Antitrust Law Daily Wrap Up, RICO—N.D. Cal.: RICO claims dismissed because facts do not suggest existence of any predicate acts of racketeering, (Feb 12, 2015)

By Dan Selcke, J.D.

The federal district court in San Francisco, California dismissed claims filed by Gennady Barsky, an investment manager who resigned following a conflict with his business partners, against an accounting firm that allegedly defrauded him in violation of the Racketeer Influenced and Corrupt Organizations Act of 1970 (RICO), since Barsky’s allegations either failed to show that the accounting firm had engaged in any racketeering activity or plead fraud with enough specificity (Barsky v. Spiegel Accountancy Corporation, February 11, 2015, Henderson, T).

Background. Barsky managed multiple investment organizations, including Pharaoh Investments, LLC and Lodgepole Investments, LLC. Eventually, a series of events led to a falling out with his business partners, his resignation, and his bankruptcy. Also, Margaret Louise Taylor, one of his former partners, and Lodgepole filed a lawsuit against him alleging that he had misappropriated Lodgepole funds. The parties settled that suit, with Barsky agreeing to transfer certain real estate properties, estimated by Barsky to have been valued at $10,500,000, to Taylor and Lodgepole.

After Barsky resigned, Spiegel Accountancy Corporation (SAC) was hired to perform accounting services for Pharaoh and Lodgepole. Barsky filed suit against SAC, along with its president Jeffrey Spiegel, for allegedly violating RICO. Barsky also alleged that SAC and Spiegel committed the torts of intentional interference with prospective economic advantage, conversion, conspiracy to commit the same, and aiding and abetting the same. The defendants filed a motion to dismiss all of these claims.

K-1 tax form. First, Barsky pointed to an incident where the defendants mailed and filed an Amended Schedule K-1 tax form for Pharaoh which did not include Barsky’s 50% ownership interest in the company. This act, Barsky alleged, was part of a scheme to force the conversion of his Chapter 11 bankruptcy to a Chapter 7 bankruptcy, and to give Taylor the “upper hand” in her then-ongoing litigation against him. These allegations satisfied the requirements under FRCP 9(b) that fraud claims be pleaded with specificity, but did not suggest a plausible mail, wire, or bankruptcy fraud violation in the face of an obvious alternative explanation.

Although the defendants did leave information about Barsky’s ownership interest in Pharaoh off the K-1 form, they had filed different versions of that same form both before and after the incident with which Barsky was concerned. On both of those occasions, the information about his ownership interest was included. The most plausible explanation for this was that the defendants simply made an inadvertent mistake or were following the instructions of their clients when they filed the incorrect form. Also, because the latest version of the K-1 form was accurate, mailing and filing it could not plausibly be an indictable as an act of mail or wire fraud. This meant it could not be a predicate act of racketeering activity.

1099 form. Barsky next alleged that, after he settled the suit Taylor and Lodgepole filed against him, the defendants filed a Form 1099 on behalf of Lodgepole that showed over $3 million in non-employee income attributable to “theft loss.” Later, they sent him the Form 1099. The settlement agreement provided that Lodgepole and Taylor would send Barsky a Form 1099, as both of them disputed the value of the assets Barsky transferred to them in the settlement. Barsky alleged, among other things, that the Form 1099 was “inaccurate and fraudulent.”

Barsky’s fraud allegations regarding the Form 1099 did not reach level of specificity required by FRCP 9(b). He did not show what made the Form 1099 fraudulent, and instead only alleged that it was incorrect with vague and conclusory statements. Even if he had met the specificity requirements of FRCP 9(b), Barsky did not plausibly allege that SAC and Spiegel could be indicted for mail or wire fraud for filing the Form 1099. The settlement agreement expressly provided that Lodgepole would send a Form 1099 to Barsky. This suggested that the defendants were only acting on the orders of Lodgepole, their client, by filing and sending that form. Again, this meant that their actions did not qualify as a predicate act of racketeering.

Not predicate acts. Finally, Barsky alleged that the defendants had done accounting work for, in one case, an investment company that had since been prosecuted by the Securities and Exchange Commission (SEC). Later, that company filed a motion to join defendant SAC as a necessary defendant in the SEC case against it. In another case, the defendants did work for a man who, along with his various investment companies, was a defendant in multiple lawsuits for fraud. These allegations fell far short of the specificity requirements of FRCP 9(b), as all they did was ask the court to draw a negative inference about the defendants’ involvement with companies that had since come under fire for questionable practices.

No pattern of activity. Even if Barsky could show that the filings and distribution of the K-1 and 1099 forms amounted to predicate acts of racketeering, he could not show that they constituted a pattern of racketeering predicates that were related and that posed a threat of continued criminal activity. All of these “predicate acts,” and there were not many, occurred within less than six months of each other. This did not meet the standard needed to show a threat of continued criminal activity under a “closed-end” analysis. Also, all of the alleged predicate acts were related to Barsky’s circumstances—his falling out with his business partners, his resignation, and his bankruptcy. Under an “open-ended” analysis, there was no plausible reason to assume that the defendants would continue to act fraudulently once Barsky’s situation was resolved. Again, this negated any threat of continued criminal activity.

Conclusion. Because Barsky could not show a pattern of racketeering activity even if he amended his complaint, the court dismissed his RICO claims with prejudice. It also dismissed his tort claims, since he did not respond to the defendants’ arguments regarding them.

The case number is: 14-cv-04957

Attorneys: Geoffrey Martin Murry (HendricksMurry, PC) for Gennady Barsky. Adam Michael Koss (Murphy Pearson Bradley & Feeney) for Spiegel Accountancy Corp.

Companies: Spiegel Accountancy Corp.

Cases: RICO CaliforniaNews