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United States v. Funds on Deposit at Citigroup Smith Barney Account No. 600-00338

September 10, 2007

UNITED STATES OF AMERICA, PLAINTIFF,
v.
FUNDS ON DEPOSIT AT: CITIGROUP SMITH BARNEY ACCOUNT NO. 600-00338 HELD IN THE NAME OF KOBI ALEXANDER AND CITIGROUP SMITH BARNEY ACCOUNT NO. 600-27694 HELD IN THE NAME OF KOBI J. ALEXANDER, DEFENDANTS.



The opinion of the court was delivered by: Nicholas G. Garaufis United States District Judge

MEMORANDUM & ORDER

GARAUFIS, United States District Judge.

Plaintiff United States of America ("Plaintiff" or the "Government") brings this civil forfeiture action against Defendants Citigroup Smith Barney Account No. 600-00338 (the "338 Account") and Citigroup Smith Barney Account No. 600-27694 (the "694 Account") (collectively, "Defendant Accounts"). Jacob "Kobi" Alexander ("Kobi") and, his wife, Hana Alexander ("Hana") (collectively, "Claimants") have filed statements of interest respecting the 338 and 694 Accounts and, as a result, oppose this forfeiture action. The Government has moved, pursuant to Rules 12(b)(1), 12(c), and 56 of the Federal Rules of Civil Procedure, for (1) an order striking Kobi's statement of interest pursuant to the fugitive disentitlement doctrine, and (2) an order dismissing the Claimants' statements of interest on the ground that Claimants lack standing. Kobi and Hana have each submitted a motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure and Rule E(2)(a) of the Supplemental Rules for Certain Admiralty and Maritime Claims.*fn1 At this time, the court considers all parties' motions.

For the reasons set forth below: the Government's motion to strike the Claimants' statements of interest on the ground of lack of statutory standing is denied; the Government's motion to strike Hana's claim on the ground of lack of standing under Article III is held in abeyance pending discovery and further briefing; the Claimants' motion to dismiss is denied but the Government is directed to amend its Complaint; the Government's motion for summary judgment with respect to the fugitive disentitlement issue is granted.

I. BACKGROUND

In theory, addressing the factual and procedural background relevant to the instant motions is complicated by the different standards of review that are attached to motions under Rules 12(b)(1), 12(b)(6), 12(c), 56, and Rule E(2)(a). With respect to Claimants' Rule 12(b)(6) motions, the court must accept all factual allegations in Plaintiff's pleadings as true and must draw inferences from those allegations in the light most favorable to Plaintiff. United States v. The Baylor Univ. Med. Ctr., 469 F.3d 263, 267 (2d Cir. 2006).

With respect to Plaintiff's Rule 12(b)(1) motion, the court must accept all undisputed factual allegations as true and draw all reasonable inferences in the light most favorable to the non-moving party. Robinson v. Malaysia, 269 F.3d 133, 140 (2d Cir. 2001).To the extent the parties dispute facts relevant to Plaintiff's Rule 12(b)(1) motion using evidentiary submissions, the court will considerthe submitted evidence and, if necessary, decide the disputed factual questions. See id. at 140 n.6 (in context of motion to dismiss for lack of subject matter jurisdiction under the Foreign Sovereign Immunities Act, district court "must" consult factual submissions "if resolution of a proffered factual issue may result in the dismissal of the complaint for want of jurisdiction").

When deciding a motion for summary judgment under Rule 56, this court must view the evidence in the light most favorable to the non-moving party and must draw all permissible inferences from the submitted affidavits, exhibits, interrogatory answers, and depositions in favor of that party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986); Vann v. City of New York, 72 F.3d 1040, 1048-49 (2d Cir. 1995). Even in a fact-intensive case, however, the court will not accept as fact mere allegations lacking evidentiary support. Abdu-Brisson v. Delta Air Lines, 239 F.3d 456, 466 (2d Cir. 2001).

In reality, the fact that this section addresses various motions with different standards of review is not problematic. With very few exceptions, the facts material to the motions at issue are undisputed. Where the court makes a factual finding, it will do so explicitly.

