Radio Smack

United States v. Lacey, No. 11-2404-cr (2d Cir. November 7, 2012) (Winter, Straub, Lynch, CJJ)

Defendants Lacey and Henry were convicted after a jury trial of various offenses resulting from their involvement in a mortgage fraud scheme. In the scheme a real estate company, MTC,  would purchase “short-sale” properties from distressed homeowners, then resell them to straw buyers, who would obtain mortgages on the properties, without intending to live in them or make payments. MTC helped the straw buyers complete fraudulent mortgage applications to ensure that they would be approved, and sometimes made a few payments on the loans to further deceive the banks, but eventually the loans defaulted and the lending banks took title to the properties through foreclosure.

One component of the fraud involved radio ads, through which MTC recruited straw buyers. Those ads told buyers that they could earn a fee by buying a house through MTC - some actually did receive a fee - and also recruited distressed homeowners looking to sell.

On appeal, the defendants argued that these radio ads should not have triggered the “mass-marketing” enhancement of § 2B1.1(b)(2)(A)(ii), and a divided panel agreed. The majority concluded that the enhancement is “properly applied only when the targets of the mass-marketing are also in some way victims in the scheme.” This is so because the guideline applies to an offense “committed through mass-marketing.” As the Eighth Circuit has already observed, an offense is “committed through mass- marketing” only when mass-marketing is used to recruit or commit victims. It is not enough for the scheme to be advanced by mass-marketing.

This interpretation is also bolstered by the surrounding text; the enhancement is surrounded by provisions that relate to the number of victims; thus it is designed to measure “the scope of the wrong by the number of victims.” The use of mass-marketing is relevant to this calculus because it provides for an enhancement when the number of actual victims is small, but the marketing creates a large number of potential victims. 

Here, the record was unclear whether some of the consumers targeted by the radio ads were “in some sense victimized,” even though the “main thrust of the fraud was directed at banks.” Obviously, any buyer who was in on the scheme or who received payment from MTC could not be seen as a victim. But some straw buyers complained that their credit scores were ruined, and others complained that MTC misled them into believing that the scheme would result in a legitimate sale and that they would be able to pay for the properties through rental income. 

The record was also unclear whether the radio ads even constituted mass-marketing at all.  The relevant provision applies to a scheme intended to “induce a large number of persons to ... invest for financial profit.” Here, while the record contained some evidence that this was true, it did not establish it sufficiently clearly. 

The court accordingly vacated the sentence and remanded to the district court for findings on whether the defendants engaged in “mass-marketing” at all, and if so, whether the targets of the marketing were “also in some sense victims” of the scheme, in that they were injured by it. 

Judge Straub, in dissent, believed that the enhancement was properly applied because the “offense” - using the relevant conduct definition - employed mas-marketing. He disagreed that the enhancement applies only where the victim is targeted by the mass-marketing. 

The panel was unanimous, however, in concluding that the restitution order erroneously failed to credit the value of the collateral underlying the foreclosed loans.

You Don't Stay

United States v. Colasuonno, No. 11-1188-cr (2d Cir. October 12, 2012)(Kearse, Walker, Raggi, CJJ)

Answering a question of first impression, here the circuit holds that the automatic stay provisions of the bankruptcy code does not apply to either a restitution order or a probation violation proceeding based on a failure to comply with a restitution order.

The facts are fairly straightforward. A jury convicted Colasuonno of bank fraud offenses; he then pled guilty to an unrelated tax fraud. At a consolidated proceeding the district court imposed a noncustodial sentence, which included about $781,000 in restitution to the IRS on the tax case.  Colasuonno seemed to show little enthusiasm for making restitution payments. After two years, even with district court intervention, he had paid only about $6,600, even though his monthly income during that period was more than $7,000.

In July of 2009, Colasuonno and his wife filed a Chapter 7 bankruptcy petition, without letting the court or probation department know. He made a few more restitution payments, in decreasing amounts, before stopping altogether in February of 2010. By then, he had paid just under $12,000.

During an October 2010 violation hearing, he argued that the automatic stay provision had allowed him to stop making restitution payments until the bankruptcy was resolved. He also argued that he stopped paying on the advice of his bankruptcy attorney. The district court disagreed, and concluded that Colasuonno had willfully failed to pay. The court revoked his probation and sentenced him to four months’ imprisonment.


On appeal, the circuit affirmed. The relevant provisions of the bankruptcy code provide that the filing of a bankruptcy petition “operates as a stay” of, inter alia, “the commencement or continuation” of certain judicial or administrative actions against the debtor. However, that statute contains an exception for the “commencement or continuation of a criminal action or proceeding against the debtor.”  In the district court, Colasuonno argued primarily that the bankruptcy statute meant that he did not have to make payments at all; on appeal, his argument was primarily that the automatic stay provision barred the district court from revoking his probation based on a failure to pay restitution.

The circuit disagreed, finding that “proceedings to enforce a probationary sentence" constitute the “continuation” of a “criminal action” against the debtor.  Obviously, the underlying case was a “criminal action.” And that action “did not end when the judgment of conviction became final.” It continued “through satisfaction of the judgment because all duties imposed on the defendant, as well as the court’s authority to hold [him] to account for those duties, derive from, and in that respect continue, the original criminal action.” 

To the court, this “plain meaning” resolution was “reinforced” by the statute’s legislative history, which stressed that the bankruptcy laws were not to be “a haven for criminal offenders.”

The appellate court also rejected the Colasuonno’s creative argument that a probation revocation proceeding was not a “criminal proceeding” because the defendant did not have the same procedural rights there as at a criminal trial. The circuit found nothing in the language of the bankruptcy statute to suggest that the “scope of the exception is determined by the rights afforded to a defendant in a particular proceeding.”

Finally, the district court did not abuse its discretion in rejecting Colasuonno’s “advice-of-counsel” defense. The district court found that Colasuonno had not told his bankruptcy attorney that the restitution order he was obliged to pay arose from a criminal conviction, and this finding was not clearly erroneous. Since the defense requires that the person invoking it had “fully and honestly laid all the facts before his counsel,” the defense did not apply here.

Gain? Wait!

United States v. Zangari, No. 10-4546-cr (2d Cir. April 18, 2012) (Cabranes, Pooler, Wesley, CJJ)

In this decision, the court found that the district court’s restitution order, which was based on the defendant's gain instead of the victims' loss, was error, but not plain error. It accordingly affirmed.

Defendant Zangari was a securities broker in the securities-lending departments of two major banks.  He engaged in unauthorized stock-loan transactions with financial institutions that had a relationship with one of his co-workers, and received a portion of the kickbacks, approximately $65,000.  His employers  suffered “losses in the form of unrealized profit.”

