Cullen v. Paine Webber Group, Inc.

• Decision Date: 23 June 1988
• Docket Number: No. 87 Civ. 2048 (MEL).,87 Civ. 2048 (MEL).
• Citation: 689 F. Supp. 269
• Parties: Thomas P. CULLEN, Herbert J. Liem, Thomas A. Monahan, Brett Vieillard, and Geoffrey J. Winters, Plaintiffs, v. PAINE WEBBER GROUP, INC., d/b/a Painewebber, Inc., formerly d/b/a Paine, Webber, Jackson & Curtis, Inc., Donald E. Nickelson, Theodore M. Johnson, Steven C. Kraus, Richard Kaufman, Guy Archbold, and Robert J. Hume, III, Defendants.
• Court: U.S. District Court — Southern District of New York

689 F. Supp. 269

Thomas P. CULLEN, Herbert J. Liem, Thomas A. Monahan, Brett Vieillard, and Geoffrey J. Winters, Plaintiffs, v. PAINE WEBBER GROUP, INC., d/b/a Painewebber, Inc., formerly d/b/a Paine, Webber, Jackson & Curtis, Inc., Donald E. Nickelson, Theodore M. Johnson, Steven C. Kraus, Richard Kaufman, Guy Archbold, and Robert J. Hume, III, Defendants.

No. 87 Civ. 2048 (MEL).

United States District Court, S.D. New York.

June 23, 1988.

COPYRIGHT MATERIAL OMITTED

Chapman, Moran, Hubbard & Zimmerman, New York City, for plaintiffs; John H. Chapman, Brian E. Moran, of counsel.

Paul, Weiss, Rifkind, Wharton & Garrison, New York City, for defendants; Max Gitter, Mary E. Crawley, of counsel.

LASKER, District Judge.

Thomas P. Cullen, Herbert J. Liem, Thomas A. Monahan, Brett Vieillard, and Geoffrey J. Winters, all former brokers with Paine Webber Group, Inc., charge Paine Webber Group, Inc., together with six individuals who are or were employed at Paine Webber (collectively "Paine Webber"), with having fraudulently induced them to accept employment with Paine Webber in order to capture their client bases, all allegedly in violation of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-1968 (1982). The plaintiffs sue under § 1964(c), for injuries allegedly sustained by reason of violations of § 1962(a), (b), (c), and (d).

Defendants move to dismiss the complaint with prejudice for failure to state a claim upon which relief can be granted. Defendants also contend that the claims of Monahan, Cullen, and Vieillard are barred by the doctrine of res judicata and that collateral estoppel precludes the claims of Cullen and Vieillard;¹ the claims of Liem must be stayed pending arbitration; and the claims of Winters should be stayed pending the outcome of his state court action. The defendants' motion, with the exception of the request to stay Winters' claim, is granted.

I. BACKGROUND

The plaintiffs allege that, between July 1982 and January 1984, Paine Webber induced each of them to leave his employment to accept positions with the defendant company. Plaintiffs worked in different offices of Paine Webber, no plaintiff remaining in its employ for more than a year and a half. The first was hired in July 1982; all five had left Paine Webber by February 1985.

Plaintiffs maintain that defendants² promised numerous benefits including a substantial cash bonus, special executive titles, a forty-percent commission, the right to prospect nationally, and brokerage assistants—representations that they knew to be false but made in the hope of recruiting plaintiffs, who were reportedly highly successful brokers. The scheme, which is alleged to have involved acts of mail and wire fraud, was all done for the purpose of enabling Paine Webber to obtain the plaintiffs' client bases.

During their employment, Cullen, Liem, Winters, and Monahan purchased or sold securities for their clients or for themselves based on recommendations of Paine Webber, recommendations plaintiffs allege often were not researched and were in fact made to further Paine Webber's interest. More specifically, Paine Webber is said to have "forced" Liem, Winters, and Monahan to sell certain stocks that soon thereafter plummetted in price, causing plaintiffs financial and professional injury. By charging Cullen for losses sustained by Paine Webber from securities held in an errors account, Paine Webber is also said to have "extorted" funds from Cullen. Plaintiffs contend that these acts violated federal and state securities law.³

Because of the defendants' failure to provide the benefits and amenities promised, the plaintiffs were unable to perform their assignments and thus, according to the plaintiffs, were constructively discharged or, in the case of Winters, fired. In addition, Paine Webber allegedly refused to furnish Cullen with a clearance enabling him to maintain contact with his accounts, thereby facilitating Paine Webber's solicitation of his clients. Moreover, it is asserted that defendants defamed the plaintiffs in an attempt to misappropriate their clients.⁴ Defendants are also said to have withheld earnings of Cullen, Winters, Liem, and Monahan and to have retained some of Cullen's personal property.

