12-2383-cr

United States v. Walsh

1 UNITED STATES COURT OF APPEALS

2

3 FOR THE SECOND CIRCUIT

4

5 August Term, 2012

6

7

8 (Argued: March 18, 2013 Decided: April 2, 2013)

9

10 Docket No. 12-2383-cr

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13

14 UNITED STATES OF AMERICA,

15

16 Appellee,

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18 - v.-

19

20 STEPHEN WALSH,

21

22 Defendant-Appellant.

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24 - - - - - - - - - - - - - - - - - - - -x

25

26 Before: JACOBS, Chief Judge, CABRANES and WESLEY,

27 Circuit Judges.

28

29 In this criminal case, Defendant Stephen Walsh appeals

30 from an order of the United States District Court for the

31 Southern District of New York (Cedarbaum, J.) denying his

32 motion to release assets frozen in a parallel civil

33 enforcement action. Walsh, charged with fraud, seeks

34 release of the proceeds from the sale of his house. Walsh

35 obtained the house from his wife in a divorce settlement in

36 which his wife received (inter alia) a $12.5 million
1 distributive award, $6 million of which was paid using funds

2 traceable to Walsh’s fraud. The district court properly

3 applied the tracing analysis from United States v. Banco

4 Cafetero Panama, 797 F.2d 1154 (2d Cir. 1986). We affirm.

5

6 MARK A. FLESSNER, Holland &

7 Knight LLP, Chicago, Illinois,

8 for Defendant-Appellant.

9

10 JOHN J. O’DONNELL, (Iris Lan, on

11 the brief), for Preet Bharara,

12 United States Attorney for the

13 Southern District of New York,

14 for Appellee.

15

16 DENNIS JACOBS, Chief Judge:

17 Stephen Walsh, defendant in this criminal fraud case,

18 appeals from an order of the United States District Court

19 for the Southern District of New York (Cedarbaum, J.)

20 denying his motion to release $3.7 million in assets that

21 were frozen in a parallel civil enforcement action. Walsh

22 seeks to use those funds for his defense. Walsh and his

23 wife had purchased a house in her name using funds unrelated

24 to the alleged fraud. Pursuant to a divorce settlement,

25 Walsh received title to the house and gave his wife (inter

26 alia) a $12.5 million distributive award, at least $6

27 million of which was directly traceable to Walsh’s alleged

28 fraud. 

2
1 After a hearing conducted pursuant to United States v.

2 Monsanto, 924 F.2d 1186 (2d Cir. 1991) (in banc), the

3 district court concluded that the $3.7 million at issue was

4 “traceable” to the fraud. Walsh does not contest the

5 underlying finding that there was probable cause to believe

6 that Walsh committed the fraud. But he does challenge the

7 finding that there was probable cause to believe that, after

8 the divorce settlement, the house became traceable to the

9 proceeds from the fraud.

10 He argues that the “tracing fiction” used by the

11 district court is inapplicable to his situation. He also

12 argues that the district court erred at the Monsanto hearing

13 by admitting hearsay testimony from the FBI agent who

14 investigated the fraud and by quashing Walsh’s subpoenas.

15 For the following reasons, we affirm.

16

17 I

18 In 1983, the Walshes bought a house on Arden Lane in

19 Sands Point for $900,000 and renovated it over the next

20 several years at a cost of more than $2 million. In 1999,

21 they sold the property in parcels for a total of $4.135

22 million. That same day, they applied most of the proceeds

3
1 to the $3.15 million purchase of another Sands Point house,

2 on Half Moon Lane (the “Half Moon House” or the “House”). 

3 The title of the House remained in Walsh’s wife’s name alone

4 until the divorce in 2006.

5 In November 2006, the Walshes entered into a

6 Stipulation and Settlement and Agreement (“Divorce

7 Agreement”) that divided their assets and resolved all

8 future claims for maintenance and/or an equitable

9 distribution award. Walsh received title to the Half Moon

10 House, as well as cars, certain bank accounts, and the

11 business interests that were involved in the alleged fraud. 

