Opinion
08 Cr. 972 (DAB)
05-13-2013
UNITED STATES OF AMERICA, v. ANTHONY CUTI, Defendant.
OPINION
On October 14, 2011, the Court referred this matter to the Honorable Henry B. Pitman for a recommendation as to which attorney's fees and expenses, of those paid to Paul, Weiss, Rifkind, Wharton & Garrison LLP ("Paul, Weiss") and to counsel for current and former Duane Reade employees, were subject to restitution by Defendant Anthony Cuti. Magistrate Judge Pitman issued his Report and Recommendation ("Report") on December 21, 2012.
On de novo review of the issue referred to Judge Pitman, the Court holds that $3,102,672.14 of the fees and expenses paid to Paul, Weiss are subject to restitution, and $1,585,125.00 of the fees and expenses paid to counsel for current and former Duane Reade employees are also subject to restitution. After combining these sums with the restitution ordered previously by the Court, the Court orders Defendant Cuti to pay Duane Reade, Inc. ("Duane Reade") $6,145,961.40 in restitution, and subsequently to pay Oak Hill $1,469,256.50 in restitution. Payment shall be made at the rate of fifteen percent of Defendant Cuti's gross monthly income, beginning with the second month of supervised release.
All references to "Oak Hill" in this Order denote Oak Hill Capital Partners, L.P., Oak Hill Capital Management Partners, L.P., and OHCP DR Co-Investors, LLC.
I. BACKGROUND
The Court assumes familiarity with the facts discussed in the Court's vacated Order and Memorandum of July 29, 2011 and Magistrate Judge Pitman's Report and Recommendation of December 21, 2012, and will discuss only the post-verdict proceedings concerning restitution. On October 18, 2010, Duane Reade and Oak Hill submitted a Victim Impact Statement and Request for Restitution Award, seeking $52,354,707.81 in restitution, broken down as $43,14 9,663.00 for Oak Hill's alleged overpayment for Duane Reade, $1,512,817.25 for legal fees and expenses paid to independent counsel Cooley Godward Kronish LLP, $342,289.62 in fees and expenses paid to AlixPartners LLP for forensic accounting services, $493,000.00 for accounting/auditor fees and expenses paid to KPMG LLP and PricewaterhouseCoopers LLP, $1,711,573.84 for fees and expenses of counsel for current and former Duane Reade employees, $4,566,050.21 for certain fees and expenses of Duane Reade and Oak Hill's counsel, Paul, Weiss, and $579,313.89 for the cost of creating and maintaining the Kroll Ontrack Inc. database. (ECF No. 114, Victim Impact Statement and Request for Restitution Award on Behalf of Duane Reade Inc. and the Oak Hill Entities ("Victim Impact Statement") 3; ECF No. 115, Decl. of Daniel J. Beller in Support of Victim Impact Statement ¶¶ 17-41.) The Government also advocated for restitution for Duane Reade and Oak Hill. (ECF No. 121, Government's Sentencing Mem. 21-29.) The Court subsequently held a Fatico hearing on the issues of loss calculation and restitution, and on July 29, 2011 issued an Order and Memorandum declining to award restitution pursuant to 18 U.S.C. §§ 3663(a)(1)(B)(ii), 3663A(c)(3)(B). (ECF No. 162, July 29, 2011 Order and Mem. 15-20.) The Court vacated the July 29, 2011 Order on August 19, 2011. (ECF No. 181, Aug. 19, 2011 Order.) On October 14, 2011, the Court held that the Government had failed to establish that Oak Hill was entitled to restitution for its alleged overpayment for Duane Reade, but awarded full restitution for the costs of the Kroll Ontrack Inc. database and the fees and expenses it paid to Cooley Godward Kronish LLP, AlixPartners LLP, KPMG LLP, and PricewaterhouseCoopers LLP. (ECF No. 200, Oct. 14, 2011 Order.) It referred to Magistrate Judge Pitman the issue of which of the requested attorney's fees paid to company counsel Paul, Weiss and to counsel for current and former Duane Reade employees were directly related to the assistance provided to the Government in its criminal investigation and prosecution of Mr. Cuti. (ECF No. 200, October 14, 2011 Order 2.)
The total amount of legal fees and expenses paid to Paul, Weiss through August 2010 on matters related to Mr. Cuti was allegedly $9,164,151.18. (ECF No. 222, Supp. Decl. of Daniel J. Beller in Support of Rev. Req. for Restitution Award ¶ 23.)
On or about December 13, 2011, Duane Reade and Oak Hill submitted to Judge Pitman a revised restitution request which excised certain charges for work related to the SEC civil action against Mr. Cuti or the arbitration action between Mr. Cuti, Duane Reade, and Oak Hill. (ECF No. 222, Supp. Decl. of Daniel J. Beller in Support of Rev. Req. for Restitution Award ¶¶ 11-15, 23.) The revised request reduced the restitution sought for the Paul, Weiss fees by $901,997.89 and for fees paid to counsel for Duane Reade employees by $125,573.84. (Id.) After Mr. Cuti pointed out additional time entries that did not relate to the criminal case, Duane Reade and Oak Hill submitted another revised request that reduced the restitution sought by a further $487,355.76, to $4,762,696.56. (ECF No. 207, Cuti Mem. in Opp. to Duane Reade and Oak Hill's Rev. Req. for Restitution; ECF No. 208, Decl. of Bruce C. Bishop Exs. H-Q; ECF No. 218, Submissions Made by Duane Reade and Oak Hill at Jan. 13, 2012 Oral Argument; Report 19-21.)
