The opinion of the court was delivered by: Rakoff, District Judge.
This is one of those cases in which calculations under the Sentencing Guidelines lead to a result so patently unreasonable as to require the Court to place greater emphasis on other sentencing factors to derive a sentence that comports with federal law.
Superseding indictment S2 05 Cr. 325(JSR), filed September 28, 2005, charged defendant Richard P. Adelson with one count of securities fraud, eight counts of causing false reports to be filed with the U.S. Securities and Exchange Commission ("S.E.C."), two counts of soliciting proxies through false statements, and one count of conspiring with others to commit such acts. The gist of the indictment was that Adelson, as Chief Operating Officer and, (eventually) President of Impath, Inc.-a public company specializing in cancer diagnosis testing-joined a conspiracy, initially concocted by others, to materially overstate Impath's financial results, thereby artificially inflating the price of its stock.
It was the Government's theory that the conspiracy began in late 1999, that Adelson joined it in 2001, and that it continued until mid-2003. However, on February 16, 2006, following a two-week trial, a jury, while convicting Adelson of conspiracy, securities fraud, and the three of the false filing counts that related to filings made in the latter half of 2002, acquitted him of all seven counts that related to earlier filings.
The most likely reading of the jury's verdict-and one that the Court accepted at sentencing-was that Adelson only joined the conspiracy toward its end. Specifically, the evidence credited by the jury shows that the conspiracy-essentially an accounting fraud-was hatched by various Impath accounting executives and employees who were under strong pressure from the Chief Executive Officer, Anuradha Saad, to maintain the company's healthy financial results and thereby buttress its "high-flying" status in the securities markets. The fraud was sufficiently sophisticated to fool the company's outside auditors, and it also fooled Dr. Saad, from whom the Government, after originally charging her with complicity in the fraud, eventually accepted a plea to misappropriating company funds for personal expenses (a misconduct unearthed, ironically, by Adelson). However, as the jury's split verdict attests, Adelson, who had more financial acumen than Saad, ultimately became aware of the fraud toward its latter stages, but, rather than expose it, chose to conceal it and to participate in its continuation, thus leading to his conviction.
After the fraud was uncovered, the accounting employees who actually designed the fraud entered into cooperation agreements with the Government, in return for which they became eligible for the substantially reduced sentences that they ultimately received. For her misappropriation of funds for personal expenses, Dr. Saad was given a "non-guideline" sentence of 3 months' imprisonment, which the Government did not appeal.
However, at Adelson's sentencing, on May 30, 2006, the Government argued that the Sentencing Guidelines, if properly calculated in Adelson's case, called for a sentence of life imprisonment, cabined only by the maximum of 85 years permitted under the counts of which Adelson was convicted. Short of that, the Government argued, the Court should at least impose a sentence somewhere in the range of 15 to 30 years' imprisonment. Adelson's counsel, by contrast, argued that the proper guideline calculation resulted in a guideline range of 21 to 27 months' imprisonment, and urged that the actual sentence be well below that range. In the end, however, the Court imposed a non-guideline sentence of 42 months imprisonment ( i.e., three-and-a-half years), plus restitution in the amount of $50 million, immediate forfeiture of $1.2 million, three years of supervised release to follow imprisonment, and a life-time ban from being an officer or director of a public company. (Adelson also faces additional monetary sanctions in a parallel proceeding brought against him by the S.E.C.).
At the time of sentence, the Court set forth on the record the multiple reasons for its determinations, and those findings and conclusions were subsequently reduced to writing in the form of the 69-page transcript of the proceedings. See transcript, 5/30/06 ("tr."). Accordingly, when the Court prepared and filed the formal Judgment on June 6, 2006, the Court, after checking the boxes on that form that recite that the Court imposed a non-guideline sentence, see "Judgment Attachment (Page 3)," and that the reasons for the non-guideline sentence relate to "the nature and circumstances of the offense and the history and characteristics of the defendant pursuant to 18 U.S.C. § 3553(a)(1)," id., responded to the directive to "[e]xplain the facts justifying a sentence outside the advisory guideline system" by simply referring back to the transcript of May 30, 2006. Id.
Nine days later, however, on June 15, 2006, the Second Circuit Court of Appeals issued its decision in United States v. Rattoballi, 452 F.3d 127, in which it indicated, albeit in dictum, an intention to strictly enforce the requirement of 18 U.S.C. § 3553(c) that the specific reasons for the imposition of a non-guideline sentence not only must be stated in open court at the time of sentencing, but "must also be stated with specificity in the written order of judgment and commitment ...," id. at 138. This left in doubt the adequacy of the Court's simple cross-reference to the sentencing transcript in the Judgment. Although the Court of Appeals, in interpreting an analogous provision of Rule 32, Fed.R.Crim.P., had previously suggested that one way to cure such a problem might be simply to append the sentencing transcript to the Judgment, see United States v. Cortez, 841 F.2d 456 (2d Cir.1988), Rattoballi leaves such a solution arguably in doubt, and, in any event, given the length of the transcript here, such an approach might not be of much practical value in the instant case.
Accordingly, the Court, sua sponte, undertook to draft this Sentence Memorandum, reiterating and further specifying the reasons for the Adelson sentence, with the notion that the memorandum would be appended to the Judgment in compliance with the thrust of Rattoballi. Unfortunately, although the first draft of this Sentence Memorandum was prepared on June 23, 2006, the press of other business prevented the Court from completing the final draft until today (July 20, 2006). In the interim, on July 5, 2006, the Government filed a Notice of Appeal from the sentence, thereby arguably depriving the Court of jurisdiction to file this Sentence Memorandum as an attachment to the Judgment now on appeal.
However, Second Circuit case law makes clear that such a memorandum may still be filed by the District Court in "aid of the appeal," see, e.g., United States v. Deutsch, 104 Fed.Appx. 202, 203 n. 1 (2d Cir.2004) (summary order); United States v. Nichols, 56 F.3d 403, 410-11 (2d Cir.1995); United States v. Ransom, 866 F.2d 574, 575-76 (2d Cir.1989) ( per curiam ). Accordingly, the Court will, for now, not attach this Sentence Memorandum to the Judgment, but will simply docket it with the Clerk of the District Court, with direction that it be included in the record on appeal.
Turning then to reasons for the non-guideline sentence of May 30, 2006, as reflected in the transcript of that date:
The Court's first job was to calculate what the sentence would be under the Sentencing Guidelines (using the version of the Guidelines that was in effect when the conspiracy ended in 2003). See tr. at 3-32. Since Adelson had had no prior brushes with the law-indeed, as undisputed evidence submitted by his counsel showed, his life prior to the events here in question was, as the Court concluded, exemplary, tr. at 58-59-his Criminal History Category was "I" (the lowest score possible).
The Government argued, however, that his total Offense Level score was no less than 55. Tr. at 3. This was rather remarkable in itself, for the official Sentencing Guidelines Table-the grid from which guideline sentences are ultimately derived-only lists Offense Levels from 1 to 43. This is because everything above level 42 is "life imprisonment," so there is no need to go higher. Put differently, an Offense Level of 55 is a level normally only seen in cases involving major international narcotics traffickers, Mafia dons, and the like. How could it possibly apply here?
What drove the Government's calculation in this case, more than any other single factor, was the inordinate emphasis that the Sentencing Guidelines place in fraud cases on the amount of actual or intended financial loss. As many have noted, the Sentencing Guidelines, because of their arithmetic approach and also in an effort to appear "objective," tend to place great weight on putatively measurable quantities, such as the weight of drugs in narcotics cases or the amount of financial loss in fraud cases, without, however, explaining why it is appropriate to accord such huge weight to such factors. See generally Kate Stith & José A. Cabranes, Fear of Judging: Sentencing Guidelines in the Federal Courts 69 (1998). Specifically, under § 2B1.1 of the guidelines, a defendant who violates the federal anti-fraud laws starts with a base offense level of either 6 or 7 (depending on the date of the offense), to which is added, e.g., 16 points if the loss is more than $1 million, or 24 points if the loss is more than $50 million, or 28 points if the loss is more than $200 million. United States Sentencing Guidelines ("U.S.S.G.") § 2B1.1(b)(1). Since successful public companies typically issue millions of publicly traded shares-in Impath's case, there were 16.6 million shares of common stock outstanding as of 2003-the precipitous decline in stock price that typically accompanies a revelation of fraud generates a multiplier effect that may lead to guideline offense levels that are, quite literally, off the chart.
The problem is further exacerbated by the fact that the ordinary measure of loss in a criminal securities fraud case is the decline in the price of stock when the fraud is revealed. See, e.g., United States v. Moskowitz, 215 F.3d 265 (2d Cir.2000), rev'd on other grounds, Crawford v. Washington, 541 U.S. 36, 124 S.Ct. 1354, 158 L.Ed.2d 177 (2004). Since this occurs at the end of the conspiracy, even someone like Adelson who had no role in originating the conspiracy but only joined it in its latter stages will still be legally responsible under the guidelines for the full loss amount that he could reasonably foresee. Cf., e.g., United States v. Studley, 47 F.3d 569, 574 (2d Cir.1995).
In the instant case, the Government calculated that the revelation of accounting irregularities at Impath in press releases issued on July 30, 2003 and August 22, 2003 caused the stock price to decline by 88%, thereby causing Impath's thousands of shareholders to suffer a combined loss of no less than $260 million. Government's Sentencing Memorandum ("Gov.Mem.") at 5. In response, defendant's counsel submitted a report from Dr. Bala Dharan, a distinguished professor of accounting at Rice University, who, after noting that several material accounting irregularities referenced in the July 30 and August 22 press releases were not attributable to the fraud of which Adelson was convicted, concluded that numerous other contemporary marketplace factors also contributed to the decline in Impath's stock (which, indeed, had been steadily declining since 2001). Because of ...