United States v. Miller

          MEMORANDUM OPINION

          T.S. Ellis, III United States District Judge.

         At issue in this mail and wire fraud, money laundering conspiracy, and identity theft prosecution is whether the Government improperly seized defendant's assets without probable cause to believe those assets will ultimately be proved at trial to be forfeitable as tainted, and not substitute assets. This issue has been fully briefed and argued and is ripe for disposition.

         I.

         A procedural history of this case and the companion case of United States v. Wallis provides necessary context for the factual findings here.^[1] On October 5, 2015, the Government charged Linda Diana Wallis (“Wallis”) by information with one count of conspiracy to commit wire fraud, in violation of 18 U.S.C. § 1343 and 18 U.S.C. § 1349. Wallis waived indictment, pled guilty to the one-count amended criminal information, and signed a statement of facts on October 15, 2015. Specifically, the statement of facts noted that from January 2013 through February 2014, in the Eastern District of Virginia, Wallis and her husband, the defendant here who was unindicted at the time, engaged in a conspiracy to obtain money through false statements and misleading representations from three different victim organizations, including SkyLink Air and Logistic Support, Inc. (“SkyLink”), the Saslaw for State Senate campaign, and the Community College Consortium on Autism and Intellectual Disabilities (“CCCAID”).^[2]Specifically, the statement of facts reflects that Wallis and defendant created two fake law firms, Federal Legal Associates (“FLA”) and The Straile Group. Wallis SOF ¶ 10. Wallis and defendant then engaged FLA and The Straile Group on behalf of SkyLink and in so doing, caused SkyLink to transfer purported legal fees approximating $368, 400 to a Capital Bank account and a PNC Bank account under Wallis's control. Id. ¶¶ 11-18. With respect to the Saslaw for State Senate campaign, the statement of facts discloses that Wallis served as treasurer of the campaign from June 2013 until September 2014, and in that time, caused approximately 73 fraudulent checks, totaling $653, 000, to be issued to the same Capital Bank and PNC Bank accounts she controlled, as well as a Capital Bank account under both Wallis's and defendant's joint control. Id. ¶ 21. Wallis also authorized approximately $482, 000 in transfers from CCAID's bank account to bank accounts that Wallis and defendant controlled from April 2010 until August 2014. Id. ¶ 29. Wallis and defendant then used these funds to pay for their personal expenses, including interest payments on a loan secured by their Virginia home, improvements to a beach home, and charters of private flights.

         After entering her guilty plea, Wallis was sentenced on March 18, 2016 to 56 months in the custody of the Bureau of Prisons. A Consent Order of Forfeiture, issued on the same day, included a money judgment against Wallis for $1, 429, 599, the amount of illegal proceeds that Wallis obtained as a result of the conspiracy, and ordered the forfeiture of two properties in partial satisfaction of that money judgment. See United States v. Linda Wallis, No. 1:15-cr-285 (E.D. Va. Mar. 18, 2016) (Consent Order of Forfeiture). Specifically, the March 18 Forfeiture Order named two properties: (1) 4551 Forest Drive, Fairfax, Virginia (“Virginia Property”); and (2) 2896 Indian Harbor Drive, Unit 3, Bethany Beach, Delaware (“Delaware Property”). Id. at 2. Defendant had purchased both properties before defendant and Wallis were married and before the charged conspiracy began, and Wallis was not a title owner on either property at that time. Significantly, however, Wallis was a signatory on the $600, 000 note held by Dan Caplan (“Caplan note”) and secured by the Virginia Property in 2007. The March 18 Forfeiture Order specified that both the Virginia and the Delaware properties were to be forfeited as “property that is traceable to, derived from, fungible with or a substitute for property that constitutes the illegal proceeds of the conspiracy to commit wire fraud.” Id.

         On April 18, 2016, defendant, who was at the time still unindicted and unrepresented, filed a Motion for Relief, requesting removal of a lis pendens filed against the Virginia Property, and also moved for an ancillary hearing pursuant to Rule 32.2(c)(1), Fed. R. Crim. P. and 21 U.S.C. § 853(n)(2), asserting that he was sole owner of the Virginia Property and the Delaware Property and as such, these properties were not forfeitable as a part of Wallis's case. With respect to defendant's Motion for Relief, a hearing was held on May 6, 2016. Following the hearing, an Order issued ordering the transfer of the net proceeds owed to defendant from the sale of the Virginia Property to the United States Marshal Service (“USMS”) upon closing of the sale of that property on May 11, 2016. See United States v. Linda Wallis, No. 1:15-cr-285 (E.D. Va. May 6, 2016) (Order). The USMS was instructed to hold these proceeds, pending the disposition of defendant's petition for an ancillary hearing. Id. At closing, the Virginia Property sold for $1, 150, 000. Of the $1, 150, 000, $686, 062.50 was used to pay off the value of the Caplan note, and the remaining $313, 550.82, the amount owed to defendant, was transferred to the USMS in accordance with the May 6 Order.

