United States District Court, E.D. New York
July 6, 2005.
METROPOLITAN TRANSPORTATION AUTHORITY, Plaintiff,
FREDERICK CONTINI, EDWARD CARROLL, MORRIS DIMINNO, MATTHEW JOSEPH DOWNEY, JAMES ROEMER, JOHN VITIELLO, CONSTANTINE VAFIAS, DAVID COAKLEY, ROBERT SANTORO, 2 BW DEVELOPMENT LLC, LINKS PEPPER CONSTRUCTION INC. d/b/a "LINKS CONSTRUCTION CO, INC.", CONAN CONSTRUCTION CORP., YANKEE ASSOCIATES, ON-THE-JOB CARPENTRY SWILLEY CONTRACTING CORP., RHINO DEMO COMPANY, INC., BULLDOG MANAGEMENT & CONSULTING, INC. D&D ASSOCIATES, 144 ENTERPRISES LLC d/b/a "CITY CHECK CASHING" and BROADWAY CONSTRUCTION, Defendants.
The opinion of the court was delivered by: DAVID TRAGER, District Judge
MEMORANDUM AND ORDER
Metropolitan Transportation Authority ("MTA" or "plaintiff"), a
New York Public Benefit Corporation that owns and manages public
transportation systems in the New York City Area, filed the
present action against defendants alleging that defendants
participated in a racketeering scheme to defraud the MTA out of
millions of dollars in connection with the renovation of the
MTA's new headquarters at 2 Broadway, New York, New York. Plaintiff alleges that defendant 144 Enterprises, LLC d/b/a
"City Check Cashing" ("City Check") violated sections 1962(c) and
1962(d) of the Racketeering Influenced and Corrupt Organizations
Act ("RICO") and aided and abetted a breach of fiduciary duty
under New York law. City Check moves to dismiss the complaint as
it pertains to it arguing that it fails to state a claim under
Fed.R.Civ.P. 12(b)(6). For the following reasons, defendant's
motion is denied.
The following facts are taken from plaintiff's complaint and
are presumed to be true for the purposes of this motion. This
case involves a conspiracy to defraud the MTA out of millions of
dollars by submitting false invoices that inflated fees for
services performed by elevator operators during a renovation
project on the MTA's new headquarters at 2 Broadway in New York
City. See Plaintiff's Complaint ("Compl.") ¶¶ 1-2. The MTA
alleges that City Check, the defendant making the pending motion,
participated in this scheme by laundering the ill-gotten gains of
the conspiracy. Id. ¶ 62.
In early 1999, the MTA contracted with Frederick Contini to
renovate 2 Broadway in downtown New York City after terminating
its contract with Contini's former employer. Id. ¶ 5. Contini
was responsible for overseeing the work on the building and coordinating the approval and payment of subcontractor invoices
for work performed. Id. The MTA also advanced funds to Contini,
to be held "in trust," for the payment of expenses. Id. ¶ 45.
Thus, Contini became a fiduciary of the MTA. Id. ¶ 137.
Soon after the MTA awarded Contini the 2 Broadway job, he and
the other defendants allegedly devised a scheme to embezzle money
from the 2 Broadway project by submitting fraudulent invoices to
the MTA for elevator operator services that were never performed.
Id. ¶ 6. The invoices also charged inflated rates for both the
work done and not done. Id. These invoices were prepared by
defendant Links Pepper Construction Inc. d/b/a Links Construction
Co. Inc. ("Links"), a shell company set up solely for the purpose
of funneling the proceeds of the scheme. Id. Contini submitted
eleven Links invoices to the MTA, the first in March 1999 and the
last in February 2000. Id. ¶ 57. The MTA issued checks to Links
based on the invoices, totaling $13,381,337.54, which were
cashed, the funds from which were then distributed to at least
six different shell companies controlled by various defendants.
Id. Only one company, defendant Conan Construction Corp.,
actually employed and paid elevator operators. Id.
Links used various methods to deliver the proceeds of the
fraudulent invoices to the various shell companies. Id. ¶¶
61-64. Of particular relevance for the motion here considered, checks issued by MTA payable to Links were brought to City Check,
a licensed check cashing facility located in Jersey City, New
Jersey, where the checks were converted to cash or bank checks
payable to certain of the defendant companies. Id. ¶ 31, 64.
