742 F.2d 408 (8th Cir. 1984), 83-1608, Alexander Grant and Co. v. Tiffany Industries, Inc.

• Citation: 742 F.2d 408
• Party Name: ALEXANDER GRANT AND COMPANY, Appellant, v. TIFFANY INDUSTRIES, INC., Farrell Kahn and Gail Martin, Appellees.
• Case Date: August 22, 1984
• Court: United States Courts of Appeals, U.S. Court of Appeals — Eighth Circuit

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742 F.2d 408 (8th Cir. 1984)

ALEXANDER GRANT AND COMPANY, Appellant,

v.

TIFFANY INDUSTRIES, INC., Farrell Kahn and Gail Martin, Appellees.

No. 83-1608.

United States Court of Appeals, Eighth Circuit

August 22, 1984

Submitted Jan. 13, 1984.

Rehearings and Rehearings En Banc Denied Oct. 31, 1984.

Walter M. Clark, Catherine D. Perry, St. Louis, Mo., for appellant; Armstrong, Teasdale, Kramer & Vaughan, St. Louis, Mo., Stanley Parzen, Mayer, Brown & Platt, Chicago, Ill., of counsel.

Kohn, Shands, Elbert, Gianoulakis & Giljum, Alan C. Kohn, Mark J. Bremer, Robert

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1. Useted, St. Louis, Mo., for Farrell Kahn.

Irl B. Baris, St. Louis, Mo., for Gail Martin.

Guilfoil, Petzall & Shoemake, Thomas J. Guilfoil, Jim J. Shoemake, St. Louis, Mo., for Tiffany Industries, Inc.

Before ROSS, JOHN R. GIBSON and BOWMAN, Circuit Judges.

JOHN R. GIBSON, Circuit Judge.

Alexander Grant and Company, a public accounting firm, appeals the dismissal of its complaint brought against its former client, Tiffany Industries, and certain Tiffany officials and employees under Title IX, the Racketeer Influenced and Corrupt Organizations (RICO) provision of the Organized Crime Control Act of 1970, Pub.L. 91-452, 84 Stat. 941, codified at 18 U.S.C. Secs. 1961-1968 (1982). The district court, 563 F.Supp. 35 (E.D.Mo.1982), relying on the Seventh Circuit's decision in Cenco, Inc. v. Seidman & Seidman, 686 F.2d 449 (7th Cir.), cert. denied, 459 U.S. 880, 103 S.Ct. 177, 74 L.Ed.2d 145 (1982), dismissed the complaint under Fed.R.Civ.P. 12(b)(6) on the ground that Grant lacked standing to sue under RICO's civil remedy provision. It also denied Grant's motion to file an amended complaint. Grant argues on appeal that the district court erred in dismissing its RICO claim and that it abused its discretion in denying Grant's motion to file the amended complaint. We reverse and remand for further proceedings.

Grant was retained by Tiffany from 1970 through May, 1978. In 1979, Grant filed an action under RICO's civil remedy provision, 18 U.S.C. Sec. 1964(c), against Tiffany, its president Farrell Kahn, and Kahn's secretary Gail Martin. Grant claimed that it was the target of a pervasive scheme of mail and wire fraud designed by the defendants to obtain a favorable audit for the fiscal year 1977. Tiffany allegedly sought the favorable audit to obtain credit on better terms and to mislead its stockholders and the Securities & Exchange Commission into believing that the company was financially healthy.

For purposes of reviewing the district court's dismissal of Grant's complaint under Fed.R.Civ.P. 12(b)(6), we must accept as true all of Grant's material allegations and liberally construe the complaint in its favor. Loge v. United States, 662 F.2d 1268, 1270 (8th Cir.1981), cert. denied, 456 U.S. 944, 102 S.Ct. 2009, 72 L.Ed.2d 466 (1982). The first allegation is that Kahn, in an effort to inflate the value of Tiffany inventory, falsely represented to Grant that Steelabrade Corporation, a supplier of products to Tiffany, held $500,000 worth of Tiffany inventory as of March, 1978. Grant requested confirmation of this claim from Steelabrade president James Murphy. Kahn and Martin, knowing Murphy would not comply, instead requested that he compile a schedule of all purchases of Steelabrade products by Tiffany during 1977. The two then attached a copy of Grant's confirmation request to the schedule and fraudulently inserted language above Murphy's signature stating that "[t]his inventory was at our premises at December 31, 1977, and March 1, 1978." These documents were then mailed to Grant.

