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Ambriz Trading Corp. v. URALSIB Financial Corp.


November 21, 2011


The opinion of the court was delivered by: Shira A. Scheindlin, U.S.D.J.



Ambriz Trading Corporation ("Ambriz") and Ilya Lobanov (collectively the "plaintiffs") bring this action against OJSC Financial Corporation URALSIB ("UFC"), URALSIB Capital, LLC ("UC"), URALSIB Securities Limited ("USL"), and Malbourne Invest & Finance, S.A. ("Malbourne") (collectively the "defendants") alleging (1) that defendants participated in a criminal enterprise under the Racketeer Influenced and Corrup Organizations ("RICO") laws,*fn1 (2) that defendants engaged in securities fraud in violation of the Securities Exchange Act of 1934 ("SEA"),*fn2 and (3) unjust enrichment.*fn3 Defendants now move to dismiss the Complaint on the grounds that (1) plaintiffs have not made a reasonable effort to effectuate service of process;*fn4 (2) lack of personal jurisdiction;*fn5 (3) all claims against Malbourne must be arbitrated; (4) venue is improper under the doctrine of forum non conveniens; and (5) plaintiffs have failed to state a claim.*fn6 Because plaintiffs have failed to effectuate service of process, defendants' motion is granted.


A. The Parties

Ambriz is a corporation under the laws of Seychelles with its principal place of business in Moscow, Russia.*fn7 Ambriz was a client of Malbourne from 2005 to 2009, during which time Malbourne arranged for the execution of equity trades on Ambriz's account.*fn8 Lobanov is a citizen of Russia who resides in Moscow.*fn9 Lobanov was employed as the Relationship Manager by UC in Moscow from May 2001 through September 2009.*fn10 While there, his responsibilities included managing client securities accounts, developing client relationships and generating new trading business.*fn11 The terms of Lobanov's employment at UC were governed by a contract written in Russian and governed by Russian law.*fn12

Lobanov ceased working for UC in September 2009.*fn13

UFC is an open joint stock company under Russian law.*fn14

UFC operates exclusively as a holding company and has only one office, in Moscow, Russia, where all twenty of its employees work.*fn15 UFC is the parent company of a number of subsidiaries, and neither it nor its subsidiaries maintain or have ever maintained any offices, bank accounts, real estate or phone listings in New York.*fn16

UC is a limited liability company under Russian law.*fn17

UC is a subsidiary of UFC and operates as a licensed broker-dealer and investment banking company.*fn18 Its operations are regulated by the Russian Federal Service on Financial Markets - the Russian equivalent of the U.S. Securities and Exchange Commission ("SEC").*fn19 UC executes trades on the Russian Trading System Stock Exchange ("RTS") and the Moscow Interbank Currency Exchange Stock Exchange ("MICEX").*fn20 UC has no offices outside of Russia and all of its two hundred employees work in Moscow.*fn21 UC does not have any bank accounts, offices, real estate or phone listings in New York, and it is not authorized to execute trades on the New York Stock Exchange ("NYSE").*fn22 UC's revenue is derived exclusively from customers outside of the United States.*fn23 While Ambriz was a client of Malbourne, Ambriz's accounts were managed by UC employees and all the relevant documentation regarding trades executed on behalf of Amrbiz is housed at UC's Moscow office.*fn24

USL is a private limited company under English law.*fn25

USL is a subsidiary of UFC and operates as a broker-dealer regulated by the United Kingdom's Financial Services Authority and as a member of the London Stock Exchange ("LSE").*fn26 All fourteen of USL's employees work in its only office in London.*fn27 USL serves institutional investors in Europe who wish to invest in Russian companies listed on the LSE.*fn28 USL does not have any offices, real estate or phone listings in New York and is not authorized to trade on the NYSE.*fn29 USL maintains a special purpose bank account with JP Morgan Chase in New York.*fn30

