The opinion of the court was delivered by: Nicholas G. Garaufis, United States District Judge.
Pursuant to the Mandatory Victim Restitution Act ("MVRA"), 18 U.S.C. § 3663A, the court must determine what amount of money, if any, Defendant Myron Gushlak must pay in restitution to the victims of his securities fraud conspiracy. For the following reasons, the court ORDERS Gushlak to pay $17,492,817.45 in restitution.
On July 22, 2003, Gushlak pled guilty to, inter alia, one count of conspiracy to commit securities fraud. (See Minute Entry for Plea Agreement Hearing (Docket Entry # 5); Information (Docket Entry # 3).)*fn1 Gushlak admitted to owning, with his coconspirators, over five percent of the stock in a publicly traded telecommunications company called Global Net. (Plea Tr. (undocketed) at 26.) Gushlak admitted that he paid kickbacks to certain brokers in exchange for the brokers' promise to aggressively push Global Net's stock on customers so that the price of the stock would rise. (Id.) These kickbacks, or "commissions," were not disclosed to the investing public (id. at 27) and the price of Global Net's stock did rise as the brokers promoted the stock (see id. at 27-28). Gushlak then, over three days in the beginning of March 2000, sold around 1.1 million shares from his personal holdings in Global Net at increasingly higher prices. (Id. at 28.) According to Gushlak, the entire scheme lasted about two years-from January 1999 until December 2000. (Id. at 27).
On November 18, 2010, the court sentenced Gushlak principally to seventy-two months in prison and a fine of twenty-five million dollars.
In addition to imposing this sentence, the court was required to order
Gushlak to pay restitution to the victims of his fraud.*fn2
It did not immediately issue such an order, however, because
at the time of Gushlak's initial sentencing hearing the proper amount
of restitution was still unknown. Cf. 18 U.S.C. § 3664(d)(5) (allowing
the court 90 days from the date of sentencing to determine victims'
losses if the such losses "are not ascertainable by the date that is
10 days prior to sentencing). Instead, the court directed the
Government to submit evidence of the victims' loss and a supporting
memorandum of law by December 20, 2010. (See Sentencing Tr. (Docket
Entry # 32) at 116.) The issue was to be fully briefed by January 17,
For the purposes of restitution, courts in this Circuit estimate the amount of financial loss suffered by victims of a criminal securities fraud in essentially the same way that they calculate damages in a civil securities fraud case.*fn3 See United States v. Rutkoske, 506 F.3d 170, 179, 180 (2d Cir. 2007). That is to say, they require evidence of "loss causation"-proof that at least part of the decline in a given security's price was caused by the disclosure or cessation of fraud. See generally id. at 178-180. The idea behind loss causation is that demand for a security-which of course drives its price-is usually a function of more than just the fraud. The demand also reflects information about the legitimate value of the underlying company. Thus, when a stock's price falls after a securities fraud is revealed or terminates, it is necessary to try to control for other factors that might have contributed to the decline.
A very simple hypothetical involving the same fraud on two different stocks illustrates the point. Imagine two companies. One company, Company A, has no assets and no expected earnings, now or at any point in the future. Its non-fraud stock price is $0. The other company, Company B, has productive assets and is a going concern. The net present value of all of its future earnings per share is $10, and so its non-fraud stock price is $10. Now, imagine a fraudster illegally "pumps" the stocks of both companies in a manner that causes the price of each to rise by $5; so that Company A's stock trades for $5 and Company B's stock trades for $15. An investor buys both stocks at fraud-inflated prices and holds them continuously. Eventually, the fraudster "dumps" all of his own holdings in the companies and stops pumping. On the same day, however, a fire destroys all of Company B's assets and Company B announces that it will not rebuild. The prices of both stocks fall to $0.*fn4 While the fraudster should clearly be made to reimburse the investor for the full amount of his loss on Company A's stock, $5, it would be unfair to force him to pay for the investor's entire loss on Company B's stock-two-thirds of which was caused by the fire.
In reality, the process of disentangling a stock's underlying value from its fraud-inflated price is not as tidy. Indeed, any attempt to do so will be inherently speculative because it is impossible to know or weigh the myriad factors investors consider-both consciously and unconsciously-when deciding to buy or sell a security.
Changes in stock prices are attributable to two broad categories of factors, or "risks": systemic risk, which is driven by factors that ought to affect all companies in the overall financial market ("Market"); and idiosyncratic-or "unique"-risk, which is driven by factors that affect less than the full Market. See generally Brealey, Myers, Allen, Principles of Corporate Finance 188 (9th ed. 2008). Idiosyncratic risk may be thought of as itself having two components: industry-specific idiosyncratic risk; and firm-specific idiosyncratic risk. In the example above, companies A and B were affected by purely firm-specific idiosyncratic risk-fraud and fire. While the hypothetical is probably an accurate representation of the factors affecting Company A's stock price, of which fraud would dominate because Company A was not actually engaged in any business; it is a great over-simplification of the factors affecting Company B's stock price, which would be affected by factors as diverse as the global price of oil (systemic risk), demand for its products (industry-specific idiosyncratic risk), the fire, and the fraud (both types of firm-specific idiosyncratic risk).
Over the long run, it may be possible to learn on average how much the movement of a specific stock price is related to changes in the Market-a process that involves, inter alia, determining the stock's "beta," see infra-and then to make generalized predictions and statements. But there is no model or counterfactual that can perfectly break down a stock's historical price into market and idiosyncratic components. What is more, even if such a feat were possible, it would be impossible to know exactly which idiosyncratic factors caused the stock to move more or less than would be predicted given the Market-How much movement can be attributed to the fraud? How much to the fire?
This uncertainty is why courts are allowed to make a "reasonable estimate" of investor loss based on the information available when calculating restitution in a stock fraud case. See United States v. Germonsen, 139 F.3d 120, 129, 130 (2d Cir. 1998). The same is true with respect to calculating loss for the purposes of determining a sentencing range, see Rutkoske, 506 F.3d at 178 (quoting U.S.S.G. § 2F1.1 cmt. n.9), and for damages calculations in civil cases, cf. Boyce v. Soundview Tech. Group, Inc., 464 F.3d 376, 387 (2d Cir. 2004) (stating that, in a breach of contract case, valuation of a security on a date when there was no accurate market price was "necessarily an approximation" (quoting Silverman v. Comm'r, 38 F.2d 927 (2d Cir. 1976))).
Thus, in proving victim loss for purposes of an order of restitution, the Government does not need to show precisely how much money investors lost because of the fraud. Instead it only needs to: (1) prove-by a preponderance of the evidence, see 18 U.S.C. § 3664(e)-that at least some of the investor victims' economic losses were caused by the fraud; and (2) demonstrate-again, by preponderance of the evidence, see id.-a reasonable estimate of the amount of the loss attributable to the fraud.
In past sentencing submissions, the Government failed to meet this standard. This failure was mostly because it did not control for other factors that could have theoretically explained all of change in Global Net's stock price during and immediately following Gushlak's conspiracy.
In its first attempt to prove victim loss, the Government requested an order of restitution in the amount of $20,468,876.29. (Restitution Letter (Docket Entry # 21) at 1.) It based this number on the amount of victim loss calculated by the United States Department of Probation in Gushlak's ...