Opinion
Civil No. 03-3210 (JRT/FLN).
June 1, 2004
David R. Marshall and Crystal M. Ovsak, FREDRIKSON BYRON, Minneapolis, MN, for plaintiff.
Robert M Gardner, GARDNER LAW OFFICE, St. Paul, MN, for defendant Stayhealthy, Inc.
Morton R. Branzburg, Andrew O. Schiff, Klehr and Brad P. Bender, KLEHR HARRISON HARVEY BRANZBURG ELLERS, Philadelphia, PA 19102; and Joseph M. Sokolowski and Kevin R. Coan, PARSINEN KAPLAN ROSBERG GOTLIEB, Minneapolis, MN, for defendants AmerisourceBergen Corp., AmerisourceBergen Drug Corp., AmerisourceBergen Services Corp., and Bergen Brunswig Drug Co.
ORDER
Defendants AmerisourceBergen Corp., AmerisourceBergen Drug Corp., AmerisourceBergen Services Corp., and Bergen Brunswig Drug Co. ("ABC" or "ABC defendants") appeal a January 27, 2004 Order of United States Magistrate Judge Franklin L. Noel granting the plaintiff's motion to amend the complaint. ABC argues the Order is contrary to law to the extent it permits Petters to assert proposed claims for relief under The Racketeer Influenced and Corrupt Organizations Act ("RICO"). ABC requests that this Court modify the Order such that plaintiff is precluded from asserting Counts XI and XII. For the reasons discussed below, the appeal is denied, and the Magistrate Judge's Order is affirmed.
BACKGROUND
The Court provides a brief summary of the procedural background and relevant facts, assuming as true all facts in the complaint. This lawsuit was filed in May of 2003. During discovery, Petters found information leading Petters to believe it had additional claims against defendants. Therefore, in December, Petters moved for leave to amend the complaint to add claims of fraud, civil conspiracy, civil RICO, and punitive damages. The motion to amend was resisted, and the Magistrate Judge heard oral argument. The Magistrate Judge, in a short order, granted leave to amend. Defendant ABC then filed this appeal.
ABC requested leave to file a reply brief to draw to the Court's attention to a Supreme Court case that ABC believed countered the argument presented by Petters. This reply brief is not improper and will be allowed. The Court has considered the reply brief for this Opinion and Order.
The ABC defendants are engaged in wholesale distribution of pharmaceuticals and other consumer goods in pharmacies. Defendant Stayhealthy engages in selling consumer goods, and as relevant here, manufactures and distributes goods used to measure body fat and caloric expenditures ("body fat goods"). In March of 2002, ABC issued to Stayhealthy a purchase order for $2 million worth of the body fat goods. Plaintiff Petters became involved with Stayhealthy and ABC when Stayhealthy sought financing to manufacture the goods Stayhealthy represented it had sold to ABC. Petters initially provided financing for a purchase order in the amount of $1,680,000. Stayhealthy represented to Petters, allegedly in concert with ABC, that the sale was unconditional when in fact it was a consignment sale. This misrepresentation was for the purpose of securing the financing.
In August, Petters agreed to a second loan and advanced significant additional funds. As part of the second loan, Petters received a promissory note and a separate Security Agreement in which Petters received an option for Stayhealthy common stock. This Security Agreement appears to serve as security for both loans.
ANALYSIS
I. Standard of Review
In this case, the grant of leave to amend necessitated a finding that the amended complaint stated a claim. The court of appeals reviews such findings de novo, therefore, the Court will review the Order of the Magistrate Judge under the same standard. United States ex rel. Gaudineer Comito, L.L.P. v. Iowa, 269 F.3d 932, 936 (8th Cir. 2001), cert. denied, 536 U.S. 925 (2002)) ("The denial of leave to amend based on futility means that the court found that the amended complaint failed to state a claim, and our review is therefore de novo.") (citing J.R. Stripling v. Jordan Prod. Co., LLC, 234 F.3d 863, 873 (5th Cir. 2000); Frey v. City of Herculaneum, 44 F.3d 667, 671 (8th Cir. 1995)). See also Lumsden v. Ramsey County Cmty. Corr. Dept., 2002 WL 31886630 *1 n. 2 (D. Minn. Dec. 23, 2002) (applying de novo standard of review on appeal of Magistrate Judge order denying leave to amend for futility).
II. Standard for Leave to Amend
Federal Rule of Civil Procedure 15(a) provides in pertinent part:
A party may amend the party's pleading once as a matter of course at any time before a responsive pleading is served. . . . Otherwise, a party may amend the party's pleading only by leave of court or by written consent of the adverse party; and leave shall be freely given when justice so requires.
Despite this liberal standard, leave to amend is improper if the proposed amendment does not state a claim on which relief may be granted. United States v. Best Care Home Health, Inc., 2002 WL 31248025 (D. Minn. Oct. 7, 2002) ("To deny a plaintiff leave to amend under Rule 15(a) based on the futility of the proposed amendment, a district court must find that the amended complaint fails to state a claim upon which relief can be granted.") (citing Gaudineer Comito, L.L.P., 269 F.3d at 936). See also Lumsden, 2002 WL 31886630 (noting that a court has discretion to deny leave to amend if amendment would be futile and a claim is futile when it fails to state a claim for relief) (citing Foman v. Davis, 371 U.S. 178, 182 (1962); Gaudineer Comito, 269 F.3d at 935.
