contains a broad injury allegation which encompasses each of the four RICO allegations: "Pursuant to 18 U.S.C. § 1964(c), Midwest has been injured in its business and property by reason of defendants' violations of § 1962 . . . ." The complaint does not include a specific allegation that Midwest has been injured by defendants' use or investment of income derived from mail or wire fraud or by defendants' acquisition or control of U.S. Grinding. Although such allegations could perhaps have been made, they are not contained in this version of the complaint, and the Court is not willing to subject defendants to yet another opportunity for Midwest to revise its claims.
The proximate cause of Midwest's injury as alleged in the complaint is defendants' alleged acts of racketeering themselves. Therefore, Midwest's RICO claims brought under section 1962(a) and (b) do not satisfy the requirement that the injury be "by reason of" the use or investment, or the acquisition or control of an interest. Accordingly, Midwest's RICO claims based on section 1962(a) and (b) are dismissed.
B. Mail and Wire Fraud
The next issue concerns Spitz and Grunfeld's alleged violation of section 1962(c). In paragraph 44 of the Amended Complaint, Midwest alleges that the defendants committed the following acts of mail or wire fraud:
a) Mailings in 1985 and 1986 of understated invoices for services provided to Cardinal and Midwest;
b) Mailings during January, 1986 in connection with the incorporation of U.S. Grinding;
c) Mailings during 1985 and 1986 in connection with efforts to obtain financing and goods with U.S. Grinding;
d) Interstate telephone calls during 1985 and 1986 for business purposes;
e) Mailings of invoices during 1986 to customers wrongfully diverted from Midwest to U.S. Grinding; and
f) Mailings in August, 1986 by Spitz to Klein Tools offering to sell his shares in Midwest.
Defendants argue that Midwest has failed to set forth wire and mail fraud
allegations sufficient to pass muster under Federal Rule of Civil Procedure 9(b), which requires a party alleging fraud to specify "with particularity" the circumstances misrepresentations. See Haroco, Inc. v. American National Bank, 747 F.2d at 405 (Rule 9(b) applies to fraud allegations in a civil RICO complaint). To satisfy Rule 9(b), Midwest must describe the time, place, particular contents of the false representations, the identity of the party making the misrepresentations and the consequences of the alleged fraud. See UNR Industries, Inc. v. Continental Ins. Co., 623 F. Supp. 1319, 1328-29 (N.D.Ill. 1985) (Getzendanner, J.); Beck v. Cantor, Fitzgerald & Co., Inc., 621 F. Supp. 1547, 1551 (N.D.Ill. 1985) (Rovner, J.). However, Rule 9(b) requires no more than that the complaint generally outline a fraudulent scheme and reasonably notify each of the defendants of their respective roles. See Haroco, 747 F.2d at 405.
Midwest identifies Spitz as the person who made all the misrepresentations surrounding the undercharging of Cardinal and the diversion of Midwest customers to U.S. Grinding.
Midwest also identifies sufficiently the parties to whom the misrepresentations were made (Midwest, Klein Tools and the former Midwest clients) and the contents of the misrepresentations (undercharging Cardinal, overcharging Klein Tools, and charging former Midwest clients for services rendered by U.S. Grinding). However, Midwest has failed to identify sufficiently the dates of the mailings made by Spitz with relation to the scheme to undercharge Cardinal and overcharge Klein Tools, in contrast to Midwest's identification in great detail of the dates of the scheme to divert Midwest customers to U.S. Grinding.
Midwest states merely that the misrepresentations took place between August, 1984 and August, 1986. Midwest's failure to identify the dates with specificity is perplexing in light of the fact that Midwest had engaged in over two years of discovery when it filed this edition of the complaint. Therefore the only mail fraud violations against Spitz that are pled sufficiently relate to the scheme to defraud Midwest by diverting Midwest's customers to U.S. Grinding, and not the scheme to undercharge Cardinal.
The mail fraud allegations against Grunfeld also fail for lack of specificity pursuant to Rule 9(b). Midwest has failed to identify any misrepresentation that Grunfeld made or in which he participated. See UNR Industries, 623 F. Supp. at 1329. In paragraphs 9 and 16 of the complaint, Midwest fails to identify whether Spitz, Grunfeld or their attorney mailed the documents relating to the incorporation of U.S. Grinding. Similarly, in paragraph 14, Midwest alleges that "defendants" used the mails to purchase machinery for U.S. Grinding without alleging which defendant used the mails. These allegations are insufficient to state a claim for violation of the mail fraud statute by Grunfeld. See H.G. Gallimore v. Abdula, 652 F. Supp. 437, 441 (N.D.Ill. 1987); Adair v. Hunt Intern. Resources Corp., 526 F. Supp. 736, 744 (N.D.Ill. 1981).
