Plaintiff's employment agreement without cause -- and force Plaintiff to resort to litigation to collect the payment, unless Plaintiff ceded his rights in the Voting Agreement.
In light of the foregoing -- which Plaintiff characterizes as "coercion and duress," Compl. P 77 -- Plaintiff agreed to terminate and cancel the Voting Agreement. A Termination Agreement and a Settlement Agreement were executed between Spartech and Plaintiff in November 1991, wherein Plaintiff formally agreed to terminate the Voting Agreement. Plaintiff also agreed to resign as Spartech's Chief Executive Officer and Chairman of the Board and accept the consulting arrangement first offered to him by Cassidy. The Settlement Agreement deferred payment of Plaintiff's severance. By terms of these agreements, Plaintiff relinquished, inter alia, his veto right, described supra, and his power to designate four members of the board of directors.
Upon Plaintiff's resignation and termination of the Voting Agreement, BV and TCW assumed shared control of Spartech. Given TCW's expressed desire to ultimately liquidate its share in Spartech, and because, according to Plaintiff, BV is now the sole practical purchaser of that share, TCW defers to BV on all Spartech matters (other than the price at which TCW will sell its share of Spartech). BV, therefore, especially given the relationship Defendants have forged with Buechler, has achieved effective control of Spartech -- the result, Plaintiff contends, that BV all along intended.
During the period from September through December 1991, out of a desire to reduce its debt, Spartech formulated, and eventually approved, a plan for recapitalization ("Recapitalization Plan" or "Plan"). Although still a director, Plaintiff was excluded from negotiations concerning the Plan, and did not learn of it until December 1991. Prior to final approval of the Plan, Plaintiff objected on more than one occasion to Spartech's failure to make recapitalization adjustments to minority interests. Spartech's board of directors, including Plaintiff, approved the Plan on May 1, 1992.
The Plan called for, inter alia, BV and TCW to exchange their subordinated debt and existing preferred stock for newly authorized convertible preferred stock and common stock. In addition, BV was permitted to purchase shares of newly authorized preferred stock (convertible into 750,000 shares of common stock later in 1992) for cash. In all, the Plan provided for the issuance of 3,540,000 shares of common stock and four new series of preferred common stock convertible into 15,024,635 common shares. No shareholders or option holders other than BV and TCW, however, participated in or benefited from the Plan.
As a result of the Plan, BV and TCW strengthened their combined control position in Spartech in exchange for far less value than they gave. Spartech's outstanding common stock after conversion or exercise of rights in all convertible securities and options increased from 14,800,000 to 26,000,000. BV's total share upon conversion is nearly 33.5% (from 5,200,000 to approximately 8,700,000 shares). TCW's share upon conversion is approximately 31% (from 2,400,000 to approximately 8,100,000 shares). Thus, the combined share of Spartech held by BV and TCW is nearly 65%.
The benefits that accrued to BV and TCW from the Plan came at the expense of Plaintiff and other public shareholders and option holders. Prior to the Plan, Plaintiff and the other public holders of Spartech securities collectively held 4,700,000 shares out of 14,800,000 shares (after conversion) of Spartech common stock. These same shareholders now own 4,700,000 shares out of 26,000,000 shares outstanding (after conversion). The total minority position has thus declined from 31% to 18%. Plaintiff's personal position in Spartech, once 22%, has declined to 8% (including options convertible to common stock). Plaintiff's actual interest in Spartech, however, has been effectively diluted to 3%, since the exercise price of these options makes it unlikely that it will ever be economical for Plaintiff to actually convert them to common stock.
Plaintiff asks this Court to, in effect, read his Complaint in Homeric terms. Plaintiff, as King Priam, bravely battles to stave off the marauders invading from across the sea -- ably played by Defendants -- only to be undone by an acquisitive Trojan Horse. That fateful equine -- artfully disguised as a benign exchange of capital for minority control and a promise to permit Plaintiff to remain in power -- is welcomed into Plaintiff's kingdom, carrying in its belly a perfidious plot to wrest from Plaintiff his Spartech. Once inside Spartech's corporate walls, however, the betrayal lurking in the beast is unleashed, Plaintiff undermined, and Spartech, like Troy, conquered from within. Plaintiff, afforded an opportunity unavailable to Priam, comes to this Court seeking redress from Defendants on the theories of RICO and common-law fraud. Defendants move to dismiss.
