Pacnet Servs. Ltd. v. Office of Foreign Assets Control of the U.S. Dep't of the Treasury

Citation521 F.Supp.3d 181
Decision Date24 February 2021
Docket Number17-CV-6027 (JMA) (LB), 18-CR-46 (JMA)
CourtU.S. District Court — Eastern District of New York
Parties PACNET SERVICES LTD., Plaintiff, v. OFFICE OF FOREIGN ASSETS CONTROL OF the UNITED STATES DEPARTMENT OF THE TREASURY; John Doe Defendants 1 – 73, Defendants. United States of America v. Ryan Young, Defendant.

George R. Calhoun, Ifrah Law, Michael Joseph O'Leary, Steven Pelak, Holland & Hart LLP, Alain Jeff Ifrah, Ifrah PLLC, Washington, DC, for Plaintiff.

James R. Cho, Rukhsanah L. Singh, United States Attorney's Office for the Eastern Distric, Brooklyn, NY, for Defendant United States Department of the Treasury.

Mark Scott Pincus, Pincus Law LLC, New York, NY, for Defendant Otter Mist Trading 1096 CC.

Michael J. Grohs, Saiber LLC, Florham Park, NJ, for Defendants International Multi-Media Entertainments Limited, Continental Mail Processing NV.

Andrew B. Lustigman, Olshan Frome Wolosky, LLP, New York, NY, for Defendants John Doe # 25, John Doe # 28 and John Doe # 57, John Doe.


AZRACK, United States District Judge:

This Order addresses two related cases—one criminal and one civil—that have not been consolidated. The Court addresses the pending motions in both cases in a single order as a matter of administrative convenience given their factual overlap.

PacNet Services Ltd. v. United States Department of the Treasury, Office of Foreign Assets Control, et al., 17-cv-6027, is an interpleader action concerning over $5 million in funds. Those same funds are the subject of criminal forfeiture proceedings in two related cases that are also pending before this Court. United States v. Ryan Young, 18-cr-46; United States v. Ercan Barka, 18-cr-31.

Defendant Office of Foreign Assets Control of the United States Department of the Treasury ("OFAC") has moved to dismiss the interpleader action. OFAC argues that sovereign immunity has not been waived and that the Court lacks subject matter jurisdiction because the United States Postal Inspection Service ("USPIS") seized, in April 2018, all funds that had been deposited in the Court Registry Account to fund this interpleader action. Also pending in the interpleader action are motions filed by Plaintiff PacNet Services Ltd. ("PacNet") that challenge the seizure of those and other funds and ask the Court to compel the Government to deposit these seized funds with the Court in order to stave off dismissal of the interpleader action.

In addition to the pending motions, the parties responded to an Order to Show Cause ("OTSC") issued by the Court on May 31, 2020 that directed the parties to address why, even if the Court had jurisdiction over the interpleader action, the Court should not stay or dismiss the interpleader action in light of Young and a related case in the District of Nevada where four of PacNet's principals—including Rosanne Day, PacNet's founder, part-owner, and managing director—were indicted in June 2019. United States v. Day, et. al, 19-cr-155 (D. Nev.). The Indictment in Day charges those defendants with conspiracy to commit mail and wire fraud, substantive mail and wire fraud, and conspiracy to commit money laundering. The Day defendants remain at large and the Government is seeking their extradition.

In Young, the pending criminal forfeiture proceeding before this Court, the defendant, Ryan Young, pled guilty in February 2018 and the Court entered a preliminary order of forfeiture in September 2019 forfeiting all the funds at issue in the interpleader action. In February 2020, PacNet filed an ancillary petition in Young asserting that it is entitled to all those funds. The Government then moved to stay resolution of the ancillary forfeiture proceeding in Young until the resolution of the Day case in Nevada.

For the reasons set forth below, the Court grants OFAC's motions to dismiss, denies the motions filed by PacNet, and dismisses this interpleader action suit for lack of subject matter jurisdiction. The Court also grants the Government's motion to stay the ancillary proceedings in Young until the resolution of the Day criminal matter.

A. Overview

Plaintiff PacNet Services Ltd., a Canadian company headquartered in Vancouver, was a payment processor, which handled the processing of incoming payments for its clients and its affiliated companies. (Compl. ¶ 17, ECF No. 1.1 ) PacNet Services Ltd. also served as a holding company for the PacNet Group, which included PacNet Services and Chexx, a company that submitted outgoing payments, including rebates, refunds, and commissions, for its clients. (Compl. ¶ 17.) Another company related by common ownership was Accu-Rate Corporation, which handled foreign exchange transactions.2 (Id. )

According to the Indictment in the Day case:

[PacNet's "mass-mail clients" which] solicited payments from consumers by sending massive volumes of mail ... made up a significant part of PacNet's processing business. During the last five years it was in operation, PacNet processed on average more than $100 million per year in checks and credit card payments from United States consumers to mass-mail clients. The total amount of money that PacNet processed for mass-mail clients, including cash from United States consumers and payments of all kinds from consumers outside of the United States, was considerably higher.
PacNet's mass-mail clients included companies that sent notifications intended to mislead the consumers into believing they would receive a large amount of money, a valuable prize, or specialized psychic services upon payment of a fee to the companies.
Many victims of PacNet's fraudulent mass-mail clients were elderly or otherwise vulnerable. Many victims were inundated with fraudulent notifications and were defrauded multiple times. Some elderly victims spent hundreds to thousands of dollars responding to fraudulent notifications before a family member or a victim's bank detected the fraud and worked to prevent additional losses.
PacNet was the payment processor of choice for fraudulent mass-mailers in the United States and around the world. Banks generally would not do business directly with fraudulent mass-mailers. PacNet thus served as a vital link between fraudulent mass-mail clients and banks, enabling the fraudulent mass-mail clients to profit from their criminal schemes by moving their money through the banking system undetected. PacNet processed tens of millions of dollars per year in payments from United States victims to fraudulent mass-mail clients.
For more than two decades, PacNet processed payments for mass-mail clients that its top management, including [the defendants indicted in Day, including PacNet's founder, part-owner, and managing director, Rosanne Day,] knew had been induced by fraudulent notifications that were designed to mislead victims into falsely believing they had won a prize or would receive something of value in exchange their payments.

(Day Superseding Indictment at 2–3 (numbering omitted), Day, 19-cr-155, ECF No. 18.) Day and the other defendants allegedly conspired with the operators of PacNet's clients that conducted fraudulent mass mailings. (Id. ¶¶ 14–15.) In addition to charging the defendants in Day, the Government has also filed charges against a number of the individuals who operated PacNet's mass-mail clients, including Barka and Young.

In its Interpleader Complaint and in numerous submissions to this Court, PacNet maintains that it was a legitimate business, which is innocent of any criminal conduct and has been unfairly and unlawfully targeted and wronged by the Government. (See PacNet OTSC Response at 20–22, ECF No. 170.) PacNet alleges that its clients include many well-respected companies and that only a "minority of PacNet's business pertained to merchants that distributed direct-mail promotions involving sweepstakes reports or astrological information." (Compl. ¶ 29.) PacNet stresses, inter alia, that it submitted numerous Suspicious Transactions Reports ("STRs") and Large Cash Transaction Reports ("LCTRS") to Canadian authorities, which, according to PacNet, establish that it committed no crimes and never conspired with any of the mass mailers who are alleged to have committed mail fraud. (Compl. ¶¶ 11–53; see also PacNet OTSC Response at 20–22; id. Ex. F (Mar. 30, 2016 FinTrac Report discussing Barka); PacNet Suppl. OTSC Response, ECF No. 174 (reports to Canadian and American authorities concerning Gary Denkberg and related entities).)

B. Investigation into PacNet and its Designation by OFAC in 2016

In September 2016, the United States Department of Justice ("DOJ"), the USPIS, and OFAC took action against a global network of mass mailing fraud schemes, for which PacNet allegedly played a critical role. (See Aff. of Terrence Sullivan, ECF No. 139-9.)

As part of its enforcement actions, the Government obtained injunctions against various entities involved in the scheme, including direct mailers, list brokers, caging services, mass mailers, and printers. (Id.; U.S. Opp'n to Cross-Mot. at 4, ECF No. 139-8.) This ongoing investigation and enforcement effort have resulted in the Day Indictment, the indictment of various mass mailer defendants, and the seizure of over $6 million of PacNet's funds.

On September 20, 2016, Magistrate Judge Cheryl Pollak issued a seizure warrant authorizing the USPIS to seize of $963,205 from an account held by PacNet at BMO Harris Bank (BMO Harris Bank Account ‘0703), finding probable cause to believe that the funds are subject to forfeiture pursuant to 18 U.S.C. §§ 981(a)(1)(A), 981(a)(1)(C), and 982(a)(1).3 (U.S. Opp'n to PacNet Sanctions Mot. at 5–6, ECF No. 158-5.)

These funds, and all other seized funds discussed herein, were deposited into the United States Marshal's seized deposit account. (Id. at 6.)

On September 22, 2016, OFAC invoked its authority to designate PacNet as a significant transnational criminal organization ("TCO").4 (Compl. ¶ 3.) OFAC's designation placed 30 corporate entities and 12 employees and officers of...

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