Summary
dismissing a § 1962(c) claim where the complaint failed to allege that the defendant directed wrongful conduct
Summary of this case from First Capital Asset Mgmt. v. Satinwood, Inc.Opinion
95 Civ. 5191 (JFK).
July 31, 2001
For Plaintiff: SACHNOFF WEAVER, LTD., Chicago, IL.
Of Counsel: J. Samuel Tenenbaum, John W. Moynihan, Scott R. Drury, Beverly Bautista.
For Defendant Christopher M. Garvey: RUSSO BURKE, New York, NY.
Of Counsel: Joseph M. Burke.
For Defendant Steven Krysty: CLIFFORD L. DAVIS, White Plains, N.Y.
OPINION and ORDER
Before the Court are motions of Defendants Steven Krysty ("Krysty") and Christopher M. Garvey ("Garvey") to dismiss the first, third, fourth, fifth, sixth and seventh claims of the Second Amended Complaint, pursuant to Fed.R.Civ.P. 12(b)(6). For the reasons stated below, The Court grants both motions.
Background
The Court assumes familiarity with the facts discussed in its earlier opinions in this case and in the related cases, In Re Motel 6 Sec. Litig., 93 Civ. 2183 (JFK), and SEC v. Thrasher, 92 Civ. 6987 (JFK), and provides below only a rudimentary recitation of the facts as needed for this decision.
Plaintiffs allege that from July 1989 through August 1991, Defendants were members of an insider trading ring (the "Ring") that obtained material, non-public inside information regarding numerous public entities in order to engage in illegal insider trading in those entities' securities. According to the Second Amended Complaint, Defendant Garvey obtained employment as a paralegal at the law firm Skadden, Arps, Slate, Meagher Flom ("Skadden") in July 1989 in order to have access to material, non-public inside information pertaining to mergers, acquisitions and takeovers of public companies. See Second Am. Compl. ¶ 42. Garvey would provide this information to Defendant Darrin Gleeman ("D. Gleeman"), Garvey's roommate and friend, so that D. Gleeman could make trades based on the information and both would share in the profits. See id. ¶ 13, 42. D. Gleeman eventually brought his father, Defendant Seymour Gleeman ("S. Gleeman"), into the conspiracy, and, through S. Gleeman, Garvey's information was passed along to a complex chain of conspirators, many of whom did not know either the original source of the information or most of the other members of the conspiracy. See id. ¶¶ 44-52, 57.
Defendant Krysty was allegedly one of the "downstream" tippees who had been brought into the conspiracy by his cousin, Defendant Michael Borlinghaus ("Borlinghaus"); there are no allegations in the Second Amended Complaint that Krysty passed inside information along to anyone else. See id. ¶¶ 19, 75, 84, 151-52.
Although Plaintiffs allege that Garvey was the "primary original source" of the inside information central to the Ring's conspiracy, see id. ¶ 41, it is not alleged that all of the Ring's allegedly illegal trades were based on information supplied by Garvey. See, e.g., id. ¶ 51. The focus of this lawsuit concerns the Ring's alleged utilization of material, nonpublic information regarding the proposed acquisition of Motel 6, L.P., a Dallas-based national chain of owner-operated economy motels, by Accor, S.A., a French-based company.See id. ¶¶ 26, 86. Plaintiffs allege that the inside information regarding Motel 6 came not from Garvey but from Hugh Thrasher ("Thrasher"), executive vice-president of Motel 6 in charge of corporate communications at the time of the tender offer negotiations. Thrasher allegedly informed his friend Carl Harris, now deceased, about the tender offer negotiations, and Harris then allegedly sought to profit from that information by tipping others, including Gregg Shawzin ("Shawzin"), a commodities broker in California. See id. ¶¶ 111-12, 116. Shawzin allegedly tipped John Anderson, ("Anderson"), and members of the Ring learned of Thrasher's material, nonpublic information through Defendant Joseph P. Greenwald ("Greenwald"), who had been informed by Anderson. See id. ¶¶ 120, 122, 127.
Plaintiffs allege that during the Class Period, between May 18, 1990 a July 12, 1990 (the date Accor made a public announcement that it would make a tender offer for Motel 6), members of the Ring purchased Motel 6 stock or call options based upon the material, nonpublic inside information provided by Thrasher. See id. ¶ 33, 102. Plaintiffs sold Motel 6 shares and call options contemporaneously with Defendants' purchases of the same during the Class Period. Plaintiffs claim that through the insider trading in Motel 6 securities, Defendants generated illegal profits to the extent of several million dollars, and that Plaintiffs and the proposed class suffered millions of dollars in damages as a result of Defendants' misconduct. See id. ¶¶ 3-4. Based upon the insider trading ring's alleged activities, Plaintiffs filed this instant action stating claims for federal RICO violations, violations of § 10(b), Rule 10b-5, § 14(e), and Rule 14e-5 of the Exchange Act, as well as state law claims for common law fraud, unjust enrichment and violations of New York's Consumer Protection Act.
