Nacchio Sentencing Series--Multiple Counts Issue

This entry is the fourth in the Nacchio Sentencing Series and answers the following question:

4. Why are the multiple counts most likely going to run consecutively?

Nottingham has to consider the federal sentencing guidelines in sentencing Nacchio. Consequently, Nottingham will not sentence Nacchio to 190 years (10 years for each count of insider trading). Nor, at the other extreme will Nottingham sentence Nacchio to probation.

Nottingham has to consider the multiple counts provision of the Federal Sentencing Guidelines. The introductory commentary to the multiple counts provisions summarize well the theory behind grouping of multiple counts:

“Convictions on multiple counts do not result in a sentence enhancement unless the represent additional conduct that is not otherwise accounted for by the guidelines. In essence, counts that are grouped together are treated as constituting a single offense for purposes of the guidelines.” USSG §3D1.2.(d) of the 1998 Guidelines Manual specifically provides that insider trading is one of the offenses that specific counts should be grouped together since the counts involve substantially the same harm. Moreover, the guidelines specifically account for the harm caused by the additional counts by the gain from the insider stock sales.

The underlying rationale is simple to understand—although Nacchio’s multiple count convictions for insider trading represent legally distinct punishment counts, in substance they represent a series of interrelated transactions. If the counts are not grouped into one offense, Nacchio would receive a prison term for his life in contrast to an executive who made just one equivalent large trade of Qwest stock.

The multiple count provisions, however, do not allow Nacchio to escape completely from the other conviction counts that are grouped into the one offense. Several individual guidelines provide special instructions for increasing punishment for aggravating punishment in light of multiple harms charged separately in separate counts. For example, the guidelines on fraud usually focuses on the loss to the person defrauded. However, the guidelines state the following special rule for insider trading offenses: "Because the victims and their losses are difficult if not impossible to identify, the gain, i.e., the total increase in value realized through trading in securities by the defendant …, is employed instead of the victims’ losses."

Obviously, the sentencing guidelines favor this measurement due to the ease in which it can be determined. Nottingham will simple compute the total gain of $44,692,550 (Sales 52,007,550 less cost of $7,315,000—the full spreadsheet in given in Question 1 of this series) to determine the aggravating aspect of these trades. The table on fraud gains between $40,000,000 and $80,000,000 million results in an increase in offense level of 17. These 17 offense levels were added to the insider trading base offense level of 8 plus the aggravating circumstance of 2 levels because Nacchio violated his position of trust to shareholders. The total 27 offense level yields a sentencing range of 70-87 months or almost 6 to 7.25 years.

It is worth mentioning that this "gain" factor in the guidelines will also create uneven justice for different CEOs. If a CEO appreciates his risk of an insider trading prosecution, he would sell his high cost shares during times that he is in possession of material nonpublic information or for the legal reason that he wants to reduce his table gain. For example, Nacchio could have sold his $28 cost stock options stock rather than his $5.50 cost stock options during the time the jury found that he traded on material nonpublic information. This action would have substantially reduced the range of potential prison sentences for Joe Naccio. Having said this, I would doubt executives actually plan there company stock sales based upon a successful prosecution for insider trading. More likely, a tax advisor would always recommend selling high cost stock first to reduce currently the tax liability on the gain. However, Nacchio really wanted to exercise and sell first the $5.50 per share options/stock due to the higher gains he could realize for himself during the insider trading sales.