From Casetext: Smarter Legal Research

Rosner v. Bank of China

United States District Court, S.D. New York
Dec 18, 2008
06 CV 13562 (S.D.N.Y. Dec. 18, 2008)

Summary

holding that factual allegations including that the defendant bank knew from viewing the fraudulent company's accounts that "the repetitive cash withdrawal of all the funds in the disbursing account was plainly inconsistent with the nature of the account holder's business as a `currency trader'" did not support the plaintiff's argument the "atypical and non-routine nature" of deposits made it "simply implausible that [the defendant bank] did not have actual knowledge of the underlying scheme"

Summary of this case from In re Agape Litigation

Opinion

06 CV 13562.

December 18, 2008


DECISION AND ORDER


Plaintiff Brian Rosner, Esq., ("Rosner") Permanent Equity Receiver for International Financial Services (New York), Inc., International Financial Services (New York) LLC, John Walker Robinson, Chan Kow Lai a/k/a Wilson Lai and Sociedade Comercial Siu Lap Limitada, brought this case against the Bank of China ("BoC"), initially seeking actual, consequential, and incidental damages for BoC's alleged aiding and abetting common law fraud and for BoC's alleged violations of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961, et seq., ("RICO"). On December 19, 2007, this Court issued a Decision and Order granting BoC's motion to dismiss Rosner's Corrected Complaint, but also granting Rosner leave to file "an amended complaint repleading the fraud claims dismissed herein" within fifteen business days. Rosner v. Bank of China, 528 F. Supp. 2d 419, 431 (S.D.N.Y. 2007).

In response to the Court's invitation, Rosner filed a First Amended Complaint on January 11, 2008, in which he not only repled his claim of aiding and abetting fraud, but also added a new claim, seeking actual, consequential, and incidental damages for BoC's alleged acts of commercial bad faith. That submission was followed by a Second Amended Complaint, filed on February 21, 2008. BoC moves to dismiss the Second Amended Complaint on several grounds, including failure to allege fraud with particularity pursuant to Federal Rule of Civil Procedure 9(b) ("Rule 9(b)") and failure to state a claim upon which relief can be granted pursuant to Federal Rule of Civil Procedure 12(b)(6) ("Rule 12(b)(6)").

The parties stipulated that BoC's response to the Second Amended Complaint is not a waiver of its argument that the commercial bad faith claim raised in the First Amended Complaint was improperly asserted at that time. (See Stipulation and Order, dated March 11, 2008.)

BoC also contends that (1) Rosner lacks standing to assert his claims; and (2) the case should be dismissed pursuant to the doctrine of forum non conveniens. Because the Court is dismissing the action pursuant to Rule 9(b), it need not address these arguments, including the parties' opposing views of Eberhard v. Marcu, 530 F.3d 122 (2d Cir. 2008).

For the reasons set forth below, BoC's Motion is GRANTED.

I. BACKGROUND

The facts below are taken from the Second Amended Complaint, which the Court accepts as true for the purpose of ruling on a motion to dismiss. See Spool v. World Child Int'l Adoption Agency, 520 F.3d 178, 180 (2d Cir. 2008) (citing GICC Capital Corp. v. Tech. Fin. Group, Inc., 67 F.3d 463, 465 (2d Cir. 1995)).

A. FACTUAL AND PROCEDURAL HISTORY

Rosner was appointed Receiver for the entities and persons listed in the caption of this case (collectively, the "IFS Defendants") in connection with a proceeding brought against them by the Commodities Futures Trading Commission ("CFTC"). (See Consent Order of Preliminary Injunction, dated Aug. 8, 2002, attached as Ex. B to the Second Amended Complaint ("Consent Order").) As discussed in more detail below, the IFS Defendants were found to have perpetrated a massive fraud involving the theft of approximately $25 million from IFS investors. (See Commodity Futures Trading Comm'n v. Int'l Fin. Servs., 323 F. Supp. 2d 482 (S.D.N.Y. 2004), attached as Ex. C to the Second Amended Complaint ("Commodity Futures").)

As Permanent Equity Receiver for the IFS Defendants, Rosner was given the "full powers of an equity receiver," and "directed and authorized to . . . initiate any actions or proceedings in state, federal or foreign court necessary to preserve or increase the assets of the Receivership Defendants." (Consent Order 8-9.) Pursuant to this power, Rosner brings this action against BoC alleging that BoC's actions (1) aided and abetted the common law fraud perpetrated on the IFS investors; and (2) constitute commercial bad faith.

BoC is a commercial bank that, until 2004, was directly owned by the People's Republic of China ("PRC"). In August 2004, the Chinese government established Central Huijin Investment Company Limited ("Central Huijin") and converted BoC into a joint stock company owned by Central Huijin. Since December 2007, BoC has been owned by Central Huijin, which is owned by China Investment Corporation, which, in turn, is owned by the PRC. BoC, which has branches throughout the world, maintains three branches in the United States, including its principal branch in New York City ("BoC-NY"), and one branch in Macau ("BoC-M"), a Special Administrative Region of the PRC.

B. THE FRAUDULENT ENTERPRISE

On July 17, 2002, the CFTC filed a civil complaint against International Financial Services, Inc. ("IFS Inc.") and Sociedade Comercial Siu Lap Limitada ("Siu Lap") in the Southern District of New York. See Commodity Futures, 323 F. Supp. 2d at 491. InCommodity Futures, the court granted the CFTC's motion for summary judgment, finding that the IFS Defendants had built a fraudulent enterprise that stole more than $25 million from IFS investors. See id. at 488, 502-03. Specifically, the court found that IFS Inc. conducted illegal off-exchange trades, in violation of 7 U.S.C. § 6(a)(1), committed fraud in violation of 7 U.S.C. § 6b(a), and engaged in unauthorized trading on customer accounts in violation of 7 U.S.C. § 6b(a)(iv). See id. at 499-504. The court entered a judgment of more than $100 million in treble damages. (Second Amended Complaint ¶ 29.)

Under the fraudulent scheme found by the court in Commodity Futures, Siu Lap funded IFS Inc. with an initial wire transfer on September 16, 1998. IFS Inc. then hired inexperienced currency traders as independent contractors, grouped the traders by their ethnicity, and encouraged them to solicit customers from their respective ethnic communities. The solicitation materials provided by IFS Inc. and the oral representations made by the independent contractors misled prospective customers by claiming that foreign currency trading offered a very high potential for returns and only minimal risk of loss. These contractors opened 820 customer accounts with $32 million to invest.

IFS Inc.'s trading procedures made it virtually impossible for its clients to profit from their investments because traders were required to quote inflated prices provided by Siu Lap for the foreign currencies. As the investors were forced to "buy" foreign currencies at these artificially inflated prices, their accounts would inevitably lose value because the currencies could not be "sold" for a higher price than the one provided by Siu Lapp. Additionally, since IFS Inc. and Siu Lapp knew that the clients' positions would result in losses, it was unlikely that any trades were ever in fact executed, particularly given that neither IFS Inc. nor Siu Lapp had dealing lines or accounts with any participants of the inter-bank foreign currency markets. Meanwhile, IFS Inc. issued statements to the individual investors showing major trading losses. In its opinion, the Commodity Futures Court summarized the scheme as follows:

In short, IFS Inc. apparently accepted thousands of dollars in client funds, issued them statements purportedly showing trading losses, and sent the money to an overseas account holder, Siu Lap, which may well have been no more than an entity that received the stolen funds.
323 F. Supp. 2d at 490.

