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United States of America v. Courtney Dupree

March 18, 2011

UNITED STATES OF AMERICA,
v.
COURTNEY DUPREE, THOMAS FOLEY, AND RODNEY WATTS, DEFENDANTS.



The opinion of the court was delivered by: Matsumoto, United States District Judge:

MEMORANDUM AND ORDER

INTRODUCTION

A four-count indictment ("Indictment"), filed August 13, 2010, charges defendants Courtney Dupree ("Dupree"), Thomas Foley ("Foley") and Rodney Watts ("Watts")*fn1 (together, "defendants") with one count of Conspiracy to Commit Bank, Mail and Wire Fraud in violation of 18 U.S.C. §§ 1349,*fn2 3551 et seq.,*fn3 one count of Bank Fraud in violation of 18 U.S.C. §§ 1344,*fn4 2,*fn5 3551 et seq., and two counts of making False Statements, in violation of 18 U.S.C. §§ 1014,*fn6 2, 3551 et seq. (See ECF No. 22, Indictment ("Indictment").) Defendant Dupree was the president and chief executive officer of GDC Acquisitions, LLC ("GDC"), and at different times relevant to the Indictment, defendant Foley was GDC's outside counsel and its chief operating officer and defendant Watts was GDC's chief financial officer and chief investment officer. (Indictment at ¶¶ 2, 3,4.)

All defendants move (1) for an order seeking relief from the July 27, 2010 seizure of funds from bank accounts at J.P. Morgan Chase held by GDC and/or its subsidiaries; (2) to suppress evidence seized at the offices of GDC and its subsidiaries pursuant to a search warrant executed on July 23, 2010; and (3) for relief, including dismissal of the Indictment, due to alleged prosecutorial misconduct. The government opposes the motions. The court has carefully reviewed the parties' submissions, and for the reasons set forth below, defendants' motions seeking relief from the seizure of funds are denied. Defendants' motions to suppress evidence seized during the search of the offices of GDC and its subsidiaries are denied. Defendants' motions to dismiss the Indictment are also denied.

BACKGROUND

I.Charges

The allegations in the Indictment, the Complaint and the submissions of the government are as follows:

Between January 2007 and July 2010, defendants Dupree, Foley and Watts allegedly orchestrated a scheme to defraud Amalgamated Bank ("Amalgamated"), a financial institution, the deposits of which were insured by the Federal Deposit Insurance Corporation, and C3 Capital, LLC, a private equity investment firm ("C3 Capital"), by obtaining, and attempting to obtain, loans for GDC and its subsidiaries JDC Lighting, LLC, Unalite Electric and Lighting, LLC, and Hudson Bay Environments Group, LLC, TDC Acquisitions, LLC, Interconnect Lighting, LLC, Image Lighting Services, LLC, Image Lighting, LLC, Image Lighting Corp., Unalite Southwest, LLC, Unalite NJ, LLC, and Unalite Distribution, LCC (collectively, the "subsidiaries") on the basis of false financial statements and other material misrepresentations. (Indictment at ¶¶ 1, 8; ECF No. 1, Complaint and Affidavit in Support of Application for Arrest Warrants ("Shea Complaint Aff.") at ¶ 3 n.2.) Specifically, on or about August 29, 2008, the subsidiaries and Amalgamated Bank allegedly entered into an agreement under which the subsidiaries could borrow up to $21 million from Amalgamated Bank through a revolving credit loan and a term loan ("Agreement"), both of which loans were guaranteed by GDC. (Indictment at ¶ 9.) Under the terms of the Agreement, the subsidiaries pledged their accounts receivable as security for the loans. (Id. at ¶ 10.) The Agreement further permitted the subsidiaries to borrow an amount equal to the sum of 75 percent of the subsidiaries' eligible accounts receivable plus the current value of the subsidiaries' inventory. (Id.) The Agreement required that the subsidiaries submit Borrowing Base Certificates ("BBCs"), certified as accurate by GDC, to Amalgamated Bank each month stating the total value of both the subsidiaries' accounts receivable and their current inventory so that Amalgamated Bank could determine the amount that the subsidiaries could borrow in any given month. (Id.)

