Alan Gould knew that the shenanigans described in Scheme I might preclude him from future business with the Government, so he formed ATA/Relocate under fraudulent pretenses. He named his wife and co-defendant, Lola R. Gould President and sole shareholder, thus disguising his dominant and ubiquitous participation in the corporation. Compl. PP 48-54.
Thirdly, defendants schemed to defraud plaintiff by not revealing that as of June 21, 1989, Ship-Rite was suspended from business as a result of its shady business practices and suspended from all future business dealings with the United States. Compl. P 55.
Fourthly, ATA fraudulently obtained contracts with the Government. It duped the United States into thinking it was a company wholly separate from Ship-Rite by filing false affidavits indicating, among other assertions, that Lola Gould was the dominant player in the company. For example, plaintiff alleges that a Guaranteed Traffic Carrier Qualification Statement (hereinafter "GTCQS"), filed to obtain qualified freight motor carrier authority, contained false statements to the extent it claimed that Lola Gould had forty-one years of experience in the transportation industry when in fact she had none, and that no other entity would assist in the fulfillment of the contract. It also failed to disclose Alan Gould's involvement in the company. Compl. PP 56-60; Exh. "C."
Conversely, this fraud was thrust upon plaintiff and others in a different light when defendants asserted that the shift to ATA was merely a name change from Ship-Rite. Plaintiff alleges that all efforts were made to insure that third parties, such as plaintiff, believed that Ship-Rite and ATA/Relocate were effectively the same company so that they would continue business dealings with them, while the same defendants took great strides to convince the Government of just the opposite: that ATA and Ship-Rite were two distinct and separate companies, so that the Government would award contracts to ATA/Relocate. Compl. PP 62-66.
The fifth scheme alleges that in late-1989 and 1990, the defendants fraudulently continued its operation of ATA knowing that Ship-Rite was under imminent suspension and insolvency by reason of the on-going investigation and the qui tam action, yet used ATA as a vehicle for its fraud. Compl. PP 67-70.
The sixth and final scheme alleged by plaintiff involves ATA/Relocate's contracts with the United States. ATA did get contracts with the United States, obtained and performed through Relocate. In order to get a contract to transport goods for the United States, it is necessary for the applying entity to obtain a Standard Carrier Alpha Code (hereinafter "SCAC") which identifies a particular contract dealing. The number of SCACs a company has is relative to the types of ICC operating authorities it possesses. Relocate only had one SCAC, based on ATA's motor carrier authority, while ATA had two SCACs: one as a freight forwarder and one as a motor carrier. Plaintiff alleges that the United States and defendants entered into their contract based solely on Relocate's motor carrier authority, which the Government believed to be separate and distinct from ATA. As this contract was made with Relocate as a motor carrier, meaning it would actually transport the goods, and was not a freight forwarder, Relocate did not have the authority to broker with plaintiff or others for transportation services.
In effect, Relocate was hired by the Government to actually transport the goods themselves and therefore they could not broker this freight and hire someone else to transport it.
In fact, ATA/Relocate submitted GTCQSs to the Government stating that no other company would assist them in the transportation of the goods. Compl. PP 58, 71-81.
Within the context of this scheme, defendant committed fraud by altering the bills of lading involved, as Ship-Rite had allegedly done earlier. The tender for the contract between the U.S. and Relocate was identified by the number REAA0002, yet, it appears that defendants altered the U.S. Government Bills of Lading (hereinafter "USGBL") to reflect a different tender, identified by REAA00004, which represents a higher rate. Compl. P 82-86.
According to custom and law, the "delivering carrier" who presents a USGBL is entitled to full and immediate payment of all charges. Compl. P 87. Under the agreement, Relocate was hired to be the delivering carrier, but in fact, Relocate turned around and hired plaintiff to find another delivering carrier. To ensure that plaintiff's hire did not receive the full payment when it presented the USGBL with the goods, defendants had to create a scheme whereby the USGBLs would not be presented by plaintiff's common carrier.
