Prosecutors Take Fair Approach to Sentencing in Fraud Case Against Executive (No, This Is Not Clickbait.)

Chief executive officerAs I’ve written about many times before, the loss amount drives many white-collar criminal sentences. The government’s view of loss amount plays a significant role in the court’s ultimate determination of that factor. the government often takes a very aggressive view when it comes to loss amount, such as in government contracting cases.

So, I was intrigued when I recently read about a case in Philadelphia where the government asked for less than the highest possible sentence for a white-collar defendant.

The Facts

The defendant in the case is Brian Hartline. He is the former CEO of Nova Bank. He was accused of having conspired to deceive regulators into giving his bank money under the Troubled Asset Relief Program, otherwise known as TARP. The total possible loss was $13.5 million, because that was the amount that Mr. Hartline and his compatriots tried to get through the TARP program.

The government sentencing memorandum filed in the case tells the story

During the course of a national financial crisis, the defendant lied to officials of the Treasury of United States at a time when that very agency was attempting to prevent a national financial collapse – all in order to dupe the Treasury into providing funds for his bank. The defendant knew that his bank was in such drastic shape that the Treasury would never give him funding because the money would be lost. Rather than respecting the process and the responsibility of federal officers to protect taxpayer money, he simply decided to lie and to conceal the true financial condition of the bank. And then, when the scheme came to light, he lied further to cover up the first lie.

That’s pretty harsh description of the crime.

Mr. Hartline went to trial in the case and was convicted by a jury of conspiracy to defraud the United States fraud related to the TARP program and two counts of making false statements to the government. The Nova Board Chairman Barry Bekkedam was also convicted.

What Was the Loss Amount?

The defendants were sentenced on November 18, 2016. The key issue for sentencing was, as usual, loss amount.

Now, the amount the defendants had tried to borrow through the TARP program was $13.5 million. The government pointed out in its sentencing memorandum that this $13.5 million was the “intended loss” to taxpayers. The Guidelines allow the court to sentence the defendant based on intended loss. This amount of intended loss would put Mr. Hartline in the sentencing range of 121 to 151 months in prison.

For his part, Mr. Hartline apparently argued that $13.5 million was not the appropriate loss amount because there is no evidence that he intended to hurt taxpayers or the Treasury. His view was that the lack of evidence of a concrete loss amount meant that he should be sentenced in the 0 to 6 month range. (His sentencing memo was under seal, so I could not read the actual argument; the government referred to the argument in its memo.)

The Government’s Position

Interestingly though, the government did not push for the highest possible guideline range. Instead, the government correctly acknowledged that sentencing Mr. Hartline based on the $13.5 million loss, when I lost never actually occurred, would lead to an unjust result.

The government ultimately concluded

A thorough consideration of all of the sentencing factors set forth in 18 USC section 3553(a) suggests that the most appropriate sentence is a significant period of incarceration, but below the advisory guideline range of 121 to 151 months.

The government went on to explain that

In this case, because the defendants did not succeed in getting any funding from the Treasury, an intended loss of the full $13.5 million under section 2B 1.1, overstates the seriousness of the offense. Accordingly, the government recommends that the court vary below the advisory guideline range of 121 to 151 months determined by the probation office.

This is an amazing statement, and it is reassuring to see government lawyers not seek the most aggressive penalty, even in a case where they clearly felt strongly that the defendant had engaged in serious wrongdoing.

The “White-Collar Executive Penalty”

There were two rather minor parts of the government sentencing memorandum that I wanted to highlight. I call these two sections, used together by the government, “the white-collar executive penalty.” (Clever, huh?)

It is typical in the government sentencing memorandum for the government to go through its calculation of what the appropriate guideline range would be. The sentencing memorandum Mr. Hartline’s case does exactly that.

Sophisticated means. After calculating the base level and the possible loss amounts, it goes on to analyze whether or not Mr. Hartline was eligible for a two-level upward adjustment for “sophisticated means.” Application note 9 to section 2B1.1 defines “sophisticated means” as

 Especially complex or especially intricate offense conduct pertaining to the execution or concealment of an offense. For example in a telemarketing scheme, locating the main office of the scheme in one jurisdiction but locating soliciting operations in another jurisdiction ordinarily indicate sophisticated means. Conduct such as hiding assets or transactions, or both, through the use of fictitious entities, corporate shells, or offshore financial accounts also ordinarily indicate sophisticated means.

The government, not surprisingly, sought to impose the two-level upward adjustment on Mr. Hartline. It argued that the defendants scheme and their efforts conceal it were sophisticated. For example, the government pointed out that the defendants arranged for a third party to borrow $5 million from the bank that the third party (by agreement) then immediately invested in the bank’s holding company.

This transaction allegedly allowed Mr. Hartline to tell federal bank regulators that the bank had $5 million of additional capital. He apparently did not disclose how the bank had actually obtained that capital.

The reason I place the sophisticated means adjustment into the “white-collar executive penalty” is that pretty much any white-collar case is going to use sophisticated means, since it is so broadly defined.

It’s a fairly low bar, as you can tell from Mr. Hartline’s case. It’s not as though Mr. Hartline went overseas, set up shell companies, engaged in extensive money-laundering through multiple entities, or engaged any sort of extreme complexity. In fact, his was fairly straightforward. Heck, I just explained it in a sentence.

It is very easy for the government to obtain this to level upward adjustment in a white collar case. White collar cases, by their very nature, are likely more sophisticated crimes than your basic illegal drug deal.

Abuse of position. The second part of the “white-collar executive penalty” is the adjustment for abuse of position of public or private trust. This also allows for two-level upward adjustment.

To determine whether or not this adjustment applies, courts will look to whether or not the defendant’s position allowed him to commit a crime that was difficult to detect, not authority he had in that position, and whether there was any reliance on the integrity of the person occupying the defendants position in the company.

Given that Mr. Hartline was the CEO of the bank, you can imagine that it was fairly easy for the government to argue that he had a position of trust, and that he abused it. And you can probably also imagine how easy it it is for the government to make this argument in any case involving an executive at a private company.

Combining the elements. Put together then, the two-level adjustment for sophisticated means and the two-level adjustment for abuse of a position of trust, allow the government in nearly every white-collar case against an executive to ask for and get a four-level enhancement. This is not insignificant. It can lead to an extra year or more in prison.

The Outcome in the Hartline Case

Ultimately, the court followed the government’s suggestion about loss and went even further. The government had argued that

A sentence greater than 10 to 16 months is necessary to reflect the seriousness of the offense, to promote respect for the law, and to provide just punishment for the offense. 18 U.S.C. § 3553(a)(2).

The court sentenced Mr. Hartline to 14 months in prison.

Given that the government could’ve pushed for sentence 10 times that long, and was willing to concede to a sentence somewhere above 16 months, this is an amazing outcome.

This case is a good example of a reasonably fair sentence imposed when the government took the right approach to loss amount. Rather than being as aggressive as possible, the government lawyers in this case instead looked to what really happened, whether the government had suffered any loss at all, and whether the possible sentence under the Guidelines really made sense when compared to the seriousness of the offense.

Kudos to the government lawyers in this case for being fair and for doing justice this time around.

Mr. Hartline may appeal, according to the docket, so I’ll keep my eye on the case and update this post.

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