Opinion ID: 206091
Heading Depth: 2
Heading Rank: 3

Heading: Restitution Under the Mandatory Victims Restitution Act

Text: At Paul's sentencing hearing, there was extensive discussion regarding restitution. According to the original Presentence Investigation Report (PSR), the total losses to all victimsincluding losses to individual investors and losses to Merrill Lynch and Spear, Leedswas $28,596,827.23, but the only losses attributable to Paul's securities fraud were the losses to the individual investors, totaling $15,945.849.47. The government conceded, however, that the losses to the individual investors could not be properly quantified, and therefore argued that the only restitution that could be properly imposed on Paul would be the losses to Merrill Lynch and Spear, Leeds, totaling $12,650,978.00. Later in the hearing, the probation officer noted that the $12,650,978.00 figure related to bank fraud and not the security [sic] fraud that [Paul] pled guilty to. J.A. 400. As a result of this confusion, the Court reserved decision on the restitution issue. The Court held restitution hearings on July 15, 2009 and July 23, 2009. By then, the Probation Department concluded that it had erred in not including the total losses that Merrill Lynch and Spear, Leeds sustained. Accordingly, the District Court imposed restitution to Merrill Lynch in the amount of $3,828,057.56 and to Spear, Leeds in the amount of $7,650,977.76. We review restitution orders deferentially and will reverse only for abuse of discretion. United States v. Pearson, 570 F.3d 480, 486 (2d Cir.2009). To identify such abuse, [the Court] must conclude that a challenged ruling rests on an error of law, a clearly erroneous finding of fact, or otherwise cannot be located within the range of permissible decisions. Id. The Mandatory Victims Restitution Act (MVRA) provides, in part, that in sentencing a defendant convicted of certain crimes, including securities fraud, the court must order the defendant to pay restitution to any victim of the offense. 18 U.S.C. § 3663A(a)(1). The MVRA defines the term victim as: [A] person directly and proximately harmed as a result of the commission of an offense for which restitution may be ordered including, in the case of an offense that involves as an element a scheme, conspiracy, or pattern of criminal activity, any person directly harmed by the defendant's criminal conduct in the course of the scheme, conspiracy, or pattern. 18 U.S.C. § 3663A(a)(2). In determining the proper amount of restitution, a court must keep in mind that [t]he loss must be the result of the fraud. United States v. Rutkoske, 506 F.3d 170, 179 (2d Cir.2007) (citing United States v. Ebbers, 458 F.3d 110, 128 (2d Cir.2006)). The pertinent question here is whether the losses to Merrill Lynch and Spear, Leeds can be considered losses resulting from the securities fraud to which Paul pled guilty. The Probation Department initially took the position that the loss to the financial institutions was the result of bank fraud, not securities fraud. In its Second Addendum to the PSR, however, the Probation Department concluded that it erred and changed its position based on Paragraph 26(d) of the Second Superseding Indictment which alleged: The offense affected financial institutions, and by committing the offense, the defendant PETER PAUL derived gross receipts in excess of $1 million. PSR Second Addendum 1 (citing U.S.S.G. § 2F1.1(b)(8)(B) (2000)). As a result, at the time of the restitution hearings, the Probation Department and the government were in agreement that Paul was accountable for the losses to Merrill Lynch and Spear, Leeds. Paul argues that Merrill Lynch and Spear, Leeds are not properly characterized as victims because their loss was not a direct and proximate cause of Paul's securities fraud. He contends instead that their loss was caused by (1) the declining stock price which left the institutions without valuable collateral to use to recover funds loaned to [Paul], and (2) bank fraud, including fraudulently obtained loans. Def.'s Br. 55-57. Specifically, Paul points out that the government conceded at the June 25, 2009 sentencing hearing that it could not establish a causal link between Paul's conduct and the drop in the price of SLM stock. According to Paul, it follows that there is no causal link between Paul's securities fraud and the loss to Merrill Lynch and Spear, Leeds, as he contends that their losses came solely as a result of the drop in share price. The government responds, however, that the margin loans were an integral part of the larger securities fraud. Gov't Br. 13. Without the loans, the government contends, Paul would not have been able to profit from the scheme without selling his holdings of SLM stock, an event that would have depressed the share price. As part of his allocution at the March 7, 2005 plea hearing, Paul explicitly admitted that: Beginning in approximately May 2000 and continuing through December 2000, I and others borrowed money on margin from Merrill Lynch via these nominee accounts, using my stock in the nominee accounts as collateral. In this way, I concealed from the investing public that I was leveraging and, in effect, liquidating a substantial part of my holdings in Stan Lee Media stock. J.A. 324. Because these loans were admittedly a significant part of the greater fraud, the necessary causal nexus unquestionably exists between Paul's conduct, the margin loans, and the losses to Merrill Lynch and Spear, Leeds. The brokerage houses would not have made the loans to Paul had they known that the collateral for the loans was the stock he manipulated through the nominee accounts. Paul, however, also argues that even if he is responsible for the losses to Merrill Lynch and Spear, Leeds, the District Court was required, under our decision in United States v. Rutkoske, 506 F.3d 170, 179 (2d Cir.2007), to exclude from the amount of restitution any losses not caused by fraud. The restitution calculation in Rutkoske involved losses to investors as a result of a collapse in the price of the stock involved in the defendant's fraud. Id. at 178-80. Because [m]any factors may cause a decline in share price between the time of the fraud and the revelation of the fraud[,] id. at 179 (citing Ebbers, 458 F.3d at 128), and because the district court failed to consider such factors, the court remanded the case for a recalculation of the loss amount. Id. at 180. In the instant case, however, the loss to Merrill Lynch and Spear, Leeds was not caused by the decline in value of SLM stock but, rather, by the making of the loans in the first instance. For this reason, the instant case is more analogous to our decision in United States v. Turk, 626 F.3d 743 (2d Cir.2010). In Turk, the defendant fraudulently procured $27 million in loans from seventy victims using a collection of buildings as collateral. Id. at 745. As a result of the collapse in the housing market, the value of the buildings dropped significantly. See id. at 744. In calculating the proper loss value, the Turk court found that the item of value lost by [the defendant's] victims was the unpaid principal of the loans, not the buildings themselves.... At any given time, the buildings in this case were nothing more than insulation against loss. Id. at 751. As a result, the decline in value in any purported collateral need not have been foreseeable to [the defendant] in order for her to be held accountable for that entire loss. Id. at 749. The same logic guides us here. The fact that independent market forces may have contributed to the decline in SLM stock held by Merrill Lynch and Spear, Leeds is irrelevant to the restitution calculation, because the stock was merely securing the fraudulently-obtained loans. The loss to the brokerage houses resulted from Paul's inducement of the loans, and it is for this loss that Paul must provide restitution. Accordingly, the District Court did not abuse its discretion in imposing the restitution. The restitution order must, therefore, be affirmed.