Emess Capital, LLC v. Rothstein, 2011 WL 13214302 (S.D. Fla. Mar. 9, 2011) (R&R):

*1 This matter is before the Court for a Report and Recommendations on two dispositive motions: (1) Defendant TD Bank N.A.’s motion to dismiss (Doc. 13) and (2) Plaintiff Emess Capital, LLC’s amended motion for default judgment against Defendant Scott W. Rothstein (Doc. 36). Having reviewed the motions, the associated briefing, the pertinent portions of the case file, and with the benefit of oral argument on February 23, 2011, the Court respectfully recommends that the motions be granted in part and denied in part, as outlined in this Report.

In particular, the Court recommends that TD Bank’s motion to dismiss be granted on the RICO and RICO conspiracy claims (Counts I and II) and denied on the remaining common law counts (III and IV). The Court also recommends that Emess’ amended motion for default judgment against Rothstein be granted on the RICO conspiracy and fraud claims (Counts II and III) but denied on the substantive RICO claim (Count I).

I. BACKGROUND

This case arises out a massive Ponzi scheme orchestrated by Defendant Scott W. Rothstein. Rothstein induced investors to buy fictitious structured settlement agreements by misrepresenting that nonexistent plaintiffs wished to recover an immediate lump sum, which the investors paid out, in exchange for selling their rights to the structured settlement agreements to the investors.¹

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Ponzi schemes are named after Charles Ponzi, a flamboyant con man who was convicted of mail fraud in 1920 and served time in federal and state prisons before being deported to Italy in 1934. Ponzi began telling investors in 1919 that investments in foreign postage coupons could yield 50 percent returns in 45 days. Ponzi claimed that he was able to produce such large returns because he redeemed coupons bought cheaply overseas for much higher amounts in the United States. In a classic Ponzi scheme, returns are paid, for a time, from new investors’ principal, not from profits (because there are none). As long as new investors continue investing and as long as old investors do not try to withdraw too much money at once, the scheme can proliferate. Ponzi Schemes - News - The New York Times, http://topics.nytimes.com/topics/reference/timestopics/subjects/f/frauds_and_swindling/ponzi_schemes/index.html (last visited Mar. 7, 2011). See also In re Ponzi, 268 F. 997, 1000 (D.C. Mass. 1920) (describing Mr. Ponzi as “undoubtedly a clever manipulator” and explaining that “so long as the current of money continued to flow in, he could pay the first investors with the receipts of the latter,” a scheme the court described as “another instance of robbing Peter to pay Paul.”)

 

One of these investors was Plaintiff Emess Capital, LCC, which in September and October 2009 purchased numerous fictitious settlement agreements based on Rothstein’s false representations.²

 

2	“Emess” is a Hebrew and Yiddish word meaning truth. JOYNE EISENBERG & ELLEN SCOLNIC, DICTIONARY OF JEWISH WORDS 39 (rev. ed. 2006); see also Truth, Yiddish Dictionary Online, http://www.yiddishdictionaryonline.com/dictionary/PœP±P….html (last visited Mar. 7, 2011).

*2 The following allegations are taken from Emess’ complaint and civil RICO statement:

Rothstein sent an email to Emess on September 9, 2009, attaching a copy of a letter from Rothstein to TD Bank’s Regional Vice President Frank Spinosa regarding Emess’ account at TD Bank. In the letter, Rothstein purported to “restrict” access to the funds in Emess’ account by specifying that the funds could be distributed only to Emess. Spinosa countersigned the letter confirming the terms proposed by Rothstein.

Emess made subsequent inquiries to Rothstein and TD Bank regarding its account at TD Bank. Rothstein told Emess that $20 million was deposited into Emess’ account but would not yet appear as available because the funds were in the “treasury queue.” This account was later confirmed by TD Bank personnel. TD Bank Assistant Vice President Roseanne Caretsky personally delivered to Emess a letter showing a computer printout reflecting a $20 million balance and the “lock-letter” signed by Rothstein and Spinosa that purported to restrict access to the account. Spinosa also assured Emess that its account was irrevocably restricted according to the terms of the lock-letter.

Based on these assurances, Emess continued to invest in Rothstein’s fictitious “structured settlements.” TD Bank later produced an updated account statement showing that Emess had a balance of $40 million. Emess kept investing. All told, Emess invested more than $60 million in 16 fictitious settlement agreements. By October 16, 2009, Spinosa represented to Emess that it had an account balance of $96 million.

Then Rothstein’s Ponzi scheme fell apart. Emess learned that Rothstein fled the United States to Morocco and was under investigation by federal law enforcement. But it was too late for Emess. There were no funds in Emess’ account with TD Bank. Emess is not sure whether there were ever any funds in its account. Rothstein was apprehended and pled guilty to RICO conspiracy and other charges in January 2010. A federal district court sentenced Rothstein to 50 years imprisonment in June 2010.

