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White-Collar Crime | Monday, July 7, 2014 | S11

of those rounded up are included because ‘Newman’
benefit, the question remains how much Damages

they “should have known” about the fraud, or evidence will be required to show that
because they broke a promise in their medi- knowledge, and whether modest circum-
care application to be flawless participants in « Continued from page S5
stantial evidence will suffice. if, ultimately, « Continued from page S9
the process, it becomes simply unacceptable.
real obstacle to guilt. for example, could the answer is that the government can dant’s control played a large role in the loss,
•the government argue to a jury that the prove, based on the defendant’s sophis- a downward departure may be justified.”).
••••••••••••••••••••••••••••
defendant was a sophisticated investor tication alone, that the defendant had in these cases, the determination that victim
1. merriam-webster’s Collegiate Dictionary 498 (11th who had to have known that the original to have known (or was willfully blind to conduct will not reduce the amount of loss
ed. 2007); see also, e.g., random house College Diction- tipper—whoever that was—had to have the fact) that the original tipper person- attributable to defendants was largely pre-
ary 526 (rev. ed. 1980); American heritage Dictionary of obtained a benefit—whatever that was— ally benefited, the requirement of tippee mised on the guidelines’ former Application
the english Language 523 (1973).
2. Black’s Law Dictionary, p. 685.
3. United States v. Autuori, 212 f.3d 105, 115 (2d Cir. simply because the tipper would not have knowledge will become an afterthought. Note 11 to §2f1.1, which provided that “[i]n a
2000) (quoting McNally v. United States, 483 U.S. 350, 358, assumed the risks of tipping for free? in This concern is not merely hypothetical, few instances, the total dollar loss that results
107 S.Ct. 2875, 97 L.ed.2d 292 (1987) (internal quotation such a case, the leak itself could serve as as Sullivan’s recent decision in United from the offense may overstate its serious-
marks and citations omitted).
4. United States v. Guadagna, 183 f.3d 122, 129 (2d Cir. circumstantial evidence of both the tip- States v. Steinberg illustrates. in that ness. Such situations typically occur when a
1999) (quoting United States v. Leonard, 61 f.3d 1181, per’s personal benefit and knowledge by case, the court determined—based on misrepresentation is of limited materiality or
1187 (5th Cir. 1995) (internal quotations omitted).
the tippee of that benefit.
the defendant’s sophistication, among is not the sole cause of the loss ... in such
5. United States v. Mavashev, 455 f. App’x 107, 111 (2d in fact, the government essentially other factors—that once the jury found instances, a downward departure may be war-
Cir. 2012).
made this argument in its Second Cir- the defendant knew the disclosures were ranted.” U.S.S.g. §2f1.1, App. Note 11 (1987).
6. U.S. v. Semrau, 6th Cir., No. 11-5396, Sept. 7, 2012.
7. United States v. Wahl, 13-3674, 2014 wL 1508447 (2d cuit brief in Newman, in which it asserted unauthorized, “it could also find that [he] in interpreting former Note 11, the Seventh
Cir. April 18, 2014).
8. United States v. Harkonen, 510 f. App’x 633 (9th Cir. that “[g]iven the nature, specificity and either knew or was overwhelmingly sus- Circuit concluded that the “Sentencing Com-
2013).
timing of [the] disclosures, the jury had picious that the original sources of that mission ‘definitively rejected adjusting the
9. http://www.hhs.gov/news/ press/2014pres/05/20140513b.html (“medicare Strike ample basis for its conclusion that New- valuable information were receiving some ‘loss’ itself downward to reflect other causes
force charges 90 individuals for approximately $260 mil- man and Chiasson knew the insiders had benefit in return,” as “[o]nly a pollyanna beyond the defendant’s control... To the extent
lion in false billing.”).
disclosed the information in breach of a could have believed otherwise.”25
[the] actual loss had other, more proximate
10. http://www.cnbc.com/id/49290071 (“Nationwide duty of trust and confidence.”22 on this while Newman will answer the ques- causes, a discretionary downward departure—
medicare fraud Bust Among The Biggest Yet”).
basis, the government then argued:
tion of whether a tippee, to be found but not a mandatory ‘loss’ adjustment—might
11. http://www.justice.gov/opa/pr/2014/June/14- crm-596.html.
guilty, must know that his tipper derived be appropriate.’” Morris, 80 f.3d at 1172 (quot-
12. http://www.justice.gov/opa/pr/2014/January/14- [T]he jury further would have found
crm-082.html.
that the defendants inferred from the a personal benefit, the ultimate import of ing United States v. Kopp, 951 f.2d 521, 530-31
13. Rehab. Ass’n of Virginia v. Kozlowski, 42 f.3d 1444, circumstances that some benefit was that answer will lie in how district courts (3d Cir. 1991)). however, the language that
1450 (4th Cir. 1994); see also Andersen v. Leavitt, Civ A provided to (or anticipated by) the apply such a knowledge requirement in the Seventh Circuit and other courts relied
03-6115 Drh, 2007 wL 2874838 (e.D.N.Y. Sept. 27, 2007). (“This case focuses on the often-confusing arena of insiders. given how the Supreme future cases.
