United States v. Matthew Marino

09-1965-cr
United States v. Matthew Marino
UNITED STATES COURT OF APPEALS 1
FOR THE SECOND CIRCUIT 2
August Term, 2009 3
(Argued: May 10, 2010 Decided: August 18, 2011) 4
Docket No. 09-1965-cr 5
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UNITED STATES OF AMERICA, 7
8 Appellee, 9
v. 10
MATTHEW MARINO, 11
12 Defendant-Appellant. 13
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B e f o r e: JACOBS, Chief Judge, WINTER, and MCLAUGHLIN, 15
Circuit Judges. 16
Appeal from a final order of conviction entered by the 17
United States District Court for the Southern District of New 18
York (Stephen C. Robinson, Judge), following a guilty plea to 19
one count of misprision of felony in violation of 18 U.S.C. § 4 20
for failing to report a Ponzi scheme. Appellant challenges the 21
district court’s restitution order requiring appellant to pay 22
restitution in the amount of $60 million pursuant to the 23
Mandatory Victims Restitution Act (“MVRA”), 18 U.S.C. §§ 3663A. 24
We affirm. 25
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EUGENE J. RICCIO, Gulash & 1
Riccio, Bridgeport, Connecticut, 2 for Defendant-Appellant. 3
4 MARGERY B. FEINZIG, Assistant 5 United States Attorney, of 6 counsel (Preet Bharara, 7 United States Attorney for the 8 Southern District of New York, 9 Jesse M. Furman, Assistant United 10 States Attorney, of counsel), for 11 Appellee. 12
13
14 WINTER, Circuit Judge: 15
Matthew Marino appeals from his sentencing by Judge 16
Robinson, following a plea of guilty to misprision of felony in 17
violation of 18 U.S.C. § 4. The only issue on appeal involves 18
the district court’s order that appellant pay restitution in 19
the amount of $60 million. Appellant argues that the district 20
court’s order of restitution was improper because it relied on 21
events occurring outside the relevant time period and the 22
putative victims’ losses were neither directly nor proximately 23
caused by his actions as required by the Mandatory Victims 24
Restitution Act of 1996 (“MVRA”), 18 U.S.C. §§ 3663A. 25
We affirm. 26
BACKGROUND 27
Appellant participated in the Bayou Hedge Fund Group 28
(“Bayou”), a classic Ponzi scheme masked as a group of domestic 29
and offshore hedge funds that, when it unraveled in 2005, 30
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caused approximately $200 million in investor losses. 1
1
Samuel Israel III and James G. Marquez opened the original 2
Bayou fund in 1996, with approximately $1 million in capital. 3
Thereafter, they recruited investors to the fund, requiring a 4
minimum investment of $100,000. Israel and Marquez shared 5
responsibility for the fund’s investment strategy and 6
recruiting investors. They hired appellant’s brother, Daniel 7
Marino, a certified public accountant, to keep the fund’s books 8
and to reconcile trading records. The fund retained accounting 9
firm Grant Thornton to act as Bayou’s independent financial 10
auditor. 11
From the start, Bayou lost money. However, rather than 12
disclose these losses to investors, Israel and Marquez, upon 13
Daniel Marino’s suggestion, remitted a portion of the 14
commissions they earned on trades to the fund’s investors, 15
thereby creating the illusion that the fund was earning 16
positive returns. 17
By the end of 1998, the fund had accumulated substantial 18
trading losses and masking the losses with trading commissions 19
was no longer possible. On or about December 30, 1998, Israel, 20
Marquez, and Daniel Marino met to discuss the fund’s losses. 21
1A final analysis of Bayou’s records indicated that there
were 392 investors who invested over $500 million in the various
Bayou funds. Of those investors, 288 lost an aggregate amount in
excess of $309 million in contributions to the fund. Of that
amount, however, $110 million plus interest was recovered.
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They devised a scheme to conceal the losses by firing Grant 1
Thornton as independent auditor and having Daniel Marino 2
prepare and issue sham audits. In 1999, Daniel Marino, with 3
the help of appellant, created a fictitious independent 4
accounting firm, Richmond-Fairfield Associates (“RFA”), which 5
purported to maintain offices in Manhattan. 6
Thereafter, Israel, Marquez, and Daniel Marino began to 7
draft and mail to investors quarterly and monthly reports 8
indicating fictitious positive rates of returns and inflated 9
accumulated profits. Investors also received annual financial 10
statements that contained inflated rates of return on trading, 11
overstated net asset values, and certifications from RFA that 12
it had audited Bayou’s financial reports. 13
In reality, however, the fund’s losses continued to mount. 14
Increasingly, Israel and Marquez blamed each other for the 15
losses, and, in January 2001, Marquez was ousted from the fund 16
after a dispute with Daniel Marino. Thereafter, Daniel Marino 17
assumed the role of Bayou’s Chief Financial Officer, where he 18
continued to manage the accounting portion of the fraud, and, 19
through RFA, drafted the fictitious audits and certifications 20
of the fund’s financial reports. For his part, Israel 21
maintained responsibility for all the investment and trading 22
activities of Bayou, including the recruitment of new 23
investors. 24
25
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Using the fictitious financial returns to claim a 1
profitable track record, Israel and Daniel Marino attracted 2
substantial numbers of new investors to the fund, receiving 3
investment capital in excess of $500 million. Israel and 4
Daniel Marino ultimately closed the original Bayou fund, and 5
opened four domestic hedge funds, as well as two different sets 6
of offshore funds in the Cayman Islands, all under the Bayou 7
banner. They hired additional employees, including traders, 8
accounting personnel, and administrative staff, all while 9
continuing to provide falsified information to Bayou investors. 10
Appellant’s involvement with Bayou began in 2002, when he 11
was hired as an employee at a salary of $5,000 per month to 12
develop a North Carolina office for the fund’s broker-dealer. 13
By the fall of 2002, appellant was making periodic trips to 14
Bayou’s office in Connecticut. 15
In or about 2003, appellant’s salary increased to $10,000 16
per month, and he began assisting his brother Daniel Marino 17
with private placement investments. These investments -- 18
including movie and real estate deals, an international money 19
transferring firm, and a French cable company -- were intended 20
to make up for Bayou’s losses and to provide personal profit to 21
