Wednesday, May 27, 2015

First Circuit holds that in fraud sentencing, sentence is based on amount of fraudulent claim not fraudulent plus legitimate claim

John Alphas owned a wholesale produce distributor.  He routinely obtained insurance for produce shipments.

Starting in March, 2007, Alphas submitted at least ten fraudulent claims to his insurers for lost, stolen or damaged produce.  Some of the claims were partially legitimate and partially fraudulent.

The federal government prosecuted Alphas.  Alphas pleaded guilty.  However, Alphas and the government did not agree on the amount of loss, a necessary step for determining sentencing. 

Alphas argued that the loss figure should exclude legitimate claims embedded in the fraudulent claims. 

The government asserted that the amount should be based on the total amount Alphas claimed, not how much he received.  It argued that the under the terms of the policies the insurer would have voided an entire claim if it had known that any part of it was fraudulent.

In United States v. Alphas, __ F.3d __, 2015 WL 2124771 (1st Cir. 2015), the United States Court of Appeals held that the loss-computation should distinguish between a fraudster who wholly fabricates a non-existent claim and a fraudster who artificially inflates s a legitimate claim.  "A fraudster who has suffered no loss at all but invents a $100,000 claim out of thin air is not the same as a fraudster who has suffered a legitimate $50,000 loss but artificially inflates his claim to $100,000." 

The court noted that the void-for-fraud clause in an insurance policy imposes on the fraudster a penalty for acting corruptly: "if the insurer discovers the fraud, the insured forfeits everything."

But the concept of loss under the criminal sentencing guidelines serves a different purpose.  The guidelines are "designed to ensure that the sentence imposed on the defendant 'reflect[s] the nature and magnitude of the loss caused or intended by [his] crimes.'"  It would make no sense to impose a more severe penalty on a fraudster whose policy has a void-for-fraud clause than on a fraudster whose policy does not contain that clause. 

The court held that, contrary to the government's position, the correct inquiry is what the fraudster reasonably expected to "euchre" (to outwit or cheat, not to play a card game in which jacks are high) out of his victim, not what would have slipped through is fingers had he not been caught.  That amount excludes sums that the fraudster would have been paid absent the fraud. 

The court also held that the restitution amount is the fraudulent amount only, not the legitimate claim, regardless of a void-for-fraud clause. 

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