Antitrust Law Daily Wrap Up, RICO—3rdCir: Small Businesses Granted Retrial of RICO Claims Over Concealed Compensation to Financial Planner, (Nov 9, 2012)

By William Zale, J.D.

In a case arising from a tax avoidance scheme, the U.S. Court of Appeals in Philadelphia has vacated a jury verdict of no liability on a RICO claim brought by four small corporations and their owners against financial planner James Barrett (National Security Systems, Inc. v. Iola, November 8, 2012, Chagares, M.). The court remanded for a new trial, holding that the trial court abused its discretion in refusing to instruct the jury that evidence of concealed compensation could constitute a scheme to defraud under the mail and wire fraud statutes, although the trial court did not abuse its discretion in refusing to instruct the jury to consider whether Barrett generated excessive commissions as part of a scheme to defraud.

“Employee Welfare Benefit Plan”

Barrett induced the plaintiffs to adopt an employee welfare benefit plan known as the Employers Participating Insurance Cooperative (EPIC). Between 1990 and 1997, the corporate plaintiffs each made contributions to their plans totaling several hundred thousand dollars. EPIC’s advertised tax benefits, the plaintiffs discovered years later, were illusory; the scheme masqueraded as a multiple employer welfare benefit plan, but in fact was a method of deferring compensation, the court said. After the Internal Revenue Service audited the plaintiffs’ plans and disallowed certain deductions claimed on their federal income tax returns, the plaintiffs brought suit against Barrett and other entities involved in the scheme.

Promoters of EPIC marketed it to closely held corporations as a means of obtaining attractive tax benefits. Defendant Ronn Redfearn, a now-deceased insurance salesman, created EPIC. He formed defendant Tri-Core, Inc., a corporation that has since filed for bankruptcy protection, to administer employee benefit plans that conformed with EPIC‘s specifications.

Commissions

As the architect, promoter, and manager of EPIC, Tri-Core received a commission from Commonwealth Life Insurance on sales of insurance policies. Commonwealth paid Tri-Core out of its general asset account and set the commission rate at a percentage of the employers’ annual contributions. Tri-Core typically received up to 85% of employer contributions in the first year of the policy and approximately 6% in subsequent years, and then redistributed part of its commission to the insurance broker who sold the EPIC plans.

Redfearn enlisted Barrett to market EPIC to closely held corporations. Two of corporate plaintiffs were notified when they established their plans that Tri-Core would receive a commission on the purchase of their life insurance contracts, but they were not provided information on the amount of the commission, who paid it, or how it was calculated, according to the court. From its commission, Tri-Core paid Barrett the equivalent of 40-50% of the corporate plaintiffs’ first-year plan contributions and 3% of their contributions in subsequent years. Barrett, in turn, distributed a portion of his commission to co-brokers. Some of the plaintiffs were aware that Barrett received commissions, but he did not tell them how much he was paid or how his compensation was calculated, the court said.

Scheme to Defraud

The plaintiffs maintained that Barrett was associated with Tri-Core, an enterprise, and participated in its pattern of committing mail and wire fraud through a scheme to defraud, in violation of RICO Sec. 1962(c). The elements of mail and wire fraud are (1) a scheme or artifice to defraud for the purpose of obtaining money or property, (2) participation by the defendant with specific intent to defraud, and (3) use of the mails or wire transmissions in furtherance of the scheme.

Among the plaintiffs’ theories of what constituted the scheme to defraud were the following: (1) Barrett and Tri-Core misled the plaintiffs into participating in EPIC in order to generate grossly excessive compensation for themselves and (2) Tri-Core and Barrett misled them into participating in EPIC by concealing the commissions they would receive.

The trial court did not abuse its discretion in refusing to instruct the jury on the excessive compensation theory because the plaintiffs failed to identify a single item of evidence from which a juror could conclude that Tri-Core and Barrett misrepresented information in order to generate unreasonably high compensation, the court determined. Review of the record on appeal did not reveal a basis on which a jury could find Tri-Core and Barrett‘s compensation disproportionately high compared to relevant industry standards, in the court’s view.

There was an adequate evidentiary basis on which a jury could find that Tri-Core and Barrett were not truthful about their commissions, the court determined. Under the circumstances, it was an abuse of discretion for the trial court to refuse to instruct the jury that this evidence could constitute a scheme to defraud under the mail and wire fraud statutes, the court concluded.

The case numbers are 10-4154 and 10-4155.

Steven J. Fram (Archer & Greiner) for Appellants/Cross-Appellees. Christopher P. Leise (White & Williams) for Appellee/Cross-Appellant.

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