United States v. Walsh , 712 F.3d 119 ( 2013 )


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  •      12-2383-cr
    United States v. Walsh
    1                       UNITED STATES COURT OF APPEALS
    2
    3                            FOR THE SECOND CIRCUIT
    4
    5                               August Term, 2012
    6
    7
    8        (Argued: March 18, 2013           Decided: April 2, 2013)
    9
    10                             Docket No. 12-2383-cr
    11
    12   - - - - - - - - - - - - - - - - - - - -x
    13
    14   UNITED STATES OF AMERICA,
    15
    16                     Appellee,
    17
    18               - v.-
    19
    20   STEPHEN WALSH,
    21
    22                     Defendant-Appellant.
    23
    24   - - - - - - - - - - - - - - - - - - - -x
    25
    26         Before:            JACOBS, Chief Judge, CABRANES and WESLEY,
    27                            Circuit Judges.
    28
    29         In this criminal case, Defendant Stephen Walsh appeals
    30   from an order of the United States District Court for the
    31   Southern District of New York (Cedarbaum, J.) denying his
    32   motion to release assets frozen in a parallel civil
    33   enforcement action.        Walsh, charged with fraud, seeks
    34   release of the proceeds from the sale of his house.        Walsh
    35   obtained the house from his wife in a divorce settlement in
    36   which his wife received (inter alia) a $12.5 million
    1    distributive award, $6 million of which was paid using funds
    2    traceable to Walsh’s fraud.    The district court properly
    3    applied the tracing analysis from United States v. Banco
    4    Cafetero Panama, 
    797 F.2d 1154
     (2d Cir. 1986).    We affirm.
    5
    6                                 MARK A. FLESSNER, Holland &
    7                                 Knight LLP, Chicago, Illinois,
    8                                 for Defendant-Appellant.
    9
    10                                 JOHN J. O’DONNELL, (Iris Lan, on
    11                                 the brief), for Preet Bharara,
    12                                 United States Attorney for the
    13                                 Southern District of New York,
    14                                 for Appellee.
    15
    16   DENNIS JACOBS, Chief Judge:
    17       Stephen Walsh, defendant in this criminal fraud case,
    18   appeals from an order of the United States District Court
    19   for the Southern District of New York (Cedarbaum, J.)
    20   denying his motion to release $3.7 million in assets that
    21   were frozen in a parallel civil enforcement action.    Walsh
    22   seeks to use those funds for his defense.    Walsh and his
    23   wife had purchased a house in her name using funds unrelated
    24   to the alleged fraud.   Pursuant to a divorce settlement,
    25   Walsh received title to the house and gave his wife (inter
    26   alia) a $12.5 million distributive award, at least $6
    27   million of which was directly traceable to Walsh’s alleged
    28   fraud.
    2
    1        After a hearing conducted pursuant to United States v.
    2    Monsanto, 
    924 F.2d 1186
     (2d Cir. 1991) (in banc), the
    3    district court concluded that the $3.7 million at issue was
    4    “traceable” to the fraud.   Walsh does not contest the
    5    underlying finding that there was probable cause to believe
    6    that Walsh committed the fraud.   But he does challenge the
    7    finding that there was probable cause to believe that, after
    8    the divorce settlement, the house became traceable to the
    9    proceeds from the fraud.
    10       He argues that the “tracing fiction” used by the
    11   district court is inapplicable to his situation.   He also
    12   argues that the district court erred at the Monsanto hearing
    13   by admitting hearsay testimony from the FBI agent who
    14   investigated the fraud and by quashing Walsh’s subpoenas.
    15       For the following reasons, we affirm.
    16
    17                                 I
    18       In 1983, the Walshes bought a house on Arden Lane in
    19   Sands Point for $900,000 and renovated it over the next
    20   several years at a cost of more than $2 million.   In 1999,
    21   they sold the property in parcels for a total of $4.135
    22   million.   That same day, they applied most of the proceeds
    3
    1    to the $3.15 million purchase of another Sands Point house,
    2    on Half Moon Lane (the “Half Moon House” or the “House”).
    3    The title of the House remained in Walsh’s wife’s name alone
    4    until the divorce in 2006.
    5        In November 2006, the Walshes entered into a
    6    Stipulation and Settlement and Agreement (“Divorce
    7    Agreement”) that divided their assets and resolved all
    8    future claims for maintenance and/or an equitable
    9    distribution award.   Walsh received title to the Half Moon
    10   House, as well as cars, certain bank accounts, and the
    11   business interests that were involved in the alleged fraud.
    12   His wife got condominiums in Florida and New York, cars,
    13   bank and securities accounts and life insurance policies,
    14   and a distributive award1 of $12.5 million.   At the time of
    15   Walsh’s indictment, the only asset of substantial value he
    16   owned was the Half Moon House.
