“Standing,”–Money Fraudulently Diverted From Intended Political Purposes Can Cause Injury to Plaintiffs Business and Property

Brookhaven Town Conservative Committee v. Walsh, 2017 WL 2590785 (E.D.N.Y., June 15, 2017)

The court granted the defendants’ motions to dismiss for failing to plead fraud with particularity as required by Rule 9(b), but also ruled that Plaintiffs had “standing” to bring the action under 18 U.S.C. § 1964.

Facts:

Defendant Walsh has been the Chairman of the SCCP, which is the governing body of the Suffolk County Committee of the Conservative Party of New York State. (Id. ¶ 11.) After Walsh was elected as Chairman of the SCCP, he “caused to be formed” the political committees of defendants Suffolk County Conservative Chairman’s Club (the “SCCCC”) and Suffolk County Conservative Chairman’s Committee H.K. (the “SCCCHK”); both are controlled by Walsh.  Plaintiffs allege that Walsh’s “purposes, among others, are to increase his political clout in Suffolk County by absolutely and exclusively controlling the affairs of the BTCC (and similar committees within the County) and by diverting funds received through fundraising solicitations by Walsh intended for the SCCP to his own purposes” through mail and wire fraud.

Discussion of Standing

The court discussed that “standing” under RICO, for purposes of a motion to dismiss, is not a jurisdictional concept, but instead is analyzed as a merits issue under Federal Rule of Civil Procedure 12(b)(6). See Lerner v. Fleet Bank, N.A., 318 F.3d 113, 116–17, 129–30 (2d Cir. 2003).    Indeed, the Second Circuit has described RICO standing as “a more rigorous matter than standing under Article III.” Denney v. Deutsche Bank AG, 443 F.3d 253, 266 (2d Cir. 2006).

The court further discussed that the plaintiff has standing to bring a RICO claim only if he has been injured in his business or property by the conduct constituting the RICO violation, and only when his actual loss is clear and definite. Sky Med. Supply Inc. v. SCS Support Claims Servs., Inc., 17 F.Supp.3d 207, 231 (E.D.N.Y. 2014) (same); Westchester Cnty. Indep. Party v. Astorino, 137 F.Supp.3d 586, 612–13 (S.D.N.Y. 2015) (collecting cases).

In this case, it was alleged that defendants falsely represented that plaintiffs’ BTCC’s financial donations would be used for some purpose, such as SCCP political activities, and then those funds were diverted by Walsh for his personal benefit.  The Court further observed that the FAC did not sufficiently support BTCC’s allegation that it “suffered injury based on a loss of diverted funds” and said that if BTCC wished to advance that claim, it “must file a second amended complaint that more fully sets forth such a theory of RICO injury.”

The SAC remedied this defect by enumerating “clear and definite” monetary contributions that plaintiffs made based on Walsh’s (supposedly fraudulent) solicitations. Nevertheless, defendants summarily claim that, “[a]lthough the Second Amended Complaint alleges that plaintiffs have made political contributions, there is simply no plausible allegation of any injury in fact.”

However, the court ruled that assuming the truth of plaintiffs’ allegations, their “economic losses would constitute an injury to both the plaintiffs’ business and property. Money constitutes ‘property’ within the meaning of RICO.” Simply put, if then “defendants fraudulently induced plaintiffs to take actions and make expenditures that would result in their financial injury.” This purported harm falls squarely within RICO’s statutory ambit.  Id., at 6.

Ed Note:   This is a useful case because it shows that monies received and not placed for the purposes intended is “injury” even though the plaintiff is not out of pocket any more money than what he intended to contribute.  Honest service fraud is on the civil RICO plate.  It is certainly a puzzle why Plaintiffs did not allege color of official right extortion, which is not subject to Rule 9(b).

 

 

 

Plaintiff Will Have to Wait “Till the Cows Come Home”- District Court Dismisses Civil RICO Defective Cow Food Case

Dandy-Veal LLC v. Lehman et al., 2017 WL 2271393 (E.D. Wis., May 23, 2017) 

Plaintiff alleged Defendants provided them inadequate and defective food for their cows, leading to decreased milk production.  This was not to be.  The court granted a motion to dismiss although finding that mail fraud violations were adequately alleged, the court did not find the necessary “pattern,” because it did find sufficient allegations of closed-ended continuity.   Close-ended continuity “refers to criminal behavior that has come to a close but endured for such a substantial period of time ‘that the duration of the criminal activity carries with it an implicit threat of continued criminal activity in the future.’ In Dandy-Veal, the parties agreed the pattern of racketeering is “closed-ended” as the fraudulent scheme had come to an end.

