Commercial Litigation and Arbitration

Sarbanes-Oxley’s Addition of 18 U.S.C. § 1513(e) as a Predicate Authorizes RICO Claim for Firing as a Result of Whistleblowing Where Retaliation Linked to Racketeering Activity — Offering Raise + Confi + Release Suffices

DeGuelle v. Camilli, 2011 U.S. App. LEXIS 24868 (7th Cir. Dec. 15, 2011):

Michael J. DeGuelle, a tax employee of S.C. Johnson & Son, Inc., was terminated after reporting an alleged tax fraud scheme to the company and federal law enforcement agencies. Following his termination, DeGuelle filed suit asserting two civil claims under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1962(c) and 1962(d). The district court dismissed DeGuelle's RICO claims with prejudice, finding that the predicate acts alleged were either unrelated or did not proximately cause DeGuelle's injuries. DeGuelle believes the district court erred in finding that the appellees' retaliatory acts were unrelated to the alleged tax fraud scheme. Because we find that the acts are related under the Supreme Court's "continuity plus relationship" test, the judgment of the district court will be reversed. ***

A. Section 1962(c)

DeGuelle's first RICO claim alleges that the appellees violated § 1962(c), which makes it unlawful for an employee of an enterprise engaged in interstate 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). To state a claim for relief under § 1962(c), DeGuelle must allege "(1) conduct (2) of an enterprise (3) through a pattern of racketeering activity." United States v. Shamah, 624 F.3d 449, 454 (7th Cir. 2010), cert. denied, 131 S. Ct. 1529 (2011). The parties dispute whether a "pattern of racketeering activity" was properly alleged in the complaint.

A pattern requires the commission of at least two predicate acts of racketeering activity occurring within ten years of each other. 18 U.S.C. § 1961(5). "Racketeering activity" is limited to the specific acts statutorily enumerated in 18 U.S.C. § 1961(1). DeGuelle's complaint alleges several acts of racketeering, including mail fraud in violation of 18 U.S.C. § 1341; tampering with a witness in violation of 18 U.S.C. § 1512(b)(3); altering, destroying, mutilating, or concealing a document with the intent to obstruct justice in violation of 18 U.S.C. § 1512(c)(1); and retaliation against a witness or informant in violation of 18 U.S.C. § 1513(e)-(f). The parties do not dispute that these alleged predicate acts occurred within a ten-year period.

In H.J. Inc. v. Northwestern Bell Telephone Co., the Supreme Court held that to show a pattern of racketeering activity, a plaintiff must demonstrate a relationship between the predicate acts as well as a threat of continuing activity. 492 U.S. 229, 239 (1989). A relationship is established if the criminal acts "have the same or similar purposes, results, participants, victims, or methods of commission, or otherwise are interrelated by distinguishing characteristics and are not isolated events." Id. at 240 (quoting 18 U.S.C. § 3575(e)). Continuity can be a closed-or open-ended concept. Id. at 241. Closed-ended continuity refers to criminal behavior that has ended but "the duration and repetition of the criminal activity carries with it an implicit threat of continued criminal activity in the future." Jennings v. Auto Meter Prods., Inc., 495 F.3d 466, 473 (7th Cir. 2007). In contrast, open-ended continuity requires a showing of past conduct that "by its nature projects into the future with a threat of repetition." H.J., 492 U.S. at 241. The "continuity plus relationship" test established in H.J. allows lower courts to apply a flexible test in determining what constitutes a pattern, while at the same time addressing Congress's concern that RICO target only long-term criminal conduct. See id. at 239, 242.

Even if a plaintiff establishes a RICO violation through a pattern of racketeering activity under § 1962(c), a plaintiff may only recover for damages to one's "business or property" occurring as a result of that violation. See Evans v. City of Chicago, 434 F.3d 916, 924-25 (7th Cir. 2006); 18 U.S.C. § 1964(c). A RICO plaintiff's injuries must be "by reason of" a violation of § 1962. 18 U.S.C. § 1964(c). This requires a showing of "but for" causation and proximate cause. Corley v. Rosewood Care Ctr., Inc. of Peoria, 388 F.3d 990, 1005 (7th Cir. 2004). Here, DeGuelle alleges that he suffered injuries to his business or property in that he was terminated from his employment, sued in Racine County Circuit Court, and defamed in local media outlets. In light of DeGuelle's injuries, logically he can only claim he was injured "by reason of" the appellees' retaliatory actions. But we agree with the district court that the § 1513(e) retaliatory acts on their own do not demonstrate a pattern of racketeering activity. Those acts by themselves do not satisfy the closed-or open-ended continuity requirement. Thus, in order for DeGuelle's claims to have any merit, the retaliation predicate acts must be grouped with other predicate acts of fraud to form a pattern of racketeering activity. To do so, these predicate acts must be related.

