United States v. Kerekes, 09 Cr. 137 (HB)

UNITED STATES OF AMERICA

v.MICHAEL KEREKES, Defendant.

No. 09 Cr. 137 (HB)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

Dated: August 15, 2012

OPINION & ORDER

Hon. HAROLD BAER, JR., District Judge:

Before the Court is the Government's application for an order of restitution to be imposed as part of the sentence of Defendant Michael Kerekes ("Kerekes"). The Government seeks restitution of $84,298,893,¹ Kerekes opposes the imposition of any restitution or in the alternative requests that any restitution amount be set at a fraction of the amount sought by the Government to reflect Kerekes' comparatively modest economic circumstances and low level of culpability. For the reasons set forth below, the Government's request for restitution is GRANTED as modified.

Background

On February 13, 2009, Kerekes pleaded guilty to one count of conspiracy to defraud the Internal Revenue Service ("IRS") in violation of Title 26, Section 7201, 7206(1) and 7212(a) and one count of tax evasion of a BDO Seidman client's taxes, in violation of 26 U.S.C. § 7201 for the year 1999. On November 16, 2011, this Court sentenced Kerekes to a one-year sentence, six months incarceration, and six months home confinement, a $50,000 fine and a $200 special assessment, both of which Defendant paid.² The Court gave the parties 30 days to provide submissions on the restitution issue, after which I scheduled a hearing which was held on January 4, 2012. Thereafter the parties provided several rounds of supplemental submissions, most recently memoranda in response to a series of questions put to the Government by the Court on May 4, 2012.

Discussion

The Mandatory Victims Restitution Act ("MVRA") provides that "the court shall order, in addition to ... any other penalty authorized by law, that the defendant make restitution to the victim of the offense." 18 U.S.C. § 3663A(a)(l); see also United States v. Walker, 353 F.3d 130. 133-34 (2d Cir. 2003). Although this Order falls outside the 90-day window provided in MVRA, 18 U.S.C. § 3664(d)(5), it is nonetheless permissible. Cf. Dolan v. United States, 130 S. Ct. 2533, 2539 (2010) ("The fact that a sentencing court misses the statute's 90-day deadline, even through its own fault or that of the Government, does not deprive the court of the power to order restitution."). As the court explained in United States v. Ageloff, 809 F. Supp. 2d 89,108 (E.D.N. Y. 2011), "the intent behind the 90-day period was not to protect defendants, but rather to protect victims from the willful dissipation of a defendant's assets." I made it clear to both defense counsel and the Government that the order of restitution would not come down within the 90-day period and provided an additional 30 days for further submissions from the parties at the January 4, 2012 hearing. Neither party objected. Another concern not applicable to Kerekes is his ability to make restitution; the PSR notes that Defendant has ample resources to comply with this Order. Another caveat in the MVRA's mandatory restitution requirement is if "determining complex issues of fact related to the cause or amount of the victim's losses would complicate or prolong the sentencing process to a degree that the need to provide restitution to any victim is outweighed by the burden on the sentencing process," 18 U.S.C. § 3663A(c)(3)(B), the order may be dispensed with, another concern not applicable here.

"If the court finds that more than 1 defendant has contributed to the loss of a victim, the court may make each defendant liable for payment of the full amount of restitution or may apportion liability among the defendants to reflect the level of contribution to the victim's loss and economic circumstances of each defendant." 18 U.S.C. § 3664(h). The concern is voiced by the Defendant as to whether the Court can impose individualized versus joint and several liability. This too is resolved by statute. Put another way, courts have discretion in deciding whether to apportion liability, United States v. Nucci, 364 F.3d 419, 422 (2d Cir. 2004), and in determining how must restitution to apportion to each defendant. United States v. Salas-Fernandez, 620 F.3d 45, 49 (1st Cir. 2010) ("[T]he court is not required to use any particular formula for apportionment or, indeed, to apportion the loss at all"). Finally, Defendant'sconcern over whether restitution is permissible in spite of the forfeiture award against Deutsche Bank is addressed in the next section.

A. Restitution is Permissible in Spite of the Forfeiture Award Against Deutsche Bank

Kerekes argues that restitution should not be ordered because Deutsche Bank has already forfeited $553,633,153 pursuant to a non-prosecution agreement ("NPA") and that payment was partially in lieu of restitution.

