Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca2-13-02042/USCOURTS-ca2-13-02042-0/pdf.json

Parties Involved:
Anthony Cuti
Appellant
William Tennant

United States of America
Appellee USA

Document Text:

13‐2042‐cr

United States v. Anthony Cuti

1 UNITED STATES COURT OF APPEALS

2 FOR THE SECOND CIRCUIT

3 ____________________

4

5 August Term, 2013

6

7 (Argued: March 12, 2014    Decided: September 11, 2014)

8

9 Docket No. 13‐2042‐cr

10

11 ____________________

12

13 UNITED STATES OF AMERICA,

14

15 Appellee,

16

17 v.

18

19 ANTHONY CUTI,

20

Defendant‐Appellant.

* 21

22

23 ____________________

24

25

Before: JACOBS and POOLER, Circuit Judges, and ROMÁN, District Judge.

** 26

27

28

* 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.

Case 13-2042, Document 115-1, 09/11/2014, 1317178, Page1 of 29
1 Appeal from a final order of restitution entered on May 13, 2013 in the

2 United States District Court for the Southern District of New York (Deborah A.

3 Batts, J.) pursuant to the Victims and Witnesses Protection Act (“VWPA”), 18

4 U.S.C. § 3663. We vacate the district court’s order and remand for the sole

5 purpose of considering the restitution order in light of our further clarifications

6 about what expenses are properly deemed “necessary” under the VWPA and

7 extension of the reasoning in United States v. Maynard, 743 F.3d 374 (2d Cir. 2014).

8 We affirm in all other respects.

9 ____________________

10 BRIAN C. BROOK, Clinton Brook & Peed (Matthew J.

11 Peed, on the brief), New York, N.Y., for Defendant‐

12 Appellant.

13

14 MICHAEL C. GERBER, Assistant United States

15 Attorney (Preet Bharara, United States Attorney for the

16 Southern District of New York; Rebecca M. Ricigliano,

17 Justin Anderson, Assistant United States Attorneys, on

18 the brief), New York, N.Y., for Appellee.

19

20 POOLER, Circuit Judge:

21 Following a jury trial, Anthony Cuti was convicted on June 8, 2010 of one

22 count of conspiracy to make false statements and four counts of securities fraud

23 and was sentenced on August 22, 2011 to concurrent terms of thirty‐six months of

2

Case 13-2042, Document 115-1, 09/11/2014, 1317178, Page2 of 29
1 imprisonment, to be followed by concurrent terms of three years of supervised

2 release. In this appeal, Cuti challenges: (1) whether the district court’s decision to

3 award restitution, directly following its denial of Cuti’s motion for a new trial

4 and after initially declining to award restitution, evinced judicial vindictiveness

5 in violation of his due process rights; and (2) whether the district court’s award of

6 restitution constituted an abuse of discretion.

7 As set forth below, we clarify whether particular expenses incurred are

8 “necessary” under the VWPA and extend the reasoning of our recent decision in

9 United States v. Maynard, a case construing the Mandatory Victims Restitution Act

10 (“MVRA”), to cases under the VWPA.  In short, we conclude that the restitution

11 order improperly includes legal expenses incurred in connection with a civil

12 arbitration that, while connected to the offense of conviction, was not undertaken

13 or pursued in aid of the prosecution.  We therefore vacate the district court’s

14 order of restitution for this limited purpose, and otherwise affirm the remainder

15 of the court’s restitution order.

16 BACKGROUND

17 I. Underlying Criminal Proceedings

18 Anthony Cuti was the Chief Executive Officer (“CEO”), and board

19 chairman of Duane Reade until 2005.  The evidence introduced at Cuti’s criminal

3

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1 trial showed that from 2000 to 2004, Cuti and his co‐defendant William Tennant,

2 Duane Reade’s former Chief Financial Officer (“CFO”) and senior vice‐president,

3 executed two different fraudulent accounting schemes in order to inflate the

4 company’s reported earnings.

