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.

Court Grants Defendant’s Motion to Dismiss Civil RICO Claim Finding Plaintiffs’ Claims Time-Barred As They Had Constructive Knowledge of Their Individual Injuries

Amory v. Giarla, 2021 WL 254192 (N.D. Cal., Jan. 26, 2021)

The court found that every single plaintiff’s claims for civil RICO relief was time-barred under the RICO statute of limitations. 

Plaintiffs are a group of artists and art buyers who either consigned their artwork or purchased artwork from defendant, a former gallerist, allegedly renowned, with various galleries in San Francisco. They allege that he misappropriated the proceeds from the sale or purchase of artwork entrusted to him for his own personal gain, abruptly closed all of his galleries after exhausting a Ponzi scheme to defraud them, and fled to Oregon with their property, which he held in trust, as a fiduciary. Plaintiffs allege breach of fiduciary duty and violations of RICO.

As a threshold matter, defendant contends that every single plaintiff’s claim is time barred. The linchpin of the RICO claim centers on defendant’s alleged acts of mail and/or wire fraud relating to plaintiffs Dennis, Mather, and Voskoboynikov. The statute of limitations for a civil RICO claim is four years. See Rotella v. Wood, 528 U.S. 549, 552 (2000). In Rotella, the Supreme Court held that the accrual clock for a civil RICO claim begins when a plaintiff knew or should have known of her injury. Notwithstanding that “a pattern of predicate acts may well be complex, concealed, or fraudulent,” it is the “discovery of the injury, not discovery of the other elements of a claim” that starts the clock. Id. at 553–56. Even so, a civil RICO claim is subject to equitable principles of tolling. Id. at 560.

The court discussed that the action was filed on July 30, 2020. Plaintiffs argued that the consignment of their artwork created a legal trust whereby defendant’s galleries held those artworks — and the proceeds from the sale of those artworks — in trust for their benefit. Plaintiff argue that their claims are not time barred because they “did not know of their injuries, nor should they have known of their injuries, until July 31, 2016, at the earliest, when they first learned via a viral Facebook post that [d]efendant had closed the [g]alleries, unilaterally and improperly terminated his consignment relationship with [them,] and fled California with their funds and/or artwork.” According to plaintiffs, their injuries lie “in the permanent loss of money and/or artwork owed to them by [d]efendant,” which did not occur until defendant severed the consignment trusts by closing the galleries and fleeing to Oregon with their property. They argue that they “had no reason to suspect that anything was amiss until at least” July 31, 2016 (id. at 12). “Until then, while the [g]alleries were still open, plaintiffs’ property was still held in trust with defendant” and there was no injury, they argue and did not have actual or constructive knowledge of defendant’s alleged fraud before July 31, 2016.   Alternatively, they argue that their RICO claim should be equitably tolled given defendant’s alleged fraudulent concealment.

 Constructive Knowledge

This order disagrees with both of plaintiffs’ arguments stating that plaintiffs’ claimed timing of their injury is intellectually dishonest as if defendant sold their consigned paintings and told plaintiffs so in 2010, they could file a suit to collect the money from the sale of the paintings in 2010, so long as the galleries remained open, notwithstanding their unsuccessful collection efforts all along.

Plaintiffs relied heavily upon Living Designs, Inc. v. E.I. Dupont de Nemours and Co., 431 F.3d 353 (9th Cir. 2005), but its facts were not directly analogous as unlike in Living Designs, plaintiffs Dennis, Mather, and Voskoboynikov circumstances demonstrate that they had constructive notice — if not actual knowledge — of defendant’s alleged fraud and their individual injuries more than four years before the filing of this action. To the extent that they argue that accrual should begin when they learned — via the Facebook post — that defendant had allegedly defrauded all of them (i.e., of his pattern of racketeering activity), that argument runs head long into Rotella’s holding that it is the “discovery of the injury, not discovery of the other elements of a claim” that starts the clock. 528 U.S at 553.

In conclusion, the three plaintiffs Dennis, Mather, and Voskoboynikov, had inquiry notice of their individual injuries — as they were not getting paid despite their collection efforts — and knew or should have known that defendant was stiffing them more than four years before they filed this action.

Equitable Tolling

Alternatively, plaintiffs argue their RICO claim should be equitably tolled due to defendant’s fraudulent concealment.  “To establish equitable tolling, … plaintiff[s] must plead with particularity that the defendant actively misled [them], and that [they] had neither actual nor constructive knowledge of the facts constituting [their] RICO claim despite [their] due diligence in trying to uncover those facts.” *10.  The allegations plaintiffs point to as being sufficient for equitable tolling are general allegations, not specific and particularized. They describe defendant’s alleged conduct in general terms, but they do not describe how any individual plaintiff, let alone how Dennis, Mather, and Voskoboynikov, in particular, were actively misled by defendant. Moreover, as already discussed, Dennis, Mather, and Voskoboynikov had at least constructive knowledge of defendant’s alleged predicate acts of wire fraud more than four years before the filing of this action. Accordingly, plaintiffs have not pled facts sufficient to justify equitable tolling. In the absence of any tolling, Dennis, Mather, and Voskoboynikov’s claims are all time barred.

