Opinion
06 Civ. 673 (LMM)(DFE).
October 28, 2008
MEMORANDUM AND ORDER
I am responding to (a) Defendants' twin letter motions to compel further discovery, and (b) Plaintiffs' letter motion to compel further discovery. I note that the letters for Bank of America Corporation and Bank of America, N.A. (collectively "BOA") were written by Robert F. Wise, Jr., Esq., and the letters for Standard Chartered Bank ("Standard Chartered" or "SCB") were written by Sharon L. Nelles, Esq. On October 27, 2008, Mr. Wise filed a formal Notice of Appearance, and I request that Ms. Nelles do so at her earliest convenience.
DEFENDANTS' TWIN MOTIONS TO COMPEL FURTHER DISCOVERY
On Defendants' twin motions, the papers consist of:
BOA's letter to me dated September 26, 2008, with BOA Exhs. A-F;
Standard Chartered's letter to me dated September 26, with SCB Exhs. 1-6;
Plaintiffs' letter response dated October 6, with Pls. Exhs. A-G;
BOA's letter reply dated October 13, with BOA Exh. G; and
Standard Chartered's letter reply dated October 13.
1. Dismissal with prejudice as to 26 of the plaintiffs.
In their October 6 response, Plaintiffs state: "We do not object to BOA's and SCB's requests for dismissal with prejudice of the 26 plaintiffs who failed to provide verified interrogatory responses." I direct the attorneys to prepare a stipulation listing the plaintiffs who will be dismissed, and to submit it for signature by Judge McKenna. The stipulation should also prepare a new caption which lists the remaining Plaintiffs, including the ones who are not listed on the docket sheet because they were added in the Second Amended Complaint, which is under seal because some portions of it refer to documents that have been marked confidential.
2. Defendants' document requests.
A. Plaintiffs' communications with the alleged fraudsters.
BOA's letter motion, at page 5, says:
"[BOA] Requests 59 and 61 seek all documents concerning communications between plaintiffs and certain alleged fraudsters, including [Edemar Cid] Ferreira, and their agents.. . . . BOA is entitled to explore any less than wholesome relationships that exist between plaintiffs and the alleged fraudsters to see if those relationships . . . negate plaintiffs' allegations of justifiable reliance.
". . . . There is a basis to believe that at least some plaintiffs may have been complicit with the alleged fraudsters — indeed, it appears that some were the alleged fraudsters. A document [BOA Exh. D] . . . indicates that Ferreira himself is behind the Rutherford plaintiffs, which are by far the largest claimants in this case. Documents obtained from the [Bank of Europe] liquidator [BOA Exh. E] also indicate that Ferreira was the owner of Blue Ray Enterprises Ltd. — the 99.9999% owner of the Rutherford parent company, plaintiff Rutherford Investment Group, C.V. — until Ferreira transferred ownership to his nephew [who] was convicted of crimes along with [him]. Thus there is good ground for BOA's suspicion that some or all of the plaintiffs may have had other connections with the fraudsters that bear on their claimed innocence of the alleged scheme."
Plaintiffs' response does not challenge the above evidence. In their footnote 2, they merely say that "no plaintiff has alleged that they relied on any statements by the Rutherford plaintiffs or even had any dealings with those entities." (Emphasis added.) Therefore, I cannot agree with the limitation Plaintiffs seek with respect to BOA Requests 59 and 61 and SCB Requests 32-29, 41-42, 44-45, 47-52, and 54-64; Plaintiffs' October 6 letter says at page 2:
Plaintiffs have agreed to produce their written communications with the individuals and entities identified in the Second Amended Complaint if those communications had anything to do with Bank of Europe or Banco Santos. . . . [But] Defendants seek all communications regardless of subject matter and, thus, seek documents not even marginally related to plaintiffs' claims, including potentially purely personal communications.
BOA replies that "[t]he bona fides of all the plaintiffs, who are totally unknown to defendants, is very much in issue." It seems obvious that the defendants are entitled to learn about all financial relationships between a plaintiff and any one of the alleged fraudsters. Moreover, I find they are entitled to learn about the personal relationships, whether they involve marriage, common ancestry, friendship, or antagonism. Pursuant to the March 2007 Stipulated Protective Order, each party may designate information as confidential so that it will be used only in the case at bar. To limit the burden at this stage, I will not require documents that were generated prior to the year 2000, but there will be no such limit on deposition questions.
