OPINION AND DECISION
Global Minerals and Metals Corp. ("Global") and R. David Campbell ("Campbell"), (collectively referred to as the "Global Defendants") move pursuant to Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure to dismiss the Second Claim of the Second Consolidated Class Action Complaint (the "Complaint"), brought under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), U.S.C. § 1961, et seq. (the "Second Claim").
Plaintiffs allege that Sumitomo Corporation ("Sumitomo"), through its head copper trader Yasuo Hamanaka ("Hamanaka"), and other parties, including the Global Defendants, manipulated the price of copper on the London Metal Exchange (the "LME"), and thereby by implication on the COMEX division of the New York Mercantile Exchange ("Comex"), for approximately seven years, from 1989 to 1996.
Specifically, between February, 1995 and June, 1996, defendants allegedly manipulated prices of copper futures contracts by purchasing and holding "unneeded" copper exchange contract long positions, thereby restricting available supply. Allegedly, as a result of the manipulation, copper prices reached an artificially high level. The purported scheme collapsed under regulatory scrutiny, at which time Sumitomo fired Hamanaka and liquidated its positions at a loss.
Plaintiffs allege that during 1995-96, after regulators became suspicious, Sumitomo and Global Defendants opened brokerage accounts together in Sumitomo's name, but as to which Global Defendants held a power of attorney and managed the trading. Plaintiffs claim this was done to exert maximum effect upon prices and to deflect the regulators attention away from Sumitomo. Plaintiffs further allege that Global Defendants and Sumitomo regularly discussed and coordinated their price manipulation and that they acted in concert in making false statements to the market place and regulators. This concerted action in manipulating the copper market forms the factual basis for the RICO claims at issue in this motion.
The Global Defendants assert that the Second Claim consists of no more than news articles, rumors and generalized allegations which defendants "will at the appropriate time prove to be baseless." They argue that the Second Claim is deficient in the following respects: 1) the Global Defendants are not alleged to have participated in the operation or management of a "RICO enterprise"; 2) the alleged predicate acts of mail fraud and wire fraud are not sufficiently particularized; and 3) Plaintiffs have not pled reliance on any acts of mail or wire fraud.
For the purposes of this motion, the factual allegations of the Second Consolidated Class Action Complaint are accepted as true, and all inferences are drawn in favor of the pleader. Mills v. Polar Molecular Corp., 12 F.3d 1170, 1174 (2d Cir. 1993).
A. Sufficiency of RICO Enterprise Allegations
To state a RICO claim, a plaintiff must allege that defendants "conducted or participated...in the conduct of [an] enterprise's affairs through a pattern of racketeering activity." 18 U.S.C. § 1962(c). RICO defines "enterprise" as "any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity." 18 U.S.C. § 1961(4). The enterprise may be "proved by evidence of an ongoing organization, formal or informal, and by evidence that the various associates function as a continuing unit." United States v. Turkette, 452 U.S. 576, 69 L. Ed. 2d 246, 101 S. Ct. 2524 (1981). This Circuit construes the enterprise element of RICO liberally: "The language and the history [of RICO] suggest that Congress sought to define the term as broadly as possible ...." United States v. Indelicato, 865 F.2d 1370, 1382 (2d Cir.), cert. denied, 493 U.S. 811, 107 L. Ed. 2d 24, 110 S. Ct. 56 (1989) (en banc).
Here, the alleged structure of the enterprise is clear from the Complaint. Although Sumitomo and Global were distinct legal entities, they opened joint accounts with Merrill Lynch, Morgan Stanley and Rudolf Wolff in Sumitomo's name, but as to which Global and Campbell had a power of attorney and played some role in the management of trading. In the Merrill Lynch account, the Global Defendants are alleged to have used Sumitomo's credit to make purchases. Through these joint accounts, as well as through their individual accounts, Sumitomo and Global are alleged to have coordinated their copper trading in an effort to manipulate prices. This is a sufficient allegation of a RICO enterprise.
Additionally, to be subject to RICO liability, a defendant must have participated, directly or indirectly, in the operation or management of the enterprise. Reves v. Ernst & Young, 507 U.S. 170, 183, 122 L. Ed. 2d 525, 113 S. Ct. 1163 (1993). Liability is not limited to those primarily responsible for an enterprise's affairs, in upper management, or who occupy a formal position in the enterprise, but may attach even to "lower-rang participants in the enterprise who are under the direction of upper management."
Id. at 183-84. However, " some part in directing the enterprise's affairs is required." Id. at 184.
Although Global Defendants contend that they merely acted at Sumitomo's behest, the Complaint alleges, at a minimum, "substantial assistance" on the part of the Global Defendants in the overall manipulation scheme. See Napoli v. United States, 45 F.3d 680, 683 (2d Cir.), cert. denied, 514 U.S. 1084 and 514 U.S. 1134 (1995). Global Defendants are alleged to have coordinated their trading activities and public statements with Sumitomo and, at least, of acting under the direction of Sumitomo by purchasing copper exchange contracts through the joint accounts. At this early stage, these allegations are sufficient to satisfy Reves.
