Appeal from the United States District Court for the Central District of California Robert M. Takasugi, District Judge, Presiding, D.C. No. 2:00-cr-00994-RMT-1.
The opinion of the court was delivered by: Milan D. Smith, Jr., Circuit Judge
Argued and Submitted June 1, 2009 -- Pasadena, California
Before: William A. Fletcher, Richard R. Clifton, and Milan D. Smith, Jr., Circuit Judges.
Defendant-Appellant Richard I. Berger appeals the sentence imposed by the district court following our affirmance of his conviction for twelve counts of bank and securities fraud. Berger argues that, in sentencing him on remand, the district court erred by: (1) not adhering to the civil loss causation principle in finding shareholder loss, as described by the Supreme Court in Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 342-48 (2005); and (2) applying an erroneous standard of proof in determining total loss for sentencing enhancement purposes. While we decline to extend the Dura Pharmaceuticals principle to criminal securities fraud, we conclude that the district court's loss calculation approach was nevertheless flawed. Thus, although we conclude that the district court used the correct standard of proof in determining the total loss, we vacate Berger's sentence and remand to the district court for resentencing.
FACTS AND PROCEDURAL BACKGROUND
Craig Consumer Electronics, Inc. (Craig) was a publicly traded consumer electronics business that primarily distributed its products to retail electronics stores. During the relevant time frame, Berger was Craig's President, Chief Executive Officer, and Chairman of the Board. Two other corporate officers, Donna Richardson and Bonnie Metz,*fn1 participated in the fraudulent scheme and were convicted along with Berger for their involvement.
In August 1994, Craig entered into a $50 million revolving credit agreement with a consortium of banks. Under the agreement, the amount Craig was permitted to borrow was based on the value of its current inventory and accounts receivable. To determine the fluctuating amount Craig was eligible to borrow, Berger and his co-defendants were required to provide the lending banks with a daily certification concerning those assets.
Berger and his accomplices began the fraudulent scheme as early as 1995.*fn2 Starting at that time and continuing through September 1997, Craig lacked sufficient qualifying accounts receivable and inventory to continue borrowing the funds needed for Craig's ongoing operations. To conceal Craig's true financial condition from the lending banks, Berger and his cohorts employed various accounting schemes to falsify the information contained in the certifications. Relying on these false statements, the banks lent millions of dollars to Craig based on either nonexistent or substantially overstated collateral.
In May 1996, Craig made an initial public offering (IPO) of its stock. In connection with the IPO, Berger publicly mis-represented the company's fiscal viability, misstating Craig's financial condition in several mandatory reports filed with the Securities and Exchange Commission (SEC). At the time of the IPO, Craig was actually operating in default of its credit agreement with the lending banks, and was substantially over-drawn on its credit line. None of this information was disclosed in Craig's mandatory SEC filings, or to its lenders.
In 1997, an audit of the company's records by Craig's accounting firm uncovered various accounting irregularities. As a result of the audit, Craig was required to restate its earnings for 1995 and part of 1996, thereby revealing that its earn- ings were substantially lower than those shown in its previous financial statements. In the months following this restatement, Craig's stock price fell from $4.99 to $0.99 per share.*fn3 In July 1997, Craig's stock was delisted from the Nasdaq because of its failure to meet Nasdaq's minimum bid price. The securities fraud and accounting irregularities noted were not publicly revealed until after the delisting. The lending banks did not discover the full extent of the fraud until August 1997, when Craig filed for bankruptcy.
In March 2003, Berger was indicted for thirty-six counts of bank and securities fraud including: conspiracy, loan fraud, falsification of corporate books and records, making false statements to accountants of a publicly traded company, and making false statements in reports filed with the SEC. Berger went to trial and was convicted on twelve of those counts. In September 2004, the district court, believing controlling authority prohibited it from applying any sentencing facts not found by the jury, calculated an applicable sentencing range of zero to six months and sentenced Berger to six months imprisonment. The district court also ordered Berger to pay restitution of $3.14 million and a $1.25 million fine. Berger appealed his conviction and restitution order, and the government cross-appealed the sentence.
We affirmed the conviction and the restitution amount. However, we vacated Berger's sentence and remanded to the district court for resentencing in light of United States v. Booker, 543 U.S. 220 (2005). On remand, using a preponderance of the evidence standard, the district court found several facts that significantly increased Berger's sentencing range.*fn4
Among other things, the district court found that Berger's fraud caused a loss of $3.14 million to the various banks with which Craig did business, thereby triggering a thirteen-level enhancement under U.S.S.G. § 2F1.1.
To determine the loss to shareholders, the court adopted one of the government's suggested calculation methods, the so-called "modified market capitalization theory," i.e., comparing the change in stock value of other, unaffiliated companies after accounting irregularities in those companies' records were disclosed to the market. The court determined that the average depreciation of those selected companies' stock was 26.5% and applied that figure to the value of Craig's initial public offering (although in Craig's case, the fraud was never disclosed to the market before trading was halted). The court calculated the resulting shareholder loss at $2.1 million.
Therefore, the total calculated loss was $5.2 million, which triggered a fourteen-level sentencing enhancement, from level sixteen to thirty. This enhancement increased the applicable sentencing range from 21-27 months to 97-121 months. The district court imposed a 97-month sentence. Berger appeals the sentence, arguing that the district court committed two significant legal errors in calculating the applicable sentencing range.
JURISDICTION AND STANDARD OF REVIEW
We have jurisdiction pursuant to 28 U.S.C. § 1291. We review de novo the district court's interpretation of the Sentencing Guidelines, United States v. Kimbrew, 406 F.3d 1149, 1151 (9th Cir. 2005), which are relevant to this case because the Guidelines address the permissible methods for loss calculation. We review for abuse of discretion the district court's application of the Guidelines to the facts of this case.*fn5 Id. "If the district court makes a material miscalculation in the advisory guidelines range, . . . we must vacate the sentence and remand for resentencing." United States v. Zolp, 479 F.3d 715, 721 (9th Cir. 2007). Whether the district court violated ...