The United States Sentencing Commission recently unveiled a number of key amendments to the Federal Sentencing Guidelines regarding securities fraud, insider trading, and financial institution fraud.  According to a Commission news release, the amendments respond to Dodd-Frank Act directives instructing it to review and amend the guidelines’ application in fraud cases.  Judge Patti B. Saris, chair of the Commission, summed up the amendments:  “The Commission’s action . . . increases penalties for insider trading cases and ensures that no defendant will receive a reduced penalty because of a federal intervention, such as a bailout.”

As the Wall Street Journal reported, “recent insider-trading defendants have received considerably harsher sentences than similar offenders in the past.”  Yet the proposed sentencing guidelines amendments will empower prosecutors to recommend sentences that are harsher still.  For its part, the defense bar believes the penalties are already sufficiently severe, though the Justice Department insists tougher sentences are required to ensure that insiders will not act on temptations to trade. 

Securities Fraud & Insider Trading

The amendments make two significant changes in securities fraud and insider trading cases.  First, they amend the securities fraud guideline “to provide a special rule for determining loss in cases involving the fraudulent inflation or deflation in the value of a publicly traded security or commodity.”  The courts are instructed to employ the “modified rescissory method” in calculating the loss attributable to the change in value, which requires calculating the difference between the price of the security when the fraud occurred and the price of the security after the fraud was disclosed, and multiplying that figure by the total shares outstanding.  The amendment creates a “rebuttable presumption” that the figure arrived at through this calculation amounts to the “actual loss” for sentencing purposes, though defendants may challenge the number with proof that “other factors” resulted in the change in value.  “Other factors” might include overall market fluctuations or indicia of economic or industry instability.

Second, the amendments create a new minimum offense level for insider trading involving “an organized scheme” and allow for a sentence enhancement in cases where the offender used “a position of trust” (such as one “that involved regular participation or professional assistance in creating, issuing, buying, selling, or trading securities or commodities”) to “facilitate significantly the commission or concealment of the offense.” 

Mortgage & Financial Institution Fraud

The amendments alter the guidelines regarding mortgage fraud and financial institution fraud in two important ways.  First, the amendments “change how the fair market value of the collateral is determined in the case of a fraud involving a mortgage loan.”  Essentially, the value of the collateral is the market value as of the date the defendant pleaded or was found guilty.  The amendments create a “rebuttable presumption” that the fair market value is the “tax assessment value,” though the defendant may present evidence that the tax assessment value is an unreasonable measure. 

Second, the amendments provide sentence enhancements for crimes resulting in financial harms that “jeopardize[e] a financial institution or organization.”  The amended guideline lists a number of “harms” the court should consider, such as the risk of insolvency.  The courts are instructed to devise a sentence based on the likelihood that the threat would have caused harm, irrespective of whether the financial institution was spared injury by government intervention, such as a “bailout.”

Departures from the Guidelines

Importantly, the amendments provide guidance for the courts in departing from the sentence range calculated under the guidelines.  An upward departure is warranted where “the offense created a risk of substantial loss” beyond the calculated “actual loss.”  This might be appropriate in cases where the wrongdoing posed “a risk of significant disruption of a national financial market.” 

The amendments allow for a downward departure in cases where the recommended sentence range “substantially overstates the seriousness of the offense.”  This may be proper where the aggregate loss flowing from the misconduct is large, but the result is “small loss amount suffered by a relatively large number of victims.”  


The Commission must submit its amendments to Congress by May 1st.  Absent Congress’ modification or disapproval, the amendments will be effective as of November 1, 2012. 

It will be months before the impact on these amendments is apparent.  And road ahead appears to have more twists and turns.  The Commission has made clear that the amended guidelines are unlikely to be the last iteration of the rules as they relate to fraud cases.  Judge Saris regards the amendments as only “the first step in a multi-year review of the fraud guideline.”  “This is an area of the guidelines,” she says, “that the Commission must continue to review in a comprehensive manner.”