Contrary to the Global Defendants suggestion, allegations of the existence of a RICO enterprise must meet only the "notice pleading" requirements of Fed R. Civ. Pro. 8. Trustees of Plumbers Nat'l Pension Fund v. Transworld Mech., Inc., 886 F. Supp. 1134, 1144-45 (S.D.N.Y. 1995); Azurite Corp. v. Amster & Co., 730 F. Supp. 571 (S.D.N.Y. 1990). At this time, nothing more is required of Plaintiffs.
B. Sufficiency of Mail and Wire Fraud Allegations
Under RICO, a "pattern of racketeering activity" consists of "at least two acts of racketeering activity" within a ten year period. See 18 U.S.C. § 1961(5); Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496 n.14, 87 L. Ed. 2d 346, 105 S. Ct. 3275 (1985); McLaughlin v. Anderson, 962 F.2d 187, 190 (2d Cir. 1992). Among the predicate acts enumerated in § 1961 (1) are any acts of mail fraud indictable under the federal mail fraud statute, 18 U.S.C. § 1341, and any acts of wire fraud indictable under the federal wire fraud statute, 18 U.S.C. § 1343.
Plaintiffs allege that the Global Defendants have committed the predicate acts of mail fraud and wire fraud in carrying out a "master plan" to manipulate and artificially inflate the prices of copper and its derivatives. The elements of a claim of mail or wire fraud are: (1) the existence of a scheme to defraud involving money or property; and (2) the use of the mails or wires in furtherance of the scheme. See United States v. Trapilo, 130 F.3d 547, 551-52 (2d Cir. 1997); McLaughlin, 962 F.2d at 191 (citing Schmuck v. United States, 489 U.S. 705, 712, 103 L. Ed. 2d 734, 109 S. Ct. 1443 (1989)).
Contrary to the Global Defendants assertion that each of the elements of common law fraud must be pled to satisfy the first prong of the mail and wire fraud statutes, "the term 'scheme to defraud' is measured by a "'nontechnical standard. It is a reflection of moral uprightness, of fundamental honesty, fair play and right dealing in the general [and] business life of members of society.'" Trapilo, 130 F.3d at 550 n. 3 (citing United States v. Von Barta, 635 F.2d 999, 1005 n. 12 (2d Cir. 1980), cert. denied, 450 U.S. 998, 68 L. Ed. 2d 199, 101 S. Ct. 1703 (1981) ( quoting Gregory v. United States, 253 F.2d 104, 109 (5th Cir. 1958). In Trapilo, the Second Circuit noted that smuggling, an act unlikely to constitute an act of common law fraud, was "an act within the meaning of a 'scheme to defraud'" because it "violated fundamental notions of honesty, fair play and right dealing." Id. See also, Ray Larsen Associates, Inc. v. Nikko America, Inc., 1996 U.S. Dist. LEXIS 11163, 89 CIV 2809, 1996 WL 442799 *5 (August 5, 1996 S.D.N.Y.) (noting that "because [the mail and wire fraud statutes] are broader than common law fraud, it is possible for a plaintiff sufficiently to plead mail or wire fraud while nevertheless failing to plead common law fraud.")
To satisfy the second prong of the mail and wire fraud statutes, a plaintiff must show 1) that the defendants "caused" the mailing or use of the wires, "namely that they must have acted 'with knowledge that the use of the mails [or wires] will follow in the ordinary course of business, or where such use can reasonably be foreseen, even though not actually intended,'" and 2) that the mailing or use of the wires "was for the purpose of executing the scheme or, in other words, 'incidental to an essential part of the scheme.'" United States v. Bortnovsky, 879 F.2d 30, 36 (2d Cir. 1989) (quoting Pereira v. United States, 347 U.S. 1, 8-9, 98 L. Ed. 435, 74 S. Ct. 358 (1954)).
In pleading a violation of the mail and wire fraud statutes, Rule 9(b) of the Federal Rules of Civil Procedure must be satisfied. Mills, 12 F.3d at 1176; de La Roche v. Calcagnini, 1997 U.S. Dist. LEXIS 7664, No. 95 CIV. 6322, 1997 WL 292108, at *7 (June 3, 1997, S.D.N.Y.). Rule 9(b) reads: "In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge and other condition of mind of a person may be averred generally." Fed. R. Civ. P. 9(b).
Rule 9(b) has great "urgency" in civil RICO actions. Schmidt v. Fleet Bank, 1998 U.S. Dist. LEXIS 1041, No. 96 CIV. 5030, 1998 WL 47827, *5 (Feb. 4, 1998, S.D.N.Y.) (quoting Morin v. Trupin, 778 F. Supp. 711, 716 (S.D.N.Y. 1991). The rationale underlying a strict application of the pleading requirements in civil RICO actions is that merely initiating a RICO action against a defendant can "unfairly stigmatize him as a 'racketeer.'" Plount v. American Home Assurance Co., 668 F. Supp. 204, 205 (S.D.N.Y. 1987). Also, "the civil RICO has resulted in a flood of what are and should be state court cases that are being reframed and brought in federal court as RICO actions because of the carrot of treble recovery and the availability of a federal forum." Id. Indeed, the "overwhelming trend" amongst the lower courts is to apply Rule 9(b) strictly in order to effect dismissal of civil RICO suits. See 16 RICO L. Rep. 1, 79-93 (1992) (index showing disproportionate number of dismissals in civil RICO suits under Rule 9(b)); see also Michael Goldsmith, Judicial Immunity For White Collar Crime: The Ironic Demise of Civil RICO, 30 Harv. J. on Legis. 1 (1993) (demonstrating, allegedly, that judicial reform of the RICO statute by the lower courts has resulted in the demise of civil RICO actions).
