pressed the four grounds for a hearing that they raised in their motion. First, the Petitioners argued that a post-deprivation hearing was required under Statewide, on the ground that the ex parte seizure of the accounts violated the Petitioners' due process rights because there were no exigent circumstances warranting the ex parte seizure. Second, the petitioners contended that there was no probable cause to support the warrant, and therefore, a hearing was necessary (i) under Rule 41(e) in order for the Government to show probable cause for believing that the accounts are subject to forfeiture, and (ii) under Franks v. Delaware, because Judge Azrack allegedly signed the seizure warrant on the basis of affidavits containing false statements. Third, the Petitioners contended that in order to create a record for an immediate appeal under Statewide if their motion is denied, they were entitled to a hearing on whether the seizure of the accounts has effectively shut down the Companies from operating. And fourth, the Petitioners contended that a probable cause hearing was required under Monsanto, because the Companies were precluded by the seizure from obtaining funds to pay counsel fees in this case, and for defending Gordon in the criminal case.
Initially, on April 19th Judge Seybert found that a probable cause hearing was not warranted at that point in time, because probable cause had been determined by Judge Azrack to be sufficient on the papers submitted to her. According to Judge Seybert, a review of the papers apparently confirmed her view that the papers were sufficient for the warrant to issue and the seizure to be made, and that a Franks hearing was not necessary. See April 19, 1995 Tr. at 44-45, 63. Nevertheless Judge Seybert did raise two concerns regarding proof of tracing the victims' money to the accounts, and the scope of the warrant and seizure. April 19, 1995 Tr. at 45, 63-64. After some argument, Judge Seybert also determined that a hearing was necessary on the issue of whether the seizure effectively shut down the Companies. She therefore allowed the hearing to proceed on that basis, in order to create a record for an immediate appeal by the Petitioners under Statewide, should the Court deny the motion to vacate the warrant. See April 19, 1995 Tr. at 60, 63-64
The next day, however, after looking at the constitutional concerns raised in the Monsanto and Statewide Judge Seybert granted the Petitioners' request for a probable cause hearing. See April 20, 1995 Tr. at 2-3, 14-16, 21.
The hearing on April 20, 1995 consisted entirely of the testimony of Biegelman. Written submissions supplementing the hearing by the Petitioners and the Government were respectively filed on April 24 and April 26, 1995. Judge Seybert found it necessary to recuse herself after the hearing, and this case, including the decision on the Petitioners' motion, was reassigned to this Court. At a conference held on May 5, 1995, the parties agreed that the Court need not conduct a new hearing on the Petitioners' motion, and that a decision on the motion could be rendered based on the hearing transcripts and the parties' submissions.
The Court has reviewed the entire file in this case, all the hearing transcripts, the exhibits entered into evidence at the hearing including the tape recordings made by CI-1 and CI-3, and the pre and post-hearing submissions of the parties. The Court further heard argument on the respective position of the parties during the May 5, 1995 conference. The Court's findings and opinion are set forth below.
1. Applicable Law.
A. Probable Cause.
In order for property to be seized, the government must have probable cause to believe that the seized property is subject to forfeiture. See 18 U.S.C. §§ 981(b)(1)(A)(i) and 981(d); Marine Midland Bank, N.A. v. United States, 11 F.3d 1119, 1126 (2d Cir. 1993) (seizure is not valid unless there is probable cause to believe the property is subject to forfeiture); United States v. Daccarett, 6 F.3d 37, 50 (2d Cir. 1993), cert. denied, 114 S. Ct. 1294 (1994); United States v. $ 37,780 in United States Currency, 920 F.2d 159, 162 (2d Cir. 1990). Property is subject to forfeiture if it is the fruit or proceeds of illegal activity. Daccarett, 6 F.3d at 55; $ 37,780 in U.S. Currency, 920 F.2d at 162. To demonstrate probable cause, the government must prove a nexus between the property and the illegal activity. Daccarett, 6 F.3d at 56.
Despite their interconnectedness, seizure and forfeiture remain two distinct statutory events. While each event requires the government to have probable cause, different consequences for each event flow from the government's failure to establish probable cause. Daccarett, 6 F.3d at 46; $ 37,780 in U.S. Currency, 920 F.2d at 161-62. Failure of the government to establish that there was probable cause at the time of the seizure only results in suppression of evidence gained from the improper seizure in later proceedings. The defendant property, however, itself is immune from suppression and remains subject to forfeiture. Daccarett, 6 F.3d at 46; $ 37,780 in U.S. Currency, 920 F.2d at 163. On the other hand, failure by the government to establish probable cause on the forfeiture issue, namely, failure to establish probable cause that the property is connected to illegal activity, will result in dismissal of the forfeiture action. Daccarett, 6 F.3d at 46.
Generally, the government is not required to demonstrate probable cause for seizing property until the forfeiture trial. Marine Midland, 11 F.3d at 1124. However, if a claimant challenges the validity of a seizure, as the Petitioners have done here, then the merits of the forfeiture trial are expedited and the government must establish probable cause for the forfeiture prior to the forfeiture trial. See Marine Midland, 11 F.3d at 1124-25; Daccarett, 6 F.3d at 50, 55. Accordingly, the Government must demonstrate here that it had probable cause to believe that the accounts seized are subject to forfeiture. Marine Midland, 11 F.3d at 1125-26.
A hearing requiring the Government to show probable cause is also triggered in certain situations prior to the filing of an indictment when funds are sought from the seized res in order to pay counsel fees for the criminal case underlying the seizure and forfeiture. The standards governing such a hearing were set forth by the Second Circuit in Monsanto:
We conclude that (1) the fifth and sixth amendments, considered in combination, require an adversary, post-restraint, pre-trial hearing as to probable cause that (a) the defendant committed the crimes that provide the basis for forfeiture, and (b) the properties specified as forfeitable in the indictment are properly forfeitable, to continue a restraint of assets (i) needed to retain counsel of choice and (ii) ordered ex parte . . . (2) . . . the Court may receive and consider at such a hearing evidence and information that would be inadmissible under the Federal Rules of Evidence; and (3) grand jury determinations of probable cause may be reconsidered in such a hearing.
Id., 924 F.2d at 1195, 1203. Monsanto's holding has been extended to require a probable cause hearing in a civil forfeiture case, where the claimant is also a defendant in the related criminal matter. See United States v. All Funds on Deposit, 767 F. Supp. 36, 42 (E.D.N.Y. 1991).
As mentioned previously, in order to establish probable cause, the government must demonstrate a nexus between the seized property and the illegal activity. To demonstrate such a nexus when the res seized is a bank account, the government must establish that there is probable cause to believe the funds represent proceeds traceable to the illegal activity. Daccarett, 6 F.3d at 56. The government is not required to link the bank account to a particular illegal activity. Marine Midland, 11 F.3d at 1126. Rather, "probable cause is established if the government can show that it has reasonable grounds, more than mere suspicion, to believe that the property is subject to forfeiture," namely, that the funds represent the proceeds of criminal activity. See Marine Midland, 11 F.3d at 1126 (citing United States v. Banco Cafetero Panama, 797 F.2d 1154, 1160 (2d Cir. 1986)), and Daccarett, 6 F.3d at 56.
Moreover, particularly in cases involving bank accounts, a finding of probable cause may be based on hearsay, including hearsay from confidential informants or circumstantial evidence. Daccarett, 6 F.3d at 56 (citations omitted). In addition, great deference is paid to the probable cause determinations of magistrate judges and judges who issue warrants. Any doubts are resolved in favor of upholding the warrant, and all of the evidence is construed in a light most favorable to the government. Marine Midland, 11 F.3d at 1125 (citations omitted).
Finally, after the government establishes probable cause, the burden shifts to the claimant to demonstrate by a preponderance of the evidence that the property is not subject to forfeiture, because it was not used unlawfully or because the illegal use was without the claimant's knowledge or consent. Daccarett, 6 F.3d at 57. If the res is a bank account, the claimant bears the burden of proving that the account does not contain proceeds traceable to the criminal activity, but "rather represents legitimate funds." Id. (citing United States v. 785 St. Nicholas Ave., 983 F.2d 396, 403 (2d Cir. 1993)).
The Court wishes to pause at this point in order to highlight several matters. First, the bank accounts at issue in this case were seized pursuant to a seizure warrant issued by Judge Azrack under Fed. R. Civ. P. 41(c)(1), on a determination of probable cause based on the contents of Biegelman's affidavit and Complaint. Interestingly, a forfeiture action has not yet been commenced by the Government. Moreover, a grand jury investigation into the criminal allegations continues and there have not been any indictments of the persons arrested in connection with the Companies' operations. As stated above, one such person arrested has pleaded guilty to an information, pursuant to a cooperation agreement.
Second, the petitioners challenge the validity of the seizure under Fed. R. Civ. P. 41(e), and have requested that counsel fees be released from the seized accounts to pay for Gordon's defense in the related criminal proceedings.
Accordingly, in this Court's view, a hearing in which the Government is obligated to show that it had probable cause to believe the accounts seized are subject to forfeiture is required, under the rule of both Marine Midland, 11 F.3d at 1125, and Monsanto, 924 F.2d at 1203. Additionally, the Court believes that to the extent the due process, post-deprivation hearing discussed in Statewide is based on a challenge to the seizure and forfeiture, it implicates a probable cause evidentiary hearing as well. See Statewide, 971 F.2d at 905.
In the present case, the Petitioners rely on two grounds to assert that the Government lacks probable cause to believe that the seized proceeds are connected to the alleged mail and wire fraud. First, the Petitioners contend that any misrepresentations contained in the solicitation letters or made by the salespersons in telephone calls constitute "mere puffing," and do not give rise to a violation of the mail fraud or wire fraud statutes. Second, they contend that, even assuming a violation of these statutes, the payments made by the alleged victims of the fraud cannot be traced to the seized bank accounts.
Because the elements of mail and wire fraud are essentially the same, see, e.g., United States v. Starr, 816 F.2d 94, 98 (2d Cir. 1987), the Court will conduct its analysis of probable cause under the mail fraud statute.
B. Probable Cause for Mail Fraud
The federal mail fraud statute provides in relevant part that a person is guilty of mail fraud, if,
having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises . . . for the purpose of executing such scheme or artifice or attempting so to do, [the person] places in any post office or authorized depository for mail matter, any matter or thing whatever to be sent or delivered by the Postal Service, or takes or receives therefrom, any such thing[.]
18 U.S.C. § 1341.
The elements of mail fraud necessary to establish the offense are (1) a scheme or artifice to defraud, (2) for the purpose of obtaining money or property, or of depriving another of an intangible right of honest services, and (3) use of the mails in furtherance of the scheme. United States v. Altman, 48 F.3d 96, 101 (2d Cir. 1995) (citing United States v. Wallach, 935 F.2d 445, 461 (2d Cir. 1990). Moreover, proof of fraudulent intent is required. Altman, 48 F.3d at 101; United States v. D'Amato, 39 F.3d 1249, 1257 (2d Cir. 1994).
A "scheme or artifice to defraud" under the statute is interpreted broadly, and includes everything designed to defraud by representations as to the past or present, or suggestions and promises as to the future. Altman, 48 F.3d at 101 (quoting Durland v. United States, 161 U.S. 306, 313, 16 S. Ct. 508, 511, 40 L. Ed. 709 (1896)). The scheme to defraud need not have been successful or complete, and the victims need not have been injured. D'Amato, 39 F.3d at 1257; Wallach, 935 F.2d at 461 ("The government is not required to show that the intended victim was actually defrauded."). Rather, "the government must show 'that some actual harm or injury was contemplated by the schemer.'" D'Amato, 39 F.3d at 1257 (quoting United States v. Regent Office Supply Co., 421 F.2d 1174, 1180 (2d Cir. 1970) (emphasis in original)); Wallach, 935 F.2d at 461.
