United States v. Sergio Lagos ( 2017 )

REVISED March 23, 2017
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit
No. 16-20146 FILED
March 17, 2017
UNITED STATES OF AMERICA, Lyle W. Cayce
Clerk
Plaintiff–Appellee,
v.
SERGIO FERNANDO LAGOS,
Defendant–Appellant.
Appeal from the United States District Court
for the Southern District of Texas
Before PRADO and HIGGINSON, Circuit Judges. ∗
EDWARD C. PRADO, Circuit Judge:
Sergio Fernando Lagos challenges the district court’s order of restitution
imposed following his guilty plea to one count of conspiracy to commit wire
fraud and to five counts of wire fraud. See 18 U.S.C. §§ 2, 1343, 1349. He
contends that the Mandatory Victims Restitution Act (“MVRA”) does not
authorize restitution for the legal, expert, and consulting fees incurred by the
victim-lender, General Electric Capital Corporation (“GECC”), in investigating
the fraud or its legal fees from the bankruptcy proceedings caused by the fraud.
∗
This opinion is being entered by a quorum of this court pursuant to 28 U.S.C. § 46(d).
No. 16-20146
Because the restitution ordered in this case is consistent with payments upheld
in our past cases, we affirm.
I.
A
The legality of a restitution award is reviewed de novo. United States v.
Espinoza, 677 F.3d 730, 732 (5th Cir. 2012). The MVRA instructs a sentencing
court to order restitution for a victim’s “actual loss directly and proximately
caused by the defendant’s offense of conviction.” United States v. Sharma, 703
F.3d 318, 323 (5th Cir. 2012); 18 U.S.C. § 3663A(a)(2). This includes “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).
According to Lagos, the forensic expert fees, legal fees, and consulting
fees incurred by GECC should not have been included because they are
“consequential damages.” His reliance on United States v. Schinnell, 80 F.3d
1064, 1070 (5th Cir. 1996), however, is misplaced because the basis for the
restitution award in that case was the Victim and Witness Protection Act
(“VWPA”), 18 U.S.C. § 3663(b)(1), not § 3663A(b)(4) and the MVRA.
In our Circuit, the scope of restitution under subsection 3663A(b)(4) is
controlled by United States v. Phillips, 477 F.3d 215 (5th Cir. 2007). In
upholding an award of restitution to the University of Texas imposed on a
computer hacker, this Court in Phillips cited § 3663A(b)(4), which authorizes
restitution of expenses incurred while participating in the investigation or
prosecution of the offense. 477 F.3d at 224. It concluded that the University of
Texas “was a victim, and it collaborated with the investigation and incurred
costs to notify other victims of [the hacker’s] data theft in order to determine
whether they had suffered further damage.” Id. As the Court explained, while
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“consequential damages” are not properly recoverable under Schinnell, that
case did not involve the application of § 3663A(b)(4). Id. In distinguishing
Schinnell, this Court gave a broad reading to § 3663A(b)(4), allowing not only
the cost of the investigation but also the cost of contacting those whose
information was compromised to be included in the restitution award. 1
In unpublished decisions following Phillips, this Court has upheld
restitution awards that encompassed attorneys’ fees and other expenses
stemming from the investigation and prosecution of the offense. United States
v. Herrera, 606 F. App’x 748, 752–53 (5th Cir. 2015) (per curiam) (affirming
investigative audit costs as part of restitution where investigative audit was a
fundamental component of investigation of defendant’s theft of federal funds);
United States v. Dwyer, 275 F. App’x 269, 271–72 (5th Cir. 2008) (affirming in
the restitution award costs of margin calls, attorneys’ fees, and accounting fees
arising from defendant’s bank fraud under plain error standard of review).
Lagos admitted that for two years, he and his co-conspirators misled
GECC about the value of their accounts receivable to induce GECC to increase
the amount of the revolving loan and to provide him and his co-defendants with
uncollateralized funds. Their wire fraud scheme caused GECC to employ
forensic experts to secure and preserve electronic data as well as lawyers and
consultants to investigate the full extent and magnitude of the fraud and to
provide legal advice relating to the fraud. Fees incurred by GECC during the
investigation of the fraud were necessary and compensable in the restitution
award. See 18 U.S.C. § 3663A(b)(4).
1 Notably, the opinion in Phillips provided a second reason for upholding the award:
the hacker violated the Computer Fraud and Abuse Act (“CFAA”), which contains its own
definition of “loss” that encompasses the “cost of responding to an offense.” 477 F.3d at 224–
25. However, the unpublished decisions that have followed Phillips did not arise from
convictions under the CFAA.
