[00:00:00] Speaker 00:
The final case is US versus homes.

[00:00:04] Speaker 00:
This is the consolidated matter.

[00:00:53] Speaker 04:
Good morning, Your Honors.

[00:00:54] Speaker 01:
Good morning.

[00:00:55] Speaker 04:
Patrick Luby of Williams and Connolly.

[00:00:56] Speaker 04:
I represent defendant appellant Elizabeth Holmes, and I'll be presenting argument on behalf of defendants from their consolidated appeal from the court's restitution order.

[00:01:05] Speaker 04:
And I'd like to reserve two minutes of my time for rebuttal.

[00:01:08] Speaker 00:
All right.

[00:01:09] Speaker 04:
May it please the court.

[00:01:11] Speaker 04:
This court should vacate the restitution order because it is contrary to law's causation principles this court has long applied in cases involving investments in legitimate companies.

[00:01:21] Speaker 04:
In these cases, loss is limited to the depreciation and share value that is directly and proximately caused by the offense conduct.

[00:01:29] Speaker 04:
On this record, the correct loss amount is far less than the investor's total investments, as two undisturbed factual findings below make plain.

[00:01:38] Speaker 04:
First, the district court found that Theranos had considerable value apart from the alleged fraud.

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There is no dispute that that value, which we call intrinsic value in our briefing and in the cases,

[00:01:51] Speaker 04:
which was comprised of hundreds of millions of dollars in the company's bank account, an IP portfolio worth over $700 million, that it continued to exist long after the alleged fraud was revealed.

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The second factual finding is the court's finding that the government did not prove that the offense conduct caused the company to collapse in 2018, which is the event that precluded certain investors from realizing all of the company's inherent value.

[00:02:16] Speaker 04:
The district court made these factual findings at sentencing, and it did not revisit them at restitution,

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Instead, it avoided them by making two fundamental legal errors.

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First, the court held that the proximate cause inquiry at restitution is limited to the decision to invest.

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But that is incorrect.

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The proximate cause test under the MVRA applies to the loss amount as well.

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Second, the court reasoned that deducting for the company's intrinsic value at sentencing was required under guidelines provisions relating to credits against loss.

[00:02:49] Speaker 04:
But that's wrong too.

[00:02:51] Speaker 04:
It's the loss causation principles that this court has articulated in cases like Zulp, like Lorienti, and Berger that required accounting for the company's intrinsic value at sentencing as part of an initial loss calculation, not as a credit for property returned.

[00:03:06] Speaker 02:
I'm not sure I understand your argument here.

[00:03:10] Speaker 02:
Did Theranos have any business other than blood testing?

[00:03:17] Speaker 04:
It had the blood testing services that it ran out of Walgreens.

[00:03:20] Speaker 04:
That was its main commercial.

[00:03:23] Speaker 04:
It also had business with the Department of Defense and pharmaceutical companies.

[00:03:26] Speaker 02:
Right, but it all related to its business of testing.

[00:03:29] Speaker 04:
Correct.

[00:03:30] Speaker 04:
And in developing that technology, it accumulated a patent portfolio that covered various aspects.

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It also developed software technologies and other inventions that surrounded the testing services, such as the Nanotainer and other proprietary technologies.

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And these technologies had real value

[00:03:50] Speaker 04:
that were independent of the alleged fraud.

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And even according to the government's own expert, a full 70% of the company's value as of December 31st, 2014 was non-fraudulent.

[00:04:05] Speaker 04:
So these two legal errors below led the court to award restitution.

[00:04:09] Speaker 00:
After the fraud came to light, were the investors able to liquidate their shares for any value?

[00:04:17] Speaker 04:
The investors who still held their shares in 2018, Your Honor, know we're not able to liquidate their shares.

[00:04:24] Speaker 00:
Right, the district court made that factual finding, right?

[00:04:27] Speaker 04:
Uh, no, your honor.

[00:04:28] Speaker 04:
The court statement at one ER 27 is not a factual finding that there was no secondary market for Theranos shares or that it was impossible to sell shares.