Defendants further argue that Midwest has failed to allege wire fraud with sufficient particularity. Under the federal wire fraud statute only interstate communications can constitute wire fraud. 18 U.S.C. § 1343. See H.G. Gallimore, 652 F. Supp. at 449. Paragraph 44 of Midwest's Second Amended Complaint mentions interstate phone calls and states merely that "various interstate telephone calls (were made) during 1985 and 1986 for business purposes." This bald assertion is insufficient to satisfy the requirements of Rule 9(b), because Midwest has not alleged with specificity the time, place, contents, or identity of the party making the misrepresentations. See Haroco 747 F.2d at 405; Beck, 621 F. Supp. at 1551.
Midwest has sufficiently alleged that Spitz, but not Grunfeld, violated the mail fraud statute. Midwest has not sufficiently pled a violation of the wire fraud statute with respect to either defendant. In light of these holdings, Midwest has sufficiently alleged the requisite mail fraud violations of section 1962(c) with regard to Spitz, but not Grunfeld. The section 1962(c) count against Grunfeld is therefore dismissed.
C. Section 1962(d) Conspiracy Claim
Defendants argue that the conspiracy claim under section 1962(d) should be dismissed for failure to meet the standard for pleading a conspiracy. Section 1962(d) provides that "it shall be unlawful for any person to conspire to violate any of the provisions of subsection (a), (b), or (c) of this section." Midwest has sufficiently pled a conspiracy between Spitz and Midwest, but not Grunfeld.
A complaint which merely implies that a defendant is responsible for someone else's fraudulent acts is insufficient to satisfy section 1962(d). Frymire v. Peat, Marwick, Mitchell & Co., 657 F. Supp. 889, 895 (N.D.Ill. 1987). A plaintiff alleging conspiracy must identify the nature of the conspiracy and the defendant's role in it with some particularity. Id. at 896. Most importantly, since conspiracy rests on agreement, the plaintiff must allege with some particularity facts sufficient to show an agreement between the parties to inflict the alleged wrong. Id. See also United States v. Neapolitan, 791 F.2d 489, 498 (7th Cir.), cert. denied, 479 U.S. 940, 107 S. Ct. 422, 93 L. Ed. 2d 372 (1986) (defendants need not themselves perform the predicate acts necessary to support a pattern of racketeering activity, but they must agree to someone doing such acts on behalf of the conspiracy). Further, the plaintiff must allege that the defendants agreed to one of the uses or effects of that pattern of racketeering activity which the statute expressly prohibits, such as conducting the affairs of an enterprise through a pattern of racketeering activity, 18 U.S.C. § 1962(c). Id. at 497, 499.
Midwest adequately alleges that U.S. Grinding, by its actions, agreed with Spitz to violate RICO. Midwest alleges that U.S. Grinding made fraudulent mailings to Midwest's former customers, and that it also used Midwest's truck to provide its services to former Midwest customers. These allegations are sufficient under section 1962(d) to show an agreement to violate section 1962(c).
The same cannot be said for the allegations against Grunfeld. In a conclusory fashion Midwest states that Grunfeld conspired to violate the provisions of section 1962(c). The complaint states that Grunfeld aided in the incorporation process, purchased machinery and secured a factory lease for U.S. Grinding. These facts are insufficient to infer that Grunfeld agreed with Spitz to engage in the predicate acts of mail and wire fraud.
Midwest's motion to dismiss the section 1962(d) claim is granted with regard to Grunfeld and denied with regard to Spitz and U.S. Grinding.
D. Pattern of Racketeering Activity
The Court must now address the RICO allegations under section 1962(c) against Spitz. Defendants move to dismiss the RICO count on the ground that the allegations do not establish a pattern of racketeering activity. Defendants argue that at best Midwest has alleged a single scheme and a single victim.
Midwest alleges that defendants engaged in three schemes to defraud Midwest and that these schemes create a pattern of racketeering activity. In the first scheme, Spitz and Grunfeld used Spitz's position at Midwest to undercharge Cardinal and overcharge Klein Tools for grinding services. This scheme has been dismissed for failure to sufficiently plead a violation of the mail fraud statute. See supra at Part III.B. In the second scheme, Spitz, Grunfeld and U.S. Grinding diverted business, employees and property from Midwest to U.S. Grinding. The third scheme involved a conspiracy by defendants to commit perjury during this lawsuit. For the reasons stated below, Midwest has sufficiently alleged the second scheme, but not the third scheme to defraud. However, the second scheme alone is sufficient to establish a pattern of racketeering activity.
To satisfy the "pattern" requirement, Midwest must allege at least two predicate acts of racketeering activity. 18 U.S.C. § 1961(5). Furthermore, the alleged racketeering activity must demonstrate "continuity and relationship" in order to constitute a pattern. Sedima, 473 U.S. at 496 n.14, 105 S. Ct. at 3285 n.l4. To satisfy the continuity element, "the predicate acts must be ongoing over an identified period of time so that they can fairly be viewed as constituting separate transactions, i.e., transactions somewhat separated in time and place." Medical Emergency Service Associates v. Foulke, 844 F.2d 391, 395 (7th Cir. 1988) (citations omitted). Many factors are relevant to the determination of whether a pattern exists, including "(1) the number and variety of predicate acts and the length of time over which they were committed; (2) the number of victims; (3) the presence of separate schemes; and (4) the occurrence of distinct injuries." Jones v. Lampe, 845 F.2d 755, 757 (7th Cir. 1988). See also United States v. Horak, 833 F.2d 1235, 1240 (7th Cir. 1987).