On December 21, 2012, Magistrate Judge Pitman issued a Report and Recommendation recommending that this Court order Defendant Cuti to pay restitution to Duane Reade in the amount of $4,544,634.60. (Report 44.) The total included $1,667,499.67 for fees Duane Reade paid to Paul, Weiss, $1,584,475.00 for fees Duane Reade paid to counsel for current and former Duane Reade employees, and $1,292,659.93 in prejudgment interest at a nine percent rate. (Report 44.) Judge Pitman found that Oak Hill was not a victim and did not award Oak Hill restitution for the fees it paid to Paul, Weiss. (Report 32-37.) Defendant Cuti and Oak Hill/Duane Reade submitted Objections to the Report on February 7, 2013. Responses to these Objections were submitted by Defendant Cuti, Oak Hill/Duane Reade, and the Government on February 28, 2013.
II. DISCUSSION
A. Standard of Review
Pursuant to 18 U.S.C. § 3664(d)(6), the Court makes a de novo determination of the issues it referred to Magistrate Judge Pitman on October 14, 2011. 18 U.S.C. § 3664(d)(6) ("The Court may refer any issue arising in connection with a proposed order of restitution to a magistrate judge . . . for proposed findings of fact and recommendations as to disposition, subject to a de novo determination of the issue by the court.").
The Victim and Witness Protection Act ("VWPA") authorizes courts to order criminal defendants to compensate the victims of their criminal offenses. See 18 U.S.C. §§ 3663, 3664. Courts may order restitution for, inter alia, "necessary . . . expenses related to participation in the investigation or prosecution of the offense or attendance at proceedings related to the offense . . . ." 18 U.S.C. § 3663(b)(4). Such expenses may include attorney's fees and accounting costs. United States v. Battista, 575 F.3d 226, 233 (2d Cir. 2009). The Government bears the burden of demonstrating, by a preponderance of the evidence, the amount of a victim's loss. 18 U.S.C. § 3664(e). B. Applicability of the Victim and Witness Protection Act
The Mandatory Victims Restitution Act ("MVRA") "makes restitution mandatory for the crimes it covers, and the VWPA enables discretionary restitution for non-MVRA crimes." Battista, 575 F.3d at 231 n.3. As relevant here, the MVRA applies in sentencing proceedings for convictions of "an offense against property under [Title 18 of the U.S. Code] . . . , including any offense committed by fraud or deceit. . . . in which an identifiable victim or victims has suffered a . . . pecuniary loss." 18 U.S.C. §§ 3663A(c)(1)(A)(ii), (B). The Second Circuit Court of Appeals has noted that "[t]he MVRA makes full restitution mandatory for . . . securities fraud." United States v. Dupes, 513 F.3d 338, 345 (2d Cir. 2008). However, to the Court's knowledge, the Court of Appeals has not yet applied the MVRA to the Title 18 offense of which Mr. Cuti was convicted: conspiracy to make false statements in annual and quarterly SEC reports, false statements to auditors, and false entries in books and records, in violation of 18 U.S.C. § 371.
The Second Circuit Court of Appeals recently rejected case law "suggesting that 'offenses against property' are limited to offenses against 'tangible property,' including money." United States v. Bengis, 631 F.3d 33, 40 n.3 (2d Cir. 2011). In doing so, it noted that Second Circuit "precedents dictate that the definition of property is broader than those cases suggest," and cited to United States v. Milstein, 481 F.3d 132, 137 (2d Cir. 2007). Bengis, 631 F.3d at 40 n.3. In Milstein, the Court of Appeals noted that "trademarks are a form of property" and that "intellectual or intangible property falls within the purview of criminal statutes designed to protect property." Milstein, 481 F.3d at 137. The Court of Appeals specifically highlighted, as a basis for its definition of property, the Supreme Court's holding in Carpenter v. United States that "intangible property fell squarely within th[e] protection" of mail and wire fraud statutes. Milstein, 481 F.3d at 137. However, in Carpenter, the Supreme Court noted that while the Wall Street Journal had "a property right in keeping confidential and making exclusive use, prior to publication, of the schedule and contents of [an investment advice] column," an entity does not have a property right in an employee's "honest and faithful service," because such an interest is "too ethereal in itself to fall within the protection of the mail fraud statute." Carpenter v. United States, 484 U.S. 19, 25-26 (1987).
