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. 

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