Dsi Associates LLC v. U.S.
| Decision Date | 02 August 2007 |
| Docket Number | Docket No. 05-6887-cv. |
| Citation | 496 F.3d 175 |
| Parties | DSI ASSOCIATES LLC, Movant-Appellant, v. UNITED STATES of America, Plaintiff-Appellee, Allegheny Energy, Inc., Allegheny Energy Supply Company, LLC, Merrill Lynch & Co., and Merrill Lynch Capital Services, Inc., Interested-Party-Appellees. Daniel L. Gordon, Defendant. |
| Court | U.S. Court of Appeals — Second Circuit |
David J. Monz, Updike, Kelly & Spellacy, P.C. (Barbara A. Frederick, of counsel), Hartford, CT, for Movant-Appellant.
Barbara A. Ward, Assistant United States Attorney for the Southern District of New York (Michael J. Garcia, United States Attorney, and Katherine Polk Failla, Assistant United States Attorney, of counsel), New York, NY, for Plaintiff-Appellee.
John Gueli, Shearman & Sterling LLP (Stuart J. Baskin and Ladan F. Stewart, of counsel), New York, NY, for Interested-Party-Appellees Merrill Lynch & Co. and Merrill Lynch Capital Services, Inc.
Before: McLAUGHLIN and SACK, Circuit Judges, and RAKOFF, District Judge*.
To resolve this appeal, we must determine whether a general creditor may intervene in a criminal forfeiture proceeding to assert its alleged rights to property subject to a criminal order of forfeiture or challenge the underlying validity of the forfeiture order, and if so, how.
On December 19, 2003, the defendant, Daniel L. Gordon, pled guilty in the United States District Court for the Southern District of New York (Gerard E. Lynch, Judge) to three counts of an information (the "Information") charging him with undertaking an elaborate scheme to defraud his employer, Merrill Lynch Capital Services, Inc., and Merrill Lynch & Co. (collectively "Merrill Lynch") of many millions of dollars. Count One charged him with wire fraud in violation of 18 U.S.C. § 1343. Count Two charged him with laundering the proceeds of the wire fraud in violation of 18 U.S.C. § 1956(a)(1)(B)(I). And Count Three charged him with conspiring to falsify Merrill Lynch's books and records in connection with the sale of its energy trading unit, Global Energy Markets ("GEM"), in violation of 18 U.S.C. § 371.1 The Information also included "forfeiture allegations" relating to the fraudulently obtained money.
According to the Information, in or before 2000, Merrill Lynch entered into a $500 million long-term energy call agreement with the Williams Energy Marketing and Trading Company. Merrill Lynch sought insurance to hedge against that obligation. In response, Gordon used an entity he had created and operated, Falcon Energy Holdings, S.A. ("Falcon"), to negotiate a fraudulent energy insurance contract with Merrill Lynch. On or about August 25, 2000, Merrill Lynch entered into the purported 11-year energy insurance agreement with Falcon, transferring approximately $43 million, its only payment pursuant to that agreement, to Falcon's bank account, which Gordon had opened for it in Switzerland.2
At about the same time, Gordon incorporated Ostrich Capital Partners, Inc. ("Ostrich") in the Marshall Islands. On or about September 21, 2000, Gordon transferred approximately $33 million from the Falcon account in Switzerland to an Ostrich account at the same bank. Gordon subsequently made several additional transfers from the Falcon account to accounts in the United States, including a total of $30 million to a bank account in New York in the name of Kings Holdings, LLC ("Kings Holdings"), a Delaware corporation, all the outstanding shares of which Gordon owned. These transfers underlie the money laundering charge against Gordon.
On or about November 14, 2000, Gordon used funds from Kings Holdings' New York bank account to purchase from the appellant DSI Associates LLC ("DSI") seventy percent of the outstanding shares of Daticon, Inc. ("Daticon"), a private document-management services company located in Connecticut. Kings Holdings acquired 7,923 of the 11,318 outstanding shares of Daticon from DSI for nearly $23 million in cash and an unsecured promissory note of $4 million. Gordon became chairman of Daticon's board of directors and received a salary and other income from the company from sometime in 2000 to sometime in 2002. DSI continued to hold thirty percent of Daticon's outstanding shares.
