Opinion
13 Civ. 5064 (PKC)
12-06-2013
LI JUN AN, Plaintiff, v. HUI ZHANG; XIAOJIAN YE; GUANG YU CHENG; JOHN LOWRY; XIAOBAO GREY WANG a/k/a GREG X. WANG a/k/a ZHENG WANG; MUGNO, WANG, AND ASSOCIATES, PC; LIUZHOU LIANGMIANZHEN CO., LTD.; YUAN XIAN WEI; KUN WU; HAI FENG WAN; JIN SHAN WU; JOHN DOE 1-10; XYZ COMPANY 1-10, Defendants.
MEMORANDUM AND ORDER
:
This action stems from a dispute among the members of the board of directors of JK Sucralose Manufacturing, Inc. ("JK"), an artificial sweetener manufacturing corporation based in the People's Republic of China. Plaintiff Li Jun An, a Chinese citizen and a board member of JK, brings claims under the Racketeer Influenced and Corrupt Organizations Act ("RICO") and several state law claims against defendants: individual board members of JK, Liangmianzhen Co., Ltd. ("LMZ"), a Chinese corporation with an ownership interest in JK; several current and former shareholders of Corona Science & Technology, Inc. ("Corona"), a New Jersey corporation with an ownership interest in JK; and Corona's counsel, a New Jersey-based law firm. Defendants Zhang, Ye, Cheng, and Lowry now move to dismiss for failure to state a claim, while defendants Wang and Mugno, Wang & Associates move to dismiss for lack of personal jurisdiction. For the reasons set forth below, the motion to dismiss pursuant for failure to state a claim is granted, and the Court need not reach the issue of personal jurisdiction.
The original motion under Rule 12(b)(6) was filed by defendants Zhang, Lowry, and Ye. (Dkt. No. 19) Defense counsel for these three defendants filed a letter on December 5, 2013 seeking leave to file a motion under Rule 12(b)(6) on behalf of defendant Cheng on substantially the same grounds as the previous motion. (Dkt. No. 43) Based on this letter, Mr. Cheng is deemed to have joined the earlier motion.
BACKGROUND
Mr. An alleges that each of the defendants have participated in a scheme to allow LMZ, a state-controlled Chinese corporation, to seize control of JK and to deprive him of his rights and interests in both Corona and JK. Specifically, he alleges that defendants Zhang, Ye, Cheng, and Lowry (together, the "Corona Defendants"), acting through their counsel, Gregory Wang of Mugno, Wang & Associates PC (together with the Corona Defendants, the "U.S. Defendants") have unlawfully taken control of Corona, a New Jersey corporation that owns a 25% stake in JK, and that, through fraudulent conduct, these defendants collaborated with the remaining defendants to oust him from his position as CEO and General Manager of JK.
JK is the world's second largest producer of sucralose, an artificial sweetener. As required under Chinese law, JK's registered shares are owned by organizations in proportion to the actual capital contributions made by each organization. (Compl. ¶ 21) The complex ownership and control structure of JK breaks down as follows. LMZ, a state-controlled Chinese corporation, owns 35% of JK and has the right to appoint three board members. These board seats are currently occupied by defendants Yuan Xian Wei, Kun Wu, and Hai Feng Wan, all of whom are Chinese citizens. Beijing Fubai Shide Technology Co., Ltd. ("FBSD"), a Chinese corporation controlled by Mr. An, owns 25.05% of JK and has the right to appoint two board members. These board seats are currently occupied by Mr. An and "Ms. Zhou," who is not a party to this action and whose first name is not set forth in the Complaint. Corona owns 25% of JK and has the right to appoint one board member. This board seat is currently occupied by defendant Zhang, although Mr. An disputes the propriety of his appointment. The two remaining shareholders, Sheyang Rong Shuang Auxiliaries, Ltd. ("Sheyang") and Beijing Botai Technology Co., Ltd. ("Botai") each own 7.475% of JK and, together, have the right to appoint one board member. This board seat is currently occupied by defendant Jin Shan Wu.
Corona is a corporation organized under the laws of New Jersey. Of the four Corona Defendants, Mr. Zhang, Mr. Ye, and Mr. Cheng reside in New Jersey and Mr. Lowry resides in Illinois. Each is a current or former shareholder in Corona. Mr. An claims to be Corona's majority shareholder, but the Corona defendants dispute this claim.
