Moskovitz et al v. LA SUISSE, SOCIETE D' ASSURANCES SUR LAVIE
MEMO ENDORSEMENT for 211 Report and Recommendations. ENDORSEMENT: No objections have been filed to the amended Report and the time for filing has passed. I adopt the amended Report as my opinion and enter judgment in the form annexed hereto. (Signed by Judge Colleen McMahon on 8/6/2014) (tn)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
LA SUISSE, SOCIETE D'ASSURANCES
SUR LA VIE, n/k/a SWISS LIFE AG
"'i'" ~ .•-i . •
, "·' .;.,,_.
MOSES KRAUS AND CARUSO AG,
GABRIEL W. GORENSTEIN, UNITED STATES MAGlS'fR::&T-E.JlJUGE -~-"''"'-'· ...
_ . . ,,._... . . .
On December 13, 2013, Judge Colleen McMahon entered a default judgment and
permanent injunction against third-party defendants Moses Kraus and Caruso AG and in favor of
third-party plaintiff Swiss Life AG. The case was referred to the undersigned for an inquest on
damages. On June 27, 2014, this Court issued a Report and Recommendation addressing Swiss
Life's request for damages. Having considered Swiss Life's objection to that Report and
Recommendation, and additional materials filed with that objection, this Court hereby vacates
the prior Report and Recommendation, La Suisse, Societe D' Assurances Sur La Vie v. Kraus,
2014 WL 2916435, 2014 U.S. Dist. LEJCIS 88487 (S.D.N.Y. June 27, 2014), and replaces it with
this Amended Report and Recommendation.
For the reasons stated below, Swiss Life AG should be awarded damages in the amount
of $8,433,027 plus 136,198,568.55 Swiss Francs ("CHF"), with the latter figure to be converted
by the Clerk of Court to United States dollars on the date judgment is entered.
'·' ' -
We summarize this litigation only to the extent necessary to explain the basis for the
Swiss Life AG, formerly known as La Suisse Societe D' Assurances Sur La Vie ("La
Suisse"), was named as the defendant in the underlying lawsuit and eventually filed a third-party
complaint against Moses Kraus and Caruso AG. See Third-Party Complaint, filed March 17,
2008 (Docket# 22) ("TPC"). 1 The original complaint has been dismissed. See Order
Dismissing Action with Prejudice and Directing Return of Funds Posted with the Court, dated
Feb. 3, 2014 (Docket# 196). In the third-party complaint, Swiss Life alleges that Kraus and
Caruso controlled an enterprise that defrauded Swiss Life and later initiated lawsuits against
Swiss Life in the names of Swiss Life policyholders in the courts of the United States,
Switzerland, and Israel, with the aim of extorting Swiss Life to make payments directly to Kraus
and Caruso. TPC iii! 23-65, 69-78, 84-90. Swiss Life seeks damages and injunctive relief for
violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C.
§ 1961, et. seq., and for breach of fiduciary duty.
TPC iii! 4-6.
Swiss Life's third-party complaint asserts that Kraus and Caruso violated RICO in two
respects. First, Kraus and Caruso are alleged to have intentionally misrepresented vital
demographic information regarding the population to which they were selling insurance policies
underwritten by La Suisse, resulting in financial gain to Kraus and Caruso and financial loss to
La Suisse. TPC if 7. Second, Kraus and Caruso are alleged to have initiated and financed the
instant lawsuit which, while purportedly commenced for the benefit of policyholders, was
We use the names "Swiss Life" and "La Suisse" as they are used in third-party plaintiff
Swiss Life's third-party complaint and inquest submissions.
allegedly in fact a tool to extort money from La Suisse. TPC ~ 8. Kraus and Caruso are also
alleged to have brought or threatened to bring additional lawsuits against La Suisse if they were
not compensated. Id.
On December 13, 2013, Judge McMahon entered a default judgment against Kraus and
Caruso based upon their failure to answer the third-party complaint. See Default Judgment,
dated Dec. 13, 2013 (Docket# 193) ("Default Judgment"). The default judgment states the
(1) Kraus and Caruso participated in a racketeering scheme under 18 U.S.C.
§ 1962(c) through their repeated violation of the U.S. criminal statutes on
extortion (18 U.S.C. § 1951), mail (18 U.S.C. § 1341) and wire (18 U.S.C.
§ 1343) fraud, and bribery (18 U.S.C. § 201), all predicate acts under 18 U.S.C.
§ 1961 et seq., the Racketeer Influenced and Corrupt Organizations Act
("RICO"). Swiss Life is entitled to treble damages as well as injunctive relief
pursuant to 18 U.S.C. § 1964(a) and (c).
