S.D.N.Y.: Govt couldn’t use “all records exception” because of lack of PC support

Securities fraud warrant was way overbroad and can’t be saved by the “all records exception” to search defendant’s business and apartment and seize even personal records. The search was so intrusive it violated the Fourth Amendment because there wasn’t sufficient probable cause all records. United States v. Wey, 2017 U.S. Dist. LEXIS 91138 (S.D. N.Y. June 13, 2017) [see NYT: Judge Scraps U.S. Evidence Against Wall Street Financier Wey]

i. Legal Standard for the All-Records Exception

Courts in the Second Circuit have recognized that “[w]hen there is probable cause to believe that an entire business is ‘pervaded’ or ‘permeated’ with fraud, seizure of all records of the business is appropriate, and broad language used in a search warrant will not offend the particularity requirement.” United States v. D’Amico, 734 F. Supp. 2d 321, 360 (S.D.N.Y. 2010). Under those limited circumstances, “broad language used in warrants will not offend the particular requirements.” U.S. Postal Serv. v. C.E.C. Servs., 869 F.2d 184, 187 (2d Cir. 1989). This principle is commonly referred to as the “all-records exception to the particularity requirement.” D’Amico, 734 F. Supp. 2d at 360 (internal quotation marks omitted) (citing United States v. Burke, 718 F. Supp. 1130, 1139 (S.D.N.Y. 1989); see also United States v. Smith, 05-cr-293A, 2007 U.S. Dist. LEXIS 52377, 2007 WL 2088938, at *3 (W.D.N.Y. Jul. 19, 2007) (“Although the particularity requirement of the Fourth Amendment creates a general presumption against ‘general’ or ‘all-records’ warrants, courts, including the Second Circuit, have recognized an exception where there is probable cause to believe that criminal activity permeates the business to be searched.”). From a strictly analytical perspective, however, “it is not so much an ‘exception’ to the particularity requirement … as a recognition that a warrant – no matter how broad — is, nonetheless, legitimate if its scope does not exceed the probable cause upon which it is based.” United States v. Bowen, 689 F. Supp. 2d 675, 683 n.6 (S.D.N.Y. 2010) (internal quotation marks omitted); cf. Hickey, 16 F. Supp. 2d at 241 (“The more extensive the probable wrongdoing, the greater the permissible breadth of the warrant.”).

For the all-records exception to apply, the affidavit in support of the search warrant need not necessarily lay out “specific factual evidence demonstrating that every part of the enterprise in question is engaged in fraud”; rather, it must only set forth “sufficient factual evidence of fraudulent activity from which a magistrate could infer that those activities are ‘just the tip of the iceberg.’” Burke, 718 F. Supp. at 1139-40 (additional internal quotation marks omitted) (quoting United States v. Offices Known as 50 State Distrib. Co., 708 F.2d 1371, 1375 (9th Cir. 1983)). Still, “[t]he Fourth Amendment requires more than mere extrapolation to activate the [allrecords] principle.” Hickey, 16 F. Supp. 2d at 241. And courts assessing the applicability of the exception must satisfy themselves that “the Government … provided the magistrate judge with sufficient probable cause to believe that the entire business operation is a scam.” Zemlyansky, 945 F. Supp. 2d at 461 (internal quotation marks and alterations omitted) (emphasis in original); United States v. Paccione, 738 F. Supp. 691, 708 (S.D.N.Y. 1990) (“Courts have consistently held that where a business is totally illegal, a search warrant may properly authorize the seizure of all documents of the business.”) (emphasis added).

