The federal government’s aggressive approach to criminal forfeiture unquestionably targets innocent bystanders to crime. In fact, the law makes it easy—and profitable—for the government to do so. A recent high-profile insider trading case in New York is a prime example of the need to challenge the government’s forfeiture approach.
In February 2014, Mathew Martoma, a hedge fund trader who worked for an affiliate of SAC Capital Advisors, was convicted of insider trading. He was sentenced to nine years in prison. In September 2014, the court entered a Preliminary Order of Forfeiture for approximately $9.4 million. The order stated that the $9.4 million
represent[ed] the amount of proceeds obtained as a result of the offenses charged in Counts One through Three of the Indictment.
Basically the government contended that the forfeiture amount arose from an SAC-related bonus received by Mr. Martoma that resulted from his insider trading activity.
The problem for the government is that the assets that were ordered forfeited are arguably jointly owned by Mr. Martoma’s wife, Dr. Rosemary Martoma. She is challenging their forfeiture.
The Assets at Stake
Here is a link to the Martoma forfeiture order. The assets that the court ordered forfeited are substantial:
- A house in Boca Raton, Florida worth approximately $3 million.
- An account with American Express Bank containing approximately $3.2 million in the name of Mathew Martoma.
- An account with ING Direct in the amount of $245,000 in the name of Rosemary Martoma.
- An account with Vanguard in the amount of $935,000 in the name of the Mathew and Rosemary Martoma Foundation.
Dr. Rosemary Martoma has contested the forfeiture of the assets mandated by the court’s Preliminary Order. She filed Petition for Hearing on Forfeiture in her husband’s criminal case, arguing that the court cannot forfeit her interests in her property, only Mr. Martoma’s interests.
Dr. Martoma relies heavily on a 2004 Second Circuit case (Pacheco v. Serendensky, 393 F.3d 348 (2d Cir. 2004)), which held that
a criminal defendant can only be made to forfeit what was his in the first place.
As Dr. Martoma’s petition explains:
Mrs. Martoma gave up her career [as a pediatrician to care for their children] based on the promise of equal ownership interest, possession, and control over all of the Defendant’s income – including the family income derived from the Defendant’s work outside of the household – regardless of the bank account or asset into which it was deposited or invested over the duration of their marriage.
* * *
Mrs. Martoma contributed to the acquisition and subsequent enhancement of each of the Florida Home, Amex Account, ING Account, and Vanguard Account by, among other things, working at home as a wife and mother throughout the course of the marriage.
The case raise four intriguing legal issues that have practical effect on spouses of all criminal defendants:
- whether Dr. Martoma may litigate the issue at all;
- who holds a superior interest interests in the property;
- whether Dr. Martoma holds a constructive trust in the property to be forfeited; and
- whether Dr. Martoma is a bona fide purchaser for value whose interests are protected from forfeiture.
Issue #1: Is Dr. Martoma Entitled to a Hearing?
The threshold issue of whether Dr. Martoma may enter the case was first raised in the government’s motion in opposition to her petition. Dr. Martoma filed her petition under 21 U.S.C. § 853(n) which allows a third party to request a hearing “to adjudicate the validity of his alleged interest in the property.”
Despite § 853(n), the government argued that a third party like Dr. Martoma is precluded from the relief sought, explaining that
All of Petitioner’s claims fail for essentially the same reason: a spouse can assert no valid ownership interest in her husband’s criminally-derived earnings because the Government’s interest in those earnings vests at the time that the crime occurs.
Dr. Martoma’s lawyers responded first by pointing out that a preliminary order of forfeiture does not subject her interest in specific property to forfeiture because forfeiture is an in personam proceeding aimed at punishing criminals and deterring crime. At best, the government should be entitled to a partial forfeiture, as to do otherwise would give the government a windfall and deny an innocent third party of her ownership interests.
Her lawyers also argued that, if Dr. Martoma holds a partial interest in the forfeited property and the government deems the entire property forfeited, it would violate constitutional due process to deny her a hearing.
Issue #2: Is Dr. Martoma’s Interest in the Property Superior to the Government’s Interest?
The second issue is to determine who holds a superior interest in the property. If Dr. Martoma’s interest is superior, then it will be shielded from forfeiture.
