In re Bank of New York Derivative, Docket No. 01-9470.

• Citation: 320 F.3d 291
• Decision Date: 12 February 2003
• Docket Number: Docket No. 01-9470.
• Parties: In re: BANK OF NEW YORK DERIVATIVE LITIGATION. Mildred Kaliski and Edward J. Kaliski, Plaintiffs-Appellants, Rita Hochenbaum and Rochelle Phillips, Plaintiffs, Charles H. Beck, on Behalf of the Bank of New York Company, Inc. Consolidated-Plaintiff, v. J. Carter Bacot, Gerald L. Hassell, Deno D. Papageorge, Alan R. Griffith, Thomas A. Renyi, John A. Luke, Jr., William R. Chaney, William C. Richardson, Catherine Rein, Richard Barth and Donald L. Miller, Defendants-Appellees, The Bank of New York Company, Inc. and The Bank of New York, Nominal-Defendants-Appellees, Sergei Kotov and Vladimir Galitzine, Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

320 F.3d 291

In re: BANK OF NEW YORK DERIVATIVE LITIGATION.

Mildred Kaliski and Edward J. Kaliski, Plaintiffs-Appellants, Rita Hochenbaum and Rochelle Phillips, Plaintiffs, Charles H. Beck, on Behalf of the Bank of New York Company, Inc. Consolidated-Plaintiff, v. J. Carter Bacot, Gerald L. Hassell, Deno D. Papageorge, Alan R. Griffith, Thomas A. Renyi, John A. Luke, Jr., William R. Chaney, William C. Richardson, Catherine Rein, Richard Barth and Donald L. Miller, Defendants-Appellees, The Bank of New York Company, Inc. and The Bank of New York, Nominal-Defendants-Appellees, Sergei Kotov and Vladimir Galitzine, Defendants-Appellees.

Docket No. 01-9470.

United States Court of Appeals, Second Circuit.

Argued: October 9, 2002.

Decided: February 12, 2003.

Francis Karam, Milberg Weiss Bershad Hynes & Lerach LLP, New York, NY

(Melvin I. Weiss, Richard H. Weiss, and Mark T. Millkey, Milberg Weiss Bershad Hynes & Lerach LLP, New York, NY; Karen L. Morris and Patrick F. Morris, Morris and Morris LLC, Wilmington, DE; Robert I. Harwood and Samuel Rosen, Wechsler Harwood Halebian & Feffer, LLP, New York, NY, on the brief), for Plaintiffs-Appellants and proposed Intervenor-Appellant, A. Norman Drucker.

Richard H. Klapper, Sullivan & Cromwell (John L. Warden, Bruce E. Clark, Marc De Leeuw, Todd G. Cosenza and Christina M. Frohock, Sullivan & Cromwell; Andrew M. Lawler and Sharon Feldman, Andrew M. Lawler, PC; Lawrence Byrne and Lance Croffoot-Suede, White & Case, on the brief), New York, NY, for Nominal Defendants-Appellees and Defendants-Appellees.

Andrew J. Levander and David S. Hoffner, Swidler Berlin Shereff Friedman, LLP, David E. Nachman, Solomon, Zauderer, Ellenhorn, Frischer & Sharp, Stephen E. Kaufman, Stephen E. Kaufman, P.C., for Defendant-Appellee J. Carter Bacot, Charles A. Stillman and James Mitchell, Stillman & Friedman, P.C., for Defendant-Appellee Deno D. Papageorge.

Before: OAKES and CABRANES, Circuit Judges, and PRESKA,^* District Judge.

JOSÉ A. CABRANES, Circuit Judge.

Plaintiff-Appellants Mildred and Edward Kaliski ("the Kaliskis") brought this shareholder derivative action in the United States District Court for the Southern District of New York (Denny Chin, Judge), alleging that certain officers and directors of the Bank of New York ("BONY") committed systematic wrongs when they sought to expand BONY's banking business in Russia in the early and mid-1990's. In particular, the Kaliskis claim that BONY's ill-advised expansion into the Russian banking industry was riddled with unlawful tactics including tax evasion, money laundering, the creation of sham banks, and the illegal transfer of funds out of Russia into suspect offshore accounts.

Because the Kaliskis did not purchase their stock in BONY until July 21, 1998, the defendants moved to dismiss the Complaint for lack of standing based upon Federal Rule of Civil Procedure 23.1 and New York Business Corporation Law § 626(b), both of which require that, in order to have standing to bring a shareholder derivative action, a plaintiff must have owned stock in the company at the time of the alleged wrongdoing. The District Court held that the expansion of BONY's banking business into Russia took place prior to July 21, 1998 and, accordingly, it granted the defendants' motion to dismiss the Complaint for lack of standing. The District Court also denied the plaintiffs' cross-motion to add an intervening plaintiff, A. Norman Drucker, who did own stock in BONY at the time of the alleged wrongdoing.

For the reasons set forth below, we affirm the judgment of the District Court.

