Babst v. Morgan Keegan & Co., Civ. A. No. 86-5614.

• Decision Date: 10 June 1988
• Docket Number: Civ. A. No. 86-5614.
• Citation: 687 F. Supp. 255
• Parties: Emile M. BABST, III, et al. v. MORGAN KEEGAN & COMPANY.
• Court: U.S. District Court — Eastern District of Louisiana

687 F. Supp. 255

Emile M. BABST, III, et al. v. MORGAN KEEGAN & COMPANY.

Civ. A. No. 86-5614.

United States District Court, E.D. Louisiana.

June 10, 1988.

Monroe & Lemann, Benjamin R. Slater, Jr., Michael R. O'Keefe, III, Mark E. Van Horn, New Orleans, La., for plaintiffs.

John C. Speer, Heiskell, Donelson, Bearman, Adams, Williams & Kirsch, Memphis, Tenn., Gibson Ochsner & Adkins, Tracey Noblitt, John Huffaker, Amarillo, Tex., and McGlinchey, Stafford, Mintz, Cellini & Lang, John Gregory Odom, Stephen W. Rider, New Orleans, La., for Perryton Feeders, Inc., Century Credit Corp. and Virl LaMunyon.

Phelps, Dunbar, Marks, Claverie & Sims, Jack M. Weiss, Trial Atty., Esmond Phelps, II, John P. Sneed, New Orleans, La., for Morgan Keegan & Co., Inc. and Allen J. Catalanotto.

Polack, Rosenberg, Rittenberg & Endom, Charles T. Curtis, Jr., New Orleans, La., for Rodney Hughes.

OPINION

ARCENEAUX, District Judge.

Currently before the Court is the motion of Morgan Keegan & Company, Inc., (Morgan Keegan) and Allen Catalanotto to dismiss the plaintiffs' RICO claims, and the motion of Perryton Feeders, Inc. (Perryton), Century Credit Corporation (Century), and Virl LaMunyon to dismiss all of the plaintiffs' claims against them. Below the Court discusses the merit of the motions.

FACTS:

The plaintiffs have sued the defendants under the Racketeering Influenced and Corrupt Organizations Act (RICO) and the federal securities laws for losses they allegedly sustained as a result of their investment in a cattle feeder investment program. According to the plaintiffs, in December of 1985, Allen Catalanotto, in his capacity as a vice-president of Morgan Keegan, solicited the plaintiffs to invest in a plan under which cattle would be purchased at the close of the year and would be sold at a break-even price in the following year. The effect of the transactions would be to defer for tax purposes until 1986, income earned in 1985. The plan required the plaintiffs to enter into contracts for the care and feeding of the cattle during the period between their purchase and their sale. In a meeting with the plaintiffs on December 23, 1985, Rodney Hughes of Agri-Capital Management, Inc. (Agri-Capital) allegedly made material misrepresentations as to the experience of persons involved in the feeding program and the availability of financing for the venture. The plaintiffs entered into an arrangement in which Agri-Capital would supervise and operate the cattle feeding program in exchange for a "consulting fee", as explained in a private offering memorandum prepared by Agri-Capital. (Doc. No. 13, Exhibit No. 15.) Hughes also allegedly required the plaintiffs to sign loan and security agreements with Century and its controlling shareholder, Virl LaMunyon.

The plaintiffs have alleged that Hughes, Agri-Capital, LaMunyon., Century and Perryton "conspired to defraud the plaintiffs by buying substantially more grain than was actually necessary to feed the cattle." In addition, the defendants allegedly sold the cattle "at higher prices than reported to plaintiffs and the advantage of the higher prices was given to cattle sales for the benefit of said defendants."

MOTIONS TO DISMISS RICO CLAIMS:

A. Pattern of Racketeering Activity

Morgan Keegan and Catalanotto first argue that the plaintiffs' RICO claims should be dismissed for failure to adequately plead a "pattern of racketeering activity." Morgan Keegan and Catalanotto point out that the plaintiffs have only alleged their involvement in three separate predicate acts, one of which was committed in December of 1985.

18 U.S.C. § 1961(5) provides as follows: A pattern of racketeering activity requires at least two acts of racketeering activity, one of which occurred after the effective date of this chapter and the last of which occurred within 10 years (excluding any period of imprisonment) after the commission of prior act of racketeering activity.

In Sedima S.P.R.L. v. Imrex Company, Inc., 473 U.S. 479, 105 S.Ct. 3275, 3285 n. 14, 87 L.Ed.2d 346 (1985), the Supreme Court explained that RICO "requires more than one `racketeering activity' and the threat of continuing activity to be effective. It is this factor of continuity plus relationship which combines to produce a pattern." However, in R.A.G.S. Couture, Inc. v. Hyatt, 774 F.2d 1350 (5th Cir.1985), the Court of Appeals for the Fifth Circuit adopted a broad definition of "pattern", finding that two related predicate acts of mail fraud could satisfy the pattern requirement. In Montesano v. Seafirst Commercial Corp., 818 F.2d 423, 426 (5th Cir.1987), another panel of the Fifth Circuit urged that the R.A.G.S. decision be overturned en banc. The court recognized that the precedent set in R.A.G.S. must be considered binding until overruled en banc. However, the court strongly urged that a stricter test be imposed under the pattern requirement. Focusing on the legislative history of RICO, the court stated that a series of acts which are simply "preparatory to a discrete accomplishment" cannot be considered a "pattern of racketeering activity." Id.