In sum, the fraud occurred over a two month period, but there were predicate acts of mail fraud lasting 18 to 20 months, which were mailing of invoices to its customers.  Although the court incorrectly analyzed that the “number of victims, the presence of separate schemes and the occurrence of distinct injuries” were relevant, the court did correctly cite to H.J. Inc. that “duration is perhaps the closest thing we have to a bright-line continuity test: the ‘predicate acts’ must ‘extend over a substantial period of time,’; ‘a few weeks or months’ is considered insubstantial.”

Here, although Dandy Veal contended the beginning between approximately July and September 2013 and lasting until March 2015, the complaint only plausibly alleged that the scheme to sell defective Lacto–Whey occurred during February and March 2015—the months in which Dandy Veal test results showed that the Lacto–Whey failed to meet the specified content levels. It alleges that Lehman directed Packerland employees to change the Lacto–Whey formula in 2013 and 2014 to save costs, but offers nothing more in support other than its conclusory statements.  Dandy Veal also alleges that its herd’s milk production noticeably decreased during “the same time period that Packerland had been selling it watered-down Lacto–Whey” but does not state with particularity when the decrease occurred or other relevant information.

Stating based on Seventh Circuit precedent “repeatedly rejected RICO claims that rely so heavily on mail and wire fraud allegations to establish a pattern,” the court stated that it did not look favorably on many instances of mail and wire fraud to form a pattern.  Thus, the court found  

the allegations of the complaint only allege facts that show Packerland’s Lacto–Whey was defective for a period of two months. Even accepting as true that the defendants knew the product was watered down and sent out the invoices and received payments anyway, the short two month period makes this the type of case better categorized as a garden variety fraud case rather than an ongoing pattern of racketeering. Accordingly, the complaint fails to allege the pattern of racketeering activity needed to support a RICO claim.

Ed Note:   Thus, this court is measuring the length of time, or duration, by the length of the time the scheme can plausibly be alleged to cause specific injury to plaintiffs, not the length of time of the predicates, which are mailings of invoices after commission of the fraud.   This view is looked as favorably by the Third Circuit (Kehr Packages), but not the Second Circuit (DeFalco).  This issue of measuring “duration,” is covered in-depth in an article of mine soon to be published.   It is most interesting given that Justice Alito, while on the Third Circuit, dissents in Kehr Packages, and takes a contrary view from apparently the Seventh Circuit would in this case.

David J. Stander is a civil RICO attorney who specializes in civil RICO litigation. 

Plaintiffs’ Case Not “Up In Smoke,” as Tenth Circuit Reverses Lower Court Dismissal of Civil RICO Claim Involving Marijuana Cultivation

Safe Streets Alliance et al v. John W. Hickenlooper et al., __ F.3d __, 2017 WL 2454359 (10th Cir., June 7, 2017)

The lower court had dismissed two Colorado landowners challenge under section 1964(c) against certain affiliates of a State- and county-licensed marijuana manufactory that allegedly has injured the landowners’ adjacent property.  The Court held that that the landowners have plausibly alleged at least one § 1964(c) claim against each of those defendants, and therefore reversed, in part, the dismissal of those claims and remand for further proceedings.

Plaintiffs (Reillys) brought civil RICO claims under § 1964(c) against a host of individuals and entities purportedly affiliated with that neighboring marijuana enterprise.  Plaintiffs allege that the Marijuana Growers are each subject to civil liability under § 1964(c) for the injuries they have caused to the Plaintiffs property by operating their association-in-fact enterprise, which by definition violates the Controlled Substances Act (CSA), and therefore violates RICO.

The Court reversed the lower court, looking favorably at the Plaintiffs’ complaint, first finding clearly that marijuana cultivation is “racketeering activity” which is defined to include “dealing in a controlled substance or listed chemical [ ]as defined in” the CSA.

