'Loss Causation' Helps Rationalize Sentencing in Securities Fraud Cases

In criminal securities fraud cases, the most important sentencing factor is the “economic loss enhancement,” which measures the intended or actual loss resulting from the fraud. This enhancement can contribute up to 26 offense levels to the guidelines calculation. Considering that the guidelines only go up to 43 levels, which calls for a life sentence, this enhancement is critical in determining how much time a defendant will remain in prison. Circuit courts have begun to apply more stringent standards used in civil securities fraud cases to determine the fraud loss in criminal sentencings. It is a welcome change.

Under the U.S. Sentencing Guidelines Manual, a “court need only make a reasonable estimate of the loss” given the available information. The loss, however, must be a result of the fraud, and courts have struggled with how to calculate loss. All too often, courts simply calculate the difference between a corporation’s market capitalization prior to the disclosure of fraud and the lower value after the disclosure. This approach frequently results in a gross overestimation of loss, unfairly adding years to sentences.