There has been a litigation outbreak between the Corona Defendants and Mr. An in the state courts of New Jersey. On February 20, 2013, the Corona Defendants filed a derivative action on behalf of Corona against Mr. An in the Superior Court of New Jersey. (Dkt. No. 20-2) The suit alleged that Mr. An was not an actual shareholder of Corona and that he had improperly held himself out as a shareholder, director, and officer of Corona. Id. Mr. An claims that, "through a series of transactions, Mr. Lowery [sic] and Mr. Cheng sold all of their [Corona] shares." (Compl. ¶ 27) He contends that he presently owns 60% of Corona, while Mr. Zhang owns 22% and Mr. Ye owns 18%. Id. In the derivative suit, the Corona Defendants claim that any such transactions are void for failure to comply with Corona's articles of incorporation; they claim that each of them owns 25% of Corona in equal shares, and deny that Mr. An has any ownership interest. (Dkt. No, 20 at ¶ 3; Dkt. No. 20-2) On or about July 16, 2013, following oral argument, the New Jersey court dismissed the derivative complaint on the ground that the purported shareholder-plaintiffs lacked standing. (Compl. ¶ 51).
Mr. An brought a derivative suit of his own against the Corona defendants, which was resolved by consent order on September 5, 2013. (Dkt. No. 20-3) After a September 28, 2013 Corona shareholder meeting failed to resolve the ownership dispute, Mr. An filed another derivative suit on behalf of Corona seeking, inter alia, declaratory judgment relief recognizing his status as a director of Corona. This dispute continues to be litigated in New Jersey state court. (Dkt. No. 20 at ¶ 7) Defendants Wang and Mugno, Wang & Associates PC have served as counsel to Corona throughout the ongoing litigation.
Mr. An's complaint before this Court includes two claims under RICO and five state tort claims: abuse of process, tortuous interference with business relationships, libel, slander, and intentional infliction of emotional distress. The RICO claims are based on allegations of two specific predicate crimes: mail fraud and wire fraud. The two crimes are based on two separate transmissions of the same underlying communication: a letter sent from Mr. Wang to the JK board of directors. This letter purported to provide an update on the progress of the Corona Litigation; it cited allegations of embezzlement raised in the Corona litigation and called for the JK board to remove Mr. An from his positions as CEO and General Manager of JK. Mr. An characterizes the letter as "defamatory" and alleges that the mailing of this letter to JK's board of directors on May 22, 2013 constitutes mail fraud, and that the subsequent sending of an email to the board in "late June" 2013 with the same letter attached constitutes wire fraud.
DISCUSSION
A. Legal Standard
To survive a motion to dismiss for failure to state a claim upon which relief can be granted, "a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). In assessing a complaint, courts must draw all reasonable inferences in favor of the non-movant and accept as true all the factual allegations in the complaint. See In re Elevator Antitrust Litig., 502 F.3d 47, 50 (2d Cir. 2007) (per curiam). Although pleadings are to be liberally construed, "bald assertions and conclusions of law will not suffice," and "[t]he pleadings must create the possibility of a right to relief that is more than speculative." Spool v. World Child Intern. Adoption Agency, 520 F.3d 178, 183 (2d Cir. 2008) (citations and quotations omitted).
The Supreme Court has stated that "RICO is to be read broadly," because of both "Congress's self-consciously expansive language and overall approach" and the statute's "express admonition that RICO is to be liberally construed to effectuate its remedial purposes." Sedima, S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 497-98, 105 S.Ct. 3275, 3286 (1985) (citations and quotations omitted). Notwithstanding this interpretive directive, because the "mere assertion of a RICO claim . . . has an almost inevitable stigmatizing effect on those named as defendants . . . courts should strive to flush out frivolous RICO allegations at an early stage of the litigation." Katzman v. Victoria's Secret Catalogue, 167 F.R.D. 649, 655 (S.D.N.Y. 1996) aff'd sub nom. Katzman v. Victoria's Secret Catalogue, Div. of The Ltd., Inc., 113 F.3d 1229 (2d Cir. 1997) (quoting Figueroa Ruiz v. Alegria, 896 F.2d 645, 650 (1st Cir. 1990)).
B. RICO Claims
Mr. An charges defendants with violating two distinct provisions of RICO. First, he alleges that defendants conducted or participated, directly or indirectly, in the conduct of the affairs of an enterprise through a pattern of racketeering activity, in violation of 18 U.S.C. § 1962(c). Second, he alleges that defendants conspired to conduct the affairs of an enterprise through a pattern of racketeering activity, in violation of 18 U.S.C. § 1962(d). In order to "establish the existence of a RICO conspiracy, a plaintiff must prove the existence of an agreement to violate RICO's substantive provisions." Cofacredit, S.A. v. Windsor Plumbing Supply Co., Inc., 187 F.3d 229, 244 (2d Cir. 1999). Because Mr. An's allegations relating to the RICO conspiracy charge are coterminous with his allegations relating to his substantive RICO claim, assessment of the sufficiency of Mr. An's RICO claims must begin with the alleged "participation" violation of 18 U.S.C. § 1962(c). See Compl. ¶¶ 52-77.