[00:04:38] Speaker 04:
Uh, the court did not make that finding, uh, and it could not have because the fact of the existence of a secondary market for Theranos shares was a matter of public record.

[00:04:46] Speaker 04:
And that's in the Coleman decision that we cite in our reply brief.

[00:04:50] Speaker 04:
And the fact that that statement in the court's order is not a factual finding is also clear from the context for several reasons.

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The first of which is that it appears in the conclusion paragraph of the relevant portion of the order.

[00:05:03] Speaker 04:
and the sentence in which it appears is merely a restatement of its holding under robers that restitution must be the initial loss amount, less any money obtained from selling shares.

[00:05:14] Speaker 04:
The court was merely observing that the 14 investor victims awarded restitution, in fact, did not sell their shares.

[00:05:21] Speaker 04:
Second, the court's order says nothing about

[00:05:24] Speaker 04:
whether or not there was a second... Well, he didn't say they didn't sell the shares.

[00:05:27] Speaker 00:
He said they were unable to liquidate the shares.

[00:05:30] Speaker 04:
He says, yes, Your Honor, he says that they were not able.

[00:05:35] Speaker 04:
But the court did not hear evidence or make an independent factual finding that a secondary market did not exist for the reasons already stated that court could not have made that finding.

[00:05:46] Speaker 04:
But to be clear, a defendant's argument does not rest on the existence of a secondary market.

[00:05:53] Speaker 04:
The lost causation principles that this court has articulated in Zulp and that line of cases, they require isolating for the company's intrinsic value, because that intrinsic value is by definition not something the investors ever lose to fraud.

[00:06:08] Speaker 04:
And that is true whether or not the investors have an opportunity to liquidate their shares because there's an investment in a private company.

[00:06:17] Speaker 04:
It's of course true that private companies can hold incredible intrinsic value apart from their alleged fraud.

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If the court were to affirm the district court's order

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It would open a direct split with the Second Circuit, which has held that Zulp's sensible loss causation rules apply equally to restitution and sentencing.

[00:06:39] Speaker 04:
The district court here provided no compelling reason why Zulp should apply at sentencing, but not restitution, in the very same case, on the very same record.

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The proposition makes no sense, and the government barely defends it as a matter of logic.

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Indeed, the government's arguments on appeal only confuse these basic points.

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First, the government overreads Roebers versus the United States.

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Roebers was, at bottom, not a loss causation case.

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The amount and cause of the loss was undisputed, and that's why the court's analysis of the statute was contained to the portion of the statute that concerns valuing for property returned.

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That provision is not at issue here.

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Second, the government misconstrues this court's restitution precedents.

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None of the cases the government cites involve investment loss.

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And to be clear and contrary to the government's suggestion, this court has never held that Zulp does not apply to restitution.

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In fact, in at least two instances, in Geringer and the Lorienti case, this court has vacated a sentence for failure to apply Zulp and has also vacated the restitution orders that are premised on the same erroneous loss causation calculations, strongly suggesting, if not holding, that Zulp should logically apply in both contexts.

[00:07:57] Speaker 04:
I'd like to address the government's fallback position as well, that the government urges a carve-out for private companies.

[00:08:05] Speaker 04:
The government cites no case for this carve-out, which the Second Circuit in the Leonard case and the District Court below rejected.

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The proposed carve-out is illogical, as I was saying earlier in response to Your Honor's questions.

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It's not just public companies that can have value.

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Private companies, of course, can have immense value.

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And this argument rests on a premise that the record conclusively refutes.

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That investors had a way to mitigate losses after October 2015.

[00:08:39] Speaker 04:
We already talked about the existence of the secondary market as evidenced in the Coleman decision.

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But that was also borne out in trial, in both trials.

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There was trial testimony about the existence of a secondary market on websites such as SharesPost.

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And Ms.

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Holmes testified about that as well.

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And Ms.

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Eileen LaPera submitted a victim impact statement in which she said that she had purchased her shares from her boss and then later resold them to a third party.

[00:09:07] Speaker 04:
So there were avenues to sell shares.

