provides that the funds were so committed "in exchange for an
agreement by Equal to invest the Funds in whatever legal manner
it sees fit. . . ." Agreement ¶ 2.
Citadel has pled that the Agreement "required that such funds
be invested for any lawful purpose." Amd. Compl. ¶ 86. Construing
this claim in the light most favorable to Citadel, the Amended
Complaint adequately pleads that the funds were to have been
treated in a particular manner, in that they were to have been
ff. Notice of Unlawful Transfer
The Amended Complaint also states that "[s]ince neither Hertzog
nor Telesis had rights of ownership in any of Citadel's funds,
anyone who assumed control over such funds equally had no rights
of ownership unless they were a bona fide purchasers for value
without knowledge." Amd. Compl. ¶ 98. With regard to Tyson, the
Amended Complaint sufficiently pleads the notice element by
stating that "Tyson, despite actions taken against Hertzog, of
which she knew or should have known, never returned the funds she
received to Citadel." Amd. Compl. ¶ 100.
However, with regard to Sullivan, Mensana and Brite, the
Amended Complaint alleges only that they "knowingly exercised
rights of ownership over [the funds] to the exclusion of
Citadel's rights as the rightful owner." Amd. Compl. ¶¶ 110, 121.
However, merely alleging that defendants "knowingly" used funds
does not adequately plead that they used the funds with knowledge
that they had been converted by Telesis. Citadel has failed to
plead the notice element of conversion with regard to Sullivan,
Mensana and Brite.
For the aforementioned reasons, Citadel has failed to state a
claim for conversion against Telesis and Hertzog. Because Counts
IV-VI are derivative of Count III and suffer from the same and
additional pleading deficiencies, they will also be dismissed
pursuant to Rule 12(b)(6).
The claim against Brite should be dismissed for one additional
reason. The Amended Complaint alleges that Brite is liable for
conversion "in the event that any of Citadel's funds were
transferred to Brite." (Amd. Compl. at ¶ 118.) In addition to the
shortcomings stated above, this pleading fails to allege any
facts sufficient to state a case or controversy against Brite. In
order for a plaintiff to have standing on any particular claim,
the plaintiff must have suffered an "injury in fact" that is
neither "conjectural" nor "hypothetical." Lujan v. Defenders of
Wildlife, 504 U.S. 555, 560, 112 S.Ct. 2130, 2136, 119 L.Ed.2d
351 (1992). Here, the claim against Brite is based upon mere
speculation. In addition to the aforementioned reasons, Count VI
will be dismissed because it does not present a controversy
The conversion claims will be dismissed without prejudice.
Citadel is granted leave to refile.
2. The Federal RICO Claims Will Be Dismissed with Prejudice
Count XII claims that Hertzog, Telesis, Mensana and Sullivan
violated 18 U.S.C. § 1962(b) by engaging in a pattern of
racketeering activity. Count XIII claims that Hertzog, Telesis,
Brite, Tyson, Mensana and Sullivan violated 18 U.S.C. § 1962(c)
by being employed by or associated with an enterprise engaged in
a pattern of racketeering activity. Count XIV claims that
Hertzog, Telesis, Mensana and Sullivan violated
18 U.S.C. § 1962(d), by conspiring to engage in a pattern of racketeering
For the reasons stated below, all three RICO claims will be
dismissed with prejudice.
a. Citadel Lacks Standing
Citadel does not have standing to bring a RICO action because
it has failed to make the requisite claim that its injury was
caused by the defendants' alleged acts
of racketeering. See Laborers Local 17 Health and Benefit Fund
v. Philip Morris, 191 F.3d 229, 235 (2d Cir. 1999) (citing
Holmes v. Securities Investor Protection Corp., 503 U.S. 258,
266, 112 S.Ct. 1311, 117 L.Ed.2d 532 (1992)).
Before an injury's cause may be identified, it is necessary to
define the injury itself. In its memoranda, Citadel defines its
injury it as "Equal's failure to return Citadel's funds." (Cit.
Resp. Br. at 13.) As discussed above, whether this
characterization is accurate depends on whether Citadel retained
ownership of the funds after transferring them to Equal pursuant
to the contract. The defendants construe the contract as a loan
in which Citadel relinquished ownership of the funds to Equal in
exchange for Equal's promise to pay interest and principal one
month later. Under the defendants' view, the injury was the
breach of contract and took place when Equal failed to transfer
ownership of the paintings as security, failed to provide regular
interest payments, and failed to transfer $11 million (or any
funds) to Citadel at the end of the contract's term. See
In contrast, Citadel construes it as an "investment contract"
in which the $11 million were to remain "Citadel's funds" while
Equal invested them on Citadel's behalf. Under Citadel's view,
the injury took place when Equal transferred Citadel's funds to
Telesis without seeking Citadel's authority, thereby depriving
Citadel of the use of its funds. See Cit. Resp. Br. at 12.
As discussed above, due to the nature of the contract and the
fact that the funds were not specifically identifiable as held in
Equal's account, Citadel no longer had ownership of the funds at
the time they were transferred to Telesis. Its claim is
essentially one for breach of contract against Equal, and
Citadel's injury was complete when Equal wired the funds to
Telesis, rendering Equal financially unable to honor the
contract. Citadel can point to no provision in either the Amended
Complaint or the RICO statement in which it alleges that any act
by any of the defendants caused its injury, see generally Cit.
Resp. Br., and, in fact, none exists. No subsequent transfer of
funds or purported "racketeering activities" by any other
defendant could have "caused" Citadel's injury after Equal had
already disbursed the money.
Citadel also argues that its "injury would not have occurred
without the transfer by Mensana of the $4 million to IIC" in
violation of the May 7, 1998 Mareva Injunction. (See Amd.
Compl. ¶¶ 176-179; Cit. Resp. Br. at 14.) However, "[a]n act
which proximately caused an injury is analytically distinct from
one which furthered, facilitated, permitted or concealed an
injury which happened or could have happened independently of the
act," in that the former scenario properly forms the predicate
for a RICO claim, whereas the latter does not. Red Ball Interior
Demolition Corp. v. Palmadessa, 874 F. Supp. 576, 587 (S.D.N Y
Citadel is correct in arguing that it would have had the
opportunity for legal redress at the Mareva Injunction
confirmation hearing if the funds had not been transferred out of
the custody of the named defendants in the English action on the
eve of that hearing. However, even if the subsequent transfers
made it more difficult for Citadel to seek redress for the injury
Equal caused, they did not in and of themselves cause the injury
within the meaning of the RICO statute. The violation of the
Mareva Injunction, even if it compounded Citadel's previous
injury, is an offense against the issuing court that is
punishable with contempt and sanctions rather than an act that
gives rise to an independent cause of action by Citadel. See,
e.g., Gompers v. United States, 233 U.S. 604, 609, 34 S.Ct. 693,
695, 58 L.Ed. 1115 (1914) (discussing English courts'
longstanding common law contempt power); D. Patrick Inc. v. Ford
Motor Co., 8 F.3d 455, 459 (7th Cir. 1993) ("there is no such
thing as an independent cause of action for civil contempt")
(quoting Blalock v. United States, 844 F.2d 1546, 1550 (11th
In addition, Citadel has failed to plead the required element
of reliance on a misrepresentation by the defendants to support
its claim that the defendant's alleged acts of wire fraud caused
its injury. See Moore v. PaineWebber, Inc., 189 F.3d 165,
169-170 (2d Cir. 1999); Metromedia Co. v. Fugazy, 983 F.2d 350,
368 (2d Cir. 1992) ("to establish the required causal connection,
the plaintiff [is] required to demonstrate that the defendant's
misrepresentations were relied on"); Odyssey Re (London) Limited
v. Stirling Cooke Brown Holdings Limited, 85 F. Supp.2d 282, 303
(S.D.N.Y. 2000) (dismissing RICO claim for failure to allege
reliance); Feeley v. Whitman Corp., 65 F. Supp.2d 164, 174
(S.D.N.Y. 1999) (same).
