EDNY Provides Civil RICO Primer in Denying Motions to Dismiss RICO Claims Based on Fraud and Bribery

Eagle One Roofing Contractors Inc. v. Dawn M. Acquafredda, 2018 WL 1701939 (E.D.N.Y., March 31, 2018)

The court heard motions to dismiss from two groups of Defendants- Insider Defendants, and the “Accord” Defendants. Insider Defendants were employees of Eagle One, a construction company, who worked with Accord Defendants, subcontractors to Eagle One, in submitting fictitious invoices for work performed. The Accord Defendants consisted of individuals and two legal entities (Accord Inc. and Accord Sales Inc). The court denied motions to dismiss the civil RICO claims of the Accord Defendants, finding a sufficient enterprise, sufficient participation, and sufficient allegation of a pattern of racketeering.
The Enterprise consisted of the Defendants, individuals and entities, who worked together to defraud Eagle One. Defendants claimed that they are separate individuals who have no common association, and Plaintiff’s asserted purpose of the RICO enterprise is identical to the alleged pattern of racketeering activity, and therefore fails to allege distinct conduct establishing an enterprise.
The court made clear that:

(1) there is distinctness between the individual defendants and the enterprise as “[t]his does not foreclose the possibility of a corporate entity being held liable as a defendant under section 1962(c) where it associates with others to form an enterprise that is sufficiently distinct from itself.” Thus, “a defendant may be a RICO person and one of a number of members of the RICO enterprise.” See Moss v. BMO Harris Bank, N.A., 258 F. Supp. 3d 289, 298-99 (E.D.N.Y. 2017) (citing Riverwoods, at 344). Here, the RICO persons are distinct from the alleged RICO enterprise. Not only is the enterprise a corporation with its own employees, but it included the Insider Defendants who were not employees of Accord;
(2) the enterprise was distinct from the underlying conduct that establishes a pattern of racketeering, citing to United States v. Turkette, 452 U.S. 576, 583 (1981). “While the proof used to establish these separate elements may in particular cases coalesce, proof of one does not necessarily establish the other.” Id. “Proof of these separate elements [need not] be distinct and independent, as long as the proof offered is sufficient to satisfy both elements.” United States v. Mazzei, 700 F.2d 85, 89 (2d Cir. 1983), also citing Pavlov v. Bank of New York Co., 25 Fed.Appx. 70, 71 (2d Cir. 2002) “The enterprise need not necessarily have a continuity extending beyond the performance of the pattern of racketeering acts alleged, or a structural hierarchy, so long as it is in fact an enterprise as defined in the statute.” see also Boyle v. United States, 556 U.S. 938, 947 (2009) (“the evidence used to prove the pattern of racketeering activity and the evidence establishing an enterprise may in particular cases coalesce.”). The court further stated that the fact that the purpose of the enterprise is identical with the alleged pattern of racketeering does not preclude the finding of an enterprise. See Fuji Photo Film U.S.A., Inc. v. McNulty, 640 F. Supp. 2d 300, 314 (S.D.N.Y. 2009) (“The Complaint further alleges that the association-in-fact was united by a common purpose, namely that of defrauding [Plaintiff]. Accordingly, Plaintiff has sufficiently pled a RICO enterprise under Rule 8(a).”). *7.
(3) Defendants, except one (Stankey) sufficiently participated in the conduct of the enterprise’s affairs.” Elsevier, Inc. v. W.H.P.R., Inc., 692 F. Supp. 2d 297, 307 (S.D.N.Y. 2010) (citing 18 U.S.C. § 1962(c) (making it unlawful “to conduct or participate, directly or indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering activity”) ). see Aerowest GmbH v. Freitag, No. CV-15-2894 (LW), 2016 WL 3636619, at *3 (E.D.N.Y. June 28, 2016) (“While each defendant need not have primary responsibility for the functioning of the enterprise, each must, at least, have some part in directing the affairs of the alleged unit.”).
Racketeering Activity
1) the predicate acts of racketeering activity were sufficiently pleaded addressing the issue of whether “when fraud is alleged against multiple defendants, a plaintiff must plead with particularity by setting forth separately the acts or omissions complained of by each defendant.” Odyssey Re (London) Ltd. v. Stirling Cooke Brown Holdings Ltd., 85 F. Supp. 2d 282, 293 (S.D.N.Y. 2000), aff’d, 2 Fed.Appx. 109 (2d Cir. 2001). The court found that fraud was not pleaded with sufficient particularity with regard to some defendants finding Accord defendants sent invoices requesting payment for work done on the 55 Water Street Job even though no work was being done there at the time. While Eagle One is unable to point to which of the American Express invoices represent actual work and which are fraudulent, the allegations are sufficiently detailed for Rule 9(b). See Fuji, 640 F. Supp. 2d at 315 (“The Complaint alleges that many of the services for which [defendant] billed [plaintiff] were never performed. Although the Complaint does not identify the specific invoice descriptions that pertain to unperformed services, [plaintiff] has provided a schedule of all invoices submitted by [defendant].”).
Thus, because there is no particularity requirement in pleading knowledge or intent, one need only allege facts that carry a strong inference of fraudulent intent, and there is no requirement that the defendant him or herself use the mails. It suffices if the defendant caused them to be used by an agent, or set in motion events which foreseeably would involve their use.” Chevron Corp. v. Donziger, 871 F. Supp. 2d 229, 250 (S.D.N.Y. 2012) (citing United States v. Bortnovsky, 879 F.2d 30, 39 (2d Cir. 1989) ).
In sum, the Complaint identified the particular invoices believed to be false, identified who made them, stated where and when they were made, and explained why they were fraudulent. See Fuji, 640 F. Supp. 2d at 310. Accordingly, Eagle One has sufficiently pleaded fraud with regard to Accord, Yopp, and Carnabuci. Each individual fraudulent invoice can serve as a predicate act of fraud. Alternatively, each job collectively is a single act of fraud. Regardless, Eagle One has established the necessary two predicate acts for a RICO claim.
2) The court found other predicate acts, including commercial bribery and found a pattern as plaintiff alleged that the fraudulent scheme took place “from at least July of 2012 through January of 2015.” This allegation is supported by the invoices that establish that the 55 Water Street job lasted from September 2013 through January 2015, and that the American Express job lasted from July 2012 through October 2014. Because the court has previously determined that Plaintiff has sufficiently pleaded claims of fraud and bribery, Plaintiff has pleaded a pattern of at least two predicate acts of racketeering (the fraudulent invoices from the 55 Water Street job and the American Express job, and the checks from Accord to Eagle One employees), within ten years of each other, that extended for a period longer than two years. THIS IS IMPORTANT SINCE IT SHOWS THE SECOND CIRCUIT MEASURES TIME BY THE PREDICATE ACTS, NOT LENGTH OF THE FRAUDULENT SCHEME.

