Recently in the Forfeiture category:
[T]he present action involves asset freeze orders in civil actions, with Defendants also being tried in a parallel criminal proceeding. These unique circumstances require the court to pay particular attention to the Defendants' Fifth and Sixth Amendment rights. The Government has failed to cite any case law which stands for the proposition that a defendant is not entitled to use untainted funds, frozen in a civil action, in order to pay legal fees for his counsel of choice in a parallel criminal action.
Lawyers: Glenn Colton and Mark Flessner (defendant Walsh); Frederick Hafetz and Tracy Sivitz (defendant Greenwood); AUSAs John O'Donnell and Marissa Mole
As the [Awad] district court reasoned, when "a defendant lacks the assets to satisfy the forfeiture order at the time of sentencing, the money judgment . . . is effectively an in personam judgment in the amount of the forfeiture order." . . . This is so because "[m]andatory forfeiture is concerned not with how much an individual has but with how much he received in connection with the commission of the crime." . . . A contrary interpretation could have the undesirable effect of creating an incentive for an individual involved in a criminal enterprise to "rid himself of his ill-gotten gains to avoid the forfeiture sanction."
Government Not Entitled to Personal Money Judgment in Criminal Forfeiture Proceeding
[Update 3/11/2010: In United States v. Awad, issued 3/11/2010, Second Circuit disagrees with Surgent's holding and finds its reasoning "unpersuasive."] The gem of this series of cases is United States v. Surgent, 2009 WL 2525137 (E.D.N.Y. August 17, 2009), a key decision on the availability of personal money judgments in criminal forfeiture proceedings. Ruling that “nothing in § 982, § 853, or the jurisprudence of the Second Circuit authorize[d him] to enter a personal money judgment, as opposed to an order forfeiting specific property, in sentencing a defendant convicted of a money laundering offense,” EDNY Judge Gleeson denied the government’s motion for the entry of a money judgment of $2.3M. The ruling has broad implications for many other criminal cases, which involve similarly-worded forfeiture statutes.
Stripping bare the echo chamber of precedents used to justify money judgments in forfeiture cases (many of the cases “which assume[d] the propriety of personal money judgments in forfeiture proceedings, are subsequently read as establishing the propriety of such judgments”), Judge Gleeson points out that “[t]he fact that the statutes in question do not provide for the enforcement of money judgments suggests that they do not authorize such judgments.” There is a key difference between money judgments and forfeiture orders: the former may be enforced like any civil judgment, whereas the latter may only be enforced by the judge who entered it. Congress hardly “deem[ed] this difference irrelevant, as there are legitimate reasons to prefer that the sentencing court oversee both the imposition and the execution of sentences containing federal forfeiture awards.”
The government’s recourse may lie in an order for substitute assets, assuming the defendant has some nominal assets at the time of conviction. Under Fed.R.Crim.P. 32, this order may be amended at any time if the defendant later obtains assets. As a practical matter, however, without a money judgment, the government is likely to leave the defendant alone.
Lawyers: Steven Kessler (Third Party Petitioner Regina Surgent); AUSA Kathleen Nanden
Early Termination of Supervised Release Granted Despite Restitution Balance Owing
A defendant secured early termination of his supervised release term in United States v. Harris, 2010 WL 723762 (S.D.N.Y. March 1, 2010), based on “[p]ost-conviction conduct [that] has been beyond reproach” and the fact that supervised release status has created “multi-faceted obstacles” to his employment prospects. The Government had opposed termination, citing the large balance owing on the defendant’s $200M restitution obligation. SDNY Judge Haight concluded, however, that “t]he desirability of Harris’s continued rehabilitation through enhanced professional opportunity trumps whatever minimal restitution might be obtained by continued supervision.” Interestingly, he noted that unlike cases that have “devastated individual victims” like that of Bernard Madoff, “the victims of Harris’s fraud were a consortium of sophisticated international banks, advised by accountants and attorneys, whose existence and business activities survived the fraud.” Moreover, “[k]eeping Harris’s supervised release restitution obligation in effect until March 2012 will have no effect whatsoever upon the balance sheets of the bank victims.”
Restitution Denied for Losses Not Proximately Caused by Offense
In United States v. Morrison, 2010 WL 480866 (E.D.N.Y. February 12, 2010), EDNY Judge Hurley reminds us that “restitution may be ordered only for the loss caused by the specific conduct that is the basis of the offense of conviction.” Morrison was convicted of a RICO conspiracy aimed at distributing cigarettes that lacked the applicable New York State tax stamps. Concluding that New York State was a victim of this conspiracy under the MVRA (Mandatory Victims Restitution Act), the Court held, however, (for the first time in this circuit it appears), that the amount of the restitution would be limited by “the specific temporal scope of the criminal conduct as outlined in the indictment.” After all, since “the government has control over the drafting of the [indictment], it bears the burden of includ[ing] language sufficient to cover all acts for which it will seek restitution.” New York City, on the other hand, was not a victim for restitution purposes. Its harm – that the bootleg sales deprived of it of local tax revenue – was “far too attenuated to demonstrate direct and proximate causation.” The case is a lesson in not taking the government’s restitution claims at face value.