    1
    Under New York law, a “distributive award” is a
    “payment[] provided for in a valid agreement between the
    parties . . . in lieu of or to supplement, facilitate or
    effectuate the division or distribution of property where
    authorized in a matrimonial action, and payable either in a
    lump sum or over a period of time in fixed amounts.” N.Y.
    Dom. Rel. Law § 236(B)(1)(b).
    4
    1        Walsh made payments to his wife pursuant to the Divorce
    2    Agreement using the proceeds of the fraudulent scheme.2    The
    3    district court found that, all told, Walsh transferred at
    4    least $6 million of proceeds of the scheme to his wife,
    5    including the $3 million New York condominium acquired in
    6    her name prior to the divorce.
    7        Walsh does not contest these findings on appeal.
    8
    9                                  II
    10       On February 24, 2009, the government filed a criminal
    11   complaint against Walsh and codefendant Paul Greenwood
    12   alleging an investment fraud that began around 1996.   The
    13   next day, the CFTC and SEC filed civil actions   alleging the
    14   same conduct against Walsh, Greenwood, and their various
    15   entities.   That same day, Judge Daniels, who was presiding
    2
    In a related case, the New York Court of Appeals
    answered a certified question from this Court and determined
    that “where the innocent spouse and matrimonial court are
    unaware of the tainted nature of particular assets,
    distribution of marital assets under Domestic Relations Law
    § 236 . . . would become unworkable, particularly where the
    illegal activity of one spouse is not revealed for a number
    of years subsequent to the divorce, as occurred in this
    particular case.” Comodity Futures Trading Comm’n v. Walsh,
    
    927 N.Y.3d 162
    , 173-74 (2011). Thus, although the proceeds
    of the fraud are clearly reachable as to Walsh’s property,
    they are not as to that of his ex-wife.
    5
    1    over the civil case, granted the government’s motion for a
    2    preliminary injunction seizing Walsh’s assets.
    3        Walsh and Greenwood were indicted on July 24, 2009, and
    4    Walsh pled not guilty a week later.
    5        In December 2009, Walsh moved to unfreeze the Half Moon
    6    House to finance his defense in the criminal case.   Judges
    7    Daniels and Cedarbaum jointly heard oral argument on the
    8    motion and ruled in February 2010 that Walsh was entitled to
    9    $900,000--the purchase price of the house on Arden Lane.
    10   The decision was without prejudice to Walsh’s ability to
    11   seek additional funding.
    12       In March 2011, the receiver sold the Half Moon House
    13   for approximately $3.7 million.   Walsh thereafter moved to
    14   have the remaining portion of the sale price released to pay
    15   for his criminal defense.   The parties agreed to hold a
    16   Monsanto hearing.   The government advised the court that its
    17   only witness would be FBI Agent Barnacle, who had
    18   investigated the fraud.
    19       Walsh subpoenaed two fact witnesses: his codefendant
    20   Greenwood, and Deborah Duffy, a partner at one of the
    21   entities involved in the fraud.   Walsh also subpoenaed Brick
    22   Kane, the Chief Operating Officer of the court-appointed
    6
    1    receiver in charge of selling the Half Moon House.    The
    2    court granted the government’s motion to quash all three
    3    subpoenas, on the ground “that the defendants seek . . . to
    4    hold a wholesale dress rehearsal of the trial by subpoenaing
    5    the principal cooperating witnesses of the government.”
    6    Telephone Conference Tr. 2, Apr. 15, 2011.
    7        At the Monsanto hearing, held over three days in May
    8    and June 2011.   Agent Barnacle recounted what Greenberg and
    9    Duffy told him about the fraudulent scheme and set out the
    10   transactional history of the Half Moon House.   The
    11   government introduced documents relating to the fraud and to
    12   the source of the assets.
    13       Judge Cedarbaum denied the motion to unfreeze the
    14   remaining proceeds from the sale of the Half Moon House in
    15   May 2012, finding   probable cause to believe (1) that Walsh
    16   perpetrated the scheme, and (2) that the proceeds from the
    17   sale of the Half Moon House were traceable to the profits
    18   from the scheme.
    19
    20                                III
    21       “In order to seize property . . . , the government must
    22   demonstrate that there was probable cause to believe that
    7
    1    the property is subject to forfeiture.”   In re Seizure of
    2    All Funds in Accounts in Names Registry Pub. Inc., 
    68 F.3d 3
        577, 580 (2d Cir. 1995).   “The findings supporting a
    4    district court’s determination as to probable cause are
    5    reviewed for clear error, but the determination itself is a
    6    conclusion of law reviewed de novo.”   Id.; accord United
    7    States v. Holder, 
    990 F.2d 1327
    , 1328 (D.C. Cir. 1993).
    8    Since Walsh does not contest any factual findings, but
    9    instead argues that the district court made an error of law
    10   in applying the tracing fictions from United States v. Banco
    11   Cafetero Panama, 
    797 F.2d 1154
     (2d Cir. 1986), to this case,
    12   we review the district court’s decision de novo.
    13       Part of the Sixth Amendment’s guarantee of the right to
    14   counsel is “the right of a defendant who does not require
    15   appointed counsel to choose who will represent him.”    United
    16   States v. Gonzalez-Lopez, 
    548 U.S. 140
    , 144 (2006).
    17   Nevertheless, a defendant may not use the proceeds of a
    18   fraud to fund his criminal defense: “A defendant has no
    19   Sixth Amendment right to spend another person’s money for
    20   services rendered by an attorney, even if those funds are
    21   the only way that that defendant will be able to retain the
    8
    1    attorney of his choice.”   Caplin & Drysdale, Chartered v.
    2    United States, 
    491 U.S. 617
    , 626 (1989).
    3        “[T]he [F]ifth and [S]ixth [A]mendments, considered in
    4    combination, require an adversary, post-restraint, pretrial
    5    hearing as to probable cause that (a) the defendant
    6    committed crimes that provide a basis for forfeiture, and
    7    (b) the properties specified as forfeitable in the
    8    indictment are properly forfeitable.”   United States v.
    9    Monsanto, 
    924 F.2d 1186
    , 1203 (2d Cir. 1991) (in banc).    The
    10   issue in this appeal is whether there was probable cause to
    11   believe that the proceeds from the sale of the Half Moon
    12   House were traceable to the proceeds of the fraud--i.e.,
    13   that they were “another person’s money.”3   Caplin, 
    491 U.S. 14
       at 626.
    15       The Walshes purchased the Half Moon House with funds
    16   that were not traceable to the fraud, and the title was put
    17   in then-Mrs. Walsh’s name alone.   But Walsh ultimately
    18   acquired the house pursuant to the Divorce Agreement in
    19   exchange for, inter alia, a $12.5 million distributive
    3
    We need not decide whether a Monsanto hearing is
    necessary in a case such as this where the government seized
    the assets in a parallel civil case, since we affirm the
    district court’s decision within the Monsanto framework.
    9
    1    award, of which at least $6 million consisted of funds
    2    directly traceable to the fraud.
    3        When some funds in a seized bank account are traceable
    4    to criminal activity and some are not, we consult Banco
    5    Cafetero, 
    797 F.2d 1154
    .   We have three “accounting choices”
    6    at our disposal to determine what amount of commingled funds
    7    are traceable to criminal activity.   Of relevance here is
    8    the “drugs-in, first-out” approach, which “consider[s]
    9    ‘traceable proceeds’ to be any one withdrawal, or any asset
    10   purchased with such withdrawal, to the extent of” the amount
    11   of the deposited tainted funds.    Id. at 1159.   Applying that
    12   approach, the district court analogized the sale proceeds of
    13   the Half Moon House “to a withdrawal from a commingled
    14   account, i.e., the marital estate.”   United States v.
    15   Greenwood, 
    865 F. Supp. 2d 444
    , 450 (S.D.N.Y. 2012).
    16       We conclude that the district court’s application of
    17   Banco Cafetero was proper.   Walsh negotiated to get the Half
    18   Moon House and to keep his (now worthless) business
    19   interests in exchange for the $12.5 million distributive
    20   award.   Although the House itself is not a fungible asset,
    21   it was “an asset purchased with” the tainted funds from the
    22   marital estate, by operation of the Divorce Agreement.    See
    10
    1    Banco Cafetero, 797 F.2d at 1159.   Since Walsh’s total
    2    assets did not exceed $6 million at the time of his arrest,
    3    under Banco Cafetero’s “drugs-in, first-out” approach, all
    4    of his assets are traceable to the fraud.
    5        Walsh argues that he had a preexisting right to the
    6    Half Moon House under New York’s 1980 Equitable Distribution
    7    Law and that he therefore did not “purchase” the House in
    8    the Divorce Agreement.   This argument ignores New York
    9    Domestic Relations Law section 236(B)(3), which allows
    10   parties to opt out of equitable distribution in favor of a
    11   negotiated settlement, which is what the Walshes did.     The
    12   analysis might differ if the marital estate had been
    13   distributed according to a court order under New York
    14   Domestic Relations Law section 236(B)(5).   We need not
    15   address that hypothetical, however, because Walsh freely
    16   negotiated title to the House in exchange for at least $6
    17   million in funds traceable to the fraud.    Accordingly, the
    18   district court properly applied Banco Cafetero.
