Opinion
Civil Action No. 01-3625, Section "C"(3)
June 12, 2002
ORDER AND REASONS
Before the Court is Defendants' Joint Motion to Dismiss Pursuant to FRCP Rules 12(b)(6), 12(b)(7), 9(b), 23.1 and 19. See Rec. Doc. 18. Defendants seek to dismiss Plaintiffs' claims pursuant to RICO, 18 U.S.C. § 1961, et seq., the Securities Exchange Act of 1934, 15 U.S.C. § 78j, and Rule 10b-5, 17 C.F.R. § 240.10b-5. IT IS ORDERED that the remainder of the motion not already denied is hereby partially GRANTED, partially DENIED, and partially DISMISSED as MOOT.
I. BACKGROUND
A. General allegations
Plaintiffs allege that Plaintiff Warren L. Reuther, Jr. ("Reuther") and Defendant James E. Smith, Jr.'s ("Smith") father, James E. Smith, Sr. ("Smith, Sr."), have a business relationship/ dating back more than twenty years and which has resulted in the creation of a number of legal entities (hereinafter "Corporations"). See Rec. Doc. 41 at 5. Each has been a 50 percent shareholder and/or member in these entities, which were formed by Smith as attorney for these entities. See id. Throughout his relationship with Smith, Sr., Reuther was President, Chief Executive Officer ("CEO"), Chairman of the Board ("Chair"), and Managing Member of the businesses, managing the Corporations' day-to-day operations. See id. Smith, Sr., had a hands-off role. See id.
"In 1996 or at the incorporation date of the entities, whichever is later," the Board of Directors ("Board") created the position of CEO and defined its responsibilities. Id. at 6. Reuther was elected to that position and relinquished his title of President to one of Smith, Sr.'s children. See id. Subsequently, Reuther has held himself out as the entities' CEO and Chair, representations that have been noted, for instance, on company stationary and in board meeting minutes. See id.
Reuther remains a significant presence in the Corporations. The Board consists of Reuther, his wife, Nancy Reuther, Smith, and Smith, Sr. See id. at 7. Reuther has never been less than a 49 percent shareholder or member in any of the entities, and he now is a 49 percent shareholder and member in all of the entities. See Id. at 6-7. Smith, Sr., now has a 25 percent stake in the entities and has divvied up another 25 percent to six family members. See id. at 7.
Apparently from approximately 1996 through at least some portion of 1998, Smith has acted as lead counsel for the entities, and his law firm, Smith Martin, APLC ("Smith Martin") has handled personal matters for Reuther. See Id. "Smith has abused his position as a member of the Board . . . and an officer of the [C]orporations by unilaterally directing Smith Martin to take actions . . . not in the best interest of the Corporations or the other shareholders/members, but that specifically give preference to Smith and his positions and actions he desires to take within the Corporations." Id. As the Corporations' counsel, Smith Martin has assisted Smith in violating fiduciary duties and has engaged in conflicts of interest. See id. at 8. For instance, Smith's acquisition of his interest in the Corporations and his assumption to the Presidency was not properly disclosed to his client. See id. Additionally, Smith "has exploited his representation of the client and used information relating to the client's representation to the client's disadvantage." See Id.
Furthermore, when Reuther assumed the positions of CEO and Chair, the By-laws (apparently of the Corporations) did not define these positions and were not amended to show their creation. See Id. at 9. Smith Martin did not advise Reuther that these positions did not exist in the By-laws. See Id.
Moreover, it is alleged that Smith Martin has acted unlawfully in connection with meetings of the Corporations' shareholders. See Id. at 9-10. Smith Martin attorneys were instructed to modify minutes to reflect incorrect information, to the benefit of Smith with respect to his connection with the Companies. See Id. at 10. Smith instructed Smith Martin to proceed to benefit Smith and not, as instructed by shareholders or Directors, in the interests of the shareholders and Directors. See Id.
In addition, Smith Martin "failed to provide in the organizational documents of the Corporations for the resolution of any such deadlock situations or any exit strategy for equity interest holders to sell their interests in the entities." Id.
Of particular interest here is Smith's compensation agreement as President, under which he was to receive twenty percent of the Corporations' net profits, except for those of Shreveport Paddlewheels, L.L.C. ("Shreveport Paddlewheels") and New Orleans Paddlewheels, Inc. ("New Orleans Paddlewheels"). See Id. at 10-11. Shreveport Paddlewheels is wholly owned by New Orleans Paddlewheels, of which Reuther is a 49 percent shareholder. See Id. at 11. Both of these entities own riverboat casino licenses, and revenues to Shreveport Paddlewheels are $130,000 per month. See id. at 11.
In significant part, the case concerns the entitlement, and propriety of transactions relating, to these revenues. At some point, New Orleans Paddlewheels shareholders voted to transfer ownership of Shreveport Paddlewheels to the New Orleans Paddlewheels shareholders. See Id. at 11. The timing of the transfer was critical for tax purposes. Smith Martin petitioned and received approval for the transfer from the Louisiana Gaming Control Board ("Gaming Board"). See Id. Smith Martin prepared documents reflecting the New Orleans Paddlewheels shareholders' intent to transfer the Shreveport Paddlewheels ownership interest to the New Orleans Paddlewheels shareholders. See Id. at 12. In January 2001, Reuther received distributions, apparently flowing from the Shreveport Paddlewheels license, from New Orleans Paddlewheels. See Id. Smith then instructed Smith Martin attorneys to tell the Gaming Board that the New Orleans Paddlewheels shareholders had decided not to transfer the ownership of Shreveport Paddlewheels, and in August 2001, the distributions resulting from the license ceased. See Id. at 12-13. Smith had instructed the funds to go to New Orleans Paddlewheels, then diverted them to other entities from which he receives twenty percent of the net profits, to the detriment of, apparently, the New Orleans Paddlewheels shareholders and the financial benefit of Smith. See id. at 13. Reuther only learned in late October 2001 that the transaction to transfer Shreveport Paddlewheels' ownership did not take place. See Id.
Meanwhile, in spring and summer 2001, Smith, as the Corporations' President and counsel, applied for a loan for New Orleans Paddlewheels. See Id. The application stated that the Shreveport Paddlewheels dividends were not going to New Orleans Paddlewheels. See Id. Thus, those dividends were not subject to the bank's credit rights. See id. By abandoning the transfer, however, Smith allowed the bank a security interest in, apparently, those proceeds, thereby changing obligations as understood by the shareholders and guarantors of the notes at the time they were executed with the bank. See id. Additionally, Reuther executed a continuing guaranty of $2 million in connection with the loan. See id. at 14.
On October 30, 2001, Smith took several steps to remove Reuther as CEO. See id. Smith told Reuther that if he did not "resign" as CEO by November 2, 2001, he would be fired. See id. Also that day, Smith cut off Reuther's email and apparently prevented the latter from entering his office. See id. Also at about that time, Smith terminated the health care insurance plans of Reuther and his family without notifying Reuther or providing him the opportunity to purchase continuing insurance. See id. at 15.
Under the Articles of Incorporation and By-laws of the Corporations and pursuant to Louisiana law, La. R.S. § 12:82, however, one officer of the Corporations cannot fire another. See id. Rather, an officer may only be removed by a majority vote of the Board. Here, the Board has not voted to remove Reuther as CEO. See id.
B. RICO allegations
Plaintiffs' RICO allegations are as follows:
Smith Martin and the Corporations are enterprises for purposes of § 1962(b). See id. at 18. Smith Martin is the enterprise for purposes of § 1962(c). See id.
Smith himself owed Reuther a fiduciary duty not to self-deal, to act in good faith, and to disclose material facts concerning the Corporations' operations. See id. at 19.
