Summary
denying motion to dismiss forfeiture complaint that described the amount and source of funds sought and scheme to defraud
Summary of this case from United States v. $9,016,830.76 Seized from First Internet Bank AccountOpinion
NO. 1:05-CV-00196.
April 9, 2008
OPINION AND ORDER
This matter is before the Court on a number of pending motions: Claimant Steven Warshak's Cross Motion to Dismiss Class Action Plaintiffs (doc. 68), Trustee Paul Kellogg's Motion to Release Assets to Pay Taxes (doc. 78); Defendant/Claimants' Motion to Redact Factual Allegations in First Amended Complaint (doc. 82); the government's Motion to Clarify Order (doc. 108), Claimants' Response in Opposition (doc. 126), and the government's Reply (doc. 141); Claimants'/Defendant TCI Media, Inc.'s Motion To Dismiss First Amended Complaint and to Dissolve Pre-Complaint Warrants (docs. 125 128), the government's Response (doc. 143), and Claimants'/Defendant's Reply (doc. 149 153); Claimants'/Defendant TCI's Motion For Protective Order (docs 135 138), the government's Response in Opposition (doc. 144), and Claimants' Reply (docs. 147 150); Claimant Steven Warshak's Motion to Set Probable Cause Hearing (doc. 172), the government's Response in Opposition (doc. 180), and Warshak's Reply (doc. 181); Warshak's Motion to Dismiss, or Alternatively, for Expedited Probable Cause Hearing (doc. 178), the government's Response in Opposition (doc. 186), and Warshak's Reply (doc. 187); Claimants' Motion for Hearing (doc. 191), Response in Opposition (doc. 192), and Claimants' Reply (doc. 193); Claimant Warshak's Renewed Motion to Dismiss (doc. 196), and the government's Response in Opposition (doc. 200); Claimants' Motion to Unseal Ex Parte Submissions (doc. 202), the government's Response (doc. 207), and Claimants' Reply (doc. 208); and the government's Motion for Leave to File Supplemental Authority (doc. 205). For the reasons indicated herein, the Court GRANTS the government's Motion for Leave to File Supplemental Authority, HOLDS IN ABEYANCE pending a status conference Claimant Steven Warshak's Cross Motion to Dismiss Class Action Plaintiffs (doc. 68), and DENIES the balance of the pending motions.
I. Background
The Court notes that although this civil matter is not exactly co-extensive with the criminal forfeiture matter before this Court in United States v. Steven Warshak, et al., 01:06-CR-00111, it is very closely related, as all of the assets in this matter, with the exception of one, are a part of those forfeiture proceedings. On February 22, 2008, the jury in the criminal matter found a nexus between such assets and criminal activity, as well as finding such property involved or traceable to money laundering violations (docs. 387, 389). The posture of this case, in the Court's view, is therefore rather different than before the jury's findings. Although the question of how much or what portion of such assets is forfeitable is still pending before the Court, the outcome of the criminal proceedings affects the Court's view on this host of pending motions.
As an initial matter, the Court GRANTS the government's Motion for Leave to File Supplemental Authority (doc. 205), in which it asked the Court to consider two new authorities for the proposition that Claimants' request for a probable cause hearing is unwarranted. In United States v. $200,255 in U.S. Currency More or Less, No. 7:050CV-27(HL), 2006 WL 1687774 (M.D. Ga. June 16, 2006), the court stated the claimant could only challenge the search and seizure under the Fourth Amendment exclusionary rule, and the court had no hearing on the validity of the complaint. Similarly, in the United States v. $78,850 in U.S. Currency, the court found that a motion to dismiss is not the proper vehicle to challenge a seizure for lack of probable cause, but rather, the claimant must file a motion to suppress the seized evidence. 444 F.Supp. 2d 630 (D.S.C. 2006). All the government must do to meet the particularity requirement is plead sufficient facts to permit a "reasonable belief" that the government will be able to satisfy its burden of proof at trial. Id. In the light of these authorities, the Court agrees that Claimant's arguments in this case for an evidentiary hearing fall flat.
Moreover, the Court notes that both Judges Dlott and Hogan found probable cause to support the seizure of the various assets in this case, and such finding is the law of the case. The Court finds no real basis to conduct further evidentiary hearings into the question of probable cause, especially in light of the Court's own findings in its Kastigar-like hearing in the criminal matter, in which it surveyed the government's conduct in the entire investigation, and found no improprieties. Finally, Claimant argued in his motions for evidentiary hearing that he needed the opportunity to present the legitimacy of his business model before the Court, something that he has now had the opportunity to do in the related criminal matter. Although portions of his business model may very well be legitimate, the jury clearly found improper activity during the period of the Indictment. For these reasons the Court DENIES all of the motions requesting or pertaining to clarification of such an evidentiary hearing (docs. 108, 172, 178, 191).
Finally, the Court notes that during the pendency of the stay, the class action Plaintiffs reached a settlement in the state court matter (doc. 215). The Court understands that Defendants have met all of their obligations to date in constituting a settlement fund, but that such obligations continue. Under these circumstances, the Court finds it appropriate to HOLD IN ABEYANCE Steven Warshak's Cross Motion to Dismiss Class Action Plaintiffs (doc. 68), pending a status conference. The Court addresses the remaining motions seriatum:
II. Motion to Release Assets to Pay Taxes (doc. 78)
Trustee Paul Kellogg asks that some 12 million dollars be released from a frozen QTIP trust designated in the name of Carri Warshak so Steven and Carri Warshak can pay their 2004 tax liability (doc. 78). This is the same account that the jury found linked to both criminal activity as well as money laundering in Case 1:06-CR00111. The Court therefore finds no basis to grant Kellogg's motion and DENIES such motion.
III. Motion to Redact Factual Allegations in First Amended Complaint (doc. 82)
Steven Warshak, Berkeley Premium Nutraceuticals, Inc., ("BPN"), and TCI Media, Inc., ("TCI") represented in this motion concern that proprietary information would be released to the public in the Amended Complaint, and that their business would be harmed (doc. 82). They asked that the factual allegations therefore be redacted, and they be given 20 days after service of the Amended Complaint to achieve an agreement with the government about what portions of the Complaint could be made public (Id.). The Court finds this motion moot because the government filed the Amended Complaint on June 3, 2005 (doc. 83), and on April 12, 2006 Judge Dlott unsealed the Amended Complaint (doc. 176). All the information, with the exception of account numbers, is therefore now part of the public record. The Court DENIES this motion as moot.
IV. Motion To Dismiss First Amended Complaint and to Dissolve Pre-Complaint Warrants (docs. 125 128), The Government's Response (doc. 143), and the Reply (docs. 149 153).
Claimants and Defendant TCI ask the Court to dismiss the first Amended Complaint, arguing that the government has failed to plead with specificity that all the funds are traceable to alleged wrongful transactions (docs. 125, 128). Claimants, relying on United States v. $39,000 in Canadian Currency, 801 F.2d 1210, 1217 (10th Cir. 1986), argue the government's Complaint is subject to a heightened pleading standard in civil forfeiture actions (Id.).
The government responds that there is no heightened pleading standard applicable here, and in any event, that its first Amended Complaint meets and exceeds such standard (doc. 143). Under United States v. One Learjet 24D, 191 F.3d 668 (6th Cir. 1999), it argues, the complaint only need to contain facts sufficient to support a reasonable belief that the government could demonstrate probable cause for finding the property tainted (Id.). The Complaint here is more than adequate, argues the government, as it sets forth the statutory bases for forfeiture, describes the amount and source of the funds seized, describes the scheme to defraud consumers, supports the allegations with witness statements, sets forth the statutory bases for money laundering, and details the frequent and complex transfers of funds to individuals and related companies (Id.). Further, the government argues it is not required to plead that every dollar in the Defendant account is traceable to Defendant's fraudulent consumer practices, and cites to a number of cases where in the money laundering context, money commingled with tainted funds can be confiscated as property involved with money laundering (Id.).
