Daniel S. Ruzumna (DR-2105) Leonard M. Braman (LB-4381) Krista D. Caner (KC-7358) Patterson Belknap Webb & Tyler LLP 1133 Avenue of the Americas New York, New York 10036 Telephone 212-336-2000 Facsimile 212-336-2222

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK

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UNITED STATES OF AMERICA :

v. :

ALL RIGHT, TITLE, AND INTEREST OF ASSA : CORPORATION, ASSA COMPANY LIMITED, AND BANK MELLI IRAN IN 650 FIFTH : AVENUE COMPANY, INCLUDING BUT NOT LIMITED TO THE REAL PROPERTY AND : Civil Action No. 08 Civ. 10934 (RJH) APPURTENANCES LOCATED AT 650 FIFTH AVENUE, NEW YORK, NEW YORK, WITH : ALL IMPROVEMENTS AND ATTACHMENTS THEREON, ET AL., :

Defendants in rem. :

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ALAVI FOUNDATION’S AND 650 FIFTH AVENUE COMPANY’S MEMORANDUM OF LAW IN SUPPORT OF THEIR MOTION TO DISMISS THE AMENDED COMPLAINT

PATTERSON BELKNAP WEBB & TYLER LLP 1133 Avenue of the Americas New York, New York 10036

Attorneys for Claimants Alavi Foundation and 650 Fifth Avenue Company PRELIMINARY STATEMENT ...... 1

ALLEGATIONS OF THE COMPLAINT ...... 4

A. The Foundation and the Building ...... 4

B. The Fifth Avenue Company...... 5

C. The Foundation’s Other Real Properties...... 7

D. The Foundation’s and the Fifth Avenue Company’s Accounts...... 8

ARGUMENT...... 8

I. The Complaint’s § 981(a)(1)(C) Claim Should Be Dismissed as to Most of Claimants’ Interests Because the Interests Are Not “Proceeds” of IEEPA Violations...... 10

A. Property Acquired Before 1995 Cannot Be “Proceeds” of an IEEPA Violation ...... 10

B. Properties Not Obtained as a Result of or Through the Allegedly Unlawful Services Are Not “Proceeds” of an IEEPA Violation...... 13

II. The Court Should Dismiss the § 981(a)(1)(A) Claim as to Most of Claimants’ Interests Because the Interests Were Not Involved in a Money Laundering Transaction ...... 18

A. The Majority of the Alleged Money Laundering Transactions Do Not Constitute Money Laundering...... 18

B. Most of Claimants’ Interests Were Not “Involved In” or “Substantially Connected” to a Money Laundering Transaction...... 21

1. The Building, the Partnership, and the Partnership Accounts ...... 23

2. The Foundation’s Real Properties...... 27

CONCLUSION ...... 29

i TABLE OF AUTHORITIES

CASES

Ashcroft v. Iqbal, __ U.S. __, 129 S. Ct. 1937 (2009)...... 12, 28

Manhattan Eye, Ear & Throat Hosp. v. Spitzer, 715 N.Y.S.2d 575 (N.Y. Sup. Ct. 1999) ...... 4

United States v. $1,399,313.74 in U.S. Currency, 591 F. Supp. 2d 365 (S.D.N.Y. 2008)...... 8, 12 n.4, 20

United States v. Anguilo, 897 F.2d 1169 (1st Cir. 1990)...... 14

United States v. Approximately 250 Documents Containing the Forged Handwriting of President John F. Kennedy and Others, No. 03 Civ. 8004 (GBD), 2008 WL 4129814 (S.D.N.Y. Sept. 5, 2008)...... 13, 15, 16, 22, 25, 27

United States v. Benyo, 384 F. Supp. 2d 909 (E.D. Va. 2005) ...... 14

United States v. Blumhagen, No. 03-CR-56S, 2005 WL 3059395 (W.D.N.Y. Nov. 15, 2005) ...... 19, 25

United States v. Capoccia, 503 F.3d 103 (2d Cir. 2007)...... 11, 22

United States v. Daccarett, 6 F.3d 37 (2d Cir. 1993)...... 8

United States v. Hodge, 558 F.3d 630 (7th Cir. 2009) ...... 17

United States v. Horak, 833 F.2d 1235 (7th Cir. 1987) ...... 14, 16

United States v. Huber, 404 F.3d 1047 (8th Cir. 2005) ...... 22

ii United States v. Iacaboni, 221 F. Supp. 2d 104 (D. Mass. 2002) ...... 22, 26, 27

United States v. Loe, 49 F. Supp. 2d 514 (E.D. Tex. 1999)...... 12, 21, 22, 25, 26, 27, 28

United States v. McCarthy, 271 F.3d 387, 395 (2d Cir. 2001)) ...... 19

United States v. Napoli, 54 F.3d 63 (2d Cir. 1995)...... 19, 20, 25

United States v. Ofchinick, 883 F.2d 1172 (3d Cir. 1989)...... 14, 15

United States v. One 1980 Rolls Royce VIN # SRL 39955, 905 F.2d 89 (5th Cir. 1990) ...... 28

United States v. One 1989 Jaguar XJ6, No. 92 Civ. 1491, 1993 WL 157630 (N.D. Ill. May 13, 1993) ...... 22

United States v. One 1998 Tractor, 288 F. Supp. 2d 710 (W.D. Va. 2003) ...... 23

United States v. Pole No. 3172, Hopkinton, 852 F.2d 636 (1st Cir. 1988)...... 11, 12

United States v. Porcelli, 865 F.2d 1352 (2d Cir. 1989)...... 14, 16

United States v. Santos, 553 U.S. 507, 128 S. Ct. 2020 (2008)...... 19

United States v. Schlesinger, 396 F. Supp. 2d 267 (E.D.N.Y. 2005) ...... 22

United States v. Van Alstyne, 584 F.3d 803 (9th Cir. 2009) ...... 20 n.6

United States v. Wittig, 333 F. Supp. 2d 1048 (D. Kan. 2004)...... 13, 16

Zigman v. Giacobbe, 944 F. Supp. 147 (E.D.N.Y. 1996) ...... 20

iii STATUTES

18 U.S.C. § 981...... 1, passim

18 U.S.C. § 982...... 22, 26

18 U.S.C. § 983...... 18, 23

18 U.S.C. § 1956...... 3 n.1, 18, 19, 20 n. 6, 28 n.9

18 U.S.C. § 1957...... 18, 19, 20 n. 6, 25, 28

18 U.S.C. § 1960...... 18

49 U.S.C. § 80303...... 23

50 U.S.C. § 1701-1707 (1977)...... 1, passim

146 Cong. Rec. H2040...... 23

N.Y. Not-for-Profit Corp. Law §§ 501 (McKinney Supp. 2008) ...... 4

N.Y. Not-for-Profit Corp. Law §§ 601 (McKinney Supp. 2008) ...... 4

MISCELLANEOUS

Federal Rule of Civil Procedure 12(b)(6) ...... 1, 8

Admiralty and Maritime Claims and Asset Forfeiture Actions Supplemental Rule G ...... 1, 8

iv Claimants Alavi Foundation (the “Foundation”) and 650 Fifth Avenue Company

(the “Fifth Avenue Company” or the “Partnership” or, collectively, “Claimants”) hereby move, pursuant to Federal Rule of Civil Procedure 12(b)(6) and Rule G(8)(b) of the Supplemental

Rules for Admiralty or Maritime Claims and Asset Forfeiture Actions, to dismiss the Verified

Amended Complaint filed on November 12, 2009 (the “Complaint”) as to Claimants’ interests in certain Defendant Properties. For the following reasons, the Court should dismiss the claims against these interests and vacate all restraints and seizure orders consistent with the dismissal.

