Harper v. New Japan Securities Intern., Inc.

• Decision Date: 18 August 1982
• Docket Number: No. CV 81-6564 AWT.,CV 81-6564 AWT.
• Citation: 545 F. Supp. 1002
• Parties: Alice M. HARPER, etc., Plaintiff, v. NEW JAPAN SECURITIES INTERNATIONAL, INC., et al., Defendants.
• Court: U.S. District Court — Central District of California

545 F. Supp. 1002

Alice M. HARPER, etc., Plaintiff, v. NEW JAPAN SECURITIES INTERNATIONAL, INC., et al., Defendants.

No. CV 81-6564 AWT.

United States District Court, C. D. California.

August 18, 1982.

Stephen P. Oggel, Ruben B. Brooks, Ronald W. Noya, Sullivan & Jones, James Howard, San Diego, Cal., for plaintiff.

Bruce A. Bevan, Jr., Marilyn B. O'Toole, Musick, Peeler & Garrett, Los Angeles, Cal., for defendants.

MEMORANDUM OPINION AND ORDER

TASHIMA, District Judge.

Plaintiff Alice M. Harper brings this action against defendants New Japan Securities International, Inc., New Japan Securities Co., Ltd. (collectively "New Japan") and New Japan's employees, Messrs. Nakanishi, Miyake, Bito, Shimidzu and Oshima, for violations of federal securities laws, the National Association of Securities Dealers ("NASD") suitability rules and the Racketeer Influenced and Corrupt Organizations Act ("RICO"), Title IX of the Organized Crime Control Act of 1970. 18 U.S.C. § 1961 et seq. State claims based on breach of fiduciary duty and fraud are also alleged.¹ New Japan has moved to dismiss plaintiff's RICO claim on the ground that it fails to state a claim upon which relief can be granted. Rule 12(b)(6), F.R.Civ.P.

The following allegations form the basis of plaintiff's claims. New Japan Securities International, Inc., is a Delaware corporation doing business as a securities broker/dealer in Los Angeles. New Japan Securities Co., Ltd., is a corporation centered in Tokyo, Japan, and is the parent of New Japan Securities International, Inc. In 1975, Harper opened accounts at both the Los Angeles and Tokyo offices of New Japan. Shortly thereafter, she opened a custodial account for her nephew at the Los Angeles office. Harper alleges that, beginning in 1978, defendants churned her custodial account through excessive purchases and sales. Upon discovering defendants' alleged misconduct, plaintiff filed this action seeking treble damages and one million dollars in punitive damages.

On March 29, 1982, defendants moved to dismiss plaintiff's RICO claim on the grounds that she had inadequately pleaded substantive violations of the statute under 18 U.S.C. § 1962 and that she had failed to allege how she was injured in her "business or property by reason of" a violation of RICO. 18 U.S.C. § 1964(c). The RICO claim was dismissed, but plaintiff was granted leave to amend.

An amended complaint was filed and defendants have again moved to dismiss on the ground that plaintiff has not alleged that she suffered any racketeering-type injury. According to defendants, the only injury alleged in the amended complaint is that which stems from the alleged securities violations and breaches of fiduciary duty. While violation of the securities laws is a predicate offense which constitutes a "racketeering activity" under RICO, 18 U.S.C. § 1961, defendants contend that, to state a claim under the RICO treble damages provision, a plaintiff must allege injury which is attributable to violation of RICO.

The issue raised by defendants' motion is one of first impression in this Circuit, although it has been the subject of several recent district court opinions in other circuits, as well as law review commentary.² While certain common threads of analysis run through the cases, the decisions are far from uniform. In light of the lack of binding precedent, the Court has reviewed the legislative history of RICO, as well as the decided cases and the commentary, in an effort to ascertain the proper construction to be given to § 1964(c). I conclude, for the reasons set forth below, that a RICO plaintiff must allege some injury which is attributable to or occurred "by reason of" a violation of RICO. Since plaintiff, after opportunity to amend, has made no such allegation, defendants' motion to dismiss should be granted.

I. RICO: POLICY AND MECHANICS

RICO is primarily a criminal statute aimed specifically at curtailing the infiltration of business enterprises by organized crime. As early as 1950,³ Congress was aware that members of organized crime, through infiltration of business enterprises, were able to obtain a "legitimate" source of income and, therefore, to conceal more effectively income obtained from unlawful activities. By enacting the Organized Crime Control Act of 1970, Congress sought to eradicate "organized crime in the United States by strengthening the legal tools in the evidence-gathering process, by establishing new penal prohibitions, and by providing enhanced sanctions and new remedies to deal with the unlawful activities of those engaged in organized crime." 84 Stat. at 923 (Statement of Findings and Purpose).

