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Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 1 of 28                           IN THE UNITED STATES DISTRI...
Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 2 of 28jurisdiction as the predicate for subject matter juris...
Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 3 of 28              A derivative state law claim on behalf ...
Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 4 of 28citizens of a foreign state who are lawful permanent r...
Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 5 of 28determined by reference to the citizenship of all of i...
Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 6 of 28             a. The Legal Standard on the Rule 12(b)(6...
Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 7 of 28identify the speaker, state when and where the stateme...
Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 8 of 28             c. The Structure of the RICO Statute.    ...
Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 9 of 28                     ii. The Enterprise Element.      ...
Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 10 of 28                     iii. The Pattern Element.       ...
Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 11 of 28acts” – is exhaustive and includes mail fraud,62 wire...
Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 12 of 28                      i. The Amended Complaint Does N...
Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 13 of 28                     ii. The Facts Alleged Do Not Sup...
Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 14 of 28an organization pattern or system of authority beyond...
Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 15 of 28whatsoever and that plaintiffs are simply complaining...
Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 16 of 28Fifth Circuit has repeatedly instructed, however, suc...
Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 17 of 28specificity and judicial scrutiny especially applies ...
Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 18 of 28of mail and/or wire fraud against each defendant the ...
Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 19 of 28failing to communicate information. They are the anti...
Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 20 of 28         The RICO pattern requirement requires more t...
Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 21 of 28“stealing” is “not a term of art” but “also is not a ...
Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 22 of 28laundering claims are brought pursuant to §1956(a)(1)...
Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 23 of 28           In one sense, the acquisition of any asset...
Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 24 of 28than $10,000 and that the property was derived from s...
Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 25 of 28             g. The Amended Complaint Fails To Adequa...
Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 26 of 28           Moreover, the allegations in the Amended C...
Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 27 of 28      V.       BECAUSE THERE IS NO DIVERSITY OR FEDER...
Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 28 of 28                                             Respectf...
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Defendants motion to dismiss in NOLA RC case (08 23-12)

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New Orleans RC mismanagement lawsuit by EB-5 investors. Sumpter et al v. Hungerford et al In this document, the defendants ask the Court to throw out the case or at least parts of it. (That is at least part of the defense attorney's job after all.)

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Defendants motion to dismiss in NOLA RC case (08 23-12)

  1. 1. Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 1 of 28 IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF LOUISIANATERENCE K. SUMPTER, ET AL. * CIVIL ACTION NO. 12-717 PLAINTIFFS, * * 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 Courtshould dismiss plaintiffs’ Amended Complaint for lack of subject matter jurisdiction and/orshould dismiss plaintiffs’ claim brought pursuant to the Racketeer Influenced and CorruptOrganizations statute (“RICO”), 18 U.S.C. §1964. I. INTRODUCTION. On March 15, 2012, the plaintiffs2 instituted this legal action asserting various state lawmismanagement and breach of fiduciary duty claims. The original Complaint3 alleged diversity1 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, VPNOLA 2, LLC, VP NOLA 2-WOW, LLC, VP NOLA Land 2, LLC, VP NOLA, LLC, NobleOutReach OriginalPrincipals, 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, LiWei Liu, Su Fang, Tianyi Liu, Ali Fuat Cercer, Faruk Cercer, Suat Ocal, Suheyla Ocal, Yiran Deng, Rong Ma, MingChen, Xirui Chen, Reem Al Nasser, and Yu Lin Li.
