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U.S. v. SCHLESINGER

October 7, 2005.

UNITED STATES OF AMERICA,
v.
NAT SCHLESINGER, also known as "Naftule Schlesinger" and "Zvi Pollack," HERMAN NIEDERMAN, and GOODMARK INDUSTRIES, INC., Defendants.



The opinion of the court was delivered by: ARTHUR SPATT, District Judge

MEMORANDUM OF DECISION AND ORDER

In this case the government seeks, pursuant to Federal Rule of Criminal Procedure 32.2(b)(2), the entry of a preliminary order of forfeiture in the total sum of $21,195,665.74 against defendants Nat Schlesinger ("Schlesinger") and Goodmark Industries, Inc. (collectively the "defendants"). The government claims that these assets are forfeitable as the proceeds of mail fraud, wire fraud, and money laundering. The defendants, who waived their right to have this matter determined by a jury, argue, among other things, that: (1) the building that housed the defendants' business is not subject to forfeiture because it did not "facilitate" the money laundering; (2) the proceeds are not "criminally derived property" within the meaning of the money laundering statute; and (3) title 28 U.S.C. § 2461(c) does not permit criminal forfeiture based on mail and wire fraud.

I. BACKGROUND

  With his brother Jack, Schlesinger owned and maintained a clothing manufacturing business in a building located at an address known at various times as: (1) 48-76 Wallabout Street, Brooklyn, New York; (2) 50 Wallabout Street, Brooklyn, New York; (3) 750 Kent Avenue, Brooklyn, New York; and (4) 1 Classon Avenue, Brooklyn, New York ("the Wallabout Street Property"). The clothing manufacturing business was known at various times as Pous Apparel, Inc., Private Brands of Delaware, Inc., and the defendant Goodmark Industries, Inc. On May 19, 2005, following a four week jury trial, the defendants were convicted of, among other counts, conspiracy to commit mail and wire fraud, 18 U.S.C. § 371, substantive mail and wire fraud, id. § 1341 and 1343, conspiracy to commit money laundering and substantive money laundering. Id. § 1956(h) and 1957.

  At the trial the government proved two fraudulent schemes. One scheme involved defrauding insurance companies by submitting fraudulent claims for losses sustained as a result of a series of fires that occurred at the Premises from 1987 to 1999. The second scheme involved using Pous Apparel, Private Brands, and Goodmark Industries as a vehicle to defraud various creditors by masking the true ownership of the companies. This scheme involved the use of nominees and shell corporations to carry out what was, in effect, two self organized bankruptcies.

  The indictment includes two criminal forfeiture allegations. The first criminal forfeiture allegation relates to counts charging a money laundering conspiracy and substantive money laundering related to proceeds from the creditor fraud and insurance fraud schemes. For these counts, the government seeks forfeiture, pursuant to 18 U.S.C. § 982, of all properties, real and personal, involved in these offenses or traceable to such property. In this allegation, the government seeks forfeiture of the sum of $11,480,629.41 as well as a specific asset: a total of $5,131,881.92 traceable to the sale of the "the Wallabout Street Property".

  The second forfeiture allegation relates to the counts that involve the mail and wire fraud conspiracy, and substantive mail fraud related to the scheme to defraud insurance companies, and the mail fraud conspiracy and substantive mail fraud related to the scheme to defraud creditors. For these counts, the government seeks forfeiture pursuant to 18 U.S.C. § 981(a)(1)(C) and 28 U.S.C. § 2461(c), of all properties, real and personal, which constituted or were derived from proceeds traceable to an offense constituting a "specified unlawful activity" under 18 U.S.C. § 1956(c)(7) in the amount of $4,583,154.41. Under that statute, mail fraud and wire fraud, or a conspiracy to commit such offense is considered a "specified unlawful activity." II. DISCUSSION

  A. Criminal Forfeiture Procedure

  The procedures governing criminal forfeiture are set forth in Federal Rule of Criminal Procedure 32.2(b)(1), which provides:
As soon as practicable after a verdict or finding of guilty, or after a plea of guilty or nolo contendere is accepted, on any count in an indictment or information regarding which criminal forfeiture is sought, the court must determine what property is subject to forfeiture under the applicable statute. If the government seeks forfeiture of specific property, the court must determine whether the government has established the requisite nexus between the property and the offense. If the government seeks a personal money judgment, the court must determine the amount of money that the defendant will be ordered to pay. The court's determination may be based on evidence already in the record, including any written plea agreement or, if the forfeiture is contested, on evidence or information presented by the parties at a hearing after the verdict or finding of guilt.
Fed R. Crim. P. 32.2(b)(1).

