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Restitution In Federal Criminal Cases: Defendant’s Gain Is Not Victim’s Loss

United States v. Zangari  2012 WL 1323189

Decided April 18, 2012

Issue: a matter of first impression in the Second Circuit, the propriety of substituting a defendant’s gain for his victims’ losses in calculating restitution under the Mandatory Victim’s Restitution Act.

Holding: The Second Circuit joined several sister circuits in concluding that such a substitution is error, they declined to exercise discretion under Federal Rule of Criminal Procedure 52(b) to notice the error in this case because the defendant failed to object to the restitution calculation before the District Court and did not satisfy his burden of persuading the court that the erroneous restitution order both “affected [his] substantial rights” and “seriously affect[s] the fairness, integrity or public reputation of judicial proceedings.”

Facts: Zangari worked as a securities broker in the securities-lending departments of, first, Morgan Stanley and, subsequently, Bank of America.  Zangari’s responsibilities included borrowing and loaning securities on behalf of his employers and their clients.

Zangari and a co-worker, Peter Sherlock, agreed to cause Morgan Stanley to enter into stock-loan transactions with two other financial institutions. As a result of those transactions, sham finder’s fees were paid to a straw stock-loan finder operated by Anthony Lupo, an acquaintance of Sherlock’s. Lupo, in turn, paid cash kickbacks to Sherlock and Sherlock paid a portion of these kickbacks to Zangari. The arrangement continued when Zangari moved to Bank of America.

Neither Morgan Stanley nor Bank of America approved the stock-loan transactions that according to the Government, as a result of the fraudulent scheme, Bank of America and Morgan Stanley suffered losses in the form of unrealized profit.

Zangari was eventually arrested, waived indictment and pleaded guilty.  In the PSR report it stated that the loss to Morgan Stanley and Bank of America is the difference between the selling price of the securities and the lower price that was negotiated by the defendants without Morgan Stanley and Bank of America’s authorization.  The PSR went on to state, without explanation, that “it was this difference in price that the defendants gained in kickbacks and bribes.”

The PSR also reported that restitution was required under the MVRA, and concluded that Zangari was “liable for restitution in the amount of $65,600 ($38,800 owed to Morgan Stanley and $26,800 owed to Bank of America).”  It did not include any explanation for this conclusion, except that it was “[p]pursuant to the guidance found in United States v. Liu.  

Prior to sentencing, Zangari’s attorney submitted a list of objections. The list did not contain any objection to the PSR’s restitution calculation.  Zangari failed on multiple occasions to alert the District Court to any potential error in the restitution calculation.

The District Court entered judgment and restitution in the amount of $65,600. Zangari filed a notice of appeal. He argued for the first time on appeal that restitution was improper because the victims of his fraud suffered no loss.

Legal Analysis:

The District Court Erred in Ordering Restitution in the Amount of the Defendant’s Gain Rather than the Amount of the Victims’ Loss

Federal courts have no inherent power to order restitution, which is traditionally a civil remedy. See United States v. Reifler, 446 F.3d 65, 127, 137 (2d Cir.2006). A sentencing court’s power to order restitution, therefore, depends upon, and is necessarily circumscribed by, statute. See United States v. Elkin, 731 F.2d 1005, 1010–11 (2d Cir.1984),

As relevant here, the MVRA applies to “an offense against property under this title, … including any offense committed by fraud or deceit,” 18 U.S.C. § 3663A(c)(1)(A)(ii), “in which an identifiable victim or victims has suffered a … pecuniary loss,” id. § 3663A(c)(1)(B). In such a case, a sentencing court “shall order, in addition to … any other penalty authorized by law, that the defendant make restitution to the victim of the offense.” Id. § 3663A(a)(1).

