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When it comes to compensating crime victims, the sacred cow of untouchable pension funds now may be a cash cow for federal prosecutors wanting to tap white-collar defendants for substantial restitution. The recent 9th U.S. Circuit Court of Appeals ruling is the first appellate decision in the nation to hold that the Mandatory Victims Restitution Act (MVRA) of 1996 trumps federal retirement law that bars confiscation of pensions to pay debts. Opening the way to garnish pension funds may cause sleepless nights for defense lawyers because a restitution order can hang on 20 years after a prison term. At least five district courts around the country have ruled similarly to the 9th Circuit in U.S. v. Novak, 2007 WL 528717, to allow garnishment of pensions to pay restitution, but none produced appellate decisions nor did they have the detailed legal analysis of the competing laws. For the wealthy defendant facing significant victim-restitution claims, putting once-untouchable pension money in play will change early plea negotiation strategy and will likely create more litigation regarding when, and how much, money can be garnished. Some also fear it could prompt indigent defendants to liquidate pensions to pay defense and investigation costs rather than risk losing it in restitution orders. “The first thing that jumps out at me is the need to attack this in negotiating a guilty plea and [to] separate out the pension,” said Stephen Rosenberg, a commercial litigator who specializes in the Employee Retirement Income Security Act of 1974 (ERISA). “I see a scenario in which there will be a lot of compromising going on,” said Leslie Caldwell, head of white-collar defense for Morgan, Lewis & Bockius from its New York office and who formerly led the U.S. Department of Justice’s Enron Corp. task force. “Prosecutors are not trying to take every cent. It will be a negotiating point,” she said. An afterthought, until now Most defense lawyers in white-collar cases focus on helping clients avoid prison time. Restitution is an afterthought, according to Michael Gilbert, a white-collar and securities lawyer in Dechert’s New York office. “Lawyers are so focused on jail that economic issues fall by the wayside,” Gilbert said. But if defendants are not focused on it, “in light of this decision, they should be,” he said. Clearly Congress and victims’ rights groups are giving restitution more attention. “This is an area of a lot more focus right now,” Gilbert said. [NLJ, Feb. 19.] Last year, Senator Byron Dorgan, D-N.D., unsuccessfully sought stronger efforts to recover an estimated $41 billion in uncollected restitution for crime victims. He is expected to reintroduce that bill later this year. The Justice Department has always taken the position it could tap into pension funds to satisfy a restitution order, according to one department official who asked not to be identified. Using pension funds raises public policy questions highlighted by the dissent in Novak. ERISA forbids assignment or alienation of funds to safeguard a stream of income for pensioners and their innocent spouses and children, according to Judge William Fletcher’s dissent. How much will courts leave for the defendant’s family to live on? “It almost goes to the level of 19th century debtor’s prison issue: Do we bankrupt the spouse of a white-collar criminal?” asked Rosenberg. In the Novak case, Raymond Novak and his wife were convicted of stealing telephone equipment from Nestl� Food Co. and reselling it. They were ordered to pay $3.3 million in restitution to Nestl� and the government went after his $200,000 pension. Pensions become fair game when the funds become available, according to the court. But “available” was not defined. Martin Bakst, Novak’s lawyer in Encino, Calif., and a solo practitioner, said the decision does not resolve whether the government can force defendants to pay a penalty for early removal of pension funds. There may be an issue if the government takes more than a defendant would withdraw monthly as pension payments, he said. Judges will also have to assess what reasonable living expenses are and how much is available to pay victims, he said. Another question is whether the Internal Revenue Service (IRS) or victims get paid first. Bakst said the Novaks owe taxes on unreported income from the fraud but “the government’s position is the victim gets paid before the IRS.” “From a practical standpoint they will never pay off all the restitution,” he said. Under the MVRA, the inability to pay restitution does not prevent imposition of a bill for the full amount of loss. The 1st, 2d, 7th, 9th and 10th circuits have allowed significant restitution orders over the years even for indigent defendants. This has public defenders concerned. There is no disincentive preventing small-time defendants from dissipating whatever pension funds they may have in order to pay for counsel and investigators if a conviction means they would lose the pension anyway, according to Steven Kalar, a federal public defender in San Francisco. “I don’t think people have thought enough about the ramifications of this,” Kalar said. “It is difficult to agree to a hypothetical amount of restitution when there is no money and leave someone destitute in their old age.” “For a young defendant, this can hang over their heads until they retire,” he said. Nor does the MVRA allow discharge of a restitution debt in bankruptcy. For victims of crime, there has been far too little attention devoted to restitution over the years. “The way we see it, this is one more tool to collect restitution,” said Susan Howley, director of public policy for the National Center for Victims of Crime. “We find time and again victims can’t get restitution. It is heartbreaking in white-collar cases where someone has lost all their life savings,” she said. She hopes Dorgan’s bill will remove more barriers to collection of funds and allow prosecutors to preserve a defendant’s assets before conviction. More litigation coming Rosenberg predicted more litigation around the country over the meaning of terms in the Novak case. The government can reach assets only to the extent that they are currently collectible. “They will have to litigate what that means,” he said. “If a criminal is 35 and can structure restitution before retirement funds are available, how does that affect it? You can’t garnish me 30 years in advance,” he said. While courts can’t force a spouse to pay the restitution of an indigent partner, the innocent spouse’s funds can be used to calculate what is available to live on, and that can affect the amount taken from a defendant’s pension. There are real collateral effects here, Rosenberg said. Most people think of people like Kenneth Lay, the former head of Enron Corp., but the smaller cases can leave a spouse without the pension he or she expected to receive, even if they didn’t know about the crime.

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