This account exists to help clients who choose to settle trades on the MICEX in U.S. dollars through a clearing mechanism offered by the Russian Depositary Clearing Company ("RDCC").*fn31 The balance of this account is swept out to USL's foreign bank accounts or to clients' accounts at the end of each day after the trades are settled as required by the RDCC.*fn32

Malbourne is a company under the laws of Anguilla with a registered address in Anguilla in the British Virgin Islands.*fn33 Malbourne is a subsidiary of UFC with no employees and with all of its operations handled by UC employees in Moscow and USL employees in London.*fn34 Malbourne executes trades on behalf of clients through Anguilla in order to take advantage of the country's favorable tax policies.*fn35 Because Malbourne has no employees, though, all the actual trading takes place in Moscow and London.*fn36 For example, while Ambriz was a client, all of Ambriz's accounts were managed from UC's Moscow office and all the trading records are maintained there.*fn37 Malbourne has no offices, real estate or phone listings in New York.*fn38 Like USL, Malbourne maintains a bank account at JP Morgan Chase in New York for the purpose of settling trades for clients who choose to use U.S. dollars to settle their trades.*fn39

Defendants are affiliated with two other entities, Jefferies International Limited ("Jefferies") and Auerbach Grayson & Company ("Auerbach"). Jefferies is a London based broker-dealer with affiliates in New York.*fn40 Because none of defendants are authorized to execute trades on the NYSE, when a client wishes to execute a trade on the NYSE, defendants refer the order to Jefferies.*fn41 Jefferies is then able to execute the trade in the United States through its New York affiliate which is authorized to trade on the NYSE.*fn42 For example, when Ambriz wanted to execute trades on the NYSE, those trades were referred to Jefferies.*fn43

Auerbach is a New York based broker-dealer registered with the SEC.*fn44 UC and USL have a correspondent brokerage relationship with Auerbach since 1999 pursuant to Rule 15a-6 under the SEA whereby UC and USL can market their services - investment opportunities in Russian companies on the RTS, MICEX and LSE - to certain sophisticated, qualified U.S. institutional investors without having to register with the SEC.*fn45 Auerbach provides these investors with access to the Russian stock market through UC and USL and, in return, Auerbach and UC or USL split the commissions on these trades.*fn46 Such commissions comprise between one and two percent of UC and USL's annual revenue.*fn47 Since 2007, Auerbach has employed two or three salespersons in the United States covering the Russian markets who share research and analysis of the Russian markets with American investors to increase their interest in Russian investments.*fn48 USL reimburses Auerbach for the salaries as well as expenses of these employees.*fn49 The allegations in the Complaint are not related to USL's relationship with Auerbach.*fn50

B. The Parties' Course of Dealing

Ambriz was a client of Malbourne from approximately 2005 through 2009.*fn51 Because Malbourne has no employees, all of the trading on Ambriz's behalf was done by employees of UC and USL and all the information and documentation relating to Ambriz's account was stored at UC's office in Moscow.*fn52 During this time, Ambriz and Malbourne's relationship was governed by a series of five contracts.*fn53 Among other things, these contracts provided that "[a]ny dispute, controversy or claim arising out of or in connection with the Agreement . . . shall be finally settled by arbitration in accordance with the Rules of the Arbitration Institute of the Stockholm Chamber of Commerce."*fn54

While Ambriz was a client, 1,622 trades were executed on its account by UC and USL.*fn55 Of those trades, 1,221 were executed on Russian stock exchanges (or 75.3%), 349 were executed on the LSE (or 21.5%), and 52 were executed on the NYSE (or 3.2%).*fn56 The 52 NYSE trades were executed by Jefferies in New York.*fn57