The Criminal Action against Kobi

On or about June 21, 2006, Kobi flew from the United States to Israel. (Plaintiff's Statement Pursuant to Local Rule 56.1 ("Pl. 56.1 St.") ¶ 1.)*fn2 At that time, the United States Attorney for the Eastern District of New York (the "USAO" or the "United States Attorney") was investigating whether Comverse Technologies, Inc. ("Comverse" or "CTI") issued backdated stock options and whether Kobi was involved in such a scheme. (Id. ¶ 2.) During July 2006, the USAO had multiple conversations with Kobi's counsel concerning this investigation. (Id. ¶ 3.) Kobi's counsel confirmed that Kobi would return to the United States on July 28, 2006. (Id. ¶ 4; Declaration of Kathleen A. Nandan ("Nandan Decl.") Exh. 3.)

While Kobi's lawyers were representing to the Government that Kobi would return to the United States on July 28, Kobi was wiring significant amounts of money from the 338 Account to Israel. (Id. ¶ 7.) In July 2006, Kobi wired $57,000,000 from the 338 Account (including $7,000,000 that had been wired to the 338 Account from the 694 Account) to accounts in Israel. (Id.)

Kobi did not return to the United States on Friday July 28, 2006. (Id. ¶ 8.) On Monday July 31, 2006, Magistrate Judge Cheryl L. Pollak issued a warrant for Kobi's arrest on the basis of charges related to the alleged backdating scheme. (Id. ¶ 7.) In August 2006, the Federal Bureau of Investigation declared Kobi a fugitive. (Id. ¶ 8.) On September 20, 2006, a Grand Jury indicted Kobi on thirty-two counts, United States v. Jacob Alexander, Indictment No. 06-628 (NGG) (RER). (Id. ¶ 10.) On October 11, 2006, a Grand Jury issued a superseding Indictment and Magistrate Judge Ramon E. Reyes, Jr. issued a new warrant for Kobi's arrest. (Id. ¶ 12.)

On September 27, 2006, Kobi was arrested in Windhoek, Namibia pursuant to a provisional arrest warrant issued by the Namibian courts in response to a request by the United States. (Id. ¶ 11.) The United States' extradition request is currently pending in the Namibian courts. (Id. ¶ 15.)

The Instant Civil Forfeiture Action

On July 31, 2006, the first business day after July 28-the day on which Kobi's counsel assured the USAO that Kobi would return to the United States-the Government filed the instant Verified Complaint In Rem (the "Complaint"). The Complaint alleges that Kobi and the Defendant accounts were involved in Comverse's backdating of stock options:

[Kobi] and others fraudulently back-dated options granted by CTI and, in so doing, made material misrepresentations to the SEC and the investing public. By backdating the options, [Kobi] generated millions of dollars in proceeds. [Kobi] then used the Defendant Accounts to launder the proceeds of the fraud by wiring nearly $60,000,000 to Israel in an attempt to conceal the proceeds from the U.S. authorities. (Compl. ¶ 8.) According to the Complaint, Kobi "and others used fictitious names to generate hundreds of thousands of backdated options, which they then parked in a secret slush fund designed to evade the requirements of CTI's stock option plans. [Kobi] unilaterally awarded options from this slush fund to favored employees." (Id. ¶ 21.) Kobi is also alleged to have "reviewed and approved CTI's proxy statements, annual and quarterly filings, and stock option plans, all of which contained material misstatements designed to conceal the fraudulent backdating scheme." (Id. ¶ 22.) As an example, the Complaint asserts that Comverse's April 30, 2002 Form 10-K inaccurately states that "all options have been granted at exercise prices equal to fair market value on the date of grant." (Id. ¶ 23.)

The Government alleges that Kobi "generated over $138 million in gross proceeds from the backdating scheme." (Id. ¶ 26.) At least some of these proceeds were allegedly placed in the 338 Account. (Id.) The Government also asserts that Kobi transferred money from the 694 Account to the 338 Account, "thereby commingling illegal proceeds with other funds." (Id. ¶ 27.)

The Complaint brings two causes of action. In the first cause of action, the Government claims that the Defendant Accounts were involved in money laundering in violation of 18 U.S.C. § 1956 and, as a result, are subject to forfeiture pursuant to 18 U.S.C. § 981(a)(1)(A). (Compl. ¶¶ 30-31.) In the second cause of action, the Government alleges that the "338 Account contains funds constituting the proceeds of" mail, wire, and securities fraud and, as a result, is subject to forfeiture pursuant to 18 U.S.C. §§ 981(c)(1)(C) and 984. (Compl. ¶ 33.)