I direct each Plaintiff to serve, by November 21, 2008, a complete response to BOA Requests 59 and 61 and SCB Requests 32-39, 41-42, 44-45, 47-52, and 54-64 (limited to the period from January 1, 2000 to the present).
B. Plaintiffs' declarations of assets held outside Brazil.
Most of the Plaintiffs are residents and citizens of Brazil. They allege that they each deposited money (generally in excess of $100,000) with a bank licensed in Antigua and Barbuda and known as Bank of Europe ("BOE"). The Defendants are entitled to challenge the accuracy of each alleged amount. They say that most of the Plaintiffs have documented those amounts solely with documents from BOE, a bankrupt enterprise which Plaintiffs allege turned out to be a fraud and Ponzi scheme. Plaintiffs assert that their bank statements from BOE were accurate at first, although false later on. It appears to be undisputed that, ever since 2002, the Central Bank of Brazil has issued regulations requiring any Brazilian citizen holding over $100,000 in assets outside Brazil (a) to file an annual Declaration providing a detailed breakdown of the amounts held outside Brazil, including the locations and types of investment, and (b) to keep a copy of the Declaration for five years after filing. (SCB Exhs. 1-4.)
BOA Request 9 and SCB Request 16 ask each Plaintiff to produce his or her complete Declaration for each year in which he or she maintained any investment at Bank of Europe. All the Plaintiffs have refused to state whether they ever filed such Declarations. They unjustifiably rely on Bistricer v. Bistricer, 659 F.Supp. 215, 218 (E.D.N.Y. 1987), which struck an affirmative defense of unclean hands and then, unsurprisingly, "reverse[d] the magistrate's order insofar as it directs discovery as to th[at] defense." However, even if Plaintiffs were to move to strike the unclean hands defense in the case at bar, the Declarations (or the lack of them) remain relevant to the fundamental issue of the amount that each Plaintiff did or did not deposit with Bank of Europe. Bank of Europe had a correspondent banking relationship with Standard Chartered froom July 1999 to December 2003. Standard Chartered's September 26 letter said at page 2: "In many cases, the amounts plaintiffs identify do not match documents produced by Standard Chartered, plaintiffs have not produced documents substantiating their claimed losses, and plaintiffs' counsel have stated that this is because a number of plaintiffs handed bags of cash to representatives of Bank of Europe." Plaintiffs' October 6 response, at page 3, says that the amounts are shown on Bank of Europe documents, that "the issue of matching transfers to Standard Chartered's documents" is an "exercise," and that "production of the declarations would not provide additional relevant information about plaintiffs' transfers."
In my view, whatever the true account is concerning the Declarations, the Plaintiffs should not be permitted to conceal it from the Defendants and from the fact finder. Each Plaintiff is able to obtain his or her Declarations, either from his or her own files or by request from the Central Bank of Brazil, or is able to verify that there was no Declaration for a particular year. Certain Declarations may be especially probative, for example if they declared assets outside Brazil but not at Bank of Europe, or if they declared money at Bank of Europe but described the investment as something other than what Plaintiffs allege was promised to them (namely, money to be invested in Banco Santos).
I direct each of the Plaintiffs to serve, by November 21, 2008, all documents responsive to BOA Request 9 and SCB Request 16.
C. Plaintiffs' tax returns and tax-related documents.
A more stringent standard applies to Defendants' requests for Plaintiffs' tax returns. "[T]he requesting party must satisfy a two-prong test: (1) the tax returns must be relevant to the subject matter of the action, and (2) a compelling need must exist because the information is not readily obtainable from a less intrusive source." Sadofsky v. Fiesta Products, LLC, 2008 WL 3210434, *6 (E.D.N.Y. Aug. 6, 2008). BOA cites Crigger v. Fahnestock Co., 2005 WL 783355, *1 (S.D.N.Y. Apr. 6, 2005). There, however, the depositions had already "covered at length" (perhaps with no objection) inconsistencies between the complaint and certain representations that those plaintiffs had made to Canadian tax authorities concerning a company owned by one of the defendants. Not surprisingly, Judge Keenan allowed the jury to hear about those inconsistencies. As for the tax deductions, he found them irrelevant to "offset any potential damages" but "probative of investor sophistication and, by extension, justifiable reliance. See Smith v. Bader, 83 F.R.D. 437 (S.D.N.Y. 1979) (Sweet, J.)." I am unclear about the nature of the fraud alleged in Crigger, but the Smith defendants emphasized "that plaintiffs invested in the partnership as a tax shelter" and hence the Smith plaintiffs invested for the precise purpose of declaring losses on their tax returns. Id. at 438.
