13‐2042‐cr United States v. Anthony Cuti
UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT ____________________
August Term, 2013
(Argued: March 12, 2014 Decided: September 11, 2014 Amended: February 6, 2015)
Docket No. 13‐2042‐cr
____________________
UNITED STATES OF AMERICA,
Appellee, v.
ANTHONY CUTI,
Defendant‐Appellant.*
Before: JACOBS and POOLER, Circuit Judges, and ROMÁN, District Judge.**
Appeal from a final order of restitution entered on May 13, 2013 in the
* The Clerk of Court is directed to amend the case caption as indicated above. ** The Honorable Nelson S. Román, United States District Judge for the Southern District of New York, sitting by designation. United States District Court for the Southern District of New York (Deborah
A. Batts, J.) pursuant to the Victims and Witnesses Protection Act (“VWPA”),
18 U.S.C. § 3663. We vacate the district court’s order and remand for the sole
purpose of considering the restitution order in light of our further
clarifications about what expenses are properly deemed “necessary” under
the VWPA and extension of the reasoning in United States v. Maynard, 743 F.3d
374 (2d Cir. 2014). We affirm in all other respects.
BRIAN C. BROOK, Clinton Brook & Peed (Matthew J. Peed, on the brief), New York, N.Y., for Defendant‐ Appellant.
JUSTIN ANDERSON, Assistant United States Attorney (Preet Bharara, United States Attorney for the Southern District of New York; Rebecca M. Ricigliano, Michael C. Gerber, Assistant United States Attorneys, on the brief), New York, N.Y., for Appellee.
POOLER, Circuit Judge:
Following a jury trial, Anthony Cuti was convicted on June 8, 2010 of
one count of conspiracy to make false statements and four counts of securities
fraud and was sentenced on August 22, 2011 to concurrent terms of thirty‐six
2 months of imprisonment, to be followed by concurrent terms of three years of
supervised release. In this appeal, Cuti challenges: (1) whether the district
court’s decision to award restitution, directly following its denial of Cuti’s
motion for a new trial and after initially declining to award restitution,
evinced judicial vindictiveness in violation of his due process rights; and (2)
whether the district court’s award of restitution constituted an abuse of
discretion.
As set forth below, we clarify whether particular expenses incurred are
“necessary” under the VWPA and extend the reasoning of our recent decision
in United States v. Maynard, a case construing the Mandatory Victims
Restitution Act (“MVRA”), to cases under the VWPA. In short, we conclude
that the restitution order improperly includes legal expenses incurred in
connection with a civil arbitration that, while connected to the offense of
conviction, was not undertaken or pursued in aid of the prosecution. We also
clarify that non‐victims are eligible for restitution only to the extent such
payments were made on behalf of the victim. We therefore vacate the district
court’s order of restitution for this limited purpose, and otherwise affirm the
remainder of the court’s restitution order.
3 BACKGROUND
I. Underlying Criminal Proceedings
Anthony Cuti was the Chief Executive Officer (“CEO”), and board
chairman of Duane Reade until 2005. The evidence introduced at Cuti’s
criminal trial showed that from 2000 to 2004, Cuti and his co‐defendant
William Tennant, Duane Reade’s former Chief Financial Officer (“CFO”) and
senior vice‐president, executed two different fraudulent accounting schemes
in order to inflate the company’s reported earnings.
Following trial, the jury returned a verdict finding Cuti guilty on all
counts: conspiracy under 18 U.S.C. § 371 (Count 1); and securities fraud in
violation of 15 U.S.C. §§ 78j(b) & 78ff, 17 C.F.R. § 240.10b–5 and 18 U.S.C. § 2
(Count 2); making false statements in two SEC filings in violation of 15 U.S.C.
§§ 78m(a) & 78ff, 17 C.F.R. § 240.13a–1 and 18 U.S.C. § 2 (Counts 3 and 4); and
making false statements in another SEC filing in violation of 15 U.S.C. §§
78o(d) & 78ff, 17 C.F.R. §§ 240.15d–1 & d–13, and 18 U.S.C. § 2 (Count 5).
Tennant was acquitted on Count 1 and convicted on Count 2. The district
court denied both defendants’ motions for a new trial and sentenced Cuti and
4 Tennant principally to imprisonment for three years and time served,
respectively, and imposed fines of $5 million on Cuti and $10,000 on Tennant.
