Opinion ID: 1039276
Heading Depth: 2
Heading Rank: 3

Heading: Amount of Loss Directly and Proximately

Text: Caused by the Offense Gushlak's remaining grounds for appeal all focus on the accuracy of the amount of the district court's restitution award. 21
Calculation under the MVRA6 With one exception, the parties agree as to the standards governing a district court's determination of the amount of a restitution award. The MVRA directs sentencing courts to order . . . that the defendant make restitution to the victim of the offense. 18 U.S.C. § 3663A(a)(1). Victim, as relevant here, is defined as a person directly and proximately harmed as a result of the commission of an offense for which restitution may be ordered. Id. § 3663A(a)(2). This provision is obviously relevant to determining the type of individuals entitled to restitution, which is not an issue presented on this appeal. See, e.g., United States v. Marino, 654 F.3d 310, 320-21 (2d Cir. 2011). But also, when read along with the balance of the MVRA, it is taken to mean that restitution may be awarded only in the amount of losses directly and proximately 6 In setting forth the legal standards governing awards under the MVRA, we rely also on cases applying materially identical provisions of another federal restitution statute, the Victim and Witness Protection Act, 18 U.S.C. § 3663. See United States v. Marino, 654 F.3d 310, 319 n.7 (2d Cir. 2011) (Because the relevant statutory language in the MVRA and VWPA is nearly identical, we include in our analysis cases arising under both statutes.). 22 caused by the defendant's conduct.7 See Reifler, 446 F.3d at 115 (noting that additional proceedings may be necessary for determining the amounts of loss to each [victim] that were directly and proximately caused by the defendant's commission of the offense); accord United States v. Squirrel, 588 F.3d 207, 215 (4th Cir. 2009) ([A]n order of restitution under the MVRA is to be based upon the loss directly and proximately caused by the defendant's offense conduct.). The government bears the burden of establishing loss amount under the MVRA. 18 U.S.C. § 3664(e). Any dispute as to the proper amount . . . of restitution shall be resolved by the court by the preponderance of the evidence. Id.; see also id. § 3663A(d). The parties' lone dispute concerning the standards governing the calculation of loss amount arises out of language in our case law that a court's power to order restitution is limited to actual loss. United States v. Carboni, 204 7 As a general matter, restitution is permitted only for an amount of loss caused by the specific conduct forming the basis for the offense of conviction, United States v. Silkowski, 32 F.3d 682, 688 (2d Cir. 1994), although the parties may provide otherwise in their plea agreement, id.; 18 U.S.C. §§ 3663A(a)(3), 3664(a). We have in the past, exercising plain error review, affirmed a restitution award imposing joint and several liability payable by all convicted co-conspirators in respect of damage suffered by all victims of a conspiracy, regardless of the facts underlying counts of conviction in individual prosecutions. United States v. Boyd, 222 F.3d 47, 50-51 (2d Cir. 2000) (per curiam). 23 F.3d 39, 47 (2d Cir. 2000) (emphasis added); see also United States v. Germosen, 139 F.3d 120, 130 (2d Cir. 1998) (restitution statute requires a showing of actual loss); Catoggio, 326 F.3d at 329 (noting requirement that the district court identify victims' actual losses prior to imposing restitution). This actual loss requirement, Gushlak contends, conflicts with the standard the district court applied insofar as the court accepted a 'reasonable estimate' of investor loss, Gushlak, 2012 WL 1379627 at , 2012 U.S. Dist. LEXIS 56009 at . We disagree. We have used the term actual loss to distinguish the sorts of losses cognizable in restitution proceedings from those cognizable under the United States Sentencing Guidelines, which additionally recognize intended loss. Germosen, 139 F.3d at 130. The term has also served to emphasize the MVRA's requirement that the court shall order restitution to each victim in the full amount of each victim's losses. 18 U.S.C. § 3664(f)(1)(A); Catoggio, 326 F.3d at 326. In other words, we have used the term to disapprove of loss calculations that incorporate hypothetical or speculative losses, and those that arbitrarily fall short of the full amount. But we have never used the word actual in this context to mean mathematically precise. Nor have we ever adopted a one-size-fits-all standard of precision for application in restitution cases. To the contrary, our case law 24 reflects the settled understanding among courts of appeals8 that a reasonable approximation will suffice, especially in cases in which an exact dollar amount is inherently incalculable. See Catoggio, 326 F.3d at 329 (citing United States v. Futrell, 209 F.3d 1286, 1292 (11th Cir. 2000), and describing it as holding that restitution could be based on a reasonable estimate of losses when it would be impossible to determine the precise amount); Germosen, 139 F.3d at 129, 130 (explaining that, for purposes of calculating loss amount under the United States Sentencing Guidelines, the court need only make a reasonable estimate of the loss, and later that the quantity and quality of evidence the district court may rely upon to determine the amount of loss is the same in both [the Guidelines and restitution] contexts). 