The manager of City Check, defendant Santoro, an alleged member
of the Genovese crime family who was formerly convicted of money
laundering, was the contact at City Check. Id. ¶ 62. Santoro
negotiated the checks in exchange for a percentage of each
check's value. Id. The balance was given to Contini and
defendant Morris Dimino as kickbacks. Id. ¶ 64. The bank checks
were often cashed at City Check and the money distributed and
pocketed by various defendants. Id.
In or about May 2000, approximately fourteen months after the
first fraudulent invoice was submitted to the MTA, duly empaneled
grand juries in the Eastern District of New York began to
investigate whether individuals and unions connected with the 2
Broadway project had violated any federal laws. Id. ¶ 65. The
grand jury issued several subpoenas to witnesses and requested
documentation supporting the invoices submitted to the MTA. Id.
¶¶ 66-74. Various defendants engaged in a cover-up by creating
false documentation in response to the subpoenas and tampered
with at least one material witness. Moreover, at least one named
defendant gave false testimony before the grand jury. Id. This
cover-up lasted from May 2000 until at least January 2002. Id. On April 18, 2002, the federal government unsealed a fifty-five
count indictment against seven of the nine individually named
defendants in this action. Id. ¶ 76. Soon after, the other two
individual defendants were also charged for their roles in the
scheme. Id. ¶¶ 77, 80. By September 2003, all of the
individually named defendants in this suit had pled guilty to all
or some of the counts brought against them, including defendant
Santoro, who pled guilty to money laundering. Id. ¶ 80.
Plaintiff alleges that City Check played an essential role in
conducting the RICO scheme because it provided an essential
conduit in the distribution of the proceeds of the conspiracy.
Further, laundering the money allowed defendants to conceal the
conspiracy from plaintiff. Finally, plaintiff claims that City
Check aided and abetted Contini's breach of the fiduciary duty he
Pattern of Racketeering Activity
The RICO statute, 18 U.S.C. § 1962(c), prohibits a "person
employed by or associated with any enterprise engaged in, or the
activities of which affect, interstate or foreign commerce, to
conduct or participate, directly or indirectly, in the conduct of
such enterprise's affairs through a pattern of racketeering activity." 18 U.S.C. § 1962(c). A "pattern of racketeering
activity" may be shown by evidence of two or more predicate acts
"that . . . themselves amount to, or . . . otherwise constitute a
threat of, continuing racketeering activity." H.J. Inc. v.
N.W. Bell Tel. Co., 492 U.S. 229, 240 (1989) (emphasis in
original). City Check argues that plaintiff cannot show that the
alleged fraud amounts to a RICO violation because the fraud "is
limited to one project . . . one victim . . ., and a period of
less than one year."*fn1 Memorandum of Law in Support of
Defendant 144 Enterprises, LLC's Motion to Dismiss Complaint
("City Check Mem.") at 2.
Regardless of the number of projects, victims involved or
duration of the scheme, it is clear that many acts of fraud were
committed and that the fraud threatened to continue into the
foreseeable future. First, rather than look at the number of projects defendants' scheme affected, the question that should be
examined is what the potential life span of the scheme was and
whether the defendants' actions posed "a distinct threat of
long-term racketeering activity, either implicit or explicit."
H.J. Inc., 492 U.S. at 242. Although defendants only chose to
submit fraudulent invoices for eleven months, from March 1999 to
February 2000, they could clearly have carried on their
racketeering activity for a very long time. The "one project," as
City Check calls it, was, at the time, proclaimed to be the
largest renovation in New York City history and would likely take
a substantial and unknowable amount of time to complete. See
Comp. ¶¶ 3, 50. Therefore, at the time the elevator operator
fraud scheme was conceived and executed, there was no specific
end in sight. See Morrow v. Black, 742 F.Supp. 1199, 1207
(E.D.N.Y. 1990) (finding that even though predicate acts spanned
a few months, continuity existed because at the time of the acts
there was a threat of continuing criminal activity). The mere
fact that the racketeering activity related to a single project
by no means indicates that the fraud would be short-lived or that
the illegal scheme would not continue far into the future.
Second, the fact that there was only one victim is irrelevant
to whether the continuity element is satisfied. See Procter &
Gamble Co. v. Big Apple Indus. Bldgs., 879 F.2d 10 (2d Cir.