In the case at bar, Defendants have not shown a compelling need for Plaintiffs' tax returns. I note that most of the tax returns would be governed by Brazilian law. I find that (a) Plaintiffs' tax returns and tax-related documents are not directly relevant to the claims and defenses, (b) they would have little "importance . . . in resolving the issues" in this case, and (c) "the burden or expense of the proposed discovery outweighs its likely benefit." Rule 26(b)(2)(C)(iii), F.R.Civ.P.
D. Documents relevant to financial sophistication.
The degree of financial sophistication possessed by any or all of the Plaintiffs does not seem to be a significant issue. The alleged fraud was simple outright theft. Ferreira persuaded the Plaintiffs to send money to BOE's bank account in New York, and then he used his control of that bank account to divert the money to pay for his lavish personal expenses. Plaintiffs received a one-page "Communication" from BOE that set forth the principal amount, the rate of return on their commitment, and the maturity date (typically 12 months in the future). However, it usually took less than three days for the money to leave the BOE account, much of it for Ferreira's personal use.
Nevertheless, BOA Request 21 seeks all documents concerning any financial advisor, broker, agent, fiduciary or other representative for each Plaintiff for each calendar year during which he or she maintained an account as BOE. BOA Request 65 seeks, for each such year, all documents concerning any investment losses of any type suffered by each Plaintiff (other than the losses at issue). BOA Request 27 seeks all documents reflecting each Plaintiff's financial condition at the time of his or her alleged investment at BOE. Once again, I find that "the burden or expense of the proposed discovery outweighs its likely benefit."
At this stage, I will not require Plaintiffs to produce the documents sought by BOA Requests 21, 27 and 65. (Plaintiffs have agreed to produce communications and documents concerning certain BOE agents on whom they relied in transferring money to BOE.) I hereby direct each Plaintiff to produce, by November 21, 2008, a summary statement of his or her assets and liabilities as of the time of his or her first investment at BOE. This, together with the other documents I have directed Plaintiffs to produce, is enough to enable Defendants to take meaningful depositions.
E. Documents concerning three plaintiffs who alleged that they lost their entire life savings.
Plaintiffs' October 6 letter, at page 6, is essentially satisfactory. I direct each Plaintiff who has made this allegation to produce, by November 21, 2008, documents showing the sources and amounts of his or her current income, and a summary statement of his or her current assets and liabilities.
F. Documents concerning one plaintiff who alleged that he became unable to pay for life-saving health treatments.
Plaintiffs' October 6 letter, at page 6, is satisfactory on this topic also. I direct Mr. Lei's widow, who has been substituted as a Plaintiff, to produce, by November 21, 2008, documents to substantiate the allegation that Mr. Lei became unable to pay for life-saving health treatments.
3. Plaintiffs' responses to interrogatories.
Plaintiffs' October 6 letter, at pages 6-7, is satisfactory, except that I direct the Plaintiffs to certify, by November 21, 2008, that they have made good-faith efforts to obtain the information from their account managers.
4. Assignors' "refusal" to produce documents.
Plaintiffs' October 6 letter, at pages 7-8, is satisfactory, except that I direct the Plaintiffs to state whether they believe that they have collected and produced all responsive documents and information from their assignors.
PLAINTIFFS' MOTION TO COMPEL FURTHER DISCOVERY
On Plaintiffs' motion, the papers consist of:
Plaintiffs' letter to me dated September 26, 2008, with Pls. Exhs. 1-5;
Standard Chartered's letter response dated October 3, with SCB Exhs. 1-4;
BOA's letter response dated October 6, with BOA Exhs. 1-18; and
Plaintiffs' letter reply dated October 13.
A. Documents concerning Defendants' compliance and policies.
Plaintiffs' Requests 15 and 16 seek documents concerning Defendants' fraud-prevention or anti-money-laundering internal controls, and Patriot Act compliance and due diligence obligations, with respect to correspondent bank accounts involving non-U.S. persons or entities. Request 17 seeks documents concerning Defendants' policies with respect to providing correspondent banking services for non-U.S. banks.
