United States v. Ferrell T. Riley

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Nos. 95-2694, 95-2778, and 95-2781
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United States of America, *
*
Plaintiff - Appellee, *
*
v. *
*
Ferrell Travis Riley; Cheryll *
S. Coon; Jack L. Brown, *
*
Defendants - Appellants, *
*
The Direct Holding Company, * Appeals from the United States
d.b.a. Direct Data Processors; * District Court for the
L.F.B. Insurance and * Western District of Missouri.
Reinsurance, a division of *
La Fenix Boliviana S.A. De *
Seguros Y Reaseguros; National *
and International Company; *
Buffalo Lodge and Resorts *
Management Company, Inc.; *
Business First Entertainment, *
*
Intervenors - Appellants. *
___________
Submitted: December 13, 1995
Filed: March 11, 1996
___________
Before BOWMAN and LOKEN, Circuit Judges, and SCHWARZER,*
District Judge.
___________
LOKEN, Circuit Judge.
A criminal defendant convicted of violating the Racketeer Influenced
and Corrupt Organizations Act ("RICO") "shall forfeit"
*The HONORABLE WILLIAM W. SCHWARZER, United States
District Judge for the Northern District of California,
sitting by designation.
his or her interests in the RICO enterprise, assets acquired in violation
of the Act, and any proceeds of racketeering activity. 18 U.S.C. §
1963(a). After a RICO indictment, but prior to the defendant's conviction,
the district court may enter orders "to preserve the availability" of
property subject to forfeiture. § 1963(d)(1). These appeals challenge
preconviction orders appointing a monitor, and later a receiver, to manage
companies allegedly owned or controlled by RICO defendants Ferrell Riley,
Cheryll Coon, and Jack Brown. Appellants are these defendants plus
affected companies that were not named in the RICO indictment (the
"Intervenor Companies").
At oral argument, counsel for the government could not identify what
property is subject to forfeiture if defendants are convicted, could not
refer us to record evidence establishing the extent of defendants'
interests in the affected companies, and could not reconcile the relevant
statutory language with the preconviction restraints the government had
obtained. Accordingly, we immediately issued an Order vacating the
district court's monitor and receiver orders. We now explain the reasons
underlying our disposition of these appeals.
I.
Count One of the November 16, 1994, indictment charged Riley, Coon,
and Brown with violating RICO by using Meadowlark Insurance Company,
Magnolia Acceptance Corporation, M & M Management Company, and Commercial
Indemnity Assurance (the "Named Companies") as an enterprise through which
defendants bribed state officials and defrauded insurance regulators, a
group health care insurance plan, and a podiatrists' association.1 At the
end of the lengthy
1
Meadowlark is a surplus lines insurer. Magnolia is a premium
finance company. M & M manages Meadowlark and other insurers.
Commercial Indemnity is Meadowlark's successor.
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indictment, the government stated its "intent to forfeit . . . at least $28
million and all interests and proceeds traceable thereto, including but not
limited to real property, automobiles, bank accounts and personal
property." An FBI agent later testified that $28 million is the
government's estimate of the Named Companies' gross receipts during the
1988 to 1992 period.
After the indictment issued, the government immediately applied for
an order restraining defendants from dissipating, encumbering, or disposing
of specific enumerated assets that the government alleged are subject to
forfeiture -- real property, automobiles, and financial institution
accounts. On November 21, 1994, the district court issued that order, and
it later extended this restraint to additional enumerated financial
institution accounts. Defendants do not challenge these restraints on
appeal, and our prior order left them in place.2
The government next moved for appointment of a monitor to examine the
affairs of the Named Companies and the Intervenor Companies in order to
prevent "dissipation of the restrained assets and/or the neglect of the
ongoing businesses." Following an evidentiary hearing, the district court
issued orders appointing a monitor and granting the monitor broad powers
to investigate the Named Companies and the Intervenor Companies, to account
for and take control of the funds of those companies, to require reports
and information, and to disapprove broad categories of business activity,
including routine insurance transactions.
2
Given the plain language of § 1963(d)(1)(A), we question
whether a preconviction restraining order may affect property not
fairly encompassed within the forfeiture allegations of the
indictment, particularly given the forfeiture pleading requirements
of Fed. R. Crim. P. 7(c)(2). See United States v. Sarbello, 985
F.2d 716, 719-20 n.8 (3d Cir. 1993). However, as appellants have
not raised that issue, we leave it for another day.
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On June 21, 1995, at the request of the monitor, the district court
converted the monitor to a receiver, giving him even broader powers of
investigation plus total control over the day-to-day operations of the
Named Companies and the Intervenor Companies. Defendants and the
Intervenor Companies appeal these monitor and receiver orders.3
II.
