On February 6, 2015, the United States Court of Appeals for the Second Circuit decided an appeal, United States v. Cuti, which interpreted the restitution provisions of the Victims and Witnesses Protection Act (VWPA). The decision is significant because it seems to place a notable limitation on the ability of a victim of white-collar crime to recover expenses incurred in the course of investigating and reporting the defendant’s criminal activity. Namely, the Court suggests that fees incurred by the company’s counsel and by counsel for a board audit or special committee cannot, in some cases, both be fully recovered. This ruling does not take into account how internal investigations are typically conducted when the allegations concern wrongdoing by senior management.

Anthony Cuti was the former Chairman and Chief Executive Officer of Duane Reade, the well-known New York City drugstore chain founded in 1960. Oak Hill, a private equity firm, acquired Duane Reade in 2004 and the following year it terminated Cuti’s employment without cause. The dispute over Cuti’s termination led to an arbitration initiated by Cuti. Oak Hill retained its longtime counsel, the Paul, Weiss law firm, to represent Duane Reade in the arbitration. In the course of defending Duane Reade, Paul, Weiss learned about certain potentially improper transactions in which Cuti was involved. These allegations led the Audit Committee of Duane Reade to retain the Cooley law firm as independent counsel to conduct an internal investigation. At various points over the successive months, Paul, Weiss provided to Cooley evidence of other potentially improper transactions involving Cuti. Paul, Weiss did so as counsel to Duane Reade, and then Cooley incorporated and investigated these facts as part of its investigation. Ultimately, it appears from the Court’s decision that both firms provided information to the U.S. Attorney’s Office and the Securities Exchange Commission.