Cuti and Tennant’s convictions were upheld in June 2013. See generally United
States v. Cuti, 720 F.3d 453 (2d Cir. 2013); United States v. Cuti, 528 F. App’x 84
(2d Cir. 2013).
II. Duane Reade’s Internal Investigations
Oak Hill, a private equity firm, acquired Duane Read in 2004, and in
2005 terminated Cuti’s employment without cause. Duane Reade and Cuti
were unable to resolve certain disagreements regarding post‐termination
benefits for Cuti, and he filed an arbitration demand against Duane Reade on
September 1, 2006. The law firm Paul, Weiss, Rifkind, Wharton & Garrison,
LLP (“Paul, Weiss”), which has represented Oak Hill since 1978, was retained
to represent Duane Reade in the arbitration.
In late August 2006, one week before Cuti initiated the arbitration,
Duane Reade’s general counsel Michelle Bergman was notified by Duane
Reade’s former Director of Construction about several suspicious “credit and
rebilling” transactions made at Cuti’s instruction that improperly classified
several million dollars as capital expenditures. Bergman notified Paul, Weiss;
5 and the Audit Committee of Duane Reade’s board of directors retained
Cooley Godward Kronish LLP (“Cooley”) as independent counsel, along with
forensic accounting firm AlixPartners LLP, to conduct an internal
investigation. On November 22, 2006, Paul, Weiss filed counterclaims in the
arbitration based on this credit rebilling fraud. Cuti refused to be interviewed
by Cooley unless Duane Reade withdrew certain of these arbitration‐related
counterclaims. No interview with Cuti was conducted, and on December 13,
2006, Cooley issued a report to Duane Reade’s Audit Committee on this credit
rebilling scheme.
In February 2007, Paul, Weiss uncovered evidence of a real estate
income concession transaction (identified as the “Blue Trophy” transaction)
involving Cuti that looked suspicious. Once again, Cooley and AlixPartners
were retained by the Audit Committee to investigate. In a report to the Audit
Committee dated May 18, 2007, Cooley concluded that between 2000 and 2005
“Cuti engaged in a fraudulent scheme designed to result in upfront
recognition of real estate concession income to improve Duane Reade’s
earnings.” App’x at 424 (quotation marks omitted). Cooley also explained
that:
6 The impetus for the investigation was information learned by attorneys at [Paul, Weiss], Duane Reade’s outside counsel, in the course of their preparation for the arbitration commenced against Duane Reade by its former CEO, Anthony Cuti. The information was communicated by Paul[,] Weiss attorneys . . . and related to a specific income item recognized by Duane Reade in the Second Quarter of 2001. Paul[,] Weiss attorneys shared that information with members of the Audit Committee, and the Audit Committee determined that further investigation into items classified as real estate concession income during the period 2000‐2006 was warranted.
App’x at 312.
The results of these internal investigations led to the filing of amended
counterclaims and affirmative defenses in the arbitration proceedings in April
2007, which the Arbitrator accepted on May 17, 2007. A few days later, on
May 22, 2007, Duane Reade’s counsel met with representatives of the U.S.
Attorney’s Office (“USAO”) for the Southern District of New York and with
the regional office of the SEC to disclose the internal investigations and their
findings.
The government commenced its own investigation into Duane Reade’s
finances. Duane Reade cooperated in the USAO investigation, attending
meetings with the prosecutors, participating in telephone calls, and
responding to numerous requests for documents and information. In July
7 2007, the arbitration proceeding was stayed at the request of the government.
Many Duane Reade employees, both former and current, were interviewed as
part of the government’s investigation. Duane Reade provided independent
counsel for each, pursuant to each employee’s individual contract, Duane
Reade’s bylaws, or its certificate of incorporation.
Throughout this time, Oak Hill and Duane Reade agreed to share the
costs of legal representation by Paul, Weiss, with Oak Hill paying 65% percent
and Duane Reade paying 35% of the fees from January 2007 through
September 2008. Ultimately, the government investigation led to an
indictment being returned against Cuti on October 9, 2008, charging Cuti in
five counts. The SEC also filed a parallel civil action against Cuti arising out
of the same conduct.
III. Post‐Verdict Proceedings in the District Court
Cuti was found guilty on all counts on June 8, 2010. In October 2010,
Oak Hill and Duane Reade submitted a joint impact statement seeking an
order of restitution of approximately $53 million—with the majority of the
amount requested to compensate for the amount that Oak Hill claimed that it
overpaid for its acquisition of Duane Reade as a result of Cuti’s fraud. So that
8 the government could present its theory of loss and restitution, the district
court held a Fatico hearing over seven days from November 2010 to June 2011.
On July 28, 2011, Cuti moved for a new trial, premised on newly
acquired evidence that one of the government witnesses had given perjured
testimony at trial. The following day, the district court issued an order and
memorandum addressing Oak Hill and Duane Reade’s requests for
restitution. United States v. Cuti, No. 08 C.R. 972(DAB), 2011 WL 3585988
(S.D.N.Y. July 29, 2011) (“Initial Restitution Order”). The court concluded that
Oak Hill was not entitled to restitution in the amount of Oak Hill’s alleged
overpayment for Duane Reade because the Government had not met its
burden of showing that Oak Hill suffered a loss attributable to Cuti’s offense
conduct. Id. at *3‐6. Next, though the court acknowledged that it “could” order
discretionary restitution under the VWPA, id. at *7 n.10, it declined to order it,
on account of “complex issues of fact as to the amount of restitution that
would unduly complicate and prolong the sentencing process”—i.e., “the
determination of just what are the types of costs Oak Hill and Duane Reade
have incurred.” Id. at *7. While it was “clear that Oak Hill and Duane Reade
have expended staggering amounts of money, time, and effort in the
9 investigation and prosecution of Defendant Cuti’s Title 18 offense,” the court
expressed concern that “some arbitration‐related costs . . . could be imbedded
in the restitution calculations,” and that “the net reimbursement of all costs . . .
can best be addressed in the context of Oak Hill, Duane Reade and Defendant
Cuti’s arbitration proceedings.” Id. The Initial Restitution Order did not address
Cuti’s recently‐filed motion for a new trial. Sentencing was scheduled for
August 22, 2011.
On August 12, 2011, Duane Reade and Oak Hill asked the court to
reconsider its position regarding restitution, a request which the court
summarily denied on August 16, 2011. However, on August 19, the court
issued a subsequent order vacating its declination of Oak Hill and Duane
Reade’s request for reconsideration. It also vacated its Initial Restitution Order.
The court’s order indicated that it would “impose restitution and retain
jurisdiction for the purpose of determining the appropriate amount” at
Defendant Cuti’s sentencing. App’x at 21. The court also directed Cuti to
respond to Oak Hill’s August 12, 2011 letter. That same day, the court also
denied Cuti’s motion for a new trial. Cuti was sentenced as scheduled on
10 A partial restitution order, issued October 14, 2011, ruled “that expenses
attributable to the non‐criminal proceedings are not appropriate for
restitution,” and that “Oak Hill, separate and apart from issues relating to
Duane Reade, is not a victim to whom restitution is owed based on the
Court’s finding that the Government failed to establish a loss.” Special App’x
at 2. The court also concluded that “Oak Hill in its capacity as successor to
Duane Reade is compensable.” Special App’x at 2. The court determined that
certain fees and expenses for Cooley and AlixPartners were subject to
restitution, as were certain fees and expenses of Duane Reade’s accountants
and auditors, as well as costs of the “Kroll Ontrack database.” Special App’x
at 2. The court then referred the remaining fees and expenses for an inquest
before Magistrate Judge Pitman. Special App’x at 2‐3.
Following the magistrate judge’s December 21, 2012 Report and
Recommendation (“R&R”), the court conducted a de novo review and
adopted the R&R with some modifications. United States v. Cuti, No. 08 C.R.
972(DAB), 2013 WL 1953741 (S.D.N.Y. May 13, 2013) (“Cuti Restitution Order”).
The court determined that restitution was only available pursuant to the
VWPA, not the MVRA, and that Oak Hill was entitled to restitution not as a
11 “victim,” but only as a “non‐victim” that had been required to make
payments to Duane Reade, the actual victim of Cuti’s crime, under 18 U.S.C. §
3664(j)(1). Id. at * 3‐6. The court then concluded that certain legal fees and
expenses paid to Paul, Weiss were “necessary and related to Duane Reade’s
participation in the investigation or prosecution of the criminal case against
Defendant Cuti” and subject to restitution, id. at * 7; as were certain other legal
fees for the costs of counsel for current and former Duane Reade employees,
id. at * 9‐10; as well as the fees to Cooley, forensic accountants and Duane
Reade accountants, and the Kroll Ontrack database, id. at * 11; for a total
award of $7,615,217.90. Id. The court concluded that Cuti had the ability to
pay the full amount of restitution, and ordered a payment schedule of 15% of
his gross monthly income, beginning in the second month of his supervised
release. Id. at *12. Given its conclusion that Oak Hill was only entitled to
restitution as a “non‐victim,” the court ordered Cuti to make restitution
payments in the amount of $6,145,961.40 to Duane Reade first, prior to making
any restitution payments to Oak Hill, in accordance with § 3664(j)(1). Id. It is
from this May 13, 2013 Opinion that Cuti appeals.