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And the government's argument also overlooks the other ways in which investor victims had opportunities to mitigate their loss, including in 2017 when certain investors that were rewarded restitution

[00:09:23] Speaker 04:
negotiated for a new class of shares with the company that included increased voting rights and other concessions, evidencing a continued interest to invest in Theranos.

[00:09:33] Speaker 00:
Would you like to save a little bit of time for rebuttal?

[00:09:35] Speaker 04:
Yes, I would, Your Honor.

[00:09:36] Speaker 04:
Thank you.

[00:09:55] Speaker 01:
It's quite a morning for you.

[00:09:59] Speaker 01:
May it please the court, Kelly Volcar on behalf of the United States again, your honors.

[00:10:02] Speaker 01:
Thank you.

[00:10:03] Speaker 01:
This court should affirm the district court's restitution order because the district court did not err, let alone abuse its discretion, by ordering the restitution amount of the actual losses that Holmes and Balwani's fraud approximately caused to 14 investor victims.

[00:10:17] Speaker 01:
On appeal, Holmes and Balwani are asking this court to read a requirement into the restitution statute that isn't there.

[00:10:23] Speaker 00:
Well, on the actual value, the court has to take into account whether there's any residual value.

[00:10:29] Speaker 00:
Did the district court engage in that analysis?

[00:10:32] Speaker 01:
It did, Your Honor, and this is where the plain language of the MVRA is instructive here.

[00:10:37] Speaker 01:
There's nothing in the plain language that indicates, well, first of all, to back up, the government's position following Roebers is that the property that was lost was the money, and the district court found that this was a fraud in the inducement case.

[00:10:52] Speaker 01:
that the misrepresentations are what caused the investors to part with that money.

[00:10:57] Speaker 01:
And so because this is a fraud in the inducement case, the property that was lost was the money.

[00:11:02] Speaker 01:
And even though the investors had shares in hand, those shares were ultimately worthless and they were unable to liquidate those.

[00:11:11] Speaker 01:
and to challenge my colleague across the aisle's position a moment ago that it was not a factual finding of the district court.

[00:11:18] Speaker 01:
The district court did make a factual finding that the investors were not able to liquidate their shares, and that is at 1ER 27.

[00:11:27] Speaker 01:
The district court, in its concluding paragraph for why it determined that there should not be a deduction or an offset value to the restitution amount as defendants were asking for,

[00:11:37] Speaker 01:
said that other than certain undisputed amounts returned, none of the investor victims lost property were returned, nor were any of the victims able to liquidate their shares.

[00:11:48] Speaker 01:
And that was the truth.

[00:11:49] Speaker 01:
And so when we look at the MVRA, the plain text of the statute tells the court what it is supposed to do, and that is exactly what Judge Davila did in reaching his decision on the restitution.

[00:12:03] Speaker 01:
The court is to look at whether or not property was returned,

[00:12:05] Speaker 01:
In some instances, there was amounts of property returned via civil settlements.

[00:12:11] Speaker 01:
Other than that, if the property is not returned, the court is to look at the greater of the value of the property either on the date of the loss.

[00:12:20] Speaker 01:
Here, Judge Davila found that the loss was the date that the investments were fraudulently induced, lest any value, any part of that property that is returned.

[00:12:31] Speaker 01:
So if there were an opportunity for the victims

[00:12:34] Speaker 01:
to sell their shares, which again indisputably there was not, then that would fall under that second half of the statutory text and would be able to offset it in that manner.

[00:12:49] Speaker 01:
my colleague across the aisle ended by pointing to there were avenues to sell the shares.

[00:12:55] Speaker 01:
The record does not support that and does not show that Judge Davila's finding was clearly erroneous.

[00:13:01] Speaker 01:
The reason being most of the instances my colleague points to were before the Wall Street Journal article in October of 2015 and all of them were before the CMS report came out.

[00:13:14] Speaker 01:
So really all of the incidents they point to were before the fraud

[00:13:18] Speaker 01:
was revealed, and the incidents they do point to are also telling.