(2) Kraus and Caruso, and any sub-broker under their control, owed a duty to
Swiss Life to properly explain and not misrepresent the terms of the Swiss Life
insurance policies, commonly referred to as marriage policies, at the heart of the
lawsuit titled Moskovitz v. La Suisse. 06 Civ. 4404. To the extent Kraus and
Caruso, and any sub-broker under their control, intentionally misrepresented,
exaggerated or failed to explain the policy terms to certain policyholders, Swiss
Life is entitled to indemnification from Kraus and Caruso for any harm arising
out of those failures.
Default Judgment at 2. The default judgment contains injunctive relief against Kraus and Caruso
pursuant to 18 U.S.C. § 1964(a) and provides that Swiss Life is to be awarded monetary
damages against Kraus and Caruso on a joint and several basis. Id. at 3. It states that Swiss Life
is entitled to treble damages pursuant to 18 U.S.C. § 1964(c). Id. Finally, the default judgment
awards to Swiss Life attorney's fees in the amount of $1,369,718.50, and costs and
disbursements in the amount of $201,884.61, pursuant to 18 U.S.C. § 1964(c). Id.
On February 10, 2014, Judge McMahon referred this matter to the undersigned to
conduct an inquest. See Order, dated Feb. 10, 2014 (Docket # 197). On February 11, 2014, this
Court issued an order directing Swiss Life to submit proposed findings of fact and conclusions of
law with supporting documentation as to its request for damages. See Scheduling Order for
Damages Inquest, dated Feb. 11, 2014 (Docket# 198). Swiss Life submitted proposed findings
of fact and conclusions of law, supporting affidavits, and other materials. 2
Under the Court's order, Kraus and Caruso were given until April 28, 2014, to oppose
Swiss Life's submissions.
2. The Order also notified the parties that the Court would
conduct the inquest based upon the written submissions of the parties unless a party sought an
3. A copy of the Order was mailed to Kraus and Caruso at their last
Because the default judgment entered in this case establishes the liability of Kraus and
Caruso, see Bambu Sales, Inc. v. Ozak Trading Inc., 58 F.3d 849, 854 (2d Cir. 1995) (citation
omitted), the "only issue remaining is whether [Swiss Life has] supplied adequate support for the
damages [it] seek[s]," Kuruwa v. Meyers, 823 F. Supp. 2d 253, 256 (S.D.N.Y. 2011), affd 512
F. App'x 45 (2d Cir. 2013); accord GAKM Res. LLC v. Jaylyn Sales Inc., 2009 WL 2150891, at
See Proposed Findings of Fact and Conclusions of Law, dated March 28, 2014 (Docket
# 200); Declaration of Jesse T. Conan, dated March 28, 2014 (Docket# 201); Attorney Time
Records (undated) (filed under seal) ("Time Records"). Along with these submissions, Swiss
Life also provided two affidavits that it had originally filed in connection with its motion for a
default judgment. See Declaration of Philippe Pointet, dated Dec. 20, 2012 (Docket # 171)
("Pointet Deel."); Declaration of Richard N. Chassin, dated Dec. 12, 2012 (Docket# 172)
("Chassin Deel."). After this Court issued the original Report and Recommendation, Swiss Life
filed an objection and an affidavit that contained additional factual material. See Swiss Life's
Rule 72 Objection to the Report and Recommendation of Magistrate Gabriel W. Gorenstein,
dated July 11, 2014 (Docket# 207) ("Objection"); Declaration of Jesse T. Conan, dated July 11,
2014 (Docket# 208) ("Conan Objection Deel.").
*2 (S.D.N.Y. July 20, 2009) ("A default judgment that is entered on the well-pleaded allegations
in a complaint establishes a defendant's liability ... and the sole issue that remains before the
court is whether the plaintiff has provided adequate support for the relief it seeks.") (citations
omitted). The Second Circuit has held that an inquest into damages may be held on the basis of
documentary evidence alone "as long as [the court has] ensured that there was a basis for the
damages specified in [the] default judgment." Fustok v. ContiCommodity Servs., Inc., 873 F.2d
38, 40 (2d Cir. 1989); accord Action S.A. v. Marc Rich & Co., Inc., 951F.2d504, 508 (2d Cir.
None of the parties have requested an evidentiaryhearing, and neither Kraus nor Caruso
have made any submission to the Court. Because Swiss Life's submissions provide a basis for
an award of damages, no hearing is required.
II. FINDINGS OFFACT AND CONCLUSIONS OF LAW
In light of the default of Kraus and Caruso, Swiss Life's properly-pleaded allegations,
except those related to damages, are accepted as true. See,£:.&_, City of New York v. Mickalis
Pawn Shop, LLC, 645 F.3d 114, 137 (2d Cir. 2011) ("It is an 'ancient common law axiom' that a
defendant who defaults thereby admits all 'well-pleaded' factual allegations contained in the
complaint.") (citing Vt. Teddy Bear Co., Inc. v. 1-800 Beargram Co., 373 F.3d 241, 246 (2d Cir.
