MEDIA

November 15, 2010

Fraud Case Prompts Sentencing Guidelines Critique

Published in: New York Law Journal | volume 244

This column reports on several significant, representative decisions handed down recently in the U.S. District Court for the Eastern District of New York. Judge John Gleeson used a particular case to illustrate why the U.S. Sentencing Guidelines for fraud cases often do not, and in reality cannot, capture all the nuances relevant to a just result. Judge Raymond J. Dearie granted a preliminary injunction against the commissioners of the New York State Board of Elections. Judge Sandra L. Townes declined to compel arbitration of Truth in Lending Act claims. And Judge Joanna C. Seybert granted, in part, plaintiff’s motion for a preliminary injunction regarding the impoundment of his vehicle pending a forfeiture proceeding.

Sentencing Disparities

In United States v. Ovid, 09 CR 216 (EDNY, Oct. 1, 2010), Judge Gleeson explained the reasons for a sentence well below the guidelines range and commented on a Department of Justice letter decrying the ‘evolution’ of two divergent ‘sentencing regimes’-one of which, in the department’s view, ‘has largely lost its moorings to the sentencing guidelines.’

In June 2010 Jonathan J. Wroblewski, director of the department’s Office of Policy and Legislation, wrote to William K. Sessions III, chair of the U.S. Sentencing Commission, about a ’cause of concern.’ The letter referred to a ‘regime’ consisting of judges who impose sentences within the guidelines range in most cases. ‘This,’ Judge Gleeson noted, ‘is apparently the good regime.’ But Mr. Wroblewski also pointed to a ‘second regime,’ consisting of judges who impose sentences in fraud cases, especially those involving high losses, ‘inconsistently and without regard to the federal sentencing guidelines.’ This ‘unacceptable’ practice, Mr. Wroblewski concluded, warranted an exploration by the commission of ‘how to create a single sentencing regime’ that will earn ‘respect.’ The letter suggested that ‘reforms might include amendments to the sentencing guidelines. . . .’

Judge Gleeson voiced a different perspective: ‘The sentencing of [defendant] Ovid on July 30, 2010, illustrates well the fact that, here in the trenches, where fraud sentences are actually imposed, there is a more nuanced reality than the DOJ letter suggests.’ The ‘second regime,’ the court explained, is not ‘adrift in the vast regions’ beneath the advisory ranges. Rather, the instant case ‘shows how the fraud guideline, despite its excessive complexity, still does not account for many of the myriad factors that are properly considered in imposing just sentences, and indeed no workable guideline could ever do so.’ Slip op. 2. In fact, a ‘fair sentence can drift quite far away from the advisory range, which is, after all, but one of eight factors ‘ relating to the offense, the offender, the goals of sentencing and other relevant considerations under 18 U.S.C. §3553(a). Slip op. 3.

Isaac Ovid pled guilty to a securities fraud conspiracy relating to two hedge funds. When the offenses occurred, he was in his early 20s and an ordained minister of the Local Christian Assembly. The conspirators marketed the funds to friends, family and church members.

With a loss level greater than $7 million, Mr. Ovid’s total guidelines offense level was 37, yielding a sentencing range of 210 to 262 months. In explaining the 60-month sentence, Judge Gleeson started by quoting a number of statements made by counsel at sentencing. The following is a brief summary of some of those statements:

  • Jadis Capital, the original investment management company, started ‘with the best of intentions,’ to benefit church members who worked at the company as well as others.
  • Mr. Ovid had been a successful trader and believed he could make money for the investors.
  • He put up about $100,000 of his own money for start-up costs.
  • The personal expenses charged against Jadis Capital, though excessive, fell into categories often treated as business expenses.
  • While the offering papers did not say Mr. Ovid would be trading, the investors knew of his involvement.
  • Mr. Ovid never drew a salary from Jadis Capital and did not siphon money for personal gain.
  • Mr. Ovid was not personally involved in certain important phases of the conspiracy.
  • After there was no hope of rescuing the fund, Mr. Ovid went to the church and confessed his wrongdoing to the congregation.
  • Mr. Ovid voluntarily submitted to Securities and Exchange Commission debriefings.
  • The people affiliated with Jadis Capital believed that the investment would work and, in their terms, ‘bless everybody.’
  • Mr. Ovid ‘heavily’ demonstrated remorse.

Such factors, the court observed, are properly considered pursuant to 18 U.S.C. §3553(a), though ‘they are not adequately accounted for in the guidelines themselves.’ Slip op. 9. The sentence, moreover, is consistent with the guidelines. Indeed, the detailed statement of mitigating circumstances, skeletally summarized above, came not from the defense, but from the prosecutor. Id.