5 Following trial, the  jury returned a verdict finding Cuti guilty on all

6 counts: conspiracy under 18 U.S.C. § 371 (Count 1); and securities fraud in

7 violation of 15 U.S.C. §§ 78j(b) & 78ff, 17 C.F.R. § 240.10b–5 and 18 U.S.C. § 2

8 (Count 2); making false statements in two SEC filings in violation of 15 U.S.C. §§

9 78m(a) & 78ff, 17 C.F.R. § 240.13a–1 and 18 U.S.C. § 2 (Counts 3 and 4); and

10 making false statements in another SEC filing in violation of 15 U.S.C. §§ 78o(d)

11 & 78ff, 17 C.F.R. §§ 240.15d–1 & d–13, and 18 U.S.C. § 2 (Count 5). Tennant was

12 acquitted on Count 1 and convicted on Count 2.  The district court denied both

13 defendants’ motions for a new trial and sentenced Cuti and Tennant principally

14 to imprisonment for three years and time served, respectively, and imposed fines

15 of $5 million on Cuti and $10,000 on Tennant.  Cuti and Tennant’s convictions

16 were upheld in June 2013. See generally United States v. Cuti, 720 F.3d 453 (2d Cir.

17 2013); United States v. Cuti, 528 F. App’x 84 (2d Cir. 2013).

18

4

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1 II. Duane Reade’s Internal Investigations

2 Oak Hill, a private equity firm, acquired Duane Read in 2004, and in 2005

3 terminated Cuti’s employment without cause.  Duane Reade and Cuti  were

4 unable to resolve certain disagreements regarding post‐termination benefits for

5 Cuti, and he filed an arbitration demand against Duane Reade on September 1,

6 2006.  The law firm Paul, Weiss, Rifkind, Wharton & Garrison, LLP (“Paul,

7 Weiss”), which has represented Oak Hill since 1978, was retained to represent

8 Duane Reade in the arbitration.

9 In late August 2006, one week before Cuti initiated the arbitration, Duane

10 Reade’s general counsel Michelle Bergman was notified by Duane Reade’s former

11 Director of Construction about several suspicious “credit and rebilling”

12 transactions made at Cuti’s instruction that improperly classified several million

13 dollars as capital expenditures.  Bergman notified Paul, Weiss; and the Audit

14 Committee of Duane Reade’s board of directors retained Cooley Godward

15 Kronish LLP (“Cooley”) as independent counsel, along with forensic accounting

16 firm AlixPartners LLP, to conduct an internal investigation.  On November 22,

17 2006, Paul, Weiss filed counterclaims in the arbitration based on this credit

18 rebilling fraud.  Cuti refused to be interviewed by Cooley unless Duane Reade

5

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1 withdrew certain of these arbitration‐related counterclaims.  No interview with

2 Cuti was conducted, and on December 13, 2006, Cooley issued a report to Duane

3 Reade’s Audit Committee on this credit rebilling scheme.

4 In February 2007, Paul, Weiss uncovered evidence of a real estate income

5 concession transaction (identified as the “Blue Trophy” transaction) involving

6 Cuti that looked suspicious.  Once again, Cooley and AlixPartners were retained

7 by the Audit Committee to investigate.  In a report to the Audit Committee dated

8 May 18, 2007, Cooley concluded that between 2000 and 2005 “Cuti engaged in a

9 fraudulent scheme designed to result in upfront recognition of real estate

10 concession income to improve Duane Reade’s earnings.” App’x at 424 (quotation

11 marks omitted). Cooley also explained that:

12 The impetus for the investigation was information learned by

13 attorneys at [Paul, Weiss], Duane Reade’s outside counsel, in the

14 course of their preparation for the arbitration commenced against

15 Duane Reade by its former CEO, Anthony Cuti. The information was

16 communicated by Paul[,] Weiss attorneys . . . and related to a

17 specific income item recognized by Duane Reade in the Second

18 Quarter of 2001. Paul[,] Weiss attorneys shared that information with

19 members of the Audit Committee, and the Audit Committee

20 determined that further investigation into items classified as real

21 estate concession income during the period 2000‐2006 was

22 warranted.

23

24 App’x at 312.

6

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1 The results of these internal investigations led to the filing of amended

2 counterclaims and affirmative defenses in the arbitration proceedings in April

3 2007, which the Arbitrator accepted on May 17, 2007.  A few days later, on May

4 22, 2007, Duane Reade’s counsel met with representatives of the U.S.  Attorney’s

5 Office (“USAO”) for the Southern District of New York and with the regional

6 office of the SEC to disclose the internal investigations and their findings.

7 The government commenced its own investigation into Duane Reade’s

8 finances. Duane Reade cooperated in the USAO investigation, attending

9 meetings with the prosecutors, participating in telephone calls, and responding

10 to numerous requests for documents and information.  In July 2007, the

11 arbitration proceeding was stayed at the request of the government.  Many

12 Duane Reade employees, both former and current, were interviewed as part of

13 the government’s investigation. Duane Reade provided independent counsel for

14 each, pursuant to each employee’s individual contract, Duane Reade’s bylaws, or

15 its certificate of incorporation.  

