RICO Goes to Russia

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June 30, 2008 12:43 PM

RICO Goes to Russia

Posted by Michael D. Goldhaber

The Arbitrazh Court of the City of Moscow has two teams of superstar American lawyers flying standby. A trial judge in Moscow's main commercial court is considering a RICO claim for $22.5 billion, brought by a U.S. plaintiff's lawyer on behalf of the Federal Customs Service of the Russian Federation against The Bank of New York Company, Inc. It is believed to be the first claim filed under RICO in a non-U.S. court. Responding to a petition for dismissal from the bank, Judge Lyodmila Pulova has asked for help in determining whether she may apply the public law of another country. The parties promptly lined up enough legal talent to fill a first-class cabin with RICO tourists.

At a hearing today in Moscow, the bank is offering as experts the former attorney general Dick Thornburgh, former congressman Abner Mikva, Yale law professor Jed Rubenfeld, RICO textbook author Gregory Joseph, and no fewer than 18 Russian specialists. On the plaintiff's side of the aisle are up to five American and four Russian luminaries, including RICO lead drafter Robert Blakey, former federal judge George Pratt, and Harvard law professor Alan Dershowitz.

There is much at stake here, not only for transnational law, but for The Bank of New York Mellon. One stock analyst, from Punk, Ziegel & Co., downgraded BONY Mellon in early spring because of the litigation risk. (The analyst, Richard Bove, says the bank has assuaged his concerns, although he has not changed his rating.) The probability of a complete plaintiff's recovery may be tiny, but the magnitude of the risk is large. And with more than $20 trillion in assets under custody, BONY Mellon is more integral to the world financial system than Bear Stearns ever was.

Settlement is unlikely any time soon, as the parties seem to occupy different universes. "This claim is a hideous joke," says defendant's expert Joseph. "The other week I had lunch with a judge who knows something about RICO [and told him about the claim]. He just laughed." As soon as a U.S. judge hearing the case finished laughing, he'd impose sanctions on the plaintiff for bringing such a frivolous claim, says the lead defense lawyer, Jonathan Schiller of Boies, Schiller & Flexner in Washington, D.C.

The lead plaintiff's lawyer, Steven Marks of Miami's Podhurst Orseck, thinks his case is solid and sees no problem with exporting it overseas. "The application of RICO by a foreign court is such a nonissue it's hard to believe it's become the focus of the case," he argues. "We routinely adopt foreign statutes and other courts do the same. RICO by its nature intended to cover global activity. The bank is [only] being held to a U.S. legal standard by which it's required to operate. [So] if ever there were a circumstance where foreign law could and should apply, this is it."

Here follows The Am Law Daily's preliminary cheat sheet. It is based on interviews with the parties' lawyers and independent experts, as well as a review of public documents. The experts' submissions were not available in advance of today's hearing.

What did Bank of New York do?
Why isn't this claim being brought in U.S. court?
Did Congress intend for RICO to apply overseas?
Is RICO a "public" law?
Is there a RICO claim here?
How likely are plaintiffs to obtain a judgment?
How likely are plaintiffs to enforce a judgment?
What's next?

What did Bank of New York do?

Over the course of the late 1990s, Lucy Edwards, who was then a midlevel bank official, with the help of her husband, Peter Berlin, and Svetlana Kudryavtsev, who was then a junior bank employee, arranged for $7.5 billion in unlicensed wire transfers from Russia to the U.S. In February 2000, Edwards and Berlin pled guilty to establishing an unapproved foreign bank branch and conspiring to violate U.S. laws (18 U.S.C. section 371). Kudryavtsev pled guilty to accepting bribes from Edwards and Berlin and lying to the FBI. Edwards admitted to suspecting (but only suspecting) that wire transfers were being used to avoid Russian taxes, because there was no other convincing explanation; she also found it suggestive that her correspondent bank hid documents from the Russian tax police, and that some of its customers toted machine guns. In November 2005, the bank entered into a nonprosecution agreement with the U.S. attorney for the Southern District of New York. It agreed to forfeit $14 million in connection with the Edwards scheme, and to adopt new anti-money-laundering policies and procedures, including the creation of a new compliance position. In the statement appended to the nonprosecution agreement, the bank acknowledged inadequate money laundering controls. According to that statement, "Berlin and Edwards pled guilty to, among other things, conspiracy to...launder money to promote wire fraud," and admitted that their accounts were used "among other things, to launder money." In the current litigation, the bank emphasizes that it was never indicted; that Edwards, whom it calls "a rogue employee," was only convicted under the general federal conspiracy provision, which is not a RICO predicate crime; and that there has never been any reckoning of how much wire transfer activity qualified as money laundering.

Why isn't this claim being brought in U.S. court?

Problem one: A previous RICO action arising out of the same facts but brought by private parties in the U.S. was dismissed on forum non conveniens grounds. See Pavlov v. Bank of New York, Inc. (S.D.N.Y., 2000).

Problem two: The U.S. Court of Appeals for the Second Circuit has held that the "Revenue Rule" bars a foreign sovereign from using RICO to recover lost taxes in a U.S. court. See Attorney General of Canada v. R. J. Reynolds Tobacco Holdings, Inc. (Second Circuit, 2001). The plaintiffs say that this isn't a revenue case.

Did Congress intend for RICO to apply overseas?

As the lead drafter, Blakey can speak with authority on this point. Indeed, the Supreme Court relied on Blakey in finding that Congress had no intent as to where RICO could be applied, en route to the conclusion that RICO can be applied by state courts. See Taffin v. Levitt (1990). "I tell you right up front," Blakey told The American Lawyer. "It never occurred to us whether states could do it, let alone whether an international court could do it."

But Mikva takes the opposite position on statutory intent, and since he served in Congress during RICO's passage, his view, too, carries weight. An independent RICO expert, professor Norman Abrams of UCLA argues that state courts are different from foreign courts because they are competent to interpret federal law (Thornburgh made the same distinction in a previous statement to the Moscow court); and are subject to Supreme Court review. Abrams called it "bizarre" and "mind-boggling" that a foreign court might undertake to interpret such a large and complex body of law.

However, Abrams concluded, "I don't think either Bob Blakey or Dick Thornburgh is an expert on this. The question is, is it appropriate under Russian law?"

The Am Law Daily touched base with Russian law expert Peter Maggs of the University of Illinois College of Law for an independent view. Maggs says that neither statutory intent nor RICO's complexity are relevant, because Russian courts have no discretion to turn down a case if they determine that they have jurisdiction.

Is RICO a "public" law?

The crux of the bank's jurisdictional argument is that the Moscow arbitrazh court deals only with private commercial disputes, whereas this case is properly understood as a dispute over public law. How RICO is classified might also be crucial at the enforcement stage, because criminal law is seen as a realm of public policy, where a nation's own courts are sovereign. As usual, the answer depends on whom you ask.

"RICO is both criminal and civil," Blakey told The American Lawyer, and for present purposes, it's civil. Professor Robert Ahdieh of Emory Law School, an independent expert on Russian law, agrees: "RICO is being used here as a source of civil legal norms. It's not a radical departure from what courts usually do when applying foreign law."

Professor Abrams sees things otherwise. "Although the lawsuit is in a civil mode, it's ultimately based on a criminal violation. You can describe it as either, but at its core it's criminal. You'd have to find that a criminal violation occurred. The foreign court would inevitably have to construe a criminal statute."

Is there a RICO claim here?

The merits have yet to be argued, but Schiller and Joseph aim to make Swiss cheese of Russia's RICO claim. There are three broad areas of disagreement.

-Statute of limitations. The wire transfers ended in 1999, and the bank says the claim was time-barred years ago. Marks maintains that the Russian customs service didn't learn about the scheme until he brought the bank's 2005 nonprosecution agreement to its attention.

-Criminal violations. The bank's lawyers say that Russia has not properly alleged, and cannot establish, that the bank committed two criminal acts that are accepted as RICO predicates and violated RICO itself, with the requisite criminal intent. Nor, they say, has the plaintiff elaborated such elements as the nature and identity of the enterprise. Marks thinks that, under a preponderance standard, he can get where he needs to go by imputing the conduct of the bank's employees to the bank. "Illegal money laundering in a series of wire transactions is textbook RICO," he says. "If this isn't textbook RICO, then no plaintiff will ever have a valid RICO claim." The defense's Joseph, who wrote one of the texts, says that the plaintiff blatantly ignores governing authority on point after point.

-Damages. The bank's lawyers say that plaintiff has not ascertained actual damages suffered by the Russian customs service and proximately caused by the bank's actions. Marks says that plaintiff is entitled to make the bank equitably disgorge funds equivalent to the $7.5 billion in unlicensed wire transfers, plus treble that amount. The defense says that Marks egregiously misreads the precedents on civil RICO disgorgement, and that any suggestion of disgorgement under the money laundering statute is nonsense. As a fallback, a damages expert for the plaintiff has calculated more than $2 billion in damages directly attributed to tax evasion facilitated by Bank of New York, and more than $2.5 billion in indirect costs suffered by the Russian economy as a result of the capital flight. Defense attorney Schiller regards this analysis as too generalized.

How likely are plaintiffs to obtain a judgment?

As weak as he believes the RICO case to be, BONY counsel Schiller feels no certainty that he'll win in Russia. He notes that the U.S. Department of State, as well as Russia's new president, have acknowledged that Russian judicial corruption is a serious problem. The New York Sun reported in April, without a specific attribution, that "analysts and legal experts say it is likely the court will rule in Russia's favor."

However, both Russian law experts consulted by The American Lawyer, Maggs and Ahdieh, stressed that, with some prominent exceptions, Russian commercial justice has improved considerably. "In general in the arbitrazh courts you're getting fair results," says Ahdieh. "Russian legal experts would not flippantly conclude that the defendant doesn't stand a chance."

How likely are plaintiffs to enforce a judgment?

After reviewing the law of 90 nations, the bank has expressed high confidence that its assets are well protected. Marks retorts: "It would be an affront to the Russian government to suggest that its judgments have no validity around the world. Russia isn't Guyana or Suriname. It's one of the leading economic powers in the world. And they're expecting 90 countries to snub it?"

Professor Linda Silberman of New York University cowrites a leading text on recognition of judgments and coheads the American Law Institute's enforcement project. "The defendant has a host of good defenses," she says. "But if I were defendant's lawyer I'd be worried." All plaintiff needs to do, she points out, is find one weak link. Among the potential defenses on enforcement:

-Public policy on criminal law. The bank would argue that the judgment trenches on another nation's sovereign right to administer its own public law.

-Public policy on punitive damages. Many countries disapprove of any U.S.-style jackpot recovery. But some will enforce the compensatory portion of the award.

-The Revenue Rule. In the U.S., the U.K., and a few other places, enforcement would be blocked so long as the judge sees this as a dispute over Russian taxes.

-Reciprocity. To the extent that Russia itself has an uneven record of enforcing foreign judgments, the plaintiff might see payback.

-Due process. The bank might question the integrity of both the Russian system generally, and this proceeding in particular. The bank has already alleged that the plaintiff backdated a document and used the judge to help prepare its case. The plaintiff contests both points, and Judge Pulova rejected them.

-Statute of limitations. The argument that the clock has run out can be raised again at the enforcement stage.

-Assets. If all other lines of defense fail, it comes down to what assets are reachable. The bank says that its Russian revenues and assets are insignificant; plaintiff is skeptical.

What's next?

If the current petition for dismissal fails, the bank plans to file a second petition for dismissal, on the grounds that the case falls under the exclusive jurisdiction of Russian tax authorities. If that fails, then the parties would present their cases on the merits. The bank could if needed pursue three levels of appeals, to the appellate arbitrazh courts, the federal circuit arbitrazh courts, and the Supreme Arbitrazh Court. The bank would reargue its legal points, as well as cite procedural irregularities. If at the end of the day a Russian judgment still stands, a worldwide war would begin over its enforcement.

Much about RICO is murky. But this much is clear: To make the world safe for RICO tourism, Russia's lawyers will have to rack up a lot of frequent flyer miles along the way.

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