8 See United States v. Burdi, 414 F.3d 216, 221-22 (1st Cir. 2005) (In calculating the restitution amount [under the MVRA], absolute precision is not required. . . . [T]he district court's obligation was to attempt to come to a reasonable determination . . . . (internal quotation marks omitted)); United States v. Hand, 863 F.2d 1100, 1104 (3d Cir. 1988) (Difficulties of measurement do not preclude the court from ordering a defendant to compensate the victim through some restitution.); United States v. Teehee, 893 F.2d 271, 274 (10th Cir. 1990) (The determination of an appropriate restitution amount is by nature an inexact science.); United States v. Futrell, 209 F.3d 1286, 1291-92 (11th Cir. 2000) (per curiam) ([W]e hold that the district court did not abuse its discretion by accepting a reasonable estimate of the amount of government loss caused by . . . fraud. Because of the inevitable gaps in evidence in cases of this nature, the district court properly applied the preponderance standard and did not abuse its discretion by accepting the government's approximation of its actual losses.) 25 We reiterate that the MVRA requires only a reasonable approximation of losses supported by a sound methodology. As explained by the First Circuit, the preponderance standard must be applied in a practical, common-sense way. So long as the basis for reasonable approximation is at hand, difficulties in achieving exact measurements will not preclude a trial court from ordering restitution. United States v. Savoie, 985 F.2d 612, 617 (1st Cir. 1993). B. Calculation of Losses in Artificial Inflation Cases The securities laws are intended to allow investors to buy, sell, or hold based on accurate information. United States v. Ebbers, 458 F.3d 110, 127 (2d Cir. 2006). A pump-and-dump scheme, by definition, seeks fraudulently to alter the mix of available information for the purpose of artificially inflating a stock price. This has the potential to harm investors who purchase at the inflated price in reliance on the information's ostensible integrity. The challenge, often daunting, is to determine if and to what extent particular investors have been harmed by artificial prices that are the result of deliberate misinformation of one sort or another (including manipulative trading practices designed to inflate the price).9 9 Similar issues arise not only in the context of criminal sentencing, but also, and perhaps more prominently, in the area of civil securities litigation. 26 We might understand the amount of investors' potential losses as a function of the inflationary component of the price paid, that is, the portion of the price paid that would not have been paid but for the fraud. But as a matter of pure logic, at the moment the transaction takes place, the [investor who paid the inflated price] has suffered no loss; the inflated purchase payment is offset by ownership of a share that at that instant possesses equivalent value. Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 342 (2005) (emphasis in original). By the same token, an investor able to sell shares before some or all of the inflationary component has fallen out of the share price suffers a loss that is less than the entire inflationary component because he, she, or it has, through the sale, recouped some or all of the overpayment. Thus, at least theoretically, an investor's actual losses are equal to the artificial inflation when the shares were purchased minus the artificial inflation when the shares were sold. Michael Barclay & Frank C. Torchio, A Although we rely on authorities from each of these contexts to establish certain general principles, we are mindful of important differences that counsel against using authorities from these different contexts interchangeably. For example, although we rely generally on the discussion of investor loss in the Supreme Court's opinion in Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005), not every principle from the context in which that case arose -- pleading standards for loss causation, an element of a civil securities litigation claim -- is readily applicable to this one, or vice versa. 