C. BoC'S ALLEGED ROLE IN THE FRAUDULENT ENTERPRISE

BoC provided banking services to the IFS Defendants, including wire transfers for the initial funding of IFS Inc. and wire transfers of the IFS investors' funds from the United States to Siu Lap's account at BoC-M. Specifically, BoC provided the following services: (1) Siu Lap created IFS Inc. by transferring funds from its BoC-M account, through BoC-NY, to IFS Inc.'s Citibank account in the United States; (2) after the IFS investors provided funds to IFS Inc., IFS Inc. transferred those funds to its Citibank account, and in turn transferred those funds, through BoC-NY, to Siu Lap's United States dollar ("USD") account at BoC-M; (3) Siu Lap transferred the funds from its BoC-M USD account to its BoC-M Hong Kong dollar ("HKD") account, converting the funds from USD to HKD; and (4) BoC permitted Siu Lap to withdraw the funds — usually all of the funds in the account at any given time — in cash from the BoC-M HKD account, very soon after each transfer became available in Macau. Thirty-eight transfers and withdrawals were conducted in this manner between January and July 2002, several in excess of $100,000.

Rosner alleges that BoC had "actual knowledge" of the fraudulent scheme, and advances five theories that he contends demonstrate BoC's actual knowledge: (1) the transactions that BoC processed were "of such an atypical and non-routine nature that it is simply implausible that BoC did not have actual knowledge of the underlying scheme" (Second Amended Complaint ¶ 90); (2) any lack of actual knowledge was a result of BoC's willful blindness (id. ¶ 91); (3) BoC had actual knowledge of the instant fraud through its actual knowledge of, and participation in, a similar scheme conducted by entities operating under the "Frankwell" umbrella (id. ¶ 92); (4) BoC had actual knowledge of the instant fraud through its actual knowledge of, and participation in, a similar scheme conducted by entities operating under the "Topworth" umbrella (id. ¶ 93); and (5) BoC's customers "expected it to bend its rules to accommodate their requests, and BoC was willing to do [so] when such customers were powerful, well-connected or influential" (id. ¶ 94).

Rosner also alleges that BoC provided substantial assistance in the fraudulent scheme because, but for BoC's willingness to transfer funds outside of the United States banking system, and but for BoC's willingness to permit Siu Lap's withdrawal of funds, the fraud could not have occurred. Rosner further alleges that BoC disregarded applicable United States and Macanese laws and regulations that, if followed, would have prevented the IFS scheme. Specifically, Rosner claims that BoC failed to comply with domestic and international bank secrecy, know-your-customer, and anti-money laundering laws, decrees, and regulations, and that BoC's failure to adhere to these laws by reporting "suspicious" transactions resulted in the theft of the $25 million at issue. Rosner concludes that the scheme "required the substantial assistance of an international bank straddling both the United States, where the funds were `collected,' and a region of the world, . . . Macau, where banking laws and regulations were not enforced, so the funds could be withdrawn and stolen. BoC knowingly provided this indispensable service. . . ." (Id. ¶ 96.)

II. DISCUSSION

A. FAILURE TO PLEAD FRAUD WITH PARTICULARITY

BoC moves to dismiss the Second Amended Complaint for failure to plead fraud with particularity as required by Rule 9(b), which states: "In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake." Thus, conclusory allegations of fraud may be dismissed under Rule 9(b). See Shemtob v. Shearson, Hammill Co., 448 F.2d 442, 444-45 (2d Cir. 1971). The Second Circuit has "construed Rule 9(b) strictly in order to minimize strike suits, to protect defendants . . . from harm to their reputation resulting from ungrounded actions, and to give defendants notice of the precise conduct in issue." Billard v. Rockwell Int'l Corp., 683 F.2d 51, 57 (2d Cir. 1982).

The Second Circuit has applied the heightened pleading requirements of Rule 9(b) to claims for aiding and abetting fraud. See, e.g., Lerner v. Fleet Bank, N.A., 459 F.3d 273, 292 (2d Cir. 2006); Filler v. Hanvit Bank, 156 Fed. Appx. 413, 417 (2d Cir. 2005) ("[T]he particularity requirements of Rule 9(b) apply to claims of aiding and abetting fraud no less than to direct fraud claims."). To establish liability for aiding and abetting fraud, a plaintiff must show "(1) the existence of a fraud; (2) [the] defendant's knowledge of the fraud; and (3) that the defendant provided substantial assistance to advance the fraud's commission." Lerner, 459 F.3d at 292 (quoting JP Morgan Chase Bank v. Winnick, 406 F. Supp. 2d 247, 252 (S.D.N.Y. 2005) (alteration in original)).

Actual, not constructive, knowledge is required to impose liability on an alleged aider and abettor. See id. at 292-93; Renner v. Chase Manhattan Bank, N.A., 85 Fed. Appx. 782, 784 (2d Cir. 2004) ("As to the knowledge requirement, New York courts require that the alleged abettor have actual knowledge of the primary wrong." (emphasis in original)); Mazzaro de Abreu v. Bank of Am. Corp., 525 F. Supp. 2d 381, 388 (S.D.N.Y. 2007).

Rule 9(b) provides that "[m]alice, intent, knowledge, and other conditions of a person's mind may be alleged generally." A more general standard of scienter is applicable because "a plaintiff realistically cannot be expected to plead a defendant's actual state of mind." Wight v. Bank Am. Corp., 219 F.3d 79, 91 (2d Cir. 2000) (citing Connecticut Nat'l Bank v. Fluor Corp., 808 F.2d 957, 962 (2d Cir. 1987)). However, "the relaxation of Rule 9(b)'s specificity requirement for scienter must not be mistaken for license to base claims of fraud on speculation and conclusory allegations." Shields v. CityTrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir. 1994) (internal quotation marks and citations omitted). Rather, the plaintiff must allege facts that give rise to a "strong inference" of fraudulent intent. Lerner, 459 F.3d at 290; see also Powers v. British Vita, P.L.C., 57 F.3d 176, 184 (2d Cir. 1995). A complaint may give rise to a strong inference of fraudulent intent in two ways. First, the plaintiff may allege "a motive for committing fraud and a clear opportunity for doing so." Powers, 57 F.3d at 184. Second, where there is no apparent motive, it is also possible to plead scienter by "identifying circumstances indicating conscious behavior by the defendant," but "the strength of circumstantial allegations must be correspondingly greater." Id. (quoting Beck v. Manufacturers Hanover Trust Co., 820 F.2d 46, 50 (2d Cir. 1987)).

