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BCCI: THE PRIORITY OF KINGS, OR WHAT'S MORE
DANGEROUS, THE CAVALRY OR THE INDIANS?
Henry H. Rossbacher and Tracy W. Young(1)
I. International vs. Domestic Criminals
Is suing the international criminal the same or different than suing the domestic criminal? The question assumes at least part of the answer. Many of the practical problems are readily apparent. There is the problem with obtaining legal jurisdiction over the malefactor's person and assets, the problem of finding both, and, of course, the prohibitive expense of an international litigation. Each country has its own procedural and substantive idiosyncracies, resulting in an uphill battle for any international litigant. But there are more subtle queries to be answered.
The first question is whether the international nature of a crime changes the domestic rights and remedies of the criminal's victims and, if so, why? If, for example, American domestic criminal and civil laws are violated, do American legal rights change because the transactions and/or the players are international? Theoretically, these rights should be no different. Granted that enforcing a United States judgment obtained under these circumstances can be difficult and quite an adventure, as anyone who has litigated in a "foreign" country knows, the creation of a domestic judgment should be the same as in purely domestic claims with domestic actors.
This brings us to a second question. Does criminal parallel jurisdiction over civil wrongs change the rights and remedies available to the victims of crime? Are their rights and remedies different solely due to the criminal or international aspects of the civil case? Are the government authorities responsible for the protection of innocent victims and regulation of financial and other institutions entitled to compensate themselves first with recovered monies, thereby leaving little or nothing for the civil litigants?
Where do you look for the answers to these interesting questions? A fruitful starting point is the collapse of the Bank of Credit and Commerce International and the resulting litigation. The BCCI fraud, the largest international crime discovered to date, has been largely unexamined since 1992 or 1993.(2) Peter Truell and Larry Gurwin did so comprehensively in an excellent book called False Profits, published by Houghton Mifflin in 1992, tracing definitively the inside story of BCCI's rise and fall.(3) That book, as well as a plethora of other writings, portray lax government regulation, then a government seizure of massive proportions leaving innocent depositors out in the cold. Key to considering the questions posed by international versus domestic and criminal versus civil disputes, however, are the really astounding judicial opinions in the substantial American litigation over BCCI -- opinions not handed down in the criminal prosecutions, but the decisions involving the civil parties.(4) These opinions lead to some startling conclusions and the identification of some problems appropriate for international consideration.
II. BCCI: Twice Burned
Of all the sources detailing the rise and fall of BCCI, the best place to start is with the book False Profits. The second most helpful source is the Report to the Committee on Foreign Relations by United States Senators John Kerry and Hank Brown, December 1992, entitled "The BCCI Affair."(5) There are also a few law review articles touching on various aspects of BCCI and its legal ramifications.(6)
On July 5, 1991, banking regulators in the United Kingdom, Luxembourg, and the Cayman Islands seized the operations of BCCI. At the time of its closing, BCCI operated in over 70 countries and was the fifth largest private bank in the world. As a result of the massive fraud engaged in by the vast BCCI criminal enterprise and its seizure, depositors worldwide lost billions of dollars.(7) To use an American Western film analogy, the innocent settlers' possessions had been absconded with by the hostile Indians while the cavalry slept.
The BCCI fraud did not happen in a vacuum. A major contributing factor was failure after failure by the European, American and other countries' government agencies and professionals responsible for preventing and detecting criminal activities such as those practiced routinely by BCCI. The banking agencies, the accountants, the prosecutors all failed to protect the depositors of BCCI. It was only when Robert Morgenthau, the New York County District Attorney, independently uncovered BCCI's illegal control over an American bank and obtained an indictment, that American agencies, albeit slowly, moved against BCCI.(8)
After the filing of several criminal indictments and civil and administrative suits, the matter came to a head with BCCI's guilty plea to racketeering and money-laundering charges. The plea was part of a larger compromise among the U.S. Government, both the United States Department of Justice and the various federal regulatory agencies, the New York District Attorney and the BCCI liquidators in London, which required BCCI initially to forfeit its United States assets of $550 million.(9) At last, although very late, the cavalry appeared to have arrived. The BCCI depositors could breathe a sigh of relief that the authorities would now safeguard their rights? Well, not exactly.
The banking agencies horned in and demanded their money up front. So did the federal prosecutor. Again the New York County District Attorney stood in the door, insisting that any settlement maximize the return to the investors.(10) These good intentions aside, the global resolution disposed of BCCI's assets without reference to the BCCI victims, who remained unrepresented and voiceless in the proceedings.
III. The Global BCCI Settlement: First in Line
Extensive negotiations among the United States Government, representatives of New York District Attorney Robert Morgenthau, the BCCI liquidators in London, and the Abu Dhabi parties, which include the entities and individuals charged criminally and other responsible parties, resulted in a massive settlement. The settlement itself is unusual, because it is a combined criminal and civil settlement, addresses international, as well as criminal concerns, allows the proceeds to be sent offshore, and because it is signed not only by the usual people (the criminals, their lawyers and the prosecutors), but also by the bankrupt BCCI's liquidators and the United States regulators of the looted banks.