While there is "no problem" with an award of restitution and forfeiture in the same case, United States v. Bengis, 631 F.3d 33,41 (2d Cir. 2011), a double recovery by a victim is prohibited. United States v. Boccagna, 450 F.3d 107,115,117 (2d Cir. 2006) ("[T]he purpose of restitution is essentially compensatory" and so "a sentencing court cannot order restitution that 'goes beyond making [the victim] whole.' ") (internal citation omitted); Nucci, 364 F.3d at 424 ("[T]here is no legal basis to permit an award that allows a victim to recover more than his due."). As I view the record, we are nowhere near that point.

B. The Restitution Award is Not Too Complex for Adjudication

Kerekes' complexity argument is easily resolved. While it is true that the IRS in its determination of the amount of tax loss attributable to BDO clients did not conduct a full audit of each taxpayer, it made estimates of the loss to the treasury attributable to each of the 19 taxpayers that utilized the BDO shelters. This was the conspiracy to which Kerekes pleaded guilty. The fact that the Government has not shown that Kerekes was directly involved with the taxpayers on the restitution list is immaterial. United States v. Boyd, 222 F.3d 47, 50-51 (2d Cir. 2000) (holding conspirators responsible for restitution of full amount of loss generated by conspiracy). For instance, there is a different tax rate associated with capital gains transactions and ordinary income transactions. Tr. 1/4/2012 Hrg. 14:2-5. Originally, in calculating the amount of the losses generated by each taxpayer, the IRS—generously in my view—applied the lower capital gain rate of 20 percent across the board rather than determining which rate actually applied to each individual. Id. at 14:6-11. In my letter to the Government dated May 4, 2012,1 asked the Government to explain why. Court's Ltr. 5/4/2012. The Government responded that "[t]he character of the loss can be surmised from descriptions contained in the Jenkens & Gilchrist opinion letters, based on the type of asset contributed to the partnership by the taxpayer (stock in the case of a desired capital loss, and foreign currency in the case of a desired ordinaryloss)."³ Gov't Mem. 5/18/2012, at 1-2. Using this formula, the Government reviewed the tax opinion letters, and concluded that of the 19 taxpayers that utilized BDO shelters, two of them, Flock and Harris, had ordinary losses. As a result, the Government's most recent submission calculated the taxes owed to the IRS using an ordinary income tax rate of 28 percent; id. at 2; however, the Government failed to offer any explanation for why a 28 percent ordinary tax rate, as opposed to some other tax rate, would be applicable to these transactions. Def. Mem. 6/1/2012, at 7 ("This assumed 28% rate is drawn from thin air, with no justification or explanation."). Under the circumstances, I adopt the 20 percent capital gains rate as the fairest, albeit at the same time the most conservative, way to calculate the losses incurred by the IRS, and the Government's proposed order will be adjusted accordingly.

The very language of the MVRA—"the court shall order restitution to each victim in the full amount of each victim's losses as determined by the court (emphasis mine)— suggests that losses need not be calculated exactly nor ordered to be paid on a joint and several basis. 18 U.S.C. § 3664(f)(1)(A). A reasonable estimate of the IRS losses is permissible. See United States v. Newsom, 399 Fed. Appx. 625, 628 (2d Cir. 1010),

The restitution order in United States v. Reifler, 446 F.3d 65 (2d Cir. 2006), relied on by Kerekes, is distinguishable. In Reifler, the problem the Second Circuit identified there was not merely that the figure used by the government was inexact, but rather that the government included individuals in its restitution calculation who were clearly not victims within the meaning of the MVRA. Id. at 133 (concluding that the government had included accounts belonging to some of the defendant's co-conspirators). This concern is not relevant here where there is no dispute that the IRS is the victim. The issue to be resolved is not whether the IRS has suffered losses but rather whether the method used to ascertain that loss is an appropriate approximation.

For the five individuals for whom the IRS did not have the actual tax return showing the claimed losses and did not conduct an interview regarding the tax shelter losses (Baldwin, Gray,Hager and the Spains),⁴ the IRS derived the IRS losses from "the long option or short sale proceeds amount, which for the J&G deals equated to the tax benefits taken on the returns." Mazzella Aff. 12/16/2011 ¶¶ 4, 10-11. At the hearing, IRS Special Agent Christine Mazzella ("Mazzella") acknowledged that in some instances the long option is greater than the tax benefit figure actually used; however, she stated that her figures were still conservative estimates because "I didn't charge any of the fees associated with this." Tr. 1/4/2012 Hrg. 56:25-26. Although the Government states that these individuals took all the steps necessary to generate a loss to the IRS, it cannot actually prove that the losses were incurred by the IRS because...