Lab, and the intended victims were Bernstein, Sami and Peterson. The desired result was to induce participation in a real estate transaction and later extinguish the interests of the investors. Compl. P 107. Finally, the method of commission involved using unwitting victims, rather than knowing confederates, as "fronts" to reaquire the QSCC after foreclosure.
Because the bank frauds bear almost no relation to the predicate acts which allegedly injured the plaintiffs, they cannot be properly considered as part of the "pattern" of racketeering activity. Ray Larsen Associates, Inc. v. Nikko America Inc., et al. 1996 U.S. Dist. LEXIS 11163, No. 89 Civ. 2809 (BSJ), 1996 WL 442799, at *6 (S.D.N.Y. August 6, 1996). See also, Vild v. Visconsi, 956 F.2d 560, 567 (6th Cir.), cert. denied, 506 U.S. 832, 121 L. Ed. 2d 59, 113 S. Ct. 99 (1992)(noting that plaintiff "cannot complain about harm to [other entities]"); Committee to Defend the United States Constitution v. Moon, 776 F. Supp. 568, 572 (D.D.C. 1991)(stating that court would "only consider those acts which have resulted in business or property harm to the [plaintiff]," and holding that plaintiff's claim of harm from those acts on others was "simply too remotely related" to support a RICO claim). Accordingly, this Court should limit its review of the predicate acts to those allegations of mail fraud and wire fraud which are alleged in connection with the QSCC venture.
A plaintiff may satisfy the continuity requirement in one of two ways. He must allege either an "open-ended" pattern of racketeering activity (i.e. past criminal conduct combined with a threat of future criminal conduct) or a "closed-ended" pattern of racketeering activity (i.e. past criminal conduct extending over a substantial period of time). GICC Capital Corp. v. Technology Finance Group. Inc., 67 F.3d 463, 466 (2d Cir. 1995), cert. denied, 135 L. Ed. 2d 1067, 116 S. Ct. 2547 (1996).
The Second Circuit has noted that inherently unlawful acts such as murder or obstruction of justice committed by an enterprise whose business is racketeering activity gives rise to the requisite threat of continuity even where the period spanned by the racketeering acts is short. United States v. Aulicino, 44 F.3d 1102, 1111 (2d Cir. 1995). However, "in cases concerning alleged racketeering activity in furtherance of endeavors that are not inherently unlawful, such as frauds in the sale of property, the courts generally have found no threat of continuing criminal activity arising from conduct that extended over even longer periods." Id. The alleged predicates in this case are not inherently unlawful.
Plaintiffs' conclusory assertion that the very nature of defendants' predicate acts "[project] into the future with a threat of repetition" is unsupported by the facts alleged in the complaint. Other than plaintiffs' bare allegation, there is no reason to conclude that the defendants will continue to use investors as unwitting "fronts" to reaquire property. To the contrary, the complaint reveals that most of the properties acquired by defendants were acquired by Misk's own partners or companies. In addition, "to infer a threat of repeated fraud from a single alleged scheme would in effect render the pattern requirement meaningless." Continental Realty Corp. v. J.C. Penney Co., Inc., 729 F. Supp. 1452, 1455 (S.D.N.Y. 1990). The alleged acts of mail and wire fraud were committed in connection with an isolated real estate venture, the QSCC project, which has been, or will be terminated, with no indication of repetition. As the Circuit Court suggested in Aulicino, 44 F.3d at 1113, the threat of continuity is not present in a situation where "the defendant had a piece of property the sale of which, even if by fraudulent means, provided a natural end to his project." That observation is peculiarly apposite here and is fatal to the "open-ended continuity" inquiry.
Whether closed-ended continuity exists is determined by weighing a variety of non-dispositive factors including the length of time over which the alleged predicate acts took place, the number and variety of acts, the number of participants, the number of victims and the presence of separate schemes. GICC, 67 F.3d at 467 (collecting cases).