Israel and Daniel Marino. However, none of these investments 22
were ever disclosed to Bayou investors, nor were they the type 23
of investments that Bayou purported to be making with 24
investors’ funds. Although appellant assisted in these private 25
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placement investments, he claims to have been unaware that the 1
investments were unauthorized. 2
In 2003, appellant was tasked with locating new office 3
space for RFA in mid-town Manhattan. Aside from retaining two 4
temporary employees for a short period in the spring of 2003, 5
RFA never had any regular employees, save for appellant. 6
Appellant managed all of RFA’s administrative tasks, including: 7
picking up the mail at RFA’s office; checking RFA’s voice mail 8
messages and reviewing written correspondence from Bayou 9
investors; paying RFA’s bills using RFA’s checkbook; and 10
picking up the phony audited financial statements from the 11
printer and copying them after Daniel Marino signed them on 12
behalf of RFA. 13
In addition, the record indicates that appellant had at 14
least some direct interaction with Bayou investors. For 15
example, the record includes several emails from appellant to 16
Daniel Marino regarding phone calls and other correspondence 17
from Bayou investors to RFA concerning RFA’s audit of Bayou. 18
In an email dated May 23, 2005, appellant notified Daniel 19
Marino of a phone call from an investment advisor whose “client 20
. . . invested in the Bayou Superfund and was wondering whether 21
the audit is almost finished or not,” to which appellant 22
inquired, “Let me know if you want me to call back and provide 23
what time frame the audit will be done.” In another email, 24
dated July 12, 2005, appellant stated: “Call from [investment 25
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advisor to a Bayou client] had a quick question. Asked for a 1
call. Wanted to check with you fir[s]t before calling back.” 2
Another email, dated January 20, 2005, indicates that appellant 3
was signing written correspondence on behalf of RFA with Daniel 4
Marino’s permission: “I have a certification letter from 5
[financial advisor] Anchin, Block & Anchin re: Custom Strategy 6
-- like last year. Go ahead and sign it?” The record also 7
indicates that appellant, as early as April 10, 2003, was 8
opening annual letters, referred to as “confirmation letters,” 9
that the fund sent to each investor indicating the value of the 10
investor’s position in the fund. Upon receipt of the 11
confirmation letter, the investors signed and returned the 12
letters, thereby confirming their understanding of their 13
account value. 14
In particular, the record includes two such faxes, sent by 15
appellant to Daniel Marino on April 10 and 29, 2003, 16
respectively (the “2003 faxes”), indicating both the dates when 17
confirmation letters were sent to particular investors and 18
whether the investors had subsequently confirmed the value of 19
their investments. Although the 2003 faxes were sent by 20
appellant, in the “from” line of the faxes appears the 21
pseudonym “M. Richmond,” of RFA. In addition to the 2003 22
faxes, the record includes an email sent by appellant in 2005 23
indicating that he continued to open investors’ confirmation 24
letters through 2005. 25
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The record also indicates appellant’s considerable 1
involvement in concealing the fraudulent nature of RFA and 2
Bayou. In particular, when Israel was involved in divorce 3
litigation in early 2005, appellant played an active role in 4
stonewalling, or otherwise preventing, Mrs. Israel’s lawyers 5
from obtaining financial records for Bayou and RFA. For 6
example, in a January 7, 2004 memorandum to Daniel Marino, 7
appellant discussed RFA’s litigation strategy with respect to 8
delaying its response to Mrs. Israel’s subpoena for RFA’s 9
financial information. In his memorandum, appellant stated 10
that he “would represent [RFA] and [outside counsel Kelley Drye 11
& Warren, LLP] would assist and perhaps be co-counsel in 12
arguing any motions/hearings,” leaving open the possibility 13
that Kelley Drye would “represent[] [RFA] themselves with my 14
guidance.” Appellant was keenly aware of the problem that Mrs. 15
Israel’s subpoena created with respect to concealing the true 16
identity of RFA’s principal and any other documentation that 17
might reveal the fraud. As appellant’s memorandum states: 18
The issue . . . with me representing [RFA] is that the 19 opposing attorney would pick up on my relation to you 20 [Daniel Marino] and therefore seek an aggressive stance 21 of distrust. 22
23 The issue with [Kelley Drye] representing [RFA] is that 24 they need to speak to the [RFA] principal and review 25 what documents they have. 26
His memorandum also states: “[Kelley Drye] suggested that . . . 27
as a second prong to the motion [to quash], [RFA] asks for a 28
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protective order on any documents provided to keep them 1
confidential (this obviously doesn’t help us).” 2
Later, on January 10, 2005, appellant sent an email to 3
Daniel Marino again discussing ways to stonewall Mrs. Israel’s 4
attorney: “Another short term solution is to have Mr. R call the 5
opposing attorney and ask for a month on the pretext that he was 6
away in latter December and was sick during first week in 7
December and just got the subpoena.” The record indicates that 8
appellant frequently used the pseudonym “M. Richmond” as the 9
fictitious principal of RFA. 2
10
On February 13, 2005, in an email to Daniel Marino regarding 11
RFA’s then-outside counsel Leonard Benowich’s response to Mrs. 12
Israel’s subpoena, appellant again discussed the problem of 13
revealing RFA’s principal: 14
In regards to [RFA], Benowich has prepared 15 Affidavits from himself, you and an individual at [RFA] 16 . . . . The Affidavit from [RFA] needs to come from an 17 individual and needs to be made as it discusses more 18 particularly the arguments [RFA] has in quashing the 19 motion. This is something [i.e., the identity of the 20 RFA principal] we will need to figure out who. 21
22 Appellant’s involvement in hiding information from Mrs. 23
Israel’s attorney is also evident in an email to Daniel Marino on 24
July 14, 2005, regarding a draft letter from Benowich to Mrs. 25
Israel’s attorney. Benowich’s draft letter attached to the email 26
2 The district court treated appellant as the alter-ego of
Matt Richmond: “[T]he documents were there in front of
[appellant] to see . . . as Mr. Richm[ond] of [RFA].”
