Asset Forfeiture

In Kam, the government seized three bank accounts, which it alleged were funded by fraudulent Medicare reimbursements. In addition, the government obtained defense counsel's agreement not to release funds in an attorney escrow account because Medicare reimbursements were deposited into it. The defendant sought the release of funds from the seized accounts or for court authorization to spend funds in the escrow account to pay his legal expenses.'

To establish his need for the funds, the defendant's submissions included a declaration from himself and his wife, along with sworn financial statements, which provided detailed information concerning the couple's income, liquid and non-liquid assets, living expenditures, and outstanding liabilities. In addition, defendant's counsel proffered that, given the complexity of the criminal prosecution, pretrial expenses might total more than $100,000, not including legal fees and document duplication expenses already incurred. The court found that the evidence submitted established that the defendant had a legitimate need to access the seized funds to pay for his defense. In particular, the court noted that the defendant's sworn financial statements showed that his family's income, though substantial, roughly equaled the family's reasonable living expenses and debt payments. The court further observed that the defendant had access to minimal liquid assets; however, the other assets belonging to him and his family were encumbered and were thus unavailable. In addition, the court acknowledged that, given the complexity of the case, defense counsel's representation of the estimated pretrial legal expenses was appropriate.'

To refute the government's allegation that the seized funds were not traceable to the underlying offense, the defendant argued that the subject accounts contained untainted funds which he could identify if the government was required to disclose the specific deposits it alleged were proceeds from fraudulent transactions. In comparison, the non-Medicare funds deposited in the escrow account were readily distinguishable from the deposited Medicare reimbursement payments.'

In determining that the defendant did not satisfy the second prehearing factor with respect to the seized accounts, the court noted that the government has a low burden to establish probable cause as to forfeitability where an account is funded by both tainted and untainted funds. The court found that defendant had not made any factual showing to rebut the probable cause inference that the seized accounts were funded largely through tainted assets. In contrast, the court held that the government could not restrain the entire escrow account, finding that the proceeds of clearly identifiable non-Medicare payments were not traceable to the fraud. The court noted that, unlike the seized accounts, the escrow account lacked fungibility problems allowing for its restraint, since no withdrawals were made from the escrow account.'

The Lessons of Kam

Kam illustrates several important considerations for counsel defending against pretrial restraints. For one, Kam identifies certain evidence a court will find persuasive in evaluating a defendant's claim that he lacks sufficient assets to pay counsel. It is essential for defense counsel to submit detailed and specific financial statements for the court to make a finding that the defendant has established that he needs the funds to pay for his defense. Compare with United States v. Emor, 794 F.Supp.2d 143, 149 (D.C.C. 2011) (finding that defendant failed to make a showing that he lacked funds to hire his counsel of choice where defendant filed a “bare-bones form in which he claims that he lack any income or investments, that his spouse is not employed, that he has six dependents, and that he has 'only between $22,000 and $50,000 in cash on hand or money in savings or checking accounts.'”). However, counsel must ensure that any such financial disclosures are complete and fully accurate or the client could face more serious consequences. In addition, clients may not want to expose their personal finances, and those of their close family, to additional government scrutiny.

Furthermore, Kam highlights the fact that the probable cause standard presents a significant obstacle that must be considered when determining the likelihood of success in challenging the government's pretrial seizure or restraint of a commingled account. Because the government is not required to trace the funds to the illegal activity on a dollar-for-dollar basis, it can seize or restrain all of the money in an account containing commingled funds where it can establish that the criminal proceeds deposited into the account exceed its current balance. Stefan D. Cassella, Criminal Forfeiture Procedure in 2012: An Annual Survey of Developments in the Case Law, 48 Crim. L. Bull. 863, 872-73 (2012).'

Third Parties

White-collar practitioners should also be cognizant of the risk to innocent corporate clients whose assets may get tied up by restraint orders or asset seizures during the course of an investigation and prosecution. Due to the fundamental difference between criminal and civil forfeiture ' the relevancy of the property's owner's culpability ' each proceeding has different procedures for third parties to assert interests in forfeited property. Civil forfeiture proceedings are procedurally similar to a typical lawsuit. Stefan D. Cassella, Overview of Asset Forfeiture in the United States, 55 United States Attorneys' Bulletin 8, 16 (Nov. 2007). The government files a verified complaint alleging that the property in question is subject to forfeiture pursuant to the applicable forfeiture statute, and any third party asserting an interest in the property must file a claim to the property and answer the forfeiture complaint. Id. Thereafter, the case moves forward through civil discovery, motion practice, and trial. Id.

