Seventh Circuit Addresses Association in Fact Enterprise Consisting of Defendant and Legal Defense Team

Sabrina Roppo v. Travelers Commercial Ins. Co., __ F.3d __, 2017 WL 3695205 (7th Cir., Aug. 28, 2017)

For various reasons, the court affirmed the district court’s dismissal of this civil RICO claim. However, in dicta, the Seventh Circuit followed the Ninth Circuit and made an important statement regarding the feasibility of an association-in-fact enterprise comprised of the Defendant and its legal defense team. This could be an important way to find “distinctness,” although the Boyle and Turkette tests would still have to be satisfied.

In this case, the Plaintiff failed to connect the legal dots between Travelers (the Defendant) and the association in fact enterprise consisting of Travelers and its outside counsel. But, the Seventh Circuit stated that:

the possibility that those players, together, could form a RICO enterprise is not without support in case law. One of our sister circuits has recognized that a corporation and its outside counsel can constitute an enterprise under RICO. See Living Designs, Inc. v. E.I. Dupont de Nemours & Co., 431 F.3d 353, 362 (9th Cir. 2005) (observing that “[j]ust as a corporate officer can be a person distinct from the corporate enterprise, DuPont is separate from its legal defense team” and holding, therefore, that “the district court erred in concluding that Plaintiffs failed to allege a distinct RICO enterprise”). Moreover, the Supreme Court recently clarified what is required to show an “association-in-fact” enterprise: “a purpose, relationships among those associated with the enterprise, and longevity sufficient to permit these associates to pursue the enterprise’s purpose.” Boyle v. United States, 556 U.S. 938, 946, 129 S.Ct. 2237, 173 L.Ed.2d 1265 (2009). Nothing in these requirements forecloses a RICO enterprise comprised of a corporation and its outside counsel.

Id., at *12, emphasis added.

The court thus could not conclude that Plaintiff’s allegations of a RICO enterprise, although lacking in detail, were wholly insubstantial or frivolous.

Ed Note:    This is the first post-Boyle decision addressing whether a legal defense team can be part of the association in fact enterprise. This decision that attorneys who are merely representing the Defendant can be part of the enterprise appears to be contrary to established law on distinctness in which the attorneys are functionally no different than corporate employees acting on behalf of the employer within the scope of their duties. But, those who function with Defendants to commit fraud, could fit in as part of an enterprise which would be distinct of the corporate employer or an association in fact enterprise consisting of the corporation and the attorneys. Of course, the facts and circumstances of each case need to be examined.
David J. Stander is a civil RICO Attorney who focuses his practice on civil RICO litigation and consulting.



Plaintiff’s RICO Claims Alleging Wire Fraud Apply Extraterritorially as Two-Part Test Was Satisfied [Corrected Copy]

Drummond Company Inc. v. Collingsworth, 2017 WL 3268907 (N.D. Ala., Aug. 1, 2017)

The court denied the Defendants’ motions to dismiss the civil RICO claims and found sufficient personal jurisdiction over the Defendants Van Bilderbeek and Ramirez. Also, in a case of first impression in the Eleventh Circuit, the court ruled that the wire fraud statute has extraterritorial reach provided there is domestic injury.
Personal jurisdiction Found Over Non-Resident Defendants
The court first stated that Plaintiff has alleged that defendant van Bilderbeek, a Dutch non-resident perpetrated intentional, tortious and/or criminal acts that were intended to cause, and actually caused, injury in Alabama. Plaintiff has alleged, and cited to evidence of, intentional acts by van Bilderbeek directed at Plaintiff, an Alabama resident. Where intentional acts are at issue, “ ‘the defendant may be held to have expected its conduct to have an effect in that state, and further to have expected that the victim will bring suit for redress there.’ ”
Van Bilderbeek is alleged to have intentionally paid witnesses for their testimony in a case that was being litigated in Alabama and it is further alleged he intended to cause harm to an Alabama business and this court (each located in Alabama). Licciardello, 544 F.3d at 1286; see also Calder, 465 U.S. at 791 (“jurisdiction over petitioners in California is proper because of their intentional conduct in Florida calculated to cause injury to respondent in California”).
The court ruled that because Plaintiff has established the relatedness and purposeful availment prongs of the specific jurisdiction inquiry, the burden shifts to van Bilderbeek to present a “compelling case” that the exercise of personal jurisdiction over him in Alabama would be unreasonable. The court concluded that van Bilderbeek’s argument failed to acknowledge that Plaintiff has alleged that his activities were “purposefully directed” at an Alabama resident and allegedly caused injuries to a resident in this forum. Therefore, van Bilderbeek had “fair warning” that his activities could subject him to jurisdiction in Alabama.
There was also personal jurisdiction over non-resident Ramirez as “‘[u]nder the “effects test,” even a nonresident defendant’s single tortious act can establish purposeful availment, without regard to whether the defendant had any other contacts with the forum’ if the intentional conduct has a direct impact on [an Alabama] resident.”. Ramirez is alleged to have been involved in more than one tortious act directed at an Alabama resident and causing damage there.