Second, the Court found that the Defendants (Marijuana Growers) purportedly “pooled their resources, knowledge, skills, and labor to achieve through th[at] enterprise efficiencies in the cultivation and distribution of marijuana that none of them could have achieved individually.”  Thus, the Court found that the Reillys’ allegations of purpose, relationship, and longevity are sufficient for them to proceed on the basis that the Marijuana Growers together created an association-in-fact enterprise.*7. The Court also stated that  the Reillys’ alternative enterprise theories did not undermine their well-supported allegations that the Marijuana Growers are each participating in a distinct, larger, association-in-fact enterprise.

Third, following Reves, the Court took a very liberal view of the Conduct Element, stating that “a plaintiff can easily satisfy Reves’ operation and management test by showing that an enterprise member played some part—even a bit part—in conducting the enterprise’s affairs.”  The Marijuana Growers had admitted that they all “agreed to grow marijuana for sale” at the facility adjacent to the Reillys’ property, a facility at which they allegedly have been doing just that, and the Court found that the Marijuana Growers thus each conducted the enterprise’s affairs.

Fourth, regarding pattern, the Court found that “a RICO victim need not have actual knowledge of exactly who committed the RICO predicate act resulting in the injury for a civil RICO claim to accrue.” Id., at *8.   The Court stated that in each of the Reillys’ alleged various actions each of the Marijuana Growers took to establish and operate the enterprise, an entity that is now purportedly pursuing those illegal ends. When coupled with the Reillys’ assertion that the Marijuana Growers began cultivating marijuana at their facility, the Court concluded those allegations plausibly stated the requisite pattern of predicate acts that present a threat of ongoing criminal activity.

Injury

Last, the Court discussed in detail that Plaintiffs plausibly pleaded (1) injuries to their property (2) that were caused by those violations.   The Court rejected Defendants’ argument that a plaintiff must submit evidence of a “concrete financial loss” (e.g., an appraisal quantifying the diminution in property value or comparator results of attempts to sell predating and postdating a RICO violation) to plausibly allege an injury to his property caused by a defendant’s § 1962 violation.

The Court concluded, however, that neither § 1964(c)‘s text nor any ruling by the Supreme Court or this court establishes the novel statistical evidentiary pleading standard that the district court applied.  In fact, the statute and applicable precedents compel the opposite conclusion with respect to the Reillys’ allegations that their property has been directly injured by their neighbors’ odorous and publicly-operating criminal enterprise. Id., at *9.

Importantly, the Court stated that a claim would be sufficient if Reillys plausibly alleged injuries to their property rights, and found that the noxious odors emanating from the Marijuana Growers’ criminal enterprise presently interfered with the use and enjoyment of their land.

Also, relying on a previous case, the Court also allegations that injury resulting from  reducing the development potential (and thus the value) of their properties were not conclusory” and were “sufficient” to proceed under § 1964(c).

Ed. Note:   The court is focusing on the liberal interpretation of civil RICO from Supreme Court decisions, and ignoring the noise and rattle from previous circuit decisions, which do not follow Supreme Court dictates.

David J. Stander is a civil RICO Attorney who focuses on fraud and civil RICO litigation. 

 

Second Circuit Does Not Follow Precepts of H.J. Inc. in Finding No “Pattern of Racketeering”

Reich v. Lopez, __ F.3d ___, 2017 WL 2293546 (2d Cir. 2017)

The court affirmed the dismissal of a civil RICO complaint alleging wire fraud and Travel Act violations regarding an effort by defendants to discredit Plaintiffs connected to a Venezuelan energy company that was in litigation with one of Reich’s clients.    The court found dismissal proper because Reich failed to allege that the defendants engaged in a “pattern of racketeering activity.”  Of his two theories, one was found to fail because the predicate acts posed no continuing threat of racketeering; the other failed because the predicate acts chosen were insufficiently related to each other.

Plaintiff alleged that two combinations of predicate acts each meet the pattern requirements. His first theory is that the requisite pattern is formed by the two acts of wire fraud alone: a false phone call to the bank shareholder and another false phone call to Cedeño. His second theory is that the requisite pattern is formed by the acts of wire fraud combined with the Travel Act violations.

The court found that Reich’s first theory failed because the predicate acts lack continuity.