A Restitution Order under the MVRA May Not Substitute the Defendants’ Gain for the Victims’ Losses

Because “the purpose of restitution is essentially compensatory,” Boccagna, 450 F.3d at 115, and because the MVRA itself limits restitution to “the full amount of each victim’s loss,” 18 U.S.C. § 3664(f)(1)(A), a restitution order must be tied to the victim’s actual, provable, loss. See United States v. Marino, 654 F.3d 310, 319–20 (2d Cir.2011) (“[R]estitution is authorized only for losses that [were] … directly caused by the conduct composing the offense of conviction and only for the victim’s actual loss.” Boccagna, 450 F.3d at 119 (“Criminal restitution … is not concerned with a victim’s disappointed expectations but only with his actual loss.” The Government bears the burden of proving a victim’s actual loss by a preponderance of the evidence. 18 U.S.C. § 3664(e).

In this case, in ordering restitution, the District Court relied on the PSR prepared by the probation officer, which stated that the loss to the victims had not been calculated because it was “amorphous.” The PSR therefore substituted Zangari’s gain from unlawful kickbacks in the place of the victims’ losses. Assuming that the victims’ actual losses “reasonably [could ]not be determined,” this substitution was permissible for purposes of calculating Zangari’s adjusted offense level under § 2B1.1 of the Guidelines. See USSG § 2B1.1, application n. 3(B) (“The court shall use the gain that resulted from the offense as an alternative measure of loss only if there is a loss but it reasonably cannot be determined.”). However, the PSR proceeded to employ the same substitution for purposes of calculating restitution. There is no provision in the Guidelines or in the MVRA itself that allows the defendant’s gain to be substituted for the victim’s loss for purposes of calculating restitution.

We have not yet had occasion to address the precise question of whether a defendant’s gain may stand in as a proxy for his victim’s loss for restitution purposes. Several of our sister circuits have addressed the issue, however, and all have agreed that “a defendant’s gain cannot be used as a proxy for actual loss.” United States v. Harvey, 532 F.3d 326, 340 (4th Cir.2008).8 We now join these courts and hold that a sentencing court ordering restitution under the MVRA may not substitute a defendant’s ill-gotten gains for the victim’s actual loss.

The MVRA, unlike Guideline § 2B1.1, does not allow a sentencing court to substitute gain for loss. It prescribes, in 18 U.S.C. § 3664(d), several measures that the court may take to determine restitution in hard cases. The court may, for example: “require additional documentation or hear testimony,” 18 U.S.C. § 3664(d)(4); allow additional time “for the final determination of the victim’s losses, not to exceed 90 days after the sentencing,” id. § 3664(d)(5); and “refer any issue arising in connection with a proposed order of restitution to a magistrate judge or special master for proposed findings of fact and recommendation as to disposition,” id. § 3664(d)(6). Ultimately, if the court finds that “complex issues of fact related to the cause or amount of the victim’s losses would complicate or prolong the sentencing process to a degree that the need to provide restitution to any victim is outweighed by the burden on the sentencing process,” then the court may, in the exercise of its sound discretion, decide not to order restitution at all. 18 U.S.C. § 3663A(c)(3)(B)

There Was No Direct Correlation between the Victims’ Losses and the Defendant’s Gain

To be sure, there may be cases where there is a direct correlation between gain and loss, such that the defendant’s gain can act as a measure of—as opposed to a substitute for—the victim’s loss. But this is not such a case, given the nature of the transactions at issue. Any loss to the identified victims in this case could only have come in the form of opportunity cost.

In short, based on the information provided in the PSR, whether the identified victims, Morgan Stanley and Bank of America, were borrowers or lenders in the subject transactions, their losses are not equivalent to the sham finder’s fees paid by Paloma and SASI to Clinton Management—let alone the kickbacks that Clinton Management in turn paid to Zangari and his coconspirators.9 Therefore, this is not a case in which a direct correlation exists between the victims’ losses and the defendant’s gain such that the latter can be used as a measure of the former.

Accordingly, we hold that it was error for the District Court to order restitution in the amount of Zangari’sgain rather than the victims’ actual losses.

Though the District Court’s Error was “Plain,” We Decline to Exercise Our Discretion to “Correct” the Error

Federal Rule of Criminal Procedure 52(b) provides appellate courts with a “limited power to correct errors that were forfeited because [they were] not timely raised in [the] district court.” United States v. Olano, 507 U.S. 725, 731, 113 S.Ct. 1770, 123 L.Ed.2d 508 (1993)