1. 1962(c) "Participation" Claim
a. Elements
In order to state a RICO "participation" claim under 18 U.S.C. § 1962(c), a plaintiff must adequately "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 . . . participates in (6) an 'enterprise' (7) the activities of which affect interstate or foreign commerce. Moss v. Morgan Stanley Inc., 719 F.2d 5, 17 (2d Cir. 1983). In addition, a civil RICO plaintiff must demonstrate that he or she "was injured in his business or property by reason of a violation of section 1962." Id. (emphasis in original) (citing 18 U.S.C. § 1964(c)).
The RICO statute defines an "enterprise" as "any individual, partnership, corporation, association, or other legal entity, and any . . . group of individuals associated in fact although not a legal entity." 18 U.S.C. § 1961(4). Mr. An's complaint alleges an enterprise consisting of a group of JK board members and several entities and individuals with varying degrees of control over JK by virtue of the company's corporate structure. Accepting the allegations of the Complaint as true, Mr. An has adequately alleged an "enterprise" within the meaning of the RICO statute, that each of the named defendants is associated with the charged enterprise, that the enterprise, which involves an international distributor of artificial sweeteners, affects interstate commerce, and that the plaintiff was injured in his business or property by reason of the defendants' conduct. Defendants contend that Mr. An's allegations fall short of adequately pleading the required predicate acts and a "pattern" of racketeering activity within the meaning of RICO.
b. Predicate Acts
Defendants argue that Mr. An's complaint fails to adequately plead the existence of two or more predicate acts constituting a pattern of racketeering activity as required to maintain a RICO claim. Under 18 U.S.C. § 1961(1), "'racketeering activity' consists of no more and no less than the commission of a predicate act." Sedima, 473 U.S. 479, 495, 105 S.Ct. at 3284 (1985). The RICO statute sets forth an exhaustive list of acts that qualify as "racketeering activity" under the statute, which includes "any act which is indictable under . . . [18 U.S.C] section 1341 (relating to mail fraud), [and 18 U.S.C] section 1343 (relating to wire fraud . . . ." 18 U.S.C. 1961(1)(B). See Beck v. Prupis, 529 U.S. 494, 497 n.2 (2000) ("Section 1961(1) contains an exhaustive list of acts of 'racketeering,' commonly referred to as 'predicate acts'"). There is no requirement that plaintiffs allege that defendants were convicted of any predicate offenses. Sedima, 473 U.S. at 493, 105 S.Ct. at 3283.
To the extent that any predicate acts sound in fraud, the pleading of those acts must satisfy the particularity requirements of Rule 9(b). See, e.g., Anatian v. Coutts Bank (Switzerland) Ltd., 193 F.3d 85, 88 (2d Cir. 1999). "[F]raud allegations ought to specify the time, place, speaker, and content of the alleged misrepresentations, and [w]here multiple defendants are asked to respond to allegations of fraud, the complaint should inform each defendant of the nature of his alleged participation in the fraud." DiVittorio v. Equidine Extractive Indus., Inc., 822 F.2d 1242, 1247 (2d Cir. 1987) (citations omitted). Further, Rule 9(b) pleadings cannot generally be based upon information and belief. Segal v. Gordon, 467 F.2d 602, 608 (2d Cir. 1972).
Mr. An's complaint alleges that defendants' activities constituted mail fraud in violation of 18 U.S.C. § 1341 and wire fraud in violation of 18 U.S.C. § 1343. (Compl. ¶ 61(b)) The Complaint alleges that four defendants, LMZ and the three LMZ-appointed board members, intentionally caused the U.S. Defendants to "disseminate false and misleading statements to legitimize the planned actions to remove Mr. An as CEO/General Manager of JK Sucralose." (Compl. ¶ 58) Mr. An alleges that two communications—a letter mailed on May 22, 2013 and an emailed proposal to the JK board of directors, sent on an unspecified date and signed by defendant Ye (the "Ye Proposal")—included a letter signed by defendant Gregory Wang (the "Wang Letter") which "contained defamatory allegations of misconduct, including embezzlement and breach of fiduciary duty by Mr. An." (Compl. ¶ 40) He further alleges that the Ye Proposal itself, which called for the JK board to remove Mr. An from his officer positions at JK, contained similar allegations of misconduct. Id. The Complaint alleges that "Defendants' misrepresentations and omissions were fraudulent because they were part of a scheme to deprive Plaintiff of his money and/or property." (Compl. ¶ ¶ 56, 72)
In pleading the two RICO counts, the Complaint also cites the Corona Defendants' commencement of litigation in New Jersey as a predicate act. (Compl. ¶¶ 57, 69) The institution and conduct of litigation are generally protected as petitioning activities under the Noerr-Pennington doctrine. T.F.T.F. Capital Corp. v. Marcus Dairy, Inc., 312 F.3d 90, 93 (2d Cir. 2002). The doctrine has been applied in RICO actions. Bath Petroleum Storage v. Market Hub Partners, L.P., 229 F.3d 1135 (summary order) (citing Int'l Bhd. of Teamsters, Local 734 Health Workers and Welfare Trust v. Phillip Morris, Inc., 196 F.3d 818, 826 (7th Cir. 1999)). In his response brief, Mr. An abandons this line of argument, relying solely on the mail fraud and wire fraud allegations as predicate acts supporting a RICO claim. (Dkt. No. 24 at 8-10)
