Richardson Greenshields Securities v. Mui-Hin Lau

• Citation: 693 F. Supp. 1445
• Decision Date: 29 July 1988
• Docket Number: No. 84 CIV. 6134 (SWK).,84 CIV. 6134 (SWK).
• Parties: RICHARDSON GREENSHIELDS SECURITIES, INC., Plaintiff, v. MUI-HIN LAU, Ho Sih Fong, Kau-Ying Lau, Ying Lup Lau and Wai Yai Chi, Defendants and Third-Party Plaintiffs, YING TAK LAU, Additional Third-Party Plaintiff, v. Lavinia WU, Angelo Da Biero, George T. Hirai and Richard DiGiacomo, Third-Party Defendants. Daniel LAU, Plaintiff, v. RICHARDSON GREENSHIELDS SECURITIES, INC., Defendant.
• Court: U.S. District Court — Southern District of New York

693 F. Supp. 1445

RICHARDSON GREENSHIELDS SECURITIES, INC., Plaintiff, v. MUI-HIN LAU, Ho Sih Fong, Kau-Ying Lau, Ying Lup Lau and Wai Yai Chi, Defendants and Third-Party Plaintiffs, YING TAK LAU, Additional Third-Party Plaintiff, v. Lavinia WU, Angelo Da Biero, George T. Hirai and Richard DiGiacomo, Third-Party Defendants.

Daniel LAU, Plaintiff, v. RICHARDSON GREENSHIELDS SECURITIES, INC., Defendant.

No. 84 CIV. 6134 (SWK).

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

July 29, 1988.

Morgan, Lewis and Bockius, New York City by Peter G. McDonough, for plaintiff and third-party defendants.

Carey and Deinoff, New York City by Michael Q. Carey, for defendants and third-party plaintiffs.

MEMORANDUM OPINION AND ORDER

KRAM, District Judge.

Presently before this Court is plaintiff's motion (1) to strike the jury demand, (2) to dismiss certain counts of the counterclaims, the third-party complaint and the complaint brought by Daniel Lau ("Lau Complaint") pursuant to Federal Rule of Civil Procedure ("Rule") 9(b) and Rule 12(b)(6), (3) to order a more definite statements as to certain claims, (4) for summary judgment on certain counts of the Lau Complaint pursuant to Rule 56 and (5) for an order granting Rule 11 sanctions. Also before the Court are defendants' and third-party plaintiffs' cross-motions (1) for an order granting a jury trial pursuant to Rule 39(b), (2) for an order granting leave to amend the pleadings and (3) for leave to replead any claims dismissed without their consent.¹

Procedural Background

This action began in August, 1984, when Richardson Greenshields Securities, Inc. ("Richardson") brought this diversity action against the defendants seeking $167,212.48, plus interest and attorneys' fees. Defendants allegedly owed this amount for deficiencies in their commodities futures trading accounts held at Richardson. Plaintiff successfully applied for and received an order of attachment against certain properties of defendants. See Richardson Greenshields v. Lau, 651 F.Supp. 929 (S.D.N.Y.1986) (granting preliminary injunction). A bench trial began on January 26, 1987, but was stayed after four days by the Court of Appeals.

Defendants had previously moved to amend their answer to assert counterclaims against plaintiff, to assert third party claims and to join Daniel Lau as a defendant and third party plaintiff. This Court denied the motion in a Memorandum Opinion and Order. Richardson Greenshields v. Lau, 113 F.R.D. 608 (S.D.N.Y.1986). The Court, pursuant to the Second Circuit's direction, see 825 F.2d 647 (2d Cir.1987), granted defendants permission to file an amended answer and third-party complaint in late 1987. These new pleadings asserted claims based on the Commodity Exchange Act, 7 U.S.C. § 4 et seq., the Racketeer Influenced and Corrupt Organizations ("RICO") Act, 18 U.S.C. § 1961 et seq., and related common law claims. Daniel Lau subsequently filed a separate action against the third-party defendants and plaintiff, raising identical claims. The Court consolidated this action with the pending action, and now both are before the Court.

Richardson is a duly registered broker-dealer with its principal place of business in New York. The original defendants, Mui-Hin Lau, Ho Sih Fong, Kau-Ying Lau, Ying Lup Lau (a/k/a Michael Lau) and Wai Yau Chi, were all customers, at least nominally, of Richardson. Defendants contend that Ying Tak Lau (a/k/a Daniel Lau) was also a customer.² The Customers are citizens of various countries, including the United States, Canada and Hong Kong. The third-party defendants, Lavinia Wu, Angelo Da Biero, George Hirai and Richard DiGiacomo, all worked in various capacities for Richardson at times relevant to this action.³

