defendants motion to dismiss in nola rc case (08 23-12)

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF LOUISIANA

TERENCE K. SUMPTER, ET AL. * CIVIL ACTION NO. 12-717PLAINTIFFS, *

* JUDGE SUSAN MORGANVERSUS *

* MAG. JUDGE ALMA CHASEZWILLIAM B. HUNGERFORD, JR., ET AL. *

DEFENDANTS * JURY TRIAL DEMANDED*

*******************************************

MEMORANDUM IN SUPPORT OF MOTION TO DISMISS FOR LACK OF SUBJECT MATTER JURISDICTION PURSUANT TO FED. R. CIV. P. 12(B)(1) AND/OR TO DISMISS PLAINTIFFS’ RICO CLAIM PURSUANT TO FED. R. CIV. P. 12(B)(6)

MAY IT PLEASE THE COURT:

Defendants1 respectfully submit this memorandum to set forth the reasons the Court

should dismiss plaintiffs’ Amended Complaint for lack of subject matter jurisdiction and/or

should dismiss plaintiffs’ claim brought pursuant to the Racketeer Influenced and Corrupt

Organizations statute (“RICO”), 18 U.S.C. §1964.

I. INTRODUCTION.

On March 15, 2012, the plaintiffs2 instituted this legal action asserting various state law

mismanagement and breach of fiduciary duty claims. The original Complaint3 alleged diversity

1 William B. Hungerford, Jr., Timothy O. Milbrath, Elizabeth R. Milbrath, Mary Hungerford, VP NOLA 1, LLC, 3200 Burgundy Street, LLC, Bartone, LLC, Bay-Algiers-JV, LLC, Bay-Bourbon-Ritas, LLC, Bay-Canal PJs, LLC, Bay-NOLA-Hospitality, LLC, Bay-NOLA-Mgmt, LLC, Bay-NOLA-Ventures-MD, LLC, Bay-One-Capital, LLC, Bay-PJs, LLC, Bay-Tulane PJs, LLC, Bay-Wow Franchise 2, LLC, Bay-Wow, LLC, Bywater Holdings, LLC, Eleanor Holdings, LLC, Noble-Franchise 1&3, LLC, Noble-Lodging-Partners, LLC, Noble Lending Holdings, LLC, NobleOutReach-NOLA, LLC, NobleOutReach, Ltd., LLC, Noble-Employees, LLC, NobleReach-NOLA, LLC, NOP, LLC, Rita’s Fajitas NOLA, LLC, Rita’s Tequila Bar NOLA, LLC, Timone, LLC, VP NOLA 1, LLC, VP NOLA 2, LLC, VP NOLA 2-WOW, LLC, VP NOLA Land 2, LLC, VP NOLA, LLC, NobleOutReach Original Principals, LLC, NobleOutReach, LLC, Noble-Real-Estate-GP, LLC, and Noble-RE-Management, LLC.2 Terence K. Sumpter, Suzette P. Lopez, Abbas Barzani, Xue Li, Chong Kee Tan, Sandra Massie, Rong Zhou, Shuhai Li, Junjie Huang, Shuangmei Ge, Seyed Abad, Atefeh Abad, Xiao Tong Zhand, Wenjie Zhan, Li Wang, Li Wei Liu, Su Fang, Tianyi Liu, Ali Fuat Cercer, Faruk Cercer, Suat Ocal, Suheyla Ocal, Yiran Deng, Rong Ma, Ming Chen, Xirui Chen, Reem Al Nasser, and Yu Lin Li.

Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 of 28

Joey

Underline

Joey

Highlight

Joey

Highlight

Joey

Highlight

Joey

Highlight

Joey

Highlight

2

jurisdiction as the predicate for subject matter jurisdiction. Months later, plaintiffs filed an

Amended Complaint4 that attempted to convert what they had previously characterized as

garden-variety mismanagement and breach of fiduciary duty claims into RICO violations. While

creative, the Amended Complaint falls short of alleging any RICO claim or enterprise.

Consequently:

The Court still lacks diversity jurisdiction over this matter pursuant to 28 U.S.C. §1332 because there is not complete diversity of citizenship among the parties;

There is no federal question jurisdiction pursuant to 28 U.S.C. §1331 because the only federal claim asserted is the RICO claim, which the Amended Complaint fails to state; and

There is no basis for the Court to exercise supplemental jurisdiction of the plaintiffs’ non-diverse state law claims pursuant to 28 U.S.C. §1367 absent either diversity or federal question jurisdiction.

II. THE PARTIES AND CLAIMS ASSERTED.

The plaintiffs are immigrant investors asserting claims derivatively on behalf of

NobleRealEstateFund, L.P. (the “Fund”). The defendants include the Fund, Bart Hungerford and

Col. Tim Milbrath individually, and a number of corporate entities created to support the Fund

and fulfill its objectives as described in its Limited Partnership Agreement5 and Private

Placement Memorandum (“PPM”).6

The Amended Complaint asserts:

Derivative state law claims on behalf of the Fund for alleged breach of fiduciary duty, gross mismanagement, conversion, misappropriation, unjust enrichment, and intentional interference with contract.

Derivative state law claims on behalf of the Fund for alleged aiding and abetting breach of fiduciary duty and conversion.

3 Rec. Doc. 1.4 Rec. Doc. 102.5 Rec. Doc. 102 at Ex. D.6 Rec. Doc. 102 at Ex. C.


Joey

Underline

Joey

Highlight

Joey

Rejected

3

A derivative state law claim on behalf of the Fund for alleged unlawful racketeering activities in violation of La. Rev. Stat. 15: 1351, et seq.

A claim for alleged violation of RICO.

Of the 12 counts in the Amended Complaint, only the RICO count is based on federal law.7

III. THE COURT DOES NOT HAVE DIVERSITY JURISDICTION OVER THIS MATTER PURSUANT TO 28 U.S.C. §1332(A)(2).

Plaintiffs allege that this Court has original jurisdiction over this matter pursuant to 28

U.S.C. §1332(a)(2),8 which reads:

The district courts shall have original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $75,000, exclusive of interests and costs, and is between… citizens of a State and citizens or subjects of a foreign state;…

“[T]o establish jurisdiction under § 1332, complete diversity must exist between the parties; no

plaintiff can be a citizen of the same state as any of the defendants.”9 Here, there is not complete

diversity among the plaintiffs and the defendants as required by §1332(a)(2) because the

plaintiffs, who are lawful permanent residents of the United States, are deemed to be domiciled

in the states in which they reside, which are the same states in which the Fund, a defendant, is

deemed to be domiciled for purposes of diversity jurisdiction.

a. Plaintiffs Are Lawful Permanent Residents of the United States and, Therefore, Are Deemed to be Domiciled in the States In Which They Reside for Purposes of Diversity Jurisdiction.

For diversity purposes, state citizenship is synonymous with domicile.10 A permanent

resident alien is deemed to be a citizen of the State in which he or she resides.11 Consequently,

district courts do not have original jurisdiction over actions between citizens of a state and

7 Rec. Doc. 102.8 Rec. Doc. 102, at ¶ 88.9 Dos Santos v. Belmere Luxury Apartments, 2012 U.S. Dist. LEXIS 74370, *7 (E.D. La. 4/3/2012).10 Coury v. Prot, 85 F.3d 244, 249 (5th Cir. 1996). 11 Dos Santos, 2012 U.S. Dist. LEXIS 74370, *8.


