United States v. Marino, No. 09-1965 (2d Cir. 2011)
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This case stemmed from appellant's participation in the Bayou Hedge Fund Group (Bayou), a classic Ponzi scheme masked as a group of domestic and offshore hedge funds. Appellant appealed from his sentencing, following a plea of guilty to misprision of felony in violation of 18 U.S.C. 4. At issue was whether the district court's order of restitution in the amount of $60 million was improper because it relied on events occurring outside the relevant time period and the putative victims' losses were neither directly nor proximately caused by his actions as required by the Mandatory Victims Restitution Act of 1996 (MVRA), 18 U.S.C. 3663A. The court found no error, much less plain error, in the district court's use of appellant's fraudulent 2003 faxes at sentencing. The court also found no error in the district court's conclusion that appellant's failure to report the Bayou fraud was both the direct and the proximate cause of the victim investors' losses. Accordingly, the judgment was affirmed.
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09-1965-cr United States v. Matthew Marino 1 UNITED STATES COURT OF APPEALS 2 FOR THE SECOND CIRCUIT 3 August Term, 2009 4 (Argued: May 10, 2010 5 Docket No. Decided: August 18, 2011) 09-1965-cr 6 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 7 8 9 UNITED STATES OF AMERICA, Appellee, 10 v. 11 12 13 MATTHEW MARINO, 14 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 15 B e f o r e: Defendant-Appellant. JACOBS, Chief Judge, WINTER, and MCLAUGHLIN, 16 17 Circuit Judges. Appeal from a final order of conviction entered by the 18 United States District Court for the Southern District of New 19 York (Stephen C. Robinson, Judge), following a guilty plea to 20 one count of misprision of felony in violation of 18 U.S.C. § 4 21 for failing to report a Ponzi scheme. 22 district court s restitution order requiring appellant to pay 23 restitution in the amount of $60 million pursuant to the 24 Mandatory Victims Restitution Act ( MVRA ), 18 U.S.C. §§ 3663A. 25 We affirm. 1 Appellant challenges the 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 EUGENE J. RICCIO, Gulash & Riccio, Bridgeport, Connecticut, for Defendant-Appellant. MARGERY B. FEINZIG, Assistant United States Attorney, of counsel (Preet Bharara, United States Attorney for the Southern District of New York, Jesse M. Furman, Assistant United States Attorney, of counsel), for Appellee. WINTER, Circuit Judge: Matthew Marino appeals from his sentencing by Judge 17 Robinson, following a plea of guilty to misprision of felony in 18 violation of 18 U.S.C. § 4. 19 the district court s order that appellant pay restitution in 20 the amount of $60 million. 21 court s order of restitution was improper because it relied on 22 events occurring outside the relevant time period and the 23 putative victims losses were neither directly nor proximately 24 caused by his actions as required by the Mandatory Victims 25 Restitution Act of 1996 ( MVRA ), 18 U.S.C. §§ 3663A. 26 27 The only issue on appeal involves Appellant argues that the district We affirm. BACKGROUND 28 Appellant participated in the Bayou Hedge Fund Group 29 ( Bayou ), a classic Ponzi scheme masked as a group of domestic 30 and offshore hedge funds that, when it unraveled in 2005, 2 1 2 caused approximately $200 million in investor losses.1 Samuel Israel III and James G. Marquez opened the original 3 Bayou fund in 1996, with approximately $1 million in capital. 4 Thereafter, they recruited investors to the fund, requiring a 5 minimum investment of $100,000. 6 responsibility for the fund s investment strategy and 7 recruiting investors. 8 Marino, a certified public accountant, to keep the fund s books 9 and to reconcile trading records. Israel and Marquez shared They hired appellant s brother, Daniel The fund retained accounting 10 firm Grant Thornton to act as Bayou s independent financial 11 auditor. 12 From the start, Bayou lost money. However, rather than 13 disclose these losses to investors, Israel and Marquez, upon 14 Daniel Marino s suggestion, remitted a portion of the 15 commissions they earned on trades to the fund s investors, 16 thereby creating the illusion that the fund was earning 17 positive returns. 18 By the end of 1998, the fund had accumulated substantial 19 trading losses and masking the losses with trading commissions 20 was no longer possible. 21 Marquez, and Daniel Marino met to discuss the fund s losses. On or about December 30, 1998, Israel, 1 A final analysis of Bayou s records indicated that there were 392 investors who invested over $500 million in the various Bayou funds. Of those investors, 288 lost an aggregate amount in excess of $309 million in contributions to the fund. Of that amount, however, $110 million plus interest was recovered. 3 1 They devised a scheme to conceal the losses by firing Grant 2 Thornton as independent auditor and having Daniel Marino 3 prepare and issue sham audits. 4 the help of appellant, created a fictitious independent 5 accounting firm, Richmond-Fairfield Associates ( RFA ), which 6 purported to maintain offices in Manhattan. 7 In 1999, Daniel Marino, with Thereafter, Israel, Marquez, and Daniel Marino began to 8 draft and mail to investors quarterly and monthly reports 9 indicating fictitious positive rates of returns and inflated 10 accumulated profits. 11 statements that contained inflated rates of return on trading, 12 overstated net asset values, and certifications from RFA that 13 it had audited Bayou s financial reports. 14 Investors also received annual financial In reality, however, the fund s losses continued to mount. 15 Increasingly, Israel and Marquez blamed each other for the 16 losses, and, in January 2001, Marquez was ousted from the fund 17 after a dispute with Daniel Marino. 18 assumed the role of Bayou s Chief Financial Officer, where he 19 continued to manage the accounting portion of the fraud, and, 20 through RFA, drafted the fictitious audits and certifications 21 of the fund s financial reports. 22 maintained responsibility for all the investment and trading 23 activities of Bayou, including the recruitment of new 24 investors. 