Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_04-cv-03642/USCOURTS-cand-3_04-cv-03642-1/pdf.json

Nature of Suit Code: 690
Nature of Suit: Other Forfeiture and Penalty Suits
Cause of Action: 28:1345 Complaint for Forfeiture

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United States District Court

For the Northern District of California

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United States District Court

For the Northern District of California

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

UNITED STATES OF AMERICA,

Plaintiff,

v

ALL FUNDS, INCLUDING CASH AND

SECURITIES, LESS MARGIN,

CONTAINED IN THE SMITH BARNEY

BROKERAGE ACCOUNT NO 428-79380-15

HELD IN THE NAME OF DYKE LIMITED,

Defendant.

 /

No C 04-3642 VRW

ORDER

The government moves for default judgment in this civil

forfeiture action. Mot Def Judg (Doc #22). Because the court

found this matter could be determined without oral argument, the

scheduled hearing date was VACATED. See Civ LR 7-1(b). For the

reasons set forth below, the court GRANTS the government’s motion.

I

This civil forfeiture of all funds in a Smith Barney

brokerage account (No 428-79380-15) (“account 428”) arises from a

Case 3:04-cv-03642-VRW Document 26 Filed 10/27/05 Page 1 of 10
United States District Court

For the Northern District of California

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fraudulent scheme by Oliver Hilsenrath (“Hilsenrath”) and David

Klarman (“Klarman”), executive officers at US Wireless, Inc (“US

Wireless”), to defraud the company’s investors by unlawfully using

their positions to issue shares of stock. Complaint (Doc #1) at 1

¶ 3, 2 ¶¶ 6-8. Account 428 is held in the name of Dyke Limited, an

offshore corporation. Id at 7 ¶ 33. The government filed a

complaint under 18 USC § 981 for forfeiture of all funds in the

account, which allegedly received proceeds traceable to the

officers’ fraudulent actions. The government then moved for

default judgment against Dyke Limited’s funds because Dyke Limited

did not answer the complaint.

The government’s complaint traces how the proceeds from

the alleged fraud were transferred to account 428. According to

the complaint, Hilsenrath and Klarman allegedly co-signed letters

directing three separate issues of stock certificates to various

offshore shell corporations under their control during the summer

of 1999. Id at 2 ¶ 8. The three transfers of US Wireless shares

apparently were made without adequate consideration for services

rendered and, in two instances, were made to non-employees under

the guise of an Employee Stock Purchase Plan. Id at 3-4 ¶ 14, 5 ¶

20, 5-6 ¶ 24. Additionally, Klarman, while acting as general

counsel, allowed trading restrictions for some stocks to be removed

by writing an opinion letter falsely asserting that the

shareholding company was unaffiliated with US Wireless and had held

the shares for more than two years. Id at 4 ¶ 16. He also

concealed that other stock was tainted by directing the change of

the registered owner on the stock certificate. Id at 5 ¶ 21.

//

Case 3:04-cv-03642-VRW Document 26 Filed 10/27/05 Page 2 of 10
United States District Court

For the Northern District of California

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Hilsenrath and Klarman allegedly stole at least 174,616

shares of US Wireless stock under this scheme, which they later

sold to generate gross proceeds of approximately $5,165,063. Id at

6 ¶ 29, 7 ¶¶ 30,32. According to the complaint, some of the

proceeds were then transferred on April 3, 2001, to account 428

held by Dyke Limited. Id at 7 ¶ 31.

Dyke Limited’s principal shareholder or partner is David

Dahan (“Dahan”). Id at 7-8 ¶ 33. David Dahan and another

investor, Haim Haruvi (“Haruvi”), raised money for American Toys, a

corporation that later evolved into US Wireless. Id. Dahan and

Haruvi allegedly knew about Klarman and Hilsenrath’s fraudulent

activity and demanded a portion of their ill-gotten gains in

exchange for not reporting the transactions to the Securities and

Exchange Commission. Id. On April 3, 2001, approximately $880,397

was transferred by wire from two offshore accounts, which were used

for the receipt and sales of US Wireless stock, to account 428. Id

at 7 ¶¶ 31,32.

An audit committee of US Wireless’s board of directors

investigated Hilsenrath and Klarman’s suspicious stock

transactions. Id at 8 ¶ 34. On May 26, 2001, the committee

concluded that Hilsenrath and Klarman worked together to pay

offshore entities excessive compensation via wire transfers of

cash, stock and stock options. Id. In December 2003, Klarman pled

guilty to federal mail fraud and money laundering charges arising

from this scheme. Id at 8 ¶ 35. On January 15, 2004, Hilsenrath

was charged with securities fraud for participating in the scheme. 

Id. Currently, both cases are pending in this district before

Judge William H. Alsup. Id.

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United States District Court

For the Northern District of California

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On August 27, 2004, the government filed a complaint for

forfeiture of all funds contained in account 428. Doc #1. The

government alleged the funds in the account constituted or were

derived from proceeds traceable to Hilsenrath and Klarman’s

fraudulent sales of securities and money laundering transactions,

and hence subject to forfeiture under 18 USC §§ 981(a)(1)(A) and

(C). Id at 9 ¶ 42.

On September 23, 2004, the government served claimant

Liquidating Trust of US Wireless Corporation, Wireless Location

Services, Inc and Wireless Location Technologies, Inc (“Liquidating

Trust”), through its attorney, Jennifer Scoliard, a copy of the

notice of forfeiture action and the complaint. Doc #4. 

Liquidating Trust was created on June 25, 2003, under an order from

the United States Bankruptcy Court for the District of Delaware

stating that all of US Wireless’s assets were to be transferred to

the trust. Doc #6 at 5 ¶¶ 19,20. On October 26, 2004, Liquidating

Trust filed a verified statement of interest to the defendant

funds. Doc #6. 

On October 1, 2004, the government served Dyke Limited

through its attorney, Eric Krebs, a copy of the notice of

forfeiture action and the complaint. Doc #5; Decl Stephanie M.

Hinds (Hinds Decl; Doc #16, Ex 1) at 2 ¶ 3. On November 4, 11 and

18, 2004, notice of the forfeiture action was published in the

Recorder, a San Francisco daily legal newspaper. Doc #11; Hinds

Decl at 2 ¶ 4. On November 4, 2004, Dyke Limited filed a verified

statement of interest to the defendant funds. Doc #8.

Dyke Limited then sought and obtained an extension to

file its answer from November 24, 2004, until December 24, 2004. 

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United States District Court

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Hinds Decl at 2 ¶ 5, Exh A. In about late December 2004, counsel

for Dyke Limited informed the government that the company would no

longer pursue its claim to the defendant funds. Hinds Decl at 2

¶ 6. The government subsequently informed the court and

Liquidating Trust regarding Dyke Limited’s decision to withdraw its

claim in a joint case management statement filed on February 17,

2005. Doc #14 at 2. Although counsel for Dyke Limited was served

with the statement and notice of the conference, Dyke Limited did

not attend the case management conference on February 22, 2005. 

Hinds Decl at 2 ¶ 6. According to the government, a few weeks

later Dyke Limited’s counsel advised the government that it had

changed its mind and intended to file an answer. Mot Def Judg at

4:10-12. To date, Dyke Limited has not filed an answer to the

government’s complaint.

 The government filed a motion for entry of default

against Dyke Limited on March 25, 2005, which was electronically

served on Dyke Limited through its attorney. Doc #16. The motion

was initially denied by the clerk on April 11, 2005. Doc #17. On

April 27, 2005, Liquidating Trust, the other party with an interest

in the defendant funds, agreed to settle with the government in

consideration for the government distributing the balance of the

funds in account 428 to them. Doc #18 at 2:11-12. On April 28,

2005, the court granted the government’s renewed motion for entry

of default against Dyke Limited because it had failed an answer in

a timely fashion. Doc #19. The court clerk then entered default

on May 2, 2005. Doc #20. On June 23, 2005, the government filed a

motion for default judgment against Dyke Limited’s interest in the

defendant funds and securities. Mot Def Judg.

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II

The court first examines whether the clerk’s entry of

default on May 2, 2005, was proper. The Supplemental Rules for

Certain Admiralty and Maritime Claims (Supp Rules) govern in rem

forfeiture proceedings. United States v Real Property at 2659

Roundhill Drive, 283 F3d 1146, 1149 n2 (9th Cir 2002). Under

Admiralty Local Rule (Admir LR) 6-2, default may be entered upon a

showing that:

(a) Notice has been given as required by Admir LR 6-1;

(b) The time to answer has expired, and 

(c) No one has filed a verified statement of right or

interest in the property.

Admir LR 6-2. The court finds that the government has met all of

these requirements.

First, Admir LR 6-2(a) provides that notice must be given

as required by Admir LR 6-1, which states:

(1) By publication as required in FRCP Supp (C)(4);

(2) By service upon the master or other person having custody

of the property; and 

(3) By service under FRCP 5(b) upon every other person who has

not appeared in the action and is known to have an interest in

the property.

Admir LR 6-1. Here, the government published notice of the

forfeiture action in the Recorder for three consecutive weeks

beginning on November 4, 2004. Hinds Decl at 2 ¶ 4. Additionally,

on October 1, 2004, the government served Dyke Limited, holder of

account 428, through its attorney. Doc #5. This service involved

mailing a certified copy of the complaint to the corporation’s last

known address, which is authorized under FRCP 5(b)(2)(B). Doc #5;

Hinds Decl at 2 ¶ 3. Finally, on September 23, 2004, the

government served Liquidated Trust because the government knew the

trust had an interest in the property. Doc #4. Accordingly, the

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court finds that the government has satisfied the notice

requirements of Admir LR 6-1.

Second, the time to answer the government’s complaint has

expired. In its statement of interest filed on November 4, 2004,

Dyke Limited specifically indicated that its claim was not an

answer and it would “file its [a]nswer no later than 20 days after

the filing of this statement of interest or right (claim).” Doc #8

at 1 n1. Under Supp Rule C(6)(a)(iii), “a person who files a

statement of interest in or right against the property must serve

and file an answer within 20 days after filing the statement.” 