  2. 2. Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 2 of 28jurisdiction as the predicate for subject matter jurisdiction. Months later, plaintiffs filed anAmended Complaint4 that attempted to convert what they had previously characterized asgarden-variety mismanagement and breach of fiduciary duty claims into RICO violations. Whilecreative, 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 ofNobleRealEstateFund, L.P. (the “Fund”). The defendants include the Fund, Bart Hungerford andCol. Tim Milbrath individually, and a number of corporate entities created to support the Fundand fulfill its objectives as described in its Limited Partnership Agreement5 and PrivatePlacement 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. 2
  3. 3. Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 3 of 28  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 28U.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; noplaintiff can be a citizen of the same state as any of the defendants.”9 Here, there is not completediversity among the plaintiffs and the defendants as required by §1332(a)(2) because theplaintiffs, who are lawful permanent residents of the United States, are deemed to be domiciledin the states in which they reside, which are the same states in which the Fund, a defendant, isdeemed 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 permanentresident 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 and7 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. 3
  4. 4. Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 4 of 28citizens of a foreign state who are lawful permanent residents of the United States that aredomiciled 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 conditionallawful permanent resident. A “conditional permanent resident” is defined as “an alien who hasbeen lawfully admitted for permanent residence within the meaning of Section 101(a)(2) of theImmigration and Nationality Act (“INA”), except that a conditional permanent resident is alsosubject to conditions and responsibilities set forth in section 215 or 216A of the Act….”13Section 101(a)(2) of the INA defines the term “lawfully admitted for permanent residence” tomean “the status of having been lawfully accorded the privilege of residing permanently in theUnited States as an immigrant in accordance with the immigration laws….” For purposes of 18U.S.C. 1332(a)(2), there is no doubt that a “conditional permanent resident” is a “lawfulpermanent resident” as expressly defined by Section 101(a)(2) of the INA. The Amended Complaint alleges that certain of the plaintiffs reside in Florida, NewJersey, Virginia, Massachusetts, California, Kentucky, New York, Missouri, Hawaii, andWashington.14 Those plaintiffs are deemed to be citizens of the foregoing states for purposes ofdiversity 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 anindispensable party to this derivative suit.16 The citizenship of a limited partnership is12 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). 4
  5. 5. Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 5 of 28determined by reference to the citizenship of all of its partners, both general and limited.17 Theplaintiffs are the limited partners of the Fund. Thus, their citizenship dictates the citizenship ofthe Fund. Because certain of the plaintiffs are citizens of Florida, New Jersey, Virginia,Massachusetts, California, Kentucky, New York, Missouri, Hawaii, and Washington fordiversity jurisdiction purposes, the Fund is likewise a citizen of those states. Because many ofthe plaintiffs and one of the defendants are citizens of the same state, there is no completediversity 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) whenthere 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 allcivil actions arising under the Constitution, laws, or treatises of the United States.” A claim fallswithin a district court’s federal question jurisdiction under 28 U.S.C. §1331 if “federal lawcreates the cause of action.”20 Here, there is no federal question jurisdiction because the onlyfederal 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 aMember of an LLC or a Limited Partner Bring a Breach of Fiduciary Duty Claim Against Those Controlling theLLC 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 alawful permanent resident, because a permanent resident is deemed to be a citizen of both the state of domicile andthe country of citizenship. Intec USA, LLC v. Engle, 667 F.3d 1038, 1041-1044 (7th Cir. 2006). Where there is analien non-resident who sues a limited liability partnership with permanent resident alien partners, complete diversitydoes 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. ConstructionLaborers Vacation Trust, 463 U.S. 1, 27-28, 103 S. Ct. 2841, 77 L. Ed. 2d 420 (1983)). 5
  6. 6. Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 6 of 28 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 facialplausibility when the plaintiff pleads factual content that allows the court to draw the reasonableinference that the defendant is liable for the misconduct alleged.”22 “[A] plaintiff’s obligation to provide the ‘grounds’ of his ‘entitlement to relief’ requiresmore than labels and conclusions, and a formulaic recitation of the elements of a cause of actionwill not do.”23 To avoid dismissal, “a plaintiff must plead specific facts, not mere conclusoryallegations.”24 “Where a complaint pleads facts that are ‘merely consistent with’ a defendant’sliability, it stops short of the line between possibility and plausibility of ‘entitlement to relief.’”25According, where the well-pleaded facts do not permit the court to infer more than the merepossibility of misconduct, “the complaint must be dismissed.”26 To assert any theory sounding in fraud, plaintiff must “state with particularity thecircumstances constituting fraud or mistake.”27 This particularity requirement applies not only tocommon law fraud claims, but also to “the pleading of fraud as a predicate act in a RICOclaim.”28 “In fact, all of the concerns that dictate that fraud be pleaded with particularity existwith 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 LeatherProds., 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). 6
