Wall Street Fraudsters Rush to Cut Prison Terms With New Ruling

US prosecutors described Gary Frank as “nothing but a con man” when he was sentenced to more than 17 years behind bars for scamming Prudential Insurance and others out of tens of millions of dollars.

But the Philadelphia-area businessman is expecting to find out this month if his sentence will be reduced under a US appeals court ruling that’s generated waves across the country. The opinion upended a long-standing practice of lengthening sentences for white-collar criminals based on how much they intended to defraud victims — versus the amounts they actually stole.

The decision, which has prompted defense bids to shorten sentences in cases of fraud against Wall Street players from Prudential, JPMorgan Chase & Co. and Wells Fargo & Co., has divided judges and may ultimately have to be settled by the country’s highest court.

“It is really a potential sea change in federal sentencing,” said Bob Welsh, Frank’s attorney.

In the case of Frank, who pleaded guilty in 2019 to inflating the revenue of his legal benefits company to borrow millions, there was a big difference between the amount he intended to cheat his victims (as much as $150 million) and their actual losses (as much as $34 million). And that just may help him get out of prison early.

The fallout started last year after the 3rd Circuit US Court of Appeals ruled that Frederick Banks, a Pennsylvania man convicted of attempting to dupe Gain Capital Group LLC out of $246,000, should be resentenced. The online trading company, the court found, suffered no actual losses given that it never sent him the funds. The Banks decision is significant since the gap between actual and intended losses in fraud cases can be vast, greatly skewing the amount of prison time from barely any to more than a decade.

“The No. 1 variable that moves the needle in sentencings for white collar cases is the loss amount,” said Andrew Boutros, a white-collar defense attorney at Dechert. “The loss amount has a huge impact on the ultimate advisory sentencing range that the court calculates.”

The ruling has sparked a debate on how much deference to give the US Sentencing Commission’s interpretation of its own guidelines, which includes a scale for federal judges across the country to follow for ratcheting up prison time based on losses to victims. The commission suggests in its commentary using the greater of actual or intended loss when determining sentences. But the appellate panel in Banks used a Supreme Court decision to challenge the commission’s authority to interpret its own rules in finding that only actual loss should be used to calculate sentences.

Prosecutors have tried to persuade judges that the sentencing commission’s interpretation deserves deference. The Justice Department has warned that relying only on actual losses would let certain defendants off the hook who are unsuccessful in pulling off a scheme.

Defense attorneys for years have argued that relying on intended loss under the commission’s guidelines leads to overly harsh sentences that don’t reflect the criminal conduct.

“We are getting these absurd results where nonviolent criminals are getting extraordinary sentences,” said defense attorney Tama Kudman.

Kudman successfully used the Banks ruling in Florida to persuade a judge that actual losses should only be taken into account when sentencing a lab owner found guilty of billing Medicare for unnecessary genetic tests. Minal Patel billed Medicare for more than $463 million in tests but the actual loss to taxpayers was $187 million.

Prison Time

The Banks decision could significantly reduce prison time for defendants in securities and commodities cases since it is difficult to figure out actual losses in those situations.

“Prosecutors often rely upon intended loss as a proxy for actual loss in securities and commodities fraud cases,” wrote Paul Hastings attorneys in a client alert. “This practice has allowed the government to calculate large loss amounts and seek high guidelines sentences where actual loss is incalculable or impractical to determine.”

It could also impact charging decisions, especially in 3rd Circuit territory, where prosecutors may think twice about devoting resources to cases with small actual losses.

In the year since the Banks ruling, defense attorneys have had limited success using the decision outside of the 3rd Circuit, which covers Pennsylvania, New Jersey, Delaware and the Virgin Islands.

In December, a federal judge in Michigan sided with the Banks ruling in a case involving a defendant who pleaded guilty to fraud against JPMorgan. The judge reasoned that she didn’t have to defer to the sentencing commission because the definition of loss isn’t “genuinely ambiguous.”

3rd Circuit

In June, a North Carolina federal judge also agreed with the 3rd Circuit decision in supporting a lower sentencing guideline for a man who pleaded guilty to bank fraud against several financial giants, including JPMorgan, Wells Fargo and crypto exchange Coinbase Global Inc.

But the following month, a 6th Circuit panel shot down an attempt by a chemical engineer to rely on the ruling after she was convicted of stealing trade secrets from her former employers. The panel criticized the 3rd Circuit for imposing a “one-size-fits-all definition” for loss that could “lead to vastly different sentences for similarly culpable defendants.”

In other cases, the 1st and 4th Circuits declined to take a position. “This is a new and fast-developing area of the law, and as of now, we do not have the kind of robust consensus in other circuits,” the 4th Circuit panel wrote. That’s why some legal experts believe the Supreme Court will need to decide even though it has so far refused to take up the issue.

Judges, prosecutors and defendants have all urged the sentencing commission to make changes. One defendant who is serving 95 years in prison for a cyber financial fraud scheme argued in an email to the commission to get rid of the intended loss interpretation since “it’s not based on fact, but rather off of subjective interpretation or ‘guess work.’”

Some judges have, however, chosen to impose sentences outside of the guidelines, which has led to diverging punishments for similar crimes.

“There has been a fracture in courts over how closely to follow the sentencing guidelines and it has been growing,” said Jerrob Duffy, a former federal prosecutor who now works in white-collar defense at Squire Patton Boggs.

Judges in the Southern District of New York, for example, only adhered to the guidelines in 18.6% of all criminal cases compared to 52.8% in the Northern District of New York. On average, judges stayed within the guideline range in 40.1% of fraud, theft and embezzlement cases nationally, according to preliminary data collected by the commission for nine months through June 30.

Criminal Conduct

When Banks was resentenced in April, the judge decided against making any changes to his original jail term because of the defendant’s repeated fraudulent conduct.

“The guidelines simply do not capture the seriousness of Mr. Banks’s criminal conduct in this proceeding, in the counts of conviction here,” said the judge at the hearing.

Frank’s fate is also in a judge’s hands. His attorney expects to show evidence of his client’s rehabilitation and service to others at the upcoming resentencing. Prosecutors earlier accused Frank of using the fraud to finagle his way onto the boards of the Philadelphia Orchestra and Philly Pops. But Frank has insisted that his philanthropic efforts were always sincere and that his life’s goal wasn’t to live in luxury or steal.

The judge was unmoved at his last sentencing, calling Frank a “serial, pathological liar.” Nevertheless, the Banks ruling gives Frank another shot.

To contact the reporter on this story:
Sabrina Willmer in Washington at swillmer2@bloomberg.net

To contact the editors responsible for this story:
Elizabeth Wasserman at ewasserman2@bloomberg.net

Romy Varghese

© 2023 Bloomberg L.P. All rights reserved. Used with permission.