United States v. Segal, Michael ( 2007 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
Nos. 05-4601 & 05-4756
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
v.
MICHAEL SEGAL and NEAR NORTH
INSURANCE BROKERAGE, INC.,
Defendants-Appellants.
____________
Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 02 CR 112—Ruben Castillo, Judge.
____________
ARGUED APRIL 12, 2007—DECIDED AUGUST 2, 2007
____________
Before RIPPLE, EVANS, and SYKES, Circuit Judges.
EVANS, Circuit Judge. Michael Segal and Near North
Insurance Brokerage (NNIB) were charged in 27 counts
of a 28-count fourth superseding indictment: Segal with
racketeering, mail and wire fraud, false statements,
embezzlement, and conspiring to impede the Internal
Revenue Service; NNIB with mail and wire fraud, false
statements, and embezzlement. A jury returned guilty
verdicts on all counts (except one which the government
dismissed), but the district court (Judge Ruben Castillo)
granted a judgment of acquittal on 7, leaving a grand total
of 19 standing at the end of the day. NNIB was ordered to
pay a $1.4 million fine and pay restitution totaling
2 Nos. 05-4601 & 05-4756
$841,517.96. Segal was sentenced to 121 months impris-
onment, ordered to pay $841,527.96 in restitution, and
forfeit $30 million and his interest in the racketeering
enterprise.
Segal was a licensed attorney, a CPA, and an insurance
broker who began working for NNIB in 1964 when it was
owned by George Dunne, a prominent politician and
president, for 21 years, of the Cook County Board. By the
early 1990s Segal was the owner and sole shareholder of
the company. He then formed NNNB, a holding company,
to be the corporate parent of NNIB and many of his other
financial interests. During the 1990s NNIB was earning
close to $50 million annually.
During the period covered by the indictment—1990-
2002—Illinois law, as set out in 50 Ill. Admin. Code
§ 3113.40(a), required insurance brokers to maintain a
premium fund trust account (PFTA) into which all premi-
ums were to be deposited and held in a fiduciary capacity
until the carriers demanded the premium payments. The
time between a broker’s receipt of premium payments
and the carrier’s demand—called the “float’’—varied
with the carrier. Commissions, interest, credit, and other
nonpremium money could be withdrawn, but brokers
were required to maintain PFTAs in trust with sufficient
funds to pay premiums. The accounts could not be used
as operating accounts. Failure to properly maintain a
PFTA was grounds for suspension or revocation of a
broker’s license. Conversion of more than $150 was a
felony.
NNIB maintained both a PFTA and an operating ac-
count, but everything was deposited in the PFTA, and the
operating account was maintained with a zero balance.
Funds were transferred to the operating account from the
PFTA to pay expenses, but after those payments were
made everything was transferred back to the PFTA. The
Nos. 05-4601 & 05-4756 3
chief financial officer of NNIB from 1990 to 1998, Norman
Pater, considered this practice to be a violation of the
regulations, as did his successor, Donald Kendeigh, and,
in turn, his successor, Thomas McNichols.
Nevertheless, Segal expanded his business, purchasing
brokerages in New York, California, Texas, and Florida. In
addition, he purchased several other companies, ranging
from a fire suppression device manufacturer to a soft-
ware maker. The acquisition of these entities was funded
by NNIB’s PFTA. Most of the companies were losing
money, so there were regular wire transfers from the
PFTA to keep them solvent. By the end of 1989 the PFTA
was over $7 million out of trust. At the end of 1995 it
was $10 million short, and by August 2001 the deficit had
grown to $30 million. Evidence shows that Segal knew he
was converting PFTA money to fund expansion and for
other unauthorized purposes. Auditors regularly told him
so. Segal contended it was no big deal. He told McNichols
that every insurance company operates the way he did. In
the face of this sort of operation, the auditing firm
McGladrey & Pullen resigned, as had an earlier firm,
Deloitte & Touche.
The cash shortfall in the PFTA was so bad in January
2001 that Segal had the head of the NNIB branch in Los
Angeles wire $3 million to cover payments which were
due to carriers. Reluctantly he wired the money on Janu-
ary 16; on the 22nd, $2.4 million was wired back to Los
Angeles.
In April 2001, McNichols drafted a letter to Segal
outlining an NNIB Management Operations Plan. Its
purpose was to bring NNIB into compliance with the
law. The plan proposed putting control of NNIB into an
executive committee that would report to Segal but be free
to act without his approval. The plan called for selling off
money-losing affiliates, segregating PFTA from operating
4 Nos. 05-4601 & 05-4756
funds, and obtaining an outside audit. The letter noted
that the PFTA was $17 million in deficit but that for
years Segal had shown no interest in balancing it, that
outside auditors had quit because of the deficit, that
Segal’s wife said Segal’s ties to the governor would pro-
tect him, and that Segal was intentionally committing a
felony. Segal rejected the plan. But he retained Hales &
Company, financial consultants, to evaluate NNIB’s
prospects of raising capital by attracting new investors.
Soon after Hales was retained, its chief executive officer
received a phone call from Segal saying that an anonymous
letter had been sent to the Illinois Department of Insur-
ance (IDOI) reporting the PFTA deficit. The Hales vice-
president in charge of the account concluded that the
PFTA was out of trust by $24 million—even after Segal
put $10 million from a mortgage on his home into the
account. Hales secured loans for NNIB, and the situation
was finally corrected when Firemen’s Fund and AIG each
loaned NNIB $10 million. The loans, however, came with
restrictions on Segal’s ability to dispose of assets, effec-
tively taking control of NNIB out of his hands.
A less dramatic aspect of the situation involved petty
cash. Dan Watkins, an employee in NNIB’s accounting
department, maintained a petty cash account of $20,000.
A ledger was kept with strict accounting of even small
withdrawals for NNIB expenses. In contrast, every week,
thousands were put in an envelope for Segal. Watkins
eventually pled guilty to embezzlement for his part in the
transactions.
NNIB often paid Segal’s personal credit card bills—to
the tune of $36,000 for the years 1999-2001. Employees of
NNIB also performed personal services for him and his
family. Evidence showed that between 1999 and 2001
Segal had $667,000 in unreported income for the value of
services rendered.
Nos. 05-4601 & 05-4756 5
In addition, Segal had employees make political contri-
butions with personal checks. NNIB then reimbursed
them. Segal also provided discounts on insurance premi-
ums for political figures.
One influential person helpful to Segal was Nathaniel
Shapo. Shapo’s first job out of college was interning for
Illinois’ then-lieutenant governor, George Ryan. Shapo
next worked for Ryan when Ryan was the Illinois secretary
of state. After Shapo graduated from law school he worked
on Ryan’s gubernatorial campaign. Ryan was elected and
appointed Shapo, who was then six months out of law
school with no insurance background, as director of the
Illinois Department of Insurance. Homer Ryan, the gover-
nor’s son, introduced Segal to Shapo. When the previously
mentioned anonymous tipster informed the IDOI of
NNIB’s PFTA deficit, IDOI began an investigation.
Fortuitously for Segal, at that time he had a meeting
scheduled with Shapo. Before the meeting, Governor
Ryan called Shapo to say he hoped things would go well
for NNIB, and after, called to ask how the meeting had
gone. Shapo told Ryan that IDOI would not do an official
examination of NNIB because it would kill a $20 million
deal Segal had in the works.
Segal was also involved in providing insurance for the
Chicago Transit Authority’s reconstruction project on its
Blue Line, a contract which NNIB was awarded. The
contract was fee-based; no commissions were to be paid to
the broker. However, before the contract was signed, Segal
arranged to have one of NNIB’s subsidiaries broker some
of the coverages—and earn a commission of $370,000, an
arrangement not revealed to the CTA.
Finally, in what seems—in the context of this case—to
be almost a minor infraction, NNIB had a policy of writ-
ing off customer credits. After a credit owed to a customer
had been carried on the books for a while without a
6 Nos. 05-4601 & 05-4756
payment demand, the credit was simply written off.
Account executives were trained not to notify customers
that they were owed credits. Segal personally approved of
these write-offs, and in the judgment against him he was
ordered to pay $471,000 in restitution to the victims.
Segal and NNIB have raised a number of issues on
appeal. We begin with their claim that they were the
targets of vindictive prosecution. They contend that
additional charges were leveled against Segal and charges
were brought against NNIB in retaliation for their pur-
suit of civil remedies against former NNIB executives
who were cooperating with the government.
Before the present criminal case began, Segal and NNIB
filed suit in state court against former NNIB executives
Matt Walsh and Dana Berry, alleging that they violated
noncompete clauses in their contracts with NNIB. After
that—but not because of it—the government charged
Segal with one count of fraud; at that time no charges
were filed against NNIB. Then Segal and NNIB prepared
a draft amended complaint in their civil case and showed
it to the prosecutors in the criminal case. The amendment
alleged that Walsh and Berry illegally acquired propri-
etary information from a former NNIB information
technologist, who had hacked into the company’s computer
system. When shown the amended complaint, the prosecu-
tor protested that the allegations were not made in good
faith and were intended to harass and intimidate Walsh
and Berry, who were expected to be government wit-
nesses. The prosecutor said that if the amended complaint
was filed, the government would take it into account in
deciding whether to bring charges against NNIB and to
charge Segal under the Racketeer Influenced and Corrupt
Organizations Act, 18 U.S.C. §§ 1962 et seq. (RICO). The
amended complaint was filed and the grand jury re-
turned superseding indictments doing just that. Claiming
that the additional charges were the result of vindictive
Nos. 05-4601 & 05-4756 7
prosecution, Segal and NNIB moved to dismiss the indict-
ment. The district judge denied the motion without a
hearing.
On a claim of vindictive prosecution, we review the
district court’s legal conclusions de novo and its findings of
fact for clear error. United States v. Falcon, 347 F.3d 1000(7th Cir. 2003); United States v. Jarrett, 447 F.3d 520 (7th
Cir. 2006).
The Constitution prohibits initiating a prosecution based
solely on vindictiveness. “[F]or an agent of the [United
States] to pursue a course of action whose objective is to
penalize a person’s reliance on his legal rights” is “a due
process violation of the most basic sort . . . .”
Bordenkircher v. Hayes, 434 U.S. 357, 363 (1978); Jarrett,
447 F.3d at 525. After a trial, in very limited circum-
stances, courts have applied a burden-shifting presump-
tion of vindictiveness where prosecutors have pursued
enhanced charges after a defendant successfully chal-
lenged a conviction and was awarded a new trial. But we
stated in Jarrett that our precedents do not provide for the
application of such a presumption before trial. It remains
a fact that a pretrial claim of vindictive prosecution is
extraordinarily difficult to prove. To prevail on this sort
of claim, Jarrett holds that a defendant must affirmatively
show that the prosecutor was motivated by animus, “such
as a personal stake in the outcome of the case or an
attempt to seek self-vindication.” Id. And it must be
recognized, in reviewing a claim of vindictiveness be-
fore trial, that prosecutors have “wide discretion over
whether, how, and when to bring a case.” Id. As the
Supreme Court has said, “A prosecutor should remain free
before trial to exercise the broad discretion entrusted to
him to determine the extent of the societal interest in
prosecution. An initial decision should not freeze future
conduct. As we made clear in Bordenkircher, the initial
8 Nos. 05-4601 & 05-4756
charges filed by a prosecutor may not reflect the extent to
which an individual is legitimately subject to prosecution.”
United States v. Goodwin, 457 U.S. 368, 382 (1982).
That the initial charges may not reflect the extent of
a defendant’s wrongdoing is clearly illustrated by the
evidence in this case. It is hard to imagine that any
prosecutor would fail to find NNIB a proper defendant or
fail to conclude that Segal’s wrongdoing extended far
beyond one fraud count. The evidence supports the indict-
ment, and Segal and NNIB have not made a showing of
vindictiveness. What they point to in an attempt to
support the claim is a statement by a prosecutor that if
the defendants filed the amended complaint, that would
be taken into account in deciding on RICO charges and
charges against NNIB. The prosecutor’s statement was
based, however, on the belief that the allegations in the
amended civil complaint were not made in good faith
but, to the contrary, were intended to harass and intimi-
date government witnesses. A prosecutor cannot be said
to act vindictively by taking into account a defendant’s
perceived efforts to intimidate witnesses. In short, defen-
dants have not made out a claim for vindictive prosecution,
nor have they shown sufficient evidence to warrant a
hearing on the claim.
Next, the defendants claim that there was a fatal
variance between the indictment and the proof at trial.
