Antitrust Law Daily Wrap Up, RICO—E. D. Mo.: Investors’ RICO claims against bank over alleged participation in Ponzi scheme fail, (Jul 10, 2013)

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

Customers that invested money in an alleged Ponzi scheme failed to assert claims for violations of the RICO Act and conspiracy to violate the RICO Act against a bank allegedly involved in the scheme, the federal district court in St. Louis has ruled. The customers failed to allege an enterprise apart from the alleged racketeering activity and failed to show that the bank directed the enterprise, exerted substantial control over its affairs, or managed its basic structure (Rosemann v. Sigillito, July 9, 2013, Reade, L.).

Martin T. Sigillito allegedly participated in a scheme, called the British Lending Program (BLP), in which individuals loaned money to a real estate developer in England for purported purchases of land in that country. The loan agreements significantly overstated the developer’s assets and understated its liabilities. The scheme allegedly “operated as a classic Ponzi scheme in which loan payments were paid from new loans.”

The primary source of the funds lent to the developer were self-directed IRAs. Enterprise Bank & Trust served as the custodian for the IRA loans invested with the BLP. The customers paid Enterprise annual fees for their services, and “Enterprise operated as if Martin Sigillito & Associates was the investment advisor for every British Lending Program IRA,” whether or not the customers actually designated Sigillito as their investment advisor. The customers made payments to their IRAs by sending money to enterprise, and Enterprise sent the money to Sigillito’s bank account “without written documentation or confirmation that [the real estate developer] ultimately received the loan funds.” Enterprise allegedly took instructions from Sigillito, generally without the customers telling Enterprise to send the loan funds to him.

Enterprise allegedly mailed the customers periodic account statements that purported to show the assets in their IRAs, but instead “falsely showed that the money was sent to England and that the value of the accounts increased with yearly interest payments from England.” Enterprise allegedly never received any repayments directly from the real estate developer, and increased the value of the accounts without receiving any such income.

On April 28, 2011, the federal government filed an indictment against Sigillito and others, charging them with wire fraud, mail fraud, and money laundering offenses. Enterprise notified the customers that it was a assigning a value of $0 to the BLP loans. Two individuals pled guilty to the charges, and a jury returned a guilty verdict against Sigillito on 20 of 22 counts in the indictment.

Seventy plaintiffs filed a complaint against Sigillito, Enterprise, and various other entities and individuals, asserting claims for violations of the RICO Act, among other claims. Enterprise filed a motion for summary judgment. The only remaining defendants at this stage of the litigation were Sigillito and Enterprise.

The court explained that to state a claim for violation of Section 1962(c) of the RICO Act a plaintiff must show “(1) the existence of an enterprise; (2) conduct by the defendants in association with the enterprise; (3) the defendants’ participation in at least two predicate acts of racketeering; and (4) conduct that constitutes a pattern of racketeering activity.”

Existence of an enterprise. The court concluded that the plaintiffs had failed to allege an enterprise between Martin Sigillito & Associates and an entity called the British American Group that was “distinct from the racketeering activity at issue.” The only non-racketeering activity alleged was a loan between a Turkish company and a Belize corporation incorporated by Sigillito for one of the plaintiffs as a vehicle to reduce the plaintiff’s taxes and liability. The court observed that nothing indicated that the Turkish company was involved in the BLP, and there was no evidence that the money involved was also involved in the alleged Ponzi scheme. The plaintiffs had not alleged any facts that would “show how the alleged enterprise, rather than Sigillito, was involved with” the loan.

Moreover, even if Sigillito had “carried on other legitimate activities, these acts were not in furtherance of the common or shared purpose of the enterprise and, thus, were not acts of the enterprise,” according to the court. The individual conduct of Martin Sigillito & Associates and the British American Group was not “sufficient to show a structure beyond that inherent in the pattern of racketeering activity,” because the only common factor linking the entities was their participation in the scheme to defraud the plaintiffs.

Conduct in association with the enterprise. The court also found that the evidence suggested that Enterprise merely “provided its regular, custodial services” to the plaintiffs, and that “there is no evidence suggesting that Enterprise directed the enterprise, exerted substantial control over its affairs, or managed its basic structure.”

The court observed that in a previous order the court had concluded that, although the plaintiffs’ allegations regarding Enterprise’s conduct in relation to the BLP were “troublesome,” they did not “suggest that Enterprise directed the operation or management of the alleged RICO enterprise.” The plaintiffs had realleged the claim in their amended complaints, but had not alleged any additional facts that would support Enterprise’s liability under Section 1962(c), according to the court. The plaintiffs’ allegations that Enterprise was “willfully ignorant of the criminal nature of the BLP and that Enterprise actively worked to conceal the true nature of the BLP from the plaintiffs” showed that Enterprise “may have assisted with the enterprise,” but did not “show that Enterprise was involved in the operation or management of the enterprise,” in the court’s view.

Moreover, Enterprise had stated in its statement of material facts supporting its motion for summary judgment that it “did not direct, operate, or manage the British Lending Program, Martin Sigillito & Associates, the British American Group, or any association of those entities.” As the plaintiffs did not properly respond to the statement, the facts were “considered undisputed.”

Therefore, the court granted Enterprise’s motion for summary judgment as to the plaintiff’s Section 1962(c) claim.

RICO conspiracy. The court concluded that the plaintiffs had also failed to allege the existence of a RICO conspiracy under Section 1962(d), because the existence of a RICO enterprise was a necessary element of both a conspiracy claim under Section 1962(d) and a claim under Section 1962(c), and the court had previously determined that the plaintiffs had not alleged such an enterprise.

The case in No. 10-CV-1165-LRR.

Attorneys: James A. Vitullo for Phillip L. Rosemann. Catherine A. Lewandowski (Husch Blackwell LLP) for Enterprise Bank & Trust.

Companies: Enterprise Bank & Trust

Cases: RICO MissouriNews