Republic of Kaz. v. Stati
Republic of Kaz. v. Stati
Opinion of the Court
Plaintiff, the Republic of Kazakhstan ("Kazakhstan"), brought this civil suit *57against the defendants - Anatolie Stati, Gabriel Stati, and the two companies they own, Ascom Group, S.A. and Terra Raf Trans Traiding Ltd. (the "Stati Parties") - for alleged violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"),
The Stati Parties moved to dismiss the complaint for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). Plaintiff opposed the motion, and the matter is ripe for decision. For the reasons that follow, the Court will grant defendants' motion and dismiss the ill-advised lawsuit. A RICO civil suit is not a vehicle to challenge non-frivolous litigation, or in this case, a valid and final foreign arbitral award.
BACKGROUND
In a related case to enforce the same foreign arbitral award, this Court granted the Stati Parties' petition to confirm the award pursuant to the New York Convention. Anatolie Stati v. Republic of Kazakhstan ,
To briefly recap, the Stati Parties initiated arbitration proceedings seeking reparations against Kazakhstan with the Stockholm Chamber of Commerce on July 26, 2010 for the expropriation of their assets, including an unfinished liquified petroleum gas plant ("LPG plant"). Compl. ¶¶ 6, 138. On December 19, 2013, the SCC tribunal found that Kazakhstan violated its obligations under the Energy Charter Treaty, and it issued an award in favor of the Stati Parties in the amount of $ 497,685,101.00, which included $ 199 million for the LPG plant. Id. ¶¶ 158-59.
Kazakhstan attempted to nullify the SCC award by instituting proceedings before the Svea Court of Appeal in Stockholm. Compl. ¶ 183. It argued, among other things, that the SCC award was procured by fraud. Id. ¶ 185. The alleged fraud concerned the value of the LPG plant. Id. ¶ 5. According to plaintiff, prior to the initiation of the arbitral proceedings, the Stati Parties "created a number of illegitimate contractual documents with related parties for the purpose of artificially inflating the construction costs of the LPG [p]lant." Id. ¶ 65. These falsified construction costs, Kazakhstan alleges, were included in financial statements, which were in turn used to fraudulently induce companies, including the state-owned oil and gas company, *58KazMunaiGas ("KMG"), into bidding $ 199 million for the LPG plant in 2008. Id. ¶¶ 5, 116, 130-31. Thus, Kazakhstan charges that the Stati Parties misrepresented the value of the LPG plant during the SCC arbitration when they proffered "the fraudulently procured bids," the "falsified financial statements," "false testimony regarding the amount of the investment in the LPG [p]lant," and "expert reports" that restated those figures as evidence. Id. ¶ 152. According to Kazakhstan, based upon this "false evidence" the arbitral panel awarded the Stati Parties $ 199 million in compensation for the LPG plant. Id.
Despite what Kazakhstan characterizes as its "detailed and specific allegations regarding [d]efendants' fraudulent scheme," the Svea Court of Appeal affirmed the arbitral award on December 9, 2016. Compl. ¶ 188. Kazakhstan then filed a motion to the Swedish Supreme Court seeking to quash the Svea Court of Appeal's judgment due to "grave procedural errors." Id. ¶ 190. That legal challenge also failed. On October 24, 2017, the Swedish Supreme Court denied Kazakhstan's motion. Stati ,
Although the Swedish Supreme Court decision extinguished Kazakhstan's hope of vacating the final arbitral award, the legal battle to resist the award's enforcement rages on in several jurisdictions across Europe and the United States where the Stati Parties initiated enforcement proceedings to collect on the award.
Plaintiff filed this suit on October 5, 2017. See Compl. Defendants moved to dismiss the complaint on April 20, 2018, arguing that plaintiff failed to state a claim, Defs.' Mot. to Dismiss [Dkt. # 19] ("Defs.' Mot."); Mem. of P. & A. in Supp. of Defs.' Mot. to Dismiss [Dkt. # 19-1] ("Defs.' Mem."). Plaintiff filed its opposition to the motion on May 25, 2018, see Rep. of Kazakhstan's Mem. of P. & A. in Opp. to Defs.' Mot. [Dkt. # 26] ("Pl.'s Opp."), and defendants filed their reply on June 11, 2018. See Reply of Defs.' Mot. to Dismiss [Dkt. # 28] ("Defs.' Reply").
