A recent Second Circuit case limits the government’s ability to do so. It is based on the most fundamental of constitutional principles: the government may not seize property without a warrant.
In United States v. Cosme, the court held that the government must obtain a warrant to seize bank accounts and other property and to hold those assets during a criminal case. The court chided the government for its creative use of civil and criminal forfeiture statutes to avoid putting the forfeiture either to a grand jury or magistrate judge’s review.
If it seems surprising that the Department of Justice needed to be reminded that the Fourth Amendment exists, then you must not be familiar with the scorched-earth tactics of the prosecutors in the Southern District of New York. Unless a court tells them that they can’t do something, then they will. This case is no exception.
A Lamborghini, a Ferrari and a Bag with $$634,894 in Cash
William Cosme was charged with mail fraud for allegedly defrauding a South Korean school of $5.5 million. According to the indictment, he told the school that he would invest its money, but he then used it for personal purchases, such as a Cadillac, a Lamborghini and a Ferrari.
When Mr. Cosme was arrested, the government seized all of his cars (even a Nissan Juke) as well as over $634,894 in cash that was found inside a bag in one of them.
The government also issued letters to the institutional holders of Mr. Cosme’s bank and trading accounts, ordering them to freeze the assets within them pursuant to civil forfeiture provisions. As the Second Circuit explained:
The letters also stated that the government was “in the process of obtaining a seizure warrant” from the court for the accounts but that “exigent circumstances require that the Subject Property be frozen immediately to prevent it from being dissipated.” App’x 161. The government cited United States v. Daccarett, 6 F.3d 37 (2d Cir. 1993), and 18 U.S.C. § 981(b)(2)(B)(ii) [the civil forfeiture provision] in support of this last statement and noted that, upon the warrant’s issuance, a copy of the warrant would be provided to the letters’ recipients.
The financial institutions froze the accounts. But the government didn’t hold up its side of the deal. It never sought a warrant for the accounts.
Mr. Cosme’s grand jury indictment contained a section titled “forfeiture allegation.” Now, some of you may remember the recent Supreme Court opinion Kaley v. United States, 134 S. Ct. 1090 (2014). There, the Court held that defendants cannot “second guess” the grand jury’s finding of probable cause for pre-conviction forfeiture.
Here, however, the government never requested that the grand jury vote on whether these assets were subject to forfeiture, and the Second Circuit notes that
In its brief on appeal, the government acknowledges for the first time that the indictment’s forfeiture allegations were “merely notice provisions that were not subject to a grand jury vote.”
So, to recap: the government did not obtain a warrant for the seizure of Mr. Cosme’s assets (despite promising the financial institutions that it would do so) and it did not ask the grand jury to vote on whether such forfeiture is subject to probable case (and apparently did not tell the trial court about this failure).
Mr. Cosme’s Lawyers
The government sought a pretrial, ex parte restraining order related to the seized assets. In support of its application, the government relied on the criminal forfeiture provision, 21 U.S.C. § 853, and informed the court that the property was “already in the lawful custody of the Government.”
I guess the government forgot that it had neither obtained a warrant nor a grand jury finding of probable cause. The court signed the order.
At a subsequent hearing, Mr. Cosme’s court-appointed attorney asked to be relieved because he believed that Mr. Cosme would be requesting a Monsanto hearing, which would be a conflict of interest. I’ve written about Monsanto rights before, but as a refresher:
A Monsanto hearing vindicates a defendant’s Sixth Amendment right to counsel by testing in an adversary hearing whether seized assets are properly forfeitable in circumstances where the defendant has insufficient assets from which to fund his defense. United States v. Monsanto, 924 F.2d 1186, 1203(2d Cir. 1991).
Mr. Cosme agreed that he wouldn’t request the Monsanto hearing, provided that he would get back the $634,894in cash that was seized from him so that he could hire a new lawyer. The judge allowed for this stipulation, warning Mr. Cosme that he “[couldn’t] come back and ask for more money” and that he was “waiv[ing] some due process.” Another stipulation allowed Mr. Cosme to access an additional $400,000 in cash for another attorney. Mr. Cosme is apparently on his ninth lawyer in the case.