Defendants argue that Mr. An relies solely on a single predicate act in his complaint. Because the two predicate acts involve the same underlying communication, i.e. the Wang Letter, defendants seek to characterize the separate mailing and emailing of this letter as the same act. The Second Circuit has explained that "though we would disapprove any attempt by the government or a private plaintiff to go beyond Congress's intent and fragment an act that plainly is unitary into multiple acts in order to invoke RICO, we conclude that where in fact there are a number of different acts, each should be separately counted." United States v. Indelicato, 865 F.2d 1370, 1383 (2d Cir. 1989). Mr. An has alleged more than just the mailing and emailing of the same document. He has alleged that the content of the Ye Proposal itself, separate from the content of the Wang Letter, contained allegations that support his claims of fraud-based predicate acts. See Compl. at ¶ 40 ("Both Mr. Ye's proposal and Mr. Wang's letter contained defamatory allegations of misconduct . . . .") At the pleading stage, the Court concludes that the mailing of the Wang Letter and the emailing of the Ye Proposal are separate predicate acts.
The mail fraud statute proscribes knowingly causing the use of the mails "for the purpose of executing" any "scheme or artifice to defraud." 18 U.S.C. § 1341. The wire fraud statute prohibits any person from "caus[ing] to be transmitted by means of wire, radio, or television communication in interstate or foreign commerce" any communications for the purpose of executing any scheme or artifice to defraud. 18 U.S.C. § 1343. "The essential elements of a mail or wire fraud violation are (1) a scheme to defraud, (2) money or property lost as the object of the scheme, and (3) use of the mails or wires to further the scheme." United States v. Shellef, 507 F.3d 82, 107 (2d Cir. 2007).
To establish a scheme to defraud under the first element, the government must prove "(i) the existence of a scheme to defraud, (ii) the requisite scienter (or fraudulent intent) on the part of the defendant, and (iii) the materiality of the misrepresentations." United States v. Pierce, 224 F.3d 158, 165 (2d Cir. 2000) (citations omitted). Further, to prove scienter or fraudulent intent, "the proof must demonstrate that the defendant had a conscious knowing intent to defraud . . . and that the defendant contemplated or intended some harm to the property rights of the victim." United States v. Guadagna, 183 F.3d 122, 129 (2d Cir. 1999) (internal citations and quotation omitted).
With respect to mail fraud, Mr. An alleges that the Wang Letter was sent to the JK Board on May 22, 2013. (Compl. ¶ 39) The complaint does not specify the basis for the alleged predicate act of wire fraud, but the claim appears to be based on an email sent on July 1, 2013 notifying JK board members of the special board meeting to remove Mr. An from his officer positions. (Compl. ¶¶ 38-41) Though this email and the Wang Letter were not attached to the Complaint, Mr. An submitted both as exhibits to his response brief. (Dkt. Nos. 25-1 & 25-2) The email included the proposal for the meeting, which referenced the Wang Letter. (Dkt. No. 25-2, at 5) It is unclear whether the Wang Letter was actually attached to this email; the complaint merely alleges that the meeting notice was "predicated upon" the Wang Letter. (Compl. ¶ 39)
The Complaint lacks particularity as to why the Ye Proposal and Wang Letter were materially false or misleading. Paragraph 40 states that "[b]oth Mr. Ye's proposal and Mr. Wang's letter contained defamatory allegations of misconduct, including embezzlement and breach of fiduciary duty by Mr. An." The Wang Letter and the Ye Proposal are damning of Mr. An, but it is not self-evident that they are fraudulent.
The Wang Letter purports to provide the JK board with an update on the Corona Litigation. Its first two full paragraphs describe the allegations made in the Corona Litigation and note that the New Jersey court denied several motions filed by Mr. An. (Dkt. No. 25-1 at 3) The third and fourth paragraphs go further, stating certain allegations raised in the Corona Litigation complaint as facts. The third paragraph states that "Mr. Lijun An took advantage of his executive position in JK Sucralose [sic] attempted to force Corona to transfer to him personally Corona's shares thereby to change the ownership proportion of JK Sucralose." Id. The following paragraph states that "In summary Mr. Lijun An has embezzled JK Sucralose's fund [sic], damaged the interest of JK Sucralose's shareholders, attempted to illegally gain control of additional JK Sucralose's [sic] shares, and therefore is now involved in litigation with Corona." Id. at 4.
