Sheftelman v. Jones

• Citation: 636 F. Supp. 263
• Decision Date: 26 May 1986
• Docket Number: No. C84-472A.,C84-472A.
• Parties: Dann S. SHEFTELMAN v. Allen O. JONES, et al.
• Court: U.S. District Court — Northern District of Georgia

636 F. Supp. 263

Dann S. SHEFTELMAN v. Allen O. JONES, et al.

No. C84-472A.

United States District Court, N.D. Georgia, Atlanta Division.

May 26, 1986.

Harold Wilson Whiteman, Jr. and Michael J. Gorby, Fain, Gorby, Reeves & Moraitakie, Atlanta, Ga., R. Bruce McNew and Nicholas E. Chimicles, Greenfield, Chimicles & Lewis, Haverford, Pa., John A. Howard and Andrew J. Hinton, Fortson & White, Atlanta, Ga., and Robert W. Anthony and Richard H. Adams, Jr., Smathers, Pleus, Adams, Fassett & Divine, Orlando, Fla., for plaintiff.

Peyton S. Hawes, Jr., Cofer, Beauchamp & Hawes, Atlanta, Ga., Ian M. Comisky, Blank, Rome, Comisky & McCauley, West Palm Beach, Fla., and Richard P. McElroy and Alexander D. Bono, Blank, Rome, Comisky & McCauley, Philadelphia, Pa., for Laventhol & Horwath.

Emmet J. Bondurant and Karen B. Bragman, Bondurant, Miller, Hishon & Stephenson, Atlanta, Ga., and J. Vernon Patrick, Jr., Patrick & Associates, Birmingham, Ala., for Holland & Knight.

Jack H. Watson, Jr. and Phillip A. Bradley, Long & Aldridge, Atlanta, Ga., for Kutak, Rock & Huie.

Gail Tusan Joyner, Mary E. Mann and J. Alexander Porter, Asbill, Porter, Churchill

& Nellis, Atlanta, Ga., for Hereth, Orr & Jones, Jack Hereth and Finerock Corp.

F. Carlton King and Wm. L. Ballard, Doster, Allen & King, Atlanta, Ga., for Rice and McElroy.

Robert O. McCloud, Jr. and H. Sanders Carter, Jr., Carter, Ansley, Smith & McLendon, Atlanta, Ga., for Cobb & Cole.

John T. Marshall and Thomas S. Richey, Powell, Goldstein, Frazer & Murphy, Atlanta, Ga., for Arnall, Golden & Gregory and James E. Dorsey.

Richard H. Martin, Pittsburgh, Pa., for Mahai Marcu.

John L. Latham, David A. Handley, Smith, Gambrell, Russell & Martin, Atlanta, Ga., for James, Raymond & Assoc., Marion Bass Securities, Nat. Union Fire Ins. Co., Wood Gundy, & Co., Inc., Heyman-Cole Inv. Securities, Herzfeld & Stern, Richardson Greenshield Securities, Swink & Co. and American Municipal Securities.

J. Kirk Quillian, Troutman, Sanders, Lockerman & Ashmore, Atlanta, Ga., for Yankelovich, Skelly & White, Inc.

Kirk M. McAlpin, Jr., Peter J. Anderson and Louise Bailey, Peterson, Young, Self & Asselin, Atlanta, Ga., for J. Milton Newton, Inc.

A. Timothy Jones, T. Ryan Mock, Jr. and John D. Steel, Atlanta, Ga., for Allen O. Jones and James E. Dorsey.

Herbert Schlanger, Atlanta, Ga., for Royal Care Communities, Ltd., Royal Care Communities, Inc., Foundation Investors, Ltd. and A.O. Jones & Co.

ORDER

RICHARD C. FREEMAN, District Judge.

This securities fraud action is before the court on plaintiff's motion for reconsideration of this court's December 26, 1984, order dismissing plaintiff's claim for relief under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-1968. Defendants oppose the motion.

Count III of plaintiff's first amended complaint provided:

Count III

(Violation of RICO Against ALL Defendants)

95. On behalf of himself and the Plaintiff Class, plaintiff repeats and realleges paragraphs 1 through 94 hereof as if fully set forth herein.

96. Royal Regency, the Developer, and the underwriting syndicate by which the Bonds were sold are enterprises within the definition of 18 U.S.C. § 1961(4), and each affects interstate commerce.

97. Each defendant was employed by and/or associated with each of the above enterprises and participated in the conduct of the affairs of each enterprise.

98. Each defendant has engaged in racketeering activity in at least the following manner:

a. fraud in the sale of securities (18 U.S.C. § 1961(d)).

b. mail fraud (18 U.S.C. § 1961(1)).

c. wire fraud (18 U.S.C. § 1961(1)).

Each defendant has engaged in a pattern of racketeering activity in that at least two acts of racketeering activity as described above have been performed by each defendant.

99. Plaintiff and the Plaintiff Class have suffered substantial financial loss as a direct and proximate result of defendants racketeering activities and defendants are liable therefor.

