I. Statute of Limitations
Plaintiff concedes that its Exchange Act claim is barred by the relevant statute of limitations. (Pl's. Mem. in Opp. to Def's. Motion to Dismiss at 3.) Thus, the only federal claims remaining are those asserted under RICO. Defendants assert a statute of limitations defense to two of the four predicate acts that form the basis of plaintiff's RICO claims. Although I find in Part II infra that no valid RICO predicate acts exist as a matter of law, it is appropriate to establish first why the statute of limitations challenge fails.
Civil RICO actions are subject to a four-year statute of limitations. Agency Holding Corp. v. Malley-Duff & Assocs., Inc., 483 U.S. 143, 97 L. Ed. 2d 121, 107 S. Ct. 2759 (1987). The instant Complaint was filed on May 11, 1994. Hence, plaintiff may assert all claims that accrued on or after May 11, 1990. Two of the RICO predicate acts are indeed time-barred: the proxy statement mailed in June, 1985,
and the comparable mailing in May, 1990, which occurred before the shareholders' meeting of May 11. However, this does not end the inquiry. Plaintiff contends that these two predicate acts generated a total of three subsequent injuries, which are not time-barred because they accrued within the limitations period. For the purposes of this motion I find that two of the three asserted injuries survive the limitations challenge.
In Malley-Duff, the Supreme Court deliberately left open the question of when a civil RICO action accrues. Id. at 156. In Bankers Trust Co. v. Rhoades, 859 F.2d 1096 (2d Cir. 1988), cert. denied, 490 U.S. 1007, 104 L. Ed. 2d 158, 109 S. Ct. 1642 (1989), the Second Circuit adopted a "rule of separate accrual" for civil RICO injuries. Bankers Trust, 859 F.2d at 1104. Under this rule, each "new and independent injury" triggers its own four-year limitations period. Id. "Each time plaintiff discovers or should have discovered an injury caused by defendant's violation of § 1962, a new cause of action arises as to that injury, regardless of when the actual violation occurred." Id. at 1105. Thus, for each injury asserted by plaintiff, I must determine precisely when plaintiff should have discovered it.
The first predicate act asserted by plaintiff, the 1985 proxy statement mailing, urged shareholders to approve the issuance to Cumming and Steinberg of 200,000 warrants each. The plan was subsequently approved. Plaintiff asserts that this corporate event generated, years later, two additional injuries. The first injury was the Board's decision in November, 1989, to repurchase most of the 1985 warrants from Cumming and Steinberg at a cost of $ 7.5 million. (The price reflected the difference between the exercise price and the then-current market price of Leucadia shares.) The second injury was the Board's decision sometime in 1990 to repurchase a smaller block of warrants at a cost of $ 95,000.
The first question to be addressed, then, is whether these injuries should have been discovered in 1985. If both repurchase decisions -- and their precise cost to the company -- could have been clearly foreseen and ascertained when the warrants were issued, then any injury from these decisions accrued in 1985 and is time-barred. See Long Island Lighting Co. v. Imo Indus., 6 F.3d 876, 887 (2d Cir. 1993) (holding that injury from defective generators accrued upon receipt, when defects should have been discovered, not four to six years later when generators were actually installed). If, on the other hand, the Board's decisions to repurchase the warrants were not clearly foreseeable in 1985, injury would accrue only when the Board took action on the warrants and the extent of the injury became concrete. See Cruden v. Bank of New York, 957 F.2d 961, 977 (2d Cir. 1992) (citations omitted).
Defendants maintain that any injury from the repurchases of the warrants necessarily accrued in 1985 because "plaintiff had actual notice of all of the facts regarding the validity of the 1985 Warrants" in 1985. (Mem. in Support of Defs.' Motion to Dismiss at 22.) Defendants are incorrect. The validity of the warrants is not the dispositive factor. For accrual purposes, the dispositive factor is when plaintiff should have discovered injury from the repurchase transactions. Nothing in the record suggests that the Board knew in 1985 if or when it would repurchase the warrants. Corporations do not repurchase every stock option they issue. Moreover, even if the Board could reasonably have anticipated or controlled any future repurchases of the warrants, it could not have predicted the cost, which was linked to the share price at the time of repurchase. Thus, I find that any anticipated repurchase of the warrants was merely speculative in 1985.
Assuming that no separate injury accrued until the Board decided to repurchase the warrants, I find that the first repurchase injury asserted by plaintiff is time-barred. The Complaint states: 1) that the Board decided to repurchase 786,000 warrants in 1989, and 2) that full payment stretched out over a period of seven months, ending on June 30, 1990 -- a date safely within the limitations window. (Compl. at 14.) From these facts, plaintiff attempts to rescue its claim from certain death by observing that some warrants were paid for after May 11, 1990. (Mem. in Opp. to Defs.' Motion to Dismiss at 6.) This argument is unavailing. Under Bankers Trust, the timing of the actual payments is immaterial. Injury accrues at the first moment when the injury should have been discovered, and in the case of a financial obligation that moment occurs when the obligation attaches. 859 F.2d at 1105 (holding that injury arising from financial obligation accrues "as to each expense when [injured party becomes] obligated to pay that expense, and not at some later date when it actually [makes] the payment").
