THE DEPARTMENT OF JUSTICE ASSET FORFEITURE PROGRAM
The Department of Justice Asset Forfeiture Program is a nationwide law enforcement program that has become an increasingly important weapon in the fight against crime. The objectives of the program, as set forth in The Attorney General's Guidelines for Seized and Forfeited Property, July 1990, are: (1) law enforcement: to punish and deter criminal activity; (2) cooperation: to enhance law enforcement cooperation at all levels of government, both domestically and internationally; and (3) revenue: as a by-product of the first two objectives, to produce funds to be reinvested into federal, state, local and international law enforcement. Thousands of investigators, litigators, property managers and support staff work in a coordinated national effort to accomplish the program's mission.
Federal civil forfeiture laws contain numerous protections against possible abuse. In civil forfeiture, the property is the "defendant" in the action. The seizure of property is equivalent to the arrest of a person and the forfeiture of property is analogous to the conviction of a person. Upon forfeiture, all property rights vest with the government. Forfeiture laws include protections for innocent owners and lienholders. Anyone with a legal interest in seized property can request a hearing before a judge or a trial by jury and require the government to establish a basis for forfeiture. The most important protection is the "innocent owner" defense, whereby the owner of the seized property can recover his property upon showing that the criminal use of the property was not the result of any act or omission by the owner.
Criminal forfeiture dates back to the passage of the Racketeer Influenced and Corrupt Organization Act of 1970 and the Controlled Substances Act of 1970. Since then, the Comprehensive Crime Control Act of 1984 and the Anti-Drug Abuse Acts of 1986 and 1988 have greatly expanded the scope of federal criminal forfeiture. In criminal forfeiture, the forfeiture of property is contingent upon the conviction of its owner. Criminal forfeiture is based upon the jurisdiction of the court over the defendant rather than the property and thus casts a wider net over property holdings than civil forfeiture. Civil forfeiture is more widely used and has an advantage over criminal forfeiture in that it provides for forfeiture regardless of the current whereabouts of the property's owners.
The six agencies responsible for identifying and seizing forfeitable property under the program are the Drug Enforcement Administration, the Federal Bureau of Investigation, the Immigration and Naturalization Service, the U.S. Postal Inspections Service, the U.S. Park Police and the Office of Criminal Investigations, Food and Drug Administration.
Other Department components perform vital and unique functions in accomplishing the program's mission. The USMS is responsible for maintaining and disposing of the vast majority of forfeited properties. The USAOs are primarily responsible for the litigation of forfeiture cases that proceed judicially. The Criminal Division's Asset Forfeiture Office provides legal advice and litigation support to the USAOs nationwide and serves as general counsel to the program.
The funds of the Program are maintained in two Treasury Accounts, the Seized Asset Deposit Fund (SADF) and the Asset Forfeiture Fund (AFF). The SADF was established for the temporary storage of non-evidentiary cash subject to forfeiture. The fund includes seized cash, proceeds from pre-forfeiture sales of seized property and income from property under seizure, like the Bicycle Club. The USMS is permitted to use funds from the SADF to cover administrative expenses incurred in the operation of seized properties.
Once the court issues a declaration of forfeiture order, assets are deemed forfeited and any related funds in the SADF are transferred to the AFF. The AFF is defined by statute and its authorities and limitations are specified in 28 U.S.C. 524(c). Resources of the AFF are intended to cover the operational costs of the program, with excess balances available for discretionary purposes, one of which is the payment of equitable shares to participating foreign governments and state and local governments. However, excess unobligated balances identified at the end of a fiscal year may be declared a "super surplus" and allocated at the discretion of the Attorney General to any federal law enforcement, litigative/prosecutive and correctional activities of the Department.
Since forfeiture, the Bicycle Club has generated about $30 million for the AFF. From FY 1991 to FY 1995, about $100 million in super surpluses22 have been declared by the Department and transferred from the AFF to various federal agencies including the FBI, DEA, INS, the USMS and the USAOs.