Several defendants moved to dismiss this count and in an order filed December 26, 1984, the court granted defendants' motion. The court found that plaintiff's RICO claim suffered from two fatal defects: "a failure to allege a violation of section 1962 and a failure to allege an injury by reason of a violation of section 1962." Sheftelman v. Jones, 605 F.Supp. 549, 550, 553-54 (N.D. Ga.1984).

On January 7, 1985, plaintiff moved this court to reconsider its December 26 order dismissing plaintiff's RICO claim. Plaintiff argued that he should be permitted to amend the complaint to allege violations of section 1962. Defendants opposed plaintiff's motion for reconsideration.

In an order dated June 28, 1985, the court deferred consideration of plaintiff's motion for reconsideration pending the Supreme Court's decisions in Sedima S.P. R.L. v. Imrex Co., Inc., ___ U.S. ___, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985) and American National Bank & Trust Co. v. Haroco, Inc., ___ U.S. ___, 105 S.Ct. 3291, 87 L.Ed.2d 437 (1985). The court gave the parties 45 days to file supplemental briefs and directed plaintiff to submit his proposed amended RICO count. The parties have filed supplemental briefs and plaintiff's motion for reconsideration is now before this court.

In his briefs, plaintiff argues that Sedima clearly abolishes any requirement of a racketeering injury distinct from the predicate acts. Plaintiff quotes the Supreme Court's statement that a section 1962(c) violation requires "(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity." 105 S.Ct. 3285 (footnote omitted). To the extent the court's order required a showing of racketeering activity apart from the predicate acts, that reasoning is no longer controlling. Sedima is clear in holding that no injury separate from the predicate acts is required. Id. at 3285.

Apart from the failure to allege a section 1962 injury, the court ruled that plaintiff's complaint was fatally deficient because it did not allege a violation of section 1962. Plaintiff construes this deficiency as a technical pleading defect, remedied by an amended complaint. Accordingly, plaintiff submitted a proposed amended Count III of the complaint. The amended count reads as follows:

COUNT III

95. On behalf of himself and the Class, plaintiff repeats and realleges paragraphs 1 through 94 hereof as if fully set forth herein.

96. Royal Regency, the Developer, and the underwriting syndicate by which the Bonds were sold are enterprises within the definition of 18 U.S.C. § 1961(4), and each affects interstate commerce.

97. Each defendant was employed by and/or associated with each of the above enterprises and participated in the conduct of the affairs of such enterprise.

98. Each defendant has engaged in racketeering activity in at least the following manner:

a. fraud in the sale of securities (18 U.S.C. § 1961(d)).

b. mail fraud (18 U.S.C. § 1961(1)).

c. wire fraud (18 U.S.C. § 1961(1)).

Each defendant has engaged in a pattern of racketeering activity in that at least two acts of racketeering activity as described above have been performed by each defendant, and has violated 18 U.S.C. § 1962.

99. Plaintiff and the Class have suffered substantial financial loss as a direct and proximate result of defendants' racketeering activities and violations of 18 U.S.C. § 1962, and defendants are liable therefor.

The portions underlined above indicate the new allegations contained in the amended complaint.

The court's December 26 order indicated a deficiency beyond a technical pleading defect. The court stated that granting plaintiff an opportunity to amend the complaint would prove futile because plaintiff had only alleged facts constituting civil fraud. The court noted that the types of racketeering activity enumerated in section 1961(1) concerned criminal misconduct.

Sedima addressed some of the issues regarding the predicate criminal acts. The Court ruled that criminal convictions on the predicate acts are not a prerequisite to a civil RICO action. 105 S.Ct. at 3281-84. Moreover, the Court indicated that the predicate acts need not be established beyond a reasonable doubt. Id. at 3282-83.

Against this backdrop of less restrictive RICO construction, plaintiff argues that the pleading requirements of civil and criminal fraud are identical. Plaintiff asserts that while a finding of intent at trial is needed to support criminal liability, no such requirement exists at the pleading stage.

The court agrees with the plaintiff that his allegations of mail, wire, and securities fraud are sufficient to survive defendants' 12(b)(6) motion. A court should grant a 12(b)(6) motion only when plaintiff can prove no set of facts entitling him to relief. See Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957). The court cannot state unequivocally that plaintiff will be unable to prove the requisite predicate acts supporting his civil RICO claim. Thus, following Sedima and further consideration, the court concludes that neither reason stated in the court's December 26 order justifies dismissal of plaintiff's RICO count.

In their supplemental brief, defendants reassert their contention that the court should dismiss plaintiff's RICO count for failure to allege a pattern of racketeering activity. Arnall Golden & Gregory ("Arnall") argues that plaintiff's RICO claim does not allege a pattern of racketeering because the complaint only alleges a single fraud—the sale of bonds by means of a misleading official statement. Arnall maintains that this single transaction cannot give rise to a pattern of racketeering activity. To state a pattern of racketeering activity, Arnall contends, plaintiff must allege distinct criminal transactions in addition to distinct predicate acts.

Sedima delineates the essential elements of a RICO cause of action as follows, "(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity." 105 S.Ct. at 3285 (...