According to the Indictment, the defendants allegedly "deliberately and falsely overstated the accounts receivable on the consolidated financial statements and BBCs that they supplied to Amalgamated Bank. They achieved this result by a variety of means, including: (a) booking fictitious sales, thereby creating fictitious accounts receivable; (b) 're-aging' the accounts receivable by issuing credits for old sales invoices, then re-booking the sales so that they appeared to have been incurred more recently, and were thus more valuable;

(c) prematurely recognizing sales and the corresponding revenue, thereby creating accounts receivable before the appropriate time under generally accepted accounting principles; and (d) failing to reduce the accounts receivable with cash received from customers, and instead improperly booking the cash in another line item on the balance sheet." (Id. at ¶ 12.)

In addition, the Indictment charges that the Agreement limited the ability of GDC and the subsidiaries to make new capital investments while the loan was outstanding and required GDC to maintain a debt to equity ratio of not more than 3 to 1. (Id. at ¶ 13.) The Indictment charges that the defendants further defrauded Amalgamated Bank by covertly purchasing Image Lighting, Inc. ("Image Lighting") contrary to the terms to the terms of the Agreement. (Id.)

Finally, the Indictment charges that between October 2008 and October 2009, defendants "attempted to obtain approximately $5 million in funding from C3 Capital by submitting false financial statements and accounts receivable aging reports that inflated GDC's accounts receivable," but C3 Capital ultimately did not lend money to GDC or the subsidiaries. (Id. at ¶ 14.)

II.Search Warrant

On July 21, 2010, the government applied for a warrant to search the offices of GDC and its subsidiaries at 47-07 32nd Place, Long Island City, New York (the "subject premises"). (ECF No. 56, Executed Search Warrant, filed July 27, 2010 (the "search warrant").) Exhibit A to the search warrant set forth the following list of items to be seized and the search, seizure and removal procedures for computerized electronic data:

1. The items to be seized are evidence or instrumentalities of violations of 18 U.S.C. §§ 1341, 1343, 1344 and 1349, specifically:

a. All documents or other materials relating to loans or other extensions of credit to GDC Acquisitions, Inc. ("GDC") and its subsidiaries,TDC Acquisitions, LLC, Interconnect Lighting, LLC, Image Lighting Services, LLC, Image Lighting, LLC, Image Lighting, Inc., Hudson Bay Environments Group, LLC Unalite Electric & Lighting, LLC, Unalite Southwest, LLC, Unalite NJ, LLC, Unalite Distribution, LLC, and JDC Lighting, LLC, (collectively, the "Subsidiaries"), such as loan agreements, loan applications, Borrowing Base Certificates, and other documents provided to creditors in support of extensions of credit from the following entities:

MVC Capital, Inc., C3 Capital LLC, Steelcase Inc., Steelcase Financial Services, Inc., and Amalgamated Bank, (collectively, the "Creditors"), and all bank records, including, but not limited to, account statements and documents related to transactions in bank accounts such as canceled checks and wire transfer records, for the period from January 1, 2006 to the present;

b. All documents relating to assets, liabilities, income, expenses, sales and accounts receivable of GDC or the Subsidiaries, including, but not limited to, accounting records, general ledgers, work papers, journals relating to the receipt or disbursement - or anticipated receipt or disbursement - of money or property, financial statements, trial balances, records detailing the relative age of various accounts receivable, invoices, and federal and state tax records (including income tax records), for the time period from January 1, 2006 to the present;

c. All documents relating to any mail box located at a commercial mail receiving agency, including, but not limited to, customer applications and correspondence;

d. All documents relating to communications or contacts between the conspirators and any of their principals, employees, or agents, or the Creditors, including, but not limited to, letters, phone messages, e-mail, text messages, "chat," or instant messages, including any attachments to such e-mails or messages, sent by or received by the user(s) of any computer located at the SUBJECT PREMISES, whether saved or deleted, and whether contained directly in an e-mail, text message, chat, or instant message account or in a customized "folder";

e. All documents relating to the conspirators', or any of their principals', employees', or agents' calendar, contact, or personal planner data or files including, but not limited to, data contained in Outlook, Lotus Notes, or Eureka, created or maintained by the user(s) of any computer located at the SUBJECT PREMISES.

2. The search procedure for electronic data contained in computer operating software or memory devices, whether performed on site or in a laboratory, or other controlled environment, may include seizure of any computer or computer-related equipment or data, including floppy diskettes, fixed hard drives, or removable hard disk cartridges, software or memory in any form containing material described above, and the removal thereof from the SUBJECT PREMISES for analysis by authorized personnel.