The court denied the Defendants’ motions to dismiss the civil RICO claims and found sufficient personal jurisdiction over the Defendants Van Bilderbeek and Ramirez. Also, in a case of first impression in the Eleventh Circuit, the court ruled that the wire fraud statute has extraterritorial reach provided there is domestic injury.
injuries to a resident in this forum. Therefore, van Bilderbeek had “fair warning” that his activities could subject him to jurisdiction in Alabama.
There was also personal jurisdiction over non-resident Ramirez as “‘[u]nder the “effects test,” even a nonresident defendant’s single tortious act can establish purposeful availment, without regard to whether the defendant had any other contacts with the forum’ if the intentional conduct has a direct impact on [an Alabama] resident.”. Ramirez is alleged to have been involved in more than one tortious act directed at an Alabama resident and causing damage there.
Plaintiff’s RICO Claims Alleging Wire Fraud Apply Extraterritorially

Van Bilderbeek argued that Plaintiff’s RICO claims should be dismissed because RICO does not apply extraterritorially. In RJR Nabisco, Inc. v. European Community, 136 S.Ct. 2090, 2102 (2016), the Supreme Court determined that, because some RICO predicates “plainly apply to at least some foreign conduct,” Section 1962 was intended to apply and, so long as a private RICO plaintiff alleges and proves a domestic injury to its business or property, does apply to racketeering conduct abroad “to the extent that the predicates alleged in the particular case themselves apply extraterritorially.” RJR Nabisco, Inc., 136 S.Ct. at 2102, 2106. The Court concluded that “[t]his unique structure makes RICO the rare statute that clearly evidences extraterritorial effect despite lacking an express statement of extraterritoriality.” Id. at 2103. That is, “the domestic and extraterritorial reach of the RICO statute is coterminous with that of the underlying predicate offenses in a given case.” United States v. Hawit, 2017 WL 663542, at *10 (E.D.N.Y. Feb. 17, 2017).

The Complaint alleges that van Bilderbeek paid Blanco on at least three separate occasions for his testimony and participation in cases filed in Alabama. Based on those allegations, it further asserts that “the Enterprise’s conduct with respect to Blanco violates 18 U.S.C. § 1343 (wire fraud), 18 U.S.C. § 201 (witness bribery), 18 U.S.C. § 1956(a)(2)(A) (money laundering), 18 U.S.C. § 1503 (obstruction of justice), and 18 U.S.C. § 1512 (witness tampering).” The Complaint further alleges that the “adverse effects” of van Bilderbeek’s witness bribery, witness tampering, money laundering, obstruction of justice and wire fraud were felt by Plaintiff here in Alabama, and thus asserted a domestic injury. Therefore, RICO may apply extraterritorially, depending on the underlying predicate offense.

The court ruled that all of the predicate offenses for Plaintiff’s RICO claims have extraterritorial application. “Congress expressly provided for extraterritorial application of jurisdiction in the obstruction of justice statute.” The money laundering statute also specifically provides for extraterritorial application where the alleged conduct is by a United States citizen. 18 U.S.C. § 1956(f) (“There is extraterritorial jurisdiction over the conduct prohibited by this section if—(1) the conduct is by a United States citizen.”). The Complaint alleges that van Bilderbeek is a United States citizen. Although his affidavit addresses his residence, it does not contradict the allegation regarding his citizenship. There is also authority for the proposition that the witness bribery statute (section 201) applies extraterritorially.

The key question is the extraterritorial application of the wire fraud statute,
While the Second Circuit has held that 18 U.S.C. § 1343 does not have extraterritorial application, European Cmty. v. RJR Nabisco, Inc.(RJR Nabsico, Inc. 2d Cir.), 764 F.3d 129, 140–41 (2d Cir. 2014) (finding the wire fraud statute does not overcome the presumption against extraterritoriality), rev’d on other grounds, RJR Nabisco, Inc., ––– U.S. ––––, 136 S.Ct. 2090, 195 L.Ed.2d 476, other courts have held to the contrary. Here, the First and Third Circuits, in recent year 2014 and 2015 decisions state “the wire fraud statute punishes frauds executed in ‘interstate or foreign commerce,’ ” and therefore can be applied extraterritorially because Congress did not have “only ‘domestic concerns in mind.’ ”) (quoting Pasquantino v. United States, 544 U.S. 349, 371–72 (2005), in turn quoting 18 U.S.C. § 1343).
The Eleventh Circuit has not ruled on this issue, but based on the case authority the court concluded that the First and Third Circuits have the better side of the debate. Therefore, van Bilderbeek’s argument that Plaintiff’s RICO claim fails due to its extraterritorial application is without merit.
Accordingly, based on the above, and finding that Plaintiff’s RICO claims are not conclusory and sufficiently pled, the RICO defendants’ motions to dismiss the civil RICO claims were denied.

