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Court Finds Longest Insider-Trading Sentence Ever Imposed Reasonable (and rejects other sentencing challenges)

In United States v. Kluger, No. 12-2701 (July 9, 2013), the Court addressed numerous challenges to Kluger’s mid-range, 144-month sentence, "a term thought to be the longest insider trading sentence ever imposed." Kluger, a law student, and then lawyer for five different securities law firms over the course of his career, was the source of tips for a three-man insider-trading scheme that spanned seventeen-years, "and, so far as is known, constituted the longest such scheme in United States history." The Court rejected Kluger’s complaints about the calculation of his Guidelines range, purported procedural errors in his sentencing, and the procedural and substantive reasonableness of his lengthy term of imprisonment.

Guidelines calculation: Under § 2B1.4, the district court attributed all of the scheme’s monetary gain (nearly $50 million) to Kluger, even though his share of the profits was far less than that of one of his co-defendants. Kluger and both of his co-defendants had agreed to limit their trades in an effort to avoid detection, but one co-defendant had violated the agreement. Kluger therefore argued that, under § 1B1.3(a)(1)(B)’s reasonable foreseeability test, the district court should have reduced the gains attributable to him. Applying United States v. Cespedes, 663 F.3d 685, 689 (3d Cir. 2011), the Court held that the "unless otherwise specified" exception in § 1B1.3(a) required it to look first to the insider trading guideline. There, it found that "[t]he plain language of the commentary’s background unequivocally attributes all of [the co-defendant’s] gains to Kluger because [the co-defendant] was ‘a person[] acting in concert with the defendant,’ as well as one ‘to whom the defendant provided inside information.’" The Court emphasized that this result "reinforc[es] the deterrence message sent to would-be tippers."

Procedural errors: (1) Evidentiary Hearing. The district court did not err in refusing to grant Kluger an evidentiary hearing, since the Rules do not require an evidentiary hearing, and the district court did afford an "extensive sentencing hearing . . . in which the parties addressed the Court." Kluger had not disputed the total gain or that he was the source of the tips, so an evidentiary hearing would not have altered the outcome at sentencing. (2) PSR Objections. Kluger complained that the PSR did not resolve all of his objections, including to the characterization of the scheme and the description of him as the initiator of it. The Court noted that, under Rule 32(g), Probation is not required to do so. Rather, under Rule 32(i), the district court must make a disposition on matters that will affect sentencing, which it did when it made its ruling under §2B1.4. (3) Discovery. Kluger claimed that his due process rights were violated when the government provided materials to Probation that were not provided to him. The Court held that Rule 32 does not provide for broad discovery of presentence materials, and that even if it did, Kluger had done no more than speculate as to the existence of such materials.

Reasonableness of Sentence: (1) Procedural Reasonableness. Kluger argued that the district court only mechanically considered the § 3553(a) factors and failed to consider the "vast disparity" between his sentence, his co-defendants’ sentences, and the sentences of other insider traders. The Court found that the district court engaged in a thorough discussion of the circumstances of the offense and the history and characteristics of the defendant, "such as Kluger’s loving and supportive family, privileged childhood, and the ability of the Bureau of Prisons to manage his poor health during his incarceration." It rejected the disparity argument, as well, citing the facts that Kluger was an attorney, the source of the tips, and that he spent most of his career involved in criminal activity ("he truly was a career criminal"). Unlike one co-defendant, Kluger did not cooperate. Unlike the other, Kluger did not have a history of community service. Compared to other cases, this one was longer, more involved, and more successful. (2) Substantive reasonableness. Noting that Kluger received a within-Guidelines sentence, which is less likely to be unreasonable than one outside the range, the Court concluded, "we cannot say that ‘no reasonable sentencing court’ would have imposed the same sentence . . . ."


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