Opinion ID: 504005
Heading Depth: 2
Heading Rank: 2

Heading: The Sec. 9(b) Pleading Requirement

Text: 29 Appellants allege that defendants used the mails and telephone in their scheme to defraud them and in doing so committed mail and wire fraud under 18 U.S.C. Secs. 1341 and 1343. Appellants allege that each such use of the mails or telephone constituted a predicate act of racketeering activity as defined in civil RICO Sec. 1961(1), 18 U.S.C. Sec. 1961(1). 11 Because these predicate acts are acts of fraud, they must be pleaded with particularity under Fed.R.Civ.P. 9(b). Seville Indus. Mach. Corp. v. Southmost Mach. Corp., 742 F.2d 786 (3d Cir.1984), cert. denied, 469 U.S. 1211, 105 S.Ct. 1179, 84 L.Ed.2d 327 (1985). 30 At bottom, appellants' allegation of fraud is as follows: Upon information and belief, defendants and/or persons acting under their direction or control provided notice to certain C-E employees other than plaintiffs, during the VESP option period, that C-E was in the process of planning and promulgating VSIP. J.A. at 45. 12 C-E argues that the district court's dismissal of the civil RICO count should be affirmed because appellants' averment of fraud failed to meet the Fed.R.Civ.P. 9(b) pleading requirements. Specifically, C-E maintains that appellants' allegation of fraud is deficient because it does not give sufficient indication of what acts constituted fraud, such as which defendants were involved, what was said, or the time and place of the statements. 31 Fed.R.Civ.P. 9(b) states: In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally. The circuits have differed in their treatment of Rule 9(b) and civil RICO predicate acts. 13 This court addressed the issue in Seville. 742 F.2d 786 (3d Cir.1984), cert. denied, 469 U.S. 1211, 105 S.Ct. 1179, 84 L.Ed.2d 327 (1985). 32 The district court in Seville had dismissed the complaint on the ground that it failed, inter alia, to meet the Fed.R.Civ.P. 9(b) pleading requirements. The plaintiff, an industrial machinery trader, alleged that the defendants induced it to enter into several contracts for the purpose of selling and re-selling industrial machinery, and that because of the defendants' fraudulent misrepresentations it shipped seven hundred pieces of machinery to the defendants without receiving payment. The district court found that the allegations of fraud were deficient because they did not describe the date, place or time of the phone calls and letters that defendants allegedly used in furtherance of their fraudulent scheme. Seville, 742 F.2d at 791. The district court also held that because the complaint failed to allege when the transportation of goods occurred, the plaintiff failed properly to plead the interstate component of the claim. 33 We reversed, noting that in applying Rule 9(b), 'focusing exclusively on its particularity language is too narrow an approach and fails to take account of the general simplicity and flexibility contemplated by the rules.'  Seville, 742 F.2d at 791 (quoting Christidis v. First Pennsylvania Mortgage Trust, 717 F.2d 96, 100 (3d Cir.1983) (quoting 5 C. Wright & A. Miller, Federal Practice and Procedure Sec. 1298, at 407 (1969))). We also pointed out that the plaintiff had specified the machinery in great detail, and, more importantly for the case sub judice, that [t]he complaint set[ ] forth the nature of the alleged misrepresentations, and while it d[id] not describe the precise words used, each allegation of fraud adequately describe[d] the nature and subject of the alleged misrepresentation. Seville, 742 F.2d at 791. As an example of the adequate description, we quoted a paragraph from the complaint: 34 [Defendants] [r]epresented to [plaintiff] that if the industrial machinery listed in Exhibits A and C were shipped on consignment to either [of the defendants], that the industrial machinery would be resold, and that the purchase price paid by [plaintiff] for this equipment along with a 50% pro rata share of the profits resulting from resale would be distributed and paid back to [plaintiff]. 35 Id. at 791 n. 6. 36 Neither party in the case sub judice cited Seville. Appellants maintain that because the 18 U.S.C. Sec. 1341 and Sec. 1343 scheme to defraud element of civil RICO fraud is not defined according to any technical standards.... [and] need not be fraudulent on its face, we should find the allegation of fraud sufficient. United States v. Pearlstein, 576 F.2d 531, 535 (3d Cir.1978). Appellants misconstrue the meaning of the pleading requirement, however. The pleading requirement simply mandates that the actions establishing the fraud be pleaded with greater particularity than other pleadings; it has no impact on the definition of fraud itself. Thus, Rule 9(b) does not alter the substantive offense of fraud, but requires detailed allegations of that offense. 