As to the third element of aiding and abetting fraud, "substantial assistance" generally exists where: (1) a defendant "affirmatively assists, helps conceal, or by virtue of failing to act when required to do so enables the fraud to proceed"; and (2) "the actions of the aider/abettor proximately caused the harm on which the primary liability is predicated." Cromer Fin. Ltd. v. Berger, 137 F. Supp. 2d 452, 470 (S.D.N.Y. 2001) (citing Diduck v. Kaszycki Sons Contractors, Inc., 974 F.2d 270, 284 (2d Cir. 1992)); see also Nigerian Nat'l Petroleum Corp. v. Citibank, N.A., No. 98 Civ. 4960, 1999 WL 558141, at *8 (S.D.N.Y. July 30, 1999); Kolbeck v. LIT Am., Inc., 939 F. Supp. 240, 249 (S.D.N.Y. 1996). Allegations of "but for" causation are insufficient; an alleged aider and abettor will be liable only where the plaintiff's injury is a direct or reasonably foreseeable result of the defendant's conduct. See Fezzani v. Bear, Stearns Co. Inc., No. 99 Civ. 0793, 2008 WL 4369719, at *16 (S.D.N.Y. Sept. 23, 2008) (citing Bloor v. Carro, Spanbock, Londin, Rodman Fass, 754 F.2d 57, 62-63 (2d Cir. 1985)). Inaction on the part of the alleged aider and abettor "ordinarily should not be treated as substantial assistance, except when it was designed intentionally to aid the primary fraud or it was in conscious and reckless violation of a duty to act." Armstrong v. McAlpin, 699 F.2d 79, 91 (2d Cir. 1983).

1. Existence of a Fraud

The first element of aiding and abetting fraud is the existence of an underlying fraud. In the present case, Rosner alleges that BoC aided and abetted the scheme to defraud IFS investors. Given the clear record that establishes the fraud perpetrated on the IFS investors, Rosner has adequately pled the existence of an underlying fraud.

2. Actual Knowledge

The second element of aiding and abetting fraud is the defendant's actual, not constructive, knowledge of the fraud. Rosner's factual allegations underlying his assertion that BoC had actual knowledge of the fraud are grouped into five theories: (1) The transactions that BoC processed were so atypical and non-routine that BoC must have had actual knowledge of the underlying fraud; (2) BoC was wilfully blind to the underlying fraud; (3) BoC had actual knowledge through its knowledge of the similar "Frankwell" scheme; (4) BoC had actual knowledge through its knowledge of the similar "Topworth" scheme; and (5) BoC's conduct in facilitating the fraud was intentional because its customers expected it to bend the rules. (See Second Amended Complaint ¶¶ 89-94.)

As noted above, while the element of actual knowledge may be alleged generally, the plaintiff still must accompany that general allegation with allegations of specific "facts that give rise to a strong inference of actual knowledge regarding the underlying fraud." JP Morgan Chase Bank, 406 F. Supp. 2d at 253;see also Lerner, 459 F.3d at 293 (dismissing claim of aiding and abetting fraud because, despite plaintiffs' conclusory allegations of actual knowledge, the facts alleged to support actual knowledge "do not give rise to the `strong inference,' required by Federal Rule of Civil Procedure 9(b), of actual knowledge"). The Court finds that, under each theory asserted, Rosner fails to allege facts with requisite particularity to give rise to a sufficiently strong inference of BoC's actual knowledge of the underlying fraud. Accordingly, Rosner's claim of aiding and abetting fraud must be dismissed.

a. BoC-M's Permission of Transfers and Withdrawals

Rosner first alleges that "the transactions that BoC processed — the repeated transfer and nearly daily withdrawal of large sums of cash over the course of several years resulting in the theft of more than $25 million — is of such an atypical and non-routine nature that it is simply implausible that BoC did not have actual knowledge of the underlying scheme." (Second Amended Complaint ¶ 90.) As additional support, Rosner alleges the following facts:

• When converting the funds in Siu Lap's BoC-M account from HKD to USD, "the teller saw that both accounts had no activity other than the repeated receipt of incoming funds transfers from the United States and the cash withdrawal of large amounts of cash." (Id. ¶ 41F.) The teller knew that these transactions were "inconsistent with the type of business, currency trading, in which Siu Lap was engaged." (Id. ¶ 41G.)
• In permitting the participants to withdraw funds, the teller "counted out a pile of money, which was likely removed in a bag or suitcase." (Id. ¶ 42A.)
• The transactions at issue were "suspicious" because (1) "they involved the almost daily transfer of large sums of money to a single entity, followed by the almost daily cash withdrawal of funds"; (2) the funds only traveled in one direction, from the United States to Macau; (3) "the accounts that received the transfers and disbursed the funds were used for no purpose other than receiving and disbursing funds"; and (4) the repetitive cash withdrawal of all the funds in the disbursing account was plainly inconsistent with the nature of the account holder's business as a `currency trader.'" (Id. ¶ 52.)
• BoC had a duty under United States and Macanese law to report these "atypical and non-routine" transactions but failed to do so. (Id. ¶ 53.)

These factual allegations, which were present in the Corrected Complaint, albeit with less detail, at most indicate only constructive knowledge of a fraudulent scheme, and are insufficient to support a strong inference that BoC had actual knowledge of the underlying fraud. New York courts overwhelmingly recognize that a plaintiff does not satisfy Rule 9(b) by alleging a bank's actual knowledge of a fraud based on allegations of the bank's suspicions or ignorance of obvious "red flags" or warning signs indicating the fraud's existence. Rosner has not directed the Court to any relevant rulings holding otherwise. See, e.g., Mazzaro de Abreu, 525 F. Supp. 2d at 388 (allegations regarding the nature of transfers out of an account and the general amount of funds in the account "at most would indicate only constructive knowledge of a fraudulent scheme");Chemtex, LLC v. St. Anthony Enters., Inc., 490 F. Supp. 2d 536, 547 (S.D.N.Y. 2007) ("New York courts have routinely held that when a defendant is under no independent duty, even alleged ignorance of obvious warning signs of fraud will not suffice to adequately allege `actual knowledge.'"); Ryan v. Hunton Williams, No. 99-CV-5938, 2000 WL 1375265, at *9 (E.D.N.Y. Sept. 20, 2000) (allegations of a bank's authorizations of transfers between accounts, multiple wire transfers, a branch manager's suspicion that certain accounts may have been vehicles for fraudulent activity, and the branch manager's referral of those accounts to the in-house fraud investigation unit "do not raise an inference of actual knowledge"); Nigerian Nat'l Petroleum, 1999 WL 558141, at *7 (allegations that a bank knowingly or recklessly disregarded several "badges of fraud" in accounts involving millions of dollars did not give "rise to an inference, let alone a `strong inference,' that the bank actually knew of, and participated in" the fraud); see also Nathel v. Siegal, No. 07 Civ. 10956, 2008 WL 4684171, at *12 (S.D.N.Y. Oct. 20, 2008) ("Even where a bank was on notice of `red flags' that indicated certain accounts may have been vehicles for fraudulent activity and referred the case to its internal fraud unit, the bank had only suspicions but not actual knowledge of fraud." (discussing Ryan)); Rizer v. Breen, No. 601676/05, 2007 N.Y. Misc. LEXIS 801, at *20 (N.Y.Sup.Ct. Jan. 29, 2007) ("[E]ven where a bank disregards several `badges of fraud,' such as a transfer of funds from a corporate account to a personal account, actual knowledge does not exist." (discussingNigerian Nat'l Petroleum)).

The only authority Rosner provides for this point is United States v. Florez, 368 F.3d 1042 (8th Cir. 2004), which Rosner cites to support his allegation that human activity would have been required for tellers at BoC-M to accommodate Siu Lap's requests for large cash withdrawals. Even assuming that the size of the cash withdrawals by Siu Lap at BoC-M did require human participation, this would at most establish an allegation of BoC's constructive knowledge, not actual knowledge.