ii. The All-Records Exception Does Not Apply Here

First, a preliminary observation: while the probable cause showing necessary to invoke the all-records exception is always substantial, the Government faces an even higher hurdle than usual in attempting to apply it to the Apartment Warrant. Indeed, as several Circuits have recognized, “it would require extraordinary proof to demonstrate that an individual’s entire life is consumed by fraud and that all records, found in the home were subject to seizure.” United States v. Falon, 959 F.2d 1143, 1148 (1st Cir. 1992); United States v. Humphrey, 104 F.3d 65, 69 n.2 (5th Cir. 1997) (“the issuance of all records searches of homes” will be upheld “only in extreme cases”); see also United States v. Cherna, 184 F.3d 403, 409 (5th Cir. 1999) (“[I]it is more difficult to demonstrate probable cause for an ‘all records’ search of a residence than for other searches.”). For that reason, even “when an individual’s allegedly fraudulent business activities are centered in his home,” the ‘”all records’ doctrine must be applied with caution” in the context of a home search, and, absent “unusual proof,” any “broad categories of items … must be sufficiently linked to the alleged criminal activity so as to distinguish them from innocent personal materials.” Falon, 959 F.2d at 1148; see also United States v. Ostrowski, 822 F. Supp. 2d 66, 71 (D. Mass. 2011) (“[E]ven pervasive fraud cannot justify seizure of every record from an individual’s home.”). While the Second Circuit does not appear to have addressed this issue directly, its decisions on the subject strongly signal that the all-records exception is generally limited to the seizure of “business records” and applicable only when there is probable cause to believe that a “business was permeated with fraud.” Nat’l City Trading Corp. v. United States, 635 F.2d 1020, 1026 (2d Cir. 1980) (emphasis added); C.E.C. Servs., 869 F.2d at 187 (same).

Even assuming, however, that the all-records exceptions could conceivably save both the NYGG Warrant and the Apartment Warrant, the Court finds that both Warrant applications fell short of providing Magistrate Judge Dolinger with “sufficient probable cause to believe that [Wey's] entire business operation [was] a scam.” Zemlyansky, 945 F. Supp. 2d at 461 (internal quotation marks and alterations omitted) (emphasis in original); see also D’Amico, 734 F. Supp. 2d at 360 (all-records doctrine applies where “there is probable cause to believe that an entire business is ‘pervaded’ or ‘permeated’ with fraud”). As noted above, the Komar Affidavit — and, by extension, the Garwood Affidavit — described NYGG, in terms suggesting some measure of presumed legitimacy, as a “corporate advisory firm” with a “special[ty]” in “introducing middle-market Chinese operating companies to the U.S. capital markets.” See, e.g., Komar Aff. ¶ 16. Accounting for all of the substantial evidence marshalled across the Komar Affidavit’s nearly 100 pages, it connected NYGG and Wey to a scheme implicating, at most, five or six discrete deals involving specifically identified Issuers, with the alleged misconduct pertaining to each company occurring in some at least roughly defined timeframe. See Reply Memorandum of Law in Further Support of Defendant Benjamin Wey’s Motion to Suppress, To Dismiss the Indictment, and For Other Relief, Dkt. No. 62 (“Reply”), at 19-20. The Komar Affidavit did not set forth any evidence, explicit or implicit, that the scheme either constituted just the “tip of iceberg” with respect to fraudulent activity involving NYGG or the Wey Apartment, or that the scheme itself constituted the entirety – or even a substantial portion – of NYGG’s or Wey’s overall business operations. It made no showing, for example, that NYGG was merely a front for the scheme or that the scheme infused or was otherwise “inseparable” from the balance of NYGG’s corporate advisory activities. Burke, 718 F. Supp. at 1141. Nowhere, more generally, did it suggest that NYGG was a so-called “boiler room” operation or similar sham enterprise. Id. at 1140-41.

Indeed, the Komar Affidavit, as the Government concedes, “candidly acknowledged,” Opp. at 36, that there were “legitimate aspects of [NYGG's] business,” Komar Aff. ¶ 35(b) n.11, but it made no effort to characterize the scope of the suspected fraud relative to NYGG’s apparently above-board operations. See Zemlyansky, 945 F. Supp. 2d at 463 (“The affidavit offers no information about the size or scope of [the subject] business, its clients, whether only part of the office deals with the kind of billing at issue in the alleged scheme, [or] the manner in which or degree to which it is controlled by the [relevant] scheme ….”). To the contrary, Komar admitted that he lacked the necessary information to do so, averring that the NYGG Search would help provide the FBI with “background” information to better understand the “scope” of the suspected fraudulent scheme as “compared to [NYGG's] overall business.” Komar Aff. ¶ 35(b) n.11.

True, the fact that a business “engaged in some legitimate activity” may not necessarily “defeat the all-records exception” on its own. D’Amico, 734 F. Supp. 2d at 360 (emphasis in original). Thus, for example, an enterprise demonstrated by the FBI to have been specifically created to serve as a front to launder organized crime proceeds could not invalidate an expressly approved all-records application by pointing to some potentially legitimate sales activity on the side. Id. at 356-62. But clear acknowledgment, of the sort offered by Komar, that an affiant is essentially in the dark as to how a suspected fraud fits into a broader “legitimate” business is inconsistent with a demonstration of probable cause that the fraud entirely permeates the enterprise.

