Recent Developments In Restitution Law

Federal restitution is governed largely by two closely related statutes. The Victim and Witness Protection Act of 1982 (VWPA), codified at 18 U.S.C. ' 3663, gives a district court discretionary powers to enter an order of restitution on sentencing any defendant convicted of a Title 18 offense, or other enumerated offenses. The Mandatory Victims Restitution Act of 1996 (MVRA), codified principally at 18 U.S.C. ' 3663A, requires restitution where the defendant is convicted of a more limited group of offenses. The VWPA and MVRA share key elements. Both authorize restitution only for “victims” of the offense, defined as persons “directly and proximately harmed” as a result of the commission of the offense (a causation standard added to both statutes by the MVRA). Both also list specific categories of loss for which a defendant may or must be ordered to pay restitution.

For financial crimes, two categories of loss are critical: property loss and expenses incurred for participation in the investigation or prosecution of the offense (“investigation expenses”). The property loss category of the statutes (subsection b(1)) provides that “in the case of an offense resulting in damage to or loss or destruction of the property of a victim of the offense” the defendant may, and under the MVRA shall, be ordered to return the property or to pay its equivalent value minus applicable set-offs. The investigation expenses category (subsection (b)(4)) initially added to the VWPA by amendment in 1994, provides that a defendant may be required to reimburse a victim for “lost income and necessary child care, transportation, and other expenses related to participation in the investigation or prosecution of the offense or attendance at proceedings related to the offense.” The language of the equivalent MVRA provision is subtly different, requiring reimbursement of expenses “incurred during participation” in the investigation or prosecution.

Judicial Interpretation

Before the enactment of the MVRA, courts had generally taken a narrow view of the losses for which restitution could be awarded. Property loss, in particular, was construed narrowly. Financial crime victims (then without the benefit of the investigation expenses subsection) attempted to recover attorney fees and accounting costs as property loss. But courts generally viewed those expenses as “consequential damages” to be excluded from restitution. See, e.g., United States v. Schinnell, 80 F.3d 1064, 1070-71 (5th Cir. 1996).

The post-MVRA era, in contrast, has been marked by more expansive interpretations of both the MVRA and VWPA. For reasons that are opaque, and may simply reflect perceived legislative intent to compensate victims more fully, courts appeared to place increasing emphasis on proximate causation, rather than on the loss categories, as the limiting principle of compensable loss, and to read the categories themselves far less restrictively. Investigation expense under the (b)(4) subsections has also been given an expansive reading by many courts. On its face, (b)(4) could be read to apply solely to the costs of assisting the government in an ongoing criminal investigation. But with the notable exception of the D.C. Circuit, which sharply limits (b)(4) awards, many decisions have found investigative expenses to be compensable under (b)(4) without searching inquiry into how those expenses related to “participation in the investigation or prosecution of the offense.”

While a survey of these developments is beyond the scope of this article, the authors of one practice guide conclude that any actual loss directly and proximately caused by an offense is generally compensable in restitution, and that it “usually makes little difference” whether the loss is specified in the statute. See West's Federal Criminal Restitution, ' 6:21 (as updated August 2014).

The Second Circuit's Decisions in Maynard and Cuti

It is against this background that the Second Circuit's opinion in Maynard should be understood. Maynard was a simple bank robbery case, in which the government sought restitution under the MVRA for the wages of bank employees given time off after the robbery, and of temporary staff who replaced them, and for costs incurred in distributing wanted posters and hiring temporary security for the bank. The government struggled to tie these expenses to any loss category in the MVRA, but argued that they were nonetheless compensable because they were directly and proximately caused by the offense. The Second Circuit confronted two principal questions: 1) whether the MVRA permitted restitution for losses not specified in the statute; and 2) whether restitution for “necessary” investigation expenses, could encompass the bank's independent investigative and security measures.

On the first question, the court's answer was an unequivocal no. It held that, by implication, the inclusion of specific loss categories in the MVRA prohibits restitution for any loss that is not specified in the statute. Proximate causation of loss was necessary, but never sufficient for an award of restitution. Also of interest is what Maynard suggests, in passing, about restitution for property loss. Other circuits had analyzed the costs of a facility closure, including wages for lost working days, as compensable property loss. Maynard agreed with the result in those cases, and cited them in holding that restitution should be awarded for staff wages during the limited period when the bank was closed as a result of the robbery. But the Maynard court drew the connection to investigation expense rather than property loss, observing that restitution may be appropriate when a “victim's facility is required to close temporarily for crime scene investigation.” Maynard subsequently characterizes losses under (b)(1) as compensation for “destruction of property.” Nothing in Maynard , therefore, appears to support an expansive reading of the property loss subsections.

