12-2383-cr United States v. Walsh **UNITED STATES COURT OF APPEALS** 1 2 **FOR THE SECOND CIRCUIT** 3 4 August Term, 2012 5 6 7 (Argued: March 18, 2013 Decided: April 2, 2013) 8 9 Docket No. 12-2383-cr 10 11 - - - - - - - - - - - - - - - - - - - -x 12 13 UNITED STATES OF AMERICA, 14 15 Appellee , 16 17 - v.- 18 19 STEPHEN WALSH, 20 21 Defendant-Appellant

. 22 23 - - - - - - - - - - - - - - - - - - - -x 24 25 Before: JACOBS, Chief Judge , CABRANES and WESLEY, 26 Circuit Judges

. 27 28 In this criminal case, Defendant Stephen Walsh appeals 29 from an order of the United States District Court for the 30 Southern District of New York (Cedarbaum, J. ) denying his 31 motion to release assets frozen in a parallel civil 32 enforcement action. Walsh, charged with fraud, seeks 33 release of the proceeds from the sale of his house. Walsh 34 obtained the house from his wife in a divorce settlement in 35 which his wife received (inter alia ) a $12.5 million 36distributive award, $6 million of which was paid using funds 1 traceable to Walsh’s fraud. The district court properly 2 applied the tracing analysis from United States v. Banco 3 Cafetero Panama , 797 F.2d 1154 (2d Cir. 1986). We affirm. 4 5 MARK A. FLESSNER, Holland & 6 Knight LLP, Chicago, Illinois, 7 for Defendant-Appellant

. 8 9 JOHN J. O’DONNELL, (Iris Lan, on 10 the brief ), forPreet Bharara, 11 United States Attorney for the 12 Southern District of New York, 13 for Appellee

. 14 15 DENNIS JACOBS, Chief Judge : 16 Stephen Walsh, defendant in this criminal fraud case, 17 appeals from an order of the United States District Court 18 for the Southern District of New York (Cedarbaum, J. ) 19 denying his motion to release $3.7 million in assets that 20 were frozen in a parallel civil enforcement action. Walsh 21 seeks to use those funds for his defense. Walsh and his 22 wife had purchased a house in her name using funds unrelated 23 to the alleged fraud. Pursuant to a divorce settlement, 24 Walsh received title to the house and gave his wife (inter 25 alia) a $12.5 million distributive award, at least $6 26 million of which was directly traceable to Walsh’s alleged 27 fraud. 28

2After a hearing conducted pursuant to United States v. 1
Monsanto , 924 F.2d 1186 (2d Cir. 1991) (in banc), the 2 district court concluded that the $3.7 million at issue was 3 “traceable” to the fraud. Walsh does not contest the 4 underlying finding that there was probable cause to believe 5 that Walsh committed the fraud. But he does challenge the 6 finding that there was probable cause to believe that, after 7 the divorce settlement, the house became traceable to the 8 proceeds from the fraud. 9 He argues that the “tracing fiction” used by the 10 district court is inapplicable to his situation. He also 11 argues that the district court erred at the Monsantohearing 12 by admitting hearsay testimony from the FBI agent who 13 investigated the fraud and by quashing Walsh’s subpoenas. 14 For the following reasons, we affirm. 15 16

**I** 17 In 1983, the Walshes bought a house on Arden Lane in 18 Sands Point for $900,000 and renovated it over the next 19 several years at a cost of more than $2 million. In 1999, 20 they sold the property in parcels for a total of $4.135 21 million. That same day, they applied most of the proceeds 22

3to the $3.15 million purchase of another Sands Point house, 1 on Half Moon Lane (the “Half Moon House” or the “House”). 2 The title of the House remained in Walsh’s wife’s name alone 3 until the divorce in 2006. 4 In November 2006, the Walshes entered into a 5 Stipulation and Settlement and Agreement (“Divorce 6 Agreement”) that divided their assets and resolved all 7 future claims for maintenance and/or an equitable 8 distribution award. Walsh received title to the Half Moon 9 House, as well as cars, certain bank accounts, and the 10 business interests that were involved in the alleged fraud. 11 His wife got condominiums in Florida and New York, cars, 12 bank and securities accounts and life insurance policies, 13 and a distributive award1of $12.5 million. At the time of 14 Walsh’s indictment, the only asset of substantial value he 15 owned was the Half Moon House. 16

