Opinion
Civil Action No. 02-746.
July 22, 2004
MEMORANDUM
Plaintiff in this case, Kristoff Gintowt, is a shareholder and former director and employee of Broadreach Consulting, Inc. ("Broadreach"), a now-dormant company in which Defendants were also shareholders and managers. Defendants TL Ventures, TL Ventures III L.P., TL Ventures III Offshore L.P., TL Ventures III Interfund L.P., TL Ventures Management L.P. and TL Ventures III LLC, collectively referred to as "TL Ventures," are venture capital management firms and their management entities. Defendants Arthur Spector and James Dixon were directors and officers of Broadreach. Plaintiff alleges that the Defendants deprived him of the value of his investment and his employment, raising claims under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1962 ("RICO"), and common law fraud and misrepresentation. Presently before the Court is Defendants' Motion for Summary Judgment.
Plaintiff argues against Defendants' Motion as if the facts support a seamless web of fraud leading to the loss of his investment. Defendants assert that Plaintiff has filed this lawsuit to recover damages for events which had nothing to do with any alleged fraud, but were caused by the general risks of the business world, specifically the blown "bubble" of technology investments. The Court, notwithstanding contrasting versions of facts and events, must analyze the legal issues and finds that a substantial part of Plaintiff's claims is barred by settled legal principles, but as to some claims, he has presented sufficient facts to withstand summary judgment. Thus, for the reasons that follow, Defendants' Motion will be granted in part and denied in part.
I. Legal Standard
Summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." FED. R. CIV. P. 56(c). An issue is "genuine" if the evidence is such that a reasonable jury could return a verdict for the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A factual dispute is "material" if it might affect the outcome of the case under governing law. Id. A party seeking summary judgment always bears the initial responsibility for informing the district court of the basis for its motion and identifying those portions of the record that it believes demonstrate the absence of a genuine issue of material fact.Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Where the non-moving party bears the burden of proof on a particular issue at trial, the moving party's initial burden can be met simply by "pointing out to the district court that there is an absence of evidence to support the non-moving party's case." Id. at 325. After the moving party has met its initial burden, "the adverse party's response, by affidavits or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial." FED. R. CIV. P. 56(e). Summary judgment is appropriate if the non-moving party fails to rebut by making a factual showing "sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex, 477 U.S. at 322. Under Rule 56, the Court must view the evidence presented on the motion in the light most favorable to the opposing party. Anderson, 477 U.S. at 255.
This Court has jurisdiction pursuant to 28 U.S.C. § 1331, as the case involves a cause of action arising under federal law. Venue is proper in this district because Broadreach, the corporation at issue in this case, and the acts alleged in connection with it, took place in this district.
II. Background
A. Procedural History
Plaintiff filed his Complaint in this case on February 13, 2002. The case was transferred to the undersigned Judge on August 8, 2002. On October 3, 2002, this Court granted Defendant's Motion to Dismiss without prejudice, and gave Plaintiff leave to file an Amended Complaint and a RICO Case Statement, see Gintowt v. TL Ventures, 226 F. Supp.2d 672 (E.D. Pa., 2002), which he did on November 1, 2002. Defendants moved once again to dismiss the Complaint and the Court denied that motion on January 2, 2003, see Gintowt v. TL Ventures, 239 F. Supp.2d 580 (E.D. Pa., 2003). After the completion of discovery, Defendants moved for Summary Judgment on January 30, 2004. Briefing on the Motion for Summary Judgment, including Statements of Undisputed Facts and supplemental letter briefs by each side submitted at the request of the Court, was completed on June 18, 2004. The Court held oral argument on the Motion for Summary Judgment on June 4, 2004.
B. Allegations of the Complaint
As the details of Plaintiff's Amended Complaint are set out in this Court's previous two opinions in this case, the allegations will be briefly summarized here. Plaintiff, in his Amended Complaint, alleges five counts against the various Defendants, all based on the same alleged scheme of Defendants to take over the company in which Plaintiff had a substantial equity position, and was a director and employee of, and operate it for Defendants' own financial gain. Plaintiff alleges that Defendants deprived Plaintiff of appropriate financial information and concealed from Plaintiff the actual business activities of Broadreach. Plaintiff claims Defendants should be liable for damages constituting the lost value of his investment in Broadreach.
Count One is a claim against only Defendants TL Ventures and Dixon for violation of RICO section 1962(b), which provides:
(b) It shall be unlawful for any person through a pattern of racketeering activity or through collection of an unlawful debt to acquire or maintain, directly or indirectly, any interest in or control of any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce.18 U.S.C. § 1962(b). Count Two is a claim against Defendants TL Ventures, Spector, and Dixon for violation of RICO Section 1962(c), which provides:
Plaintiff's Amended Complaint also names Rice Sangalis in Count Two, but Rice Sangalis had been voluntarily dismissed as a Defendant in this case. Accordingly, the Court will treat the inclusion of Rice Sangalis in the Amended Complaint as an oversight.
(c) It shall be 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 or collection of unlawful debt.18 U.S.C. § 1962(c). Count Three is a claim against all Defendants for violation of RICO Section 1962(d), which provides:
(d) It shall be unlawful for any person to conspire to violate any of the provisions of subsection (a), (b), or (c) of this section.18 U.S.C. § 1962(d). Counts Four and Five are claims against all Defendants for common law fraud and negligent misrepresentation, respectively.
III. Undisputed Facts
The following facts are not disputed by the parties.
These facts are drawn from Defendants' Statement of Undisputed Facts of May 14, 2004 and Plaintiff's Response to Defendants' Statement of Undisputed Material Facts of May 24, 2004, both of which rely on Plaintiff's Amended Complaint.
A. The Parties
Plaintiff Kristoff Gintowt ("Gintowt") was a shareholder of The Reohr Group, Inc. ("Reohr") and a shareholder and, until January 1999, a director of Broadreach, a company that was the result of a merger between Reohr and other entities. Reohr was a corporation providing technicians to other companies to meet their information technology needs, a service known as "staffing." In the mid-1990's, Reohr began providing "consulting" services in addition to staffing. By 1996, Reohr was owned by Plaintiff along with Leighton Yohannan ("Yohannan") and Robert English ("English").
Defendant TL Ventures consists of venture capital investment firms and their affiliated management entities. TL Ventures was one of the investors in, and one of the entities that coordinated the transaction that led to, Broadreach.
Defendant James W. Dixon ("Dixon") was the CEO and a director of Broadreach. Prior to joining Broadreach, Dixon was the CEO of Information Technology Consulting, Inc. ("ITC"), a subsidiary of HDS Network Systems, Inc. ("HDS"). ITC was formed for the purpose of acquiring and combining several companies in the technology services field, as Reohr, and then selling an interest in the combined entity to the public through an initial public offering ("IPO") in a so-called "rollup" transaction.
Defendant Arthur R. Spector ("Spector") was a director of Broadreach. Prior to joining Broadreach, Spector was the CEO of HDS, later known as Neoware Systems, Inc. ("Neoware"), as well as the managing director of TL Ventures.
