RICO. Although plaintiffs allege that defendants committed mail fraud when they mailed intermittent mortgage payments to Miriam, there are no facts alleged demonstrating that they knowingly participated in the fraudulent scheme.
Because Curi has a fiduciary relationship with plaintiffs, his failure to disclose to plaintiffs that the mortgage was in default is part of a scheme to defraud. But Lilliam and Thomas do not have such obligations and therefore the mere failure to disclose, without more, does not constitute a scheme to defraud under the mail fraud statute. Cf. United States v. Altman, 48 F.3d 96, 102 (failure to disclose on part of fiduciary is a violation of the mail fraud statute).
Even if Lilliam and Thomas Janata had each committed two acts of mail fraud, the complaint does not allege facts suggesting that Lilliam and Thomas engaged in a "pattern" of racketeering activity. The mailing of partial payments on a mortgage and failure to disclose the fact that such mortgage was in default is, at most, an isolated act of fraud. There is no evidence in the record that such activity would continue.
Finally, nothing in the complaint suggests that Lilliam and Thomas Janata participated in the "operation or management of the enterprise." Even if Thomas and Lilliam Janata were in some instances the intended beneficiaries of Curi's wrongdoing, this is not enough to hold them liable under RICO.
E. Eleanor Feinstein
Plaintiffs do not allege that Eleanor committed an act that would qualify as a predicate act under 18 U.S.C. § 1961(1). The complaint says that Eleanor Feinstein, together with Rosa Curi, was a mortgagee on a purchase money mortgage obtained in connection with the 1632 Decatur Street Property. Eleanor then purportedly foreclosed upon the mortgage, reacquired title, sold the property and converted the proceeds of the sale. These allegations do not constitute a predicate act under RICO, nor are they sufficient for the court to infer that Eleanor acted with fraudulent intent. The complaint plainly fails to state a RICO claim against Eleanor.
F. Sheldon Feinstein
The complaint says that Feinstein committed two acts of mail fraud: on April 26, 1984 when Valdes mailed Feinstein a check for $ 80,000 made payable to Feinstein "as attorney" and again on June 26, 1985 when Valdes mailed to Feinstein another such check for $ 5,000. Feinstein improperly deposited these amounts into his escrow account "for his own personal use and the use of Curi." Both of these checks were in connection with the 110th Street conversion project.
The complaint also says that Feinstein committed three acts of securities fraud in violation of 15 U.S.C. § 78(j) and breached his fiduciary duty to plaintiffs when he entered into a partnership agreement for the purchase of the 72-11 110th Street building, issued cooperative shares in the property to Curi and Valdes under their names or under the name "CV", and then failed to distribute partnership shares to plaintiffs.
These allegations are insufficient to state a RICO claim against Feinstein.
First, securities fraud no longer constitutes a predicate act under RICO. See 18 U.S.C. 1964(c) ("no person may rely upon any conduct that would have been actionable as fraud in the purchase or sale of securities to establish a violation of Section 1962"); ABF Capital Managment v. Askin Capital Management, L.P., 957 F. Supp. 1308 (S.D.N.Y. 1997).
In any event, plaintiffs fail to allege the factual elements necessary to state a claim of securities fraud. To establish a violation under 15 U.S.C. § 78j(b), a plaintiff must allege that defendants made a false representation or omitted to disclose material information "in connection with the purchase or sale of securities." 15 U.S.C. § 78j(b). Plaintiffs must also allege that they suffered injury as a result of their reasonable reliance on such misrepresentation or omission.
The test of what constitutes a security is a "flexible one, based primarily upon the substance of the transaction." Fund of Funds, Ltd. v. Arthur Andersen & Co., 545 F. Supp. 1314 (S.D.N.Y. 1982) (citing United Housing Foundation Inc. v. Forman, 421 U.S. 837, 849, 95 S. Ct. 2051, 2059, 44 L. Ed. 2d 621 (1975)). The court determines if the "scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others." Fund of Funds, 545 F. Supp. at 1347 (quoting SEC v. W. J. Howey Co., 328 U.S. 293, 301, 66 S. Ct. 1100, 1104, 90 L. Ed. 1244 (1946)).
