The opinion of the court was delivered by: Milton Pollack, Senior District Judge.
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).