Dr. Martoma begins her petition by stating that Florida recognizes tenancy by the entirety for the house and bank accounts. (In such a state, when property is given to one spouse, each holds a joint interest in the property. Moreover, a tenancy by the entirety may not be severed unilaterally or by a forfeiture proceeding against one of the spouses.)
The government concedes that Dr. Martoma may own a portion of the assets to be forfeited. However, they contend that the government’s claim to the property is superior to Dr. Martoma’s and therefore has the effect of vesting before the property ever became hers.
The government states that under the “relation back” doctrine, when the government secures a forfeiture judgment for money and assets that can be traced to a criminal act, the government’s interest in the property relates back to the time of the wrongful act. According to a declaration filed by the special agent in the case, the money and property to be forfeited can be traced directly to Mr. Martoma’s 2008 bonus based on his insider trading.
Dr. Martoma’s lawyers disagree that the relation back doctrine applies. Because of the doctrine of tenancy by the entirety, when the 2008 bonus was deposited into the couple’s bank accounts, Mr. Martoma’s tainted funds (which were the proceeds of his crime) were comingled with Dr. Martoma’s untainted funds. The funds – and the house bought with them – should therefore be deemed “substitute assets” for the purpose of forfeiture. Under New York federal law, the relation back doctrine does not apply to substitute assets targeted for forfeiture.
Issue #3: Does Dr. Martoma Have A Constructive Trust Over the Assets to be Forfeited?
Dr. Martoma’s lawyers also argue that she should be given relief from the forfeiture judgment because she is entitled to the benefit of a “constructive trust” in half the martial assets.
In 2005, Dr. Martoma gave up her pediatric practice with the understanding that she would be entitled to joint ownership of Mr. Martoma’s income and assets. Because she relied on Mr. Martoma’s promise to that effect, her lawyers argue, the court should impose a constructive trust on the roughly $4 million in assets for which she seeks protection from forfeiture. The trust would date from 2005, well before Mr. Martoma’s allegedly wrongful acts. Therefore, this theory—if adopted by the court—would defeat the relation back doctrine.
The government’s response on this issue was relatively terse, arguing that federal case law requires that a constructive trust beneficiary (like Dr. Martoma) be able to trace a connection between the trust property (the assets to be forfeited) and the value that she gave up (her practice and career) before she is entitled to the benefit of the trust. According to the government’s motion, Dr. Martoma has not shown this connection.
Issue #4: Is Dr. Martoma A Bona Fide Purchaser for Value?
The final issue is whether Dr. Martoma is a bona fide purchaser for value who is protected from forfeiture by 21 U.S.C. §853(n)(6)(B). This section states that the court may amend its forfeiture order if it determines that:
the petitioner is a bona fide purchaser for value of the right, title, or interest in the property and was at the time of purchase reasonably without cause to believe that the property was subject to forfeiture under this section;
This issue will ultimately turn on whether the court looks to federal or state law to determine her status as a bona fide purchaser. Dr. Martoma’s lawyers look to state law, arguing that at the time she received her interest in Mr. Martoma’s income she had no reason to believe that they were subject to forfeiture.
The government relies on federal law which requires that she show that not only did she purchase the property without knowledge of the possibility of forfeiture, but also that she purchased the property from the criminal defendant.
The government also argues that § 853(n)(6)(b) requires that the transaction was conducted at arm’s length and a transaction between husband and wife cannot be at arm’s length. (Florida law does not require that the transaction be at arm’s length.)
No Decision Yet
The court has not yet decided this issue, and Dr. Martoma filed a sur-reply on March 23, 2015. (I promise to post an update when the issue is decided.)
There’s no way to get around the unfairness of the situation. Dr. Martoma did nothing wrong; she simply quit her (presumably well-paying and highly-skilled) job to stay at home. She did not break any laws. She is entitled to ownership of half of the marital assets.
The problem, of course, is that a large portion of those assets were a result of Mr. Martoma’s criminal conduct—at least according to the government.
It seems to me that if the government cannot prove that the spouse participated in, or even knew about, any wrongdoing, then seizure of the spouse’s assets should not be permitted.
If I had to hazard a guess, though, I would predict that the court will split the baby here—perhaps allowing Dr. Martoma to keep the house and a portion of the bank accounts, but not all of them.
Criminal forfeiture is a powerful tool. It is too bad that the government chooses to wield this tool against the innocent families of convicted defendants and even more frustrating that the law plainly enables this approach.