United States v. Ovid

UNITED STATES OF AMERICA, v. ISAAC OVID, AARON RIDDLE, JOSEPH JONATHAN COLEMAN and ROBERT RIDDLE, Defendants.

09-CR-216 (JG) (ALC)

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF NEW YORK

Date: June 8, 2012

ELECTRONIC PUBLICATION ONLY

MEMORANDUM AND ORDER

APPEARANCES:

LORETTA E. LYNCH

United States Attorney

Brooklyn, New York 11201

By: Brian D. Morris

Attorney for the United States

of America

FISHMAN JACKSON LUEBKER PLLC

By: Monica L. Luebker

Jay E. Ray

Attorneys for Third-Party Petitioner

QBE del Istmo, Compania de Reaseguros, Inc.

JOHN GLEESON, United States District Judge:

In this ancillary proceeding, brought pursuant to 21 U.S.C. § 853(n) and Rule 32.2(c) of the Federal Rules of Criminal Procedure, third-party petitioner QBE del Istmo, Compania de Reaseguros, Inc. ("QBE") challenges the criminal forfeiture of $2,565,456.89 plus interest (the "Funds") from a limited partnership in which QBE was a limited partner. Before me is the government's motion to dismiss QBE's petition for lack of standing.

I previously referred the motion to then-Magistrate Judge Andrew L. Carter, Jr. In his report and recommendation (the "Report"), Judge Carter recommended granting the motion. QBE has objected to the Report. Although I agree with portions of the Report, I disagree with the ultimate conclusion that QBE lacks standing. I will therefore sustain QBE's objections to the Report, in part, and deny the motion to dismiss.

BACKGROUND

The defendants in the underlying criminal case - Isaac Ovid, Aaron Riddle, Joseph Jonathan Coleman, Timothy Smith and Robert Riddle - perpetrated a multi-million dollar fraud through an investment management company they formed, Jadis Capital, Inc. ("Jadis Capital"). Their fraudulent scheme involved the creation and marketing of two different hedge funds. Both of these hedge funds were formed as separate limited partnerships under Delaware law and both used Jadis Investments, LLC ("Jadis Investments"), a Delaware limited liability company the defendants had also formed, as investment manager.

The defendants formed the first of these hedge funds, Logos Multi-Strategy Hedge Fund I LP (the "Logos Fund"), in November 2004. They marketed the Logos Fund to numerous investors, many of whom were members of a church in which the defendants held positions of authority. See Third Party Pet. To Adjudicate Interest in Forfeited Property & To Amend Forfeiture Order ("Pet.") ¶ 23, ECF No. 67. Through numerous fraudulent misrepresentations and omissions, the defendants were able to obtain approximately $9 million in investments in the Logos Fund. Id. ¶ 18.

The Logos Fund quickly incurred massive trading losses. The defendants also misappropriated investor funds, which they used for their own benefit. See id. ¶ 23. "ByOctober 2005, more than eighty percent of the money in the Logos Fund had either been lost trading or otherwise expended by the defendants." Indictment ¶ 22, ECF No. 4.

The defendants formed the second hedge fund, The Donum Fund, LP (the "Donum Fund" or "Donum LP"), in August 2005. Pet. ¶ 5. Its general partner was Donum, LLC, a Delaware limited liability company, and Riddle served as its initial limited partner. Id. Unlike the Logos Fund, which targeted individual investors, the Donum Fund targeted larger, institutional investors. Id. ¶ 24.

Shortly after forming the Donum Fund, the defendants contacted Financial Pacific, a licensed Panamanian broker-dealer, to discuss investing in the Donum Fund. Id. ¶ 9. After conducting some initial investigation into Jadis Investments and Jadis Capital, Financial Pacific received a written proposal to invest in the Donum Fund in September 2005. Id. ¶ 11. That same month, two of Financial Pacific's executives traveled to New York to meet with Jadis Capital employees and to tour its offices. Id. As with the Logos Fund, the defendants made numerous fraudulent misstatements and omissions regarding the Donum Fund. See, e.g., id. ¶ 46.

QBE, one of Financial Pacific's clients, agreed to invest $3 million in the Donum Fund. Id. ¶ 12. QBE wired $3 million, through intermediaries, to a Donum LP account and became a limited partner in Donum LP on October 10, 2005. Id. Donum LP obtained one or two additional limited partners, who invested $50,000 to $100,000. Id. ¶ 2.

By December 2005, the Donum Fund had lost approximately $500,000 through one bad investment, leaving $2,565,456.89 in its accounts. Id. ¶¶ 13-14. By that point, the U.S. Securities and Exchange Commission (the "SEC") had been investigating Jadis Capital for some time, and had discovered the defendants' fraud. See id. ¶ 13. As a result, Donum LP had beenliquidated and its remaining funds were being held in escrow at the SEC's request. Id. ¶¶ 13-14. QBE learned that Jadis Investments "was out of business and that there was no one available to provide an accounting of investments and liquidation for Donum LP." Id. ¶ 15 (internal quotation marks omitted). QBE did not attempt to recover the funds being held in escrow because the SEC threatened to seize the funds if it did so. See id. ¶ 17.

