Opinion ID: 2585
Heading Depth: 2
Heading Rank: 1

Heading: The City's Civil RICO Claims

Text: Pursuant to § 1962(c), RICO's substantive provision, it is unlawful 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. . . . 18 U.S.C. § 1962(c). Thus, in order to establish a RICO violation under § 1962(c), a plaintiff (or prosecutor) must allege and prove four elements: (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity. Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985). These requirements apply whether the RICO claim is civil or criminal in nature. In civil cases, however, RICO plaintiffs must also satisfy the requirements of 18 U.S.C. § 1964(c). Section 1964(c) provides that [a]ny person injured in his business or property by reason of a violation of section 1962 has the right to recover threefold the damages he sustains. . . . 18 U.S.C. § 1964(c). Thus, under § 1964(c), a civil RICO claimant must show: (1) a substantive RICO violation under § 1962; (2) injury to the plaintiff's business or property, and (3) that such injury was by reason of the substantive RICO violation. See Lerner v. Fleet Bank, N.A., 318 F.3d 113, 120 (2d Cir.), cert. denied, 540 U.S. 1012, 124 S.Ct. 532, 157 L.Ed.2d 424 (2003). In this case, the District Court dismissed the City's RICO claims on the ground that the City failed adequately to plead a RICO enterprise. Defendants ask us to affirm that decision arguing that the City failed to (1) allege a RICO violation under § 1962, and, in the alternative, arguing that the City failed to (2) demonstrate the requisite injury to its business or property, or (3) allege an injury that was by reason of the alleged RICO violations, thus failing to allege causation. See 18 U.S.C. § 1964(c). We address these issues in reverse order below. [19]
The Supreme Court has addressed civil RICO's causation requirements in three key cases. See Anza v. Ideal Steel Supply Corp., 547 U.S. 451, 457-61, 126 S.Ct. 1991, 164 L.Ed.2d 720 (2006); Holmes v. Sec. Investor Prot. Corp., 503 U.S. 258, 265-70, 112 S.Ct. 1311, 117 L.Ed.2d 532 (1992); Sedima, 473 U.S. at 496-97, 105 S.Ct. 3275. First, in Sedima, the Supreme Court explained that the damages from any injury caused under RICO must flow from the commission of the predicate acts. 473 U.S. at 497, 105 S.Ct. 3292. Thus, the plaintiff only has standing if, and can only recover to the extent that, he has been injured in his business or property by the conduct constituting the [RICO] violation. Id. at 496, 105 S.Ct. 3292. As the Court explained, the compensable injury necessarily is the harm caused by [alleged] predicate acts. . ., for the essence of the violation is the commission of those acts in connection with the conduct of an enterprise. Id. at 497, 105 S.Ct. 3292. Subsequently, in Holmes, the Court focused more particularly on § 1964(c)'s requirement that the claimed injury be by reason of a defendant's RICO violation. See 18 U.S.C. § 1964(c). While recognizing that this language could be read to allow a plaintiff to recover simply upon a showing that defendant's violation was the but-for cause of plaintiff's injury, the Court held that the language was not intended to be read so broadly. Holmes, 503 U.S. at 265-66, 112 S.Ct. 1311 (noting the unlikelihood that Congress meant to allow all factually injured plaintiffs to recover under RICO). Specifically, the Court held that a plaintiff must be able to show that the violation was not only the but-for cause of the injury, but also the proximate cause, which demand[s] for some direct relation between the injury asserted and injurious conduct alleged. Id. at 268, 112 S.Ct. 1311. The Holmes Court noted the following three policy reasons for requiring proximate causation in the RICO context: (1) the factual difficulty of measuring indirect damages and distinguishing among distinct independent causal factors; (2) the complexity of apportioning damages among plaintiffs to obviate the risk of multiple recoveries; and (3) the fact that the need to grapple with these problems is simply unjustified by the general interest in deterring injurious conduct, since directly injured victims can generally be counted on to vindicate the law. Id. at 269, 112 S.Ct. 1311. The Court then held that the injury in Holmes was too remote to allow recovery because it was contingent upon the harm to another. [20] Id. at 271-74, 112 S.Ct. 1311. Third, and most recently in Anza, 547 U.S. 451, 126 S.Ct. 1991, 164 L.Ed.2d 720, the Supreme Court found no proximate cause where the plaintiff's injury was not derivative, as it was in Holmes, but was nevertheless too remote to allow recovery. In Anza, a merchant sued its competitor under RICO alleging that it was injured because the competitor failed to charge sales tax and submitted fraudulent tax returns and, thus, was able to undercut plaintiff's price. Id. at 453-56, 126 S.Ct. 1991. In finding that the plaintiff had inadequately alleged proximate causation, the Court explained that [t]he cause of [the plaintiff's] asserted harms ... is a set of actions (offering lower prices) entirely distinct from the alleged RICO violation (defrauding the State). Id. at 458, 126 S.Ct. 1991. The alleged RICO violation directly caused the State to be defrauded