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stated: “Please be advised that as far as . . . Dan Marino and 1
Sam Israel are concerned, you will not receive any documents nor 2
will you be deposing anyone associated with my client [RFA].” 3
In the email, appellant also stated in reference to the draft 4
letter: “It may be better to say ‘as far as my client is 5
concerned’ rather than Dan Marino and Sam Israel because there is 6
supposed to be independence between [RFA] and the both of you.” 7
Meanwhile, as appellant and Daniel Marino continued in their 8
efforts to stonewall Mrs. Israel’s attorney, Bayou had begun to 9
unravel in a serious manner. By 2005, Israel and Daniel Marino 10
had largely wound down and suspended trading on behalf of the 11
various Bayou funds, while still representing to their clients 12
that Bayou was actively managing an investment portfolio. Rather 13
than pursuing legitimate trading activities, they instead 14
invested the remaining Bayou funds in a series of fraudulent 15
“prime bank” instrument trading programs in a desperate attempt 16
to recoup Bayou’s enormous losses. 17
For his part, appellant continued to play a substantial role 18
in concealing Bayou’s losses from its investors. For example, in 19
March 2005, prior to mailing RFA’s 2004 “audit” of Bayou to 20
investors, appellant, at Daniel Marino’s direction, changed a 21
number in the “audited” financials that were later distributed to 22
investors. 23
On May 23, 2005, after Israel transferred nearly $100 24
million to a New Jersey bank in pursuit of a prime bank 25
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investment opportunity, the Arizona Attorney General seized the 1
funds after concluding that the funds were the proceeds of a 2
fraudulent prime bank scheme. Thereafter, investors began to 3
inquire in earnest about Bayou’s activities, and, in mid-July 4
2005, one such investor requested documentation as to RFA’s 5
independence from Daniel Marino. 6
To allay the investor’s concerns, and, as appellant stated 7
in an email to Daniel Marino, “until snooping is done on [RFA] 8
itself,” appellant and Daniel Marino devised a scheme to provide 9
the investor a fake purchase-sale agreement indicating that RFA 10
had been sold by Daniel Marino to the fictitious Matt Richmond on 11
September 31, 1999. However, the agreement was never provided to 12
the investor. 13
The Bayou fraud was finally revealed in August 2005, when 14
Daniel Marino issued a check for approximately $53 million to an 15
investor who was asking questions about the fund and seeking to 16
redeem his investment. After the check was returned for 17
insufficient funds, on August 16, 2005, the investor attempted to 18
meet Daniel Marino at Bayou’s office in Stamford, Connecticut. 19
There, the investor discovered a suicide/confession note from 20
Daniel Marino which fully revealed the Bayou fraud. The investor 21
notified the local police, who later located Daniel Marino and 22
notified federal authorities. 23
Israel, Daniel Marino, and Marquez later pled guilty to 24
charges related to the Bayou fraud. Israel and Daniel Marino 25
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were sentenced principally to 20 years’ imprisonment and ordered 1
to pay $300 million in restitution. Marquez was sentenced 2
principally to 51 months’ imprisonment and ordered to pay 3
restitution in the amount of $6,259,650. 4
On September 3, 2008, appellant pled guilty to misprision of 5
felony pursuant to a Pimentel letter. 3 Appellant admitted that, 6
from January 2005 through August 2005, he was aware of the fraud 7
being perpetrated on Bayou’s investors, and failed to report the 8
crime. In addition, appellant admitted to having taken 9
affirmative action to conceal the fraud, including participating 10
in the administration of RFA, concealing RFA’s financial 11
information from Mrs. Israel, modifying the number in the 12
financial statements, and assisting Daniel Marino in creating the 13
fake purchase-sale agreement for RFA. 14
On April 21, 2009, the district court sentenced appellant to 15
21 months’ imprisonment, to be followed by a term of supervised 16
release of one year, a mandatory $100 assessment, and restitution 17
in the amount of $60 million. The court explained that the 18
amount of restitution was appropriate because appellant’s role 19
was “significant and key to the perpetuation of the fraud.” In 20
3 A Pimentel letter generally refers to an informational
letter from the government containing an estimate of a
defendant’s likely sentence under the Sentencing Guidelines. See
United States v. Pimentel, 932 F.2d 1029, 1034 (2d Cir. 1991).
It is not a binding contract nor a plea agreement, but it is
often relied upon by defendants in entering guilty pleas.