16 Throughout this time, Oak Hill and Duane Reade agreed to share the costs

17 of legal representation by Paul, Weiss, with Oak Hill paying 65% percent and

18 Duane Reade paying 35% of the fees from January 2007 through September 2008.

7

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1 Ultimately, the government investigation led to an indictment being returned

2 against Cuti on October 9, 2008, charging Cuti in five counts.  The SEC also filed a

3 parallel civil action against Cuti arising out of the same conduct.  

4 III. Post‐Verdict Proceedings in the District Court

5 Cuti was found guilty on all counts on June 8, 2010.  In October 2010, Oak

6 Hill and Duane Reade submitted a joint impact statement seeking an order of

7 restitution of approximately $53 million—with the majority of the amount

8 requested to compensate for the amount that Oak Hill claimed that it overpaid

9 for its acquisition of Duane Reade as a result of Cuti’s fraud.  So that the

10 government could present its theory of loss and restitution, the district court held

11 a Fatico hearing over seven days from November 2010 to June 2011.

12 On July 28, 2011, Cuti moved for a new trial, premised on newly acquired

13 evidence that one of the government witnesses had given perjured testimony at

14 trial.  The following day, the district court issued an order and memorandum

15 addressing Oak Hill and Duane Reade’s requests for restitution. United States v.

16 Cuti, No. 08 C.R. 972(DAB), 2011 WL 3585988 (S.D.N.Y. July 29, 2011) (“Initial

17 Restitution Order”). The court concluded that Oak Hill was not entitled to

18 restitution in the amount of Oak Hill’s alleged overpayment for Duane Reade

8

Case 13-2042, Document 115-1, 09/11/2014, 1317178, Page8 of 29
1 because the Government had not met its burden of showing that Oak Hill

2 suffered a loss attributable to Cuti’s offense conduct. Id. at *3‐6. Next, though the

3 court acknowledged that it “could” order discretionary restitution under the

4 VWPA, id. at *7 n.10, it declined to order it, on account of “complex issues of fact

5 as to the amount of restitution that would unduly complicate and prolong the

6 sentencing process”—i.e., “the determination of just what are the types of costs

7 Oak Hill and Duane Reade have incurred.” Id. at *7. While it was “clear that Oak

8 Hill and Duane Reade have expended staggering amounts of money, time, and

9 effort in the investigation and prosecution of Defendant Cuti’s Title 18 offense,”

10 the court expressed concern that “some arbitration‐related costs . . . could be

11 imbedded in the restitution calculations,” and that “the net reimbursement of all

12 costs . . . can best be addressed in the context of Oak Hill, Duane Reade and

13 Defendant Cuti’s arbitration proceedings.” Id. The Initial Restitution Order did not

14 address Cuti’s recently‐filed motion for a new trial. Sentencing was scheduled for

15 August 22, 2011.

16 On August 12, 2011, Duane Reade and Oak Hill asked the court to

17 reconsider its position regarding restitution, a request which the court summarily

18 denied on August 16, 2011.  However, on August 19, the court issued a

9

Case 13-2042, Document 115-1, 09/11/2014, 1317178, Page9 of 29
1 subsequent order vacating its declination of Oak Hill and Duane Reade’s request

2 for reconsideration. It also vacated its Initial Restitution Order.  The court’s order

3 indicated that it would “impose restitution and retain jurisdiction for the purpose

4 of determining the appropriate amount” at Defendant Cuti’s sentencing. App’x

5 at 21. The court also directed Cuti to respond to Oak Hill’s August 12, 2011 letter.

6 That same day, the court also denied Cuti’s motion for a new trial.  Cuti was

7 sentenced as scheduled on August 22, 2011.   

8 A partial restitution order, issued October 14, 2011, ruled “that expenses

9 attributable to the non‐criminal proceedings are not appropriate for restitution,”

10 and that “Oak Hill, separate and apart from issues relating to Duane Reade, is

11 not a victim to whom restitution is owed based on the Court’s finding that the

12 Government failed to establish a loss.” Special App’x at 2. The court also

13 concluded that “Oak Hill in its capacity as successor to Duane Reade is

14 compensable.”  Special App’x at 2. The court determined that certain  fees and

15 expenses for Cooley and AlixPartners were subject to restitution, as were certain

16 fees and expenses of Duane Reade’s accountants and auditors, as well as costs of

17 the “Kroll Ontrack database.”  Special App’x at 2. The court then referred the

18

10

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1 remaining fees and expenses for an inquest before Magistrate Judge Pitman.