Some courts in this District have found that a plaintiff sufficiently alleged that a bank had the requisite actual knowledge when the plaintiff alleged facts beyond mere awareness of highly suspicious transfers and withdrawals. See, e.g.,Mazzaro de Abreu, 525 F. Supp. 2d at 389 (holding that plaintiff satisfactorily pled a bank's actual knowledge by alleging that the bank "knew some recipients of transfers to be `black market currency traders' and expressed its concern over fraud and money laundering"); id. at 390 (finding adequate pleading of another bank's actual knowledge based on allegations that the bank knew that recipients of transfers were black market currency traders and "the fact that [the bank] advised Bank of Europe as to how to conceal its fraudulent activities shows actual knowledge of fraud"). In contrast to Mazzaro de Abreu, Rosner offers no allegations that BoC expressed concern over possible fraud by Siu Lap, or that BoC made any other statements about Siu Lap's use of BoC's services to conduct fraudulent activities that would give rise to a strong inference of BoC's actual knowledge of the fraud.

Because the factual allegations in the Second Amended Complaint at most indicate BoC's constructive knowledge of the IFS fraud, Rosner's allegations do not give rise to a strong inference that BoC had requisite actual knowledge to support his claim of aiding and abetting fraud.

b. BoC's Alleged Willful Blindness

Rosner next alleges that "even if one were to assume that BoC lacked actual knowledge, it could only lack actual knowledge as the result of its own willful blindness." (Second Amended Complaint ¶ 91.) Rosner thus asks the Court to "impute" BoC with actual knowledge. (Id.)

"[T] he overwhelming weight of authority holds that actual knowledge is required, rather than a lower standard such as recklessness or willful blindness." Pension Comm. of Univ. of Montreal Pension Plan v. Banc of Am. Sec., LLC, 446 F. Supp. 2d 163, 202 n. 279 (S.D.N.Y. 2006) ("Pension Committee"). Rosner's request that the Court "impute" actual knowledge through BoC's alleged willful blindness, which concedes a lack of actual knowledge, must therefore be denied.

Several courts have suggested that willful blindness might be an acceptable standard for scienter if the plaintiff properly alleges that the defendant bank owes an independent duty to the plaintiff. In Pension Committee, for example, the plaintiffs, much like Rosner, alleged that the fraudulent activities at issue "had to have been apparent" to the bank. Id. at 202. The court concluded that the "plaintiffs allege no basis for inferring that [the defendant] owed them any duty to monitor, verify, or investigate the veracity of the information," and concluded that "[w]hen a defendant is under no such duty, even alleged ignorance of obvious warning signs of fraud does not suffice to adequately allege the actual knowledge necessary to sustain an aiding and abetting claim." Id. at 202-03. See also Chemtex, LLC v. St. Anthony Enters., Inc., 490 F. Supp. 2d 536, 547 (S.D.N.Y. 2007); Kolbeck, 939 F. Supp. at 247. Rosner alleges no facts giving rise to the existence of any duty owed to him by BoC, and thus cannot avail himself of any possible "duty" exception, if such an exception exists, that would permit an imputation of BoC's actual knowledge through willful blindness.

The Court is aware that another court in this District, in evaluating a motion to dismiss a claim of aiding and abetting fraud, considered the criminal doctrine of "conscious avoidance," where "it can almost be said that the defendant actually knew because he or she suspected a fact and realized its probability, but refrained from confirming it in order later to be able to deny knowledge." Fraternity Fund Ltd. v. Beacon Hill Asset Mgmt., LLC, 479 F. Supp. 2d 349, 368 (S.D.N.Y. 2007) (internal quotation marks omitted). The Fraternity Fund Court found that the plaintiff adequately pled actual knowledge because "the Court sees no reason to spare a putative aider and abettor who consciously avoids confirming facts that, if known, would demonstrate the fraudulent nature of the endeavor he or she substantially furthers." Id.

The Court is not persuaded that Fraternity Fund applies to the allegations made in the Second Amended Complaint. First,Fraternity Fund is in the minority of cases in this District that have permitted an allegation of willful blindness to satisfy the scienter requirement of actual knowledge. Second, even if such a standard were permissible, Rosner has not offered any specific factual allegations in support of his general allegation that BoC was willfully blind. Rather, Rosner relies upon the very same allegations regarding the suspicious nature of Siu Lap's accounts, transfers, and withdrawals that this Court has already determined are, at most, indicative of BoC's constructive knowledge. If such allegations are insufficient to support a claim of actual knowledge, they are necessarily insufficient to support a claim of willful blindness; otherwise, the required element of actual knowledge would effectively be demoted to one of constructive knowledge. Because Rosner does not provide any factual allegations specifically supporting his charge that BoC consciously avoided confirming the existence of a fraudulent scheme, the Court rejects Rosner's application of "willful blindness" for imputing actual knowledge to BoC.

In Cromer Fin. Ltd. v. Berger, No. 00 Civ. 2284, 2003 WL 21436164, at *9 (S.D.N.Y. June 23, 2003), the court suggested in the context of a summary judgment ruling that "there is no reason to believe that New York law would not accept willful blindness as a substitute for actual knowledge in connection with aiding and abetting claims." Those plaintiffs, however, "presented evidence raising questions of fact" as to whether the defendant "consciously avoided confirming the existence of the fraud." Id.

c. BoC's Knowledge of the Frankwell Scheme

Rosner next alleges that "BoC had actual knowledge of the IFS scheme through its actual knowledge of, and participation in, the Frankwell scheme," which Rosner claims was identical to the fraud perpetrated by IFS. (Second Amended Complaint ¶¶ 65, 92.)

In June 1994, the CFTC filed a civil complaint against the following entities: (1) Frankwell Bullion Ltd. ("Frankwell Bullion"), a Hong Kong corporation; (2) Frankwell Investment Services, Inc., a California corporation; (3) Maywell Investment Services, Inc., a California corporation; (4) Frankwell Investment Services (Texas), Inc. ("FISTI"), a Texas corporation; and (5) Frankwell Management Service (New York) Inc. ("FMS"), a New York corporation (collectively, "Frankwell"). (See Declaration of Lanier Saperstein, Ex. C.) Rosner alleges "that IFS is the successor of the Frankwell entities," and that Siu Lap "was one of the entities identified as being a member of the Asia-based Frankwell entities." (Second Amended Complaint ¶ 66-67.)

The court in that case did not reach the merits; rather, it held that the CFTC had exceeded its jurisdiction in bringing the action against the Frankwell entities, granted summary judgment to the Frankwell entities, and dismissed the action. CFTC v. Frankwell Bullion Ltd., 904 F. Supp. 1072 (N.D. Cal. 1995),aff'd, 99 F.3d 299 (9th Cir. 1996).

Rosner lists Evergreen International Development (New York) ("Evergreen") as another United States-based Frankwell entity. (Second Amended Complaint ¶ 66.) Evergreen was succeeded by FMS. (Id. ¶ 67.)

First, Rosner attempts to tie IFS Inc. and its executives to various Frankwell entities and their executives. For example, Rosner alleges that FMS and FISTI were succeeded by IFS Inc. (Id. ¶ 67.) Rosner then alleges that Wilson Lai ("Lai"), a principal defendant in the IFS case, and Michael Wong ("Wong") were officers of Frankwell Bullion and FISTI, and later became officers of IFS Inc. (Id. ¶ 68.) Finally, Rosner alleges that Andy Lok ("Lok") was "a Frankwell officer during the time of the Frankwell fraud," and later became the manager of Siu Lap during the IFS fraud. (Id.)