Smith's pattern of racketeering activity includes: (a) making misrepresentations about Reuther's status as CEO and about Smith's Presidency and ownership interest in the Corporations; (b) altering Board meeting minutes; (c) mailing corporate certificates with false information to the Louisiana Secretary of State; (d) mailing investor packages containing false information; (e) failing to disclose and engaging in conflicts of interest.; (f) failing to provide for an exit strategy for Corporations owners wishing to sell their interests and failing to provide for a mechanism to resolve shareholder, Board member, member, and manager deadlocks; (g) refusing to let Reuther inspect corporate documents; (h) interfering with Reuther's ability to perform his job as Chair and CEO; (i) failing to complete documents requested by Corporations officers and directors; (j) failing to complete the Shreveport Paddlewheels-New Orleans Paddlewheels buyout to increase Smith's personal profit; and (k) misrepresenting to the Gaming Board, Reuther, and, apparently, the New Orleans Paddlewheels shareholders the intentions of New Orleans Paddlewheels shareholders to transfer the Shreveport Paddlewheels ownership interest. See id. at 19-20.
Smith's course of conduct began in January 1999 and continues, harming Reuther and the Corporations' shareholders. See id. at 22. Reuther has suffered "pecuniary damage to his business and property, including . . . lost revenue, lost wages, loss of employment, lost business opportunity, loss of stock value, [and] damage to personal and business reputation." Id. The Corporations' shareholders have suffered "pecuniary damages to their business and property, including . . . lost revenue and . . . stock value." Id.
C. Securities laws violations allegations
Plaintiffs allege that Smith Martin and/or Smith Rosenberg, L.L.C., Smith Martin's successor, and, apparently, the firms' attorneys aided and abetted Smith in making false statements and omitting material facts in investor materials "to sell security interests and/or enter into investment contracts." Id. at 24. Relying upon Smith's and Smith Martin's false statements and/or omissions of material facts, Reuther has purchased securities and/or entered into investment contracts in, inter alia, the Royal St. Charles Hotel and the Garden District Hotel. See id. at 25. Moreover, Reuther has reinvested significantly in, and executed personal guarantees on behalf of, the Corporations and other related limited liability companies. See id. As a result of their actions, Defendants are liable to Reuther and the Corporations pursuant to 15 U.S.C. § 78j and 17C.F.R. § 240.10b-5. See id.
II. ANALYSIS
A. Standard of review
When considering a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted, a district court must accept the factual allegations of the complaint as true and resolve all ambiguities or doubts regarding the sufficiency of the claim in favor of the plaintiff. See Fernandez-Montes v. Allied Pilots Ass'n, 987 F.2d 278, 284 (5th Cir. 1993). Unless it appears "beyond a doubt that the plaintiff can prove no set of facts in support of his claim," the complaint should not be dismissed for failure to state a claim. Id. at 284-285 (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957)). However, conclusory allegations or legal conclusions masquerading as factual conclusions will not defeat a motion to dismiss. See Blackburn v. City of Marshall, 42 F.3d 925, 931 (5th Cir. 1995) (citing Fernandez-Montes, 987 F.2d at 284).
B. RICO claims
In seeking dismissal of the RICO claims here, Defendants advance two primary arguments. First, Defendants contend, Plaintiffs lack standing to bring their claims. Second, Plaintiffs either have insufficiently pleaded any viable RICO claim or may not recover under the theories asserted.
Defendants also argue that dismissal of Plaintiffs' RICO claims is appropriate to the extent Plaintiff has pleaded fraud in the sale of securities in violation of 15 U.S.C. § 78j and 17 C.F.R. § 240.10b-5 as predicate acts under 18 U.S.C. § 1961(1). See Rec. Doc. 18 at 10. Plaintiffs, however, have represented that they do not seek recovery under 18 U.S.C. § 1961(1) on the basis that Defendants violated these underlying securities laws. See Rec. Doc. 26 at 19. Accordingly, insofar as Defendants argue here for dismissal of the RICO claims to the extent they are predicated on the above-mentioned securities fraud laws, the motion is dismissed as moot.