Ed Note: Two subsequent SDNY decisions have followed this decision, i.e., Dandong Old North East, and Drummond Company, each of which involved fraud and money laundering cases but only addressed the “domestic injury” argument. Thus, given the Second Circuit decision on wire fraud not having extraterritorial effect may no longer be valid given the S.Court decision, it appears the two-part test of (1) domestic injury and (2) whether Congress expressly provided for extraterritorial application of the predicate offense need to be met.


Court Again Dismisses Civil RICO Complaint Finding No “Domestic Injury”

(1)  Yanchukov v. Finskiy, 2017 WL 3491965 (SDNY, Aug. 14, 2017)

The court found the complaint and the counterclaims failed to establish domestic injury for purposes of the RICO statute, and thus dismissed the RICO claims. The Court therefore declined to exercise supplemental jurisdiction over the state-law claims.

The court discussed RJR Nabisco wherein the Supreme Court concluded that § 1964(c) does not overcome the presumption against extraterritoriality, the Court held that “[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 (emphasis added).

The court discussed that since RJR Nabisco, courts in this district have consistently held that determining the location of a RICO injury depends on where the plaintiff suffered the injury—not where the injurious conduct took place. Citing cases including the recent Dandong Old N.-E. Agric. & Animal Husbandry Co. v. Gary Ming Hu, No. 15 Civ. 10015, 2017 WL 3328239, at *11 (S.D.N.Y. Aug. 3, 2017). The court stated that particularly after the Supreme Court’s decision in RJR Nabisco, putative RICO violations are construed narrowly to adhere to the well-established presumption against extraterritoriality.” Dandong, 2017 WL 3328239, at *11.

Court Finds that There is No Domestic Injury

The court thus analyzed Plaintiffs’ claims in the SAC, and found it was clear that the alleged injuries suffered by Plaintiffs were not suffered domestically. Plaintiff Yanchukov is a Russian businessman, and co-Plaintiff Unique Goals, Faith Union, and Mangazeya are all incorporated or registered in the British Virgin Islands. Plaintiffs argument was not sufficient to show they suffered an injury in the United States.

White Tiger was a gold producer with mining properties in Peru, Quebec, and Russia that is now known as Mangazeya. The fact that Defendant Finskiy conducted business in the United States, held White Tiger board meetings in the United States, and diverted the allegedly ill-gotten funds to the United States for his use (see Dkt. No. 96 at 27), is irrelevant to determining whether Plaintiffs suffered a domestic injury under the Bascuñan test. See Ablyazov, 226 F. Supp. 3d at 281 (rejecting “any suggestion that an alleged RICO injury may be deemed ‘domestic’ or ‘foreign’ purely by reference to the location of the predicate acts that purportedly caused it”).

Moreover, it is of no moment that White Tiger (now Mangazeya) allegedly “has been impeded from accessing the United States capital markets, and has seen its business prospects in the United States severely diminished.” (Dkt. No. 96 at 27 (citing SAC ¶ 158).) If reputational injury leading to loss of access to U.S. markets were sufficient to support a determination of domestic injury, the exception would swallow the rule: any company could demonstrate domestic injury by alleging a diminished capacity to participate in the markets of the United States.

Ed Note: In the Second Circuit, civil RICO Attorneys should obviously focus on the locus of the Plaintiff who is alleged to have incurred the injury; even where the defendant operates his businesses in the U.S., and the predicate acts occur in the U.S., “domestic injury” may not be found. All of the case authority is SDNY district court cases; it remains to see how the Second Circuit will analyze RJR Nabisco.