The court discussed RICO targets conduct that “amount[s] to or pose[s] a threat of continued criminal activity.” See H.J Inc. 492 U.S. at 239, 109 S.Ct. 2893.  The court found that under each theory continuity was not supportable, as the wire fraud alone was not continuous in either sense, the phone calls included no future threat of repetition, and false phone calls were not Derwick Associates’ (the enterprise), a Venezuelan energy company,  “regular way of operating [its] business” stating that although Derwick allegedly bribed Venezuelan officials, it is not a narcotics ring or an organized crime family.

Reich’s second theory—that the predicate acts are both the wire fraud and the Travel Act violations—sufficiently pleaded closed-ended continuity because it alleges conduct from 2009 until at least the end of December 2012.  But, the court found that although the predicate crimes were “vertically” related to the activities of the Enterprise, it applied also a “horizontal relatedness” test to find that there was insufficient relatedness and thus no pattern.

In contravention of the explicit holding in H.J. Inc., the court first stated that the Plaintiff has to prove both “vertical” and “horizontal” relatedness.   Also, in contravention of H.J. Inc., the court drew the same distinction used in H.J. Inc. in a continuity analysis,  that is determining whether enterprises that are and are not primarily legitimate.   The court stated because the enterprise (Derwick), a company alleged to having engaged in bribes, was found to be an enterprise not primarily in the “business [of] racketeering activity,” predicate acts must also be “horizontally related.”    Finding the methods of commission, victims, purpose, and results of the predicate acts were all dissimilar, the court concluded there was no “horizontal relatedness” and thus no pattern.

Analysis:

(1)  H.J. Inc. held that “relatedness” can be shown in the disjunctive, and there is no authority to find that both need be applied.   H.J. Inc. does not apply an enterprise test to relatedness.

(2)  The court’s finding that open-ended continuity need be a narcotics ring or organized crime family is plain wrong, and contrary to the explicit language in H.J. Inc.  In H.J. Inc., the Supreme Court found that RICO open-ended continuity may be found when, for example, there is a legitimate business (as enterprise) which regularly conducts business through illegitimate means, by committing acts of fraud for example. 109 S.Ct. at 2902-03.  The requirement that open-ended continuity can only be found in violent enterprises, such as narcotics rings and organized crime families, also disregard those enterprises primarily in the “business [of] racketeering activity,” which include activities like bribery and fraud.

(3) The court found continuity, closed-ended, just based on three years, without analyzing more. A good case for that principle.

David J. Stander, Esq. is a civil RICO attorney who focuses on civil RICO litigation.

Court Examines In Depth Civil RICO Extraterritoriality Post RJR Nabisco: Split in Circuits Evident as Majority Focus in on Where Alleged Injury Occurred

Elsevier Inc. v. Pierre Grossman, IBIS, 2017 WL 1843298  (S.D.N.Y., May 8, 2017)

In a detailed examination of extraterritoriality for civil RICO claims, because of the law change by the Supreme Court’s opinion in RJR Nabisco, the court granted Plaintiffs’ motion for a new trial as to Defendant Grossmann on the issue of domestic injury.  The court also granted Plaintiffs’ motion for leave to file a Second Amended Complaint as to Defendants PTI and IBIS.

Earlier OpinionPre-RJR Nabisco

The Court in a previous opinion in Elsevier had applied its domestic-injury analysis to Plaintiffs’ evidence at trial and found that neither of Plaintiffs’ alleged injuries—the alleged competitive injury to Plaintiffs’ business and alleged parting with property under false pretenses—was a “domestic injury” for purposes of RICO.   In the earlier opinion, the Court considered the strictures of FRCP 59 and 15, however, and concluded that “it would be permissible to order a new trial on the issue of domestic injury at this juncture.”  Because the Court did “not believe it would be advisable to hold a second trial unless Plaintiffs [were] capable of introducing more information on the issue of domestic injury” though, it directed Plaintiffs to “renew their Rule 59 motion,” but only if that motion were “accompanied by a proffer of the evidence that would be offered at a trial on the issue of domestic injury.”  With regard to Plaintiffs’ assertion that they had parted with property under false pretenses, the Court suggested that Plaintiffs’ proffer should indicate that Plaintiffs’ journals left their control in the United States because they were shipped from the United States and/or authorized for shipment by Plaintiffs’ employees in the United States. Id. at 788-90.

