RICO Pattern — Nine-Month Scheme by Employee Lacks Continuity — Sole Victim Is Company — Harmed ESOP Participants Not Cognizable Victims — Good Quote (Anti-Mail Fraud Predicate)
From Whitney, Bradley & Brown, Inc. v. Kammermann, 2011 U.S. App. LEXIS 12841 (4th Cir. June 23, 2011):
WBB is a federal government contractor, headquartered in Reston, Virginia, that facilitates business relationships between private enterprise and the Department of Defense. WBB continuously employed Kammermann as a manager from May 2004 until January 2009. In May 2006, unbeknownst to WBB, Kammermann formed and also began working for a business entity called CLK Executive Decisions, LLC ("CLK"), which provided services nearly identical to those performed by WBB. In January 2009, WBB terminated Kammermann's employment upon learning of his conflicting involvement in and ownership of CLK.
On March 29, 2010, WBB filed the operative complaint... [which] alleges that Kammermann, while employed by WBB, engaged in a scheme that encompassed two types of fraudulent activities: (1) the weekly transmission of false time entry reports to WBB; plus (2) the submission of duplicative expense reports to WBB and clients of CLK for the same activities. According to the Complaint, Kammermann transmitted weekly time entry reports to WBB documenting that he was working for WBB when he was actually working for CLK. The Complaint also specifies fourteen instances of duplicate billing that occurred in the nine-month period between March and December 2008***.
In the civil RICO claim, WBB alleges, inter alia, that Kammermann
[f]rom at least March 2008 and continuing through December 2008 . . . unlawfully, knowingly, and intentionally conducted and participated, directly and indirectly, in the conduct, management, and operation of CLK . . . through a pattern of racketeering activity consisting of numerous acts . . . indictable under 18 U.S.C. §§ 1341 (mail fraud) and 1343 (wire fraud).
Complaint ¶ 99. The alleged predicate offenses of mail and wire fraud underlying the civil RICO claim were Kammermann's submissions to WBB, through an overnight delivery service and email transmissions, of the false time entry and expense reports. On July 7, 2010, the district court issued its Opinion, ruling that, because WBB was unable to satisfy the continuity- of-activity requirement of the Pattern Element, Kammermann was entitled to summary judgment on the civil RICO claim. Significantly, the court recognized that the only fraudulent activity supported by the record was the submission of duplicative expense reports to WBB and clients of CLK on fourteen occasions between March and December 2008. The court characterized WBB's allegations of an open-ended pattern as "pro forma," concluding that no such pattern existed absent evidence that Kammermann's fraudulent activities continued after December 2008.... The court also agreed with Kammermann that a closed-ended pattern had not been shown, explaining that only "fourteen predicate acts over a twelve month period is insufficient to make out a case for RICO." ... In so ruling, the district court emphasized that (1) we have been reluctant to find civil RICO liability where the only predicate acts are mail and wire fraud offenses; (2) the only participants in the fraud scheme were Kammermann and CLK; (3) the only victims of the scheme were WBB and the five clients of CLK; (4) the scheme was limited to "misrepresentations made in order to obtain expense reimbursements from WBB"; and (5) the Complaint and evidence failed to show any distinct injuries.***
WBB contends that Kammermann's fraud scheme involved more than 150 predicate acts, continued for nearly three years, and had more than 150 victims. ***
First, WBB maintains that, in addition to the duplicate billings to WBB and CLK's clients, Kammermann submitted false expense reports and weekly time entry reports to WBB from 2006 until 2009. The record, however, discloses no evidence of wrongdoing beyond the duplicate billing recognized by the district court in its Opinion. ***
Second, WBB asserts that Kammermann's fraud scheme continued for nearly three years, beginning when he formed CLK in 2006 and continuing until his termination from WBB in 2009. The evidence, however, fails to support this assertion, establishing only the duplicate billing scheme that occurred in the nine-month period between March and December 2008.