2004)); Finkel v. Romanowicz, 577 F.3d 79, 84 (2d Cir. 2009) ("In light of [defendant's] default,
a court is required to accept all ... factual allegations as true and draw all reasonable inferences
in [plaintiffs] favor.") (citation omitted). The following findings of fact and conclusions of law
are based on the allegations in Swiss Life's third-party complaint regarding liability and the
admissible evidence regarding damages contained in its inquest submissions.
A. Facts Relating to Liability
Swiss Life is an insurance company organized under the laws of Switzerland with its
principal place of business in Zurich, Switzerland. TPC ~ 10. Swiss Life merged with La Suisse
in November 2005, and La Suisse no longer exists as a separate corporate entity. Id.
Caruso is a European brokerage firm organized under the laws of Liechtenstein with its principal
place of business in London, England.
broker affiliated with Caruso.
12. Kraus is a resident of England and an insurance
14-15. Kraus and Caruso acted as insurance brokers for La
Suisse and, as such, sold and marketed the insurance policies that were the subject of the instant
1. Fraud in Relation to Sale of Insurance Policies
The insurance policies involved in this case are endowment policies known as "marriage
23. They call for the payment of the face value of the policy when the insured
person reaches age 26, dies, or marries, whichever happens first. Id. Insurance brokers from the
Chassidic Jewish community in New York and elsewhere conceived a plan to market and sell
these policies in the late 1980's.
24. La Suisse entered into agreements with various
brokers, including Kraus and Caruso, that allowed the brokers to sell the policies in New York.
26-27. The agreements provided that the brokers would earn commissions on the sale of
each policy, and they further specified that the brokers owed duties of good faith, honesty, and
loyalty to La Suisse.
In setting the price of premiums for the policies, La Suisse used statistics concerning the
marriage rates and ages of the Swiss population.
29. The brokers informed La Suisse that
they planned to market the policies to the Jewish population at large. Id.
30. The marriage
rates and marriage ages of the Jewish population are consistent with the statistics of the marriage
rates and marriage ages of the Swiss population. Id. ~ 31. The marriage rates and ages of the
Chassidic community, however, are significantly different from those of the Swiss or Jewish
populations generally, and the brokers knew that the average marriage age of members of the
Chassidic community is approximately 19 years of age, far lower than that of the Swiss or
Jewish populations generally. Id. if 32. Unbeknownst to La Suisse, the brokers planned to sell
the policies almost exclusively to members of the Chassidic community. Id.
if 25. As a
consequence of the brokers' misrepresentations regarding the probable marriage ages and rates
of the policyholders, the policyholders systematically gained unusually high returns because the
insured persons would marry at ages far lower than the statistical assumptions La Suisse had
used to set premiums. Id.
if 33. On average, each policyholder paid approximately five fewer
annual premiums than La Suisse expected when it priced the policies but still received the full
face value of the policy upon marriage. Id. if 34. La Suisse relied on the brokers'
misrepresentations when setting the terms of the policies, including the price of the premiums.
Id. if 39. The brokers sold approximately 7,000 policies to residents of New York. Id. if 35. La
Suisse uncovered this fraudulent conduct in 1995 and immediately ceased all sales of new
policies. Id. if 36. It continued paying benefits on existing ones, however. Id.
To prevent La Suisse from revising the terms of its policies, the brokers, including Kraus
and Caruso, repeatedly misrepresented the population to which they were marketing and selling
the policies. Id. if 41. These misrepresentations occurred during the period between 1989 and
1995. Id. if 40. For example, in a telephone conversation in September 1990, Kraus represented
to Gerhard Mayer of La Suisse that most marriages would occur between the ages of 22 and 24,
even though Kraus knew this representation was false. Id. iii! 42-43. La Suisse relied on this
misrepresentation to its detriment. Id. ii 44. On October 10, 1990, Kraus told La Suisse that the
company should not be concerned about the possibility that large numbers of policyholders
would marry earlier than its assumptions indicated, even though Kraus knew this representation
45-46. La Suisse relied on this misrepresentation to its detriment.
or about May 15, 1995, Kraus forwarded to La Suisse a letter he received from the Council of
Jewish Federations, dated May 15, 1995, which contained statistics stating that the average age
of first marriage for Jewish men is 29 and the average age of first marriage for Jewish women is
48. Kraus knew that sending this letter to La Suisse would persuade La Suisse that it
had correctly relied on statistics for the marriage ages and rates of the Swiss population, as they
were consistent with the statistics contained in the letter from the Council of Jewish Federations.
49. La Suisse believed that the letter and the statistics it contained supported its reliance on
statistics for the marriage ages and rates of the Swiss population, as they were consistent with the
statistics provided by the Council of Jewish Federations.
Part or all of the payment of premiums due on the policies was financed by the brokers or
companies controlled by the brokers. Id.
66. The brokers, including Kraus and Caruso, paid
the premiums on behalf of policyholders in exchange for the right to collect the benefits, but the
brokers never informed La Suisse that, in many cases, the brokers were the true parties of
2. Extortionate Litigation and Associated Bribery
The brokers also attempted to extort La Suisse and Swiss Life by using the threat of
litigation and actual litigation. Id.