In fact, the Komar Affidavit recognized the relative narrowness of its actual probable cause showing, consistently asserting, for example, that there was probable cause to believe that “documents and other evidence relating to the SmartHeat, Deer, and AgFeed schemes” would be found at the NYGG offices. Komar Aff. ¶ 35; see also id. ¶ 38 (“There [is] probable cause to believe that the [NYGG offices] currently contain evidence of Wey’s use of nominees to conceal his ownership in CleanTech and Nova Lifestyle.’”) (emphasis added); see also Burke, 718 F. Supp. at 1141 (rejecting all-records argument pertaining to art gallery in part because the affidavit itself made clear that there was “probable cause to believe that mail fraud and wire fraud involving the sale of purported fine art prints by Salvador Dali, had been committed” by the subject gallery) (emphasis in original) (internal quotation marks and alterations omitted).

The Garwood Affidavit, for its part, fell especially short of making the heightened showing required to authorize the seizure of all records from the Wey Apartment. Even incorporating as it did the Komar Affidavit, the Garwood Affidavit nowhere approached a “demonstration]” from which one could draw the reasonable inference that Wey’s “entire life [was] consumed by fraud.” Falon, 959 F.2d at 1148. Nor did it aver that NYGG’s allegedly fraudulent business activities were in any way “centered” on the Wey Apartment, id., or that there “was considerable overlap between [Wey's] personal and business lives,” Cherna, 184 F.3d at 409 (citing Humphrey, 104 F.3d at 68-69). To the contrary, the Garwood Affidavit’s probable cause showing as to the Wey Apartment itself was, all things considered, relatively narrow, focusing principally on allegations that: (i) Michaela Wey often performed “bookkeeping” and “payroll” functions for NYGG from the Wey Apartment, where she “sometimes mail[ed] checks”; (ii) Deer stock certificates had been sent to the Wey Apartment in April 2009; and (iii) Wey’s sister had purportedly executed suspicious electronic fund transfers to personal accounts in the name of Michaela Wey. Garwood Aff. ¶¶ 6-12. Such a showing might well justify the seizure of materials pertaining to the purported scheme outlined in the Komar Affidavit, but it most assuredly did not rise to the level of supporting an all-records authorization.

Further belying the suggestion that the all-records exception excuses the Warrants’ lack of particularity, the evidence before the Court indicates that the Government neither intended to seek formal authority to seize all records from NYGG and/or the Wey Apartment nor understood itself at any time – until perhaps it joined issue on the instant motion — to be in possession of any such authority. The Komar and Garwood Affidavits nowhere made the explicit assertion that NYGG – or any other Wey-linked business operation for that matter — was permeated by fraud. They also did not explicitly request permission to execute an all-records seizure. See, e.g., Vilar, 2007 U.S. LDist. LEXIS 26993, 2007 WL 1075041, *21 (“[T]he Affidavit itself makes no explicit allegation that the [subject] entities were permeated with fraud.”). Moreover, apart from AUSA Massey’s somewhat rote incantations on direct examination at the Hearing that NYGG was “permeated with fraud” at the time of the Searches, Hearing Tr. 13:10-15 — assertions that the Court found too rehearsed to be persuasive — the Government’s witnesses testified across the board that the Warrants covered something less than all records from either location (although, as discussed further below, they also struggled to articulate any limiting principle) and they had no recollection of actually applying for all-records authorization. See, e.g., id. 47:4-8 (Q. “Is it fair to say, sir, that Exhibit A was an attempt by you to cover basically every form or format of material that could be found in a location from notes, handwritten notes, scraps of paper, every form of item that could be found?” A. “No, that’s not correct.”) (Massey); id. 33:5-8 (Q. “What I’m trying to figure out from your testimony, sir, is whether you are testifying that you actually made the [Warrant] application pursuant to the [all-records] doctrine or not?” A. “I don’t recall. I simply don’t recall.”); id. 188:16-18 (Q. “Never occurred to you that [the NYGG Warrant] might be a warrant that covered everything in the office?” A. “I don’t feel it covered everything in the office.”) (Komar); see also id. 40:4-10 (Q: “… do you believe that your understanding of the business gave you the right to seize every record at the home of Benjamin and Michaela Wey?” A. “No.”) (Massey). As several courts outside this Circuit have recognized, “if the [G]overnment is relying upon the ‘permeated with fraud’ exception to support an application for an otherwise overly-broad search warrant, it should state so in the application rather than attempting a post-hoc rationalization.” United States v. Bridges, 344 F.3d 1010, 1020 (9th Cir. 2003) (Thomas, J., concurring in pertinent part); cf. Abrams, 615 F.2d at 544 (“If, as the government urges, the affidavit information called for all . . . of the Medicare-Medicaid records in the offices, then the warrant should have said so.”); United States v. Winn, 79 F. Supp. 3d 904, 920 (S.D. Ill. 2015) (“The bottom line is that if [the applying officer] wants to seize every type of data from the cell phone, then it was incumbent upon him to explain in the complaint how and why each type of data was connected to [Defendant's] criminal activity, and he did not do so.”).

