Case 9:03-cv KAM Document 2240 Entered on FLSD Docket 03/26/2009 Page 1 of 11 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF FLORIDA

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1 Case 9:03-cv KAM Document 2240 Entered on FLSD Docket 03/26/2009 Page 1 of 11 SECURITIES AND EXCHANGE COMMISSION UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF FLORIDA Case No Civ-MARRA/JOHNSON vs. Plaintiff MICHAEL LAUER, LANCER MANAGEMENT GROUP, LLC, and LANCER MANAGEMENT GROUP II, LLC and Defendants LANCER OFFSHORE, INC., LANCER PARTNERS, LP, OMNIFUND, LTD., LSPV, INC., and LSPV, LLC Relief Defendants. / ORDER AND OPINION DENYING MOTION TO MODIFY FREEZE ORDER THIS CAUSE is before e Court upon Defendant Lauer s Motion to Modify Freeze Order to Allow Use of His Own Assets to Retain Counsel [DE 2063]. The Court has carefully considered e motion, supplemental filings, responses filed by bo e Receiver and e Securities and Exchange Commission ( SEC ), e reply, e evidence presented at e evidentiary hearing held November 6, 2008, and argument of counsel. All of Michael Lauer s ( Lauer ) assets are currently restrained pursuant to an order entered on July 18, 2003 [DE 22] ( Freeze Order ). Lauer has on previous

2 Case 9:03-cv KAM Document 2240 Entered on FLSD Docket 03/26/2009 Page 2 of 11 occasions sought modification of e Freeze Order to allow for payment of living expenses and for e retention of counsel. Those motions were denied because e purpose of e asset freeze was to preserve sufficient funds for e payment of a potential disgorgement award. SEC v. ETS Payphones, 408 F.3d 727, 734 (11 Cir. 2005). The Court has since granted summary judgment in favor of e SEC and against Lauer finding at Lauer committed a massive securities fraud. An evidentiary hearing to determine e proper amount of disgorgement and prejudgment interest at Lauer should pay was held on December 12, The SEC has been given an extension of time to file a motion seeking a civil monetary penalty as well. On January 29, 2008, a federal grand jury returned an indictment against Lauer, among oers, based largely on e same conduct as alleged by e SEC in is case. The instant motion seeks modification of e Freeze Order so at Lauer may retain counsel of his choice to represent him in e criminal proceeding. Lauer bases his present request on his assertion at ere is a difference between e standard for asset freezes for disgorgement purposes in SEC enforcement actions and his Six Amendment right to use non-forfeitable assets to retain counsel of his choice. In order to assure him adequate funds for defense in his criminal case, Lauer requests at e Court release $2.5 million of his frozen assets to his defense attorney s trust account. Lauer points to two potential sources for such funds: 1) e cash account in his Banc of America ( BOA ) brokerage account, wor over $2.6 Page 2 of 11

3 Case 9:03-cv KAM Document 2240 Entered on FLSD Docket 03/26/2009 Page 3 of 11 million; and 2) e proceeds from e sale of his New York condominium, now held by e Receiver, which amounts to approximately $750,000. Lauer argues at e sources of ese funds are not tainted wi any of his allegedly fraudulent conduct, but raer are derived from assets acquired by him prior to e time his fraud allegedly began ( Fraudulent Time Period ). A defendant s right to use his own assets to retain counsel of choice is limited to use of assets which are legitimately obtained. United States v. Bissell, 866 F.2d 1343, 1351 (11 Cir. 1989). Thus, Lauer may not use assets to retain counsel which are subject to criminal forfeiture in e indictment. Id.; United States v. Register, 182 F.3d 820, (11 Cir. 1999). Conversely, under circumstances where frozen assets are oerwise unencumbered, a defendant should not be deprived of e use of such assets for retention of counsel which are not traceable to e commission of e offense. Lauer acknowledges at he has no right to access funds which are tainted by securities fraud and subject to forfeiture. The indictment s forfeiture count describes e assets subject to forfeiture as property and proceeds obtained, directly or indirectly, as e result of [e violations alleged in e indictment]. Indictment, pg. 2, 2. Those violations are alleged to have taken place from in or around October 1999 rough in or around July See, e.g., Count 1, pg. 6, 2. Accordingly, Lauer s asserts at assets obtained prior to at date, or derived from assets obtained prior to at date, are Page 3 of 11