69. In 1997, non-defendant broker Elias Horowitz initiated
and financed the first in a series of policyholder lawsuits in New York against La Suisse in the
case of Kalman Weiss v. La Suisse, 97 Civ. 1352.
70. In Kalman Weiss, the policyholders
asserted claims for breach of contract and discrimination under 42 U.S.C. § 1981. Id. Horowitz
also caused another action in New York to be brought against Swiss Life under the name of Isac
Hirsch v. La Suisse, 04 Civ. 10251.
71. At a meeting with La Suisse executives on or
about February 28, 2001, Kraus offered to provide favorable testimony for the company in
Kalman Weiss ifhe were compensated.
72. Kraus advised La Suisse executives that he
could influence the jury in the case depending on how he chose to testify, and he also told the
executives that he had documents in his possession which could similarly sway the jury. Id. La
Suisse ignored Kraus's offers and refused to compensate him. Id. Kraus planned to testify for
the plaintiffs in Kalman Weiss but was disqualified because plaintiffs had not properly identified
him as a witness in the pretrial order.
73. Other than several small awards based on
misdirected payments, La Suisse prevailed in Kalman Weiss.
In 2005, Kraus and Caruso filed the instant action ("Moskovitz"), purportedly on behalf
75. Kraus and Caruso paid all legal fees in Moskovitz and otherwise
controlled the litigation. Id. Kraus and Caruso have also initiated approximately 50 lawsuits in
Switzerland and Israel against La Suisse and Swiss Life and have engaged in a calculated effort
to use these lawsuits to force Swiss Life to make payments directly to them. Id.
efforts included threats to file more lawsuits unless Kraus and Caruso were paid money, as well
as promises to settle lawsuits if they were paid.
RICO provides that it is unlawful for any person "employed by or associated with any
enterprise engaged in ... interstate or foreign commerce, to conduct or participate, directly or
indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity."
18 U.S.C. § 1962(c). There are three elements to a civil RICO claim: (1) a substantive violation
of 18 U.S.C. § 1962; (2) injury to plaintiff's business or property; and (3) causation of the injury
by reason of the violation.
UFCW Local 1776 v. Eli Lilly & Co., 620 F.3d 121, 131
(2d Cir. 2010); accord Sky Med. Supply Inc. v. SCS Support Claims Servs., Inc., 2014 WL
1801139, at *9 (E.D.N.Y. May 7, 2014). Also, "in order to prevail on a civil RICO claim
predicated on any type of fraud ... the plaintiff must establish 'reasonable reliance' on the
defendants' purported misrepresentations or omissions." Bank of China, N.Y. Branch v. NBM
LLC, 359 F.3d 171, 178 (2d Cir. 2004).
The terms of the default judgment entered by Judge McMahon explicitly provide that
Kraus and Caruso "participated in a racketeering scheme under 18 U.S.C. § 1962(c)"through the
predicate acts of extortion, mail fraud, wire fraud, and bribery, and that "Swiss Life is entitled to
treble damages ... pursuant to 18 U.S.C. § 1964(a) and (c)." Default Judgment at 2. In light of
the issues resolved by the default judgment itself, we will consider only whether Swiss Life's
submissions adequately demonstrate that Kraus and Caruso's RICO violations caused the
damages it alleges. 3
Accordingly, we begin our analysis by noting that "a RICO plaintiff is required to show
that the RICO violation not only was a 'but for' cause of his injury, but was also the proximate
cause as well." Anza v. Ideal Steel Supply Corp., 547 U.S. 451, 464 (2006) (citing Holmes v.
Sec. Investor Prot. Corp., 503 U.S. 258, 268 (1992)) (internal quotation marks omitted);
accord Hemi Grp., LLC v. City of New York, N.Y., 559 U.S. 1, 9 (2010) ("[T]he plaintiff is
required to show that a RICO predicate offense not only was a 'but for' cause of his injury, but
was the proximate cause as well.") (citation and internal quotation marks omitted). As the
Second Circuit has explained:
Swiss Life has satisfied the reliance element, as the third-party complaint alleges that
"La Suisse relied on the Brokers' misrepresentations ... when setting the terms of the Marriage
Policies, including the price of the premiums." TPC ~ 39.
To show injury by reason of a RICO violation, a plaintiff must demonstrate that
the violation caused his injury in two senses. First, he must show that the RICO
violation was the proximate cause of his injury, meaning "there was a direct
relationship between the plaintiffs injury and the defendant's injurious conduct."
First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763, 769 (2d Cir. 1994).
Second, he must show that the RICO violation was the but-for (or transactional)
cause of his injury, meaning that but for the RICO violation, he would not have
been injured. See Holmes v. Sec. Investor Prot. Corp., 503 U.S. 258, 268 (1992).
