Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_05-cv-00684/USCOURTS-azd-2_05-cv-00684-0/pdf.json

Nature of Suit Code: 470
Nature of Suit: Civil (Rico)
Cause of Action: 18:1964 Racketeering (RICO) Act

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NOT FOR PUBLICATION

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

James C. Sell, as Receiver for American

National Mortgage Partners, LLC and

Related Entities and as Assignee of

Creditors, Investors, Shareholders,

Members, Partners and Trusts of the

Receivership Entities, 

Plaintiff, 

vs.

Zions First Nation Bank (Utah and

Idaho), a national banking association, et

al., 

Defendant. 

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No. CV-05-0684-PHX-SRB

ORDER

This case arises out an alleged Ponzi scheme perpetrated by Defendants. At issue are

the following items on the docket: a Motion to Dismiss filed by Defendant Zions First

National Bank and National Bank of Arizona (together, "ZNBA") (Doc. 38). That motion

was joined by Defendants Paul and Carol Meka (Doc. 39), Defendant Pamela Coulter

("Coulter"), both in her personal capacity and in her capacity as personal representative of

Darrell Coulter (Doc. 62), Defendants Mark and Bernadette Kesler (Doc. 68), Defendants

Larry and Sheila Dunning (Doc. 103), and Defendant Gregory Harrington (Doc. 58). In

addition to joining ZNBA's Motion to Dismiss, Harrington filed his own Motion to Dismiss

and a Motion for Summary Judgment (Doc. 58). Plaintiff James C. Sell, in his capacity as

receiver, filed a Motion to Strike the Separate Statement of Facts that Harrington filed in

Case 2:05-cv-00684-SRB Document 123 Filed 02/10/06 Page 1 of 23
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1

The following facts, which are presumed true for purposes of this Order, were drawn

from the FAC and the exhibits attached thereto. While the Court has culled some of the facts

from the Receiver's Interim Report (which is Exhibit D to the FAC), they are mentioned for

background purposes only and were not relied upon in any part of the Court's decision. As

will be explained below, the Receiver's Interim Report is stricken from the FAC pursuant to

Federal Rules of Civil Procedure 10(c) and 12(f).

2

For an interesting discussion of the history of Ponzi schemes and their creator,

Charles Ponzi, see Bald Eagle Area School District v. Keystone Financial, Inc., 189 F.3d

321, 324 n.1 (3d Cir. 1999).

3

Some of the Investors are alleged to be multiemployer employee benefit plans within

the meaning of ERISA. (First Am. Compl., ¶ 162.)

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support of his Motion for Summary Judgment (Doc. 114). ZNBA has filed a Motion to

Strike the Incorporation by Reference of the Receiver's Interim Report into the First

Amended Complaint ("FAC") (Doc. 37), a motion that was joined by Harrington (Doc. 57),

Coulter (Doc. 60), and the Keslers (Doc. 70). Coulter also filed a separate Motion to Strike

on the same issue (Doc. 60). ZNBA filed a Motion to Stay Discovery pending the Court's

ruling on its Motion to Dismiss (Doc. 36), in which Harrington (Doc. 56), Coulter (Doc. 61),

and the Keslers (Doc. 69) joined. Separate Motions to Dismiss were filed by Defendant

Robert Rehm (Doc. 112), Defendants Philip and Tricia Vigarino (Doc. 52), and the Mekas

(Doc. 32.) The motions to dismiss are brought pursuant to Federal Rules of Civil Procedure

12(b)(1) and 12(b)(6).

I. FACTUAL BACKGROUND1

The Ponzi scheme2 at issue in this case allegedly caused more than five hundred

investors3

 (the "Investors") to be defrauded out of millions of dollars largely through false

promises of high-yield, low-risk investments in mortgage companies controlled by some of

the Defendants. 

The First Amended Complaint ("FAC") divides the Defendants into three categories:

the Bank Defendants, the Insider Defendants and the Professional Defendants. (FAC, ¶ 4.)

The Insider Defendants consist of Larry and Sheila Dunning, Frank Caspare, Robert Rehm,

Gregory Harrington, Paul Meka, Phillip Vigarino, Eric Strasser, Mark Kesler and Helen C.

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The FAC also includes as Professional Defendants "Randy C. Kiesel, CPA, P.C., an

Arizona professional corporation, [and] . . . David B. Stocker, Ltd., an Arizona professional

corporation." (FAC, at 1-2.)

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Hartze. (FAC, ¶ 4.) The Bank Defendants are Zions First National Bank, National Bank of

Arizona, Western Security Bank, Daryl Coulter and Marshall Boyce. (FAC, ¶ 4.) The

Professional Defendants are Randy C. Kiesel and David B. Stocker.4

 (FAC, ¶ 4.) The Ponzi

scheme is alleged to have been orchestrated by the Insider Defendants with assistance from

the Professional and Bank Defendants.

The centerpiece of the Ponzi scheme was a group of mortgage lending companies (the

"Receivership Entities") operated and controlled by the Insider Defendants. Those

Defendants solicited investment in their companies by lying to prospective investors. Some

of those lies included: telling Investors that they would always receive a high rate of return

on their investment with almost no risk; informing Investors that the particular company they

invested in would issue real-estate loans to qualified borrowers, and that those loans would

be protected by, among other things, first position liens on real property, a security device

known as the "Illinois Land Trust," and a guarantee by Guaranteed Performance, Inc.

("GPI"); promising Investors that their profits would come from proceeds generated by

specific real-estate transactions; allowing Investors to believe that the Receivership Entities

were independent of one another; and failing to tell Investors that the people actually in

control of the Receivership were felons barred from obtaining mortgage brokers' licenses by

virtue of their convictions for, among other crimes, loan fraud and embezzlement.

