In Watts v. United States, the Second Circuit (Livingston, Parker, Park) issued an unpublished summary order that affirmed Michael Watts’ convictions for his role in a pump-and-dump scheme, and agreed with the government that his sentence of one year and one day was substantively unreasonable.[1] The panel engaged in a close analysis of the relevant facts and the 18 U.S.C. § 3553(a) factors, and took issue with the district court’s evaluation of the case, remanding the case to the district court for resentencing.

Background

According to the evidence at trial and the government’s allegations, between 2014 and 2016, Watts conspired with his co-defendants to inflate the share price of Hydrocarb Energy Corporation (“HECC”) through an illegal scheme using false and fraudulent sales pitches and high-pressure, manipulative tactics to get investors, often elderly people, to purchase inflated stock. Watts and the others ran a “boiler room” operation to effectuate this scheme, paying the boiler room participants half of his proceeds to line up victims to his pump-and-dump scheme. Watts’ own personal fortune was invested in HECC and when HECC’s failure became inevitable, and Watts used the scheme to sell his shares as quickly as he could.

Following a jury trial in 2019, Watts was convicted of conspiracy to commit securities fraud in violation of 18 U.S.C. § 371; conspiracy to commit wire fraud in violation of 18 U.S.C. §§ 1349 and 1343; securities fraud in violation of 15 U.S.C. §§ 78j(b), 78ff; conspiracy to commit money laundering in violation of 18 U.S.C. §§ 1956(h) and 1957(a); and three counts of money laundering in violation of 18 U.S.C. § 1957(a) for his participation in a stock manipulation scheme.

Watts’ Sentencing Guidelines range was 235 to 293 months. The district court granted Watts a downward variance from the Guidelines and sentenced Watts to one year and one day imprisonment, in addition to $4,430,354.03 in restitution and $561,111 in forfeiture.

The Appeal

On appeal, Watts argued that the Government constructively amended his indictment, that the district court abused its discretion in denying his motion for a new trial, and that the district court erroneously calculated the forfeiture and restitution he owed. The Second Circuit panel quickly rejected Watts’ arguments on appeal. The panel determined that there was not a substantial likelihood that Watts was convicted of an offense other than those charged by the grand jury; there was “ample trial evidence” to support his conviction; and the district court properly calculated both Watts’ restitution and forfeiture amounts.

The Second Circuit panel spent the majority of its 13-page summary order discussing the Government’s cross-appeal and ultimately determined that Watts’ sentence was substantively unreasonable. In doing so, the panel stated that “apart from the need to provide restitution, the district court in this case minimized Watts’s history of violating securities laws; categorically dismissed the value of general deterrence; excused Watts’s lack of remorse; and failed to justify treating him so differently from other co-conspirators.” According to the panel, the district court placed “undue emphasis” on restitution to the detriment of the other factors enumerated in 18 U.S.C. § 3553(a) and failed to “meaningfully weigh” the remaining factors.

After finding that the district court’s analysis rose to the level of substantive unreasonableness, the panel engaged in its own evaluation of the 18 U.S.C. § 3553(a) factors and highlighted facts that, in the panel’s estimation, went overlooked by the district court. The panel remanded the case to the district court for resentencing.

Analysis

The Court’s attention was no doubt grabbed by the substantial downward variance granted by the district court—from a Guidelines range that stood at almost 20 years on the low end, to an imposed sentence of less than only one year and one day in prison. As the panel explained, this sentence was a 95% reduction from the applicable Guidelines range, and even the district court that imposed the sentence characterized it as “extraordinar[ily] low.” It seems likely that if the district court had imposed a sentence of 4 or 5 years imprisonment—still a substantial downward variance—the case might not have caught the Court’s attention, if it had been appealed at all.

The remainder of the panel’s opinion engages in a more searching analysis of the facts and circumstances in the case than we typically see in the Court’s decisions. In determining that Watts’ sentence was substantively unreasonable, the panel found fault with nearly every part of the district court’s analysis of the 18 U.S.C. § 3553(a) factors. For example, the panel determined that the district court “entirely failed to meaningfully weigh” general deterrence in its analysis. However, the panel directly quotes the district court’s consideration of general deterrence and its ultimate conclusion that the value of this factor was outweighed by other factors. Similarly, the district court determined that Watts’ investment of $15 million in HECC when it was a viable, legitimate company “mitigates in his favor for his subsequent crimes.” The Second Circuit squarely rejected this finding and had a different view of the record and Watts’ role in the pump-and-dump scheme. The panel explained that in its view, the fact that Watts lost millions is not a mitigating factor and Watts’ apparent lack of remorse favored a lengthier sentence. In sum, the panel explained, “[t]hat Watts used his insider status, knowledge of commodity markets, and awareness of Hydrocarb’s financial condition to dump his shares as they collapsed in value could easily make his more culpable, not less.”

The summary order is not precedential, and so it may not be a sign of a changing attitude at the Circuit with respect to its review of downward variances. That said, the approach taken by the Court to rebalance the 3553(a) factors is in tension with the spirit of the broad discretion afforded to district courts when sentencing defendants, as elucidated in Gall v. United States, 522 U.S. 38 (2007) and Kimbrough v. United States, 552 U.S. 85 (2007). Those decisions discourage appellate courts from reweighing the Section 3553(a) factors and substituting their own analysis for that of the district court.

In addition, the Court’s consideration of the imposed sentence with the Guidelines range seems to proceed from a starting point that the Guidelines will produce a reasonable sentence (or something close to it). One rarely sees this type of searching analysis for an in-the-range sentence even though the Second Circuit does not afford a Guidelines-range sentence a presumption of reasonableness. See United States v. Fernandez, 443 F.3d 19 (2d Cir. 2005) (declining to presume that a Guidelines sentence is reasonable); see also United States v. Friedberg, 558 F.3d 131, 137 (2d Cir. 2009).Given the general recognition that the sentences generated by the Guidelines in fraud cases are often too long to be substantively reasonable, within-the-range sentences should also be scrutinized with care. In addition, one wonders if the Court would also conduct a searching analysis of a district court’s grant of an upward variance from the Sentencing Guidelines. Although the summary order is non-precedential, defendants who receive a sentence that is significantly above the Guidelines range—or even a sentence within the range—should look to Watts when challenging their sentence on appeal.