12 DISCUSSION
Cuti makes two challenges to the Cuti Restitution Order. He asserts that
the district court’s August 19, 2011 reversal of its July 29, 2011 order (declining
to award restitution) and the timing of that reversal “immediately after
denying Cuti’s motion for a new trial” created the appearance of a “vindictive
sentencing increase” under North Carolina v. Pearce, 395 U.S. 711 (1969), and
that this requires vacatur. He also seeks vacatur because he argues that (1)
Oak Hill was not a “victim”; (2) Duane Reade’s employees’ legal fees should
not have been included in the restitution order; and (3) because the restitution
order improperly included expenses incurred prior to the government’s
investigation and prosecution of Cuti’s criminal case.
I. Applicable Legal Standards
A. Vindictiveness
In Pearce, the Supreme Court held that “[d]ue process of law . . .
requires that vindictiveness against a defendant for having successfully
attacked his first conviction must play no part in the sentence he receives after
a new trial.” 395 U.S. at 725. In so holding, the court noted that “whenever a
judge imposes a more severe sentence upon a defendant after a new trial, the
13 reasons for his doing so must affirmatively appear.” Id. at 726. “Otherwise, a
presumption arises that a greater sentence has been imposed for a vindictive
purpose—a presumption that must be rebutted by objective information . . .
justifying the increased sentence.” Alabama v. Smith, 490 U.S. 794, 798‐99 (1989)
(omission in original and internal quotation marks omitted).
The Pearce presumption “do[es] not apply in every case where a
convicted defendant receives a higher sentence on retrial” or at resentencing.
Texas v. McCullough, 475 U.S. 134, 138 (1986). “The presumption exists to
prevent not enlarged sentences after a new trial but rather vindictiveness of a
sentencing judge.” United States v. Singletary, 458 F.3d 72, 76 (2d Cir. 2006)
(internal quotation marks omitted). “[B]efore a defendant may invoke the
Pearce presumption, there must be a reasonable likelihood that the increase in
sentence is the product of actual vindictiveness on the part of the sentencing
authority.” Id. (internal quotation marks omitted).
B. Restitution under the VWPA
The VWPA provides that “[t]he court, when sentencing a defendant
convicted of an offense under this title . . . , may order . . . that the defendant
make restitution to any victim of such offense.” 18 U.S.C. § 3663(a)(1)(A). The
14 VWPA requires sentencing courts to consider the amount of the loss sustained
by the victim as a result of the offense, the defendant’s financial resources, the
financial needs and earning ability of the defendant and the defendant’s
dependents, and other factors the court deems appropriate. See
id. § 3663(a)(1)(B)(i). “While the district court must review these statutory
factors, detailed factual findings for each factor are not required.” United
States v. Battista, 575 F.3d 226, 230 (2d Cir. 2009). “Any dispute as to the proper
amount or type of restitution shall be resolved by the court by the
preponderance of the evidence.” 18 U.S.C. § 3664(e).
We review a district court’s restitution order “deferentially, reversing
only if in our view the trial court abused its discretion.” United States v. Amato,
540 F.3d 153, 159 (2d Cir. 2008). “To identify such abuse, we must conclude
that a challenged ruling rests on an error of law, a clearly erroneous finding of
fact, or otherwise cannot be located within the range of permissible
decisions.” United States v. Boccagna, 450 F.3d 107, 113 (2d Cir. 2006) (internal
quotation marks omitted).
