One of the many potential consequences of a criminal conviction is that the government may seize assets held by the defendant’s family to satisfy a criminal forfeiture order against the defendant himself. In United States v. Daugerdas, the Southern District of New York held that the wife of a lawyer convicted of a tax shelter fraud scheme lacked standing to raise questions about the underlying forfeiture of $32 million held in accounts which she controlled, and that she also was incapable of showing that any of her legal interests in the funds were superior to the government’s interests in forfeiture, which vested earlier when her husband began his scheme. The Daugerdas opinion illustrates the potential futility of transferring the proceeds of illegal activity to third parties. When it comes to criminal forfeiture, the U.S. is a special creditor.
The order of criminal forfeiture at issue arose out of a well-publicized and significant tax shelter prosecution involving various tax professionals, including lawyers and accountants. Although criminal forfeiture cannot rest upon a substantive criminal tax violation under Title 26 (the Internal Revenue Code, or IRC), the government sometimes maneuvers around that statutory rule by charging what are really violations of the IRC as mail or wire fraud under Title 18. There is a DOJ policy which generally prohibits the use of the mail or wire fraud statutes to turn traditional tax violations into mail fraud, wire fraud or money laundering charges and/or forfeiture counts; this issue represents a complicated topic all by itself. Suffice it to say for the purposes of this discussion that the $32 million forfeiture order in Daugerdas rested on mail fraud convictions. The petitioner’s husband, former tax attorney Paul Daugerdas, was convicted and jailed for running an alleged tax fraud scheme from about 1994 to 2004, which produced at least $180 million in illegal proceeds. Approximately $32 million of these same proceeds – the subject of the contested forfeiture – were deposited between February 2000 and July 2009 into accounts held in the petitioner’s own name, a trust controlled by the petitioner, or a corporation the petitioner owned because her husband had assigned the corporation to her in 2002.
The petitioner’s argument hinged upon a claim that the property at issue was not directly connected to the fraud offense resulting in forfeiture, but rather represented only “substitute assets” held by Daugerdas which could be seized to satisfy the forfeiture order against him. The court described the primary issue in the case as follows:
The thrust of Petitioner’s claim—indeed, her only stated argument on this motion—is that her interest in the property contained in the Subject Accounts vested prior to the Government’s because the Government never established “the requisite nexus between the property and the offense” necessary to show that the property constitutes “offense proceeds.” Fed. R. Crim. P. 32.2(b)(1)(A). Thus, Petitioner argues, the money is in fact “substitute property” rather than “offense property.” 21 U.S.C. § 853(a), 853(p). This is a crucial distinction for Petitioner because the Government’s interest in “offense property” vests at the time of the acts giving rise to the forfeiture proceeding (which in this case would be 1994, when Paul Daugerdas’s fraudulent scheme began). See 21 U.S.C. § 853(c). It is less clear when the Government’s interest in substitute property vests, although at least one court in this district has held that vesting does not occur until a grand jury returns an indictment. See United States v. Peterson, 820 F. Supp. 2d 576, 585 (S.D.N.Y. 2011) (concluding that “the government’s interest in substitute assets vests upon the issuance of the grand jury indictment”). Because Petitioner’s own interest in the Subject Accounts vested between February 2000 and July 2009—well after the acts leading to the forfeiture, but before the initial Indictment—the classification of these assets as “offense” or “substitute” property is critical to the viability of her claim.
The court rejected petitioner’s claim because it found that she was attempting to re-litigate an issue that only the criminal defendant could have litigated (and in this case, did litigate and lost previously on the merits both before the Southern District and on appeal to the Second Circuit). The court observed that, under 21 U.S.C. § 853(k), a third party may not challenge the underlying determination of forfeitability; instead, a third party only may allege that she has her own legal interest in the forfeited property that must be protected. Here, the petitioner sought to undo the court’s prior determination that the property at issue in fact represented “offense” property, rather than merely “substitute” property. The petitioner simply lacked standing to challenge the finding that the property really was “offense” property.
Forfeiture litigation can be very technical and rule-bound, and the Daugerdas opinion is no exception. The court then turned to the petitioner’s claim that, regardless of any defects in the initial determination of forfeitability, the property still actually belonged to her and that her ownership interests trumped the competing interests of the government in the same property. However, her inability to challenge the property’s characterization as “offense” property doomed this argument to failure. The court found that, although the petitioner had standing under Article III of the Constitution to bring her suit (because “seizure of property without due process is the quintessential injury”), she nonetheless lacked “statutory standing” – i.e., she had no viable cause of action as a matter of law – because she was incapable of showing under 21 U.S.C. § 853(n)(6)(A) that she had a legal third-party right in the property that had vested prior to the time that the offense occurred and the government’s right to forfeiture arose. Specifically, although the facts alleged in her petition revealed that the petitioner had a vested right in the property no earlier than February 2000, the court previously had found that the government’s interest in the property vested since at least 1994 (when her husband had commenced the alleged fraud scheme). Petitioner only could have avoided this conclusion by having the property re-characterized as “substitute” property, in which the government’s right arguably could have vested later. This illustrates the power of the forfeiture statute’s bar against third parties’ standing to challenge property’s forfeitability in the first instance. Petitioner’s claim here was, in essence, foreclosed before she even had the opportunity to bring it.
The court distinguished the case at hand, a situation involving a “criminal defendant [attempting to] insulat[e] offense proceeds from forfeiture by transferring those proceeds to third parties[,]” from a situation in which a third-party victim might show that the defendant never had proper title to the victim’s property during the offense because the property had been stolen. Finally, the petitioner never alleged that she had statutory standing under the alternative cause of action under 21 U.S.C. § 853(n)(6)(B) by claiming that she was a “bona fide purchaser for value” of the property, and was at that time “reasonably without cause to believe that the property was subject to forfeiture.”
The Daugerdas opinion shows how difficult it can be for spouses and other family members to avoid the enforcement of an order of forfeiture. It also highlights the importance of the criminal defendant litigating in the first instance any issues regarding the legitimacy of the government’s underlying forfeiture theory.