This claim fares no better. Specifically, they argue that
the evidence showed multiple schemes to defraud rather
than the single scheme charged in the indictment. We
treat such a claim as an attack on the sufficiency of the
evidence, and we review the evidence in the light most
favorable to the government. United States v. Olson, 450
F.3d 655 (7th Cir. 2006).
Much summarized, the fourth superseding indictment
charged the defendants with a single scheme to defraud
Nos. 05-4601 & 05-4756 9
and to obtain money and things of value from the PFTA
(an account they were required to maintain for the
benefit of customers and insurance carriers) by creating
the false appearance that payments to NNIB would be held
in trust for payment of premiums, that credits due custom-
ers would be refunded to them, and that the customers
would receive honest services. Rather than a single
scheme, defendants contend that evidence at trial revealed
three separate schemes: failure to maintain sufficient
funds in the PFTA; writing off of customer credits; and
collection of a commission from the CTA contract for
Blue Line renovation. The district court found that the
evidence was sufficient for the jury to find that the fraudu-
lent acts were all part of a single scheme. We agree.
As part of their argument on this point, the defendants
characterize the misuse of the PFTA account as improper
borrowing which did not actually harm anyone or benefit
them, certainly a benign interpretation of the facts. And
the law is otherwise. The unauthorized use of money
from an insurance premium trust account is mail fraud
even if the defendant did not gain and the victim did not
lose. See United States v. Vincent, 416 F.3d 593 (7th Cir.
2005). The claim that the carriers were at little risk
ignores the facts which show that NNIB was often late
in paying carriers and had to hold checks to carriers
until it came up with sufficient funds to send them out. By
2001, NNIB had to obtain cash from affiliates to pay
premiums and by the end of that year had to borrow $30
million to meet its obligations. In addition, it is hard to
see how the defendants can contend that the credit write-
offs were unrelated to the larger scheme. Withholding of
credits directly deprived customers of money they were
owed and of the honest services of their broker. In addi-
tion, it reduced the PFTA deficit, at least to some degree.
Proceeds from other acts, such as the CTA fraud, were
commingled in the PFTA and used for a variety of unau-
10 Nos. 05-4601 & 05-4756
thorized purposes. Political contributions and premium
discounts to influential people provided Segal with cover
to prevent discovery of his financial shenanigans. In short,
the evidence supports a finding of an overarching scheme
involving the misuse of the PFTA account, as alleged
in the superseding indictment.
We turn next to the claim that the jury instructions
regarding mail and wire fraud were improper. The defen-
dants were convicted of fraud for depriving another of the
“intangible right to honest services” pursuant to 18 U.S.C.
§ 1346. They contend that the jury instructions mis-
stated the law and that there is a likelihood that the
instructions confused the jury into thinking the defendants
could be convicted for violations of Illinois insurance law.
The defendants further contend that state law is always
irrelevant under the statute. Alternatively, they say that
if state law is relevant, it was overemphasized in the
instructions. We review the instructions as a whole to
determine whether they fairly treat the issues. United
States v. Murphy, 469 F.3d 1130 (7th Cir. 2006).
The argument that state law is always irrelevant in
determining the scope of a fiduciary duty, the breach of
which may give rise to a deprivation of honest services, is
foreclosed by United States v. Bloom, 149 F.3d 649 (7th
Cir. 1998). Bloom makes clear that state laws are useful
for defining the scope of fiduciary duties, and that what
distinguishes a mere violation of fiduciary duty from a
federal fraud case is the misuse of one’s position for
private gain.
Our conclusion is not altered by our decision in United
States v. Thompson, 484 F.3d 877 (7th Cir. 2007). Defen-
dants argue that in Thompson we rejected the notion
that simple violations of administrative rules provide the
basis for a mail fraud conviction. In fact, what we said is
that there is a “potential to turn violations of state rules
Nos. 05-4601 & 05-4756 11
into federal crimes,” at which point we explained that our
decision in Bloom specifically protects against that danger
and remains the governing legal standard. The case
against Thompson simply did not measure up.
