USA v. Schlegel et al, 795 F. Supp. 2d 219

Background

In October 2007, the Government charged Brooks and Hatfield with securities, mail, and wire fraud, and restrained bank accounts and seized items including three cars, 6,007,099 DHB shares, gold watches, designer pens, and a jewel-encrusted belt buckle.
On September 14, 2010, the jury convicted Brooks on multiple counts and Hatfield on several counts, with some acquittals, in relation to the Indictment.
The parties waived jury forfeiture, leading to protracted non-jury forfeiture proceedings in November 2010 and post-hearing briefs through April 2011.
The Government moved for a preliminary order of forfeiture under 18 U.S.C. § 981(a)(1)(C); the Court granted in part, denied in part, and reserved judgment pending supplemental calculations and briefing.
The Court addressed whether forfeiture should include all proceeds or only the increment caused by fraud, and whether intervening authorities (e.g., Treacy) altered the measurement approach.
The Court ultimately declined to issue a final forfeiture amount, directing revised calculations excluding the PACA-related amounts and reserving judgment on certain assets and tracing issues.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
How should forfeiture be measured under § 981(a)(1)(C)?	Brooks and Hatfield alleged that all illicit proceeds should be forfeited.	The Court should only forfeit the difference between inflated value and legitimate value (net of non-fraudulent gains).	Only the difference between inflated value and legitimate sale value is forfeitable.
Does Treacy require net profits rather than gross proceeds for forfeiture?	Treacy supports forfeiture of net profits from fraud.	Treacy dictates broader or different measurement; court should rethink.	Treacy supports the same measurement approach as the April 21 Order; the Court applies a differential (net) concept rather than forfeiting gross proceeds.
What methods should determine ill-gotten gains for stock sales? (event studies vs. cash-flow methods)	Event studies accurately measure loss causation and ill-gotten gains.	Event studies are unreliable and inappropriate for forfeiture; rely on discounted cash flow and P/E analyses.	Backward- and forward-looking event studies are ignored; forfeiture should be based on discounted cash flow and P/E analyses, with revisions excluding PACA.
Should the unauthorized compensation and PACA-related schemes be included in forfeiture against Brooks and Hatfield?	Proceeds from both schemes are forfeitable against both defendants when tied to the conspiracies.	Evidence insufficient to prove fraud or intent for certain WGH Consulting payments; limited forfeiture.	Brooks forfeit full proceeds of the unauthorized compensation scheme; Hatfield's $94,000 WGH Consulting payments denied forfeiture due to insufficient proof of fraudulent proceeds.
How should restated financials and PACA inventory fraud affect forfeiture calculations?	Restated figures support larger forfeiture; PACA should be included where appropriate.	Restatements and PACA should be handled carefully; exclusion may be warranted where events post-date trades.	The Court requires revised calculations omitting PACA effects; restated financials bolster the government’s approach but must be applied consistently with the Indictment.

Key Cases Cited

United States v. Gaskin, 364 F.3d 438 (2d Cir. 2004) (preponderance standard for forfeiture; forfeiture as part of sentencing)
United States v. Treacy, 639 F.3d 32 (2d Cir. 2011) (management of measurement date; net vs gross profits in forfeiture; not exact science)
United States v. Lizza Industries, Inc., 775 F.2d 492 (2d Cir. 1985) (gross vs net profits in forfeiture; punitive nature of forfeiture)
United States v. Zvi, 168 F.3d 49 (2d Cir. 1999) (proceeds as profits from fraud; definition of proceeds)
United States v. Awad, 598 F.3d 76 (2d Cir. 2010) (forfeiture applies irrespective of defendant's assets; forfeiture in non-securities context)