Emess filed this lawsuit in May 2010 against Rothstein and TD Bank. Counts I through III charge Rothstein and TD Bank with violation of the Racketeering Influenced and Corrupt Organizations Act (RICO), conspiracy to violate RICO, and fraudulent misrepresentation, respectively. Count IV of the complaint charges TD Bank only with aiding and abetting.³

3	Because the Court has diversity jurisdiction under 28 U.S.C. § 1332(a)(1), the Court’s jurisdiction over Emess’ common law claims does not depend on its ability to state a cause of action under RICO.

Emess alleges that TD Bank and Rothstein committed wire fraud, interstate transportation of property obtained by fraud, and money laundering, which are RICO predicate acts. See 18 U.S.C. §§ 1343, 1956(a)(1)(A)-(B), 1957, 2314. Emess alleges six separate dates when “Defendants” allegedly committed wire fraud, ranging from September 3, 2009 to October 20, 2009. Doc. 11, at 9-11. Emess also alleges 10 transactions of interstate transportation of stolen property from September 3, 2009 to October 21, 2009. Id. at 12. Emess does not allege specific dates for money laundering. Doc. 11, at 13.

*3 Rothstein has not appeared to defend himself and Emess moved for a default judgment against him.

TD Bank moved to dismiss the complaint. TD Bank argues that Emess fails to adequately plead RICO violations, or RICO conspiracy, because the allegations do not show the existence of a RICO enterprise and the racketeering attributable to TD Bank did not occur over a substantial period of time. TD Bank also contends that the RICO claim must fail because Emess does not allege TD Bank’s individual operation or management of the racketeering enterprise. TD Bank also moved to dismiss the common law claims for fraudulent misrepresentation and aiding and abetting fraud because they are not pled with the requisite particularity and do not show that TD Bank acted with knowledge of the fraud.

II. TD BANK’S MOTION TO DISMISS

A. Pleading Requirements for Motion to Dismiss

In reviewing a motion to dismiss, all well-pleaded facts in the plaintiff’s complaint and all reasonable inferences drawn from those facts must be taken as true. Jackson v. Okaloosa County, Fla., 21 F.3d 1531, 1534 (11th Cir. 1994). Federal Rule of Civil Procedure 8(a)(2) requires a “short and plain statement of the claim showing that the pleader is entitled to relief.” Specific facts are not necessary; the statement need only “give the defendant fair notice of what the ... claim is and the grounds upon which it rests.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)).

Under the plausibility standard announced by the Supreme Court in Twombly, the facts pled in the complaint must “raise a reasonable expectation that discovery will reveal evidence” corroborating the plaintiff’s claim. 550 U.S. at 556. When the plaintiffs “have not nudged their claims across the line from conceivable to plausible, their complaint must be dismissed.” Id. at 570. 

“As a general rule, conclusory allegations and unwarranted deductions of fact are not admitted as true in a motion to dismiss.” South Fla. Water Mgmt. Dist. v. Montalvo, 84 F.3d 402, 409 n.10 (11th Cir. 1996). Additionally, when on the basis of a dispositive issue of law no construction of the factual allegations will support the cause of action, dismissal of the complaint is appropriate. Marshall County Bd. of Educ. v. Marshall County Gas Dist., 992 F.2d 1171, 1174 (11th Cir. 1993). 

Allegations of fraud are subject to heightened pleading standards and “must state with particularity the circumstances constituting [the] fraud.” Fed. R. Civ. P. 9(b). The actor’s mental state, however, may be alleged generally. Id. A complaint is pleaded with particularity when it alleges “(1) the precise statements, documents, or misrepresentations made; (2) the time, place, and person responsible for the statement; (3) the content and manner in which these statements misled the Plaintiffs; and (4) what the defendants gained by the alleged fraud.” Brooks v. Blue Cross & Blue Shield of Fla., Inc., 116 F.3d 1364, 1380-81 (11th Cir. 1997). Rule 9(b) cannot be satisfied by “lumping” all “Defendants” together in allegations of fraud. Id. at 1381. 

*4 A complaint satisfies the requirements of Twombly and Rule 9(b) when it plausibly and particularly alleges the defendant’s fraudulent acts. American Dental Ass’n v. CIGNA Corp., 605 F.3d 1283, 1291 (11th Cir. 2010). “When a RICO claim is based on predicate acts involving fraud, those predicate acts must be pleaded with particularity, in accordance with [Rule 9(b)].” Liquidation Comm’n of Banco Intercontinental, S.A. v. Alvarez Renta, 530 F.3d 1339, 1355 (11th Cir. 2008).

B. RICO

Count I charges TD Bank with violating 18 U.S.C. § 1962(c), which makes it illegal for “any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering activity or collection of unlawful debt.” In order to establish a federal civil RICO violation under § 1962(c), a plaintiff must allege four elements: (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity. Williams v. Mohawk Ind., Inc., 411 F.3d 1252, 1256 (11th Cir. 2005). Because the language of § 1962(c) provides for liability for a person engaged in a RICO enterprise, not the enterprise itself, the elements of a cause of action under § 1962(c) must be alleged as to each individual defendant. De Falco v. Bernas, 244 F.3d 286, 306 (1st Cir. 2001); United States v. Persico, 832 F.2d 705, 714 (2d Cir. 1987).

