The White Collar Appeal: D.C. Circuit holds that, when calculating loss under the U.S. Sentencing Guidelines, sometimes a market disclosure isn’t a market disclosure

• On Friday, July 25, 2025, the D.C. Circuit issued a decision that will provide prosecutors an argument to extend the period in which a stock is deemed to be fraudulently inflated, thereby increasing defendants’ sentencing exposure under the Sentencing Guidelines.
• In United States v. Berman, No. 24-3044 (D.C. Cir. July 25, 2025), the defendant argued that fraud was “disclosed to the market” the day the SEC announced that the defendant was lying in press releases about the company’s products. The district court, however, held that the fraud was disclosed only months later when the defendant was indicted. Using the later date increased the defendant’s offense level by 22 levels.
• By affirming that decision, the D.C. Circuit has given prosecutors greater flexibility to argue for ever-higher Guidelines calculations in securities fraud cases.  Going forward, defendants should (1) be careful about what they say in seeking to rebut accusations of misconduct, (2) be cautious about stipulating to a loss calculation methodology that does not require proof of individualized investor reliance and (3) develop robust alternative explanations for stock price movements.

Background

In a case oddly reminiscent of Theranos, Keith Berman, the CEO of Decision Diagnostics Corp. (DECN), claimed that DECN had “perfected” technology for a finger-stick COVID-19 blood test that would be “commercial ready” by summer 2020.  In fact, however, DECN had no working prototypes, no FDA approval, and no production capacity.  About a month and a half after the first press release, the SEC suspended trading in DECN, and a month after that, it publicly announced that it had concluded that, while issuing his earlier press releases, Berman knew the company had no working prototypes and no FDA approval, and did not know how many kits DECN could produce. Undeterred, Berman continued issuing false press releases and even took to investor forums, where he posted more than 1,000 messages (often using aliases) seeking to discredit the SEC investigation.  He also submitted fake shareholder letters to the SEC defending his conduct.  

Berman ultimately pleaded guilty to securities fraud, wire fraud, and obstruction.  He and the government agreed at sentencing that, to calculate loss, the district court should use the “modified rescissory method,” under which the court would calculate the difference between average stock prices during (1) the fraud period and (2) the 90 days following the disclosure of the fraud to the market.  They did not agree, however, about when the relevant market disclosure was.  Berman argued it was either (1) April 23, when the SEC temporarily suspended trading; (2) May 20, when the SEC publicly described the key information underlying that suspension; or at the latest, (3) July 20, when otcmarkets.com added a “buyer-beware” warning on the DECN purchase page.  The government argued the fraud was not disclosed until the indictment was unsealed on December 18, because it was only then that “the full scope of the Defendant’s misconduct became known to the public.”   The difference was significant.  Under Berman’s analysis, the loss would be $0, while under the government’s it would be $28 million—which translates to a 22-level enhancement under the Sentencing Guidelines.

The district court adopted the government’s analysis.  In particular, the court found that “a core component” of the charged criminal scheme was Berman’s ongoing (and not-yet-public) effort throughout the summer of 2020 “to persuade prospective investors to ignore the SEC, doubt its credibility and keep investing in DECN.”  The district court further explained it was only after the indictment (not the SEC disclosures) that DECN’s stock price cratered, returning to a level similar to the prices prior to Berman’s initial false press release on March 3, 2020.  

Holding

The D.C. Circuit affirmed the district court’s loss calculation and sentence, finding no clear error in the district court’s finding that the unsealing of the indictment was the relevant market disclosure.  Acknowledging that numerous courts have found securities fraud adequately disclosed by SEC announcements similar to the May 20 announcement about DECN, the D.C. Circuit distinguished those decisions on the basis that they did not involve ongoing efforts like Berman’s to discredit the SEC’s announcement.  Berman’s ongoing campaign to discredit those warnings and maintain investor confidence constituted a “core component” of the fraud that remained undisclosed until his indictment was unsealed.  The D.C. Circuit also held that the modified rescissory method does not require individualized proof of investor reliance on specific fraudulent statements.

Takeaways

Berman is unhelpful precedent for defendants in criminal securities fraud cases.  Not only does the decision enable prosecutors to extend the fraudulent period, but it appears to employ circular reasoning to do so. Part of the district court’s analysis was that earlier dates could not have been market disclosures, because the market did not react to the disclosures.  But that conflates two distinct concepts.  Assessing the disclosure date is based on the information made available to the investing public.  The loss amount (or in a civil case, damages) is based on how the market reacts to that information.  Concluding that the SEC’s May 20 disclosure could not have been an adequate market disclosure because the market did not react sufficiently is begging the question.  The fact that the D.C. Circuit did not critique this unsound, yet government-friendly, logic is unwelcome news for defendants.

Executives must be careful about what they say following accusations of misconduct.  Ultimately, both the district court and the D.C. Circuit relied on Berman’s efforts to sow doubt about the SEC’s announcement as a key factor in setting the disclosure date as the unsealing of the indictment.  Although using fake names on message boards would appear to reflect Berman’s bad faith, the decision puts innocent executives in a bind:  if they seek to rebut what they perceive as false accusations against their companies, they increase the risk of being deemed to perpetuate the fraud and thereby extend the period for Guidelines purposes.  A recent decision in the District of Massachusetts underscores the risk.  In that case, following a $2 billion judgment against software company Pegasystems in a trade secrets case, Pegasystem's investors brought suit for civil securities fraud based on the company's initially characterizing the trade secrets complaint as “without merit."  See City of Fort Lauderdale Police & Firefighters’ Ret. Sys. v. Pegasystems Inc.  Companies and executives thus must evaluate carefully what they say in response to accusations from the SEC, short sellers, and other market participants.  At a minimum, they should consult with legal counsel prior to issuing responsive public statements.

Defendants should think twice before agreeing to the modified rescissory method for calculating damages.  Here, Berman effectively was foreclosed from arguing that his efforts to undermine the SEC did not affect investors because he had stipulated to the modified rescissory method, under which individual loss causation is not required.  Had he proposed an alternative analysis, he might have been able to introduce evidence that cast doubt on how “core” his posts on message boards really were to the fraud. 

Defendants should prepare robust explanations for why the stock price did not react to the market disclosure.  Here, Berman’s expert argued that investors must not have reacted rationally to the SEC’s May 20 announcement, a conclusion that neither the district court nor the D.C. Circuit found persuasive.  Defendants should seek to put forth alternative explanations for stock price movements to bring a stronger challenge to the loss causation analysis.