Bank of New York in settlement talks with Russia
So will taxpayer TARP money go to pay a Miami plaintiffs lawyer?
NEW YORK (Fortune) -- The good news is that a Moscow judge adjourned Tuesday's scheduled pretrial hearing in Russia's dubious $22.5 billion suit against the Bank of New York Mellon to allow the parties to pursue settlement talks. The agency bringing the suit, the Russian Federal Customs Service, had requested the talks in a short letter that the bank's lawyers received Friday.
The bad news is that an anonymous "Russian government" source has been quoted in the Russian newspaper Kommersant as suggesting that $800 million would be a reasonable figure for resolving the suit.
On top of many other reasons why Russia's suit, which has extortionate overtones, must not be permitted to succeed -- see my September feature story in FORTUNE, "Bank of New York's $22.5 Billion Headache" -- there's now a capper. Last October the bank, at the U.S. Treasury's bidding, accepted $3 billion in TARP (Troubled Assets Relief Program) money.
Are taxpayers now going to watch more than a quarter of that money go to Russia to pay off a fishy-smelling suit? And even if taxpayers could stomach that, are they prepared to then see 29% of the $800 million -- $232 million -- pass through to American lawyer Steven Marks of Miami's Podhurst Orseck, who represents victims in many airplane crash cases and who has been Russia's contingent-fee trial counsel in the weird case? Court records show that that's what Marks's retainer agreement calls for him to receive. Marks did not return emails seeking comment.
For those who came in late, Russia sued the bank in May 2007 under the U.S. civil racketeering laws, theorizing that it was liable in treble damages for the $7.5 billion that a rogue, Russian émigré, bank vice president, Lucy Edwards, helped Russian citizens illegally wire out of that country from 1996 to 1999. Edwards pleaded guilty in Manhattan to a federal conspiracy charge in 2000 and got probation. Russia says it was harmed by Edwards' circumvention of its laws against capital flight.
But instead of filing suit in a U.S. court familiar with our complex Racketeer Influenced and Corrupt Organizations (RICO) statute, Russia's counsel, Marks, filed it in the Moscow Arbitrazh Court, a Russian commercial court that has, of course, never handled a RICO case before and whose authority to do so under Russian law is sharply disputed. But putting aside all the legal niceties, there's an elephant in the room: Most legal experts believe that Russian arbitrazh courts simply lack the judicial independence to rule impartially in a case in which the Russian government has a major stake.
Had Russia's RICO suit been filed here, it is quite likely that a U.S. court would have dismissed it, for many reasons. The simplest to understand is the statute of limitations. Edwards pleaded guilty in 2000, yet Russia waited till 2007 to sue, seemingly putting the suit beyond RICO's four-year limit.
The lapse isn't just a technicality, either. It gets at a troubling reality, which is that Russia's indignation at Edwards' acts is of suspiciously recent origin.
When U.S. prosecutors first came to Russian authorities in 1999, seeking help investigating Edwards, Russian officials downplayed the gravity of what she'd done, claiming that most of her transfers were lawful and that American officials and media were blowing the matter out of proportion.
The Bank of New York has hinted in the past at settlement sums it could plausibly swallow. It made $1.4 million in revenue from Edwards' illegal wire transfers. Accordingly, when the bank signed a non-prosecution agreement with U.S. authorities concerning Edwards' conduct, it agreed to pay the government $14 million -- ten times its gross revenue from her scheme -- in recognition of its having failed to adequately supervise Edwards.
Though Marks frequently says that the bank admitted criminal liability in this agreement, it didn't. Because of Marks's assertions, in fact, prosecutors issued an unambiguous statement to the bank on July 29 clarifying that "the Bank was not charged with any criminal violations" and "did not admit criminal culpability." Nonetheless, Marks has continued to make the same assertions.
The $14 million fine the bank paid the U.S. government in 2005 is probably a sensible sum to pay Russia, too. Of course, Marks' contingency on that sum would come to $4.6 million, rather than $232 million, and, admittedly, after expenses, he might not come away with much profit. But he should be grateful if he breaks even. According to Columbia Law School professor Katherina Pistor, a 2007 ruling of Russia's highest constitutional court holds that contingent fees in judicial cases are contrary to Russian public policy and, therefore, unenforceable. If Marks' case is about vindicating Russia's laws, he should get zero.