Ann. § 9A.32.050(l)(a) (West 2000). Manslaughter is usually of two

types, voluntary, which usually denotes some form of "heat of passion," see, e.g., Va. Code Ann.

§ 18.2-35 (Mitchie 1996); MODEL PENAL CODE § 2ia3(l)(b) (1985), and involuntary, which

usually means "reckless," see, e.g. , Va. CodeAnn. § 1 8.2-36 (Mitchie 1 996); MODEL Penal CODE

§ 210,3( 1 )(a) (1985). The two types ofmanslaughter are, in some states, also two different degrees

of homicide. See. e.g, COLO. REV. Stat. Ann. § 18-3-104-105 (West 1999). In Colorado, until

recently, voluntary "heat ofpassion" manslaughter was punished as a Class 3 felony, while reckless

manslaughter was punished as a Class 4 felony. In 1996, the crime previously known as "heat of

passion" manslaughter became a form of second degree murder, albeit still punishable as a Class

3 felony, /a?. § 18-3- 103(b). Many states have some form of criminally negligent homicide. See,

e.g, id. § 18-3-105; WASH. Rev. CODE Ann. § 9A.32.O70 (West 2000) (defining manslaughter in

the second degree as causing the death ofanother person "with criminal negligence"). In states with

the death penalty, the state is required to prove the highest form of culpable homicide plus one or

more aggravating factors.

28. See, e.g., WASH. REV. CODE ANN. § 9A.36.011 (West 2000) (first degree assault

committed where defendant "with intent to inflict great bodily harm: [ajssaults another with a

firearm or any deadly weapon or by any force or means likely to produce great bodily harm or

death"); id § 9A.36,022 (second degree assault committed where defendant administers poison

with intent to injure, inflicts grievous bodily harm, or assaults victim with a deadly weapon); id. §

9A.36.03 1 (defining third degree assault in several ways involving less harm and less dangerous

weapons than required in first and second degree assaults). The weapon factor is a proxy for

measuring blameworthiness as demonstrated by a willingness to inflict the sort ofharm that can be

caused by dangerous or deadly weapons.

29. ROLLIN M. Perkins & Ronald M. Boyce, Criminal Law, 290 (3d ed. 1 982) ("Under
the early law felonies were punishable by death, and larceny was a common-law felony.") Professor

Roger Groot, one of the leading authorities on Twelfth and Thirteenth Century English criminal

practice, see. e.g., Roger D. Groot, The Jury ofPresentment Before 1215, 26 AM. J. LEGAL HiST.

1 (1982), has studied English plea rolls from Thirteenth Century and found a de facto division of

larceny cases into offenses meriting hanging and those which did not predate the formal creation

of grand and petit larceny categories in the Statute of Westminster of 1275. Professor Groot says

that, as early as the 1240s, defendants often were not subjected to the normal criminal processes

when they stole "petty things." Roger D. Groot, Petit, Larceny, Jury Lenity and Parliament, in

"The Dearest Birth Right of the People of England": The Jury in the History of the



14 INDIANA LAW REVIEW [Vol. 35:5

By 1 275, larceny was divided into grand and petit larceny depending on the value
ofthe goods stolen; both crimes were felonies, but only the former was punished
with death.^^ In the 1700s, Parliament enacted statutes creating the crimes of

false pretenses^' and embezzlement,^^ both of which were "misdemeanors"

though punishable by penalties we would now consider appropriate for
"felonies."" Under modern codes, the various types of property crimes are
generally consolidated into the single crime of "theft," each of the old familiar

categories becoming now but a different method of committing the same
offense. ^"^ There are generally only two or three degrees of "theft," with the

primary distinction between the degrees being the value of the thing stolen.^^

In addition, modem state penal codes include crimes such as robbery,
burglary, or extortion that customarily involve stealing in some form.^^ These

Common Law (200 1 ).
30. See PERKINS & BOYCE, supra note 29, at 335 nn.4-5.
31. 30 Geo. 2, c. 24, § 1 (1757) (Eng.).

32. 39Geo. 3,c. 85(1799)(Eng.).

33. See PERKINS & BOYCE, supra note 29, at 363-64 (describing the history of the law of
false pretenses and quoting the first false pretenses statute as imposing penalties of fine,

imprisonment, the pillory, public whipping, or transportation for seven years), at 352 n.6 (noting

that the punishment for embezzlement under the 1799 statute was transportation not to exceed

fourteen years).

34. Wayne R. LaFave& Austin W. Scott, Jr., Criminal Law § 8.8(c), at 760-6 1 (2d ed.
1 986); Perkins & Boyce, supra note 29, at 390-91

.

35. For example, in Delaware, theft is either a Class G felony or a misdemeanor, depending
on whether the property taken is worth more or less than $500. Del. Code Ann. tit. 11, § 841

(1995) (theft may also be a Class F felony if the property is worth $500 or more and the victim is

60 years ofage or older). Wzishington divides theft into three degrees based primarily on the value

of the thing taken. See Wash. Rev. Code Ann. § 9A.56.030(l)(a) (West 2000) (theft in the first

degree, a Class B felony, is committed when value ofproperty or services taken exceed(s) $1500);

id § 9A. 56.040(1) (theft in the second degree, a Class C felony, is committed when value of
property or services taken is between $250 and $ 1 500); id. § 9A.56.050( 1 ) (theft in the third degree,

a misdemeanor, is committed when value of property or services taken does not exceed $250). In

Washington, first and second degree theft are felonies; third degree theft is a misdemeanor.

Colorado divides theft into four degrees based on the value ofthe thing taken; there are two felony

and two misdemeanor classifications. COLO. Rev. Stat. Ann. § 18-4-401 (West 2000).

Some states have special laws dealing with bad checks, receiving stolen property, and other

variants ofsimple thievery. See, e.g., Wash. Rev. Code Ann. § 9A.56.060 (West 2000) (crime of

unlawful issuance ofbank checks is Class C felony when the amount ofthe check or checks exceeds

$250, but a misdemeanor if the amount is $250 or less); id. §§ 9A.56.150, 9A.56.160, 9A.56.170

(the crimes of possession of stolen property in the first, second, and third degree are divided into

same degrees as theft based on same dollar amounts). However, such offenses are customarily

divided into the same number of degrees as is theft itself based on the amount ofthe bad check or

the value ofthe stolen property. Id. ; see also COLO. Rev. Stat. Ann. § 1 8-4-4 1 (West 2000) (theft

by receiving divided into same degrees as theft, based on the value ofthe stolen property received).

36. Burglary can be committed when the illegal entry is made for the purpose ofcommitting



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 1

5

crimes are often divided by statute into degrees, but the focus of these offenses

is less on economic harm than on invasions ofother interests—^the sanctity ofthe
home, the risk of physical violence patent in every robbery and latent in every

burglary,^^ and the threat to people, property, or reputation implicit in extortion.

Accordingly, the factors establishing the relative seriousness of the statutory

degrees ofburglary, robbery, and extortion are almost exclusively non-economic.

The difference between simple and aggravated robbery is the presence or absence

of a weapon.^^ The difference between first and second degree burglary is most
often the presence of a weapon or the commission of an assault during the

39
crime.

Notably absent fi-om the ranking calculus of traditional common law and
state statutory economic crimes is any consideration of mental state or of the

nature and quality of the act(s) which make up the crime. Of course, proof of
both a culpable mental state and some voluntary act in aid of the crime are
prerequisites for the imposition ofliability. However, the mental state necessary

to almost all simple theft-type crimes is some variant of an intent to steal,
defraud, or otherwise deprive the owner of the use or benefit of his property

."^^

No effort has been made, at least by the drafters of statutes, to distinguish
between more and less reprehensible conditions of larcenous intentionality.
Similarly, theft-type statutes prohibit a host ofmeans by which victims may be

a non-property crime. See. e.g., WASH. Rev. Code Ann. § 9A.52.020 (West 2000) (defining

burglary). Similarly, extortion can involve obtaining either property or services by threat, including

sexual favors. See, e.g., id § 9A.56.110 (defining extortion).

37. See United States v. Couch, 65 F.3d 542, 545 (6th Cir. 1995) (observing that the federal

sentencing guideline for burglary has a higher base offense level than the theft guideline because

"criminal activity that takes place in a dwelling or structure carries with it an increased risk of

encountering innocent people and causing physical and psychological injuries").

38. Compare, e.g., WASH. REV. CODE ANN. § 9A.56.200 (West 2000) (robbery in the first

degree is committed when defendant is armed with or displays a deadly weapon or inflicts bodily

injury), ^^ith id. § 9A.56.210 ("A person is guilty of robbery in the second degree if he commits

robbery.").

39. Compare, e.g., id. § 9A.52.020 (burglary in the first degree committed where defendant

enters a dwelling and is armed with a deadly weapon or assaults any person therein), with id. §
9A.56.030 (burglary in the second degree committed if defendant, "with intent to commit a crime

against a person or property . . . therein . . . enters or remains unlawfully in a building other than

a vehicle or a dwelling"). Compare COLO. REV. STAT. ANN. § 1 8-4-202 (West Supp. 2000) (first

degree burglary committed when defendant unlawfully enters a building or occupied structure with

intent to commit a crime therein and assaults or menaces another person or is armed with a deadly

weapon), w/Y/z id. § 1 8-4-203 (second degree burglary committed when defendant breaks into,

enters or remains unlawfully in a building with intent to commit a crime therein against another

person or property).

40. Joshua Dressler, Understanding Criminal Law § 32.07 (required mental state for
larceny is intent to steal), § 32.09[B] (describing required mental state for embezzlement), §

32.I0[C][3] (required mental state for false pretenses is intent to defraud).



16 INDIANA LAW REVIEW [Vol. 35:5

relieved of their property, but method is not a factor in ranking such crimes."*'
The consequence ofthis pattern of historical development is that there are a

variety of well-developed, long-recognized statutory guideposts for

distinguishing between more and less serious crimes against persons, but only
one recognized, commonly codified determinant ofthe degrees ofseriousness of
economic crimes—^the value of the thing stolen.

One might well ask why this simple, and seemingly simplistic, approach to
categorizing economic crimes persisted in English law, and dominates the law of
American states today. The probable answer is that it suited the theft cases that
predominated in the developing law of England before very recent times, and
which continue to predominate in most American state courts. As George
Fletcher has observed, early theft law, both in England and on the European
continent, concerned itself largely with cases of "manifest thievery": that is,

cases that look and feel like the paradigm ofa thiefseizing one's goods by stealth
and carrying them away."*^ Despite being the source of endless headaches to
generations of judges, lawyers, and law students, the common law and early
statutory crimes—larceny by trick, embezzlement, and false pretenses—^that
developed to fill perceived gaps in the early law of larceny"^^ were nonetheless

directed at conduct instinctively identifiable as stealing. Even today, the vast
majority of "economic crimes" adjudicated in state courts remain very close to

the classic model of manifest thievery or its early offshoots.'*'* The defendant

41. See, e.g., the consolidated Colorado theft statute, COLO. Rev. Stat. Ann. § 18-4-401

(West 1999), which prohibits direct taking of property from another, obtaining control over

property by threat or by deception, knowing use, concealment, or abandonment ofthe property of

another, and unlawfiilly demanding compensation for the return of another's property, all within

the same statute. Id.

42. George P. Fletcher, The Metamorphosis of Larceny, 89 Harv. L. Rev. 469, 476-81

(1976) (describing the concepts of manifest thievery in Roman, biblical, early English, and other

Indo-European legal traditions).

43. Id. at 502-20. See also GEORGE P. FLETCHER, RETHINKING CRIMINAL Law §§ 2.1-2.4,
59-113(1978).

44. Ofthe 989,007 inmates in the custody of state correctional authorities in 1 995, 230,300

prisoners or 23.3% of the total population, were incarcerated for property offenses. Bureau of

Justice Statistics, Correctional Populations in the United States 9-10 tbl. 1.11, 1.12

( 1 997). Ofthis total, 1 0.9% were incarcerated for burglary, 4.8% for larceny, 2.6% for fraud, 2.2%

for vehicle theft, and 2.7% for miscellaneous property crimes such as receiving stolen property,

destruction ofproperty, etc. Id. at 10 tbl. 1.12. Ofthe crimes reported to state police, larceny-theft

offenses constitute over fifty percent of all the crimes in the following categories: murder, forcible

rape, robbery, burglary, larceny-theft, and motor vehicle theft. See Bureauof Justice Statistics,

U.S. Dep'tof Justice, Sourcebookof Criminal Justice Statistics- 1 995, 349 tbl. 3 . 1 1 9 ( 1 995);

Bureau of Justice Statistics, U.S. Dep't of Justice, Sourcebook of Criminal Justice

Statistics- 1994, at329tbl. 3.103 (1994); Bureauof Justice Statistics, U.S. Dep'tof Justice,

Sourcebook of Criminal Justice Statistics-1993, at 375 tbl. 3.116 (1993). The average

property loss (in dollars) incurred for larceny-theft excluding motor vehicle theft ranged from $483

in 1993 to $505 in 1995. Id



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 1

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stole a car, picked a pocket, tapped a till, wrote a dud check, or doctored the

books, and it is easy to identify what was stolen, who it was stolen from, and how
much it was worth. In these simple circumstances, the defendant's state ofmind
ispatent and effectively indistinguishable from virtually all other such offenders,

his methods are unremarkable, and so the value of the thing taken is not a bad

proxy for the extent of the injury caused or threatened by the defendant's

behavior, and thus for the relative seriousness of the crime.

By contrast, there are literally hundreds offederal economic crimes. Ofthe
roughly 970 criminal statutes listed in Statutory Index to the 2000 Federal

Sentencing Guidelines,"*^ some 250 of them, or more than twenty-five percent,
were sentenced using either the theft guideline. Section 2B1.1, or the fraud

guideline, Section 2F1.1.*^ This total does not include the federal versions of

crimes such as burglary,"*^ robbery,"** extortion,^^ blackmail,^*^ bribery,^^ or

criminal copyright infringement," all of which are also crimes of dishonest

acquisition.^^

Federal economic crimes are not only numerous, they cover an immense
range of disparate conduct and implicate an array of interests far beyond the

interest of easily identifiable victims in readily quantifiable money, goods, or

services. Federal criminal laws protect the integrity of commodities markets,^*

and prohibit the sale of unregistered securities through the mail.^^ They punish
removal, disturbance, or destruction ofthe "graves, relics, or other evidences of

an ancient civilization,"^^ and the removal of documents relating to claims

against the United States.^^ They prohibit counterfeiting United States

45. The Statutory Index to the Guidelines, which appears at Appendix A, is a list of almost

all the federal statutory provisions prescribing criminal penalties. It contains a separate entry for

each separately chargeable statutory subsection. The list "specifies the guideline section(s) . . .

ordinarily applicable to the statute of conviction." U.S.S.G., app. A (2000).
46. Id.

47. Id. §2B2.1.

48. Id §2B3.1.

49. Id § 2B3.2.

50. Id § 2B3.3.

51. /c/. §2B4.1.

52. Id § 2B5.3.

53. The Guidelines provisions for all of these crimes incorporate enhancements for "loss."

See id §§ 2B5.3(b)(l), 2B4.1(b)(l), 2B3.3(b)(l), 2B3.2(B)(2), 2B3.1(b)(7), 2B21(b)(2).

54. E.g., 1 U.S.C.A. § 6 (West 2001) (restriction ofcommodities futures trading and foreign

transactions).

55. 15 U.S.C.A. § 77e (West 2001 ) (making it unlawful to sell unregistered securities through

the mail).

56. 16 U.S.C.A. § 114 (West 2001) (regarding the removal, disturbance, destruction, or

molestation of ruins).

57. 18 U.S.C.A. § 285 (West 2001) (regarding taking or using papers relating to claims

against the United States).



18 INDIANA LAW REVIEW [Vol. 35:5

currency/* the obligations offoreign countries,^^ and the papers ofships.^^ More
familiarly, federal law punishes theft and embezzlement from federally insured

banks,^* and criminalizes every "scheme or artifice to defraud" carried out by
means of either the U.S. Mail" or interstate wire communications,^^ or directed
at any "health care benefit program."^

Moreover, penalty levels for federal economic crimes vary widely and

conform to no discernible pattern. The maximum penalties for federal economic
crimes range from misdemeanor levels ofa year or less,^^ to five years per count
of conviction for wire and mail fraud,^^ to thirty years for bank fraud,^^ to life

imprisonment for conducting a "continuing financial crimes enterprise."^* These

penalties are not tied to an overall ranking scheme, such as those nearly universal

in state systems, where the legislature creates a limited set of offense categories

("Class 1" or "Class 2" or "Class 3" felonies, etc.) and then assigns every crime

in the criminal code to one ofthe categories.^^ Such a scheme embraces all types
ofcrime and incorporates legislative judgments about the relative seriousness of

different offenses. Instead, the penalty ranges for federal economic offenses

seem almost whimsical, owing more to the political enthusiasms of the moment
they were enacted than any reasoned effort to compare the relative seriousness

of different crimes.^^

58. Id. § 471 (prohibiting counterfeiting "any obligation or other security of the United

States").

59. Id. § 480 (prohibiting making, altering, or counterfeiting with intent to defraud

obligations of foreign governments).

60. Id. § 507 (prohibiting falsely making, forging, counterfeiting, or altering registries,

licenses, passes, permits, and other ship's papers).

61. /^. § 656 (regarding theft, embezzlement or misapplication by bank officer or employee).

62. Id. § 1341 (prohibiting mail fraud).

63. Id. § 1343 (prohibiting wire fraud).

64. Id. § 1347 (prohibiting knowingly and willfully executing or attempting to execute a

scheme or artifice to defraud any health care benefit program).

65. Id. § 656 (providing that penalty for embezzlement of less than $1000 by a bank

employee or officer shall be a fine, imprisonment for not more than one year, or both).

66. Id §§ 1341, 1343.

67. Id. § 1 344 (providing that penalty for bank fraud shall be a $ 1 million fine, or thirty years

imprisonment, or both).

68. Id. § 225(a) (prohibiting organizing, managing, or supervising a continuing financial

crimes enterprise).

69. See, e.g., COLO. Rev. Stat. Ann. § 18-1-105 (West 2000) (classifying felonies into six

classes) and § 18-1-106 (West 2000) (classifying misdemeanors into three classes); Wash. Rev.

CodeAnn. § 9A.20,01 (West 2000) (classifying felonies into three classes and misdemeanors into

two classes).

70. A notable recent example of the effect of current events on federal criminal sentences is
the fourfold, then sixfold, increase in the maximum penalty for bank embezzlement, from five years

to twenty years in 1 989, and from twenty years to thirty years in 1 990, enacted by a Congress in the

grip ofthe savings and loan debacle ofthe 1 980s. Compare Act ofJune 25, 1 948, ch. 645, 62 Stat.



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 1

9

The void created by the absence of meaningful congressional guidance on

questions ofrelative offense seriousness is compounded by yet another condition
common in federal economic crime prosecutions. Statutory structures, state and
federal, for crimes against persons have a marked cabining effect on sentences

in large part because a conviction for such offenses is likely to be of a single

count—one murder, one assault, one rape, one robbery. Where there are multiple
counts of conviction for crimes against persons, they have a tendency to merge

for sentencing purposes, or, when they do not, there are likely to be distinctly
different harms being punished—^two dead victims if there are two counts of
homicide, two robbed stores ifthere are two counts ofrobbery. The relationship
between the number of counts of conviction and the number of discretely
identifiable harms is much more blurred in federal white collar cases. The most
notable examples are wire and mail fraud, offenses in which every separate

mailing or interstate wire communication in furtherance ofthe criminal scheme
is a separately indictable and punishable offense.^'

By way of illustration, if a state legislature decides that the appropriate
penalty range for one second degree murder is twelve to twenty-four years, the

sentencing judge is probably going to be limited to a sentence within that range,

and be precluded from sentencing the defendant to more than twenty-four years

(a penalty range the legislature thought it was reserving for, say, first degree
murder). The judge will be equally constrained from sentencing the defendant

to less than twelve years, a range the legislature thought appropriate for various

forms of manslaughter.^^ In contrast, until the advent ofthe Federal Sentencing

Guidelines, the length of possible sentence faced by a federal white collar

offender ran from a minimum ofprobation to a maximum term of imprisonment
calculated by multiplying the number ofcounts ofconviction times the maximum
statutory sentence for each such count.^^ Thus, at least prior to the Guidelines,

683, 729 (1948) (codified as amended at 18 U.S.C.A. § 656 (West 2001)) (setting maximum

sentence for theft, embezzlement, or misapplication by bank officer or employee at five years

imprisonment and a $5000 fine), with Financial Institutions Reform, Recovery, and Enforcement

Act of 1989, Pub. L. No. 101-73, § 961(b), 103 Stat. 183, 499 (1989) (increasing maximum fine

for violation of § 656 from $5000 to $1 million, and maximum term of imprisonment from five

years to twenty years), and CrimQ Control Act of 1990, Pub. L. No. 101-647, § 2504(b), 104 Stat.

4789, 4861 (1990) (increasing maximum term of imprisonment for violation of § 656 from twenty

years to thirty years).

71. 18 U.S.C.A. § 1341 (West 2001); United States v. Clevenger, 458 F. Supp. 354, 359

(E.D. Tenn. 1978) (holding separate counts for separate mailings in furtherance ofsame scheme to

defraud not multiplicitous); United States v. Brodbeck, 430 F. Supp. 1 056, 1 060 (E.D. Wis. 1 977)

(same). See also United States v. Calvert, 523 F.2d 895, 914 (8th Cir. 1975) (each separate use of

wire communication in aid of same scheme to defraud is separate offense).

72. This assumes a sentencing structure employing statutory ranges with minimaand maxima.

If there were no minima, the top-end constraints would still exist.

73. See, e.g.. United States v. Perez, 956 F.2d 1098, 1 102-03 (1 1th Cir. 1992) (affirming the

power of a district court to impose consecutive sentences for convictions of burglary and theft

arising from the same transaction).



20 INDIANA LAW REVIEW [Vol. 35:5

the apparent legislative judgment about offense seriousness implicit in the
decision to set five years as the maximum sentence for one count ofa crime such
as wire fraud disintegrated in the face of untrammeled prosecutorial discretion

to charge one count or fifty arising from the same scheme, and the equally
unlimited power ofthejudge to sentence anywhere in a legally permissible range
that could run from zero to 250 years.

Thus, when the United States Sentencing Commission set out to create
guidelines for sentencing economic criminals, it faced an array of difficulties

greater than that presented by virtually any other category of offender.

2. The Original Guidelines ' Approach to Economic Crimes.—^The issues
addressed by the Guidelines fall broadly into two categories: first, issues
common to all offenders regardless oftheir particular offense, and second, issues
specific to particular offenses. The first category addresses the treatment of
criminal history,^'* the multiple count rules,^^ relevant conduct,'^ adjustments for

the defendant's role,'^ adjustments for vulnerable victims,^^ and the virtual

exclusion ofthe defendant's personal circumstances and characteristics from the

calculation of guideline range.^^ The second category contains all the rules
concerning the offense(s) for which the defendant is being sentenced. These are

found in Chapter Two, "Offense Conduct."*"

The Commission's approach to drafting Chapter Two guidelines for
particular crimes was empirical and historical, rather than normative and
philosophical. That is, with a few notable exceptions, the Commissioners did not
attempt to determine what the penalty for any given offense should be; rather,

they set out to reproduce the sentencing patterns in existence before the

Guidelines.*' The Commission studied a sample of 10,000 past cases to
determine what sentences were rendered and why.*^ The objective was to
identify the characteristics of both offenders and offenses that judges had

historically deemed important in making sentencing choices. In effect, the
Commission attempted to discover the federal common law of sentencing and

74. ^-ee U.S.S.G., ch. 4 (2000).

75. See id. ch. 3, pt. D.

76. See id. § 1B1.3.

77. Id. ^ SUA.7.

78. Id §3A1.1.

79. Mch. 5,pt.H.
80. Id ch. 2.

81

.

The most prominent exception to the general approach of attempting to reproduce pre-

Guidelines sentence levels was narcotics sentences, where, largely in response to statutory

mandates, the Commission created a structure which dramatically increased drug sentences. See

generally Bowman, supra note 7, 733-34, 740-46 (discussing drug sentences under the Guidelines

and arguing that they are, in general, too long). See also Frank 0. Bowman, III & Michael Heise,
Quiet Rebellion? Explaining Nearly a Decade ofDeclining Federal Drug Sentences, 86 lOWA L.

Rev. 1043, 1067-1 126 (2001) (attempting to explain why the average federal narcotics sentence

declined significantly between 1 992 eind 1 999).

82. Breyer, supra note 7, at 7 n.50.



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 2

1

codify it.

In the case of economic crimes, the original Commission adhered to its

historical approach in some respects, but diverged from it in others. On the one
hand, the Commission consciously chose to raise sentencing levels for economic

crimes over pre-Guidelines levels.^^ The commissioners were plainly concerned

that probationary sentences had been too common in economic crimes,*'* and that
the Guidelines' objectives would be better served by the imposition of "short but

certain terms of confinement for many white-collar offenders . . . ."^^ On the
other hand, the Commission did attempt to ascertain the factors that had

historically been important in sentencing economic crimes, and to incorporate

their findings in the Chapter Two offense conduct guidelines for such crimes.
In my view, the original Commission was correct to raise sentences for

economic crimes above their de minimis historical levels.*^ However, its effort

to identify sentencing factors federal judges had in the past found determinative

for economic crimes produced rather lean results. Indeed, the Commission

mentioned only two such factors in the commentary to the guidelines governing

theft and fraud—^the amount of the loss, and the amount and sophistication of
planning activity involved in the crime.*^

83. Id. at 20-21; Marvin E. Frankel, Sentencing Guidelines: A Need for Creative

Collaboration, 101 YALE L. J. 2043, 2047 (1992) ("[T]he Commission produced guidelines that

actually increase the overall severity [offederal sentences] taking particular aim at so-called white-

collar offenders whom the Commission found (perhaps correctly) to have been treated with undue

solicitude.").

84. As Justice Breyer, then a member ofthe Sentencing Commission, put it in 1 988, "A pre-

Guidelines sentence imposed on these criminals would likely take the form ofstraight probationary

sentences." Breyer, supra note 7, at 7 n.49. See also John Hagan & Ilene Nagel Bernstein, The
Sentence Bargaining of Upperworld and Underworld Crime in Ten Federal District Courts, 1

3

Law & Soc'Y Rev. 467, 475 (1979) (quoting an Assistant U.S. Attorney regarding office policy
ofvigorous advocacy in white-collar sentencing hearings "because unless we did [advocate strongly

for imprisonment] almost everybody would walk out on probation").

85. Breyer, supra note 7, at 20.

86. See Bowman, supra note 7, at 734-41 (supporting the Commission's choice to increase

economic crime sentences, and arguing that, even under the Guidelines, federal white collar

sentences are often too low).

87. In the commentary to the former fraud guideline, the Commission observed:

Empirical analyses of pre-guidelines practice showed that the most importantfactors

that determined sentence length were the amount of loss and whether the offense was

an isolated crime of opportunity or was sophisticated or repeated. Accordingly,

although they are imperfect, these are theprimaryfactors upon which the guideline has

been based.

U.S.S.G. § 2F1.1, app. background (2000) (emphasis added).

The commentary to the former theft guideline states:

The value of the property stolen plays an important role in determining sentences for

theft and other offenses involving stolen property because it is an indicator of both the

harm to the victim and the gain to the defendant . . . The guidelines provide an



22 INDIANA LAW REVIEW [Vol. 35:5

For the purpose of drafting guidelines, the original Sentencing Commission
divided federal economic crimes into two basic types: crimes involving "the
most basic forms of property offenses: theft, embezzlement, transactions in

stolen goods, and simple property damage or destruction"** sentenced under
Section 2B1.1,*^ and fraud crimes, sentenced under the provisions of Section

2F 1 . 1 . Then, having gone to the trouble ofcreating the distinction between theft
on the one hand and fraud on the other, the Commission drafted two virtually
identical guidelines, both of them based primarily on the amount of "loss"
resulting from the defendant's criminal conduct.'®

The term "loss" was not defmed in the text of the former theft and fraud
guidelines.^' Rather, it was discussed and defmed in the commentary to those
guidelines. The primary definition of "loss" appeared in Application Note 2 to
the theft guideline. Section 2B 1 . 1 . The heart ofthe definition was this: " 'Loss

'

means the value of the property taken, damaged or destroyed.
^''^^ The fraud

guideline. Section 2F1 . 1, incorporated this definition, stating: "Valuation ofloss

is discussed in the Commentary to § 2B1 .1 (Larceny, Embezzlement, and Other
Forms of Theft). As in theft cases, loss is the value of the money, property, or
services unlawfiilly taken . . . ."'^

Application Note 7 to Section 2F1.1 went on to state: '''Frequently, loss in

a fraud case will be the same as in a theft case."'* This language raised but did

enhancement for more than minimal planning, which includes most offense behavior

involving affirmative acts on multiple occasions. Planning and repeated acts are

indicative ofan intention and potential to do considerable harm. Also, planning is often

related to increased difficulties of detection and proof

Id. § 2B1.1, app. background.

88. Id. ch. 2, pt. B(l), introductory app.

89. Property damage cases were nominally sentenced under Section 2B1 .3, but the core of

that guideline was a cross-reference to Section 2B1.1 incorporating the loss table of Section

2B1. 1(b)(1).

90. 5eeU.S.S.G.§§2Bl.l,2Fl. 1(2000).

91. The word "loss" appeared in guideline text only as a description of the monetary

increments in two tables (§ 2B1 . 1(b)(1) and § 2F1 . 1(b)(1)) which gave rise to increases in offense

level. See id. § 2B1. 1(b)(1) (2000): "If the loss exceeded $100, increase the offense level as

follows: [followed by a table]."

92. Id. § 2B1 .1, app. n.2 (emphasis added). Application Note 2 goes on to say:

Ordinarily, when property is taken or destroyed the loss is the fair market value ofthe

particular property at issue. Where the market value is difficult to ascertain or

inadequate to measure harm to the victim, the court may measure loss in some other

way, such as reasonable replacement cost to the victim. Loss does not include the

interest that could have been earned had the funds not been stolen. When property is

damaged, the loss is the cost of repairs, not to exceed the loss had the property been

destroyed.

Id. The note then discusses several examples and special cases. Id.

93. Id. § 2F1.1, app. n.8 (emphasis added).

94. Id. (emphasis added).



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 23

not answer the question ofwhen loss in fraud cases would be the same as loss in
theft cases.^^ The commentary to the former fraud guideline set out a number of
special rules for particular cases, such as product substitution cases,^^ fraudulent

loan and contract procurement cases,^^ procurement fraud,^^ government program

benefits,^^ and Davis-Bacon Act cases. '^'^ Under both the former theft and fraud

guidelines, "the loss need not be determined with precision. The court need only

make a reasonable estimate of the loss, given the available information."'^'
Finally, the general rule for both theft cases under Section 2B 1 . 1 and fraud cases
under Section 2F1.1 was that the court should use the greater of actual or
intended loss, ifthe intended loss was different than the actual loss and could be
determined.

'^^

II. The Case FOR Reform

A. Consolidation ofthe Former Theft and Fraud Guidelines

From the inception ofthe guidelines system, the existence of one guideline

95. For further discussion of this issue, see infra, notes 269-89 and accompanying text.

96. U.S.S.G. § 2F1.1, app. n.8(a) (2000).

97. Id. §2Fl.l,app.n.8(b).

98. Id. §2Fl.l,app. n.8(c).

99. Id §2Fl.l,app. n.8(d).

100. Id §2Fl.l,app. n.8(e).

101. Id § 2B1.1, app. n.3; id § 2F1.1 app. n.9.

1 02. This rule was plainly stated only in the application notes to former § 2F1 . 1 concerning

fraud cases: "Consistent with the provisions of § 2X1 . 1 (Attempt, Solicitation, or Conspiracy), if

an intended loss that the defendant was attempting to inflict can be determined, this figure will be

used if it is greater than the actual loss." Id. § 2F1.1, app. n.8. Nonetheless, the same principle

seems implicit in the examples used for illustration in the former theft guideline:

Examples : (1 ) In the case of a theft of a check or money order, the loss is the loss that

would have occurred if the check or money order had been cashed. (2) In the case of

a defendant apprehended taking a vehicle, the loss is the value ofthe vehicle even ifthe

vehicle is recovered immediately.

Id §2Bl.l,app. n.2.

The concept of intended loss was expUcitly imported into the theft guideline only in cases of

attempt. The former theft guideline read:

In the case ofa partially completed offense (e.g., an offense involving a completed theft

that is part of a larger, attempted theft), the offense level is to be determined in

accordance with the provisions of § 2X1.1 (Attempt, Solicitation, or Conspiracy)

whether the conviction is for the substantive offense, the inchoate offense (attempt,

solicitation, or conspiracy), or both; see Application Note 4 in the Commentary to §2

XI. 1.

Id. § 2B1.1, app. n.2. The base offense level for an attempted theft was determined by adding to

the base offense level of the substantive offense "any adjustments from such guideline for any

intended offense conduct that can be established with reasonable certainty." Id. § 2X1. 1(a).



24 INDIANA LAW REVIEW [Vol. 35:5

for crimes involving "theft," Section 2B1.1, and another for crimes involving

"fraud," Section 2F1.1, was the source of some of the confusion surrounding
federal economic crime sentencing generally, and the loss concept in particular.
In the end, it became clear that there was no good reason to have two separate
guidelines for theft and fraud, and that there were compelling reasons to
consolidate the two sections.

First, the distinction between theft and fraud is largely illusory. Although not

all theft crimes are frauds, virtually every fraud could be charged as some form
of theft. Federal law abounds with instances where the same course ofthievery
is chargeable under multiple statutes, some of which are called "frauds," and
some of which are traditional "theft-like" offenses. '°^

Second, even if it were possible to draw a meaningful distinction between
thefts and frauds, it would only be useful to do so in writing sentencing
guidelines ifthe objective were to generate different sentencing outcomes for the

two categories of cases. However, the sentencing range under both the former
theft and fraud guidelines was driven almost entirely by loss amount, and the loss
tables in the two guidelines were virtually identical. Moreover, because the fraud
guideline essentially adopted the "loss" definition from the theft guideline,

application of either former Section 2B1.I or Section 2F1.1 to the same set of
facts customarily produced either the identical sentencing range, or a pair of

ranges so close that the top of one approached or overlapped the bottom of the

other.
'^"^ Thus, in the overwhelming majority of cases, the existence of separate

fraud and theft guidelines was merely a pointless duplication.
Third, the existence of separate theft and fraud guidelines was mischievous.

Sections 2B 1 . 1 and 2F 1 . 1 , and their commentary regarding "loss," were slightly
different. Consequently, creative litigants and judges tried to impute meaning

into the differences, which often led to confusion.
'°^

Throughout the long economic crime sentencing debate, there was little or
no dissent from the view that the theft and fraud guidelines should be
consolidated. '^^ The Sentencing Commission explicitly acknowledged the

103. See Frank O. Bowman, III, Coping with "Loss": A Re-Examination of Sentencing
Federal Economic Crimes Under the Guidelines, 5 1 Vand. L. REV. 46 1 , 490-92 ( 1 998) [hereinafter

Bowman, Coping with "Loss"] (discussing the illusory character of the theft-fraud distinction in

federal law).

104. The Sentencing Table is constructed so that the top of one sentencing range will overlap

the bottom of the range two offense levels higher. U.S.S.G. ch. 5, pt. A (2000).
1 05. See, e.g. , Bowman, Coping with "Loss, " supra note 1 03, at 493-97 (discussing the series

of Third Circuit cases beginning with United States v. Kopp, 951 F.2d 521 (3d Cir. 1991), and

running through United States v. Badaracco, 954 F.2d 928 (3d Cir. 1992), United States v. Coyle,

63 F.3d 1239 (3d Cir. 1995), and United States v. Maurello, 76 F.3d 1304 (3d Cir. 1996)); J. Phil

Gilbert, Statement on "Loss" on Behalfofthe Judicial Conference Committee on Criminal Law,

10 Fed. Sent. Rep. 128, 129 (1997).

1 06. The three arguments for consolidation set forth in the text were laid out to the Sentencing

Commission at its first public hearing on loss and the theft and fraud guidelines. U.S. Sentencing

Commission October 1 997 Hearing on the Definition of "Loss ": Excerpts, 1 FED. SENT. Rep. 1 57,



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 25

foregoing critique when it consolidated the theft and fraud guidelines as part of
the 2001 economic crime package. '°^ As this aspect ofthe 2001 economic crime
package was non-controversial, it will receive no further detailed discussion in

this Article.

B. The "Loss " Conundrum

Ifthe problems in federal economic crime sentencing had been limited to the

superfluity of separate theft and fraud guidelines, the debate would have been a

short one. Far more significant was the galaxy ofdifficulties whirling around the
concept of "loss." As described above, when the original Sentencing
Commission wrote guidelines for economic crimes, it made the idea of"loss" the
linchpin of the enterprise. '°* In both the former theft and fraud guidelines the

base offense level^^^ resulting from conviction alone was very low (4 in theft

cases,"° and 6 in fraud cases'"), while the offense level could increase by up to

eighteen levels in fraud cases and twenty levels in theft cases, depending on the

amount of "loss" found by the court. "^ More concretely, the maximum term of

159 (James E. Felman, ed. and annotator, 1997) [hereinafter 1997 Hearing Excerpts] (testimony

of Professor Frank 0. Bowman, III). No member of the Commission expressed any disagreement

then or later. A consolidated economic crimes guideline was part of the first economic crime
package published for comment by the Conaboy Sentencing Commission. 63 Fed. Reg, 602, 610-

14 (Jan. 6, 1998). The CLC supported consolidation beginning in 1997. See Gilbert, supra note

105, at 129 (statement by then-Chair of CLC Sentencing Guidelines Subcommittee endorsing a
common definition of loss in both theft and fraud cases). Commentary by probation officers was

favorable, see Fred S. Tryles, A Critique ofthe Operation ofthe Theft andFraud Guidelinesfrom

the Perspective ofOne Probation Officer, 10 FED. SENT. REP. 131 (1997), and neither the Justice

Department nor the Practitioners Advisory Group (the official advisory body representing the

defense bar in Sentencing Commission matters) ever expressed opposition to the principle of

consolidation.

1 07. See Sentencing Guidelines for the United States Courts, 66 Fed. Reg. 305 1 2, 30540 (June

6, 2001) (setting forth Sentencing Commission's reasons for consolidating theft and fraud

guidelines).

1 08. See supra notes 83- 1 02 and accompanying text. For a more complete explanation ofthe

operation of the U.S. Sentencing Guidelines generally, and the guidelines on economic crimes in

particular, see Bowman, Coping with "Loss, " supra note 1 03, at 472-90.

109. The Guidelines measure offense seriousness on the vertical axis of a sentencing grid.

U.S.S.G. ch. 5, pt. A (2000). The unit ofmeasurement on this axis is an "offense level." The "base
offense level" for a crime is the number ofoffense levels awarded simply for conviction ofthe basic

crime covered by the particular guideline in question. A defendant's final offense level will be the
product of a process of adding to or subtracting from the base offense level as a result of other

factors present in the offense. In economic crimes, one ofthe principal such factors is the amount

of "loss." See id.\ see also Bowman, Coping -with "Loss, " supra note 103, at 472-90.

1 10. See U.S.S.G. § 2Bl.l(a) (2000).

111. See id §2Fl.l(a).

112. 5ee/£/. §§2B1. 1(b), 2F1. 1(b).



26 INDIANA LAW REVIEW [Vol. 35:5

imprisonment a judge could impose on a first-time fraud offender based on the
fact ofconviction alone would be six months,"^ but that sentence could increase
to more than five years based solely on the amount of loss.

^''*

In the years following the Guidelines' adoption, the loss calculation became
one ofthe most commonly litigated issues in federal sentencing law. Because the
loss measurement is a primary determinant of sentence length in all crimes of
dishonest acquisition, federal district courtjudges have been obliged to make loss
findings in more than 9000 cases every year."^ There are more than 1200
reported federal court opinions that discuss the loss finding in some way.^^^ In
addition to the sheer number of opinions on loss, disputes over the meaning of
the term produced numerous splits of opinion between the federal circuits. '^^

Perhaps even more significant than either the volume of litigation or the number
of identifiable circuit splits was the overall sense of uncertainty, confusion, and
sheer aggravation that emerged whenever lawyers and judges who dealt with
federal white collar crime discussed loss."* An indication ofthis frustration can

113. Id. §5A.

1 14. See id. §§ 2F 1.1(b), 5A. The increase in maximum available guidelines sentence from

six months to five years posited in the text assumes a first-time offender convicted of fraud with a

resulting base offense level of 6 who stole $80 million, the maximum amount on the loss table. It

also assumes no other adjustments to offense level other than that for "loss" amount.

1 1 5. Loss calculations are required in all fraud, larceny, and embezzlement cases, see id. §§

2B 1 . 1 , 2F 1 . 1 . In 1 999, federal judges sentenced 6 1 44 fraud defendants, 2067 larceny defendants,

and 949 embezzlement defendants. 1999 SOURCEBOOK, supra note 5, at 24, tbl. 1 1 . In addition,

loss calculations are often necessary in burglary and robbery cases, see U.S.S.G. §§ 2B2. 1, 2B3.

1

(2000). In 1999, federal courts sentenced 1771 robbery defendants, and fifty-three burglary

defendants. 1 999 SOURCEBOOK, supra note 5, at 24, tbl. 1 . U . Thus, somewhere between 9000 and
11,000, or sixteen to twenty percent, of the 54,903 federal cases sentenced in 1999 required a

determination of"loss." See id. This proportion has held roughly steady for some years. See, e.g.,

1995 Annual Report, supra note 5, at 60, tbl. 18.

1 16. For example, a Westlaw search conducted on November 11, 2000 revealed over 1200

federal cases in which loss under Guideline Section 2B 1 . 1 or 2F1 . 1 is at least mentioned. As ofthe

same date, there were at least 300 officially reported federal appellate decisions under Section

2F1.1 alone in which the amount of loss was an issue of sufficient moment that the opinion

discussed it in detail. See ROGER W. Haines, Jr. & Jennifer C. Woll, Federal Sentencing
Guide § 305 (CD-rom Edition 1, 2000) (The Federal Sentencing Guide provides one-paragraph

summaries of significant sentencing issues decided in published opinions by federal courts of

appeals. It does not summarize sentencing decisions in district court cases or in unpublished,

though publicly available, appellate opinions.)

1 1 7. See Bowman, Coping with "Loss, " supra note 1 03, at 464 n.3 . In its statement ofreasons

for the 2001 economic crime amendments, the Sentencing Commission lists a number ofthe circuit

splits resolved by the amendments. See Sentencing Guidelines for United States Courts, 66 Fed.

Reg. 30512, 30541-45 (June 6, 2001) [hereinafter Statement ofReasons] (setting forth Sentencing

Commission's reasons for adoption of economic crime package).

1 1 8. See, for example, United States v. Kaczmarski, 939 F. Supp. 1 1 76, 1 1 82 n. 7 (E.D. Pa.

1996), in which Judge Dalzell refers with obvious exasperation to the task of "construing the



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 27

be found in a 1996 survey by the Federal Judicial Center ofthe attitudes toward

the Guidelines of federal judges and probation officers."^ The Federal Judicial
Center askedjudges and probation officers to rate the clarity ofthe twelve most

commonly used guidelines. Clarity was defined as the "degree to which the
terms and definitions in the guideline are understandable." '^° Both groups rated

the fraud guideline (which, as we have seen, pivots on the definition of loss)
second to last in clarity.'^'

Why has loss proven to be such a problem? No one disputes the notion that
stealing more is worse than stealing less. Similarly, almost no one disagrees with
the basic judgment at the heart of both the former and newly adopted economic
crime guidelines that the sentences of thieves and swindlers should be

determined in some significant part by the magnitude of the economic
deprivations they caused or intended. '^^ Where the Commission fell short
between 1987 and 2001 was in the translation of a sound fundamental intuition

into a just, doctrinally coherent, easy-to-apply set of rules.

The root ofthe loss problem was that the former theft and fraud guidelines
did not contain a meaningful definition ofthe term. The descriptive commentary
regarding loss following Sections 2B 1 . 1 and 2F 1 . 1 included a series ofdirectives
that neither singly nor together amounted to a coherent definition. The basic
definition of loss announced in the theft guideline ^^^ and adopted by reference

into the fraud guideline*^^—^'*the value of the property taken, damaged, or
destroyed"'^^—used the language of larceny. The word "taken" is a term of art,
denoting to an Anglo-American criminal lawyer the "taking" element ofcommon
law larceny, with its insistence on a transfer of possession of moveable

personalty. '^^ Outside the limited context of simple larceny-like offenses, this

definition was virtually useless. For example, if "taken" retained some vestige
of its common law meaning, when was property "taken" in a wire fraud or a
check kite or a bankruptcy fi^aud or an insider trading case? And how? And from

vaporous word loss." Id. The Second Circuit describes "loss" more circumspectly as "a flexible,

fact-driven concept " United States v. Jacobs, 1 17 F.3d 82, 95 (2d Cir. 1997) (quoting United

States V Dickler, 64 F.3d 818, 825 (3d Cir. 1995)).

1 19. MollyTreadwayJohnson&ScottA.Gilbert,FederalJudicialCenter,TheU.S.

Sentencing Guidelines, Results of theFederal Judicial Center's 1 996 Survey, Reportto

THE Committee on Criminal Law of the Judicial Conference ( 1 997)
120. Mat 18.
121. Mat 19.
122. There is, however, disagreement over the degree to which numeric measurements of

economic harm should drive economic crime sentences. See, e.g., Jon O. Newman, Toward

Guidelines Simplification, 13 FED. SENT. 56 (2000) (arguing that the influence of loss amount on

sentence length should be substantially decreased). This issue will be addressed further below. See

infra notes 137-45 and accompanying text.

123. U.S.S.a§2Bl.l,app. n.2(2000).

124. Id §2Fl.l,app. n.8.

125. Id §2Bl.l,app. n.2.

1 26. See Dressler, supra note 40, § 32.04, at 5 1 0.



28 INDIANA LAW REVIEW [Vol. 35:5

whom? Alternatively, if "taken" was intended to invoke no particular doctrinal
association, what did it mean?

Aside from the larceny-based core definition, perhaps the most glaring
definitional defect in the former loss rules was their treatment of causation. The
former theft and fraud guidelines and the cases construing them created a
puzzling patchwork, which looked roughly like this:

1. The relevant conduct guideline. Section IB 1.3, mandated a broad
measurement ofharm, saying that offense levels were to be determined based on
"all harm[s] result[ing] from" a defendant's own conduct, and thus apparently set
up a rule of pure "but for" causation.

^^^

2. By contrast, both the former fraud and theft guidelines defined loss
narrowly as the "thing taken," the corpus delicti of the crime.

*^^

3

.

Moreover, former Section 2F 1 . 1 , Application Note 8(c), said only "direct
damages" counted, and excluded "consequential damages."'^^ Both these terms
are drawn from contract law and are difficult, if not impossible, to apply in the
criminal context. '^^ If"consequential damages" was given its customary contract
law meaning. Application Note 8(c) excluded from loss even economic harms
directly caused by defendant's conduct and foreseeable to him.'^'

4. On the other hand, in cases of procurement fraud and product
substitution, former Section 2F1 .1, Application Note 8(c), specifically included

in loss the "consequential damages" elsewhere excluded, if the loss was
"foreseeable."'^'

5. Likewise, under the "relevant conduct" rules, if a defendant has

co-conspirators or other criminal cohorts, he is responsible for all harms that

resulted from all of their "reasonably foreseeable acts and omissions" in

furtherance of the crime.
'^^

6. In loan fraud cases, pursuant to former Section 2F 1 . 1 , Application Note
8(b), the loss to banks caused by a drop in value ofpledged collateral was a part

127. See U.S.S.G. § 1B1.3 (2000).

128. See id. §§ 2B1.1, app. n.2, and 2F1.1, app. n.8.

129. See id. § 2F1.1, app. n.8(c).

130. For a complete discussion ofthe problems created by the importation into the Guidelines

of the contract terms "direct damages" and "consequential damages," see Bowman, Coping with

"Loss, " supra note 103, at 51 1-22.

131. The modem test for whether some alleged economic harm caused by a breach ofcontract

is classified as a "consequential damage" is whether the harm was reasonably foreseeable to the

breaching party. James J. White& Robert S. Summers, Uniform Commercial Code § 1 0-4 at
569 (4th ed. 1995); A. CORBIN.CORBIN ON CONTRACTS. § 1010,at79(1964);5gefl/5oU.C.C § 2-

7 1 5(2)(a) (stating that a defendant would be liable for "any loss resulting from general or particular

requirements and needs of which the seller at the time of contracting had reason to know.") If a

harm to a contract plaintiff was reasonably foreseeable to the breaching defendant, then it is

ordinarily recoverable by the plaintiff absent some special contractual provision excluding such

recovery. See U.C.C. § 2-715 & cmt 3 (1998).
132. U.S.S.G. § 2F1.1, app. n.8(c) (2000).

133. Id § 1B1.3.



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 29

ofthe loss, regardless ofwhether it was foreseeable and despite the fact that such

a loss is a classic "consequential damage."'^"*

7. Except in loan fraud cases, if a victim's loss was genuinely attributable

to several causes, there was no rule for determining what the causal nexus to a
defendant's conduct must be before the loss should be counted.

This list describes only some ofthe problems with measuring losses actually
incurred, and deals not at all with the oddities of the former theft and fraud

guidelines' treatment of loss in wholly or partially completed offenses. In short,

in place of a coherent definition of a concept central to the sentencing of more
than one-fifth of all federal defendants, '^^ the former theft and fraud guidelines

presented judges and lawyers with a jumble of rules developed piecemeal over

the first decade of guidelines experience about what loss meant in particular

situations.

Finally, there existed a concern among some observers that loss, even if
better defined, was too influential in the sentencing calculus. These critics were

troubled that loss, by far the largest factor in setting an economic crime sentence,

failed to account for other considerations that ought to be important in sentencing

economic criminals.

C. Sentence Seventy in Economic Offenses

As noted above, the original Sentencing Commission consciously chose to
set penalties for economic offenses above their pre-Guidelines levels. ^^^ Even so,

to many observers, economic crime sentences still appeared quite low, both by
comparison with sentences imposed for other offenses (particularly narcotics),

and as measured by their moral seriousness and the damage they inflict on

society. '^^ Two points seemed particularly troubling. First, under the former
guidelines, a defendant could steal a very substantial sum without being required
to serve any prison time. For example, a first-time offender must have stolen

more than $70,000 before any sentence of imprisonment was mandated (and the
amount rose to $200,000 if the crime was a one-time occurrence involving only
minimal planning).'^* Second, defendants who stole obscenely large amounts of

134. See id § 2F1.1, app. n.8(b).

135. In 1999, of the 55,408 offenders sentenced in the federal courts, roughly 1 1,000 were

sentenced for the offenses of fraud, larceny, embezzlement, burglary, or robbery, all of which

involve calculations ofloss amount under the applicable guidelines. See 1 999 SOURCEBOOK, supra

note 5, at 12 tbl. 3; U.S.S.G. §§ 2B1.1, 2F1.1 (2000).

136. See supra notes 8 1 -87 and accompanying text.

1 37. Bowman, supra note 7, at 740. See also Catharine Goodwin, The Casefor a New Loss

Table. 13 FED. SENT. Rep. 7 (2000).

1 38. The result was the same whether the crime was a "theft" or a "fraud." Compare U.S.S.G.

§ 23 1 . 1 (b)( 1 )(I) (2000), with § 2F 1 . 1 (b)( 1 )(G) (2000). The $70,000 figure assumes a "more than

minimal planning" adjustment under either former Section 28 1.1 (b)(4)(A) or Section

2F 1 . 1 (b)(2)(A) ofthe Guidelines; the $200,000 figure assumes a simple crime with only one victim

for which no such adjustment is required. Both figures assume a defendant who pleads guilty



30 INDIANA LAW REVIEW [Vol. 35:5

money received strikingly low sentences. For example, a swindler who stole
between $20 million and $40 million would, if he pled guilty, be sentenced to
only thirty-seven to forty-six months.

'^^

By contrast, many members of the defense bar saw no need to increase
sentences even for high-loss defendants. ^"^^ Moreover, a number of observers
both in and out ofthe defense bar felt that the theft and fraud guidelines were too
rigid for offenders who stole relatively small amounts, and that judges ought to
be accorded more flexibility to impose probationary or alternative sentences on
such offenders.^'*'

In the end, a compromise was struck. The Commission adopted a new loss
table for the newly consolidated economic crime guideline."*^ The new table
both increased sentences for high-loss offenders, and reduced sentences for low-

loss offenders. In addition, the new guideline omits the two-level "more than
minimal planning" adjustments contained in both the former theft and fraud

guidelines, ^*^ and the "scheme to defraud more than one victim" adjustment in
the former fraud guideline.''*'^ Instead ofrequiring a factual determination on the

existence of more than minimal planning or multiple victims in virtually every
case, the new guideline builds the two levels into its loss table beginning with
cases in which the loss exceeds $120,000. The details ofthese adjustments, and
the rationales for them, have been treated elsewhere.''*^ In any event, the new
table is what it is. Forjudges and lawyers, an archeological foray into how the
particular numbers were chosen is likely to be of little practical use. Hence, the

new loss table will receive only incidental mention in the balance ofthis Article.

sufficiently early in the process to avail himself of the three-level reduction for acceptance of

responsibility under Guideline Section 3El.l(a), (b). Moreover, under the former guidelines, a

first-time offender must have stolen more than $20,000 before ajudge was required to impose even

intermediate conditions of confinement such as home detention, community confinement, etc. (a

figure that rose to $70,000 if the offense did not involve "more than minimal planning"). See id.

§2Bl.l;ch. 5,pt. A.

1 39. This result assumes a first-time offender given a two-level "more than minimal planning"

upward adjustment under Guideline Section 2F 1.1(b)(2)(A) (2000), and a three-level acceptance

ofresponsibility downward adjustment pursuant to Sections 3E 1.1 (a)-(b). See also id ch. 5, pt. A.

1 40. Barry Boss, Do We Need to Increase the Sentences in White-Collar Cases? A Viewfrom
the Trenches, 10 FED. SENT. 124 (1997) [hereinafter Boss, Do We Need to Increase the Sentences
in White-Collar Cases?]; Barry Boss & Jude Wikramanayake, Sentencing in White Collar Cases:
Time Does Not Heal All Wounds, 13 FED. SENT. 15 (2000); James E. Felman, Comments of

Practitioners ' Advisory Group, Criminal Law Committee, and Probation Advisory Group on

Proposed Changes to "Loss" Tables, 13 FED. SENT. 19 (2000).

141. Goodwin, supra note 137, at 12.

142. U.S.S.G.§2B1. 1(b)(1) (2001).

143. M §§2B 1.1 (b)(4)(A), 2F1. 1(b)(2)(A) (2000).
144. Id §2F 1.1 (b)(2)(B).

145. See Bowman, Coping with "Loss, " supra note 103, at 499-500 (discussing abolition of

more than minimal planning adjustment); Goodwin, supra note 137, passim (discussing

modifications to loss table).



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 3

1

D. Money Laundering

Money laundering statutes were passed to address a phenomenon ancillary
to all modem crimes committed for money—^the ilh-gotten gains must be
transported and concealed from authorities, and criminals have learned to use the

mechanisms and instruments ofthe modem financial system to accomplish these
ends. The "laundering" of criminal proceeds not only facilitates the underlying
offenses, but can be an evil in itself, leading to corruption of the fmancial

institutions upon which legitimate modem commerce depends. '"^^ The money
laundering problem is particularly acute in the narcotics trafficking area where

narcotics traffickers have employed financial institutions to transform unwieldy

stacks of drug cash into more readily transferrable and concealable forms of
wealth. However, federal money laundering statutes do not distinguish between
drug crimes and other offenses that generate illegal proceeds. The basic conduct
prohibited is knowingly engaging in financial transactions involving fiinds

believed to be derived from a long list ofunlawful activities, including fraud and

theft.'''

The sentencing controversy involving money laundering arose from the
conjunction of two facts. First, the original Guidelines set the penalties for

money laundering quite high, with a base offense level of20 or 23, depending on
the particular statutory subsection under which the defendant was convicted, and
additional upward adjustments based on the amount of money laundered.

'"^^

Second, until now, the money laundering guidelines took no account of the
sentence level for the crime that generated the laundered money. In consequence,

a defendant who committed a $70,000 fraud crime for which the sentence under
Section 2F 1 . 1 would be ten to sixteen months could receive a sentence ofthirty-

three to forty-one months if he happened to deposit or wire transfer the proceeds

in or through a bank and the govemment elected to use such transactions as the
basis of a money laundering charge.''*^ Because it is virtually impossible to
commit a fraud crime without engaging in one of the types of monetary
transactions covered by the money laundering statutes, prosecutors have enjoyed
the option ofadding a money laundering charge to virtually any fraud indictment,
thus racheting up the potential Guidelines penalty.

'^^

1 46. The most prominent example of the corrosive effects of money laundering on financial

institutions and networks is the infamous BCCI case. See United States v. BCCI Holdings

(Luxembourg), S.A., 46 F.3d 1185 (D.C. Cir. 1995) (describing BCCI litigation and resolving

claims of defendant bank's branches to forfeited funds); United States v. BCCI Holdings

(Luxembourg), S.A., 961 F. Supp. 287 (D.C. D.C. 1997) (holding that dealing with known rogue

bank forecloses bona fide purchaser claim in forfeiture proceeding).

147. 18 U.S.C.A. § (1956 & 1994).
148. U.S.S.G. § 2Sl.l(a)(b)(2) (2000).

149. See id. §§ 2F.1.1; ch. 5, pt. A; 25.1.1.

150. I speak here of the effect of money laundering counts on fraud penalties because fraud

and theft are the subject of this Article. However, money laundering counts can also be used to



32 INDIANA LAW REVIEW [Vol. 35:5

Critics complained about this state ofaffairs on at least three grounds. First,

where the financial transaction characterized as money laundering is really
nothing more than a necessary incident of an otherwise unremarkable fraud or
theft, imposition ofhigher money laundering penalties circumvents thejudgment
of the Sentencing Commission about the appropriate punishment for economic
crime. Second, because money laundering charges are actually brought and
prosecuted to conviction in only a small fraction ofthe economic crime cases in
which they might theoretically be applied,'^' like cases are being treated
dissimilarly, at the discretion of local federal prosecutors. Third, even where
money laundering charges are not included in the indictment, or if included are
not prosecuted to conviction, the looming threat ofsuch charges and the resultant

higher penalty is said to give prosecutors unfair plea bargaining leverage.

III. A Procedural History of the 2001 Economic Crime Package:
The Amendments to the Former Theft and Fraud Guidelines

The process that culminated in the theft and fraud components of the 2001
economic crime package had its genesis in the guidelines "simplification"

initiative of former Sentencing Commission Chair Richard Conaboy.'^^ Staff
work on economic crime sentencing reform began in 1995.'^^ In January 1997,
the Commission promulgated issues for comment on economic crime sentencing
reform. ^^'^ In the late summer of 1997, the first comprehensive proposal for
consolidating the theft and fraud guidelines and redefining "loss" in terms of

principles of causation was circulated to the Commission and other interested

increase sentences for other federal offenses, such as bribery or public corruption.

151. It is impossible to determine how many economic crime sentencings might have included

money laundering counts had the government chosen to press the matter. However, national

sentencing statistics are suggestive. In Fiscal Yeai 2000, 1 1,748 defendants were sentenced for

larceny, fraud, embezzlement, forgery, counterfeiting, bribery, or tax offenses. U.S. Sentencing

CoMM'N, 2000 Sourcebook OF Federal Sentencing Statistics 28, tbi. 12 (2001) [hereinafter

2000 Sourcebook.] Almost all the offenses in these categories can serve as predicate offenses for

money laundering. See 18 U.S.C. § 1956(b)(7) (1994). In 2001, an additional 23,002 defendants

were sentenced for drug trafficking offenses, which are also predicate offenses for money

laundering. 2000 SOURCEBOOK, supra. Nonetheless, in 2000, only 980 defendants were sentenced

for money laundering. Id.

1 52. Although in the beginning the review of economic crime guidelines was only one small

part of an ambitious effort to simplify the Guidelines generally, the 2001 economic crime package

ultimately proved to be the only concrete result of the Conaboy Commission's simplification

project.

