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Bascunan v. Elsaca

United States Court of Appeals, Second Circuit

June 13, 2019


          Argued: March 6, 2019

         This civil RICO action asks whether extraterritoriality issues prevent a Chilean national and affiliated parties from suing another Chilean national and affiliated parties in the United States for their alleged involvement in numerous fraudulent schemes. The primary allegations are that the defendants, while located in foreign nations, used the mail or wires to order fraudulent asset transfers from the plaintiffs' New York bank accounts to the defendants' own accounts. The United States District Court for the Southern District of New York (Daniels, J.) held that all but one of the schemes were impermissibly extraterritorial under either civil RICO, 18 U.S.C. § 1964(c), or the mail, wire, and bank fraud statutes the plaintiffs cited as predicates to the civil RICO cause of action, 18 U.S.C. §§ 1341, 1343, and 1344. The court then found that the remaining scheme, standing alone, did not constitute a pattern of racketeering activity under RICO.

         We hold that all but one of the schemes call for domestic applications of civil RICO and the underlying mail, wire, and bank fraud statutes. Accordingly, we REVERSE the judgment of the district court and REMAND for further proceedings consistent with this opinion.

          ROBIN L. ALPERSTEIN (Jesse T. Conan, on the brief), Becker, Glynn, Muffly, Chassin & Hosinski LLP, New York, NY, for Plaintiffs- Appellants.

          DAVID S. FLUGMAN (Jennifer M. Selendy, on the brief), Selendy & Gay PLLC, New York, NY, for Defendants-Appellees.

          Before: WESLEY and LIVINGSTON, Circuit Judges; and BRODIE, District Judge. [†]


         This is the second time we have been asked to decide whether Jorge Yarur Bascuñán and affiliated parties (collectively, "Bascuñán") can sue his cousin Daniel Yarur Elsaca and affiliated parties (collectively, "Elsaca") under civil provisions of the Racketeer Influenced and Corrupt Organizations Act of 1970 ("RICO") for their role in an alleged network of transnational fraudulent schemes. The first time this case was before us, we reversed an order of the United States District Court for the Southern District of New York (Daniels, J.)[1] dismissing Bascuñán's claims as impermissibly extraterritorial. We remanded for the court to consider whether Bascuñán adequately pleaded a domestic injury in light of our opinion and any additional allegations in the then-pending Second Amended Complaint ("SAC").[2] On remand, the district court dismissed the SAC, finding that it failed to allege a domestic injury under RICO, impermissibly relied on extraterritorial applications of RICO predicate statutes, and failed to adequately allege a continuous pattern of racketeering activity.[3] For the following reasons, we reverse the judgment of the district court and remand for further proceedings consistent with this opinion.


         A. Factual Background[4]

         Bascuñán is a resident and citizen of Chile. His grandfather founded Banco de Crédito e Inversiones ("BCI"), the third-largest bank in Chile. His father was the president and controlling shareholder of the bank. In the 1990s, Bascuñán inherited a large fortune from his parents (the "Bascuñán Estate," or "Estate") consisting of numerous companies, financial property, a significant stake in BCI, and a large trust administered in New York. For reasons not relevant here, Bascuñán was unable to manage his fortune at the time his parents died.

         In 1999, Bascuñán hired Elsaca, his cousin, to manage the Bascuñán Estate. Elsaca is a citizen and resident of Chile and has a business degree from the London School of Economics. He is also a licensed accountant and prominent economist who formerly led the Superintendencia de Valores y Seguros (de Chile), which the SAC describes as Chile's equivalent of the U.S. Securities and Exchange Commission. Soon after Elsaca took the job, he and his attorney, Defendant José Pedro Silva Prado ("Silva"), persuaded Bascuñán to grant Elsaca power of attorney, giving him "complete control" over Bascuñán's finances. J.A. 615. Most notably, Elsaca gained the ability to transfer the Estate's property without obtaining Bascuñán's authorization.

         The bulk of the SAC focuses on four sets of alleged schemes to steal and misappropriate money from the Bascuñán Estate that Elsaca conducted individually, with associates, and through alter-ego shell corporations. In total, the SAC alleges that Elsaca stole at least $64 million.

         1. The New York Trust Account Scheme

         The New York Trust Account Scheme involved the misappropriation of assets held in two trusts owned by the Estate. J.P. Morgan set up the "Afghan Trust" in the Cayman Islands in 1998-before Bascuñán hired Elsaca-and has since administered it from New York, where the Afghan Trust's J.P. Morgan bank account is located. The Afghan Trust's stated purpose was funding Bascuñán's charitable endeavors. In 2001, Elsaca asked UBS to set up the "Capri Star Trust." Capri Star was also a Cayman Islands trust purportedly intended to support Bascuñán's charitable endeavors. Elsaca funded the Capri Star Trust with money from the Afghan Trust that he placed in a UBS bank account located and administered in New York.[5] The only members of the Capri Star Trust Committee were Elsaca and Silva.

         According to the SAC, the Capri Star Trust was a fraudulent enterprise, the "sole purpose" of which was "generat[ing] sham fees" for Elsaca and Silva. Id. at 617. Elsaca named himself "Investment Advisor" in Capri Star Trust documents and set his advisory fee at 1% per year of the assets under management. He withdrew his advisory fees by contacting UBS employees located in New York using the mail or wires and authorizing them to send money from Capri Star's New York bank account to Elsaca's own accounts. This conduct was fraudulent, the SAC alleges, because Elsaca "provided no investment advice to the Capri Star Trust, whose assets were actively managed by UBS." Id. at 618. In total, Elsaca ordered at least seventeen transfers, totaling more than $2.7 million, from the Capri Star Trust to accounts and entities under his control.

         Bascuñán also alleges that Elsaca used the Capri Star Trust Account to generate sham legal fees for Silva's law firm. Beginning in October 2001, Silva biannually mailed a $20, 000 invoice for allegedly fictitious legal work to the Capri Star Trust. Elsaca then used the mail or wires to authorize UBS employees in New York to transfer money from Capri Star's New York bank account to Silva's firm. In 2005, Elsaca faxed a letter to UBS authorizing these biannual payments on a standing basis. Additionally, in 2001, Elsaca authorized a one-time wire transfer of $90, 000 from Capri Star's New York bank account to Silva. In total, Elsaca sent Silva "at least $390, 000." Id. at 621.

         2. The Anacapri Investment Fund Scheme

         The Anacapri Investment Fund Scheme involved four sub-schemes by which Elsaca and others allegedly stole over $60 million from the Bascuñán Estate. At the center of this activity was the ANACAPRI Private Investment Fund ("Anacapri"), created by Elsaca in 2003. Elsaca funded Anacapri with $48 million from three of Bascuñán's other companies.[6] i. The Fintair Misappropriation. Around June 2003, when the Estate owned Anacapri, Elsaca "caused Anacapri to acquire" Defendant-Appellee Fintair Finance Corp., a British Virgin Islands ("BVI") corporation that Elsaca owned and had formed earlier that year. Id. at 624. This acquisition made Fintair part of the Bascuñán Estate.[7] The SAC alleges that between 2003 and 2009, Elsaca falsely represented to Morgan Stanley that he, rather than the Bascuñán Estate, owned Fintair. Under this guise, Elsaca opened a New York-based Morgan Stanley bank account in Fintair's name and transferred $37, 850, 000 from the Bascuñán Estate into the account.[8] The transfers were directed through Defendant-Appellee GM & E Asset Management S.A. ("GM&E"), a Chilean corporation owned by Defendants-Appellees Cary Equity's Corp. and Hay's Finance Corp., which are themselves BVI corporations owned and controlled by Elsaca.[9] Elsaca then sent money from Fintair's New York bank account to himself and others in approximately 500 separate transfers and check deposits. Elsaca transferred around $30 million of these funds to the New York-based Morgan Stanley bank account of Defendant-Appellee Euweland Corp., a BVI corporation owned and controlled by Elsaca. Other transferees included Elsaca, Silva, Defendant-Appellee Cristían Jara Taito, Hay's, and GM&E, along with several nonparties affiliated with these individuals and entities.

         ii. The BCI Share Theft Scheme.