  7. 7. Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 7 of 28identify the speaker, state when and where the statements were made, and explain why thestatements were fraudulent.”30 b. The Purpose of the RICO Statute. The origins of RICO date back to the 1930s and 1940s when Congress was concernedabout the influence of organized crime, specifically the Mafia, on the U.S. economy.31 Congresspassed RICO in an effort to combat organized, long-term criminal activity.32 Congress “neverintended that the statute be employed to allow plaintiffs to turn garden-variety state law fraudand breach of fiduciary duty cases into RICO claims.”33 Considering that RICO allegations havea stigmatizing effect on those named as defendants34 and carry also the possibility of trebledamages,35 RICO is an “unusually potent weapon” sometimes referred to as the “litigationequivalent 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, courtshave warned that putative civil RICO claims that “are nothing more than sheep masquerading inwolves’ 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. DSCCommc’ns Corp., 14 F.2d 1061, 1068 (5th Cir. 1994) (pleading fraud with particularity requires the plaintiffs toallege the “time, place and contents of the false representations, as well as the identify of the person making themisrepresentation 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. 7
  8. 8. Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 8 of 28 c. The Structure of the RICO Statute. The RICO statute creates a civil action for any person “injured in his business or propertyby reason of a violation of section [18 U.S.C.] 1962.”41 To state a claim under §1962, a plaintiffmust 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 substantiveRICO violations set out in §1962. Each contemplates a different relationship through which thedefendant used racketeering activity to act upon or toward an enterprise.”43 The four violationsinclude:  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.47Elements common to all four sections of 1962 are: (1) a person who engages in (2) a pattern ofracketeering activity, (3) connected to the acquisition, establishment, conduct or control of anenterprise.4841 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). 8
  9. 9. Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 9 of 28 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 isongoing with some continuity of personnel.49 The enterprise may be a legal entity or “any unionor 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 associatesfunction as a continuing unit.”51 The enterprise is not a pattern or racketeering activity, butmust 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’saffairs through a pattern of racketeering activity, the plaintiff must demonstrate not only that theenterprise is distinct from the series of predicate acts constituting racketeering activity, but alsothat the RICO “person” who commits the predicate acts is distinct from the “enterprise.”53 It isnot enough to establish that a defendant corporation through its agents committed the predicateacts in the conduct of its own business.54 That officers or employees of a corporation, in thecourse of their employment associate to commit predicate acts does not establish an association-in-fact enterprise distinct from the corporation.5549 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. 9
  10. 10. Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 10 of 28 iii. The Pattern Element. “The heart of any RICO complaint is the allegation of a pattern of racketeering.”56Courts carefully scrutinize the pattern requirement to curb “widespread attempts to turn routinecommercial disputes into civil RICO actions,” to “forestall RICO’s use against isolated orsporadic criminal activity, and to prevent RICO from becoming a surrogate for garden-varietyfraud 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 pleadeach requisite element of each underlying criminal offense that constitutes a predicate act inorder to survive a motion to dismiss.59 At least two predicate acts must be alleged against eachdefendant the plaintiff seeks to hold liable. “[A] RICO plaintiff must plead the specified facts asto 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, eachof which subsumes additional constituent elements which the plaintiff must plead.61 The list offederal offenses located at 18 U.S.C. §1961(1) – which are commonly referred to as “predicate56 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 multipledefendants, the complaint must not lump together all of the defendants, as ‘the complaint should inform eachdefendant of the nature of his alleged participation in the fraud.’”)61 Foufas, 867 F.2d at 880. 10
  11. 11. Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 11 of 28acts” – is exhaustive and includes mail fraud,62 wire fraud,63 interstate transportation of stolenproperty,64 and money laundering,65 which are the predicate acts in which plaintiffs allege certaindefendants 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 Because It Fails To Establish The Existence Of Any RICO Enterprise. Although very lengthy, the Amended Complaint is substantively lacking certainnecessary allegations to state a RICO claim. As a threshold matter, the RICO claim must bedismissed because the Amended Complaint fails to allege facts sufficient to establish theexistence of any RICO enterprise. The enterprise requirement is not met for two discretereasons: (1) the Amended Complaint does not allege the existence of any enterprise distinct fromthe Fund; and (2) the Amended Complaint does not allege that any of the six so-called RICOenterprises have any hierarchy or structure for group decision-making, function as a continuingunit, or have any systems in place beyond those necessary to conduct their ordinary businessoperations.62 18 U.S.C. §1341.63 18 U.S.C. §1343.64 18 U.S.C. §2314.65 18 U.S.C. §1957. 11
