Commercial Litigation and Arbitration

RICO Forfeiture — Where Lawyer/Racketeer Deposits Illicit Proceeds of Ponzi Scheme in Firm’s Bank Account, Commingling It with Legitimate Revenues, Entire Account at Time He Is Charged Is Not Forfeitable

In re Rothstein, , 2013 U.S. App. LEXIS 11793 (11th Cir. June 12, 2013):

A number of criminal statutes within the Federal Code mandate that a defendant, when convicted, forfeit to the United States as part of his sentence the lucre he acquired as a result of his criminal activity. In this case, the defendant, a lawyer, deposited the lucre in his law firm's bank accounts, where it was commingled with the firm's receipts from legitimate clients. The question this appeal presents is whether the money in the bank accounts at the time the defendant was charged is subject to forfeiture. We hold that it is not.***

Before sentencing, on May 24, 2010, the Trustee petitioned the District Court pursuant to the ancillary hearing procedure provided by 21 U.S.C. § 853(n)12 to order the Government to return the RRA [Rothstein, Rosenfeldt and Adler P.A. ("RRA")] accounts held in Gibraltar Bank and TD Bank. His petition pointed out that, as the information stated, the TD Bank accounts were held in the name of RRA and that he could establish that the Gibraltar Bank accounts were likewise held in the name of RRA. As for the other properties listed in the preliminary order of forfeiture, he requested that the court declare that the bankruptcy estate held an interest in such properties--because they were acquired with funds from RRA's bank accounts--that was "vested in the [law firm] rather than [Rothstein or the Government]." See § 853(n).***

On June 11, 2010, the Government moved to dismiss the Trustee's petition, arguing, in effect, that the preliminary order of forfeiture forfeited to the United States the funds RRA held in the bank accounts. On July 9, 2010, the court denied its motion with respect to the bank accounts. It granted the motion, however, as it related to the other properties listed in the information***.


The Trustee contends, in essence, that the bank accounts could not be forfeited because the funds they held did not constitute proceeds of Rothstein's Ponzi scheme. Further, in his responsive briefing to our questions at oral argument, he contends that the RRA bank accounts contained commingled assets and thus were not subject to proceeds forfeiture. ***

While the plea agreement and preliminary order of forfeiture both equivocate on the point, it seems to us from the surrounding documents that, in seeking the forfeiture of the law firm's bank accounts, the Government proceeded under the theory that the accounts comprised the proceeds of Rothstein's Ponzi scheme. We have said that proceeds of crime constitute a defendant's "interest" in property, United States v. Conner, 752 F.2d 566, 575-76 (11th Cir. 1985); for this reason, they can be forfeited in an in personam proceeding in a criminal case.

Though RICO does not define "proceeds," see 18 U.S.C. § 1961, the only other statutory provision that the Government has cited that makes reference to proceeds forfeiture, 18 U.S.C. § 981(a)(1)(C), defines it as "property of any kind obtained directly or indirectly, as the result of the commission of the offense giving rise to forfeiture, and any property traceable thereto, and . . . not limited to the net gain or profit realized from the offense," 18 U.S.C. § 981(a)(2)(A). Therefore, whatever money Rothstein obtained as a result of his criminal activity, and any property that can be traced to that money, is forfeitable. Under the relation-back rule, where such money or property is "subsequently transferred to a person other than the defendant," that money or property "vests in the United States upon the commission of the act giving rise to forfeiture" unless the third party can demonstrate his right to the property in an § 853(n) hearing. 21 U.S.C. § 853(c). ***

Property can only be forfeited as proceeds, however, where the Government "establishe[s] the requisite nexus between the property and the offense." Fed. R. Crim. P. 32.2(b)(1)(A). The Advisory Committee notes to Federal Rule of Criminal Procedure 32.2 offer the money on deposit in a bank account as one example of "specific property" that requires such a showing***

. Where no such showing can be made, the Government must resort to the substitute asset provision of sections 1963 and 853, which provides that "the court shall order the forfeiture of any other property of the defendant" where "as a result of any act or omission of the defendant," forfeitable property, such as proceeds, "has been commingled with other property which cannot be divided without difficulty." 21 U.S.C. § 853(p). [Footnote 18. Section 1963(m) of Title 18 is substantively identical to 21 U.S.C. § 853(p).] The Government may seek forfeiture under this provision of property "up to the value of" commingled property. Id.

We have not previously addressed the question of when property becomes so commingled that it may not be forfeited directly such that substitute property must be forfeited instead. The Third Circuit, however, has offered instructive guidance in a pair of cases, United States v. Voigt, 89 F.3d 1050 (3d Cir. 1996), and United States v. Stewart, 185 F.3d 112 (3d Cir. 1999). In Voigt, that court held that "the government must prove by a preponderance of the evidence that the property it seeks under § 982(a)(1) in satisfaction of the amount of criminal forfeiture to which it is entitled has some nexus to the property 'involved in' the money laundering offense." Id. at 1087. Commenting that this burden may be very difficult to meet where property "is commingled in an account with untainted property," the court rejected the government's effort to forfeit items of jewelry "purchased with funds from an account into which money laundering proceeds had been commingled with other funds, and after numerous intervening deposits and withdrawals." Id. at 1087-88. The court held that, in such a situation, funds cannot be traced as a matter of law, and therefore "the government must satisfy its forfeiture judgment through the substitute asset provision." Id. at 1088 (emphasis added).

