Sunday, December 27, 2009

Case o' The Week: A Loss Cause, Berger and the Dura Pharmaceuticals Principle

The slow Christmas week lets us stretch back a bit to catch an important recent case on sentencing loss calculation: United States v. Berger, 587 F.3d 1038 (9th Cir. 2009), decision available here.

Decision by Judge M. Smith.

Facts: Berger was the President, CEO, and Chairman of the Board of Craig Consumer Electronics, Inc. Id. at 1040. With his cohorts he cooked the books and deceived banks that had loaned millions; he also misrepresented the company’s financial viability when it went public.

Berger was convicted of bank and securities fraud, sentenced to six months during the Blakely interregnum, saw his sentence reversed in the Ninth, and was sentenced to 97 months after a Booker remand. Id. at 1042.

He appealed.

Issue(s): “Berger argues that, in sentencing him on remand, the district court erred by: (1) not adhering to the civil loss causation principle in finding shareholder loss, as described by the Supreme Court in Dura Pharmaceuticals, Inc. v. Brouda, 544 U.S. 336 (2005), and (2) applying an erroneous standard of proof in determining total loss for sentencing enhancement purposes.” Id. at 1039-40.

Held: “While we decline to extend the Dura Pharmaceuticals principle to criminal securities fraud, we conclude that the district court’s loss calculation approach was nevertheless flawed. Thus, although we conclude that the district court used the correct standard of proof in determining the total loss, we vacate Berger’s sentence and remand to the district court for resentencing.” Id. at 1040.

Of Note: Berger is an important case because it may mark the beginning of a circuit split, as the Ninth rejects the Dura Pharmaceuticals principle in the context of securities fraud sentencing. Dura Pharmaceutical is a recent Supreme Court case that limited federal civil causes of action for securities fraud. Id. at 1042. In a nutshell, the Dura rule is that i) a fraud must be revealed publicly, and ii) that disclosure must have caused loss to shareholders, before a private cause of action for securities fraud lies. Id.

Although both the Second and Fifth Circuits have strongly suggested that this principle should control in loss calculation for criminal securities fraud (a good thing for the defense), Judge Milan Smith here rejects the rule for the Ninth. Id. at 1033. Judge Smith also rejects the loss calculation method actually used by the district court, which looks to the loss suffered by other companies’ stock when fraud is disclosed. Id. at 1045. What the panel rather conspicuously does not do, however, is explain exactly how loss is to be calculated when “secret” fraud has had no actual impact on stock price. Id. at 1046.

In a world of continued market volatility (and increased securities fraud criminal prosecutions) that unanswered question will be increasingly common.

How to Use: Ironically, in Dura Pharmaceuticals the Supreme Court rejected the Ninth Circuit’s rule of civil liability – and now the Ninth rejects the Supreme Court’s decision in Dura as a rule of criminal liability. The Dura principle may still have some legs, though. First, Judge Smith concedes that this rule regarding loss may make sense in the context of restitution. Id. at 1044 & n.7. Moreover, while the Second and Fifth Circuits haven’t exactly held that Dura Pharmaceuticals applies in the criminal context, they’ve sure suggested as much. A circuit split – and ultimate Supreme Court review – is likely enough that it is worth preserving the objection.

(Aside: does the broad economic principle underlying Dura Pharmaceutical make sense in the mortgage fraud context, where rising property values may have washed out any loss from the underlying fraud?)

For Further Reading: For an interesting perspective on Dura from the losing side of the case, see, What’s Brewing in Dura v. Brouda, available here.

"Stock Market. The Ride" cartoon from

Steven Kalar, Senior Litigator N.D. Cal. FPD. Website at


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