  12. 12. Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 12 of 28 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 existingcorporations. A complaint alleging that officers or employees of a corporation, in the course oftheir employment, associated to commit predicate acts is insufficient to establish a RICOenterprise distinct from the corporation they serve.66 This entire case centers on plaintiffs’ complaints about the operation of the Fund and itsaffiliated portfolio companies. The claims arise directly from actions certain defendants took inthe course of serving as officers and employees of the defendant entities. Stated another way, thesame conduct that forms the basis of the plaintiffs’ mismanagement claims against thedefendants also forms the basis of the racketeering allegations the plaintiffs use to support theirRICO claims. Viewed in this light, the plaintiffs’ allegations amount to nothing more thanallegations of an intra-corporate conspiracy, which courts have consistently found inadequate tostate 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 hasrecognized 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 agentsparticipate in the complained of action.”6966 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’sSteaks, 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). 12
  13. 13. Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 13 of 28 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 organizedcrime commonly associated with Mafia “crime families.”70 United States v. Riccobene,71provides a good example of a classic RICO enterprise. In Riccobene, the nine defendants wereaccused of engaging in illegal gambling and loan operations. Recorded conversations of thedefendants 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 hierarchicalstructure in which the “Godfather” Bruno, presided over the family with an inner circle ofadvisors, who watched over a group of middle managers who, in turn, supervised the actualoperations of the enterprise. Based on this evidence establishing a hierarchy and that the ninedefendants 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,72explained 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 grantedsummary 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 nothave a structure for group decision-making, do not function as a continuing unit, and do not have70 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 anddistinguished 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). 13
  14. 14. Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 14 of 28an organization pattern or system of authority beyond that necessary to carry out the daily affairsof each of the entities.”73 The deficiencies that existed in establishing the existence of a RICO enterprise inSchaffer are the same deficiencies that the Amended Complaint suffers in attempting to allege aRICO claim here. Plaintiffs’ RICO Case Statement74 and Amended Complaint (which arevirtually identical with regard to the description of the alleged association-in-fact enterprises) 75do not allege that the entities they attempt to lump together to create six so-called RICOenterprises have any structure for group decision-making, function as continuing units, or haveany patterns or systems of authority beyond those necessary to carry out the daily affairs of eachof the entities. For instance, with respect to the alleged BNM Enterprise, the Amended Complaintasserts that Bay-NOLA-Mgmt received money from the Fund which it used to pay for suchthings as an “ownership interest” in another company, “real estate,” “rent,” “monthly leasepayments,” “management service fees, financial services, construction services, and/oraccounting expenses,” “day-to-day operating expenses,” and employees.76 What the AmendedComplaint does not allege is any hierarchy or structure for group decision-making among theentities 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 anypattern or system of authority in place beyond what is necessary to carry out the daily affairs ofthe constituent entities. When scrutinized closely, it is clear that there is no enterprise73 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 takenvirtually 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. 14
  15. 15. Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 15 of 28whatsoever 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 challengethe wisdom or fairness of the decision by Bay-NOLA-Mgmt to use money it received from theFund 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 areno 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 theBNM Enterprise, it fails to allege the existence of any other enterprise. As the plaintiffs’ wellknow, 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 ofbeing a pooled venture capital investment vehicle. The fact that the plaintiffs’ capitalcontributions to the Fund were invested in other companies and that Hungerford and Milbrathhad indirect ownership interest in some of those companies was not part of any scheme todefraud the plaintiffs. Quite to the contrary, before investing in the Fund, the plaintiffs were toldthat “[t]he Fund’s investments will primarily be in companies that the General Partners will beinstrumental in nurturing/founding or joint venturing.”77 Likewise, the plaintiffs were advisedthat the money they contributed to the Fund would be invested and that “[t]he primary purpose ofthe [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, thiscase 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 bestalleges that the RICO defendants joined together to misappropriate the Fund’s money. As the77 Rec. Doc. 102 at Exhibit C, p. 1.78 Rec. Doc. 102 at Exhibit D, ¶1.2. 15
