Commercial Litigation and Arbitration

RICO Enterprise Allegedly Consisting of Corporation Plus Officers and Employees Fails, As Does One Allegedly Composed of Corporations That Operate Within A Unified Corporate Structure

Cruz v. FXDirectDealer, LLC, 2013 U.S. App. LEXIS 12448 (2d Cir. June 19, 2013):

A. Civil RICO Claim

Hugo Cruz appeals from a judgment of the United States District Court for the Southern District of New York (Paul A. Crotty, Judge), dismissing his amended complaint. On appeal, Cruz argues that the amended complaint's allegations that FXDirectDealer, LLC ("FXDD") engaged in dishonest and deceptive practices in managing its online foreign exchange trading platform are sufficient to state a claim for violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962(c), and New York General Business Law §§ 349(h) and 350, and also for breach of contract and of the implied covenant of good faith and fair dealing. For the following reasons, we affirm the District Court's dismissal of Cruz's RICO claim and his claim for breach of the implied covenant of good faith and fair dealing, but we vacate the judgment of the District Court with respect to Cruz's New York General Business Law and breach of contract claims.***

"To establish a RICO claim, a plaintiff must show: (1) a violation of the RICO statute, 18 U.S.C. § 1962; (2) an injury to business or property; and (3) that the injury was caused by the violation of Section 1962." DeFalco v. Bernas, 244 F.3d 286, 305 (2d Cir. 2001) (quotation marks omitted). To establish a violation of § 1962(c), in turn, a plaintiff must show that a person engaged in "(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity." Id. at 306 (quotation marks omitted).

"[U]nder the so-called 'distinctness' requirement, . . . a plaintiff must 'allege . . . the existence of two distinct entities: (1) a "person"; and (2) an "enterprise" that is not simply the same "person" referred to by a different name.'" City of New York v., Inc., 541 F.3d 425, 438 n.15 (2d Cir. 2008) (quoting Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158, 161 (2001)), rev'd on other grounds sub nom. Hemi Grp., LLC v. City of New York, N.Y., 559 U.S. 1 (2010). As we have long recognized, the plain language and purpose of the statute contemplate that a person violates the statute by conducting an enterprise through a pattern of criminality. It thus follows that a corporate person cannot violate the statute by corrupting itself. See Bennett v. U.S. Trust Co. of New York, 770 F.2d 308, 315 (2d Cir. 1985). "A 'person' is defined as 'any individual or entity capable of holding a legal or beneficial interest in property,'" id. at 447 (quoting 18 U.S.C. § 1961(3)), while an "'enterprise' is defined as 'any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity,'" id. (quoting 18 U.S.C. § 1961(4)). "[F]or an association of individuals to constitute an enterprise, the individuals must share a common purpose to engage in a particular fraudulent course of conduct and work together to achieve such purposes." First Capital Asset Mgmt., Inc. v. Satinwood, Inc., 385 F.3d 159, 174 (2d Cir. 2004) (quotation marks omitted).

We agree with the District Court that Cruz's RICO claim fails because the amended complaint does not allege a continuing RICO enterprise distinct from the RICO "person." Accordingly, we do not address whether the amended complaint pleaded mail and wire fraud as predicate acts of racketeering activity with sufficient particularity or pleaded a RICO enterprise distinct from the alleged pattern of racketeering activity.

The amended complaint alleges that FXDD is a RICO "person" that conducts the deceptive practices of an association of individuals dubbed the "FXDD Fraud Enterprise." The FXDD Fraud Enterprise is alleged to consist of the following: FXDD itself; Tradition (North America) Inc. ("Tradition"), FXDD's parent company; Advanced Technologies Group, Ltd. ("ATG"), a former equity stakeholder in FXDD; FXDD's chief operating officer; FXDD's managing director and corporate counsel; software companies that develop and sell FXDD's software; software companies and programmers who assisted FXDD in the development of its trading platforms; and "introducing brokers" who receive commissions from FXDD for educating consumers about forex trading.

The amended complaint alleges merely that the members of the enterprise "associated together for the common purpose of employing the multiple deceptive, abusive and fraudulent acts described in" the amended complaint and that "[t]he overarching purpose of the FXDD Fraud Enterprise is for each of its members to profit from customers opening Live Accounts with Defendant." As an initial matter, the amended complaint contains no specific factual allegation about the intent of ATG or of the software companies, and it affirmatively alleges that the introducing brokers generally were unaware of FXDD's deceptive practices. Thus, ATG, the software companies, and the introducing brokers are not plausibly alleged to "share a common purpose to engage in a particular fraudulent course of conduct," First Capital Asset Mgmt., 385 F.3d at 174 (quotation marks omitted), and were properly excluded from the alleged RICO enterprise.

We turn, then, to the remaining members of the alleged enterprise -- FXDD, Tradition, corporate counsel, and the chief operating officer. The amended complaint alleges that FXDD's corporate counsel and its chief operating officer carry on the regular affairs of FXDD, such as day-to-day financial operations, including the "implementation and supervision of deceptive trading practices." We have long since rejected the idea that a RICO enterprise may consist "merely of a corporate defendant associated with its own employees or agents carrying on the regular affairs of the defendant," Riverwoods Chappaqua Corp. v. Marine Midland Bank, N.A., 30 F.3d 339, 344 (2d Cir. 1994), and we see no reason to revisit that issue here. The requirement of distinctness cannot be evaded by alleging that a corporation has violated the statute by conducting an enterprise that consists of itself plus all or some of its officers or employees.

Excluding these officers leaves us with Tradition and FXDD. We have held that corporations that are legally separate but "operate within a unified corporate structure" and "guided by a single corporate consciousness" cannot be both the "enterprise" and the "person" under § 1962(c). Discon, Inc. v. NYNEX Corp., 93 F.3d 1055, 1064 (2d Cir. 1996), vacated on other grounds, 525 U.S. 128 (1998); see Cullen v. Margiotta, 811 F.2d 698, 729-30 (2d Cir. 1987) ("[A] solitary entity cannot . . . simultaneously constitute both the RICO 'person' whose conduct is prohibited and the entire RICO 'enterprise,'" but may be "one of a number of members of the RICO 'enterprise.'"), overruled on other grounds, Agency Holding Corp. v. Malley-Duff & Assocs., Inc., 483 U.S. 143 (1987). FXDD and Tradition are alleged to operate as part of a single, unified corporate structure and are, as such, not sufficiently distinct to demonstrate the existence of a RICO enterprise. Finally and obviously, neither Tradition nor FXDD standing alone can constitute an enterprise as an "association in fact." Accordingly, the District Court did not err when it concluded that Cruz's amended complaint failed to allege a RICO enterprise distinct from FXDD.

Footnote 3. We need not -- and do not -- address whether the Supreme Court's decision in Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158 (2001), would permit a complaint naming FXDD as the "person" and Tradition alone as the "enterprise" to go forward. In contrast with Cedric Kushner Promotions, the amended complaint here does not allege a single corporate enterprise but rather the "less natural" scenario of "a corporation . . . 'associated with' [an] oddly constructed entity" that includes the corporation. Id. at 164. See also David B. Smith & Terrance G. Reed, Civil RICO ¶ 3.07 at 3-85 (2013) ("Most courts have recognized that the non-identity requirement would be eviscerated if a plaintiff could successfully plead that the enterprise consists of a defendant corporation in association with . . . affiliated entities acting on its behalf." (quotation marks omitted)).

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