12 His wife got condominiums in Florida and New York, cars,

13 bank and securities accounts and life insurance policies,

and a distributive award1 14 of $12.5 million. At the time of

15 Walsh’s indictment, the only asset of substantial value he

16 owned was the Half Moon House. 

 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).

4
1 Walsh made payments to his wife pursuant to the Divorce

Agreement using the proceeds of the fraudulent scheme.2 2 The

3 district court found that, all told, Walsh transferred at

4 least $6 million of proceeds of the scheme to his wife,

5 including the $3 million New York condominium acquired in

6 her name prior to the divorce.

7 Walsh does not contest these findings on appeal.

8

9 II

10 On February 24, 2009, the government filed a criminal

11 complaint against Walsh and codefendant Paul Greenwood

12 alleging an investment fraud that began around 1996. The

13 next day, the CFTC and SEC filed civil actions alleging the

14 same conduct against Walsh, Greenwood, and their various

15 entities. That same day, Judge Daniels, who was presiding

 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.

5
1 over the civil case, granted the government’s motion for a

2 preliminary injunction seizing Walsh’s assets. 

3 Walsh and Greenwood were indicted on July 24, 2009, and

4 Walsh pled not guilty a week later. 

5 In December 2009, Walsh moved to unfreeze the Half Moon

6 House to finance his defense in the criminal case. Judges

7 Daniels and Cedarbaum jointly heard oral argument on the

8 motion and ruled in February 2010 that Walsh was entitled to

9 $900,000--the purchase price of the house on Arden Lane. 

10 The decision was without prejudice to Walsh’s ability to

11 seek additional funding.

12 In March 2011, the receiver sold the Half Moon House

13 for approximately $3.7 million. Walsh thereafter moved to

14 have the remaining portion of the sale price released to pay

15 for his criminal defense. The parties agreed to hold a

16 Monsanto hearing. The government advised the court that its

17 only witness would be FBI Agent Barnacle, who had

18 investigated the fraud.

19 Walsh subpoenaed two fact witnesses: his codefendant

20 Greenwood, and Deborah Duffy, a partner at one of the

21 entities involved in the fraud. Walsh also subpoenaed Brick

22 Kane, the Chief Operating Officer of the court-appointed

6
1 receiver in charge of selling the Half Moon House. The

2 court granted the government’s motion to quash all three

3 subpoenas, on the ground “that the defendants seek . . . to

4 hold a wholesale dress rehearsal of the trial by subpoenaing

5 the principal cooperating witnesses of the government.” 

6 Telephone Conference Tr. 2, Apr. 15, 2011. 

7 At the Monsanto hearing, held over three days in May

8 and June 2011. Agent Barnacle recounted what Greenberg and

9 Duffy told him about the fraudulent scheme and set out the

10 transactional history of the Half Moon House. The

11 government introduced documents relating to the fraud and to

12 the source of the assets. 

13 Judge Cedarbaum denied the motion to unfreeze the

14 remaining proceeds from the sale of the Half Moon House in

15 May 2012, finding probable cause to believe (1) that Walsh

16 perpetrated the scheme, and (2) that the proceeds from the

17 sale of the Half Moon House were traceable to the profits

18 from the scheme. 

19

20 III

21 “In order to seize property . . . , the government must

22 demonstrate that there was probable cause to believe that

7
1 the property is subject to forfeiture.” In re Seizure of

2 All Funds in Accounts in Names Registry Pub. Inc., 68 F.3d

3 577, 580 (2d Cir. 1995). “The findings supporting a

4 district court’s determination as to probable cause are

5 reviewed for clear error, but the determination itself is a

6 conclusion of law reviewed de novo.” Id.; accord United

7 States v. Holder, 990 F.2d 1327, 1328 (D.C. Cir. 1993). 

8 Since Walsh does not contest any factual findings, but

9 instead argues that the district court made an error of law

10 in applying the tracing fictions from United States v. Banco

11 Cafetero Panama, 797 F.2d 1154 (2d Cir. 1986), to this case,

12 we review the district court’s decision de novo. 

