Client Alerts

Client Alert: US Supreme Court confirms foreigners can sue American residents for organised crime when they commit fraud and bribery from the US in relation to an international commercial arbitration

Volterra Fietta Client Alert
7 August 2023

On 22 June 2023, the United States Supreme Court issued a decision in Yegiazaryan v. Smagin that confirmed that, in most cases, foreigners can sue Americans and American residents for their damages arising out of fraud and bribery perpetrated in the US in relation to international commercial arbitrations.

In the United States, a statute called the Racketeer Influenced and Corrupt Organizations Act (“RICO”) is a powerful instrument that permits plaintiffs to sue defendants for their involvement in certain predicate criminal acts related to organised crime, including fraud, bribery and witness intimidation.  This includes, on success in the suit, the assessment of triple damages as punitive damages.  RICO was integral to the US Government’s largely successful campaign against the mafia in the 1980s and 1990s and today remains a powerful tool for the victims of similar types of crime.

In a prior decision (RJR Nabisco v. European Community), the US Supreme Court had left open the question of whether the civil causes of action in RICO could be deployed by a foreign person that suffered damages outside the US based on conduct that occurred in part in the US.  In its most recent decision, the US Supreme Court answered that question as “yes”.  The Supreme Court said that, in view of the statute’s purpose, a foreigner could bring suit in the US under the statute for relevant crimes committed in the US, even if all the damages to the foreigner formally accrued abroad.  It did so in relation to a case involving fraud and witness intimidation arising out of an international commercial arbitration.

Background to the case

In 2014, Vitaly Smagin won an arbitral award worth over USD 84 million in an LCIA arbitration against Ashot Yegiazaryan, his former business partner.  The arbitration involved a misappropriation of investment funds from 2003 to 2009 in a joint real estate venture between the two parties in Moscow.

In March 2016, Smagin, who lives in Russia, obtained a confirmation of the award under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards in a district court in California – the state where Yegiazaryan had lived since 2010.  However, Smagin found himself unable to collect on the USD 92 million judgement.  This was allegedly due to Yegiazaryan’s various acts of fraudulent concealment of assets, including tens of millions of dollars he obtained from an unrelated arbitration in 2015.  It also allegedly arose from Yegiazaryan’s intimidation of relevant witnesses.

The Civil RICO Suit

In 2020, Smagin filed a civil suit under the RICO that alleged that Yegiazaryan “engaged in a pattern of criminal activity, predominantly in and targeted at California, to prevent [Smagin] from collecting on his California judgment” in violation of RICO.

However, in 2021, the California district court dismissed the case on the ground of Smagin’s failure to plead “domestic injury” allowing him recourse to RICO.  The district court found that Smagin’s citizenship and residence in Russia meant that the injury done to him was located in Russia and thus, in its view, not amenable to a RICO-based lawsuit in the US.  In doing so, the trial court used formal jurisdictional rules that located the place of injury for an unpaid debt as the location of the creditor and not the debtor.

In June 2022, the ruling was reversed by the Court of Appeals for the Ninth Circuit.  That Court held that the lawsuit could proceed under RICO because the predicate crimes occurred in California and were designed to frustrate a California court’s monetary judgment (which had recognised the underlying arbitration award).  Eschewing a bright-line approach, the Ninth Circuit instead adopted a “context-specific” approach that looked to all relevant factors to make its determination.

After accepting the case on certiorari, the US Supreme Court affirmed the Court of Appeal’s reasoning.  It ruled that, based on a contextual approach, Yegiazaryan’s alleged commission of fraud and intimidation in California, to frustrate a California judgment, meant that the injury at issue arose in the US and thus was amenable to RICO’s civil mandates.  In doing so, the court emphasised the purposes of the RICO statute as a crime-prevention mechanism.

Implications for International Commercial Arbitration

While an important tool for the resolution of business disputes, international commercial arbitration can often be open to improper and illegal tampering, such as by bribery, corruption, witness intimidation or fraud and perjury.  In many cases, arbitration counsel are not cognisant of the potential criminal implications of the opposing party’s conduct.  As can be seen, if some of the criminal acts occur in the US, the US Supreme Court’s decision in Yegiazaryan v. Smagin confirms a pathway for aggrieved parties to obtain significant recourse as victims of such illegal acts in the context of international commercial arbitration (and, likely, World Bank-based investment arbitration before ICSID in Washington, D.C.).

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