Court Opinion

ID: 856909
Source: CourtListenerOpinion
Date Created: 2013-04-02 14:25:33.023573+00
Date Added: 2024-06-11T11:51:09.295157
License: Public Domain

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
11
12   - - - - - - - - - - - - - - - - - - - -x
13
14   UNITED STATES OF AMERICA,
15
16                     Appellee,
17
18               - v.-
19
20   STEPHEN WALSH,
21
22                     Defendant-Appellant.
23
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,

14   and a distributive award1 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

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

13   that they were “another person’s money.”3   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

17   those involving drugs4--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 cross-

6    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

14   documents that were available to the receiver.5   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