1. Emess Does Not Allege the Conduct of an Enterprise

TD Bank argues that the complaint fails to allege its conduct of an enterprise under the “operation or management” test articulated by Reves v. Ernst & Young, 507 U.S. 170, 172 (1993).⁴

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TD Bank also argues in its motion to dismiss that Emess has not pled the existence of an enterprise. TD Bank wisely declined to press this point during oral argument. In this Circuit, “the definitive factor in determining the existence of a RICO enterprise is the existence of an association of individual entities, however loose or informal, that furnishes a vehicle for the commission of two or more predicate crimes.” United States v. Goldin Indus., 219 F.3d 1271, 1275 (11th Cir. 2000). Rothstein’s alleged association with various TD Bank employees, which goes beyond alleging mere day-to-day business operations of a bank, meets this standard. Id. at 1274-75 (“a RICO enterprise need not possess an ‘ascertainable structure’ distinct from the associations necessary to conduct the pattern of racketeering activity”).

Reves held that a defendant does not violate § 1962(c) unless it participated in the RICO enterprise by in some way directing the operation or control of the enterprise. Reves rejected the notion that a defendant must exercise significant or primary control of the enterprise, but also rejected imposing liability for mere aiding and abetting. Id. at 179 & n.4; see also Williams v. Mohawk Indus., 465 F.3d 1277, 1285 (11th Cir. 2006). It is also important to note that liability under RICO attaches to a person who participates (i.e., directs) the affairs of the enterprise, and not merely someone associated with the enterprise who does not direct its affairs. 18 U.S.C. § 1962(c). Reves rejected the proposition that only the enterprise’s upper management can be held liable under the operation or control test -- thus, theoretically, TD Bank could be held liable as a minor partner in an enterprise orchestrated by Rothstein -- but cautioned that actors on the enterprise’s lower rungs must still exert control over the enterprise to be liable RICO participants. 507 U.S. at 184.

*5 Emess stated at the hearing that its civil RICO statement alleges conduct by TD Bank sufficient to satisfy the “operation or control” test on pages 18-20. Doc. 66, at 47-48. The allegations in Emess’ civil RICO case statement, however, do not support this argument. In fact, the civil RICO statement alleges that Rothstein “participated in and controlled the affairs of the Enterprise” while TD merely “participated in the affairs of the Enterprise.” Doc. 11, at 19 (emphasis added).

Emess also alleges that TD Bank controlled the transfer of funds into and out of accounts held by the bank. Id. at 20. Emess further alleges that TD Bank issued “lock letters” that misled investors such as Emess that their accounts were irrevocably locked when in fact they could be accessed by Rothstein. But these allegations do not show that TD Bank participated in the direction of the affairs of the enterprise. Controlling the transfer of funds is merely what a bank does in its regular course of business and is not the same as controlling the affairs of the enterprise. According to the complaint, Rothstein managed the scheme and directed others to make false and misleading statements. Doc. 1, ¶ 13. TD Bank, on the other hand, transferred money between accounts and “assisted in the scheme” “at ROTHSTEIN’s direction.” Id. ¶ 16; see also id., ¶ 24 (describing how Rothstein acted “with the assistance of” TD Bank).

The lock-letters, meanwhile, were written and signed by Rothstein and only countersigned by Spinosa for TD Bank, a further indication that Rothstein directed and controlled the scheme in which TD Bank merely participated. Doc. 1-3, at 2. Although “conduct or participate” are the words used in § 1962(c), a RICO plaintiff may not simply allege that “the defendant participated in the enterprise.” Instead, the plaintiff must allege participation in accordance with the meaning that the Supreme Court gave the term in Reves. Emess has not done that.

Accordingly, Emess’ allegations do not plead actionable conduct or participation under RICO because they do not give rise to a plausible inference that TD Bank itself directed the operation or control of the enterprise.

RICO does not contain a provision imposing liability on those who aid and abet racketeering -- a significant omission according to the Supreme Court: “[W]hen Congress enacts a statute under which a person may sue and recover damages from a private defendant for the defendant’s violation of some statutory norm, there is no general presumption that the plaintiff may also sue aiders and abettors.” Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 182 (1994); see also Rolo v. City Investing Co. Liquidating Trust, 155 F.3d 644, 656-57 (3d Cir. 1998) (applying Central Bank of Denver to bar aiding and abetting claim under civil RICO).

Super Vision International, Inc. v. Mega International Commercial Bank, Co., Ltd.., 534 F. Supp. 2d 1326 (S.D. Fla. 2008), is instructive. There, the plaintiff alleged that the defendant bank violated RICO by enabling a judgment debtor to defraud the creditor. The district court granted the bank’s motion to dismiss, even though the plaintiff alleged that the bank was aware of the fraud, because the operation or control test was not satisfied. The district court found the allegations lacking because the bank “did not control any aspect of the alleged enterprise ... [or] control the funds [transferred by the judgment debtor].” Id. at 1338.

*6 I recognize that in countersigning lock-letters to Emess and misrepresenting the terms of Emess’ account, TD Bank’s actions exceed those alleged against the bank in Super Vision. The Eleventh Circuit has also noted that Reves “declined to decide how far liability under § 1962(c) extends down the ladder of operation.” United States v. Starrett, 55 F.3d 1525, 1542 (11th Cir. 1995) (quotations and alterations omitted). Nevertheless, Reves rejected the argument that participate was akin to aiding and abetting under § 1962(c). Reves, 507 U.S. at 178. And while the allegations of TD Bank’s conduct may exceed aiding and abetting fraud, they do not amount to TD Bank’s control or direction of the operation or management of the alleged racketeering enterprise.

In a related case against TD Bank, another district court found that nearly identical allegations demonstrated that TD Bank “played an important role in the enterprise, and that Rothstein needed TD Bank” to legitimize the enterprise, retain investors, and attract new investors. Coquina v. Rothstein, No. 10-60786, 2011 WL 197241, at *3 (S.D. Fla. Jan. 20, 2011). While I agree with Coquina’s characterization of the allegations against TD Bank, I find that the allegations do not amount to participation under the Reves operation or management test because the complaint itself sets out that TD Bank acted at Rothstein’s direction and does not otherwise allege instances of TD Bank exercising control over or directing the affairs of the enterprise. The allegations in the complaint plausibly show that TD Bank enabled, aided, and supported the enterprise, but they do not show, per Reves, that TD Bank directed or controlled the operation or management of the enterprise.

2. Emess Does Not Allege a Pattern of Racketeering Activity

Next, TD Bank argues that the complaint should be dismissed because Emess fails to allege a pattern of racketeering activity.⁵

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TD Bank wisely refrained from pressing its point at the hearing that Emess fails to properly allege RICO predicate acts. In its motion, TD Bank originally argued that Emess fails to allege scienter for the RICO predicate acts. As I will explain in my analysis of the fraudulent misrepresentation claim, Emess has alleged specific facts which give rise to a strong inference that the bank possessed the requisite fraudulent intent. See Republic of Pan. v. BCCI Holdings (Luxembourg) S.A., 119 F.3d 935, 949 (11th Cir. 1997). Meanwhile, Emess’ allegations of money laundering and interstate transportation of property obtained by fraud are not subject to Rule 9(b)’s heightened pleading standard.

Under the RICO statute, a “pattern of racketeering activity” requires at least two predicate acts committed within a ten-year period. 18 U.S.C. § 1961(5). But because RICO was designed to create liability for longstanding racketeering activity, and not isolated schemes, the Supreme Court has further directed that the predicate acts must also be related and “amount to, or ... otherwise constitute a threat of, continuing racketeering activity.” H.J. Inc. v. North-western Bell Telephone Co., 492 U.S. 229, 240 (1989) (emphasis added). Under this “continuity” requirement, courts require allegations of either opened-ended continuity, in which there is an ongoing threat of racketeering activity, or closed-ended continuity, where the racketeering occurred over a substantial period of time. But predicate acts alleged “over a few weeks or months and threatening no future criminal conduct,” do not amount to a pattern of racketeering under § 1962(c). Id. at 242.

My review indicates that no federal court of appeals has ever found that a series of predicate acts committed during a period of less than one year satisfies the continuity requirement. The cases indicate that two years is more likely to be the demarcation between closed-ended RICO activity and other, non-RICO fraudulent schemes. See Cofacredit, S.A. v. Windsor Plumbing Supply Co., 187 F.3d 229, 242 (2d Cir. 1999) (noting that the Second Circuit “has never held a period of less than two years to constitute a ‘substantial period of time’ ”). The Eleventh Circuit, meanwhile, has held that frauds occurring over six and nine months respectively do not meet RICO’s continuity requirement. Jackson v. Bellsouth Telecomms., 372 F.3d 1250, 1266 (11th Cir. 2004) (nine months insufficient); Aldridge v. Lily-Tulip, Inc Salary Ret. Plan Benefits Comm., 953 F.2d 587, 593 (11th Cir. 1992) (six months insufficient).

*7 To determine the relevant time period of a RICO pattern, the court must look the interval between related predicate acts. H.J., 492 U.S. at 242; Jackson, 372 F.3d at 1266. In Jackson, for example, the Eleventh Circuit declined to credit the plaintiff’s general allegation that the fraud was accomplished over a substantial period of time, and instead looked at the precise time period for which the specific predicate acts were alleged. 372 F.3d at 1266.

