Opinion
Civil Action No. 95-6617 (NHP).
April 6, 1999
Thomas H. Ehrhardt, Esq. LAW OFFICES OF SAMUEL A. MALAT, Haddon Heights, N.J. Attorneys for Plaintiffs.
Gary W. Stuhltrager, Esq., Deptford, N.J., Attorneys for Defendants.
LETTER OPINION ORIGINAL ON FILE WITH CLERK OF THE COURT
Dear Litigants:
This matter comes before the Court on defendants, Cardiff Broadcasting Group and Cardiff Partners "A"'s motion to dismiss the Amended Complaint of plaintiffs, Leslie O'Keefe, et al. This matter was decided without oral argument pursuant to Federal Rule of Civil Procedure 78. For the reasons set forth herein, defendants Cardiff Broadcasting Group and Cardiff Partners "A"'s motion to dismiss is GRANTED.
STATEMENT OF FACTS
Plaintiffs Leslie O'Keefe, et al., ("plaintiffs") allege that defendants, Cardiff Broadcasting Group and Cardiff Partners "A" ("Cardiff") were part of a fraudulent scheme wherein plaintiffs were solicited and induced to purchase "membership interests," or "units," in the Greater Columbian Basin Limited Liability Company ("Greater Columbian"), a Nevada limited liability company. See Amended Complaint, ¶ 44. The solicitation was purportedly an effort to raise funds to finance a wireless cable television system to be owned and managed by Greater Columbian in Walla Walla, Washington. See Amended Complaint, ¶ 44. Plaintiffs allege that the money was not used for that purpose but, instead, was illegally diverted to a company known as "Nationwide Wireless Company," a corporation which plaintiffs allege was created to form various limited liability companies for the purpose of promoting and selling securities in the form of the aforementioned "membership interests." See id., ¶ 17.
Defendant Cardiff Broadcasting is a California limited partnership doing business in Kennewick, Washington. Cardiff was the General Partner of Cardiff Partners "A," a limited partnership doing business in Kennewick, Washington which plaintiffs allege was the owner of various rights to wireless cable licenses represented to be the assets of Greater Columbian.
The sale of these units was advertised by Harry I. "Sonny" Bloch ("Bloch") on his nationally syndicated radio talk show, The Sonny Bloch Show. See id., ¶ 45. Bloch aired advertisements for these units on his radio station, urging listeners to call an "800" number and purchase units. See id. When the listeners called, they were put in contact with various telemarketers, who would echo Bloch's endorsements and entice people to invest in the business. See id. Plaintiffs allege that the marketing campaign resulted from the various defendants associating in fact in an enterprise which functioned as a continuing unit with an ascertainable structure.
The pertinent paragraphs of plaintiffs' Amended Complaint with respect to the alleged enterprise read as follows:
The thirty-two (32) named Defendants, eight (8) corporations, a partnership, and twenty-three (23) individuals . . . plus John Does which may later be identified, formed an association in fact constituting an "enterprise" within the meaning of 18 U.S.C. § 1961(4), which functions as a continuing unit with an ascertainable structure separate and distinct from that of the conduct of the pattern of racketeering activity, and distinct from the identity of any one person who is a part thereof.See Amended Complaint, ¶ 56.
The Defendants have engaged in a pattern of racketeering activity within the meaning of 18 U.S.C. § 1961(5), involving multiple predicate acts including wire fraud ( 18 U.S.C. § 1343), mail fraud ( 18 U.S.C. § 1341) and fraud in the sale of securities as is more fully set forth in paragraphs 82 through 96 with the purpose of disseminating information to the Plaintiffs which fraudulently misrepresented the offerings of unregistered securities.See Amended Complaint, ¶ 58.
Plaintiffs' attempt to tie Cardiff into this alleged conspiracy is based solely on the fact that Cardiff entered into a contract with Nationwide to sell its wireless cable licenses and equipment at the Kennewick, Washington site. See id., ¶ 50.
With respect to the specific RICO allegations as to Cardiff, the Amended Complaint reads:
65. CARDIFF received income directly from the pattern of racketeering in the form of payments from Nationwide, using funds received from the Plaintiffs, for a station that ultimately was never completed, and licenses which never came into the hands of the Greater Columbian investors.
* * * *
68. CARDIFF used the income, on information and belief, in the operation of the Yuma wireless cable station, which enabled the other Defendants to keep up the pretense and pretext of legitimacy as they continued to defraud additional investors of funds.
* * * *
71. CARDIFF participated directly or aided and abetted with intent to facilitate, in the operation or management of the Sonny Bloch Enterprises, by sending a representative to the Investors' Meeting of June 1994, Jack McCauly, who, by discussing technical aspects of the purported station and broadcast capability, lent credence and an air of legitimacy, to the fraud and lulled the Plaintiffs into anticipating that they would soon be operating the station, even as other Defendants were emptying the Nationwide bank account of funds.See Amended Complaint, ¶¶ 65, 68 and 71.
DISCUSSION
I. Rule 12(b)(6)
A Rule 12(b)(6) motion to dismiss should be granted when it appears beyond doubt that no relief could be granted under any set of facts which could be proved consistent with the allegations of that claim in the Complaint. Hartford Fire Ins. Co. v. California, 509 U.S. 764, 811 (1993). All allegations in the complaint must be taken as true, and reasonable factual inferences must be drawn in the plaintiff's favor.Gomez v. Toledo, 446 U.S. 635, 636 n. 3 (1980). The question in addressing such a motion is not whether the plaintiff will ultimately prevail, but whether the complainant can prove any set of facts that would entitle the complainant to relief. Schanzer v. Rutgers University, 934 F. Supp. 669 (D.N.J. 1996).
As more fully set forth herein, plaintiffs have failed to allege facts which would entitle them to relief against the aforementioned defendants.
II. RICO
Where a plaintiff claims a violation pursuant to the Racketeer Influenced and Corrupt Organizations Act ("RICO"), it must be pled with specificity pursuant to Federal Rule of Civil Procedure 9(b), which deals with fraud or mistake. See Cayman Exploration Corp. v. United Gas Pipe Line, 873 F.2d 1357, 1362 (10th Cir. 1989) (asserting that 9(b) is applicable to RICO predicate acts). The rule mandates that the actions establishing the fraud must be pled with greater particularity than other pleadings. Fed.R.Civ.P. 9(b). See also Saporito v. Combustion Engineering, Inc., 843 F.2d 666, 675 (3d Cir. 1988), vacated on other grounds, 489 U.S. 1049 (1989).
Rule 9(b) provides:
(b) Fraud, Mistake, Condition of the Mind . In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally.Fed.R.Civ.P. 9(b).
In this matter, plaintiffs allege in Counts One and Two of the Amended Complaint that Cardiff violated Sections 1962(a),(c), and (d) of the civil RICO statute. Cardiff contends, via motion to dismiss, that the allegations of RICO violations should be dismissed.
Section 1962(a) provides, in pertinent part:
It shall be unlawful for any person who has received any income derived, directly or indirectly, from a pattern of racketeering activity . . . to use or invest, directly or indirectly, any part of such income, or the proceeds from such income, in acquisition of any interest in, or the establishment or operation of, any enterprise which is engaged in . . . interstate or foreign commerce.18 U.S.C. § 1962(a).
"This provision was primarily directed at halting the investment of racketeering proceeds into legitimate businesses, including the practice of money laundering." Lightning Lube, Inc. v. Witco Corp., 4 F.3d 1153, 1188 (3d Cir. 1993) (citing Brittingham v. Mobil Corp., 943 F.2d 297, 303 (3d Cir. 1991) (quoting 11 Cong. Rec. 35, 199 (1970) (remarks of Rep. St. Germain), 11 Cong. Rec. 607 (1970) (remarks of Sen. Byrd))). Section 1962(a) "does not state that it is unlawful to receive racketeering income . . . [rather] the statute prohibits a person who has received such income from using or investing it in a proscribed manner." Lightning Lube, 4 F.3d at 1188 (citing Grider v. Texas Oil Gas Corp., 868 F.2d 1147, 1149 (10th Cir. 1989), cert. denied, 493 U.S. 820 (1989)).
In order to state a RICO claim against a defendant pursuant to § 1962(a), a plaintiff must allege that: (1) the defendant received money from a racketeering activity; (2) the defendant invested that money in an enterprise; and (3) the enterprise affected interstate commerce.Lightning Lube, Inc. v. Witco Corp., 4 F.3d 1153, 1188 (3d Cir. 1993) (citing Shearin v. E.F. Hutton Group, Inc., 885 F.2d 1162, 1165 (3d Cir. 1989)). See also Eli Lilly and Co., v. Roussel Corp., 23 F. Supp.2d 460, 486-87 (D.N.J. 1998). Finally, it is essential that a plaintiff also allege "an injury resulting from the investment of racketeering income distinct from an injury caused by the predicate acts themselves."Lightning Lube, 4 F.3d at 1188 (citing Glessner v. Kenny, 952 F.2d 702, 709 (3d Cir. 1991); Banks v. Wolk, 918 F.2d 418, 421 (3d Cir. 1991); Rose v. Bartle, 871 F.2d 331, 357-58 (3d Cir. 1989)).