Second, Rosner alleges that "Frankwell perpetrated the same scheme that was later perpetrated by IFS" — specifically, that Frankwell "had engaged in a scheme which involved soliciting investments from members of Asian affinity groups for the purposes of investing in foreign currency-exchange contracts, but, as in the case of the later IFS scheme, neither investing, nor returning the funds." (Id. ¶ 69.)

Third, Rosner alleges that BoC was Frankwell's "long-term banker" and that Frankwell maintained accounts at BoC's Hong Kong branch ("BoC-HK") with a balance totaling more than $10 million HKD. (Id. ¶ 74.) Rosner points out that Frankwell identified BoC as a "currency account reference," and Lok made a written representation that "Bank of China is our only Banker." (Id. ¶¶ 75-76.)

Fourth, Rosner alleges that the CFTC seized and closed Frankwell's five United States offices, and that the Receiver appointed in that matter (the "Frankwell Receiver") reported findings that are "remarkably similar" to those reported by the IFS Receiver. (Id. ¶¶ 69-71.) The Frankwell Receiver served BoC with a restraining order directing BoC to restrain Frankwell's accounts. (Id. ¶ 77.) Additionally, in a related matter, in 1994 the United States Attorney for the Eastern District of New York indicted Wing Yeung Chan ("Chan"), the principal of FMS (the predecessor of IFS), alleging that "Chan, through FMS, had persuaded dozens of recent Chinese immigrants to transfer several million dollars to FMS for the purpose of investing in foreign-currency contracts, but had neither invested nor returned the funds to the clients." (Id. ¶ 73.) Chan pled guilty in 1996. (Id.)

Rosner summarizes his allegations regarding the Frankwell scheme and its relevance to BoC's actual knowledge of the IFS fraud as follows:

[A]s a result of BoC's long-term banking relationship with Frankwell, the well-publicized seizure of Frankwell's five U.S. offices and indictment of Chan, and the fact that Frankwell's Receiver served BoC with a restraining order, BoC had actual knowledge of the Frankwell scheme. Due to the significant continuity between Frankwell's principals and IFS's principals — Wilson Lai, Michael Wong and Andy Lok were first principals of Frankwell and later principals of IFS and Siu Lap — BoC also had actual knowledge of the IFS scheme. Moreover, BoC likely played the same role in the Frankwell scheme that it played in the IFS scheme.

(Id. ¶ 78.)

Rosner's allegations surrounding the Frankwell fraud do not raise a sufficiently strong inference that BoC had actual knowledge of the IFS fraud. The Second Amended Complaint and the documents referenced therein establish that only one Frankwell entity, Frankwell Bullion, was a customer of BoC. Further, Frankwell Bullion was a customer of the BoC-HK branch; Rosner does not allege that Frankwell Bullion (or any Frankwell entity) was a customer of BoC-NY or BoC-M. (Id. ¶ 74.) Rosner does not allege facts explaining how BoC-M could have been put on notice regarding activity that took place eight years prior and was limited to an entirely separate branch, BoC-HK. Cf. Gutekunst v. Continental Ins. Co., 486 F.2d 194, 196 (2d Cir. 1973) (in the context of actual and constructive notice, holding that under New York law, "notice received by one branch of a bank does not constitute constructive notice to any other branch of the same bank" (citation omitted)); SEC v. Credit Bancorp, Ltd., 279 F. Supp. 2d 247 (S.D.N.Y. 2003). Finally, Rosner does not allege that BoC-M knew of any involvement in the Frankwell fraud by Siu Lap (BoC-M's only relevant customer in this matter). In short, Rosner does not satisfactorily allege how BoC-HK's alleged knowledge of Frankwell Bullion's participation in the Frankwell scheme resulted in BoC-M's actual knowledge of the IFS fraud.

Further undermining Rosner's chain of events, the Second Amended Complaint alleges that certain Frankwell entities were succeeded by IFS entities, (id. ¶ 67), but does not allege that BoC had any knowledge of these successions. In addition, Rosner alleges that Lai, Wong, and Lok were Frankwell officers at the time of the Frankwell fraud, and later became principals of IFS Inc. and Siu Lap. (Id. ¶ 68.) However, he does not allege that BoC knew that Lai, Wong, and Lok played any role in the Frankwell fraud. Thus, Rosner's allegations are plagued with unacceptably vague and speculative assertions.

The Second Amended Complaint states that Lok "was a Frankwell officer during the time of the Frankwell fraud and later the manager of Siu Lap during the IFS fraud." (Id. ¶ 68.) However, Rosner fails to allege which of the many Frankwell entities Lok was an officer for; if Lok was not an officer at Frankwell Bullion, then he had no connection to BoC during the Frankwell fraud and thus could not serve as an intermediary of providing BoC with actual knowledge that Siu Lap was engaging in fraudulent activity.

The parties dispute whether BoC had "actual knowledge" of the Frankwell fraud and actively participated in the scheme, or whether BoC learned of that fraud after it occurred, along with the rest of the public. The Court finds it inappropriate to delve into a separate sub-analysis of BoC's alleged actual knowledge of the Frankwell fraud. Rather, the Court will disregard all of Rosner's conclusory and speculative allegations, relying instead on the factual allegations contained in the Second Amended Complaint. However, the Court notes that to the extent that Rosner alleges that BoC had actual knowledge of the Frankwell based on its ignorance of "red flags" obvious warning signs, such allegations do not meet the standard of alleging actual knowledge with sufficient particularity. In addition, to the extent that Rosner alleges that BoC was an active participant because BoC-HK accounts served as vehicles for fraudulent activity in the Frankwell fraud, such allegations fail to satisfy the standard of alleging "substantial participation" discussed below.

Finally, even assuming that the factual allegations Rosner asserts regarding the Frankwell scheme are true, Rosner's allegations at best amount to BoC's constructive knowledge, not actual knowledge, of the IFS fraud. After discussing the history of the Frankwell scheme in great detail, Rosner's only allegations connecting the Frankwell scheme to BoC's alleged actual knowledge of the IFS fraud involve the assertion that Lai, Wong, and Lok were principals of Frankwell entities, and later principals of IFS Inc. and Siu Lap. (Second Amended Complaint ¶¶ 78, 93.) Notwithstanding that Rosner does not allege that BoC actually knew that Lai, Wong, and Lok were principals involved in both fraudulent schemes, Rosner at best alleges the existence of "red flags" that should have caused BoC to suspect fraudulent activity was afoot. For the reasons discussed above, a bank's ignorance of "red flags" or obvious warning signs of fraudulent activity cannot establish a bank's actual knowledge sufficient to support a claim of aiding and abetting fraud. See, e.g., Ryan, 2000 WL 1375265, at *9; Nigerian Nat'l Petroleum, 1999 WL 558141, at *7.

d. BoC's Knowledge of the Topworth Scheme

Rosner next alleges that "BoC had actual knowledge of the IFS scheme through its actual knowledge of, and participation in, the Topworth scheme." (Second Amended Complaint ¶ 93.)

