Hecht v. Commerce Clearing House, Inc.

Decision Date21 April 1989
Docket NumberNo. 86 CIV. 9839 (SWK).,86 CIV. 9839 (SWK).
Citation713 F. Supp. 72
PartiesJeffrey HECHT, Plaintiff, v. COMMERCE CLEARING HOUSE, INC., William Miller, Louis Ceccoli, and Stanley Stephens, Defendants.
CourtU.S. District Court — Southern District of New York

Michael Flomenhaft, New York City, for plaintiff.

Sidley & Austin by Theodore J. Theophilos, Kelley A. Cornish, New York City, by Lawrence I. Kipperman, Jean F. Holloway, Chicago, Ill., for defendants.

MEMORANDUM OPINION AND ORDER

KRAM, District Judge.

This action arises out of the civil remedies provision of the Racketeer Influenced and Corrupt Organizations Act of 1970 ("RICO"), 18 U.S.C. § 1964 (1984) and common-law principles of fraud and prima facie tort. Defendants have moved to dismiss the complaint for failure to state a claim upon which relief can be granted pursuant to Federal Rules of Procedure 12(b)(6) and for failure to plead fraud with particularity in accordance with Rule 9(b).

BACKGROUND1

Plaintiff Jeffrey Hecht ("Hecht") began working at defendant Commerce Clearing House ("CCH") in January, 1985 as a Candidate Sales Representative. Complaint ¶¶ 13-14. Prior to that time, defendant Stanley Stephens ("Stephens") held the same position at CCH and serviced the area Hecht took over. Complaint ¶ 34. Defendant William Miller ("Miller") was the District Sales Manager of the New York office and Second Vice President of CCH. Complaint ¶ 25. Defendant Louis Ceccoli ("Ceccoli") worked as an Assistant Manager of the New York office. Id. At all times, Stephens worked under the supervision of Miller and Ceccoli. Complaint ¶¶ 32-33.

After commencing work at CCH, Hecht allegedly learned of various fraudulent acts, including illegalities committed by defendants, their agents, servants and employees. Complaint ¶ 35. These acts included forgery of customer signatures on orders and/or confirmations, billing customers for orders lacking proper confirmation in violation of purported CCH procedures, and intentional and/or reckless disregard of subscription cancellation requests. Id. Plaintiff learned of these frauds from customers, some of whom advised Hecht of their refusal to purchase further from CCH until irregular and false overcharges from CCH were rectified. Complaint ¶¶ 36-37.

Hecht alleges that commissions he would have received from the renewal of fraudulently sold subscriptions would have represented income derived from the frauds committed by defendants. Complaint ¶ 87. Thus, "to preserve his earnings potential, comply with CCH manual of procedures, terminate the ongoing frauds, the protection, continuation and concealment of which would require his cooperation, Hecht sought the approval of CCH by Miller and Ceccoli of his effort to rectify the aforesaid fraudulent acts and the corresponding customer accounts." Complaint ¶ 97. Although Miller and Ceccoli allegedly confessed knowledge of the frauds, they suppressed Hecht's efforts to rectify them. Complaint ¶ 98.

Hecht was allegedly told by Miller and Ceccoli that in order to remain at CCH he had to cooperate with the "concealment and/or protection" of these frauds. Complaint ¶¶ 99-100. Because of his refusal to cooperate and his insistence that the defendants rectify the alleged frauds, Hecht claims that he was terminated for insubordination. Complaint ¶¶ 101-02.

DISCUSSION
Plaintiff Lacks Standing To Sue Under 18 U.S.C. § 1964(c) For Violations Of 18 U.S.C. § 1962

Plaintiff alleges five violations of 18 U.S. C. § 1962. Complaint ¶ 105.2 Civil RICO remedies are set forth in 18 U.S.C. § 1964(c) as follows:

Any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefor in any appropriate U.S. district court and shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney's fee.

Id. (emphasis added). In Sedima S.P.R.L. v. Imrex Co., 473 U.S. 479, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985), the Court elaborated on the standing requirement implicit in this provision of the statute as follows:

If the defendant engages in a pattern of racketeering activity in a manner forbidden by § 1962, and the racketeering activities injure the plaintiff in his business or property, the plaintiff has a claim under § 1964(c).... The plaintiff only has standing if, and can only recover to the extent that, he has been injured in his business or property by the conduct constituting the violation.

Id. at 495-96, 105 S.Ct. at 3284-85 (emphasis added).

In light of Sedima, "there are thus, two requirements for standing under § 1964(c): (1) the plaintiff must show that there has been a violation of § 1962, and (2) he must show that his injury was caused by the violation." Pujol v. Shearson/American Exp., Inc., 829 F.2d 1201, 1205 (1st Cir.1987). To show a violation of § 1962, the plaintiff must allege that the defendant committed at least two of the predicate acts described in § 1961(1). Id. Plaintiff alleges two predicate acts, mail fraud in violation of 18 U.S.C. § 1341 and wire fraud in violation of 18 U.S.C. § 1343. Thus, plaintiff has met this first requirement. The critical question in this case is whether plaintiff has alleged the requisite causal connection between the predicate acts and the plaintiff's injuries—his loss of a job and potential sales commissions—to meet the second requirement.