PRELIMINARY STATEMENT

By way of this action, the Government seeks forfeiture of essentially all of the

Foundation’s and the Fifth Avenue Company’s property, claiming, first, that Claimants’ interests in the Defendant Properties constitute “proceeds” of violations of the International Emergency

Economic Powers Act, 50 U.S.C. § 1701-1707 (1977), (“IEEPA”) and are subject to forfeiture under 18 U.S.C. § 981(a)(1)(C), and, second, that Claimants’ interests are forfeitable under

§ 981(a)(1)(A) as properties “involved in” money laundering transactions. The Government does not allege that the Foundation is owned by or serves as a front for Iran—nor could it, since the Foundation’s status as a New York not-for-profit corporation has been established for over thirty years. (Cmpl. ¶ 24). Instead, the Complaint alleges that Iran has controlled the

Foundation since the 1970s, and that therefore the Foundation’s normal business activities, e.g., managing its property and performing charitable activities, were really unlawful “services” performed on behalf of Iran. Even under the Government’s expansive view of unlawful services, however, the Government’s claims fail because they seek forfeiture of properties that do not constitute “proceeds” of the alleged crimes, and which are neither “involved in” nor have a

“substantial connection” to the alleged money laundering transactions.

1 The Government’s § 981(a)(1)(C) claim, i.e., the “proceeds” forfeiture claim, should be dismissed as to Claimants’ interests for at least two reasons. First, many of the

Defendant Properties cannot be IEEPA proceeds because Claimants acquired interests in them long before IEEPA was enacted or made applicable to services performed on behalf of Iran.

Indeed, IEEPA was first enacted in 1977, and was only made applicable to services performed on behalf of Iran in 1995 at the earliest. But the building at 650 Fifth Avenue (the “Building”) was built by the Foundation in the 1970s and transferred to the Partnership in 1989.The

Foundation acquired its interest in the Partnership in 1989. And the Foundation purchased all but one of the its other real properties sought to be forfeited by the Government (the “Real

Properties”) before 1995. Though the Foundation has supported the Real Properties financially since 1995, any forfeiture based on such support could occur only in proportion to the amount of alleged IEEPA proceeds as compared to untainted funds that went into the Real Properties.

Second, the § 981(a)(1)(C) claim fails because the Complaint seeks forfeiture of property that does not meet the statutory definition of “proceeds.” Section 981(a)(2) defines

“proceeds” as property obtained as the result of the commission of the offense giving rise to forfeiture, or the amount of money acquired through the illegal transactions resulting in forfeiture

(less the direct costs of providing the services). Properties that would have been obtained whether or not unlawful services were performed are not proceeds of those services. Under

§ 981’s definition, the Fifth Avenue Company’s rental income from the Building is not IEEPA

“proceeds.” Likewise, “ownership distributions” received by the Foundation as a result of an ownership interest in the Partnership (Cmpl. ¶ 100) are not “proceeds” subject to forfeiture. The only “proceeds” of an IEEPA violation alleged in the Complaint are the “management fees” the

2 Foundation received for managing the Building and properties traceable to those fees. (Cmpl.

¶ 98). As to all other Defendant Properties, the § 981(a)(1)(C) claim should be dismissed.

The Government’s § 981(a)(1)(A) claim, i.e., the money laundering forfeiture claim, is equally deficient. Most of the alleged money laundering transactions that purportedly give rise to forfeiture are not money laundering transactions at all. With a limited exception not relevant here,1 money laundering requires a transaction involving the proceeds of specified unlawful activity. The Complaint alleges that the Foundation engaged in specified unlawful activity by performing services for Iran in violation of IEEPA. But as noted above, the only possible “proceeds” of those services were the Foundation’s management fees. While later transactions involving these fees may constitute money laundering, most of Claimants’ interests were not “involved in” and did not bear any substantial connection to these later transactions.

Finally, the Court should dismiss the Complaint’s § 981(a)(1)(A) claim because, for property to be subject to forfeiture under this section, it must be “involved in” a money laundering transaction. Involvement in the predicate specified unlawful activity—here, services in violation of IEEPA—is not enough to permit forfeiture. The Building, the Foundation’s 60% interest in the Partnership, the Partnership’s bank accounts, and major portions of the other Real

Properties were not “involved in” a money laundering transaction under § 981(a)(1)(A). At best, the Complaint alleges that these Defendant Properties were involved in IEEPA violations. But even if that allegation were true, that is not enough; the money laundering forfeiture claim still would have to be dismissed.

1 The money laundering statutes also prohibit the transfer of funds across the United States borders for the purpose of promoting an IEEPA violation. See 18 U.S.C. § 1956(a)(2). The Amended Complaint does not allege that the Foundation or the Fifth Avenue Company transferred any funds in such a manner, and thus the Government has not alleged a violation of these provisions as against the Foundation or the Fifth Avenue Company.

3 Accordingly, as set forth more fully below, even assuming the truthfulness of the allegations in the Complaint, the Court should dismiss the Government’s claims with respect to the vast majority of Claimants’ interests in the Defendant Properties.

ALLEGATIONS OF THE COMPLAINT

In the Complaint, the Government offers two theories of forfeiture: (1) the

Defendant Properties are subject to forfeiture pursuant to § 981(a)(1)(C) as “proceeds” of an

IEEPA violation; and (2) the Defendant Properties are forfeitable as property “involved in” money laundering transactions in violation of § 981(a)(1)(A). (Cmpl. ¶ 2). Both theories rely on allegations that the Foundation is “controlled by the Islamic Republic of Iran and has been providing services to the Iranian Government, in violation of IEEPA,” without a license from the

Department of Treasury, Office of Foreign Asset Control. (Cmpl. ¶¶ 21, 23). The alleged services include “managing a charitable organization for the Iranian Government, running a charitable organization for the Iranian Government, and transferring funds from 650 Fifth

Avenue Company to Bank Melli.” (Cmpl. ¶ 21).

A. The Foundation and the Building

The Foundation was established in 1973 by the former Shah of Iran, Shah Reza

Mohammad Pahlavi, as “a not-for-profit corporation organized under the laws of the State of

New York, to pursue Iran’s charitable interests in the United States.” (Cmpl. ¶ 24). As a New

York not-for-profit corporation, the Foundation does not have any owners, members or shareholders as a matter of New York law. See N.Y. Not-for-Profit Corp. Law (“N-PCL”)

§§ 501, 601 (McKinney Supp. 2008); see also Manhattan Eye, Ear & Throat Hosp. v. Spitzer,

715 N.Y.S.2d 575, 592-93 (N.Y. Sup. Ct. 1999). Accordingly, neither Iran nor any Iranian entity or individual owns the Foundation.

4 In the 1970s, the Foundation borrowed $42,000,000 from Bank Melli in order to

“acquire the rights to real estate and to construct a commercial office building located at 650

Fifth Avenue, New York, New York.” (Cmpl. ¶ 24). The Building was constructed in the

1970s, and the Foundation owned the Building until 1989, when, as is further described below, it transferred it to the Fifth Avenue Company in return for the majority interest in the Partnership.

(Cmpl. ¶¶ 41- 42). The vast majority of the Foundation’s income has consisted of “proceeds of the Building,” i.e., rental payments from the Building’s tenants and, starting in 1989, ownership distributions from the Fifth Avenue Company, which in turn were made up of such rental payments. (Cmpl. ¶ 125). In contrast to its “ownership distributions,” which resulted from its ownership interest in the Partnership (Cmpl. ¶ 100), the Foundation also received a

“management fee” as “payment for its management services.” (Cmpl. ¶ 98). The Foundation’s other income consisted largely of income on investments and savings. (Cmpl. ¶ 126).