4

citizens of a foreign state who are lawful permanent residents of the United States that are

domiciled in the same state.12 Here, each of the plaintiffs has obtained approval of their Form I-

526 petitions. As such, each plaintiff has been admitted to the United States as a conditional

lawful permanent resident. A “conditional permanent resident” is defined as “an alien who has

been lawfully admitted for permanent residence within the meaning of Section 101(a)(2) of the

Immigration and Nationality Act (“INA”), except that a conditional permanent resident is also

subject to conditions and responsibilities set forth in section 215 or 216A of the Act….”13

Section 101(a)(2) of the INA defines the term “lawfully admitted for permanent residence” to

mean “the status of having been lawfully accorded the privilege of residing permanently in the

United States as an immigrant in accordance with the immigration laws….” For purposes of 18

U.S.C. 1332(a)(2), there is no doubt that a “conditional permanent resident” is a “lawful

permanent resident” as expressly defined by Section 101(a)(2) of the INA.

The Amended Complaint alleges that certain of the plaintiffs reside in Florida, New

Jersey, Virginia, Massachusetts, California, Kentucky, New York, Missouri, Hawaii, and

Washington.14 Those plaintiffs are deemed to be citizens of the foregoing states for purposes of

diversity jurisdiction.

b. There Is No Complete Diversity of Citizenship Because the Fund, a Defendant, is Domiciled in the Same States in Which The Resident Alien Plaintiffs Are Domiciled.

The Fund is a defendant in this matter.15 It is a limited partnership and is an

indispensable party to this derivative suit.16 The citizenship of a limited partnership is

12 28 U.S.C. § 1332(a)(2); Dos Santos, 2012 U.S. Dist. LEXIS 74370.13 8 C.F.R. § 1216.1 “Definition of conditional permanent resident.”14 Rec. Doc. 102, ¶¶ 20-29, 31-36, 38-39.15 Rec. Doc. 102, ¶ 85.16 See Koster v. Lumbermens Mut. Cas. Co., 330 U.S. 518, 520-523, 91 L. Ed. 1067, 67 S. Ct. 828 (1947); Litman v. Prudential-Bache Properties, Inc., 611 A.2d 12, 15 (Del.Ch. 1992).


5

determined by reference to the citizenship of all of its partners, both general and limited.17 The

plaintiffs are the limited partners of the Fund. Thus, their citizenship dictates the citizenship of

the Fund. Because certain of the plaintiffs are citizens of Florida, New Jersey, Virginia,

Massachusetts, California, Kentucky, New York, Missouri, Hawaii, and Washington for

diversity jurisdiction purposes, the Fund is likewise a citizen of those states. Because many of

the plaintiffs and one of the defendants are citizens of the same state, there is no complete

diversity of citizenship.18 Moreover, even if the plaintiffs were deemed to be non-resident aliens,

the result would be the same because jurisdiction cannot be predicated on §1332(a)(2) when

there are non-resident aliens on both sides of the “v.”19

IV. THE COURT DOES NOT HAVE FEDERAL QUESTION JURISDICTION OVER THIS MATTER PURSUANT TO 28 U.S.C. §1331 BECAUSE THE AMENDED COMPLAINT FAILS TO STATE A VIABLE RICO CLAIM.

28 U.S.C. §1331 provides that “[t]he district courts shall have original jurisdiction of all

civil actions arising under the Constitution, laws, or treatises of the United States.” A claim falls

within a district court’s federal question jurisdiction under 28 U.S.C. §1331 if “federal law

creates the cause of action.”20 Here, there is no federal question jurisdiction because the only

federal cause of action alleged is the RICO claim, which is subject to dismissal pursuant to Fed.

R. Civ. P. 12(b)(6).

17 Carden v. Arkoma Associates, 494 U.S. 185; 110 S.Ct. 1015; 108 L.Ed.2d 157; 1990 US LEXIS 1172 (1990). 18 For a thorough analysis of the complete diversity of citizenship in derivative suits, see Burkhard, James R., May a Member of an LLC or a Limited Partner Bring a Breach of Fiduciary Duty Claim Against Those Controlling the LLC or a Partnership as a Diversity Act?, 23 Rev. Litig. 239, The University of Texas at Austin (Spring, 2004).19 There is no diversity jurisdiction where there are aliens on both sides of the case, even if an alien on one side is a lawful permanent resident, because a permanent resident is deemed to be a citizen of both the state of domicile and the country of citizenship. Intec USA, LLC v. Engle, 667 F.3d 1038, 1041-1044 (7th Cir. 2006). Where there is an alien non-resident who sues a limited liability partnership with permanent resident alien partners, complete diversity does not exist and the court cannot assert subject matter jurisdiction. China Nuclear Energy Indus. Corp. v. Anderson, LLP, 11 F. Supp. 2d 1256, 1258-1260 (D. Colo. 1998).20 Sevin v. Parish of Jefferson, 632 F.Supp.2d 586, 593 (E.D. La. 2008) (quoting Franchise Tax Bd. v. Construction Laborers Vacation Trust, 463 U.S. 1, 27-28, 103 S. Ct. 2841, 77 L. Ed. 2d 420 (1983)).


6

a. The Legal Standard on the Rule 12(b)(6) Motion to Dismiss the RICO Claim.

To survive a motion to dismiss, “a complaint must contain sufficient factual matter,

accepted as true, to ‘state a claim to relief that is plausible on its face.’”21 “A claim has facial

plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable

inference that the defendant is liable for the misconduct alleged.”22

“[A] plaintiff’s obligation to provide the ‘grounds’ of his ‘entitlement to relief’ requires

more than labels and conclusions, and a formulaic recitation of the elements of a cause of action

will not do.”23 To avoid dismissal, “a plaintiff must plead specific facts, not mere conclusory

allegations.”24 “Where a complaint pleads facts that are ‘merely consistent with’ a defendant’s

liability, it stops short of the line between possibility and plausibility of ‘entitlement to relief.’”25

According, where the well-pleaded facts do not permit the court to infer more than the mere

possibility of misconduct, “the complaint must be dismissed.”26

To assert any theory sounding in fraud, plaintiff must “state with particularity the

circumstances constituting fraud or mistake.”27 This particularity requirement applies not only to

common law fraud claims, but also to “the pleading of fraud as a predicate act in a RICO

claim.”28 “In fact, all of the concerns that dictate that fraud be pleaded with particularity exist

with even greater urgency in civil RICO actions.”29 The Fifth Circuit “interprets Rule 9(b)

strictly, requiring a plaintiff pleading fraud to specify the statements contended to be fraudulent,

21 Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). 22 Id. at 1949; see also Gentilello v. Rege, 627 F.3d 540, 544 (5th Cir. 2010); PSKS, Inc. v. Leegin Creative Leather Prods., Inc., 615 F.3d 412, 417 (5th Cir. 2010), cert. denied, 131 S. Ct. 1476 (2011). 23 Twombly, 550 U.S. at 55. 24 Collins v. Morgan Stanley Dean Witter, 224 F.3d 496, 498 (5th Cir. 2000). 25 Iqbal, 129 S.Ct. at 1949 (quoting Twombly, 550 U.S. at 557); Leegin, 615 F.3d at 417. 26 Iqbal, 129 S.Ct. at 1950 (citing Fed. R. Civ. P. 8(a)(2)).27 Fed. R. Civ. P. 9(b). 28 Tel-Phonic Servs., Inc. v. TBS Int’l, Inc., 975 F.2d 1134, 1138 (5th Cir. 1992). 29 Zaro Licensing, Inc. v. Cinmar, Inc., 779 F.Supp. 276, 281 (S.D. N.Y. 1991).