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particular, the court explained that, by maintaining the 1
appearance that RFA was a legitimate accounting firm, appellant 2
led investors to believe that “their investments [were being] 3
scrubbed and reviewed” and that the Bayou Fund was “legitimate 4
and real,” thereby “allow[ing] the fraud to perpetuate.” The 5
court determined that restitution in the amount of $60 million -- 6
the estimated amount of losses suffered by Bayou Fund investors 7
between January and August 2005 -- was appropriate restitution 8
given the fact that these losses were reasonably foreseeable to 9
appellant. 10
This appeal followed. 11
DISCUSSION 12
“We review a district court’s order of restitution for abuse 13
of discretion.” United States v. Ojeikere, 545 F.3d 220, 222 (2d 14
Cir. 2008) (internal quotation marks omitted). We review the 15
district court’s legal conclusions de novo, and its factual 16
findings for clear error. United States v. Amato, 540 F.3d 153, 17
158 (2d Cir. 2008). 18
a) Reliance on Pre-2005 Events 19
Appellant first argues that the district court erred by 20
relying upon events that transpired outside the relevant time 21
period. In particular, appellant asserts that his fraudulent 22
faxes in 2003 while he was working at RFA fall outside the 23
relevant period of the offense for which he was convicted -- 24
i.e., January through August 2005 -- and the district court 25
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should therefore not have relied upon them in determining the 1
restitution amount. We disagree. 2
Because appellant did not raise this argument as an 3
objection at sentencing, we review it only for plain error. See 4
United States v. Inserra, 34 F.3d 83, 90 n.1 (2d Cir. 1994). The 5
district court considered appellant’s 2003 faxes only to show 6
knowledge of the consequences of his acts during the period of 7
his criminal activity. The 2003 faxes established that appellant 8
had knowledge of the severity of potential investor losses at 9
stake in the Bayou fraud during the relevant time period in 2005. 10
As the court explained at sentencing, “[the investors’ losses 11
were] also foreseeable to him because he’s the person that is 12
sending out confirmations with dollar figures . . . and waiting 13
to see if people confirmed that they received these confirmations 14
on their investment.” Accordingly, we find no error, much less 15
plain error, in the district court’s use of the 2003 faxes at 16
sentencing. 17
b) Direct and Proximate Causation 18
Appellant’s second argument is that restitution is improper 19
because the victims’ losses were neither directly nor proximately 20
caused by his actions or inactions as required under the MVRA. 21
We disagree. 22
1. The Statutory Framework 23
The MVRA requires sentencing courts to order restitution for 24
certain crimes, such as “an offense against property under this 25
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title . . . including any offense committed by fraud or deceit,” 1
and where an identifiable victim has suffered pecuniary loss. 18 2
U.S.C. § 3663A(a)(1); § 3663A(c)(1). 4 “The goal of restitution, 3
in the criminal context, is ‘to restore a victim, to the extent 4
money can do so, to the position he occupied before sustaining 5
injury.’” United States v. Battista, 575 F.3d 226, 229 (2d Cir. 6
2009) (quoting United States v. Boccagna, 450 F.3d 107, 115 (2d 7
Cir. 2006)). 8
The statute defines “victim” broadly as any: 9
person directly and proximately harmed as a result of 10
4Section 3663 addresses restitution generally, and provides
that when sentencing a defendant, the court may order
restitution. 18 U.S.C. § 3663(a)(1)(A) (“The court, when
sentencing a defendant convicted of an offense under this title .
. . other than an offense described in section 3663A(c), may
order . . . that the defendant make restitution to any victim of
such offense . . . .”). Section 3663A mandates restitution for
specified offenses, and provides, in relevant part:
(a)(1) Notwithstanding any other provision of law,
when sentencing a defendant convicted of a [covered]
offense . . . , the court shall order . . . that the
defendant make restitution to the victim of the offense
or, if the victim is deceased, to the victim’s estate.
. . .
(c)(1) This section shall apply in all sentencing
proceedings for convictions of, or plea agreements
relating to charges for, any offense . . . (A) that is
. . . (ii) an offense against property under this
title, . . . including any offense committed by fraud
or deceit . . .
Id. § 3663A.
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the commission of an offense for which restitution may 1
be ordered including, in the case of an offense that 2
involves as an element a scheme, conspiracy, or pattern 3
of criminal activity, any person directly harmed by the 4
defendant’s criminal conduct in the course of the 5
scheme, conspiracy, or pattern. 6
7
18 U.S.C. § 3663A(a)(2). 8
In addition, the MVRA provides that restitution may not be 9
imposed if the determination of complex issues of fact relating 10
to causation would unduly “complicate or prolong the sentencing 11
process.” Id. § 3663A(c)(3)(B). As we have noted, this latter 12
provision reflects Congress’s intent that “sentencing courts not 13
become embroiled in intricate issues of proof,” and that the 14
“process of determining an appropriate order of restitution be 15
streamlined.” United States v. Reifler, 446 F.3d 65, 136 (2d 16
Cir. 2006) (citations and internal quotation marks omitted). 17
The procedures by which the sentencing court imposes a 18
restitution order are set forth in 18 U.S.C. § 3664. Pursuant to 19
Section 3664, after a defendant pleads or is found guilty of a 20
covered crime, a federal probation officer provides the 21
sentencing court with a report that includes, inter alia, details 22
of the victims of the defendant’s crime and their losses, as well 23
as the economic circumstances of the defendant. 18 U.S.C. § 24
3664(a). Upon review of this report, and after a sentencing 25
hearing, the sentencing court determines the amount of 26
restitution the defendant owes, resolving any disputes as to the 27
proper amount by a preponderance of the evidence. Id. § 3664(e). 28
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As we explain in greater detail below, the MVRA’s definition 1
of “victim” tracks identically the definition of “victim” 2
provided in the Victim Witness Protection Act (“VWPA”), 18 U.S.C. 3
§ 3663(a)(2), the general, discretionary restitution statute that 4
preceded and was partially superseded by the MVRA. In 5
particular, both the MVRA and the VWPA, as amended, require 6
identical causation standards -- i.e., the victim’s harm must be 7
“directly and proximately” caused by the defendant’s criminal 8
activity. See 18 U.S.C. § 3663A(a)(2); id. § 3663(a)(2). 9
Neither the VWPA nor the MVRA explicitly defines the 10
requisite causation standard sufficiently to directly answer the 11
question before us -- i.e, whether appellant’s admitted offense 12
“directly and proximately” caused Bayou investors’ losses. 13
2. Legislative History 14
The current causation standards are the result of several 15
amendments to the federal restitution statutes. We therefore 16
turn to the legislative history for insight into Congressional 17
intent. Congress first authorized federal courts to order 18
restitution during sentencing with the enactment of the VWPA in 19
1982. Under the 1986 version of the VWPA, federal courts were 20
authorized, when sentencing for certain crimes, to order “that 21
the defendant make restitution to any victim of such offense.” 22
Hughey v. United States, 495 U.S. 411, 412 (1990). In contrast 23
to the current versions of the MVRA and VWPA, the 1986 version of 24
the VWPA omitted any causation standard, but, rather, simply 25
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provided that restitution would apply to “any victim of the 1
offense.” See Pub. L. No. 97-291, 96 Stat. 1248 (1982). 2
Like the current version of the MVRA, the original version 3
of the VWPA included a provision that limited a sentencing 4
court’s authority to order restitution where such restitution 5
would “unduly complicate or prolong the sentencing process.” See 6
id. As the Senate Report explained, “the Committee added this 7
provision to prevent sentencing hearings from becoming prolonged 8
and complicated trials on the question of damages owed the 9
victim.” S. Rep. No. 97-532, at 31 (1982), reprinted in 1982 10
U.S.C.C.A.N. 2515, 2537. 11
The first major amendment to the VWPA came in 1990, with the 12
passage of the Crime Control Act of 1990, Pub. L. No. 101-647, 13
104 Stat. 4789 (1990). 5 The Crime Control Act amended the VWPA 14
5Of less relevance here, a separate provision added to the
VWPA with the 1990 amendments permitted courts to order
restitution beyond the offense of conviction “to the extent
agreed to by the parties in a plea agreement.” 18 U.S.C. §
3663(a)(3). This amendment clarified an issue that had divided
the circuits - - whether Hughey barred restitution beyond the
count of conviction even where there was a plea agreement by the
defendant. See United States v. Silkowski, 32 F.3d 682, 689 (2d
Cir. 1994); United States v. Rice, 954 F.2d 40, 43 (2d Cir.
