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holding where the “[p]laintiffs' RICO claims, which provide the only basis for federal jurisdiction, must be dismissed” that “[t]here is no reason for the [c]ourt to exercise its discretion to retain jurisdiction over [p]laintiffs' state law claims”
Summary of this case from Lorber v. WinstonOpinion
02 CV 2893 (JSM)
August 5, 2003
OPINION ORDER
This is another instance of counsel taking a straightforward breach of contract case and through tortured pleading attempting to turn it into a RICO claim, with callous disregard of the damage done to the reputations of the Defendants by broad claims of fraud and conspiracy that are not supported by the facts alleged.
In essence, the Amended Complaint alleges that Primedia, Inc., and some of its subsidiaries and their officers, violated the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et. seq., by inducing the Plaintiffs to become employees or to continue their employment by fraudulently promising to pay them stock options and bonuses. These allegedly fraudulent misrepresentations were incorporated in mail and wire communications thereby violating the mail and wire fraud statutes and constituting predicate offenses under the RICO statute.
Prior to the time this action was transferred to this Court from the Central District of California, the original Complaint was dismissed and Plaintiffs were given leave to replead. The Amended Complaint will sometimes be referred to herein simply as the Complaint.
While the Complaint charges the Defendants with serious criminal conduct in furtherance of a massive conspiracy, it is bereft of any specific factual allegation that would lead a reasonable reader to conclude that the Defendants knowingly engaged in any fraudulent conduct. This Complaint is a perfect example of the importance of the requirement of Federal Rule of Civil Procedure 9(b) that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." As the Second Circuit has repeatedly noted, Rule 9(b) is intended:
to provide a defendant with fair notice of a plaintiff's claim, to safeguard a defendant's reputation from `improvident charges of wrongdoing,' and to protect a defendant against the institution of a strike suit . . .See, e.g., O'Brien v. Nat'l Property Analysts Partners, 936 F.2d 674, 676 (2d Cir. 1991); Ross v. Bolton, 904 F.2d 819, 823 (2d Cir. 1990);DiVittorio v. Equidyne Extractive Indus., Inc., 822 F.2d 1242, 1247 (2d Cir. 1987).
Each of the named Plaintiffs were employed by Primedia subsidiaries that were established in the midst of the dot.com boom. It is alleged that, in order to retain these individuals or to induce them to become employees, the Defendants, beginning in August 1999, promised them that they would receive stock options entitling them to purchase shares in the particular subsidiary for 50 cents a share. While it is alleged that the Defendants never intended to issue the options to the Plaintiffs, each of them received written communications acknowledging that they had been awarded options on a specific number of shares. It is further alleged that beginning in October 2000, Plaintiffs were told that they would receive options for Primedia stock rather than stock in their particular internet subsidiary company. Statements that at least some of the Plaintiffs would receive Primedia stock options continued to be made until July 2001. However, the Plaintiffs never received their stock options.
There are letters to four of the Plaintiffs confirming the stock options, annexed to the Amended Complaint. There is no letter for the fifth Plaintiff, Kristine Griscom, but the Complaint alleges that she received confirmation of her options by e-mail.
Analysis of the adequacy of these allegations of fraud must begin with the recognition that:
we must not mistake the relaxation of Rule 9(b)'s specificity requirement regarding condition of mind for a "license to base claims of fraud on speculation and conclusory allegations," Wexner v. First Manhattan Co., 902 F.2d 169, 172 (2d Cir. 1990). Accordingly, plaintiffs must allege facts that give rise to a strong inference of fraudulent intent. Shields, 25 F.3d at 1128; accord Mills, 12 F.3d at 1176; O'Brien, 936 F.2d at 676 ; Ouaknine v. MacFarlane, 897 F.2d 75, 80 (2d Cir. 1990). "The requisite `strong inference' of fraud may be established either (a) by alleging facts to show that defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness." Shields, 25 F.3d at 1128.Acito v. IMCERA Group, Inc. 47 F.3d 47, 52 (2d Cir. 1995).