B. Stock Purchase Transaction
In July and August of 1996, Spector approached the members of Reohr about the possibility of an investment. On August 23, 1996, Spector mailed to English a letter and confidentiality agreement. On October 2, 1996, Spector mailed to English, Plaintiff and Yohannan a draft proposal letter that expressed interest in acquiring Reohr's assets. On October 10, 1996, ITC sent a letter to English, Plaintiff and Yohannan by facsimile that outlined ITC's proposal to purchase Reohr's assets. A final proposal letter for the purchase of the assets and disclosed liabilities of Reohr dated November 18, 1996 was executed by Spector on behalf of ITC and by English (for himself and as President of Reohr), Plaintiff and Yohannan. That letter stated that closing was anticipated to occur by December 31, 1996. No closing on the Reohr acquisition occurred by year end 1996.
In early 1997, TL Ventures purchased a company named GCG Consultants, Inc. d/b/a Global Consulting Group ("Global") which also provided data processing staffing. On February 17, 1997, ITC sent to Reohr a facsimile that included a draft Asset Purchase Agreement between ITC and Reohr. ITC and Reohr and its shareholders entered an Asset Purchase Agreement dated February 27, 1997. The obligations of ITC and the Reohr shareholders under the Asset Purchase Agreement were conditioned on the consummation of the IPO. On March 4, 1997, HDS, the parent company of ITC, issued a press release announcing the entry of the Asset Purchase Agreement and that Reohr and Global were expected to be included in the rollup transaction. The plans for an immediate IPO for the combined company were abandoned in the spring of 1997, though the Defendants continued to negotiate toward a transaction that would roll up technology service companies into a single entity, but with private investment.
In the summer of 1997, Spector and Dixon engaged in negotiations to purchase a company called RealTime Consulting, Inc. for inclusion in the rollup transaction. In late July 1997, RealTime's owner withdrew, leaving only Global and Reohr as candidates for the combined entity.
At this point, negotiations ensued for a restructured transaction which was not conditioned on an IPO and which resulted in ITC and Global merging into Reohr, which became the surviving corporation. Plans were made by ITC to borrow funds from a bank to provide working capital for the merged entity and a source for the payment of part of the purchase price. These plans were disclosed in a Confidential Offering Memorandum distributed by ITC in July 1997. The Confidential Offering Memorandum also disclosed that TL Ventures' purchase of Global was for cash. Prior to the closing on the merger transaction, Reohr did not conduct due diligence on Global.
In August 1997, Dixon personally invested $1,000,000 in Reohr, obtaining an ownership interest of 6.711%. Dixon and TL Ventures became shareholders of Reohr, as embodied in the Stock Purchase and Combination Agreement of August 11, 1997 as amended and restated as of October 22, 1997. In September 1997, Rice Sangalis Toole Wilson ("Rice Sangalis"), a private equity investment firm, elected to make an investment in the new entity.
The final closing on the Stock Purchase and Combination Agreement by which ITC and Global were merged into Reohr and created the new entity, Broadreach, occurred on or about October 22, 1997. As a result of the transaction that finally closed on October 22, 1997, the Reohr shareholders collectively received $7,500,000 in cash. Plaintiff received 35% of this amount. As of the October 22, 1997 transaction, the shareholders of Broadreach were Plaintiff, the former Reohr partners Yohannon and English, Dixon, ITC, TL Ventures, and Rice Sangalis. Spector was not, individually, a shareholder of Broadreach.
C. Termination of Plaintiff as Employee and Director of Broadreach
In February 1998, Dixon placed a phone call to Plaintiff saying that his area of Broadreach was "not working out" and the next day had a meeting with Plaintiff asking him to resign from Broadreach. Dixon subsequently mailed a Separation Agreement and Release to Plaintiff.
In January 1999, Plaintiff resigned from the Broadreach Board of Directors at the urging of Dixon. After Plaintiff resigned from the Board, Dixon sent him a letter dated February 1, 1999, promising to keep Plaintiff informed of Broadreach's affairs.
The original Board of Directors of Broadreach consisted of the following individuals: Dixon, Plaintiff, English, Yohannan, Spector, Donald Rice and Stephen Andriole. At the Board meeting on February 12, 1999, after his resignation, Plaintiff was replaced by John Leonard, a business associate of English. Sometime during 1999, Gary Anderson became a member of the Broadreach Board. Effective February 4, 2000, Don Rice resigned from the Broadreach Board and was replaced by Kurt Keene.
D. Conversion of Broadreach
During 1998 and 1999, Broadreach's management migrated the company's business from primarily staffing to consulting, with an emphasis on eBusiness. The plans for and implementation of this migration were made openly and with the knowledge of Broadreach's senior managers and directors, including English, Yohannan, and other holdovers from Reohr. As early as September 1997, Dixon began to arrange for the attendance of Reohr employees at e-commerce seminars. In early September 1997, Dixon requested that Plaintiff and the other Reohr shareholders make a presentation to Rice Sangalis which emphasized the "solutions" or consulting work that Reohr had performed.
Broadreach managers held a planning session on November 3-4, 1998 and a "midnight branding session" on December 10-11, 1998 devoted to planning for Broadreach's eBusiness. The results of this session were presented to the Broadreach Board at its meeting of February 12, 1999 by Rob Kelley with no recorded dissent from English or Yohannan. The migration from staffing to consulting and eBusiness was approved by the Broadreach Board of Directors upon management's recommendation.
During 1998 and 1999, Broadreach's business grew, and the consulting segment contributed that growth, as the staffing segment contracted. The eBusiness segment of Broadreach's business included activities that could be categorized as "staffing" and those that could be categorized as "consulting" or "eBusiness." English and Yohannan were involved in the classification process. During this period, Broadreach periodically issued documents called "Options Holder Quarterly," signed by Dixon and English that summarized recent achievements of Broadreach, as well as challenges that the company faced in its transition to eBusiness. In addition, on several occasions after his resignation from Broadreach, Plaintiff received a binder prepared for Broadreach's Board Meeting, including materials on the company's progress. In 1999, Broadreach also issued at least one press release noting its success and received press coverage and awards.
Beginning in July of 1999, Broadreach began experiencing difficulties. Its operating results for July and August of 1999 were disappointing and in October 1999, Broadreach engaged First Albany Corporation ("First Albany") to advise the company in connection with the possible sale of its eBusiness segment.
On September 27, 1999, Broadreach — by its CFO, Robert Graham ("Graham") — sent a letter to Plaintiff, offering to buy back a portion of his shares in the company for $350,000, as required by the Stockholders' Agreement dated as of October 22, 1997. Plaintiff declined this offer. In November 1999, Broadreach sought an additional investment of $2 million from its shareholders. Plaintiff declined to participate, but shareholders TL Ventures, English, Dixon, Yohannan, and Rice Sangalis opted to participate. Graham also contributed capital to Broadreach as part of this call for additional investment.
Between January and March of 2000, Broadreach and First Albany sent information and made presentations to prospective buyers of Broadreach. Preliminary discussions for a sale of Broadreach for as much as $120,000,000 occurred with one company, Merant, PLC, but this deal fell through, concurrent with the downturn in the stock market in April of 2000. Broadreach was able to sell its staffing business in the summer of 2000 for $1,625,000 to a company called Technisource, Inc.