AUDIT OBJECTIVES, SCOPE AND METHODOLOGY
At the request of the Office of the Deputy Attorney General, we have performed an audit of the Department's oversight of its interest in the LCP Partnership/Bicycle Club, which was seized on April 3, 1990. We reviewed actions taken by the Criminal Division's AFO, the USAOs prosecuting the forfeiture and the USMS. The objectives of the audit were to:
SCOPE AND METHODOLOGY
The audit was performed in accordance with generally accepted government auditing standards. The audit included reviewing files and interviewing representatives from the USMS Central District of California, the USMS Seized Asset Division, the Criminal Division's AFO, the USAOs for the Southern District of Florida and the Central District of California, the Justice Management Division, and the Office of the Deputy Attorney General. We also reviewed: reports issued by GAO and the Department covering various aspects of the asset forfeiture program; reviews contracted or performed by USMS; audited financial statements of the Bicycle Club; the trustees' monthly reports to the court; Department policy directives relating to the seizure of complex business organizations; and the records reflecting the government's receipt of partnership shares.
In addition, we interviewed the Club's successor trustee, the replacement successor trustee, and the General Partner of Park Place Associates. Our recommendations are based on our review of the Department's actions related to seizure, management and disposal of the partnership interest.
PRIOR REVIEWS OF THE ASSET FORFEITURE PROGRAM
STATEMENT ON COMPLIANCE WITH LAWS AND REGULATIONS
We have audited the Department's oversight of its interest in the Bicycle Club. We reviewed the management of the seized asset including actions taken by the AFO, USAOs and the USMS. The audit was conducted in accordance with generally accepted government auditing standards.
In connection with this audit, and as required by the standards, we tested transactions and records to obtain reasonable assurance of compliance with laws and regulations that, if not complied with, we believe could have a material effect on program operations. Compliance with laws and regulations applicable to seized assets is the responsibility of the Department's management.
Our audit included examining, on a test basis, evidence concerning laws and regulations. The specific laws and regulations for which we conducted tests are noted in the report. The results of our tests indicated that, for the transactions and records tested, we identified noncompliance with Department policy guidance for pre-seizure planning.
With respect to those transactions not tested, nothing came to our attention that causes us to believe that the Department's management was not in compliance with the applicable laws and regulations, other than those for which we noted violations as detailed in the Findings and Recommendations section.
OIG ANALYSIS AND REBUTTAL OF CRIMINAL DIVISION COMMENTS
Appendix VII contains the Criminal Division's written response to our draft audit report. Based on these comments, as well as comments from other Department components, we made revisions to the draft report where we considered it necessary. However, we reject many of the most sweeping assertions made by the Criminal Division in its response.
Criminal Division Response:
In the view of the Criminal Division, the Report contains numerous factual errors and draws largely, if not completely, inaccurate conclusions concerning, especially, the government's preseizure planning and disposal efforts in United States v. Kramer, Case No. 87-879-CR-ROETTGER (S.D. Fla.) (the Bicycle Club Case).
The Criminal Division did not bring to our attention anywhere in its response specific factual errors. It does, however, point out various areas where it: reached different conclusions; would have written the report differently; may have presented information in a different format; would have omitted certain details; or would have included additional details regarding litigative matters.
As we discuss throughout this response, the Department had clear preseizure planning policy before the Bicycle Club seizure. The Criminal Division itself, which now has responsibility for asset forfeiture policy, affirmed the Department's policy in March 1996 when it issued Policy Directive 96-3. Notwithstanding established policy, the Criminal Division's comments indicate that it either does not understand the concept of meaningful preseizure planning or simply refuses to recognize the benefits that can be obtained by performing it.
Criminal Division Response:
Meanwhile, the government, despite the continuous objections, motions and even state court lawsuits of various PPA and LCP partners, has managed to dispose of its interest to a publicly held company, subject only to approval by California regulatory authorities and rejection by the courts of various additional objections to the disposal.