of taxes, not the plaintiff to lose money to its competitor. Id. The principles outlined in these decisions, as applied to the City's allegations, support a finding that the City has standing. Comporting with Sedima, the City alleges that it has been injured (the loss of tax revenues) by defendants' RICO violations (the predicate acts of mail and wire fraud in furtherance of a scheme to defraud the City of taxes). See Sedima, 473 U.S. at 496, 105 S.Ct. 3275. Any recoverable damages occurring by reason of a violation of § 1962(c) (a specific dollar amount for each pack of cigarettes sold without complying with the Jenkins Act) flow from the scheme to defraud the City of use taxes at the heart of the alleged predicate acts of mail and wire fraud. See id. at 497, 105 S.Ct. 3275. The City's claims are easily distinguishable from the ones found to be insufficient in Holmes, 503 U.S. at 271, 112 S.Ct. 1311. Specifically, unlike in Holmes where the plaintiff's injury was derivative, the City's alleged injury of lost tax revenue is directly caused by defendants' alleged schemes. That New York State may also have been injured by defendants' alleged schemes does not make the City's injury any less direct; the City is owed a certain amount of taxes independent of any amount owed to or collected by the State. The fact that the failure to file Jenkins Act reports with the State leads directly to the City's alleged harm, namely loss of tax revenues, also distinguishes this case from Anza, where the injury was found to be too attenuated. See Anza, 547 U.S. at 459, 126 S.Ct. 1991. Moreover, Anza is distinguishable from this case in two important, related, respects. First, Anza involved a RICO claim of a competitor complaining of another merchant's ability to offer lower prices, and the Court's holding sought to limit RICO standing in that type of case. See id. at 460, 126 S.Ct. 1991. As the Court explained, claims brought by economic competitors ... if left unchecked, could blur the line between RICO and the antitrust laws. Id. Second, because competition claims may involve a host of market factors unrelated to the alleged RICO violation, following the causal chain and measuring damages involve evidentiary complexities beyond what a factfinder should be expected to reasonably or reliably parse through. The Anza Court, in describing the speculative nature of the proceedings that would follow if [plaintiff] were permitted to maintain its claim, explained: A court considering the claim would need to begin by calculating the portion of [defendant's] price drop attributable to the alleged pattern of racketeering activity. It next would have to calculate the portion of [plaintiff's] lost sales attributable to the relevant part of the price drop. The element of proximate causation recognized in Holmes is meant to prevent these types of intricate, uncertain inquiries from overrunning RICO litigation. Id. at 459-60, 126 S.Ct. 1991; see also id. at 460, 126 S.Ct. 1991 (A RICO plaintiff cannot circumvent the proximate-cause requirement simply by claiming that the defendant's aim was to increase market share at a competitor's expense.). Here, by contrast, the City's claim is not market based. While the City's case will not be free of evidentiary wrinkles, any potential wrinkles are nowhere near the type or degree involved in Anza. See id. at 460, 126 S.Ct. 1991. Our finding of proximate causation in this case also fully comports with the underlying premises of that causation requirement, which the Supreme Court outlined in Holmes, 503 U.S. at 269, 112 S.Ct. 1311. [21] See Anza, 547 U.S. at 458, 126 S.Ct. 1991. As set forth above, the first concern raised in Holmes is that indirect claims present the factual difficulty of measuring indirect damages and distinguishing among distinct independent causal factors. See Holmes, 503 U.S. at 269, 112 S.Ct. 1311. Here, however, measuring the damages is as simple as counting the number of cigarette packs sold by defendants to New York City residents without complying with the Jenkins Act. Moreover, the fact that the cigarette purchasers may be partially to blameeither because they were not aware of their reporting duties or because, as part of the alleged RICO conspiracy, they were intentionally hiding the fact of their purchasesdoes not defeat proximate causation. [22] We have held that defendants remain liable where their actions were a substantial factor that caused the loss. See Lerner, 318 F.3d at 123 (Central to the notion of proximate cause [under RICO] is the idea that a person is... liable ... to those with respect to whom his acts were a substantial factor in the sequence of responsible causation, and whose injury was reasonably foreseeable or anticipated as a natural consequence. (internal quotation marks omitted)); see also Williams v. Mohawk Indus., 465 F.3d 1277, 1288 n. 5 (11th Cir.2006) (noting that under RICO, proximate cause is not ... the same thing as a sole cause, and it is enough for the plaintiff to plead and prove that the defendant's tortious or injurious conduct was a substantial factor in the sequence of responsible causation (internal quotation marks omitted)), cert. denied, ___ U.S. ___, 127 S.Ct. 1381, 167 L.Ed.2d 174 (2007). [23] A contrary rule would effectively require that a plaintiff's injury be caused by only one source, and, as this is often not the case, it would operate to insulate from liability defendants who scheme with others in violation of RICO. Here, defendants' actions are clearly alleged to be a substantial factor in the City's loss. The second potential problem highlighted by Holmes  namely, the complexity of apportioning damages among plaintiffs to obviate the risk of multiple recoveries, 503 U.S. at 269, 112 S.Ct. 1311  is also not implicated here. Only the City can claim loss of the City's use taxes. To the extent that the State of New York is also aggrieved by defendants' actions, it would have separate damages because it charges separate taxes. See N.Y. Tax Law §§ 471, 471-a. The third reason highlighted by Holmes for requiring a direct injury is the expectation that those directly injured will litigate their claims in order to vindicate the law. 503 U.S. at 269, 112 S.Ct. 1311. Although the State may also seek to sue to vindicate the law, the City should not have to rely on the State to enforce the RICO laws, where the City's injury in the form of lost taxes is no less direct than any comparable injury of the State. Finally, the City's claims are distinguishable from those our Court has found to be inadequate, in cases on which defendants rely. Specifically, as alleged, there are no speculative steps in this chain of causation. When defendants fail to comply with the Jenkins Act, defendants deprive both the City and the State of information needed to collect taxes from the in-State and in-City cigarette purchasers. And the City has alleged that it will be `fully and promptly' informed by the New York State Department of Taxation and Finance of any information relevant to the collection of cigarette taxes, including Jenkins Act reports. Cf. Lerner, 318 F.3d at 124 (Each of the assumptions upon which this theory [of causation] rests is inherently speculative.). In addition, the City's alleged injury is not derivative of the State's injury. Cf. Laborers Local 17 Health and Benefit Fund v. Philip Morris, Inc., 191 F.3d 229 (2d Cir.1999), cert. denied, 528 U.S. 1080, 120 S.Ct. 799, 145 L.Ed.2d 673 (2000). Though the City and State are injured by the same activity, the City's injury does not depend on the State being injured. Cf. id. at 239 (concluding that injuries alleged by labor union health and welfare trust funds against tobacco companies and public relations firms, based on deception about the dangers of smoking and resulting health care expenses by funds and plan participants, were derivative of injuries suffered by the plan participants and thus too remote to confer standing on the funds). And it is clear that the City is alleged to be the target of the scheme because a large part of, if not the driving force behind, defendants' business plans was to sell cigarettes in such a way as to allow consumers to evade New York City's taxes. Cf. Abrahams v. Young & Rubicam Inc., 79 F.3d 234, 239 (2d Cir.) (holding that plaintiff lacked standing under RICO because the plaintiff was not a target of the scheme, but rather was merely injured by the fallout from the scheme's exposure), cert. denied, 519 U.S. 816, 117 S.Ct. 66, 136 L.Ed.2d 27 (1996). The fact that the State may also have been targeted by defendants' schemes does not change the result. No precedent suggests that a racketeering enterprise may have only one `target,' or that only a primary target has standing; indeed, there is a broad class of plaintiffs under RICO. See Baisch, 346 F.3d at 375. Contrary to our colleague's dissenting view, the predicate racketeering acts in this case are not Jenkins Act violations; rather, as discussed in Section C infra, the predicate acts are wire and mail fraud violations. Thus, whether or not the injury is direct must be determined by looking at the nature and consequences of the alleged predicate acts of mail and wire fraud. In the City's allegations, the Jenkins Act violations form the basis of defendants' scheme to defraud, an essential element of the alleged predicate acts of mail and wire fraud, which targeted both the City and State in an effort to deprive both of the information needed to collect use taxes. The fact that defendants have no statutory duty to the City under the Jenkins Act does not make the City's alleged harm from the mail and wire fraud violations derivative, unforeseeable, or any less direct. As the dissent recognizes, the mail and wire fraud statutes extend to protect taxing authorities from fraud. See, e.g., United States v. DeFiore, 720 F.2d 757, 761-62 (2d Cir.1983), cert. denied, 467 U.S. 1241, 104 S.Ct. 3511, 82 L.Ed.2d 820 (1984). Moreover, we do not share our dissenting colleague's concern that this case represents a major expansion of mail fraud doctrine. For the reasons we have already explained, in this unique case, the City has alleged an injury in the form of lost taxes that is independent from, even if parallel to, any injury suffered by the State. [24] By recognizing the City's right to proceed in this case, we are neither extending the scope of the mail and wire fraud statutes, nor the scope of RICO, beyond their established reach.
