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United States v. Lindell

United States District Court, D. Hawaii

September 8, 2016

UNITED STATES OF AMERICA, Plaintiff,
v.
GEORGE LINDELL 01 and HOLLY HOAEAE 02, Defendants.

         ORDER (1) DENYING LINDELL'S MOTION TO PARTIALLY UNFREEZE ASSET FOR LIVELIHOOD EXPENSES (DKT. NO. 210); LINDELL'S MOTION FOR IMMEDIATE RETURN OF UNTAINTED PORTION OF SEIZED ASSET (DKT. NO. 292); LINDELL'S MOTION TO VACATE GUILTY VERDICTS (DKT. NO. 294); AND HOAEAE'S JOINDER IN LINDELL'S MOTIONS (DKT. NO. 300); (2) DENYING AS MOOT GOVERNMENT'S APPLICATION FOR A RESTRAINING ORDER, OR IN THE ALTERNATIVE, A SEIZURE WARRANT (DKT. NO. 311); AND (3) GRANTING GOVERNMENT'S MOTION FOR ENTRY OF FORFEITURE MONEY JUDGMENT (DKT. NO. 214)

          DERRICK K.WATSON UNITED STATES DISTRICT JUDGE

         INTRODUCTION

         Following a twenty-seven day trial, a jury found Lindell and Hoaeae guilty of operating a Ponzi scheme, as charged in the Second Superseding Indictment, and convicted both defendants of multiple counts of mail and wire fraud. The jury also found Lindell guilty of four counts of money laundering.

         Post-trial, Lindell now challenges the propriety of the Government's February 2012 seizure of his Wells Fargo retirement account. Lindell further asserts that even if properly seized, a portion of his retirement account should have been released to both cover what he refers to as “livelihood expenses” and to pay for counsel of his own choosing. According to Lindell and Hoaeae, the failure to do so for the latter purpose deprives both of their Sixth Amendment rights within the meaning of Luis v. United States, 136 S.Ct. 1083 (2016), and mandates the vacatur of the jury's guilty verdicts.

         Not to be left out, the Government seeks a post-trial restraining order, or alternatively, a new seizure warrant to cover the appreciation of funds in the same Wells Fargo retirement account above the approximately $256, 000 that was initially seized more than four and a half years ago. The Government also moves for entry of a forfeiture money judgment.

         Because the Government seized Lindell's retirement account pursuant to a valid 2012 warrant approved by the Magistrate Judge and supported by probable cause, and because all of the funds in that account are “tainted, ” Defendants' various motions to release the funds and to vacate the jury's verdict are denied. The Government's application for a further restraining order on that account is moot and is denied on that basis. The Government's motion for entry of a forfeiture money judgment is granted, with instructions specified below.

         BACKGROUND

         I. Pretrial Seizure and Charges

         In 2010, the FBI began investigating Lindell, Hoaeae and the companies they controlled, The Mortgage Store (“TMS”) and True Wealth Group, LLC, Living by Design (“TWG”). The FBI discovered that, from 2005 through November 2010, Lindell and Hoaeae marketed a product known as “The Parking Lot.” Defendants' product received that moniker because investors could “park” their money at guaranteed rates of return ranging from 6 to 8 percent. To document Parking Lot investments, TMS issued a promissory note to investors setting forth the amount of their investment and the interest rate to be paid.

         Although Lindell and Hoaeae represented to potential investors that the funds deposited in The Parking Lot would be invested in bonds and secured real estate, the bulk of investor funds was used to make Ponzi payments owed to previous Parking Lot investors and to personally enrich Defendants. Lindell and Hoaeae deposited Parking Lot investor monies into the TMS business bank account, Bank of Hawaii (“BOH”) account ending in -3355, contrary to representations to investors that funds would be deposited in a separate account. As a result, investor funds were immediately commingled with other TMS funds, including money not related to the Parking Lot. Defendants also used BOH -3355 to make Parking Lot disbursements.[1]

         TMS filed a chapter 7 bankruptcy petition on November 12, 2010. See In Re The Mortgage Store, Inc., Case No. 10-03454 (Bankr. D. Haw.). On December 3, 2010, the Bankruptcy Trustee initiated an adversary proceeding against Lindell, alleging that Lindell fraudulently transferred millions of dollars of TMS's funds to himself while running a Ponzi scheme, to the detriment of TMS's investors and creditors. See Field v. Lindell, Adv. Proc. No. 10-90146 (Bankr. D. Haw.). The Trustee and Lindell settled the adversary proceeding pursuant to an October 31, 2011 settlement agreement in which Lindell agreed to a $5, 000, 000 personal judgment in favor of the Trustee, and the Trustee agreed to exclude a portion of Lindell's retirement accounts from execution. See Field v. Lindell, Adv. Proc. No. 10-90146 (Bankr. Dkt. No. 132), see also Exs. B & C. to Govt.'s Collective Mem. in Opp. to Lindell Motions (Klevansky Decl., Settlement Agreement, Stipulated Non-Dischargeable Judgment) (Dkt. No. 316).

