Client Investigative Expenses: Reimbursable as Restitution, or Not?
On January 12, 2018, the U.S. Supreme Court granted certiorari in Lagos v. United States, 864 F.3d 320 (5th Cir. 2017), cert. granted, 138 S. Ct. 734 (U.S. Jan. 12, 2018), to resolve a persisting circuit split over whether the Mandatory Victims Restitution Act (“MVRA”) requires restitution for the costs of internal investigations and attorneys’ fees incurred separately and independently from the government’s official investigation.
In Lagos, defendant-petitioner Sergio F. Lagos pleaded guilty to one count of conspiracy to commit wire fraud and to five counts of wire fraud, arising from a revolving-loan financing agreement between Lagos (and his company USA Dry Van Logistics LLC) and General Electric Capital Corporation (“GECC”). Specifically, GECC extended financing to Lagos based upon the value of his company’s accounts receivable. In order to secure increased financing, Lagos and his co-conspirators falsified their accounts receivable to the tune of $26.726 million by, inter alia, recording fictitious sales and “paying” the company for those fictitious sales with some of the money borrowed from GECC.
District Court Ruling
The U.S. District Court for the Southern District of Texas sentenced Lagos to 97 months of imprisonment and three years of supervised release. The court also ordered restitution pursuant to the MVRA, and Lagos agreed that he was responsible to GECC, the victim, for the money he still owed GECC under the financing agreement, totaling about $11 million. However, Lagos disagreed with the court that he was liable under the MVRA for an additional $4.895 million to compensate GECC for forensic expert fees, legal fees, and consulting fees. GECC incurred those expenses conducting an internal investigation of Lagos’ fraud and in participating in USA Dry Van Logistics’ bankruptcy proceedings.
The crux of the dispute revolves around the meaning of 18 U.S.C. § 3663A(b)(4), which requires (for certain crimes) restitution 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.)
Lagos contends that the plain language of this clause is applicable only to necessary expenses incurred by a party participating in the official government criminal investigation and prosecution. Thus, an internal investigation undertaken outside of the government’s official investigation and “neither required nor requested”1 by the government—as in his own case—is simply not covered by the statute. In opposition, the government contends that Lagos’ unreasonably narrow interpretation fails to comport with the MVRA’s substantive purpose of ensuring that victims of a crime receive full restitution.
The Fifth Circuit Weighs In
In a brief opinion, the Fifth Circuit upheld the district court’s restitution award. Based on prior Fifth Circuit cases that had given a broad reading to § 3663A(b)(4), the Fifth Circuit found that GECC’s internal investigatory and legal costs—which were caused directly by Lagos’ fraud—easily fell within the scope of that statutory provision.
Although he concurred with the judgment of the court, Judge Stephen A. Higginson separately wrote to suggest that the Fifth Circuit may be interpreting § 3663A(b)(4) too broadly. Judge Higginson first expressed his agreement with the D.C. Circuit’s “persuasive interpretation” of the statute in United States v. Papagno, 639 F.3d 1093 (D.C. Cir. 2011). In Papagno, the D.C. Circuit held that, as a matter of straightforward statutory interpretation, costs incurred through an internal investigation neither required nor requested by the government are not covered by the § 3663A(b)(4). As a preliminary matter, the D.C. Circuit noted that the singular “offense” referred to in the section is the criminal offense of conviction, and the singular “investigation or prosecution” is the official criminal investigation and prosecution conducted by the government. The D.C. Circuit then focused on the term “participation,” finding that it has a narrower meaning than “assistance”—i.e., that an internal investigation may have assisted the government’s investigation does not mean that the internal investigators participated in the government’s investigation. The D.C. Circuit also highlighted § 3663A(b)(4)’s use of the term “necessary,” which further militates against its application to such an internal investigation—an internal investigation neither required nor requested by government investigators is by definition “unnecessary.”
Judge Higginson then noted three additional points that further support the D.C. Circuit’s narrower reading of the statute: 1) Breaking the statute down, Judge Higginson read § 3663A(b)(4) to allow reimbursement for a victim’s participation in the investigation of the offense, participation in the prosecution of the offense, and attendance at proceedings related to the offense. In his view, because the latter two can occur only within the context of the government’s criminal enforcement, that implies that the first—participation in the investigation of the offense—must also be limited to the context of the government’s criminal enforcement; 2) the Fifth Circuit’s broad interpretation may be difficult to administer, requiring district courts to determine the scope of “the investigation” and what expenses were “necessary”; and 3) limiting the reach of § 3663A(b)(4) does not prevent victims from fully recovering their losses. Other criminal restitution provisions may allow recovery, and even where they fall short, victims may bring their own civil actions.
The D.C. Circuit’s and Judge Higginson’s narrower reading of § 3663A(b)(4) is the minority position. Counting the Fifth Circuit, seven of the eight circuits that have considered the question have taken the broader view of that statutory provision.2 We shall see what the court has to say. – ©2018 BLANK ROME LLP
- Petition for a Writ of Certiorari, Lagos v. United States, No. 16-1519, 2017 WL 2665926, at *I (U.S. June 15, 2017).
- See, e.g., United States v. Janosko, 642 F.3d 40, 42 (1st Cir. 2011); United States v. Amato, 540 F.3d 153, 159-60 (2d Cir. 2008); United States v. Elson, 577 F.3d 713, 727-28 (6th Cir. 2009); United States v. Hosking, 567 F.3d 329, 332 (7th Cir. 2009); United States v. Stennis-Williams, 557 F.3d 927, 930 (8th Cir. 2009); United States v. Nosal, 844 F.3d 1024, 1046-47 (9th Cir. 2016).