US Sentencing Commission is Open to Public Comment on Proposed Amendments that Could Impact Insider Trading Convictions

The U.S. Sentencing Commission is welcoming public comment on amendments that have been proposed to its sentencing guidelines, which would ramp up the offense level for certain insider trading cases. Also, there are other proposals, related to amendments to the guidelines that get specific about determining loss in fraud cases, dealing with the rehabilitative efforts of offenders, and assessing the harm related to bank and mortgage fraud.

The proposed amendment to Section 2B1.4 of the US Sentencing Guidelines calls for an offense-level enhancement if the defendant accused of insider training had occupied a position of trust (four levels) or used sophisticated means (two levels), with the latter requiring a minimum base offense level of 12. Right now, insider trading’s base offense level is eight.

Under the proposed amendment, the term “sophisticated” would mean a very complex offense conduct as it relates to hiding or executing the offense. Factors that courts would take into account to determine whether sophisticated means were applied by the inside trader include how many transactions were made, the monetary value of each transaction, the number of securities involved, the duration of time that the offense took place for, whether shell companies, fake entities, or offshore accounts were used to hide the transactions, and if auditing mechanisms, internal compliance policies, and compliance and ethics programs were undermined to cover up the insider trading scam.

The proposed amendment as it relates to mortgage fraud and other financial institution-related frauds would deal with foreseeable pecuniary harm (including costs the lending institution involved with foreclosure on the mortgaged property would have to pay), as long as the institution had applied due diligence during initiation, monitoring, the processing of the loan, and collateral disposal.

The US Sentencing Commission also wants to look at making clear what method or methods would be used to figure out securities fraud losses. Commission members are hoping this will stop sentencing disparities from occurring. Methods that have been used to figure out loss have included the modified rescissory method, the simple rescissory method, the market-adjusted method, and market capitalization.

Modified rescissory method: Concentrates on the difference between the average security price after market disclosure and the average security price while the fraud was occurring.

Simple rescissory method: Looks at the price paid for the security and what that was after the fraud was uncovered.

Market-adjusted method: Can turn according to changes in the values of the securities (but doesn’t include changes related to external market forces.)

Market capitalization: Looks at the difference between the price after disclosure and beforehand.

The commission is looking into providing a loss-causation standard not unlike the one for civil securities fraud cases.

Proposed amendments to the US Sentencing Guidelines (PDF)

Proposed Amendments to Guidelines Would Increase Stakes for Insider Trading, Bloomberg/BNA, February 20, 2012


More Blog Posts:

Senate Passes Bill Banning Congressional Insider Trading, Institutional Investor Securities Blog, February 8, 2012

Insider Trading: Former FrontPoint Partners Hedge Fund Manager Pleads Guilty to Criminal Charges, Institutional Investor Securities Blog, August 20, 2012

$78M Insider Trading Scam: “Operation Perfect Hedge” Leads to Criminal Charges for Seven Financial Industry Professionals, Stockbroker Fraud Blog, January 18, 2012

At Shepherd Smith Edwards and Kantas, LTD, LLP, we represent victims of insider trading and other types of securities fraud.