The various agreements required BCCI to plead guilty to several state and federal criminal and civil charges, including violations of the Racketeer Influenced Corrupt Organizations Act ("RICO"),(11) and pursuant to RICO, to forfeit to the United States Department of Justice all BCCI assets located in the United States, amounting to $550 million.(12) Although the forfeiture against BCCI affected only its American assets, under a recent decision from the Second Circuit Court of Appeals, left intact by the Supreme Court, forfeitures by American authorities in the future are no longer limited to American assets and could thus affect countless victims of financial crimes worldwide.(13)
In January 1992, BCCI pled guilty to a massive superseding indictment that identified BCCI as a RICO criminal enterprise.(14) In general, it was agreed that the forfeited moneys would be distributed in the following manner: "half of all sums recovered by the government would be surrendered to the global liquidation fund; the other half was to be reserved for the Attorney General's discretionary allocation among several enumerated purposes, which included offsetting losses to 'the Bank Insurance Fund of the FDIC and United States taxpayers' resulting from BCCI's collapse, and making further contributions to the global liquidation fund."(15)
In greater detail, the December 19, 1991 Plea Agreement required the following distribution of funds:(16) $5 million as an interim capitalization payment to Independence Bank; $100 million to the foreign liquidators to be deposited in the Worldwide Victims Fund; $100 million to a U.S. Disgorgement, Compensation and Penalty Fund (the "U.S. Fund"); and remaining moneys to be disbursed in equal amounts to the Worldwide Victims Fund and the U.S. Fund. It was agreed the following disbursements would be made from the U.S. Fund: (1) to minimize loss to the Bank Insurance Fund of the FDIC and U.S. taxpayers by providing additional capital to subsidiary banks of First American and Independence Bank, or to reimburse the Bank Insurance Fund; (2) to pay a $10 million fine imposed by New York State; (3) to satisfy a punitive forfeiture in an amount to be determined in the discretion of the Attorney General; (4) to compensate the Department of Justice for reasonable costs of investigation and prosecution; (5) to compensate the New York County District Attorney for reasonable costs of investigation and prosecution; to reimburse the Board of Governors of the Federal Reserve System, the FDIC, RTC, OTS, OCC and SEC for the reasonable costs of their investigation, civil and administrative proceedings; and (6) as restitution to BCCI victims.
The FDIC was reimbursed from the U.S. Fund between $75 million and $125 million for the Independence Bank bailout alone. The New York County District Attorney was reimbursed approximately $11 million for its costs of investigation and prosecution, about $5 million of that coming from the BCCI U.S. Fund, with the remainder collected from other sources.(17) In short, all of the various government agencies wanted to be made whole in a situation where innocent depositors would lose. Remarkable about the plea agreement implementing both the forfeiture and the division of the proceeds was that no representative of the defrauded depositors was a party. The cavalry had arrogated to itself the authority to act in the public interest on behalf of the victims. Not surprisingly, government entities' interests were the first protected.
Again, not surprisingly, the settlers were neither satisfied nor particularly grateful. The defrauded depositors thought they deserved a seat of their own at the banquet. They argued that this agreement further victimized the defrauded BCCI depositors. As noted by M.A. Fleming, a spokesman for the BCCI Depositors Protection Association, a group of major depositors from 25 countries, including the United States,
Having been robbed in the first place largely as the result of the failure of regulators worldwide, including [those in the U.S.], that money is going to profit the very regulators that failed to protect us.(18)
Moreover, the U.S. authorities controlled whatever distribution would be made to victims. Prior to the transfer of funds to the Worldwide Victims Fund, the Department of Justice and the New York County District Attorney had to be satisfied that the Liquidating Authorities had established procedures designed to ensure that the money would be distributed to innocent victims of the BCCI fraud.(19) Thus, the federal and local authorities not only took the money and fully compensated themselves first, they positioned themselves to control all subsequent disbursements, taking away any possible hope that American legal rights would be vindicated in an American court.(20)
IV. The Civil Suits: Insult and Injury
Dissatisfied with this state of affairs, the BCCI victims attempted to invoke the jurisdiction of the American civil courts to assert their claims. First, they sought to enjoin the forfeiture negotiated by the government. In Petition of Smouha, a civil litigant who had obtained a judgment under the civil provision of the RICO statute before the government's settlement with BCCI, petitioned in bankruptcy court to enjoin implementation of the settlement, and the forfeiture.(21) The bankruptcy appeals court gave him the back of its hand. Referring to the plea agreement negotiated with BCCI as "a precisely written, scrupulously constructed and rigorously negotiated document," the Court refused to "sanction any interference in this global resolution of all the controversies involving BCCI in the United States."(22)
The Smouha court cited as grounds for its decision lack of jurisdiction and its lack of power to issue an injunction.(23) It was shocked and dismayed that anyone would be so ungrateful as to suspect that the American government representatives responsible for the global settlement would keep the money for themselves or at least do what they wanted with it. One disgruntled BCCI creditor was not going to be allowed to upset a deal signed off on by so many important people, a deal that alleviated the headache of addressing hundreds of individual claims in American courts. The cavalry had come, recovered the settlers' wagon, then rode off in it without them.
Next came depositors' suits in the form of class actions. In one action, United States v. BCCI Holdings (Luxembourg) S.A., the class plaintiffs sought compensation for BCCI's and the bank's insiders' actions that defrauded plaintiffs into depositing, then losing their money.(24) The plaintiffs alleged interests in BCCI's assets, a basis for challenging the forfeiture under the RICO statute. Their claims were summarily dismissed. The courts denied the plaintiffs standing to sue and the right to challenge the government forfeiture under RICO.(25) In dismissing the plaintiffs' claims, the courts engaged in a tortured and wrong reading of the RICO statute and of the law of constructive trust. The courts recognized that the RICO statute does not differentiate between legal and equitable interests, then misconstrued remedies law to deny the claims.
In a truly appalling display, the District of Columbia Circuit Court of Appeals in Washington went against prevailing authority to dispose summarily of the depositors' claims. Other circuits had established that a constructive trust could be superior to the government's claim of forfeiture.(26) The D.C. Circuit disagreed.(27) The D.C. Circuit also refused to follow the Reckmeyer decision from the Fourth Circuit Court of Appeals in Virginia. Reckmeyer had held that a person can prove an interest (statutory "interest" as required by RICO) in a seized asset if they show the forfeited property "represents their only means of recovery."(28) The D.C. Circuit, however, refused to follow this precedent and held, inexplicably, that without a judgment and a perfected lien, the petitioners were out of luck.(29)
Yet Congress never intended in passing the RICO Act to supersede normal bankruptcy priorities. If the government had not seized the property first, but had taken their forfeiture judgment into the bankruptcy proceedings and "stood in line, they would have been last . . . ."(30) Its distribution priority would have been fourth. Unsecured creditors, such as the depositors filing the petitions, would have been third.(31) Forfeiture claims "are to be treated as inferior and subordinate to the claims of the unsecured creditors. Indeed, a [Bankruptcy Code]§ 726(a)(4) claim is superior in order of distribution only to postpetition interest and the Debtor's right to receive any surplus. The intent of Congress was that unsecured creditors should be protected from 'the debtor's wrongdoing.'"(32)
What was really going on? Why were the courts so unwilling to entertain the civil litigants' claims? Could it be that the American courts fancied themselves to be some kind of international judiciary, committed to the global (and least messy) resolution of complex financial disputes? In that light, as one of the lower court decisions exemplifies, vested rights would not be allowed to get in the way. In dismissing various BCCI depositors' petitions challenging the forfeiture, the United States Court for the District of Columbia reasoned that the defrauded victims could always file claims in Luxembourg, the Cayman Islands or some other liquidation proceeding. The Court stated,
The worldwide collapse of BCCI has brought enormous and continuing tragedy to innocent victims, and all losses, whatever the amount, suffered by the depositors are lamentable. Regardless of those losses and of the conclusion of this Order, however, the petitioners have been given an opportunity to file claims in liquidation proceedings in the appropriate jurisdictions . . . .(33)
Yet, the "foreign" jurisdictions were only "appropriate" because American government officials and courts were shipping assets seized in America abroad. The rationale for the appropriateness of the location for liquidation proceedings was the country of incorporation. On this rationale, the settlers should go to Canada because the Sioux Nation's international headquarters are there and the cavalry has efficiently forwarded what was left of their possessions. Perhaps the Mounties might help.
Okay, if you are a BCCI victim, you cannot stop the guilty plea, the global settlement or the forfeiture, and you cannot use the RICO statute to assert your claims to the seized proceeds of the crimes.(34) You can at least sue the crooks who helped BCCI, right? Well, no. Not according to the Ninth Circuit, the Federal appeals court in California.
In the case of Hamid v. Price Waterhouse & Co., depositors in BCCI brought a class action under RICO against seventy-seven (77) people, firms, and a foreign country, but not BCCI, for civil RICO violations.(35) The defendants were alleged to have looted the bank for personal gain, to have issued false financial statements, to have contributed to its inability to pay its depositors, and in general to have been part of the gigantic BCCI fraud.(36) It is not unreasonable to suppose that the BCCI entities themselves were not solely liable, either criminally or civilly, for the billions of dollars in losses suffered worldwide. Could not the settlers bring their own claims as victims of this massive civil and criminal wrong?
The Ninth Circuit denied the victims had any claims to bring, finding that the class plaintiffs' claims were derivative of the claims of BCCI and likening depositors to shareholders. In other words, the Court denied the plaintiffs standing to sue, finding that only the bank could sue, with perhaps the bank being subject to all the defenses good against the malefactors. The Court in Hamid explained,
BCCI is being liquidated in international proceedings in Luxembourg. Its assets located in the United States have been forfeited and are subject to control of the Justice Department. The appellants in this case have claims similar to those of many other potential claimants. Their claims, if allowed in this lawsuit, would enable them to jump ahead of other creditors in priority and obtain greater shares of the failed bank's assets and of the assets of any wrongdoers who may owe money to the failed bank on account of their wrongs. [Citation omitted](37)
The Court in Hamid was simply wrong. Every (well, maybe not every) RICO scholar in the country was bemused by this reasoning.(38) The Court's decision "ignores well-settled law holding that when creditors of an insolvent entity have been victimized by fraud committed by the corporation, and the officers, directors and professionals who participated therein, those creditors have standing to directly pursue RICO claims against the non-bankrupt wrongdoers."(39) In deciding Hamid, the Court completely ignored its own prior case recognizing that victims -- the real parties in interest -- are entitled to pursue their own claims.(40) Indeed, if the depositors are not allowed to sue in their own behalf, then no one can, or will, assert their claims for them. The receivers of the dishonest BCCI entities are not entrusted with, and may not pursue under the law, the claims of innocent depositors allegedly defrauded by the corporations, their officers and directors and their professional assistors (like Price Waterhouse).(41)
So where are we? In Luxembourg, the Cayman Islands and elsewhere. In fact, the cobbled-together ad hoc resolution in BCCI resulted in three receiverships in three jurisdictions, where the laws in one require litigants and receivers to do things that are prohibited in the other. American victims are required to pursue assets seized in America by the American government and courts in foreign countries because the criminal enterprises that defrauded the American victims have their "corporate fiction" origins in those legal entities. These decisions have been made without the participation or agreement of even one representative of one victim. This result bothers no one in power. In fact, the cavalry, à la President Nixon, has declared victory.
In this era of globalization, we need an agreed-upon international policy and clear rules so that when international frauds occur again, which they will, we can deal with them in a coherent, just and fair way. The victims of crimes should not be shoved to the back of the line by their government protectors. Their courts should not palm them off with unspecified claims in foreign climes. Procedures must be devised to provide victims separate representation at an appropriately-shaped table.
V. Conclusion
Private claims will be treated differently by American courts because they also constitute crimes, particularly if they conflict with forfeiture proceedings, and there are two well-funded opponents (the criminals and the government). Private claims are particularly vulnerable if the claims (and crimes) are international because the courts go into logical paralysis in their efforts to appear diplomatic.
The private litigant is faced with a dilemma because it is not clear when the government will enter and attempt to preempt the fray. This brings us back to ancient England and the good old days of "deodands." According to American sources, the ancient doctrine of "deodands" was used by early English monarchs to augment the Crown's treasury. Where an object was the instrument of a wrong, deodands made it the property of the Crown.(42) It was an elastic concept, based on the monarch's needs. Not much has changed.
"Put not your trust in princes . . . ."(43) You are better off with a good plaintiff's lawyer who, at least, knows where his (or her) loyalties lie.
References
1. * Henry H. Rossbacher (B.S.Ec. 1965, Wharton School of Finance and Commerce, University of Pennsylvania; LL.B. 1968, University of Virginia, Phi Delta Phi) is the principal of Rossbacher & Associates, a law firm situated in Los Angeles, California, which specializes in civil, criminal and appellate litigation in all state and federal courts.
Tracy W. Young (B.A. 1977, New York University; J.D. 1983, Cardozo School of Law, New York) is a Senior Attorney with Rossbacher & Associates.
This article was first given as a paper at the 15th International Symposium on Economic Crime, Jesus College, Cambridge, September 1997.
2. According to Robin Leigh-Pemberton, a Governor of the Bank of England, and Robert M. Morgenthau, the District Attorney for New York County, New York, United States; see also G. Robert Blakey, Kevin P. Roddy, Reflections on Reves v. Ernst & Young: Its Meaning And Impact On Substantive, Accessory, Aiding Abetting And Conspiracy Liability Under Rico, 33 American Criminal Law Review 1345, 1570 n.40 (Special Edition 1996), quoting from and citing, "Subcomm. on Terrorism Narcotics and Int'l Operations, The BCCI Affair: A Report to the Senate Committee on Foreign Relations 64" (Staff Report Sept. 1992).
3. A number of the participants have cited False Profits and some of the revelations made by these investigative journalists prior to the book's publication as indispensable to the ensuing criminal investigations.
4. See, e.g., United States v. BCCI Holdings (Luxembourg), S.A., 46 F.3d 1185, 1187 n.1 (D.C. Cir.), cert. denied, __U.S.__, 115 S.Ct. 2613 (1995); Hamid v. Price Waterhouse, et al., 51 F.3d 1411 (9th Cir.), cert. denied, ___U.S.___, 116 S.Ct. 709 (1996); Petition of Smouha, 136 B.R. 921, 923-924 (S.D.N.Y.), dismissed by In re Smouha, 979 F.2d 845 (2d Cir. 1992); see also U.S. v. BCCI Holding (Luxembourg), S.A., 961 F.Supp. 287 (D.D.C., Apr 22, 1997); U.S. v. BCCI Holding (Luxembourg), S.A., 956 F.Supp. 5 (D.D.C., Feb 13, 1997)(No. 91-0655(JHG)); U.S. v. BCCI Holding (Luxembourg), S.A., 169 F.R.D. 220, 36 Fed.R.Serv.3d 1256 (D.D.C., Nov 07, 1997)(No.Crim.A. 91-0655 JHG); U.S. v. BCCI Holding (Luxembourg), S.A., 956 F.Supp. 1 (D.D.C., Sep 23, 1996)(No. 91-0655 (JHG)); U.S. v. BCCI Holding (Luxembourg), S.A., 941 F.Supp. 189 (D.D.C., Sep 20, 1996)(No.Crim.A. 91-0655 (JHG)); U.S. v. BCCI Holding (Luxembourg), S.A., 923 F.Supp. 264 (D.D.C., Apr 30, 1996)(No.CR.A. 91-0655 (JHG)); U.S. v. BCCI Holding (Luxembourg), S.A., 919 F.Supp. 31 (D.D.C., Mar 06, 1996) (No.CIV.A. 91-0655 (JHG)); U.S. v. BCCI Holding (Luxembourg), S.A., 916 F.Supp. 1270 (D.D.C., Feb 27, 1996)(No.CRIM.A. 91-0655 (JHG)); U.S. v. BCCI Holding (Luxembourg), S.A., 916 F.Supp. 1286 (D.D.C., Feb 27, 1996)(No.CRIM.A. 91-0655 (JHG)); U.S. v. BCCI Holding (Luxembourg), S.A., 1994 WL 914456 (D.D.C., Oct 28, 1994); U.S. v. BCCI Holding (Luxembourg), S.A., 1994 WL 914457 (D.D.C., Oct 28, 1994); U.S. v. BCCI Holding (Luxembourg), S.A., 1994 WL 914458 (D.D.C., Oct 28, 1994); U.S. v. BCCI Holding (Luxembourg), S.A., 1994 WL 914459 (D.D.C., Oct 28, 1994); U.S. v. BCCI Holding (Luxembourg), S.A., 1994 WL 914460 (D.D.C., Oct 28, 1994); U.S. v. BCCI Holding (Luxembourg), S.A., 833 F.Supp. 9 (D.D.C., Aug 19, 1993); U.S. v. BCCI Holding (Luxembourg), S.A., 833 F.Supp. 17 (D.D.C., Aug 19, 1993); U.S. v. BCCI Holding (Luxembourg), S.A., 833 F.Supp. 22 (D.D.C., Aug 19, 1993); U.S. v. BCCI Holding (Luxembourg), S.A., 833 F.Supp. 9 (D.D.C., Aug 19, 1993); U.S. v. BCCI Holding (Luxembourg), S.A., 841 F.Supp. 1 (D.D.C., Feb 23, 1993)(No.CR. 91-0655 (JHG)); U.S. v. BCCI Holding (Luxembourg), S.A., 841 F.Supp. 111 (D.D.C., Feb 22, 1993)(No.CRIM. 91-0655 (JHG)).
5. The BCCI Affair, a Report to the Committee on Foreign Relations, U.S. Senate, 102nd Cong. 2d Sess. (Senate Print 102-140). See Executive Summary, http://www.fas.org/irp/congress/ 1992 rpt/bcci/01 exec.htm, and related internet sites (see, e.g., http://www.fas.org/irp/congress/1992 rpt/bcci/index.html).
6. See W. Drew Sorrell, II, Racketeering Influenced Corrupt Organization Act, 64 Geo. Wash. L. Rev. 1441 (1996); Myron M. Sheinfeld, Teresa L. Maines & Marie W. Wege, Civil Forfeiture and Bankruptcy: The Conflicting Interests of the Debtor, Its Creditors and the Government, 69 Am. Bankr. L.J. 87 (1995); Raj Bhala, Tragedy, Irony, and Protectionism After BCCI: A Three-Act Play Starring Maharajah Bank, 48 S.M.U. L. Rev. 11 (1994); Donna Edwards, The Bank of Credit and Commerce International Scandal: A Warning for Bank Regulators, 24 Law & Pol'y Int'l Bus. 1267 (1993); Daniel M. Laifer, Putting the Super Back in the Supervision of International Banking Post-BCCI, 60 Fordham L. Rev. S467 (1992); Elizabeth Kingma, New Frontiers in the Regulation of International Money Movement in the Wake of BCCI, 86 Am. Soc'y Int'l L. Proc. 188 (1992); Hal S. Scott, Supervision of International Banking Post-BCCI, 8 Ga. St. U. L. Rev. 487 (1992); Duncan E. Alford, Basle Committee Minimum Standards: International Regulatory Response to the Failure of BCCI, 26 Geo. Wash. J. Int'l L. & Econ. 241 (1992).
7. See False Profits; "Kerry Report"; see also Hamid v. Price Waterhouse & Co., et al., supra, n.3; see also 1992 Memorandum submitted by Price Waterhouse in response to questions from the Treasury and Civil Service Committee, House of Commons, England.
8. Issues of influence and outright bribery are addressed at length in the book False Profits and the various Congressional Reports, but will not be addressed in this article, although the fact such actions contributed to causing the depositors' harm shows further the injustice of denying them their own day in court. Extra-American actions against BCCI and its crime lords are without the compass of this article.
9. See December 19, 1991 Plea Agreement between the United States Department of Justice, the New York District Attorney's Office, Commissaries of BCCI holdings (Luxembourg) S.A., BCCI S.A., Joint Provisional Liquidators of BCCI (Overseas) Ltd. and for International Creditors and Investment Company.
10. September 11, 1997 telephone conference with John W. Moscow, Assistant District Attorney, County of New York.
11. 18 United States Code §§ 1961 et seq.
12. See, supra, n.8, the December 19, 1991 Plea Agreement.
13. See United States v. All Funds in any Accounts Maintained in the Names of Beriberi to Castro Meza or Esperanza Rodrigues de Castro, 63 F.3d 148 (2d Cir.), cert. denied, __ U.S. __, 116 S.Ct. 1541 (1996); Fletcher N. Baldwin, Jr., All Funds and International Seizure Cooperation of the USA and the UK, 5 Journal of Financial Crime 113 (1997, (Henry Stewart Pub'l, London). In the All Funds case, a lower New York court was allowed to proceed with an in rem forfeiture of drug money located in bank accounts in London, regardless that no criminal activity had occurred in New York or London. Nevertheless, the Second Circuit found sufficient cooperative activity by the authorities in England to confer jurisdiction in New York and thereby transfer the funds. See also Henry H. Rossbacher, Recent Developments in Federal Securities Law, 4 European Financial Services Law 191 (Kluwer, 1997), considering the Second Circuit's decisions on RICO jurisdiction: Alfadda v. Fenn, 935 F.2d 475 (2d Cir. 1991), and North South Finance Corp. v. Al-Turki, 100 F.3d 1046 (2d Cir. 1996).
14. See March 2, 1992 Memorandum of Points and Authorities filed by Plaintiffs Akhtar Hamid, et al., in Opposition to the Price Waterhouse World Firm Limited's Motion to Dismiss or Strike the Third Amended Complaint in the Class Action Civil No. 91-4483-CBM(ex), United States District Court, Central District of California, at page 14.
15. See, supra, n.3, United States v. BCCI Holdings (Luxembourg), S.A., 46 F.3d at 1187; see also, supra, n.1, G. Robert Blakey, Kevin P. Roddy, Reflections on Reves v. Ernst & Young: Its Meaning And Impact On Substantive, Accessory, Aiding Abetting And Conspiracy Liability Under Rico, 33 American Criminal Law Review at 1570.
16. See, supra, n.8, the December 19, 1991 Plea Agreement, ¶¶11 and 12.
17. See, supra, n.9. See also August 4, 1997 correspondence from John W. Moscow. According to Mr. Moscow, money was seized from the following sources:
*The agreement regarding the plea and cooperation of Kamal Adham ("Adham"), Sayed Jawahry ("Jawahry"), Arabian Industrial & Commercial Company, Ltd. ("Arabian Industrial"), and BNK Holdings, S.A. ("BNK Holdings") with the District Attorney of New York and the Department of Justice; **the settlement agreement of Khalid bin Mahfouz, Haroon Rashid Kahlon, Eastbrook, Inc. and National Commercial Bank.
18. See Wall Street Journal, December 31, 1991, at B4. The settlement was also championed by the Bush Administration in order to avoid local bank failures in an election year. Wall Street Journal, December 20, 1991 at A4.
19. See, supra, n.8, December 9, 1991 Plea Agreement ¶14.
20. After the initial $550 million forfeiture, additional moneys were collected from various sources. The initial forfeiture excluded New York and California, which independently seized approximately $275 million in BCCI assets. New York and California creditors were made whole. Additionally, First American Bank eventually sold for about $450 million. See, supra, n.9. It has also been reported that as of November 1995, approximately $487 million has been recovered through American Settlements exclusive of the First American Bank sale. The Daily Telegraph (London), November 17, 1995, at 33.
21. See, supra, n.3, Petition of Smouha, 136 B.R. at 923-924. The civil litigant is Nicholas Collwyn Sturge. Brian Smouha served as one of the liquidators appointed to locate and protect BCCI's assets in the wake of its closure. Id. at 923-924. The Racketeering Influenced Corrupt Organizations Act ("RICO") is codified at 18 United States Code sections 1961 et seq. The civil section is 18 United States Code section 1964(c).
22. See Petition of Smouha, supra, n.3, 136 B.R. at 929.
23. See Petition of Smouha, supra, n.3, 136 B.R. at 926-929.
24. See United States v. BCCI Holdings (Luxembourg), S.A., 833 F.Supp. 9 (D.D.C. 1994), affirmed, 46 F.3d 1185, 1187 n.1 (D.C. Cir.), cert. denied, __ U.S. __, 115 S.Ct. 2613 (1995).
25. Id. Under the RICO Act, third parties may challenge a forfeiture if they can assert they have a "legal interest in property which has been ordered forfeited." 18 United States Code § 1963(l)(2). A party who files a petition alleging a "legal interest" that, if established, would compel amendment of the forfeiture, is then entitled to a hearing. Id. The court shall amend the forfeiture order if, after the hearing, the court determines that the petitioner has established by a preponderance of the evidence that,
(A) The petitioner has a legal right, title, or interest in the property, and such right, title, or interest was vested in the petitioner rather than the defendant or superior to any right, title, or interest of the defendant at the time of the commission of the acts which gave rise to the forfeiture of the property under this section; or
(B) the petitioner is a bona fide purchaser for value of the right, title, or interest in the property and was at the time of purchase reasonably without cause to believe that the property was subject to forfeiture under this section. . . .
18 United States Code § 1963(l)(6).
26. See, supra, n.23, United States v. BCCI, 46 F.3d at 1191. Those other decisions are United States v. Schwimmer, 968 F.2d 1570 (2nd Cir. 1992); United States v. Levin, 9142 F.2d 2177 (3d Cir. 1991); United States v. Campos, 859 F.2d 1233 (6th Cir. 1988); United States v. Marx, 844 F.2d 1303 (7th Cir. 1988). See also, supra, n.5, Sorrell, Racketeering Influenced Corrupt Organization Act, 64 Geo. Wash. L. Rev. 1441 (1996).
27. In United States v. BCCI Holdings (Luxembourg) S.A., two petitions were filed by persons claiming to represent a class of worldwide depositors in BCCI. These "class petitioners" had previously initiated a large civil RICO action against the founders, officers, and directors of BCCI, as well as against numerous other "related" third parties. Supra, n.23, 46 F.3d at 1188, citing, Hamid v. Price Waterhouse & Co., 15 RICO Law Reporter 1234, 1242-43, 1252 (C.D. Cal. 1992) (dismissing complaint on standing grounds).
The two petitions stated merely that the class members had an interest in the forfeited property, but did not specify that interest. The third petitioner, Raymond Davies, appointed by a Sierra Leone court as conservator over BCCI's affairs in that country, and as representative of the Sierra Leone branch depositors, challenged the forfeiture of $2 million held in the name of BCCI (Overseas) Sierra Leone at a New York bank. Davies argued that depositors he represented were entitled to a constructive trust over the funds because failure to do so would unjustly enrich BCCI. See, supra, n.23, United States v. BCCI (Luxembourg) S.A., 833 F.Supp. at 13-15. The district court allowed the first two groups of petitioners to adopt the argument made by Davies in the third petition. It then dismissed the class petitioners' claims. The court did so without granting the petitioners a hearing. The court found that the use of a constructive trust would be fundamentally unfair to the remainder of the worldwide depositors. The court also denied the alternative claim that the depositors were "bona fide purchasers" entitled to amendment of the order under section 1963(l)(6)(B) of the RICO Act. Id. at 15-16.
On appeal, the District of Columbia Circuit Court of Appeals held that the complaints of both the conservator and the class representatives failed to state claims under RICO. The Court first analyzed the plaintiffs' claim of a constructive trust over the forfeited funds and their entitlement to a hearing under RICO. The government contended that a constructive trust was merely an equitable interest, not a legal interest as required by the statute. The Court agreed with other Circuit Courts of Appeals that Congress had not intended to draw a distinction between legal and equitable interests in passing RICO. Id. at 1189. The Court did not, however, agree with other Circuit Courts of Appeals that have held that a constructive trust could be interposed as superior to the government's forfeiture claim. Those other decisions are United States v. Schwimmer, 968 F.2d 1570 (2nd Cir. 1992); United States v. Levin, 9142 F.2d 2177 (3d Cir. 1991); United States v. Campos, 859 F.2d 1233 (6th Cir. 1988); United States v. Marx, 844 F.2d 1303 (7th Cir. 1988). Each of these other courts' decisions recognize that a legal interest under RICO can be shown with such a preexisting constructive trust.
The BCCI Court explained, "[w]hile those courts, in our view, properly rejected the government's legal/equitable distinction, they did not consider whether a judicially imposed constructive trust would be inconsistent with the statutory remedial scheme." Id. at 1189-1191. The BCCI Court found that Congress' intent was to seize assets used in illicit activities at the time of the criminal act and, therefore, a court should not circumvent this purpose. The Court's central justification for its decision rested on the creation of competing legal fictions. The Court refused to create a constructive trust -- a legal fiction -- that would compete with the congressionally created legal fiction providing forfeiture of property to the United States under RICO based on the "relation back" doctrine. Under this doctrine, the government is deemed to acquire its interest at the time of the criminal act. Id. at 1191; see, supra, n.1, Roddy, Blakey, 33 American Criminal Law Review at 1573. The Court did not explain why it would not be appropriate in the BCCI case to create a legal fiction for equity purposes and find that a constructive trust over the funds deposited by victims of BCCI preceded the government's interest. See, supra, n.5, Sorrell, 64 Geo. Wash. L. Rev. at 1444.
The BCCI Court further ignored the severe limitations on the relation back doctrine imposed by the United States Supreme Court in 1993 in United States v. 92 Buena Vista Avenue, __U.S.__, 113 S.Ct. 1126, 1134 (1993). Under that case and other Circuit Court opinions relying on it, similar forfeiture provisions have not been found to relate back so as to divest innocent property owners' rights. See, supra, n.1, Roddy, Blakey, 33 American Criminal Law Review at 1573. BCCI never had an unqualified property interest in the stolen money that could be forfeited to the government under RICO. The BCCI Court simply got it wrong when it characterized a constructive trust as a remedy that a court devises after litigation. 46 F.3d at 1190-91. As noted by Kevin Roddy and Professor Robert Blakey,
In fact, constructive trusts and equitable liens are long-recognized features of common law jurisprudence . . . [citation omitted]. Speaking for the New York Court of Appeals, Justice Cardozo stated, "a constructive trust is a formula through which the conscience of equity finds expression. When property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest, equity converts him into a trustee." . . . [Citation omitted.] . . . The imposition of a constructive trust or equitable lien was particularly appropriate where the depositors alleged that they were fraudulently induced to deposit their money into BCCI, a phony bank.
See, supra, n.1, Roddy, Blakey, 33 American Criminal Law Review at 1575. Moreover, although RICO provides that the government's title vests "upon the commission of the act giving rise to the forfeiture," BCCI's plea of guilty in 1992 related to RICO predicate acts rising out of its infiltration of U.S. banks, not its fraudulent inducement of depositors to part with their hard-earned money. 18 United States Code § 1963(c).
28. See United States v. Reckmeyer, 836 F.2d 200, 204-206 (4th Cir. 1987).
29. See, supra, n.23, BCCI, 46 F.3d at 1191. Under RICO, a petitioner can establish a statutory "interest" by showing he is a "bona fide purchaser for value of the right, title, or interest in the property and was at the time of purchase reasonably without cause to believe that the property was subject to forfeiture under this section." 18 United States Code § 1963(l)(6)(B). In the case of United States v. Reckmeyer, the Fourth Circuit Court of Appeals interpreted an identical section applicable to drug crimes, and concluded it allowed general creditors to establish an interest in forfeited property when the "forfeited property . . . represents their only means of recovery." See, supra, n.27, United States v. Reckmeyer, 836 F.2d at 204-206. The BCCI Court rejected the Fourth Circuit's reasoning in the Reckmeyer case that it would be possible for a person to prove an interest in a seized asset if they showed their claim exceeded the total value of the asset. Id. at 207-208. The BCCI Court reasoned that bank depositors as a whole do not have an interest in any particular portion of a banking operation, but only in the bank's assets as a whole. Without a judgment and a perfected lien, the petitioners had no claim. See, supra, n.23, BCCI, 46 F.3d at 1191; see also discussion in Sorrell, supra, n.5, Sorrell, Racketeering Influenced Corrupt Organizations Act, 64 Geo. Wash. L. Rev. at 1446-1447. To allow bank depositors standing as bona fide purchasers would, the BCCI Court warned, turn the district court into a bankruptcy court and circumvent the statutory construction that requires creditors without an interest in a specific property to seek relief from the Attorney General. 46 F.3d at 1191.