Zangari pled guilty to a Travel Act conspiracy, and was sentenced under USSG § 2B4.1, the commercial bribery guideline. The PSR used the $65,000 figure as the loss calculation, recommending an enhancement for a loss between $30,000 and $70,000. Although neither bank had submitted a loss affidavit, the PSR used Zangari’s gain as a proxy for their losses. The report equated the kickback amount the banks’ lost profit on the transactions, but did not detail how it reached this conclusion.

Zangari never objected to the loss calculation, and the district court used it both for calculating his guidelines and for fixing the amount of restitution.  On appeal, however, Zangari argued that the restitution order was illegal because the victims suffered no loss.

The circuit agreed that the restitution order was erroneous. The restitution statutes require that the order reflect the “full amount of each victim’s loss.” But here, the district court based the order instead on Zangari’s gain. While this is acceptable for calculating the loss for guidelines purposes - an application note permits using gain as a substitute for loss where the loss “reasonably cannot be determined” - the substitution is not permissible for calculating restitution.  Indeed, every circuit to consider the question has reached the same result, even in “hard cases.”

It is true that there are cases where there is a direct correlation between the defendant’s gain and the victim’s loss; in such situations the gain is a “measure of” but not a “substitute for” the loss.  But here, there was no such correlation. In the stock-loan transactions at issue the securities and collateral involved were returned to their previous owners at the end of the loan. “Therefore, any loss to the identified victims in this case could only have come in the form of opportunity cost.” And those losses were not equivalent to the sham finders fees that produced Zangari’s gain.

Accordingly, the order was error, and the error was “plain.” Nevertheless, the circuit declined to exercise its discretion to correct it because Zangari failed to show prejudice by demonstrating that the amount would have been less had it been properly calculated.  Rather, he insisted only that the banks’ failure to file affidavits of loss showed that they suffered no loss at all. The circuit disagreed: “the fact that the victims did not claim a loss does not mean that they did not sustain” one.

The circuit also thought this might even be a case of “salutary error,” in that it was possible that the restitution award “in fact understated the victims’ actual losses.”  Zangari pled guilty to being a member of an “industry-wide” conspiracy, and could have been held liable for all of the losses of all of the victims affected by it along with, under § 3663A(b)(4), the expenses they incurred in their internal investigations, including attorneys fees and accounting costs.

Many Unhappy Returns

United States v. Cadet, No. 10-4220-cr (2d Cir. December 20, 2011) (Miner, Cabranes, Wesley, CJJ)

An Eastern District jury convicted Joseph Cadet of 16 tax offenses based on his preparation of dozens of false tax returns for his "clients" between 2003 and 2006. Although the court affirmed his conviction - he challenged only the admission of Rule 404(b) evidence, a perennial loser in this circuit - it vacated and remanded the sentence due to a host of sentencing errors.

First, the district court imposed a 41-month prison sentence and a three-year term of supervised release on each of the 16 counts of conviction. But the statutory maximum term of imprisonment for each violation of 26 U.S.C. § 7206(2) was three years’ imprisonment to be followed by one year of supervised release.

The court also made several incorrect restitution rulings. First, the restitution order included losses sustained by New York City and State, but the district court did not make an “explicit finding” as to whether those entities were “proper victims entitled to restitution.” Second, the court erroneously failed to deduct from the restitution amount payments that the taxpayer-clients made to the IRS to settle outstanding tax assessments. And third, the district court erroneously included losses associated with an uncharged tax return.

Aliens vs. Predator

United States v. Archer, No. 10-4684-cr (2d Cir. September 20, 2011) (Newman, Calabresi, Hall, CJJ)

Thomas Archer, a solo-practitioner immigration lawyer in Queens, ran a visa fraud mill. His specialty was the I-687, an amnesty program that permitted certain aliens who were here illegally in the 1980's to adjust their status and receive a visa. In 2004 and 2005, Archer filed nearly 240 I-687 applications; the DHS denied them all.

Convicted of visa fraud and conspiracy to commit visa fraud, his appeal concerned both trial issues - centered around his claim that he did know know that his assistants were filing forms with false information - and sentencing issues. The circuit affirmed Archer’s conviction, but remanded for resentencing and recalculation of the restitution.

The Trial Issues

At trial, an immigration agent who had reviewed 175 I-687 applications that Archer’s office filed, testified that almost all of them had certain suspicious factual allegations in common. That said, however, only three clients actually testified about the preparation of their fraudulent I-687's, and the government entered only four applications into evidence. The aliens' stories had much in common: their I-687 applications contained information that they knew was false; Archer or his staff gave them supporting affidavits for others to sign that were already filled in, and; Archer’s office told them to abandon the application process once they had received temporary work permits, but before their interview.

Archer’s principal trial defense was that he was unaware of the fraudulent actions of his staff. To this end, he requested two jury instructions. First he sought a “Philips” instruction that “the fact that a defendant is a solo practitioner, without more, is an insufficient basis from which to infer his guilt because, even though he is the only lawyer in the office, he may not be aware of everything his staff is doing.” He also sought a “Maniego” instruction that “attorneys are not held to a higher duty to investigate than non-lawyers and have no special obligation to verify independently information give to them by clients.” The district court rejected these requests and instead gave a fairly generic “knowingly” charge that simply told the jurors to consider whether Archer knew that the visa applications contained false statements but nevertheless presented them.

The circuit affirmed. Although it agreed that both the Philips and the Maniego instructions contain legally sound principles, here the instruction that the court gave was accurate and “left no room for the jury to convict Archer if it believed that he merely ran an office from which fraudulent documents were filed.”

The Sentencing Issues

The circuit found fault with the district court’s findings on two sentencing enhancements and its restitution order.

First, based solely on the agent’s statistical review of the 175 I-687 applications, the court enhanced Archer’s guideline range by nine-levels for creating 100 or more fraudulent documents, even though only the government admitted only four applications at trial. The circuit found that this statistical review failed the Shonubi “specific evidence” test. The principal problem was that the government “presented no evidence that the four applications proven false at trial were ... a representative slice of the 175 applications” that the agent reviewed because the government did not “randomly select[]” them; they were the applications associated with particular witnesses that the government chose to call and, most likely, “the most egregious cases.”

In addition, even though there was a suspicious statistical similarity among the applications reviewed, there was no “baseline” - evidence of what the national pool of I-687's, most of them likely filed by honest lawyers, actually looked like. Finally, the government did not explain why the similarities among Archer’s I-687 applications were “in themselves incriminating.” The only facts at issue were dates of entry and of travel and those facts were not “so peculiar” or “obvious” “that no further explanation is needed.”

The second sentencing error concerned the obstruction of justice enhancement. The district court imposed it because Archer texted a former employee, Singh, asking him whether he was going to be a government witness. When Archer concluded that the answer was “yes,” he texted Singh again, this time calling him a “Pussy.” According to the PSR, Singh felt “very threatened” by those messages.

Here, there was no direct and obvious threat; Archer’s statements to Singh were ambiguous. Where this occurs, the circuit usually defers to the district court’s findings on the speaker’s meaning and intent, but here the district court made none. And a “reasonable reading” of the messages would not support a finding of intent sufficient to support the enhancement. To the circuit, the “most obvious” reading of the texts was that Archer wished to know whether Singh would testify against him, and was displeased to learn that he would. Thus, even though Archer called Singh an “unpleasant name” and Singh was, subjectively, “afraid,” it was error to impose the obstruction enhancement.

The district court also erred in imposing restitution to 234 of Archer’s former clients - the total was more than $300,000 - because there was insufficient evidence that all of the clients were “victims” under the MVRA. The clients were only “victims” if Archer’s conspiracy to commit visa fraud caused their losses. This turns not so much on whether the aliens had “clean hands” but on whether their losses arose from the visa fraud or from an uncharged consumer fraud - Archer’s effort to cheat them of their money. After all, a person can commit visa fraud without accepting any money from the applicants.

If Archer’s clients though they were buying his honest legal services, then they may well have been victims of the visa fraud conspiracy. But, if they knew they were buying the “cover that his law practice gave to their false visa applications” then the visa fraud was not the proximate cause of their loss. There are some cases where it will be clear that no reasonable person would have given the defendant money if he had known of his plan. In those cases, a generalized description of the fraud is enough to support restitution. But, where it is “plausible that some individuals would have paid the defendant even if they had been informed of his fraudulent plan, then the government must proffer some individualized evidence to meet its burden of showing that each alleged ‘victim’ was actually a victim.”

This case is in that latter category. At least some of the aliens clearly knew that their visa applications contained falsehoods, but went along with the process anyway. In addition, filing a “false but plausible I-687 application was anything but a sure loser.” While the application was pending, the alien obtained a temporary work permit, and there was always the possibility, however, small the applicant would receive a visa. Given the resulting lack of certainty as to which clients were victims, the court remanded for recalculation of the restitution order.

Procedures on Remand

This decision has a particularly interesting discussion of the procedures that the district court is to undertake on remand. For sentencing issues, the “consensus” among the other circuits is “where the government knew of its obligation to present evidence and failed to do so, it may not enter new evidence on remand” unless the “government’s burden was unclear,” the “trial court prohibited discussion of the issue,” or the “evidence was, for a good reason, unavailable.”

The circuit “join[ed] that consensus” - sort of - but it still punted. It did not resolve the issue other than to remand for resentencing with instructions that the district court “consider in the first instance whether the justifications ... for allowing the government to present new evidence on remand exist in this case.” If the court allows no new evidence, it should recalculate Archer’s sentencing range without the 100-or-more-documents and obstruction enhancements. It if chooses to consider new evidence it should recalculate the range based on its findings with respect to that evidence and impose a sentence based on this and, of course, all of the other § 3553(a) factors.

For the restitution problem, there is yet another twist to the remand. To satisfy its burden, the government will have to show that each fee-paying client “did not know of the fraud and would not have paid a fee had” he known. Since the government has to “prove two negatives,” “some refinement in the proper allocation” of the evidentiary burdens is necessary.

Ordinarily, according go the circuit, “where the prosecution’s burden of proof would require it to prove a negative and the facts at issue are more readily ascertainable by the defendant,” the defendant assumes a burden of producing “at least a triable issue as to the fact at issue,” after which the prosecution assumes the burden of persuasion. That is the “appropriate” allocation of burdens here. Archer is “more likely than the government to ascertain whether a client knew of the fraud or would have paid a fee even if the client had known of the fraud,” since this knowledge would have come from Archer himself or someone in the firms.

Since the district court did not follow this program in the first instance, on remand, the court will have to reconsider which of Archer’s clients is entitled to restitution. The court will also have to consider whether to allow new evidence, as discussed above. But on the restitution question, the lack of clarity on the parties’ respective burdens “would seem to favor allowing additional evidence on the issue.” Even if there is no new evidence, however, the parties are “free to make new arguments based on the evidence already in the record.”

Comment

Mr. Archer now faces something of a dilemma. On remand, each client that he alleges knew what was going on - and hence is not a “victim” for restitution purposes - will add one at least more admittedly fraudulent document to the potential offense level enhancement. Will he stop at ninety-nine to keep his offense level lower, and make restitution to the others? Or will he go all the way, and claim that none of his clients were "victims?" In other words, which will he choose - money or freedom?

Porn Free

United States v. Aumais, No. 10-3160-cr (2d Cir. September 8, 2011) (Jacobs, Winter, McLaughlin, CJJ)

In this interesting opinion, the court weighs in on a subject of national controversy: whether a defendant convicted of possessing or receiving child pornography should be ordered to pay restitution to those depicted in the images. On the facts here the court, largely bucking the national trend, concluded that restitution was not appropriate.

This case involves images of a woman who uses the pseudonym Amy. Her uncle abused her for years when she was a child; he photographed the abuse and the images made their way to the internet. The uncle went to prison, but the images are still widely circulated. The effects of this on Amy have been devastating, and far transcend the harm caused by the abuse itself. She is so fearful of being identified in public from one of the images that she can barely function, and faces years of therapy to help her cope. Her restitution claim totals about $3.3 million, and she seeks to collect it from every person convicted of possessing one of her images.

The defendant here pled guilty to possessing a large collection of child pornography, including pictures of Amy. The district court, after a lengthy hearing in which a therapist who evaluated Amy testified, ordered more than $48,000 in restitution. But the circuit reversed.

To get there, the court first had to engage in some statutory interpretation and, in doing so, the court deepened an existing circuit split.

Title 18 U.S.C. § 2559, the restitution statute for victims of sex crimes involving children, provides for mandatory restitution of a victim’s full losses, and enumerates a number of specific costs, such as medical and psychiatric treatment, rehabilitation, and associated transportation costs. The last subsection on the list, § 2559(b)(3)(F), covers “any other losses suffered by the victim as a proximate result of the offense.” Most circuits have held that this proximate causation requirement applies to those losses enumerated in subsections that precede § (b)(3)(F). But one, the Fifth Circuit, has held that the proximate causation requirement is limited to the “catch-all” subsection. In that circuit, any causation is sufficient to trigger restitution under the others.

The circuit here joined the majority, holding that “under § 2559, a victim’s losses must be proximately caused by the defendant’s offense.” Proximate cause is a “deeply rooted principle in both tort and criminal law” that Congress did not intend to “abrogate when it drafted § 2259.”