To effect this scheme, defendants had to create commercial bills of lading to replace the USGBLs, which on their face would tip off the common carrier or plaintiff that Relocate was intended to transport the goods under the contract. To effect the "switch," the goods would be driven to a nearby warehouse, from where the common carrier would pick them up. At this point, the USGBL would be replaced with a commercial bill of lading. Then, to secure payment, defendants would mail the USGBL to the ultimate destination. Compl. PP 87-94; see Exh. "G" for a sample commercial bill of lading.
This scheme was motivated by defendants' intention to not pay plaintiff and others who brokered the transportation services. Defendants were successful in that they got paid for services others performed. The scheme was perpetuated since defendants would only pay in part and make promises of future payments, to induce the future provision of services. Compl. P 95. Thus, defendants duped the U.S. and the plaintiffs and walked away with money for work it never performed.
Plaintiff's complaint alleges four claims. The first claim alleges violations of the Racketeer Influenced and Corrupt Organizations Act, (hereinafter "RICO"), 18 U.S.C. § 1962(a), (b) & (c), based on predicate acts of mail and wire fraud in violation of 18 U.S.C. §§ 1341 and 1343. The second claim alleges a conspiracy to violate the RICO statute, 18 U.S.C. § 1962(d). Plaintiff's third and fourth claims are for fraud and the abuse of the corporate enterprise, respectively.
Defendants move to dismiss plaintiff's complaint for failure to state a claim upon which relief can be granted and for failure to plead fraud with the required particularity.
When determining the validity of a motion to dismiss, the Court must assume all facts as alleged by plaintiff to be true, drawing all reasonable inferences in favor of plaintiff. Ferran v. Town of Nassau, 11 F.3d 21, 22 (2d Cir. 1993). On this basis, since plaintiff's complaint establishes the essential basic facts to support its claims, defendants' motion to dismiss must be denied.
I. Plaintiff's civil RICO claims
A. General Standing
Plaintiff's first claim alleges violations of 18 U.S.C. §§ 1962 (a), (b) and (c), commonly referred to as the civil RICO statute. 18 U.S.C. § 1964(c), which allows a civil litigant to sue for injuries sustained as a result of criminal RICO acts, states:
any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue there for in any appropriate United States district court and shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney's fee.
18 U.S.C. § 1964(c).
In order to have standing to sue pursuant to this section, "a plaintiff must show; (1) a violation of section 1962; (2) injury to business or property; and (3) causation of the injury by the violation." Hecht v. Commerce Clearing House, Inc., 897 F.2d 21, 23 (2d Cir. 1990), citing O'Malley v. O'Neill, 887 F.2d 1557, 1561 (11th Cir. 1989). The Court went on to explain that "for our purposes, the RICO pattern or acts proximately cause a plaintiff's injury if they are a substantial factor in the sequence of responsible causation, and if the injury is reasonably foreseeable or anticipated as a natural consequence." Hecht, at 23-24 (citations omitted). See also, Sedima, S.P.R.L. v. Imrex Company, Inc., 473 U.S. 479, 496, 105 S. Ct. 3275, 3285, 87 L. Ed. 2d 346 (1985) ("the plaintiff only has standing if . . . he has been injured in his business or property by the conduct constituting the violation.")
Here, plaintiff charges that the defendants created an enterprise and perpetuated a scheme, the purpose of which was advanced by the alleged acts of mail and wire fraud. The plaintiff in this case was injured by these fraudulent acts as they induced plaintiff to be duped by defendants' scheme. The fraud here was directed at plaintiff, as well as the United States, and therefore the injury suffered by plaintiff was proximately caused thereby. Therefore, plaintiff has standing generally to bring a civil RICO action under these facts since the injury it has suffered was proximately caused by the RICO violations.