2 Special App’x at 2‐3.    

3   Following the magistrate judge’s December 21, 2012 Report and

4 Recommendation (“R&R”), the court conducted a de novo review and adopted

5 the R&R with some modifications. United States v. Cuti, No. 08 C.R. 972(DAB),

6 2013 WL 1953741 (S.D.N.Y. May 13, 2013) (“Cuti Restitution Order”).  The court

7 determined that restitution was only available pursuant to the VWPA, not the

8 MVRA, and that Oak Hill was entitled to restitution not as a “victim,” but only as

9 a “non‐victim” that had been required to make payments to Duane Reade, the

10 actual victim of Cuti’s crime, under 18 U.S.C. § 3664(j)(1). Id. at * 3‐6.  The court

11 then concluded that certain legal fees and expenses paid to Paul, Weiss were

12 “necessary and related to Duane Reade’s participation in the investigation or

13 prosecution of the criminal case against Defendant Cuti” and subject to

14 restitution, id. at * 7; as were certain other legal fees for the costs of counsel for

15 current and former Duane Reade employees, id. at * 9‐10; as well as the fees to

16 Cooley, forensic accountants and Duane Reade accountants, and the Kroll

17 Ontrack database, id. at * 11; for a total award of $7,615,217.90.  Id. The court

18 concluded that Cuti had the ability to pay the full amount of restitution, and

11

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1 ordered a payment schedule of 15% of his gross monthly income, beginning in

2 the second month of his supervised release. Id. at *12. Given its conclusion that

3 Oak Hill was only entitled to restitution as a “non‐victim,” the court ordered Cuti

4 to make restitution payments in the amount of $6,145,961.40 to Duane Reade first,

5 prior to making any restitution payments to Oak Hill, in accordance with

6 § 3664(j)(1). Id. It is from this May 13, 2013 Opinion that Cuti appeals.

7 DISCUSSION

8 Cuti makes two challenges to the Cuti Restitution Order. He asserts that the

9 district court’s August 19, 2011 reversal of its July 29, 2011 order (declining to

10 award restitution) and the timing of that reversal “immediately after denying

11 Cuti’s motion for a new trial” created the appearance of a “vindictive sentencing

12 increase” under North Carolina v. Pearce, 395 U.S. 711 (1969), and that this requires

13 vacatur. He also seeks vacatur because he argues that (1) Oak Hill was not a

14 “victim”; (2) Duane Reade’s employees’ legal fees should not have been included

15 in the restitution order; and (3) because the restitution order improperly included

16 expenses incurred prior to the government’s investigation and prosecution of

17 Cuti’s criminal case.  

18

12

Case 13-2042, Document 115-1, 09/11/2014, 1317178, Page12 of 29
1 I. Applicable Legal Standards

2 A. Vindictiveness

3

4 In Pearce, the Supreme Court held that “[d]ue process of law . . . requires

5 that vindictiveness against a defendant for having successfully attacked his first

6 conviction must play no part in the sentence he receives after a new trial.” 395

7 U.S. at 725. In so holding, the court noted that “whenever a judge imposes a more

8 severe sentence upon a defendant after a new trial, the reasons for his doing so

9 must affirmatively appear.” Id. at 726. “Otherwise, a presumption arises that a

10 greater sentence has been imposed for a vindictive purpose—a presumption that

11 must be rebutted by objective information . . . justifying the increased sentence.”

12 Alabama v. Smith, 490 U.S. 794, 798‐99 (1989) (omission in original and internal

13 quotation marks omitted).

14 The Pearce presumption “do[es] not apply in every case where a convicted

15 defendant receives a higher sentence on retrial” or at resentencing. Texas v.

16 McCullough, 475 U.S. 134, 138 (1986). “The presumption exists to prevent not

17 enlarged sentences after a new trial but rather vindictiveness of a sentencing

18 judge.” United States v. Singletary, 458 F.3d 72, 76 (2d Cir. 2006) (internal

19 quotation marks omitted). “[B]efore a defendant may invoke the Pearce

13

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1 presumption, there must be a reasonable likelihood that the increase in sentence

2 is the product of actual vindictiveness on the part of the sentencing authority.” Id.

