On January 12, 2018, the Supreme Court granted certiorari to hear an appeal from a two-judge, Fifth Circuit panel decision regarding whether federal law permits restitution orders in criminal cases to cover the costs of internal investigations that are “neither required nor requested” by the government. Lagos v. United States, Petition for Writ of Certiorari, p. 8, filed June 15, 2017. Joining six other circuits, the Fifth Circuit held that the Mandatory Victims Restitution Act (“MVRA”) authorizes recovery of the fees incurred during an internal investigation, if such fees were “directly caused by the defendants’” criminal offense. United States v. Lagos, 864 F.3d 320, 323 (5th Cir. Mar. 17, 2017). This holding conflicts with a 2011 decision issued by the D.C. Circuit, holding that such costs were not recoverable, if the investigation was “neither required nor requested by criminal investigators or prosecutors.” United States v. Papagno, 639 F.3d 1093, 1095 (D.C. Cir. 2011). The Fifth Circuit affirmed the district court’s order requiring former CEO Sergio Lagos of USA Dry Van Logistics to cover $5 million in fees GE Capital incurred during its internal investigation related to USA Dry Van’s bankruptcy petition.
In 2013, Lagos and three other USA Dry Van executives pled guilty in federal district court to wire fraud and conspiracy to commit wire fraud, admitting that they misled GE Capital regarding the value of the company’s assets in order to obtain a $38 million loan. GE Capital launched its own independent investigation into this fraud and incurred considerable expenses, including legal and forensic expert fees. In determining that such costs are subject to restitution, the Fifth Circuit explained that the defendants’ “fraud scheme caused GECC to employ forensic experts to secure and preserve electronic data as well as lawyers and consultants to investigate the full extent and magnitude of the fraud and to provide legal advice relating to the fraud.” Consistent with Fifth Circuit precedent, the Court concluded that such fees were “necessary and compensable in the Restitution award.”
Lagos, in his petition for certiorari, urged the Supreme Court to reject the panel’s interpretation and follow that of the D.C. Circuit, which previously held that the plain language of the statute requires that covered expenses “take place within the context of the government’s criminal enforcement.” Lagos also cited Judge Higginson’s concurrence, which found the D.C. Circuit’s interpretation persuasive and suggested the Fifth Circuit had read the statute “too broadly,” but felt bound “by prior precedent” to join in the panel’s decision.
In its reply in opposition to the petition for certiorari, the government argued that the law should not exclude private investigations, given that “victims of financial crimes not infrequently conduct their own investigations to determine what occurred before alerting and providing their investigatory fruits to authorities.” The costs of such investigation are “necessary” and therefore recoverable expenses even when the government “has not requested or required it.”
This case will provide the Supreme Court with the opportunity to outline the scope of the MVRA in criminal cases, which often is a hotly contested issue at enforcement sentencings. This is particularly the case where an executive’s alleged wrongdoing led to a costly internal investigation that was conducted by the executive’s employer. Though imprisonment is often the most well publicized aspect of sentencing and carries the most serious consequences, criminal judgments can also include significant restitution and forfeiture orders. The Supreme Court’s decision in this case will provide much-needed guidance in this context. We will continue to monitor and report on developments in this case.
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