Case 2:18-cr-00422-SMB Document 559 Filed 05/02/19 Page 1 of 11
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`IN THE UNITED STATES DISTRICT COURT
`FOR THE DISTRICT OF ARIZONA
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`United States of America,
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`Plaintiff,
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`v.
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`Michael Lacey, et al.,
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`Defendants.
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`No. CR-18-00422-PHX-SMB
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`ORDER
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`There are seven defendants in this matter. Of which, six have joined the motion
`before the Court. Defendants Joye Vaught and Andrew Padilla filed a motion to dismiss
`the indictment against them or, in the alternative, a motion to allow their counsel to
`withdraw. (Doc. 456). Defendants James Larkin (Doc. 463), Scott Spear (Doc. 464),
`Michael Lacey (Doc. 465), and John Brunst (Doc. 467) join the motion to dismiss, but
`not the alternative motion to withdraw counsel. The seventh defendant, Dan Hyer, has
`entered a plea of guilty as to Count 1 of the Superseding Indictment and is awaiting
`sentencing. (Docs. 270, 284, 520). The Government filed a response to the motion to
`dismiss (Doc. 476), to which Defendants replied. (Doc. 507). Defendants Vaught and
`Padilla filed Ex Parte Applications and Consents for Withdrawal of Counsel (Docs. 556,
`558) Defendants argue the case should be dismissed because the Government has
`violated their Fifth and Sixth Amendment rights.
`I.
`BACKGROUND
`On July 25, 2018, a federal grand jury returned a 100-count superseding
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`Case 2:18-cr-00422-SMB Document 559 Filed 05/02/19 Page 2 of 11
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`indictment against Defendants alleging they engaged in criminal acts while operating of
`the website Backpage.com (“Backpage”), including conspiracy, facilitating prostitution,
`and money laundering. (Doc. 230). It included forfeiture allegations. (Id.). This is one of
`multiple cases involving Backpage. In another case before this Court, Backpage itself and
`related entities have pleaded guilty to Money Laundering Conspiracy, 18 U.S.C.
`§ 1956(h). (CR-18-465-PHX-SMB, the “Backpage Proceedings,” Docs. 8, 10, 20). In still
`another, the CEO of Backpage, Carl Ferrer has pleaded guilty to Conspiracy, 18 U.S.C.
`§ 371. (CR-18-464-PHX-SMB, the “Ferrer Proceedings,” Docs. 7, 12, 20). Both of those
`cases are awaiting sentencing and forfeiture proceedings. Additional forfeiture
`proceedings are underway in the Central District of California and on appeal in the Ninth
`Circuit. (Docs. 360, 456, 476, 507).
`In the Backpage and Ferrer Proceedings, Backpage and its related entities and
`Ferrer stipulated to seizures. (Ferrer Proceedings, Docs. 22–23; Backpage Proceedings,
`Docs. 21–22, 44). Defendants in this case have filed petitions to determine their interest
`in the property subject to forfeiture in those two cases. (Ferrer Proceedings, Docs. 29–35;
`Backpage Proceedings, Docs. 28–34). They have also motioned to stay the hearings to
`determine their interest in the property subject to forfeiture. As of this date, those
`hearings have not taken place, and the Defendants have not asked this Court to conduct
`them. Rather, they have agreed to or requested stays.
`In the Ferrer Proceedings, the initial hearing to determine the third-party interests
`in property subject to forfeiture was scheduled for November 16, 2018. (Ferrer
`Proceedings, Doc. 43). Defendant Larkin filed a motion to stay that hearing pending the
`outcome of an appeal to the Ninth Circuit of some of the Central District of California
`seizure cases and a case in Delaware Court of Chancery.1 (Id., Doc. 44). All Defendants
`in this cased joined that motion. (Id., Docs. 45–50). The Government did not object to the
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`1 Defendants contend that the Delaware case, Camarillo Holdings, LLC, et al. v. Amstel
`River Holdings, LLC, et al., C.A. No. 2018-0606SG, will resolve the “core issues relating
`of the property rights” of some of the properties at issue in the forfeiture proceedings.
