Lead Opinion
Vеrnon Smith challenges the district court’s grant of summary judgment in favor of the government in this action seeking the forfeiture of two cashier’s checks in the aggregate amount of $122,000. Discerning no error, we affirm.
I.
On August 9, 2007, federal agents seized two cashier’s checks from Vernon’s home during a search executed as part of a fraud investigation into Target Oil and Gas Corporation (“Target Oil”), a company run by Vernon’s sons that engaged in speculative oil drilling. A grand jury indicted the sons, Miсhael and Christopher, along with four other Target Oil employees for offenses arising from a fraudulent scheme to induce investment in the drilling business. The four employees pleaded guilty to conspiracy to commit mail and wire fraud, but Michael and Christopher proceeded to trial.
The trial evidence showed that Target Oil mailed potential investors information packets that often misrepresented past success and exaggerated future pоtential. United States v. Smith,
Next came the case we review here, the government’s in rem civil forfeiture action to seize the two cashier’s checks in the amount of $60,649.64 and $100,000. Vernon claimed ownership of the checks, and the government then moved for summary judgment, pointing to evidence that Vernon used investor money from Target Oil to рurchase the checks. The district court found that $122,000 of investor money funded the cashier’s checks, and because the company’s scheme to defraud was “so pervasive[,] ... any money taken from investors^] funds can be considered the proceeds of a scheme or artifice to defraud.” (R. 43, Am. Op. & Order at 16-
II.
We review de novo the district court’s grant of summary judgment, Briscoe v. Fine,
A. Proceeds
Vernon first argues that the district court “applied the wrong legal standard” in concluding that the $122,000 constituted forfeitable proceeds. Under the civil forfeiture statute, ‘“proceeds’ means property of any kind obtained directly or indirectly, as the result of the commission of the offense giving rise to the forfeiture.” 18 U.S.C. § 981(a)(2)(A). According to Vernon, the court should not have treated all of Target Oil’s investor funds obtained during the conspiracy as “proceeds” because the government needed to prove that the overt acts of fraud directly generated the funds Vernon claimed.
But the statutory language — defining proceeds to include property obtained “directly or indirectly” from the crime — and our criminal forfeiture cases endorsе no such stringent standard. For instance, in Michael and Christopher’s appeal, we held that the investor money that funded the purchase of the cashier’s checks constituted forfeitable proceeds because “the transactions ‘all resulted directly or indirectly from a conspiracy to commit fraud.’ ” Smith,
Vernon argues that his circumstances fall outside of the standard aрplied by our precedent for two reasons. First, he denies the existence of the conspiracy to defraud. But our previous decision held otherwise. See Smith,
B. Investor Funds
Next, Vernon argues that district court erred in tracing $75,000 used to purchase one of the cashier’s checks to investor funds, offering a different explanation — unrelated to the fraud — for how the money appeared in his account. But Vernon initially acknowledged in his response to the government’s summary-judgment motion that the government conducted an “extensive' review” of the relevant bank rеcords and could trace the amount to investor funds. (R. 31-1, Mem. at 3, 5 (requesting the court overrule the government’s summary judgment motion as to “portions of the cashier’s checks,” and acknowledging that $122,000 came from investor funds, necessarily including the $75,000 that bought cashier’s check number 0022175).) Indeed, an exhibit that the government attached to its verified complaint reflects this exhaustive review. It details how Target Oil purchased a compressor with investor funds before selling it for $75,000 and depositing that money into its operating account. Then, Michael withdrew $75,000 from that account and purchased a cashier’s check in that amount, depositing it in an account held jointly with Vernon, his father. Vernon, in turn, withdrew that $75,000 to apply it to the purchase of the seized $100,000 cashier’s check. (R. 1-5, Bottoms Aff. Ex. B at 1-6.)