The court then discussed the recent Supreme Court opinion on extraterritoriality in depth.  In RJR Nabisco, Inc. v. European Community, ––– U.S. ––––, (2016), the Supreme Court affirmed the strength of the judiciary’s presumption against extraterritoriality, and the Court outlined the two-step process according to which a court must analyze that presumption’s applicability to a given statute. RJR Nabisco, 136 S. Ct. at 2100-01.   At the first step, a court asks “whether the presumption against extraterritoriality has been rebutted—that is, whether the statute gives a clear, affirmative indication that it applies extraterritorially.” Id. at 2101. The court “must ask this question regardless of whether the statute in question regulates conduct, affords relief, or merely confers jurisdiction.” Id. If the statute applies extraterritorially, then the court’s inquiry is at its end.

However, if there is nothing in the statute to rebut the presumption against extraterritoriality, the court must proceed to the second step of the analysis, which requires the court to consider whether the case involves a domestic or extraterritorial application of the relevant law. RJR Nabisco, 136 S. Ct. at 2101. A court “do[es] this by looking to the statute’s ‘focus’ ”: that is, if the conduct relevant to the statute’s focus occurred in the United States, then the case involves a permissible domestic application even if other conduct occurred abroad; but if the conduct relevant to the focus occurred in a foreign country, then the case involves an impermissible extraterritorial application regardless of any other conduct that occurred in U.S. territory.*4 Id.; accord Matter of Warrant to Search a Certain E-Mail Account Controlled & Maintained by Microsoft Corp., 829 F.3d 197, 216-17 (2d Cir. 2016).

In RJR Nabisco, the Supreme Court applied this two-step framework to determine the extent to which the “substantive prohibitions in § 1962 may apply to foreign conduct.” 136 S. Ct. at 2101. At step one, the Court found that § 1962 “gives a clear, affirmative indication that [it] applies to foreign racketeering activity—but only to the extent that the predicates alleged in a particular case themselves apply extraterritorially.” Id. at 2102. Thus, for any crime to constitute a proper predicate act under RICO, the crime must involve: (i) a violation of a statute that applies extraterritorially or (ii) domestic conduct that is relevant to the “focus” of a domestic criminal statute. See id. at 2101-02.

Thus, the Court concluded, “[s]ection 1964(c) requires a civil RICO plaintiff to allege and prove a domestic injury to business or property and does not allow recovery for foreign injuries.” Id. at 2111. The Court acknowledged that “[t]he application of this rule in any given case will not always be self-evident,” but declined to articulate a definition of a “domestic injury to business or property,” leaving that question for another case. Id.

Thus, what is “Domestic Injury.”

Courts to consider this question left open by RJR Nabisco have diverged in their analysis thereof. See City of Almaty, Kazakhstan v. Ablyazov, No. 15 Civ. 5345 (AJN), 2017 WL 1424326, at *2 (S.D.N.Y. Apr. 20, 2017) (“[C]ourts both within this District and around the country have adopted varying approaches to assessing the novel domestic-injury question that could at least potentially yield differing determinations.”). Indeed, “two separate, and apparently conflicting, lines of reasoning have emerged from these opinions. The first line … focuses on where the alleged injury was suffered. The second line … focuses on where the conduct occurred that caused the injury.” Cevdet Aksüt Oğullari Koll. Sti v. Cavusoglu, Civ. No. 2:14-3362, 2017 WL 1157862, at *4 (D.N.J. Mar. 28, 2017) (collecting cases).

The SDNY has taken the former approach and earlier had concluded that in the RICO context, courts should employ a more flexible inquiry to determine where an injury occurs. First, the court should determine what type of injury a RICO plaintiff has suffered. If the plaintiff has suffered an injury to his or her business, the court should ask where substantial negative business consequences occurred. By contrast, if the plaintiff has suffered an injury to his or her property, the court should ask where the plaintiff parted with the property or where the property was damaged. Elsevier, 199 F. Supp. 3d at 786. Clearly, the Court’s focus was on where an alleged injury was suffered by a RICO plaintiff, rather than where the alleged predicate acts were committed by a RICO defendant. See id.

