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'Windfall' Restitution Awards in Financial Fraud Cases

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'Windfall' Restitution Awards in Financial Fraud Cases G THE B IN EN V C R H E S A N 8 8 D 8 B 1 AR SINCE WWW. NYLJ.COM VOLUME 262—NO. 123 THURSDAY, DECEMBER 26, 2019 SECOND CIRCUIT REVIEW Expert Analysis Narrowing the Bounds of ‘Windfall’ Restitution Awards in Financial Fraud Cases n United States v. Calderon, No. of credit, thus, reduces the risk of 17-1956 (2d Cir. Dec. 3, 2019), nonpayment by foreign banks. Fol- the U.S. Court of Appeals for lowing the 2007 global financial cri- the Second Circuit limited the ses, International Industrial Bank of availability of “windfall” restitu- Russia (IIB)—USDA-approved foreign Ition awards and narrowed its inter- By And bank that had issued several letters Martin Brad S. pretation of the “proximate cause” Flumenbaum Karp of credit for the defendant—col- requirement for financial fraud vic- lapsed and defaulted on over $18 tims under the Mandatory Victims million in GSM-102 obligations to U.S. Restitution Act of 1996 (the MVRA), Export Credit Guarantee program banks CoBank and Deutsche Bank. 18 U.S.C. §3663A. In an opinion writ- (GSM-102). Designed to “increase Honoring its guarantees, the USDA ten by Circuit Judge Debra Ann Liv- exports of agricultural commodi- reimbursed the banks 98% of the ingston, and joined by Circuit Judges ties,” the GSM-102 program guar- unpaid principal. Amalya Kearse and Rosemary Pool- antees loans made by U.S. banks to District Court Proceedings er, the Second Circuit ruled that the foreign banks in connection with U.S. MVRA “does not supply a windfall for commodity exports to developing The Justice Department investi- those who independently enter into nations. 7 U.S.C. §5622(b)(1). Acting gated IIB’s collapse and found that, risky financial enterprises through as GSM-102 financial intermediaries, from 2007 to 2012, defendants had no fault of the fraudsters,” where the the defendants facilitated foreign conspired to fraudulently obtain mil- financial loss at issue was not proxi- bank participation in the GSM-102 lions of dollars in loans by falsifying mately caused by the defendant’s program by: (i) arranging a letter bills of lading and presenting the fal- criminally fraudulent conduct. of credit between the foreign bank sified shipping documents to CoBank and a U.S. bank, and (ii) presenting and Deutsche Bank (the “defrauded Background certain compliant documents to U.S. banks”) to facilitate the release of Defendants Pablo Calderon and banks in order for the U.S. bank to millions of dollars in USDA-guaran- Brett Lillemoe structured third- finance the USDA-guaranteed export teed loans to foreign banks. Defen- party transactions in the USDA’s transaction. The banks paid defen- dants were indicted for conspiracy dants fees for this service. to commit wire and bank fraud, and In return for a U.S. bank’s partici- on multiple counts of wire and bank MARTIN FLUMENBAUM and BRAD S. KARP are litigation partners at Paul, Weiss, Rifkind, Whar- pation in the GSM-102 program, the fraud, among other charges. ton & Garrison, specializing in complex commer- USDA guarantees the foreign bank’s A jury convicted defendants of one cial and white-collar defense litigation. Brad is the repayment, generally covering 98% count of conspiracy to commit wire Chairman of Paul, Weiss. NAIRUBY L. BECKLES, a litigation associate at the firm, assisted in the of the foreign bank’s obligation fraud and bank fraud, in violation of preparation of this column. under the letter of credit. A letter 18 U.S.C. §1349. Calderon was also In some jurisdictions, this reprint may be considered attorney advertising. Past representations are no guarantee of future outcomes. THURSDAY, DECEMBER 26, 2019 convicted of one count of wire fraud, 18 U.S.C. §3663A(a)(2); see also 1 adheres to the strict rule that “the in violation of 18 U.S.C. §1343, and U.S.C. §1. victim’s loss must be the result of sentenced to five months’ imprison- When a victim “has received the fraud.” Paul, 634 F.3d at 676. ment. Lillemoe was convicted of an compensation from insurance or As the restitution doctrine has additional four counts of wire fraud, any other source with respect to a evolved, the Second Circuit has dis- in violation of 18 U.S.C. §1343, and loss,” the MVRA also requires that tinguished between securities fraud sentenced to fifteen months’ impris- the court “order that restitution be cases and run-of-the-mill financial onment followed by three years of paid to the person who provided or fraud cases involving fraudulently supervised release. is obligated to provide the compen- obtained loans. With respect to secu- The district court entered restitu- sation.” 