Sentencing Fraud

by Mihailis E. Diamantis

Imagine a class of criminals that is growing year over year, whose members have higher than average recidivism rates, and for whom the public has very little sympathy.[1]  They would seem an unlikely group for judges and scholars to think are punished too severely.  This, though, is the fortunate position of the white-collar fraudster.

To be sure, federal penalties for fraud can be quite burdensome.[2]  The base offense level for most frauds is 6, but this can climb as the loss caused by the fraud increases from $6,501 (add 2 levels) up to $550,000,001 (add 30 levels).  The number of victims can also have a significant impact, ranging from an additional 2 levels if there are at least ten victims to an additional 6 levels if there are more than twenty-five.  A first-time fraudster who causes more than $550,000,001 in losses to at least twenty-five victims is looking at a recommended sentence of thirty years to life.[3]  For most judges and scholars, that kind of punishment sounds disproportionate.[4]

What sense could there be—whether from the framework of deterrence, rehabilitation, or retribution—to that position?  Some data could help put things in perspective.  Consider first what deterrence theory should recommend based on the numbers.  Deterrence is a natural starting point for theorizing about white-collar crime; many think that white-collar criminals are particularly good at the sort of cost-benefit analysis that deterrence theory relies on for its effects.[5]  According to standard deterrence theory, the magnitude of the sanction multiplied by the chance of getting caught should be greater than the expected criminal gains.[6]  Suppose, for example, that someone defrauds fifty victims of a total of $10,000,000.  Suppose further (and probably very conservatively) that he has a one-in-ten chance of getting caught.  The deterrence calculus, all else being equal, would call for a minimum fine of $100,000,001.  The problem for deterrence, though, is that this figure would very likely exceed what the fraudster could pay.  That means that fines are inadequate to deter this sort of crime.[7]  Perhaps in recognition of this, the Sentencing Guidelines for fraud are keyed to prison sentences.  The same fraudster sentenced under the Guidelines would have an offense level of 32 and a sentencing range of 10 to 13 years.

While that sentence may sound harsh in the abstract, the best evidence of sufficiency for deterrence is whether the sanction adequately impacts potential criminals’ cost-benefit analysis.  If we observe unacceptable levels of some crime, deterrence theorists would generally recommend upping the penalty.  But here is where the case for lighter sentences runs in to trouble.  So far as white-collar fraud is concerned, there have been year-over-year increases in frequency.[8]  The natural conclusion for the deterrence theorist should be that the sentences fraudsters receive are actually too low.[9]

Maybe instead of deterrence, judges and scholars who favor lighter fraud sentences are thinking in terms of rehabilitation.  Rehabilitation theorists measure the sufficiency of punitive measures by their capacity to reform criminals[10] and thereby prevent them from recidivating.[11]  Perhaps judges and scholars think white-collar fraudsters should have lighter sentences because their social and educational backgrounds allow them to reintegrate more easily into society.[12]  Here, though, data once again beats out armchair reasoning.  As many as 39.2% of white-collar criminals are re-convicted within three years of their first offense,[13] and one-in-three fraudsters have prior convictions.[14]  A classic rehabilitation theorist would, like the deterrence theorist, conclude that the Guidelines ranges are actually too low—perhaps currently giving fraudsters insufficient time to learn their lesson or failing to communicate how serious fraud is.[15]

The most compelling argument for lighter fraud sentences may come from retributivists, who think criminals should be punished in proportion to the seriousness of their crime.  Judges and scholars may claim that white-collar fraud is a less serious offense than analogous street crimes that involve the potential for violence.[16]  The worry—evident when the Sentencing Commission raised the Guidelines ranges for fraud—is that this moral intuition may be the product of cognitive bias and the unconscious empathy judges and scholars (including myself) naturally feel for white-collar criminals, with whom they share similar socio-economic backgrounds.[17]  In light of this concern, it may be best to turn to the moral intuitions of society more broadly, rather than just those of judges and scholars.[18]

Once more, the data is telling.  In 1985, the Bureau of Justice Statistics released The National Survey of Crime Severity, which polled Americans on the “seriousness” of various sorts of crimes.[19]  These polls showed that people rank the moral seriousness of check fraud, embezzlement, and robbery as roughly on a par.[20]  More recent studies suggest this data is still good. People today think that white-collar crime is morally blameworthy,[21] and, on average, people think that robbery and white-collar fraud deserve equivalent punishment.[22]

Do the Sentencing Guidelines reflect this moral equivalency between fraud and robbery?  One test would be to compare offense levels for the average fraud and the average robbery.  The average convicted fraud causes a loss of roughly $5.5M.[23]  Assuming no other aggravating offense characteristics, the average fraud has an offense level of 24 (6 for the base offense level plus 18 for the loss).[24]  The average robbery is for $1,167 and involves some kind of dangerous weapon.[25]  Again assuming no other additional aggravating offense characteristics, the average robbery has an offense level of exactly the same, 24 (20 for the base offense level plus 4 for using a dangerous weapon).[26] So far as retribution is concerned, the Sentencing Guidelines seem to have it spot on.

