Court Dismisses Crypto-Currency Civil RICO Class Action Complaint Finding Inadequate Allegation of Proximate Causation and Inadequately Pleaded Section 1962(a) Violation

In re: TETHER AND BITFINEX CRYPTO ASSET LITIGATION, 2021 WL 4452181 (SDNY, Sept. 8, 2021)

The Court granted in part and denied in part the Moving Defendants’ motions to dismiss, but denied in full the civil RICO claims, asserted under both section 1962(a) and 1962(c).  The court first found that the section 1962(c) claims failed because of inadequate proximate causation, and found the 1962(a) claim filed because of inadequate allegation of an enterprise. See p. *44-49.

Section 1962(c)

Regarding section 1962(c), the Plaintiffs alleged that Defendants have been associated-in-fact and have constituted a RICO enterprise since at least 2015,” and, further, that “Crypto Capital and Fowler were part of the enterprise from at least 2016 to October 2019.” The Count Eight Enterprise is alleged to have conducted its affairs through a pattern of racketeering activity that included wire fraud, bank fraud, money laundering, engaging in monetary transactions in criminally derived property, and operating an unlicensed money transmitting business. 

Its purpose, according to Plaintiffs, was to manipulate the price of crypto-commodities by engaging in a scheme to defraud the market. The Enterprise used a purported stablecoin, USDT, which the Tether, Bitfinex, and Individual Defendants fraudulently represented was backed 1:1 by U.S. dollar reserves. These misrepresentations allowed these Defendants to issue new, unbacked USDT and use that debased USDT to artificially inflate the prices of crypto-commodities through transactions on the Bittrex and Poloniex exchanges. 

Plaintiffs claim injury as a consequence of the Count Eight Enterprise’s racketeering acts, insofar as Plaintiffs “purchas[ed] crypto-commodities at artificially inflated prices they would not have paid but for the Count Eight Defendants’ scheme.  The Court focused on the issues of standing and causation wherein a plaintiff must plead, at a minimum … causation of the injury by the defendant’s violation.” stating that under RICO, causation requires both “but for” and proximate causation. 

To establish proximate causation, the court discussed the factors in Supreme Court law discussing that connection between the defendant’s conduct and the plaintiff’s injury must be “direct” and “straightforward,” and must not entail “intricate, uncertain inquiries” into the extent of the defendant’s responsibility for the loss,  A link that is “too remote, purely contingent, or indirect” is insufficient,  and even at the pleading stage, a court should rarely “go beyond the first step” in assessing causation.

The Court discussed that all of the predicate racketeering acts alleged here — wire fraud, money laundering, bank fraud, unlawful money transactions, and operation of unlicensed money transmitting businesses — arose out of essentially the same related conduct: covering up the unbacked nature of USDT by circumventing U.S. banking regulations (bank fraud and operation of unlicensed money transmitting businesses), and then using that unbacked USDT to purchase crypto=commodities (money laundering, wire fraud, and unlawful money transactions).

The Moving Defendants argue that any alleged loss incurred by Plaintiffs is too attenuated from Defendants’ purported racketeering activity to establish proximate cause under RICO. Specifically, they argue that the intervening activity of third parties — those users who exchanged crypto-commodities for the allegedly unbacked USDT — breaks the causal chain. *39.  The Court agreed with the Moving Defendants that Plaintiffs’ allegations require the intervening activity of third parties, that those third parties are better situated than Plaintiffs to allege RICO claims given the racketeering activity alleged here, and that the connection between the racketeering activity and the harm “is attenuated by substantial intervening factors or third party conduct.” *40. 

This Court independently identified other cases addressing proximate cause in the context of RICO market manipulation claims, but those cases are distinguishable. 

Section 1962(a)

Regarding the section 1962(a) claim, the court found Plaintiffs could not satisfy the enterprise pleading requirements of Section 1962(a), and because Plaintiffs failed to allege a qualifying enterprise, Plaintiffs have also failed to allege the investment of any proceeds of  racketeering activity in the “acquisition of any interest in, or the establishment or operation of” a commerce-affecting enterprise. 18 U.S.C. § 1962(a). Finally, Plaintiffs have failed to allege a qualifying injury. To state a claim under Section 1962(a), a plaintiff must allege “injury from the defendant’s investment of the racketeering income, and not merely by the predicate acts. Plaintiffs’ failures to allege a qualifying enterprise or a qualifying investment foreclose their ability to plead injury cognizable under Section 1962(a).

Because Plaintiffs did not adequately allege a substantive violation of RICO in either Count Eight or Count Nine, the Court dismissed the RICO conspiracy claim. 

Court Rules That Civil RICO Issue of Distinctness between Legal Entity Defendant and Enterprise Consisting of Legal Entity, Subsidiary, and Other Insurers is Appropriate for Summary Judgement 

Meyers M.D. v. Provident Life and Accident Ins. Co., 2021 WL 4460129 (M.D. Fla. 9/19/21)

The court granted in part and denied in part the civil RICO claims, ruling that a defense arguing separate distinctness between the RICO enterprise (consisting of the defendant and subsidiaries and other independent insurers) and defendant is properly an issue for summary judgment.

In discussing liability under 18 U.S.C. § 1962(c), the Supreme Court has recognized that “one must allege and prove the existence of two distinct entities: (1) a ‘person’; and (2) an ‘enterprise’ that is not simply the same ‘person’ referred to by a different name.” Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158, 161 (2001). Further, in examining the sufficiency of a claim under 18 U.S.C. § 1962(c), the Eleventh Circuit has stated:

In an association-in-fact enterprise, a defendant corporation cannot be distinct for RICO purposes from its own officers, agents, and employees when those individuals are operating in their official capacities for the corporation. Significantly, to state a civil RICO claim, a plaintiff must establish a distinction between the defendant ‘person’ and the ‘enterprise’ itself.