1989). In Procter & Gamble Co. v. Big Apple Industrial Buildings, the Second Circuit found that defendants' multiple
fraudulent representations to the plaintiff regarding a single
project constituted a "pattern of racketeering activity." Id.
at 18. The Second Circuit found that the finite nature of the
project was irrelevant and that the proper issue for
consideration was whether the alleged "acts of racketeering were
neither isolated nor sporadic." Id. In this case, the
fraudulent acts and money laundering were clearly neither
isolated or sporadic, but systematic, occurring every month for
eleven months, and part of a well-planned and defined scheme.
"`Continuity' is both a closed- and open-ended concept,
referring either to a closed period of repeated conduct, or to
past conduct that by its nature projects into the future with a
threat of repetition." H.J. Inc., 492 U.S. at 241 (citing
Barticheck v. Fid. Union Bank/First Natl. State, 832 F.2d 36,
39 (3d Cir. 1987)). An "`analysis of the threat of continuity
cannot be made solely from hindsight.'" U.S. v. Aulicino,
44 F.3d 1102, 1112 (2d Cir. 1995) (quoting U.S. v. Busacca,
936 F.2d 232, 238 (6th Cir. 1991)). Rather, open-ended continuity may
be shown if, "at the time of occurrence" the racketeering
activity threatens future criminal activity. Morrow,
742 F. Supp. at 1207 (emphasis in original). Open-ended continuity may
be found even where the predicate acts occur over a very short
period of time. U.S. v. Indelicato, 865 F.2d 1370, 1383 (2d
Cir. 1989) (holding that continuity existed where three murders that were part of a
scheme to change leadership in an organized crime family occurred
A threat of continuity may be established where the predicate
acts are inherently unlawful and were made in pursuit of
inherently unlawful goals even if, as here, the "period spanned
by the racketeering acts was short." Aulicino, 44 F.3d at 1111.
Essentially, if the nature of the acts indicate that the
defendants had a continuing intent and ability to carry on the
racketeering activity, a threat of continuity is established.
See Id.; Nafta v. Feniks Intl. House of Trade,
932 F. Supp. 422, 427 (E.D.N.Y. 1996). Here, the overall goal of the scheme
was to embezzle money from the MTA, an act considered inherently
unlawful. See Aulicino, 44 F.3d at 1111. City Check allegedly
participated in the scheme by laundering the proceeds of the
fraud, an act which is also viewed as inherently unlawful. See
U.S. v. Coiro, 922 F.2d 1008 (2d Cir. 1991); Int'l. Bhd. of
Teamsters v. Carey, 297 F. Supp. 2d 706, 715 (S.D.N.Y. 2004).
Therefore, City Check's money laundering acts undertaken in
pursuit of embezzling money from the MTA show a threat of future
criminal conduct sufficient to establish open-ended continuity
even though those acts spanned less than one year. (2)
Operation and Management
City Check also argues that plaintiff has not sufficiently pled
that City Check participated in the "operation or management" of
the enterprise. The Supreme Court has interpreted § 1962(c)'s
required element of "conduct" to "include an element of
direction," that the defendant had "some part in directing the
enterprise's affairs." See Reves v. Ernst & Young,
507 U.S. 170, 178-79 (1998). In Reves, the Supreme Court adopted an
"operation or management" test to determine in all RICO cases
whether a defendant had sufficient connection to the enterprise
to warrant imposing liability. The operation-management test has
been recognized as "a very difficult test to satisfy." Amsterdam
Tobacco Inc. v. Philip Morris Inc., 107 F. Supp. 2d 210, 216
(S.D.N.Y. 2000); see also Redtail Leasing, Inc. v.
Bellezza, 2001 WL 863556, at *4 (S.D.N.Y. July 31, 2001). The
test has, however, been met where defendants had a managerial
role in a RICO enterprise, as well as where defendants "exercised
broad discretion in carrying out the instructions of [their]
principal[s]." United States v. Diaz, 176 F.3d 52, 92 (2d Cir.