Turning to the scope of (b)(4), the Maynard court then undertook to explicate what investigation expenses are “necessary,” an issue that the court had not previously addressed. The court first explained that expenses recoverable under (b)(4) are those “the victim was required to incur to advance the investigation or prosecution of the offense.” That only takes the analysis so far, however. The Second Circuit has upheld restitution for internal investigation expenses that were not incurred at government request, while the investigation led to the discovery of a crime. Reviewing those prior decisions, Maynard concludes that such expenses are “necessary” where: 1) an entity had an interest to protect (such as the integrity of its operations); 2) the entity had a duty to protect that interest in the face of evidence or “grounded suspicion” of internal misconduct; and 3) the investigation was calculated to protect that interest. Under those standards, the court held, the wanted posters and additional security had no investigatory purpose, and were “gratuitous” rather than necessary expenditures.

Just a few months later, in United States v. Cuti , the Second Circuit considered how Maynard would apply to a significantly more complex claim of restitution for investigation expense under the VWPA. There, the corporate victim's outside counsel was retained to defend an employment-related arbitration brought by a former employee. During the course of its work, counsel uncovered evidence of the employee's accounting fraud, which it reported to the corporation's audit committee. The committee then retained a second firm to conduct an investigation and to assist with the government's investigation. As an initial matter, the Second Circuit held that Maynard's gloss on “necessary” expenses ' those the entity was “required to incur to advance the investigation or prosecution of the offense” ' applied equally to investigation expense under the VWPA. The remaining question was what legal expenses were necessary to the criminal investigation, given that some legal work may have been undertaken for purposes unrelated to investigation of the criminal case, and that the law firms' work may have overlapped in some respects.

The Second Circuit remanded for further consideration, in particular, of whether the work of either firm was redundant or duplicative with respect to the investigation. Most importantly, Cuti emphasized that to be “necessary to the investigation” of the criminal case, it was not sufficient that expenditures had merely helped the government's investigation. Thus, as one would expect, it appears that necessity under Maynard is not tied to general duties of the corporation, or activities that indirectly assist the government, but to a duty to investigate possible internal misconduct per se, and the actions that serve that end.

Outside of the Second Circuit, Maynard has already been cited favorably by district courts on both the issue of “necessary” investigation expenses, and the exclusivity of the MVRA loss categories. On the former issue, where many jurisdictions have to date provided little specific guidance, the Second Circuit's analysis seems likely to gain some traction, and would tend to support arguments for close scrutiny of investigation expense claims. As for the loss categories, the logic of Maynard's holding that the categories specified in the MVRA are the only losses for which restitution may be awarded also seems to apply, with equal force, to the losses for which a district court “may” order restitution under the VWPA. To the extent that Maynard encourages a renewed focus on the exclusivity and scope of the loss categories, it has potential to move the tide against more expansive claims for compensable loss.

To take one obvious example, consider a corporate victim's expense of reissuing financial statements following the discovery of a fraud. In the past, the government has sometimes been successful in obtaining restitution for financial restatement as a loss proximately caused by the offense. See United States v. Cummings, 189 F.Supp.2d 67 (S.D.N.Y. 2002). Yet such expenses do not seem to qualify as the “loss or destruction of property” under (b)(1), nor does financial restatement, in itself, appear to serve any investigatory purpose for the corporation under (b)(4). Under Maynard, it seems clear that these and other similar remedial expenses would not be compensable. More careful focus on the loss categories can only mean increasing challenges for financial crime victims trying to shoehorn miscellaneous expenses into the restitution statutes.

Reed A. Smith is an attorney at Cooley LLP, where his practice centers on white-collar criminal defense and complex commercial litigation. Cooley LLP represented the corporate victim in the underlying investigation at issue in United States v. Cuti, discussed in this article.

The past year has seen no shortage of significant restitution decisions. The Supreme Court, in Robers v. United States , 134 S. Ct. 1854, settled an important, if straightforward, question on the valuation of loan collateral and, at the opposite end of the complexity spectrum, it addressed restitution under the Violence Against Women Act for possession of child pornography, generating multiple dissents, and offering at least a flavor of how the justices might be inclined to approach the general restitution statutes.