The majority of other courts to consider the question have followed suit. See Cevdet Aksüt Oğullari Koll. Sti, 2017 WL 1157862, at *4-5 (collecting cases) (“[M]ost of the courts appear to have focused on where plaintiffs’ injuries were felt.”). Other courts within this Circuit, for example, have adopted a version of the injury-focused approach derived by analogy to New York State’s choice-of-law statute, N.Y. C.P.L.R. § 202. See Bascuñan v. Daniel Yarur ELS Amended ComplaintA, No. 15 Civ. 2009 (GBD), 2016 WL 5475998, at *4-6 (S.D.N.Y. Sept. 28, 2016); see also City of Almaty, Kazakhstan v. Ablyazov, No. 15 Civ. 5345 (AJN), 2016 WL 7756629, at *7-9 (S.D.N.Y. Dec. 23, 2016) (adopting Bascuñan‘s holding that “[t]he appropriate subject of the inquiry required by RJR Nabisco is not the location of the … purportedly injurious conduct but the location where the injury itself arose.  Under this approach, a court looks to “where the economic impact of [an] injury was ultimately felt,” which is typically the state of a plaintiff’s residence or, in the case of a foreign corporation, either where it maintains a principal place of business or its place of incorporation. Bascuñan, 2016 WL 5475998, at *4 (quoting Deutsche Zentral-Genossenchaftsbank AG v. HSBC N. Am. Holdings, Inc., No. 12 Civ. 4025 (AT), 2013 WL 6667601, at *6 (S.D.N.Y. Dec. 17, 2013)). Courts “ask two common-sense questions: ‘[i] who became poorer, and [ii] where did they become poorer.’ ” Id. (quoting Deutsche Zentral-Genossenchaftsbank AG, 2013 WL 6667601, at *6).

This approach is similar to that adopted by most courts outside the Second Circuit. See, e.g., Cevdet Aksüt Oğullari Koll. Sti, 2017 WL 1157862, at *5 (“The Court, therefore, concludes that the only relevant inquiry is where Plaintiff’s injury occurred—i.e. where the impact of Plaintiff’s injury was felt—and not where the predicate acts occurred.”); Absolute Activist Value Master Fund Ltd. v. Devine, No. 15-cv-328, 2017 WL 519066, at *19-20 (M.D. Fla. Feb. 8, 2017) (“Defendant is correct to the extent she argues that the focus of the matter is the geographic location of the injury to plaintiffs, not the location of a defendant’s wrongful acts”); Exeed Indus., LLC v. Younis, No. 15 C 14, 2016 WL 6599949, at *3 (N.D. Ill. Nov. 8, 2016) (finding foreign plaintiffs did not suffer a domestic injury because “the injury alleged was not initially suffered by Plaintiffs in the United States, nor have Plaintiffs maintained a United States presence”).

District Courts in N.J. and C.D. Cal. Diverge

A minority of courts elsewhere, however, have looked to the place where the RICO-predicate acts that caused the alleged injury occurred. See, e.g., Akishev v. Kapustin, No. CV 13-7152 (NLH) (AMD), 2016 WL 7165714, at *8 (D.N.J. Dec. 8, 2016) (finding domestic injury because defendants chose “to operate their fraudulent scheme from New Jersey and Pennsylvania,” such that “the locus delecti of the crimes committed is the United States”); Tatung Co., Ltd. v. Shu Tze Hsu, No. SA CV 13-1743 (DOC) (ANX), 2016 WL 6683201, at *7-8 (C.D. Cal. Nov. 14, 2016) (declining to follow Bascuñan because conduct of defendants so clearly targeted California that “[i]t would be absurd to find that such activity did not result in a domestic injury to Plaintiff”).

Thus, given the change in civil RICO law regarding domestic injury changed on June 20, 2016, long after the Rule 16 scheduling order’s May 9, 2015 deadline for motions to amend the pleadings, good cause supported Plaintiffs’ motion to amend. Courts in the Second Circuit have found good cause to support amendment when plaintiffs have diligently sought leave upon a change in controlling law.

Thus, Plaintiffs’ diligence in addressing the intervening change in RICO law counsels in favor of permitting amendment.  Consideration of other relevant factors favors the same result. First, permitting an amendment at this stage in the litigation will not prejudice PTI or IBIS, and second, Plaintiffs’ amendment will not be futile. The “amended portion of the complaint” will not “fail to state a cause of action,” but rather will correct those portions of the Amended Complaint that currently fail to state a cause of action. Third, Plaintiffs have not been given “ample prior opportunity to allege” their domestic injury. This is Plaintiffs’ first opportunity to do so. For these reasons, Plaintiffs’ motion for leave to amend their pleading with regard to their RICO and RICO conspiracy claims against Defendants PTI and IBIS was granted.