Court Does Not Find “Domestic Injury,” Dismisses Civil RICO Complaint

Dandong Old North-East Agricultural & Animal Husbandry Co., Ltd., v Gary Ming Hu, 2017 WL 3328239 (S.D.N.Y., August 3, 2017)

Plaintiff Dandong Old North-East Agriculture & Animal Husbandry Co., Ltd. (“Plaintiff” or “Dandong”) alleged civil RICO claims against its former executive, Gary Ming Hu, and others, contending that Hu conspired with individuals and entities to defraud Plaintiff into paying above-market prices for tons of soybeans, and then laundered proceeds of that fraud through New York real estate purchases involving his ex-wife, Yuhua Wang, and their daughter, Esther Hu Mangan.

The court granted the joint motion of two other individual defendants Wang and Mangan (collectively, “Defendants”) to dismiss the claims asserted against them for failure to state a claim under RICO because it does not properly allege that Defendants’ conduct caused a domestic injury to its business.

Civil RICO “Domestic Injury” Requirement

Plaintiff alleges domestic injury by cataloging: (i) the damage to its reputation in the U.S. soybean market; (ii) its strong business connection to the U.S., including during the period of the alleged fraud; (iii) the losses it incurred over the life of the fraud, both early (in the form of overpayment and increased soybean costs) and late (in the form of reduced production and layoffs); and (iv) the costs incurred by Plaintiff in investigating and litigating Defendants’ fraudulent conduct.

Defendants countered that even if Plaintiff suffered from losing its soybean supplier in the United States, it felt the effects of that loss only in China, its country of incorporation and principal place of business. Further, Defendants argue that damage to Plaintiff’s reputation is considered a “personal injury and … not an injury to business or property within the meaning of 18 U.S.C. § 1964(c).” (Id. at 7 (quoting Hamm v. Rhone-Poulenc Rorer Pharms., Inc., 187 F.3d 941, 954 (8th Cir. 1999))).

Legal Analysis of “Domestic Injury”

The Supreme Court’s decision in RJR Nabisco set forth that putative RICO violations are construed narrowly to adhere to the well-established presumption against extraterritoriality. RJR Nabisco, 136 S. Ct. at 2108. This presumption holds that “federal laws will be construed to only have domestic application.” Id. at 2100. As relevant here, the Court in RJR Nabisco held that a private cause of action under 18 U.S.C. § 1962 requires a plaintiff to prove—with attention to both the elements specified above and the extraterritoriality limitations on certain predicate acts—a domestic injury to the plaintiff’s business or property.

The Supreme Court left open the question of determining what constitutes a domestic injury, and federal district courts have adopted one of two lines of reasoning: “[t]he first line … focuses on where the alleged injury was suffered. The second line … focuses on where the conduct occurred that caused the injury.” Id. (citing Cevdet Aksüt Oğullari Koll. Sti v. Cavusoglu, Civ. No. 2:14-3362, 2017 WL 1157862, at *4 (D.N.J. Mar. 28, 2017)).

SDNY Adopts Option One

The SDNY has adopted the former, locus-of-effects approach which determines the existence of a domestic injury by focusing on where the plaintiff felt the effects of the injury, and not where the defendant committed the injury-inducing acts.

Under this analysis, the court concluded plaintiff has failed to allege a domestic Injury to Its business rejecting arguments that Defendants caused domestic injury by substantially damaging Plaintiff’s reputation in the United States soybean market. The court rejected the view of the Plaintiff, citing to a Ninth Circuit district court case (Tatung), that the “domestic injury” requirement is satisfied so long as “the actions causing the injury took place primarily in the United States.”

The court stated that it explicitly adopted the approach described in Bascuñan, which defined a domestic injury to occur “where the plaintiff suffered the injury, not at all where the defendant’s alleged conduct took place.” Id.; see also Elsevier III, 2017 WL 1843298, at *5. The court discussed that Plaintiff sought to find a domestic injury with regard to soybean contracts that shipped the commodity outside the United States. Any deprivation of Plaintiff’s money was felt in China. And, in sharp contrast to Elsevier, Plaintiff was not deprived of its property in the United States; indeed, Plaintiff received all of the soybeans for which it contracted with U.S. suppliers. And while Defendants’ conduct may have impaired Plaintiff’s later ability to secure soybean suppliers in the United States, such a loss of potential business opportunities is not a cognizable domestic injury. In other words, Plaintiff’s expectation of continued contract counterparties among U.S. soybean suppliers is far too attenuated to suffice as a domestic injury under RICO.

Also, costs to investigate and litigate are not “domestic” simply because the alleged conduct that produced them occurred in the United States. Defendants may have engaged in fraudulent conduct within the United States, but “it does not follow that [Plaintiff was] injured” there. Elsevier II, 199 F. Supp. 3d at 788. Similarly, a foreign corporation cannot allege a domestic injury to its business if it only experiences the effects of an alleged RICO scheme abroad. Cevdet, 2017 WL 1157862, at *6.