Emess argues that its predicate acts allegations properly allege a pattern of closed-ended continuity. See Doc. 1, ¶ 73; Doc. 11, at 17. The predicate acts described in the complaint and civil RICO statement, however, occurred over a seven-week period, from September 3, 2009 to October 21, 2009. This truncated time period is clearly inadequate for closed-ended continuity. Emess generally alleges that the pattern of racketing activity occurred over four years, but the relevant time period for closed-ended continuity analysis is the period between the related predicate acts. H.J., 492 U.S. at 242; Jackson, 372 F.3d at 1266. The only particular predicate acts outlined in the complaint and civil RICO statement span just seven weeks. Dismissal of Emess’ RICO claim against TD Bank is appropriate under these circumstances.

3. Emess’ Arguments Against Dismissal are Not Persuasive

In its effort to stave of dismissal of the RICO claims against TD Bank, Emess offers up a smorgasbord of suggestions for the Court. Emess suggested that the Court (1) should consider deposition testimony taken since the filing of this lawsuit, (2) take judicial notice of the forfeiture order in Rothstein’s criminal case, (3) apply the district court’s holdings in Coquina, and (4) bootstrap Rothstein’s wrongful activities to the RICO claims against TD Bank. Of particular significance, in Emess’ view, are comments by the district court during Rothstein’s sentencing that the fraud occurred over a four-year period. Although the Court need not dwell extensively on these issues because they are not persuasive, in the interest of providing the District Court with a comprehensive report, I will make the following observations:

First, Emess’ suggestion that post-filing deposition testimony can be considered in analyzing the sufficiency of the claims is not consistent with the analytical framework that district courts must use on 12(b)(6) motions: It is axiomatic that district courts look only to the four corners of the complaint in determining whether the plaintiff states a cause of actions and, in the RICO context, the court may also consider allegations in the plaintiffs civil RICO statement. Old Time Enters., Inc. v. Int’l Coffee Corp., 862 F.2d 1213, 1218-19 (5th Cir. 1989); Allstate Ins. Co. v. Palterovich, 653 F. Supp. 2d 1306, 1318 n.7 (S.D. Fla. 2009).⁶

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It is generally accepted that a court may also consider “public records, materials that do not contradict the complaint or materials that are necessarily embraced by the pleadings.” Noble Sys. Corp. v. Alorica Cent., LLC, 543 F.3d 978, 982 (8th Cir. 2008) (quotations omitted). As I will explain in addressing Emess’ motion for default judgment against Rothstein, it is appropriate to take judicial notice of Rothstein’s plea agreement and conviction -- because those matters are necessarily embraced in the pleadings against Rothstein -- but TD Bank was not a litigant in Rothstein’s criminal case. TD Bank is not estopped from challenging matters decided in Rothstein’s criminal case and, in any event, neither Rothstein’s plea agreement nor the forfeiture order entered by the district court contain any factual findings regarding TD Bank’s conduct in the RICO conspiracy for which Rothstein was convicted.

*8 If Emess believes that facts learned in deposition testimony provided after this lawsuit was filed can cure the defects in its pleadings, then it should file an amended complaint and include the new facts that are relevant to the RICO claim against TD Bank.

Second, while Emess suggested at the hearing that the Court could consider deposition testimony, Emess specifically declined to ask the Court to convert the motion to dismiss into a motion for summary judgment, and it would be premature to do so at this stage of the litigation. Accordingly, I will not take judicial notice of matters outside of the pleadings in assessing the sufficiency of the allegations against TD Bank. As I will explain in greater detail in my discussion of Emess’ motion for a default judgment against Rothstein, Rothstein was not convicted of violating § 1962(c) of RICO -- he was convicted of violating § 1962(d) -- so his conviction cannot serve as a substitute for sufficient RICO allegations under § 1962(c). A factual finding that Rothstein engaged in a pattern of racketeering activity was not even necessary to support Rothstein’s conviction, let alone establish a cause of action against a non-party, such as TD Bank.

Third, the criminal forfeiture judgment forfeited only Rothstein’s interest, if any, in the bank accounts maintained by TD Bank. Banks do not own the funds contained in their customers’ accounts. Rather, bank accounts constitute debtor-creditor relationships, where the account holder is the bank’s creditor. See Fla. Stat. § 674.104; Grillo v. City Nat’l Bank, 354 So. 2d 959, 960 (Fla. 3d DCA 1978). The government regularly seizes bank accounts without ever suggesting that the bank is in any way responsible for holding the tainted funds. The criminal forfeiture order does not suggest that TD Bank engaged in predicate racketeering acts and Emess does not point to anything (in a court order, hearing transcript, or government memorandum) from Rothstein’s criminal prosecution that could reasonably enable this Court to construe the forfeiture order (forfeiting Rothstein’s interest in bank accounts held at TD Bank) against TD Bank.

Fourth, Emess forcefully argued at the hearing that the Court should following the holding in Coquina, which found that nearly identical allegations stated causes for RICO and RICO conspiracy. But as Emess implicitly acknowledges, Coquina is not binding authority. See McGinley v. Houston, 361 F.3d 1328, 1331 (11th Cir. 2004); Doc 72, at 5 n.3.