Once standing has been established, to sufficiently state a claim under this section, a complaint must allege
(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. . . . Plaintiff must [also] allege [(8)] that he was "injured in his business or property by reason of a violation of § 1962." (Emphasis in original.)
Moss v. Morgan Stanley Inc., 719 F.2d 5, 17 (2d Cir. 1983), cert. denied, 465 U.S. 1025 (1984).
To satisfy the above, a plaintiff is required to allege a "pattern of racketeering." The Supreme Court has stated "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." H.J. Inc. v. Northwestern Bell Telephone Co., 492 U.S. 229, 239, 109 S. Ct. 2893, 2900, 106 L. Ed. 2d 195 (1989) (emphasis in original). The acts alleged need only further a singular scheme in order to establish a pattern. See Beauford v. Helmsley, 865 F.2d 1386, 1391 (2d Cir.), cert. denied, 493 U.S. 992, 110 S. Ct. 539, 107 L. Ed. 2d 537 (1989); United States v. Indelicato, 865 F.2d 1370, 1381 (2d Cir.), cert. denied, 493 U.S. 811, 110 S. Ct. 56, 107 L. Ed. 2d 24 (1989).
Two acts reflecting relatedness and continuity may be sufficient to substantiate a "pattern," and there must be continuity to the enterprise or scheme. Indelicato, at 1382-1384. It is not sufficient that the enterprise or scheme has a short-lived goal or inherently terminable nature. Beck v. Manufacturers Hanover Trust Co., 820 F.2d 46, 51 (2d Cir. 1987), cert. denied, 484 U.S. 1005, 108 S. Ct. 698, 98 L. Ed. 2d 650 (1988); Albany Insurance Co. v. Esses, 831 F.2d 41, 44 (2d Cir. 1987).
In the present case, plaintiff alleges that an unspecified number of mail and wire fraud violations constitute "a pattern of racketeering in furtherance of an enterprise or scheme" which was hoped to last indefinitely. Assuming the acts themselves to have been adequately pleaded, as is discussed below, the acts furthered an ongoing scheme to defraud, which included duping the United States into believing that ATA was a wholly separate company from Ship-Rite and one in which Alan Gould was not involved. Conversely, defendants duped plaintiff into believing that ATA was the same company as Ship-Rite and that ATA had a contract with the Government to transport as a motor carrier, thus inducing plaintiff's participation in the scheme unknowingly. As acts performed not in an "isolated or sporadic manner" but related to and in conjunction with this scheme, they satisfy the "pattern of racketeering" requirement. In re Crazy Eddie Securities Litigation, 714 F. Supp. 1285, 1289 (E.D.N.Y. 1989).
When the predicate acts substantiating a RICO claim sound in fraud, they must be pled with the particularity required by Federal Rules of Civil Procedure, Rule 9(b). Moss, 719 F.2d at 19; In re Crazy Eddie Securities Litigation, 714 F. Supp. at 1292. Rule 9(b) states that while "malice, intent, knowledge, and other conditions of mind of a person may be averred generally," fraud or mistake "shall be stated with particularity." Rule 9(b). Yet the liberal pleading rules of Rule 8 must be squared with the Rule 9(b) particularity rules. Ouaknine v. MacFarlane, 897 F.2d 75, 79 (2d Cir. 1990). Therefore it is sufficient to allege the "time, place, speaker, and sometimes even the content of the alleged misrepresentation." Id.; cf. Beck, 802 F.2d at 50.
In this action, plaintiff asserts in the Complaint PP 110 and 111, that defendants "repeatedly caused letters to be mailed" which included "the posting of checks to and receipt of invoices, confirmations and acknowledgment[sic] from plaintiff for services rendered, the transmission of USGBLs to the ultimate destination of shipped goods, the posting of tariffs, bid solicitations and correspondence with the United States of America, the transmission of improper 'replacement' commercial bills of lading from New York to New Jersey, and mailing to and from the State of New York regarding the establishment and corporate obligations of ATA." Compl. P 110. One such example is the mailing of defendant's partial payments. Compl. P 28. Other examples of mailings are revealed in Compl. P 39, which alleges that all defendants "posted, received and knowingly caused others to post orders, bills of lading, acknowledgements, checks and similar items or received same through the United States postal Service for the purpose of executing said scheme and artifice. The aforesaid posting and receipt of posted materials were in violation of 18 U.S.C. § 1341."
