The Second Circuit Court of Appeals recently ruled that over $3 million in attorneys’ fees and accounting costs incurred by a corporation which had been defrauded by individual defendants were properly included in a criminal restitution order. The legal fees had been paid to outside counsel hired by the business to: conduct an internal investigation of a fraud perpetrated by three of its employees; report the fraud to the government; represent the business in meetings with the government; and assist in gathering and producing evidence sought by both the prosecution and the defense. The accounting costs were attributable to forensic accounting services furnished during the internal investigation.
Electronic Data Systems Corporation (“EDS”) had purchased a smaller company operated by the three defendants, who continued to run it post-acquisition. The threesome (one of whom died before trial) fraudulently deceived EDS into believing that their subsidiary was meeting performance targets tied to their compensation incentive plan. A federal jury convicted both surviving defendants of mail fraud, wire fraud and conspiracy. One defendant was sentenced to four years in prison, the other to one year, and both were ordered to pay restitution of almost $13 million to EDS as the victim of their crimes. The main challenge mounted by the defendants on appeal was to the inclusion in the restitution order of over $3 million in legal fees and accounting costs.
The Second Circuit affirmed the district court’s restitution order, noting that the 1996 Mandatory Victims Restitution Act (“MVRA”), codified at 18 U.S.C. § 3663A, made restitution a mandatory part of sentencing for certain offenses. Those include offenses against property grouped under Title 18 of the United States Code, “including any offense committed by fraud or deceit,” and in which “an identifiable victim or victims has suffered a . . . pecuniary loss.” The Court noted that the MVRA now requires defendants to reimburse crime victims “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” (emphasis added). The Court rejected the defendants’ arguments that the “other expenses” intended by the MVRA were limited to costs analogous to those specifically identified in the statute. It noted that the Ninth Circuit also had endorsed the inclusion of attorneys’ fees and accounting costs in criminal restitution orders and rejected the contrary reasoning of decisions cited by the defendants.
The Second Circuit stressed that, to be included in a restitution order, expenses must have been incurred by a crime victim; must have been “necessary;” must have been incurred during the investigation or prosecution of the offense; and must not require unduly complicated factual determinations. The Court found that the legal fees and accounting costs were well substantiated in a memorandum outlining the work done by outside counsel and the accounting firms. The memorandum, in turn, was supported by a sworn declaration by a member of the law firm as well as invoices and other documents detailing the costs involved. The Court questioned the Ninth Circuit’s additional requirement that any expenses be the “direct and foreseeable result” of a defendant’s wrongful conduct in order to qualify for restitution. However, the Second Circuit declined to “formulate a precise test in the present case” because it found that it was readily predictable that the defendants’ “complicated fraud against a large corporation and a number of its clients” as well as others “would force the corporation to expend large sums of money on its own internal investigation as well as its participation in the government’s investigation and prosecution of defendants’ offenses . . . .”
The full text of the Second Circuit’s decision can be found at United States v. Amato, et al., Nos. 06-5600, 06-5741, 07-2152 and 07-2311, U.S. App. LEXIS 17840 (2d Cir. August 21, 2008).