1992).
A similar provision is included in the current version of
the MVRA. 18 U.S.C. § 3663A(c)(2) (“In the case of a plea
agreement that does not result in a conviction for [a covered
offense], [restitution] shall apply only if the plea specifically
states that [the covered offense] gave rise to the plea
agreement.”). Moreover, the MVRA provides that a court “shall
[]order, if agreed to by the parties in a plea agreement,
restitution to persons other than the victim of the offense.” 18
U.S.C. § 3663A(a)(3).
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by, inter alia,6 adding § 3663(a)(2), which provides: 1
For the purposes of restitution, a victim of an offense 2
that involves as an element a scheme, a conspiracy, or 3
a pattern of criminal activity means any person 4
directly harmed by the defendant’s criminal conduct in 5
the course of the scheme, conspiracy, or pattern. 6
See Pub. L. No. 101-647, § 2509, 104 Stat. at 4863; 18 U.S.C. § 7
3663(a)(2). In introducing the causation standard that the 8
victim be “directly harmed by the defendant’s criminal conduct,” 9
Congress explained: 10
The use of ‘directly’ precludes, for example, an 11
argument that a person has been harmed by a financial 12
institution offense that results in a payment from the 13
insurance fund because, as a taxpayer, a part of that 14
person’s taxes go to the insurance fund. 15
16
H.R. Rep. No. 101-681(I), at 177 n.8 (1990), reprinted in 1990 17
U.S.C.C.A.N. 6472, 6583, n.8. 18
The next major amendment to the federal restitution statutes 19
came in 1996 with enactment of the MVRA, which was included as 20
Title II, Subtitle A, of the Antiterrorism and Death Penalty Act 21
of 1996 (“AEDPA”), Pub. L. No. 104-132, 110 Stat. 1214 (1996). 22
Most significantly, the MVRA partially superseded the VWPA 23
6The Crime Control Act of 1990 was passed shortly after the
Supreme Court’s decision in Hughey. At issue in Hughey was
whether the VWPA authorized a sentencing court to order a
defendant who was charged with multiple offenses, but only
convicted of a single offense, to make restitution for victims’
losses related to all alleged offenses. Hughey, 495 U.S. at 412-
13. The Court held that it did not, and interpreted the term
“restitution to any victim of such offense” under the VWPA to
authorize restitution “only for the loss caused by the specific
conduct that is the basis of the offense of conviction.” Id.