15 II. Analysis
We first address Cuti’s vindictiveness argument. Cuti can point only to
timing of the district court’s pivot regarding the feasibility of separating out
the money spent in contemplation of arbitration from the funds spent on the
investigation for his criminal case. As an initial matter, this is not the
customary procedural posture for a claim of judicial vindictiveness, which
usually involves a sentencing following an appeal from or collateral attack on
a defendant’s conviction. With the particular procedural posture here, the
district court had little reason or motivation to be vindictive. See, e.g.,
McCulloch, 475 U.S. at 139 (“[U]nlike the judge who has been reversed, the
trial judge here had no motivation to engage in self‐vindication.” (alteration in
original and internal quotation marks omitted)).
Moreover, the district court’s decision to award restitution was clearly
within the court’s discretion under Section 3663(a)(1)(B)(ii).1 The court’s
1 Section 3663(a)(1)(B)(ii) provides that “[t]o the extent that the court determines that the complication and prolongation of the sentencing process resulting from the fashioning of an order of restitution under this section outweighs the need to provide restitution to any victims, the court may decline to make such an order.” (emphasis added).
16 apparently sua sponte decision (to reconsider, and to undertake the significant
task of considering a restitution award in this case) was neither an error of
law, nor was it based on a clearly erroneous finding of fact. Emphasizing only
the close temporal proximity between the court’s order denying his motion for
a new trial and its decision to award restitution, Cuti has not pointed to
anything concrete in the record to support his theory of vindictiveness. Thus,
as we find no abuse of the district court’s discretion in its decision to award
restitution under the VWPA, nor any “reasonable likelihood” that the decision
was the product of actual vindictiveness, Singletary, 458 F.3d at 76, Cuti is not
entitled to a presumption of vindictiveness.2 See McCulloch, 475 U.S. at 139
(“The presumption of Pearce does not apply in situations where the possibility
of vindictiveness is this speculative.”). In this instance, the claim of
vindictiveness, unaided by the presumption, fails as clearly insufficient.
2 Because we hold that the record cannot support any presumption of vindictiveness under Pearce, we need not and do not analyze the government’s argument that neither the Supreme Court nor our Circuit has ever permitted the Pearce vindictiveness rule to apply outside of the context of a court having to re‐ sentence a defendant, either following remand or a grant of a new trial. (Red 20‐ 21)
17 B. Restitution
Cuti’s first two restitution arguments—that Oak Hill should not have
been deemed eligible for restitution because it was not a victim of Cuti’s
fraud, and that Oak Hill should not have been reimbursed for paying its
employee’s legal fees—lack merit and do not warrant vacatur. We find,
however, that in awarding Oak Hill restitution the district court failed to
properly clarify whether the restitution award to Oak Hill included work by
Paul, Weiss that only addressed Oak Hill’s legal interests. As to Cuti’s
remaining argument, which challenges whether Duane Reade’s payment of
legal fees were “necessary” as contemplated under Section 3663(b)(4), we find
this too requires vacatur and remand.
1. Oak Hill as Non‐Victim Entitled to Restitution
First, there was no abuse of discretion in the court’s decision to award
Oak Hill restitution under § 3664(j)(1) on the theory that Oak Hill paid
expenses on Duane Reade’s behalf. We permit restitution in situations where a
third party has directly paid an expense incurred by the victim, rather than
having the victim pay and having the third party reimburse the victim
afterward. See, e.g., United States v. Douglas, 525 F.3d 225, 254 (2d Cir. 2008)
18 (“The fact that [third party] Brink’s paid for the headstone directly rather than
having [victim] Moran Sr. pay for it and reimbursing him does not relieve
Douglas of the obligation to make restitution for the cost incurred.”); United
States v. Malpeso, 126 F.3d 92, 95 (2d Cir. 1997) (upholding award of restitution
to the FBI under the VWPA even though FBI had paid the expense directly
instead of reimbursing the victim, there being “no significant functional or
economic difference between the indemnitor’s prior payment of the victim’s
expense and subsequent reimbursement”).
The district court found that Oak Hill was not a victim and
appropriately excluded fees paid to Paul, Weiss that reflected trial and post‐
trial work that advanced Oak Hill’s own legal interests. However, the district
court did not discuss whether any of Oak Hill’s pre‐trial payments to Paul,
Weiss reflected work performed solely on behalf of Oak Hill. As Cuti points
out, the record suggests that some of Paul, Weiss’s pre‐trial work may have
been performed on behalf of Oak Hill. Therefore, we vacate this aspect of the
district court’s restitution award. On remand, the district court should
exclude any payments made by Oak Hill to Paul, Weiss that reflected legal
19 work performed solely on Oak Hill’s behalf, whether incurred before, during
or after trial.
2. Legal Fees for Duane Reade’s employees as “Necessary” Expenses
Next, Cuti asserts that Duane Reade did not “incur” legal fees on behalf
of its employees because it was not required to reimburse these legal fees. This
assertion is belied by the district court’s conclusion and factual finding that
“Duane Reade’s expenses for its employees’ counsel were necessary and
related to its participation in the Government investigation and prosecution of
. . . Cuti.” Cuti Restitution Order, 2013 WL 1953741, at *9. The district court
concluded further that these expenses “were necessary and constituted an
actual loss.” Id. at *10. This decision was soundly within the court’s exercise of
discretion. These costs were incurred during and as a direct result of the
government’s investigation into Cuti’s fraud, and the district court reasonably
concluded that Duane Reade was obligated to indemnify its employees’
independent legal representation for their participation in the government’s
investigation. The district court, along with the magistrate judge, carefully
parsed the legal fees paid for each individual employee, and only permitted
20 fees related to the government’s investigation. Such expenditures—resulting
from assistance provided to the government—are appropriately included in a
restitution order under the VWPA. See Battista, 575 F.3d at 234 (“[T]he district
court did not err in awarding the NBA attorneys’ fees incurred as a result of the
assistance it provided to the government in its investigation and prosecution of
Battista’s criminal offense.” (emphasis added)). We therefore affirm this
portion of the district court’s restitution order.
3. Other Legal Expenses Incurred by Duane Reade
Cuti’s final argument requires us to consider whether expenses incurred
by Paul, Weiss on Duane Reade’s behalf in the course of its work on the
arbitration that also contributed to discovering Cuti’s fraud, in addition to the
expenses incurred by Cooley’s internal investigations into both frauds,
properly constitute “necessary . . . other expenses related to participation in
the investigation or prosecution . . . related to the offense” under 18 U.S.C.
§ 3663(b)(4). To engage with this question we must further clarify the types of
expenses that are “necessary” and “related to the offense” within the meaning
of Section 3663(b)(4).
21 i. United States v. Maynard and “Necessary” Expenses
Recently, in United States v. Maynard, we considered what constitutes
“necessary” expenses under the Mandatory Victims Restitution Act, 18 U.S.C.
§ 3663A(b)(4), reasoning that “[t]he victim expenses that are recoverable as
restitution under 18 U.S.C. § 3663A(b)(4) are expenses the victim was required
to incur to advance the investigation or prosecution of the offense.” 743 F.3d at
381 (emphasis added).
In so concluding, we surveyed our prior case law, acknowledging that
our Circuit takes “a broad view of what expenses are ‘necessary’” in the
restitution context. See id. (citing United States v. Papagno, 639 F.3d 1093, 1101
(D.C. Cir. 2011) (“In reaching our conclusion, we recognize that several other
courts of appeals have taken a broader view of the restitution provision at
issue here.”)). In particular, our analysis considered two relatively recent
restitution opinions from our Court—Amato and United States v. Bahel. See
Amato, 540 F.3d 153; Bahel, 662 F.3d 610 (2d Cir. 2011).
In Amato, we affirmed a restitution award of attorney’s fees and
accounting costs incurred as a result of an internal investigation that
uncovered fraud “notwithstanding that not all of the effort and expense was
22 requested by the government,” Maynard, 743 F.3d at 381. In Bahel, a
subsequent restitution case, “we affirmed restitution for legal fees incurred
when the United Nations hired outside counsel to conduct an internal
investigation rather than use on‐staff lawyers.” See id.; see also Bahel, 662 F.3d
at 647‐48. We reasoned that:
In both [Amato and Bahel], the internal investigations paid for by the victims unmasked fraud and led to investigations conducted by the authorities. The expense of the internal investigations was necessary because the entity had interests to protect (the integrity of its ongoing operations and reputation, at the least) as well as a duty to protect those interests when faced with evidence, indicia, or a grounded suspicion of internal misconduct, and the investigation was a means calculated to achieve the protection of those interests.
Maynard, 743 F.3d at 381 (emphasis added).
Though Maynard involved an award of mandatory restitution under the
MVRA, we have noted that “the provisions of the VWPA and the MVRA are
nearly identical in authorizing an award of restitution.” Battista, 575 F.3d at
230 (internal quotation marks omitted). In Battista, we concluded that the
“holding in Amato—concededly decided in the MVRA context—applies to the
almost verbatim statutory language in the VWPA. . . . The rationale that we
provided in support of our conclusion that attorneys’ fees were recoverable as
23 ‘other expenses’ under the MVRA applies with equal force to the VWPA.” Id.
at 233‐34.