         With respect to defendant's motion for an ancillary hearing, defendant gained representation on May 19, 2016. The parties subsequently filed four sets of briefs, and three hearings were held on December 16, 2016, March 24, 2017, and June 9, 2017. During the ancillary proceedings, the Government presented documentary evidence and testimony from Stacy Young, an FBI forensic accounting expert. Specifically, Young testified that she had traced $338, 140.60 in proceeds from Wallis and defendant's fraud to the Virginia property^[3] and $58, 818.35 in criminal proceeds to the Delaware Property. To conduct her tracing analysis, Young testified that she reviewed bank records from the Capital Bank and PNC bank accounts under Wallis and defendant's control. Young then traced funds originating with the various victim organizations to payments associated with the Virginia and Delaware properties. In particular, Young traced funds embezzled from SkyLink, CCAID, and the Saslaw for Senate campaign, to payments made to Daniel Caplan, the holder of the Caplan note secured by the Virginia Property. And, with respect to the Delaware property, Young traced fraud funds to payments to Herl's Bath and Tile, Lansing Building Products, and CLM General Contracting LLC. The parties stipulated that Herl's Bath and Tile, Lansing Building Products, and CLM General Contracting LLC provided services and improvements to the Delaware Property.

         On September 20, 2017, defendant was indicted by a Eastern District of Virginia grand jury on one count of conspiracy to commit mail and wire fraud, in violation of 18 U.S.C. § 1349, one count of conspiracy to launder monetary instruments, in violation of 18 U.S.C. §§ 1956(h), three counts of mail fraud, in violation of 18 U.S.C. §§ 1341 and 1342, three counts of wire fraud, in violation of 18 U.S.C. §§ 1343 and 1342, and two counts of aggravated identity theft, in violation of 18 U.S.C. §§ 1028A(a)(1) and 1028A(a)(2). Indictment (Doc. 1) at 1. With respect to the money laundering count, the grand jury found probable cause to believe that defendant and Wallis transferred and laundered funds through multiple financial accounts or bogus entities. The Indictment charges that defendant and Wallis then used a portion of these laundered proceeds to fund purchases for the Virginia and Delaware properties. For example, the Indictment alleges that on August 3, 2012, Wallis instructed Capital Bank to transfer funds from CCAID to her personal account before making a payment to Dan Caplan for the Virginia Property and before making a payment to Herl's Bath and Tile for improvements to the Delaware property. Id. ¶ 117. Shortly thereafter, the Indictment alleges that on August 23, 2012, Wallis directed Capital Bank to route funds from CCAID through multiple bank accounts before making payments on the Virginia Property. Id. ¶ 118. And on February 26, 2013, the Indictment alleges that Wallis instructed Capital Bank to transfer $10, 000 from the FLA account to Wallis and defendant's personal account to cover a check for the Delaware Property. Id. ¶ 120. Accordingly, the grand jury found probable cause to believe that the Delaware Property and the net proceeds from the sale of the Virginia Property were subject to forfeiture as properties involved in a money laundering offense and traceable to both money laundering and the underlying fraud. Id. at 37. Following the grand jury's Indictment, the Government filed a new lis pendens on the Delaware Property and on the proceeds from the sale of the Virginia Property.

         Thereafter, on January 3, 2018, defendant filed the Motion for Release of Funds at issue here. Defendant's arguments in support of this motion are essentially similar to the arguments he advanced in the ancillary proceedings in Wallis's case, namely that the funds from the Virginia and Delaware properties are not traceable to proceeds from the charged criminal offenses and thus are not tainted and cannot be seized pre-trial. Along with his motion, defendant also attached an affidavit, averring that he had no unexhausted assets, apart from the seized assets, with which to fund his legal defense in this case. The Government disputes defendant's arguments with respect to the properties, contending both (i) that the properties were involved money laundering and (ii) that the properties are traceable to laundered money and the underlying fraud proceeds. As a result, the Government contends that the assets were properly seized pending trial. The Government also contests the validity and the credibility of defendant's affidavit, arguing that there is no credible or reliable evidence that defendant has no other assets with which to fund his legal defense in this case.