Ray v. Spirit Airlines, Inc., 836 F.3d 1340, 1355 (11th Cir. 2016).

The court interpreted Eleventh Circuit rules that other prohibition against the unity of person and enterprise applies only when the singular person or entity is defined as both the person and the only entity comprising the enterprise.” United States v. Goldin Indus., Inc., 219 F.3d 1271, 1275 (11th Cir. 2000) (emphasis in original).*9.

Here, the enterprise is alleged:

Unum Group and its subsidiaries, including Paul Revere and Provident, and its common claims handling unit, as well as other independent insurers such as New York Life Insurance Company and John Hancock Mutual Life Insurance Company who use Unum Group’s common claims handling unit and methods, as well as the firm of NawrockiSmith and Ernest Smith ….

The court discussed other case law in the circuit which recognized where the plaintiff alleged that a bank and a bank manager “generated proceeds” from a pattern of criminal activity which were used to further the operation of the bank’s parent company, that “most circuits have held that a parent company and its subsidiaries cannot form an ‘enterprise’ for RICO purposes unless there is some suggestion that the vehicle of corporate separateness was deliberately used to facilitate unlawful activity.”

The court recognized that other district courts have followed the Seventh Circuit which has held that “[a] parent and its wholly owned subsidiary have no more sufficient distinctness to trigger RICO liability than to trigger liability for conspiring in violation of the Sherman Act, unless the enterprise’s decision to operate through subsidiaries rather than divisions somehow facilitated its unlawful activity ….” Bucklew v. Hawkins, Ash, Baptie & Co., LLP, 329 F.3d 923, 934 (7th Cir. 2003).

The court ruled that at this stage of the litigation, the Court declind to follow the cited cases from other circuits to dismiss the RICO claims. This fact-intensive inquiry is best left for a summary judgment motion.

Ed Note:   The Enterprise appears distinct because it includes other independent insurers such as New York Life etc.   It seems to be an open and shut determination that the Enterprise is distinct, but summary judgement is the proper procedure to determine “distinctness.”

Sixth Circuit Joins Three Other Circuits in Ruling that in Civil RICO Conspiracy actions The Government Is Not Required To Prove Actual Existence of the RICO Enterprise Or Other Elements; Would This Ruling Apply to Civil RICO Conspiracy Litigation? 

United States v. Rich, et al, 2021 WL 4146810, __ F.4th __, (6th Cir. 2021)

The court affirmed the conviction of defendants for engaging in a RICO conspiracy violation of Section 1962(d) , which renders it “unlawful for any person to conspire to violate any of the provisions” of § 1962.   The court did not find the challenge to the jury instructions warranted ruling that it is acceptable to instruct that –

[T]o convict a defendant on the RICO conspiracy offense based on an agreement to violate … 1962(c) … the Government must prove the following five elements beyond a reasonable doubt:

One, the existence of an enterprise or that an enterprise would exist.

Two, that the enterprise was or would be engaged in, or its activities affected or would affect interstate commerce.

Three, a conspirator was or would be employed by or associated with the enterprise.

Four, a conspirator did or would conduct or would participate in, directly or indirectly, the conduct of the affairs of the enterprise.

And five, a conspirator did or would knowingly participate in the conduct of the affairs of the enterprise through a pattern of racketeering activity as described in the indictment; that is, a conspirator did or would commit at least two acts of racketeering activity.

Based on the Supreme Court’s language in Salinas v. United States, 522 U.S. 52, 118 S.Ct. 469, 139 L.Ed.2d 352 (1997), the court joined three other circuits, the Tenth, the Second, and the Ninth in approving this “future language,” and held that the government is not required to prove the existence of the enterprise, or other elements, and found an instruction that an agreement to create a racketeering enterprise or other elements (such as pattern) suffices. The majority found that the dissent’s reliance on Boyle v. U.S., which only pertains to the factors to determine whether the RICO association in fact enterprise is adequately proved, was not persuasive.

Editor Note

Application to Civil RICO

The question is whether the circuit law in criminal RICO conspiracy cases in which the government is not required to prove the existence of the enterprise applies to civil RICO.   The Third Circuit, in Smith v. Berg, 247 F.3d 532, 537-538 (3rd Cir. 2001) found in a civil RICO conspiracy action that (1) liability for a substantive RICO violation is not a prerequisite to liability under RICO’s conspiracy provision, and (2) homeowners thus stated RICO conspiracy claims against title companies and mortgage lenders, even if those defendants did not manage corrupt enterprise in question.  The Smith v. Berg court stated that in accord with the general principles of criminal conspiracy law, a defendant may be held liable for conspiracy to violate section 1962(c) if he knowingly agrees to facilitate a scheme which includes the operation or management of a RICO enterprise. Id. at 538.

Thus, although Smith v. Berg does not explicitly hold that an agreement that an enterprise or other elements would be formed is sufficient in the civil context, the court follows the dictates of Salinas closely, which is the legal basis for finding this “future” language on enterprise and other elements sufficient in criminal RICO conspiracy actions. 

As a practical matter, because most circuits, if not all except the Third, require the adequate pleading of a substantive RICO action in order to find liability for civil RICO conspiracy, the reliance on finding that an enterprise and other elements need not have been in existence would not prevail.   It will be interesting in future cases whether other circuits join Smith v. Berg and lay a basis for finding sufficient civil RICO liability when it is shown that defendants have merely agreed that an enterprise, other elements, such as pattern, would have been in existence.

Fifth Circuit Reverses District Court Finding No Facts to Conclusively Establish that the Civil RICO Statute of Limitations Barred Plaintiffs Action Finding Documents Only Created A Fact Issue

Petrobras America, Inc. v. Samsung Heavy Industries Company, Limited., No. 20-20338; 2021 WL 3521659, __4th __, (5th Cir. Aug. 11, 2021)  

The Fifth Circuit reversed and remanded for further proceedings the district court determination that Plaintiff Petrobras America was barred from bringing a civil RICO lawsuit because of the statute of limitations. The lawsuit was filed on March 5, 2019 and Petrobras argued that they did not have notice of their injury until May 2015, within four years of the date of filing.

Petrobras argued that the district court erred in its determination that Petrobras was on notice in 2014 of the facts that gave rise to its RICO claims. The statute of limitations is four years for both Texas fraud claims and civil RICO claims.  The statute of limitations for a RICO claim does not accrue until a plaintiff discovers, or through reasonably diligent investigation should discover, the injury.4 Rotella v. Wood, 147 F.3d 438, 440 (5th Cir. 1998)aff’d528 U.S. 549, 120 S.Ct. 1075, 145 L.Ed.2d 1047 (2000)Jensen v. Snellings, 841 F.2d 600, 607 (5th Cir. 1988) (“A plaintiff who has learned of facts which would cause a reasonable person to inquire further must proceed with a reasonable and diligent investigation, and is charged with the knowledge of all facts such an investigation would have disclosed.”).

In Petrobras’s view, it did not and could not have discovered its injury until May of 2015, when it completed an internal audit of the drilling services contract for DS-5. Samsung disagrees, arguing that Petrobras knew as far back as 2007, and certainly no later than 2014, that it had been injured. Because a “statute of limitations is an affirmative defense for which the [defendant] has the burden of proof,” we will address Samsung’s proposed dates of notice in turn. Trinity Marine Prods., Inc. v. United States, 812 F.3d 481, 486 (5th Cir. 2016)accord Fed. R. Civ. P. 8(c)(1).

In asserting that Petrobras had notice in 2007, Samsung argues that two Petrobras employees  knowledge of the bribes is imputed to Petrobras, but the court found there employees’ knowledge cannot be imputed to Petrobras.*3. 

Samsung presented another argument for dismissal, i.e., Petrobras officials knew as early as 2007 that it might not need the DS-5; thus Petrobras knew about its injury as far back as 2007. There were conflicting e-mail and documents, but the Court stated that regardless of whether Petrobras or Samsung is correct in its reading of these e-mails and documents, they do not conclusively establish that the statute of limitations had run by March 5, 2019. Rather, they create a fact issue about Petrobras’s knowledge and the 2007 e-mails and related documents are not a proper basis for 12(b)(6) dismissal. 

The court also rejected Samsung’s view that Petrobras was injured by the “unfavorable terms” in the DS-5 contract, which it ultimately did not need. In its reply brief, Petrobras characterizes the injury as “a wholly unnecessary contract that was procured through Samsung’s fraud.” The Court thus held that Samsung “has not met its burden of conclusively establishing that” Petrobras knew or should have known about its injury as far back as 2007. *4.   

The Court also rejected arguments that two newspaper articles and Petrobras’s 2014 Form 20-F Annual Report, filed in 2015 with the U.S. Securities and Exchange Commission finding that regardless of whether it was proper to consider these documents, they do not conclusively establish that the statute of limitations began running prior to March 5, 2015. The SEC filing and news articles do not mention Pride or DS-5 at all. Pride—not Samsung—entered into the DS-5 contract with Petrobras. Samsung’s involvement was “camouflaged.” The Samsung–Petrobras contract involved the construction of the Vitória 10,000 and Petrobras 10,000; the Petrobras–Pride contact involved the drilling services of the DS-5. The separate bribery schemes involved separate parties, separate contracts, and separate ships.

In short, the Court concluded that Samsung’s arguments at best raise fact questions not suitable for disposition under Rule 12(b)(6).*5, citing Acad. of Allergy & Asthma in Primary Care v. Quest Diagnostics, Inc., 998 F.3d 190, 200 (5th Cir. 2021) (reversing 12(b)(6) dismissal on statute-of-limitations grounds because Defendants failed to conclusively establish that Plaintiffs should have discovered their injury through a diligent inquiry).   Samsung has not conclusively established at the 12(b)(6) stage that Petrobras’s RICO and Texas fraud claims accrued before March 5, 2015. 

Closed-Ended Continuity Not Found When Only Single Scheme, Single Victim, Even If “Longevity” Existed

Palantir Technologies v. Abramowitz, 2021 WL 2400779 (N.D. Cal., June 11, 2021)

The court granted Defendant’s motion to dismiss the civil RICO claim finding that plaintiff did not adequately plead RICO “continuity.” 

In this case for years between 2012 and 2014, a consultant named Abramowitz engaged in discussions with Palantir’s employees regarding certain technologies and gained access to Palantir’s confidential and proprietary information regarding its Healthcare, Cyber, and Natural Resources Technologies. This conduct continued through year 2018 in which Abramowitz filed 14 domestic and international patent applications based on this confidential and proprietary information, falsely claiming on each application to be the sole inventor, Palantir alleges that it was harmed by Defendants’ actions because it spent millions of dollars developing its Healthcare, Cyber, and Natural Resources Technologies; lost value from its trade secrets by Defendants’ unauthorized publication of the trade secrets in patent applications; spent significant funds and resources investigating Defendants’ misconduct; initiated proceedings before the U.S. Patent and Trademark Office (“USPTO”) and before German courts to establish that Palantir is the true inventor of the patent applications at issue; lost substantial financial gain; and lost valuable business opportunities.

