The opinion of the court was delivered by: John Gleeson, United States District Judge:
In this ancillary proceeding, brought pursuant to 21 U.S.C. § 853(n) and Rule 32.2(c) of the Federal Rules of Criminal Procedure, third-party petitioner QBE del Istmo, Compania de Reaseguros, Inc. ("QBE") challenges the criminal forfeiture of $2,565,456.89 plus interest (the "Funds") from a limited partnership in which QBE was a limited partner. Before me is the government's motion to dismiss QBE's petition for lack of standing.
I previously referred the motion to then-Magistrate Judge Andrew L. Carter, Jr. In his report and recommendation (the "Report"), Judge Carter recommended granting the motion. QBE has objected to the Report. Although I agree with portions of the Report, I disagree with the ultimate conclusion that QBE lacks standing. I will therefore sustain QBE's objections to the Report, in part, and deny the motion to dismiss.
The defendants in the underlying criminal case -- Isaac Ovid, Aaron Riddle, Joseph Jonathan Coleman, Timothy Smith and Robert Riddle -- perpetrated a multi-million dollar fraud through an investment management company they formed, Jadis Capital, Inc. ("Jadis Capital"). Their fraudulent scheme involved the creation and marketing of two different hedge funds. Both of these hedge funds were formed as separate limited partnerships under Delaware law and both used Jadis Investments, LLC ("Jadis Investments"), a Delaware limited liability company the defendants had also formed, as investment manager.
The defendants formed the first of these hedge funds, Logos Multi-Strategy Hedge Fund I LP (the "Logos Fund"), in November 2004. They marketed the Logos Fund to numerous investors, many of whom were members of a church in which the defendants held positions of authority. See Third Party Pet. To Adjudicate Interest in Forfeited Property & To Amend Forfeiture Order ("Pet.") ¶ 23, ECF No. 67. Through numerous fraudulent misrepresentations and omissions, the defendants were able to obtain approximately $9 million in investments in the Logos Fund. Id. ¶ 18.
The Logos Fund quickly incurred massive trading losses. The defendants also misappropriated investor funds, which they used for their own benefit. See id. ¶ 23. "By October 2005, more than eighty percent of the money in the Logos Fund had either been lost trading or otherwise expended by the defendants." Indictment ¶ 22, ECF No. 4.
The defendants formed the second hedge fund, The Donum Fund, LP (the "Donum Fund" or "Donum LP"), in August 2005. Pet. ¶ 5. Its general partner was Donum, LLC, a Delaware limited liability company, and Riddle served as its initial limited partner. Id. Unlike the Logos Fund, which targeted individual investors, the Donum Fund targeted larger, institutional investors. Id. ¶ 24.
Shortly after forming the Donum Fund, the defendants contacted Financial Pacific, a licensed Panamanian broker-dealer, to discuss investing in the Donum Fund. Id. ¶ 9. After conducting some initial investigation into Jadis Investments and Jadis Capital, Financial Pacific received a written proposal to invest in the Donum Fund in September 2005. Id. ¶ 11. That same month, two of Financial Pacific's executives traveled to New York to meet with Jadis Capital employees and to tour its offices. Id. As with the Logos Fund, the defendants made numerous fraudulent misstatements and omissions regarding the Donum Fund. See, e.g., id. ¶ 46.
QBE, one of Financial Pacific's clients, agreed to invest $3 million in the Donum Fund. Id. ¶ 12. QBE wired $3 million, through intermediaries, to a Donum LP account and became a limited partner in Donum LP on October 10, 2005. Id. Donum LP obtained one or two additional limited partners, who invested $50,000 to $100,000. Id. ¶ 2.
By December 2005, the Donum Fund had lost approximately $500,000 through one bad investment, leaving $2,565,456.89 in its accounts. Id. ¶¶ 13--14. By that point, the U.S. Securities and Exchange Commission (the "SEC") had been investigating Jadis Capital for some time, and had discovered the defendants' fraud. See id. ¶ 13. As a result, Donum LP had been liquidated and its remaining funds were being held in escrow at the SEC's request. Id. ¶¶ 13--14. QBE learned that Jadis Investments "was out of business and that there was no one available to provide an accounting of investments and liquidation for Donum LP." Id. ¶ 15 (internal quotation marks omitted). QBE did not attempt to recover the funds being held in escrow because the SEC threatened to seize the funds if it did so. See id. ¶ 17.
The defendants were indicted in April 2009. In February and March 2010, each defendant pleaded guilty to a charge of conspiracy to commit securities fraud in violation of 18 U.S.C. § 371. On June 23, 2010, this Court entered a preliminary order of forfeiture. The defendants were ordered to forfeit all right, title and interest in two separate funds:
(1) $166,075.47 from the Logos Fund, and (2) $2,565,456.89 from the Donum Fund. Preliminary Order of Forfeiture 1--2, ECF No. 56.
On August 3, 2010, QBE petitioned to adjudicate its interest in the Donum Fund's property that was forfeited and to amend the preliminary order of forfeiture. The government moved to dismiss the petition for lack of standing. On December 7, 2011, Judge Carter filed the Report, recommending that the motion be granted. QBE timely filed objections to the Report on December 21, 2011, and the government filed a response to the objections on January 25, 2012.