Monday, September 13th, 2021

Second Circuit reverses and remands an order of restitution, imposed under the Mandatory Victim’s Restitution Act of 1996 (“MVRA”) — 18 U.S.C. § 3663A(a)(2), (c) — because the Government failed to prove, by a preponderance, the proximate cause element: i.e., that the losses to the victims were foreseeable to the defendant in the course of committing the “offense of conviction.” United States v. Goodrich, No. 19-208, __F.4th__ , 2021 WL 3889801 (2d Cir. Sept. 1, 2021) (C.J.J. Calabresi, Pooler, Carney).

The Circuit reversed, in part, an Amended Judgment that imposed restitution under the MVRA, because, although the defendant was responsible for the $479,000 losses to purchasers of stocks traded on the public market, the government didn’t establish that the $1.85 million of losses from the “private placement” trades were foreseeable to Goodrich.

Defendant Goodrich, a broker-dealer in the over-the-counter securities market,  pleaded guilty to a conspiracy to commit securities fraud, in violation of 18 U.S.C. § 371. Goodrich executed fraudulent trades with co-defendants to artificially inflate the share price of a sham company named, Cubed, Inc.  Op at 3-4 (They allegedly engaged in a “pump and dump” market manipulation scheme, through “wash” and “matched” trades); see Op at 4, 6, footnotes 1 & 4 defining a pump & dump scheme and wash and matched trades).

Goodrich executed trades in the public market, while “his co-defendants, who are not appellants here, arranged the sale of Cubed shares outside the public market in a private placement.” Op at 3. The “private placement” trades that the co-defendants arranged “involved the sale of restricted common stock to select investors[.]” Op at 20. “[R]estricted” common stock “is different in kind from the unrestricted common stock” of Goodrich’s trades in the public market. “The former cannot be sold in public markets generally and is subject to unique transfer restrictions.” Id. (citing 17 CFR § 230.144(a)(3), which “codif[ies]  SEC Rule 144 on the sale of restricted stock”).

Goodrich challenged the portion of the restitution order attributing to him the losses of the private placement victims (of $1.8 million), arguing that those losses didn’t result from his offense of conviction and weren’t foreseeable to him. The Circuit agreed with Goodrich.

The MVRA provides that, to be owed restitution, a victim must have been “‘directly and proximately harmed as a result of the commission of [a covered] offense’ of conviction.” Op at 3 (brackets in original) (quoting 18 U.S.C. § 3663A(a)(2), (c)) ; see id. at 12.

“Thus, in determining to whom a defendant owes restitution, the statute requires the court (1) to identify the ‘offense’ of conviction and (2) to ascertain whether the putative ‘victim’ was ‘directly and proximately harmed’ by the defendant’s commission of that ‘offense.’” Op at 12.  The “proximate cause element requires the Government to show, by a preponderance of the evidence, that the harm to victims was foreseeable to Goodrich in the course of committing the offense of conviction.” Op at 3.

Moreover, when the conviction results from a guilty plea (rather than a trial), the Circuit looks “to the materials supporting the plea — such as the allocution statement, the plea agreement, and the indictment — to ascertain the ‘offense of conviction’ for restitution purposes.” Op at 15; see  id. n.9.

Here, the Circuit, after reviewing Goodrich’s plea allocution, the plea agreement, and the superseding indictment, “conclude[d] that Goodrich pleaded guilty to a conspiracy to manipulate the Cubed share price in the public market.” Op at 16-17 (emphasis added); see id. at 16-18. The question then became, “as 18 U.S.C. § 3663A(a)(2) makes plain, … whether the losses suffered by the private placement victims were ‘directly and proximately’ caused by the conspiracy to manipulate the public share price of Cubed.” Op at 18 (emphasis added).

But the government didn’t meet its burden of proving that “the challenged $1.85 million loss ‘amount was ‘sustained …as a result of Goodrich’s offense[.]” Op at 18 (ellipses, brackets, & emphasis in original) (quoting 18 U.S.C. § 3664(e) (burden of proof for restitution).

The Circuit stated: “we assess proximate cause based on whether losses are ‘foreseeable’ to a defendant. The record contains too little evidence suggesting that Goodrich knew of, or could have reasonably foreseen, that his participation in the public market scheme would result in the harm to private placement purchasers.” Op at 18-19.  “With respect to proximate cause, [the government] has not adduced sufficient evidence that Goodrich’s offense—agreeing to manipulate the Cubed share price in the public market—had a ‘sufficiently close connection to’ the losses sustained by victims in the private placement.” Op at 18;  see Op at 3-4 (“The offense to which Goodrich pled guilty was conspiracy to manipulate the Cubed share price in the public market….[T]he Government has not adduced sufficient evidence that the private placement victims were foreseeable to Goodrich.”).

Thus,“[t]he Amended Judgment is REVERSED to the extent that it imposes on Goodrich a restitution obligation of $1.85 million for losses to the private placement victims.” Op at 23. The case was remanded for the

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