Significantly, the government had entered into a ‘charge bargain’ with Mr. Ovid allowing him to plead to one count with a 5-year statutory maximum, and had persuaded the court to accept the bargain.

The special features of this case ‘are matters of judgment, not precise calibration.’ Slip op. 12. In the court’s view it is not ‘surprising or disturbing’ that the consideration of sentencing factors ‘will produce a range of reasonable outcomes. . . .’ Slip op. 13. The DOJ letter seemed to Judge Gleeson to suggest a ‘deeper concern’-‘that judges are inexplicably and unjustifiably all over the lot. . . .’ Slip op. 14. If this problem actually exists, the solution is not to promulgate more amendments to the fraud guideline, which ‘is way too complicated as it is.’ Slip op. 14.

Finally, there is already a remedy for truly unwarranted disparities in fraud sentences-appellate review. But the department chooses to employ that remedy only rarely. According to Sentencing Commission data, at most ‘only 1% of the cases the DOJ letter describes as extremely problematic’ are being appealed by the government.’ Slip op. 15. Judge Gleeson reminded the department not to see appellate review as futile: it has prevailed two-thirds of the time in the handful of cases where it has challenged sentences based on the sentencing judge’s application of the §3553(a) factors. Slip op. 16.

Election Law

In Credico v. New York State Board of Elections, 10 CV 4555 (EDNY, Oct. 28, 2010), Chief Judge Dearie preliminarily enjoined the commissioners of the New York State Board of Elections from enforcing Election Law §7.104.4 (e) and directed them ‘to certify the ballot in the Nov. 2, 2010 general election so that Randy Credico’s name is placed on the [U.S. Senate] ballot for both the Libertarian Party and the APP [Anti-Prohibition Party].’

New York Election Law §7.104.4 distinguishes between candidates who are nominated by more than one party and candidates who are nominated by more than one independent body. A party is a political organization whose gubernatorial candidate received more than 50,000 votes in the prior election, and an independent body is a political organization whose gubernatorial candidate received less than 50,000. The names of candidates nominated by more than one party appear on the ballot line of each party, while candidates nominated by more than one independent body must choose one ballot line or have the Board of Elections select one.

Plaintiff was a candidate for U. S. senator for the State of New York for both the Libertarian Party and the APP, which are both independent bodies. The Board of Elections notified him that he had to designate whether he wanted to be placed on the Libertarian or APP ballot line, and that if he did not notify them of his choice, he would be placed on the Libertarian Party ballot line. Plaintiff requested that his name be placed on both ballot lines, and the Board of Elections refused to comply.

Chief Judge Dearie dismissed plaintiffs’ claims against the Board of Elections under the 11th Amendment, which bars a suit for injunctive relief against a state agency unless Congress has abrogated the state’s immunity or the state has waived it. However, plaintiffs’ request for injunctive relief against the commissioners in their official capacities could go forward.

Because election laws necessarily implicate the First and Fourteenth amendments and violations of First Amendment rights are irreparable injuries, plaintiffs had shown they would suffer irreparable injury if the injunction was not granted. Slip op. 5.

The court also found that plaintiffs demonstrated a clear or substantial likelihood of success on the merits. The Election Laws here place burdens on the associational rights of only minor political parties, implicating both the First Amendment and Fourteenth Amendment Equal Protection Clause. To determine the constitutionality of the state’s electoral regulations, Chief Judge Dearie weighed the burdens placed on plaintiffs’ associational rights against the states interests in the Election Law provisions.

The burdens placed on plaintiffs’ associational rights were not severe: Mr. Credico was not removed from the ballot and could still educate his supporters that he had received the nomination of both independent bodies. Slip op. 7. But on the facts here, New York’s asserted interest-to limit the number of ballot lines when candidates receive multiple crossnominations- carried no weight, because APP had a ballot line anyway and where Mr. Credico’s name would appear there would be a blank space. In short, New York’s interest in saving space on the ballot would not be served, and APP supporters would be confused by the blank space. Slip op. 8-9.

Finally, the Board of Elections failed to submit any affidavits or sworn testimony to support its claim that a change in the ballot was not possible. Slip op. 9-10.

Enforceability of Arbitration

In Follman v. World Financial Network National Bank, 10 CV 1921 (EDNY, Oct. 20, 2010), Judge Townes rejected defendant’s attempt to compel arbitration of claims brought under the federal Truth in Lending Act, 15 U.S.C. §1601, by the holder of a Victoria’s Secret credit card.