3 (internal quotation marks omitted).  

4

5 B. Restitution under the VWPA

6 The VWPA provides that “[t]he court, when sentencing a defendant

7 convicted of an offense under this title . . . , may order . . . that the defendant

8 make restitution to any victim of such offense.” 18 U.S.C. § 3663(a)(1)(A). The

9 VWPA requires sentencing courts to consider the amount of the loss sustained by

10 the victim as a result of the offense, the defendant’s financial resources, the

11 financial needs and earning ability of the defendant and the defendant’s

12 dependents, and other factors the court deems appropriate. See

13 id. § 3663(a)(1)(B)(i). “While the district court must review these statutory factors,

14 detailed factual findings for each factor are not required.”  United States v.

15 Battista, 575 F.3d 226, 230 (2d Cir. 2009). “Any dispute as to the proper amount or

16 type of restitution shall be resolved by the court by the preponderance of the

17 evidence.” 18 U.S.C. § 3664(e).

18 We review a district court’s restitution order “deferentially, reversing only

19 if in our view the trial court abused its discretion.” United States v. Amato, 540

14

Case 13-2042, Document 115-1, 09/11/2014, 1317178, Page14 of 29
1 F.3d 153, 159 (2d Cir. 2008). “To identify such abuse, we must conclude that a

2 challenged ruling rests on an error of law, a clearly erroneous finding of fact, or

3 otherwise cannot be located within the range of permissible decisions.” United

4 States v. Boccagna, 450 F.3d 107, 113 (2d Cir. 2006) (internal quotation marks

5 omitted).

6 II. Analysis

7 A. Vindictiveness

8 We first address Cuti’s vindictiveness argument. Cuti can point only to

9 timing of the district court’s pivot regarding the feasibility of separating out the

10 money spent in contemplation of arbitration from the funds spent on the

11 investigation for his criminal case. As an initial matter, this is not the customary

12 procedural posture for a claim of judicial vindictiveness, which usually involves

13 a sentencing following an appeal from or collateral attack on a defendant’s

14 conviction. With the particular procedural posture here, the district court had

15 little reason or motivation to be vindictive. See, e.g., McCulloch, 475 U.S. at 139

16 (“[U]nlike the judge who has been reversed, the trial judge here had no

17 motivation to engage in self‐vindication.” (alteration in original and internal

18 quotation marks omitted)).

15

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1 Moreover, the district court’s decision to award restitution was clearly

within the court’s discretion under Section 3663(a)(1)(B)(ii).1 2 The court’s

3 apparently sua sponte decision (to reconsider, and to undertake the significant

4 task of considering a restitution award in this case) was neither an error of law,

5 nor was it based on a clearly erroneous finding of fact. Emphasizing only the

6 close temporal proximity between the court’s order denying his motion for a new

7 trial and its decision to award restitution, Cuti has not pointed to anything

8 concrete in the record to support his theory of vindictiveness. Thus, as we find no

9 abuse of the district court’s discretion in its decision to award restitution under

10 the VWPA, nor any “reasonable likelihood” that the decision was the product of

11 actual vindictiveness, Singletary, 458 F.3d at 76, Cuti is not entitled to a

presumption of vindictiveness.2 12 See McCulloch, 475 U.S. at 139 (“The presumption

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).

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.

16

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1 of Pearce does not apply in situations where the possibility of vindictiveness is

2 this speculative.”).  In this instance, the claim of vindictiveness, unaided by the

3 presumption, fails as clearly insufficient.

4 B. Restitution

5 Cuti’s first two restitution arguments—that Oak Hill should not have been

6 deemed eligible for restitution because it was not a victim of Cuti’s fraud, and

7 that Oak Hill should not have been reimbursed for paying its employee’s legal

8 fees—lack merit and do not warrant vacatur. We address each of these

9 arguments briefly below, and then we proceed to Cuti’s third argument, which

10 challenges whether Duane Reade’s payment of legal fees—in particular, those

11 paid to Paul, Weiss prior to the commencement of the government’s

12 investigation—were “necessary” as contemplated under Section 3663(b)(4). This

13 third question requires vacatur and remand.