Whether partnership shares, like those at issue in the 110th Street conversion project, constitute "securities" under § 78j depends on the extent to which the partners exercise a "managerial role in the partnership's affairs[.]" Mayer v. Oil Field Systems Corp., 721 F.2d 59, 65 (2d Cir. 1983). The federal securities law does not apply where "general partners have legal rights and responsibilities for the conduct of the partnership's business, which provide access to information, at least latent control, and some protection." 545 F. Supp. at 1348 (citations omitted). But it does apply where the partners act more like passive investors with little or no control over the business and whose interest in the venture could better be characterized as an "investment contract." See, e.g., Henkind v. Brauser, 1989 U.S. Dist. LEXIS 5344, *11-14, No. 87 Civ. 4072, 1989 WL 54109 at *5-6 (S.D.N.Y. 1989).
While there is insufficient evidence in the record for the court to determine whether the partnership arrangement for the 110th Street property falls within the ambit of the federal securities law, plaintiffs fail to allege that Feinstein made a misleading statement or omitted to disclose a material fact upon which they relied. Feinstein did not have a fiduciary relationship with plaintiffs. Moreover, it is unclear whether he even knew the source of the money he invested on Curi's behalf.
Plaintiffs also have not alleged facts sufficient to establish Feinstein's liability under an "aiding and abetting" theory. Nothing in the complaint says that Feinstein's affirmative acts helped Curi perpetrate the alleged securities fraud or that his inaction violated an independent duty to act. See IIT an Intern. Inv. Trust v. Cornfeld, 619 F.2d 909, 927 (2d Cir. 1980).
Second, Feinstein's receipt of plaintiffs' funds, whether or not sufficient to allege violations of the mail fraud statute, does not constitute participation in the "conduct or management of the enterprise itself." Reves v. Ernst & Young, 507 U.S. 170, 185, 113 S. Ct. 1163, 1173, 122 L. Ed. 2d 525.
To participate in the "conduct" of the enterprise means to be involved in "some degree of [its] direction." Id. at 178, 113 S. Ct. at 1169. Mere involvement or association with a RICO enterprise is not enough to establish RICO liability--"the test is not involvement but control . . . ." Dep't of Economic Development v. Arthur Andersen & co., 924 F. Supp. 449, 466 (S.D.N.Y. 1996) (quoting A.I. Credit Corp. V. Hartford Computer Group, Inc., 847 F. Supp. 588, 601 (N.D. Ill. 1994)).
The enterprise alleged is the association-in-fact of Valdes and Curi for the purpose of defrauding plaintiffs of their money. While Feinstein played a role in the management of the 110th Street partnership, that partnership is not an alleged enterprise in the complaint and involves several individuals unrelated to the allegations here.
At best, the complaint alleges that Feinstein, through the receipt of plaintiffs' funds, knowingly facilitated one of the dozens of transactions by which Curi and Valdes embezzled plaintiffs' money. The knowing receipt of fraudulently obtained funds does not constitute participation in the "operation and management" of the enterprise. Amalgamated Bank of New York v. Marsh, 823 F. Supp. 209, 220 (S.D.N.Y. 1993). See also General Motors Corp. v. Ignacio Lopez de Arriortua, 948 F. Supp. 670, 681 (E.D. Mich. 1996) (knowing receipt of stolen trade secrets does not constitute participation in the RICO enterprise). Having alleged no greater role on Feinstein's part, plaintiffs fail to state a RICO claim against him.
Defendants Sheldon and Eleanor Feinstein move in the alternative for summary judgment on the grounds that they did not commit any predicate acts and had no knowledge of the fraud. Because the court will dismiss the RICO counts against them, it need not address their motion for summary judgment.