Grant's second claim of fraud concerns an alleged sale of $3,500,000 worth of Tiffany products to the government of Nigeria. Grant learned through the course of its audit that a substantial portion of the products sold had not yet been purchased by Tiffany. Grant questioned whether Tiffany could, under these circumstances, record in its financial statements the substantial earnings resulting from this sale. In response, Tiffany personnel stated that the sale should be certified because they had issued purchase orders for the products as of June 30, 1977, and that the products were held by ten suppliers who were simply awaiting further shipping instructions. Grant requested confirmation of this claim from the ten suppliers. Kahn and Martin backdated purchase orders and mailed to Grant forged letters from the suppliers confirming the representations made by Tiffany personnel. Grant, still apprehensive, sought "reconfirmation" of

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the same information. Kahn and Martin then pressured six suppliers to sign and mail reconfirmation letters back to Grant.

Grant further asserts that Kahn and Martin typed two letters at Tiffany's St. Louis County offices allegedly from Nigerian bank officials. The two letters, one a forgery and the other "on information and belief" a forgery, represented that the two banks had extended $3,500,000 in loan commitments to the Nigerian government to enable it to purchase the Tiffany products. Grant also claims that Tiffany used false information to persuade four independent public accounting firms to certify the Nigerian sale, thereby pressuring Grant to do the same. These certifications were then mailed to Grant. By April 1978, Grant suspected that it was being defrauded and reported its concerns to the Securities & Exchange Commission as required by SEC regulations.

Grant concludes its complaint with the allegation that Tiffany's actions constitute a substantive RICO violation under 18 U.S.C. Sec. 1962(c). ¹ It asserts that mail fraud, 18 U.S.C. Sec. 1341, and wire fraud, id. Sec. 1343, are two of the acts included in the definition of "racketeering activity," ² that the defendants carried out two or more such acts within a ten-year period, thus establishing a "pattern of racketeering activity," ³ and that Tiffany is an interstate "enterprise" ⁴ conducted by defendants through a pattern of racketeering activity. Grant further asserts that it is entitled to civil damages for this violation under 18 U.S.C. Sec. 1964(c). ⁵

The district court denied Grant's motion to file an amended complaint. The amended complaint names additional Tiffany officials as defendants and recites the foregoing with far greater specificity and clarity. It also incorporates additional claims of fraud; the original complaint includes 26 acts of mail fraud and 4 acts of wire fraud while the amended complaint reveals 48 and 10 instances, respectively. Included in the amended complaint are the following additional allegations: (1) Tiffany officials were negotiating with seven insurance companies for $9,000,000 in loans when it discovered in June, 1977 that, if generally accepted accounting principles were used, it was operating at a loss for the year; (2) Tiffany officials forged at least some of the "reconfirmation" letters from those suppliers who either refused or ignored Kahn's request that they assure Grant that they held Tiffany inventory bound for Nigeria; (3) Tiffany officials forged a third letter and a telex from officers of Nigerian banks that confirmed the $3,500,000 loan commitment to the Nigerian government; and (4) Tiffany officials further defrauded Grant by representing that Tiffany "farm stores" held inventory in excess of its actual value. The officials also pressured the managers of these stores to send false certifications to Grant and to make phony offers to purchase their inventories at inflated prices.

Grant asserts that it was damaged in three respects as a result of Tiffany's fraudulent representations. First, it claims

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that it suffered "theft of services," i.e., the fraud required it to spend substantially more time on the Tiffany audit with a commensurate increase in fees, none of which have been paid. Second, it contends that the SEC investigation caused it to spend large amounts for attorneys' fees, document requests, and other expenses. Third, Grant argues that the fraud caused it to suffer damages to its business reputation.

I. Standing

The district court did not hold, nor does Tiffany argue, that Grant has failed to plead facts sufficiently alleging that Tiffany committed a substantive violation of RICO under section 1962(c). ⁶ Rather, the district court relied on Cenco and its holding that the accounting firm in that case suffered only "indirect" injury insufficient to grant it standing under section 1964(c). ⁷ Grant asserts that Cenco should not be adopted as the law of this circuit because its restrictive interpretation has no basis in the language or legislative history of RICO. It further argues that, in any event, this case is distinguishable from Cenco because Grant has been "directly" injured by Tiffany's fraudulent practices. Tiffany argues that Cenco was properly decided and that Grant has suffered the same indirect injury alleged by the accounting firm in that case. ⁸

We believe that Cenco is distinguishable from this case. In Cenco, the accounting firm of Seidman & Seidman was a co-defendant with Cenco, Inc., in a class action brought by persons who had purchased Cenco stock at allegedly inflated prices due to the company's fraudulent representations. The co-defendants cross-claimed against each other: Seidman argued that it too had been defrauded by Cenco and sought as damages under RICO indemnification for its liability to the shareholders. In this case, Grant seeks not indemnification but damages for the amount of its lost fees, the amount spent by reason of the SEC investigation, and the amount representing its loss of business reputation. We believe these are direct injuries, distinguishable from a claim for indemnification which, by its very nature, is secondary and indirect.

Second, and more compellingly, we are...