         Two hearings were held on this Motion for Release of Funds on February 16, 2018 and February 22, 2018. In the course of these hearings, the Government presented additional testimony from Young, the FBI forensic accounting expert. Young adopted her testimony from the Wallis hearings with respect to tracing and testified that, through additional analysis, she was able to identify nine additional transactions involving the Virginia Property and to trace a total of $315, 317.10 to the Virginia Property, excluding appreciation. Feb. 16 Hearing Tr. (Doc. 40) 40:24-41:6, 53:23-54:2. These additional transactions included transfers used to pay property taxes on the Virginia Property and to install fixtures in the home. Young also described how several of the transactions identified in the money laundering count of defendant's Indictment demonstrated that the Virginia and Delaware properties were involved in money laundering. For example, with respect to the August 3, 2012 transaction, Young testified that she was able to trace funds embezzled from CCAID to a $8, 500 payment on the Caplan note for the Virginia Property and a $10, 000 payment for improvements to the Delaware Property. Young read into the record emails from Wallis describing each of these transactions. Specifically, on August 3, 2012, Wallis emailed a Capital Bank employee, asking him to transfer $8, 500 to Dan Caplan and $10, 000 to Herl's Bath and Tile. See Id. at 62:16-22. The Capital Bank employee responded to Wallis, informing her that CCAID was the only account with sufficient funds to process the request and asking her whether he should “do everything from there or transfer enough funds to your personal and do them from there.” Id. at 63:10-15. The documentary evidence presented at the hearing reflects that Wallis, in turn, instructed the Capital Bank employee to “[t]ransfer to personal and do them there.” Id. at 63:17. Young testified at the February 16 hearing that in her opinion, the fact that Wallis deliberately transferred funds through her personal account before making payments suggested she intended to conceal ownership and origin of the fraud funds from both the government and the recipients of the funds. Id. at 61:8-18.^[4]

         Young also testified that the Virginia and Delaware properties facilitated the money laundering conspiracy. Specifically, Young testified that more than 50 emails related to the conspiracy were sent from the Virginia Property and that four fake email addresses were accessed from the residence. Id. at 67:12-24. Moreover, Wallis was located in the Delaware Property when she sent several of the emails directing transfers of funds from the victim organizations, through her personal accounts, and then to various vendors. Id. at 70:3-15.^[5] Following the conclusion of the two hearings, the parties submit supplemental briefing on these issues. As such, these issues have been fully briefed and argued and are ripe for disposition.

         II.

         It is well-settled, and the parties do not dispute, that the Government has the authority to restrain certain assets of a criminal defendant prior to trial even where the defendant needs those assets to fund his legal defense. United States v. Monsanto, 491 U.S. 600, 615-16 (1989). Specifically, the Government may seize or restrain property prior to trial “based on a finding of probable cause to believe that the property will ultimately be proved forfeitable.” Id. at 615.^[6] In this respect, the Fourth Circuit has made clear that there must be probable cause to believe the assets seized are directly forfeitable as tainted assets connected to the crime; the Government may not restrain substitute assets that are in no way linked to the crime. United States v. Chamberlain, 868 F.3d 290, 297 (4th Cir. 2017) (holding that “Section 853(e) does not by its terms permit pretrial restraint of substitute assets”). Probable cause in this context, as in others, is “reasonable ground for belief of guilt, supported by less than prima facie proof but more than mere suspicion.” United States v. $95, 945.18, U.S. Currency, 913 F.2d 1106, 1110 (4th Cir. 1990) (quoting United States v. $364, 960 In U.S. Currency, 661 F.2d 319, 323 (5th Cir. Unit B 1981)). In other words, probable cause requires that there is a “fair probability”, not certainty that the restrained assets are subject to forfeiture. Kaley, 134 S.Ct. at 1103 (“Probable cause . . . is not a high bar. It requires only the fair probability on which reasonable and prudent people, not legal technicians, act.”).^[7]

         Applying these principles, the Supreme Court has recognized that criminal defendants have a limited opportunity to challenge the pretrial restraint of assets pursuant to a grand jury's indictment. Specifically, although a defendant may not challenge the grand jury's determination that the defendant committed the offense charged, the defendant may challenge the grand jury's determination that the seized property is sufficiently related to the crime or crimes charged in the indictment. Kaley, 134 S.Ct. at 1103. In this regard, a defendant is entitled to the release of funds seized pretrial if evidence reveals that the government seized substitute assets without probable cause to believe those assets were subject to forfeiture as tainted assets. See United States v. Farmer, 274 F.3d 800, 805 (4th Cir. 2001) (citations omitted).^[8] Accordingly, the question presented here is whether the Government seized the Virginia Property and the Delaware Property with probable cause to believe those assets were subject to forfeiture as tainted assets.

         III.

         Analysis of this question properly begins with consideration of the statutes defining the crimes charged and authorizing forfeiture with respect to these crimes. The grand jury indicted defendant for, among other things, mail and wire fraud, in violation of 18 U.S.C. §§ 1341 and 1343, and conspiracy to commit money laundering, in violation of 18 U.S.C. § 1956(h). Specifically, the Indictment charges that defendant and Wallis conspired to commit money laundering transactions in violation of 18 U.S.C. §§ 1956(a)(1)(B)(i) and 1957. Section 1956 prohibits, inter alia, knowingly conducting a financial transaction involving proceeds of “specified unlawful activity” for the purpose of concealing the nature of those proceeds. 18 U.S.C. § 1956(a)(1)(B)(i). And § 1957 prohibits knowingly engaging in “a monetary transaction in criminally derived property of a value greater than $10, 000.” 18 U.S.C. § 1957(a).