The lengthy monitor and receiver orders do not discuss the
relationship between the Named Companies, the Intervenor Companies, and the
specific assets that the district court initially restrained, or the extent
to which assets of these companies might ultimately be subject to RICO
forfeiture. Nor do these orders discuss the statutory authority for the
virtually unlimited powers granted to the monitor, and then to the
receiver, to manage the affairs of these companies, many of which are
engaged in insurance businesses that are subject primarily to state
regulation by reason of the McCarran-Ferguson Act, 15 U.S.C. § 1012(b).
3
The government argues that these appeals are in large part
untimely because they were not filed within the ten days prescribed
for commencing a criminal appeal. See Fed. R. App. P. 4(b).
However, Rule 4(a), which governs civil appeals, applies if the
order being appealed is "essentially a civil proceeding arising
from a criminal one." United States v. Brown, 835 F.2d 176, 179
(8th Cir. 1987). The merits of a preconviction order restraining
forfeitable assets are governed by the civil standards for
temporary restraining orders and preliminary injunctions. See
United States v. Lewis, 759 F.2d 1316, 1324-25 (8th Cir.), cert.
denied, 474 U.S. 994 (1985). And postconviction proceedings to
recover forfeited property are considered civil for purposes of
Rule 4, whether commenced by the criminal defendant or by a third
party. See United States v. Mosquera, 845 F.2d 1122, 1125 (1st
Cir. 1988); United States v. Lavin, 942 F.2d 177, 181 (3d Cir.
1991). We conclude that an order imposing preconviction restraints
prior to forfeiture is, in substance, a civil proceeding for
purposes of Rule 4. Therefore, these appeals are timely.
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Preconviction restraints are extreme measures. Before a
preconviction restraint may issue, the government must demonstrate at a
hearing that the RICO defendant is likely guilty and that the property to
be restrained will be subject to criminal forfeiture. See Lewis, 759 F.2d
at 1324. And the preconviction restraint order should include specific
findings permitting an appellate court to determine whether the property
restrained is subject to forfeiture. See In re Assets of Martin, 1 F.3d
1351, 1361-62 (3d Cir. 1993). The government virtually ignored these
procedural safeguards in this case. A brief review of the relevant
statutes and the rather barren record on appeal reveals that serious error
resulted.
We begin with the statute authorizing preconviction restraints, 18
U.S.C. § 1963(d)(1):
Upon application of the United States, the court may enter a
restraining order or injunction . . . or take any other action
to preserve the availability of property described in
subsection (a) for forfeiture under this section --
(A) upon the filing of an indictment or information
charging a violation of section 1962 of this chapter and
alleging that the property with respect to which the order is
sought would, in the event of conviction, be subject to
forfeiture under this section.
This provision was added to RICO in 1984 to give the court power "to assure
the availability of the property [subject to forfeiture] pending
disposition of the criminal case." S. Rep. No. 225, 98th Cong., 2d Sess.
204, reprinted in 1984 U.S.C.C.A.N. 3182, 3387. Appellants concede that
the term "any other action" in § 1963(d)(1) includes the discretion to
appoint a monitor or receiver when appropriate. However, these types of
preconviction restraints are "strong medicine and should not be used where
measures that are adequate and less burdensome" are available. United
States v. Regan, 858 F.2d 115, 121 (2d Cir. 1988). Cf. Aviation Supply
Corp. v. R.S.B.I. Aerospace, Inc., 999 F.2d 314, 316-17 (8th Cir. 1993).
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Preconviction restraints may only be used to preserve the
availability of property subject to forfeiture under § 1963(a), that is:
(1) any interest the [RICO violator] has acquired or
maintained in violation of section 1962;
(2) any--
(A) interest in;
(B) security of;
(C) claim against; or
(D) property or contractual right of any kind
affording a source of influence over;
any enterprise which the [RICO violator] has established,
operated, controlled, conducted, or participated in the conduct
of, in violation of section 1962; and
(3) any property constituting, or derived from, any
proceeds which the [RICO violator] obtained, directly or
indirectly, from racketeering activity or unlawful debt
collection in violation of section 1962.
In this case, the government never identified what assets of the
Named Companies and the Intervenor Companies are subject to forfeiture
under § 1963(a). Under § 1963(a), only defendants' interests in the RICO
enterprise and the proceeds from their racketeering activity are subject
to forfeiture. Though the indictment alleged that the Named Companies are
an enterprise through which defendants conducted their racketeering
activities, an allegation that an enterprise was used to commit RICO
violations is not enough to make the enterprise forfeitable, only
defendants' interests in that enterprise. RICO's criminal forfeiture is
an in personam remedy to punish the RICO defendants. See United States v.
Conner, 752 F.2d 566, 576 (11th Cir. 1985). It does not permit the
government to seize control of an enterprise that defendants used to
accomplish their racketeering.