27 Comparison of Trading Models Used for Calculating Aggregate Damages in Securities Litigation, LAW & CONTEMP. PROBS., Spring/Summer 2001, at 106; see also Bradford Cornell & R. Gregory Morgan, Using Finance Theory to Measure Damages in Fraud on the Market Cases, 37 UCLA L. REV. 883, 886 (1990). To quantify investor losses in this manner, one needs to determine what the aggregate price of the investor's shares would have been on a given date but for the fraud; this value can then be subtracted from the actual market price of the shares on that date. Green v. Occidental Petroleum Corp., 541 F.2d 1335, 1344 (9th Cir. 1976) (Sneed, J., concurring). This disentangles those elements of a stock price that are a result of legitimate factors from those that are the result of fraudulent ones. Although performing the task may be a challenge in any particular case, as a general matter, it is necessary to a determination whether particular losses were directly and proximately caused by fraud, or instead by the materialization of some non-fraud risk, against which investors are not protected by the securities laws. See United States v. Zolp, 479 F.3d 715, 719 (9th Cir. 2007) ([T]he court must disentangle the underlying value of the stock, inflation of that value due to the fraud, and either inflation or deflation of that value due to unrelated causes.); see also United States v. Rutkoske, 506 F.3d 170, 178-79 (2d Cir. 2007). 28 This sort of quantitative analysis, relying as it does on sophisticated principles of corporate finance and statistics, is hardly the stuff of ordinary judicial expertise. Courts therefore can and ordinarily do rely on the testimony of one or more experts for one side to establish a statistical model, and one or more on the other side to bring to the court's attention the ways in which that model may be unsound, and, if necessary, propose a viable alternative. See Rutkoske, 506 F.3d at 180 (Normally, expert opinion and some consideration of the market in general and relevant segments in particular will enable a sentencing judge to approximate the extent of loss caused by a defendant's fraud.).10 C. Application of Governing Law We turn, then, to the question of whether the district court's restitution calculation of $17,492,817.45 comports with the applicable legal principles. We conclude that it does. 10 The Federal Rules of Evidence do not apply at sentencing proceedings. Fed. R. Evid. 1101(d)(3). Expert testimony in restitution cases is therefore not governed by the strictures of Fed. R. Evid 702, nor, it follows, by authorities interpreting that Rule, for example, Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), and Kumho Tire Co., Ltd. v. Carmichael, 526 U.S. 137 (1999). 29 1. The Government's Showing. As we have described, the district court first relied on Gushlak's allocution and affidavits filed with the government's fourth restitution submission to establish the nature and timing of the fraud. These materials suggested a fraud accomplished through misrepresentations and manipulative trading practices. They also revealed that the coconspirators continued to use these manipulative practices and others through the summer of 2000 to keep GBNE's stock price inflated. But apparently as a result of downward pressure caused by the bursting of the dot-com bubble; the tapering of the manipulative trading practices; and short sales by sophisticated investors who had realized that GBNE's price was manipulated, GBNE's inflated price could not be sustained. What this demonstrated, as an initial matter, is that this was not a relatively simple situation in which the fraudulent conduct at issue was revealed all at once, such that one could observe the market's immediate response to a disclosure in order to quantify victims' losses. Rutkoske, 506 F.3d at 179 (describing similar circumstances). It appears instead to be a case where the inflationary (fraud-induced) component fell out of the price gradually, as the result of cessation of manipulative conduct, an increasing awareness in the market that GBNE's price was inflated, and perhaps even broader market forces. 30 See Madge S. Thorsen, Richard A. Kaplan & Scott Hakala, Rediscovering the Economics of Loss Causation, 6 J. BUS. & SEC. L. 93, 103-06 (2006) (explaining how these factors might lead to gradual dissipation of the inflationary component). The balance of the district court's findings were drawn from the expert report and testimony of DeRosa. His analysis was an attempt to do what we have described above. He sought to calculate the fair market price of GBNE during the period in which the price had been manipulated, February 29, 2000, to December 31, 2000, which he labeled the Manipulation Period. This fair market price -- essentially, what the price would have been 'but for' the price manipulation, DeRosa Rep. at 5, Joint App'x at 623 -- could then be compared to GBNE's actual closing price to isolate the so-called inflationary component of the price -- that part of the price that was the result of fraud. To calculate GBNE's fair market prices, DeRosa started with a clean price for GBNE, an actual closing price that he could assume with some confidence was not the product of manipulation. He selected the actual closing price of GBNE on January 1, 2001, which date he designated as the beginning of what he