Antitrust Law Daily Wrap Up, RICO—S.D.N.Y.: Allegations of fraud by partner fail to state RICO claims against accounting firm, (Nov 20, 2013)

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

Customers of a certified public accountant who allegedly committed fraud in filing the customers’ taxes failed to state RICO claims against the accounting firm in which the accountant was a partner, the federal district court in New York City has ruled (Targum v. Citrin Cooperman & Co., LLP, November 19, 2013, Scheindlin, S.). The court also rejected a claim under the Computer Fraud and Abuse Act and a motion for sanctions by the accounting firm against the customers.

Matthew G. Weber, a certified public accountant and partner at Citrin Cooperman & Company, LLP, began preparing and filing taxes for Andrew and Erika Targum, Andrew S. Targum, P.C., Andrew Scott Targum, P.C., Targum Britton & Tolud, LLP (TBT), and Irwin Seeman (“the plaintiffs”) in 2003. In 2005, Weber was sued for accounting malpractice, and retained TBT to represent him, paying for the legal services by providing his accounting services free of charge. As part of these services, Weber and Citrin received access to computers, including software and spreadsheets containing tax information, and the plaintiffs made wire transfers to a “Citrin-identified bank account” to pay city and state taxes.

Weber allegedly prepared two sets of tax filings, one provided to the plaintiffs, and the other to relevant tax authorities. Without the plaintiffs’ knowledge, the latter “grossly underreported” the plaintiffs’ taxable income and made other misrepresentations. Weber also allegedly failed to file certain required tax returns, while representing that he had. On February 28, 2012, Citrin sent the plaintiffs a mass-mailed letter, stating that Weber had been providing services to them without Citrin’s knowledge or authorization. Citrin’s Chief Operating Officer later sent Seeman a letter demanding payment for services rendered by Citrin. In February 2012, Weber was indicted on three counts of grand larceny and one count of repeatedly failing to file taxes. Weber pleaded guilty to all charges, and was incarcerated.

The plaintiffs filed suit against Weber, Citrin, and other individuals, alleging violations of the federal RICO Act, the Computer Fraud and Abuse Act, and state law. Citrin filed a sanctions motion under Federal Rule of Civil Procedure 11 and a motion to dismiss.

RICO Act. The court granted the motion to dismiss the RICO claims. The court observed that the complaint was “indisputably prolix.” It “confusingly treat[ed] Weber and Citrin as a unit,” thus failing to put Citrin on notice of the allegations against it, and made many allegations on “information and belief,” allegations that were “especially inadequate under Rule 9(b)’s heightened pleading standard.”

Moreover, the court found “deficient” the plaintiffs’ allegations regarding Citrin’s alleged predicate acts of mail fraud, wire fraud, and engaging in monetary transactions in property derived from unlawful activity. The court observed that the complaint identified only four mailings from Citrin: “(1) the mass-mailed letter sent to Andrew S. Targum, P.C, informing it of Weber’s fraudulent activity (the “2/28/12 Letter”), (2) the same letter sent to Seeman, (3) another letter to Seeman regarding an unpaid balance (the “3/9112 Letter”), and (4) several invoices and collection notices sent to Seeman.” None of these were alleged to contain false statements or could “conceivably give rise to a strong inference of fraudulent intent.” The plaintiffs failed to show how the mailings were connected to the alleged tax fraud scheme. Finally, Citrin could not be held liable for fraudulent mailings sent by Weber because the plaintiffs “fail[ed] to explain how Citrin’s unidentified ‘acts’ could have caused Weber to use the mails or how Weber’s fraudulent scheme was foreseeable.

Citrin also could not be held liable for wire fraud for a falsified power of attorney Citrin allegedly sent to the New York State Department of Taxation and Finance or for tax documents e-mailed between the plaintiffs, Weber, and Citrin, according to the court. Purely intrastate communication was beyond the reach of the federal wire fraud statute and could not serve as a RICO predicate act, and here all parties were located in New York and the plaintiffs did not allege that the communications were interstate.

Finally, the only alleged monetary transactions, other than those from the plaintiffs to Weber, were Weber’s transfer of funds to his family members. The plaintiffs did not allege that Citrin made any transfers. The court observed that courts did not generally impose vicarious liability under RICO unless a corporate defendant was “a central figure in the RICO scheme.” The plaintiffs failed to allege who in “Citrin’s management team” learned of Weber’s fraud or how they did so. The complaint even stated that Citrin’s managing partner only learned of Weber’s actions after the fraud was discovered, that Citrin was apparently ignorant of what its partners did, and that Citrin’s management team may have been “truly oblivious” to the tax fraud scheme. Citrin’s February 28 letter indicated only that Citrin had learned of Weber’s fraud. Moreover, the complaint failed to allege that any high-level employees or partners other than Weber had committed any predicate acts, or that Weber was acting in Citrin’s interest in any way.

Computer Fraud and Abuse Act. The Computer Fraud and Abuse Act provides a cause of action against a person who “intentionally accesses a computer without authorization or exceeds authorized access, and thereby obtains … information from any protected computer.” Here, the complaint alleged that Citrin had “access to Targum’s computers,” and thus failed to allege “unauthorized access.” Instead, the complaint alleged that Citrin and Weber had “exceeded their authorized access by altering information on Targum’s computers, software utilized by Targum, and work-product created by Targum that Citrin and Weber were not entitled to alter,” that Citrin and Weber used the “information in electronic format to alter filings with government agencies,” and that the “altered data has been permanently corrupted.” The court found that the plaintiffs’ allegations “confuse[d] ‘access’ with ‘misuse,’” and that the “misuse [did] not state a claim under the CFAA, because a person does not ‘exceed authorized access’ or act ‘without authorization’ when he misuses information to which he otherwise has access.”

Having dismissed the plaintiffs’ federal claims, the court declined to exercise its supplemental jurisdiction over the plaintiffs’ state law claims. The court also denied Citrin’s motion for sanctions because it failed to serve the plaintiffs with its Third Sanctions motion 21 days before filing it on August 22, 2013, as required by Rule 11’s safe harbor provision.

The case is No. 12 Civ. 6909 (SAS).

Attorneys: Russell Marc Yankwitt (Yankwitt LLP) for Andrew Targum. John Kolsin Crossman (Zukerman Gore, Brandeis & Crossman, LLP) for Citrin Cooperman & Co., LLP. Jonathan B. Schwartzman (Cordova & Schwartzman) for Lorraine Weber. Leo K. Barnes, Jr. (Barnes & Barnes, P.C.) for Vincent Camileri.

Companies: Citrin Cooperman & Co., LLP

Cases: RICO NewYorkNews