In Lagos v. United States, decided on May 29, 2018, the U.S. Supreme Court unanimously held that restitution orders under the Mandatory Victims Restitution Act (MVRA) are limited to fees and expenses incurred during government investigations and criminal proceedings.1 Following Lagos, a criminal defendant is not required under the MVRA to pay a corporate victim's investigatory and legal fees associated with internal investigations or related civil and bankruptcy proceedings.
Under the MVRA, a defendant convicted of fraud and certain other offenses is required to "reimburse the victim for lost income and necessary child care, transportation, and other expenses incurred during participation in the investigation or prosecution of the offense or attendance at proceedings related to the offense." 18 U.S.C. §3663A(b)(4) (emphasis added). At issue in Lagos was how to interpret that language.
Writing for a unanimous Court, Justice Breyer held that restitution for fees and expenses under the MVRA – specifically, the scope of the words "investigation" and "proceedings" within the meaning of the statute – is "limited to government investigations and criminal proceedings."
The Court's conclusion that restitution does not cover expenses relating to a company-initiated internal investigation resolves a circuit split over the issue. Previously, the DC Circuit held that the MVRA does not authorize restitution for the costs of a company's internal investigation that is not required or requested by the government, while seven other circuit courts concluded that such costs are recoverable as restitution if they were caused by the defendant's criminal offense.2
The Court's decision reverses a ruling by the Fifth Circuit, which affirmed a district court decision ordering Sergio Fernando Lagos (Lagos) – the owner and CEO of a holding company who pleaded guilty to defrauding a lender – to pay approximately $5 million in restitution to the lender under the MVRA. The restitution order covered the lender's legal, expert and consulting fees incurred in investigating the fraud and its additional legal fees as a party in related bankruptcy proceedings. Results of the lender's internal investigation were subsequently turned over to the FBI. Although the lender's internal investigation was unprompted by the government and conducted before the criminal investigation even began, the Fifth Circuit affirmed the restitution order and held that the fees incurred were "necessary and compensable" as restitution.3 With respect to the legal fees incurred by the lender relating to the separate bankruptcy proceedings, the Fifth Circuit determined that such fees were "directly caused by the defendants' fraud for purposes of restitution." In a concurring opinion, however, one member of the Fifth Circuit panel cautioned that the court may be interpreting the relevant provisions of the MVRA "too broadly." The Court agreed.
Adopting a narrower view of restitution, the Court primarily relied on the plain language and structure of the MVRA. The Court first noted that the words "investigation" and "prosecution" are directly linked within the statute, which suggests that they are "of the same general type." Because "prosecution" must refer to a criminal prosecution, the term "investigation" similarly refers to a "government's criminal investigation." "Proceedings" likewise refers to criminal proceedings, not "proceedings of any sort." Significantly, as the Court explained, while the MVRA authorizes restitution of lost income, child care, transportation and "other" expenses, "the statute says nothing about the kinds of expenses a victim would often incur when private investigations [or] bankruptcy proceedings are at issue, namely, the costs of hiring private investigators, attorneys, or accountants."
The Court also cited an important practical consideration for its decision: "A broad reading would create significant administrative burdens." As Justice Breyer explained, such an interpretation would necessarily "invite disputes" about whether particular expenses incurred during a private investigation or attendance at a civil or bankruptcy proceeding were in fact "necessary." Adopting the government's broad reading would subject a district court to a time-consuming analysis as part of criminal sentencing to determine what type of "proceedings" are sufficiently "related to the offense" so as to be eligible for reimbursement as restitution. Such a fact-intensive examination would seemingly run contrary to congressional intent, particularly given that "few victims are likely to benefit because more than 90% of criminal restitution is never collected." The Court's more narrow construction of the MVRA avoids these administrative burdens. The fact that some victims will not receive restitution sufficient to cover some expenses (e.g., those related to a company-initiated internal investigation) is consistent with the purpose of the statute and does not foreclose a victim from seeking restitution through civil remedies.
Importantly, the Court also rejected the government's argument that the lender's internal investigation expenses should be reimbursed under the MVRA because the lender later shared the information it uncovered with the government. Citing the statute's requirement that the expenses must be incurred "during participation in the investigation or prosecution of the offense," the Court declined to expand the MVRA's reach to "preparticipation" expenses since the statute does not cover expenses incurred before the victim's participation in a government investigation began. The Court did not address and left open the question of whether the statute covers the costs of an internal investigation that is conducted at the government's behest.
The Court's decision in Lagos has significant implications for corporations seeking to allocate the costs of internal investigations and civil litigation to a convicted defendant. The Court's narrow reading of the MVRA means that federal district court judges may not be able to impose upon defendants the costs of a company's legal representation, which neither the defendant, the court nor even the prosecutors may have had the ability to limit, monitor or control as they were being incurred. Although the Court indicated that civil remedies remain available to corporate victims, the costs and burdens of full-blown civil litigation are far greater than those associated with submitting a request for restitution to the district court in connection with a defendant's sentencing.
1 Lagos v. United States, No. 16-1519, 2018 WL 2402570 (May 29, 2018).
2 Compare United States v. Papagno, 639 F.3d 1093 (D.C. Cir. 2011), with United States v. Janosko, 642 F.3d 40 (1st Cir. 2011); United States v. Amato, 540 F.3d 153 (2d Cir. 2008); United States v. Lagos, 864 F.3d 320 (5th Cir. 2017); United States v. Elson, 577 F.3d 713 (6th Cir. 2009); United States v. Hosking, 567 F.3d 329 (7th Cir. 2009); United States v. Stennis-Williams, 557 F.3d 927 (8th Cir. 2009); and United States v. Nosal, 844 F.3d 1024 (9th Cir. 2016).
3 United States v. Lagos, 864 F.3d 320, 322 (5th Cir. 2017).
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