  16. 16. Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 16 of 28Fifth Circuit has repeatedly instructed, however, such an allegation still is insufficient to createRICO liability because the enterprise must be “an entity separate and apart from the pattern ofracketeering in which it engages.”79 For instance, in Elliot v. Foufas, a frequently cited FifthCircuit case addressing the RICO “enterprise” requirement, the Fifth Circuit granted a Rule12(b)(6) motion to dismiss the plaintiff’s RICO claim, which was founded on allegations that thedefendants 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 ofestablishing the existence of a RICO enterprise has not been met. For this reason alone, theCourt 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 allegedto have violated §1962(a), (b), or (c) engaged in racketeering activity, let alone a pattern ofracketeering activity. Specifically, the Amended Complaint does not allege that any of thedefendants engaged in a pattern of mail or wire fraud or state any claim against the defendantsfor interstate transportation of stolen property or money laundering. The plaintiffs allegationsare 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 themail and/or wires to execute that scheme, and (3) specific intent to defraud.81 The need for79 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. 16
  17. 17. Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 17 of 28specificity and judicial scrutiny especially applies where mail and wire fraud are alleged asRICO predicate acts “because of the relative ease with which a plaintiff may mold a RICOpattern from allegations that, upon closer scrutiny, do not support it.”82 Indeed, courts haverecognized that mail fraud and wire fraud statutes are the ones most frequently abused byplaintiffs like those in this case who attempt to criminalize ordinary fraud claims and commercialdisputes by converting them improperly into RICO claims.83 Consequently and importantly, a RICO claim predicated on mail or wire fraud mustspecifically 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 todismiss RICO claims predicated on wire fraud brought against Greg Engles, the CEO ofdefendant Dean Foods Company because it found that plaintiff’s allegations that Deanemployees engaged in telephone conversations where one of them made factual representationsregarding certain actions or statements of the defendant Engles were insufficient to show thatEngles himself had violated the wire fraud statute because the plaintiffs did not allege thatEngles himself used the telephone. Pages 19-20 of the plaintiffs’ RICO Case Statement and Paragraphs 590-602 of theAmended Complaint address the allegations of mail and wire fraud. Notably, the AmendedPetition impermissibly lumps together the defendants.85 It does not plead each requisite element81 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 “becausethe 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 verybreadth of the mail and wire fraud statutes that has caused judicial concern that the statutes not be given too vagueand 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 17
  18. 18. Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 18 of 28of 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 themail 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 allegedmisrepresentations than just those cited above. However, it is apparent from the face of thepleadings that no mail or wires were used in making the other misrepresentations alleged. Forinstance:  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 tomisrepresentations by omission. By their very nature, such allegations accuse the defendants ofdefendants, the complaint must not lump together all of the defendants, as ‘the complaint should inform eachdefendant of the nature of his alleged participation in the fraud.’”) 18
  19. 19. Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 19 of 28failing to communicate information. They are the antithesis of alleging use of the mail or wiresto perpetrate a scheme to defraud. Thus, when the Amended Complaint is scrutinized it reveals only two allegations tosupport a wire fraud claim – the two emails from Hungerford, which were sent approximately ayear apart on December 25, 2008 and December 30, 2009. While the Amended Complaintadmittedly alleges two misrepresentations made by Hungerford in emails, as courts haverecognized, “two of anything seldom make out a pattern.”86 Moreover, the Amended Complaintutterly 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 continuedcriminal activity.87 Indeed, reading the emails (which are attached to the Amended Complaint asExhibits F and M) shows that they have nothing to do with one another, certainly do not amountto 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 Complaintare sufficient to state such a claim because they do not specify that each identified RICOdefendant used the mail to send items containing fraudulent misrepresentations. For instance,there is no allegation in the Amended Complaint specifying that NobleOutReach-NOLA mailedanything to anyone or that the content of anything allegedly mailed by NobleOutReach-NOLAcontained fraudulent misrepresentations. Admittedly, the Amended Complaint does allege thatthe 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 isinsufficient 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 . 19
