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Lasala v. Bank of Cyprus Public Co. Limited

August 15, 2007

JOSEPH P. LASALA AND FRED S. ZEIDMAN, AS CO-TRUSTEES OF THE AREMISSOFT CORPORATION LIQUIDATING TRUST, PLAINTIFF,
v.
BANK OF CYPRUS PUBLIC COMPANY LIMITED DEFENDANT.



The opinion of the court was delivered by: Haight, Senior United States District Judge

MEMORANDUM OPINION AND ORDER

In this diversity action, plaintiffs seek to hold defendant Bank of Cyprus Public Company Limited ("Bank of Cyprus" or "the Bank") responsible for its alleged role in connection with a massive "pump and dump" scheme perpetrated by two corporate insiders of a software company, who fraudulently inflated the company's value and then sold their shares and funneled these funds through banks in Cyprus and elsewhere. In this motion defendant seeks to dismiss the complaint on three separate grounds: (1) forum non conveniens; (2) preemption of the claims by the Securities Litigation Uniform Standards Act, 15 U.S.C. §§ 77, 78 ("SLUSA"); and (3) failure to state a claim upon which relief may be granted pursuant to Fed. R. Civ. P. 12(b)(6). For the following reasons, I dismiss the complaint on the ground of forum non conveniens.

I. BACKGROUND

A. The Scheme Perpetrated by Kyprianou and Poyiadjis

Much of the following account is drawn from the Amended Complaint (the "complaint"), whose well-pleaded factual allegations are taken as true on this motion. AremisSoft Corporation ("AremisSoft" or "the Company") was a software company, incorporated in Delaware, whose main business was development and sale of computer software technology. Compl. ¶ 9. From about 1998 through July of 2001, Lycourgos Kyprianou and Roys Poyiadjis, two officers of the Company,*fn1 caused the Company to issue false public statements and regulatory filings representing to the public that it was experiencing rapid growth when in fact its growth nowhere neared the stated revenues. Id. ¶ 20. The two men caused AremisSoft to announce publicly that it had acquired other software companies of significant value, when, in reality, the companies were small and had been acquired for much less than the announced price. They fabricated records in support of these falsehoods. Id.

The effect of these fraudulent misrepresentations was that the value and profitability of the Company were perceived to be much greater than they actually were, and consequently the price at which the Company's shares were traded on the open market was artificially high. Kyprianou and Poyiadjis sold their shares at these inflated prices to investors who were not privy to their knowledge concerning the true value of the Company. Kyprianou also looted money directly from AremisSoft by converting tens of millions of dollars from AremisSoft to his own accounts. Id. ¶ 4.

By May 2001 attention began to be focused on AremisSoft for reporting inflated income. On May 17, the New York Times reported that the true value of an AremisSoft contract with the Bulgarian government was not the $37.5 million claimed by the Company but rather less than $4 million. Id. ¶ 24. By May 24, 2001, at least one class action lawsuit against AremisSoft and its directors had been filed. Id. On July 31, 2001, the day after AremisSoft was due to release its second quarter 2001 earnings, the Company announced that Kyprianou had resigned and that it was delaying the earnings release. On July 31, 2001, the Company was delisted from NASDAQ. Id. On or about October 4, 2001, the SEC sued Kyprianou and Poyiadijs in a civil injunction action, alleging that they had sold millions of shares of their AremisSoft stock in violation of U.S. securities laws. Id. ¶25. In an action before this Court, the SEC succeeded in freezing $175 million of Poyiadjis's proceeds lodged in bank accounts in the Isle of Man. In December 2001, an indictment was obtained against Poyiadjis in the Southern District of New York, and in June 2002, a superseding indictment was returned against Kyprianou, Poyiadjis, and M.C. Mathews, the top AremisSoft executive in India, on counts of securities fraud and money laundering, and conspiracy to commit both crimes. Id. ¶¶ 26, 29. On March 15, 2002, AremisSoft filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code. Id. ¶ 27.

B. The Parties

Neither the swindlers or any of their co-conspirators, whose acts of fraud and theft are undisputed, are parties to this case. Kyprianou is in Cyprus, and Poyiadjis is awaiting sentencing in this Court, having pleaded guilty to fraud. See United States v. Poyiadjis et al., 01 Cr. 1177, 2002 WL 1941481 (S.D.N.Y. Aug. 21, 2002). Defendant is a banking corporation with its principal place of business in Nicosia, Cyprus. Decl. Louis Pochanis in Supp. Def.'s Mot. Dismiss, dated Nov. 30, 2006 ("Pochanis Decl."), at ¶¶ 1, 4. The Bank operates 146 branches in Cyprus and is the leading financial services organization in Cyprus, with a market share in total banking system deposits and loans in Cyprus of over 25%. Id. ¶ 4. The Bank also operates more than 240 branches worldwide and maintains correspondent relationships with more than 2300 banks, which allow the Bank to engage in transactions in United States currency. See Compl. ¶¶ 12, 14. The Bank maintains a representative office in New York. Id. ¶ 11.

AremisSoft was a depositor of the Bank of Cyprus. Plaintiffs are co-trustees of the AremisSoft Corporation Liquidating Trust (the "Trust"), a Delaware trust formed pursuant to three orders by District Judge Pisano of the District of New Jersey in connection with AremisSoft's voluntary bankruptcy: (1) a July 2002 order confirming the First Amended Joint Plan of Reorganization of AremisSoft ("Plan of Reorganization"); (2) an August 2002 order approving a Class Action Settlement with AremisSoft; and (3) an August 2002 order correcting the Order and Final Judgment previously entered in respect of AremisSoft's Chapter 11 bankruptcy petition. Id. ¶ 5. The governing documents for the Trust are the Plan of Reorganization and the Liquidating Trust Agreement ("Trust Agreement").

This action seeks to pursue some of the claims assigned to the Trust. The Trust was assigned four categories of assets: (1) AremisSoft's pre-confirmation causes of action; (2) causes of action arising under the Bankruptcy Code; (3) proceed assets irrevocably transferred to the Trust pursuant to the Plan; and (4) investor claims. Pl.'s Mem. in Opp'n, at 4. The Trust beneficiaries are Softbrands, Inc., the successor corporation into which all the viable operating assets of AremisSoft were vested, and the former AremisSoft investors. Id. at 14. Plaintiffs state in their brief that "[w]hile the Trust is authorized to pursue litigation on behalf of its beneficiaries, including Softbrands -- which, notably, is not a former investor but the corporate successor of AremisSoft -- it also engages in other non-litigation activities consonant with those of any other post-confirmation trust. These activities include the collection of assets, liquidation of those assets, investment of the liquid assets, and distribution of the net proceeds to the Trust beneficiaries." Id.

C. The Allegations Against the Bank

This case, along with the related cases filed by the plaintiff Trustees against UBS, AG ("UBS") and Lloyds TBS Bank, PLC ("Lloyds"),*fn2 turns on the role of a bank in facilitating the fraud and/or the money laundering of one or both of the swindlers and their co-conspirators. In the captionedcase against the Bank of Cyprus, Kyprianou is the central villain. The gravamen of the complaint is that "Defendant, knowingly and in breach of its duties and obligations to AremisSoft Corporation ('AremisSoft' or the 'Company') as its depositor, allowed AremisSoft's former Chairman and CEO Lycourgos Kyprianou ('Kyprianou') to loot Company assets for Kyprianou's personal gain and benefit and to launder through bank accounts at Bank of Cyprus millions of dollars in proceeds of the massive, international fraud Kyprianou and his co-conspirators perpetrated on AremisSoft." Compl. ¶ 2.

