Saturday, August 27th, 2011

Crew Bayou

United States v. Marino, 09-1965-cr (2d Cir. August 18, 2011) (Jacobs, Winter, McLaughlin, CJJ)

Matthew Marino was at the margin of the Bayou Hedge Fund Group disaster – a Ponzi scheme that defrauded its investors of more than $300 million. The fund was opened in 1996 by two principals, who hired Marino’s CPA brother, Daniel Marino, to keep its books. This defendant, Matthew Marino, was hired by Bayou in 2002 and over the next three years took steps to help perpetuate and conceal the fraud. The scheme came crashing down in 2005, and the principals, including Marino’s brother, all pled guilty to fraud charges.

Appellant Marino, on his part, pled to one count of misprision of felony, covering his actions between January and August of 2005, a period during which investors lost $60 million in the Bayou scheme. He received a twenty-one month prison sentence. This appeal concerns only his challenge to the $60 million restitution order. In this very long decision – the slip opinion runs to nearly thirty-two pages – the circuit rejects Marino’s claim that he was not the “direct and proximate” cause of that loss.

The restitution statute that the court applied to Marino, 18 U.S.C. § 3663A, defines a “victim” as “any person directly and proximately harmed as a result of” the commission of the offense. According to the circuit’s review of the legislative history, Congress included this causation standard as a way of avoiding complex restitution litigation that might unduly prolong the sentencing proceedings.

Applying this standard here, the circuit concluded that Marino’s actions constituted both direct and proximate causation.

Marino’s knew of, failed to report, and helped conceal the Bayou fraud during 2005. Had Marino disclosed the fraud, no investor would have injected fresh cash into the scheme. Accordingly, his crime was a “cause in fact” – a direct, “but for” cause – of those losses. And it was not merely “speculative” for the circuit to assume that the losses would have ceased if Marino had reported the fraud. An insider-whistleblower is much more likely to be “taken seriously by enforcement officials.”

As for proximate causation, under the circuit’s “zone of risk” approach – thanks again, Mrs. Palsgraf – his actions were “clearly the proximate cause” of the victims’ losses, even if his actions were not like the “wantonly fraudulent” conduct of the Bayou principals. His role in the losses was significant, since he vouched for the accuracy of the fund’s books to the Bayou investors. It therefore does not matter that Marino’s actions were “less serious” than those of the principals. During the period of his criminal activity, his acts remained “essential to” the “criminal scheme.”

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