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Circuit Upholds Forfeiture Based on Appreciation

The Second Circuit (Pooler, Jacobs, Wesley) issued an opinion holding that a criminal forfeiture order in an insider trading case is not limited to the amount of funds acquired through illegal activity but may extend to the appreciation of those funds.  In the case United States v. Afriyie, 17-cr-2444 and 17-cr-4045, the Court upheld a conviction for securities fraud and wire fraud, and upheld an almost $2.8 million forfeiture order, but vacated and remanded a restitution order in light of the Supreme Court’s recent decision in Lagos v. United States, 138 S. Ct. 1684 (2018).


In January and February 2016, while Afriyie was working as an investment analyst for MSD Capital, his employer was provided with material non-public information about a potential acquisition of ADT Corp. (“ADT”), a publicly-traded company in the home security and alarm industry, by a private equity firm.  One day after receiving an email alerting him to the potential acquisition of an alarm monitoring services company, and on the same day that his employer added ADT to its list of restricted securities, Afriyie purchased an ADT call option.  The next day, he purchased more ADT call options.  A few days later, after accessing documents specific to the ADT deal despite the fact that he was not assigned to work on the project, he purchased 2,000 additional ADT options.  Approximately two weeks later, after the acquisition became public, ADT’s stock price rose by 47.5% and the value of Afriyie’s investment increased by 6,000%.  The following week, Afriyie sold his options for a profit of over $1.5 million.  One month later, he was arrested.

In July 2017, after a one-week jury trial, Afriyie was convicted of securities fraud and wire fraud in violation of 15 U.S.C. §§ 78j(b) and 78ff, 17 C.F.R. 240.10b-5, and 18 U.S.C. § 1343.  He was sentenced to 45 months’ imprisonment, forfeiture in the amount of $2,780,720.02, and restitution in the amount of $663,028.92. 

The Appellate Decision

Afriyie appealed his conviction and sentence on the grounds that the district court (1) committed reversible plain error in its jury instructions; (2) committed plain error in admitting certain testimony; (3) erred in calculating the forfeiture amount; and (4) inappropriately calculated the restitution amount.  The Court agreed with Afriyie’s fourth argument, remanding the restitution order for recalculation in light of the Supreme Court’s decision in Lagos v. United States, which held that legal fees incurred in connection with a private investigation are not necessarily compensable as restitution under the Mandatory Victims Restitution Act.  But the Court rejected Afriyie’s first three arguments and upheld his conviction and forfeiture order.

The Second Circuit rejected Afriyie’s first argument challenging the jury instructions.  He claimed that the lower court failed to explain what constitutes a fiduciary relationship.  The Court held the defendant had signed a confidentiality agreement that established a “relationship of confidence” between himself and MSD Capital.  This agreement meant that even if there had been an error in the jury instructions concerning the nature of fiduciary relationship, it would have amounted to harmless error given the evidence on this subject.  The Court also rejected the defendant’s argument that the district court did not properly instruct the jury on the burden of proof, finding no plain error.

The Court also rejected Afriyie’s second argument—that the district court admitted lay testimony on the issues of stock projections and nonpublic information—finding that the witness at issue testified based on his firsthand knowledge and participation in the evaluation of the potential transaction.  Here too, the Court ruled on the merits and also found that any alleged error was not prejudicial given the overwhelming evidence at trial on the subject of Afriyie’s access to confidential information.

The Second Circuit next considered two issues relating to sentencing, one concerning loss calculation and the other concerning forfeiture.  With respect to loss calculation, the Court affirmed the imposition of a 16-level enhancement that was based on the evidence at trial and the jury’s forfeiture verdict.  With respect to forfeiture, the defendant alleged that it was error for the district court to have imposed a forfeiture order in excess of the $1.53 million profit Afriyie made from selling the ADT call options.  The forfeiture amount imposed—almost $2.8 million—represented the over $2.6 million in Afriyie’s brokerage account at the time of his indictment, plus the almost $150,000 Afriyie wired from his brokerage account to his savings account between the ADT stock appreciation and the time of his arrest. 

The Court looked to the forfeiture statute, 18 U.S.C. § 981(a)(1)(C) as incorporated to criminal proceedings by 28 U.S.C. § 2461(c), which states that a defendant convicted of insider trading must forfeit “[a]ny property, real or personal, which constitutes or is derived from proceeds traceable to the offense.”  Concluding that the phrase “derived from proceeds” does not restrict Section 981(a)(1)(C) from applying to funds that have appreciated in value, the Court held that “as a matter of law, forfeiture may extend to the appreciation of funds acquired through illegal transactions in an insider-trading scheme.” 

In holding that Afriyie’s punishment should not be limited to the immediate gains of his unlawful conduct, the Court established that illegal profits deposited into an account can render the entire account—both the original assets and those derived from those assets—susceptible to forfeiture.  This decision highlights the Court’s view of insider trading’s long- and far-reaching effects.  The Court’s decision emphasizes that the measure of criminal financial conduct is best defined by gain to the criminal actor, and not by profits at a single point in time.


The Second Circuit’s ruling resolves an open question about the wording of the forfeiture statute and how it should be applied where the assets obtained from insider trading have appreciated in value.  With physical property, it is easy to see how this statutory language should be construed.  If a house is to be forfeited as the proceeds of crime, the fact that the value of the house increased doesn’t entitle the victim to a credit.  Nor would a decrease in the value of the house entitle the government to seek additional funds from the defendant.  Likewise, if the property was sold, then the proceeds from the sale—derived from the illegally obtained property—should be forfeited.  Here, the situation is more complicated: the illegally obtained funds generated income between the time when they were obtained and the date of the forfeiture.  While it is not hard to imagine circumstances in which it might seem unfair for the government to obtain the “derived” proceeds, on the circumstances here, the Court of Appeals had no problem concluding that the government was entitled to forfeit the appreciated value. 

-By Emma Ellman-Golan and Harry Sandick