The government supported its search and seizure warrant request with an affidavit from FBI Special Agent Gavin Shea, which alleged that "there is probable cause to believe that there is presently located within the SUBJECT PREMISES evidence and instrumentalities, as set forth in Exhibit A to the Search Warrant attached hereto, of violations of federal law, including violations of 18 U.S.C. §§ 1341, 1343, 1344, 1349." (ECF No. 55, Affidavit in Support of Application for Search and Seizure Warrants, dated July 21, 2010 ("Shea Aff.") at ¶ 11.) The Shea Affidavit also incorporated as Exhibit E thereto the Complaint and Affidavit in Support of Application for Arrest Warrants of the defendants and Frank Patello, which described the alleged fraudulent scheme in detail. (ECF No. 55, Ex. E, Complaint and Affidavit in Support of Application for Arrest Warrants ("Shea Complaint Aff.").)

In the affidavits he submitted, Agent Shea described his professional qualifications: he is a certified public accountant and has worked with the FBI over the past twelve years investigating "white collar crime, including bank fraud, securities fraud, telemarketing fraud, money laundering schemes, and other types of schemes." (Shea Aff. at ¶ 1.) The affidavit also described the appearance, location and layout of the subject premises occupied by GDC and its subsidiaries (Shea Aff. at ¶¶ 3, 4), and provided factual support for the government's position that there was probable cause to search the subject premises. Specifically, Special Agent Shea relied on a confidential source ("CS-1") to support probable cause to issue the search and seizure warrants. (Shea Aff. at ¶¶ 6, 7, 8.)

Special Agent Shea affirmed that based upon "the information set forth and incorporated . . ., [his] training, experience, and participation in this and other financial crime and money-laundering investigations, and [his] conversations with other law enforcement officers, there is probable cause to believe that the SUBJECT PREMISES is being used by the conspirators for the storage of various financial records and documents relating to bank fraud, mail fraud, and wire fraud." (Shea Aff. at ¶ 9.) Special Agent Shea set forth the type of documents and records that "persons who commit frauds such as this one often maintain." (Shea Aff. at ¶ 10.) Special Agent Shea affirmed that in executing the warrant, law enforcement officers would "make every effort to 'image' or copy GDC's original computer servers in such a way that [they would] not have to seize them," but also requested authority to "search, copy, image and seize the computer hardware (and associated peripherals)" and set forth different search techniques. (Shea Aff. at ¶¶ 13, 14.)

On July 21, 2010, Magistrate Judge Go signed the warrant to search GDC's offices at 47-07 32nd Place, Long Island City, New York 11101. (ECF No. 56, Executed Search Warrant, filed July 27, 2010.) Judge Go ordered that "the search of computers and electronic devices should be in accordance with the procedures set forth in the affidavit of Agent Shea." (Id.)

The search warrant was executed on July 23, 2010. The government seized approximately 188 boxes of documents, images of the company's computer servers, and images of desktop computers and other electronic storage devices on the premises. (See id.)

III.Seizure Warrants

On July 21, 2010, the government also applied for seizure warrants. The government sought to seize funds in Amalgamated Bank accounts held by GDC and the subsidiaries. (ECF No. 57, Seizure Warrant, dated July 21, 2010.) In support of its application for seizure warrants, the government submitted several affidavits from Special Agent Shea. In his Affidavit in Support of Application for Search and Seizure Warrants, discussed above, which also incorporated the Complaint Affidavit, Special Agent Shea affirmed that there "is probable cause to believe that any and all funds on deposit in the accounts listed below and in Exhibit B to this affidavit (collectively, the "SUBJECT ACCOUNTS") are subject to forfeiture pursuant to Title 18, United States Code, sections 981(a)(1)(C), 981(a)(1)(D), 982(a)(2), and Title 28, United States Code section 2461, as representing property which constitutes or is derived from proceeds traceable to a conspiracy to commit bank fraud, mail fraud, and wire fraud contrary to Title 18, United States Code, Sections 1344 (bank fraud), 1341 (mail fraud), and 1343 (wire fraud), respectively, all specified unlawful activities." (Shea Aff. at 2.)

