Defending Against Asset Forfeiture

Given the DOJ's express focus on seeking forfeiture in corporate fraud and financial crime investigations, white-collar practitioners need to be well-versed on asset forfeiture law, including the myriad legal issues that may arise during the course of legal representation. While there are numerous aspects to criminal and civil forfeiture that defense counsel may encounter, this article focuses on two issues that are particularly important for helping clients navigate this complex landscape: forfeiture of attorneys' fees, and third-party forfeiture.

An Overview of Federal Forfeiture Laws

Federal law enforcement agencies can pursue three different types of forfeiture: administrative, civil and criminal. Administrative forfeiture is carried out by federal law enforcement agencies, such as the FBI, in financial fraud cases without the involvement of a prosecutor or a court. Stefan D. Cassella, Overview of Asset Forfeiture in the United States, 55 United States Attorneys' Bulletin 8, 12-13 (Nov. 2007). Law enforcement agents may seize assets they discover during the course of an investigation and administratively forfeit them. Administrative forfeiture is fairly common. Id. Seizure must be based on probable cause to believe that the property is subject to forfeiture and, typically, pursuant to a judicial warrant, except where a warrantless seizure is authorized. Id. In the event that an administrative forfeiture is contested, the government can pursue either criminal or civil forfeiture. Dery, supra, at 2.

Forfeiture Actions

Criminal and civil forfeiture are judicial actions brought by criminal and civil prosecutors. Criminal forfeiture operates in personam against the assets of the defendant, and serves as part of the penalty for the defendant's conviction. United States v. Nava, 404 F.3d 1119, 1124 (9th Cir. 2005). In contrast, “civil forfeiture is an in rem proceeding in which liability attaches to a particular property and not particular institutions or individuals.” Id. (internal citations and quotations omitted). Unlike criminal forfeiture, in an action for civil forfeiture the property owner's culpability is irrelevant in determining whether the property should be forfeited. United States v. Cherry, 330 F.3d 658, 669 n.16 (4th Cir. 2003). Civil forfeiture is independent of any criminal case, and therefore may be filed before, after, or without an accompanying indictment. Instead, the relevant inquiry is typically whether the preponderance of the evidence shows that the property is tainted from criminal activity and, thus, forfeitable under the applicable forfeiture statute (i.e., the government has met its burden of establishing the nexus between the property and the offense forming the basis for the forfeiture). Craig Gaumer, A Prosecutor's Secret Weapon: Federal Civil Forfeiture Law, 55 United States Attorneys' Bulletin 59, 62-63 (Nov. 2007).

Parallel Forfeiture Proceedings

Parallel forfeiture proceedings are not uncommon. Indeed, prosecutors recognize that they serve as an important tool to preserve allegedly tainted property where the government is not yet ready to indict the owner but seeks to prevent the property from being sold or otherwise transferred, damaged, dissipated or hidden. Gaumer, supra, at 67. Thus, individuals and businesses may have to contend with civil forfeiture proceedings at even the early stages of a government investigation, and regardless of whether any charges are ultimately pursued.

Pretrial Asset Restraints And Attorney Fees

The first area of concern for defense counsel and their clients is the government's ability to obtain pretrial restraining orders or asset seizures, which may affect a defendant's ability to fund his defense. Property subject to forfeiture under the applicable forfeiture statute may be restrained or seized prior to a criminal trial, including funds that may otherwise be used for attorney fees. Prosecutors typically seek restraining orders and seizure warrants at the inception of all forfeiture cases involving real or personal property. While the Sixth Amendment protects a criminal defendant's right to choose the counsel he desires, it does not permit him “to foot his legal bill with funds that are tainted by his fraud” even if the funds are the only way that the defendant would be able to retain the counsel of his choice. SEC v. Coates, No. 94 Civ. 5361(KMW), 1994 WL 455558, at *3 (S.D.N.Y. Aug. 23, 1994) (citing United States v. Monsanto, 491 U.S. 600 (1989)); see also Caplin & Drysdale, Chartered v. United States, 491 U.S. 617, 624-26 (1989).

