In a decision that could have far-reaching implications, a federal appeals court has vacated a convicted Ponzi schemer's 11-year prison sentence after finding that the loss amount used in calculating the relevant sentencing guidelines improperly failed to account for money returned to victims in the form of fictitious "interest" payments. Jason Snelling, of Cincinnati, Ohio, was originally sentenced in October 2012 to a 131-month term after previously pleading guilty to three counts of conspiracy, obstruction, and tax evasion. While the resentencing will likely reduce Snelling's 131-month sentence, he must also deal with two other prison sentences related to the scheme, including a 40-year prison sentence being served consecutively to Snelling's other sentences.
Snelling and others operated Dunhill Investment Advisers and CityFund Advisory in downtown Cincinnati, where they held themselves out as successful day-traders and solicited investors by promising guaranteed annual rates of return ranging from 10% to 15%. Ultimately, dozens of investors entrusted millions of dollars to Snelling and his companies. However, rather than utilize investor funds as promised, Snelling and his partner ran a Ponzi scheme whereby they used incoming investor funds to pay returns to existing investors, as well as to support lavish lifestyles that included purchases of a boat, furniture, and even plastic surgery.
After a tip by an investor whose accountant questioned the legality of the operation, authorities filed civil and criminal charges against Snelling and his partner, including state and federal charges against Snelling. In connection with the federal charges, Snelling ultimately pleaded guilty to one count each of three counts of conspiracy, obstruction, and tax evasion.
District Court Sentencing
While the plea agreement included Snelling's admission of guilt to the charges, it also referenced the disagreement between the government and Snelling regarding the offense-level calculations to be used by the U.S. Probation Office to calculate the sentencing-guidelines range included in a Presentence Investigation Report ("PSR"). Snelling argued that, under the U.S. Sentencing Guidelines, any funds returned to investors during the course of the fraud in the form of "profits" or "interest" should be used to offset the initial loss attributable to his fraud. Indeed, the commentary to U.S.S.G. § 2B1.1 provided that a loss would be reduced by, among other things:
(i) The money returned, and the fair market value of the property returned and the services rendered, by the defendant or other persons acting jointly with the defendant, to the victim before the offense was detected. The time of detection of the offense is the earlier of (I) the time the offense was discovered by a victim or government agency; or (II) the time the defendant knew or reasonably should have known that the offense was detected or about to be detected by a victim or government agency.
The government opposed Snelling's position, taking the position that Snelling “should not get credit for payments to perpetuate the scheme made with other victims’ money.” In other words, the Government maintained that Snelling's payment of fictitious returns to victims served simply to further the fraud and create the impression that the venture was legitimate. At sentencing, despite Snelling's protests, the Government adopted the Government's position and held that:
the loss should not be reduced, particularly because the monies did not represent profits . . . any return of money was to induce further investment . . . .
Based on the Government's methodology, the Court held that the intended loss for purposes of federal sentencing guidelines was $8,924,451.46. Using the highest calculated offense level of 35 for mail and wire fraud and after applying a three-level reduction based on Snelling's acceptance of responsibility, the Court applied U.S.S.G. § 2B1.1(b)(1)(K) to arrive at a sentencing range of 121 to 151 months. Based on that calculation, Snelling was ultimately sentenced to a 131-month term.
Snelling timely appealed, claiming that the district court committed error by using a loss figure of $8,924,451.46, representing the total amount of money taken in from investors, instead of of $5,336,187.78, which represented the total losses after accounting for the total amount returned to investors over the life of the scheme. This difference was crucial, as different sub-sections of U.S.S.G. § 2B1.1(b)(1) applied based on whether or not the loss figure was greater than or less than $7 million. As a result, while the calculation used by the district court resulted in a range of 121 to 151 months, a calculation using the loss figure urged by Snelling would have resulted in a maximum range of 97 - 121 months.
The Sixth Circuit agreed with Snelling's position, specifically noting that:
Snelling’s argument, based on the text of the Guidelines alone, is persuasive. His reading of the Guidelines is further bolstered by U.S.S.G. § 2B1.1 Application Note 3(F)(iv), which specifically addresses Ponzi-scheme loss calculations. Application Note 3(F)(iv) states that, when calculating the loss figure in a Ponzi scheme, the “loss shall not be reduced by the money or the value of the property transferred to any individual investor in the scheme in excess of that investor’s principal investment.” U.S.S.G. § 2B1.1 Application Note 3(F)(iv). Snelling argues that the language of this note implies that courts are expected to reduce loss figures by the sums returned to investor victims, and that the note seeks to limit such reduction to no more than the principal invested. Thus, the Sentencing Commission, while contemplating that loss figures should be reduced according to the amount of money returned, does not want a single investor’s returns to be deducted beyond the amount originally invested: “[T]he gain to an individual investor in the scheme shall not be used to offset the loss to another.” U.S.S.G. § 2B1.1 Application Note 3(F)(iv). Again, Snelling’s argument is persuasive. The fact that the Application Notes limit deductions from loss figures to no more than the sums originally invested implies, quite strongly, that the loss figures are to be reduced in the first place.
(emphasis added). The Court also looked to previous editions of the sentencing guidelines, pointing to language in the pre-2001 editions that entirely omitted any language calling for a reduction based on the sums returned to victims.
Addressing the government's position, the Sixth Circuit conceded that while there certainly was appeal to prohibiting a Ponzi schemer from benefiting from making payments to carry out the fraud, the relevant concern was whether the district court properly applied the sentencing guidelines. Based on the finding that the district court did commit error by failing to account for the payments made by Snelling to his victims, the Sixth Circuit vacated Snelling's sentence and remanded the case back to the district court for resentencing.
The Sixth Circuit candidly admitted that adopting Snelling's position would, in essence, ultimately mitigate the sentence a Ponzi schemer would ultimately face. Indeed, it is well-acknowledged that a Ponzi schemer's ability to consistently deliver the returns promised to investors serves to create an aura of legitimacy around the scheme and ultimately entice new investors. However, the Sixth Circuit noted that it was restricted to the question of whether the sentencing court adhered to the sentencing guidelines as written, and vacated the sentence based upon its finding of error.
The theoretical implications of such a position are significant. Historically, the government's calculated loss figures were typically rarely disturbed; indeed, the Sentencing Guidelines state that courts "need only make a reasonable estimate of loss … based on available information.” Moreover, and especially in the common scenario where the Ponzi schemer pleads guilty, the post-collapse investigation into the scheme is only in the infant stages and rarely is enough information available to calculate the amount of funds ultimately disbursed to victims.
The biggest takeaway of the Sixth Circuit's decision, assuming it is adopted by other courts in loss calculations, are that scheme perpetrators will essentially be actively mitigating their future prison sentence by continuing their scheme. Indeed, in the situation of two Ponzi schemes that raise an identical amount of funds from victims, the scheme that makes a higher payout to victims theoretically would result in a lower prison sentence for that perpetrator based on the net loss calculation. Arguably, such a scenario technically incentivizes a Ponzi schemer to return as much as possible to investors with the knowledge that the returns will not only attract new investors but also serve to ultimately reduce any prison sentence.
The Sixth Circuit's opinion is below: