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United States v. Chin

United States District Court, D. Massachusetts

February 23, 2018




         Following Glenn Chin's conviction for mail-fraud racketeering, conspiracy, mail fraud, and violations of the federal Food, Drug, and Cosmetic Act (FDCA), the government sought the forfeiture of the entire $611, 774 that Chin was paid in salary as a pharmacist at New England Compounding Center (NECC) between 2006 and October 2012, when NECC ceased doing business. See Dkt #1391 (Motion for Order of Forfeiture). Chin filed an opposition, see Dkt #1423, and the court heard oral argument on February 15, 2018.[1] For the reasons to be stated, the government's motion will be allowed in part.

         The government is correct that a forfeiture in this case is virtually mandated by 18 U.S.C. § 1963. See Alexander v. United States, 509 U.S. 544, 562 (1993) (noting that “a RICO conviction subjects the violator not only to traditional, though stringent, criminal fines and prison terms, but also mandatory forfeiture under § 1963.”). The court also agrees that Chin's salary, paid for his work as NECC's Supervisory Pharmacist during the period of time in which NECC was operating as a criminal enterprise, is forfeitable. See United States v. DeFries, 129 F.3d 1293, 1313 (D.C. Cir. 1997) (holding that salaries received by former union officials after their tampering with union elections were subject to forfeiture because “but for the elections, which the district court found to be tainted by appellants' racketeering activity, they would not have received their salaries.”). Here, but for Chin's participation in conduct “tainted by . . . racketeering activity, ” he would not have earned the salary that he did from NECC. See United States v. Angiulo, 897 F.2d 1169, 1213 (1st Cir. 1990) (endorsing the “but for” test).

         Where the court parts company with the government is over the proposition that NECC operated as a criminal enterprise from its inception, thus exposing the entirety of Chin's earnings from 2006 through 2012 (the statute of limitations period) to forfeiture. As I observed at Chin's sentencing (and at the sentencing of codefendant Barry Cadden), the weight of the evidence, as corroborated by an analysis of the jury's verdict, is that NECC originated as a legitimate business, but under mounting pressure to maximize profits, degenerated into a criminal enterprise in March of 2010, and operated as such until its collapse in October of 2012.[2] Consequently, only the salary that Chin received during that period of time falls within the precincts of forfeitable gains.

         According to the government's calculations, as corroborated by Chin's tax returns, the total of Chin's potential salary exposure can be calculated as follows. Chin earned $171, 837 at NECC in 2011, and $163, 805 during the ten months in 2012 during which NECC remained viable. Chin was paid $165, 531 by NECC in 2010 (at a monthly salary of $13, 794.25). Prorating 2010 over ten months from March to December yields $137, 942.50. Combining the three figures ($137, 942.50 $171, 837 $163, 805) yields a total of $ 473, 584.50.

         Chin advances three arguments in support of a lesser amount. The first, and most radical, is the contention that he should only forfeit the portion of his salary associated with the specific shipments of drugs the jury found to have been part of the mail fraud scheme. See Chin Opp'n, Dkt #1423 at 5 (arguing that “a reasonable method” of calculating forfeiture would be “to determine what percentage of NECC's gross revenues” during the racketeering period “was comprised of products that were tainted by the fraud proved at trial, and find the forfeiture amount to be the corresponding percentage of Mr. Chin's compensation for that period.”).

         There are legal, as well as conceptual difficulties, with this argument. As the government points out, 18 U.S.C. § 1963(a)(3) provides for the forfeiture of “any property constituting, or derived from, any proceeds which the person obtained, directly or indirectly, from racketeering activity.” In Chin's case, the entire salary he earned at NECC during the relevant time period constitutes “proceeds . . . obtained, directly or indirectly” from his participation in the racketeering enterprise. Moreover, as a practical matter, there is no realistic means of calculating the actual value added by Chin to any specific batch of drugs shipped by NECC.

         Chin's second argument is that his gross salary is an improper starting point for any calculation of a forfeitable amount because it includes payments for federal and state taxes, as well as other benefits, that were deducted from his paycheck. The government counters (accurately) that First Circuit precedent generally holds that forfeitable proceeds in a RICO context are to be measured in gross, rather than net, terms. See, e.g., United States v. Hurley, 63 F.3d 1, 21 (1st Cir. 1995) (rejecting defendant's argument that “proceeds” means “net proceeds” or “net profits” under § 1963 (a)(3)). This precedent is consistent with Congress's intention that RICO's forfeiture provisions be “broadly interpreted.” Id.