On August 9, 2000, Graham sent to Plaintiff a draft of the company's unaudited financial statements, in response to Plaintiff's request for the company's audited financial statements.
In December 2000, Graham mailed to all Board members a Notice of a joint Shareholders/Board meeting to be held on December 19, 2000, in which the company would seek additional funding of up to $2.5 million. On December 14, 2000, Broadreach issued a Business Report to its Board. In January 2001, a press release issued by LiquidHub, Inc. stated that LiquidHub was a spin-off of Broadreach. The substance of this press release was report at the shareholder meeting, where Plaintiff was present.
In 2001, Broadreach located a potential buyer for its assets named Vector esp, Inc. ("Vector"). On July 23, 2001, Broadreach notified its shareholders of a special meeting on August 2, 2001 to authorize a sale of substantially all of Broadreach's assets to an affiliate of Vector. The sale to Vector as contemplated in the special meeting notice never took place because Citizens Bank, Broadreach's lender at the time, declared Broadreach in default of its obligations. Broadreach's default led to a foreclosure transaction in August 2001 by Citizens and a sale of Broadreach assets to Vector, after which Broadreach could no longer continue in business. As a result, the investment of defendants, Plaintiff and the other investors in Broadreach became worthless.
IV. Defendants' Motion for Summary Judgment
A. Legal Bars to Claims
Defendants first argue that Plaintiff's § 1962(b) claim is statutorily barred for two reasons. First, Defendants argue that because Plaintiff alleges fraud in connection with the purchase of securities, the conduct cannot be a predicate act under RICO, even if Plaintiff attempts to plead mail or wire fraud to circumvent this constraint. Second, Plaintiff's claim regarding the acquisition of control of Broadreach is time-barred because the four-year statute of limitations applied by the Supreme Court and Third Circuit has expired in this case, because Plaintiff knew of his injury in December of 1997.
In addition, Defendants argue that Plaintiff's allegations regarding fraudulent and negligent misrepresentation to third parties are not proper because Plaintiff cannot bring such claims on behalf of third parties.
B. Deficiencies in RICO Claims
Defendants also argue that Plaintiff's Count One under 18 U.S.C. § 1962(b) is defective because it is based on the incorrect premise that Defendants Dixon and TL Ventures "acquired interests in Reohr and Broadreach and maintained control of Broadreach through a pattern of racketeering activity." Defendants argue that Count One should fail because it is undisputed that Defendants Dixon and TL never acquired ownership or operating control of Broadreach in connection with the October 1997 transaction because Defendants never constituted a majority of the Board of Directors of Broadreach.
Defendants argue that the facts cannot establish that any of the Defendants committed acts of mail or wire fraud because the facts do not show either falsity or the intent to defraud. In addition, Defendants maintain that because Plaintiff closed himself off from sources of information prior to and at closing, his reliance on any alleged misrepresentations is unreasonable.
In their Motion for Summary Judgment, Defendants also argue that Plaintiff, who alleges that Defendants maintained control of Broadreach through a pattern of racketeering activity directed not specifically at Plaintiff, but rather at third parties, cannot, as a matter of law, succeed with a RICO claim. Defendants also argue that the alleged fraudulent conduct toward third parties does not constitute mail or wire fraud. In addition, Defendants argue that Plaintiff cannot show the requisite pattern of racketeering activity, rather, the facts reveal Defendants conducting ordinary business activities.
Defendants maintain that the undisputed facts show that Plaintiff's termination and resignation were not the product of or incident to the alleged RICO violation. Instead, the undisputed facts show that Plaintiff's termination and resignation were the result of difficult relationships between Plaintiff and Defendant Dixon.
Defendants also argue that Plaintiff treats all Defendants as agents for each other, and that the facts do not support such an argument. In addition, Defendant TL Ventures argues that there is no evidence that TL Ventures is culpable as Plaintiff has not shown any facts specific to this Defendant. Defendant Spector argues that the facts show no culpability for Spector because Plaintiff has not shown any facts supporting the allegations against Spector. Finally, Defendant Dixon argues that the facts do not show culpability for Dixon because the facts alleged are not sufficient to fulfill the requisite elements of the claims against Dixon.
Defendants argue that because Plaintiff's substantive RICO claims are deficient, his 1962(d) conspiracy claim must fail. Defendants also maintain that Plaintiff has shown no evidence describing the period, object, or actions of any alleged conspiracy.
C. Common Law Claims
Defendants argue that Plaintiff's fraudulent inducement claim is barred by the parol evidence rule. Defendants also argue that Plaintiff cannot satisfy the elements of common law fraud or negligent misrepresentation because there is no proof of a fraudulent misrepresentation or of scienter and because any reliance by Plaintiff was unjustified.
Defendants argue that the facts, at most, show a failure to disclose, rather than misrepresentation to Plaintiff, regarding Broadreach's financial difficulties in the summer and fall of 1999. According to Defendants, under Pennsylvania law, non-disclosure is not actionable in fraud or negligence. In addition, Defendants argue that the only duty to speak could come from the letter to Plaintiff from Dixon promising to send him quarterly reports, and that these reports were sent to Plaintiff. Defendants further argue that there is no showing that Plaintiff relied on the failure of Defendants to provide information, rather than the advice of other parties, regarding the 1999 buy back offer. Finally, Defendants argue that there is no evidence of scienter.
V. PSLRA and Statute of Limitations
A threshold issue is whether Plaintiff's claims are barred by the RICO statute of limitations or by the PSLRA's restrictions on RICO claims. In 1995, Congress enacted the Private Securities Litigation Reform Act ("PSLRA"), Pub.L. No. 104-67, 109 Stat. 737 (1995). Section 107 of the PSLRA amended Section 1964(c) of RICO, to provide that "no person may rely upon any conduct that would have been actionable as fraud in the purchase or sale of securities to establish a violation of section 1962." 18 U.S.C. § 1964(c). "The Conference Committee intend[ed] this amendment to eliminate securities fraud as a predicate offense in a civil RICO action" H.R. Conf. Rep. No. 104-369, at 47 (1995), reprinted in 1995 U.S.C.C.A.N. 730, 746. Therefore, Section 107 eliminates "`any conduct actionable as fraud in the purchase or sale of securities' as a predicate act for a private cause of action under RICO." Bald Eagle Area School District v. Keystone Financial, Inc., 189 F.3d 321, 327 (3d Cir. 1999) (quoting Mathews v. Kidder, Peabody Co., Inc., 161 F.3d 156, 157 (3d Cir. 1998)). In Bald Eagle, the Third Circuit clarified that where the remedies of the PSLRA and RICO overlap, plaintiffs cannot bring a duplicative RICO claim. Thus, the Defendants argue that because Plaintiff's Count One raises a claim under RICO where the predicate act is the sale of securities, specifically Reohr stock, it is not properly raised under RICO.