Here, the district likewise held that proximate causation was required, and went on to hold that the standard was met. But the circuit disagreed. Amy had no direct contact with Aumais, or even know of his existence. Her victim impact statement did not mention him and, since she was evaluated before Aumais was even arrested, the doctor could not speak to the impact that Aumais caused her. Thus, “in the absence of evidence linking Aumais’ possession to any loss suffered by Amy,” his conduct was not a proximate cause those losses.

The court also noted, in dicta, the “baffling and intractable issue that this case would otherwise present in terms of damages and joint and several liability.” The district court held that Amy’s harm was the result of both the uncle’s abuse and others’ possession of the images and that the resulting counseling costs could not be separated. But, if her future counseling costs are partly the result of her uncle’s abuse, then “Aumais cannot be responsible for all of those losses,” even though § 2259 requires full restitution. Moreover, a restitution award to Amy would “raise issues as to joint and several liability.” Amy has sought restitution in hundreds of cases. In a 2010 case, her attorney estimated that she had received $170,000 in payments. But, since the law prohibits recovery of more than the victim’s actual losses the need for national monitoring to police this “would pose significant practical difficulties.” There does not even seem to be be a government body that would be responsible for, or even able to, track “payments that may involve defendants in numerous jurisdictions across the country.”

That said, however, the court did not intend to “categorically foreclose payment of restitution to victims of child pornography from a defendant who possesses their pornographic images. But, where the victim impact statement and the psychological evaluation were drafted before the defendant was even arrested “or might as well have been,” emphasis added, “as a matter of law,” the defendant’s possession of the victim’s image was not a proximate cause of the victim’s loss.

Trace Amounts

United States v. Gonzalez, 10-2202-cr (2d Cir. July 22, 2011) (Kearse, Miner, Chin, CJJ)

Former state senator Efrain Gonzalez, Jr., pled guilty to various fraud-related charges in connection with two sham charities that he set up while in office. This opinion contains an interesting discussion of the concept of “tracing” criminal proceeds. In it, the court concludes that tracing is not required to determine the number of victims under § 2B1.1, but is required, to some degree at least, to calculate the actual loss for restitution purposes.

The case arose from the actions of two supposed charities, West Bronx Neighborhood Association (WBNA) and United Latin American Foundation (ULAF). Each received both public money and private donations, and each - although supposed to be engaged in charitable activities - instead spent most of its money enriching Gonzalez by paying his personal bills - and those of some of his cronies - and funding a lavish lifestyle.

Gonzalez ultimately pled guilty to mail fraud, federal-program fraud, wire fraud and conspiracy. He later tried, unsuccessfully, to take the plea back - the circuit’s rejection of that issue, while very long, is straightforward and is not summarized here - and ultimately received a below-guideline 84-month sentence and restitution.

In challenging the length of his prison sentence, Gonzalez argued that the district court erred in concluding that the offense involved 50 or more victims under § 2B1.1(b)(2)(B). He claimed that, although more than 50 individuals donated money to WBNA, the government had not traced back the misappropriated funds to those particular donors. The circuit rejected this argument. It is not true that “before a person who has made a charitable contribution can be considered a victim within the meaning of § 2B1.1(b)(2)(B), his donation must be traced to a particular misallocation by the defendant.” Rather, a victim is a person who sustained any part of the actual loss, with no need that he be “linked with a specific part of the loss.” Such a holding is particularly apt given the specific instruction in the commentary to § 2B1.1 that defendants who exploit victims’ charitable impulses “create particular social harm.”

Interestingly, the court reached a somewhat different conclusion with respect to the restitution amount. In fixing restitution, the district court relied on WBNA’s donor lists. While it is true that any such donor could be a victim for restitution purposes, the circuit disagreed that each donor should be compensated for the full amount donated, since some of them “received value in return for their donations.” Some donated to and attended a WBNA gala that offered a “Buffet Supper” and an “Open Bar,” and others donated money for advertisements that appeared in the event’s program. The district court’s view that these donors expected that 100 per cent of their contributions would be used for charitable purposes was sufficient to make the determination that they were victims for restitution purposes, but was not sufficient to order full restitution of the amounts they gave. The circuit remanded the restitution order for “further proceedings to determine to what extent donors suffered [actual] losses.”

PC World

Here are two per curiams in white collar cases, decided on the same day.

First, in United States v. Lauerson, No. 09-0255-cr (2d Cir. June 7, 2011) (McLaughlin, Pooler, Sack, CJJ) (per curiam), the circuit agreed that the district court lacked the authority to waive the delinquency and default penalties arising from the defendant’s falling behind on his restitution payments. The relevant statute, 18 U.S.C. § 361, permits courts to, in some circumstances, modify or remit the restitution order itself, but does not permit waiver of those penalties.

And, in United States v. Wolfson, No. 10-2786-cr (2d Cir. June 7, 2011) (Kearse, Pooler, Lynch, CJJ), the court found no error in the jury instructions at a“pump and dump” securities fraud trial. The scheme operated by having corrupt stock brokers selling overvalued stocks, for which they were rewarded with “exorbitant” commissions that they either failed to disclose at all or lied about. Wolfson argued that the brokers had no duty to disclose their commission, and thus that it was error for the district court to give a fiduciary duty instruction. But the circuit noted that, while there is no “general” fiduciary duty inherent in the ordinary broker/customer relationship, there is a “relationship of trust and confidence.” A properly instructed jury “may find that stock brokers have a duty to disclose material commissions to their customers, and can convict brokers who breach that duty.”

Dead Again

United States v. Qurashi, No. 10-348-cr (2d Cir. March 8, 2011) (Newman, Walker, Pooler, CJJ)

Imran Quarashi and his brother, Adnan, purchased $3 million insurance policies on Adnan’s life from two different insurance companies. They then faked Adnan’s death, falsely asserting that he had died in a car accident in Pakistan, and the insurers paid Quarashi on the policies. A few years later, Adnan returned to the United States and assumed a new identity, Hassan Khan, and Quarashi purchased eight $10 million insurance policies on Khan’s life. When he claimed that Khan had been killed in a traffic accident in Pakistan, the insurance companies balked, opened an investigation, and Quarashi was ultimately charged with fraud.

Quarashi pled guilty - Adnan is still a fugitive - and was sentenced to 108 months’ imprisonment. On appeal he challenged the district court’s inclusion of prejudgment interest on the restitution order. Noting that this was an issue of first impression here, the circuit affirmed.

The restitution statute, 18 U.S.C. § 3663A, provides that restitution shall be based on the property’s value “on the date of sentencing” if that is greater than the value on the date of loss. Since the purpose of restitution is to make the victims whole,“value” is a “flexible concept to be calculated by a district court by the measure that best serves” the statutory purpose. And, indeed, accounting for the “time-value of money” requires flexibility. Since the statute requires restitution in the “full amount of” the victim’s losses, there is “no reason to exclude losses that result from the deprivation of the victim’s ability to put its money to productive use.” Prejudgment interest “stands in to provide a rough but fair approximation” of this loss.

