United States v. Bailey
| Decision Date | 22 February 2012 |
| Docket Number | CRIMINAL CASE NO. 1:11cr10 |
| Court | U.S. District Court — Western District of North Carolina |
| Parties | UNITED STATES OF AMERICA, Plaintiff, v. JAMES W. "BILL" BAILEY, JR., PETITIONS OF BRIAN D. GARDZE, CARLTON LEE MATTHEWS, STEPHEN M. TODD, DANIEL F. RUSSIAN, BRUCE H. KEEL, and GREGORY MCCARTHY. |
THIS MATTER is before the Court on the Motion by Claimants Brian D. Gardze, Carlton Lee Matthews, Stephen M. Todd, Daniel F. Russian, Bruce H. Keel, and Gregory McCarthy ("Petitioners") to clarify the Court's Order of April 8, 2011 regarding the calculation of their interests in certain certificated securities in Sage Automotive Interiors, Inc. ("Sage"). [Doc. 226]. The Court held a hearing on this Motion on December 12, 2011. After careful consideration of the testimony and exhibits presented at the hearing, theparties' post-hearing filings1 , and the entire record of this case, the Court hereby enters the following findings of fact and conclusions of law.
1. On February 1, 2011, the Defendant was charged in a Bill of Information with filing false tax returns, in violation of 26 U.S.C. § 7206(l), committing mail fraud, in violation of 18 U.S.C. § 1341, and committing securities fraud, in violation of 15 U.S.C. §§ 78j(b) and 78ff, 17 C.F.R. § 240.10b-5, and 18 U.S.C. § 2. [Doc. 1].
2. The Bill of Information contained a Notice of Forfeiture, which stated the Government's intent to pursue the forfeiture of the Defendant's interest in various property pursuant to 18 U.S.C. § 982 and 28 U.S.C. § 2461(c), including "[a]ny and all shares or percentile ownership of ... Sage Automotive." [Doc. 1 at 11].
3. The Defendant entered a plea of guilty to the Bill of Information on February 16, 2011. [Doc. 15].
4. Following the Defendant's plea of guilty, the Government and the Defendant presented the Court with a proposed Consent Order and Judgment of Forfeiture ("Consent Order"), pursuant to which the Defendant agreed to forfeit, among other things, his interest in 110,000 shares of Sage that were seized during the course of the Government's investigation. [Doc. 16 at 8]. Beyond the Defendant's consent to the proposed forfeiture and his stipulation as set forth in the Plea Agreement that he "has or had a possessory interest or other legal interest in each item or property" identified in the Bill of Information [Doc. 3 at 118(b)], the Government presented no evidence supporting the forfeiture of the Sage shares. The Consent Order was entered on February 16, 2011.
5. The Petitioners and others (collectively "the Sage Petitioners") filed their Verified Claims on March 11, 2011, seeking to adjudicate the validity of their interest in the Sage certificated securities ("Sage Certificates" or "Certificates"). [Docs. 23-38].
6. In late March 2001, Sage entered into an agreement to be acquired by another company. As part of this acquisition, Sage shareholders were offered the option to purchase stock in the acquiring company using the proceeds of the sale of their Sage stock. Due to the need to redeem the Certificates in the sale process and to preserve their rights to reinvest with the acquiring company, the Sage Petitioners moved for an expedited hearing on their claims.2 [Doc. 48].
7. The Court granted the Petitioners' motion and held an expedited hearing on April 5, 2011.
8. The Court issued an Order on April 8, 2011 ("Sage Order"), directing the return of the Certificates to the Sage Petitioners subject to certain requirements. [Doc. 164].
9. Particularly, the Court concluded that because the Defendant had obtained money from the Sage Petitioners through fraudulent means, a constructive trust arose in those funds at the time that they were conveyed to the Defendant. [Id. at 7]. Having determined that the Sage Petitioners had a valid legal interest in the funds under state law and that such interest was superior to any interest the Defendant may have had, the Court then conducted a tracing analysis. Using the bank record summaries that were prepared by the Government and introduced at the hearing without objection by the Sage Petitioners ("the Bank Summaries"), the Court applied the lowest intermediate balance rule (LIBR) to trace the Sage Petitioners' funds and determine the amount of the Certificates' value that should be returned to them. The Court recognized a constructive trust on the entirety of the Certificates issued on behalf of some of the Sage Petitioners. [Id. at 8-9]. With respect to the present Petitioners, for whom Certificates were purchased in whole or in part with commingled funds, the Court awarded only a percentage of the Certificates' value. [Id. at 9-10]. 10. Some of those Petitioners who received only a percentage of the Certificates' value filed a Motion to Clarify the Order on June 7, 2011, seeking reconsideration of the Court's Order regarding the calculation of their percentage ownership of the Certificates.3 With regard to Petitioner Stephen Todd's interest, the Petitioners had also discoveredan error in the Bank Summaries that had been prepared by the Government that had an effect on the result. [Doc. 226].