Three years later, in Stewart, the Third Circuit was confronted with the question of "whether the government may forfeit directly tainted funds from an account that has been frozen from the time of the illegal transfer but that also contains untainted money." Stewart, 185 F.3d at 129. Observing that Stewart involved one $3 million transfer into a single account that previously contained only $160,000 and that, before that account was frozen "almost immediately" after the transfer, only one withdrawal was made, with the government's permission, to pay the defendant's trial attorney, the Third Circuit found the case to be distinguishable from Voigt. Id. In Stewart, "the government clearly traced laundered funds forfeited by the jury to Stewart's Account. Stewart does not contest this tracing, which in any event the government clearly established." The court found that the "difficulty" alluded to by the substitute asset provision, and in turn in Voigt, was not present in Stewart. The court thus carved out an exception to its earlier holding in Voigt: in a very simple case involving few individual deposits, traced proceeds within a commingled account may be directly forfeited without resort to the substitute asset provision, without "render[ing] the substitute asset provision a nullity." Voigt, 89 F.3d at 1087.

In the case at hand, Rothstein's investors' funds were deposited in RRA bank accounts and commingled with legitimate income RRA received from the billings of its seventy lawyers, $12 million in the first ten months of 2009 alone. This commingling went on for four years--the duration of Rothstein's Ponzi scheme. The sheer volume of financial information available and required to separate tainted from untainted monies in this case leads us to the conclusion that it is far more appropriate to apply the Third Circuit's rule in Voigt than the exception to that rule it lays out in Stewart.

Quite unlike the situation in the latter case, here, the Government revealingly presented as an exhibit to the brief it filed in support of its motion for a preliminary order of forfeiture an FBI agent's affidavit that included twenty-one pages detailing transfers in and out of the RRA bank accounts made on behalf of Rothstein's investors, RRA, and "other" depositors. Even these, the agent noted, did not comprise "each and every fact known to me" but instead a one-page "summary of all deposits, transfers and withdrawals for the subject accounts" during a one-month period and "twenty pages regarding my review of the subject accounts and other accounts for the purpose of attempting to identify non-investor clients of RRA." Record, vol. 2, no. 133-1, 1-3. The District Court itself expressed frustration with the tracing methodology the parties employed at the ancillary hearing, which focused on the timing of deposits and withdrawals. The methodology, borrowed from the law of trusts and referred to as the lowest intermediate balance rule ("LIBR"), attempts to divide tainted and untainted money by considering, where a set amount of proceeds is deposited into an account and commingled with other funds, "the account to be 'traceable proceeds' to the extent of [the deposited proceeds] as long as the account balance never falls below that sum." United States v. Banco Cafetero Panama, 797 F.2d 1154, 1159 (2d Cir. 1986). The court dubbed the LIBR a "legal fiction," Record, vol. 13, no. 579, at 12, but acknowledged that, according to the Government's representation in open court, "all of the interested parties believe LIBR provides the appropriate legal rule here," id. at 13 n.8. The Court therefore "honor[ed] the parties' accord." Id. at 13 n.8.

In sum, if ever there was a case where commingled proceeds "c[ould not] be divided without difficulty" and that therefore required the Government to seek forfeiture pursuant to the statutes' substitute property provisions, §§ 1963(m) and 853(p), this is that case. For us to conclude otherwise would "render the substitute asset provision a nullity," Voigt, 89 F.3d at 1087, contrary to the time-honored canon of construction that we "'should disfavor interpretations of statutes that render language superfluous,'" In re Griffith, 206 F.3d 1389, 1393 (11th Cir. 2000) (quoting Connecticut Nat'l Bank v. Germain, 503 U.S. 249, 253, 112 S. Ct. 1146, 1149, 117 L. Ed. 2d 391 (1992)). We therefore hold that the District Court erred in ordering forfeiture of the funds as proceeds. Consequently, all proceedings the court held subsequent to the imposition of Rothstein's sentence must be vacated.***

Our conclusion that the bank accounts did not contain forfeitable proceeds does not foreclose the Government's attempt to forfeit a property interest held by Rothstein, individually; that is, a property interest that is neither proceeds of his criminal activity nor derived therefrom. An example of such interest is Rothstein's shareholder's interest in RRA and hence in the firm's bank accounts. The Government, as the court in Voigt made clear, may on remand move the District Court "to amend the judgment to reflect that [Rothstein's interest in the law firm and thus its bank accounts] is forfeitable as a substitute asset," Voigt, 89 F.3d at 1088.

The District Court must be mindful that a substitute property interest may be forfeited only "up to the value of" any forfeitable proceeds that have been commingled and are accordingly unavailable for forfeiture as proceeds. 18 U.S.C. § 1963(m); 21 U.S.C. § 853(p)(2). The Government must identify and establish the value of the proceeds that were commingled. Since a substitute property interest is not within the District Court's jurisdiction as it would be were the court proceeding in rem, the District Court, to effectuate forfeiture of the property interest, exercises its in personam jurisdiction over the defendant and orders the defendant to convey the interest to the United States. So, if the court orders Rothstein's shareholder interest in RRA forfeited as a substitute property interest, it will order Rothstein to assign the interest--which encompassed the accounts--to the Government subject, of course, to any claims third parties may have against such interest. Then, with that assignment in hand, the Government, standing in Rothstein's shoes, may appear in the Chapter 11 proceeding and lay claim to Rothstein's share of law firm assets that survive bankruptcy.

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