Antitrust Law Daily Wrap Up, RICO—E.D. Pa.: Concrete contractor sufficiently alleges RICO enterprise, pattern of racketeering activity against former executive, his assistant, and his company, (Jul 17, 2013)

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

A concrete contractor sufficiently alleged claims that a RICO enterprise consisting of its former chief operating officer, his assistant, and his company violated the RICO Act by diverting assets and business opportunities from the contractor, the federal district court in Philadelphia has ruled (Mega Concrete, Inc. v. Smith, July 15, 2013, McLaughlin, M.). However, the contractor failed to allege a sufficiently continuous enterprise to assert RICO claims against a second enterprise consisting of the officer, his assistant, a third company, and the third company’s principal.

Mega Concrete, Inc., Mega Sitework, LLC, and Capponi Enterprises, Inc. (collectively, “Mega”) perform cast-in-place concrete and site work under the trade name Mega Construction Company. Mega obtains work through bidding on potential projects, and uses change orders to modify the scope of price of the work as set forth in the initial contract.

Michael Smith worked for Mega in several capacities, including as Mega’s chief operating officer. According to Mega, in 2005 Smith began a scheme to divert revenue, materials , equipment, and manpower from Mega, in conjunction with Kimberly Lawson, his assistant, and Paramount Concrete Construction, Inc., a company he controlled. Smith allegedly manipulated or concealed “work orders to increase the amount of work Mega performed on a given project without a corresponding entry in Mega’s system,” and “would alter books and records to conceal the use of Mega equipment and labor,” which “resulted in Mega employees performing work on projects for which Mega was not compensated.” Smith, Paramount, and Lawson carried out this scheme in connection with a series of construction projects. Smith also allegedly diverted business opportunities from Mega to Paramount.

By 2006, Smith allegedly “solicited and recruited” U.S. Concrete, Inc., through its principal Jerry Fradjenberg, to work together on two construction projects. According to Mega, U.S. Concrete agreed to engage Mega to perform laser screed concrete work at two construction sites. The parties purportedly agreed that Smith and Lawson would issue false invoices for substantially less than the value of the work performed on the projects. The parties then carried out this scheme, with Smith and Lawson sending false invoices underbilling U.S. Concrete, and U.S. Concrete paying those bills despite knowing that Mega had performed more work than was invoiced.

Later, U.S. Concrete rented a laser screed belonging to Mega, but Smith agreed with Fradjenberg to cap the daily price at $2,000, even though the pricing policy Mega and U.S. Concrete had agreed on did not contain a price cap. U.S. Concrete also purportedly falsely claimed the laser screed malfunctioned, requiring remedial work for which U.S. Concrete billed Mega.

Mega failed suit against a range of defendants, later whittled down to Smith, Lawson, Paramount, Fradjenberg, and U.S. Concrete, asserting a variety of claims including claims under the RICO Act. Lawson did not respond, and default judgment was entered against her. Smith and Paramount filed a motion to dismiss, while Fradjenberg and U.S. Concrete filed a motion for judgment on the pleadings.

Mega alleged two RICO enterprises, one consisting of Lawson, Smith, and Paramount that purportedly diverted money, resources, and business opportunities from four construction projects (“the Smith Enterprise”), and one consisting of Smith, Lawson, U.S. Concrete, and Fradjenberg (“the U.S. Concrete Enterprise”). The court rejected the defendants’ argument that a prior decision of the court dismissing seven other defendants required dismissal of the present claims. The previous decision had found that no enterprise among all twelve defendants had plausibly been pled, but the present claims were not “essentially the same” as those claims because the court “ha[d] not before passed on the sufficiency of RICO claims based on the new, smaller-scale enterprises.”

Smith Enterprise—RICO enterprise. The court concluded that Mega had pled the existence of a RICO enterprise, finding that Mega had adequately alleged, “though just barely,” that Lawson combined with Smith and Paramount to form an enterprise. Lawson allegedly helped solicit non-enterprise partners on three construction projects, forged a Mega executive’s signature on an invoice receipt, caused Mega to perform work on two projects for which it was not paid, coordinated with Smith to obtain work assignments for Smith’s side business, agreed with participants in a construction project that she, Smith, and a third party would divert Mega’s payments to themselves if Mega was selected to perform work at the site, and helped Smith divert and then kept money owed to Mega. Moreover, the ongoing nature of the scheme from 2006 through 2008, with a break of only a few months, “demonstrate[d] commonality of purpose,” and Lawson’s position as Smith’s assistant indicated they had a “continuing relationship.”

Nor did the inclusion of both Smith and Paramount in the Smith Enterprise run afoul of the requirement that an enterprise and its participants be distinct, according to the court. Mega did not allege that either Paramount or Smith was the enterprise; rather, Mega contended that Paramount and Smith were participants in a multi-member enterprise. Although “various courts of appeals” had found that “a corporation acting in tandem only with its employees cannot form a RICO enterprise,” the Smith Enterprise included a third party, Lawson, who did not come within the “corporate sphere” of the other members.

Moreover, the cases “address[ed] the issue of distinctiveness when the corporation is both defendant participant and an entity encompassing all enterprise members,” but did not “speak to whether an individual employee or owner, such as Smith, is distinct enough from an association in fact comprised of him and his company to also be a ‘person employed by or associated with’ the enterprise.” The court could find no court of appeals case addressing “the viability of a § 1962(c) claim against an owner and his solely owned company when they are both alleged to be enterprise members and persons who ‘conduct[ed] or participate[d] . . . in the conduct’ of the enterprise’s affairs through the owner’s actions.”

Smith Enterprise—Pattern of racketeering activity. Mega also sufficiently alleged a pattern of racketeering activity, in the court’s view. Mega’s allegations regarding Smith’s submission of false change orders, his diversion of money from construction projects to himself and his business, and other allegations were sufficient to “satisfy the heightened pleading requirement for claims of mail fraud” and “the normal pleading requirements for offenses under the Stolen Property Act.” The alleged duration of the scheme was “sufficiently lengthy and the individual acts sufficiently related to establish a continuous pattern of RICO racketeering.”

U.S. Concrete Enterprise—RICO enterprise. However, Mega failed to allege a RICO enterprise with respect to the U.S. Concrete Enterprise, according to the court. The court could find nothing in Mega’s pleadings that would “suggest that Smith, Lawson, and the U.S. Concrete defendants operated as a ‘continuing unit’ from March 2006 through October 2007, including the almost-seventeen-month hiatus between the projects.” Instead, the pleadings depicted two “discrete and isolated instances in which Smith, with Lawson’s help, provided unauthorized discounts to the same customer.” The court noted that the alleged members of the enterprise only engaged in activity during two months over the two-year span.

RICO conspiracy. Since Mega sufficiently alleged a substantive RICO claim with respect to the Smith and Paramount, the court concluded that Mega had also adequately alleged that those defendants had engaged in a RICO conspiracy. However, Mega did not plausibly allege that the members of the U.S. Concrete Enterprise conspired to commit a violation of the RICO conspiracy provision, in the court’s view.

The court granted the U.S. Concrete defendants’ motion for judgment on the pleadings.

The case is Civil Action No. 09-4234.

Attorneys: Edward T Kang (Weir & Partners LLP) for Mega Concrete, Inc. Howard A. Rosenthal (Archer & Greiner, PC) for Michael Smith. Todd W. Heck (Basile & Testa, PA) for U.S. Concrete, Inc.

Companies: Mega Concrete, Inc.; Paramount Concrete Construction, Inc.; U.S. Concrete, Inc.

Cases: RICO PennsylvaniaNews