In addition to his Affidavit in Support of Application for Search and Seizure Warrants dated July 21, 2010, Agent Shea also submitted additional affidavits in support of the seizure warrants that were ultimately issued on July 23 and July 27, 2010 to seize funds in GDC's and its subsidiaries' accounts at Amalgamated Bank and J.P. Morgan Chase Bank. (See ECF No. 58, Affidavit in Support of Application for Seizure Warrants, dated July 23, 2010 ("7/23/10 Shea Seizure Aff."); Declaration of Marion Bachrach ("Bachrach Decl."), Ex. E (same); Ex. F, Affidavit in Support of Application for Seizure Warrants, dated July 27, 2010 ("7/27/10 Shea Seizure Aff.").) In these affidavits, Special Agent Shea provided the source of his information and his grounds for believing probable cause existed to seize the funds, including setting forth details of the scheme to defraud and the fraudulent financial statements. (Shea Aff. at ¶ 7; see also 7/23/10 and 7/27/10 Shea Seizure Affs.) Following the government's execution of the search and seizure warrants on July 23, 2010, and in further support of probable cause, Special Agent Shea affirmed that "[a]fter being placed under arrest, PATELLO, [GDC's] controller and chief financial officer ("CFO"), confirmed the statements of the CS-1 and stated that the fraud proceeds were initially deposited into an account held by GDC and then dispersed throughout the Subject Accounts as needed to run GDC and its subsidiaries. PATELLO further stated that the Additional Subject Accounts received fraud proceeds through the same process. Specifically, PATELLO stated that the money was distributed to all other accounts held at Amalgamated and Chase Banks including Unalite accounts in Texas." (7/23/10 and 7/27/10 Shea Seizure Affs. at ¶ 32.)

Magistrate Judge Go signed two seizure warrants for accounts at Amalgamated and J.P. Morgan Chase Bank on July 21, 2010, and limited the seizures to $21,000,000. (ECF No. 57, Seizure Warrants, dated July 21, 2010 ("7/21/10 Seizure Warrants"); see also Bachrach Decl., Ex. A.) Pursuant to these seizure warrants, sixteen bank accounts at Amalgamated were seized on July 23, 2010. (7/23/10 Shea Seizure Aff. at ¶ 3.) A second seizure warrant for five additional bank accounts at Amalgamated was signed by Judge Reyes on July 23, 2010. The government subsequently learned that the additional bank accounts and one of the original subject accounts were held at J.P. Morgan Chase Bank rather than at Amalgamated Bank as listed in the warrant. (7/27/10 Shea Seizure Aff. at ¶ 3; see also ECF No. 100, Memorandum of Law in Opposition to Defendants' Motion Opposing Government's Seizure and Restraint of Funds ("Govt. Seizure Opp."), at 3 n.2.) Accordingly, on July 27, 2010, Magistrate Judge Reyes reissued the seizure warrant authorizing seizure of funds held at J.P. Morgan Chase Bank by Unalite Southwest LLC and Unalite NY, LLC (the "Chase accounts"). (ECF No. 60, Seizure Warrant, dated July 27, 2010.)

Upon Amalgamated's request, on August 2, 2010, the government informed Amalgamated that it had decided to return the seizure warrant as unexecuted as to the funds in the Amalgamated accounts. (See generally ECF No. 100, Govt. Seizure Opp., at 5.) According to the government, the only funds that currently remain under the government's control (the "restrained funds") are approximately $1,000,556 from the Chase accounts, which were seized pursuant to the July 27, 2010 warrant. (Id. at 5-6.)

In a separate state court proceeding initiated by Amalgamated, by Order to Show Cause dated August 4, 2010, New York Supreme Court Justice Shirley Werner Kornreich granted Amalgamated's request, inter alia, for an order temporarily restraining defendants, GDC and its affiliates, from "moving, removing, transferring, encumbering . . . assets . . . and . . . books [and] records . . . other than in the ordinary course of business. . . ." (ECF No. 100, Ex. F, Order to Show Cause Appointing Temporary Receiver, dated Aug. 4, 2010, at ¶ 21.) Justice Kornreich also ordered that all funds in the Chase accounts be deposited into the Amalgamated Bank account. (Id. at ¶ 24.)

On August 8, 2010, counsel for defendant Dupree contacted AUSA Evan Weitz to discuss making funds in the Chase accounts available for use by GDC. (ECF No. 91-5, Affidavit of Roscoe C. Howard, Jr. ("Howard Aff.") at ¶¶ 20, 23.) According to defendants, AUSA Weitz advised Dupree's counsel that the government intended to freeze the approximately $700,000 in the Chase accounts in contemplation of forfeiture, but that the government would release the funds in the Chase accounts on the condition that the funds be transferred to an account at Amalgamated and that Amalgamated agree to the transfer of such funds. (Howard Aff. at ¶ 24.)