Pursuant to this case law, the Court holds that Mr. Cuti's Title 18 offense is not an offense against property. Essentially, the conspiracy to make false statements and entries violated Duane Reade's interest in maintaining accurate records and having an honest and faithful employee. These interests fall into the Supreme Court's category of "ethereal" interests. Mr. Cuti was not convicted of breaching confidentiality or of violating Duane Reade's intellectual property rights. Moreover, although the Government attempted to show that the conspiracy caused a monetary loss to Oak Hill, it failed to do so. Because Mr. Cuti's offense is not an offense against property for the purposes of the MVRA, the VWPA applies to his crime of conviction. C. Oak Hill's Entitlement to Restitution
Under the VWPA, courts are only authorized to order defendants to pay restitution to victims and those who provide or are obligated to provide compensation to victims. 18 U.S.C. §§ 3663(a), 3664(j)(1); see also United States v. Malpeso, 126 F.3d 92, 94 (2d Cir. 1997) ("Under the VWPA, courts are authorized to order defendants to make restitution to 'any victim' of the offense of conviction."). The statutes define "victim" as "a person directly and proximately harmed as a result of 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. §§ 3663(a)(2). Whether an entity is a victim "depends upon 'whether [its] losses were caused by [the] offense' of conviction." United States v. Skowron, 839 F. Supp. 2d 740, 744 (S.D.N.Y. 2012) (quoting United States v. Archer, 671 F.3d 149, 170 (2d Cir. 2011)).
"[T]he provisions of the VWPA and the MVRA are nearly identical in authorizing an award of restitution." United States v. Battista, 575 F.3d 226, 230 (2d Cir. 2009) (quotation marks omitted). In analyzing provisions that are nearly identical in both statutes, the Court will interpret them in pari materia, looking to case law relating to either statute. See id. at 234 (interpreting the VWPA and MVRA in pari materia and noting that the Second Circuit Court of Appeals has "often interpreted the MVRA and VWPA in concert"); see also United States v. Marino, 654 F.3d 310, 319 n.7 (2d Cir. 2011) ("Because the relevant statutory language in the MVRA and VWPA is nearly identical, we include in our analysis cases arising under both statutes.").
The restitution statutes' "direct and proximate causation requirements both reflect 'Congress's interest in maintaining efficiency in the sentencing process.'" United States v. Marino, 654 F.3d 310, 320 (2d Cir. 2011) (quoting United States v. Reifler, 446 F.3d 65, 135 (2d Cir. 2006)). The "direct causation requirement promotes this efficiency because 'the less direct an injury is, the more difficult it becomes to ascertain the amount of a plaintiff's damages attributable to the violation.'" Id. (quoting Reifler, 446 F.3d at 135). Likewise,
the requirement that the harm have been "proximately" caused [i]s a reflection of Congress's interest in maintaining efficiency in the sentencing process, as the term "proximate cause" is sometimes used "to label generically the judicial tools used to limit a person's responsibility for the consequences of that person's own acts. At bottom, the notion of proximate cause reflects ideas of what justice demands, or of what is administratively possible and convenient . . . ."Reifler, 446 F.3d at 135 (quoting Holmes v. Sec. Inv. Protection Corp., 503 U.S. 258, 268 (1992)).
Although direct targets of defendants' criminal activities are clearly victims pursuant to the VWPA, the Second Circuit Court of Appeals has also defined as victims entities which were not the primary targets of the criminal scheme but were nonetheless "harmed by the conduct committed during the course" of defendants' crime of conviction. Battista, 575 F.3d at 231. Compare United States v. Amato, 540 F.3d 153, 157, 162-63 (2d Cir. 2008) (holding that Defendants owed restitution to a corporation against which Defendants perpetrated fraudulent scheme); United States v. Gupta, No. 11 Cr. 907, 2013 WL 662954, at *5 (S.D.N.Y. Feb. 25, 2013); Gupta, No. 11 Cr. 907, 2012 WL 5246919, at *3 (S.D.N.Y. Oct. 24, 2012) (ordering Defendant to pay restitution to corporation to which he owed, and breached, a duty of confidentiality); United States v. Kuruzovich, No. 09 Cr. 824, 2012 WL 1319805, at *4-5 (S.D.N.Y. Apr. 13, 2012) (holding that the target of Defendant's blackmail was a victim), with Battista, 575 F.3d at 231 (holding, where misuse of National Basketball Association's confidential proprietary information was "one of the key features" of Defendant's scheme, that NBA was victim even though Defendant "did not defraud the NBA directly"); Skowron, 839 F. Supp. 2d at 746 (awarding restitution to Defendant's employer because "[d]eceiving his employer . . . was an integral part of [Defendant]'s scheme"); United States v. Cummings, 189 F. Supp. 2d 67, 75-76 (S.D.N.Y. 2002) (awarding restitution to corporation "forced" to file restated financial statements as a result of Defendant's crime). See also United States v. Desnoyers, 708 F.3d 378, 390 (2d Cir. 2013) (instructing District Court to award restitution for payments related to acts "necessary to the overall scheme" but not "integral to the offense of conviction").
Here, Duane Reade was directly and proximately harmed by the conduct committed during the course of Mr. Cuti's crime of conviction. The "key feature" of Mr. Cuti's crime of conviction was making Duane Reade's income appear greater than it actually was to auditors and in books, records, and SEC reports. However, Oak Hill was not the direct target of Mr. Cuti's crime of conviction, nor has the Government established that Oak Hill was directly and proximately harmed by the conduct committed during the course of his crime. Here, Mr. Cuti's crime of conviction did not involve Oak Hill's financial reports, Oak Hill was not Mr. Cuti's employer, and Oak Hill was not forced to pay the relevant legal fees. Moreover, the Court previously found that the Government had failed to establish that Oak Hill suffered a loss by overpaying for Duane Reade. Oak Hill's mere status as corporate parent of Duane Reade does not convert it into a victim; such a finding would detract from Congress's interest in maintaining an efficient sentencing process. Nor does Oak Hill become a victim merely because it has paid legal and accounting fees; such a holding would also make sentencing proceedings inefficient by, for instance, requiring criminal defendants to reimburse every individual the Government interviewed in its investigation or used as a witness in its prosecution. Accordingly, the Court finds that Oak Hill is not a victim pursuant to the VWPA.