Fifth, Emess cannot establish a sufficient pattern of continuing racketeering activity against TD Bank by making vague allegations about Rothstein’s activities. To the contrary, Emess must make individualized allegations that TD Bank’s related predicate acts constitute a RICO pattern. De Falco, 244 F.3d at 306; Feinstein v. Resolution Trust Corp., 942 F.2d 34, 46 (1st Cir. 1991).

The point of Rule 9(b) is precisely to prevent defendant-clumping in fraud complaints by requiring the plaintiff to allege each defendant’s specific participation in the fraud. American Dental, 605 F.3d at 1291; Ambrosia Coal & Constr. Co., 482 F.3d 1309, 1317 (11th Cir. 2007); Brooks, 116 F.3d at 1380-81; Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993); GREGORY P. JOSEPH, CIVIL RICO: A DEFINITIVE GUIDE 153 (3d ed. 2010) (“In determining whether a pattern has been stated against any particular defendant, the court considers only the alleged offenses in which the defendant was purportedly involved, directly or indirectly, or for which that defendants bears some responsibility. Extraneous offenses committed by other persons attached to the enterprise may not form the basis of the pattern charged against wholly uninvolved persons.”) (citations omitted).

*9 Permitting generalized allegations of RICO patterns undermines the heightened pleading requirements for RICO-fraud complaints and ignores, in essence, what a RICO violation is: a substantial pattern of related predicate acts amounting to a distinct threat of long-term racketeering activity. H. J., 492 U.S. at 242-43. But see Coquina, 2011 WL 197241, at *5 (finding generalized allegations of four-year fraud sufficiently alleged a pattern of racketeering activity). The only predicate acts alleged with particularity in the complaint and civil RICO statement occurred over a mere seven weeks and therefore do not amount to a pattern of racketeering activity.

In a last-ditch attempt to save its RICO claim, Emess provides an out-of-context quote from United States v. Basciano, 599 F.3d 184 (2d Cir. 2010). Doc. 72, at 1. In Basciano, a federal grand jury indicted the defendant on multiple RICO violations and the defendant successfully argued that a successive charge of substantive racketeering should be dismissed under the Double Jeopardy Clause. The Second Circuit stated:

[W]here, as in this case, a grand jury has charged a single pattern of racketeering consisting of various predicate acts ascribed to a number of co-defendants, a court properly considers all charged predicates in identifying the pattern through which the defendants are alleged to have conducted the affairs of an enterprise. To identify pattern in such a case only by reference to the predicates charged against an individual defendant, as the government urges, would lead to the untenable conclusion, rejected even by the government at oral argument, that a single § 1962(c) charge against multiple defendants might be construed to plead multiple patterns of racketeering -- in short, multiple substantive racketeering crimes.

Id. at 189. Read in context, it is clear that the Double Jeopardy problem facing the Basciano court is distinct from the issue here. The Second Circuit was clearly concerned that the United States unconstitutionally charged a defendant with multiple RICO violations for what was essentially the same pattern of racketeering. Basciano does not undermine the ample authority that each defendant’s predicate acts are not automatically ascribable to all other defendants.

Furthermore, Emess’ argument is based on the faulty premise that it has alleged continuity as to Rothstein but needs only to bootstrap the claims onto TD Bank as well. Actually, as I will explain in more depth later in this Report, Rothstein only pled guilty to conspiracy to violate RICO, not to a substantive RICO violation, and the pattern allegations in Emess’ complaint are therefore deficient against Rothstein as well.

Emess’ citation to a case that is so clearly distinguishable from the facts before the Court, while simultaneously neglecting to distinguish the ample authority for the rule that substantive RICO allegations must be assessed based on the predicate acts alleged against each individual defendant, only underscores the insufficiency of its substantive RICO claim against TD Bank. See, e.g., Banks v. Wolk, 918 F.2d 418, 420, 424 (3d Cir. 1990) (analyzing predicate acts alleged against each individual defendant).

In sum, Count I of the complaint does not state a cause of action because Emess has not adequately alleged TD Bank’s conduct of an enterprise through a pattern of racketeering activity under § 1962(c).

C. RICO Conspiracy

In Count II, Emess alleges a RICO conspiracy claim against TD Bank and Rothstein. “Section 1962(d) of the RICO statutes [28 U.S.C. § 1962(d)] makes it illegal for anyone to conspire to violate one of the substantive provisions of RICO, including § 1962(c).” American Dental, 605 F.3d at 1293.

*10 Agreement to participate in a RICO conspiracy, however, can be proved in either one of two ways: (1) by showing an “agreement on an overall objective,” or (2) in the absence of an agreement on an overall objective, by showing that a defendant agreed personally to commit two predicate acts and therefore to participate in a “single objective” conspiracy.

United States v. Church, 955 F.2d 688, 694 (11th Cir. 1992).

