199 F.3d 961 (7th Cir. 2000), 99-1286, Brouwer v Raffensperger

Docket Nº:99-1286
Citation:199 F.3d 961
Party Name:VIRGINIA E. BROUWER, WESLEY BAXTER, ALBERTA E. HAESSIG, HARDY HICKS, JR., NATALIE HICKS, GERALD J. MOSS, VIOLA ROBINETTE, JUNE YOST, AND RUTH WILCHER, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS-APPELLANTS, V. RAFFENSPERGER, HUGHES & CO., CATHERINE L. BRIDGE, AND BARNES & THORNBURG, DEFENDANTS-APPELLEES
Case Date:January 13, 2000
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit
 
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199 F.3d 961 (7th Cir. 2000)

VIRGINIA E. BROUWER, WESLEY BAXTER, ALBERTA E. HAESSIG, HARDY HICKS, JR., NATALIE HICKS, GERALD J. MOSS, VIOLA ROBINETTE, JUNE YOST, AND RUTH WILCHER, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS-APPELLANTS,

V.

RAFFENSPERGER, HUGHES & CO., CATHERINE L. BRIDGE, AND BARNES & THORNBURG, DEFENDANTS-APPELLEES

No. 99-1286

United States Court of Appeals, Seventh Circuit

January 13, 2000

Argued September 30, 1999

Appeal from the United States District Court for the Southern District of Indiana, Indianapolis Division. No. 92-753-C-D/F--S. Hugh Dillin, Judge.

Anthony C. Valiulis (argued), Michael J. Freed, Much, Shelist, Freed, Denenberg, Ament & Rubenstein, Chicago, IL, for Plaintiffs-Appellants.

Roger L. Taylor (argued), Kirkland & Ellis, Chicago, IL, Anne H. Weinheimer, Indianapolis, IN, for Defendant-Appellee Raffensperger, Hughes & Company, Incorporated.

William P. Wooden (argued), Wooden & McLaughlin, Indianapolis, IN, for Defendants-Appellees Catherine L. Bridge and Barnes & Thornburg.

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Before Harlington Wood, Jr., Coffey, and Evans, Circuit Judges

Evans, Circuit Judge

Today we find ourselves looking at the intersection between a substantive RICO violation of 18 U.S.C. sec. 1962(c) (the Racketeering and Corrupt Organizations Act) and a conspiracy violation pursuant to sec. 1962(d), that is, trying to reconcile Reves v. Ernst & Young, 507 U.S. 170, 113 S.Ct. 1163 (1993), with Salinas v. United States, 522 U.S. 52, 118 S.Ct. 469 (1997). Our vehicle for trying to reconcile these cases is this suit brought by a class of unhappy investors against several defendants, including an underwriting firm and a law firm, growing out of work they did for an Indianapolis company called the Firstmark Corporation which is now bankrupt. The underwriting firm, a "Qualified Independent Underwriter" (a QIU in securities argot), is Raffensperger, Hughes & Co., Inc. which got out of the case on its motion to dismiss; Attorney Catherine L. Bridge and her law firm, Barnes & Thornburg of Indianapolis, were granted summary judgment. Motions to reconsider were filed, the last one based on what was then the new decision in Salinas. The motions were denied and this appeal was filed.

The issue in this case is, says the plaintiff-class, a purely legal one regarding the requirements for a RICO conspiracy violation under 18 U.S.C. sec. 1962(d), specifically, whether a party must agree to personally participate in the operation, management, or conduct of the racketeering enterprise for a conspiracy violation to exist under sec. 1962(d), as defendants claim and the district court found; or whether it is enough that a party agrees that some member of the conspiracy conduct or participate in the operation or management of an enterprise, as plaintiffs argue. It is not exactly a matter of first impression in this circuit, yet the starkness with which the issue is raised requires that we take a close look at several of our cases.

The district court's characterization of the facts1 is not disputed on this appeal; we will present only a very brief summary. Firstmark is an Indiana holding company whose subsidiaries engaged in various financial services. The conspiracy here is alleged to have begun around 1981 when two defendants, Leonard Rochwarger and William Smith (who have settled the claims against them, as have several other persons originally named as defendants), devised a plan for Firstmark to become a wholly owned subsidiary of Rockmont Corporation, of which Rochwarger was president and CEO. Firstmark immediately began to have serious financial trouble. In fact, the transaction caused what is described

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as "crushing debt." As a result, Rochwarger began to sell off Firstmark assets as well as debt securities, including commercial paper. Firstmark's troubles continued in 1986, and its value as a going concern dropped.

At this time it is alleged that Rochwarger and the other defendants devised a scheme to conceal the true financial condition of Firstmark by increasing the margin between the quantity of notes sold to investors and those redeemed by investors. Proceeds from the note sales were used to pay interest and principal on previously sold notes and to finance the sale of more notes. To do this, the conspirators are alleged to have deceived investors into purchasing new notes, rolling over current notes, or otherwise refraining from redeeming their notes. At the same time, insiders were siphoning off the assets of Firstmark. The result was an ever-growing pyramid of debt that forced Firstmark into bankruptcy in 1988. The plaintiff-class fell for the scheme and lost a bundle--$57 million.

The rules of the National Association of Securities Dealers require its members (such as Firstmark) to use the services of QIUs to perform due diligence on registration statements and to recommend a minimum yield for the sale of notes like the ones involved here. That's how Raffensperger became involved with Firstmark; then the Barnes & Thornburg law firm was hired to perform the due diligence that would be the basis for providing the minimum yields at which the notes would be sold. The allegations are that the yields bore no relation to reality. In fact, it is alleged that the yields were set deceptively low to make the notes appear less risky to elderly investors. It is also alleged that both defendants knew that the investors were likely, if not certain, to lose their entire investment. The law firm allegedly had three main...

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