153. See U.S. Memorandum of Frank 0. Bowman, III, Special Counsel, U.S. Sentencing

Commission, to Donald A. Purdy, Chief Deputy General Counsel, U.S. Sentencing Commission,

Summary and Analysis of Judicial Interpretations of the Term "Loss" in U.S.S.G. §§ 2B1.1 and

2F1.1 (April 16, 1996) (on file with author).

1 54. 62 Fed. Reg. 1 52, 1 7 1 -74 ( 1 997).



2001 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 33

participants in the economic crime sentencing debate.'"

In 1997, the Commission held its first public hearings on economic crime

sentencing reform. '^^ Interestingly, although debate would continue for another

four years, the basic issues were already fairly well defined by the time ofthese

first hearings. The Justice Department, the Criminal Law Committee (CLC) of
the Judicial Conference, and probation officers generally favored modifying the

loss table to increase sentences for high-loss offenders, '^^ while the defense bar

opposed such increases.'^* There was little dissent from the idea that
consolidating the theft and fraud guidelines would be desirable. '^^ The tough
questions were whether a wholesale rewrite of the economic crime sentencing

155. The full proposal and analysis was later published as a law review article. See Bowman,

"Coping with Loss, " supra note 1 03; see also Frank 0. Bowman, III, Back to Basics: Helping the

Commission Solve the "Loss" Mess with Old Familiar Tools, 10 FED. SENT. REP. 115 (1997)

[hereinafter Bowman, Back to Basics] (containing a condensed version of the reform proposal);

Frank O. Bowman, III, Appendix to Guest Editor 's Observations: A Proposalfor a Consolidated

Theft/Fraud Guideline, 10 FED. SENT. REP. 173 (1997) (containing the text of the proposed

consolidated theft/fraud guideline).

156. A public hearing on changing the loss tables for the then-existing theft and fraud
guidelines was held in the spring of 1997. See UNITED STATES SENTENCING COMM'N, Public

Hearing on Proposed Guideline Amendments (Mar. 18, 1997), available at http://www.ussc.gov/

hearings.htm, at 49-63 (testimony of Frederic H. Cohn, member of Sentencing Guidelines

Committee of the New York Council of Defense Lawyers). Another "non-public" hearing on the
loss table at which representatives of the Justice Department and the judiciary appeared was also

held in the spring of 1997, see 1997 Hearing Excerpts, supra note 1 06, at 1 59 (testimony ofJudge

Gerald Rosen at October 1997 Sentencing Commission hearing recalling another hearing "back in

the spring" on the loss tables); however, no public record of these proceedings can be found. A
hearing addressing the interlocking questions of changing the tables and rewriting the theft and

fraud guidelines themselves was held in October 1997. Full transcripts ofthe October hearing and

copies of the written statements of the witnesses can be obtained at the Sentencing Commission

website, available at http://www.ussc.gov/hearings.htm. An edited transcript of the October

hearing appears in the Federal Sentencing Reporter. See 1997 Hearing Excerpts, supra note 106.

1 57. See Boss, Do We Need to Increase the Sentences in White-Collar Crimes?, supra note

140, at 124 ("Spearheading the movement to increase sentences in economic crime cases has been

the Criminal Law Committee ofthe Judicial Conference."); 1997HearingExcerpts, supra note 1 06,
at 158 (testimony of Gregory Hunt, chair of the Probation Officers Advisory Group, noting that

"probation officers were quite effusive about the streamlining and increased severity of the loss

table and they wholeheartedly support its adoption").

158. Boss, Do We Need to Increase the Sentences in White-Collar Crimes?, supra note 140,
at 127 ("By adopting either of the two current proposals, we are not only artificially and

unnecessarily increasing the sentences in these economic crime cases, but also legitimizing as a

sentencing baseline the draconian and irrational sentencing schemes in drug cases.").

159. See, e.g., Tryles, supra note 106, at 134 ("The Sentencing Commission has an

opportunity to advance its goal of simplification by merging the current theft and fraud

guidelines.").



34 INDIANA LAW REVIEW [Vol. 35:5

rules generally, and the loss concept in particular, was really necessary, '^^ and if
so, additional questions posed whether the loss concept should remain at the

heart ofeconomic crime sentencing,'^* whether it needed to be redefmed,'^^ and
whether any redefinition should be based on principles of causation.

'^^

In January 1998, the Commission published for comment a comprehensive
economic crime reform package that sought to consolidate the theft and fraud
guidelines, revise the loss table, and redefine "loss."'^ This first officially

proposed redefinition of loss, though still a work in progress, had already
assumed the broad outlines that had been suggested in the October 1 997 hearings
and that would ultimately be adopted in April 2001. That is, actual loss was
defined in terms ofreasonably foreseeable harms resulting from the defendant's

criminal conduct; the concept of intended loss was retained as a measurement of
offense seriousness for wholly or partially uncompleted offenses; and a variety

of special rules addressing particular problems of loss measurement were
appended to the core loss definition. '^^ Between January and April 1998, staff

and outside groups continued to work on the package. In February 1998,
Commission staffproduced and circulated for comment a revised draft ofthe loss
definition that had been published in January. '^^ On March 5, 1998, the
Commission held a public hearing on the pending economic crime proposals,

'^^

1 60. See, e.g. , 1 997 Hearing Excerpts, supra note 1 06, at 1 57 (statement ofCommission Chair

Richard Conaboy, opening the hearing with the question, "Why should the Commission consider

tackling this whole problem of the definition of loss?"); id. at 158, (testimony of Judge Gerald

Rosen), 1 66 (statement ofCommissioner Mary Harkenrider, ex-officio representative ofthe Justice

Department, questioning whether anything more than "slight refinements" to the economic crime

guidelines were required).

161. See id. at 158 (statement of James E. Felmzm, on behalf of the Practitioners Advisory

Group, noting that, "[Wje agree that loss is the best starting point to determine the severity of the

offense. We don't think loss is the only way to measure the severity of the offense and the
offender's culpability—we just can't improve on it").

162. Id. at 160 (testimony of Judge Gerald Rosen on behalf of the CLC, stating that, "I think

the one consistent thing that we heard from all of us is that the core definition [of loss] needs to be

redone.")

1 63

.

M at 1 59, 1 6 1 , 1 62 (testimony ofProfessor Frank Bowman, urging that loss be redefined
in terms of causation); id. at 163 (testimony of Judge Gerald Rosen on behalfofthe CLC, agreeing

that "any definition [of loss] ought to include the notions of causation, foreseeability and harm").

See also Frank D. Bowman, III: October 15, 1997 Hearing of the U.S. Sentencing Commission,

available at http:\\www.ussc.gov/hearings/bowman.pfd.

1 64. 63 Fed. Reg. 602-35 (Jan. 6, 1998). For a general discussion ofthe status ofthe evolving

debate on economic crime sentencing reform as it existed in early 1 998, see Bowman, Back to

Basics, supra note 1 55, at 1 1 5.

165. Jd

1 66. This and several other working drafts are publ ished in The Final Redefinition of "Loss,
"

Plus Five Preceding Drafts, 13 FED. SENT. 43 (2000) [hereinafter Final Redefinition].

167. The March 5, 1998 hearing was held in San Francisco, California, in conjunction with

the annual meeting of the White Collar Crime Section of the Criminal Justice Section of the



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 3 5

at which representatives ofthe Department of Justice/^^ the defense bar,'^^ and

the academy*^° testified. In April 1998, a revised version ofthe economic crime

package came within one vote of obtaining the unanimous approval it required
from the only four Commissioners then remaining. '^^ The elements ofthe April

1998 package were quite similar to the ultimately successful 2001

package—consolidation ofthe theft and fraud guidelines, a revised loss table, a
redefinition of"loss" in terms ofcausation ("reasonably foreseeable harms"), and

a variety of special and ancillary rules. However, no further formal action was
possible between 1998-99 because, by fall 1998, the terms of all the

Commissioners had expired and the vacancies remained unfilled until December
1999.

Reconsideration of the loss definition was so plainly essential to any
meaningftil economic crime sentencing initiative that, even after it became clear

that the dwindling Conaboy Sentencing Commission membership would be
unable to bring reform to fruition, they arranged for the loss redefinition so

nearly passed in April 1998 to be "field-tested" during the summer of 1998.'^^

American Bar Association. Key Issues: Reassessing Sentencesfor Federal Theft, Fraud and Tax

Crimes, United States Sentencing Commission, Public Hearing (Mar. 5, 1998) [hereinafter Mar.

5, 1998 Hearing Transcriptl, available at http://www.ussc.gov/agendas/3_5_98/0305ussc.pfd.

Copies of the written statements of the witnesses can also be obtained at the Sentencing

Commission website, available at http://www.ussc.gov/agendas/hrg3_98.htm.

1 68. KatrinaA. Pflaumer& Mary C. Spearing, Testimony Before the United States Sentencing
Commission, Mar. 5, 1998, available at http://www.ussc.gov/agendas/3_5_98/dojfraud.htm (setting

out position of Department of Justice on pending economic crime proposals, including proposed

loss table changes and the February 1 998 staffdraft loss definition). See also Mar. 5, 1 998 Hearing

Transcript, supra note 167, at 68 (oral testimony of Mary Spearing); id. at 75, 88 (oral testimony

of Katrina Pflaumer).

1 69. T. Mark Flanagan, Prepared Statement to the United States Sentencing Commission, Mar.

5, 1998 Public Hearing, http://www.ussc.gov/agendas/3_5_98/flanagan.htm (discussing the

proposed loss redefinition published by the Commission in the January 1998 Federal Register and

the February 1 998 staff draft loss definition); David F. Alexrod, Statement to the United States

Sentencing Commission, Mar. 5, 1998, available at http://www.ussc.gov/agendas/3_5_98/

axelrod.pfd (discussing proposed amendments to special offense characteristic provisions of theft

and fraud guidelines). See also Mar. 5, 1998 Hearing Transcript, supra note 167, at 55, 98 (oral

testimony of Gerald H. Goldstein); id. at 61, 96 (oral testimony ofDavid Axelrod); id. at 73 (oral

testimony of Ephraim Margolin); id. at 85 (oral testimony of T. Mark Flanagan).

170. Frank O. Bowman, III, United States Sentencing Commission Hearing, Mar. 5, 1998,

Prepared Statement, available at http://www.ussc.gov/agendas/3_5_98/bowman98.pfd (containing

a detailed critique of the February 1998 staff draft loss definition), and Mar. 5, 1998 Hearing

Transcript, supra note 167, at 100 (oral testimony of Frank O. Bowman, III).

171. The version of the loss redefinition considered by the Commission in April 1998 is

reproduced in Final Redefinition, supra note 166, at 45.

172. United States Sentencing Comm'N, A Field Test of Proposed Revisions to the

Definition ofLoss in the Theft andFraud Guidelines: A Report to the Commission (Oct. 20, 1998),
available at http://www.ussc.gov.



36 INDIANA LAW REVIEW [Vol. 35:5

The response to the proposed redefinition by the federal judges and probation
officers who participated in the field test was overwhelmingly positive. ^^^

Consequently, even during the 1 998-99 hiatus with no sitting Commissioners, the
Commission staff, in consultation with interested outside groups, continued to
work on refining the draft loss definition, with particular attention to feedback
received during the field test. The staff produced a proposal for a revised
definition in May 1999.^^"* During 1999, work also continued on possible
revisions of the loss table.

When the seven empty seats around the Sentencing Commission table were
refilled in December 1999, the newly constituted Commission, under the
chairmanship ofJudge Diana Murphy, made continuation ofthe economic crime
initiative a top priority. In October 2000, the Commission sponsored its Third
Symposium on Crime and Punishment in the United States: Symposium on
Federal Sentencing Policyfor Economic Crimes andNew Technology Offenses
at George Mason University School ofLaw, Arlington, Virginia. '^^ The first day
ofthe symposium was devoted to discussion ofproblems in sentencing theft and
fraud cases, particularly the problems in defining "loss."^^^

Work on the economic crime package continued following the symposium.
In January 2001 , the Commission published for comment a new set ofeconomic
crime reform proposals, including options for revising the loss table and for

redefining "loss."^^^ The Commission published two proposals for redefining

"loss," a staff draft containing a number of options on each of the contested
points, and a separate proposal submitted by the Committee on Criminal Law of
the United States Judicial Conference.

^^*

173. Id.

1 74. Final Redefinition, supra note 1 66, at 47 (text ofProposed Loss Redefinition, May 1 999

Staff Draft).

1 75. United States Sentencing Comm'N, Third Symposium on Crime and Punishment in

the United States: Symposium on Federal Sentencing Policy for Economic Crimes and New

Technology Offenses (Oct. 12-13, 2000) [hereinafter Symposium Proceedings]. Video webcasts

of most of the Economic Crime Symposium proceedings can be viewed on the Sentencing

Commission website, http://www.ussc.gov.

176. Symposium Proceedings, supra note 175, at 3-132. See also Frank O. Bowman, III,

Briefing Paper on Problems in Redefining "Loss, " 1 3 FED. SENT. 22 (2000) (briefing paper on

problems of"loss" definition provided to small group discussion leaders prior to the October 2000

Economic Crime Symposium); Transcript, Plenary Session IV: Major Issues Related to

Determination of "Loss " as a Measure ofOffense Seriousness and Offender Culpability, 1 3 FED.

Sent. Rep. 3 1 (2000) [hereinafter 2000 Symposium Transcript] (transcript of the plenary session

ofthe Economic Crime Symposium at which the small group leaders summarized the results oftheir

discussions on redefining "loss").

177. Sentencing Guidelines for the United States Courts, 66 Fed. Reg. 7962 (Jan. 26, 2001)

[hereinafter January 2001 Commission Draft].

178. Id. at 7992-98. See also Letter of Hon. William W. Wilkins, Jr., Chair, Committee on

Criminal Law ofthe Judicial Conference ofthe United States, to the Chair and Members ofthe U.S.

Sentencing Commission (with attachments) (Nov. 9, 2000) (on file with author). For a detailed



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 3 7

The views of the CLC on loss and the economic crime package generally
seem to have been particularly influential among the Commissioners.'^^ The
final proof of their influence came as the deadline for action in the 2000-01
amendment cycle approached. Preparatory to the Commission's March 2001
meeting, Commission staff prepared yet another draft of a reformed "loss"
definition. '^° The March 2000 staff draft would have abandoned the
foreseeability-based definition of loss that had been widely accepted since the

1998 field test, and suggested reinstating concepts such as "consequential

damages" that (as will be discussed below'^') generated much of the confusion
under the former guidelines. At the March 200 1 Commission hearing, thejudges
of the Sentencing Guidelines Subcommittee of the CLC submitted a written
statement'^^ and testified forcefully in favor of their own proposal. Shortly
thereafter, the Commission voted to adopt the final economic crime package,
including a reformed loss definition that conformed to the CLC proposal on
almost every significant issue.

The final procedural point of interest regarding the 2001 economic crime
package is that, following passage of the package, the Commission published a
detailed explanation of the newly adopted rules.'" This explanatory material is

a welcome departure from prior practice, and will doubtless prove useful to
judges and practitioners.

discussion of the November 2000 CLC "loss" definition proposal, see Frank O. Bowman, III, A
Judicious Solution: The Criminal Law Committee Draft Redefinition ofthe "Loss " Concept in

Economic Crime Sentencing, 9 GEO. MASON L. REV. 451 (2000).
179. The CLC was an interested and active participant from the very beginning of the

Sentencing Commission's consideration ofeconomic crime sentencing reform. Representatives of

the CLC testified at Commission hearings and were heavily involved in negotiations over the shape
of the package formally presented to the Sentencing Commission in April 1998. See, e.g., 1997

Hearing Excerpts, supra note 106, at 167 (testimony ofHon. Gerald Rosen before U.S. Sentencing

Commission on behalf of the CLC); Gilbert, supra note 105, at 128 (statement by then-Chair of

CLC Sentencing Guidelines Subcommittee endorsing a common definition ofloss in both theft and
fraud cases).

1 80. Final Redefinition, supra note 1 66, at 5 1 (Proposed Redefinition of"Loss" : March 200

1

Sentencing Commission Staff Draft).

181. See infra notes 207-29 and accompanying text.

182. Committee on Criminal Law, Judicial Conference of the United States, Criminal Law
Committee Comments on Proposed Changes to "Loss" Definition, 13 Fed. Sent. 41 (2000)

([hereinafter CLC Comments].
183. Statement of Reasons, supra note 117 (setting forth Sentencing Commission's reasons

for adoption of economic crime package).



38 INDIANA LAW REVIEW [Vol. 35:5

IV. AN Analysis and Critique of the Most Important Provisions of
THE 2001 Economic Crime Package

A. The Fundamental Choices

The two most important decisions made in the course ofthe debate over the
2001 Economic Crime Package were, first, to retain "loss"—pecuniary harm to
the victim—as the primary measure of offense seriousness in economic crime,
and second, to redefine loss in terms of causation. Before examining the

specifics of the amendments adopted by the Commission, it is important to
consider these fundamental choices.

1. The Retention of ''Loss " as the Core Measurement ofOffense Severity.—
A crime occurs when there is a volitional act attended by a culpable mental state
and the act causes, or at least risks causing, a harm.'*^ All these concepts—act,
mental state, cause, and harm—are relevant both to the threshold question ofthe
existence ofcriminal liability and to assessing offense seriousness for purposes

of assigning appropriate punishment.'*^ Throughout the long economic crime

sentencing debate, the Commission wrestled with the concern that, in the case of
completed economic crimes, heavy reliance on a quantitative measurement of

loss to determine offense level overemphasizes harm to the near-exclusion ofthe

other traditionally relevant components ofoffense seriousness, particularly those

relating to the defendant's culpable mental state. Conversely, the established rule

for wholly or partially inchoate economic offenses that "loss" should be the

greater of actual or intended loss'*^ could be argued to overemphasize mental

state at the expense ofconsiderations ofactual harm.'*^ In the end, however, the

Commission retained loss as the linchpin of economic crime sentencing.
Although the Commission never explicitly set out its reasons for adhering to a
loss-based model, '^* three considerations may have proven persuasive.

First, although actual loss (even when awkwardly defined as it was under the
former Guidelines) plainly measures harm, it also serves as a gauge of the

defendant's guilty mind. The persistent historical impulse to rank property

1 84. Jerome Hall, General Principles of Criminal Law 1 6- 1 9, 1 85-90 (2d ed. 1 960).
1 85. "[T]he assessment of harm caused by the defendant as a result of the crime charged has

understandably been an important concern of the criminal law, both in determining the elements

ofthe offense and in determining the appropriate punishment." Payne v. Tennessee, 501 U.S. 808,

819(1991).

186. See U.S.S.G. §§ 2B1.1, app. n.2 and 2F1.1, app. n.8 (2000).

1 87. The argument is that by treating an incomplete attempt to steal or swindle $X as the

equivalent of actually stealing $X, the Guidelines overemphasize mental state in comparison to

actual harm.

1 88. In its statement of reasons for adopting the economic crime package, the Commission

addressed a number of the specific elements of the loss definition, but did not explain the

fundamental choice to adhere to a loss-centered system. See Statement ofReasons, supra note 1 1 7,

at 30540-42 (setting forth Sentencing Commission's reasons for adoption of economic crime

package).



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 39

crimes by the value of property stolen rests in part on a judgment about mental

state. Recall that the mental state element of virtually all economic crimes is

some variant ofan intent to steal, defraud, or otherwise deprive the victim ofthe
use or benefit of his property.'*^ Thus, from the point of view of statutory law,

all convicted thieves, embezzlers, and con artists are formally indistinguishable

as regards mens rea. Even so, stealing more is worse than stealing less and
merits greater punishment, not only because a larger loss inflicts a greater harm,

but also because one who desires to inflict a large harm is customarily thought
to have a more reprehensible condition of mind than one who desires to inflict
a small one. To this extent, actual loss is not a bad proxy for mental state. (And,
of course, intended loss is a direct measurement of culpable mental state.)

Second, careful study of the pre-reform economic crime guidelines reveals

that they did not merely rely on either actual or intended loss as crude proxies for

mental state, but had already identified and provided specific offense level

adjustments for most ofthe factors relating to mental state traditionally thought
important in the imposition of economic crime sentences. The only systematic
study offederal sentencing practices for "white-collar" offenders was conducted
by Wheeler, Mann, and Sarat in 1988, before the Guidelines' promulgation, and
surveyed federal judges about the sentences they gave economic criminals and

the reasons for giving them.'^° The survey confirmed the original Sentencing
Commission's finding*^' that the amount ofplanning activity and the complexity

ofthe criminal scheme are considered important byjudges in sentencing. *^^ The
conclusion is unsurprising. In all types of crime, a defendant who plots, plans,
and schemes to achieve an evil end is thought more culpable than one who causes
the same harm on impulse. Moreover, Wheeler and his colleagues identified

other factors—including leadership role within the criminal undertaking, ^^^
whether the defendant betrayed a position of trust, '^'* indications of genuine

contrition, ^^^ and cooperation with authorities upon apprehension'^—^that entered
into judges' sentencing decisions.

All ofthese considerations are related to assessments ofmental state (as well

as to other sentencing considerations such as assessment offuture dangerousness,

likelihood of rehabilitation, and harm to the community), and all are accounted
for in the former Guidelines' structure. Complexity of scheme and extent of

planning activity were dealt with through the two-level upward adjustment for
"more than minimal planning" included in both the former theft and fraud

1 89. See supra note 40 and accompanying text.

1 90. Stanton Wheeler et al., Sitting in Judgment: The Sentencing of White-Collar

Criminals 1-5 (1988) (describing authors' research methods).

191. Supra note 87 and accompanying text.

1 92. Wheeler et al. supra note 1 90, at 93-94.

193. /J. at 97-102.

194. Id.

195. Mat 120-21.
196. Id.



40 INDIANA LAW REVIEW [Vol. 35:5

guidelines. '^^ The other listed considerations were (and continue to be)
accounted for in guidelines applicable to all types of offenses. The defendant's
role, as leader or follower, can generate upward or downward adjustments of up
to four offense levels. ^^^ Abuse of a position oftrust is penalized by a two-level
upward adjustment. '^^ Contrition is at least the ostensible subject of the
"acceptance of responsibility" guideline.^^ The biggest potential sentencing
rewards are reserved for defendants who provide "substantial assistance" to the
government in investigating and prosecuting others.^^^ These offense level
adjustments prove on inspection to account for almost all the factors commonly
thought relevant to assessing a financial felon's state ofmind during the offense
and after his apprehension. All ofthese adjustments, with the notable exception

of the "more than minimal planning" provisions of the former theft and fraud
guidelines, are retained in the revised economic crime guideline structure.^^^

One might nonetheless contend that, even though the Guidelines identify
most of the factors other than loss relevant to assessing the relative seriousness

of economic crimes, loss nonetheless receives undue weight in the sentencing

calculus. After all, a defendant's offense level could be increased by up to

twenty levels for amount of loss under the former theft guideline,^^^ while the
maximum increase or decrease for any of the other factors just listed was (and
remains) four.^*^"* Part ofthe response to this argument is implicit in the very fact

that loss serves multiple purposes. That is, actual loss is not only a direct

measure of harm, but also an important proxy measurement of mens rea.
Similarly, intended loss serves as a direct measurement of mental state, but also

as a rough measure of the risk of real harm presented by the defendant's
conduct.^^^ Thus, loss, both actual and intended, properly looms larger than other

197. U.S.S.G. § 2B 1.1 (b)(4)(A) (2000); id. § 2F 1.1 (b)(2)(A).

198. Id. §§381.1-1.2.

199. Id §381.3.

200. /<i. § 3E1 . 1 (a) (conferring two- or three-level offense level reductions where a defendant

"demonstrates acceptance of responsibility for his offense"). Of course, realists with some

experience offederal sentencing would doubtless say that the "acceptance ofresponsibility" credit

has more to do with rewarding early guilty pleas and the resultant saving in governmental resources

than it does with an assessment of contrition.

201

.

Id. § 5K1. 1 . See 8owman, supra note 7, at 722-24 (discussing sentence reductions for

substantial assistance under § 5K1.1); Frank O. Bowman, III, Departing is Such Sweet Sorrow:

A Year of Judicial Revolt on "Substantial Assistance " Departures Follows a Decade of
Prosecutorial Indiscipline, 29 STETSON L. REV. 7 (1999).

202. As I will discuss below, see infra Part IV.H, the Commission addressed the deficiencies

of"more than minimal planning" by abolishing that adjustment and substituting enhancement for

"sophisticated means" and a graduated adjustment for number of victims.

203. U.S.S.G. § 281.1(b)(l)(U) (2000).

204. Id. §§ 38 1 . 1 -1 .2 (providing for four-level upward or downward adjustments for role in

the offense).

205. Speaking broadly, a criminal defendant who intends to steal $1 million, and though

unsuccessful, engages in enough completed conduct to subject himselfto criminal liability, presents



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 4

1

more narrowly focused sentencing factors.
Moreover, careful reflection on the Guidelines' structure further diminishes,

if it does not entirely extinguish, the argument that undue weight is placed on

loss. The Guidelines' Sentencing Table is logarithmic, with each increase oftwo

offense levels representing an increase in minimum sentence length ofsix months
or twenty-five percent, whichever is greater. Thus, a mere two-level adjustment

for role in the offense, abuse oftrust, acceptance ofresponsibility, or the like will

increase or decrease the otherwise applicable sentence by at least twenty-five

percent. For example, a defendant who stole $100,000 from his employer, thus
abusing a position of trust, would (under the former theft guideline) receive a

sentence often to sixteen months based on the loss amount alone, but would see
his minimum sentence increase by five months or fifty percent as a consequence
ofthe two-level abuse oftrust enhancement. Ifthe loss were $400,000, the abuse

of trust enhancement would increase the defendant's minimum sentence thirty-
three percent from eighteen to twenty-four months to twenty-four to thirty

months. Viewed in this light, it is difficult to sustain the position that loss is
overemphasized as compared to a factor like abuse of trust when such a factor
increases by thirty-three to fifty percent a sentence that would be required by loss

amount alone.^^^
The third and final consideration that may have cemented the Sentencing

Commission's continued reliance on the loss measurement was that by redefining

actual loss in terms ofcausation, the Commission was able to make loss a better
proxy measurement of the defendant's guilty mind than it had been under the

former definition. To see why this is so, let us consider the Commission's
decision to adopt a causation-based definition of actual loss.

2. The Decision to Define ''Loss" in Terms of Causation.—Ks described
above,^^^ the "definition" of actual loss scattered in bits and pieces through the

commentary on the former theft and fraud guidelines was a hodgepodge—a core
definition ("the value of the property taken, damaged, or destroyed"^^^) drawn

from the common law of larceny combined with an apparent rule of causation
derived by negative inference from the exclusion of a classification of harms

("consequential damages") drawn from civil contract law,^*^^ plus a gaggle of

special rules. Virtually no one defended the old definition. The problem was to

identify core principles upon which a new coherent definition could be based.
More concretely, the difficulty was to define loss in a way that would account
simultaneously for the amount of harm caused by the economic criminal's
conduct and for the relationship between that harm and the defendant's state of
mind.

a greater risk to society than a defendant who commits the same quantum of culpable conduct but

intends to steal only $10,000.

206. Of course, the force of this argument depends to some degree on which you count first,

loss or enhancements such as abuse of trust, role in the offense, etc.

207. See supra notes 127-35 and accompanying text.

208. U.S.S.G. § 2B1.1, app. n.2{2000).

209. Id. §2Fl.l,app. n.8(c).



42 INDIANA LAW REVIEW [Vol. 35:5

Even in completed offenses, the simple equivalency between harm inflicted
and offense seriousness becomes more complex when the defendant's criminal
conduct causes harms that the defendant did not specifically desire (even though
he may have realized that they might well result), or from which he did not
personally benefit. For example, a defendant in a fraudulent loan application

case, hopeful that his "ship would come in" in time to make repayment, may not
have intended that the bank lose its loan money. Or the author ofa telemarketing
scheme might not intend that his elderly victims lose their homes as a result of
losing their retirement savings to the telemarketer. In these and many other
cases, whether the defendant is to be held culpable for particular losses to

victims, and thus whether the loss number and perhaps his offense level may be
increased, will depend on the legal question of causation. In other words, was
the causal link between the defendant's conduct and the harm that resulted
sufficiently direct that the law should hold the defendant responsible and increase

his punishment accordingly?

The literature of criminal law, contracts, and torts usually conceives of
causation problems as having two components, customarily labeled "cause-in-
facf and legal cause.^'° Cause-in-fact is about determining the causal

relationship between a defendant's act and a subsequent harm to another.^" It

asks whether the conduct truly was a part of the chain of events in the physical
world that brought about the harm. Legal cause asks a different question:

Assuming that the defendant's conduct truly did play a role in bringing about the
harm, is it just to impose legal liability for the harm concededly caused?^'^ For

example, a hiker who dislodges a pebble on a mountainside may start an
avalanche that obliterates a village below. Cause-in-fact is concerned only with

the issue of whether the dislodged pebble started the avalanche. Legal cause is

about whether, assuming that the pebble did cause the slide, the hiker should, as

a matter of law and social policy, be held accountable and punished for the

destruction of the village and the death of the villagers.

In both civil and criminal law, the most common causation standard is
"reasonable foreseeability."^'^ To a certain extent, the familiar reasonable
foreseeability standard conflates the analytically distinct questions of cause-in-

fact and legal cause. That is, under a reasonable foreseeability standard, a

defendant will be held civilly liable or criminally culpable for harms that were

caused in fact by defendant's conduct, in the sense that they would not have

occurred but for defendant's conduct, and were, at the time ofdefendant's illegal

conduct, foreseeable to a reasonable person in defendant's position. The former
economic crime guidelines did not address the issue ofcausation of loss, except

210. For an extended discussion of the problem of causation in economic crime sentencing,

as well as the relationship ofthinking about causation in other areas ofthe law to this problem, see

Bowman, Coping with "Loss, " supra note 103, at 527-36.