On August 17, 2010, defense counsel asked Amalgamated to make funds in the Chase accounts available to GDC to pay bills such as payroll, rent, taxes, legal fees, and D&O insurance. (Howard Aff. at ¶ 25.) One week later, on August 24, 2010, Amalgamated released funds for the August 13, 2010 payroll that had passed. (Howard Aff. at ¶ 13.) According to defendants, since that time, Amalgamated has refused to disperse any additional funds (Howard Aff. at ¶ 16), GDC laid off almost all of its employees and the business operations of GDC have effectively been terminated (Howard Aff. at ¶ 18).

DISCUSSION

Defendants now make the following motions: (1) to vacate the seizure warrants and release the funds in the Chase accounts pursuant to Fed. R. Crim. P. 41(g), and request (a) an evidentiary hearing regarding issues of fact relating to the seizures pursuant to Rule 41(g), (b) a hearing pursuant to Franks v. Delaware, 438 U.S. 154 (1978), and (c) a hearing pursuant to United States v. Monsanto, 924 F.2d 1186 (2d Cir. 1991) ("Monsanto IV");*fn7 (2) to suppress evidence seized pursuant to the search warrant executed on July 23, 2010 at GDC's premises pursuant to Fed. R. Crim. P. 12(b)(3)(C) and 41(h); and (3) to dismiss the four-count Indictment pursuant to Fed. R. Crim. P. 12(b) based on prosecutorial misconduct. Defendants' motions are predicated on their arguments that the government's search and seizures were not authorized by law and violated the Constitution. The court addresses each motion below.

I.Defendants' Motions Opposing Seizure of Funds

a.Standard

As discussed below, 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, 982; 21 U.S.C. § 853(f); 28 U.S.C. § 2461(c). To demonstrate probable cause, the government must establish a nexus between the property and the illegal activity. See Fed. R. Crim. P. 32.2(b); United States v. Galestro, No. 06-CR-285, 2008 U.S. Dist. LEXIS 53834, at *32 (E.D.N.Y. July 15, 2008).

b.Application

Defendants Dupree and Watts argue that (1) the government failed to establish probable cause for the seizure of funds; (2) the government cannot seize or restrain assets prior to trial pursuant to 28 U.S.C. § 2461; (3) defendants were deprived of due process because they were not given notice or an opportunity to be heard prior to the government's seizure of funds; (4) the government's seizure of funds should be vacated based on "false statements and omissions" in the government's affidavits in support of the seizure warrants, and that they are entitled to an evidentiary hearing pursuant to Franks v. Delaware, 438 U.S. 154 (1978), to determine if the alleged false statements and omissions "were intentional and reckless and necessary to a determination of probable cause"; and (5) defendant Watts is entitled to a hearing pursuant to United States v. Monsanto, 924 F.2d 1186 (2d Cir. 1991) ("Monsanto IV"), to determine whether "he is entitled to use seized funds of the businesses that employed him in order to pay for his defense." (See generally ECF No. 90, Memorandum of Law in Support of Motion by Defendants Watts and Dupree Opposing Government's Unconstitutional and Unlawful Seizure and Restraint of Funds ("Defs. Seizure Mem.").) Defendant Foley joins this motion. (See ECF No. 94, Declaration of Joseph W. Ryan, Jr. ("Ryan Decl."), at ¶ 2.)

In opposition, the government asserts that (1) defendants do not have standing to seek the return of the seized funds; (2) the government met its burden to establish probable cause for the issuance of seizure warrants; (3) 28 U.S.C. § 2461 allows for pretrial seizure of funds; (4) defendants were afforded all appropriate due process in the seizure of the fraud proceeds; (5) defendants are not entitled to a Franks hearing; and (6) defendant Watts is not entitled to a Monsanto hearing. (See generally ECF No. 100, Govt. Seizure Opp.) The court will consider each argument in turn.