Closed Ended Continuity

The Parties are in agreement that the alleged predicate acts are wire fraud based on alleged affirmative misrepresentations and omissions.   The court discussed that “The continuity requirement reflects Congress ‘concern[ ] in RICO with long-term criminal conduct.’ ” *6 citing Mocha Mill, Inc. v. Port of Mokha, Inc., No. 18-CV-02539-HSG, 2019 WL 1048252, at *10 (N.D. Cal. Mar. 5, 2019) (quoting H.J., 492 U.S. 229, 240 (1989)). “[C]ontinuity is both a closed- and open-ended concept, referring either to a closed period of repeated conduct or to past conduct that by its nature projects into the future with a threat of repetition.” Mocha Mill, 2019 WL 1048252, at *10 (internal quotation marks omitted).

Closed-ended continuity is established by showing that related predicate acts occurred over a substantial period of time.” Id. (internal quotation marks omitted). “[T]he Ninth Circuit has explained that activity spanning only a matter of months, involving a single victim, with a singular goal, cannot sustain a RICO claim.” Mocha Mill, 2019 WL 1048252, at *10 (citing Medallion Television Enterprises, Inc. v. SelecTV of California, Inc., 833 F.2d 1360, 1363 (9th Cir. 1987)). A “single episode,” containing multiple predicate acts, “having the singular purpose of impoverishing [the plaintiff],” with “no suggestion that these defendants…ever intended anyone but [plaintiff] any harm” also cannot sustain a RICO claim. Mocha Mill, 2019 WL 1048252, at *10 (quoting Sever v. Alaska Pulp Corp., 978 F.2d 1529, 1535 (9th Cir. 1992)).

Defendants argued that, since this alleged scheme only has a single fraud—establishing competing businesses based on Palantir’s own technology to benefit the Abramowitz enterprise— and a single victim—Palantir—there can be no closed-ended continuity under Ninth Circuit law.  Palantir argues that the multiyear length of the alleged scheme is sufficient to allege closed-ended continuity and suggests, for the first time, that the USPTO is also a victim of the scheme. Opp’n 18-20.

“RICO’s continuity requirement is not satisfied if plaintiffs have merely alleged a single fraud perpetrated on a single victim.” United Energy Owners Comm., Inc. v. U.S. Energy Mgmt. Sys., Inc., 837 F.2d 356, 360 (9th Cir. 1988) (internal quotation marks omitted); accord Shwurong Lee v. Bank of New York Mellon, No. 16-CV-05094-JST, 2016 WL 8729924, at *9 (N.D. Cal. Dec. 9, 2016). The Court also previously noted that the second factor, the number of victims, is more determinative as the Ninth Circuit rarely upholds a finding of continuity where there is only a single victim. See Sever, 978 F.2d at 1535.*7.   

The Court agrees with Defendants that “longevity is only one piece of the puzzle.”*8.   Palantir’s allegations regarding the victim of the scheme (Palantir) and the single goal of the scheme (“establishing competing businesses based on Palantir’s own technology to benefit himself, KT4, and the Trust”) have not changed since the Court previously found them deficient.  The court relied on

Ninth Circuit’s decisions in Sever and Medallion to compel this Court’s decision in this case, i.e., that “although Sever alleges a number of ‘acts,’ APC’s collective conduct is in a sense a single episode having the singular purpose of impoverishing Sever, rather than a series of separate, related acts.” Id. at 1535. The Ninth Circuit found that these allegations do not satisfy the continuity requirement established by the Supreme Court in H.J. v. Northwestern BellSever, 978 F.2d at 1535. Analogizing to Medallion, the Ninth Circuit found that predicate acts designed to bring about a single event did not pose a threat of continuity. Id. at 1535-36. Single-victim cases with a single episode—regardless of the alleged number of actual acts—and a single purpose do not meet the continuity requirement. See id. at 1535.

The court found that since there is a single victim (Palantir) and acts that can properly be characterized as a single episode (stealing Palantir’s confidential and proprietary information) for a single purpose (establishing competing businesses based on Palantir’s own technology, these “[are] in a sense a single episode,” Sever, 978 F.2d at 1535, and that does not satisfy the continuity requirement stating- 

The situation in this case is analogous [to Medallion]: a single alleged fraud—theft of Palantir’s trade secrets in order to establish competing businesses to benefit the Abramowitz enterprise—was committed against a single alleged victim—Palantir. *9. 

The court also discussed that Mocha Mill, a recent decision from this district, follows Sever and MedallionMocha Mill, 2019 WL 1048252. In Mocha Mill, the plaintiffs alleged conspiratorial conduct lasting over two years “with a singular goal of stealing Mocha Mill’s business” had not established closed-ended continuity. *8.   The court concluded that since Palantir has only pled a singular goal with a single alleged episode constituting a single fraud against a single victim, it has not sufficiently pled closed-ended continuity, after multiple revisions of the Complaints, Palantir’s RICO claim based on closed-ended continuity is DISMISSED WITHOUT LEAVE TO AMEND.