Eighth Circuit Affirms District Court’s Granting of Class Certification for Civil RICO Claims

Custom Hair Designs by Sandy v. Central Payment Co., LLC, __F.3d__, 2020 WL 7755459 (8th Cir., Dec. 30, 2020)

The Court affirmed the lower court’s motion for certification of plaintiff class brought on behalf of more than 160,000 small retailers that used the defendant’s credit card processing services, seeking to recover on breach of contract, fraudulent concealment, and civil racketeering theories for defendant’s alleged misrepresentation of its fees, multiplication of fees, and inflation of fees without prior approval from issuing banks.

Standing

Regarding the civil RICO claims, the court addressed standing.  The court referred to the Supreme Court which stated that “[A] plaintiff asserting a RICO claim predicated on mail fraud need not show, either as an element of its claim or as a prerequisite to establishing proximate causation, that it relied on the defendant’s alleged misrepresentations.” Bridge v. Phoenix Bond & Indem. Co., 553 U.S. 639, 661 (2008). “When a court evaluates a RICO claim for proximate causation, the central question it must ask is whether the alleged violation led directly to the plaintiff’s injuries.” Id. at 654, 128 S.Ct. 2131quoting Anza v. Ideal Steel Supply Corp., 547 U.S. 451, 461, 126 S.Ct. 1991, 164 L.Ed.2d 720 (2006).

The Court stated there is no basis that the proximate-cause analysis under RICO must precisely track the proximate-cause analysis of a common-law fraud claim.” Id. at 655, 128 S.Ct. 2131Compare In re United States Foodservice Inc. Pricing Litig., 729 F.3d 108, 121-22 (2d Cir. 2013) (affirming RICO certification in pricing case) and Torres v. S.G.E. Mgmt., LLC, 838 F.3d 629, 639 (5th Cir. 2016) (en banc) (post-Bridge case certifying RICO class), with pre-Bridge cases.

The court found that defendant CPAY’s arguments about reliance were mistaken. Although reliance is required for common law fraud, RICO’s predicate is mail or wire fraud, which did not exist at common law. Bridge, 553 U.S. at 652, 128 S.Ct. 2131. The requirements for common law fraud are not read into RICO. Id.  Thus, plaintiffs are correct that overpayments from a pattern of systemic mail fraud in CPAY’s billing would satisfy RICO’s causation requirements and be common among all plaintiffs. See In re Foodservice, 729 F.3d at 122 (holding fees “created for the purpose of misrepresenting cost and … then kept secret so as to deceive customers about overbilling” was a question amenable to common proof).

Ed Note:   This is a good case to catalogue circuit cases pertaining to class certifications of civil RICO actions.

Court Denies Defendant’s Motion to Dismiss Civil RICO Claim Finding Plaintiff Sufficiently Alleged the Elements of a Civil RICO Offense

LD et al. v. United Behavorial Health et al., 2020 WL 732566 (N.D. Cal., Dec. 18, 2020)

The court denied United Behavorial Health’s (United) motion to dismiss, but granted, without prejudice, the Plaintiffs claims against co-defendant MultiPlan asserting that additional predicate acts by MultiPlan need to be alleged.  Plaintiffs alleged that defendants violated RICO Sections 1962(c) and 1962(d) by committing the predicate offenses of wire fraud and mail fraud in violation of 18 U.S.C. §§ 1341 and 1343.

Plaintiffs alleged that in furtherance of a scheme to defraud Defendants allegedly sent various forms of communication to plaintiffs as part of the scheme, such as VOB calls, EOBs, and PAD letters, which were misleading because they did not disclose that defendants had not or would not use a methodology for reimbursing the claims for IOP (intensive care services) services at issue that was consistent with the plan requirements.  Plaintiffs were injured by this alleged scheme because they were forced to pay the difference between the billed amount for the IOP services and the artificially low amounts that United reimbursed.  Plaintiffs further allege that the billed amounts for the IOP services they received were lower than the customary rates of similar IOP providers in the geographic region; because their plans required reimbursement of out-of-network IOP services based on the customary rates of similar IOP providers in the geographic region, their plans should have covered most, if not all, of the billed amounts. 

Standing

The court first addressed civil RICO standing under 18 U.S.C. § 1964(c), requiring a plaintiff must show: (1) that his alleged harm qualifies as injury to his business or property; and (2) that his harm was ‘by reason of’ the RICO violation,” i.e., the injury is the direct result” or “a foreseeable and natural consequence of” the alleged scheme.  Id. at *11, citing to Bridge v. Phoenix Bond & Indem. Co., 553 U.S. 639, 658 (2008). To determine whether an injury is too remote to allow recovery under RICO, courts apply the “following three-factor ‘remoteness’ test: (1) whether there are more direct victims of the alleged wrongful conduct who can be counted on to vindicate the law as private attorneys general; (2) whether it will be difficult to ascertain the amount of the plaintiff’s damages attributable to defendant’s wrongful conduct; and (3) whether the courts will have to adopt complicated rules apportioning damages to obviate the risk of multiple recoveries.” Id. at *11, citing case.

The Court concluded that the factors for RICO standing were satisfied here because a direct relation exists between the alleged RICO scheme and plaintiffs’ alleged harm, that is, Plaintiffs’ injury, which is in the form of plaintiffs’ payment of the amounts that United did not reimburse but should have reimbursed, directly flows from this alleged scheme.  Also, other typical factors also weigh in favor of this finding, such as, there is no risk of multiple recoveries because there are no other victims who were more directly injured than plaintiffs who are in a position to sue defendants. The fact plaintiffs did not allege first-party reliance does not alter this conclusion as Plaintiffs have plausibly alleged that someone in the chain of causation relied on United’s alleged misrepresentations.

