Experts in white-collar criminal defense cases are expressing surprise at a deal struck recently between Rep. Duke Cunningham and federal prosecutors who are investigating the California Republican’s ties to a defense contractor.
Cunningham and the U.S. Attorney’s Office for the Southern District of California, which is investigating the GOP lawmaker’s financial dealings with Mitchell Wade, former president and owner of defense contractor MZM Inc., have agreed to allow the California Republican to sell his Rancho Santa Fe, Calif., home. The net proceeds from the sale will be placed into an escrow account overseen by U.S. District Judge Dana Sabraw while the Justice Department continues its criminal probe of Cunningham.
A civil forfeiture claim by the federal government against the Rancho Santa Fe property will also proceed on a parallel track. Cunningham and the government will haggle over how much of the home sale’s proceeds will be off-limits to Cunningham as federal prosecutors assemble their case against him.
The house is expected to sell for more than $3 million. Cunningham’s attorneys want to limit the amount of that $3 million-plus that could be seized by the federal government to roughly $300,000. Prosectors are expected to seek a much higher amount.
Cunningham has also pledged to give a portion of the sale proceeds to charity.
Cunningham sold his Del Mar, Calif., home to Wade in November 2003 for $1.675 million, and two weeks later used $1.45 million of that amount to purchase his Rancho Santa Fe residence. Wade resold the Del Mar home just nine months later for $700,000 less than he paid for it. Federal prosecutors have alleged that Cunningham “demanded and received” the inflated price for his home from Wade “in return for being influenced in the performance of his official acts as a public official.” Cunningham and Wade have denied the allegation.
Federal prosecutors had sought to block Cunningham from ever selling the Rancho Santa Fe home. In July, federal prosecutors secretly placed a notice of lis pendens — a warning of potential civil forfeiture proceedings by the government — against the Rancho Santa Fe home. Once news of that lien became public, potential buyers were scared off, suppressing the value of the property, according to Cunningham’s lawyers.
As part of the agreement between Cunningham and the U.S. attorney’s office, the notice of lis pendens has been vacated, although federal prosecutors have retained the right to move against Cunningham’s assets in the future.
Plato Cacheris, a veteran Washington, D.C., defense lawyer, called the deal between Cunningham and the Justice Department on the Rancho Santa Fe home “unusual,” suggesting that it was odd that Cunningham and his attorneys “would take a deal like this” prior to him even being charged by the government.
Another Washington-based criminal- defense attorney privately compared the government’s tactics to those used in the prosecution of drug dealers. In such cases, the government often moves to seize property from the defendants, arguing that the property was purchased with funds from an illegal activity.
Cunningham’s lawyer, Lee Blalack, defended the escrow agreement with the government. “It is not uncommon,” Blalack said. “It happens.”
Blalack said the agreement will allow the Cunninghams to sell their home at this time, which is the most important financial move that the couple can take as they prepare to face criminal prosecution. Instead of having the notice of lis pendens in place, the Cunninghams are now free to get whatever they can from a potential buyer, with likely “only a portion” of those funds sequestered from use, according to Blalack.
While officials in the U.S. attorney’s office in San Diego declined to comment for this article, recent motions filed in court by federal prosecutors make clear the direction their probe of Cunningham and Wade is heading.
In an Oct. 7 motion seeking to stay civil forfeiture proceedings until the criminal charges are brought against Cunningham, lawyers from the U.S. attorney’s office in San Diego argued that the Cunninghams’ intention to sell the Rancho Santa Fe property was “suspicious” and could jeopardize the government’s ability to seek monetary fines against Cunningham if he is found guilty.
“While the Government is not, at this time, contending that Claimants’ plan to sell Subject Property was intended to foreclose or frustrate future forfeiture efforts, there is no denying the suspicious timing of the plan — two weeks after the Government searched the Subject Property and five months prior to the two years required for the tax exemption for the sale of the property,” the Oct. 5 motion states. The FBI searched the Cunninghams’ home on July 1.
Under federal law, a couple facing capital gains taxes from a home sale can avoid paying the tax on up to $500,000 in profits. But the “ownership test” required by the IRS prevents those who own a home for less than two years from applying for this exemption.
The Cunninghams purchased their Rancho Santa Fe home in December 2003 for $2.55 million and have been seeking as much as $3.5 million for the residence. Capital gains on home sales are taxed at a federal rate of 25 percent. But the exemption could be jeopardized if the Cunninghams were to sell the home before December 2005.
The Cunninghams, though, may be limited in accessing the exemption if they exercised this option when they sold their Del Mar home to Wade for $1.675 million. The couple purchased that home in 1987 for $435,000, according to legal documents.
Federal prosecutors also have alleged in legal filings that Cunningham’s attorneys are attempting to use the civil forfeiture proceedings to uncover evidence that might be used against their client in a criminal case.
Cunningham’s lawyers want to initiate the “discovery” process in their lawsuit against the government prior to agreeing to any stay in the civil case, a move that federal prosecutors are strongly resisting.
“Simply stated, this Court should issue a stay, as the government has proffered abundant evidence demonstrating any discovery request by Claimants would have the adverse affect of providing potential targets with far more information than they are entitled and could severely impact the government’s ability to investigate any related criminal case,” states the Oct. 7 motion from the government.
Blalack has repeatedly denied this claim, both in legal filings and interviews, and he did so again on Friday, stating that the Cunninghams have “due process rights that must be respected.”
Federal prosecutors also have questioned the claim of Duke Cunningham’s wife, Nancy, that she was unaware of the dealings between her husband and Wade, and thus should not be subject to any civil forfeiture action filed against the Congressman, including the potential seizure of their home or other joint assets.
“On the other hand, the government’s declarations provide a more than adequate basis for the Court to conclude that, at a minimum, there are substantial questions of fact that need to addressed regarding Mrs. Cunningham’s knowledge of the conduct giving rise to the forfeiture action,” states the Oct. 7 motion.