Fraud Loss and Restitution: The Government Must Prove Investors Relied on the Lies

In a securities fraud case, the government cannot count every investor's loss toward your sentence or restitution without proof that those investors actually relied on the lies. The Eleventh Circuit so held in United States v. Stein, No. 14-15621 (11th Cir. Jan. 18, 2017).

What happened

Mitchell Stein, a former lawyer, was convicted of mail, wire, and securities fraud tied to Signalife stock.

He challenged two parts of his sentence:

• The loss amount under the guidelines (USSG §2B1.1). A bigger loss means a higher guideline range.
• Restitution under the Mandatory Victims Restitution Act (MVRA). Restitution is money the court orders you to pay back to victims.

He argued that the government failed to prove both factual and legal causation for the loss amount. In other words, it did not show that his fraud actually caused the investors' losses.

What the court decided

The court affirmed his conviction but vacated (threw out) his sentence. Applying the same standard to both the loss and restitution challenges, it agreed with Mr. Stein that, to count investors' losses, the government had to prove the investors "relied on the fraudulent information Mr. Stein disseminated" when they bought the stock.

The district court had found that more than 2,000 investors relied on his false information. But the only proof was testimony from two people that they relied on his false press releases, plus general evidence that some investors rely on public information. That was not enough to assume reliance for over 2,000 people, so the district court was wrong to base the actual loss figure on all of those investors' losses.

The district court also failed to decide whether other events caused the stock price to fall. If those events were unforeseeable, their effect should have been subtracted from the loss.

The case was sent back for the district court to fix these errors. You can follow the case on the Justice Department's victim notification page.

Why it matters

If you are facing a fraud sentence, the loss amount often drives both the guideline range and the restitution order. The government has to prove that loss with real evidence, not assumptions.

The loss figure usually first appears in the presentence report (PSR), the probation office's report to the judge. If the number is built on assumptions about who was harmed and why, that is the time to object, with your own records and, where needed, a defense expert on what else moved the stock price.

Facing a federal sentence? Book a consultation to talk it through with Brandon Sample.