The court also indicated - but stopped short of holding - that in a case where there is evidence that the victim “would not have put the funds to productive use,” prejudgment interest might not be appropriate. Here, while the insurance companies’ restitution request, which included a request for prejudgment interest, did not specify how the money would have been used if it had not been paid out to Quarashi, there was no evidence that they would not have used it productively.

Peter Paul and Money

United States v. Paul, No. 09-3191-cr (2d Cir. March 7, 2011) (Cabranes, Chin, CJJ, Crotty, DJ)

Defendant Peter Paul pled guilty to securities fraud, in connection with a stock manipulation scheme that permitted him to fraudulently obtain multi-million dollar margin loans, which he never repaid, from two brokerage houses. The district court sentenced Paul principally to 120 months’ imprisonment and more than $11.4 in restitution.

He raised three main claims on appeal, all without success.

At a pretrial conference, the district judge remarked that he had a reputation for giving a Guideline sentence after trial but for being lenient with defendants who pled guilty. The judge also remarked that the twenty-five months Paul spent fighting extradition in Brazil - he apparently fled there as his scheme was unraveling - would not be credited if he did not plead guilty. On appeal, Paul claimed that these remarks violated Fed.R.Cr.P. 11(c)(1), which forbids the district court from participating in plea discussions. The court rejected a “bright-line” rule in assessing Rule 11(c)(1) claims, noting that such issues are “highly fact-specific.” The the judge made the first remark in the context of setting a trial date - not about Paul specifically. The second remark, in context, was of even less concern to the court; it was clearly related to the court’s effort to find a way to release Paul on bail and not to coerce a plea. Moreover, any Rule 11(c)(1) violation here was harmless; Paul was not present when the remarks were made, pled guilty several months later, affirmed in the plea that he was doing so voluntarily, and neither he nor his attorney ever objected to the statements.

Paul also claimed, again for the first time on appeal, that the nearly four-year delay in his sentencing violated his right to a speedy sentencing. But the court found no plain error. Most of the delay was due to prosecutorial negligence, which “does not weigh as heavily as would an intentional delay,” and one year of the delay was attributable “solely to Paul’s request for adjournments.” In addition, Paul could identify no actual prejudice resulting from the delay other than his anxiety over the uncertainty of what would happen to him.

Finally, Paul challenged the restitution order, which required him to repay the losses to the brokerage houses that extended the margin loans. He argued that those losses were caused by the declining stock price, which left the institutions without the collateral necessary to recover the money they lent. The circuit disagreed because the losses were not caused by a decline in stock value, they were caused by “the making of the loans in the first instance,” and Paul clearly obtained the loans fraudulently.

Restoration Comedy

United States v. Pescatore, No. 10-0520-cr (2d Cir. February 23, 2011) (Kearse, Winter, Hall, CJJ)

In connection with a plea agreement that covered both a long-running chop-shop operation and an extortion scheme, Michael Pescatore agreed to accept a 132 month sentence, a $2.5 million forfeiture and “no less than $3 million” in restitution. The agreement specified that the prosecutors would recommend that the forfeited assets be transferred to the victims, a process known as “restoration,” but that the ultimate decision lay with the Department of Justice, which would “make its decision in accordance with applicable law.”

At Pescatore’s 2008 sentencing, the court imposed the agreed-upon sentence, including $3 million in restitution, to be paid in full by the end of 2009. The written Judgment reflected this order, but did not contain the names of the victims to whom Pescatore owed restitution or the amounts to which they were entitled. In early 2009, the government wrote to the district court and asked it to correct the Judgment to incorporate the victim-loss tables in the PSR, and the court granted the motion, filing an amended Judgment that incorporated this information.

In April of 2009, the government notified Pescatore that the DOJ had denied the restoration request. Six months later, he moved in the district court for “specific performance” of the restoration portion of the plea agreement, and also sought to be relied from the $3 million in restitution, arguing that the total loss to his victims was less than that amount. The district court held a hearing on these applications in January of 2010 and denied them both. It noted that Pescatore had not made any restitution payments even though the deadline had passed, and gave him thirty days to pay the $3 million. Pescatore then sought a stay of the restitution order from the circuit, which denied it. But he still never paid the money.

On appeal, Pescatore pursued these same claims. The circuit affirmed but, because it was true that the total loss to the victims was less than $3 million, the court remanded the case for further proceedings.

The court first found no merit to Pescatore’s complaint about the government’s decision to retain the forfeited assets instead of restoring them to his victims. The statute, 18 U.S.C. § 981(e), permits the Justice Department to do either based on an exercise of its own discretion. And there was nothing in Pescatore’s plea agreement that placed any constraints on that discretion. The line prosecutors were obligated only to “recommend” restoration, which they did, and the promise that the DOJ would act “in accordance with applicable law” was not a “promise to grant restoration so long as it is not prohibited.” Without deciding whether this type of decision is subject to judicial review, the appellate court noted that the government had put on the record a reason for the refusal - Pescatore “actually does have assets” - and that Pescatore did not contest this.

As for restitution, the circuit agreed that the true amount of the loss to Pescatore’s victims was not $3 million, it was more like $2.56 million, and rejected the government’s claim that the amended Judgment was already in this amount. While the amended Judgment incorporated the PSR’s victim-loss tables, those tables did not contain a total, and the total amount specified in the amended Judgment remained at $3 million.

But, because Pescatore did not object to this amount when he was originally sentenced, the circuit reviewed only for plain error and concluded that he met only three of the four parts of the plain error test. The incorrect restitution amount was an “error,” that was “plain,” and affected Pescatore’s “substantial rights.” But it did not “seriously affect the fairness, integrity or public reputation” of the proceedings because, as far as the circuit was concerned, Pescatore simply “flouted” the restitution order by refusing to comply with it without obtaining a stay.

Even after the circuit denied his application for a stay, he made no effort to expedite the appeal. To the contrary, he missed two filing deadlines that resulted in dismissals and reinstatements. His “election” to “disobey the Judgment” therefore caused him to flunk final prong of the plain error test.

Even so, the court sent the case back for further proceedings. Pescatore must now pay the full $3 million, and will be subject to statutory interest and financial penalties as a result of his tardiness. If the total of the principal, interest and penalties is less than $3 million he will be entitled to a refund of the difference.

Be Careful What You Fish For

United States v. Bengis, No. 07-4895-cr (2d Cir. January 4, 2011) (Feinberg, Cabranes, Hall, CJJ)

Three defendants pled guilty to various offenses arising from their South African lobster fishing businesses; they illegally harvested large numbers of rock lobsters from South African waters for export to the United States, conduct that violated both South African and United States law. This opinion addresses the government’s appeal of the district court’s legal conclusion that South Africa was not entitled to restitution. The Circuit reversed.