In contrast, a third party seeking to assert an interest in assets subject to a criminal proceeding must wait until the resolution of the criminal case to commence an ancillary proceeding to establish an interest in the forfeited property. Id.

One recent example of this problem is United States v. Egan. In this case, Robert Egan, the principal and owner of Mount Vernon Money Center (MVMC), a company engaged in various cash management businesses such as check cashing, ATM replenishment, armored transportation, and payroll services, was arrested on Jan. 29, 2010 (and later indicted), for allegedly misappropriating tens of millions of dollars of customer money to fund operating losses in MVMC's businesses, and to enrich himself. Egan, No. 10-CR-191 (JFK), 2010 WL 3258085, at *1 (S.D.N.Y. Aug. 16, 2010). On Feb. 11, 2010, Egan, MVMC and the government agreed to a consent order that authorized the seizure of all of the cash, currency, and other monetary instruments stored in MVMC cash vaults located at two of the company's offices, pending resolution of the criminal case.

MVMC customers had to wait almost one year to commence an ancillary proceeding to seek the return of their seized property. While certain customers sought relief from the court prior to the conclusion of the criminal action, none were successful. Specifically, on April 16, 2010, Clothing Emporium Inc., a former customer of MVMC, moved for the release of $106,320 of its alleged funds seized pursuant to the seizure order. Shortly thereafter, Granite Check Cashing, another former MVMC customer, filed a similar motion seeking the return of $392,000 from the seized funds. In denying these former customers' motions to release the seized funds to which they purportedly held an interest, the court stated that “the exclusive avenue available to third parties wishing to assert their interest in property charged to be forfeitable is an 'ancillary proceeding.'” Id. at *2.

MVMC's many corporate clients, including, but not limited to, Clothing Emporium Inc., Granite Check Cashing, Capital One Bank, Bank of America, Amalgamated Life Insurance Company, and Golden Krust Caribbean Bakery & Grill, were forced to wait until Sept.15, 2010, when Egan forfeited his interest in $19,288,702 seized from MVMC's assets in connection with his guilty plea. See Memorandum & Order, United States v. Egan, No. 10-CR-191 (JKF) (S.D.N.Y. Feb. 4, 2010), ECF 359. As of the summer of 2012, certain MVMC customers were still litigating their interests in seized property.

For third parties, the practical implication of criminal forfeiture, as demonstrated by Egan, is that innocent corporate clients and individuals whose assets are the subject of a criminal forfeiture proceeding may be forced to wait months or even years before they can pursue the return of their seized or restrained property. Even if ultimately successful, the property may have materially depreciated as a result of the delay, or financial conditions may have changed so as to decrease the value of the property. Thus, while one of the laudable goals of asset forfeiture may be to compensate victims of economic crimes, in practice seizures may also harm innocent victims and third parties. The only recourse in such situations is for experienced defense counsel to engage in discussions with prosecutors and convince them to exercise their discretion to release the property in the interests of justice.

Conclusion

In light of the DOJ's increased focus on seeking asset forfeiture in corporate fraud and other financial crime investigations, defense counsel must be prepared to navigate through the complex maze of asset forfeiture law. Defending and securing the property of business and individual clients, at an early stage, may be essential for providing effective representation over the course of an investigation or prosecution. In addition, innocent corporate clients who have an interest in property that could be subject to seizure should seek counsel on steps that may be taken preemptively, so as to avoid the procedural pitfalls of criminal forfeiture actions.'

Forfeiture of attorneys' fees and third-party forfeiture are only two of the many issues that are likely to arise when individual and company assets are on the government's radar. To battle against the government's increased use of asset forfeiture ' a trend that is likely to continue over the next few years ' counsel and clients alike must take measures to inform themselves concerning this thorny area of law.

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 in New York office of the firm.

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Last month, we began discussion of the Department of Justice's (DOJ's) increased use of asset forfeiture and pursuit of higher-value forfeitures when it is prosecuting economic crimes. Sometimes when the alleged “ill-gotten gains” are restrained or seized prior to the criminal trial, the accused is left without sufficient funds to pay counsel. In other cases, assets rightfully belonging to third parties are affected. In such cases, although the laws are written to favor the government's interests, those whose assets are (or may be) seized have some options.