13 Part of the Sixth Amendment’s guarantee of the right to

14 counsel is “the right of a defendant who does not require

15 appointed counsel to choose who will represent him.” United

16 States v. Gonzalez-Lopez, 548 U.S. 140, 144 (2006). 

17 Nevertheless, a defendant may not use the proceeds of a

18 fraud to fund his criminal defense: “A defendant has no

19 Sixth Amendment right to spend another person’s money for

20 services rendered by an attorney, even if those funds are

21 the only way that that defendant will be able to retain the

8
1 attorney of his choice.” Caplin & Drysdale, Chartered v.

2 United States, 491 U.S. 617, 626 (1989). 

3 “[T]he [F]ifth and [S]ixth [A]mendments, considered in

4 combination, require an adversary, post-restraint, pretrial

5 hearing as to probable cause that (a) the defendant

6 committed crimes that provide a basis for forfeiture, and

7 (b) the properties specified as forfeitable in the

8 indictment are properly forfeitable.” United States v.

9 Monsanto, 924 F.2d 1186, 1203 (2d Cir. 1991) (in banc). The

10 issue in this appeal is whether there was probable cause to

11 believe that the proceeds from the sale of the Half Moon

12 House were traceable to the proceeds of the fraud--i.e.,

that they were “another person’s money.”3 13 Caplin, 491 U.S.

14 at 626.

15 The Walshes purchased the Half Moon House with funds

16 that were not traceable to the fraud, and the title was put

17 in then-Mrs. Walsh’s name alone. But Walsh ultimately

18 acquired the house pursuant to the Divorce Agreement in

19 exchange for, inter alia, a $12.5 million distributive

 3 We need not decide whether a Monsanto hearing 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 Monsanto framework.

9
1 award, of which at least $6 million consisted of funds

2 directly traceable to the fraud. 

3 When some funds in a seized bank account are traceable

4 to criminal activity and some are not, we consult Banco

5 Cafetero, 797 F.2d 1154. We have three “accounting choices”

6 at our disposal to determine what amount of commingled funds

7 are traceable to criminal activity. Of relevance here is

8 the “drugs-in, first-out” approach, which “consider[s]

9 ‘traceable proceeds’ to be any one withdrawal, or any asset

10 purchased with such withdrawal, to the extent of” the amount

11 of the deposited tainted funds. Id. at 1159. Applying that

12 approach, the district court analogized the sale proceeds of

13 the Half Moon House “to a withdrawal from a commingled

14 account, i.e., the marital estate.” United States v.

15 Greenwood, 865 F. Supp. 2d 444, 450 (S.D.N.Y. 2012). 

16 We conclude that the district court’s application of

17 Banco Cafetero was proper. Walsh negotiated to get the Half

18 Moon House and to keep his (now worthless) business

19 interests in exchange for the $12.5 million distributive

20 award. Although the House itself is not a fungible asset,

21 it was “an asset purchased with” the tainted funds from the

22 marital estate, by operation of the Divorce Agreement. See

10
1 Banco Cafetero, 797 F.2d at 1159. Since Walsh’s total

2 assets did not exceed $6 million at the time of his arrest,

3 under Banco Cafetero’s “drugs-in, first-out” approach, all

4 of his assets are traceable to the fraud.

5 Walsh argues that he had a preexisting right to the

6 Half Moon House under New York’s 1980 Equitable Distribution

7 Law and that he therefore did not “purchase” the House in

8 the Divorce Agreement. This argument ignores New York

9 Domestic Relations Law section 236(B)(3), which allows

10 parties to opt out of equitable distribution in favor of a

11 negotiated settlement, which is what the Walshes did. The

12 analysis might differ if the marital estate had been

13 distributed according to a court order under New York

14 Domestic Relations Law section 236(B)(5). We need not

15 address that hypothetical, however, because Walsh freely

16 negotiated title to the House in exchange for at least $6

17 million in funds traceable to the fraud. Accordingly, the

18 district court properly applied Banco Cafetero.

19

20 IV

21 Walsh argues that the district court made two related

22 erroneous evidentiary rulings at the Monsanto hearing: (1)

11
1 admitting Agent Barnacle’s hearsay testimony; and (2)

2 quashing Walsh’s subpoenas. For the reasons that follow, we

3 reject both arguments.

4

5 A

6 The admissibility of hearsay at a Monsanto hearing is a

7 question of law that we review de novo. See generally

8 United States v. Ferguson, 676 F.3d 260, 285-86 (2d Cir.

9 2011) (reviewing hearsay decision de novo).

10 In order to “preclud[e] unwarranted exposure of

11 government witnesses,” Monsanto permits a “court [to]

12 receive and consider at such a hearing evidence and

13 information that would be inadmissible under the Federal

14 Rules of Evidence.” 924 F.2d at 1198, 1203. Although Walsh

15 argues that Monsanto’s evidentiary rule should be limited to

16 cases where witnesses may be in physical danger--such as

those involving drugs4 17 --we are persuaded by district court

18 opinions in this Circuit applying Monsanto’s evidentiary

 4 Monsanto involved 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. See SEC v. Manor Nursing Ctrs.,

Inc., 458 F.2d 1082, 1103 (2d Cir. 1972). 

12
1 rule to non-drug cases. E.g., United States v. All Funds on

2 Deposit in any Account at Certain Fin. Insts. Held in the

3 Names of Certain Individuals, 767 F. Supp. 36, 42 (E.D.N.Y.

4 1991) (Spatt, J.); see also United States v. Clarkson Auto

5 Elec., Inc., No. 10-CR-6111CJS, 2012 WL 345911, at *1 n.4

6 (W.D.N.Y. Feb. 1, 2012) (Payson, M.J.). The unwarranted

7 exposure of government witnesses was a valid consideration

8 in this case, to avoid what the district court called a

9 “dress rehearsal” of the trial. In any event, the Monsanto

10 hearing involved only a finding of probable cause, and “[a]

11 finding of probable cause may be based on hearsay.” United

12 States v. Daccarett, 6 F.3d 37, 56 (2d Cir. 1993). 

13

14 B

15 We review the quashing of a subpoena for abuse of

16 discretion. See Arista Records, LLC v. Doe 3, 604 F.3d 110,

17 117 (2d Cir. 2010). The same consideration that justifies

18 receipt of hearsay evidence in a Monsanto hearing

19 (unwarranted exposure of witnesses) supports the district

20 court’s exercise of discretion to quash the subpoenas of two

21 fact witnesses: Greenwood and Duffy. Walsh argues that his

22 right to an “adversary proceeding” should be weighed against

13
1 the government’s interest in protecting its witnesses, and

2 argues that his is the greater interest. But Monsanto has

3 already decided, when the government has an interest in

4 preventing the “unwarranted exposure” of its witnesses, that

5 interest tends to outweigh a defendant’s right to cross6 examine those witnesses before the trial. See 924 F.2d at

7 1195-98.

8 The subpoena served on the receiver raises no risk of

9 “unwarranted exposure of government witnesses,” but in any

10 event, the district court did not consider any hearsay

11 evidence that was based on the receiver’s analysis or

12 conclusions. Rather, the district court based its decision

13 entirely on the documentary evidence in the case--the same

documents that were available to the receiver.5 14 Walsh fails

15 to show what he would have gained by calling the receiver. 

 5 Walsh argues that the court did consider 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.

14
1 Accordingly, the district court did not abuse its discretion

2 in quashing Walsh’s subpoenas.

3 For the foregoing reasons, we affirm the order of the

4 district court.

15