Vernon now disparages that exhibit, arguing that it cannot qualify as “legally competent evidence,” though he lodges no specific complaints with its detailed transactional history. (Reply Br. at 21-22.) Even if Vernon’s earlier concession does not estop him from changing positions on appeal, see Johnson v. U.S. Postal Serv.,
Vernon’s alternative theory for the $75,000 similarly lacks merit. He points to the affidavit of a Target Oil accountant that states the $75,000 came from the legitimate sale of a drill rig, not the compressor purchased with investor funds. (Appellant Br. at 23, 36-38; R. 34-2, Butler Aff. ¶ 6.) But Vernon offers no evidence that his sons or their companies deposited those sale proceeds into the Target Oil account (Citizens Bank 2016443) that ultimately funded the seized cashier’s check. The accountant has no firsthand knowledge of that; his belief that the deposit occurred stems entirely from his “recollection of a conversation with Mi[chael] Smith in April 2004.” (See R. 34-2, Butler Aff. ¶ 6.) We cannot credit such conjecture. See Fed.R.Civ.P. 56(c)(4) (“An affidavit ... must be made on personal knowledgе.”). And though Vernon offered a bank statement, check, and deposit slip showing that
C. Evidentiary Hearing
Vernon also contends that the district court needed to conduct an evidentiary hearing on his motion to correct the judgment because, according to Vernon, the government never carried its initial summary-judgment burden of tracing the investor money to “specific acts of mail fraud.” We review this claim for an abuse of discretion. Reynolds v. Bagley,
D. Innocent Owner
After the government established that the cashier’s checks were subject to forfeiture, the burden shifted to Vernon to demonstrate that he qualified as an “innocent owner” of the seized property. Vernon maintains that the district court erred in determining that he could not satisfy the innocent owner defense under 18 U.S.C. § 983(d)(2)(A). That provision аpplies to “property interests] in existence at the time the illegal conduct giving rise to the forfeiture took place.” Vernon claims that he had a pre-existing interest in the money, deposited by Michael, that he used to purchase the seized cashier’s checks, because he loaned Michael “in excess of $150,000 around 1980 so that [his son] could set up a sawmill business.” (R. 34-1, Smith Aff. ¶ 5.) Accepting this vague account of a 30-year-old business loan for the sake of argument, § 983(d)(2)(A) provides no protection for such an unsecured loan. See 18 U.S.C. § 983(d)(6)(B)(i) (stating that the term “owner” excludes “person[s] with only a general unsecured interest in, or claim against, the property or estate of another”). Accordingly, Vernon’s protectable ownership interest in the funds used to purchase the seized cashier’s - checks arose when Michael deposited them into their joint account between May 2003 and April 2004 — ie., when Vernon could exercise dominion over the funds. Because these deposits occurred after the start of his sons’ conspiracy in February 2003, see Smith,
m.
We AFFIRM.
Dissenting Opinion
dissenting.
I respectfully dissent. In my view, genuine issues of material fact preclude summary judgment on the question of whether the investor funds used to purchase the cashier’s checks are, in fact, traceable to the conspiracy to defraud, and on the question of whether Claimаnt Vernon Smith can establish the “innocent owner” defense. I would therefore vacate the district judge’s orders and remand the case for an evidentiary hearing.
The government bears the burden of proving, by a preponderance of the evidence, that the property at issue is subject to forfeiture. See 18 U.S.C. § 983(c). Here, the cashier’s checks at issue are subject to forfeiture only to the extent that the investor funds used to purchase them
It appears to be undisputed that the investor funds that were ultimately used to purchase the $60,649.64 cashier’s check were received by Target Oil and Gas (“Target”) and deposited in the First Southern National Bank account between May and July of 2003. Likewise, it is undisputed that the $75,000 used to purchasе the $100,000 cashier’s check was deposited in the Whitaker Bank account on April 9, 2004. The district court found that this $75,000 deposit was traceable to Target’s sale of an IR compressor, originally purchased by Target in late 2003 with investor funds.
Assuming arguendo that all of the investor funds used to purchase the two cashier’s checks were received by Target in 2003, the key question is whether these funds were obtained as a result of the “scheme or artifice to defraud.” As the district court corrеctly noted, the funds were received from Target investors during the time period of the conspiracy as alleged in the criminal indictment, “[f]rom on or about February 18, 2003, and continuing through on or about February 2008.” However, in my view, under the unique circumstances of this case, that fact is not dispositive.
In order to obtain a conspiracy conviction, the government need not prove the exact temporal boundaries of the conspiracy. See United States v. Willis,
Here, the indictment alleges that the conspiracy began “on or about February 18, 2003.” Yet, the first overt act alleged did not occur until March 24, 2004, when Target mailed a packet of materials to an investor. The indictment itself alleges no specific acts of wrongdoing between February 18, 2003, and March 24, 2004.
In United States v. Rogers,
In reliance on United States v. Warshak,
Vernon Smith maintains that all investor funds deposited to Target’s accounts in 2003 were derived from legitimate investor transactions that pre-dated any wrongdoing, and that the court’s “pervasive fraud” approach, as applied in this ease, contravenes the statutory requirement that only those proceeds traceable to the conspiracy to defraud are subject to forfeiture. I agree.
