Robinson v. Kidder, Peabody and Co., Inc., Civ. No. 87-CV-70302-DT.

• Decision Date: 02 July 1987
• Docket Number: Civ. No. 87-CV-70302-DT.
• Citation: 674 F. Supp. 243
• Parties: Linda Jane ROBINSON, Plaintiff, v. KIDDER, PEABODY AND COMPANY, INCORPORATED, and Terry Cross, Defendants.
• Court: U.S. District Court — Western District of Michigan

674 F. Supp. 243

Linda Jane ROBINSON, Plaintiff, v. KIDDER, PEABODY AND COMPANY, INCORPORATED, and Terry Cross, Defendants.

Civ. No. 87-CV-70302-DT.

United States District Court, E.D. Michigan, S.D.

July 2, 1987.

Gary Rossi, Bloomfield Hills, Mich., for plaintiff.

S. Allen Early, Detroit, Mich., for defendants.

ORDER AND OPINION

COHN, District Judge.

I.

This is an action under the Racketeer Influenced and Corrupt Organization Act (RICO), 18 U.S.C. § 1961 et seq., the 1933 Securities Act, 15 U.S.C. § 77a et seq., and the 1934 Securities Exchange Act, 15 U.S. C. § 78a et seq., together with pendent state claims. Plaintiffs, mother and daughter, allege that they were unsophisticated investors with no prior experience in the stock market. In 1979, plaintiffs opened one investment account each with Kidder, Peabody through its agent/broker, defendant Cross. They allege that Cross traded on the account for his personal benefit and without concern for plaintiffs' legitimate investment needs (i.e., "churning"). The relevant counts on the motion before the Court are Counts III and IV alleging violation of RICO (one count for each plaintiff).

On February 23, 1987, defendants moved to dismiss the RICO counts for failure to state a claim, Fed.R.Civ.P. 12(b)(6), or to require a more particular statement, Fed.R. Civ.P. 12(e). On March 5, plaintiffs filed a response arguing why the RICO counts met pleading standards. On March 11, the Court entered its standard order requiring that plaintiffs file a "RICO Case Statement" setting forth the factual and legal predicate for Counts III and IV. Plaintiffs filed their statement on March 26. Plaintiffs' RICO case statement indicates that they rely exclusively on 18 U.S.C. § 1962(c).¹ At this time, plaintiffs have no reason to believe that defendants violated 18 U.S.C. § 1962(a), (b), or (d) — the other major RICO provisions.

Defendants responded with a supplemental brief arguing that: 1) a "pattern" of racketeering has not been alleged because plaintiffs simply rely on one alleged scheme implemented through a few acts; 2) RICO requires the "enterprise" to be distinct from the defendants; and 3) the enterprise must have an existence separate and apart from the pattern of racketeering activity. On April 22, plaintiffs responded to defendants' supplemental brief. Argument was heard on the motion on June 1, followed by further argument on June 22 at the Court's request.

For the following reasons, defendants' motion to dismiss Counts III and IV in their entirety is DENIED, and defendant Kidder, Peabody's motion to be dismissed as a defendant is GRANTED. While an allegation of churning on two accounts states a "pattern" under RICO, the enterprise cannot be joined as a defendant. Further, while the legal entity of Kidder, Peabody is an enterprise distinct from the alleged pattern of racketeering, an amendment to state an association in fact enterprise between Cross and Kidder, Peabody would be futile since that enterprise would not have an existence apart from the alleged pattern of racketeering.

II.

A.

The first issue is whether the conduct of churning alleged by plaintiffs supports the RICO requirement of a "pattern." Section 1962(b) states that a "pattern of racketeering activity" requires at least two acts of racketeering activity. Section 1962(a) defines "racketeering activity" to include mail fraud, 18 U.S.C. § 1341, and wire fraud, 18 U.S.C. § 1343. Defendants do not challenge the sufficiency of plaintiffs' allegations of "predicate acts."

Plaintiffs allege that, from March of 1979 to July of 1984, defendants engaged in two or more² instances of fraud in the sale of securities. 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 discussed the previously unexplored "pattern" requirement. While not issuing a definitive interpretation of that requirement, the Court concluded that the two or more acts must not be isolated or sporadic. The test is "continuity plus relationship." Various factors include whether the criminal acts "have the same or similar purposes, results, participants, victims, or methods of commission, or otherwise are interrelated by distinguishing characteristics and are not isolated events." Id. at 496 n. 14, 105 S.Ct. at 3285 n. 14 (citation omitted).

The Court of Appeals for the Sixth Circuit has not interpreted the "pattern" requirement. Several judges of this district have interpreted it narrowly to require that the criminal acts be in furtherance of more than one criminal scheme. See National Business Funding, Inc. v. Custom Muffler Specialists, Inc., 675 F.Supp. 1080 (E.D. Mich. 1987); In re Evening News Ass'n Tender Offer Litigation, 642 F.Supp. 860 (E.D.Mich.1986); Zahra v. Charles, 639 F.Supp. 1405 (E.D.Mich.1986); Barris v. Farmer, slip op., No. 83-1873 (E.D.Mich. Nov. 17, 1986). However, in the wake of Sedima it is clear that a case-by-case analysis of the facts in each case is appropriate to a determination of whether the "pattern" requirement has been satisfactorily pleaded.