The truth about the Receivership Entities differed dramatically from the way it was

represented to the Investors: some of the Receivership Entities were not licensed mortgage

brokers; the Receivership Entities made high-risk investments backed by minimal collateral;

to the extent that the Receivership Entities paid their Investors the promised rate of return,

that money came not from the promised real-estate transactions but from other Investors or

other sources, including other Receivership Entities; the real-estate transactions that the

Receivership Entities did engage in were unsecured, defectively secured or were secured by

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subordinate liens; neither GPI nor the Illinois Land Trust provided meaningful investment

protection; the Receivership Entities were not independent but were controlled by the Insider

Defendants and operated as a common enterprise with commingled assets; the Insider

Defendants forged and materially altered documents; Dunning, Harrington and Strasser, in

order to conceal their felony convictions, installed figureheads, such as Caspare and Hartze,

at various positions in the Receivership Entities.

The Bank Defendants furthered the Ponzi scheme by implementing loan programs

with relaxed standards to prospective investors who sought funds to invest in the

Receivership Entities, while failing to disclose their financial interest in the Receivership

Entities. Coulter, an employee of ZNBA, "fraudulently represent[ed] to investors that they

could profit on the interest spread between the rates charged by the Loan Program and the

return promised by the Receivership Entities." (FAC, ¶ 57(F)(3).) 

The Professional Defendants consist of an attorney and a certified public accountant.

Stocker served as the attorney for the Receivership Entities, yet abdicated his responsibility

to ensure that the transactions to which the Receivership Entities were parties complied with

the law. Kiesel, the CPA for the Receivership Entities, submitted false financial reports to

governmental agencies to create the illusion that the Receivership Entities were solvent and

profitable.

The FAC provides specific examples of some typical transactions, four of which will

be summarized here. One involves twenty-three loans totaling about $20 million made by

several Receivership Entities (the "Castle Lenders") to Castle Megastores and its affiliates

(together, "Castle"). (FAC, ¶ 64.) Defendants raised about $14 million from Investors (also,

the "Castle Lenders"). (FAC, ¶ 65.) Castle eventually defaulted, yet payments were still

made to Castle Lenders. (FAC, ¶¶ 67-68.) The Castle Lenders were led to believe that the

money was coming from Castle's loan payments, but in fact it was coming from new

Investors. (FAC, ¶ 69.) The default notwithstanding, Defendants continued to raise money

from other Investors for additional loans to Castle, and in so doing, failed to disclose that

Castle had defaulted on prior loans. (FAC, ¶ 71.) Defendants also led new Investors to

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believe that the funds the previous Castle Lenders had been receiving came not from other

sources, but from Castle's payment of the prior loans. (FAC, ¶ 64.) While some Investors

whose money was lent to Castle were repaid, others were not. (FAC, ¶ 73.) 

In another instance, a man named Herbert Fisher applied to one of the Receivership

Entities, American National Mortgage Partners, LLC ("ANMP") for a loan of about

$350,000, and signed a promissory note to ANMP for the requested amount (FAC ¶¶ 74-75.)

To raise the funds for that loan, various Insider Defendants solicited money from Investors

(the "Fisher Investors"), who were promised that their investment would be secured by a first

position lien on twelve town homes, and that the return on their investment would come from

the proceeds of the loan. (FAC, ¶¶ 76-77.) The Insider Defendants formed an entity,

Thomas Townhouses, LLC, to carry out the business related to the loan. (FAC, ¶ 79.)

$40,000, representing what was purported to be the loan deposit, was placed in escrow by

ANMP. (FAC, ¶ 80.) 

Events did not transpire as the Insider Defendants had promised. No loan was ever

made to Fisher; the escrow was cancelled; the $40,000 was returned to ANMP, commingled

with the assets of other Receivership Entities, and used for the benefit of the Insider

Defendants; the Fisher Investors were not informed that the loan was never made, and on

three occasions, they received money from the Insider Defendants which was represented to

be "interest" payments on the loan, but was actually money contributed by different Investors

to other bogus ventures. (FAC, ¶¶ 81-86.) The Fisher Investors received no other return on

their investments. (FAC, ¶ 87.) 

The third example given in the FAC describes how one of the Bank Defendants

relaxed its lending criteria to enable an unqualified borrower to take out a loan to invest in

one of the Receivership Entities. Investor Luther Durant, a man with only $3,700 in liquid

assets, applied to NBA for a $100,000 loan which he sought to invest with the Receivership

Entities. (FAC, ¶¶ 88-89.) Coulter, the NBA employee who handled the transaction, ensured

that Durant received the loan by relaxing NBA's lending criteria and by failing to properly

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perform due diligence. (FAC, ¶¶ 90-91.) The investment did not bear fruit, and Durant was

unable to repay NBA. (FAC, ¶ 92.)

A fourth example depicts the fraudulent methods employed by some of the Defendants

to secure a loan to purchase some property in Sedona, Arizona. One of the Receivership

Entities maintained a bank account at Western Security Bank. (FAC, ¶ 95.) Western

Security, through its agent Boyce, issued a $400,000 cashier's check on that account, despite

knowing that the account had insufficient funds to cover that amount. (FAC, ¶¶ 95-96.) The

Receivership Entities used that money to obtain a loan from ZNBA to purchase some

property in Sedona. (FAC, ¶¶ 97-98.) ZNBA relaxed its normal lending procedures to

ensure that the Receivership Entities qualified for the loan. (FAC, ¶ 99.) It appears that the

Receivership Entities were unable to repay the loan.

