GE Capital Restitution Fight in Supreme Court Spotlight

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By Jordan S. Rubin

Eight-figure restitution a former trucking company CEO was ordered to pay for defrauding General Electric Capital Corp. should actually be closer to seven, he’ll argue at the U.S. Supreme Court.

Besides the millions at stake in Lagos v. United States and the ruling’s potential effect on thousands of restitution cases a year, the dispute raises broader questions about rehabilitation and attorneys’ fees, according to outside briefs filed in support of white collar convict Sergio Lagos.

Oral arguments are scheduled for April 18.

Lagos was convicted of defrauding GE Capital in what the government called a “Ponzi-like scheme.” He made it seem like his Texas company, USA Dry Van Logistics, was more successful than it was, causing the corporate lender to loan more money than it would have otherwise.

How much Lagos has to reimburse the lender turns on the justices’ interpretation of a 1996 law, the Mandatory Victims Restitution Act.

Lagos’s case deals with the act‘s requirement 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 parties disagree about what some of those words mean.

Lagos doesn’t deny that, out of the nearly $16 million in restitution ordered, he owes close to $11 million representing the unsecured principal of the loan.

But he claims he shouldn’t have to pay the remainder. It was generated by the company’s own choices, he said in reference to attorney and other expert fees spent investigating the fraud and in subsequent bankruptcy proceedings.

But Lagos’s interpretation of the law is faulty and would prevent crime victims from receiving their full due, the government said in its March 28 brief.

A ruling is expected by the end of June.

Ponzi-like Scheme

Between 2008 and 2010, Lagos caused GE Capital to loan tens of millions of dollars to Dry Van “by modifying Dry Van’s records in difficult-to-detect ways that made the business appear substantially more valuable than it actually was,” the government charged.

Under the scheme, out of about $37 million in accounts receivable that Dry Van showed on its books, about $26 million was fraudulent.

When the lender learned of the scheme, it “acted immediately to investigate the fraud and mitigate its effects,” the government said. The company “incurred nearly $5 million in losses getting to the bottom of” Lagos’s fraud, it said.

GE Capital shared its findings with the FBI, which the government said were “vital to the successful prosecution.”

Visitors stand outside the U.S. Supreme Court in Washington, D.C., U.S., on Tuesday, Feb. 27, 2018.
Broad v. Narrow

Lagos pleaded guilty to wire fraud and was sentenced to over eight years in prison and ordered to pay the nearly $16 million in restitution.

He appealed, challenging the $5 million in costs incurred by GE. But the U.S. Court of Appeals for the Fifth Circuit said he was on the hook for the whole thing.

The fraud scheme caused GE Capital “to employ forensic experts to secure and preserve electronic data,” the Fifth Circuit said in explaining why Lagos had to pay. The lender retained “lawyers and consultants to investigate the full extent and magnitude of the fraud and to provide legal advice relating to the fraud,” the appeals court said.

But the Fifth Circuit acknowledged that courts across the country haven’t ruled uniformly on the issue.

The U.S. Court of Appeals for the D.C. Circuit takes a “narrower” view of restitution, the Fifth Circuit observed.

Notably, one of the Fifth Circuit judges wrote a separate opinion explaining why—despite the fact he felt bound by Fifth Circuit precedent to rule against Lagos—he thought the Washington court’s reasoning was more persuasive.

The Fifth Circuit might be looking at restitution “too broadly,” Judge Stephen A. Higginson wrote in his concurrence. He agreed with the D.C. Circuit that “participating” in a government investigation under the restitution law doesn’t encompass a company’s internal investigation.

Go Narrow, Lagos Says

The Fifth Circuit was wrong, Lagos argued in his Feb. 26 brief. The law here “applies to government investigations, not private investigations,” he said in the filing.

Private conduct not requested by the government that “merely assists the government” isn’t enough to get restitution for those expenses, he claimed.

But the term “investigation” in the statute doesn’t just refer to the “work of the government alone,” the government replied in its brief.

Yet Lagos also points to what he deems a “more fundamental problem” with the government’s argument, regarding the part of the law that mentions “other expenses” alongside “child care” and “transportation.” The fact that an internal investigation is so different from those two things, he argued, is further proof that Lagos shouldn’t have to pay for it.

But the government says those examples in the statute don’t limit what other expenses could be required for restitution—rather, they’re just examples.

What did Congress Want?

The two sides offer different rationales for congressional motivation in passing the restitution law.

“Congress would have known that victims routinely contribute to the investigation of a crime before the government gets involved,” the government said in its March filing. Lagos’s contrary interpretation would “subvert” the “basic purpose” of the law, it said: “making crime victims whole.”

But he says Congress would’ve been clearer in its language if it wanted him to pay for the expenses at issue here. He also says the high court can rule in his favor without leaving victims out to dry—he just thinks a criminal proceeding is the wrong forum.

Internal investigation costs “are traditionally the subject of civil tort suits,” he noted. Courts in civil cases “can provide make-whole recovery without intruding upon the criminal-justice system’s need for swift and efficient sentencing.”

Big Awards = Bad Awards

An outside brief supporting Lagos alerts the justices to what it sees as broader issues underpinning the dispute.

“Imposing millions of additional dollars in restitution debt for internal investigations is likely to harm defendants, plunging them further into debt, preventing them from rejoining society, and making them more likely to commit new crimes,” the filing on behalf of Shon Hopwood, a Georgetown law professor, said.

After pleading guilty to bank robbery and serving over a decade in prison, Hopwood became a lawyer and now teaches criminal law.

Adopting the government’s interpretation of the law here would “quite literally prevent most defendants from paying their debts to society,” his brief argued.

Awards that are “large yet uncollectable” also lead to frustrated victims “who feel let down by the courts and who would be more satisfied with awards that are smaller yet collectible,” it said.

The other outside brief takes aim at attorneys’ fees. The fees issue is “lurking” in this case, the brief from the National Association of Criminal Defense Lawyers, filed by Stuart Banner of the UCLA School of Law Supreme Court Clinic, said.

Like Lagos’s brief, it raised the issue of child care and transportation being mentioned alongside “other expenses” in the restitution law.

It gave a colorful example to try to illustrate as those other things: “When a store advertises ‘baseballs, footballs, and other balls,’ shoppers know they will not find matzo balls or balls of yarn.”

To contact the reporter on this story: Jordan S. Rubin in Washington at jrubin@bloomberglaw.com

To contact the editor responsible for this story: C. Reilly Larson at rlarson@bloomberglaw.com

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