The court takes a view contrary to the district’s State Farm case holding because Eagle One failed to plead substantive RICO violations by Stankey or Jack Acquafredda, Eagle One’s conclusory allegation that they too “entered into a scheme to embezzle Eagle One funds” is insufficient, and the RICO conspiracy charges against them are dismissed. Discon, Inc. v. NYNEX Corp., 93 F.3d 1055, 1062-63 (2d Cir. 1996) (“Since we have held that the prior claims do not state a cause of action for substantive violations of RICO, the present [§ 1962(d) ] claim does not set forth a conspiracy to commit such violations.”).
Ed Note: This case provides detailed analysis and case law to support civil RICO claims in which Defendants commonly put forth arguments. The conspiracy analysis still is not congruent with Salinas.


Ninth Circuit Affirms Dismissal of Civil RICO Lawsuit Ruling that Shareholders are not Permitted to pursue RICO actions for Derivative Injuries

Uthe Technology Corp. v. Aetrium, 2018 WL 3215143 (9th Cir., July 2, 2018)

The Court affirmed an order granting summary judgment in favor of the Defendants in a civil action brought under “RICO.” Appellant Uthe Technology Corporation (“Uthe”) is a manufacturer of semiconductor products. Uthe conducted business in Asia through its wholly-owned subsidiary, Uthe Technology (Singapore) Pte Ltd. (“Uthe Singapore”). Uthe alleges that, in 1992, several employees, officers, and directors of Uthe Singapore, along with others—including Defendants-Appellees Aetrium, Inc. (“Aetrium”) and Harry Allen—(collectively, “the Conspirators”) conspired to steal Uthe Singapore’s business by diverting Uthe Singapore’s customers and orders to a newly created company, withholding payments, and taking other actions that harmed the business of Uthe Singapore. Ultimately, these alleged actions caused Uthe to sell Uthe Singapore to some of the Conspirators at a reduced price.