7

identify the speaker, state when and where the statements were made, and explain why the

statements were fraudulent.”30

b. The Purpose of the RICO Statute.

The origins of RICO date back to the 1930s and 1940s when Congress was concerned

about the influence of organized crime, specifically the Mafia, on the U.S. economy.31 Congress

passed RICO in an effort to combat organized, long-term criminal activity.32 Congress “never

intended that the statute be employed to allow plaintiffs to turn garden-variety state law fraud

and breach of fiduciary duty cases into RICO claims.”33 Considering that RICO allegations have

a stigmatizing effect on those named as defendants34 and carry also the possibility of treble

damages,35 RICO is an “unusually potent weapon” sometimes referred to as the “litigation

equivalent of a thermonuclear device.”36 Accordingly, courts have tried to prevent RICO from

“being misused as a vehicle for federalizing state court fraud claims…”37 To this end, courts

have warned that putative civil RICO claims that “are nothing more than sheep masquerading in

wolves’ clothing”38 or ordinary fraud cases “clothed in the Emperor’s trendy garb”39 should be

“flush[ed] out” at early stages of the litigation.40 Such are the very nature of the plaintiffs’

claims in this case.

30 Herrmann Holdings, Ltd. v. Lucent Techs., Inc., 302 F.3d 552, 564-65 (5th Cir. 2002); see also Tuchman v. DSC Commc’ns Corp., 14 F.2d 1061, 1068 (5th Cir. 1994) (pleading fraud with particularity requires the plaintiffs to allege the “time, place and contents of the false representations, as well as the identify of the person making the misrepresentation and what [the person] obtained thereby.”).31 Feichtinger, Gail A., Casenote: Rico’s Enterprise Element: Redefining or Paraphrasing to Death? 22 Wm. Mitchell L. Rev., 1027, 1029-30 (1996)32 H.J. Inc. v. Northwestern Bell Telephone Co., 492 U.S. 229, 242 (1989).33 Meier v. Musberger, 588 F.Supp.2d 883 (ND Il. 2008). 34 Katzman v. Victoria’s Secret Catalogue, 167 F.R.D. 649, 655 (S.D.N.Y. 1996).35 18 U.S.C. 1964(c). 36 Katzman, 167 F.R.D. at 655 (quoting Miranda v. Ponce Fed. Bank, 948 F.2d 41, 44 (1st Cir. 1991).37 Meier, 588 F.Supp. at 900.38 Kirk v. Heppt, 423 F.Supp.2d 147, 150 (S.D.N.Y. 2006).39 In re Integrated Res. Real Estate Ltd. P’ships Secs. Litig., 850 F.Supp. 1105, 1148 (S.D.N.Y. 1993)40 Katzman, 167 F.R.D. at 655.


8

c. The Structure of the RICO Statute.

The RICO statute creates a civil action for any person “injured in his business or property

by reason of a violation of section [18 U.S.C.] 1962.”41 To state a claim under §1962, a plaintiff

must allege: 1) the conduct, 2) of an enterprise, 3) through a pattern; 4) of racketeering activity.42

i. The Conduct Element.

The conduct element “embodies the requirements of one or more of the four substantive

RICO violations set out in §1962. Each contemplates a different relationship through which the

defendant used racketeering activity to act upon or toward an enterprise.”43 The four violations

include:

1962(a): Receiving and using or investing income derived from a pattern of racketeering activity to acquire an interest in or establish the operation of an enterprise engaged in interstate or foreign commerce;44

1962(b): Acquiring or maintaining an interest in or control of any enterprise engaged in interstate or foreign commerce through a pattern of racketeering activity;45

1962(c): Conducting or participating in the conduct of the affairs of an enterprise engaged in interstate or foreign commerce through a pattern of racketeering activity;46

1962(d): Conspiring to do any of the foregoing.47

Elements common to all four sections of 1962 are: (1) a person who engages in (2) a pattern of

racketeering activity, (3) connected to the acquisition, establishment, conduct or control of an

enterprise.48

41 18 USC 1964(c).42 Elliot v. Foufas, 867 F.2d 877, 880 (5th Cir. 1989).43 Foufas, 867 F.2d at 880. 44 18 U.S.C. §1962(a).45 18 U.S.C. §1962(b).46 18 U.S.C. §1962(c).47 18 U.S.C. §1962(d).48 Wheelan v. Winchester Production Co., 319 F.3d 225, 228-29 (5th Cir. 2003).


9

ii. The Enterprise Element.

A RICO enterprise is characterized by its members having a common or shared purpose,

where there is some sort of hierarchical, decision-making structure, and where the enterprise is

ongoing with some continuity of personnel.49 The enterprise may be a legal entity or “any union

or group of individuals associated in fact although not a legal entity.”50 Where, as in this case,

the plaintiff is alleging an association-in-fact enterprise, he must adduce evidence demonstrating

“an ongoing organization, formal or informal, and …evidence that the various associates

function as a continuing unit.”51 The enterprise is not a pattern or racketeering activity, but

must exist separate and apart from the pattern of racketeering activity in which it engages.52

For purposes of §1962(c) particularly, which prohibits the conduct of an enterprise’s

affairs through a pattern of racketeering activity, the plaintiff must demonstrate not only that the

enterprise is distinct from the series of predicate acts constituting racketeering activity, but also

that the RICO “person” who commits the predicate acts is distinct from the “enterprise.”53 It is

not enough to establish that a defendant corporation through its agents committed the predicate

acts in the conduct of its own business.54 That officers or employees of a corporation, in the

course of their employment associate to commit predicate acts does not establish an association-

in-fact enterprise distinct from the corporation.55

49 United States v. Turkette, 452 U.S., 576, 583 (1981). 50 18 U.S.C. §1961(4). 51 Wheelan v. Winchester Production Co., 319 F.3d 225, 229 (5th Cir. 2003) (quoting Atkinson v. Anadarko Bank & Trust Co., 808 F.2d 438, 439-40 (5th Cir.1987)).52 Wheelan, 319 F.3d at 229.53 Bishop v. Corbett Marine Ways, Inc., 802 F.2d 122, 123 (5th Cir. 1996). 54 Foufas, 867 F.2d at 881. 55 Id.


10

iii. The Pattern Element.