Georgia Thompson was a state procurement officer who
steered a travel contract to the low bidder (who made legal
campaign contributions to an incumbent governor) even
though other people involved in the selection process rated
a rival company more highly. The theory of the prosecution
was that she deprived the state of her honest
services—that is, her “duty to implement state law the
way the administrative code laid it down . . . .” The private
gain—the Bloom requirement—was a tiny salary increase
of $1,000 per year and an alleged improvement in her
job security for pleasing her superiors who allegedly
favored the company she backed. We soundly rejected the
government’s theory. First, we found that Thompson
already had job security as a civil servant. We then
analyzed the case based on the assumption that she
received the raise for steering the contract. Even using
that assumption, we concluded that “a raise approved
through normal civil-service means is not the sort of
‘private gain’ to which Bloom refers.” Thompson does not
change the Bloom rules, but merely reinforces them.
Furthermore, this case differs from Thompson in both
degree and in kind. The difference in degree hardly bears
mentioning—a $30 million fraud versus a $1,000 per
year civil service raise. But, more importantly, it differs
in kind. We concluded that Thompson did not act out of
private gain, whereas Segal knowingly and intentionally
misused the PFTA for his own very significant private
gain. Bloom remains the law in this circuit and Thompson
does nothing to change the result in our case today.
As to the instructions, the jury was told that the defen-
dants were charged with violations of various federal
12 Nos. 05-4601 & 05-4756
laws, including the mail fraud, wire fraud, and racketeer-
ing laws. The instructions specifically state that the
defendants “are not charged in this case with any state
crimes or any violations of state regulations.” The jury
was told that it “should consider the following provisions
of Illinois law . . . in determining the existence, the scope
and the nature of defendants’ legal and fiduciary duties
in this case.” The instructions also state:
To find defendants guilty of the charged federal
offenses, it is not enough to find that one or both of the
defendants violated Illinois law or the Illinois Insur-
ance Regulations. Your job is to decide whether the
government has proven beyond a reasonable doubt
every element of each federal offense charged in the
indictment based on the instructions I give you. Even
if you believe that the defendants violated Illinois law
or Illinois Insurance Regulations, you should return a
verdict of not guilty if you also believe that the govern-
ment has not proven every element of the particular
charged federal offense you are considering beyond a
reasonable doubt.
The defendants proposed an instruction, which was
rejected, that the intent necessary to convict was the
intent to defraud, not the intent to violate state law. Even
though the defendants’ specific proposed instruction was
rejected, the jury was instructed that it had to find that
the defendants acted knowingly and with intent to de-
fraud. “Scheme to defraud” and “intent to defraud” were
defined without any reference to state law. Viewed as a
whole, we find the instructions fairly informed the jury
that state law was to be used only to determine the nature
of the defendants’ legal and fiduciary duties.
Segal also contends that the jury was not properly
instructed on the “pattern” element of the RICO charge.
He does not claim that the instructions which were given
Nos. 05-4601 & 05-4756 13
were erroneous or that the evidence was insufficient to
prove a pattern. But he wanted an instruction that “a
multiplicity of mailings or interstate communications
may be no indication of the requisite pattern or racketeer-
ing activity because each mailing or wire communication
was a separate offense and the number of offenses ‘does
not necessarily translate into a pattern of racketeering
activity.’ ” We reject his argument. In this case there are
years of false representations in various mail and wire
communications. We have upheld convictions in similar
circumstances. In United States v. Genova, 333 F.3d 750,
759 (7th Cir. 2003), we said that a jury could conclude that
the false mailings in that case were integral to the scheme
and that “because the scheme extended over several years,
a jury also sensibly could find a pattern of racketeering.”
In the final challenge to the convictions, defendants
claim that their conviction of insurance fraud under 18
U.S.C. § 1033(b) cannot stand because NNIB was not
“engaged in the business of insurance” as required by the
statute. NNIB, defendants say, is an insurance broker, not
an insurance provider.
The statute defined the “business of insurance” as the
writing of insurance or reinsuring of risks “by an insurer,
including all acts necessary or incidental to such writing
or reinsuring and the activities of persons who act as, or
are, officers, directors, agents, or employees of insurers or
who are other persons authorized to act on behalf of such
persons[.]” § 1033(f)(1). “Insurer” means “any entity the
business activity of which is the writing of insurance or
the reinsuring of risks . . . .” § 1033(f)(2). We have previ-
ously said that under Illinois law, an insurance broker, or
agent of the insured is:
[o]ne who procures insurance and acts as middleman
between the insured and the insurer, and solicits
insurance business from the public under no employ-
14 Nos. 05-4601 & 05-4756
ment from any special company, but, having secured
an order, places the insurance with the company
selected by the insured, or, in the absence of any
selection by him, with the company selected by such
broker.
American Ins. Corp. v. Sederes, 807 F.2d 1402, 1405 (7th
Cir. 1986), quoting Galiher v. Spates, 262 N.E.2d 626, 628
(1970). Whether the broker is an agent of the insured or
the insurer is a question of fact and “[a]lthough an insur-
ance broker typically represents the insured, the broker
may also become the agent of the insurer or both parties.”
Capitol Indemnity Corp. v. Stewart Smith Intermediaries,
Inc., 593 N.E.2d 872, 876 (Ill. App. 1992). Whether an
entity is an agent of the company or the insured is deter-
mined by its actions. The evidence in this case is suf-
ficient to support a finding that the defendants were
engaged in the business of insurance as that term is
broadly defined in the statute to include “all acts neces-
sary to incidental to such writing or reinsuring.”
§ 1033(f)(1).
We now turn to issues involving the forfeiture and
restitution orders. Restitution was ordered against both
Segal and NNIB in the amount of $841,527.96. They
contend the evidence did not support $542,2911 of that
amount. The latter amount was attributable to cred-
its—due to customers—which were written off. Of that
amount, $357,079 was alleged to be owed but not paid to
Waste Management. Segal presented an affidavit from
Waste Management’s risk management director saying
that the sum was not owed to his company. But given
other evidence, it was certainly possible that Waste
Management didn’t know it had credits coming.
1
The uncontested amount is the restitution ordered to be paid
to the CTA for the illegal commission on the Blue Line project.
Nos. 05-4601 & 05-4756 15
We review the district court’s calculation of restitution
for abuse of discretion. United States v. Swanson, 394 F.3d
520, 526 (7th Cir. 2005); United States v. Danford, 435
F.3d 682 (7th Cir. 2006). We review the evidence in the
light most favorable to the government. Olson, 450 F.3d
655 (7th Cir. 2006). The government is required to prove
the entitlement to restitution by a preponderance of the
evidence. In this case, the credits occurred in 1999, and the
findings regarding the victims and the amounts they
were owed were based on a report prepared by a govern-
ment auditor and attached to the government’s objec-
tions to the presentence report. NNIB CFO McNichols
testified about a meeting with Segal in the fall of that year
in which old, unclaimed credits were reviewed. Segal gave
instructions to write them off. Another witness testified
that if a client did not ask for the credit for a period of
time, it was written off. Including these unpaid credits in
the restitution order cannot be said to have been errone-
ous.
On the forfeiture issues, an initial matter involves
Segal’s claim that he was prejudiced by his absence from
the hearing at which a preliminary forfeiture order was
entered. We review the issue de novo, United States v.
Smith, 31 F.3d 469 (7th Cir. 1994), to determine whether
Segal’s due process rights were violated. A defendant
has a due process right to be present “ ‘whenever his
presence has a relation, reasonably substantial, to the
fulness of his opportunity to defend against the charge.’ ”
United States v. Gagnon, 470 U.S. 522, 526 (1985) (quoting
Snyder v. Massachusetts, 291 U.S. 97 (1934)). But “the
presence of a defendant is a condition of due process to
the extent that a fair and just hearing would be thwarted
by his absence, and to that extent only.” Snyder, 291 U.S.
at 107-08. The determination is made in light of the record
as a whole. United States v. McCoy, 8 F.3d 495 (7th Cir.
1993). In this case, the hearing resulted only in a prelimi-
16 Nos. 05-4601 & 05-4756
nary order; the actual forfeiture was further litigated at
a later time. Segal’s counsel was at the hearing and no
testimony was taken. When addressing this issue at a
later proceeding, District Judge Castillo stated:
I have taken a close look at that particular issue,
and I’ve read the pleadings. The record I think is
reflected in the pleadings that have been filed very
ably and adequately by Mr. Segal’s counsel that
reflects that the preliminary forfeiture order was
entered without him being here. That was an over-
sight. As I said at the point in time when the prelimi-
nary forfeiture order was entered, if we had all had
our thinking caps on, that order should have been
entered at the point in time immediately following the
return of the verdict, but there was a lot of issues
going on, not the least of which was whether or not
Mr. Segal would be detained pending sentencing or
not.
That being the case, the record will reflect that
during the entire period from the point in time that
preliminary forfeiture order was entered until Mr.
