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United States v. Nicolo

February 17, 2009

UNITED STATES OF AMERICA, PLAINTIFF,
v.
JOHN NICOLO, DAVID FINNMAN, DEFENDANTS.



The opinion of the court was delivered by: David G. Larimer United States District Judge

PRELIMINARY ORDER OF FORFEITURE

INTRODUCTION

Defendants John Nicolo and David Finnman were convicted after trial of multiple counts involving conspiracy, mail and wire fraud, and money laundering. The indictment also contained two forfeiture allegations, the "First Forfeiture Allegation" relating to the money laundering convictions and a "Second Forfeiture Allegation" relating to the fraud counts. See Third Superseding Indictment (Dkt. #70) at 174-79. The parties stipulated before trial that the Court would determine forfeiture issues subsequent to the jury's verdict and prior to sentencing. The government now moves for a preliminary order of forfeiture as to both defendants Nicolo and Finnman pursuant to Rule 32.2(b) of the Federal Rules of Criminal Procedure.*fn1

In describing criminal forfeiture statutes, one commentator has noted that they are "complex" and "labyrinthine."*fn2 That may be so, but in this case it is clear and quite straightforward that defendant John Nicolo fraudulently received millions of dollars as a direct result of engaging in criminal activities over a period of years, involving a conspiracy to commit honest services fraud, mail and wire fraud and money laundering.

As part of the sentencing process, the government seeks to divest Nicolo of his ill-gotten gains, by means of an order directing the forfeiture of Nicolo's interests in certain assets. Specifically, the government seeks, under Rule 32.2(b)(1), a preliminary order of forfeiture as to several bank accounts, vehicles, and two parcels of real property in New York and Florida, as well as an in personam judgment against Nicolo in the sum of $9,729,264.*fn3

As to defendant Finnman, the government seeks only an in personam forfeiture money judgment in the amount of $385,393. The government does not seek forfeiture of any specific item of personal or real property as to Finnman.

In addition to relying on the evidence at trial, the government has submitted, as Exhibit A to its motion, an affidavit of Daniel Ciavarri, a financial analyst employed by the Federal Bureau of Investigation ("FBI"). Ciavarri performed a financial analysis of the various bank accounts owned by defendant Nicolo and his wife, co-defendant Constance Roeder. In addition, the government and defendants have submitted legal memoranda in support of their respective positions. In their submissions, counsel for both Nicolo and Finnman have raised a host of arguments in opposition to the government's forfeiture motion. The Court entertained extensive oral argument on the government's motion on December 8, 2008.

Based on the evidence at trial and the criminal convictions which followed, I find that the government has met its burden, and I therefore grant the motion and issue a preliminary order of forfeiture. An in personam judgment will be entered against both defendants Nicolo and Finnman. Defendant John Nicolo, by virtue of this order, also forfeits his interest in the property herein described, for the following reasons.

DISCUSSION

I. Statutory Framework

The government seeks forfeiture under two separate, but similar, federal statutes. The Second Forfeiture Allegation seeks forfeiture of a total sum of over $9.7 million from Nicolo as proceeds of the various fraud-related crimes of which he was convicted. Forfeiture of that amount is sought pursuant to 18 U.S.C. § 981(a)(1)(C), as well as 28 U.S.C. § 2461(c), which together provide for forfeiture of property "which constitutes or is derived from proceeds traceable" to a violation of certain statutes "or any offense constituting 'specified unlawful activity'." 18 U.S.C. § 981(a)(1)(C).*fn4 Violations of the mail and wire fraud statutes constitute "specified unlawful activity." United States v. Funds Held in the Name or for the Benefit of Wetterer, 210 F.3d 96, 103 (2d Cir. 2000); see also 18 U.S.C. §§ 1956(c)(7), 1961(1).

In addition, as to the First Forfeiture Allegation concerning the substantive money laundering convictions and the conspiracy to commit money laundering, the government relies on 18 U.S.C. § 982(a)(1), which subjects to forfeiture "any property, real or personal, involved in such offense, or any property traceable to such property."

Although defendants oppose the government's motion for a preliminary order of forfeiture, there is little dispute as to the applicable standards that control the Court's decision. Deciding a motion for a preliminary order of forfeiture is part of the sentencing process. As such, the rules of evidence that must be followed in criminal trials do not apply to this proceeding. See United States v. Capoccia, 503 F.3d 103, 110 (2d Cir. 2007); United States v. Gaskin, No. 00-CR-6148, 2002 WL 459005, at *9 (W.D.N.Y. Jan. 8, 2002), aff'd, 364 F.3d 438 (2d Cir. 2004), cert. denied, 544 U.S. 990 (2005). The Court's determination of what, if any, property is subject to forfeiture may be based on evidence already in the record from the trial or as submitted in the sentencing proceeding. Capoccia, 503 F.3d at 109-10. The government has the burden of proof to establish the propriety of forfeiture by a preponderance of the evidence.