[00:13:22] Speaker 01:
They point to one victim who bought shares from her boss, Don Lucas, who was a board member.

[00:13:29] Speaker 01:
That was not an arm's length transaction.

[00:13:32] Speaker 01:
Also, the district court specifically found that Eileen LaPera, the person they were referring to, was not a victim for purposes of the restitution award, despite the government seeking that on her behalf.

[00:13:42] Speaker 01:
The second thing they point to is one investor selling another investor

[00:13:47] Speaker 01:
shares in December, I believe.

[00:13:51] Speaker 01:
And the last thing they point to is one additional investment made after the Wall Street Journal article and Holmes' self-serving statements that before the fraud was revealed, she had had people ask to buy her shares in the company.

[00:14:07] Speaker 01:
In sum, this is a case where

[00:14:12] Speaker 01:
the district court reviewed the plain language and the purpose of the MVRA, looked to the court's instructive ruling in Rovers, found that the money lent by the investors when they were fraudulently induced based on misrepresentations was the property at issue.

[00:14:32] Speaker 01:
And so the only offset that the defendants were entitled to was any money that was returned.

[00:14:38] Speaker 01:
And again, for certain investors, there were some civil settlements and that money was offset.

[00:14:45] Speaker 01:
But other than that, there's no basis in this court's case law or in the text of the MVRA to reduce the amount by an artificial value in the shares that the victims themselves never received.

[00:15:00] Speaker 00:
It really is the fact that there's no residual value left, right, that drives the analysis in this particular case, not the fact that there's no offset at all.

[00:15:10] Speaker 00:
If there were residual value, then the government's argument really wouldn't work.

[00:15:16] Speaker 01:
Your Honor, the government's position is that the statute allows for an analysis in that manner as well, and Justice Sotomayor's concurrence in Roeber's, I think, is very instructive on this point.

[00:15:28] Speaker 00:
allows compensation in the amount of actual losses.

[00:15:31] Speaker 00:
It doesn't allow any windfall, so the extent that the residual value is high, that's not the case in this particular case, I can tell from the record, but if you have a case where the residual value is high, then the court would have to do the offset, wouldn't they?

[00:15:48] Speaker 01:
Your honor, I think that the offset would be and this court in Gagarin held that it's permissible to put the burden of proving a statutory offset on the defendants, which the district court, I believe, did so here in citing Gagarin.

[00:16:02] Speaker 01:
However, in that case, I think there would still need to be proof

[00:16:05] Speaker 01:
that there was, if there was residual value, that the victims could somehow recoup that.

[00:16:11] Speaker 01:
And that was my reference to Justin.

[00:16:13] Speaker 03:
Isn't that actually the definition of residual value?

[00:16:15] Speaker 03:
I mean, if you can't recoup it, it's not really residual value, it seems.

[00:16:19] Speaker 01:
That's correct, Your Honor.

[00:16:20] Speaker 01:
And that's why I think a lot of the cases that my colleague across the aisle points to are in the context of public companies.

[00:16:27] Speaker 01:
And in the context of public companies, of course, we have a stock exchange.

[00:16:31] Speaker 01:
And if you have stock and there's a fraud is revealed, but there's still

[00:16:34] Speaker 01:
some residual value left, you have a basis to go sell that stock.

[00:16:39] Speaker 01:
And there's an easier way to do an offset.

[00:16:42] Speaker 01:
So I think it is the combination here that this was both a private company, but also a private company with illiquid shares and no opportunity for the victims to recoup that cost.

[00:16:53] Speaker 01:
So regardless of whether or not there-

[00:16:56] Speaker 03:
Should we take that into account that the victims should have known that it was going to be more illiquid, so therefore we should apply a different test than in a private company closely?

[00:17:08] Speaker 03:
Well, I don't know if I should say closely held, but where they're not illiquid as opposed to on the stock market, does that enter into the equation of the restitution?

[00:17:20] Speaker 01:
I think it should, Your Honor, and I would point the court towards two reasons.

[00:17:24] Speaker 01:
One is Justice Sotomayor's concurrency.

[00:17:26] Speaker 03:
Well, I was actually going a different way.

[00:17:28] Speaker 03:
I'm surprised you agreed with me, because I was actually going to say that the victims shouldn't be entitled to as much restitution, because they knew that they had more illiquid stock than they would in a public company.

[00:17:41] Speaker 03:
So therefore, their reliance interest was different.

[00:17:45] Speaker 01:
Your Honor, pardon me if I'm misunderstanding.

[00:17:48] Speaker 03:
Well, maybe you didn't.

[00:17:48] Speaker 03:
Maybe you do agree with me.

[00:17:50] Speaker 03:
I don't know.

[00:17:51] Speaker 01:
I apologize.

[00:17:52] Speaker 01:
I am worried that I'm misunderstanding the court's question.

[00:17:56] Speaker 01:
I would want to pivot back to this court's decision in Gosse, which talked about property and the idea of what is property is when the victim has the power to dispose of that property.

[00:18:09] Speaker 01:
And so that is where I think that illiquidity can come into play here because these victims never had the power to dispose of the property to get any value back.

[00:18:19] Speaker 01:
And therefore, the actual loss is the amount that they invested and lost.

[00:18:24] Speaker 01:
And the district court did not abuse its discretion in reaching that conclusion.

[00:18:29] Speaker 01:
If this court has no further questions, we ask that the court affirm.

[00:18:32] Speaker 01:
Thank you, counsel.

[00:18:45] Speaker 04:
Thank you, Your Honors.

[00:18:46] Speaker 04:
There was residual value in the company after the alleged fraud was revealed in October 2015.

[00:18:51] Speaker 04:
The hundreds of millions of dollars in the company's bank account, the patent portfolio worth upwards of $700 million in potential licensing opportunities, these things did not evaporate.

[00:19:02] Speaker 04:
The fact that investors may have had difficulty in selling their shares is not owing to the fraud and is not traceable to the proximate cost requirement under the MVRA.

[00:19:11] Speaker 04:
It's just the nature of the investment investing in a private company.

[00:19:15] Speaker 04:
But private companies can have immense value.

[00:19:18] Speaker 04:
This court and ZULP in the Second Circuit line of cases adopting the similar reasoning do not make this distinction that the government suggests.

[00:19:26] Speaker 04:
In fact, they recognize the opposite of the government's position, that the impaired value here is the share value in Theranos.

[00:19:33] Speaker 04:
To be sure, the investors invested money, but they purchased equity with that money.

[00:19:37] Speaker 04:
It was that property interest in Theranos that was impaired by the alleged revelation of the fraud.

[00:19:43] Speaker 04:
But Zulp instructs that when, after the revelation of the fraud, there's still immense value, which the government does not dispute.

[00:19:49] Speaker 04:
Its own expert estimated the company to be worth upwards of $1 billion in October of 2015.

[00:19:56] Speaker 04:
Zulp requires accounting for that residual value as part of the proximate cause inquiry.

[00:20:03] Speaker 04:
And I'd like to just speak briefly about the record evidence on the existence of the secondary market, which to be clear, the defendant's argument does not rise or fall, but the government cites no evidence regarding the inability of investors

[00:20:18] Speaker 04:
to sell their shares.

[00:20:20] Speaker 04:
The snippets of testimony that it includes for Mr. Eisenman and Mr. Lucas, I invite the court to review those portions of the supplemental excerpts because they do not establish that fact, which goes a long way of explaining why the district court did not find that fact in its opinion.

[00:20:35] Speaker 04:
It just merely noted that the investors

[00:20:38] Speaker 04:
who held their shares, had not been able to sell their shares.

[00:20:41] Speaker 04:
Not that it was impossible, but merely that they continued to hold that equity at that time.

[00:20:46] Speaker 04:
Thank you, Your Honors.

[00:20:47] Speaker 00:
All right.

[00:20:47] Speaker 00:
Thank you very much, Council, both sides for your argument this morning.

[00:20:50] Speaker 00:
The third matter is also submitted, and we're in recess until tomorrow morning.