25 4 Thereafter, Daniel Marino For his part, Israel 1 Using the fictitious financial returns to claim a 2 profitable track record, Israel and Daniel Marino attracted 3 substantial numbers of new investors to the fund, receiving 4 investment capital in excess of $500 million. 5 Daniel Marino ultimately closed the original Bayou fund, and 6 opened four domestic hedge funds, as well as two different sets 7 of offshore funds in the Cayman Islands, all under the Bayou 8 banner. 9 accounting personnel, and administrative staff, all while 10 11 Israel and They hired additional employees, including traders, continuing to provide falsified information to Bayou investors. Appellant s involvement with Bayou began in 2002, when he 12 was hired as an employee at a salary of $5,000 per month to 13 develop a North Carolina office for the fund s broker-dealer. 14 By the fall of 2002, appellant was making periodic trips to 15 Bayou s office in Connecticut. 16 In or about 2003, appellant s salary increased to $10,000 17 per month, and he began assisting his brother Daniel Marino 18 with private placement investments. 19 including movie and real estate deals, an international money 20 transferring firm, and a French cable company -- were intended 21 to make up for Bayou s losses and to provide personal profit to 22 Israel and Daniel Marino. 23 were ever disclosed to Bayou investors, nor were they the type 24 of investments that Bayou purported to be making with 25 investors funds. These investments -- However, none of these investments Although appellant assisted in these private 5 1 placement investments, he claims to have been unaware that the 2 investments were unauthorized. 3 In 2003, appellant was tasked with locating new office 4 space for RFA in mid-town Manhattan. 5 temporary employees for a short period in the spring of 2003, 6 RFA never had any regular employees, save for appellant. 7 Appellant managed all of RFA s administrative tasks, including: 8 picking up the mail at RFA s office; checking RFA s voice mail 9 messages and reviewing written correspondence from Bayou 10 investors; paying RFA s bills using RFA s checkbook; and 11 picking up the phony audited financial statements from the 12 printer and copying them after Daniel Marino signed them on 13 behalf of RFA. 14 Aside from retaining two In addition, the record indicates that appellant had at 15 least some direct interaction with Bayou investors. 16 example, the record includes several emails from appellant to 17 Daniel Marino regarding phone calls and other correspondence 18 from Bayou investors to RFA concerning RFA s audit of Bayou. 19 In an email dated May 23, 2005, appellant notified Daniel 20 Marino of a phone call from an investment advisor whose client 21 . . . invested in the Bayou Superfund and was wondering whether 22 the audit is almost finished or not, to which appellant 23 inquired, Let me know if you want me to call back and provide 24 what time frame the audit will be done. 25 dated July 12, 2005, appellant stated: Call from [investment 6 For In another email, 1 advisor to a Bayou client] had a quick question. 2 call. 3 Another email, dated January 20, 2005, indicates that appellant 4 was signing written correspondence on behalf of RFA with Daniel 5 Marino s permission: I have a certification letter from 6 [financial advisor] Anchin, Block & Anchin re: Custom Strategy 7 -- like last year. 8 indicates that appellant, as early as April 10, 2003, was 9 opening annual letters, referred to as confirmation letters, 10 that the fund sent to each investor indicating the value of the 11 investor s position in the fund. 12 confirmation letter, the investors signed and returned the 13 letters, thereby confirming their understanding of their 14 account value. 15 Asked for a Wanted to check with you fir[s]t before calling back. Go ahead and sign it? The record also Upon receipt of the In particular, the record includes two such faxes, sent by 16 appellant to Daniel Marino on April 10 and 29, 2003, 17 respectively (the 2003 faxes ), indicating both the dates when 18 confirmation letters were sent to particular investors and 19 whether the investors had subsequently confirmed the value of 20 their investments. 21 appellant, in the from line of the faxes appears the 22 pseudonym M. Richmond, of RFA. 23 faxes, the record includes an email sent by appellant in 2005 24 indicating that he continued to open investors confirmation 25 letters through 2005. Although the 2003 faxes were sent by 7 In addition to the 2003 1 The record also indicates appellant s considerable 2 involvement in concealing the fraudulent nature of RFA and 3 Bayou. 4 litigation in early 2005, appellant played an active role in 5 stonewalling, or otherwise preventing, Mrs. Israel s lawyers 6 from obtaining financial records for Bayou and RFA. 7 example, in a January 7, 2004 memorandum to Daniel Marino, 8 appellant discussed RFA s litigation strategy with respect to 9 delaying its response to Mrs. Israel s subpoena for RFA s In particular, when Israel was involved in divorce For 10 financial information. 11 that he would represent [RFA] and [outside counsel Kelley Drye 12 & Warren, LLP] would assist and perhaps be co-counsel in 13 arguing any motions/hearings, leaving open the possibility 14 that Kelley Drye would represent[] [RFA] themselves with my 15 guidance. 16 Israel s subpoena created with respect to concealing the true 17 identity of RFA s principal and any other documentation that 18 might reveal the fraud. 19 20 21 22 23 24 25 26 In his memorandum, appellant stated Appellant was keenly aware of the problem that Mrs. As appellant s memorandum states: The issue . . . with me representing [RFA] is that the opposing attorney would pick up on my relation to you [Daniel Marino] and therefore seek an aggressive stance of distrust. The issue with [Kelley Drye] representing [RFA] is that they need to speak to the [RFA] principal and review what documents they have. 27 His memorandum also states: [Kelley Drye] suggested that . . . 28 as a second prong to the motion [to quash], [RFA] asks for a 8 1 protective order on any documents provided to keep them 2 confidential (this obviously doesn t help us). 