Credit Lyonnais, S.A. ("CL") and Credit Lyonnais Rouse ("CLR")
(collectively referred to as the "Credit Lyonnais Defendants") each
move, pursuant to Rules 12(b)(6) and 9(b) of the Federal Rules of Civil
Procedure, to dismiss the Sixth Amended Consolidated Class Action
Complaint (the "Complaint") against them for failure to state a claim
upon which relief can be granted and for failure to allege fraud with
In the Complaint, plaintiffs assert claims under the Racketeer
Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961
et seq. and the common law of New York alleging that the prices of copper
futures contracts traded on the Commodity Exchange Inc. and the Comex
division of the New York Mercantile Exchange Inc. were artificially
inflated between June 24, 1993 and June 15, 1996, inclusive, by an
alleged conspiracy of certain defendants herein.
A motion to dismiss under Rule 12 must be denied "unless it appears
beyond doubt that the plaintiff can prove no set of facts in support of
his claim which would entitle him to relief." Scheuer v. Rhodes,
416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974) (quoting Conley
v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957)). For the
purposes of this motion, the factual allegations of the 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).
I. SUFFICIENCY OF ALLEGATIONS AGAINST CREDIT LYONNAIS ROUSE ("CLR")
A. Sufficiency of RICO Allegations
1. Sufficiency of Section 1962(c) Allegations
To state a RICO claim, a plaintiff must allege that defendants
"conduct[ed] or participat[ed] . . . 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, 101 S.Ct. 2524, 69 L.Ed.2d 246 (1981).
Defendants cite various Seventh Circuit cases to support their contention
that to properly allege an association-in-fact, there must be a structure
and goals separate from the predicate acts themselves. However, this
Circuit construes the enterprise element of RICO liberally; "[T]he
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,
110 S.Ct. 56, 107 L.Ed.2d 24 (1989) (en banc).
In Moss v. Morgan Stanley, 719 F.2d 5 (2d Cir. 1983), this Circuit held
that a RICO enterprise need not have an "`economic goal . . apart from
the commission of the predicate acts,'" but simply "an ascertainable
structure distinct from the pattern of racketeering, and [which] cannot
simply be the sum of the predicate acts." Schmidt v. Fleet Bank,
16 F. Supp.2d 340, n. 5 (S.D.N.Y. 1998). This Circuit has explicitly
rejected the view that evidence offered to prove the "enterprise" and the
"pattern of racketeering" must necessarily be distinct. See id.
Plaintiffs allege several alternative associations-in-fact comprised of
various combinations of Sumitomo, Global, Winchester, CLR and the alleged
Winchester-CLR joint venture. At this juncture in the proceedings, the
agreement, dated May 20, 1991, between Winchester and CLR, which
establishes a "group of companies . . . for the purpose of carrying on,
inter alia, the buying and selling of non-ferrous metals, the buying and
selling of commodities in general, the buying and selling of foreign
exchange whether in the spot or the futures market and introducing
clients to CLR" (the "Winchester-CLR Agreement") alone serves as
sufficient evidence of enterprise structure distinct from the alleged
particular acts, which constitute the defendants' alleged pattern of
racketeering. Plaintiffs have sufficiently alleged the existence of a
RICO enterprise. At this time, this Court does not address plaintiffs'
assertions regarding CLR's vicarious liability for acts of Winchester.
Moreover, 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, 113 S.Ct.
1163, 122 L.Ed.2d 525 (1993). As this Court has noted before, 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-rung participants in the
enterprise who are under the direction of upper management." Id. at
183-84, 113 S.Ct. 1163. However, "some part in directing the enterprise's
affairs is required." Id. at 184, 113 S.Ct. 1163.
CLR contends that its role in the alleged enterprise was attenuated as
it can show that it did not have knowledge of the underlying business of
Sumitomo and Global and was thus unaware of the lack of commercial
justification for the trades it cleared on their behalf. It further
argues that its position as an "outsider" is determinative of the Reves
test. However, "[o]nce a RICO enterprise is established, a defendant may
be found liable even if he does not have specific knowledge of every
member and component of the enterprise." Mason Tenders District Council
Pension Fund v. Messera, 1996 WL 351250 at *6 (S.D.N.Y. 1996) ("Whether
or not this conduct is viewed as being at the core of the enterprise . .
."). Furthermore, "[t]he RICO statute has been repeatedly construed to
cover both insiders as well as those peripherally connected to a RICO
enterprise, particularly where the "outsiders" are alleged to have
engaged in kickbacks in order to influence the enterprise's decision."
Id. See also Azrielli v. Cohen Law Offices, 21 F.3d 512, 514-15, 521 (2d
Cir. 1994) (Judge Kearse held that the district court should not have
dismissed the § 1962(c) claim against defendant who served as "the
middle person in [a] flip sale" of a building "`by allowing his name to
be used on the bogus contract and showing up at the closing.'").