The Supreme Court has found that "the word `participate' makes
clear that RICO liability is not limited to those with primary
responsibility, just as the phrase `directly or indirectly' makes clear that RICO liability is not limited to
those with a formal position in the enterprise." Reves,
507 U.S. at 178-179. RICO liability is also applicable to "lower rung
participants in the enterprise who are under the direction of
upper management." Id. at 184. However, "the simple taking of
directions and performance of tasks that are `necessary or
helpful' to the enterprise, without more, is insufficient to
bring a defendant within the scope of § 1962(c)." United States
v. Viola, 35 F.3d 37, 41 (2d Cir. 1994). There is a difference
between actual control over an enterprise and mere association
with an enterprise; in light of that difference, the test for
liability "is not involvement but control." Congregacion de la
Mision Provincia de Venezuela v. Curi, 978 F. Supp. 435, 450
(E.D.N.Y. 1997) (citing Dept. of Econ. Dev. v. Arthur Anderson &
Co., 924 F. Supp. 449, 466 (S.D.N.Y. 1996)).
City Check argues that its and Santoro's involvement in the
RICO scheme was merely "peripheral" and that City Check was
neither "a central player in the alleged underlying scheme" nor
responsible for Santoro's acts under the doctrine of respondeat
superior. See City Check Mem. at 13. To support this
contention, City Check cites a number of cases where banks or
other organizations were found not to survive the "operation and
management" test even though they knowingly accepted and
maintained deposits of fraudulently obtained funds. Id. at 11 (citing Dubai Islamic Bank v. Citibank, N.A.,
256 F. Supp. 2d 1071 (S.D.N.Y. 2003); Sundial Intern. Fund Ltd. v. Delta
Communications, Inc., 923 F. Supp. 38 (S.D.N.Y. 1996); Indus.
Bank of Latvia v. Baltic Fin. Corp., No. 93-cv-9032, 1994 WL
286162 (S.D.N.Y. June 27, 1994); Amalgamated Bank of N.Y. v.
Marsh, 823 F. Supp. 209 (S.D.N.Y. 1993)).
These cases are distinguishable from the case at bar. First,
the defendants in the above-cited cases were considered
"outsiders" to the enterprise. Plaintiff's complaint clearly
states that Santoro was a full-fledged member of the enterprise
and that he was an integral cog in the works. Second, the
defendants in each of the above cases did not benefit directly
from the scheme, nor did they do anything but passively receive
the funds. Here, Santoro received a kickback from each check that
he handled and did not merely hold the funds but cut checks as
requested so that the money could be distributed to the various
entities involved in the scheme.
A more relevant case is American Arbitration Association v.
Defonseca, No. 93 CIV. 2424, 1996 WL 363128 (S.D.N.Y. June 28,
1996). In that case, the role of one of the moving defendants in
the scheme was to maintain joint control of accounts, deposit
checks of fraudulently obtained funds into those accounts and
send a portion of the proceeds of these checks to another of the
defendants. See id. at *1-*2. The court found that this amounted to participation in the scheme because "[t]he complaint
must only state that [the defendant was] in charge of certain
aspects of the enterprise." Id. at *5. Like the defendant in
Defonseca, Santoro "participated" in the scheme by directing at
least part of the money laundering division of the scheme.
Therefore, the complaint properly alleges that Santoro was part
of the "operation and management" of the scheme.
In determining whether a corporation may bear RICO liability
for the actions of its employee "`the critical question is
whether the illegal conduct alleged was known to and participated
in by sufficiently high-level employees within a corporation
and/or was sufficiently pervasive within the corporation as to be
fairly attributed to the corporation.'" Local 857 I.B.T. Pension
Fund v. Pollack, 992 F. Supp. 545, 568 (S.D.N.Y. 1998) (quoting
In re American Honda Motor Co., Inc. Dealerships,
958 F. Supp. 1045, 1051 n. 3 (D. Md. 1997)). In addition, the corporation must
have received a benefit from its employee's participation in the
conspiracy. See id. at 569; Burke v. Dowling,
944 F. Supp. 1036, 1069-1070 (E.D.N.Y. 1995). Plaintiff alleges that Santoro
was an owner/operator of City Check during the time he
participated in the conspiracy. In essence, Santoro is alleged to
have been in charge of the day-to-day operations of City Check, a
sufficiently high level employee to impute knowledge of the
wrongdoing on City Check. See Local 875, 992 F. Supp. at 569 (finding that company could be liable under RICO where managing
director was involved in enterprise). The issue of the benefit to
City Check was not addressed by either party. Therefore, as
stated above, plaintiff has properly pled that Santoro
participated in the RICO enterprise and City Check is vicariously
liable under the theory of respondeat superior for his
City Check argues that plaintiff's claim should be dismissed
because plaintiff fails to plead that City Check's conduct
proximately caused plaintiff's injuries. Under the RICO statute,
"[a]ny person injured in his business or property by reason of a
violation of section 1962 of this chapter may sue therefor . . ."