Plaintiff argues that a broader reading of the RICO statute is appropriate here. Plaintiff argues that the reason for amending RICO to exclude predicate acts related to securities was to avoid duplicative remedies for such conduct, and not to immunize defendants from liability for such conduct. See Blakey Roddy,Securities Reform and RICO: A Lawyer's Dream, 23 RICO L. Rep. 802 (1996), Smith Reed, Civil RICO, § 2.02 (2003 ed.). Thus, according to Plaintiff, the PSLRA and RICO, read together, should allow conduct not actionable under the securities law to be addressed under RICO. Plaintiff argues that Bald Eagle does not mean that he is without a RICO claim in this case, because Plaintiff never actually had an actionable claim under the PSLRA. Plaintiff argues that, because he did not know of his injury until December 2000 at the earliest and the statute of limitations for a claim under the PSLRA expired in November 2000, he never could have sued under the PSLRA. Therefore, because Plaintiff never could have presented a claim under the PSLRA, there was never any risk of the PSLRA and RICO providing duplicative remedies. Thus, Plaintiff argues, the logic of Bald Eagle and the analysis presented by Blakey would suggest that a RICO claim is appropriate here.
Plaintiff's argument misconstrues Congress's decision to exclude claims under the PSLRA from the umbrella of RICO. Claims based on securities transactions are not properly brought under RICO because the PSLRA provides the statutory remedy for these claims. Congress explicitly amended RICO to exclude securities transactions as predicate acts. Congress did not say that RICO could provide a remedy where the PSLRA was not available. Rather, the explicit language of the statute and the intent of Congress as expressed in the legislative history, noted above, exclude securities transactions completely from those predicate acts actionable under RICO. Just because the Plaintiff did not or, as Plaintiff argues, could not, properly raise a PSLRA claim within the statute of limitations, this division of remedies does not collapse.
Although Plaintiff argues that he was not aware of his injury under the PSLRA, and Defendant argues that Plaintiff did, in fact, have notice of his injury, before the PSLRA statute of limitations expired, the resolution of this issue does not change the outcome of whether Plaintiff's Count One, insofar as it relates to the purchase and sale of Reohr stock, is properly brought under RICO. This Court is not willing to contradict the exclusion of securities claims from RICO delineated in Congress's amendment and explained in Bald Eagle in favor of an overly broad application of RICO. Thus, Plaintiff's Count One, insofar as it relates to the sale of Reohr stock, is not properly brought under RICO.
The Court is aware that it rejected Defendants' argument regarding the PSLRA in both of its opinions on Defendants' Motions to Dismiss because it was obliged to accept Plaintiff's allegations as true. When considering the Motions to Dismiss, the Court urged Defendants to assert this argument with a properly documented Motion for Summary Judgment. Now that Defendants have presented the Court with a properly documented Motion for Summary Judgment, the record is sufficient for the Court to exclude Plaintiff's claims regarding the sale and purchase of Reohr stock from Count One.
Defendants also argue that Plaintiff's claim under Count One is barred by the four year RICO statute of limitations. Defendants argue that, under the "injury discovery accrual rule" applied by the Third Circuit, Forbes v. Eagleson, 229 F.3d 471, 484 (3d Cir. 2000), Plaintiff knew of his injury as a result of his sale of Reohr stock by December 1997 at the latest and, therefore, his Complaint filed in February 2002 is barred by the statute of limitations. Plaintiff disputes this contention, arguing that he did not know of his injury until December of 2000. As there are factual issues in dispute as they relate to this argument, it is not properly decided by this Court at summary judgment. However, because the PSLRA bars Plaintiff's claims as they relate to the sale of Reohr stock, as discussed above, this issue is moot.
VI. RICO Standing
A. Summary of Contentions and Conclusions
Plaintiff's RICO claims are based on two sets of injuries he suffered, each deriving from his status with regards to Broadreach. Plaintiff's briefs do not separate his claims as the Court concludes the law requires. First, Plaintiff was an investor in and shareholder of Broadreach, and lost the value of his investment. Second, Plaintiff was a director and employee of Broadreach who was terminated. Because these two sets of injuries implicate RICO in different ways, this Court will address them separately. First, Plaintiff's status as a shareholder and the resultant injury will be discussed. It is important to note at the outset that Plaintiff is not suing Broadreach, the corporation of which he was a shareholder. Rather, he is suing some of the individual investors, directors, and officers of the corporation.
As the review of the case law, below, shows, if a plaintiff is a shareholder, this Court cannot automatically say that the shareholder has no standing to sue under RICO for acts taken in regard to the corporation. If a shareholder alleges, or in the summary judgment stage presents evidence of, an injury directed at the shareholder, as distinct from the corporation, then the shareholder has standing to sue. If, however, the injury occurs solely because the plaintiff is a shareholder of a corporation that suffers injury, then the plaintiff does not have standing.
In this case, Plaintiff alleges two different types of injury: the loss in value of his investment and damages based on his termination as an employee and director of Broadreach. As further discussed below, Plaintiff's injuries due to his termination clearly give him standing to sue. However, once Plaintiff was terminated as an employee and director, his status was solely that of a shareholder in Broadreach. The loss in the value of his investment was incident to injury to the corporation, and not an injury directed at him. Therefore, Plaintiff does not have standing to sue for the loss in value in his investment in Broadreach subsequent to his termination.
B. Plaintiff Does Not Have RICO Standing to Sue for Damages Incident to His Status as a Shareholder
The fact that Plaintiff is a shareholder of a corporation does not automatically mean that he does not have standing to bring a claim under RICO. When there is an injury that affects both the shareholder and the corporation, a fact specific inquiry is necessary to determine whether the shareholder has standing to bring suit. Maiz v. Virani, 253 F.3d 641, 655-56 (11th Cir. 2001) (holding that plaintiffs who were induced to invest in a real estate venture, only to be defrauded, satisfied the proximate causation requirement).
[S]imply because the plaintiff is a shareholder of a corporation, it does not necessarily follow that he lacks standing to seek RICO damages in his own right. There is no bright-line rule for determining when an individual who is also a corporate shareholder sues under 1964 to recover for a RICO violation that affects both the individual and the corporation. The inquiry is inherently fact-specific.Maiz at 655. 18 U.S.C. § 1964(c) articulates the standard for standing under RICO,
Any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefor in any appropriate United States district court.18 U.S.C. § 1964(c). The Supreme Court examined the standing requirement of RICO, and specifically clarified the "by reason of" requirement of the statute, in Holmes v. Securities Investor Protection Corp., 502 U.S. 258, 117 L.Ed.2d 532, 112 S.Ct. 1311 (1992). The Court, analogizing RICO to the Clayton Act, found that the right to sue under RICO requires a showing that the alleged violation was the proximate cause of the plaintiff's injury. The Court in Holmes identified three factors that determine whether a RICO claim is based on an injury that is too remote from the alleged racketeering activity:
First, the less direct an injury is, the more difficult it becomes to ascertain the amount of a plaintiff's damages attributable to the violation, as distinct from other, independent factors. Second, quite apart from problems of proving factual causation, recognizing claims of the indirectly injured would force courts to adopt complicated rules apportioning damages among plaintiffs removed at different levels of injury from the violative acts, to obviate the risk of multiple recoveries. And, finally, 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 as private attorneys general, without any of the problems attendant upon suits by plaintiffs injured more remotely.Holmes, 503 U.S. at 269-70. See Callahan v. A.E.V., Inc., 182 F.3d 237, 263-66 (3d Cir. 1999) (applying three factors from Holmes to determine that plaintiff had not established proximate causation). The proximate causation standard in Holmes has been applied to "generally preclude recovery by `a plaintiff who complained of harm flowing merely from the misfortunes visited upon a third person by the defendant's acts." Brokerage Concepts v. U.S. Healthcare, 140 F.3d 494, 521 (3d Cir. 1998) (quotingHolmes, internal quotations omitted).
