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Sperber v. Boesky

decided: June 3, 1988.


Appeal from judgment of United States District Court for the Southern District of New York, Gerard L. Goettel, J., dismissing civil RICO complaint for lack of proximate cause. Affirmed.

Feinberg, Chief Judge, Cardamone and Pierce, Circuit Judges.

Author: Feinberg

FEINBERG, Chief Judge:

Section 1964(c) of the Racketeer Influenced and Corrupt Organizations Act (RICO) provides that a civil RICO plaintiff can recover only damages suffered "by reason of a violation of section 1962" of Title 18, the "Prohibited activities" section of RICO. This case requires us to construe that statutory language. Appellants, plaintiffs below, claim they were injured when the market price of six "takeover stocks" dropped following the announcement by the Securities and Exchange Commission (SEC) that Ivan F. Boesky had been involved in widespread insider trading and other illegality. The district court, Gerard L. Goettel, J., dismissed the complaint for failure to state a claim on which relief could be granted, Fed. R. Civ. P. 12(b)(6), because it found that plaintiffs' injuries were not proximately caused by defendant's racketeering violations. Sperber v. Boesky, 672 F. Supp. 754 (S.D.N.Y. 1987). Plaintiffs appealed, and we now affirm.

I. Background

Since this is an appeal from a motion to dismiss, we take as true the allegations of the complaint, as amended. However, as the district court indicated, the 53-page, 114-paragraph complaint contains much irrelevant detail about Boesky's insider-trading activity in general but omits important particulars about the nature of the specific claims in this case. Nonetheless, the complaint makes the allegations set forth below.

As indicated, the complaint seeks recovery pursuant to 18 U.S.C. § 1964(c), which provides that "Any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefor in any appropriate United States district court and shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney's fee." The complaint alleges that Boesky violated 18 U.S.C. § 1962 subsections (a) (investing racketeering income), (b) (acquiring or maintaining interest in enterprise through pattern of racketeering), (c) (conducting affairs of enterprise through racketeering) and (d) (conspiracy to do the foregoing).*fn1 Although the complaint does not specify the predicate acts of racketeering that underlie each violation, it alleges that Boesky violated the securities laws, the commercial bribery statutes and the wire and mail fraud statutes by conducting insider trading and by paying various people for confidential information. The complaint also accuses Boesky of falsely describing his investment prowess as resulting from diligent research rather than from illegal inside tips, although it is unclear whether this behavior is alleged as a predicate act.

The suit was filed as a class action, although the district court apparently dismissed the case before ruling on whether to certify the class. The class is defined as all those who purchased common stock or call options for common stock in six publicly-traded companies (CooperVision, Inc.; Gillette Co.; Holiday Corp.; Public Service Corp. of Indiana; Time, Inc.; and USX Corp.) between November 3 and November 14, 1986, the day on which the SEC and United States Attorney announced that Boesky had agreed to plead guilty to one count of insider trading. In the weeks following November 14, the prices of the six stocks declined by between 7% and 32%. However, as the district court noted, plaintiffs' total losses are not discernible from the face of the complaint. 672 F.2d at 757. It is clear, though, that the named plaintiffs had only a limited interest in only two of the relevant stocks: one plaintiff bought 40 call options in CooperVision on November 5 and the other bought 100 shares of Time, Inc. on November 7. The plaintiffs either let expire or sold these interests after the SEC announcement.

The complaint also alleges that Boesky owned an undisclosed amount of stock in each of the six companies, and that he sold this stock (apparently with the permission of the SEC) between November 3 and November 14 without disclosing the material and non-public fact that he would soon be pleading guilty. However, these sales and the November 3 starting date for the class seem irrelevant to the present lawsuit, since plaintiffs disavow any claim that Boesky was trading illegally in the six stocks listed above and any claim of injury arising out of these alleged sales. 672 F. Supp. at 756. Their theory is somewhat more attenuated.

Plaintiffs' complaint alleges that "They have been damaged as a result of their investment decisions to invest in takeover companies whose prices were artificially inflated as a result of the unlawful activities of [Boesky] and his reputation, falsely created and maintained." This general, but cryptic, allegation is the focus of this appeal. We emphasize again that appellants do not contend that Boesky was trading illegally in the six stocks listed above. With this in mind, Judge Goettel noted that plaintiffs' allegation is open to two interpretations. 672 F. Supp. at 756-57. One reading is that Boesky's reputation as a financial wizard was obtained by his various illegal (racketeering) activities and was such that his purchases of the six stocks drove up their prices. A second reading of the allegation is that Boesky's (illegal) investment success made all takeover stocks more expensive because it encouraged more people to enter the market in attempts to duplicate his success. Under either of these theories, plaintiffs claim to have paid a price inflated by Boesky's racketeer-created reputation. However, they do not claim to have suffered a loss until the price fell, presumably because until the fall they could have recovered their capital by selling at the still-inflated price.

The district court held that under either reading of the complaint, the losses were not proximately caused by the racketeering violations because Boesky had no duty to protect plaintiffs from the effects of his racketeering. It therefore dismissed the complaint.

Plaintiffs devote much of their brief to challenging the district court's approach to the SEC announcement regarding Boesky's illegal activities. They claim that the district court erroneously ruled that the announcement was an intervening cause of their harm, cutting off Boesky's liability for their damages. This argument is premised on an incorrect reading of the opinion below. The district court ruled that the announcement was not enough to create liability where none existed before; it did not rule that the announcement cut off pre-existing liability. This ruling was substantially correct. As will be seen below, the effect of the announcement is irrelevant because we find that Boesky cannot be held liable to plaintiffs at all.

II. Discussion

In interpreting the RICO causation requirement (as with any issue of statutory interpretation) we start with the statutory language and the legislative history. In this case, the language is general and there is little legislative history. However, the Supreme Court has set out "general principles surrounding this statute," one of which is that "RICO is to be read broadly" not only because of "Congress' self-consciously expansive language and overall approach, see United States v. Turkette, 452 U.S. 576, 586-87, 69 L. Ed. 2d 246, 101 S. Ct. 2524 (1981)," but also because of Congress' "express admonition that RICO is to 'be liberally construed to effectuate its remedial purposes.'" Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 497-98, 87 L. Ed. 2d 346, 105 S. Ct. 3275 (1985) (quoting Pub. L. 91-452, § 904(a), 84 Stat. 947). See generally Lynch, RICO: The Crime of Being a Criminal, 87 Colum. L. Rev. 661, 666-713, 938-45 (1987) (RICO recognizes new harms and creates new wrongs). Balanced against this is the principle--also recognized by Sedima and Haroco, Inc. v. American National Bank and Trust Co., 747 F.2d 384 (7th Cir. 1984), aff'd, 473 U.S. 606, 87 L. Ed. 2d 437, 105 S. Ct. 3291 (1985) (per curiam)--that legal liability should not extend as far as factual causation. As a leading treatise explains "[i]n a philosophical sense, the consequences of an act go forward to eternity," and extending liability as far as factual causation therefore "would result in infinite liability for ...

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