         Where, as here, a defendant is indicted for mail or wire fraud, “any property, real or personal, which constitutes or is derived from proceeds traceable to” the offense is forfeitable. 18 U.S.C. 981(a)(1)(C). Moreover, a defendant charged with money laundering, in violation of 18 U.S.C. §§ 1956(h), is required to forfeit “any property, real or personal, involved in [a transaction or attempted transaction in violation of section 1956 or 1957] . . ., or any property traceable to such property[.]” 18 U.S.C. § 982(a)(1). Courts have consistently interpreted the phrase “involved in” in § 982(a)(1) broadly to include the money or property being laundered as well as property used to commit or to facilitate the money laundering offense or the underlying unlawful activity.^[9] And importantly, property involved in a money laundering offense is forfeitable in its entirety, even if legitimate funds have also been invested in the property. See United States v. Kivanc, 714 F.3d 782, 794-85 (4th Cir. 2013) (“[W]hen legitimate funds are commingled with property involved in money laundering . . . ., the entire property, including the legitimate funds, is subject to forfeiture.”).^[10]

         For the reasons described below, the evidence adduced during the February 16 and February 22 hearings on this matter discloses that there is probable cause to believe the Virginia and Delaware properties were “involved in” the money laundering conspiracy and, in part, “traceable to” the money laundering conspiracy and the underlying fraud charged in the Indictment. Accordingly, the properties are forfeitable pursuant to §§ 982(a)(1) and 981(a)(1)(C) and are properly subject to pretrial restraint. Defendant's Motion for Release of Funds must therefore be denied.

         A.

         To begin with, the Indictment and the evidence in this case make clear that the Virginia and Delaware properties were seized with probable cause to believe the properties were “involved in” a money laundering conspiracy, and as such, defendant is not entitled to release of these properties, even if he intends to use the funds therefrom to pay for his legal defense.

         Here, the grand jury found there was probable cause to believe both the Virginia and the Delaware properties were involved in defendant and Wallis's money laundering conspiracy based on a series of transactions identified explicitly in the Indictment. Specifically, the grand jury found that funds, derived from defendant's and Wallis's fraud, were laundered through several bank accounts, and then used to make payments on the properties, including (i) interest payments on the Caplan note for the Virginia Property, (ii) payments for property taxes on the Virginia Property, (iii) payments to install fixtures in the Virginia Property, and (iv) payments for improvements to the Delaware Property. Based on these transactions, the grand jury found there was probable cause to believe that the Virginia and Delaware properties are forfeitable as property involved in the money laundering conspiracy.

         The evidence presented by the Government over the course of the two hearings on this question supports the grand jury's probable cause finding that both the Virginia and the Delaware properties were involved in a conspiracy to commit money laundering offenses in violation of §§ 1956 and 1957. Specifically, with respect to the § 1956 offense alleged in the Indictment, the Government introduced evidence via the FBI forensic accounting expert of the financial transactions underlying each of the payments into the Virginia and the Delaware properties. Specifically, the evidence from Wallis's emails and bank records discloses that Wallis embezzled funds from the SkyLink, CCAID, and Saslaw accounts and then moved some fraud funds through the FLA bank account, deliberately transferred other funds via various personal accounts, and made numerous other unusual financial moves before making payments related to the Virginia and Delaware properties. See Feb. 16 Hearing Gov't Exs. 1-5.^[11] The FBI forensic accounting expert testified that the structure of these transactions involving the Virginia and Delaware properties indicates, as required to establish a § 1956 offense, that Wallis intended to conceal the origin or source of the fraud funds in each of her transactions. See Feb. 16 Hearing Tr. 61:8-18. This evidence is thus sufficient to support the grand jury's probable cause determination that the Virginia and Delaware properties were “involved in” a conspiracy to launder money in violation of § 1956.

         And with respect to the § 1957 offense alleged in the Indictment, the FBI forensic accounting expert testified that she identified several transactions of more than $10, 000 where fraud proceeds were transferred into personal bank accounts and then transferred to the Delaware and Virginia properties. For example, the documentary evidence presented at the February 16 hearing reveals that on June 6, 2012, Wallis transferred $22, 500 from the CCAID bank account to Herl's Bath and Tile to fund improvements to the Delaware property. Feb. 16 Hearing Gov't Ex. 1. Moreover, the FBI forensic accounting expert testified that on August 23, 2012, Wallis instructed Capital Bank to transfer $23, 000 from CCAID to FLA and then $25, 000 from FLA to the Caplan note. Feb. 16 Hearing Tr. 71:1-72:4. These transactions of ...