News & Articles


02 / 25 / 2013

United States v. James W. Bailey, Jr., Case No. 1:11-cr-00010-MR-DLH (WDNC 2-25-13)
United States District Judge Martin Reidinger issued a profound opinion earlier today.  Not only did the Court reject the efforts on the part of the Department of Justice to have an order of forfeiture issued with respect to properties purchased by ponzi schemer, Bill Bailey, in the name of certain IRA Petitioners, through LLCs the IRAs owned, but in doing so, the Court stated the Government had pursued the matter improperly.  Noting that the purpose of the criminal forfeiture statute (21 USC Section 853) was to punish the wrong-doer (i.e., Defendant Bill Bailey), then it became clear that the Government's pursuit of the properties was misguided because forfeiture of properties does "absolutely nothing" to punish the Defendant.  In fact, as the Court put it, "(Bailey) has no dog in that fight, which is likely why he was so willing to consent to the forfeiture of those assets in the first place; it affected him not in the least."  Thus, the Court went further and found it a bit odd that the ones who are being punished by the Government's actions (in pursuing forfeiture) "are the Petitioners, who are completely innocent in every regard...and the Government seeks to deprive them of their hard-earned retirement funds and assets based on absurd contortions of the forfeiture statute."  Opinion at 81-82.  The Government's arguments were viewed by Judge Reidinger as completely without any merit whatsoever because they were being pursued "to punish and dispossess innocent parties."  Id.
The Court reviewed how the parties have had to expend countless hours (and countless pages) asserting their arguments, and concluded that the "Government has repeatedly cited to cases that do not support the Government's position, all in the interest of making more of the Defendant's clients "share the pain" resulting from this massive fraud." Opinion at 82.  To quote the Court:
"This is the sort of behavior that diminishes the public trust in government, as well as the justice system in general.  After all, it is the Department of Justice that seeks to dispossess these innocent owners and make them victims, ostensibly in the name of 'fairness."  As such, if the Government were successful, these Petitioners would only be victims of the Government, not of the Defendant."  Id.
In the case, Bill Bailey was charged with the filing of false tax returns, committing mail fraud, and committing securities fraud.  The Bill of Information contained a Notice of Forfeiture, which stated that the Government's intent to pursue the forfeiture of Defendant's interest in various properties, including any and all assets titled in the name of LLCs established by Defendant and/or Southern Financial Services for the purpose of managing and/or purchasing assets.  An originally issued consent order had authorized forfeiture of any and all interest in any LLCs, including LLCs in the name of Southern Financial Services clients, established by Defendant and/or Southern Financial Services for the purpose of managing and/or purchasing assets.  When the Government removed reference to "any and all interest in any LLCs" then the forfeiture proceedings were no longer focused in on the forfeiture of any membership interests.  Opinion, at 3. 
It was undisputed that none of the Petitioners ever authorized or intended either Defendant Bailey or his Southern Financial to have any right, title, or membership interest in the respective Petitioner IRA LLCs, or in any assets purchased on their behalf.  Opinion, at 39.  The Government presented no forecast of evidence that Defendant Bailey has any type of ownership interest in the properties, but still claimed that it had "some type of interest" because that interest arose in favor of Bailey at the moment when the funds were transferred from the IRA Petitioners' IRA accounts to Southern Financial.  Opinion, at 64.  The Court noted that the fact that the Defendant had possession of the Petitioners' funds for that short period immediately before the fund were used to purchase properties as the Petitioners had instructed, but, in fact, the transactions, in fact, were closed, and thus, vesting the IRA Petitioners' interests.  In other words, the proceeds of the Defendant's fraud, at least with respect to the IRA Petitioners, were in essence returned to them, they suffered no loss, as the position of the Petitioners were superior.  The Court further focused on how merely custodial services were provided by Southern Financial, and as such, it was clearly holding the funds for someone, i.e., the beneficial owner of the funds.  The Court rejected Defendant Bailey's unsupported statement in his Plea Agreement that he has or had a possessory or legal interest in the assets originally claimed by forfeiture, but that just saying so, doesn't make it so.  Opinion, at 70. 
The Court rejected suggestions by the Government that because the IRA Petitioners' funds were not segregated in any manner from other funds held by the Defendant, these properties MUST have been purchased with funds provided by Bailey's other victims.  The Court noted that the Government had not presented any evidence to support its claims, nor did it make any effort to trace such funds through the purchases.  Opinion, at 57 n.16.  The fact that Defendant Bailey was not, in fact, a qualified custodian under Section 408 did not matter, as the fact that the Bailey failed to manage the self-directed IRAs appropriately did not change the result.  Opinion at 37.
The Court goes on to state that when Defendant Bailey set up the arrangements, the specific petitioner or petitioner IRA was designated as the sole member and owner and with Defendant Bailey designated only as the organizer or manager.  In other words, Defendant Bailey was not, and never had been, a member of any of the Petitioner LLCs.  Opinion, at 38.  Temporary co-mingling of the Petitioner's funds with the funds of other Southern Financial clients, all of the transactions for which Petitioners forwarded funds to Bailey were completed as directed.  Id.
The Court states in apparent dicta that "(d)espite the fact that Bailey failed to manage the self-directed IRAs appropriately, he did properly establish LLCs for all of the IRA Petitioners."  Opinion, at 37.  As to "the procedures Bailey followed,  (these) were insufficient to preserve certain tax benefits for the Petitioners, the LLCs themselves that were created were at all times valid, properly organized, and existing under North Carolina law."  Id. 
NOTE:  As to the Federal tax consequences, it is not at all clear if the Court is referencing its  understanding of the facts, or perhaps, indicating awareness of the actual decisions reached by the IRS as to the tax status of the Petitioner IRA LLCs.  The statement is made that because Defendant Bailey was not, in fact, a qualified custodian under Section 408, or because he had caused in many cases for his clients to engage (unknowingly) in prohibited transactions, that these actions would compromise the tax-deferred status of their funds.  Such statements may not be binding when it comes the Federal tax law.  See e.g., Ancira v. IRS, 119 T.C. No. 6 (2002)(petitioner directed investments of the IRA by directing investments to be made in stock, and in making the check payable to and negotiating the check, and getting the stock issued into the IRA account, petitioner's actions were as the IRA Trustee's agent, and thus Petitioner was not in constructive receipt of the IRA assets); cf. Lemishow v. IRS, 110 T.C. 110 (1998)(taxpayer making withdrawals from retirement accounts, investing the distributions in stock, and then contributing that stock to a new IRA could not treat these steps as a tax-free rollover).