  20. 20. Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 20 of 28 The RICO pattern requirement requires more than “sporadic activity.”88 It requires ashowing 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. Thekinds of racketeering activity alleged in the Amended Complaint – the sending of three pieces ofcorrespondence each at least one year apart to different people, one of whom is not a plaintiff oreven a limited partner in the Fund – are not sufficiently related to form a single RICO pattern, asthey do not share “the ‘same or similar purposes, results, participants, victims, or methods ofcommission.”90 Nor can the sending of three pieces of correspondence over the course of a fouryear 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 foranyone to transport stolen, converted, or fraudulently obtained goods in interstate or foreigncommerce while knowing of the theft. The NSPA was intended to supplement state lawenforcement by using Congress’ power under the commerce clause of the Federal Constitution tocombat criminals whose movements across state lines took them beyond the reach of state andlocal law enforcement agencies.92 Typically, NSPA claims involve transportation of movableproperty across state lines.93 In United States v. McClain,94 the Fifth Circuit noted that the term88 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 prongsof 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 mailand wire fraud directed at the plaintiffs were not sufficiently related to form a pattern); Vild v. Visconsi, 956 F.2d560, 566-59 (6th Cir. 1992) (pattern requirement not satisfied because predicate acts directed at others were notsufficiently 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 mapslocating 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). 20
  21. 21. Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 21 of 28“stealing” is “not a term of art” but “also is not a word bereft of meaning.” In McClain, the FifthCircuit cautioned about expanding the meaning of the word “stealing” beyond the connotationconventionally 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) withspecific intent and knowledge that it was stolen. The Amended Complaint makes the conclusoryallegation 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 anyallegations whatsoever establishing that any of the alleged RICO defendants intentionally andknowingly transferred property they knew to be “stolen” as that term is conventionallyunderstood. Indeed, nowhere within the 19 pages of the Amended Complaint devoted todescribing the transactions about which the plaintiffs complain (paragraphs 217-337) do theplaintiffs ever allege that Hungerford or Milbrath or any of the entities identified transportedmoney 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 transactionsdescribed in this First Amended Complaint violated …18 U.S.C. §1956 (the federal moneylaundering statute); and 18 U.S.C. §1957 (the monetary transactions in criminally derivedproperty statute).”97 The RICO Case Statement adds little, but clarifies that the plaintiffs’ money95 Id.96 Rec. Doc. 102 at ¶571.97 Id. 21
  22. 22. Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 22 of 28laundering claims are brought pursuant to §1956(a)(1)(B)(i) and §1957 and are only assertedagainst 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 knewinvolved the proceeds of unlawful activity, (3) knowing the transaction was designed to concealor disguise the nature, location, source, ownership or control of the proceeds of the unlawfulactivity. Put another way, to state a claim under 18 U.S.C. § 1956(a)(1)(B)(1), the plaintiffsmust allege that Hungerford and Milbrath possessed funds, the source of which they knew to beillicit, 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 statuteto become a money spending statute.” 99 Money spending is not criminal under §1956(a)(1).100Rather, the statute is intended to punish “conduct that really is distinct from the underlyingspecified unlawful activity[,]…[not to] provide overzealous prosecutors with a means ofimposing additional criminal liability any time a defendant makes benign expenditures withfunds derived from unlawful acts.”101 The Fifth Circuit has recognized that merely showing thata defendant spent proceeds of illegal activity is insufficient to establish a specific intent toconceal as required to prove a money laundering concealment claim. For instance, in UnitedStates v. Olaniyi-Oke, the Fifth Circuit rejected the government’s argument that purchasinggoods with illegally obtained credit was sufficient to state a money laundering concealmentclaim, explaining:98 United States v. Garza, 42 F.3d 251, 253 (5th Cir. 1994) (citing United States v. Fuller, 974 F.2d 1474, 1478 (5thCir. 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). 22
  23. 23. Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 23 of 28 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 moneyspending statute. At its core, this lawsuit is about the plaintiffs’ complaints about the manner inwhich the capital they contributed to the Fund was invested and/or spent. Within the AmendedComplaint, the plaintiffs complain that the Fund’s money was used to buy minority ownershipinterests 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 moneylaundering claims. The plaintiffs attempt to make the money laundering concealment statute “fit” by arguingthat the general ledgers of various entities incorrectly characterize the nature of certaintransactions as management, consulting and administrative fees. The plaintiffs suggest in theirRICO Case Statement that their allegation that the defendants’ mischaracterization of certainpayments is evidence of specific intent to conceal. However, even if the pleadings are viewed inthe light most favorable to the plaintiffs, they allege only that the transactions mischaracterizedcertain expenditures as payments for legitimate business expenses, when they were actuallypayments to Hungerford and Milbrath. The plaintiffs do not allege that the transactions weremischaracterized to conceal the fact that the proceeds being transferred were originally obtainedthrough illicit means – which is the very allegation required to distinguish a money launderingclaim from a money spending claim. To state a claim under 18 U.S.C. §1957, the plaintiffs must allege that Hungerford andMilbrath “engaged in a monetary transaction in criminally derived property of a value greater102 Olaniyi-oke, 199 F.3d at 771. 23
