Opinion ID: 484931
Heading Depth: 2
Heading Rank: 2

Heading: The Causation Requirement

Text: 31 Section 1964(c) of RICO provides a cause of action for those injured in business or property by reason of prohibited racketeering activities. The district court concluded as a matter of law that Roeder could not have been injured by reason of defendants' alleged racketeering. The court said the illegal payments to Adamsky were meant to benefit shareholders, and that [i]t was the unintended mischance of getting caught which produced a disaster in which the plaintiff unfortunately shared along with the defendants. 32 Roeder claims that he was injured when defendants engaged in racketeering activity of which investors were unaware, causing the price of Alpha's stock to be inflated. Therefore, he urges, those who bought the stock after the alleged bribery, but before disclosure, paid a higher price than the stock was worth, and suffered a loss when the price dropped after information about the bribery was released to the market. We agree with the district court that an inflated market price of Alpha's stock would not be by reason of the bribery. If the price of Alpha's stock was higher than it should have been when Roeder bought it, this was by reason of nondisclosure. 33 Roeder's complaint, however, also can be read as alleging that the stock price was inflated by securities fraud. Under RICO, racketeering activity includes any offense involving ... fraud in the sale of securities ... punishable under any law of the United States. 18 U.S.C. Sec. 1961(1). Therefore, even though the stock price cannot fairly be said to have been inflated by reason of the bribery, if it was inflated by reason of nondisclosure that violated the securities laws, the requisite causal connection for RICO could exist. But this nexus vanished when we concluded that Roeder's complaint did not allege facts that, if proved, would establish that the nondisclosure violated the securities laws. 34 There is another way in which Roeder claims he was injured. His complaint alleges that the bribery caused the market price of Alpha's stock to be worth less and to decline. As the district court pointed out, the alleged racketeering activity was not aimed at Alpha's shareholders; the direct victims of the scheme would be those who stood to lose if Alpha obtained the subcontract by improper and illegal means. Recovery under RICO, however, is not limited to direct victims. Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 105 S.Ct. 3275, 3286, 87 L.Ed.2d 346 (1985). Damages that flow from the commission of the predicate acts are recoverable. Id. A corporation's involvement in illegal activity can result in a loss of business and damage to its ability to compete, and these negative effects would be reflected in the value of the corporation's stock. 35 A suit under RICO for injuries to the corporation, however, can only be brought by the corporation itself or by a shareholder suing derivatively on behalf of the corporation. Rand v. Anaconda-Ericsson, Inc., 794 F.2d 843, 849 (2d Cir.), cert. denied, --- U.S. ----, 107 S.Ct. 579, 93 L.Ed.2d 582 (1986); Warren v. Manufacturers Nat'l Bank of Detroit, 759 F.2d 542, 545 (6th Cir.1985). Any decline in market price of the shares owned by Roeder and the class he seeks to represent--those who bought Alpha stock between May 23, 1983, and October 3, 1984--that can be said to have flowed from defendants' actions merely reflects the decrease in value of the firm as a result of the alleged illegal conduct. Rand v. Anaconda-Ericsson, Inc., 794 F.2d at 849. It is only where the injury sustained to one's stock is peculiar to him alone, and does not fall alike upon other stockholders, that one can recover as an individual. 12B W. Fletcher, Cyclopedia of the Law of Corporations, Sec. 5913, at 434 (rev. perm. ed. 1984); see also Carter v. Berger, 777 F.2d 1173, 1175 (7th Cir.1985) (The investors in the firm suffer when the firm incurs a loss, yet only the firm may vindicate the rights at issue.); Small v. Goldman, 637 F.Supp. 1030, 1031 (D.N.J.1986) (finding the courts to be unanimous in not allowing shareholders to bring actions in their own right for injuries to the corporation absent some specific direct harm to the shareholders). A RICO action to recover for injury to the corporation is a corporate asset, and shareholders cannot bring it in their own names without impairing the rights of prior claimants to such assets. Rand v. Anaconda-Ericsson, Inc., 794 F.2d at 849. Roeder's RICO complaint is not the proper vehicle for shareholders to obtain redress for any damage defendants' activities inflicted on Alpha. 36 In sum, Roeder may not maintain an action under RICO in his own right, or on behalf of the limited class of shareholders he seeks to represent, for injury to the corporation and the consequent decline in stock price affecting shareholders generally. Particular shareholders' losses suffered by reason of nondisclosure constituting a violation of the securities laws would be recoverable, but, as already pointed out, Roeder's complaint does not allege facts that would establish Alpha violated the securities laws by not disclosing the alleged bribery before they did.