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United States v. Lacey

United States District Court, D. Arizona

May 1, 2019

United States of America, Plaintiff,
Michael Lacey, et al., Defendants.



         There are seven defendants in this matter. Of which, six have joined the motion before the Court. Defendants Joye Vaught and Andrew Padilla filed a motion to dismiss the indictment against them or, in the alternative, a motion to allow their counsel to withdraw. (Doc. 456). Defendants James Larkin (Doc. 463), Scott Spear (Doc. 464), Michael Lacey (Doc. 465), and John Brunst (Doc. 467) join the motion to dismiss, but not the alternative motion to withdraw counsel. The seventh defendant, Dan Hyer, has entered a plea of guilty as to Count 1 of the Superseding Indictment and is awaiting sentencing. (Docs. 270, 284, 520). The Government filed a response to the motion to dismiss (Doc. 476), to which Defendants replied. (Doc. 507). Defendants Vaught and Padilla filed Ex Parte Applications and Consents for Withdrawal of Counsel (Docs. 556, 558) Defendants argue the case should be dismissed because the Government has violated their Fifth and Sixth Amendment rights.

         I. BACKGROUND

         On July 25, 2018, a federal grand jury returned a 100-count superseding indictment against Defendants alleging they engaged in criminal acts while operating of the website (“Backpage”), including conspiracy, facilitating prostitution, and money laundering. (Doc. 230). It included forfeiture allegations. (Id.). This is one of multiple cases involving Backpage. In another case before this Court, Backpage itself and related entities have pleaded guilty to Money Laundering Conspiracy, 18 U.S.C. § 1956(h). (CR-18-465-PHX-SMB, the “Backpage Proceedings, ” Docs. 8, 10, 20). In still another, the CEO of Backpage, Carl Ferrer has pleaded guilty to Conspiracy, 18 U.S.C. § 371. (CR-18-464-PHX-SMB, the “Ferrer Proceedings, ” Docs. 7, 12, 20). Both of those cases are awaiting sentencing and forfeiture proceedings. Additional forfeiture proceedings are underway in the Central District of California and on appeal in the Ninth Circuit. (Docs. 360, 456, 476, 507).

         In the Backpage and Ferrer Proceedings, Backpage and its related entities and Ferrer stipulated to seizures. (Ferrer Proceedings, Docs. 22-23; Backpage Proceedings, Docs. 21-22, 44). Defendants in this case have filed petitions to determine their interest in the property subject to forfeiture in those two cases. (Ferrer Proceedings, Docs. 29-35; Backpage Proceedings, Docs. 28-34). They have also motioned to stay the hearings to determine their interest in the property subject to forfeiture. As of this date, those hearings have not taken place, and the Defendants have not asked this Court to conduct them. Rather, they have agreed to or requested stays.

         In the Ferrer Proceedings, the initial hearing to determine the third-party interests in property subject to forfeiture was scheduled for November 16, 2018. (Ferrer Proceedings, Doc. 43). Defendant Larkin filed a motion to stay that hearing pending the outcome of an appeal to the Ninth Circuit of some of the Central District of California seizure cases and a case in Delaware Court of Chancery.[1] (Id., Doc. 44). All Defendants in this cased joined that motion. (Id., Docs. 45-50). The Government did not object to the stay. (Id., Doc. 52). The Court reset the hearing for December 7, 2018. (Id., Doc. 53). The Defendants and Government then submitted a joint motion to continue the hearing. (Id., Doc. 54). The Court granted the motion and reset the hearing for January 25, 2019. (Id., Doc. 56). The parties again requested a stay, which was denied. (Id., Docs. 59-60). The parties filed another motion on January 23, 2019, to stay the hearing for at least four months, though they presented different rationales for doing so. (Id., Doc. 62). The Court reset the hearing for June 21, 2019. (Id., Doc. 64). A similar process played out in the Backpage Proceedings. (Backpage Proceedings, Docs. 28-41, 51-57, 59-62, 64-75, 82- 83, 85-87).

         Among the assets Ferrer and Backpage stipulated to forfeit are attorney trust accounts, commonly called IOLTA accounts. The Government moved to seize these accounts in the Central District of California (“CDCA”). It obtained ex parte seizure warrants for Defendants Vaught and Padilla's IOLTA accounts on October 31, 2018. The Government informed counsel they can keep earned fees through November 30, 2018. The Government also seized the trust account of one of Defendant Lacey's attorney's in August 2018. Defendants argue that these seizures, along with other actions by the Government, infringe on their Fifth and Sixth Amendment rights to due process and counsel of choice and warrant dismissal of this case. In this proceeding, Defendants previously asked the Court to stop the seizures. (Docs. 360, 401). The Court ruled that the Defendants must seek relief from the seizure warrants in the courts that issued them. (Doc. 447). The seizure warrants have since expired, but the Government has said they may renew them and Defendants say they have not withdrawn from the accounts out of fear of prosecution.

