United States of America v. Greenwood (Walsh)

Filing

OPINION, affirmed, by DJ, JAC, RCW, FILED.[894246] [12-2383]

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12-2383-cr
United States v. Walsh

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UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
August Term, 2012
(Argued: March 18, 2013

Decided: April 2, 2013)

Docket No. 12-2383-cr
- - - - - - - - - - - - - - - - - - - -x
UNITED STATES OF AMERICA,
Appellee,
- v.STEPHEN WALSH,
Defendant-Appellant.
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Before:

JACOBS, Chief Judge, CABRANES and WESLEY,
Circuit Judges.

In this criminal case, Defendant Stephen Walsh appeals

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from an order of the United States District Court for the

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Southern District of New York (Cedarbaum, J.) denying his

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motion to release assets frozen in a parallel civil

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enforcement action.

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release of the proceeds from the sale of his house.

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obtained the house from his wife in a divorce settlement in

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which his wife received (inter alia) a $12.5 million

Walsh, charged with fraud, seeks
Walsh

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distributive award, $6 million of which was paid using funds

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traceable to Walsh’s fraud.

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applied the tracing analysis from United States v. Banco

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Cafetero Panama, 797 F.2d 1154 (2d Cir. 1986).

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The district court properly

We affirm.

MARK A. FLESSNER, Holland &
Knight LLP, Chicago, Illinois,
for Defendant-Appellant.
JOHN J. O’DONNELL, (Iris Lan, on
the brief), for Preet Bharara,
United States Attorney for the
Southern District of New York,
for Appellee.
DENNIS JACOBS, Chief Judge:
Stephen Walsh, defendant in this criminal fraud case,

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appeals from an order of the United States District Court

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for the Southern District of New York (Cedarbaum, J.)

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denying his motion to release $3.7 million in assets that

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were frozen in a parallel civil enforcement action.

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seeks to use those funds for his defense.

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wife had purchased a house in her name using funds unrelated

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to the alleged fraud.

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Walsh received title to the house and gave his wife (inter

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alia) a $12.5 million distributive award, at least $6

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million of which was directly traceable to Walsh’s alleged

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fraud.

Walsh

Walsh and his

Pursuant to a divorce settlement,

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After a hearing conducted pursuant to United States v.

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Monsanto, 924 F.2d 1186 (2d Cir. 1991) (in banc), the

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district court concluded that the $3.7 million at issue was

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“traceable” to the fraud.

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underlying finding that there was probable cause to believe

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that Walsh committed the fraud.

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finding that there was probable cause to believe that, after

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the divorce settlement, the house became traceable to the

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proceeds from the fraud.

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Walsh does not contest the

But he does challenge the

He argues that the “tracing fiction” used by the

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district court is inapplicable to his situation.

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argues that the district court erred at the Monsanto hearing

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by admitting hearsay testimony from the FBI agent who

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investigated the fraud and by quashing Walsh’s subpoenas.

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He also

For the following reasons, we affirm.

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I
In 1983, the Walshes bought a house on Arden Lane in

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Sands Point for $900,000 and renovated it over the next

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several years at a cost of more than $2 million.

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they sold the property in parcels for a total of $4.135

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million.

In 1999,

That same day, they applied most of the proceeds

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to the $3.15 million purchase of another Sands Point house,

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on Half Moon Lane (the “Half Moon House” or the “House”).

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The title of the House remained in Walsh’s wife’s name alone

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until the divorce in 2006.

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In November 2006, the Walshes entered into a

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Stipulation and Settlement and Agreement (“Divorce

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Agreement”) that divided their assets and resolved all

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future claims for maintenance and/or an equitable

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distribution award.

Walsh received title to the Half Moon

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House, as well as cars, certain bank accounts, and the

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business interests that were involved in the alleged fraud.

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His wife got condominiums in Florida and New York, cars,

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bank and securities accounts and life insurance policies,

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and a distributive award1 of $12.5 million.

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Walsh’s indictment, the only asset of substantial value he

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owned was the Half Moon House.

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At the time of

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

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Agreement using the proceeds of the fraudulent scheme.2

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district court found that, all told, Walsh transferred at

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least $6 million of proceeds of the scheme to his wife,

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including the $3 million New York condominium acquired in

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her name prior to the divorce.

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The

Walsh does not contest these findings on appeal.

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II
On February 24, 2009, the government filed a criminal

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complaint against Walsh and codefendant Paul Greenwood

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alleging an investment fraud that began around 1996.

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next day, the CFTC and SEC filed civil actions

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same conduct against Walsh, Greenwood, and their various

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entities.

The

alleging the

That same day, Judge Daniels, who was presiding

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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

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preliminary injunction seizing Walsh’s assets.