Although a defendant may be liable for RICO conspiracy even if it is not liable for the substantive RICO offense, a RICO plaintiff must still allege an illegal agreement to violate a substantive provision of RICO. Jackson., 372 F.3d at 1269. Otherwise, the allegations in the complaint do no more than allege that the defendants conspired to commit conduct that does not violate RICO. Id. Consequently, a “conspiracy itself furnishes no cause of action. The gist of the action is not the conspiracy but the underlying wrong that was allegedly committed. If the underlying cause of action is not viable, the conspiracy claim must also fail.” Spain v. Brown & Williamson Tobacco Corp., 230 F.3d 1300, 1311 (11th Cir. 2000) (emphasis added) (quoting Allied Supply Co., Inc. v. Brown, 585 So. 2d 33, 36 (Ala. 1991)); see also Rogers v. Nacchio, 241 Fed. Appx. 602, 609 (11th Cir. 2007) (“Thus, where a plaintiff fails to state a RICO claim and the conspiracy count does not contain additional allegations, the conspiracy claim necessarily fails.”)

As explained above, the underlying substantive RICO cause of action is not viable as pled because RICO’s “pattern” prong is not adequately alleged. Nor does the complaint contain additional allegations of conspiracy to violate RICO that go beyond the acts alleged for the § 1962(c) claim. Consequently, to the extent that the complaint and civil RICO statement allege an agreement between TD Bank and Rothstein, it is an agreement to do something other than violate RICO. The RICO conspiracy claim against TD Bank should therefore be dismissed.⁷

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It should be noted, however, that the operation or control test is most likely inapplicable to RICO conspiracy claims. The Eleventh Circuit held in Starrett that the “Reves test does not apply to a conviction for RICO conspiracy” under § 1962(d). 55 F.3d at 1547. Although it does not appear that either the Eleventh Circuit or any district court within the Eleventh Circuit has explicitly decided whether Starrett’s holding applies to civil RICO conspiracy claims, the Third Circuit and the Seventh Circuit have read Starrett to apply in the civil context as well. Smith v. Berg, 247 F.3d 532, 536 n.8 (3d Cir. 2001); MCM Partners, Inc. v. Andrews-Bartlett & Assocs., Inc., 62 F.3d 967, 979 (7th Cir. 1995); see also United States v. Philip Morris USA, Inc., 327 F. Supp. 2d 13, 19 (D.D.C. 2004). This distinction has no practical consequence at this stage of the litigation because the lack of sufficient continuity allegations alone defeats Emess’ conspiracy claim.

D. Fraudulent Misrepresentation

Next, Emess charges Rothstein and TD Bank with fraudulent misrepresentation (Count III). To support this cause of action, a plaintiff must show that the defendant (1) made a false statement concerning a material fact, (2) which the defendant knew to be false, (3) an intention that the representation induce another to act on it, and (4) damages by the party acting in reliance on the representation. Johnson v. Davis, 480 So. 2d 625, 627 (Fla. 1985); Huffstetler v. Our Home Life Ins. Co., 65 So. 1, 2 (Fla. 1914). A plaintiff pleading common law fraud must also satisfy the heightened pleading standards of Rule 9(b).

*11 Emess’ complaint properly alleges fraudulent misrepresentation. Emess alleges that on September 11, 2009, Spinosa, a TD Bank executive, confirmed the terms of the lock-letter over the phone, specifically stating that TD Bank was obligated to adhere to the letter’s restrictions that the funds in the account could be distributed only to Emess. Doc. 1, ¶ 34; Doc. 1-3, at 2. Spinosa was asked in a deposition whether he received payments of $50,000 and $75,000 from Rothstein but declined to answer based on his right against self incrimination under the Fifth Amendment. Because this is a civil proceeding, a factfinder may make adverse inferences based on Spinosa’s refusal to answer the question. Eagle Hosp. Physicians, LLC v. SRG Consulting, Inc., 561 F.3d 1298, 1304 (11th Cir. 2009); United States v. Two Parcels of Real Prop. Located in Russell County, Ala., 92 F.3d 1123, 1129 (11th Cir. 1996). Accordingly, a fact-finder could infer both Spinosa’s knowledge that his statements were false, his intent to induce action by Emess, and his benefit from the fraud. Ambrosia Coal, 482 F.3d at 1316-17. Emess has therefore stated a cause of action for fraudulent misrepresentation against TD Bank.⁸

8

I recognize that in finding that Emess states a claim for fraudulent misrepresentation, I have relied on facts (i.e., Spinosa’s refusal to answer questions) alleged only in the civil RICO case statement. I have not found any case on point which either permits or prohibits me from considering allegations in the civil RICO statement in evaluating common law (i.e., non-RICO) claims. Nevertheless, I believe this course of action is appropriate. Local Rule 12.1 explicitly contemplates that a RICO statement may be filed as part an amended pleading. A leading RICO treatise also opines that “[t]he substance of RICO statements may be considered on motions to dismiss because they are viewed as elaborations of the pleadings.” GREGORY P. JOSEPH, CIVIL RICO: A DEFINITIVE GUIDE 227 (3d ed. 2010). Finally, Rule 12(e) permits the district court to order a plaintiff to file a more definite statement, such as a RICO case statement, and Rule 83(b) permits the court to regulate civil practice in the absence of controlling law. Since both the complaint and the civil RICO statements are considered “pleadings,” I do not believe I am required to take a hyper-technical approach and recommend dismissal of a common law claim simply because the plaintiff makes the right allegation in the wrong document.

E. Aiding and Abetting

Count IV charges TD Bank with aiding and abetting fraud. Because the Florida Supreme Court has never held that a valid cause of action exists for aiding and abetting, it is still an open question whether this cause of action exists under Florida common law. Tippens v. Round Island Plantation L.L.C., No. 09-14036, 2009 U.S. Dist. LEXIS 66224, at *19-20 (S.D. Fla. July 31, 2009) (“It is unclear whether aiding and abetting fraud exists as a cause of action in Florida”). Florida’s Fifth District Court of Appeal, however, assumed that a claim for aiding and abetting exists, but found that the facts before it could not support the cause of action. ZP No. 54 Ltd. P’ship v. Fid. & Deposit Co., 917 So. 2d 368, 371-74 (Fla. 5th DCA 2005). Accordingly, at this stage in the litigation, it is plausible that Emess can state a claim for aiding and abetting common law fraud. Cf. Florida v. United States HHS, 716 F. Supp. 2d 1120, 1156-60 (N.D. Fla. 2010) (permitting states’ coercion and commandeering claim to proceed past 12(b)(6) stage because plaintiffs’ legal theory, though rejected by other circuits, was unresolved in the Eleventh Circuit).

 

To state a claim for aiding and abetting a fraud, the plaintiff must allege (1) the existence of an underlying fraud; (2) the defendant’s knowledge of the fraud; and (3) that the defendant provided substantial assistance to advance the commission of the fraud. ZP No. 54, 917 So. 2d at 372. The complaint alleges in detail the facts of the underlying fraud and alleges generally TD Bank’s knowledge of the fraud. The pleadings also permit a “strong inference” that TD Bank acted with fraudulent intent. Because the mental state requirement for fraud (intent) is more culpable than that required for aiding and abetting (knowledge), the pleadings necessarily also allege a sufficient mental state for aiding and abetting. The complaint further alleges that TD Bank rendered substantial assistance in advancing the fraud by, for example, providing Emess with letters that showed false account balances and misrepresenting that the funds placed in Emess’ account could be disbursed only to a specific account designated by Emess. As such, TD Bank’s motion to dismiss should be denied on the aiding and abetting claim.⁹

9

During oral argument, TD Bank conceded that Emess’ allegations, while inadequate to plead a RICO claim, “probably” constitute aiding and abetting. Doc. 66, at 44 (“They [TD Bank] didn’t control any part of the enterprise. They didn’t control the money. Even with misrepresentations, which would probably be aiding and abetting some kind of fraud, it wasn’t RICO.”) (emphasis added).

F. Dismissal

*12 TD Bank argues that the Emess’ RICO and RICO conspiracy claims should be dismissed with prejudice because Emess cannot possibly make adequate “control” allegations under Reves. The decision to permit the plaintiff to file an amended complaint is within the discretion of the district court, but district courts should permit amendment unless granting leave to amend would be futile. Hall v. United Ins. Co. of Am., 367 F.3d 1255, 1262-63 (11th Cir. 2004); see also Fed. R. Civ. P. 15(a)(2) (providing that leave to amend should be freely granted when justice so requires).

At this stage of the litigation, it cannot be said that amendment would be futile. Emess may well confront significant challenges in satisfying the Reves operation or control test. Nevertheless, I will recommend dismissal without prejudice. Emess should be permitted to file an amended complaint if, consistent with counsels’ Rule 11 obligations, it can cure the pleading deficiencies identified in the foregoing analysis.

III. EMESS’ MOTION FOR DEFAULT JUDGMENT AGAINST ROTHSTEIN

***

IV. RECOMMEDNATION

In accordance with the foregoing, it is respectfully recommended that:

1. Emess’ motion for default judgment be granted as to Counts II and III and denied as to Count I.

2. Final Default Judgment be entered against Rothstein in the amount of $102,637,500, plus reasonable attorneys’ fees and costs.

3. TD Bank’s motion to dismiss be granted as to Counts I and II and denied as to Counts III and IV.

4. Counts I and II of the complaint be dismissed as to TD Bank without prejudice and Emess be permitted to file an amended complaint within a reasonable time to be determined by the District Court.

V. OBJECTIONS

Pursuant to 28 U.S.C. § 636(b)(1) and Local Magistrate Rule 4(b), the parties have fourteen (14) days after being served with a copy of this Report and Recommendation to serve and file written objections, if any, with the presiding United States District Judge. Each party may file a response to the other party’s objections within 14 days of the objections. Failure to timely file objections shall bar the parties from a de novo determination by the District Judge of an issue covered in this report and bar the parties from attacking on appeal the factual findings contained herein. Resolution Trust Corp. v. Hallmark Builders, Inc., 996 F.2d 1144, 1149 (11th Cir. 1993).