Factual Background

The following discussion is based exclusively on the amended answer and third-party complaint as way of background to the motions to dismiss.⁴ In 1981, Lavinia Wu ("Wu") worked as a commodity broker for Prudential-Bache Securities, Inc. ("Bache") and supervised the opening of individual accounts at Bache for Mui-Hin Lau, Ho Sih Fong ("Fong") and Kau-Ying Lau, and a joint account for Michael Lau and Wai Yau Chi. In December, 1982, Wu informed Michael and Daniel Lau that she was leaving Bache and moving to Richardson. The Customers allege that Wu induced Michael and Daniel Lau to transfer from Bache to Richardson money and securities in the Bache accounts by making a series of misrepresentations as to her abilities to trade on their behalf at Richardson. The two Laus, with the help of Wu, closed all the Bache accounts without the knowledge of Mui-Hin Lau, Ho Sih Fong, Kau-Ying Lau or Wai Yau Chi, and opened four accounts at Richardson: a joint account in the name of Michael Lau and Wai Yau Chi, and one account each in the name of the other individuals (the "Richardson accounts"). The Customers allege that the Brokers knew that neither Michael nor Daniel Lau had any authority from the other named account holders to open the accounts or to authorize trades in the account, though the Brokers led Michael and Daniel Lau to believe that they did have such authority. With the guidance of Wu, Michael and Daniel Lau prepared inaccurate customer account forms and signed papers without authority. Richardson and the Brokers allowed Daniel Lau to control trading in the accounts even though they had no financial information concerning him. Richardson and DiGiacomo, Da Biero and Wu allegedly allowed the accounts to be opened in this way, based on false information, in order to increase the commissions which could be earned.

Trading in the four Richardson accounts began in January, 1983, and ended in July, 1984. Wu, exercising discretionary control over the accounts, made purchases and sales of commodities futures contracts in gold, platinum, silver and copper futures. Though trading occurred frequently, the Customers allege that none of the them other than Michael and Daniel Lau had knowledge of the trading. Wu continued to trade, even though margin calls exceeded known assets and even though she knew that Michael Lau was borrowing money to meet the margin calls. Alleged losses amounted to over two million, with commissions exceeding $55,000. Richardson liquidated the accounts in July, 1984 at a loss to the Customers.

Discussion

I. RICO

The RICO statute in question here, 18 U.S.C. § 1962(c), states:

It shall be unlawful for any person employed by or associated with any enterprise ... to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity ..."

The statute defines "enterprise" as "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). The statute defines "person" as "any individual or entity capable of holding a legal or beneficial interest in property". Id. at § 1961(3). The Customers allege that Richardson and the Brokers formed an enterprise that operated to induce them to transfer their accounts fraudulently from Bache to Richardson and then to engage in a fraudulent scheme to churn the accounts.

A. Defendants as "Enterprise" and "Person"

Plaintiff argues that the RICO claim⁵ should be dismissed because Richardson and the Brokers are named as both the RICO enterprise and the RICO persons, citing Bennett v. United States Trust Co., 770 F.2d 308, 315 (2d Cir.1985), cert. denied, 474 U.S. 1058, 106 S.Ct. 800, 88 L.Ed. 2d 776 (1986). In Bennett, the Second Circuit held that "under section 1962(c) a corporate entity may not be simultaneously the `enterprise' and the `person' who conducts the affairs of the enterprise through a pattern of racketeering activity." 770 F.2d at 315; see also Anitora Travel, Inc. v. Lapian, 677 F.Supp. 209, 219 (S.D.N.Y. 1988).

Richardson's and the Brokers' argument is without merit. In the amended pleadings, the Customers allege that "RICHARDSON, WU, DA BIERO, HIRAI and DIGIACOMO associated in fact, although not a legal entity, formed and constituted an enterprise ..." The enterprise is thus comprised of a corporation and a number of individuals, and is thus distinguishable from the facts of Bennett and Anitora, in which the enterprise itself was named as a defendant. The Second Circuit has recently stated that "we see no reason why a single entity could not be both the RICO `person' and one of a number of members of the RICO `enterprise'. The definitions of these terms are intentionally broad." Cullen v. Margiotta, 811 F.2d 698, 729-30 (2d Cir.1987), cert. denied sub nom. Nassau County Republican Committee, ___ U.S. ___, 107 S.Ct. 3266, 97 L.Ed.2d 764 (1987). The Cullen Court specifically explained that "though we rejected in Bennett the notion that an entity may be deemed `associated with' only itself, there is neither a conceptual nor a doctrinal difficulty in positing an entity associated with a group of which it is but a part." Id. Since each of the defendants, including Richardson, are named separately and each are only part of a larger enterprise, which is not itself named as a defendant, the Court finds that the pleadings satisfy the requirements of this Circuit.⁶

B. The Continuity Requirement

Richardson and the Brokers argue that the RICO claim is deficient since no continuing enterprise has been alleged. The Customers respond that the allegations set forth an eighteen month scheme involving two brokerage houses, six victims and four accounts at each brokerage house. The Customers also urge that the scheme threatened to continue into the future.

In Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496 n. 14, 105 S.Ct. 3275, 3285 n. 14, 87 L.Ed.2d 346 (1985), the Supreme Court noted that Congress did not intend the RICO sanctions to reach "sporadic activity" and decided that two unrelated predicate acts did not constitute a pattern. Instead, there must be "more than one `racketeering...