July 31, 2009
Nacchio Insider Trading Sentence Reversed: Tenth Circuit Adopts Dura Loss Causation Approach to Criminal Guidelines Sentencing
Posted by Christine Hurt

Doug Berman jumps on this big sentencing case.  The Nacchio case was not on my radar much, but I take it that he was convicted of 19 counts of insider trading and sentenced to 72 months (6 years to you and me) for each count.  So, we're talking Madoff numbers here.  Now, how the prosecutors and district court got to this number was by calculations under the Guidelines of the profit that Nacchio realized from his securities fraud. 

I've written before about the strange disconnect in calculating the magnitude of loss caused by securities fraud in criminal courts and in private securities litigation.  In private securities litigation, the doctrine of loss causation requires courts to extricate out how much others' shares went down (if any) because of the revelation of the fraud, isolated from other economic events that are happening at the same time.  Loss causation is the death knell for plaintiffs, although an employment scheme for economists.  But in criminal securities fraud cases, prosecutors ignore other economic factors and focus on the bare drop in stock price following revelation of fraud, and it's only important in sentencing, not in a finding of guilt.  Insider trading is even trickier because you aren't measuring the diminution in value of shareholders' stock, but the gain of the insider's stock (or loss avoided).  I guess to make matters simple, the district court just counted the net profit Nacchio received for selling stock, without trying to separate out the amount of profit that was related to selling before revelation of bad news.  So, if I sell a $50 stock for $25 profit relying on insider information that had it been known, would have reduced the stock price to $49, then for Guidelines' purposes, that's a $25 profit, not a $1 profit.

But, the Tenth Circuit thinks the district court can do better.  The opinion is here.  The Tenth Circuit doesn't fully adopt Dura, recognizing that the goals of criminal punishment are different than the goals of civil litigation, but it goes pretty far in saying that the district court should have taken into account the inherent value of the stock (as it appreciated over time) and separated out other economic factors that went into the stock price.  This may not satisfy many academics who question the rationale behind criminalizing insider trading at all, but it is good for white collar crime sentencing generally.

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