United States District Court, Western District of New York
April 22, 1991
DOROTHY NUNDY, INDIVIDUALLY AND AS EXECUTRIX OF THE LAST WILL AND TESTAMENT OF JAMES NUNDY, DECEASED, PLAINTIFF,
PRUDENTIAL-BACHE SECURITIES, INC., AND DAVID KLASS, DEFENDANTS.
The opinion of the court was delivered by: Telesca, Chief Judge.
DECISION AND ORDER
Presently before the court are defendants' motions to dismiss
Counts VI and VII of plaintiff's complaint which allege
violations of 18 U.S.C. § 1962(a), (c) of the Racketeer
Influenced and Corrupt Organizations Act ("RICO"). For the
reasons discussed below, the defendants' motions are granted.
The facts of this case were extensively discussed in a prior
opinion of this court and therefore need only be briefly
recounted here. This action arose out of a broker customer
relationship between the plaintiff, a 71 year old widow, the
brokerage firm of Prudential-Bache, and one of its employees,
David Klass. The accounts which served as the basis of that
relationship (hereinafter referred to as the "Estate," "Margin"
and "Investment" accounts) were originally opened by the
plaintiff's husband and were under his exclusive control and
direction until the time of his death in July of 1986. Soon
after his death, the plaintiff, as the Executrix of her
husband's estate and sole legatee under his will, took
responsibility for those accounts and advised defendant Klass
that because she did not understand the securities market, she
would rely on him "to do the right thing" for her.
Plaintiff alleges, however, that between the fall of 1986 and
the fall of 1988, defendant Klass nonetheless "knowingly,
intentionally and without plaintiff's authorization and
knowledge," executed 90 purchase and sale securities
transactions for the Estate Account and 142 such transactions
for the Investment Account. All but six of these were confirmed
as "principal" transactions through a notice stating that: "We
sold to or bought from you for our own account as Principal."
Complaint at ¶¶ 23-29. The defendants did not disclose to the
plaintiff any interest or profit they may have had in these
In her original RICO count, plaintiff alleged that
defendants' conduct violated 18 U.S.C. § 1962(c), which
essentially prohibits any "person" "employed by or associated
with an enterprise" from conducting the affairs of that
enterprise through a pattern of racketeering activity. By
Decision and Order dated November 13, 1990, I dismissed this
count with leave to replead, holding that the "plain language
[of § 1962(c)] clearly envisions liability only where there is
a specified interaction between two entities, and that the same
defendant-`person' may therefore not serve in two roles at the
same time." Nundy v. Prudential-Bache, et al., slip op. at 15
(unpublished disposition); see also Official Publications, Inc.
v. Kable News Co., 884 F.2d 664, 668 (2d Cir. 1989).
In attempt to avoid this infirmity, the plaintiff has since
amended her § 1962(c) claim to allege a cause of action solely
against defendant Klass and has added a separate claim under §
1962(a) against defendant Prudential-Bache. The defendants now
move to dismiss these two counts.
1. Section 1962(a) Claim Against Prudential-Bache
Section 1962(a) provides, in relevant part:
It shall be unlawful for any person who has
received any income derived . . . from a pattern of
racketeering activity . . . to invest . . . such
income . . . in the acquisition . . ., . . .
establishment or operation of . . . any enterprise
which is engaged in . . . interstate . . .
18 U.S.C. § 1962(a) (emphasis added).
Relying on the language of the statute, Prudential-Bache
argues initially that plaintiff's § 1962(a) claim must fail
because it alleges that Prudential-Bache is both the "person"
who received racketeering income and the "enterprise" into
which such income was invested. I find this argument
unavailing. Although the Second Circuit has yet to rule on this
issue, the majority of circuits that have done so have held
that a corporate-"enterprise" may be held liable under
subsection (a) when it also acts as a perpetrator of the
alleged predicate acts. See, e.g., Yellow Bus Lines,
839 F.2d 782, 790 (D.C.Cir. 1988), reh'g denied, en banc (D.C.Cir.
1988), cert. denied, 488 U.S. 926, 109 S.Ct. 309, 102 L.Ed.2d
328 (1989); Haroco v. Amer. Nat. Bank & Trust Co. of Chicago,
747 F.2d 384, 402 (7th Cir. 1984), aff'd on other grounds,
473 U.S. 606, 105 S.Ct. 3291, 87 L.Ed.2d 437 (1985); see generally
Solovy, et. al., Current Issues in Civil RICO Litigation, at
33 (1989). These courts have reasoned, and I agree, that such a
construction of § 1962(a) is consistent both with the overall
framework of the RICO statute, as well as the terms of the
provision itself which, unlike subsection (c), contain no
language suggesting that the "person" and the "enterprise" must
be separate. See Schofield v. First Commodity Corp. of Boston,
793 F.2d 28, 31-32 & n. 2 (1st Cir. 1986);
The defendant alternatively argues that the plaintiff has
also failed to plead the type of special racketeering injury
necessary to sustain a cause of action under § 1962(a). I find
this argument more persuasive. Under the plain language of the
RICO statute, a plaintiff alleging a violation of § 1962(a)
must demonstrate that she suffered an "injury `by reason of'
defendant['s] investment of racketeering income in an
enterprise," and not merely as a result of defendant's
participation in the
predicate acts themselves. Ouaknine v. MacFarlane, 897 F.2d 75,
83 (2d Cir. 1990) (emphasis added); accord Grider v. Texas Oil
and Gas Corp., 868 F.2d 1147, 1149 (10th Cir.), cert. denied,
___ U.S. ___, 110 S.Ct. 76, 107 L.Ed.2d 43 (1989).*fn1
In this case, the plaintiff claims only that her "injury
resulted from Prudential-Bache's 226 repeated, alleged criminal
offenses and . . . that the income derived from the
racketeering activity was used by Prudential-Bache to operate
a RICO enterprise affecting interstate commerce." Plaintiff's
Mem. of Law in Opposition to Defendants' Motion to Dismiss RICO
Counts of Second Amended Complaint, at 8 (citing Complaint at
¶ 67). Since these allegations do not plead a separate injury
resulting from defendant's investment of racketeering income,
they are insufficient as a matter of law. Accordingly, the
plaintiff's sixth cause of action against defendant
Prudential-Bache is dismissed.
2. § 1962(c) Claim Against David Klass
Defendant Klass argues that plaintiff's complaint fails to
plead the requisite pattern of racketeering activity necessary
for liability under RICO. I agree.
Reduced to its essence, § 1962(c) imposes civil and criminal
liability only upon those who conduct the affairs of an
enterprise through a "pattern of racketeering activity." Moss
v. Morgan Stanley, Inc., 719 F.2d 5, 17 (2d Cir. 1983), cert.
denied, 465 U.S. 1025, 104 S.Ct. 1280, 79 L.Ed.2d 684 (1984);
18 U.S.C. § 1962(c). Although the term "pattern" is statutorily
defined as consisting of "at least two acts of racketeering
activity" within a ten year period, 18 U.S.C. § 1961(5), a RICO
count which alleges nothing more is clearly insufficient.
Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496 n. 14, 105
S.Ct. 3275, 3285 n. 14, 87 L.Ed.2d 346 (1985). Instead, under
recent Supreme Court precedent, a plaintiff alleging a pattern
of racketeering activity must demonstrate (1) that there is a
"relationship" between the predicate acts and (2) "that the
predicates themselves amount to, or that they otherwise
constitute a threat of, continuing racketeering activity." H.J.
Inc. v. Northwestern Bell Telephone Co., 492 U.S. 229, 109
S.Ct. 2893, 2901, 106 L.Ed.2d 195 (1989) (emphasis in
original). As the Court held in H.J. Inc., "[i]t is this factor
of continuity plus relationship which combines to produce a
pattern." Id., 109 S.Ct. at 2900 (emphasis in original); see
also Sedima, 105 S.Ct. at 3285 n. 14. The Court also noted that
whether a plaintiff has satisfied each of these elements
"depends upon the specific facts of each case." H.J. Inc., 109
S.Ct. at 2902.
