The Seventh Circuit Court of Appeals on Wednesday found clear error in the sentencing of a quantitative finance professional who pleaded guilty to unlawfully possessing and transmitting trade secrets. The defendant, twenty-eight year old Yihao Pu, stole expensive and proprietary high-speed securities trading software with the hope to use it for his own pecuniary gain. Unfortunately for Pu, he ended up losing money on the scheme. Already out $40,000, things got worse for him when his employer, financial giant Citidel, caught on.
From 2009 through 2011, Pu worked at two financial companies using their software systems to conduct trades for their clients. He illegally copied files during his time at both companies using personal electronic storage devices and employed those files to conduct personal trades for his own benefit. The wheels came off when Citadel grew increasingly suspicious of activity on Pu’s work computer and conducted an internal investigation revealing the extent of his criminal actions.
Charged by a grand jury with twenty-three criminal offenses, Pu avoided trial by pleading guilty to one count of unlawfully transmitting a trade secret as to Citadel and another count of unlawfully possessing a trade secret as to the other company. At sentencing, the parties agreed, and the district court found, that there was no actual monetary loss—again, Pu had himself lost $40,000 by the time the government put a stop to his illegal trading. The district court instead looked to how much money the companies paid their employees to develop the algorithms and source code that Pu stole, arriving at a loss amount of over $12,000,000. This large-dollar loss calculation increased what would have been a sentencing offense level of nine by twenty points—more than 200-percent for those keeping score. After a departure downward from the guidelines, the court sentenced Pu to three years’ imprisonment. The court also ordered Pu to pay more than $750,000 in restitution for the money Citadel paid forensic analysts and attorneys to investigate his conduct based largely, if not solely, on a letter from Citadel reflecting its claimed expenses.
Not okay on either count, said the Seventh Circuit.
On the sentencing issue, the Seventh Circuit observed that “the real question” was “whether the government proved by a preponderance … that the cost of development of the trade secrets was the correct loss figure.” United States v. Pu, No. 15-1180, slip op. at 12 (Feb. 24, 2016) (citation omitted). This analysis required the court to look to whether it was “more likely than not that Pu intended to cause a loss to the victims that equaled the cost of the development.” Id. The court concluded that it did not. It found no direct or circumstantial evidence of record bearing on what Pu intended the loss to be. The court further corrected the district court’s apparent assumption that there must have been an intended loss “because there was no actual loss,” finding that the district court’s use of the cost of development as a stand-in for intended loss was inappropriate. Id. at 13. It held “as a practical matter” that this loss calculation conflicted with the district court’s finding “that there was insufficient evidence of a grander scheme that was interrupted.” Id.
The Seventh Circuit rejected the government’s contention at oral argument that the district court’s downward departure adequately addressed Pu’s conduct. Instead, the court held that the clearly erroneous intended loss calculation resulted in a sentence that may have been higher than one that the court would have imposed had it been departing from a correctly calculated guideline range. Resentencing was required.
On the question of restitution, the Seventh Circuit held that the district court improperly ordered Pu to pay more than $750,000 in expenses Citadel incurred while investigating him. This wasn’t because Pu wasn’t willing to pay – he was, and his lawyer said so at sentencing – but he argued successfully that he was due a “complete accounting” of those costs before he could be compelled to do so. The letter from Citadel’s counsel generally listing fees paid to outside attorneys and forensic analysts was not sufficient.
The Seventh Circuit’s opinion provides important guidance on what is often a significant issue in white collar sentencings: the amount of the defendant’s intended loss. By rejecting the government’s attempt to plug in an amount that is unrelated to the defendant’s intended loss, the court helps clarify what the government is required to prove. The court also provides a reminder that proof of restitution requires more than cursory summaries.