Friday, May 14, 2010

Enhancement for Mass Marketing

This post is about a sentencing issue that arose in a federal cybercrime case. Before I get to the case itself, I need to provide a little background on federal sentencing law and practice.

As Wikipedia explains, the federal government uses what is known as guideline sentencing.

As this Congressional Research Service report explains, sentencing in general has historically been based on one of two policies: determine sentencing or indeterminate sentencing. As the CRS report also explains, indeterminate sentencing was the prevailing policy in federal (and most state) sentencing through much of the nineteenth and twentieth centuries. Indeterminate sentencing was popular when the primary purpose of sentencing was to rehabilitate (essentially, to “cure”) offenders; the premise was that, as with medical care, the best way to “cure” those who committed crimes was by imposing a sentence diagnostically calculated to achieve the best results for that particular person. So you were sentenced and then became eligible for release once you were “cured.” (Of course, if you weren’t “cured,” that could be a problem . . . . )

In the 1980s, Congress replaced indeterminate sentencing and rehabilitation as the driving sentencing policy with (i) a type of determinate (fixed) sentencing and (ii) a policy that focused on deterring offenders (pain = disinclination to re-offend), incapacitating them (can’t commit crimes if you’re locked up), exacting vengeance (to some extent) and, if it worked out, rehabilitation. Prior determinate sentencing policies were just that: The crime carried a penalty of 5 years in jail so you did 5 years, no less.

In the Sentencing Reform Act of 1984, Public Law 98-473, Congress adopted a different approach to determinate sentencing: guideline sentencing. That’s the system the federal government (and most states) use now. In the CRS report, you can read about how the federal sentencing guidelines have evolved since. My goal here is simply to outline how they work.

Basically, in a guideline system, there’s a baseline sentence for each offense, which was arrived at by calculating the “harm” resulting from the commission of the offense and other relevant factors. That’s the sentence that should be imposed absent the factors that distinguish guideline sentence from traditional, fixed determinate sentencing. The guidelines also provide for “departures,” i.e., factors that let a sentencing judge deviate somewhat from the baseline sentence.

As the CRS report explains, there are three types of departures: substantial assistance departures (you get a break on your sentence because you provided the prosecution “substantial assistance” on a case or cases); upward departures (enhancements . . . your baseline sentence can be increased based on certain factors) and downward departures (your baseline sentence can be reduced based on other factors). If you want to know more about how all of that works, check out the CRS report or the U.S. Sentencing Commission’s website.

The case is U.S. v. Hall, 2010 WL 1753349 (U.S. Court of Appeals for the 8th Circuit 2010), and this is how it arose:

In February 2003, [Kermit Kingsley] Hall asked his real estate agent, Heidi Jenkins, to register two trusts, the Kingsley Trust and the Axiom Trust, in Texas. Jenkins registered the two trusts on the same date, at the same courthouse, and with the same business address. Jenkins also opened a bank account for the Axiom Trust at Hall's request. Hall hired Jenkins to serve as the Axiom Trust's trustee, and Jenkins had authority to sign for deposits and withdrawals on the bank account.

Hall began soliciting investors for the Axiom Trust, which Hall falsely trumpeted as a large repository for real estate assets. Hall invited potential investors to purchase $75,000 units of beneficial interest in the Axiom Trust. . . . Hall told prospective investors the face value of the Axiom Trust's shares was guaranteed and the shares would earn high rates of interest. . . .

Hall convinced J.B., T.J., and others to invest in the Axiom Trust. J.B. traded Hall a 10,080 square foot chateau for twenty-seven shares. J.B. was eager to sell the home because his eldest son had recently died and it was painful for his family to continue to live there. T.J. gave Hall $65,000 in exchange for one share. T.J. was trying to help find investors to help him build a church, and Hall told T.J. he would be willing to build the church if T.J. helped Hall `free up funds’ to send to someone in France.

Hall frittered away all of the Axiom Trust's assets. . . . J. asked Hall many times to return his money. Hall repeatedly rebuffed T.J.'s efforts. . . .

In January 2006, Hall met Joseph Cooper, a certified public accountant in St. Louis. . . With the promise of a $300,000 annual salary, Hall hired Cooper to serve as the Kingsley Trust's accountant and later as trustee. At Hall's direction, Cooper and David Jarman, a local financial advisor whom Hall had appointed as a trustee of the Kingsley Trust, opened bank accounts in the St. Louis area for the Kingsley Trust. Cooper and Jarman became the accounts' signatories, but Hall controlled the funds.

