Rosner v. Bank of China

Decision Date19 December 2007
Docket NumberNo. 06 CV 13562.,06 CV 13562.
Citation528 F.Supp.2d 419
PartiesBrian ROSNER, Esq., Receiver for International Financial Services (New York), Inc., International Financial Services (New York) LLC, John Walker Robinson, Chan Kow Lai a/k/a Wilson Lai and Sociedade Comercial Siu Lap Limitada, Plaintiff, v. BANK OF CHINA, Defendant.
CourtU.S. District Court — Southern District of New York

Brian Rosner, Natalie Ann Napierala, Tiffany Elizabeth Cale, Rosner & Napierala, LLP, New York, NY, for Plaintiff.

Pamela Rogers Chepiga, Allen & Overy, New York, NY, for Defendant.

DECISION AND ORDER

VICTOR MARRERO, District Judge.

Plaintiff Brian Rosner, Esq., ("Rosner") Permanent Equity Receiver for International Financial Services ("IFS") (New York), Inc., International Financial Services (New York) LLC, John Walker Robinson, Chan Kow Lai aNa Wilson Lai and Sociedade Comercial Siu Lap Limitada, brought this case against the Bank of China ("BoC"), seeking actual, consequential, and incidental damages for BoC's alleged aiding and abetting common law fraud and for BoC's alleged violations of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961, et seq., ("RICO"). Pursuant to Federal Rules of Civil Procedure 12(b)(1) ("Rule 12(b)(1)"), 9(b) ("Rule 9(b)"), and 12(b)(6) ("Rule 12(b)(6)"), BoC moves to dismiss Rosner's claims on several grounds, including lack of subject matter jurisdiction, failure to allege fraud with particularity, and failure to state a claim upon which relief can be granted with respect to the RICO allegations.

By Order dated September 26, 2007, the Court granted BoC's motion to dismiss and indicated that its findings, reasoning, and conclusions would be set forth in a subsequent decision and order. Accordingly, for the reasons set for below, BoC's Motion is GRANTED in part and DNIED in part.

I. BACKGROUND1
A. FACTUAL AND PROCEDURAL HISTORY

Rosner was appointed Receiver for the entities and persons listed in the caption of this case (collectively, the "IFS Defendants") in connection with a proceeding brought against them by the Commodities Futures Trading Commission ("CFTC"). (See Consent Order of Preliminary Injunction, dated Aug. 8, 2002, attached as Ex. C to the Corrected Complaint ("Consent Order").) As discussed in more detail below, the IFS Defendants were found to have perpetrated a massive fraud involving the theft of approximately $25 million from IFS investors. (See Commodity Futures Trading Comm'n v. Intl Fin. Servs., 323 F.Supp,2d 482 (S.D.N.Y.2004), attached as Ex. D to the Corrected Complaint ("Commodity Futures").)

As Permanent Equity Receiver for the IFS Defendants, Rosner was given the "full powers of an equity receiver," and "directed and authorized to.... initiate any actions or proceedings in state, federal or foreign court necessary to preserve or increase the assets of the Receivership Defendants." (Consent Order 8-9.) Pursuant to this power, Rosner brought this action against BoC alleging that BoC's actions aided and abetted the common law fraud perpetrated on the IFS investors, and violated RICO.

BoC is a commercial bank primarily owned by the People's Republic of China with its principal place of business in Beijing, China. It maintains three branches in the United States, including one in New York City, and has one branch in Macau, a Special Administrative Region of the People's Republic of China.

B. THE FRAUDULENT ENTEPRISE

On July 17, 2002, the CFTC filed a civil complaint against International Financial Services, Inc. ("IFS Inc.") and Sociedade Comercial Siu Lap Limitada ("Siu Lap") in the Southern District of New York, and moved for summary judgment. See Commodity Futures, 323 F.Supp.2d at 491. In Commodity Futures, the Court granted CFTC's motion for summary judgment, and found that the IFS Defendants had built a fraudulent enterprise that stole more than $25 million from IFS investors. See id. at 488, 502-503. Specifically, the Commodity Futures Court found that IFS Inc. conducted illegal off-exchange trades, in violation of 7 U.S.C. § 6(a)(1), committed fraud in violation of 7 U.S.C. § 6b(a), and engaged in unauthorized trading on customer accounts in violation of 7 U.S.C. § 6b(a)(iv). See id. at 499-504. The Court entered a judgment of more than $100 million in treble damages. (Corrected Complaint ¶ 47.)

Under the fraudulent scheme, found by the Court in Commodity Futures, Siu Lap funded IFS Inc. with an initial wire transfer on September 16, 1998. IFS Inc. then hired inexperienced currency traders as independent contractors, grouped the traders by their ethnicity, and encouraged them to solicit customers from their respective ethnic communities. The solicitation materials provided by IFS Inc. and the oral representations made by the independent contractors misled prospective customers by representing that foreign currency trading offered a very high potential for returns and only minimal risk of loss. These contractors opened 820 customer accounts with $32 million to invest.

IFS Inc.'s trading procedures made it virtually impossible for its clients to profit from their investments because traders were required to quote inflated prices provided by Siu Lap for the foreign currencies. As the investors were forced to "buy" foreign currencies at these artificially inflated prices, their accounts would inevitably lose value because the currencies could not be "sold" for a higher price than the and provided by Siu Lap. Additionally, since IFS Inc. and Siu Lap knew that the clients' positions would result in losses, it was unlikely that any trades were ever in fact executed, particularly given that neither IFS nor Siu Lap had dealing lines or accounts with any participants of the interbank foreign currency markets. Meanwhile, IFS Inc. issued statements to the individual investors showing major trading losses. In its opinion, the Commodity Futures Court summarized the scheme as follows:

In short, IFS Inc. apparently accepted thousands of dollars in client funds, issued them statements purportedly showing trading losses, and sent the money to an overseas account holder, Siu Lap, which may well have been no more than an entity that received the stolen, funds.

323 F.Supp.2d at 489.

C. BoC'S ALLEGED ROLE IN THE FRAUDULENT ENTERPRISE

BoC provided banking services to the IFS Defendants, including wire transfers for the initial funding of IFS Inc. and wire transfers of the IFS investors' funds from the United States to Macau. Specifically, BoC provided the following services: once the IFS investors provided funds to IFS Inc., IFS Inc. transferred the funds to its account at Citibank. Upon IFS Inc.'s request, the funds were transferred.IFS Inc's Citibank account through the Citibank account of BoC's New York branch to Siu Lap's United States dollar ("USD") account at BoC's Macau branch. BoC's Macau branch then transferred the funds between accounts, and converted them from USD to Hong Kong dollars ("HKD"). On the same day that each transfer became available in Macau, Siu Lap withdrew the funds in cash from the BoC HKD account. Thirty-eight transfers and withdrawals were conducted in this manner between January and July 2002, many in excess of $100,000.

Rosner alleges that BoC knew about the fraudulent scheme and its role in the fraudulent scheme, and knowingly used its correspondent relationships with United States banks to transfer the stolen funds. Rosner alleges that BoC disregarded applicable laws and regulations that, if followed, would have prevented the laundering of the IFS Investors' funds. Specifically, Rosner claims that BoC failed to comply with domestic and international bank secrecy, know-your-customer, and anti-money laundering laws, decrees, and regulations, and that BoC was a knowing and willing participant in the fraudulent scheme and provided the banking services necessary to effectuate the transfer of the stolen funds.

II. DISCUSSION
A. SUBJECT MATTER JURISDITION

BoC moves to dismiss Rosner's claims for lack of subject matter jurisdiction, pursuant Rule 12(b)(1), arguing that, as an instrumentality of a sovereign nation, BoC is immune from suit under the Foreign Sovereign Immunities Act, 29 U.S.C. § 1601 et seq. ("FSIA"). The Court agrees with Rosner, and finds that sovereign immunity is inapplicable, as BoC's actions regarding the transfer and withdrawal of funds fit within the FSIA's exception for commercial activity.

1. Legal Standard

On a motion to dismiss for lack of subject matter jurisdiction pursuant to Rule 12(b)(1), the plaintiff bears the burden of establishing that the Court has subject matter jurisdiction to adjudicate the allegations in the complaint. See Malik v. Meissner, 82 F.3d. 560, 562 (2d Cir. 1996). In considering the motion, the Court must "accept as true all material factual allegations in the complaint." Shipping Fin. Serv. Corp. v. Drakos, 140 F.3d 129, 131 (2d Cir.1998). However, the Court is not obligated to draw inferences from the pleadings and other submissions favorable to the party asserting jurisdiction.

The FSIA provides that foreign states shall be immune from the jurisdiction of the courts of the United States, unless any one of several statutorily defined exceptions applies. See 28 U.S.C. § 1604. These exceptions under the FSIA are "the sole source for subject matter jurisdiction over any action against a foreign state." Cabiri, v. Government of the Republic of Ghana, 165 F.3d 193, 196 (2d Cir.1999). "When one of these exceptions applies, the foreign government is stripped of immunity, and pursuant to 28 U.S.C. § 1330(a), subject matter jurisdiction exists in the district court." Weltover, Inc. v. Republic of Argentina, 941 F.2d 145, 148 (2d Cir.1991). In Cargill Int'l S.A. v. M/T Pavel Dybenko, 991 F.2d 1012, 1016 (2d Cir.1993), the Second Circuit set forth the burden of persuasion for a finding of subject matter jurisdiction under the FSIA. If a defendant challenges the factual...

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