The district court determined that DeGuelle's complaint alleged two unrelated schemes: "tax fraud" and "retaliation." Because the district court considered the alleged predicate acts as two separate schemes, the retaliatory actions taken against DeGuelle (terminating DeGuelle, filing a lawsuit, and making defamatory statements) were considered unrelated to the predicate acts alleged as part of the tax fraud scheme (mail fraud, destroying records, and offering DeGuelle benefits in exchange for his silence). The district court reasoned that the two schemes were unrelated because they involved different actors, motives, and victims. The tax fraud scheme was undertaken by Wenzel, Pappenfuss, and Randleman, while the retaliation scheme was carried out by Camilli, Kosterman, and Eckhardt. The tax fraud scheme aimed to defraud the IRS of tax revenue while the retaliation scheme's sole purpose was to retaliate against DeGuelle for being a whistleblower. Since none of the retaliatory acts occurred prior to DeGuelle's whistle-blowing, such acts could not support a theory that the appellees were attempting to "cover up" their tax fraud. In other words, by the time DeGuelle suffered retaliation, the government was already aware of SCJ's wrongdoing.

DeGuelle argues that the Sarbanes-Oxley Act's addition of § 1513(e) as a RICO predicate act allows his claim to proceed. *** That section provides:

Whoever knowingly, with the intent to retaliate, takes any action harmful to any person, including interference with the lawful employment or livelihood of any person, for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any Federal offense, shall be fined under this title or imprisoned not more than 10 years, or both.

18 U.S.C. § 1513(e). Section 1513(f) subjects wrongdoers to the same penalties for entering into a conspiracy to commit such acts. Under RICO, violations of § 1513 are considered "racketeering activity." 18 U.S.C. § 1961(1). Prior to enactment of the Sarbanes-Oxley Act, retaliation against an employee in the form of interference with his or her lawful employment was not considered a racketeering act, see, e.g., Hamm v. Rhone-Poulenc Rorer Pharm., Inc., 187 F.3d 941, 953 (8th Cir. 1999), and courts denied RICO standing to employees terminated for refusing to cooperate in an alleged racketeering scheme, see Corporate Healthcare Fin., Inc. v. BCI Holdings Co., 444 F. Supp. 2d 423, 432 (D. Md. 2006) (listing cases).

Footnote 3. Many cases addressing RICO retaliation claims since the enactment of the Sarbanes-Oxley Act have declined to reconsider these issues. See, e.g., Hoatson v. N.Y. Archdiocese, No. 05 Civ. 10467, 2007 WL 431098, at *6 (S.D.N.Y. Feb. 8, 2007) ("Retaliatory firing is clearly not a listed predicate act or 'racketeering activity.'"), aff'd, 280 F. App'x 88 (2d Cir. 2008); Herrick v. South Bay Labor Council, No. C-04-02673, 2004 WL 2645980, at *3 (N.D. Cal. Nov. 19, 2004) (whistleblower terminated in retaliation for reporting her concerns could not bring RICO claim because her injuries stemmed from wrongful discharge, not alleged racketeering activity); but cf. Vierria v. Cal. Highway Patrol, 644 F. Supp. 2d 1219, 1236-37 (E.D. Cal. 2009) (termination of employee constituted racketeering activity under section 1513(e)).

The addition of § 1513(e) as a predicate act raises issues about the relationship between retaliatory actions and the underlying wrongdoing. The language of § 1513(e) and logic imply that retaliatory actions always occur after a whistleblower reports others' wrongdoing. Under the district court's reasoning, retaliation cannot be related to the underlying wrongdoing for purposes of RICO because the retaliatory acts will always occur after the underlying wrongdoing has been disclosed. Thus, there is no "cover up." In addition, the motives and victims will almost never be the same. We can conceive of very few cases in which a single retaliatory act would be considered "related" to other predicate acts under this reasoning. This is troubling when one considers the purposes of the Sarbanes-Oxley Act and its addition of § 1513(e) to RICO's statutory scheme.

When an employer retaliates against an employee, there is always an underlying motivation. In this case, for example, the motivation was to retaliate against DeGuelle for disclosing the tax scheme. Retaliatory acts are inherently connected to the underlying wrongdoing exposed by the whistleblower. Although there may not be the same victims or results, in most cases retaliatory acts and the underlying scheme "are interrelated by distinguishing characteristics and are not isolated events." H.J., 492 U.S. at 240. Accordingly, we believe a relationship can exist between § 1513(e) predicate acts and predicate acts involving the underlying cause for such retaliation. Such a finding is consistent with the Supreme Court's flexible standard and acknowledges the rationale behind the Sarbanes-Oxley Act's whistleblower provisions.

