Duane Reade Fraudster Owes Less Restitution

     MANHATTAN (CN) – A former Duane Reade CEO convicted of cooking the books deserves a recalculation of the restitution he owes, the 2nd Circuit ruled Thursday.
     The $7.6 million restitution order handed down in May 2013 improperly included legal expenses incurred by the company before the government launched a criminal investigation into former CEO Anthony Cuti’s activities, the federal appeals court found.
     On remand, the U.S. District Court must sort out what payments to outside accountants and lawyers were essential to the investigation and whether any of those bills were duplicative.
     Cuti, who served a decade as CEO until his ouster in 2005, was convicted in 2010 of conspiracy and securities fraud for accounting schemes run over several years that inflated Duane Reade earnings. He was sentenced in 2011 to three years in prison and three years of supervised release, and was fined $5 million.
     Oak Hill Capital Partners acquired Duane Reade in 2004 while Cuti and co-defendant William Tennant, the company’s chief financial officer, were manipulating earnings.
     Their scam did not come to light until Oak Hill terminated Cuti the following year and he sought arbitration on a benefits package.
     After the outside law firm Oak Hill had retained to represent it in the arbitration uncovered Cuti’s misdeeds, the company’s board of directors hired a forensic-accounting firm and independent counsel.
     The U.S. Attorney’s Office in Manhattan got involved in May 2007 after Duane Reade disclosed its internal findings.
     After Cuti and Tennant were convicted – the CFO on just one count of securities fraud – Oak Hill and Duane Reade sought $53 million in restitution, most of it aimed at compensating Oak Hill for overpaying for the pharmacy chain.
     A federal judge initially denied that request but eventually found that restitution would be appropriate.
     After further study and a recommendation from a federal magistrate, U.S. District Judge Deborah Batts issued a restitution order in May 2013.
     She said Oak Hill deserved compensation not as a victim of Cuti’s fraud but as a non-victim because it had agreed to share legal costs with Duane Reade, Cuti’s actual victim.
     Her restitution order included certain fees that the companies paid to outside counsel Paul, Weiss, Rifkind, Wharton & Garrison and Cooley Godward Kronish, and to forensic accountants AlixPartners.
     It also included the costs of providing counsel for current and former Duane Reade employees whom the government interviewed.
     Cuti appealed the $7.6 million award to the 2nd Circuit, saying the court’s change of heart on restitution indicated vindictiveness after denying his request for a new trial.
     The three-judge appellate panel found Thursday that mere “close temporal proximity between the court’s order denying his motion for a new trial and its decision to award restitution” is not enough to show vindictiveness.
     Cuti also failed to persuade the court that Oak Hill was not a restitution-eligible victim of his fraud, and the court upheld compensation for employees’ legal fees.
     He did, however, persuade the court to nix expenses associated with the arbitration, accrued before the government began its investigation, from the restitution order.
     Though both the Mandatory Victims Restitution Act and the Victims and Witnesses Protection Act authorize restitution awards, the court found that the Duane Reade case is complicated by the arbitration that touched off the investigation into Cuti’s schemes.
     The Paul Weiss law firm initially focused on the arbitration, while Cooley Godward came on board only after the criminal acts came to light, the court noted.
     “To conclude that both firms’ expenses for investigating the same two underlying frauds were ‘necessary’ to the government’s case would vitiate any limit on our already broad view of ‘necessary’ expenses,” Judge Rosemary Pooler wrote for a three-member panel. “Inasmuch as the Cuti restitution order did so, this was error requiring remand.”
     On remand the District Court should consider “whether the government has proved by a preponderance of evidence that some, or any, of Paul Weiss’s and Cooley’s expenses” prior to the launch of the criminal probe “were ‘necessary to the investigation or prosecution’ of Cuti’s criminal case,” the 29-page opinion states.
     The court also should look out for “redundant or duplicative” expenses, Pooler said.
     Circuit Judge Dennis Jacobs concurred, as did U.S. District Judge Nelson Roman, sitting by designation from the Southern District of New York.
     Duane Reade, which dates to 1960, now operates as a subsidiary of drugstore giant Walgreen Co., which acquired it in 2010. Duane Reade is headquartered in Manhattan and operates many of its stores there.

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