By filing these RICO claims, Citadel is attempting to transform
what is an "elegantly simply two-party contract dispute into a
dizzily complex multi-party tort litigation." Rolls Royce, 929
F. Supp. at 120. Yet Citadel has failed to plead the causal or
reliance elements required to establish standing to bring a RICO
claim against any of the defendants. Therefore the federal RICO
claims will be dismissed in their entirety.
b. Citadel Cannot Make Out a Federal RICO Claim
Because it appears beyond doubt that Citadel prove no set of
facts in support of any of its three RICO claims which would
entitle it to relief even if it did have standing, see Harris v.
City of New York, 186 F.3d at 250, the RICO claims will be
dismissed with prejudice. The deficient RICO elements are set
forth briefly below.
i. § 1962(b) and (c)
To state a RICO claim under § 1962(b) and (c), a plaintiff must
plead seven elements: "(1) that the defendant (2) through the
commission of two or more acts (3) constituting a `pattern' (4)
of `racketeering activity' (5) directly or indirectly invests in,
or maintains an interest in, or participates in (6) an
`enterprise' (7) the activities of which affect interstate or
foreign commerce." Moss v. Morgan Stanley, Inc., 719 F.2d 5, 17
(2d Cir. 1983) (quoting 18 U.S.C. § 1962(a)-(c)); see
Scheiner v. Wallace, 832 F. Supp. 687, 699 (S.D.N.Y. 1993). "In
considering RICO claims, courts must attempt to achieve results
`consistent with Congress's goal of protecting legitimate
businesses from infiltration by organized crime.'" Schmidt v.
Fleet Bank, 16 F. Supp.2d 340, 346 (S.D.N.Y. 1998).
aa. Predicate Acts of Racketeering
The RICO statute defines "racketeering activity" as comprising
enumerated crimes, including wire fraud as alleged in this case.
18 U.S.C. § 1961(1); 18 U.S.C. § 1343 (wire fraud). A plaintiff
alleging wire fraud must show (1) the existence of a scheme to
defraud, (2) defendant's knowing or intentional participation in
the scheme, and (3) the use of interstate wire communications in
furtherance of the scheme. See S.Q.K.F.C., Inc. v. Bell Atlantic
Tricon Leasing Corp., 84 F.3d 629, 633 (2d Cir. 1996).
Moreover, because Citadel alleges wire fraud as the predicate
acts, the Amended Complaint must comport with Fed.R.Civ.P. Rule
9(b), which requires plaintiffs to plead the circumstances of the
fraud with particularity. See Cosmas v. Hassett, 886 F.2d 8, 11
(2d Cir. 1989) (stating Rule 9(b) requirement that "a complaint
must adequately specify the statements it claims were false or
misleading, give particulars as to the respect in which plaintiff
contends the statements were fraudulent, state when and where the
statements were made, and identify those responsible for the
statements."); Zaro Licensing, Inc. v. Cinmar, Inc., 779
276, 281 (S.D.N.Y. 1991) ("All of the concerns that dictate that
fraud be pleaded with particularity exist with even greater
urgency in civil RICO actions") (citation and internal quotations
Given the difficulty in pleading a defendant's state of mind
with specificity, Rule 9(b) requires that a plaintiff plead the
intent element of fraud only in general terms. See Powers v.
British Vita, P.L.C., 57 F.3d 176, 184 (2d Cir. 1995). This
standard may be satisfied by pleading either that the defendants
engaged in consciously fraudulent behavior, or that they had
motive and a "clear opportunity" to commit fraud. Id.
Finally, where, as here, more than one defendant is charged
with fraud, the Amended Complaint must particularize each
defendant's alleged participation in the fraud. See Di Vittorio
v. Equidyne Extractive Industries, Inc., 822 F.2d 1242, 1247 (2d
Cir. 1987) ("where multiple defendants are asked to respond to
allegations of fraud, the complaint should inform each defendant
of the nature of his alleged participation in the fraud."); Daly
v. Castro Llanes, 30 F. Supp.2d 407, 414 (S.D.N.Y. 1998). In the
context of a RICO claim, each defendant must be alleged to have
engaged in two or more predicate acts. See Lakonia Management
Ltd. v. Meriwether, 106 F. Supp.2d 540, 550 (S.D.N.Y. 2000) (RICO
complaint must allege that each defendant committed at least two
predicate acts of racketeering); Moeller v. Zaccaria,
831 F. Supp. 1046, 1056 (S.D.N.Y. 1993) (same).
There is no set of facts under which Citadel would be able to
make out a colorable claim on the first two elements of fraud:
that the defendants were intentionally engaged in a scheme to
defraud. Although the Amended Complaint does allege that the
defendants used the wires to transfer funds and to transmit
facsimiles, there is no showing of a nexus of knowledge between
these transfers that would be sufficient to support a claim that
there was a collective enterprise engaging in a common scheme to
defraud Citadel. The complaint fails to allege in even cursory
fashion that any defendant other than Hertzog had knowledge of
the origin of the funds, or that there was any question as to the
lawfulness of the transfers, much less an intent to defraud.
Hertzog and Telesis are the only defendants in this action who
were defendants in the Mareva Injunction. Amd. Compl. ¶ 26.
Because none of the other defendants in this action were involved
in the English action, they cannot be charged with knowledge that
the funds transfers they received were in any way unlawful.
Even if Citadel could allege the predicate criminal acts, it
could not establish a pattern by making the requisite showing
that the defendants' acts are "related, and that they amount to
or pose a threat of continued criminal activity." H.J., Inc. v.
Northwestern Bell Tel. Co., 492 U.S. 229, 239, 109 S.Ct. 2893,
106 L.Ed.2d 195 (1989). The continuity necessary to establish a
pattern may be either "closed-ended" or "open-ended."
Closed-ended continuity involves acts occurring over a
"substantial" amount of time, which the Supreme Court has defined
as including periods of more than a few months. See id., 492
U.S. at 242, 109 S.Ct. 2893. The Second Circuit has never found
that activity continuing for less than two years is substantial
under this rule. See Cofacredit, 187 F.3d at 242. Here, Citadel
concedes that the defendants' alleged racketeering acts took
place "within a period of less than two years." Amd. Compl. ¶¶
191, 215. In fact, the life of the racketeering activity is
measured by the predicate acts, which, in this case, range only
from April 1998 to February 1999, less than one year. Amd. Compl.
¶¶ 172-188; see H.J., Inc., 492 U.S. at 242, 109 S.Ct. 2893.
There is no closed-ended continuity.
Open-ended continuity does not require a substantial temporal
but requires a plaintiff to show a threat of ongoing criminal
activity beyond the period in which the predicate acts were
committed. See Cofacredit, 187 F.3d at 242. Citadel argues that
the defendants' allegedly criminal conduct will inherently
continue until Citadel is made whole. Cit. Resp. Br. at 18.
However, the fact that the complainant has not recovered its
contractual loss is simply not sufficient to prove the threat of
future criminal acts by the defendants. Cf. Perlman v. Zell,
185 F.3d 850, 853 (7th Cir. 1999) ("breach of contract is not
fraud, and a series of broken promises therefore is not a pattern
of fraud. It is correspondingly difficult to recast a dispute
about broken promises into a claim of racketeering under RICO.")
Counts XII and XIII will be dismissed with prejudice.
iii. § 1962(d)
In order to establish a violation of § 1962(d), the Supreme
Court has held that a "conspirator must intend to further an
endeavor which, if completed, would satisfy all of the elements
of a substantive criminal offense. . . ." Salinas v. United
States, 522 U.S. 52, 65, 118 S.Ct. 469, 139 L.Ed.2d 352 (1997);
see also Cofacredit, S.A. v. Windsor Plumbing Supply Co.,
187 F.3d 229, 244-45 (2d Cir. 1999). In other words, a RICO
conspiracy claim cannot stand where, as here, the elements of the
substantive RICO provisions are not met. See Discon, Inc. v.
NYNEX Corp., 93 F.3d 1055, 1062-63 (2d Cir. 1996).
Count XIV will be dismissed with prejudice.
For the aforementioned reasons, the default motion is granted
as to Telesis and denied as to Tyson. The Amended Complaint will
be dismissed, and the plaintiff is granted leave to refile in
accordance with this opinion.
It is so ordered.