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McBrearty v. Vanguard Group

April 2, 2009

DEANNA MCBREARTY AND MARYLYNN HARTSEL, INDIVIDUALLY, DERIVATIVELY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS,
v.
THE VANGUARD GROUP, INC.; GEORGE U. SAUTER; DUANE F. KELLY; JOHN J. : BRENNAN; CHARLES D. ELLIS; RAJIV L. GUPTA; AMY GUTMANN; JOANN HEFFERNAN HEISEN;; ANDRE F. PEROLD; ALFRED M. RANKIN, JR.; J. LAWRENCE WILSON; ACADIAN ASSET MANAGEMENT, LLC; RONALD D. FRASHURE; JOHN R. CHISHOLM; BRIAN K. WOLAHAN;; ALLIANCEBERNSTEIN LP; HENRY S. D'AURIA; SHARON E. FAY; KEVIN F. SIMMS; MARATHON ASSET MANAGEMENT LLP; WILLIAM J. ARAH; JEREMY H. HOSKING; AND NEIL M. OSTRER, DEFENDANTS,
VANGUARD INTERNATIONAL EQUITY INDEX FUNDS, D/B/A VANGUARD EUROPEAN STOCK INDEX FUND; AND VANGUARD HORIZON FUNDS, D/B/A VANGUARD GLOBAL EQUITY FUND, NOMINAL DEFENDANTS.



The opinion of the court was delivered by: Denise Cote, District Judge

OPINION & ORDER

This lawsuit concerns an investment fund's liability to its shareholders for investments in online gambling companies. The investments declined in value after the gambling companies became the targets of a United States government crackdown. Plaintiffs, each a shareholder in one of the nominal defendants, bring this derivative and putative class action lawsuit alleging violations of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961-1968 ("RICO"), as well as state-law claims for breach of fiduciary duty, negligence and waste. Defendants have moved to dismiss the complaint arguing that, inter alia, plaintiffs lack statutory standing under RICO because they cannot show that they were injured "by reason of" the defendants' alleged RICO violations. Plaintiffs having been injured by the government's enforcement actions and their attendant publicity, and only indirectly (at best) by the defendants' purchase of stock, their RICO claims are dismissed for failure to plead proximate causation.

BACKGROUND

The following facts are taken from the complaint. Plaintiff Deanna McBrearty purchased shares in nominal defendant Vanguard European Stock Index Fund ("Vanguard European") on or about May 20, 2005. Plaintiff Marylynn Hartsel purchased shares in nominal defendant Vanguard Global Equity Fund ("Vanguard Global") sometime prior to July 1, 2006.*fn1 Plaintiffs allege that the nominal defendants repeatedly purchased shares in "illegal gambling businesses," as defined by 18 U.S.C. § 1955. In or about 2006, federal and state law enforcement agencies "began a crackdown" on gambling businesses, such as those in which the nominal defendants had invested. Consequently, the stock prices of the gambling business owned by the nominal defendants dropped precipitously, and plaintiffs' portfolios declined in value.

The plaintiffs name as defendants the investment advisor and the portfolio managers responsible for investment decisions made by the nominal defendants and individuals associated with each of these entities.

Plaintiffs allege that, by purchasing and holding stock in the gambling businesses subject to the government's enforcement activities, the defendants conspired together to commit predicate acts under RICO by "financ[ing]" or "own[ing]" an illegal gambling business, in violation of 18 U.S.C. § 1955. Their investments in gambling businesses over a multi-year period, plaintiffs assert, constitute a pattern of racketeering activity that injured plantiffs "as a direct and proximate result."

This action was filed on August 29, 2008. On October 27, 2008, the defendants moved to dismiss the complaint. Plaintiffs' opposition, filed on November 24, asserted that their complaint was sufficient to withstand defendants' motions, but requested leave to amend in the alternative.

At a December 18 conference, the parties agreed with the Court's proposal to initially address two of the issues raised in the motions to dismiss -- whether plaintiffs had demonstrated that defendants' alleged RICO violations caused their injuries, thereby conferring standing to sue under RICO, and the sufficiency of the purchase of gambling-company stock as a predicate act under RICO. A finding in the defendants' favor on either issue, the parties agreed, could not be cured by amendment. Were the plaintiffs to prevail on both issues, they would then have the opportunity to amend their complaint to cure any possible deficiencies, and then the remainder of defendants' motions to dismiss would be considered. As explained below, it is only necessary to reach the first of these two issues to conclude that the RICO claim must be dismissed.

DISCUSSION

A trial court considering a Rule 12(b)(6) motion must "accept as true all factual statements alleged in the complaint and draw all reasonable inferences in favor of the non-moving party." McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 191 (2d Cir. 2007). At the same time, "conclusory allegations or legal conclusions masquerading as factual conclusions will not suffice to defeat a motion to dismiss." Achtman v. Kirby, McInerney & Squire, LLP, 464 F.3d 328, 337 (2d Cir. 2006) (citation omitted). A court considering a Rule 12(b)(6) motion applies a "flexible plausibility standard, which obliges a pleader to amplify a claim with some factual allegations in those contexts where such amplification is needed to render the claim plausible." Boykin v. KeyCorp, 521 F.3d 202, 213 (2d Cir. 2008) (citation omitted). "To survive dismissal, the plaintiff must provide the grounds upon which his claim rests through factual allegations sufficient to raise a right to relief above the speculative level." ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007).

Defendants assert that plaintiffs cannot plausibly allege a violation of RICO, because they cannot plead that defendants' alleged violations of RICO proximately caused plaintiffs' injuries. RICO's civil provision, 18 U.S.C. § 1964(c), provides a private cause of action for any person injured in her business or property "by reason of" a violation of RICO. McLaughlin v. American Tobacco Co., 522 F.3d 215, 222 (2d Cir. 2008) (citing 18 U.S.C. § 1964(c)). In Holmes v. Securities Investor Protection Corporation, 503 U.S. 258 (1992), the Supreme Court refined its earlier conception of causation (the "by reason of" requirement) and explicitly imposed a proximate causation requirement for civil RICO actions. Three policy considerations informed its decision to limit the plaintiffs who could recover from a RICO violation to those who were directly or proximately injured:

(1) the factual difficulty of measuring indirect damages and distinguishing among distinct independent causal factors;

(2) the complexity of apportioning damages among plaintiffs to obviate the risk of multiple recoveries; and

(3) the fact that the need to grapple with these problems is simply unjustified by the general interest in deterring injurious conduct, since directly injured victims can ...


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