Segal’s attorneys filed their written objection, I think
a period of 30 days, no issue was ever brought before
this Court by way of any—not even one- or two-para-
graph motion saying Mr. Segal should have been
present at the preliminary forfeiture proceeding. It
was never brought. And that the record will reflect.
The record will also reflect that it’s this Court’s
conclusion that Mr. Segal has been more than ade-
quately represented during that period of time and
that extensive objections have been filed to the pre-
liminary forfeiture proceeding.
So Judge Castillo concluded that if there was an error, it
did not prejudice Segal. We agree with that conclusion.
Furthermore, there were almost countless hearings
Nos. 05-4601 & 05-4756 17
regarding the forfeiture in this case, hearings at which
Segal was present unless he voluntarily chose not to
attend, as was the case on December 29, 2004. All in all,
we are not convinced that Segal’s due process rights were
violated when the preliminary forfeiture was entered.
Segal also raises issues regarding the forfeitures them-
selves. 18 U.S.C. § 1963(a) provides that a person con-
victed of a RICO violation shall forfeit the enterprise
“which the person has established, operated, controlled,
conducted, or participated in the conduct of, in violation of
section 1962” and “any property constituting, or derived
from, any proceeds which the person obtained, directly
or indirectly, from racketeering activity or unlawful debt
collection . . . .” The judgment against Segal required the
forfeiture of both.
As to the enterprise, Segal contends that it was error
for the court to set aside the jury verdict. The contention
requires some explanation. The “enterprise” in this case
was NNIB and related affiliates. Segal was the sole owner
of the enterprise. The judge instructed the jury that
Segal’s interest in the enterprise was subject to forfeiture
to the extent the enterprise was tainted by racketeering
activity. The verdict form asked the jury to reply “yes” or
“no” to the question whether Segal held an interest in the
enterprise and, if so, what percentage of Segal’s inter-
ests were tainted. The jury replied “yes” and answered
the latter question 60 percent. However, the judge ordered
forfeiture of 100 percent of the enterprise, thus the
argument is that the “60 percent verdict” was set aside.
The court noted that under § 1963(a), Segal’s interest in
the enterprise subjected 100 percent of the enterprise to
forfeiture. That is a correct conclusion. The error was in
submitting the percentage question to the jury in the
first place. The error, however, had no bearing on the case.
The fact is that the jury found that Segal had an interest
in the enterprise. In fact, Segal owned the enterprise. The
18 Nos. 05-4601 & 05-4756
evidence at trial to that effect was not simply sufficient,
but overwhelming. And § 1963 requires forfeiture of the
enterprise.
Segal also objects to the forfeiture of $30 million in
proceeds. He argues that there is a fatal variance between
the allegations of the indictment and the theory of forfei-
ture employed at his trial. He also contends that the
evidence is insufficient to support the amount of the
forfeiture.
The indictment charges that Segal’s interest subject to
forfeiture is
at least $20,000,000, including but not limited to all
salary, bonuses, dividends, pension and profit sharing
benefits received by defendant MICHAEL SEGAL,
from NNIB and NNNG acquired and maintained
during the period 1990 through 2001.
He says that the indictment must be interpreted to mean
that only his executive salary of $120,000 per year, the
cash he took from petty cash, and the claims for personal
expenses are subject to forfeiture. In addition, he says the
government must show what proportion of his executive
compensation consisted of racketeering proceeds. We
cannot agree.
The items Segal mentions are, indeed, subject to forfei-
ture, but so is some of the money he stole from the PFTA.
There is no requirement that proceeds be in the form of
more-or-less legitimate salary payments or shady small
reimbursements. While the indictment mentions salaries,
bonuses, etc., it also says the forfeiture includes but is
not limited to those items and that “at least” $20,000,000
is subject to forfeiture. In short, the indictment does not
limit the forfeiture to the specific items it mentions or
the ones Segal acknowledges. Assets forfeited as pro-
ceeds in Genova, a case on which Segal places considerable
Nos. 05-4601 & 05-4756 19
reliance, included clearly illegal bribes, as well as seem-
ingly legitimate attorney fees. In fact, the defendant in
Genova conceded that the bribes he received were subject
to forfeiture. Here, the evidence is sufficient to show that
money was stolen from the PFTA. It is also sufficient to
show what the amount was. The evidence shows a deficit
which grew over the years. At the end of 1989 the PFTA
was over $7 million out of trust. At the end of 1995 it was
$10 million short. Dennis Pogenburg of the Hales Groups
testified that in the fall of 2001 the deficit was $24
million—after $10 million in borrowed money had been
deposited into the fund. McNichol testified that at the
end of April 2001 the PFTA deficit was $29 million. By
the end of 2001, $30 million was borrowed to meet NNIB’s
premium obligations.