i.Standing

Defendants argue that their individual status, respectively, as an owner (Dupree), executives (Dupree and Watts), and claimant-creditor (Foley), they have standing to contest the seizure of the funds in the accounts of GDC and its subsidiaries. (See ECF No. 90, Defs. Seizure Mem., at 20; ECF No. 94, Ryan Decl., at ¶ 2.) In response, the government argues that defendants "lack standing to seek the return of restrained funds because Amalgamated possesses a superior interest in the funds as a result of the loan agreement." (ECF No. 100, Govt. Seizure Opp., at 7.) In reply, defendants argue that "[w]here, as here, the government has not started a civil suit, the only issue is whether a claimant has Article III standing, which these defendants clearly do." (ECF No. 105, Reply Memorandum of Law in Support of Motion by Defendants Watts and Dupree Opposing Government's Unconstitutional and Unlawful Seizure and Restraint of Funds ("Defs. Reply. Seizure Mem.") at 3.) Defendants further argue that "a claimant need only show injury to claim constitutional standing." (Id.) The court finds that, for purposes of their motions to vacate the seizure warrants, defendants have standing to contest the seizure of GDC's funds.

In order to contest the seizure of funds in the accounts of GDC and its subsidiaries, "a litigant must allege a 'distinct and palpable injury to himself' that is the direct result of the 'putatively illegal conduct of the [adverse party]' and likely to be redressed by the requested relief.'" United States v. Cambio Exacto S.A., 166 F.3d 522, 527 (2d Cir. 1999) (internal citations omitted). Defendants thus bear the burden of demonstrating standing to vacate the seizures. United States v. Any and All Funds on Deposit in Account No. 12671905, No. 09 CV 3481, 2010 U.S. Dist. LEXIS 81151, at *14 (S.D.N.Y. Aug. 10, 2010) (citations omitted). In determining standing to contest the seizure and forfeiture of funds, courts look to ownership and possession of the seized property as reliable indicators of standing to claim injury. Cambio, 166 F.3d at 527. However, "while ownership and possession generally may provide evidence of standing, it is the injury to the party seeking standing that remains the ultimate focus." Id.

Here, defendants allege that they were injured when GDC was allegedly "shuttered," that they were deprived of salaries and advances of legal fees to which they were entitled, and that they were denied their Fifth and Sixth Amendment rights to due process and counsel. The court will discuss the merits of defendants' claims, infra, but finds that they have satisfied their initial burden of establishing Article III standing. See, e.g., United States v. Hooper, 229 F.3d 818, 820 n.4 (9th Cir. 2000) (where wives of defendants whose property had been forfeited in connection with drug offenses challenged the forfeiture, there was "no dispute that [the wives] had Article III standing to file their petitions and challenge the forfeitures").

ii.Statutory Authority to Seize

Defendants argue that the government was not entitled to a pretrial seizure of funds or substitute assets pursuant to 18 U.S.C. § 982 and 28 U.S.C. § 2461. (ECF No. 90, Defs. Seizure Mem., at 27-28.) In response, the government argues that defendants have mischaracterized the law, and that 18 U.S.C. §§ 981, 982, 21 U.S.C. § 853(f) and 28 U.S.C. § 2461, as amended, allow for pretrial seizure of funds. (ECF No. 100, Govt. Seizure Opp., at 14-15, 19-20.) In reply, defendants argue that the Magistrate Judges did not make a determination that an order pursuant to 21 U.S.C. § 853(e) may not be sufficient to assure the availability of forfeiture assets, as required by 21 U.S.C. § 853(f). (ECF No. 105, Defs. Reply. Seizure Mem., at 8.)

Defendants have raised two distinct issues: (1) whether the government, in a criminal case, is authorized to seize property prior to conviction; and if it is, (2) whether the government is required to show that a restraining order, injunction or temporary restraining order without notice or opportunity for a hearing, provided by 21 U.S.C. § 853(e), would not be sufficient to assure the availability of the funds for forfeiture.

The government executed seizure warrants pursuant to its authority under the civil forfeiture statute, 18 U.S.C. § 981(a)(1)(C), and the criminal forfeiture statutes, 18 U.S.C. § 982(a)(2) and 28 U.S.C. § 2461(c). Both 18 U.S.C. § 982(b)(1) and 28 U.S.C. § 2461(c) apply the procedures of 21 U.S.C. § 853 for seizure and forfeiture, as discussed infra.

Title 18 U.S.C. § 981 provides that the United States may obtain civil forfeiture of "[a]ny property . . . which constitutes or is derived from proceeds traceable to a violation of section . . . 1344 [bank fraud]." 18 U.S.C. § 981(a)(1)(C). In addition, "[a]ny property, real or personal, which represents or is traceable to the gross receipts obtained, directly or indirectly, from a violation of . . . 18 U.S.C. § 1341 (relating to mail fraud) and § 1343 (relating to wire fraud)," is also subject to forfeiture. 18 U.S.C. § 981(a)(1)(D), (E).