4 Case 9:03-cv KAM Document 2240 Entered on FLSD Docket 03/26/2009 Page 4 of 11 not subject to pre-trial restraint and erefore should be available to him for defense fees and costs. Currently, all of Lauer s assets are frozen by e Freeze Order wiout regard to wheer ey are forfeitable. Previously, Lauer sought modification of e freeze order to retain counsel for e defense of is civil enforcement action and to pay his living expenses. The Court held at e asset freeze in is case could reach all of Lauer s assets wiout regard to eir origin in order to ensure eir availability to satisfy any disgorgement remedy at might be awarded. Now Lauer requests a distribution of untainted funds in order to pay legal fees arising from his criminal defense. His current claim, not previously asserted, is based on his Six Amendment constitutional right to have e use of his own funds to retain counsel. It is well-settled at in e face of a Six Amendment claim of entitlement to e use of unencumbered assets for legal fees in a criminal case, e defendant may only be denied access to forfeitable assets, i.e., ose which are traceable proceeds of criminal activity. Bissell, 866 F.2d at 1351; Register, 182 F.3d at Therefore, in ruling on is motion, e Court is required to determine wheer e particular assets which Lauer wishes to use for legal expenses should be Page 4 of 11

5 Case 9:03-cv KAM Document 2240 Entered on FLSD Docket 03/26/2009 Page 5 of 11 1 made available because ere is not probable cause to believe ey are forfeitable proceeds. Proceeds of e Sale of e New York Condominium Lauer seeks to have e proceeds from e sale of e New York City condominium made available to him based on e fact at e condominium was purchased in 1997, prior to e period of e alleged fraud. The condominium was purchased in January 1997, for $1.33 million by TRSOR, Inc., a company Lauer controlled as its sole shareholder. DE 2176 at and 79 & Ex. 11. Lauer financed 100% of e purchase of e condominium rough an interest only loan. Lauer, erefore, had no equity in e condominium when he purchased it. DE 2176 at 52 & Ex. 11. Evidence shows at during e Fraudulent Time Period, Lauer carried e condominium by using tainted funds. DE 2176 at & Ex. 12. After e Court entered e Freeze Order, e condominium was sold for $2.4 million and net proceeds from e sale were approximately $750,000. DE 2176 at 53 & Ex. 11. These proceeds are now held by e Receiver. Lauer asserts, and e SEC s expert does not disagree, at e value of e condominium, which increased by approximately $750,000, is attributable purely to market appreciation. Since e market appreciation value was not derived from 1 To secure a pre-trial order restraining a defendant from using potentially forfeitable assets to pay counsel of his choice, e government need only show probable cause to believe at e assets at issue are tainted by e defendant s alleged fraud. See United States v. Monsanto, 924 F.2d 1186, 1203 (2d Cir. 1991). Page 5 of 11

6 Case 9:03-cv KAM Document 2240 Entered on FLSD Docket 03/26/2009 Page 6 of 11 payments made by Lauer, Lauer asserts at any arguably tainted money he used to keep e condominium does not render e property forfeitable under applicable forfeiture statutes. Under Sections 981(a)(1)(C), and Section 982(a)(2)(A), only property which constitutes or is derived from proceeds traceable to a violation is forfeitable. DE 2109 at 8-9. The Court concludes, for purposes of is case, at when tainted funds are used to pay costs associated wi maintaining ownership of e property, e property itself and its proceeds are tainted by e fraud. See United States v. One Single Family Residence Located at Ave. Nor, Lake Park, Palm Beach County, Fla., 933 F.2d 976, 982 (11 Cir. 1991) (as to a wrongdoer, e full value of real property is forfeitable because some of e funds invested are traceable to e alleged conduct). Since Lauer s use of tainted funds allowed him to maintain ownership, use and benefit of e property, is case does not present a mere commingling of tainted and untainted funds. See United States v. Puche, 350 F.3d 1137, (11 Cir. 2003). Lauer directly profited from using tainted funds to pay for e property. That profit includes any appreciation in its value. Even assuming, arguendo, at e $750,000 being held by e Receiver from e sale of condominium is not tainted by securities fraud, ere is anoer claimant wi a prior and superior right to ese funds, namely, e Internal Revenue Service ( IRS ). Even after e forced sale of Lauer s Greenwich Connecticut home, he remains indebted to e United States in excess of $2 million for unpaid income Page 6 of 11