Oak Hill's voluntary entry into an agreement with Duane Reade to pay a percentage of Paul, Weiss's fees relating to the Cuti matter was just that: voluntary. (See ECF No. 229, Decl. Of Daniel J. Beller in Further Support of Restitution Award ¶ 2 & Ex. A.) Likewise, Oak Hill's 2010 agreement with Walgreen Co. to retain the liabilities related to Mr. Cuti's crimes was presumably entered into voluntarily and in consideration of other benefits related to the sale of Duane Reade to Walgreen Co. (See Duane Reade & Oak Hill Obj. 6 n.8; id. Exs. A, B.) An entity's voluntary agreement to take on a victim's obligations does not make it a victim. Instead, as discussed infra, such agreements are covered by 18 U.S.C. § 3664(j)(1).
However, Congress has created a remedy for non-victims who have compensated victims for losses subject to restitution:
If a victim has received compensation from insurance or any other source with respect to a loss, the court shall order that restitution be paid to the person who provided or is obligated to provide the compensation, but the restitution
order shall provide that all restitution of victims required by the order be paid to the victims before any restitution is paid to such a provider of compensation.18 U.S.C. § 3664(j)(1); see also United States v. Douglas, 525 F.3d 225 (2d Cir. 2008) (awarding restitution to non-victim pursuant to 18 U.S.C. § 3664(j)(1), in MVRA case); United States v. Malpeso, 126 F.3d 92 (2d Cir. 1997) (same, in VWPA case). Here, Duane Reade received compensation from Oak Hill for a portion of the necessary legal and accounting costs related to Duane Reade's participation in the criminal investigation and prosecution of Mr. Cuti. Oak Hill paid approximately sixty-five percent of Duane Reade's legal fees for work done by Paul, Weiss from January 2007 through September 2008. (See ECF No. 218, Rev. App'x, Fee and Expense Documentation, Paul, Weiss ("Rev. App'x"), Billing and Payment Summary ("Summary Sheet").) Roughly ten to fifteen percent of the legal bills incurred by Duane Reade for work done from January 2009 through March 2010 were paid by Oak Hill. For all these legal bills, Oak Hill paid a share of the total bill, rather than selecting particular fee entries for payment. (See Summary Sheet; ECF No. 229, Decl. of Daniel J. Beller in Further Support of Restitution Award ¶ 2 & Ex. A.) Oak Hill also paid 100% of the legal fees related to work done for Duane Reade from April 2010 through August 2010. Finally, Oak Hill paid $68,114.64 to AlixPartners LLP for the forensic accounting services it provided to Duane Reade. (App'x, Fee and Expense Documentation, AlixPartners LLP; ECF No. 115, Decl. of Daniel J. Beller in Support of Victim Impact Statement and Request for Restitution Award on Behalf of Duane Reade Inc. and the Oak Hill Entities, Oct. 18, 2010, ¶ 22.)
Oak Hill is entitled to receive restitution pursuant to 18 U.S.C. § 3664(j)(1) for the money it provided to Duane Reade with respect to Duane Reade's compensable actual loss: the legal and accounting fees that were necessary and related to Duane Reade's participation in the criminal investigation or prosecution of Mr. Cuti. See 18 U.S.C. §§ 3663(b)(4), 3664(j)(1). Under Second Circuit law, Oak Hill is still eligible for restitution even though it made its payments directly to Paul, Weiss and AlixPartners LLC, rather than paying Duane Reade and having Duane Reade make the payments. See Douglas, 525 F.3d at 254 ( "The fact that [the non-victim] paid for the headstone directly rather than having [the victim] pay for it and reimbursing him does not relieve [Defendant] of the obligation to make restitution for the cost incurred."); Malpeso, 126 F.3d at 95 ("It is true that the [non-victim] paid [the victim]'s costs up front, rather than compensating him for costs he had previously borne. . . . [T]here is no significant functional or economic difference between the indemnitor's prior payment of the victim's expense and subsequent reimbursement. We conclude that the statute authorizes restitution for the [non-victim]'s payment of [the victim]'s relocation expenses.").
