By: James W. Kraus
On February 17, 2012, a panel of the United States Court of Appeals for the Second Circuit affirmed the conviction and 24-year sentence of former prominent Democratic fundraiser, Norman Hsu. United States v. Hsu, No. 09-4152-CR slip op (2d Circuit 2/17/12). Hsu raised funds for former Sen. Hillary Clinton and other marquee Democrats, and became what is known as a “bundler” on behalf of political candidates.
According to the Court, Hsu ran a 10-year Ponzi scheme through which he stole more than $50 million from investors. After obtaining funds from investors by promising high returns, Hsu would provide investors with post-dated checks in the amount of the investor’s principal, plus a “guaranteed” return on that investment, usually, on an annualized basis, of 60%. While on certain occasions, investors would immediately cash the checks when they became due, more often they would “roll over” their investment, thereby investing the original principal plus accumulated gains in anticipation of further returns that would accrue during the next cycle. Instead of investing the money he collected, Hsu spent it on himself or made charitable contributions to burnish his public image.
Mr. Hsu also used his political connections created by campaign fundraising to create an appearance of legitimacy useful in recruiting victims to his investment scam, and used the illusions of successful investments to recruit his investors as campaign “donors.”
On the eve of trial, Hsu pled guilty to the Ponzi scheme counts (mail fraud and wire fraud), and then had a jury trial with respect to the campaign finance charges. The jury returned a verdict of guilty on all four campaign finance fraud charges.
At sentencing, Mr. Hsu argued that the proper estimate of loss to be used in calculating his sentence was the amount of restitution that Hsu owed his victims. The government asserted that the losses associated with Mr. Hsu’s scheme were between $50 million and $100 million, a figure arrived at by adding the total amounts reflected on the faces of all outstanding checks held by Hsu investors, then subtracting from the total return the final round of the checks. With respect to that loss calculation, the district court agreed, finding that the “very method by which Mr. Hsu was able to perpetuate his fraudulent scheme” depended on his ability to inflate the perceived earnings year after year, “as part of a malicious effort to maintain their confidence and lure other victims.” Mr. Hsu was eventually sentenced on all of the counts of conviction with an aggregated period of incarceration of 24 years, 4 months.
On appeal, the Second Circuit was faced with determining whether the sentencing court in a Ponzi scheme can include as part of its “intended loss” determination, those earnings that victims reinvested in a Ponzi scheme, even though those “earnings” were invented as part of the scheme itself. The Second Circuit agreed with the district court that it certainly can use those “earnings” as part of the intended loss calculation. The court distinguished the Hsu case from the case where an investor puts money into a fraudster’s hands, and ultimately receives nothing of value in return. In such a case, the loss is measured by the amount of principal invested, not by the principal amount plus the promised interest or rate of return that was never received. It pointed out that with Hsu’s scheme, the situation was different, in that the investor is not only told that the investment will grow, but is actually told that the investment has grown and that the original investment and the accrued interest or other gain is now available to be withdrawn or reinvested in the scheme.
The Court did acknowledge that there can be more than one way to measure losses in a Ponzi scheme case. It affirmed the principle that the district court is required only to make “a reasonable estimate of loss,” citing by way of example, United States v. Rigas , 583 F.3d 108, 120 (2d. Cir. 2009). In Hsu’s case, however, the court found that the task was quite straight forward, indicating that Hsu’s victims frequently returned post-dated checks to him for reinvestment, thereby relinquishing the opportunity to cash those checks and withdraw from the scheme. When this occurred, the reinvested checks – including the previously promised returns – became part of their principal investment, and therefore, constitute the very losses that Hsu intended to inflict upon his victims.