Open-Ended Continuity

The court discussed that only predicate acts can form the basis of an open-ended continuity allegation. Ticor Title Ins. Co. v. Florida, 937 F.2d 447, 450 (9th Cir. 1991) (“To satisfy the continuity prong of the test, one need only show that the predicates pose a threat of continued criminal activity, such as when the illegal conduct is “a regular way of conducting [a] defendant’s ongoing legitimate business.”) (emphasis added) (quoting H.J., 492 U.S. 229, 243 (1989)).   

Because Palantir’s allegations regarding open-ended continuity rely on alleged fraud regarding patent applications—conduct that does not constitute mail or wire fraud—Palantir has not sufficiently pled open-ended continuity. See Fleet Credit Corp. v. Sion, 893 F.2d 441, 448 (1st Cir. 1990) (“A threat of continued criminal activity for purposes of RICO is not established merely by demonstrating that the Sions’ acts of common law fraud were a regular way of conducting their ongoing businesses. Rather, Fleet must demonstrate that the predicate acts—here the acts of mail fraud—were a regular way of conducting the ongoing businesses.”) (emphasis in original). The alleged predicate acts in this case, i.e., the misrepresentations by Abramowitz to induce the sharing of confidential information and material omissions concerning fraudulent plans, had ceased by the time this lawsuit was filed.

Since Palantir has repeatedly failed to cure the deficiencies with its open-ended continuity theories by amendment, Palantir’s RICO claim based on open-ended continuity was dismissed without leave to amend. 

Defendant’s Waiver of Service Did Not Waive the Right to Challenge Personal Jurisdiction Regarding a Civil RICO Claim

Don’t Look Media LLC v. Fly Victor Limited, __ F.3d ___, 2021 WL 2280897 (11th Cir., June 4, 2021)

The court affirmed the lower court decision dismissing the civil RICO claim finding lack of personal jurisdiction, and finding a revenue sharing agreement’s forum selection clause mandated litigation of the dispute in an English court.

Plaintiff Don’t Look Media, LLC (“DLM”) licensed its private jet booking website to defendant Fly Victor Ltd. in exchange for Fly Victor’s agreement to invest in increasing traffic to the site and to share booking revenues with DLM. According to DLM, Fly Victor never fulfilled its obligations. DLM sued Fly Victor, some of its directors and officers, and related entities in the Southern District of Florida. Among other things, DLM alleged that the Fly Victor directors and officers had violated RICO by defrauding DLM of the site revenues and laundering these ill-gotten gains through closely held firms.

No Service of Party Within the United States Negates Civil RICO Action

The court first based its affirmance because DLM relied only on a RICO provision that allows for service of process in any United States judicial district. 18 U.S.C. section 1965(d).  But this statute cannot provide personal jurisdiction because DLM did not serve any party within the United States. It only attempted service on the defendants in a London office building.

The court thus held that even assuming that DLM’s RICO allegations are sufficiently colorable to invoke RICO’s nationwide service of process provision, DLM did not serve any party in accordance with that provision. The court stated that Section 1965(d)’s authorization of service in any judicial district plainly does not authorize service outside the United States.*4.   RICO therefore did not supply a statutory basis for personal jurisdiction in this action, and DLM did not offer any alternative statutory basis.

Waiver of Service Did not Waive the Right to Challenge Personal Jurisdiction

The court also discussed the defense counsel’s waiver of service stating that Defense counsel’s email waived, at most, the ability to argue that DLM’s method of serving the defendants — leaving a bundle of documents for several defendants at Fly Victor’s London reception desk — was insufficient. It did not waive the right to challenge personal jurisdiction. Personal jurisdiction and proper service are distinct requirements and distinct objections. See Fed. R. Civ. P. 4(d)(5) (“Waiving service of a summons does not waive any objection to personal jurisdiction or to venue.”); Fed R. Civ. P. 12(b)(2), (5) (listing “lack of personal jurisdiction” and “insufficient service of process” as distinct defenses), citing cases.

The court also discussed that even setting aside that no defendant was served in the United States, § 1965(d)’s remaining terms did not apply as none of the Individual Defendants resided or had an agent in any United States judicial district. Nor did they “transact [their] affairs” in any such district. DLM’s only claims on this score were that Jackson is a director of, and Vorster is a director and officer of, an entity called YoungJets LLC, a California LLC that is authorized to do business in Florida and maintains a registered agent in Tallahassee. YoungJets changed its name to Fly Victor Inc. — not to be confused with defendant Fly Victor Ltd. — in 2018. But DLM did not make any allegations to support disregarding corporate separateness between Jackson and Vorster and YoungJets.*6. 

The court concluded that DLM did not serve any defendant within the United States, and thus RICO’s nationwide (not worldwide) service of process provision cannot provide the statutory basis for personal jurisdiction in this case. Therefore, the court did not reach the further questions that would necessarily have arisen had DLM served the Individual Defendants in the United States — namely whether DLM’s RICO claims are sufficiently colorable to support reliance on RICO for personal jurisdiction and whether the exercise of personal jurisdiction over the defendants in the Southern District of Florida would offend due process.*7. 

Forum Selection Clauses Found Enforceable.

Moreover, the forum selection clauses are enforceable, plainly applied to DLM’s claims, and required dismissal in favor of an English forum.*8. 