The Iranian revolution broke out in 1978, and in the following years, the Iranian government attempted to “centralize, take possession of, and manage property expropriated by the revolutionary government,” including property belonging to the Foundation. (Cmpl. ¶¶ 25-

30). According to the Complaint, from the time of the revolution, the Iranian government has controlled the Foundation. The Iranian government, or entities working at its direction, held conferences with the Foundation’s directors and influenced the composition of the Foundation’s board. (Cmpl. ¶¶ 28, 49-52, 60). Iranian ambassadors to the United Nation sometimes attended

Foundation board meetings, met with Foundation officers, and suggested ideas on how the

Foundation should conduct its charitable activities. (Cmpl. ¶¶ 52, 63, 65, 67-77).

B. The Fifth Avenue Company

In the 1980s, facing “a substantial tax liability as a result of the Bank Melli debt on the Building,” Iranian officials and the Foundation “devised a plan to create 650 Fifth Avenue

5 Company in order to remove the mortgage on the Building and free the rental income from federal income tax.”2 (Cmpl. ¶ 31). The Fifth Avenue Company was created “on or about July

31, 1989” as a partnership between the Foundation and Assa Corporation (“Assa”), a New York corporation owned indirectly by Bank Melli. (Cmpl. ¶¶ 38-41). Bank Melli holds a 40% interest in the Fifth Avenue Company through Assa and Assa’s corporate parent, Assa Company

Limited, a corporation domiciled in Jersey, Channel Islands, United Kingdom. (Cmpl. ¶ 20).

Under the partnership agreement entered into by the Foundation and Assa (the “Partnership

Agreement”), the Foundation contributed the Building, and Assa contributed $44.8 million.

(Cmpl. ¶ 42).

Pursuant to the Partnership Agreement, the Foundation has “the obligation of administering the day-to-day business and affairs of the Partnership,” as well as the “sole authority to execute instruments on behalf of the Partnership.” (Cmpl. ¶ 96). The Foundation has played a critical role in “managing the Building, acting as the Building’s managing partner and overseeing all of the Building’s finances.” (Cmpl. ¶ 98). The Foundation “directed when ownership distributions were made to the partners of 650 Fifth Avenue Company—the Alavi

Foundation and Assa Corp.” (Cmpl. ¶ 100). The ownership distributions for Assa were typically $200,000 per month. (Id.).

As payment for its management services—services the Government claims were performed on behalf of Iran—the Fifth Avenue Company paid the Foundation a “management

2 Consistent with its efforts to paint all of the Foundation’s conduct in the most sinister light, the Government suggests that the creation of the Fifth Avenue Company partnership was an improper tax dodge. In reality, the partnership was a legitimate tax planning effort and its purposes were fully disclosed to the Internal Revenue Service and New York Attorney General’s Office. For purposes of this motion, the most relevant aspect of the Partnership is that it was created six years before providing services to Iran became unlawful and ten years before Bank Melli was designated part of Iran.

6 fee,” which was used to pay a portion of the salaries of the Foundation’s president, controller and secretary for “their work on behalf of 650 Fifth Avenue Company.” (Cmpl. ¶ 98). The fee for the Foundation’s services was “approximately $20,000 per month from at least in or about April

2001 through 2002, and increased to approximately $30,000 per month in or about 2003.” (Id.).

The last management fee was paid on or about December 1, 2008. (Id.). The Fifth Avenue

Company also engaged a real estate management company to manage the buildings from at least

1997 to the present. (Cmpl. ¶ 97).

C. The Foundation’s Other Real Properties

The Complaint seeks forfeiture of seven real properties other than the Building held in the name of the Foundation (the “Real Properties”). All but one of these Real Properties were purchased well before IEEPA prohibited transactions with Iran. They are briefly described as follows:

 Real Property-2 is property located in Houston, Texas that the Foundation purchased on or about November 7, 1988 (Cmpl. ¶ 135);

 Real Property-3 is property located in Queens, New York that the Foundation purchased from on or about March 20, 1991 through on or about April 14, 1997 (Cmpl. ¶ 136);

 Real Property-4 is property located in Carmichael, California that the Foundation purchased on or about March 21, 1989 (Cmpl. ¶ 139);

 Real Properties-5 and -6 are properties located in Catharpin, Virginia that the Foundation purchased on or about May 25, 1990 (Cmpl. ¶ 140); and

 Real Properties-7 and -8 are properties located in Rockville, Maryland that the Foundation purchased on or about July 22, 1981 and October 30, 1984 respectively (Cmpl. ¶ 141).

From the date of acquisition until the filing of the Complaint, the Foundation paid for improvements and paid real estate taxes for the Real Properties. (Cmpl. ¶¶ 135-43). Though the

Complaint alleges in a conclusory fashion that the Foundation spent “millions of dollars in

7 proceeds of IEEPA violations on the Foundation Real Properties” (Cmpl. ¶ 134), it offers no details as to whether the alleged proceeds were used to acquire or maintain the Real Properties, what the actual payments were, or what services generated the alleged proceeds.

D. The Foundation’s and the Fifth Avenue Company’s Accounts

Finally, the Complaint seeks forfeiture of three bank accounts held in the name of the Foundation at Sterling National Bank, N.A. (the “Alavi Accounts”), and two bank accounts held in the name of the Fifth Avenue Company at JPMorgan Chase Bank, N.A (the “Partnership

Accounts”). (Cmpl. ¶¶ 124-33). The majority of funds deposited in the Alavi Accounts allegedly came directly or indirectly from the Fifth Avenue Company (Cmpl. ¶¶ 124-29), though the Complaint does not break down the amounts that consisted of ownership distributions or management fees. A lesser amount of the Foundation’s deposits consisted of “dividends and capital gain on investments, interest on savings and temporary cash investments, contributions, rental income … and ‘miscellaneous’” income. (Cmpl. ¶ 126). The sole source of the funds in the Partnership Accounts was “income from the Building.” (Cmpl. ¶ 130). From the Partnership

Accounts, approximately $36,720,900 was transferred to the Foundation. (Cmpl. ¶ 131).

ARGUMENT

The Government’s two claims for forfeiture fail to state a claim under Rule

12(b)(6) of the Federal Rules of Civil Procedure and the “more stringent” pleading standards of

Rule G(2)(F) of the Supplemental Rules for Admiralty or Maritime Claims and Asset Forfeiture

Actions. United States v. Daccarett, 6 F.3d 37, 47 (2d Cir. 1993). Under that standard, the

Government must “state sufficiently detailed facts to support a reasonable belief that the government will be able to meet its burden of proof at trial.” U.S.C. Admiralty and Maritime

Claims R. G(2); see also Daccarett, 6 F.3d at 47; United States v. $1,399,313.74 in U.S.

Currency, 591 F. Supp. 2d 365, 369 (S.D.N.Y. 2008). The § 981(a)(1)(C) claim fails because

8 Claimants’ interests in most Defendant Properties are not “proceeds” under § 981’s definition or traceable to such proceeds. The § 981(a)(1)(A) claim is deficient because Claimants’ interests in the Defendant Properties were not “involved in” money laundering transactions. With limited exceptions, the Government’s claims should be dismissed.

For ease of reference, the Defendant Properties in which Claimants have an interest are identified in the table below, followed by an indication or lack of indication as to whether a particular ground for dismissal is appropriate as to that Defendant Property.