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Likewise, the district court correctly included GECC’s legal fees incurred
in the related bankruptcy proceedings in the restitution award under
subsections 3663A(a)(2) and (b)(4). In its victim impact statements, GECC
described how the defendants’ fraudulent scheme directly caused the
defendants’ companies (the GECC borrowers) to file for bankruptcy. The
bankruptcy court ordered GECC to continue to make advances to the
defendants’ companies during the bankruptcy proceedings. Thus, the district
court correctly determined that the legal fees incurred by GECC during the
related bankruptcy proceedings were directly caused by the defendants’ fraud
for purposes of restitution. See 18 U.S.C. § 3663A(a)(2), (b)(4); Sharma, 703
F.3d at 323 (authorizing restitution for losses “directly and proximately caused
by the defendant’s offense[s] of conviction”).
We note that the D.C. Circuit takes a narrower view of restitution under
subsection 3663A(b)(4). United States v. Papagno, 639 F.3d 1093 (D.C. Cir.
2011). 2 Whatever the merits of the contrary reasoning in Papagno, this panel
is bound by this Court’s prior decision in Phillips and will follow it here.
B
In the alternative, Lagos argues that even if the MVRA authorizes
restitution for GECC’s legal, expert, and consulting fees, the district court
improperly relied upon unsigned, unverified victim-impact statements
submitted by GECC to calculate the restitution award. But Lagos never
challenged the fee amounts alleged in the victim-impact statements on these
grounds. The district court was entitled to rely on the unrebutted victim-
2This restrictive reading, however, is unique among the circuits, several of which have
come to the opposite conclusion, although without the benefit of Papagno’s reasoning
regarding internal investigations. See United States v. Elson, 577 F.3d 713, 726–29 (6th Cir.
2009); United States v. Hosking, 567 F.3d 329, 331–32 (7th Cir. 2009); United States v.
Stennis-Williams, 557 F.3d 927, 930 (8th Cir. 2009); United States v. Amato, 540 F.3d 153,
159–63 (2d Cir. 2008); United States v. Gordon, 393 F.3d 1044, 1056–57 (9th Cir. 2004); see
also United States v. Gupta, 925 F. Supp. 2d 581, 584 (S.D.N.Y. 2013).
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impact statements to support the restitution award. See Sharma, 703 F.3d at
324 n.21. GECC submitted to the district court an accounting of the names of
the law firms and consultants retained and the nature of the work performed
in support of its investigative fees and its fees incurred from the bankruptcy
proceedings directly caused by Lagos’s wire fraud scheme. Lagos’s claim that
the district court failed to subject the victim-impact statements to the
appropriate level of scrutiny is without merit.
II.
Finally, the Government urges the court to remand this case for the
district court to correct a mathematical error in the restitution total. The
district court adopted a restitution total of $15,970,517.37, an amount urged
by the Government at sentencing, but the restitution amount supported by the
itemization in the victim-impact statements is actually $104.62 lower than the
amount imposed by the district court. Lagos does not address the issue at all,
and, as stated, he never challenged the specific fee amounts listed in the
victim-impact statements before the district court. While this court requires
that every dollar included in a restitution award be supported by record
evidence, see Sharma, 703 F.3d at 323, by failing to challenge the fee amounts
before the district court or here, Lagos has waived the issue, see United States
v. Scroggins, 599 F.3d 433, 446 (5th Cir. 2010).
***
Based on the foregoing, the judgment of the district court is AFFIRMED.
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STEPHEN A. HIGGINSON, Circuit Judge, concurring:
I join Judge Prado’s opinion and write separately only to suggest that we
may be interpreting Section 3663A(b)(4) too broadly.
As always, statutory interpretation begins “with the plain language and
structure of the statute.” Coserv Ltd. Liab. Corp. v. Sw. Bell Tel. Co., 350 F.3d
482, 486 (5th Cir. 2003). I agree with the D.C. Circuit’s persuasive
interpretation of the statutory terms “participation” and “necessary” in
Papagno, see 639 F.3d at 1098–1101, and specifically, that “participating” in a
government investigation does not embrace an internal investigation, “at least
one that has not been required or requested by criminal investigators or
prosecutors.” Id. at 1098–99.
I think three additional points support the D.C. Circuit’s narrow reading
of the statute. First, the noscitur a sociis canon of statutory interpretation
suggests a narrow reading of the phrase “participation in the investigation . . .
of the offense.” The noscitur a sociis canon provides that “a word is known by
the company it keeps[.]” Yates v. United States, 135 S. Ct. 1074, 1085 (2015);
see also United States v. Williams, 553 U.S. 285, 294 (2008). Section
3663A(b)(4) contains a list enumerating the types of conduct allowing for
reimbursement. It provides that reimbursement is available for certain
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. The statute therefore allows reimbursement for expenses incurred in
the course of three types of conduct: (1) participation in the investigation of the
offense, (2) participation in the prosecution of the offense, and (3) attendance
at proceedings related to the offense. Both participation in the prosecution of
the offense and attendance at proceedings related to the offense must take
place within the context of the government’s criminal enforcement. The
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question is whether participation in the investigation of the offense is also
limited to the government’s criminal enforcement. The noscitur a sociis canon
suggests to me that it is.
Second, a broad reading of Section 3663A(b)(4) is difficult to administer.