I. BACKGROUND

In reviewing the denial of a motion to dismiss or a motion for summary judgment, we must view the facts in the light most favorable to the non-moving party. See, e.g., Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957); Abramson v. Pataki, 278 F.3d 93, 97 (2d Cir.2002). The relevant facts, as presented by the Kaliskis, are as follows:

BONY is a financial institution incorporated under the laws of the State of New York. It is wholly owned by, and the principal subsidiary of, the Bank of New York Company, Inc. ("the Company"), one of the largest bank holding companies in the United States. In 1990, BONY began planning the expansion of its business into the Russian banking market. With the collapse of the Soviet Union in 1991, BONY's efforts to transact business in Russia accelerated. In order to facilitate this expansion, BONY reorganized its European Division in the fall of 1992, creating a new Eastern European Division. Several officers within this new division devised a scheme called "Prokutki," or "spinning around," which was designed to conceal the illegal movement of U.S. dollars and other assets out of Russia. Am. Compl., Sept. 1, 2000, ¶ 85. They moved these assets into offshore accounts, taking a percentage of their total value as commission. These officers created a system to manage the accounts and an encryption code that enabled them to communicate about the transactions in secret. They then marketed their "global custody" scheme to numerous Russian banks. Id. ¶ 87. This illegal system was devised in 1992, became fully operational during that year, and continued to expand throughout the early and mid-1990s.

The Kaliskis purchased their BONY stock on July 21, 1998. In August 1998, another bank, the Republic Bank of New York, filed a Suspicious Activity Report with the Treasury Department, indicating that it had detected unusual volumes in BONY transfers to Russian accounts.¹ In response to this report, the FBI and the United States Attorney's Office for the Southern District of New York began to investigate BONY. To date, their investigation has triggered a number of indictments, and at least three BONY employees have pleaded guilty to federal crimes. Two of these employees, Lucy Edwards and Peter Berlin, pleaded guilty to illegal conduct that occurred as recently as 1999.

On August 19, 1999, The New York Times published a front-page article breaking the story of BONY's illegal conduct. Raymond Bonner and Timothy L. O'Brien, "Activity at Bank Raises Suspicions of Russia Mob Tie," N.Y. Times, August 19, 1999, at A1. The article reported that "[b]illions of dollars have been channeled through the Bank of New York in the last year in what is believed to be a major money laundering operation by Russian organized crime." Id.

In response to this publicity and to the government investigation, BONY's directors formed an Anti-Money Laundering Oversight Committee in September 1999. According to the Kaliskis, however, the committee's investigation was limited, and although the committee did uncover some "unusual activity," most of BONY's Russian banking business was permitted to continue. Am. Compl., Sept. 1, 2000, ¶ 171.

On September 23, 1999, the Kaliskis filed this derivative suit on behalf of BONY and the Company.² In addition to naming as defendants numerous BONY officers allegedly involved in the wrongful conduct, the Kaliskis brought suit against individual BONY and Company directors. The Complaint alleges that the director-defendants breached their fiduciary duty to the corporations by "fail[ing] to fully inform themselves [about the Russian banking industry] to the extent reasonably appropriate under the circumstances." Id. ¶ 193. Specifically, it alleges that the director-defendants "failed to implement and enforce an adequate compliance system or to adequately oversee the development of the business in derogation of their duties to implement compliance controls." Id. The Kaliskis also maintain that the directors "ignored multiple, specific warnings issued by governmental, regulatory, and private security sources that the Russian banking system was being infiltrated by organized crime — a fact recognized by other banks in the United States, which began to scale down their Russian operations." Id. To support this contention, the Complaint cites several newspaper and magazine articles as well as reports issued by Russian banks and governmental agencies that warned of extensive money laundering and illegal operations in the Russian banking industry. The Complaint indicates that some of these reports were issued "as early as 1991," and that they "intensified in 1992, 1993, 1994, and forward." Id. ¶ 69.

According to the Complaint, the illegal scheme was primarily implemented between 1992 and 1996. On occasion, however, the Complaint suggests that some of the illegal conduct may have continued into the later 1990's. For example, the Complaint states that "[f]rom 1993 through 1996 and beyond there were numerous telephone conversations and meetings among the conspirators concerning the offshore structure, the percentages to which each individual was entitled, and the movement of the money abroad." Id. ¶ 101 (emphasis added). The Complaint also indicates that "[m]ultiple computer entries prepared during 1993, 1994, 1995, 1996, and thereafter reflect[ed] the conspirators' shares in the offshore companies through which the stolen money was being routed." Id. ¶ 108 (emphasis added). Finally, the Complaint alleges that BONY's unlawful relationship with one of its correspondent Russian Banks, Moscow International Bank, began "as early as the spring of 1996" and continued "during the several years thereafter." Id. ¶ 116.

During an extensive period of discovery, the Kaliskis produced reports indicating that BONY's relationship with each of the Eastern European banks with which it perpetrated the unlawful transactions persisted into 1999 or 2000. They also produced wire transfer data indicating that BONY may have continued to transfer some money out of Russia after the Kaliskis purchased their BONY stock in July 1998.

On October 28, 1999, Gilbert Katz, a BONY shareholder since 1985, filed a derivative action in the New York State Supreme Court, New York County, against substantially the same defendants and raising substantially the same...