In 2012, arbitration in Singapore concluded that the Conspirators were liable to Uthe for the approximately $9 million difference between the sale price for Uthe Singapore and what Uthe Singapore would have been worth but for the Conspirators’ actions. After the arbitration award, Uthe sought to reopen the case against Aetrium and Allen. Uthe filed a Second Amended Complaint (the “SAC”) in 2012 alleging, among other claims, a treble damages claim under the civil RICO statute. The district court granted Defendants’ motion for summary judgment, finding that Uthe had been fully compensated by the Singapore arbitration award and was barred from seeking treble RICO damages by the “one satisfaction rule.” Uthe appealed and we reversed, holding that Uthe was entitled to pursue treble damages under RICO, provided that any award was offset by the amount of the Singapore arbitration award. Uthe Tech. Corp. v. Aetrium, Inc., 808 F.3d 755, 762 (9th Cir. 2015).

On remand, the case was stayed pending publication of the Supreme Court’s opinion in RJR Nabisco, Inc. v. European Community, ––– U.S. ––––, 136 S.Ct. 2090, 195 L.Ed.2d 476 (2016), which concerned the extraterritorial application of civil RICO claims. After the Supreme Court issued its opinion, Defendants filed yet another summary judgment motion, arguing that Uthe’s remaining injury was not a “domestic injury” within the meaning of RJR Nabisco and, alternatively, that Uthe’s alleged injuries were derivative injuries that could not be redressed through a RICO action.

Derivative Injuries

The court discussed that a derivative injury occurs “[w]here all of a corporation’s stockholders are harmed … solely because they are stockholders,” i.e., the injury to the shareholders is indirect and is “derivative” of the injury to the corporation because the shareholders have been injured “solely because” of their shareholder status. In the RICO context, the court has held that a plaintiff may not use the civil RICO statute to recover for derivative injuries because the plaintiff has no standing to assert a claim for injuries inflicted on a different legal entity (in the case of a shareholder, the corporation in which he owns shares) that affect him only indirectly.

The court affirmed the district court’s order agreeing that Uthe’s remaining alleged injuries are derivative of its stake in Uthe Singapore. Thus, in short, Uthe’s theory below was based on a derivative injury, namely that the Conspirators stole Uthe Singapore’s customers and thus harmed Uthe Singapore’s business, thereby reducing the value of Uthe Singapore’s stock, and harming Uthe itself when Uthe sold its shares.

The court distinguished its holding from those cases which stand for the proposition that, at times, courts may allow a former shareholder to pursue a claim for a derivative injury as part of a direct action in order to avoid a situation in which the former shareholder is left without a remedy, but Uthe’s claim was a derivative injury and thus its argument failed to distinguish its claim from those barred by our precedent.

Accordingly, the Court concluded that because Uthe’s injury is a derivative injury, the district court correctly granted summary judgment on Uthe’s RICO claim.

Fifth Circuit Affirms Previous Rulings that “Whistle Blowers” Do Not Have Standing to Bring Civil RICO Lawsuits

Arroyo v. Oprona, Inc., 2018 WL 2026996 (5th Cir. 2018)

The court affirmed a district court’s grant of a Rule 12(b)(6) motion to dismiss a civil RICO claim de novo, finding that the plaintiff did not establish standing to bring a civil RICO claim” under the RICO statute.

The court found that Arroyo has no standing under the RICO statute to assert her civil RICO claims because the injury Arroyo allegedly suffered stems from her loss of employment after she refused to participate in the scheme headed by Yoxall to defraud the IRS and reported Yoxall’s conduct to Rosen Swiss. “

The court cited to earlier precedent that “whistle blowers do not have standing to sue under RICO for the injury caused by the loss of their job.” “[B]eing discharged for either reporting a RICO violation or refusing to participate in a RICO violation does not flow from the predicate acts” and fails to establish standing to sue under the RICO statute. In other words, Arroyo’s injury resulted from Oprona’s decision to terminate her employment and not from the alleged predicate acts. Thus, Arroyo, as an employee allegedly discharged for reporting and refusing to participate in an activity that violated RICO, lacks standing to sue under the RICO statute.

Ed Note: This holding is consistent with thrust of civil RICO law that injury proximately and directly caused by predicate acts is required for standing. An employer’s act of termination of employment itself is not itself predicate activity.

Second Circuit Affirms Dismissal of Civil RICO Complaint Finding Insufficient Pleading of a “Material Misrepresentation”

Williams v. Affinion Group, LLC, ___ F.3d ___, 2018 WL 2090267 (2d Cir. 2018)

The Complaint alleged that consumers were “duped into believing” that membership programs were being offered by an e-merchant, rather than a company known as Trilegiant, and each time an e-merchant shared a customer’s billing information with Trilegiant, both the e-merchant and Trilegiant “committed an act of wire fraud.” The complaint alleges thousands of acts of mail and wire fraud in furtherance of the RICO enterprise and RICO conspiracy, including Trilegiant’s billing (by transmitting fraudulent charges on credit card bills), use of telephones (in refund mitigation to preserve fraudulent gains), and use of the internet (to initiate the scheme through post-transaction marketing and datapass).