As noted above, one of the requirements for a civil RICO claim is that plaintiff be injured in its business or property. 18 U.S.C. § 1964(c). Defendants argue that the City's allegations of lost taxes do not allege an injury to the City's business or property because that injury was not one the City incurred as a party to a commercial transaction. This argument finds support in Town of West Hartford v. Operation Rescue, 915 F.2d 92, 103-04 (2d Cir.1990), where we suggested that a municipality must have sustained its injury as a party to a commercial transaction to have standing under RICO. However, we have since explained that our statements to that effect in Town of West Hartford were merely dicta. See Att'y Gen. of Can. v. R.J. Reynolds Tobacco Holdings, Inc., 268 F.3d 103, 132 n. 40 (2d Cir.2001), cert. denied, 537 U.S. 1000, 123 S.Ct. 513, 154 L.Ed.2d 394 (2002). We see no reason to import an additional standing requirement on municipalities for RICO claims, and thus expressly reject our dicta to the contrary in Town of West Hartford. See Sedima, 473 U.S. at 495, 497-500, 105 S.Ct. 3275 (noting that RICO is to be read broadly, and overruling our Court's engrafting of a racketeering injury requirement which found no support in the statute or legislative history). We have consistently held that tax losses from unpaid taxes are property for purposes of the mail and wire fraud statutes. See, e.g., Fountain v. United States, 357 F.3d 250, 255-60 (2d Cir.2004), cert. denied, 544 U.S. 1017, 125 S.Ct. 1968, 161 L.Ed.2d 856 (2005); United States v. Porcelli, 865 F.2d 1352, 1355 (2d Cir.) (affirming mail fraud and RICO convictions for fraudulent under-reporting of taxes to State), cert. denied, 493 U.S. 810, 110 S.Ct. 53, 107 L.Ed.2d 22 (1989); DeFiore, 720 F.2d at 761. Moreover, in Anza, the Supreme Court suggested that a State would have a recoverable injury where the allegations are that the defendants defrauded the State out of tax revenues. See 547 U.S. at 460, 126 S.Ct. 1991. Thus, we hold that lost taxes can constitute injury to business or property for purposes of RICO, and conclude that the City has adequately met this requirement notwithstanding that its injury did not arise from its participation in a commercial transaction. See Illinois Dep't of Revenue v. Phillips, 771 F.2d 312, 314-16 (7th Cir. 1985) (rejecting the notion that a State government unit suing under RICO is limited to competitive or commercial injuries); but see Canyon County v. Syngenta Seeds, Inc., 519 F.3d 969, 977-80 (9th Cir.2008) (endorsing the dicta in Town of West Hartford ).
As noted above, to state a claim for damages under § 1964(c) a plaintiff must first allege a substantive RICO violation under § 1962(c). See Moss v. Morgan Stanley Inc., 719 F.2d 5, 17 (2d Cir.1983), cert. denied, 465 U.S. 1025, 104 S.Ct. 1280, 79 L.Ed.2d 684 (1984). In turn, § 1962(c) makes it unlawful 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.... 18 U.S.C. § 1962(c). We discuss the racketeering activity and enterprise elements of a substantive RICO violation as they relate to these cases in turn.