Claimants reply that the government is wrong that after the enactment of the Civil Asset Forfeiture Reform Act of 2000 ("CAFRA"), 18 U.S.C. §§ 981 and 983, it is not held to a heightened pleading standard. Claimants argue that a "vague" money laundering allegation is not a magic wand that permits the government to plead fewer facts (docs. 149, 153). In Claimants' view, because CAFRA ultimately puts the burden of proof on the government, "to establish, by a preponderance of the evidence, that the property is subject to forfeiture," this means the government actually has a heightened pleading standard (Id.). Claimants contend the government is required to allege that seized assets are the proceeds of and directly traceable to unlawful conduct, and the Complaint fails to specify when the unlawful transactions occurred, how many such transactions occurred, or how they amount to $25 million (Id.).
Having reviewed this matter, the Court finds well-taken the government's position that its complaint contained sufficient facts to support a reasonable belief that the government could demonstrate probable cause for finding the subject property tainted. United States v. One Learjet 24D, 191 F.3d 668 (6th Cir. 1999). The Court disagrees with Claimants' proposition that CAFRA resulted in a heightened pleading standard, regardless of the ultimate burden of proof upon the government. Claimants' view appears to directly conflict with the statute, which specifically provides that "no complaint may be dismissed on the ground that the Government did not have adequate evidence at the time the complaint was filed to establish the forfeitability of the property." 18 U.S.C. § 983(a)(3)(D). For these reasons, the Court DENIES Claimants'/Defendant TCI's Motions.
V. Motions For Protective Order (docs 135 138), Response in Opposition (doc. 144), and Reply (docs. 147 150)
In these motions, Claimants and Defendant TCI request the Court enter a protective order preventing the use of their responses in discovery in this civil proceeding from use in any criminal proceeding. Because the Court stayed this matter until the resolution of the criminal proceeding, the Court now finds Claimant's/Defendant TCI's motions MOOT, and therefore the Court DENIES the motions for protective order.
VI. Claimant Warshak's Renewed Motion to Dismiss (doc. 196), and the Government's Response in Opposition (doc. 200)
Warshak repeats arguments in this motion that the seizure of his assets for eighteen months is a violation of his due process rights (doc. 196, citing Barker v. Wingo, 407 U.S. 514 (1972)). The government responds that in United States v. $8,850 in United States Currency, 461 U.S. 555 (1983), the Supreme Court applied the Barker v. Wingo, 407 U.S. 514 (1972) balancing test applicable to speedy trial claims and found that the 18-month delay in filing a forfeiture action did not violate the claimant's right to due process (doc. 200). The U.S. argues that as it commenced this case nine days after a seizure, this case is distinguishable from $8,850 in United States Currency, and therefore the Barker test — which Defendant invokes as applicable — does not apply (Id.).
The Barker test provides a balancing test of four elements — 1) the length of the delay, 2) reasons for the delay, 3) assertion of right to a hearing by Claimant, and 4) prejudice to claimant, which the Court balances to determine whether a delay in filing a forfeiture action was reasonable. The government argues here that as it filed this action within nine days of the seizure, there is no question that its actions were reasonable and comported with Barker (doc. 200). Next, the government notes that because Warshak was indicted on September 20, 2006 for numerous counts of money laundering, this forfeiture action is supported by a probable cause finding by the Grand Jury (Id.).
Even should the Court apply Barker, the government argues the 18-month delay was reasonable and justified, that any delay in this action can be attributed to the host of motions filed by Defendant, delays due to the illness of Judge Dlott, and the fact this was not the only case on the Court's docket (Id.). Warshak is not prejudiced by his accumulating tax liability, argues the government, because William Bertemes, Warshak's financial planner, admitted in his plea agreement that the sole purpose of the Q-TIP trust was to get money out of the name of the sole shareholder, Warshak, in order to hide and otherwise conceal funds from the Federal Trade Commission (Id.).