A Monsanto Hearing

As discussed in Part One of this article, the Fifth and Sixth Amendments to the Constitution give criminal defendants, including those that are the subject of parallel criminal and civil actions, the right to a pretrial probable cause hearing ' commonly referred to as a “ Monsanto hearing” after United States v. Monsanto , 491 U.S. 600 (1989) ' to challenge a pretrial asset restraint or seizure if the defendant lacks sufficient funds to pay counsel. United States v. Kam, 2010 U.S. Dist. LEXIS 143458 (E.D.N.Y. 2011), a recent case involving a challenge to the seizure of commingled accounts, is instructive as to what counsel should be prepared to show to obtain a Monsanto hearing.

In Kam, the government seized three bank accounts, which it alleged were funded by fraudulent Medicare reimbursements. In addition, the government obtained defense counsel's agreement not to release funds in an attorney escrow account because Medicare reimbursements were deposited into it. The defendant sought the release of funds from the seized accounts or for court authorization to spend funds in the escrow account to pay his legal expenses.'

To establish his need for the funds, the defendant's submissions included a declaration from himself and his wife, along with sworn financial statements, which provided detailed information concerning the couple's income, liquid and non-liquid assets, living expenditures, and outstanding liabilities. In addition, defendant's counsel proffered that, given the complexity of the criminal prosecution, pretrial expenses might total more than $100,000, not including legal fees and document duplication expenses already incurred. The court found that the evidence submitted established that the defendant had a legitimate need to access the seized funds to pay for his defense. In particular, the court noted that the defendant's sworn financial statements showed that his family's income, though substantial, roughly equaled the family's reasonable living expenses and debt payments. The court further observed that the defendant had access to minimal liquid assets; however, the other assets belonging to him and his family were encumbered and were thus unavailable. In addition, the court acknowledged that, given the complexity of the case, defense counsel's representation of the estimated pretrial legal expenses was appropriate.'

To refute the government's allegation that the seized funds were not traceable to the underlying offense, the defendant argued that the subject accounts contained untainted funds which he could identify if the government was required to disclose the specific deposits it alleged were proceeds from fraudulent transactions. In comparison, the non-Medicare funds deposited in the escrow account were readily distinguishable from the deposited Medicare reimbursement payments.'

In determining that the defendant did not satisfy the second prehearing factor with respect to the seized accounts, the court noted that the government has a low burden to establish probable cause as to forfeitability where an account is funded by both tainted and untainted funds. The court found that defendant had not made any factual showing to rebut the probable cause inference that the seized accounts were funded largely through tainted assets. In contrast, the court held that the government could not restrain the entire escrow account, finding that the proceeds of clearly identifiable non-Medicare payments were not traceable to the fraud. The court noted that, unlike the seized accounts, the escrow account lacked fungibility problems allowing for its restraint, since no withdrawals were made from the escrow account.'

The Lessons of Kam

Kam illustrates several important considerations for counsel defending against pretrial restraints. For one, Kam identifies certain evidence a court will find persuasive in evaluating a defendant's claim that he lacks sufficient assets to pay counsel. It is essential for defense counsel to submit detailed and specific financial statements for the court to make a finding that the defendant has established that he needs the funds to pay for his defense. Compare with United States v. Emor , 794 F.Supp.2d 143, 149 (D.C.C. 2011) (finding that defendant failed to make a showing that he lacked funds to hire his counsel of choice where defendant filed a “bare-bones form in which he claims that he lack any income or investments, that his spouse is not employed, that he has six dependents, and that he has 'only between $22,000 and $50,000 in cash on hand or money in savings or checking accounts.'”). However, counsel must ensure that any such financial disclosures are complete and fully accurate or the client could face more serious consequences. In addition, clients may not want to expose their personal finances, and those of their close family, to additional government scrutiny.

Furthermore, Kam highlights the fact that the probable cause standard presents a significant obstacle that must be considered when determining the likelihood of success in challenging the government's pretrial seizure or restraint of a commingled account. Because the government is not required to trace the funds to the illegal activity on a dollar-for-dollar basis, it can seize or restrain all of the money in an account containing commingled funds where it can establish that the criminal proceeds deposited into the account exceed its current balance. Stefan D. Cassella, Criminal Forfeiture Procedure in 2012: An Annual Survey of Developments in the Case Law, 48 Crim. L. Bull. 863, 872-73 (2012).'

