Antitrust Law Daily Wrap Up, RICO—S.D. Cal.: The Donald must defend RICO claims involving Trump University, (Aug 3, 2016)

By Mark Engstrom, J.D.

Republican presidential nominee and real estate magnate Donald Trump will have to defend class action RICO claims alleging that Trump engaged in a pattern of racketeering by using mailings and wirings to make false representations about Trump University (TU), the federal district court in San Diego has ruled. Trump’s motion for summary judgment was denied (Cohen v. Trump, August 2, 2016, Curiel, G.).

Art Cohen paid $1,495 to Trump University to attend a three-day real estate retreat, where he subsequently purchased a "Gold Elite" program for $34,995. In his complaint against Trump, Cohen alleged that he would not have paid for any of the TU programs if he had known that Trump did not "handpick" TU instructors, or that TU was not a "university," as claimed by Trump and TU’s promotions.

Trump argued that Cohen had: (1) sought an "unprecedented expansion" of RICO law; (2) failed to establish that Trump had conducted the affairs of TU; (3) failed to show that the alleged misstatements or omitted facts were material; and (4) failed to show that Trump "knowingly participated" in a scheme to defraud.

Scope of civil RICO. Trump argued that RICO was never intended to provide a federal cause of action and treble damages for every plaintiff, and that "garden-variety business disputes" should not be "squeeze[ed]" into civil RICO actions. Essentially, Trump made a policy argument that RICO should be narrowly construed so that civil plaintiffs would not be given the "unusually potent weapon" of RICO treble damages.

The court noted, however, that the Supreme Court had ruled in favor of an expansive interpretation of civil RICO in multiple cases. Although the court acknowledged that some scholars had questioned the Supreme Court’s reading of RICO’s legislative history, it also noted that the High Court had not deviated from its general admonition that RICO should be "read broadly."

Ultimately, the district court could not implement Trump’s "policy preferences"—that civil RICO should not be extended to consumer class actions—in contravention of the settled approach of higher courts. The court thus declined to effect an amendment of the RICO statute by imposing an amorphous requirement that civil RICO should not be extended to consumer class actions.

Conducting an enterprise. Trump argued that his role with TU—planning and launching it, investing his own money in it, controlling a majority ownership stake in it, reviewing its financial documents, conducting status meetings with its president, and reviewing its advertisements "very quickly"—merely constituted the "ordinary business conduct" of a principal investor and top executive; his role did not include "direct[ing] the operations or management of TU."

The court found that the record evidence raised a genuine issue of material fact regarding Trump’s participation in the operation or management of a RICO enterprise. The court was unpersuaded by cases Trump cited to support the proposition that the alleged activity did not amount to playing "some part" in the operation or management of the enterprise. Because Cohen raised a genuine issue of material fact regarding the "knowing" character of Trump’s participation, the court concluded that a genuine issue of material fact was present regarding Trump’s role in direction of TU.

Materiality of alleged misrepresentations. Trump argued that Cohen could not show that Trump had engaged in racketeering activity because, in order to establish liability for the predicate acts of mail fraud and wire fraud, Cohen had to prove that the statements allegedly made or the facts allegedly omitted were "material." According to Trump, Cohen could not make that showing because: (1) the alleged misrepresentations constituted non-actionable puffs and (2) even if the alleged misrepresentations were not puffs, they were nevertheless not false or misleading.

In the court’s view, neither argument was persuasive. The Court thus concluded that Cohen had raised a genuine issue of material fact regarding the false or misleading character of Trump’s representation of "integral involvement" in TU.

Knowing participation. Trump argued that Cohen could not show that Trump had "knowingly devised or knowingly participated in a scheme or plan to defraud." The court noted, however, that intent to defraud could be proven through reckless indifference to the truth or falsity of statements in the context of federal fraud statutes.

In this case, the evidence indicated that Trump did not personally meet, interview, or select TU instructors or mentors, even though Trump—and marketing materials that were approved by Trump—had represented that TU instructors or mentors were "handpicked" by Trump.

According to the court, the record contained a genuine issue of material fact regarding Trump’s knowing participation in an allegedly fraudulent scheme.

The case is No. 3:13-cv-2519-GPC-WVG.

Attorneys: Aaron M. Olsen (Zeldes, Haeggquist & Eck, LLP) for Art Cohen. Benjamin James Morris (Foley & Lardner LLP) for Donald J. Trump.

Cases: RICO CaliforniaNews