Gain? Wait!

United States v. Zangari, No. 10-4546-cr (2d Cir. April 18, 2012) (Cabranes, Pooler, Wesley, CJJ)

In this decision, the court found that the district court’s restitution order, which was based on the defendant’s gain instead of the victims’ loss, was error, but not plain error. It accordingly affirmed.

Defendant Zangari was a securities broker in the securities-lending departments of two major banks.  He engaged in unauthorized stock-loan transactions with financial institutions that had a relationship with one of his co-workers, and received a portion of the kickbacks, approximately $65,000.  His employers  suffered “losses in the form of unrealized profit.”

Zangari pled guilty to a Travel Act conspiracy, and was sentenced under USSG § 2B4.1, the commercial bribery guideline. The PSR used the $65,000 figure as the loss calculation, recommending an enhancement for a loss between $30,000 and $70,000. Although neither bank had submitted a loss affidavit, the PSR used Zangari’s gain as a proxy for their losses. The report equated the kickback amount the banks’ lost profit on the transactions, but did not detail how it reached this conclusion.

Zangari never objected to the loss calculation, and the district court used it both for calculating his guidelines and for fixing the amount of restitution.  On appeal, however, Zangari argued that the restitution order was illegal because the victims suffered no loss.

The circuit agreed that the restitution order was erroneous. The restitution statutes require that the order reflect the “full amount of each victim’s loss.” But here, the district court based the order instead on Zangari’s gain. While this is acceptable for calculating the loss for guidelines purposes – an application note permits using gain as a substitute for loss where the loss “reasonably cannot be determined” – the substitution is not permissible for calculating restitution.  Indeed, every circuit to consider the question has reached the same result, even in “hard cases.”

It is true that there are cases where there is a direct correlation between the defendant’s gain and the victim’s loss; in such situations the gain is a “measure of” but not a “substitute for” the loss.  But here, there was no such correlation. In the stock-loan transactions at issue the securities and collateral involved were returned to their previous owners at the end of the loan. “Therefore, any loss to the identified victims in this case could only have come in the form of opportunity cost.” And those losses were not equivalent to the sham finders fees that produced Zangari’s gain.

Accordingly, the order was error, and the error was “plain.” Nevertheless, the circuit declined to exercise its discretion to correct it because Zangari failed to show prejudice by demonstrating that the amount would have been less had it been properly calculated.  Rather, he insisted only that the banks’ failure to file affidavits of loss showed that they suffered no loss at all. The circuit disagreed: “the fact that the victims did not claim a loss does not mean that they did not sustain” one.

The circuit also thought this might even be a case of “salutary error,” in that it was possible that the restitution award “in fact understated the victims’ actual losses.”  Zangari pled guilty to being a member of an “industry-wide” conspiracy, and could have been held liable for all of the losses of all of the victims affected by it along with, under § 3663A(b)(4), the expenses they incurred in their internal investigations, including attorneys fees and accounting costs.