Court Dismisses Defendant’s Civil RICO Claims Involving Payments to University of Louisville Officials Allegedly Spearheaded by Adidas Finding Inadequate Causation and Inadequate Allegation of Direct Injury

Bowen, Jr. v. Adidas America, Inc., 2021 WL 2141724 (D. S. C., May 26, 2021)

Plaintiff alleges Defendants derailed his promising career when they engaged in racketeering activity by conspiring to bribe, and bribing, his father to persuade Plaintiff to play basketball for the University of Louisville (“UofL”)—an Adidas-sponsored university. The gravamen of Plaintiff’s complaint is that Defendants committed predicate acts of wire fraud against student-athletes and universities by offering payments to the families of high-school basketball players for those players to attend such universities on scholarships, which allegedly rendered false the certifications of NCAA eligibility that those players made to the universities. Plaintiff alleges Adidas spearheaded this purported RICO enterprise. Adidas disputes Plaintiff’s account, asserting it was the victim of a scheme perpetrated by Bowen Sr., two rogue mid-level Adidas employees, and others, to misappropriate Adidas’s funds.

Bowen Jr. alleged four counts of violations of RICO.  The civil RICO statute provides that “[a]ny person injured in his business or property by reason of a violation of section 1962 of this chapter may sue … in any appropriate United States district court and shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney’s fee.” 18 U.S.C. § 1964(c). A private RICO plaintiff must show damage to “business or property” proximately caused by the defendant’s RICO violation to have standing to bring suit.  Allegations of personal injuries and the pecuniary losses incurred therefrom do not qualify as injury to “business or property.” 

Bowen Jr. claimed that, as a result of the alleged acts of racketeering, he suffered “three … categories” of damages: “(1) damage to his protected property interest and the services guaranteed therein via the June 1, 2017 contract with the University of Louisville; (2) damage to his NCAA eligibility; and (3) damage to his earnings as a professional basketball player.

  1. Louisville Scholarship

Plaintiff’ argued that he lost a contractual right under his scholarship to “prepare for the NBA” at UofL. (Id.).  The court ruled that Plaintiff’s argument was unsupported by sound legal principles. Plaintiff’s expectations did not amount to a contractual right to play basketball at UofL. The court ruled that a college athlete’s scholarship creates a protectable property interest in participation in college athletics has been rejected in other cases which held that the “interest” in playing intercollegiate athletics which the college athletes contended was created by their scholarships was “too speculative to establish a constitutionally protected right,” and commented that “the athlete on scholarship has no more ‘right’ to play than the athlete who ‘walks on.’ ” Thus, a RICO plaintiff’s claimed “injury to mere expectancy interests or to an intangible property interest” cannot confer RICO standing. *4. 

2. NCAA Eligibility

Bowen Jr. next claimed “damage to his NCAA eligibility,” under which he also groups certain alleged costs of an attorney helping Bowen Jr. to attempt to return to college basketball.  The court stated that neither is a cognizable injury here, citing to case law which has previously held that there is no right to “participation in interscholastic athletics,” and thus student-athletes’ expectations of future athletic careers are constitutionally protected.  Thus, the Court thus declined to expand RICO’s reach and finds the loss of Plaintiff’s NCAA eligibility insufficient to confer RICO standing and thus, not an actionable harm.

3. Legal Fees and Costs

Plaintiff cited legal fees and costs of $28,342.48 incurred attempting to regain his NCAA eligibility under the same genre of damages as his loss thereof. Bowen Jr.’s claimed legal fees cannot constitute an injury sufficient to confer standing because they fail to qualify as an injury to “business or property” and as such, are not compensable under the RICO statute.  The court discussed that even if Plaintiff had paid the fees, they are not recoverable for the additional reason that they derive from an attempt to remedy non-cognizable harm—a claimed inability to compete in NCAA basketball. Such derivative injuries, even if nominally to business or property, do not suffice for RICO standing as they are an indirect injury from a defendant’s conduct. *5.

4. Professional Earnings

Bowen Jr.’s claim of lost professional earnings is likewise deficient because it is not an injury to his “business or property,” but an unrecoverable expectancy interest. It is unnecessary for the Court to address the merits of these arguments, as Plaintiff’s failure to show an injury to his business or property interests is fatal to his RICO claims.

 Injunctive Relief

Plaintiff’s request for injunctive relief asked thr Court for an order enjoining Adidas from sponsoring any NCAA Division I men’s basketball programs.   Plaintiff asserted that “absent injunctive relief, RICO would be rendered hollow as it applies to illegal bribery schemes by corporate sponsors to influence intercollegiate recruiting for profit. Preventive injunctive relief is the sole vehicle to provide meaningful impact on the livelihood and development of student-athletes, like [Bowen Jr.], who have been exploited by corrupt enterprises motivated by corporate and institutional gain.”

Plaintiff’s brief notes that “[w]hile the Fourth Circuit has not weighed in on the availability of injunctive relief to private parties under RICO, oral argument on this issue was recently held” and “the Fourth Circuit is expected to issue a ruling within the coming months.” However, whether the Fourth Circuit determines RICO authorizes private plaintiffs to seek injunctive relief will have no impact on the Court’s disposition on the instant matter because plaintiff “has not sufficiently pled a RICO claim” he could not “be entitled to injunctive relief”).  As determined above, Plaintiff lacked standing for his RICO claims, and resultantly, he was foreclosed from injunctive relief on that basis. *7. 

 Limited Discovery Provided

The Court extended Plaintiff latitude in permitting the opportunity to establish factual support for his allegations in discovery before entertaining Adidas’s arguments on RICO standing, but discovery has confirmed Plaintiff cannot make the required showing. Zeal alone cannot cure the deficiencies in Plaintiff’s RICO claims. The availability of civil relief under RICO is narrowly circumscribed, and the record makes clear that Bowen Jr.’s claimed harms were not to cognizable business or property interests.

