Antitrust Law Daily Wrap Up, RICO—D.N.J.: RICO claim barred; predicate acts involved securities fraud, (Oct 28, 2014)

By Edward L. Puzzo, J.D.

An individual bringing claims of fraud in connection with her investment in a hotel development company could not maintain a RICO claim because her asserted predicate acts involved securities fraud, which was barred as a predicate act by the Private Securities Litigation Reform Act, the federal district court in Trenton, New Jersey has ruled (Sundholm v. eSuites Hotels LLC, October 27, 2014, Thompson, A.).

Micaela Sundholm brought a number of claims in connection with an allegedly fraudulent “Ponzi” scheme by which she was defrauded of over $200,000, ostensibly for an investment in eSuites, a company claimed to be developing hotels in Arizona, Florida, and North Carolina. Her complaint against eSuites Hotels, OCS Capital Group, Liberty Title, and related individuals alleged violations of the Racketeering Influenced and Corruption Organization Act of 1970 (RICO), the New Jersey Consumer Fraud Act (CFA), various federal and New Jersey securities law violations, and common law fraud. The defendants moved to dismiss.

RICO. To state a private cause of action under RICO, a plaintiff must allege (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity. The pattern of racketeering activity requires “at least two predicate acts of racketeering activity,” and the Private Securities Litigation Reform Act expressly barred the use of securities fraud as a predicate act. Plaintiff’s claim that the defendants devised a scheme to defraud her, utilizing mail and wire fraud, and induced her to pay $200,000 for stock in eSuites and for the purchase of unregistered securities had to be dismissed with prejudice, the court ruled.

Private right of action. One of plaintiff’s claims was brought under Section 17(a) of Securities Act of 1933, which prohibits any scheme to defraud in connection with the sale of securities. The court explained that a clear majority of district courts in the Third Circuit, as well as other circuits, found that an implied private right of action under Section 17 does not exist. Since the plaintiff did not show how her case differed from the majority of cases that found no standing for private individuals, this count was dismissed with prejudice.

Time-barred counts. The court found that plaintiff’s claims under Section 12 of the 1933 Securities Act and under the New Jersey Uniform Securities Law were time-barred. The federal law required bringing an action within one year of the occurrence of the unlawful conduct and within three years after the security was offered to the public. The state law required bringing an action within two years of the contract of sale or investment device, or when the plaintiff knew or should have known of her cause of action.

Plaintiff did not bring these claims until March 2014, nearly six years after her April 2008 purchase of shares in eSuites. However, she claimed that she would not have known of the potential cause of action until mid-2012 because she continued to receive misleading communications from the defendants until that point. The court determined that she should have known of her action soon after April 2008, when she failed to receive stock certificates after paying $100,000 for them, or soon after October 2009, when a promissory note for another $100,000 came due and was not paid. Therefore, these counts were untimely and dismissed with prejudice.

CFA claims. The court dismissed with prejudice claims brought under the New Jersey Consumer Fraud Act (CFA) because the act does not cover fraud in the sale of securities.

Common law fraud. Plaintiff made various common law, securities, and consumer fraud claims against misrepresentations of “defendants” without sufficiently specifying which defendants, and the precise nature of the misrepresentations. Thus, the claim fell short of the heightened pleading standards of Federal Rule of Civil Procedure 9(b) for fraud claims and the state requirements for common law fraud claims. The court dismissed with prejudice the fraud claims against OSC Capital and Liberty Title, but did not dismiss the claims against the remaining defendants.

The case is Civil Action No. 14-1996.

Attorneys: Rosaria A. Suriano (Meyner and Landis, LLP) for Micaela Sundholm. Christopher J. Dalton (Buchanan, Ingersoll & Rooney, PC) for eSuites Hotels, LLC. Heather Hiznay Kidera (Phillips Lytle LLP) for OCS Capital Group, LLC, and Gilbert Michael Olguin.

Companies: eSuites Hotels, LLC; OCS Capital Group, LLC; Liberty Title Agency, LLC.

Cases: RICO StateUnfairTradePractices NewJerseyNews