The Seventh Circuit has continued to analyze pattern of racketeering activity issues in fact-specific terms based on these factors. See Brandt v. Schal Associates, Inc., 854 F.2d 948, 952 (7th Cir. 1988); SK Hand Tool Corp v. Dresser Industries, Inc., 852 F.2d 936 (7th Cir. 1988); Medical Emergency Services, 844 F.2d at 395. Numerous Seventh Circuit decisions have held that a pattern of racketeering does not exist where multiple fraudulent acts are committed in furtherance of a single episode of fraud that involves one victim and relates to one basic transaction. See Brandt, 854 F.2d at 952-54; SK Hand Tool, 852 F.2d at 940; Medical Emergency Service, 844 F.2d at 396-98; Tellis v. U.S. Fidelity & Guaranty Co., 826 F.2d 477, 479 (7th Cir. 1987); Skycom Corp. v. Telstar Corp., 813 F.2d 810, 818 (7th Cir. 1987); Marks v. Pannell Kerr Forster, 811 F.2d 1108, 1112 (7th Cir. 1987); Elliott v. Chicago Motor Club Ins., 809 F.2d 347, 350 (7th Cir. 1986).
The third alleged scheme to defraud concerns denials made in this case by the defendants in response to Midwest's interrogatories and by Spitz and Grunfeld in their depositions. These denials cannot constitute a scheme for purposes of the RICO statute. In Jones, a bank had allegedly engaged in a single fraudulent loan transaction. The Seventh Circuit rejected the characterization of the bank's subsequent "cover-up" activities as a separate scheme. Id. at 759. The court stated that to do so would turn every transaction "into a 'multiple scheme' if the defendant denies wrongdoing." Id. See also SK Hand Tool, 852 F.2d at 941 n.8. The same reasoning applies to the defendants' denials made during the course of this lawsuit. Hence, Midwest has failed to allege a separate scheme to defraud based on a cover-up of its prior activities.
The only remaining scheme involves the diversion of business, employees and property from Midwest to U.S. Grinding. The factual circumstances alleged in Midwest's complaint with relation to this scheme are not properly characterized as only "one episode of fraud," and the multiple racketeering acts allegedly committed by defendants do not relate to only "one basic transaction." Instead, Midwest's allegations set forth a series of transactions, each of which amounted to a single episode of fraud.
The Seventh Circuit addressed a similar scheme involving multiple episodes of fraud in Liquid Air Corporation v. Rogers, 834 F.2d 1297 (7th Cir. 1987). In Liquid Air, defendants defrauded plaintiff Liquid Air Corporation by bribing one of Liquid Air's employees. Defendants caused the employee to prepare false shipping orders and invoices on nineteen separate occasions so that it appeared defendants had returned gas cylinders which defendants had been leasing from Liquid Air. Defendants improperly retained the cylinders. The Liquid Air court held that on each occasion when the employee prepared a false invoice, Liquid Air sustained a distinct injury. Id. at 1304-05. The court found that even though defendants effectuated a single fraudulent scheme on a single victim, they had engaged in a pattern of racketeering. The court stated that the repeated infliction of economic injury on a single victim of a single scheme is sufficient to establish a pattern of racketeering activity. Id. at 1305.
This case is even stronger than Liquid Air because of the variety and quantity of predicate acts. These acts included the diversion of numerous Midwest business clients in nearly one hundred separate transactions, the diversion of a number of Midwest employees to U.S. Grinding, and using Midwest's truck for U.S. Grinding deliveries. Moreover, Midwest alleges that defendants committed fraudulent acts during each of the separate grinding transactions. As a result of each transaction, Midwest sustained a loss of business. Each lost transaction therefore caused Midwest a distinct injury.
The Court finds that the alleged fraudulent acts of the defendants pass the "continuity plus relationship" test. The acts were sufficiently separate in time and place to meet the "continuity" prong of the test. The acts related to separate transactions, caused numerous distinct injuries, and occurred over a seven-month span. At the same time, the acts are sufficiently related to meet the "relationship" prong of the test. The acts were inflicted upon the same victim, Midwest, involved the same type of fraud, and were committed somewhat closely in time. Therefore, the Court concludes that Midwest's allegations are sufficient to allege a pattern of racketeering activity. Accordingly, the Court denies defendants' motion to dismiss Midwest's section 1962(c) RICO claim as it applies to Spitz.
Defendants' motion to dismiss Count I is granted with regard to section 1962(a) and (b) for failure to allege injury caused by the claimed violations. The motion to dismiss the section 1962(c) aspect of Count I is granted with regard to Grunfeld for failure to plead fraud with particularity and denied with regard to Spitz. The motion to dismiss the section 1962(d) conspiracy claim of Count I is granted with regard to Grunfeld and denied with regard to Spitz and U.S. Grinding. Because parts of the RICO claim survive, the motion to dismiss the pendent state law claims is denied as to Counts II, III and IV.
DATED: May 11, 1989