The report contains the progress of the current disposal agreement on pages 5, 8, and 9. We included the fact that the registration application, an element necessary to complete the disposal, is being reviewed by the California Gaming Registration Office. However, we caution that as of this report's date, the Department has not yet disposed of its interest in this problematic asset. As discussed in the report, we recommend a contingency plan involving brokers in the event that the current deal is not successfully concluded. According to a Department official, the USMS, and the Criminal Division, this type of plan currently exists.
Criminal Division Response:
It is true that there was minimal preseizure planning in this case, but nothing further was needed: There were no real alternatives to forfeiting the defendants' interests in the Bicycle Club.
In fact the USAO did contact the USMS prior to the seizure and did have numerous contacts with the Bell Gardens City Finance Director...
The Criminal Division acknowledges above that only minimal preseizure planning was performed. This is consistent with the evidence we collected during our review. Throughout our audit, the United States Attorneys, the Criminal Division, and the USMS have been unable to provide documentation illustrating that any meaningful preseizure planning occurred. In addition, the prosecuting attorney, representatives of the USMS, and representatives from the Criminal Division have stated that no preseizure planning occurred, to their knowledge, and that the United States Marshal for the Central District of California was not notified of the seizure until at least the day before the seizure order was signed by the court.
The prosecuting attorney did state that he may have called the local Marshal in Fort Lauderdale, Florida sometime prior to the seizure order. In any case, this was inadequate. Also, Department policy requires that the USMS from the district where the property is located should be involved in planning (i.e. the Central District of California).
The Deputy Attorney General addressed a memorandum in 1986 to All United States Attorneys, titled Anticipating and Avoiding Problems Relating to the Management and Disposition of Seized and Forfeited Assets. Directive No. 86-1. As we state in our report, the directive foresaw potential situations in which planning and caution would be necessary. In our report, we quote the situations described in the directive which are relevant to the Bicycle Club situation. The directive states that when operating businesses are targeted for forfeiture, investigative agents, case attorneys, and federal marshals must address the investigative, litigative, financial, and property management problems and needs before a seizure decision is reached by the United States Attorney.
That directive requires that "Prior to reaching a settlement or plea agreement in a forfeiture case or preparing a proposed order of forfeiture in a case, or otherwise making a final decision to seize or forfeit an asset that will entail significant management responsibilities, you (USA) or your trial assistant shall meet with the United States Marshal or his representative who has or will have custody of the property in order to assess the financial impact of a proposed action. The United States Marshal will provide the necessary financial and disposal information." The USMS was never given the opportunity to research management, financial, or disposal information.
The directive further stated that "As part of the consultation process in these difficult situations, the United States Attorney, in cooperation with the Marshal, should consider the utility of a written feasibility assessment arrived at by mutual decision. At any rate, the United States Attorney and the Marshal should provide the Asset Forfeiture Office appropriate documentation as necessary to facilitate the evaluation process."
Once the decision to pursue a forfeiture has been made, primary responsibility for management and disposal of assets lies with the United States Marshals Service. All arrangements for property services or commitments pertaining to the property are the responsibility of the United States Marshal. United States Attorneys are not to make independent management decisions. It appears by the initial order, and based on the Criminal Division's comments, that the U.S. Attorney's Office made the independent management decision to keep the current General Manager in place running the Club, in addition to making plans with the City of Bell Gardens on management and disposal related matters without including the USMS.
Our report includes the alternatives to immediate seizure or forfeiture as described in the directive, to illustrate that there were alternatives available, and that documentation was unavailable as to whether the AUSA was aware of the alternatives or whether the alternatives were considered at all. The directive states that when potential problems exist, ordinarily forfeiture will not necessarily be forsaken because proper planning should resolve any problems.
The complexities described in the Criminal Division comments surrounding this forfeiture and the asset itself, are exactly why we concur with the directives and stress the importance of planning. In addition, we are curious why the prosecutors and investigators saw it necessary to discuss the seizure of the Club with the City of Bell Gardens, as well as the Club's general manager, and not include the USMS in these discussions.