         Defendants argue their constitutional rights were violated because the seizures were executed in a manner to avoid judicial review after the Government led them to believe it would not be seizing IOLTA accounts, and after Defendants had agreed to the proposed case management schedule without knowledge that the Government would seek pre-trial forfeitures. Defendants also take umbrage with the Government's motion to disqualify certain counsel from representing Defendant Lacey and Defendant Larkin, which the Court denied. (Doc. 338). They believe they have been retaliated against for their “vigorous” assertion of their rights, while the cooperating defendants are still able to use tainted funds for their counsel. Defendants further argue that the cooperating defendants are especially unreliable, making the seizures especially suspect. Defendants Padilla and Vaught additionally argue that as employees of Backpage, they reasonably expected to receive attorneys' fees as a benefit. They contend the appropriate remedy for the Government's actions is to dismiss the indictment against them.

         The Government responds by arguing that Defendants have no right to use tainted funds for attorneys' fees. They also argue that there is a remedy available for defendants to prevent the seizures and future seizures of these funds through a Monsanto hearing, where they would be able to prove they could not fund their defense but for the seized assets and that probable cause does not exist to seize the property. See United States v. Monsanto, 491 U.S. 600 (1989). Additionally, the funds were only seized after the CEO of Backpage, along with Backpage and its related entities, pleaded guilty to criminal conduct, and shut down the website.

         II. Discussion

         The Fifth and Sixth Amendments protect criminal defendants' rights to due process and assistance of counsel. U.S. Const. amends. V, VI. The rights are overlapping. “The Constitutional guarantees a fair trial through the Due Process Clauses, but it defines the elements of a fair trial largely through the several provisions of the Sixth Amendment[.]” Strickland v. Washington, 466 U.S. 668, 684-85 (1984); see Caplin & Drysdale v. United States, 491 U.S. 617, 633 (1989) (stating the court is “not sure that” the Fifth Amendment argument “adds anything to petitioner's Sixth Amendment Argument”). The Sixth Amendment right to assistance of counsel includes the right “to select and be represented by one's preferred attorney.” Wheat v. United States, 486 U.S. 153, 159 (1988). This right is not unlimited, as a “defendant may not insist on representation by an attorney he cannot afford, ” id., and he 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 that defendant will be able to retain the attorney of his choice, ” Caplin, 491 U.S. at 626.

         Forfeiture presents a unique problem for Fifth and Sixth Amendment issues. Freezing defendants' assets prior to trial is permissible if the assets would be subject to forfeiture upon conviction. Kaley v United States, 571 U.S. 320, 340 (2014). To do so, the Government must show that there is “probable cause to believe that the property will ultimately be proved forfeitable.” Id. (quoting United States v. Monsanto, 491 U.S. 600, 615 (1989)). Kaley also explains the Government's interest in forfeitures. They “help to ensure that crime does not pay, ” punish wrongdoing, deter future illegality, and “lessen the economic power of criminal enterprises.” Id. (citing Caplin, 491 U.S. at 630). Forfeitures are also used to “recompense victims of crime, improve conditions in crime-damaged communities, and support law enforcement activities like police training.” Id. (citing Caplin, 491 U.S. at 629-30). The Government may not, however, restrain criminal defendants' “legitimate, untainted assets (those not traceable to a criminal offense) needed to retain counsel of choice, ” even if the Government was only doing so to preserve the assets for payment of restitution and other criminal forfeitures. Luis v. United States, 136 S.Ct. 1083, 1088 (2016).

         1. The Seizures and Defendants' Fifth and Sixth Amendment Rights

         Defendants contend that the seizures are “unlawful.” (Doc. 476 at 2). They compare this case to U.S. v. Stein (Stein I), 435 F.Supp.2d 330 (S.D.N.Y. 2006), and the case affirming it, U.S. v. Stein (Stein II), 541 F.3d 130 (2d. Cir. 2008). In Stein I and II, the courts dismissed the indictment against former employees and partners of an accounting firm because the government pressured the firm to limit and condition the payment of the defendants' attorneys' fees in order to prevent the Government from indicting the firm. Prior to that case, the firm's practice was to pay for its partners and employees' legal fees for legal matters that arose within the scope of their duties and responsibilities to the firm. Stein I, 435 F.Supp. 2d. at 340. The firm changed this policy in response to pressure from the Government. Id. at 336. The result was that the defendants were deprived of their reasonable expectation of attorneys' ...

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