Antitrust Law Daily Wrap Up, RICO—SDTex: Construction Contractor Fails to Plead Racketeering Claims Based on Competitor’s Bribery of School District Official, (Nov 16, 2012)

By Thomas Long, J.D.

A commercial construction repair business (The Gil Ramirez Group) and its principal owner (collectively, “GRG”) failed to state civil RICO claims based on an alleged bribery scheme influencing the awarding of contracts by the Houston Independent School District (“HISD”), the federal district court in Houston has ruled (The Gil Ramirez Group, LLC v. Houston Independent School District, November 15, 2012, Ellison, K.).

After a bond issue was approved to raise proceeds for school district construction, HISD adopted a bidding system to award contracts for construction and repair jobs. HISD first selected three contractors for the northern region of the school district and three for the southern region. In 2008, GRG was one of the contractors selected by HISD, along with a competitor of GRG’s, Fort Bend Mechanical, Ltd. (“FBM”).

FBM and David Medford, its principal (collectively, “FBM defendants”) were among the political donors to the president of HISD’s board of trustees, Lawrence Marshall. GRG alleged that, when Lawrence became president of the board, he began to take steps to award contracts to his political donors. Medford allegedly made large donations to Marshall’s campaigns between 2008 and 2011, and allegedly wrote a $25,000 check to Marshall five days before FBM was approved as a contractor for HISD. Marshall allegedly made changes in the procedures for awarding bids so that he could funnel contracts to FBM and other donors.

GRG also alleged that, every month, FBM and another defendant contractor each paid $3,000 and $2,500 respectively to consulting firm JM Clay and Associates (also a defendant in this case). That firm was operated by Marshall’s friend and campaign treasurer. The payments to JM Clay allegedly were transferred to Marshall or Marshall & Associates, a business entity owned by Marshall. GRG asserted that there was no indication that Marshall performed any work for these payments.

HISD also allegedly siphoned purpose-specific bond money to use for general operating services, and then improperly paid fees to FBM.

GRG alleged numerous violations of law by HISD, Marshall and his company, the FBM defendants, JM Clay, and others. These claims included violations of 18 U.S.C. §1962(b), (c), and (d) of the Racketeer Influenced Corrupt Organizations (RICO) Act.

The FBM defendants filed a motion to dismiss GRG’s third amended complaint for failure to state a claim.

Racketeering Activity

GRG alleged that FBM engaged in a pattern of racketeering activity that included bribery, wire fraud, and money laundering. FBM contended that GRG’s allegations of predicate offenses were mere legal conclusions.

Bribery. The federal bribery statute, 18 U.S.C. §201, makes it a criminal offense to directly or indirectly give, offer, or promise anything of value to a public official, with the intent to influence any official act. The definition of the term “public official” includes an officer, employee, or other person acting for or on behalf of the United States, or any department, agency, or branch of government, in any official function.

FBM argued that GRG (1) did not identify a “public official” within the meaning of Sec. 201 and (2) did not plead the necessary intent.

The U.S. Supreme Court held in Dixson v. United States, 465 U.S. 482, 496 (1984) that a “public official” for purposes of Sec. 201 is not limited to federal government employees, the district court noted. The proper question, the Court stated, is whether the person occupied a position of public trust with official federal responsibilities—that is, some degree of official responsibility for carrying out a federal program or policy.

According to the district court, a person like Marshall could be considered a “public official” under Sec. 201 if facts were alleged to indicate that he occupied a “position of public trust with official federal responsibilities.” However, GRG failed to assert that HISD was “charged with the administration of federal funds.” In order to state a predicate act of racketeering under Sec. 201, GRG would have to identify what federal funds or other federal responsibilities Marshall was charged with, the court said. Because GRG failed to do so, the allegations of RICO Act violations based on violations of Sec. 201 were dismissed without prejudice. GRG was permitted to amend the complaint in order to plead facts supporting the inference that Marshall was a public official for purposes of Sec. 201.

With regard to intent, the court held that GRG did plead sufficient facts to support the inference that payments by Medford and FBM were made with the requisite intent to influence an official act. It was not required that the alleged payment be made in exchange for an explicit promise to perform or not perform an official act; intent could be established by circumstantial evidence.

GRG alleged that FBM and Medford made large payments that were passed on to Marshall, without any indication that Marshall performed any services for the payments. The allegations supported the inference that the payments were made with the intent to bribe Marshall, the court said.

Wire fraud. The FBM defendants argued that GRG failed to identify any allegedly fraudulent statements to support GRG’s contention that FBM engaged in predicate acts of wire fraud in violation of 18 U.S.C. Sec. 1343. However, the court noted, a “scheme to defraud” was not limited to false representations. A scheme to defraud could include a scheme “to deprive another of the intangible right of honest services.” Therefore, the FBM defendants could be charged with a violation of Sec. 1343 based on their efforts to bribe Marshall. Furthermore, unlike a bribery offense under Sec. 201, a wire fraud offense under Sec. 1343 did not require the government official involved to have federal responsibilities, the court said. In the court’s view, GRG adequately alleged the predicate offense of wire fraud.

Money laundering. The court held that GRG failed to allege violations of the federal money laundering statute, 18 U.S.C. Sec. 1956. To establish money laundering, a plaintiff must show that a defendant (1) knowingly conducted a financial transaction; (2) that involved the proceeds of an unlawful activity; (3) with the intent to promote or further unlawful activity.

GRG alleged that three groups of transactions constituted money laundering: the payment of a two percent fee to HISD, the $25,000 contribution from Medford to Marshall, and the payments to Clay that Clay ultimately transferred to Marshall.

No facts were asserted to indicate that FBM’s payments to Clay or Medford’s payments to Marshall involved any illegal proceeds, the court said. In addition, the allegations specifically indicated that the fees paid by FBM had nothing to do with furthering the alleged bribery operation. Leave to amend would be futile, and the RICO claim based on the predicate offense of money laundering was dismissed with prejudice.

Enterprise

A plaintiff alleging a RICO violation must plead the existence of an “enterprise” that is distinct from the “person” charged with committing a pattern of racketeering activity.

GRG argued that “the operation of the FBM entities separate and apart from the racketeering activities qualifies them as an enterprise under the RICO [Act].” However, the court said, FBM cannot be the RICO enterprise because FBM was alleged to be one of the persons committing the predicate acts forming the pattern of racketeering.

GRG did, however, plead sufficient facts to support the inference that certain defendants had formed associations-in-fact based on a common and continuous purpose of committing bribery, in the court’s view. In the complaint, GRG did not claim that their pleadings supported the existence of an association-in-fact based on the bribery scheme but instead alleged that an association-in-fact existed among the defendants because they all had some relationship with one another. This was not sufficient to establish an enterprise, the court said; there was no discernible ongoing organization among all of the defendants. GRG was given leave to amend the complaint to allege the association-in-fact described by the court, or any other association-in-fact that comported with the legal requirements for establishing a RICO enterprise.

“Acquisition” Injury

Section 1962(b) of the RICO Act prohibits a person from acquiring or maintaining an interest in an enterprise through a pattern of racketeering. To state a claim under Sec. 1962(b), plaintiffs must allege that their injuries were proximately caused by a RICO person gaining an interest in, or control of, an enterprise through a pattern of racketeering activity. This injury must be distinct from the injuries caused by the predicate acts.

GRG alleged no facts to suggest that any of the FBM defendants acquired or maintained their interest in FBM—or any potential association-in-fact enterprise among the defendants—through a pattern of racketeering activity, the court said. Therefore, the Sec. 1962(b) claim was dismissed with prejudice.

The case is No. 4:10-cv-4872.

Chad W. Dunn (Brazil & Dunn) for The Gil Ramirez Group, LLC. Arturo Gabriel Michel (Thompson Horton LLP) for Houston Independent School District.

Cases: RICO TexasNews