Despite characterizing the result as “unseemly,” a panel of the Sixth Circuit in United States v. Snelling nonetheless reduced the sentencing guideline range for a swindler who presided over a nearly $9 million Ponzi scheme.  Relying on commentary added to the Sentencing Guidelines in 2001, the panel concluded that Snelling should have received credit for money paid out to investors during the scheme, thereby reducing the loss amount caused by his crimes and, by extension, his possible sentence.

Snelling created fictitious companies that promised to invest money into overseas mutual funds and overnight depository accounts that supposedly provided annual returns of 10– 15%.  In reality, “returns” paid to early investors came from the deposits of new investors—the classic operation of a Ponzi scheme.  Snelling and his partner squandered the remainder of the deposits on their extravagant lifestyles.  Along the way, though, the scheme paid “returns” to some investors of nearly $3.5 million. Snelling wanted credit for those returns when it came time for sentencing.  If the amount deemed lost by the scheme was reduced by those returns, the applicable guidelines range would drop from 121–151 months to 97–121 months, well below Snelling’s 131-month sentence.

The panel agreed with Snelling that the clear text of the Guidelines applied to reduce his Guidelines range.  Promulgated as part of the Sentencing Commission’s overhaul of the fraud provisions, the note (titled “Ponzi and Other Fraudulent Investment Schemes”) creates a special loss calculation rule.  When operators of a Ponzi scheme transfer money to an individual investor as part of its scheme, the amount of loss is reduced up to the investor’s principal investment.  The panel acknowledged the “intuitive appeal” of the government’s argument that swindlers should not benefit from conduct designed to lure additional investors into the scheme.  But the panel held that a straightforward reading of the Guidelines compelled resentencing.  A seemingly conflicting decision from the Eighth Circuit, United States v. Nichols, 416 F.3d 811 (8th Cir. 2005), was distinguished based on the facts of the two schemes and the Eighth Circuit’s reliance on decisions interpreting earlier versions of the Guidelines.

On a related note, the Snelling decision underscores the importance of permitting appeals of contested sentencing issues.  Many federal prosecutors demand complete waivers of appellate rights as part of a guilty plea.  But DOJ’s policy permits a limited waiver of appeal whereby a specified issue, like the correct interpretation of an application note, remains available for appellate review.  The outcome in Snelling shows how important that review can be for uniform interpretation of the Guidelines.