UFCW Local 1776, 620 F.3d at 132. Proximate cause requires "some direct relation between the
injury asserted and the injurious conduct alleged," and thus, a "link that is too remote, purely
contingent, or indirect is insufficient." Hemi Grp., 559 U.S. at 9 (citations and quotation marks
Here, the third-party complaint alleges that, but for Kraus and Caruso's
misrepresentations concerning the average marriage ages of the population they intended to
target, La Suisse would not have sold the policies as written. See TPC iii! 29-36. The predicate
acts of fraud also proximately caused Swiss Life's injury inasmuch as the third-party complaint
alleges that Kraus and Caruso actively persuaded Swiss Life not to alter the terms of the
marriage policies by repeatedly misrepresenting the population to which they were marketing
and selling the policies, thus establishing that Kraus and Caruso's fraud was a direct cause of
Swiss Life's injury. See id. iii! 40-41.
1. Damages from Kraus and Caruso's Fraud
Swiss Life seeks to recover "damages suffered by Swiss Life arising out of the sale of the
Marriage Policies in the United States brokered by Kraus and Caruso." Proposed Findings of
Fact and Conclusions of Law if 35. To calculate these damages, Swiss Life notes that "[l]ife
insurance companies, such as Swiss Life, collect premiums from policyholders and pay benefits
to those policyholders upon the occurrence of specified events - the 'insured event."' Pointet
Deel. ii 4. "As a general matter, life insurance companies set the price of annual premiums so
that they collect sufficient funds to pay benefits and cover costs." Id. Because insurers "receive
premiums up front and pay claims later," they are able to invest the money they hold for their
own benefit. Proposed Findings of Fact and Conclusions of Law iJ 24. Under the terms of the
marriage policies at issue in this case, marriage was an insurable event. Pointet Deel. ii 5.
However, as a result of the fraud described above, Swiss Life collected approximately five fewer
premium payments per policy than it had expected. Id. ii 6. The average annual premium paid
by the policyholders was approximately CHF 6,000, meaning that Swiss Life lost, on average,
approximately CHF 30,000 per policy. Id. Swiss Life had sold approximately 10,000 marriage
policies worldwide. Id.
In 2006, Swiss Life engaged PriceWaterHouseCoopers ("PWC") to assess the losses
suffered by the company from these marriage policies. Id. ii 7. PWC's analysis established that,
as of December 31, 2006, Swiss Life had paid CHF 749,471,889 in benefits to policyholders of
the marriage policies. Id.
ii 9; Financial Data Chart (annexed as Ex. B to Pointet Deel.).
that date, the cumulated reserves available to satisfy the benefits were CHF 471,674,169.
Pointet Deel. ii 9; Financial Data Chart. Thus, PWC determined that Swiss Life's losses were
CHF 277, 797, 720 as of December 31, 2006. Pointet Deel. ii 9; Financial Data Chart. Between
December 31, 2006, and June 30, 2012, Swiss Life accumulated additional losses of CHF
I 0,556,442. See Financial Data Chart; Pointet Deel. ii 11. Thus, as of June 30, 2012, Swiss
Life's actual losses on the entire portfolio of marriage policies were CHF 288,354,162. Pointet
Deel. ii 11.
Swiss Life's records establish that Kraus and Caruso acted as broker for 28% of all of the
marriage policies sold worldwide, with 50% of these policies having been sold to policyholders
in the United States and 50% having been sold to policyholders living outside the United States.
14. Therefore, Swiss Life concludes that losses arising out of the marriage policies are 14%
of the worldwide losses. Because Swiss Life has (inexplicably) rounded down the worldwide
losses to CHF 288,000,000, Swiss Life calculates the losses on the policies brokered by Kraus
and Caruso in the United States to be CHF 40,320,000 (i.e., 14% of the rounded-down
worldwide loss figure).
15. Kraus and Caruso also received a total of CHF 10,159,045.70
in commissions from their sale of marriage policies. Id. ~ 16. Because 50% of those policies
were sold in the United States, commissions paid to Kraus and Caruso for their sale of marriage
policies in the United States total CHF 5,079,522.85.
17. As a result, Swiss Life concludes
that the damages it suffered arising out of the sale of the marriage policies in the United States
brokered by Kraus and Caruso are CHF 45,399,522.85.
18; Proposed Findings of Fact and
Conclusions of Law~ 35.
The Court finds this methodology for calculating damages attributable to Kraus and
Caruso to be reasonable, particularly given that neither Kraus nor Caruso have proposed any
other manner of calculating damages.
U.S.A. Famous Original Ray's Licensing Corp.
v. Famous Ray's Pizza Buffet Inc., 2013 WL 5363777, at *5 (S.D.N.Y. Sept. 26, 2013)
(resolving doubts in damages calculations against defaulting defendant). Case law requires that
a party need only establish the amount of damages at an inquest with "reasonable" certainty.