3 Later, on January 10, 2005, appellant sent an email to 4 Daniel Marino again discussing ways to stonewall Mrs. Israel s 5 attorney: 6 opposing attorney and ask for a month on the pretext that he was 7 away in latter December and was sick during first week in 8 December and just got the subpoena. 9 appellant frequently used the pseudonym M. Richmond as the 10 11 Another short term solution is to have Mr. R call the The record indicates that fictitious principal of RFA.2 On February 13, 2005, in an email to Daniel Marino regarding 12 RFA s then-outside counsel Leonard Benowich s response to Mrs. 13 Israel s subpoena, appellant again discussed the problem of 14 revealing RFA s principal: 15 16 17 18 19 20 21 22 23 In regards to [RFA], Benowich has prepared Affidavits from himself, you and an individual at [RFA] . . . . The Affidavit from [RFA] needs to come from an individual and needs to be made as it discusses more particularly the arguments [RFA] has in quashing the motion. This is something [i.e., the identity of the RFA principal] we will need to figure out who. 24 Israel s attorney is also evident in an email to Daniel Marino on 25 July 14, 2005, regarding a draft letter from Benowich to Mrs. 26 Israel s attorney. Appellant s involvement in hiding information from Mrs. Benowich s draft letter attached to the email 2 The district court treated appellant as the alter-ego of Matt Richmond: [T]he documents were there in front of [appellant] to see . . . as Mr. Richm[ond] of [RFA]. 9 1 stated: Please be advised that as far as . . . Dan Marino and 2 Sam Israel are concerned, you will not receive any documents nor 3 will you be deposing anyone associated with my client [RFA]. 4 In the email, appellant also stated in reference to the draft 5 letter: 6 concerned rather than Dan Marino and Sam Israel because there is 7 supposed to be independence between [RFA] and the both of you. 8 9 It may be better to say as far as my client is Meanwhile, as appellant and Daniel Marino continued in their efforts to stonewall Mrs. Israel s attorney, Bayou had begun to 10 unravel in a serious manner. 11 had largely wound down and suspended trading on behalf of the 12 various Bayou funds, while still representing to their clients 13 that Bayou was actively managing an investment portfolio. 14 than pursuing legitimate trading activities, they instead 15 invested the remaining Bayou funds in a series of fraudulent 16 prime bank instrument trading programs in a desperate attempt 17 to recoup Bayou s enormous losses. 18 By 2005, Israel and Daniel Marino Rather For his part, appellant continued to play a substantial role 19 in concealing Bayou s losses from its investors. 20 March 2005, prior to mailing RFA s 2004 audit of Bayou to 21 investors, appellant, at Daniel Marino s direction, changed a 22 number in the audited financials that were later distributed to 23 investors. 24 25 For example, in On May 23, 2005, after Israel transferred nearly $100 million to a New Jersey bank in pursuit of a prime bank 10 1 investment opportunity, the Arizona Attorney General seized the 2 funds after concluding that the funds were the proceeds of a 3 fraudulent prime bank scheme. 4 inquire in earnest about Bayou s activities, and, in mid-July 5 2005, one such investor requested documentation as to RFA s 6 independence from Daniel Marino. 7 Thereafter, investors began to To allay the investor s concerns, and, as appellant stated 8 in an email to Daniel Marino, until snooping is done on [RFA] 9 itself, appellant and Daniel Marino devised a scheme to provide 10 the investor a fake purchase-sale agreement indicating that RFA 11 had been sold by Daniel Marino to the fictitious Matt Richmond on 12 September 31, 1999. 13 the investor. 14 However, the agreement was never provided to The Bayou fraud was finally revealed in August 2005, when 15 Daniel Marino issued a check for approximately $53 million to an 16 investor who was asking questions about the fund and seeking to 17 redeem his investment. 18 insufficient funds, on August 16, 2005, the investor attempted to 19 meet Daniel Marino at Bayou s office in Stamford, Connecticut. 20 There, the investor discovered a suicide/confession note from 21 Daniel Marino which fully revealed the Bayou fraud. 22 notified the local police, who later located Daniel Marino and 23 notified federal authorities. 24 25 After the check was returned for The investor Israel, Daniel Marino, and Marquez later pled guilty to charges related to the Bayou fraud. 11 Israel and Daniel Marino 1 were sentenced principally to 20 years imprisonment and ordered 2 to pay $300 million in restitution. 3 principally to 51 months imprisonment and ordered to pay 4 restitution in the amount of $6,259,650. 5 Marquez was sentenced On September 3, 2008, appellant pled guilty to misprision of 6 felony pursuant to a Pimentel letter.3 7 from January 2005 through August 2005, he was aware of the fraud 8 being perpetrated on Bayou s investors, and failed to report the 9 crime. Appellant admitted that, In addition, appellant admitted to having taken 10 affirmative action to conceal the fraud, including participating 11 in the administration of RFA, concealing RFA s financial 12 information from Mrs. Israel, modifying the number in the 13 financial statements, and assisting Daniel Marino in creating the 14 fake purchase-sale agreement for RFA. 15 On April 21, 2009, the district court sentenced appellant to 16 21 months imprisonment, to be followed by a term of supervised 17 release of one year, a mandatory $100 assessment, and restitution 18 in the amount of $60 million. 19 amount of restitution was appropriate because appellant s role 20 was significant and key to the perpetuation of the fraud. The court explained that the 3 In A Pimentel letter generally refers to an informational letter from the government containing an estimate of a defendant s likely sentence under the Sentencing Guidelines. See United States v. Pimentel, 932 F.2d 1029, 1034 (2d Cir. 1991). It is not a binding contract nor a plea agreement, but it is often relied upon by defendants in entering guilty pleas. 