The opinion of the court was delivered by: Seybert, District Judge
Defendant Sandra Hatfield has moved for a hearing, pursuant to United States v. Monsanto, 924 F.2d 1186 (2d Cir. 1991). For the foregoing reasons, that motion is GRANTED.
I. Ms. Hatfield's Right to a Monsanto Hearing
"A fundamental requirement of due process is the opportunity to be heard. It is an opportunity which must be granted at a meaningful time and in a meaningful manner." Monsanto, 924 F.2d at 1195. Due process is particularly important when restraining funds that a defendant needs to pay counsel because "a defendant who is denied any pretrial opportunity to contest a restraint of assets needed to retain counsel is irrevocably deprived of that counsel." Id. Consequently, in Monsanto, the Second Circuit held that the Fifth and Sixth Amendments require an "adversary, post-restraint, pretrial hearing as to probable cause that (a) the defendant committed crimes that provide a 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." Id. at 1203.
Here, the Government restrained Ms. Hatfield's assets ex parte. Docket No. 4. Thus, Ms. Hatfield has a right to a Monsanto hearing where she contest this ex parte deprivation if she shows that she needs the restrained funds to "retain counsel of choice." Id. Ms. Hatfield has met this burden. Ms. Hatfield's counsel, Ronald Riopelle of Sercarz & Riopelle LLP, has represented that his firm's outstanding bills to Ms. Hatfield exceed $1 million, while her unrestrained assets total only $113,604.32, and includes money that Ms. Hatfield needs to live on. In the past, Sercarz & Riopelle's bills have been paid (if belatedly) by Ms. Hatfield's former employer, Point Blank Solutions, Inc., under a fee advancement agreement. But Point Blank has now declared bankruptcy. So Sercarz & Riopelle LLP stands no realistic prospect of getting paid soon and, should it get paid eventually, it will likely recover only pennies on the dollar. In addition, Point Blank's bankruptcy likely repudiates the Company's obligation to pay Sercarz & Riopelle's bills going forward.
In response, the Government argues that Ms. Hatfield has "substantial unrestrained funds," she can use to pay her attorneys' fees, such as the bonus she received in January 2005, and the excess cash she generated from selling DHB stock which the Government failed to restrain. But Mr. Riopelle has repeated represented that Ms. Hatfield previously spent these funds to meet other obligations, such as taxes and living expenses. The Court credits those representations. Moreover, the Court notes that, rather than seeking to refute Ms. Hatfield's claims, the Government appears to concede that Ms. Hatfield has previously "disposed of the bonus in addition to the $1.3 million" she generated from selling DHB stock.*fn1 Docket No. 966. Thus, the fact that Ms. Hatfield once had substantial assets says nothing about whether she has substantial assets today, nearly four years into a complex criminal prosecution. And the evidence before the Court indicates that Ms. Hatfield, in fact, lacks such assets -- especially when considered along with her need to pay living expenses and attend trial far from home. Thus, the Court finds that Ms. Hatfield lacks meaningful assets that she could use to pay counsel.
The Court recognizes that, as a technical matter, Ms. Hatfield's current financial situation does not impact her ability to "retain counsel," Monsanto, 924 F.2d at 1203, since she has already "retained" Sercarz & Riopelle LLP. But, on the facts of this case, it makes little difference. At the time Ms. Hatfield retained Sercarz & Riopelle LLP, the firm could not have reasonably anticipated that Ms. Hatfield's prosecution would last nearly four years (to date), culminate in a (likely) five month trial, or survive Point Blank's bankruptcy filing. And, as Mr. Riopelle has represented, his small firm cannot continue to appear on trial Monday through Thursday, week after week, without pay, while neglecting paying work. Indeed, Mr. Riopelle has represented that his firm stands about a month away from bankruptcy and that, as a practical matter, his firm would have to seriously restructure Ms. Hatfield's representation unless it receives a cash influx. Thus, while Ms. Hatfield's Sixth Amendment right to "retain" counsel may not be directly implicated, her inability to pay counsel implicates her equally important Sixth Amendment right to "use one's own funds to mount the defense that one wishes to present." U.S. v. Stein, 541 F.3d 130, 151 (2d Cir. 2008). There is no logical reason for Monstanto to apply to one kind of Sixth Amendment violation, but not another. Thus, notwithstanding Monstanto's language about "retain[ing]" counsel, the Court understands the decision as applying to Sixth Amendment rights generally.
Now that the Monsanto hearing has been granted, the Government has the burden of showing probable cause that the assets it has restrained are "properly forfeitable."*fn2 See Monsanto, 924 F.2d at 1196, 1203; CFTC v. Walsh, 09-CV-1749, 2010 WL 882875, *3 (S.D.N.Y. 2010) (interpreting Monsanto as placing the burden on the Government); U.S. v. Millan-Colon, 836 F. Supp. 994, 1005 (S.D.N.Y. 1993) (same).