Plaintiffs also say that each of the defendants conspired to commit two predicate acts of racketeering activity in violation of 18 U.S.C. § 1962(d).
Section 1962(d) of Title 18 makes it unlawful to "conspire to violate any of the provisions" of § 1962(a), (b), or (c). To plead a violation of § 1962(d), plaintiffs must do more than allege an agreement to commit the predicate acts. Plaintiffs must allege facts from which the court could infer the existence of such agreement and that defendants "understood the scope of the enterprise and knowingly agreed to further its affairs through the commission of various offenses." Morin v. Trupin, 711 F. Supp. 97, 111 (S.D.N.Y. 1989) (citation omitted).
Here plaintiffs make the conclusory allegation that "Valdes, Miriam and each of the defendants consciously entered into an agreement to commit at least two acts of racketeering in furtherance of the scheme to defraud, steal and embezzle money from the plaintiffs." Later in the complaint it is alleged that defendants "knowingly entered in to agreements with each other to engage in the formation and operation of several conspiracies in which defendants committed the predicate acts of racketeering."
Plaintiffs say that the court can infer the existence of an agreement from the fact that each of the defendants personally benefitted from the scheme and from at least one act of racketeering activity.
With respect to Curi, the complaint adequately sets forth facts suggesting that he entered into an agreement with Valdes to commit at least two acts of racketeering activity in furtherance of the scheme to defraud plaintiffs of their money.
The complaint does not set forth such facts with respect to the remaining defendants. No predicate acts have been alleged as to Rosa, Jorge, Lilliam and Thomas Janata, Luis and Maria Luisa Vega, and Eleanor Feinstein. And while a charge of conspiracy does not require commission of a predicate act, the complaint does not specify what predicate acts these defendants might have agreed to commit. Nor does it allege facts that establish these defendants understood that their actions were part of a pattern of racketeering activity. See Giuliano v. Everything Yogurt, Inc., 819 F. Supp. 240, 249 (E.D.N.Y. 1993) (court dismissed conspiracy count where complaint failed "to supply facts to buttress its 'barebones' allegation that defendants conspired to commit mail fraud).
While predicate acts were alleged against Feinstein, there are no facts to suggest that he agreed to participate in the conduct or management of the enterprise. Neibel v. Trans World Assurance Co., 108 F.3d 1123, 1128 (9th Cir. 1997) (conspiracy in the RICO context requires an agreement "to operate or manage an enterprise") (quoting United States v. Antar, 53 F.3d 568, 581 (3d Cir. 1995)). Conspiring with "someone who is operating or managing the enterprises" is not a basis for liability under 18 U.S.C. § 1962(d). Id.
The complaint says that Feinstein knew that the funds Curi transferred to him for, investment were fraudulently acquired. But mere knowledge of the scheme, even coupled with personal benefit, is not enough to impose liability for a RICO conspiracy. Id.
The RICO conspiracy claims against all defendants except Curi will be dismissed.
Plaintiffs also make state law claims for "fraud and deceit," "fraudulent concealment" and "conversion." Because it appears that these claims are part of the same "case or controversy" as the federal claims, the court retains supplemental jurisdiction over them, even those involving defendants against whom the RICO claims will be dismissed. 28 U.S.C. § 1367(a). But it is unclear whether plaintiffs have alleged the elements of each state law claim with respect to each of the defendants. Accordingly, plaintiffs are directed to replead the state law claims providing the court with a "short and plain statement" of their claims for relief. Fed. R. Civ. P. 8(a).
Plaintiffs' claims arising. from the 1982-1984 transaction are time-barred.
The court dismisses the RICO claims, counts I and II of the complaint, as to all defendants except Marcelo Curi.
Dated: Brooklyn, New York
September 5, 1997
Eugene H. Nickerson, U.S.D.J.
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