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BCCI HOLDINGS, SOCIETE ANONYME v. PHARAON

March 19, 1999

BCCI HOLDINGS (LUXEMBOURG), SOCIETE ANONYME, ET AL., PLAINTIFFS,
v.
GHAITH R. PHARAON, DEFENDANT.



The opinion of the court was delivered by: Stein, District Judge.

OPINION AND ORDER

Plaintiffs BCCI Holdings (Luxembourg) Societe Anonyme ("BCCI Holdings"), Bank of Credit and Commerce International Societe Anonyme ("BCCI S.A."), Bank of Credit and Commerce International (Overseas) Limited ("BCCI Overseas"), and International Credit and Investment Company (Overseas) Limited ("ICIC Overseas") (collectively, the "BCCI Group"), brought this action against defendant Ghaith R. Pharaon, a Saudi Arabian businessman and major shareholder in the BCCI Group, asserting claims for (1) violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq., (2) common law fraud, and (3) collection on a personal guaranty executed by defendant in favor of BCCI Overseas.

Defendant has moved pursuant to Fed.R.Civ.P. 12(c) for judgment on the pleadings dismissing the complaint. Plaintiffs have moved for partial summary judgment on the RICO claims (Counts I to IV of the complaint) by reason of estoppel, based on the alleged preclusive effect of the final decision rendered by the Board of Governors of the Federal Reserve System in In the Matter of Ghaith R. Pharaon, No. 91037-E-I1, 91-037-CMP-I1 (January 31, 1997) (finding that Pharaon participated in violations of the Bank Holding Company Act by the BCCI Group and fining him $37 million), aff'd sub nom. Pharaon v. Board of Governors of the Fed. Reserve Sys., 135 F.3d 148 (D.C.Cir.), cert. denied, ___ U.S. ___ 119 S.Ct. 371, 142 L.Ed.2d 307 (1998), and the underlying recommended decision containing findings of fact and conclusions of law issued by an administrative law judge ("ALJ") on April 12, 1996. For the reasons that follow, defendant's motion is granted and plaintiffs' motion is denied because plaintiffs lack standing to bring the RICO claims alleged in this litigation. Absent standing on the RICO claim, this Court declines to exercise its supplemental jurisdiction over the remaining state law claims, which, accordingly, are also dismissed.

Background

This action stems from Pharaon's alleged participation in a complex scheme through which the BCCI Group, using Pharaon as an undisclosed "nominee," secretly acquired control of Independence Bank, a medium-sized California lender. As part of this alleged scheme, Pharaon and the BCCI Group's prior management obtained deposit insurance for deposits at Independence Bank from the Federal Deposit Insurance Corporation ("FDIC") through fraudulent means. The scheme also entailed the creation of Baldwin Holdings S.A., a Panamanian corporation, to acquire problem real estate assets from Independence Bank and thus allow the bank to continue to perpetrate the alleged fraud. Defendant and the BCCI Group's prior management also allegedly agreed that the BCCI Group would fund Baldwin Holding's acquisition of these assets through a $17.9 million loan which defendant is claimed to have personally guaranteed. The loan has not been repaid. In 1992, Independence Bank was placed in receivership by the FDIC, which has paid approximately $100 million in insured deposit claims as a result of the bank's failure. The FDIC has also filed claims in the worldwide BCCI Group liquidations for over $114 million.

In a September 1991 Notice of Assessment, the Board of Governors of the Federal Reserve System charged defendant with participating — along with BCCI — in the fraudulent acquisition of Independence Bank in violation of section 3(a) of the Bank Holding Company Act, which makes it unlawful for a company to become a bank holding company without the Board of Governors' approval. 12 U.S.C. § 1842(a)(1) (1994). The Notice also charged that during the period in which the BCCI Group controlled Independence Bank, the BCCI Group — in the annual reports it was required to submit to the Board of Governors as a foreign bank, see id. § 3106(a) — concealed its control of Independence in violation of section 5(c) of the Act. Id. § 1844(c). The Notice charged Pharaon pursuant to the Act's individual liability provision, section 8(b), 12 U.S.C. § 1847(b), and proposed a $37 million civil penalty.

Following a hearing, the ALJ, on April 12, 1996, issued a recommended decision in favor of the Board. The Board adopted the ALJ's recommended decision on January 31, 1997, and the United States Court of Appeals for the District of Columbia Circuit affirmed that determination. Pharaon v. Board of Governors of the Fed. Reserve Sys., 135 F.3d 148 (D.C.Cir.), cert. denied, ___ U.S. ___, 119 S.Ct. 371, 142 L.Ed.2d 307 (1998).

Plaintiffs' court appointed fiduciaries filed this action on April 26, 1994, alleging RICO violations (Counts I — IV) and common law fraud (Count V), and bringing a claim for collection on the personal guaranty allegedly executed by defendant in favor of BCCI Overseas (Count VI). All of these claims for relief concern the same events that were the focus of the Board of Governors' action against defendant. In addition, the court appointed fiduciaries have already pled guilty on behalf of the BCCI Group to criminal RICO violations, including the same alleged racketeering acts that form the basis of the complaint in this case. These motions followed.

I. Defendant's Motion for Judgment on the Pleadings

A. The allegations in the complaint

The scheme alleged in the complaint is as follows:

During the early and mid-1980's, the BCCI Group's founder and Chairman, Agha Hasan Abedi, and its Vice President, Swaleh Naqvi, sought to acquire a bank in the United States. Believing, however, that the BCCI Group could not obtain approval from the Board of Governors of the Federal Reserve System to purchase a bank in its own name,*fn1 the BCCI Group decided to use a nominee — Pharaon — "to circumvent regulatory requirements." (Compl. §§ 26-29).

In November 1994, BCCI Group employees provided a letter of intent to Independence Bank confirming the willingness of an unnamed purchaser to acquire all of the bank's shares for a price not to exceed $23 million. BCCI Group's employees always refused to identify the purchaser. (Compl. ¶ 28).

At around the same time — allegedly in an effort to lend the appearance of legality to the relationship between defendant and the BCCI Group — Naqvi and Pharaon signed an "Investment Advisory Agreement" and had it back-dated to August 1, 1984. This agreement provided that in return for advice with respect to the acquisition of a United States bank, Pharaon would pay BCCI S.A. an annual fee of $25,000 and a fee of 1 percent of the purchase price of a bank. The complaint alleges, however, that no payments were ever made pursuant to the agreement. (Compl. ¶ 29).

Between November 30, 1984 and April 30, 1985, BCCI Group officers and employees negotiated the terms of the sale of Independence Bank with representatives of the bank's owner. During that period, BCCI Group officers and employees always led Independence Bank to believe that Pharaon was the proposed purchaser. U.S. counsel — purporting to represent Pharaon with respect to the Independence Bank acquisition — allegedly communicated solely with BCCI Group officers and employees, and obtained all information provided to U.S. regulatory authorities from the BCCI Group. (Compl. ¶ 30).

On April 30, 1985, Pharaon executed a "Stock Purchase Agreement" with the owner of Independence Bank, pursuant to which Pharaon agreed to pay $23 million for all voting shares of Independence Bank. (Compl. ¶ 31). The Stock Purchase Agreement also provided that Pharaon would place a good faith deposit of 10 percent of the purchase price — $2.3 million — in an escrow account with a bank in Geneva. The BCCI Group, however, as it would with all payments toward the purchase of Independence Bank, provided the funds for this deposit via a June 24, 1995 wire transfer from BCCI Overseas Grand Cayman, through ...


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