Ambriz and Malbourne's relationship ended in 2009 at around the same time as Lobanov's departure from UC.*fn58 On March 16, 2010, a dispute arose concerning Malbourne's refusal to execute Ambriz's request to transfer its funds held by defendants to Ambriz's account at Credit Suisse, and Ambriz initiated arbitration.*fn59 On August 19, 2010, Malbourne voluntarily released the funds, and on December 15, 2010, the arbitration panel in Sweden found in favor of Ambriz, and awarded Ambriz damages and fees.*fn60 The arbitration did not involve any allegations of trading improprieties.*fn61 On March 8, 2011, Ambriz filed a petition with this Court to confirm the arbitral award.*fn62 On March 14, 2011, Ambriz voluntarily dismissed the action and the Court vacated its earlier temporary restraining order freezing Malbourne's assets in its JP Morgan Chase bank account.*fn63

C. The Present Action

1. RICO and Securities Fraud

Despite the successful arbitration, Ambriz alleges that it has not been made whole because in addition to refusing to transfer Ambriz's accounts, defendants have systematically and continuously engaged in fraud and corrupt practices during the time that defendants were executing trades on Ambriz's account.*fn64 Specifically, plaintiffs allege that UFC and its subsidiaries were "engaged in a scheme, pursuant to which purchases and sales of stock were made at one time in the day upon which they were ordered, but recorded and reported as having been made at another time that same day."*fn65

Through this scheme, defendants were able to (1) record purchases as having occurred when the purchase price was higher than at the actual time of execution, and thereby pocket the difference between the lower, actual price and the higher, purported purchase price; and (2) record sales as having occurred when the sale price was lower than at the actual time of execution, and thereby pocket the difference between the higher, actual sale price and the lower, purported sale price.*fn66 Through this scheme, Ambriz alleges that it was defrauded of at least three million dollars.*fn67 Thus, under the treble damages provision of the RICO laws, Ambriz claims that it is entitled to at least nine million dollars.*fn68

Plaintiffs further allege that this action must be brought in the United States, and not in Russia, for a number of reasons: (1) Russian law does not provide for treble damages; (2) Russian law has no equivalent of RICO violations; (3) Russian courts would lack jurisdiction (referred to as "competence") in this matter to the extent that it involved injuries arising out of conduct occurring outside of Russia; and (4) because of the difficulties in combining criminal and civil actions in Russian courts.*fn69 Defendants strongly resist this conclusion and contend that: (1) Russian law recognizes the general types and natures of claims asserted here; (2) Russian courts would have jurisdiction to entertain the claims asserted here; (3) Russian civil and procedural law can accommodate the kind of complex multi-party litigation brought here; and (4) it would be exceedingly difficult under international law to obtain proper discovery and travel visas that would be necessary to litigate this matter in the U.S.*fn70 Defendants further argue that "[w]hile Russia does not allow for punitive or treble damages and does not have a RICO statute . . . Russian law provides for causes of action for the kinds of claims and wrongs alleged by plaintiffs in this case."*fn71 Moreover, all defendants state that they are amenable to suit in Russia and would consent to service in Russia as well as Russian jurisdiction over plaintiffs' claims.*fn72

2. Retaliation

Plaintiffs claim that Lobanov learned of defendants' illegal schemes in 2009 and tried to protect Ambriz's investments by requesting the immediate sale of all equities held by defendants on Ambriz's behalf.*fn73 UC allegedly then fired Lobanov in retaliation for his request.*fn74 Lobanov argues that this termination was unlawful because he was not an employee at will, and that under his employment contract he could only be terminated for gross professional misconduct.*fn75

Plaintiffs thus filed this action seeking monetary damages for defendants' securities fraud, corrupt practices, breach of contract and unjust enrichment arising out of the alleged trading improprieties and unlawful termination.