But likely of greater significance to the present audience were two cases from the Second Circuit, United States v. Maynard , 743 F.3d 374 (2d Cir. 2013), and United States v. Cuti , 766 F.3d 199 (2d Cir. 2014). Those decisions are important less because they break new ground, than because they affirm existing limits on the scope of restitution of which courts seemed to be losing sight. In the face of some of the more expansive restitution claims currently advanced by victims of financial crimes, Maynard and Cuti should present real obstacles to recovery.

Basic Statutory Background

Federal restitution is governed largely by two closely related statutes. The Victim and Witness Protection Act of 1982 (VWPA), codified at 18 U.S.C. ' 3663, gives a district court discretionary powers to enter an order of restitution on sentencing any defendant convicted of a Title 18 offense, or other enumerated offenses. The Mandatory Victims Restitution Act of 1996 (MVRA), codified principally at 18 U.S.C. ' 3663A, requires restitution where the defendant is convicted of a more limited group of offenses. The VWPA and MVRA share key elements. Both authorize restitution only for “victims” of the offense, defined as persons “directly and proximately harmed” as a result of the commission of the offense (a causation standard added to both statutes by the MVRA). Both also list specific categories of loss for which a defendant may or must be ordered to pay restitution.

For financial crimes, two categories of loss are critical: property loss and expenses incurred for participation in the investigation or prosecution of the offense (“investigation expenses”). The property loss category of the statutes (subsection b(1)) provides that “in the case of an offense resulting in damage to or loss or destruction of the property of a victim of the offense” the defendant may, and under the MVRA shall, be ordered to return the property or to pay its equivalent value minus applicable set-offs. The investigation expenses category (subsection (b)(4)) initially added to the VWPA by amendment in 1994, provides that a defendant may be required to reimburse a victim for “lost income and necessary child care, transportation, and other expenses related to participation in the investigation or prosecution of the offense or attendance at proceedings related to the offense.” The language of the equivalent MVRA provision is subtly different, requiring reimbursement of expenses “incurred during participation” in the investigation or prosecution.

Judicial Interpretation

Before the enactment of the MVRA, courts had generally taken a narrow view of the losses for which restitution could be awarded. Property loss, in particular, was construed narrowly. Financial crime victims (then without the benefit of the investigation expenses subsection) attempted to recover attorney fees and accounting costs as property loss. But courts generally viewed those expenses as “consequential damages” to be excluded from restitution. See, e.g., United States v. Schinnell , 80 F.3d 1064, 1070-71 (5th Cir. 1996).

The post-MVRA era, in contrast, has been marked by more expansive interpretations of both the MVRA and VWPA. For reasons that are opaque, and may simply reflect perceived legislative intent to compensate victims more fully, courts appeared to place increasing emphasis on proximate causation, rather than on the loss categories, as the limiting principle of compensable loss, and to read the categories themselves far less restrictively. Investigation expense under the (b)(4) subsections has also been given an expansive reading by many courts. On its face, (b)(4) could be read to apply solely to the costs of assisting the government in an ongoing criminal investigation. But with the notable exception of the D.C. Circuit, which sharply limits (b)(4) awards, many decisions have found investigative expenses to be compensable under (b)(4) without searching inquiry into how those expenses related to “participation in the investigation or prosecution of the offense.”

While a survey of these developments is beyond the scope of this article, the authors of one practice guide conclude that any actual loss directly and proximately caused by an offense is generally compensable in restitution, and that it “usually makes little difference” whether the loss is specified in the statute. See West's Federal Criminal Restitution, ' 6:21 (as updated August 2014).

The Second Circuit's Decisions in Maynard and Cuti

It is against this background that the Second Circuit's opinion in Maynard should be understood. Maynard was a simple bank robbery case, in which the government sought restitution under the MVRA for the wages of bank employees given time off after the robbery, and of temporary staff who replaced them, and for costs incurred in distributing wanted posters and hiring temporary security for the bank. The government struggled to tie these expenses to any loss category in the MVRA, but argued that they were nonetheless compensable because they were directly and proximately caused by the offense. The Second Circuit confronted two principal questions: 1) whether the MVRA permitted restitution for losses not specified in the statute; and 2) whether restitution for “necessary” investigation expenses, could encompass the bank's independent investigative and security measures.