Mail fraud and wire fraud are forms of `racketeering activity' for purposes of RICO. Anza, 547 U.S. at 454, 126 S.Ct. 1991; see also 18 U.S.C. §§ 1341 (mail fraud), 1343 (wire fraud). To procure a conviction for mail fraud, the government must prove three elements: (1) a scheme to defraud victims of (2) money or property, through the (3) use of the mails. United States v. Walker, 191 F.3d 326, 334 (2d Cir.1999), cert. denied, 529 U.S. 1080, 120 S.Ct. 1702, 146 L.Ed.2d 506 (2000). Likewise, a defendant commits wire fraud where he was one of the participants in a fraudulent scheme which was furthered by the use of interstate transmission facilities. United States v. Corey, 566 F.2d 429, 431 n. 2 (2d Cir.1977). Allegations of mail [or wire] fraud must be made with the particularity required by Federal Rule of Civil Procedure 9(b). McLaughlin, 962 F.2d at 191. To constitute a [mail or wire fraud] violation ... it is not necessary to show that [defendants] actually mailed [or wired] ... anything themselves; it is sufficient if they caused it to be done. Pereira v. United States, 347 U.S. 1, 8, 74 S.Ct. 358, 98 L.Ed. 435 (1954); accord McLaughlin, 962 F.2d at 191 (mail fraud); United States v. Whiting, 308 F.2d 537, 540 (2d Cir.1962) (wire fraud), cert. denied, 372 U.S. 909, 83 S.Ct. 722, 9 L.Ed.2d 718 (1963). Moreover, [i]t is sufficient for the mailing [or transmission] to be incident to an essential part of the scheme, or a step in the plot. Schmuck v. United States, 489 U.S. 705, 710-11, 109 S.Ct. 1443, 103 L.Ed.2d 734 (1989) (internal quotation marks omitted). It is settled law in this Circuit that a Jenkins Act violationassuming one occurredmay form the basis of a wire or mail fraud conviction. See DeFiore, 720 F.2d at 761-62 (upholding wire fraud conviction based on scheme to defraud New York of substantial cigarette tax revenues). [25] Other circuits have also reached this conclusion. See United States v. Melvin, 544 F.2d 767, 773 (5th Cir.1977) (same with respect to mail fraud); United States v. Brewer, 528 F.2d 492, 495 (4th Cir.1975) (same). Here, the City alleges that the named RICO persons directed the alleged enterprises to conceal cigarette sales from state tax authorities by failing to file Jenkins Act reports or directed to effect sales by means of misrepresentations while using the mails or wires to effect a sale of cigarettes to New York City residents. The City further alleges that this amounts to a scheme to defraud New York City of its use taxes because defendants have deprived the City of the information it needs to charge and collect those taxes. We find that these allegations sufficiently allege a scheme or artifice to defraud that was furthered by the use of mail or wires. See McLaughlin, 962 F.2d at 191. Even assuming arguendo that the District Court was correct to find that the individual defendants acting in their official capacities could not be liable under the Jenkins Act for their companies' failures to comply with the reporting laws, the individuals allegedly committed the predicate acts of mail and wire fraud by directing the companies to use the mails and wires to sell cigarettes and to violate the Jenkins Act. These allegations are sufficient to allege a pattern of racketeering activity for purposes of RICO. See Pereira, 347 U.S. at 8-9, 74 S.Ct. 358.