1. RICO Standing
Defendants first argue that Plaintiffs lack standing because they have not pleaded injuries proximately caused by Smith's alleged racketeering activities. The Fifth Circuit has held that RICO "does not impose much of a standing requirement upon plaintiffs." Whalen v. Carter, 954 F.2d 1087, 1090 (5th Cir. 1992). Both sides agree — as does the Court — that Holmes v. Sec. Investor Prot. Corp., 503 U.S. 258, 112 S.Ct. 1311, 117 L.Ed.2d 532 (1992), sets the appropriate standard for determining standing — the alleged § 1962 violation must proximately cause the plaintiffs injury to business or property. Here, Plaintiffs clearly have standing. The alleged goal of the RICO activity was for Smith to gain control of the Corporations and financially benefit himself at the expense of the Corporations' other shareholders, including Reuther. In order to effect control, Smith needed to unload Reuther, who is alleged to have been the Corporations' de facto CEO and represented to have been as such to, inter alia, the public, investors, and banks. Thus, Reuther himself and on behalf of the Corporations" shareholders, has standing arising from the loss of his own employment status and influence and also the proceeds he allegedly was and is entitled to as a shareholder.
The Court notes that his 49 percent stake was by far the largest, nearly twice that of Smith, Sr., at 25 percent.
To the extent Defendants claim that Reuther's firing is not a cognizable injury under RICO, the Court disagrees. Defendants paint with too broad a brush. The cases they cite are all clearly distinguishable for much the same reasons.
In support of this argument, Defendants first cite in support Shearin v. E.F. Hutton Group, Inc., 885 F.2d 1162 (3d Cir. 1989). Hutton dealt with allegations that the goal of the alleged RICO activity was to bilk a brokerage firm's customers. See id. at 1164. Shearin was hired by a subsidiary of a parent company that, along with another subsidiary, allegedly agreed to used the first subsidiary to commit the alleged wrongful actions. See id. Shearin was fired when she did not play the "good soldier." Id. at 1168. The various alleged misdeeds of the RICO defendants in that case did not "cause" her to be fired, however. The RICO defendants were not directing the alleged RICO activity at her, however; rather, the persons injured by the predicate acts were the duped customers. See id.
In the instant case, however, the RICO goal was for Smith to gain control of the Corporations, and to do so, he had to "fire" Reuther. That was one of the predicate acts and furthered the goal. Since his firing was "caused" by the misdeeds of the defendants, the instant termination is distinguishable from that in Shearin.
Hecht v. Commerce Clearing House, 897 F.2d 21 (2d Cir. 1990), is distinguishable for the same reason. According to his allegations, Hecht was working for a company upon whose customers the alleged RICO misconduct was perpetrated. See id. at 22. It was further alleged that when Hecht would not go along with the scheme, he was fired. See id. Assuming the allegations as true, the court noted that Hecht was neither the target of the racketeering, nor one of the customers. See id. at 24. His firing may have been a factual result of the RICO activity, but not the legal cause. See id. In the instant case, again, the RICO activity's alleged purpose was for Smith to gain control of the Corporations and profit thereby; a key to that success was undoing any influence by Reuther.
Cullom v. Hibernia Nat'l Bank, 859 F.2d 1211 (5th Cir. 1988), and Reddy v. Litton Indus., Inc., 912 F.2d 291 (9th Cir. 1990), cert. denied, 502 U.S. 921, 112 S.Ct. 332, 116 L.Ed.2d 272 (1991), involve much the same scenario and do not warrant discussion other than to note that they are distinguishable on virtually the same grounds as Shearin and Hecht.