Footnote 4. We acknowledge that there is a danger, as expressed by many courts prior to the enactment of the Sarbanes-Oxley Act, that plaintiffs will bring claims which should be handled by state law (i.e., wrongful termination) into federal court under the guise of RICO. See Midwest Grinding Co. v. Spitz, 976 F.2d 1016, 1022 (7th Cir. 1992). But we are confident the continuity requirement will often weed out those claims which do not truly demonstrate a threat of continued wrongdoing.

This is not to say that a predicate act of retaliation will always be related to the underlying wrongdoing. Courts must still examine the facts of each case in determining whether the alleged predicate acts satisfy the "continuity plus relationship" test in that they are "not isolated events." For instance, the district court's finding of two independent schemes in this case, if we were to adopt this point of view, would indicate that the retaliatory acts were isolated events separate and apart from the tax fraud scheme. But the allegations contained within the complaint suggest otherwise. We believe the district court erred in finding that the retaliatory actions taken against DeGuelle were unrelated to the ongoing tax fraud scheme.

DeGuelle alleges violations of four statutes which are considered "racketeering activity." First, DeGuelle alleges several instances of mail fraud in violation of 18 U.S.C. § 1341. These acts occurred in December 2000, February 2005, June 2005, and March 2009. DeGuelle alleges that Wenzel, Randleman, Pappenfuss, and Eckhardt participated in these fraudulent activities. Next, DeGuelle alleges violations of 18 U.S.C. § 1512(c)(1), which prohibits the destruction of records. DeGuelle alleges that Wenzel instructed him to destroy records in 2002 so that they would not be discovered by the IRS. DeGuelle's third series of allegations focus on illegal tampering with a witness in violation of 18 U.S.C. § 1512(b)(3). DeGuelle alleges that in December of 2008, Camilli, Kosterman, and Eckhardt offered to pay him a higher salary and to pay his attorney's fees if he agreed to sign a confidentiality agreement and release all claims. This offer came after DeGuelle informed Kosterman and Camilli that he intended to file a whistleblower complaint with the Department of Labor. In addition, in March of 2009, Kosterman offered DeGuelle the opportunity to resign in exchange for one year of salary and benefits if he agreed to sign a confidentiality agreement and release all claims. Finally, DeGuelle alleges that Camilli, Kosterman, and Eckhardt engaged in retaliatory acts against him in violation of 18 U.S.C. § 1513(e)-(f) by terminating his employment, filing a lawsuit against him, and disseminating defamatory statements to the press. ***

[T]he district court ... did not recognize that Kosterman, Camilli, and Eckhardt were responsible for the first act of tampering in December of 2008. These three actors offered DeGuelle an increase in salary and payment of attorney's fees if he agreed to sign a confidentiality agreement and release all claims. This offer occurred after DeGuelle informed human resources he planned to file a whistleblower complaint. The district court clearly identified this act as part of the fraud scheme, and rightly so, as it was intended to prevent DeGuelle from disclosing the company's alleged wrongdoing. Yet the district court did not recognize that these same three actors were also responsible for DeGuelle's termination, thus providing a link between the fraud scheme and the retaliation scheme.

In addition, there is a temporal relationship between the predicate acts in this case, such that under H.J., we can conclude that these acts "otherwise are interrelated by distinguishing characteristics and are not isolated events." 492 U.S. at 240. The first act of tampering, which the parties and the district court agree is related to the alleged acts of mail fraud, occurred in December 2008. During the same month, DeGuelle filed his Department of Labor complaint. An additional act of mail fraud occurred in March 2009. Shortly thereafter, a second act of tampering occurred in which Kosterman offered DeGuelle the opportunity to resign with pay and benefits if he signed a confidentiality agreement and release of claims. After DeGuelle refused, he was terminated in early April 2009. It is reasonable to infer from the alleged facts that Kosterman, recognizing all attempts to silence DeGuelle had failed, resorted to retaliatory termination as a result. The lawsuit and defamatory statements followed shortly thereafter. Thus, over a five-month period, the company engaged in two acts of tampering, one act of mail fraud, and three acts of retaliation. Moreover, the second act of tampering preceded DeGuelle's termination by a very short period of time. It is safe to say these were not isolated events.

Admittedly, some of the actions taken by Kosterman and Camilli are inconsistent with any alleged involvement in the tax fraud scheme. The human resources department apparently took DeGuelle's allegations seriously, prompting the hiring of an outside law firm to investigate tax fraud within the company. In addition, both Kosterman and Camilli investigated DeGuelle's negative performance review. After they determined the review was retaliatory in nature, it was revoked. Despite these inconsistencies, however, there are enough allegations within the complaint to conclude, at this stage in the proceedings, that Kosterman and Camilli were participants in the RICO scheme. For instance, Kosterman and Camilli attempted to silence DeGuelle by offering him incentives if he signed a confidentiality agreement. They also participated in DeGuelle's termination, an alleged act of retaliation.