In order for the statute to be violated in the context of solicitations to purchase a product, the alleged fraud must concern facts material to the bargain the potential customer is induced to enter through the seller's representations. The seminal case in this regard is United States v. Regent Office Supply Co.
In Regent, a company selling office supplies was accused of mail fraud, allegedly resulting from its salespersons' (called "agents") sales pitch during solicitations of orders for its merchandise. In order to expeditiously get a determination of whether the conduct and sales pitch fell within the prohibition of the mail fraud statute, the defendant agreed to be indicted and tried upon certain admissions and stipulations of fact constituting the alleged crime. The defendant basically stipulated that the agents secured sales by making false representations to potential customers that: (i) the agent had been referred to the customer by a friend of the customer, (ii) the agent had been referred to customer firm by officers of such firms, (iii) the agent was a doctor, or other professional person, who had stationary to be disposed of; and (iv) stationary of friends of the agent had to be disposed of because of a death and that the customer would help to relieve this difficult situation by purchasing it. Id., 421 F.2d at 1176. The defendant explained that the false representations were made by its agents in order to get past secretaries and secure the attention of the person in charge of purchasing. The district court determined that the defendants' conduct constituted a scheme to defraud under the mail fraud statute, and found the defendants guilty as charged.
The Second Circuit reversed the convictions. In the Second Circuit's view, although the agents' representations during the solicitation were "'white lies' repugnant to 'standards of business morality,'" id. at 1179, the defendants' conduct did not constitute a fraudulent scheme under the mail fraud statute because the false representations made during the solicitations were not directed at the "quality, adequacy or price of the goods to be sold, or otherwise to the nature of the bargain." Id. at 1179.
In attempting to delineate the boundary line between puffing and fraud, the Second Circuit first explained that in discerning whether a particular practice constitutes fraud or an aggressive sales tactic, courts were to consider the realities of the market and contemporary business sales practice. See id. at 1178. The court then explained that mail fraud can only exist when the seller's representations mislead the buyer as to the quality or effectiveness of the product, or as to the advantages or future benefits accruing to the purchaser when such benefits cannot realistically be ascertained:
The most nearly analogous cases sustaining convictions for mail fraud have involved sales tactics and representations which have tended to mislead the purchaser, or prospective purchaser, as to the quality or effectiveness of the thing being sold, or to mislead him with regard to the advantages of the bargain which should accrue to him. Thus claims or statements in advertising may go beyond mere puffing and enter the realm of fraud where the product must inherently fail to do what is claimed for it. United States v. Andreadis, 366 F.2d 423 (2d Cir. 1966), cert. denied, 385 U.S. 1001, 87 S. Ct. 703, 17 L. Ed. 2d 541 (1967) (claim that "Regimen Tablets" could reduce weight without dieting contradicted scientific evidence); United States v. New South Farm and Home Company, 241 U.S. 64, 36 S. Ct. 505, 60 L. Ed. 890 (1916) (false representations regarding climate, ability to grow crops, and expected future improvements in promotion of land sales); Wilson v. United States, 190 F. 427 (2d Cir. 1911) (sale of intrinsically worthless stock). And promotion of an inherently useful item may also be fraud when the scheme of promotion is based on claims of additional benefits to accrue to the customer, if the benefits as represented are not realistically attainable by the customer. United States v. Armantrout, 411 F.2d 60, 64 (2d Cir. 1969) (carpet sold at inflated price on customer's expectation that defendant's "chain referral" scheme would return purchase price and produce profit for him); United States v. Baren, 305 F.2d 527 (2d Cir. 1962) (promotion of knitting machines on representation that women customers could easily make complicated knitted garments for profitable resale, after it became known that average prospects could not so operate them).