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Walsh and Greenwood were indicted on July 24, 2009, and
Walsh pled not guilty a week later.
In December 2009, Walsh moved to unfreeze the Half Moon

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House to finance his defense in the criminal case.

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Daniels and Cedarbaum jointly heard oral argument on the

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motion and ruled in February 2010 that Walsh was entitled to

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$900,000--the purchase price of the house on Arden Lane.

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The decision was without prejudice to Walsh’s ability to

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seek additional funding.

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Judges

In March 2011, the receiver sold the Half Moon House

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for approximately $3.7 million.

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have the remaining portion of the sale price released to pay

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for his criminal defense.

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Monsanto hearing.

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only witness would be FBI Agent Barnacle, who had

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investigated the fraud.

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Walsh thereafter moved to

The parties agreed to hold a

The government advised the court that its

Walsh subpoenaed two fact witnesses: his codefendant

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Greenwood, and Deborah Duffy, a partner at one of the

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entities involved in the fraud.

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Kane, the Chief Operating Officer of the court-appointed

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Walsh also subpoenaed Brick

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receiver in charge of selling the Half Moon House.

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court granted the government’s motion to quash all three

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subpoenas, on the ground “that the defendants seek . . . to

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hold a wholesale dress rehearsal of the trial by subpoenaing

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the principal cooperating witnesses of the government.”

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Telephone Conference Tr. 2, Apr. 15, 2011.

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The

At the Monsanto hearing, held over three days in May

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and June 2011.

Agent Barnacle recounted what Greenberg and

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Duffy told him about the fraudulent scheme and set out the

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transactional history of the Half Moon House.

The

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government introduced documents relating to the fraud and to

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the source of the assets.

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Judge Cedarbaum denied the motion to unfreeze the

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remaining proceeds from the sale of the Half Moon House in

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May 2012, finding

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perpetrated the scheme, and (2) that the proceeds from the

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sale of the Half Moon House were traceable to the profits

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from the scheme.

probable cause to believe (1) that Walsh

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III
“In order to seize property . . . , the government must
demonstrate that there was probable cause to believe that

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the property is subject to forfeiture.”

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All Funds in Accounts in Names Registry Pub. Inc., 68 F.3d

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577, 580 (2d Cir. 1995).

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district court’s determination as to probable cause are

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reviewed for clear error, but the determination itself is a

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conclusion of law reviewed de novo.”

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States v. Holder, 990 F.2d 1327, 1328 (D.C. Cir. 1993).

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Since Walsh does not contest any factual findings, but

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instead argues that the district court made an error of law

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in applying the tracing fictions from United States v. Banco

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Cafetero Panama, 797 F.2d 1154 (2d Cir. 1986), to this case,

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we review the district court’s decision de novo.

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In re Seizure of

“The findings supporting a

Id.; accord United

Part of the Sixth Amendment’s guarantee of the right to

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counsel is “the right of a defendant who does not require

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appointed counsel to choose who will represent him.”

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States v. Gonzalez-Lopez, 548 U.S. 140, 144 (2006).

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Nevertheless, a defendant may not use the proceeds of a

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fraud to fund his criminal defense: “A defendant has no

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Sixth Amendment right to spend another person’s money for

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services rendered by an attorney, even if those funds are

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the only way that that defendant will be able to retain the

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United

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attorney of his choice.”

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Caplin & Drysdale, Chartered v.

United States, 491 U.S. 617, 626 (1989).

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“[T]he [F]ifth and [S]ixth [A]mendments, considered in

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combination, require an adversary, post-restraint, pretrial

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hearing as to probable cause that (a) the defendant

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committed crimes that provide a basis for forfeiture, and

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(b) the properties specified as forfeitable in the

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indictment are properly forfeitable.”

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Monsanto, 924 F.2d 1186, 1203 (2d Cir. 1991) (in banc).

United States v.
The

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issue in this appeal is whether there was probable cause to

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believe that the proceeds from the sale of the Half Moon

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House were traceable to the proceeds of the fraud--i.e.,

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that they were “another person’s money.”3

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at 626.

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Caplin, 491 U.S.

The Walshes purchased the Half Moon House with funds

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that were not traceable to the fraud, and the title was put

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in then-Mrs. Walsh’s name alone.

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acquired the house pursuant to the Divorce Agreement in

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exchange for, inter alia, a $12.5 million distributive

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But Walsh ultimately

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

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directly traceable to the fraud.

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When some funds in a seized bank account are traceable

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to criminal activity and some are not, we consult Banco

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Cafetero, 797 F.2d 1154.

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at our disposal to determine what amount of commingled funds

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are traceable to criminal activity.

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the “drugs-in, first-out” approach, which “consider[s]

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‘traceable proceeds’ to be any one withdrawal, or any asset

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purchased with such withdrawal, to the extent of” the amount

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of the deposited tainted funds.