Plaintiff here only felt the effects of Defendants’ overpricing scheme in China. After Defendants allegedly overpriced the soybean contracts and siphoned the excess funds, Plaintiff terminated ninety employees and reduced its soybean production in its Dandong City factory. And while Plaintiff did incur attorneys’ fees in the United States, those expenses were paid from China.

The court concluded that regardless of where the conspirators’ conduct took place, Plaintiff’s injury was felt in China, the only place its business had ever been located. In short, the Amended Complaint failed to plead domestic injury, and thus fails to state a claim under 18 U.S.C. § 1962(c).

The court also discussed “comity,” stating the Chinese government has prosecuted Gary Hu and sentenced him to twenty years’ imprisonment for his role in this very fraud. The Court stated that –

“Allowing [Plaintiff’s] RICO claims to proceed under these circumstances would be at odds with the Supreme Court’s directive that the need to enforce the presumption against extraterritoriality is ‘at its apex’ when remedies available in United States courts may conflict with those available abroad.”

Court Finds Civil RICO Conspiracy Claim Thus Fails

The court uses Salinas language, but is wrong in its conclusion. The court stated that to state a cause of action under conspiracy, a plaintiff must allege facts demonstrating an intent to further “an endeavor which, if completed, would satisfy all of the elements” of the substantive offense under 18 U.S.C. § 1962(c). Ritchie v. N. Leasing Sys., Inc., No. 12 Civ. 4992 (KBF), 2016 WL 1241531, at *8 (S.D.N.Y. Mar. 28, 2016) (quoting Baisch v. Gallina, 346 F.3d 366, 376-77 (2d Cir. 2003)).

But the court erred in concluding a RICO conspiracy claim “necessarily must fail if the substantive claims are themselves deficient.” See Salinas etc.

Ed Note: The civil RICO Attorney practitioner must be able to thoroughly understand the complex rules governing “extraterritoriality” and recognize the split in the circuits (Second v. Third/Ninth) on the application of the “domestic injury” rules.

Despite Errors in Citation and Analysis, Court Upholds Civil RICO Claim Alleging Criminal Copyright Infringement

Synopsys v. Ubiquiti Networks, Inc. et al, 2017 WL 3485881 (N.D. Cal. Aug. 15, 2017)

Despite making obvious errors in analysis and citation, the court denied in part the Defendant’s motion to dismiss civil RICO claims, the court addressed a panoply of issues involving civil RICO including (1) analyzing what is a proper RICO predicate for copyright infringement; (2) what is an association in fact enterprise; and (3) distinctness between person and enterprise.

Summary of Facts

Plaintiff Synopsys alleges that in 2013, defendants Tsai, Ubiquiti, and UNIL fraudulently induced Synopsys to grant them access to a subset of Synopsys’ software for a finite time for purposes of evaluation. Defendant Ubiquiti Networks International, Ltd. (UNIL) is alleged to be a subsidiary of Ubiquiti that is involved in the development and distribution of networking technology for Ubiquiti. Defendant Ching-Han Tsai is employed by Ubiquiti as a project lead and is a semiconductor professional who regularly works in California.

It is alleged that since 2014, Tsai, Ubiquiti, and UNIL have been “secretly using counterfeit keys” obtained or created through hacker websites to illegally use Synopsys’ EDA without a “valid license.”

Synopsys alleges that Tsai and others at Ubiquiti and UNIL “conspired to, and did, form an associated in fact enterprise (‘Piracy Enterprise’) with the purpose of pirating Synopsys’ software and that the defendants took wrongful acts in furtherance of their Enterprise.” It is alleged that all three defendants also used interstate internet communications to conduct the Enterprise, including extensive use of the counterfeit License Keys.

The Predicate Acts Were Alleged Properly

18 U.S.C. 1029 is a predicate act proscribing criminal copyright infringement occurs. The court accepted the Plaintiff’s view that RICO’s legislative history (showing a particular concern over piracy and counterfeiting enterprises), favored the application of the “plain language” of RICO which requires only “any” act of criminal copyright infringement, no matter its size or impact. See, e.g., ICONICS, Inc. v. Massaro, 192 F. Supp. 3d 254, 269 (D. Mass. 2016) (permitting allegations of copyright infringement stemming from a business dispute between two companies to be a predicate act under RICO). Synopsys’ allegations, especially when considered in the context of the scheme alleged, are sufficient to allege criminal copyright infringement. Note: Court discusses that 17 U.S.C. § 506 is the statute proscribing criminal copyright infringement; this is wrong as 17 U.S.C. 506 is NOT a RICO predicate, or even any violation. Hard to understand what Court is thinking here.

Wire Fraud Under 18 U.S.C. § 1343 Properly Alleged

The court found that Plaintiff sufficiently alleged the use of interstate wires to facilitate the fraud because emails themselves do not need to be stand-alone actionable frauds as long as they were in furtherance of the fraudulent scheme. The AC also sufficiently alleges that the defendants used the internet to send and access unauthorized copies of the software and the illegal keys.

Also, the court found that Rule 9(b) particularity is satisfied because the AC is replete with details regarding the fraudulent scheme; that Ubiquiti and UNIL, acting through Tsai, never intended to truly evaluate Synopsys’ software but instead sought access in order to pirate it and that they did exactly that once they secured access through the evaluation license keys. How the scheme was carried out thereafter – with the creation of counterfeit license keys, repeated access of Synopsys’ websites for documentation and support – is described in detail. The specific communications made by defendants to effectuate the scheme (emails and meetings) are repeatedly identified.

Enterprise Properly Alleged

Synopsys had two theories of RICO enterprise. First, Ubiquiti and UNIL as otherwise legitimate businesses joined with Tsai and “other employees” to conduct the affairs of Ubiquiti and UNIL through a course of racketeering activity. Second, an association-in-fact enterprise (Piracy Enterprise) was developed where Tsai, Ubiquiti, UNIL and others employees all came together to create the Piracy Enterprise and conduct the illegal acts.

The court accepted the Piracy Enterprise finding sufficient
distinctness between related corporate entities, and discussed this issue in depth, (1) “the formal, legal separation of the defendant entities satisfies the RICO distinctiveness requirement,” or (2) “something more” than mere legal distinctiveness, like different or uniquely significant role in the enterprise.

The court ruled the presence of a separate corporate entity –UNIL – takes this case a step away from cases finding insufficient distinctness where the alleged person is a corporate employee and the alleged enterprise is the corporation. Note: Court is mixing its person and enterprise as a corporate employee individual is always distinct from its corporation. Cedric Kushner. Ubiquiti and UNIL are separate corporate entities alleged to have engaged in separate acts in furtherance of the conspiracy. This question may be revisited on summary judgment after discovery about the governance and operation of the two corporate entities is conducted and as more evidence comes to light regarding whether the association-in-fact enterprise was simply conducting its own affairs (e.g., the affairs of the corporations) or the affairs of a distinct RICO enterprise. *16.

RICO Conspiracy Properly Alleged

Finally, in addition to arguing that because Synopsys fails to allege a substantive RICO violation there can be no conspiracy, Ubiquiti argues that Synopsys’ conspiracy claim fails for the independent reason that Synopsys has failed to allege that any of the defendants “agreed to facilitate” the scheme; in other words failed that all three reached an agreement to conduct the RICO enterprise. The court ruled that the allegations concern activities of all three, going far beyond the activities of Tsai. Given the scope of the alleged piracy here, agreement can be readily and plausibly inferred.

Note:     David J. Stander is a civil RICO Attorney who regularly publishes insights into complex civil RICO issues. Despite obvious errors in citation and analysis, this is an interesting case because it shows that court will accept conduct which violates Title 18 when such acts are “indictable” under that section, regardless of the severity and gravity of the violations. All that is needed is sufficient allegation of the “indictable” conduct and any qualifying language.

District Court Details How Plaintiffs Adequately Pleaded Civil RICO Enterprise and Pattern in a Complex Civil RICO Fraud Action

Metropolitan Property and Casualty Ins. Co., v. Savin Hill, ___ F. Supp.3d ___, 2017 WL 3120273 (D. Mass., 2017)

The court concluded that the claims for violations of RICO and RICO conspiracy asserted in Counts II and IV of the Second Amended Complaint survived the motions to dismiss.

1. Existence of a RICO Enterprise

First, the court did reject claims based on the “victim-enterprise” theory, i.e.,
“by alleging a legitimate enterprise that was victimized by a racketeering scheme” finding the Reves “conduct or participate” criterion not adequately alleged.

Editor Note: There is no such legal theory as “victim-enterprise,” as an enterprise is either a legal entity or an association in fact. Not relevant to status as an enterprise, the Court has stated that an enterprise can be a victim or a vehicle. See Cedric Kushner, so this could be the genesis of this so-called theory. The Reves test, discussed by the court as applying to “victim-enterprises” applies to any kind of enterprise as defined in RICO, but is relaxed in RICO conspiracy cases. Perhaps the court is thinking of legal entity enterprises as “victim-enterprises.” If so, all of the elements of RICO apply, including the Reves test, except the rules and conduct involving “association in fact” enterprises. See below.