12 1 particular, the court explained that, by maintaining the 2 appearance that RFA was a legitimate accounting firm, appellant 3 led investors to believe that their investments [were being] 4 scrubbed and reviewed and that the Bayou Fund was legitimate 5 and real, thereby allow[ing] the fraud to perpetuate. 6 court determined that restitution in the amount of $60 million -- 7 the estimated amount of losses suffered by Bayou Fund investors 8 between January and August 2005 -- was appropriate restitution 9 given the fact that these losses were reasonably foreseeable to 10 11 appellant. This appeal followed. 12 13 The DISCUSSION We review a district court s order of restitution for abuse 14 of discretion. 15 Cir. 2008) (internal quotation marks omitted). 16 district court s legal conclusions de novo, and its factual 17 findings for clear error. 18 158 (2d Cir. 2008). 19 a) Reliance on Pre-2005 Events 20 United States v. Ojeikere, 545 F.3d 220, 222 (2d We review the United States v. Amato, 540 F.3d 153, Appellant first argues that the district court erred by 21 relying upon events that transpired outside the relevant time 22 period. 23 faxes in 2003 while he was working at RFA fall outside the 24 relevant period of the offense for which he was convicted -- 25 i.e., January through August 2005 -- and the district court In particular, appellant asserts that his fraudulent 13 1 should therefore not have relied upon them in determining the 2 restitution amount. 3 We disagree. Because appellant did not raise this argument as an 4 objection at sentencing, we review it only for plain error. See 5 United States v. Inserra, 34 F.3d 83, 90 n.1 (2d Cir. 1994). 6 district court considered appellant s 2003 faxes only to show 7 knowledge of the consequences of his acts during the period of 8 his criminal activity. 9 had knowledge of the severity of potential investor losses at The The 2003 faxes established that appellant 10 stake in the Bayou fraud during the relevant time period in 2005. 11 As the court explained at sentencing, [the investors losses 12 were] also foreseeable to him because he s the person that is 13 sending out confirmations with dollar figures . . . and waiting 14 to see if people confirmed that they received these confirmations 15 on their investment. 16 plain error, in the district court s use of the 2003 faxes at 17 sentencing. 18 b) Direct and Proximate Causation 19 Accordingly, we find no error, much less Appellant s second argument is that restitution is improper 20 because the victims losses were neither directly nor proximately 21 caused by his actions or inactions as required under the MVRA. 22 We disagree. 23 1. 24 The MVRA requires sentencing courts to order restitution for 25 The Statutory Framework certain crimes, such as an offense against property under this 14 1 title . . . including any offense committed by fraud or deceit, 2 and where an identifiable victim has suffered pecuniary loss. 3 U.S.C. § 3663A(a)(1); § 3663A(c)(1).4 4 in the criminal context, is to restore a victim, to the extent 5 money can do so, to the position he occupied before sustaining 6 injury. United States v. Battista, 575 F.3d 226, 229 (2d Cir. 7 2009) (quoting United States v. Boccagna, 450 F.3d 107, 115 (2d 8 Cir. 2006)). 9 10 18 The goal of restitution, The statute defines victim broadly as any: person directly and proximately harmed as a result of 4 Section 3663 addresses restitution generally, and provides that when sentencing a defendant, the court may order restitution. 18 U.S.C. § 3663(a)(1)(A) ( The court, when sentencing a defendant convicted of an offense under this title . . . other than an offense described in section 3663A(c), may order . . . that the defendant make restitution to any victim of such offense . . . . ). Section 3663A mandates restitution for specified offenses, and provides, in relevant part: (a)(1) Notwithstanding any other provision of law, when sentencing a defendant convicted of a [covered] offense . . . , the court shall order . . . that the defendant make restitution to the victim of the offense or, if the victim is deceased, to the victim s estate. . . . (c)(1) This section shall apply in all sentencing proceedings for convictions of, or plea agreements relating to charges for, any offense . . . (A) that is . . . (ii) an offense against property under this title, . . . including any offense committed by fraud or deceit . . . Id. § 3663A. 15 1 2 3 4 5 6 7 8 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). 9 In addition, the MVRA provides that restitution may not be 10 imposed if the determination of complex issues of fact relating 11 to causation would unduly complicate or prolong the sentencing 12 process. 13 provision reflects Congress s intent that sentencing courts not 14 become embroiled in intricate issues of proof, and that the 15 process of determining an appropriate order of restitution be 16 streamlined. 17 Cir. 2006) (citations and internal quotation marks omitted). 18 Id. § 3663A(c)(3)(B). As we have noted, this latter United States v. Reifler, 446 F.3d 65, 136 (2d The procedures by which the sentencing court imposes a 19 restitution order are set forth in 18 U.S.C. § 3664. Pursuant to 20 Section 3664, after a defendant pleads or is found guilty of a 21 covered crime, a federal probation officer provides the 22 sentencing court with a report that includes, inter alia, details 23 of the victims of the defendant s crime and their losses, as well 24 as the economic circumstances of the defendant. 25 3664(a). 26 hearing, the sentencing court determines the amount of 27 restitution the defendant owes, resolving any disputes as to the 28 proper amount by a preponderance of the evidence. 18 U.S.C. § Upon review of this report, and after a sentencing 16 Id. § 3664(e). 1 As we explain in greater detail below, the MVRA s definition 2 of victim tracks identically the definition of victim 3 provided in the Victim Witness Protection Act ( VWPA ), 18 U.S.C. 4 § 3663(a)(2), the general, discretionary restitution statute that 5 preceded and was partially superseded by the MVRA. 6 particular, both the MVRA and the VWPA, as amended, require 7 identical causation standards -- i.e., the victim s harm must be 8 directly and proximately caused by the defendant s criminal 9 activity. 