37 That detail is lacking here. The complaint in Seville indicated who made the representations to whom, and the general content of the representations. Although the appellants' complaint does indicate the general content of the representations (notice that C-E was in the process of planning and promulgating VSIP ), 14 it does not indicate who the speakers were (defendants and/or persons acting under their direction and control  ) or who received the information (certain C-E employees other than plaintiffs). 15 J.A. at 56-58 (emphasis added). 38 Although we, too, are mindful of the admonition in Christidis, relied upon in Seville, not to read the particularity requirement too narrowly, the pleadings before us do not provide even the level of notice that we pointed out in Christidis is the underpinning of the particularity requirement. See Christidis, 717 F.2d at 100. Moreover, there is no reason to believe that additional information is in the exclusive control of C-E. See New England Data Serv., Inc. v. Becker, 829 F.2d 286, 289 (1st Cir.1987). Hence, we hold that the appellants' allegations are insufficient to meet the particularity requirement of Rule 9(b). 39 Because appellants should have an opportunity to amend the complaint to provide greater specificity, see Fed.R.Civ.P. 15; District Council 47 v. Bradley, 795 F.2d 310, 316 (3d Cir.1986), we will remand with instructions to the district court to grant leave to amend. See New England Data Serv., Inc., 829 F.2d at 290 (Rule 9(b) requires specific allegations of fraud in civil RICO cases, but the court should make a second determination as to whether the claim as presented warrants the allowance of discovery and if so, thereafter provide an opportunity to amend the defective complaint ) (emphasis in original); Ray v. Karris, 780 F.2d 636, 645 (7th Cir.1985) (allowing amendment of pleadings following failure to make sufficient civil RICO allegations). B. The RICO Pattern Requirement 40 Because appellants may be able to amend Count III to allege fraud with the requisite particularity, we will consider whether appellants have sufficiently pleaded a pattern of racketeering activity. RICO Sec. 1961(5) states that a  'pattern of racketeering activity' requires at least two acts of racketeering activity. 18 U.S.C. Sec. 1961(5). These predicate racketeering acts may include, among others, any acts that are indictable under the federal mail fraud (18 U.S.C. Sec. 1341) and wire fraud (18 U.S.C. Sec. 1343) statutes. 18 U.S.C. Sec. 1961(1) (Supp. III 1985). 41 In its now famous and somewhat opaque Sedima footnote, the Supreme Court stated: 42 The legislative history supports the view that two isolated acts of racketeering do not constitute a pattern. As the Senate Report explained: The target of [RICO] is thus not sporadic activity. The infiltration of legitimate business normally requires more than one 'racketeering activity' and the threat of continuing activity to be effective. It is this factor of continuity plus relationship which combines to produce a pattern. S.Rep. No. 91-617, p. 158 (1969) (emphasis added). 43 Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 496, 105 S.Ct. 3275, 3285 n. 14, 87 L.Ed.2d 346 n. 14 (1985). The courts have since divided as to the footnote's meaning. 44 Some courts have interpreted the Supreme Court's language as an invitation to restrict the reach of civil RICO by requiring that to comprise a pattern the predicate acts must include multiple schemes, or continuity demonstrated by ongoing or open-ended activity. See, e.g., Superior Oil Co. v. Fulmer, 785 F.2d 252, 257 (8th Cir.1986) (requiring multiple fraudulent schemes); Northern Trust Bank/O'Hare v. Inryco, Inc., 615 F.Supp. 828, 832-33 (N.D.Ill.1985) (requiring more than a single scheme). This court, however, has examined the pattern requirement in two recent opinions, Barticheck v. Fidelity Union Bank/First National State, 832 F.2d 36 (3d Cir.1987), and Marshall-Silver Construction Co. v. Mendel, 835 F.2d 63 (3d Cir.1987), and has rejected the notion that at least two schemes must be alleged and that they must be ongoing or open-ended. 45 In Barticheck, the defendants were a drilling partnership, a bank, and two officers of the bank. The plaintiffs, investors in the partnership, alleged that the organizers of the partnership had pre-existing debts to the bank, and that only by selling interests in the partnership could funds be raised to pay off the debt. The plaintiffs alleged that the partnership, acting in concert with the bank officers, materially misrepresented the risks involved in the partnership and the extent of the bank's financing of the partnership. The plaintiffs borrowed all or nearly all of the purchase price of their shares in the partnership from the bank, which did not follow routine loan procedures. Partnership interests turned out to be worthless, and plaintiffs sued, charging that the partnership organizers, with help from bank officers, had defrauded the plaintiffs in violation of civil RICO and state law. The district court dismissed the complaint on the pleadings, holding that the complaint failed to allege a RICO pattern. 