Warshak is factually distinguishable. In that case, defendants sold herbal supplements that purportedly enhanced male sexual performance. From its inception, the product was bogus. The doctors who purportedly develоped the supplement were entirely fictitious, and the advertisements touted fictitious consumer satisfaction studies. Defendants were convicted of fraud and ordered to forfeit $459 million in proceeds, the entirety of their company’s revenue. Defendants appealed that decision, arguing that, although there was evidence of fraud early on, they thereafter ran a legitimate business. They argued that the portion of revenue earned after 2003 was. not subject to forfeiture. The court disagreed, concluding that the fraudulent scheme was so pervasive that all revenue was subject to forfeiture. The court found that, even though the company “attempted to affect an air of legitimacy, the very nucleus of its business model remained rotten and malignant,” and the “entire operation was permeated with fraud.” Id. at 332. The court rejected the argument that the later sales were legitimate, сoncluding that all sales were the outgrowth of the company’s fraudulent beginnings. Id.
In contrast to Warshak, Target’s beginnings were apparently legitimate. Notably, of the more than $15 million in investor funds received by Target, the government alleged that only $3.2 million was fraudulently obtained. Moreover, of Target’s more than 150 well projects, only seventeen of those projects were the subject of the indictment. This implies that a significant portion of Target’s business transactions were not tainted by frаud. The court’s “pervasive fraud” approach, as applied to the facts of this particular case, can lead to a result that is contrary to law, given that unless the funds at issue are traceable to the conspiracy, they are not subject to forfeiture.
Vernon Smith notes that the jury acquitted the defendants on many of the counts of mail fraud, and the jury found fraud in connection with just eight well projects. None of the investor funds that were used to purchase the cashier’s checks were traceable to those eight projects. Smith
Nevertheless, one cannot determine which property is subject to forfeiture without first identifying the “boundaries of the overall scheme.” In this case, for the reasons set forth above, the temporal boundaries of that scheme have not been sufficiently defined. The government must prove, by a preponderance of the evidence, that the conspiracy to defraud was in existence when the investor funds at issue were acquired by Target. If those funds were aсquired before the conspiracy was formed, they cannot logically be deemed “proceeds” of the conspiracy, and would not be subject to forfeiture. For this reason, an evidentiary hearing is required.
The question of when the conspiracy to defraud began is also crucial to determining whether Vernon Smith can establish that he is an “innocent owner” of at least some of the funds at issue. An innocent owner’s interest in property is not subject to forfeiture. 18 U.S.C. § 983(d)(1). The relevant statutory provision reads as follows:
With respect to a property interest in existence at the time the illegal conduct giving rise to forfeiture took place, the term “innocent owner” means an owner who—
(i) did not know of the conduct giving rise to forfeiture; or
(ii) upon learning of the conduct giving rise to the forfeiture, did all that reasonably could be expected under the circumstances to terminate such use of the property.
18 U.S.C. § 983(d)(2)(A). In this case, Vernon Smith knew nothing of the conduct giving rise to the forfeiture of the cashier’s checks. The key issue is whether Vernon Smith’s property interest in those cashier’s checks arose before or after the illegal conduct at issue took place.
Vernon argues that Michael gave him the money to repay a loan made more than thirty years earlier. Assuming arguendo that this is true, it was an unsecured loan. As such, Vernon had no protectable property interest in the outstanding debt. See 18 U.S.C. § 983(d)(6)(B)(i) (providing that the term “owner” does not include “a person with only a general unsecured interest in, or claim against, the property or estate of another”). Vernon’s property interest in the money did not arise until Michael gave it back to him and he exercised control over it. With respect to the money used to purchase the first cashier’s check, it appears that Michael gave Vernon these funds between May of 2003 аnd August of 2004. The second cashier’s check was purchased with funds given to Vernon by Michael on April 9, 2004.
For these reasons, I believe that the district court erred in granting the government’s motion for summary judgment and in denying Vernon Smith’s request for an evidentiary hearing. I would therefore vacate the district court orders and remand the case for further proceedings.
Notes
. Vernon Smith maintains that the $75,000 deposit instead resulted from the sale of a drill rig by Kentucky-Indiana Oil & Gas and involved no tainted investor funds.
. In fаct, the year 2003 is mentioned just one other time in the indictment. Paragraph 11 alleges that: "As part of the conspiracy, the Defendants intentionally failed to disclose to potential investors numerous material facts, including, but not limited to: ... that the Kentucky Department of Financial Institutions entered into an Agreed Order with Target Oil and Defendant Michael Smith on February 14, 2003," concerning the accreditation of potential investors and the provision of offering circulars. Although the Agreed Order was allegedly signed in February of 2003, it is not clear when the alleged intentional concealment took place.