Directives that have been issued since the 1986 directive have continued to stress the importance of preseizure planning. Deputy Attorney General Directive No. 94-2 Guidelines for Pre-seizure Planning updates and supersedes the preseizure planning policy set forth in the 1986 directive. In this directive, preseizure planning includes assessing the following: (1) the management and disposition problems that are anticipated, and how they will be resolved, and (2) any expected logistical problems involved in the maintenance, management, or disposition of the asset that should be identified and solutions for them developed.
An additional directive has been issued by the Criminal Division's Chief, Asset Forfeiture and Money Laundering Section. Policy Directive 96-3, dated March 15, 1996, was to all United States Attorneys and law enforcement agencies of the Department of Justice. The directive reemphasized the need for preseizure planning and was intended to serve as a reminder that the Marshals Service should be promptly advised prior to all significant seizures. The Chief, Asset Forfeiture and Money Laundering Section, states that the guidelines also provide that the United States Attorney initiating the forfeiture action is responsible for ensuring that proper and timely preseizure planning occurs. A representative of the Marshals Service from the district in which an asset is located should attend preseizure planning meetings in cases involving assets that are prosecuted outside of the district where the asset is located. Additionally, under the guidelines, United States Attorneys are responsible for ensuring proper and timely pre-indictment (emphasis added) coordination with the Marshals Service to prepare for and assess the property management and financial needs of those assets subject to forfeiture.
Our overall conclusion is not that Department policy is inadequate, but rather that policy was not followed. It is worth noting that although our current review concerned only the Bicycle Club, the lack of preseizure planning is apparently not an isolated situation. As described in our report, GAO reported in 1996 that there was no indication that the USAOs consulted with the USMS prior to initiating action to seize and forfeit real property and businesses in 95 percent of cases GAO reviewed. This occurred even though preseizure guidelines were reissued in 1994 and 1996. The last policy issuance was by the Criminal Division's Chief, Asset Forfeiture and Money Laundering Section, as noted above.
Criminal Division Response:
The Working Group operated successfully.
We disagree with virtually all of the Conclusions set forth on pages 21-22 of the Report. As noted above, any disagreements over when and to whom to sell the government's interest were not allowed to delay the sale. Similarly, any "indecision" over how to sell the government's interest did not significantly delay the sale. Also as noted above, it is simply inaccurate to state that the Working Group was not effective "because there was no mechanism to resolve differences of opinion among its members." When necessary disagreements were resolved by referring the matter to higher authority.
As stated in our report, as a unit, the working group did not have overall authority to direct or implement decisions. Members only had authority in the capacity of their position within their respective component, i.e., the USA's to prosecute and litigate, the Criminal Division's to advise and make policy, and the USMS' to dispose and manage the asset. The 1996 decision to designate an official from the Deputy Attorney General's Office as the overall decision making authority on management, disposal, and litigation is recognition of the need for decision making authority to be vested in one senior Department official. We believe this process has improved accountability and the decision making process regarding the government's interest in the Club.
During our audit, the documentation provided to us regarding the "working group" were scattered handwritten notes by the attendees and later typed agendas that included the subjects to be discussed at upcoming meetings. We were told that the group was informal and that the group stopped meeting in 1995. As reported, in addition to documentation, we interviewed members of the group who were still available. Based on our review of documents and our interviews, we conclude that disagreements over when and how to sell the club did occur. In addition, we were provided no evidence indicating matters were resolved by referring them to higher authority until the Deputy Attorney General's office designated a representative in 1996.
Criminal Division Response:
To be fair, the facts of the Bicycle Club case are extremely complex, and the nature of forfeiture law is little understood outside of prosecutors' offices. And it does appear that the multiplicity of errors in the Report (we have touched upon only the most egregious) stems from its authors having understood neither the complex facts of the case nor the nature of forfeiture law. However, understanding their genesis does not eliminate the necessity of identifying the Report's errors and misstatements. Allowing them to go unchallenged would risk saddling future forfeiture actions with nonsensical rules and erroneous "lessons learned."
