Second Circuit Limits Available Restitution To Corporate Victims Of Crime

Counsel representing corporate victims of crime need to be aware of the Second Circuit's recent decision clarifying the scope of restitution available to corporate victims under the Mandatory Victims Restitution Act of 1996 ("MVRA"), 18 U.S.C. § 3663A. Although the Court left intact the rule that costs incurred in conducting internal investigations are recoverable as restitution, it limited the ability to recover as restitution other costs commonly incurred by corporate crime victims.

In U.S. v. Maynard, the Second Circuit held that restitution under the MVRA does not extend to all harms directly and proximately caused by a defendant's criminal offense, and is instead limited to the four categories of harm enumerated in the statute. The Second Circuit's decision likely limits the ability of corporate victims to recoup expenses incurred in the attempt to recover certain losses caused by employee criminal misconduct. Although the decision limits the range of available restitution overall, the Second Circuit strongly reaffirmed the propriety of imposing restitution for attorney fees and accounting costs incurred in conducting internal investigations following the discovery of fraud or other misconduct.

Prior to 1982, federal courts were not permitted to award restitution outside of the probation context. United States v. Maynard, 12-5106, 2014 WL 684987, at *2 (2d Cir. Feb. 24, 2014). In 1982, Congress enacted the Victim and Witness Protection Act ("VWPA"), which for the first time gave courts discretion to impose restitution for certain harms. Id. In response to the victims' rights movement, Congress subsequently passed the MVRA, which made restitution mandatory for a "broad swath of offenses." Id. The purpose of restitution under the MVRA "is to make victims of crime whole, to fully compensate these victims for their losses and to restore these victims to their original state of well-being." United States v. Boccagna, 450 F.3d 107, 115 (2d Cir. 2006) (internal quotation marks and citations omitted). In light of this purpose, courts have relied on the MVRA to compensate corporate victims for both the economic damages caused byan employee's wrongdoing as well as the expenses incurred by victims in uncovering and detailing the extent of such wrongdoing.

Most courts interpreting the MVRA, including the Second Circuit, have squarely held that corporate victims have the right to recoup the costs associated with uncovering the offense, including the costs of internal investigations of those incurred responding to government subpoenas. See, e.g., United States v. Amato, 540 F.3d 153, 159 (2d Cir. 2008) (affirming restitution for attorney fees and accounting costs incurred by defendant's employer's internal investigation on the basis of the plain language of the MVRA, which contemplates restitution for "‘other expenses' incurred during the victim's participation in the investigation or prosecution of the offense or attendance at proceedings related to the offense."); United States v. Gordon, 393 F.3d 1044, 1057 (9th Cir. 2004) (affirming order requiring a defendant to pay restitution for expenses an employer incurred in responding to five grand jury subpoenas and a number of government requests in connection with the government's investigation of wire fraud and insider trading by a former employee).

However, courtsare split on whether attorney fees and costs in recovering a victim's losses in separate civil proceedings and other business expenses incurred in responding to criminal misconduct are subject to restitution under the MVRA as economic damages directly and proximately caused by the criminal wrongdoing. SeeUnited States v. Cummings, 281 F.3d 1046, 1053 (9th Cir. 2002) (upholding restitution award that included the victim's attorney's fees and expenses for separate state and international civil proceedings as such proceedings were not "wholly separate" from the government's prosecution of the defendant); United States v. Blackburn, 9 F.3d 353, 358 (5th Cir. 1993) (holding that attorney's fees incurred in defending civil suit seeking to recover defectively pledged certificate of deposit were recoverable in restitution because they directly resulted from the underlying offense); United States v. Havens, 424 F .3d 535, 539 (7th Cir. 2005) (finding that costs associated with victim's lawsuit to recover damages for identity theft are not recoverable "because they do not reflect the losses she suffered as a direct result of [defendant's] conduct"); United States v. Elson, 577 F.3d 713, 728 (6th Cir. 2009) ("Generally, attorney fees incurred in civil litigation against the defendant for the same acts at issue in the criminal proceedings are consequential damages that are not recoverable."); United States v. Battista, 575 F.3d 226, 234 (2d Cir. 2009) (finding that attorney fees associated with counseling a corporate victim on its public response to employee's criminal misconduct are not recoverable under the VWPA as those fees "were not associated with assisting the government in its investigation and prosecution").