 Enterprise

An enterprise that is not a legal entity is commonly known as an ‘association-in-fact’ enterprise” and plaintiffs alleged new facts that raise the inference that defendants engaged in in an association-in-fact enterprise. The enterprise’s affairs existed for the common purpose of keeping the difference between the artificially low amounts that United reimbursed for the IOP claims and the amount at which the claims should have been reimbursed if the plan requirements had actually been followed by defendants.

Defendants’ argument that this was merely a routine contractual relationship with a goal of cost-containment is premature. The Court does not rule on the merits but on the plausibility of the allegations. Here, the FAC raises a plausible inference that the contractual relationship between defendants was used as a cover for their scheme to profit from the fraud at plaintiffs’ expense. That a legitimate contractual relationship between the defendants exists does not undermine plaintiffs’ plausible allegations that defendants also engaged in an enterprise to defraud them and used the contractual relationship as a cover. *13. 

Conduct

The court found the “conduct” element of a Section 1962(c) claim satisfied as the FAC raised the inference that United and MultiPlan each had some part in directing the alleged enterprise’s affairs. Plaintiffs aver that United and MultiPlan collaborated to develop and use on an ongoing basis the Viant database and pricing tool to under-reimburse the IOP claims at issue, and that they did so for the purpose of advancing the enterprise’s goal of defrauding plaintiffs and profiting from the under-reimbursement of the IOP claims. Plaintiffs also aver that “United determined the fraudulent rates for underpayment that would be [falsely] presented as UCR,” FAC ¶ 119, raising the inference that, in addition to having a role in the operation of the alleged enterprise, United also had a role in its management. Further, and again, the fact that defendants had a contractual relationship is not determinative to the contrary.

Pattern of Racketeering Activity

In the FAC, plaintiffs have alleged some additional facts with respect to the communications by defendants that were allegedly fraudulent or misleading. However, an analysis of all the communications alleged reveals that only the VOB calls between plaintiffs’ provider, Summit Estate, and United took place before plaintiffs received the IOP services at issue. See FAC ¶¶ 255, 291, 322, 351, 378. Accordingly, only these communications could satisfy the reliance requirement for a RICO claim predicated on mail or wire fraud. See Bridge, 553 U.S. at 658 (holding that RICO plaintiff alleging mail or wire fraud must aver facts to show that “someone relied on the defendant’s misrepresentations”).

Although plaintiffs have not averred other details of these VOB calls, such as the names of the persons who participated in such calls or the dates of the calls, the Court finds that plaintiffs have alleged sufficient factual matter as to the circumstances constituting fraud so that United “can prepare an adequate answer from the allegations.”   Accordingly, plaintiffs have satisfied the element of pattern of racketeering with respect to United. With respect to MultiPlan, plaintiffs have not averred facts raising the reasonable inference that MultiPlan engaged in at least two acts of mail fraud or wire fraud upon which plaintiffs relied that constitute a pattern of racketeering activity.

District Court Provides Road-Map To Find Civil RICO Allegations Sufficient Finding, Inter Alia, Sufficiently Alleged Predicate Fraud Acts, Enterprise, and Pattern of Racketeering

David Starr, Sandi Cook, Bernadette et. al., v. VSL Pharmaceuticuls et al., 2020 WL 769480 (D. Md., Dec. 28, 2020)

The court denied Defendants motion to dismiss the civil RICO claims finding the complaint sufficient. Here, Plaintiffs’ allegations involve a single product—VSL#3—and largely focus on a scheme to pass off a new formulation of VSL#3 as containing the De Simone Formulation when it does not. Defendants, together with members of the Cavazza Family and the Italian manufacturers of VSL#3, continued to market and sell VSL#3 as containing the De Simone Formulation despite knowing that they no longer had access to that formulation, and as having the same clinical effectiveness as the De Simone Formulation despite research findings to the contrary. The scheme consisted of unsuccessfully attempting to reverse engineer the De Simone Formulation and then developing a different formulation and establishing a manufacturing process in Italy; affirmatively marketing VSL#3 as the same product as the De Simone Formulation; falsely citing clinical studies on the De Simone Formulation as studies of their new formulation; and affirmatively concealing information about the differences between the products.

The court addressed the issues raised by Defendants. 

Scheme to Defraud/Predicates

The court found the scheme to defraud and predicate mailings and wiring were adequately alleged. the court found that the Plaintiffs adequately and specifically alleged that Defendants engaged in a scheme to deceive consumers by selling the new VSL#3 through the use false representations that it was the same as the prior version that used the De Simone Formulation, and they sought to obtain money in the form of increased profits from sales.  As for the use of the mails and interstate wires, Plaintiffs assert that the scheme was furthered by the shipping of VSL#3 packages and the sending of marketing materials and other correspondence to prescribing physicians by U.S. mail, and by the distribution by wire, specifically the internet, of marketing and advertising materials with false or fraudulent misrepresentations, such as the false or misleading statements on the VSL#3 website.