Courts have applied the proximate causation requirement, as illustrated in Holmes, to allow a variety of suits. InCeribelli v. Elghanayan, 990 F.2d 62, 64 (2d Cir. 1993), the Second Circuit found that investors induced to buy overvalued stock had standing to sue, but suggested that if the investors had only alleged a dimunition in the value of their investments, they probably would not have had standing. In Steamfitters Local Union No. 420 Welfare Fund v. Philip Morris, Inc., 171 F.3d 912, 932-34 (3d Cir. 1999), the Third Circuit held that a union health fund did not have standing to sue a tobacco company based on the increased costs for health care for smokers because the chain of causation was too attenuated. In Callahan, 182 F.3d at 263-66, the Third Circuit found that there was not proximate causation for the lost business suffered by competing liquor distributors where defendant liquor distributors obtained fraudulent liquor licenses from the state in order to sell liquor at discounted prices. In Baisch v. Gallina, 346 F.3d 366, 372-75 (2d Cir. 2003), the Second Circuit found that a plaintiff who provided construction financing to defendant contractors who subsequently falsified construction documents and forms provided to plaintiff as well as the party receiving the construction services satisfied the proximate causation requirement.
In the present case, Plaintiff's injuries as a shareholder, setting aside any injuries caused by his termination, are the loss in the value of his investment in Broadreach. Plaintiff alleges that these injuries were caused by the Defendants, who were other investors in, and officers of, Broadreach. But Plaintiff has not sued the corporation itself for his injuries, perhaps because it has no assets.
Viewing the facts in the light most favorable to Plaintiff, the Defendants attempted to change the nature of Broadreach's business, misled actual and potential investors and the public regarding the success of Broadreach, and ultimately led Broadreach into bankruptcy. Plaintiff does not allege that the Defendants induced his investment into Broadreach with these acts, but only that the value of his existing investment decreased. Even accepting all of Plaintiff's facts as true, the injury of Plaintiff's devalued investment is too attenuated to satisfy RICO's proximate causation requirement.
Plaintiff does not allege the type of direct injury that has previously been found to satisfy proximate causation under RICO. Plaintiff has not alleged that his investment was induced by the racketeering scheme and has not shown the requisite directness between the racketeering acts and his injury. Applying the factors outlined in Holmes, it would be impossible to apportion damages for the injury that Plaintiff alleges between the acts of the Defendants and independent factors, such as the failure of other investors to put additional investment into Broadreach, or the downturn in the stock market, or the choice of Broadreach's creditors to collect their loans.
In addition, it is consistent with the general principles of corporate law to require a shareholder to show a violation of a duty owed to the shareholder in order to have standing to sue as an individual. Plaintiff could not bring these claims under Pennsylvania law, as he would have to bring any claims for injury to the corporation on a derivative basis, or to allege violations of a duty owed to him as a shareholder. Under Pennsylvania state law, a shareholder may file a derivative suit where the corporation is the directly injured party, such as where the "director or controlling stockholder mismanages or misappropriates corporate property," but does not have standing to sue as an individual. See Weston v. Reading Company, 445 Pa. 182, 191, 282 A.2d 714, 719 (Pa. 1971) (holding that an individual has standing to bring a derivative suit as a stockholder or owner of an interest in the corporation at the time of the occurrence of the challenged transaction), Clinton Hudson Sons v. Lehigh Valley Cooperative Farms, Inc., 73 F.R.D. 420 (E.D. Pa. 1977), aff'd mem., 586 F.2d 834 (3d Cir. 1978) (where the alleged wrong is primarily against the corporation, redress for that wrong must be sought by the corporation in the form of a derivative action).
Only when a shareholder can establish individual injury, separate and apart from the injury to the corporation, can the shareholder bring suit as an individual. See, e.g., Fishkin v. Hi-Acres, Inc., 462 Pa. 309, 341 A.2d 95 (1975) (modifying the decree of the court of common pleas to provide an opportunity to amend a defective complaint against the purchaser-defendants as bona fide purchasers for value); Vierling v. Baxter, 293 Pa. 52, 141 A.2d 728 (1928) (reversing the lower court and holding that Plaintiff suffered an individual injury and could therefore bring suit in his own name). In addition, "it is hornbook law that where the conduct alleged constitutes not only a wrong against the corporation, but also a violation of duties owed directly to a stockholder, whether such duties arise from contract or otherwise, a direct, personal cause of action may be maintained." Korman Corp. v. Franklin Town Corp., 11 Phila. 181, 191-192 (Penn. C.P., 1984).
Similarly, as discussed above, Plaintiff can only bring a claim under federal law for damages arising out of his purchase or sale of a stock under the PSLRA, but not under RICO. The concept underlying these restrictions on shareholder suits is to prevent double recovery by individuals suing in both their individual and shareholder capacity. In addition, this limitation on Plaintiff supports the policy consideration underlying Holmes, which is to impose limitations on the type of injuries cognizable under RICO to those injuries sufficiently related to the core RICO concerns. See Holmes, 503 U.S. at 274. Thus, Plaintiff's claims as they relate to his status as a shareholder will be dismissed for lack of standing.
C. Plaintiff Does Have Standing to Sue for Damages Related to His Termination of Employment and Resignation as Director
The remaining RICO claims are those that relate to the termination of Plaintiff's employment and his resignation as a director of Broadreach. The Court notes that some cases have found that the termination of an employee is insufficient to support a claim under RICO. Those cases, however, deal with facts that differ from those before this Court. See Beck v. Prupis, 529 U.S. 494, 146 L.Ed.2d 561, 120 S.Ct. 1608 (2000) (holding that a terminated plaintiff who had discovered a RICO violation cannot bring suit under 1962(d) because the overt act of termination, allegedly done in furtherance of the conspiracy, was not itself "racketeering activity"); Shearin v. E.F. Hutton Group, 885 F.2d 1162 (3d Cir. 1989) (finding that a terminated whistleblowing plaintiff did not have standing to bring a 1962(c) claim based on the RICO violations she disclosed because the injury of termination is not proximately related to a RICO violation); Anderson v. Ayling, 297 F. Supp.2d 805, 810-12 (E.D. Pa. 2003) (finding that terminated plaintiffs who opposed the imposition of an emergency trusteeship did not have standing to bring a 1962(c) claim because the terminations did not occur "by reason of" the RICO violations).