The Court finds that plaintiff failed to state a RICO claim based upon a "scheme" that amounts to a protracted legal dispute over an LPG plant. Accordingly, the Court will dismiss the RICO claims with prejudice, and it declines to exercise supplemental jurisdiction over the common law claims of fraud and civil conspiracy.
STANDARD OF REVIEW
"To survive a [ Rule 12(b)(6) ] motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face." Ashcroft v. Iqbal ,
A claim is facially plausible when the pleaded factual content "allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal ,
In evaluating a motion to dismiss under Rule 12(b)(6), a court must "treat the complaint's factual allegations as true and must grant plaintiff 'the benefit of all inferences that can be derived from the facts alleged.' " Sparrow v. United Air Lines, Inc. ,
ANALYSIS
I. The RICO Claims
In Count I and II of its complaint, Kazakhstan alleges that the Stati Parties violated the RICO statute,
Defendants have moved to dismiss the RICO claims on several grounds, arguing that: 1) the complaint fails to allege cognizable predicate acts of racketeering; 2) plaintiff has failed to allege a pattern of racketeering activity; 3) plaintiff seeks to impermissibly apply RICO to conduct that is overwhelmingly extraterritorial; 4) plaintiff fails to allege a domestic injury; and 5) plaintiff fails to allege proximate causation between the predicate acts and the alleged harm. Defs.' Mem. at 10-28.
Because the Court finds that the complaint fails to adequately allege the necessary predicate acts and a pattern of racketeering, plaintiff's RICO claims fail, and the Court need not address defendants' other arguments.
Section 1962(c) provides that:
It shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity or collection of unlawful debt.
"Racketeering activity" encompasses "any act which is indictable" under a specific list of federal criminal offenses known as "predicate offense[s]."
a. Plaintiff fails to allege predicate acts.
Plaintiff's RICO claims are predicated on violations of the mail fraud, wire fraud, and money laundering statutes. Compl. ¶¶ 263, 274, 283. Kazakhstan contends that by transmitting "pleadings, briefs, witness statements" and other litigation *61materials during the SCC arbitral proceeding and the subsequent enforcement actions, defendants committed various acts of mail fraud and wire fraud under
At bottom, the RICO claims are entirely predicated on defendants' initiation and prosecution of non-frivolous litigation, and plaintiff's alleged domestic injuries consist of the legal costs it incurred in resisting the enforcement of a valid and binding arbitral award. This far-fetched theory of RICO liability lacks legal support.
Courts do not allow allegedly fraudulent " 'litigation activities,' such as filing fraudulent documents or engaging in baseless litigation to serve as predicate acts for RICO ... where such acts constitute 'the only allegedly fraudulent conduct.' " Feld Entm't, Inc. v. Am. Soc'y for the Prevention of Cruelty to Animals ,
The same principle applies here. The predicate acts of mail fraud and wire fraud that Kazakhstan lists to support its RICO claim all involve the filing of legal documents and complaints. See, e.g. , Compl. ¶ 263 ("Stati Parties submit Request for Arbitration," "Stati Parties file Petition to Confirm Arbitral Award," "Stati Parties file Complaint to enforce, inter alia, amount of the SCC Award").
Numerous other circuit courts and district courts across the country have concluded that wrongful litigation activities cannot serve as RICO predicate acts. See Snow Ingredients, Inc. v. SnoWizard, Inc. ,
The Court's conclusion is consistent with the D.C. Circuit's admonition regarding RICO claims premised on mail fraud or wire fraud in general:
RICO claims premised on mail or wire fraud must be particularly scrutinized because of the relative ease with which a plaintiff may mold a RICO pattern from allegations that, upon closer scrutiny, do not support it ... This caution stems from the fact that "[i]t will be the unusual fraud that does not enlist the mails and wires in its service at least twice."
W. Assocs. Ltd. P'ship, ex rel. Ave. Assocs. Ltd. P'ship v. Mkt. Square Assocs. ,
Plaintiff insists that its RICO suit can be distinguished from this general principle because the "fraud claims are not the only bases for the civil RICO violation" - the complaint included a money laundering claim as well. Pl.'s Opp. at 11. But that misses the mark since the alleged "money laundering" consists merely of defendants' payments of their legal fees. See Compl. ¶ 274.
*63Not surprisingly, plaintiff has not identified a single decision in which a court sustained RICO allegations based solely on the transmission of litigation materials and the payment of legal fees associated with the enforcement of a valid and binding arbitral award. The cases plaintiff cites are all distinguishable because the complained-of lawsuits were not only frivolous, but they involved other unlawful conduct, such as bribery and/or the intimidation of witnesses and third parties.
b. Plaintiff fails to allege a pattern of racketeering .
Even if plaintiff had succeeded in alleging predicate acts that are cognizable under the RICO statute, its RICO claims would fail because it has not properly alleged a "pattern of racketeering activity."
Applying this framework, the Edmondson court rejected a real estate developer's RICO claim premised on allegations that a tenants' association illegally blocked the sale of building.
Plaintiff's 93-page complaint describes a single scheme. As summarized by plaintiff: "The Complaint sets out the details of the Stati Parties' elaborate and fraudulent scheme to artificially inflate the construction costs of the LPG plant, conceal that fraud during the SCC Arbitration to obtain the SCC Award, and then attempt to enforce the fraudulently procured SCC Award in multiple jurisdictions, including the United States." Pl.'s Opp. at 10. While there are various stages to this alleged scheme, ultimately all of the actions described in the complaint were aimed at accomplishing a "single discrete goal," Edmondson ,
Defendant insists that its RICO claims survive based upon Supreme Court and D.C. Circuit precedent which provides that in some circumstances, a single scheme may be sufficient under RICO. Pl.'s Opp. at 17, citing H.J. Inc. v. Nw. Bell Tel. Co. ,
At bottom, this suit is yet another attempt to relitigate the underlying arbitral award. Whatever fraud Kazakhstan contends occurred before and during the SCC arbitration more than eight years ago, it had a full opportunity to raise those issues in the appeals process in Sweden and its allegations were rejected. Kazakhstan tried again in the numerous subsequent *65proceedings where it has resisted the enforcement of the arbitral award on the same grounds. As the Court noted in its prior opinion, the grounds for refusing the enforcement of a foreign arbitral award under the New York Convention are "narrow," and Kazakhstan failed to meet its "heavy burden." Stati ,
Because the Court finds that plaintiff failed to allege a substantive RICO violation under Section 1962(c), it also finds that it has failed to plead a conspiracy to violate RICO under Section 1962(d). See Papageorge ,
II. The State Law Claims
Having dismissed plaintiff's federal law claims, the Court declines to exercise supplemental jurisdiction over the remaining state law claims of fraud and civil conspiracy. Under
CONCLUSION
Because plaintiff has failed to plead predicate acts or a pattern of racketeering activity, the Court will dismiss its RICO claims under Counts I and II with prejudice. The Court declines to exercise supplemental jurisdiction over the common law counts of fraud and civil conspiracy. Accordingly, Counts III and IV are dismissed without prejudice. A separate order will issue.
In the same opinion, the Court also denied Kazakhstan's motion to reconsider the Court's denial of its motion for leave to include additional defense grounds premised on a theory that the Stati Parties obtained the SCC award through fraud. Stati ,
See TermoRio S.A. E.S.P. v. Electranta S.P. ,
On April 24, 2018, the Court granted defendants' Motion to Vacate the Clerk's Entry of Default against Ascom Group, S.A. and Terra Raf Trans Traiding Ltd. See Order [Dkt. # 20]; Mem. Op. [Dkt. # 21].
Kazakhstan requests that the Court deny the Stati Parties' motion to dismiss on the basis of the doctrine of judicial estoppel "given that the Stati Parties, on March 26, 2018, represented to the High Court of London - in enforcement proceedings concerning the SCC Award - that the merits of Kazakhstan's fraud allegations will be adjudicated in this case, after discovery and oral evidence." Pl.'s Opp. at 1. The Court reviewed the judgment of the High Court, and it finds that judicial estoppel is unwarranted, see Moses v. Howard Univ. Hosp. ,
Under the statute, "racketeering activity" also "means (A) any act or threat involving murder, kidnapping, gambling, arson, robbery, bribery, extortion, dealing in obscene matter, or dealing in a controlled substance or listed chemical (as defined in section 102 of the Controlled Substances Act), which is chargeable under State law and punishable by imprisonment for more than one year."
Moreover, plaintiff has not stated a claim for money laundering that could support the RICO allegations. Plaintiff alleges that defendants violated sections 1956(a)(2)(A) and (B)(i) of the money laundering statute by "making payments from outside the United States to counsel in the United States." Compl. ¶ 274. The federal money laundering statute provides:
(2) Whoever transports, transmits, or transfers, or attempts to transport, transmit, or transfer a monetary instrument or funds from a place in the United States to or through a place outside the United States or to a place in the United States from or through a place outside the United States
(A) with the intent to promote the carrying on of specified unlawful activity; or
(B) knowing that the monetary instrument or funds involved in the transportation, transmission, or transfer represent the proceeds of some form of unlawful activity and knowing that such transportation, transmission, or transfer is designed in whole or in part -
(i) to conceal or disguise the nature, the location, the source, the ownership, or the control of the proceeds of specified unlawful activity; or
18 U.S.C. §§ 1956 (a)(2)(A) & (B)(i)
But Kazakhstan's suggestion that funds were transmitted with the intent to promote "specified unlawful activity" in violation of section 1956(a)(2)(A) of the money laundering statute, fails for the reasons set forth above: according to plaintiff, the "unlawful activity" of mail fraud and wire fraud is based solely on the filing of "fraudulent pleadings, briefs, witness statements, and other evidence in the various legal proceedings." Pl.'s Opp. at 12.
Plaintiff's claim under section 1956(a)(2)(B)(i) fares no better. To make out a claim under this provision a plaintiff must allege that a defendant transmitted money into or outside the United States, knowing that the monies involved "represent the proceeds of some form of unlawful activity." 18 U.S.C § 1956(a)(2)(B)(i). Plaintiff's complaint recites the elements of the provision but fails to allege that the money used to pay defendants' attorneys was derived from any "unlawful activity." See Compl. ¶ 274. In its opposition, Kazakhstan contends that the Stati Parties used "proceeds raised fraudulently in the United States" to pay their attorneys' fees. Pl.'s Opp. at 13, citing Compl. ¶¶ 38-57, 65-102. However, those paragraphs make no reference of the use of illegally obtained funds to pay attorneys' fees. Therefore, plaintiff has failed to allege facts to support a conclusion that defendants engaged in the RICO predicate crime of money laundering.
See U.S. v. Eisen ,
Plaintiff contends that it pled "multiple victims of the Stati Parties' fraud," including defrauded investors, the Kazakhstan-owned oil and gas company, and auditors. Pl.'s Opp. at 8. The complaint does not allege that these parties were the victims of the conduct that forms the basis of the predicate acts - the "wrongful" litigation and payments to counsel. See Compl. ¶¶ 45, 130, 214, 252. But even if did, it would merely mean that plaintiff identified "a few" rather than single victim, which does not change the outcome. Edmondson ,
Reference
- Full Case Name
- REPUBLIC OF KAZAKHSTAN v. Anatolie STATI
- Cited By
- 5 cases
- Status
- Published