1 Under New York law, a “distributive award” is a “payment[] provided for in a valid agreement between the parties . . . in lieu of or to supplement, facilitate or effectuate the division or distribution of property where authorized in a matrimonial action, and payable either in a lump sum or over a period of time in fixed amounts.” N.Y. Dom. Rel. Law § 236(B)(1)(b). 4Walsh made payments to his wife pursuant to the Divorce 1 Agreement using the proceeds of the fraudulent scheme. 2The 2 district court found that, all told, Walsh transferred at 3 least $6 million of proceeds of the scheme to his wife, 4 including the $3 million New York condominium acquired in 5 her name prior to the divorce. 6 Walsh does not contest these findings on appeal. 7 8

**II** 9 On February 24, 2009, the government filed a criminal 10 complaint against Walsh and codefendant Paul Greenwood 11 alleging an investment fraud that began around 1996. The 12 next day, the CFTC and SEC filed civil actions alleging the 13 same conduct against Walsh, Greenwood, and their various 14 entities. That same day, Judge Daniels, who was presiding 15

2 In a related case, the New York Court of Appeals answered a certified question from this Court and determined that “where the innocent spouse and matrimonial court are unaware of the tainted nature of particular assets, distribution of marital assets under Domestic Relations Law § 236 . . . would become unworkable, particularly where the illegal activity of one spouse is not revealed for a number of years subsequent to the divorce, as occurred in this particular case.” Comodity Futures Trading Comm’n v. Walsh, 927 N.Y.3d 162, 173-74 (2011). Thus, although the proceeds of the fraud are clearly reachable as to Walsh’s property, they are not as to that of his ex-wife. 5over the civil case, granted the government’s motion for a 1 preliminary injunction seizing Walsh’s assets. 2 Walsh and Greenwood were indicted on July 24, 2009, and 3 Walsh pled not guilty a week later. 4 In December 2009, Walsh moved to unfreeze the Half Moon 5 House to finance his defense in the criminal case. Judges 6 Daniels and Cedarbaum jointly heard oral argument on the 7 motion and ruled in February 2010 that Walsh was entitled to 8 $900,000--the purchase price of the house on Arden Lane. 9 The decision was without prejudice to Walsh’s ability to 10 seek additional funding. 11 In March 2011, the receiver sold the Half Moon House 12 for approximately $3.7 million. Walsh thereafter moved to 13 have the remaining portion of the sale price released to pay 14 for his criminal defense. The parties agreed to hold a 15
Monsantohearing. The government advised the court that its 16 only witness would be FBI Agent Barnacle, who had 17 investigated the fraud. 18 Walsh subpoenaed two fact witnesses: his codefendant 19 Greenwood, and Deborah Duffy, a partner at one of the 20 entities involved in the fraud. Walsh also subpoenaed Brick 21 Kane, the Chief Operating Officer of the court-appointed 22

6receiver in charge of selling the Half Moon House. The 1 court granted the government’s motion to quash all three 2 subpoenas, on the ground “that the defendants seek . . . to 3 hold a wholesale dress rehearsal of the trial by subpoenaing 4 the principal cooperating witnesses of the government.” 5 Telephone Conference Tr. 2, Apr. 15, 2011. 6 At the Monsantohearing, held over three days in May 7 and June 2011. Agent Barnacle recounted what Greenberg and 8 Duffy told him about the fraudulent scheme and set out the 9 transactional history of the Half Moon House. The 10 government introduced documents relating to the fraud and to 11 the source of the assets. 12 Judge Cedarbaum denied the motion to unfreeze the 13 remaining proceeds from the sale of the Half Moon House in 14 May 2012, finding probable cause to believe (1) that Walsh 15 perpetrated the scheme, and (2) that the proceeds from the 16 sale of the Half Moon House were traceable to the profits 17 from the scheme. 18 19

**III** 20 “In order to seize property . . . , the government must 21 demonstrate that there was probable cause to believe that 22

7the property is subject to forfeiture.” In re Seizure of 1 All Funds in Accounts in Names Registry Pub. Inc. , 68 F.3d 2 577, 580 (2d Cir. 1995). “The findings supporting a 3 district court’s determination as to probable cause are 4 reviewed for clear error, but the determination itself is a 5 conclusion of law reviewed de novo .” Id. ; accordUnited 6 States v. Holder , 990 F.2d 1327, 1328 (D.C. Cir. 1993). 7 Since Walsh does not contest any factual findings, but 8 instead argues that the district court made an error of law 9 in applying the tracing fictions from United States v. Banco 10 Cafetero Panama , 797 F.2d 1154 (2d Cir. 1986), to this case, 11 we review the district court’s decision de novo

