SDNY Dismisses Another Civil RICO Action; Finding One Securities Transaction(s) Dooms an Otherwise Sufficiently Pleaded Civil RICO Action Alleging Non-Securities Related Wire and Mail Fraud

Zohar CDO 2003-1, Ltd. v. Patriarch, 2017 WL 6628609, __ F. Supp.3d ___ (SDNY, Dec. 28, 2017)

In the above case, Judge William Pauley III granted the Defendants’ motions to dismiss a civil RICO action for being in violation of the PSLRA Amendment to RICO which bars any civil RICO claim that is actionable as fraud in the purchase or sale of securities. See 18 U.S.C. section 1965(c) (“no person may rely upon any conduct that would have been actionable as fraud in the purchase or sale of securities to establish a violation of section 1962.”)

This dismissal was issued on the same date as Judge Pauley’s dismissal of another civil RICO action, Dotan Newman v. Jewish Agency for Israel, et al., 2017 WL 6628616 (SDNY, Dec. 28, 2017), and follows a long line of dismissals of civil RICO actions in the SDNY where complex civil RICO cases find themselves on the proverbial chopping block. See e.g., Zamora v. JPMorgan Chase, 2015 WL 4653234 (SDNY, July 31, 2015) (J. Pauley). Judge Pauley’s decisions are well-researched, coherent, and detailed, but the dismissal of the subject Zohar case based on a stringent view of the PSLRA Amendment is concerning.

In Zohar, the Plaintiffs asserted a dozen claims against Defendants predicated on a massive racketeering conspiracy involving the illegal investment and mis-management of Zohar’s assets. Defendants exploited their fiduciary status to expropriate Zohar’s equity in its portfolio companies, pay themselves dividends, and deceive Zohar and its investors into paying exorbitant fees by misreporting the value of Zohar’s collateral.

The legal issue is whether the alleged scheme is actionable as fraud in the purchase or sale of securities, and if any one predicate is so barred, the entire claim is foreclosed by the securities fraud bar codified in the RICO statute.

Judge Pauley discussed precedent that if the alleged conduct could form the basis of a securities fraud claim against any party—be it against, or on behalf of, the plaintiff, defendants or a non-party—it may not be fashioned as a civil RICO claim. To best define what constitutes conduct actionable as fraud in the purchase or sale of securities, courts have consulted an obvious source in Section 10(b) of the Securities Exchange Act of 1934, which—while not identical to the language of the RICO Amendment—covers a broad range of securities fraud. Judge Pauley stated that If even “one predicate act alleges breaches of duty coincident with securities transactions then the whole scheme is subject to the [RICO Amendment].”

This pillar is the death knell for Zohar’s claims. Although finding that two of Defendants’ schemes did not coincide with the purchase or sale of securities as they involved fraud which occurred separate and apart from the sale of Zohar’s CLOs, the court found the because the Complaint alleges a single, ongoing fraudulent scheme, all of Defendants’ alleged acts must be considered together. Thus, while two schemes (the OC Test and Monthly Report allegations) escaped the RICO bar, the allegations relating to Defendants’ theft of Zohar’s equity interests and distributions were fatal to the RICO claim as these equity transactions, tendered as common stock, preferred stock, and LLC membership interests, were governed by the federal securities laws.

The purchase of stock was integral to the scheme to defraud since, without it, Defendants would have lacked the position to claim dividends and exercise control over the portfolio companies. *11. The Judge concluded that while certain allegations here may fall into that category of exempted conduct, there was clearly another component to Defendants’ overarching scheme that involved activity forming the basis for an actionable claim under the securities laws. Here, the post-investment looting involved the purchase and sale of securities.
Therefore, the Judge ruled that a single securities transaction that coincides with the fraudulent scheme can be the death knell of a RICO claim, Zohar’s civil RICO claim was dismissed.
Ed Note: This conclusion severely limits civil RICO plaintiff suits when there may exist just one “single securities transaction” coinciding with the fraudulent scheme despite many other instances of mail and wire fraud which themselves do NOT fall within the PSLRA exception. It will be interesting to see how the Second Circuit views this decision (which would assuredly be appealed).

David J. Stander, Esq. is a civil RICO Attorney who regularly maintains his blog for all to follow recent civil RICO court decisions.



District Court Finds Sufficient “Threat of Continuity” From Alleged Predicate Violations of 18 U.S.C. Section 1832 (Trade Secrets Act Violations)

Bartlett v. Bartlett, 2017 WL 5499403 (S.D. Ill., Nov. 17, 2017)

The court granted the motion to dismiss civil RICO claims alleging “Garden-Variety” wire and/or mail fraud, but denied the motion to dismiss the civil RICO claims based on trade secrets violations. in violation of 18 U.S.C. § 1832.

Mail/Wire Fraud
The court stated that courts in this circuit have been hesitant to allow RICO claims predicated on wire and/or mail fraud alone to proceed, when they are mere garden-variety disputes. See McDonald v. Schencker, 18 F.3d 491, 499 (7th Cir. 1994) (referring to a RICO claim predicated on mail fraud as “nothing more than a garden-variety business dispute recast as mail fraud”); Cmty. Ins. Servs., Ltd. v. United Life Ins. Co., No. 05-CV-4105-JPG, 2006 WL 2038652, at *5 (S.D. Ill. Mar. 24, 2006) (dismissing a RICO action predicated on wire and mail fraud as a “garden-variety fraud case concerning what is best described as a business dispute”); Faith Constr. 4, Inc. v. Girouard, No. 14 CV 2886, 2014 WL 6679118, at *3 (N.D. Ill. Nov. 21, 2014) (dismissing a RICO action that was predicated on mail fraud because the act of mailing was too remote to be the proximate cause of a RICO injury); Wankel v. S. Illinois Bancorp, Inc., No. 06-cv-0619-MJR, 2007 WL 2410328, at *10 (S.D. Ill. Aug. 21, 2007) (“it seems that Plaintiffs’ cause of action constitutes precisely what the Supreme Court and Seventh Circuit courts hope to forestall: ‘RICO’s use against isolated or sporadic criminal activity [such that] RICO [becomes] a surrogate for garden-variety fraud actions properly brought under state law’ ”).

Trade Secrets
Section 1832 was recently added as a predicate offense and it is based on theft of trade secrets, a serious federal offense. The court found that at this stage in the proceedings, the plaintiff has adequately pled that the defendants engaged in theft of trade secrets. The complaint also repeatedly asserts that the defendants intended to convert the trade secrets for their own personal gain and to the detriment of Plaintiff (Mark) and this was enough to satisfy the Twombly pleading standards.

The issue therefore involved whether the plaintiff met the continuity requirement in order to state a valid “pattern of racketeering activity” under RICO. Although only one scheme was involved, the court found that, assuming the plaintiffs allegations were true, the plaintiff adequately pleaded an open-ended scheme predicated on theft of trade secrets as plaintiff has alleged past conduct that “by its nature projects into the future with a [specific] threat of repetition” that satisfies the Twombly pleading standards.

Proximate Cause

The court stated that if the theft of trade secrets allegations are true, the diversion of financial and business data from American and B&B to Quick Cash would directly harm Plaintiff Mark’s financial interests in his holdings. Accordingly, the proximate cause standard was found met.

Ed Note:  The court’s opinion further places nails in the coffins for finding “garden-variety fraud” allegations to be successfully alleged under civil RICO.  Courts focus on the nature of the violation and when more serious criminal-like crimes are alleged, such as extortion, bribery, Trade Secrets Act violations, the courts can find the continuity from the “nature itself of the racketeering activity.”

In a fraud case only, the saving grace would appear to be to find facts to support that this was the “defendant’s regular way of doing business.”  This could include finding other victims which would infer that the activity is not short-term limited, but carries with it the threat of continued activity.

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


Third Circuit Again Addresses Closed-Ended Continuity in Civil RICO Action; Reaffirms Holding That Measure is the Length of Time of Defendants’ Fraudulent Activity

Yucaipa American Alliance Fund I L.P. v. English, __ Fed. Appx. ___, 2017 WL 5483163 (3rd Cir., Nov. 5, 2017)

The Third Circuit confirmed the District Court’s granting of Plaintiff BD/S’s motion to dismiss the RICO claims. The lower court had concluded that Yucaipa lacked RICO standing and had failed to allege a pattern of racketeering activity, and declined to exercise jurisdiction over the remaining state law tort claims.

RICO Injury

The Court first held that the District Court did not err in concluding it lacked RICO standing, stating that the District Court correctly determined Yucaipa’s alleged injuries were not a concrete financial loss and were contingent on the result of the pending bankruptcy litigation.  RICO requires proof of actual monetary loss, i.e., an out-of-pocket loss,” and an injury contingent upon the impact of events in the future which have not yet occurred” will not suffice.

The Court found that Yucaipa’s allegations, first, the loss of value of its first lien debt due to equitable subrogation in the bankruptcy proceeding, and second, attorneys’ fees and expenses from the bankruptcy and related litigation, did not suffice to confer standing for civil RICO liability under section 1964(c). The Court found that the first alleged injury is plainly contingent on the outcome of the pending bankruptcy proceeding, which is still ongoing, and the second alleged injury could not be decided because these attorneys’ fees incurred as a result of the alleged RICO violations are also contingent on the outcome of pending litigation in the bankruptcy court.

Pattern of Racketeering

The court also determined that the District Court correctly concluded that Yucaipa failed to allege a closed-ended continuity of RICO activity (having given up on alleging open-ended continuity). The Court discussed that “because ‘duration is the sine qua non of continuity’ in a closed-ended scheme, … twelve months [between RICO predicate acts] is not a substantial period of time.” *5, citing cases.

The District Court concluded Yucaipa had failed to plead a closed-ended continuity by looking at the dates of the alleged predicate acts in the complaint. The earliest predicate act identified in the complaint was an email sent on September 16, 2011, and the last predicate acts alleged were statements in the involuntary bankruptcy petition filed in May 2012, i.e., only nine months and thus did not satisfy the closed-ended continuity requirement.

Yucaipa contends the District Court erred in calculating the length of the pattern of racketeering arguing the closed-ended continuity should be deemed to begin with the 2009 emails from BD/S to Yucaipa because this is when the “underlying scheme” began.

Yucaipa relies on Tabas v. Tabas, in which the Circuit stated “in civil RICO complaints based on predicate acts of mail fraud ‘the continuity test requires us to look beyond the mailings and examine the underlying scheme or artifice.’ ” 47 F.3d 1280, 1294 (3d Cir. 1995) (quoting Kehr Packages, Inc. v. Fidelcor, Inc., 926 F.2d 1406, 1414 (3d Cir. 1991)).

In Tabas, the Court considered claims arising out of an alleged RICO conspiracy by a partner in a real estate firm and his business associates to defraud the estate of a deceased partner through mischaracterizing personal expenses as business expenses and receiving compensation not authorized by the partnership agreement. Tabas, 47 F.3d at 1282–85. The alleged predicate acts were instances of mail fraud, but we explained “[e]ach time defendants misrepresented the business nature of an expense, made a questionable charge, or received compensation to which they were not entitled, they lessened the income available to the” plaintiffs. Id. at 1294. We concluded the RICO continuity included each of the fraudulent deductions from the assets of the partnership. Id.

Here,  Yucaipa asked the court to extend the Tabas holding beyond fraudulent conduct to include conduct which did not violate any RICO predicate statute, but that allegedly led to losses due to subsequent RICO predicate acts. The Court found that these discussions (which occurred in year 2009) are not comparable to the fraudulent actions of the defendants in Tabas, which caused direct harm to the plaintiffs, and the Court declined to extend Tabas to these facts. Accordingly, we agree with the District Court’s determination that Yucaipa failed to plead a closed-ended continuity based on RICO predicate acts occurring over a nine-month period.

Ed. Note:   This case addresses issues raised by this author, David J. Stander, Civil RICO Attorney, in a recent article published in the ABA Business and Torts discussing Justice Alito’s concurrence/dissent in Kehr Packages. The holding above is consistent with the holding in Kehr Packages, i.e., duration is the “relevant criminal conduct is the defendant’s deceptive or fraudulent activity, rather than innocent mailings that may continue for a long period of time.” Kehr Packages, at 1418.

Thus, the above holding is the measure in the Third Circuit, even though Justice Alito indicates that the duration “must equal the duration of the related predicates.” Id., at 1423. Duration measured by length of time of mailings/wirings is the view of the Second Circuit.  Reconciling these positions is difficult, but for now, the holding in the Third Circuit, buttressed in part by this instant decision, is the measure is the period of deceptive or fraudulent activity, even if the actual mailings/wirings cover a shorter period of time.

Second Circuit Offers Primer on Extraterritoriality Issues in Civil RICO Litigation

Bascunan v. Elsace, ___ F.3d ___, 2017 WL 4872400 (2d Cir., Oct. 30, 2017)

The Second Circuit reversed, in part, a lower court decision granting a motion to dismiss in which plaintiff, a citizen and resident of Chile and entities owned and controlled by citizen brought civil RICO action against his cousin, who was also citizen and resident of Chile, and the cousin’s employees and corporate entities, alleged the cousin had power of attorney over his finances and stole millions of dollars from him through several fraudulent financial schemes.

Of the four schemes analyzed, two were found to constitute “domestic injury,” and thus provide standing to Plaintiff.

As a matter of first impression, in the Second Circuit and elsewhere, the court analyzed the Supreme Court decision in RJR Nabisco to consider whether the RICO statute applies extraterritorially. The Court determined, as an initial matter, that “[t]he question of RICO’s extraterritorial application really involves two questions”: (1) “do RICO’s substantive prohibitions, contained in § 1962, apply to conduct that occurs in foreign countries?” and (2) “does RICO’s private right of action, contained in § 1964(c), apply to injuries that are suffered in foreign countries?” In answering both questions, the Court applied the presumption against extraterritoriality.

With respect to the first question, the Court held that “RICO applies to some foreign racketeering activity,” explaining that “[a] violation of § 1962 may be based on a pattern of racketeering that includes predicate offenses committed abroad, provided that each of those offenses violates a predicate statute that is itself extraterritorial.”

On the second question, the one directly relevant to this appeal, the Court concluded that a plaintiff must allege a domestic injury. In answering the second question, the Court made a point of separately applying the presumption against extraterritoriality to Section 1964(c). Nevertheless, the Supreme Court stated that the “domestic injury” requirement of Section 1964(c)—more specifically, the fact that RICO’s private right of action lacks language expressly providing recovery for injuries to foreign persons—“does not mean that foreign plaintiffs may not sue under RICO.”

Ultimately, because the plaintiffs had stipulated that they waived their damages claims for any domestic injuries, the Court did not explain how to identify a “domestic injury” and noted only that “[t]he application of this rule in any given case will not always be self-evident, as disputes may arise as to whether a particular alleged injury is ‘foreign’ or ‘domestic.’ ”

Based on this sparse guidance, the Court did not indicate what factors a court should examine to determine whether a plaintiff’s alleged injury is foreign or domestic. If a plaintiff alleges more than one “injury,” courts should separately analyze each injury to determine whether any of the injuries alleged are domestic. If one of the alleged injuries is domestic, then the plaintiff may recover for that particular injury even if all of the other injuries are foreign.

Schemes Not Found to Have Caused “Domestic Injury”

Based on the above, the Second Circuit analyzed each fraud scheme, and concluded first that two schemes, i.e., the Dividend Scheme and the General Anacapri Investment Fraud Scheme, failed to allege a “domestic” injury, as the only domestic element alleged is that Defendant Elsaca transferred these foreign funds to his own accounts in New York, and Elsaca laundered stolen money using bank accounts in the United States and elsewhere.

The Second Circuit ultimately concluded that an injury to tangible property is generally a domestic injury only if the property was physically located in the United States, and that a defendant’s use of the U.S. financial system to conceal or effectuate his tort does not, on its own, turn an otherwise foreign injury into a domestic one. The court thus held that the use of bank accounts located within the United States to facilitate or conceal the theft of property located outside of the United States does not, on its own, establish a domestic injury. In addition, and importantly, the court stated that these injuries did not arise from any preexisting connection between Bascuñán and the United States. To allow such a plaintiff to recover treble damages would thus “unjustifiably permit [foreign] citizens to bypass their own [nation’s] less generous remedial schemes.”

Schemes Finding “Domestic Injury”

The Second Circuit did hold that two other schemes constituted domestic injury, i.e., when certain property—although belonging to a foreign owner—was located within the United States when it was stolen. Thus, the District Court erred in holding that these schemes caused only foreign injuries. Thus, when Defendant Elsaca misappropriated funds held in a New York bank account at J.P. Morgan this scheme was to involve the misappropriation of tangible property located within the United States. Where the injury is to tangible property, the court concluded that, absent some extraordinary circumstance, the injury is domestic if the plaintiff’s property was located in the United States when it was stolen or harmed, even if the plaintiff himself resides abroad. it ensures that both foreign and domestic plaintiffs can obtain civil RICO’s remedy for damage to their property, but only if their property was located within the territorial jurisdiction of the United States. In so doing, it protects the interest each sovereign has in regulating the private property situated in its own territory without extending the reach of American law or discriminating against foreign plaintiffs. Accordingly, the Second Circuit stated that its holding reduces the possibility of international discord. Id. * 11.

The Second Circuit stated that, to be clear, it did not hold that a plaintiff’s place of residence is never relevant to the domestic injury inquiry required by RJR Nabisco. A plaintiff’s residence may often be relevant—perhaps even dispositive—in determining whether certain types of business or property injuries constitute a domestic injury. But with respect to the particular type of property injury alleged here—the misappropriation of Bascuñán’s trust funds from a specific bank account located in the United States—the court concluded that the location of the property and not the residency of the plaintiff is the dispositive factor.

Regarding the second scheme, the BCI Share Theft scheme, the court found that the misappropriation of the bearer shares, located in a safety deposit box in New York, also constitutes the misappropriation of tangible property, and thus a “domestic injury” within the meaning of the civil RICO statute.

Ed Note: This detailed opinion provides a primer on interpreting factual scenarios involving whether a Plaintiff has standing when there is a question as to whether there is “domestic injury.”

David J. Stander is a civil RICO Attorney who focuses on complex issues involved in civil RICO litigation.


Ninth Circuit Reverses and Allows Plaintiff to File Third Amended Civil RICO Complaint

Mai Mgoc Bui v. Ton Phi Nguyen, 2017 WL 4653438 (9th Cir. 10/17/17)

The Court reversed and remanded with instructions so that plaintiff Bui would have another opportunity to amend her complaint. The district court found that Bui’s SAC failed to sufficiently allege each element.

First, the Court found that Bui’s SAC sufficiently pleads the existence of such an enterprise. First, Bui alleges that Defendants had a “scheme to plunder millions of dollars from Mrs. Bui,” and that Defendants “accomplished this plunder of Mrs. Bui’s money by means of deliberate, calculated and malicious legal acts, including actual fraud, wire fraud and forgery.” As evidenced by the SAC’s allegations, this scheme required a common purpose to carry out. Second, the SAC pleads a sufficient “structure or organization,” because, although the SAC alleges that Hung Tran (Hung) and Lan Bich Nguyen (Lan) functioned as the primary actors, the corporate entities controlled by others, and the property transactions facilitation by them, formed a cohesive part of the group Bui alleges defrauded her. Finally, the SAC sufficiently alleges longevity necessary to accomplish the enterprise’s purpose, as it alleged that the Nguyen family operated other fraudulent schemes in the past, which interacted with the instant allegation. As such, the district court erred by concluding that Bui had failed to sufficiently plead the existence of an “enterprise.”

Second, a RICO claim must adequately plead at least “two acts of racketeering activity,” which, in this case, are wire and mail fraud. 18 U.S.C. § 1961(5). Bui alleges four wire transfers and one mailing as the necessary predicate acts of wire and mail fraud, but the district court concluded that, at most, only one of the alleged transfers was wire fraud. The Court disagreed finding that three of the alleged transfers sufficiently plead three instances of wire fraud.

The Court further stated that even if the three instances of alleged wire fraud may not provide a sufficient “pattern,” we cannot say that the amendment would be futile and would contradict the Chodos factors at this motion to dismiss stage of the action. There may be additional facts and legal theories that could be incorporated into a Third Amended Complaint which, as required by the Federal Rules, “[t]he court should freely give … when justice so requires.” Fed. R. Civ. P. 15(a)(2).

Ed Note: There are two major takeaways here: (1) the Court will liberally construe amendments of civil RICO complaints; (2) the Court will reverse even if the district court erred on the threshold issue of finding two acts, without necessity to find whether other elements, such as “pattern of racketeering activity” have been adequately alleged.


Second Circuit Rules Liability for Only RICO conspiracy Not Inconsistent

Ruocco v. Hemmerdinger Corporation, 2017 WL 4387184 (2d Cir., Oct. 10, 2017)

The Court affirmed the denial of Defendants Ruocco and Tomicic’s post-trial motions for judgment as a matter of law or a new trial after a jury had found the Defendants liable under RICO conspiracy.

Hemmerdinger sued the Defendants for state law fraud (“Claim One”), a substantive claim under the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. § 1962(c) (“Claim Two”), and a claim for conspiracy to violate RICO, § 1962(d) (“Claim Three”). The jury found Tomicic and McCambridge liable for fraud (Claim One), and concluded that Ruocco, ETI, Tomicic, and Recycle Technology had participated in a RICO conspiracy (Claim Three), but NOT Claim Two. The court entered judgment on June 6, 2016. Ruocco, ETI, and Tomicic then filed post-trial motions for judgment as a matter of law and a new trial. When these motions were denied, Ruocco and Tomicic filed a timely notice of appeal.

On appeal, Ruocco and Tomicic argued that the jury verdict was inconsistent, and that the district court’s jury instruction as to the RICO conspiracy claim (Claim Three) was flawed because the jury did not find on Claim Two (1962(c)) that a civil enterprise existed among the defendants. The jury had found there was an agreement among two or more persons to participate in an enterprise that would affect interstate commerce through a pattern of racketeering activity and thus had found liability as to Claim Three (RICO conspiracy).

Defendants also asserted that a jury may not find defendants liable for a RICO conspiracy after it has expressly found that a RICO “enterprise” does not exist. Ruocco and Tomicic argued, in addition, that a RICO conspiracy claim cannot succeed unless at least one defendant is found liable for a substantive RICO offense, so finding liability for Claim Three (§ 1962(d), RICO conspiracy) but not Claim Two (§ 1962(c), a substantive RICO offense) is inconsistent. This claim was rejected.

The trial judge had answered a question during deliberations in the affirmative that

“are claim two and claim three independent of each other as in the defendants can be found guilty of claim three, irrespective of the outcome of claim two?”

Even Ruocco’s attorney had agreed that the answer was yes, and no other party objected.

Ruocco and Tomicic both acknowledged that the instruction to which they object is taken from Leonard B. Sand, et al., Modern Federal Jury Instructions, CIVIL, # 84–35 (Lexis 2016), and that they did not raise this challenge either during the district court’s charge conference or in their post-trial motions.

Thus, the court found the district court did not err in setting aside the verdict as
inconsistent, and that “endorsement [of a jury charge] might well be deemed a true waiver, negating even plain error review.” The Court did not find the verdict to be inconsistent, and Defendants/Appellants’ second attack on the consistency of the jury verdict was waived.

The Court stated that it has held that when, as here, a trial court based jury instructions on pattern jury instructions that reflect current law, there is no plain error. The Modern Federal Jury Instructions supplied the very language that Ruocco and Tomicic now object to, and they have not cited any authority that plainly shows the Modern Federal Jury Instructions were incorrect.

Ed Note: This case importantly stands for the proposition, even without considering waiver by Defendants/Appellants that a defendant can be found liable under RICO conspiracy irrespective of the outcome of substantive RICO claim.



Second Circuit States Position Regarding Legal Entity RICO Persons and “Distinctness;” Reaffirms Kushner when RICO Person/Defendant is An Individual

U1it4less, Inc. v. Fedex Corporation, ___ F.3d ___, 2017 WL 4103869 (Sept. 18, 2017)

In this important case, the Second Circuit affirmed the lower court’s granting of Defendant FedEx’s summary judgment motion which dismissed the Plaintiff U1it4less (BikerGear) substantive RICO claims because BikerGear failed to adduce evidence that FedEx Corp. and FedEx Services, corporate entities, the alleged RICO “persons,” are distinct from FedEx Ground, the alleged RICO “enterprise.”
BikerGear, an internet retailer of motorcycle gear, accused FedEx Corporation and its subsidiaries FedEx Corporate Services, Inc. and FedEx Ground Package System, Inc. of fraudulently marking up the weights of packages shipped by BikerGear and overcharging BikerGear for Canadian customs.
District Court
Judge Forrest held that the mere fact of separate incorporation was not enough to satisfy the requirement that the RICO “person” and “enterprise” be distinct. In addition, Judge Forrest concluded that BikerGear’s RICO claims required a showing that the separate incorporation of FedEx Ground facilitated the racketeering enterprise allegedly run by FedEx Corp. and FedEx Services. Because the evidence showed only that BikerGear “interacted with FedEx Ground and FedEx Services precisely as it would have had those sister subsidiaries in fact been divisions of a single FedEx corporation,” Judge Forrest concluded that there was “no genuine question as to whether FedEx Corp. and FedEx Services are distinct from FedEx Ground for purposes of the RICO claims.”
Second Circuit Analysis of Distinctness
Though Congress initially enacted the RICO statute to target organized crime, the Supreme Court in Cedric Kushner, 533 U.S. at 164, has since identified the statute’s basic purposes as “both protect[ing] a legitimate ‘enterprise’ from those who would use unlawful acts to victimize it and also protect[ing] the public from those who would unlawfully use an ‘enterprise’ (whether legitimate or illegitimate) as a vehicle through which unlawful activity is committed.” Id., at *4 (emphasis added). (the “victim” and “vehicle” criterions). Note: Usually, this means that a legal entity is the enterprise which is victimized, and the association in fact which is used as the vehicle.