The court discussed that a defendant need not personally mail or transmit by a wire; it is sufficient to have acted in way that caused such a mailing or transmission. See 18 U.S.C. §§ 13411343. Moreover, there is no requirement that the mailed VSL#3 packages or electronically transmitted materials actually contained false statements relied upon by consumers. These elements can be satisfied by, for example, “ ‘innocent’ mailings—ones that contain no false information,” or mail or wire communications that are “routine,” as long as they are in furtherance of the overall unlawful scheme. Schmuck v. United States, 489 U.S. 705, 714–15 (1989). Here, Plaintiffs have alleged that VSL participated in the scheme to defraud and worked with Alfasigma on misleading content for the VSL#3 website, and they have alleged facts supporting the conclusion that Defendants used both the U.S. mail and interstate wires in furtherance of a scheme to defraud, including that VSL#3 packages with inserts containing false claims were mailed and false statements about the current formulation of VSL#3 were posted on the VSL#3 website. The Court therefore finds the allegations sufficient on these points, and found Plaintiffs pleaded Defendants’ criminal intent to defraud with requisite specificity to meet the plain text of Rule 9(b), which states that “[m]alice, intent, knowledge, and other conditions of a person’s mind may be alleged generally.” Fed. R. Civ. P. 9(b).

Sufficient Association in Fact Enterprise

The court then found that Plaintiffs sufficiently alleged an association in fact enterprise consisting of different entities and persons, i.e., Defendants, members of the Cavazza Family, and CSA and Nutrilinea, two Italian manufacturers of VSL#3.   The court found that Plaintiffs properly alleged an enterprise separate from the “persons” alleged to be at the center of the racketeering activity, the Cavazza Family. Plaintiffs have adequately alleged both that Defendants were “persons” and that there was a separate “enterprise.” 

Next, the court found that regarding the conduct test, the enterprise must be a “truly joint enterprise where each individual entity acts in concert with the others to pursue a common interest,” and plaintiffs adequately alleged such a joint enterprise where Plaintiffs have plausibly alleged that Defendants were not just separate, stranger businesses engaged in independent commercial activity. The allegations here thus differ from those in United Food and Commercial Workers Union and Employers Midwest Health Benefits Fund v. Walgreen, Co., 719 F.3d 849 (7th Cir. 2013), relied on by Defendants, in which a complaint asserting that the defendants jointly participated in a drug substitution and overcharging scheme contained no allegations that either defendant was “involved … in the affairs of the other,” but instead described conduct “entirely consistent” with each company “going about its own business” to “advance their individual self-interests.” Id. at 854-55.*7 

Because the Amended Complaint alleged facts showing that Defendants engaged in coordinated efforts and were not simply engaged in “parallel conduct” which may be insufficient to establish an enterprise under RICO. 

Conduct of the Enterprise

The court found that where the Amended Complaint contains ample allegations that Defendants, even if under the direction of the Cavazza Family, participated extensively in the operation of the enterprise, the Reves “conduct and management” test is met.  this purported flaw in the Amended Complaint provides no basis for dismissal.

Pattern of Racketeering Activity

The court discussed that acts constitute “continued criminal activity” if there is a “closed period of repeated conduct…extending over a substantial period of time.” Citing to H.J. Inc. The period of time to establish this “closed-ended” form of continuity typically must last over a year. There is also “continued criminal activity” if there has been repeated conduct “that by its nature projects into the future with a threat of repetition.” H.J. Inc., 492 U.S. at 241–42. This form of continuity, focusing on the possibility of future conduct, is “open-ended” and can be established by, for example, evidence that “the predicate acts or offenses are part of an ongoing entity’s regular way of doing business.” Id. at 241-42.

The court found that where Plaintiffs have alleged that the scheme lasted for three years—they have plausibly alleged closed-end continuity. Moreover, Plaintiffs also properly allege open-ended continuity by asserting that Defendants and the other enterprise members effected this scheme through a series of related acts that posed and continue to pose a threat of criminal activity, and that Defendants have shown that they would do so indefinitely. The court added that it has nowhere endorsed the idea that forced cessation of activity brings with it the boon of foreclosing liability under an open-ended continuity theory. Plaintiffs’ allegations, when credited, permit the inference that selling VSL#3 as “the same” as the De Simone Formulation was part of Defendants’ “regular way of doing business,” and that, in the absence of the permanent injunction, “by its nature” such conduct would “project[ ] into the future with a threat of repetition.” H.J., Inc., 492 U.S. at 241-42. The Court thus concludes that Plaintiffs have adequately alleged continuity, and the permanent injunction did not foreclose a finding of open-ended continuity.

The court also examined previous case law in which the 4th circuit examined “factors relevant to this inquiry include the number and variety of predicate acts and the length of time over which they were committed, the number of putative victims, the presence of separate schemes, and the potential for multiple distinct injuries.” Id. Although the existence of only a single illegal scheme is relevant and weighs against a finding of continuity, “[p]redicate acts which arise under a single scheme … may be a pattern for RICO purposes if they are continuous and related.” Menasco, 886 F.2d at 684.  The court stated that presence of only one scheme, however, does not alone preclude a finding of a pattern. *8.   Upon consideration of these facts, the Court found that while Plaintiffs allege a single scheme, its duration, the number and variety of forms of predicate acts, and the number of victims place it beyond the single schemes referenced by Defendants that were of limited duration or involved only one or a limited number of victims and the alleged scheme was not comparable to the “ordinary or garden-variety fraud claims better prosecuted under state law” that are insufficient to support a RICO claim. *9.  The Plaintiffs allegations could be viewed as the kind of “open-ended scheme contemplating the repeated infliction of independent economic injuries on an indiscriminate number of victims” that “may well pose a special threat to social well-being.” 