Second, the court accepted as adequately pleaded the existence of an association-in-fact enterprise. See Count II and Count IV of their Second Amended Complaint. Here, the Plaintiffs allege that the defendants were a group of persons associated together for the common purpose of wrongfully obtaining insurance benefits through the Massachusetts statutory framework governing personal injury claims arising out of motor vehicle accidents, and thereby constitute an “association-in-fact enterprise,” as that term is defined in section 1961(4).

The defendants contend that these claims must be dismissed because the Plaintiffs have failed to allege the existence of a RICO enterprise having a distinct and ascertainable structure apart from the predicate acts of racketeering activity. This court disagreed for many reasons, chief of which was the Supreme Court has clarified that “an ‘association-in-fact enterprise need not have any structural features beyond ‘a purpose, relationships among those associated with the enterprise, and longevity sufficient to permit these associates to pursue the enterprise’s purpose.’ ” Id. (quoting Boyle v. United States, 556 U.S. 938, 946, 129 S.Ct. 2237, 2244, 173 L.Ed. 2d 1265 (2009)).

The court found that each of the three criteria of Boyle are satisfied, finding that the Plaintiffs have alleged that the defendants acted for the common purpose of fraudulently obtaining “monetary payments, through insurance claims, from Metropolitan and Commerce by submitting or facilitating the submission of fraudulent chiropractic records and bills, and submitting and prosecuting fraudulent claims for insurance benefits based on such records and bills.” They have also delineated the specific roles of the defendants in the allegedly fraudulent scheme, and the nature of the relationships among the various groups of defendants. In addition, the Plaintiffs have alleged extensive and detailed facts regarding the nature of the defendants’ relationships, as “family members and business associates,” which they allegedly used “to create, develop and implement a cohesive and comprehensive network of improper and illegal relationships in order to fraudulently obtain unwarranted insurance benefits” from the Carriers.

The court specifically rejected that Plaintiffs must allege “a distinct structure amongst all of the defendants separate and apart from each of their individual endeavors,” and Plaintiffs sufficiently alleged that the defendants engaged in a coordinated effort to carry out the alleged fraudulent billing scheme. The court also ruled that the final feature of an association-in-fact enterprise, longevity, is easily met by the Plaintiffs’ allegations as well.

2. Alleged Participation in the Conduct of the RICO Enterprise

The court also found the Plaintiffs adequately alleged that the defendant[s] conducted or participated, ‘directly or indirectly, in the conduct of the RICO enterprise’s affairs’ as the Plaintiffs alleged facts showing how each of the defendants was integral to carrying out the activities of the alleged enterprise. Id., at *12-13 citing to Warren Chiropractic & Rehab Clinic P.C., 2015 WL 4724829, at *7.

3. Continuity

The court rejected the Defendants’ argument that found Second Amended Complaint alleges related predicate acts that amount to continued criminal activity. The court found sufficient that the Plaintiffs contended that throughout the time period from January 2008 to August 4, 2016, the defendants “submitted false and/or fraudulent chiropractic records, bills, letters, PIP Applications and/or fraudulent insurance claims for payment to [the Carriers] through the use of and/or knowledge of the use of United States mails and wires[,]” or aided and abetted their co-defendants in submitting such materials. The court concluded that “[A] plaintiff who alleges a high number of related predicate acts committed over a substantial period of time establishes that those acts amount to continued criminal activity[.]” Fleet Credit Corp., 893 F.2d at 446.

4. Conspiracy to Violate RICO

The court found the Plaintiffs claim that the Defendants’ acted in a conspiracy to violate civil RICO adequately pleaded.

Ed Note: This case is a good blueprint for drafting a civil RICO complaint which will in any jurisdiction pass muster. Cases with multiple plaintiffs, long-running and diverse complex mail and wire fraud schemes, with sufficient particularity and direct injury, are almost always successful civil RICO cases.

Court Accepts Amended Civil RICO Complaint Finding No “Futility”

Trier et al v. Genesee County et al., 2017 WL 3278360, E.D. Mich., Aug. 2, 2017

Plaintiffs sought leave to file a second amended complaint to, among other things, clarify the RICO allegations. Defendants opposed arguing that the Proposed Second Amended Complaint should be denied due to futility of amendment and result in unfair prejudice.