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insofar as it made restitution that was previously discretionary 1
mandatory as to certain offenses, see 18 U.S.C. § 3663A(a)(1) & 2
(c), and amended the VWPA’s definition of “victim” to match that 3
of the newly enacted MVRA, including the requirement that a 4
victim be someone “directly and proximately harmed as a result” 5
of defendant’s committed crime. See AEDPA §§ 204, 205, 110 Stat. 6
at 1228, 1230. 7
Congress explained these newly enacted causation standards 8
as follows: 9
The committee intends this provision to mean, except 10
where a conviction is obtained by a plea bargain, that 11
mandatory restitution provisions apply only in those 12
instances where a named, identifiable victim suffers a 13
physical injury or pecuniary loss directly and 14
proximately caused by the course of conduct under [the 15
convicted offense(s)]. 16
17
. . . 18
19
In all cases, it is the committee’s intent that highly 20
complex issues related to the cause or amount of a 21
victim’s loss not be resolved under the provisions of 22
mandatory restitution. The committee believes that 23
losses in which the amount of the victim’s losses are 24
speculative, or in which the victim’s loss is not 25
clearly causally linked to the offense, should not be 26
subject to mandatory restitution. 27
28
S. Rep. No. 104-179, at 19 (1995) reprinted in 1996 U.S.C.C.A.N. 29
924, 932. 30
To summarize, since 1982 when it authorized federal courts 31
to impose restitution Congress has: (i) broadened this authority 32
by, inter alia, allowing restitution for victims who directly 33
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suffered harm from crimes involving conspiracy or a criminal 1
scheme, and allowing restitution for crimes pled in a plea 2
agreement; (ii) made restitution mandatory for certain crimes; 3
(iii) imposed a “direct and proximate” causation standard as to 4
both discretionary and mandatory restitution; and (iv) remained 5
insistent that restitution determinations not unduly prolong 6
sentencing proceedings. 7
Although the legislative history is “suggestive rather than 8
compelling” as to the requisite causation standard, United States 9
v. Vaknin, 112 F.3d 579, 587 (1st Cir. 1997), it may be aptly 10
described as a “middle road” approach. For example, Congress’s 11
intent to expand restitution as a remedial measure cautions 12
against a rigid “direct” causation standard that would foreclose 13
restitution where even the slightest intervening event severs 14
factually or temporally the link between defendant’s crime and 15
victim’s loss. At the same time, however, Congress’s preference 16
for expeditious restitution determinations suggests that the 17
factual and temporal link between crime and loss cannot be so 18
tenuous as to require a “prolonged and complicated trial[]” on 19
the issue of causation. S. Rep. No. 97-532 at 31, supra, 1982 20
U.S.C.C.A.N. at 2537; see also Vaknin, 112 F.3d at 589 21
(“Restitution should not be ordered in respect to a loss which 22
would have occurred regardless of the defendant’s conduct. . . . 23
Even if but for causation is acceptable in theory, limitless but 24
for causation is not. Restitution should not lie if the conduct 25
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underlying the offense of conviction is too far removed, either 1
factually or temporally, from the loss.”). 2
3. Caselaw 3
We turn next to our caselaw. 7 We have previously stated 4
that restitution is authorized only “for losses that [were] . . . 5
directly caused by the conduct composing the offense of 6
conviction,” United States v. Silkowski, 32 F.3d 682, 689 (2d 7
Cir. 1994), and only for the victim’s “actual loss.” United 8
States v. Germosen, 139 F.3d 120, 130 (2d Cir. 1998). 9
In Reifler, we addressed the MVRA’s causation requirements 10
at length and in the context of a financial fraud. There, the 11
district court had imposed restitution orders against defendants 12
who pled guilty to conspiracy, in violation of 18 U.S.C. § 371, 13
to artificially inflate the price of securities, in violation of 14
Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 15
78j(b), and Securities Exchange Commission Rule 10b-5, 17 C.F.R. 16
§ 240.10b-5. Reifler, 446 F.3d at 135. We vacated the district 17
court’s restitution orders principally because they ordered 18
restitution to persons who clearly were not victims of the 19
conspiracy, or who were co-conspirators rather than victims. Id. 20
at 125-26. 21
7Because the relevant statutory language in the MVRA and
VWPA is nearly identical, we include in our analysis cases
arising under both statutes. See United States v. Oladimeji, 463
F.3d 152, 158 n.1 (2d Cir. 2006)(applying Hughey, in
interpretation of the VWPA, to a review of a restitution order
imposed under the MVRA); In re Local # 46 Metallic Lathers Union,
568 F.3d 81, 86 (2d Cir. 2009) (same).
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However, we also questioned whether restitution was 1
appropriate even for the innocent persons who had made stock 2
purchases during the conspiracy because of the difficulties in 3
meeting the MVRA’s causation requirements. See id. at 135-39. 4
As we explained, the MVRA’s direct and proximate causation 5
requirements both reflect “Congress’s interest in maintaining 6
efficiency in the sentencing process.” Id. at 135. The MVRA’s 7
direct causation requirement promotes this efficiency because 8
“‘the less direct an injury is, the more difficult it becomes to 9
ascertain the amount of a plaintiff’s damages attributable to the 10
violation.’” Id. at 135 (quoting Holmes v. Sec. Investor Prot. 11
Corp., 503 U.S. 258, 269 (1992)). Likewise, the MVRA’s proximate 12
causation requirement promotes efficiency in the sentencing 13
process by “limit[ing] a person’s responsibility for the 14
consequences of that person’s own acts[,] . . . reflect[ing] 15
ideas of what justice demands, or of what is administratively 16
possible and convenient.” Id. at 135 (citations and internal 17
quotation marks omitted). 18
Applying these principles in Reifler, we expressed serious 19
doubt, but did not decide, whether the MVRA’s causation 20
requirements should have foreclosed restitution for even innocent 21
shareholder victims. See id. at 135-39. We first noted the 22
difficulty that the victims would have encountered as private 23
plaintiffs in a Rule 10b-5 civil action against defendants, 24
either for their lack of standing as purchasers or sellers of 25
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securities, or for their failure to show reliance on any 1
misrepresentation or omission by defendants, both of which are 2
required in a private Rule 10b-5 action. Id. at 135-36 (citing 3
Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975)). 4
In light of the victims’ difficulty in establishing Rule 5
10b-5's purchaser/seller standing requirement -- a rule that is 6