14 1. Oak Hill as Non‐Victim Entitled to Restitution

15 First, there was no abuse of discretion in the court’s decision to award Oak

16 Hill restitution under § 3664(j)(1) on the theory that Oak Hill paid expenses on

17 Duane Reade’s behalf. We permit restitution in situations where a third party has

18 directly paid an expense incurred by the victim, rather than having the victim

17

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1 pay and having the third party reimburse the victim afterward. See, e.g., United

2 States v. Douglas, 525 F.3d 225, 254 (2d Cir. 2008) (“The fact that [third party]

3 Brink’s paid for the headstone directly rather than having [victim] Moran Sr. pay

4 for it and reimbursing him does not relieve Douglas of the obligation to make

5 restitution for the cost incurred.”); United States v. Malpeso, 126 F.3d 92, 95 (2d Cir.

6 1997) (upholding award of restitution to the FBI under the VWPA even though

7 FBI had paid the expense directly instead of reimbursing the victim, there being

8 “no significant functional or economic difference between the indemnitor’s prior

9 payment of the victim’s expense and subsequent reimbursement”). There being

10 no abuse of discretion here, we affirm the district court’s award of restitution to

11 Oak Hill as a non‐victim.

12 2. Legal Fees for Duane Reade’s employees as “Necessary”

13 Expenses

14

15 Next, Cuti asserts that Duane Reade did not “incur” legal fees on behalf of

16 its employees because it was not required to reimburse these legal fees. This

17 assertion is belied by the district court’s conclusion and factual finding that

18 “Duane Reade’s expenses for its employees’ counsel were necessary and related

19 to its participation in the Government investigation and prosecution of . . . Cuti.”

18

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1 Cuti Restitution Order, 2013 WL 1953741, at *9. The district court concluded

2 further that these expenses “were necessary and constituted an actual loss.” Id. at

3 *10. This decision was soundly within the court’s exercise of discretion. These

4 costs were incurred during and as a direct result of the government’s

5 investigation into Cuti’s fraud, and the district court reasonably concluded that

6 Duane Reade was obligated to indemnify its employees’ independent legal

7 representation for their participation in the government’s investigation. The

8 district court, along with the magistrate judge, carefully parsed the legal fees paid

9 for each individual employee, and only permitted fees related to the

10 government’s investigation. Such expenditures—resulting from assistance

11 provided to the government—are appropriately included in a restitution order

12 under the VWPA. See Battista, 575 F.3d at 234 (“[T]he district court did not err in

13 awarding the NBA attorneys’ fees incurred as a result of the assistance it provided to

14 the government in its investigation and prosecution of Battista’s criminal offense.”

15 (emphasis added)). We therefore affirm this portion of the district court’s

16 restitution order.

17 3. Other Legal Expenses Incurred by Duane Reade

18 Cuti’s final argument requires us to consider whether expenses incurred by

19

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1 Paul, Weiss on Duane Reade’s behalf in the course of its work on the arbitration

2 that also contributed to discovering Cuti’s fraud, in addition to the expenses

3 incurred by Cooley’s internal investigations into both frauds, properly constitute

4 “necessary . . . other expenses related to participation in the investigation or

5 prosecution . . . related to the offense” under 18 U.S.C. § 3663(b)(4). To engage

6 with this question we must further clarify the types of expenses that are

7 “necessary” and “related to the offense” within the meaning of Section 3663(b)(4).

8 i. United States v. Maynard and “Necessary” Expenses

9 Recently, in United States v. Maynard, we considered what constitutes

10 “necessary” expenses under the Mandatory Victims Restitution Act, 18 U.S.C.

11 § 3663A(b)(4), reasoning that “[t]he victim expenses that are recoverable as

12 restitution under 18 U.S.C. § 3663A(b)(4) are expenses the victim was required to

13 incur to advance the investigation or prosecution of the offense.” 743 F.3d at 381

14 (emphasis added).

15 In so concluding, we surveyed our prior case law, acknowledging that our

16 Circuit takes “a broad view of what expenses are ‘necessary’” in the restitution

17 context. See id. (citing United States v. Papagno, 639 F.3d 1093, 1101 (D.C. Cir. 2011)

18 (“In reaching our conclusion, we recognize that several other courts of appeals

20

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1 have taken a broader view of the restitution provision at issue here.”)). In

2 particular, our analysis considered two relatively recent restitution opinions from

3 our Court—Amato and United States v. Bahel. See Amato, 540 F.3d 153; Bahel, 662

4 F.3d 610 (2d Cir. 2011).

5 In Amato, we affirmed a restitution award of attorney’s fees and accounting

6 costs incurred as a result of an internal investigation that uncovered fraud

7 “notwithstanding that not all of the effort and expense was requested by the

8 government,” Maynard, 743 F.3d at 381. In Bahel, a subsequent restitution case,

9 “we affirmed restitution for legal fees incurred when the United Nations hired

10 outside counsel to conduct an internal investigation rather than use on‐staff

11 lawyers.” See id.; see also Bahel, 662 F.3d at 647‐48. We reasoned that:

12

13 In both [Amato and Bahel], the internal investigations paid for by the

14 victims unmasked fraud and led to investigations conducted by the

15 authorities. The expense of the internal investigations was necessary

16 because the entity had interests to protect (the integrity of its

17 ongoing operations and reputation, at the least) as well as a duty to

18 protect those interests when faced with evidence, indicia, or a

19 grounded suspicion of internal misconduct, and the investigation

20 was a means calculated to achieve the protection of those interests.

21

22 Maynard, 743 F.3d at 381 (emphasis added).

23

21

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1 Though Maynard involved an award of mandatory restitution under the

2 MVRA, we have noted that “the provisions of the VWPA and the MVRA are

3 nearly identical in authorizing an award of restitution.” Battista, 575 F.3d at 230

4 (internal quotation marks omitted). In Battista, we concluded that the “holding in

5 Amato—concededly decided in the MVRA context—applies to the almost

6 verbatim statutory language in the VWPA. . . . The rationale that we provided in

7 support of our conclusion that attorneys’ fees were recoverable as ‘other

8 expenses’ under the MVRA applies with equal force to the VWPA.” Id. at 233‐34.

9 With this in mind, we now extend Maynard’s reasoning to the VWPA.

10 Thus, “necessary . . . expenses related to participation in the investigation” as

11 described in the VWPA, 18 U.S.C. § 3663(b)(4), are “expenses the victim was

12 required to incur to advance the investigation or prosecution of the offense,”

13 Maynard, 743 F.3d at 381. This may include internal investigations undertaken in

14 the face of evidence—or grounded suspicion—of internal misconduct which

15 ultimately unmask fraud. Id.

16 ii. Duane Reade’s Expenses

17 This extension of Maynard to restitution under the VWPA does not end our

18 inquiry. This is the case for two reasons. First, the internal investigation here was

22

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1 initially motivated by Duane Reade’s need to defend itself in Cuti’s arbitration

2 proceeding. Second, Duane Reade retained two separate law firms over the

3 course of the arbitration, one to handle its own internal investigation, the other

4 to assist with the government’s investigation. As such, this case does not involve

5 a straightforward “internal investigation paid for by the victim” that unmasks

6 fraud as described in Maynard. Id.

7 In its final restitution order, the district court concluded that the

8 government had proved Paul, Weiss’s work was necessary under the VWPA by

9 relying on the government’s representations that Paul, Weiss’s work “gave rise to

10 the whole investigation of the real estate concession transactions,” and “figured

11 out there was a problem [with the credit and rebilling scheme].” Cuti Restitution

12 Order, 2013 WL 1953741, at *9 (internal quotation marks omitted). The district

13 court cited Amato, relying on our “broader view” of what “other expenses” could

14 be deemed necessary in the restitution statutes, specifically including legal fees.

15 Id.

16 If the purpose of an internal investigation is to uncover or investigate fraud

17 “when faced with evidence, indicia, or a grounded suspicion of internal

18 misconduct,” Maynard, 743 F.3d at 381, then such expenses are properly deemed

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1 expenses that a “victim was required to incur to advance the investigation or

2 prosecution of the offense,” id., and thus subject to restitution. On the other hand,

3 where the record shows that a particular investigation was commenced, and its

4 corresponding expenses incurred for another reason (here the defense of an

5 impending arbitration by a disgruntled former executive) then that particular

6 investigation cannot be “a means calculated to achieve the protection” of a

7 corporation’s “ongoing operations and reputation” for the restitution purposes

8 described in Maynard, id.

9 The record on appeal bears no indication of when (if at all) Duane Reade

10 had Paul, Weiss shift its focus from a civil litigation defense to an internal

11 investigation premised on a “grounded suspicion of internal misconduct.”

12 Maynard, 743 F.3d at 381. Upon being notified of the credit rebilling scheme in

13 September 2006, Duane Reade’s Audit Committee retained Cooley to conduct

14 internal investigations and draft a report, while Paul, Weiss was working on the

15 arbitration and filing counterclaims.  Similarly, while Paul, Weiss may have

16 uncovered evidence of the real estate concession scheme in February 2007 and

17 subsequently “educate[d]” Cooley about it, App’x at 351, it was Cooley that

18 undertook and prepared the May 2007 report on it for the Duane Reade board.