II. PROCEDURAL HISTORY

On March 24, 2003, the Arizona Corporation Commission ("ACC") filed a Verified

Complaint (the "ACC Complaint") in Maricopa County Superior Court against the

Receivership Entities and against all of the Defendants with the exception of ZNBA, Coulter,

Harrington, Western Security Bank, Boyce, Hartze and Kiesel. The ACC Complaint alleges

violations of state law, including the offer and sale of unregistered securities in violation of

Arizona Revised Statutes ("A.R.S.") § 44-1841, the sale of securities by an unregistered

dealer or salesman in violation of A.R.S. § 44-1842, and fraud in connection with the offer

or sale of securities in violation of A.R.S. § 44-1991. The ACC Complaint also asks the

Superior Court to appoint a receiver to take control of the assets of the more than one

hundred named Receivership Entities. The Superior Court appointed a receiver, Plaintiff

James C. Sell.

On March 10, 2003, about two weeks before the filing of the ACC Complaint, two of

the Receivership Entities, ANMP and ANMP 74th Street (together, "ANMP"), filed for

Chapter 11 protection in the United States Bankruptcy Court. The ANMP bankruptcy

proceedings were consolidated, and on July 18, 2005, the Bankruptcy Court consolidated the

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ANMP proceedings with the Receivership Entities for purposes of any distributions provided

for in the Plan of Reorganization in the ANMP Chapter 11 proceedings.

Next, the Receiver sought permission from the Superior Court to commence certain

actions on behalf of the "Receivership Entities, their non-objecting, non-insider creditors,

investors, shareholders, members, partners and trusts." (FAC, Ex. C.) The Receiver also

moved for an order confirming that the "Defrauded Parties have validly assigned their rights

to such actions to the Receiver and that they have agreed to execute any subsequent

assignment documents to evidence same." (FAC, Ex. C.) 

The Superior Court, in an Order dated March 1, 2005, granted the Receiver's motion,

and ordered that:

. . . 

(2) The Receiver has the authority to commence actions on behalf of

the Defrauded Parties;

(3) The Receiver is the assignee of the rights and claims of the

Defrauded Parties, by virtue of the Motion, and has the authority to

commence, maintain, and bind the Defrauded Parties to any settlements

of the Actions, . . . 

(4) The Defrauded Parties have validly assigned their rights to such

actions to the Receiver and that they have agreed to execute any

subsequent assignment documents to evidence same; 

. . . 

(6) The Receiver is the proper party in interest to bring the Actions;

and

(7) Notwithstanding this Order, any Defrauded Party who has 'OptedOut' of the Motion shall retain the right to independently pursue claims

against any and all third parties such party deems responsible.

(FAC, Ex. C.)

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The present action is the consequence of the March 1, 2005 Order. The Receiver

wasted no time, filing his Complaint with this Court the next day. Amended on June 10,

2005, the FAC contains seventeen causes of action, thirteen of which are based on state law.

The FAC is alleged to stand on two jurisdictional legs: the Racketeer Influenced and

Corrupt Organizations Act, 18 U.S.C. § 1961, et seq. ("RICO") and the Employee Retirement

Income Security Act of 1974, 29 U.S.C. § 1001, et seq. ("ERISA"), as amended by the

Multiemployer Pension Plan Amendments Act of 1980, 29 U.S.C. §§ 1381-1453

("MPPAA"). Whether those legs can in fact stand, as Plaintiff contends, or whether they

buckle and fall and bring down with them the remainder of the FAC, as Defendants argue,

are the central issues of the pending motions to dismiss.

III. LEGAL STANDARDS AND ANALYSIS

A. Motion to Strike Receiver's Interim Report

Paragraph 139 of the FAC incorporates by reference the Receiver's Interim Report,

which is attached to the FAC. ZNBA has filed a motion, joined by other Defendants, to

strike both paragraph 139 as well as the Receiver's Interim Report. According to the motion,

paragraph 139 is "immaterial" within the meaning of Federal Rule of Civil Procedure 12(f),

and the Receiver's Interim Report is not a "written instrument" within the meaning of Rule

10(c). The Court agrees with Defendants on both points.

Rule 10(c) provides that "[s]tatements in a pleading may be adopted by reference in

a different part of the same pleading or in another pleading or in any motion. A copy of any

written instrument which is an exhibit to a pleading is a part thereof for all purposes." In

other words, for present purposes, the rule authorizes a complaint to incorporate by reference

a "written instrument" that is attached to the complaint as an exhibit.

The Receiver's Interim Report is not a "written instrument" within the meaning of

Rule 10(c). Courts have interpreted the term "written instrument" to mean "a document

evidencing legal rights or duties or giving formal expression to a legal act or agreement, such

as a deed, will, bond, lease, insurance policy or security agreement." DeMarco v. DepoTech

Corp., 149 F. Supp. 2d 1212, 1220 (S.D. Cal. 2001) (quotations and citations omitted). Such

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documents "consist largely of documentary evidence, specifically, contracts, notes, and other

writings on which a party's action or defense is based[.]" Id. (quoting Rose v. Bartle, 871

F.2d 331, 339 n.3 (3d Cir. 1989)).

