Judges use the Federal Sentencing Guidelines to determine sentences for individuals and corporations convicted of federal crimes. Corporate managers and their advisors can use the Sentencing Guidelines to identify areas of risk, focus compliance programs and underscore to employees the consequences of improper behavior.

Recently effective amendments to the Sentencing Guidelines further the goals of the Sarbanes-Oxley Act by increasing penalties for serious corporate fraud and for attempts to obstruct justice. Not only do the amendments increase risks for corporate officers, directors, and employees, they also underscore the importance of implementing effective corporate financial reporting and control systems, document retention policies and related compliance programs.

How the Sentencing Guidelines Work

The Sentencing Guidelines use a point system to determine a sentencing range for each person convicted of a federal crime. The Sentencing Guidelines assign points based on the type of crime, the amount of the loss and other factors. The number of points assigned determines the "offense level" for the crime, which in turn determines the defendant's sentencing range. The higher the offense level, the harsher the sentence.

Amendments to the Sentencing Guidelines

Effective November 1, 2003, the Sentencing Guidelines were amended to increase the sentencing ranges for those found guilty of serious corporate crimes. Many of the amendments implement provisions of the Sarbanes-Oxley Act. The relevant amendments focus on two areas: (1) corporate fraud, including accounting fraud, and (2) obstruction of justice, including the destruction of documents.

Corporate Fraud.

The most significant amendments will increase the offense levels for those who commit serious corporate fraud. The biggest impact will be felt by those who engage in large-scale fraud at public companies, similar to that involved in the Enron and WorldCom scandals. The changes include:

• Increased Base Offense Level for Securities Fraud. The base offense level for securities fraud and other serious crimes of fraud is increased one level, from 6 to 7. This small change will have a big impact on some offenders, as it will reduce the availability of probation and ensure that people convicted of fraud serve time in prison.

• Increased Offense Level for Frauds that Cause Catastrophic Losses. Before the amendments, all frauds that caused more than $100,000,000 in losses received the same 26-level increase. Now frauds that cause losses in excess of $200,000,000 receive a 28-level increase. If losses exceed $400,000,000, the amount of the increase is 30 levels. Because they involve such large dollar amounts, these changes generally will come into play only when a crime affects the market value of a public company.
• Increased Offense Level for Crimes With at Least 250 Victims. Before the amendments, crimes that victimized at least 50 people received a 4-level increase. The amendments provide that crimes that victimize at least 250 people will receive a 6-level increase.
• Increased Offense Level for Crimes That Endanger the Solvency of a Public Company or Many Individuals. Offense levels are increased up to 4 levels for crimes that endanger the solvency or financial security of (a) a publicly traded company or other large organization, or (b) 100 or more victims.
• Significantly Increased Offense Level for Securities Law Violations by Officers or Directors of a Public Company. Offense levels are increased an additional 4 levels if a defendant violated the securities laws while serving as an officer or director of a publicly traded company.

Obstruction of Justice.

The amendments also increase offense levels for serious acts of obstruction of justice and perjury. The biggest impact will be felt by corporate employees who destroy documents in order to cover up wrongdoing. The changes include:

• Increased Base Offense Level for Obstruction of Justice or Perjury. The base offense level for all offenses involving the obstruction of justice or perjury is increased two levels, from 12 to 14.

• Increased Offense Levels for Destruction of Key Records or Large Numbers of Records. Offense levels are increased 2 levels for offenses that involve the destruction of large numbers of records or especially probative records.
• New Sentencing Guidelines for Destruction of Audit Records. The crime of destroying corporate audit records, created by the Sarbanes-Oxley Act, is tied into existing Sentencing Guidelines.

Illustration: Effect of the Amended Sentencing Guidelines

As a result of these amendments, a corporate officer, director or employee who commits serious corporate fraud or wrongfully destroys documents faces much harsher punishment. The effect is especially great where the crime affected a public company's market capitalization and stock price.

For example, assume that a vice president of Enron pleads guilty to securities fraud for participating in a scheme that artificially inflated the company's stock. The offense level might be calculated as follows:

• Before the recent amendments, the offense level would be 35, comprising (a) a base offense level of 6; (b) an increase of 26 levels based on the amount of the loss (over $100,000,000); (c) an increase of 4 levels because the offense involved more than 50 victims; (d) an increase of 2 levels for abuse of a position of trust; and (e) a decrease of 3 levels for pleading guilty and cooperating with the government. The presumptive sentencing range would be imprisonment for 14 to 17½ years.

• After the recent amendments, the offense level would be 46, comprising (a) a base offense level of 7; (b) an increase of 30 levels based on the amount of the loss; (c) an increase of 6 levels because the offense involved more than 250 victims; (d) an increase of 2 levels because the offense endangered the solvency or financial security of a public company; (e) an increase of 4 levels because the offense involved a violation of the securities laws while the defendant was an officer of a publicly traded company; and (f) a decrease of 3 levels for pleading guilty and cooperating with the government. The presumptive sentence would be life in prison.