As to the enterprise requirement, the Supreme Court has explained that a plaintiff must allege and prove the existence of two distinct entities: (1) a `person'; and (2) an `enterprise' that is not simply the same `person' referred to by a different name. Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158, 161-62, 121 S.Ct. 2087, 150 L.Ed.2d 198 (2001); Riverwoods Chappaqua Corp. v. Marine Midland Bank, N.A., 30 F.3d 339, 344 (2d Cir.1994) ([B]y virtue of the distinctness requirement, a corporate entity may not be both the RICO person and the RICO enterprise under section 1962(c).). A person is defined as any individual or entity capable of holding a legal or beneficial interest in property. 18 U.S.C. § 1961(3). An enterprise is defined as any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity. 18 U.S.C. § 1961(4). A RICO enterprise based on an association-in-fact theory is a group of persons associated together for a common purpose of engaging in a course of conduct, the existence of which is proved by evidence of an ongoing organization, formal or informal, and by evidence that the various associates function as a continuing unit. United States v. Turkette, 452 U.S. 576, 583, 101 S.Ct. 2524, 69 L.Ed.2d 246 (1981). We look to the hierarchy, organization and activities to determine whether an alleged association functioned as a unit. United States v. Coonan, 938 F.2d 1553, 1560-61 (2d Cir.1991) (noting that proof of various racketeering acts may be relied on to establish the existence of an association-in-fact enterprise), cert. denied, 503 U.S. 941, 112 S.Ct. 1486, 117 L.Ed.2d 628 (1992). [F]or an association of individuals to constitute an enterprise, the individuals must share a common purpose to engage in a particular fraudulent course of conduct and work together to achieve such purposes. First Capital Asset Mgmt., Inc. v. Satinwood, Inc., 385 F.3d 159, 174 (2d Cir.2004) (internal quotation marks omitted). In practice, the dual requirements of (1) distinctness and (2) the proof needed to demonstrate an association-in-fact, work in tandem to weed out claims dressed up as RICO violations but which are not in fact. Specifically, the distinctness doctrine requires a plaintiff to demonstrate that the RICO person is legally separate from the RICO enterprise, while the association-in-fact requirements help ensure that distinctness is not achieved by simply tacking on entities to the enterprise which do not in fact operate as a continuing unit or share a common purpose. See Turkette, 452 U.S. at 583, 101 S.Ct. 2524; Satinwood, 385 F.3d at 174. As explained earlier, the alleged enterprises in the cases before us generally take on one of two forms. In the first, a defendant corporate entity is alleged to be a passive enterprise with its defendant officers and/or directors acting as the RICO person[s]. (hereafter, the primary enterprises). As laid out above, these alleged primary enterprises are as follows:  An enterprise consisting of defendant SmokesSpirits. com, with defendant Michael Klee as the alleged RICO person.  An enterprise entitled EZTobacco Enterprise consisting of Electronic Computer Consulting, LLC, with defendant Theresa Trivett, doing business as EZ-Tobacco.com, as the alleged RICO person.  An enterprise consisting of defendant Nexicon, with defendants Richard Urrea, Daniel Urrea, and certain non-defendant individuals as the alleged RICO persons.  An enterprise consisting of defendant Hemi Group, with defendant Kai Gachupin as the alleged RICO person.  An enterprise consisting of defendant NCCigarettes.com, with defendants XFire, Scott Herring, and Jeff Reinhardt as the alleged RICO persons. [26] The second set of enterprises are association-in-fact enterprises, where the association consists of a defendant entity and a third-party, and the RICO person[s] consist of the defendant entity and generally officers and/or directors of the entities comprising the enterprise. The remaining alleged association-in-fact enterprises in these cases are as follows:  An enterprise consisting of defendant Nexicon and non-party American Indian CigCo, with defendants Nexicon, Richard Urrea, Daniel Urrea, and certain non-parties, at least one of which is an employee/officer of American Indian CigCo, as the RICO persons.  An enterprise consisting of defendant Hemi Group and non-defendant A1 Enterprises, with defendants Hemi Group and Kai Gachupin as the RICO persons. [27] We address each set of enterprises below.
The City's allegations are sufficient to meet the distinctness requirement with respect to all of the primary enterprises. In Cedric Kushner, the Supreme Court explained that the RICO person and alleged enterprise must be only legally, and not necessarily actually, distinct. 533 U.S. at 163, 166, 121 S.Ct. 2087 (determining that Don King, the alleged person, was distinct from Don King Productions, the alleged RICO enterprise, of which Don King was president and sole shareholder). The City has alleged with respect to the primary enterprises that the enterprise is an innocent corporation, with its own legal basis for existing, and the persons are employees or officers of the organization unlawfully directing the enterprise's racketeering activities. That is sufficient under the distinctness standards articulated in Cedric Kushner. We address below the additional, case-specific challenges made by certain defendants.