In February 1994, the CTFC filed a civil complaint against Topworth and related entities, alleging that Topworth engaged in a fraudulent scheme identical to the Frankwell and IFS schemes. (Id. ¶ 79.) Topworth's Receiver determined that the client funds at issue had been transferred to an account maintained at BoC-HK, and he served BoC with a subpoena demanding that BoC produce records of that account. (Id. ¶ 80.) The Receiver concluded that "as far back as the early nineties, BoC had transferred millions of dollars abroad, and then permitted the withdrawal of these funds through a series of cash transactions, the same conduct in which BoC engaged in connection with the IFS scheme." (Id. ¶ 84.) Rosner concludes that BoC had actual knowledge of the Topworth scheme by virtue of its failure to comply with the Receiver's subpoena, and "because it was an active participant in the scheme: millions of dollars were transferred to Topworth's account at BoC-HK, and then withdrawn through a series of transactions that occurred immediately after the funds were received; these transactions included `numerous' cash transactions." (Id. ¶ 93.) According to Rosner, these allegations establish BoC's actual knowledge of the IFS scheme. (Id.)

Rosner's allegations regarding the Topworth fraud fail to give rise to a sufficiently strong inference of BoC's actual knowledge of the IFS fraud. Rosner offers no allegations in support of BoC's actual knowledge of the IFS fraud except that it had actual knowledge "through its actual knowledge of, and participation in, the Topworth scheme." (Id.) Even assuming that the factual allegations Rosner asserts surrounding the Topworth fraud are true, he at best alleges that BoC should have been aware of "red flags" in connection with the IFS scheme. For the reasons discussed above, such allegations do not trigger BoC's actual knowledge of the IFS fraud. See, e.g., Ryan, 2000 WL 1375265, at *9; Nigerian Nat'l Petroleum, 1999 WL 558141, at *7.

For the reasons discussed above, the Court will not delve into whether BoC had "actual knowledge" of the Topworth fraud, but rather rely on Rosner's factual allegations while disregarding his conclusory and speculative allegations. See supra fn. 10.

e. BoC's Intentional Conduct in Facilitating the IFS Scheme

Finally, Rosner alleges that BoC had actual knowledge of the IFS scheme because "BoC's customers expected it to bend its rules to accommodate their requests, and BoC was willing to do [so] when such customers were powerful, well-connected or influential." (Second Amended Complaint ¶ 94.)

Actual knowledge may be implied from a strong inference of fraudulent intent by alleging "a motive for committing fraud and a clear opportunity for doing so." Powers, 57 F.3d at 184. "Motive would entail concrete benefits that could be realized as a result of the fraud." Renner v. Chase Manhattan Bank, No. 98 Civ. 926, 2000 WL 781081, at *10 (S.D.N.Y. June 16, 2000), aff'd, 85 Fed. Appx. 782 (2d Cir. 2004).

Rosner alleges that BoC had a motive to process the IFS transactions, and thus, may be deemed to have actual knowledge of the fraud. Specifically, Rosner alleges that "BoC processed these transactions because, in the regions of the world in which BoC operates, it is politically advantageous, if not necessary, for BoC to facilitate this type of conduct." (Id. ¶ 57.)

Rosner then alleges that contemporaneous with the IFS scheme, the United States Office of the Controller of the Currency (the "OCC"), which regulates BoC's United States activities, was conducting an investigation of suspicious transactions at BoC-NY unrelated to the IFS scheme. (Id. ¶ 58.) The OCC was not aware of the IFS transactions, and BoC-NY did not advise the OCC of their existence. (Id. ¶ 59.)

Rosner next relies on a New York Times article discussing the questionable transactions at BoC-NY, "including inappropriate loans, and transactions made by BoC's branches in other parts of the world, which, collectively, had resulted in excessive losses to the Bank." (Id. ¶ 61.) The Second Amended Complaint characterizes the New York Times article as stating that "in the Chinese banking system, high-level banking officials are appointed by the state and are expected to dole out political favors." (Id. ¶ 62.) The quoted sections of the article, however, refer only to the granting of loans by Chinese banks. (Id.) Rosner concludes that "BoC processed the IFS transactions because the relevant parties, the principals of IFS and Siu Lap, were powerful, well-connected and influential." (Id. ¶ 63.)

Rosner fails to allege any motive that would result in "concrete benefits" to BoC as a result of the IFS fraud. Renner, 2000 WL 781081, at *10. Rosner's allegation that BoC had a motive to aid and abet the IFS fraud because "the principals of IFS and Siu Lap[] were powerful, well-connected and influential," (Second Amended Complaint ¶ 63), does not specify a "concrete benefit" that would be realized by BoC, but rather relies on vague and conclusory allegations about how "BoC's customers expected it to bend its rules" (id. ¶ 94). Without the allegation of a "concrete benefit" to be realized by BoC, Rosner has not sufficiently alleged a motive that would permit the Court to find that BoC had actual knowledge of the IFS fraud.

In addition, Rosner does not provide any information as to which principals of IFS Inc. and Siu Lap were "powerful, well-connected, and influential," in what manner they were "powerful, well-connected, and influential," or if BoC knew they were "powerful, well-connected, and influential." Such a vacant, conclusory allegation cannot provide the basis of BoC's actual knowledge of the IFS scheme, particularly when Rosner fails to allege any concrete benefit to be realized by BoC.

In his memorandum to the Court, Rosner alleges for the first time that the principals of IFS Inc. and Siu Lap "were allegedly members of the Chinese mob." (Memorandum of Law in Opposition to Bank of China's Motion to Dismiss the Second Amended Complaint, dated May 13, 2008 ("Rosner Opp."), at 16 n. 70.) Even if true, Rosner still fails to allege what concrete benefit BoC realized from the IFS scheme.

Rosner's allegations fail to give rise to a "strong inference" of BoC's actual knowledge of the IFS scheme. Lerner, 459 F.3d at 290. Because Rosner provides insufficient factual allegations to support his assertion that BoC had actual knowledge of the IFS fraud, his aiding and abetting claim must be dismissed pursuant to Rule 9(b) for failure to plead fraud with particularity.

3. Substantial Assistance

Even if Rosner had alleged facts giving rise to a strong inference of BoC's actual knowledge of the IFS fraud, BoC's actions did not rise to the level of providing "substantial assistance."

As noted above, "substantial assistance" generally exists where: (1) a defendant "affirmatively assists, helps conceal, or by virtue of failing to act when required to do so enables the fraud to proceed"; and (2) "the actions of the aider/abettor proximately caused the harm on which the primary liability is predicated." Cromer Fin., 137 F. Supp. 2d at 470. Rosner alleges that BoC provided substantial because "but for BoC's willingness to transfer funds outside the United States banking system, and but for BoC's willingness to permit the wholesale withdrawal of the funds from the international banking system, the fraud simply could not have occurred." (Second Amended Complaint ¶ 95 (emphasis in original).)

Rosner's allegations are clearly insufficient. Rosner alleges, literally, "but for" causation; however, "but for" causation is not sufficient to establish aider and abettor liability. See,e.g., Fezzani, 2008 WL 4369719, at *16; Cromer Fin., 137 F. Supp. 2d at 470.