On the day this action was filed, July 31, 2006, Magistrate Judge Pollak issued a Warrant for the seizure of the Defendant Accounts. (Nandan Decl. ¶ 10, Exh. 5.) At the time the Defendant Accounts were seized, there was approximately $47 million in the 338 Account and $2.4 million in the 694 Account. (Morvillo Aff. ¶ 9.)

II. DISCUSSION

The Government moves to (1) strike the Claimants' statements of interest on standing grounds and (2) strike Kobi's statement of interest pursuant to the fugitive disentitlement doctrine. Claimants move to dismiss the Complaint pursuant to Rule 12(b)(6) for failure to state a cause of action.

The parties agree that Rule G(8)(c) of the Supplemental Rules requires the court to rule upon the motion to strike for lack of standing before considering the Claimants' motions to dismiss. (Government's Memorandum of Law in Opposition to Claimants' Motion to Dismiss ("Gov't MTD Opp.") at 2; Kobi's Reply Memorandum of Law in Further Support of Kobi's Motion to Dismiss ("Kobi MTD Rep.") at 3.) Rule G(8)(c) provides that a motion to strike a claim for lack of standing "must be decided before any motion by the claimant to dismiss the action." As a result, the court shall consider the motion to strike for lack of standing first.

The question of whether the court should consider the Government's motion for summary judgment on its fugitive disentitlement doctrine claim before Kobi's motion to dismiss is a more difficult question. I do not understand the Government to be asserting that the fugitive disentitlement motion should be considered first. The Government states that "the Court should consider the Claimants' motion [to dismiss] only if it denies the government's motion to strike their claims." (Gov't MTD Opp. at 2.) Although the Government's motion for summary judgment with respect to the fugitive disentitlement issue is contained in motion papers titled "Motion to Strike the Claims Filed by Jacob "Kobi" Alexander and Hana Alexander," in reality, the fugitive disentitlement motion is a different motion on a different ground (fugitive disentitlement versus standing) made pursuant to a different rule (Rule 56 as opposed to Rule 12).

In contrast to the Government's vague argument, Kobi specifically argues that the motion to dismiss should be considered prior to the fugitive disentitlement motion. (Kobi Standing Mem. at 21 n.10; Kobi MTD Rep. at 3.) Kobi also points to a number of cases in this Circuit in which courts considered a motion to dismiss prior to considering fugitive disentitlement. See United States v. 479 Tamarind Drive, No. 98 Civ. 2279 (RLC), 2005 WL 2649001, at *2 n.3, *3 n.5 (S.D.N.Y. Oct. 14, 2005) (court considered claimant's motion to dismiss prior to considering fugitive disentitlement); United States v. $138,381, 240 F. Supp. 2d 220, 224-26 (E.D.N.Y. 2003) (court considered Government's motion for summary judgment on the merits prior to considering fugitive disentitlement). No court in this Circuit appears to have explicitly considered which motion should be given priority. In any event, as the Government is not arguing that the court should consider the fugitive disentitlement motion prior to Kobi's motion to dismiss, this court shall consider the motion to dismiss first. As a result, the court not need reach the question of which motion should be considered first.

A. Standing

The Government argues that both Claimants' claims should be dismissed for lack of statutory standing and Hana's claim should also be dismissed for lack of standing under Article III of the United States Constitution. (Government's Memorandum of Law in Support of the United States' Motion to Strike the Claims ("Gov't Standing Mem.") at 12.)

1. Standard of Review

The Government moves, under Rules 12(b)(1) and 12(c), to strike the Claimants' statements of interest on the ground that Claimants lack standing. This court will consider the motion pursuant to Rule 12(b)(1). "It is well ingrained in the law that subject-matter jurisdiction can be called into question either by challenging the sufficiency of the allegation or by challenging the accuracy of the jurisdictional facts alleged." Gwaltney of Smithfield, Ltd. v. Chesapeake Bay Found., Inc., 484 U.S. 49, 68, 108 S.Ct. 376 (1987) (Scalia, J., concurring in part and concurring in the judgment) (citations omitted; emphasis in original). "If the defendant challenges only the legal sufficiency of the plaintiff's jurisdictional allegations, the court must take all facts alleged in the complaint as true and draw all reasonable inferences in favor of plaintiff." Robinson v. Malaysia, 269 F.3d 133, 140 (2d Cir. 2001) (internal citations and quotation marks omitted). If the parties present factual evidence that is "relevant to the jurisdictional question," the court may consider such evidence. Id.; accord Goonewardena v. New York, 475 F. Supp. 2d 310 (S.D.N.Y. 2007). The district court must consider facts outside the pleadings "if resolution of a proffered factual issue may result in the dismissal of the complaint for want of jurisdiction." Robinson, 269 F.3d at 141 n.6. The party asserting subject-matter jurisdiction bears the burden of proving by a preponderance of the evidence that jurisdiction exists. Makarova v. United States, 201 F.3d 110, 113 (2d Cir. 2000); accord Goonewardena, 475 F. Supp. 2d at 310.

