06 September 2007

Societe Generale Loses Bid to Block RBC Suit

Bloomberg, Joe Schneider, 6 September 2007

Societe Generale and Citigroup Inc.'s CitiCapital unit lost a bid to block Royal Bank of Canada's suit to recover C$100 million ($95 million) lost to fraud at a Toronto medical clinic.

The Supreme Court of Canada today denied, without comment, Societe Generale and CitiCapital's requests for a hearing. The banks sought to overturn an Ontario Court of Appeal ruling allowing the suit to go ahead.

The Supreme Court's denial means the case will go to trial Feb. 25, Royal Bank's lawyer, Robert Morris, said in a phone interview. The trial in the Ontario Superior Court is scheduled to take eight weeks, Morris said. ``And the judge said we'd better be finished in those eight weeks,'' Morris said.

Royal Bank, based in Toronto, is attempting to recover money from bank drafts and checks issued to Loren and Roman Koval, former owners of the Kings Health Center, by Societe Generale and CitiCapital from 1994 to 2000. The Kovals had devised a fraud scheme to finance a lavish lifestyle with phony equipment lease contracts.

The proceeds of the equipment-lease fraud at the clinic were deposited at Royal Bank in the form of checks and drafts honored by Societe Generale and CitiCapital. When the fraud was uncovered and the two banks reversed payment, Royal Bank said Societe Generale and CitiCapital were negligent in their dealings with the clinic and didn't have the right to recover the money.

The Court of Appeal for Ontario last year overturned two lower-court rulings dismissing Royal Bank's claims, saying the lower court erred by placing the onus on Royal Bank to prove there was a need for a trial on the issues.

``The onus is always on the moving party to satisfy the court that there is no genuine issue for trial with respect to a claim,'' Judge Stephen Borins wrote for the three-member appeal panel. ``To not interfere with the decision of the motions judge would result in a substantial risk of inconsistent findings.''

Societe Generale issued 49 bank drafts from 1994 to 2000 to finance the clinic's bogus medical equipment. CitiCapital issued five checks to Loren Koval for similar financings. Royal Bank accepted the bank drafts and checks for deposit, and Societe Generale and CitiCapital cleared the transactions, the appeal court said.

CitiCapital and Societe Generale sought to recover the money in 2000, after the fraud came to light and the Kovals fled Canada. Captured in 2001 and sentenced to seven years in prison, they were paroled in 2003. Only $1.29 million of the money they took was recovered.

Royal Bank sued Paris-based Societe Generale and CitiCapital, along with Bank of Montreal, which ``reverse cleared'' CitiCapital's checks. Royal Bank alleged the banks acted improperly in reversing payment. The defendant banks relied on a rule that gives a person on whose behalf a bill is paid the right to recover the amount if the bill contains a forged endorsement.

``SoGen was unaware that it was the victim of Ms. Koval's fraud because, throughout the six years, it never made any inquiries of any `supplier,''' the appeal court said.

Royal Bank is seeking C$80.7 million from Societe Generale and C$8.7 million from CitiCapital and Bank of Montreal, plus damages.

The case is Between Royal Bank of Canada and Societe Generale (Canada), 31880, Supreme Court of Canada (Ottawa).