The opinion of the court was delivered by: Cedarbaum, J.
Defendant Stephen Walsh has been charged with conspiracy to commit securities fraud and wire fraud, as well as the substantive crimes of securities fraud, commodities fraud, money laundering, and wire fraud. In order to pay the fees of his privately retained counsel in this criminal action, Walsh applies for the release of assets frozen in parallel civil enforcement actions brought by the Securities and Exchange Commission ("SEC") and the Commodity Futures Trading Commission ("CFTC"). For the reasons that follow, Walsh's application is denied.
On February 25, 2009, the CFTC and the SEC filed civil enforcement actions against Walsh, Paul Greenwood, and several entities, alleging fraudulent conduct between 1996 and February 2009. Judge Daniels, who presides over the civil actions, issued a restraining order freezing the assets of all defendants, including Greenwood and Walsh. A criminal indictment was filed against Walsh and Greenwood on July 24, 2009. On July 28, 2010, Greenwood entered a guilty plea to all counts of the indictment.
Walsh filed a motion in this criminal action on December 22, 2009, requesting that the court unfreeze certain assets to allow him to pay attorney's fees. He argued that his residence at 7 Half Moon Lane, Sands Point, New York ("Half Moon Lane"), had been purchased with proceeds from the sale of a property, 38 Arden Lane, Sands Point, New York ("Arden Lane"), that had been purchased prior to the period of the alleged fraud. On February 4, 2010, Judge Daniels and I, sitting together, heard oral argument on the motion.
We held that Walsh was entitled to receive up to $900,000 -- the 1983 purchase price of Arden Lane -- if the Government could not meet its burden at a Monsanto-type probable cause hearing. CFTC v. Walsh, 09 CV 1749, 1750 (GBD), 09 CR 722 (MGC), 2010 WL 882875, at *1, *3 (S.D.N.Y. Mar. 9, 2010). In Monsanto, the Supreme Court held that under the forfeiture statute relating to drug crimes, "assets in a defendant's possession may be restrained [pre-trial] . . . on a finding of probable cause to believe that the assets are forfeitable." United States v. Monsanto, 491 U.S. 600, 615-16, 109 S. Ct. 2657 (1989). On remand, the Second Circuit held that the Fifth and Sixth Amendments require an adversarial, post-restraint, pre-trial hearing to determine whether restraint of the assets needed to retain counsel of choice is supported by probable cause. United States v. Monsanto, 924 F.2d 1186, 1203 (2d Cir.) (en banc), cert. denied, 112 S. Ct. 382 (1991). The Government initially chose not to seek a Monsanto hearing.*fn1
In March 2011, the receiver appointed by Judge Daniels sold Half Moon Lane. The net proceeds were approximately $3,800,000. Anticipating that he would need more than $900,000 for defense costs, Walsh made an application for the remaining portion of the sale proceeds to pay his counsel, and the Government and Walsh agreed that a Monsanto hearing should be held.
On May 24, May 25, and June 28, 2011, I held a Monsanto hearing. The Second Circuit has advised that the Federal Rules of Evidence should not be followed at a Monsanto hearing, "thus allowing the use of hearsay testimony and precluding unwarranted exposure of Government witnesses." Id. at 1198. The Government presented FBI Special Agent James Barnacle to testify about his investigation and his interviews with witnesses. Counsel for Walsh cross-examined Barnacle, and both sides offered documentary evidence.
At a Monsanto hearing, the Government bears the burden of establishing probable cause to believe 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." Monsanto, 924 F.2d at 1203. Monsanto involved an asset freeze in the context of forfeiture resulting from alleged narcotics violations. The logic of holding a post-freeze, pre-trial hearing applies equally to an asset freeze in a civil enforcement action that affects the defendant's ability to retain counsel in a parallel criminal action. See SEC v. Coates, No. 94 Civ. 5361 (KMW), 1994 WL 455558, at *3 (S.D.N.Y. Aug. 23, 1994).
I. Probable Cause: Criminal Activity
The following is a summary of the evidence introduced by the parties at the Monsanto hearing. My findings are based on the credible testimony of Agent Barnacle and the documentary evidence.
Greenwood and Walsh were the general partners of WG Trading Company LP ("WG Trading Company"), an SEC-registered broker-dealer and CFTC-registered commodity pool operator. Barnacle testified that starting in 1996, Greenwood, Walsh, and individuals under their management solicited funds from investors for an equity index arbitrage strategy. This strategy involved shorting futures in the S&P 500 and purchasing the underlying stocks. Greenwood and Walsh ran the strategy in connection with an entity called the Westridge Group, which consisted of WG Trading Company and Westridge Capital Management, an investment adviser that was 51% owned by Walsh and Greenwood.*fn2 Barnacle testified that investors were told that they could invest in WG Trading Company through three different mechanisms. First, an investor could purchase a limited partnership interest in WG Trading Company. Second, an investor could become a noteholder in a separate entity, WG Trading Investors, through a promissory note. Investors were told that their funds would pass through to WG Trading Company, and the note would pay interest at a rate based on the return achieved in WG Trading Company. Third, an investor could purchase an interest in an offshore entity, and that money would flow into WG Trading Investors and through to WG Trading Company. According to Barnacle, investors were told that their money would ultimately end up in WG Trading Company's index arbitrage strategy.
Barnacle testified that WG Trading Investors' financials included $553,506,346.05 in "notes receivable." Deborah Duffy, the compliance officer for WG Trading Company, explained to Barnacle that this was the sum of the promissory notes signed by Walsh and Greenwood. The notes represented money owed to WG Trading Investors for personal advances, as well as losses and other expenses incurred by WG Trading Company. Greenwood told Barnacle that they billed expenses to WG Trading Investors rather than WG Trading Company in order to make WG Trading Company's returns appear higher. According to Barnacle, based on the records and his conversations with Greenwood and Duffy, Walsh drew a little over $50,000,000 for personal expenses from WG Trading Investors. Walsh's share of the promissory notes, which included his share of WG Trading Company's losses and expenses, totaled ...