`(Ferrer Proceedings, Doc. 62)
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`Case 2:18-cr-00422-SMB Document 559 Filed 05/02/19 Page 3 of 11
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`stay. (Id., Doc. 52). The Court reset the hearing for December 7, 2018. (Id., Doc. 53). The
`Defendants and Government then submitted a joint motion to continue the hearing. (Id.,
`Doc. 54). The Court granted the motion and reset the hearing for January 25, 2019. (Id.,
`Doc. 56). The parties again requested a stay, which was denied. (Id., Docs. 59–60). The
`parties filed another motion on January 23, 2019, to stay the hearing for at least four
`months, though they presented different rationales for doing so. (Id., Doc. 62). The Court
`reset the hearing for June 21, 2019. (Id., Doc. 64). A similar process played out in the
`Backpage Proceedings. (Backpage Proceedings, Docs. 28–41, 51–57, 59–62, 64–75, 82–
`83, 85–87).
`Among the assets Ferrer and Backpage stipulated to forfeit are attorney trust
`accounts, commonly called IOLTA accounts. The Government moved to seize these
`accounts in the Central District of California (“CDCA”). It obtained ex parte seizure
`warrants for Defendants Vaught and Padilla’s IOLTA accounts on October 31, 2018. The
`Government informed counsel they can keep earned fees through November 30, 2018.
`The Government also seized the trust account of one of Defendant Lacey’s attorney’s in
`August 2018. Defendants argue that these seizures, along with other actions by the
`Government, infringe on their Fifth and Sixth Amendment rights to due process and
`counsel of choice and warrant dismissal of this case. In this proceeding, Defendants
`previously asked the Court to stop the seizures. (Docs. 360, 401). The Court ruled that the
`Defendants must seek relief from the seizure warrants in the courts that issued them.
`(Doc. 447). The seizure warrants have since expired, but the Government has said they
`may renew them and Defendants say they have not withdrawn from the accounts out of
`fear of prosecution.
`Defendants argue their constitutional rights were violated because the seizures
`were executed in a manner to avoid judicial review after the Government led them to
`believe it would not be seizing IOLTA accounts, and after Defendants had agreed to the
`proposed case management schedule without knowledge that the Government would seek
`pre-trial forfeitures. Defendants also take umbrage with the Government’s motion to
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`Case 2:18-cr-00422-SMB Document 559 Filed 05/02/19 Page 4 of 11
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`disqualify certain counsel from representing Defendant Lacey and Defendant Larkin,
`which the Court denied. (Doc. 338). They believe they have been retaliated against for
`their “vigorous” assertion of their rights, while the cooperating defendants are still able to
`use tainted funds for their counsel. Defendants further argue that the cooperating
`defendants are especially unreliable, making the seizures especially suspect. Defendants
`Padilla and Vaught additionally argue that as employees of Backpage, they reasonably
`expected to receive attorneys’ fees as a benefit. They contend the appropriate remedy for
`the Government’s actions is to dismiss the indictment against them.
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` The Government responds by arguing that Defendants have no right to use tainted
`funds for attorneys’ fees. They also argue that there is a remedy available for defendants
`to prevent the seizures and future seizures of these funds through a Monsanto hearing,
`where they would be able to prove they could not fund their defense but for the seized
`assets and that probable cause does not exist to seize the property. See United States v.
`Monsanto, 491 U.S. 600 (1989). Additionally, the funds were only seized after the CEO
`of Backpage, along with Backpage and its related entities, pleaded guilty to criminal
`conduct, and shut down the website.
`II.
`Discussion
`The Fifth and Sixth Amendments protect criminal defendants’ rights to due
`process and assistance of counsel. U.S. Const. amends. V, VI. The rights are overlapping.
`“The Constitutional guarantees a fair trial through the Due Process Clauses, but it defines
`the elements of a fair trial largely through the several provisions of the Sixth
`Amendment[.]” Strickland v. Washington, 466 U.S. 668, 684–85 (1984); see Caplin &
`Drysdale v. United States, 491 U.S. 617, 633 (1989) (stating the court is “not sure that”
`the Fifth Amendment argument “adds anything to petitioner’s Sixth Amendment
`Argument”). The Sixth Amendment right to assistance of counsel includes the right “to
`select and be represented by one’s preferred attorney.” Wheat v. United States, 486 U.S.
`153, 159 (1988). This right is not unlimited, as a “defendant may not insist on
`representation by an attorney he cannot afford,” id., and he has “no Sixth Amendment
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`Case 2:18-cr-00422-SMB Document 559 Filed 05/02/19 Page 5 of 11
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`right to spend another person’s money for services rendered by an attorney, even if those
`funds are the only way that defendant will be able to retain the attorney of his choice,”
`Caplin, 491 U.S. at 626.