  24. 24. Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 24 of 28than $10,000 and that the property was derived from specified unlawful activity.”103 TheAmended Complaint fails to adequately plead a §1957 claim. Both the Amended Complaint andthe RICO Case Statement simply recite the elements of a §1957 claim and allege that they aremet. To adequately state a claim, however, the plaintiffs must do more. They must specificallyidentify the property that was allegedly derived from unlawful activity, identify the particularunlawful activity through which the property was allegedly derived, and identify the monetarytransaction 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 inthe purchase or sale of securities.”104 This prohibition applies to prevent a RICO action based onsecurities fraud even if the plaintiff would not have standing to sue for recovery on that securitiesfraud.105 The plaintiffs do not allege a securities fraud claim or allegations that would amount tosecurities fraud. However, their claims are analogous to securities fraud claims in the sense thatthey pertain to an investment into a legally-established investment vehicle and fraud thatallegedly 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 atypical securities fraud case cannot be converted to a RICO claim, the plaintiffs should not beable 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. 24
  25. 25. Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 25 of 28 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 thesubstantive 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’sobjective manifestations of an agreement to participate in the conduct of the affairs of anenterprise; and (3) an overt act, which need not be a crime, in furtherance of the conspiracy.”106A plaintiff must allege that the defendants entered into an agreement to commit two or morepredicate acts in furtherance of the RICO conspiracy.107 Put another way, “because the core of aRICO civil conspiracy is an agreement to commit predicate acts, a RICO civil conspiracycomplaint, at the very least, must allege specifically such an agreement.”108 “In addition, aplaintiff must show that defendants knew that the acts agreed upon were part of a pattern ofracketeering activity.109 As an initial matter, a RICO conspiracy claim must be dismissed when a complaint failsto allege any viable substantive RICO claim.110 For instance, in Manax v. McNamara,111 theFifth Circuit approved dismissal of a RICO conspiracy claim because the plaintiff failed tosufficiently plead the existence of a RICO enterprise. Here, the plaintiffs’ RICO conspiracyclaim must be dismissed because the Amended Complaint fails to state any other viable RICOclaim 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 therequisite 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). 25
  26. 26. Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 26 of 28 Moreover, the allegations in the Amended Complaint alleging a conspiracy are woefullyshy of asserting a RICO claim with a net wide enough to capture all 40 of the defendants theyhave attempted to stigmatize with their misuse of the statute. All the plaintiffs allege in supportof 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 merelyidentify which defendants allegedly conspired together and which provision of RICO theyconspired to violate.113 There are absolutely no allegations anywhere within the AmendedComplaint 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 hadknowledge of any conspiracy; objectively manifested any agreement to participate in the conductof the affairs of any of the six alleged association-in-fact enterprises; engaged in any overt acts infurtherance of any alleged conspiracy; or entered into an agreement to commit two or morepredicate acts in furtherance of the so-called RICO conspiracy. The conspiracy claim is simplybaseless and further evidences the plaintiffs’ attempt to overreach and improperly criminalizewhat amounts to nothing more than a corporate mismanagement dispute to try to obtain federaljurisdiction. Conspiracy by its very definition requires more than one defendant, as an individualcannot conspire with himself. And it cannot be created by alleging more than one predicate actby the same defendants, nor by “electricity” or knowledge of the predicate acts of others. Itrequires 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. 26
  27. 27. Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 27 of 28 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, itcannot exercise supplemental jurisdiction over pendent state law claims absent diversityjurisdiction.114 For the reasons set forth above, this Court does not have original jurisdictionover this matter pursuant to either §1332(a)(2) or §1331. Therefore, the Court cannot exercisesupplemental 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 arecitizens of the same states. There is no federal question jurisdiction over this dispute because theonly federal claim asserted, the RICO claim, must be dismissed because the Amended Complaintfails to allege either the existence of a RICO enterprise or that the alleged RICO defendantsengaged in a pattern of racketeering activity. Absent original jurisdiction over this matter, theCourt 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 supplementaljurisdiction over related claims)). 27
  28. 28. Case 2:12-cv-00717-SM-ALC Document 112-1 Filed 08/23/12 Page 28 of 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 Square New Orleans, LA 70139 Telephone: (504) 581-3234 Facsimile: (504) 566-0210 Attorneys for Defendants CERTIFICATE OF SERVICE I hereby certify that a copy of the above and foregoing pleading has been served upon allcounsel 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 28

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