III. RICO's Securities Fraud Exception
ABC argues that leave to amend is futile in this case because Petters' RICO claims are expressly barred by the Private Securities Litigation Reform Act ("PSLRA"). The conduct that ABC suggests amounts to actionable securities fraud is the option for Petters to convert the debt owed by Stayhealthy to Stayhealthy stock. ABC argues that this conduct amounts to actionable securities fraud, because the alleged fraud (representing that the purchase of body fat goods was not contingent) coincided with the securities transaction (pledging stock as collateral for the loans). Petters counters that the alleged conduct is not actionable as securities fraud, because the misrepresentation in question did not pertain to the stock itself.
Section 1964(c) of the RICO statute provides that "no person may rely upon any conduct that would have been actionable as fraud in the purchase or sale of securities to establish a violation of Section 1962." 18 U.S.C. § 1964(c). Prior to this amendment, "plaintiffs regularly elevated fraud to RICO violations because RICO offered the potential bonanza of recovering treble damages." Bald Eagle Area Sch. Dist. v. Keystone Fin., Inc., 189 F.3d 321, 327 (3d Cir. 1999) (hereinafter " Bald Eagle"). The amendment was intended to "eliminate securities fraud as a predicate offense in a civil RICO action." Id. (citing H.R. Conf. Rep. No. 104-369, at 47 (1995)). For the "securities fraud" exception to apply, courts have held that it is not necessary that the particular RICO plaintiff be able to maintain a securities fraud; the alleged conduct must nonetheless be actionable as securities fraud for a RICO claim to be precluded. See, e.g., Howard v. America Online, Inc., 208 F.3d 741, 749 (9th Cir. 2000) (precluding RICO action where claims implicated conduct which could have been actionable securities fraud despite claimants' lack of standing to assert those claims); Florida Evergreen Foliage v. E.I. DuPont De Nemours and Co., 165 F. Supp.2d 1345, 1356-58 (S.D. Fla. 2001) (same).
It is true that there is no requirement that there be a misrepresentation about the value of a particular security to state an actionable claim for securities fraud. SEC v. Zandford, 535 U.S. 813, 820 (2002). There must, however, be some connection between the securities transaction and the misrepresentation, or the courts risk turning every fraud "that happened to involve securities into a [securities laws] violation." Id. at 820 ("the statute must not be construed so broadly as to convert every common-law fraud that happens to involve securities into a violation of § 10(b)."). That was not the intent of Congress in enacting the securities fraud exception to the RICO statute. Bald Eagle, 189 F.3d at 327.
In this case, the "connection" between the alleged fraud and the securities transaction is tenuous, at best. ABC has not established that any private plaintiff could bring a securities case by alleging this conduct — it simply would not be actionable as a securities violation. This case is distinguished readily from those cited by the ABC defendants. A preliminary and simple distinction is that many of the cases cited by ABC involved either express securities fraud, conduct that was admittedly violative of the securities law, or conduct that was the basis for SEC investigation. For example, in Bald Eagle, the plaintiffs admitted that some unpled, but related conduct amounted to securities fraud, but argued the securities fraud exception did not apply because some of the conduct was not related to securities. The Court rejected this argument, holding that "plaintiff cannot avoid the RICO Amendment's bar by pleading mail fraud, wire fraud and bank fraud as predicate offenses in a civil RICO action if the conduct giving rise to those predicate offenses amounts to securities fraud." Bald Eagle, 189 F.3d at 330. In contrast, the instant case does not present a plaintiff attempting "surgical presentation of the cause of action" that threatens to "undermine the congressional intent behind the RICO Amendment." Id.
As another example, the case is easily distinguished from the District of Minnesota case cited by ABC, Stephenson v. Deutsche Bank AG, 282 F. Supp.2d 1032, 1071 (D. Minn. 2003). In that case, plaintiffs pled both securities fraud claims and, in the alternative, RICO civil claims. Id. The Court held that the PSLRA barred plaintiffs' RICO claims where plaintiffs brought claims for securities fraud violations and, in the alternative, brought claims for civil RICO. The Court noted that "the securities laws . . . generally provide adequate remedies for those injured by securities fraud." Id. (quotations and citation omitted). See also Howard, 208 F.3d at 749 (rejecting plaintiffs' argument that because they did not have standing to pursue securities claim, they were not precluded from making claim under RICO); In re Enron Corp. Sec. Derivative "ERISA" Litig., 284 F. Supp.2d 511, 620 (S.D. Tex. 2003) (noting that the proper inquiry is "not whether the wrongful conduct is `connected to and dependent upon securities fraud,' but whether the conduct is `actionable as securities fraud'" and finding that inquiry satisfied where the plaintiffs "clearly alleged five types of named predicate acts that are parts of an overarching scheme and conspiracy to defraud current and prospective shareholders of Enron stock in a Ponzi scheme, with all alleged acts and omissions intended to achieve the same goal, personal enrichment of Defendants at the expense of the corporation, its shareholders, and its ERISA plan participants and beneficiaries") (citing Bald Eagle, 189 F.3d at 330).
Unlike the cited cases, this is not an instance in which "the conduct alleged as predicate acts was so closely connected to and dependent upon conduct undertaken in connection with the purchase or sale of securities that is was actionable as securities fraud." Bald Eagle, 189 F.3d at 329. The conduct is not independently actionable as securities fraud, and therefore the Order allowing plaintiff to amend was not erroneous or contrary to law.
ORDER
Based on the foregoing, all the records, files, and proceedings herein, IT IS HEREBY ORDERED that defendant ABC's motion for leave to file a reply brief [Docket No. 78] is GRANTED. IT IS FURTHER ORDERED that the Magistrate Judge's Order of January 27, 2004 [Docket No. 64] is AFFIRMED.