In the Superseding Indictment, the Government seeks forfeiture under 18 U.S.C. § 981(a)(1)(C) and 28 U.S.C. § 2461(c). Of these, only § 981(a)(1)(C) is a substantive statute delineating the scope of forfeitable assets. The other statute, § 2461(c), merely clarifies that § 981 applies to criminal cases and authorizes certain forfeiture procedures. Thus, for Monsanto purposes, the Government must show probable cause that Ms. Hatfield's presently retrained assets are subject to forfeiture under § 981(a)(1)(C). In its pre-hearing briefs, the Government attempts to do so by interpreting § 981(a)(1)(C) as authorizing forfeiture of the entire gross proceeds Ms. Hatfield reaped by selling DHB shares while possessing material inside information. The Court is not persuaded by this interpretation.
Section 981(a)(1)(C) subjects to forfeiture "Any property, real or personal, which constitutes or is derived from proceeds traceable to a violation of [specified statutes] or a conspiracy to commit such offense." The statute then provides two definitions of "proceeds," depending on the kind of offense committed. "In cases involving illegal goods, illegal services, unlawful activities and telemarketing and health care fraud schemes, the term 'proceeds' means property of any kind obtained directly or indirectly, as a 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." § 981(a)(2)(A). On the other hand, "[i]n cases involving lawful goods or lawful services that are sold or provided in an illegal manner, the term 'proceeds' means the amount of money acquired through the illegal transactions resulting in the forfeiture, less the direct costs incurred in providing the goods or services..." § 981(a)(2)(B).
Thus, at the outset, the Court must determine whether the Government's criminal "case" against Ms. Hatfield "involv[es] illegal goods, illegal services [or] unlawful activities," or "lawful goods or lawful services that are sold or provided in an illegal manner." The Court finds it is a mix of both. Ms. Hatfield's alleged illegal trading, for instance, stems from her selling a lawful good (DHB stock) in an illegal manner (while possessing material inside information). But this alleged insider trading would not have been possible, or profitable, without many of the underlying frauds. And these frauds, in turn, involved both "illegal services" (such as inventing non-existent inventory) and "unlawful activities" (e.g., wire and mail fraud, executing a scheme to defraud persons in connection with the sale of securities). Thus, this "case" clearly "involv[es]" both "illegal services" and "unlawful activities." And, accordingly, the Court applies § 981(a)(1)(A) to Ms. Hatfield's potentially forfeitable assets.
The question then turns to what § 981(a)(1)(A) means as applied to Ms. Hatfield. The Government contends that it enables forfeiture of the entire "gross proceeds" Ms. Hatfield reaped by selling her DHB stock. The Court disagrees. Under § 981(a)(1)(A), "proceeds" does not mean any property bearing some factual nexus to a crime. It means "property of any kind obtained directly or indirectly, as the result of the commission of the offense giving rise to forfeiture." (emphasis supplied). Here, Ms. Hatfield's stock sales did not cause her to "obtain" "property." It merely enabled her to transform one kind of property (stock) into another kind (cash) of equal market value. The actual alleged "illegal activity" that "result[ed]" in Ms. Hatfield "obtain[ing]" "property" were the underlying alleged frauds. These alleged frauds, if committed, may have enabled Ms. Hatfield to "obtain" "property" in two ways. First, the frauds may have caused DHB to compensate her based on the Company's fictional financial results, and thus led to DHB paying her too much (including too much equity compensation). And second, the frauds may have caused DHB's stock price to rise artificially, thereby increasing the value of Ms. Hatfield's DHB equity investment. As it relates to cash Ms. Hatfield generated by selling stock, this means that the following amounts are subject to forfeiture: (1) 100% of the cash Ms. Hatfield generated by selling stock that DHB awarded her based on the Company's fraudulent financial performance; and (2) for stock Ms. Hatfield otherwise obtained, the difference between the stock's inflated value, and what it would have sold for absent the fraud. This reasoning is consistent with a central purpose of criminal forfeiture: to prevent a defendant from enjoying the benefits of ill-gotten gains.*fn3
The Government's requested interpretation, in contrast, bares little relationship to a defendant's ill-gotten gains. Instead, the Government reads the statute as requiring a securities fraud defendant to forfeit 100% of the cash generated by selling stock, regardless of whether: (1) the defendant purchased the stock with his own money; and (2) the fraud had a meaningful impact on the stock price. And, depending on a case's facts, such an interpretation raises serious Constitutional concerns. See, generally, U.S. v. Bajakajian, 524 U.S. 321, 334, 118 S.Ct. 2028, 141 L.Ed. 2d 314 (1998) (holding that forfeiture can violate the Excessive Fines clause). Suppose, for instance, that a Widget Corp. executive purchases 1000 Widget shares at $100 a share. A few days later, the executive uncovers material inside information indicating that Widget's stock is only worth $99 a share and sells his position at the same $100 a share price he originally paid. In so doing, the executive unquestionably violates federal securities laws. But his ill-gotten gain would be only $1000, representing the loss he avoided. Under the Government's theory, however, the executive would face forfeiture of his entire $100,000 investment, even though $99,000 of that stemmed from legitimate personal funds unrelated ...