whether the appropriate decision-makers knew the scope and details of the fraud allegedly perpetrated by DeLorean. Given the parties' differing accounts of the decline and fall of DMCL, and the susceptibility of the evidence to differing interpretations, it is not clear whether NIDA and DOC adequately investigated that which appeared suspicious. Similarly, it is not clear when AA realized what DeLorean had done and was doing.
In short, there are material issues of fact as to who knew what, and when they knew it. Summary judgment therefore is not warranted on this ground as to the remaining claims for relief.
(2) Loss Causation
AA's second argument also is directed to all the claims in the Second Amended Complaint. AA asserts that a poor economy in general and weakness in the luxury car market in particular -- not fraudulent accounting -- caused the losses suffered by NIDA and DOC. (Pl. Mem. at 121, arguing that "the collapse of the DeLorean entities was caused by market forces, namely, a severe recession that rocked the entire automotive industry".) See First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763, 772 (2d Cir. 1994) ("when the plaintiff's loss coincides with a marketwide phenomenon causing comparable losses to other investors, the prospect that the plaintiff's loss was caused by the fraud decreases"), cert. denied, 130 L. Ed. 2d 632, 115 S. Ct. 728 (1995).
AA correctly observes that the launch of the DMC-12 coincided with a worldwide recession, and that NIDA and DOC were aware that adverse economic conditions threatened the viability of DMCL and its parent. See, e.g., Dep. of Sir Kenneth Percy Bloomfield, Permanent Secretary of DOC, Zirin Aff. Ex 10 at 227 (acknowledging that the worldwide automobile market was "extremely depressed" in early 1982); Mem. on Report of Northern Ireland Dep't of Fin. & Personnel, Zirin Aff. Ex. 19 P 10 (attributing demise of DMCL to, inter alia, "the unprecedented contraction in the car market in the United States due to the effects of cyclical recession compounded in the short term by weather conditions"); Mem. of Sir Kenneth Percy Bloomfield, Jan. 14, 1982, Zirin Aff. Ex. 199 P 1 (noting that in December 1981, "sales of all cars in the USA fell to the lowest December figure since 1959, inventories soared to record heights and the industry shut down 29 plants").
Macroeconomic troubles undoubtedly had some negative effect on DMCL's survival. But it is not clear on the current record that the failure of DMCL was attributable entirely to market conditions. DED has cited statistics suggesting that the luxury car market fared better than the general car market in 1981, perhaps due to greater price inelasticity of demand in the luxury market segment. See, e.g., Report of McKinsey & Co., Nov. 20, 1981, Schade Aff. Ex. 326 at 011843, 011853 ("Sales of luxury cars have held up well in the first 10 months of the year, despite the overall difficulties of the marketplace"); Letter of John E. Cammell, Vehicles Div., July 29, 1980, Zirin Aff. Ex. 61 at 00641566 ("luxury sports cars attract buyers who are somewhat insulated from short-term economic trends").
AA challenges the validity of DED's market data and the assumptions about the car market on which DED's statistical conclusions are based. AA argues that the market outlook was so bleak that DMCL would have failed even if the misappropriated funds had never been removed from DMCL's coffers. The parties have offered differing estimates of how much more money would have been required to save DMCL. Compare Dep. of Joseph H. Penrose, Schade Aff. Ex. 97 at 506 ($ 15-20 million of additional capital would have saved DMCL) with Conclusions of Cabinet Meeting, Jan. 21, 1982, Zirin Aff. Ex. 204 at ("it was almost certain that without further urgent Government assistance of some $: 47 million,* DeLorean Motor Cars would have to cease trading").
I find that the parties' conflicting submissions have created an issue of fact as to how much of the failure of DMCL was caused by a troubled car market. Accordingly, summary judgment cannot be granted globally for lack of loss causation.
(3) RICO Standing
With respect to DED's RICO claims, AA argues as a threshold matter that DED does not have standing to maintain a RICO action.
Title 18 § 1962 declares unlawful certain conduct undertaken in connection with a "pattern of racketeering activity." Section 1961(1)(D) defines "racketeering activity" to include "any offense involving . . . fraud in the sale of securities." Section 1964(c) establishes a civil action in favor of "any person injured in his business or property by reason of a violation of section 1962." The Supreme Court has construed that language narrowly and has found that a plaintiff does not have standing to sue under RICO absent "some direct relation between the injury asserted and the injurious conduct alleged." Holmes v. Securities Investor Protection Corp., 503 U.S. 258, 268, 117 L. Ed. 2d 532, 112 S. Ct. 1311 (1992).
The Second Circuit has held that a plaintiff cannot establish such a "direct relation" merely by showing that he is a shareholder in, or creditor of, a corporation injured by a RICO violation. Manson v. Stacescu, 11 F.3d 1127, 1131 (2d Cir. 1993) ("Since the shareholder's injury, like that of the creditor, is merely derivative of the injury to the corporation, the shareholder's injury is not related directly to the defendant's injurious conduct"), cert. denied, 130 L. Ed. 2d 206, 115 S. Ct. 292 (1994).