However, defense counsel is not without some ammunition to fight against government seizures. The Fifth and Sixth Amendments provide a criminal defendant with the right to a pretrial probable cause hearing ' commonly referred to as a “Monsanto hearing” after United States v. Monsanto ' to challenge the pretrial asset restraint or seizure where the defendant lacks sufficient funds to pay counsel. 924 F.2d 1186 (2d Cir. 1991).

Although civil forfeiture proceedings do not ordinarily implicate defendants' Fifth and Sixth Amendment rights, a Monsanto hearing may also be sought where the government has commenced both civil and criminal proceedings against a defendant. Parallel proceedings have become more customary in securities fraud and financial crime cases. It is increasingly common for the Securities Exchange Commission (SEC) or other governmental regulatory agencies to commence civil enforcement actions and seek pretrial asset-freeze orders to ensure that the defendant does not dissipate assets either before, after or simultaneously with criminal actions brought by the United States Attorney's Office.

Because regulatory enforcement agencies can freeze all of a defendant's assets, even those not traceable to the defendant's criminal conduct, courts have held that the Monsanto factors apply to determine whether assets frozen in a civil enforcement action should be released to enable a defendant to pay for an attorney in a companion criminal case. SEC v. McGinn, No. 10-CV-457 (GLS/DRH), 2012 WL 1142516, at *2-3 (N.D.N.Y. Apr. 4, 2012) (collecting cases).

To obtain a Monsanto hearing, most courts of appeals have recently required defendants to make an initial showing that: 1) the defendant has insufficient assets to pay counsel and afford living expenses; and 2) there is a bona fide reason to believe that the prior determination of probable cause as to forfeitability was erroneous. United States v. Kam, No. 10-CR-875 (RJD), 2011 WL 3039589, at *4 (E.D.N.Y. Mar. 18, 2011) (collecting cases), report and recommendation adopted, No. 10-CR-875 (RJD)(RLM), 2011 WL 3104379 (E.D.N.Y. July 20, 2011).

If the defendant establishes both factors, a court will conduct a Monsanto hearing to determine if the government has probable cause as to some, all, or part of the restrained property. Courts are divided on which party bears the burden of proof at the hearing. Depending on the applicable circuit, a Monsanto hearing may give defense counsel an opportunity to preview the government's evidence prior to trial. Thus prosecutors might agree to release some assets to avoid early discovery.

Conclusion

Given the DOJ's aggressive use of asset forfeitures, including higher-value forfeitures, counsel should be prepared to seek Monsanto hearings, and next month we will address some of the issues that counsel may face in connection with these hearings. In addition, we will also examine how government restraint and seizure of assets can affect third parties that have an interest in the affected property.

Jonathan B. New, a member of this newsletter's Board of Editors, is a partner in the New York office of Baker Hostetler, where he focuses his practice on white-collar criminal and regulatory matters, internal corporate investigations and complex commercial litigation. Christy Nixon is a litigation associate, also resident in the New York office.

Asset forfeiture has become a powerful weapon in the Department of Justice's (DOJ's) anti-fraud and financial crime arsenal, adding to the challenges faced by counsel representing individuals and companies in the cross-hairs of a government investigation. With the professed goal of taking the profit out of crime, the DOJ has aggressively prosecuted economic crimes and pursued higher-value forfeitures. See GAO Report to Congressional Requesters, Justice Assets Forfeiture Fund, Transparency of Balances and Controls over Equitable Sharing Should Be Improved (July 2012), available at www.gao.gov/assets/600/592349.pdf; DOJ, National Asset Forfeiture Strategic Plan 2008-2012 (2008), available at www.justice.gov/criminal/afmls/pubs/pdf/strategicplan.pdf.