The Court finds the government's position correct as to Claimant's motion. There is no question that probable cause existed for the seizure of the assets in question. The Court therefore DENIES Claimant's motion.
VII. Claimants' Motion to Unseal Ex Parte Submissions (doc. 202), Response (doc. 207), Reply (doc. 208)
Subsequent to his indictment on September 20, 2006, Warshak moved for the unsealing of ex parte submissions in this case (doc. 202). The government refused, based on its view that such unsealing is not required, that such unsealing could jeopardize the Court's analysis of the taint issues and the criminal case, and that such unsealing would violate the work product doctrine (doc. 207). Claimants argue in this motion that in the judicial system there is a strong presumption in favor of openness, and against secret ex parte submissions (doc. 202). Claimants further argue there is no further need to maintain ex parte files under seal, as the basis for keeping them sealed had been an "ongoing" criminal investigation, which cannot be seriously jeopardized at this point, as the Grand Jury investigation is concluded (Id.).
The government responds that it agreed to the partial unsealing of the record — those documents in support of the search warrants executed on March 16, 2005, such that Claimants have been provided with probable cause submissions for the warrants (doc. 207). The remaining documents at issue, argue the government — ex parte stay submissions and ex parte tax evidence — are submissions that are authorized by statutes, 18 U.S.C. §§ 981(g)(5) and 983(f)(4) (Id.). These statutes, argue the government, do not contemplate disclosure at any time (Id.).
Next, the government argues Claimants have not shown a substantial need for such information, and finally, the government invokes the work product doctrine (doc. 207). The government has given Claimants access to the three truckloads of documents it seized, and the Claimants are not entitled to the government's work product summaries of such documents (Id.). Claimants can acquire the information "by other means" that is, by reviewing the documents (Id.).
Claimants reply that the government's reliance on statutory authority does not provide it with entitlement to maintain secrecy indefinitely (doc. 208). Claimants argue the fact that the government is providing access to the three truckloads is not the equivalent of providing him access to documents amassed by the government during its lengthy investigation (Id.). Claimants argue the government waived any work-product privilege when it took the affirmative step of submitting documents to the Court to persuade the Court to take certain actions (Id.). The government, argues Claimants, should not be allowed to use the doctrine as both a "sword and a shield" (Id.).
The Court has heard identical arguments in the context of the criminal matter, and never ordered the government to turn over work product protected material. The Court has been satisfied that the government has complied with its discovery obligations, and in the context of a Fed.R.Crim.P. 16 challenge, concluded that Defendants (Claimants here) were clamoring for information that emanated from them in the first place. Moreover, now that the criminal matter has concluded, the Claimants in this case have a clear understanding of the information the government possesses and has used against them. For these reasons, the Court DENIES Claimants' Motion.
VIII. Conclusion
For the reasons indicated herein, the Court GRANTS the government's Motion for Leave to File Supplemental Authority (doc. 205), but DENIES each of the remaining pending motions: Trustee Paul Kellogg's Motion to Release Assets to Pay Taxes (doc. 78); Defendant/Claimants' Motion to Redact Factual Allegations in First Amended Complaint (doc. 82); the government's Motion to Clarify Order (doc. 108); Claimants'/Defendant TCI's Motion To Dismiss First Amended Complaint and to Dissolve Pre-Complaint Warrants (docs. 125 128); Claimants'/Defendant TCI's Motion For Protective Order (docs 135 138); Claimant Steven Warshak's Motion to Set Probable Cause Hearing (doc. 172); Warshak's Motion to Dismiss, or Alternatively, for Expedited Probable Cause Hearing (doc. 178); Claimants' Motion for Hearing (doc. 191); Claimant Warshak's Renewed Motion to Dismiss (doc. 196); and Claimants' Motion to Unseal Ex Parte Submissions (doc. 202). The Court further HOLDS IN ABEYANCE Steven Warshak's Cross Motion to Dismiss Class Action Plaintiffs (doc. 68), pending a status conference in this matter, set for May 15, 2008 at 10:30 A.M.
SO ORDERED.