Plaintiffs' allegations regarding the profit and loss share agreement
between CLR and Winchester and regarding the various forms of reciprocal
assistance between Hamanaka or Sumitomo and CLR and Winchester are at a
minimum sufficient to allege "substantial assistance on
the part of CLR in the overall manipulation scheme." See Napoli v. United
States, 45 F.3d 680, 683 (2d Cir.) cert. denied, 514 U.S. 1084, 115
S.Ct. 1796, 131 L.Ed.2d 724 and 514 U.S. 1134, 115 S.Ct. 2015, 131
L.Ed.2d 1014 (1995). At this early stage, these allegations are
sufficient to satisfy Reves.
Allegations of the existence of a RICO enterprise must meet only the
"notice pleading" requirements of Fed.R.Civ.Pro. 8. Trustees of Plumbers
and Pipefitters 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
than those allegations made herein is required of plaintiffs.
2. 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, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985). 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.*fn1
Plaintiffs allege that the Credit Lyonnais defendants have committed
the predicate acts of mail fraud and wire fraud in carrying out an
ongoing pattern of concerted activity to manipulate and artificially
impact the price of copper and Comex futures and options contracts. 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 v. Anderson,
962 F.2d 187, 191 (2d Cir. 1992) (citing Schmuck v. United States,
489 U.S. 705, 712, 109 S.Ct. 1443, 103 L.Ed.2d 734 (1989)).
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; German de La Roche v. Calcagnini, 95 Civ. 6322, 1997 WL 292108,
at *7 (S.D.N.Y. 1997). Rule 9(b) provides: "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).
This Court has recognized the significance of Rule 9(b) in civil RICO
actions. See In re Sumitomo Copper Litigation, 995 F. Supp. 451, 455
(S.D.N.Y. 1998) (Pollack, J.). The rationale underlying a strict
application of the pleading requirements in civil RICO actions is that
simply bringing a RICO action against a defendant can unfairly brand him
as a "racketeer." Id. However, while Rule 9(b) should be construed
strictly in the context of civil RICO actions, it should not be exercised
in such a manner as to obstruct even plaintiffs with valid claims from
initiating such actions. Moreover, this Court has held that Rule 9(b)
must still be read along 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).
Defendant CLR's argument that plaintiffs' allegations fail to
adequately allege wire or mail fraud because they have not
alleged facts from which this Court could infer that CLR knew that the
trades were not commercially justified is overshadowed by Rule 9(b)'s
provision for general averment with regard to defendant's knowledge,
especially when considered with the earlier noted principle that once a
RICO enterprise is established, a defendant can be found liable even if
he does not have specific knowledge of all its components. See Mason
Tenders, 1996 WL 351250 at *6.
This Court has held:
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, 109 S.Ct. 1443. 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) .
. . In complex civil RICO actions involving multiple
defendants, therefore, Rule 9(b) does not require that
temporal or geographic particulars of each mailing or
wire transmission made in furtherance of the
fraudulent scheme be stated with particularity.
Spira[v. Nick], 876 F. Supp.  at 559 [(S.D.N.Y.
1995)]. In such cases, Rule 9(b) requires only that
the plaintiff delineated, 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. 1997); Center Cadillac[, Inc. v. Bank Leumi
Trust Co. of New York], 808 F. Supp.  at 229
[(S.D.N.Y. 1992)]; Beth Israel Med. Ctr. v. Smith,
576 F. Supp. 1061, 1070-71 (S.D.N.Y. 1983).
In Re Sumitomo, 995 F. Supp. 451, 456 (S.D.N.Y. 1998) (Pollack, J.).
In this action, the Complaint asserts a detailed conspiracy to
manipulate and corner the market for physical copper and copper futures.
"In light of the complaint's allegations, it is certainly reasonable to
infer that mail and/or telephone communications were used in furtherance
of the defendants' scheme." Beth Israel, 576 F. Supp. at 1071.
Furthermore, plaintiffs do plead specific predicate acts of mail and wire
fraud in the Complaint, such as:
53. . . . Hamanaka sent a fax to Threlkeld at his
office in Vermont, asking him to verify fictitious
trades which supposedly had occurred through DLT and
CLR on September 17 and September 28, 1990, involving
127,505 MT of copper and more than $560 million.
105. The CLR-Winchester joint venture sent various
warrant confirmations to Sumitomo during the Class
Period. These included a false warrant confirmation,
sent by Winchester (per Winchester Tokyo) in early
August 1993 which materially overstated the amount of
copper warrants which Sumitomo held with CLR on the
close of business on July 31, 1993.
119. . . . After "washing" the funds [referring to
"the first cash infusions from the enterprise's put
financing strategy"] through Sumitomo Hong Kong,
Hamanaka transferred the October 4 funds directly to
Merrill Lynch. For the second transaction, Hamanaka
had J.P. Morgan wire the October 20 funds, directly
to CLR, to CLR's account at Citibank in New York for
the further credit of Sumitomo.
These and other similar allegations when viewed in light of the alleged
overall conspiracy adequately meet the requirements of Rule 9(b). As
such, at this juncture in the proceeding, this Court need not continue to
address the issue of whether the existence of any agency relationship,
between various entities allegedly involved in the conspiracy, was
adequately pleaded so as to otherwise satisfy Rule 9(b), as asserted by
plaintiffs and denied by defendant CLR.