U.S.'Attorneys' offices reportedly collected $13.1 billion nationwide in criminal and civil forfeiture actions during fiscal year 2012, more than doubling the $6.5 billion collected in fiscal year 2011. In fact, fiscal year 2012's forfeitures nearly matched the $13.18 billion collected in fiscal years 2010 and 2011 combined, half of which have been reported to involve white collar crime. Press Release, U.S. Attorney's Office Announces Record Collections in Civil & Criminal Actions in Fiscal Year 2012 (Dec. 11, 2012), available at www.justice.gov/usao/ncw/pressreleases/Charlotte-2012-12-11-financial-recoveries-2012.html; Alice W. Dery, Overview of Asset Forfeiture, ABA Business Law Today, 1 (June 2012), http://apps.americanbar.org/buslaw/blt/content/2012/06/article-02-dery.shtml.

This past year, the U.S. Attorney's Office for the Southern District of New York alone has recovered about $3 billion in criminal forfeiture proceeds, which is reportedly the largest amount ever recovered by a single United States Attorney's office since the DOJ established the asset forfeiture program four decades ago. Peter Lattman, Forfeiture from Crimes Adds Luster to Enforcers, N.Y. Times, Jan. 2, 2013, B1. Accounting for 68% of the national total, Manhattan's use of asset forfeiture exemplifies what Preet Bharara, U.S. Attorney for the Southern District of New York, has described as the “government being efficient and bringing home the bacon.” Id.

Given the DOJ's express focus on seeking forfeiture in corporate fraud and financial crime investigations, white-collar practitioners need to be well-versed on asset forfeiture law, including the myriad legal issues that may arise during the course of legal representation. While there are numerous aspects to criminal and civil forfeiture that defense counsel may encounter, this article focuses on two issues that are particularly important for helping clients navigate this complex landscape: forfeiture of attorneys' fees, and third-party forfeiture.

An Overview of Federal Forfeiture Laws

Federal law enforcement agencies can pursue three different types of forfeiture: administrative, civil and criminal. Administrative forfeiture is carried out by federal law enforcement agencies, such as the FBI, in financial fraud cases without the involvement of a prosecutor or a court. Stefan D. Cassella, Overview of Asset Forfeiture in the United States, 55 United States Attorneys' Bulletin 8, 12-13 (Nov. 2007). Law enforcement agents may seize assets they discover during the course of an investigation and administratively forfeit them. Administrative forfeiture is fairly common. Id. Seizure must be based on probable cause to believe that the property is subject to forfeiture and, typically, pursuant to a judicial warrant, except where a warrantless seizure is authorized. Id. In the event that an administrative forfeiture is contested, the government can pursue either criminal or civil forfeiture. Dery, supra, at 2.

Forfeiture Actions

Criminal and civil forfeiture are judicial actions brought by criminal and civil prosecutors. Criminal forfeiture operates in personam against the assets of the defendant, and serves as part of the penalty for the defendant's conviction. United States v. Nava , 404 F.3d 1119, 1124 (9th Cir. 2005). In contrast, “civil forfeiture is an in rem proceeding in which liability attaches to a particular property and not particular institutions or individuals.” Id. (internal citations and quotations omitted). Unlike criminal forfeiture, in an action for civil forfeiture the property owner's culpability is irrelevant in determining whether the property should be forfeited. United States v. Cherry , 330 F.3d 658, 669 n.16 (4th Cir. 2003). Civil forfeiture is independent of any criminal case, and therefore may be filed before, after, or without an accompanying indictment. Instead, the relevant inquiry is typically whether the preponderance of the evidence shows that the property is tainted from criminal activity and, thus, forfeitable under the applicable forfeiture statute (i.e., the government has met its burden of establishing the nexus between the property and the offense forming the basis for the forfeiture). Craig Gaumer, A Prosecutor's Secret Weapon: Federal Civil Forfeiture Law, 55 United States Attorneys' Bulletin 59, 62-63 (Nov. 2007).

Parallel Forfeiture Proceedings

Parallel forfeiture proceedings are not uncommon. Indeed, prosecutors recognize that they serve as an important tool to preserve allegedly tainted property where the government is not yet ready to indict the owner but seeks to prevent the property from being sold or otherwise transferred, damaged, dissipated or hidden. Gaumer, supra, at 67. Thus, individuals and businesses may have to contend with civil forfeiture proceedings at even the early stages of a government investigation, and regardless of whether any charges are ultimately pursued.