Although this court can extend the time to file an answer or claim,

the Ninth Circuit has held “the court's discretion is not

unbounded. It should only exercise its discretion to grant

additional time where the goals underlying the time restriction and

the verification requirement are not thwarted.” United States v

1982 Yukon Delta Houseboat, 774 F2d 1432, 1436 (9th Cir 1985). And

most courts seem to require strict compliance to Supp Rule C. “In

order to have standing to challenge a forfeiture, a claimant must

strictly comply with the pleading requirements of Supplemental Rule

C(6).” United States v $288,914 in United States Currency, 722 F

Supp 267, 270 (ED La 1989); see also United States v Currency

$267,961.07, 916 F2d 1104, 1108 (6th Cir 1990).

Dyke Limited did not file an answer before the November

24, 2004, deadline but sought and received an extension to file

until December 24, 2004. Hinds Decl at 2 ¶ 5, Exh A. Then, in

late December 2004, Dyke Limited’s counsel informed the government

that the corporation would no longer pursue its claim to the

defendant funds. Hinds Decl at 2 ¶ 6. In the ten months that have

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passed since Dyke Limited filed its statement of interest, it has

not answered the complaint. Accordingly, the time to file an

answer has long since passed and to further continue this action

would thwart the goals underlying Supp Rule 6(C).

Third, entry for default is proper if no other parties

have filed a statement of interest in the property. Admir LR 6-

2(c). Dyke Limited’s verified statement of interest to the

defendant funds is not valid because it was filed beyond the

required deadline. Such claims must be filed within 30 days “after

the earlier of (1) the date of service of the Government’s

complaint or (2) completed publication of notice under Rule C(4).” 

Supp Rule C(6)(a)(i)(A). Alternatively, Supp Rule C(6)(a)(i)(B)

allows the court to determine a time in which a claim may be filed.

Although the government served Dyke Limited on October 1, 2004,

Dyke Limited did not file its claim until November 4, 2004. Doc ##

5, 8. Hence, Dyke Limited did not file a claim of interest within

the 30 day deadline following service and its claim should be

barred under the strict compliance standard of Supp Rule C.

Even if Dyke Limited’s untimely statement of interest is

accepted, an entry of default is appropriate because Dyke Limited’s

attorney told the government that it did not want to pursue its

claim of interest in December 2004. Hinds Decl at 2 ¶ 6. Dyke

Limited’s failure to file an answer is consistent with its

statement to the government. Accordingly, Dyke Limited’s claim no

longer carries any weight.

Additionally, Liquidating Trust’s verified statement of

interest to the defendant funds presently does not bar entry of

default. Although Liquidating Trust’s verified statement of

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interest did bar the government’s initial motion for entry of

default on March 25, 2005, a subsequent agreement removed this

impediment. On April 27, 2005, Liquidating Trust agreed to settle

in consideration for the government distributing the balance of the

defendant funds to Liquidating Trust, and the parties have in fact

since settled. Doc #18 at 2:11-12; Doc #25. Because no other

valid statement of interest was pending, the court properly

directed the clerk to enter default against Dyke Limited on April

28, 2005. Doc #19.

III

Default judgment may be entered in accordance with FRCP

55(b) any time after default has been entered. Admir LR 6-2. FRCP

55(b) requires that if a party fighting default judgment has

appeared in an action, then the party shall be served written

notice of the application of judgment at least three days prior to

the hearing. Here, the government filed its motion for default

judgment on June 23, 2005, and electronically served Dyke Limited’s

attorney with written notice of the default judgment on that date. 

Mot Def Judg at 6. Additionally, Dyke Limited’s attorney was sent

two additional electronic notices from the court clerk, on July 5,

2005, and July 22, 2005, because of continuances in the default

judgment hearing. Doc ## 23, 24. In summary, Dyke Limited was

properly served with written notice and given more than adequate

time to prepare and respond for the default judgment hearing.

Despite having over two months to prepare, Dyke Limited

has not filed a timely opposition to this motion. See Civ LR 7-3

(requiring that a party file its opposition or statement of

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nonopposition no later than 21 days before the hearing date). 

Because Dyke Limited has not answered the government’s complaint,

nor opposed any of the government’s motions, the court sees no

reason to delay ruling on this matter any further. Additionally,

the court finds that the verification of the complaint signed by

FBI Special Agent Lori Johnston satisfies the government’s initial

burden of showing probable cause to believe that the funds in

account 428 are traceable to Hilsenrath and Klarman’s fraud against

US Wireless.

IV

For the foregoing reasons, the court GRANTS the

government’s motion for default judgment. The clerk is directed to

close the file, terminate all pending motions and vacate all

scheduled hearing dates.

IT IS SO ORDERED.

 

VAUGHN R WALKER

United States District Judge

Case 3:04-cv-03642-VRW Document 26 Filed 10/27/05 Page 10 of 10