United States v. Kolfage

537 F.Supp.3d 559

UNITED STATES of America,

v.Brian KOLFAGE, Stephen Bannon, Andrew Badolato, and Timothy Shea, Defendants.

20 Cr. 412 (AT)

United States District Court, S.D. New York.

Signed May 5, 2021

Alison Gainfort Moe, Assistant US Attorney, Nicolas Roos, Assistant US Attorney, Robert Benjamin Sobelman, United States Attorney's Office, New York, NY, for United States of America.

Harvey A. Steinberg, Springer and Steinberg, P.C., Denver, CO, for Defendant Brian Kolfage.

Daniel Lawrence Stein, Michael Paul Heffernan, Mayer Brown LLP, New York, NY, Kelly Bain Kramer, Mayer Brown LLP, Washington, DC, for Defendant Andrew Badolato.

John C. Meringolo, Meringolo & Associates, P.C., New York, NY, for Defendant Timothy Shea.

ORDER

ANALISA TORRES, District Judge:

Defendant Brian Kolfage moves for an order modifying the post-indictment restraining order issued on August 24, 2020, which prohibits the transfer of certain funds involved in his charged offenses (the "Restraining Order"), ECF No. 64. Alternatively, he requests a hearing to challenge the Court's finding that there was probable cause for the issuance of the Restraining Order, ECF No. 77. For the reasons stated below, Kolfage's motions are DENIED without prejudice.

BACKGROUND

On August 17, 2020, a grand jury returned a sealed indictment charging Defendants, Brian Kolfage, Stephen Bannon, Andrew Badolato, and Timothy Shea, with conspiracy to commit wire fraud, in violation of 18 U.S.C. § 1349, and conspiracy to commit money laundering, in violation of 18 U.S.C. § 1956(h). Indictment, ECF No. 2. The indictment alleges that, in a conspiracy occurring "from at least in or around December 2018 up to and including the date of the filing of this Indictment," Defendants fraudulently induced donors to contribute millions of dollars to an online crowdfunding campaign known as We Build the Wall. Id. ¶¶ 1, 27–29. The indictment further states that Kolfage, Bannon, and Badolato made repeated false statements—on the crowdfunding website, We Build the Wall's website, and in social media, press releases, and donor solicitations—that money from the fundraising campaign would not be taken for Defendants’ personal use, and that all funds would go to the campaign's stated mission: building a wall at the southern border of the United States. Id. ¶¶ 1, 9, 11–14. Despite these representations, Defendants allegedly took hundreds of thousands of dollars for their personal use. Id. ¶ 17. Kolfage claims that "[he] and his codefendants’ alleged agreement to act under false pretenses ended in January 2020" when "[We Build the Wall's] website was changed to disclose that [Kolfage] would receive a salary." Def. Mem. at 5, ECF No. 77.

The indictment contemplates that if Defendants were convicted, they would have to forfeit certain property involved in the alleged crimes under 18 U.S.C. §§ 981(a)(1)(C) and 982(a)(1), and 28 U.S.C. § 2461(c). Indictment ¶¶ 34–35. The indictment was unsealed on August 20, 2020. ECF No. 3.

On August 24, 2020, the Court granted the Government's ex parte application for a sealed restraining order pursuant to 18 U.S.C. §§ 981, 982, 21 U.S.C. § 853, and 28 U.S.C. § 2461. Restraining Order at 1–2. The Restraining Order restrains the transfer of funds into or out of three We Build the Wall bank accounts. Id. It does not restrain funds acquired after the Restraining Order was issued. ECF No. 63 at 21. The Court found probable cause to grant the Restraining Order because the Government's application (the "Restraining Order Application") and the supporting affidavit of United States Postal Inspector Troy Pittenger (the "Pittenger Affidavit"), both filed ex parte and under seal, demonstrate that assets in the accounts "are subject to restraint and forfeiture as proceeds of a conspiracy to commit wire fraud, in violation of Title 18, United States Code, Section 1343, and/or property involved in money laundering, in violation of Title 18, United States Code, § 1956." Restraining Order at 1. On December 14, 2020, the Court unsealed the Restraining Order, but denied non-parties We Build the Wall and Kris Kobach's motion to unseal the Restraining Order Application and the Pittenger Affidavit. ECF No. 63 at 23.

According to Kolfage, prior to the unsealing of the Indictment, and before he was aware of a criminal investigation, We Build the Wall took out a liability insurance policy (the "Policy") from Ironshore Specialty Insurance Company ("Ironshore"), which covers up to $1 million in legal fees and costs with respect to criminal charges brought against We Build the Wall's directors and officers. Kolfage Decl. ¶ 3, ECF No. 77-1. Under the Policy, before Ironshore begins coverage on a claim, a defendant must satisfy an "insurance retention amount," by "demonstrat[ing] to Ironshore that $125,000 in valid legal fees and expenses have been incurred and paid on [a defendant's] behalf from a source of funds other than Ironshore." Id.