The Court finds that $1,401,141.86 of the fees and disbursements Oak Hill paid to Paul, Weiss and $68,114.64 of the fees and expenses Oak Hill paid to AlixPartners LLP were necessary and related to Duane Reade's participation in Mr. Cuti's criminal investigation or prosecution. However, the Court will not order restitution for any of the fees and disbursements relating solely to Oak Hill's participation in the Government's prosecution of Mr. Cuti. These non-compensable costs include all costs related to the trial testimony of Oak Hill partner Michael Green, who was not employed by Duane Reade, because those costs were not related to Duane Reade's participation in the Government's prosecution. (See Rev. App'x, Tab 45 at 4, 6-11.) Likewise, no restitution may be awarded for legal work aimed solely at achieving restitution for Oak Hill, such as work related to the claims that Oak Hill was a victim and that Defendant Cuti's fraud caused Oak Hill to overpay for Duane Reade; it is likely that a good deal of the legal work on restitution pertained to these claims, given that the bulk of the restitution sought related to Oak Hill's alleged overpayment for Duane Reade. In contrast, legal fees and disbursements related to whether Duane Reade is a victim; whether attorney's fees and accounting costs are compensable; and the extent of the losses resulting from the Kroll database and the Cooley, AlixPartners, KPMG, PricewaterhouseCoopers, Duane Reade employee, and Paul, Weiss fees and expenses, are compensable because they relate to Duane Reade's participation in Mr. Cuti's prosecution. On de novo review of the Revised Appendix, the Pre-Sentence Report, the Victim Impact Statement, and the Government's Sentencing Memorandum, the Court finds that the Government has shown by a preponderance of the evidence that fifty percent of the restitution-related legal fees were related to Duane Reade's participation in the criminal prosecution. (See Rev. App'x, Tab 44 at 4-10; Rev. App'x, Tab 45 at 14-18.) Although fifty percent is an estimate, it is a reasonable estimate based on the evidence before the Court. See United States v. Milstein, 481 F.3d 132, 137 (2d Cir. 2007) (upholding District Court's Restitution Order because the Court, inter alia, "made a reasonable estimate of the amount of [loss]" "based on the evidence before it"). After deducting, from the payments Oak Hill made to Paul, Weiss and AlixPartners LLP for necessary expenses related to Duane Reade's participation in the criminal case, all legal fees related to Michael Green, fifty percent of the legal fees related to restitution, and a proportional amount of disbursements, the Court finds that $1,469,256.50 of the expenses paid by Oak Hill are subject to restitution. D. Duane Reade's Actual Loss
"[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." Marino, 654 F.3d at 319-20 (quotation marks and alterations omitted). "The Government bears the burden of proving a victim's actual loss by a preponderance of the evidence." United States v. Zangari, 677 F.3d 86, 92 (2d Cir. 2012) (citing 18 U.S.C. § 3664(e).) The District Court, in turn, must make a "reasonable estimate" of the actual loss "based on the evidence before it." United States v. Milstein, 481 F.3d 132, 137 (2d Cir. 2007); see also United States v. Newsom, 399 F. App'x 625, 627 (2d Cir. 2010) (upholding Restitution Order because it was a "reasonable estimate of the actual loss to investors caused by the fraud"); United States v. Stathakis, 320 F. App'x 74, 78 (2d Cir. 2009) (noting, for purposes of restitution, that the "court need only make a reasonable estimate of the loss") (quotation marks omitted); United States v. Nazareno, 65 F. App'x 354, 356 (2d Cir. 2003) (noting, for purposes of restitution, that "loss need not be determined with precision, that the court need only make a reasonable estimate of the loss, given the available information, and that the estimate of loss may be based on general factors") (quotation marks and alterations omitted); United States v. Germosen, 139 F.3d 120, 129-30 (2d Cir. 1998) (noting, for purposes of determining a defendant's offense level, that "the loss need not be determined with precision" and the Court "need only make a reasonable estimate of the loss, given the available information," and further noting that "the quantity and quality of evidence the district court may rely upon to determine the amount of loss is the same" for purposes of determining offense level and restitution) (quotation marks omitted).
The VWPA authorizes courts to order that defendants "reimburse the victim for . . . necessary . . . other expenses related to participation in the investigation or prosecution of the offense or attendance at proceedings related to the offense . . . ." 18 U.S.C. § 3663(b)(4). The statute "requires that the included expenses be "necessary." Battista, 575 F.3d at 233. The Second Circuit Court of Appeals has held that the "other expenses" eligible for reimbursement "may include attorney fees and accounting costs." Id.; Amato, 540 F.3d at 159.
1. Legal Fees and Expenses Paid to Paul, Weiss
The Government has demonstrated by a preponderance of the evidence that the Paul, Weiss legal bills that were necessary and related to Duane Reade's participation in the investigation or prosecution of the criminal case against Defendant Cuti amount to an actual loss to Duane Reade of $3,102,672.14.
Oak Hill has compensated Duane Reade for $1,401,141.86 of this sum. However, "In no case shall the fact that a victim has received . . . compensation with respect to a loss from insurance or any other source be considered in determining the amount of restitution." 18 U.S.C. § 3664(f)(1)(B) (emphasis added). Accordingly, the $1,401,141.86 paid by Oak Hill constitutes part of Duane Reade's actual loss.
Defendant Cuti argues that the Court ought to exclude all Paul, Weiss time records containing "mixed block entries" that do not distinguish between work related to the criminal case and work related to the SEC investigation or the arbitration action. (Cuti Obj. 14-17.) Mr. Cuti correctly notes that the burden of demonstrating the amount of loss by a preponderance of the evidence ought to be placed on the Government, and not on him. See Zangari, 677 F.3d at 92. However, the Court finds that the Government has met this burden with regard to $3,102,672.14 in legal fees paid to Paul, Weiss. While the Court's estimate of Duane Reade's actual loss is not perfectly precise, it is a reasonable estimate based on the evidence before it. See Newsom, 399 F. App'x at 627; Stathakis, 320 F. App'x at 78; Milstein, 481 F.3d at 137; Nazareno, 65 F. App'x at 356; Germosen, 139 F.3d at 129-30. A far less accurate estimate would result if the Court excluded every entry in which an attorney recorded both compensable and non-compensable activities. The more reasonable approach, taken by the Court here, is to permit the Government and victim to reduce the restitution sought by the amount charged for non-compensable activities, and to review all evidence provided in order to determine the most accurate estimate of necessary expenses related to the victim's participation in the criminal investigation or prosecution.
The Government has failed to meet its burden with regard to legal costs related solely to Oak Hill's participation in the criminal case, see supra Part II.C, and additional legal costs stemming only from William Tennant's offenses (see Rev. App'x, Tab 45 at 18-19).
Defendant Cuti further objects that the Court ought not presumptively order restitution for all time entries that do not on their face reflect work related to the arbitration defense or SEC investigation. (Cuti Obj. 17-20.) Mr. Cuti argues that such an approach is inherently random, citing as an example Magistrate Judge Pitman's recommendation that the Court award restitution for Daniel Beller and Aidan Synnott's travel to and attendance at a March 2007 meeting with Oak Hill; although Mr. Beller and Mr. Synnott's entries do not mention arbitration, a withdrawn entry by Lawrence Wee states that the March 2007 meeting was "re arbitration status and path forward." (Cuti Obj. 19 & nn. 35-36.) However, Duane Reade and Oak Hill have explained that the meeting was a Duane Reade board meeting at which Mr. Beller was "presenting the facts of the internal investigation, what had [Paul, Weiss] found, what was going on with the independent counsel. So this was about the developments of the day which had to do with the criminal case." (ECF No. 225, Decl. of Brian C. Brook ("Brook Decl.") Ex. 1, 88:20-23.) Mr. Synnott, a litigator, was also involved in the presentation regarding the criminal case. (Brook Decl. Ex. 1, 87:24-25; Duane Reade Resp. to Cuti Obj. 12-13.) In contrast, Mr. Wee, a corporate lawyer, attended the board meeting in order to determine the appropriate SEC disclosures, some of which related to the arbitration. (Brook Decl. Ex. 1, 89:12-90:14.) Accordingly, Duane Reade's expenses for Mr. Beller and Mr. Synnott's time are compensable because they were related to participation in the investigation or prosecution of the criminal case, while the expenses for Mr. Wee's time are not compensable because they were not related to participation in the criminal case. With regard to these entries and all others for which the Court is ordering restitution, the Court has abided by the law in this Circuit, requiring the Government to prove actual loss by a preponderance of the evidence and making a reasonable estimate of actual loss based on the evidence before it.
Defendant Cuti also argues that Judge Pitman recommended reimbursement of "time that on its face was spent on SEC or arbitration matters." (Cuti Obj. 18-19.) As an example, Mr. Cuti argues that Judge Pitman recommended reimbursement of legal fees "incurred on Duane Reade's motion to the arbitrators to stay the arbitration." (Cuti Obj. 19.) Indeed, Judge Pitman stated that he found a "handful of examples" of time charges related to the SEC or arbitration matters, and recommended that this Court respond to those overcharges by making an across-the-board, two-percent reduction of restitution ordered for the Paul, Weiss fees. (Report 37-38.) This Court, in contrast and on de novo review, finds no examples of time charges related to the SEC or arbitration matters for which Duane Reade still seeks compensation. To be sure, Duane Reade and Oak Hill initially sought such restitution. For instance, as of January 7, 2012, they still sought $65,094.50 related to the Government's Request to Stay the arbitration. (See ECF No. 208, Ex. I; ECF No. 218, Ex. I; ECF No. 230, Ex. A, at 1.) Because Paul, Weiss's work on the Request to Stay was not necessary to the investigation or prosecution of Mr. Cuti, the $65,094.50 was not properly compensable under the VWPA. However, the Paul, Weiss billing entries that initially included work related to the Request to Stay also contain $44,838.00 in fees that the Court finds to be necessary expenses unrelated to the Request to Stay. (See ECF No. 218, Ex. I.) Accordingly, 100% of that $44,838.00, and of the other $3,057,834.14 in necessary Paul, Weiss legal fees related to Duane Reade's participation in the criminal investigation, is compensable.
Defendant Cuti next argues against restitution for any expenses incurred before the commencement of the Government's criminal investigation on May 22, 2007. The Government has demonstrated by a preponderance of the evidence that the fees sought for the period prior to May 22, 2007 were necessary and related to Duane Reade's participation in the criminal investigation of Mr. Cuti. (See Brook Decl. Ex. 1, 83:6-84:20 (Government noting, inter alia, that Paul, Weiss's work "gave rise to the whole investigation of the real estate concession transactions which is the bulk of the fraud in this case" and that Paul, Weiss "did the initial investigating" regarding the credit and rebilling scheme and "figured out there was a problem").) As Mr. Cuti states, such fees would not be compensable within the D.C. Circuit. (Cuti Obj. 21 (citing United States v. Papagno, 639 F.3d 1093, 1098-99 (D.C. Cir. 2011)). However, the Second Circuit Court of Appeals has "taken a broader view" of the "other expenses" provision in the restitution statutes, Papagno, 639 F.3d at 1101 (citing Amato, 540 F.3d 153), and has awarded restitution for an internal investigation that occurred before the victim reported the Defendant's fraud to the Government. Amato, 540 F.3d at 162-63; see also Gupta, 2013 WL 662954, at *2 (awarding restitution for expenses incurred during victim's internal investigation into Defendant's conduct); Skowron, 839 F. Supp. 2d at 748-49 (same); United States v. Qurashi, No. 05 Cr. 498, slip op. at 38, 41-42 (E.D.N.Y. Aug. 26, 2009) (noting that victims' internal investigation expenses were "'necessary' as envisioned by the [MVRA] because without them, the complexities of the fraud engaged in by Defendant might never have been fully resolved, nor would Defendant's prosecution have been as effective"), adopted by No. 05 Cr. 498, slip op. (E.D.N.Y. Sept. 30, 2009), aff'd by 634 F.3d 699 (2d Cir. 2011). Pursuant to this Circuit's "broader view", the Court awards restitution to Duane Reade for the Paul, Weiss legal fees incurred from September 2006 to May 22, 2007.