RICO provides substantial criminal penalties, 18 U.S.C. § 1963, harsh civil remedies which may be sought by the government, 18 U.S.C. § 1964(a) & (b), and a private right of action for treble damages to anyone injured "by reason of" a violation of the Act. 18 U.S.C. § 1964(c). Civil RICO, at 1101.

The substantive provisions of RICO prohibit the following activities:

(1) The use of income or proceeds from a pattern of racketeering activity by a principal in that activity to acquire an interest in or to establish an enterprise engaged in interstate commerce. § 1962(a).

(2) Acquisition of an interest in or control of an enterprise engaged in interstate commerce through a pattern of racketeering activity. § 1962(b).

(3) Operation of an enterprise engaged in interstate commerce through a pattern of racketeering activity. § 1962(c).

(4) Conspiracy to commit any of the above activities. § 1962(d).

Racketeering activity consists of a wide range of both federal and state offenses, ranging from bribery, 18 U.S.C. § 201, to any offense involving fraud in the sale of securities. 18 U.S.C. § 1961(1). A "pattern" of racketeering activity requires at least two acts of racketeering activity within ten years of each other, one of which must have occurred after the effective date of the statute, October 15, 1970. Each act of criminal activity is counted as an act of racketeering activity, even if numerous acts arise out of the same episode. United States v. Weatherspoon, 581 F.2d 595, 601-02 (7th Cir. 1978) (each mailing in furtherance of scheme to defraud counts as an act of racketeering activity).

The breadth and generality of RICO is apparent from the face of the statute. Read expansively, § 1964(c) would seem to permit every plaintiff who can allege the commission of two predicate acts to bring a cause of action for treble damages. The implications of such a result lead inevitably to the question of what Congress intended when it enacted § 1964(c).

II. LEGISLATIVE HISTORY OF RICO

In the early stages of its development, RICO was conceived as a supplement to the antitrust laws. The Kefauver Committee, which in 1950 disclosed the problem of the infiltration of business by organized crime, noted that once infiltration had occurred, criminal methods were used to create monopolies and unfair competition. S.Rep.No. 2370, 81st Cong., 2d Sess. 16 (1950). In 1967, a Presidential Commission recommended the adoption of regulatory measures to control infiltration by organized crime, and in so doing, noted the value of antitrust type remedies. President's Commission on Law Enforcement and Administration of Justice, The Challenge of Crime in a Free Society 190, 208 (1967).

In response to the Commission's recommendations regarding infiltration by organized crime, the 90th Congress introduced two bills. S. 2048 proposed an amendment to the Sherman Act prohibiting the investment or business use of unreported income.⁴ Techniques, at 72. S. 2049 was a bill independent of, but parallel to, the Sherman Act which would have allowed injunctive relief to the government and third parties, damages and costs to the government, and treble damages to the victims.⁵

These attempts to apply antitrust type statutes to organized crime were referred to the Senate Committee on the Judiciary, 113 Cong.Rec. 18007 (1967), but no action was taken. Techniques, at 78. The Antitrust Section of the American Bar Association took the position that RICO should be separated from the existing body of antitrust law. House Hearings on S. 30, 91st Cong., 2d Sess. 149 (1970). Several reasons were advanced for this position. First, the Antitrust Section believed that it was undesirable to co-mingle criminal enforcement goals with the goals of regulating competition. Second, litigants seeking to bring treble damage actions under RICO would be subject to stringent standing to sue and proximate cause requirements applicable in the antitrust context. Finally, it appeared undesirable to create the possibility that case law governing RICO actions, which might be heavily weighted in favor of the private citizen, would be transferred to the antitrust context. Id.

The 91st Congress continued the efforts of the 90th Congress to enact legislation aimed at curtailing infiltration of business by organized crime. Taking a somewhat broader approach, the Senate drafted an expansive criminal law reform statute covering general areas such as gambling, grand juries, immunity and recalcitrant witnesses. Techniques, at 79. The Senate, perceiving that the creation of a private treble damages action would necessarily require the resolution of complex legal issues such as standing to sue, proximate cause and statute of limitations, dropped the treble damages provision from the Act. Id. at 81-82, n.57.

The Senate bill was then sent to the House. While the House embraced the principle of the legislation, it introduced numerous parallel bills which varied in certain respects from the Senate version. The treble damages provision was re-introduced into the legislation. Notwithstanding commentary on the immense scope of the bill, the House declined to elaborate on the potential legal issues associated with the private treble damages provision. Id. at 97, nn.88, 90.

On October 12, 1969, the bill, as amended by...