A charitable reading of the complaint might find that the predicate acts alleged took place over a span of approximately four and half years, from sometime after August 1991, when Misk had telephone conversations concerning the QSCC project with Bernstein, until February 1996, when J&J began foreclosure proceedings. However, even though the scheme "may have required a number of steps over a determinate period of time, nevertheless because of its terminable nature and single goal it does not meet the requirement of continuity." Mead v. Schaub, 757 F. Supp. 319, 323 (S.D.N.Y. 1991).
Courts in the Second Circuit have generally held that where the conduct at issue involves a limited number of perpetrators and victims and a limited goal, the conduct is lacking in closed-ended continuity. See e.g. Mathon v. Marine Midland Bank, N.A., 875 F. Supp. 986, 998-99 (E.D.N.Y. 1995)(holding that a single real estate transaction involving one alleged victim, a limited goal and criminal conduct which lasted approximately fifteen months is not sufficient "continuity"); Airlines Reporting Corp. v. Aero Voyagers, Inc., 721 F. Supp. 579, 583-4 (S.D.N.Y.1989)(holding that a complaint alleging a closed-ended, single scheme involving three perpetrators, one victim and an uncomplicated transaction over a thirteen month period failed to adequately plead continuity); Continental Realty, 729 F. Supp. at 1454 (holding that a claim alleging fraud in a real estate deal transaction involving one victim, one group of perpetrators, and a single goal occurring over more than a year is not sufficient for closed-ended continuity). The criminal activity alleged in this case involved only one major perpetrator who focused his activity on one group of purchasers in a single, non-complex scheme to obtain financing for a purchase of property and then default on the loan. This does not establish "closed-ended continuity."
Accordingly, plaintiffs have also failed to sufficiently allege a pattern of racketeering activity.
c. Sufficiency of Relevant Predicate Acts
While the court has concluded that plaintiffs have failed to satisfy RICO's "pattern" requirement, it also bears mentioning that they have failed to sufficiently allege the commission of least two acts of racketeering activity within a ten year period by each defendant as required.
§ 1961(5); McLaughlin v. Anderson, 962 F.2d 187, 192 (2d Cir. 1992).
(i) Mail and Wire Fraud
A complaint alleging mail and wire fraud must show (1) the existence of a scheme to defraud, (2) the defendant's knowing or intentional participation in the scheme, and (3) the use of interstate mails or transmission facilities in furtherance of the scheme. S.Q.K.F.C., Inc. v. Bell Atlantic TriCon Leasing Corp., 84 F.3d 629, 633 (2d Cir. 1996).
The scheme to defraud alleged by plaintiffs is the plan to use the Roy Pet purchase group as an unwitting "front" to obtain financing to reacquire the QSCC property and later default on the obligation and extinguish the group members' ownership interests in the property. The defendants correctly assert that the fact that Misk and Rizk intended to default on an obligation cannot transform what otherwise looks like a breach of contract claim into a fraud claim. See, Drexel Burnham Lambert, Inc. v. Saxony Heights Realty Associates, 777 F. Supp. 228, 235 (S.D.N.Y. 1988)("an attempt to convert a contract claim into a tort claim by the additional naked assertion that the breaching party never intended to perform is doomed to fail."). However, even if the Court were to find that the plaintiffs' allegations do evince a scheme to defraud, the plaintiffs have set forth no facts which show that the mails or interstate wires were used in furtherance of, or incident to, the scheme.
The complaint's only references to the mails are in summary paragraphs whose boilerplate language states that, "on more than two occasions [the defendants] illegally used the United States mails in violation of 18 U.S.C. § 1341 [and] 18 U.S.C. § 1952(a)(3) et. seq." Compl. PP 130A(a)(i), 130B(b)(i). This conclusory language is unsupported by facts in the body of the complaint. Paragraphs 97 through 129 of the complaint, which cover the entirety of plaintiffs' involvement with Misk and Rizk, are wholly barren of any reference to use of the mails. Because the complaint does not delineate any of the specifics regarding the defendants' use of the mails, there can be no predicate act of mail fraud. See McCoy v. Goldberg, 748 F. Supp. 146, 154 (S.D.N.Y. 1990)(the assertion of summary legal conclusions regarding the use of the mails absent factual specifics is insufficient to bring the alleged behavior of defendants within the scope of the mail fraud statute).