Ed Note:    In finding for Plaintiffs on the civil RICO claims, the court makes some very important findings  (1) the elements of mail and wire fraud can be satisfied by, for example, “ ‘innocent’ mailings—ones that contain no false information,” or mail or wire communications that are “routine,” as long as they are in furtherance of the overall unlawful scheme; (2)  an association in fact can be found when the enterprise must be a “truly joint enterprise where each individual entity acts in concert with the others to pursue a common interest;  (3) persons acting under the direction of others in the operation of the enterprise is sufficient to meet the Reves “conduct and management test; (4) the court added that it has nowhere endorsed the idea that forced cessation of activity brings with it the boon of foreclosing liability under an open-ended continuity theory: (5) the court stated that presence of only one scheme, however, does not alone preclude a finding of a pattern.*8-*9 but to be sufficient allegations should be viewed as the kind of “open-ended scheme contemplating the repeated infliction of independent economic injuries on an indiscriminate number of victims” that “may well pose a special threat to social well-being.” 

 

Court Finds Plaintiff Did Not Adequately Plead a Pattern of Racketeering When Predicate Acts of Fraud Were Incidental to Another Predicate Violation, here, the Alleged Abstraction of Assets of an ERISA Plan

Poppi Metaxas v. Kenneth Lee, et al., 2020 WL 7025095 (E.D. Cal., 11/30/20)

Plaintiff Poppi Metaxas alleged RICO violations against nine defendants (“Defendants”), all employees or former employees of the community bank she once ran as CEO. Ms. Metaxas alleges that Defendants have “denied her claim for retirement benefits as part of a long-running criminal scheme to inflate the bank’s assets with funds set aside for her retirement plan.” 

The Court presented some interesting and novel argument regarding “pattern” in ultimately granting the Defendants’ motions to dismiss.

Pattern of Racketeering Activity

The court dismissed a First Amended Complaint (FAC) finding that plaintiff did not adequately plead a pattern of racketeering.  Upon consideration of this FAC, and oral argument, the Court concluded that Metaxas adequately pled the predicate acts of mail and wire fraud.  Defendants asserted in argument that a predicate act under 18 U.S.C. § 664 could not be asserted for abstractions or thefts against a “SERP,” which is an unfunded plan described in ERISA.  However, the court indicated that Ms. Metaxas’s factual allegations and her recitation of out-of-circuit authority created some uncertainty about the mechanics of the SERP, the Court thus assumed, arguendo, that she stated a plausible claim of abstraction as a predicate act under RICO.*12.    

Assuming Ms. Metaxas had stated a plausible claim of two predicate acts, the question remained whether Ms. Metaxas adequately alleged a “pattern” of racketeering activity, as mandated by 18 U.S.C. § 1962(c).*12.  The court discussed that while duration is an important factor in determining whether closed-ended continuity is satisfied, the Ninth Circuit has described the “substantial period of time” requirement as a “flexible concept” and declined to adopt bright-line rules based on the temporal length of a scheme. See Allwaste, 65 F.3d at 1528. Courts also consider additional factors, such as the number of predicate acts, victims, and injuries, to assess whether the plaintiff has demonstrated closed-ended continuity. See Midwest Grinding Co. v. Spitz, 976 F.2d 1016, 1023-24 (7th Cir. 1992). Thus, according to the Court, when a plaintiff alleges only a single scheme with a single victim it cuts against a finding of both closed-ended as well as open-ended continuity. See Religious Tech. Ctr. v. Wollersheim, 971 F.2d 364, 365-67 (9th Cir. 1992) (emphasis added). Particularly in the context of open-ended continuity, a criminal scheme with a singular goal poses no threat of continuing criminal activity once that goal is achieved. Id.

Plaintiff alleged that the bank regulators were the principal victim of Defendants’ misrepresentations, while the Defendants contended that the regulators remained “merely inevitable players” in a circumscribed scheme ultimately focusing on Ms. Metaxas and her SERP benefits. The court discussed that even though the FAC sought to recharacterize the regulators as the primary targets of Defendants’ scheme, it remains the case that without the targeted abstraction of Ms. Metaxas’s SERP benefits none of the other predicate acts would have occurred (at least not in the manner alleged).*13.

The court concluded that the denial of her retirement benefits continues to supply the means for, and constitutes the but for cause of, Defendants’ other acts. The court stated that the additional instances of racketeering activity that Defendants purportedly committed are ancillary to what remains “a single scheme with a single victim,” as the Court previously held. *14.  In particular, while the FAC’s allegations of mail and wire fraud are more detailed than those in Ms. Metaxas’s original complaint, Defendants’ false reports to regulators continue to be—even in Ms. Metaxas’s own account—“the inevitable consequence, or at most cover-up”  of the scheme to deprive Ms. Metaxas of her SERP benefits. This conclusion is underscored by the highly contingent nature of Ms. Metaxas’s mail and wire fraud allegations, which, in order to succeed on the merits, would require a finding that Defendants did in fact wrongfully abstract her retirement benefits. The court stated that put another way, if Defendants were not actually liable to Ms. Metaxas under the SERP when they appropriated the retirement funds, then they did not commit fraud in reporting those funds as general assets in subsequent reports to the regulatory agencies.*14.   