With this in mind, we now extend Maynard’s reasoning to the VWPA.
Thus, “necessary . . . expenses related to participation in the investigation” as
described in the VWPA, 18 U.S.C. § 3663(b)(4), are “expenses the victim was
required to incur to advance the investigation or prosecution of the offense,”
Maynard, 743 F.3d at 381. This may include internal investigations undertaken
in the face of evidence—or grounded suspicion—of internal misconduct
which ultimately unmask fraud. Id.
ii. Duane Reade’s Expenses
This extension of Maynard to restitution under the VWPA does not end
our inquiry. This is the case for two reasons. First, the internal investigation
here was initially motivated by Duane Reade’s need to defend itself in Cuti’s
arbitration proceeding. Second, Duane Reade retained two separate law firms
over the course of the arbitration, one to handle its own internal investigation,
the other to assist with the government’s investigation. As such, this case
does not involve a straightforward “internal investigation paid for by the
victim” that unmasks fraud as described in Maynard. Id.
24 In its final restitution order, the district court concluded that the
government had proved Paul, Weiss’s work was necessary under the VWPA
by relying on the government’s representations that Paul, Weiss’s work “gave
rise to the whole investigation of the real estate concession transactions,” and
“figured out there was a problem [with the credit and rebilling scheme].” Cuti
Restitution Order, 2013 WL 1953741, at *9 (internal quotation marks omitted).
The district court cited Amato, relying on our “broader view” of what “other
expenses” could be deemed necessary in the restitution statutes, specifically
including legal fees. Id.
If the purpose of an internal investigation is to uncover or investigate
fraud “when faced with evidence, indicia, or a grounded suspicion of internal
misconduct,” Maynard, 743 F.3d at 381, then such expenses are properly
deemed expenses that a “victim was required to incur to advance the
investigation or prosecution of the offense,” id., and thus subject to restitution.
On the other hand, where the record shows that a particular investigation was
commenced, and its corresponding expenses incurred for another reason (here
the defense of an impending arbitration by a disgruntled former executive)
then that particular investigation cannot be “a means calculated to achieve the
25 protection” of a corporation’s “ongoing operations and reputation” for the
restitution purposes described in Maynard, id.
The record on appeal bears no indication of when (if at all) Duane
Reade had Paul, Weiss shift its focus from a civil litigation defense to an
internal investigation premised on a “grounded suspicion of internal
misconduct.” Maynard, 743 F.3d at 381. Upon being notified of the credit
rebilling scheme in September 2006, Duane Reade’s Audit Committee retained
Cooley to conduct internal investigations and draft a report, while Paul, Weiss
was working on the arbitration and filing counterclaims. Similarly, while
Paul, Weiss may have uncovered evidence of the real estate concession
scheme in February 2007 and subsequently “educate[d]” Cooley about it,
App’x at 351, it was Cooley that undertook and prepared the May 2007 report
on it for the Duane Reade board. Paul, Weiss meanwhile continued to work
on the arbitration and amended its counterclaims and affirmative defenses
accordingly in April 2007. A corporate client such as Duane Reade is entitled
to expend as much as it deems prudent on preparations for its defense in a
civil case or arbitration. However, under Maynard, not all such expenses are
“necessary” for restitution purposes. Here, there is no outward indication of
26 when the investigative work specific to Paul, Weiss transmogrified from work
aimed at getting “dirt”on Cuti for the arbitration, see App’x at 313, into an
internal investigation to root out accounting or securities fraud.
Moreover, the entirety of the expenses incurred by Duane Reade for
both the Cooley and the Paul, Weiss internal investigations, premised on the
same underlying findings and conduct, cannot both have been “necessary” to
advance the government’s investigation under the VWPA. To the extent that
Paul, Weiss’s initial work on the real estate concession scheme, prior to
turning over its information to Cooley, was the work that “unmasked [the]
fraud,” Maynard, 743 F.3d at 381, Cooley’s work was probably not necessary.