The language of those three Requests was overly broad, but has been narrowed by Plaintiffs' September 26 letter, at page 4, which says: "Plaintiffs seek general policy documents that [were] distributed in the ordinary course to defendants' employees with responsibility for correspondent banking relationships with offshore banks." To this sentence, I would add: "and that were in effect during any part of the time when correspondent banking services were provided to Bank of Europe by the Defendant which is now responding." I direct the Defendants to serve, by November 21, 2008, all documents responsive to Plaintiffs' Requests 15, 16, and 17, as so narrowed. Such documents would provide a fact finder with context when assessing what Defendants' employees said, wrote, and did. Hence they are relevant regardless of whether a violation of such policies would be sufficient to establish an essential element of a cause of action.
B. Documents concerning governmental investigations.
Plaintiffs' Requests 24-27 seek Defendants' communications with, and document productions to, Brazilian, Antiguan and British Virgin Islands law enforcement or regulatory authorities concerning Bank of Europe, Ferreira, Banco Santos, Alsace Lorraine Investment Services Limited, Support Financial, Beauford, or European Asset Management, excluding Suspicious Activity Reports.
The Defendants state that they have produced all of those documents, except for two objections. First, Standard Chartered objects to providing "the subpoena that compelled this production and the cover letter that accompanied it." I overrule this objection.
Second, BOA objects to providing documents concerning investigations of Banco Santos. BOA says it has produced account statements for the BOE account administered by BOA (from late 2003 to late 2004), showing that BOA executed 2300 transfers out of the BOE account, totaling $390 million, of which $136 million went to Banco Santos. (BOA's 10/6/08 letter, pp. 7, 9.) Plaintiffs' reply does not dispute this evidence, which certainly undercuts their allegation that "Banco Santos — the one entity that was supposed to have been the recipient of Loan Participation Program funds — received only occasional transfers of such funds." (Second Amended Complaint, ¶ 9.) On the other hand, Plaintiffs' 9/26/08 letter at page 7 called Banco Santos "the purported legitimate destination of plaintiffs' funds." BOA's 10/6/08 letter, at page 7, erroneously asserts: "[Plaintiffs] do not allege that there was something fraudulent about Banco Santos or its relationship to BOA. In this important sense, . . . the `legitimate destination' could have been any bank, for example, Citibank. . . ." To the contrary, Banco Santos was owned by Ferreira, and there is evidence that Defendants realized that Ferreira owned both BOE and Banco Santos. Accordingly, I overrule the artificial attempt to carve out the governmental investigations of Banco Santos.
I direct the Defendants to serve, by November 21, 2008, all documents responsive to Plaintiffs' Requests 24-27.
C. Documents concerning Braza, Lespan and Tansy.
One grievance of Plaintiffs is that most of the money sent to the BOE account was not transferred to Banco Santos. A second grievance is that millions of dollars were transferred from the BOE account in the form of direct payments for Ferreira's personal expenses. A third grievance is that millions of dollars were transferred from the BOE account to three South American currency dealers named Braza, Lespan, and Tansy.
To avoid dismissal at the pleading stage, the Second Amended Complaint, at ¶¶ 44-54, made more detailed allegations about Braza, Lespan, and Tansy. Judge McKenna cited those allegations prominently in Abreu v. Bank of America Corp., 2008 WL 3171560 (S.D.N.Y. Aug. 6, 2008), when denying Defendants' motions to dismiss the claim of aiding and abetting fraud. However, Plaintiff is now pressing three very broad document requests concerning Braza, Lespan, Tansy.
Request 28 seeks all communications between a Defendant and "any U.S. city and/or municipal, state or federal law enforcement or regulatory authority in connection with any investigation of [that Defendant] and money laundering or other illegal financial activity by [Braza, Lespan, or Tansy]." Request 29 seeks all documents provided by that Defendant to any such authority in connection with any such investigation. Request 35 begins with an absurdly overbroad phrase ("All documents referring or relating to Tansy, S.A., Braza, and [or] Lespan, including but not limited to . . ."); I hereby strike that phrase. The remainder of Request 35 seeks documents concerning any internal investigations undertaken by the responding Defendant concerning Braza, Lespan, or Tansy.
Standard Chartered responds that it has no documents responsive to Requests 28 or 29. (SCB's 10/3/08 letter, pp. 5-6.) This tends to undercut Plaintiffs' claim that Standard Chartered knew that some or all of those three currency dealers were under investigation for money laundering. I note that the Second Amended Complaint alleges that Standard Chartered transferred the following amounts from its BOE account: $15 million to Braza (¶ 50), $3,566,330 to Lespan (¶ 47 at first six subparagraphs), and $20 million to Tansy (¶ 51).