Indeed, the courts that read Section 3663A(b)(4) to allow recovery of fees
incurred during an internal investigation are divided over what, if anything,
limits the reach of “other expenses.” For example, the Ninth Circuit allows
recovery for “investigation costs—including attorneys’ fees—incurred by
private parties as a ‘direct and foreseeable result’ of the defendant’s wrongful
conduct.” United States v. Gordon, 393 F.3d 1044, 1057 (9th Cir. 2004). The
Second Circuit has questioned this approach, noting that the statute “seems to
focus more on the link between these expenses and the victim’s participation
in the investigation and prosecution than on the offense itself.” Amato, 540
F.3d at 162.
Even if agreement could be reached on a limiting principle in theory, a
broad view of Section 3663A(b)(4) requires district courts to undertake difficult
analyses to determine which investigation costs were “necessary” to “the
investigation.” See, e.g., United States v. Waknine, 543 F.3d 546, 559 (9th Cir.
2008) (remanding a case to the district court to consider more thoroughly
whether investigation expenses were reasonably necessary). I do not envy
district courts faced with this task. To begin, it will often be difficult to
determine the scope of “the investigation.” For example, imagine that a
hospital discovers that its drug inventory is vanishing. Hoping to prevent
further losses, the hospital launches a full internal investigation. During the
course of the hospital’s investigation, it discovers that an employee is stealing
drugs. The hospital fires the employee and turns over the evidence it
uncovered to the federal prosecutors. The prosecutors had never heard of the
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employee before and had not been investigating the theft. Nonetheless,
charges are eventually brought and the employee is convicted of possession
with intent to distribute narcotics. The hospital seeks restitution for its
investigation costs. Did the hospital participate in the investigation even
though the federal prosecutors were not investigating at all when the hospital
conducted its internal investigation? And the hypotheticals can get more
difficult. Imagine that, unbeknownst to the hospital, federal prosecutors were
investigating a string of drug sales at the time the hospital’s internal
investigation began. However, the prosecutors still had no reason to suspect
the employee of being the drug supplier, and accordingly, had no reason to
subpoena the hospital to aid in the investigation. Nonetheless, when the
hospital turns over the results of its internal investigation, the prosecutors
realize that they can link the employee’s thefts to the string of drug sales. The
employee is prosecuted for and convicted of drug sales. Can the hospital
recover its investigation costs because it provided key evidence to an ongoing
investigation even though it was never asked to do so? One more example.
Imagine that the hospital has insurance that covers employee theft. The
hospital’s legal department drafts and files a claim with its insurance provider
to recover the value of the stolen drugs. At the employee’s trial, the
government introduces the claim form as evidence of the breadth of the drug
conspiracy. Can the hospital recover the entire cost of filing the insurance
claim?
And even if the district judge can determine the scope of the
investigation, he or she still must determine which expenses were “necessary.”
I recognize that this question is more familiar to district courts, who are often
tasked with calculating attorneys’ fees. But familiarity does not make the task
easier. See, e.g., Court Awarded Attorney Fees: Report of the Third Circuit
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Task Force, 108 F.R.D. 237, 262 (1986) (“[D]istrict judges find it difficult,
indeed, in most instances, impossible, to police [hours and rates of attorneys]
by looking over the shoulders of lawyers to monitor the way they handle their
cases. To impose that obligation on the Bench is unrealistic, unduly time-
consuming, and typically will amount to little more than an exercise in
hindsight.”); Hon. John F. Grady, Reasonable Fees: A Suggested Value-Based
Analysis for Judges, 184 F.R.D. 131, 131 (1999) (“Most federal district judges
would agree that the determination of reasonable attorneys’ fees is among the
most challenging tasks they are called upon to perform.”). Moreover, I think
that the necessity inquiry is likely to be even more difficult than usual in the
context of Section 3663(A)(b)(4). Usually, a district judge evaluating a fee
request has overseen the entirety of the litigation subject to the dispute and
therefore can decide on their own experience which expenses were reasonable
and necessary. Not so under a broad reading of Section 3663(A)(b)(4). Instead,
the district court will have only seen the criminal prosecution that ends the
Government’s investigation. Of course, Congress is free to require, and wise
policy may dictate, that courts answer difficult questions. But I am
uncomfortable requiring sentencing judges to undertake challenging
restitution calculations when, in my view, the statute does not require the
inquiry.
Third, and finally, limiting the reach of Section 3663A(b)(4) does not
prevent victims from fully recovering their losses. Preliminarily, there are a
number of other more explicit and specific criminal restitution provisions that
may allow for recovery. For example, Section 3663A(b)(1) allows for victims of
property offenses to recover the value of their lost property. Likewise, in the
context of identity theft crimes, Congress allows for victims to recover
investigation costs unrelated to any government request. See Papagno, 639
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F.3d at 1099–100; 18 U.S.C. § 3663(b)(6). And where criminal restitution
statutes fall short, victims may bring their own civil actions to recover their
losses.
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