46 We reversed, rejecting the notions that more than one scheme must be alleged and that a scheme must be ongoing or open-ended, and concluded that a case-by-case analysis should be undertaken to determine the extent of the racketeering activity. Barticheck, 832 F.2d at 40. We indicated that a determination of whether the facts alleged comprise a RICO pattern with the requisite continuity plus relationship, Sedima, 473 U.S. at 496 n. 14, 105 S.Ct. at 3285 n. 14, turns on a combination of the following factors: (1) the number of unlawful acts; (2) the length of time over which the acts were committed; (3) the similarity of the acts; (4) the number of victims; (5) the number of perpetrators; and (6) the character of the unlawful activity. Id. at 39. We held that the complaint met the RICO pattern requirement because its allegations of a scheme carried out by several individuals and two entities (the bank and the partnership), whose misrepresentations were repeated to roughly twenty individuals, certainly comports with the ordinary understanding of the word pattern. Id. 47 In Marshall-Silver, filed a month after Barticheck, we upheld a dismissal for failure to allege a sufficient pattern. In Marshall-Silver, a general contractor alleged that over the course of a year the defendants--an engineering firm, its officers, and a law firm of which the officers were members--fraudulently forced the general contractor into bankruptcy. According to the general contractor, the engineering firm subcontracted with the general contractor, but because the engineering firm's performance was late and was of poor quality the general contractor refused to pay. The engineering firm's officers thereupon confronted the general contractor regarding payment and wrote two letters threatening to destroy the general contractor unless it paid the engineering firm for the work. The defendants subsequently filed a petition for involuntary bankruptcy against the general contractor and contacted the press in order to publicize the filing of the petition. The press reported that the general contractor was bankrupt, leading to its inability to obtain needed construction bonds. The general contractor alleged that the defendants knew the petition was false, and alleged that the petition and subsequent publicity led ultimately to the destruction of its business. The bankruptcy court later dismissed the petition. 48 We held that these facts did not meet the Barticheck pattern requirement, noting that [t]he target of the RICO statute, as its name suggests, is criminal activity that, because of its organization, duration, and objectives poses, or during its existence posed, a threat of a series of injuries over a significant period of time. Marshall-Silver, 835 F.2d at 66-67. We concluded that the facts failed to meet the pattern requirement because they comprised allegations of an activity that involved a single victim and a single injury, and that involved a single, short lived scheme with only two active perpetrators. Id. at 67. An examination of the instant case in light of the several factors enumerated in Barticheck and Marshall-Silver indicates that appellants' allegations meet the pattern requirement. 49 First, whereas the Marshall-Silver court identified only two active perpetrators and the Barticheck court identified two corporate entities and several individuals, 16 the number of alleged perpetrators here includes C-E and four of its officers. Next, despite C-E's attempts to characterize the acts as a single event, the number of acts involving Saporito and the other appellants included at least the thirty-two inducements to retire, as well as perhaps the acts of informing other individuals that they should postpone retirement until the second plan was offered. By comparison, in Barticheck approximately twenty-three acts were found sufficient to constitute a pattern, whereas Marshall-Silver involved only six. Similarly, the number of victims in the case sub judice includes the thirty-two plaintiff-employees, as compared to twenty in Barticheck and one in Marshall-Silver. Moreover, regarding the similarity of the acts, the acts alleged by appellants--the fraudulent inducements to retire under the less lucrative plan--were virtually identical to one another. So too were the wrongful acts held sufficient in Barticheck, which involved the fraudulent inducement to invest in the fraudulent partnership. Finally, the length of time involved here was roughly six months, the Marshall-Silver activities extended over a similar period, and it is unclear how long the activities extended in Barticheck. 17 50 On the whole, we are satisfied that, if proven, the multiple inducements to retire made to at least thirty-two individuals over an extended period satisfy the continuity plus relationship requirement, and thus constitute a pattern of racketeering activity.