In this matter, plaintiffs allege that Cardiff contracted with Nationwide to sell its wireless cable licenses and equipment at the Kennewick, Washington site. See Amended Complaint, ¶ 50. Plaintiffs aver that Nationwide paid Cardiff, pursuant to the terms of the contract, with funds received from plaintiffs — funds which plaintiffs allege were gathered as a result of a pattern of racketeering. Plaintiffs also allege that Cardiff used the income it receive from Nationwide towards the operation of the Yuma wireless cable station, which "enabled the other defendants to keep up the pretense and pretext of legitimacy as they continued to defraud additional investors of funds." See Amended Complaint, ¶ 68.
The specific language of the Amended Complaint reads:
[Cardiff] received income directly from the pattern of racketeering in the form of payments from Nationwide, using funds received from the Plaintiffs, for a station that ultimately was never completed, and licenses which never came into the hands of the Greater Columbian investors.See Amended Complaint, ¶ 65.
Assuming the aforementioned facts to be true, plaintiffs have not pled facts sufficient to indicate to this Court that they were injured as a result of Cardiff's use of the funds towards the Yuma operation. In other words, plaintiffs have not pled an injury separate and apart from the alleged racketeering acts themselves.
In the Amended Complaint, plaintiffs simply state:
72. Plaintiffs were injured in their business and/or property by reason of the above stated violations of 18 U.S.C. § 1962 (a) and (c), in that Plaintiffs were defrauded, some on repeated occasions, into paying funds for Units with no value, as Greater Columbian has no assets, no FCC licenses, no equipment with which to operate a wireless cable system; and the Units cannot be resold as they are unregistered with no resale market.See Amended Complaint, ¶ 72. The Complaint fails to allege that plaintiffs suffered any injury as a result of Cardiff depositing payments made by Nationwide, pursuant to the contract, into the Yuma operation. If plaintiffs were injured, it appears from the face of the Amended Complaint that plaintiffs were injured when they made the initial investments as a result of Sonny Bloch's recommendations — not when Cardiff secured partial payment from Nationwide in connection with a contract. Thus, plaintiffs' Section 1962(a) claim must be dismissed.
This Court cautions that it is not making a determination of the merits of plaintiffs' claims with respect to any of the defendants in this matter.
Section 1962(c) provides:
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 enterprises' affairs through a pattern of racketeering activity or collection of unlawful debt.18 U.S.C. § 1962(c).
First, a plaintiff must allege that an "enterprise" existed separate and apart from the person or entity alleged to be liable. Lightning Lube, Inc. v. Witco Corp., 4 F.3d 1153, 1191 (3d Cir. 1993). The definition of "enterprise" includes "any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity." 18 U.S.C. § 1961(4). In order to satisfy the "enterprise" claim of § 1962(c), a plaintiff must allege: "evidence of an ongoing organization, formal or informal" and "evidence that the various associates function as a continuing unit." United States v. Turkette, 452 U.S. 576, 583 (1981). Additionally, the enterprise must be shown to have an existence "separate and apart from the pattern of activity in which it engages." Id.
Second, a plaintiff must show that a defendant "agreed to participate." This requirement is met when a plaintiff alleges that a defendant conducted the enterprise by participating in its "operation or management." Reves v. Ernst Young, 507 U.S. 170, 185 (1993). See also University of Maryland v. Peat Marwick, Main Co., 996 F.2d 1534, 1538-39 (3d Cir. 1993). The Reves decision provides guidance on this issue:
Once we understand the word "conduct" to require some degree of direction and the word "participate" to require some part in that direction, the meaning of § 1962(c) comes into focus. In order to "participate, directly or indirectly, in the conduct of such enterprise's affairs," one must have some part in directing those affairs. Of course, the word "participate" makes clear that RICO liability is not limited to those with primary responsibility for the enterprise's affairs, just as the phrase "directly or indirectly" makes clear that RICO liability is not limited to those with a formal position in the enterprise, but some part in directing the enterprise's affairs is required.Id. at 179 (footnote omitted).
Finally, a plaintiff must allege that a defendant participated in the enterprise "through a pattern of racketeering activity or collection of unlawful debt." 18 U.S.C. § 1962(c). In the Amended Complaint, plaintiffs allege that Cardiff participated in the "Sonny Bloch Enterprise," the alleged purpose of which was to "fraudulently induce individuals to pay funds for units of Greater Columbian Basin Limited Liability Company and then misappropriate the funds for the use of the Sonny Bloch Enterprise." See Amended Complaint, ¶ 56. Assumingarguendo that plaintiffs have sufficiently alleged that an enterprise did, in fact, exist plaintiffs have failed to satisfy the remaining elements of Section 1962(c).
