Justia White Collar Crime Opinion Summaries

Petitioner’s father established a trust for the benefit of petitioner and his siblings, and made petitioner the nonprofessional trustee. The trust’s sole asset was the father’s life insurance policy. Petitioner borrowed funds from the trust three times; all borrowed funds were repaid with interest. His siblings obtained a state court judgment for breach of fiduciary duty, though the court found no apparent malicious motive. The court imposed constructive trusts on petitioner’s interests, including his interest in the original trust, to secure payment of the judgment, with respondent serving as trustee for all of the trusts. Petitioner filed for bankruptcy. Respondent opposed discharge of debts to the trust. The Bankruptcy Court held that petitioner’s debts were not dischargeable under 11 U. S. C. 523(a)(4), which provides that an individual cannot obtain a bankruptcy discharge from a debt “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.” The district court and the Eleventh Circuit affirmed. The Supreme Court vacated. The term “defalcation” in the Bankruptcy Code includes a culpable state of mind requirement involving knowledge of, or gross recklessness in respect to, the improper nature of the fiduciary behavior. The Court previously interpreted the term “fraud” in the exceptions to mean “positive fraud, or fraud in fact, involving moral turpitude or intentional wrong.” The term “defalcation” should be treated similarly. Where the conduct does not involve bad faith, moral turpitude, or other immoral conduct, “defalcation” requires an intentional wrong. An intentional wrong includes not only conduct that the fiduciary knows is improper but also reckless conduct of the kind that the criminal law often treats as the equivalent. Where actual knowledge of wrongdoing is lacking, conduct is considered as equivalent if, as set forth in the Model Penal Code, the fiduciary “consciously disregards,” or is willfully blind to, “a substantial and unjustifiable risk” that his conduct will violate a fiduciary duty. View "Bullock v. BankChampaign, N. A." on Justia Law

After the mutual funds, known as the Lancelot or Colossus group, folded in 2008, the trustee in bankruptcy filed independent suits or adversary actions seeking to recover from solvent third parties, including the Funds’ auditor, law firm, and some of the Funds’ investors, which the Trustee believes received preferential transfers or fraudulent conveyances. The Funds had invested in notes issued by Thousand Lakes, which was actually a Ponzi scheme, paying old investors with newly raised money. In these proceedings the trustee contends that investors who redeemed shares before the bankruptcy received preferential transfers, 11 U.S.C. 547, or fraudulent conveyances, 11 U.S.C. 548(a)(1)(B) and raised a claim under the Illinois fraudulent-conveyance statute, using the avoiding power of 11 U.S.C. 544. The bankruptcy court rejected the claims, citing the statutory exception: “the trustee may not avoid a settlement payment or transfer made to a financial participant in connection with a securities contract, except under section 548(a)(1)(A) of this title.” The Seventh Circuit affirmed. A transfer from the Funds to each redeeming investor occurred “in connection with” a securities contract. View "Peterson v. Somers Dublin, Ltd." on Justia Law

Gary and Deborah divorced in 2003 and agreed to a marital settlement. Gary purchased an annuity, to pay him $200 per month until his death; the settlement required him to pay her “$200 per month…in lieu of her interest in [the annuity].” Two years later, Gary filed for Chapter 7 bankruptcy and asked the court to discharge financial obligations to his ex-wife under the settlement. Gary attempted to blackmail Deborah into cooperation, using nude photos of her sister as a child. He is now in prison for bankruptcy fraud and possession of child pornography. 18 U.S.C. 152(6), 2252A(a)(5)(B). Deborah and the bankruptcy trustee agreed that she had an unsecured claim for $158,455.63, including $12,400 representing 62 monthly payments that the trustee had received under the annuity. Gary owned the annuity, so these payments were part of the bankruptcy estate and their inclusion in her claim was a mistake. The trustee successfully moved the bankruptcy judge to permit transfer to Deborah of $1000 in annuity payments collected since settling her claim, and to direct the company to make future payments to her directly. The Seventh Circuit reversed, directing the court either to order Deborah to return the $1000 or order the trustee to deduct it from her claim and to instruct the company to resume making payments to the trustee. View "Peel v. Peel" on Justia Law

