10 May 2016
Stefan Cassella of Asset Forfeiture Law, LLC discusses a recent Second Circuit judgement which establishes that holding the defendants in the Madoff fraud scheme jointly and severally liable for the forfeiture of $19.7 billion, while “monumental,” did not violate the Excessive Fines Clause of the Eighth Amendment. Each defendant, including those whose role was to provide technical support vital to the success of the scheme, is jointly and severally liable for the acts of those who were at the core of the scheme. Perpetrators of a Ponzi scheme must forfeit the “gross proceeds” of the scheme without any deduction for “direct costs.”.
[United States v. Bonventre, ___ Fed. Appx. ___, 2016 WL 1579036 (2nd Cir. Apr. 20, 2016).]
Defendants, all former employees of Bernard L. Madoff Investment Securities, were convicted of multiple securities and bank fraud violations and were held jointly and severally liable to forfeit $19.7 billion in fraud proceeds in the form of a money judgment. They appealed their convictions and the forfeiture judgment.
With respect to the forfeiture, Defendants first argued that the district court erred in holding them liable for the gross proceeds of the offense rather than its net profits.
18 U.S.C. § 981(a)(2)(A) sets forth the general rule that a defendant must forfeit the gross proceeds of his offense. Section 981(a)(2)(B), however, allows the defendant to deduct his “direct costs” if the crime involved selling or providing “lawful services . . . in an unlawful manner.” The panel held that sub-paragraph (B) did not apply in this case because running an investment business as a Ponzi scheme does not constitute a “lawful service” that was merely operated in “an unlawful manner.”
Moreover, the panel held that even if Section 981(a)(2)(B) did apply, Defendants were unable to show that they incurred any “direct costs” in running the Ponzi scheme. If Defendants had, for example, purchased securities and then resold them to their clients, they might have incurred a direct cost. But as it was, the only costs Defendants incurred were “overhead expenses” which are expressly excluded from the definition of “direct costs” in the statute.
Thus, the panel concluded that “the district court correctly ordered forfeiture based on the gross proceeds generated by Defendants’ fraudulent scheme.”
Next, one of the defendants argued that he should not be held jointly and severally liable for the full amount of the forfeiture because he was merely a computer programmer and not the main player in the fraud scheme. But the court held that each defendant was liable for the acts of those who “participated jointly” in the fraud scheme, as long as those acts were foreseeable to him.
Finally, the same Defendant objected that holding him jointly and severally liable for a $19.7 billion forfeiture judgment violated the Excessive Fines Clause of the Eighth Amendment. The panel applied the Bajakajian factors to the excessive fines analysis and concluded that the forfeiture was not grossly disproportional to the gravity of the offense.
First, the court rejected Defendant’s argument that as a mere computer programmer he was “several steps removed from the heart of the fraud” and hence could not be constitutionally required to bear the full weight of the forfeiture imposed on his co-defendants. The securities fraud statutes, Defendant argued, do not target “computer programmers or other technical workers whose specialized services are needed to carry out the core fraud.” Thus, in his view, for purposes of the excessive fines analysis he did not fall into the class of persons at whom the criminal offense was aimed.
The court held, however, that Defendant was a “vital member of the conspiracy” without whose work altering records and falsifying documents “the fraudulent scheme could not have been sustained.”
The court also rejected Defendant’s argument that the forfeiture was excessive because it greatly exceeded the maximum statutory fine of $10 million. A more apt comparison, the court said, was to Defendant’s 100 year prison sentence. Moreover, where the forfeiture ordered is in an amount equivalent to the actual proceeds of the crime, comparing the forfeiture to the maximum fine that could have been imposed is unnecessary.
Finally, the court rejected Defendant’s assertion that the forfeiture was disproportional in terms of the harm caused. The offense, the court said, involved “financial devastation of unprecedented magnitude” that caused “thousands of innocent lives [to be] irreversibly upended.” Accordingly, the court concluded that the forfeiture, “while monumental, was not grossly disproportional to the gravity of the crimes of conviction.”
So the forfeiture order was affirmed in all respects.
There are three key points in this opinion. First, the court joins others in holding that if a business is fraudulent from the beginning, or so infused with fraud as to overwhelm any legitimate side to its operation, it cannot qualify as lawful business being conducted in an unlawful manner for purposes of limiting the forfeiture to net profits under Section 981(a)(2)(B). See, e.g., United States v. Sigillito, 899 F. Supp.2d 850, 864-65 (E.D. Mo. 2012) (defendant in an investment fraud scheme must forfeit the gross amount he took from investors, without credit for his use of the later investments to pay the early investors; 981(a)(2)(A) applies because the scheme was entirely unlawful).
This issue is not well-settled, however. Many courts in white collar cases have applied Section 981(a)(2)(B) and allowed the defendant a credit for direct costs if there was a legitimate side to his business. See United States v. Contorinis, 692 F.3d 136, 145 n.3 (2d Cir. 2012) (buying and selling securities is not inherently unlawful; therefore in an insider trading case, forfeiture is limited to the net gain after deducting the costs pursuant to § 981(a)(2)(B)); United States v. Swenson, 2014 WL 3748301, *5 (D. Idaho July 29, 2014) (§ 981(a)(2)(B) applies in securities fraud cases because the defendant “did not sell investors an illegal product; he sold investors lawful goods and services in an illegal manner”). See also cases cited in Section XXXVII.A.6 of my Criminal Forfeiture Case Outline.
Second, the court contributes to the ongoing debate over joint and several liability. See the comments on this issue in the last few issues of the Digest. Without discussing the legal basis for joint and several liability, the panel simply holds that all defendants may be ordered to forfeit proceeds received by others who “participated jointly in the crime,” provided that the actions generating those proceeds were foreseeable to the defendant. On the Brief Bank page of my website, www.assetforfeiturelaw.us, I have posted a recent brief on joint and several liability that discusses liability based on the “joint actor” theory.
Finally, notwithstanding the Government’s argument that the forfeiture of the proceeds of an offense can never be unconstitutionally excessive, the court, like courts in other cases, does not foreclose the possibility that holding a minor player in a scheme jointly and severally liable for the forfeiture of all foreseeable proceeds could violate the Excessive Fines Clause of the Eighth Amendment. It holds, however, that a person whose technical skills were vital to the success of the scheme is not such a minor player, even if he was several steps removed from the heart of the fraud scheme.
What’s more, the court holds that comparing the forfeiture to the maximum statutory fine is unnecessary, even in a joint and several liability case, when the forfeiture is measured by the exact amount of the proceeds.
Stefan Cassella, Asset Forfeiture Law, LLC
Count reading this article to your CPD minutes, by signing up to our CPD WalletFREE CPD Wallet