intended to avoid “severe problems of proof,” Blue Chip Stamps, 7
421 U.S. at 758 -- we questioned whether the victims should be 8
able to recover restitution under the MVRA, which, through its 9
proximate causation requirement, is also intended to avoid 10
problems of proof. Reifler, 446 F.3d at 136. On review of the 11
statutory language and the legislative history, we concluded that 12
there was nothing to suggest that “persons eligible to receive 13
restitution under the MVRA would include persons who lack 14
standing to sue, based on the conduct underlying the offense of 15
conviction, in a civil action.” Id. at 137. 16
Reifler should not be read, however, to suggest that someone 17
who is otherwise a “victim” is not eligible for restitution 18
because a private right of action is not available. Nor, if a 19
private right of action exists, need such a person show that he 20
or she fulfills every element of that action. Restitution under 21
the MVRA is a remedy provided to victims independent of the 22
availability, or lack thereof, of a private right of action 23
against a defendant. What Reifler means is that where an 24
analogous private right of action exists, caselaw under it may 25
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inform, but perhaps not control, causation determinations in 1
restitution proceedings. In the present matter, appellant’s 2
misprison of felony concealed from authorities a massive, ongoing 3
Ponzi scheme involving securities fraud. Securities fraud is the 4
subject of numerous private actions and has caused us to discuss 5
at great lengths the causation standards applicable in that 6
context. See, e.g., Lentell v. Merill Lynch & Co., 396 F.3d 161, 7
172 (2d Cir. 2005); Suez Equity Inv., L.P. v. Toronto-Dominion 8
Bank, 250 F.3d 87, 95-96 (2d Cir. 2001). In particular, we have 9
long held that “a securities-fraud plaintiff ‘must prove both 10
transaction and loss causation.’” Lentell, 396 F.3d at 172 11
(quoting First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 12
763, 769 (2d Cir. 1994)). 13
We have further stated: 14
Use of the term “loss causation” is occasionally 15 confusing because it is often used to refer to three 16 overlapping but somewhat different concepts. It may be 17 used to refer to whether the particular plaintiff or 18 plaintiff class relied upon -- or is refutably presumed 19 to have relied upon -- the misrepresentation. ATSI 20 Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 107 21 (2d Cir. 2007). Generally, however, courts use the 22 term “transaction causation” to refer to this element. 23 See, e.g., Dura Pharms., 544 U.S. at 341-42, 125 S.Ct. 24 1627; Emergent Capital Inv. Mgmt., LLC v. Stonepath 25 Group, Inc., 343 F.3d 189, 197 (2d Cir. 2003) (“Like 26 reliance, transaction causation refers to the causal 27 link between the defendant’s misconduct and the 28 plaintiff’s decision to buy or sell securities.”). 29
30 “Loss causation” may also refer to the requirement 31 that the wrong for which the action was brought is a 32 but-for cause or cause-in-fact of the losses suffered, 33 also a requirement for an actionable Section 10(b) 34 claim. 35
36
25

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In re Omnicom Grp., Inc. Sec. Litig., 597 F.3d 501, 509-10 (2d 1
Cir. 2010). Finally, we have explained that “a misstatement or 2
omission is the ‘proximate cause’ of an investment loss if the 3
risk that caused the loss was within the zone of risk concealed 4
by the misrepresentations and omissions alleged by a disappointed 5
investor.” Lentell, 396 F.3d at 173. 6
4. Application 7
Appellant was convicted of having knowledge of, failing to 8
report, and taking affirmative steps to conceal the Bayou fraud. 9
See United States v. Cefalu, 85 F.3d 964, 969 (2d Cir. 1996) 10
(“The elements of Misprision of Felony are 1) the principal 11
committed and completed the alleged felony; 2) defendant had full 12
knowledge of that fact; 3) defendant failed to notify the 13
authorities; and 4) defendant took steps to conceal the crime.”) 14
In his view, his conduct was neither the direct nor the 15
proximate cause, for purposes of the MVRA, of the Bayou 16
investors’ losses from early 2005 until August of that year when 17
the fraud was revealed. He argues that, because he was not 18
directly engaged in the operational activity of the Bayou fraud 19
-- e.g., trading, investment or other related financial activity 20
-- his conduct in concealing the fraud was not the direct cause 21
that the MVRA requires. We disagree. 22
We begin by noting that a Bayou investor may meet the 23
causation requirement of the statutory definition of “victim” 24
without showing individual reliance. The very nature of the 25
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crime -- concealment -- indicates the harm deemed to result from 1
public ignorance in the securities fraud context. And, in any 2
event, we may presume that had appellant disclosed the crime in a 3
timely fashion, no investor would have invested fresh cash in the 4
Ponzi. 5
For that reason, appellant cannot claim that his crime was 6
not a cause in fact -- a “but for” cause -- of the investors’ 7
losses. Appellant was one of four individuals who knew of and 8
should have revealed the Bayou fraud, but did not. During the 9
relevant time period -- between January and August of 2005 -- 10
investors entrusted over $60 million with Bayou in reliance on 11
the false representation that Bayou was a legitimate investment 12
firm that was audited by an independent financial accounting 13
firm. But for appellant’s role in affirmatively concealing the 14
falsity of this representation, these investors would certainly 15
not have invested in Bayou, as no reasonable investor would 16
invest in a known Ponzi scheme. 17
We find no merit in appellant’s argument that the curative 18
effect of his reporting the Bayou fraud is merely speculative. 19
It is true that enforcement agencies have, at times, failed to 20
take action on the reports of so-called whistleblowers to 21
financial fraud, see, e.g., U.S. Securities and Exchange 22
Commission Office of Investigations, Case No. OIG-509, 23
Investigation of Failure of the SEC to Uncover Bernard Madoff’s 24
Ponzi Scheme, Executive Summary, (Aug. 31, 2009), available at, 25
27

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www.sec.gov/news/studies/2009/oig-509.pdf (“SEC Madoff 1
Investigation”); however, it is also true that whistleblower tips 2
are among the most effective means of revealing financial frauds 3
and accounting scandals. See, e.g., Douglas M. Branson, Too Many 4
Bells? Too Many Whistles? Corporate Governance in the Post-Enron, 5
Post-Worldcom Era, 58 S.C. L. Rev. 65, 78-79 (2006) (“Fraud and 6
accounting imbroglios come to light because of a tip (42.6%), 7
internal auditing (24.6%), accident (18%), outside auditors’ 8
discovery (16.4%), and . . . internal control (8.2%).”); Jonathan 9