7 Case 9:03-cv KAM Document 2240 Entered on FLSD Docket 03/26/2009 Page 7 of 11 taxes, interest and penalties for e 2001 tax year. DE 2160, DE 2176 at 85 & Ex. 16, 17. Indeed, e United States Department of Justice, Tax Division, object[s] to any distribution of funds currently held by e Receiver or Bank of America Brokerage account to Lauer. Raer because all of e untainted funds in e possession of e Receiver and in possession of Bank of America are subject to e government s tax lien, we request at any untainted funds be transmitted to is office to satisfy - in whole or in part - Mr. Lauer s unpaid tax debt. See Ex. 19 to Evidentiary Hearing (Letter to SEC from Michael Kearns, Chief, Civil Trial Section, Souern Region, U.S. Department of Justice, Tax Division.) The Internal Revenue Code provides at a lien upon all of a debtor's property arises in favor of e United States as to any tax unpaid after demand. 26 U.S.C The federal tax lien arises upon assessment. 26 U.S.C The IRS made its first assessment against Lauer, giving rise to a lien of approximately $3 million, on December 30, Ex. 19 to Evidentiary Hearing. A tax liability in excess of $2 million remains. The assessment created a lien on all of e property owned by Lauer at at time. That property includes e BOA account and e New York condominium. Accordingly, e IRS lien arose before Lauer was indicted on January 29, 2008, and has priority over Lauer s instant effort to free funds for counsel of his choice. Lauer cannot use an indictment handed down after a tax lien has attached to his property, and e need for counsel incident to at indictment, as a basis for avoiding e legal effects of e prior lien. Page 7 of 11

8 Case 9:03-cv KAM Document 2240 Entered on FLSD Docket 03/26/2009 Page 8 of 11 The Banc of America Cash Account Lauer also argues at e cash in his BOA Account constitutes untainted funds which should be made available to him to retain counsel of his choice. As of February 28, 2008, e cash balance in e account was approximately $2.6 million. As of October 31, 2008, Lauer s BOA Account was wor approximately $4.69 million. DE 2176 at & Ex. 8. Lauer maintains at is cash was derived primarily from e proceeds of e sale of stock in Titan Corporation ( Titan ) which was acquired before e beginning of e Fraudulent Time Period. He erefore asserts ese funds are untainted and should be available for him to hire defense counsel. In e first instance, as was e case wi e proceeds from e sale of his New York condominium, Lauer s claim to e use of ese funds is subordinate to e tax lien of e I.R.S. Moreover, at e beginning of e Fraudulent Time Period, Lauer had 90,000 shares of Titan in his BOA Account. During e Fraudulent Time Period, Lauer sold all but 7,500 Titan shares. DE 2176 at 47 & Ex. 9. Subsequently, and wiin e Fraudulent Time Period, Lauer purchased more an 900,000 Titan shares and en sold hundreds of ousands of shares. DE 2176 at & Ex. 9. At e end of e Fraudulent Time Period, Lauer once again owned 90,000 Titan shares. Based on Lauer s own records, e cost basis of e 90,000 Titan shares he originally owned was different an e cost basis for e 90,000 Titan shares he owned at e end of e Fraudulent Time Period. See DE 2064 at 3. Consequently, contrary to Lauer s initial claim, it is undisputed at e 90,000 Titan shares he owned at e Page 8 of 11