District Court Rules That Plaintiff Entitled to Strict Additional Discovery to Adequately Plead Mail Fraud RICO Predicate Crimes

Norfe Group Corp. v. R.Y. Espinoza Inc., 2021 WL 1845329 (D. P.R. May 7, 2021) 

Norfe alleges that defendants used the mails and wires to execute a fraudulent scheme whereby they would avoid their obligations to their insureds. Id. Defendants moved to dismiss for failure to state a claim, and the court found that Norfe’s amended complaint failed to comply with Rule 9(b)’s particularity requirement, as it borderline failed to plead mail fraud with specificity.  Rather than dismiss the action, the court granted Norfe limited discovery under New England Data Services, Inc. v. Becher, 829 F.2d 286 (1st Cir. 1987).  For the reasons described in the opinion, Norfe was  permitted additional strictly limited additional discovery.

A. Documents Solely in Possession of Defendant May Permit Plaintiff to Have Additional Limited Discovery

As the court has previously explained, certain of Plaintiff’s allegations did not comply with Rule 9(b)’s particularity requirement, as they borderline failed to plead mail fraud with specificity.  Nonetheless, Norfe’s RICO claims were not dismissed outright. Despite Rule 9(b)’s heightened pleading requirements, the First Circuit recognizes that “it will often be difficult for a plaintiff to plead with specificity when the facts that would support her claim are solely in the possession of a defendant….,” Cordero-Hernández v. Hernández-Ballesteros, 449 F.3d 240, 244 (1st Cir. 2006) (citing Becher, 829 F.2d at 290), a circumstance which can frequently arise in RICO mail and wire fraud cases. See Becher, 829 F.2d at 290-91 (“In the instant case, it is seemingly impossible for the plaintiff to have known exactly when the various defendants phoned or wrote to each other or exactly what was said.”). Thus, “a court faced with an insufficiently specific claim may permit limited discovery in order to give a plaintiff an opportunity to develop the claim and amend the complaint.” See Cordero-Hernández, 449 F.3d at 244 (citing Becher, 829 F.2d at 290). 

This discovery is neither automatic nor offered to plaintiffs as a matter of right. Defendants maintain that the court never authorized written discovery and that, even if written discovery were permitted, Norfe seeks material outside the scope of the limited discovery permitted under Becher. *4. 

B. Rule 9(b) Does Not Require Plaintiff to Plead Every Individual Misrepresentation with Specific Detail

Even assuming that Norfe would need information regarding other insureds’ claims for purposes of its own RICO cause of action, it would not need to provide specific details regarding each and every one of those 250 insurance claims, related emails, internal reports, and invoices to satisfy Rule 9(b)See Puerto Rico Med. Emerg. Group, Inc. v. Iglesia Episcopal Puertorriqueña, Inc., 118 F. Supp. 3d 447, 458 (D.P.R. 2015) (“To be sure, because [plaintiff] alleges an expansive scheme spanning several years and including hundreds of misrepresentations, Rule 9(b) does not require it to plead every individual misrepresentation with specific detail.”). “Setting forth the date, sender, recipient [ ], and mode of delivery for a representative sample … would suffice.” Id.

Norfe thus also sought information related to its RICO allegations and peculiarly within defendants’ control. Mindful both of the challenges inherent to pleading RICO mail fraud claims and of Rule 9(b)’s purpose to protect defendants from the harms of groundless fraud claims, the court permitted  strictly limited additional discovery, and Norfe could send new written requests to defendants within certain parameters. 

Ed. Note:   This case provides useful reiteration of the rules regarding the pleading of mail and wire fraud allegations, and appears to be a more liberal test for seeking discovery at the pleading stage than other circuits.

Court Finds Insufficient Standing for a Prospective Lessee (Sterling) to Allege Civil RICO Violations When Lessee Was Not Person Most Directly and Proximately Injured By Alleged Racketeering Activity

Sterling Suffolk Racecourse LLC v. Wynn Resorts, Ltd., 990 F.3d 31 (1st Cir. 2021)

Court Finds Insufficient Standing for a Prospective Lessee (Sterling) to Allege Civil RICO Violations When Lessee Was Not Person Most Directly and Proximately Injured By Alleged Racketeering Activity

The court of appeals affirmed the lower court’s decision dismissing the civil RICO claim but for different reasons, instead finding that the plaintiff-prospective lessee (Sterling Suffolk Racecourse, LLC- “Sterling”) did not and could not meet the causation of injury requirements set forth at 18 U.S.C. § 1964(c).

Property owner (Sterling) brought a civil RICO action alleging that casino operator Wynn Resorts, its subsidiary, its executives, and owner of site for casino conspired to deprive Sterling as a potential lessee of exclusive gaming license.  Sterling alleged these parties conspired to violate civil RICO in order to deprive Mohegan of a gaming license, costing Sterling the opportunity to lease its East Boston property to Mohegan for a casino site.

