Antitrust Law Daily Wrap Up, RICO—2ndCir: Former Wife Stated Timely RICO Claims Against Investor over Alleged Misrepresentations Regarding Money Received in Settlement, (Apr 4, 2013)

By Tobias J. Gillett, J.D., LL.M.

The former wife of an investor adequately alleged Racketeer Influenced and Corrupt Organizations Act (RICO) claims against the investor and his brother over their alleged misrepresentations regarding money the investor received from settlement of a lawsuit pertaining to a real estate investment, the U.S. Court of Appeals in New York has ruled (Cohen v. S.A.C. Trading Corp., April 3, 2013, Leval, P.). The wife alleged sufficient facts to support an inference that the investor and his brother had engaged in fraudulent misrepresentations and concealment, and her 1991 suspicions regarding the investor’s representations concerning the real estate investment did not put her on inquiry notice such that her claims were barred by the four-year statute of limitations for civil RICO claims.

According to the wife’s complaint, in 1986 Steven Cohen invested approximately $9 million in real estate through his company S.A.C. Trading Corporation. Later that year, Cohen informed his wife, Patricia Cohen, that the entire investment had been lost, but by January 1987 a claim settlement had returned $5.5 million of the investment. The investment remained on S.A.C.’s books at $8,745,169, but Steven and his brother Donald told Patricia it was worthless.

In 1989, Steven and Patricia entered into a separation agreement prior to their eventual divorce. The agreement stated that Steven had provided Patricia with a net worth statement and a statement of financial condition, but that he made no representation as to the value of the real estate investment. The agreement claimed to be "entire and complete," and that neither party had made "representations or warranties" to the other except as set forth in the agreement. The statement of financial condition reflected the investment, but Steven’s lawyer informed Patricia that the money had been "lost."

In 1991, Patricia brought a motion to set aside the 1989 agreement’s financial provisions "upon the grounds that it is unconscionable and was procured by fraud and economic duress." She claimed that Steven had failed to disclose his 1989 income, took the real estate investment, and misrepresented income he had received through work as a trader for Gruntal & Co. Her attorney affirmed in an affidavit that he and Patricia did not believe Steven had "truthfully stated his income." Steven countered with an affidavit stating that the real estate investment was involved in bankruptcy proceedings, and hence he had written it off as worthless. Steven and Patricia ultimately agreed to an amended settlement agreement in 1992.

In 2006, Patricia learned of a fraud conviction of a Gruntal employee, and began investigating representations Gruntal had made to her. In the process, she discovered the court case in which Steven had recovered the $5.5 million. Patricia filed suit against Steven and Donald, alleging that they had violated the RICO Act, among other claims. The district court granted their motion to dismiss, concluding that she had not adequately alleged fraud and that her claims were time-barred. Patricia appealed.

Sufficiency of the pleading. On appeal, the Second Circuit concluded that the district court had improperly granted the motion to dismiss with respect to three of the four misrepresentations on which Patricia relied. The court agreed with the district court that Patricia did not adequately allege that Steven’s 1986 claim that the investment had been lost was fraudulent, because she had not alleged that Steven or Donald had reason to know that at that time that they would recover part of the investment.

However, the appeals court disagreed with the district court with regard to statements by Steven and his attorney that the money involved in the real estate investment had been "lost." The district court had found that the $5.5 million payment was separate from the real estate investment, and hence the statement that the real estate investment was worthless was not false. The appeals court observed that Patricia had alleged that Steven had falsely represented that the investment money was lost, not merely that the investment had a greater value than Steven claimed, and the district court "gave no adequate reason for dismissing that claim."

The appeals court also overturned the district court’s conclusion concerning Steven’s certification in the 1989 separation agreement of the accuracy of his financial statement, which allegedly did not include the real estate investment. The district court had reasoned that Steven’s statement could have been true because he could have lost the $5.5 million in the period between recovering the money in 1987 and issuing the financial statement in 1988, or the $5.5 million could have been included in the $9,484,358 in assets Steven declared in the statement.

The appeals court observed that the district court’s analysis "reflect[ed] a misunderstanding" of the Supreme Court’s 2009 decision in Ashcroft v. Iqbal, 556 U.S. 662, 2009-2 Trade Cases ¶76,785, in that Iqbal required pleading of facts supporting a plausible inference of fraud, not of facts with "no conceivable other explanation." Patricia’s facts adequately supported an inference that Steven "had not frittered away two-thirds of his assets in that short time." Similarly, although it was possible that the $5.5 million was included in the $9,484,358 in the statement, the more plausible inference was that Steven had continued to conceal the investment, given that Patricia had also alleged that Steven fraudulently concealed the $5.5 million settlement in the negotiations leading up to the 1989 separation agreement.

Statute of limitations. The appeals court also concluded that the district court erred in dismissing Patricia’s RICO claim as barred by the statute of limitations. The court explained that civil RICO claims are subject to a four-year statute of limitations, and claims of fraud under New York law are generally subject to a six-year statute of limitations. The court noted that the Second Circuit had applied a discovery accrual rule to RICO claims, "under which the limitations period begins to run when the plaintiff discovers or should have discovered the RICO injury." The district court had concluded that Patricia was put on inquiry notice in 1991, when she suspected Steven had concealed some income and payments due him, and had understated the value of the real estate investment.

The appeals court disagreed with the district court’s reasoning. "Inquiry notice imposes an obligation of reasonable diligence," the court explained, and did not charge her "with an awareness of any and all monies Steven may have received and concealed, regardless of whether a reasonable investigation based on what she knew would have revealed it."

Even assuming that Patricia had not been reasonably diligent in 1991, nothing in the record indicated that greater reasonable investigation would have revealed the lawsuit in which Steven recovered the $5.5 million. The information available to her at the time would not have suggested that Steven had conducted the lawsuit, "much less that he received a concealed payment in settlement of the suit." The lawsuit had not received any publicity, and, although someone who suspects a defendant of fraud may have a duty "to see if others have sued the defendant and whether such suits revealed evidence of fraud," that principle did not suggest that Patricia was under a duty to investigate what lawsuits Steven may have brought against others. Furthermore, the fact that Patricia discovered the lawsuit in 2006 did not mean that Patricia would have discovered the lawsuit "in the course of a reasonable investigation in 1991."

Finally, Patricia’s 1991 suspicions that Steven had misrepresented the value of the real estate investment did not put her on inquiry notice of the lawsuit and settlement. Patricia’s suspicions focused on Steven’s possible misrepresentations regarding the value of investment, not on the possibility that Steven had received a concealed settlement payment. Moreover, "inquiry notice is triggered by awareness of facts which a reasonable person would investigate; it is not triggered by unfounded suspicions." Patricia’s suspicions in 1991 "were based on nothing but intuition or wishful thinking," not facts "that gave rise to any duty to investigate." Her distrust of Steven was not an "objective fact."

Therefore, the court vacated the district court’s judgment with respect to all of Patricia’s claims, except a claim for unjust enrichment which the court agreed was time-barred.

The case is No. 11-1390-cv.

Attorneys: Howard W. Foster (Foster PC) for Patricia Cohen. Martin Klotz (Willkie Farr & Gallagher LLP) for Steven A. Cohen.

Companies: S.A.C. Trading Corp.

Cases: RICO ConnecticutNews NewYorkNews VermontNews