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RICO — Same Act Cannot Constitute Both Predicate Offense and Requisite Investment within § 1962(a), as Investment Injury Must Be Distinct from Pattern Injury

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From Guy’s Mechanical Sys., Inc., v. FIA Card Servs., N.A., 2009 U.S. App. LEXIS 14065 (3d Cir. June 22, 2009) (unpublished):

GMSI is a small company in western Pennsylvania that performs mechanical contracting services. Its principal owner, Wilbur Guy, has a credit card account with FIA that he mainly uses for business purchases. GMSI's bookkeeper, Lorene Sinclair, embezzled money by having Guy endorse GMSI checks intended to pay off his credit card account, altering the checks to increase the amount to be paid (for example, adding a "6" to a check for $137.50 to make it appear to be for $6137.50), and using the checks to overpay on a FIA credit card account held by her husband. Sinclair would then collect cash refunds of those overpayments from FIA, channeling GMSI money into her pockets. This scheme went on for over ten years, enabling Sinclair to embezzle hundreds of thousands of dollars. [GMSI sued FIA under 18 U.S.C. § 1962(a).]

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Section 1962(a) "was primarily directed at halting the investment of racketeering proceeds into legitimate businesses, including the practice of money laundering." Brittingham v. Mobil Corp., 943 F.2d 297, 303 (3d Cir. 1991). In order to avoid overlap with 18 U.S.C. § 1962(c), which creates liability for any injury caused by a pattern of racketeering activity, the Third Circuit has held that a claim under § 1962(a) "must allege an injury resulting from the investment of racketeering income distinct from an injury caused by the predicate [racketeering] acts themselves." Lightning Lube, Inc. v. Witco Corp., 4 F.3d 1153, 1188 (3d Cir. 1993).

GMSI alleges in its suit that FIA participated in a predicate racketeering activity, money laundering, by providing refunds to Sinclair for more than ten years despite their suspicious nature. GMSI asserts that this behavior caused it direct loss when FIA deposited the fraudulent checks and invested its proceeds from those checks (the amount not refunded to Sinclair) in its business operations. FIA moved to dismiss GMSI's claims, prompting the District Court to raise the question of whether GMSI had adequately pled an "investment injury" separate from the predicate money laundering offense. The District Court ultimately decided that GMSI had failed to do so, and rejected GMSI's attempt to amend its complaint, concluding that the proposed amendments would not cure the pleading deficiency. GMSI timely appealed the District Court's ruling.

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The flaw in GMSI's reasoning is that it does not identify any injury caused specifically by the use or investment of racketeering proceeds, as required under our interpretation of § 1962(a). Appellant makes every effort to cast FIA's cashing of GMSI checks as an investment of racketeering income, independent from the alleged money laundering that produced that income, that injured GMSI. However, it was in fact FIA's conversion of the checks provided by Sinclair into cash that provided it with its purported racketeering proceeds in the first place. The cashing of the checks cannot simultaneously have constituted both the step by which FIA realized its proceeds from Sinclair's embezzlement and the subsequent investment of those proceeds in a way that proximately caused an injury to GMSI. If that one discrete act were counted as both the production of racketeering income and the use of that income, then "the distinction between sections 1962(a) and 1962(c) would be blurred" in a way that undermines Congress's intent in creating the two separate provisions. Glessner v. Kenny, 952 F.2d 702, 709 (3d Cir. 1991). Therefore, as the District Court correctly reasoned, FIA's cashing of the checks may only be considered a part of the predicate racketeering offense of money laundering. Such predicate offenses are punishable under § 1962(c), not § 1962(a). Lightning Lube, 4 F.3d at 1189.

GMSI does not attempt to argue that it suffered any other independent injury from FIA's investment or use of the checks. Nor would it be successful if it did so. As we have made clear, the mere use of racketeering proceeds to support a business that continues to engage in the racketeering activities that produced those profits does not qualify as an investment injury for purposes of a § 1962(a) claim. See Brittingham v. Mobil Corp., 943 F.2d 297, 303-05 (3d Cir. 1991) (finding allegation that corporation's proceeds from racketeering activity enabled it to continue its fraudulent activities insufficient to support a claim under § 1962(a)). GMSI therefore cannot successfully plead a § 1962(a) claim. The District Court was correct both in dismissing the complaint and denying GMSI's motion to amend.

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New York Attorneys JHA handles range the gamut of complex financial and commercial litigation and arbitration, including securities, RICO, corporate and contract disputes, credit default swaps, derivatives, and class, mass, and derivative actions. The firm also represents law firms in major disputes.
New York Attorneys JHA handles range the gamut of complex financial and commercial litigation and arbitration, including securities, RICO, corporate and contract disputes, credit default swaps, derivatives, and class, mass, and derivative actions. The firm also represents law firms in major disputes.

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