         On February 16, 2012, the Magistrate Judge approved a seizure warrant for $256, 688.46 in funds located in Lindell's Wells Fargo Individual Retirement Account (“IRA”) ending in -7984. The Application and Affidavit in Support of Application for Seizure Warrant, sworn to by FBI Special Agent Steven P. Carter, alleged that probable cause existed to seize the retirement account pursuant to 18 U.S.C. §§ 981(a)(1)(C), 982(a)(2), and 984.[2] On May 7, 2012, Lindell's court-appointed counsel filed a claim of ownership with the FBI. Pursuant to 18 U.S.C. § 983(a)(3)(A), the Government obtained - with Lindell's agreement - three extensions of time, up to May 28, 2013, in which to file a complaint for forfeiture against the funds in the retirement account. See Misc. No. 12-00238 JMS-KSC. To date, however, the Government has not filed a civil forfeiture complaint against the funds.

         On May 23, 2013, a federal grand jury indicted Defendants. The Indictment was superseded on March 24, 2014 and again on October 23, 2014. The United States charged Lindell and Hoaeae with mail and wire fraud in violation of 18 U.S.C. §§ 1341 and 1343. The Government additionally charged Lindell with money laundering in violation of 18 U.S.C. § 1957. The Second Superseding Indictment included a forfeiture notice for, among other property, $27, 000 contained in Wells Fargo -7984, $8, 626, 588.86, which represented the proceeds of the charged mail and wire fraud offenses, and any property involved in or traceable to the charged transactions in criminally derived property. Dkt. No. 60 (10/23/14 Second Superseding Indictment).

         II. Trial and Post-Trial Motions

         The evidence adduced at trial established that Lindell and Hoaeae ran the Parking Lot scheme from at least 2005 to 2010, and received gross receipts of $26, 671, 268.66 in deposits from Parking Lot investors. The net loss to victims was $8, 988, 428.47. See Trial Exhibit O-7. Lindell and Hoaeae deposited these investor funds in BOH -3355, where they were purposefully commingled with TMS's other funds, enabling Defendants to conceal the ownership of investor funds and to launder the proceeds of the Parking Lot. Government witnesses testified that investigators utilized the Lowest Intermediate Balance Rule (“LIBR”) to trace Parking Lot funds and concluded that 54 percent of the funds deposited into BOH -3355 were proceeds of the Parking Lot scheme during the relevant time periods. Parking Lot funds frequently flowed out of BOH -3355 into Lindell's personal checking account to pay for personal expenses or into his building account for the construction of his personal residence. Other Parking Lot funds were distributed to Hoaeae in the form of checks or transferred from BOH -3355 to her personal account to pay for her personal credit card debts, vehicles, and expenses.

         On April 21, 2015, the Court granted the Government's motion to dismiss Counts 2, 13, and 16, and on May 14, 2015, the Court granted the Government's oral motion to dismiss Counts 5, 11, and 12 as to both Defendants. On May 27, 2015, the jury returned a guilty verdict against both Defendants on all remaining charges, including the mail fraud offenses set forth in Counts 1, 3-4, and 6-10, and the wire fraud offenses set forth in Counts 14 and 15, of the Second Superseding Indictment. Lindell was additionally convicted of the money laundering charges in Counts 17 through 20. The jury also returned a Special Verdict Regarding Forfeiture, determining that $27, 000 of the funds contained in Wells Fargo -7984 were subject to forfeiture as proceeds of the mail and wire fraud offenses.

         On August 14, 2015, Lindell filed a Motion to Partially Unfreeze Asset for Livelihood Expenses, seeking the release of “reasonable livelihood expenses” from the seized Wells Fargo -7984, pursuant to the Fifth and Eighth Amendments. Dkt. No. 210. That same day, his court-appointed trial counsel moved to withdraw, which was granted on August 24, 2015. Dkt. Nos. 209, 215 and 218.