In all of these ways, the circumstances here are readily distinguishable from those presented in D’Amico, the case on which the Government relies to advance its all-records argument. Opp. at 36-37. There, the FBI not only expressly sought permission to seize “all documents relating to” the business to be searched, but it also established in its warrant application that the subject business, while perhaps engaging in some attempt to sell energy drinks as a side operation, had specifically been created to, and did, serve primarily as a front for the laundering of proceeds generated by illicit mafia operations. 734 F. Supp. 2d at 356-62. For that matter, the circumstances here differ more generally from the typical cases in which the allrecords exception is applied in this Circuit: those “involv[ing] rampant misconduct and little, if any, legitimate business activities.” Vilar, 2007 U.S. Dist. LEXIS 26993, 2007 WL 1075041, at *21 (collecting cases); see also Zemlyansky, 945 F. Supp. 2d at 461 (“In cases where the all records exception has been applied, the affidavit submitted in support of the warrant contained detailed information that would provide reason to believe that all or nearly all of the business under investigation was illegal.”); Burke, 718 F. Supp. at 1139-1140 (surveying case law and noting that evidence sufficient to invoke all-records exception tends to “consist of a large number of fraudulent transaction or of documentation – in the form of information gleaned from interviews with former employees or from undercover surveillance of the operation – that the entire operation is a scam”).

More instructive here are cases like Hickey and Burke. In Hickey, four corporations were allegedly involved in a RICO, fraud, and money laundering scheme centered on controlling and exploiting commercial garbage operations in the Town of Islip, New York (the “Islip fraud”). 16 F. Supp. 2d at 226. Law enforcement agents obtained warrants to seize “all business records” of each of the four entities. Id. at 237. The court invalidated the warrants, concluding as pertinent here that they were not salvageable under the all-records exception because the warrant application’s probable cause showing focused on the “core criminality” targeted by the investigation – the “one overriding scheme” represented by the Islip fraud — and lacked sufficient information to suggest that the “other operations of the defendant corporations” were “similarly corrupted.” Id. 240-241. And in Burke, the court refused to apply the all-records exception to warrants to search offices of Barclay Galleries, even though the underlying affidavits identified six fraudulent transactions involving Salvador Dali prints and several related fraudulent statements and misrepresentations, and averred, based on information from confidential sources, that the offices housed “a boiler room operation.” 718 F. Supp. at 1138-40. Judge Mukasey observed that “[n]otably absent” from the affidavits was “any indication that the government believed … that Barclay’s sale of non-Dali artwork was also fraudulent or that Barclay’s sale of fraudulent Dali artwork represented just a sample of its pervasively fraudulent sales,” and that the Government made no “showing that the sale of Dali prints was inseparable from the sale of print by other painters.” Id. at 1140-41.

The instant facts are analogous. The Komar and Garwood Affidavits unquestionably establish probable cause to search for and seize something: for example, materials pertaining to the specific entities and individuals purportedly implicated as Issuers or Nominees in the five to six transactions on which the Affidavits focused. They fall short, however, of establishing the requisite probable cause to believe that Wey’s entire business operation was a scam, so as to justify the seizure of all records from either NYGG or the Wey Apartment.

For the foregoing reasons, the Court concludes that both Warrants lack particularity and that shortcoming is not excused under the all-records exception.

2. The Search Warrants Are Overbroad

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