Further, Rosner alleges no participation by BoC other than that it allowed IFS Inc. and Siu Lap to create accounts, transfer funds among accounts, and make withdrawals from accounts. The Second Amended Complaint gives no evidence that BoC was doing anything more than providing its usual banking services to a customer, and "the `mere fact that participants in a fraudulent scheme use accounts at a bank to perpetrate it, without more, does not in and of itself rise to the level of substantial assistance.'" Mazzaro de Abreu, 525 F. Supp. 2d at 390 (quoting Nigerian Nat'l Petroleum, 1999 WL 558141, at *8).

Rosner attempts to overcome this deficiency by alleging that the transactions at issue "were atypical and non-routine." (Second Amended Complaint ¶ 52.) This conclusory allegation, however, cannot save Rosner's claim; the entire extent of BoC's participation in the IFS scheme alleged by Rosner was that IFS Inc. and Siu Lap created BoC accounts, transferred funds between accounts, and withdrew funds in cash. A conclusory allegation that these services are "atypical and non-routine" cannot satisfy Rosner's burden of alleging substantial assistance with requisite particularity. See Mazzaro de Abreu, 525 F. Supp. 2d at 390 (where complaint alleged that the defendant bank transferred funds "to obviously improper destinations for a host of obviously improper purposes," the court found that the "characterization of the transfers as `improper' is conclusory").

Indeed, the services provided by BoC to IFS Inc. and Siu Lap are the sorts of services that New York courts have repeatedly determined do not rise to the level of substantial assistance.See, e.g., Rizer, 2007 N.Y. Misc. LEXIS 801, at *21 (when a bank processes withdrawals, transfers, and deposits, accepts, processes and/or cashes checks, "[s]uch acts do not constitute substantial assistance."); Ryan, 2000 WL 1375265, at *9 ("The affirmative acts of opening the accounts, approving various transfers, and then closing the accounts on the basis of suspected fraud, without more, do not constitute substantial assistance."); Nigerian Nat'l Petroleum, 1999 WL 558141, at *8 (finding no substantial assistance by defendant bank where it executed repeated wire transfers for millions of dollars); Williams v. Bank Leumi Trust Co., No. 96 Civ. 6695, 1997 WL 289865, at *5 (S.D.N.Y. May 30, 1997) ("[T]he mere fact that all the participants in the alleged scheme used accounts at Bank Leumi to perpetrate it, without more, does not rise to the level of substantial assistance necessary to state a claim for aiding and abetting liability.").

In this case, Rosner offers no viable allegations supporting his claim of substantial assistance other than that the participants in the IFS scheme "used accounts at [BoC] to perpetrate it." Williams, 1997 WL 289865, at *5; see also Mazzaro de Abreu, 525 F. Supp. 2d at 391 ("While Plaintiffs allege that Standard Chartered transferred funds [associated with the underlying fraud], they fail to indicate how these transfers substantially assisted Bank of Europe in its fraud.").

To support his argument that his allegations of BoC's "atypical and non-routine" transactions properly allege BoC's substantial assistance, Rosner cites to ABF Capital Mgmt. v. Askin Capital Mgmt., L.P., 957 F. Supp. 1308 (S.D.N.Y. 1997). That case, however, did not involve use of a bank's services, but rather involved broker-dealers that allegedly "induced their sales forces to market unmodelable securities." Id. at 1330. The court concluded that "[p]articipation in the financing of a fraudulent scheme, particularly where, as here, it is alleged that the financing was not routine, constitutes substantial assistance." Id. (emphasis added). In the instant case, there is no allegation or indication that BoC financed IFS Inc. and Siu Lap's fraudulent scheme.

ABF Capital Mgmt. cites Monsen v. Consolidated Dressed Beef Co., Inc., 579 F.2d 793 (3d Cir. 1978) with the parenthetical explanation that "a bank's atypical financing transactions constituted substantial assistance." 957 F. Supp. at 1330. Monsen did not involve the use of a bank's services, but rather involved affirmative acts by a bank to ensure the continuation of a note program. 579 F.2d at 802.

In short, the Second Amended Complaint establishes that, at most, IFS Inc. and Siu Lap used their BoC accounts as vehicles for conducting the IFS fraud. Rosner provides no support for his argument that BoC's provision of banking services, without more, constitutes substantial assistance sufficient to state a claim against BoC for aiding and abetting fraud.

Because Rosner has not provided any factual support for his allegation that BoC offered anything more than use of BoC's accounts and services, the Court denies Rosner's request to conduct a hearing as to what constitutes "usual" banking practices.

Finally, Rosner contends that BoC failed to comply with domestic and international bank secrecy, know-your-customer, and anti-money laundering laws, decrees, and regulations. As this Court already stated in its previous opinion on this matter, even if true, such violations of law do not elevate BoC's actions into the realm of "substantial assistance." See Rosner, 528 F. Supp. 2d at 427; see also Mazzaro de Abreu, 525 F. Supp. 2d at 391 ("A violation of a federal regulation . . . does not [in and] of itself constitute substantial assistance.");Cromer Fin., 137 F. Supp. 2d at 471 (failure to enforce regulations of the Federal Reserve Bank and New York Stock Exchange do not constitute substantial assistance). As such, Rosner fails to allege that BoC was the proximate cause of any injuries suffered by the IFS investors.

Rosner's allegation that BoC had a "duty" under United States and Macanese law to report these "atypical and non-routine" transactions, but failed to do so, is misguided. (Second Amended Complaint ¶ 53.) "Although the failure to act when required to do so and enabling the fraud to proceed constitutes substantial assistance, inaction is substantial assistance only when the defendant owes a fiduciary duty directly to the plaintiff."Mazzaro de Abreu, 525 F. Supp. 2d at 391 (quoting Cromer Fin., 137 F. Supp. 2d at 470 (internal quotation marks and brackets omitted). Rosner does not allege the existence of a duty BoC directly owed to him. BoC's inaction therefore does not constitute substantial assistance.

Accordingly, Rosner's fraud claim against BoC must be dismissed pursuant to Rule 9(b), as Rosner has failed to plead fraud with sufficient particularity.

Because the Court previously granted Rosner the opportunity to replead his fraud claim and because he has failed to cure the deficiencies found in the Corrected Complaint, Rosner's claim of aiding and abetting fraud is dismissed with prejudice. See Wolff v. Rare Medium, Inc., 210 F. Supp. 2d 490, 500 (S.D.N.Y. 2002) (dismissing plaintiff's amended complaint with prejudice because plaintiff was given opportunity to replead and still failed to state a cognizable legal claim).

B. FAILURE TO STATE A CLAIM OF COMMERCIAL BAD FAITH

1. Leave to File an Amended Pleading to Include the Claim for Commercial Bad Faith

After dismissing the Corrected Complaint, the Court granted Rosner leave to file "an amended complaint repleading the fraud claims dismissed herein" within fifteen business days. Rosner, 528 F. Supp. 2d at 431. Rosner not only repled his fraud claim, but also asserted a new claim of commercial bad faith. (Second Amended Complaint ¶¶ 97-108.) BoC contends that Rosner failed to comply with Rule 15 of the Federal Rules of Civil Procedure ("Rule 15") because he did not seek BoC's consent to amend his pleading, nor did he seek leave of the Court to amend his pleading, in order to add a claim of commercial bad faith. See Rule 15(a)(2) (when not amending a pleading as a matter of course, "a party may amend its pleading only with the opposing party's written consent or the court's leave"). Rosner responds that leave of the Court was not required because Rule 15 permits a party to amend its pleading once as a matter of course. See Rule 15(a)(1).