In the present case, because this Court remains restrained by R.A.G.S., the plaintiffs have satisfied the "pattern" requirement despite the minimal involvement of Morgan Keegan and Catalanotto.¹

B. Criminal Intent Required in Civil RICO Cases

In their second argument, Morgan Keegan and Catalanotto point out that the plaintiffs have failed to allege that they acted with criminal intent.² In their complaint, the plaintiffs alleged that each of the defendants acted with "either the intent to defraud or willful and reckless disregard for the plaintiffs' interests or with scienter." (Complaint p. 32.) However, in the RICO case statement, the plaintiffs stated with greater particularity the alleged misconduct of Morgan Keegan and Catalanotto. In describing the state of mind of these defendants, the plaintiffs alleged that they failed to exercise the appropriate standard of care under the circumstances: "if Catalanotto had exercised the fiduciary duties he owed to plaintiffs, he would have discovered (the falsity of certain statements he had made and the fact of a conspiracy among Hughes, Agri-Capital, LaMunyon, Century and Perryton)." (RICO case statement pp. 19, 20, 21.)

A necessary ingredient of every successful RICO claim is an element of criminal activity. In this case, the plaintiffs rely upon 18 U.S.C. § 1961(1)(D), which defines "racketeering activity" to include: "any offense involving ... fraud in the sale of securities ... punishable under law of the United States." It is clear that civil RICO requires that the defendant's state of mind be the same as that required in a criminal prosecution. See Armco, Indus. Credit Corp. v. SLT Warehouse Co., 782 F.2d 475, 485 (5th Cir.1986) (defendant could not be held liable as aider and abettor of mail fraud in civil action absent showing of criminal intent); Bender v. Southland Corp., 749 F.2d 1205, 1216 (6th Cir.1984) (plaintiff must allege intent to defraud for RICO mail fraud); Levine v. Merrill-Lynch, Pierce, Fenner & Smith, Inc., 639 F.Supp. 1391, 1395-96 (S.D.N.Y.1986) ("in order to charge Merrill-Lynch with a RICO violation, plaintiffs would have to plead facts that would give rise to criminal liability on its part for Scott's acts."); Frota v. Prudential-Bache Securities, Inc., 639 F.Supp. 1186, 1192 (S.D.N.Y.1986) (RICO securities violations must be criminal); Kronfeld v. First Jersey Nat. Bank, 638 F.Supp. 1454, 1471 (D.N.J.1986) (RICO securities violations must be willful).

The Fifth Circuit has found that civil liability may be imposed under the securities laws if the defendant knows of the falsity of the information, acts in reckless disregard of its falsity, or acts with intent to deceive. See First Virginia Bankshares v. Benson, 559 F.2d 1307, 1314 (5th Cir.1977). However, Morgan Keegan and Catalanotto argue that one may not be convicted for violations of the securities laws unless the defendants intended to commit acts prohibited by the securities laws. See United States v. Dixon, 536 F.2d 1388, 1397 (2nd Cir.1976) (act in violation of securities laws is done willfully "if done intentionally and deliberately and if it is not the result of innocent mistake, negligence or inadvertence.") In United States v. Boyer, 694 F.2d 58, 60 (3rd Cir.1982), the court upheld a jury charge given in a criminal securities case which stated that intent to deceive may be found from a material misstatement of fact made with reckless disregard of the facts. The court reasoned as follows:

There is no reason to suppose that in enacting criminal statutes prohibiting mail fraud or securities fraud the Congress intended that the substantive element of the offense — the scienter — should be different than from civil liability for fraud. We conclude, therefore, that inclusion in the change of a reference to reckless disregard of the facts was not improper.

See also United States v. Frick, 588 F.2d 531, 536 (5th Cir.) cert. denied, 441 U.S. 913, 99 S.Ct. 2013, 60 L.Ed.2d 385 (1979) (reckless indifference for the truth suffices for conviction under the mail fraud statute); Louisiana Power & Light v. United Gas Pipe Line, 642 F.Supp. 781, 803 (E.D. La.1986) ("`knowing intent to defraud' may be found when a defendant deliberately proceeds with reckless indifference for the truth, making representations that are baseless, and shutting his eyes to their probable falsity").

Fed.R.Civ.P. 9(b) provides that, "malice, intent, knowledge and other condition of mind of a person may be averred generally." The meager facts pleaded by the plaintiffs are minimally adequate to survive the current motion to dismiss since the court cannot say that reasonable jurors could not find the defendants' conduct to have been done in reckless disregard for the truth. Thus, the defendants' motion must be denied insofar as it is based upon failure of the plaintiffs to plead intent.³

C. Se...