RGI Brands LLC v. Cognac Brisset-Aurige, S.a.r.l., 2013 WL 1668206, at *6
(S.D.N.Y. April 18, 2013) (citing cases). While Swiss Life's model is based on its total losses, it
does not seek damages for money lost on policies untainted by Kraus and Caruso's fraud.
Instead, it determines loss attributable to the policies Swiss Life issued at the behest of Kraus
Accordingly, we find that Swiss Life suffered losses of CHF 45,399,522.85 as a result of
Kraus and Caruso's fraudulent conduct.
2. Damages from Extortionate Litigation
Swiss Life also seeks damages for expenses incurred in defending against the Moskovitz
litigation, the pursuit of which, in part, constituted the RICO predicate act of extortion under the
default judgment. For this aspect of its claim, Swiss Life seeks damages in the amount of
$2,811,009. See Proposed Findings of Fact and Conclusions of Law~ 46. Although Moskovitz
was filed on June 2, 2005, Swiss Life asserts that "the case demands and associated extortionate
pressure began to increase dramatically starting in January 2006."
42 (citing Chassin Deel.
4). Thus, Swiss Life seeks only those fees "incurred ... from January 1, 2006, to November
30, 2012, just before Swiss Life filed its motion for a default judgment." Id.
The Hobbs Act, 18 U.S.C. § 1951, defines "extortion" as "the obtaining of property from
another, with his consent, induced by wrongful use of actual or threatened force, violence, or
fear, or under color of official right." Id. § 1951 (b )(2). In order to make out a claim of extortion
in violation of the Hobbs Act, a plaintiff must prove that a defendant "(l) induced [the victim],
with [the victim's] consent, to part with property, (2) through the wrongful use of actual or
threatened force, violence or fear (including fear of economic loss), (3) in such a way as to
adversely effect interstate commerce." McLaughlin v. Anderson, 962 F .2d 187, 194 (2d Cir.
1992) (citations omitted); accord Ascentive, LLC v. Opinion Corp., 842 F. Supp. 2d 450, 478
(E.D.N.Y. 2011). The element of fear required under the Hobbs Act maybe satisfied by
"putting the victim in fear of economic loss." United States v. Capo, 817 F.2d 947, 951 (2d Cir.
1987) (citation omitted). The victim must "reasonably believe" that the defendant "had the
power to harm the victim" and also that "the defendant would exploit that power to the victim's
detriment." United States v. Middlemiss, 217 F.3d 112, 118 (2d Cir. 2000) (citations omitted).
"[L]egal fees may constitute RICO damages when they are proximately caused by a RICO
violation." Stochastic Decisions, Inc. v. DiDomenico, 995 F.2d 1158, 1167 (2d Cir. 1993)
(citation omitted); accord Angermeir v. Cohen, 2014 WL 1613016, at *13 (S.D.N.Y. March 27,
2014) (collecting cases). Because the Hobbs Act also forbids attempted extortion, an
extortionate effort need not be successful in order to be actionable. See McLaughlin, 962 F.2d at
194 (citing 18 U.S.C. § 1951(a)). However, "a threat to cause economic loss is not inherently
wrongful; it becomes wrongful only when it is used to obtain property to which the threatener is
not entitled." United States v. Jackson, 180 F.3d 55, 70 (2d Cir. 1999); accord Kashelkar v.
Rubin & Rothman, 97 F. Supp. 2d 383, 392 (S.D.N.Y. 2000) (no claim for extortion lies "when
the Defendant had a good faith claim of right to the money sought") (citations omitted);
Calabrese v. CSC Holdings, Inc., 283 F. Supp. 2d 797, 809 (E.D.N.Y. 2003) ("[T]he use of
economic threats to obtain property is wrongful only if the defendant does not have a claim of
right to that property.") (citations omitted); United States v. Sturm, 870 F.2d 769, 773 (1st Cir.
1989) ("[T]he use of legitimate economic threats to obtain property is wrongful only if the
defendant has no claim of right to that property.").
Notwithstanding these principles, courts are nearly unanimous in the view that the pursuit
of frivolous litigation does not constitute the predicate RICO act of extortion. See,~. Deck v.
