Don’t Hide the Money: Supreme Court Allows Civil Racketeering Claim to Proceed in Foreign Arbitration Context

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If you’ve ever seen the popular film Goodfellas, you might have heard of the infamous Racketeer Influenced and Corrupt Organizations Act. It’s usually referred to by its acronym, “RICO,” and was designed to punish a laundry list of criminal conduct such as “gambling, arson, robbery, bribery, extortion, dealing in obscene matter, or dealing in a controlled substance.” What’s lesser known is that it also features a civil component: “Any person injured in his business or property by reason of a violation of [RICO] may sue therefor in any appropriate United States district court and shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney’s fees.” And when it comes to the enforcement of foreign arbitral awards, the civil remedies section just took on new importance.

In the recent case of Yegiazaryan v. Smagin, the United States Supreme Court considered whether an individual could bring a civil RICO suit in the United States for conduct related to the enforcement of an arbitration award that was entered in another country. The case involved Ashot Yegiazaryan, a Russian businessman living in California, and Vitaly Smagin, a Russian businessman residing in Russia. Smagin won an arbitration award against Yegiazaryan in London. He sought to collect by filing suit in California, where Yegiazaryan resided.  The district court there froze Yegiazaryan’s assets and entered judgment, but Smagin alleged that Yegiazaryan, along with a bank and a law firm, also violated RICO by engaging in criminal activity designed to prevent him from collecting on that judgment, including shady transfers of a massive sum of money obtained in an unrelated arbitration.  

The district court concluded that Smagin couldn’t bring his civil RICO suit in California because of a principle known as “the presumption against extraterritoriality.” That principle requires courts to give “extraterritorial application” to congressional statutes passed in the United States only when there is “clearly expressed congressional intent” for the statute to apply outside the United States. With respect to RICO, the Supreme Court had long held that there must be a “domestic injury” to the plaintiff. Focusing on the residence of Smagin, the district court concluded that there was no domestic injury and thus no cause of action under RICO.

The Supreme Court disagreed. Writing for the majority, Justice Sonia Sotomayor concluded that Smagin had alleged a domestic injury. The Court focused on his allegations of Yegiazaryan’s “domestic actions to avoid collection,” which included “creating U.S. shell companies to hide his U.S. assets,” forging documents in U.S. court, and “intimidating a U.S.-based witness.” Further, the actions were “directed towards Los Angeles County” for the “purpose of frustrating enforcement of the California judgment.” Smagin’s rights to the judgment also existed only in California. Thus, the Court concluded that a plaintiff alleges a domestic injury under RICO “when the circumstances surrounding the injury indicate it arose in the United States.”

What the Court’s decision in Yegiazaryan means for foreign arbitral awards in the immediate future is unclear. What is clear is that behavior designed to stymie an individual’s ability to collect a foreign arbitral award — if carried out in the United States — can potentially subject participants in the scheme to civil RICO liability. Goodfellas character Henry Hill “always wanted to be a gangster,” so he probably understood the risks of civil RICO liability. With the Yegiazaryan case the rest of us should consider them, too. 

If you have any questions about the Yegiazaryan case or international arbitration generally, please do not hesitate to contact Jennifer Ersin or Sumner Fortenberry.