10 In See 18 U.S.C. § 3663A(a)(2); id. § 3663(a)(2). Neither the VWPA nor the MVRA explicitly defines the 11 requisite causation standard sufficiently to directly answer the 12 question before us -- i.e, whether appellant s admitted offense 13 directly and proximately caused Bayou investors losses. 14 2. Legislative History 15 The current causation standards are the result of several 16 amendments to the federal restitution statutes. We therefore 17 turn to the legislative history for insight into Congressional 18 intent. 19 restitution during sentencing with the enactment of the VWPA in 20 1982. Under the 1986 version of the VWPA, federal courts were 21 authorized, when sentencing for certain crimes, to order that 22 the defendant make restitution to any victim of such offense. 23 Hughey v. United States, 495 U.S. 411, 412 (1990). 24 to the current versions of the MVRA and VWPA, the 1986 version of 25 the VWPA omitted any causation standard, but, rather, simply Congress first authorized federal courts to order 17 In contrast 1 provided that restitution would apply to any victim of the 2 offense. See Pub. L. No. 97-291, 96 Stat. 1248 (1982). 3 Like the current version of the MVRA, the original version 4 of the VWPA included a provision that limited a sentencing 5 court s authority to order restitution where such restitution 6 would unduly complicate or prolong the sentencing process. See 7 id. 8 provision to prevent sentencing hearings from becoming prolonged 9 and complicated trials on the question of damages owed the As the Senate Report explained, the Committee added this 10 victim. 11 U.S.C.C.A.N. 2515, 2537. 12 S. Rep. No. 97-532, at 31 (1982), reprinted in 1982 The first major amendment to the VWPA came in 1990, with the 13 passage of the Crime Control Act of 1990, Pub. L. No. 101-647, 14 104 Stat. 4789 (1990).5 The Crime Control Act amended the VWPA 5 Of less relevance here, a separate provision added to the VWPA with the 1990 amendments permitted courts to order restitution beyond the offense of conviction to the extent agreed to by the parties in a plea agreement. 18 U.S.C. § 3663(a)(3). This amendment clarified an issue that had divided the circuits - - whether Hughey barred restitution beyond the count of conviction even where there was a plea agreement by the defendant. See United States v. Silkowski, 32 F.3d 682, 689 (2d Cir. 1994); United States v. Rice, 954 F.2d 40, 43 (2d Cir. 1992). A similar provision is included in the current version of the MVRA. 18 U.S.C. § 3663A(c)(2) ( In the case of a plea agreement that does not result in a conviction for [a covered offense], [restitution] shall apply only if the plea specifically states that [the covered offense] gave rise to the plea agreement. ). Moreover, the MVRA provides that a court shall []order, if agreed to by the parties in a plea agreement, restitution to persons other than the victim of the offense. 18 U.S.C. § 3663A(a)(3). 18 1 2 3 4 5 6 by, inter alia,6 adding § 3663(a)(2), which provides: For the purposes of restitution, a victim of an offense that involves as an element a scheme, a conspiracy, or a pattern of criminal activity means any person directly harmed by the defendant s criminal conduct in the course of the scheme, conspiracy, or pattern. 7 See Pub. L. No. 101-647, § 2509, 104 Stat. at 4863; 18 U.S.C. § 8 3663(a)(2). 9 victim be directly harmed by the defendant s criminal conduct, 10 In introducing the causation standard that the Congress explained: 11 12 13 14 15 16 17 H.R. Rep. No. 101-681(I), at 177 n.8 (1990), reprinted in 1990 18 U.S.C.C.A.N. 6472, 6583, n.8. 19 The use of directly precludes, for example, an argument that a person has been harmed by a financial institution offense that results in a payment from the insurance fund because, as a taxpayer, a part of that person s taxes go to the insurance fund. The next major amendment to the federal restitution statutes 20 came in 1996 with enactment of the MVRA, which was included as 21 Title II, Subtitle A, of the Antiterrorism and Death Penalty Act 22 of 1996 ( AEDPA ), Pub. L. No. 104-132, 110 Stat. 1214 (1996). 23 Most significantly, the MVRA partially superseded the VWPA 6 The Crime Control Act of 1990 was passed shortly after the Supreme Court s decision in Hughey. At issue in Hughey was whether the VWPA authorized a sentencing court to order a defendant who was charged with multiple offenses, but only convicted of a single offense, to make restitution for victims losses related to all alleged offenses. Hughey, 495 U.S. at 41213. The Court held that it did not, and interpreted the term restitution to any victim of such offense under the VWPA to authorize restitution only for the loss caused by the specific conduct that is the basis of the offense of conviction. Id. 19 1 insofar as it made restitution that was previously discretionary 2 mandatory as to certain offenses, see 18 U.S.C. § 3663A(a)(1) & 3 (c), and amended the VWPA s definition of victim to match that 4 of the newly enacted MVRA, including the requirement that a 5 victim be someone directly and proximately harmed as a result 6 of defendant s committed crime. 7 at 1228, 1230. 8 9 See AEDPA §§ 204, 205, 110 Stat. Congress explained these newly enacted causation standards as follows: 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 S. Rep. No. 104-179, at 19 (1995) reprinted in 1996 U.S.C.C.A.N. 30 924, 932. 31 The committee intends this provision to mean, except where a conviction is obtained by a plea bargain, that mandatory restitution provisions apply only in those instances where a named, identifiable victim suffers a physical injury or pecuniary loss directly and proximately caused by the course of conduct under [the convicted offense(s)]. . . . In all cases, it is the committee s intent that highly complex issues related to the cause or amount of a victim s loss not be resolved under the provisions of mandatory restitution. The committee believes that losses in which the amount of the victim s losses are speculative, or in which the victim s loss is not clearly causally linked to the offense, should not be subject to mandatory restitution. To summarize, since 1982 when it authorized federal courts 32 to impose restitution Congress has: 33 by, inter alia, allowing restitution for victims who directly 20 (i) broadened this authority 1 suffered harm from crimes involving conspiracy or a criminal 2 scheme, and allowing restitution for crimes pled in a plea 3 agreement; (ii) made restitution mandatory for certain crimes; 4 (iii) imposed a direct and proximate causation standard as to 5 both discretionary and mandatory restitution; and (iv) remained 6 insistent that restitution determinations not unduly prolong 7 sentencing proceedings. 