Antitrust Law Daily Wrap Up, TOP STORY—DNJ: Prudential’s New Jersey RICO Claims Proceed Against Goldman Sachs over Alleged Misinformation Regarding Mortgage-Backed Securities , (Apr 10, 2013)

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

The Prudential Insurance Company of America and related Prudential investment companies ("Prudential") have stated claims under the New Jersey RICO law against Goldman Sachs and Company and two related entities ("Goldman"), alleging that Goldman made material misrepresentations in its offering materials regarding residential mortgage-backed securities (RMBS), the federal district court in Newark, New Jersey has ruled (The Prudential Insurance Company of America v. Goldman Sachs and Co., April 9, 2013, Wigenton, S.).

Goldman Sachs & Company is a New York-based investment firm. Goldman bought mortgage loans, pooled them, underwrote securities, and sold securities to investors. Prudential filed suit against Goldman, alleging that it made material misrepresentations in its offering materials for its RMBSs. Prudential further alleged that Prudential had relied on the offering materials, and that Goldman must have known they contained false and misleading statements due to its knowledge of the underlying loan information and the originators’ practices. Prudential asserted New Jersey RICO claims, among other claims. Goldman moved to dismiss.

Choice of law. The court declined to rule on a choice-of-law argument by Goldman. Goldman contended New York law should apply because it was based in New York and disseminated the offering materials from New York, because the alleged RICO enterprise was made up of New York entities, because New York had a stronger interest in having its statute apply, and because Prudential "failed to allege that securities were sold in New Jersey, that meetings were held in New Jersey, that misrepresentations were made in New Jersey, or that any underlying assets were located in New Jersey." Prudential claimed New Jersey law should apply because it received and relied on the materials in New Jersey and incurred losses in New Jersey, and because the New Jersey legislature intended the RICO Act to have a "broad application." Since New York’s RICO statute did not provide for a private right of action, while New Jersey’s statute did, the choice of law determination could dispose of the RICO claim.

The court found it would benefit from additional information regarding aspects such as where Goldman made the alleged misrepresentations, where Prudential relied on them, Goldman’s actions outside New York, Prudential’s actions outside New Jersey, and locations of dealings between the parties. The court applied New Jersey law for purposes of the present motion.

New Jersey RICO Act

To state a claim under New Jersey’s RICO Act, a plaintiff must establish five elements: "(1) the existence of an enterprise; (2) that the enterprise engaged in or its activities affected trade or commerce; (3) that defendant was employed by, or associated with the enterprise; (4) that he or she participated in the conduct of the affairs of the enterprise; and (5) that he or she participated through a pattern of racketeering activity." The parties did not dispute the third or fourth elements, and hence the court considered them to be satisfied.

Enterprise. The court rejected Goldman’s argument that Prudential had not satisfied the "enterprise" element because "corporate affiliates, such as a parent corporation and its subsidiaries, cannot associate with each other to form an ‘enterprise’ for purposes of federal RICO." The court observed that, while the federal RICO statute might not have applied, the New Jersey Supreme Court had found that the New Jersey would be "satisfied if there exists a group of people, no matter how loosely associated, whose existence or association provides or implements the common purpose of committing two or more predicate acts." The broader New Jersey definition encompassed the enterprise alleged by Prudential.

New Jersey trade or commerce. The court also dispensed with Goldman’s contention that the enterprise did not affect New Jersey trade or commerce because the alleged conduct "did not take place in New Jersey or have any effect in New Jersey," and "the alleged enterprise consisted entirely of New York entities operating in New York." Prudential adequately alleged that its RMBS purchases "were all made from New Jersey," that "the decisions to purchase, including reliance on the Offering Materials, also took place in New Jersey," and that the alleged conduct caused economic harm to New Jersey residents, in the court’s view.

Pattern of racketeering activity. The New Jersey RICO Act defines "racketeering activity" as any of the listed "crimes under the laws of New Jersey or equivalent crimes under the laws of any other jurisdiction." Prudential alleged predicate act violations of the New Jersey Uniform Securities Act, as well as New Jersey statutes proscribing deceptive practices, theft by deception, and falsified records. As Prudential adequately pled conduct underlying claims for common law fraud, aiding and abetting fraud, equitable fraud, and negligent misrepresentation, and the predicate acts stemmed from the same conduct, Prudential adequately pled the RICO predicate acts.

RICO conspiracy. A claim for conspiracy to violate New Jersey’s RICO Act requires both "an agreement to conduct or participate in the conduct or the affairs of the enterprise" and "an agreement to the commission of at least two predicate acts." Prudential alleged that Goldman conspired with other entities, including other Goldman entities, to violate the New Jersey RICO Act and that Goldman committed the alleged racketeering activity.

Since Prudential had "sufficiently pled the existence of an enterprise and a viable RICO claim," Prudential only had to establish an agreement to violate the New Jersey RICO Act. Goldman argued that the conspiracy claim failed "because corporate affiliates cannot engage in an intra-corporate conspiracy as a matter of law." However, the court observed that Goldman relied on case law interpreting the federal RICO Act for this assertion. In any case, Prudential had alleged that Goldman had conspired not only with Goldman entities, but also with "others." Therefore, the court found that Prudential had adequately alleged a New Jersey RICO conspiracy claim.

The court also declined to dismiss Prudential’s claims for common law fraud, aiding and abetting fraud, equitable fraud, and negligent misrepresentation.

The case is Civil Action No. 12-6590 (SDW)(MCA).

Attorneys: David W. Field (Lowenstein, Sandler LLP) for The Prudential Insurance Co. of America; A. Ross Pearlson (Wolff & Samson PC) for Goldman, Sachs & Co.

Companies: The Prudential Insurance Co. of America; Park Place Commerce Investments, LLC; Commerce Street Investments, LLC; Pru Alpha Fixed Income Opportunity Master Fund I, L.P.; Prudential Trust Co.; Prudential Investment Portfolios 2; Goldman, Sachs & Co.; Goldman Sachs Mortgage Co.; GS Mortgage Securities Corp.

MainStory: TopStory RICO NewJerseyNews