Source: http://www.nyfederalcriminalpractice.com/forfeiture/
Timestamp: 2019-04-24 12:36:34+00:00

Document:
[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.
Just after this blog highlighted Judge Gleeson's thoughtful decision in Surgent holding that personal money judgments are not authorized in forfeiture proceedings, see here, the Second Circuit rules otherwise in United States v. Awad, 07-4483-cr (2d Cir. March 11, 2010). Forfeiture money judgments may be imposed as part of a defendant's sentence under 21 U.S.C. § 853(a), and such judgment "does not depend on a defendant's assets at the time of sentencing." The Court specifically notes Judge Gleeson's decision in Surgent and finds its reasoning "unpersuasive."
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."
As this blog has noted in the past, see here and here, financial penalties can reverberate deeply in an offender’s post-conviction life. Several recent decisions provide some respite for offenders laboring under onerous restitution and forfeiture obligations.
[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.
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.
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.
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.
How much losses were actually generated in Madoff’s fraud? Is that figure the same as the forfeiture or restitution amounts that will be ordered at his sentencing? Will his wife be able to shelter any of her assets from seizure? Who are Madoff’s victims? Do they include, for example, the employees of Madoff’s firms, or aspiring beneficiaries of now-defunct charities that invested with Madoff? Several recent decisions preview these issues, which as this blog has noted in the past, become more and more relevant as courts and legislators question the efficacy of more and longer periods of incarceration.
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.
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”).
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.
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.
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 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."
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.
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).

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