The Receiver's Interim Report, however, does not evidence any legal rights or duties,

nor does it give formal expression to a legal act or agreement. The Report is simply an

expanded version of the FAC. Both are summaries that were prepared by Plaintiff (or his

lawyer) and set forth Plaintiff's view of how he believes the Ponzi scheme transpired and the

role of the various Defendants therein. Whereas the FAC is fifty-two pages double-spaced,

the Report consists of sixty-two single-spaced pages and contains one thousand one hundred

pages of exhibits. As the Report fails to meet the definition of a "written instrument" as that

term is defined in Rule 10(c), it is stricken from the FAC. See United States v. Ritchie, 342

F.3d 903, 908 (9th Cir. 2003) ("The doctrine of incorporation by reference may apply, for

example, when a plaintiff's claim about insurance coverage is based on the contents of a

coverage plan, or when a plaintiff's claim about stock fraud is based on the contents of SEC

filings. . . . Affidavits and declarations . . . are not allowed as pleading exhibits unless they

form the basis of the complaint.") (citations omitted); Swanson v. United States Forest Serv.,

87 F.3d 339, 343-45 (9th Cir. 1996); Perkins v. Silverstein, 939 F.2d 463, 467 n.2 (7th Cir.

1991) (noting that "newspaper articles [and] commentaries . . . are not the type of

documentary evidence or 'written instrument[s]' which [Rule 10(c)] intended to be

incorporated into, and made a part of, the complaint") (citations omitted). None of the cases

Plaintiff cites alter or have any effect on that conclusion. Also, as the Report is stricken from

the FAC, paragraph 139 of the FAC, which refers the reader to that Report, is also stricken.

In his response, Plaintiff asks the Court, in the event that it believes that the Report

should be stricken, for permission to amend the Complaint again "for the purpose of cutting

and pasting the facts set forth in the Receiver's Report directly into the Complaint." (Pl.'s

Opp'n to ZNBA's Mot. to Strike, at 2.) That request, as it is phrased, is denied, as it

essentially asks the Court to allow Plaintiff to add the contents of a sixty-two page singlespaced document with over one thousand pages of exhibits to an already lengthy fifty-two

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page document. Such an amendment would make a mockery of Federal Rule of Civil

Procedure 8's requirement that a complaint contain but a "short and plain statement of the

claim." (emphasis added). If there are particular facts that are contained in the Report that

Plaintiff feels should be included if an amended Complaint is filed, he may add them, but is

advised to do so judiciously.

It is also worth noting that the Court's conclusions in this Order as to whether Plaintiff

has stated a claim under RICO or ERISA would be the same regardless of whether the Report

was stricken from the FAC.

B. Authority of Receiver

ZNBA raises the issue of whether Plaintiff has the requisite authority and the standing

in his capacity as receiver to commence these actions. The Court will not reach those issues,

as even assuming that Plaintiff did have such authority and standing, all of his claims must

still be dismissed for the reasons stated below.

C. Federal Jurisdiction

ZNBA moves for dismissal pursuant to Federal Rule of Civil Procedure 12(b)(6),

arguing that the FAC fails to state a claim under both RICO and ERISA.

1. Federal Rule of Civil Procedure 12(b)(6)

A Rule 12(b)(6) dismissal for failure to state a claim can be based on either: (1) the

lack of a cognizable legal theory, or (2) insufficient facts to support a cognizable legal claim.

Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1990); Robertson v. Dean

Witter Reynolds, Inc., 749 F.2d 530, 534 (9th Cir. 1984). 

In determining whether a complaint states a valid claim, all allegations of material fact

are taken as true and construed in the light most favorable to the non-moving party. Clegg

v. Cult Awareness Network, 18 F.3d 752, 754 (9th Cir. 1994). The complaint should not be

dismissed unless it appears beyond doubt that there are “no set of facts” that would entitle

the plaintiff to relief under the asserted claim. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.

Ct. 99, 103 (1957); see also Balistreri, 901 F.2d at 701.

2. RICO

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"RICO provides for civil and criminal liability for entities engaged in a 'pattern of

racketeering activity.' 18 U.S.C. § 1961(a)-(d). A person who suffers injury as a result of

a RICO violation may sue an entity pursuant to 18 U.S.C. § 1964. To demonstrate a 'pattern'

of racketeering activity, a plaintiff must show at least two predicate acts of racketeering

activity occurring within a ten-year period. 18 U.S.C. § 1961(5)." Blythe v. Deutsche Bank

AG, 399 F. Supp. 2d 274 (S.D.N.Y. 2005).

6

While the FAC contains three separate causes of action allegedly arising under the

civil RICO statute, all three may be dismissed if it can be said as a matter of law that all of

Plaintiff's allegations "rely on conduct that would have been actionable as fraud in the

purchase or sale of securities."

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The issue is whether Plaintiff can state a claim under RICO5

 in light of the enactment

in 1995 of the Private Securities Litigation Reform Act ("PSLRA"), which barred the use of

securities fraud as a predicate civil RICO offense. 

Section 107 of the PSLRA amended the civil RICO statute, and it now states, in

relevant part, "Any person injured in his business or property by reason of a violation of

section 1962 of this chapter may sue therefor in any appropriate United States district court

and shall recover threefold the damages he sustains and the cost of the suit, including a

reasonable attorney's fee, except that no person may rely upon any conduct that would have

been actionable as fraud in the purchase or sale of securities to establish a violation of

section 1962." 18 U.S.C. § 1964(c) (emphasis added).6

 

ZNBA and the Defendants who have joined ZNBA's motion argue that all of the

allegations contained in the FAC would have been actionable as fraud in the purchase or sale

of securities, and therefore, none of those allegations can form the basis of a civil RICO

claim. Plaintiff makes two responses, each of which will be addressed in turn: the first is that

it cannot be determined from the face of the FAC whether Defendants were engaged in the

sale of securities; the second is that the FAC alleges predicate acts that have no relation to

securities fraud and therefore may serve as predicate offenses under the civil RICO statute.

a. Whether Defendants Were Engaged in the Sale of

Securities

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7

The Securities Act of 1933 defines a "security" as, among other things, an

"investment contract." See 15 U.S.C. §§ 77b(a)(1), 78c(a)(1) (2003); S.E.C. v. Rubera, 350

F.3d 1084, 1090 (9th Cir. 2003).

