Bass, Berry & Sims attorney Chris Lazarini analyzed the application of the "bona fide purchaser" exception under the criminal forfeiture statutes in a case in which an individual acquired additional shares in Rugged Power Investments (RPI) after receiving RPI shares from an individual under investigation for fraud. The Court ruled that both the original and additional shares were subject to forfeiture.
Chris provided the analysis for Securities Litigation Commentator (SLC). The full text of the analysis is below and used with permission from the publication. If you would like to receive additional content from the SLC, please visit the SLC website to sign up for the newsletter.
USA vs. Galemmo, No. 15-3932 (6th Cir., 8/16/16)
Under the criminal forfeiture statutes, title to forfeitable property belongs to the government at the time the criminal act is committed, subject to an innocent third party's ability to establish, by a preponderance of the evidence, that her claim to the property is "superior" to that of the government's or that she was a "bona fide purchaser for value" who acquired her interest in the property when she was "reasonably without cause to believe that the property was subject to forfeiture."
After Glen Galemmo pled guilty to wire fraud and money laundering in a Ponzi scheme, he was ordered to forfeit certain assets. The forfeited assets included 45 units in Rugged Power Investments, LLC ("RPI"), an entity he founded and to which he had transferred proceeds of his fraud in exchange for 30 RPI units. While he was under investigation, Mr. Galemmo transferred his 30 RPI units to his wife. Exercising her rights as a unit holder and using funds provided to her by her father-in-law, Mrs. Galemmo purchased an additional 15 RPI units. After the district court rejected Mrs. Galemmo's challenge to the forfeiture of the 45 RPI units, she appealed the decision on the 15 units she purchased, arguing that she bought them with innocent funds and had no reason to believe they would be subject to forfeiture at the time of her purchase.
Conducting a de novo review, the Sixth Circuit affirms. The criminal forfeiture statutes provide that, by operation of the relation-back clause, title to forfeitable property belongs to the government at the time the criminal act is committed. An innocent third party may avoid forfeiture, the Court explains, if she can establish by a preponderance of the evidence that her interest in the property is "superior" to that of the government or that she was a "bona fide purchaser for value" who acquired her interest in the property when she was "reasonably without cause to believe that the property was subject to forfeiture." 21 U.S.C. §853(n)(6)(B).
The Court finds that Mrs. Galemmo's interest in the 15 RPI units is not superior to the government's interest. Under the relation-back doctrine, the government’s interest in the original 30 RPI units related back to when Mr. Galemmo first obtained those units using proceeds of his fraud. Because that event predated Mr. Galemmo's transfer of the units to his wife, the Court concludes, Mrs. Galemmo never had the right to buy additional RPI units. Instead, when the government obtained title to the original 30 units, it also obtained title to all ownership rights tied to those units, including the right to buy additional units.
Turning to the "bona fide purchaser" exception, the Court finds Mrs. Galemmo cannot show by a preponderance of evidence that she was without cause to believe the 15 shares were subject to forfeiture. Her own actions, the Court finds, which included efforts to shield other of Mr. Galemmo's assets from the government, reveal an awareness of the "red flags" around her and her husband's finances and show a reason to believe that the 15 RPI units were subject to forfeiture.
One Court member wrote a concurring opinion agreeing with the outcome but observing that the monies loaned to Mrs. Galemmo by her father-in-law would not have been subject to forfeiture had she held the cash received instead of using it to purchase the RPI units.