Third Parties

White-collar practitioners should also be cognizant of the risk to innocent corporate clients whose assets may get tied up by restraint orders or asset seizures during the course of an investigation and prosecution. Due to the fundamental difference between criminal and civil forfeiture ' the relevancy of the property's owner's culpability ' each proceeding has different procedures for third parties to assert interests in forfeited property. Civil forfeiture proceedings are procedurally similar to a typical lawsuit. Stefan D. Cassella, Overview of Asset Forfeiture in the United States, 55 United States Attorneys' Bulletin 8, 16 (Nov. 2007). The government files a verified complaint alleging that the property in question is subject to forfeiture pursuant to the applicable forfeiture statute, and any third party asserting an interest in the property must file a claim to the property and answer the forfeiture complaint. Id. Thereafter, the case moves forward through civil discovery, motion practice, and trial. Id.

In contrast, a third party seeking to assert an interest in assets subject to a criminal proceeding must wait until the resolution of the criminal case to commence an ancillary proceeding to establish an interest in the forfeited property. Id.

One recent example of this problem is United States v. Egan. In this case, Robert Egan, the principal and owner of Mount Vernon Money Center (MVMC), a company engaged in various cash management businesses such as check cashing, ATM replenishment, armored transportation, and payroll services, was arrested on Jan. 29, 2010 (and later indicted), for allegedly misappropriating tens of millions of dollars of customer money to fund operating losses in MVMC's businesses, and to enrich himself. Egan, No. 10-CR-191 (JFK), 2010 WL 3258085, at *1 (S.D.N.Y. Aug. 16, 2010). On Feb. 11, 2010, Egan, MVMC and the government agreed to a consent order that authorized the seizure of all of the cash, currency, and other monetary instruments stored in MVMC cash vaults located at two of the company's offices, pending resolution of the criminal case.

MVMC customers had to wait almost one year to commence an ancillary proceeding to seek the return of their seized property. While certain customers sought relief from the court prior to the conclusion of the criminal action, none were successful. Specifically, on April 16, 2010, Clothing Emporium Inc., a former customer of MVMC, moved for the release of $106,320 of its alleged funds seized pursuant to the seizure order. Shortly thereafter, Granite Check Cashing, another former MVMC customer, filed a similar motion seeking the return of $392,000 from the seized funds. In denying these former customers' motions to release the seized funds to which they purportedly held an interest, the court stated that “the exclusive avenue available to third parties wishing to assert their interest in property charged to be forfeitable is an 'ancillary proceeding.'” Id. at *2.

MVMC's many corporate clients, including, but not limited to, Clothing Emporium Inc., Granite Check Cashing, Capital One Bank, Bank of America, Amalgamated Life Insurance Company, and Golden Krust Caribbean Bakery & Grill, were forced to wait until Sept.15, 2010, when Egan forfeited his interest in $19,288,702 seized from MVMC's assets in connection with his guilty plea. See Memorandum & Order, United States v. Egan, No. 10-CR-191 (JKF) (S.D.N.Y. Feb. 4, 2010), ECF 359. As of the summer of 2012, certain MVMC customers were still litigating their interests in seized property.

For third parties, the practical implication of criminal forfeiture, as demonstrated by Egan, is that innocent corporate clients and individuals whose assets are the subject of a criminal forfeiture proceeding may be forced to wait months or even years before they can pursue the return of their seized or restrained property. Even if ultimately successful, the property may have materially depreciated as a result of the delay, or financial conditions may have changed so as to decrease the value of the property. Thus, while one of the laudable goals of asset forfeiture may be to compensate victims of economic crimes, in practice seizures may also harm innocent victims and third parties. The only recourse in such situations is for experienced defense counsel to engage in discussions with prosecutors and convince them to exercise their discretion to release the property in the interests of justice.

Conclusion

In light of the DOJ's increased focus on seeking asset forfeiture in corporate fraud and other financial crime investigations, defense counsel must be prepared to navigate through the complex maze of asset forfeiture law. Defending and securing the property of business and individual clients, at an early stage, may be essential for providing effective representation over the course of an investigation or prosecution. In addition, innocent corporate clients who have an interest in property that could be subject to seizure should seek counsel on steps that may be taken preemptively, so as to avoid the procedural pitfalls of criminal forfeiture actions.'

Forfeiture of attorneys' fees and third-party forfeiture are only two of the many issues that are likely to arise when individual and company assets are on the government's radar. To battle against the government's increased use of asset forfeiture ' a trend that is likely to continue over the next few years ' counsel and clients alike must take measures to inform themselves concerning this thorny area of law.

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 in New York office of the firm.

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