The Ye Proposal consists of a brief four-sentence message to the JK board. The first, second, and fourth sentences merely cite the JK bylaws and propose that the chairman of the board call an emergency meeting to decide whether to remove Mr. An from his position as an officer of JK. (Dkt. No. 25-2 at 5) The third sentence, which purports to provide the reason for the proposal, states that "Corona Corporation, which is one of JK's shareholders, sent out an attorney opinion letter, alleging the direct conflict of interest if Mr. Lijun An remains in the position of General Manager, which would damage the interest of the shareholders." Id.
Mr. An has not specifically alleged which statements in the Wang Letter or Ye Proposal are false or misleading. None of the three statements quoted above, and no other statement in either communication, is false or misleading on its face, and Mr. An provides no allegations compelling a different conclusion. The mere fact that a statement is negative or even defamatory with respect to a plaintiff does not make it fraudulent. In order for a statement to be actionable under the mail and wire fraud statutes, a plaintiff must allege the existence of a scheme, conscious and knowing intent to defraud on the part of the speaker, and the materiality of the misrepresentation. Pierce, 224 F.3d at 165. While Mr. An has alleged a scheme against him, he fails to allege the materiality of any misrepresentation, or that any of the statements were made with "a conscious, knowing intent to defraud." Guadagna, 183 F.3d at 129.
Under each of the two RICO counts, the Complaint states that "The facts alleged in this Complaint create a strong inference of scienter with respect to Defendants." (Compl. ¶¶ 62, 75) It is unclear whether this statement of scienter pertains to the RICO counts themselves or to the predicate acts of mail fraud and wire fraud. Regardless, these paragraphs merely state a legal conclusion; the relevant inquiry is not whether the plaintiff has stated that scienter exists, but whether the plaintiff has "provide[d] some factual basis for conclusory allegations of intent," which must "give rise to a 'strong inference' that the defendants possessed the requisite fraudulent intent." Turkish v. Kasenetz, 27 F.3d 23, 28 (2d Cir. 1994) (citation omitted). Reviewed in its entirety, the Complaint fails to allege facts giving rise to a strong inference that the statements were made with recklessness or an intent to defraud.
Mr. An's briefing to this Court suggests that there may exist other predicate acts known to defendants but not to him. Under Rule 9(b), facts that are "peculiarly within the opposing party's knowledge" may be alleged upon information and belief, "in which event the allegations must be accompanied by a statement of facts upon which the belief is based." DiVittorio, 822 F.3d at 1247. This principle applies to the specific averments of fraud identified in the Complaint that are subject to the heightened pleading requirements of Rule 9(b). It does not mean that the Court must assume that there are additional predicate acts not known to Mr. An that could support a RICO claim.
Mr. An's pleadings with respect to the predicate acts of mail fraud and wire fraud fail to satisfy the particularity requirements of Rule 9(b), and his RICO claim under 18 U.S.C. § 1962(c) is, therefore, subject to dismissal. Because dismissal under Rule 9(b) raises the issue of whether to grant plaintiff leave to amend, the Court will consider whether, even if the two predicate acts of fraud had been pleaded with particularity as required under Rule 9(b), the Complaint would still fail to state a claim for failure to adequately allege a pattern of racketeering activity.
c. Pattern Requirement
Mr. An's complaint fails to adequately demonstrate that the predicate acts alleged constitute a "pattern" of racketeering activity, as required by all three substantive RICO provisions. See 18 U.S.C. § 1962(a)-(c). Under the statute, a "'pattern of racketeering activity' requires at least two acts of racketeering activity . . . the last of which occurred within ten years . . . after the commission of a prior act of racketeering activity." 18 U.S.C. § 1961(5). In addition to showing at least two predicate acts, a civil RICO plaintiff must also show that "the predicate acts [are] related and reveal continued, or the threat of continued, unlawful conduct." Azrielli v. Cohen Law Offices, 21 F.3d 512, 520 (2d Cir. 1994). Thus, in order to allege a pattern of racketeering activity, a plaintiff must show both relatedness and continuity. See, e.g., United States v. Daidone, 471 F.3d 371, 375 (2d Cir. 2006).
In order to demonstrate relatedness, the Second Circuit requires a plaintiff to show both horizontal and vertical relatedness. Id. Horizontal relatedness describes the relationship between the predicate acts themselves, while vertical relatedness describes the relationship between the predicate acts and the overall RICO enterprise. Id. In practice, these tests may be satisfied with a single showing of relatedness: vertical relatedness may be demonstrated by establishing that the predicate acts are "related to the activities of [the RICO] enterprise," and horizontal relatedness may be established by showing that each individual predicate act is related to the RICO enterprise. Id. Here, the Complaint has adequately alleged that the predicate acts of mail fraud and wire fraud are each related to the alleged RICO enterprise.