In the instant case, the decision to repurchase the 786,000 warrants was explicitly and fully disclosed in the 1990 proxy statement, (1990 Proxy Statement at 30), a document which plaintiff concedes was mailed several weeks before the shareholders' meeting of May 11, 1990. Thus, the injury should have been discovered before May 11, 1990, and is barred by the statute of limitations.
The second repurchase decision cited in the Complaint, however, is not so easily dismissed because of the scanty evidence in the record presented to me. The Complaint states that sometime in 1990 the Board repurchased an additional set of 1985 warrants. (Compl. at 14.) However, the Complaint provides no facts to support this allegation, and the 1990 and 1991 proxy statements, which the Complaint incorporates by reference, mention no new repurchase transaction undertaken after 1989. Assuming that such a transaction occurred, I must construe the ambiguity in the record in plaintiff's favor. Because plaintiff might not have been able to discover the asserted injury before May 11, 1990, I find that the claim survives for the purposes of this motion. However, defendants may submit a renewed motion on the statute of limitations defense, if appropriate after further discovery.
The second predicate act asserted by plaintiff, the 1990 proxy statement, urged shareholders to approve a merger between Leucadia and another company. Plaintiff maintains that this act also generated a subsequent injury: the merger itself, which was approved at the shareholders' meeting of May 11, 1990. I agree with plaintiff that this claim is not time-barred. The directors did not control enough voting stock to approve the merger on their own; they needed eight percent of the outside shareholders to form the two-thirds majority required to approve the merger. Thus, the mere mailing of the proxy statement did not cause the injury to accrue. If the merger proposal had not passed at the shareholders' meeting, plaintiff would have had no claim to assert. I find, therefore, that the merger accrued when the shareholder votes were cast and that this claim of injury survives the limitations challenge.
II. The RICO Claims
The above findings are overshadowed, however, by plaintiff's failure to state a RICO violation. The RICO civil liability provision confers standing on any "person injured in his business or property by reason of a violation of section 1962." 18 U.S.C. § 1964(c). The Supreme Court has further limited standing to plaintiffs whose injuries were proximately caused by a RICO violation. Holmes v. Securities Investor Protection Corp., 503 U.S. 258, 268, 117 L. Ed. 2d 532, 112 S. Ct. 1311 (1992). The requirement of proximate causation generally means that shareholders may not bring civil RICO claims in their individual capacities, but they may sue derivatively on behalf of the corporation. Manson v. Stacescu, 11 F.3d 1127, 1130-31 (2d Cir. 1993), cert. denied, 130 L. Ed. 2d 206, 115 S. Ct. 292 (1994); Rand v. Anaconda-Ericsson, Inc., 794 F.2d 843, 849 (2d Cir.), cert. denied, 479 U.S. 987, 93 L. Ed. 2d 582, 107 S. Ct. 579 (1986). In the instant case, plaintiff is a corporate shareholder suing in a derivative capacity.
To maintain a shareholder's derivative suit under RICO, a plaintiff must show: 1) a violation of 18 U.S.C. § 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). As a matter of law, I find that plaintiff fails to establish the first element, a violation of § 1962, because the Complaint fails to allege facts from which mail fraud or wire fraud can be inferred. This finding is fatal not only to the RICO counts, but to the state law claims of conversion and common law fraud, which will be discussed in more detail in Part III infra.
A. The Violation of § 1962
The Complaint alleges violations of 18 U.S.C. § 1962(b), (c) and (d) -- two substantive violations and one conspiracy claim. All three prongs of § 1962 require a showing that defendants engaged in certain prohibited activities through "a pattern of racketeering activity." By statute, a pattern of racketeering activity requires at least two acts of racketeering activity within 10 years. 18 U.S.C § 1961(5). An act of "racketeering activity," in turn, may be any one of the federal and state crimes enumerated in 18 U.S.C. § 1961(1), including mail fraud and wire fraud.
The federal crimes pleaded by plaintiff, however, do not exist in a vacuum. Mail and wire fraud necessarily arise from an underlying "scheme or artifice to defraud." 18 U.S.C. §§ 1341 and 1343. The Complaint fails to establish any such scheme. Plaintiff's entire argument rests on an incorrect interpretation of N.Y. Bus. Corp. Law §§ 505 and 612. Because I find that defendants did not violate these New York statutes, all four asserted predicate acts fail as a matter of law.
i. N.Y. Bus. Corp. Law § 505
Three of the predicate acts alleged in the Complaint stem from an asserted violation of § 505, which regulates the issuance of stock options. Section 505 provides in relevant part:
(a)(1) Except as otherwise provided in this section . . ., a corporation may create and issue . . . rights or options entitling the holders thereof to purchase from the corporation, upon such consideration, terms and conditions as may be fixed by the board, shares of any class or series[.]
. . . .