Lawyers: William Murphy and Kenneth Ravenell of William H. Murphy, Jr. & Associates, Peter Smith of Law Offices of Peter Smith & Associates, Daniel Nobel, Richard Levit of Levitt & Kaizer(Defendant); Eric Proshansky, Corporation Counsel of the City of New York, Law Department (the City of New York); David Paldy, Department of Taxation and Finance, Office of Tax Enforcement, Special Investigations Unit ( the State of New York); AUSAs James Miskiewicz, John Durham, Diane Leonardo-Beckman.
Court Denies Victim’s Request for Priority in Distribution of Restitution Monies
In United States v. Dreier, 2010 WL 424706 (S.D.N.Y. February, 5, 2010), SDNY Judge Rakoff tried to bring some sanity and order to the sprawling mess generated by the fraud schemes of convicted lawyer, Marc Dreier. In the decision, he approved proposed settlement agreements between the government, the SEC and the bankruptcy trustees, noting that “[t]he forfeiture laws [.] authorize the Government to compromise competing claims to forfeited assets” and ) “nothing in the [Crime Victims' Rights Act] requires the Government to seek approval from crime victims before negotiating or entering into a settlement agreement.” Notably, he rejected the claim of one victim that he should get priority since he was an “individual as opposed to an institutional investor.” Confirming his previous order of pro rata distribution, Judge Rakoff noted:
The truth is that a fraud as large and egregious as Dreier’s is like an earthquake that savages its victims at random and is followed by a series of aftershocks that destroys still further assets. Any alternative to the pro rata approach would entail a costly and extensive inquiry into the circumstances of each victim's loss, which would likely devolve into a war of recriminations, to the detriment of all concerned.
One of the ills highlighted in the Supreme Court's recent money laundering decisions in Santos and Cuellar is the tacking on of money laundering charges to a variety of crimes in order to induce guilty pleas. The entanglement of substantive criminal charges with money laundering charges is illustrated in United States v. Roberts, 2009 WL 1833389 (E.D.N.Y. June 29, 2009), where the defendant, an airline employee, was charged with participation in a drug importation conspiracy and also with two money laundering counts, arising out of his role in surreptitously loading and unloading baggage off and on planes traveling between the U.S. and Jamaica.
The evidence of Roberts' alleged participation in money laundering consisted essentially of his secret loading of a black plastic bag onto a Jamaica-bound flight which would be retrieved at the other end by another individual who would use it "to pay for the drugs or buy more drugs." Granting the defendant's motion for a judgment of acquittal on the money laundering counts, Judge Irizarry held that this evidence demonstrated "only an intent to conceal the transportation, not an intent to transport money in order to conceal it." As in Cuellar, the evidence suggests that “the secretive aspects of the transportation were employed to facilitate the transportation, ... but not necessarily that secrecy was the purpose of the transportation.” The government had "failed to introduce any evidence that the reason that the drug smugglers move money to Jamaica is to conceal or disguise any of the attributes of the funds listed in Section 1956(a)(2)(B)(i)."
Roberts fared less well on his request for a jury determination on the criminal forfeiture money judgment sought by the government under 21 U.S.C. § 853 in connection with the narcotics trafficking charges he faced. In United States v. Roberts, 2009 WL 1911690 (E.D.N.Y. June 30, 2009), the court found that on the issue of forfeiture, a jury may decide only whether there is a nexus between the specific property sought to be forfeitured and the charged offense. It had no role where the government only sought - as here - a forfeiture money judgment. "If the government does not seek specific property, but rather a personal money judgment, the court itself determines the amount of money that the defendant will be ordered to pay. . . The defendant is not entitled to have the jury decide the amount of the forfeiture.” Interestingly, the government had not taken a position on this issue, but noted that district courts have differed on the issue.
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
As courts retreat from heavy custodial sentences in white collar cases (see here), one can expect alternative measures, like forfeiture, fines and restitution, to become the new punitive focal point. In fact in United States v. Brennan, 05 CR 747 (JBW), (previously discussed here), EDNY Judge Weinstein announced last year that he intended to reject lengthy guideline sentences and instead impose probation on nine defendants in a $100 million fraud scheme, but directed a report and recommendation from a magistrate on any restitution they owed. That report, along with some other recent decisions, amplifies the nascent but burgeoning jurisprudence on the Mandatory Victims Restitution Act (MVRA), previously blogged about here and here, an area of law that can significantly impact the post-conviction lives of defendants.
Brennan ($100 million Newsday Circulation Fraud)
Brennan arose out of a $100 million fraud perpetrated on the advertisers of Newsday and Hoy newspapers involving the inflation of paid circulation statistics. Indicating his intention not to impose custodial sentences on all nine defendants, including the one who did not cooperate with the government, Judge Weinstein referred the case to Magistrate Judge Gold for a report and recommendation as to the amount of restitution that should be ordered in the case under the MVRA. Following hearings and briefing, Judge Gold delivered in In re Newsday Litigation, 08 MC 96, 2008 WL 2884784 (E.D.N.Y. July 23, 2008), a thoughtful and detailed review of the applicable legal standards and complicated facts at issue.