2. Legal Fees for Representation of Current and Former Duane Reade Employees
Upon de novo review of the evidence submitted, the Court finds that the Government has proved by a preponderance of the evidence that Duane Reade's actual loss with respect to the costs of counsel for current and former Duane Reade employees is $1,585,125.00. As with the Paul, Weiss charges, this number reflects a reasonable estimate of Duane Reade's actual loss based on the evidence before the Court. This Circuit's case law does not require each billing entry to specifically reference a particular inquiry or request from the U.S. Attorney's office, as Mr. Cuti claims. (Cuti Obj. 30-31.)
An $875.00 charge for the "[r]eview [of] arbitration documents" submitted by Duane Reade for restitution is not compensable because it was not related to participation in the Government's investigation or prosecution. (See ECF No. 218, Rev. App'x, Fee and Expense Documentation, Counsel for Duane Reade Employees, Tab 1 at EXPI000006002, EXPI000006005.) Magistrate Judge Pitman also recommended that the Court deny restitution for $650.00 charged for "attention to SEC actions" and "attention to SEC matter." (Report 29.) However, on January 13, 2012, Duane Reade withdrew its request for restitution of the $650.00 charge, which would not have been compensable. (See ECF No. 218, Rev. App'x, Fee and Expense Documentation, Counsel for Duane Reade Employees, Tab 21 at 2.)
Duane Reade's expenses for its employees' counsel were necessary and related to its participation in the Government's investigation and prosecution of Defendant Cuti. As Magistrate Judge Pitman noted,
It is highly probable that without independent counsel, the current and former employees would have refused to be interviewed by the USAO and would have refused to cooperate. As sophisticated attorneys and business executives, the current and former Duane Reade employees
would have been well aware that there were risks in speaking with the USAO; an individual's cooperation with the prosecution is not a guarantee of immunity from prosecution in this District.(Report 30.) Had the Government not received the Duane Reade employees' cooperative assistance in its investigation and prosecution of Mr. Cuti, its case against him would have suffered. The legal expenses Duane Reade paid were accordingly necessary to the Government's investigation and prosecution pursuant to the VWPA. See United States v. Levis, No. 08 Cr. 181, 2011 WL 497958, at *2 (S.D.N.Y. Feb. 10, 2011) (finding victim's payment of employees' legal fees to be necessary and compensable under MVRA); see also Skowron, 839 F. Supp. 2d at 748-49 (same, with regard to victim's payment of legal fees of acquired company's employees).
Defendant Cuti argues that the Court should not award restitution for any legal expenses related to Michelle Bergman's "own potential criminal exposure" because representation of Ms. Bergman's own interests was not necessary. (Cuti Obj. 30.) However, Ms. Bergman's counsel, like all the independent counsel Duane Reade hired, was acting pursuant to its ethical obligation to protect its client's interests. Ms. Bergman's assistance to the Government, which Mr. Cuti concedes was necessary (see Cuti Obj. 30), resulted from her understanding that her interests were being protected by counsel. Accordingly, all of Ms. Bergman's counsel's work related to Mr. Cuti's criminal case, including work to protect Ms. Bergman's interests, was necessary.
Nor does the fact that the Government ultimately viewed Ms. Bergman as a potential coconspirator who was unsuitable to participate in Mr. Cuti's trial make her participation in its criminal investigation unnecessary. (See Gov. Letter to Court, Feb. 7, 2013; Brook Decl. Ex. 1, 21:13-14.) --------
Finally, Mr. Cuti argues that Duane Reade should not be compensated for its employees' legal fees because Duane Reade had an "independent obligation to indemnify those employees under their employment contracts, Duane Reade's Certificate of Incorporation, and/or Delaware law." (Cuti Obj. 28.) However, Congress did not make restitution awards dependent on whether the victim makes an unencumbered choice to pay its employees' legal fees in response to a Government investigation. Regardless of whether a preexisting obligation existed, Duane Reade's expenses for its employees' legal fees were necessary and constituted an actual loss. See also Skowron, 839 F. Supp. 2d at 74 9 (finding legal expenses to be necessary even where "Morgan Stanley was contractually obligated to indemnify its employees under these circumstances").