Despite the Supreme Court's invitation in Sedima's dictum to construe the "pattern" requirement narrowly, the trend in some courts has been in the opposite direction. In Morgan v. Bank of Waukegan, 804 F.2d 970, 975 (7th Cir.1986), the Court of Appeals for the Seventh Circuit held that the predicate acts need not "always occur as part of separate schemes in order to satisfy the continuity aspect of the pattern requirement...." Id. at 975-96. The test is whether the predicate acts "can fairly be viewed as constituting separate transactions, i.e., `transactions "somewhat separated in time and place."'" Id. (citations omitted). The Morgan court held that several acts of mail fraud constituted a "pattern" because they were distinct, some relating to separate foreclosure sales, while others were related to allegedly fraudulent statements made in connection with the original loan transaction involved there. This more liberal interpretation of RICO's "pattern" requirement has also found acceptance in other circuits. See Soper v. Simmons Int'l, Ltd., 632 F.Supp. 244, 250-55 (S.D.N.Y.1986) (discussing cases). But see Note, Civil RICO; Restrictive Interpretations of a "Pattern" in Light of Sedima, S.P.R.L. v. Imrex Co., Inc., 64 U.Det.L. Rev. 201 (1986) (expressing contrary interpretation of trend).

While defendants merely argue from general definitions in the case law as to what constitutes a RICO "pattern," plaintiffs have cited numerous cases on point finding that allegations of churning, if well pleaded, state a RICO "pattern." E.g., Levine v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 639 F.Supp. 1391 (S.D.N.Y. 1986); Smith v. Oppenheimer and Co., Inc., 635 F.Supp. 936 (W.D.Mich.1985); Bale v. Dean Witter Reynolds, Inc., 627 F.Supp. 650 (D.Minn.1986); Nunes v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 609 F.Supp. 1055 (D.Md.1985); Binkley v. Sheaffer, 609 F.Supp. 601 (E.D.Pa.1985); Roche v. E.F. Hutton & Co., Inc., 603 F.Supp. 1411 (M.D.Pa.1984). Defendants offer no churning cases to the contrary. Given the limited case discussion offered by defendants and the plethora of cases on point cited by plaintiffs, defendants have not made a convincing case for dismissing Counts III and IV in their entirety. "These are not two isolated acts of racketeering activity, nor do they consist of one criminal act divided up into component parts in order to satisfy the quantitative demands of the RICO statute." Levine, supra, 639 F.Supp. at 1396.

B.

Furthermore, plaintiffs have described the churning with the requisite specificity for fraud claims. Fed.R.Civ.P. 9(b) and 12(e). Plaintiffs allege the beginning and ending dates of the churning, their account numbers, their average equity account values, their total average account values, the number of transactions, the dollar total of purchases, the turnover ratio of the equity account values, the turnover ratio of the entire accounts, the dollar total of commissions, the percentage of the equity account values paid in commissions, and the percentage of total average account values paid in commissions. This is sufficient to put defendants on notice of the claims against them, and it is not necessary to allege each and every transaction involved. Nunes, supra, 609 F.Supp. at 1065; Binkley, supra, 609 F.Supp. at 603-04; Finn v. Davis, 602 F.Supp. 801, 805 (S.D.Fla.1985); Roche, supra, 603 F.Supp. at 1416-17 & nn. 3-5.

III.

Plaintiffs say that Kidder, Peabody is the enterprise under the statute. Section 1962(c) defines an "enterprise" to include any group of individuals associated in fact. The enterprise and the alleged pattern of racketeering cannot have a singular existence. See U.S. v. Turkette, 452 U.S. 576, 582-83, 101 S.Ct. 2524, 2528-29, 69 L.Ed.2d 246 (1981). That is, the mere commission of some felonies by a few persons cannot constitute an "enterprise" if there is no other infrastructure between them in support of a continuing relationship.

Paragraphs 6b and 7 of plaintiffs' RICO Case Statement satisfy this pleading requirement. Kidder, Peabody is alleged to have an existence (trading in securities) separate and apart from the racketeering claimed by plaintiffs (fraudulent trading in securities). Defendants mischaracterize plaintiffs' complaint as alleging that the racketeering activity is the "sale of securities," which would be synonymous with Kidder, Peabody's existence as an enterprise and thus fail to meet the "separate and apart" requirement. On the contrary, plaintiffs more specifically plead that the racketeering occurred in unnecessary trading in securities, a fraudulent and narrower aspect of the enterprise's normal activities. Plaintiffs have thus alleged that Kidder, Peabody has a "separate economic existence from the alleged pattern of racketeering." Barker v. Underwriters at Lloyd's, London, 564 F.Supp. 352, 357 (E.D.Mich. 1983). Contrary to defendant...