Here, Plaintiff is not a whistleblower who discovered a racketeering scheme, as in the cases cited above. Rather, as the evidence discussed below shows, Plaintiff has sufficiently raised issues of fact for trial that a racketeering scheme existed, and that part of that scheme was to deceive him and remove him from the affairs of Broadreach. These facts are sufficient to support a RICO claim. See Oglesby v. St-Gobain Corp., 1997 U.S. Dist LEXIS 13832 (E.D. (holding that Plaintiff had standing to bring 1962(c) and 1962(d) claims based on employment termination because the injury stemmed from the predicate acts), Roberts v. Tandy, 1990 U.S. Dist. LEXIS 6208 (E.D. Pa. 1990) (finding that Plaintiff had standing to bring a RICO claim based on termination of employment because the termination stemmed from the predicate acts). Plaintiff has presented sufficient evidence to allow a jury to find that the Defendants committed predicate acts, such as mail and wire fraud directed at him, and that his termination as both an employee and a director was part of and the direct result of this pattern of activity. Thus, Plaintiff properly has standing to bring suit based on the injury he suffered as a result of his termination as an employee and director of Broadreach.
VII. Plaintiff's RICO Claims Related to His Termination and Resignation from Board of Directors
Plaintiff's RICO claims must be restricted to those injuries he suffered as a result of his ouster as an employee and director of Broadreach. As a result of the narrow nature of the remaining claims, many of Defendants' arguments regarding the sufficiency of Plaintiff's RICO pleadings need not be addressed.
Excepting the acts related to the sale and purchase of securities and Plaintiff's role as a shareholder, discussed above, Plaintiff alleges a number of predicate acts related to his RICO claims, based on his ouster as an employee and director of Broadreach. These predicate acts, listed in the factual discussion above and addressed as they relate to each RICO claim below, raise genuine issues of material fact as the parties have presented disparate versions of the inferences, motivations and intents that can be drawn from these acts. As a result, the remaining RICO claims survive summary judgment and are properly issues for a jury to decide.
A. RICO Requirements
The remaining issues for the Court to address on the motion for summary judgment are whether Plaintiff's claims as to his ouster as an employee and director of Broadreach satisfy the requirements of RICO. Counts One through Three raise claims under RICO sections 1962(b)-(d), each of which have separate requirements, which will be addressed in turn.
1. Section 1962(b)
RICO section 1962(b) provides:
(b) It shall be unlawful for any person through a pattern of racketeering activity or through collection of an unlawful debt to acquire or maintain, directly or indirectly, any interest in or control of any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce.
The Third Circuit specifically requires a plaintiff to show not only that the defendants acquired or maintained control of an enterprise through racketeering activity, but also that, "a plaintiff must allege a specific nexus between control of a named enterprise and the alleged racketeering activity." Kehr Packages v. Fidelcor, Inc., 926 F.2d 1406, 1411 (3d Cir. 1991).
The only claims remaining under Plaintiff's Count One are those that relate to the termination of Plaintiff's employment and his ouster as a director of Broadreach. Defendants argue that Plaintiff has not shown a RICO violation because the record shows no basis to conclude that Plaintiff's terminations were motivated by Defendants' desire to maintain control of Broadreach and thus, the nexus requirement is not met. In addition, Defendants TL Ventures and Spector argue that there is no evidence that they were in any way involved in Plaintiff's termination or the communications related to it.
Plaintiff has alleged a number of predicate acts that relate to the termination of his employment and director position at Broadreach. These predicate acts are reflected in the following chart. Pre-Termination Predicate Acts Date Defendant Act Record Citation
Those alleged predicate acts occurring after February 1, 1999 are not included because, after that date, Plaintiff was solely a shareholder in Broadreach and, thus is without standing to bring a RICO claim, as discussed above.
Those predicate acts itemized in Plaintiff's RICO Statement are referred to as "RICO Statement at ___" in the last column of the chart. Those predicate acts that are not itemized in the RICO Statement, but are agreed upon by the parties, as reflected in their respective Statements of Undisputed Facts, are listed as "Def. Ex. ___" referring to the exhibits to Defendants' Motion for Summary Judgment, or "Pl. Ex. ___" referring to the exhibits to Plaintiff's Exhibits in Opposition to Defendants' Motion for Summary Judgment.
Defendants contend that the acts relied upon by Plaintiff, specifically the mailing of a term sheet on October 2, 1996 and November 18, 1996 and phone calls made by Dixon between August 1996 and October 22, 1997 are not, in fact, fraudulent. (Gintowt Tr. at 310, 394, 397). Plaintiff argues that his termination from employment and forced ouster were part of a scheme to remove him from oversight of Defendants' actions, and that the cited predicate acts were misrepresentations designed to achieve that goal. In support of this view, Plaintiff cites testimony that Plaintiff was expressing "caution" about the direction of the company and "was not going to let it go" (Andriole Tr. at 81-3), Dixon's disputed testimony that he "helped" Plaintiff decide to leave (compare Gintowt Decl. at ¶¶ 15, 20 with Dixon Tr. at 235-38), and Dixon's testimony that, once Plaintiff had been terminated, Dixon began to work on removing him from the Board (Dixon Tr. at 258-62), all of which a jury could find supports Plaintiff's contentions that he was forced out of the company due to his disagreement with Dixon and others. In addition, Plaintiff cites testimony which a jury could find supports Plaintiff's contentions that Defendants Spector and TL Ventures were actors in this scheme, including testimony that the Defendants consulted each other when taking the alleged predicate acts (Gintowt Tr. at 494, 509), that Dixon consulted Spector regarding Plaintiff's termination and/or resignation from the Board (Spector Tr. at 179-82, 195-6), that Rice Sangalis passively looked to Defendant TL Ventures (Keene Tr. at 61-2), and that TL Ventures played an active role in the management of Broadreach (Dixon Tr. at 54-6, 196-7, Spector Tr. at 52-3, 107). Viewing the facts in the light most favorable to Plaintiff, there are genuine issues of material fact as to both whether the actions of all Defendants were done with the intention of misleading Plaintiff and others, whether these acts constituted racketeering activity, and whether these actions resulted in the maintenance of control of Broadreach through Plaintiff's ouster. These issues are, thus, appropriately reserved for a jury.
"___ Tr. at ___" refers to the deposition transcripts attached as exhibits to the parties' briefs on summary judgment.
2. Section 1962(c)
RICO section 1962(c) provides:
(c) It shall be 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 or collection of unlawful debt.
As the Supreme Court defined in Sedima SPRL v. Imrex Co., 473 U.S. 479, 496, 87 L.Ed.2d 346, 105 S.Ct. 3275 (1985), "a violation of § 1962(c) requires . . . (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity" as well as injury resulting from the conduct constituting a violation. After review of the summary judgement briefing and the oral argument, the Court finds that Plaintiff has established sufficient issues of material fact as to RICO liability as it relates to the termination of his employment and his ouster as a director of Broadreach.
a. Enterprise
18 U.S.C. § 1961(4) defines the term "enterprise" as including "any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity." A plaintiff in a RICO case must show more than simply that fraud occurred, rather, the plaintiff must show that a fraudulent scheme was conducted through an enterprise. Specifically, courts have required a distinction between the enterprise itself and the individuals who are controlling the enterprise, as only the "person" and not the "enterprise" are liable under § 1962. The leading Third Circuit case on this requirement is Jaguar Cars, Inc. v. Royal Oaks Motor Car Co., 46 F.3d 258, 265-66 (3d Cir. 1995), which clarified the distinctiveness requirement by concluding that when officers and employees of a legitimate corporation operate and manage the corporation so as to use it to conduct a pattern of racketeering activity, the distinctiveness requirement is satisfied. See Cedric Kushner Motions Ltd. v. King, 533 U.S. 158, 150 L.Ed.2d 198, 121 S.Ct. 2087 (2001) (concluding that where "a corporate employee, acting within the scope of his authority, allegedly conducts the corporation's affairs in a RICO-forbidden way . . . [the] corporate owner/employee . . . is distinct from the corporation itself."), Healthguard of Lancaster Inc. v. Gartenberg, 2004 U.S. Dist. LEXIS 4437 (2004) (finding that Plaintiff had fatally blurred the distinctiveness requirement by asserting that the enterprise was identical to the Defendants).