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approach, the district court analogized the sale proceeds of

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the Half Moon House “to a withdrawal from a commingled

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account, i.e., the marital estate.”

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Greenwood, 865 F. Supp. 2d 444, 450 (S.D.N.Y. 2012).

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We have three “accounting choices”

Of relevance here is

Id. at 1159.

Applying that

United States v.

We conclude that the district court’s application of

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Banco Cafetero was proper.

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Moon House and to keep his (now worthless) business

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interests in exchange for the $12.5 million distributive

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award.

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it was “an asset purchased with” the tainted funds from the

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marital estate, by operation of the Divorce Agreement.

Walsh negotiated to get the Half

Although the House itself is not a fungible asset,

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See

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Banco Cafetero, 797 F.2d at 1159.

Since Walsh’s total

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assets did not exceed $6 million at the time of his arrest,

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under Banco Cafetero’s “drugs-in, first-out” approach, all

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of his assets are traceable to the fraud.

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Walsh argues that he had a preexisting right to the

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Half Moon House under New York’s 1980 Equitable Distribution

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Law and that he therefore did not “purchase” the House in

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the Divorce Agreement.

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Domestic Relations Law section 236(B)(3), which allows

This argument ignores New York

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parties to opt out of equitable distribution in favor of a

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negotiated settlement, which is what the Walshes did.

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analysis might differ if the marital estate had been

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distributed according to a court order under New York

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Domestic Relations Law section 236(B)(5).

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address that hypothetical, however, because Walsh freely

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negotiated title to the House in exchange for at least $6

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million in funds traceable to the fraud.

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district court properly applied Banco Cafetero.

The

We need not

Accordingly, the

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IV

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Walsh argues that the district court made two related

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erroneous evidentiary rulings at the Monsanto hearing: (1)

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admitting Agent Barnacle’s hearsay testimony; and (2)

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quashing Walsh’s subpoenas.

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reject both arguments.

For the reasons that follow, we

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A
The admissibility of hearsay at a Monsanto hearing is a

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question of law that we review de novo.

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United States v. Ferguson, 676 F.3d 260, 285-86 (2d Cir.

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2011) (reviewing hearsay decision de novo).

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See generally

In order to “preclud[e] unwarranted exposure of

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government witnesses,” Monsanto permits a “court [to]

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receive and consider at such a hearing evidence and

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information that would be inadmissible under the Federal

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Rules of Evidence.”

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argues that Monsanto’s evidentiary rule should be limited to

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cases where witnesses may be in physical danger--such as

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those involving drugs4--we are persuaded by district court

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opinions in this Circuit applying Monsanto’s evidentiary

924 F.2d at 1198, 1203.

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Although Walsh

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

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Deposit in any Account at Certain Fin. Insts. Held in the

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Names of Certain Individuals, 767 F. Supp. 36, 42 (E.D.N.Y.

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1991) (Spatt, J.); see also United States v. Clarkson Auto

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Elec., Inc., No. 10-CR-6111CJS, 2012 WL 345911, at *1 n.4

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(W.D.N.Y. Feb. 1, 2012) (Payson, M.J.).

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exposure of government witnesses was a valid consideration

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in this case, to avoid what the district court called a

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“dress rehearsal” of the trial.

The unwarranted

In any event, the Monsanto

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hearing involved only a finding of probable cause, and “[a]

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finding of probable cause may be based on hearsay.”

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States v. Daccarett, 6 F.3d 37, 56 (2d Cir. 1993).

United

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B
We review the quashing of a subpoena for abuse of

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discretion.

See Arista Records, LLC v. Doe 3, 604 F.3d 110,

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117 (2d Cir. 2010).

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receipt of hearsay evidence in a Monsanto hearing

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(unwarranted exposure of witnesses) supports the district

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court’s exercise of discretion to quash the subpoenas of two

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fact witnesses: Greenwood and Duffy.

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right to an “adversary proceeding” should be weighed against

The same consideration that justifies

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Walsh argues that his

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the government’s interest in protecting its witnesses, and

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argues that his is the greater interest.

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already decided, when the government has an interest in

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preventing the “unwarranted exposure” of its witnesses, that

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interest tends to outweigh a defendant’s right to cross-

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examine those witnesses before the trial.

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1195-98.

But Monsanto has

See 924 F.2d at

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The subpoena served on the receiver raises no risk of

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“unwarranted exposure of government witnesses,” but in any

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event, the district court did not consider any hearsay

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evidence that was based on the receiver’s analysis or

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conclusions.

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entirely on the documentary evidence in the case--the same

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documents that were available to the receiver.5

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to show what he would have gained by calling the receiver.

Rather, the district court based its decision

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Walsh fails

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

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in quashing Walsh’s subpoenas.

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For the foregoing reasons, we affirm the order of the
district court.

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