The Court, however, agrees with Defendants that Plaintiffs do not have standing to the extent their claims are based on injuries "to body and mind." Such injuries are not "to `business or property' and therefore are not recoverable under RICO." Garcia v. Scribner, No. C 97-0742, 1998 U.S. Dist. LEXIS 10508, at *2 (N.D. Cal. July 10, 1998) (citing Berg v. First State Ins. Co., 915 F.2d 460, 464 (9th Cir. 1990)). The statute itself allows recovery for injuries to "business or property." 18 U.S.C. § 1964(c). Thus, Defendants are correct to the extent that Plaintiffs seek damages, under RICO, to "body and mind" that are unrelated to "business or property." See Price v. Pinnacle Brands, Inc., 138 F.3d 602 n. 20 (5th Cir. 1998).
Defendants also contend that Reuther cannot recover for "damages to reputation." The Court agrees. In this case, Reuther is not claiming that his personal reputation has been smeared, but rather that his professional and business renown has been tarnished. Nevertheless, such an injury is not compensable under § 1964(c). See, e.g., City of Chicago Heights v. Lobue, 914 F. Supp. 279, 285 (N.D. Ill. 1996).
Additionally, Defendants contend that Plaintiffs lack standing because their injuries resulted from "`misfortunes visited upon a third person by the defendant's acts.'" Bivens Gardens Office Bldg., Inc. v. Barnett Banks of Fla., Inc., 140 F.3d 898, 906 (quoting Holmes, 503 U.S. 258 at 267, 112 S.Ct. at 1318, 117 L.Ed.2d 532). In the instant case, however, the alleged goal is to injure Reuther directly. Smith allegedly undertook various predicate acts, some of which allegedly directly injured Reuther (e.g., terminating him, failing to advise him that the By-laws needed to be amended to officialize his CEO status) and some of which arguably target and injure others (the banks, investors who received erroneous information). Still, however, Smith's overall goal was to take over the Corporations, and the RICO goal was to remove Reuther as CEO to do so.
Finally in this area, Defendants cite Price for the argument that "injury to mere expectancy interests or to an `intangible property interest' are insufficient to confer RICO standing." 138 F.3d at 607 (citing In re Taxable Mun. Bond Sec. Litig., 51 F.3d 518, 523 (5th Cir. 1995)). The Court agrees that to the extent Reuther seeks recovery, on his own behalf, for damage to personal and business reputation, Reuther lacks standing under Price. However, the remainder of the damages alleged, although their quantification may be difficult, are not so intangible as to be insufficient to confer standing.
Next, Defendants expend significant energy arguing that Reuther, on his own behalf, lacks standing under Beck v. Prupis, 162 F.3d 1090 (11th Cir. 1998), aff'd, 529 U.S. 494, 120 S.Ct. 1608, 146 L.Ed.2d 561 (2000). In that case, "Beck claim[ed] that he was fraudulently induced to make certain unwise financial decisions in three ways: (1) the defendants' failure to tell him about his impending termination, (2) the defendants' failure to inform him of their illegal activities, and (3) the defendants' creation of false financial statements." Id. at 1096. The Beck court held that none of these underlying rationales was sufficient to confer standing. Id. at 1096-97. Defendants contend that Reuther's personal claims must be dismissed based on the Eleventh Circuit's rejection of Beck's claims.
The Court notes, however, that Beck's claims were dismissed on summary judgment in each case for a lack of evidence. As the instant motion is one to dismiss Plaintiffs' claims under Rule 12(b)(6), Beck is inapplicable.
Finally, Defendants challenge Reuther's standing as to his claims of damages to his investment in the Corporations because Reuther (1) has failed to join the Corporations as required under Rules 12(b)(7) and 19; (2) has not made a demand on the Corporations prior to bringing suit as required under Louisiana Code of Civil Procedure article 611; and (3) does not "fairly and adequately represent the interest of the shareholders or members similarly situated in enforcing the right of the corporation," as required by Rule 23.1. Alternatively, Defendants argue for dismissal of the shareholders' derivative suit because the Corporations' shareholders have not been injured as a result of Reuther's discharge.
