Wednesday, December 16, 2015

The Website, the "Precious Metals" and Fraud

This post examines an opinion from the U.S. District Court for the Southern District of Georgia:  U.S. v. Waddell, 2015 WL 8148732 (2015).  The U.S. Magistrate Judge begins the opinion by explaining that
Stacy Waddell has been indicted for wire and mail fraudmoney laundering, and destroying counterfeit gold coins to prevent their use against him. . . . He moves to suppress (1) evidence gathered during a warrantless search of the non-public portions of a website owned by a corporation he controlled . . . ; (2) bank records obtained after federal agents, without a warrant, opened mail addressed to another Waddell corporation . . .; and (3) evidence seized from his home, car, cell phone, and office pursuant to judicially-approved warrants. . . .

Waddell testified and offered evidence at an evidentiary hearing on his website and mail suppression motions. . . . .  
U.S. v. Waddell, supra.
He then outlines the conduct that gave rise to these charges, noting that in 2014,
Secret Service agent Brent Rothschild received a phone call from a Savannah attorney who reported that Waddell defrauded his client out of approximately $26,000. An investigation ensued that revealed multiple Waddell-controlled companies that purported to engage in the business of selling precious metals. The government contends that Waddell, at times using third-parties, placed internet ads offering gold and silver for sale through those companies and inviting people to call for more information.

When they did, Waddell often directed them to a website he operated,, to make purchases. Once there, people could purchase the precious metals only by sending money via wire transfer to bank accounts owned by Waddell's companies. The government alleges that many, if not most, of those people never received anything in return for their money.
U.S. v. Waddell, supra.
The judge goes on to outline what was involved in the searches that are the primary targets of Waddell’s motion to suppress, beginning with the “ Search”:
During his investigation, Rothschild identified Heidi Peterson as the site designer and administrator for On April 9, 2015, he contacted Peterson to discuss the website and her relationship with Waddell. Peterson, who herself had suspicions about Waddell's activities after some of his customers called her to complain, told Rothschild she built the website and maintained its security architecture for a yearly fee. She also printed out and gave Rothschild the invoice for one of the customers who complained about Waddell.

After their initial conversation, Rothschild followed up with an email thanking Peterson and asking her to let him know if she had anything else she thought might be helpful to the investigation. Peterson replied and, without prompting from Rothschild, provided her administrative login credentials to He then used that information to log in to, access non-public portions of the site, and print off 15–20 invoices that he believed evidenced fraudulent sales by Waddell. That information ultimately led Rothschild to identify a substantial number of additional victims.
U.S. v. Waddell, supra.  Next, the opinion outlines the “mail search” that was also a target of Waddell’s motion to suppress:
Among others, Rothschild's investigation unearthed two Florida entities—Southern Precious Metals (SPM) and Rare Silver Antiques (RSA) — that allegedly played a part in Waddell's schemes. Because both were based out of a Tampa, Florida address, Rothschild contacted the Secret Service field office there for assistance.

In December 2014, agent Lisa Chan went to the Tampa address associated with SPM and RSA (a residence) and interviewed the home's owner, Debra Sweet. Sweet at one point worked for Waddell and had agreed to use her home as the mailing address for SPM and RSA. By the time Chan contacted her, however, she and Waddell had no relationship.

Still, Sweet had grown suspicious of Waddell and the two companies (she discerned from bank statements for SPM and RSA that Waddell appeared to use them primarily to pay for personal expenses, including casinos and strip clubs). She retained bank records sent to her home for Waddell's companies, including two envelopes that she left unopened. She turned them over to Chan, who then consulted with Rothschild about whether to open them.

One envelope was addressed to SPM and a woman named Brianna Stiles, while the other was addressed to SPM and a woman named Savannah Anderson. Waddell's name appeared nowhere on either. Given that, Rothschild instructed Chan to open them. Both contained BB & T bank debit cards for accounts that Rothschild did not know existed. The envelopes ultimately led to additional evidence against Waddell.
U.S. v. Waddell, supra.  
The judge then analyzed the arguments Waddell made in his motion to suppress that addressed the searches described above, beginning with the “ Search”:
At the suppression hearing and in their various briefs, both Waddell and the government spill much ink arguing over whether Peterson had authority to consent to Rothschild's search of Whether or not she could, however, is ultimately irrelevant since Waddell has no standing to contest the search's constitutionality.

`It has long been the rule that a defendant can urge the suppression of evidence obtained in violation of the Fourth Amendment only if that defendant demonstrates that his Fourth Amendment rights were violated by the challenged search or seizure.’ U.S. v. Padilla, 508 U.S. 77 (1993) (emphasis in original). A corporation and the natural individual who created it are different `persons’ for Fourth Amendment purposes, however. Cedric Kushner Promotions, Ltd. v.King, 533 U.S. 158 (2001) (Indeed, `incorporation's basic purpose is to create a distinct legal entity, with legal rights, obligations, powers, and privileges different from those of the natural individuals who created it, who own it, or whom it employs’).

In the context of searches of corporate property, therefore, it is `clear that a corporation's shareholder -- even a sole shareholder -- does not have standing to assert the corporation's Fourth Amendment rights absent harm to an individualized, legitimate and reasonable expectation of privacy.’ Ruttenberg v. Jones, 603 F.Supp.2d 844 (U.S. District Court for the Eastern District of Virginia 2009) affirmed, 375 F. App'x 298 (U.S. Court of Appeals for the 4th Circuit 2010); see also U.S. v. Nagle, 803 F.3d 167 (U.S. Court of Appeals for the 3rd Circuit 2015) (`[A] corporate shareholder has a legitimate expectation of privacy in corporate property only if the shareholder demonstrates a personal expectation of privacy in the areas searched independent of his status as a shareholder’); Williams v. Kunze, 806 F.2d 594 (U.S. Court of Appeals for the 5th Circuit 1986) (`Unless the shareholder, officer or employee can demonstrate a legitimate and reasonable expectation of privacy in the records seized, he lacks standing to challenge the search and seizure’); U.S. v. Vicknair, 610 F.2d 372 (U.S. Court of Appeals for the 5th Circuit 1980) (`When corporate property is seized or searched, an individual cannot assert the corporation's Fourth Amendment rights absent a showing that he had an independent privacy interest in the goods seized or the area searched).

`Consequently, [w]hen a man chooses to avail himself of the privilege of doing business as a corporation, even though he is its sole shareholder, he may not vicariously take on the privilege of the corporation under the Fourth Amendment; documents which he could have protected from seizure, if they had been his own, may be used against him, no matter how they were obtained from the corporation. Its wrongs are not his wrongs; its immunity is not his immunity.’

United States v. Britt, 508 F.2d 1052 (U.S. Court of Appeals for the 5th Circuit 1975).
U.S. v. Waddell, supra (emphasis in the original).
The judge then applied the principles outlined above to this case, noting, first, that
Waddell . . . availed himself of the privilege of doing business as a corporation. On April 24, 2013, he incorporated Optimal Financial Group Inc. d/b/a/ Global Gold (`Global Gold’) with himself as CEO and sole shareholder. Doc. 115–1 at 9. That same day he also incorporated PMX Refinery Inc. Id. at 26. And almost two years prior to those incorporations, he started Global Gold, Inc. Id. at 13.

