Racketeer Influenced and Corrupt Organizations Act (RICO) - The World in U.S. Courts: Summer 2019

September.11.2019

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US Domestic Injury Found Where Theft Deemed to Have Occurred when Funds Transferred from US Bank Account

Bascuñán v. Elsaca, US Court of Appeals for the Second Circuit, June 13, 2019

This opinion reflects the second time the case has visited the Court of Appeals, and the second time the court reversed the dismissal of a complaint to hold that a US “domestic” injury had been alleged.

Bascuñán, a Chilean inheritor, brought RICO claims against Elsaca, his cousin, arising from multiple related alleged fraudulent schemes that caused a $64 million loss. In an earlier opinion, the Court of Appeals held that a US domestic injury had been alleged in the theft of “bearer shares” physically located in New York and funds held in a New York bank account. By contrast, the alleged use of US bank accounts to facilitate thefts outside the US did not so qualify.

The Court of Appeals considered several new alleged schemes in the current opinion. First, Bascuñán alleged that Elsaca transferred funds from a Bascuñán account in Chile to the New York account of a Bascuñán entity Elsaca had secretly set up and that he controlled. Elsaca, using a power of attorney, then directed 500 transfers of funds from that entity’s New York account to himself. The Court of Appeals agreed that the transfer between Bascuñán accounts was not the event causing injury: Even though Bascuñán was unaware of the New York account, he had a legal right to access it and so the transfer of funds to it was not a legal injury, and the fact the transfer originated in Chile was thus irrelevant. Rather, the Court of Appeals concluded that the alleged theft occurred upon the transfer of funds from the New York bank account to Elsaca, and that occurred in the US.

Second, Bascuñán alleged that Elsaca sold a Chilean company owned by Bascuñán to a Chilean shell company controlled by Elsaca at a fraction of the company’s value. That company owned the subsidiary whose New York account was the subject of the first alleged scheme. The Court of Appeals found Bascuñán's below-market indirect loss of funds in a New York account to constitute a US domestic injury. The Court of Appeals reached the same conclusion as to an alleged scheme in which dividends paid by another Bascuñán company were diverted to the New York account and then allegedly stolen by Elsaca.

The Court of Appeals also considered the application of wire and mail fraud statutes in the context of a RICO claim. It noted that neither statute has extraterritorial application, and thus could be used as RICO “predicate” violations only if its application could be considered “domestic.” To answer this question, the Court of Appeals was required to determine the “focus” of each law, and then whether the facts of the case proved domestic in light of that focus. Following the conclusions of three other courts of appeals, it concluded that the appropriate focus was “the use of the mail or wires in furtherance of a scheme to defraud,” where that use was “essential” to or a “core component” of the scheme.  Looking to one of the alleged schemes, the Court of Appeals found the required US events sufficient: “The Complaint supports a reasonable inference that the repeated use of domestic mail and wires to fraudulently order a domestic bank to transfer millions of dollars out of a domestic account was a core component of the alleged scheme to defraud.” The same conclusion applied to the RICO predicate offense of bank fraud, whose focus was found to be “a scheme to obtain property owned or controlled by a bank under false or fraudulent pretenses.” A US domestic violation was made out where, as here, a “core component” of the alleged fraud was the use of US mail or wires to direct theft or misappropriation of funds from a US bank.

Defrauded Lichtenstein Trust Did Not Suffer US “Domestic Injury’ where Forged Painting was Purchased with Funds Wired from Account in Lichtenstein

Martin Hilti Family Trust v. Knoedler Gallery, LLC d/b/a Knoedler & Company et al., US District Court for the Southern District of New York, May 8, 2019

Plaintiffs sued a New York art gallery and related defendants for fraud in connection with their sale of forged paintings purported to be by abstract expressionist masters. Among many issues, the Court considered whether one plaintiff, a Lichtenstein trust, suffered a US “domestic injury” as required for a private RICO action to be brought.

The Court noted that its first task was to determine where the injury occurred. It observed that precedent in the Second Circuit held that an injury to tangible property, including money, is deemed to have occurred where the property is located at the time of the injury, absent extraordinary circumstances. Here, the trust’s representative visited the defendant gallery in New York where he first received misrepresentations about a subject painting’s authorship. The painting itself, however, was not available for inspection and was subsequently shipped to Lichtenstein for review by the trust. The purchase was consummated when the trust wired $5.5 million to the gallery’s account in New York. The Court found this fact dispositive of the injury occurring in Lichtenstein. It rejected the plaintiff’s argument that injury was suffered as a result of a forged painting created in New York and sold as a result of the New York gallery’s reputation and illegal conduct, repeating that the location of an injury is not determined by the location of the bad conduct giving rise to it. In so holding, the Court treated a money in a Lichtenstein-based account as “tangible property.”

In a long footnote, the Court questioned, but did not resolve, whether the U.S. domestic injury requirement was actually intended to apply in a case such as the one at bar in which no extraterritorial application of the underlying RICO predicate violations was at issue.

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