Fed. Ins. Co. v. United States
| Decision Date | 13 February 2018 |
| Docket Number | 16-3402-cr,August Term, 2017,Docket Nos. 16-2967-op |
| Citation | 882 F.3d 348 |
| Parties | FEDERAL INSURANCE COMPANY, as subrogee of Science Applications International Corporation, now known as Leidos Holdings Inc., Petitioner, v. UNITED STATES of America, Respondent. United States of America, Appellee, v. Mark Mazer, Dimitry Aronshtein, Svetlana Mazer, Larisa Medzon, Anna Makovetskaya, Carl Bell, Gerard Denault, Padma Allen, Reddy Allen, Technodyne LLC, Science Applications International Corporation, Defendants, Federal Insurance Company, as subrogee of Science Applications International Corporation, now known as Leidos Holdings Inc., Appellant. |
| Court | U.S. Court of Appeals — Second Circuit |
William B. Pollard (Amy C. Gross, on the brief ), Duane Morris LLP, New York, NY, for Petitioner/Appellant.
Jacob E. Warren (Andrew D. Goldstein, Howard Master, Michah W.J. Smith, on the brief ), Assistant United States Attorneys, for Geoffrey Berman, Interim United States Attorney, Southern District of New York, New York, NY, Respondent/Appellee.
Before: Parker, Lynch, and Carney, Circuit Judges.
These related cases stem from an extended fraud committed against the City of New York between 2003 and 2011. Science Applications International Corporation ("SAIC") was the lead contractor on New York City's so-called CityTime project, an effort to update the City's time-keeping and management software. Several SAIC employees, including Carl Bell, conspired to obtain bribes and kickbacks from one of SAIC's subcontractors on the CityTime project in exchange for their steering work to that entity at inflated prices. The employees were eventually convicted in the United States District Court for the Southern District of New York (George B. Daniels, J. ), and SAIC entered into a deferred prosecution agreement taking responsibility for its part in the scheme. In 2014, SAIC successfully filed a claim under an Employee Theft Insurance Policy provided by Federal Insurance Company ("Federal") on the theory that the improper payments obtained by Bell and his coconspirators constituted the wrongfully appropriated property of SAIC. After making a $15 million payment to SAIC, Federal entered the criminal case against Bell in an effort to recover its payment. The present appeals concern Federal's efforts either to obtain restitution from Bell or, in the alternative, to assert a priority right in the property that he agreed to forfeit as proceeds of his crimes.
The district court rebuffed both of Federal's attempts to obtain relief below. First, Federal moved pursuant to the Crime Victims' Rights Act ("CVRA"), 18 U.S.C. § 3771, for an order of restitution to be entered in its favor as part of Bell's sentence. The district court denied the motion, and in the matter before us designated No. 16-2967-op, Federal seeks a writ of mandamus directing the district court to order restitution in its favor. Although the government has identified numerous procedural obstacles that might prevent Federal from obtaining that remedy, we need not resolve all of the questions of statutory interpretation raised by the government's arguments. We conclude that, even assuming Federal could overcome the applicable procedural obstacles, its petition nevertheless fails on the merits. The district court did not abuse its discretion when it concluded that SAIC's own criminal conduct precluded it—and, by extension, Federal as its subrogee—from obtaining restitution from Bell. Accordingly, Federal's petition for mandamus relief is DENIED.
Second, Federal filed a petition in connection with the government's application to forfeit the proceeds of Bell's crimes, claiming superior rights to Bell's forfeited property pursuant to 21 U.S.C. § 853(n). Federal asserted that a constructive trust should be imposed on the subject property in favor of SAIC, because the property was traceable to bribes and kickbacks that Bell improperly obtained by virtue of his position as an SAIC employee. The district court summarily dismissed Federal's petition, and, in the case before us designated No. 16-3402-cr, Federal appeals that order. We conclude that the district court failed to make adequate factual findings regarding whether SAIC's allegedly unclean hands should bar it from obtaining an equitable remedy, and, if such a remedy remains available, whether the property was traceable to bribes and kickbacks actually obtained at SAIC's expense. The district court's order of dismissal is thus VACATED and the matter is REMANDED to the district court for further proceedings consistent with this opinion.