Stern represented Allen in a discrimination suit, after which they became romantically involved. Allen and her husband had separated and had executed a settlement agreement awarding Allen $95,000, to be paid in installments. A month later, Allen visited a bankruptcy attorney, Losey, giving Stern’s name as “friend/referral” on an intake form. In filing for bankruptcy, Allen did not disclose the marital settlement. While her bankruptcy was pending, Allen received the money. A month after her bankruptcy discharge, Allen transferred the settlement proceeds to Stern, who opened a CD in his name. The attorney for Allen’s ex-husband informed the bankruptcy trustee that Allen failed to disclose the settlementand the discharge was revoked. Allen pleaded guilty to making a false declaration in a bankruptcy proceeding, 18 U.S.C. 152(3). She told a grand jury that Stern had not referred her to Losey and was convicted of making a material false statement in a grand jury proceeding, 18 U.S.C. 1623. The court admitted Losey’s client-intake form as evidence of perjury. Stern was convicted of conspiring to commit money laundering, 18 U.S.C. 1956(h). The Seventh Circuit affirmed Allen’s conviction, holding that the intake form was not a communication in furtherance of legal representation and was not subject to attorney-client privilege. Reversing Stern’s conviction, the court held that the judge erred in excluding Stern’s testimony about why he purchased the CDs. View "United States v. Stern" on Justia Law

Defendant, a lawyer, deposited lucre in his law firm's bank accounts after he was convicted of criminal activity, where it was commingled with the firm's receipts from legitimate clients. At issue was whether the money in the bank accounts at the time defendant was charged was subject to forfeiture. The sheer volume of financial information available and required to separate tainted from untainted monies in this case lead the court to apply the Third Circuit's rule in United States v. Voigt; in this case, the district court erred in ordering forfeiture of the funds as proceeds; consequently, all proceedings the court held subsequent to the imposition of defendant's sentence must be vacated; the court's conclusion did not foreclose the Government's attempt to forfeit a property interest held by defendant individually; and, after addressing the parties' remaining arguments, the court reversed and remanded the judgment of the district court. View "United States v. Rothstein" on Justia Law

Petitioner’s father established a trust for the benefit of petitioner and his siblings, and made petitioner the nonprofessional trustee. The trust’s sole asset was the father’s life insurance policy. Petitioner borrowed funds from the trust three times; all borrowed funds were repaid with interest. His siblings obtained a state court judgment for breach of fiduciary duty, though the court found no apparent malicious motive. The court imposed constructive trusts on petitioner’s interests, including his interest in the original trust, to secure payment of the judgment, with respondent serving as trustee for all of the trusts. Petitioner filed for bankruptcy. Respondent opposed discharge of debts to the trust. The Bankruptcy Court held that petitioner’s debts were not dischargeable under 11 U. S. C. 523(a)(4), which provides that an individual cannot obtain a bankruptcy discharge from a debt “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.” The district court and the Eleventh Circuit affirmed. The Supreme Court vacated. The term “defalcation” in the Bankruptcy Code includes a culpable state of mind requirement involving knowledge of, or gross recklessness in respect to, the improper nature of the fiduciary behavior. The Court previously interpreted the term “fraud” in the exceptions to mean “positive fraud, or fraud in fact, involving moral turpitude or intentional wrong.” The term “defalcation” should be treated similarly. Where the conduct does not involve bad faith, moral turpitude, or other immoral conduct, “defalcation” requires an intentional wrong. An intentional wrong includes not only conduct that the fiduciary knows is improper but also reckless conduct of the kind that the criminal law often treats as the equivalent. Where actual knowledge of wrongdoing is lacking, conduct is considered as equivalent if, as set forth in the Model Penal Code, the fiduciary “consciously disregards,” or is willfully blind to, “a substantial and unjustifiable risk” that his conduct will violate a fiduciary duty. View "Bullock v. BankChampaign, N. A." on Justia Law

In 2000 the SEC charged violation of securities law. The court appointed a receiver to distribute assets among victims of the $31 million fraud. The receiver found that assets had been used to acquire oil and gas leases. SonCo claimed an interest in the leases. In 2010, the district court issued an “agreed order,” requiring SonCo to pay $600,000 for quitclaim assignment of the leases and release of claims in Canadian litigation. Alco operated the wells and had posted a $250,000 cash bond with the Texas Railroad Commission. Alco could get its $250,000 back if replaced by new operator that posted an equivalent bond. The $250,000 had come, in part, from defrauded investors. Alco was incurring environmental liabilities, with little prospect of offsetting revenues. SonCo was to replace Alco, but failed to so, after multiple extensions. The district judge held SonCo in civil contempt, ordered it to return the leases, and allowed the receiver to keep the $600,000. The Seventh Circuit upheld the finding of civil contempt. Following remand, the Seventh Circuit affirmed the sanction; considering additional environmental compliance costs and receivership fees, a plausible estimate of the harm would be $2 million. ”SonCo will be courting additional sanctions, of increasing severity, if it does not desist forthwith from its obstructionist tactics.” View "Sec. & Exch. Comm'n v. First Choice Mgmt Servs., Inc." on Justia Law