The so-called "continuity" requirement may "be satisfied either by showing a 'closed-ended' pattern—a series of related predicate acts extending over a substantial period of time—or by demonstrating an 'open-ended' pattern of racketeering activity that poses a threat of continuing criminal conduct beyond the period during which the predicate acts were performed." Spool v. World Child Int'l Adoption Agency, 520 F.3d 178 at 183. Here, Mr. An has not adequately alleged either a closed-ended pattern or an open-ended pattern of racketeering activity.
i. Closed-Ended Continuity
To demonstrate "closed-ended continuity, the plaintiff must prove 'a series of related predicates extending over a substantial period of time.'" Cofacredit, 187 F.3d at 242 (quoting H.J. Inc. v. Nw. Bell Tel. Co., 492 U.S. 238, 242 (1989)). The Second Circuit has identified several "non-dispositive factors" considered by courts in determining whether closed-end continuity exists, "including, inter alia, the length of time over which the alleged predicate acts took place, the number and variety of acts, the number of participants, the number of victims, and the presence of separate schemes." GICC Capital Corp. v. Tech. Fin. Group, Inc., 67 F.3d 463, 467 (2d Cir. 1995). Notwithstanding this list of factors, the Second Circuit has repeatedly emphasized that "closed-ended continuity is primarily a temporal concept," and has "never held a period of less than two years to constitute a 'substantial period of time.'" Cofacredit, 187 F.3d at 242; see also DeFalco v. Bernas, 244 F.3d 286, 321 (2d Cir. 2001); Spool, 520 F.3d at 184. The relevant period in evaluating continuity "is the time during which RICO predicate activity occurred, not the time during which the underlying scheme operated or the underlying dispute took place." Spool, 520 F.3d at 184 (citations omitted).
Even under the most liberal reading of his complaint, Mr. An has failed to adequately allege closed-ended continuity as a matter of law. The only two predicate acts alleged in the Complaint occurred no more than 39 days apart, which falls far short of the two-year benchmark that the Second Circuit has consistently cited. Further, nearly all of the factors identified in GICC Capital weigh against a finding of closed-ended continuity: Mr. An has alleged the commission of only two acts over a short period, has not identified any victims of the scheme other than himself, and has alleged only a single scheme. The mere fact that the Complaint names 11 separate defendants cannot, standing alone, justify a finding of closed-ended continuity.
The mail fraud allegedly occurred on May 22, 2013. (Compl. ¶ 39) Although the Complaint does not provide a date for the email communication underlying the alleged wire fraud offense, Mr. An claims in his response brief that the wire fraud occurred "in or around late June 2013."
ii. Open-Ended Continuity
"To satisfy open-ended continuity, the plaintiff . . . must show that there was a threat of continuing criminal activity beyond the period during which the predicate acts were performed." Cofacredit, 187 F.3d at 242. When an enterprise's business is "primarily or inherently unlawful," such a threat is generally presumed. Spool, 520 F.3d at 185 (citations omitted); see also United States v. Aulicino, 44 F.3d 1102, 1111 (2d Cir. 1995) ("[W]here the acts of the defendant or the enterprise were inherently unlawful, such as murder or obstruction of justice, and were in pursuit of inherently unlawful goals, such as narcotics trafficking or embezzlement, the courts generally have concluded that the requisite threat of continuity was adequately established . . . ."). In contrast, when the enterprise primarily conducts a legitimate business, no such presumption arises. Spool at 185. In such a case, "there must be some evidence from which it may be inferred that the predicate acts were the regular way of operating that business, or that the nature of the predicate acts themselves implies a threat of continued criminal activity." Id.
The activities of the enterprise alleged in the Complaint are primarily legitimate. A RICO plaintiff cannot avoid the determination that defendants are linked with a primarily legitimate enterprise by framing the enterprise in a way that separates it out from its legitimate business activities. Spool at 185-86. This is because the broadly worded definition of "enterprise" in the RICO statute encompasses "any ongoing organization, formal or informal, that functions as a continuing unit." Id. at 186 (citations and quotations omitted). Each of the defendants in the alleged scheme is connected with JK, whether directly (as in the case of the board members) or indirectly (as in the case of LMZ and the Corona-associated U.S. Defendants, each of whom exerts a degree of control over the JK board by virtue of JK's corporate structure). JK is the world's second-largest sucralose manufacturer and is primarily engaged in the legitimate business of selling artificial sweeteners around the globe.
