In a ruling applying conflicting precedents, the Eleventh Circuit identified factors courts should consider when determining whether certain accounts are subject to asset forfeiture.
The dispute over the forfeiture of bank accounts tied to the former law firm of convicted Ponzi scheme operator Scott Rothstein is helping to clarify what factors courts may weigh in deciding which assets the government may seize in fraud cases. However, given that the recent decision from the U.S. Court of Appeals for the Eleventh Circuit relied on conflicting precedents, there remain no bright-line rules for asset forfeitures when third-party interests are involved.
In an update to the case reported in White Collar Watch in February, the Eleventh Circuit ruled on June 12, 2013 that funds in bank accounts titled in the name of Rothstein Rosenfeldt Adler, P.A. (“RRA”) are not subject to forfeiture even though Rothstein was the firm’s chief executive officer when he was charged with money laundering and mail and wire fraud arising from his operation of a $1 billion Ponzi scheme. Identifying ill-gotten gains was too difficult, the court said, because money was transferred into and out of the accounts so many times.
The decision – which is based on an analysis of two Third Circuit cases – suggests that factors such as who has access to accounts and how many transfers are made can affect forfeiture.
The Trustee for RRA, which is in bankruptcy, filed the appeal after the U.S. District Court for the Southern District of Florida allowed forfeiture of two accounts it had previously opposed. The Trustee argued that the forfeiture was an erroneous taking of property that did not belong to Rothstein and the accounts and some properties purchased with money from them were assets of the bankruptcy estate.
Generally, all of the proceeds of a crime and the property used or involved in the commission of a crime are subject to forfeiture where the government “establishes the requisite nexus between the property and the offense.” The government also must prove that the defendant has an interest in the forfeited property.
In its ruling, the Eleventh Circuit noted that it had not “previously addressed the question of when property becomes so commingled that it may not be forfeited directly. . . .” For that reason, the judges referenced the two Third Circuit cases: United States v. Voight and United States v. Stewart.
In Voight, the government sought forfeiture of jewelry purchased with funds from an account into which money laundering proceeds were deposited and into and out of which intervening deposits and withdrawals occurred. The Third Circuit court held that “the government must prove by a preponderance of the evidence that the property it seeks. . . in satisfaction of the. . . criminal forfeiture. . . has some nexus to the property ‘involved in’ the. . . offense.” The court further held that, in cases where the forfeitable property has been disposed of or is otherwise not traceable because it is commingled, the government must obtain forfeiture of substitute assets.
In Stewart, the government sought forfeiture of funds from an account that was frozen from the time of an illegal transfer, but which also contained untainted money. In Stewart, there was a single deposit of $3 million into a single account. After the deposit, only one withdrawal was made. In Stewart, the Third Circuit created an exception to the substitute asset provision for simple cases where “traced proceeds within a commingled account may be directly forfeited without resort to the substitute asset provision” of the forfeiture statute.
According to an article in the United States Attorneys’ Bulletin, the substitute asset provision provides that a “court can order forfeiture of some unrelated, untainted asset of equal value to satisfy [a] money judgment.” Section 853(p) of Title 21 of the United States Code provides that substitute property shall be forfeited if property derived from or used in the commission of a crime:
(A) cannot be located upon the exercise of due diligence; (B) has been transferred or sold to, or deposited with, a third party; (C) has been placed beyond the jurisdiction of the court; (D) has been substantially diminished in value; or (E) has been commingled with other property which cannot be divided without difficulty.
Stewart and Voight highlight diametrically opposite results in criminal asset forfeiture cases. On the one hand, Stewart illustrates a relatively simple case where it was not necessary for the Third Circuit to invoke the substitute asset provision because the government could easily trace the proceeds of illegal activity. By contrast, Voight illustrates application of the substitute asset provision where the government’s attempt to trace forfeitable assets was frustrated by the defendant’s extensive commingling with legitimate assets.
In considering the facts in Rothstein, the Eleventh Circuit applied the holding in Voight to rule that the substitute asset provision should apply to the government’s forfeiture action because of the “sheer volume of financial information available and required to separate tainted from untainted monies. . . .” Specifically, the Eleventh Circuit identified the difficulties of tracing the ill-gotten gains given the “twenty-one pages [of] transfers in and out of the RRA bank accounts” and sympathized with the District Court’s frustration with the tracing methodology employed by the parties. The Eleventh Circuit therefore held “that the District Court erred in ordering forfeiture of the [RRA] funds as proceeds.”
The Eleventh Circuit also ruled that the District Court erred in permitting forfeiture of property to the extent the property was acquired with funds in the RRA accounts and remanded the case to the District Court to resolve the question of fact of whether the RRA account funds were in fact used to acquire the other properties. The Eleventh Circuit reasoned that if the funds used to acquire properties were from one or more RRA accounts, “the Trustee prevails as a matter of law since the funds consisted of proceeds commingled with legitimate RRA funds and, as such, were not forfeitable as proceeds.”