“The heart of any RICO complaint is the allegation of a pattern of racketeering.”56

Courts carefully scrutinize the pattern requirement to curb “widespread attempts to turn routine

commercial disputes into civil RICO actions,” to “forestall RICO’s use against isolated or

sporadic criminal activity, and to prevent RICO from becoming a surrogate for garden-variety

fraud actions properly brought under state law.”57

Beyond showing the commission of at least two predicate offenses, establishing a

“pattern of racketeering activity” calls for a showing “that the racketeering predicates are related,

and that they amount to or pose a threat of continued criminal activity.”58 A plaintiff must plead

each requisite element of each underlying criminal offense that constitutes a predicate act in

order to survive a motion to dismiss.59 At least two predicate acts must be alleged against each

defendant the plaintiff seeks to hold liable. “[A] RICO plaintiff must plead the specified facts as

to each defendant. It cannot avoid Rule 12(b)(6) by lumping together the defendants.”60

iv. The Racketeering Activity/Predicate Acts Element.

“Racketeering activity” is defined by reference to various state and federal offenses, each

of which subsumes additional constituent elements which the plaintiff must plead.61 The list of

federal offenses located at 18 U.S.C. §1961(1) – which are commonly referred to as “predicate

56 Rotella v. Wood, 528 US 549, 556 (2000) [Emphasis in original.] 57 Meier, 588 F.Supp.2d at 900 (quoting Midwest Grinding Co., Inc. v. Spitz, 976 F.2d 1016, 1022 (7th Cir. 1994)).58 Abell v. Potomac Ins. Co., 946 F.2d 1160, 1164-1165 (5th Cir. 1991) (citing H.J. Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 239 (1989)). [Emphasis in original.]; Jones v. Liberty Bank & Trust Co., 461 Fed. Appx., 407, 409 (5th Cir. 2012) (citing Abraham v. Singh, 480 F.3d 351, 355 (5th Cir. 2007); see also 18 USC 1961(e).59 Foufas, 867 F.2d at 880.60 In re MasterCard Int’l Inc. Internet Gambling Litig., 132 F.Supp.2d 468, 476 (E.D. La. 2011); see also Kivisto v. Miller, Canfield, Paddock & Stone, PLC, 413 F. App’x 136, 139 (11th Cir. 2011) (“In a case involving multiple defendants, the complaint must not lump together all of the defendants, as ‘the complaint should inform each defendant of the nature of his alleged participation in the fraud.’”)61 Foufas, 867 F.2d at 880.


11

acts” – is exhaustive and includes mail fraud,62 wire fraud,63 interstate transportation of stolen

property,64 and money laundering,65 which are the predicate acts in which plaintiffs allege certain

defendants engaged in this case.

d. The Content of the Amended Complaint.

The Amended Complaint identifies:

40 RICO defendants. It alleges that 9 of those defendants actually engaged in a pattern of racketeering activity in violation of 18 U.S.C. 1964(a), (b), and/or (c). To rope in the remaining 31 defendants, the Amended Complaint generally alleges (with no detailed facts) that they conspired to violate the RICO statute;

6 association-in-fact enterprises: BNM Enterprise, VP Enterprise, Bay-One-Capital Enterprise, Rita Enterprise, Maurepas Foods Enterprise, and NOR Enterprise; and

4 general types of racketeering activity: mail fraud, wire fraud, interstate transportation of stolen property, and money laundering.

e. The Amended Complaint Fails To State An Actionable RICO Claim BecauseIt Fails To Establish The Existence Of Any RICO Enterprise.

Although very lengthy, the Amended Complaint is substantively lacking certain

necessary allegations to state a RICO claim. As a threshold matter, the RICO claim must be

dismissed because the Amended Complaint fails to allege facts sufficient to establish the

existence of any RICO enterprise. The enterprise requirement is not met for two discrete

reasons: (1) the Amended Complaint does not allege the existence of any enterprise distinct from

the Fund; and (2) the Amended Complaint does not allege that any of the six so-called RICO

enterprises have any hierarchy or structure for group decision-making, function as a continuing

unit, or have any systems in place beyond those necessary to conduct their ordinary business

operations.

62 18 U.S.C. §1341.63 18 U.S.C. §1343.64 18 U.S.C. §2314.65 18 U.S.C. §1957.


12

i. The Amended Complaint Does Not Allege The Existence Of Any Enterprise Distinct From The Fund.

A RICO plaintiff must distinguish between the alleged RICO enterprise and existing

corporations. A complaint alleging that officers or employees of a corporation, in the course of

their employment, associated to commit predicate acts is insufficient to establish a RICO

enterprise distinct from the corporation they serve.66

This entire case centers on plaintiffs’ complaints about the operation of the Fund and its

affiliated portfolio companies. The claims arise directly from actions certain defendants took in

the course of serving as officers and employees of the defendant entities. Stated another way, the

same conduct that forms the basis of the plaintiffs’ mismanagement claims against the

defendants also forms the basis of the racketeering allegations the plaintiffs use to support their

RICO claims. Viewed in this light, the plaintiffs’ allegations amount to nothing more than

allegations of an intra-corporate conspiracy, which courts have consistently found inadequate to

state a RICO claim because the coordinated conduct of a corporation, its subsidiaries, divisions,

officers, or employees cannot constitute a conspiracy.67 For its part, the Fifth Circuit has

recognized that RICO claims are governed by “traditional conspiracy law,”68 and confirmed that

“a corporation or another company cannot conspire with itself, no matter how many of its agents

participate in the complained of action.”69

66 Foufas, 867 F.2d at 881.67 Copperweld v. Independence Tube Corp., 467 U.S. 752, 769 (1984); see also, Fogie v. Thorn Ams., Inc., 190 F.3d, 889, 898 (8th Cir. 1999); Rhodes v. Consumers’ Buyline, Inc., 868 F.Supp. 368, 377 (D. Mass. 1993); Sluka v. Estate of Herink, No. 94-CV-4999, 1996 WL 612462, at *7 n. 2 (E.D. N.Y. Aug. 13, 1996); Helman v. Murry’s Steaks, Inc., 742 F.Supp. 860, 883 (D. Del. 1990).68 U.S. v. Posada-Rios, 158 F.3d 832, 857 (5th Cir. 1998).69 Elliot v. Tilton, 89 F.3d 260, 265 (5th Cir. 1996) (quotations omitted).


13

ii. The Facts Alleged Do Not Support A Finding Of The Existence Of Any Association-in-Fact Enterprises.

As stated above, Congress originally enacted RICO to prevent the type of organized

crime commonly associated with Mafia “crime families.”70 United States v. Riccobene,71

provides a good example of a classic RICO enterprise. In Riccobene, the nine defendants were

accused of engaging in illegal gambling and loan operations. Recorded conversations of the

defendants showed the existence of an intricate and well-designed structure for decision-making.

Specifically, the recordings established the existence of a crime family with a hierarchical

structure in which the “Godfather” Bruno, presided over the family with an inner circle of

advisors, who watched over a group of middle managers who, in turn, supervised the actual

operations of the enterprise. Based on this evidence establishing a hierarchy and that the nine

defendants operated as a continuous unit, the court found the existence of a RICO enterprise.

Citing Riccobene in the civil RICO context, the Fifth Circuit in Shaffer v. Williams,72

explained that:

A RICO enterprise must have an ongoing organization, with associates functioning as a continuing unit. An “ongoing organization” is shown by the existence of a decision making structure, whether hierarchical or consensual. The RICO enterprise must have a common or shared purpose and continuity of structure and personnel. [Internal citations omitted.]

In Shaffer, the plaintiff sued one individual and 30 defendant entities. The Fifth Circuit granted

summary judgment dismissing the plaintiff’s RICO claim based on evidence establishing that

“the known entities in the alleged enterprise do not constitute an ongoing organization, do not

have a structure for group decision-making, do not function as a continuing unit, and do not have

70 Gardiner, Michael A., Comment: The Enterprise Requirement: Getting to the Heart of Civil RICO; 1988 Wis. L.Rev. 663, 674 (1988).71 709 F.2d 214 (3d Cir.), cert. denied, 464 U.S. 849 (1983). The holding in Riccobene has been abrogated and distinguished by some courts. Defendants merely cite it here as an example of a classic RICO enterprise.72 794 F.2d 1030, 1032 (5th Cir. 1986).


14

an organization pattern or system of authority beyond that necessary to carry out the daily affairs

of each of the entities.”73

The deficiencies that existed in establishing the existence of a RICO enterprise in

Schaffer are the same deficiencies that the Amended Complaint suffers in attempting to allege a

RICO claim here. Plaintiffs’ RICO Case Statement74 and Amended Complaint (which are

virtually identical with regard to the description of the alleged association-in-fact enterprises) 75

do not allege that the entities they attempt to lump together to create six so-called RICO

enterprises have any structure for group decision-making, function as continuing units, or have

any patterns or systems of authority beyond those necessary to carry out the daily affairs of each

of the entities.

For instance, with respect to the alleged BNM Enterprise, the Amended Complaint

asserts that Bay-NOLA-Mgmt received money from the Fund which it used to pay for such

things as an “ownership interest” in another company, “real estate,” “rent,” “monthly lease

payments,” “management service fees, financial services, construction services, and/or

accounting expenses,” “day-to-day operating expenses,” and employees.76 What the Amended

Complaint does not allege is any hierarchy or structure for group decision-making among the

entities the plaintiffs seek to rope into the alleged enterprise or that the entities function as a unit

(as opposed to separate companies) or that any members of the alleged enterprise have any

pattern or system of authority in place beyond what is necessary to carry out the daily affairs of

the constituent entities. When scrutinized closely, it is clear that there is no enterprise

73 Schaffer, 794 F.2d at 1031-32.74 Rec. Doc. 110.75 The provisions of Plaintiffs’ RICO Case Statement relating to the alleged association-in-fact enterprises are taken virtually verbatim from the allegations in the Amended Complaint. The RICO Case Statement adds nothing.76 Rec. Doc. 102 at ¶¶459-475 which are substantively identical to the RICO Case Statement, Rec. Doc. 110 at pp. 30-34.


15

whatsoever and that plaintiffs are simply complaining about the manner in which Bay-NOLA-

Mgmt spent money it received from the Fund. While the plaintiffs may be entitled to challenge

the wisdom or fairness of the decision by Bay-NOLA-Mgmt to use money it received from the

Fund to purchase ownership interests in other companies, pay rent, pay for various services,

purchase real property, and the like via the state law claims they have asserted, there simply are

no facts to support a finding of the existence of any enterprise required to create RICO liability.

For the very same reason the Amended Complaint fails to allege the existence of the

BNM Enterprise, it fails to allege the existence of any other enterprise. As the plaintiffs’ well

know, the truth is that none of the defendant entities operated as separate “crime rings.” Rather,

the defendant entities are all corporations that were established to fulfill the Fund’s purpose of

being a pooled venture capital investment vehicle. The fact that the plaintiffs’ capital

contributions to the Fund were invested in other companies and that Hungerford and Milbrath

had indirect ownership interest in some of those companies was not part of any scheme to

defraud the plaintiffs. Quite to the contrary, before investing in the Fund, the plaintiffs were told

that “[t]he Fund’s investments will primarily be in companies that the General Partners will be

instrumental in nurturing/founding or joint venturing.”77 Likewise, the plaintiffs were advised

that the money they contributed to the Fund would be invested and that “[t]he primary purpose of

the [Fund] is to provide a limited number of select investors with the opportunity to realize long-

term appreciation from investments made in a diversified range of industries…”78 In short, this

case does not involve any hidden plan or scheme. Simply put, it is not RICO material.

Viewed in the light most favorable to the plaintiffs, the Amended Complaint at best

alleges that the RICO defendants joined together to misappropriate the Fund’s money. As the

77 Rec. Doc. 102 at Exhibit C, p. 1.78 Rec. Doc. 102 at Exhibit D, ¶1.2.


16

Fifth Circuit has repeatedly instructed, however, such an allegation still is insufficient to create

RICO liability because the enterprise must be “an entity separate and apart from the pattern of

racketeering in which it engages.”79 For instance, in Elliot v. Foufas, a frequently cited Fifth

Circuit case addressing the RICO “enterprise” requirement, the Fifth Circuit granted a Rule

12(b)(6) motion to dismiss the plaintiff’s RICO claim, which was founded on allegations that the

defendants conspired to deprive the plaintiff of commissions, in part because:

Plaintiff has failed to assert continuity – that the association existed for any purpose other than to commit the predicate offenses. The mere fact that individuals might have joined together to defraud Elliot of her commissions is insufficient.80

Based on the law and the facts as alleged by the plaintiffs, the threshold requirement of

establishing the existence of a RICO enterprise has not been met. For this reason alone, the

Court should find that the Amended Complaint fails to state a viable RICO claim.

f. The Amended Complaint Fails To State An Actionable RICO Claim Because It Fails To Allege That Each RICO Defendant Accused Of Violating §1962(a), (b), or (c) Engaged In Racketeering Activity Or A Pattern Of Such Activity.

Additionally, the Amended Complaint does not allege that each RICO defendant alleged

to have violated §1962(a), (b), or (c) engaged in racketeering activity, let alone a pattern of

racketeering activity. Specifically, the Amended Complaint does not allege that any of the

defendants engaged in a pattern of mail or wire fraud or state any claim against the defendants

for interstate transportation of stolen property or money laundering. The plaintiffs allegations

are more analogous to allegations of securities fraud, which are not actionable as RICO claims.

i. The Amended Complaint Does Not Allege That The Defendants Engaged In A Pattern Of Mail Or Wire Fraud.

The elements of mail and/or wire fraud include: (1) a scheme to defraud, (2) use of the

mail and/or wires to execute that scheme, and (3) specific intent to defraud.81 The need for

79 Foufas, 867 F.2d at 881 (citing Atkinson v. Anadarko Bank & Trust Co., 808 F.2d 438, 441 (5th Cir. 1987)). 80 Foufas, 867 F.2d at 881.


17

specificity and judicial scrutiny especially applies where mail and wire fraud are alleged as

RICO predicate acts “because of the relative ease with which a plaintiff may mold a RICO

pattern from allegations that, upon closer scrutiny, do not support it.”82 Indeed, courts have

recognized that mail fraud and wire fraud statutes are the ones most frequently abused by

plaintiffs like those in this case who attempt to criminalize ordinary fraud claims and commercial

disputes by converting them improperly into RICO claims.83

Consequently and importantly, a RICO claim predicated on mail or wire fraud must

specifically allege that each RICO defendant individually violated the mail or wire fraud statutes.