The court also discussed that even if Defendants are eventually judged liable to Ms. Metaxas for the SERP payments, e.g., in the related ERISA action, then Defendants’ fraudulent reporting will presumably cease, with Ms. Metaxas receiving her previously withheld benefits. If Defendants were to prevail on the merits of the ERISA action there would be no fraud or abstraction.

Accordingly, the court concluded that Defendants’ conduct did not “amount to or pose a threat of continued criminal activity” as it did not establish open-ended continuity because, for the reasons just given, it does not “project[ ] into the future with a threat of repetition.”  It also does not establish closed-ended continuity because Defendants’ scheme targeted only one victim, Ms. Metaxas herself, with the regulatory agencies at most the merely incidental victims of the scheme. 

Ed. Note:   The view of this court that continuity may not be found when subsequent predicate acts spring from another preceding predicate act is a new and novel way for courts to find plaintiffs’ civil RICO claims inadequately pleaded.  There is no requirement in H.J. Inc. that different types of predicate acts must be alleged independent of each other, nor multiple victims. The requirement for independence between predicate acts for continuity purposes in fact directly conflicts with H.J. Inc.’s tests for finding “relationship” between predicates, i.e., the “criminal acts have the same purpose, results, participants, victims, or methods of commission.”  H.J. Inc. 492 U.S. at 240.   Under the court’s rationale, if “relatedness” is met a pattern can almost never be adequately alleged in a civil RICO case alleging fraud predicates.  This conflicts with the broad remedial purpose of the civil RICO statute as evidenced by legislative history and Supreme Court law. 

District Court Judge Denies Defendants’ Motion to Dismiss Civil RICO Claim Finding the Complaint Sufficient Despite the Fourth Circuit’s Strict Interpretation of Civil RICO Fraud Allegations

Timothy Ekstrom  et al. v. Congressional Bank- Successor-In-Interest to American Bank, 2020 WL 6565251 (D.Md., Nov. 9, 2020)

Facts:

Plaintiffs allege that American made referrals of their loans and the loans of others to All Star for title and settlement services. In exchange, All Star, which is not a defendant, allegedly laundered payments to American, largely through third party marketing companies. As a result of the scheme, plaintiffs allegedly paid inflated settlement fees.  Plaintiffs contend that American “laundered the kickbacks through third party marketing companies” to conceal the scheme, and “continuously and regularly used the U.S. Mail and wires,” in furtherance of the scheme, “over a period of at [least] three years….” 

From April 2009 until at least September 2010, All Star paid at least 38 kickbacks to American “for the assignment and referral of American Bank loans from” the Nottingham Branch.  Throughout this period, the Nottingham Branch “assign[ed] and refer[ed] more than 800 American Bank loans [to All Star], secured by property in 34 states, pursuant to the Kickback Agreement, agreement fixing prices, and the pattern of racketeering activity in furtherance of the All Star scheme.” 

Plaintiffs assert that “American Bank and All Star under[took] affirmative acts that fraudulently conceal[ed]” the kickback scheme.

Civil RICO Precepts

The court discussed that in the Fourth Circuit, a civil RICO action “‘is a unique cause of action that is concerned with eradicating organized, long-term, habitual criminal activity.’ ” The Fourth Circuit “will not lightly permit ordinary business contract or fraud disputes to be transformed into federal RICO claims.” 

Congress has directed that the statute “be liberally construed to effectuate its remedial purposes.”  But, “Congress contemplated that only a party engaging in widespread fraud would be subject to” the “serious consequences” available under the RICO statute, such as treble damages. Menasco, Inc. v. Wasserman, 886 F.2d 681, 683 (4th Cir. 1989). And, courts have recognized the “need to limit [RICO’s] severe penalties to offenders engaged in ongoing criminal activity, rather than isolated wrongdoers.” Friedler2005 WL 465089, at *7.

Enterprise

The court found at this stage of the case the plaintiffs have adequately alleged an association-in-fact enterprise. First, plaintiffs plainly allege that a bilateral enterprise existed and its members had a “common purpose”: to “defraud[ ] borrowers into paying higher and fixed prices for title and settlement services.  Second, plaintiffs have adequately alleged that the individual members of the enterprise had relationships with each other and carried out specific roles in furtherance of the enterprise.  For example, plaintiffs attached numerous exhibits showing a relationship between Horwitz and various account executives at American.  Finally, the members of the enterprise were associated with each other for an extended period of time—at least 18 months, if not longer. *20.

Racketeering Activity –  Rule 9(b)

Further, “[w]hile a plaintiff normally must plead specific instances of mail or wire fraud, such a requirement is relaxed where there are ‘numerous mailings of standardized documents containing identical false representations.’ ” In these cases, “Rule 9(b) may be satisfied if the complaint sufficiently identifies ‘[t]he time period involved and the content of the misrepresentations.’ ” 

The Complaint alleges that there are “numerous mailings of identical false representations,” the time frame during which they were sent, and the content contained in the solicitations.  Further, plaintiffs have appended to the Complaint copies of the allegedly fraudulent solicitation mailers.  And, with respect to the wires, the Complaint alleges specific dates when American used wires to further its scheme and provided copies of invoices purportedly showing the funneling of kickback payments through third-party companies. Accordingly, the Judge concluded that plaintiffs have alleged, with particularity, that American engaged in a scheme to defraud borrowers and used the mail and wire services to further that scheme. 