On the first question, the court's answer was an unequivocal no. It held that, by implication, the inclusion of specific loss categories in the MVRA prohibits restitution for any loss that is not specified in the statute. Proximate causation of loss was necessary, but never sufficient for an award of restitution. Also of interest is what Maynard suggests, in passing, about restitution for property loss. Other circuits had analyzed the costs of a facility closure, including wages for lost working days, as compensable property loss. Maynard agreed with the result in those cases, and cited them in holding that restitution should be awarded for staff wages during the limited period when the bank was closed as a result of the robbery. But the Maynard court drew the connection to investigation expense rather than property loss, observing that restitution may be appropriate when a “victim's facility is required to close temporarily for crime scene investigation.” Maynard subsequently characterizes losses under (b)(1) as compensation for “destruction of property.” Nothing in Maynard , therefore, appears to support an expansive reading of the property loss subsections.

Turning to the scope of (b)(4), the Maynard court then undertook to explicate what investigation expenses are “necessary,” an issue that the court had not previously addressed. The court first explained that expenses recoverable under (b)(4) are those “the victim was required to incur to advance the investigation or prosecution of the offense.” That only takes the analysis so far, however. The Second Circuit has upheld restitution for internal investigation expenses that were not incurred at government request, while the investigation led to the discovery of a crime. Reviewing those prior decisions, Maynard concludes that such expenses are “necessary” where: 1) an entity had an interest to protect (such as the integrity of its operations); 2) the entity had a duty to protect that interest in the face of evidence or “grounded suspicion” of internal misconduct; and 3) the investigation was calculated to protect that interest. Under those standards, the court held, the wanted posters and additional security had no investigatory purpose, and were “gratuitous” rather than necessary expenditures.

Just a few months later, in United States v. Cuti , the Second Circuit considered how Maynard would apply to a significantly more complex claim of restitution for investigation expense under the VWPA. There, the corporate victim's outside counsel was retained to defend an employment-related arbitration brought by a former employee. During the course of its work, counsel uncovered evidence of the employee's accounting fraud, which it reported to the corporation's audit committee. The committee then retained a second firm to conduct an investigation and to assist with the government's investigation. As an initial matter, the Second Circuit held that Maynard's gloss on “necessary” expenses ' those the entity was “required to incur to advance the investigation or prosecution of the offense” ' applied equally to investigation expense under the VWPA. The remaining question was what legal expenses were necessary to the criminal investigation, given that some legal work may have been undertaken for purposes unrelated to investigation of the criminal case, and that the law firms' work may have overlapped in some respects.

The Second Circuit remanded for further consideration, in particular, of whether the work of either firm was redundant or duplicative with respect to the investigation. Most importantly, Cuti emphasized that to be “necessary to the investigation” of the criminal case, it was not sufficient that expenditures had merely helped the government's investigation. Thus, as one would expect, it appears that necessity under Maynard is not tied to general duties of the corporation, or activities that indirectly assist the government, but to a duty to investigate possible internal misconduct per se, and the actions that serve that end.

Outside of the Second Circuit, Maynard has already been cited favorably by district courts on both the issue of “necessary” investigation expenses, and the exclusivity of the MVRA loss categories. On the former issue, where many jurisdictions have to date provided little specific guidance, the Second Circuit's analysis seems likely to gain some traction, and would tend to support arguments for close scrutiny of investigation expense claims. As for the loss categories, the logic of Maynard's holding that the categories specified in the MVRA are the only losses for which restitution may be awarded also seems to apply, with equal force, to the losses for which a district court “may” order restitution under the VWPA. To the extent that Maynard encourages a renewed focus on the exclusivity and scope of the loss categories, it has potential to move the tide against more expansive claims for compensable loss.

To take one obvious example, consider a corporate victim's expense of reissuing financial statements following the discovery of a fraud. In the past, the government has sometimes been successful in obtaining restitution for financial restatement as a loss proximately caused by the offense. See United States v. Cummings , 189 F.Supp.2d 67 (S.D.N.Y. 2002). Yet such expenses do not seem to qualify as the “loss or destruction of property” under (b)(1), nor does financial restatement, in itself, appear to serve any investigatory purpose for the corporation under (b)(4). Under Maynard, it seems clear that these and other similar remedial expenses would not be compensable. More careful focus on the loss categories can only mean increasing challenges for financial crime victims trying to shoehorn miscellaneous expenses into the restitution statutes.

Reed A. Smith is an attorney at Cooley LLP, where his practice centers on white-collar criminal defense and complex commercial litigation. Cooley LLP represented the corporate victim in the underlying investigation at issue in United States v. Cuti, discussed in this article.