Moreover, Mr. An's allegations themselves foreclose a finding of a threat of future criminal activity, because the alleged scheme to remove him from his position as CEO and General Manager of JK has been successfully completed. Mr. An is the only plaintiff in this action, and the sole victim of the alleged scheme. The harm claimed by Mr. An is a wrongful deprivation of his position as CEO and General Manager of JK and the corresponding loss of compensation. Mr. An was in fact terminated from these positions in the course of a July 5, 2013 special board meeting. (Compl. ¶¶ 38, 46; Dkt. No. 25-2) Once Mr. An was ousted from his officer positions, the scheme to remove him essentially came to its conclusion. "[I]t defies logic to suggest that a threat of continued looting activity exists when, as Plaintiff[] admit[s], there is nothing left to loot." First Capital Asset Mgmt., Inc. v. Satinwood, Inc., 385 F.3d 159, 181 (2d Cir. 2004) (citation and quotations omitted).
To the extent that Mr. An claims harms relating to his interest in Corona, the two predicate acts of mail fraud and wire fraud were directed to the JK board, and the underlying communication expressly sought his removal as an officer of JK, not Corona. The dispute over Mr. An's status as a Corona shareholder and officer is the subject of ongoing litigation in the New Jersey state courts and is not before this Court.
Far from posing an ongoing threat of criminal activity, the scheme alleged in this case is "inherently terminable." GICC Capital, 67 F.3d at 466 (emphasis in original). The two communications, each sent from the same individuals to the same recipients for the same purpose and containing the same letter, provide no "basis to infer that similar [communications] would occur in the future." Id. (citing Beauford v. Helmsley, 865 F.2d 1386, 1392 (2d Cir. 1989) (en banc)). Rather, the Complaint here alleges nothing more than a "discrete and relatively short-lived scheme to defraud a [single] victim[], which is insufficient to establish open-ended continuity." Spool at 186 (citing Cofacredit, 187 F.3d at 244). Thus, even assuming the truth of all of plaintiff's allegations, "the alleged predicate acts do not amount to or pose a threat of continued criminal activity." First Capital Asset Management, 385 F.3d at 181 (citation and quotations omitted).
Accordingly, Mr. An has failed to demonstrate that the predicate acts alleged satisfy either closed-ended or open-ended continuity. As a matter of law, his complaint fails to demonstrate a "pattern of racketeering activity" and thus fails to state a claim under 18 U.S.C. 1962(c).
2. Additional Predicate Act
Mr. An has asked that if his complaint fails to state a claim on which relief can be granted, he be granted leave to replead in light of additional allegations provided in a declaration attached to his response brief (the "An Declaration"). (Dkt. No. 25) There, Mr. An alleged for the first time that he learned in or after May 2012 that defendants Zhang and Ye embezzled $1.7 million from JK USA Corp., a US-based wholly-owned subsidiary of JK. Id. at ¶¶ 5-6. According to Mr. An, defendant Hai Feng Wan, a director and the CFO of JK, performed an audit of JK USA Corp. in or about May 2012, discovered this embezzlement, and at some point made Mr. An aware of it. Id. at ¶ 6. Mr. An does not explain how or when this embezzlement took place. He claims that he informed defendant Kun Wu, who is chairman of the JK Board, of the misconduct and proposed that the board commence a derivative suit in JK's name against Mr. Zhang and Mr. Ye, but Mr. Wu declined to do so and took no further action. Id. at ¶¶ 7-8. Mr. An claims that these circumstances indicate that LMZ and the board members appointed by LMZ are protecting Mr. Zhang and Mr. Ye in exchange for their cooperation in delivering control of Corona. Id. at ¶ 14. Mr. An fails to offer any explanation reconciling his allegations of an LMZ-driven conspiracy against him with his new allegations that Hai Feng Wan, an LMZ-appointed board member, discovered the embezzlement and notified Mr. An.
This action was first filed on July 22, 2013, two months after the alleged discovery of the embezzlement. Mr. An does not explain why he failed to include the embezzlement-related allegations in his complaint, which suggests that their inclusion here is responsive to arguments raised in briefing. --------
Under the futility doctrine, the Court declines to grant Mr. An leave to replead to incorporate these new allegations, because, even assuming their truth, his complaint would still fail to allege a pattern of racketeering activity. See, e.g., Williams v. Citigroup, Inc., 659 F.3d 208, 214 (2d Cir. 2011) ("It is well established that leave to amend need not be granted . . . where the proposed amendment would be futile.") (citation and quotations omitted) With respect to closed-ended continuity, the allegations do not specify the details or timing of the embezzlement; Mr. An only alleges that the embezzlement was discovered in May 2012. The embezzlement allegation thus provides no basis for assuming that the alleged scheme extended beyond the two-year period often cited by the Second Circuit as an implicit minimum to demonstrate closed-ended continuity. See Cofacredit, 187 F.3d at 242. Moreover, application of the GICC Capital factors militates against a finding of closed-ended continuity. See 67 F.3d at 467. The period of time over which the alleged predicate acts took place is unclear and appears to span fewer than two years, the embezzlement allegation brings the number of predicate acts alleged from two to three, Mr. An remains the only alleged victim of the scheme, and there is only a single scheme alleged. Mr. An also fails to allege that any defendants other than Mr. Zhang, Mr. Ye, and Mr. Kun Wu are involved in the embezzlement scheme; in fact, Mr. An has alleged that defendant Wan, accused in the Complaint of being part of the scheme, discovered the embezzlement and informed Mr. An.