The allegations in the complaint cannot provide the basis for a wire fraud predicate either. Invocation of the wire fraud statute requires an interstate telephone call. As noted in McCoy, where all parties are New York residents, "all telephone calls are presumed to be intrastate and, absent any indication otherwise, the predicate act of wire fraud is not stated." 748 F. Supp. at 154. Given that Misk, Rizk and Dr. Bernstein are all New York residents and Lincoln and MDL are New York corporations, and no interstate calls are alleged in the complaint, "it is unreasonable to assume that interstate use of the wires occurred." Id. Therefore, this jurisdictional prerequisite has not been satisfied.
ii. Fed. R. Civ. P. 9(b)
Plaintiffs' mail and wire fraud claims also fail to comply with Fed. R. Civ. P. 9(b) which provides: "In all averments of fraud . . . the circumstances constituting fraud. . . shall be stated with particularity. Malice, intent, knowledge, and other conditions of mind of a person may be averred generally." When the predicate acts of a civil RICO claim are grounded in fraud, the concerns associated with pleading fraud with particularity take on even greater importance. Plount v. American Home Assur. Co., 668 F. Supp. 204, 206 (S.D.N.Y. 1987). A claim of mail or wire fraud must specify the content, date and place of any alleged misrepresentations and the identity of the persons making them. Wexner v. First Manhattan Co., 902 F.2d 169, 172-73 (2d Cir. 1990). See also Official Publications, Inc. v. Kable News Co., 692 F. Supp. 239, 245 (S.D.N.Y. 1988)(In alleging mail fraud, plaintiff must set forth "the content of the items mailed and specify how each of the items was false and misleading."), aff'd in part and rev'd in part, 884 F.2d 664 (2d Cir. 1989); Qantel Corp. v. Niemuller, 771 F. Supp. 1361, 1369 (S.D.N.Y. 1991)(to plead wire fraud with particularity, plaintiff must identify number of telephone calls that were made and dates on which they were made).
As noted above, plaintiffs' mail fraud claims are insufficient because there are no facts in the body of the complaint that refer to use of the mails in connection with the fraudulent scheme. The only statement which refers to use of the telephone or wires is P 100, which alleges that, sometime after August of 1991, "Misk, Bernstein and Dr. Sami had many telephone conversations" during which Misk bragged about his wealth, failed to reveal that he had engaged in bank frauds, and omitted to disclose the various legal actions commenced against him. Conspicuous by their absence are allegations of the number of calls made, the time or place of the calls, who placed them, and who received them. Without these particulars, the requirements of Rule 9(b) are not satisfied and plaintiffs' wire fraud predicates cannot stand.
In Hecht v. Commerce Clearing House. Inc., 897 F.2d 21 (2d Cir. 1990), the Second Circuit explained RICO's causation requirement as follows:
The RICO civil liability provision confers standing on any person injured in his business or property by reason of a violation of section 1962. Thus, in order to have standing, a RICO plaintiff must show: (1) a violation of section 1962; (2) injury to business or property; and (3) causation of the injury by the violation. . . . Because a plaintiff must show injury by the conduct constituting the violation of RICO, the injury must be caused by a pattern of racketeering activity violating section 1962 or by individual RICO predicate acts. Moreover, the RICO pattern or acts must proximately cause plaintiff's injury. . . . 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, 897 F.2d at 24-25 (internal citations omitted).