`Forfeiture presents a unique problem for Fifth and Sixth Amendment issues.
`Freezing defendants’ assets prior to trial is permissible if the assets would be subject to
`forfeiture upon conviction. Kaley v United States, 571 U.S. 320, 340 (2014). To do so,
`the Government must show that there is “probable cause to believe that the property will
`ultimately be proved forfeitable.” Id. (quoting United States v. Monsanto, 491 U.S. 600,
`615 (1989)). Kaley also explains the Government’s interest in forfeitures. They “help to
`ensure that crime does not pay,” punish wrongdoing, deter future illegality, and “lessen
`the economic power of criminal enterprises.” Id. (citing Caplin, 491 U.S. at 630).
`Forfeitures are also used to “recompense victims of crime, improve conditions in crime-
`damaged communities, and support law enforcement activities like police training.” Id.
`(citing Caplin, 491 U.S. at 629–30). The Government may not, however, restrain criminal
`defendants’ “legitimate, untainted assets (those not traceable to a criminal offense)
`needed to retain counsel of choice,” even if the Government was only doing so to
`preserve the assets for payment of restitution and other criminal forfeitures. Luis v.
`United States, 136 S. Ct. 1083, 1088 (2016).
`1. The Seizures and Defendants’ Fifth and Sixth Amendment Rights
`Defendants contend that the seizures are “unlawful.” (Doc. 476 at 2). They
`compare this case to U.S. v. Stein (Stein I), 435 F. Supp. 2d 330 (S.D.N.Y. 2006), and the
`case affirming it, U.S. v. Stein (Stein II), 541 F.3d 130 (2d. Cir. 2008). In Stein I and II,
`the courts dismissed the indictment against former employees and partners of an
`accounting firm because the government pressured the firm to limit and condition the
`payment of the defendants’ attorneys’ fees in order to prevent the Government from
`indicting the firm. Prior to that case, the firm’s practice was to pay for its partners and
`employees’ legal fees for legal matters that arose within the scope of their duties and
`responsibilities to the firm. Stein I, 435 F. Supp. 2d. at 340. The firm changed this policy
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`in response to pressure from the Government. Id. at 336. The result was that the
`defendants were deprived of their reasonable expectation of attorneys’ fees. Stein II, 541
`F.3d at 155–56. “In a nutshell, the Sixth Amendment protects against unjustified
`governmental interference with the right to defend oneself using whatever assets one has
`or might reasonably and lawfully obtain.” Id. at 156.
`Defendants miss an important distinction with the Stein cases and their case,
`however, as the Stein cases concerned untainted funds from the accounting firm’s general
`business. “Although ‘there is no Sixth Amendment right for a defendant to obtain counsel
`using tainted funds, [a defendant] still possesses a qualified Sixth Amendment right to
`use wholly legitimate funds to hire the attorney of his choice.’” Id. at 155 (quoting United
`States v. Farmer, 274 F.3d 800, 804 (4th Cir. 2001) (alteration and emphasis in original)).
`The Government in the Stein cases never alleged the funds were tainted. In this way, the
`case is also different than Luis, where the Government acknowledged that it was trying to
`stop Luis from using her own untainted funds. 136 S. Ct. at 1088. Here, the Government
`is asserting that the assets they are trying to seize are tainted, and, as demonstrated by the
`CDCA rulings, courts have found probable cause that the assets will ultimately be proved
`forfeitable. As this Court previously ruled, any disagreement with the CDCA’s rulings
`should be taken up in that court.
`In addition to the probable cause findings, Backpage and its related entities,
`Ferrer, and Hyer have all pleaded guilty, and Backpage and Ferrer have stipulated to
`forfeitures. The Defendants filed petitions to determine their interests in those stipulated
`forfeitures in the Backpage and Ferrer Proceedings, but have consented to or requested
`stays to prevent their interests from being adjudicated. Instead, they have been pursing
`litigation in the Delaware Court of Chancery to determine their “interests in certain assets
`the Government seeks to forfeit from Backpage.com, LLC and its affiliates. (Ferrer
`Proceedings, Doc. 62 at 10–11). Furthermore, the contention that the seizures are
`escaping judicial review is belied by the Defendants’ own contention that some of the
`seizures have been set for expedited briefing and argument in the Ninth Circuit (Doc. 507
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`at 9), others are pending at the CDCA (Doc. 527 at 17), and they have not tried to
`adjudicate their interests in the Backpage and Ferrer Proceedings.
