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The practice of using of a restitution law to make criminal fraud defendants pay internal investigation costs and fees unprompted by the government might be in jeopardy in light of U.S. Supreme Court oral argument April 18 in a case involving General Electric Capital Corp.
Some of the justices expressed skepticism of the practice, though the argument of the ex-CEO convicted of wire fraud challenging it didn’t go unscathed.
Besides the millions at stake here, the high court’s ruling could affect payments in tens of thousands of restitution cases a year.
Sergio Lagos was convicted of defrauding GE Capital in what the government called a “Ponzi-like scheme.”
He made it seem like his Texas trucking company, USA Dry Van Logistics, was more successful than it was, inducing the corporate lender to loan more money than it would have otherwise, the government alleged.
How much Lagos has to reimburse GE Capital turns on the justices’ interpretation of the Mandatory Victims Restitution Act.
The act requires that defendants pay victims 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.”
The sentencing judge ordered Lagos to pay nearly $16 million in restitution.
The U.S. Court of Appeals for the Fifth Circuit’s ruled for the government below, upholding the award.
Lagos doesn’t deny that he owes close to $11 million representing the unsecured principal of the loan.
The text of the law doesn’t require such payments, Geyser argued. He said the “investigation or prosecution” language mentioned in the law refers only to the government’s investigation, not an internal investigation undertaken before the government gets involved.
Plus, attorneys’ fees shouldn’t fall under the “other expenses” referenced in the act, Geyser argued. They’re nothing like the child care and transportation expenses mentioned in the same sentence, which shows Congress didn’t want them covered there, he said.
But “the investigation” doesn’t just refer to the government’s investigation, assistant to the U.S. solicitor general Michael R. Huston argued for the government.
Justice Sonia Sotomayor didn’t buy that. You have to read “investigation” along with “prosecution,” she said, suggesting both words describe government activity.
Further chipping away at Huston’s argument, Justice Elena Kagan advanced the view that the statute was written with an individual victim in mind, not a corporate one.
And if the statute was written with an individual victim in mind, doesn’t that pose a “serious problem” for the government? Justice Neil M. Gorsuch asked.
Huston replied that Congress would have known that it’s “very common in fraud cases against corporations for the fraud to be discovered through an internal investigation.”
Justice Anthony M. Kennedy asked Huston whether his reading of the restitution law could “limit extreme expenditures.”
Huston tried to assuage Kennedy by pointing out that only “necessary” expenses can be recovered.
But that explanation didn’t end the issue, at least not for some of the justices.
“How would you determine whether the scope of an internal investigation is necessary?” Justice Samuel A. Alito Jr. wondered.
Gorsuch and Chief Justice John G. Roberts Jr. both voiced concerns with the government’s argument when it comes to trial court resources.
If the court accepts Geyser’s argument, wouldn’t that create a “perverse incentive,” by essentially telling companies not to investigate wrongdoing? Justice Ruth Bader Ginsburg asked.
Geyser said no, because companies can recover the same fees in civil litigation.
Sotomayor later latched onto that point, making the case that companies could still recover losses outside of the restitution context.
She got Huston to concede that the company would be able to use Lagos’s conviction to show his liability in civil litigation.
Toward the end of the argument, Ginsburg brought up the fact that defendants aren’t always able to pay the full restitution ordered.
She asked what to make of the argument that “all that this does is to assure that the wrongdoer’s life will be miserable after he finishes his prison sentence because he will never be able to pay these huge attorney fee restitution awards, and you’re not going to help the victim because the award will be uncollectible.”
Huston offered a simple response.
If the restitution award is large here, it’s because Lagos “conducted a massive fraud,” he said. “He stole $25 million in less than two years. And so I think he really has nobody to blame but himself for the amount of the award.”
The case is Lagos v. United States , U.S., No. 16-1519, argued 4/18/18 .
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