Judge Gold’s report is notable for the following: he credited the $96 million already paid in restitution to the victim advertisers by the newspapers themselves (essentially, unindicted co-conspirators) against any restitution amount imposed on the defendants; the claims of victims who did not attend the hearings or respond to the government’s filings, despite ample notice, would be disregarded; to the extent the court’s recommended restitution amount of almost $6 million overstated the victim’s losses, that over-estimate was justified by the court’s recommendation not to impose prejudgment interest nor estimate amounts owing for portions of the fraud that lacked adequate records; and, finally, an individual who presented a factually dubious claim that he was fired as a result of the circulation fraud would not be considered a “victim” under the MVRA, which requires that the victim’s losses be “clearly causally linked to the offense” (citing the Senate Report).
In the end, at sentencing, Judge Weinstein rejected the $6 million restitution figure, although he did impose fines of up to $125,000 on each defendant. He reasoned that these victims – to the extent they could be identified – had plenty of time to come forward and claim amounts owing to them and they had elected not to.
Update 10/07/08: Judge Weinstein has published a decision explaining his adoption of most of Judge Gold's recommendation and his rejection of the recommended $6 million restitution figure, available at In re Newsday Litigation, 2008 WL 4279570 (E.D.N.Y. September 18, 2008): "There is no need to order restitution in these cases. Most victims have been made whole. Providing restitution to a relatively few who did not receive compensation for small amounts will prolong the sentencing process to a degree that the need to provide restitution is outweighed by the burden on the sentencing process. This memorandum and order shall be attached to the judgment and commitment of each defendant."
Donaghy (NBA Referee Fraud)
United States v. Donaghy, 07-cr-587 (CBA), 2008 WL 2884748 (E.D.N.Y. July 23, 2008), involved another high-profile fraud – an NBA referee who placed bets, through a friend, on games over which he officiated. He pled to conspiracy to commit wire fraud, and at issue in this decision was the amount of restitution he and his co-conspirators owed to his former employer. Similar to Judge Gold’s analysis in the Newsday decision, this case is a lengthy consideration of the relevant principles and complicated fact issues. Most notable is the court’s analysis of whether the restitution award should include losses for conduct that was not expressly part of the offense of conviction, but arguably encompassed within the offense of conviction under the “single conspiracy” rule. The court’s decision to apportion some of the restitution amount among the three defendants – which the court has the discretion to do – is also of note.
Yalincak (Lien on Future Assets)
Finally, in United States v. Yalincak, 3:05cr111 (JBA), 2008 WL 3833713 (D.Conn. August 14, 2008), in which a defendant sought to prevent the government from attaching his potential personal injury litigation recoveries, the court pointed out that under 18 U.S.C. § 3613(c) and (f), “an order of restitution” imposed on a defendant is considered “a lien in favor of the United States” on all of that person’s property rights which “arises on the entry of judgment and continues” for “at least twenty years,” during which time, “the Government can collect property already held by the Defendant and also any additional ‘substantial resources’ he receives, ‘including inheritance, settlement, or other judgment.’” 18 U.S.C. § 3664(n).
The multi-million dollar legal and forensic accounting fees incurred by companies investigating fraud perpetrated by their executives may be included in a restitution order under the Mandatory Victims Restitution Act (MVRA), the Second Circuit held in United States v. Amato, 06-5600-cr, 2008 WL 3876554 (2d Cir. August 21, 2008). The case is another reminder of how one’s criminal conduct can be the gift that goes on giving, long after any prison sentence or probation term has been served.
The holding is a simple one: the MVRA requires district courts to “reimburse the victim for lost income and necessary child care, transportation, and other expenses incurred during participation in the investigation or prosecution of the offense or attendance at proceedings related to the offense.” In Amato, the Court, following a Ninth Circuit case, held that the phrase “other expenses” may include attorney fees and accounting costs incurred by the victim in investigating and assisting the prosecution of the case. The “plain meaning of the statute” gave the district court “broad authority” to determine the victim’s expenses that may be included in a restitution order, as long as they met four statutory requirements: they were “necessary,” they were incurred in connection with the investigation or prosecution, they were incurred by a victim, and “they do not require unduly complicated determinations of fact.”
The Court sidestepped the issue of whether the expenses must also be the “direct and foreseeable result” of the defendant’s wrongful conduct, as required by the Ninth Circuit. “We need not formulate a precise test in the present case because – even assuming attorney fees and auditing costs must be a direct and foreseeable result of the offense – such a requirement was clearly met here . . . That this fraud would force the corporation to expend large sums of money on its own internal investigation as well as its participation in the government’s investigation and prosecution of defendants’ offenses is not surprising.”
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