Plaintiffs allege that they "stand to lose approximately $ 1,440,000 as a result of the illegal actions of the alleged RICO enterprise." Compl. P 129. They arrive at this figure based on a $ 500,000 contribution to the project, the expenditure of $ 130,000 in legal fees, $ 50,000 in "miscellaneous expenses," and $ 760,000 in lost income from lease payments for assets partially owned by plaintiffs and used by the QSCC beginning in September 1993. Id.
Because the complaint does not adequately specify even a single use of the mails by any defendant or other person incident to the scheme, it cannot be said that plaintiffs' injuries were a reasonably foreseeable consequence of a mail fraud predicate. To the extent that predicate acts of wire fraud are alleged, the link between the misrepresentations and plaintiffs' injuries is weak. As noted above, the only paragraphs in the complaint that mention telephone conversations are those in which Misk bragged to Bernstein about his accomplishments as a real estate developer and in which he failed to disclose his prior acts of bank fraud and the lawsuits commenced against him. Compl. PP 100-101. These statements were clearly not the reason that Bernstein's investment turned out to be a losing one. See Citibank N.A. v. K-H Corp., 968 F.2d 1489, 1495 (2d Cir. 1992). Bernstein's major losses -- his contribution to the project and the lost lease payments -- appear to have occurred more directly as a result of the QSCC's failure to make the lease payments on equipment and Misk's denial of entry to abortion patients. These actions do not constitute racketeering acts and therefore cannot proximately cause a RICO violation.
In addition, the fraudulent representations allegedly occurred "sometime after" Misk's initial conversation with Bernstein and Sami in August of 1991. According to plaintiffs, the culmination of the scheme, i.e. Misk's refusal to allow Bernstein's patients access to the QSCC and the foreclosure action commenced by J&J, occurred between March of 1995 and February of 1996. As the Second Circuit has noted, "when a significant period of time has elapsed between the defendant's actions and the plaintiff's injury, there is a greater likelihood that the loss is attributable to events occurring in the interim." First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763, 772 (2d Cir. 1994), cert. denied, 130 L. Ed. 2d 632, 115 S. Ct. 728 (1995).
"When factors other than the defendant's fraud are an intervening direct cause of a plaintiff's injury, that same injury cannot be said to have occurred by reason of the defendant's actions." 27 F.3d at 768. The complaint mentions at least eight factors not connected with the alleged acts of mail fraud or wire fraud which intervened to substantially cause plaintiffs' injuries: (1) the QSCC's failure to make equipment lease payments, (2) the Lab's failure to make its rental payments, (3) Misk's transfer of the QSCC's title to BSR, (4) Misk's delayed transfer of the Operating Certificate to plaintiff, (5) Misk's manipulation of insurance payments, (6) Misk's refusal to permit Bernstein's patients to access the abortion facility, (7) Misk's failure to make monthly mortgage installment payments to J&J, and (8) Misk's refusal to pay real estate taxes for the building. Thus, even if plaintiffs had adequately plead a violation of § 1962, their RICO claim would still be fatally flawed for failure to allege injury by reason of such a violation.
The temptation to assess the cupidity of Bernstein as being the predominant cause of his claimed injury is well nigh irresistible. For example, it is virtually impossible to comprehend why he never had the advice of a competent lawyer at every stage of these transactions involving substantial sums of money; how he suffered Misk's obstruction of his clinic on property in which Misk had no discernible legal interest, and; how he suffered Misk to exercise control over insurance reimbursements for services he (Bernstein) provided to patients. Because this complaint is hopelessly flawed for a variety of other reasons which have been explained, the temptation to make that assessment will be avoided.
