United States v. Walsh

12-2383-cr
United States v. Walsh
UNITED STATES COURT OF APPEALS 1
2
FOR THE SECOND CIRCUIT 3
4
August Term, 2012 5
6
7
(Argued: March 18, 2013 Decided: April 2, 2013) 8
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Docket No. 12-2383-cr 10
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UNITED STATES OF AMERICA, 14
15
Appellee, 16
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- v.- 18
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STEPHEN WALSH, 20
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Defendant-Appellant. 22
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Before: JACOBS, Chief Judge, CABRANES and WESLEY, 26
Circuit Judges. 27
28
In this criminal case, Defendant Stephen Walsh appeals 29
from an order of the United States District Court for the 30
Southern District of New York (Cedarbaum, J.) denying his 31
motion to release assets frozen in a parallel civil 32
enforcement action. Walsh, charged with fraud, seeks 33
release of the proceeds from the sale of his house. Walsh 34
obtained the house from his wife in a divorce settlement in 35
which his wife received (inter alia) a $12.5 million 36

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distributive award, $6 million of which was paid using funds 1
traceable to Walsh’s fraud. The district court properly 2
applied the tracing analysis from United States v. Banco 3
Cafetero Panama, 797 F.2d 1154 (2d Cir. 1986). We affirm. 4
5
MARK A. FLESSNER, Holland & 6
Knight LLP, Chicago, Illinois, 7
for Defendant-Appellant. 8
9
JOHN J. O’DONNELL, (Iris Lan, on 10
the brief), for Preet Bharara, 11
United States Attorney for the 12
Southern District of New York, 13
for Appellee. 14
15
DENNIS JACOBS, Chief Judge: 16
Stephen Walsh, defendant in this criminal fraud case, 17
appeals from an order of the United States District Court 18
for the Southern District of New York (Cedarbaum, J.) 19
denying his motion to release $3.7 million in assets that 20
were frozen in a parallel civil enforcement action. Walsh 21
seeks to use those funds for his defense. Walsh and his 22
wife had purchased a house in her name using funds unrelated 23
to the alleged fraud. Pursuant to a divorce settlement, 24
Walsh received title to the house and gave his wife (inter 25
alia) a $12.5 million distributive award, at least $6 26
million of which was directly traceable to Walsh’s alleged 27
fraud. 28
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After a hearing conducted pursuant to United States v. 1
Monsanto, 924 F.2d 1186 (2d Cir. 1991) (in banc), the 2
district court concluded that the $3.7 million at issue was 3
“traceable” to the fraud. Walsh does not contest the 4
underlying finding that there was probable cause to believe 5
that Walsh committed the fraud. But he does challenge the 6
finding that there was probable cause to believe that, after 7
the divorce settlement, the house became traceable to the 8
proceeds from the fraud. 9
He argues that the “tracing fiction” used by the 10
district court is inapplicable to his situation. He also 11
argues that the district court erred at the Monsanto hearing 12
by admitting hearsay testimony from the FBI agent who 13
investigated the fraud and by quashing Walsh’s subpoenas. 14
For the following reasons, we affirm. 15
16
I 17
In 1983, the Walshes bought a house on Arden Lane in 18
Sands Point for $900,000 and renovated it over the next 19
several years at a cost of more than $2 million. In 1999, 20
they sold the property in parcels for a total of $4.135 21
million. That same day, they applied most of the proceeds 22
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to the $3.15 million purchase of another Sands Point house, 1
on Half Moon Lane (the “Half Moon House” or the “House”). 2
The title of the House remained in Walsh’s wife’s name alone 3
until the divorce in 2006. 4
In November 2006, the Walshes entered into a 5
Stipulation and Settlement and Agreement (“Divorce 6
Agreement”) that divided their assets and resolved all 7
future claims for maintenance and/or an equitable 8
distribution award. Walsh received title to the Half Moon 9
House, as well as cars, certain bank accounts, and the 10
business interests that were involved in the alleged fraud. 11
His wife got condominiums in Florida and New York, cars, 12
bank and securities accounts and life insurance policies, 13
and a distributive award 1 of $12.5 million. At the time of 14
Walsh’s indictment, the only asset of substantial value he 15
owned was the Half Moon House. 16
1 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).
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Walsh made payments to his wife pursuant to the Divorce 1
Agreement using the proceeds of the fraudulent scheme. 2 The 2
district court found that, all told, Walsh transferred at 3
least $6 million of proceeds of the scheme to his wife, 4
including the $3 million New York condominium acquired in 5
her name prior to the divorce. 6
Walsh does not contest these findings on appeal. 7
8
II 9
On February 24, 2009, the government filed a criminal 10
complaint against Walsh and codefendant Paul Greenwood 11
alleging an investment fraud that began around 1996. The 12
next day, the CFTC and SEC filed civil actions alleging the 13
same conduct against Walsh, Greenwood, and their various 14
entities. That same day, Judge Daniels, who was presiding 15
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.
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over the civil case, granted the government’s motion for a 1
preliminary injunction seizing Walsh’s assets. 2
Walsh and Greenwood were indicted on July 24, 2009, and 3
Walsh pled not guilty a week later. 4
In December 2009, Walsh moved to unfreeze the Half Moon 5
House to finance his defense in the criminal case. Judges 6
Daniels and Cedarbaum jointly heard oral argument on the 7
motion and ruled in February 2010 that Walsh was entitled to 8
$900,000--the purchase price of the house on Arden Lane. 9
The decision was without prejudice to Walsh’s ability to 10
seek additional funding. 11
In March 2011, the receiver sold the Half Moon House 12
for approximately $3.7 million. Walsh thereafter moved to 13
have the remaining portion of the sale price released to pay 14
for his criminal defense. The parties agreed to hold a 15
Monsanto hearing. The government advised the court that its 16
only witness would be FBI Agent Barnacle, who had 17
investigated the fraud. 18
Walsh subpoenaed two fact witnesses: his codefendant 19
Greenwood, and Deborah Duffy, a partner at one of the 20
entities involved in the fraud. Walsh also subpoenaed Brick 21
Kane, the Chief Operating Officer of the court-appointed 22
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receiver in charge of selling the Half Moon House. The 1
court granted the government’s motion to quash all three 2
subpoenas, on the ground “that the defendants seek . . . to 3
hold a wholesale dress rehearsal of the trial by subpoenaing 4
the principal cooperating witnesses of the government.” 5
Telephone Conference Tr. 2, Apr. 15, 2011. 6
At the Monsanto hearing, held over three days in May 7
and June 2011. Agent Barnacle recounted what Greenberg and 8
Duffy told him about the fraudulent scheme and set out the 9
transactional history of the Half Moon House. The 10
government introduced documents relating to the fraud and to 11
the source of the assets. 12
Judge Cedarbaum denied the motion to unfreeze the 13
remaining proceeds from the sale of the Half Moon House in 14
May 2012, finding probable cause to believe (1) that Walsh 15
perpetrated the scheme, and (2) that the proceeds from the 16
sale of the Half Moon House were traceable to the profits 17
from the scheme. 18
19
III 20
“In order to seize property . . . , the government must 21
demonstrate that there was probable cause to believe that 22
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the property is subject to forfeiture.” In re Seizure of 1
All Funds in Accounts in Names Registry Pub. Inc., 68 F.3d 2
577, 580 (2d Cir. 1995). “The findings supporting a 3
district court’s determination as to probable cause are 4
reviewed for clear error, but the determination itself is a 5
conclusion of law reviewed de novo.” Id.; accord United 6
States v. Holder, 990 F.2d 1327, 1328 (D.C. Cir. 1993). 7
Since Walsh does not contest any factual findings, but 8
instead argues that the district court made an error of law 9
in applying the tracing fictions from United States v. Banco 10
Cafetero Panama, 797 F.2d 1154 (2d Cir. 1986), to this case, 11
we review the district court’s decision de novo. 12
Part of the Sixth Amendment’s guarantee of the right to 13
counsel is “the right of a defendant who does not require 14
appointed counsel to choose who will represent him.” United 15
States v. Gonzalez-Lopez, 548 U.S. 140, 144 (2006). 16
Nevertheless, a defendant may not use the proceeds of a 17
fraud to fund his criminal defense: “A defendant has no 18
Sixth Amendment right to spend another person’s money for 19
services rendered by an attorney, even if those funds are 20
the only way that that defendant will be able to retain the 21
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attorney of his choice.” Caplin & Drysdale, Chartered v. 1
United States, 491 U.S. 617, 626 (1989). 2
“[T]he [F]ifth and [S]ixth [A]mendments, considered in 3
combination, require an adversary, post-restraint, pretrial 4
hearing as to probable cause that (a) the defendant 5
committed crimes that provide a basis for forfeiture, and 6
(b) the properties specified as forfeitable in the 7
indictment are properly forfeitable.” United States v. 8
Monsanto, 924 F.2d 1186, 1203 (2d Cir. 1991) (in banc). The 9
issue in this appeal is whether there was probable cause to 10
believe that the proceeds from the sale of the Half Moon 11
House were traceable to the proceeds of the fraud--i.e., 12
that they were “another person’s money.” 3 Caplin, 491 U.S. 13
at 626. 14
The Walshes purchased the Half Moon House with funds 15
that were not traceable to the fraud, and the title was put 16
in then-Mrs. Walsh’s name alone. But Walsh ultimately 17
acquired the house pursuant to the Divorce Agreement in 18
exchange for, inter alia, a $12.5 million distributive 19
3 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.