  It is well-settled in the Second Circuit that once the defendant is convicted of an offense on proof beyond a reasonable doubt, the government is only required to establish the forfeitability of the property subject to criminal forfeiture as a result of that offense by a preponderance of the evidence. United States v. Fruchter, 411 F.3d 377, 383 (2d Cir. 2005) ("Booker and Blakely [do not] require proof beyond a reasonable doubt in open-ended punishment schemes, such as [criminal] forfeiture."); see also Libretti v. United States, 516 U.S. 29, 49, 116 S. Ct. 356, 367-68, 133 L. Ed. 2d 271, 289 (1995). Criminal forfeiture is most commonly used by the government to seize the "proceeds of" and "property facilitating" drug trafficking offenses, 21 U.S.C. § 853, and the "proceeds of" and "property involved in" money laundering. 18 U.S.C. § 982. Under Rule 32.2(b)(1), the court is assigned the task of determining the amount of money the defendant will be ordered to pay or whether there is a sufficient nexus between the property and the offense of conviction. The court makes this determination based upon the evidence in the record of the criminal trial or evidence presented at a hearing after the verdict. See Fruchter, 411 F.3d at 384.

  B. Criminal Forfeiture for Money Laundering and Money Laundering Conspiracy

  The government seeks forfeiture in the amount of $11,480,629.41 under the provisions of 18 U.S.C. § 982 based upon money laundering and money laundering conspiracy relating to monetary transactions with regard to insurance fraud proceeds and monetary transactions derived from the Goodmark Industries creditor fraud. Specifically, the amount sought includes: (1) $11,480,629.41 representing the total value of the property allegedly involved in the money laundering; and (2) $5,131,881.92 representing the net proceeds traceable to the Wallabout Street Property.

  Under 18 U.S.C. § 982, "any property, real or personal, involved in such offense, or any property traceable to such property" is subject to criminal forfeiture. The term "involved in" has consistently been interpreted broadly by courts to include any property involved in, used to commit, or used to facilitate the money laundering offense. See United States v. Huber, 404 F.3d 1047, 1056 (8th Cir. 2005); United States v. Puche, 350 F.3d 1137 (11th Cir. 2003); United States v. McGauley, 279 F.3d 62. 76 n. 14 (1st Cir. 2002); United States v. Baker, 227 F.3d 955 (7th Cir. 2000); United States v. Wyly, 193 F.3d 289 (5th Cir. 1999); United States v. Bornfield, 145 F.3d 1123 (10th Cir. 1998); United States v. Hawkey, 148 F.3d 920, 927-28 (8th Cir. 1998); United States v. Tencer, 107 F.3d 1120, 1134 (5th Cir. 1997); United States v. 1501 West Boulevard, 814 F. Supp. 468, 479 n. 37 (W.D.N.C. 1993), aff'd, United States v. Marsh, 105 F.3d 927 (4th Cir. 1997); United States v. Eleven Vehicles, 836 F. Supp. 1147, 1153 (E.D. Pa. 1993); United States v. Krasner, 841 F. Supp. 649 (M.D. Pa. 1993); United States v. Certain Accounts, 795 F. Supp. 391, 396 (S.D. Fla. 1992); United States v. All of the Inventories of the Bus. Known as Khalife Bros. Jewelry, 806 F. Supp. 648, 650 (E.D. Mich. 1992); United States v. All Monies in Account No. 90-3617-3, 754 F. Supp. 1467, 1473 (D. Haw. 1991). This interpretation is supported by the legislative history. See 134 Cong. Rec. S17365 (daily ed. Nov. 10, 1988) (statement of Sen. Biden).

  The government claims that the Wallabout Street Property and all proceeds traceable to its sale are forfeitable because the property facilitated the defendants' money laundering. "Facilitation occurs when the property makes the prohibited conduct less difficult or more or less free from obstruction or hindrance." United States v. Wyly, 193 F.3d 289, 302 (5th Cir. 1999) (quoting Tencer, 107 F.3d at 1134). In Wyly, the defendant was a public official who accepted a kickback in return for steering the contract for the construction of a privately-owned prison to a particular contractor. After the defendant was convicted of money laundering, the court held that the government was entitled to forfeiture of the new jail itself as property involved in the money laundering offense. The Fifth Circuit reasoned that "the prison[] was the source of the criminal proceeds and was indispensable to the money laundering conspiracy. Without the prison, there could have been no bribery, mail fraud, or money laundering." Id. at 302.

  The Second Circuit appears to have embraced the "facilitation" approach. In United States v. G.P.S. Automotive Corp., 66 F.3d 483, 486 (2d Cir. 1995), the government sought civil forfeiture for money laundering under § 981, the analogous civil provision to the criminal statute (§ 982) relevant in this case. The Second Circuit upheld the forfeiture of the defendants' automotive salvage and repair shop as well as the property in which it was located. Id. at 487. Specifically, the court found that there were several unlawful transactions at the business, such as removing or altering vehicle identification numbers, that were directly related to the automotive-fraud and the money laundering. Id. at 487.

  The Defendants contend that property is only subject to forfeiture under the "facilitation theory" if that property actually facilitates the money laundering. The Defendants argue that the money laundering offense is distinguishable from the unlawful activity that forms the basis ...


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