United States v. Petix

• Decision Date: 01 December 2016
• Docket Number: 15-CR-227A
• Parties: United States of America v. Richard Petix, Defendant.
• Court: U.S. District Court — Western District of New York

United States of America v. Richard Petix, Defendant.

15-CR-227A

UNITED STATES DISTRICT COURT WESTERN DISTRICT OF NEW YORK

December 1, 2016

Report and Recommendation

I. INTRODUCTION

In Count Two of the superseding indictment that it has filed, the Government accuses defendant Richard Petix ("Petix") of running an unlicensed money transmitting business in violation of 18 U.S.C. § 1960. The financial instrument at the heart of the alleged unlawful business, however, is not cash, checks, notes, or other aspects of the United States monetary system. The financial instrument in question is the digital virtual currency known as Bitcoin.¹ Does the transmission of Bitcoin come within the reach of Section 1960?

Petix says no and has filed a motion (Dkt. No. 23) to dismiss Count Two accordingly. Petix argues that Bitcoin is private property like precious metals and that he did not operate any business connected to Bitcoin that would fall under Section 1960. The Government counters that Bitcoin is just the latest example of a medium of exchange that Section 1960 was written to regulate.

The Hon. Richard J. Arcara has referred this case to this Court under 28 U.S.C. § 636(b). (Dkt. No. 4.) The Court held oral argument on August 24, 2016. After considering the parties' arguments and papers including supplemental papers, the Court respectfully recommends granting Petix's motion.

II. BACKGROUND

This case concerns allegations that Petix lied to his probation officers about using computers, in particular using them in connection with the decentralized virtual currency known as Bitcoin. Petix's relationship with the USPO stemmed from a criminal conviction in this District for knowingly transporting child pornography in interstate commerce, in violation of 18 U.S.C. § 2252A(a)(1). (See generally Case No. 06-CR-6007.) On January 16, 2009, District Judge Charles J. Siragusa sentenced Petix to a term of imprisonment of 60 months and a term of supervised release of 30 years. (Dkt. No. 26-1 at 3.) As a special condition of supervision, Judge Siragusa required Petix to give the USPO advance notice of any computer usage and gave the USPO broad authority to manage that usage. (Id. at 4.) In October 2015, after his release, Petix filled out paperwork for the USPO pertaining to the special condition about computer usage. Among other information that Petix gave in that paperwork, he explicitly denied being a computer user. (Dkt. No. 1 at 4; Dkt. No. 26 at 3.) The paperwork contained a notice that false statements could lead to prosecution under 18 U.S.C. § 1001. (Id.)

As alleged by the Government, Petix's compliance with the special condition of release did not last long. Between August 2014 and December 2015, Petix engaged in numerous transactions involving the buying and selling of bitcoins. Given the nature of Bitcoin, Petix's transactions necessarily would have required the use of a computer; Petix also placed advertisements on a certain website—another activity that would involve computer use. (See Dkt. No. 24 at 7-8.) Law enforcement agents and the USPO eventually became aware of Petix's activity, in part through the use of undercover agents and confidential sources. (See id.) On December 3, 2015, agents and probation officers observed Petix at a local coffee shop using a computer and other electronicdevices. (Dkt. No. 1 at 4; Dkt. No. 26 at 4-5.) When the agents and probation officers confronted Petix, he denied ownership of the devices, even when his girlfriend, sitting in a car outside the coffee shop, confirmed his ownership. (Dkt. No. 26 at 4-5.) The open screen of the computer displayed information indicating that Petix had just completed a transaction involving 37 bitcoins with a value, at the time, of approximately $ 13,000. The agents and probation officers took Petix into custody that evening.

This Court saw Petix for the first time the next day. The Court signed a criminal complaint (Dkt. No. 1) accusing Petix of making false statements to the agents and probation officers in violation of 18 U.S.C. § 1001(a)(2). The Court ordered Petix detained in part because of supervised release violation proceedings that had begun at the same time before Judge Siragusa. (Dkt. No. 2.) The Government filed an indictment on December 9, 2015. (Dkt. No. 3.) This original indictment contained only one count of making a material false statement in violation of 18 U.S.C. § 1001(a)(2). The Government filed a superseding indictment on March 9, 2016. (Dkt. No. 16.) The superseding indictment contains two counts. In Count One, the Government accuses Petix of making a material false statement in violation of 18 U.S.C. § 1001(a)(2). In Count Two, the Government accuses Petix of running an unlicensed money transmitting business in violation of 18 U.S.C. § 1960. The superseding indictment also contains a notice of forfeiture for electronic devices seized on December 3, 2015 and a notice of intent to seek a money judgment.