Despite these claims, the Court did not find the allegation of a sufficient scheme to defraud, wherein a plaintiff must provide proof of a material misrepresentation. Neder v. United States, 527 U.S. 1, 25 (1999). The plaintiffs argued that the district court erred by requiring them to allege specific misrepresentations in the use of the mail or wires to satisfy Rule 9(b). While recognizing that mail or wire communications themselves need not contain a false statement. Schmuck v. United States, 489 U.S. 705, 715, 109 S.Ct. 1443, 103 L.Ed.2d 734 (1989), a plaintiff still needs to allege a material misrepresentation as part of the defendants’ scheme to fraud to state a violation of section 1341 or 1343.

The Court agreed with the district court that the complaint here lacked the particularized allegation of an underlying “scheme to defraud” animated by a material misrepresentation, and neither the complaint’s specific discussion of Trilegiant’s allegedly deceptive tactics, nor its conclusory references to Trilegiant’s fraudulent scheme, set forth a material misrepresentation with the requisite particularity. The complaint therefore failed to plead a scheme to defraud. Without an underlying scheme to defraud, the plaintiffs have not alleged a pattern of racketeering.

Ed Note: It is unclear whether the “material misrepresentation” is required to be a mailing or interstate wiring or whether it can be argued that so long as there is particularity of mailings/wirings in furtherance of the scheme, an oral misrepresentation is sufficient. It appears safe to find the material misrepresentation in a predicate act.

Civil RICO Conspiracy

The court also found the conspiracy claim failed as plaintiff failed to allege “the existence of an agreement to violate RICO’s substantive provisions.” Because the alleged conspiracy involved an agreement to commit the same substantive RICO violations the court deemed insufficiently pled, and the plaintiffs have not alleged any further acts that, if carried out, would have satisfied RICO’s requirement of a pattern of racketeering. Citing to Salinas v. United States, 522 U.S. 52, 118 S.Ct. 469, 139 L.Ed.2d 352 (1997).

Ed Note: The court looks at one prong of Salinas, but ignores the preceding sentence that all that is necessary if that the Defendant adopt the scheme. The Court’s view appears to be the prominent view in analyzing civil RICO conspiracy allegations.

Court Denies Motion to Dismiss Civil RICO Complaint Finding Sufficient Distinctness

Murphy v. Gospel of Asia Inc., 2018 WL 2422755 (W.D. Ark., May 29, 2018)

The Court dismissed the motion on the pleadings under Rule 12(c)(2) finding that a legal entity defendants GFA and an affiliate was distinct from an enterprise consisting of GFA, and other legal entities, such as Believers Church, Gospel for Asia-India, Last Hour Ministries, and Love India Ministries, and others, all of which are alleged to be affiliates or associates of the named Defendants.

The court first addressed general rules of distinctness: First, “the person named as the defendant cannot also be the entity identified as the enterprise.” Atlas Pile Driving Co. v. DiCon Fin. Co., 886 F.2d 986, 995 (8th Cir. 1989). Second, “[plaintiffs] cannot 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.’ ” (known as the Riverwoods test).

But, here, these rules did not apply as the Court concluded first, that the allegations in the Complaint make clear that GFA was simply one member of a RICO enterprise consisting of all of the named Defendants. This is more than sufficient to allege a plausible association-in-fact enterprise. *2, citing Atlas Pile Driving, supra., 886 F.2d at 995. Second, the Complaint did not allege 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.*3

Moreover, because there remained unresolved factual disputes about whether the named Defendants are distinct from the “RICO enterprise,” judgment on the pleadings was improper.

Editor Notes: There are various givens regarding distinctness (ALWAYS DISTINCT):

(1) Individual defendants are each always distinct from an association in fact solely consisting of themselves as members. See Boyle, Brittingham; Gospel for Asia

(2) Individuals are always distinct from legal entity enterprises. Kushner.

(3) Individual legal entity defendants are always distinct from an association in fact of individuals and unrelated entities or entities not commonly controlled by Defendants. Atlas Pile Driving

Eleventh Circuit Analyses RJR Nabisco to Hold That the Presumption Against Extraterritoriality was Rebutted for Certain Applications of the Federal RICO Statute

Comparelli v. Republica Bolivariana De Venzuela, ___ F.3d ___, 2018 WL 2749717 (11th Cir. 2018)

The court reversed and remanded a lower court decision which dismissed a complaint for lack of subject-matter jurisdiction. Foreigners had brought action against República Bolivariana de Venezuela and nationalized Venezuelan company under expropriation exception of Foreign Sovereign Immunities Act (FSIA), alleging unlawful taking of their property in violation of international law.

