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. 

Nicholas Ellis, disbarred for insurance fraud, has been reinstated to Massachusetts bar

In In re Nicholas J. Ellis, 45 7 Mass. 413 (2010), the Supreme Judicial Court ruled last month that Nicholas Ellis, who had been disbarred in 1997 for insurance fraud, could be reinstated to the practice of law.

Ellis had been disbarred for knowingly submitting fraudulent medical records to insurance companies. His actions were part of a larger scheme by his personal injury law firm, Ellis & Ellis, to defraud insurance companies.

The SJC has found that Nicholas has been rehabilitated.

The court found that when Nicholas joined Ellis & Ellis he was new to the practice of law. The firm was established by his father and "tightly controlled" by his brother. Nicholas' wrongdoing was minor compared to the wrongdoing of the firm and his brother.

The court weighed Nicholas' wrongdoing against his post-disbarment activities, which included being the at-home parent to his children while his wife worked, attempting to become a teacher (he was unable to obtain employment because of his convictions), coaching youth teams, and charitable work through his church. He also expressed remorse about his wrongdoing.

I have mixed feelings about the ruling. It irks me that Nicholas gets brownie points for staying home with his kids. If he were a woman, would the SJC give him rehabilitation points for doing that, or for coaching a kid's team, or for doing volunteer work with a church? And I'm not too impressed with his studying to be a teacher when no school in its right mind would hire him.

It also bothers me that the SJC states that his new practice areas are sufficiently distinct from his old personal injury practice. One of his new practice areas is social security disability law. Forged medical records work just as well with the government as with insurance companies.

On the other hand, I like the idea of rehabilitation. I applaud the notion that each of us can grow beyond whatever stupid, wrong or unethical ideas we were indoctrinated with by our families, even if that growth comes in middle age.

So I give Nicholas the benefit of the doubt. Welcome back to the practice of law. I hope you prove worthy.

And now for something completely different . . .

An early 1970's pop-culture look at insurance fraud, with Farrah Fawcett and Colonel Potter thrown into the mix:

The Sound of Money