The district court had first held that South Africa did not have a property interest in the illegally harvested lobsters. The appellate court disagreed. Under South African law, lobsters caught illegally are not the property of those who caught them. They are subject to seizure by the government, which can then sell them and keep the proceeds. Thus, the defendants’ conduct, which included evading the seizure of overharvested lobsters, deprived South Africa of that income stream.

The district court also held that South Africa was not a “victim” under the restitution statues because it failed to show that it suffered any loss caused by the defendants’ conduct. The Circuit again disagreed, even though the defendants pled guilty only to importing the lobsters into the United States. By smuggling the lobsters out of South Africa knowing that they had been unlawfully harvested, the defendants still deprived South Africa of the potential income from any seized, overfished lobsters.

Finally, the district court had concluded that calculating a restitution award would overly complicate and prolong the proceedings. But the Circuit noted that experts in the district court had already calculated likely loss amounts using two different methodologies. The Circuit selected the higher of the two and held that it “seems to us a sufficient loss calculation methodology under the circumstances presented by this case.” Unfortunately for the defendants, that methodology produced a loss in excess of $61 million.

Payoff Games

United States v. Kalish, No. 08-3374-cr (2d Cir. November 24, 2010) (Newman, Winter, Lynch, CJJ)

Defendant Kalish was convicted of mail and wire fraud in connection with an advance loan fee scheme. The district court ordered him to pay $ 1.2 million in restitution, and also ordered a $ 3.9 million forfeiture.

On appeal, Kalish claimed that the district court should have reduced the forfeiture amount by the amount of the restitution order. The circuit affirmed, finding that the claim was premature. There is no error in imposing both a forfeiture order and a restitution order, since each is authorized by a separate statute.

However, once “some payment has been made by way of restitution, a defendant would be in a position to argue that such a payment should be a credit against any then remaining forfeiture amount.” Since the forfeiture amount represents “ill-gotten gains,” it is “at least arguable” that any money returned to a victim has reduced the amount of “ill-gotten gains” remaining in the defendant’s possession. But Kalish did not claim that he had made any restitution payments, so the court did not need to “decide whether such an argument would prevail.”

Payment Plan Available

United States v. Kyles, No. 06-4196-cr (2d Cir. April 2, 2010) (Miner, Katzmann, Raggi, CJJ)

In 1993, defendant Kyles received a long bank robbery sentence, along with a $4,133 restitution order. The court did not set a payment schedule, and instead (illegally) delegated that task to the Probation Department, which never acted. In 1998, the district court amended the restitution order by directing that Kyles pay $2 per month while incarcerated. Kyles did not appeal that order.

In 2006, the district court amended the order again, this time raising the monthly payments from $2 to $25. After much back-and-forth over whether the district court had authority to order this and Kyles’ ability to pay, the court amended the order again, this time specifying that Kyles’ payments should be “increased in accordance with the guidelines of the Inmate Financial Responsibility Program.”

Kyles appealed, arguing that the district court lacked the authority to modify his restitution schedule in this way. The court disagreed. Although a district court’s ability to alter an imposed sentence is quite limited, here the court found that an order modifying the payment schedule, but not the amount of the restitution itself, did not alter the sentence.

Kyles also made a double jeopardy argument. The Double Jeopardy Clause protects the “finality of criminal judgments” and hence prohibits “alternations to sentences carrying a legitimate expectation of finality.” But here since the order altered only the payment schedule, Kyles had no “legitimate expectation of finality.”

Third, Kyles argued that the district court lacked the statutory authority to change the payment schedule while he was incarcerated. The circuit disagreed, finding an inherent power to do so in the statutory provision that gives district courts the “equitable authority” to order payments over time instead of immediate payment of the whole amount. “Inherent in equitable authority is the power to adjust orders when the circumstances informing them change.”

Finally, the court agreed with Kyles that delegating to the Bureau of Prisons the power to set the amount of restitution payments was illegal. The court remanded the case for a imposition of restitution order that specifies the amount Kyles must pay each month and makes clear that prison officials cannot depart from that order.

The Boss From Hell

United States v. Sabhnani, No. 08-3720-cr (2d Cir. March 25, 2010) (Wesley, Livingston, CJJ, Restani, JCIT)

The defendants, husband and wife, were convicted of forced labor, harboring aliens, peonage and document servitude, both substantive and conspiracy. The wife received an eleven-year sentence, while the husband was sentenced to forty months. The court also imposed fines and restitution and ordered the forfeiture of their home. The defendants raised several issues on appeal, not all of which are summarized here, but won relief only on a restitution issue.

Background

The facts of this case are quite disturbing. The defendants lived very comfortably, along with their children, in a large house on Long Island from which the husband ran a successful export business. Beginning in 2002, with the help of the wife’s mother, the defendants brought two women to the United States from Indonesia to serve as household servants. Their treatment of the women was truly horrific. The wife would regularly abuse them physically - by, inter alia, depriving them of sleep, beating, starving and mutilating them - and psychologically - by insulting and threatening them and their families back in Indonesia. The husband’s role was more passive - he would report the women's supposed violations of the house rules to his wife, then let her do the dirty work.

The situation lasted until 2007, when one of the women finally mustered the courage to escape and summon help. A search of the home revealed substantial physical evidence, including blood and physical instruments that were used to beat the women.

The Appeal

The circuit affirmed the convictions and sentences, but remanded for recalculation of the restitution.

1. The Restitution Issue

In peonage or forced labor cases, 18 U.S.C. § 1593 provides for mandatory restitution of the full amount of the victim’s losses, which it defines as “the value of the victim’s labor as guaranteed under the minimum wage and overtime guarantees of the Fair Labor Standards Act” (the “FLSA”). Here, the district court concluded that the two women worked twenty-four hours a day when the defendants were at home and eight when they were on vacation. It determined a minimum wage amount, then multiplied that by a statutorily determined factor to calculate overtime pay. After subtracting the amount that had been actually sent to the victims’ families, the court doubled the total under a FLSA provision providing for “liquidated damages” for minimum wage violations.

The defendants first argued that the victims were not entitled to overtime pay under the FLSA, and thus that the restitution amount was incorrect. The circuit agreed. The FLSA provides for overtime for employees who work more than forty hours per week, and this guarantee covers domestic workers. But the overtime provision does not apply to domestic employees who reside in the household. Reading the plain language of the statute, the court easily concluded that the victims here “resided” in the defendants’ house. The trial evidence showed that they lived in the house and did so as permanent residents for a considerable time. Moreover, the ordinary meaning of the term "residence" applies even, when the “residence” is involuntary, such as when a person “resides” in prison. Accordingly, since the victims were not statutorily entitled to overtime pay, the circuit remanded the case for recalculation of the restitution amount. It noted, however, that the residence exception does not excuse the employer from paying a live-in worker for all hours worked. Thus, on remand the district court need not deviate from its decision to award the victims pay for working twenty-four hours per day.