2. § 1962(a)
The failure to adequately allege an enterprise, predicate acts and a pattern of racketeering activity is fatal to all of plaintiffs' RICO claims. However, it should be noted that their § 1962(a) allegations suffer from additional problems. "To state a claim under § 1962(a), a plaintiff must make two basic allegations: first, that the defendants used or invested racketeering income to acquire or maintain an interest in the alleged enterprise, and second, that the plaintiff suffered an injury as a result of that investment by the defendants." O&G Carriers, Inc. v. Smith, 799 F. Supp. 1528, 1542 (S.D.N.Y. 1992). Here, there are no factual allegations to support the proposition that the defendants ever received racketeering income in connection with the QSCC venture, and the loans secured as a result of the alleged bank frauds were apparently used to purchase real property, not to acquire or maintain an interest in the alleged enterprise. Additionally, there are no allegations that plaintiffs' injuries were caused by any investment by the defendants. Thus, plaintiffs' § 1962(a) claims must fail.
3. § 1962(b)
To state a claim under § 1962(b), a plaintiff must allege that: (1) the defendants acquired or maintained an interest in the alleged enterprise through a pattern of racketeering activity, and (2) that the plaintiff suffered injury as a result of the acquisition of the enterprise. O&G Carriers, 799 F. Supp. at 1543. No factual allegations to support either element have been made here.
Because plaintiffs have failed to adequately allege an enterprise, a pattern of racketeering activity and the requisite causation, their RICO claims should be dismissed.
B. The Securities Fraud Claim
The other federal claim is count three of the complaint, which alleges a claim for damages under Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder.
1. Statute of Limitations
Both parties agree that a one year/three year statute of limitations applies to the § 10(b) claim; that is, plaintiffs' claim is barred if it was brought more than one year from the discovery of the fraud or more than three years from the date of its accrual. Ceres Partners v. GEL Assocs., 918 F.2d 349 (2d Cir. 1990). A plaintiff in a securities fraud case will be deemed to have discovered fraud for purposes of triggering the statute of limitations when a reasonable investor of ordinary intelligence would have discovered the existence of the fraud. Armstrong v. McAlpin, 699 F.2d 79, 88 (2d Cir 1983). "When the circumstances would suggest to an investor of ordinary intelligence the probability that she has been defrauded, a duty of inquiry arises, and knowledge will be imputed to the investor who does not make such an inquiry." Dodds v. Cigna Securities, Inc., 12 F.3d 346, 350 (2d Cir. 1993), cert. denied, 128 L. Ed. 2d 74, 114 S. Ct. 1401 (1994). Because the issue of inquiry notice is determined by an objective standard, the court may resolve it as a matter of law on a motion to dismiss. Id.
As noted earlier, the complaint in this action was filed on June 4, 1996. Plaintiffs argue that the filing was within the limitations period because they did not learn of the fraud until J&J began its foreclosure action in February of 1996. They maintain that, until that time, it was their belief that they had invested in a corporation that acquired and operated a property as "it was supposed to."
A review of the facts in the complaint belies this assertion and discloses numerous events that would surely have served as red flags to plaintiffs prior to February 1996. The complaint alleges that Misk refused to execute a written agreement regarding the operating terms of the Lab until March of 1995 and that he "thereafter" withdrew consent to such agreement. It further alleges that Misk intentionally delayed transfer of the Operating Certificate and failed to bill insurance payments for the entirety of 1994. Most tellingly, the complaint states that, in March of 1995, " in blatant breach of the agreement among the parties, [Misk] refused to permit Bernstein's abortion patients access to the QSCC facilities . . .". Compl. P 125. (Emphasis added). This occurrence alone, which took place some fourteen months before plaintiffs' complaint was filed, would have put any reasonably intelligent person on inquiry notice of Misk's improper actions. Accordingly, plaintiffs' securities fraud claim is barred by the statute of limitations and should be dismissed.
2. "In Connection With"
Even if it had been timely filed, the securities fraud claim would still have to be dismissed for failure to plead a fraud "in connection with the purchase or sale" of securities. Section 10(b) of the Exchange Act makes it "unlawful for any person . . . (b) to use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities and Exchange] Commission may prescribe as necessary or appropriate in the public interest for the protection of investors." 15 U.S.C. § 78j(b). Rule 10b-5, a general anti-fraud provision promulgated by the SEC, provides:
Employment of manipulative and deceptive devices.
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or