Let's Reform Those Draconian Sentencing Guidelines
from January/February 2008
by Rob Norton
On February 16, 2006, Richard P. Adelson was convicted of securities fraud, deceit, and conspiracy in connection with the overstatement of corporate earnings at Impath, a New York City company that provided diagnostic and laboratory services. Adelson had joined the outfit in 1992 as a salesman and had later become president and chief operating officer, serving until 2003, when an accounting scandal put Impath into bankruptcy—and Adelson in the crosshairs of the U.S. Justice Department. Prosecutors told the court that federal sentencing guidelines called for a prison sentence of 85 years: life without parole.
To many, including Corporate Board Member , this seemed excessive. Adelson was a first offender who had led an otherwise blameless, even exemplary, life. More than 100 friends and acquaintances, including clergymen, policemen, and a Harvard dean, attested to his good works and deep humanity. Moreover, he had played a fairly minor role in the fraudulent conduct for which he was convicted. He was penitent, and no one argued that he posed any further danger to society.
Somebody else who was shocked by the prosecution’s demand was Jed Rakoff, the U.S. district-court judge who had presided over the case. In a blistering 21-page sentencing memorandum, he wrote that the suggested sentence was “patently unreasonable.” Instead Rakoff sentenced Adelson, 40 at the time, to three and a half years in prison and ordered him to pay no less than $50 million in restitution, $1.2 million of which was seized from his forfeited assets, with the rest to be paid out of future income at the rate of 15% per month—meaning he’ll most likely be making restitution for the rest of his life. Rakoff also banned Adelson for life from serving as an officer or director of a public company. Prosecutors have appealed the sentence.
The jail time the prosecution sought in Adelson’s case was extreme, but it illustrates all too well just how harshly the U.S. criminal justice system approaches corporate fraud cases these days—in part because of an effort to make the penalties for white-collar crime match the draconian punishments imposed in recent decades for even nonviolent street crimes, such as drug possession. But two sentencing wrongs don’t make a right.
There are other ways to punish white-collar criminals. As it is, the sentences recently doled out may well mean that some miscreants will die in prison. Former Adelphia CEO John Rigas was 82 when he began his 15-year sentence. Former WorldCom CEO Bernard Ebbers was 63 at the time he was sentenced to 25 years.
Others have been given unusually long sentences as well. Enron CEO Jeffrey Skilling, 52 when his sentence came down, got 24 years; Computer Associates chairman and CEO Sanjay Kumar, 44, got 12 years. They were among those who received federal sentences, for which there is no parole. Tyco International CEO Dennis Kozlowski, then 58, and CFO Mark Swartz, 45, were convicted in a New York State court and given maximum sentences of 25 years. Both will be eligible for parole in eight and one-third years—but they will be serving very hard time. State prison is brutal.
The U.S. treats white-collar criminals far more harshly than most other major industrialized countries. The CEO and CFO of Royal Ahold, a Dutch retailer that nearly went bankrupt in an accounting scandal in 2003, were convicted of fraud in the Netherlands and fined E225,000 (then $290,000) apiece. They also got suspended nine-month jail sentences, meaning that they served no time whatsoever.
The draconian punishments in the U.S. are a relatively new development in the law. As recently as 20 years ago, white-collar criminals who were first offenders often avoided jail entirely, and rarely served much time. The stiffening of sentences has been especially pronounced in the last 15 years. In 1990, for example, Michael Milken, the most vilified figure in the 1980s “decade of greed” insider-trading scandals, was sentenced to 10 years in jail. The sentence was considered shockingly harsh at the time, but under the rules then in place, Milken would have been eligible for parole in four years. In fact, his sentence was subsequently reduced to two years. Had today’s rules been in effect, Milken would probably still be in jail with many more years left to serve—and he’d have a lot of company. In July, the President’s Corporate Fraud Task Force, which includes several Justice Department officials and U.S. attorneys plus the heads of eight other federal agencies and departments, announced on its fifth anniversary that it had secured 1,236 convictions, among them those of 214 CEOs and presidents, 53 CFOs, 129 vice presidents, and 23 corporate counsel or attorneys. The list included board insiders, but there is no evidence that outside directors have been jailed or fined for criminal misdeeds. Some, of course, have been sued in civil courts, notably those serving at Enron when the scandal hit; they agreed to pay a combined total of $13 million out of their own pockets to settle a shareholder suit.
One reason the U.S. is a leader in imposing severe prison sentences on white-collar criminals is that American voters want it that way. They have increasingly demanded harsh punishment in general, for both crime in the streets and crime in the suites. Another reason is the increasing eagerness of prosecutors to seek criminal charges in cases that years ago would have been handled in the civil justice systems. That gives them much more formidable tools for prosecuting and convicting white-collar offenders.
Then, of course, high-profile cases have traditionally provided a fast track to fame and fortune for those who prosecute them. Thomas Dewey used his successful pursuit of mobsters like Legs Diamond to run (successfully) for governor of New York and later (otherwise) for president. More recently, Rudy Giuliani blazed a similar route prosecuting white-collar cases (see the box on page 72 for what happened to some of his targets).