211. Mat 530-31.
212. Id. at 532-36.

213. Id.



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 43

indirectly.^^"* The newly consolidated economic crime guideline not only
addresses causation, but defmes actual loss in causal terms. "Actual loss" will

now mean "the reasonably foreseeable pecuniary harm that resulted from the
offense."2i5

The decision to define loss in terms of causation came only after the
Commission considered and rejected a series of objections:

a. Leaving causation undefinedwas not a viable option.—From time to time
during the loss debate, it was suggested that placing a causation standard in the
loss definition was just too troublesome, and that the status quo should be
maintained by omitting any reference to cause. This was not a tenable option.
No coherent definition of loss is possible without a specification ofthe required
causal nexus between the crime and economic harms that are to be counted as

loss. Even if the Commission had ignored the question of causation, courts
construing the economic crime guidelines do not have that luxury. The causation
issue is latent in every loss determination, regardless of the prevailing formal

definition ofthe term, and was the pivotal question in many cases under the old
definition.^'^ Moreover, a well-defined causation standard not only provides the

immediate rule of decision in some number of cases, but serves as the central
organizing principle against which special rules governing particular loss

measurement problems should be measured.

b. Reasonable foreseeability is the best available causation standard.—
There were those who, while conceding that some causal standard was doubtless
necessary, remained skeptical of the particular standard

—
"but for" causation

plus reasonable foreseeability—embodied in the 2001 economic crime

214. See supra notes 127-35 and accompanying text (describing the patchwork treatment of

causation implied by current guidelines provisions, including the relevant conduct guideline);

U.S.S.G. § 1B1.3 (2000); see also id. § 2F1.1, app. n.8(c) (inclusion of the contracts term

"consequential damages")-

215. U.S.S.G. § 2B1.1, app. n.2(A)(i) (2001).

216. See, e.g.. United States v. Hicks, 217 F.3d 1038 (9th Cir. 2000) (employing proximate

cause analysis to determine loss), cert, denied, 531 U.S. 1037 (2000); United States v. Neadle, 72

F.3d 1 104 (3d Cir. 1995) (discussing the necessary causal connection between the conduct of a

defendant who lied about the undercapitalization of his insurance company and insurance losses

sustained in the wake ofHurricane Hugo), amended 79 F.3d 14 (1996). See also United States v.

Yeaman, 1 94 F.3d 442 (3d Cir. 1 999) (rejecting zero loss where defendant's misrepresentations had

"but for" causal connection to loss), appeal after remand 248 F.3d 228 (3d Cir. 2001); United

States V. Green, 1 14 F.3d 613 (7th Cir. 1997) (charging nurse who created false bills as part of

insurance fraud scheme with entire loss, including payments for pain and suffering, because

insurance settlements are customarily based on size of medical bills); United States v. Copus, 1 10

F.3d 1529 (10th Cir. 1997) (finding in loan fraud case that pecuniary harm attributable to false

statement constituted loss); United States v. Cheng, 96 F.3d 654 (2d Cir. 1996) (wholesaler who

accepted food stamps from restaurants caused loss); United States v. Kopp, 951 F.2d 521 (3d Cir.

1991) (suggesting proximate cause analysis); United States v. Krenning, 93 F.3d 1257 (5th Cir.

1996) (finding district court's method of valuing loss bore no reasonable relation to harm from

fraud).



44 INDIANA LAW REVIEW [Vol. 35:5

package.^'^ However, none of the theoretically available alternative standards

withstood carefiil scrutiny .^^^ On the one hand, a pure "but for" causation
standard would be too inclusive. Chains of cause and effect run on infinitely

through time. To hold a defendant criminally responsible for every adverse
pecuniary consequence of his wrongdoing, no matter how remote or
unforeseeable, plainly would be unfair to the defendant.

Conversely, limiting "loss" to intended economic harms—^those the
defendant consciously desired—^would be too restrictive a measurement of
offense seriousness. If a corporate treasurer embezzles company funds to
speculate in futures trading or to place bets at the dog track, he may not "intend"
to deprive the company of the money. He may honestly "intend" to make good
his defalcations, with interest, but when the orange crop freezes or the dogs don't
run, his good intentions do not reduce the company's financial loss and should

not reduce the defendant's sentence. When the owner ofa business starts kiting
checks to tide over cash flow problems, he may hope that his business will turn
a comer and all the checks can be made good. But when the corner is not turned
and the kite collapses leaving banks holding hundreds ofthousands of dollars of

worthless paper, the economic harm to the banks is not lessened by the

defendant's unfounded optimism. When a real estate swindler lies to the bank
financing a development, to his partners, to purchasers of the lots, and to

contractors working on the project, he may intend to steal for himself only a
small fraction of the money and resources invested in the project. But the
entirely predictable result of his crimes may be the collapse of the entire
undertaking and financial harm to the bank, his partners, the purchasers, and the

contractors far in excess of the personal gain on which the swindler's attention

was focused. In short, limiting actual loss to the amount subjectively intended
by the defendant does not accurately measure the economic harm caused by the

defendant's crimes, and it permits the defendant to limit his sentencing exposure

by making difficult-to-disprove claims about his benevolent intentions or about

his failure to consider the likely consequences of his crime.

217. This line of thinking would seem to have been the impetus behind one of the options in

the Commission staff proposal published in January 2001, as well as in the loss definition in the

March 2001 staff draft. In January 2001, the staff offered as Section 2(A) [Option 2] the option of

defining "actual loss" as "the pecuniary harm that resulted or will result from the conduct for which

the defendant is accountable under § IBl .3 (Relevant Conduct)." See January 2001 Commission

Draft, supra note 1 77, at 7995. The commentary accompanying Option 2 ofthe January 200 1 staff

draft stated that the purpose of this option would be to "make clear 'but for' causation is required

but without concept of reasonable foreseeability." Id. at 7993. The March 2001 staff draft would

have defined "actual loss" to mean: ". . . monetary loss and property damage that resulted from the

offense . . . [not including] consequential damages." See Final Redefinition, supra note 166, at 51.

218. For an excellent summary of the debate over competing standards of causation for loss,

see the statement of John D. Cline, facilitator of one of the break-out groups at the October 2000

Sentencing Commission Economic Crime Symposium, 2000 Symposium Transcript, supra note

1 76, at 33-34 (summarizing the discussion in his break-out group over possible causation standards

for loss and reporting the consensus that the best standard was reasonable foreseeability).



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 45

It became clear that a proper causation standard for loss would lie somewhere
between the purely objective standard of "but for" causation and a purely

subjective inquiry into the defendant's intentions. The loss definition in the 200

1

economic crime package fits this bill. It insists, as a minimum, that the
defendant's offense have been a cause-in-fact of the economic harm at issue.
However, it limits the defendant's sentencing liability to those losses foreseeable

to a reasonable person.

c. The criminal law traditionally imposes punishments for reasonably

foreseeable harms caused by a defendant 's criminal conduct.—From time to
time, it was suggested that holding defendants criminally responsible for
reasonably foreseeable harms caused by their illegal conduct was a radical
innovation. Ofcourse, exactly the reverse is true. The concept of foreseeability
has long been a staple of analysis both in determining guilt and in imposing

sentences.^'^ Foreseeability is expressly an element of crimes where the

prohibited mental state is criminal negligence^^^ and even the most aggravated

degrees ofrecklessness.^^^ It is also integral to determinations ofguilt for crimes

in which the ostensible mens rea involves intentionality or knowledge.^^^ For
example, a party to a conspiracy is responsible for any crime committed by a co-

conspirator if it is within the scope of the conspiracy, or is a foreseeable

consequence of the unlawful agreement.?^^ In cases of accomplice liability, an

accomplice "is guilty not only of the offense he intended to facilitate or

encourage, but also of any reasonably foreseeable offense committed by the

person he aids and abets."^^"* The felony murder rule, which imposes the highest

219. "The notion of causation runs throughout the law—including the criminal law—and it
is generally understood to encompass two concepts. A defendant's conduct must generally be both
the 'cause in fact' and the 'proximate cause' of some harm before liability is imposed." United

States V. Neadle, 72 F.3d 1 104, 1 1 19 (3d Cir. 1995) (Becker, J., concurring and dissenting).

220. See, e.g., MODEL PENAL CODE § 2.02(2)(d) (1985) (defining criminal negligence to

require that defendant should have been aware of a substantial and unjustifiable risk of harm).

221. See, e.g., Henderson v. Kibbe, 431 U.S. 145, 156-57 (1977) (finding foreseeability of

death a necessary component of depraved indifference murder under New York law); Regina v.
Cunningham, 2 Q.B. 396 (Crim. App. 1957) (holding that "malice" under the Offenses against the

Person Act, 1861, embraces both intentional and reckless conduct and recklessness requires

evidence that defendant foresaw the threatened injury).

222. See, e.g. People v. Rakusz, 484 N.Y.S.2d 784, 786 (N.Y. Crim. Ct. 1985) (finding

defendant guilty of assault, defined as: "[w]ith intent to prevent ... a police officer . . . from

performing a lawful duty, he causes physical injury to [the officer]," when an officer frisked a

struggling defendant and cut his hand on the knife, because the injury was foreseeable to

defendant); State v.Williquette, 385 N.W.2d 145, 147, 150 (Wise. 1986) (holding that a defendant

"subjects a child" to abuse if, by act or omission, "she causes the child to come within the influence

of a foreseeable risk of cruel maltreatment").

223. Pinkerton v. United States, 328 U.S. 640, 647-48 (1946). See also United States v.

Laurenzana, 1 1 3 F.3d 689, 693-99 (7th Cir. 1997) (defendant guilty ofconspiracy to commit mail

fraud where he enters scheme in which it is reasonably foreseeable that mails will be used).

224. People v. Croy, 710 P.2d 392, 398 n.5 (Cal. 1985) (citing People v. Beeman, 674 P.2d



46 INDIANA LAW REVIEW [Vol. 35:5

available degree of criminal homicide for killings occurring during the

commission of certain dangerous felonies, in effect substitutes foreseeability of

death for the intent to cause it.^^^

Foreseeability ofharm is also widely employed as a determinant ofthe harms

to be considered in sentencing. Even before the 200 1 economic crime sentencing
reforms, the Guidelines themselves repeatedly used foreseeability as the dividing

line between those harms which count for measuring offense seriousness and

those which do not.^^^ Inclusion ofreasonably foreseeable harms in the criminal

sentencing calculus has received the imprimatur of the United States Supreme
Court, even in the capital sentencing context.^^^

1318, 1326 (Cal. 1984)). See generally Dressler, supra note 40, § 30.05 [B][5].

225. Some jurisdictions apply the felony murder rule to all deaths caused in fact by the

commission of designated dangerous felonies, on the theory that such felonies always present a

particular risk of death. LaFave& Scott, supra note 34, § 7.5(b), at 624-25. Other jurisdictions
impose a specific requirement that the death in the particular case have been a foreseeable outcome

of defendant's felony. Id. § 7.5(d), at 626-27.

226. See, e.g., U.S.S.G. § IB 1 .3(a)(1)(B) (2000) (dictating that sentencing be based on harms

resulting from the foreseeable conduct of defendant's criminal partners); id. § 2F1.1, app. n.8(c)

(including in "loss" foreseeable consequential damages in procurement fraud and product

substitution cases); see also id. § 2F1.1, app. n.l(a) (authorizing a departure for "reasonably

foreseeable, substantial non-monetary harm"); id. § 2F1.1, app. n. 10(c) (authorizing departure for

"reasonably foreseeable" physical, psychological, or emotional harm); United States v. Samo, 73

F.3d 1470, 1500-01 (9th Cir. 1995) (finding all losses on fraudulently procured loan attributable

to the defendant even where the default was not his fault because it was reasonably foreseeable from

the defendant's conduct that the loan would be approved, hence putting the bank's money at risk.)

227. In Payne v. Tennessee, 501 U.S. 808, 818 (1991), the Court approved the use of victim

impact evidence over the objection that such evidence concerns "factors about which the defendant

was unaware, and that were irrelevant to the decision to kill," and thus had nothing to do with the

"blameworthiness of a particular defendant." (quoting Booth v. Maryland, 482 U.S. 496, 504, 505

( 1 987)). Justice Souter, in his concurrence, responded to this line of argument by observing that

the harms to the surviving victims of homicide (the families, friends, communities, and loved ones

of the deceased) portrayed in victim impact evidence are morally, and therefore legally, relevant

precisely because they are so plainly foreseeable. Said Justice Souter:

Murder hasforeseeable consequences Every defendant knows, if endowed with the

mental competence for criminal responsibility, that the life he will take by his homicidal

behavior is that of a unique person, like himself, and that the person to be killed

probably has close associates, "survivors," who will suffer harms and deprivations from

the victim's death .... The foreseeability ofthe killing's consequences imbues them

with direct moral relevance, . . . and evidence of the specific harm caused when a

homicidal risk is realized is nothing more than evidence of the risk that the defendant

originally chose to run despite the kinds of consequences that were obviously

foreseeable.

Id. at 838-39 (Souter, J., concurring) (emphasis added).

In dissent. Justice Stevens tacitly conceded that impact on surviving victims would be relevant

if foreseeable. His argument was simply that the majority's holding



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 47

A persistent, and in my view ultimately persuasive, argument in favor of
employing notions of causation and reasonable foreseeabiliy to define loss was

that these concepts were familiar tools to judges and lawyers faced with the task

ofdetermining the proper reach ofresponsibility for the harms caused by legally

culpable conduct.^^*

d. A reasonable foreseeability standard requires an assessment of the
defendant 's blameworthiness by requiring a nexus between the defendant 's state

of mind and harms counted as loss.—As noted above, a number of the
participants in the loss debate expressed concern that heavy reliance on a

quantitative measure of loss to determine offense seriousness overemphasized

harm as compared to considerations of mental state and other indicators of
blameworthiness.^^^ In my view, this criticism was somewhat misconceived
because loss, however defined, is always a rough proxy measurement of a

defendant's guilty mind, at least insofar as we can agree that a plan to steal a lot
is more blameworthy than one to steal a little. Moreover, the definition of loss
finally included in the 2001 economic crime package represents an improvement

over the status quo precisely because it requires a judicial judgment about a

defendant's fault for identified harms. It is unjust to put someone in prison for

harms he neither intended nor could reasonably have anticipated would result

from his choice to do wrong. It is entirely appropriate, however, to punish based

on harms that would not have occurred but for the defendant's evil choices, and
which the defendant either anticipated or could and should have anticipated. The
new reasonable foreseeability standard obliges the sentencing court to consider
the facts of the case from the perspective of a reasonable person in defendant's

situation when it separates harms for which a defendant ought justly to be
punished from those for which he should not.

B. The Details ofthe New Definition ofActual Loss

The new consolidated economic crime guideline defines "actual loss" to
mean "the reasonably foreseeable pecuniary harm that resulted from the

permits a jury to sentence a defendant to death because of harm to the victim and his

family that the defendant couldnotforesee, which was not even identified until after the

crime had been committed, and which may be deemed by the jury, without any rational

explanation, to justiiy a death sentence in one case but not in another.

Id at 863 (Stevens, J., dissenting) (emphasis added).

228. The familiarity of these concepts was a theme sounded from the outset of the economic

crime sentencing debate. See Bowman, Coping with "Loss, " supra note 103, at 536; Bowman,

Back to Basics, supra note 1 55, at 1 19.

229. See supra Part IV.A.2.b; see also 1997 Hearing Excerpts, supra note 106, at 162

(colloquy of Commissioner Deannell Tacha and Professor Frank Bowman); id. at 164 (testimony

of Professor Frank Bowman); Newman, supra note Ml, passim', and the comments of Judge Jon

O. Newman, Senior Judge, United States Court of Appeals for the Second Circuit, and others, at

the Second Plenary Session ofthe Third Symposium on Crime and Punishment in the United States,

Oct. 12, 2000, available at http://www.ussc.gov/AGENDAS/symposium.htm.



48 INDIANA LAW REVIEW [Vol. 35:5

offense."^^^ The key term "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."^^' In combination,
these two provisions should prove to be a sound, workable core definition of
actual loss. Several fine points deserve additional analysis.

1. The Limitation to Harm That "Resultedfrom'' the Offense.—
a. "Butfor " causation.—As noted above, the concept of causation in the

law has two elements, cause-in-fact and legal cause.^^^ In the new loss definition,
reasonable foreseeability is the standard for legal cause. The phrase "resulted
from" addresses cause in fact. In its statement of reasons accompanying the
economic crime package, the Commission makes clear that a loss that "resulted
from" an offense is one that would not have occurred "but for" the occurrence of
the offense.^"

b. Temporal limitations on includable losses.—Notice that the phrase
"resulted from the offense" is expressed in the past tense. This choice ofwords

implies that, in order to be counted in loss, pecuniary harms must already have

manifested themselves in some way at the time loss is calculated. The issue of
time-of-measurement of loss is addressed in detail below in Part IV.E.

2. The Meaning of "the Offense ".—^Nearly all of the debate over loss
focused on the concept of harm and the proper definition of the causal link

between culpable conduct and includable harm. Much less discussed was the
question ofwhat conduct should count as the starting point ofthe chain of cause

and effect leading to includable harm. All the early drafts of the loss definition

contained language specifying that loss was harm resulting from conduct for
which the defendant was accountable under the relevant conduct guideline.
Section 1 Bl .B.^^'* The January 2001 CLC draft also included this specification.
The last two Commission staff drafts—^the January 2001 draft published in the

230. U.S.S.G. §2Bl.l,app. n.2(A)(i)(2001).

231. M § 2B1.1, app. n.2(A)(iv).
232. See supra notes 210-12 and accompanying text.

233. See Statement of Reasons, supra note 1 1 7, at 30543 ("The amendment incorporates this

causation standard that, at a minimum, requires factual causation (often called "but for" causation)

and provides a rule for legal causation (i.e., guidance to courts regarding how to draw the line as

to what losses should be included and excluded from the loss determination).").

234. See Bowman, Coping with "Loss, " supra note 103, at 572 (proposing loss definition

limited to harm "caused by the acts and omissions specified in subsections (a)(1) and (a)(2) of §

1 B 1 .3 (Relevant Conduct)"); Final Redefinition, supra note 1 66, at 43 (Draft Loss Redefinition by
USSC Staff, Feb. 20, 1998, limiting loss to harm resulting "from the conduct for which the
defendant is accountable under § 1 B 1 .3 (Relevant Conduct)"); id. at 45 (Proposed Loss Definition,

Apr. 2, 1998 version, limiting loss to harm resulting "from the conduct for which the defendant is

accountable under § IB 1.3 (Relevant Conduct)"); id. at 47 (Proposed Loss Definition, May 1999

StaffDraft, limiting loss to harm resulting "from the conduct for which the defendant is accountable

under § IB 1.3 (Relevant Conduct)"); id. at 49 (CLC Proposed Definition of Loss, Jan. 2001,

limiting loss to harm resulting "from the conduct for which the defendant is accountable under §

1 B 1 .3 (Relevant Conduct)").



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 49

Federal Register^^^ and the March 2001 staff draft^^^—omitted the reference to
the relevant conduct guideline, referring instead simply to "the offense." This

same usage was adopted in the final loss definition.^^^ The Commission's

statement of reasons does not explain this particular drafting choice.

Nonetheless, there is no cause to think it has substantive significance. Rather,

the drafters felt that the cross-reference to Section IB 1.3 was unnecessary

because the relevant conduct rules apply to all offense types.

3. The Limitation to Pecuniary Harm.—The injuries to victims of theft,
fraud, and other "economic" crimes are not necessarily limited to economic

harm. Victims may suffer emotional harm, damage to reputation, disruption of
personal or business relationships, or even physical illness. Because harms of

this sort are often foreseeable to defendants, one might, as the economists say,

"monetize" non-economic harms by assigning monetary values to injuries such

as emotional distress (as courts and juries do routinely in civil lawsuits) and

include the monetary value of foreseeable non-economic harms in loss.

However, there was never any support for including non-economic harms in loss.
Indeed, with a single exception, every draft redefinition of loss advanced during

the five-year debate over the economic crime package, regardless of its

authorship, contained language limiting loss to "pecuniary" or "monetary"

harms.^^^ The new definition specifically excludes non-economic harms by
defining loss to include only "pecuniary harm."^^^ To make the point still clearer,
the new guideline commentary defines "pecuniary harm" as "harm that is
monetary or that is otherwise readily measurable in money. Accordingly,

pecuniary harm does not include emotional distress, harm to reputation, or other

non-economic harm."^"*^

There will doubtless be cases in which courts will need to explore the

235. See January 2001 Commission Draft, supra note 177 (limiting loss to harms resulting

from "the offense").

236. See Final Redefinition, supra note 166, at 51 (Proposed Redefinition of "Loss": Meu*.

2001 Sentencing Commission Staff Draft, limiting loss to harms resulting from "the offense").

237. U.S.S.G. § 2B1.1, app. n.2(A)(i) (2001).

238. E.g., Bowman, Coping with "Loss, " supra note 103, at 572 (proposing loss definition

limited to "pecuniary harm" and stating that "[T]he phrase 'pecuniary harm' is to be given its

common meaning. Many physical and emotional harms, injuries to reputation, etc. can be assigned

a monetary value. However, 'loss' does not measure harms ofthis kind. Its purpose is to measure

economic harms."); Final Redefinition, supra note 166, at 45 (Proposed Loss Definition, Apr. 2,

1998 version, limiting loss to "pecuniary harm"); id. at 47 (Proposed Loss Definition, May 1999
Staff Draft, limiting loss to "pecuniary harm"); id. at 49 (CLC Proposed Definition of Loss, Jan.

2001, limiting loss to "pecuniary harm"); id. at 51 (Proposed Redefinition of "Loss": Mar. 2001

Sentencing Commission Staff Draft limiting actual loss to "monetary loss and property damage").

The only proposed redefinition that did not limit loss to pecuniary or monetary harms was the very

first Commission staff proposal in February 1998, id. at 43 (Draft Loss Redefinition by United

States Sentencing Commission Staff, Feb. 20, 1998).

239. U.S.S.G. § 231. 1, app. n.2(A)(i) (2001).

240. M § 2B1.1, app. n.2(A)(iii).



50 INDIANA LAW REVIEW [Vol . 3 5 :

5

boundaries of the pecuniary harm category. In such cases, courts should be
mindful that a consistent theme throughout the long economic crime package

debate was the concern that defining loss in terms of reasonable foreseeability

would transform federal theft and fraud sentencings into civil damage award
hearings, withjudges obliged to assign monetary values to intangible harms. The
limitation of loss to pecuniary harm, those harms "readily measurable in

money,"^'*' was specifically intended to forestall such wide-ranging inquiries.
4. Product Substitution, Procurement Fraud, and Protected Computer

Cases—Specific Examples of Reasonably Foreseeable Pecuniary Harms or
Special Cases?—^As noted above, the former theft and fraud guidelines contained
a number of opaque and convoluted provisions relating to causation.^"*^ Among
these was the limitation of fraud loss to "direct damages," except in cases of
procurement fraud and product substitution, where "consequential damages"

were to be included in loss if "reasonably foreseeable."^"*^ The former fraud
guideline went on to specify the types ofvictim costs that should be included in

loss in product substitution and procurement fraud cases:

[I]n a case involving a defense produce substitution offense, the loss

includes the government's reasonably foreseeable costs of making
substitute transactions and handling or disposing ofthe product delivered

or retrofitting the product so it can be used for intended purpose, plus the

government's reasonably foreseeable cost of rectifying the actual or

potential disruption to government operations caused by the product

substitution. Similarly, in the case offraud affecting a defense contract

award, loss includes the reasonably foreseeable administrative cost to the

government and other participants of repeating or correcting the

procurement action affected, plus any increased cost to procure the

product or service involved that was reasonably foreseeable.^"^

In light of the fact that the new economic crime guideline defines loss to
include reasonably foreseeable harms for all theft and fraud cases, special

provisions for procurement fraud and product substitution cases might have been

discarded as superfluous. Alternatively, these provisions might have been

retained as examples of the reasonably foreseeable pecuniary harms now to be
included in loss.^"*^ Somewhat oddly, the Commission chose instead to transfer
the precise language ofthe former fraud guideline regarding loss in procurement

fraud and product substitution cases to the new loss definition under the
subheading "Rules of Construction in Certain Cases."^"*^

241. Id.

242. See supra notes 127-35 and accompanying text.

243. U.S.S.G. § 2F1.1, app. n.8(c) (2000).

244. Id.

245. For example, this was the approach taken by thejudges ofthe CLC in their proposed loss

definition. See Final Redefinition, supra note 166, at 49-51 (CLC Proposed Definition of Loss,

Jan. 2001).

246. U.S.S.G. § 2B1.1, app. n.2(A)(v)(I)-(II) (2001).



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 5

1

The retention of special procurement fraud and product substitution
provisions is easily explained from a political perspective. The Department of

Justice insisted on keeping the old language to insure that loss in these cases

would be no less expansive under the new definition than it had been before.
However, the way in which the old language was placed in the new guideline
gives rise to some potential interpretive difficulties. It is unclear whether
sentencing courts should view the procurement fraud and product substitution

subsections only as specific directives in those particular types of cases or also

as examples ofthe reach ofreasonable foreseeability in other types ofcases. The
legislative history ofthe economic crime package tends to support the view that

the procurement fraud and product substitution provisions should be considered

examples and analogies as well as case-type-specific directives. However, the

third provision on the list of "Rules of Construction in Certain Cases" places at

least a shadow of doubt on this construction.
The commentary to the former theft guideline provided that loss in an offense

involving a "protected computer"^"^^ "includes the reasonable cost to the victim

of conducting a damage assessment, restoring the system and data to their
condition prior to the offense, and any lost revenue due to interruption of

service."^'*^ Notice that this language refers to the reasonableness ofthe victim's

costs, but includes no restriction on the foreseeability of such costs to the

defendant. Again in response to Justice Department concerns, the Commission
preserved the special "protected computer" section by inserting it into the new
loss definition, as the third item on the list "Rules of Construction in Certain

Cases."^"*^ Moreover, the Commission revised the old "protected computer"

language before inserting it into the new economic crime guideline. The new
version states that, in protected computer cases, the pecuniary harms listed in the

former guideline are now to be included in loss "regardless of whether such
pecuniary harm was reasonably foreseeable."^^° This added language places
computer cases completely outside the loss paradigm governing all other theft,

fraud, and destruction of property cases.^^' It would also permit an argument
that, in common with the protected computer subsection, the procurement fraud
and product substitution subsections are intended to be read as sui generis, and

not as examples ofreasonably foreseeable harms includable in loss in other types

of case.

247. The term "protected computer" is defined in 18 U.S.C. § 1030(e)(2)(A)-(B) (1994).

248. U.S.S.G. § 2B1.1, app. n.2 (2000).

249. Id. § 2B1.1, app. n.2(A)(v)(III) (2001).

250. Id.

25 1

.

This last-minute addition to the computer crime provision ofthe loss definition seems to

have slipped under the radar. It was not the subject of any public briefing, debate, or discussion

of which I am aware. Candidly, it seems a bad idea, both unjustifiable as a matter of sentencing

theory and unnecessary in practice.



52 INDIANA LAW REVIEW [Vol. 35:5

C Pecuniary Harms Excludedfrom Actual Loss
The new loss definition excludes from loss interest and most investigative

costs. Although such pecuniary harms will often be foreseeable to defendants,

the Sentencing Commission decided that their inclusion in loss would do little
if anything to advance the purposes of sentencing.

1. The Exclusion from Loss of Foreseeable Investigative Costs of the
Government, andCosts Incurred by Victims in Aiding the Government.—One of
the foreseeable consequences ofcrime is that the government will investigate and

prosecute those offenses of which it becomes aware. It is also foreseeable that

victims of crime will assist the investigation. Criminal investigations and

prosecutions cost money. Thus, one might include in "loss" the foreseeable costs

of investigating and prosecuting the defendant's crimes. However, there was
universal agreement that such costs should not affect sentence length.^^^ First,

the amount ofmoney the government spends to investigate and prosecute a case
often depends on fortuitous factors unrelated to the seriousness ofthe offense or

the defendant's overall blameworthiness—considerations such as the
thoroughness ofthe investigators, the number and location ofwitnesses, whether
expert witnesses or specialized forensic techniques are required, and so forth.

Second, even if investigative costs could be shown to bear some rough
relationship to offense seriousness or defendant culpability, the investment of

judicial time and resources necessary to accurately determine investigative costs

would be unlikely to produce commensurate gains in the accuracy of the loss

figure as a measurement of relative culpability between defendants. Therefore,

the new economic crime guideline specifically excludes from loss "[c]osts to the
government of, and costs incurred by victims primarily to aid the government in,

the prosecution and criminal investigation of an offense."^^^

The only point of contention that might arise under this provision is that its
language seems to permit a court to include in loss the investigative costs ofboth

victims and government agencies in connection with civil proceedings. For

example, the government might argue that investigative costs it incurred pursuing

252. No participant in the loss debate ever suggested including investigative costs in loss.

Most of the draft redefinitions of loss included language excluding investigative costs. The first

proposal to exclude such costs referred only to "costs incurred by government agencies in criminal

investigation or prosecution of the defendant." Bowman, Coping with "Loss, " supra note 103, at

573 . The first Commission draft to exclude investigative costs was the April 2, 1 998 version, which

excluded government investigative costs in a background note. Final Redefinition, supra note 1 66,

at 47 (Proposed Loss Definition, Apr. 2, 1998 Version). By May 1999, Commission staff had

expanded the exclusion to embrace "costs incurred by victims primarily to aid the government in,

the prosecution and criminal investigation ofan offense." Id. at 47 (Proposed Loss Definition, May

1999 Staff Draft), This formulation, excluding both government and some private investigative

costs, carried through all subsequent drafts into the final version of the economic crime package.

Id. at 49 (CLC Proposed Definition ofLoss, Jan. 2001 ); id. at 52 (Proposed Redefinition of"Loss":

Mar. 2001 Sentencing Commission Staff Draft).

253. U.S.S.G. § 2B1.1 n.2(D)(ii)(2001).



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 53

administrative remedies or civil forfeiture against the defendant arising out ofthe

offense conduct could be included in loss. Likewise, the prosecution might assert

that legal fees and other costs incurred by victims in private civil actions against

the defendant arising from the offense conduct should also count as loss. How
such arguments will be received by sentencing courts remains to be seen.^^'*

2. The Exclusion from Loss of Interest.—The former theft and fraud
guidelines excluded interest from loss. Application Note 8 to former Section

2FL1 said that loss "does not . . . include interest the victim could have earned
on such funds had the offense not occurred."^^^ Nonetheless, interest proved a

difficult issue in the debate over redefining loss because for some years a number
ofcourts ofappeals had (depending on one's point ofview) either simply ignored

the former Guidelines or interpreted them creatively in order to include

"bargained-for" interest in loss.^^^ The Commission considered two basic

approaches to interest: exclude all interest, including both bargained-for and so-

called "opportunity cost" interest, or include interest only in cases in which the

promise of a return on investment was part of the inducement to fraud
("bargained-for" interest).^^^ After considering the arguments outlined below, the

254. Myown sense, drawn from the fairly limited discussions ofthis particular question during
the loss debates, is that the Commission adopted this language contemplating that certain costs

incurred by victims to discover the existence of a crime or to remedy its financial effects would be

included in loss. The boundaries of this category of includable loss were never discussed in any

detail.

255. U.S.S.G. § 2F1.1, app. n.8 (2000).

256. See United States v. Sharma, 190 F.3d 220, 228 (3d Cir. 1999) (distinguishing

"opportunity cost interest" from "bargained-for interest" and including the latter in loss); United

States V. Nolan, 136 F.3d 265, 273 (2d Cir. 1998) (unpaid interest and penalty fees included in

loss); United States v. Gilberg, 75 F.3d 15, 19 (1st Cir. 1996) (including $726,637 in accrued

mortgage loan interest); United States v. Goodchild, 25 F.3d 55, 65 (1st Cir. 1994) (including

finance charges and late fees in loss from unauthorized credit card use); United States v. Henderson,

19 F. 3d 917, 928 (5th Cir. 1994) ("Interest should be included if . . . the victim had a reasonable

expectation ofreceiving interest from the transaction."); United States v. Jones, 933 F.2d 353, 354-

55 (6th Cir. 1991) (finding interest should be included where defrauded credit card companies had

reasonable expectation ofspecific return on credit extended); cf. United States v. Guthrie, 144 F.3d

1006, 1011 (6th Cir. 1998) (holding inclusion of interest lost by creditors of defendant in

bankruptcy fraud scheme was erroneous); United States v. Clemmons, 48 F.3d 1 020, 1 025 (7th Cir.

1 995) (finding loss includes bargained-for interest), overruledby United States v. Allender, 62 F.3d

909, 917 (7th Cir. 1995); United States v. Moored, 38 F.3d 1419, 1423-24 (6th Cir. 1994) (stating

in dictum that loss does not include interest); United States v. Lowder, 5 F.3d 467, 471 (10th Cir.

1993) (holding interest should be included where defendant promised victims a specific interest

rate).

The Fourth Circuit excluded interest categorically. See United States v. Hoyle, 33 F.3d 415,

419 (4th Cir. 1994); see also United States v. Allen, 88 F.3d 765, 771 (9th Cir. 1996).

257. The April 2, 1 998 Commission draft includes as Option 1 the exclusion ofall interest and

similar costs, and as Option 2 the exclusion of all interest except that "bargained for as part of a

lending transaction that is involved in the offense." Final Redefinition, supra note 166, at 45



54 INDIANA LAW REVIEW [Vol. 35:5

Commission decided on a categorical exclusion of interest ofall types from loss.
The new economic crime guideline states: "Loss shall not include . . . [i]nterest
of any kind, finance charges, late fees, penalties, amounts based on an agreed-

upon return or rate of return, or other similar costs."^^*

a. An analysis ofthe argumentsfor inclusion ofinterest.—Consistency with
the core definition of loss suggests inclusion of interest. If a criminal steals

money that the victim would otherwise have loaned to or invested with an honest
person or institution, it is reasonably foreseeable that the victim will lose not only

his principal, but also the time value of that money. Loss of the time value of

money is, from an economic point ofview, indisputably a "harm" suffered by the
victim ofa fraud. But the consistency argument proves too much. If "loss" is to

include the time value of stolen money, then consistency dictates that time value

should be included not only when the defendant defrauds a victim by promising
payment of "interest," but also when he promises a return on investment in the
form of"dividends," "capital gains," or "profits." A defendant's sentence should
not turn on the fortuity of the name used to characterize the promised return on
investment. Likewise, a victim suffers the harm of lost time value of his money
even if the scheme is one that involves no promise of return on investment. For

example, an insurance company defrauded by an insured who torches his own
business and then collects fire insurance proceeds is deprived ofthe time value

ofthe insurance payout no less than it would be ifthe company had lost the same
amount by investing it with a crooked stock broker who falsely promised a high
rate of return.

b. "Bargained-for" interest.—The approach ofthose courts which sought
to evade the former prohibition against interest by including interest specifically

promised by a defendant as part of the inducement to the victim to part with his

money gave rise to strong theoretical and practical objections.
First, "loss" is primarily a measurement of harm actually suffered by the

victim, not of the magnitude of the false promises of the crooked defendant. If

a defendant defrauded Victim A by promising payment often percent interest
monthly, A's "actual loss" is not his principal plus 120% annual interest because
there was never a realistic possibility that the defendant or anyone else would
pay him interest at that rate. The only reliable measure ofwhat the victim lost
by giving his money to the defendant rather than investing it with an honest
person is the market rate for invested money. (And even this is highly
speculative because there is no way ofknowing whether the victim would indeed
have invested it.)

Second, using the interest rate promised by defendants creates a disparity of

punishment between similarly situated defendants. Three defendants who stole
the same amount ofmoney should not receive different sentences merely because
the first falsely promised his victims a fifty percent return, the second promised

100%, and the third committed a form of fraud (like the arsonist who defi-auded
his fire insurer in the example above) that involved no promise of return on

(Proposed Loss Definition, Apr. 2, 1998 Version).

258. U.S.S.G. § 2B1.I, app. n.2(D)(i) (2001).



2001] FEDERAL ECONOMIC CRIME SENTENCING REFORM 55

investment. Likewise, two defendants who stole the same amount of money by
falsely promising a twenty-five percent return on investment should not receive

different punishments because the first characterized the promised payment as

"interest," while the second happened to call the promised payment "dividends."

Third, using different interest rates in every case adds to sentencing

complexity. There will be inevitable disputes over exactly what rate of return

was promised. Particularly in multi-victim fraud cases, it will often prove that

the defendant promised different rates of return to different victims. In such

cases, the court would not only have to make findings about exactly what was
promised each of perhaps dozens or hundreds of victims, but then someone
would have to do the resulting math to arrive at a loss number.

Courts may have been drawn into including bargained-for interest by two
unarticulated lines ofthought. The first is an unconscious reversion to memories

of first-year contracts and the recollection that aggrieved contract litigants are

often entitled to the "benefit of the bargain" as a measure of damages.^^^ But

calculation of loss in a criminal sentencing is not a contracts problem. In

contracts, courts are concerned, not with punishment of the morally

blameworthy, but with enforcement of (primarily commercial) agreements.^^^

The benefit ofthe bargain rule, when it is applicable, focuses on ensuring that the
non-breaching party is disadvantaged as little as possible by the breach of the

agreement, not on measuring moral culpability ofthe party in breach. Moreover,

even in contracts, the prevailing litigant is only sometimes entitled to the benefit

of his bargain; other measures of damages are as or more common.^^'
The second idea that may lie behind the "bargained for" interest cases is the

notion that the magnitude ofthe defendant's false promises is somehow a proxy
measurement for the defendant's blameworthiness. This, however, is a false

equivalency. A crook who euchres a victim out of $1000 by falsely promising
a ten percent monthly return is by no rational calculation either more or less

blameworthy than another crook who inveigles the victim into parting with the
same $1000 with a false promise of a fifteen percent monthly return. The harm
to the victim in both cases is the same, and the true measure of each defendant's

blameworthiness is his settled desire to cheat the victim of$1 000, rather than the

259. See, e.g. , JOHN EDWARD MURRAY, JR., MURRAY ON CONTRACTS § 2 1 9, at 438 (1 974).
Murray posits that

The purpose ofcontract law is often stated as the fulfillment ofthose expectations which

have been induced by the making of a promise. If the promise is breached the legal

system protects the expectations by attempting to place the injured promisee in the

position he would have been in had the promise been performed.

Id.

260. "The law of contracts is concerned with the securing and protection of those economic

interests which result from assurances." M § 1, at 2.
26 1

.

See, e.g. , RESTATEMENT(SECOND)OF CONTRACTS § 344, app. a ( 1 979) (emphasizing that

securing to a non-breaching promisee the benefit ofhis bargain is only one ofthree interests served

by the law of remedies for breach of contract, the other two being reliance and restitution, and that

the relief granted "may not correspond precisely to any of these interests").



56 INDIANA LAW REVIEW [Vol. 35:5

particular false promises he makes in his efforts to do so. In short, among the
competing proposals regarding interest, the "bargained for" interest option was
the least desirable of the lot.

c. Additional argumentsfor total exclusion ofinterest.—Including interest
introduces all the problems of equity between defendants and complexity of

calculation just discussed, but does little to make loss a more accurate measure
of relative offense seriousness. Indeed, even when interest is assessed at
differing rates for different defendants,^^^ the interest component of loss is in

some significant degree a proxy measurement, not ofrelative offense seriousness,
but of the length of time elapsed between the taking of the money and the date
that loss is measured preparatory to sentencing. For example, assume two
defendants each steal $10,000 by the same means on the same date, but one is
sentenced six months and the other eighteen months after the crime. If loss is

measured as of the date of the sentencing, the defendant sentenced later would
have more interest added to his loss figure and therefore, at least potentially,
would receive a longer sentence. This is an absurd and unjust result. Even if
loss is to be measured at the time of detection,^^^ then accrued interest becomes

a proxy measurement for the length oftime the defendant evaded detection. This

may arguably bear some attenuated relationship to culpability, but it is a long
stretch.

d. The Commission 's decision to exclude interest.—The Commission seems
to have been convinced that courts should not expend valuable resources on

quantifying interest as an element of loss when the result of the labor advances
the purposes ofsentencing so little. In its statement of reasons, the Commission
wrote that, "This rule [that interest should be excluded from loss altogether] is

consistent with the general purpose ofthe loss determination to serve as a rough

measurement ofthe seriousness ofthe offense and culpability ofthe offender and

avoids unnecessary litigation regarding the amount of interest to be included."^^

e. The upward departure for interest.—Despite the blanket exclusion of
interest and related costs from loss itself, the Commission nonetheless adopted

a provision listing interest as a factor that might support an upward departure.

An upward departure may be warranted if "[t]he offense involved a substantial

262. Had the Commission decided to include in "loss" interest of any type, I would have

recommended that the guidelines adopt a standard interest rate for all defendants. This would

ameliorate some ofthe problems identified above. It would accurately measure the true economic

worth of the harm suffered by victims fraudulently deprived of the time value of their money, and

it would eliminate the inequities created by calculating the sentences of defendants who stole

identical amounts based on the fortuity of the particular false promises they made. Federal law

establishes a rate to be paid to litigants in civil cases in 28 U.S.C. § 1961 (1994). If interest in any

form were to be added into "loss," the simplest, most equitable, and most theoretically sound way

of doing so would be to use a standard statutory rate. For further discussion on this point, see

Bowman, Coping with "Loss, " supra note 103, at 540-41.

263. See infra Part IV.E (discussing time-of-measurement provisions of the new economic

crime guideline).

264. Statement of Reasons, supra note 1 1 7, at 30543.



2001] FEDERAL ECONOMIC CRIME SENTENCING REFORM 57

amount of interest of any kind, finance charges, late fees, penalties, amounts

based on an agreed-upon return or rate of return, or other similar costs, not

included in the determination of loss for purposes of subsection (b)(l)."^^^

Considered strictly on the merits, this provision seems difficult to justify. The
point ofexcluding interest is that including it produces difficulties in calculation,

invites disparate sentences, and is unlikely to make the resulting loss figure any
more accurate a measure of relative culpability. A categorical exclusion
produces substantial gains in simplicity and clarity. Circuit courts have already

proved remarkably adept at slipping interest into loss, even in the face of the

existing prohibition against it.^^^ Leaving the back door ajar by putting in a

departure provision would seem to risk more of the same. Moreover, with no
guidance as to what a "substantial" amount of interest might entail, the language

seems likely to prove difficult to interpret, and pregnant with the possibility of

unjustifiable disparity between similarly situated defendants.^^^ At all events the

Commission contemplates that an upward departure based on a substantial
amount of interest will be "rare."^^^

D. "Net'* vs. "Gross " Loss: The Problem ofAccountingfor Things of
Value Transferred to the Victim by the Defendant

In many economic crime cases, particularly those involving fraud in some
form, a defendant will transfer or return something ofvalue to the victim as part

of the scheme. Even in simple theft or embezzlement cases a defendant will

sometimes return all or part of the money or property stolen before the crime is
detected by either the victim or authorities. Because loss is a measurement ofthe

economic harm suffered by the victims of a defendant's criminal conduct, the
question then arises whether loss is "net" or "gross." That is, should the value

ofthe money or property abstracted from the victim be offset by the value ofthe
money or property transferred or returned to the victim by the defendant? In the
debates over the economic crime package, this question was often referred to as
the "crediting" problem.

1. The Law Under the Former Theft and Fraud Guidelines.—Crediting
issues were a frequent subject of opinions construing the loss provisions of the

former theft and fraud guidelines. The most commonly encountered problems
were:

(a) whether a defendant should be given credit for repayments or recoveries

265. U.S.S.G. §2Bl.l,app.n.l5(A)(iii)(2000).

266. See note 256 and accompanying text.

267. For the reasons stated in the text, thejudges ofthe CLC opposed a departure for interest.
See CLC Comments, supra note 1 82, at 42; Bowman, supra note 1 78, at 474. The inclusion of an
interest departure was a concession to the Justice Department in the bargaining leading up to the

final April 2001 vote on the economic crime package.

268. "[T]he amendment provides that a departure may be warranted in the rare case in which

exclusion of interest will under-punish the offender." Statement of Reasons, supra note 11 7, at

30543.



58 INDIANA LAW REVIEW [Vol. 35:5

made after discovery of the crime, but before sentencing;
(b) whether a defendant should be given credit for amounts or assets pledged

as collateral as part of a fraudulently induced transaction;

(c) whether a defendant should be given credit for repayments made after the
completion of the theft or fi-aud, but before detection of the crime; and

(d) whether a defendant should be given credit in the calculation of actual

loss for anything ofvalue he gives to victims as part ofa scheme to deprive them
of money or property.

The answers to the first and second questions were clear. First, payments
made by the defendant or recoveries ofproperty occurring after discovery ofthe
crime but before sentencing, were not credited to the defendant.^^^ The only
arguable exception to this first general rule was created by a second general
rule—assets pledged by a defendant to a victim as part ofa fraudulently induced
transaction were credited against loss regardless of whether the victim took

control of the pledged asset before or after detection of the crime.^^^

The more difficult questions arose in addressing the third and fourth

269. Kg., United States v. Stoddard, 150 F.3d 1140, 1146-47 (9th Cir. 1998) (refusing to

credit post-detection repayments against loss); United States v. Pappert, 104 F.3d 1 559, 1 568 (1 0th

Cir. 1 997) (refusing to credit repayments made after detection, but before arrest); United States v.

Smith, 62 F.3d 1073, 1079(8thCir. 1995) (finding credit card fraud defendant responsible for total

eimount of unauthorized charges and giving no credit for items obtained by fraud, but later

recovered); United States v. Akin, 62 F.3d 700, 702 (5th Cir. 1995) (presentence restitution did not

reduce loss calculation); United States v. Graham, 60 F.3d 463, 467-68 (8th Cir. 1995) (result of

loss calculation not be reduced merely because defendant's fraudulent scheme was not entirely

successftil); United States v. Asher, 59 F.3d 622, 625 (7th Cir. 1995) (fact that check-kiting

defendant immediately repaid $160,000 overdraft outstanding at time of discovery does not affect

"loss" figure); United States v. Norris, 50 F.3d 959, 961-62 (Uth Cir. 1995) (holding that

repayments on student loan came to late to reduce loss); United States v. Mau, 45 F.3d 2 1 2, 2 1 6- 1

7

(7th Cir. 1 995) (arranging a fully collateralized repayment plan after discovery will not reduce loss);

United States v. Bean, 18 F.3d 1367, 1369 (7th Cir. 1994) (no departure for pre-sentence

restitution); United States v. Carey, 895 F.2d 318, 323-24 (7th Cir. 1990) (reversing a district

court's downward departure for presentencing restitution, noting that restitution may be relevant

to acceptance of responsibility under Guidance Section 3E1.1, or to a departure under Section

5K2.0, if extraordinary, but that mere restitution was not enough).

270. Pursuant to Guidelines Section 2F. 1 . 1 , app. n.8(b) (2000), actual loss was "the amount

of the loan not repaid at the time the offense is discovered, reduced by the amount the lending

institution has recovered (or can expect to recover) from any assets pledged to secure the loan."

Id. In general, courts construing this provision routinely deducted the value of pledged collateral

from loss; however, there remained some disagreement over fine points. See Roger W. Haines,

JR, Frank O. Bowman, III, & Jennifer C. Woll, Federal Sentencing Guidelines Handbook
485-86 (Nov. 2000 ed.) (discussing treatment of collateral in the measurement of fraud loss under

the former fraud guideline); see also John D. Cline, Calculation of Loss Under the Sentencing

Guidelines, 9 GEO. MASON L. Rev. 357, 363 (2000) (stating that "several courts have stated that
the actual loss is the amount ofthe loan not repaid at the time of sentencing, reduced by the value

of any security pledged by the defendant," and collecting cases).



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 59

problems listed above—^whether to credit defendants for repayments made prior
to detection but after "completion" of the offense, and whether to credit

defendants for things of value transferred to victims by the defendant as part of

the scheme to obtain the victims' money or property.
For example, there was general agreement that a defendant should be given

credit for anything of value he transfers to a victim in return for the money or
property obtained by fraud. The commentary to the former fraud guideline

required that in a case offraudulent misrepresentation ofthe value ofgoods, any

loss suffered by the victim must be offset by the value ofthe goods delivered by
the defendant.^^^ Moreover, the courts of appeals held that in almost all

economic crime cases with a flavor of fraud that the Guidelines' insistence on a
measurement of net detriment to the victim was not limited to cases involving
misrepresentation of the value of goods.^^^ On the other hand, as will be

271. U.S.S.G. § 2F.1, app. n.8(b) (2000) stated:

A fraud may involve the misrepresentation of the value of an item that does have some
value (in contrast to an item that is worthless). Where, for example, a defendant

fraudulently represents that stock is worth $40,000 and the stock is worth only $ 1 0,000,

the loss is the amount by which the stock is overvalued (i.e. $30,000). In a case

involving a misrepresentation concerning the quality ofa consumer product, the loss is

the difference between the amount paid by the victim for the product and the amount for

which the victim could resell the product received.

272. See United States v. Barnes, 125 F.3d 1287, 1290-91 (9th Cir. 1997) (finding that the

sentencing court erred in failing to consider benefits the defendant provided a plasma center while

fraudulently impersonating a doctor, and holding that "the victim has sustained no loss because he

received the services for which he bargained, despite the fact that he received them from a person

who was not legally authorized to offer them."); United States v. Sublett, 124 F.3d 693, 695 (5th

Cir. 1 997) (vacating the defendant's sentence in a contracting fraud case where the trial court failed

to give the defendant credit against the loss amount for legitimate services he provided or intended

to provide, and holding that, "The district court therefore must deduct the value of the legitimate

services actually provided by [defendant's] operation under the first contract and those that he

intended to provide under the second contract in its calculation of the loss under section

2F 1.1 (b)(1)."); United States v. Williams, 1 1 1 F.3d 139, 1997 WL 187342 at *4 (9th Cir. 1997)
("Consistent with our prior cases, 'actual loss' under the guidelines should be measured as the 'net

loss' flowing from the defendant's conduct."); United States v. Pappert, 1 04 F.3d 1 559, 1 568 ( 1 0th

Cir. 1997) (holding that the sentencing court should calculate "net loss by subtracting the value of

what was given to the victim(s) during the course of the transaction from the value of what was

fraudulently taken"); United States v. Carroll, 87 F.3d 1315, 1996 WL 266425, at *3 (6th Cir.
1 996) (unpublished disposition) ("The guidelines do require the district court to determine the net

loss."); United States v. Kohlbach, 38 F.3d 832, 840-42 (6th Cir. 1994) (where defendants

fraudulently sold adulterated orange juice containing beet sugar instead of pure orange juice

concentrate, loss calculated by subtracting wholesale price of beet sugar from price of orange

concentrate, then multiplying by amount of sugar used in the adulterated juice); United States v.

Harper, 32 F.3d 1387, 1391 (9th Cir. 1994) (holding actual loss "is a measure of what the victims

of the fraud were actually relieved of," or the net loss to the victim) (citing United States v.

Haddock, 12F.3d950,961 (10th Cir. 1993)); United States v. Lavoie, 19 F.3d 1102, 1105 (6th Cir.



60 INDIANA LAW REVIEW [Vol. 35:5

discussed in detail below, a number of courts declined to credit defendants in
"Ponzi" scheme investment frauds with pre-detection repayments to early
mvestors.

Similar discrepancies arose in cases that looked more like theft or
embezzlement than fraud. On the one hand, the net loss rule applied to fraud
cases was universal in check-kiting schemes. The courts held that the proper
measurement of"loss" in a check-kiting case is the actual loss to the victim bank
as reflected by the amount ofthe overdraft at the time the kite is detected.^^'* On
the other hand, courts took very different approaches to other closely related

forms of stealing from banks. In UnitedStates v. Johnson^^^ a credit union clerk

"embezzled" $88,483.41 by transferring it to a dummy account in the credit
union and then withdrawing it a«^"misapplied" another $3 1 8,9 1 5 by transferring
it to another account in the credit union, but not withdrawing it. She turned

herself in before withdrawing the $3 18,915. The Eighth Circuit held that the loss

1994) (loss based on actual or expected loss, rather than face value of total loan proceeds);

Haddock, 12 F.3d at 961 (holding that in determining actual loss, "only net loss is considered;

anything received from the defendant in return reduces the actual loss."); United States v. Whitlow,

979 F.2d 1008, 1012 (5th Cir. 1992) (holding that the loss incurred by consumers to whom
defendant fraudulently sold cars with altered odometers was the price paid by the victim to the

defendemt less the market value ofthe vehicles as measured by their resale value); United States v.

Sloman, 909 F.2d 176, 182 (6th Cir. 1990) (insurer's net out-of-pocket loss due to defendant's

fraudulent acts was proper basis for determining the defendant's sentence). In United States v.

Palmer, the court upheld the district court's loss calculation against defendant's complaint that

court failed to credit him "for the value of products received by the victims, refunds, bounced

checks, and stop payment orders." 122 F.3d 215, 222 (5th Cir. 1997). The opinion impliedly

conceded that such offsets were proper, but relied on the district court's finding that "the

government, which generated the total loss figure, had done its best to exclude such items from its

calculations." Id See also United States v. Peterson, 101 F.3d 375, 383-384 (5th Cir. 1996)

(agreeing with the district court that defendant in stock fraud scheme should be credited with

amounts paid to investors as returns, but not with money defendant claimed an intention to repay);

United States v. Krenning, 93 F.3d 1257, 1269 (5th Cir. 1996) ("the focus of the loss calculation

should be on the harm caused to the victim of the fraud," citing with approval, United States v.

Orton, 73 F.3d 33 1 , 333 (1 1th Cir. 1 996), in which the Eleventh Circuit adopted a net loss approach

to determining loss in Ponzi schemes).

273. See infra notes 290-98 and accompanying text.

274. See HAINES, BOWMAN, & WOLL, supra note 270, at 489-91 (collecting cases). The
defendant is also entitled to a limited class of immediately available offsets. See United States v.

Flowers, 55 F.3d 218, 222 (6th Cir. 1995) (finding loss in check kite is the "gross amount of the

loss at the time of the detection of the fraud . . . , less funds available for offset . . . and secured

collateral"); United States v. Shaffer, 35 F.3d 1 10,

1

14-15 (3d Cir. 1994) (holding in check-kiting

scheme that loss is amount of outstanding bad checks at time of discovery less applicable offsets);

United States v. Marker, 871 F. Supp. 1404, 1409 (D. Kansas 1994) ("[A]ctual loss should be

calculated as it exists at the time of detection rather than at sentencing.").

275. 993 F.2d 1358, 1358-59 (8th Cir. 1993).



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 6

1

included the embezzled $88,000, but not the misapplied $3 18,915.^^^ Likewise,

in UnitedStates v. Shattuck,^^^ the First Circuit indicated in dicta that the amount

of "victim loss" in an embezzlement does not include the amount of misapplied

funds that remained in a bank account.^^^

The Third and Seventh Circuits took a contrary position. In United States v.
Strozier^^ the Seventh Circuit held that where the defendant fraudulently

deposited $405,000 into a bank account, but withdrew only $36,000, the loss was
$405,000.^^° In United States v. Kopp^^^ the Third Circuit discussed in dictum

the situation of a hypothetical clerk who intends to withdraw the money, invest
it, and then return it.^^^ It noted that, while the "amount taken" would be the
amount invested, if the clerk was successful and returned the money without
detection, both the intended and actual loss would appear to be zero. The court
appeared to view this as an unacceptable result, implying that the proper measure

of loss was the whole amount.^*^
2. The New Economic Crime Guidelines Adopt a Net Approach to Loss,—

Throughout the long process of forging an economic crime package, crediting

loomed as a troublesome issue. As the previous section suggests, existing case
law was extensive, dense, and often contradictory. The theoretical issues were
complicated. Many of the interested parties had strong views on particular
comers of the problem.^*'* On balance the new guideline seems theoretically

276. Id. at 1 359. The apparent theory was that there was not a "taking" as to the larger sum.

For a discussion regarding the problems flowing from the use of the term "taken" in Guideline

Section 2B1. 1, Application Note 2. See supra notes 92-102.

277. 961 F.2d 1012 (1st Cir. 1992). Shattuck is cited with approval in Johnson, 993 F.2d at

1359 n.2.

278. 961F.2datl017.

279. 981 F.2d 281 (7th Cir. 1992). Strozier is cited with approval in United States v. Yusufu,

63 F.3d 505, 513 (7th Cir. 1995).

280. 981F.2dat284.

281. 951 F.2d521(3dCir. 1991).

282. /^. at 530 n. 13.

283. The court says that "embezzlement, unlike ordinary theft or fraud, involves not only a

taking but also an action akin to a breach of fiduciary duty, which might justify always using the

amount taken as 'loss'." Id.\ see also United States v. Mount, 966 F.2d 262 (7th Cir. 1992)

(Easterbrook, J.). Defendant stole baseball playoff tickets with a face value of $12,000 and sold

them in a block to a scalper for $30,000. Id. at 264-66. Integral to the scheme was the necessity

of placing $12,000 in the baseball team's account to cover up the theft; presumably, the money

would come from the sale to the scalper. Id. at 266. The court suggested defendant's intention to

repay, and perhaps his success in doing so, do not matter: "An embezzler who abstracts $10,000

to invest in the stock market causes a 'loss' of $10,000 even if he plans to repay before the next

audit (to avoid detection) and even if he invests in only blue chip stocks." Id. at 266.

284. See, e.g., 1997 Hearing Excerpts, supra note 106, at 164 (testimony of Judge Gerald

Rosen regarding crediting rules in Ponzi scheme investment frauds); Pflaumer & Spearing, supra
note 1 68 (discussing Justice Department concerns over crediting provisions ofFebruary 1 998 draft

loss definition).



62 INDIANA LAW REVIEW [Vol. 35:5

sound and a fair accommodation of most of the most commonly expressed
concerns.

The new economic crime guideline comes down firmly in favor of the
proposition that loss is a measurement ofeconomic harm to victims and therefore

must be a measurement of net economic deprivation. It states as a general rule

that: "Loss shall be reduced by . . . [t]he money returned, and the fair market
value of the property returned and the services rendered, by the defendant or

other persons acting jointly with the defendant, to the victim before the offense

was detected."^^^ In addition, the new guideline addresses two specific recurring
problems in the area of credits against loss—^the problem of investment fraud
cases, and issues surrounding regulatory offenses and unlicensed

professionals—and provides a timing rule for including credits.
The following sections will analyze the language ofthe general credits rule,

as well as the particular provisions goveming investment fraud, and regulatory

offenses. Finally, I will address an issue not covered by the new guideline: items
ofde minimis value provided to victims by defendants. Discussion ofthe timing

rule for credits will be deferred until the discussion in Part IV.E oftiming of loss

measurement.

3. The Language of the New Crediting Rule.—The new crediting rule
contains one imprecise use of language that might have proven potentially

troublesome were it not for the clarification provided by the Commission's

statement of reasons.^^^ The rule says loss is to be "reduced by . . . [t]he money
returned, and the fair market value of the property returned and the services

rendered, by the defendant "^^^ Read literally, the word "returned" might be

construed to mean that the only things to be credited against loss are money or
property that the defendant obtained from and later gave back to a particular

victim. This reading would exclude from the crediting rule anything the

defendant transferred to a victim that the victim had not possessed in the first

place. For example, it would eliminate the credit explicitly provided under the

former fraud guideline for the $10,000 fair market value of stock purchased by

a victim in reliance on the defendant's fraudulent misrepresentation that the stock

was worth $40,000.^*^ In such a case, the defendant would not be "returning" the
undervalued (but valuable) stock because the victim never owned it prior to the

285. U.S.S.G. § 2B1.1, app. n.2(E)(i) (2001).

286. The new crediting rule contains a second verbal imprecision of primarily theoretical

concern. It speaks of "reducing loss" by the value of money, property and services passing from

the defendant to the victim prior to detection. Properly speaking, since loss is the net economic

detriment suffered by the victim in consequence of the defendant's conduct as of the time of

detection, loss is not "reduced" by the value of things transferred from the defendant to the victim.

Rather, loss is defined as the difference in value between what the victim parted with and what the

defendant transferred to the victim. For this reason, the CLC draft says that "[l]oss shall be
determined by excluding" benefits provided to victims by defendants prior to detection. Final

Redefinition, supra note 1 66, at 49. The difference is minor, but potentially valuable.

287. U.S.S.G. § 2B1.1, app. n.2(E)(i) (2001) (emphasis added).

288. Id § 2F1.1, app. n.8(a) (2000).



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 63

fraudulent transaction.

A construction of the new rule based on a literal reading of the word
"returned" would be disastrous, absurd in theory and exclude many cases the
Commission plainly intended to cover. Fortunately, both the legislative history
ofthe crediting provision, and more particularly, the Commission's statement of
reasons accompanying the new economic crime guideline, make clear that the
Commission intends the crediting provision to be a general rule covering all
economic benefits passing from the defendant to the victim prior to detection.

In its statement of reasons, the Commission wrote:

The loss definition also provides for the exclusion from loss of certain
economic benefits transferred to victims, to be measured at the time of
detection. This provision codifies the "net loss" approach that has

developed in the case law, with some modifications made for policy
reasons. This crediting approach is adopted because the seriousness of

the offense and the culpability ofa defendant is better determined using

a net approach. This approach recognizes that the offender who
transfers something of value to the victim(s) generally is committing a

less serious offense than an offender who does not.^^^

4. Investment Fraud Cases.—Under the former fraud guideline, courts
adopted three different approaches to credits for amounts returned to the victims

of investment schemes with more than one victim (such as so-called "Ponzi
schemes") in which the defendant repays money to early victims in order to
continue the scheme or avoid detection. The Second, Fourth, Fifth, Sixth, and
Ninth Circuits held that payments made to Ponzi scheme victims are not
deductible from the "loss" figure.^^^ The theory of these cases was that a
defendant should receive no credit for such payments because they are a

necessary part ofthe scheme designed to gain the investors' confidence in order

to secure additional investments and to forestall discovery of the scheme. The
Seventh Circuit considered the victims as a class and took a net loss approach:

the loss is the amount taken from the class ofvictims by the defendant minus the

amount given back to the class of victims by the defendant.^^' The Eleventh
Circuit found a middle ground, adopting a "loss to the losing victims"

289. Statement of Reasons, supra note 1 17, at 30543.

290. United States v. Munoz, 233 F.3d 1 1 1 7 (9th Cir. 2000); United States v. Deavours, 2 1

9

F.3d 400 (5th Cir. 2000); United States v. Loayza, 107 F.3d 257 (4th Cir. 1997); United States v.

Carrozzelia, 105 F.3d 796 (2d Cir. 1997); United States v. Mucciante, 21 F.3d 1228 (2d Cir. 1994);

United States v. Dobish, 102 F.3d 760 (6th Cir. 1996). At one point, the Fifth Circuit seemed to

be leaning toward the Eleventh Circuit's "loss to the losing victims" approach, see United States

V. Krenning, 93 F.3d 1257, 1269 (5th Cir. 1996) ("the focus of the loss calculation should be on

the harm caused to the victim of the fraud," citing with approval. United States v. Orton, 73 F.3d

331,333 (11th Cir. 1 996)), but the Fifth Circuit, in DeovoMA-j took a different course. 219F.3dat

403.

291. United States v. Holiusa, 13 F.3d 1043, 1045-46 (7th Cir. 1994).



64 INDIANA LAW REVIEW [Vol. 35:5

approach.^^^ Under this theory, the loss is the total amount lost by those victims
who were out money at the time ofthe scheme's discovery. Those investors who
received repayments in excess of their original investment are not considered

"victims" at all. Therefore, their windfalls are not counted towards reducing the

losses of other investors.^^^

The refusal of the Second, Fourth, Fifth, Sixth, and Ninth Circuits to give
credit for any payments to early investors was troublesome even as an
interpretation of the former guidelines. The reasoning ofthese courts was even
less persuasive as a guide to what the law should be. First, giving no credit for
repayments ran contrary to the basic "net loss" approach embodied in former

Section 2FL 1, Application Notes 8(a) and 8(b), as well as the plentifiil case law
endorsing the net loss approach.^^'* Second, as a matter of policy, because the

function of the loss figure is to measure economic harm to victims, it must
distinguish between greater and lesser harms. A scheme in which a defendant
takes and keeps $10,000 causes more economic harm than one in which the
defendant takes $10,000, but gives back $5000.

Third, the rationale for the court-created "Ponzi scheme exception" to the

basic net loss rule—^that defendants deserve no credit for payments made solely
to perpetuate the scheme—ifwritten into the guidelines as a caveat to the general
rule that "actual loss" is a net concept, would swallow the general rule and

eliminate virtually all credits.^^^ No defendant truly bent on fraud confers
benefits on his victims out ofbenevolence or a sense ofsound commercial ethics.

Any swindler who can will steal without incurring any overhead. Thus, almost
all payments and transfers by defendants to victims are made in some sense to
further the success of the scheme.

Consider four cases: (A) a man steals my wallet containing $ 1 0,000; (B) a
man convinces me to give him $10,000 in exchange for stock he knows to be
worth $5000; (C) a man convinces me to give him $10,000 in exchange for his
promise to pay me $13,000 next Tuesday, but actually pays me only $8000
(hoping that this payment will be sufficient to prevent me from going to the
police); and (D) a man lies about his assets and convinces me to loan him
$10,000 in exchange for an unfulfilled promise to repay the money with interest,
collateralized by a security interest in real property worth $9000. Assume in
each case that the defendant' s purpose throughout was to steal. Under a crediting

rule with a "perpetuation" exception, the defendant who steals my wallet with
$10,000 in it, of course, gets no credit because he gave nothing back. The
defendant who gave me stock he knew to be worth only $5000 in return for my

292. United States v. Orton, 73 F.3d 331, 334 (1 1th Cir. 1996).

293. See id.

294. See supra notes 270-73 and accompanying text.

295

.

The tendency ofthese investment cases to erode the general net loss principle can be seen

in UnitedStates v. Blitz, 1 5 1 F.3d 1 002, 1 1 2 (9th Cir. 1 998), in which the court denied defendant

telemarlceters credit for pre-detection refunds and other payments to victims on the ground that such

payments were merely necessary incidents to the execution ofthe scheme. The court equated such

payments with defendants' payment of their phone bills.



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 65

$10,000 would, under a "perpetuation" rule, get no credit for the $5000 because

the purpose of giving it to me was to convince me to part with my money and to
avoid criminal prosecution by giving me something ofarguable economic value.
Likewise, neither the defendant who made a partial payment of $8000 in order
to dissuade me from going to the police, nor the defendant who pledged $9000
in collateral to obtain the loan, would be credited. In each ofthe cases above, the

defendant gave me money or property in order to convince me to part with my
own or to forestall apprehension and punishment. Consequently, a "perpetuation
exception" has the effect of wiping out the general principle that "loss" is a net

concept, and therefore the effect of treating identically cases in which the

economic harm to the victims is incontestably quite different. In investment

fraud schemes as elsewhere, the difference in harm caused should be reflected
in the sentence imposed.

The Seventh Circuit's approach of considering the net loss to the victim
investors as a class was likewise questionable because windfalls bestowed on
early investors in a Ponzi scheme do nothing to reduce the harm inflicted on later

investors left holding the bag.^^^

In its new economic crime guideline, the Commission expressly adopted the
Eleventh Circuit's "loss to the losing victims" approach to muhi-victim fraud

schemes.^^^ Accordingly, the new loss definition provides that:

In a case involving a fraudulent investment scheme, such as a Ponzi

scheme, loss shall not be reduced by the money or the value of the
property transferred to any individual investor in the scheme in excess

of that investor's principal investment (i.e., the gain to an individual

investor in the scheme shall not be used to offset the loss to another

individual investor in the scheme).^^^

5. Regulatory Ojfenses and Unlicensed Professionals.—Some of the
knottiest problems presented by the net versus gross loss debate arose from cases

in which defendants evaded FDA regulatory processes in bringing drugs to
market. In one case. United States v. Chatterji, the defendant provided false

information to the FDA to gain approval of a drug.^^^ In another. United States
V. Haas, the defendant purchased drugs in Mexico for sale in the United States,

296. See supra note 291 and accompanying text.

297. "This amendment adopts the approach of the Eleventh Circuit that excludes the gain to

any individual investor in the scheme from being used to offset the loss to other individual investors

because any gain realized by an individual investor is designed to lure others into the fraudulent

scheme." Statement ofReasons, supra note 1 17, at 30544 (referring to United States v. Orton, 73

F.3d 331 (11th Cir. 1996)).

298. U.S.S.G. §2Bl.I,app.n.2(F)(iv)(2001). Thislanguageistaken virtually verbatim from

the 2001 CLC Draft, see Final Redefinition, supra note 166, at 50, with the exception of the
Commission's substitution of "individual investor" for the CLC's "investor." The significance of

the term "individual investor" is unclear. I take it to mean "single investor," and not to convey any

distinction between individual and institutional investors.

299. 46 F.3d 1336 (4th Cir. 1995).



66 INDIANA LAW REVIEW [Vol. 35:5

thus bypassing FDA controls.^^ In both cases, the defendant sold drugs that
were equally effective as those approved by the FDA. In Chatterji, the Fourth
Circuit found no economic harm and therefore no loss,^^' while in Haas, the Fifth
Circuit found no economic harm, but remanded the case to the district court for
a determination of the defendant's sentence based on his gain.^^^ A similar
problem was presented in UnitedStates v. Maurello, where the Third Circuit held
that a defendant convicted of mail fraud for deceiving clients by practicing law

without a license must be credited in the loss calculation for the value of
satisfactory legal services rendered.

^°^

Some observers, notably including the Justice Department, argued that those
who place consumers at risk by evading regulatory processes for drugs and other
products and services should receive significant sentences. From a theoretical
perspective, where Congress creates a regulatory authority to regulate risky

activities such as the production of medicine, and a defendant intentionally

circumvents that authority to make a profit, the fact that the defendant lucked out
and did not hurt or kill anybody does not reduce the severity ofthe crime—or if
it does, not by much. Consumers are entitled to rely on the regulatory process.
They would not, as a rule, purchase products known to have been produced in
defiance of regulatory safeguards. Thus, the entire amount paid for the
improperly certified item is indeed a loss because it measures the out-of-pocket

expense to fraudulently misinformed consumers. Alternatively, if we consider
that the class of victims may include the defendant's competitors—companies
that produce equivalent products in conformity with regulatory standards—^the
value of the defendant's sales is a fair measure of the loss to the defendant's

competitors. The same arguments can fairly be made in cases involving
unlicensed professionals.

In response to these concerns, the CLC proposed^^'' and the Commission
ultimately adopted a narrowly targeted exception to the crediting rule under

which loss, by definition, includes the amounts paid by victims for

services . . . fraudulently rendered to the victim by persons falsely posing

as licensed professionals; . . . goods . . . falsely represented as approved

by a governmental regulatory agency; or . . . goods for which regulatory
approval by a government agency was required but not obtained, or was
obtained by fraud, with no credit provided for the value of those items

or services.^°^

300. 171 F.3d 259 (5th Cir. 1999).

301. 46 F.3d at 1342-43. Although in a later case involving nearly identical facts, United

States V. Marcus, 82 F.3d 606 (4th Cir. 1 996), the Fourth Circuit found the loss to be the value of

the gross sales ofan unapproved drug, distinguishing Chatterji on the ground that the modifications

of the drug formula in Marcus affected the bioequivalence of the drug. Id. at 610.

302. 171F.3dat270.

303. 76F.3d 1304, 1311-12 (3d Cir. 1996).

304. See Final Redefinition, supra note 166, at 49-50.

305. U.S.S.G. § 2B1.1, app. n.2(F)(v)(2001).



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 67

The new rule for measuring loss in regulatory cases also solves a technical
problem in the area of "gain." At various times during the economic crime

sentencing debate, the Department of Justice pressed for an extension of the

concept of "gain" to deal with regulatory evasion cases. The Department of
Justice's solution to the regulatory crime problem would have had a much greater
distorting effect on the overall structure of the loss definition than would the

newly adopted targeted provision for regulatory and unlicensed professional

cases. The new guideline addresses legitimate concerns about imposing
appropriate punishment for regulatory crimes without introducing the

unpredictable complications that might well ensue from elevating "gain" to equal

footing with "loss" as a measure of offense seriousness.

6. Items ofde minimis Value,—The Justice Department repeatedly expressed
concern about any rule that would require the court to credit defendants for the
nearly worthless items sent by telemarketers in place ofthe items promised—five
dollar plastic radios in place of the promised "stereo system," common coins in
place of the promised "rare collectibles," etc. The Department was
understandably concerned about two points: first, that such junk confers no real

economic benefit on the persons receiving it, and thus should not reduce a

defendant's punishment, and second, that calculating the value ofthe stuff is, at

best, a nuisance.

Responses to Justice Department concerns took two basic forms. Some loss
redefinition proposals included language declining credits against loss for items

of "de minimis" value transferred from defendants to victims.^^^ Alternatively,

Sentencing Commission staff suggested excluding from "loss" anything
transferred to victims by defendants if the thing "has little or no value to the

victim because it is substantially different from what the victim intended to

receive."^^^ As phrased, this second approach had the potential to become a
Trojan horse undermining uniform application of the net loss concept. The
problem was the emphasis on whether the economic benefit conferred is of little
or no value "/o the victim because it is substantially different from what the
victim intended to receive.""^^^ In every fraud case, what the victim got was
"substantially different from what the victim intended to receive." Ifthe victim

got what he intended to receive, there would be no crime. And in many (perhaps
most) cases, victims, if asked, will say that what they got is of little or no value

to them because it was not what they bargained for, even if the thing transferred
had substantial, measurable economic value. The effect of including this
provision would have been to shift the focus of the loss determination from an

objective consideration of the market value of whatever the defendant gave the

victims to a subjective evaluation of what the victim thinks is the worth ofwhat
the defendant gave him.

In the end, the Commission included neither proposal in the new loss

306. See, e.g.. Final Redefinition, supra note 166, at 49-50.

307. Id. at 52.

308. Id. (emphasis added).



68 INDIANA LAW REVIEW [Vol. 35:5

definition. As a result, courts will be obliged to address the effect on loss of
allegedly de minimis benefits on a case-by-case basis.

E. Time-of-Measurement

Critical to the practical problem ofmeasuring loss is a determination ofwhen
loss should be measured. The time-of-measurement problem has two basic
components. The first is the question ofwhen to value the worth of stolen assets
whose value fluctuates over time, such as stock, precious metals, coins,
commodities, real estate, and the like. The second is when to count so-called
"credits" against loss, such as transfers to victims as part of the scheme,

repayments to victims, and posted collateral. The most common counting
question is whether to reduce the loss amount by the value ofthings returned or
conveyed to the victim after the crime has been detected. This second

component of the time-of-measurement problem also has a sub-issue, in that
there must be a rule for when to value those things counted as credits.

To illustrate both components ofthe time-of-measurement problem, assume
that a telemarketer sells, and delivers to the victim, stock falsely represented to

be worth $1000, which is, at the time of the sale, actually worth $300. The
victim pays the telemarketer by giving him a quantity of gold, then valued at
$1000. Assume further that, after the fraud is detected, the telemarketer sends
the victim a check for $700. Assume still further that the true market value ofthe
stock has dropped to $200 as of the date of detection the fraud, but climbs up to

$400 by the time of sentencing. In the meantime, the value ofthe gold increases

to $ 1 1 00 at the time of detection, but has dropped to $900 by sentencing day.

Ideally, guideline time-of-measurement rules should tell a sentencing judge:

when to value the gold from which the victim was swindled; whether to reduce
the amount ofthe loss by the value ofthe stock initially transferred to the victim;
ifso, when to value the stock transferred to the victim; and whether to reduce the
amount of the loss by the amount of the $700 check.

In my view, the most significant (and indeed only major) defect in the new
loss definition is its failure to fully address the time-of-measurement problem.

The new guideline contains time-of-measurement rules only for cases involving
credits against loss: generally, defendants will be credited with things of value

transferred to victims prior to detection, and in loan cases, defendants will be

credited for collateral pledged by the defendant in "the amount the victim has
recovered at the time of sentencing from disposition of the collateral, or if the

collateral has not been disposed of by that time, the fair market value of the

collateral at the time ofsentencing."^^^ However, the new guideline contains no
general time-of-measurement rule, and no rule about when to value credits other
than collateral. The rule on measurements ofcredits against loss is sound, so far
as it goes. The absence of any other timing rules is disappointing.

1. The New Time-of-Measurement Rulesfor Crediting.—The time to count
"credits" against loss is the time of detection. If defendants were credited with

309. U.S.S.G. § 2B1.1, app. n.2(E)(iHii)(2001).



200 i ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 69

repayments made after detection, but before sentencing, the rich (or those who
had not yet spent their criminal earnings) could buy themselves out of prison

tirne.^^^ The universal rule among those courts that considered the question under
the former guidelines was that credits against loss such as transfers to victims,
pledges of collateral, and repayments should be measured at the time of

detection.^ ^^ The Commission wisely codified this rule.

Second, it is equally clear that "credits" should not be valued prior to

detection. Early Commission drafts suggested that things ofvalue transferred by

a defendant to a victim and credited against loss should be valued at the time of
transfer.

^^^ Establishing the value of credits at the time of transfer to the victim

would prove terribly cumbersome in many multi-victim or multi-transaction
cases, and would produce substantively erroneous and unfair results in certain

cases.

Consider the following examples:

a. Precious metals/rare coins boiler room.—Defendants sell over the
telephone to hundreds of victims supposedly "rare" coins or ingots of precious

metals at vastly inflated prices. The defendants do send coins to the victims, and

the coins have some value. However, the value of the coins is much less than
represented and the value fluctuates over time. Here, the Commission staffs
proposed time-of-measurement rule would require the court to determine the date

of every "transfer" of coins, and determine the value ofthe coins for every date

on which a transfer occurred. In a routine boiler room case, this would involve
hundreds or even thousands of different valuations.

b. Stockfraud.—Defendant makes an initial stock offering in the penny
stock market, and makes inflated and untrue claims in the prospectus. Hundreds
of victims buy the stock over a six month period, during which time the stock
steadily gains in value. At the end of the six month period, the defendant's
falsehoods come to light and the value of the stock plunges to zero. In such a
case, not only would the proposed "valuation at time oftransfer" rule require the

court to determine the fluctuating price of the bogus stock on every date on
which there was a purchase, but it would produce the absurd result that the
victims would be found to have no "loss" at all. Since the amount ofmoney the

310. See. e.g.. United States v. Wright, 60 F.3d 240, 244 (6th Cir. 1995) (Batchelder, J.,

dissenting).

311. See, e.g., United States v. Fraza, 106 F.3d 1050, 1055 (1st Cir. 1997) (holding loss is

amount of fraudulent loan not repaid at time offense was discovered); United States v. Akin, 62

F.3d 700, 701 (5th Cir. 1995) (rejecting argument of check-kiting defendant that the loss figure

should be reduced by restitution payments made between time of discovery of kite and sentencing,

and holding loss to be measured at time ofdiscovery ofscheme); United States v. Flowers, 55 F.3d

218, 220-22 (6th Cir. 1995) (holding in check-kiting scheme that loss is to be amount of

outstanding bad checks, less any amount in accounts at time ofdiscovery); United States v. Shaffer,

35 F.3d 1 10 (3d Cir. 1994) (time for determining loss is time crime is detected); United States v.

Frydenlund, 990 F.2d 822, 825-26 (5th Cir. 1993) (rejecting argument that check-kiting should be

treated like fraudulently obtained loan and instead measuring loss at time ofdiscovery of scheme).

312. See, e.g.. Final Redefinition, supra note 166, at 45-48.



70 INDIANA LAW REVIEW [Vol. 35:5

victims paid to the defendant would be offset by a credit for the market value of
the stock on the date oftransfer, by definition the "loss" would be zero.

Similar phenomena occur in real estate schemes in which defendants succeed
in inflating the market value of otherwise undesirable property. In all such

schemes, measuring the value ofthe thing transferred to the victim at the time of

transfer produces a loss of zero. The only way around this result is to argue that
the "real" value ofthe transferred property at the time ofthe transfer was not its
then-current market price, but the value it would have had if full information had
been available. But this is nothing more than a roundabout way ofsaying that the
value of transferred property in such cases is actually its value at the time of

detection of the crime. So why not adopt that rule in the first place?
Happily, the Commission did not codify a rule requiring that credits against

loss be valued at the time of transfer from the defendant to the victim.

Unhappily, the Commission adopted no valuation rule at all for credits except in
the case ofpledged collateral. The rule governing collateral is at least consistent
with pre-existing law.^'^

2. TimingIssues Left to the Courts.—^As a consequence ofthe Commission's
abstention, sentencing courts will be obliged to develop some time-of-
measurement rules by common law processes. In doing so, they may wish to
consider the following points:

In theory, loss could be measured, and its constituent elements counted and

valued, at any one of a number of points, including the time the crime is legally
complete, the time of detection, or the time of sentencing. Moreover, one could

envision time-of-measurement rules that counted the components of loss at one

time, but valued them at another. We have already seen that some Commission
loss definition drafts dealt with the crediting problem by counting as credits

against loss only those transfers from defendants to victims made prior to
detection, but valuing the things transferred to the victims as of the time of

transfer.^'"* Similarly, the January 2001 Staff Draft proposed as one option

counting awe/ valuing credits at the time ofdetection, while "measuring" (which

I take to mean both counting and valuing) loss generally at the time of
sentencing.^

'^

In the view of a number of observers, including the Criminal Law
Committee, to the extent possible, all the elements ofthe loss calculation should

be counted and valued at the same point in time.^'^ Although there may be
reasons to deviate in special cases from this principle, the greater the number of
exceptions, the greater will be potential for confusion. A strong case can be

313. Under the former fraud guideline, U.S.S.G. § 2F1.1, app. n.8(b) (2000), collateral was

valued at either the amount obtained by the victim through foreclosure and liquidation, or if these

events have not yet occurred by sentencing, at the fair market value at the time of sentencing. See

Haines, Bowman & Woll, supra note 270, at 484-88.
314. See supra note 270 and accompanying text.

3 1 5. See January 2001 Commission Draft, supra note 177, at 7994..

3 1 6. See Final Redefinition, supra note 166, at 50; CLC Comments, supra note 182, at 41

;

Bowman, supra note 1 78, at 487.



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 7

1

made that the most desirable point at which to measure loss is the time of
detection.

I have already addressed the arguments in favor ofboth counting and valuing

credits against loss at the time of detection, arguments which the Commission
found at least partially persuasive. The knottier question remains when to
measure loss more generally, or to put it another way, when to count and value
those components of loss not involving credits. The argument favoring the CLC
position that loss should be measured at the time ofdetection may be summarized
in this way: First, time-of-detection makes the best sense as the moment at which
to "freeze the action" for purposes ofmeasurement. Once a crime is discovered
by its victims, they can take steps to prevent further losses. Likewise, once a

crime is detected, defendants will ordinarily stop their criminal behavior, either

because they have been arrested or because they fear arrest and do not wish to

make their punishment worse. Thus, in the ordinary case, the time of detection
will be the point of maximum loss.^'^ Additionally, even though losses may
sometimes continue to accrue after detection up until sentencing despite the

cessation ofa defendant's active criminal efforts, there is far too great a potential

for arbitrariness in measuring loss at the date of sentencing. For example,

defendants should not have to spend more time in prison because losses mount
while the government or the court delays a prosecution or sentencing.^

'^

Nonetheless, a case can be made for counting and valuing the "non-credit"
components of loss at the time of sentencing. In the first place, there is at least
some potential tension between a time-of-detection measurement rule and the
basic definition of loss as "reasonably foreseeable pecuniary harm that resulted
from the offense."^^^ Presumably, some of the harms that fall within this
definition will not manifest themselves until some time after the moment the
crime is detected. Moreover, one could argue that the valuation problem would
be made somewhat simpler because probation officers and other experts
preparing for sentencing could look to current market values of assets, as

opposed to ascertaining those values at the earlier time of detection. However,
I confess to finding the valuation argument uncompelling, as I doubt that in most
cases valuing assets on a past date certain would prove any more difficult than
providing a current market value.

The CLC proposed the following rules, which courts may find ofpersuasive

317. Of course, if a defendant persisted in committing additional criminal conduct leading to

new losses after detection of the scheme, this rule would not cut off his sentencing liability for the

new losses because the additional conduct would not yet have been "detected" for purposes of the

rule.

3 1 8. See, e.g.. United States v. Stanley, 54 F.3d 103 (2d Cir. 1995). In Stanley, a bank trust

officer bought bonds at a high price for trust clients ofa bank. As the bonds began to devalue, the

officer misstated their value in bank records and in statements sent to clients. As a result, neither

the bank nor clients could act to sell and stem losses. Id. at 104. The court calculated loss as the

amount of devaluation in period between misstatements to bank and customers and the time at

which fraud was discovered, /c/. at 106.

319. U.S.S.G. §2Bl.l,app. n.2(A)(i)(2001).



72 INDIANA LAW REVIEW [Vol. 35:5

value when considering time-of-measurement problems not covered by the new
guideline:

Time of measurement: Loss should ordinarily be measured at the time
the offense was detected.

(i) For purposes of this guideline, an offense is detected when the
defendant knew or reasonably should have known that the
offense was detected by a victim or a public law enforcement
agency.

(ii) Except as provided in subsection (D)(iii), the value of any

"economic benefit" transferred to the victim by the defendant
for purposes ofSubsection (C) shall be measured at the time the

offense was detected.

(iii) However, in a case involving collateral pledged by a defendant,

the "economic benefit" of such collateral to the victim for

purposes of Subsection (C) is the amount the victim has
recovered at the time of sentencing from disposition of the

collateral. Ifthe collateral has not been disposed ofby that time,

the "economic benefit" of the collateral is its value at the time

of sentencing.^^°

These proposed rules embody the principle that, in general, all components
of"loss" should be measured at the time ofdetection. This means that the money
or property obtained by the defendant from the victim, andthe money or property
transferred back to the victim from the defendant during the course of the

scheme, should all be counted and valued as of the date of detection. The only
exception to this general rule is the valuation of pledged collateral, which the

CLC, like the Commission itself, retained for reasons of ease of administration
and continuity with existing practice.

F. Gain

The former fraud guideline provided that a defendant's "gain" from his
offense might be used as a means of estimating the loss: "The offender's gain

from committing a fraud is an alternative estimate that ordinarily will

underestimate the loss."^^' This provision was directed primarily at situations

such as large telemarketing frauds with numerous victims in which precise

determination of the exact loss suffered by the victim class is difficult or

impossible, but an examination of the defendant's records permits a good

estimate of the amount the defendant gained from the crime. It was also useful
in cases in which the former larceny-based loss definition made it difficult to

320. See Final Redefinition, supra note 166, at 50.

321. U.S.S.G. §2Fl.l,app. n.9(2000).



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 73

identify the true victim(s) of the offense."^ Three major questions about gain

were decided during the course ofthe debate over the economic crime package.

1. The New Economic Crime Guideline Retains "Gain " as a Method of
Estimating Loss.—It has been argued that a separate provision addressing a
defendant's "gain" is superfluous in a properly drafted loss guideline because

"gain" is unnecessary if the victims of defendant's conduct are accurately

identified.^^^ However, other observers argued persuasively that there are some
cases, particularly frauds involving numerous victims with small individual

losses, in which proving loss directly victim-by-victim is prohibitively

difficult.^^^ In such cases, it makes good sense to have gain available as a means
ofapproximating loss. The new economic crime guideline treats gain injust this
way stating that "The court shall use the [defendant's] gain that resulted from the
offense as an alternative measure of loss only if there is a loss but it reasonably

cannot be determined."^^^

The final guideline correctly abandoned the approach ofseveral earlier drafts
that proposed using gain "instead of'^^^ or as "an alternative measure of'^^^ loss
where "gain is greater than loss and more accurately reflects the seriousness of

the offense."^^^ This approach was freighted with problems. As thejudges ofthe
CLC observed:

The Committee urges the Commission to view with caution proposals
that treat "gain" as having independent significance. The loss tables are
established on the assumption that they measure relative amounts of

economic harm inflicted on victims of crime. As long as "gain" is
merely an occasionally useful way ofestimating "loss," treating a "gain"
of $X the same as a "loss" of $X makes sense because the defendant's
gain is some victim's loss. Some of the pecuniary gain options in the
Commission Proposal assume, however, that there are cases in which the
defendant receives a "gain," but does not cause a corresponding amount
ofeconomic harm, either because he causes no economic harm at all or
because the amount ofthe gain is greater than the amount ofthe loss. (§
2.(E) [Options 2 and 3])^^^^' If such cases exist, then in such cases it

seems doubtful that gain should have the same effect on punishment as

322. See Bowman, Coping with "Loss, " supra note 103, at 508-09, 536-37.

323. Mat 508.
324. See, e.g. , Carol C, Lam, Assessing Loss in Health Care Fraud Cases, 1 FED. SENT. 1 45,

147 (1997) ("It is, of course, logistically impossible to prove widespread fraud on a patient-by-

patient, claim-by-ciaim basis in a medical practice that had thousands of patients, each of whom
received multiple services.")

325. U.S.S.G. §2Bl.l,app.n.2(B)(2001).

326. See, e.g., Final Redefinitiony supra note 166, at 48.

327. January 2001 Commission Draft, supra note 177, at 7994.

328. See, e.g.. Final Redefinition, supra note 166, at 48.

329. The reference here is to the Sentencing Commission staff proposal published in January

2001 . See January 2001 Commission draft, supra note 177.



74 INDIANA LAW REVIEW [Vol. 35:5

loss. In any case in which the "loss" is truly zero, or in which a
defendant's gain exceeds the economic loss to all identifiable victims,

gain is no longer a true measurement ofeconomic harm. The Committee
is unsure of the justification for sentencing the defendant to the same
punishment he would have received ifhe had caused a harm equal to his
gain."^

Assume two cases. Defendant A steals $100 from Victim, as a result of
which he somehow "gains" $1000. Defendant B simply steals $1000 from
Victim. The rule proposed in the January 2001 Commission draft and critiqued
by the CLC would have punished Defendant A equally with Defendant B, even
though Defendant B stole ten times as much money from and caused ten times
as much economic harm to Victim. There is no justification either in criminal
law theory, or in common sense, for such a result.

2. Gain and Regulatory Fraud.—A good deal of the debate over "gain"
flowed from very particular Justice Department concerns about a series of

appellate decisions finding no loss in cases where pharmaceutical manufacturers

sold efficacious drugs after fraudulently obtaining FDA approval to do so, and
requiring sentencing courts to offset against loss the value of useful services

provided by unlicensed doctors and lawyers."' The proposals to allow the use
of gain "instead of loss, or as "an alternative measure" of loss when gain is
greater than loss, were crafted primarily with these cases in mind. As discussed
above, to address Justice Department concerns, the CLC proposed a special
crediting rule, which in effect, defines loss in regulatory fraud cases as the gross

amount paid by victims for goods or services fraudulently misrepresented as
having regulatory approval or as being provided by a licensed professional.^^^

Once this rule (now incorporated in the economic crime guideline"^) seemed
assured ofpassage, the Justice Department lost interest in an expansive definition

of gain.