In an Opinion dated September 30, 1997, this Court dismissed all claims against Defendants D. Gleeman, S. Gleeman and Edwin Karger ("Karger") on the grounds that Plaintiffs failed to state a claim upon which relief may be granted, although Plaintiffs were granted leave to replead the first and fourth claims for relief. See Redtail Leasing, Inc. v. Bellezza, 95 Civ. 5191 (JFK), 1997 WL 603496 (S.D.N.Y. Sept. 30, 1997) ("Bellezza I"). Plaintiffs then filed their Second Amended Complaint, and, in a decision dated January 22, 1999, this Court granted the joint motion by D. Gleeman, S. Gleeman, and Karger to dismiss all remaining claims against them. This Court also granted Defendant David J. Simon's ("Simon") motion to dismiss all claims pending against him. See Redtail Leasing, Inc. v. Bellezza, 95 Civ. 5191 (JFK), 1999 WL 32941 (S.D.N.Y. Jan. 22, 1999) ("Bellezza II"). Relying on the Court's reasoning in these two prior opinions, Garvey and Krysty have now filed motions to dismiss the first, third, fourth, fifth, sixth and seventh claims of the Second Amended Complaint.
Standard of Review Under Rule 12(b)(6)
A motion to dismiss for failure to state a claim pursuant to Rule 12 (b)(6) of the Federal Rules of Civil Procedure should be granted only if it "`appears beyond doubt that the plaintiff can prove no set of facts in support of his claim that would entitle him to relief.'" Cooper v. Parsky, 140 F.3d 433, 440 (2d Cir. 1998), quoting Conley v. Gibson, 355 U.S. 41, 45-46 (1957). The factual allegations set forth in the complaint must be accepted as true, and the court must draw all reasonable inferences in favor of plaintiff. See Thomas v. City of New York, 143 F.3d 31, 37 (2d Cir. 1998). The issue on a motion to dismiss "is not whether . . . plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims," Villager Pond, Inc. v. Town of Darien, 56 F.3d 375, 378 (2d Cir. 1995) (citation omitted). Nevertheless, the complaint must contain allegations concerning each of material elements necessary to sustain recovery under a viable legal theory. See Connolly v. Havens, 763 F. Supp. 6, 9 (S.D.N.Y. 1991).
State Law Claims
In Bellezza I, this Court held that Plaintiffs' fifth claim under § 349(a) of the New York General Business Law must be dismissed because § 349(a) should not be applied to investment transactions in securities. See Bellezza I, 1997 WL 603496 at *6. In addition, this Court dismissed Plaintiffs' common law fraud claim; although reliance is an element of any claim for common law fraud, Plaintiffs had failed to allege facts to support a claim of actual, direct reliance on Defendants' material omissions. See id. at *7. This Court also dismissed Plaintiffs' seventh claim because Plaintiffs had not alleged any facts which showed the type of direct dealing or actual, substantive relationship which is required to assert a common law claim for unjust enrichment. See id. at *8. The Court's reasoning in Bellezza I applies equally to the claims asserted against Garvey and Krysty, and Plaintiffs acknowledge that there has been no change in the law since Bellezza I was decided. See Pls.' Mem. at 2. In fact, Plaintiffs oppose Garvey's and Krysty's motions simply by reasserting arguments which this Court has already rejected. These arguments are no more persuasive now than they were when first proffered; consequently, Garvey's and Krysty's motions to dismiss Plaintiffs' fifth, sixth and seventh claims are hereby granted.
Section 1962(b) — RICO Acquisition Claim
Plaintiffs' third claim for relief alleges a violation of 18 U.S.C. § 1962 (b), which provides:
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). As this Court held in Bellezza I, "[t]o state a claim under § 1962(b), a plaintiff must plead that they were injured by a defendants' acquisition of an interest in an enterprise, as distinct from an injury resulting from the pattern of racketeering activity, or commission of predicate acts." Bellezza I, 1997 WL 603496 at *3 (S.D.N.Y. Sep. 30, 1997) (emphasis added); see also Discon, Inc. v. Nynex Corp., 93 F.3d 1055, 1062-63 (2d Cir. 1996) (finding that the plaintiff did not state a claim under § 1962(b) because the plaintiff "has not alleged any injury stemming from the `acquisition or maintenance' of [the enterprise] by [the defendant], only injuries resulting from the commission of predicate acts"), vacated on other grounds, 525 U.S. 128 (1998); Katzman v. Victoria's Secret Catalogue, 167 F.R.D. 649, 657 (S.D.N.Y. 1996), aff'd, 113 F.3d 1229 (2d Cir. 1997).
In Bellezza I this Court dismissed the Plaintiffs' § 1962(b) claim against the Gleemans and Karger because Plaintiffs "offer[ed] no factual allegations to show how Defendants' acquisition of or maintenance of an interest in or control of the enterprise injured Plaintiffs in a manner distinct from the racketeering activity itself." Bellezza I, 1997 WL 603496 at *4. Plaintiffs' § 1962(b) claim against Garvey and Krysty fails for the same reason. Plaintiffs acknowledge that there has been no change in the law since Bellezza I was decided, see Pls.' Mem. at 2, and once again offer no new arguments in opposition to the instant motions to dismiss. The Court finds that Plaintiffs cannot state a cause of action under § 1962(b); accordingly, Garvey's and Krysty's motions to dismiss the third claim against them are granted.
