WERE NOT DETERMINED BY ARM'S LENGTH NEGOTIATIONS WITH THE PARTNERSHIP." See Tree Lake PPM at 51.
There was no apparent misrepresentation, and plaintiffs' allegations regarding the payment of fees accordingly fails to state a claim.
The Complaint is further deficient in its allegation of the scienter element. For liability to attach under Section 10(b), plaintiffs must plead and prove scienter on the part of each of the defendants. As noted above, plaintiffs' allegations regarding scienter are plainly insufficient to charge each of the defendants with intentional fraudulent conduct -- it is not enough to argue that all of the defendants are insiders who earned substantial sums from the syndications. Luce and DiVittorio only held that the strict requirements of Rule 9(b) apply more liberally in very limited circumstances as to those who participated in drafting an allegedly fraudulent prospectus. The Second Circuit recently warned that Luce and DiVittorio "must not be mistaken for license to base claims of fraud on speculation and conclusory allegations." Wexner v. First Manhattan Co., 902 F.2d 169, 172 (2d Cir. 1990). "[A] complaint must adduce specific facts supporting a strong inference of fraud or it will not satisfy even a relaxed pleading standard." Id.
2. Mail Fraud
The Complaint also fails adequately to allege the predicate violations of the mail and wire fraud statutes, 18 U.S.C. §§ 1341, 1343. The mail fraud statute provides in relevant part that:
whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations or promises, . . . for the purpose of executing such scheme or artifice (or attempting to do so) fuses the mails or causes them to be used) shall not be fined more than $ 1,000 or imprisoned not more than five years, or both.
The applicable language of the wire fraud statute is nearly identical and the same analysis is applicable to both statutes. Carpenter v. United States, 484 U.S. 19, 25, 98 L. Ed. 2d 275, 108 S. Ct. 316 n. 6 (1987). A RICO claim predicated on mail or wire fraud must specify (1) which defendants used the mail or wire services; (2) what was transmitted; (3) the date of the transmission; and (4) to whom the communication was sent. Antonoff v. Bushell, 1991 U.S. Dist. LEXIS 7167, 1991 WL 95433 (S.D.N.Y. 1991).
Plaintiffs conclusorily allege the use of mail and wire services as follows:
(a) Defendants utilized the United States mails in furtherance of their scheme to defraud, in violation of 18 U.S.C. § 1341, by repeatedly mailing or causing to be mailed to plaintiffs the Memoranda and other offering materials to plaintiffs and utilizing the mails to communicate among themselves and with third parties.
(b) Defendants utilized interstate wire communications in furtherance of their scheme to defraud, in violation of 18 U.S.C. § 1343, by, communicating among themselves, with third parties on the telephone on numerous occasions throughout the course of their scheme, concerning the 'investments.'
Cmplt. at P37. Such allegations are insufficient to plead the predicate acts of mail or wire fraud.
In sum, plaintiffs have not pleaded adequately the RICO predicate acts of mail fraud, wire fraud, or securities fraud. Accordingly, plaintiffs' claim against defendants for violation of Section 1962(c) is dismissed without prejudice.
Plaintiffs' RICO conspiracy allegation also fails to state a claim. 18 U.S.C. § 1962(d) requires an allegation that a "defendant himself at least agreed to commit two or more predicate crimes." United States v. Ruggiero, 726 F.2d 913, 921 (2d Cir.), cert. denied, 469 U.S. 831, 105 S. Ct. 118, 83 L. Ed. 2d 60 (1984). The defendant need not have committed the acts; only the agreement to commit the statutorily prescribed conduct is required. United States v. Teitler, 802 F.2d 606, 613 (2d Cir. 1986). The Complaint alleges:
All of the defendants conspired among themselves to further the scheme to defraud, which was in violation of 18 U.S.C. § 1962(c) as described above. By knowingly and willingly participating in the conspiracy, defendants violated 18 U.S.C. § 1962(d).
Cmplt. at P44. Such an allegation falls short of alleging that each defendant personally agreed to commit two or more predicate acts. See Friedman, 730 F. Supp. at 548-49 (allegation that defendants "conspired to and did participate in the conduct of the above enterprise's affairs through a pattern of racketeering activity . . ." insufficient to satisfy the requirements of Section 1962(d)); Reinfeld v. Riklis, 722 F. Supp. 1077, 1084 (S.D.N.Y. 1989) (allegation that defendants "committed, caused to be committed, or agreed to the commission of  the predicate crimes alleged. . ." insufficient to state a claim under Section 1962(d)). To state a claim under Section 1962(d), it is not enough to allege that the defendant agreed that the crimes should be committed by others. Zola v. Gordon, 685 F. Supp. 354, 377 (S.D.N.Y. 1988).
