New York Federal Criminal Practice Blog
March 28, 2009

Making Off with Criminal Proceeds: Some Recent Notable Second Circuit and District Court Decisions on Restitution and Forfeiture

How much losses were actually generated in Madoff’s fraud?  Is that figure the same as the forfeiture or restitution amounts that will be ordered at his sentencing?  Will his wife be able to shelter any of her assets from seizure?  Who are Madoff’s victims?  Do they include, for example, the employees of Madoff’s firms, or aspiring beneficiaries of now-defunct charities that invested with Madoff?  Several recent decisions preview these issues, which as this blog has noted in the past, become more and more relevant as courts and legislators question the efficacy of more and longer periods of incarceration.  

Stiffed Employees Not Victims Under MVRA

Celebrity fraudster Raffaello Follieri’s former employees who are owed back pay are not “victims” under the Mandatory Victim Restitution Act, SDNY Judge Koeltl holds in United States v. Follieri, 2009 WL 151725 (S.D.N.Y. January 21, 2009).  They had creatively argued that Follieri should have paid their salaries out of his ill-gotten gains, instead of spending the money on entertaining movie-stars.  Judge Koeltl pointed out that under the MVRA, a victim is a person who has been “directly or proximately harmed” by the offense and whose losses are “causally linked” to the offense.  Here, the employees “did not, like investors, invest or make loans to the defendant” as a result of the misrepresentations that were the basis of Follieri’s guilty plea, and their losses were “not clearly causally linked to the offense.”   

Restitution Order Requires Transparent Estimate of Loss

In United States v. Hernandez, 2009 WL 113267 (D.Conn. January 15, 2009), Connecticut Judge Burns has issued a withering critique of the government’s efforts to establish loss for restitution purposes in a case involving fraudulent car loan applications to Mitsubishi.  She begins by making an important distinction between sentencing loss and restitution loss.  The first deals with fixing punishment and therefore need not be calculated “with certainty or precision;” the second, by contrast, involves “accurately gaug[ing] each victim’s loss while avoiding overpayment.”  As a result, the court “need not order restitution where the calculation of loss is so complex or opaque that it would inordinately delay the process or is likely to be grossly inaccurate.”  

Here, the government failed to meet its burden of presenting “a transparent method” of reasonably calculating the victim’s loss.  It’s primary witness – a Mitsubishi Director of Operations, who, one cannot help noticing, starts out with a transparency problem given her affiliation – had not personally prepared the spreadsheet summarizing Mitsubishi’s alleged losses, could not explain the formula underlying it, and was unable to counter defense arguments that Mitsubishi’s  own lending practices had contributed to the losses.  Judge Burns concludes:  

The government failed to produce a witness competent to testify about the accuracy of [Mitsubishi]’s calculations and did not establish a transparent method for determining loss.  Not a person present at the sentencing hearing had the expertise or wherewithal to dispute whether [Mitsubishi’s] calculations were off by 5% or 500%.  Determining [Mitsubishi]’s loss would therefore prolong and burden the sentencing process.  [Mitsubishi] may instead seek to recuperate its losses through civil remedies.

Account in Wife’s Name Does Not Escape Forfeiture

In a comprehensive decision that may foretell the Madoffs’ forfeiture fate, United States v. Kalish, 2009 WL 130215 (S.D.N.Y. January 13, 2009), the defendant challenged a forfeiture money judgment of $8.4M entered against him as part of his criminal sentence, as well as the forfeiture of certain property, including an investment account in his wife’s name.  The case involved an advance fee fraud scheme.

SDNY Judge Patterson begins, like Judge Burns above, by pointing out that loss for sentencing purposes (based on individual testimony and affidavits of victims and thus necessarily conservative) is not the same as the forfeiture amount (which consists of “the amount of proceeds gained by Defendant from his illegal activities”).  Here, the government has established that the $8.4M derived from proceeds traceable to the fraudulent advanced fee scheme, including - “through a complex web of bank and investment accounts,” the contents of the wife’s bank account.  “Defendant has not shown that other deposits were made into the investment accounts in Lynne Kalish’s name or that either Mr. or Mrs. Kalish had substantial investment income from other sources.”  Notably, while only $1.7M of fraud proceeds were traceable to the account in question, the court found the entire $2.4M in the account forfeitable, attributing the additional $0.7M to appreciation of the fraud proceeds.  