11. On November 10, 2011, the Court vacated the Sage Order with respect to Petitioners Gardze, Matthews, Todd, Russian, Keel, and McCarthy and set a hearing for December 12, 2011. The Court further stated that the filings in the ancillary proceeding had caused it to question the basis for the preliminary order of forfeiture obtained by the Government and therefore, the Government would be required to show the requisite nexus between the property subject to the forfeiture order and the offenses to which the Defendant pled guilty. [Doc. 306].
12. The hearing regarding Petitioners' Motion to Clarify was held on December 12, 2011. During the hearing, the Government presented the testimony of five witnesses and offered into evidence voluminous documents as exhibits. At the conclusion of the Government's nexus presentation, Petitioners submitted nine exhibits of documents concerning the Petitioners' interests in the Certificates. [Doc. 318].
13. From approximately January 2000 to December 2010, the Defendant committed a series of acts to defraud his investors. [Doc. 1 at ¶1].
14. The Defendant founded and operated Southern Financial Services Inc., 1031 Exchange Services, LLC, and AVL Properties, LLC (collectively, "the Companies") in Asheville, North Carolina. [Id. at ¶2].
15. Through Southern Financial, the Defendant offered different investment vehicles to his clients, including: (a) Asset Management Accounts, (b) Investment Accounts; and (c) Self-Directed IRA Asset Management Accounts. When clients forwarded funds to the Defendant to invest, he would deposit the money in Southern Financial bank accounts, regardless of what type of investment the investor selected. [Id. at ¶¶4, 5].
16. While the Government maintains that the Defendant engaged in one overarching fraudulent scheme, the evidence reveals that the Defendant engaged in various fraudulent schemes with his investors' funds.4 Forexample, some clients received regular account statements which listed bogus investments and fabricated rates of return. [Transcript of Dec. 12, 2011 Hearing, Doc. 318 at 12-45]. With respect to other clients, the Defendant promised to purchase certain assets with funds transferred from the clients' individual retirement accounts ("IRAs") and to act as a custodian thereof, presumably so as to maintain the tax-sheltered nature of the IRA funds. These clients provided funds to the Defendant with the specific directive to purchase a particular asset, such as real estate, or in the case of the Sage Petitioners, stock certificates. While the Defendant may have made fraudulent statements to obtain some of these funds and may have commingled such funds once obtained, these purchases were in fact completed as directed.
17. When more of his victims began to request withdrawals, the Defendant began a "check-kiting" scheme whereby he would deposit checks in one of his Companies' accounts, then write a check out of that account to anaccount at another bank, utilizing the "float" time between the processing of the checks to make any necessary lulling payments to his "investors." [Transcript of Dec. 12, 2011 Hearing, Doc. 318 at 92-93; Defendant's Aff., Doc. 140].
18. Eventually, the Defendant was unable to circulate the checks quickly enough between the accounts because of an overdraft at one institution. He was thus unable to continue his schemes and his offenses were discovered by his bank, HomeTrust, which also notified the authorities. [Transcript of Dec. 12, 2011 Hearing, Doc. 318 at 50-51].
19. In 2008, the entity that was to become Sage was a division of Milliken Corporation ("Milliken"), a textile and chemical company headquartered in Spartanburg, South Carolina. When Milliken decided to withdraw from the automotive market and close the division, the management team of the division decided to pursue incorporating and operating as an independent entity. Over a very short period of time, the management team attracted significant venture capital and converted the division into a privately-held company, which became Sage. Themanagers contributed significant capital from their Milliken retirement accounts and many of the division's employees' retirement accounts.
20. In order to utilize the retirement account funds, it was necessary to transfer the funds from their existing retirement accounts with Milliken to new, self-directed Individual Retirement Accounts ("IRAs"). The Petitioners therefore contacted Southern Financial. The Defendant met with the Petitioners in Greenville, South Carolina, and discussed their need for self-directed IRAs. Specifically, he informed them that he was properly licensed and convinced them that he could set up the appropriate...
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