In light of the above discussion and the "relatively broad" relationship standard, United States v. Maloney, 71 F.3d 645, 661 (7th Cir. 1995), we find that the predicate acts alleged in the complaint are related. Additionally, we find that the continuity requirement is satisfied. As noted by the district court, the predicate acts of tax fraud satisfy the closed-ended continuity test because these acts occurred over a period of five years and involved several actors and methods of commission. Grouping the § 1513(e) predicate acts with the alleged acts of tax fraud does not undermine this closed-ended continuity analysis. Instead, this grouping includes additional predicate acts, victims, and injuries, further supporting a finding of closed-ended continuity. See Morgan v. Bank of Waukegan, 804 F.2d 970, 975 (7th Cir. 1986) ("Relevant factors include the number and variety of predicate acts and the length of time over which they were committed, the number of victims, the presence of separate schemes and the occurrence of distinct injuries."). ***

B. Section 1962(d)


In order to state a claim for § 1962(d) conspiracy, "a plaintiff must allege that (1) the defendant agreed to maintain an interest in or control of an enterprise or to participate in the affairs of an enterprise through a pattern of racketeering activity, and (2) the defendant further agreed that someone would commit at least two predicate acts to accomplish those goals." Slaney v. Int'l Amateur Athletic Fed'n, 244 F.3d 580, 600 (7th Cir. 2001). "[T]he touchstone of liability under § 1962(d) is an agreement to participate in an endeavor which, if completed, would constitute a violation of the substantive statute." Goren v. New Vision Int'l, Inc., 156 F.3d 721, 732 (7th Cir. 1998). The defendant need not personally commit a predicate act; rather, a plaintiff must allege that the defendant agreed that someone would commit at least two predicate acts in furtherance of the conspiracy. See Lachmund v. ADM Investor Servs., Inc., 191 F.3d 777, 784 (7th Cir. 1999). ***

The complaint alleges that Wenzel, Randleman, and Pappenfuss5 engaged in tax fraud in order to receive significantly higher discretionary bonuses. DeGuelle first alleges that Wenzel informed Randleman of the IRS's errors in January of 2001. Afterwards, Wenzel instructed DeGuelle to alter or destroy records. In 2005, DeGuelle approached Pappenfuss with his concerns, but he was directed by Pappenfuss to do as Wenzel directed. Later that same year, Pappenfuss prepared a fraudulent tax return at the instruction of Wenzel and Randleman. As alleged in the complaint, these men stood to personally benefit from the filing of amended tax returns based on the IRS's errors. Further, there are sufficient factual allegations indicating that these men worked in tandem within the tax department and made decisions together. One could infer that these three agreed to participate in the affairs of an enterprise through a pattern of racketeering activity, and further agreed to commit at least two predicate acts of mail fraud.

In order to state a claim for relief, however, DeGuelle must allege that this conspiracy proximately caused his injuries. The complaint indicates that Wenzel, Randleman, and Pappenfuss only engaged in acts of mail fraud and did not participate in decisions to silence or terminate DeGuelle. Thus, DeGuelle must allege that an agreement existed between the three tax department conspirators and Eckhardt, Kosterman, or Camilli.

DeGuelle alleges that all of the appellees in this case had knowledge of illegal acts, discussed those acts, and facilitated commission of those acts such that it may be inferred that there was an agreement among all of the appellees. DeGuelle notes that he informed Camilli of Wenzel and Randleman's actions in January of 2008, and Wenzel was aware of this report by March 2008. Thus, there must have been some communication between Wenzel and Camilli. In addition, Camilli and Randleman initially approved Wenzel's negative performance review, Kosterman and Camilli offered to pay DeGuelle's attorney's fees to persuade him not to expose the tax fraud scheme, and Eckhardt and Kosterman also attempted to silence DeGuelle so that he could not disclose further information to outside parties. Finally, DeGuelle points out that Eckhardt signed and filed a fraudulent tax return and was involved in the decision to terminate DeGuelle (along with Camilli and Kosterman).***

We can easily infer that the tax department conspirators intended to conceal their crimes: Wenzel and Randleman did not disclose the foreign tax credit errors to the IRS and DeGuelle was ordered on more than one occasion to alter or destroy records to prevent detection. Even though Eckhardt, Camilli, and Kosterman may not have been involved in the formation of the conspiracy, "parties may still be found guilty even though they join or terminate their relationship with the core conspirators at different times." United States v. Noble, 754 F.2d 1324, 1329 (7th Cir. 1985). Eckhardt, Camilli, and Kosterman engaged in acts aimed at preventing DeGuelle from disclosing information outside the company. It can be inferred from the facts of the complaint that these actions against DeGuelle were part of the original conspirators' agreement to conceal their fraud.

Although the complaint's allegations as to the existence of an agreement are sparse, at this stage in the proceedings, there are enough allegations to infer that an agreement existed.

Share this article:


Recent Posts