3. Other Losses
As the Court held in its October 14, 2011 Order, the following categories of fees and expenses are also subject to restitution: fees and expenses of independent counsel Cooley Godward Kronish LLP in the amount of $1,512,817.25; fees and expenses of forensic accountants AlixPartners LLP in the amount of $342,289.62; accounting/auditor fees and expenses paid to KPMG LLP and PricewaterhouseCoopers LLP in the amount of $4 93,000; and costs of the Kroll Ontrack database in the amount of $579,313.89.
The total amount subject to restitution, including the payments made to Paul, Weiss, counsel for Duane Reade employees, Cooley Godward Kronish LLP, AlixPartners LLP, KPMG LLP, PricewaterhouseCoopers LLP, and Kroll Ontrack Inc., is $7,615,217.90. E. Appropriate Restitution Under the VWPA
Whereas "a district court lacks discretion under the MVRA to deny an award of restitution or to award restitution for anything less than the full amount of the victim's losses," Desnoyers, 708 F.3d at 389 (quotation marks omitted), "restitution under the VWPA is discretionary." Battista, 575 F.3d at 230. "The VWPA requires sentencing courts to consider the amount of the loss sustained by the victim as a result of the offense, the defendant's financial resources, the financial needs and earning ability of the defendant and the defendant's dependents, and other factors the court deems appropriate," but "detailed factual findings for each factor are not required." Id. Even so, "'full restitution remains the norm, sparing the victims the need to get a separate civil judgment. When there is doubt about [the defendant's] ability to pay, the court should order full restitution.'" United States v. Mattice, 186 F.3d 219 (2d Cir. 1999) (quoting United States v. Porter, 90 F.3d 64, 68 (2d Cir. 1996). "[T]he critical object of the VWPA [is] making crime victims whole by 'requir[ing] restitution whenever possible.'" United States v. Kyles, 601 F.3d 78, 85 (2d Cir. 2010) (quoting Porter, 90 F.3d at 68).
The Court has reviewed the financial disclosures and related arguments made in the Pre-Sentence Report, Mr. Cuti's Sentencing Memorandum of October 18, 2010, the transcript from the sentencing proceedings, the Supplemental Financial Disclosures of February 7, 2013, Mr. Cuti's Objections to Judge Pitman's Report, and the Government's letter response of February 28, 2013. REDACTED
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Upon considering the factors listed in 18 U.S.C. § 3663(a)(1)(B)(i)(I-II), the Court determines that Mr. Cuti has the ability to pay full restitution of $7,615,217.90, as long as the Court sets an appropriate payment schedule. However, the Court does not order Defendant Cuti to pay prejudgment interest.
The restitution statutes require the Court to specify:
the manner in which, and the schedule according to which, the restitution is to be paid, in consideration of-18 U.S.C. § 3664(f)(2). Having considered the above factors, discussed by the Court above and in more detail in the Pre-Sentence Report and Mr. Cuti's submissions, the Court orders Mr. Cuti to make restitution at the rate of fifteen percent of his gross monthly income, beginning with the second month of supervised release. Mr. Cuti must make full restitution to Duane Reade in the amount of $6,145,961.40 before any restitution is paid to Oak Hill. See 18 U.S.C. § 3664(j)(1). As specified by statute, Mr. Cuti "shall notify the court and the Attorney General of any material change in [his] economic circumstances that might affect [his] ability to pay restitution," or the Court may be notified by the United States or Duane Reade. 18 U.S.C. § 3664(k). "Upon receipt of the notification, the court may, on its own motion, or the motion of any party, including the victim, adjust the payment schedule, or require immediate payment in full, as the interests of justice require." 18 U.S.C. § 3664(k).
(A) the financial resources and other assets of the defendant, including whether any of these assets are jointly controlled;
(B) projected earnings and other income of the defendant; and
(C) any financial obligations of the defendant; including obligations to dependents.
Mr. Cuti has requested that the Court "indicate its willingness to revisit the amount of the fine, so that the Court of Appeals may remand the fine." (Cuti Obj. 39-40.) The Court is not willing to revisit the $5 million fine it previously imposed. Courts regularly order both fines and restitution, because they serve different purposes: fines are punitive, whereas "[t]he purpose of restitution is to compensate victims for their losses." United States v. Gonzalez, 647 F.3d 41, 65 (2d Cir. 2011); see United States v. Bajakajian, 524 U.S. 321, 327-28 (1998). Mr. Cuti's fine constitutes part of his punishment, and the Court finds that he has the ability to pay the fine, even in combination with the restitution ordered today, given his projected income and the payment schedule set for the restitution. Again, this Court has the authority to adjust the restitution payment schedule if Mr. Cuti's economic circumstances change materially. Accordingly, if the Court still maintained jurisdiction over the issue of Mr. Cuti's fine, the fine would not be revised.
III. CONCLUSION
For the reasons above, the Court orders Defendant Anthony Cuti to pay a total of $7,615,217.90 in restitution. $6,145,961.40 shall be paid to the victim of his offenses, Duane Reade. After Duane Reade is paid in full, Mr. Cuti shall pay Oak Hill, the entity that provided Duane Reade with compensation for its losses, $1,469,256.50. Defendant Cuti shall make restitution at the rate of fifteen percent of his gross monthly income, beginning with the second month of supervised release.
SO ORDERED
DATED: New York, New York
May 13, 2013
/s/_________
Deborah A. Batts
United States District Judge