1. "Whistle Blowing" As Opposed To "Not Participating" In The Alleged RICO Violations

Plaintiff's argument that he has been injured in his business or property and thus has standing to sue under civil RICO rests on two allegations. First, plaintiff alleges that because of his insistence that defendants rectify frauds committed on customer accounts, he was terminated. Complaint ¶ 102. Second, plaintiff alleges that because he refused to cooperate with the concealment and/or protection of these frauds he was terminated. Complaint ¶ 100-01. The first allegation may be termed "whistle blowing", whereas the second allegation may be termed "not participating".

This Court has refused to recognize a plaintiff's standing for "whistle blowing", holding that the plaintiffs' injuries did not flow directly from the alleged predicate acts. Burdick v. American Express Company, 677 F.Supp. 228, 230 (S.D.N.Y.1988) (former Vice-President of American Express denied standing to sue where he was fired in retaliation for his complaints about Shearson's alleged illegal activities); see also Nodine v. Textron, 819 F.2d 347 (1st Cir.1987) (former employee of Textron denied standing to sue where he was fired for reporting an illegal customs scheme to his superiors); Morast v. Lance, 807 F.2d 926 (11th Cir.1987) (former bank employee denied standing where he was fired for reporting illegal bank transactions).

Alternatively, plaintiff argues that, unlike the above cases, he was also fired because he refused to participate in the continuing frauds against CCH customers. Pl.Supp.Mem. in Opp. at 3. In Cullom v. Hibernia National Bank, 859 F.2d 1211 (5th Cir.1988), the Fifth Circuit directly addressed the issue of whether a "non-participant" as opposed to a "whistle blower" should have standing to sue under civil RICO.

Cullom served as president and chief executive officer of Southwest National Bank ("SNB"). He alleged that SNB and three other banking companies created a fraudulent scheme to sell short-term loan participations to other banks in order to distort their financial conditions. One of the other banks asked SNB to facilitate a loan transaction of this type. Cullom was suspicious of the transaction and sought the advice of SNB's legal counsel. SNB's counsel refused to render an opinion on the matter so Cullom sought the advice of independent counsel. The independent counsel advised Cullom not to act without the advice of SNB's counsel. Ultimately, Cullom refused to participate in the scheme but SNB's loan committee voted, over his objections, to go forward with the transaction. After the vote, Cullom was told by SNB's legal counsel and a member of SNB's board of directors "not to make waves". Shortly afterward, he was asked to, and did resign. He was told that his resignation was requested because he refused to participate and cooperate in the loan participations and because he sought the advice of independent counsel. See id. at 1211-12.

The Cullom court rejected the plaintiff's contention that the factual distinction between being fired for blowing the whistle on a RICO violation as opposed to refusing to participate in a RICO violation bears legal significance. Id. at 1216. Like the plaintiff in Cullom, Hecht principally relies on Morast, supra, 807 F.2d 926 and Callan v. State Chemical Mfg. Co., 584 F.Supp. 619 (E.D.Pa.1984), to support his argument that a legal distinction exists between reporting a RICO violation and refusing to participate in one. The Cullom court found these cases unpersuasive and rejected the distinction the plaintiff was attempting to make. See Cullom, supra, 859 F.2d at 1217 n. 12. This Court concurs.

In Morast, the plaintiff was fired because of a conspiracy and the only way the defendants could continue their illegal scheme was to rid the bank of employees who would not go along with the plan. See Morast, supra, 807 F.2d at 933. The court stated that "Morast was not fired because he refused to participate in the bank's illegal scheme , and, therefore, Morast's injury, his discharge, did not flow directly from the predicate acts, the defendant's banking violations." Id. (footnote omitted).

Like the Cullom court, this Court does not read these statements to mean that "whistle blowers" do not have standing to sue while "non-participants" do. See Cullom, supra, 859 F.2d at 1217 n. 12. "Instead, given Morast's allegation that the bank had to rid itself of those who would not `go along' to continue its illegal scheme, we read this language as meaning that the only way the court could possibly find that Morast had standing was if he...

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3 cases
  • Cornetta v. Town of Highlands
    • United States
    • U.S. District Court — Southern District of New York
    • January 22, 2020
    ...been a violation of [ 18 U.S.C.] § 1962, and (2) he must show that his injury was caused by the violation." Hecht v. Comm. Clearing House , 713 F. Supp. 72, 74 (S.D.N.Y. 1989) (citation, alterations, and quotation marks omitted), aff'd , 897 F.2d 21 (2d Cir. 1990). The Second Circuit has ex......
  • Miller v. Helmsley, 89 Civ. 6148 (KC).
    • United States
    • U.S. District Court — Southern District of New York
    • August 29, 1990
    ...entities themselves. 3 For example, plaintiff claims that Burdick (as well as inter alia, the district court's decision in Hecht, 713 F.Supp. 72 (S.D.N.Y.1989), which was affirmed by the Second Circuit), is not applicable because Miller has not alleged that he is a "whistleblower." This arg......
  • Hecht v. Commerce Clearing House, Inc.
    • United States
    • U.S. Court of Appeals — Second Circuit
    • January 25, 1990
    ...U.S.C. Sec. 1964(c) (1988), as well as under common law theories of prima facie tort The district court, in Hecht v. Commerce Clearing House, Inc., 713 F.Supp. 72 (S.D.N.Y.1989), found that whether or not Hecht's injuries resulted from his "blowing the whistle" and insisting on correction o......

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