BikerGear argued that the mere fact of separate legal incorporation satisfies the distinctness requirement under Section 1962(c). The court disagreed stating that because “a corporate person cannot violate the statute by corrupting itself,” Cruz v. FXDirectDealer, LLC, 720 F.3d 115, 120 (2d Cir. 2013) (citing Bennett, 770 F.2d at 315), so “if a corporate defendant can be liable for participating in an enterprise comprised only of its agents—even if those agents are separately incorporated legal entities—then RICO liability will attach to any act of corporate wrong-doing and the statute’s distinctness requirement will be rendered meaningless.” Id., at *5, citing to In re ClassicStar Mare Lease Litig., 727 F.3d 473, 492 (6th Cir. 2013) (citing Riverwoods Chappaqua Corp. v. Marine Midland Bank, N.A., 30 F.3d 339, 344 (2d Cir. 1994)).

Accordingly, a plaintiff [corporate entity] may not circumvent the distinctness requirement “by alleging a RICO enterprise that consists merely of a corporate defendant associated with its own employees or agents carrying on the regular affairs of the defendant,” Riverwoods, 30 F.3d at 344—that consists, in other words, of a corporate defendant “corrupting itself,” Cruz, 720 F.3d at 120.

The Second Circuit noted that the principle in Discon and Cruz has its limits and “does not foreclose the possibility of a corporate entity being held liable … where it associates with others to form an enterprise that is sufficiently distinct from itself.” Riverwoods, 30 F.3d at 344; Securitron Magnalock Corp. v. Schnabolk, 65 F.3d 256, 263–64 (2d Cir. 1995). Thus, among other things, because BikerGear presented no evidence showing that any FedEx entity operated outside of a unified corporate structure guided by a single corporate consciousness. See Cruz, 720 F.3d at 121.

BikerGear’s argument that Discon and Cruz are distinguished because the alleged RICO enterprises in those cases were associations-in-fact comprised of all the defendant corporations combined, while the alleged enterprise here is a discrete subsidiary was viewed as “immaterial.”

Cedric Kushner

This Supreme Court case was distinguished as the Second Circuit stated that in Cedric Kushner the Supreme Court emphasized that its holding was limited to the circumstances in which “a corporate employee unlawfully conducts the affairs of the corporation of which he is the sole owner—whether he conducts those affairs within the scope, or beyond the scope, of corporate authority.” Id. at 166, 121 S.Ct. 2087. As for both corporate employees and corporate entities, the Supreme Court suggested, Congress had in mind the “protect[ion of] the public from those who would run organizations in a manner detrimental to the public interest.” Id. at 165, 121 S.Ct. 2087 (quotation marks omitted).

The Second Circuit stated that the Court in Kushner described its earlier decisions relating to the distinctness issue (for example, Discon) as “significantly different”—a strong signal that it was not addressing cases in which, as here in BikerGear, a corporate person conducts the affairs of an enterprise consisting only of corporate members of its wholly-owned corporate family. Id. at 164, 121 S.Ct. 2087; see also Ray v. Spirit Airlines, Inc., 836 F.3d 1340, 1356 (11th Cir. 2016); ClassicStar Mare, 727 F.3d at 492.

Finally, the Second Circuit noted that in analogous contexts the majority of its sister circuits appear to agree that the fact of separate incorporation alone fails to satisfy RICO’s distinctness requirement. Id.,at *7 , citing cases.

Ed Note:   David J. Stander is an Attorney who focuses his practice on civil RICO. It is important to note that the holding only addressed RICO persons who are “corporate entities,” while the court distinguished the holding of Kushner in which the Supreme Court emphasized that its holding was limited to the circumstances in which “a corporate employee unlawfully conducts the affairs of the corporation of which he is the sole owner—whether he conducts those affairs within the scope, or beyond the scope, of corporate authority.” Id. at 166, 121 S.Ct. 2087. Clearly, such a “corporate employee” who operates his P.C. through fraud is running the “an organization in a manner detrimental to the public interest.”