Not “Involved Not Obtained as Interest Arose In” Money Defendant Property Result of IEEPA Before 1995 Laundering Violation Transaction Interest of Alavi Foundation in 650 Fifth Avenue Company    Real Property located at 650 Fifth Avenue, New York, New York (Real Property 1)    Real Property located at 2313 South Voss Road, Houston, Texas (Real Property 2)   * Real Property located at 55-11 Queens Boulevard, Queens, New York (Real Property 3) * * Real Property located at 4836 Marconi Avenue, Carmichael, California (Real Property 4)   * Real Property located at 4204 and 4230 Aldie Road, Catharpin, Virginia (Real Properties 5 and 6)   * Real Property located at 7917 Montrose Road and 8100 Jeb Stuart Road, Rockville, Maryland (Real   * Properties 7 and 8) All Funds at JPMorgan Chase Bank in Acct. Nos. 230484468 and 230484476 in the name of 650 Fifth   Avenue Company (Accounts 5 and 6) All Funds at Sterling National Bank Acct. Nos. 3802032201, 3802032216, and 3852524414 in the * name of Alavi Foundation (Accounts 7, 8, and 9)

Check marks with an asterisk indicate that the Defendant Property is not subject to forfeiture, except, at most, in proportion to any IEEPA proceeds used to support or fund it.

9 I. The Complaint’s § 981(a)(1)(C) Claim Should Be Dismissed as to Most of Claimants’ Interests Because the Interests Are Not “Proceeds” of IEEPA Violations

The Court should dismiss the Government’s § 981(a)(1)(C) claim as to

Claimants’ interests in all Defendant Properties except for those containing or derived from the management fees paid to the Foundation. Section 981(a)(1)(C) subjects to forfeiture “property, real or personal, which constitutes or is derived from proceeds traceable to a violation of … any offense constituting ‘specified unlawful activity,’” including an IEEPA violation. But only the

Foundation’s management fees arguably constitute “proceeds” under § 981(a)(2)’s definition and, therefore, only those fees and the Defendant Properties that received them can be subject to forfeiture under this claim. As to the Building, the Foundation’s interest in the Partnership, and the Partnership Accounts, the § 981(a)(1)(C) claim fails as a matter of law because these

Defendant Properties were acquired before IEEPA became applicable to services for Iran, or were not obtained as a result of or through the allegedly unlawful services.

A. Property Acquired Before 1995 Cannot Be “Proceeds” of an IEEPA Violation

As the Government appeared to concede in a previous submission,3 Claimants’ interests in Defendant Properties that were acquired before IEEPA prohibited the performance of services on behalf Iran cannot be proceeds of an IEEPA violation. Section 981(a)(2) defines proceeds as either: “property of any kind obtained directly or indirectly, as the result of the commission of the offense giving rise to forfeiture, and any property traceable thereto,” see 18

U.S.C. § 981(a)(2)(A), or “the amount of money acquired through the illegal transactions

3 In its response to Assa’s July 9, 2009 motion to dismiss the original complaint, which included the argument that Assa’s interest in the Partnership could not be proceeds because it was acquired prior to 1995, the Government conceded that it was seeking to forfeit the Partnership interests only as property “involved in” money laundering, not as proceeds of an IEEPA violation. (See Gov't Opp. Mot. Dismiss at 17 n.7, Oct. 14, 2009).

10 resulting in the forfeiture, less the direct costs incurred in providing the goods and services,” see

18 U.S.C. § 981(a)(2)(B). Under either definition, therefore, proceeds are limited to property acquired after the unlawful activity (or at least after the unlawful activity began) and because of the unlawful activity.

Here, Claimants’ interests in the Defendant Properties were acquired before

IEEPA and the relevant Iranian Transactions Regulations (“ITRs”) made the performance of services on behalf of Iran unlawful and therefore these interests cannot be proceeds under either definition set forth in § 981(a)(2). Indeed, forfeiture case law makes clear that such interests are not “proceeds” and not forfeitable. See United States v. Capoccia, 503 F.3d 103, 116 (2d Cir.

2007) (Sotomayor, J.) (“[T]he government has not established (nor logically could it) that the funds involved in the pre-May 2000 transfers were ‘obtained…as a result’ of the later, particular transfers of which [defendant] was convicted.”); United States v. Pole No. 3172, Hopkinton, 852

F.2d 636, 641 (1st Cir. 1988) (reversing decision wherein “United States was given full title to a parcel of land that was purchased two years before the forfeiture statute was even passed, two years before any indication of involvement with drugs, and five years before the date on which the government first shows the owner profiting from a transaction in drugs”).

According to the Complaint, the provision of services on behalf of Iran first became unlawful in May 1995 at the earliest. (Cmpl. ¶¶ 7-10). By May 1995, the Foundation already had acquired its 60% interest in the Partnership and all but one of the other Real

Properties, and the Fifth Avenue Company already had acquired the Building. Indeed, the

Foundation acquired its interest in the Partnership in 1989 and in the Real Properties (other than the Queens property) from 1984 through 1990. (Cmpl. ¶¶ 41, 135-141). The Fifth Avenue

11 Company acquired the Building in 1989 and has held it since then. (Cmpl. ¶ 41-42). Thus, none of these Defendant Properties were purchased with proceeds of an IEEPA violation.

The Government has also alleged that the Foundation “spent millions of dollars in proceeds of IEEPA violations” on land, improvements and real estate taxes for the Real

Properties (other than the Building). (Cmpl. ¶¶ 134, 135. 137-140. 142-143). But even if this conclusory allegation were accepted as true, see Ashcroft v. Iqbal, __ U.S. __, 129 S. Ct. 1937,

1949-52 (2009) (holding that conclusory recitations are “disentitle[d]” a presumption of truth and do not contribute to the establishment of the elements of a cause of action), only that portion of the Real Properties that received IEEPA proceeds would be subject to forfeiture.4 See Pole No.

3172, Hopkinton, 852 F.2d at 639 (“The property was purchased with a downpayment constituting 20.8% of its value. Since that 20.8% interest was acquired two years before the earliest indication of drug activity there is absolutely no reason to believe it is forfeitable.”)

(emphasis added); United States v. Loe, 49 F. Supp. 2d 514, 523 (E.D. Tex. 1999) (“Here, 52.6% of the purchase funds was tainted property, therefore, the United States’ interest is limited to this portion.”). The use of proceeds to support or maintain a property does not render the entire property forfeitable. See Pole No. 3172, Hopkinton, 852 F.2d at 639 (“We do not believe … that forfeitability spreads like a disease from one infected mortgage payment to the entire interest in the property acquired prior to the payment.”). Thus, that portion (or a pro rata interest)—and

4 Should the Court conclude that the management fees are proceeds of an IEEPA violation, only those proceeds or portion of property representing those proceeds are subject to forfeiture under § 981(a)(1)(C). Notably, the Complaint alleges that the Foundation’s management fees were “used to pay a portion of the salaries” of Foundation employees (Cmpl. ¶ 98), not that the management fees were used to support the Foundation’s Real Properties. Absent such an allegation, these properties are not forfeitable as proceeds of an IEEPA violation. United States v. $1,399,313.74 in U.S. Currency, 591 F. Supp. 2d 365, 374 (S.D.N.Y. 2008) (concluding that the Government’s general and “conclusory allegations that [were] insufficient to raise a right to relief above the speculative level” could not survive motion to dismiss) (citations omitted).

12 exclusively that portion—of the Real Properties would be subject to forfeiture if the Foundation used IEEPA proceeds to make capital improvements in them.

Accordingly, no portion of the Fifth Avenue Company’s interest in the Building and no portion of the Foundation’s interest in the Partnership is subject to forfeiture under

§ 981(a)(1)(C), and the claim should be dismissed as to Claimants’ interests in these two

Defendant Properties. Further, the Court should dismiss the § 981(a)(1)(C) claim as to the

Foundation’s interests in the other Real Properties, with the possible exception of those portions that received financial support traceable to an IEEPA violation.

B. Properties Not Obtained as a Result of or Through the Allegedly Unlawful Services Are Not “Proceeds” of an IEEPA Violation

The Court should dismiss the majority of the § 981(a)(1)(C) claim for another related reason: most of Claimants’ interests were not “obtained … as a result of” or “acquired through” the alleged IEEPA violations. 18 U.S.C. §§ 981(a)(2)(A), 981(a)(2)(B). Besides the interests Claimants acquired before 1995, which temporally cannot be proceeds of the alleged violations, the Partnership’s rental receipts that comprise the Partnership Accounts and the

Foundation’s ownership distributions contained in the Alavi Accounts cannot causally be unlawful proceeds because they resulted from non-criminal sources and, therefore, do not meet

§ 981(a)(2)’s definition of proceeds.

“Proceeds” of a criminal offense in a § 981 civil forfeiture proceeding are strictly limited to property obtained as the result of or through an offense; they do not indiscriminately include anything that arguably may be related to the offense. See 18 U.S.C. § 981(a)(2); see also

United States v. Approximately 250 Documents Containing the Forged Handwriting of President

John F. Kennedy and Others, No. 03 Civ. 8004 (GBD), 2008 WL 4129814, at *2 (S.D.N.Y.

Sept. 5, 2008) (“250 Documents”); United States v. Wittig, 333 F. Supp. 2d 1048, 1051-1053 (D.

13 Kan. 2004). Courts have consistently held that forfeitable proceeds are limited to what would not have been obtained “but for” the offense giving rise to forfeiture. See, e.g., United States v.

Anguilo, 897 F.2d 1169, 1213 (1st Cir. 1990) (RICO); United States v. Ofchinick, 883 F.2d 1172,

1183 (3d Cir. 1989) (RICO); United States v. Porcelli, 865 F.2d 1352, 1363, 1365 (2d Cir. 1989)

(RICO); United States v. Horak, 833 F.2d 1235, 1243 (7th Cir. 1987) (RICO); United States v.

Benyo, 384 F. Supp. 2d 909, 914 (E.D. Va. 2005) (§ 981 forfeiture using procedures set forth in

21 U.S.C. § 853) (citing Horak, 833 F.2d at 1243).

In Horak, for instance, the Seventh Circuit reversed a RICO forfeiture order, finding that the district court’s analysis of what constitutes an interest “acquired or maintained” by the unlawful conduct was “overly expansive.” 833 F.2d at 1242. The district court had ordered the forfeiture of the defendant’s salary, bonuses, and profit-sharing and pension plans because his illegal acts “enhanced” his job performance. In remanding for further consideration, the Court of Appeals instructed:

[O]n remand, the court must determine what portion of Horak’s interests would not have been acquired or maintained “but for” his racketeering activities. That is, in order to win a forfeiture order, the government must show on remand that Horak’s racketeering activities were a cause in fact of the acquisition or maintenance of these interests or some portion of them.

Id. at 1243. Thus, because the defendant’s interests in his salary, bonuses, and benefit plans had not been established to result from the crime, reversal of the forfeiture order was necessary. Id.

Similarly, in Ofchinick, the Third Circuit reversed another RICO forfeiture order, holding that the Government failed to link the defendant’s decision to acquire or maintain ownership of stock in a privately held company to the fraudulent scheme. 883 F.2d at 1183-84.

The Court noted that the purpose of forfeiture is “not to seize legitimately acquired property,” but to forfeit the gains of the illegal acts. Id. at 1183. In holding that the stock was not subject to

14 forfeiture, the Court found that the company’s existence pre-dated the scheme, that the stock was issued before the scheme began, and that the stock was not acquired or maintained because of the scheme. Id. at 1184. Thus, the Government could not satisfy the ‘but for’ test, because the defendant’s interest in the stock resulted from his legitimate ownership, not from the criminal conduct. Id. at 1183-84.

In the § 981(a)(1)(C) context, this Court in 250 Documents denied forfeiture of forged documents at the heart of a mail and wire fraud scheme, holding that “the documents do not fall within the statutory definition of ‘proceeds’ as a matter of law.” 2008 WL 4129814, at

*2. Despite finding that the documents were “the instrumentality or means” that enabled the defendant to commit the offense and reap “ill-gotten gains,” the Court held that they were not subject to forfeiture under § 981’s definition of “proceeds” because the defendant’s fraud was

“not used to ‘obtain’ the documents.” Id. Accordingly, the Court limited forfeiture to those monies obtained as a result of fraud, which the Court held constituted the “proceeds” of the offense. Id.

Here, the funds contained in the Partnership Accounts and the ownership distributions contained in the Alavi Accounts were not obtained as a result of or through the alleged IEEPA violations, and consequently are not forfeitable. As the Government concedes in the Complaint, “[t]he only source of funds in the Partnership Accounts is income from the

Building.” (Cmpl. ¶ 130). But the “income from the Building” is not proceeds of an IEEPA violation; it is income derived from rental payments by tenants of the Building. The Partnership acquired its interest in the Building in 1989, i.e., six years before IEEPA and the ITRs made it unlawful to provide services to Iran, and has been receiving rental income from the Building since then. (Cmpl. ¶¶ 31, 41). The Government thus cannot show that the funds in the

15 Partnership Accounts would not have been received “but for” an IEEPA violation. Porcelli, 865

F.2d at 1365; Horak, 833 F.2d at 1243. Accordingly, the funds in the Partnership Accounts are the result of the Partnership’s ownership interest in the Building and are not subject to forfeiture.

See Wittig, 333 F. Supp. 2d at 1052 (removing restraint imposed pursuant to § 981 forfeiture claims on defendant’s advanced legal fees because they existed “by virtue of [employer’s]

Articles of Incorporation” and were not “derived from the alleged scheme or conspiracy to commit the underlying charges”).

Likewise, the Foundation’s “ownership distributions” that were deposited into the

Alavi Accounts are not subject to forfeiture because they were obtained as a result of the

Foundation’s 60% interest in the Fifth Avenue Company, which also was acquired in 1989. The

Government admits that “the vast majority of the Alavi Foundation’s income has consisted of proceeds of the Building,” as opposed to “proceeds of IEEPA violations.” (Compare Cmpl.

¶ 125 with Cmpl. ¶ 134). The concession is well taken since the majority of the “proceeds of the

Building” consists of what the Government has aptly described as “ownership distributions.”

(Cmpl. ¶ 100). As the terms make clear, “ownership distributions” resulted because of the

Foundation’s ownership interest in the Partnership, while the Foundation’s “management fee” resulted from the performance of services that allegedly violated IEEPA. Though the

Government may later claim that all funds in the Alavi Accounts are subject to forfeiture because of the commingling of ownership distributions and management fees—an allegation that is conspicuously absent from the Complaint—the “ownership distributions” cannot be proceeds as a matter of law. See 250 Documents, 2008 WL 4129814, at *2 (documents not subject to forfeiture because “[t]hey are not the proceeds generated from his mail and wire fraud offenses”).

16 In considering forfeiture of assets derived from two revenue sources—one a criminal source, the other not—the recent case of United States v. Hodge, 558 F.3d 630 (7th Cir.