Engineered Laminates, 349 F.3d 1253, 1258 (10th Cir. 2003) ("[W]e join a multitude of other
courts in holding that meritless litigation is not extortion under [18 U.S.C.] § 1951.");
FindTheBest.com, Inc. v. Lumen View Tech. LLC, 2014 WL 2050610, at *4 (S.D.N.Y. May 19,
2014) ("The courts of appeals which have addressed the question have all agreed that the
instigation of meritless litigation does not establish the predicate RICO act of extortion.") (citing
cases); id. ("[W]hile the Second Circuit has not yet addressed the question, district courts in this
circuit have held that the filing of meritless litigation, or even malicious prosecution, is not a
predicate RICO act.") (citing cases); E. Savings Bank, FSB v. Papageorge, 2014 WL 910357, at
*5 (D.D.C. March 10, 2014) ("Abusive or sham litigation does not constitute a RICO predicate
act.") (citing cases); but see Hall Am. Ctr. Assocs. Ltd. P'ship v. Dick, 726 F. Supp. 1083,
I 093-97 (E.D. Mich. 1989) (lawsuit was component of extortion). As the Tenth Circuit pointed
out in Deck, "[t]o promote social stability, we encourage resort to the courts rather than resort to
force and violence" and "[e]xtortion is the antithesis of litigation as a means of resolving
disputes." 349 F.3d at 1258. As a result, "recognizing abusive litigation as a form of extortion
would subject almost any unsuccessful lawsuit to a colorable extortion (and often a RICO)
claim." Id. In other words, "[w]henever an adverse verdict results from failure of the factfinder
to believe some evidence presented by the plaintiff, the adverse party could contend that the
plaintiff engaged in extortionate litigation." Id.; accord FindTheBest.com, 2014 WL 2050610, at
* 14 ("Recognizing [meritless] litigation as a predicate RICO act would give complainants
unprecedented access to federal courts and the treble damage remedy authorized under RICO"
and "allowing these suits to proceed as RICO suits risks chilling parties' resort to the judicial
system to resolve their disputes.").
Swiss Life, however, urges that these cases are inapposite because this case does not
involve a "trumped-up complaint about frivolous litigation." Objection at 4. In their view,
Moskowitz and the other lawsuits are different in kind because they "have no nexus to Kraus or
the personal payment demanded by him to make them go away." Id. Indeed, case law
recognizes that litigation may constitute extortion where the "victim of the extortionate activity
had a preexisting right to be free from the threats invoked." United States v. Tobin, 155 F.3d
636, 640 (3d Cir. 1998). In Tobin, involving a criminal violation of the Hobbs Act, the
defendant's threat to sue was considered extortionate where the defendant "did not threaten to
pursue legal action" to enforce an alleged oral contract but rather "threatened unrelated lawsuits
alleging sexual harassment." Id. Here, Swiss Life points out that the policyholder lawsuits
"initiated and controlled by Kraus and Caruso could not resolve a dispute between Kraus/Caruso
and Swiss Life." Objection at 4 n.4.
We agree. The lawsuits controlled by Kraus and Caruso constituted extortion for RICO
purposes because Kraus and Caruso did not have a legitimate claim of right to the proceeds of
the Moskovitz lawsuit. Rather, the allegations of the third-party complaint, deemed admitted by
virtue of Kraus and Caruso's default, establish that "Kraus and Caruso have attempted to
leverage their control and influence over the policyholders by instituting policyholder litigations
against Swiss Life, such as Moskovitz, and otherwise threatening Swiss Life in an attempt to
extort Swiss Life into making payments directly to Kraus and Karuso." TPC ii 84; accord id.
ii 77 ("Kraus and Caruso have engaged in a calculated and persistent effort to use the lawsuits
already filed, including Moskvovitz, to force Swiss Life to make payments directly to them.").
In light of these facts, Kraus and Caruso could not have any claim of right to the proceeds of the
Moskowitz suit. Indeed, Kraus and Caruso "did not commence Moskovitz for the benefit of the
plaintiffs and the nominal policyholders; rather, they initiated and [were] financing it as a tool to
extort additional money" from Swiss Life. Id. ii 8. Similarly, the third-party complaint
establishes that Kraus attempted to negotiate a payment directly to himself and Caruso in
exchange for the withdrawal of all policyholder lawsuits, including Moskovitz. Id. ii 78(b). The
third-party complaint also establishes that the threats made by Kraus and Caruso "put Swiss Life
in fear of economic injury," TPC ii 89, thereby demonstrating that Swiss Life "reasonably
believe[d]" that Kraus and Caruso "had the power to harm" Swiss Life and that Kraus and
Caruso "would exploit that power to [Swiss Life's] detriment," Middlemiss, 217 F.3d at 118.4
Under these circumstances, we believe that it is permissible to grant Swiss Life RICO damages
based on the Moskovitz lawsuit. There is no risk of a "chilling" effect of the sort posited by
Deck and FindTheBest.com. By holding Kraus and Caruso liable for RICO damages, the Court
will not be punishing the parties who could rightfully bring any lawsuit under the terms of the
insurance policies at issue -
As to the appropriate amount of damages in the form of attorney's fees, Swiss Life has
submitted a summary of contemporaneous time records showing the hours worked and the
hourly rates of Swiss Life's attorneys at Becker, Glynn, Muffly, Chassin and Rosinski LLP, who
worked on Swiss Life's defense of Moskovitz. See Time Records; Conan Objection Deel. at 24. Swiss Life has also provided a description of each attorney's background and legal
experience. See Conan Objection Deel. at 2-4. One of Swiss Life's attorneys has also submitted
an affidavit explaining that he separated out the hours devoted to defending the Moskowitz suit
(for which fees are sought) from the hours spent prosecuting the RICO action against the third
party defendants. See Chassin Deel. iii! 2-11; Time Records. The Court has reviewed this
information and is satisfied that Swiss Life has made a reasonable effort to separate out the hours
attributable to the extortionate litigation conduct and that the total number of hours sought for
this multi-year effort (7449.06) are reasonable. Accordingly, Swiss Life should be awarded
attorney's fees as RICO damages for these hours in the amount of $2,811,009. See Chassin
Some of these threats referred to in paragraph 89 were apparently made in contexts
unrelated to the policyholder litigation. It is clear, however, that the threats described there refer,
at least in part, to threats made in connection with that litigation.