The defendants also contested the district court’s award of liquidated damages, arguing that the relevant FLSA provision, § 216(b) did not apply to restitution awards under 18 U.S.C. § 1593. The circuit disagreed. The restitution provision fixes the amount owed as the greater of the value to the defendant of the victim’s services or the value of the labor as guaranteed under the “minimum wage and overtime guarantees” of the FLSA. The circuit held that the FLSA’s provision for liquidated damages counted as part of the “value of the victim’s labor.” First, the restitution provision’s reference to the FLSA does not limit the value calculation to the FLSA's provisions under which wages and overtime are calculated. Moreover, § 216(b)’s double damages provision is triggered automatically by a violation of the FLSA's wage and overtime provisions. Third, § 216(b) is “explicitly and exclusively tied to violations of the minimum wage and overtime rules.” Thus, under § 1593, the value of the victim’s labor as guaranteed under the minimum wage and overtime guarantees of FLSA includes the liquidated damages under § 216(b).

This is so even though the liquidated damages provision can be dispensed with if the employer’s FLSA violation was undertaken in good faith. This carve-out does not mean that the liquidated damages is not part of the value of the victim’s labor that the FLSA guarantees. “The possibility that a judge may in narrow circumstances relieve an employer of its obligations to pay [does not alter] Section 216's general command that liquidated damages be paid."

2. Other Sentencing Issues

A. The court rejected the wife’s contention that enhancements for both “serious bodily injury” and the use of a “dangerous weapon” constituted impermissible double counting.

B. Both defendants contested the “vulnerable victim” enhancement, arguing that because Congress took into account a victim’s vulnerability in enacting the criminal statutes under which they were convicted, the guideline under which they were sentenced, § 2H4.1, implicitly incorporated that vulnerability, and thus the victims here were not “unusually vulnerable.” They were, rather, the “prototypical victims Congress aimed to protect.”

The circuit disagreed, even though it agreed that the congressional findings behind the statutes included findings that persons with some of the same characteristics as these victims were more likely to be victims of the crimes of forced labor, peonage and document servitude. But neither the offense guideline nor the vulnerable victim guideline supported the defendants’ argument. The offense guideline itself specifies no victim-related factor that, under the commentary to the vulnerable victim guideline, would preclude application of the enhancement.

3. Trial Issues

A. The appellate court rejected, inter alia, the defendants’ claim that the district court should have granted their motion for a change of venue due to prejudicial pretrial publicity. The publicity was driven largely by coverage of court proceedings. Thus, the prosecution's reported comments, some of which were inflammatory, were proper given the litigation context in which they were made. Moreover, the press also reported on comments of the defendants’ attorneys. Nor was the press coverage “so pervasive and prejudicial as to have created a reasonable likelihood that a fair trial could not be conducted.” Finally, there was a searching voir dire of prospective jurors that the defendants did not object to as inadequate.

B. The husband challenged the district court’s jury instruction on aiding and abetting which, in one place, indicated that liability might attach for a “failure to act.” This was, arguably, error, since none of the charges on which he was convicted was predicated on a failure to act, and he had no common law duty to act. Omissions may serve as the basis for criminal liability only if there is an affirmative duty to act, and this is equally true for aiding and abetting. But here, the complained of language was
“not inaccurate” - it was “simply extraneous to this case.” And the “charge as a whole” repeatedly made clear that the jury had to find that the husband “by some act” sought to make his wife’s crimes succeed.

You Can’t Bet On It

United States v. Battista, No. 08-3750-cr (2d Cir. August 6, 2009) (Walker, Wesley, Wallace, CJJ)

James Battista was part of an illegal NBA gambling operation. He pled guilty to conspiring to transmit wagering information, in violation of 18 U.S.C. §§ 371 and 1084, and his sentence included restitution to the NBA. On appeal he unsuccessfully challenged this order.

Background

The gambling scheme began with a corrupt NBA referee, who would transmit “picks” through an intermediary to Battista, who would then place bets on those games. Battista paid the ref a fee for each game where the ref picked the winner. The ref and the intermediary each pled guilty to wire fraud, while Battista pled guilty to the wagering conspiracy. At sentencing, the district court ordered the three defendants to pay more than $ 200,000 in restitution to the NBA.

The Appeal

On appeal, Battista argued that the NBA was not a “victim” of his wagering offense and that the league’s attorneys’ fees and investigative costs were not recoverable under the restitution statutes. The circuit affirmed.

The court first was asked to determine which restitution statute applied in Battista’s case. Under 18 U.S.C. § 3663A (the “MVRA”) full restitution is mandatory for certain types of offenses, including Title 18 “offense[s] against property ... including any offense committed by fraud or deceit.” 18 U.S.C. § 3663(c)(1)(A)(ii). Offenses not covered by the MVRA are covered by 18 U.S.C. § 3663 (the “VWPA”), under which restitution is discretionary, to be imposed only after the court balances the victim’s losses against the defendant’s resources.

Here, while Battista conceded that his offense conduct involved fraud or deceit, he argued that, since the statute under which he was convicted did not have fraud or deceit as an element, the MVRA did not apply to him. It is an open question whether the MVRA applies to fraudulent or deceitful conduct that is charged under a non-fraud or non-deceit statute, but the court did not resolve it here. It found that even if the discretionary VWPA applied, restitution under was proper. The district court’s findings as to Battista’s financial circumstances were not clearly erroneous. Moreover, the court properly considered the need to treat Battista and his co-defendants equally. They pled guilty to wire fraud and thus, for them, restitution was indisputably mandatory.

Next, the court held that the NBA was properly deemed a “victim” under the restitution statutes, since it was “directly and proximately harmed as a result of the commission of” Battista’s offense.

Finally, the court concluded that the NBA’s attorneys’ fees were recoverable. The restitution statutes contain a list of the kinds of losses that are covered, including “other expenses related to participation in the investigation or prosecution of the offense.” The district court properly included in the restitution order those attorneys’ fees that were “directly related to” the investigation as “other expenses.”

Back to the Future

United States v. Pearson, No. 07-0142-cr (2d Cir. July 2, 2009) (Miner, Katzmann, Raggi, CJJ) (per curiam)

Title 18, U.S.C. § 2259 provides that, in sex abuse cases, restitution is mandatory for the full amount of any loss to the victim, including the costs of medical or psychiatric care. Here, in a case of first impression in the circuit, the court held that this section includes restitution for estimated future expenses.