3. The Rejected Downward Departure for ''Gain".—^A number of
commentators from the defense community argued forceftilly that in cases where
a defendant's personal gain is substantially less than the loss to the victim

resulting from the offense, the Guidelines should provide for an encouraged

downward departure.^^"* The rationale for such a departure was said to be that a
defendant who causes a large economic loss, but receives relatively little personal
benefit from the crime, is less culpable than a defendant who gamers all or a

330. Committee on Criminal Law, Judicial Conference of the United States, Criminal Law

Committee Comments on Proposed Changes to "Loss" Definition, 13 FED. SENT. REP. 41 (2000)

(internal footnote added).

331. See supra notes 299-305 and accompanying text.

332. See supra notes 304-05 and accompanying text (discussing genesis ofCLC proposal on
measuring loss in regulatory fraud cases).

333. U.S.S.G. § 2B1.1, app. n.2(F)(v) (2001).

334. The most forceful exponent of this view was James E. Felman of the Practitioners'

Advisory Group. See Symposium Proceedings, supra note 175, at 62 (remarks ofJames E. Felman

during the Third Plenary Session ofthe October 2000 Sentencing Symposium on Economic Crime).



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 75

large portion ofthe victim's loss for himself"^ A departure on this ground was
proposed in several drafts of the new economic crime guideline; however, no
such departure appears in the final version."^ This omission does not

categorically preclude a departure based on a defendant's small personal gain.

Nonetheless, such a departure would be an "unmentioned," rather than an

"encouraged," departure under the taxonomy of Koon v. United States. ^^^

G. Intended Loss

J. The Theory ofIncludingIntendedLoss in Economic Crime Sentencing.—
All of the sections of the new economic crime guideline discussed so far have
concerned defining and measuring the actual losses inflicted by defendants. We
now turn to "intended loss." The new economic crime guideline retains the rule
of the former fraud guideline that where the loss a defendant intended to inflict

was larger than the loss the victim actually sustained, the larger intended loss
figure should be used to calculate the sentence."* Before addressing the

335. Id

336. U.S.S.G. § 2B1.1, app. n.l5(B) (Downward Departure Considerations) (2001).

337. 518 U.S. 81, 95-96 (1996) (creating a three-tiered structure for reviewing departures

under Guideline Section 5K2.0, with different standards ofreview for encouraged, prohibited, and

unmentioned factors). For analyses ofthe Koon case, see Bowman, supra note 201 , at 23-24; Frank

O. Bowman, III, Places in the Heartland: Departure Jurisprudence After Koon, 9 FED. SENT. REP.

19(1 996); and Barry L. Johnson, Discretion and the Rule ofLaw in Federal Guideline Sentencing:

Developing Departure Jurisprudence in the Wake ofKoon v. United States, 58 OHIO ST. L.J. 1 697

(1998).

338. Compare U.S.S.G. §2B1.1, app. n.2(A)(i)(2001),w//;2 U.S.S.G. §2Fl.l,app.n.8(2000)

("[I]f an intended loss that the defendant was attempting to inflict can be determined, this figure

will be used if it is greater than the actual loss."). For cases construing the former intended loss

provision, see, for example, UnitedStates v. Smith, 62 F.3d 1073, 1079 (8th Cir. 1 995) (credit card

fraud defendant responsible for total amount ofunauthorized charges, receiving no credit for items

obtained by fraud, but later recovered); UnitedStates v. Alonso, 48 F.3d 1 536, 1 547 (9th Cir. 1 995)

(holding in credit card fraud case that loss equals greater ofactual or intended losses); UnitedStates

V. Mizrachi, 48 F.3d 651, 657 (2d Cir. 1995) (upholding district court's use of intended loss in

amount of face value of policy taken out by defendant on property he burned); and United States

V. Watkins, 994 F.2d 1 192 (6th Cir. 1993) (formulating test for when defendant responsible for

intended loss: Defendant intended the loss; it was possible for the defendant to cause the loss; and

the defendant must have completed or been about to complete all acts necessary to bring about the

loss.). In United States v. Kopp, 951 F.2d 521 (3d Cir. 1991), the court stated:

[FJraud "loss" is, in the first instance, the amount ofmoney the victim has actually lost

(estimated at the time of sentencing), not the potential loss as measured at the time of

the crime. However, the "loss" should be revised upward to the loss that the defendant

intended to inflict, if that amount is higher than actual loss.

Id. at 535-36. Similarly, in United States v. Chevalier, 1 F.3d 581, (7th Cir. 1993), the Seventh

Circuit Court of Appeals stated:

In calculating the amount of fraud, the district court was required to find the amount of



76 INDIANA LAW REVIEW [Vol. 35:5

specifics of the new rules on intended loss, it is useful to pause and consider the
place of intended loss in the overall scheme of sentencing economic crime.

A measurement ofactual loss caused by a defendant's criminal conduct is an
appropriate component ofthe sentencing calculation because, as noted above, it
measures actual harm and serves as a proxy measurement for other offense
seriousness factors like state of mind. By contrast, because "intended loss" is
only used when it exceeds actual loss, it is a measurement of harms that never
happened.

The Sentencing Commission provides an increase in offense level for
"intended loss" in both the old and new economic crime guidelines for the same
reasons that substantive criminal liability is imposed for inchoate crimes like

attempt and conspiracy."^ First, criminal law is preeminently concerned with

blameworthiness. We punish when, and because, punishment is deserved.^'*^
While the occurrence ofharmful results is ordinarily a prerequisite for criminal
liability, to some degree punishment on that basis has more to do with luck than
desert. Would-be killers who shoot straight are punished for murder while those
who don't are not. Nonetheless, we punish unconsumated efforts to cause harm
as "attempts" or "conspiracies" (albeit usually less severely than completed

crimes) so long as the would-be perpetrator has come close enough to success
that we can be confident his malignant designs were real and not mere fantasy,
and thus that his conduct was morally blameworthy.^"*' Second, we punish the

money the victim has actually lost (estimated at the time ofsentencing), not the potential

loss as measured at the time of the crime. However, the "loss" should be revised

upward to the loss that the defendant intended to inflict, if that amount is higher than

the actual loss.

Id. at 585-86.

Many courts held the same rule applicable to theft crimes, despite the absence of language in

former Section 2B1.1 applying the intended loss rule generally to such cases. See, e.g.. United

States V. Offiong, 83 F.3d 430, 1996 WL 195547 (9th Cir. 1996) (unpublished disposition)
(applying Guideline Section B 1 . 1 , Application Note 4 presumption of$ 1 00 per credit card intended

loss in stolen credit card case); United States v. Sowels, 998 F.2d 249, 25 1 (5th Cir. 1 993) (same);

United States v. Chapdelaine, 989 F.2d 28, 35 (1st Cir. 1993) (applying intended loss in an

attempted robbery case, and noting Guideline Section 2X1.1, Application Note 2, which states that,

"in an attempted theft the value ofthe items the defendant attempted to steal would be considered");

United States v. Hernandez, 952 F.2d 1110, 1118 (9th Cir. 1991) (holding intended loss an

appropriate component ofsentencing calculation for tape counterfeiting defendant sentenced under

Guideline Section 2B1.1).

339. See generally Richard Buxton, The Working Paper on Inchoate Offenses: (1) Incitement

and Attempt, 1973 Crim. L. Rev. 656, 660.

340. See, e.g.. United States v. Studevent, 1 1 6 F.3d 1 559, 1 562-64 (D.C. Cir. 1997) (rejecting

defendant's argument that actual loss is the dominant focus of the guidelines, and hence there

should be an impossibility limitation on intended loss because in part, "One ofthe Guidelines' goals

is to tailor punishment to a defendant's particular degree of culpability.").

34 1

.

Criminal liability for the crime ofconspiracy requires evidence ofsome fixity ofpurpose

in the form of an agreement with one or more co-conspirators. United States v. James, 528 F.2d



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 77

unsuccessful criminal not only because he deserves it, but because his frustrated

plans present a high enough risk of actual harm that the utilitarian justifications
for punishment dictate a dollop of deterrence.

The idea of basing punishment for economic crime on intended loss is
grounded in the same moral and utilitarian considerations that impose substantive
liability for attempts and conspiracies. Morally, we may consider that a swindler
who intends to take a large amount ofmoney is more culpable, and thus deserves
a greater punishment, than one who seeks or secures a smaller amount.^'*^ From
the utilitarian perspective, use of intended loss imposes punishment

consequences (and thus, one hopes, achieves a deterrent effect) proportional to

the degree of risk the defendant's behavior posed to the economic well-being of

his fellow citizens, as measured by the magnitude of his criminal objectives.
2. The Language ofthe New IntendedLoss Rule.—The new economic crime

guideline says simply that "loss is the greater of actual or intended loss."^"*^ By
contrast, in its May 1999 draft, the staff suggested as Option 2 that loss be
defined as either "the sum ofactual loss and any additional intended loss" or "the
sum of actual loss and any intended loss not resulting in actual loss."^'*'* The
Commission was ultimately unpersuaded by this approach.

There are certainly cases in which the defendant desired to cause pecuniary

harm in addition to the actual harm that his conduct did indeed cause. But the
vast majority of such cases are already accounted for by the present rule.

Consider, for example, a defendant who intends to defraud his victims of
$100,000, but only succeeds in getting away with $50,000 before being caught.
In such a case, the staff proposal would have added the $50,000 actually stolen

to the additional $50,000 the defendant wanted to steal, but couldn't, and get a

loss of $100,000. The rule adopted by both the new and former guidelines
dictates the identical result because the $100,000 loss the defendant intended

999, 1012 (5th Cir. 1 976); State v. Bums, 9 N.W.2d 5 1 8, 520 (Minn. 1943). Morever, a conspiracy

normally requires an overt act in furtherance of the conspiracy committed by one of the

conspirators. United States v. Offutt, 127 F.2d 336, 338 (D.C. Cir. 1942). Attempt liability

customarily requires the commission ofa "substantial step" toward accomplishment ofthe criminal

goal. Model Penal Code § 5.01(2) (1985). See also Buxton, supra note 339, at 660.

The law of Attempt limits its deterrent and preventive role in the interests of freedom

by requiring action, ofsome sort, as well as intention, on the part ofthe accused; in the

same way as in substantive crime the deterrent and preventive role ofthe law is to some

degree limited by the requirement of mens rea.

342. See Studevent, 1 16 F.3d at 1563 ("Limiting intended loss to that which was likely or

possible . . . would eliminate the distinction between a defendant whose only ambition was to make

some pocket change and one who plotted a million dollar fraud.")

343. U.S.S.G. § 2B1.1, app. n.2(A) (2001). Neither the former nor new Guidelines, nor any

ofthe draft proposals on redefining loss, amplify the meaning ofthe word "intended." Drawing on

general criminal law principles, it is fair to conclude that the intended loss is the harm the defendant

either desired to cause or was practically certain would result from his offense. Whether any

language making this point explicit should be included in the Guidelines remains an open question.

344. See, e.g., Final Redefinition, supra note 166, at 47.



78 INDIANA LAW REVIEW [Vol. 35:5

already includes the $50,000 the defendant succeeded in stealing. The staffs
proposal was an attempt to address those cases in which a defendant intends to
cause a loss in addition to the actual loss, and the actual loss figure includes

economic harms reasonably foreseeable to the defendant, but not specifically
intended by him. There are no doubt some such cases. There is, however, reason
to doubt that they are sufficiently common to make it worthwhile to complicate
the definition of loss. In any event, the Commission did not find it so.

3. Impossibility and ''Economic Reality. "—Should a defendant be held
responsible for losses he subjectively desired and intended to inflict even if the

achievement of his criminal goals was impossible, or at the least highly
improbable? This question arose under the former theft and fraud guidelines in

two types ofcases, those involving government "sting" operations where no loss
was possible because the defendant was dealing with government agents, and
those in which the defendant's objectives were either impossible or improbable

for some other, usually economic, reason. There was a divergence of views
among the circuits on both types of cases.

a. "Sting" operations.—Defendants caught by government undercover
operations before they stole any money commonly argued that the intended loss
provision offormer Section 2F1 . 1, Application Note 8, should not apply to them
because no actual loss was possible. The majority of the circuits to have
addressed the question rejected this argument and treated fraud cases no

differently than drug cases or other "stings" in which success is foreclosed by the

defendant's choice of confederate.^"*^

The Tenth Circuit, however, took a different view. In United States v.
Galbraith,^^^ the court wrote that where the defendant is dealing with a

government agent and no money changes hands, there is no loss.^"^' The thesis
was that, because "loss" is supposed to measure economic harm, in a situation
where no harm could have occurred, the loss is zero. The Galbraith court relied
heavily on United States v. Santiago?^^ In Santiago, the defendant falsely

reported to his insurance company that his car had been stolen and submitted a

345. See United States v. Klisser, 190 F.3d 34, 36 (2d Cir. 1999) (holding fact that defendant

attempted to conspire with undercover agent does not make intended loss zero); United States v.

Schlei, 122 F.3d 944, 995-96 (Uth Cir. 1997) (sentencing guidelines permit enhancement for

sentences based on defendant's intended loss in sting operation); Studevent, 1 16 F.3d at 1561 (loss

calculation includes stolen checks passed to undercover FBI agent despite fact they would never

be cashed); United States v. Robinson, 94 F.3d 1325, 1329 (9th Cir. 1996) ("There is no reason

why defendants caught as a result of a sting operation should be treated any differently than

defendants caught participating in an ongoing fraud."); United States v. Falcioni, 45 F.3d 24, 27

(2d Cir. 1995) ("Simply because the government's crime prevention efforts prove successful . .

.

does not mean the 'intended loss' is zero."); United States v. Yellowe, 24 F.3d 1110, 1112-13 (9th

Cir. 1 99
1 ) (applying intended loss provision ofSection 2F 1 . 1 where defendant enters into a scheme

with a government informant to make unauthorized credit card charges).

346. 20 F.3d 1054, 1058-1060 (10th Cir. 1994).

347. See also United States v. Sneed, 34 F.3d 1570 (10th Cir. 1994) (accord).

348. 977 F.2d 517 (10th Cir. 1992).



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 79

claim for $ 11 ,000.^^*^ Because the police intervened, the claim was not processed,
but had it been, the maximum the company would have paid would have been the
car's "blue book" value of $4800.^^^ The court concluded that the "intended
loss" thus could not "exceed the loss a defendant in fact could have occasioned

if his or her fraud had been entirely successful," in this case $4800.^^'

It is doubtful that Santiago compels the result in Galhraith. First, literal

application of the Santiago standard to the facts of Galbraith produces a result

contrary to the one reached by the court. If Galbraith 's "fraud had been entirely

successful," he would have secured over $600,000.^^^ To say that Galbraith
"could not have succeeded" because he was dealing with government agents is
the same as saying that Santiago "could not have succeeded" because the police
found about his scam before the claim could be processed.

The Tenth Circuit was apparently attempting to import into fraud sentencing
a version of the principles of criminal liability concerning mistake of fact, or

perhaps the doctrine of impossible attempts. Even if those principles have a
place in sentencing law, the Tenth Circuit does not appear to have applied them

properly to the facts of Santiago. A defendant claims mistake offact when he
wishes to establish that he lacked the requisite culpable mental state necessary

to establish criminal liability. The claim will be effective only where the

mistaken belief, if honestly held, would negate or disprove the existence of the

required mental state.^" Modem law concerning the doctrine of impossible
attempts looks at the facts as defendant believed them to be. If he either did

everything he could do to complete the transaction, or performed a substantial

step toward completion, and the completed transaction would have constituted

a crime if the facts were as he thought them, he is guilty of attempt.^^"*

If Santiago honestly believed that his insurance claim could yield $1 1,000,

it is hard to see why he is not guilty ofat least an attempt to defraud the company
of $1 1,000. At a minimum, and as the Santiago court held, his over-optimistic
goals certainly do not relieve him of liability for the $4800 loss that would have
occurred without the vigilance ofthe police. Likewise, the question in Galbraith

is whether, if the facts were as Galbraith believed them to be, he could have

succeeding in defrauding his putative victims of over $600,000. The answer is
plainly yes. The Tenth Circuit's Galbraith opinion creates the arguably

349. Mat 519.
350. Id.

351. Id. at 524.

352. Galbraith, 20 F3d at \059.

353. MODEL Penal Code § 2.04(l)(a) (1985).
354. Id §§ 2.04(2), 5.01. See also United States v. Thomas, 13 U.S.C.M.A 278, 32 C.M.R.

278 (CM.A. 1962) (servicemen guilty of attempted rape of deceased woman with whom they had
intercourse where they believed her to be alive, but unconscious and thus incapable of consent, at

the time of the act). But see United States v. Berrigan, 482 F.2d 171, 188-89 (3d Cir. 1973)

(reversing convictions for sending letters into and out of a federal penitentiary "without the

knowledge and consent of the warden" because, unbeknownst to defendants, their courier had the

warden's consent to carry the letters).



80 INDIANA LAW REVIEW [Vol. 35:5

anomalous situation that a defendant can be sentenced based on the amount of
nonexistent narcotics he attempted to buy from a government agent, but not on
the amount of money he attempted to swindle from the same agent.^^^

b. General impossibility or improbability.—In Galbraith, the Tenth Circuit
also relied on the Sixth Circuit's opinion in United States v. Watkins^^^ and its

own work in United States v. Smithy where it held that to meet the requirements
of Section 2F1 . 1, "the record must support by a preponderance of the evidence
the conclusion that Mr. Smith realistically intended a $440,896 loss, or that a
loss in that amount wasprobable.''^^^ These two opinions are exemplars ofa line
of cases that attempted to impose an outer limit on the scope of "intended loss"

defined by a notion of "economic reality." Some of the early cases in this line,
including Smithy seem to have drawn inspiration from the reference to "probable"
loss in the pre- 1991 guidelines,^^* a term later omitted.^^^ Even after that
amendment, some courts continued to consider the probability of success of
defendants' schemes.^^^ However, the majority position regarding the former

355. The Ninth Circuit notes this anomaly in United States v. Robinson, 94 F.3d 1 325, 1 329

(9th Cir. 1 996), and cites it as a reason to reject the impossibility argument regarding intended loss.

356. 994 F.2d 1 192, 1 196 (6th Cir. 1993) (formulating test for when defendant responsible

for intended loss: defendant intended the loss; it was possible for the defendant to cause the loss;

and the defendant must have completed or been about to complete all acts necessary to bring about

the loss.); see also United States v. Moored, 38 F.3d 1419 (6th Cir. 1994). In Moored, the Sixth

Circuit discussed the "'probable' loss contemplated by section 2F1 . 1 ." Id. at 1 425. A/oore^ adopts

the reasoning and language oi United States v. Smith, 951 F.2d 1 164 (10th Cir. 1991), saying that

"the record must support, by a preponderance of the evidence, a conclusion that [the defendant]

realistically intended a loss ofmore than $ 1 ,700,000." Id. (emphasis added). Later, the court said:

Clearly, it would have been proper for the district court to enhance Defendant's offense

level ifthere was sufficient evidence in the record that Defendant did not intend to repay

the loan, or even if there was proof in the record that Defendant had no realistic means

to pay the loan.

Id. at 1429. As a practical matter, the court seems to suggest that once a defendant asserts an

intention to repay money, the government must affirmatively disprove that claim.

357. Smith, 951 F.2d at 1 168 (emphasis added).

358. See, e.g.. United States v. Dozie, 27 F.3d 95, 99 (4th Cir. 1994) (affirming district court's

use of"economic reality" to limit fraud loss calculation, and relying on reference in former version

of Guideline Section 2F1.1, app. n.7, to "probable or intended loss").

359. U.S.S.G. App. C, amend. 393 (1991).

360. In United States v. Egemonye, 62 F.3d 425 (1st Cir. 1995), the First Circuit sent

equivocal signals. The court upheld the district court's assessment of loss in a stolen credit card

scheme as the aggregate credit limits of all the stolen cards, saying: "Where there is good evidence

ofintent andsomeprospect ofsuccess, we do not think that a court needs to engage in more refined

forecasts ofjust how successful the scheme was likely to be." Id. at 429 (emphasis added). See

also United States v. Ensminger, 174 F.3d 1143, 1146 (10th Cir. 1999) (holding no loss

enhancement appropriate where fraud had not even a remote possibility of success); United States

V. Sung, 51 F.3d 92, 95 (7th Cir. 1995) (rejecting $960,000 loss calculation in product

counterfeiting scheme that government based on capacity of empty counterfeit cartons purchased



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 8

1

theft and fraud guidelines was that the "amount of loss that the [defendants]
intended to inflict does not have to be realistic."^^'

The new economic crime guideline codifies the majority view on both sting
cases and the economic reality doctrine. It states that: "'Intended loss' (I) means
the reasonably foreseeable 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)."^"

H. Enhancements

With the exception ofthe "more than minimal planning" adjustments in both

the former theft and fraud guidelines,^^^ and the "scheme to defraud more than
one victim" adjustment in the former fraud guideline,^^ which were deleted and

built into the loss table beginning at $120,000, the new economic crime guideline
retains all the offense level enhancements of both the former theft and fraud

guidelines. The new guideline adds a new enhancement for offenses involving
numerous victims.^^^ These changes are related to one another, and to the
enhancement for "sophisticated means" added in 1998.^^

The former theft and fraud guidelines were criticized for taking inadequate
account ofthe defendant's culpable mental state. Two indices ofmental state in
an economic offense are the complexity ofthe scheme and the number ofvictims
adversely affected by the defendant's crime. A complex scheme requires more
planning and deliberation than an impulsive one. A scheme to steal from many
victims suggests a more abandoned mental state than a scheme to steal from only

by defendant because defendant had "no reasonable expectation" of being able to sell so much

product).

361. See United States v. Lorenzo, 995 F.2d 1448, 1460 (9th Cir. 1993) (citing United States

V. Koenig, 952 F.2d 267, 271-72 (9th Cir. 1991) ("[S]ection 2F1.1 only requires a calculation of

'intended loss' and does not require a finding that the intentions were realistic.")). See also United

States V. Jacobs, 1 17 F.3d 82, 94-98 (2d Cir. 1997) (upholding face amount of fraudulent bank

drafts as loss despite very small risk that drafts would actually be honored); United States v.

Studevent, 116 F.3d 1559, 1561-62 (D.C. Cir. 1997) (intended loss need not be realistically

possible); United States v. Ismoila, 100 F.3d 380, 396 (5th Cir. 1996) ("The fact that the victims

were not at risk for the charges above their credit limit is not dispositive."); United States v. Wai-

Keung, 115 F.3d 874, 877 (1 1th Cir. 1997) (same); United States v. Coffman, 94 F.3d 330, 336

(7th Cir. 1996) (expressly rejecting the argument "that a loss that cannot possibly occur cannot be

intended"); United States v. DeFelippis, 950 F.2d 444 (7th Cir. 1 991 ) (irrelevant that there was "no

possibility" defendant would obtain loan based on fraudulent misrepresentations).

362. U.S.S.G. § 2B1.1, app. n.2(A)(ii)(2001).

363. Id. § 2B 1.1(b)(4)(A) (2000), and § 2F 1.1 (b)(2)(A) (2000).

364. Id. §2F1. 1(b)(2)(B).

365. /f/. § 2B 1 . 1 (b)(2) (200 1 ). The new guideline also adds an enhancement for making false

statements to a consumer in connection with educational loans. Id. § 2B 1.1(b)(7)(D).

366. Id §2F 1.1 (b)(5) (1998).



82 INDIANA LAW REVIEW [Vol. 35:5

one. However, the former theft and fraud guidelines accounted for these factors

only through the "more than minimal planning" adjustment in both the fraud and
theft guidelines, and the more-than-one-victim adjustment in the fraud guideline.

Because the more than minimal planning enhancement was applied to more than
eighty percent of all defendants sentenced under the fraud guideline and more
than sixty percent ofthose sentenced under the theft guideline,^^^ it did very little

to differentiate the relative culpability offraud and theft defendants. By setting
the bar for the enhancement so low, the former guidelines made no distinction
between the mental state of a small business owner who carried out a $10,000
check kite and that of a fraudulent telemarketer who defrauded thousands of
victims and concealed the proceeds in offshore bank accounts.

It was suggested that the Guidelines could better account for gradations in
mental state by: abolishing the more than minimal planning adjustment; creating
instead an enhancement for those defendants who really did engage in complex
planning; creating a downward adjustment for only minimal planning or a single
instance of impulsive behavior; and creating a new enhancement for multiple
victims that imposed differing increases in offense level depending on the

number of victims.^^* The Commission ultimately adopted three-fourths ofthis
approach.

Effective November 1, 1998, the Commission added a two-level
enhancement to the former fraud guideline applicable if "(A) the defendant

relocated, or participated in relocating, a fraudulent scheme to another
jurisdiction to evade law enforcement or regulatory officials; (B) a substantial

part ofa fraudulent scheme was committed from outside the United States; or (C)
the offense otherwise involved sophisticated means."^^' This amendment was
originally submitted to Congress in September 1998 as a temporary emergency

amendment. In 2000, the Commission made the amendment permanent,^^^ and
renumbered it from Section 2F 1.1(b)(5) to Section 2Fl.l(b)(6).^^^ It is now
incorporated in the new economic crime guideline as Section 2B 1.1 (b)(8).
As noted, the new economic crime guideline eliminates more than minimal
planning. The new economic crime guideline also contains a two-tiered
enhancement for offenses involving numerous victims.^^^ Ifthe offense involved

more than ten but fewer than fifty victims, the offense level increases by two.^^^
Offenses involving fifty or more victims receive a four-level increase.^^"^ As yet,
the Commission has provided no offense level discount for minimal planning or
one-time impulsive behavior.

367. See Bowman, Coping With "Loss, " supra note 103, at 499 n.l86.

368. /c/. at 497-502.

369. U.S.S.G.§2F1. 1(b)(5).

370. Id. app. C, amend. 595 (2000).

371. Id. app. C, amend. 596 (2000).

372. For a discussion of the rationale for such an enhancement, see Frank O. Bowman, III,

Coping With "Loss, " supra note 103, at 500-02.

373. U.S.S.G. §2Bl.l(b)(2)(A)(i)(2001).

374. Id §231. 1(b)(2)(B).



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 83

/. Departures

L Upward Departures.—The application notes to the consolidated
economic crime guideline contain a revised list ofencouraged upward departure

factors.^^^ Some of the revisions merely rephrase encouraged departure factors
listed in the former theft and fraud guidelines without any apparent change in

meaning. For example. Application Notes 15(A)(i) and 15(A)(ii) of Section

2B1.1 (2001) authorize a departure if a defendant's object in committing an

economic crime was to cause a non-monetary harm or if, in committing an
economic crime, the defendant caused or risked "substantial non-monetary

harm." These provisions merely break into two paragraphs, and provide

examples for, the two clauses ofApplication Note 1 1 (a) offormer Section 2F1 . 1

.

In some cases, the new phrasing of old departure factors may have substantive
impact. For example, the former fraud guideline encouraged departure if "the

offense involved the knowing endangerment of the solvency of one or more
victims."^^^ The new economic crime guideline retains this enhancement, but
omits the requirement that it be "knowing." The effect is to provide an
encouraged departure in any case in which the solvency of a victim was
endangered by the offense, regardless ofwhether the defendant was aware ofthat

possibility.

The new guideline omits three encouraged, but virtually never used,
departures listed in former Section 2F1.1: the departure for making false

statements "for the purpose offacilitating some other crime,"^^^ the departure for
"endanger[ing] national security or military readiness,"^^* and the departure for

"caus[ing] a loss of confidence in an important institution."^^^

Finally, the new economic crime guideline adds one new encouraged
departure factor of considerable importance. Application Note 15(A)(iv)

provides for an upward departure where "[t]he offense created a risk of

substantial loss beyond the loss determined for purposes ofsubsection (b)(l)."^^°

The inclusion of risk of loss as a departure factor is important primarily as a
limitation on the category of actual loss. Under the former fraud guideline, a

number of courts included in actual loss harms that victims never actually
suffered, but which were risked by the defendant's conduct. For example, some
courts refused to credit defendants for collateral posted in loan fraud cases, citing

a so-called "risk theory of loss" pursuant to which loss would include not only

actual economic harm suffered, but also the value of economic interests placed

at risk.^*' A similar line of thinking was at work in investment fraud cases in

375. Id. §2Bl.ln.l5(2001).

376. /^. § 2F1 . 1 n. 1 1 (f) (2000) (emphasis added).

377. Id §2Fl.ln.ll(b).

378. Id §2F1. In. 11(d).

379. Id §2Fl.ln.ll(e).

380. Id § 2B1.1 n.l5(A)(iv) (2001).

381. See, e.g., United States v. Najjor, 255 F.3d 979, 985 (9th Cir. 2001).



84 INDIANA LAW REVIEW [Vol. 35:5

which courts refused to grant credit against loss for amounts paid to victims as
part of the scheme.^*^ By negative implication, the risk of loss departure in the
new economic crime guideline rejects a "risk theory of loss." Under the new
guideline, actual loss includes only actual loss. Unrealized losses risked by the

offense are to be considered only for purposes of departure.

2. Downward Departures.—The new economic crime guideline contains
only one ground for an encouraged downward departure. A downward departure
"may be warranted" in cases "in which the offense level determined under this
guideline substantially overstates the seriousness of the offense."^^^ This

language differs from the analogous provision of the former fraud guideline in

that the old language spoke only of the amount of the loss overstating the
seriousness of the offense.^^"^ However, the revision appears to be primarily one

of style rather than substance.

J. Ex Post Facto Considerations

In any case covered by Section 2B1 .1 (2001) in which the criminal conduct

was completed prior to November 1, 2001, the sentencing court will be obliged
to determine whether application of the new economic crime guideline will
benefit or disadvantage the defendant by comparison with a sentence under the

former theft or fraud guidelines. If the defendant would have received a lower
sentence under the old guidelines, the Ex Post Facto Clause compels imposition
of that lower sentence rather than the higher sentence under Section 281.

1

(2001).^^^ The Guidelines' "one book rule," mandates that "The Guidelines
Manual in effect on a particular date shall be applied in its entirety

."^^^

Therefore, in pre-November 1 , 2001 cases, in order to make the before-and-after
comparison required by the Ex Post Facto Clause, courts will often have to
perform two complete sentencing calculations, one using the old rules in their
entirety, and the another using the new rules in their entirety.