We reject the Criminal Division's snide suggestion that we were not competent to perform this audit. The Criminal Division has not identified any significant factual errors in our report. The individuals who prepared or reviewed this report are knowledgeable, experienced auditors, analysts, and attorneys.
As we discussed in our report, seized asset management has been a problem in the Department for almost a decade. The data in this report is consistent with and corroborated by findings on the same subject from a variety of sources, including the Criminal Division. The need for improved management and coordination of the Asset Forfeiture program led the Attorney General to report the program as a "material weakness" in FY 1989 through FY 1995 Annual Reports to the President and the Congress pursuant to the Federal Managers' Financial Integrity Act. OMB designated the federal forfeiture program as one of its 100 "high risk" programs requiring close OMB oversight. In January 1990, the General Accounting Office designated the "Management of Seized and Forfeited Assets," as one of the fourteen program areas in the entire Executive Branch that warranted special GAO audit or review. In February 1995, the GAO renewed its 1990 designation of the "Management of Seized and Forfeited Assets," as one of the areas in the Executive Branch that warranted special GAO audit or review. Moreover, our reports, as well as those of GAO, the House Appropriations Committee, the House Judiciary Committee and the Senate Governmental Affairs Committee, have pointed out the need for stronger management and direction of this program.
The Justice Management Division's, Asset Forfeiture Management Staff and the Criminal Division's, Asset Forfeiture and Money Laundering Section have reported to the Attorney General for her report to the President, dated December 31, 1997, that there remains need for improvement in maintenance and disposal of assets and better program accountability. In addition, both groups have reported that they will continue to monitor program activity closely and work with the participating agencies on innovative ways to improve financial investigations, case planning and execution, preseizure analysis of alternatives, post-seizure administration of assets, and management and control of program funds. They have stated that they will rely on sources such as our reports, General Accounting Office reports, interviews, site visits, contractor reviews, financial reports, and other automated data to provide information on the accomplishment of corrective actions. Accordingly, we reject the Criminal Division's implicit suggestion that because of their alleged legal and factual complexity, forfeiture matters that arise in the course of complex criminal and civil litigation should be immune from meaningful oversight.
Criminal Division Response:
We address the Findings and Recommendations concerned with preseizure planning and
the disposal process, because the Findings are largely inaccurate and some of the
Recommendations, if acted upon, are likely to be harmful to the forfeiture program.
Again, our report does not include significant factual inaccuracies. In its discussion regarding recommendations, the Criminal Division neglected to point out which recommendations it was referring to or why these recommendations could be "harmful" to the forfeiture program. In another part of its response, the Criminal Division refers to our recommendations as "reasonable." In our judgment, all of our recommendations are reasonable, practical, and consistent with existing policy. None would be harmful to the forfeiture program.
Criminal Division Response:
Such asset (meaning complex or controversial assets) should not be seized until (1) the risks of seizing and holding the asset are fully evaluated; and (2) all components with responsibilities in the seizure and disposal efforts are adequately consulted. This proposed rule reflects an ideal process which is not always possible to achieve in the real world, at least not if one wishes to actually forfeit property.
Our advice is consistent with existing policy and based on common sense. It is simply unacceptable to seize and forfeit property without fully understanding the facts and the resulting consequences on management and disposal of the asset. In the case we reviewed, the asset seized was not a $10,000 automobile. The asset was a controversial, operating business, valued at over $100 million, with extremely complex ownership arrangements. Ample preseizure policy has been issued by the Department. If the policies are not going to be followed, the Department should not waste time developing them. Our review of the Bicycle Club case did not cause us to believe there is a policy problem. In fact, our review concludes that the then Deputy Attorney General had the foresight in 1986 to anticipate these potential problems by issuing Directive 86-1. Unfortunately, the policies were not followed in 1990 when the Bicycle Club was seized and forfeited and, despite its diatribe against this report, the Criminal Division fails to explain why it did not follow these policies. Certainly, it could not have been because of time exigencies -- two and a half years elapsed between the indictment and the forfeiture of the Bicycle Club. If the policies had been followed, we believe that the Department would have been better prepared to manage and dispose of the Bicycle Club.