`Given the probable cause findings, this case, at least at this point, is much more
`like Monsanto and Caplin. Assets may be restrained “based on a finding of probable
`cause to believe that the assets are forfeitable.” Monsanto, 491 U.S. at 615. “[T]he
`Government may—without offending the Fifth or Sixth Amendment—obtain forfeiture
`of property that a defendant might have wished to use to pay his attorney.” Id. at 616
`(citing Caplin, 491 U.S. 617). Allowing pretrial restraint of assets is consistent with “the
`long-recognized and lawful practice of vesting title to any forfeitable assets, in the United
`States, at the time of the criminal act giving rise to forfeiture.” Caplin, 491 U.S. at 627.
`This ensures any “ill-gotten gains” will not dissipate before conviction and protects the
`community’s interest in recovery. Monsanto, 491 U.S. at 616. The Supreme Court
`affirmed these rulings as recently as 2014 when it decided Kaley. 571 U.S. at 371 (“So
`again: With probable cause, a freeze is valid.”).
`Here, the seizures were based on the CDCA’s finding of probable cause. Pretrial
`restraints based on probable cause to believe that the assets will be ultimately forfeited
`does not offend the Fifth or Sixth Amendment. Unlike in the Stein cases or in Luis, the
`Government is not attempting to prevent Defendants from using assets it believes are
`untainted. Accordingly, the seizures do not violate the Fifth and Sixth Amendments.2
`2. Padilla and Vaught’s Reasonable Expectation of Indemnification
`Relying on the Stein cases, Padilla and Vaught argue that the Government’s
`seizures interfered with funds earmarked to pay their legal fees. As previously discussed,
`Stein is distinguishable because there was no allegation that the accounting firm’s funds
`were tainted. Criminal proceeds are forfeitable to the United States “at the time of the
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`2 The parties also present First Amendment arguments, with Defendants arguing their
`activities fall within First Amendment protected activity and the Government arguing
`there is no First Amendment right to commit or facilitate criminal activity. Both
`arguments appear to be made in good faith. On April 22, 2019, Defendants lodged a
`proposed motion to dismiss based on their First Amendment rights. The Court will
`reserve judgment on the First Amendment issues until that motion is before it.
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`criminal act giving rise to forfeitures.” Caplin, 491 U.S. at 627. As Stein II recognized,
`“there is no Sixth Amendment right for a defendant to obtain counsel using tainted
`funds.” 541 F.3d at 155 (quoting Farmer, 274 F.3d at 804)). While they may have a
`reasonable expectation that Backpage would fund their defense, that expectation does not
`extend to lawfully seized funds. Accordingly, Padilla and Vaught’s right to the seized
`funds are no different than the other defendants.
`3. The Cooperating Witnesses
`the
`them differently from
`treating
`Defendants contend
`the Government
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`cooperating defendants Ferrer and Hyer—by allegedly not seeking seizure of their
`counsels’ IOLTA accounts—also violates their Fifth Amendment and Sixth Amendment
`rights. (Doc. 476 at 6–7, 12–13). They argue this undermines the workings of our
`adversarial system of criminal justice. (Id. at 12). Despite the common occurrence of
`cooperating defendants, however, Defendants do not provide case law to support that
`precise argument, and the Court is unable to find any.
`
`Preferential terms for defendants that plead guilty is not new to our adversarial
`system. “[T]he conscious exercise of some selectivity in enforcement is not in itself a
`federal constitutional violation.” Oyer v. Boles, 368 U.S. 448, 456 (1968). Selectivity in
`enforcement is permissible, unless the selection was “based upon an unjustifiable
`standard such as race, religion, or other arbitrary classification.” Id.; see Bordenkircher v.
`Hayes, 434 U.S. 357, 364 (1978) (“To hold that the prosecutor’s desire to induce a guilty
`plea is an unjustifiable standard, which, like race or religion, may play no part in his
`charging decision would contradict the very premises that underlie the concept of plea
`bargaining itself.”) (internal quotations omitted); see also United States v. Rodriguez, 162
`F.3d 135, 151–53 (1st Cir. 1998) (holding that the Government’s alleged policy of more
`lenient treatment for co-conspirators that pleaded guilty than those that go to trial was not
`unconstitutional).