Pattern of Racketeering Activity

The court found that plaintiffs have alleged a fraudulent scheme that, if proven, would “pose a special threat to social well-being.”  That is, the allegations are similarly serious: plaintiffs allege a fraudulent scheme involving at least two companies and five bank branches over at least 18 months that allegedly affected over 800 borrowers’ loans in 30 states.  At this stage, the allegations are sufficient to support a claim of a pattern of racketeering activity that “rises above the routine,” and closed-ended continuity was satisfied.

Proximate Cause

The Court explained that “a person can be injured ‘by reason of’ a pattern of mail fraud even if he has not relied on any misrepresentations.” Id. at 649-50;  (“Bridge’s holding eliminates the requirement that a plaintiff prove reliance in order to prove a violation of RICO predicated on mail fraud.”). Moreover, “a RICO claim predicated on mail fraud is based on the fraudulent scheme rather than on a particular fraudulent mailing.” 

Accordingly, drawing all inferences in favor of plaintiffs, the Court concluded the proximate cause element at this stage.

Ed. Note:  In finding closed-ended continuity, the Complaint alleged that the predicate acts—the wire transfers and over 100,000 mail solicitations—spanned a period of at least eighteen months.  Thus, in the Fourth Circuit it is not the amount of time, but rather the extensiveness of the conduct and scheme which is relevant in closed-ended continuity.   Also, the exhibits filed with the Complaint were key to the court’s determination.

Plaintiff Alleged a Prima Facie Civil RICO Claim and thus the Court granted Plaintiff’s Ex Parte Motion for Leave of Court to Serve Third-Party Subpoenas Duces Tecum Prior to the Service To Any Defendant

Cothran v. Abdul Koomson, 2020 WL 6450498 (E.D. Tex., Nov. 3, 2020)

Plaintiff alleged that Defendants conspired to lure Cothran into believing she was wiring funds to an individual romantic suitor when, in truth, she was wiring funds to the criminal enterprise. Cothran requests discovery from Capital One Bank and Bank of America to document and establish the allegedly fraudulent circumstances of the transfer of money to the Capital One Bank account, including the purpose of identifying unknown defendants who are anonymous Internet users.

Although the Federal Rules do not provide an exact standard for a court’s granting such authorization, the court stated that several other federal courts within the Fifth Circuit, including the Eastern District of Texas, have used a “good cause” standard to determine whether a party is entitled to early discovery.

In a good-cause analysis, the court weighs five factors: (1) whether the plaintiff has made a prima facie case of actionable harm; (2) the specificity of the discovery request; (3) the absence of alternative means to obtain the subpoenaed information; (4) whether there is a central need for the subpoenaed information to advance the claim; and (5) the user’s expectation of privacy.

Specifically, when “a party seeks a subpoena for identifying information of anonymous Internet users…‘the court must also balance the need for disclosure against the defendant’s expectation of privacy.’ ” Ensor, 2019 WL 4648486, at *2 (quoting Malibu Media, LLC v. Doe, SA-19-CV-00601, 2019 WL 3884159, at *1 (W.D. Tex. Aug. 16, 2019)). The court, when determining whether to authorize early discovery, enjoys “broad discretion to tailor discovery narrowly and to dictate the sequence of discovery.” 

Regarding Factor One, prima facie case, the Court concluded that Cothran demonstrated good cause has made a prima facie case of actionable harm and thus is entitled to limited early discovery for the purpose of identifying the unknown defendants. To establish a prima facie civil RICO claim, a plaintiff must allege: (1) a substantive predicate violation of 18 U.S.C. § 1962; (2) injury to his [or her] business or property; and (3) a causal connection between the racketeering activity and the injury.” 

The court found Cothran has alleged all three elements listed above. In particular, Cothran alleges that each of the individual Defendants is a “person” as defined in Section 1961(3) of RICO. Cothran further alleges that each of the individual Defendants conducted, participated in, or conspired to conduct or participate in a pattern of racketeering activity in connection with the defrauding enterprise’s conduct.  She claims that this enterprise is an “association in fact.”  Cothran alleges in detail how Defendants conspired to lure Cothran into believing she was wiring funds to an individual romantic suitor when, in truth, she was wiring funds to the criminal enterprise. She specifically alleges that Defendants engaged in a pattern of RICO predicate acts when they “repeatedly and systematically utilized wire fraud and bank fraud to defraud victims, divert the money to their own benefit, launder their proceeds,…and conceal the existence of their Enterprise.”  see 18 U.S.C. § 1961(1) (listing, among others, wire fraud and money laundering as RICO predicate acts). Cothran has therefore met the first prong of her prima facie RICO case.

Under the second prong of a prima facie Section 1962 violation, a civil RICO plaintiff must allege that he or she “suffered injuries ‘by reason of’ [the defendant’s violation of § 1962].” Ocean Energy II, Inc. v. Alexander & Alexander, Inc., 868 F.2d 740, 746 (5th Cir. 1989)(quoting 18 U.S.C. § 1964(c)). Cothran has alleged that, as a direct and proximate result of Defendants’ RICO violations, Cothran suffered extensive injuries, including damages of at least $153,943.32. Cothran has met the second prong of a prima facie showing.

For the third prong, a civil RICO plaintiff must assert his or her “right to sue” by pleading facts that demonstrate that the defendant’s violation of Section 1962 was both a “but-for” and “proximate” cause of his or her injuries. Holmes v. Sec. Inv’r Prot. Corp., 503 U.S. 258, 268, 112 S.Ct. 1311, 117 L.Ed.2d 532 (1992). Cothran has alleged that her injuries were the “direct and proximate result” of Defendants’ RICO acts. Cothran has met the third prong of her prima facie case.

The court also found that the remaining factors [Factors 2-5] of the good-cause analysis were satisfied.

Court Denies Defendants’ Motion to Dismiss Civil RICO Claims Finding Standing, Statute of Limitations, Legal Entity Enterprise, and Predicate Acts Adequately Alleged

Uselman et al v. Pop et al., 2020 WL 6075553 (E.D. Mich., Oct. 15, 2020)

The court denied the defendants’ motion to dismiss RICO claims.   Plaintiffs were contractors who agreed to utilize its own equipment and vehicles to exclusively transport freight on behalf of the Carrier (Defendants).  The Agreement also provided that the “Carrier shall pay to Contractor a sum equal to 80 (%) percent of the gross revenues (after allowable deductions as provided herein) received by Carrier from Carrier’s customers for the transportation of any freight by Contractor.”  Once Plaintiffs transported the freight, the Defendants mailed Plaintiffs Driver/Contractor Settlement statements that purported to represent the gross revenue paid by the third-party shipper.  Plaintiffs allege that these statements were falsified because “Defendants would skim a portion” of the 80% amount and “misrepresent[ ] the gross revenues that RSP had actually received.”

Standing

Defendants argued under Rule 12(b)(1) that the held that a plaintiff lacked standing to sue in his individual capacity as his company’s creditor, sole shareholder, and chairman of the board. 

Plaintiffs’ claims in the instant case are identical to the purported injuries inflicted upon their companies, and that the named businesses were simply corporate extensions of the individual Plaintiffs that allowed them to enter into the relevant Agreements. Further, the Supreme Court has clarified that individuals may bring suit under the civil RICO statute if the predicate acts have caused injury to either their business or their property.  The court found that at this early dismissal stage, Plaintiffs have adequately demonstrated that Defendants’ alleged conduct injured the corporate entities and, by extension, the individual Plaintiffs. There is sufficient evidence to link the identities of the corporations and the individual Plaintiffs based on the supplied Agreement and the relevant case law. The Court therefore finds that Plaintiffs have met the constitutional minimum to establish standing, and the Complaint would not be dismissed for lack of subject matter jurisdiction under Rule 12(b)(1).

Statute of Limitations

Plaintiffs alleged that Defendants acted to conceal all of Plaintiffs’ claims by failing to disclose the true amounts the third-party shippers paid to the Defendants. The court stated that if true, these misrepresentations prevented Plaintiffs from knowing, or even suspecting, that they were not receiving their owed compensation under the Agreements for many years. Plaintiffs state that it was not until “April or May 2018” that they suspected any wrongdoing by Defendants and if true,  Plaintiffs claims were properly pled within the statute of limitations under both the RICO injury discovery rule and the state fraudulent concealment rule.  This Court thus found that a factual dispute exists as to the onset date of the applicable statues of limitations and whether Plaintiffs acted reasonably and diligently to investigate any suspicions of wrongdoing before 2018.*5. 

Legal Entity Enterprises

Plaintiffs argued that each of the four named Defendants are legally distinct entities, satisfying the pleading requirement at this stage.  Plaintiffs here have alleged, at the very least, that (1) RSP Express’ registration as a motor carrier and (2) NA Truck Repair’s license to work on vehicles are distinct elements that separate them from Razvan and Maria Pop.  Plaintiffs further argued that Defendants Razvan Pop and Maria Pop engaged in fraudulent behavior, while the corporate entities (RSP Express and NA Truck Repair) “performed distinct roles that helped facilitate the fraudulent scheme.”  The Court discussed that the unique registrations of the corporate entities provided the individual Defendants with a means to carry out the alleged fraud. The court compared the facts to Begala, 214 F.3d at 782 (finding that the plaintiff’s complaint did not “contain facts suggesting that the behavior of the listed entities is ‘coordinated’ in such a way that they function as a ‘continuing unit.’ ”).

Note:   The court is looking at multiple legal entities to see whether they “function as a continuing unit,” a test for association in fact enterprise.  Merely, each legal entity is itself a distinct enterprise from each individual defendant, but distinctness from each corporate defendant was also found under the association in fact argument. 

Predicate Mail Fraud Acts

Plaintiffs’ claim that Defendants mailed thousands of statements that fraudulently concealed their obligation to pay Plaintiffs a certain sum in accordance with their Agreements. This system, Plaintiffs aver, allowed Defendants to unlawfully withhold funds that were otherwise owed to the owner-operators.  The court stated that other circuits have interpreted the mail fraud statute to find that a defendant may be criminally liable for fraudulently underreporting payment obligations via mailings.  Therefore, Plaintiffs have sufficiently demonstrated that the facts contained in Count I constitute RICO predicate acts.

The court noted for Count II (RICO conspiracy) Plaintiffs are attempting to use violations of state anti-tampering laws, which are misdemeanors and do not qualify as “racketeering activity,” as the Defendants’ predicate RICO offense, and the Plaintiff were granted leave to amend on this point. Accordingly, the motion to deny was denied on this Count without prejudice.

Editor Note:   It is advisable as a matter of practice to not include legal entities as defendants when also alleging them as parts of enterprises, but it is certainly possible, as evidenced by this court’s decision.