If the case for lighter white-collar fraud sentences has any merit, it must come from somewhere other than straight-forward pursuit of the basic purposes of criminal law.  While there may be good arguments for lighter criminal sentences across-the-board, there seems little reason to single fraud out for that privilege.

Footnotes

[1] This post draws on themes I develop more fully in White-Collar Showdown, 102 Iowa L. Rev. Online 320 (2017).

[2] See U.S. Sentencing Guidelines Manual § 2B1.1 (U.S. Sentencing Comm’n 2016).

[3] See U.S Sentencing Guidelines Manual § 5A sentencing table (U.S. Sentencing Comm’n 2016).

[4] See Mark W. Bennett et al., Judging Federal White-Collar Fraud Sentencing: An Empirical Study Revealing the Need for Further Reform, 102 Iowa L. Rev. 939 (2017) (arguing for lower fraud guideline ranges by citing survey data establishing that most state and federal judges are inclined to sentence fraudsters at or below the present Guidelines minimum); Samuel W. Buell, Is the White Collar Offender Privileged?, 63 Duke L.J. 823, 839–41 (2014) (“[I]f many sentences (even longer ones) are now imposed in deviation from what the guidelines dictate, maybe that is not because judges favor leniency for white collar violators but because the fraud guidelines have become so harsh that they are no longer much help to the sensible jurist trying to punish rationally and proportionately.”); Frank O. Bowman III, Sentencing High-Loss Corporate Insider Frauds After Booker, 20 Fed. Sent’g Rep. 167, 169–70 (2008) (“[V]irtually every judge faced with a top-level corporate defendant in a very large fraud has concluded that sentences called for by the Guidelines were too high. This near unanimity suggests that the judiciary sees a consistent disjunction between the sentences prescribed by the Guidelines for [large fraud cases] . . .  and the fundamental requirement of section 3553(a) that judges impose sentences ‘sufficient, but not greater than necessary’ to comply with its objectives.”); Daniel S. Guarnera, A Fatally Flawed Proxy: The Role of “Intended Loss” in the U.S. Sentencing Guidelines for Fraud, 81 Mo. L. Rev. 715, 732 (2016) (“[T]he relatively high number of downward sentencing departures indicates a systematic tendency of the fraud Guidelines to over-punish in light of Congress’s mandate to sentence federal offenders proportionally.”); Ellen Pogdor, The Challenge of White Collar Sentencing, 97 J. Crim. L. & Criminology 731, 733 (describing white-collar sentences as “draconian,” especially as applied to first-time offenders); John D. Esterhay, “Street Justice” for Corporate Fraud—Mandatory Minimums for Major White-Collar Crime, 22 Regent U.L. Rev. 135, 138 (2009) (“[F]ederal judges . . . continue to be more lenient towards serious white-collar fraud than other types of crime.”).  But see Mary Kreiner Ramirez, Just in Crime: Guiding Economic Crime Reform After the Sarbanes-Oxley Act of 2002, 34 Loy. U. Chi. L.J. 359, 408 (2003) (“The dual purposes of retribution and deterrence support longer terms of imprisonment [for white collar fraud] . . . .”).

[5] See Jennifer Arlen, The Potentially Perverse Effects of Corporate Criminal Liability, 23 J. Legal Stud. 833, 834 (1994) (“[White-collar criminals] are rational self-interested utility maximizers who commit crimes in order to benefit themselves.”); Stephanos Bibas, White-Collar Plea Bargaining and Sentencing after Booker, 47 Wm. & Mary L. Rev. 721, 724 (2005) (“[W]hite-collar crime is more rational, cool, and calculated than sudden crimes of passion or opportunity, so it should be a prime candidate for general deterrence.”).

[6] See Jennifer Arlen & William J. Carney, Vicarious Liability for Fraud on Securities Markets: Theory and Evidence, 1992 U. Ill. L. Rev. 691 (1992) (“[T]he damage award imposed on the agent must equal the agent’s expected gain from the fraud divided by the probability that the agent will be found liable.”); Cindy R. Alexander & Mark A. Cohen, The Causes of Corporate Crime: An Economic Perspective, in Prosecutors in the Boardroom 11, 14–15 (Anthony S. Barkow & Rachel E. Barkow eds., 2011) (“Within this rational-choice ‘deterrence’ framework, individuals weigh the costs and benefits of crime-related activity against the expected sanction to maximize their private utility under the constraints of the organization in which they find themselves . . . .”).