For instance, in Andrews v. Dairy Farmers of America, Inc.,84 the court granted a motion to

dismiss RICO claims predicated on wire fraud brought against Greg Engles, the CEO of

defendant Dean Foods Company because it found that plaintiff’s allegations that Dean

employees engaged in telephone conversations where one of them made factual representations

regarding certain actions or statements of the defendant Engles were insufficient to show that

Engles himself had violated the wire fraud statute because the plaintiffs did not allege that

Engles himself used the telephone.

Pages 19-20 of the plaintiffs’ RICO Case Statement and Paragraphs 590-602 of the

Amended Complaint address the allegations of mail and wire fraud. Notably, the Amended

Petition impermissibly lumps together the defendants.85 It does not plead each requisite element

81 United States v. Harms, 442 F.3d 367, 372 (5th Cir. 2006) (listing elements of mail fraud); United States v. Mills, 199 F.3d 184, 188 (5th Cir. 1999) (explaining that the elements of wire fraud are the same as mail fraud “because the mail and wire fraud statutes share the same language in relevant part…”).82 Kolar v. Preferred Real Estate Invs., Inc., 361 F. App’x 354, 363 (3d Cir. 2010). 83 Meier, 588 F.Supp.2d at 904 (citing Agency Holdings Corp. v. Malley-Duff & Assoc., Inc., 483 U.S. 143 (1987)).; see also Emery v. American General Finance, Inc., 71 F.3d 1323, 1346 (7th Cir. 1995) (explaining that it is the very breadth of the mail and wire fraud statutes that has caused judicial concern that the statutes not be given too vague and encompassing a scope, especially in the RICO context.)84 2011 U.S. Dist. LEXIS 130109 (S.D. Miss. 2011).85 In re MasterCard Int’l Inc. Internet Gambling Litig., 132 F.Supp.2d 468, 476 (E.D. La. 2011); see also Kivisto v. Miller, Canfield, Paddock & Stone, PLC, 413 F. App’x 136, 139 (11th Cir. 2011) (“In a case involving multiple


18

of mail and/or wire fraud against each defendant the plaintiffs seek to hold liable as required.

The only allegations in the Amended Complaint claiming that a particular defendant used the

mail and/or wires to misrepresent information are:

Paragraph 199 of the Amended Complaint – stating that Hungerford misrepresented information in an email to one of the plaintiffs on December 30, 2009; and

Paragraph 350 of the Amended Complaint – stating that Hungerford misrepresented information in an e-mail dated December 25, 2008 to a prospective immigrant investor (who is not a plaintiff in this suit or an investor in the Fund).

In the RICO Case Statement, the plaintiffs add:

At Page 19 – a statement that unspecified “Defendants” made misrepresentations in the WINTER 2011 UPDATE to the Fund’s limited partners; and

At Page 20 – general statements that multiple defendants used the postal system to misrepresent information to the City of New Orleans or USCIS. The plaintiffs fail to identify any particular mailings to the City or USCIS or to specify any statements in any such mailings that were inaccurate.

Admittedly, the Amended Complaint and RICO Case Statement reference more alleged

misrepresentations than just those cited above. However, it is apparent from the face of the

pleadings that no mail or wires were used in making the other misrepresentations alleged. For

instance:

Pages 25 and 26 of the RICO Case Statement refer to an in-person meeting between Hungerford and Tong Wu where Hungerford allegedly misrepresented information. No use of the wires or mail is alleged.

Page 26 of the RICO Case Statement refers to misrepresentations allegedly made in the Memorandum of Understanding between NobleReach-NOLA and the City of New Orleans. No use of the wires or mail is alleged.

The remainder of the Amended Complaint and RICO Case Statement refer to

misrepresentations by omission. By their very nature, such allegations accuse the defendants of

defendants, the complaint must not lump together all of the defendants, as ‘the complaint should inform each defendant of the nature of his alleged participation in the fraud.’”)


19

failing to communicate information. They are the antithesis of alleging use of the mail or wires

to perpetrate a scheme to defraud.

Thus, when the Amended Complaint is scrutinized it reveals only two allegations to

support a wire fraud claim – the two emails from Hungerford, which were sent approximately a

year apart on December 25, 2008 and December 30, 2009. While the Amended Complaint

admittedly alleges two misrepresentations made by Hungerford in emails, as courts have

recognized, “two of anything seldom make out a pattern.”86 Moreover, the Amended Complaint

utterly fails to make the required showing that the two alleged predicate acts of wire fraud (i.e.,

the two Hungerford emails) are related or that they amount to or pose any threat of continued

criminal activity.87 Indeed, reading the emails (which are attached to the Amended Complaint as

Exhibits F and M) shows that they have nothing to do with one another, certainly do not amount

to any criminal activity, and do not pose any threat to continued criminal conduct.

With respect to the mail fraud claim, none of the allegations in the Amended Complaint

are sufficient to state such a claim because they do not specify that each identified RICO

defendant used the mail to send items containing fraudulent misrepresentations. For instance,

there is no allegation in the Amended Complaint specifying that NobleOutReach-NOLA mailed

anything to anyone or that the content of anything allegedly mailed by NobleOutReach-NOLA

contained fraudulent misrepresentations. Admittedly, the Amended Complaint does allege that

the WINTER 2011 UPDATE contained various misrepresentations by “Defendants.” However,

even if that single allegation is deemed sufficient to state a mail fraud violation, it still is

insufficient to establish any “pattern” of racketeering activity.

86 Meier, 588 F.Supp.2d at 900.87 18 U.S.C. §1961(e); Abell., 946 F.2d at 1164-1165 .


20

The RICO pattern requirement requires more than “sporadic activity.”88 It requires a

showing that the RICO defendants engaged in predicate acts that were both “continuous” and

“related.”89 The Amended Complaint does not come close to meeting either requirement. The

kinds of racketeering activity alleged in the Amended Complaint – the sending of three pieces of

correspondence each at least one year apart to different people, one of whom is not a plaintiff or

even a limited partner in the Fund – are not sufficiently related to form a single RICO pattern, as

they do not share “the ‘same or similar purposes, results, participants, victims, or methods of

commission.”90 Nor can the sending of three pieces of correspondence over the course of a four

year period possibly be considered “continuous.”

ii. The Amended Complaint Does Not State a Claim Against Any Defendant For Violating The National Stolen Property Act.

The National Stolen Property Act (“NSPA”),91 makes it a federal criminal offense for

anyone to transport stolen, converted, or fraudulently obtained goods in interstate or foreign

commerce while knowing of the theft. The NSPA was intended to supplement state law

enforcement by using Congress’ power under the commerce clause of the Federal Constitution to

combat criminals whose movements across state lines took them beyond the reach of state and

local law enforcement agencies.92 Typically, NSPA claims involve transportation of movable

property across state lines.93 In United States v. McClain,94 the Fifth Circuit noted that the term

88 H.J., 492 U.S. at 239. 89 See, e.g., Heller Fin., Inc. v. Grammco Computer Sales, Inc., 71 F.3d 518, 524 (5th Cir. 1996) (explaining that “[a]lthough proof of continuity and relationship may often overlap, the two inquiries analytically are distinct prongs of the pattern element requiring separate analysis.” 90 Word of Faith, 90 F.3d at 122. See also, Heller, 71 F.3d at 524-25 (commercial bribery of third party and mail and wire fraud directed at the plaintiffs were not sufficiently related to form a pattern); Vild v. Visconsi, 956 F.2d 560, 566-59 (6th Cir. 1992) (pattern requirement not satisfied because predicate acts directed at others were not sufficiently related to predicate acts directed at plaintiff).91 18 U.S.C. §2314.92 Dowling v. United States, 437 U.S. 207 (1985).93 See, e.g., Dowling, supra (referencing ticket blanks on which counterfeit tickets have been printed and maps locating possible oil deposits as examples of the types of property to which the NSPA typically applies).94 545 F.2d 988, 1002 (5th Cir. 1977).


21

“stealing” is “not a term of art” but “also is not a word bereft of meaning.” In McClain, the Fifth

Circuit cautioned about expanding the meaning of the word “stealing” beyond the connotation

conventionally called to mind.95

To rely on the NSPA as a predicate act in this case, the plaintiffs must allege that: (1)

Hungerford, Milbrath, BNM, VP Nola, NobleFranchise 1&3, Bay-One-Capital, Bay-Bourbon-

Ritas, Bywater Holdings and Noble-Lending-Holdings: (1) transported stolen property (2) with

specific intent and knowledge that it was stolen. The Amended Complaint makes the conclusory

allegation that: “The transactions described in this First Amended Complaint violated 18 U.S.C.

§2314 (National Stolen Property Act)…”96 However, the Amended Complaint is devoid of any

allegations whatsoever establishing that any of the alleged RICO defendants intentionally and

knowingly transferred property they knew to be “stolen” as that term is conventionally

understood. Indeed, nowhere within the 19 pages of the Amended Complaint devoted to

describing the transactions about which the plaintiffs complain (paragraphs 217-337) do the

plaintiffs ever allege that Hungerford or Milbrath or any of the entities identified transported

money or other property that they knew to be stolen.

iii. The Amended Complaint Does Not State A Viable Money Laundering Claim Against Milbrath Or Hungerford.

The Amended Complaint contains the conclusory allegation that “[t]he transactions

described in this First Amended Complaint violated …18 U.S.C. §1956 (the federal money

laundering statute); and 18 U.S.C. §1957 (the monetary transactions in criminally derived

property statute).”97 The RICO Case Statement adds little, but clarifies that the plaintiffs’ money

95 Id.96 Rec. Doc. 102 at ¶571. 97 Id.


22

laundering claims are brought pursuant to §1956(a)(1)(B)(i) and §1957 and are only asserted

against Hungerford and Milbrath.

To state a claim under §1956(a)(1)(B)(i), a plaintiff must allege that the defendant: (1)

conducted or attempted to conduct a financial transaction, (2) which the defendant then knew

involved the proceeds of unlawful activity, (3) knowing the transaction was designed to conceal

or disguise the nature, location, source, ownership or control of the proceeds of the unlawful

activity. Put another way, to state a claim under 18 U.S.C. § 1956(a)(1)(B)(1), the plaintiffs

must allege that Hungerford and Milbrath possessed funds, the source of which they knew to be

illicit, and then laundered those funds with the intent to conceal or disguise the nature, location,

source, ownership, or control of the funds.98

Importantly, the Fifth Circuit has been “careful not to allow the money laundering statute

to become a money spending statute.” 99 Money spending is not criminal under §1956(a)(1).100

Rather, the statute is intended to punish “conduct that really is distinct from the underlying

specified unlawful activity[,]…[not to] provide overzealous prosecutors with a means of

imposing additional criminal liability any time a defendant makes benign expenditures with

funds derived from unlawful acts.”101 The Fifth Circuit has recognized that merely showing that

a defendant spent proceeds of illegal activity is insufficient to establish a specific intent to

conceal as required to prove a money laundering concealment claim. For instance, in United

States v. Olaniyi-Oke, the Fifth Circuit rejected the government’s argument that purchasing

goods with illegally obtained credit was sufficient to state a money laundering concealment

claim, explaining:

98 United States v. Garza, 42 F.3d 251, 253 (5th Cir. 1994) (citing United States v. Fuller, 974 F.2d 1474, 1478 (5th Cir. 1992), cert. denied, 114 S. Ct. 112 (1993)).99 Brown, 553 F.3d at 786. [internal citations omitted.]100 United States v. Olaniyi-oke, 199 F.3d 767, 771 (5th Cir. 1999)101 Olaniyi-oke, 199 F.3d at 771 (citing United States v. Brown, 186 F.3d 661, 670-71, (5th Cir. 1999).


23

In one sense, the acquisition of any asset with proceeds of illegal activity conceals those proceeds by converting them into a different and more legitimate-appearing form. But the requirement that the transaction be designed to conceal implies that more than this trivial motivation to conceal must be proved.102

In this case, the plaintiffs are attempting to use the money laundering statute as a money

spending statute. At its core, this lawsuit is about the plaintiffs’ complaints about the manner in

which the capital they contributed to the Fund was invested and/or spent. Within the Amended

Complaint, the plaintiffs complain that the Fund’s money was used to buy minority ownership

interests in companies, to purchase real estate at above-market prices, and was generally wasted.

These are garden-variety mismanagement and breach of fiduciary duty claims; not money

laundering claims.

The plaintiffs attempt to make the money laundering concealment statute “fit” by arguing

that the general ledgers of various entities incorrectly characterize the nature of certain

transactions as management, consulting and administrative fees. The plaintiffs suggest in their

RICO Case Statement that their allegation that the defendants’ mischaracterization of certain

payments is evidence of specific intent to conceal. However, even if the pleadings are viewed in

the light most favorable to the plaintiffs, they allege only that the transactions mischaracterized

certain expenditures as payments for legitimate business expenses, when they were actually

payments to Hungerford and Milbrath. The plaintiffs do not allege that the transactions were

mischaracterized to conceal the fact that the proceeds being transferred were originally obtained

through illicit means – which is the very allegation required to distinguish a money laundering

claim from a money spending claim.

To state a claim under 18 U.S.C. §1957, the plaintiffs must allege that Hungerford and

Milbrath “engaged in a monetary transaction in criminally derived property of a value greater

102 Olaniyi-oke, 199 F.3d at 771.


24

than $10,000 and that the property was derived from specified unlawful activity.”103 The

Amended Complaint fails to adequately plead a §1957 claim. Both the Amended Complaint and

the RICO Case Statement simply recite the elements of a §1957 claim and allege that they are

met. To adequately state a claim, however, the plaintiffs must do more. They must specifically

identify the property that was allegedly derived from unlawful activity, identify the particular

unlawful activity through which the property was allegedly derived, and identify the monetary

transaction that relates to the property at issue. The plaintiffs have not done so and, consequently,

have not stated a §1957 claim.

iv. The Plaintiffs Allegations Are More Analogous To Securities Fraud Allegations Which Cannot Be Converted To RICO Claims.