With respect to open-ended continuity, the addition of an isolated allegation of a single instance of embezzlement is not enough to indicate an ongoing threat of criminal activity. The An Declaration provides no indication that acts of embezzlement were conducted at any point before or after this single occasion, and no reason to believe that future acts of embezzlement or other such criminal activity will be undertaken.
Further, the relationship between the alleged embezzlement and the subsequent acts of mail fraud and wire fraud is unclear and attenuated at best. With respect to the continuity requirement in pleading a RICO claim, "in the end, it is not the number of predicates proved but, rather, 'the relationship that they bear to each other or to some external organizing principle' that indicates whether they manifest the continuity required to prove a pattern." United States v. Pizzonia, 577 F.3d 455, 465 (2d Cir. 2009) (quoting H.J. Inc. at 238). Mr. An merely avers that he personally believes that LMZ is protecting defendants Zhang and Ye despite their embezzlement in exchange for their cooperation in delivering control of Corona's shares in JK to LMZ. (Dkt. No. 27 at ¶ 14) Beyond this bare allegation, no connection is provided between the embezzlement and the mail and wire fraud acts alleged in the Complaint. While Mr. An alleged an injury to his business or property that was proximately caused by the two predicate acts of fraud, it is entirely unclear from the An Declaration whether or how Mr. An suffered an injury from embezzlement from a US-based subsidiary of JK.
Thus, amendment of the Complaint to include these additional allegations would be futile, because the Complaint would still fail to state a claim under 18 U.S.C. § 1962(c). Mr. An's request for leave to replead is therefore denied.
3. 1962(d) Conspiracy Claim
Where "there is insufficient evidence that the [defendants] actually committed predicate acts displaying the continuity necessary to support a substantive RICO violation," and "no evidence that defendants agreed to perform additional acts that, if committed, would have displayed continuity sufficient to establish a pattern of racketeering activity," a RICO conspiracy claim must fail. Cofacredit, 187 F.3d at 245. Here, Mr. An has failed to state a substantive RICO claim under 18 U.S.C. § 1962(c), and has made no additional allegations in pleading a RICO conspiracy claim. See Compl. ¶¶ 65-77. Thus, Mr. An has also failed to state a claim under 18 U.S.C. § 1962(d).
C. State Law Claims
With the dismissal of plaintiff's federal claims, this Court must decide whether to exercise supplemental jurisdiction over the remaining state law claims. 28 U.S.C. § 1367. Although section 1367(c)(3) is couched in permissive terms, the Second Circuit has made clear that the Court's discretion "is not boundless." Valencia ex rel. Franco v. Lee, 316 F.3d 299, 305 (2d Cir. 2003). In deciding whether to exercise jurisdiction over supplemental state-law claims, district courts should balance the values of judicial economy, convenience, fairness, and comity—the "Cohill factors." Klein & Co. Futures, Inc. v. Board of Trade of City of New York, 464 F.3d 255, 262 (2d Cir. 2006) (citing Carnegie-Mellon Univ. v. Cohill, 484 U.S. 343, 350 (1988)). "[I]f the federal claims are dismissed before trial, even though not insubstantial in a jurisdictional sense, the state claims should be dismissed as well." First Capital Asset Mgmt., Inc. v. Satinwood, Inc., 385 F.3d 159, 183 (2d Cir. 2004) (citation omitted). Discovery has not yet commenced in the present action. There are no economies achieved in continuing the action in this Court. Plaintiff is a Chinese national and defendants are Chinese nationals and residents of New Jersey and Illinois. The Southern District of New York is not the most convenient forum for the parties and there is no federal interest intertwined with the state law claims. Accordingly, the Court declines to exercise supplemental jurisdiction over Mr. An's state law claims.
CONCLUSION
For the foregoing reasons, defendants' motion to dismiss (Dkt. No.19) is GRANTED, and plaintiff's claims are dismissed as against all defendants. The remaining motions to dismiss (Dkt. Nos. 13, 16) are DENIED as moot. The Clerk is directed to enter judgment for the defendants and close the case.
/s/_________
P. Kevin Castel
United States District Judge Dated: New York, New York
December 6, 2013