2. Standing in Civil Forfeiture Actions

In order to assert a claim over property that is subject to a civil forfeiture action, a claimant "must have both standing under the statute or statutes governing their claims and standing under Article III of the Constitution as required for any action brought in federal court." United States v. Cambio Exacto, S.A., 166 F.3d 522, 526 (2d Cir. 1999).

3. Statutory Standing

The Government argues that Claimants have failed to gain statutory standing because they failed to comply with the requirements set out in Rule C(6) of the Supplemental Rules. Rule C(6) requires claimants in civil forfeiture actions to file a verified statement identifying their interest or right in the property subject to forfeiture. Specifically, the Government argues that the Claimants' claims were defective because-instead of being verified by Claimants-they were verified by Claimants' counsel and, then, only on information and belief. (Gov't Standing Mem. at 17.) Claimants argue that (1) the claims submitted met the requirements of Rule C(6) and, even if the original claims did not meet such requirements, (2) Claimants should be permitted to amend their claims to comply with Rule C(6). (Kobi's Memorandum of Law in Opposition to the Government's Motion to Strike His Claim ("Kobi Standing Opp.") at 8-14; Hana's Memorandum of Law In Support of Opposition to the Government's Motion to Strike Her Claim ("Hana Standing Opp.") at 4-8.) As I find that Claimants should be permitted to amend their statements of interest, I do not reach the question of whether the Claimants' initial statements of interest comply with the pleading requirements.*fn3

On or about October 10, 2006, Kobi executed an Amended Verified Statement of Interest. (Affidavit of Robert G. Morvillo ¶ 3, Exh. C.) Similarly, on November 9, 2006, Hana executed an Amended Verified Statement of Interest, which was provided to the Government on November 10, 2006. (Strassberg Affidavit ¶ 2, Exh. A.) The Government does not argue that the amended statements of interest failed to meet the pleading standards. Instead, the Government argues only that Claimants should not be permitted to amend their statements of interest. (Reply Memorandum of Law in Support of The United States' Motion to Strike the Claims Filed by Jacob "Kobi" Alexander and Hana Alexander ("Gov't Standing Rep.") at 9-11.)

The parties agree that amendments to statements of interest should be liberally permitted, absent evidence of bad faith undue delay, or prejudice. (Gov't Standing Rep. at 10; Kobi Standing Opp. at 12-13; Hana Standing Opp. at 7.) Although "[a] district court may require claimants in forfeiture proceedings to comply strictly with the rule's requirements in presenting its claims to the court. . . . the court may exercise its discretion by extending the time for the filing of a verified claim. United States v. $125,938.62, 370 F.3d 1325, 1329 (11th Cir. 2004) (internal quotation marks omitted). "'[A]mendments should be liberally permitted to add verifications to claims originally lacking them.'" United States v. 1982 Yukon Delta Houseboat, 774 F.2d 1432, 1436 (9th Cir. 1985) (quoting 7A J. Moore & A. Pelaez, Moore's Federal Practice, P C. 16, at 700.16 (2d ed. 1983)); see also United States v. U.S. Currency in the Amount of $103,387.27, 863 F.2d 555, 561-62 (7th Cir. 1988) ("While this court requires that meticulous attention be paid to detail, it also believes that amendments should be liberally permitted to add verifications to claims originally lacked them, provided that the amendment would not undermine the goals underlying the time restriction and verification requirements of Rule C.") (internal citations and quotation marks omitted).

In deciding whether to permit such an untimely amendment, courts consider the following factors:

[T]he time the claimant became aware of the seizure, whether the Government encouraged the delay, the reasons proffered for the delay, whether the claimant had advised the court and the Government of his interest in defendant before the claim deadline, whether the Government would be prejudiced by allowing the late filing, the sufficiency of the answer in meeting the basic requirements of a verified claim, and whether the claimant timely petitioned for an ...


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