called the Post-Manipulation Period. Derosa Rep. at 5, Joint App'x at 623. He then set out to demonstrate how this clean price would have behaved, 31 proceeding from the beginning of the Post-Manipulation Period backward throughout the preceding Manipulation Period. DeRosa's attempts to do this rested on the premise that movements in a particular stock's price can be expected to be associated with contemporaneous like movements in the prices of stocks in general and in particular the prices of stocks in the same industry. DeRosa Rep. at 12, Joint App'x at 630. This empirical regularity is the natural consequence of common risks. One such set of risks is what some corporate finance literature terms market risk (or systematic risk) -- economywide perils that threaten all businesses, but also tend to affect the share price of companies in the same industry similarly. RICHARD A. BREALEY ET AL., PRINCIPLES OF CORPORATE FINANCE 170 & n.25 (10th ed. 2011); see also RONALD J. GILSON & BERNARD S. BLACK, (SOME OF) THE ESSENTIALS OF FINANCE AND INVESTMENT 96-97 (1993). Another is what the district court called industry-specific idiosyncratic risk, Gushlak, 2012 WL 1379627 at , 2012 U.S. Dist. LEXIS 56009 at , which consists of risk factors that apply to all companies in a particular industry, and affects similar companies within that industry in similar manner and to a similar degree. These latter risks are a form of what the literature calls specific, unsystematic, or unique risk. BREALEY, supra, at 170; GILSON & BLACK, supra, at 96-97. 32 What DeRosa sought to do, then, was identify a company or group of companies whose rate of return11 moved in like manner and degree to GBNE's during the Post-Manipulation Period, during which GBNE was not being manipulated by fraud. For this, DeRosa used a technique known as regression analysis. Regression analysis, DeRosa explained, is a way of determining the impact of . . . explanatory variables -- here, the monthly rates of return of potential comparator stocks -- on the dependent variable -- the monthly rate of return of GBNE. DeRosa Rep. at 10, Joint App'x at 628. This approach was used to find a comparator the rate of return of which had a meaningful statistical relationship with GBNE's, such that an unmanipulated GBNE could be expected to behave like the comparator, and for the same reasons. Id. The comparator could then serve as a proxy for GBNE's reaction to the materialization of market and industry-specific risks during the Manipulation Period. DeRosa applied this method to rates of return of shares in companies he deemed similar to GlobalNet, reasoning that these were the most likely to 11 Specifically, DeRosa used monthly rates of return for one dollar invested on January 1, 2001. DeRosa Rep. at 6, Joint App'x at 624. He used rate of return instead of stock price because it permitted him to normalize fluctuations in the various comparators' prices. Hearing Tr., Feb. 14, 2012, at 19-20, Joint App'x at 1773-74; see also id. at 28, Joint App'x at 1782 (explaining DeRosa's reason for using monthly, instead of daily, rate of return). 33 have a statistically meaningful relationship with GBNE's rate of return. His analysis led him to the view that an existing stock index, CUTL, was the best available comparator. Id. at 14, Joint App'x at 632. CUTL, he explained, is a capitalization-weighted index composed of NASDAQ stocks in the telecommunications industry. Id. at 8, Joint App'x at 626.12 DeRosa testified that according to his analysis, the relationship between CUTL's and GBNE's rates of return during the Post-Manipulation Period was highly significant, Hearing Tr., Feb. 14, 2012 (2/14 Hr'g), at 26, Joint App'x at 1780, and that CUTL was an outstanding explanatory variable, id. at 28, Joint App'x at 1782. He pointed out, moreover, that CUTL and GBNE were not correlated at all during the Manipulation Period. DeRosa Rep. at 14, Joint App'x at 632. This, he opined, was powerful confirmation of the manipulation. 2/14 Hr'g at 26-27, Joint App'x at 1780-81. CUTL's relationship to GBNE enabled DeRosa to use CUTL's movements during the Manipulation Period to calculate what GBNE's price 12 I found a telecommunications [stock] index that [is] prepared by the NASDAQ people. It's not the NASDAQ index; it's just prepared by them on telecommunications. We refer to it as 'CUTL' because that was its sticker [sic] symbol, and it has about 400 stocks in it. Test. of David DeRosa, Hr'g Tr., Feb. 14, 2012, at 17, Joint App'x at 1768. 34 would have been absent the manipulation on any given date. He did so by applying CUTL's fluctuations in rates of return backwards in time from January 1, 2001, to GBNE's price on that date. DeRosa Rep. at 14-15, Joint App'x at 632-33. In other words, he made GBNE's price move back through time the way CUTL's did. He then plotted these prices on a chart along with GBNE's actual closing price, id. at 15, Joint App'x at 633. This chart is set forth at the end of this opinion