         The Bascuñán Estate owned 1.47% of BCI, the Chilean bank that Bascuñán's father had controlled prior to his death. The Estate held its interest via Plaintiff-Appellant Hofstra Corp., a BVI corporation that owned Plaintiff-Appellant Tarascona Corp., a BVI corporation that owned the shares. The SAC alleges that in 2007, when the shares were worth approximately $47 million, Elsaca or one of his agents traveled to New York to steal the physical bearer shares from Hofstra's safety deposit box. Elsaca subsequently registered the shares in the name of Nueva T Corp., a BVI corporation he had recently created. He then directed associates to issue shares of Nueva T to Euweland, another Elsaca-owned corporation. Two weeks later, Elsaca "caused the [Bascuñán] Estate to purchase" shares of Nueva T from Euweland using $43 million in Anacapri funds. Id. at 631. The allegation is effectively that Elsaca stole the shares from Bascuñán and then sold them back to him.

         iii. The Sham Anacapri Sale.

         Next, the SAC alleges that in 2009, Elsaca "misappropriated Anacapri," and thus its asset Fintair, which held Estate funds in its New York bank account. Id. at 634. It did this by "caus[ing Bascuñán's companies] to sell their stakes in Anacapri to [Defendant-Appellee Agrícola e Inmobiliaria Chauquén Limitada]," a Chilean corporation owned by Elsaca. Id. The sale was for roughly $7.5 million, but Anacapri's assets had a book value of around $21.5 million.[10] In effect, the allegation is that Elsaca "sold" Anacapri to his shell company at a $14 million discount.

         iv. The Sham Management Fees.

         Bascuñán also alleges that between 2000 and 2009, Elsaca paid himself approximately $16 million in sham management fees from Anacapri. Bascuñán claims Elsaca transferred this money from unknown accounts to several New York-based Morgan Stanley bank accounts owned by GM&E, a shell corporation that Elsaca indirectly owned.

         3. The Tarascona Misappropriation

         The SAC alleges that between 1999 and 2004, Elsaca opened and maintained eleven New York-based Morgan Stanley bank accounts in Tarascona's name for the purpose of misappropriating Estate funds. According to the SAC, Elsaca falsely represented to Morgan Stanley that he owned Tarascona, when in fact the Estate owned it. He then transferred Tarascona's money into the accounts of his own corporations. For example, he sent over $2 million in 333 transfers to the ten or more New York bank accounts belonging to Hay's.

         4. The BCI Dividend Misappropriation

         Finally, Bascuñán alleges that Elsaca and his associates misappropriated over $3.5 million in dividends earned on the BCI shares by diverting them to Estate-owned New York bank accounts, including the Fintair account, and then taking the funds.

         * * *

         Bascuñán alleges that he was unaware of Elsaca's schemes when they occurred and that Elsaca never provided him a true accounting of the Estate's assets. In late 2009, Bascuñán discovered that Elsaca had drafted Bascuñán's will in a manner that would have allowed Elsaca to control the Estate in perpetuity. Bascuñán soon severed ties with Elsaca. Over the following years, Bascuñán and various auditors uncovered Elsaca's alleged fraud. The SAC alleges that Bascuñán remains unaware of the full extent of the fraud because Elsaca and his associates have refused to cooperate with his investigations.[11]

         B. Litigation History

         Bascuñán filed this lawsuit in the United States District Court for the Southern District of New York and filed his First Amended Complaint ("FAC") shortly thereafter. Following an appeal and remand described below, Bascuñán filed the currently operative SAC.

         The SAC states five claims under federal and state law. Count 1 alleges that, through the above-described conduct, all Defendants violated 18 U.S.C. § 1962(c), a substantive provision of RICO prohibiting individuals from conducting an enterprise through a pattern of racketeering activity. Seeking relief under 18 U.S.C. § 1964(c), a private right of action commonly known as "civil RICO," Bascuñán alleges that all Defendants engaged in four categories of racketeering activity, or "predicates": (1) mail and wire fraud in violation of 18 U.S.C. §§ 1341 and 1343; (2) money laundering in violation of 18 U.S.C. §§ 1956 and 1957; (3) bank fraud in violation of 18 U.S.C. § 1344; and (4) violations of the Travel Act, 18 U.S.C. § 1952. Count 2 alleges that all Defendants violated 18 U.S.C. § 1962(d), another of RICO's substantive provisions, by knowingly conspiring to commit the same unlawful predicates. Count 3 is a state-law claim for unjust enrichment against all Defendants. Count 4 is a state-law constructive-trust claim against all Defendants. Count 5 asks the court to order Elsaca to provide an accounting of the full scope of his alleged misappropriation.

         Earlier in this litigation, the district court dismissed the FAC, which stated similar claims, under Rule 12(b)(6) of the Federal Rules of Civil Procedure. See Bascuñan, No. 15 Civ. 2009 (GBD), 2016 WL 5475998, at *1. It principally found that the claims involved extraterritorial conduct that was beyond RICO's reach. Id. In RJR Nabisco, Inc. v. European Community, 136 S.Ct. 2090 (2016), the Supreme Court held that RICO's private right of action, contained in § 1964, does not overcome the presumption against extraterritoriality, and therefore in order to state a claim under the statute, a plaintiff must allege a domestic injury. Interpreting that decision, the district court held that Bascuñán had failed to allege a domestic injury as required by § 1964 because he "resided" in Chile when he sustained the "injury" in question. Bascuñan, No. 15 Civ. 2009 (GBD), 2016 WL 5475998, at *5-6. The court also denied Bascuñán's motion for leave to file the then-pending SAC. Id. at *6 n.16.

         We reversed in Bascuñán I. Rejecting the district court's residency test, we held that "when a foreign plaintiff [alleging a civil RICO injury] maintains tangible property in the United States, the misappropriation of that property constitutes a domestic injury." Bascuñán I, 874 F.3d at 814. Applying our rule to the versions of the BCI Dividend and Anacapri Investment Fund schemes stated in the FAC, we found no domestic injury because the only domestic aspect of these allegations was that Elsaca transferred stolen funds into domestic bank accounts. Id. at 818. However, we held that the New York Trust Account and BCI Share Theft schemes involved domestic injuries because those allegations concerned property that was taken out of bank accounts physically located in the United States. Id. We accordingly reversed the district court's judgment dismissing the FAC, vacated its order denying Bascuñán's motion for leave to file his SAC, and remanded for further proceedings. Id. at 825.

         On remand, Bascuñán filed the SAC. He contends that he had not known at the time of filing the FAC that "[the] defendants opened and maintained approximately 31 accounts at Morgan Stanley in New York between 1999 and at least 2012." District Court Docket, ECF No. 65 at 4. Unlike the FAC, the SAC contains the above-described allegations that, with respect to the BCI Dividend Misappropriation and Anacapri Investment Fund schemes, the Defendants perpetrated their fraud by repeatedly stealing money out of the Estate's Morgan Stanley bank accounts in New York. Additionally, the SAC contained new allegations that Fintair (and, thus, its New York bank account) was part of the Estate between 2003 and 2009, a fact Bascuñán had not previously known and that Elsaca conceded in a 2016 declaration. See J.A. 240-41.

         Elsaca again moved to dismiss under Rule 12(b)(6). As relevant here, he argued (1) that Bascuñán failed to allege a domestic injury with respect to much of Elsaca's conduct, (2) that although the New York Trust Account Scheme involved a domestic RICO injury, the claim relied on impermissibly extraterritorial applications of the RICO predicate statutes, and (3) that whichever schemes survived an extraterritoriality analysis did not amount to a continuous pattern of racketeering activity as required under RICO. See Yarur Bascuñan, 338 F.Supp.3d at 306-07. The district court agreed on all three grounds, declined to exercise supplemental jurisdiction over the state-law claims, and dismissed the SAC in its entirety. See id. at 307, 316-17. Bascuñán timely appealed.


         This appeal brings us to the intersection of civil RICO and the presumption against extraterritoriality, a prescriptive comity doctrine and canon of statutory construction that limits the reach of federal statutes to domestic conduct unless they purport to apply to extraterritorial conduct. See In re Picard, Tr. for Liquidation of Bernard L. Madoff Inv. Sec. LLC, 917 F.3d 85, 95 (2d Cir. 2019). As the Supreme Court explained in RJR Nabisco, "[t]he question of RICO's extraterritorial application really involves two questions. First, do RICO's substantive prohibitions, contained in ยง 1962, apply to conduct that occurs in foreign ...

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