Upon his indictment, Kolfage retained Harvey A. Steinberg, Esq., and his law firm, Springer & Steinberg, P.C. ("Steinberg"). Id. ¶ 2. Steinberg agreed to represent Kolfage "pursuant to [the Policy]," and to forgo a retainer. Id. ¶ 4. Since beginning its representation, Steinberg has billed substantial legal fees. Id. ¶ 5.

Ironshore agrees that the Policy covers Kolfage's legal fees in this action, contingent on the payment of the insurance retention amount. Id. ¶ 3. We Build the Wall has committed to paying the $125,000. Id. ¶ 4. Kolfage claims that without the restrained funds, We Build the Wall cannot afford the payment.¹ Id. ¶ 4. Accordingly, the Policy has not taken effect, and Ironshore has not paid Steinberg. Id. ¶ 3. Steinberg has told Kolfage that without payment, it will have to withdraw from this action. Id. ¶ 5. If Steinberg withdraws, Kolfage states that it will be a "substantial hardship" for him to secure other counsel. Id.

In order to satisfy the insurance retention amount, Kolfage seeks an order modifying the Restraining Order to permit We Build the Wall to access funds received after January 2020, the date We Build the Wall's website disclosed Kolfage's salary. Def. Mem. at 6.

DISCUSSION

I. Legal Standard

The statutory framework for criminal forfeiture provides that if, upon the return of an indictment, the court finds probable cause that certain property would be subject to forfeiture upon conviction, the court may enter a pretrial restraining order to preserve the availability of that property. See 21 U.S.C. § 853(e)(1) ; Kaley v. United States , 571 U.S. 320, 323, 134 S.Ct. 1090, 188 L.Ed.2d 46 (2014). As "the government needs some means of promptly heading off any attempted disposal of assets that might be made in anticipation of a criminal forfeiture," these restraining orders can be issued ex parte and without a prior hearing. United States v. Monsanto , 924 F.2d 1186, 1193 (2d Cir. 1991), abrogated on other grounds by Kaley , 571 U.S. 320, 134 S.Ct. 1090.

When a pretrial restraining order prohibits a defendant from using funds to pay for counsel, tensions may arise between the restraining order and the defendant's Fifth Amendment right to due process and his Sixth Amendment right to counsel. Id. at 1193. However, "neither the Fifth nor the Sixth Amendment to the Constitution requires Congress to permit a defendant to use assets adjudged to be forfeitable to pay that defendant's legal fees." United States v. Monsanto , 491 U.S. 600, 614–15, 109 S.Ct. 2657, 105 L.Ed.2d 512 (1989) (applying this rule to pretrial restraining orders) (citing Caplin & Drysdale, Chartered v. United States , 491 U.S. 617, 109 S.Ct. 2646, 105 L.Ed.2d 528 (1989) ). Therefore, so long as a court finds probable cause that the restrained assets are forfeitable, a defendant is not entitled to modification of the restraining order to allow him to access funds to pay for an attorney. Id. at 616, 109 S.Ct. 2657 ; cf. Luis v. United States , 578 U.S. 5, 136 S. Ct. 1083, 1093, 194 L.Ed.2d 256 (2016) ("[I]nsofar as innocent (i.e. , untainted) funds are needed to obtain counsel of choice, ... the Sixth Amendment prohibits [a pretrial restraining order on those funds].").

Given the constitutional rights at stake, when a defendant raises a concern that a pretrial restraining order freezes assets necessary for him to obtain counsel, he may request a Monsanto hearing to challenge the Court's ex parte finding that probable cause existed for the issuance of the restraining order. Monsanto , 924 F.2d at 1203. At the hearing, the Government must demonstrate that there is probable cause that the assets are indeed forfeitable upon conviction, a showing which has two components: "(1) that the defendant has committed an offense permitting forfeiture," which is established by a grand jury's indictment, and "(2) that the property at issue has the requisite connection to that crime," that is, that it is traceable to the alleged offense. Kaley , 571 U.S. at 323–24, 398, 134 S.Ct. 1090. A defendant may challenge probable cause only on the second ground. Id. at 398, 134 S.Ct. 1090. If the government cannot meet its burden to demonstrate probable cause, the restraining order must be modified. See In re Seizure of All Funds in Accts. in Names Registry Publ'g Inc. , 68 F.3d 577, 579–80 (2d Cir. 1995) (describing district court proceedings).

II. Applicability of the Stein Case

Kolfage argues that the modification of the Restraining Order is governed not by Monsanto , but by the Second Circuit's decision in United States v. Stein , 541 F.3d 130 (2d Cir. 2008). Def. Mem. at 3–4. In Stein , the government was investigating a potential tax fraud related to defendants’ employer, KPMG, and certain of its employees. Id. at 137. At the commencement of the investigation, KPMG announced that it would pay for the attorney of any employee the Government asked to interview. Id. However, at that time, the Government's policy was to consider, in determining the corporation's culpability for the fraud, ...