Rule 9(b) does not require the particularized pleading of the conspiracy itself in a RICO claim. Hecht v. Commerce Clearing House, Inc., 897 F.2d 21, 26 n.4 (2d Cir. 1990). The pleading of a conspiracy is subject to the more liberal requirements of Rule 8(a). "Even so, the complaint must allege some factual basis for a finding of a conscious agreement among the defendants." Id.; Landy v. Heller, White & Co., 783 F. Supp. 125 (S.D.N.Y. 1991). In the instant action, there are no factual allegations supporting an inference that the various defendants consciously agreed to become part of a RICO conspiracy. Accordingly, plaintiffs' claim against defendants for violation of Section 1962(d) is dismissed without prejudice.
Controlling Person Liability under RICO
The Complaint in the instant action also includes a RICO claim against Primerica, BEI, and Berg, alleging both controlling person liability and direct liability on the part of those defendants. Vigorously disputing the RICO claim, the Berg defendants argue that the allegations against it are far too vague and conclusory to support the claim.
This Court has previously held that in order to connect a controlling person with a RICO claim, a plaintiff must establish facts that show criminal liability on the part of the controlling person for the controlled person's acts, because section 1961 defines acts to be racketeering only if they are among the enumerated felonies punishable under the laws of the United States. See Bingham v. Zolt, 683 F. Supp. 965, 974 (S.D.N.Y. 1988); Frota v. Prudential-Bache Securities, Inc., 639 F. Supp. 1186, 1192 (S.D.N.Y. 1986); Levine v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 639 F. Supp. 1391, 1396 (S.D.N.Y. 1986). In order for a controlling person to be held criminally liable under [section 20 of the 1934 Act], it must be shown that the controlling person knowingly used the controlled person to commit the illegal act." Frota, 639 F. Supp. at 1192.
In the instant case, the Complaint fails adequately to allege that Primerica or BEI themselves committed any of the requisite predicate acts or acted with the requisite criminal intent. The Complaint describes BEI only as "a public company whose shares were listed on the New York Stock Exchange," Cmplt. at P5(e), and Primerica as a corporation which acquired BEI in early 1985 for more than $ 30 million, Cmplt. at P5(v). The Complaint does not allege that Primerica or BEI played any part in the alleged misdeeds or had any knowing involvement in the purported fraud.
Nor can the Court say at this time that the Complaint sufficiently alleges that Berg himself committed any of the requisite predicate acts or acted with the requisite criminal intent. Although the Complaint does allege that "the principle architects of the fraudulent scheme were Harmon and Berg" and that "Harmon, Berg and entities formed and controlled by them decided to utilize devices which amounted to an elaborate 'Ponzi' or pyramid scheme," such allegations are wholly conclusory in nature. Moreover, while Berg's status as president and chairman of the board of two entities which participated as joint venturers in entities which were general partners of certain Berg Harmon partnerships may suffice to tie him to misrepresentations in offering materials, it is not clear whether there remain any actionable misrepresentations or omissions for which Berg is alleged to be responsible. Accordingly, the RICO claim as against Primerica, BEI, and Berg is dismissed without prejudice.
Pendent State Law Claims
Dismissal of pendent state law claims is appropriate where the federal claims to which they were appended have been dismissed by the Court. See United Mine Workers v. Gibbs, 383 U.S. 715, 16 L. Ed. 2d 218, 86 S. Ct. 1130 (1966). However, in light of the court's ruling that plaintiffs shall have a limited opportunity to amend the Complaint, dismissal of the state law claims is premature. Similarly, the Court will not rule at this time on defendants' assertion that the Complaint fails to state a claim under state law with respect to fraud, negligence, and breach of fiduciary duty.
For the foregoing reasons, plaintiffs' Second Amended Complaint is dismissed without prejudice pursuant to Fed. R. Civ. P. Rules 9(b) and 12(b)(6). Plaintiffs shall have leave to replead within thirty days from the date of this decision those claims which the Court has dismissed without prejudice.
Dated: New York, New York
April 7, 1992
William C. Conner
United States District Judge