In 2000, SAIC became the lead contractor on CityTime, a New York City initiative to modernize its timekeeping and payroll system (the "Project"). Between 2003 and 2011, Gerard Denault, SAIC's Program Manager for the Project, and Carl Bell, its Chief Systems Engineer, conspired with others to steer CityTime-related work to Technodyne LLC, a subcontractor that provided information technology consulting staff for the Project, at inflated prices, in exchange for kickbacks and bribes. Over the course of the scheme, Technodyne was paid approximately $325 million for its work on the Project, out of which millions of dollars were kicked back to Bell and Denault.
SAIC initially had a fixed-price contract with the City, meaning that SAIC had committed to fulfilling its obligations under the contract for a specified price, regardless of its actual costs. Because SAIC bore any excess costs, including the costs of its employees' kickback scheme, by the end of 2005 it was "losing millions of dollars on the Project." RA at 183.2 That year, however, SAIC began negotiations with the City to convert the contract to what was essentially a "cost-plus" payment plan, in which the City would pay SAIC for its work on an hourly basis using a formula that factored in the price of subcontractor labor. Such a plan would effectively shift the burden of cost overruns to the City. At Denault's eventual criminal trial, Bell (who testified for the government) identified Denault as the "champion" of the contract amendment. RA at 78. Both Bell and Denault understood that the adoption of the cost-plus amendment would enable them to extend and expand their kickback scheme.
The City agreed to the conversion in 2006. Denault took immediate advantage of the new payment structure: he deliberately extended the schedule of the Project and assigned additional employees to the team. The cost-plus amendment also benefitted SAIC, which was no longer losing money on CityTime. Indeed, because SAIC earned a profit even on labor costs that were inflated by kickbacks, the change in the payment formula meant that SAIC now gained, rather than lost, from Denault and Bell's corrupt scheme. By 2010, SAIC estimated that it stood to make a net profit of $60 million for its work on the Project.
Around the time that the cost-plus amendment was being negotiated in 2005, a whistleblower employee complained to SAIC's management that Technodyne was receiving improperly favorable treatment. The complainant (correctly) concluded that the best explanation for the irregularities was that Denault was receiving kickbacks in exchange for steering work to the subcontractor. SAIC dismissed the complaint without investigation and the allegations were never brought to the attention of SAIC's Board of Directors or of the City.
On June 24, 2011, pursuant to a cooperation agreement, the government filed, and Bell plead guilty to, a five-count criminal information arising from his role in the CityTime scheme. Count One of the information alleged that from 2003 through 2011 Bell had participated in a conspiracy to defraud the City into "significantly overpaying for the CityTime project in order to, among other reasons, increase the amount of concealed kickbacks paid to him and at least one other person by an SAIC subcontractor," in violation of 18 U.S.C. § 1343. RA at 22–23. Count Two alleged a conspiracy during the same period "to defraud, and to deprive Bell's employer, SAIC, of its intangible right to Bell's honest services," in connection with the same scheme, in violation of 18 U.S.C. §§ 1343 and 1346. Id. at 23–24. Count Three alleged wire fraud in furtherance of the honest services scheme, in violation of 18 U.S.C. §§ 1343 and 1346. Count Four alleged a conspiracy to violate the Travel Act, 18 U.S.C. § 1952, by traveling interstate and using the mail and other facilities of interstate and foreign commerce in furtherance of the kickback scheme. Count Five alleged conspiracy to launder money, in violation of 18 U.S.C. § 1956(a)(1)(B)(i). The information relied on the same conduct, Bell's receipt of a $36,000 wire transfer from India in 2009, to establish elements of each count. Bell's sentencing was deferred in anticipation of his testimony at the trial of his coconspirators, which took place in 2013.
On March 8, 2012, SAIC entered into a deferred prosecution agreement ("DPA") with the government in which SAIC "admit[ted] that it, through the conduct of certain managerial employees and others, defrauded the City into significantly overpaying for CityTime." RA at 160. Attached to the DPA was a "Statement of Responsibility" delineating the scope of the offense conduct to which SAIC admitted. In particular, the Statement provided:
SAIC accepts responsibility for the illegal conduct alleged against Denault and admitted by Bell during the course of the CityTime project. The Company acknowledges that the conduct and managerial failures described herein contributed to the ability of Denault and Bell to commit their alleged crimes against the City, and that the City was defrauded by SAIC as a result.
Id. at 183–84. The Statement specified that, in addition to failing to investigate the 2005 whistleblower complaint, SAIC had failed to adequately supervise...
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