By contrast, Plaintiffs' reply does not dispute BOA's representation that it transferred far smaller amounts from its BOE account: nothing to Braza, $2 million to Lespan (ending on 9/22/04), and $565,215 to Tansy (ending on 10/25/04) — a total of $2,565,215 in 14 transfers, far less than 1% of the 2300 transfers (totaling $390,000,000) executed by BOA from the BOE account at BOA. (BOA's 10/6/08 letter, p. 7 and notes 6 and 7.)
I note that the Second Amended Complaint, at ¶ 26 and ¶ 221, alleges that BOE approached BOA in September and November of 2002, even though BOA did not provide correspondent banking services to BOE until late 2003.
Taking all of the arguments into account, I deny Plaintiffs' motion to compel BOA to answer Requests 28, 29 and 35, except that I direct BOA to serve, by November 21, 2008, copies of the following documents:
(a) all reports concerning Lespan that were generated by BOA's Compliance Department during the period from January 1, 2002, through September 23, 2004, and that referred to internal anti-money-laundering policies or protocols or Patriot Act compliance;
(b) the first notice received by BOA during the period from January 1, 2000, through the present, that Lespan was under investigation by any U.S. city and/or municipal, state or federal law enforcement or regulatory authority concerning money laundering or other illegal financial activity;
(c) all reports concerning Tansy that were generated by BOA's Compliance Department during the period from January 1, 2002, through October 26, 2004, and that referred to internal anti-money-laundering policies or protocols or Patriot Act compliance; and
(d) the first notice received by BOA during the period from January 1, 2000, through the present, that Tansy was under investigation by any U.S. city and/or municipal, state or federal law enforcement or regulatory authority concerning money laundering or other illegal financial activity.
I deny Plaintiffs' motion to compel Standard Chartered to answer Requests 28 and 29 as moot. I deny Plaintiffs' motion to compel Standard Chartered to answer Request 35, except that I direct Standard Chartered to serve, by November 21, 2008, copies of the following documents:
(a) all reports concerning Braza that were generated by Standard Chartered's Compliance Department during the period from January 1, 1999, through December 31, 2003, and that referred to internal anti-money-laundering policies or protocols or Patriot Act compliance;
(b) the first notice received by Standard Chartered during the period from January 1, 1999, through the present, that Braza was under investigation by any U.S. city and/or municipal, state or federal law enforcement or regulatory authority concerning money laundering or other illegal financial activity;
(c) all reports concerning Lespan that were generated by Standard Chartered's Compliance Department during the period from January 1, 1999, through December 31, 2003, and that referred to internal anti-money-laundering policies or protocols or Patriot Act compliance;
(d) the first notice received by Standard Chartered during the period from January 1, 1999, through the present, that Lespan was under investigation by any U.S. city and/or municipal, state or federal law enforcement or regulatory authority concerning money laundering or other illegal financial activity;
(e) all reports concerning Tansy that were generated by Standard Chartered's Compliance Department during the period from January 1, 1999, through December 31, 2003, and that referred to internal anti-money-laundering policies or protocols or Patriot Act compliance; and
(f) the first notice received by Standard Chartered during the period from January 1, 1999, through the present, that Tansy was under investigation by any U.S. city and/or municipal, state or federal law enforcement or regulatory authority concerning money laundering or other illegal financial activity.
D. Documents concerning Banco Santos (Know Your Customer documents; documents relating to any application by Banco Santos for banking services).
I overrule Defendants' objections to Plaintiffs' Requests 39 and 40. I direct the Defendants to serve, by November 21, 2008, all documents responsive to Plaintiffs' Requests 39 and 40.
E. Documents concerning fees and potential business from entities other than Bank of Europe.
I sustain Defendants' objections to Plaintiffs' Request 34 (documents concerning fees or potential business from Braza, Lespan, or Tansy). I strike the reference to Braza, Lespan, and Tansy from Plaintiffs' Request 21. I overrule the objections to Plaintiffs' Requests 18-20, the remainder of Request 21, and Requests 32 and 33. I direct the Defendants to serve, by November 21, 2008, all documents responsive to Plaintiffs' Requests 18-20, Request 21 (excluding Braza, Lespan, and Tansy), and Requests 32 and 33.