         The “gross proceeds” approach is further supported by the obvious difficulty involved in calculating “business expenses” in the mine run of RICO cases, in which the enterprise is constituted from the outset as an illegal entity for which, deliberately, no accurate records are kept in order to conceal the underlying activity from law enforcement. NECC, however, is an exception. The company was not initially constituted as an illegal enterprise, and it kept detailed and accurate records during its corporate existence. Consequently, it is no difficult matter to segregate the portion of Chin's salary that was deducted for federal and state taxes, health benefits and retirement accounts. Not surprisingly, there is support in circuit case law for using a net approach where the relevant figures are readily ascertainable. See United States v. Genova, 333 F.3d 750, 761 (7th Cir. 2003).

         A recent Supreme Court recent ruling, Honeycutt v. United States, 137 S.Ct. 1626 (2017), offers important guidance. Honeycutt stands for the proposition that a RICO forfeiture is to be “limited to property the defendant himself actually acquired as the result of the crime.” Id. at 1635. As the government points out, Honeycutt makes clear that property “received” can include benefits obtained “indirectly” from a RICO enterprise. See Gov't's Reply, Dkt # 1432 at 5 (“For example, if a criminal participated in a fraud scheme and the victim paid the criminal's mortgage or car loan for him, the value of that payment would be ill-gotten gains that the criminal obtained indirectly.”). Consistent with this reasoning, the portions of Chin's salary that were deducted to cover health care benefit payments and retirement account contributions constitute property “obtained” indirectly by Chin because he was their ultimate beneficiary.

         The money deducted from Chin's salary as federal income tax payments do not, however, fit within this analysis. The counter-argument, made by government counsel at the forfeiture hearing, that the federal tax deductions were paid for Chin's “benefit” (presumably because in a larger sense he and his family were recipients of government services), is not one that most taxpayers, however zealous in their filings, would find compelling. While there may be a flush of civic pride in paying taxes, it is difficult to see how money paid into the U.S. Treasury can be characterized as proceeds “obtained” by a defendant. There is also a double counting issue arising from the fact that forfeited proceeds escheat to the Treasury, meaning that Chin is being asked, in effect, to pay his taxes twice.[3] These two considerations lead me to conclude that Chin's federal income tax payments should be deducted from the forfeiture figure.[4]

         According to Chin's tax returns, his tax bracket varied between 25% and 28% during the tax years in question. The court will use the mean of 26.5% as an appropriate estimate for Chin's effective tax rate during this period. This results in an adjusted, post-federal tax figure of $473, 584.50 minus $125, 499.90[5], or $348, 084.60.

         Chin's third argument is constitutional. He contends that the forfeiture of his entire earnings during the relevant period would violate the Excessive Fines Clause of the Eighth Amendment.[6] “The touchstone of the constitutional inquiry under the Excessive Fines Clause is the principle of proportionality: The amount of the forfeiture must bear some relationship to the gravity of the offense that it is designed to punish.” United States v. Bajakajian, 524 U.S. 321, 334 (1998). In evaluating whether a financial penalty is so oppressive as to violate the Eighth Amendment, courts begin by applying a three-factor test: “(1) whether the defendant falls into the class of persons at whom the criminal statute was principally directed; (2) other penalties authorized by the legislature (or the Sentencing Commission); and (3) the harm caused by the defendant.” United States v. Heldeman, 402 F.3d 220, 223 (1st Cir. 2005).

         The three-factor test weighs heavily in favor of the government. With respect to the first factor, Chin argues that he is “far from fitting the archetypal profile of an organized crime figure or a calculating predator who chooses to enter into a conspiracy for the very purpose of perpetuating fraud, who are the classes of persons at whom the [RICO and RICO forfeiture] statutes were principally directed.” Chin Opp'n, Dkt #1423 at 10. While in the popular imagination, RICO conjures up images of mobsters engaged in loansharking, extortion, and illegal gambling, Congress intended “that RICO (although a criminal statute) be broadly interpreted.” Hurley, 63 F.3d at 21. The best evidence of this is the inclusion of mail fraud, which is hardly one of the usual tools of the gangster trade, as one of the predicate acts on which a RICO enterprise can be based.

         As for the second factor, Chin cites the Probation Office's Presentence Report (PSR) and its recommendation of a “fine range” of $20, 000 to $200, 000. See PSR ¶ 167. Because that recommended range is significantly lower than the forfeiture amount that the government seeks, Chin argues that the proposed forfeiture is “out of line” with the financial penalty endorsed by the U.S. Sentencing Commission. While this argument has some value in considering whether a hardship reduction in the forfeiture amount is appropriate, for purposes of the second Heldeman factor, it is not persuasive. The statutorily authorized maximum fine is $250, 000 on each of ...

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