Thursday, February 16, 2006

Deducting Expenses from the Corruption Gain for Sentencing

The Eleventh Circuit had its third look at U.S. v. Devegter, a "pay-to-play" corruption case involving a payment of over $41,000 for an investment bank to conduct a bond refinancing for Fulton County, Georgia.  On this trip, the issue concerns calculating the gain from the corruption, a key issue in determining the sentence in that type of case. The defendants were charged with wire fraud under a right of honest services theory, and the sentencing involved the application of Sec. 2B4.1 of the Federal Sentencing Guidelines, the commercial bribery provision under which the judge uses the greater of the gain from the corruption or the amount of the bribe.  The district court found that the gain could not be estimated because the government could not establish that amount, and therefore used the $41,000 amount in sentencing, and then departed downward.  The Eleventh Circuit reversed (here), finding that the bases for the downward departures, including aberrational conduct, could not support the departure (a Booker remand was also required, but did not affect the analysis). 

Regarding the calculation of the gain from the bribery, the court considered whether indirect costs should be deducted.  The government argued that the gain to the investment bank from the bond refinancing deal was over $600,000, but the district court found that the government did not incorporate year-end bonuses paid to employees as reducing the gain, and therefore went with the amount of the bribe, a much lower figure.  The Eleventh Circuit rejected that position, holding:

The district court’s order ignores the distinction between variable and fixed overhead costs by equating year-end bonuses with commissions. Commissions are specifically identified and readily apportioned to a given transaction, but year-end bonuses usually depend on employee performance on multiple deals throughout the year and cannot be readily apportioned to a particular bond deal. The inherent difficulty of apportioning a year-end bonus to a specific transaction takes it outside the realm of direct costs that should be subtracted from profits in determining the net improper benefit. The government’s failure to include these costs therefore did not preclude the district court from relying on the net improper benefit as opposed to the bribe amount for sentencing purposes. Moreover, the defendants’ have the burden of proving what direct costs should be subtracted in determining the net improper benefit, and they have not satisfied this burden in regards to the bonuses.

In other words, a general cost of doing business is not a basis to reduce the gain from an otherwise corrupt transaction.  It would hardly be appropriate to deduct the amount of the bribe from the gain, even though that could be considered a "direct" cost. (ph)

http://lawprofessors.typepad.com/whitecollarcrime_blog/2006/02/deducting_expen.html

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