3. Service of Process

In order to serve defendants, plaintiffs hand delivered separate copies of the summons and Complaint addressed to each defendant to the offices of Auerbach at 25 West 45th Street in New York on July 7, 2011.*fn76 At that time, the receptionist refused to accept service.*fn77

Plaintiffs again attempted to serve defendants at the same location on July 13.*fn78 At that point, the receptionist accepted the summonses on behalf of all defendants except for Malbourne, because she had not heard of it.*fn79 However, two days later, counsel for Auerbach contacted plaintiffs' counsel to inform them that defendants did not have any offices within Auerbach's offices and that Auerbach was not authorized to accept service on behalf of defendants.*fn80 Plaintiffs also arranged for two copies of the summons and Complaint to be served on USL through the New York Secretary of State because plaintiffs believed that USL had previously been registered to do business in New York.*fn81 Defendants explain that the reason for this inactive entry with the New York Secretary of State is that UFC had contemplated opening a New York office in 2002, but decided against doing so for strategic business reasons.*fn82 Hence the entity listed in the New York state database does not exist.*fn83

Finally, plaintiffs attempted to serve Malbourne through what they believed to be Malbourne's "registered agent," the Trident Trust Company ("Trident").*fn84 Plaintiffs learned that Malbourne was registered in Anguilla "at Trident," and that Trident maintained an office at 545 Fifth Avenue, Suite 402, in New York.*fn85 Plaintiffs thus hand delivered a copy of the summons and Complaint to the receptionist at that location.*fn86 Defendants all strongly assert that they have not been served, no service upon them has been attempted, and that they maintain no authorized agent to accept service in the United States.*fn87 Moreover, to the extent that any advertisements or marketing materials appear to link defendants to New York addresses or telephone numbers,*fn88 defendants claim that such references are exclusively to Auerbach and never to UFC, UC, USL or Malbourne.*fn89


Federal Rule of Civil Procedure 4 governs service of process.*fn90 A plaintiff may serve a corporate defendant residing outside of the United States by (1) "any internationally agreed means of service that is reasonably calculated to give notice, such as those authorized by the Hague Convention on the Service Abroad of Judicial and Extra-judicial Documents [the 'Hague Convention'];"*fn91 (2) any other "method that is reasonably calculated to give notice" and permitted by the foreign country (other than by hand delivery);*fn92 or (3) any means ordered by the court that is "not prohibited by international agreement."*fn93 Under Federal Rule of Civil Procedure 12(b)(5), a party may assert the defense of "insufficient service of process." The mandatary 120-day time limit for service of process, however, does not apply to service of foreign defendants.*fn94 Because there is no mandatory 120-day time limit to serve foreign defendants, "courts have used a flexible due diligence standard in determining whether service of process under Rule 4(f) is timely."*fn95

"[S]ervice on a defendant in a foreign country that is a signatory to the Hague Convention [must] be attempted according to the terms of the Hague Convention."*fn96 However, "[w]here service on a domestic agent [of a foreign entity] is valid and complete under both state law and the Due Process Clause . . . the Convention has no further implications."*fn97 Under the Hague Convention, "process is first sent to the Central Authority of the foreign jurisdiction in which process is to be served."*fn98

The Hague Convention also provides additional ways to effectuate service of process.*fn99 "However, if a Central Authority is dilatory or refuses to cooperate, a plaintiff may request a U.S. court to order alternative service methods pursuant to Rule 4(f)(3), so long as the plaintiff waits at least six months from her initial application to the foreign Central Authority."*fn100 Courts may require plaintiffs to demonstrate a good-faith effort to effectuate service on a foreign defendant before authorizing an alternative method of service.*fn101

Although Russia is a signatory to the Hague Convention, in "July 2003, Russia unilaterally suspended all judicial cooperation with the United States in civil and commercial matters."*fn102 Accordingly, courts have granted parties' requests to pursue alternative methods of service on Russian defendants pursuant to Rule 4(f)(3).*fn103


Plaintiffs have not attempted to effectuate service in Russia. Nor have plaintiffs pled that they had - or would have had - trouble doing so.*fn104 Plaintiffs have also not asked this court to allow them to serve defendants in any specialized manner under Rule 4(f)(3) due to difficulty with service under the Hague Convention or traditional methods. Instead, plaintiffs submit that they have already effectuated service of process on defendants by serving defendants through Auerbach, the New York Secretary of State and Trident. Moreover, plaintiffs believe that the case should not be dismissed for failure to effectuate service inasmuch as they "served Defendants in good faith because [counsel for plaintiffs] did so in reliance on both the Petition and the Memorandum of Law and its exhibits submitted earlier this year."*fn105 Under the flexible due diligence standard applied in this district, however, plaintiffs have thus far failed to effectuate service of process.