K. Changes in Money Laundering Guidelines

The essential critique of the former money laundering guideline stemmed
from two points. First, a defendant could be convicted ofmoney laundering for
using the ill-gotten proceeds of a broad spectrum ofcrimes to perform virtually

any financial transaction involving a bank or similar institution. Second, the

guidelines set very high base offense levels merely for being convicted of a

money laundering offense, regardless ofthe seriousness ofthe underlying offense
(although there were some modest differences) and largely irrespective of the
amount ofmoney laundered. That is, money laundering of any type produced a

382. See, e.g.. United States v. Munoz, 233 F.3d 1 1 17, 1 138 (9th Cir. 2000).

383. U.S.S.G. § 2B1.1 n.l5(B) (2001).

384. Id §2F1.1 n.8(b) (2000).

385. See Miller v. Florida, 482 U.S. 423, 432-33 (1987).

386. U.S.S.G. § IBl. 11(b)(2) (2001).



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 85

base offense level of20,^*^ and convictions under three subsections of 1 8 U.S.C.

§ 1956(a) produced base offense levels of 23.^^^ A base offense level of 23
translates, irrespective ofany other factor, into a sentence ofabout four years.^^^

When one added on enhancement for the amount of laundered money,^^ the
sentences were higher still.

According to some critics, this combination ofcircumstances often penalized
laundering money derived from crime more harshly than the underlying crime
itself, and created an incentive for prosecutors to charge money laundering in
otherwise unexceptional fraud cases in order to generate far higher sentences

than would otherwise be available. After years of debate, the Commission
included in the 200 1 economic crime package a new money laundering guideline
that ties money laundering penalties much more closely to the penalties for the
underlying crime that generated the laundered funds.^^* The focus ofthis Article
is economic crime, not money laundering, which is often associated with drug
trafficking and other offenses. Consequently, the details of the new money
laundering guideline will not be discussed here.

Nonetheless, the new money laundering provision is of considerable
importance to economic crime sentencing because henceforth a money
laundering sentence will no longer be automatically higher than a fraud sentence.

At a minimum, both counsel and the court will have to calculate carefully the
differentials, if any, before agreeing to pleas or sentencing defendants.

CONCLUSION

I hope readers find the foregoing analysis useful. The project of passing an

economic crime package has been ongoing since 1995, and has drawn on the

energy and talents of hundreds of lawyers, judges, past and preseilt Sentencing

Commissioners, and members of the Commission staff. Although no law is
perfect, I am hopeful (and cautiously confident) that the provisions of this
package will both simplify economic crime sentencing and generate sentences

that are at least incrementally more just than those imposed under the former
guidelines.

387. Id. §2S 1.1 (a)(2) (2000).

388. Id. §2S1. 1(a)(1).

389. M § 5A (Sentencing Table).
390. Id §2S 1.1 (b)(2).

391. Id §2S1. 1(2001). For example, the new Section 2S 1.1 (a)(1) refers to the offense level

of the underlying offense as one measure of the proper offense level for money laundering, and

Section 2S 1.1 (a)(2) ties base offense level to amount laundered using the new fraud table, and

imposes only a two-level "premium" for money laundering.



86 INDIANA LAW REVIEW [Vol. 35:5

Appendix A

The New Consolidated Economic Crime Guideline, U.S.S.G. § 2B1.1
(Nov. 1, 2001), and Selected Application Notes

§2B1.1. Larceny, Embezzlement and Other Forms of Theft; Offenses
Involving Stolen Property; Property Damage or Destruction;
Fraud and Deceit; Forgery; Offenses Involving Altered or
Counterfeit Instruments Other than Counterfeit Bearer
Obligations of the United States

(a) Base Offense Level: 6

(b) Specific Offense Characteristics

(1) If the loss exceeded $5,000, increase the offense level as

follows:

Loss (Apply the Greatest) Increase in Level

(A) $5,000 or less no increase

(B) More than $5,000 add 2
(C) More than $10,000 add 4
(D) More than $30,000 add 6
(E) More than $70,000 adds
(F) More than $120,000 add 10
(G) More than $200,000 add 12
(H) More than $400,000 add 14
(I) More than $1,000,000 add 16
(J) More than $2,500,000 add 18
(K) More than $7,000,000 add 20
(L) More than $20,000,000 add 22
(M) More than $50,000,000 add 24
(N) More than $100,000,000 add 26.

(2) (Apply the greater) If the offense

(A) (i) involved more than 1 0, but less than 50, victims;
or (ii) was committed through mass-marketing,

increase by 2 levels; or

(B) involved 50 or more victims, increase by 4 levels.

(3) If the offense involved a theft from the person of another,

increase by 2 levels.



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 87

(4) If the offense involved receiving stolen property, and the

defendant was a person in the business of receiving and
selling stolen property, increase by 2 levels.

(5) If the offense involved misappropriation of a trade secret

and the defendant knew or intended that the offense would
benefit a foreign government, foreign instrumentality, or

foreign agent, increase by 2 levels.

(6) Ifthe offense involved theft of, damage to, or destruction of,
property from a national cemetery, increase by 2 levels.

(7) If the offense involved (A) a misrepresentation that the

defendant was acting on behalfofa charitable, educational,
religious, or political organization, or a government agency;

(B) a misrepresentation or other fraudulent action during the

course of a bankruptcy proceeding; (C) a violation of any

prior, specific judicial or administrative order, injunction,

decree, or process not addressed elsewhere in the

guidelines; or (D) a misrepresentation to a consumer in

connection with obtaining, providing, or furnishing financial

assistance for an institution ofhigher education, increase by

2 levels. If the resulting offense level is less than level 10,

increase to level 10.

(8) If (A) the defendant relocated, or participated in relocating,

a fraudulent scheme to another jurisdiction to evade law

enforcement or regulatory officials; (B) a substantial part of

a fraudulent scheme was committed from outside the United
States; or (C) the offense otherwise involved sophisticated

means, increase by 2 levels. Ifthe resulting offense level is

less than level 12, increase to level 12.

(9) If the offense involved (A) the possession or use of any

device-making equipment; (B) the production or trafficking

of any unauthorized access device or counterfeit access

device; or (C)(i) the unauthorized transfer or use of any

means of identification unlawfully to produce or obtain any
other means of identification; or (ii) the possession of 5 or
more means ofidentification that unlawfully were produced
from, or obtained by the use of, another means of
identification, increase by 2 levels. If the resulting offense

level is less than level 12, increase to level 12.

(10) If the offense involved an organized scheme to steal
vehicles or vehicle parts, and the offense level is less than

level 14, increase to level 14.



88 INDIANA LAW REVIEW [Vol. 35:5

(11) Ifthe offense involved (A) the conscious or reckless risk of

death or serious bodily injury; or (B) possession of a

dangerous weapon (including a firearm) in connection with
the offense, increase by 2 levels. If the resulting offense

level is less than level 14, increase to level 14.

(12) (Apply the greater) If

(A) the defendant derived more than $1,000,000 in
gross receipts from one or more financial
institutions as a result of the offense, increase by 2

levels; or

(B) the offense substantiallyjeopardized the safety and

soundness of a financial institution, increase by 4

levels.

If the resulting offense level determined under subdivision

(A) or (B) is less than level 24, increase to level 24.

(c) Cross References

(1) If (A) a firearm, destructive device, explosive material, or

controlled substance was taken, or the taking of any such

item was an object ofthe offense; or (B) the stolen property

received, transported, transferred, transmitted, or possessed

was a firearm, destructive device, explosive material, or
controlled substance, apply §2Dl.l (Unlawful

Manufacturing, Importing, Exporting, or Trafficking

(Including Possession with Intent to Commit These
Offenses); Attempt or Conspiracy), §2D2.1 (Unlawfiil

Possession; Attempt or Conspiracy), §2K1.3 (Unlawful

Receipt, Possession, or Transportation of Explosive

Materials; Prohibited Transactions Involving Explosive

Materials), or §2K2.1 (Unlawful Receipt, Possession, or

Transportation of Firearms or Ammunition; Prohibited

Transactions Involving Firearms or Ammunition), as

appropriate.

(2) Ifthe offense involved arson, or property damage by use of

explosives, apply §2K1 .4 (Arson; Property Damage by Use
of Explosives), if the resulting offense level is greater than

that determined above.

(3) If (A) neither subdivision (1) nor (2) of this subsection

applies; (B) the defendant was convipted under a statute
proscribing false, fictitious, or fraudulent statements or

representations generally (eg. . 18 U.S.C. § 1001, § 1341,



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 89

§ 1342, or § 1343); and (C) the conduct set forth in the

count of conviction establishes an offense specifically

covered by another guideline in Chapter Two (Offense
Conduct), apply that other guideline.

(d) Special Instruction

(1) If the defendant is convicted under 18 U.S.C. § 1030(a)(4)

or (5), the minimum guideline sentence, notwithstanding
any other adjustment, shall be six months' imprisonment.

Commentary
[Selected provisions]

2. Loss Under Subsection (b)(\) . This application note applies to the
determination of loss under subsection (b)(1).

(A) General Rule . Subject to the exclusions in subdivision (D), loss is

the greater of actual loss or intended loss.

(i) Actual Loss . "Actual loss" means the reasonably foreseeable

pecuniary harm that resulted from the offense.

(ii) Intended Loss . "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).

(iii) Pecuniary Harm . "Pecuniary harm" means harm that is
monetary or that otherwise is readily measurable in money.

Accordingly, pecuniary harm does not include emotional

distress, harm to reputation, or other non-economic harm.

(iv) Reasonably Foreseeable Pecuniary Harm . For purposes of
this guideline, "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.

(v) Rules of Construction in Certain Cases . In the cases

described in subdivisions (I) through (III), reasonably

foreseeable pecuniary harm shall be considered to include the
pecuniary harm specified for those cases as follows:

(I) Product Substitution Cases . In the case of a product

substitution offense, the reasonably foreseeable



90 INDIANA LAW REVIEW [Vol. 35:5

pecuniary harm includes the reasonably foreseeable
costs of making substitute transactions and handling
or disposing of the product delivered, or of

retrofitting the product so that it can be used for its

intended purpose, and the reasonably foreseeable

costs ofrectifying the actual or potential disruption to

the victim's business operations caused by the
product substitution.

(II) Procurement Fraud Cases . In the case of a

procurement fraud, such as a fraud affecting a

defense contract award, reasonably foreseeable

pecuniary harm includes the reasonably foreseeable
administrative costs to the government and other
participants of repeating or correcting the

procurement action affected, plus any increased costs

to procure the product or service involved that was
reasonably foreseeable.

(III) Protected Computer Cases . In the case of an offense
involving unlawfully accessing, or exceeding

authorized access to, a "protected computer" as

defined in 18 U.S.C. § 1030(e)(2), actual loss

includes the following pecuniary harm, regardless of

whether such pecuniary harm was reasonably
foreseeable: reasonable costs to the victim of

conducting a damage assessment, and restoring the
system and data to their condition prior to the

offense, and any lost revenue due to interruption of

service.

(B) Gain . The court shall use the gain that resulted from the offense as
an alternative measure of loss only ifthere is a loss but it reasonably

cannot be determined.

(C) Estimation ofLoss . The court need only make a reasonable estimate
ofthe loss. The sentencingjudge is in a unique position to assess the
evidence and estimate the loss based upon that evidence. For this

reason, the court's loss determination is entitled to appropriate

deference. See 18 U.S.C. § 3742(e) and (f).

The estimate of the loss shall be based on available information,
taking into account, as appropriate and practicable under the

circumstances, factors such as the following:

(i) The fair market value of the property unlawfully taken or
destroyed; or, if the fair market value is impracticable to



2001] FEDERAL ECONOMIC CRIME SENTENCING REFORM 91

determine or inadequately measures the harm, the cost to the

victim of replacing that property.

(ii) The cost of repairs to damaged property.

(iii) The approximate number of victims multiplied by the
average loss to each victim.

(iv) More general factors, such as the scope and duration of the
offense and revenues generated by similar operations.

(D) Exclusions from Loss . Loss shall not include the following:

(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.

(E) Credits Against Loss . Loss shall be reduced by the following:

(i) The money returned, and the fair market value of the
property returned and the services rendered, by the defendant

or other persons acting jointly with the defendant, to the

victim before the offense was detected. The time of
detection of the offense is the earlier of (I) the time the

offense was discovered by a victim or government agency; or
(II) the time the defendant knew or reasonably should have
known that the offense was detected or about to be detected
by a victim or government agency.

(ii) In a case involving collateral pledged or otherwise provided

by the defendant, the amount the victim has recovered at the

time ofsentencing from disposition ofthe collateral, or ifthe

collateral has not been disposed of by that time, the fair

market value of the collateral at the time of sentencing.

(F) Special Rules . Notwithstanding subdivision (A), the following

special rules shall be used to assist in determining loss in the cases

indicated:

(i) Stolen or Counterfeit Credit Cards and Access Devices:

Purloined Numbers and Codes . In a case involving any
counterfeit access device or unauthorized access device, loss

includes any unauthorized charges made with the counterfeit
access device or unauthorized access device and shall be not



92 INDIANA LAW REVIEW [Vol. 35:5

less than $500 per access device. However, if the
unauthorized access device is a means oftelecommunications
access that identifies a specific telecommunications

instrument or telecommunications account (including an

electronic serial number/mobile identification number
(ESN/MIN) pair), and that means was only possessed, and
not used, during the commission ofthe offense, loss shall be

not less than $100 per unused means. For purposes of this

subdivision, "counterfeit access device" and "unauthorized

access device" have the meaning given those terms in

Application Note 7(A).

(ii) Government Benefits . In a case involving government
benefits (e.g. , grants, loans, entitlement program payments),

loss shall be considered to be not less than the value of the

benefits obtained by unintended recipients or diverted to

unintended uses, as the case may be. For example, if the
defendant was the intended recipient of food stamps having
a value of$ 1 00 but fraudulently received food stamps having

a value of $ 1 50, loss is $50.

(iii) Davis-Bacon Act Violations . In a case involving a Davis-

Bacon Act violation ( i.e. , a violation of 40 U.S.C. § 276a,

criminally prosecuted under 18 U.S.C. § 1001), the value of

the benefits shall be considered to be not less than the

difference between the legally required wages and actual

wages paid.

(iv) Ponzi and Other Fraudulent Investment Schemes . In a case
involving a fraudulent investment scheme, such as a Ponzi

scheme, loss shall not be reduced by the money or the value
of the property transferred to any individual investor in the

scheme in excess ofthat investor' s principal investment (i.e. ,
the gain to an individual investor in the scheme shall not be

used to offset the loss to another individual investor in the

scheme).

(v) Certain Other Unlawful Misrepresentation Schemes . In a

case involving a scheme in which (I) services were

fraudulently rendered to the victim by persons falsely posing

as licensed professionals; (II) goods were falsely represented

as approved by a governmental regulatory agency; or (III)

goods for which regulatory approval by a government agency

was required but not obtained, or was obtained by fraud, loss

shall include the amount paid for the property, services or

goods transferred, rendered, or misrepresented, with no credit

provided for the value of those items or services.



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 93

(vi) Value of Controlled Substances . In a case involving

controlled substances, loss is the estimated street value ofthe

controlled substances.

3. Victim and Mass-Marketing Enhancement under Subsection (b)(2) .

(A) Definitions . For purposes of subsection (b)(2):

(i) "Mass-marketing" means a plan, program, promotion, or
campaign that is conducted through solicitation by telephone,

mail, the Internet, or other means to induce a large number of
persons to (I) purchase goods or services; (II) participate in

a contest or sweepstakes; or (III) invest for financial profit.

"Mass-marketing" includes, for example, a telemarketing

campaign that solicits a large number of individuals to
purchase fraudulent life insurance policies.

(ii) "Victim" means (I) any person who sustained any part ofthe
actual loss determined under subsection (b)(1); or (II) any

individual who sustained bodily injury as a result of the
offense. "Person" includes individuals, corporations,

companies, associations, firms, partnerships, societies, and

joint stock companies.

6. Sophisticated Means Enhancement under Subsection (b)(8) .

(A) Definition of United States . For purposes of subsection (b)(8)(B),

"United States" means each of the 50 states, the District of
Columbia, the Commonwealth of Puerto Rico, the United States
Virgin Islands, Guam, the Northern Mariana Islands, and American
Samoa.

(B) Sophisticated Means Enhancement . For purposes of subsection
(b)(8)(C), "sophisticated means" means especially complex or

especially intricate offense conduct pertaining to the execution or

concealment ofan offense. For example, in a telemarketing scheme,

locating the main office of the scheme in one jurisdiction but

locating soliciting operations in another jurisdiction ordinarily

indicates sophisticated means. Conduct such as hiding assets or

transactions, or both, through the use of fictitious entities, corporate

shells, or offshore financial accounts also ordinarily indicates

sophisticated means.

(C) Non-Applicability of Enhancement . If the conduct that forms the
basis for an enhancement under subsection (b)(8) is the only conduct



94 INDIANA LAW REVIEW [Vol. 35:5

that forms the basis for an adjustment under §3C1.1, do not apply

that adjustment under §3C 1.1.

***

15. Departure Considerations .

(A) Upward Departure Considerations . There may be cases in which the
offense level determined under this guideline substantially

understates the seriousness ofthe offense. In such cases, an upward
departure may be warranted. The following is a non-exhaustive list
of factors that the court may consider in determining whether an
upward departure is warranted:

(i) A primary objective ofthe offense was an aggravating, non-
monetary objective. For example, a primary objective ofthe

offense was to inflict emotional harm.

(ii) The offense caused or risked substantial non-monetary harm

.

For example, the offense caused physical harm,

psychological harm, or severe emotional trauma, or resulted

in a substantial invasion of a privacy interest (through, for

example, the theft of personal information such as medical,

educational, or financial records).

(iii) The offense involved a substantial amount of interest of any
kind, finance charges, late fees, penalties, amounts based on

an agreed-upon return or rate ofreturn, or other similar costs,

not included in the determination of loss for purposes of

subsection (b)(1).

(iv) The offense created a risk of substantial loss beyond the loss
determined for purposes of subsection (b)(1).

(v) The offense endangered the solvency or financial security of
one or more victims.

(vi) In a case involving stolen information from a "protected

computer", as defined in 18 U.S.C. § 1030(e)(2), the

defendant sought the stolen information to ftirther a broader

criminal purpose.

(vii) In a case involving access devices or unlawfully produced or

unlawfully obtained means of identification:

(I) The offense caused substantial harm to the victim's
reputation or credit record, or the victim suffered a



2001] FEDERAL ECONOMIC CRIME SENTENCING REFORM 95

substantial inconvenience related to repairing the

victim's reputation or a damaged credit record.

(II) An individual whose means of identification the
defendant used to obtain unlawful means of
identification is erroneously arrested or denied a job

because an arrest record has been made in that
individual's name.

(III) The defendant produced or obtained numerous means
of identification with respect to one individual and

essentially assumed that individual's identity.

(B) Downward Departure Consideration . There may be cases in which
the offense level determined under this guideline substantially

overstates the seriousness ofthe offense. In such cases, a downward
departure may be warranted.

Background : This guideline covers offenses involving theft, stolen property,
property damage or destruction, fraud, forgery, and counterfeiting (other than
offenses involving altered or counterfeit bearer obligations ofthe United States).

It also covers offenses involving altering or removing motor vehicle

identification numbers, trafficking in automobiles or automobile parts with

altered or obliterated identification numbers, odometer laws and regulations,

obstructing correspondence, the falsification ofdocuments or records relating to

a benefit plan covered by the Employment Retirement Income Security Act, and
the failure to maintain, or falsification of, documents required by the Labor

Management Reporting and Disclosure Act.

Because federal fraud statutes often are broadly written, a single pattern of

offense conduct usually can be prosecuted under several code sections, as a result

of which the offense of conviction may be somewhat arbitrary. Furthermore,
most fraud statutes cover a broad range of conduct with extreme variation in
severity. The specific offense characteristics and cross references contained in
this guideline are designed with these considerations in mind.

The Commission has determined that, ordinarily, the sentences of
defendants convicted offederal offenses should reflect the nature and magnitude

of the loss caused or intended by their crimes. Accordingly, along with other

relevant factors under the guidelines, loss serves as a measure ofthe seriousness

ofthe offense and the defendant's relative culpability and is a principal factor in
determining the offense level under this guideline.



96 INDIANA LAW REVIEW [Vol. 35:5

Appendix B

Former Guidelines Provisions Defining ^^Loss"

From U.S.S.G. § 2B1.1 (Theft Offenses), Application Notes

2. "Loss" means the value of the property taken, damaged, or destroyed.
Ordinarily, when property is taken or destroyed the loss is the fair market
value of the particular property at issue. Where the market value is
difficult to ascertain or inadequate to measure harm to the victim, the court
may measure loss in some other way, such as reasonable replacement cost
to the victim. Loss does not include the interest that could have been

earned had the funds not been stolen. When property is damaged, the loss
is the cost of repairs, not to exceed the loss had the property been

destroyed. Examples : ( 1 ) In the case ofa theft of a check or money order,
the loss is the loss that would have occurred if the check or money order
had been cashed. (2) In the case of a defendant apprehended taking a

vehicle, the loss is the value ofthe vehicle even if the vehicle is recovered

immediately.

Where the offense involved making a fraudulent loan or credit card
application, or other unlawful conduct involving a loan or credit card, the

loss is to be determined under the principles set forth in the Commentary
to '2F 1 . 1 (Fraud and Deceit).

In certain cases, an offense may involve a series oftransactions without a
corresponding increase in loss. For example, a defendant may embezzle
$5,000 from a bank and conceal this embezzlement by shifting this amount
from one account to another in a series of nine transactions over a six-

month period. In this example, the loss is $5,000 (the amount taken), not

$45,000 (the sum of the nine transactions), because the additional
transactions did not increase the actual or potential loss.

In stolen property offenses (receiving, transporting, transferring,

transmitting, or possessing stolen property), the loss is the value of the

stolen property determined as in a theft offense.

In an offense involving unlawfully accessing, or exceeding authorized

access to, a "protected computer" as defined in 18 U.S.C. §1030(e)(2)(A)

or (B), "loss" includes the reasonable cost to the victim of conducting a

damage assessment, restoring the system and data to their condition prior
to the offense, and any lost revenue due to interruption of service.

In the case of a partially completed offense (e.g. , an offense involving a

completed theft that is part of a larger, attempted theft), the offense level

is to be determined in accordance with the provisions of '2X1 . 1 (Attempt,

Solicitation, or Conspiracy) whether the conviction is for the substantive



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 97

offense, the inchoate offense (attempt, solicitation, or conspiracy), or both;

see Application Note 4 in the Commentary to '2X1 . 1

.

3. For the purposes ofsubsection (b)(1), the loss need not be determined with

precision. The court need only make a reasonable estimate of the loss,
given the available information. This estimate, for example, may be based
upon the approximate number of victims and the average loss to each
victim, or on more general factors such as the scope and duration of the

offense.

4. The loss includes any unauthorized charges made with stolen credit cards,
but in no event less than $100 per card. See Commentary to " 2X1.1
(Attempt, Solicitation, or Conspiracy) and 2F1 . 1 (Fraud and Deceit).

5. Controlled substances should be valued at their estimated street value.

15. In cases where the loss determined under subsection (b)(1) does not fully

capture the harmfulness of the conduct, an upward departure may be
warranted. For example, the theft ofpersonal information or writings (e.g. ,

medical records, educational records, a diary) may involve a substantial
invasion ofa privacy interest that would not be addressed by the monetary

loss provisions of subsection (b)(1).

Background : The value of the property stolen plays an important role in
determining sentences for theft and other offenses involving stolen property

because it is an indicator of both the harm to the victim and the gain to the
defendant. Because ofthe structure ofthe Sentencing Table (Chapter 5, Part A),

subsection (b)(1) results in an overlapping range ofenhancements based on the

loss.

From U.S.S.G. § 2F1.1 (Fraud Offenses), Application Notes

8. Valuation of loss is discussed in the Commentary to §2B1.1 (Larceny,
Embezzlement, and Other Forms of Theft). As in theft cases, loss is the
value ofthe money, property, or services unlawftjlly taken; it does not, for

example, include interest the victim could have earned on such funds had

the offense not occurred. Consistent with the provisions of §2X1.1

(Attempt, Solicitation, or Conspiracy), if an intended loss that the

defendant was attempting to inflict can be determined, this figure will be
used if it is greater than the actual loss. Frequently, loss in a fraud case

will be the same as in a theft case. For example, if the fraud consisted of
selling or attempting to sell $40,000 in worthless securities, or representing

that a forged check for $40,000 was genuine, the loss would be $40,000.



98 INDIANA LAW REVIEW [Vol. 35:5

There are, however, instances where additional factors are to be considered
in determining the loss or intended loss:

(a) Fraud Involving Misrepresentation of the Value of an Item or
Product Substitution

A fraud may involve the misrepresentation of the value of an item
that does have some value (in contrast to an item that is worthless).
Where, for example, a defendant fraudulently represents that stock

is worth $40,000 and the stock is worth only $10,000, the loss is the

amountby which the stock was overvalued (Le,, $30,000). In a case
involving a misrepresentation concerning the quality of a consumer
product, the loss is the difference between the amount paid by the
victim for the product and the amount for which the victim could
resell the product received.

(b) Fraudulent Loan Application and Contract Procurement Cases

In fraudulent loan application cases and contract procurement cases,

the loss is the actual loss to the victim (or ifthe loss has not yet come
about, the expected loss). For example, if a defendant fraudulently

obtains a loan by misrepresenting the value of his assets, the loss is.

the amount of the loan not repaid at the time the offense is
discovered, reduced by the amount the lending institution has

recovered (or can expect to recover) from any assets pledged to

secure the loan. However, where the intended loss is greater than the

actual loss, the intended loss is to be used.

In some cases, the loss determined above may significantly
understate or overstate the seriousness of the defendant's conduct.

For example, where the defendant substantially understated his debts

to obtain a loan, which he nevertheless repaid, the loss determined

above (zero loss) will tend not to reflect adequately the risk of loss

created by the defendant's conduct. Conversely, a defendant may
understate his debts to a limited degree to obtain a loan (e.g. , to

expand a grain export business), which he genuinely expected to

repay and for which he would have qualified at a higher interest rate

had he made truthful disclosure, but he is unable to repay the loan
because of some unforeseen event (e.g. , an embargo imposed on
grain exports) which would have caused a default in any event. In

such a case, the loss determined above may overstate the seriousness
of the defendant's conduct. Where the loss determined above
significantly understates or overstates the seriousness of the

defendant's conduct, an upward or downward departure may be
warranted.



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 99

(c) Consequential Damages in Procurement Fraud and Product
Substitution Cases

In contrast to other types of cases, loss in a procurement fraud or

product substitution case includes not only direct damages, but also

consequential damages that were reasonably foreseeable* For
example, in a case involving a defense product substitution offense,

the loss includes the government's reasonably foreseeable costs of

making substitute transactions and handling or disposing of the
product delivered or retrofitting the product so that it can be used for

its intended purpose, plus the government's reasonably foreseeable

cost of rectifying the actual or potential disruption to government
operations caused by the product substitution. Similarly, in the case
of fraud affecting a defense contract award, loss includes the

reasonably foreseeable administrative cost to the government and

other participants of repeating or correcting the procurement action

affected, plus any increased cost to procure the product or service

involved that was reasonably foreseeable. Inclusion of reasonably
foreseeable consequential damages directly in the calculation ofloss
in procurement fraud and product substitution cases reflects that

such damages frequently are substantial in such cases.

(d) Diversion of Government Program Benefits

In a case involving diversion of government program benefits, loss

is the value ofthe benefits diverted from intended recipients or uses.

(e) Davis-Bacon Act Cases

In a case involving a Davis-Bacon Act violation (a violation of 40

U.S.C. § 276a, criminally prosecuted under 18 U.S.C. § 1001), the

loss is the difference between the legally required and actual wages
paid.

9. For the purposes ofsubsection (b)( 1 ), the loss need not be determined with

precision. The court need only make a reasonable estimate of the loss,
given the available information. This estimate, for example, may be based
on the approximate number ofvictims and an estimate ofthe average loss
to each victim, or on more general factors, such as the nature and duration
of the fraud and the revenues generated by similar operations. The
offender's gain from committing the fraud is an alternative estimate that

ordinarily will underestimate the loss.

11. In cases in which the loss determined under subsection (b)(1) does not fully

capture the harmfulness and seriousness of the conduct, an upward
departure may be warranted. Examples may include the following:



100 INDIANA LAW REVIEW [Vol. 35:5

(a) a primary objective of the fraud was non-monetary; or the fraud
caused or risked reasonably foreseeable, substantial non-monetary

harm;

(b) false statements were made for the purpose offacilitating some other
crime;

(c) the offense caused reasonably foreseeable, physical or psychological

harm or severe emotional trauma;

(d) the offense endangered national security or military readiness;

(e) the offense caused a loss of confidence in an important institution;

(f) the offense involved the knowing endangerment of the solvency of
one or more victims.

In a few instances, the loss determined under subsection (b)( 1 ) may overstate the
seriousness of the offense. This may occur, for example, where a defendant
attempted to negotiate an instrument that was so obviously fraudulent that no one

would seriously consider honoring it. In such cases, a downward departure may
be warranted.

12. Offenses involving fraudulent identification documents and access devices,

in violation of 18 U.S.C. §§ 1028 and 1029, are also covered by this

guideline. Where the primary purpose ofthe offense involved the unlawful
production, transfer, possession, or use of identification documents for the

purpose of violating, or assisting another to violate, the laws relating to

naturalization, citizenship, or legal resident status, apply §2L2. 1 or §2L2.2,

as appropriate, rather than §2F 1.1. In the case ofan offense involving false
identification documents or access devices, an upward departure may be
warranted where the actual loss does not adequately reflect the seriousness

of the conduct.

Background : This guideline is designed to apply to a wide variety offraud

cases. The statutory maximum term of imprisonment for most such
offenses is five years. The guideline does not link offense characteristics
to specific code sections. Because federal fraud statutes are so broadly

written, a single pattern ofoffense conduct usually can be prosecuted under

several code sections, as a result ofwhich the offense ofconviction may be
somewhat arbitrary. Furthermore, most fraud statutes cover a broad range
of conduct with extreme variation in severity.



200 1 ] FEDERAL ECONOMIC CRIME SENTENCING REFORM 1 1

Empirical analyses of pre-guidelines practice showed that the most
important factors that determined sentence length were the amount of loss
and whether the offense was an isolated crime of opportunity or was
sophisticated or repeated. Accordingly, although they are imperfect, these

are the primary factors upon which the guideline has been based.