Antitrust Law Daily Wrap Up, RICO—3rdCir: Dismissal of RICO Claims Connected to Merger of Financial Companies Upheld, (Jan 14, 2013)

By Peter Reap, J.D., LLM

Matthew P. Amos and twenty four other former shareholders (hereinafter “Amos”) in Community Financial, Inc. (“CFI”), failed to adequately allege a cause of action under the Racketeer Influenced and Corrupt Organizations Act (“RICO”) against a company, Franklin Financial Services Corporation, that acquired CFI and seven individual defendants, the U.S. Court of Appeals in Philadelphia has decided in a not-for-publication opinion (Amos v. Franklin Financial Services Corp., January 11, 2013, McKee, T.). Thus, a federal district court’s dismissal of Amos’ first amended complaint on the ground that it failed to satisfy the pleading requirements for a civil RICO action was affirmed.

Franklin Financial Services Corporation acquired CFI in a merger whereby CFI ceased to exist and its shareholders and third parties were paid cash for their shares. Amos filed suit, alleging that the seven individual defendants (hereinafter “Lowell Gates”), most of whom were shareholders and officers of CFI, operated CFI in a manner that diluted the value of Amos’ shares upon the merger relative to the value of Lowell Gates’ shares. Amos alleges that to accomplish this goal, Lowell Gates devised a fraudulent scheme and engaged in fraudulent conduct directed at Amos and other nondefendant shareholders.

Amos asserted claims under civil RICO, alleging violations of 18 U.S.C. §§ 1962(b), (c), and (d) where the predicate acts are alleged to have been mail and wire fraud, 18 U.S.C. §§ 1341 and 1343, respectively. The district court dismissed the first amended complaint based on its conclusion that Amos failed to state civil RICO claims because of the statutory exception for fraud claims in the sale of securities found in 18 U.S.C. § 1964(c).

Amos filed a motion for reconsideration, arguing that the district court erred in dismissing the complaint because the transaction in question was a “freeze-out merger” and, therefore, could not constitute securities fraud. After briefing, the district court issued a Memorandum Opinion on November 22, 2011 in which it agreed with Amos. However, the district court again dismissed the first amended complaint, finding that it failed to satisfy the pleading requirements for a civil RICO action. This appeal followed.

A RICO claim pursuant to § 1962(b) makes it “unlawful for any person through a pattern of racketeering activity . . . to acquire or maintain, directly or indirectly, any interest in or control of any enterprise which is engaged in, or the activities of which affect, interstate of foreign commerce.” 18 U.S.C. § 1962(b) (emphasis added), the court noted. A pattern of racketeering activity is established by showing that the defendants engaged in at least two predicate acts within ten years of each other.

“Racketeering activity” is defined in RICO to mean any act or threat involving specified state-law crimes, any act indictable under specified federal statutes, and certain federal offenses. The predicate acts of racketeering could include federal mail fraud under 18 U.S.C. § 1341 or federal wire fraud under 18 U.S.C. § 1343. As relevant here, mail or wire fraud consists of: (1) a scheme to defraud; (2) use of the mails or wires to further that scheme; and (3) fraudulent intent.

In its through and well-reasoned November 22, 2011, opinion, the district court fully and completely explained why the first amended complaint failed to adequately allege a civil RICO action and why dismissal of the first amended complaint was appropriate, the appellate court determined. There was nothing to add to the district court’s thoughtful analysis and discussion, in the court’s view. Accordingly, the district court’s dismissal was affirmed for the reasons set forth in the district court’s November 22, 2011, opinion.

The district court gave a number of reasons why the first amended complaint failed to adequately allege a civil RICO action under 18 U.S.C. §§ 1962(b), (c), or (d). First, it found that Amos failed to show proximate cause because the injury alleged in the first amended complaint was derivative of injury to CFI, not a direct injury to Amos. Second, it found that Amos did not plead a pattern of racketeering activity on the part of both the individual defendants and Franklin Financial. Third, it found that the first amended complaint failed to plead the existence of an association-in-fact enterprise. Fourth, it found that Amos’s RICO conspiracy claim failed because the first amended complaint did not adequately allege violations of §§ 1962(b) or (c).

On appeal, Amos’ arguments in support of his overarching contention that the district court’s dismissal of the first amended complaint was error were without merit, according to the appellate court.

The case is No. 11-4528.

Michael A. Farnan (Farnan Law Office) for Matthew P. Amos. Timothy J. Nieman (Rhoads & Sinon LLP) for Franklin Financial Services. Ian M. Comisky (Blank Rome LLP) for Lowell R. Gates.

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