United States v. Hsu, No. 09-4152-cr (2d Cir. February 17, 2012) (Winter, Lynch, Carney, CJJ)
Norman Hsu, a prominent, if corrupt, political fundraiser, used the connections he made in politics to run a giant Ponzi scheme. He pled guilty to mail and wire fraud, and was convicted by a jury of campaign finance fraud. In all, the district court imposed a 292-month guideline sentence.
The main, but not only, issue on his appeal concerned an interesting sentencing issue. The district court found that the Ponzi scheme caused a loss of between $50 million and $100 million, but in doing so included earnings that the victims reinvested in the scheme – even though those earnings were invented as part of the scheme – in the intended loss. The circuit agreed that this was permissible.
Normally, in fraud cases, the guidelines measure the amount of principal the victims lost, and not the amount of lost principle plus the promised profit that never materialized. But the “situation is different” where the investor is “told not simply that his investment will grow, but that it has grown, and that the total of his original investment and the accrued interest or other gain is now available to be withdrawn or reinvested in the scheme, depending on the investor’s preference.” For Ponzi-scheme participants who can choose either to withdraw or reinvest, the choice to reinvest, which is usually necessary to keep the scheme alive, “transforms promised interest into realized gain that can be used in the computation of loss.” Only the “most recent promised or reported” gains are excluded from the guidelines calculation as interest.
The alternative, calculating losses only by looking at the money actually invested by victims, would “fail to take into account” the very nature of Ponzi schemes: the victims’ changing behavior in the face of the fraudulent report of the success of their investments and the fact that the purported proceeds of this “success” are maintained in accounts controlled by the defendant, not withdrawn by the investors. When the defendant gives the victims the option of withdrawing the proceeds, but then induces them to instead reinvest the money and again put it at risk, the “victims have suffered further loss.”
The court recognized that the task of defining this “reinvestment” will in many cases be difficult and will have to be “pursue[d] with care,” because “what constitutes interest precluded from consideration during sentencing in one context may be the very loss intended in another.” But here, the case was “straightforward. Hsu’s victims frequently returned post-dated checks to him for reinvestment, thereby relinquishing the opportunity to cash those checks and withdraw from the scheme. When this occurred, the reinvested checks – including the previously promised returns – became part of their principle investment, and therefore constitute the very losses that Hus intended to inflict.” Hsu’s contrary argument – “that the ‘gains’ did not exist … reduces to the claim that the victims losses do not count because he was unable to pay them back.”
The court concluded by noting that this method is not “the only way to measure loss in a Ponzi scheme,” but is one way to develop a “reasonable estimate” of loss for the guidelines. In the end, all the court really held is that the exclusion of interest from loss calculations did not apply, and that the district court’s calculation was otherwise reasonable and appropriately measured the harm to the victims.