United States District Court, D. Nebraska
John M. Gerrard United States District Judge
The Court has received the revised presentence investigation report and addendum (RPIR) in this case. The defendant has objected to the RPIR on various grounds (filing 196), and has moved for a downward departure based on his personal circumstances (filing 197).
I. OBJECTIONS TO RPIR
The defendant was convicted after a jury trial of one count of conspiracy to commit wire fraud affecting a financial institution or securities fraud, one count of conspiracy to falsify bank entries, three counts of wire fraud affecting a financial institution, one count of securities fraud, and six counts of falsifying bank entries. Filing 146.
The defendant has objected to the RPIR on several grounds, including: its calculation of loss caused by the offense conduct; its conclusions that the offense conduct resulted in substantial financial hardship to 25 or more victims, involved sophisticated means, and substantially jeopardized the safety and soundness of a financial institution; and its conclusion that the defendant was an organizer or a leader in committing the offense. Filing 196.
1. Loss Calculation
Under U.S.S.G. § 2B1.1(b)(1), where a defendant is convicted of a fraud offense, the offense level depends on the amount of loss caused by the offense conduct. As with other sentencing enhancements, the burden is on the government to prove the loss amount by a preponderance of the evidence. See, United States v. Peroceski, 520 F.3d 886, 889 (8th Cir. 2008); United States v. Jackson, 155 F.3d 942, 948 (8th Cir. 1998). The government alleges two forms of loss in this case: loss to shareholders, and loss to the FDIC.
The RPIR concludes that shareholders lost $36, 443, 123.50 and the FDIC lost $17, 171, 154.00 as a result of the defendant's fraud-a total of $53, 614, 277.50 in losses. Accordingly, the RPIR recommends a 22-level increase in offense level pursuant to U.S.S.G. § 2B1.1(b)(1)(L).
The defendant objects to that loss calculation, and the resulting offense level increase, on several grounds. Filing 196 at 3. First, the defendant argues that the government failed to establish the FDIC losses by a preponderance of the evidence, because it failed to prove the losses were attributable to the offense conduct, and because it provided insufficient information about how the loss amount was determined. Filing 196 at 4-7. Second, the defendant objects that the government failed to establish the shareholder loss by a preponderance of evidence, because the method used to calculate the loss failed to distinguish between loss caused by the fraud and loss caused by other factors. Filing 196 at 7-13. The defendant also argues that using the government's method of calculating shareholder loss would violate the Ex Post Facto Clause. Filing 196 at 13. Third, the defendant objects to the aggregation of shareholder and FDIC loss to arrive at a loss amount. Filing 196 at 13. Fourth, the defendant proposes that a more appropriate method for calculating loss would be to base it on the defendant's gain. Filing 196 at 14.
The Court directed the government to submit to the Court and the defendant a summary of the evidence it intends to produce on loss, restitution, and forfeiture. Filing 199. In response to the government's subsequent submission, the defendant moved to continue the sentencing hearing. Filing 201. The Court granted the motion and amended the sentencing schedule accordingly. Filing 203. Pursuant to the amended schedule, the government filed its notice regarding the documentary evidence and witnesses it intends to offer at sentencing (filing 206), and the defendant filed a supplemental written statement on loss, restitution, and forfeiture, along with supporting evidence (filings 207 and 208).
(a) Shareholder loss
According to the Guidelines, in a case involving "fraudulent inflation or deflation in the value of a publicly traded security or commodity, the court in determining loss may use any method that is appropriate and practicable under the circumstances." U.S.S.G. § 2B1.1, cmt. n.3(F)(ix). "One such method the court may consider, " according to the Guidelines, is a method sometimes referred to as the "modified rescissory" method (MRM). Id.; see United States v. Brown, 595 F.3d 498, 525 n.30 (3d Cir. 2010).