Rosner's alternative assertion that he "obtained the Court's consent to file an amended pleading and the Court's only limitation on this amended pleading pertained to the RICO claim" (Rosner Opp. at 17 n. 78) is incorrect. The Court granted Rosner leave to file "an amended complaint repleading the fraud claims."Rosner, 528 F. Supp. 2d at 431.

Once the Court dismissed the Corrected Complaint, Rosner's right to amend as a matter of course terminated. See In re "Agent Orange" Prod. Liability Litig., 220 F.R.D. 22, 24 (E.D.N.Y. 2004) ("An absolute right to amend terminates upon the dismissal of the complaint."). There is no question that Rosner needed to either acquire BoC's consent or file a motion with the Court seeking leave to file an amended complaint beyond the Court's Order if he wished to assert a new claim. Rosner did neither.

The Court disapproves of Rosner's approach of filing first and seeking permission later. However, the Court is also aware that leave to amend is generally granted freely, "unless there is undue delay, bad faith, futility, or prejudice to the non-moving party." Elmowitz v. Executive Towers at Lido, LLC, 571 F. Supp. 2d 370, 381 (E.D.N.Y. 2008); see also Block v. First Block Assocs., 988 F.2d 344, 350 (2d Cir. 1993). No such circumstances appear here. The Court therefore grants Rosner's request for leave to file an amended pleading, and will now consider the claim of commercial bad faith contained in the Second Amended Complaint.

2. Failure to Plead Commercial Bad Faith

"To state a claim for commercial bad faith against a bank, a plaintiff must allege: (1) a scheme or acts of wrongdoing; together with either: (2) allegations of the bank's actual knowledge of the scheme or wrongdoing that amounts to bad faith; or (3) allegations of complicity by bank principals in alleged confederation with the wrongdoers." Mazzaro de Abreu, 525 F. Supp. 2d at 394-95. "Claims of commercial bad faith, like claims of fraud, are governed by the heightened pleading requirements of Federal Rule of Civil Procedure 9(b)."Lerner, 459 F.3d at 293 (citing Wight, 219 F.3d at 91-92).

Because the Second Amended Complaint makes no allegation of complicity by any principal of BoC, the Court restricts its analysis to BoC's actual knowledge of the IFS fraud.

As with a claim for aiding and abetting fraud, "[a] claim of commercial bad faith requires that the bank have actual knowledge of facts and circumstances that amount to bad faith, thus itself becoming a participant in a fraudulent scheme." Id. (quotation marks omitted). As a result, courts that dismiss claims of aiding and abetting fraud brought against banks routinely dismiss claims of commercial bad faith on identical grounds. See, e.g., Ryan, 2000 WL 1375265, at *10 ("As I have already concluded that the complaint fails adequately to allege that Chemical had actual knowledge of Wolas's fraud, the plaintiffs' claim for commercial bad faith must also be dismissed."); Renner, 2000 WL 781081, at *17 ("Since I have already held that Chase did not have actual knowledge of the fraudulent scheme, this claim must fail.");Nigerian Nat'l Petroleum, 1999 WL 558141, at **6-8 (dismissing claim of aiding and abetting fraud based on finding that defendant did not have actual knowledge to support claim of commercial bad faith).

The Second Amended Complaint seems to recognize the similarity of the claims — Rosner's allegations of commercial bad faith are nearly identical to his allegations of aiding and abetting fraud. (Compare Second Amended Complaint ¶¶ 85-96 with id. ¶¶ 97-108.)

The Court has already determined that the Second Amended Complaint does not sufficiently allege BoC's actual knowledge of the IFS scheme, but rather alleges, at most, BoC's constructive knowledge. Therefore, for the reasons discussed above, Rosner has not pled facts giving rise to a strong inference of BoC's actual knowledge, and his claim of commercial bad faith must be dismissed pursuant to Rule 9(b).

The Court is aware that the Second Circuit recently stated it has "considerable doubt" about whether a claim of commercial bad faith has any applicability to claims "which do not allege fraud in the making and cashing of checks." Lerner, 459 F.3d at 293. Rosner characterizes this statement as dictum. (Rosner Opp. at 18 n. 79.) The Court adopts the approach taken by the Second Circuit in Lerner, finding that "[e]ven if a claim for commercial bad faith were available in this context," Rosner's claim fails "for the same reason" as does his claim "for aiding and abetting fraud" — specifically, that Rosner "fail [s] to plead facts giving rise to the `strong inference' of actual knowledge of fraud." Id., 459 F.3d at 293.

Because the Court has already provided Rosner with an opportunity to replead his allegations regarding BoC's actual knowledge with sufficient particularity to satisfy the requirements of Rule 9(b), and because he has failed to cure the deficiencies of the Corrected Complaint, the Court dismisses Rosner's claim of commercial bad faith with prejudice.

III. ORDER

For the reasons stated above, it is hereby

ORDERED that the motion (Docket No. 33) of defendant Bank of China, to dismiss the Second Amended Complaint is GRANTED.

The Clerk of Court is directed to withdraw any pending motions and to close this case.

SO ORDERED.


Summaries of

Rosner v. Bank of China

United States District Court, S.D. New York
Dec 18, 2008
06 CV 13562 (S.D.N.Y. Dec. 18, 2008)

holding that factual allegations including that the defendant bank knew from viewing the fraudulent company's accounts that "the repetitive cash withdrawal of all the funds in the disbursing account was plainly inconsistent with the nature of the account holder's business as a `currency trader'" did not support the plaintiff's argument the "atypical and non-routine nature" of deposits made it "simply implausible that [the defendant bank] did not have actual knowledge of the underlying scheme"

Summary of this case from In re Agape Litigation

finding the allegations of "atypical" and "almost daily" large transfers and withdrawals that were "inconsistent with the account holder’s business" did not give rise to a strong inference of actual knowledge

Summary of this case from Yao-Yi v. Wilmington Trust Co.

finding that “willful blindness” or “conscious avoidance” did not satisfy the actual knowledge requirement

Summary of this case from In re Allou Distributors, Inc.

discussing the standard for aiding and abetting a fraud

Summary of this case from Boyarsky v. Hoberman (In re Jeweled Objects LLC)

disapproving of plaintiff's "approach of filing first and seeking permission later" but accepting amended complaint nonetheless, noting that "leave to amend is generally granted freely"

Summary of this case from Easton LLC v. Inc. Village of Muttontown

stating that a "minority" of cases in the district have accepted allegations of willful blindness to satisfy the requirement of pleading actual knowledge

Summary of this case from Picard v. Ceretti (In re Bernard L. Madoff Inv. Sec. LLC)
Case details for

Rosner v. Bank of China

Case Details

Full title:BRIAN ROSNER, ESQ., RECEIVER FOR INTERNATIONAL FINANCIAL SERVICES (NEW…

Court:United States District Court, S.D. New York

Date published: Dec 18, 2008

Citations

06 CV 13562 (S.D.N.Y. Dec. 18, 2008)

Citing Cases

In re Agape Litigation

The first cause of action that the Plaintiffs assert in the Second Amended Complaints is that BOA aided and…

Yao-Yi v. Wilmington Trust Co.

Furthermore, the alleged volume of substantial "atypical money transfers" does not create a strong inference…