The government's allegation in the indictment that it intends to
forfeit "at least $28 million" does not cure this deficiency.
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The $28 million is the estimated total receipts of the Named Companies
during the course of defendants' alleged RICO conspiracy. These revenues
are not forfeitable under the "proceeds" provision of § 1963(a)(3). "[T]he
statute says that it is the proceeds received by the defendants, not by
their enterprise, that are forfeitable." United States v. Masters, 924
F.2d 1362, 1370 (7th Cir.), cert. denied, 500 U.S. 919 and 502 U.S. 823(1991). See United States v. Olson, 22 F.3d 783, 785 (8th Cir.), cert.
denied, 115 S. Ct. 320 (1994) (bank officers' salaries and bonuses are
subject to forfeiture, not the bank depositors' funds). Even if the
government had included the Named Companies as RICO defendants, its
assertion that $28 million is subject to forfeiture would be absurd. A
corporate defendant's racketeering "proceeds" are subject to forfeiture.
However, while Congress used that term to spare the government the burden
of proving net profits, see S. Rep. No. 225 at 199, 1984 U.S.S.C.A.N. at
3382, "proceeds" means something less than the gross receipts of a
defendant's insurance business because an insurer's gross receipts would
include, for example, amounts needed to pay policyholder claims. See
Masters, 924 F.2d at 1370; United States v. Lizza Indus., Inc., 775 F.2d
492, 497-98 (2d Cir. 1985), cert. denied, 475 U.S. 1082 (1986).
Finally, the government failed to explain how assets of the
Intervenor Companies could be subject to forfeiture. The government argued
that defendants own or control the Intervenor Companies and that defendants
have commingled assets of the Named Companies and the Intervenor Companies.
But the statute does not authorize preconviction restraints on substitute
assets. See United States v. Field, 62 F.3d 246, 248-49 (8th Cir. 1995).
Thus, the conclusory testimony of the government investigators fell far
short of the showing needed to impose a preconviction monitor or
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receiver on the activities of companies that were not even named in the
indictment.4
We are also concerned that the powers assumed by the monitor and
receiver exceeded the statutory authority for preconviction restraints.
The government initially requested appointment of a monitor in response to
defendants' request that the specific initial restraints be relaxed so as
to permit the payment of insurance claims. The government explained that
a monitor was needed in part to prevent "the neglect of the ongoing
businesses." This position appears to reflect a belief that RICO
prosecutors are the proper persons to run defendants' insurance businesses
and to determine which insurance claimants and creditors should be paid.
They are not. Insurance regulation is the prerogative of the States.5 And
if it were not, federal bankruptcy law would provide the proper forum for
distributing the inadequate assets of defendants' failed or neglected
businesses. RICO provides only an in personam forfeiture remedy,
permitting preconviction restraint and postconviction seizure of
defendants' ownership interests in, and any proceeds they have drained
from, the RICO enterprise. The
4
After conviction, substitute assets may be forfeited in the
circumstances described in § 1963(m). Some circuits therefore
permit preconviction restraints on substitute assets. But those
courts require a showing that assets forfeitable under § 1963(a)
are unavailable, a showing the government did not make in this
case. See In re Billman, 915 F.2d 916 (4th Cir. 1990), cert.
denied, 500 U.S. 952 (1991).
5
See 15 U.S.C. § 1012(b). Obviously, the federal government
may prosecute mail and wire fraud committed upon state insurance
regulators, and other criminal exploitation of an insurance
company. See, e.g., United States v. Sylvanus, 192 F.2d 96, 100
(7th Cir. 1951), cert. denied, 342 U.S. 943 (1952) (mail fraud);
United States v. Cavin, 39 F.3d 1299, 1305 (5th Cir. 1994) (fraud
on regulators and policyholders). But in our view, the criminal
forfeiture of policyholder premiums, either without regard to the
payment of insurance claims, or with the assertion of federal
authority to decide which claims to pay, runs a significant risk of
conflict with the McCarran-Ferguson Act's grant of primary control
over the business of insurance to the States.
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government here seemingly lost sight of this statutory limit on its
authority.
III.
For the foregoing reasons, we have vacated the monitor and receiver
portions of the district court's preconviction restraint orders. On
appeal, appellants further argue that the monitor's investigatory powers
afforded the prosecution an improper discovery and evidence-gathering tool,
and violated the Intervenor Companies' Fourth Amendment rights. Although
these are legitimate concerns, we are satisfied that the district court
properly took them into account, and we reject these contentions.
This opinion finally disposes of these appeals. Our orders of
December 22, 1995, and January 16, 1996, remain in effect. The remainder
of our mandate shall issue forthwith.
A true copy.
Attest:
CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.
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