Hall hired Jarman to develop a website for the Kingsley Trust. Hall drafted and controlled the website's content, and Jarman focused on the website's layout. The Kingsley Trust's website promoted, `[G]uaranteed deposits that post annual rates twice the norm’ and `Kingsley Trust erases the guesswork with "principal guarantee.”’ The website contained a form onto which visitors could submit their contact information to learn more about investing in the Kingsley Trust.

C.O. invested in the Kingsley Trust after Hall promised to help build a church. . . . S.E., an unemployed truck driver, invested $10,000. J.K . . . invested $10,000. I.M., a recent widow . . . , invested $75,000. . . .

As with the Axiom Trust, Hall misappropriated the Kingsley Trust's assets instead of investing them. Cooper directly helped Hall perpetuate the fraud, but Jarman did not. When Jarman discovered Hall was not investing the Kingsley Trust's assets, . . . . [he] contacted the Federal Bureau of Investigation (FBI), and an investigation ensued. . . .

U.S. v. Hall, supra. There’s actually a lot more, but you get the idea. As the result of the investigation, Hall was charged with 1 count of mail fraud and 2 counts of wire fraud; he went to trial and was convicted on all counts. U.S. v. Hall, supra.

At sentencing, the district court calculated Hall's Guidelines range to be 57 to 71 months imprisonment, based in part on a two-level enhancement for mass marketing under § 2B 1.1(b)(2)(A). The district court sentenced Hall to 59 months imprisonment and ordered him to pay over $525,000 in restitution. . . .

U.S. v. Hall, supra. Hall appealed, claiming the judge erred in assessing the two-level mass-marketing enhancement. U.S. v. Hall, supra. Here’s his argument:

Hall argues the district court erred in applying the mass-marketing enhancement because his victims would have `invested’ in the Kingsley Trust notwithstanding its website. Hall maintains he did not commit any fraud through mass marketing because it was his force of personality and connections with a trusted local accountant, financial advisors, and others-not the Kingsley Trust's website-that convinced his victims to part with their money. Hall also proposes the record contains little evidence his victims visited the website.

U.S. v. Hall, supra (emphasis in the original). The U.S. Sentencing Guidelines, which create the enhancement, define mass-marketing as including fraudulent schemes (Hall was convicted of 3 counts of fraud) “conducted through solicitation by . . . the Internet . . . to induce a large number of persons to . . . invest for financial profit.” U.S. Sentencing Guidelines § 2B 1. 1, cmt. n. 4(A). The U.S. Court of Appeals found that the district judge did not err in applying the enhancement to Hall’s sentence:

Even if we assume the Kingsley Trust's website did not convince any of Hall's victims to invest and was not widely viewed, the district court nonetheless did not err in applying the . . . enhancement. In amending § 2B 1. 1, the United States Sentencing Commission stated it intends the . . . enhancement `to apply in cases in which mass-marketing has been used to target a large number of persons, regardless of the number of persons who have sustained an actual loss or injury.’ U.S.S.G. app. C, amend. 617 (Supp.2003). The fact that few people fell into Hall's virtual trap has little relevance . . . so long as Hall attempted to use the Kingsley Trust's website to solicit funds from a large number of persons. . . . The . . . enhancement applies regardless of whether, in a hypothetical world, Hall could have successfully solicited his victims employing the more traditional arts of persuasion. . . . The mere fact Hall operated a website devoted to the solicitation of investments in his fraudulent scheme is sufficient. . . [He] does not dispute . . . that the Kingsley Trust's website was fully accessible to millions of persons worldwide via the Internet. . . .

`[M]ere use of a website is not sufficient to trigger’ a mass-marketing enhancement. . . . Hall did more than merely use a website. Hall's website was not intended to be a garden-variety website: Jarman testified he worked over 1,000 hours on the website, for which Hall promised to pay him $50,000. Hall placed `a billboard on the information superhighway’ to advertise his fraudulent scheme. Soliciting investments in the Kingsley Trust `was not a minor part of [the] website’ but `the very reason the site existed.’

U.S. v. Hall, supra (quoting U.S. v. Hanny, 509 F.3d 916 (U.S. Court of Appeals for the 8th Circuit 2007)).

Other courts have reached the same conclusion as to the enhancement’s applicability when the government doesn’t tie it to actual victims. See U.S. v. Zein, 2009 WL 4884973 (U.S. District Court for the District of Michigan 2009). It’s consistent with the definition of mass-marketing quoted above and an Application Note the U.S. Sentencing Commission included in the Guidelines to help judges apply them. Both note that mass-marking involves the “solicitation by telephone, mail, the Internet, or other means to induct a large number of persons to” buy things, participate in a content or “invest for financial profit.” The purpose, then, is to impose heavier penalties on those who try to use websites to enhance their pool of victims, as well as those who actually do.

(The photo, in case you’re wondering, is of Carlo Ponzi, as in Ponzi scheme.)

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