         On August 21, 2015, the Government filed a motion for the entry of two money judgments: (1) against both Defendants, jointly and severally, for $8, 626, 588.86, the amount obtained by Defendants as a result of the mail and wire fraud offenses, as proved at trial; and (2) a money judgment against Lindell only in the amount of $255, 000, the amount the evidence at trial established was involved in the transactions in criminally derived property for the money laundering offenses. Dkt. No. 214.

         Lindell, then represented by his current court-appointed counsel, filed two motions on May 27, 2016: (1) Motion For Immediate Return Of Untainted Portion of Seized Asset (Dkt. No. 292); and (2) Motion to Vacate Guilty Verdicts (Dkt. No. 294). Both motions rely on the argument that the initial seizure of Wells Fargo -7984 was unlawful and that the “untainted” portion of the funds from that account should be released so that Lindell can hire counsel of his choice pursuant to Luis v. United States, 136 S.Ct. 1083 (2016). Since Lindell also argues that the release of funds to hire counsel of choice should have occurred long ago, prior to trial, he asserts that his conviction should be vacated. Hoaeae joins in Lindell's motions and seeks to vacate her guilty verdict as well, based on the Sixth Amendment and her joint defense agreement with Lindell. Dkt. No. 300.

         On July 15, 2016, the Government filed an Application for a Restraining Order, Or In the Alternative, A Seizure Warrant, For the Contents of Wells Fargo Individual Retirement Account Number ****984 (Dkt. No. 311), seeking to restrain the entirety of Wells Fargo -7984, including any appreciation of funds accrued following the initial seizure in 2012. According to the Government, the balance of Wells Fargo -7984 now exceeds $400, 000.[3] See Govt.'s Collective Mem. in Opp. to Lindell Motions at 12 (Dkt. No. 316).

         DISCUSSION

         The Court first addresses Lindell's various motions seeking to unfreeze his retirement account and vacate his verdict before turning to the Government's restraining order application and motion for entry of forfeiture judgment.

         I. Lindell's Motions For Immediate Return Of Untainted Portion Of Seized Asset (Dkt. No. 292) And To Vacate Guilty Verdicts (Dkt. No. 294)

         Lindell's motions are based on the untenable premise that the contents of Wells Fargo -7984 are “untainted” and not subject to forfeiture. Because that premise is without merit, the related grounds relied upon to unfreeze the asset and vacate the verdict necessarily fail. Both the motion for immediate return of “untainted” portion of seized asset (Dkt. No. 292) and the motion to vacate guilty verdicts (Dkt. No. 294) are accordingly denied.

         A. The Initial Seizure and Retention of Funds Was Lawful

         Lindell asserts that the Government's initial seizure of Wells Fargo -7984 was unlawful because the Application and Affidavit supporting the February 16, 2012 warrant misapplied controlling law. Lindell also contends that the Government breached additional duties (1) which arose on May 28, 2013 to return the funds when the Government failed to file a civil forfeiture complaint or to “take the steps necessary to preserve its right to maintain custody of the property as provided in the applicable criminal forfeiture statute, ” 18 U.S.C. § 983(a)(3)B)(II); and (2) when the First Superseding Indictment was returned on March 25, 2014, which effectively terminated the criminal forfeiture action against all funds in the retirement account in excess of $27, 000. Finally, Lindell argues that the initial seizure improperly restrained more than criminal proceeds. Each contention is addressed below.

         1. The Seizure Warrant Was Valid

         The three statutory bases for forfeiture set forth in Special Agent Carter's Affidavit in support of the seizure warrant are 18 U.S.C. §§ 981(a)(1)(C), 982(a), and 984:

(a) 18 U.S.C. § 981(a)(1)(C), as property, real or personal, which constitutes or is derived from proceeds traceable to a violation of any offense constituting “specified unlawful activity” (as defined in 18 U.S.C. § 1956(c)(7)), or a conspiracy to commit such offense. In the instant case, the alleged specified unlawful activities include mail fraud (18 U.S.C. § 1341) and bank fraud (18 U.S.C. 1344);
(b) 18 U.S.C. § 982(a)(2), as property constituting, or derived from, proceeds obtained directly or indirectly as a result of a violation of, or conspiracy to violate, 18 U.S.C. §§ 1341 and/or 1344 affecting a financial institution; and/or
(c) 18 U.S.C. § 984, as fungible funds deposited in accounts of a financial institution within one year from the date of the above-referenced fraud.

