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United States District Court, S.D. New York

February 1, 2005.

OSRECOVERY, INC., et al., Plaintiffs,

The opinion of the court was delivered by: LEWIS KAPLAN, District Judge


Defendant Parex Bank ("Parex") moves to dismiss the third amended complaint ("Complaint") for, among other things, lack of subject matter jurisdiction.*fn1

At the center of this lawsuit is an alleged scheme involving the sale of a non-existent gold-backed Internet currency ("OSGold") and the operation of a massive Ponzi scheme disguised as a high-yield investment program ("OSOpps"). According to the Complaint, Parex, which is organized and has its principal place of business in Latvia, facilitated the fraud by providing banking services to certain key defendants. Cpt. ¶¶ 24, 144-65. Parex allegedly provided these defendants with anonymous debit cards, which the defendants in turn distributed to OSGold and OSOpps account holders. Id. ¶¶ 145, 150. The debit cards allegedly were linked to Parex bank accounts controlled by the defendants, making it possible for the defendants to steal cardholders' funds undetected. Id. ¶ 157. Plaintiffs are residents of "numerous jurisdictions from around the world, including the United States." Id. ¶ 14.

  The Complaint asserts claims against Parex under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1962(a)-(d), as well as various state law claims. The alleged bases for jurisdiction are the federal question presented by the RICO claims, see 28 U.S.C. § 1331, as well as supplemental jurisdiction, see 28 U.S.C. § 1367. Page 2

  Standards Governing Motion to Dismiss

  On a Rule 12(b)(1) motion to dismiss for lack of subject matter jurisdiction, a court "need not accept as true contested jurisdictional allegations." Jarvis v. Cardillo, No. 98 Civ. 5793 (RWS), 1999 WL 187205, at *2 (S.D.N.Y. Apr. 5, 1999). Instead, it "may resolve disputed jurisdictional fact issues by reference to evidence outside the pleadings, such as affidavits." Filetech S.A. v. Fr. Telecom S.A., 157 F.3d 922, 932 (2d Cir. 1998) (quoting Antares Aircraft, L.P. v. Fed. Republic of Nigeria, 948 F.2d 90, 96 (2d Cir. 1991)). The party seeking to invoke the subject matter jurisdiction of the court bears the burden of demonstrating that such jurisdiction exists. Scelsa v. City Univ. of New York, 76 F.3d 37, 40 (2d Cir. 1996).

  Extraterritorial Reach of RICO

  As RICO is silent about extraterritorial application, courts determining the statute's extraterritorial reach look for guidance to tests developed in securities and antitrust cases. E.g., North South Fin. Corp. v. Al-Turki, 100 F.3d 1046, 1051-52 (2d Cir. 1996). Regardless of the test used, the ultimate inquiry is whether "Congress would have wished the precious resources of United States courts and law enforcement agencies to be devoted to [foreign transactions] rather than leave the problem to foreign countries." Id. at 1052 (quoting Bersch v. Drexel Firestone, Inc., 519 F.2d 974, 985 (2d Cir.), cert. denied, 423 U.S. 1018 (1975)).

  In securities cases, two alternative tests are used to determine the extraterritorial reach of securities laws: the conduct test and the effects test. E.g., id. (citing Itoba Ltd. v. LEP Group PLC, 54 F.3d 118, 121-22 (2d Cir. 1995), cert. denied, 516 U.S. 1044 (1996)). Under the conduct test, jurisdiction exists only "where conduct material to the completion of the fraud occurred in the United States" and that conduct "directly caused" the loss. E.g., id. (quoting Psimenos v. E.F. Hutton & Co., 722 F.2d 1041, 1046 (2d Cir. 1983)). The effects test, by comparison, confers jurisdiction "whenever a predominantly foreign transaction has substantial effects within the United States." E.g., id. (quoting Consolidated Gold Fields PLC v. Minorco, S.A., 871 F.2d 252, 261-62 (2d Cir. 1989)).

  In antitrust cases, before Congress spoke on the issue, courts adopted a slightly different version of an effects test. Under that test, the Sherman Act reached conduct abroad only if the conduct "was meant to produce and did in fact produce some substantial effect in the United States." Hartford Fire Ins. Co. v. California, 509 U.S. 764, 796 (1993).*fn2 Page 3

  Allegations Against Parex

  The Complaint does not identify any acts by Parex in the United States that were related to the fraud. The only allegations of U.S. conduct by Parex in the Complaint are that it held accounts at New York banks and that it employed a "representative" in New York. See Cpt. ¶ 24. But there is no indication that Parex used these bank accounts or this representative in connection with the fraud rather than for general business purposes. Plaintiffs' motion papers point to various wire transfers between Parex and other defendants involving New York bank accounts in support of their claim of jurisdiction. See Parex Mem. 22-23; Mancini Aff. Ex. 5. But they do not allege that these wire transfers were material to the fraud or directly caused plaintiffs' losses. Thus, the existence of Parex accounts in New York, the presence of its representative here and the wire transfers, whether considered individually or collectively, do not satisfy the conduct test.

  Nor do plaintiffs adequately allege that Parex's activities had effects in the United States. As Parex correctly points out, the Complaint is devoid of any allegations that domestic plaintiffs held Parex debit cards or otherwise were injured by Parex.

  Plaintiffs respond by arguing that injuries suffered by "American citizens [who] were solicited by partners and agents of Parex Bank while in the United States" were effects sufficient to subject Parex to suit here. See Parex Mem. 22 (citing Cpt. ¶¶ 38-40). But the portion of the Complaint upon which they rely do no more than describe the scheme in conclusory terms. See Cpt. ¶¶ 38-40. They do not suggest that American plaintiffs were injured here by RICO violations committed by Parex. Indeed, plaintiffs have submitted no evidence that would support a finding that domestic plaintiffs held Parex debit cards or otherwise were injured by Parex.*fn3

  Accordingly, plaintiffs have not established a basis for subject matter jurisdiction over plaintiffs' RICO claim against Parex under the conduct test or either of the effects tests.*fn4 As the federal claim against Parex is being dismissed prior to trial, the Court declines to exercise Page 4 supplemental jurisdiction over the state law claims.*fn5


  For the foregoing reasons, Parex Bank's motion to dismiss [docket item 176] for lack of subject matter jurisdiction is granted without leave to replead.*fn6 Plaintiffs' application to the Court, by letter dated December 7, 2004, to convert defendant's motion into a motion for summary judgment is denied as moot.


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