### *The HONORABLE WILLIAM W. SCHWARZER, United State s

District Judge for the Northern District of California, sitting by designation.

__________________________________ Nos. 95-2694, 95-2778, and 95-2781

__________________________________ United States of America, * * Plaintiff - Appellee, * * v. * * Ferrell Travis Riley; Cheryll * S. Coon; Jack L. Brown, * * Defendants - Appellants, * * The Direct Holding Company, * Appeals from the United States d.b.a. Direct Data Processors; * District Court for the L.F.B. Insurance and * Western District of Missouri. Reinsurance, a division of * La Fenix Boliviana S.A. De * Seguros Y Reaseguros; National * and International Company; * Buffalo Lodge and Resorts * Management Company, Inc.; * Business First Entertainment, * * Intervenors - Appellants. *

___________ Submitted: December 13, 1995 Filed: March 11, 1996

___________ Before BOWMAN and LOKEN, Circuit Judges, and SCHWARZER, * District Judge.

___________ LOKEN, Circuit Judge.

A criminal defendant convicted of vi olating the Racketeer Influenced and Corrupt Organizations Act ("RICO") "shall forfeit"

### Meadowlark is a surplus lines insurer. M agnolia is a premium 1 

### finance company. M & M manages Meadowlark and other insurers

. Commercial Indemnity is Meadowlark's successor.
-2- his or her interests in the RICO enterprise, assets acquired in violation of the Ac t, and any proceeds of racketeering activity. 18 U.S.C. § 1963(a). After a RICO indictment, but prior to the defendant's conviction , the dis trict court may enter orders "to preserve the availability" o f pro perty subject to forfeiture. § 1963(d)(1). These appeals challeng e preconviction orders appointing a monitor, and l ater a receiver, to manage companies allegedly o wned or controlled by RICO defendants Ferrell Riley, Cheryll Coon, and Jack Brown. Appellants are these defendants plu s affected companies that were not named in the RICO indictment (th e "Intervenor Companies").
At oral argument, counsel for the go vernment could not identify what property is subject to forfeiture if defendants are convicted, could not refer us to record evidence establishing the extent of defendants ' interests in the affe cted companies, and could not reconcile the relevant statutory language with the preconviction restraints the government ha d obtain ed. Accordingly, we immediately issued an Order vacating th e district court's moni tor and receiver orders. We now explain the reasons underlying our disposition of these appeals.

I.

Count One of the November 16, 1994, indictment charged Riley, Coon, and Br own with violating RICO by using Meadowlark Insurance Company , Magnolia Acceptance C orporation, M & M Management Company, and Commercial Indemnity Assurance (the "Named Companies") as a n enterprise through which defendants bribed state officials and defrauded insurance regulators, a group health care insurance plan, anda podiatrists' association. At the 1 end of the lengthy

### Give n the plain language of § 1963(d)(1)(A), we questio n 2 

### whether a preconviction restraining order may affect property not fairl y encompassed within the forfeiture allegations of th e indictment, particularly given the forfeiture pleading requi rements of Fed . R. Crim. P. 7(c)(2). See United States v. Sarbello , 98 5 F.2d 716, 719-20 n.8 (3d Cir. 1993). However, as appellants have not raised that issue, we leave it for another day. -3- indictment, the government stated its "intent to forfeit . . . at least $2 8 million and all interests and proceeds traceable thereto, including but no t lim ited to real property, automobiles, bank accounts and persona l pr operty." An FBI agent later testified that $28 million is th e govern ment's estimate of the Named Companies' gross receipts during th e 1988 to 1992 period.

After the indictment issued, the government immediately applied for
an order restraining defendants from dissipating, encumbering, or disposin g of specific enumerated assets that the government alleged are subject to forfeiture -- real property, automobiles, and financial institutio n accounts. On November 21, 1994, the district co urt issued that order, and it la ter extended this restraint to additional enumerated financia l instit ution accounts. Defendants do not challenge these restraints o n appeal, and our prior order left them in place. 2
The government next moved for appointment of a monitor to exami ne the affairs of the Named Companies and the Intervenor Companies in order t o pre vent "dissipation of the restrained assets and/or the neglect of th e ongoing businesses." Following an evidentiary h earing, the district court issued orders appointing a monitor and granting the monitor broad powers to investigate the Named Companies and the Intervenor Companies, to accoun t for and take control of the funds of those companies, to require reports and information, and to disapprove broad categories of business activity, including routine insurance transactions.

