BEFORE THE UNITED STATES SENTENCING COMMISSION

In the Matter of Request for Comment on Emergency Amendments to Sentencing Guidelines, Policy Statements and Commentary

Implementing the Sarbanes-Oxley Act of 2002, Pub. L. 107-204

 

Comments of the Staff of the Bureau of Consumer Protection, the Bureau of Economics, and the Office of Policy Planning of the Federal Trade Commission*

 

December 18, 2002

 

*These comments represent the views of the staff of the Bureau of Consumer Protection, the Bureau of Economics, and the Office of Policy Planning of the Federal Trade Commission. They are not necessarily the views of the Federal Trade Commission or any individual Commissioner. The Commission has, however, voted to authorize the staff to submit these comments.

The United States Sentencing Commission has requested comments on proposed amendments that it intends to promulgate to implement the Sarbanes-Oxley Act of 2002, Pub. L. 107-204. The Act directed the Sentencing Commission to amend the United States Sentencing Guidelines to address highloss complex fraud cases and raise penalties for white collar crime generally.1 The staffs of the Bureau of Consumer Protection, the Bureau of Economics, and Office of Policy Planning of the Federal Trade Commission ("FTC") recommend that the Sentencing Commission increase penalties for "lower loss" frauds of less than $120,000 and enhance penalties for obstruction of justice offenses.

 

I. The FTC and its Law Enforcement Authority

 

The FTC is the federal government’s primary consumer protection agency. Under Section 5 of the Federal Trade Commission Act ("FTC Act"),2 the agency’s mandate is to take action against "unfair or deceptive acts or practices" and to promote vigorous competition in the marketplace. The FTC Act authorizes the FTC to halt deception through civil actions filed by its own attorneys in federal district court,3 as well as through administrative cease and desist actions. Typically these federal court civil actions seek preliminary and permanent injunctions to halt the targeted illegal activity as well as redress for injured consumers.

Although the FTC does not itself bring criminal prosecutions, conduct that violates the FTC Act may also violate criminal statutes such as the mail fraud and wire fraud statutes,4 and certain statutes the FTC enforces civilly also provide for criminal penalties.5 Further, some defendants engage in the same or similar conduct even after a court has ordered them to stop engaging in such conduct. In these cases, the FTC may refer the matter to the Department of Justice ("DOJ") for criminal contempt prosecution.6 To the extent authorized by law, FTC staff frequently assist DOJ and local United States Attorney’s offices in the prosecutions.7

 

II. Proposed Amendments to the Sentencing Guidelines

 

As a result of the FTC’s efforts to stop and deter deceptive conduct, especially by recidivists, we are keenly aware of the need for sentencing guidelines that provide judges with the authority and discretion to punish convicted scam artists appropriately. Accordingly, we concur with DOJ’s recommendations in its October 1, 2002 letter to the Chair of the United States Sentencing Commission.8 In particular, we concur with DOJ’s comments about the need for (1) increased penalties for "lower loss" frauds of less than $120,000 and (2) enhancements in the Obstruction of Justice guidelines to appropriately account for more serious offenses. Enhanced penalties for fraud at lower monetary levels will better deter fraudulent actors before they cause significant injury to consumers. Further, the extent of the contemnor’s punishment depends largely on how the judge applies the guidelines. Whether the judge applies the Obstruction of Justice or a specific offense guideline may create a significant disparity in the sentence. Promulgating enhancements in the Obstruction of Justice guidelines such as cross-referencing the fraud loss table and accounting for the number of participants and victims will more appropriately reflect specific offense characteristics so there is less disparity in sentences. Although the Sentencing Commission’s amendments address highloss complex fraud cases, we believe these recommendations will more fully adjust the sentencing guidelines to raise penalties for all white collar crimes covered by the Fraud and Obstruction of Justice sections of the guidelines as anticipated by the legislation.

 

A. Amendments to USSG § 2B1.1 (Fraud)

 

We concur with DOJ’s general recommendation to increase penalties for "lower loss" frauds.9 As DOJ’s October 1 letter notes, victims are often devastatingly injured by lower loss frauds, particularly small businesses and individual consumers. In addition, such egregious criminal conduct could hurt many more victims and cause greater losses but for law enforcement actions. In recent years, the Internet and other high-tech marketing techniques have provided con artists the opportunity to expand in size and scope, as well as to disappear quickly. To combat this problem, the FTC seeks to stop these types of scams quickly by bringing actions in federal court requesting preliminary and permanent injunctive relief. The goal is to stop the fraud before even more consumers become victims.

A perverse consequence if there is a swift response, however, is that the loss may be too little to persuade the United States Attorney’s office to prosecute.10

For example, in FTC v. Benoit,11 the FTC quickly moved against defendants who used deceptive emails or "spam" to dupe consumers into placing expensive international audiotext calls.12 The defendants sent thousands of consumers an unsolicited email stating that each recipient’s "order" had been received and that his or her credit card would be billed $250 to $899. The email instructed consumers to call a telephone number in the 767 area code if they had any questions. Most consumers did not realize that 767 was the area code for Dominica, West Indies. The email was, in fact, no more than a ruse to connect victims to a pay-per-call audiotext entertainment service with sexual content that charged expensive international rates. As a result of the FTC’s quick action, filing a complaint and motion for a temporary restraining order in federal court less than one month after discovering the scam, victims lost only a little over $85,000.