First, the Court notes that the Complaint has been amended to join the Corporations. Second, Reuther has sufficiently alleged that it would have been futile to make a demand on the Corporations on the basis that the Board was deadlocked:
At a properly noticed meeting of the Board of Directors of the Corporations on November 21, 2001, the four directors evenly split their votes (2-2) on all eight items on the agenda for the meeting, including authorizing the preparation and filing of a lawsuit for breach of fiduciary duties of the officers, directors, and attorneys on behalf of the Corporations. Thus, the board of directors is now in a deadlock, which cannot be broken by the shareholders.
Rec. Doc. 41 at 4. Third, the Court declines to grant Defendants' motion based on the conclusory assertion that Reuther will not properly represent the shareholders in the derivative action. Such a contention is appropriate for a motion for summary judgment, not one to dismiss under Rule 12(b)(6). Finally', again, Plaintiffs allege not that the Corporations' shareholders were directly injured by Reuther's discharge, but that Reuther's discharge was part of the scheme that did injure the shareholders — namely, Smith's alleged wrongful takeover of the Corporations. Accordingly, the Court rejects this set of assertions as a basis for granting the instant motion.
2. Substantive challenges to the RICO claims
Defendants argue that Plaintiffs' claims must be dismissed on the merits for the following primary reasons: (1) the racketeering acts are not pled with sufficient particularity and (2) Plaintiffs have failed to allege a "pattern" of racketeering under § 1962. The Court considers these contentions in turn.
First, Defendants contend that Plaintiffs have failed to comply with the requirement that fraud be pled with particularity as to the "`time, place and content of the false representations, as well as the identity of the person making the representations and what [that person] obtained thereby.'" 5-Star Premium Fin., Inc. v. Wood, No. 99-3705, 2000 U.S. Dist. LEXIS 6373, at *12 (E.D. La. May 2, 2000) (alteration in original). See also Williams v. WMX Techs., Inc., 112 F.3d 175 (5.th Cir.), cert. denied, 522 U.S. 966, 118 S.Ct. 412, 139 L.Ed.2d 315 (1997) (plaintiffs' claims dismissed where complaint (1) noted a conversation for which the date would be crucial, but did not include the date of the conversation; (2) cited a prospectus for the defendant company, but did not say which aspect of the prospectus was "false"; and (3) referred to a number of newspaper articles without specifying the comments attributable to the defendants). Defendants claim that the allegations are similar to those pled in Williams. Defendants also specifically complain that Plaintiffs have not alleged that they detrimentally relied on the alleged fraudulent representations. On both accounts, Defendants argue, Plaintiffs' claims must be dismissed. The Court disagrees.
Rule 9(b)'s requirement that fraud claims be pled with particularity must be read in conjunction with the general liberal pleading rules set forth in Rule 8, "which requires only a `short and plain statement of the claim showing that the pleader is entitled to relief.'" Landry v. Air Line Pilots Ass'n Int'l AFL-CIO, 901 F.2d 404, 430 (5th Cir. 1990) (quoting Rule 8(a)(2)). See also Wilson v. Arch-Air Freight, Inc., No. Civ. A. No. 93-4222, 1995 WL 72776, at *12 (E.D. La. Feb. 17, 1995).
Here, unlike the insufficient allegations in Williams, the RICO case statement sets forth adequate descriptions of the allegedly fraudulent acts, including the time, place, and contents of the false representations, as well as who made them and for what gain. See, e.g., ¶ 5 (alleging January 1999 Board meeting in Smith failed to point out alterations in business plan that later would be used by Smith to erode Reuther's authority over Corporations and further his takeover bid).
The Court also disagrees with Defendants' argument that Plaintiffs have not shown that they detrimentally relied on the alleged fraudulent representations. In the RICO case statement, Reuther accuses Smith and Smith Martin of failing to properly advise him that his CEO status was meaningless without the By-laws amendment. See id. Hence, Reuther gave up to Smith the Presidency, a powerful position, for what amounted to an illusory position. See id. Also, Reuther alleges that he exerted himself extensively for the Corporations, relying on the notion that his CEO status was a position of authority. See id. Furthermore, it is alleged that Smith was able to ride Reuther's good name to increase the Corporations' health, but intended nonetheless to take over the Corporations and cut out Reuther, to the detriment of Reuther and the other shareholders. See id. The Court notes again here that Reuther himself was a 49 percent shareholder, holding a stake far greater than any of the other owners. See Rec. Doc. 41 at 6-7.