### The government argues that these appeals are in large par t 3 

### untimely because they were not filed within the ten days pre scribed for com mencing a criminal appeal. See Fed. R. App. P. 4(b)

. Howeve r, Rule 4(a), which governs civil appeals, applies if th e orde r being appealed is "essentially a civil proceeding arisin g from a criminal one." United States v. Brown , 835 F.2d 176, 17 9 (8th Cir. 1987). The merits of a preconviction order restraining fo rfeitable assets are governed by the civil standards fo r tempor ary restraining orders and preliminary injunctions. Se e United States v. Lewis , 759 F.2d 1316, 1324-25 (8th Cir.), cert
. denied , 474 U.S. 994 (1985). And postconviction proceedings t o reco ver forfeited property are considered civil for purposes o f Rule 4, whether commenced by the criminal defendant or by a third party
. See United States v. Mosquera , 845 F.2d 1122, 1125 (1s t Ci r. 1988); United States v. Lavin , 942 F.2d 177, 181 (3d Cir

. 1991). We conclude that an order imposing preconviction res traints prior to forfeiture is, in substance, a civil proceeding fo r purposes of Rule 4. Therefore, these appeals are timely.
-4- On June 2 1, 1995, at the request of the monitor, the district court
conve rted the monitor to a receiver, giving him even broader powers o f invest igation plus total control over the day-to-day operations of th e Named Companies and the Intervenor Companies. Defendants and th e Intervenor Companies appeal these monitor and receiver orders. 3

II.

The lengthy monitor and receiver orders do not discuss th e relationship between the Named Companies, the Intervenor Companies, and th e specific assets that the district court initially restrained, or the exten t to wh ich assets of these companies might ultimately be subject to RIC O forfeiture. Nor do these orders discuss the statutory authority for the virtuall y unlimited powers granted to the monitor, and then to th e receiver, to manage the affairs of these companies, many of which ar e engage d in insurance businesses that are subject primarily to stat e regulation by reason of the McCarran-Ferguson Act, 15 U.S.C. § 1012(b).

### -5- Preconviction restraints are extreme measures. Before a precon viction restraint may issue, the government must demonstrate at a hearing that the RICO defendant is likely guilty and that the property to be restrained will be subject to criminal forfei ture. See Lewis , 759 F.2d at 1324. And the preconviction restraint order should include specifi c findings permitting an appellate court to determine whether the property restrained is subject to forfeiture. See In re Assets of Martin , 1 F.3d 1351, 1 361-62 (3d Cir. 1993). The government virtually ignored thes e procedura l safeguards in this case. A brief review of the relevan t statutes and the rather barren record on appeal reveals that serious error resulted.

We begin with the statute authorizing preconviction restraints, 1 8 U.S.C. § 1963(d)(1):

Upon application of the United States, the court may enter a restraining order or inj unction . . . or take any other action to preserve the availability of property described i n subsection (a) for forfeiture under this section -- (A) upon the filing of an indictment or informatio n cha rging a violation of section 1962 of this chapter an d alleging that the property with respect to which the order is sou ght would, in the event of conviction, be subject t o forfeiture under this section.

This provision was added to RICO in 1984 to give the court power "to assur e the av ailability of the property [subject to forfeiture] pendin g disposition of the cr iminal case." S. Rep. No. 225, 98th Cong., 2d Sess. 204, reprinted in 1984 U.S.C.C.A.N. 3182, 3387. Appellants concede that the t erm "any other action" in § 1963(d)(1) includes the discretion t o appoint a monitor or receiver when appropriate. However, these types of preconviction restraints are "strong medicine an d should not be used where
measures that are adequate and less burdensome" are available. Unite d States v. Regan , 858 F.2d 115, 121 (2d Cir. 1988). Cf. Aviation Suppl y Corp. v. R.S.B.I. Aerospace, Inc. , 999 F.2d 314, 316-17 (8th Cir. 1993).

### -6- Preco nviction restraints may only be used to preserve th e availability of property subject to forfeiture under § 1963(a), that is:

(1) any interest the [RICO violator] has acquired o r maintained in violation of section 1962; (2) any-- (A) interest in; (B) security of; (C) claim against; or (D) property or contractual right of any kind affording a source of influence over;
any en terprise which the [RICO violator] has established , operated, controlled, conducted, or participated inthe conduct of, in violation of section 1962; and (3) any property constituting, or derived from, an y proce eds which the [RICO violator] obtained, directly o r ind irectly, from racketeering activity or unlawful deb t collection in violation of section 1962.

In this case, the government never identified what assets of th e Named Companies and the Intervenor Companies are subject to forfeitur e under § 1963(a). Und er § 1963(a), only defendants' interests in the RICO enterprise and the proceeds from their racketeering activity are subject to forfeiture. Though the indictment alleged th at the Named Companies are
an enterprise through which defendants conducted their racketeerin g acti vities, an allegation that an enterprise was used to commit RIC O violat ions is not enough to make the enterprise forfeitable, onl y defendants' interests in that enterprise. RICO's criminal forfeiture is
an in personam

remedy to punish the RICO defenda nts. See United States v. Conner , 752 F.2d 566, 576 (11th Cir. 1985). It does not permit th e gove rnment to seize control of an enterprise that defendants used t o accomplish their racketeering.