The allegations constituting the wire fraud violations state that "for the purpose of executing and attempting to execute the aforesaid schemes to defraud, defendants repeatedly caused to be made and made interstate telephone calls and other uses of interstate wire facilities to and from this district and elsewhere in repeated violation of 18 U.S.C. § 1341. The use of wires include, but are not limited to interstate telephone calls to plaintiff and other transportation brokers to arrange for the shipment of goods, and false promises of future payments." Compl. P 111.
Elsewhere in the Complaint, the specifics regarding the time and place of these communications are described. One such phone call by defendant Sally Adamo to plaintiff's President Joseph Padula occurred on May 9, 1989 to inform Mr. Padula that Ship-Rite had changed its name to ATA, that ATA had just received a contract to transport the personalty of United States servicemen, and that ATA hoped that plaintiff could provide the transportation services for that contract. Compl. P 23-25. Subsequently, the complaint alleges that defendant Sally Adamo "repeatedly" called plaintiff between May 9, 1989 and September 5, 1990, to request and arrange for plaintiff's provision of transportation brokerage services on behalf of ATA. Compl. P 27. Further descriptions are offered regarding telephone calls between defendants Betty Hockenjos and Sally Adamo and plaintiff, the substance of which induced plaintiff to continue to provide services for defendant, despite the fact that monies were outstanding, on promises that full payment would be forthcoming. Compl. P 29. In addition, the complaint alleges a telephone conversation between Joseph Padula and defendant Alan Gould wherein Gould represented that ATA's funds were being used to help restore Ship-Rite to a government contract it had lost earlier. Gould at that time promised that plaintiff would be paid in full once this matter was resolved, by October, 1990. Compl. P 32. In October, 1990, Gould made the same representation when he told Padula that the account would be satisfied in March, 1991. Compl. P 35. These allegations are sufficiently specific to satisfy the particularity requirements of Rule 9(b).
Additionally, when a plaintiff alleges that mail and wire fraud constitute the predicate acts necessary for a RICO claim, each of the acts must themselves constitute a violation of the mail and wire fraud statutes, 18 U.S.C. §§ 1341, 1343. To qualify, one must have proof of "(1) a scheme or artifice to defraud or obtain money by means of false pretenses, representations, or promises; (2) a use of the mails [or interstate wires] for the purpose of executing the scheme; and (3) a specific intent to defraud either by devising, participating in or abetting the scheme." Morrow v. Black, 742 F. Supp. 1199, 1205 (E.D.N.Y. 1990), citing 18 U.S.C. § 1341. Here, the story told by plaintiff's complaint sufficiently explains how the specific mailings and telephone calls advanced and executed defendants' schemes to defraud the plaintiff so that the contracts with the United States would be maintained, and the circumstances surrounding these events create a "strong inference" of the intent to defraud, which is sufficient. Beck, 820 F.2d 46, 50 (2d Cir. 1987). As a result, this Court finds that this complaint sufficiently alleges the predicate acts necessary to support a RICO claim.
Defendants argue that the predicate acts alleged by plaintiff are insufficient in that they fail to show that there was a material misstatement or omission; in other words, plaintiff has failed to show that it or the U.S. Government would have acted differently had they known all of the facts regarding ATA's true ownership or lawful authority or use of motor carriers. This argument fails to address the concerns raised by the caselaw on this issue and again, inappropriately challenges the facts as alleged by plaintiff. The acts as alleged by plaintiff adequately state predicate acts of a RICO claim based on the mail and wire fraud statutes.
