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United States v. All Assets Held at Bank Julius Baer & Company

July 9, 2008

UNITED STATES OF AMERICA, PLAINTIFF,
v.
ALL ASSETS HELD AT BANK JULIUS BAER & COMPANY, LTD., GUERNSEY BRANCH, ACCOUNT NUMBER 121128, IN THE NAME OF PAVLO LAZARENKO LAST VALUED AT APPROXIMATELY $2 MILLION IN UNITED STATES DOLLARS, ET AL., DEFENDANTS IN REM.



The opinion of the court was delivered by: Paul L. Friedman United States District Judge

OPINION

This matter came before the Court on the motion to dismiss of claimants Pavel Lazarenko and Alexander Lazarenko on their own behalf and on behalf of Ekaterina Lazarenko and Lecia Lazarenko ("Claimants" or "Lazarenko Claimants").*fn1 Plaintiff, the United States of America, has filed an action in rem against various bank accounts located in foreign nations around the world containing assets totaling over $250 million. The United States brings this action pursuant to two separate provisions of the civil forfeiture statute -- 18 U.S.C. § 981(a)(1)(C) and 18 U.S.C. § 981(a)(1)(A) -- seeking both direct forfeiture of alleged criminal proceeds and forfeiture of property allegedly involved in or traceable to money laundering.

Claimants moved to dismiss the First Amended Verified Complaint for Forfeiture In Rem ("Amended Complaint") pursuant to Rule 12(b)(1) of the Federal Rules of Civil Procedure for lack of subject matter jurisdiction, and pursuant to Rule 12(b)(6) for failure to state a claim upon which relief can be granted. The Court heard oral argument on this motion on January 23, 2007.*fn2 Upon consideration of the motion, the opposition, the reply and the arguments made at the motions hearing, the Court denied Claimant's Motion to Dismiss by Order of March 29, 2007.*fn3 The reasons underlying that Order are set forth in this Opinion.

I. BACKGROUND

A. Factual Background

The following facts are alleged by the government in its First Amended Verified Complaint for Forfeiture In Rem:

Claimant Pavel Ivanovich Lazarenko, a.k.a. Pavlo Lazarenko, was a dominant figure in the Ukrainian government and economy from approximately 1992 to 1998, first in the heavily industrial Dnepropetrovsk District, and later throughout the Ukraine. First Amended Verified Complaint for Forfeiture In Rem ("Am. Compl.") ¶¶ 6, 21-24, 35. During this period, Lazarenko received more than $326 million in payments from various individuals and businesses through wire transfers occurring in the United States, while reporting an income of less than $6,000 per year in 1996 and 1997, having no other substantial employment, and declaring that he had no money in banks or other financial institutions. Id. ¶¶ 7, 8, 26, 28, 34, 38, 41-44, 49, 50-54.

Those directing payment to Lazarenko during this period allegedly also obtained millions of dollars through their association with Lazarenko. Am. Compl. ¶ 9. One such associate was Peter Nikolayevich Kiritchenko, who was formally named as and served as an advisor to Lazarenko when he was First Vice Prime Minister and Prime Minister of Ukraine. Id. Associates such as Kiritchenko allegedly would accept payments on behalf of Lazarenko in order to conceal them from Ukrainian and other law enforcement authorities, and then pass the payments through to accounts outside of Ukraine in the name of shell corporations under Lazarenko's control. Id. ¶¶ 25, 27, 29, 34, 38-40, 42-43, 49, 53, 55, 59.

Through such criminal acts, the United States alleges, Lazarenko and his associates were able to acquire hundreds of millions of United States dollars. Am. Compl. ¶ 10. Their schemes included, but were not limited to: skimming funds in United States dollars from multimillion dollar contracts for the distribution of natural gas imports in Ukraine and providing kickbacks to Lazarenko; obtaining property by wrongful use of fear or under color of official right; making payments to Lazarenko to influence or induce him to act or refrain from an official act; manipulating state businesses to provide millions of dollars in goods to private businesses and individuals that would share their profits with Lazarenko; diverting millions of United States dollars to their personal use by using fraudulent contracts to purchase goods for state enterprises at inflated prices or to falsify the purchase of goods that were not purchased; and concealing Lazarenko's association with corporations doing business with the local and national governments to deprive Ukraine of the honest services of its employees. Id.

These criminal acts allegedly occurred, in part, in the United States and were conducted in United States dollars through transactions with or through United States financial institutions. Am. Compl. ¶¶ 11, 12. For example, on January 14, 1994, Kiritchenko allegedly transferred approximately $216,000 from his Account Number 61310 in the name of Orphin at American Bank of Poland in Warsaw, Poland, through Chase Manhattan Bank in New York, to Lazarenko's Kato-82 account at Credit Lyonnais in Switzerland. Id. ¶ 31. Similar transfers allegedly were made by Claimant Ditiakovsky, Energy Systems of Ukraine ("UESU") and its affiliates, ITERA International Energy Corporation and its affiliates, Pacific Modern Homes, and Mykhola Agafonov, among others. Id. ¶¶ 34, 36, 40, 43. In addition, persons and businesses alleged to have transferred the proceeds of their fraudulent activities to Lazarenko, such as Agafonov, UESU, United Energy International, Ltd. ("UEIL"), ITERA, and Somolli Enterprises, Ltd., allegedly did so through financial institutions in the United States. Id. ¶¶ 39, 40.

Between 1992 and 1999, Lazarenko and his associates also opened bank accounts in the United States, Switzerland, Antigua, Guernsey, Poland, Liechtenstein and Cyprus, among other countries, and allegedly transferred the proceeds of their criminal acts into and out of these accounts in an effort to conceal or disguise the nature, origin, location, source, ownership or control of these proceeds and property. Am. Compl. ¶ 13. For example, criminal proceeds deposited into accounts in the name of Kato-82 and Lip Handel in Switzerland allegedly were transferred to the United States and back to other Swiss accounts, such as Carpo-53 and Nihpro. Id. ¶ 61. Payments received in Kiritchenko's accounts in Switzerland and Poland were also allegedly transferred across the United States boundaries and in and out of United States financial institutions into accounts in Switzerland. Id. ¶¶ 31, 36, 50, 88. Lazarenko and his associates conducted these transactions in United States dollars. Id.

In 1997, in part through negotiations that allegedly occurred in part in the United States, Lazarenko and Kiritchenko allegedly purchased a controlling interest in an Antiguan bank, the European Federal Credit Bank ("Eurofed"), in order to further conceal or disguise the nature, origin, location, source, ownership or control of the proceeds of their criminal acts. Am. Compl. ¶¶ 14, 66. Their ownership and control of Eurofed, which maintained depositors' funds not in Antigua, but primarily at investment accounts and correspondent accounts in the United States, allowed the defendant properties to be maintained at financial institutions in the United States while appearing to be on deposit in Antigua. Id. ¶¶ 66-67, 70-75.

On June 3, 2004, a jury in the United States District Court for the Northern District of California found Lazarenko guilty on 29 criminal counts. Am. Compl. ¶¶ 17, 18. The jury's verdict included specific findings that Lazarenko engaged in a conspiracy to launder the proceeds of foreign extortion, wire fraud, and illegal transportation through the United States of property stolen or taken by fraud. Am. Compl. ¶ 18. After the trial judge granted in part and denied in part Lazarenko's motion for a judgment of acquittal under Rule 29 of the Federal Rules of Criminal Procedure, Lazarenko stands convicted of eight counts of money laundering and money laundering conspiracy, five counts of wire fraud, and one count of interstate transportation of property stolen, converted or taken by fraud. See Opp. at 9-10 and 10 n.2; Docket, Criminal No. 00-00284, N.D.Cal.*fn4 Kiritchenko pled guilty in the United States to the receipt or transportation of property stolen, converted or taken by fraud. Am. Compl. ¶ 19; Opp. at 10.

In June 2000, "a Swiss court convicted Lazarenko of money laundering after Lazarenko accepted charges of money laundering related to abuse of power committed to the detriment of Ukraine." Am. Compl. ¶ 16. In addition, Lazarenko has been charged in Ukraine with abuse of public office. Id. ¶ 15. The defendants in rem in this case were obtained based on some of the conduct that led to Lazarenko's indictments and convictions and are currently located in foreign bank accounts in Guernsey, Antigua & Barbuda, Switzerland, Lithuania, and Liechtenstein. Id. ¶¶ 1, 17-19.

B. Overview of Claims

The United States brings eight claims for forfeiture falling into two general categories. The First, Second, Third and Fourth Claims for Relief allege the direct forfeiture of criminal proceeds pursuant to 18 U.S.C. § 981(a)(1)(C), which provides for the direct forfeiture of proceeds from violation of certain enumerated criminal statutes or any offense constituting "specified unlawful activity" as defined in 18 U.S.C. § 1956(c)(7). See Am. Compl. ¶¶ 120-139. The Fifth, Sixth, Seventh and Eighth Claims for Relief allege forfeiture of property involved in money laundering violations pursuant to 18 U.S.C. § 981(a)(1)(A), which provides for the forfeiture of any property involved in or traceable to a violation of the money laundering provisions of 18 U.S.C. §§ 1956 and 1957. Am. Compl. ¶¶ 140-155. The United States argues that all of the defendant properties are forfeitable under either theory. Claimants argue both that the Court lacks subject matter jurisdiction and that the government has failed to state a claim with respect to each claim.

1. Section 981(a)(1)(C) Direct Forfeiture Claims

The direct forfeiture claims, brought under 18 U.S.C. § 981(a)(1)(C), allege that the defendant properties are the proceeds of four offenses occurring, in part, in the United States or affecting the interstate or foreign commerce of the United States, and two foreign offenses for which direct forfeiture is specifically authorized by law. Under 18 U.S.C. § 981(a)(1)(C), the following property is subject to forfeiture to the United States:

Any property, real or personal, which constitutes or is derived from proceeds traceable to a violation of section 215, 471, 472, 473, 474, 476, 477, 478, 479, 480, 481, 485, 586, 487, 488, 501, 502, 510, 542, 545, 656, 657, 842, 844, 1005, 1006, 1007, 1014, 1028, 1029, 1030, 1032, or 1344 of this title or any offense constituting "specified unlawful activity" (as defined in section 1956(c)(7) of this title), or a conspiracy to commit such offense.

The four offenses for which a part of the criminal conduct allegedly occurred in the United States are: interstate transportation or receipt of property stolen or taken by fraud in violation of 18 U.S.C. §§ 2314 and 2315 (First Claim); Hobbs Act extortion in violation of 18 U.S.C. § 1951 (Second Claim); and wire fraud, including property and honest services fraud, in violation of 18 U.S.C. §§ 1343 and 1346 (Third Claim). The two foreign offenses for which direct forfeiture is alleged and authorized by law are: an offense against a foreign nation of extortion, and an offense against a foreign nation of bribery of a public official, misappropriation, theft, or embezzlement of public funds by or for the benefit of a public official; these offenses are enumerated in 18 U.S.C. §§ 1956(c)(7)(B)(ii) and (iv) (Fourth Claim).

2. Section 981(a)(1)(A) Money Laundering Forfeiture Claims

The money laundering forfeiture claims, brought under 18 U.S.C. § 981(a)(1)(A), allege that the defendant properties were involved in or are traceable to property involved in money laundering transactions or attempted money laundering transactions. The violations of money laundering law alleged in the complaint include: conduct designed to conceal the nature, location, source, ownership or control of proceeds of a specified unlawful activity under 18 U.S.C. § 1956(a)(1)(B)(i) (Fifth Claim); international transportation, transmission or transfer of proceeds of a specified unlawful activity under 18 U.S.C. § 1956(a)(2)(B)(i) (Sixth Claim); engaging in or attempting to engage in monetary transactions affecting interstate or foreign commerce with more than $10,000 in proceeds of a specified unlawful activity under 18 U.S.C. § 1957 (Seventh Claim); and conspiracy to engage in money laundering under 18 U.S.C. § 1956(h) (Eighth Claim). The United States alleges the same four predicate offenses occurring, in part, in the United States, and the same foreign extortion predicate as in its direct forfeiture claims as a basis for the money laundering allegations. Foreign official bribery, misappropriation, theft, or embezzlement, as enumerated under 18 U.S.C. § 1956(c)(7)(B)(iv), is not alleged as a basis for money laundering forfeiture.

II. DISCUSSION

A. Subject Matter Jurisdiction

Claimants argue that the complaint must be dismissed pursuant to Rule 12(b)(1) of the Federal Rules of Civil Procedure for lack of subject matter jurisdiction because: (1) there is no statutory or non-statutory basis for exercising jurisdiction in this case; (2) the ex post facto clause bars the retroactive application of statutory jurisdiction based on statutes that were not part of the civil forfeiture statute at the time of the alleged offenses, but were incorporated later; and (3) the money laundering statutes, 18 U.S.C. §§ 1956 and 1957, do not provide a basis for subject matter jurisdiction. Mot. at 6-16.*fn5 The United States maintains that the Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1355 and 18 U.S.C. §§ 981(a)(1)(A) and 981(a)(1)(C). The United States, as the plaintiff in this case, bears the burden of establishing by a preponderance of the evidence that the Court has subject matter jurisdiction. See Kokkonen v. Guardian Life Ins. Co., 511 U.S. 375, 377 (1994); Moms Against Mercury v. Food and Drug Admin., 482 F.3d 824, 828 (D.C. Cir. 2007) (citing Georgiades v. Martin-Trigona, 729 F.2d 831, 833 n.4 (D.C. Cir. 1984)).

This Court has original jurisdiction "of any action or proceeding for the recovery or enforcement of any fine, penalty, or forfeiture, pecuniary or otherwise, incurred under any Act of Congress, except matters within the jurisdiction of the Court of International Trade [setting forth exception under 18 U.S.C. § 1582]." 28 U.S.C. § 1355(a).*fn6 The Court therefore must turn to the question of what statutory authority exists for this Court to exercise subject matter jurisdiction over the defendant properties. As already noted, ...


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