The government's allegation in the indictment that it intends t o forfeit "at least $28 million" does not cure this deficiency.

### -7-

The $ 28 million is the estimated total receipts of the Named Companie s during the course of defendants' alleged RICO conspiracy. These revenues
are not forfeitable under the "proceeds" provision of § 1963(a)(3). "[T]h e statute s ays that it is the proceeds received by the defendants, not b y the ir enterprise, that are forfeitable." United States v. Masters , 92 4 F.2d 13 62, 1370 (7th Cir.), cert. denied , 500 U.S. 919 and 502 U.S. 82 3 (1991). See United States v. Olson , 22 F.3d 783, 785 (8th Cir.), cert
. denie d , 115 S. Ct. 320 (1994) (bank officers' salaries and bonuses ar e subj ect to forfeiture, not the bank depositors' funds). Even if th e govern ment had included the Named Companies as RICO defendants, it s assertion that $28 million is subject to forfeiture would be absurd. A corporate defendant's racketeering "proceeds" are subject to forfeiture. However, while Congre ss used that term to spare the government the burden of proving net profits, see S. Rep. No. 225 at 199, 1984 U.S.S.C.A.N. at 3382, "p roceeds" means something less than the gross receipts of a defendant's insurance business because an insurer's gross receipts would include , for example, amounts needed to pay policyholder claims. Se e Masters , 924 F.2d at 1370; United States v. Lizza Indus., Inc. , 775 F.2d 492, 497-98 (2d Cir. 1985), cert. denied , 475 U.S. 1082 (1986).
Finally, the government failed to explain how assets of th e Intervenor Companies could be subject to forfeiture. The government argue d that defendants own or control the Intervenor Companies and that defendant s have commingled assets of the Named Companies and the Intervenor Companies

. But the statute does not authorize preconviction restraints on substitute assets. See United S tates v. Field , 62 F.3d 246, 248-49 (8th Cir. 1995). Thus, the conclusory testimony of the government investigators fell fa r short of the showing needed to impose a preconviction monitor or

### After conviction, substitute assets may be forfeited in the 4 

### ci rcumstances described in § 1963(m). Some circuits therefor e permit preconviction restraints on substitute assets. But thos e cou rts require a showing that assets forfeitable under § 1963(a ) are unavailable, a showing the government did not make in thi s case. See In re Billman , 915 F.2d 916 (4th Cir. 1990), cert
. denied , 500 U.S. 952 (1991).
See 15 U.S.C. § 1012(b). Obviously, the federal government 5 

### may prosecute mail and wire fraud committed upon state insuranc e regul ators, and other criminal exploitation of an insuranc e company. See, e.g. , United States v. Sylvanus , 192 F.2d 96, 10 0 (7th Cir. 1951), cert. denied , 342 U.S. 943 (1952) (mail fraud) ; United States v. Cavin , 39 F.3d 1299, 1305 (5th Cir. 1994) (fraud on regulators and policyholders). But in our view, the crimina l forfeiture of policyholder premiums, either without regard to the pay ment of insurance claims, or with the assertion of federa l authority to decide which claims to pay, runs a significant risk of conflict with the McCarran-Fer guson Act's grant of primary control over the business of insurance to the States. -8- receiver on the activities of companies that were not even named in th e indictment. 4

We are also concerned that the powers assumed by the monitor an d recei ver exceeded the statutory authority for preconviction restraints

. The government initially requested appointment o f a monitor in response to defendants' request t hat the specific initial restraints be relaxed so as to permit the payment of insurance claims. The government explained that
a monitor was needed in part to prevent "the neglect of the ongoin g busin esses." This position appears to reflect a belief that RIC O prosecutors are the proper persons to run defend ants' insurance businesses and to determine which insurance claimants and creditors should be paid. They are not. Insurance regulation is the prerogative of the St ates. And 5 if it were not, feder al bankruptcy law would provide the proper forum for distrib uting the inadequate assets of defendants' failed or neglecte d busine sses. RICO provides only an in personamforfeiture remedy , permitting preconviction restraint and postconviction seizure o f defend ants' ownership interests in, and any proceeds they have draine d from, the RICO enterprise. The

### -9-

government here seemingly lost sight of this statutory limit on it s authority.

III.

For the f oregoing reasons, we have vacated the monitor and receiver portio ns of the district court's preconviction restraint orders. O n appeal, appellants further argue that the monitor's investigatory powers afforded the prosecution an improper discovery and evidence-gathering tool , and violated the Inte rvenor Companies' Fourth Amendment rights. Although the se are legitimate concerns, we are satisfied that the district cour t properly took them into account, and we reject these contentions.

This o pinion finally disposes of these appeals. Our orders o f December 22, 1995, an d January 16, 1996, remain in effect. The remainder of our mandate shall issue forthwith.

A true copy.

Attest:

CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.