In re Crazy Eddie Securities Litigation

• Decision Date: 16 June 1989
• Docket Number: No. 87 C 33.,87 C 33.
• Citation: 714 F. Supp. 1285
• Parties: In re CRAZY EDDIE SECURITIES LITIGATION.
• Court: U.S. District Court — Eastern District of New York

714 F. Supp. 1285

In re CRAZY EDDIE SECURITIES LITIGATION.

No. 87 C 33.

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

June 16, 1989.

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Rabin & Sirota (Howard B. Sirota, of counsel), New York City, for plaintiff Kaun.

Abbey & Ellis (Arthur Abbey, of counsel), New York City, for plaintiff Papastamatakis.

Milberg, Weiss, Bershad, Specthrie & Lerach (Michael C. Spencer, of counsel), New York City, for plaintiff Hoffman.

Akin, Gump, Strauss, Hauer & Feld (David A. Donohoe, Clinton R. Batterton, and Anthony T. Pierce, of counsel), Washington, D.C., and Pryor, Cashman, Sherman & Flynn (James A. Janowitz, of counsel), New York City, for defendant Crazy Eddie, Inc.

Kronish Lieb Wiener & Hellman (Justin N. Feldman, of counsel), New York City, for defendant Eddie Antar.

Friedman & Kaplan (Bruce S. Kaplan, of counsel), New York City, for defendants Kairey, Pasquariello, Zimel, Eddy Antar, Sam E. Antar, Solomon E. Antar, and Levy.

Sherman & Sterling (Kenneth M. Kramer, of counsel), New York City, and Davis, Markel & Edwards (Thomas Sweeney, of counsel), New York City, for defendant Peat Marwick Main & Co. NICKERSON, District Judge.

By Memorandum and Order dated December 30, 1988 (the December opinion), Bernstein v. Crazy Eddie, Inc., 702 F.Supp. 962 (E.D.N.Y.1988), familiarity with which is assumed, the court granted in part motions by various defendants to dismiss the complaint. Plaintiffs and cross-claimant Crazy Eddie, Inc. (Crazy Eddie), move to reargue that part of the order dismissing with prejudice their respective claims under § 1962(c) and (d) of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1961 et seq. (1982 & Supp. IV 1986). Defendant Peat Marwick Main & Co. (Peat Marwick) moves to reargue that part of the order denying its motion to dismiss the claims brought under § 12(2) of the Securities Act of 1933 (the Securities Act), 15 U.S.C. § 77a et seq. (1982 & Supp. IV 1986). Defendant Crazy Eddie moves to enforce a Memorandum of Understanding purporting to settle its claims with some plaintiffs. Peat Marwick and eight other defendants, Eddie Antar, Isaac Kairey, Steven Pasquariello, Carl G. Zimel, Eddy Antar, Sam E. Antar, Solomon E. Antar, and Edmond Levy (the individual defendants), renew their motion to dismiss Crazy Eddie's cross-claims.

I. The RICO Claims

In dismissing with prejudice plaintiffs' and Crazy Eddie's claims under § 1962(c) and (d) of RICO, the court relied on the Second Circuit's opinion in Beauford v. Helmsley, 843 F.2d 103 (2d Cir.1988). This court held that the alleged "discrete" and "finite" scheme, like the scheme alleged in Beauford, lacked sufficient continuity to state a claim under RICO. (The court also dismissed on other grounds claims under § 1962(a) and (b). The parties do not seek to revive those claims on this motion.)

In an en banc opinion the Court of Appeals later vacated the decision of the Beauford panel. 865 F.2d 1386 (2d Cir. 1989). Plaintiffs and Crazy Eddie now seek to reinstate or replead their RICO claims.

A. The Complaint Under the New Second Circuit Standard

Together with its companion opinion, United States v. Indelicato, 865 F.2d 1370 (2d Cir.1989) (en banc), the en banc decision in the Beauford case undermines the rationale stated in the December opinion for dismissing the § 1962(c) and (d) claims. In those cases, the Second Circuit established that "a RICO pattern may be adequately alleged without an allegation that the scheme pursuant to which the racketeering acts were performed is an ongoing scheme having no demonstrable ending point," so long as the acts of racketeering activity are "neither isolated nor sporadic." Beauford, supra, 865 F.2d at 1391; see also Indelicato, supra, 865 F.2d at 1383 (no need to allege "a scheme with no apparent termination date.... We doubt that Congress meant to exclude from the reach of RICO multiple acts of racketeering simply because they achieve their objective quickly or because they further but a single scheme."). This new reasoning by the Court of Appeals requires this court to reconsider its earlier decision.