The court found no futility finding that Plaintiffs’ RICO claims and all proposed amendments survive a motion to dismiss. The court addressed each element of § 1962(c) to find that the factual allegations, taken as true, provided sufficient facts for the court to draw the reasonable inference that Defendants were liable for the alleged violation of § 1962(c).

a. Enterprise

The Plaintiffs alleged that Defendants formed an association in fact enterprise that had a common purpose of engaging in the alleged misconduct of exchanging deputization for money. Plaintiffs further allege that “there were relationships among those associated with the enterprise” and “there was longevity as the relationships between the members of the Enterprise began in 2006 at the latest and continued up until at least year 2016.” Therefore, Plaintiffs’ Second Amended Complaint alleged sufficient factual allegations to support the enterprise element.

b. Conduct

The court accepted Plaintiffs claim that Defendants participated in the “operation or management” of the Enterprise’s affairs. Pickell was the central figure in the association in fact who demanded payment of monies from Plaintiffs in order to have deputization duties. Hope acted as Pickell’s appointed agent and representative, and endorsed the checks and deposited them into a bank account for the personal financial gain/benefit of Defendants. In exchange for Defendant Hope’s patronage and illegal activities, Defendant Pickell rewarded Defendant Hope by awarding his company Allen & Hope Inc. the exclusive rights to all process serving activities for Defendant, Genesee County and termination Plaintiffs. Defendant, C. Hope working with co-Defendants planned and devised the method to extort Plaintiffs and assisted and managed the affairs of the enterprise with Co-Defendants by determining and implementing schemes to increase revenues for Allen and Hope. These acts were condoned by Genesee County which had the custom, practice, and policy to take money not due the County by virtue of Defendant Pickell’s influence and political office.

Thus, the court found the Second Amended Complaint sufficiently described how the proposed defendant C. Hope and others engaged in misconduct violating § 1962(c). The court finds that the factual context created by these specific allegations together with the general factual allegations constitutes sufficient support for the conduct element.

c. Pattern of Racketeering Activity

The court found the SAC adequately alleged acts of extortion in violation of federal law, as Defendant Pickell, as aided and abetted by Hope, C. Hope and Allen & Hope, obtained property from Plaintiffs, i.e., payments of for [sic] $65.00 to $150.00 a year, with their consent, wrongfully induced under fear of economic harm, all in violation of 18 U.S.C. § 1951, as Plaintiffs were told that if they did not make the payments, which were unlawful and not required under law, they would not be selected to provide paid deputization duties.

In regards to the pattern of racketeering, Plaintiffs alleged that Defendants engaged in exchanging deputization for money from December 2006 until December 2016. Plaintiffs allege both the “continuity” and “relatedness” prongs of the pattern of racketeering activity element. As to relatedness, the acts of extortion were related to the affairs of the Enterprise as the Defendants worked together so that Defendant Pickell could obtain something of value, i.e., the annual payments from Plaintiffs, to which he had no official right, and in return Defendant Pickell would reward deputization designations to the Plaintiffs. Defendants Hope, C. Hope, and Hope’s company Allen & Hope aided and abetted Defendant Pickell in return for obtaining exclusive rights to process-serving activities in Genesee County.
Plaintiffs satisfied the “relatedness” prong because they essentially alleged that Defendants engaged in “criminal acts that have the same or similar purposes, results, participants, victims, or methods of commission, or otherwise are interrelated by distinguishing characteristics and are not isolated events.”

In regards to continuity, Plaintiffs adequately alleged close-ended continuity as these were continuous acts occurring over a substantial period of time, i.e., at least eleven (11) years. Plaintiffs also adequately alleged that the pattern of racketeering activity constituted “open-ended” continuity based upon a threat of continuing racketeering activity because the predicate activity constituted the regular way Defendants did business. Because such criminal conduct was part of the regular way Pickell, Hope, and C. Hope did business it gives rise to the inference that such offenses will continue indefinitely if not interrupted. Hope and C. Hope continue to maintain the exclusive right to process serving in the County and continue their close relationships with County officials, including Defendant Pickell.

Furthermore, Plaintiffs allege that the continuous acts will continue indefinitely because Defendants “continue to maintain the exclusive right to process serving in the County and continue their close relationships with County officials, including Defendant Pickell.

Thus, the court ruled that Plaintiffs have pled sufficient facts in support of their civil RICO claim to survive a motion to dismiss. Accordingly, amendment would not be “futile.”

The court also found the amendment would not unduly prejudice the defendants. Undue prejudice is often found when the delay in amending the pleadings is unexplained, unjustified, and the case has already reached an advanced stage of litigation, which is not the case here. The court stated that no undue prejudice exists from amended pleadings simply because the opposing party would have to defend against new or better pleaded claims.

Ed Note: This ruling effectively forecloses any motion to dismiss by Defendants.  This is an important case which shows that public corruption is clearly within the realm of civil RICO actions.