Was This Sentence Quite Excessive for a Bizarre Fraud Scheme?

By: Ifrah Law

A $3 billion fraud scheme, more farcical than dangerous and in any case doomed to fail, led to 20-year sentences in federal prison for all four conspirators. The U.S. Court of Appeals for the 2nd Circuit, however, vacated the sentences on procedural grounds, and U.S. District Judge Stefan R. Underhill of the District of Connecticut, sitting by designation, wrote a concurrence that drew back the procedural curtain to shed light on what he saw as a fundamentally flawed corner of the administration of justice. This was the U.S. Sentencing Guidelines’ loss table, which he said was “divorced from its own objectives and from common sense” in this case.

The case, United States v. Juncal, came to the court on appeal from the District Court for the Eastern District of New York. The appellants – James Campbell, John Juncal, and Rodney Sampson – and their codefendant Emerson Corsey had been convicted of conspiracy to commit mail and wire fraud. The four men, posing as officers of a (fictional) Wyoming-based multinational bank and its client in Buryatia, an obscure region of Siberia, attempted to extract a $3 billion loan from a hedge fund to finance an (imaginary) Siberian oil pipeline. In exchange for the loan, they offered to assign to the hedge fund $5 billion in U.S. Treasury notes, which they claimed would generate a $14 billion return in just five short years. When a broker asked for physical evidence of the T-notes, the defendants explained that they had hidden the notes in Austria for safe keeping. The defendants did, however, send the broker copies of T-notes from their AOL account.

The absurd nature of these facts notwithstanding, the defendants’ offense levels were calculated based on an intended loss amount of $3 billion, and each received the statutory maximum sentence for fraud: 20 years in prison. At sentencing and on appeal, counsel for the defendants highlighted the significant flaws in the loss calculation, arguing that the “30-point mega-enhancement vastly overstated both the seriousness of the offense, and the danger of appellants to their community.

At sentencing, their arguments fell on deaf ears. On appeal, they did not. The Second Circuit questioned the lower court’s failure to apply (or even address the merits of) a reduced sentence and remanded the case for resentencing. Because the case was “clouded by the possibility of error,” the appeals court “felt it appropriate to give the District Court an opportunity to clarify its thinking.” The case was remanded on procedural grounds, and the appeals court declined the appellants’ request to consider whether the sentences were substantively unreasonable.

Judge Underhill began his nine-page concurrence by first agreeing that the sentences should be vacated and remanded for procedural error. However, he also noted that “the real problem is that the sentences are shockingly high.” For that reason, he “would reach the question of substantive reasonableness and would reverse on the merits.” In his view, “the loss guideline is fundamentally flawed, and those flaws are magnified where, as here, the entire loss amount consists of intended loss. Even if it were perfect, the loss guideline would prove valueless in this case, because the conduct underlying these convictions is more farcical than dangerous.”

Underhill went on to explain that the current guidelines are the result of three increases in the recommended ranges for fraud crimes, each of which “was directed by Congress, without the benefit of empirical study of actual fraud sentences by the Sentencing Commission.” He also noted the common perception that the loss guidelines are broken, and highlighted their widely inconsistent implementation among the district judges. However, since this case could be decided on procedural errors, the circuit court was able to remand the case without expressing a view on the substantive issues that Underhill highlighted.

In so doing, however, the appeals court may have overlooked an opportunity to fashion a common- law reasonableness standard to protect the administration of justice in future cases.

There are many arguments to support the avoidance of knotty substantive issues when their examination will not affect the final outcome of the case. As Underhill himself pointed out, courts ordinarily examine the procedural issues first before applying an abuse-of-discretion standard to examine the substantive reasonableness of a sentence. However, that practice creates a slippery slope: district court judges are forced to proceed without meaningful guidelines, and abuses of discretion go unnoticed.