The Court additionally rejects Defendants' next argument, that Reuther was not the "target" of the fraudulent representations and thus the representations were not the proximate cause of Plaintiffs' injuries. This contention simply restructures Defendants' standing argument regarding proximate cause. Here, again, Defendants argue "facts" more appropriately considered in a summary judgment motion.
Finally, the Court rejects as bordering on the frivolous Defendants' argument that Plaintiffs have failed to allege the necessary "pattern" of racketeering. H.J., Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 109 S.Ct. 2893, 106 L.Ed.2d 195 (1989), sets out the controlling language on RICO's "pattern" requirement. In general, the requisite "pattern" is a flexible concept. Id. at 239, 109 S.Ct. at 2900, 106 L.Ed.2d 195. To satisfy the pattern requirement, the complaint must allege that the acts are marked by sufficient relatedness and continuity. See id.
The allegations satisfy the relatedness requirement. A pattern is created by acts having "the same or similar purposes, results, participants, victims, or methods of commission . . . ." Id. at 240, 109 S.Ct. at 2901, 106 L.Ed.2d 195. Here, all the conduct attributed to Defendants is alleged to be for the same purpose and/or results — to take over the Corporations for the financial benefit of Smith and at the expense of Reuther and the other shareholders — and have the same victims, again, Reuther and the other shareholders.
The continuity requirement also is satisfied. This prong of the inquiry may be satisfied by adequately showing either closed- or open-ended conduct, that is, "either . . . a closed period of repeated conduct, or . . . past conduct that by its nature projects into the future with a threat of repetition." Id. at 241, 109 S.Ct. at 2902, 106 L.Ed.2d 195. Here, Plaintiffs satisfy both formulations of the concept. First, Plaintiffs have alleged a three-year scheme under which Smith:
intended that his representations and omissions would place him in a position where he could justify his termination of Reuther (based upon the absence of by-laws authorizing Reuther's position), divert revenue to his own use, improperly increase his own compensation, avoid agreed-upon limits to his authority (such as a one year term of presidency) and otherwise obtain power and financial benefits.
Rec. Doc. 6 at ¶ 5. Moreover, the conduct allegedly projects into the present and future. As alleged, Smith, having successfully ousted Reuther, continues to control the Corporations, "disregarding the desires and demands of 50% of the shareholders and directors." Rec. Doc. 26 at 35. It is further alleged that "Smith will not voluntarily step down or refrain from further fraudulent actions to maintain control of the Corporations." Id. Accordingly, the pleading requirement as to "continuity" is satisfied.
Defendants also argue that Plaintiffs have failed to sufficiently plead securities fraud as a predicate act. As noted above, Plaintiffs have represented that they do not seek recovery under 18 U.S.C.s § 1961(1) on the basis that Defendants violated above-mentioned securities laws. Accordingly, insofar as Defendants argue here for dismissal of the RICO claims to the extent that underlying violations of the above-mentioned securities fraud laws are not sufficiently pled, the motion is dismissed as moot.
C. Securities claims
After oral argument on April 24, 2002, the Court denied the instant motion to the extent it sought dismissal of Plaintiffs' claims under the Securities Exchange Act of 1934, 15 U.S.C. § 78j, and 17 C.F.R. § 240.10b-5, subject to Plaintiffs amending their Complaint and First Amended and Supplemental Complaint ("complaints"), see Rec. Docs. 1, 12, to (1) add as Defendants the Corporations on whose behalf Plaintiffs have filed this suit and (2) to allege that Reuther was (a) a purchaser of securities and (b) purchased them after the allegedly fraudulent conduct in order to claim damages therefrom. On May 6, 2002, Plaintiffs filed their Second Amended and Supplemental Complaint, adding these Corporations as Defendants. See Rec. Doc. 41.