The government did not commence an administrative or judicial civil forfeiture action. Had the government commenced a civil forfeiture action pursuant to 18 U.S.C. § 981, the Federal Rules of Civil Procedure and the Supplemental Rules for Certain Admiralty and Maritime Claims would apply. See Cambio, 166 F.3d at 526. The government, however, did not file a verified complaint in rem and obtain an arrest warrant in rem, pursuant to the Supplemental Rules for Certain Admiralty and Maritime Claims. See 18 U.S.C. § 981(b)(2)(A).*fn8 Because the government did not commence a civil in rem forfeiture action, defendants were not required to timely file a claim under Rule C(6).

In addition to utilizing the procedures for civil forfeiture under 18 U.S.C. § 981, the government also invoked the criminal forfeiture provisions of 18 U.S.C. § 982(a)(2), which provides, in relevant part, that the court, in imposing a sentence on a person convicted of a violation of, or a conspiracy to violate 18 U.S.C. § 1341 (mail fraud), § 1343 (wire fraud), or § 1344 (bank fraud), shall order that the person forfeit any property constituting, or derived from, proceeds the person obtained directly or indirectly as the result of such violation. Further, the gross receipts of mail, wire and bank fraud offenses "shall include any property . . . which is obtained, directly or indirectly, as the result of such offense." 18 U.S.C. § 982(a)(4).

In addition to 18 U.S.C. §§ 981 and 982, the seizure warrants signed by Judges Go and Reyes were issued pursuant to accounts were subject to seizure and forfeiture. Section 2461(c) of Title 28 provides that where a person is charged in a criminal case with a violation for which civil or criminal forfeiture is authorized, the procedures set forth in 21 U.S.C. § 853 "shall apply to all stages of a criminal forfeiture proceeding. . . ."

The court finds that the criminal forfeiture provisions of 18 U.S.C. § 982(b)(1) and 28 U.S.C. § 2461(c), as amended, both of which explicitly apply the provisions of 21 U.S.C. § 853 to all stages of criminal forfeiture proceedings, authorize pretrial seizure of funds.

The history of 28 U.S.C. § 2461, one of the statutes relied upon by the government for the seizure, is instructive on the first issue defendants raise, whether the government, in a criminal case, is authorized to seize property prior to conviction. Prior to 2006, § 2461(c) stated:

If a forfeiture of property is authorized in connection with a violation of an Act of Congress, and any person is charged in an indictment or information with such violation but no specific statutory provision is made for criminal forfeiture upon conviction, the Government may include the forfeiture in the indictment or information in accordance with the Federal Rules of Criminal Procedure, and upon conviction, the court shall order the forfeiture of the property in accordance with the procedures set forth in section 413 of the Controlled Substances Act (21 U.S.C. § 853), other than subsection (d) of that section.

Interpreting this pre-amendment version of § 2461, the Second Circuit, in 2005, held that § 2461 did not permit the government to seize assets prior to conviction. United States v. Razmilovic, 419 F.3d 134, 137 (2d Cir. 2005). The Razmilovic court held that the statute's use of the term "forfeiture," which "in a criminal case . . . constitutes punishment for a crime and necessarily occurs post-conviction," necessitates the conclusion that § 2461 did not permit pretrial seizures. Id. The Razmilovic court read the language permitting "forfeiture . . . upon conviction . . . in accordance with the procedures of Section 853, except for subsection (d)," as recognition of the fact that forfeiture is an act that occurs after conviction.

Id. at 137-38 (emphasis added).

In 2006, Congress amended § 2461, which now provides in subsection (c) as follows:

If a person is charged in a criminal case with a violation of an Act of Congress for which the civil or criminal forfeiture of property is authorized, the Government may include notice of the forfeiture in the indictment or information pursuant to the Federal Rules of Criminal Procedure. If the defendant is convicted of the offense giving rise to the forfeiture, the court shall order the forfeiture of the property as part of the sentence in the criminal case pursuant to the Federal Rules of Criminal Procedure and section 3554 of title 18, United States Code. The procedures in section 413 of the Controlled Substances Act (21 U.S.C. § 853) apply to all stages of a criminal forfeiture proceeding, except that subsection (d) of such section applies only in cases in which the defendant is convicted of a violation of such Act. 28 U.S.C. § 2461(c) (emphasis added).