David J. Stander is a civil RICO Attorney who focuses on complex litigation issues in civil RICO and fraud litigation.   The Second Circuit/majority view appears to liberalize arguments for jurisdiction for U.S. plaintiffs subject to racketeering conduct outside the U.S. when the injury was “felt” domestically, such as where Plaintiff lives or his or her business operates.

Court Requires Specific Factual Averments to Meet “Regular Way of Doing Business” Open-Ended Continuity Prong

Klineburger v. Kell, 2017 WL 1550013 (E.D. Pa. May 1, 2017)

The court granted a motion to dismiss a civil RICO complaint finding that plaintiff did not adequately allege the continuity prong for a pattern of racketeering.   The issue was whether the “open-ended” continuity prong could be satisfied by showing that the defendants’ fraudulent conduct was the “regular way the defendant conducted his business.”

The court discussed that the Plaintiff, realizing his deficiencies regarding the “regular way of doing business” continuity requirement in his original Complaint, added language in his Amended Complaint that averred that the defendant Wolsky has been involved in similar transactions that resulted in him obtaining the exact dominion and control over those competing entities, with the exact same end result of the Enterprise somehow obtaining all assets and goodwill of the subject company(ies). Plaintiff also stated in his Amended Complaint that “[i]f not stopped, Defendants will continue to perpetrate their scheme and defraud Plaintiff Klineburger from his hard earned money.”

But, the court found these to be general allegations, and found that Plaintiff failed to make any factual averments that Defendants have attempted, or in the future will attempt, similar actions against other companies and/or individuals.   Thus, the assertions in Plaintiff’s Amended Complaint were considered mere conclusions of law and, although the Court accepted all of the complaints material allegations as true for purposes of deciding a Rule 12(b)(6) motion, the Court did not accept as true conclusory allegations of law.  Id., at *8, citing to Morse v. Lower Merion Sch. Dist., 132 F.3d 902, 906 (3d Cir. 1997); Mineo v. McEachern, 2014 WL 2197032, at *2 (D.N.J. May 27, 2014) (holding that in a RICO claim, conclusory allegations are not enough to show open-ended continuity).   The court stated that other courts have rejected similar arguments by plaintiffs who have attempted to rely on conclusory allegations to adequately allege the continuity factor of a RICO claim.

Moreover,  although not citing to Tabas v. Tabas which held to the contrary, the court stated that Third Circuit has resisted efforts to generate RICO claims from “garden variety” torts.  Id., at *9, citing to Banks v. Wolks, 918 F.2d 418, 423 (3d Cir. 1990), and that seems to be precisely what Plaintiff has attempted to do here.   The Court stated that this is nothing more than a breach of contract claim that Plaintiff has unsuccessfully attempted to morph into a civil RICO claim.  If the Court were to allow these conclusory allegations to constitute a “pattern of racketeering activity,” then any plaintiff with a complaint involving two or more predicate acts could instantly create a RICO complaint that would withstand a motion to dismiss by simply claiming a threat of repetition.  Plaintiff has not pleaded sufficient factual allegations to survive Rule 12(b)(6) dismissal as he has alleged nothing more than a short-lived scheme directed to improperly withhold monies owed to him. See Kehr, 926 F.2d at 1413 (“[A]Ithough a single fraudulent scheme can give rise to RICO liability, when that scheme is short-lived and directed at a limited number of people, this court has required some further indication that the defendant’s fraudulent activities are likely to continue.”).  Therefore, Count I of Plaintiff’s Amended Complaint alleging that Defendants are liable under Section 1962(c) of the RICO statute was dismissed with prejudice.

 Conspiracy

Courts still get it wrong.

The court stated that Plaintiff’s claim for Conspiracy to Commit RICO under Section 1962(d) will also be dismissed as a matter of law since it found, for the reasons discussed above, that he failed to sufficiently plead a substantive RICO claim. See Macauley v. Estate of Nicholas, 7 F. Supp. 3d 468, 485-486 (E.D. Pa. 2014) (“[A]ny claim under section 1962(d) based on a conspiracy to violate any of the other subsections of section 1962 necessarily must fail if the substantive claims are themselves deficient.”).

