not consummate the merger, thanks to the vigilance of Grafman, who was president of the corporation. This prompted Collias and Karlos to divest Grafman of some of his duties and to amend the corporation's by-laws, allegedly without notice to Century's shareholders or directors. These actions vested even greater power in Collias and Karlos. Within weeks, Collias called a directors' meeting, where at the urging of Collias and Karlos the board removed Grafman as president. Bonick was in on this scheme too, allegedly making false, deceptive, and misleading statements and projections regarding Century's financial performance. According to Grafman's complaint, the Three once again used the mails to further their scheme.
After the palace coup the defendants allegedly began to enrich the Three at Century's expense. The defendants had unspecific financial transactions with financial institutions which were to Century's detriment. They borrowed great sums from a bank, partly on the basis of a personal guarantee previously tendered to the bank by Grafman, without allowing Grafman to participate in these dealings. Bonick and Collias also misrepresented Century's financial health to the bank, which somehow furthered their scheme to gain control of Century.
The crowning blows began in late 1988. In November, without obtaining the approval of Century's board or its shareholders, the Three obtained government approval for the transfer of station KMEL-FM, a Century radio property in San Francisco. The Three intended to put the property in the hands of a limited partnership which they had created, known as the San Francisco Century Limited Partnership. Creation of this partnership allegedly was the first step in a new effort to enrich Collias and Karlos; in this, the Three received help from alleged co-conspirators Soter and Baisch, who also were Century shareholders and directors. In December, the Three approached Heller Financial, Inc. to finance the purchase of another San Francisco radio station, KNBR-AM. The Three apparently intended to use the limited partnership as the vehicle for this purchase, and planned to transfer partnership interests to Collias and Karlos without adequate consideration. Heller said no to the deal, and so the Three approached another bank with a slightly different proposal. That bank also balked.
Finally, in June 1989, the Three found a willing financier, Greyhound Financial Corporation. The Three then caused the assets of KMEL-FM to go to the limited partnership, whose interests were held solely (or so one can infer from Grafman's complaint) by Collias and Karlos. Other Century shareholders were left out of the deal. In order to gain approval of this transaction, the Three falsely represented to Grafman and Century's other directors and shareholders that transfer of KMEL-FM to the limited partnership was a prerequisite to Greyhound's financing the deal. Collias and Karlos also concealed from Century's shareholders and directors the existence of a bona-fide offer to purchase the shares of Century, a proposal which Collias and Karlos rejected out of hand. As a result of these transactions, Collias and Karlos now have exclusive control of KMEL-FM.
The defendants press several arguments why this court should dismiss Grafman's complaint. They first contend that Grafman lacks standing to bring his RICO claims. The RICO statute limits its private civil remedies to "any person injured in his business or property by reason of a violation of section 1962. . . ." 18 U.S.C. § 1964(c). The defendants contend that all of the RICO injuries which Grafman alleges were not done to him, but to Century. Shareholder derivative actions are not permitted by RICO. See Rylewicz v. Beaton Services, Ltd., 888 F.2d 1175, 1989 U.S.App. LEXIS 16659 (7th Cir. 1989); Flynn v. Merrick, 881 F.2d 446, 449-50 (7th Cir. 1989). If this rule applied to this case, the court would have to dismiss Counts 1-2, for although Grafman has captioned his action as one brought on behalf of Century Broadcasting Corporation, he has not complied with Rule 23.1, Fed.R.Civ.Pro., which governs derivative actions.
Grafman does not dispute the general rule that shareholders in a corporation which has suffered from a RICO violation may not bring suit on their own. He contends, however, that his case falls within the exceptions to this rule under the federal common law, acknowledged by the court in Flynn, 881 F.2d at 449. One exception is where the shareholder suffers an injury which is separate and distinct from that of other shareholders, such as when a majority of shareholders deprives a minority of their right to vote or participate in the affairs of the corporation. See Twohy v. First Nat. Bank of Chicago, 758 F.2d 1185, 1194 (7th Cir. 1985); William Fletcher, 12B Cyclopedia of the Law of Private Corporations § 5911 (Rev.perm.ed. 1984).
This exception will save some aspects of Counts 1-2, but not all of them. Most of Grafman's allegations concern harm to Century, particularly those relating to the financial improprieties of the Three and the transfer of KMEL-FM to the Century Limited Partnership. These actions harmed all of Century's shareholders, not just Grafman. Grafman does allege harms, however, which did not befall all of Century's shareholders: the diminution of his voting power on account of the 1986 reorganization of Century and the loss of his rights on account of the by-law changes made the following year. From the complaint it appears that Grafman has standing to challenge these acts.
Having persuaded the court to narrow the harms for which Grafman may recover, the defendants direct three arguments specifically against Count 1. One of them is so powerful that the court will decline to rule on the other two. The defendants argue that Grafman fails to allege "racketeering activity," as required to state a cause of action under § 1962(c). Grafman contends that he alleges mail fraud, which is a violation of 18 U.S.C. § 1341 and one of the things defined as "racketeering activity" in id., § 1961(1)(A).
The defendants would accept mail fraud as being "racketeering activity" only if Grafman adequately alleged it in compliance with Rule 9(b), Fed.R.Civ.Pro. That rule states in part: "In all averments of fraud or mistake, the circumstances constituting the fraud or mistake shall be stated with particularity." Rule 9(b) applies to allegations of fraud in civil RICO actions. See Haroco v. American Nat. B. & T. Co. of Chicago, 747 F.2d 384, 405 (7th Cir. 1984), aff'd 473 U.S. 606, 87 L. Ed. 2d 437, 105 S. Ct. 3291 (1985) (per curiam); Frank E. Basil, Inc. v. Leidesdorf, 713 F. Supp. 1194, 1197-98 (N.D.Ill. 1989). As this court held in Basil, id. at 1198, "a complaint of fraud . . . is sufficient under Rule 9(b) when it sets forth the time, place, and manner of false misrepresentations, identities of parties, and the consequences of misrepresentations."
These are Grafman's allegations pertaining to the defendants' alleged mail fraud:
35. The defendants Collias, Karlos, and Bonick placed or caused to be placed into authorized depositories of the United States Mail items for delivery in furtherance of their scheme to defraud the shareholders of Century and to gain a greater share of ownership and control of Century, as follows: