Bank of China, NY Branch v. NBM L.L.C., et al. (11/15/2005)

Question presented: Did the 2nd Circuit Court of Appeals err when it held that civil RICO plaintiffs alleging mail and wire fraud as predicate acts must establish "reasonable reliance" under 18 U.S.C. sec. 1964(c)?

BY BRIAN BENNETT, MEDILL NEWS SERVICE

The Bank of China alleged that in 1991, John Chou and Sherry Liu began an elaborate scheme to defraud the bank that included huge sums of money being borrowed through false and misleading representations and forged documents.

The Bank of China claimed that the married couple defaulted on loan obligations, converted the borrowed funds into different currencies and transferred the funds into accounts that were represented as those of independent businesses. The Bank of China claimed the accounts were not independent, but controlled by Chou and Liu as part of the scheme.

The borrowed funds were falsely represented to the Bank of China to be "trade debt" owed to Chou and Liu, which created the appearance that the "third-party businesses" were thriving and had cash flows to sustain the borrowing limits set by the Bank of China. The borrowed funds were also disguised as collateral for further loans, creating further indebtedness to the bank.

Additional money was drawn down against letters of credit issued under the presentation of false and forged documents for non-existent transactions.

Finally, the Bank of China alleged Patrick Young, a former deputy manager of the bank, accepted bribes in exchange for handling the fraudulent exchanges between the accused and the bank.

Young was paid a $120,000 bribe to make false representations and submit false representations to Bank of China management. Young was convicted and served 10 months in prison.

Chou and Liu were also criminally prosecuted and convicted for their roles in the fraud. Chou was sentenced to 46 months in prison, while Liu was sentenced to five months in jail and five months in home confinement.

At the time of the scheme's collapse in 2000, the Bank of China estimated that it had over $85 million in loans outstanding to Chou, Liu and the businesses they controlled. The Bank of China was able to recover approximately $50 million in collateral, leaving the bank with losses exceeding $34 million.

In February 2001, the Bank of China filed suit in the U.S. District Court for the Southern District of New York against NBM L.L.C., Yang Mei Corp., GEG International Inc., BOC Co., Non-Ferrous BM Corp., Shumin Wang, John Chou, Dao Zhong Liu, CBL Ltd., Century Ltd and Patrick Young (NBM).Young would not join in any of the further appeals.

In the suit, the Bank of China alleged that the defendants breached contracts, committed fraud, violated the Racketeer Influenced and Corrupt Organizations (RICO) Act, breached fiduciary duty and received unjust enrichment at the bank's expense.

In September 2002, a jury found that the Bank of China had been defrauded, that the defendants had been unjustly enriched at the expense of the bank and that the RICO Act had been violated. Furthermore, the jury found that NBM L.L.C. and Yang Mei Corp. breached loan agreements with the bank, that Young had breached his fiduciary duties to the bank, and that Chou, Liu, NBM L.L.C., Yang Mei Corp., BOC Co. and RCHFINS Inc. aided and abetted Young in breaching those fiduciary duties.

The Bank of China was awarded $35.4 million in compensatory damages and a total of $96.4 million in punitive damages.

An appeal to the 2nd Circuit Court of Appeals included alleged defects in jury instructions.

In February 2004, a unanimous 2nd Circuit panel reversed and remanded the case for retrial. Its principal basis for reversing was that the District Court had not instructed the trial jury that in determining whether the defendants had committed a civil RICO violation, the jury must consider and determine whether or not the Bank of China reasonably relied on the defendant's misrepresentations.

A civil RICO action differs from a criminal bank fraud prosecution in that in a criminal case, the government need not prove any individual or institution relied on the defendant's purported misrepresentations, the 2nd Circuit concluded.

On the final day of jury instruction, the District Court told jurors that the Bank of China may have been defrauded even if individuals in places of high ranking in the bank, such as Patrick Young, knew of the "true nature of the transactions in question."

By giving such instructions, NBM argued, the District Court had undermined their argument that the fraud was in fact sanctioned by a bank officer and therefore the Bank of China would not have reasonably relied on the defendants' misrepresentations. Put simply, the instructions may have relieved the Bank of China of showing part of its burden of proof.

On June 27, 2005, on the final day of its 2004-05 term, the U.S. Supreme Court accepted review in the case, limiting review to whether civil RICO plaintiffs alleging mail and wire fraud as predicate acts must establish "reasonable reliance."

The Bank of China maintains that the scheme carried out by Chou and Liu is a "conspiracy, with its sophisticated, continuous, and corrupt manner of operation" and that the language of RICO itself contains no requirement that a victim must prove "reasonable reliance" upon a misrepresentation before it may prevail in a civil suit.

On Nov. 15, 2005, a couple of months before the case was to be argued orally, the Court dismissed the case.