However, while Rule 9(b) may be construed strictly in the context of civil RICO actions, it should not be applied in a manner which would, in effect, obstruct all plaintiffs, including those with valid claims, from initiating civil RICO actions. RICO clearly provides for civil remedies to benefit victims of racketeering, and in the absence of congressional action, these provisions should not be ignored. See 18 U.S.C. § 1964(c); see also H.J. Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 249, 106 L. Ed. 2d 195, 109 S. Ct. 2893 (U.S. 1989) ("RICO may be a poorly drafted statute; but rewriting it is a job for Congress...."). Moreover, even if applied strictly, Rule 9(b) must still be read together with Rule 8(a), which requires a plaintiff to plead only a short, plain statement upon which he is entitled to relief. See Connolly v. Havens, 763 F. Supp. 6, 12 (S.D.N.Y. 1991).
In cases in which a plaintiff claims that specific statements or mailings were themselves fraudulent, i.e. themselves contained false or misleading information, the complaint should specify the fraud involved, identify the parties responsible for the fraud, and where and when the fraud occurred. See Mills, 12 F.3d at 1175 (citing Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir. 1989)); McLaughlin, 962 F.2d at 191 (2d Cir. 1992); Luce v. Edelstein, 802 F.2d 49, 55 (2d Cir. 1986).
In cases in which the plaintiff claims that the mails or wires were simply used in furtherance of a master plan to defraud, the communications need not have contained false or misleading information themselves. See Schmuck, 489 U.S. at 715. In such cases, a detailed description of the underlying scheme and the connection therewith of the mail and/or wire communications, is sufficient to satisfy Rule 9(b). Spira v. Nick, 876 F. Supp. 553, 559 (S.D.N.Y. 1995); Center Cadillac v. Bank Leumi Trust Co., 808 F. Supp. 213, 229 (S.D.N.Y. 1992), aff'd, 99 F.3d 401 (2d Cir. 1995). When read appropriately, Spira does not fall outside the established rules in this Circuit, as appears from the following extract:
For one thing, we do not regard mailings in furtherance of the scheme, but which are not themselves false or misleading, as "averments of fraud" within the language of Rule 9(b). For another, it is difficult to see any useful purpose in requiring that a RICO complaint specifically allege each mailing in furtherance of a complex commercial scheme, at least where, as here, the complaint alleges that numerous mailings of particular kinds were made in furtherance of the scheme. Once the plaintiff alleges with particularity the circumstances constituting the fraudulent scheme, neither the reputational interests nor the notice function served by Rule 9(b) would be advanced in any material way by insisting that a complaint contain a list of letters or telephone calls.
Id. In complex civil RICO actions involving multiple defendants, therefore, Rule 9(b) does not require that the temporal or geographic particulars of each mailing or wire transmission made in furtherance of the fraudulent scheme be stated with particularity. Spira, 876 F. Supp. at 559.
In such cases, Rule 9(b) requires only that the plaintiff delineate, with adequate particularity in the body of the complaint, the specific circumstances constituting the overall fraudulent scheme. Madanes v. Madanes, 981 F. Supp. 241, 254 (S.D.N.Y. 1998); Center Cadillac, 808 F. Supp. at 229; Beth Israel Med. Ctr. v. Smith, 576 F. Supp. 1061, 1070-71 (S.D.N.Y. 1983).
Here, the Complaint asserts a detailed fraudulent master plan involving coordinated efforts by Global Defendants and Sumitomo to manipulate copper prices. In alleging the predicate acts of mail and wire fraud for the purposes of the RICO claim, the Complaint refers back to its previous factual allegations, and therefore must be read in conjunction with them. Plaintiffs allege, with the requisite specificity, a scheme whereby Sumitomo and Global Defendants purchased and held unneeded copper exchange contacts long positions in excess of 1,000,000 tons of copper, thereby injecting artificial demand and buying pressure into the supply/demand equation for copper exchange contracts. Global Defendants and Sumitomo are then alleged to have cornered substantially all of the copper available for delivery in copper exchange warehouses and kept the copper off the market, artificially restricting available supply. Among the relevant allegations regarding use of the mails and wires, the Complaint states:
56 (b) Campbell ... spoke periodically from Global's office in New York with Sumitomo, per Imamura, by telephone. Global, per Campbell had, during 1995-96, virtually daily contact by interstate wires (telephone and telefax) with Sumitomo, per Hamanaka or Masahiro Mogari, who was a trader on Sumitomo's Copper Team.