United States v. Schlesinger, 396 F. Supp.2d 267, 271 (E.D.N.Y. 2005) aff'd, 514 F.3d 277 (2d Cir. 2008).

As to Nicolo, consideration of the forfeiture issues has been clouded somewhat because most of the personal and real property at issue is titled not to Nicolo but to his wife, co-defendant Constance Roeder. No order of forfeiture is sought against her.*fn5 It is important, therefore, to underscore the limited task before the Court on this motion. The Court's task at this juncture is not to consider and resolve the potentially thorny issues concerning third-party ownership of the property sought to be forfeited. Those issues are for another day.

Rather, the Court's obligation at this stage is primarily to determine the nexus or connection between the crime of conviction and the property sought to be forfeited. The requisite nexus can be established, and the property forfeited, if the property was: "involved in" the underlying offense; is "traceable to" property that was involved in the offense; constitutes "proceeds" of the offense; or is "derived from" proceeds of the offense. Capoccia, 503 F.3d at 117. If the government succeeds in establishing such a nexus, then Nicolo's interest in that property may be ordered forfeited.

Once the Court enters the preliminary order of forfeiture as to Nicolo, then, if a third party claims an interest in the property designated for forfeiture, the Court will consider such claims and render a final determination at an ancillary proceeding, as authorized by Rule 32.2(c).

Those proceedings may be and usually are conducted well after imposition of sentence and entry of the Judgment and Commitment.*fn6

With respect to mail and wire fraud, property is subject to forfeiture if it "constitutes or is derived from proceeds traceable to" a fraud violation. 18 U.S.C. § 981(a)(1)(C). The term "proceeds" is defined, in pertinent part, as "property of any kind obtained directly or indirectly, as the result of the commission of the offense giving rise to forfeiture, and any property traceable thereto, and is not limited to the net gain or profit realized from the offense." 18 U.S.C. § 981(a)(2)(A). To put it another way, "[p]roceeds are property that a person would not have but for the criminal offense ... ." United States v. Grant, No. S4 05 CR 1192, 2008 WL 4376365, at *2 n. 1 (S.D.N.Y. Sept. 25, 2008); accord United States v. Evanson, No. 2:05 CR 00805, 2008 WL 3107332, at *3 (D.Utah Aug. 4, 2008); see, e.g., United States v. Zvi, 168 F.3d 49, 52 (2d Cir.) (permitting forfeiture of funds legitimately obtained through defendants' sale of gold jewelry prior to the commission of fraud involving faked robbery of jewelry store, because "[t]he proceeds from the pre-robbery sale of gold represented the defendants' take from the scheme"), cert. denied, 528 U.S. 872 (1999)

With respect to forfeiture of fraud proceeds under § 981, then, a defendant may be ordered to forfeit all monies received by him as a result of the fraud, regardless of his net profits from the scheme. See, e.g., United States v. Uddin, ___ F.3d ___, 2009 WL 23606, at *4 (2d Cir. Jan. 6, 2009) (where defendant was convicted of food stamp fraud, district court did not err by entering forfeiture order equal to amount of government's entire loss, regardless of whether defendant shared the cash that he fraudulently received from the government with the food stamp beneficiary, since fraud "'proceeds' are not limited to net profits from the crime").

Consistent with that principle, it is irrelevant, for forfeiture purposes, whether a defendant convicted of fraud in connection with a kickback scheme actually performed any of the services that he contracted to perform as a result of the scheme. Again, monies paid to a defendant as a result of the scheme are "proceeds" subject to forfeiture, without regard to whether the victim received anything in return. See United States v. Webber, 536 F.3d 584, 603 (7th Cir. 2008) (explaining that since "[r]estitution is remedial in nature, and its goal is to restore the victim's loss," whereas forfeiture is punitive and "seeks to disgorge any profits that the offender realized from his illegal activity[,] ... restitution is calculated based on the victim's loss, while forfeiture is based on the offender's gain"); see, e.g., United States v. 10150 NW 133 St., 278 Fed.Appx. 880, 883 (11th Cir. 2008) (whether defendant Medicare provider actually filled medically necessary prescriptions pursuant to kickback scheme was irrelevant, since "[t]he kickbacks that led to the [Medicare] claims made them fraudulent, so the money paid for the claims is the proceeds of a crime").

To the extent that Nicolo received payments from the fraud victims as a result of the charged schemes, then, those payments are forfeitable, regardless of whether he performed any work pursuant to the contracts. Nicolo's performance, if any, may be relevant to the victims' loss, and hence to a future order of restitution,*fn7 but it is irrelevant to the amount of his proceeds. See 18 U.S.C. § 981(a)(2)(A); Advance Pharmaceutical, Inc. v. United States, 391 F.3d 377, 400 (2d Cir. 2004) (finding no abuse of discretion in district court's forfeiture award based on gross, rather than net, profits in RICO case); United States v. Lizza Indus., Inc., 775 F.2d 492, 498 (2d Cir. 1985) ("proceeds" are gross profits), cert. denied, 475 U.S. 1082 (1986). Ordering Nicolo to disgorge the full amount of his proceeds, irrespective of any loss to the victim, is consistent with the punitive purpose of criminal forfeiture. See Pacheco v. Serendesky, 393 F.3d 348, 355 (2d Cir. 2004) (noting that the purposes of criminal forfeiture are "to punish, deter and disempower criminals").