In this case, then, the district court properly ordered such future restitution. The circuit sent the case back anyway, however, because the district court, which arrived at a figure of nearly $ 1 million - the victims were two young girls - did not adequately explain how it arrived at the figure it selected.

The court also held that the issue survived the appellate waiver in Pearson’s plea agreement. With respect to restitution, the agreement merely stipulated that Pearson would pay “in full,” without specifying an amount. This language “plainly contemplate[d] a future determination of the amount necessary to provide ‘full’ restitution.” Thus, while the waiver would have covered the district court’s decision to impose full restitution, it did not “unambiguously” cover an appeal of “possible errors in the determination of what amount constitutes full restitution.”

Cashed and Burned

United States v. Varrone, No. 07-4533-cr (2d Cir. January 30, 2009) (Calabresi, Sotomayor, Parker, CJJ)

Joseph A. Castello ran a check cashing business. He cashed more than $200 million in checks that exceeded $10,000 - charging a four percent check-cashing fee - for which he was obligated to file currency transaction reports (CTR’s). He did not, however, and was convicted by a jury of violating 31 U.S.C. §§ 5313 and 5322(a). On appeal, he challenged a restitution order, and claimed that the forfeiture order violated the Excessive Fines Clause of the Eighth Amendment. The circuit vacated.

The Restitution Order

The restitution order involved a fraud victim, who was induced to send a $300,00 check to a bogus financial firm. This had nothing at all to do with Castello, except that the firm cashed the check at his establishment. When the victim contacted Castello, he falsely represented that he was an “honest man,” who always paid his taxes. The district court ordered, as a condition of Castello’s supervised release, that he repay the $300,000.

Addressing a question of first impression in this circuit, the court reversed. Under 18 U.S.C. §§ 3583(d) and 3653(b)(2), a district court can order a defendant to “make restitution to a victim of the offense” as a condition of supervised release. However, it has long been clear that, under the restitution statutes, restitution can be ordered only for the “losses caused by the specific conduct that is the basis for the offense of conviction.” Here, the court agreed that this is also true for the restitution provisions of the supervised release statute. “[R]estitution can be ordered as a condition of supervised release ... only to compensate for losses caused by the specific conduct that is the basis for the offense of conviction.” Since the loss here was caused by an unrelated fraud scheme, and not Castello’s failure to file CTR’s, the restitution order was not authorized.

The Forfeiture

In the district court, the government sought, and obtained, a forfeiture order that included: a money judgment of more than $9 million, which represented four percent of the value of the checks exceeding $10,000 that Castello cashed without filing CRT’s; Castello’s interest in real property that he purchased with tainted funds; and about $2.7 million in funds that went through a Citibank account that Castello used to conduct his check cashing business.

On appeal, he challenged the forfeiture under the Excessive Fines Clause of the Eighth Amendment. A forfeiture is excessive if it is “grossly disproportional to the gravity of a defendant’s offense.” In United States v. Bajakajian, 524 U.S. 321, 337-39 (1998), the Court identified four considerations for determining whether a forfeiture is excessive: the “essence of the [defendant’s] crime” and its relation to other criminal activity; whether the defendant “fit into the class of persons for whom the statute was principally designed; the maximum authorized sentence and fine; and the nature of the harm caused by the offense.

Here, the district court neither evaluated the Bajakajian factors nor made factual findings regarding them. The circuit noted that the forfeiture order against Castello was more than forty times the maximum permissible fine, thus it was not presumptively permissible under the Eighth Amendment. It also noted that this - the third Bajakajian factor - was the only one conclusively established by the record, and it weighed against the constitutionality of the forfeiture. The other three factors were “not clearly established by the record.” In the absence of “factual development by the district court regarding” the three other Bajakajian factors, the court concluded that the record was insufficient to evaluate the Eighth Amendment claim, and remanded the case for further proceedings.

Materia Girls

United States v. Ojeikere, No. 07-1970-cr (2d Cir. October 7, 2008) (Newman, Winter, Calabresi, CJJ)

Defendant Ojeikere was convicted of participating in an “advance fee” scheme the tricked its victims into sending money to the defendant and his confederates to release “large sums of money supposedly held in Nigeria.”

On appeal, he challenged the restitution order, which was nearly $700,000. He claimed that his “victims,” although they suffered losses, had hands too dirty to claim restitution, since they all participated in what they believed was a fraudulent scheme to obtain money from Nigeria. The court agreed with Ojeikere in principle only - restitution is not appropriate where the victims are, in effect, co-conspirators.

But restitution “may not be denied simply because the victim had greedy or dishonest motives.” It should only be denied where the victims’ intentions were in pari materia with those of the defendant. Because Ojeikere did not demonstrate that his victims lost ill-gotten gains “or that they were in pari materia with” his scheme, restitution was appropriate.

Feetotalers

United States v. Amato, No. 06-5600-cr (2d Cir. August 21, 2008) (Cardamone, Miner, Pooler, CJJ)

The defendants were the principals of a consulting firm that was purchased by EDS, a much larger company. Their compensation included an incentive plan that promised large bonuses if they helped their clients, financial services firms, avoid losses caused by escheatments. The defendants never met their goals, but devised a successful scheme to deceive EDS into believing that they had.

After a jury trial, the court sentenced both defendants to prison, then conducted a restitution hearing and concluded that they owed $12.8 million in restitution to EDS. This figure included more than $3 million in attorney and accountant fees that EDS had incurred as a result of its participation in the prosecution.

On appeal of this part of the restitution order, the circuit affirmed. It noted that the statute at issue, 18 U.S.C. § 3663A(b)(4) mandates reimbursement to the victim for “lost income and necessary child care, transportation, and other expenses incurred during participation in the investigation or prosecution of the offense or attendance at proceedings related to the offense.” The defendants argued that the phrase “other expenses,” did not include attorney and accountant fees, but the court disagreed, following the “plain language” of the statute.

It rejected several statutory interpretation arguments made by the defendants. First, they claimed that, under the principle of ejusdem generis, “other expenses” had to be limited to losses similar to those enumerated in the statute. Under ejusdem generis, “general terms that follow specific ones are interpreted to embrace only objects of the same kind or class as the specific ones.” But that canon is not applicable here; it is merely a “helpful guide” to legislative intent and is not entitled to “unthinking reliance.” Moreover, it only applies when the specific terms are clearly part of a common class. There is no common attribute of lost income, child care and transportation expenses that would exclude attorney and accountant fees.

The defendants also argued causation, claiming that the fees represented an “indirect” harm to the EDS, while the restitution statute is limited to “direct harm.” The court agreed in principle only. While it is true that the “link between an offense and the resulting restitution award may [not] be ignored,” here the requirement that the expense be a direct and foreseeable consequence of the offense was met.