30. Professor G. Robert Blakey, Symposium: Federal Asset Forfeiture Reform, Shaping Today's Forfeiture Law: A Conversation with Senator McClellan, 21 J. Legis. 175, 183 (1995).
31. See 11 United States Code § 726(a)(3), (4) (1993 and SUPP. 1996).
32. Sachs v. Ryan (In re Ryan), 15 B.R. 514, 520 (Bankr.D.Md. 1981); see 11 United States Code § 724 (providing for avoidance of liens securing a forfeiture claim); see also Myron M. Sheinfeld, Teresa L. Mains, Mark W. Wege, Civil Forfeiture and Bankruptcy: The Conflicting Interest of the Debtor, Its Creditors and the Government, 69 Am.Bankr.L.J. 87, 115-117 (Winter, 1995).
The bankruptcy scheme relegating forfeitures to fourth priority reflects the view that forfeitures must not be allowed to seize assets that would otherwise be distributed to general creditors. In light of the increase in the number and quantity of forfeitures by government entities, it could be argued that bankruptcy courts should now assert their mandated congressional role and preempt the government's attempt to gain a priority in the debtor's property. Bankruptcy courts should utilize the Bankruptcy Code to provide pro rata distribution to creditors under the priority scheme provided by Congress. See, supra, n.5, Civil Forfeiture and Bankruptcy, 69 Am.Bankr.L.J. at 118.
33. See United States v. BCCI (Luxembourg) S.A., 814 F.Supp. 106, 111 (D.D.C. 1993).
34. There lies the great irony. The RICO statute authorizing the government's seizure of the money enjoins "making due provision for the rights of any innocent persons." 18 United States Code § 1963(g). Yet the courts sanctioned the seizure and precluded suits by such "innocent persons," making a mockery of the statutory scheme and the rule of law.
35. Under 18 United States Code section 1964(c),
[a]ny person injured in his business or property by reason of a violation of [18 U.S.C.] section 1962 of this Chapter may sue therefor . . . and shall recover threefold the damages he sustains. . . .
36. See, supra, n.3, Hamid v. Price Waterhouse, supra, 15 F.3d at 1419.
37. Id. at 1420.
38. In their excellent article dissecting the opinion, Kevin Roddy and Professor Robert Blakey summarize the problems it poses:
A claim for . . . [consequential] damages belongs exclusively to the depositors . . . In addition, the liquidators may well be precluded from any recovery against those who looted the banks, since the "pirates" were insiders. . . . Conflating the depositor's suit against the "pirates" with that of the bank and denying standing to the depositors may well have the perverse outcome of denying recovery against wrongdoers to any person, hardly the result envisioned by the Supreme Court, when it recognized the concept of direct/indirect injury in Holmes v. Securities Investor Protection Corp., [___U.S.___,112 S.Ct. 1311, 1320-21 (1992)]. . . . Second, the court commented negatively on the failure of the depositors to sue BCCI. The depositors could not, however, as the bank was in bankruptcy . . . [Footnotes omitted.]
Third, the court mischaracterized the depositors' claim as "derivative". In fact, the depositors' complaint carefully articulated the depositors' theory that they were the direct victims of a fraud that targeted, not only the bank, but them. They were, in fact, fraudulently induced to deposit their money in BCCI in reliance on repeated false and misleading representations made to them. [Referenced endnotes not included.]
G. Robert Blakey, Kevin P. Roddy, Reflections on Reves v. Ernst & Young: Its Meaning and Impact on Substantive, Accessory, Aiding Abetting and Conspiracy Liability Under RICO, 33 American Criminal Law Review 1345, 1577-1578.
39. Petition for Writ of Certiorari in the United States Supreme Court, filed in Hamid, et al., v. Price Waterhouse et al., October 3, 1995 at 20-22. See also Caplin v. Main Midland Grace Trust Co., 406 U.S. 416, 421-32, 434 (1972). The Court's decision is particularly troubling in that Price Waterhouse has admitted, as the class plaintiffs alleged, that a massive fraud occurred and that payoffs were used to conceal it. See 1992 Memorandum submitted by Price Waterhouse to the Treasury and Civil Service Committee of The House of Commons, England, in response to questions from the committee.
40. See Williams v. California 1st Bank, 859 F.2d 664 (9th Cir. 1988).
41. See Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416, 431-32 (1972) (trustee of an insolvent entity does not have standing to sue on behalf of victims of its fraud and cannot preempt victims' lawsuit because they have standing to pursue their own class action fraud claims).
42. See Andrew R. Hull, 285 Books Received, 37 Santa Clara L. Rev. 285, 291 (1996) (reviewing "A License to Steal: The Forfeiture of Property" by Leonard W. Levy, 1996).
43. ". . . nor in the son of man,in whom there is no help." Psalms 146:3 (King James).
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