The Path to Restitution After Lagos

This article originally appeared in Law360. Reprinted with permission. Any opinions in this article are not those of Winston & Strawn or its clients; the opinions in this article are the authors’ opinions only.

The U.S. Supreme Court’s recent decision in Lagos v. United States, which significantly changes the legal landscape relating to restitution, may benefit defendants while changing how corporate victims approach internal investigations and referral to law enforcement. In the past, assistant United States attorneys in various districts successfully obtained restitution orders through which defendants would reimburse their victims for costs the victims incurred investigating the crimes at issue by citing a particular provision of the Mandatory Victims Restitution Act (MVRA). Following Lagos, those days are over. Specifically, on May 29, the Supreme Court unanimously ruled in Lagos that subsection (b)(4) of the MVRA does not encompass costs incurred for investigations that a “victim chooses to do on its own”—overturning the law prevailing in every circuit to address the issue, except one.

The Lagos Case

In Lagos, the defendant was convicted of using a company he owned and operated to defraud its lender. After defendant Lagos admitted his fraudulent conduct to an outside consultant, the lender company conducted an investigation, and ultimately shared what it had learned with the federal government. Lagos was indicted and pleaded guilty to wire fraud. As part of his sentence, following Fifth Circuit precedent, the district court judge ordered Lagos to pay approximately $5 million in restitution pursuant to a provision of the MVRA, which “requires defendants convicted of a listed range of offenses ‘to reimburse the victim for lost income and necessary child care, transportation, and other expenses incurred during participation in the investigation.” Specifically, the trial court ordered (and the Fifth Circuit upheld) restitution based on “forensic expert fees, legal fees, and consulting fees” that the victim incurred both in its internal investigation and pursuit of bankruptcy claims against Lagos’ company.

The Supreme Court’s Decision

In a unanimous opinion, the Supreme Court concluded that the plain text of subsection (b)(4) of the MVRA did not support the restitution awarded. In the court’s view, the words “investigation” and “proceeding,” as used in the statute, “are limited to government investigations and criminal proceedings.” As part of its ruling, the court considered Congress’ intent and practical considerations relating to courts determining what costs are “necessary” for an internal investigation, finding that each cut in favor of a narrow reading of the statute. Of note, the court specifically rejected an argument that the victim company’s cost should fall under the ambit of subsection (b)(4) because the victim company shared its investigation results with the government, and they were helpful to various facets of the government’s prosecution. The court explained that the terms “incurred during participation” did not reach costs incurred through a private investigation before any government investigation, even where the information is ultimately shared with federal law enforcement. The court also was not swayed by the government’s argument that victims may not be able to recover full losses, absent a restitution order, noting that victims can still pursue a civil remedy.

Implications of the Lagos Decision

On its face, the Lagos decision negatively changes the restitution landscape for corporate victims that conduct their own investigations prior to a government investigation or prosecution. However, the Supreme Court left open the possibility that certain investigative costs incurred by a corporate victim may still be recouped, though uncertainty abounds.

First, if a company conducts an investigation at the government’s invitation or request, certain costs may be recoverable. However, what type of request must be made, and what expenses will be covered, is an open question. Therefore, companies and their counsel will need to think strategically, and prudently, when embarking on an investigation and determining when and how to refer the matter to law enforcement.

Second, the Lagos decision does not change the fact that, on its face, subsection (b)(4) of the MVRA requires defendants to reimburse victims for “participation in the investigation or prosecution of the offense or attendance at proceedings related to the offense.” Therefore, companies and their counsel should consider methods for separately tracking expenses specifically related to the government’s investigation to facilitate potential recovery.

Third, subsection (b)(1) of the MVRA may provide an alternative mechanism for recovering private investigative costs. Subsection (b)(1) applies to “an offense resulting in ... loss ... of property of a victim of the offense” and requires return of the property or restitution equal to its value if returning such property” would be “impossible, impracticable, or inadequate.” Arguably, a company’s investigation costs are directly and proximately caused by a defendant’s offense, and thus could be considered “property” that was “los[t]” as a “result” of a defendant’s offense. In fact, in his briefing in Lagos, the solicitor general offered this provision as a potential alternative ground for upholding the restitution judgment, though the court did not address this provision. Giving potential credence to this argument, the Seventh Circuit has upheld awards for restitution based on investigation-related costs, such as costs for an auditor and costs for employee time, citing this provision. As victims are not party to criminal cases, however, they will have to rely on the U.S. attorney’s offices to pursue somewhat novel arguments under this provision.

While potentially harming corporate victims, the Lagos decision will benefit defendants. Under Lagos, defendants may now have a path to avoid large, six- or seven-figure restitution judgments driven up by internal investigation costs. This is important because, even if a defendant never would be able to afford paying off such a judgment, the mere existence of a restitution judgment impacts the defendant in an ongoing manner. For example, “an order of restitution ... is a lien in favor of the United States.” Many courts have found that the U.S. attorney’s office may record this lien against real property, like a defendant’s home, and may seek a turnover or garnishment order relating to a defendant’s qualifying, nonexempt assets up to the amount of the judgment. By removing internal investigation costs from a potential restitution judgment (and corresponding lien) against criminal defendants, Lagos may lift a significant burden off the shoulders of defendants who otherwise would have been saddled for decades with a restitution judgment.

Conclusion

In sum, while the Lagos decision has eliminated the traditional way that many corporate victims recouped investigation costs, there still may be ways for at least a subset of those costs to be recovered through a restitution judgment, though counsel—both in-house and outside—must tread with caution, as the path to such recovery is now more limited, and definitely unclear.