2009), is instructive. In Hodge, the Seventh Circuit reaffirmed the principle that “the forfeiture statute [18 U.S.C. § 981(a)(2)(A)] covers only income and assets obtained from the unlawful deeds.” Id. at 635 (emphasis added). The Hodge case involved a massage parlor business that had been providing illegal prostitution services. The district court had ordered forfeiture of all revenue of the business, but the Seventh Circuit reversed. The Seventh Circuit concluded that, unless the massage parlor would have “closed its doors but for the prostitution,” its entire revenue was not subject to forfeiture. Id. Rather, “if it could have operated as a legitimate massage parlor, then the revenues of the legal part of the business are not forfeitable.” Id. 635.

Indeed, the court made clear, “[w]hen a business has both lawful and unlawful aspects, only the income attributable to the unlawful activities is forfeitable.” Id.

Because the funds in the Partnership Accounts were derived solely from non- criminal rental payments by tenants of the Building, those funds are not proceeds of an IEEPA violation. And because the Foundation’s ownership distributions resulted solely from its ownership interest in the Partnership, those distributions are not proceeds of an IEEPA violation, and the Alavi Accounts are not forfeitable as to these distributions. Accordingly, the

Government’s § 981(a)(1)(C) claim should be dismissed as to: (1) the Building; (2) the

Partnership Accounts; (3) the Foundation’s interest in the Fifth Avenue Company; (4) the

Foundation’s interests in the Real Properties, except to the possible extent they were improved with management fees; and (5) the Foundation’s “ownership distributions” contained in its Alavi

Accounts.

17 II. The Court Should Dismiss the § 981(a)(1)(A) Claim as to Most of Claimants’ Interests Because the Interests Were Not Involved in a Money Laundering Transaction

The Complaint’s second claim, premised on 18 U.S.C. § 981(a)(1)(A), should be largely dismissed because many of the transactions that the Government alleges give rise to forfeiture do not constitute money laundering, and, even if they did, Claimants’ interests were not involved in the transactions. Section 981(a)(1)(A) subjects to forfeiture “[a]ny property, real or personal, involved in a transaction or attempted transaction in violation of section 1956, 1957 or 1960 of [Title 18], or any property traceable to such property.” If the Government pursues a claim based on a theory that property “was involved in the commission of a criminal offense,” as it has done here, “the Government shall establish that there was a substantial connection between the property and the offense.” 18 U.S.C § 983(c)(3). Here, the Building, the Foundation’s 60% interest in the Fifth Avenue Company, the Partnership Accounts, and the majority portions of the

Foundation’s Real Properties were not “involved in” and do not have a “substantial connection” to money laundering transactions.

A. The Majority of the Alleged Money Laundering Transactions Do Not Constitute Money Laundering

For the Complaint’s § 981(a)(1)(A) claim to survive a motion to dismiss as to

Claimants’ interests, the interests must have been involved in a transaction involving the proceeds of specified unlawful activity. Indeed, with a limited exception not relevant here,5 to constitute money laundering in violation of either 18 U.S.C. §§ 1956 or 1957—i.e., the money laundering statutes referenced in the Complaint (Cmpl. ¶¶ 2, 149-57)—a financial transaction must at a minimum involve “proceeds of some form of specified unlawful activity” or

“criminally derived property” (which is defined as “any property constituting, or derived from,

5 See supra note 1.

18 proceeds obtained from” specified unlawful activity). 18 U.S.C. §§ 1956(a)(1), 1957(a),

1957(f)(2). Because only the Foundation’s “management fees” arguably constitute proceeds of its alleged IEEPA-violating services, only those transactions involving management fees could conceivably constitute money laundering transactions.

As stated by the Second Circuit, “[t]he two-step analytical process required by the domestic money laundering statute requires the defendant to (1) acquire the proceeds of a specified unlawful activity, and then (2) engage in a financial transaction with those proceeds.”

United States v. Napoli, 54 F.3d 63, 68 (2d Cir. 1995) (citation omitted); see also United States v. Blumhagen, No. 03-CR-56S, 2005 WL 3059395, at *2 (W.D.N.Y. Nov. 15, 2005).

Accordingly, if a transaction does not involve proceeds of an unlawful activity, there can be no money laundering offense. See Blumhagen, 2005 WL 3059395 at *2 (quoting United States v.

McCarthy, 271 F.3d 387, 395 (2d Cir. 2001)) (“[W]hen the underlying crime is completed, a transaction conducted with the proceeds from that crime may provide the basis for a money laundering conviction.”).

The meaning of “proceeds” in the money laundering context is similar in all respects pertinent here to § 981’s definition of proceeds. That is, property cannot constitute proceeds of specified unlawful activity, such as an IEEPA violation, unless that property was obtained as a result of the unlawful activity. Indeed, in 2008, the Supreme Court considered the meaning of proceeds under § 1956 in the context of an illegal gambling operation. United States v. Santos, 553 U.S. 507, 128 S. Ct. 2020 (2008). The Santos Court, in a plurality decision, noted that “Congress has defined ‘proceeds’ in various criminal provisions, but sometimes has defined it to mean ‘receipts’ and sometimes ‘profits.’” 128 S. Ct. at 2024. Finding the statute ambiguous, the Court interpreted proceeds to mean profits. Id. at 2025 (“Because the ‘profits’

19 definition of ‘proceeds’ is always more defendant-friendly than the ‘receipts definition,’ the rule of lenity dictates that it should be adopted.”). But regardless of which definition the Court had adopted, there was no question that proceeds only referred to property acquired as a result of specified unlawful activity.6 United States v. $1,399,313.74 in U.S. Currency, 591 F. Supp. 2d

365, 373 (S.D.N.Y. 2008) (rejecting Government’s money laundering theory where there was

“no allegation that the [funds] used to purchase the dollars that were deposited into the Account were in any way derived from the commission of a crime”); Zigman v. Giacobbe, 944 F. Supp.

147, 157 (E.D.N.Y. 1996) (“[T]o allege a predicate act for money laundering, the proceeds must be from a ‘specified unlawful activity.’”).

Rental income received from the Building’s tenants and deposited into the

Partnership Accounts are not “proceeds” of an IEEPA violation or any other specified unlawful activity. Transactions involving this income, which the Government has admitted is “income from the Building” (Cmpl. ¶ 130), are not and cannot be money laundering transactions. See

Napoli, 54 F.3d at 68. Accordingly, the Defendant Properties generating, receiving, distributing, or holding the Building’s rental income—i.e., the Building, the Foundation’s 60% Partnership interest, and the Partnership Accounts—are not properties “involved in” money laundering transactions or properties subject to forfeiture under § 981(a)(1)(A).

Similarly, transactions involving the Foundation’s “ownership distributions” are not money laundering transactions and do not give rise to § 981(a)(1)(A) forfeiture. “Ownership distributions,” which were obtained as a result of an ownership interest and not an IEEPA

6 Consistent with this principle, in May 2009, §§ 1956 and 1957 were amended to include the definition of proceeds as “any property derived from or obtained or retained, directly or indirectly, through some form of unlawful activity, including the gross receipts of such activity.” 18 U.S.C. §§ 1956(c)(9), 1957(f)(3) (emphasis added). The amendments are not retroactive, see United States v. Van Alstyne, 584 F.3d 803, 814 n.12 (9th Cir. 2009), but in any event confirm that proceeds still can only consist of property resulting from unlawful conduct.