Trying to Vacate the Restraining Order
Mr. Cosme moved to vacate the order preventing him from requesting the Monsanto hearing, arguing the following:
(1) that the seizure of his assets was unlawful pursuant to the Fourth Amendment because the government had not obtained a warrant and exigent circumstances did not justify the seizure; (2) that the order violated his Fifth Amendment rights to due process because the government’s application was ex parte; and (3) that the order violated his Sixth Amendment rights because he did not have enough money to retain his counsel of choice.
The district court denied Mr. Cosme’s motion, citing Kaley. The opinion held that “the Government made a sufficient showing of probable cause by virtue of the indictment, which included the forfeiture allegation.” Mr. Cosme appealed.
The Second Circuit Sets the Record Straight
On appeal, the government first argued that Mr. Cosme waived his right to challenge the forfeiture based on his consent to the stipulations. The Second Circuit rejected that argument, because Mr. Cosme had not waived all of his rights when he agreed not to request a Monsanto hearing. He did waive a challenged based on the Sixth Amendment, but not his Fourth Amendment rights.
The Second Circuit also rejected the government’s argument that the indictment’s forfeiture allegations required rejection of Mr. Cosme’s Fourth Amendment claim, because the grand jury had not actually voted on these allegations. In short, Kaley did not apply because the grand jury had not voted “and the district court was required to make its own probable cause finding where none had yet been made in the case.”
The court of appeals was quite troubled by the fact that the government was able to freeze Mr. Cosme’s bank accounts for two years without a warrant. The government argued that the “exigent circumstances” exception allowed for their seizure. The Second Circuit rejected that contention because this exception applies only to provide the government with time to obtain a warrant and that period had long since ended.
The court of appeals also took issue with the government’s tactic of relying first on the civil forfeiture statute and then later the criminal forfeiture statute:
The government’s switch from civil forfeiture to criminal forfeiture in this case does not immunize it from having to demonstrate probable cause. When it first seized Cosme’s property in 2012, the government cited civil forfeiture provision 18 U.S.C. § 981(b)(2)(B)(ii). That provision allows the government to seize “there is probable cause to believe that the property is subject to forfeiture” and an “exception to the Fourth Amendment warrant requirement would apply.” 18 U.S.C. § 981(b)(2)(B)(ii). At the August 6, 2013 hearing, the government, at that point seeking only criminal forfeiture, relied on 21 U.S.C. § 853(e),5 which enables a court to “enter a restraining order or injunction . . . or take any other action to preserve the availability of property . . . upon the filing of an indictment or information charging a violation . . . for which criminal forfeiture may be ordered . . . .”
The court was careful to note that it did not see any “inherent problem with the government’s pursuit of criminal forfeiture after first initiating civil forfeiture,” but you get the sense that the court was concerned that the prosecutor had played fast and loose with the rules. It held that “this tactic cannot serve as a tool for the government to seize assets without ever showing probable cause.”
Shouldn’t the Government Have Corrected the District Court’s Misunderstanding?
One concern raised somewhat obliquely by the court of appeals was whether the prosecutors misled the lower court as to what the grand jury had considered behind closed doors:
It is evident from the district court’s April 21, 2014 opinion that, when making its probable cause finding, the district court relied on a mistaken understanding of what the grand jury voted on in the indictment.
Certainly, the prosecutors knew that the grand jury had not voted on the forfeiture allegations. And the prosecutors knew that they were the only ones with that information, since the judge and the defense counsel were not in the grand jury room. Yet the government apparently did not correct the district court’s “mistaken understanding” here, choosing instead to defend the lower court’s opinion.
Not a Complete Victory
This is one of those cases that is a win for future defendants but not for the defendant here. The Second Circuit did not outright return Mr. Cosme’s assets but instead (appropriately) remanded the case for a probable cause determination. As the court explained, “even when the initial seizure if found to be illegal, the seized property can still be forfeited.”