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The Second Circuit Limits the Application of Two Guidelines Enhancements

In United States v. Huggins,15-1676, the Second Circuit (Winter, Cabranes, and Restani, sitting by designation) limited the scope of two Guidelines enhancements often applicable to white-collar crimes:  (1) U.S.S.G. §2B1.1(b)(16)(A), which provides for a two-level enhancement when the conduct derived more than $1 million from financial institutions; and (2) U.S.S.G. §3B1.3, which permits a two-level increase when a defendant has abused a position of public or private trust.  Huggins marks the first time the Court has given thorough consideration to the first enhancement and further clarified how courts should apply the second. 

Huggins was convicted of wire fraud and conspiracy to commit wire fraud in a scheme arising from his creation of sham companies that falsely promised investments in oil, diamonds, and gold in West Africa.  Instead, Huggins pocketed virtually all of the $8.1 million received from investors and used the money to cover a wide variety of personal expenses.  Huggins was found guilty on both counts after a two-week jury trial.  At sentencing, the District Court calculated a Guidelines range of 262 to 327 months, which included a two-level enhancement for funds derived from a financial institution and another two-level increase for abuse of a position of private trust.  The District Court sentenced Huggins to concurrent sentences of 120 months on each count—a significant downward variance of more than 50% from the low end of the believed-to-be-applicable range.  Huggins appealed the application of the enhancements along with several other claims, all of which the Second Circuit rejected in a separate summary order. 

Financial Institution Enhancement  

Investors in Huggins’ companies sent funds to Bank of America in New York.  Huggins then withdrew funds by ATM, wire transfer, or cashing checks.  Section 2B1.1(b)(16)(A) of the United States Sentencing Guidelines provides for a two-level sentencing enhancement if “the defendant derived more than $1,000,000 in gross receipts from one or more financial institutions as a result of the offense.”  Huggins argued that routine withdrawals from a bank account were not “derived” from a financial institution within the meaning of the Guidelines provision.  The Second Circuit, which became the second Court of Appeals to consider this question, agreed.  In instances in which a defendant simply withdraws funds from an existing account, the Court reasoned, the financial institution serves “as little more than a conduit of funds” and is not a “victim who lost funds as a result of the fraud.”  (Op. at 9).  The Guidelines, the Court continued, “provide no basis to enhance penalties for a defendant who stores his fraudulent proceeds in a financial institution . . . while allowing a defendant who avoids use of a financial institution to receive a lesser punishment.”  Id.

To determine whether funds were “derived” from a financial institution, the Court looked not to the source of the funds but rather to the risk of loss posed by the defendant’s conduct.  The Court concluded that the financial institution “must suffer a loss or liability,” such as the risk incurred by a fraudulently obtained loan, for the enhancement to apply.  This standard, the Court reasoned, effectuates the underlying purpose of the enhancement:  to punish those who place a financial institution at risk. 

Abuse of Private Trust Enhancement

The Court also sided with Huggins in connection with the second enhancement imposed by the District Court, a two-level increase in offense level “[i]f the defendant abused a position of public or private trust.”  U.S.S.G. §3B1.3.  Huggins argued that application of the private trust adjustment to his conduct was improper because he was simply a salesman who did not occupy a position of trust to his investors.  The Court, relying on a substantial body of Second Circuit case law, agreed.  Under United States v. Thorn, 446 F.3d 378 (2d Cir. 2006), courts undertake a two-prong analysis to determine whether the increase should apply.  First, they ask whether, from the victim’s perspective, the defendant occupied a position of trust.  Id. at 388.  If the answer to the first question is yes, courts then move to the second part of the inquiry:  whether the abuse of that trust “significantly facilitated the commission or concealment of the offense.”  Id.  In this case, the inquiry did not move beyond the first prong.  Huggins, the Court concluded, did not occupy a position of trust. 

A defendant only occupies a position of trust, the Court explained, when he or she has been “accorded discretion by the victim and abused a position of fiduciary or quasi-fiduciary status.”  When a defendant acts as a salesman engaging in arms-length negotiations with investors, he does not occupy a position of trust, even if he has a personal relationship with the individuals investing.  A personal friendship with investors, the Court explained, is “part and parcel of being a salesman.”  (Op. at 14).  By contrast, a defendant who serves as an investment advisor or broker is far more likely to occupy a position of trust.  Finally, the Court cautioned against the double-counting that would occur if all organizers of fraudulent schemes were deemed to occupy a position of trust with respect to their victims:  “[s]uch a broad reading would transform this abuse-of-trust enhancement into a vehicle for double counting, relying on a necessary element of the crime as a basis for applying the enhancement.”  (Op. at 16). 

Notwithstanding the trend after Booker and its progeny, the Guidelines range still needs to be correctly calculated.  An appeal may lie even when—as here—the Guidelines range seemed to play a small role in the district court’s decision about what sentence to impose.  In addition to Judge Newman’s recent decision in United States v. Algahaim, No. 15-2014 (2d Cir. Dec. 1, 2016), where the Court questioned the general relevance of the Guidelines in certain fraud cases, the Court here reminds litigants that it remains determined to police the application of the Guidelines.  It is hard to predict whether the defendant will receive a sentence shorter than the one he originally received, but it is worth trying.

-By Susan Millenky and Harry Sandick