8

As the Court pointed out at oral argument, it is somewhat ironic that Plaintiff, who

was appointed to his position as receiver because of alleged violations by the Receivership

Entities of Arizona's securities laws, now makes the argument that the Receivership Entities

were not actually involved in the sale of securities.

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Plaintiff argues that the question of whether the agreements between the Receivership

Entities and the Investors constitute "investment contracts," a type of security,7

 "would

require a fact-intensive inquiry" and cannot be resolved at this stage of the litigation. (Pl.'s

Resp. to Mot. to Dismiss at 12.)8

 

The parties agree that S.E.C. v. Howey, 328 U.S. 293, 299, 66 S. Ct. 1100, 1103

(1946) controls this inquiry. In Howey, the Supreme Court defined an "investment contract"

as any "contract, transaction or scheme whereby a person invests his money in a common

enterprise and is led to expect profits solely from the efforts of the promoter or third party."

Id. at 298-99, 66 S. Ct. at 1103. That definition has been "distilled" into a three-part test

requiring "(1) an investment of money (2) in a common enterprise (3) with an expectation

of profits induced by the efforts of others." Rubera, 350 F.3d at 1090 (quoting S.E.C. v. R.G.

Reynolds Enters., Inc., 952 F.2d 1125, 1130 (9th Cir. 1991)).

Curiously, while Plaintiff argues that it is not possible to resolve definitively from the

face of the FAC whether the arrangements between the Investors and the Receivership

Entities constitute "investment contracts," he does not point to where he believes the

ambiguities lie. Nor can the Court find any. There was clearly "an investment of money."

See, e.g., FAC, ¶¶ 5, 8-12, 45-50, 52, 54, 57. The Receivership Entities were common

enterprises. See, e.g., FAC, ¶¶ 64-65, 69-70, 76-79, 82-83, 85, 101-104; S.E.C. v. Alliance

Leasing Corp., 28 Fed. Appx. 648, 651 (9th Cir. 2002) (noting that a common enterprise

existed where the defendant "pooled investors' interests and [the defendant] and the investors

shared profits"). As to the third element, the Ninth Circuit has elaborated that, "[w]e have

rejected a strict interpretation of this prong in favor of a more flexible focus on 'whether the

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efforts made by those other than the investor are the undeniably significant ones, those

essential managerial efforts which affect the failure or success of the enterprise." Rubera,

350 F.3d at 1092 (quoting S.E.C. v. Glenn W. Turner Enters., 474 F.2d 476, 482 (9th Cir.

1973) (citation omitted)). In Rubera, the Ninth Circuit found that the third prong had been

satisfied where 

[t]he investors in Mr. Rubera's telephone investment program were

passive, completely relying on Alpha to select a suitable location for

the telephone, install the pay telephone, maintain the telephone, pay all

monthly telephone and utility bills, as well as obtain all regulatory

certifications. These functions were all crucial to the profitability of the

investments in the pay telephones, and, concomitantly, to the success

of the investment program as a whole. The entire scheme hinged on

Alpha's efforts, managerial skills, and . . . continued solvency.

Rubera, 350 F.3d at 1092.

The same is true in the present action. The Investors in the Receivership Entities were

passive, completely relying on the various Defendants to conduct all aspects of the business,

as well as obtain all mortgage lending certifications and licenses, and submit to the state all

financial statements and audit reports. See, e.g., FAC, ¶¶ 6 (alleging that the Insider

Defendants "systematically manipulated the Receivership Entities' financial statements and

misstated their financial condition, commingled assets and liabilities . . . and otherwise

dominated and controlled the Receivership Entities to use them as a vehicle for the scheme")

(emphasis added), 7-14, 45-63. There is no question that these functions are alleged to be

crucial to the profitability of the Receivership Entities and the success of the investments as

a whole. The entire scheme hinged on the efforts and managerial skills of the various

Defendants and particularly the Insider Defendants. As such, it is clear from the face of the

FAC that the arrangements between the various Defendants and the Investors constitute

"investment contracts."

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b. Whether the FAC Alleges Predicate Acts Other Than

Securities Fraud

As mentioned above, § 107 of the PSLRA amended the civil RICO statute to

disqualify from use as a predicate offense "any conduct that would have been actionable as

fraud in the purchase or sale of securities." 18 U.S.C. § 1964(c). The viability of Plaintiff's

RICO claims turn on whether the FAC alleges any conduct that would not be actionable as

fraud in the purchase or sale of securities. 

The PSLRA was enacted not only to "deprive plaintiffs of the right to bring securities

fraud based RICO claims," Scott v. Boos, 215 F.3d 940, 945 (9th Cir. 2000), but also to

"prevent a plaintiff from 'plead[ing] other specified offenses, such as mail or wire fraud, as

predicate acts under civil RICO if such offenses are based on conduct that would have been

actionable as securities fraud." Bald Eagle Area Sch. Dist., 189 F.3d at 327 (3d Cir. 1999)

(quoting H.R. Conf. Rep. No. 104-369, at 47 (1995)). See also Blythe, 399 F. Supp. 2d at

274; Ling v. Deutsche Bank AG, 2005 WL 1244689, at *3 (S.D.N.Y. May 26, 2005); Seippel

v. Jenkens & Gilchrist, P.C., 341 F. Supp. 2d 363, 372 (S.D.N.Y. 2004) ("In amending

RICO, Congress was clear in stating that the PSLRA was meant to eliminate the possibility

that litigants might frame their securities claims under a mail or wire fraud claim.") (quoting

Jordan (Berm.) Inv. Co. v. Hunter Greem Invs. Ltd., 205 F. Supp. 2d 243, 248 (S.D.N.Y.

2002)); Swartz v. KPMG, LLC, 401 F. Supp. 2d 1146, 1151 (W.D. Wash. 2004) ("The rule

that a plaintiff cannot assert a RICO claim based on predicate acts that sound in securities

fraud is applicable even if, as is the case here, the claim is pled as a matter of mail fraud or

wire fraud.") (citing Howard v. Am. Online, Inc., 208 F.3d 741, 749-50 (9th Cir. 2000)).

With that backdrop, the Court turns to the interpretation of the term "conduct . . .

actionable as fraud in the purchase or sale of securities." 18 U.S.C. § 1964(c). Helpful in

this regard is the Supreme Court's interpretation of § 10(b) of the Securities Exchange Act

of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, which make it "unlawful

for any person . . . [t]o use or employ, in connection with the purchase or sale of any

security," "any device, scheme, or artifice to defraud." See S.E.C. v. Zandford, 535 U.S. 813,

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122 S. Ct. 1899 (2002) (emphasis added). In Zandford, the Court endorsed the SEC's "broad

reading" of that phrase, and held that "it is enough that the scheme to defraud and the sale of

securities coincide." Id. at 820, 122 S. Ct. at 1903. In that case, the defendant, a securities

broker, was alleged to have "made sales of his customer's securities for his own benefit." Id.

at 820, 122 S. Ct. at 1903. He argued that he had not committed fraud "in connection with"

the sale of securities because the "sales themselves were perfectly lawful," and were not "in

connection with" the subsequent misappropriation of the proceeds from those sales. The

Court rejected that argument, because 

[T]he securities sales and the respondent's fraudulent practices were not

independent events. This is not a case in which, after a lawful

transaction had been consummated, a broker decided to steal the

proceeds and did so. Nor is it a case in which a thief simply invested

the proceeds of a routine conversion in the stock market. Rather, the

respondent's fraud coincided with the sales themselves. . . . [E]ach sale

was made to further respondent's fraudulent scheme. . . . In the

aggregate, the sales are properly viewed as a course of business that

operated as a fraud or deceit on a stockbroker's customer. 

Id. at 820-21, 122 S. Ct. at 1904. 

The terms "in connection with . . . any . . . scheme . . . to defraud," and "actionable as

fraud in the . . . sale of securities," at first glance, do not appear to appear to perfectly

overlay, but on closer analysis, they do. This is because:

(1) It is a violation of Section 10(b) and Rule 10b-5 to commit fraud "in connection with" the

purchase or sale of any security;

(2) If one violates Section 10(b) and Rule 10b-5, they have committed securities fraud;

(3) Therefore, one way to define securities fraud is fraud in connection with the sale of any

security.

(4) Conduct that would have been actionable as fraud in the purchase or sale of securities

may not serve as a predicate offense under the civil RICO statute;

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(5) Conduct that would have been actionable as fraud in the purchase or sale of securities is

conduct for which one could be found liable for of securities fraud; 

(6) Therefore, conduct that is actionable as securities fraud is conduct that occurred in

connection with the sale of securities.

The appropriate inquiry then becomes whether all of the allegations in the FAC

occurred "in connection with" the sale of securities. See Bald Eagle, 189 F.3d at 330; Blythe,

399 F. Supp. 2d at 274; Ling, 2005 WL 1244689, at *3; Seippel, 341 F. Supp. 2d at 372-74.

ZNBA's motion contends that the heart of the FAC is the Ponzi scheme, and the heart of the

Ponzi scheme is securities fraud, and while there may be other predicate acts alleged, they

were performed "in connection with" the Ponzi scheme, and must therefore be dismissed.

Plaintiff counters that the FAC alleges four predicate acts, none of which occurred in

connection with securities fraud: wire fraud in violation of 18 U.S.C. § 1343, mail fraud in

violation of 18 U.S.C. § 1341, and bank fraud and conspiracy to commit bank fraud in

violation of 18 U.S.C. § 1344. Each of these allegedly independently predicate acts will be

discussed in turn.

1. Mail and Wire Fraud

According to Plaintiff, some of the Defendants committed wire and mail fraud by

causing distributions to be made to the Investors. These distributions were fraudulent

because whereas Defendants told the Investors that the money they were receiving was the

fruit of "bona fide, existing and performing loans," the money had been obtained from other

Investors who believed they too were investing in "bona fide, existing and performing loans."

(Pl.'s Resp. to Mot. to Dismss at 12.) Also, Plaintiff alleges that the Professional Defendants

committed wire and mail fraud by submitting "false and misleading audit reports to the

Arizona Banking Department," as part of another one of Defendants' bogus investment

schemes.

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Plaintiff makes the argument that when viewed in isolation, the predicate acts

themselves have nothing to do with securities fraud. In other words, according to Plaintiff,

because the predicate acts, in effect, state a claim for wire fraud and bank fraud, they do not

constitute securities fraud.

Plaintiff's argument, however, "ignores the reality that the same set of facts can

support convictions for mail fraud, wire fraud, bank fraud and securities fraud without giving

rise to any multiplicity problems." Bald Eagle, 189 F.3d at 330 (citing United States v.

Faulhaber, 929 F.2d 16 (1st Cir. 1991); United States v. Reed, 639 F.2d 896 (2d Cir. 1981)).

As mentioned above, the question is not whether a plaintiff can state a claim under a nonsecurities-related predicate act, but whether the allegations that form the basis of that

predicate act occur "in connection with" securities fraud.

Here, they do. In fact, it is hard to imagine just how any predicate acts could be more

connected to a Ponzi scheme than those just discussed. This Ponzi scheme, like seemingly

all Ponzi schemes, functioned by duping investors to give money for what they believe is one

type of investment but is actually another, and some of those investors sometimes receive

what they are promised, only it does not come from where they think it does, but from other,

more recent, investors. The disbursement of money from more recent investors to older

investors is the hallmark of the scheme. Those disbursements are, in other words, "in

connection with" securities fraud. 