    19
    20                                 IV
    21       Walsh argues that the district court made two related
    22   erroneous evidentiary rulings at the Monsanto hearing: (1)
    11
    1    admitting Agent Barnacle’s hearsay testimony; and (2)
    2    quashing Walsh’s subpoenas.   For the reasons that follow, we
    3    reject both arguments.
    4
    5                                  A
    6        The admissibility of hearsay at a Monsanto hearing is a
    7    question of law that we review de novo.   See generally
    8    United States v. Ferguson, 
    676 F.3d 260
    , 285-86 (2d Cir.
    9    2011) (reviewing hearsay decision de novo).
    10       In order to “preclud[e] unwarranted exposure of
    11   government witnesses,” Monsanto permits a “court [to]
    12   receive and consider at such a hearing evidence and
    13   information that would be inadmissible under the Federal
    14   Rules of Evidence.”   924 F.2d at 1198, 1203.   Although Walsh
    15   argues that Monsanto’s evidentiary rule should be limited to
    16   cases where witnesses may be in physical danger--such as
    17   those involving drugs4--we are persuaded by district court
    18   opinions in this Circuit applying Monsanto’s evidentiary
    4
    Monsanto involved a seizure pursuant to 21 U.S.C.
    § 853(e)(3), a drug statute. There is no analogous statute
    in this case; the government froze Walsh’s assets in the
    related civil case under the court’s equity powers granted
    to it by Section 22(a) of the 1933 Securities Act, 15 U.S.C.
    § 77v(a), and Section 27 of the 1934 Securities Exchange
    Act, 15 U.S.C. § 78aa. See SEC v. Manor Nursing Ctrs.,
    Inc., 
    458 F.2d 1082
    , 1103 (2d Cir. 1972).
    12
    1    rule to non-drug cases.   E.g., United States v. All Funds on
    2    Deposit in any Account at Certain Fin. Insts. Held in the
    3    Names of Certain Individuals, 
    767 F. Supp. 36
    , 42 (E.D.N.Y.
    4    1991) (Spatt, J.); see also United States v. Clarkson Auto
    5    Elec., Inc., No. 10-CR-6111CJS, 
    2012 WL 345911
    , at *1 n.4
    6    (W.D.N.Y. Feb. 1, 2012) (Payson, M.J.).    The unwarranted
    7    exposure of government witnesses was a valid consideration
    8    in this case, to avoid what the district court called a
    9    “dress rehearsal” of the trial.    In any event, the Monsanto
    10   hearing involved only a finding of probable cause, and “[a]
    11   finding of probable cause may be based on hearsay.”   United
    12   States v. Daccarett, 
    6 F.3d 37
    , 56 (2d Cir. 1993).
    13
    14                                 B
    15       We review the quashing of a subpoena for abuse of
    16   discretion.   See Arista Records, LLC v. Doe 3, 
    604 F.3d 110
    ,
    17   117 (2d Cir. 2010).   The same consideration that justifies
    18   receipt of hearsay evidence in a Monsanto hearing
    19   (unwarranted exposure of witnesses) supports the district
    20   court’s exercise of discretion to quash the subpoenas of two
    21   fact witnesses: Greenwood and Duffy.   Walsh argues that his
    22   right to an “adversary proceeding” should be weighed against
    13
    1    the government’s interest in protecting its witnesses, and
    2    argues that his is the greater interest.    But Monsanto has
    3    already decided, when the government has an interest in
    4    preventing the “unwarranted exposure” of its witnesses, that
    5    interest tends to outweigh a defendant’s right to cross-
    6    examine those witnesses before the trial.   See 924 F.2d at
    7    1195-98.
    8        The subpoena served on the receiver raises no risk of
    9    “unwarranted exposure of government witnesses,” but in any
    10   event, the district court did not consider any hearsay
    11   evidence that was based on the receiver’s analysis or
    12   conclusions.   Rather, the district court based its decision
    13   entirely on the documentary evidence in the case--the same
    14   documents that were available to the receiver.5   Walsh fails
    15   to show what he would have gained by calling the receiver.
    5
    Walsh argues that the court did consider the
    receiver’s conclusions by admitting Government Exhibit 603,
    which was a chart prepared by the receiver detailing
    payments Walsh made to his wife. As is clear from the
    hearing transcript, the government introduced this chart
    only “[f]or convenience and ease.” Hr’g Tr. 134:13, May 24,
    2011. The underlying records--upon which the receiver based
    the figures in the chart--were also admitted into evidence,
    and Agent Barnacle testified that he had reviewed those
    records and the chart and that the chart accurately
    reflected them. That the receiver created the chart is
    irrelevant because the chart did not reflect any independent
    analysis or computation on the receiver’s part.
    14
    1   Accordingly, the district court did not abuse its discretion
    2   in quashing Walsh’s subpoenas.
    3       For the foregoing reasons, we affirm the order of the
    4   district court.
    15