Pretrial Asset Restraints And Attorney Fees

The first area of concern for defense counsel and their clients is the government's ability to obtain pretrial restraining orders or asset seizures, which may affect a defendant's ability to fund his defense. Property subject to forfeiture under the applicable forfeiture statute may be restrained or seized prior to a criminal trial, including funds that may otherwise be used for attorney fees. Prosecutors typically seek restraining orders and seizure warrants at the inception of all forfeiture cases involving real or personal property. While the Sixth Amendment protects a criminal defendant's right to choose the counsel he desires, it does not permit him “to foot his legal bill with funds that are tainted by his fraud” even if the funds are the only way that the defendant would be able to retain the counsel of his choice. SEC v. Coates, No. 94 Civ. 5361(KMW), 1994 WL 455558, at *3 (S.D.N.Y. Aug. 23, 1994) (citing United States v. Monsanto , 491 U.S. 600 (1989)); see also Caplin & Drysdale, Chartered v. United States , 491 U.S. 617, 624-26 (1989).

However, defense counsel is not without some ammunition to fight against government seizures. The Fifth and Sixth Amendments provide a criminal defendant with the right to a pretrial probable cause hearing ' commonly referred to as a “Monsanto hearing” after United States v. Monsanto ' to challenge the pretrial asset restraint or seizure where the defendant lacks sufficient funds to pay counsel. 924 F.2d 1186 (2d Cir. 1991).

Although civil forfeiture proceedings do not ordinarily implicate defendants' Fifth and Sixth Amendment rights, a Monsanto hearing may also be sought where the government has commenced both civil and criminal proceedings against a defendant. Parallel proceedings have become more customary in securities fraud and financial crime cases. It is increasingly common for the Securities Exchange Commission (SEC) or other governmental regulatory agencies to commence civil enforcement actions and seek pretrial asset-freeze orders to ensure that the defendant does not dissipate assets either before, after or simultaneously with criminal actions brought by the United States Attorney's Office.

Because regulatory enforcement agencies can freeze all of a defendant's assets, even those not traceable to the defendant's criminal conduct, courts have held that the Monsanto factors apply to determine whether assets frozen in a civil enforcement action should be released to enable a defendant to pay for an attorney in a companion criminal case. SEC v. McGinn, No. 10-CV-457 (GLS/DRH), 2012 WL 1142516, at *2-3 (N.D.N.Y. Apr. 4, 2012) (collecting cases).

To obtain a Monsanto hearing, most courts of appeals have recently required defendants to make an initial showing that: 1) the defendant has insufficient assets to pay counsel and afford living expenses; and 2) there is a bona fide reason to believe that the prior determination of probable cause as to forfeitability was erroneous. United States v. Kam, No. 10-CR-875 (RJD), 2011 WL 3039589, at *4 (E.D.N.Y. Mar. 18, 2011) (collecting cases), report and recommendation adopted, No. 10-CR-875 (RJD)(RLM), 2011 WL 3104379 (E.D.N.Y. July 20, 2011).

If the defendant establishes both factors, a court will conduct a Monsanto hearing to determine if the government has probable cause as to some, all, or part of the restrained property. Courts are divided on which party bears the burden of proof at the hearing. Depending on the applicable circuit, a Monsanto hearing may give defense counsel an opportunity to preview the government's evidence prior to trial. Thus prosecutors might agree to release some assets to avoid early discovery.

Conclusion

Given the DOJ's aggressive use of asset forfeitures, including higher-value forfeitures, counsel should be prepared to seek Monsanto hearings, and next month we will address some of the issues that counsel may face in connection with these hearings. In addition, we will also examine how government restraint and seizure of assets can affect third parties that have an interest in the affected property.

Jonathan B. New, a member of this newsletter's Board of Editors, is a partner in the New York office of Baker Hostetler, where he focuses his practice on white-collar criminal and regulatory matters, internal corporate investigations and complex commercial litigation. Christy Nixon is a litigation associate, also resident in the New York office.