Defendants now raise three additional post-amendment arguments for dismissal of the securities claims: (1) in their Second Amended and Supplemental Complaint, Plaintiffs fail to abide by the Court's instructions to allege specific dates and amounts of investments upon which the securities fraud claim is premised; (2) the entities Plaintiffs allegedly invested in are not parties to this suit and therefore do not constitute investments upon which Reuther's securities claims are based; and (3) in any event, no such investments were made, thus necessitating dismissal of the securities claims.
First, Defendants misrepresent the Court's amendment instructions. As noted above, the Court instructed Plaintiffs to amend their complaints to allege that Reuther was a purchaser of securities and purchased them after the allegedly fraudulent conduct in order to claim damages therefrom. Paragraph 82. of the Second Amended and Supplemental Complaint alleges both the purchase and time of the purchase of the securities upon which the instant allegations are based, thus satisfying the Court's instructions.
Second, the face of the Complaint identifies specific investments underlying alleged securities violations and thus are alleged investments upon which Reuther's securities claims are based.
Finally, the contention that the alleged investments were in fact not made is obviously a disputed issue of fact and therefore not appropriate for determination in a Rule 12(b)(6) motion to dismiss.
III. Conclusion
In light of the foregoing,
IT IS ORDERED that:
Defendants' Joint Motion to Dismiss Pursuant to FRCP Rules 12(b)(6), 12(b)(7), 9(b), 23.1 and 19 is hereby partially GRANTED, partially DENTED, and partially DISMISSED as MOOT.
IT IS ORDERED that the following motions set for hearing on June 19, 2002, will be considered on the briefs.
99-0771 INFUSION RESOURCES, INC., ET AL. v. MINIMED, INC. Motion by MiniMed Inc. to strike damages report and motion to dismiss (203)
00-0597 JOSEPHINE S. LOVOI v. ALITALIA AIRLINES, ET AL. Motion by Alitalia Linee Italiane, S.p.A. to strike plaintiffs jury demand (106)
00-3537 CARGILL FERROUS INTERNATIONAL, ETC. v. M/V INDUSTRIAL ADVANTAGE ETC., ET AL. Motion by Industrial Maritime Carriers (USA), Inc. for partial summary judgment (35)
01-1560 GAIL COOPER, ET AL. v. LOUISIANA STATE UNIVERSITY MEDICAL CENTER/HEALTH CARE SERVICE DIVISION Motion by Gail Cooper for reconsideration [of the Court's order denying the plaintiffs' motion for leave to file second supplemental and amending petition] (45)
01-3625 WARREN L. REUTHER. JR. ET AL. v. JAMES E. SMITH. JR., ET AL. Rule 12(b) motion by Hollywood Casino Shreveport to dismiss for failure to state a claim upon which relief can be granted; for failure to join a party under rule 19; and for lack of subject matter jurisdiction (44)
02-0010 MOLLY MARTIN v. JAMES "JIM" HALDANE, ET AL. Motion by Molly Martin to reconsider decision not to enforce the consent agreement and alternative motion for preliminary default (9)
02-0055 DEBRA SAFFORD v. ST. TAMMANY FIRE PROTECTION DISTRICT NO. 1, ET AL. Motion by American Alternative Insurance Corporation for summary judgment (18) Motion by American Alternative Insurance Corporation to strike affidavit in opposition to motion for summary judgment (23)
02-0743 WILLIAM CARTER v. BAYER CORPORATION, ET AL. Motion by William Carter to lift stay, re-open case, for costs, attorney fees, and for issuance of rule 11 sanctions against defendants Bayer Corporation and Eckerds (23)
02-1489 MARGARET AMBROSE, ETC., ET AL. v. JOHN DOE, ET AL. Motion by Margaret Ambrose and Raymond L. Ambrose, Jr. to remand to the Civil District Court for the Parish of Orleans (5)