Petix filed omnibus pretrial motions on February 24, 2016. (Dkt. No. 15.) Petix withdrew his motions to suppress (see Dkt. No. 30), and his non-dispositive motions will be addressed in a separate Decision and Order. The Court's focus here is on Petix's additional pretrial motion ofJuly 29, 2016, a motion to dismiss Count Two of the superseding indictment. (Dkt. No. 23.) Petix frames his motion with language about grand jury proceedings but really expresses two legal challenges to Count Two. Petix argues that what he allegedly did in Count Two "was the functional equivalent of selling any other chattel—e.g. a silver dollar, collectable currency, a diamond, gold jewelry, etc." (Dkt. No. 23-1 at 4.) By proposing that the Court treat Bitcoin as chattel, Petix effectively is arguing that Bitcoin is not "money" or "funds" as Section 1960 uses those terms. Additionally, Petix argues that what he allegedly did in Count Two does not constitute "transmitting" or "transferring" the proceeds from sales of bitcoins as understood in Section 1960. (Id.) In supplemental briefing, Petix develops this argument further by arguing that his alleged conduct does not constitute a "business" that he was "operating" for purposes of Section 1960. (Dkt. No. 35 at 9, 11.) The Government counters that Bitcoin qualifies as "funds" under Section 1960 because "virtual currencies such as Bitcoin have no intrinsic value or purpose beyond serving as a means of transferring wealth." (Dkt. No. 24 at 13.) The Government argues further that what Petix allegedly did counts as a business that he operated because "[a]ny transfer or non-transfer of the defendant's fees, proceeds, or profits from selling bitcoins is irrelevant to Count Two. The transfer of the bitcoins is the service that the defendant performed on behalf of any paying member of the public, wherever situated, and his business of doing so is what is encompassed in Count Two." (Id. at 14.)

III. DISCUSSION

A. Motions to Dismiss Indictments Generally

Petix is arguing that the Government's allegations in Count Two, taken at face value, do not amount to a criminal offense. The Court accordingly will review Petix's motion under Rule12(b)(3)(B)(v), which allows for pretrial motions to dismiss indictments for "failure to state an offense." See also United States v. Sampson, 371 U.S. 75, 78-79 (1962) ("Of course, none of these charges have been established by evidence, but at this stage of the proceedings the indictment must be tested by its sufficiency to charge an offense."). "[A]n indictment is sufficient if it, first, contains the elements of the offense charged and fairly informs a defendant of the charge against which he must defend, and, second, enables him to plead an acquittal or conviction in bar of future prosecutions for the same offense. It is generally sufficient that an indictment set forth the offense in the words of the statute itself, as long as those words of themselves fully, directly, and expressly, without any uncertainty or ambiguity, set forth all the elements necessary to constitute the offence intended to be punished. Undoubtedly the language of the statute may be used in the general description of an offence, but it must be accompanied with such a statement of the facts and circumstances as will inform the accused of the specific offence, coming under the general description, with which he is charged." Hamling v. United States, 418 U.S. 87, 117-18 (1974) (internal quotation marks and citations omitted). "The court is limited, however, in what it may consider during this analysis. Its determination must be based on whether the facts alleged in the indictment, if accepted as entirely true, state the elements of an offense and could result in a guilty verdict. Generally speaking, it is a narrow, limited analysis geared only towards ensuring that legally deficient charges do not go to a jury." United States v. Bergrin, 650 F.3d 257, 268 (3d Cir. 2011) (citation omitted).

B. Bitcoin and Section 1960

Count Two of the superseding indictment consists of a violation of 18 U.S.C. § 1960. Section 1960 has two subsections, an operational subsection and a definitional subsection. Theoperational subsection appears simple enough: It runs one sentence long. "Whoever knowingly conducts, controls, manages, supervises, directs, or owns all or part of an unlicensed money transmitting business, shall be fined in accordance with this title or imprisoned not more than 5 years, or both." 18 U.S.C. § 1960(a). Analysis of the statute quickly becomes complicated, though; of all the terms and phrases used in the operational subsection, the definitional subsection partially defines only two of them. For purposes of Section 1960, and ignoring language not relevant to this case, "the term 'unlicensed money transmitting business' means a money transmitting business which affects interstate or foreign commerce in any manner or degree and . . . fails to comply with the money transmitting business registration requirements...