Spira v. Nick

• Decision Date: 24 February 1995
• Docket Number: No. 94 Civ. 7066 (LAK).,94 Civ. 7066 (LAK).
• Citation: 876 F. Supp. 553
• Parties: Robert A. SPIRA, Plaintiff, v. Larry K. NICK and Sharon Kaufman Nick, Defendants.
• Court: U.S. District Court — Southern District of New York

876 F. Supp. 553

Robert A. SPIRA, Plaintiff, v. Larry K. NICK and Sharon Kaufman Nick, Defendants.

No. 94 Civ. 7066 (LAK).

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

February 24, 1995.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Wayne P. Jordan, New York City, for plaintiff.

Scott N. Fein, Elizabeth M. Morss, Whiteman Osterman & Hanna, Albany, NY, for defendants.

MEMORANDUM AND ORDER

KAPLAN, District Judge.

The plaintiff in this case, an investor in two investment vehicles controlled by defendant Larry Nick, claims that Nick and his wife have embezzled large sums of money from a substantial number of Nick-dominated entities. They bring a host of State law-based claims, including claims of fraud and conversion, purportedly on behalf of a class of all investors in Nick-controlled entities. The only alleged basis of federal jurisdiction is two causes of action for alleged conspiracies to violate the Racketeer Influenced and Corrupt Organizations Act ("RICO"). The defendants move to dismiss the RICO claims for failure to allege fraud with particularity and failure to state a claim upon which relief may be granted. Plaintiff cross-moves for a preliminary injunction and for the appointment of a receiver for the Nick entities pendente lite.

Facts

The core of the complaint is a claim that Larry Nick abused his position as a general partner or principal shareholder of various limited partnerships and corporations. He is said to have diverted money from these entities for his personal use and to have disposed of certain partnership and corporate assets without allegedly required consents of other investors. Nick's wife, Sharon Kaufman Nick, is named as a defendant on six of the twelve counts, including both RICO conspiracy claims.

Plaintiff has submitted an affidavit of Frank Caputi, who was Nick's accountant from July 1987 until June 16, 1994. Caputi makes extensive, sometimes detailed, and generally undocumented allegations supporting plaintiff's claims. Caputi's account is hotly contested by affidavits of Larry Nick, which also are unsupported by documentation in many particulars. Both sides claim to have been handicapped in supporting their positions by reason of the seizure of many of Nick's records by the Federal Bureau of Investigation in June 1994 pursuant to a search warrant. Suffice it to say, for present purposes, that Caputi's assertions, if credited, would state several serious claims against Nick. As will appear, however, it is unnecessary for us to consider most of these allegations in detail in order to resolve the pending motions.

The Motion to Dismiss

Federal jurisdiction in this case stands or falls with the sufficiency of the RICO claims. Defendants argue that the RICO claims, which are based on predicate acts of mail and wire fraud, should be dismissed for the following reasons:

1. The fraud allegations are not made with the requisite particularity in that the complaint does not (a) identify the statements it claims were false or misleading or give particulars of the respects in which plaintiff contends that the statements were fraudulent, (b) state when and where the allegedly fraudulent statements were made, (c) identify the items mailed and the wire communications relied upon and how each was false or misleading, or (d) adequately allege any basis of liability under RICO with respect to defendant Sharon Kaufman Nick.

2. The RICO allegations all are made on information and belief and therefore do not satisfy Rule 9(b)'s requirement that averments of fraud be made with particularity.

3. The RICO conspiracy counts fail to state a claim upon which relief may be granted because (a) there is no allegation of an agreement by each defendant to commit two predicate acts, (b) the complaint does not adequately allege a pattern of racketeering activity, and (c) the complaint fails to allege the existence of a RICO enterprise.

Information and Belief Pleading

The operative allegations of the complaint all are made on information and belief.

Defendants correctly point out that fraud allegations made on information and belief do not satisfy Rule 9(b) unless the facts are peculiarly within the knowledge of the defendants, in which case the complaint must allege facts demonstrating the basis for the information and belief. Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374, 379 (2d Cir.1974); Segal v. Gordon, 467 F.2d 602, 608 (2d Cir.1972); Devaney v. Chester, 709 F.Supp. 1255 (S.D.N.Y.1989). The complaint as it stands therefore is deficient.