         Carter Aff. ¶ 9, attached as Ex. 3 to Lindell Motion (Dkt. No. 292).[4]

         The retirement account was lawfully seized under the civil forfeiture statute, Section 981(a)(1)(C), as proceeds traceable to a violation of an offense constituting “specified unlawful activity” under Section 1956(c)(7). It was also lawfully seized pursuant to the criminal forfeiture statute, Section 982(a)(2), as proceeds obtained as a result of a violation of Section 1341 affecting a financial institution.[5] The crux of Lindell's argument to the contrary is that because Sections 981(a)(1)(C) and 982 are limited to “tainted” funds, the warrant was invalid with respect to the “untainted” portion of Wells Fargo -7984. However, because all of the funds in the retirement account were “tainted” as a result of Defendants' commingling with specified proceeds, Lindell's argument does not withstand scrutiny.

         Lindell's retirement account is subject to forfeiture under Section 981(a)(1)(C) as property derived from proceeds of mail and wire fraud offenses. As set forth in Special Agent Carter's Affidavit, Wells Fargo -7984 was opened on September 21, 2009 and funded from a rollover of the balance from the closing of a TMS 401(k) profit sharing plan. Carter Aff. ¶¶ 26-27 at p. 11. More specifically, in 2009, Lindell rolled over $220, 915.22 from the TMS 401(k) to Wells Fargo -7984. Carter Aff. ¶ 27(b). The TMS 401(k), in turn, was funded in part from TMS's primary operational account, BOH -3355, in which substantial Parking Lot investor proceeds were deposited. In fact, the Government submitted evidence of a July 27, 2007 transfer from BOH -3355 into the TMS 401(k), at which time the only funds in BOH -3355 were Parking Lot investor funds. Carter Aff. ¶¶ 27-29; see also Carter Aff. ¶ 30 (“From review of the TMS BOH 3355 account, it was determined that all or part of the investor's funds were used to assist in funding the payments to the TMS 401K retirement plan which was ‘rolled' over to benefit the funding of the Lindell IRA in the amount of $220, 815.22, which has increased due to market conditions.”).

         It is undisputed that BOH -3355 contained Parking Lot investor funds - proceeds of what the jury determined to be mail and wire fraud offenses - which were commingled with other TMS funds unrelated to the Parking Lot scheme. It is also undisputed that BOH -3355 was the origin of monies used to fund Lindell's TMS 401(k), which was rolled over in 2009 into Wells Fargo -7984.[6] The commingling of investor funds-tainted proceeds-with other TMS funds is sufficient to taint the entire amount transferred to Wells Fargo -7984. See United States v. Lazarenko, 564 F.3d 1026, 1035 (9th Cir. 2009) (For purposes of Section 1956 money laundering charges, “the commingling of tainted money with clean money taints the entire account . . . It is enough that the money, even if innocently obtained, was commingled in an account with money that was obtained illegally.”) (citing United States v. English, 92 F.3d 909, 916 (9th Cir. 1996)).

         TMS utilized up to sixteen different accounts to transfer investor funds. Turner Aff. ¶¶ 23-24. The Government has sufficiently traced the proceeds using LIBR, which post-Luis decisions look upon with approval. United States v. Marshall, 2016 WL 3937514, at *5-6 (N.D. W.Va. July 18, 2016) (citing United States v. Banco Cafetero Panama, 797 F.2d 1154, 1159-60 (2d Cir. 1986); In re Dameron, 155 F.3d 718, 724 (4th Cir. 1998)) (adopting lowest intermediate balance rule to determine whether assets in various bank accounts were “tainted” for purposes of Luis analysis)).[7] In sum, Well Fargo -7984 contained commingled, tainted funds subject to forfeiture pursuant to Section 981(a)(1)(C).

         Further, the initial seizure of the funds in Wells Fargo -7984 was lawful pursuant to the criminal forfeiture statute, Section 982(a)(2), as proceeds obtained directly or indirectly as a result of a violation of mail and wire fraud affecting a financial institution. Lindell argues that the warrant is invalid as a criminal seizure warrant because the Application contains no factual basis to support the conclusion that Wells Fargo -7984 contains proceeds of a mail or wire fraud offense which affects a financial institution. Lindell reads Section 982 too narrowly. Financial institutions were instrumental in the operation of the Parking Lot Ponzi scheme and Lindell's ongoing concealment of his fraudulent activities. The Carter Affidavit details several paragraphs of conduct by Lindell “affecting a financial institution, ” including: fraudulently depositing, withdrawing, and transferring Parking Lot investor funds into BOH -3355 in order to launder those funds; using the 10 percent Bank of Hawaii Sweep Account; and utilizing the Wells Fargo -7984 and TMS 401(k) accounts, the Wachovia Securities Managed Account and other accounts at financial institutions to conceal and facilitate fraudulent mail ...


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