8 9 Although the legislative history is suggestive rather than compelling as to the requisite causation standard, United States 10 v. Vaknin, 112 F.3d 579, 587 (1st Cir. 1997), it may be aptly 11 described as a middle road approach. 12 intent to expand restitution as a remedial measure cautions 13 against a rigid direct causation standard that would foreclose 14 restitution where even the slightest intervening event severs 15 factually or temporally the link between defendant s crime and 16 victim s loss. 17 for expeditious restitution determinations suggests that the 18 factual and temporal link between crime and loss cannot be so 19 tenuous as to require a prolonged and complicated trial[] on 20 the issue of causation. 21 U.S.C.C.A.N. at 2537; see also Vaknin, 112 F.3d at 589 22 ( Restitution should not be ordered in respect to a loss which 23 would have occurred regardless of the defendant s conduct. . . . 24 Even if but for causation is acceptable in theory, limitless but 25 for causation is not. For example, Congress s At the same time, however, Congress s preference S. Rep. No. 97-532 at 31, supra, 1982 Restitution should not lie if the conduct 21 1 underlying the offense of conviction is too far removed, either 2 factually or temporally, from the loss. ). 3 3. Caselaw 4 We turn next to our caselaw.7 We have previously stated 5 that restitution is authorized only for losses that [were] . . . 6 directly caused by the conduct composing the offense of 7 conviction, United States v. Silkowski, 32 F.3d 682, 689 (2d 8 Cir. 1994), and only for the victim s actual loss. United 9 States v. Germosen, 139 F.3d 120, 130 (2d Cir. 1998). 10 In Reifler, we addressed the MVRA s causation requirements 11 at length and in the context of a financial fraud. 12 district court had imposed restitution orders against defendants 13 who pled guilty to conspiracy, in violation of 18 U.S.C. § 371, 14 to artificially inflate the price of securities, in violation of 15 Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 16 78j(b), and Securities Exchange Commission Rule 10b-5, 17 C.F.R. 17 § 240.10b-5. 18 court s restitution orders principally because they ordered 19 restitution to persons who clearly were not victims of the 20 conspiracy, or who were co-conspirators rather than victims. 21 at 125-26. Reifler, 446 F.3d at 135. 7 There, the We vacated the district Id. Because the relevant statutory language in the MVRA and VWPA is nearly identical, we include in our analysis cases arising under both statutes. See United States v. Oladimeji, 463 F.3d 152, 158 n.1 (2d Cir. 2006)(applying Hughey, in interpretation of the VWPA, to a review of a restitution order imposed under the MVRA); In re Local # 46 Metallic Lathers Union, 568 F.3d 81, 86 (2d Cir. 2009) (same). 22 1 However, we also questioned whether restitution was 2 appropriate even for the innocent persons who had made stock 3 purchases during the conspiracy because of the difficulties in 4 meeting the MVRA s causation requirements. 5 See id. at 135-39. As we explained, the MVRA s direct and proximate causation 6 requirements both reflect Congress s interest in maintaining 7 efficiency in the sentencing process. 8 direct causation requirement promotes this efficiency because 9 the less direct an injury is, the more difficult it becomes to 10 ascertain the amount of a plaintiff s damages attributable to the 11 violation. 12 Corp., 503 U.S. 258, 269 (1992)). 13 causation requirement promotes efficiency in the sentencing 14 process by limit[ing] a person s responsibility for the 15 consequences of that person s own acts[,] . . . reflect[ing] 16 ideas of what justice demands, or of what is administratively 17 possible and convenient. 18 quotation marks omitted). 19 Id. at 135. The MVRA s Id. at 135 (quoting Holmes v. Sec. Investor Prot. Likewise, the MVRA s proximate Id. at 135 (citations and internal Applying these principles in Reifler, we expressed serious 20 doubt, but did not decide, whether the MVRA s causation 21 requirements should have foreclosed restitution for even innocent 22 shareholder victims. 23 difficulty that the victims would have encountered as private 24 plaintiffs in a Rule 10b-5 civil action against defendants, 25 either for their lack of standing as purchasers or sellers of See id. at 135-39. 23 We first noted the 1 securities, or for their failure to show reliance on any 2 misrepresentation or omission by defendants, both of which are 3 required in a private Rule 10b-5 action. 4 Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975)). 5 Id. at 135-36 (citing In light of the victims difficulty in establishing Rule 6 10b-5's purchaser/seller standing requirement -- a rule that is 7 intended to avoid severe problems of proof, Blue Chip Stamps, 8 421 U.S. at 758 -- we questioned whether the victims should be 9 able to recover restitution under the MVRA, which, through its 10 proximate causation requirement, is also intended to avoid 11 problems of proof. 12 statutory language and the legislative history, we concluded that 13 there was nothing to suggest that persons eligible to receive 14 restitution under the MVRA would include persons who lack 15 standing to sue, based on the conduct underlying the offense of 16 conviction, in a civil action. 17 Reifler, 446 F.3d at 136. On review of the Id. at 137. Reifler should not be read, however, to suggest that someone 18 who is otherwise a victim is not eligible for restitution 19 because a private right of action is not available. 20 private right of action exists, need such a person show that he 21 or she fulfills every element of that action. 22 the MVRA is a remedy provided to victims independent of the 23 availability, or lack thereof, of a private right of action 24 against a defendant. 25 analogous private right of action exists, caselaw under it may Nor, if a Restitution under What Reifler means is that where an 24 1 inform, but perhaps not control, causation determinations in 2 restitution proceedings. 3 misprison of felony concealed from authorities a massive, ongoing 4 Ponzi scheme involving securities fraud. 5 subject of numerous private actions and has caused us to discuss 6 at great lengths the causation standards applicable in that 7 context. 8 172 (2d Cir. 2005); Suez Equity Inv., L.P. v. Toronto-Dominion 9 Bank, 250 F.3d 87, 95-96 (2d Cir. 2001). In the present matter, appellant s Securities fraud is the See, e.g., Lentell v. Merill Lynch & Co., 396 F.3d 161, In particular, we have 10 long held that a securities-fraud plaintiff must prove both 11 transaction and loss causation. 12 (quoting First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 13 763, 769 (2d Cir. 1994)). Lentell, 396 F.3d at 172 14 We have further stated: 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 Use of the term loss causation is occasionally confusing because it is often used to refer to three overlapping but somewhat different concepts. It may be used to refer to whether the particular plaintiff or plaintiff class relied upon -- or is refutably presumed to have relied upon -- the misrepresentation. ATSI Commc ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 107 (2d Cir. 2007). Generally, however, courts use the term transaction causation to refer to this element. See, e.g., Dura Pharms., 544 U.S. at 341-42, 125 S.Ct. 1627; Emergent Capital Inv. Mgmt., LLC v. Stonepath Group, Inc., 343 F.3d 189, 197 (2d Cir. 2003) ( Like reliance, transaction causation refers to the causal link between the defendant s misconduct and the plaintiff s decision to buy or sell securities. ). Loss causation may also refer to the requirement that the wrong for which the action was brought is a but-for cause or cause-in-fact of the losses suffered, also a requirement for an actionable Section 10(b) claim. 25 1 In re Omnicom Grp., Inc. Sec. Litig., 597 F.3d 501, 509-10 (2d 2 Cir. 2010). 3 omission is the proximate cause of an investment loss if the 4 risk that caused the loss was within the zone of risk concealed 5 by the misrepresentations and omissions alleged by a disappointed 6 investor. Finally, we have explained that a misstatement or Lentell, 396 F.3d at 173. 7 4. 8 Appellant was convicted of having knowledge of, failing to 9 Application report, and taking affirmative steps to conceal the Bayou fraud. 10 See United States v. Cefalu, 85 F.3d 964, 969 (2d Cir. 1996) 11 ( The elements of Misprision of Felony are 1) the principal 12 committed and completed the alleged felony; 2) defendant had full 13 knowledge of that fact; 3) defendant failed to notify the 14 authorities; and 4) defendant took steps to conceal the crime. ) 15 In his view, his conduct was neither the direct nor the 16 proximate cause, for purposes of the MVRA, of the Bayou 17 investors losses from early 2005 until August of that year when 18 the fraud was revealed. 19 directly engaged in the operational activity of the Bayou fraud 20 -- e.g., trading, investment or other related financial activity 21 -- his conduct in concealing the fraud was not the direct cause 22 that the MVRA requires. 23 He argues that, because he was not We disagree. We begin by noting that a Bayou investor may meet the 24 causation requirement of the statutory definition of victim 25 without showing individual reliance. 26 The very nature of the 1 crime -- concealment -- indicates the harm deemed to result from 2 public ignorance in the securities fraud context. 3 event, we may presume that had appellant disclosed the crime in a 4 timely fashion, no investor would have invested fresh cash in the 5 Ponzi. 6 And, in any For that reason, appellant cannot claim that his crime was 7 not a cause in fact -- a but for cause -- of the investors 8 losses. 9 should have revealed the Bayou fraud, but did not. Appellant was one of four individuals who knew of and During the 10 relevant time period -- between January and August of 2005 -- 11 investors entrusted over $60 million with Bayou in reliance on 12 the false representation that Bayou was a legitimate investment 13 firm that was audited by an independent financial accounting 14 firm. 15 falsity of this representation, these investors would certainly 16 not have invested in Bayou, as no reasonable investor would 17 invest in a known Ponzi scheme. 18 But for appellant s role in affirmatively concealing the We find no merit in appellant s argument that the curative 19 effect of his reporting the Bayou fraud is merely speculative. 20 It is true that enforcement agencies have, at times, failed to 21 take action on the reports of so-called whistleblowers to 22 financial fraud, see, e.g., U.S. Securities and Exchange 23 Commission Office of Investigations, Case No. OIG-509, 24 Investigation of Failure of the SEC to Uncover Bernard Madoff s 25 Ponzi Scheme, Executive Summary, (Aug. 31, 2009), available at, 27 1 www.sec.gov/news/studies/2009/oig-509.pdf ( SEC Madoff 2 Investigation ); however, it is also true that whistleblower tips 3 are among the most effective means of revealing financial frauds 4 and accounting scandals. 5 Bells? Too Many Whistles? Corporate Governance in the Post-Enron, 6 Post-Worldcom Era, 58 S.C. L. Rev. 65, 78-79 (2006) ( Fraud and 7 accounting imbroglios come to light because of a tip (42.6%), 8 internal auditing (24.6%), accident (18%), outside auditors 9 discovery (16.4%), and . . . internal control (8.2%). ); Jonathan See, e.g., Douglas M. Branson, Too Many 10 Macey, Getting the Word Out About Fraud: A Theoretical Analysis 11 of Whistleblowing and Insider Trading, 105 Mich. L. Rev. 1899, 12 1904-06 (2007) (noting the substantial recoveries of qui tam 13 claimants -- i.e., whistleblowers revealing fraud against the 14 federal government by public companies -- under the Federal False 15 Claims Act). 16 Where, as here, the whistleblower has insider knowledge of 17 the ongoing fraud, the whistleblower s tip will more likely be 18 taken seriously by enforcement officials. 