Finally, WBB entreaties us to conclude that there were more than 150 victims of Kammermann's fraud scheme, mainly by adding WBB's ESOP participants. Unfortunately for WBB, however, it is "[a] basic tenet of American corporate law . . . that the corporation and its shareholders are distinct entities." Dole Food Co. v. Patrickson, 538 U.S. 468, 474 (2003). Thus, "[p]eople dealing with a corporation are obliged to look to the corporation for satisfaction of their claims. Only in extraordinary circumstances are directors liable for corporate debts." Flip Mortg. Corp. v. McElhone, 841 F.2d 531, 534 (4th Cir. 1988). As a corollary, a corporate entity is generally treated as a single victim for purposes of civil RICO liability. Accordingly, the district court correctly recognized that there were, at most, six victims of Kammermann's fraud scheme — WBB and the five clients of CLK.***
At bottom, WBB is left to rely solely on our Berry decision [Professionals, Inc. v. Berry, No. 91-1509, 1992 WL 64796 (4th Cir. Apr. 2, 1992)]. Unfortunately for WBB, however, that decision is neither controlling nor apposite. First, the Berry decision bears no precedential weight. See Local Rule 32.1; Pressly v. Tupperware Long Term Disability Plan, 553 F.3d 334, 338 (4th Cir. 2009) (recognizing that unpublished decisions are not binding in this Court). Second, the Berry decision is readily distinguishable on its facts, and therefore not on point. That case involved a real estate company (Professionals), a family (the Berrys), and another business that the Berrys formed and operated (Berry Associates). In 1985, the Berrys solicited investments for two plots of land, which they titled to Berry Associates. Professionals later contracted with Berry Associates to develop the land in exchange for part of any profits.
During the following three years, the Berrys diverted approximately $500,000 from Professionals. In so doing, they, inter alia, (1) caused Professionals to pay salaries to Berry family members who were performing no services; (2) fraudulently purchased and resold land; (3) wrote checks to themselves to cover unsubstantiated expenses; (4) directed their accountant to falsely indicate that a loan from Professionals had been repaid; (5) made false entries in check records on which their accountant relied; and (6) filed misleading financial reports. Additionally, the Berrys opened bank accounts for sham construction companies that had failed to maintain business records, pay taxes, or register under state law. Nevertheless, the Berrys fraudulently charged Professionals in excess of $325,000 for services never performed by the construction companies. As a result, Professionals pursued a civil RICO claim against the Berrys and Berry Associates. After conducting a bench trial, the district court ruled in favor of Professionals, rendering a plaintiff's judgment on the RICO claim.
On appeal to this Court, the Berrys contended that the RICO claim's predicate acts failed to constitute a pattern of racketeering activity. We disagreed, however, and affirmed the district court's judgment for the plaintiff. For our purposes today, two observations are pertinent. First, although the Berrys used mail and wire transfers and communications, they did so in a variety of ways -- by "solicitation of initial and multiple subsequent fiscal contributions, preparation and furnishing of false and misleading financial reports, and participation in shareholders' meetings during which the Berrys disseminated false and misleading reports on the progress of the sites." Berry, 1992 WL 64796, at *3. The extensive and varied manner in which the Berrys used mail and wire transfers is an important distinction from this case, where Kammermann used mail and wire transfers solely to file his false expense reports. Second, in Berry there were fifty-eight fraudulent acts over a three-year period that victimized sixteen investors and involved three individual schemes and participants.
As our unpublished decision in Berry emphasized, "[t]he acts encompassed a variety of techniques to deplete corporate assets and support the Berrys' method of operating the corporation, including falsified invoices and creation of fictitious subcontractors." 1992 WL 64796, at *3. These facts stand in contrast to the ordinary commercial fraud cases where we have been consistently reluctant to approve use of the civil RICO statute, such as where "one perpetrator undertook actions directed toward a single fraudulent goal that impacted two investors over a period of approximately one year" -- a set of facts much more analogous to those presented here. Id. (citing Menasco, Inc. v. Wasserman, 886 F.2d 681, 684 (4th Cir. 1989)). As we have emphasized, "[i]f the pattern requirement [of the civil RICO statute] has any force whatsoever, it is to prevent . . . ordinary commercial fraud from being transformed into a federal RICO claim." Menasco, 886 F.2d at 685. Moreover, "we are cautious about basing a RICO claim on predicate acts of mail and wire fraud because it will be the unusual fraud that does not enlist the mails and wires in its service at least twice." GE Inv. Private Placement Partners v. Parker, 247 F.3d 543, 549 (4th Cir. 2001) (internal quotation marks omitted).
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