Criminal Division Response:
using percentages of ownership in the Bicycle Club disguises the fact that the government has never had uncontested ownership of a controlling interest (i.e., more than 50 percent) in the LCP Partnership.
Our discussion of controlling interest does not relate to percentage interest in either the LCP Partnership or to a percentage interest in the Bicycle Club Joint Venture. The controlling interest we refer to throughout the report is related to the forfeiture of the general partnership interest in the LCP Limited Partnership that was forfeited to the government in 1993. In a limited partnership, the general partner has control over the partnership. The Limited Partnership Agreement of LCP Associates, LTD., a California Limited Partnership, states that the general partners shall have exclusive control over the business of the partnership, including the power to assign duties, to sign deeds, notes, deeds of trust, contracts and leases; and to assume direction of business operations, and shall have all rights, power and authority generally conferred by law or necessary, advisable or consistent with accomplishing the purpose of the partnership.
We use ownership percentages in relation to the overall Bicycle Club rather than percentages of the LCP partnership for consistency in our presentation and because the Department initially seized and forfeited 100 percent of the Bicycle Club; not just the LCP Partnership. We note also that our approach of using overall percentages of Club ownership is the same approach the Criminal Division used in its response to our draft report on page 2 of the attachment. Further, we do not state in our report that the government's interest in the partnership or the Club has been uncontested. To the contrary, we refer to the ongoing litigation in several places in the report.
Criminal Division Response:
At Page 4, second bullet, the reference to the arrest of the Asian Games Manager, in order to be fair, should be preceded by the words, "As a result of government investigation by an Organized Crime Strike Force.
We were not provided evidence to substantiate the comment above. During our interviews with USAO Central District of California officials, investigative information related to the Bicycle Club was not disclosed to us. In addition, although understandable as self-congratulating, we do not see how this information affects the fact that a senior official of a Club partially owned by the government was arrested and later convicted of loan sharking and extortion.
FINDINGS AND RECOMMENDATION
1. PRESEIZURE PLANNING
Criminal Division Response:
However, these alternatives, according to the Memorandum (at page 3), are to be considered only in the extraordinary situation where it has been "determined that forfeiture...is not desirable."
In short, the "alternatives" were not, in this case, realistic alternatives at all. Rejecting them out of hand, or "not considering" them, was entirely proper; no matter how lengthy their consideration, they would not have become more palatable.
We have contacted the prosecutor in this case, and he has told us that he did contact the United States Marshals Service (USMS) in Los Angeles about the case prior to the seizure. He also has told us that during the months before the seizure, he was in frequent contact with the Bell Gardens City Finance Director, (who, pursuant to the order authorizing seizure of the Club, would become the Interim Trustee of the Club), in order to ensure there was a smooth transition if and when a seizure took place. And indeed the seizure did go smoothly. A Deputy U.S. Marshal, who was present at the "seizure" of the Bicycle Club, recalls that the USMS personnel went to the Club, met with the management and posted a notice of seizure on a bulletin board -- all without any disruption of the Club's operation.
As we stated in our preseizure discussion earlier, our report includes the alternatives
to immediate seizure or forfeiture as described in the 1986 directive, to illustrate that
there were alternatives available, and that documentation was unavailable as to whether
the AUSA was aware of the alternatives or whether the alternatives were considered at all.
The directive states that when potential problems exist, planning should resolve them
without necessarily forsaking forfeiture.