Segal makes much of the fact that our cases require that
proceeds forfeitures be of net, not gross, proceeds and that
while restitution is loss based, forfeiture is gain based. He
is correct about the legal principles, as Genova and United
States v. Masters, 924 F.2d 1362 (7th Cir. 1991), make
clear, but wrong about the application to his case. Here,
the amount stolen is equal to the amount of the deficit.
The gain is equal to the loss.
Furthermore, the $30 million is net, not gross, proceeds
to Segal. It is true that to collect the funds which went
(briefly) into the PFTA, NNIB had expenses—employee
salaries, etc. But taking the money once it was there did
not cause Segal to incur expenses. He does not say, for
instance, that he paid someone to help him make off with
the funds. The expenses involved in the acquisition of the
$30 million were borne by NNIB; the defendant from
whom the forfeiture is sought is Segal. To him, it was
all net proceeds, figuratively, all gravy.
Again, Genova may provide a loose analogy. Jerome
Genova was the mayor of Calumet City, Illinois. He
20 Nos. 05-4601 & 05-4756
appointed Lawrence Gulotta as city prosecutor and
arranged for Gulotta’s law firm to get most of the city’s
legal business. Gulotta kicked back to Genova about 30
percent of the payments the law firm received from the
city. The kickbacks were a cost of doing business and,
because we require forfeiture on net proceeds, were
deducted from Gulotta’s forfeiture of his fees. However, the
kickbacks were net proceeds to Genova. In Segal’s case,
as well, the pilfered funds were net proceeds to him—if
not to NNIB.
Segal also argues, though, that he paid the money back,
and apparently for that reason he thinks the $30 million
is not subject to forfeiture. We have trouble seeing why
paying the money back means that he did not take it in
the first place. More importantly, he did not personally
pay it back. He paid it back by borrowing from Firemen’s
Insurance and AIG in loans, primarily secured by assets
of the company.
All of that said, what is not clear from the record is how
much of the $30 million was poured back into the enter-
prise and how much went to benefit Segal personally.
Without that information we cannot determine whether
at least part of the $30 million forfeiture would con-
stitute double billing, given that the amount that went
back into the company will be forfeited through the
forfeiture of the enterprise. Double billing, as the Court of
Appeals for the Third Circuit has said, cannot be the
intent of Congress:
We do not believe that Congress intended forfeiture
verdicts to double if property forfeitable under section
1963(a)(1) also happened to be forfeitable under
section 1963(a)(2). To read the statute to permit such
verdict doubling would introduce an arbitrariness
into the statute that could not have been contemplated
by Congress.
Nos. 05-4601 & 05-4756 21
United States v. Ofchinick, 883 F.2d 1172, 1182 (3rd Cir.
1989). Accordingly, we will remand the case to the district
court for a determination of what portion of the $30 million
was not reinvested in the enterprise, but rather went to
benefit Segal personally and is subject to forfeiture as
proceeds of the illegal enterprise.
Finally, Segal argues that the forfeiture violates the
Excessive Fines Clause of the Constitution. We review
constitutional questions de novo. United States v.
Kirschenbaum, 156 F.3d 784 (7th Cir. 1998).
In United States v. Bajakajian, 524 U.S. 321, 334 (1998),
the Court held that “a punitive forfeiture violates the
Excessive Fines Clause if it is grossly disproportional to
the gravity of a defendant’s offense.” It is true that the
forfeiture is large. It is only excessive, however, if it is
disproportional to the offense. We cannot say that it was.
This was a massive fraud. When a defendant commits a
multimillion-dollar crime, he can be required to forfeit
assets also running into the millions.
For all these reasons, the judgment of forfeiture of the
proceeds of the racketeering activity is VACATED and
REMANDED for further proceedings in the district court.
In all other respects, the judgments against Segal and
NNIB are AFFIRMED.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—8-2-07