Assuming for the moment that the securities fraud, mail fraud, and wire fraud alleged as predicate acts are well-pleaded, the court holds that they are sufficiently related and continuous to satisfy the new standard. The acts allegedly constituted part of an on-going scheme to defraud shareholders by fostering the false impression that Crazy Eddie was a rapidly growing company. The scheme was allegedly carried out over a period of years and presumably would have continued, albeit not indefinitely, if new management had not ousted the individual defendants. The racketeering acts were "neither isolated nor sporadic," and therefore constitute a "pattern of racketeering activity."

Eddie Antar argues that, because the ouster of the individual defendants eliminated any "threat of continuity" of racketeering activity, this case is distinguishable from the Beauford case, in which the court listed allegations suggesting such a threat of mail fraud. Beauford, supra, 865 F.2d at 1392.

It is true that the individual defendants can no longer pursue their fraudulent scheme. The court does not believe, however, that the language cited in Beauford precludes the finding of a pattern of racketeering activity merely because new management foiled those defendants' pursuit of their plan. If, for example, every member of an organized crime family were indicted, arrested, and held without bail, it would be fatuous to conclude that none of them could be prosecuted under RICO because they could no longer commit further misdeeds.

In the December opinion this court expressed concern that broad application of the civil RICO statute would ensnare many who have no connection and little if any similarity to its chief target, organized crime. Bernstein, supra, 702 F.Supp. at 981-82. The Second Circuit has concluded, however, that Congress intended this result: "Congress made the legislative judgment ... that in order to reach members of organized crime, it was worth reaching other offenders as well." Beauford, supra, 865 F.2d at 1393.

Since this court relied on precedents now effectively overruled, it vacates the December opinion to the extent that it dismisses with prejudice plaintiffs' and Crazy Eddie's § 1962(c) and (d) claims.

The individual defendants argue that those claims are nonetheless inadequate on other grounds.

B. Crazy Eddie's Cross-Claim Under RICO

The individual defendants urge that Crazy Eddie may not cross-claim under RICO because it cannot show the requisite "injury" stemming from the individual defendants' alleged scheme to inflate the price of Crazy Eddie securities.

Crazy Eddie says that the scheme caused harm of two kinds. First, the scheme harmed Crazy Eddie by eventually causing a dramatic drop in the price of its stock and damage to its credit rating, going-concern value, and business reputation. Second, the scheme harmed Crazy Eddie derivatively by perpetrating a fraud on plaintiffs for which Crazy Eddie may ultimately be liable.

To make out a civil RICO claim, a plaintiff must show that he has been "injured in his business or property by reason of a violation of section 1962." 18 U.S.C. § 1964(c). If a plaintiff can prove each element of a § 1962 violation, "the compensable injury necessarily is the harm caused by predicate acts sufficiently related to constitute a pattern, for the essence of the violation is the commission of those acts in connection with the conduct of an enterprise." Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 497, 105 S.Ct. 3275, 3285, 87 L.Ed.2d 346 (1985) (emphasis added).

The cross-complaint characterizes the individual defendants' acts as a "scheme to defraud shareholders and others relying on Crazy Eddie's public financial information." It alleges that in furtherance of this scheme the individual defendants "used the U.S. mails to deliver materially false and misleading information to the public," "used wire and interstate telephone communications," and "devised and participated in a fraud in the sales of securities."

The alleged predicate acts constituting the "pattern of racketeering activity" under RICO are thus not the doctoring of the books and thefts from inventory alleged in the complaint and admitted in Crazy Eddie's answer but the securities frauds and the use of the mails and wires to perpetrate frauds. The only "injury" for which Crazy Eddie could conceivably claim threefold damages under § 1964(c) is therefore not the amount it lost from the individual defendants' alleged thievery but whatever further injury is attributable to the revelation of the alleged frauds as reflected in Crazy Eddie's eventual loss of its business reputation, going concern value, and credit rating.

It is hard to see how Crazy Eddie could prove that it lost more from the public knowledge that it was run by alleged defrauders as well as alleged thieves than it would have lost had they been merely thieves. But because the case is still at the pleading stage the court will assume for the sake of argument that Crazy Eddie could make that showing and will address the question of whether the putative injury was "by reason of," that is, "caused" by, the predicate acts.

No doubt in a literal sense the web of causation of any injury is seamless and infinite. E.g., Bloom v. Bradford, 480 F.Supp. 139, 148 (E.D.N.Y.1979). But while RICO imposes liability for "indirect" as well as "direct" injury, "both direct and indirect injuries must be proximately caused" by the RICO violation. Sperber v. Boesky, 849 F.2d 60, 63, 64 (2d Cir.1988). That is but a shorthand way of saying that some practical boundary must be set to liability for indirect consequences of the RICO predicate acts, and set on the basis of the objectives of the statute, the foreseeable consequences of the acts, and their relationship to the loss...