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United States v. Regan

decided: September 22, 1988.

UNITED STATES OF AMERICA, APPELLEE,
v.
JAMES SUTTON REGAN, JACK Z. RABINOWITZ, CHARLES M. ZARZECKI, PAUL BERKMAN, STEVEN BARRY SMOTRICH, AND BRUCE LEE NEWBERG, DEFENDANTS, PRINCETON/NEWPORT PARTNERS, L.P., OAKLEY SUTTON MANAGEMENT CORPORATION, OAKLEY SUTTON INVESTMENT CORPORATION, ENGLEWOOD PARTNERS D/B/A PRINCETON/NEWPORT ARBITRAGE PARTNERS, SPRING STREET PARTNERS OF N.J., L.P., OAKLEY SUTTON ENTERPRISES, INC., BOSS PARTNERS, OAKLEY SUTTON PARTNERS, L.P., OAKLEY SUTTON SECURITIES CORP., OSM PARTNERS, L.P., PNP LTD., PRINCETON/NEWPORT INCOME PARTNERS, PRINCETON/NEWPORT INDEX PARTNERS, PRINCETON/NEWPORT OPTION PARTNERS, ROULETTE N.V., SWILAZ PARTNERS, WESTCOAST INVESTMENTS, WITHERSPOON ASSOCIATES OF N.J., L.P., PRINCETON/NEWPORT COLLATERAL PARTNERS, AND ALL OTHER ENTITIES OWNED OR CONTROLLED BY PRINCETON/NEWPORT, APPELLANTS



Appeal from an order of the United States District Court for the Southern District of New York restraining appellants' use of their assets. The order was issued to protect from dissipation certain property alleged to be forfeitable in a RICO indictment of six individuals. We hold that Section 1963(d)(1)(A) authorizes the restraint of potentially forfeitable property in the possession of unindicted third parties. However, the present order may unnecessarily restrain non-forfeitable property, and we remand for a further hearing. Remanded.

Winter and Miner, Circuit Judges, and Billings, District Judge.*fn*

Author: Winter

WINTER, Circuit Judge:

This appeal raises questions concerning the propriety of restraints upon property in the hands of third parties that is potentially forfeitable under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq. (Supp. IV 1986).

Appellants are a consortium of twenty investment companies owned or controlled by Princeton/Newport Partners, L.P. (collectively "the Princeton/Newport Group" or "the Group"). The Princeton/Newport Group is not a defendant in the RICO action. Five of the six defendants, however, are partners in, and/or executives of, Princeton/Newport Partners, L.P. and/or the Group, and these defendants are alleged to have conducted these firms in a manner that violated RICO. Because the defendants' interests in the Princeton/Newport Group are forfeitable upon conviction, the Princeton/Newport Group is a third party in possession of potentially forfeitable property. The Group appeals from Judge Stanton's order prohibiting them from engaging in transactions outside the ordinary course of business without prior authorization and subjecting their affairs to review by a government-designated monitor.

We reject appellants' claim that their assets are beyond the authority of a court under Section 1963(d)(1)(A) to restrain the dissipation of potentially forfeitable assets. We also reject appellants' claim that the restraining order in question is overbroad because it affects the use of assets that are not subject to forfeiture. Our sole reservation arises out of the lack of a finding as to the need to restrain the Princeton/Newport Group's property as well as the property of the individual defendants. We remand for such a finding.

BACKGROUND

On August 4, 1988, a grand jury in the Southern District of New York returned an indictment charging James Sutton Regan, Jack Z. Rabinowitz, Charles M. Zarzecki, Paul Berkman, Steven B. Smotrich and Bruce Lee Newberg with: (i) conspiring to commit securities fraud, mail fraud, wire fraud, tax fraud, and to create and maintain false books and records in violation of the securities laws; (ii) conspiring to conduct and participate in the affairs of a racketeering enterprise consisting of the Princeton/Newport Group; (iii) conducting and participating in that racketeering enterprise; and (iv) committing mail and wire fraud. The indictment seeks forfeiture of the proceeds received by the defendants from the unlawful acts and of the defendants' interests in the alleged racketeering enterprise, the Princeton/Newport Group, claimed by the government to have been 12 percent at the time of the crimes.

The Princeton/Newport Group consists of Princeton/Newport Partners, L.P., a limited partnership, and nineteen associated business ventures, each of which are owned and/or controlled by Princeton/Newport Partners, L.P. The Group is engaged in anomaly arbitrage--the buying and selling of securities based on mathematical models that identify market anomalies.

The defendants are alleged to have used the Princeton/Newport Group to engage in bogus transactions that created fictitious losses in violation of the tax laws and "parked" stock--concealed its ownership--for Drexel Burnham Lambert, Inc. in violation of securities disclosure rules. Five of the defendants either hold an equity position in, or are employees of, an entity included in the Princeton/Newport Group. Regan is one of two managing general partners of Princeton/Newport Partners, L.P. Rabinowitz is a general partner of Princeton/Newport Partners, L.P., responsible for overseeing and managing the financial and accounting operations of the Group. Zarzecki is a general partner of Princeton/Newport Partners, L.P. and directs the Princeton/Newport Group's trading activity. Berkman is a general partner of and principal trader for Princeton/Newport Arbitrage Partners, a Princeton/Newport Group entity, while Smotrich is comptroller of the Princeton/Newport Group. Bruce Lee Newberg, the remaining defendant, was an employee of Drexel Burnham Lambert, Inc.

On the day that the grand jury returned the indictment, the government moved, pursuant to 18 U.S.C. § 1963(d)(1)(A), for an order freezing real property and various financial accounts other than interests in the Princeton/Newport Group owned by the individual defendants. It further moved to restrain the defendants from withdrawing their partnership interests in the Group. Such orders have been entered and are not at issue on this appeal.

The government also moved for an order directed at the Princeton/Newport Group restraining the use of its assets. After two hearings, the district court entered an order that: (i) prohibits the Princeton/Newport Group from disposing of any of its assets, "[e]xcept in the ordinary course of business[,]" unless it receives express permission from the district court after providing the government with three hours prior notice; (ii) directs the Princeton/Newport Group to allow a government-designated "monitor" to conduct a review, at least twice monthly and at the Group's expense, of the Group's books and records; and (iii) guarantees that "[e]ntities doing business with Controlled Entities or defendants will not be deemed in violation of [the] Order for any transactions undertaken with the Controlled Entities or defendants, and shall be fully protected in connection with any transactions with the Controlled Entities, if they receive an oral representation to them by an employee of the entities, other than the defendants, that the transaction is allowed by this Order." In addition, the order provides that "[e]ntities doing business with the Controlled Entities shall be entitled to presume the authenticity of representations and instructions from any person who is identified as an employee of the Controlled Entities."

In order to allow Princeton/Newport to take this appeal, the district court stayed distribution of the restraining order to various institutions with which the individual defendants and the Princeton/Newport Group have accounts. The author of this opinion, sitting as applications judge, declined to stay the order and authorized the distribution of one paragraph of the order, affecting only the individual defendants, to institutions where those defendants had personal accounts.*fn1 ...


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