The same is true for the submission of false financial documents to state agencies. If

the state knew how the Receivership Entities operated, they would have been, like they

eventually were, sued under securities fraud laws and placed in receivership. Thus, it was

essential to the Ponzi scheme to keep the state in the dark, a feat that was accomplished for

at least a little while through the submission of false documents to the state.

As such, the wire fraud and mail fraud events to which Plaintiff points as allegedly

independent of securities fraud were, to the contrary, part and parcel of it. Bald Eagle, 189

F.3d at 330 (holding that the plaintiff's allegations of wire fraud and mail fraud as potential

predicate acts under RICO were barred by the PSLRA because they were undertaken "in

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connection with the purchase and sale of securities"); Seippel, 341 F. Supp. 2d at 372-74

(barring the use of wire fraud and mail fraud as predicate offenses where the allegations

underlying those causes of action were "part of a single fraudulent scheme," and as such, the

plaintiffs "cannot now divide the scheme into its various component parts," an act of

"surgical presentation" that "would undermine the congressional intent behind the RICO

amendment"); Ling, 2005 WL 1244689, at *3 (dismissing the plaintiff's RICO claim where

the predicate acts of wire fraud and mail fraud were "in connection with securities fraud");

Swartz, 401 F. Supp. 2d at 1151 ("The rule that a plaintiff cannot assert a RICO claim based

on predicate acts that sound in securities fraud is applicable even if, as is the case here, the

claim is plead as a matter of mail fraud or wire fraud.") (citing Howard, 208 F.3d 749-50).

See Zandford, 535 U.S. at 820, 122 S. Ct. at 1903 (holding that an act is "in connection with"

securities fraud if it is temporally coincident with securities fraud and occurs during "a

'course of business' that operated as a fraud"). Therefore, § 107 of the PSLRA precludes the

use of Plaintiff's wire fraud and mail fraud claims as predicate acts under the civil RICO

statute.

2. Bank Fraud/ Conspiracy to Commit Bank

Fraud

Plaintiff gives two examples of bank fraud/conspiracy to commit bank fraud that he

alleges were independent of securities fraud. Both involve various Defendants, acting on

behalf of the Receivership Entities, defrauding banks to obtain loans to purchase properties

for the Receivership Entities. However, these allegations are but tentacles of the same

octopus, sufficiently connected to securities fraud to bar their use as predicate acts. 

The Insider Defendants created over one hundred companies fueled by the money of

defrauded Investors. The act of defrauding a bank to further several of those entities is not

independent of the Ponzi scheme, but clearly in furtherance of it. Id. at 820, 122 S. Ct. at

1903 (finding that an act was "in connection with" securities fraud where, among other

reasons, the act was committed "to further [the] . . . fraudulent scheme," and the act and the

securities fraud were not "independent events"). As in Zandford, Defendants' allegedly

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ZNBA's Motion to Dismiss, as well as those filed by other Defendants, raise other

arguments as to why the RICO claims should be dismissed from the FAC. In light of the

Court's conclusion that § 107 of the PSLRA bars Plaintiff's RICO claims, the Court need not

and does not address those arguments. 

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independent acts "are properly viewed as a course of business" which included securities

fraud. See also Bald Eagle, 189 F.3d at 330 ("[c]onduct undertaken to keep a securities fraud

Ponzi scheme alive is conduct undertaken in connection with the purchase and sale of

securities"); Ling, 2005 WL 1244689, at *3 (holding that the plaintiff's bank fraud could not

serve as a predicate act in light of the PSLRA). As such, Plaintiff's bank fraud/conspiracy

to commit bank fraud claims cannot be used as predicate acts.

In sum, all of the predicate acts that Plaintiff has alleged were committed "in

connection with" securities fraud, which is to say that they are "actionable as fraud in the .

. . sale of securities," and are therefore barred by the PSLRA. Having failed to plead a

requisite predicate act, all of Plaintiff's RICO claims are dismissed.9

3. ERISA

Plaintiff brings his ERISA claim pursuant to 29 U.S.C. § 1451(a)(1). That subsection,

which falls beneath the heading "Persons entitled to maintain actions," states, "A plan

fiduciary, employer, plan participant, or beneficiary, who is adversely affected by the act or

omission of any party under this subtitle with respect to a multiemployer plan, or an

employee organization which represents such a plan participant or beneficiary for purposes

of collective bargaining, may bring an action for appropriate legal or equitable relief, or

both."

ZNBA argues that even assuming Plaintiff meets the strictures of §1451, that

provision is simply one of standing; in other words, it does not "create a private cause of

action under ERISA for 'fraudulent acts and omissions' generally." (ZNBA's Mot. to Dismiss

at 14.) The MPPAA, of which § 1451 is a part, concerns the liability of an employer who

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withdraws from a multiemployer pension plan. 29 U.S.C. § 1383. According to ZNBA, the

FAC is devoid of any allegation relating to withdrawal liability.

ZNBA is correct. In Bay Area Laundry & Dry Cleaning Pension Trust Fund v.

Ferbar Corporation of California, 522 U.S. 192, 203, 118 S. Ct. 542, 550 (1997), the United

States Supreme Court stated that, 

[Section] 1451(a)(1) does not provide a cause of action in the air for

any adverse effect on multiemployer pension funds. . . . Section 1451

prescribes a variety of procedures for the governance of civil actions

brought to enforce the MPPAA. Subsection (a), headed '[p]ersons

entitled to maintain actions,' answers only a 'standing' question - who

may sue for a violation of the obligations established by the Act's

substantive provisions. Subsection (a)(1) extends judicial remedies for

violation of the MPPAA to a broad range of plaintiffs--any 'plan

fiduciary, employer, plan participant, or beneficiary, who is adversely

affected.' But that provision does not make an 'adverse effect' unlawful

per se, any more than does § 10(a) of the Administrative Procedure

Act, which similarly empowers 'adversely affected' persons to invoke

judicial remedies.

(emphasis in original) (some internal punctuation and citations omitted). See Berwind Corp.

v. Apfel, 94 F. Supp. 3d 597, 613 (E.D. Pa. 2000) ("[Section] 1451 creates a private cause of

action under ERISA only for violations of 29 U.S.C. §§ 1381 through 1453.") (emphasis

added) (citing Steiner Elec. Co. v. Cent. States, S.E. & S.W. Areas Pension Fund, 1995 WL

399517, at *6 (N.D. Ill. June 29, 1995)). 

The "substantive provisions" of the MPPAA concern, as ZNBA points out, the

ramifications for an employer if it chooses to withdraw from a multiemployer pension plan.

See, e.g., 29 U.S.C. §§ 1382, 1391, 1399; S.E. & S.W. Areas Pension Fund v. T.I.M.E. - DC,

Inc., 826 F.2d 320, 321 (5th Cir. 1987) (noting that the intent of the MPPAA was to "reduce

the burden of employer withdrawals upon a plan and remaining employers by requiring that

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an employer withdrawing from a multiemployer pension plan pay a fixed and certain debt

to the pension plan") (citations and internal punctuation omitted). The FAC contains no

allegations of anything pertaining to withdrawal liability, nor does the word "withdrawal"

even appear in the FAC. In fact, the word "multiemployer" seems to appear only once in the

FAC, in the following statement: "The Plans include, inter alia, multiemployer plans as

defined under ERISA." (FAC, ¶ 162.) Given the absence of allegations concerning

withdrawal liability, the FAC fails to state a claim under ERISA, and that count is dismissed

from the FAC.

4. Supplemental Jurisdiction

Given that Plaintiff has failed to state a claim under either RICO or ERISA, the only

remaining counts arise under state law. As such, the Court has discretion as to whether to

exercise supplemental jurisdiction over those claims. Herman Family Revocable Trust v.

Teddy Bear, 254 F.3d 802, 805-06 (9th Cir. 2001). The Court declines to exercise

supplemental jurisdiction, and the state law claims are dismissed.

5. Miscellaneous

The Motions to Dismiss as well as Harrington's Motion for Summary Judgment argue

that, even assuming Plaintiff had the requisite authority and standing as receiver to

commence this action, and even assuming that the FAC had stated a claim under ERISA and

RICO, the state law claims should still be dismissed for failure to state a claim. In light of

the Court's conclusion that Plaintiff has failed to state a claim under ERISA and RICO, the

Court need not address any of Defendants' arguments concerning the state law claims.

D. Motion to Stay Discovery

Defendants ask that discovery be stayed pending the Court's ruling on the instant

motions to dismiss. Because this Order dismisses the FAC, it is a moot point whether

discovery should be stayed.

IV. CONCLUSION

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This action is dismissed without prejudice. The FAC alleged subject matter

jurisdiction under RICO and ERISA. However, as Plaintiff has failed to state a claim under

both of those statutes, counts one through four are dismissed. The remaining state law claims

are dismissed as well, as the Court has declined to exercise supplemental jurisdiction over

them.

IT IS ORDERED granting the Motion to Strike the Incorporation by Reference of

the Receiver's Interim Report into the First Amended Complaint filed by ZNBA (Doc. 37)

and joined by some of the other Defendants.

IT IS FURTHER ORDERED granting the Motion to Strike the Incorporation by

Reference of the Receiver's Interim Report into the First Amended Complaint filed by

Coulter (Doc. 60).

IT IS FURTHER ORDERED granting the Motion to Dismiss filed by ZNBA (Doc.

38). As that motion was joined by Defendants Paul and Carol Meka (Doc. 39), Defendant

Pamela Coulter, both in her personal capacity and in her capacity as personal representative

of Darrell Coulter (Doc. 62), Defendants Mark and Bernadette Kesler (Doc. 68), Defendants

Larry and Sheila Dunning (Doc. 103), and Defendant Gregory Harrington (Doc. 58), the case

is dismissed as to those parties as well.

IT IS FURTHER ORDERED granting Defendant Gregory Harrington's Motion to

Motion to Dismiss (Doc. 58). His Motion for Summary Judgment will not be considered at

this time as it was prematurely filed.

IT IS FURTHER ORDERED denying as moot Plaintiff James C. Sell's Motion to

Strike the Separate Statement of Facts that Harrington filed in support of his Motion for

Summary Judgment (Doc. 114).

IT IS FURTHER ORDERED denying as moot the Motion to Stay Discovery filed

by ZNBA (Doc. 36) and joined by Harrington (Doc. 56), Coulter (Doc. 61), and the Keslers

(Doc. 69). 

IT IS FURTHER ORDERED granting the Motion to Dismiss filed by Defendant

Robert Rehm (Doc. 112).

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IT IS FURTHER ORDERED granting the Motion to Dismiss filed by Defendants

Philip and Tricia Vigarino (Doc. 52).

IT IS FURTHER ORDERED granting the Motion to Dismiss filed by Paul and

Carol Meka (Doc. 32).

IT IS FURTHER ORDERED that if Plaintiff believes there is some other basis for

the assertion of federal jurisdiction, he may file an amended Complaint within 20 days of this

Order.

DATED this 9th day of February, 2006.

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