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award, of which at least $6 million consisted of funds 1
directly traceable to the fraud. 2
When some funds in a seized bank account are traceable 3
to criminal activity and some are not, we consult Banco 4
Cafetero, 797 F.2d 1154. We have three “accounting choices” 5
at our disposal to determine what amount of commingled funds 6
are traceable to criminal activity. Of relevance here is 7
the “drugs-in, first-out” approach, which “consider[s] 8
‘traceable proceeds’ to be any one withdrawal, or any asset 9
purchased with such withdrawal, to the extent of” the amount 10
of the deposited tainted funds. Id. at 1159. Applying that 11
approach, the district court analogized the sale proceeds of 12
the Half Moon House “to a withdrawal from a commingled 13
account, i.e., the marital estate.” United States v. 14
Greenwood, 865 F. Supp. 2d 444, 450 (S.D.N.Y. 2012). 15
We conclude that the district court’s application of 16
Banco Cafetero was proper. Walsh negotiated to get the Half 17
Moon House and to keep his (now worthless) business 18
interests in exchange for the $12.5 million distributive 19
award. Although the House itself is not a fungible asset, 20
it was “an asset purchased with” the tainted funds from the 21
marital estate, by operation of the Divorce Agreement. See 22
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Banco Cafetero, 797 F.2d at 1159. Since Walsh’s total 1
assets did not exceed $6 million at the time of his arrest, 2
under Banco Cafetero’s “drugs-in, first-out” approach, all 3
of his assets are traceable to the fraud. 4
Walsh argues that he had a preexisting right to the 5
Half Moon House under New York’s 1980 Equitable Distribution 6
Law and that he therefore did not “purchase” the House in 7
the Divorce Agreement. This argument ignores New York 8
Domestic Relations Law section 236(B)(3), which allows 9
parties to opt out of equitable distribution in favor of a 10
negotiated settlement, which is what the Walshes did. The 11
analysis might differ if the marital estate had been 12
distributed according to a court order under New York 13
Domestic Relations Law section 236(B)(5). We need not 14
address that hypothetical, however, because Walsh freely 15
negotiated title to the House in exchange for at least $6 16
million in funds traceable to the fraud. Accordingly, the 17
district court properly applied Banco Cafetero. 18
19
IV 20
Walsh argues that the district court made two related 21
erroneous evidentiary rulings at the Monsanto hearing: (1) 22
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admitting Agent Barnacle’s hearsay testimony; and (2) 1
quashing Walsh’s subpoenas. For the reasons that follow, we 2
reject both arguments. 3
4
A 5
The admissibility of hearsay at a Monsanto hearing is a 6
question of law that we review de novo. See generally 7
United States v. Ferguson, 676 F.3d 260, 285-86 (2d Cir. 8
2011) (reviewing hearsay decision de novo). 9
In order to “preclud[e] unwarranted exposure of 10
government witnesses,” Monsanto permits a “court [to] 11
receive and consider at such a hearing evidence and 12
information that would be inadmissible under the Federal 13
Rules of Evidence.” 924 F.2d at 1198, 1203. Although Walsh 14
argues that Monsanto’s evidentiary rule should be limited to 15
cases where witnesses may be in physical danger--such as 16
those involving drugs 4
--we are persuaded by district court 17
opinions in this Circuit applying Monsanto’s evidentiary 18
4 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).
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rule to non-drug cases. E.g., United States v. All Funds on 1
Deposit in any Account at Certain Fin. Insts. Held in the 2
Names of Certain Individuals, 767 F. Supp. 36, 42 (E.D.N.Y. 3
1991) (Spatt, J.); see also United States v. Clarkson Auto 4
Elec., Inc., No. 10-CR-6111CJS, 2012 WL 345911, at *1 n.4 5
(W.D.N.Y. Feb. 1, 2012) (Payson, M.J.). The unwarranted 6
exposure of government witnesses was a valid consideration 7
in this case, to avoid what the district court called a 8
“dress rehearsal” of the trial. In any event, the Monsanto 9
hearing involved only a finding of probable cause, and “[a] 10
finding of probable cause may be based on hearsay.” United 11
States v. Daccarett, 6 F.3d 37, 56 (2d Cir. 1993). 12
13
B 14
We review the quashing of a subpoena for abuse of 15
discretion. See Arista Records, LLC v. Doe 3, 604 F.3d 110, 16
117 (2d Cir. 2010). The same consideration that justifies 17
receipt of hearsay evidence in a Monsanto hearing 18
(unwarranted exposure of witnesses) supports the district 19
court’s exercise of discretion to quash the subpoenas of two 20
fact witnesses: Greenwood and Duffy. Walsh argues that his 21
right to an “adversary proceeding” should be weighed against 22
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the government’s interest in protecting its witnesses, and 1
argues that his is the greater interest. But Monsanto has 2
already decided, when the government has an interest in 3
preventing the “unwarranted exposure” of its witnesses, that 4
interest tends to outweigh a defendant’s right to cross- 5
examine those witnesses before the trial. See 924 F.2d at 6
1195-98. 7
The subpoena served on the receiver raises no risk of 8
“unwarranted exposure of government witnesses,” but in any 9
event, the district court did not consider any hearsay 10
evidence that was based on the receiver’s analysis or 11
conclusions. Rather, the district court based its decision 12
entirely on the documentary evidence in the case--the same 13
documents that were available to the receiver. 5 Walsh fails 14
to show what he would have gained by calling the receiver. 15
5 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.
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Accordingly, the district court did not abuse its discretion 1
in quashing Walsh’s subpoenas. 2
For the foregoing reasons, we affirm the order of the 3
district court. 4
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