Plaintiff’s claims fell within a broad arbitration agreement that had been added, after the initial credit card agreement, pursuant to a ‘change-of-terms’ provision allowing defendant/issuer to ‘add, change or delete the terms of this Agreement (including, but not limited to, Annual Percentage Rate and fees), at any time with or without notice. . . .’ As plaintiff had failed to opt out of these new terms upon due notice, the issuer moved to stay her claims, pending arbitration, under the Federal Arbitration Act, 9 U.S.C. §1, et seq.

Applying Ohio law as called for by the credit card agreement, Judge Townes held that, in order for addition of an arbitration clause to be proper under the ‘changeof-terms’ provision, ‘the parties’ dispute resolution rights must be addressed or contemplated in the original agreement.’ Slip op. 12. As the court found, a provision allowing defendant/issuer to recover attorney’s fees and court costs for its successful claims against the cardholder was not sufficient. Because the original agreement did ‘not address a cardholder’s dispute resolution rights against defendant,’ there was no meeting of the minds at the inception of the contract as to the right of defendant/ issuer to add the arbitration clause. See Maestle v. Best Buy Co., 2005 WL 1907282 (Ohio App. 8 Dist. 2005). Slip op. 13.

Seizure of Vehicle

In Boyle v. County of Suffolk, 10 CV 3606 (EDNY, Oct. 19, 2010), Judge Seybert granted in part and denied in part plaintiff’s motion for a preliminary injunction and ordered defendants within seven days either to release plaintiff’s impounded vehicle or conduct a retention hearing that met due process.

Suffolk County Police arrested plaintiff on two misdemeanor counts of driving while intoxicated and temporarily impounded his car under Suffolk County Code 270, pending a post-seizure hearing. At the hearing the parties stipulated that several procounty exhibits would enter into evidence, and the county rested without providing any testimony or other documentation. Plaintiff called no witnesses, despite an adjournment to enable him to subpoena the arresting officer. The Suffolk County judge granted the county’s motion to retain the vehicle pending final resolution of a forfeiture proceeding.

Plaintiff contended that the county’s post-seizure hearing procedures violated his due process right to a properly conducted post-seizure hearing. In considering whether plaintiff had shown a likelihood of success on the merits or a serious question going to the merits, Judge Seybert noted that due process requires three issues to be considered at the retention hearing: ‘whether probable cause existed for the arrest of the vehicle operator; whether it is likely that the City will prevail in an action to forfeit the vehicle; and whether it is necessary that the vehicle remain impounded in order to ensure its availability for a judgment of forfeiture.’ Slip op. 5 (quoting Krimstock v. Kelly, 506 F.Supp.2d 249, 252 (SDNY 2007)). The county must prove these issues by a preponderance of the evidence.

The county met its probable cause and likelihood of success burdens. The post-seizure hearing procedure did not offend due process, and the stipulated exhibits more than met the county’s burden on those two prongs. The exhibits showed that plaintiff drove while intoxicated and had a prior conviction for driving while intoxicated, permitting seizure for a subsequent offense and establishing that the county would likely obtain forfeiture of plaintiff’s vehicle. Judge Seybert rejected plaintiff’s contention that due process required live testimony.

The county, however, did not show any need for plaintiff’s vehicle to remain impounded to ensure that it would be available for a judgment of forfeiture. The county argued through counsel without providing any evidence that the county needed to retain the vehicle to protect it from destruction or sale pending the civil forfeiture action and that the vehicle would depreciate if used pending the forfeiture action. According to Judge Seybert, these arguments did not satisfy the county’s burden of proof. Further, the state judge had not made findings that retaining plaintiff’s vehicle was necessary to ensure its availability for forfeiture. Thus, plaintiff demonstrated with certainty that the procedure at his post-seizure retention hearing violated his due process rights and met the irreparable harm prong.

Balancing the equities, the court indicated that plaintiff would likely lose his car because he repeatedly broke the law and drove while intoxicated, and that the due process violation was potentially curable without returning the car to plaintiff. Judge Seybert ordered the County Court either to release plaintiff’s vehicle or hold another retention hearing to give the county the opportunity to introduce material showing that retaining plaintiff’s car was necessary. Alternatively, the hearing officer could fashion less severe relief that protected the county’s interest such as requiring plaintiff to post a bond or restraining plaintiff’s assets. Slip op. 15-16.

Harvey M. Stone and Richard H. Dolan are partners at Schlam Stone & Dolan. Bennette D. Kramer, a partner of the firm, assisted in the preparation of the article.

[This article is reprinted with permission from the November 15, 2010, issue of the New York Law Journal. Copyright © 2010 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.]