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IN RE BANK OF NEW YORK DERIVATIVE LITIGATION

November 27, 2001

IN RE BANK OF NEW YORK DERIVATIVE LITIGATION.


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

OPINION

In this shareholder derivative action, plaintiffs Mildred and Edward J. Kaliski allege that certain officers and directors of nominal defendants Bank of New York Company, Inc. (the "Company") and its wholly-owned subsidiary Bank of New York ("BONY") committed systemic wrongdoing in the early and mid-1990's when they sought to expand BONY's banking business in Russia. Plaintiffs, however, did not buy their BONY stock until July 21, 1998, well after all or most of the alleged wrongdoing had occurred.

Defendants move to dismiss the complaint on the ground that plaintiffs have not satisfied the contemporaneous ownership requirements of Federal Rule of Civil Procedure 23.1 and New York Business Corporation Law § 626(b), which require a plaintiff to have actually owned stock in the company at the time of the alleged wrongdoing to have standing to bring a shareholder derivative action. Implicitly acknowledging their lack of standing, plaintiffs cross-move to add as a plaintiff in this action another shareholder who did own stock at the time of the alleged wrongdoing.

The existence of a proper client — a plaintiff with standing to sue — is not a mere technicality; the absence of a suitable plaintiff is not a deficiency that can be remedied two years after the fact. Moreover, derivative plaintiffs represented by experienced counsel are pursuing virtually identical claims in a pending state court action. Consequently, to the extent meritorious derivative claims exist, the interests of the shareholders and nominal defendants will be protected in the state court proceedings. For these reasons, as discussed more fully below, defendants' motion is granted and plaintiffs' cross-motion is denied.

BACKGROUND

A. Factual Background

1. The Alleged Wrongdoing

In their amended complaint, plaintiffs allege the following:

BONY expanded into the Russian banking industry in the early and mid-1990's despite governmental and industry warnings of organized crime and corruption. BONY and its shareholders were harmed as a result. (Am. Compl. at ¶¶ 73, 74, 75). BONY's ill-advised expansion was riddled with unlawful tactics, including tax evasion, money laundering, creation of sham banks, and transfer of funds out of Russia and into suspect offshore accounts. (Id. at ¶¶ 116, 118, 122).

In 1990, BONY purchased a 20% stake in Inter-Maritime Bank, Geneva ("IMB"), renaming it Bank of New York, Inter-Maritime Bank ("BONY-IMB"). (Id. at ¶ 54). BONY installed defendant Deno Papageorge ("Papageorge") on the board of BONY-IMB, where he made contact with controlling shareholder Bruce Rappaport ("Rappaport"). (Id. at ¶¶ 51-54, 57). This relationship was the catalyst for BONY's expansion into the Russian correspondent banking business.

BONY's "blind rush" into the Russian banking market was marked by the restructuring of BONY's European Division and the creation of an Eastern European Division. (Id. at ¶¶ 81, 193). Beginning in 1991 or 1992, Natasha Gurfinkel ("Gurfinkel"), the head of the Eastern European division, collaborated with Vladimir Doudkin ("Doudkin"), Deputy Chairman of Inkombank, and others, on a scheme named "Prokutki," or "spinning around." This scheme was designed to conceal the illegal movement of U.S. dollars and other asserts out of Russia. (Id. at ¶ 85). These individuals devised and marketed a "global custody system" to manage the accounts and also commissioned an encryption system to enable the BONY and Inkombank conspirators to communicate in secret. (Id. at ¶¶ 87-88). These events marked the beginning of a complex scheme whereby BONY was used as a central conduit for the wire transfer of funds out of Russia. (Id. at ¶ 91).

Ultimately, the wire transfer scheme involved many banks, and while the scheme was devised between 1992 and 1993, at least some behavior occurred in the later 1990's. Plaintiffs highlight complex tax evasion and capital flight schemes concocted by Gurfinkel, Kotov, and the Moscow International Bank ("MIB") "as early as the spring of 1996 and during the several years thereafter." (Id. at ¶ 116). Plaintiffs describe telephone conversations and meetings among the participants concerning the offshore structure that occurred "from 1993 through 1996 and beyond." (Id. at ¶ 101). Plaintiffs also discuss "multiple computer entries prepared during 1993, 1994, 1995, 1996, and thereafter" that reflect conspirators' shares in the offshore companies through which the stolen money was routed. (Id. at ¶¶ 108, 113).

2. Edwards's Guilty Plea

3. Breaches of Fiduciary Duty

In addition to the illegal activities described above, plaintiffs also allege that the director defendants "failed to fully inform themselves to the extent reasonably appropriate under the circumstances as they ignored multiple, specific warnings issued by governmental, regulatory, and private security forces that the Russian banking system was being infiltrated by organized crime-a fact recognized by other banks in the United States, which began to scale down their Russian operations." (Am. Compl. at ¶ 193). For example, In 1996, Russian Central Bank officials notified BONY executives of specific ongoing investigations of several of their correspondent bank customers for internal investigation. (Id. at ¶ 138). Plaintiffs detail similar alerts from Russian, American and other international sources throughout the 1990's. (Id. at ¶ 123). Plaintiffs also discuss many media reports of corruption in the Russian ...


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