Searching over 5,500,000 cases.

Buy This Entire Record For $7.95

Official citation and/or docket number and footnotes (if any) for this case available with purchase.

Learn more about what you receive with purchase of this case.


United States District Court, Southern District of New York

April 30, 1990


The opinion of the court was delivered by:  Motley, District Judge. Background


Indictment 89 Cr. 446 was filed on June 15, 1989. A superseding indictment adding Defendant McDonald was filed on August 24, 1989. The superseding indictment charges defendants with the following: substantive and conspiracy violations of the Racketeer Influenced and Corrupt Organizations ("RICO") statute, 18 U.S.C. §§ 1962(c) and (d), through a "pattern of racketeering activity" and mail and wire fraud violations of 18 U.S.C. § 1341. The RICO counts of that superseding indictment alleged twenty-two racketeering acts, including mail fraud on New York City and State government agencies, mail and wire fraud on CSX Transportation Inc. ("CSX") and mail fraud on doctors and medical care facilities. A superseding indictment removing, inter alia, Racketeering Acts 19-22, alleging acts of mail fraud on several doctors and a nursing home, was filed on February 6, 1990. A further superseding indictment, removing Racketeering Act 1(d) and the corresponding Count 6 — an alleged act of mail fraud against the City of New York — and adding two mailings to Racketeering Act 4, Acts 4(a) and (b) corresponding to new Counts 8 and 9 — alleging acts of mail fraud against CSX Realty, was filed on March 8, 1990.*fn*

Defendants have moved pursuant to Fed.R.Crim.P. 12 and 41 for the following:

1) dismissal of Counts One and Two of the indictment (the RICO counts) on the grounds that they are unconstitutionally vague;

2) dismissal of the RICO counts or striking of Racketeering Acts 1-2 and 5-22 on the grounds that environmental crimes are not authorized RICO predicate acts;

3) dismissal of Counts 3-8 of the indictment, alleging mail fraud against the City of New York on the grounds that they are based on insufficient evidence;

4) dismissal of Racketeering Acts 1-2 and 5-22 and Counts 3-8 of the indictment on the grounds that the conduct alleged does not constitute mail fraud;

5) dismissal of the RICO counts on the grounds that there is no separation alleged between the enterprise and the persons conducting the affairs of the enterprise;

6) dismissal of the RICO counts on the grounds that the indictment does not allege a proper enterprise;

7) severance of the trial of Angelo Paccione and Anthony Vulpis from John McDonald on the grounds that severance is required under Bruton v. United States, 391 U.S. 123, 88 S.Ct. 1620, 20 L.Ed.2d 476 (1968) and that their defenses will be antagonistic and mutually exclusive;

8) suppression of the evidence seized pursuant to the search warrants on the grounds that the warrants authorized a general search in violation of the Fourth Amendment's particularity clause;

9) suppression of evidence seized pursuant to allegedly warrantless searches.

Defendant John McDonald has also moved pursuant to Fed.R.Crim.P. 12(b)(3) for suppression of statements allegedly made by Defendant McDonald on or about July 19, 1989.

For the following reasons, these motions are denied.


1. The RICO Statute Is Not Unconstitutionally Vague

Defendants have moved to dismiss Counts One and Two of the indictment (the RICO substantive and conspiracy counts) on the ground that the RICO statute is unconstitutionally vague. Defendants assert that the terms "pattern of racketeering activity", "enterprise" and "association" with the enterprise are so vague as to provide little or no notice to any person of what conduct is prohibited and that the statute has provided neither content nor standard for determining what these terms mean, nor have the courts provided any meaningful limitation.

Relying extensively on dicta in Justice Scalia's concurring opinion in H.J., Inc. v. Northwestern Bell Telephone Co., ___ U.S. ___, 109 S.Ct. 2893, 106 L.Ed.2d 195 (1989), defendants maintain that the terms "pattern of racketeering" activity, "enterprise," and "association" with the enterprise, are concepts so vague as to violate the notice to defendants requirement that the due process clause of the Fifth Amendment imposes on all federal criminal statutes. Defendants also complain that the vagueness of the statute's language, especially as to the meaning of "association" with the enterprise, is such as to give to the prosecutors impermissible discretion as applied to this case.

In H.J., Inc., the Court defined the term "pattern of racketeering" which requires proof by the prosecution of at least two predicate acts, as enumerated in the RICO statute, as consisting of two components: (1) relatedness and (2) continuity.

  RICO's legislative history reveals Congress'
  intent that to prove a pattern of racketeering
  activity a plaintiff or prosecutor must show that
  the racketeering

  predicates are related, and that they amount to or
  pose a threat of continued criminal activity. For
  analytic purposes these two constituents of RICO's
  pattern requirement must be stated separately,
  though in practice their proof will often overlap.
  The element of relatedness is the easier to
  define, for we may take guidance from a provision
  elsewhere in the Organized Crime Control Act of
  1970 (OOCA), Pub.L. 91-452, 84 Stat. 922, of which
  RICO formed Title IX. OCCA included as Title X the
  Dangerous Special Offender Sentencing Act,
  18 U.S.C. § 3575 et seq. (now partially
  repealed). Title X provided for enhanced sentences
  where, among other things, the defendant had
  committed a prior felony as part of a pattern of
  criminal conduct. As we noted in Sedima [v. Imrex
  Company, Inc.], 473 U.S. [479], at 496, n. 14 [105
  S.Ct. 3275, 3285, n. 14, 87 L.Ed.2d 346], Congress
  defined Title X's pattern requirement solely in
  terms of the relationship of the defendant's
  criminal acts one to another: "criminal conduct
  forms a pattern if it embraces 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."
  18 U.S.C. § 3575(e) . . . RICO's legislative
  history tells us, however, that the relatedness of
  racketeering activities is not alone enough to
  satisfy Section 1962's pattern element. To
  establish a RICO pattern it must also be shown that
  the predicates themselves amount to, or that they
  otherwise constitute a threat of, continuing
  racketeering activity. . . "Continuity" is both a
  closed- and open-ended concept, referring either to
  a closed period of repeated conduct, or to past
  conduct that by its nature projects into the future
  with a threat of repetition. See Barticheck v.
  Fidelity Union Bank/First National State,
  832 F.2d 36, 39 (CA3 1987). It is, in either case, centrally
  a temporal concept — and particularly so in the
  RICO context, where what must be continuous, RICO's
  predicate acts or offenses, and the relationship
  these predicates must bear to one another, are
  distinct requirements. A party alleging a RICO
  violation may demonstrate continuity over a closed
  period by proving a series of related predicates
  extending over a substantial period of time.
  Predicate acts extending over a few weeks or months
  and threatening no future criminal conduct do not
  satisfy this requirement: Congress was concerned in
  RICO with long-term criminal conduct. Often a RICO
  action will be brought before continuity can be
  established in this way. In such cases, liability
  depends on whether the threat of continuity is
  demonstrated. See S.Rep. No. 91-617, at 158.

    Whether the predicates proved establish a threat
  of continued racketeering activity depends on the
  specific facts of each case. Without making any
  claim to cover the field of possibilities —
  preferring to deal with this issue in the context
  of concrete factual situations presented for
  decision — we offer some examples of how this
  element might be satisfied. A RICO pattern may
  surely be established if the related predicates
  themselves involve a distinct threat of long-term
  racketeering activity, either implicit or explicit.
  Suppose a hoodlum were to sell "insurance" to a
  neighborhood's storekeepers to cover them against
  breakage of their windows, telling his victims he
  would be reappearing each month to collect the
  "premium" that would continue their "coverage."
  Though the number of related predicates involved
  may be small and they may occur close together in
  time, the racketeering acts themselves include a
  specific threat of repetition extending
  indefinitely into the future, and thus supply the
  requisite threat of continuity. In other cases, the
  threat of continuity may be established by showing
  that the predicate acts or offenses are part of an
  ongoing entity's regular way of doing business.
  Thus, the threat of continuity is sufficiently
  established where the predicates can be attributed
  to a defendant operating as part of a long-term
  association that exists for criminal purposes. Such
  associations include, but extend well beyond, those

  grouped under the phrase "organized crime." The
  continuity requirement is likewise satisfied where
  it is shown that the predicates are a regular way
  of conducting defendant's ongoing legitimate
  business (in the sense that it is not a business
  that exists for criminal purposes), or of
  conducting or participating in an ongoing and
  legitimate RICO "enterprise."

Id., 109 S.Ct. at 2900-02.

The Court construed the term "pattern" as requiring plaintiffs or prosecutors to prove ". . . continuity of racketeering activity, or its threat, simpliciter. This may be done in a variety of ways, thus making it difficult to formulate in the abstract any general test for continuity." Id., 109 S.Ct. at 2901.

The term "pattern of racketeering" had been previously defined by the Second Circuit as requiring similar proof. Very recently in United States v. Indelicato, 865 F.2d 1370 (2d Cir. 1989), this Circuit, en banc, defined the meaning of the term "pattern of racketeering", which definition is binding on this Court:

  [P]roof of two acts of racketeering activity
  without more does not suffice to establish a RICO
  pattern; . . . the concepts of relatedness and
  continuity are attributes of activity, not of a
  RICO enterprise, and . . . . a RICO pattern may not
  be established without some showing that the
  racketeering acts are interrelated and that there
  is continuity or a threat of continuity; . . . a
  pattern may be established without proof of
  multiple schemes, multiple episodes, or multiple
  transactions; and . . . racketeering acts that are
  not widely separated in time or space may
  nonetheless, given other evidence of the threat of
  continuity, constitute a RICO pattern.

Id. at 1381. (emphasis added)

  The degree to which these factors establish a
  pattern may depend on the degree of proximity, or
  any similarities in goals or methodology, or the
  number of repetitions. Congress' elaboration on
  the concept of pattern in connection with its
  provision in 18 U.S.C. § 3575(e) for
  dangerous special offenders is instructive. As
  discussed in Sedima's footnote 14, [Sedima,
  S.P.R.L. v. Imrex Co., 741 F.2d 482 (2d Cir. 1984),
  rev'd, 473 U.S. 479, 105 S.Ct. 3275, 87 L.Ed.2d 346
  (1985)] that section provided that criminal conduct
  would form a pattern if it embraced criminal acts
  that had for example, "the same or similar
  purposes, results, participants, victims, or
  methods of commission." 18 U.S.C. § 3575(e)
  (1982), repealed by Sentencing Reform Act of 1984,
  Pub.L. No. 473, tit. II, Sections 212(a)(1) and
  (2), 235(a)(1), 98 Stat. 1987, 2031.

Indelicato, at 1382.

The allegations in the indictment in this case satisfy the Indelicato requirements. The Government alleges in the indictment that the racketeering acts are interrelated and that there is a threat of continuity, if not continuity in fact. "The validity of the indictment is to be tested by its allegations, not by defense counsel's forecast of the . . . evidence," so that a technically sufficient indictment "is not subject to dismissal on the basis of factual questions, the resolution of which must await trial." United States v. Black, 291 F. Supp. 262, 264 (S.D.N.Y. 1968) (Weinfeld, J.)

Lower federal courts have found the specific provisions challenged by defendants here as well as other related provisions not to be vague. United States v. Tripp, 782 F.2d 38, at 41-42 (6th Cir. 1986) (rejecting contention that definition of "racketeering activity" is void for vagueness); United States v. Ruggiero, 726 F.2d 913, 923 (2d Cir. 1984); United States v. Scotto, 641 F.2d 47, 52 (2d Cir. 1980), cert. denied, 452 U.S. 961, 101 S.Ct. 3109, 69 L.Ed.2d 971 (1981); United States v. Huber, 603 F.2d 387, 393 (2d Cir. 1979), cert. denied, 445 U.S. 927, 100 S.Ct. 1312, 63 L.Ed.2d 759 (1980); United States v. Swiderski, 593 F.2d 1246 (D.C. Cir. 1978), cert. denied, 441 U.S. 933, 99 S.Ct. 2056, 60 L.Ed.2d 662 (1979) (Section 1962(c) not vague and, in particular, terms "enterprise," "employed by or associated with," "directly and indirectly in the conduct of such enterprise's affairs through a pattern of racketeering

***************[PLEASE INSERT FDS73889]***************


Chartwell contends that the Amended Rights Plan violates the "anti-discrimination" provisions of Section 501(c) of the NYBCL, which requires, subject to certain exceptions, that "each share shall be equal to every other share of the same class." The statutory exceptions are primarily those permitted by Section 505(a)(2), which expressly permits a corporation to "void," or preclude the exercise of, rights or options held by an "interested person," a term defined in Section 912 as a holder of 20% of the stock. This exception was inserted into the anti-discrimination statute by legislative amendment on December 21, 1988.

Both sides assume, for purposes of this claim, that the original Plan did not violate the equality requirement of Section 501(c) because it conformed to the exception permitted by Section 505(a)(2), being a voiding of options held by a 20% holder. Chartwell contends that the reduction of the non-redeemability threshold to 12.5% is a discrimination that is not protected by Section 505(a)(2) and violates Section 501(c).

The stated purpose of the New York legislature in enacting the 1988 amendments to Sections 501 and 505 was to allow corporate boards "sufficient time to evaluate offers or bids made by any party for all or part of the shares of the corporation, and to determine and pursue whatever course of action promotes the best long-term interests and short-term interests of the corporation and its shareholders." Legislative Findings and Declaration, Section 1 of L. 1988, c. 743. The legislature stated that it found "the ability to restrict or condition the exercise or receipt by certain shareholders . . . of rights or options . . . will grant additional time to board of directors to evaluate such offers or bids and take appropriate action thereafter." Id.*fn2 The provision was designed specifically in response to "recent judicial decisions of certain New York courts" which prohibited corporate boards from restricting the rights of interested shareholders, and thus "may have [had] the effect of unduly shortening the time available to such boards to fully and fairly evaluate offers or bids for the corporation's shares." Id.

The judicial decision which most directly sparked the legislature's concern, and prompted the amendment of Section 505(a)(2), was Bank of New York Co., Inc. v. Irving Bank Corp., 142 Misc.2d 145, 536 N.Y.S.2d 923 (Sup. 1988). In that case, the court found that a "flip-in" amendment to a corporation's rights agreement which entitled all common shareholders except those holding 20% or more to obtain more shares at a bargain price impermissibly discriminated among shareholders in violation of Section 501, because it greatly diluted the equity and voting rights of the shareholder who crossed the 20% threshold. The court enjoined the enforcement of the flip-in provision. Id. 536 N.Y.S.2d at 926.

With the enactment of Section 505(a)(2), the legislature made the express decision that a Plan of the sort enjoined in Bank of New York could lawfully discriminate against a holder of 20% or more.*fn3 In selecting the 20% level as the line between permissible and impermissible discrimination, the legislature effected a compromise between the general anti-discrimination norms embodied in Section 501 and the clearly expressed legislative concern about the proliferation of hostile takeovers. The compromise permitted some discrimination against presumed acquirors, but set the level of permitted discrimination at 20% holdings of a company's stock.

There is of course no question that the 12.5% threshold established by the amended Plan is lower than the 20% threshold permitted by Section 505(a)(2). Chartwell contends that the discriminatory Rights Plan therefore violates Section 501(c). Avon argues that this is not the type of discrimination forbidden by Section 501(c).

Section 501(c), Avon argues, requires only that shares of stock be equal to one another. It does not forbid discrimination against stockholders. Avon argues that the discrimination effected by its amended Plan is against the holders in their role as bidders and that it is not a discrimination between shares of stock, as prohibited by Section 501(c).

I find no merit whatever in Avon's argument. Even accepting its premise that Section 501(c) forbids discrimination only among shares of stock and not among shareholders, it is unmistakably clear that Avon has created a discrimination between shares of stock.

Each share is entitled to one Right under the amended Plan. The Rights in the hands of a 12.5% owner are different from those in the hands of a holder of fewer shares. The Rights in the hands of the 12.5% holder, after the passage of ten days, face the certainty that upon that holder's crossing of the 20% activation threshold, they will be voided while the Rights of all other holders will be exercised. Because the Rights issue became nonredeemable ten days after the crossing of the 12.5% threshold, the Rights of the 12.5% holder enjoy no possibility of a future redemption that would avert the undesirable discriminatory dilution. In contrast, the Rights held by a 12.4% holder carry a significantly different advantageous feature — the continuing possibility of redemption of the Rights issue. The 12.4% holder may exercise influence on the Board in the hope of procuring redemption. Thus, the Rights of the 12.4% holder carry with them an important opportunity not carried by the Rights of the 12.5% holder — the possibility of redemption.

The difference is most clearly illustrated by imagining two nearly identical situations — the acquisition by the holders of 12.5% and 12.4% on a single day of an additional 8% of the Avon stock, bringing the holdings of each above 20%. In the case of the 12.5% holder, the Rights issue will unavoidably be activated, with all Rights holders except him purchasing additional shares at a bargain price, substantially diluting his interest. In the case of a 12.4% holder, this disastrous consequence remains avoidable; his Rights enjoy the possibility that within ten days the Rights issue may be redeemed, averting discriminatory exercise and dilution.

The argument that the shares of the 12.5% holder and the 12.4% holder are "equal" to one another has no conceivable merit. The fact that Avon can point to many respects in which the securities are equal is irrelevant. Of course, they enjoy equal voting, dividend and liquidation rights. In addition, the Rights distributed under the Plan enjoy equal right to exercise when activated by another holder's crossing of the 20% threshold.*fn4 They do not, however, enjoy equal access to the redemption of the "poison pill" directed against them. In this respect, the shares are not equal, and the amended Plan therefore violates Section 501(c).

The point can be further illustrated by the following example. Assuming that there are two competing bidders for control; one holds 12.5% of Avon's stock, while the other does not. Each makes a tender offer to acquire control of the corporation. The offeror holding less than 12.5% can offer to buy up to a majority share of the corporation's stock at a stated price, the offer being conditioned on Board of Directors redemption of the Rights Plan within ten days. In contrast, the holder of 12.5% cannot make such an offer; the Board of Directors may not redeem the Rights Plan in connection with his acquisition of 20% or more of the stock. In this sense the stock of the 12.5% holder carries a burden which is not carried by other shares, and is not equal to other shares as required by Section 501(c).

Moreover, Chartwell correctly points out that if Avon can lawfully set 12.5% as the threshold for nonredeemability, it could set the threshold at a much lower percentage as well. The evidence shows that 12.5% was selected by Avon not because of any special logic inhering in that number, but because that was the level which Chartwell had almost reached in its accumulation. Chartwell points out correctly that a Board of Directors through this device could place a formidable obstacle in the path of any accumulation of stock. This is clearly not what the legislature intended to permit when it selected 20% as the dividing line between permitted and prohibited discrimination.


The court finds that Avon's amendment to its Rights Plan violates Section 501(c) of the NYBCL.*fn5

Chartwell is entitled to the entry of declaratory judgment.


chasing further Avon stock until the invalidity of the 12.5% threshold has been established.

*fn2 Presumably, the extra time would afford the target's board additional time to react to a hostile takeover bid or to explore other alternatives in an effort to maximize stockholder value.

*fn3 Thus, the Memorandum of the Assembly Rules Committee notes that the 1988 amendment to Section 505 was intended to permit resident corporations to use poison pill rights plans to prevent or delay hostile takeovers, and to reverse judicial decisions that had declared those poison pills invalid. See New York State Legislative Annual 1988, ch. 743, at 298.

*fn4 Avon cites GAF Corp. v. Union Carbide Corp., 624 F. Supp. 1016, 1035 (S.D.N.Y. 1985), for the proposition that "nothing in New York law requires even-handed treatment of bidders." I find this case inapposite. GAF held that it was permissible for a board facing a hostile tender offer to make an exchange offer to repurchase shares of the corporation. The court noted that the exchange offer merely provided shareholders a financial alternative to tendering their shares, and left the potential acquiror free to compete with the exchange offer in the market. Nothing in GAF remotely addresses the question raised today — whether a board may take action which forecloses the possibility of redemption of "poison pill" rights in bids by one shareholder but not in bids by others. Moreover, nothing in GAF purports to address the anti-discrimination provisions of the NYBCL, much less the specific requirements of Section 505(a)(2), which was amended to its present form three years after the GAF opinion was rendered.

*fn5 I express no opinion about the legality of the 20% threshold set by the New York legislature, which is among the issues posed by the underlying declaratory judgment action brought by Avon. The current motion only challenges Avon's right to amend its Rights Plan to lower the nonredeemability threshold below 20%.


© 1992-2003 VersusLaw Inc.

Buy This Entire Record For $7.95

Official citation and/or docket number and footnotes (if any) for this case available with purchase.

Learn more about what you receive with purchase of this case.