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`As the Government points out, its primary duty with regard to leniency to
`cooperating defendants is to disclose that benefits have been provided. Giglio v. United
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`States, 405 U.S. 150, 154–55 (1972) (holding that the Government must produce
`evidence to the defense that affects a witness’s credibility). By disclosing that the
`Government has provided the witness with benefits for cooperating, the defense is able to
`attack the witness’s credibility. Id. The Government has complied with this obligation.
`Thus, Defendants’ Fifth and Sixth Amendment rights are not violated by the
`Government’s preferential treatment of cooperating witnesses.
`4. Vindictive Prosecution
`The Court is also not convinced that the timing of the seizures, nor any other
`Government actions, indicate that this case is akin to a vindictive prosecution. Vindictive
`prosecution is when “prosecutorial actions stem from an animus toward the exercise of a
`defendant’s rights.” United States v. Gallegos-Curiel, 681 F.2d 1164, 1169 (9th Cir.
`1982). Defendants must show either direct evidence of a vindictive motive or establish a
`presumption of vindictiveness. United States v. Goodwin, 457 U.S. 368, 380–81 (1982).
`Defendants have not presented actual evidence. “The presumption [of vindictiveness]
`applies only to the extent it reflects the very real likelihood of actual vindictiveness.”
`Gallegos-Curiel, 681 F.2d at 1167. “A sequence of events is not enough; the likelihood
`of retaliation is crucial.” Id. at 1171. A prosecutor is especially free prior to trial to
`exercise discretion in how he or she goes about prosecuting cases. See Goodwin, 457 U.S.
`at 382 (“A prosecutor should remain free before trial to exercise the broad discretion
`entrusted to him to determine the extent of the societal interest in prosecution.”).
`The Government moved to seize assets after Backpage and its related entities and
`Ferrer pleaded guilty and stipulated to forfeitures. The CDCA found probable cause for
`them. These seizures, as discussed above, comply with the Fifth and Sixth Amendments.
`This Court will not find a presumption of vindictive prosecution where the Government’s
`seizures have passed constitutional muster.
`5. Disclosure of Communications
`Defendants contend they are entitled to discovery of information relating to the
`government’s purposes in seizing IOLTA accounts. They also request disclosure of all
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`cases where the Government has seized post-indictment, but prior to trial, attorneys’ fees
`from defendants’ counsel of choice. The only support they provide for these requests is
`“Rule 16 of the Federal Rules of Criminal Procedure.” (Doc. 456 at 17). They do not
`provide which subsection of the rule purportedly commands it nor do they provide any
`statutes or case law. Rule 16(a)(2) excepts “reports, memoranda, or other internal
`government documents made by an attorney for the government or other government
`agent in connection with investigating or prosecuting the case” from disclosure.
`Defendants do not attempt to explain why this exception would not apply. Therefore, the
`Court will not grant Defendants’ requests.
`6. Vaught and Padilla’s Motion to Withdraw Counsel
`Vaught and Padilla presented an alternative motion, if the motion to dismiss was
`denied, to withdraw their counsel pursuant to LRCrim 57.14 and LRCiv 83.3, as Vaught
`and Padilla no longer have funds to pay them. The Court is satisfied that this constitutes
`good cause for withdrawal. See Addis v. McKinley Medical, LLC, Civ. No. 07-1318-AA,
`2011 WL 846688, at *1 (D. Or. March 8, 2011). The Court will direct the appointment of
`either the Federal Public Defender or counsel from the Criminal Justice Act Panel.
`III. Conclusion
`THERFORE, Defendants’ Motion to Dismiss due to Government Interference (Doc. 476)
`is DENIED. IT IS FURTHER ORDERED:
`1. Defendants’
`relating
`request
`for disclosure of communications
`Government’s decision to seize attorney trust accounts is DENIED.
`2. Defendants Padilla and Vaught’s motion to withdraw counsel and applications and
`consent for withdrawal of counsel (Docs. 556, 558) are GRANTED. The Clerk of
`Court shall appoint the Federal Public Defender or counsel from the Criminal
`Justice Act panel for the District Court to represent Defendants Padilla and
`Vaught;
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`the
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`3. Defendants Motion for Hearing on Motion to Dismiss due to Government
`Interference (Doc. 501) is DENIED.
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`Dated this 1st day of May, 2019.
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