And to the extent that Paul, Weiss may have “identif[ied]” the real estate
concession scheme, see App’x at 103 n.7, only to hand off the bulk of the
investigative work to Cooley (to interview employees, prepare the May 18,
2007 report, etc.), the district court’s parsing of Duane Reade’s expenditures
must reflect these distinctions. To conclude that both firms’ expenses for
investigating the same two underlying frauds were “necessary” to the
government’s case would vitiate any limit on our already broad view of
“necessary” expenses. Inasmuch as the Cuti Restitution Order did so, this was
27 error requiring remand.
This is not to say that fees paid to two outside law firms working side‐
by‐side on an internal investigation may not, in theory, be treated as necessary
expenses under the VWPA. However, to be “necessary” for restitution, it is
not enough that the expenses incurred “helped the investigation,” which is
what the government represented below. App’x at 403 (emphasis added). On
remand, the question for the district court is whether the government has
proved by a preponderance of evidence that some, or any, of Paul, Weiss’s
and Cooley’s expenses were “necessary to the investigation or prosecution” of
Cuti’s criminal case. See Maynard, 743 F.3d at 382; Amato, 540 F.3d at 161. The
court should consider at least whether the claimed expenditures by Paul,
Weiss were redundant or duplicative of the expenses incurred for Cooley’s
investigatory work—including whether one firm’s work served merely as a
second opinion or to corroborate the other’s findings—as well as whether the
fact that two independent firms were at times working in tandem created
additional, needless administrative costs.3
3 For example, while it appears undisputed that Paul, Weiss is responsible for discovering the real estate concession fraud, and that it turned over its documents and findings to the government on May 22, 2007, it is unclear to what
28 Ultimately, it may be that the lack of clarity in the record results in some
of Duane Reade’s claimed expenditures not being subject to restitution.4 We
leave such a determination for the district court in the first instance. At a
minimum, Paul, Weiss’s expenses from meetings with the government,
turning over its findings, and cooperating with the government’s own
investigation are recoverable under our precedent as necessary expenses
under Section 3663(b)(4). See Amato, 540 F.3d at 162. The question for remand
is whether any other Paul, Weiss and Cooley fees satisfy the necessity
requirement as clarified in our opinion today.5
extent, if any, Cooley’s report, dated May 18, 2007—and which was apparently turned over to the government at a later date—was redundant in view of Paul, Weiss’s own investigative documents, and vice versa. See, e.g., App’x at 350‐51; 402‐03; 456‐57. 4 Neither Cuti nor the government has provided us with the actual fee requests, which remain filed in hard copy with the district court. (As Cuti explained in his brief to this Court: “Should this Court decide to undertake the daunting task of attempting to examine these volumes itself, it should be aware that the volumes were not filed electronically, although multiple hardcopies were filed with the district court.”). 5 Cuti’s final argument is that the VWPA imposes a temporal limitation that denies restituion for victim expenses incurred prior to the beginning of the government’s investigation. Cuti relies on wording in the MVRA, which permits reimbursement of expenses “incurred during” a victim’s participation in the criminal investigation. While we ordinarily read the MVRA and VWPA in pari materia, see Battista, 575 F.3d at 223‐34, n. 7, the relevant statutory language
29 CONCLUSION
For the reasons discussed above, we affirm the district court’s
restitution order in part and vacate and remand in part. Specifically, we affirm
the district court’s determination that Oak Hill could be awarded restitution
as a “non‐victim.” However, we vacate and remand for an explicit distinction
between fees for work performed solely on behalf of Oak Hill which are not
the basis for restitution and fees Oak Hill paid on behalf of Duane Reade
which are properly included in the restitution award. In addition, we affirm
the district court’s conclusion that Duane Reade’s employees’ attorneys fees
were properly subject to restitution. As to whether Duane Reade’s payment of
fees and costs to Paul, Weiss and Cooley constitute “necessary” expenses
under the VWPA, we vacate and remand for further proceedings consistent
with this opinion. On remand, the district court is free to exercise its
discretion as to whether “determining complex issues of fact related to the
cause or amount of the victimʹs losses would complicate or prolong the
differs. In contrast to the MVRA, the VWPA does not limit itself to expenses incurred “during” the investigation. Cuti’s argument also runs counter to the Court’s decision in Amato, which permitted restitution for attorney’s fees incurred prior to the government’s investigation. See 540 F.3d at 162.
30 sentencing process to a degree that the need to provide restitution to any
victim is outweighed by the burden on the sentencing process.” 18 U.S.C. §
3663A(c)(3)(B).