18 U.S.C. § 1964(c). The Supreme Court has interpreted this
provision to require a "direct relation between the injury
asserted and the injurious conduct alleged." Holmes v. Sec.
Investor Prot. Corp., 503 U.S. 258, 268 (1992). The defendant's
conduct must therefore be both the factual and proximate cause of
the plaintiff's injury. Id.
Central to the notion of proximate cause is the idea
that a person is not liable to all those who may have
been injured by his conduct, but only those with
respect to whom his acts were a substantial factor in
the sequence of responsible causation, and whose
injury was reasonably foreseeable or anticipated as a
natural consequence. . . . [T]he reasonably
foreseeable victims of a RICO violation are the
targets, competitors, and intended victims of the
racketeering enterprise. Baisch v. Gallina, 346 F. 3d 366, 373-374 (2d Cir. 2003)
(internal citations and quotations omitted).
In order to be the proximate cause of a plaintiff's injury in
the RICO context, a defendant's acts must have been "`a
substantial factor in the sequence of responsible causation.'"
Standardbred Owners Assoc. v. Roosevelt Raceway Assoc., L.P.,
985 F.2d 102, 104 (2d Cir. 1993) (quoting Hecht v. Commerce
Clearing House, Inc., 897 F.2d 21, 23-24 (2d Cir. 1990)). City
Check played an essential role in the scheme to embezzle millions
of dollars from the MTA. Without Santoro, at least some of the
proceeds could not have been converted to cash and distributed to
the participants. If people did not get paid, the scheme would
not have continued. Thus, City Check was a "substantial factor"
in plaintiff's loss. See Am. Arbitration Assoc., 1996 WL
363128 at *6 (finding that in embezzlement and money laundering
scheme, money laundering defendants were a proximate cause of
Subdivision (d) of 18 U.S.C. § 1962 prohibits "any person
[from] conspir[ing] to violate any of the provisions of
subsection (a), (b) or (c) of this section." 18 U.S.C. § 1962(d).
"[T]he requirements for RICO's conspiracy charges under § 1962(d)
are . . .: A `conspirator must intend to further an endeavor which, if completed, would satisfy all of the
elements of a substantive criminal offense, but it suffices that
he adopt the goal of furthering or facilitating the criminal
endeavor.' In the civil context, a plaintiff must allege that the
defendant `knew about and agreed to facilitate the scheme.'"
Baisch, 346 F.3d at 376-77 (quoting Salinas v. U.S.,
522 U.S. 52 (1997)).
City Check argues that it cannot be held liable under § 1962(d)
because plaintiff did not properly plead continuity under §
1962(c) and because City Check cannot be held vicariously liable
for Santoro's actions. As stated above, plaintiff has properly
pled continuity and that City Check is liable for Santoro's
actions. As Santoro clearly knew about and agreed to participate
in the scheme, plaintiff has properly pled that City Check
conspired to violate RICO.
State Law Claim
Plaintiff alleges that City Check and other defendants aided
and abetted Contini's breach of fiduciary duty. Under New York
law, to state a claim for aiding and abetting a breach of
fiduciary duty, a plaintiff must allege "(1) a breach of
fiduciary obligations to another; (2) that the defendant
knowingly induced or participated in the breach; and (3) that the
plaintiff suffered damages as a result." In re Sharp Int'l Corp., 302 B.R. 760, 770 (E.D.N.Y. 2003) (citing Kaufman v.
Cohen, 760 N.Y.S.2d 157, 307 A.D.2d 113 (1st Dep't 2003)).
City Check contends that plaintiff has not properly pled that
City Check knew that a fiduciary relationship existed between
Contini and the MTA. In its complaint, plaintiff details
Contini's fiduciary relationship and alleges that all of the
defendants, including City Check, knew of this relationship. This
is an issue of fact to be determined after discovery or by a
jury. Therefore, it would be inappropriate to dismiss this claim
at this early stage of the litigation.
Accordingly, because plaintiff has adequately pled both
violations of RICO and aiding and abetting a breach of fiduciary
duty in violation of state law, City Check's motion to dismiss is