Bearing these thoughts in mind, there is little question that
the plaintiff here has demonstrated the requisite
"relationship" between the predicate acts. This requirement is
satisfied if the acts "have the same or similar purposes,
results, participants, victims, or methods of commission,"
id. at 2901; United States v. Simmons, 923 F.2d 934, 951 (2d
Cir. 1991), all or most of which are present here.
The more difficult issue in this case is whether plaintiff
has sufficiently pled continuity. The requirement of continuity
has proven to be the most indistinct of all interpretations
given by the courts to the statutory framework of RICO. See
generally Van Graafeiland, J., RICO and the Rule of Lenity, 9
N.Ill.L.Rev. 331, 335-337 (1989). In attempt to provide
guidance and better define its boundaries, the Court in H.J.
Inc. stated that the continuity requirement is best viewed as
"centrally a temporal concept," one which can apply "either to
a closed period of repeated conduct, or to past conduct that by
its very nature projects into the future with a threat of
repetition." 109 S.Ct. at 2902. The court held that where, as
here, the racketeering conduct is alleged to have occurred
during a closed period, continuity could only be shown by
proving that the acts were neither "isolated" nor "sporadic"
but instead extended over a "substantial period of
time." Id. The Court reasoned that because Congress was
concerned in RICO with only "long-term criminal conduct,"
"[p]redicate acts extending over a few weeks or months and
threatening no future criminal conduct" could not be deemed as
sufficient grounds for imposing liability. Id. & n. 4.
Since the Court's decision in H.J. Inc., the lower courts
construing the continuity requirement have focused on a number
of other factors in addition to the temporal span of the
predicate acts. These factors include the number of
participants and/or victims involved, the complexity of the
scheme alleged, the occurrence of distinct injuries, and, more
generally, the "`overall context in which the acts took
place,'" Azurite Corp. Ltd. v. Amaster & Co., 730 F. Supp. 571,
580-81 (S.D.N.Y. 1990) (citations omitted); see also Polycast
Tech. Corp. v. Uniroyal, Inc., 728 F. Supp. 926, 948 (S.D.N Y
1989) (collecting cases); Airlines Reporting Corp. v. Aero
Voyagers, Inc., 721 F. Supp. 579, 584 (S.D.N.Y. 1989); Lenczycki
v. Shearson Lehman Hutton, Inc., Fed.Sec.L.Rep. ¶ 95,615
(S.D.N.Y. 1990) (Avail on Westlaw 1990 WL 151137).
Considering these factors as well as the teachings of
H.J. Inc., I find that the plaintiff has failed to plead
sufficient facts to satisfy the continuity requirement. Viewed
in its entirety, the plaintiff has alleged nothing more than a
discrete, short-lived and straightforward securities scheme
involving at most, only two perpetrators and one victim. Cf.
Azurite, 730 F. Supp. at 581 (allegations of various acts of
mail and wire fraud over 7 month period, without more,
insufficient to establish continuity); Lowenbraun v. L.F.
Rothschild, Unterberg, Towbin, 685 F. Supp. 336, 340 (S.D.N Y
1988) (churning involving 119 transactions over the course of
16 month period insufficient). Moreover, while some 226 acts of
racketeering are alleged to have occurred, those acts were all
identical or similar in nature and gave rise to the same type
of injury.*fn2 Aero, 721 F. Supp. at 584. Furthermore, there is
nothing in plaintiff's complaint to suggest that defendants
committed these same or similar acts either before or after
those alleged in the complaint, or that they otherwise pose a
threat of similar misconduct in the future. Id.; Newman v. L.F.
Rothschild, Unterberg, Towbin, 677 F. Supp. 146, 147-148
(S.D.N.Y. 1987). In sum, I find that defendant's alleged
securities fraud scheme neither amounts to, nor constitutes a
threat of continuous racketeering activity, and therefore does
not demonstrate that kind of long-term criminal conduct
envisioned by Congress as violative of RICO. Accordingly,
plaintiff's seventh cause of action against David Klass is
Defendants' motions to dismiss plaintiff's sixth and seventh
causes of action is granted.
ALL OF THE ABOVE IS SO ORDERED.