A. Plaintiffs' Service on Other Parties Was Ineffectual

Plaintiffs' service on entities other than defendants cannot constitute proper service. First, service on Auerbach was not sufficient to effectuate service of process. Auerbach is simply an affiliated broker-dealer and none of the defendants maintain a presence in the offices of Auerbach.*fn106 Auerbach was also not a subsidiary or an agent of the defendants. Moreover, plaintiffs were informed immediately by Auerbach that it could not accept service on behalf of defendants.*fn107 Furthermore, plaintiffs cannot rely on the Petition and Memorandum of Law submitted in support of their earlier action to confirm an arbitration award that state that defendants can be served at 25 West 45th Street. In fact, plaintiffs themselves authored those documents and defendants never contested the content of those documents because that case was voluntarily dismissed within six days.*fn108 Finally, the two vague LinkedIn pages that plaintiffs submit with their Memorandum of Law are far too conclusory to establish that defendants actually maintain a presence in the offices of Auerbach.*fn109

These very short listings merely represent two individuals' postings that they work for URALSIB in New York. Defendants have explained, however, that (1) one of the individuals on LinkedIn previously worked for Auerbach covering the Russian markets, but no longer works there; and (2) the other individual formerly worked for a subsidiary of UFC in Omsk, Russia - a company with no presence at all in New York.*fn110

Second, plaintiffs' service on the New York Secretary of State cannot demonstrate good faith inasmuch as (1) the posting for URALSIB Securities in New York was clearly expired and has been terminated since December 12, 2005.*fn111 In any event, plaintiffs do not controvert defendants' explanation that this listing was for a potential UFC subsidiary that was never actually formed.*fn112

Third, plaintiffs have failed to proffer any indication that Trident is related to Malbourne in any way, and Malbourne has affirmed that no corporation or person in the United States is authorized to accept service of process on its behalf.*fn113

Plaintiffs' various attempts to effectuate service via other parties cannot substitute for service on defendants.

B. Good Faith Alone Does Not Excuse Failure to Serve

Finally, there is no reason for me to excuse plaintiffs' failure to effectuate proper service. Plaintiffs should have made some attempt at actually serving defendants and, if that was ineffective, asked this Court to allow an alternative means of service. Moreover, all of the parties were clearly in communication with experienced Russian counsel from whom plaintiffs could have sought advice related to service.*fn114 In the absence of any actual service, all that plaintiffs proffer to this Court in support of their good-faith effort to serve defendants are affidavits of service stating that certain unnamed receptionists - not even employed by defendants - took plaintiffs' summons and Complaint.*fn115

However, I do not find that this meets even the low threshold required to demonstrate a good-faith effort to effectuate service, and, in any event, plaintiffs have not shown that I can or should waive the need for service based on good-faith alone.

Moreover, as I informed the parties at an initial case management conference, absent further facts, this case would merit dismissal for lack of personal jurisdiction due to defendants' lack of sufficient contacts with New York,*fn116 and under the doctrine of forum non conveniens due to the excessively burdensome nature of litigating this case in New York.*fn117 Additionally, to the extent that plaintiffs have voluntarily withdrawn their breach of contract claims,*fn118 Lobanov, the individual plaintiff, lacks standing to continue as a plaintiff in this action inasmuch as his claims are based solely on breach of contract arising out of his termination and he had no stake in the alleged securities fraud.*fn119 Accordingly, plaintiffs are strongly advised to pursue their claims of fraud and breach of contract in Russia - the forum most suitable for the resolution of this serious dispute.


For the foregoing reasons, defendants' motion to dismiss is granted. The Clerk of the Court is directed to close this motion [Docket No. 10] and this case.


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