The Bank of Cyprus administered at least eight accounts in the name of AremisSoft, as well as numerous accounts for AremisSoft affiliates and other alter ego companies controlled or owned by Kyprianou. Pl.'s Mem. in Opp'n, at 5; Compl. ¶¶ 3, 33-34. The Bank also extended a loan, secured by AremisSoft stock, to one of Kyprianou's alter ego companies. Id. ¶¶ 3, 41.The accounts in question were, in plaintiffs' words, "funded" by AremisSoft's accounts at Commerce Bank in New Jersey, and transactions in and out of them were facilitated by correspondent banks in New York. Pl.'s Mem. in Opp'n, at 5. Kyprianou and his wife also maintained numerous personal accounts at the Bank. Compl. ¶ 36.

The complaint details a number of transactions in which Kyprianou moved funds from AremisSoft accounts into accounts of alter ego companies for which he was the beneficial owner and/or into personal accounts. The following are particular transactions cited by plaintiffs:

o Kyprianou was the beneficial owner of the accounts of Southwood Management Ltd ("Southwood"), an alter ego entity. In 2000, the Southwood accounts at Bank of Cyprus received large deposits that were the proceeds of sales of AremisSoft stock, money which was then transferred to an account at HSBC in London jointly owned by Kyprianou and his wife. Kyprianou also transferred close to $12 million of AremisSoft's corporate cash to Southwood's bank accounts at Bank of Cyprus. Compl. ¶¶ 37, 38, 63; Pl.'s Mem. in Opp'n, at 5.

o Kyprianou controlled at least three bank accounts at Bank of Cyprus in the name of another alter ego entity called Semark Consultancy Services ("Semark"). In 2001, Kyprianou transferred more than $10 million of AremisSoft's corporate cash to these accounts at the Bank of Cyprus. Then he transferred approximately $2.5 million from a Semark account to a personal account held by him and his wife at HSBC in London. Compl. ¶¶ 39, 67-68; Pl.'s Mem. in Opp'n, at 6.

o In December 2000, Kyprianou caused $10.9 million to be transferred from one of AremisSoft's Bank of Cyprus accounts to an account in the name of Still & Life, an Austrian company whose accounts at Bank of Cyprus he controlled, "purportedly for the purchase of an India-based software company known as E-ChaRM." Pl.'s Mem. in Opp'n, at 6. Kyprianou had, however, already purchased the company for only $290,000. Compl. ¶ 49. That same day, Kyprianou instructed the Bank to transfer nearly all the money from the Still & Life account to one of the Semark accounts, for which he had signing authority. See Pl.'s Mem. in Opp'n,at 6-7; Compl. ¶¶ 42-44, 51.

o In December 2000, Kyprianou also caused $7.34 million to be transferred from one of AremisSoft's Bank of Cyprus accounts to an account in the name of Denon at Bank of Cyprus, "purportedly for purchase of a Dubai-based software company." Pl.'s Mem. in Opp'n,at 7. Kyprianou had, however, already acquired the company for only $250,000. Compl. ¶ 54. That same day, approximately $7.4 million was transferred from the Denon account to a Southwood Bank of Cyprus account. See id. ¶¶ 54-57.

o Even after HSBC terminated its relations with the Kyprianous, the UK branch of the Bank of Cyprus welcomed the Kyprianous and opened accounts in August 2001 for the funds formerly at HSBC. This was three months after media reports appeared concerning the AremisSoft fraud. Id. ¶ 72.

On or about April 9, 2002, Kyprianou transferred £645,534.51 from an account he held at Lloyds TSB Bank in Geneva, Switzerland into one of Mrs. Kyprianou's accounts at Bank of Cyprus. This Lloyds TSB account had allegedly been used by Kyprianou to launder more than $44 million worth of his illegal insider trading proceeds of AremisSoft stock. Id. ¶ 82. That same day, the same amount of money was moved into another Bank of Cyprus account maintained by Mrs. Kyprianou, and the next day it was transferred to yet another account. Id. ¶ 83.

These transactions fall into three categories. In the first, Kyprianou simply looted AremisSoft funds by moving corporate cash into accounts of alter ego companies he controlled. In the second, Kyprianou ferreted away in his own accounts the spread between the amount he told the AremisSoft board he was paying for the companies being acquired and the much lower amount that he actually paid for them. In the third, Kyprianou laundered the proceeds of his illegal insider trading.

Allegedly Bank of Cyprus employees in London voiced concerns in their internal documents about the irregularity of the above transactions in October of 2001. Id. ¶¶ 75-92. Yet, with only minor restrictions, the Bank of Cyprus management did not alter its permissive administration of the accounts. See id. ¶¶ 81, 93. The Bank allegedly serviced the accounts and facilitated transfers for approximately three more years. Id. ¶ 80.

Plaintiffs' allegations against the Bank can be summarized by two paragraphs in the complaint:

For a period of approximately three years, Bank of Cyprus knowingly allowed Kyprianou, and those acting on his behalf, to use its accounts to launder money in furtherance of his fraudulent scheme until the accounts, including the Semark and Southwood accounts, were virtually emptied out in 2004 and 2005.

The numerous transfers made by the Kyprianous through their accounts at Bank of Cyprus bore all the classic hallmarks of money laundering. The activity in the accounts were [sic] especially suspicious in light of the numerous public allegations of fraud against Kyprianou made after May 2001. . . . [F]or no discernible business purpose, significant amounts of money were transferred into and out of many different accounts with great frequency. The sheer volume of the transactions alone raises serious questions concerning the legitimacy of the account activity.

Compl. ¶¶ 73-74.

The Complaint states five counts. Count I alleges that the Bank aided and abetted Kyprianou's breach of fiduciary duty by "knowingly permitting Kyprianou to launder tens of millions of U.S. dollars that represented the proceeds of his insider trading activities." Compl. ¶ 98. Count II alleges that the Bank, of which AremisSoft was a depositor, is liable as a constructive trustee of AremisSoft's assets and of all the accounts in which Kyprianou had a direct or indirect interest. Id. ¶¶ 102, 104, 108. Count III alleges that the Bank breached its contract with AremisSoft through its failure to alert AremisSoft to Kyprianou's money laundering. Id. ¶ 112. Count IV alleges that the Bank breached an implied covenant of good faith and fair dealing through its improper administration of the accounts. Id. ¶ 116. Count V is a claim for negligence stemming from the Bank's alleged failure to exercise ordinary care in the handling of its accounts. Id. ¶¶ 120, 121.

D. The Context of This Lawsuit

Plaintiffs have already instituted legal actions in Cyprus. In July 2005, they sued twelve primary players, including Kyprianou, in the underlying fraud perpetrated on the Company. See Decl. Demetrios Stylianides, in Supp. Def.'s Mot. Dismiss ("Stylianides Decl."), dated Nov. 22, 2006, ¶ 13. Nine of the defendants are alleged either to reside in Cyprus or to have operations there. In January 2006, plaintiffs obtained freezing orders against defendants which relate to a property under the alleged control of defendants, located in London. See id. ¶ 17.

In another action, filed in December 2005, plaintiffs sought discovery against the Bank of Cyprus and three other banks. Id. ¶ 18. This discovery was to be in aid of the main Cyprus action. That application was opposed by the Bank on the basis that it did not assert any substantive claim and also failed to name as necessary parties to the action AremisSoft, Kyprianou, and other persons and entities. Def.'s Mem., at 5; Decl. John Fellas, in Supp. Def.'s Mot. Dismiss, dated Nov. 30, 2006 ("Fellas Decl."), Exs. 4,6, 7. On Aug. 31, 2006, the Cyprus court denied plaintiffs' application, a decision which plaintiffs have appealed. The next day plaintiffs filed this action in New York against the Bank. Def.'s Mem., at 5.

E. Judge Pisano's Decision

Before the present motion to dismiss was filed in this Court, District Judge Pisano dismissed a similar case brought by the same plaintiffs in the District of New Jersey against two private Swiss banks. See LaSala & Zeidman v. Bordier et Cie & Dominick, 452 F. Supp. 2d 575 (D. N.J. 2006). The complaint in that case, like the complaint at bar,alleged a tort cause of action, though plaintiffs had also asserted claims arising out of alleged violations of Swiss statutory provisions. Judge Pisano dismissed all plaintiffs' claims on the ground that the entire action was preempted by SLUSA. Id. at 579-91.

In that case, defendants had filed a separate motion to dismiss on the basis of forum non conveniens and lack of personal jurisdiction, but "contend[ed] that dismissal under SLUSA . . . is a subject matter jurisdiction inquiry pursuant to Rules 12(b)(1) and 12(h)(3)." 452 F. Supp. 2d at 577 n.1.While Judge Pisano noted that the case had been brought on the basis of diversity jurisdiction, he said, "The Court need not resolve whether this motion is properly brought pursuant to Rule 12(b)(1) and/or Rule 12(h)(3)," because the parties agreed that SLUSA would be addressed before other pending motions and the outcome of his SLUSA analysis rendered the other pending motions moot. Id.

SLUSA preemption is certainly a question of subject matter jurisdiction when the case comes to federal court via removal from a state court. See Spielman v. Merrill Lynch et al., 332 F.3d 116, 122-25 (2d Cir. 2003); Aruaujo v. John Hancock Life Ins. Co., 206 F. Supp. 2d 377, 380 (E.D.N.Y. 2002). For claims that fall within SLUSA, the statute preempts actions removed from state courts "by essentially converting a state law claim into a federal claim," Spielman, 332 F.3d at 123, and then mandatingits dismissal. As Judge Lynch of this Court has pointed out, however, the statute contains separate provisions concerning "preemption as a jurisdictional mechanism requiring removal" and "preemption as a defense to state-law claims."Winne v. Equitable Life Assurance Soc. of U.S, 315 F. Supp. 2d 404, 409 (S.D.N.Y. 2003). Preemption therefore appears in SLUSA in the form of both a jurisdictional provision and a failure to state a claim provision. Normally, as Judge Newman pointed out in a concurring opinion in Spielman, the two are "the opposite sides of the same coin." Spielman, 332 F.3d at 132. See also Winne, 315 F. Supp. 2d at 409. The case at bar was not removed from a state court to this Court. Plaintiffs initially filed their complaint in this Court on the basis of diversity of citizenship. In consequence, SLUSA is a preemption defense and, as such, one of a number of preliminary grounds for dismissal, among which a judge has discretion to choose when deciding whether to dismiss a case. See Sinochem Int'l Co. Ltd. v. Malaysia Int'l Shipping Corp., 127 S.Ct. 1184, 1186 (2007) (a federal court "has leeway to choose among threshold grounds for denying audience to a case on the merits") (citation and internal quotation marks omitted). In the exercise of that discretion, I consider first the forum non conveniens ground for dismissal.

II. DISCUSSION

A. Forum Non Conveniens

The doctrine of forum non conveniens permits a court to dismiss an action "even if the court is a permissible venue with proper jurisdiction over the claim." Carey v. Bayerische Hypo-Und Verinsbank AG, 370 F.3d 234, 237 (2d Cir. 2004) (citation omitted). A district court should dismiss a complaint where, on balance, the resolution of the matter in an adequate alternative forum would be more convenient for the parties and courts and more just. See R. Maganlal & Co. v. M.G. Chem. Co., 942 F.2d 164, 167 (2d Cir. 1991) ("The central purpose of a forum non conveniens inquiry is to determine where trial will be most convenient and will serve the ends of justice."). "The first step in a forum non conveniens analysis is for the court to establish the existence of an adequate alternative forum. Second, the court must determine the level of deference to accord the plaintiff's choice of forum. Third, the court must weigh the public and private ...


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