The court agreed with the defendant that the proceeds to be forfeited are subject to the deduction of “direct costs,” which included commissions paid to employees.  Such deducted costs are permissible under the provision of the relevant forfeiture statute where the defendant is deemed to have provided “lawful services that are . . . provided in an illegal manner” (as opposed to “illegal services [or] unlawful activities” – a distinction that is essentially one without a difference, and, Judge Patterson points out, at least merits the use of the rule of lenity).  

The court, however, rejected the defendant’s argument that forfeiture should be limited to advance fees paid after the effective date of the relevant forfeiture provision (August 2000) because the crime was a conspiracy that straddled the effective date.  The court also rejected the claim that money judgments are not permissible under the relevant statutes and that the forfeiture amount should be offset by the amount ordered in restitution (“restitution and forfeiture are different remedies, and therefore Defendant is subject to both”).  

Account in Wife’s Name Really Doesn’t Escape Forfeiture

In another decision addressing the forfeiture of property in the spouse’s name, United States v. Niccolo, 2009 WL 368302 (W.D.N.Y. February 17, 2009), WDNY Judge Larimer acknowledges that the forfeiture laws are “labyrinthine,” but the issue before him was straightforward:  is there a connection between the property in question and the crime of conviction under the relevant forfeiture statute?  In the context of fraud convictions, the property must “constitute[.] or derive[.] from proceeds traceable to” the fraud.  For money laundering convictions, the test is more expansive – was the property “involved in” a money laundering offence, or “traceable to such property.”  If the necessary connection is established, a preliminary order of forfeiture may be entered.  The fact that the property may be held in the wife’s name is irrelevant.  She must claim her interest in the property in a later ancillary proceeding.  And her husband has no standing to assert any claim on her behalf, since he has disclaimed any ownership interest in the property in question.  

Judge Larimer also makes clear that the forfeitable property consists of the gross – not net – proceeds of the fraud, as well as accounts containing commingled laundered and untainted funds where the government establishes “some nexus” to the property involved in the money laundering offense.  He drew the line at the forfeiture of the real property, however, where there was no “direct financial link” between the money laundering and premises, beyond merely “incidental and fortuitous” activities like sending faxes from and receiving mail at the addresses.

Lawyers: Matthew Lembke, Cerulli Massare & Lembke (defendant); AUSAs Richard Resnick and Frank Sherman

Forfeiture Order May Not Be Excessive

Last, but certainly not least, in a notable decision authored by Judge Sotomayor, United States v. Varrone, 554 F.3d 327 (2d Cir. January 30, 2009), the Second Circuit imposed some limits on the district court’s powers to order forfeiture that “far exceeds the statutory and Guideline maximum fines.”  The Supreme Court held in Bajakajian that a criminal forfeiture is unconstitutionally excessive if “it is grossly disproportional to the gravity of a defendant's offense,” and set forth four factors for evaluating excessiveness, including the “essence” of the defendant’s crime, whether the defendant fits into the class of persons targeted by the statute, the maximum sentence and fine available, and the nature of the harm caused.  In Varrone, however, the size of the forfeiture was so much greater than the maximum allowable fine (forty times greater, in fact) that the Court could not presume that the order was constitutional.  And so, it sent the case back for additional fact-finding in light of the four Bajakajian factors.  The case is a warning to district courts that large forfeiture orders which greatly exceed the allowable fines must be supported by sufficient facts.  

The Court also joined sister circuits in holding that restitution may only be ordered as a condition of supervised release “to compensate for losses caused by the specific conduct that is the basis for the offense of conviction.”  

Lawyers: Murray Singer, Esq. (defendant); AUSA Burton Ryan

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