Restitution may be the most important issue that most criminal defense lawyers are uninterested in litigating. Folks who practice in the criminal space – even the white-collar space – tend to see themselves as a champion of liberty. They care about freedom and justice. They are significantly less interested in fighting over money.
Nonetheless, money is an important thing in many people’s lives. And, if a person is convicted of a crime, the government will try to take their money too – either through a fine, a forfeiture judgment, or restitution.
The Second Circuit, in United States v. Cuti, recently narrowed the scope of what expenses can be part of a restitution judgment.
Anthony Cuti was the CEO of Duane Reade until 2005. He was convicted of securities fraud after trial in connection with two accounting fraud schemes to inflate the company’s earnings. His conviction was upheld in a separate appeal – that’s not the issue in this case.
This case is all about the Benjamins.
Mr. Cuti is Fired
In 2004, Duane Reade was purchased by Oak Hill — a private equity firm. Mr. Cuti was terminated shortly after in 2005.
As sometimes happens, Oak Hill and Mr. Cuti did not agree on all of the details of how his termination should be sorted out. The case went to arbitration. Paul Weiss represented Duane Reade in the arbitration.
Shortly before the arbitration was started though, Duane Reade’s general counsel learned that there were some suspected shenanigans that involved Mr. Cuti.
The company hired Cooley to investigate.
It will surprise exactly no one that having Paul Weiss and Cooley do a bunch of legal work was really expensive.
The Restitution Framework
Let’s step back from the story of what happened with Mr. Cuti to look at the legal framework for these cases.
When a person – or corporation – suffers a loss because someone did something that was illegal, they generally get to recover their expenses in ferreting out that loss or illegal conduct. That said, they can only do that for expenses that are necessary to figure out what the loss is.
As the Second Circuit explained it:
necessary . . . expenses related to participation in the investigation as described in the [Victim and Witnesses Protection Act], 18 U.S.C. § 3663(b)(4), are “expenses the victim was required to incur to advance the investigation or prosecution of the offense,” This may include internal investigations undertaken in the face of evidence–or grounded suspicion–of internal misconduct which ultimately unmask fraud.
What’s a Necessary Expense?
So, the expenses that Duane Reade had to shell out for that were related to unmasking what happened were necessary. What does that mean here?
Here there were two law firms looking into these transactions — Paul Weiss was doing it in connection with an arbitration proceeding and Cooly was doing it in connection with an internal investigation. Does Cuti have to pay for both firms’ expenses?
As it happens, probably not:
while Paul, Weiss may have uncovered evidence of the real estate concession scheme in February 2007 and subsequently “educate[d]” Cooley about it, App’x at 351, it was Cooley that undertook and prepared the May 2007 report on it for the Duane Reade board. Paul, Weiss meanwhile continued to work on the arbitration and amended its counterclaims and affirmative defenses accordingly in April 2007. A corporate client such as Duane Reade is entitled to expend as much as it deems prudent on preparations for its defense in a civil case or arbitration. However, under Maynard, not all such expenses are “necessary” for restitution purposes.
The Circuit remanded the case for the district court to wade through Paul Weiss’s bills to figure out which were related to the arbitration and which went to investigate the fraud.