Recently in Federal Criminal Restitution Category

April 19, 2012


1237498_untitled.jpgOn April 18, 2012, the Second Circuit, joining several other circuits, decided that when calculating criminal restitution, substituting a defendant's gain for the victim's losses is inappropriate under the Mandatory Victim's Restitution Act ("MVRA"). The Second Circuit found that the express language of the MVRA limited restitution to "the full amount of each victim's loss." 18 U.S.C. ยง 3664(f)(1)(A). Therefore the restitution order must be tied to a victim's "actual, provable, loss" not a defendant's gain.

In U.S. v. Zangari, No. 10-4546, the defendant, a securities broker in the securities lending departments at Morgan Stanley and then Bank of America, received kickbacks in exchange for entering into stock-loan transactions. A stock-loan transaction is one where securities are temporarily transferred from the lender to a borrower. The borrower is obliged to return the securities at some future point. During the period of the securities loan, the lender is secured by collateral delivered by the borrower usually in the form of cash, government securities, or a letter of credit. The borrower's motivation is to either cover a short position, sell the borrowed securities in the hopes of purchasing it back in the future at a lower price, or gain a tax advantage from temporarily owning the borrowed security. The lender's motivation is to earn a return on the collateral, either from the fees paid by the borrower when the collateral is not cash, reinvesting the cash collateral, or loaning the cash collateral at a higher interest rate than that paid to the borrowers.

Because there is no direct correlation between the kickbacks paid to Zingari and to his employers' opportunity cost in lending the securities, the Second Circuit determined that ordering restitution equal to the kickbacks received by Zingari was inappropriate. In order to determine the amount of the victim's losses, the MVRA allows courts to: (1) require additional documentation or testimony; (2) allow additional time for final determination of the victim's losses, not to exceed 90 days after sentencing, and (3) refer the matter for a magistrate judge or special matter for a recommendation. Further, if the court determines that the complexity of determining the amount of the victim's losses would complicate or prolong sentencing and the need to provide restitution is outweighed by the burden on the sentencing process, the court may decline to order any restitution.

Although the court concluded that restitution order in Zangari was inappropriate, the court did not reverse the restitution order because the defendant failed to object to the restitution calculation before the District Court. Zangari is a good reminder that in cases where the victim's loss is difficult to determine, counsel should argue that no restitution should be imposed.