United States District Court, E.D. Virginia, Alexandria Division
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 ...