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United States v. 50.44 Bitcoins

United States District Court, D. Maryland

May 31, 2016

UNITED STATES OF AMERICA, Plaintiff,
v.
50.44 BITCOINS, Defendant.

          REPORT AND RECOMMENDATION

          Timothy J. Sullivan United States Magistrate Judge.

         On December 2, 2015, the United States filed its Verified Complaint for Forfeiture against Defendant 50.44 Bitcoins. (ECF No. 1.) The Clerk’s Entry of Default was filed on March 9, 2016. (ECF No. 6.) On March 10, 2016, the United States filed a Motion for Default Judgment

         (“Motion”) (ECF No. 8). No response to the Motion has been filed and the time for doing so has passed. See Loc. R. 105.2. On March 10, 2016, Judge Hollander referred the Motion to me for a report and recommendation. (ECF No. 9.) Having reviewed the pleadings, memoranda, and supporting documents, I find that no hearing is necessary. See Loc. R. 105.6. For the reasons that follow, I recommend that the Motion be granted.

         I. LEGAL STANDARD

         A. Default Judgment

         Although the Fourth Circuit has a “strong policy that cases be decided on the merits, ” United States v. Shaffer Equip. Co., 11 F.3d 450, 453 (4th Cir. 1993), default judgment “is appropriate when the adversary process has been halted because of an essentially unresponsive party.” S.E.C. v. Lawbaugh, 359 F.Supp.2d 418, 421 (D. Md. 2005). In determining whether to award a default judgment under Fed.R.Civ.P. 55, the Court accepts as true the well-pleaded factual allegations in the complaint as to liability. See Ryan v. Homecomings Fin. Network, 253 F.3d 778, 780-81 (4th Cir. 2001); United States ex rel. Durrett-Sheppard Steel Co. v. SEF Stainless Steel, Inc., No. RDB-11-2410, 2012 WL 2446151, at *1 (D. Md. June 26, 2012). Nonetheless, the Court must consider whether the unchallenged facts constitute a legitimate cause of action, since a party in default does not admit mere conclusions of law. United States v. Redden, No. WDQ-09-2688, 2010 WL 2651607, at *2 (D. Md. June 30, 2012) (citing Ryan, 253 F.3d at 790).

         In order to constitute a legitimate cause of action, a civil forfeiture complaint must “state sufficiently detailed facts to support a reasonable belief that the government will be able to meet its burden of proof at trial.” Fed.R.Civ.P. Supp. G(2)(f). In a civil forfeiture trial, “the burden of proof is on the Government to establish, by a preponderance of the evidence, that the property is subject to forfeiture.” 18 U.S.C. § 983(c)(1). If it is the Government’s theory that the property was involved in the commission of a criminal offense, the Government must establish that there was a “substantial connection between the property and the offense.” 18 U.S.C. § 983(c)(3).

         B. Property Subject to Forfeiture

         Under 18 U.S.C. § 981, “any property, real or personal, involved in a transaction or attempted transaction in violation of [18 U.S.C. § 1960], or any property traceable to such property” is “subject to forfeiture to the United States.” 18 U.S.C. § 981(a)(1)(A). Under 18 U.S.C. § 1960, it is a crime for a person to knowingly conduct, control, manage, supervise, direct, or own an unlicensed money transmitting business. An “unlicensed money transmitting business” is, among other things, a business that “fails to comply with the money transmitting business registration requirements under section 5330 of title 31, United States Code, or regulation prescribed under such section.” 18 U.S.C. § 1960(b)(1)(B). The Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”) has stated that an administrator or exchanger of a virtual currency like Bitcoin[1] is required to register as a Money Service Business (“MSB”) with FinCEN. See Application of FinCEN’s Regulations to Persons Administering, Exchanging or Using Virtual Currencies, FIN-2013-G001, Department of the Treasury, Financial Crimes Enforcement Network, March 18, 2013.[2] Accordingly, a money transmitting business that operates in Bitcoins must register with FinCEN. Failure to register is a violation of 18 U.S.C. § 1960. Property involved in transactions that violate § 1960 is subject to forfeiture. 18 U.S.C. § 981(a)(1)(A).

         II. ANALYSIS

         A. Factual Background

         In support of its Verified Complaint for Forfeiture, the United States has attached the Declaration of Brian Bonus (“Bonus”), a Special Agent with the United States Secret Service. (ECF No. 1-1.) According to Bonus, the Silk Road was an online criminal marketplace operated on The Onion Router.[3] After the Silk Road was dismantled by federal law enforcement authorities in October 2013, authorities conducted an investigation to determine the identities of the users of the site. Authorities discovered that a user operating under the username “JumboMonkeyBiscuit” (“the user”) “served as an illegal vendor of narcotics and as a Bitcoin exchanger-exchanging fiat currency into crypto-currency and vice versa.” (ECF No. 1-1 at 2.) Between April 2013 and October 2013, the user completed 1, 521 transactions, most of which were transactions to convert fiat currency into Bitcoins and vice versa. (Id.) Investigators determined that the clients of the user were directed to ship cash to a post office box registered to Thomas Callahan. (Id.) Bonus states that the user accepted the mailed cash and transmitted Bitcoins as directed by the sender of the cash. (Id. at 3.) In October 2014, United States Postal Inspectors intercepted a parcel containing $10, 000 in U.S. Currency. (Id.) The parcel was addressed to a fictitious business at an address connected with an investigation into the shipment of narcotics through the U.S. mail. The Postal Inspectors determined from a review of the packing slip contained in the parcel that the package had been sent by an online package mailing service account registered with Endicia.com. The registered customer of the Endicia.com account was Thomas Callahan, whose account was connected to a physical address closely resembling the return address on the parcel. (Id. at 4.) The registered customer of the Endicia.com account had previously been issued approximately 130 postage and tracking numbers. (Id.)

         In November 2014, members of federal law enforcement executed a search warrant at 4604 Payne Road, Hurlock, Maryland, which was another address connected to the Endicia.com account registered to Thomas Callahan. (Id. at 5.) During the search, Amanda Callahan was present at the residence and agreed to speak to investigators. She stated that she and Thomas Callahan (the “Callahans”) act as money exchangers on various internet sites, including online marketplaces like the Silk Road. She showed investigators a personal computer that contained Bitcoins stored at several Bitcoin addresses, including a wallet with a name that matched the addressee of the intercepted parcel.[4] Amanda Callahan voluntarily transferred the contents of the Bitcoin ...


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