Second Circuit Keeps Cash From Home Sale Frozen

Posted On Wednesday, April 3, 2013

The Second Circuit on Tuesday rebuffed the attempt of an alleged Ponzi schemer to use the proceeds of the sale of his home to pay for his defense, even though he and his wife originally bought the house with untainted money.  United States v. Walsh, No. 12-2383-cr (2nd Cir. April 2, 2013).

“We need not address that hypothetical,” Chief Judge Dennis Jacobs wrote for the court, “because Walsh freely negotiated title to the House in exchange for at least $6 million in funds traceable to the fraud.”

The court ruled that Stephen Walsh, accused of orchestrating a fraud that cost investors more than $500 million, bought the house from his wife when the couple divorced in 2006 using funds traceable to the scheme.  That means the money from the sale of the house must remain frozen, the court concluded.

Stephen Walsh was charged in 2009, along with his partner Paul Greenwood, with securities fraud relating to an alleged $550 million Ponzi scheme which was run through their companies, Westridge Capital Management and WG Trading.  The alleged scheme was exposed shortly after the Bernard Madoff Ponzi scheme came to light at the end of 2008.

The Walshes bought the aforementioned house in Sands Point, N.Y. in 1999 using money unrelated to the fraud.  As part of the divorce, Walsh paid his wife $12.5 million for title to the house and other assets.  Walsh conceded that at least $6 million of those funds came from the alleged scheme but argued that he had a preexisting right to the home as marital property.

The Second Circuit disagreed, concluding that Walsh opted out of the New York rules for division of marital property by entering into a settlement with his wife.  The court declined to address whether the result might be different if title to the house had been awarded as part of a court-ordered property division. 

“We need not address that hypothetical,” Chief Judge Dennis Jacobs wrote for the court, “because Walsh freely negotiated title to the House in exchange for at least $6 million in funds traceable to the fraud.”

In wading through the issues raised when funds traceable to criminal activity are comingled with other funds, the Second Circuit relied upon United States v. Banco Cafetero Panama, 797 F.2d 1154 (2nd Cir. 1986), and applied the “drugs-in, first-out” approach.  That test considers traceable proceeds to be any one withdrawal, or any asset purchased with such withdrawal, to the extent of the amount of the deposited tainted funds.  The Court approved the district court’s approach, where it analogized the sale proceeds of the home to a withdrawal from a comingled account, i.e., the marital estate.  Based on this analysis, the Court concluded that the district court’s decision was appropriate, given that Walsh had negotiated to get the home and to keep his business interests in exchange for the $12.5 distributive award.

The Second Circuit acknowledged that the Sixth Amendment right to Counsel includes the right of a defendant who does not require appointed counsel to choose who will represent him, citing United States v. Gonzalez-Lopez, 548 U.S. 140, 144 (2006).  It found, however, that a defendant has no Sixth Amendment right to spend another person’s money for services rendered by an attorney, even if those funds are the only way the defendant will be able to retain the attorney of his choice, citing Caplin & Drysdale, Chartered v. United States, 491 U.S. 617, 626 (1989).

Walsh also argued that the district court made two erroneous evidentiary rulings at the Monsanto hearing regarding his motion for access to the funds.  Specifically, Walsh argued that the district court erroneously allowed hearsay testimony by an FBI agent regarding statements by Walsh’s co-defendant Paul Greenwood and former business partner Deborah Duffy, based on the government’s claimed need to protect the witnesses.  The court disagreed, indicating approval of the district court’s finding that the unwarranted exposure of government witnesses was a valid consideration in Walsh’s case to avoid what the district court called a “dress rehearsal” of the trial.   It rejected Walsh’s argument that preclusion of access to witnesses should be limited to cases where witnesses may be in physical danger.

The Second Circuit’s decision adds another twist on the question of what funds defendants can use to pay for their defense.  As we wrote in March, the Supreme Court will hear a case next term addressing whether defendants whose assets have been frozen have a right to attack the underlying charges against them at a pretrial hearing on whether they should have access to those funds.

A complete copy of the opinion can be found here: