Fraudsters Get a Break- Ninth Circuit Affirms Dismissal of Civil RICO Finding Inadequate “Continuity”

Kan-Di-Ki v. Sorenson, 2018 WL 832865 (9th Cir., Feb. 13, 2018)

The Ninth Circuit affirmed the lower court’s dismissal of federal civil RICO claims.

The Plaintiff (DL) alleged that Defendants John Sorensen and Timothy Paulsen perpetrated a fraud scheme that lasted ten months, from January 2012 to October 2012, when they allegedly defrauded three x-ray and laboratory vendors. The Court stated it has declined to adopt a bright-line rule for how long an alleged scheme must last to establish closed-ended continuity. However, under the circumstances present here, which involved a limited number of participants and a limited number of alleged actual victims, the Court found the alleged scheme was too limited and short in duration to sufficiently establish closed-ended continuity.

Open-Ended Continuity

The Court stated that the district court properly concluded that the amended complaint does not adequately plead open-ended continuity, rejecting the claim that Sorensen and Paulsen’s conduct during 2012 was part of a regular way of doing business, and thus that their conduct stretches into the future with a threat of repetition. The court noted that the three vendors targeted provided the same types of services (x-ray and laboratory services), and all three were targeted in the same time period. The fact that DL does not identify any other vendors targeted during 2012 suggests that this was a one-time scheme that was aimed at cutting costs in those service categories (whether fraudulently or legitimately).

The Court rejected arguments that a spreadsheet prepared with the words “Total so far” permitted the inference that Sorensen and Paulsen were going to begin targeting new categories of vendors. They may merely have intended to seek further credits from the x-ray and laboratory vendors listed on the spreadsheet, whom they had already targeted. Thus, the allegations in the amended complaint are not sufficient to establish open-ended continuity.*1.

The Court also concluded that the amended complaint does not adequately plead post-2012 conduct that would bolster its arguments for closed-ended and open-ended continuity even though there were three internal emails sent in 2013, which the Court stated may simply reflect that Sorensen and Paulsen were lawfully working to negotiate with vendors. DL does not plausibly allege that these emails are more likely to reflect an intent to defraud than an intent to reduce costs through legal means. Nor has DL plausibly alleged that these emails were “incident” to a post-2012 fraud scheme, because there are no well-pled allegations that there was any scheme to defraud vendors after 2012. The amended complaint contains no specific facts about any fraudulent conduct toward any identifiable third parties after 2012. Thus, the post-2012 fraud allegations do not bolster DL’s arguments for closed-ended or open-ended continuity

Even if they were adequately pled, actions that merely shield defendants from liability for a past fraudulent scheme do not extend that scheme unless other circumstances suggest that the scheme is not yet complete. Thus, the post-2012 non-fraud allegations did not bolster DL’s arguments for closed-ended or open-ended continuity.*2.

Ed. Note:  This case shows that courts require specific facts about fraudulent conduct against other victims to show the “regular way of doing business” prong for threat of continuity (open-ended). The last part of the holding suggests that any actions after completion of the scheme to defraud do not extend its time or threat. This leaves open the question of whether “lulling letters” further the threat.


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