The standard for disposing of a Rule 12(b)(6) motion to dismiss a RICO claim is well-established. Such a motion should be granted "only if 'it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations.'" McLaughlin v. Anderson, 962 F.2d 187, 190 (2d Cir. 1992) (quoting H.J., Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 249-50, 106 L. Ed. 2d 195, 109 S. Ct. 2893 (1989) (citations omitted)). On the motion, this Court must "read the facts alleged in the complaint in the light most favorable" to the non-moving party. H.J., Inc., 492 U.S. at 249. This approach comports with the traditional standard applied to motions to dismiss generally. See California Motor Transp. v. Trucking Unlimited, 404 U.S. 508, 515, 30 L. Ed. 2d 642, 92 S. Ct. 609 (1972); accord Brass v. American Film Technologies, Inc., 987 F.2d 142, 150 (2d Cir. 1993); Allen v. Westpoint-Pepperell, Inc., 945 F.2d 40, 44 (2d Cir. 1991); Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47-48 (2d Cir. 1991), cert. denied, 118 L. Ed. 2d 208, 112 S. Ct. 1561 (1992); Frasier v. General Elec. Co., 930 F.2d 1004, 1007 (2d Cir. 1991). Defendants are entitled to dismissal of both the RICO and the common-law fraud counts only if this Court finds beyond a doubt that Plaintiff "can prove no set of facts" to support his claims of entitlement to relief. See Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957).
Plaintiff's civil RICO claim, contained in Count II of his Complaint, and alleging violation of 18 U.S.C. § 1962(b), cannot survive Defendants' motion to dismiss. The Court assumes, arguendo, that Plaintiff has standing under 18 U.S.C. § 1964 to advance a civil RICO claim. The RICO claim fails, however, because Plaintiff can prove no set of facts consistent with the allegations of the Complaint that would establish that Defendants engaged in racketeering activity in violation of 18 U.S.C. § 1962(b).
The pleading requirements for a civil RICO action in the Second Circuit are well-established.
[Plaintiff] must allege the existence of seven constituent elements: (1) that the defendant (2) through the commission of two or more acts (3) constituting a "pattern" (4) of "racketeering activity" (5) directly or indirectly invests in, or maintains an interest in, or participates in (6) an "enterprise" (7) the activities of which affect interstate or foreign commerce.
Moss v. Morgan Stanley Inc., 719 F.2d 5, 17 (2d Cir. 1983) (citing 18 U.S.C. § 1962(a)-(c)), cert. denied, 465 U.S. 1025 (1984). The dispositive issues in the present case concern the sufficiency of pleading with regard to only two of the foregoing elements -- "racketeering activity" and "pattern."
Plaintiff fails to sufficiently allege racketeering activity. Among the crimes that can constitute racketeering activity for the purposes of a civil RICO claim are: (1) any act indictable under 18 U.S.C. § 1341 (relating to mail fraud) or 18 U.S.C. § 1343 (relating to wire fraud); and (2) "any offense involving . . . fraud in the sale of securities" punishable under federal law. See 18 U.S.C. § 1961(1)(B) and (D).
Plaintiff's mail and wire fraud claims are not sufficiently pleaded to withstand a motion to dismiss, because Plaintiff has not shown the requisite strong inference of fraudulent intent.
Plaintiff classifies as predicate acts constituting racketeering activity eleven "bundles" of wire transmissions, Compl. P 113, and three "bundles" of mailings, id. P 115, in which Defendants participated. The elements of mail and wire fraud that Plaintiff must show to survive a motion to dismiss are: (1) a scheme to defraud, and (2) knowing use of interstate mails or transmission facilities to further the fraud. United States v. Gelb, 700 F.2d 875, 879 (2d Cir.), cert. denied, 464 U.S. 853 (1983).
An allegation of intentional fraud is necessary for a pleading of a scheme to defraud. Beck v. Manufacturers Hanover Trust Co., 820 F.2d 46, 49 (2d Cir. 1987) (citations omitted), cert. denied, 484 U.S. 1005 (1988), overruled by, United States v. Indelicato, 865 F.2d 1370 (2d Cir. 1989) (en banc) (overruling Beck on issue of what constitutes "pattern" for purposes of RICO statute). A simple allegation of fraudulent intent is not sufficient, despite the generally liberal requirements of Rule 9(b) of the Federal Rules of Civil Procedure concerning pleadings of intent and other "condition[s] of mind." Id. at 50 (quoting Fed. R. Civ. P. 9(b)). On the contrary, a claim must
provide some factual basis for conclusory allegations of intent . . . [that] give rise to a "strong inference" that the defendants possessed the requisite fraudulent intent.
Id. (citations omitted); accord Ouaknine v. MacFarlane, 897 F.2d 75, 80 (2d Cir. 1990). Such a strong inference is established in one of two ways:
[(1) by] alleging facts showing a motive for committing fraud and a clear opportunity for doing so, or (2) where motive is not apparent, . . . by identifying circumstances indicating conscious behavior by the defendant.