. 12 Part of the Sixth Amendment’s guarantee of the right to 13 counsel is “the right of a defendant who does not require 14 appointed counsel to choose who will represent him.” United 15 States v. Gonzalez-Lopez , 548 U.S. 140, 144 (2006). 16 Nevertheless, a defendant may not use the proceeds of a 17 fraud to fund his criminal defense: “A defendant has no 18 Sixth Amendment right to spend another person’s money for 19 services rendered by an attorney, even if those funds are 20 the only way that that defendant will be able to retain the 21

8attorney of his choice.” Caplin & Drysdale, Chartered v. 1 United States , 491 U.S. 617, 626 (1989). 2 “[T]he [F]ifth and [S]ixth [A]mendments, considered in 3 combination, require an adversary, post-restraint, pretrial 4 hearing as to probable cause that (a) the defendant 5 committed crimes that provide a basis for forfeiture, and 6 (b) the properties specified as forfeitable in the 7 indictment are properly forfeitable.” United States v. 8
Monsanto , 924 F.2d 1186, 1203 (2d Cir. 1991) (in banc). The 9 issue in this appeal is whether there was probable cause to 10 believe that the proceeds from the sale of the Half Moon 11 House were traceable to the proceeds of the fraud--i.e. , 12 that they were “another person’s money.” 3Caplin, 491 U.S. 13 at 626. 14 The Walshes purchased the Half Moon House with funds 15 that were not traceable to the fraud, and the title was put 16 in then-Mrs. Walsh’s name alone. But Walsh ultimately 17 acquired the house pursuant to the Divorce Agreement in 18 exchange for, inter alia , a $12.5 million distributive 19

3 We need not decide whether a Monsantohearing is necessary in a case such as this where the government seized the assets in a parallel civil case, since we affirm the district court’s decision within the Monsantoframework. 9award, of which at least $6 million consisted of funds 1 directly traceable to the fraud. 2 When some funds in a seized bank account are traceable 3 to criminal activity and some are not, we consult Banco 4 Cafetero , 797 F.2d 1154. We have three “accounting choices” 5 at our disposal to determine what amount of commingled funds 6 are traceable to criminal activity. Of relevance here is 7 the “drugs-in, first-out” approach, which “consider[s] 8 ‘traceable proceeds’ to be any one withdrawal, or any asset 9 purchased with such withdrawal, to the extent of” the amount 10 of the deposited tainted funds. Id.at 1159. Applying that 11 approach, the district court analogized the sale proceeds of 12 the Half Moon House “to a withdrawal from a commingled 13 account, i.e. , the marital estate.” United States v. 14 Greenwood, 865 F. Supp. 2d 444, 450 (S.D.N.Y. 2012). 15 We conclude that the district court’s application of 16 Banco Cafeterowas proper. Walsh negotiated to get the Half 17 Moon House and to keep his (now worthless) business 18 interests in exchange for the $12.5 million distributive 19 award. Although the House itself is not a fungible asset, 20 it was “an asset purchased with” the tainted funds from the 21 marital estate, by operation of the Divorce Agreement. See 22

10Banco Cafetero , 797 F.2d at 1159. Since Walsh’s total 1 assets did not exceed $6 million at the time of his arrest, 2 under Banco Cafetero ’s “drugs-in, first-out” approach, all 3 of his assets are traceable to the fraud. 4 Walsh argues that he had a preexisting right to the 5 Half Moon House under New York’s 1980 Equitable Distribution 6 Law and that he therefore did not “purchase” the House in 7 the Divorce Agreement. This argument ignores New York 8 Domestic Relations Law section 236(B)(3), which allows 9 parties to opt out of equitable distribution in favor of a 10 negotiated settlement, which is what the Walshes did. The 11 analysis might differ if the marital estate had been 12 distributed according to a court order under New York 13 Domestic Relations Law section 236(B)(5). We need not 14 address that hypothetical, however, because Walsh freely 15 negotiated title to the House in exchange for at least $6 16 million in funds traceable to the fraud. Accordingly, the 17 district court properly applied Banco Cafetero

. 18 19

**IV** 20 Walsh argues that the district court made two related 21 erroneous evidentiary rulings at the Monsantohearing: (1) 22