The defendants were indicted in April 2009. In February and March 2010, each defendant pleaded guilty to a charge of conspiracy to commit securities fraud in violation of 18 U.S.C. § 371. On June 23, 2010, this Court entered a preliminary order of forfeiture. The defendants were ordered to forfeit all right, title and interest in two separate funds: (1) $166,075.47 from the Logos Fund, and (2) $2,565,456.89 from the Donum Fund. Preliminary Order of Forfeiture 1-2, ECF No. 56.

On August 3, 2010, QBE petitioned to adjudicate its interest in the Donum Fund's property that was forfeited and to amend the preliminary order of forfeiture. The government moved to dismiss the petition for lack of standing. On December 7, 2011, Judge Carter filed the Report, recommending that the motion be granted. QBE timely filed objections to the Report on December 21, 2011, and the government filed a response to the objections on January 25, 2012.

DISCUSSION

A. Standard of Review

Pursuant to 28 U.S.C. § 636(b)(1), I must make a de novo review of any portions of a report and recommendation to which objections have been made. T-Mobile Ne. LLC v. Inc. Vill. of E. Hills, 779 F. Supp. 2d 256, 260 (E.D.N.Y. 2011); see also Fed. R. Civ. P. 72(b)(3). After review, I may accept, reject or modify any of the magistrate judge's findings orrecommendations. T-Mobile Ne., 779 F. Supp. 2d at 260 (citing 28 U.S.C. § 636(b)(1); Fed. R. Civ. P. 72(b)).

"[A] motion to dismiss a third-party petition in a forfeiture proceeding prior to discovery or a hearing should be treated like a motion to dismiss a civil complaint under Federal Rule of Civil Procedure 12(b)." Willis Mgmt. (Vt.), Ltd. v. United States, 652 F.3d 236, 241 (2d Cir. 2011) (quoting Pacheco v. Serendensky, 393 F.3d 348, 352 (2d Cir. 2004)) (internal quotation marks omitted) (alteration in original). Thus, I will assume the well-pleaded facts in the petition are true and determine if QBE has alleged facts plausibly establishing its standing. See id. at 241-42; see also Fed. R. Crim. P. 32.2(c)(1)(A).

B. Standing To Challenge Forfeiture

A third party "asserting a legal interest in property which has been ordered forfeited to the United States . . . may . . . petition the court for a hearing to adjudicate the validity of his alleged interest in the property." 21 U.S.C. § 853(n)(2); see also 28 U.S.C. § 2461(c); DSI Assocs. LLC v. United States, 496 F.3d 175, 183 (2d Cir. 2007) ("[S]ection 853(n) provides the exclusive means by which a third party may lay claim to forfeited assets . . . ."). Following a hearing, the court may determine that "the right, title, or interest" in the forfeited property "was vested in the petitioner rather than the defendant or was superior to any right, title, or interest of the defendant" or 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." 21 U.S.C. § 853(n)(6). If the court makes such a determination, it must amend the preliminary order of forfeiture accordingly. Id.

To have standing to bring a petition under § 853(n)(2), a petitioner must have "a legal interest" in the property at issue. See United States v. Ribadeneira, 105 F.3d 833, 835 (2dCir. 1997). A general creditor of the defendant lacks an interest in any of the defendant's specific property and, thus, lacks standing under § 853(n)(2). DSI Accocs., 496 F.3d at 184; Ribadeneira, 105 F.3d at 835. "State law determines a petitioner's legal interest in the property at issue." Willis Mgmt., 652 F.3d at 242.

C. Analysis

1. QBE's Standing as a Limited Partner of Donum LP

Under Delaware law, "property of a limited partnership belongs to the partnership as an entity, not to its individual partners." Mass. Mut. Life Ins. Co. v. Certain Underwriters at Lloyd's of London, No. 4791-VCL, 2010 WL 2929552, at *8 (Del. Ch. July 23, 2010); see also 6 Del. C. § 17-701; In re Marriott Hotel Props. II Ltd. P'ship, No. Civ. A. 14961, 2000 WL 128875, at *15 (Del. Ch. Jan. 24, 2000). However, this is a default rule that may be modified by the terms of a particular partnership agreement. See McGovern v. Gen. Holding, Inc., No. 1296-N, 2006 WL 4782341, at *18 & n.83 (Del. Ch. June 2, 2006).

QBE argues that the terms of Donum LP's partnership agreement gave it a property interest in its capital account held by Donum LP. For the reasons stated in Judge Carter's Report, I conclude that Donum LP's partnership agreement does not modify the default rule that partnership property is that of the partnership, not the limited partners. See Report at 10-11.

However, this conclusion does not resolve the question of standing. It appears to be beyond dispute that Donum LP itself would have standing to contest the forfeiture of the Funds. This raises the question as to whether QBE - a limited...