Defendants in NCCigarettes argue that NCCigarettes.com is a sole proprietorship run by Scott Herring, not an enterprise, and that the additional personsJeff Reinhardt and Xfirecommitted no predicate acts under RICO and are not liable because Xfire was merely an Internet service provider that provided services to the alleged enterprise. NCCigarettes.com's claim that it is a sole proprietorship is unavailing at this stage in the pleadings. Though we have not previously spoken on this, our sister circuits have allowed § 1962(c) claims to proceed when the enterprise is a sole proprietorship with a distinct and separate identity from that of the individual defendant who owns it. These circuits have held that a defendant is distinct from the sole proprietorship enterprise, unless the sole proprietor is strictly a one-man show. McCullough v. Suter, 757 F.2d 142, 144 (7th Cir.1985) (The only important thing is that [the enterprise] be either formally (as when there is incorporation) or practically (as when there are other people besides the proprietor working in the organization) separable from the individual.); United States v. Benny, 786 F.2d 1410, 1415-16 (9th Cir.) (affirming RICO conviction where defendant's sole proprietorship was a troupe, not a one-man show), cert. denied, 479 U.S. 1017, 107 S.Ct. 668, 93 L.Ed.2d 720 (1986); see also Guidry v. Bank of LaPlace, 954 F.2d 278, 283 (5th Cir.1992) (espousing the approach to sole proprietorships announced in McCullough, but holding that the distinctness requirement was not met under the circumstances of the case). Under this approach, which we now join, we find that the City has adequately alleged distinctness as to the NCCigarettes.com primary enterprise because the City has alleged that Herring's sole proprietorship is not a one-man show. However, we agree with defendants Xfire and Reinhardt that the allegations are insufficient to state a claim against them as RICO persons. As explained earlier, § 1962(c) makes it unlawful for any person employed by or associated with an enterprise ... to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs.... 18 U.S.C. § 1962(c). In Reves v. Ernst & Young, the Supreme Court explained that [i]n order to `participate, directly or indirectly, in the conduct of such enterprise's affairs,' one must have some part in directing those affairs. 507 U.S. 170, 179, 113 S.Ct. 1163, 122 L.Ed.2d 525 (1993); see also id. at 184, 113 S.Ct. 1163 ([I]t is clear that Congress did not intend to extend RICO liability under § 1962(c) beyond those who participate in the operation or management of an enterprise through a pattern of racketeering activity.). Although this is a low hurdle to clear at the pleading stage, see Satinwood, 385 F.3d at 176, the City's allegations most generously construed  simply do not clear it with respect to Xfire or Reinhardt. [28] These defendants are not alleged to have violated the Jenkins Act, and, unlike the named RICO person in the other primary enterprises, neither Xfire nor Reinhardt are alleged to have directed or caused the enterprise to commit a Jenkins Act violation. Simply alleging that certain entities provide services which are helpful to an enterprise without any allegations that those entities exert any control over the enterprise does not sufficiently allege a claim under RICO against those entities. See Reves, 507 U.S. at 179, 113 S.Ct. 1163; see also, e.g., Azrielli v. Cohen Law Offices, 21 F.3d 512, 521 (2d Cir.1994); Univ. of Md. at Baltimore v. Peat, Marwick, Main & Co., 996 F.2d 1534, 1539-40 (3d Cir.1993).
Nexicon argues that the City erroneously named it as a defendant because Cyco. net, Inc. (Nevada) sold its Internet tobacco retail business, Cyco.net, Inc. (New Mexico), to American Indian CigCo in 2003. Cyco.net, Inc. (Nevada), then changed its name to Nexicon, which is a publicly traded company engaged in network security and billing management. [29] Moreover, Richard Urrea claims to have terminated a consultancy agreement with American Indian Cigco and ceased doing business with the company, and thus argues that Nexicon should not be held liable. Whatever the merits of these factual averments, we must accept the City's allegations as true at this stage, and dismissal is not warranted on these bases. Nexicon defendants also argue that the City failed to make a showing that Nexicon exercised any control over American Indian CigCo's shipments of cigarettes. The City is not required to make a showing that Nexicon exercised any control over American Indian CigCo's shipments of cigarettes at this stage. As explained, to show the requisite level of management, the City must allege that the defendants `conduct[ed] or participate[d], directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity. Satinwood, 385 F.3d at 175-76 (quoting 18 U.S.C. § 1962(c)). By alleging that Nexicon and American Indian CigCo have entered profit sharing and employment agreements, the City has adequately pled that Nexicon has some part in directing the enterprise's affairs. Reves, 507 U.S. at 179, 113 S.Ct. 1163.
