Opinion ID: 425977
Heading Depth: 3
Heading Rank: 2

Heading: Threshold Defect in the Complaint

Text: 50 To state a claim for damages under RICO a plaintiff has two pleading burdens. First, he must allege that the defendant has violated the substantive RICO statute, 18 U.S.C. Sec. 1962 (1976), commonly known as criminal RICO. In so doing, he must allege the existence of seven constituent elements: (1) that the defendant (2) through the commission of two or more acts (3) constituting a pattern (4) of racketeering activity (5) directly or indirectly invests in, or maintains an interest in, or participates in (6) an enterprise (7) the activities of which affect interstate or foreign commerce. 18 U.S.C. Sec. 1962(a)-(c) (1976). Plaintiff must allege adequately defendant's violation of section 1962 before turning to the second burden-- i.e., invoking RICO's civil remedies of treble damages, attorneys fees and costs. See Bays v. Hunter Savings Association, 539 F.Supp. 1020, 1023 (S.D.Ohio 1982). To satisfy this latter burden, plaintiff must allege that he was injured in his business or property by reason of a violation of section 1962. 18 U.S.C. Sec. 1964(c) (1976) (emphasis added). Moss' complaint fails to carry either pleading burden. Section 1962 51 Plaintiff's complaint fails to allege one of the elements needed to state a violation of section 1962--that defendant Newman engaged in racketeering activity. Section 1961(5) defines pattern of racketeering activity as at least two acts of racketeering activity occurring within ten years of each other. 18 U.S.C. Sec. 1961(5) (1976). 11 In turn, section 1961(1)(D) defines racketeering activity to include any offense involving fraud ... in the sale of securities. 18 U.S.C. Sec. 1961(1)(D) (Supp. III 1979). 12 Plaintiff sought to satisfy both the pattern and racketeering elements of RICO by alleging that [d]efendants' actions as set forth herein in this Complaint constitute at least two acts of fraud in connection with the purchase and sale of securities and as such represent a pattern of racketeering activity within the meaning of RICO. J.App. at 11. Thus, the complaint clearly relies on Newman's allegedly fraudulent securities transactions with respect to Deseret stock as the predicate acts of racketeering that form the pattern underpinning plaintiff's RICO claim. Such allegations of fraud would ordinarily satisfy RICO's racketeering activity pleading prerequisite. 13 52 However, in section I of this opinion, we held that plaintiff Moss' pleadings had failed as a matter of law to state a claim that Newman had defrauded him in violation of section 10(b) and rule 10b-5. In affirming the district court's grant of Newman's 12(b)(6) motion to dismiss, we dismissed plaintiff's claim of securities fraud from the complaint. In addition, the district court's dismissal of plaintiff's section 14(e), rule 14(e)-3 and common law fraud claims was never appealed. Therefore, since the complaint contains no valid allegation of fraud, 14 to underpin the predicate acts of racketeering, it necessarily must fail. 53 With respect to the sufficiency of the racketeering allegations, the district court's decision in Mauriber v. Shearson/American Express, Inc., 546 F.Supp. 391 (S.D.N.Y.1982), is instructive. There the plaintiff alleged that defendant's mismanagement of a discretionary brokerage account violated section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b) (1976), and RICO, 18 U.S.C. Sec. 1962(c) (1976). In response to defendant's Rule 12(b)(6) motion the district court found that plaintiff had failed to state its section 10(b) fraud claim with sufficient particularity to meet the pleading requirements of Fed.R.Civ.P. 9(b). The court further concluded that: 54 [T]he RICO claim must fail for reasons not advanced by defendants. In Count II, the complaint alleges a violation of RICO by vaguely referring back to all of the preceding paragraphs that constitute the Section 10(b) violation. As earlier stated, the securities fraud allegations fail in numerous respects to comply with the specificity requirements of Fed.R.Civ.P. 9(b). Until such time as plaintiff adequately pleads fraud it will not be known whether a RICO violation is properly alleged. As a result, Count II of the complaint is dismissed with leave to replead within 20 days of the date hereof. 55 Id. at 397 (emphasis added); accord Maryville Academy v. Loeb Rhoades & Co., 530 F.Supp. 1061, 1070 (N.D.Ill.1981) (Court notes that filing the lawsuits is not fraud in connection with a securities transaction; thus the filings are not within the scope of racketeering activity under the RICO statute.); see also Van Schaick v. Church of Scientology, 535 F.Supp. 1125, 1138 (D.Mass.1982). 56 The instant complaint suffers from a defect more fundamental than that found in Mauriber. As plaintiff has failed to state a valid claim that defendant Newman's securities transactions were fraudulent violations of section 10(b) or rule 10b-5, we cannot now conclude that such acts represent racketeering activity sufficient to support his RICO cause of action. Rather, since our dismissal of the securities fraud claim so undercut the existence of any racketeering activity in the complaint, 15 we affirm the district court's dismissal of plaintiff's RICO claim.