In Maynard, the defendants, who pled guilty to a series of bank robberies, objected to the inclusion of additional expenses incurred by one victim bank as part of the restitution order. Those additional expenses included: (1) paid time-off for the bank's regular staff for two days following the robbery; (2) pay for replacement staff and mileage expenses for replacement staff; (3) cost of wanted posters; and (4) costs of a temporary security guard at the bank after the robbery. The district court concluded that these expenses were properly subject to restitution as losses directly and proximately caused by the robbery. The Second Circuit disagreed, finding that only the wages the victim bank paid to its regular staff during the bank's closure on the day of the robbery fell within the MVRA. Maynard, 2014 WL 684987, at *4.

The Second Circuit rejected the argument that "any and all losses are compensable [under the MVRA] to the extent that they were ‘directly and proximately caused by a defendant's offense.'" Id. at 3. Instead, it found that only the four categories of expenses listed in the text of 18 U.S.C. § 3663A(b) are compensable under the MVRA, which compensate only for losses such as the destruction of property or funeral expense, or expenses necessary for the participation in the investigation and prosecution of the offense. In coming to this conclusion, the Second Circuit relied on the rule of statutory construction "‘inclusio unius est exclusion alterius - that to express or include one thing implies the exclusion of the other." Id. (internal quotation marks and citation omitted). Applying this rule, the Second Circuit concluded that "Congress intended to limit the restitutable harms covered by the MVRA" to those four categories and further reasoned that "[i]f Congress intended to include all harms directly and proximately caused by a defendant's offense, it could have done so with wording more simple and categorical." Id. Therefore, while the "requirements of direct and proximate causation are necessary conditions for restitution," they are not "sufficient ones" as the "statute makes clear, the harm must also come within one of the categories enumerated in § 3663A(b)." Id. The Second Circuit found that the other expenses incurred by the victim bank as a direct result of the robbery may not be included in the restitution order because those expenses did not fall within the enumerated harms of § 3663A(b).

The Second Circuit's limitation of restitution to only those expenses which fall into those four enumerated categories of § 3663A(b) circumscribes a corporate victim's ability to recoup attorney fees and costs incurred in the attempt to recover its losses. Thus, fees incurred in separate civil proceedings seeking recovery of losses as well as costs incurred in pursuing insurance recovery will not be subject to restitution because such expenses do not fall within the four enumerated categories, even though such expenses could be said to be directly and proximately caused by the underlying criminal conduct.

Although the decision in Maynard limited the range of available restitution overall, the Second Circuit did reaffirm the compensability of one major expense regularly incurred by corporate victims – the costs of internal investigations which uncover fraud. The Second Circuit confirmed its prior holding in Amato that restitution under § 3663A(b)(4) is proper for "attorney's fees and accounting costs incurred by an internal investigation that uncovered fraud – notwithstanding that not all of the effort and expense was requested by the government." Id. at 5. The Second Circuit explained that its takes a "broad view" of what are the "necessary expenses" incurred during the participation in the investigation or the prosecution of the offense under § 3663A(b)(4). Thus, internal investigations are necessary expenses "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." Id. This "broad view" of necessary expenses means that even those expenses, incurred when a corporate victim independently and proactively initiates an investigation into a suspicion of wrongdoing, will be compensable under the MVRA.

Given the Second Circuit's recent ruling, counsel need to be mindful of which expenses are compensable under the MVRA and which are not. Although attorney's fee and accounting costs associated with a corporate victim's internal investigation are compensable, fees incurred in pursuing civil or insurance recovery are likely not. It is therefore paramount that counsel and corporate victims seeking restitution keep detailed documentation of all expenses incurred, including specifically identifying how those expenses fall within the enumerated harms of § 3663A(b) to support a restitution claim under the MVRA.