After Monahan, Vieillard, and Cullen left Paine Webber, Paine Webber initiated arbitration proceedings against them, seeking to recover money allegedly due for losses charged to their errors accounts and on an agreement signed upon beginning employment. The agreement, characterized by defendants as a promissory note, provided that the signing employee would repay Paine Webber the amount advanced, which approached $300,000 for some of the plaintiffs, if, among other reasons, his employment was terminated within three years. One-third of the amount would be forgiven annually.

In each proceeding, the plaintiffs (in this action, but defendants in the arbitration) raised a variety of defenses and counterclaims, alleging among others, that they had been induced to accept employment at Paine Webber based on representations that had not been fulfilled. In the arbitration decisions announced on April 30, 1986, March 11, 1987, and June 24, 1987, respectively, Monahan's, Vieillard's and Cullen's counterclaims were dismissed and awards entered for Paine Webber. The judgment in the Monahan arbitration was confirmed on July 8, 1986 by the Supreme Court of New York.⁵

II. RICO

Because they are dispositive, only the following two of defendants' challenges to the sufficiency of plaintiffs' RICO claim are addressed: 1) that "the individual client bases and brokerage businesses" of the plaintiffs do not constitute an enterprise within the meaning of § 1961(4), and 2) that plaintiffs have not alleged a "continuing enterprise" as required by the law of this circuit.⁶

A. Enterprise

The complaint alleges two enterprises.

The racketeering activity herein complained of relates to enterprises, as defined in 18 U.S.C. § 1961(4), consisting of plaintiffs' individual client or customer bases and individual securities brokerage businesses or practices. Alternatively, it is alleged that the individual defendants and PAINE WEBBER comprise "a group of individual associations in fact comprising an enterprise" as defined in 18 U.S.C. § 1961(4).

Complaint at ¶ 19. Defendants argue that the brokers' client bases cannot constitute an "enterprise," which is defined to include "any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity." 18 U.S.C. § 1961(4).

In United States v. Turkette, 452 U.S. 576, 583, 101 S.Ct. 2524, 2528, 69 L.Ed.2d 246 (1981), the Court stated that an enterprise is "a group of persons associated together for the common purpose of engaging in a course of conduct." The enterprise is proved "by evidence of an ongoing organization, formal or informal, and by evidence that the various associates function as a unit." Id. Looking to Turkette, courts in this circuit have held that "for an association of individuals to constitute an `enterprise' for purposes of RICO, the individuals must share a common purpose to engage in a particular fraudulent course of conduct and work together to achieve such purposes." Moll v. U.S. Life Title Ins. Co., 654 F.Supp. 1012, 1031 (S.D.N.Y.1987) (citations omitted).

It cannot be said, under the standards of Turkette and Moll, that plaintiffs' individual client bases constitute an enterprise within the meaning of § 1961(4), any more than would, for example, a stamp collection. The clients of the broker-plaintiffs did not share a common purpose or associate together; their only link was their broker.⁷ See In re Cantanella and E.F. Hutton and Co., 583 F.Supp. 1388, 1426 (E.D. Pa.1984) (holding plaintiff failed to plead an enterprise because "no conceivable reading of the statutory definition would support a conclusion that securities accounts qualify as `enterprises'").

B. Continuity Requirement

Defendants also contend that the complaint must be dismissed because it fails to plead a "continuing" enterprise as required in this circuit to state a cause of action under RICO. Rather than "continuing," as that term has come to be understood in this circuit, the alleged enterprise had, according to the defendants, a single, short-term goal—namely, the recruitment and discharge of the plaintiffs.

In Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985), the Supreme Court, when considering the elements necessary to establish a pattern of racketeering, stated:

`The target of RICO is thus not sporadic activity. The infiltration of legitimate business normally 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.'

473 U.S. at 496 n. 14, 105 S.Ct. at 3285 n. 14 (quoting S.Rep. No. 91-617, p. 158 (1969) (emphasis added)).

The Second Circuit, interpreting Sedima, has held that "the inquiry as to relatedness and continuity is best addressed in the context of the concept of `enterprise' expressed in section 1962(c)" and has articulated the following pleading requirements as to an enterprise:

An enterprise is `a group of persons associated together for a common purpose of engaging in a course of conduct' and `is proved by evidence of an ongoing organization, formal or informal, and by evidence that the various associates function as a continuing unit.' United States v. Turkette, 452 U.S. 576, 583, 101 S.Ct. 2524, 2528, 69 L.Ed.2d 246 (1981). This circuit requires that, under section 1962(c), the enterprise be a continuing operation and that the acts be related to the common purpose.

United States v. Ianniello, 808 F.2d 184, 191 (2d Cir.1986), cert. denied, ___ U.S. ___, 107 S.Ct. 3229, 3230, 97 L.Ed.2d 736 (1987). In Ianniello, the enterprise,...