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Citing improper jury instructions, the 2nd U.S. Circuit Court of Appeals overturned a lower court fraud ruling, and with it, pushed aside a $106 million verdict in a suit brought by the Bank of China over bogus loan applications. Sitting by designation in the circuit court, Southern District Judge Shira Scheindlin wrote that the lower court incorrectly instructed the jury about the standard of proof applied to a civil fraud action involving racketeering. Scheindlin also found an “improper admission” of a witness, but she declined to determine whether the “evidentiary error was harmless,” since the court had already overruled the jury verdict and called for a new trial. In a corresponding order, the appeals court rejected the defendants’ claim that Southern District Judge Denny Chin “had an improper connection” with the bank after the judge revealed that he had previously met one defendant, a former bank employee. Bank of China brought the suit claiming that the defendants had defrauded it by inflating their assets and cash-flows when applying for loans, forging documents, and bribing the deputy manager of the branch to assist in their fraud. The jury found the defendants violated the Racketeer Influenced and Corrupt Organizations Act, and said they were guilty of breaching contracts and fraud. It awarded about $35 million in compensatory damages. Judge Chin then tripled the damages under � 1964(c) of RICO to arrive at the $106 million figure. Defendants appealed claiming, among other things, improper jury instructions and errors that constituted abuses of discretion by the district court judge. In its decision, the appellate court narrowed in on Chin’s jury instructions. The defense had argued at trial that several bank employees knew of the transactions alleged to be fraudulent, thereby precluding the bank from claiming it had reasonably relied on false or misleading statements. “The defense said that there wasn’t any fraud because no detrimental or justifiable reliance” took place, said Richard Willstatter of Green & Willstatter, an attorney for some of the defendants. However, Chin flatly rejected this argument. In his instructions to the jury, he said, “Now, certain defendants have argued that certain agents and employees of the bank knew of the true nature of the transactions in question, and that therefore the bank could not have been the victim of fraud. I instruct you that an institution may be defrauded, even if its agents and employees permitted or participated in the fraud.” With this instruction, ruled the circuit court, Chin misapplied the standard in RICO civil actions and deprived the defendants of a chance to put on their case. The erroneous instructions, the panel said, “relieved the Bank of China of its burden to prove ‘reasonable reliance,’ an element of common law fraud and, as we now hold, the RICO predicate acts of mail, wire and bank fraud.” The appeals court found that Chin had incorrectly applied the criminal RICO standard in the civil suit. The civil standard, however, “predicated on any type of fraud, including bank fraud,” required the plaintiff to “establish ‘reasonable reliance’ on the the defendants’ purported misrepresentations or omissions.” “Thus,” the circuit court continued, “Bank of China was required to prove that it reasonably relied on defendants’ purported misrepresentations — i.e., the representations that the defendants made to the Bank in order to obtain the loans.” Richard DePalma of Coudert Brothers, who represented the bank, said Wednesday that he believed “Judge Chin had followed the pattern jury instructions” that did not include the “reasonable reliance” language the circuit court demanded. Bank of China had argued that the “adverse interest exception rebuts the usual presumption that the acts and knowledge of an agent acting within the scope of employment are imputed to the principal.” The court said, however, that “if Bank of China’s officers or employees were aware of, or participated in defendants’ scheme, their knowledge would be imputed to the Bank unless the employees exhibited a ‘total abandonment’ of Bank of China’s interests.” The improper jury instructions, the court said, precluded the jury from making this factual determination. The circuit court also ruled that the district court had improperly permitted a plaintiff’s witness to testify on matters requiring his expertise without designating him as an expert. Chin then prevented defendants from calling an expert to rebut the testimony. “Had [the witness] properly been disclosed as an expert,” the 2nd Circuit said, “defendants would have been permitted to call their expert.” The court declined to determine whether this mistake constituted a “harmless error” because it had vacated the verdict and ordered a new trial. DePalma said his client intended to retry the case. MEETING WITH DEFENDANT A week after the jury verdict, Chin told the attorneys that he had previously met one of the non-appealing defendants, Patrick Young, a former Bank of China employee. During a telephone conference with the parties, Chin said that his mother the night before had informed him of his meeting with Young three years earlier. Chin added that his father was friends with Young’s wife’s father, and that they had not spoken since their initial meeting. Chin said the meeting did not influence him. None of the parties commented on Chin’s revelation at the time, but the defendants later claimed Chin had acted improperly. The circuit court dismissed the claims because “this issue … was never raised below.” It went on to note that Chin’s connection was with a defendant, not the plaintiff bank, and that his interaction with Young “could not have affected his conduct at trial, or caused him to improperly influence the jury.” Willstatter, the defense attorney, said he “may seek to have the case assigned to a different judge” if Chin is assigned on remand. DePalma said he thought “it was not an issue,” and that Chin would likely preside over the case during a second trial.

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