Antitrust Law Daily Wrap Up, RICO—NDIll: Investors Fail to Allege Pattern of Racketeering Activity, Enterprise in RICO Claims Against Consumer Loan Business, (Dec 17, 2012)

By Tobias J. Gillett, J.D., LLM.

Investors in an allegedly fraudulent consumer loan business did not adequately plead a RICO claim against the business’s principals and their affiliated companies because the investors failed to demonstrate a sufficient pattern of racketeering activity and to establish the existence of an enterprise for RICO purposes, the federal district court in Chicago has ruled (Shepard v. Lustig, December 13, 2012, Darrah, J.).

According to the investors, the business’s principals, Miles Lustig and Grant Lustig, approached the plaintiff investors seeking investment capital for a business offering low denominational, unsecured consumer loans. The investors would receive stock in the business and annual interest of ten percent in exchange for their investments.

The investors claimed, however, that they never received any return on their investments and that the Lustigs instead used the funds for personal expenses and to fund other businesses. The funds allegedly were also used to bribe a police officer to cover up information he had regarding an automobile accident Grant Lustig had experienced, and associated misrepresentations he made to his insurance company, as well as to pay an attorney for Grant Lustig at a later grand jury proceeding indicting the police officer for the bribery.

After the Lustigs allegedly attempted to convince the investors to permit them to release the investors’ loans to other entities under their control, the investors filed suit, claiming the Lustigs’ conduct violated the RICO Act, among other claims.

Pleading with Particularity

The Lustigs first defended against the RICO claim by arguing that the claim failed to satisfy Federal Rule of Civil Procedure 9(b), requiring plaintiffs to plead claims of fraud with particularity. Specifically, the Lustigs contended that the investors did not “establish to whom the alleged misrepresentation[s] were made, or when or where they were made” and that the investors had not “indicate[d] or infer[red] intent on the part of Miles and Grant to fraudulently induce plaintiffs.”

However, the court found that the investors had adequately alleged that the Lustigs had made misrepresentations to the investors at meetings, in telephone calls, and in a credit agreement. Moreover, an investor had received financial information sheets from the Lustigs. Despite the Lustigs’ claims, the funds allegedly were diverted to unauthorized purposes. The complaint also specifically claimed use of the mail and wires in furtherance of the scheme.

Moreover, the court noted that at the pleading stage plaintiffs are only required to allege intent “generally,” and that the investors had done so in their complaint. The court also disposed of an argument that Lustigs’ actions were “entitled to a presumption of reasonableness under the Business Judgment Rule,” observing that the Business Judgment Rule’s presumption “may be rebutted with allegations that a director acted fraudulently.” Therefore, the court found the investors had pled their RICO claim with sufficient particularity.

Pattern of Racketeering Activity

However, the court found that the investors had failed to establish the pattern of racketeering activity necessary for a RICO claim. To plead a RICO claim, the court explained, a plaintiff must allege at least two acts of racketeering activity within ten years, as well as either “a completed scheme that, by its duration, can carry an implicit threat of future harm” (closed-ended continuity) or “a scheme that, by its intrinsic (e.g., business-as-usual) nature, threatens repetition and thus future harm” (open-ended continuity).

The investors attempted to plead closed-ended continuity by pointing to predicate acts beginning with the first solicitation of investors in December 2009, and extending to sale of a condominium allegedly purchased with the investment funds. The investors argued the events spanned a period of two and a half years, while the Lustigs argued that the events only covered 13 months.

However, the court noted that the duration of the scheme is not dispositive, and observed that the investors had only identified seven victims, and only one fraudulent scheme. Moreover, all victims received the same injury, and no threat of future of future harm had been shown. The court concluded that under these circumstances the investors had failed to demonstrate closed-ended continuity.

Furthermore, the court found the investors could not establish open-ended continuity. At the time of the suit, the Lustigs no longer held positions on the business’s Board of Directors. Moreover, a “vague assertion” that the Lustigs could reassert a previously-filed motion for injunctive relief to regain control of the business did “not rise to the level of a specific threat of repetition.” The court noted that it was unclear what harm could be repeated, unless the investors chose to invest more money with the Lustigs, and that the investors had alleged that their previous investments were “gone.”

RICO Enterprise

The court also found that, even if the investors could demonstrate a pattern of racketeering activity, their allegations did not satisfy the “enterprise” element of a RICO claim. The court explained that RICO liability “depends on showing that the defendants conducted or participated in the conduct of the enterprise’s affairs, not just their own affairs.”

The court determined that the plaintiffs had merely “describe[d] a sort of piggy bank for Grant and Miles to dip into in order to make various purchases for their own personal benefit and for the benefit of other entities within their control.” In the court’s view, the investors had not shown “an overarching goal of the enterprise” apart from satisfying the desires of the Lustigs. Therefore, the court dismissed the investors’ RICO claim with prejudice.

The case is No. 11-cv-7601.

Allan A. Ackerman (Allan A. Ackerman, P.C.) for William Shepard. Michael Joseph Morrisroe (Michael J. Morrisroe Ltd.) for Miles Lustig.

Cases: RICO IllinoisNews