Even though the fraud was egregious, it is unlikely that DOJ or a local United States Attorney’s office would have chosen to prosecute the case. In determining whether to accept an FTC referral, DOJ conducts, in essence, a cost-benefit analysis, weighing the costs of bringing a resource-intensive criminal prosecution against the benefits, if successful ( i.e., incarceration and the deterrent effect that follows). In the Benoit case, the amount of loss, and thus the likely sentence, would likely have been too low to outweigh the resources necessary to prosecute the matter.

Based on our experience, we support DOJ’s recommendation to increase penalties for lower loss frauds. This would help eliminate the current perverse incentives that make criminal prosecution less likely when law enforcers have acted swiftly to stop fraud in progress.

 

B. Amendments to USSG § 2J1.2 (Obstruction of Justice)

 

As mentioned earlier, the FTC pursues criminal contempt actions through referrals to DOJ. In referring criminal contempt actions to DOJ, we must consider the court’s application of USSG § 2J1.1 (Contempt) guidelines. USSG § 2J1.1 directs the court to apply USSG § 2X5.1 (Other Offenses), which, in turn, directs the court to apply the most analogous offense guidelines. In the context of the violation of an order prohibiting false representations, the most analogous guideline should be USSG § 2B1.1 (Larceny, Embezzlement, and Other Forms of Theft; Offenses Involving Stolen Property; Property Damage or Destruction; Fraud and Deceit; Forgery; Offenses Involving Altered or Counterfeit Instruments Other than Counterfeit Bearer Obligations of the United States). The application note to USSG § 2J1.1, however, specifically mentions USSG § 2J1.2 (Obstruction of Justice) as a sufficiently analogous offense to apply to contempt. Accordingly, in sentencing contemnors, some courts have applied fraud sentencing guidelines while others have applied obstruction of justice guidelines. The judge’s decision on which guideline to use significantly affects the resulting sentence.

The experiences of two contempt defendants, Dennis S. Goddard and Kenneth Sterling, are instructive. In 1994, the FTC filed a federal court action against Goddard for defrauding millions of dollars from consumers through a telemarketing scheme offering rare coins as an investment opportunity.13 He stipulated to a permanent injunction requiring him to post a bond before offering investment opportunities and prohibiting specified false representations. In flagrant violation of the order, Goddard again defrauded numerous consumers out of over $1 million as part of another investment scheme that involved a large number of participants. In 2000, Goddard pleaded guilty to a four count information charging him with criminal contempt.14 The court, applying the Fraud guidelines, sentenced Goddard to 24 months incarceration.15

In contrast, another recidivist, Kenneth Sterling, received a significantly shorter sentence than Goddard because the court applied the Obstruction of Justice guidelines.16 In 1995, DOJ, on behalf of the FTC, sued Sterling in federal court for defrauding millions of dollars from consumers through a vending machine business opportunity scheme.17 He stipulated to a permanent injunction requiring him to comply with the FTC’s Franchise Rule18 and prohibiting specified false representations. Thereafter, he and many other participants engaged in the exact activity prohibited by the order, and defrauded numerous consumers out of more than $600,000. The court found him guilty of criminal contempt, but applied the Obstruction of Justice guidelines, sentencing him to seven months incarceration.19 If the court had applied the Fraud guidelines, Sterling likely would have received a sentence in the range of 33 to 41 months.20

Although these two matters both involved clear cut violations of prior court orders, substantial consumer injury, a large number of participants, and multiple victims, one contemnor received significantly less punishment because that court applied the Obstruction of Justice guidelines rather than the Fraud guidelines. Promulgating enhancements to the Obstruction of Justice guidelines that account for serious offenses, such as cross-referencing the fraud loss table and accounting for the number of participants and victims, would diminish the disparity in potential sentences. Con artists then would be on notice that they face significant jail time if they violate a federal court order, better deterring recidivist conduct.

 

III. Conclusion

 

For the reasons discussed above, the FTC staff recommends that the Sentencing Commission consider increasing penalties for "lower loss" frauds of less than $120,000 and promulgating enhancements to the Obstruction of Justice guidelines to account for serious offenses. We appreciate the Sentencing Commission’s efforts in implementing the directives contained in the Sarbanes-Oxley Act and are grateful for your consideration of the views expressed herein and your support of the FTC’s efforts to enforce its federal court orders. If any other information would be useful regarding these matters, please contact J. Reilly Dolan, Assistant Director, Bureau of Consumer Protection, Division of Enforcement, at (202) 326-3292.