The Second Circuit has not yet decided whether the explicit language in amended § 2461(c), making applicable the procedures in 21 U.S.C. § 853 to "all stages of a criminal forfeiture proceeding," permits pretrial seizure. The government relies on a decision from a Missouri district court which, applying the procedures of 21 U.S.C § 853, notes in dicta, that "[i]t appears that Congress has clarified its intent that section 2461(c) authorizes the pretrial restraint of assets." United States v. Schlotzhauer, No. 06-00091-01/03-CRW-GAF, 2008 WL 320717, at *9 (W.D. Mo. Feb. 4, 2008).

The court has undertaken an independent review of the relevant statutes. Congress, in § 2461(c), specifically singled out subsection (d) of § 853 as the only subsection of § 853 that is restricted to post-conviction application, and provided that all other subsections of § 853, including subsection (f), "apply to all stages of a criminal forfeiture proceeding." 28 U.S.C. § 2461(c).

Similarly, 18 U.S.C. § 982(b)(1) provides that criminal forfeitures of property under § 982, including any seizure and disposition of property, and any related judicial or administrative proceeding, shall be governed by 21 U.S.C. § 853. Like 28 U.S.C. § 2461(c), any judicial or administrative proceeding, including the seizure and disposition of property subject to criminal forfeiture under 18 U.S.C. § 982, is governed by 21 U.S.C. § 853 (except subsection (d)).

Section § 982(b)(1) provides that: The forfeiture of property under this section, including any seizure and disposition of the property and any related judicial or administrative proceeding, shall be governed by the provisions of section 413 (other than subsection (d) of that section) of the Comprehensive Drug Abuse Prevention and Control Act of 1970 (21 U.S.C. 853).

The Second Circuit has recognized that 18 U.S.C. § 982(b)(1) provides that "forfeiture of property, including seizure in a judicial proceeding, shall be governed by 21 U.S.C. § 853." De Almeida v. United States, 459 F.3d 377, 379 (2d Cir. 2006). In De Almeida, the government seized 39 bank accounts utilizing seizure warrants issued pursuant to 18 U.S.C. § 982, prior to the return of an indictment that included a forfeiture count. Id. The Second Circuit upheld the district court's decision to decline to exercise jurisdiction over the third-party claimant's motion to return the funds pursuant to Fed. R. Civ. P. 41(g), even though the government seized the funds without notice or hearing and held the funds for over two years before it brought an action for forfeiture. Id. at 382-83.

Pursuant to 21 U.S.C. § 853(f), if the court determines that "there is probable cause to believe that the property to be seized would, in the event of conviction, be subject to forfeiture" and that a restraining order, injunction or temporary restraining order under subsection (e) "may not be sufficient to assure the availability of the property for forfeiture, the court shall issue a warrant authorizing the seizure of such property." 21 U.S.C. § 853(f) (emphasis added). The prospective language, "in the event of conviction," in § 853(f) leaves no doubt that a seizure warrant "shall" be issued prior to conviction upon a determination of probable cause that the property to be seized would, in the event of conviction, be subject to forfeiture, and that a restraining order, injunction or temporary restraining order under subsection (e) "may not be sufficient to assure the availability of the property for forfeiture." Id. The Second Circuit, in De Almeida, did not question the government's authority pursuant to 18 U.S.C. § 982(b) and 21 U.S.C. § 853 to seize funds without notice or hearing, prior to the return of an indictment with a forfeiture count. 459 F.3d 377. Accordingly, the court finds that 28 U.S.C. § 2461(c), as amended, and 18 U.S.C. 982(b)(1), which both apply 21 U.S.C. § 853(f), authorize pretrial seizure of funds by the government.

The court next turns to the second issue raised by defendants, whether the government sustained its burden to show that the procedures set forth in 21 U.S.C. § 853(e) "may not be sufficient to assure the availability of the property for forfeiture." 21 U.S.C. § 853(f) (The court shall issue a seizure warrant if it determines that "an order under subsection (e) of this section may not be sufficient to assure the availability of the property for forfeiture."). The parties do not dispute that § 853(f) requires this determination. Defendants assert, however, that the government did not ask either Magistrate Judge Go or Magistrate Judge Reyes to make the determination, under a probable cause standard, that measures less drastic than seizure would have been insufficient to assure the property's availability for forfeiture, nor did the government provide the Magistrate Judges with the basis for making any such determination. ...


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