Under the MRM, the average price of the security in the 90 days following the disclosure of the fraud is subtracted from the average price of the security during the period in which the fraud occurred. U.S.S.G. § 2B1.1, cmt. n.3(F)(ix). The difference is multiplied by the number of shares outstanding to reach an estimate of the loss caused by the fraud. Id. But the Guidelines caution that the Court must determine whether the outcome of this method is "a reasonable estimate of the actual loss attributable to the change in value of the security or commodity." Id.In making this determination, "the court may consider . . . the extent to which the amount so determined includes significant changes in value not resulting from the offense (e.g. changes caused by external market forces, such as changed economic circumstances, changed investor expectations, and new industry-specific or firm-specific facts, conditions, or events)." Id.
(i) The government's proposed loss estimate
The government contends that the Court should apply the MRM in calculating shareholder loss for this case. Filing 206 at 5. According to the government, the fraud period began on September 2, 2008-the date of the modification of the TownesVista loan. See filing 206-1 at 3. And it contends that the fraud continued until November 10, 2009-the date that TierOne filed an 8-K disclosing roughly $120 million in previously unreported losses to shareholders. See, filing 206-1 at 3; Exhibit 723. Based on these dates, the government's expert witness, Michael Petron, performed the MRM calculation. See filing 206-1. First, he subtracted TierOne's average share price in the 90 trading days following November 10, 2009 ($0.74) from the average share price between and including September 2, 2008 and November 10, 2009 ($2.90). Filing 206-1 at 3, 13. He multiplied that difference ($2.16) by 16, 950, 290-his estimate of the average number of shares outstanding during the purported fraud period. Filing 206-1 at 3-4, 13. He arrived at an estimate of $36, 612, 626 in loss to shareholders as a result of the defendant's fraud. Filing 206-1 at 4, 13.
(ii) The defendant's criticisms of the government's loss estimate
The defendant contends that the government's figure is not a reasonable estimate of the loss caused by the defendant's fraud. Filing 207. The defendant argues that (1) the government fails to account for the difference between the government's estimate of loss under the MRM and its estimate of loss for restitution purposes, (2) the government's calculation fails to account for factors other than the defendant's fraud that caused the share price to decrease, (3) the government used the wrong dates for the period of the fraud and disclosure of the fraud, and (4) the government's use of the number of outstanding shares during the fraud period as a multiplier under the MRM was inappropriate. Filing 207 at 3-7.
First, the defendant points out that there is a sizeable difference between the government's estimate of total shareholder loss caused by the fraud, and the government's calculation of shareholder loss for purposes of restitution-the former amounts to over $36 million, and the latter is roughly $9 million. Filing 207 at 3. The defendant contends that the list of transactions the government used to calculate restitution "contains approximately 90% of all transactional data during the government's so-called 'fraud period.'" Filing 207 at 3. Thus, the defendant argues, the two amounts should be closer together, and "the $36 million dollar figure is devoid of reality." Filing 207 at 3.
Second, the defendant argues that the government's calculation fails to account for the losses TierOne suffered as a result of factors other than the defendant's fraud. Filing 207 at 4. These factors can be roughly divided into two categories: (1) external economic factors, including "the industry-wide decline in the banking industry" and "the severe stress on the nation's economy as a whole"; and (2) losses resulting from TierOne's real estate investments. Filing 207 at 4. According to the defendant, "it is impossible to reasonably calculate the result of defendant's offense conduct, as opposed to the significant market factors and business decisions at TierOne (made prior to 2008) that led to a decline in TierOne's share value." Filing 207 at 5.
Third, the defendant contends that the government used the incorrect dates for the fraud period in its MRM calculation. Filing 207 at 5. The government chose as its start date September 2, 2008-the date that TierOne agreed to modify the TownesVista loan. Filing 207 at 6. But the defendant argues that there is no evidence he made any fraudulent statements to shareholders-or that he fraudulently omitted to disclose any information to shareholders-until at least May 21, 2009, the date of TierOne's annual shareholder meeting. Filing 207 at 6. Additionally, the defendant points out that at trial, the government repeatedly referred to November 5, 2009 as the date the fraud was disclosed. Filing 207 at 7. In its MRM calculation, the government uses November 10, 2009 as the disclosure date. Filing 207 at 7. According to the defendant, the government "offers no explanation for its change in position." Filing 207 at 7.
Finally, the defendant argues that the government's use of the average number of total outstanding shares as a multiplier in its MRM calculation was inappropriate. Filing 207 at 7. The defendant contends that this number "fails to account for the fact that a significant amount of these shares were not actively traded, including more than 2.7 million shares held by directors and executives at the company." Filing 207 at 7. Thus, the defendant reiterates his position that "performing a loss calculation in this highly complex case is impossible" and that the Court should instead base the calculation on the defendant's gain. Filing 207 at 7.
(iii) The government's response to the defendant's criticisms
In response to the defendant's objections to the RPIR, the government asked Petron to analyze the potential effect of general market forces on TierOne's share prices during the relevant periods. Filing 206-1 at 6. To that end, Petron determined that the SPRD S&P Regional Banking ETF ticker (KRE) could be used "as a surrogate for market performance." Filing 206-1 at 6. The KRE "seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P Regional Banks Select Industry Index." Filing 206-1 at 6 (quoting SPDR S&P Regional Banking ETF, State Street Global Advisors SPDR, https://www.spdrs.com/product/fund.seam?ticker=KRE (last visited March 10, 2016)). According to Petron's analysis, the correlation coefficient between the respective share prices of KRE and TierOne is 0.908, which Petron contends "suggests a strong positive linear relationship." Filing 206-1 at 6. Thus, Petron concludes, "one can assume that KRE represents a good market indicator for the movements of TierOne's stock." Filing 206-1 at 6. To account for the effects of general market forces on TierOne share prices, Petron performed additional loss calculation scenarios using the KRE.
In one scenario, Petron calculated the percent difference between TierOne's share price on the disclosure date, November 10, 2009, and TierOne's share price 5 trading days later, November 17, 2009. Filing 206-1 at 7, 29. TierOne share prices declined 48.54%. Filing 206-1 at 7, 29. Then, Petron performed the same comparison, but using KRE share prices instead of TierOne share prices. Filing 206-1 at 7, 29. KRE share prices increased 5.12% over the same time period. Filing 206-1 at 7, 29.
In another scenario, Petron calculated the percent difference between TierOne's average share price between and including September 2, 2008 and November 10, 2009, and TierOne's average share price for the 90 trading days following November 10, 2009. Filing 206-1 at 7, 29. He then repeated the calculation using KRE's average share prices. TierOne's average share price decreased 74.48% between the two periods, and KRE's average share price decreased 1.65%. Filing 206-1 at 7, 29. Reasoning that, therefore, general market forces likely accounted for a 1.65% decrease in TierOne's average share price between the two periods, Petron subtracted 1.65% from the 74.48% total decrease in TierOne's average share price. Filing 206-1 at 7, 29. This resulted in an adjusted decrease of 72.83%, which amounts to an adjusted shareholder loss totaling $35, 799, 239.00-about $800, 000 less than the government's original estimate of loss. Filing 206-1 at 7, 29.
This new analysis, the government argues, "makes clear that there were no external market forces or changed economic circumstances that caused the decline in TierOne's stock during the 90-day period following the disclosure." Filing 206 at 5-6. The defendant, on the other hand, takes issue with Petron's analysis. He expects his expert witness, John Salomon, to testify at the sentencing hearing that the regional banks which make up the index KRE is based on "are not comparable to TierOne in significant respects." Filing 208 at 7. Salomon is expected to offer an analysis of "problem banks" that Salomon contends are more similarly situated to TierOne. Filing 208 at 7. According to the defendant, ...