Defendants do not specifically dispute that Plaintiff's allegations satisfy the enterprise requirements. Indeed, Plaintiff has alleged an enterprise very similar to that contemplated by Jaguar Cars; he alleges that the Defendants, as directors and officers of Broadreach, used that legitimate corporation to conduct a pattern of racketeering activity. Plaintiff's evidence is sufficient to raise an issue of fact as to whether Defendants controlled the enterprise, as it is undisputed that Defendants were the officers, directors, and shareholders of the corporation that constituted the enterprise. Therefore, Plaintiff has presented sufficient evidence to show material issues of fact as to whether an enterprise existed.
b. Pattern of Racketeering
To establish a pattern of racketeering activity, Plaintiff must show that the various predicate acts are "related" and "continuous". See H.J. Inc. v. Northwestern Bell Telephone Co., 492 U.S. 229, 106 L.Ed.2d 195, 109 S.Ct. 2893 (1989), Kehr Packages v. Fidelcor, Inc., 926 F.2d 1406, 1411-12 (3d Cir. 1991). Predicate acts are related if they "have the same or similar purposes, results, participants, victims, or methods of commission, or otherwise are interrelated by distinguishing characteristics and are not isolated events." Id. at 240. Continuity is "both a closed- and open-ended concept, referring either to a closed period of repeated conduct, or to past conduct that by its nature projects into the future with a threat of repetition." H.J. Inc., 492 U.S. at 241. Continuity as a closed-ended concept is established if the plaintiff can show "a closed period of repeated conduct" lasting at least one year.Tabas v. Tabas, 47 F.3d 1280, 1292 (3d Cir. 1995). Because the facts of this case involve a series of acts in a delineated time period, with no threat of future repetition, the closed-ended standard provides the appropriate analysis of continuity.
Defendants do not contend that the acts presented by Plaintiff as predicate acts are neither related or continuous. In fact, all of these acts relate to the ongoing management of and investment in Broadreach, are repeated conduct of the same variety by the same handful of individuals, and encompass at least one year and, thus, are both related and continuous.
Defendants argue that Plaintiff has not established acts by the Defendants that qualify as predicate acts under RICO because none of these acts constituted mail or wire fraud. The Court disagrees and concludes that Plaintiff has established sufficient evidence to pose a genuine issue of material fact as to whether Defendants' acts constituted fraud. Fraud requires a showing of fraudulent statements made with the intent to deceive someone.See Sowell v. Butcher Singer, Inc., 926 F.2d 289, 296 (3d Cir. 1991). Although Defendants maintain that none of the communications pointed to by Plaintiff as predicate acts were actually misleading, there is an issue of fact as to whether the term sheets sent by Spector were deceptive, as Plaintiff's evidence raises an issue as to whether Spector mislead Plaintiff about the plans for Reohr. (Gintowt Tr. at 310-13, 337). There is also an issue of fact as to whether the representations made by Dixon in phone conversations were deceptive, as Plaintiff's evidence raises issues of fact as to whether Dixon misled Plaintiff. (Gintowt Tr. At 490-94, 498-503). In addition, it is important to note that each individual act of mail or wire communication may constitute a predicate act, even if it is not itself fraudulent, so long as it is made as part of an effort at deception. See Schmuck v. United States, 489 U.S. 705 (1989), Kehr Packages v. Fidelcor, Inc., 926 F.2d 1406 (3d Cir. 1991). Plaintiff has presented evidence that raises an issue of fact as to whether there was a broader effort of deception, specifically whether the Defendants, through the predicate acts, discussed above, were attempting to deceive and remove Plaintiff. Dixon himself has stated that after Plaintiff was terminated, Dixon began working on getting Plaintiff to resign from the Board. (Dixon Tr. at 258-62). Specifically, it is an issue of fact for the jury whether the predicate acts, including the term sheets sent by Spector, telephone conversations between Plaintiff and Dixon, and other communications were fraudulent and, thus, sufficient RICO predicate acts.
3. Section 1962(d)
RICO section 1962(d) provides:
(d) It shall be unlawful for any person to conspire to violate any of the provisions of subsection (a), (b), or (c) of this section.
In order to succeed on a claim for conspiracy under RICO, a plaintiff must show the period of the conspiracy, the object of the conspiracy, and the actions taken to achieve the object of the conspiracy. Plaintiff here has presented sufficient evidence, as discussed above, that Defendants' conspiracy for the purpose of controlling Broadreach for their own financial gain was conducted from 1996 onward through the predicate acts alleged by Plaintiff. See Shearin v. E.F. Hutton Group, Inc., 885 F.2d 1162, 1166 (3d Cir. 1989). (Although the requirements of 1962(d) standing in Shearin were abrogated by Beck v. Prupis, 529 U.S. 494, 146 L.Ed.2d 561, 120 S.Ct. 1608 (2000), the pleading requirements under 1962(d) remain good law). In addition, the plaintiff must show that the co-conspirator defendants knew and understood the nature of the RICO enterprise and knowingly entered into an agreement to commit predicate acts for the purpose of conducting the enterprise, although each defendant does not have to personally commit those acts. Glessner v. Kenny, 952 F.2d 702, 714 (3d Cir. 1991).
The facts presented, viewed most favorably to Plaintiff, establish genuine issues of fact as to whether the Defendants, knowing the nature of the enterprise, knowingly joined into the conspiracy to commit the various predicate acts discussed above. Plaintiff has raised an issue of fact as to whether a conspiracy existed because a jury could find from the relationship between and among Dixon, Spector, and TL Ventures that they were acting in concert, such as the phone calls by Dixon and Spector's mailings, as discussed above. Plaintiff has also raised issues of fact as to whether TL Ventures is responsible for Dixon and Spector's activities. Plaintiff's evidence that raises an issue of fact as to whether TL Ventures is culpable as a conspirator includes testimony that TL Ventures approved Dixon's appointment as CEO of Broadreach (Spector Tr. at 52-3), testimony that Rice Sangalis would play a passive role and TL Ventures would control the Board (Keene Tr. at 61-2), as well as undisputed evidence that TL Ventures played an active role in the management of Broadreach (Dixon Tr. at 54-6, 196-7). Plaintiff's evidence also raises an issue of fact as to whether the Defendants consulted each other when taking the alleged predicate acts (Gintowt Tr. at 494, 509).