The allegations of the Amended Complaint totally fail to provide a "strong inference of fraudulent intent." Viewed solely on the canvas of the Amended Complaint, the allegations that options were promised and never delivered might provide some slight inference that the Defendants never intended to fulfill their promise. However, as Judge Batts of this Court observed in CSI Inv. Partners II, L.P. v. Cendant Corp., 180 F. Supp.2d 444, 463 (S.D.N.Y. 2001):
The simple fact of nonperformance of a promise is insufficient to raise an inference of fraud. Fisk, 927 F. Supp. at 726. "A contract may be breached for legitimate business reasons. . . . Contractual breach, in and of itself, does not bespeak fraud. . . . Mills, 12 F.3d at 1176.
While the Court must accept the specific factual allegations of the Amended Complaint as true, in determining the inferences to be drawn from those facts, the Court need not blind itself to facts that can be judicially noticed. Ohio Bell Tel. Co. v. Public Utils. Comm'n of Ohio, 575 S.Ct. 724, 729 (1937) ("Courts take judicial notice of matters of common knowledge.").
Viewed in the context of the well-publicized dot.com boom and bust that occurred during 1999 and 2000, the fact that Plaintiffs never received options for working in these dot.com companies does not support an inference that the Defendants engaged in the massive conspiracy to defraud which the Plaintiffs purport to allege.
Given what happened in the dot.com world in 1999 and 2000, there is no reason to suspect that the Defendants were not speaking truthfully in 1999 when they told Plaintiffs that they intended to take the individual dot.com subsidiaries public and that Plaintiffs would have options of the stock at 50 cents a share. Indeed, the Complaint alleges that other companies were attracting employees to dot.com companies by promising them stock options which would make them rich when the dot.com company succeeded. Since the options were confirmed in writing and would not vest for at least a year, there is nothing suspicious in the fact that the paper work for the options was not completed during that period. However, a year later when the options would first vest, the internet bubble of 1999 had begun to burst and the prospect of taking a dot.com subsidiary public was no longer viable. It was at this point, according to the Complaint, that the Defendants began talking about providing the Defendants with options on Primedia rather than the particular dot.com subsidiary. Given the obvious difficulty of calculating the value in late 2000 of an option granted in 1999 for a dot.com subsidiary, it does not bespeak fraud that the Defendants did not resolve this issue before the Plaintiffs' employment terminated. This is particularly true since the stock of Primedia leaped to a record high in early 2001 from which it quickly plummeted and then continued to decrease for the next three years.
Nothing about the facts alleged supports the inference that the Defendants' statements in 1999, that Plaintiffs would receive options on the stock of their dot.com subsidiary, were not made in complete good faith. Similarly, the fact that some of the Plaintiffs did not receive promised performance bonuses cannot sustain a claim of fraud absent some showing that a particular Plaintiff's subsidiary had achieved a level of success that would have justified the award of a bonus. Here, as inShields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1129 (2d Cir. 1994):
[Plaintiffs have] satisfied the Rule 9(b) pleading requirements concerning the "time, place, speaker, and sometimes even the content of the alleged misrepresentation." See Ouaknine, 897 F.2d at 79. What is lacking from all of [Plaintiffs'] allegations are particularized facts to support the inference that the defendants acted recklessly or with fraudulent intent.
Nor does the Complaint allege any facts suggesting that the Defendants had any motive to commit the massive fraud alleged. The mere fact that Defendants had a desire to see the company succeed does not provide a motive to engage in serious fraud. See San Leandro Emergency Medical Group Profit Sharing Plan v. Philip Morris Comps., Inc., 75 F.3d 801, 813-14 (2d Cir. 1996).
Since Plaintiffs have failed to plead mail or wire fraud with the specificity required by Rule 9(b), Plaintiffs' RICO claims, which provide the only basis for federal jurisdiction, must be dismissed. There is no reason for the Court to exercise its discretion to retain jurisdiction over Plaintiffs' state law claims. Therefore, the Complaint will be dismissed.
There remains only the question whether Plaintiffs should be given another opportunity to replead. Since Plaintiffs have already had a Complaint dismissed and been permitted to file an Amended Complaint, there is no reason to permit an additional amendment. Denny v. Barber, 576 F.2d 465, 471 (2d Cir. 1978). Given the blatant defects in the Amended Complaint, there is no reason to believe that the Plaintiffs could state a RICO claim were they given another chance.
It is therefore ordered that the Amended Complaint is dismissed with prejudice.