19 Moberly, Sarbanes-Oxley s Structural Model to Encourage Corporate 20 Whistleblowers, 2006 BYU L. Rev. 1107, 1107 (2006) ( [T]he 21 [Enron, Worldcom and Global Crossing] scandals demonstrate 22 employees efficacy as monitors with accurate insider knowledge 23 about the inner workings of their corporations. ); Geoffrey 24 Christopher Rapp, Beyond Protection: Invigorating Incentives for 25 Sarbanes-Oxley Corporate and Securities Fraud Whistleblowers, 87 28 See Richard E. 1 B.U. L. Rev. 91, 109 (2007) ( Overcoming an internal conspiracy 2 can only succeed if insiders bring information about ongoing 3 corporate and securities fraud to the attention of regulators . . 4 . . ); cf. SEC Madoff Investigation at 37 ( The [SEC] Enforcement 5 staff claimed that [a Madoff whistleblower] was not an insider or 6 an investor, and thus, immediately discounted his evidence. ). 7 Indeed, when a Bayou investor notified authorities of the Bayou 8 fraud, Israel and Daniel Marino were immediately taken into 9 custody and the Bayou fraud was brought to a conclusion. 10 Accordingly, we regard the potential curative effect of 11 appellant s reporting of the Bayou fraud as much more than 12 speculative. 13 Furthermore, appellant not only failed to disclose the 14 fraud, but also took affirmative steps to conceal it. 15 conduct was, therefore, a cause in fact. 16 His As to proximate causation,8 appellant first argues that his 17 actions were not substantial in comparison to the wantonly 18 fraudulent conduct of the Bayou principals, Israel, Marquez and 19 Daniel Marino. 20 that there was nothing to suggest that he could have foreseen the 21 extent of losses that the firm was incurring. Appellant Br. 12. 8 In addition, appellant asserts Again we disagree. Appellant s actions were clearly the proximate cause of the victims losses under the zone of risk approach to loss causation. See Lentell, 396 F.3d at 172-73. By hiding the fact that Bayou s financial audits were a sham and modifying a financial statement, appellant concealed the risk that Bayou was a Ponzi scheme. See id. 29 1 As discussed above, appellant s primary role in the Bayou 2 fraud was in sustaining the falsity that RFA was a legitimate 3 accounting firm that conducted independent audits of Bayou s 4 investment results. 5 wantonly fraudulent, appellant greatly understates his role in 6 the Bayou fraud. 7 of independent financial auditors as vouching to the investing 8 public for the accuracy of a firm s books and the importance of 9 his role in vouching such accuracy to Bayou s victim investors. 10 In arguing that his conduct was not In essence, he asks us to ignore the importance Courts have long recognized the important public watchdog 11 function of independent financial auditors to the investing 12 public. As the Supreme Court has stated: 13 14 15 16 17 18 19 20 21 22 23 24 25 26 By certifying the public reports that collectively depict a corporation s financial status, the independent auditor assumes a public responsibility . . . . The independent public accountant performing this special function owes ultimate allegiance to the corporation s creditors and stockholders, as well as to investing public. This public watchdog function demands that the accountant maintain total independence from the client at all times and requires complete fidelity to the public trust. . . . Thus, the independent auditor s obligation to serve the public interest assures that the integrity of the securities markets will be preserved . . . . United States v. Arthur Young & Co., 465 U.S. 805, 817-19 (1984); 27 see also AUSA Life Ins. Co. v. Ernst & Young, 206 F.3d 202, 230 28 (2d Cir. 2000) ( Reasonable investors surely view firms with an 29 untrustworthy management and auditor far more negatively than 30 they view financially identical firms with honest management and 31 a watch-dog auditor. ) (Winter, J., dissenting). 32 30 1 Here, the importance of RFA to the Bayou fraud was critical. 2 Indeed, RFA was created precisely because Daniel Marino and 3 Israel knew that without an independent financial auditor 4 blessing Bayou s fictitious investment results, they would have 5 been unable to carry out the Bayou fraud. 6 without RFA, Bayou would have been unable to attract new 7 investors -- the sine que non of any successful Ponzi scheme. 8 Moreover, there is no question that Bayou investors 9 continuously relied on RFA s independent audits of Bayou s Most important, 10 financial results. The record indicates multiple instances where 11 investors contacted RFA with questions regarding the Bayou audits 12 and, later, with serious concerns regarding RFA s independent 13 status. 14 importance to Bayou investors of RFA s independence. 15 times, appellant stressed to Daniel Marino the importance of the 16 illusion of independence. 17 Marino regarding the Benowich letter, appellant stressed that 18 there is supposed to be independence between [RFA] and the both 19 of you [Daniel Marino and Israel]. 20 unwilling to adopt the view that appellant s actions did not 21 seriously injure Bayou s investors. 22 serious than the actions of Israel and Daniel Marino is 23 essentially irrelevant because, during the period of appellant s 24 criminal activity, his acts were essential to Israel and Daniel 25 Marino s criminal scheme. It is also clear that appellant was keenly aware of the At various For example, in his email to Daniel 31 Accordingly, we are Whether they were less 1 We also disagree with appellant s view that his victims 2 losses were not foreseeable. Through his handling of the 3 victims confirmation statements, appellant knew first-hand the 4 amounts the victims had at stake in the Bayou fraud. 5 reasonable person in his position could have failed to foresee 6 that the victims who invested in Bayou from January through 7 August of 2005 would ultimately face substantial or even complete 8 loss of their investment. No 9 To summarize, we find no error in the district court s 10 conclusion that appellant s failure to report the Bayou fraud was 11 both the direct and the proximate cause of the victim investors 12 losses. 13 14 CONCLUSION For the foregoing reasons, we affirm. 32
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