Moore and Parry v. Painewebber

• Decision Date: 01 August 1998
• Docket Number: Docket No. 98-9426
• Citation: 189 F.3d 165
• Parties: (2nd Cir. 1999) ROBERT L. MOORE and JEANNETTE S. PARRY, Plaintiffs-Appellants, v. PAINEWEBBER, INC., Defendant-Appellee
• Court: U.S. Court of Appeals — Second Circuit

Page 165

189 F.3d 165 (2nd Cir. 1999)

ROBERT L. MOORE and JEANNETTE S. PARRY, Plaintiffs-Appellants, v. PAINEWEBBER, INC., Defendant-Appellee.

Docket No. 98-9426

August Term, 1998

UNITED STATES COURT OF APPEALS SECOND CIRCUIT

Argued: May 25, 1999

Decided: Aug. 20, 1999

Appeal from a judgment of the United States District Court for the Southern District of New York (Keenan, J.) dismissing the plaintiffs' RICO claims for failure to plead "loss causation."

Vacated and remanded.

CALABRESI, concurring in a separate opinion.

[Copyrighted Material Omitted] EDWARD LABATON, Goodkind Labaton Rudoff & Sucharow LLP, New York, NY (Joel Bernstein and James W. Johnson, of counsel); Frederick J. Keitel, III, Keitel and Keitel, Palm Beach, FL; Michael Hanzman, Hanzman Criden Korge Hertzberg & Chaykin, Miami, FL; Marc H. Edelson, Hoffman & Edelson, Doylestown, PA; Ira Neil Richards, Trujillo Rodriguez & Richards, LLC, Philadelphia, PA, for Plaintiffs-Appellants.

STEVEN M. BARNA, Wachtell, Lipton, Rosen & Katz, New York, NY (Jeffrey M. Wintner, Maria L. Sachs, Lara Adamsons, of counsel); Hannah Berkowitz, Jacqueline O. LiCalzi, PaineWebber Inc., New York, NY, for Defendant-Appellee.

Before: VAN GRAAFEILAND, CALABRESI, and STRAUB, Circuit Judges.

CALABRESI, Circuit Judge:

The plaintiffs, Robert L. Moore and Jeannette S. Parry, claim that PaineWebber, Inc., the defendant, disguised a life insurance policy as an investment package similar to an Individual Retirement Account ("IRA"), thereby tricking them into buying life insurance with funds that they would otherwise have used for IRAs or similar investments. Moore and Parry brought suit under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §1961 et seq., and for common-law fraud. The United States District Court for the Southern District of New York (Keenan, J.) dismissed the complaint pursuant to Fed. R. Civ. P. 12(b)(6). According to the district court, the plaintiffs had met two of the RICO statute's requirements by alleging that PaineWebber engaged in material misrepresentations and that those misrepresentations caused the plaintiffs to purchase the "investment package" at issue. To state a claim under RICO, however, a plaintiff must also allege that the defendant's unlawful acts were in a legal sense the cause of the plaintiff's economic loss. See, e.g., First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763, 769 (2d Cir. 1994). The district court held that Moore and Parry had failed to allege such "loss causation," and it therefore dismissed the complaint. We conclude that, if proved, the claims in the plaintiffs' complaint would show loss causation as required under RICO. We therefore vacate the judgment of the district court.

BACKGROUND

PaineWebber is a financial services company that offers a variety of investment and insurance opportunities to its clients. According to the complaint, changes in the federal tax code in the late 1980s prompted many investors to reduce the amount of money they put into IRAs, thus making the IRA business less lucrative for PaineWebber. At the same time (the plaintiffs claim), PaineWebber was searching for new ways to persuade people to buy life insurance. In order to recapture its lost IRA investment stream and to boost life insurance sales, PaineWebber allegedly decided to market a universal life insurance policy -- the "Provider" -- as if it were an IRA or an IRA substitute.

The plaintiffs assert that PaineWebber used a variety of deceptive techniques in its attempt to present the Provider as a kind of IRA. For example, PaineWebber is said to have advertised the Provider as a retirement savings plan offering "cash accumulation," competitive interest rates, and tax-advantaged status. The size of the investment that clients were told to make in their Provider accounts -- $2000 each year -- was allegedly chosen because $2000 is both the maximum and the typical amount that people contribute annually to IRAs. The complaint further charges that PaineWebber, in its marketing for the Provider, deliberately avoided insurance-associated terms like "premium" and instead used inappropriate words like "contribution" or "deposit." Finally, according to the plaintiffs, PaineWebber's internal training materials explicitly acknowledged that the targeted customer base could be easily persuaded to invest large amounts of money in the Provider, so long as the customers did not think of the Provider as a life insurance policy.

PaineWebber did tell its clients that purchasers of the Provider would get life insurance coverage. The plaintiffs claim, however, that this insurance was presented as an added benefit rather than the investment itself. In reality, the Provider was a universal life insurance policy and nothing more. It was of course true that, given the nature of universal life insurance, purchasers who put in money could, in the long term, take out cash. But the plaintiffs state that they would not have bought into the Provider if they had realized that all they were buying was a universal life insurance policy.

Moore and Parry are both PaineWebber clients who were sold the Provider package in 1989.¹ They both allege that they were approached by PaineWebber and told that the Provider would be a good replacement for their existing IRAs. Moore contributed $2000 to the Provider in 1989 and each year thereafter through the filing of the complaint in 1997. Parry contributed $2000 in each of 1989, 1990, 1992, and 1993. Both retain their "investments." Nevertheless, they assert that had they known what the Provider really was, they would have done other things with their money, such as put it in real IRAs.

After they had "invested" in the Provider, the plaintiffs received account statements in the mail, detailing the full range of the portfolios they held with PaineWebber. In these statements, PaineWebber listed the annual Provider "deposits" as part of the plaintiffs' holdings, along with their stocks, bonds, and so forth, as if the Provider were a cash savings plan. But the moneys paid for the Provider were not held as deposits in an account. They were, instead, used to pay insurance premiums on a universal life insurance policy. As a result, at least for the first several years, the cash value of the Provider was substantially less than the actual dollar amount contributed.

Before Parry bought the Provider, PaineWebber also sent her a chart showing the projected value of her universal life insurance policy.² This chart was labeled at the top, in capital letters, "CAPITAL GAINS (FLEXIBLE PREMIUM ADJUSTABLE BENEFIT LIFE INSURANCE POLICY)." The chart showed that the expected cash value of the insurance policy would be lower than Parry's cumulative deposits for seven years. Significantly, the chart did not state that the life insurance policy whose value it depicted was coextensive with, as opposed to being a component of, the Provider.

On September 9, 1996, Moore filed suit against PaineWebber in the Southern District of New York (Keenan, J.) on both a RICO and a common-law fraud theory. Judge Keenan dismissed the complaint pursuant to Rule 12(b)(6), finding that Moore had no standing to bring suit under RICO because, inter alia, he had failed to allege "loss causation," i.e., a sufficient causal relationship between PaineWebber's deceit and any losses Moore sustained. Judge Keenan did, however, grant Moore leave to replead his complaint.

On October 15, 1997, Moore filed an amended complaint with Parry as co-plaintiff. They set forth the allegations described above. Liability was again premised on RICO and common-law fraud under New York law. The plaintiffs claimed to have suffered damages because they were charged insurance premiums and commissions and because they forewent the (greater) benefits that would have accrued to them had they put their money in IRAs and other retirement savings plans (as they allegedly would have done had they known that the Provider was nothing but life insurance).

PaineWebber moved to dismiss for lack of subject matter jurisdiction under Rule 12(b)(1), for failure to state a claim under Rule 12(b)(6), and for failure to plead fraud with particularity as required by Rule 9(b). On September 24, 1998, the district court granted the motion.³ It explained that, to avoid dismissal, a RICO claim that asserts fraud as the injury-producing predicate act must (a) allege a material misrepresentation, (b) allege that this misrepresentation was a but-for cause of the plaintiffs' entering into the transactions at issue, (c) allege that the misrepresentation was the proximate cause of the losses the plaintiffs sustained, and (d) allege the fraud with the required particularity. The court found that the claimed attempt to conceal the fact that the Provider was merely universal life insurance was a material misrepresentation and that the plaintiffs had sufficiently asserted "transaction causation." It held, however, that the plaintiffs had not adequately pled "loss causation." Accordingly, Judge Keenan deemed it unnecessary to address whether the fraud had been pled with particularity. He declined to permit a further opportunity to amend, saying that the plaintiffs had had two chances and that the reasons they had been unable to plead loss causation were inherent in the facts of the case. Having dismissed the plaintiffs' federal claims, the district court also dismissed their pendent state law claims.

The plaintiffs now appeal.

DISCUSSION

We review a dismissal granted under Rule 12(b)(6) de novo, with all inferences drawn in favor of the nonmoving party. See Jaghory v. New York State Dep't of Educ., 131 F.3d 326, 329 (2d Cir. 1997).

The plaintiffs' theory of RICO liability is based on predicate acts of mail fraud in violation of 18 U.S.C. §1341 and wire fraud in violation of 18 U.S.C. §1343. For RICO liability to exist as a result of a violation of these statutes, the defendant must have...