A civil RICO claim cannot rest on “conduct that would have been actionable as fraud in

the purchase or sale of securities.”104 This prohibition applies to prevent a RICO action based on

securities fraud even if the plaintiff would not have standing to sue for recovery on that securities

fraud.105 The plaintiffs do not allege a securities fraud claim or allegations that would amount to

securities fraud. However, their claims are analogous to securities fraud claims in the sense that

they pertain to an investment into a legally-established investment vehicle and fraud that

allegedly occurred during the course of the investment managers’ performance of their job duties

– as opposed to fraud that occurred through a separate and distinct illegal enterprise. Just as a

typical securities fraud case cannot be converted to a RICO claim, the plaintiffs should not be

able to convert their ordinary mismanagement claims into RICO claims.

103 United States v. Parker, 558, 562 (5th Cir. 2010).104 MLSMK Inv. Co. v. JP Morgan, 651 F.3d 268, 277 (2nd Cir. 2011).105 Id.


25

g. The Amended Complaint Fails To Adequately Plead A RICO Conspiracy.

18 U.S.C. §1962(d) makes it illegal for anyone to conspire to violate one of the

substantive provisions of RICO. The elements of a conspiracy to violate RICO are: “(1)

knowledge by the defendant of the essential nature of the conspiracy; (2) the defendant’s

objective manifestations of an agreement to participate in the conduct of the affairs of an

enterprise; and (3) an overt act, which need not be a crime, in furtherance of the conspiracy.”106

A plaintiff must allege that the defendants entered into an agreement to commit two or more

predicate acts in furtherance of the RICO conspiracy.107 Put another way, “because the core of a

RICO civil conspiracy is an agreement to commit predicate acts, a RICO civil conspiracy

complaint, at the very least, must allege specifically such an agreement.”108 “In addition, a

plaintiff must show that defendants knew that the acts agreed upon were part of a pattern of

racketeering activity.109

As an initial matter, a RICO conspiracy claim must be dismissed when a complaint fails

to allege any viable substantive RICO claim.110 For instance, in Manax v. McNamara,111 the

Fifth Circuit approved dismissal of a RICO conspiracy claim because the plaintiff failed to

sufficiently plead the existence of a RICO enterprise. Here, the plaintiffs’ RICO conspiracy

claim must be dismissed because the Amended Complaint fails to state any other viable RICO

claim or enterprise.

106 Bonton v. Archer Chrysler Plymouth, Inc., 889 F. Supp. 995, 1005 (S.D. Tex. 1995) (citing United States v. Sutherland, 656 F.2d 1181, 1187 n.4 (5th Cir. 1981)).107 Tel-Phonic Servs., Inc., 975 F.2d at 1140. 108 Hecht v. Commerce Clearing House, Inc., 897 F.2d 21, 25 (2d Cir. 1990).109 Id. at 1140-41 (citing Miranda v. Ponce Fed. Bank, 948 F.2d 41, 47 (1st Cir. 1991)).110 See Nolen v. Nucentrix Broadband Networks, Inc., 293 F.3d 926, 930 (5th Cir. 2002) (“The failure to plead the requisite elements of … §1962(c) violation implicitly means that Nolen cannot plead a conspiracy to violate [that] section. Thus, the district court also correctly dismissed Nolen’s conspiracy claims.”)111 842 F.2d 808, 812 (5th Cir. 1988).


26

Moreover, the allegations in the Amended Complaint alleging a conspiracy are woefully

shy of asserting a RICO claim with a net wide enough to capture all 40 of the defendants they

have attempted to stigmatize with their misuse of the statute. All the plaintiffs allege in support

of their “conspiracy theory” is that:

At all times material to this action, the Louisiana Entity Defendants, the Maryland Entity Defendants, and the Delaware Entity Defendants conspired with each other and unnamed co-conspirators for purposes of violating 18 U.S.C. §1962(c).112

The statements in the RICO Case Statement are no more helpful or specific. They merely

identify which defendants allegedly conspired together and which provision of RICO they

conspired to violate.113 There are absolutely no allegations anywhere within the Amended

Complaint or the RICO Case Statement to establish the existence of a conspiracy. Specifically,

there are no allegations that the 40 defendants alleged to be RICO co-conspirators had

knowledge of any conspiracy; objectively manifested any agreement to participate in the conduct

of the affairs of any of the six alleged association-in-fact enterprises; engaged in any overt acts in

furtherance of any alleged conspiracy; or entered into an agreement to commit two or more

predicate acts in furtherance of the so-called RICO conspiracy. The conspiracy claim is simply

baseless and further evidences the plaintiffs’ attempt to overreach and improperly criminalize

what amounts to nothing more than a corporate mismanagement dispute to try to obtain federal

jurisdiction. Conspiracy by its very definition requires more than one defendant, as an individual

cannot conspire with himself. And it cannot be created by alleging more than one predicate act

by the same defendants, nor by “electricity” or knowledge of the predicate acts of others. It

requires proof of an actual agreement between RICO actors through a separate RICO enterprise.

There simply are no such allegations made in this case.

112 Rec. Doc. 102 at ¶579.113 Rec. Doc. 110 at pp. 52-55.


27

V. BECAUSE THERE IS NO DIVERSITY OR FEDERAL QUESTION JURISDICTION, THE COURT CANNOT EXERCISE SUPPLEMENTAL JURISDICTION OVER THE NON-DIVERSE STATE LAW CLAIMS.

When a federal court does not have subject matter jurisdiction over a federal law claim, it

cannot exercise supplemental jurisdiction over pendent state law claims absent diversity

jurisdiction.114 For the reasons set forth above, this Court does not have original jurisdiction

over this matter pursuant to either §1332(a)(2) or §1331. Therefore, the Court cannot exercise

supplemental jurisdiction over the plaintiffs’ non-diverse state law claims.

VI. CONCLUSION.

There is no diversity jurisdiction over this dispute because the plaintiffs and the Fund are

citizens of the same states. There is no federal question jurisdiction over this dispute because the

only federal claim asserted, the RICO claim, must be dismissed because the Amended Complaint

fails to allege either the existence of a RICO enterprise or that the alleged RICO defendants

engaged in a pattern of racketeering activity. Absent original jurisdiction over this matter, the

Court cannot exercise supplemental jurisdiction of the non-diverse state law claims.

Accordingly, the Court should grant this motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(1)

and dismiss the Amended Complaint for lack of subject matter jurisdiction.

114 Gibb v. City of Friendswood, 2008 U.S. Dist. LEXIS 1188, 3-4 (S.D. Tex. Jan. 7, 2008) (citing 28 U.S.C. § 1367(a) (stating that a court must have original jurisdiction over the civil action before it can exercise supplemental jurisdiction over related claims)).


28

Respectfully submitted:

ADAMS AND REESE LLP

_/s/ Elizabeth A. Roussel_____________WILLIAM B. GAUDET (#1374)ELIZABETH A. ROUSSEL (#27943)CHRISTOPHER J. KANE (#29282)4500 One Shell SquareNew Orleans, LA 70139Telephone: (504) 581-3234Facsimile: (504) 566-0210Attorneys for Defendants

CERTIFICATE OF SERVICE

I hereby certify that a copy of the above and foregoing pleading has been served upon all

counsel of record via notice of electronic filing, email, fax or by placing same in the U.S. Mail,

properly addressed and postage prepaid, this 23rd day of August, 2012.

/s/ Elizabeth A. Roussel


defendants motion to dismiss in nola rc case (08 23-12)

Investor Relations