18 U.S.C. §3664(j)(1). Pursu- rities fraud, the Second Circuit rea- tion orders as to both defendants, ant to the Supreme Court’s ruling soned that “many factors may cause relying on two provisions of the last year in United States v. Lagos, a decline in share price between the MVRA. First, relying on §3664(j)(1) 138 S. Ct. 1684 (2018), corporations time of the fraud and the revelation of the MVRA, the district court held are not entitled to windfall compen- of the fraud” and, therefore, a court that the USDA was entitled to an sation for the costs and expenses must take into account “the extent order of restitution of $18.5 million to which a defendant’s fraud, as after reimbursing the defrauded distinguished from market or other The Second Circuit ruled that banks for IIB’s defaulted GSM-102 forces, caused shareholders’ losses.” program obligations involving the MVRA “does not supply a United States v. Rutkoske, 506 F.3d defendants. Second, pursuant to windfall for those who inde- 170, 179 (2d Cir. 2007). By contrast, §3663A(b)(4) of the MVRA, the pendently enter into risky fi- in fraud cases involving fraudulently district court ordered defendants nancial enterprises through no obtained loans, the Second Circuit to pay CoBank $305,743.33, which has been more inclined to dismiss fault of the fraudsters,” where included $137,422 for losses asso- a defendant’s arguments that a vic- ciated with the transactions and the financial loss at issue was tim’s loss resulted from market con- $168,321.33 for costs and attorneys’ not proximately caused by the ditions, like the 2008 housing mar- fees incurred in connection with the defendant’s criminally fraudu- ket collapse, if the court found that investigation and prosecution of the lent conduct. defendant’s own conduct induced case. Defendants appealed from the fraudulently obtained loans. both the judgment of conviction associated with conducting inter- United States v. Turk, 626 F.3d 743, and the restitution order entered nal investigations or related civil 751 (2d Cir. 2010). See, e.g., United against them. and bankruptcy proceedings under States v. Frenkel, 682 F. App’x 20 (2d §3663A(b)(4) of the MVRA. Cir. 2017) (rejecting defendant’s argu- Mandatory Victims ments to attribute loss to the real Restitution Act of 1996 Second Circuit’s Precedent estate market collapse). The MVRA mandates restitu- Before Calderon, the Second Cir- Second Circuit’s Opinion tion for the victim of certain fed- cuit had a “well established” rule eral crimes, including “any offense that “fluctuation in market prices On appeal, defendants in Calderon against property” that is “commit- does not excuse a defendant from argued that the defrauded banks did ted by fraud or deceit in which [a paying full restitution for monies not qualify as “victims” under the victim] has suffered a…pecuni- stolen in the course of a fraudu- MVRA because the banks were not ary loss.” 18 U.S.C. §§3663A(a)(1), lent scheme.” United States v. Onua, “directly and proximately harmed” (c)(1). Under the MVRA, a “victim” 493 F. App’x 209, 211–12 (2d Cir. by the defendants’ fraud. 18 U.S.C. is defined broadly as “a person 2012) (citing United States v. Paul, §3663A(a)(2). Accordingly, the ulti- directly and proximately harmed as 634 F.3d 668, 678 (2d Cir. 2011)). mate question before the Second a result of the commission of [the] When determining the amount Circuit was whether the defrauded offense,” and includes corporations. of restitution, the Second Circuit banks’ financial losses were the THURSDAY, DECEMBER 26, 2019 result of defendants’ fraud. that the USDA would decline to reim- lent documents to the [defrauded] Pointing to its well-established burse the defrauded banks because banks.” Id. Therefore, the decision jurisprudence on loss causation in the transactions were not compli- to offer the foreign loans was not the MVRA context, the Second Cir- ant with GSM-102 program require- influenced by defendants’ miscon- cuit first noted its prior finding that ments. “Neither of these risks[] even duct. Accordingly, the Second Circuit “[t]he MVRA’s proximate causation arguably materialized,” the court held that CoBank and Deutsche Bank requirement is . akin to the well- reasoned, because IIB’s default was were not “victims” under the MVRA established requirement that there caused by a wholly unrelated reason: because defendants did not proxi- be ‘loss causation’ in securities-fraud its financial collapse due to the glob- mately cause their losses. cases and not merely transaction al financial crisis. Id. at 16. That, the Echoing the Supreme Court’s (‘but-for’) causation.” Calderon, 2019 court reasoned, was “the actual risk skepticism about windfall awards in WL 6482379, at *15. Proximate cause, that materialized” in Calderon. Id. last year’s Lagos decision, the court not but-for causation, therefore was The Second Circuit also distin- emphasized that “the MVRA pro- the appropriate causation standard guished Calderon from United States vides redress to the victims of fraud, to apply.
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