[7] See John D. Coffee, Jr., Corporate Crime and Punishment: A Non-Chicago View of the Economics of Criminal Sanctions, 17 Am. Crim. L. Rev. 419, 434-35 (1980) (arguing that it may not be possible to collect fines large enough to deter white-collar crime).

[8] U.S. Sentencing Comm’n, Sentencing and Guideline Application Information for §2B1.1 Offenders 1, 1 fig.1 (2013).

[9] Daniel Richman, Federal White Collar Sentencing in the United States: A Work in Progress, 76 Law & Contemp. Probs. 53, 65 (2013) (“[T]he deterrence curve offers but limited support for lower sentences.”).

[10] See RA Duff, Virtue, Vice and the Criminal Law—A Response to Huigens and Yankah, in Law, Virtue and Justice 195, 196 (Amalia Amaya & Ho Hock Lai eds.,
2013) (“We could . . . use criminal law and punishment as ways of directly fostering virtue and preventing vice . . . .”).

[11] See Benjamin B. Sendor, The Relevance of Conduct and Character to Guilt and Punishment, 10 Notre Dame J.L. Ethics & Pub. Pol’y 99, 100 (1996) (“‘[B]ad character’ in this context means a ‘settled disposition’ . . . to commit acts that violate the law.”) (citation omitted).

[12] Patricia M. Jones, Sentencing, 24 Am. Crim. L. Rev. 879, 885 (1987) (indicating that it is commonly argued “that the defendant’s respectable community position and gainful employment make rehabilitation unnecessary”).

[13] See Katie A. Fredericks et al., White Collar Crime: Recidivism, Deterrence, and Social Impact, 2 Forensic Res. & Criminology Int’l J., 1/11, 7/11 (2016). We should take this number with a grain of salt, since the authors used an unusually broad definition of “white-collar crime,” which seems to include many non-violent property offenses, like motor vehicle theft, that would not appear on standard lists.

[14] Elizabeth Szockyj, Imprisoning White-Collar Criminals?, 23 S. Ill. U. L.J. 485, 494 (1999) (indicating that 72% of regulatory offenders and 64% of fraudulent offender have no prior adult convictions).

[15]See John Irwin, Prisons in Turmoil 2 (1980) (indicating that early American “prison planners” hoped to “ke[ep felons] in quiet solitude, reflecting penitently on their sins in order that they might cleanse and transform themselves”).

[16] See Bennett et al., supra note 4, at 983 (the Guidelines “seriously overstate criminal culpability” of white-collar fraud).

[17] See Andrew Weissmann & Joshua A. Block, White-Collar Defendants and White-Collar Crimes, 116 Yale L.J. Pocket Part 286, 289 (2007) (“One of the laudatory goals in promulgating the Sentencing Guidelines was to remedy the potential for hidden—or unhidden—bias in favor of ‘white collar’ defendants.”).

[18] Paul G. Cassell, Too Severe?: A Defense of the Federal Sentencing Guidelines (and a Critique of Federal Mandatory Minimums), 56 Stan. L. Rev. 1017, 1023 (2004) (“Perhaps the most straightforward way of determining desert is to determine what society believes is the appropriate penalty for a particular crime.”).

[19] Marvin E. Wolfgang et. al., U.S. Dep’t of Just., Bureau of Just. Stat., The National Survey of Crime Severity 153–65 (1985).

[20] Id. at 155–56.

[21] Stuart P. Green & Matthew B. Kugler, Public Perceptions of White Collar Crime Culpability: Bribery, Perjury, and Fraud, 75 L. & Contemp. Probs.33, 52–58 (2012) (presenting data on the fine-grained moral judgments people make about when fraud deserves to be punished).

[22] See Donald J. Rebovich & John Kane, The National Public Survey on White Collar Crime 12 (2000) (“[M]any now believe that white collar crime can be as serious or more serious than certain types of street crimes.”); Andrea Schoepfer et al., Do Perceptions of Punishment Vary Between White-Collar and Street Crimes?, 35 J. Crim. Just. 151, 157 (2007) (“Specifically, 31 percent of the respondents believed that the robbery should receive a more severe punishment and 31 percent believed that fraud should receive a more severe punishment, while 38 percent of the respondents believed that the two crimes should be equally punished.”).

[23] U.S. Sentencing Comm’n, Overview of Federal Criminal Cases Fiscal Year 2014 8 (2015).

[24] See id.; U.S. Sentencing Guidelines Manual § 2B1.1(a)–(b) (U.S. Sentencing Comm’n 2016).

[25] Robbery, Fed. Bureau of Investigation: Uniform Crime Reporting, (last visited May 21, 2017).

[26] See id.; U.S. Sentencing Guidelines Manual § 2B3.1(a)–(b) (U.S. Sentencing Comm’n 2016).

Mihailis E. Diamantis is an Associate Professor of Law at the University of Iowa College of Law.

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