United States v. Walsh, No. 12-2383 (2d Cir. 2013)
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In this criminal fraud case, defendant appealed from the district court's order denying his motion to release $3.7 million in assets that were frozen in a parallel civil enforcement action. Defendant and his wife had purchased a house in her name using funds unrelated to the alleged fraud. Pursuant to the divorce settlement, defendant received title to the house and gave his wife a $12.5 million distribution award, at least $6 million of which was directly traceable to defendant's alleged fraud. The court held that the district court properly applied the tracing analysis from United States v. Banco-Cafetero. The court rejected defendant's claim that the district court made two related erroneous evidentiary rulings at the Monsanto hearing. Accordingly, the court affirmed the judgment of the district court.
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12-2383-cr United States v. Walsh 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT August Term, 2012 (Argued: March 18, 2013 Decided: April 2, 2013) Docket No. 12-2383-cr - - - - - - - - - - - - - - - - - - - -x UNITED STATES OF AMERICA, Appellee, - v.STEPHEN WALSH, Defendant-Appellant. - - - - - - - - - - - - - - - - - - - -x Before: JACOBS, Chief Judge, CABRANES and WESLEY, Circuit Judges. 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. 34 release of the proceeds from the sale of his house. 35 obtained the house from his wife in a divorce settlement in 36 which his wife received (inter alia) a $12.5 million Walsh, charged with fraud, seeks Walsh 1 distributive award, $6 million of which was paid using funds 2 traceable to Walsh s fraud. 3 applied the tracing analysis from United States v. Banco 4 Cafetero Panama, 797 F.2d 1154 (2d Cir. 1986). 5 6 7 8 9 10 11 12 13 14 15 16 17 The district court properly We affirm. MARK A. FLESSNER, Holland & Knight LLP, Chicago, Illinois, for Defendant-Appellant. JOHN J. O DONNELL, (Iris Lan, on the brief), for Preet Bharara, United States Attorney for the Southern District of New York, for Appellee. DENNIS JACOBS, Chief Judge: 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. 22 seeks to use those funds for his defense. 23 wife had purchased a house in her name using funds unrelated 24 to the alleged fraud. 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. Walsh Walsh and his Pursuant to a divorce settlement, 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. 5 underlying finding that there was probable cause to believe 6 that Walsh committed the fraud. 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 Walsh does not contest the But he does challenge the He argues that the tracing fiction used by the 11 district court is inapplicable to his situation. 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 He also For the following reasons, we affirm. 16 17 18 I 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. 21 they sold the property in parcels for a total of $4.135 22 million. In 1999, 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. 15 Walsh s indictment, the only asset of substantial value he 16 owned was the Half Moon House. 1 At the time of 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 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 The Walsh does not contest these findings on appeal. 8 9 10 II 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. 13 next day, the CFTC and SEC filed civil actions 14 same conduct against Walsh, Greenwood, and their various 15 entities. The alleging the 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 4 5 Walsh and Greenwood were indicted on July 24, 2009, and Walsh pled not guilty a week later. In December 2009, Walsh moved to unfreeze the Half Moon 6 House to finance his defense in the criminal case. 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 Judges In March 2011, the receiver sold the Half Moon House 13 for approximately $3.7 million. 14 have the remaining portion of the sale price released to pay 15 for his criminal defense. 16 Monsanto hearing. 17 only witness would be FBI Agent Barnacle, who had 18 investigated the fraud. 19 Walsh thereafter moved to The parties agreed to hold a The government advised the court that its Walsh subpoenaed two fact witnesses: his codefendant 20 Greenwood, and Deborah Duffy, a partner at one of the 21 entities involved in the fraud. 22 Kane, the Chief Operating Officer of the court-appointed 6 Walsh also subpoenaed Brick 1 receiver in charge of selling the Half Moon House. 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 The 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 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. probable cause to believe (1) that Walsh 19 20 21 22 III In order to seize property . . . , the government must demonstrate that there was probable cause to believe that 7 1 the property is subject to forfeiture. 2 All Funds in Accounts in Names Registry Pub. Inc., 68 F.3d 3 577, 580 (2d Cir. 1995). 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. 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 In re Seizure of The findings supporting a Id.; accord United 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. 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 United 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. 9 Monsanto, 924 F.2d 1186, 1203 (2d Cir. 1991) (in banc). United States v. 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 14 at 626. 15 Caplin, 491 U.S. 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. 18 acquired the house pursuant to the Divorce Agreement in 19 exchange for, inter alia, a $12.5 million distributive 3 But Walsh ultimately 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. 6 at our disposal to determine what amount of commingled funds 7 are traceable to criminal activity. 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. 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. 15 Greenwood, 865 F. Supp. 2d 444, 450 (S.D.N.Y. 2012). 16 We have three accounting choices Of relevance here is Id. at 1159. Applying that United States v. We conclude that the district court s application of 17 Banco Cafetero was proper. 18 Moon House and to keep his (now worthless) business 19 interests in exchange for the $12.5 million distributive 20 award. 21 it was an asset purchased with the tainted funds from the 22 marital estate, by operation of the Divorce Agreement. Walsh negotiated to get the Half Although the House itself is not a fungible asset, 10 See 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. 9 Domestic Relations Law section 236(B)(3), which allows This argument ignores New York 10 parties to opt out of equitable distribution in favor of a 11 negotiated settlement, which is what the Walshes did. 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). 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. 18 district court properly applied Banco Cafetero. The We need not Accordingly, the 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. 3 reject both arguments. For the reasons that follow, we 4 5 6 A The admissibility of hearsay at a Monsanto hearing is a 7 question of law that we review de novo. 8 United States v. Ferguson, 676 F.3d 260, 285-86 (2d Cir. 9 2011) (reviewing hearsay decision de novo). 10 See generally 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. 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 924 F.2d at 1198, 1203. 4 Although Walsh 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.). 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. The unwarranted 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. 12 States v. Daccarett, 6 F.3d 37, 56 (2d Cir. 1993). United 13 14 15 B 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). 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. 22 right to an adversary proceeding should be weighed against The same consideration that justifies 13 Walsh argues that his 1 the government s interest in protecting its witnesses, and 2 argues that his is the greater interest. 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. 7 1195-98. But Monsanto has See 924 F.2d at 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. 13 entirely on the documentary evidence in the case--the same 14 documents that were available to the receiver.5 15 to show what he would have gained by calling the receiver. Rather, the district court based its decision 5 Walsh fails 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 4 For the foregoing reasons, we affirm the order of the district court. 15
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