Defendants also argue that the District Court correctly dismissed the City's association-in-fact enterprise allegations in Nexicon and NCCigarettes. The District Court found that while the City alleged technically legitimate enterprises based on the association-in-fact theory, the City failed to (1) allege a configuration that has an `ongoing organization, formal or informal,' and that its `various associates function as a continuing unit'; (2) allege a nexus between the RICO predicate acts and the association-in-fact enterprises; and (3) explain each participant's role in the alleged course of fraudulent conduct. Nexicon, 2006 WL 647716, at , 2006 U.S. Dist. LEXIS 10295, at -29 (quoting Turkette, 452 U.S. at 583, 101 S.Ct. 2524). [30]
The District Court erred in holding that the City failed to adequately plead an enterprise with respect to the Nexicon association-in-fact enterprise. First, the City has sufficiently alleged a functioning unit by alleging that Nexicon and American Indian CigCo entered profit sharing and employment agreements and that they have interlocking financial and management agreements. The City further alleged that American Indian CigCo transfers assets from Nexicon to American Indian CigCo in order to hide assets and that American Indian CigCo regularly transfers funds earned from illegal cigarette sales to Nexicon. The relatedness requirement also was met with respect to this enterprise. See United States v. Daidone, 471 F.3d 371, 375 (2d Cir.2006) (per curiam) (citing United States v. Minicone, 960 F.2d 1099, 1106 (2d Cir.), cert denied, 503 U.S. 950, 112 S.Ct. 1511, 117 L.Ed.2d 648 (1992)); see also Satinwood, 385 F.3d at 174. In this regard, the City alleges that defendants' business plans depended on (1) concealing their customers' purchases from state tax authorities; (2) informing their customers that the purchases would be concealed; and (3) concealing purchasers' tax liability from the purchasers themselves. Thus, the relatedness requirement was met because the alleged acts of mail and wire fraud were more than merely related to the activities of the online cigarette sellers; they were essential to defendants' business. Finally, the City also sufficiently alleges the roles that relevant defendants had in operating or managing the Nexicon association-in-fact enterprise. Defendants Nexicon, Richard Urrea and Daniel Urrea are clearly alleged to have participated in management by virtue of their roles in the organizations that make up the enterprise. [31] As the Nexicon association-in-fact enterprise is clearly alleged to be made up of several defendant persons who operated or managed the affairs of the enterprise, the dismissal of this claim must be vacated.
However, we affirm the District Court's finding that the City failed to sufficiently allege a functioning unit with respect to the Hemi Group association-in-fact enterprise. Although the City alleges that the Hemi Group association-in-fact displays a continuity of structure and personnel, and has a consensual decision-making structure, the City alleges no facts tending to support this stock allegation. The bare allegations that A1 Enterprises works with the Hemi Group to conceal from New York City cigarette sales; that Kai Gachupin is believed to be an officer or employee of A1 Enterprises, as well as an owner or shareholder of the Hemi Group, are insufficient to plead the type of continuity required for an association-in-fact enterprise.
To the extent the City's complaint can be construed as alleging an association-in-fact enterprise consisting of NCCigarettes.com and the Internet service provider, Xfire, we agree with the District Court that the City has failed to meet its pleading burden. Perhaps because the City never intended to plead an association-in-fact with respect to this group of defendants, it has not provided any solid information regarding the hierarchy, organization, and activities of the alleged enterprise, from which we could fairly conclude that its members functioned as a unit. See Satinwood, 385 F.3d at 174 (internal quotation marks omitted). Thus, to the extent that the City has indeed attempted to allege an association-in-fact enterprise with respect to this group of defendants, the District Court's dismissal of this claim is affirmed.
With respect to those claims where we have found the City's enterprise allegations insufficient, we do not foreclose the possibility that amendment could cure the shortcomings. In 2006, when the complaints were finally dismissed, the City had not moved for leave to amend the complaints, and the District Court did not grant it sua sponte. Rule 15(a) of the Federal Rules of Civil Procedure instructs courts that leave to amend should be freely given. Leave to amend need not be granted, however, where the proposed amendment would be futile. Advanced Magnetics, Inc. v. Bayfront Partners, Inc., 106 F.3d 11, 18 (2d Cir.1997) (citations and internal quotation marks omitted). Thus, on remand to the District Court, the court may grant leave to amend if and as it deems appropriate.