 

Respectfully submitted,
____________________________
J. Howard Beales III, Director

Elaine D. Kolish, Associate Director for Enforcement
James Reilly Dolan, Assistant Director for Enforcement
Victor F. DeFrancis, Staff Attorney
Bureau of Consumer Protection

____________________________
David T. Scheffman, Director
Bureau of Economics

____________________________
Ted Cruz, Director

Jerry Ellig, Deputy Director
Mark Nance, Attorney
Office of Policy Planning

 

 

Endnotes:

1. See, e.g., Sections 805 and 905 of the Sarbanes-Oxley Act of 2002 ("In carrying out this section, the Sentencing Commission shall– consider the extent to which the guidelines and policy statements adequately address whether the guideline offense levels and enhancements for violations of the sections amended by this Act are sufficient to deter and punish such offenses, and specifically, are adequate in view of the statutory increases in penalties contained in this Act;" § 905 (b)(2)); 148 Cong. Rec. S7418 ("This section would require the United States Commission to review and consider enhancing, as appropriate, criminal penalties in cases involving obstruction of justice and in serious fraud cases." Statement of Sen. Leahy); 148 Cong. Rec. S7426 ("Our bill also directed the U.S. Sentencing Commission to review our existing Federal sentencing guidelines. As you know, the sentencing guidelines carefully track the statutory maximum penalties that Congress sets for specific criminal offenses. Our bill requires the sentencing commission to go back and recalibrate the sentencing guidelines to raise penalties for white collar offenses affected by this legislation." Statement of Sen. Biden.)
   
   
2. 15 U.S.C. § 45(a).
   
   
3. Section 13(b) of the FTC Act, 15 U.S.C. § 53(b).
   
   
4. 18 U.S.C. §§ 1341, 1343.
   
   
5. See FTC Act § 14; Truth In Lending Act § 112, 15 U.S.C. § 1611; Fair Credit Reporting Act §§ 619-20, 15 U.S.C. §§ 1681q & r; Wool Products Labeling Act, 15 U.S.C. § 68h; Fur Products Identification Act, 15 U.S.C. § 69i; Textile Fiber Products Identification Act, 15 U.S.C. § 70i. The FTC may always, of course, refer suspected criminal violations of the antitrust laws to the Department of Justice for investigation and possible prosecution.
   
   
6. The FTC’s Bureau of Consumer Protection established Project Scofflaw in 1996 to improve the Commission’s ability to detect and deter violators of FTC-obtained federal district court orders. Project Scofflaw aims to deter recidivism through civil and criminal contempt actions. In the six years since the project’s inception, DOJ and United States Attorney’s Offices successfully have prosecuted 16 defendants for conduct that violated FTC-obtained federal court orders. For more information, see the Report to the Commission on Project Scofflaw’s First Five Years, available at http://www.ftc.gov/os/2002/01/projectscofflawreport.pdf.
   
   
7. In eight of the 16 cases prosecuted since 1996, a Commission staff attorney was crossdesignated as a Special Assistant United States Attorney ("SAUSA"), pursuant to 28 U.S.C. § 543, to assist the prosecution. In many of the others, the Commission provided significant investigative assistance. Commission staff also have been cross-designated as SAUSAs in other pending criminal investigations.
   
   
8. October 1, 2002 letter from Eric H. Jasso, Counselor to the Assistant Attorney General, Criminal Division, DOJ, to the Honorable Diana E. Murphy, Chair, United States Sentencing Commission, regarding the implementation of the Sarbanes-Oxley Act of 2002.
   
   
9. DOJ further recommends specific adjustments to the fraud loss table. The Commission takes no position on those specific adjustments.
   
   
10. We often attempt to persuade DOJ or a local Assistant United States Attorney to prosecute criminally defendants the FTC already has filed against because the possibility of jail time may more effectively stop would-be career con artists from jumping scam to scam.
    
    
11. FTC v. Benoit (previously FTC v. One or More Unknown Parties), No. 3:99 CV 181 (W.D.N.C. 1999).
    
    
12. "Audiotext" services are telephone-based entertainment or information services.
    
    
13. FTC v. Goddard Rarities, Inc., No. 93-CV-4602 (C.D. Cal.).
    
    
14. United States v. Dennis S. Goddard, No. 2:00cr00450 (C.D. Cal.).
    
    
15. It is our understanding that under the Fraud guidelines, Goddard was at Offense Level 20 (33 to 41 months) before receiving a downward departure for providing substantial assistance in the investigation or prosecution of another person pursuant to USSG § 5K1.1.
    
    
16. United States v. Kenneth Sterling, No. 0:99cr06105 (S.D. Fla.).
    
    
17. United States v. American Vending Corp., No. 0:95cv06640 (S.D. Fla.).
    
    
18. 16 C.F.R. Part 436.
    
    
19. Under the Obstruction guidelines, he was at Offense Level 10 (6 to 12 months).
    
    
20. Another court recently sentenced an FTC recidivist to 125 months in jail after the defendant pleaded guilty to two counts of mail fraud for causing more than $2.5 million in injury. The relevant conduct also violated an FTC-obtained federal court prohibiting violations of the Franchise Rule and prohibiting specified false representations. See United States v. Robert L. Ferrara, No. 02-00016-01-CR-W-5 (W.D. Mo.).