More importantly, Global Gold, not Waddell individually, owned and contracted with Peterson for its design and maintenance. Before beginning work on the website, Peterson submitted a proposal for Waddell's approval that `outline[d] work to be performed by Heidi Peterson as it relates to the website currently owned and controlled by Global Gold,’ doc. 115–1 at 4 (emphasis added), and listing the website's registrant as Optimal Financial Group. Id. at 5. That remains the case today, as Global Gold continues to be listed as the `admin organization’ responsible for See id. at 22. Waddell's name appears nowhere in the registration of the website or as anything more than the contact person for Global Gold. See id. at 5 (Peterson's proposal); id. at 28 (invoice from Peterson's company to for installing a `shopping cart’ on

What's more, Waddell never paid Peterson for any of her services. Instead, payment came from various corporations, including Global Gold. For example, a Global Gold Bank of America account paid the aforementioned shopping cart invoice. See doc. 115–2 at 5 (Bank of America account records for a Global Gold account); id. at 11 (statement of withdrawals for that account showing a PayPal payment to Peterson's company for the $175 shopping cart invoice). And's 2014 annual renewal fee was paid to Peterson by a corporation (in this case Optimal Financial Group d/b/a/ `We Buy You Save’), not Waddell. See id. at 30 (SCBT/South Bank records for an Optimal Financial account showing a PayPal payment to Peterson for the $125 invoice). As recently as February 2015, another annual renewal invoice was paid through a PayPal account linked to the email address Id. at 41 (payment receipt); id. at 43 (articles of incorporation for My Bullion Source, Inc., a Florida corporation).
U.S. v. Waddell, supra.  
The judge then began the process of applying these principles to Waddell’s motion to suppress, pointing out, initially, that
[b]ecause Global Gold, not Waddell, owned, it had a Fourth Amendment interest at stake when Rothschild used Peterson's administrative credentials to search the non-public portions of the site. But Waddell cannot piggyback on that interest absent an “individualized, legitimate and reasonable expectation of privacy” in the website. See Ruttenberg v. Jones, supra.  He's shown no such interest or privacy expectation, however, and thus lacks standing to contest the search's constitutionality.
U.S. v. Waddell, supra.  
Next, he took up Wadell’s arguments to the contrary, noting, first, that he claimed he,
not Global Gold, has a sufficient interest to challenge the search of because he is Global Gold's sole shareholder (and thus owner), the site's only authorized user, and the sole generator of its contents. Doc. 110 at 1. But that's not the personalized interest upon which his standing can rest. Although a corporation can, like a car, be owned by an individual, the corporation, unlike a car, has legal rights—including Fourth Amendment rights—that are distinct from its owner's rights.

Waddell thus must have an expectation of privacy in “separate and distinct from [his] interests as [Global Gold's] dominant shareholder.” Ruttenberg v. Jones, supra (shareholder of corporation, absent more, had no standing to assert a claim in her personal capacity). . . . Waddell has shown nothing more than the interest of an owner in his business and the interest every defendant has in not having evidence used against him. Again that's not enough.

While the U.S. Supreme Court has held that a corporate officer may challenge an illegal search and seizure of corporate records, its holding was based on the theory that the premises being searched (usually the individual's office or an area where they spent significant time, typically in a space utilized by no other corporate employee) come within the Fourth Amendment concept of home, rather than on a determination that the officer may raise a right of the corporation. Mancusiv. DeForte, 392 U.S. 364 (1968) (union official had personal Fourth Amendment standing to object to alleged unreasonable search and seizure of union records from office shared by official with other union officials, where official, who spent considerable time in office, had custody of records at time of seizure and could reasonably have expected that records would not be touched except with permission of other union official); see also U.S. v. Nagle, supra (the expectation of privacy a business owner has in commercial property `is different from, and indeed less than, a similar expectation in an individual's home’) (quoting NewYork v. Burger, 482 U.S. 691(1987). . . . Mancusi established `that one has standing to object to a search of his office, as well as of his home.’ Mancusi v. DeForte, supra.