Canopy Financial developed and marketed software for banks and health-care payers to handle health-related savings accounts and administered the health-care funds of almost 2,000 entities. When Canopy entered bankruptcy in 2009, it came to light that Banas and Blackburn had misappropriated more than $90 million from Canopy’s investors and the customers. Each was sentenced to more than 10 years’ imprisonment. Blackburn committed suicide. The Trustee for the benefit of Canopy’s creditors has recovered about $50 million by seizing assets from Blackburn’s mansion and is attempting to recover from recipients of fraudulent conveyances, transfers made while Canopy was insolvent, not in exchange for reasonably equivalent value, 11 U.S.C. 544(b), 548, 550; 740 ILCS 160/1 to 160/12. According to the Trustee, Banas and Blackburn spent more than $80,000 of Canopy’s money at a Nevada nightclub. After obtaining default judgment, the Trustee began to collect from its assets in Nevada. The owner sought to vacate the default under Rule 60(b)(1) for excusable neglect by its agent for service of process. The bankruptcy judge declined. The Seventh Circuit affirmed, noting that the owner had the burden of proof, but chose not to present any evidence about whether the agent received the essential documents. View "Buddha Entm't, LLC v. Paloian" on Justia Law

For more than 20 years, Kurlemann built and sold luxury homes in Ohio. In 2005-2006 he borrowed $2.4 million to build houses in Mason. When neither sold, he enlisted realtor Duke, who found two straw buyers, willing to lie about their income and assets on loan applications that Duke submitted to Washington Mutual. Both buyers defaulted. Duke pled guilty to seven counts, including loan fraud and making false statements to a lending institution, and agreed to testify at Kurlemann’s trial. A jury convicted Kurlemann of six counts, including making false statements to a lending institution, 18 U.S.C. 1014; and bankruptcy fraud, 18 U.S.C. 157. The district court sentenced Kurlemann to concurrent 24-month sentences and ordered him to pay $1.1 million in restitution. The district court sentenced Duke to 60 months. The Sixth Circuit affirmed the bankruptcy fraud conviction, based on Kurlemann’s concealment of his interest in property, but reversed and remanded his false statements conviction, finding that the trial court improperly instructed the jury that concealment was sufficient to support conviction. The court also reversed Duke’s sentence, finding that the court failed to explain the sentence it imposed. View "United States v. Kurlemann" on Justia Law

Stone owned STM, which owed Fifth Third about $1 million, secured by liens on business assets and on Stone’s house. Stone’s attorney, Atherton, introduced Stone to Waldman, a potential investor. Stone did not know that Atherton was indebted to Waldman and had given Waldman STM’s proprietary business data. Atherton filed STM’s Chapter 11 bankruptcy petition to preserve assets so that Waldman could acquire them. Atherton allowed the automatic stay to expire. Fifth Third foreclosed, obtaining judgments and a lien on Stone’s house. Waldman paid Fifth Third $900,000 for the bank’s rights. Waldman and Atherton offered to pay off Stone’s debts and employ him in exchange for STM’s assets and told Stone to sign documents without reading them, to meet a filing deadline. The documents actually transferred all STM assets exchange for a job. Ultimately, Waldman owned all STM assets and Stone’s indebtedness, with no obligation to forgive it. Waldman filed garnishment actions; Stone filed a Chapter 11 bankruptcy petition, alleging that Waldman had fraudulently acquired debts and assets. Atherton was disbarred. The bankruptcy court found that Waldman and Atherton had perpetrated “egregious frauds,” invalidated Stone’s obligations, and awarded Stone $1,191,374 in compensatory and $2,000,000 in punitive damages. The district court affirmed. The Sixth Circuit affirmed the discharge, but vacated the award of damages as unauthorized. View "Waldman v. Stone" on Justia Law