VIII. Agency Argument
Defendants argue that there is no relationship among the Defendants to establish that they acted as agents for each other and thus, Plaintiff improperly holds each Defendant liable for the entire alleged scheme. See Reves v. Ernst Young, 507 U.S. 170, 184 (1993) (holding that only those agents "who participate in the operation or management of an enterprise through a pattern of racketeering activity" are liable under RICO).
The parties do not dispute that the various Defendants had interlaced relationships. Defendant Spector was a managing partner of TL Ventures, until he subsequently became a Director of Broadreach, and was responsible for hiring Dixon as the CEO of Broadreach. Dixon was the CEO of Broadreach and had an ongoing relationship with TL Ventures, including formerly serving as the head of corporations in which TL Ventures had invested. TL Ventures held control of a seat on the Board of Directors of Broadreach, was an investor in Broadreach, and hosted meetings between the management of Broadreach and the Board of Directors of TL Ventures.
Beyond these facts, to which the parties agree, Plaintiff has raised genuine issues of fact as to whether the Defendants acted in concert or as agents for each other. In particular, there are issues of fact for the jury as to whether the various predicate acts taken by Defendant Dixon, in his role as a manager of Broadreach, were on behalf of or with the consent of the other Defendants, in their roles as Directors of Broadreach. In addition, Dixon is specifically alleged to have engaged in the deceptive phone calls previously discussed and Spector is alleged to have sent the deceptive mailings previously discussed. TL Ventures is not alleged to have committed any of the specific predicate acts, but Plaintiff's evidence that TL Ventures knowingly gave management responsibility to Dixon and Spector (Spector Tr. at 52-3, Dixon Tr. at 54-6, 196-7, Gintowt Tr. at 494, 509) raises an issue of fact as to the means by which this occurred and whether TL Ventures was specifically aware of the actions Dixon and Spector were taking, and thus may be legally liable for those actions.
Defendants' argument on this issue is governed by the same set of facts as those that the Court considered to find that Plaintiff has shown sufficient evidence of a RICO conspiracy under § 1962(d), and the "agency" concept also applies to the common law claims. As discussed above, it is an issue of fact whether the Defendants were agents for each other, because a jury could find that the relationships between and among Dixon, Spector, and TL Ventures were such that each Defendant participated in the operation or management of the enterprise by means of the racketeering activity.
IX. Common Law Claims
Plaintiff also pleads common law claims against all Defendants for common law fraud in Count Four and negligent misrepresentation in Count Five. Plaintiff's common law claims are not constrained by the PSLRA or the standing requirements of RICO. However, consistent with Pennsylvania law, Plaintiff's common law claims may not include claims arising from his status as a shareholder of Broadreach, as they could only be raised derivatively.
Defendants argue that the statements on which Plaintiff purports to have relied were directed at third parties and, thus, not properly the basis for his common law claims. Defendants also argue that Plaintiff is attempting to rely on a nondisclosure, rather than a misrepresentation regarding his claim that Plaintiff's failure to accept Broadreach's buyback offer in the fall of 1999 was the product of his reliance on a fraudulent or negligent misrepresentation, and that such a nondisclosure is not actionable in fraud or negligence absent a duty to disclose. In addition, Defendants argue that Plaintiff has not shown that Defendants intentionally withheld information from Plaintiff. Finally, Defendants argue that Plaintiff's reliance was not on the representations of Defendants, but on the advice of a third party.
Despite Defendants' contentions, Pennsylvania law establishes that there is a duty to disclose in a number of situations, including when there is a fiduciary relationship between the parties, when disclosure is necessary to prevent an ambiguous statement from being misleading, and where an undisclosed fact is basic to a transaction. See Duquesne Light Co. v. Westinghouse Elec. Corp., 66 F.3d 604 (3d Cir. 1995). Although there is no fiduciary relationship here, Plaintiff has presented sufficient evidence to raise issues of fact as to whether any other of these situations apply, for example whether Defendants failed to inform Plaintiff of facts that were material to the transaction and whether Defendants promised, and then failed, to keep Plaintiff informed of Broadreach's results. (Gintowt Tr. at 519-20, 522-23). In addition, Plaintiff has established an issue of material fact as to whether he relied on Defendants' representations, or lack thereof, as to his decision not to participate in the buyback offer. (Gintowt Decl. at ¶ 29-33). Thus, Plaintiff has established sufficient evidence for the issues of fact regarding his common law claims to be decided by a jury.
X. Conclusion
For the reasons stated above, Defendants' Motion for Summary Judgment will be granted in part and denied in part. Plaintiff's Count One, a claim under RICO Section 1962(b), insofar as it relates to the purchase and sale of Reohr stock in October of 1997, will be dismissed. The Court does not presently decide whether the Plaintiff asserts any other claim under 1962(b). In addition, Plaintiff's Counts One through Three, raising claims under RICO Sections 1962(b)-(d) will be dismissed insofar as they arise from injury to Plaintiff in his status as a shareholder of Broadreach. The remainder of Plaintiff's claims under RICO, which relate to Plaintiff's alleged damages as a result as his termination as an employee and director of Broadreach, as well as Plaintiff's common law claims, are properly left for trial.
An appropriate order follows.
ORDER
AND NOW, this day of July, 2004, it is hereby ORDERED that Defendants' Motion for Summary Judgment (Doc No. 35) is GRANTED IN PART AND DENIED IN PART. For the reasons stated in the foregoing Memorandum, Plaintiff's claims, which arise under RICO and relate to the purchase and/or sale of securities, and all claims which arise from Plaintiff's status as a shareholder of Broadreach, are DISMISSED with prejudice. Plaintiff's remaining claims under RICO and common law will proceed to trial.It is further ORDERED that:
1. In light of and as limited by the foregoing Memorandum, within 14 days, Plaintiff shall file a statement of contentions separately under RICO, common law fraud and negligent representation for trial, except as to the amount of damages. Plaintiff's statement may incorporate by reference allegations of the Amended Complaint and/or the RICO Case Statement.
2. Plaintiff shall file a Pretrial Memorandum pursuant to Local Rule 16.1(c), including a supplemental statement of contentions, supported either by his own affidavit or declaration and/or report of an expert, describing the methodology and computation of the damages he alleges, limited to the issues to be tried in accordance with the Court's Memorandum, together with service on Defendants of any other expert reports, by August 20, 2004.
3. By September 20, 2004, Defendants shall file a Pretrial Memorandum and shall serve expert reports
4. Any expert depositions shall be completed by October 8, 2004.
5. Final pretrial conference will be held on October 21, 2004 in Courtroom 17B at 9:30 a.m. Counsel shall consult with each other on the prospects of settlement prior to the conference, and have their clients present at the conference.
6. Points for Charge and Motions in Limine shall be filed by October 29, 2004. Responses to Motions are due by November 4, 2004.
7. Trial is scheduled for November 8, 2004, as a backup to a criminal trial. Counsel shall consult chambers as to the status of the criminal trial and be prepared to start this case on that date if the criminal trial does not proceed, or upon completion of the criminal trial.