Table of Contents I. Introduction II. The Civil Damages Origins of Market Loss at Sentencing A. Securities Fraud in Private 10b-5 Actions B. Victim Loss C. Calculation Method D. Causation 1. Transaction Causation 2. Loss Causation E. Pre-Guidelines Market Loss in Sentencing III. The Federal Sentencing Guidelines and Evolution in Criminal Cases A. The Guidelines B. Federal Courts' Calculations of Loss IV. Current Problems with Securities Price Reduction as Loss A. Civil Causation Should Be the Bare Minimum for Criminal Sentencing 1. Basic's Fraud-on-the-Market Should Not Apply at Criminal Sentencing 2. Civil Doctrine Should Apply to Criminal Market Loss Calculations B. Market Loss Is Not Reasonably Foreseeable as Required by the Guidelines C. United States v. Booker V. A Workable Solution VI. Conclusion
On December 16, 2008, the United States District Court for the District of Connecticut sentenced Ronald E. Ferguson, CEO of Gen Re Corporation, on charges of conspiracy, securities fraud, and mail fraud for his role in orchestrating an illegal scheme that resulted in almost $600 million in market decline of AIG Corporation's stock price. (1) Despite the Federal Sentencing Guidelines (Guidelines) recommending life in prison (2) for these crimes, the court sentenced Ferguson for two years. (3) At sentencing, the court emphasized that Ferguson did not gain directly from this loss amount. (4) Instead, this amount resulted from later marketplace transactions. (5)
Ferguson's direct responsibility involves the issue of market loss, a unique type of victim loss that a court calculates for sentencing purposes, which consists of losses third-party shareholders suffer, normally after revelation of the fraud. (6) This Article will discuss how the victim loss amount influences the Guidelines for fraud under section 2B1.1 and how these Guidelines provide harsh imprisonment terms when loss amounts reach the hundreds of millions of dollars. such dollar amounts are common when employing market loss. When the fraud becomes public knowledge, the price of a security listed on an efficient market quickly will incorporate the new information, causing a sharp decrease in the security's price. (7) Because defendant responsibility is unclear with market loss, judges often are hesitant to apply severe Guideline sentences to such defendants, (8) as was the case with Ferguson. such hesitance creates disparities between judges who apply the Guidelines, and those judges who do not. This Article will examine these problems and how they result from a failure to differentiate market loss from direct loss.
Part II analyzes the history of market loss, a calculation of loss that arose as a damage calculation in private plaintiff civil securities fraud actions. This Part describes the evolving theory of loss causation in order to understand the foundation for market loss at criminal sentencing. This Part also explains how market loss might have been used in sentencing before the Guidelines.
After the codification of the Guidelines, victim loss became the official driving factor in fraud sentencing. Thus, Part III examines the loss table and how a large loss finding leads to a long prison term recommendation. Because the court must calculate victim loss to adhere to the Guidelines, courts determine market loss in a manner similar to previous civil securities fraud cases. Part III also analyzes the subsequent developments in federal court.
Part IV argues that market loss is inappropriate for criminal sentencing in its current form, because it differs from direct victim loss due to weaker causation. A defendant might be civilly liable for market loss, but he is not responsible for that loss in the way that criminal sentencing should require. Loss causation, even if …