By: John A. Schwab
In a recent precedential opinion, the U.S. Court of Appeals for the Third Circuit vacated and remanded a fraud case where the sentencing court erred in its calculation of the loss amount. U.S. v. Diallo, No. 10-3771 (3d Cir. Jan. 15, 2013). The Defendant, Issa Diallo, was arrested in 2008 after using a counterfeit credit card to purchase gift cards in Wilkes-Barre, Pennsylvania. Police recovered 53 counterfeit credit cards, a laptop, flash drives, and a “skimming” device, used to code credit card account information on a credit card’s magnetic strip. Forensic analysis of the laptop and flash drives by the U.S. Secret Service revealed account information corresponding to over 200 compromised Discover, Visa, and MasterCard credit card accounts.
In 2010, Mr. Diallo pled guilty to possessing counter-access devices with intent to defraud in violation of 18 U.S.C. § 1029(a)(3). At the sentencing hearing, Diallo’s counsel argued that the Defendant’s sentence should be calculated based on the actual loss to the credit card companies, approximately $160,000. However, counsel for the United States argued the intended loss was $1.6 million, the cumulative credit limits for the 327 credit card accounts for which Diallo had either the credit card or account information. As practitioners know, Section 2B1.1 of the federal sentencing guidelines provides for incremental increases in an offense level for specific loss amounts. The guidelines also direct a sentencing court, when determining the loss amount, to use the greater of the actual loss or intended loss. In Diallo, the sentencing court used the $1.6 intended loss amount, not the $160,000 actual loss. On appeal, Diallo asserted that the sentencing court erred in concluding that the potential loss was the intended loss which greatly overstated the seriousness of the offense.
Although this was an issue of first impression regarding intended loss of credit card fraud, the Third Circuit observed its previously rulings on intended loss in bank fraud and check kiting cases. Such opinions make clear that the Court “has never endorsed sentencing based on the worst-case scenario potential” and cautions sentencing courts to consider actual and intended harm. Diallo, slip. op. *10 (citing U.S. v. Kopp, 951 F.2d 521 (3d Cir. 1991)). The Third Circuit directed sentencing courts faced to engage in a “deeper analysis” by examining a defendant’s subjective intent, not simply equate potential loss with intended loss. This decision mirrored rationale from the Tenth Circuit, which stated that “‘intended loss’ means a loss the defendant purposely sought to inflict.” Diallo, slip. op. * 8 (citing U.S. v. Manatau, 647 F.3d 1048 (10th Cir. 2011)).
In the end, the Third Circuit directed the sentencing court to examine whether Diallo intended to use each and every credit card account until the $1.6 million aggregate credit limit was depleted or if the $160,000 actual amount was a more reasonable estimate of the loss. As the Third Circuit noted, the analysis by the sentencing court raises the possibility of burden-shifting to the defense to contest whether the enhancement applies. “[T]hough the government bears the burden of proof in guidelines cases, the burden of production may shift to the defendant once the government presents prima facie evidence of a given loss figure.” Diallo, slip. op. *9 (citing U.S. v. Geevers, 226 F.2d 186, 188 (3d Cir. 2000)).