Three Supreme Court cases interpret “by reason of” to require that a plaintiff in a civil RICO action show that the defendant’s actions were “not only … a ‘but for’ cause of [plaintiff’s] injury, but … the proximate cause as well.” Id. at 35, citing cases.  The “central question” in evaluating proximate causation in the RICO context “is whether the alleged violation led directly to the plaintiff’s injuries.” Id.  See Hemi Group, LLC v. City of N.Y., 559 U.S. 1, 9, 130 S.Ct. 983, 175 L.Ed.2d 943 (2010) citing to Holmes

This court has identified in these Supreme Court cases “three functional factors with which to assess whether proximate cause exists under RICO.” In re Neurontin Mktg. & Sales Pracs. Litig., 712 F.3d 21, 35-36 (1st Cir. 2013) (citing Holmes, 503 U.S. at 269-70, 112 S.Ct. 1311). These are (1) “concerns about proof” because “the less direct an injury is, the more difficult it becomes to ascertain the amount of a plaintiff’s damages attributable to the violation, as distinct from other, independent, factors,” id. at 36 (quoting Holmes, 503 U.S. at 269, 112 S.Ct. 1311); (2) “concerns about administrability and the avoidance of multiple recoveries,” id.; and (3) “the societal interest in deterring illegal conduct and whether that interest would be served in a particular case,” id. As to this third factor, “directly injured victims can generally be counted on to vindicate the law … without any of the problems attendant upon suits by plaintiffs injured more remotely.” Id. (quoting Holmes, 503 U.S. at 269-70, 112 S.Ct. 1311).

In applying the Hemi analysis, the court ruled that it is clear that Sterling did not sufficiently allege a direct, non-contingent injury.  At minimum, Mohegan, which is not involved in this suit, is a “better situated plaintiff[ ]” with “an incentive to sue.” Id. at 11-12, 130 S.Ct. 983 (citing Holmes, 503 U.S. at 269-70, 112 S.Ct. 1311). Mohegan was Wynn’s direct competitor for the gaming license. Sterling’s theory is that Wynn’s wrongful conduct cost Mohegan the gaming license, which in turn cost Sterling the benefit of a potential lease with Mohegan. Any injury Mohegan suffered is necessarily several steps closer to Wynn’s allegedly wrongful conduct. By attempting to recover directly from Wynn, Sterling’s theory of causation both “go[es] beyond the first step” of the injuries from the alleged RICO scheme and is “purely contingent.” Id. at 9, 10, 130 S.Ct. 983.

The court ruled that Sterling is in the same position as any third-party business which hoped for a major contract from the Mohegan casino project, and lost that potential for business revenues when Mohegan lost the application bid.  Moreover, any causal link between Wynn’s conduct and Sterling’s lost rental income is “purely contingent.” Id. at 36 citing to Holmes, 503 U.S. at 271, 112 S.Ct. 1311. Sterling’s agreement with Mohegan imposed conditions that may have excused performance regardless of whether Mohegan obtained a license from the Commission. Mohegan was released from any obligation to perform in the event of a “Material Adverse Change” affecting the lease, including if construction took longer than two years for any reason outside of its control, or if local authorities other than the Commission refused to approve the project.

The court concluded that these problems with Sterling’s theory of causation caused it to fail under each of the three functional factors laid out in In re Neurontin. 712 F.3d at 36. In these circumstances, Sterling cannot show a “direct injury” from Wynn’s actions, and so its RICO claims failed as a matter of law.

Court Denies Defendants’ Motion to Dismiss Civil RICO Claim Finding Sufficient “Injury” and Also Recognizing Equitable Relief for Civil RICO Claims

Smith v. FirstEnergy Corp., et al, 2021 WL 496415 (S.D. Ohio, Feb. 10, 2021)

The court denied the Defendants’ motion to dismiss a civil RICO claim. In the summer of 2020, former Speaker of the Ohio House of Representatives Larry Householder and his political associates were indicted for a $60 million-dollar federal racketing conspiracy. The criminal complaint alleged that in exchange for hefty bribes from “Company A,” Householder and members of his racketeering enterprise (“Householder Enterprise”) worked to pass and uphold House Bill 6 (“HB 6”), a near billion-dollar nuclear power plant bailout for FirstEnergy Corp. Plaintiffs, individual and commercial ratepayers of FirstEnergy Corp., bring civil claims on behalf of a proposed class against Defendants, FirstEnergy Corp., FirstEnergy Service Co., and various individuals in decision-making roles at either entity. Plaintiffs allege that as a result of FirstEnergy’s racketeering alongside the Householder Enterprise, they have been injured by having to pay costs and fees set forth in HB 6.

The crux of Plaintiffs’ RICO and OCPA claims is that Defendants violated the statutes by engaging in a pattern of racketeering activity by making bribes to the Householder Enterprise to ensure the ultimate enactment of HB 6.  The Court found that Plaintiffs’ complaint pleaded both injury and causation adequately under § 1964(c) and rejected Defendants contention that Plaintiffs have not suffered a cognizable injury because HB 6’s surcharge provision had not yet taken effect and may never take effect.  The court stated that a federal civil RICO claim is ripe when the injury is “ascertainable and definable.” Id. at *4, citing case.   Plaintiffs injury is ascertainable and definable because the exact amount of injury—85 cents or $2,400 per month—and the imminent date at which it will begin—January 2021—are exceedingly clear. Thus, Defendants’ argument was purely a matter of statutory standing, or interpretation of the word “injured.”

The court stated that unlike an unknowable future injury at an undiscernible point in time, the injury here is defined monetarily and there is no vague contingent future event—the surcharges are part of an enacted law with an effective date.  Moreover, under Defendant’s position prospective equitable relief would never be appropriate under the statute. Equitable relief is generally available under § 1964(c), and no court has concluded that this excludes any particular type of equitable relief. 

Defendants provide no authority demonstrating that an award of preliminary injunctive relief in parallel state proceedings renders an injury pleaded in an already-filed complaint incognizable, or even unripe. State proceedings, legislative or judicial, could certainly moot this case at some point or impact the relief available to Plaintiffs. But these concerns are not raised before the Court. The issue here is one of statutory standing, and Defendants failed to show that “injured” in § 1964(c) does not contemplate imminent, ascertainable, and specified injuries.