20 violation, were received by the Alavi Accounts and were used to improve and maintain the

Foundation’s Real Properties. These transactions did not involve criminal proceeds and cannot constitute money laundering. Thus, those Defendant Properties alleged to have been “involved in” transactions utilizing “ownership distributions” are not subject to forfeiture under

§ 981(a)(1)(A), unless the transactions also involved the Foundation’s management fees. And even if management fees were used to make capital improvements to the Real Properties, the

Real Properties would only be “involved in” a money laundering transaction in proportion to the amount of funds used. See, e.g., United States v. Loe, 49 F. Supp. 2d at 521 (finding that “52.6% of the property is subject to forfeiture as property traceable to property involved in a money laundering offense. As to the remaining 47.4% of the property, the Court concludes that the

$457,508.89 payment of untainted funds precludes a finding that this portion of the property is subject to forfeiture.”).

B. Most of Claimants’ Interests Were Not “Involved In” or “Substantially Connected” to a Money Laundering Transaction

Even if all of the alleged transactions, including those involving rental receipts and ownership distributions, were considered to be money laundering transactions, most of the

Defendant Properties (i.e., the Building, the Foundation’s Partnership interest, the Partnership

Accounts, and the majority portion of the Real Properties) still would not be subject to

§ 981(a)(1)(A) forfeiture because they were not “involved in” and did not have a “substantial connection” to these transactions as the terms are defined in forfeiture law. 7

7 According to the allegations of the Complaint, there were numerous transfers between the Foundation’s bank accounts, including its Alavi Accounts. To the extent these transfers included management fees, these transfers potentially constituted money laundering. The Foundation is not seeking dismissal of the §981(a)(1)(A) claim at this time as to the Alavi Accounts because the Complaint alleges that the Alavi Accounts received transfers of potentially laundered IEEPA proceeds.

21 “Involved in,” in the forfeiture context, has been interpreted to mean “any property involved in, used to commit, or used to facilitate the money laundering offense.”

United States v. Schlesinger, 396 F. Supp. 2d 267, 271-272 (E.D.N.Y. 2005) (collecting cases); see also 250 Documents, 2008 WL 4129814, at *3 (“The term ‘involved in’ refers to property that is itself being laundered, as well as property used to facilitate a money laundering offense.”).

As the language of the statute makes clear, forfeiture under § 981(a)(1)(A) is permitted only if property is involved in a money laundering transaction, not simply if property is involved in the predicate specified unlawful activity. 18 U.S.C. § 981(a)(1)(A); see also United States v. Huber,

404 F.3d 1047, 1061 (8th Cir. 2005) (“[F]acilitation under section 982(a)(1)’s [the analogous criminal forfeiture statute] ‘involved in’ clause is geared at the forfeitability of instrumentalities…that facilitate (or promote) the money-laundering transactions”) (emphasis in original); United States v. Iacaboni, 221 F. Supp. 2d 104, 116 (D. Mass. 2002) (“To justify forfeiture under § 982 it is not enough merely to show that the Union St. property was involved in the gambling operation; the Government must demonstrate that the house was involved in money laundering.”), aff’d in part, rev’d in part on other grounds, 363 F.3d 1 (1st Cir. 2004).

Thus, “[i]t is not sufficient to establish that property was ‘involved in’ the underlying [predicate offense] but rather it must also be ‘involved in’ the money laundering itself.” Loe, 49 F. Supp.

2d at 519.

This requirement of a “substantial connection” was initially developed by the courts, see, e.g., United States v. One 1989 Jaguar XJ6, No. 92 Civ. 1491, 1993 WL 157630, at

*2-3 (N.D. Ill. May 13, 1993), and then codified by Congress in the Civil Asset Forfeiture

Reform Act of 2000 (CAFRA), a statute enacted to remedy the Government’s “abuse of the civil forfeiture process.” Capoccia, 503 F.3d at 116. As its legislative history shows, the “substantial

22 connection” test is “intended to mean something, it is intended to require that facilitating property have a connection to the underlying crime significantly greater than just ‘incidental or fortuitous.’” 146 Cong. Rec. H2040 at 2050 (daily ed. Apr. 11, 2000) (Statement of Rep. H.

Hyde) (emphasis added).

For instance, in United States v. One 1998 Tractor, 288 F. Supp. 2d 710, 711

(W.D. Va. 2003), the defendant, “a truck driver who transport[ed] goods in his tractor-trailer for a living,” was convicted of transporting contraband cigarettes in the cab (tractor) of the tractor- trailer. The Government sought to forfeit the entire tractor-trailer as “involved in” the offense under the forfeiture provision in 49 U.S.C. § 80303, arguing that the trailer facilitated the offense by “creating the appearance that the claimant was engaged in a legitimate trucking business.” Id. at 712, 714. Applying the “substantial connection” requirement of § 983(c)(3), the court held that the tractor had a substantial connection to the offense, but the trailer, which never carried the contraband, did not, and that forfeiture of the trailer was inappropriate where the Government failed to show that the trailer was not used for legitimate business purposes. Id. at 714.

Here, the Building, the Foundation’s interest in the Fifth Avenue Company, the

Partnership Accounts, and the majority portion of the Real Properties were not involved in and had no substantial connection to the transactions alleged in the Complaint. As to these interests, the §981(a)(1)(A) claim must be dismissed.

1. The Building, the Partnership, and the Partnership Accounts

The Building, the Foundation’s 60% interest in the Fifth Avenue Company, and the Partnership Accounts were not involved in a money laundering transaction or substantially connected to one. Few allegations in the Complaint directly address the Building, which is described as “[t]he principal asset of 650 Fifth Avenue Company.” (Cmpl. ¶ 20). The

23 Complaint does not allege that the Building was purchased or built with IEEPA proceeds; to the contrary, the Complaint acknowledges that land was purchased and the Building was built at least fifteen years before services to Iran became unlawful. (Cmpl. ¶ 24). Nor does the

Complaint allege that the Building was used to launder funds. The only allegation linking the

Building to purported unlawful conduct is that the Foundation violated IEEPA by “managing a commercial building for the Iranian Government.” (Cmpl. ¶ 21). But even if this allegation were true,8 at most, it would only imply that the Building was involved in the predicate IEEPA violation, not a money laundering transaction.

The Foundation’s interest in the Partnership and the Partnership Accounts are also not linked to a laundering transaction, as required for forfeiture under § 981(a)(1)(A). The

Complaint establishes that the Partnership pre-dates IEEPA’s application to services for Iran by six years. (Cmpl. ¶ 41). The Fifth Avenue Company’s sole source of revenue and the sole source of funds in its Partnership Accounts consisted of rental income from the Building. (Cmpl.

¶ 130) (“The only source of funds in the Partnership Accounts is income from the Building.”).

The Partnership transferred a substantial portion of its rental income to the Foundation, but the

Complaint establishes that only a small portion constituted payment for the Foundation’s alleged

IEEPA-violating services.(Compare Cmpl. ¶ 98 (“As payment for its management services, the

Alavi Foundation directed 650 Fifth Avenue Company to pay the Foundation a management fee.”) with Cmpl. ¶ 100 (describing payment of “ownership distributions”)). But even if these transfers were payments for unlawful services, those payments would constitute only IEEPA

8 Though it is not relevant for purposes of this motion, this allegation in the Complaint should be rejected. The Complaint acknowledges that the Building was built in the 1970s and majority owned since then (directly and then through its interest in the Partnership) by the Foundation. (Cmpl. ¶¶ 20, 24, 42). Even if Iran controlled the Foundation, as is alleged in the Complaint, the Foundation’s management of the Building was on its own behalf.

24 proceeds; the payments would not constitute money laundering. See Napoli, 54 F.3d at 68

(describing “two-step analytical process” requiring a defendant to “(1) acquire the proceeds of a specified unlawful activity, and then (2) engage in a financial transaction with those proceeds”);

Blumhagen, 2005 WL 3059395 at *2.

