Threshold RICO Requirements Strictly Enforced: District Court Dismisses Civil RICO Case with Prejudice

March 31, 2020

Key Takeaways

  • The Rajaratnam decision provides yet another stark example of the numerous barriers plaintiffs must overcome in pursuit of RICO’s promise of treble damages, along with the potent arguments defense counsel have at their disposal to defeat such efforts.

In a recent decision dismissing with prejudice a civil suit by former hedge fund manager Raj Rajaratnam under the Racketeer Influenced and Corrupt Organizations (“RICO”) Act, U.S. District Judge Kiyo Matsumoto of the Eastern District of New York reiterated that courts will continue to “scrutinize civil RICO claims early in . . . litigation to separate the rare complaint that actually states a claim for civil RICO from that more obviously alleging common law fraud.” Rajaratnam v. Motley Rice LLC et al., No. 18-cv-3234, 2020 WL 1476171, at *9 (E.D.N.Y. Mar. 26, 2020). In dismissing Rajaratnam’s claims, Judge Matsumoto recognized that RICO provides a “powerful incentive for plaintiffs to attempt to fit garden variety fraud claims within the standard of civil RICO due to the allure of treble damages, attorney’s fees, and federal jurisdiction,” in turn justifying the need for courts to police carefully RICO’s threshold requirements. Rajaratnam, 2020 WL at *9.

Judge Matsumoto’s RICO dismissal comes on the heels of the Second Circuit’s recent decision in the Halvorssen case, affirming the dismissal of a single-count RICO complaint by a Southern District of New York District Court for failing to satisfy the statute’s “relatedness” and “continuity” requirements, the subject of a recent Dechert OnPoint. Both decisions counsel in favor of a careful review of RICO’s threshold requirements before filing suit if a plaintiff, or at the outset of any litigation if a defendant.

To state a valid RICO claim, among other things, a plaintiff must allege a “pattern of racketeering activity” by a RICO “enterprise” consisting of at least two predicate acts of racketeering that are related to each other and either present the risk of continuing or continued for a period of time prior to the action being filed.

In his civil RICO complaint, Rajaratnam alleged that the law firm Motley Rice, together with a confidential FBI informant and members of the government’s Joint Terrorism Task Force (“JTTF”), operated a RICO enterprise that improperly acquired and disseminated false information about his alleged support for the Sri Lankan terrorist group known as the “Tamil Tigers,” with the aim of coercing Rajaratnam into a lucrative settlement with Motley Rice’s clients. The allegations in his complaint were anchored around a 2009 lawsuit brought by the Motley Rice firm in New Jersey federal court on behalf of victims of the Tamil Tigers (the “New Jersey action”), alleging that Rajaratnam had provided material support to the terrorist group.

Judge Matsumoto found that the disparate predicate acts alleged in Rajaratnam’s complaint failed to satisfy RICO’s “horizontal relatedness” requirement. Although “horizontal relatedness” requires that predicate acts of racketeering be related to each other, “vertical relatedness” requires that those predicate acts be related to the RICO “enterprise.” To be sufficiently related to each other, predicate acts must “have the same or similar purposes, results, participants, victims, or methods of commission, or otherwise [be] interrelated by distinguishing characteristics.” H.J. Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 240 (1989).

The court found that various alleged acts of racketeering by Motley Rice, including conduct in pursuit of 1970s asbestos litigation, litigation related to the September 11 terrorist attacks, the use of a consulting firm to exploit government contacts, and the use of duplicitous tactics to induce the arrest of an Afghan drug lord were all insufficiently related to each other, to the New Jersey action, and to Rajaratnam to satisfy the “horizontal relatedness” requirement. See Rajaratnam, 2020 WL at *12.

Similarly, the court held that Rajaratnam had failed to otherwise plead at least two predicate acts of racketeering needed to establish a “pattern” of racketeering activity, whether mail or wire fraud, witness tampering, bribery, or any of the other acts of racketeering enumerated under RICO. The court noted that the mail and wire fraud statutes may not be used to transform allegedly false statements in litigation into RICO predicates, nor would putatively defamatory statements—in this case, a 2009 press release by Motley Rice and allegedly false statements to Vanity Fair by the FBI informant and a member of the JTTF about Rajaratnam’s professed support for the Tamil Tigers—qualify as predicate mail and wire fraud violations. Id. at *16.

The court held that Rajaratnam had likewise failed to plead predicate violations of the witness tampering, money laundering, and related criminal statutes. The court cautioned that even if Rajaratnam had successfully pled a single act of bribery by Motley Rice, courts should refuse to permit plaintiffs to “fragment[ ] a singular act into multiple acts simply to invoke RICO.” Id. at *22.

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