Here it is reasonably plain that the basis for the allegations made in the complaint on information and belief is the information provided by Caputi, Nick's former accountant, which now has been submitted in the form of an affidavit. The information in that affidavit may permit plaintiff to frame a proper complaint with respect to some or all of the energy entities, although it contributes little with respect to the real estate partnerships. In view of the likelihood that plaintiff can frame a legally sufficient complaint, we address the other issues raised by defendant's motion in an effort to forestall further motion practice addressed to the pleadings.

The Mail and Wire Fraud Allegations

The heart of defendants' claim that the complaint fails to comply with Rule 9(b) rests on the premise that each mailing and wire communication said to constitute a predicate act of mail or wire fraud must be false or misleading. It is this proposition that underlies the argument that plaintiff has failed to specify "the statements he claims were false or misleading and to give particulars as to the respect in which he contends the statements were fraudulent." (Def.Br. 12 quoting McLaughlin v. Anderson, 962 F.2d 187, 191 (2d Cir.1992)). The same proposition evidently is the basis for the assertion that Rule 9(b) requires that the temporal and geographic particulars of each alleged mailing and wire communication be alleged with particularity. Defendants, however, misunderstand the mail and wire fraud statutes as they apply in these circumstances and their interrelationship with RICO.

The complaint alleges that Larry Nick was a principal shareholder or general partner of, and thereby controlled, twenty-five corporations and partnerships, some in the energy field and the balance in real estate. He allegedly embezzled funds from these entities in many specifically identified cases relating to the energy partnerships by mailing checks representing the allegedly diverted monies to other persons or entities. In many instances, the complaint identifies the approximate dates, amounts, purposes and payees of the diversions. It alleges further that many, perhaps all, of the diversions were concealed from investors. (See cpt ¶¶ 20, 27, 36, 91) It asserts also that, in April 1993, Nick caused one of the entities to file a fraudulent form K-1 with the Internal Revenue Service, evidently for the purpose of concealing the true state of affairs from the limited partners. (Id. ¶ 28)

Not all of the allegations incorporated in the RICO counts are as specific. In a number of cases, the pleading alleges broadly that fraudulent communications regarding various matters were made to investors through the mails. (E.g., id. ¶¶ 32, 38, 47) Notwithstanding the generality of some of the allegations, however, the complaint alleges with a fair degree of specificity that Nick, as a general partner and controlling shareholder of the energy entities, owed fiduciary duties to plaintiff and the other investors which he breached by taking money to which he was not entitled and by concealing and, on occasion, lying about the affairs of these entities. The complaint is entirely conclusory insofar as it relates to the real estate partnerships. We deal first with the allegations concerning the energy entities.

The mail fraud statute, 18 U.S.C. § 1341, provides in pertinent part:

"Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises ... for the purpose of executing such scheme or artifice or attempting so to do, places in any post office or authorized depository for mail matter, any matter or thing whatever to be sent or delivered by the Postal Service, or takes or receives therefrom, any such matter or thing ... shall be fined not more than $1,000 or imprisoned not more than five years, or both."

Thus, the elements of the offense are a scheme or artifice to defraud and a mailing in furtherance of the scheme. E.g., Pereira v. United States, 347 U.S. 1, 8, 74 S.Ct. 358, 362-63, 98 L.Ed. 435 (1954).

Here the scheme is defendants' alleged embezzlement of funds from the investment vehicles they controlled. While common law fraud in most circumstances requires a false representation of a material fact, there is no such requirement under the mail and wire fraud statutes in a case like this.

To begin with, the Second Circuit held only last week that the scheme element is satisfied by embezzlement by a fiduciary. United States v. Altman, 48 F.3d 96, 101 (2d Cir.1995). Nor need we rest on that basis alone. A breach of fiduciary duty accompanied by concealment or deception also may constitute a scheme or artifice to defraud within the meaning of the mail and wire fraud statutes, at least where the concealment or deception could result in harm. E.g., Altman, supra; United States v. Weiss, 752 F.2d 777 (2d Cir.), cert. denied, 474 U.S. 944, 106 S.Ct. 308, 88 L.Ed.2d 285 (1985); United States v. Siegel, 717 F.2d 9 (2d Cir. 1983); United States v. Margiotta, 688 F.2d 108, 121 (2d Cir.1982), cert. denied, 461 U.S. 913, 103 S.Ct. 1891, 77 L.Ed.2d 282 (1983); United States v. Bronston, 658 F.2d 920 (2d Cir.1981), cert. denied, 456 U.S. 915, 102 S.Ct. 1769, 72 L.Ed.2d 174 (1982); United States v. Barta, 635 F.2d 999 (2d Cir.1980), cert. denied, 450 U.S. 998, 101 S.Ct. 1703,...