The Court faced a very similar issue in 250 Documents. In that case, the

Government sought to forfeit forged documents, claiming that the documents were involved in a money laundering transaction. 2008 WL 4129814 at *3. The Government’s complaint alleged that the documents were involved in a § 1957 transaction because the defendant “used the proceeds of the sale [of the documents] to conduct monetary transactions over $10,000.” Id.

The Court denied forfeiture, finding that “[t]he documents are not property that were themselves being laundered nor were they otherwise involved in, derived from, or used to facilitate a money laundering offense.” Id. The Court explained its reasoning as follows:

[The defendant] obtained the proceeds of his criminal acts by fraudulently creating and selling the documents to unwary third- party purchasers. [The defendant's] subsequent monetary transactions, with the proceeds of his mail and wire fraud activities, did not involve the documents that were now in the legal possession of innocent owners. Since the documents were not involved in a money laundering transaction, the property is not subject to forfeiture under § 981(a)(1)(A).

Id. In essence, the Court ruled that property that generates proceeds that are later laundered is not “involved in” the subsequent laundering transaction, and that property cannot be forfeited under § 981(a)(1)(A).

Similarly, in United States v. Loe, the court denied the Government’s attempt to forfeit leasehold rights in a marina because they were not “involved in” money laundering transactions of insurance fraud proceeds derived from the marina. 49 F. Supp. 2d at 519-20.

The Loe defendants were convicted on conspiracy and money laundering charges for

25 participating in a scheme fraudulently to obtain flood insurance proceeds for interests in the marina and by which they subsequently laundered the proceeds of the fraud. 49 F. Supp. 2d at

516. The Government sought to forfeit the lease rights in the marina as property “involved in’ money laundering, but the court refused, holding that “the Government failed to show sufficient nexus between the money laundering offenses and the lease rights.” Id. at 519. The court found that “the Government failed to offer evidence that the lease rights had a connection to the money laundering offenses themselves, as distinct from the underlying mail or wire fraud conspiracy.”

Id. at 520.

And finally, in United States v. Iacaboni, after considering whether to forfeit the defendant’s house as property “involved in” a money laundering transaction, the court denied forfeiture despite “[t]he fact that substantial evidence suggest[ed] that the house was used to promote the illegal gambling operation” because the evidence did not demonstrate “that defendant’s use of the house in any way constituted the crime of money laundering.” 221 F.

Supp. 2d at 114. The court relied on the fact that the house was not proceeds of the illegal gambling business, nor made a part of laundering transactions using criminal proceeds. Id. at

115. The involvement of the house in the gambling business was held to be insufficient to render it forfeitable as property “involved in” or having a “substantial connection” to money laundering.

See id. at 116-17 (“To justify forfeiture under § 982 [the criminal analog to § 981], it is not enough merely to show that the Union St. property was involved in the gambling operation; the

Government must demonstrate that the house was involved in money laundering.”).

Claimants’ interests in the Building, the Partnership, and the Partnership Accounts are equally not “involved in” and do not have a “substantial connection” to the alleged money laundering transactions involving the Foundation’s management fees. The Building generated

26 rental income; the Fifth Avenue Company owned the Building; and the Partnership Accounts held and later transferred the rental receipts. None of these Defendant Properties were “involved in” or “substantially connected” to the subsequent purported money laundering transactions by the Foundation or by Assa under the law and the clear reasoning of 250 Documents, Loe, or

Iacaboni. Whatever connection these Defendant Properties may have had to the alleged IEEPA violations is simply irrelevant to the § 981(a)(1)(A) claim. To be subject to forfeiture under

§ 981(a)(1)(A) claim, Claimants’ interests must have been involved in and had a substantial connection to the alleged money laundering transactions. They did not. This claim should be dismissed as to these interests.

2. The Foundation’s Real Properties

The Foundation’s Real Properties also were not “involved in” or “substantially connected” to the alleged money laundering transactions, with the possible exception of those portions of the Real Properties that purportedly received “proceeds of IEEPA violations” for capital improvements. (Cmpl. ¶ 134). The other far larger portions of the financial support received by the Real Properties were not “involved in” a laundering transaction, and, at a minimum, the Complaint’s § 981(a)(1)(A) claim should be dismissed as to these portions.

The Complaint confirms that the Foundation purchased all but one Real Property prior to 1995 (Cmpl. ¶¶ 135, 139, 140, 141), and therefore by definition all but that one could not have been purchased with proceeds, or laundered proceeds, of an IEEPA violation. The

Complaint contains no allegations that the Real Properties were used for laundering criminal proceeds or facilitated the purported laundering. The Complaint includes only a conclusory allegation that: “The Alavi Foundation has spent millions of dollars in proceeds of IEEPA violations on the Foundation Real Properties.” (Cmpl. ¶ 134).

27 If the Court were to find that the Government has sufficiently alleged that the

Foundation’s Real Properties received transfers of IEEPA proceeds in excess of $10,000, then the Complaint would adequately have pled a § 1957 money laundering violation.9 The

Complaint’s allegations, therefore, would be adequate to establish that the Real Properties were

“involved in” money laundering transactions in proportion to the amount of funds allegedly transferred in violation of § 1957. But only to that proportion. See United States v. One 1980

Rolls Royce VIN # SRL 39955, 905 F.2d 89, 90-92 (5th Cir. 1990) (holding that portion of properties purchased with legitimate funds were not forfeitable under the drug forfeiture statute);

Loe, 49 F. Supp. 2d at 523 (“Once the property was purchased, the United States’ interest in tainted funds was transformed into a proportion of the property equal to the percentage of the tainted funds used to purchase the property.”). Thus, at most, the Complaint may state a

§ 981(a)(1)(A) claim as to those portions of the Real Properties that were supported by transfers of IEEPA proceeds; the Complaint fails to state a claim as to the remainder of the Real

Properties.

And even as to those portions allegedly supported by laundering transactions, the

Court should dismiss the § 981(a)(1)(A) claim because the Complaint does not sufficiently allege that the post-1995 money transfers to the Defendant Properties represented the Foundation’s

“management fees”—i.e., the proceeds of the alleged IEEPA violations. If they did not, then they cannot constitute money laundering. The Government’s single, conclusory allegation that:

“The Alavi Foundation has spent millions of dollars in proceeds of IEEPA violations on the

Foundation Real Properties” (Cmpl. ¶ 134) is insufficient. See Iqbal, 129 S. Ct. at 1949-52.

9 The Complaint does not allege that the Foundation transferred funds to the Real Properties to promote or conceal its IEEPA violations, so these transfers cannot be deemed violations of § 1956(a).

28 Notably absent in the Complaint is any allegation that the Real Properties were supported by the

Foundation’s “management fees.” To the contrary, the Complaint alleges that “the management fee was used to pay a portion of the salaries of the Alavi Foundation’s president, controller and secretary,” not to support the Real Properties. (Cmpl. ¶ 98-99). Thus, the Court should dismiss the § 981(a)(1)(A) claim as to the entirety of the Real Properties.

CONCLUSION

For the foregoing reasons, this Court should Grant the Foundation and Fifth

Avenue Company’s motion to dismiss the Complaint as to the properties set forth above in which they have an interest.

Dated: March 1, 2010

PATTERSON BELKNAP WEBB & TYLER LLP

By: _/s/ Daniel S. Ruzumna______Daniel S. Ruzumna (DR-2105) Leonard M. Braman (LB-4381) Krista D. Caner (KC-7358) 1133 Avenue of the Americas New York, New York 10036-6710 Telephone: (212) 336-2000

Attorneys for Claimants Alavi Foundation and 650 Fifth Avenue Company

29