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1 Paul, Weiss meanwhile continued to work on the arbitration and amended its

2 counterclaims and affirmative defenses accordingly in April 2007.  A corporate

3 client such as Duane Reade is entitled to expend as much as it deems prudent on

4 preparations for its defense in a civil case or arbitration. However, under

5 Maynard, not all such expenses are “necessary” for restitution purposes. Here,

6 there is no outward indication of when the investigative work specific to Paul,

7 Weiss transmogrified from work aimed at getting “dirt”on Cuti for the

8 arbitration, see App’x at 313, into an internal investigation to root out accounting

9 or securities fraud.

10 Moreover, the entirety of the expenses incurred by Duane Reade for both

11 the Cooley and the Paul, Weiss internal investigations, premised on the same

12 underlying findings and conduct, cannot both have been “necessary” to advance

13 the government’s investigation under the VWPA. To the extent that Paul, Weiss’s

14 initial work on the real estate concession scheme, prior to turning over its

15 information to Cooley, was the work that “unmasked [the] fraud,” Maynard, 743

16 F.3d at 381, Cooley’s work was probably not necessary. And to the extent that

17 Paul, Weiss may have “identif[ied]” the real estate concession scheme, see App’x

18 at 103 n.7, only to hand off the bulk of the investigative work to Cooley (to

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1 interview employees,  prepare the May 18, 2007 report, etc.), the district court’s

2 parsing of Duane Reade’s expenditures must reflect these distinctions. To

3 conclude that both firms’ expenses for investigating the same two underlying

4 frauds were “necessary” to the government’s case would vitiate any limit on our

5 already broad view of “necessary” expenses. Inasmuch as the Cuti Restitution

6 Order did so, this was error requiring remand.

7 This is not to say that fees paid to two outside law firms working side‐by‐

8 side on an internal investigation may not, in theory, be treated as necessary

9 expenses under the VWPA. However, to be “necessary” for restitution, it is not

10 enough that the expenses incurred “helped the investigation,” which is what the

11 government represented below. App’x at 403 (emphasis added). On remand, the

12 question for the district court is whether the government has proved by a

13 preponderance of evidence that some, or any, of Paul, Weiss’s and Cooley’s

14 expenses prior to May 22, 2007 were “necessary to the investigation or

15 prosecution” of Cuti’s criminal case. See Maynard, 743 F.3d at 382; Amato, 540 F.3d

16 at 161. The court should consider at least whether the claimed expenditures by

17 Paul, Weiss were redundant or duplicative of the expenses incurred for Cooley’s

18 investigatory work—including whether one firm’s work served merely as a

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1 second opinion or to corroborate the other’s findings—as well as whether the fact

2 that two independent firms were at times working in tandem created additional,

needless administrative costs.3 3

4 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. 5 4 We leave

6 such a determination for the district court in the first instance. At a minimum,

7 Paul, Weiss’s expenses from meetings with the government, turning over its

8 findings, and cooperating with the government’s own investigation are

9 recoverable under our precedent as necessary expenses under Section 3663(b)(4).

10 See Amato, 540 F.3d at 162. The question for remand is whether any other Paul,

11

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

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.”).

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1 Weiss and Cooley fees, incurred prior to the commencement of the government’s

investigation, satisfy the necessity requirement as clarified in our opinion today.5 2

3 CONCLUSION

4 For the reasons discussed above, we affirm the district court’s restitution

5 order in part and vacate and remand in part. Specifically, we affirm the district

6 court’s determination that Oak Hill could be awarded restitution as a “non‐

7 victim,” and Duane Reade’s employees’ attorneys fees were properly subject to

8 restitution. As to whether Duane Reade’s payment of fees and costs to Paul,

9 Weiss and Cooley constitute “necessary” expenses under the VWPA, we vacate

10 and remand for further proceedings consistent with this opinion.   On remand,

11 the district court is free to exercise its discretion as to whether “determining

12 complex issues of fact related to the cause or amount of the victimʹs losses would

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

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.

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1 complicate or prolong the sentencing process to a degree that the need to provide

2 restitution to any victim is outweighed by the burden on the sentencing process.”

3 18 U.S.C. § 3663A(c)(3)(B).

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