Macey, Getting the Word Out About Fraud: A Theoretical Analysis 10
of Whistleblowing and Insider Trading, 105 Mich. L. Rev. 1899, 11
1904-06 (2007) (noting the substantial recoveries of qui tam 12
claimants -- i.e., whistleblowers revealing fraud against the 13
federal government by public companies -- under the Federal False 14
Claims Act). 15
Where, as here, the whistleblower has insider knowledge of 16
the ongoing fraud, the whistleblower’s tip will more likely be 17
taken seriously by enforcement officials. See Richard E. 18
Moberly, Sarbanes-Oxley’s Structural Model to Encourage Corporate 19
Whistleblowers, 2006 BYU L. Rev. 1107, 1107 (2006) (“[T]he 20
[Enron, Worldcom and Global Crossing] scandals demonstrate 21
employees’ efficacy as monitors with accurate insider knowledge 22
about the inner workings of their corporations.”); Geoffrey 23
Christopher Rapp, Beyond Protection: Invigorating Incentives for 24
Sarbanes-Oxley Corporate and Securities Fraud Whistleblowers, 87 25
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B.U. L. Rev. 91, 109 (2007) (“Overcoming an internal conspiracy 1
can only succeed if insiders bring information about ongoing 2
corporate and securities fraud to the attention of regulators . . 3
. .”); cf. SEC Madoff Investigation at 37 (“The [SEC] Enforcement 4
staff claimed that [a Madoff whistleblower] was not an insider or 5
an investor, and thus, immediately discounted his evidence.”). 6
Indeed, when a Bayou investor notified authorities of the Bayou 7
fraud, Israel and Daniel Marino were immediately taken into 8
custody and the Bayou fraud was brought to a conclusion. 9
Accordingly, we regard the potential curative effect of 10
appellant’s reporting of the Bayou fraud as much more than 11
speculative. 12
Furthermore, appellant not only failed to disclose the 13
fraud, but also took affirmative steps to conceal it. His 14
conduct was, therefore, a cause in fact. 15
As to proximate causation, 8 appellant first argues that his 16
actions were not substantial in comparison to the “wantonly 17
fraudulent” conduct of the Bayou principals, Israel, Marquez and 18
Daniel Marino. Appellant Br. 12. In addition, appellant asserts 19
that there was nothing to suggest that he could have foreseen the 20
extent of losses that the firm was incurring. Again we disagree. 21
8 Appellant’s actions were clearly the proximate cause of
the victims’ losses under the zone of risk approach to loss
causation. See Lentell, 396 F.3d at 172-73. By hiding the fact
that Bayou’s financial audits were a sham and modifying a
financial statement, appellant concealed the risk that Bayou was
a Ponzi scheme. See id.
29

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As discussed above, appellant’s primary role in the Bayou 1
fraud was in sustaining the falsity that RFA was a legitimate 2
accounting firm that conducted independent audits of Bayou’s 3
investment results. In arguing that his conduct was not 4
“wantonly fraudulent,” appellant greatly understates his role in 5
the Bayou fraud. In essence, he asks us to ignore the importance 6
of independent financial auditors as vouching to the investing 7
public for the accuracy of a firm’s books and the importance of 8
his role in vouching such accuracy to Bayou’s victim investors. 9
Courts have long recognized the important “public watchdog” 10
function of independent financial auditors to the investing 11
public. As the Supreme Court has stated: 12
By certifying the public reports that collectively depict a 13 corporation’s financial status, the independent auditor 14 assumes a public responsibility . . . . The independent 15 public accountant performing this special function owes 16 ultimate allegiance to the corporation’s creditors and 17 stockholders, as well as to investing public. This “public 18 watchdog” function demands that the accountant maintain 19 total independence from the client at all times and requires 20 complete fidelity to the public trust. . . . Thus, the 21 independent auditor’s obligation to serve the public 22 interest assures that the integrity of the securities 23 markets will be preserved . . . . 24
25 United States v. Arthur Young & Co., 465 U.S. 805, 817-19 (1984); 26
see also AUSA Life Ins. Co. v. Ernst & Young, 206 F.3d 202, 230 27
(2d Cir. 2000) (“Reasonable investors surely view firms with an 28
untrustworthy management and auditor far more negatively than 29
they view financially identical firms with honest management and 30
a watch-dog auditor.”) (Winter, J., dissenting). 31
32
30

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Here, the importance of RFA to the Bayou fraud was critical. 1
Indeed, RFA was created precisely because Daniel Marino and 2
Israel knew that without an independent financial auditor 3
blessing Bayou’s fictitious investment results, they would have 4
been unable to carry out the Bayou fraud. Most important, 5
without RFA, Bayou would have been unable to attract new 6
investors -- the sine que non of any successful Ponzi scheme. 7
Moreover, there is no question that Bayou investors 8
continuously relied on RFA’s “independent audits” of Bayou’s 9
financial results. The record indicates multiple instances where 10
investors contacted RFA with questions regarding the Bayou audits 11
and, later, with serious concerns regarding RFA’s independent 12
status. It is also clear that appellant was keenly aware of the 13
importance to Bayou investors of RFA’s independence. At various 14
times, appellant stressed to Daniel Marino the importance of the 15
illusion of independence. For example, in his email to Daniel 16
Marino regarding the Benowich letter, appellant stressed that 17
“there is supposed to be independence between [RFA] and the both 18
of you [Daniel Marino and Israel].” Accordingly, we are 19
unwilling to adopt the view that appellant’s actions did not 20
seriously injure Bayou’s investors. Whether they were less 21
serious than the actions of Israel and Daniel Marino is 22
essentially irrelevant because, during the period of appellant’s 23
criminal activity, his acts were essential to Israel and Daniel 24
Marino’s criminal scheme. 25
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We also disagree with appellant’s view that his victims’ 1
losses were not foreseeable. Through his handling of the 2
victims’ confirmation statements, appellant knew first-hand the 3
amounts the victims had at stake in the Bayou fraud. No 4
reasonable person in his position could have failed to foresee 5
that the victims who invested in Bayou from January through 6
August of 2005 would ultimately face substantial or even complete 7
loss of their investment. 8
To summarize, we find no error in the district court’s 9
conclusion that appellant’s failure to report the Bayou fraud was 10
both the direct and the proximate cause of the victim investors’ 11
losses. 12
CONCLUSION 13
For the foregoing reasons, we affirm. 14
32

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