In ruling for the Plaintiffs/Foreigners, the court analyzed the extraterritorial application of the civil RICO statute, analyzing “whether the presumption against extraterritoriality has been rebutted—that is, whether the statute gives a clear, affirmative indication that it applies extraterritorially.” Id., citing to RJR Nabisco, Inc. v. European Cmty., ––– U.S. ––––, 136 S.Ct. 2090, 2101, 195 L.Ed.2d 476 (2016). In analyzing the FSIA “expropriation exception,” the court discussed that this case mirrors the situation described in RJR Nabisco, which held that the presumption against extraterritoriality was rebutted for certain applications of the federal RICO statute. There, the Supreme Court noted “that RICO defines racketeering activity to include a number of predicates that plainly apply to at least some foreign conduct.” RJR Nabisco, 136 S.Ct. at 2101. For example, the prohibition against hostage taking includes conduct that occurred outside the United States, provided that “the offender or the person seized or detained is a national of the United States,” “the offender is found in the United States,” or “the governmental organization sought to be compelled is the Government of the United States.” See 18 U.S.C. § 1203(b)(1); RJR Nabisco, 136 S.Ct. at 2101–02.

The court continued to state that in other words, like the FSIA expropriation exception, the RICO statute as applied to exterritorial hostage takings ensured a specific nexus to the United States. That nexus requirement was enough to rebut the presumption against extraterritoriality in RJR Nabisco, and we hold that the nexus requirement of § 1605(a)(3) similarly rebuts that presumption here.

The court concluded that on remand, the district court should permit the Comparellis to file an amended complaint and, after Venezuela and Pequiven have responded, address whether the domestic takings rule applies and whether jurisdiction exists under the FSIA’s expropriation exception.


Circuit Court Rules that the District Court Properly Abstained Until Appellate Review of Earlier Actions Were Determined Before Ruling that Res Judicata Barred a Civil RICO Action

Beck v. Clausen, __ F.3d __, 2018 WL 1572689 (7th Cir. 2018)

Plaintiffs (an LLC and its shareholders) (collectively “the Baeks”), brought this action against Northside Community Bank (“NCB”) and several of its employees, alleging civil RICO violations which focus on the allegedly fraudulent and abusive acts committed by NCB in the course of a lending relationship with the plaintiffs. This RICO action is the last in a series of legal actions between the parties.

In response to the RICO complaint, NCB initially moved to dismiss, or in the alternative, to stay the proceeding under Colorado River Water Conservation District v. United States, 424 U.S. 800, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976). After the state court struck or dismissed all of the plaintiffs’ claims and granted summary judgment to NCB on its claims, NCB amended its motion to assert an alternative ground for dismissal: res judicata. The Plaintiffs argued that res judicata could not apply to their RICO claim because they never had filed a similar RICO claim in state court. Although they had attempted to amend their complaint to include such a claim, that motion had been denied. According to the Baeks, “a claim that was never filed could not be dismissed.”

The district court granted NCB’s amended motion. Applying Illinois’ law of res judicata, it determined that there had been a final judgment both in the previous actions, there was identity of the parties (or their privies) in the prior actions and the federal RICO action; and those causes of action were the same as the federal RICO claim because they all involved “a single group of operative facts.”

Plaintiff had also argued that that the Circuit Court’s adjudication was not final until an appeal had been resolved on earlier actions. Although this argument did not “rely on new law or new facts,” the district court noted that it did “raise an important argument not yet passed upon.” The district court therefore considered the argument on the merits, and waited until the state appellate court issued an order affirming the judgments rendered in the state court with respect to two other actions before ruling the current RICO suit was barred.

This Circuit Court ruled that the district court correctly determined that res judicata precluded the plaintiffs’ present action, and therefore the district court granted the defendants’ motion to dismiss the complaint with prejudice. The Court also found that the abstention by the district court under the Colorado River doctrine, which allows courts to conserve judicial resources by abstaining from accepting jurisdiction when there is a parallel proceeding elsewhere, was proper finding that it was sensible to stay proceedings until an earlier-filed state case has reached a conclusion, and then (but only then) to dismiss the suit outright on grounds of claim preclusion.

Ed Note: The rules governing Colorado River abstention and res judicata are complex, but commonly broadly interpreted to bar civil federal actions in federal court.