Criminal forfeiture based on money laundering violations differs in some respects from fraud-based forfeiture. As stated, 18 U.S.C. § 982(a)(1) subjects to forfeiture any property "involved in" a money laundering offense, or any property "traceable to such property." "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." Schlesinger, 396 F.Supp.2d at 271 (S.D.N.Y. 2005) (collecting cases). See also United States v. Reiner, 397 F.Supp.2d 101, 112 (D.Me. 2005) (noting authority that "the standard for determining what funds are 'involved in' a money laundering offense is less demanding than that for establishing 'proceeds'" of a crime under § 981(a)(1)) (citing United States v. McGauley, 279 F.3d 62, 76-77 (1st Cir. 2002)).

Forfeiture based on a defendant's money laundering, then, is appropriate not only with respect to the laundered monies themselves, but also with respect to property that is used to commit or facilitate the offense. "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 United States v. Tencer, 107 F.3d 1120, 1134 (5th Cir.), cert. denied, 522 U.S. 960 (1997)).

"[P]roperty 'traceable to' means property ... the acquisition [of which] is attributable to the money laundering scheme rather than from money obtained from untainted sources." United States v. Bornfield, 145 F.3d 1123, 1135 (10th Cir. 1998), cert. denied, 528 U.S. 1139 (2000). See also United States v. Voigt, 89 F.3d 1050, 1084-87 (3d Cir.) ("We hold that the term 'traceable to' means exactly what it says," i.e., "that the property ... has some nexus to the property 'involved in' the money laundering offense"), cert. denied, 519 U.S. 1047 (1996).

In Voigt, the Court of Appeals for the Third Circuit illustrated the difference between "involved in" and "traceable to" through the following example: if the defendant receives $500,000 cash in a money laundering transaction and hides the cash in his house, the government may seize that money as property "involved in" the money laundering offense. If the defendant purchased a $250,000 item with that money, the government may seek the remaining cash as "involved in" the offense, whereas the item purchased is subject to forfeiture as property "traceable to" property involved in the money laundering offense.

Voigt, 89 F.3d at 1087.

It is also important to keep in mind the different types of money laundering offenses of which Nicolo has been convicted. Counts 33 and 34 of the Third Superseding Indictment charged Nicolo with engaging in a money laundering conspiracy, in violation of 18 U.S.C. § 1956(h). Specifically, those counts charge Nicolo with conspiring to engage in violations of 18 U.S.C. § 1956(a) and § 1957.*fn8 The other nineteen money laundering counts here charged Nicolo with substantive violations of § 1957.

While §§ 1956(a) and 1957 both generally fall under the rubric of "money laundering," there are significant differences between the two.

Section 1956 ... prohibits money laundering as that activity is commonly understood. Section 1956 punishes conducting a financial transaction with the proceeds of specified unlawful activity knowing that the transaction is designed to conceal or disguise the nature, location, source, ownership or control of the proceeds, or intending that the transaction be so designed. Section 1957, on the other hand, prohibits engaging in monetary transactions in property from specified unlawful activity, and contains no requirement that the transaction be designed to conceal anything. A defendant must know only that she is engaging in a transaction and that the subject of the transaction is criminally derived property.

United States v. Allen, 129 F.3d 1159, 1164-65 (10th Cir. 1997). See also United States v. Brown, 186 F.3d 661, 670 (5th Cir. 1999) (§ 1957 criminalizes the "mere spending of dirty money"); United States v. Rutgard, 116 F.3d 1270, 1291 (9th Cir. 1997) (§ 1957 "applies to the most open, above-board transaction. The intent to commit a crime or the design of concealing criminal fruits is eliminated"); United States v. Wynn, 61 F.3d 921, 927 (D.C. Cir.) ("Due to the omission of a 'design to conceal' element, section 1957 prohibits a wider range of activity than money 'laundering,' as traditionally understood"), cert. denied, 516 U.S. 1015 (1995). Unlike § 1956, however, § 1957 requires that the property involved have a value greater than $10,000. 18 U.S.C. § 1957(a).

II. Forfeiture Concerning Defendant Nicolo

As to Nicolo, the government seeks a judgment in the approximate amount of $9.7 million, as well as the forfeiture of specific items of property which the government claims should be utilized to satisfy the $9.7 million judgment.

The specific items of real and personal property are listed in the First Forfeiture Allegation, at pages 175-76 of the Third Superseding Indictment, and at page 44 of the government's motion for a preliminary order of forfeiture. They include monies in six different bank accounts or CD accounts, three automobiles and two parcels of real property, one in Penn Yan, New York and the other in Palm Beach, Florida. Pursuant to seizure warrants issued well before trial, all of ...


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