on was deleted from §2f1.1 in 1991 and the new
medicare and the legislation and regulations that govern Court and [the Second Circuit] have language stated that a downward departure
it.”); Lewis v. Grinker, 965 f.2d 1206, 1216 (2d Cir. 1992) defined benefit ... the jury would •••••••••••••• •••••••••••••• •
may be warranted where the “loss determined”
(“first, the medicaid Act is a statute of ‘unparalleled have found that the defendants may “overstate the seriousness of the offense.”
complexity,’ among the ‘most intricate ever drafted by Congress.’ its provisions are ‘almost unintelligible to the 1. Nos. 13-1837-cr(L), 13-1917-cr(con) (2d Cir.).
2. United States v. Jiau, 734 f.3d 147, 153 (2d Cir. U.S.S.g. §2f1.1, App. Note 10 (1991). in 2001,
uninitiated.’”) (internal citations omitted).
understood the insiders would not 2013).
§2f1.1 was deleted altogether and moved into
14. United States v. Sachakov, 812 f. Supp. 2d 198, 213 have undertaken the highly risky step 3. 693 f.3d 276, 289 (2d Cir. 2012).
(e.D.N.Y. 2011).
of disclosing earnings information 4. 904 f. Supp. 2d 363, 370, 371 n.6 (S.D.N.Y. 2012). §2B1.1, which only provides for a downward
15. 966 f. Supp. 2d 1321, 1332 (S.D. fla. 2013), aff’d, 13- shortly before a quarterly announce- According to rakoff, because the purpose in misap- propriation prosecutions “is to protect property departure in cases “in which the offense level
13719, 2014 wL 1708888 (11th Cir. may 1, 2014).
16. See, e.g., United States v. Guerra, 485 f.3d 1291 ment unless they expected to receive rights in information,” “the tippee’s knowledge that determined ... substantially overstates the
(11th Cir. 2007).
something in return. put differently, disclosure of the inside information was unauthor- seriousness of the offense.” U.S.S.g. §2B1.1,
17. http://www.webmd.com/health-insurance/drown- the jury would have concluded ized is sufficient for liability.” id. at 370.
App. Note 19(C) (2001). These changes to the
ing-in-sea-of-medicare-paperwork.
that the defendants knew insiders 5. id. at 371.
guidelines serve to undermine the precedential
18. http://blogs.marketwatch.com/encore/2013/07/29/ more-disgruntled-doctors-leave-medicare/?link=instory.
disclosed the information for some 6. No. 12 Cr. 121, 2013 wL 1943342, at *2 (S.D.N.Y. may 7, 2013) (order denying bail) (emphasis omitted).
value of those decisions finding mitigation inap-
19. 131 S. Ct. 2060, 2070, 179 L. ed. 2d 1167 (2011).
7. id.
plicable to criminal sentencing and restitution.
20. id., at 2070-71, 179 L. ed. 2d 1167 (2011).
personal reason rather than for no 8. reply Brief for Defendant-Appellant Anthony in view of these changes to the guidelines
21. See infra note 26.
reason at all.23
Chiasson at 12, United States v. Newman, Nos. 13-
22. United States v. Mahmud, 541 f. App’x 630 (6th Cir.
1837-cr(L), 13-1917-cr(con) (2d Cir. Dec. 18, 2013).
9. Brief for the United States of America at and the foundational requirements of cau-
2013).
23. id. at 632.
But will the Second Circuit accept such 53, United States v. Newman, Nos. 13-1837-cr(L), sation underlying both restitution and sen-
24. id.
highly circumstantial proof of knowledge? 13-1917-cr(con) (2d Cir. Nov. 14, 2013) [hereinafter tencing loss determinations, defendants may
25. id. at 634.
At oral argument in Newman, Judge ralph government Brief].
have recourse through a failure to mitigate
26. United States v. Lighty, 616 f.3d 321, 378 (4th Cir.
k. winter Jr. asked whether the govern- 10. 463 U.S. 646 (1983).
losses defense. in mounting a successful chal-
2010) (“A willful blindness instruction should be given only in “rare circumstances,” United States v. Ruhe, ment was arguing that the act of the 11. id. at 660.