Deel. if 6.
3. Trebling of Damages Under RICO
The terms of the default judgment explicitly provide that "Swiss Life is entitled to treble
damages .... " Default Judgment at 2. Therefore, Swiss Life's damages of CHF 45,399,522.85
from Kraus and Caruso's fraud should be trebled, resulting in an award of CHF 136,198,568.55.
Similarly, Swiss Life's attorney's fees of $2,811,009 for defending Moskovitz, incurred as
damages for extortion, should be trebled, resulting in an award of $8,433,027. See generally
Stochastic Decisions, Inc., 995 F.2d at 1167 (affirming district court's decision to treble legal
fees as RICO damages).
4. Conversion from Swiss Francs to U.S. Dollars
Swiss Life requests that its award be converted to United States dollars based upon an
exchange rate reported by the Wall Street Journal at the close of business on March 27, 2014 the day before it filed its papers. Proposed Findings of Fact and Conclusions of Law at 15 n.3.
"It is well settled that a money judgment by an American court must be in American currency."
Shaw, Savill, Albion & Co. v. The Fredericksburg, 189 F.2d 952, 954 (2d Cir. 1951). Swiss Life
has not briefed the issue of what date the Court should use for converting its award from Swiss
francs to U.S. dollars with respect to damages from Kraus and Caruso's fraud. "[F]ederal courts
sitting in non-diversity cases have rather consistently adopted the judgment-day rule." Vishipco
Line v. Chase Manhattan Bank, N.A., 660 F.2d 854, 865 (2d Cir. 1981) (citations omitted).
Under the "judgment day rule," a judgment denominated in a foreign currency is converted into
dollars as of the date on which the judgment is rendered. See Restatement (Third) of Foreign
Relations Law§ 823 cmt. d (1987). While there is discretion to alter this practice, especially to
make the injured party whole, see id. cmt. c, plaintiffs have not suggested any reason to depart
from this general principle. Accordingly, the Clerk of Court should be directed to enter
judgment in favor of Swiss Life in the U.S. dollar equivalent of CHF 136, 198,568.55 as of the
date of judgment for the damages attributable to Kraus and Caruso's fraud. Cf. Sae Sadelmi
S.p.A. v. Papua N.G. Elec. Comm'n, 1994 WL 669543, at *2 (S.D.N.Y. Nov. 29, 1994)
(directing Clerk to enter judgment "in the U.S. dollar equivalent" of the foreign currencies at
issue "using the applicable rates that exist as of the date judgment is entered" in a case where
federal jurisdiction was premised on a federal statute).
For the foregoing reasons, the Clerk should be directed to award Swiss Life a judgment
in United States dollars against Moses Kraus and Caruso AG in the sum of $8,433,027 plus CHF
136, 198,568.55, with the latter figure to be converted by the Clerk of Court to United States
dollars pursuant to the exchange rate in effect on the date judgment is entered.
PROCEDURE FOR FILING OBJECTIONS TO THIS
REPORT AND RECOMMENDATION
Pursuant to 28 U.S.C. § 636(b)(l) and Rule 72(b) of the Federal Rules of Civil
Procedure, the parties have fourteen (14) days including weekends and holidays from service of
this Report and Recommendation to serve and file any objections. See also Fed. R. Civ. P. 6(a),
(b ), (d). Such objections (and any responses to objections) shall be filed with the Clerk of the
Court, with copies sent to the Hon. Colleen McMahon at 500 Pearl Street, New York, New York
l 0007. Any request for an extension of time to file objections must be directed to Judge
McMahon. If a party fails to file timely objections, that party will not be permitted to raise any
objections to this Report and Recommendation on appeal. See Thomas v. Arn, 474 U.S. 140
(1985); Wagner & Wagner, LLP v. Atkinson, Haskins, Nellis, Brittingham, Gladd & Carwile,
P.C., 596 F.3d 84, 92 (2d Cir. 2010).
Dated: July 21, 2014
New York, New York
Copies mailed to:
34 Fountayne Road
2 Stamford Hill
London NI 66XZ
C/O Kranz Treuhand & Verwaltungs
Vaduz FL, 9490
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