11admitting Agent Barnacle’s hearsay testimony; and (2) 1 quashing Walsh’s subpoenas. For the reasons that follow, we 2 reject both arguments. 3 4

**A** 5 The admissibility of hearsay at a Monsantohearing is a 6 question of law that we review de novo . See generally 7 United States v. Ferguson, 676 F.3d 260, 285-86 (2d Cir. 8 2011) (reviewing hearsay decision de novo ). 9 In order to “preclud[e] unwarranted exposure of 10 government witnesses,” Monsantopermits a “court [to] 11 receive and consider at such a hearing evidence and 12 information that would be inadmissible under the Federal 13 Rules of Evidence.” 924 F.2d at 1198, 1203. Although Walsh 14 argues that Monsanto ’s evidentiary rule should be limited to 15 cases where witnesses may be in physical danger--such as 16 those involving drugs4--we are persuaded by district court 17 opinions in this Circuit applying Monsanto ’s evidentiary 18

4 Monsantoinvolved a seizure pursuant to 21 U.S.C. § 853(e)(3), a drug statute. There is no analogous statute in this case; the government froze Walsh’s assets in the related civil case under the court’s equity powers granted to it by Section 22(a) of the 1933 Securities Act, 15 U.S.C. § 77v(a), and Section 27 of the 1934 Securities Exchange Act, 15 U.S.C. § 78aa. SeeSEC v. Manor Nursing Ctrs., Inc. , 458 F.2d 1082, 1103 (2d Cir. 1972). 12rule to non-drug cases. E.g. , United States v. All Funds on 1 Deposit in any Account at Certain Fin. Insts. Held in the 2 Names of Certain Individuals , 767 F. Supp. 36, 42 (E.D.N.Y. 3 1991) (Spatt, J. ); see alsoUnited States v. Clarkson Auto 4 Elec., Inc. , No. 10-CR-6111CJS, 2012 WL 345911, at *1 n.4 5 (W.D.N.Y. Feb. 1, 2012) (Payson, M.J. ). The unwarranted 6 exposure of government witnesses was a valid consideration 7 in this case, to avoid what the district court called a 8 “dress rehearsal” of the trial. In any event, the Monsanto 9 hearing involved only a finding of probable cause, and “[a] 10 finding of probable cause may be based on hearsay.” United 11
States v. Daccarett , 6 F.3d 37, 56 (2d Cir. 1993). 12 13

**B** 14 We review the quashing of a subpoena for abuse of 15 discretion. SeeArista Records, LLC v. Doe 3 , 604 F.3d 110, 16 117 (2d Cir. 2010). The same consideration that justifies 17 receipt of hearsay evidence in a Monsantohearing 18 (unwarranted exposure of witnesses) supports the district 19 court’s exercise of discretion to quash the subpoenas of two 20 fact witnesses: Greenwood and Duffy. Walsh argues that his 21 right to an “adversary proceeding” should be weighed against 22

13the government’s interest in protecting its witnesses, and 1 argues that his is the greater interest. But Monsantohas 2 already decided, when the government has an interest in 3 preventing the “unwarranted exposure” of its witnesses, that 4 interest tends to outweigh a defendant’s right to cross5 examine those witnesses before the trial. See924 F.2d at 6 1195-98. 7 The subpoena served on the receiver raises no risk of 8 “unwarranted exposure of government witnesses,” but in any 9 event, the district court did not consider any hearsay 10 evidence that was based on the receiver’s analysis or 11 conclusions. Rather, the district court based its decision 12 entirely on the documentary evidence in the case--the same 13 documents that were available to the receiver. 5Walsh fails 14 to show what he would have gained by calling the receiver. 15

5 Walsh argues that the court didconsider the receiver’s conclusions by admitting Government Exhibit 603, which was a chart prepared by the receiver detailing payments Walsh made to his wife. As is clear from the hearing transcript, the government introduced this chart only “[f]or convenience and ease.” Hr’g Tr. 134:13, May 24, 2011. The underlying records--upon which the receiver based the figures in the chart--were also admitted into evidence, and Agent Barnacle testified that he had reviewed those records and the chart and that the chart accurately reflected them. That the receiver created the chart is irrelevant because the chart did not reflect any independent analysis or computation on the receiver’s part. 14Accordingly, the district court did not abuse its discretion 1 in quashing Walsh’s subpoenas. 2 For the foregoing reasons, we affirm the order of the 3 district court. 4

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