Summary
The Second Circuit reviewed dismissal of a civil RICO complaint against a bank and related defendants arising from the administration and foreclosure of railroad bond collateral. The court held that the complaint adequately pleaded scienter for alleged mail and wire fraud relating to the collateral sale and adequately pleaded a pattern of racketeering activity, but failed to plead a sufficiently continuing RICO enterprise. The judgment dismissing the complaint was affirmed.
Topics
Practice areas
Questions Presented
- Whether the amended complaint adequately pleaded the scienter element of alleged mail and wire fraud predicate acts under Federal Rule of Civil Procedure 9(b).
- Whether the amended complaint adequately pleaded a pattern of racketeering activity under RICO.
- Whether the amended complaint adequately pleaded a continuing RICO enterprise under 18 U.S.C. §§ 1961(4) and 1962(c).
Holdings
- Rule 9(b) permits intent to be alleged generally, but a complaint must provide factual allegations creating a strong inference that defendants possessed fraudulent intent. The complaint adequately pleaded scienter for the allegations concerning the sale of the United States collateral in Phases II and III, but did not adequately plead scienter for the interest-payment allegations in Phase I.
- Two related predicate acts are sufficient to satisfy the pleading requirement for a RICO pattern; a multiple-episodes requirement is not imposed.
- A purported association formed solely to accomplish a single, short-lived objective—the sale of collateral at a reduced price—does not constitute the continuing enterprise required by 18 U.S.C. §§ 1961(4) and 1962(c).
Key quotations
“It is clear after Ianniello that the District Court erred in interpreting “pattern of racketeering activity” to require multiple episodes. Ianniello confirms that two related predicate acts will suffice to establish a pattern under 18 U.S.C. § 1961(5).” (820 F.2d at 51)
“Such an association is not sufficiently continuing to constitute an “enterprise” under 18 U.S.C. §§ 1961(4), 1962(c).” (820 F.2d at 52)
Factual background
Plaintiffs held bonds issued by National Railroad Company of Mexico, secured by United States railroad collateral, and Manufacturers Hanover Trust Company served as successor trustee for the bond issues. Plaintiffs alleged that defendants improperly treated Mexico as the owner of approximately 96% of the bonds, made interest distributions to Mexico, and arranged the sale of the United States collateral to Mexrail, Inc. at an artificially low price. The amended complaint alleged a three-phase conspiracy involving mail and wire fraud, but the court found that only the allegations concerning the collateral sale adequately supported scienter and a pattern of racketeering activity.
Procedural history
Plaintiffs filed a civil RICO action alleging that defendants engaged in mail and wire fraud concerning interest payments on Mexican bonds, the sale of United States collateral, and distribution of sale proceeds. The district court dismissed the amended complaint, initially on alternative grounds that the complaint inadequately pleaded racketeering activity and a pattern of racketeering activity, and adhered to that ruling after reargument. The Second Circuit held that some scienter and pattern allegations were adequate but affirmed dismissal because the complaint did not adequately plead a continuing RICO enterprise.