Supreme Court Makes Civil RICO Available Against Fraudulent Domestic Efforts To Avoid International Arbitration Award Enforcement

• Published date: 05 July 2023
• Subject Matter: Litigation, Mediation & Arbitration, Criminal Law, Arbitration & Dispute Resolution, Trials & Appeals & Compensation, Personal Injury, White Collar Crime, Anti-Corruption & Fraud
• Law Firm: Jones Day
• Author: Mr Sion Richards, Victoria Dorfman, Fahad Habib, Melissa Stear Gorsline, Sheila Shadmand and Viktoriia Korynevych

The U.S. Supreme Court held that a foreign plaintiff can sue a domestic U.S. judgment-debtor under the Racketeer Influenced and Corrupt Organizations Act ("RICO") for the debtor's fraudulent domestic efforts to avoid collection on a U.S. judgment confirming a foreign arbitral award.

On June 22, 2023, the U.S. Supreme Court, in a 6-to-3 decision in Yegiazaryan v. Smagin authored by Justice Sotomayor, held that foreign plaintiffs can bring a civil RICO action when "the circumstances surrounding the alleged injury" arose in the United States. This decision clarified the scope of the "domestic-injury" requirement adopted by RJR Nabisco, Inc. v. European Community, 579 U.S. 325 (2016), which held that "[a] private RICO plaintiff ... must allege and prove a domestic injury to its business or property" to overcome the presumption against extraterritoriality. In Smagin, the Court rejected petitioners' bright-line rule that would locate a foreign plaintiff's injury at the plaintiff's residency'typically, in a foreign jurisdiction'and thus preclude foreign plaintiffs from suing under RICO on extraterritoriality grounds. Instead, the Court emphasized that RICO is "notoriously expansive in scope" and its application to foreign plaintiffs "requires a more nuanced approach."

This dispute involved Vitaly Smagin, a Russian national, and Ashot Yegiazaryan, a California resident, who allegedly stole Smagin's shares in a venture in Moscow. Smagin was awarded $84 million in arbitration in London and obtained a federal court judgment in California confirming and enforcing the award under the New York Convention. Smagin, however, did not recover on the judgment because Yegiazaryan had allegedly hidden his assets from collection through domestic and foreign entities. Yegiazaryan also directed his co-conspirators to file fraudulent claims against him in foreign jurisdictions, which he would not oppose, to obtain sham judgments that encumbered his assets and blocked Smagin's access.

Smagin sued Yegiazaryan and his co-conspirators under civil RICO. The district court explained that Smagin's residence is in Russia; thus, he "experiences the loss from his inability to collect on his judgment in Russia." Because Smagin failed to plead a domestic injury, the presumption against exterritoriality barred the suit. The Ninth...