However, the Second Circuit has recognized a "special duty" exception to the rule of no standing for creditors and shareholders. Under that doctrine, a plaintiff can maintain a RICO action if he sustained "injury that is separate and distinct from the injury sustained by the corporation." Id. For example, in Ceribelli v. Elghanayan, 990 F.2d 62 (2d Cir. 1993), the "special duty" exception was successfully invoked by plaintiff shareholders who alleged that the defendant fraudulently concealed material information about the corporation, causing the shareholders to pay too much for their shares. The Court found that the shareholders had standing to sue under RICO because the defendant had duties to the shareholders as securities purchasers that were distinct from duties owed to the corporation. Id. at 64. Thus, when fraudulent activity induces the shareholder to become a shareholder in the first place, the injury is not merely derivative of the injury suffered by the corporation. See, e.g., In re Colonial Ltd. Partnership Litig., 854 F. Supp. 64, 105 (D. Conn. 1994) (injury was not merely derivative; plaintiffs claimed that "defendants' fraudulent conduct induced them to purchase their limited partnership interests"); Friedman v. Hartmann, No. 91 Civ. 1523, 1994 U.S. Dist. LEXIS 3404, *11, 1994 WL 97104, *3 (S.D.N.Y. Mar. 23, 1994) (plaintiffs have RICO standing because allegedly fraudulent representations were the "basis for inducing the plaintiffs to make their investments"), recons. denied, 1994 WL 376058 (S.D.N.Y. Jul. 15, 1994); Dayton Monetary Assoc. v. Donaldson, Lufkin & Jenrette Secs. Corp., No. 91 Civ. 2050, 1993 U.S. Dist. LEXIS 14435, *4, 1993 WL 410503, *2 (S.D.N.Y. Oct. 14, 1993) ("plaintiffs do have standing to sue the trading defendants for injury proximately caused by alleged fraudulent representations which caused them to invest in limited partnerships which were worth less than they thought").
Fraudulent inducement is exactly what DED alleges here. DED does not claim simply that it owned shares of DMCL and that these shares became worthless when the company was victimized by RICO violations. Rather, DED argues that NIDA and DOC were induced by defendants' misrepresentations and fraudulent omissions to invest capital in DMCL. As the successor to defrauded securities purchasers, DED would have standing to assert RICO claims, assuming DED could establish liability for the underlying RICO predicate acts.
AA's fallback position is that AA did not in fact make fraudulent representations that induced NIDA and DOC to invest in DMCL. That contention goes to the merits of the fraud claims, on which I have found material issues of fact precluding summary judgment as explained above in Part IV. (1)(b) of this opinion.
(4) Section 1962(c) (RICO)
AA argues that DED's claim under § 1962(c) is foreclosed by the Supreme Court's ruling in Reves v. Ernst & Young, 507 U.S. 170, 113 S. Ct. 1163, 122 L. Ed. 2d 525 (1993). I agree.
Section 1962(c) provides:
It shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity . . . .
Securities fraud is one form of "racketeering activity." 18 U.S.C. § 1961(1)(D). A "pattern" of such activity means the commission of at least two predicate racketeering acts within 10 years. 18 U.S.C. § 1961(5). DED has argued that DMC and DMCL constituted a RICO enterprise, and that AA participated in the conduct of that enterprise's affairs through a pattern of acts of securities fraud and mail fraud. (Pl. Mem. at 295) In 1988, Judge Stewart denied AA's motion to dismiss this claim under Fed. R. Civ. P. 12(b)(6). 683 F. Supp. at 1483. However, in 1993 the Supreme Court narrowed the scope of liability under § 1962(c) with its decision in Reves.
Reves involved a § 1962(c) claim arising from the bankruptcy of a farmers' cooperative association that had issued promissory notes. The noteholders sued the co-op's accountants, Arthur Young & Co., charging that Arthur Young's audit reports fraudulently concealed the co-op's insolvency. The plaintiffs alleged that Arthur Young had failed to reveal in its reports, and had failed to inform the co-op's board of directors, that one of the co-op's key assets had been overvalued. 113 S. Ct. at 1166-68. The plaintiffs argued that the co-op was a racketeering enterprise, and that Arthur Young participated in the conduct of the enterprise's at fairs through multiple acts of securities fraud.
The Court barred recovery under § 1962(c). To be liable under that provision, the Court held, "one must participate in the operation or management of the enterprise itself." Id. at 1173. The Court stressed that "some part in directing the enterprise's affairs is required." Id. at 1170 (emphasis in original). Although an enterprise most typically is operated or managed by persons within an enterprise, the Court explained, "an enterprise also might be 'operated' or 'managed' by others 'associated with' the enterprise who exert control over it as, for example, by bribery." Id. at 1172-73.
Struggling to survive Reves, DED alleges in the Second Amended Complaint that AA's accountants participated in the operation and management of DMC and DMCL. (SAC P 228(b)) DED argues that AA did this by
lending its reputation to the companies' courtship of public and private investors, participating directly in negotiations with prospective governmental investors, developing asset and earnings projections relied on by the investors, advocating the companies' positions before the SEC, chartering the Northern Ireland subsidiary, lending its staff to serve as company accountants, developing internal corporate policies, establishing accounting and information systems, creating the financial records and generating from them the financial statements it purported to audit, and even employing its partners and its venerable reputation to shield the companies from the slings and arrows of adverse publicity.