That is not the case, however, for the owner of a business who seeks to `challenge a search of the entire business premises.’ U.S. v. Novak, 2015 WL 720970 (U.S. District Court for the Northern District of Illinois 2015); see also id. at * 5 (`an individual does not have Fourth Amendment standing to challenge a search of a business by virtue of corporate ownership of the business; he must show a more direct connection between himself or his work and the items seized.’). . . .
U.S. v. Waddell, supra.  
The judge then ruled on the issues raised in this motion to suppress, noting that
[h]ere, Waddell stored no personal documents on He had no proverbial desk drawer in which he kept personal items. To the contrary, everything on the website related entirely to Global Gold's business. Indeed, the only documents Rothschild bothered retaining were invoices of alleged precious metals sales—the very business Global Gold purported to engage in. Nothing related to Stacy Waddell. This case, therefore, does not even equate to those where a corporate officer seeks standing by claiming he had control over not only his personal office area, but all of the corporate facilities.  See U.S. v. Novak, supra. And it goes without saying that the `home’ concept raised by defendants challenging the search of a brick-and-mortar corporate suite at best abstractly fits into a corporate suite that resides only in cyberspace.

Under those circumstances, the Court cannot disregard the corporate form for the benefit of an owner like Waddell, who argues that his personal rights are at stake precisely because he disregarded that form. See U.S. v. Lagow, 66 F. Supp. 738 (U.S. District Court for the Southern District of New York (1956) (piercing the corporate veil “is done not for the benefit of the person who organizes the corporation but for the purpose of protecting the rights of third persons, and then only in exceptional instances”). . . . Accordingly, his motion to suppress the fruits of that search should be denied.
U.S. v. Waddell, supra.  
The Judge then took up the “envelopes search”, noting that the
[same is true for Agent Chan's search of the two envelopes Deborah Sweet turned over. Neither envelope was to or from Stacy Waddell. The only connection to him lay in one of the addressees—Southern Precious Metals, Inc.—a company Waddell owned. But, for the same reasons that apply to Rothschild's search of, that's not enough to confer standing on Waddell (i.e., only SPM could assert a Fourth Amendment right to the envelopes, not Waddell). His motion to suppress the evidence obtained from opening the envelopes should likewise be denied.
U.S. v. Waddell, supra.  
Finally, the judge took up Waddell’s “third motion to suppress, explaining that
[a]fter the evidentiary hearing on the website and envelope searches, Waddell filed a third motion to suppress contesting the validity of warrants to search his home, car, and seize his cell phone. Doc. 101. He offers only conclusions to support his assertion that evidence from those searches `should be suppressed.’ Id. at 1; see also id. (`The [warrant] affidavits bore numerous false statements known to be false by SA Rothschild when sworn under oath’); id. at 2 (`The seizure of defendant's I–Phone upon arrest was illegal’). That's nowhere close to enough to merit an evidentiary hearing, much less suppression of evidence. 

Defendant fails to identify, for example, what statements were false, much less indicate how and why they were false or how they were critical to a finding of probable cause. Franks v. Delaware, 438 U.S. 154 (1978) (defendant challenging the veracity of a search warrant affidavit must make a `substantial preliminary showing’ that the affidavit contained a deliberately false or reckless statement that was essential to a finding of probable cause; mere `conclusory’ allegations will not suffice -- rather, the defendant must make an `offer of proof,’ supported by affidavits or other reliable witness statements, establishing the statement's deliberate falsity or recklessness, or satisfactorily explain the absence of such evidence).

Waddell has failed to make the threshold showing required before mounting a challenge to the veracity of the warrant affidavits. Those affidavits, which carry a `presumption of validity,’ . . . clearly establish probable cause for the challenged searches. Hence, Waddell's third motion, like his first two, should be denied.
U.S. v. Waddell, supra.  
The Magistrate Judge therefore recommended that all three of Waddell’s motions to suppress should be denied.  U.S. v. Waddell, supra.  As to the recommendation, as Wikipedia explains,
[b]ecause Article III of the United States Constitution vests the judicial powers in courts to which the judges are appointed for life (and which are therefore called Article III tribunals), decisions of a magistrate judge are subject to review and either approval, modification or reversal by a district judge of that court - except in civil cases where the parties consent in advance to allow the magistrate judge to exercise the jurisdiction of the district judge, and in which case appeals from the decision of the magistrate judge are heard by the United States Court of Appeals. 

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