After learning of Gordon's scheme, representatives of the United States Attorney's office in Manhattan negotiated with representatives of DSI with a view toward finding a neutral third party to purchase all the shares of Daticon—those held by Kings Holdings and those held by DSI. The government intended to seize Kings Holdings' portion of the proceeds in a forfeiture proceeding as part of its planned criminal prosecution of Gordon.
On July 18, 2003, while negotiations with the government were proceeding, DSI filed suit against Kings Holdings and Gordon in Connecticut state court. DSI alleged that the two had defaulted on the unsecured promissory note that was a part of the consideration they paid to DSI for the Daticon stock. At the same time, DSI sought and received an ex parte prejudgment attachment on $5 million worth of Kings Holdings' assets.
On August 6, 2003, DSI and Kings Holdings settled their dispute and terminated the Connecticut proceedings. Under the settlement, the prejudgment attachment was vacated and in its place Kings Holdings executed a non-negotiable, unsecured demand promissory note for $2.5 million (the "Settlement Note" or the "Note"). The settlement agreement provided that the Settlement Note could be enforced by a claim against the proceeds of a sale of Daticon, except in the event that the government placed any such proceeds in an escrow account or initiated a forfeiture proceeding against Kings Holdings. The parties had received notice from the government, however, that it intended to initiate forfeiture proceedings that would include any Daticon sale proceeds. They therefore agreed that if DSI attempted to collect on the Settlement Note from the proceeds of the sale of Daticon after such a proceeding had been initiated, it would do so within the "context of" the criminal forfeiture proceeding unless the United States Attorney for the Southern District of New York "consented to any other means of collection." Letter Agreement dated Aug. 6, 2003, at 1.
In September 2003, pursuant to an arrangement with the government, Kings Holdings and DSI sold their shares of Daticon to a neutral third party3 with the active monitoring and approval of the government. Approximately $22.9 million of the sale proceeds were immediately placed in a government account pending forfeiture proceedings. Approximately $6.5 million of the proceeds were deposited in an escrow account (the "Escrow Account"), to be held there until the end of the following year, to provide for post-acquisition contingencies specified in the purchase agreement, which primarily related to the anonymous third-party purchaser. The remaining $6 million was transferred into a separate escrow account (the "Separate Escrow Account") until December 26, 2003, to be available in the event that post-acquisition challenges arose relating to Gordon's ownership and control of Kings Holdings. If no challenges were made by that date, the money would be transferred from the Separate Escrow Account to a government account awaiting forfeiture.
On October 15, 2003, after making a demand for payment in full of the Settlement Note, DSI filed another complaint in Connecticut state court based on the Note. DSI applied to the court for a second ex parte prejudgment attachment order against the sale proceeds that had been put into escrow funds in the amount of $2.5 million, plus interest. That day, the Connecticut court entered a prejudgment attachment for $2.5 million against the Separate Escrow Account.4 On December 26, 2003, when no claims other than those embodied in the court's attachment order on the $6 million Separate Escrow Account funds had been made, that amount less the $2.5 million that remained the subject of the prejudgment attachment was paid into the government account. The $2.5 million apparently remains in the Separate Escrow Account.
Meanwhile, on December 19, 2003, Gordon pled guilty to all three charges contained in the Information. Pursuant to a written plea agreement, he agreed to forfeit the $43 million he initially received pursuant to the fraudulent scheme, as well as any interest in property derived from proceeds traceable to the wire fraud offense or involved in the money laundering offense. On February 20, 2004, as part of Gordon's sentence, the district court entered a Preliminary Order of Forfeiture requiring the defendant to forfeit $43 million and any right, title, and interest in specific property described in the Preliminary Order.
Title 21 U.S.C. §§ 853(n)(1) and (2) set forth the procedure for asserting, in an ancillary proceeding, a third-party claim with respect to property subject to a criminal order of forfeiture:
(1) Following the entry of an order of forfeiture under this section, the United States shall publish notice of the order and of its intent to dispose of the property in such manner as the Attorney General may direct. The Government may also, to the extent practicable, provide direct written notice to any person known to have alleged an interest in the property that is the subject of the order of forfeiture as a substitute for published notice as to those persons so notified.
(2) Any person, other than the defendant, asserting a legal interest in property which has been ordered forfeited to the United States pursuant to this section may, within thirty days of the final publication of notice or his receipt of notice under paragraph (1), whichever is earlier, petition the court for a hearing to adjudicate the validity of his alleged interest in the property. . . .
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