Second Circuit Issues Notable Ruling on Loss Calculations for Sentencing Purposes
Adding to a string of important decisions on loss calculations under the Sentencing Guidelines (see here and here), the Second Circuit vacated two sentences in a securities fraud case for errors in calculating the applicable loss. The court had utilized a “gross sales” basis rather than basing the loss on gross-sales-minus-actual-value. The technical distinction translates into real time off a white collar defendant’s sentence.
Were Investments at Issue Securities?
The securities at issue in United States v. Leonard, 05-5523-cr, 2008 WL 2357233 ((2d Cir. June 11, 2008), consisted of interests in limited liability companies formed to finance the production and distribution films, including “The Amati Girls” and “Carlo's Wake,” which saw limited release and flopped. In an interesting analysis, which examined the substance rather than the form of the financial relationships involved, the Court concludes that these interests were “investment contracts” that fit the definition of a security, as that term is defined under the Securities Exchange Act of 1934.
What Was Actual Value of Securities?
Following the defendants’ conviction after trial, the district court computed the loss amount as equal to the entire cost of the securities sold by the defendants, on the ground that the victims of the fraud would not have invested but for the fraudulent misrepresentations at issue regarding the size of the commissions. The Court concluded that while this may well be true, it does not end the analysis, because it “does not, in and of itself, mean that the securities the investors received in exchange for their contributions were entirely without value.” After all, the Court explained, “the investors did obtain an interest in a company engaged in producing and distributing a motion picture.”
Accordingly, the Court remanded for resentencing so that the district court could make a “reasonable estimate” of the actual value of the instruments and deduct that amount from the purchase price for purposes of establishing the actual loss caused by the scheme (“mindful that illiquid securities for which there is no public market can be extremely difficult to value.”) In an important footnote, the Court reiterated, citing its decision in Rutkoske, that “the district court may look to principles governing recovery of damages in civil securities fraud cases for guidance in calculating the loss amount for purposes of the Guidelines.”
Now, this will be an interesting resentencing. How to value interests in now defunct companies that produced movies that flopped, but which for a time, gave the investors the thrill of being connected to the movie business?
Were Investments at Issue Securities?
The securities at issue in United States v. Leonard, 05-5523-cr, 2008 WL 2357233 ((2d Cir. June 11, 2008), consisted of interests in limited liability companies formed to finance the production and distribution films, including “The Amati Girls” and “Carlo's Wake,” which saw limited release and flopped. In an interesting analysis, which examined the substance rather than the form of the financial relationships involved, the Court concludes that these interests were “investment contracts” that fit the definition of a security, as that term is defined under the Securities Exchange Act of 1934.
What Was Actual Value of Securities?
Following the defendants’ conviction after trial, the district court computed the loss amount as equal to the entire cost of the securities sold by the defendants, on the ground that the victims of the fraud would not have invested but for the fraudulent misrepresentations at issue regarding the size of the commissions. The Court concluded that while this may well be true, it does not end the analysis, because it “does not, in and of itself, mean that the securities the investors received in exchange for their contributions were entirely without value.” After all, the Court explained, “the investors did obtain an interest in a company engaged in producing and distributing a motion picture.”
Accordingly, the Court remanded for resentencing so that the district court could make a “reasonable estimate” of the actual value of the instruments and deduct that amount from the purchase price for purposes of establishing the actual loss caused by the scheme (“mindful that illiquid securities for which there is no public market can be extremely difficult to value.”) In an important footnote, the Court reiterated, citing its decision in Rutkoske, that “the district court may look to principles governing recovery of damages in civil securities fraud cases for guidance in calculating the loss amount for purposes of the Guidelines.”
Now, this will be an interesting resentencing. How to value interests in now defunct companies that produced movies that flopped, but which for a time, gave the investors the thrill of being connected to the movie business?
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