The recent history of sentences meted out to white-collar criminals is curiously intertwined with the history of dealings with various street villains, notably drug traffickers. “The white-collar sentencing story is just a tributary of a much broader set of streams in the politics of crime and excessive sentencing,” says Douglas Berman, a professor at Ohio State University’s Moritz College of Law and author of the Sentencing Law and Policy blog, which tracks criminal-sentencing developments. That story begins as early as the late 1960s when voters, alarmed by growing levels of street crime, began electing candidates who espoused law-and-order platforms, a strategy exemplified by President Richard Nixon and his vice president, Spiro Agnew (who, ironically, resigned after being implicated in a bribery scandal; he pleaded no contest to income tax evasion, was fined $10,000, and served three years’ probation). Nobody heard the voters better than New York governor Nelson Rockefeller, who in 1973 pushed through a set of state laws that mandated harsh prison sentences of as much as 15 years to life for possession of illegal drugs.
The Rockefeller drug laws, as they became known, were the envy of the swelling ranks of law-and-order politicians and pundits who loudly criticized judges for not handing out stiffer criminal sentences. At the same time, liberal politicians and judges voiced concern about the disparities between the treatment of street criminals, mostly poor and members of racial minorities, and corporate offenders, who were wealthy and white. “Many judges felt, ‘You’re making us send these inner-city kids away forever for a few hundred dollars of crack, while these multimillion-dollar white-collar guys are getting a slap on the wrist,’” says David Zlotnick, a professor at the Roger Williams University School of Law in Rhode Island. The easy legislative response, he says, was to ratchet up white-collar sentences to the same multi-decade levels.
The result of this uncomfortable coalition was the formation of the U.S. Sentencing Commission, which drew up stiff mandatory-sentencing guidelines for federal crimes, enacted by Congress in 1987. One goal was to increase the uniformity of sentences. The guidelines set forth minimum and maximum prison terms for a vast number of offenses. Judges were required to impose sentences within the guidelines. At the same time, Congress eliminated parole for federal crimes.
The sentencing guidelines take a sledgehammer approach. In drug cases, a major consideration in calculating prison terms is the amount of drugs a criminal possessed when arrested. One of the guidelines’ most controversial features has been the 100-to-one disparity between crack cocaine and powder cocaine for sentencing purposes: Five grams of crack led to a five-year prison sentence, but it took 500 grams of powder cocaine to warrant the same sentence, even though the drugs are equally concentrated. This disparity has been widely and severely criticized, largely because most defendants in crack-cocaine cases are African American, while most defendants in powder-cocaine cases are white. In effect, the guidelines wound up promoting the same kind of de facto racial bias that liberal supporters had hoped to end by requiring uniform sentencing. Some judges have declined to go along with sentencing guidelines.
The disparity between the penalties for crack and cocaine possession was recently reduced but is still in force. In financial-fraud cases, the guidelines get tough by emphasizing the financial loss resulting from a crime. Starting with fraud that produces a loss of up to $5,000, the guidelines set a “base offense level,” measured in points, for an instance of fraud, reflecting the defendant’s prior criminal record. Then they add points to the offense level as monetary losses rise and other aggravating factors, such as the number of victims, are added.
Thus a first offender guilty of fraud would receive a base offense level of six under the guidelines, which would call for a prison sentence between zero and six months and be left to the judge’s discretion. But the points added for financial losses mount quickly and steeply. If a case of fraud results in a loss of more than $1 million, the offense level rises to 22, suggesting a sentence of 41 to 51 months. When losses hit $100 million, the offense level goes to 32, implying a sentence of 10 to 12 years. If an instance of fraud involves more than 250 victims, another six points is added, which pushes the offense level to 38, leading to a sentence of 20 to 25 years.
Anyone accused of fraud at a large public company that results in a big fall in the stock price is therefore at risk of an extremely long prison sentence, almost without exception. In the case of Impath’s Richard Adelson, the prosecution argued that the offense level was no less than 55, which Judge Rakoff said was “rather remarkable” considering that the official sentencing table lists only levels from one to 43.
Another factor that pushes up sentences is the government’s propensity to layer on additional counts of criminal conduct based on the underlying crime. This is done by adding counts for such things as wire and mail fraud (using a telephone or sending a letter in connection with the base offense) and by applying other statutes, such as the Racketeer Influenced and Corrupt Organizations Act (RICO) and the money-laundering statutes, in cases for which they were clearly not intended.
The Supreme Court ruled in 2007 that the mandatory guidelines were unconstitutional because of another of their controversial features: Congress directed judges to consider “acquitted conduct” in setting sentences. This means that even if a jury acquits the defendant of some charges (using the strict trial definition of guilt beyond a reasonable doubt), the judge is ordered to base the sentence on the acquitted crimes as well if he or she believes the defendant guilty of them (using the much lower standard of “a preponderance of evidence”). The Supreme Court held that taking acquitted conduct into account when sentencing under mandatory guidelines deprived defendants of their right to a trial by jury.
But rather than throwing the guidelines out and asking Congress for wholesale revision, the court, in a pair of fuzzy split decisions, ruled that judges should still use the guidelines as “advisory” and could continue to consider acquitted conduct in sentencing. This past June, in another split decision, the Supreme Court underscored its support for the guidelines and ruled that any sentence falling within the range they set forth should be considered “reasonable” by courts reviewing the sentence on appeal. This also means that any sentence outside the guidelines, such as the one Judge Rakoff imposed on Adelson, can be considered unreasonable and subject to appellate review.
Many experts in criminal law feel the multi-decade sentences being handed down today are excessive. “They are absurd, and a waste of time and money,” says Roger Williams University’s David Zlotnick.
Even some of the prosecutors who helped put Enron officials behind bars believe the penalties that can now be imposed go too far. “We’ve gotten where we are today without a real discussion,” says attorney Samuel Buell, who led the Enron prosecutors’ team and now teaches at Washington University Law School in St. Louis. Buell wrote a paper for the Cardozo Law Review in 2007, calling for the reform of sentencing for financial-reporting fraud. Asked about some of the recent white-collar-crime sentences, he says, “I would say where we’re looking at life without parole for white-collar criminal cases, that’s absurd.”
Some federal judges obviously agree. A few, like Jed Rakoff, have refused to impose the prison sentences called for by the guidelines, daring prosecutors to appeal them. Appellate courts have sent some of those cases back to the judges for harsher sentences, but in other cases the courts have struck down lengthy sentences imposed by judges. For example, Jamie Olis, a midlevel Dynegy executive sentenced in 2004, at age 38, to 24 years for his role in accounting fraud at the energy company, had his sentence reduced to six years on appeal. During its current term, the Supreme Court is considering two cases that could lead to greater clarity about the sentencing guidelines. Both involve district-court sentences that fell short of the guidelines’ prescriptions. One defendant who pleaded guilty to being part of an Ecstasy-selling conspiracy when 21 and a college student got probation; another, who admitted to drug offenses involving both powder and crack cocaine, as well as a firearms offense, got 15 years. Circuit courts later sided with prosecutors and ruled the sentences unreasonable, and the Supremes have now heard arguments in the two cases.
Few legal critics hold out much hope for a major change in sentencing patterns anytime soon. One big reason, if not the biggest: politics. The law-and-order movement was originally a Republican Party endeavor for the most part, and many Democrats felt the sentences being given out to minority street criminals were unconscionable. But the Clinton administration made little effort to reform the laws, for fear the party would be seen as soft on crime. Similarly, during George W. Bush’s presidency there’s been no move to reduce the sentences of white-collar criminals, for fear the Republicans will be seen as beholden to big business. “When push comes to shove,” says law professor Douglas Berman, “everyone is inclined to sell out the criminals.”
One reform that would cut excessive sentences down significantly, of course, would be to prohibit prosecutors from layering additional counts of wire fraud and the like on top of more serious crimes. A more basic reform would be to recognize that the sentencing guidelines that grew out of Americans’ late-20th-century fixation on punishment are fundamentally flawed and Congress needs to rewrite them. But that’s unlikely, requiring as it would a change in public opinion and, even more improbable, a burst of political leadership. While an established group of public-interest organizations has been lobbying for many years against harsh sentences for minor drug offenders, the business community has been conspicuously absent in lobbying against harsh treatment for white-collar offenders.
Growing awareness of the political and economic consequences of excessive sentencing may yet move public opinion. In recent years, newspapers and magazines have begun noting that the U.S. is now the world leader in both the absolute number and the proportion of its citizens that are in jail. More than two million Americans are behind bars (about the same as the number enrolled in universities). The country’s incarceration rate, according to Brown University economics professor Glenn Loury, is 6.2 times that of Canada, 7.8 times that of France, and 12.3 times that of Japan. Loury’s primary complaint is with the racial implications of the war on drugs, but he also points out the economic costs. Those are enormous, even though the U.S. corrections sector is big business and accounts for a lot of jobs (and voters)—more, in fact, than the combined workforces of Ford Motor, General Motors, and Wal-Mart, the three largest private-sector employers.
The overarching problem with multi-decade sentences for nonviolent crimes like fraud and drug possession is that they seem disproportionate to the goals prison sentences are supposed to achieve: penitence, deterrence, restitution, and retribution. Does life without parole for a white-collar fraud offender—or 25 years for a single drug offense—really accomplish these things any more effectively than, say, three- to five-year sentences? Perhaps in some specific cases, but surely not in all.
The point was made eloquently by Judge Rakoff in his Adelson sentencing memorandum: “[I]t is obvious that sentencing is the most sensitive, and difficult, task that any judge is called upon to undertake. Where the sentencing guidelines provide reasonable guidance, they are of considerable help to any judge in fashioning a sentence that is fair, just and reasonable. But where, as here, the calculations…have so run amok that they are patently absurd on their face, a court is forced to place greater reliance on…more general considerations…as carefully applied to the particular circumstances of the case and to the human being who will bearthe consequences.”