Plaintiffs attempt to satisfy section 1962(c) as to Cardiff by asserting that:
93. On Sunday, June 12, 1994, an organizational meeting, ("the Meeting") of investors in Greater Columbian was held at the Radisson Airport Hotel in Newark, New Jersey. At the meeting, Jack McCauly, a representative of CARDIFF and/or one of its related entities, spoke to the assembled investors in great detail about the technical aspects of the purported wireless cable operation, and representing that the capability already did or would soon exist to broadcast 19 channels, and implying that the Plaintiffs would soon be utilizing that broadcast capability . . .See Amended Complaint, ¶ 93.
There is no allegation in the Amended Complaint, however, that anyone, let alone Cardiff, "managed" or "directed" the alleged enterprise. The Complaint only surmises that because Cardiff entered into a contractual arrangement with Nationwide, it too must be a part of the Sonny Bloch Enterprise. Plaintiffs simply fail to allege that Cardiff was directing the enterprise or was even being directed by one of the other parties. It is not enough that there are allegations that Cardiff was conducting its own affairs; it must be alleged that Cardiff was involved in the enterprise's affairs. Id. Finally, plaintiffs have not alleged that defendants participated in the enterprise through a pattern of racketeering activity or, at a minimum, a pattern of false representations made by Jack McCauly. Therefore, plaintiffs have not met the pleading requirement to allege a § 1962(c) cause of action against Cardiff.
Section 1962(d) provides:
It shall be unlawful for any person to conspire to violate any of the provisions of subsections (a), (b), (c) of this section.18 U.S.C. § 1962(d).
"Any claim under section 1962(d) based on conspiracy to violate the other subsections of section 1962 necessarily must fail if the substantive claims themselves are deficient." Lightning Lube, Inc. v. Witco Corp., 4 F.3d 1153, 1191 (3d Cir. 1993) (citing Leonard v. Shearson Lehman/American Express, Inc., 687 F. Supp. 177, 182 (E.D.Pa. 1988)). Therefore, because plaintiffs have failed to state a claim upon which relief could be granted under sections (a) and (c), plaintiffs' claim pursuant to 18 U.S.C. § 1962(d) should likewise be dismissed.
III. Securities Law Violations
In Counts IV, V, VI, and VII, plaintiffs allege various securities law violations pursuant to the Securities Acts of 1933 and 1934.
A. Counts IV and V: Sections 12(1) and 12(2) of the Securities Act of 1933
In order to be held liable under Sections 12(1) and 12(2) of the Securities Exchange Act of 1933 ("1933 Act") a person must be a "seller" of an unregistered security. See Securities Exchange Act of 1933, §§ 12(1),(2), 15 U.S.C. § 771 (1999). In Pinter v. Dahl, 486 U.S. 622, 647 (1988), the United States Supreme Court stated that although the language of Section 12(1) "contemplates a buyer-seller relationship not unlike traditional contract privity," see id. at 642, the scope of Section 12(1) is not limited to those who pass along the title. Id. at 642-47. Instead, the Court opined that the term "seller" in the context of Section 12(1) consists of: (1) "the owner who passed title, or other interest in the security, to the buyer for value" and (2) "the person who successfully solicits the purchase, motivated at least in part by a desire to serve his own financial interests or those of the securities owner." See id. Therefore, according to Pinter, both direct sellers and a person who engages in the active solicitation of an offer to buy can be "sellers" for purposes of Section 12(1). Later, in In re Craftmatic Securities Litigation, 890 F.2d 628, 635 (3d Cir. 1989), the Third Circuit held that the Supreme Court's definition of "seller" set forth inPinter applied to actions brought pursuant to Section 12(2) of the 1933 Act. In re Westinghouse Securities Litigation, 90 F.3d 696, 716 (3d Cir. 1996).
To survive a motion to dismiss, a plaintiff must sufficiently allege facts in the Complaint showing that a defendant was a "seller" of securities. In re Westinghouse Securities Litigation, 90 F.3d 696 (3d Cir. 1996) (holding that plaintiffs sufficiently alleged a cause of action pursuant to Section 12(2) against defendants when they alleged defendants "solicited plaintiffs" to purchase securities "and that they were motivated by a desire to further their own financial interests.").See also In re Laser Arms Corp. Securities Litigation, 794 F. Supp. 475, 482 (S.D.N Y 1989), aff'd, 969 F.2d 15 (1992) (holding that Complaint did not sufficiently allege a cause of action pursuant to Section 12(1) against broker dealers because no "purchase" of unregistered securities was alleged).
In this matter, plaintiffs state in Counts IV and V that defendants, including Cardiff, were sellers within the meaning of the Act. However, plaintiffs' blanket allegation is insufficient; plaintiffs must allege facts to support an allegation that Cardiff is a direct seller of securities or that Cardiff solicited the purchase of the membership interests motivated, at least in part, by a desire to serve its own financial interests or those of the securities owner. For example, there is no factual allegation that Cardiff gave plaintiffs a prospectus which induced them to purchase the membership interests. Likewise, there are no allegations that Cardiff or its representatives made oral representations to induce the purchase of the membership interests. The Court cannot simply assume, without any factual allegations, that Cardiff is a "seller."
The sole factual allegation in the Amended Complaint tying Cardiff into this claim is that Jack McCauly, as a representative of Cardiff, attended an organizational meeting of investors in Greater Columbian at the Radisson Airport Hotel in Newark, New Jersey. In the Amended Complaint, plaintiffs allege that Jack McCauly, "spoke to the assembled investors in great detail about the technical aspects of the purported wireless cable operation, and represent[ed] that the capability already did or would soon exist to broadcast 19 channels, and impl[ied] that the Plaintiffs would soon be utilizing that broadcast capability . . ." See Amended Complaint, ¶ 93. However, plaintiffs do not allege that Jack McCauly made any representations beyond the "technical" aspects of the cable operation. Simply stated, plaintiffs do not allege that Cardiff, via Jack McCauly, solicited plaintiffs to purchase the membership interests.
It is clear from the face of the Complaint that plaintiffs have not sufficiently alleged that Cardiff is a "seller" of securities and, therefore, have not alleged any facts which would entitle them to relief. Thus, Counts IV and V of plaintiffs' Amended Complaint must be dismissed.
B. Counts III, VI and VII: Fraud; Section 10(b), 15 U.S.C. § 78b, and Rule 10b-5 Promulgated thereunder, 17 C.F.R. § 240.10b-5
Federal Rule of Civil Procedure 9(b) mandates that the actions establishing fraud must be pled with greater particularity than other pleadings. See Fed.R.Civ.P. 9(b). The Third Circuit has explained that Rule 9(b) requires a plaintiff to plead: "(1) a specific false representation of material fact; (2) knowledge by the person who made it of its falsity; (3) ignorance of its falsity by the person to whom it was made; (4) the intention that it should be acted upon; and (5) that the plaintiff acted upon it to his damage." In re Westinghouse Securities Litigation, 90 F.3d 696, 710 (3d Cir. 1996).
Similarly, to state a claim pursuant to Section 10(b) of the Securities Exchange Act of 1934 ("1934 Act") and Rule 10b-5, a plaintiff must allege with particularity the facts and circumstances constituting fraud. See Securities Exchange Act of 1934, § 10(b), 15 U.S.C. § 78j(b) (1999). See also Fed.R.Civ.P. 9(b). More specifically, the Third Circuit has held that in order for a private plaintiff to plead a securities fraud claim under Section 10(b) and Rule 10b-5, a plaintiff must allege: (1) that the defendant made a misrepresentation or omission; (2) of a material fact; (3) with knowledge or recklessness; (4) that the plaintiff reasonably relied on the misrepresentation or omission and (5)(6) as a result of that reliance, plaintiff suffered damage. In re Westinghouse Securities Litigation, 90 F.3d 696, 710 (3d Cir. 1996).
In this matter, plaintiffs have not alleged that Cardiff or any of its agents made any representations. The one factual allegation set forth in the Amended Complaint which attempts to secure Cardiff's role in this matter is set forth in ¶ 93 of the Amended Complaint. That paragraph alleges that Jack McCauly, as a representative of Cardiff, attended an organizational meeting of investors in Greater Columbian at the Radisson Airport Hotel in Newark, New Jersey and spoke about the technical aspects of the purported wireless cable operation. Once again, however, this allegation is insufficient since plaintiffs do not allege that Jack McCauly made any misrepresentations. See Amended Complaint, ¶ 93. Therefore, Counts III, VI and VII must be dismissed.
Since this Court has dismissed plaintiffs' entire Amended Complaint as to Cardiff, this Court declines to impose a constructive trust and to issue a permanent injunction as to Cardiff. See Amended Complaint, Counts X and XI.