B. 18 U.S.C. § 1962(a) claim
Plaintiff's First Cause of Action alleges that defendants Alan and Lola Gould violated § 1962(a), which states in relevant part:
It shall be unlawful for any person who has received any income derived, directly or indirectly, from a pattern of racketeering or through a collection of an unlawful debt in which such person has participated as a principal within the meaning of section 2, title 18 U.S.C., to use or invest, directly or indirectly, any part of such income, or the proceeds of such income, in acquisition of any interest in, or the establishment or operation of, any enterprise which is engaged in, or the activities which affect, interstate or foreign commerce.
18 U.S.C. § 1862(a).
The Second Circuit has stated that "to state a claim for civil damages under § 1962(a), a plaintiff must allege injury from the defendants' investment of racketeering income in an enterprise." Ouaknine v. MacFarlane, 897 F.2d 75, 83 (2d Cir. 1990). This requires that the injury from the § 1962(a) violation be differentiated from those injuries caused by the predicate acts themselves, "since the essence of a violation of § 1962(a) is not commission of predicate acts but investment of racketeering income." Id.
This investment-injury requirement is not satisfied merely because the defendant/enterprise has reinvested money from the racketeering acts back into its own operations, thus enabling the scheme to continue. Section 1964(c) requires that the plaintiff be injured "by reason of" a violation of one of the § 1962 subsections, meaning that the violation of § 1962(a) alone is not sufficient; plaintiff must show how its business or property was injured as a result of the violation. Id. at 82-83; Vista v. Columbia Pictures, Inc., 725 F. Supp. 1286, 1299-1300 (S.D.N.Y. 1989). Therefore plaintiff must show that it was injured by the investment itself. "When a defendant is also the RICO enterprise and a racketeering scheme is not the enterprise's sole purpose, investment of the proceeds from the pattern of racketeering for general operations is too attenuated a causal connection to satisfy Sections 1962(a) and 1964(c)." Williamson v. Simon & Schuster, 735 F. Supp. 565, 568 (S.D.N.Y. 1990).
If the defendant/enterprise merely invested money back into itself, the injury sustained by plaintiff is essentially a result of the "mere participation in predicate acts of racketeering" which is not sufficient and was rejected expressly by the Second Circuit and various District Courts. Ouaknine, 897 F.2d at 82; Gelb v. American Telephone and Telegraph Co., 813 F. Supp. 1022, 1024 (S.D.N.Y. 1993) ("a plaintiff's injury must be the result of a defendant's investment of the proceeds of the predicate acts, rather than the predicate acts themselves."); Giuliano v. Everything Yogurt, Inc., 819 F. Supp. 240, 248-249 (S.D.N.Y. 1993) (plaintiffs' § 1962(a) claim is dismissed since it is predicated on injuries "sustained through defendants' racketeering activity, not through the investment of the proceeds derived from prior racketeering activity.") In fact, to hold otherwise, would effectively make a violation of § 1962(a) synonymous with a violation of § 1962(c), which prohibits participation in an enterprise. See infra p. 24-25.
In the present case, defendants of this claim, Alan and Lola Gould, are the principals of the enterprise, who, plaintiff alleges, retained monies due plaintiff under the ATA/Relocate contracts, and instead invested that money into Ship-Rite to restore it to lost Government contracts. Plaintiff's Memo. at 9-10. This allegation substantiates an injury as a result of the investment, separate from that suffered as a result of the scheme or "mere participation in the predicate acts" themselves. As a result, defendants' motion to dismiss plaintiff's § 1962(a) claim is denied.
C. 18 U.S.C. § 1962(b) claim.
Plaintiff asserts that defendants Alan and Lola Gould violated § 1962(b) which states:
It shall be unlawful for any person through a pattern of racketeering activity or through collection of unlawful debt to acquire or maintain, directly or indirectly, any interest in or control of any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce.