Key Points

  • Restitution for a misdemeanor violation of 18 U.S.C. § 641 is not statutorily limited to $1,000, because the dollar amount of the converted property is not an element of the misdemeanor offense.
  • Restitution under the Mandatory Victims Restitution Act is limited to losses caused by the offense of conviction, which in a guilty-plea case is defined by the charging instrument, plea agreement and allocution.
  • Malakhov's plea established only that he converted a portion of NSF grant funds to unauthorized uses after receiving them, not that he fraudulently induced NSF to pay them.
  • The district court erred by ordering $200,000 in restitution on a fraudulent-inducement theory, and fraud-based criminal and False Claims Act cases awarding the full grant amount do not apply.
  • The Second Circuit vacated the restitution award and remanded for the district court to determine NSF's actual loss from the conversion, including whether Solid Cell's project expenditures and final report offset it.

A federal appeals court on Thursday threw out a $200,000 restitution order against a company executive who pleaded guilty to misspending National Science Foundation grant money. The court held that the trial judge had made him repay the entire grant on a fraud theory his plea never covered.

The U.S. Court of Appeals for the Second Circuit rejected the executive's argument that restitution for his misdemeanor was capped at $1,000. But it agreed that the trial court had measured the government's loss by conduct outside the crime he admitted. Circuit Judge Joseph F. Bianco wrote for a panel that included Circuit Judges Cabranes and Lynch.

The decision sends the case of Arkady Malakhov, CEO of Solid Cell Inc., back to the U.S. District Court for the Western District of New York to recalculate what, if anything, he owes. The panel distinguished grant recipients who lie to win federal money, whom other courts have ordered to repay all of it, from a defendant convicted only of diverting money after he received it.

NSF awarded Solid Cell a $225,000 grant in July 2017 under the Small Business Innovation Research program, which reserves part of federal agencies' research spending for small businesses. Malakhov named Yuriy Lobunets as principal investigator, the person responsible for leading the research, although Lobunets was not then authorized to work in the United States. Malakhov twice requested and received $100,000, each time certifying that the investigator was available to do the work.

Solid Cell then spent part of the money on unrelated costs, the court wrote, including $40,000 to repay business loans and $30,000 in payments to Malakhov himself. In an October 2017 email, Malakhov told an NSF program director that "we may have broken the rules in that [the PI] did not have work authorization in the US on the date we were officially awarded the grant."

Prosecutors indicted Malakhov in 2022 on six counts, including wire fraud. In November 2024 he pleaded guilty to a single misdemeanor count of conversion under 18 U.S.C. § 641, which punishes stealing or knowingly converting government money or property.

At sentencing, the government argued that NSF was "owed that 200 grand back because they never would have given it if they had not been lied to by the defendant." Malakhov countered that the misdemeanor capped restitution at $1,000 and that NSF lost nothing, because Solid Cell eventually performed about $232,976 worth of research on the project. U.S. District Judge Frank P. Geraci found that "the actual loss to NSF was the $200,000 it was fraudulently induced to pay" and sentenced Malakhov to three years of probation.

Section 641 makes the crime a felony but carries a lighter penalty, up to one year in prison, when the property's value does not exceed $1,000. Relying on the circuit's 2016 decision in United States v. Lee, Bianco wrote that the misdemeanor requires proof only that the property had "some value." Nothing in Malakhov's charging document or plea limited the amount to $1,000.

Malakhov had pointed to Lee's reference to a "ceiling value" in the misdemeanor clause. Read in context, Bianco wrote, that passage answered a different question, and "the Court certainly did not purport to limit the amount of restitution that could be ordered for a misdemeanor violation of Section 641."

Malakhov fared better on his second argument. The Mandatory Victims Restitution Act requires restitution for a victim's full losses, but only for losses caused by the offense of conviction. In a guilty-plea case, the charging document, the plea agreement and the defendant's admissions in court define that offense.

All three, the panel held, showed that Malakhov admitted converting part of the money after he received it, not lying to get it. Bianco wrote that "fraudulent inducement—based on Malakhov's alleged false statement regarding the availability of the PI—was not part of his offense of conviction." Before the plea, the government had dismissed the count based on Malakhov's alleged misstatement about the investigator's immigration status.

Malakhov admitted "putting the grant funds to unauthorized uses," the opinion said, but the district court "calculated restitution as if he had admitted to fraudulently inducing payment of the funds in the first place." The panel set aside out-of-circuit rulings upholding full-grant restitution, including the Sixth Circuit's in United States v. Agrawal, because those defendants had been convicted of fraud.

"Even further afield is the government's reliance on various civil cases brought under the False Claims Act," Bianco wrote. In each of those cases, he explained, the defendant had lied or committed fraud to obtain a grant the government would not otherwise have awarded.

In a footnote, the panel said its result "comports with the common-sense principles underlying the government-benefits rule." Under that sentencing-guidelines rule, the loss is the full benefit when an ineligible person obtains it, but only the diverted portion when funds go to unintended uses.

Kathryn S. Austin of the Federal Public Defender's Office for the Western District of New York represented Malakhov. Assistant U.S. Attorney Melissa M. Marangola, with Monica J. Richards on the brief, represented the government.

The panel vacated only the restitution portion of the judgment and remanded for the limited purpose of reconsidering it. Geraci must now decide whether, and to what extent, NSF suffered an actual loss from the misspending itself. Against Malakhov's $232,976 figure, NSF's expert concluded that "at most, $60,149 of the amount attributed to the NSF award should be considered for an allowability determination." The panel left it to Geraci to decide whether Solid Cell's project spending and final report should offset the loss, writing, "We are a court of review, not of first view."