However, this is contrary to Salinas and Smith v. Berg, a Third Circuit case, which explicitly held that a RICO conspiracy can be alleged and proven without showing a substantive claim provided injury can be shown.

Ed. Note:   This court takes a rather strict view of continuity, and RICO conspiracy, different than other precedent in the Third Circuit, see Tabas v. Tabas, not excluding “garden-variety” fraud, and Smith v. Berg, above.

Court Denies Defendants’ Motion to Dismiss Civil RICO Claims, But Analysis of “Injury” Was Unclear

Diamond Consortium Inc. v. Manookian,  2017 WL 1495091 (E.D. Tex. Apr. 26, 2017)

The court denied the two Defendants’ (Defendant Mark Hammervold and his law firm, Defendant Hammervold, PLC (collectively, the “Hammervold Defendants”) motion to dismiss a civil RICO claim alleging mail fraud, wire fraud, and Travel Act violations (based on extortion violations).

In sum, the plaintiffs alleged that the Hammervold Defendants participated in a scheme with other defendants who created websites and distributed fliers falsely accusing Plaintiffs of having committed “diamond fraud” and “cheating customers through the sale of over-graded diamonds.” Plaintiffs allege that the other defendants, Manookian, threatened Plaintiffs with several diamond over-grading lawsuits, unless Plaintiffs retained Cummings Manookian as counsel and paid a $25,000 monthly retainer fee for a period of 120 months, totaling three million dollars.  The Diamond Doctor did not retain Cummings Manookian.

Plaintiffs allege that Manookian continued to defame Plaintiffs utilizing websites, Facebook posts, YouTube videos, fliers, and door hangers accusing Blank and The Diamond Doctor of being “fraudsters” and “stealing customers’ cash.” Plaintiffs allege that Manookian has threatened several other jewelers with similar “smear campaigns” to extort the jewelers into paying Cummings Manookian large retainer fees.

The Hammervold Defendants “are necessary to Manookian’s illegal acts … because Manookian solicits clients to sue the targeted jewelers and then refers those cases to Hammervold and/or Hammervold, PLC to prosecute, thereby avoiding the appearance of a conflict when Manookian subsequently enters into ‘engagement agreements’ to represent the targeted jewelers as part of his extortion scheme.”  Plaintiffs alleged, sufficiently, that Cummings Manookian, and the Hammervold Defendants are members of an association-in-fact enterprise because they “together function as a unit with a common purpose: extorting millions of their victims.”

The court found that the Hammervold Defendants participated in a scheme to defraud Plaintiffs of three million dollars. [This is curious since this was extortion, not a scheme to defraud, and Plaintiffs did not pay.   Plaintiffs sufficiently alleged that the Hammervold Defendants were a necessary part of this scheme to allow Manookian and his firm to avoid an appearance of conflict when they entered into engagement agreements.

Ed. Note:   The court did not find the extortion predicates because the Plaintiffs’ complaint states “Manookian attempted to obtain Diamond Doctor’s property (i.e., $25,000 per month for 10 years or $3 million).”   THIS IS WRONG, as section 1951 Hobbs Act specifically provides for “attempts and conspiracies.”   However, “attempts” or “conspiracies” alone in civil RICO are not usually sufficient because an injury must result from the violative activity.  Here the proper analysis would have found sufficient monetary injury resulting from the defamatory activity, which also constituted an “attempt” to commit extortion and also arguably a Travel Act violation.

RICO Conspiracy

The district court takes the easy way out here stating Plaintiff’s claim for conspiracy to commit RICO under Section 1962(d) will also be dismissed as a matter of law since the court found, for the reasons discussed above, that he has failed to sufficiently plead a substantive RICO claim.   Of course, a substantive RICO claim is not needed, but rather a conspiratorial agreement with at least one overt act causing injury, is sufficient.

Ed Note:   This appears to be a strong civil RICO case, but extortionate activities, including attempts to extort, or conspiracy to extort are clearly the proper predicates, not fraud.  The Defendants activity was not to trick Plaintiffs by misrepresentations, but was outright extortionate activity, which also affected interstate commerce.