9 Case 9:03-cv KAM Document 2240 Entered on FLSD Docket 03/26/2009 Page 9 of 11 end of e Fraudulent Time Period were not e same 90,000 Titan shares at he owned at e beginning of e Fraudulent Time Period. Thus, e allegedly untainted funds Lauer possessed at e outset of e Fraudulent Period no longer exist. All e funds currently held in e BOA Account related to e Titan shares were acquired during e Fraudulent Time Period. This, in and of itself, demonstrates at e funds in e BOA Account are not free from e taint of e alleged fraud. Furermore, Lauer s counsel acknowledged at money is fungible and as such, it is impossible to differentiate between "tainted" and "untainted" dollars in a bank account. Lauer also acknowledged at approximately $7 million of e deposits made into his BOA Account are arguably traceable by e Government as criminal proceeds. DE 2109 at 10. Noneeless, Lauer asserts at it is fair to give him credit for e amount derived from e sale of e Titan stock which was purchased before e Fraudulent Time Period. DE 2109 at 10; DE 2176 at 91. The Court rejects is argument. As previously stated, e untainted funds Lauer had at e outset of e Fraudulent Period no longer exist. They lost eir untainted status when e original 90,000 Titan Shares were sold and different shares were acquired during e Fraudulent Time Period when $7 million of funds traceable to fraudulent conduct was infused into e account. Thus, is is not a case of mere commingling of tainted and untainted funds in an account. See United States v. Puche, 350 F.3d at Moreover, under e facts presented here, e Court concludes at "[i]t is unnecessary to attempt to segregate in some manner e Page 9 of 11

10 Case 9:03-cv KAM Document 2240 Entered on FLSD Docket 03/26/2009 Page 10 of 11 tainted funds from e commingled account.... The presence of some tainted funds... is sufficient to taint [all]." United States v. Garcia, 37 F.3d 1359, 1365 (9 Cir. 1994); accord United States v. Tencer, 107 F.3d 1120, 1131 (5 Cir. 1997); U.S. v. Cancelliere, 69 F.3d 1116, 1120 (11 Cir. 1995), as amended on clarification, (Feb. 2, 1996); United States v. Jackson, 935 F.2d 832, 840 (7 Cir. 1991); cf. United States v. Voigt, 89 F.3d 1050, 1081 (3d Cir. 1996). The Eleven Circuit has cited United States v. Garcia, stating [b]ecause money is fungible, e government must prove only at e tainted proceeds were commingled wi oer funds. United States v. Ward, 197 F.3d 1076, 1083 (11 Cir. 1999). In United States v. Ward, a bankruptcy fraud and money laundering case, e court held, [o]nce tainted, proceeds cannot become untainted. Ward, 197 F.3d at The Ward Court also cited United States v. Moore, 27 F.3d 969, (4 Cir. 1994) stating, [w]hen money is commingled, e illicitly-acquired funds and e legitimately-acquired funds... cannot be distinguished from each oer... Id. Conclusion There is a strong governmental interest in obtaining full recovery of all forfeitable assets, an interest at overrides any Six Amendment interest in permitting criminals to use assets adjudged forfeitable to pay for eir defense. Caplin & Drysdale, Chartered v. United States, 491 U.S. 617, (1989). Under e facts of is case, ere is no way to distinguish, nor is it necessary to attempt to distinguish, tainted funds from untainted funds. Moreover, e IRS has a lien for Page 10 of 11

11 Case 9:03-cv KAM Document 2240 Entered on FLSD Docket 03/26/2009 Page 11 of 11 approximately $2 million against all of Lauer s property. Thus, none of Lauer s assets may be release from e freeze order to pay for counsel of his choice. Hence, it is hereby ORDERED AND ADJUDGED at Defendant Lauer s Motion to Modify Freeze Order to Allow Use of His Own Assets to Retain Counsel [DE 2063] is DENIED. DONE AND ORDERED in Chambers at West Palm Beach, Palm Beach County, Florida, is 25 day of March, copies to: All counsel of record KENNETH A. MARRA United States District Judge Page 11 of 11