12. id. at 662 (citation omitted).
lenge to a loss determination based on such
191 f.3d 376, 385 (4th Cir. 1999), because the instruc- disclosure itself provides evidence of 13. id. at 663.
a theory, it will be important to frame the
tion presents the danger of allowing the jury to con- the personal benefit, apparently reflect- 14. id. at 667.
argument in terms of “causation” and to focus
vict based on an ex post facto theory (he should have 15. SEC v. Obus, 693 f.3d 276, 289 (2d Cir. 2012). in
been more careful) or to convict on a negligence theory ing a concern that the government had United States v. Jiau, which was handed down after Sullivan’s decision in Newman, the Second Circuit on demonstrating the existence of a break in
(the defendant should have known his conduct was il- legal). United States v. Mancuso, 42 f.3d 836, 846 (4th Cir. offered no principle for distinguishing applied the Obus court’s articulation of the elements the chain of causation. even if a sentencing
1994)”); United States v. Lara-Velasquez, 919 f.2d 946, 951 routine corporate leaks—which would of an insider trading violation to a criminal prosecu- court declines to find a break in the causal
(5th Cir. 1990) (“The instruction is ‘properly given only not serve as the basis for insider trad- tion under the classical theory. See 734 f.3d 147, 153 chain meriting a reduction in loss amount, it
when [the] defendant claims a lack of guilty knowledge ing liability—from material, nonpublic (2d Cir. 2013).
may find a downward departure is warranted
and the proof at trial supports an inference of deliber- ate ignorance.’ ... The circumstances which will support information disclosed for personal ben- 16. Dirks, 463 U.S. at 664.
17. 693 f.3d at 292.
in light of the victim’s independent conduct.
the deliberate ignorance instruction are rare.”) (quoting efit. The government distinguished the 18. United States v. Whitman, 904 f. Supp. 2d 363,
A court may well be susceptible to this line
United States v. Pacific Hide & Fur Depot, 768 f.2d 1096, case on its facts, pointing out that the 371 (S.D.N.Y. 2012).
of argument in mortgage fraud cases where
1098 (9th Cir. 1985); see also United States v. Batencort, defendant-tippees had actively pressed 19. id. (quoting jury instructions).
victim banks often fail to diligently dispose
592 f.2d 916, 918 (5th Cir. 1979) (the instruction should 20. See United States v. Goffer, 721 f.3d 113, 124
be given only when “there are facts that point in the di- rection of deliberate ignorance.”).
for material, nonpublic information. (2d Cir. 2013). The Second Circuit held in Obus that tippee knowledge could be established through of properties or maintain properties in good
27. See, e.g., United States v. Wahl, 13-3674, 2014 wL further, the government argued that demonstration of conscious avoidance, also known repair thereby driving down property values
1508447 (2d Cir. April 18, 2014) (health care fraud pros- the analysis should focus on the total- as willful blindness. See 693 f.3d at 288-89.
to the defendant’s detriment.
ecution, conscious avoidance instruction given); United ity of the circumstances, which would 21. See United States v. Mylett, 97 f.3d 663, 668 (2d
States v. St. Junius, 739 f.3d 193 (5th Cir. 2013) (health care fraud prosecution, deliberate ignorance instruction include the specificity and timing of the Cir. 1996).
22. government Brief, supra note 9, at 61 (internal •••••••••••••••••••••••••••••
given); United States v. Mahmud, 541 f. App’x 630 (6th information along with the behavior and quotation marks omitted).
Cir. 2013) (same); United States v. Werther, Crim.A. 11- sophistication of the trader. And indeed, 23. id. at 64-65.
1. The mvrA also provides that restitution may not
434, 2013 wL 5309451 (e.D. pa. Sept. 23, 2013) (health the Second Circuit has already held that 24. See Obus, 693 f.3d at 288 (noting that the be imposed if the determination of complex issues of
care fraud prosecution, willful blindness instruction giv- “knows or should know standard” from Dirks “is a fact relating to causation would unduly “complicate or prolong the sentencing process.” §3663A(c)(3)(B). how-
en); United States v. Martinez, 527 f. App’x 822 (11th Cir. 2013) (health care fraud prosecution, deliberate igno- the tippee’s sophistication is a factor that fact-specific inquiry turning on the tippee’s own knowledge and sophistication”).
ever in mortgage fraud cases, as opposed to other fraud
rance instruction given); United States v. Ajoku, 718 f.3d can be taken into account to show knowl- 25. No. 12 Cr. 121, 2014 wL 2011685, at *5 (S.D.N.Y. cases, where the value of tangible collateral is at issue, it
882, 889 (9th Cir. 2013), cert. granted, judgment vacated edge of a fiduciary breach.24
may 15, 2014) (noting the defendant was “(1) re- is unlikely that there would be complex issues of fact re-
on other grounds, 134 S. Ct. 1872 (U.S. 2014) (health care Accordingly, if the Second Circuit peatedly receiving (2) valuable, material, nonpublic lating to causation that would unduly complicate or pro-
fraud prosecution, willful blindness instruction given); does hold in Newman that tippees must information (3) from a company insider (4) in vio- lation of company policy (5) numerous times each long the sentencing process. Thus, a mitigation defense should not run afoul of Congress’ intent that sentencing
United States v. Lopez-Diaz, 940 f. Supp. 2d 39, 59 (D.p.r. 2013) (same).
have knowledge of the tipper’s personal
quarter”).
courts not become embroiled in intricate issues of proof.