Following the reasoning in Bellezza I, this Court later dismissed § 1962(b) claims against Defendant Simon as well. See Bellezza II, 1999 WL 32941 at *3, *6.
Section 1962(c) — RICO Conduct Claim
Plaintiffs' fourth claim for relief alleges a violation of 18 U.S.C. § 1962 (c), which 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 enterprise's affairs through a pattern of racketeering activity or collection of unlawful debt.18 U.S.C. § 1962(c)."In order to `participate, directly or indirectly in the conduct of such an enterprise's affairs,' one must have some part in directing those affairs," Reves v. Ernst Young, 507 U.S. 170, 180 (1993); liability under § 1962(c) "may not be imposed on one who merely `carries on' or `participates' in an enterprise's affairs,"Biofeedtrac Inc. v. Koliner Optical Enters. Consultants, S.R.L., 832 F. Supp. 585, 590-91 (E.D.N Y 1993)."As interpreted by courts in this district and others, the `operation and management' test . . . is a very difficult test to satisfy. . . . There is a "substantial difference between actual control over an enterprise and association with an enterprise in ways that do not involve control; only the former is sufficient under Reves.'" Schmidt v. Fleet Bank, 16 F. Supp.2d 340, 346 (S.D.N.Y. 1998) (citations omitted).
In Bellezza II this Court dismissed § 1962(c) claims against the Gleemans, Karger, and Simon, finding that the Second Amended Complaint did not allege that these defendants had a role in managing or directing the enterprise's affairs. See Bellezza II, 1999 WL 32941 at *5. Plaintiffs' Second Amended Complaint is similarly devoid of allegations suggesting that Garvey or Krysty had some part in managing or directing the enterprise's affairs, and following the reasoning in Bellezza II, it is clear that Garvey and Krysty did not manage or direct the enterprise's affairs and so cannot be liable under § 1962(c). Plaintiffs argue that, under United States v. Allen, 155 F.3d 35, 42 (2d Cir. 1998), the question of whether a defendant participated in the operation or management of the enterprise should presented to the jury. In Allen the Second Circuit held that a defendant's "commission of crimes that advance [an alleged RICO enterprise's] objectives must be assessed by a fact-finder to determine whether or not his criminal activity . . . constitutes participation in the operation or management of the enterprise's affairs." Id. The Second Circuit acknowledged, however, that, where the evidence is indisputable, a claim need not reach a jury.See id. (noting that the fact-finder's determination is necessary "[u]nless a civil RICO defendant is indisputably directing the affairs of the enterprise").
In this case, Garvey and Krysty indisputably did not direct the affairs of the enterprise. There are no allegations in the Second Amended Complaint that Garvey even knew about either the information leaked by Thrasher or about any resulting trades, and Plaintiffs clearly fail to allege that Garvey directed the conduct of the other members of the Ring with regard to the Motel 6 securities. While Plaintiffs allege that Krysty traded using material, nonpublic information regarding Motel 6, there is no allegation that he directed the insider trading of Motel 6 securities. Since the allegations against Garvey and Krysty do not to establish that these defendants directed part of the affairs of the Ring, Plaintiffs' § 1962(c) claims against Garvey and Krysty are dismissed.
Plaintiffs acknowledge that Garvey's participation in the Ring was similar to that of D. Gleeman, against whom Plaintiffs' § 1962(c) claim has already been dismissed. See Pls.' Mem. at 5 n. 2.
Plaintiffs admit that Krysty's involvement in the Ring was similar to that of a defendant in a related case who, like Krysty, merely traded using material, nonpublic information provided by others. See Pls.' Mem. at 5 n. 2 (citing In Re Motel 6 Sec. Litig., 94 Civ. 2183 (JFK), 2001 WL 336822 at *7 (S.D.N Y Apr. 5, 2001).
Section 1962(d) — RICO conspiracy claim
Plaintiff's first claim for relief alleges that Defendants engaged in a conspiracy to violate 18 U.S.C. § 1962 (b)-(c), in violation of § 1962(d). Section 1962(d) makes it "unlawful for any person to conspire to violate any of the provisions of subsections (a), (b), or (c) of this section." 18 U.S.C. § 1962 (d). Upon a careful review of the Second Amended Complaint, the Court finds that Plaintiffs have made no more than conclusory allegations with regard to the § 1962(d) claim against Garvey and Krysty; the factual allegations just do not support a claim that they conspired to violate § 1962(b) or § 1962(c) with respect to alleged insider trading in Motel 6 securities. Therefore Garvey's and Krysty's motion to dismiss Plaintiffs' first claim is granted.
Conclusion
For the reasons stated above, the Court grants Defendant Steven Krysty's and Defendant Christopher M. Garvey's motions to dismiss the first, third, fourth, fifth, sixth and seventh claims for relief. The remaining parties are reminded that a ready for trial date of October 1, 2001 has been set for this action.
SO ORDERED.