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December 22, 1993



The opinion of the court was delivered by: PETER K. LEISURE

LEISURE, District Judge

 This is a derivative action brought by shareholders of the American Express Company ("American Express") against several former and current directors (the "Directors") and officers of American Express. Count one of the First Amended Consolidated Complaint (the "Complaint") alleges that certain of the Directors violated section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. 78(n)(a) ("Section 14(a)"), and Rule 14a-9 of the Securities Exchange Commission, 17 C.F.R. § 240.14a-9 ("Rule 14a-9"). Count two of the Complaint alleges that all of the individual defendants in this action violated their fiduciary duties as directors and officers of American Express. Count three of the Complaint alleges that defendants Robert Smith ("Smith"), Susan Cantor ("Cantor"), and Harry L. Freeman ("Freeman") (collectively, the "RICO Defendants") violated sections 1962(c) and (d) of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-68.

 The defendants move to dismiss the Section 14(a) claim pursuant to Fed. R. Civ. P. 12(b)(6), to dismiss the RICO claim pursuant to Fed. R. Civ. P. 9(b) and 12(b)(6), and to dismiss the claim for breach of fiduciary duty pursuant to Fed. R. Civ. P. 12(b)(1). The Directors also move, in the alternative, for a stay of this action. For the reasons stated herein, the Complaint is dismissed in its entirety.


 The instant suit arises out of an alleged campaign by senior officers of American Express to defame Edmond J. Safra ("Safra"), a former Vice Chairman and Director of American Express. According to the Complaint, Safra severed his ties with American Express in 1984. Approximately four years later, executives at American Express became concerned when they learned that Safra was planning to open a bank in Switzerland. To thwart his plans, the Chairman of American Express, James D. Robinson ("Robinson"), Smith, Freeman and Cantor allegedly concocted a scheme to disseminate false and defamatory information regarding Safra.

 In early 1988, Cantor met with a private investigator named Antonio Giuseppe Greco ("Greco") and offered him $ 500,000 to facilitate the publication of adverse stories about Safra. Greco succeeded in causing various defamatory stories to be published, in one instance by paying $ 18,000 to the Press Secretary to the President of Peru.

 In March 1988, in the midst of the alleged campaign to defame Safra, the Directors of American Express distributed a Proxy Statement (the "1988 Proxy Statement") to American Express shareholders seeking their approval of amendments to American Express's by-laws and corporate charter (the "Raincoat Provisions") (1) indemnifying American Express's directors for liability in the absence of a judgment establishing bad faith, deliberate dishonesty, or personal benefit and (2) prospectively limiting the directors' liability for breach of duty to cases involving bad faith, intentional misconduct, personal profit, or violations of a state dividend statute. The shareholders approved the Raincoat Provisions.

 In June of 1989, Safra confronted Robinson with information he had obtained regarding American Express's campaign to defame him. On July 28, 1989 American Express issued a public apology to Safra for its efforts to injure his reputation and announced that it would donate $ 8 million to charities of his choosing.

 On August 7, 1989, plaintiffs sent a letter to the Board of Directors of American Express, seeking the institution of legal proceedings with respect to claims against officers, directors and employees who had been involved in the Safra matter. Complaint at P 177. After the completion of an investigation by American Express's Audit Committee, the nonmanagement directors of American Express passed a resolution that it was not in the best interests of American Express to initiate litigation with respect to the Safra matter. Plaintiffs made a second demand upon the Directors to initiate litigation, and in October 1990 this second demand was also refused.

 In early 1991, plaintiffs filed three suits that were consolidated pursuant to Fed. Rule Civ. P. 42(a). On June 30, 1992 the plaintiffs filed the First Amended Consolidated Complaint at issue here. The Complaint alleges violations of RICO based on predicate acts of bribery and mail and wire fraud relating to the Safra matter; violations of Section 14(a) and Rule 14a-9 by issuance of the 1988 Proxy statement; and violations of breach of fiduciary duty. In August of 1992, the defendants moved this Court to dismiss the Complaint.



 A. Proximate Cause

 The defendants contend that the Complaint fails to state a claim upon which relief can be granted because plaintiffs' alleged injuries were not proximately caused by the defendants' RICO violations. The injuries include reputational harm to American Express and the costs of carrying out the Safra defamation campaign and of the subsequent settlement agreement with Safra.

 In Holmes v. Securities Investor Protection Corp., 117 L. Ed. 2d 532, 112 S. Ct. 1311 (1992) the Supreme Court held that proximate cause, a legal concept derived from tort law, is an aspect of the requirement under section 1964(c) of RICO that a plaintiff demonstrate he has been injured "by reason of" the defendant's violation of RICO. 112 S. Ct. at 1318, 1322. The Court described this doctrine as traditionally requiring "some direct relation between the injury asserted and the injurious conduct alleged." 112 S. Ct. at 1318. Thus, "a plaintiff who complained of harm flowing merely from the misfortunes visited upon a third person by the defendant's acts was generally said to stand at too remote a distance to recover." Id. In Holmes, the defendants had allegedly engaged in a scheme of stock manipulation causing certain securities broker dealers to become insolvent and consequently unable to meet obligations to their customers. The plaintiff claimed to be subrogated to the rights of these customers. Id. at 1319. The Supreme Court held, however, that the link between the stock manipulation and the injury to the customers was too remote. Id.

 Holmes endorsed what had been the law of this Circuit since the United States Court of the Appeals for the Second Circuit (the "Second Circuit") rendered its decision in Sperber v. Boesky, 849 F.2d 60 (2d Cir. 1988). In that case, the Second Circuit held that the injuries to the plaintiff stock purchasers had not been proximately caused by the defendant's alleged violation of RICO. The Court noted that the plaintiffs were "neither the target of the racketeering enterprise nor the competitors nor the customers of the racketeer." Id. at 65.

 The plaintiffs in the instant case were plainly not "remote" in the same sense as the plaintiffs in Holmes and Sperber. The plaintiffs were injured not through the anonymous forces and complex interrelationships of the marketplace, but rather through their ownership of a corporation whose officers allegedly violated RICO. However, proximate cause is not limited to the concept of remoteness. In Hecht v. Commerce Clearing House, Inc., 897 F.2d 21 (2d Cir. 1990), an employee alleged that he had been fired for his unwillingness to participate in his employer's RICO violations. Id. at 22. The employee also claimed that his commissions had decreased because customers of his employer cancelled subscriptions upon learning of the RICO fraud. The Second Circuit held as follows:

Although Hecht's loss of employment may have been factually caused by defendants' RICO violations, it was not a foreseeable natural consequence sufficient for proximate causation.
For similar reasons, Hecht's injury from loss of commissions does not confer standing . . . Hecht's loss of commissions may have been factually caused by RICO violations, but was not proximately caused by the violations. Because Hecht was "neither the target of the racketeering enterprise nor the competitor[] nor the customer[] of the racketeer[s]," see Sperber, 849 F.2d at 65, the injury to Hecht from customers' deciding to cancel subscriptions or to withdraw ...

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