United States v. Bailey

• Citation: 926 F.Supp.2d 739
• Decision Date: 25 February 2013
• Docket Number: Criminal Case No. 1:11–cr–00010–MR–DLH.
• Court: U.S. District Court — Western District of North Carolina
• Parties: UNITED STATES of America, Plaintiff, v. James W. “Bill” BAILEY, Jr., Defendant.

926 F.Supp.2d 739

UNITED STATES of America, Plaintiff,

v.James W. “Bill” BAILEY, Jr., Defendant.

Criminal Case No. 1:11–cr–00010–MR–DLH.

United States District Court,

W.D. North Carolina,

Asheville Division.

Feb. 25, 2013.

Richard Lee Edwards, United States Attorney, Corey F. Ellis, AUSA, Asheville, NC, Benjamin Bain–Creed, William A. Brafford, U.S. Attorney's Office, Charlotte, NC, Kurt W. Meyers, Charlotte, NC, for Plaintiff.

Ronald Kevin Payne, Long, Parker, Warren, Anderson & Payne, P.A., Asheville, NC, for Defendant.

MEMORANDUM OF DECISION AND ORDER

MARTIN REIDINGER, District Judge.

THIS MATTER is before the Court on the ancillary petitions filed by former clients of the Defendant James W. “Bill” Bailey, Jr., a financial advisor who has admitted to engaging in a massive Ponzi scheme to defraud investors of millions of dollars over the course of a decade. The Petitioners whose matters are addressed by this Order forwarded funds from their individual retirement accounts (IRAs) to the Defendant for the purpose of purchasing real estate, or funding real estate purchases by others, with their IRA funds. Unlike so many of the Defendant's other clients, whose funds were stolen and never invested as promised, the present Petitioners each received the real estate asset they had instructed the Defendant to purchase within the time promised. The Government now seeks the forfeiture of these properties from the Petitioners on the theory that these assets constitute the proceeds of the Defendant's fraud. For the reasons that follow, the Court rejects the Government's position and therefore orders that these properties should be removed from the preliminary order of forfeiture.

I. PROCEDURAL BACKGROUND

On February 1, 2011, the Defendant James W. “Bill” Bailey was charged in a Bill of Information with filing false tax returns, in violation of 26 U.S.C. § 7206(1); 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]. 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 properties pursuant to 18 U.S.C. § 982 and 28 U.S.C. § 2461(c), including “any and all assets titled in the name of LLCs established by Defendant and/or Southern Financial Services for the purpose of managing and/or purchasing assets....” [ Id. at 3].¹

The Defendant entered a plea of guilty to the Bill of Information on February 16, 2011. [Doc. 15]. 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 the properties identified in the Notice of Forfeiture in the Bill of Information. [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 ¶ 8(b) ], the Government presented no evidence supporting the forfeiture of these properties. The Consent Order was entered by the Magistrate Judge on February 16, 2011.

On March 11, 2011, several petitioners (collectively “the Sage Petitioners”) filed Verified Claims, seeking to adjudicate the validity of their interest in the certificated securities of Sage Automotive Interiors, Inc. (“Sage Certificates” or “Certificates”) that were identified in the Consent Order. [Docs. 23–38]. Other claims asserting interests in various properties identified in the Consent Order quickly followed. [ See Docs. 40, 41, 42, 43, 46, 47, 62, 71, 72, 73, 74, 76, 79, 80, 82, 83, 85, 86, 87, 88, 89, 92, 93, 94, 96, 97, 98, 99, 100, 101, 103, 104, 110, 111, 113, 114, 115, 119, 120, 121, 122, 131, 168, 171, 174, 183, 186, 187, 200, 292].

On March 22, 2011, the Sage Petitioners moved for an expedited hearing on their claims. [Doc. 48]. The Court granted the Sage Petitioners' motion and held an expedited hearing on April 5, 2011. Following the expedited hearing, on April 8, 2011, 2011 WL 1343192, the Court entered an Order (“the First Sage Order”), directing the return of the Certificates to the Sage Petitioners subject to certain requirements. [Doc. 164]. 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 other Sage 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].

Several of those Sage 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. [Doc. 226]. While that motion was pending, the Court granted the motions of various other Petitioners to conduct discovery for a period of sixty (60) days. [Doc. 230].

In July 2011, the Court referred the remaining claims to the Magistrate Judge for the purpose of conducting such ancillary proceedings as may be required to adjudicate these claims [Doc. 239]. The Magistrate Judge proceeded to schedule hearings on the Petitioners' claims for the end of September 2011. [Doc. 241].

On September 7, 2011, this Court entered an Order staying all proceedings pending resolution of the Sage Petitioners' Motion to Clarify. [Doc. 286]. In ordering the stay, the Court noted that reconsideration of the First Sage Order “may have a significant impact on the manner in which the other pending ancillary claims are addressed by the parties and resolved by this Court.” [ Id.]. Subsequently, on November 10, 2011, 2011 WL 5509027, the Court granted the Sage Petitioners' Motion to Clarify and vacated the First Sage Order with respect to these Petitioners (“the Second Sage Order”). A hearing was set to hear these Petitioners' ancillary claims on December 12, 2011. [Doc. 306].

In the Second Sage Order, the Court stated that the filings in the ancillary proceedings had caused it to question the basis for the preliminary order of forfeiture obtained by the Government:

The Court determines that rehearing of this matter is necessary for another, more fundamental reason as well. Review of the Motion for Reconsideration, as well as the myriad of filing[s] by other claimants since the original Sage Hearing, has led the Court to question whether the Government satisfied its initial burden of proving the requisite nexus between the Defendant's crimes and the property sought to be seized pursuant to the preliminary order of forfeiture.

[Doc. 306 at 12]. Accordingly, the Court determined that the Government would be required to show the requisite nexus between each property subject to forfeiture pursuant to the Consent Order and the offenses to which the Defendant pled guilty before the Petitioners would be required to go forward with their claims. [Id.].

The hearing regarding the Sage 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. Included among these witnesses were former clients of the Defendant, who had established Investment Management or Asset Management Accounts with Southern Financial. These witnesses testified that the Defendant never purchased any of the stocks, bonds, or securities that he had been instructed to purchase, and that he had provided them false account statements to hide his fraud. At the conclusion of the Government's nexus presentation, the Sage Petitioners submitted nine exhibits of documents concerning their interests in the Sage Certificates. [Doc. 318]. The parties were given the opportunity to file post-hearing briefs, as well as proposed findings of fact and conclusions of law for the Court's consideration. [Docs. 319, 320, 321, 322, 323, 324].

On February 22, 2012, 2012 WL 569744, the Court entered an Order granting the Petitions of those Sage Petitioners who challenged the First Sage Order, and the Consent Order and Judgment of Forfeiture was amended to reflect their superior rights in the Sage Certificates. [Doc. 331].

In light of the Court's Order, a status conference was held with counsel on March 8, 2012 to address the remaining ancillary claims. At that time, the Government advised the Court that it did not intend to offer any additional evidence regarding the nexus between the Petitioners' property that had been seized and the Defendant's crimes. As a consequence of this status conference, the Court ordered motions to dismiss and/or summary judgment to be filed by April 23, 2012. [ See Text–Only Order entered March 8, 2012]. With respect to Petitioner Mark Fox, the parties were given until May 14, 2012 to file such motions. [ Id.]. Pursuant to the Court's Order, the remaining Petitio...