Also, we do not consider contacting the USMS District with responsibility for the asset a day or two before the seizure order is signed by the court adequate preseizure planning. We do not believe that the "smooth transition" of the physical seizure illustrates that preseizure planning occurred. It does, however, illustrate that the AUSA discussed the seizure with the City of Bell Gardens and the General Manager of the Club, weeks or perhaps months before the physical seizure. We are curious as to why the USMS, which would ultimately have management and disposal responsibility over the asset, was not extended the same courtesy and allowed to research and plan further than a day or two before the seizure. We are also concerned about the implication in the Criminal Division's response that the USMS' role in preseizure planning is essentially to post a seizure sign on the premises. We view this type of thinking as counter-productive. If the asset forfeiture program is to work, it must involve a team approach with the USMS as a partner in decision making.
Criminal Division Response:
...[n]one of the participants in the group had either the ability to bind the group or to ensure that any decisions made by the group or any subset of its members were actually implemented. This is not exactly accurate.
Our statement is accurate. Please see our previous comments regarding the working group.
Criminal Division Response:
There was no disagreement on selling the United States' interest in LCP (at least not after the initial meeting of the Working Group, during which it was pointed out to the USAO S.D. Fla. that, as a matter of policy...
Thus we do not believe that it is fair to state, ...that AFO/USMS wanted to sell the Club but the S.D. Fla opposed the sale for "four to five years."
Documents reviewed and interviews with representatives from the components involved brought us to the conclusion that there were disagreements over how and when to sell the government's interest. Documentation shows that over an extended period the USAO for the Southern District of Florida believed it was best to hold onto the Club for 4 to 5 years. As the Criminal Division's comments state, USMS and AFO informed the USAO this was against policy. Representatives then pursued disposal options, although not very aggressively.
B. Disposal Efforts
Criminal Division Response:
The government from the beginning recognized that it would be extremely difficult to sell any portion of the government's interest which was on appeal, and soon came to realize that it would be extremely difficult to sell less than a controlling interest in the LCP Partnership to anyone other than an existing LCP partner.
[Purchaser financial difficulties] a recurring problem that has plagued the ability to sell the government's interest in LCP and which might have similarly plagued sales arranged through a broker.
We believe the potential marketability of the government's interest in the asset was certainly an issue that should have been researched and considered prior to seizure. We also believe that although complex, research into the ownership of the club, the California limited partnership agreements involved with the ownership, and the California partnership laws, which includes the right of first refusal of the existing partners, should have been conducted and considered prior to seizure. While the outcome of such research and planning cannot be known with absolute certainty, it is reasonable to believe that advance planning would have lessened the extent of the problems that developed.
Criminal Division Response:
We also disagree that the Department did not move to sell the asset as "decisively as it should have and spent significant time considering offers from entities that did not have sufficient funds, did not submit viable offers, or may not have been eligible to purchase the property.
Our report is not particularly critical of the Department's effort to sell its interest in the asset before November 1993. This is when the general partnership of LCP (i.e. controlling interest) was forfeited to the government and when the court instructed the Department to dispose of its interest in the asset. Coincidentally, this was also about the time the value of the asset appeared to be at its peak. As we reported, an option for the Department was to hire investment bankers to market and dispose of the government's interest. Some Department representatives appeared to believe the cost of this would lead to criticism, and others believed it was a standard cost for this service. It appears true that the investment bankers indicated the market for the government's interest in 1992 was very limited. Still, we conclude that hiring brokers would have been the better option, then and now. We base our conclusion on the Department's policy to sell assets promptly. In our judgment, this means obtaining a competitive price at the time of sale. It does not mean holding assets to obtain the highest possible price by attempting to maximize sale proceeds. As discussed in our report, there are too many risks in doing so.
On page 5 of its response, the Criminal Division acknowledges that it may have been a better idea to use brokers, but attributes our conclusion to "hindsight." We disagree. Brokers have expertise and an incentive to bring sellers and qualified buyers together. It is true that we cannot say with certainty that a sale would have occurred if the Department had hired brokers. We can, however, make the reasonable suggestion that it is more likely that a sale would have occurred by now if the transaction was handled by a broker on commission instead of by trustees on what appear to be fairly generous salaries. In our judgment, this is common sense and not hindsight as the Criminal Division suggests.
C. The Decline in Value of the Bicycle Club
Criminal Division Response:
We do not believe that this matter [the decline in the Club's value] is relevant to the issues raised by the report.
We note, too, that the decline in value is probably overstated on the chart which appears at page 19.
The analysis of the Club's value is relevant because it is a valid example of the potential risks of holding assets for long periods of time. The chart entitled Estimated Value of Government Interest in the Bicycle Club is based on estimates provided to the USMS by its contractors, except with respect to the estimated value of the pending agreement. The pending agreement estimate is based on discussions with the USMS, the trustee, and our review of the pending agreement. In our judgment, it is a fair presentation of what appears to have happened to the value of the Club. However, we have clarified in the report that because a sale did not occur at these times, we cannot say with certainty that the government could have sold its interest in the Club for the amounts indicated.
3. USE OF CONTRACTORS FOR MANAGEMENT AND DISPOSAL OF ASSETS
Criminal Division Comments:
We do not agree, therefore, that the Department "diluted its responsibility to manage and dispose of the government's interest" by seeking the appointment of a successor trustee instead of obtaining the contractual services of a business manager.
We believe that this was a good decision and certainly to the government's benefit given the problems arising from the actions of the non-governmental partners of LCP and PPA.
In general, we believe that contractors should be used to manage and dispose of complex assets. The Criminal Division agrees with this in its response. Procurement regulations for obtaining contractors provide a higher degree of control over matters such as obtaining competitive compensation rates, specific job requirements, length of employment, and termination requirements. For example, the USMS does not have unilateral authority to terminate the court appointed trustee. All of these issues are discussed in the report. However, because of the ongoing nature of management and disposal efforts for this asset, as well as its complexities, we could not determine in this instance whether the overall effect of using court-appointed trustees has been an advantage or a disadvantage. We revised the finding to clarify this point.
OVERALL CONCLUSION AND LESSONS LEARNED
Criminal Division Comments:
We disagree with the statement that "the Department unnecessarily compounded [the difficulties of managing and disposing of the Bicycle Club] by poor internal communication, inaction and bad decisions." The Report cites no instances of poor internal communication or inaction. The possibly "bad decisions" appear to be limited to allowing the trustee to simultaneously operate the Club and negotiate for the sale of the government's interest in the LCP Partnership, failing to provide detailed written guidance to the trustee, allowing the court to appoint an overall trustee instead of insisting on a separate USMS contractor, and failing to promptly engage a broker to sell the government's interest in the LCP Partnership.
We disagree with the statement that "the Department's seizure and disposal efforts...have been poorly managed."
It is clear that our conclusions and opinions differ from the Criminal Division's regarding the measurement of success and the quality of the Department's seizure and disposal efforts related to the Bicycle Club forfeiture. We believe our statement is accurate and fair given the audit evidence we collected. Please see our previous discussions which include examples of poor communication, inaction, and bad decisions.
# # #
Overall, the Criminal Division's response concerns us in several respects. We do not agree that the sole measure of success for the program should be obtaining the criminal forfeiture, as suggested. It is an important measure, but not the only one. Our report gives credit to the Department for depriving criminals of over $30 million in drug profits. Our report also criticizes the Department where we felt it was justified.
The notion that the Department did not make any errors throughout the seven years it has owned an interest in this asset is troubling. The Criminal Division's comments suggest, contrary to the ample evidence presented in our report, that the Department's handling of the Bicycle Club has been a model of wisdom, efficiency, and effectiveness. While troubling in the context of this report, it is profoundly disturbing because this approach suggests that if similar situations arise in the future, little if anything will change. If this is the case, no lessons have been learned and the same problems are likely to recur. This would be a wholly unsatisfactory result.
22 In 1991, the surplus was referred to as a capital surplus instead of a super surplus.