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KOULOURIS v. ESTATE OF CHALMERS

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS, EASTERN DIVISION


March 25, 1992

TOM KOULOURIS, Plaintiff,
v.
ESTATE OF HYMEN P. CHALMERS and ELECTRONICS, MISSILES & COMMUNICATIONS, INC., Defendants.

The opinion of the court was delivered by: MARVIN E. ASPEN

MEMORANDUM OPINION AND ORDER

 MARVIN E. ASPEN, District Judge:

 Along with a number of other lawsuits filed in the Northern District of Illinois, this action arises from the sale of stock of Electronics, Missiles & Communications, Inc. ("EMC") in the mid-1980s. Plaintiff Tom Koulouris brings this two-count amended complaint against EMC and the Estate of Hymen P. Chalmers, alleging violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-1968, and common-law fraud. EMC and the Estate now move to dismiss Koulouris' amended complaint for failure to state a claim. For the reasons set forth below, we grant the motions.

 I. Background *fn1"

 Beginning on or about January 14, 1984, Chalmers, who was a director, treasurer and shareholder of EMC, together with Andrew Nanos, an EMC shareholder, conducted an aggressive sales campaign to promote the sale of EMC stock in the Chicago metropolitan area. In an effort to arouse investor interest and to induce Koulouris and other individuals to purchase EMC stock, Chalmers and Nanos purportedly made false representations and omissions of fact regarding EMC's financial status and the market value of the stock. Koulouris purchased approximately 14,800 shares of EMC common stock between 1982 and 1985 at prices ranging from $ 5 to $ 16-1/2 per share, *fn2" partly as a result of the alleged misrepresentations and omissions of material fact.

 Finding itself in a precarious financial condition, in September 1984, EMC obtained an exemption from the registration requirements of the federal securities laws, pursuant to "Regulation A: promulgated under § 3(b) of the Securities Exchange Act of 1933, 15 U.S.C. § 77c(b), clearing the way for an offering of common stock to be sold to the public. Despite the funds raised through this Regulation A offering, EMC's financial status remained dire. Indeed, in January 1985, EMC defaulted on a $ 2 million revolving line of credit, prompting the Board of Directors to consider filing for protection under Chapter 11 of the Bankruptcy Act. In a desperate attempt to raise funds, EMC initiated another Regulation A offering in February 1985, consisting of 1,242,000 shares of common stock at $ 1 per share. Koulouris claims that the February 1985 offering violated Regulation A in that it was commenced in less than twelve months after the previous offering. Moreover, as the market price at the time of the offering ranged between $ 4-3/4 and $ 6-3/4 per share, Koulouris maintains that EMC further violated Regulation A by offering the stock at a price in disregard of its market value.

 On October 14, 1985, Barron's, a weekly financial newspaper, reported that the market price for EMC stock was inflated in light of EMC's financial difficulties. As a result of the article, on October 15, 1985, EMC stock dropped from an opening bid of $ 14 per share to $ 11-1/4 in less than an hour. In order to support the price of the stock, Chalmers, Nanos and other unnamed individuals placed purchase orders for approximately 152,000 shares, allegedly with no intention of payment. Nevertheless, on October 22, 1985, the market price of EMC stock plunged to $ 2-1/2 per share.

 Koulouris contends that from October 25, 1985, until January 27, 1989, the date he filed this action, Nanos and Chalmers lulled him into inaction "by blaming the fall in the price of EMC stock, among other reasons, on unknown persons who were trying to hurt the defendants by selling EMC stock short." In his initial complaint, Koulouris charged EMC, Chalmers and Nanos with violations of federal securities laws, RICO and common-law fraud. On December 3, 1991, this court dismissed Koulouris' securities claims, concluding that they were barred under the applicable statute of limitations. Accordingly, we granted Koulouris leave to file the current amended complaint, which withdraws all securities claims, removes Nanos as a defendant and substitutes the Estate of Hymen P. Chalmers as a defendant in place of Chalmers, now deceased.

 II. Discussion

 EMC and Chalmers' Estate raise several challenges to Koulouris' amended complaint. First, both defendants contend that the RICO and other fraud claims are not pled with the particularity required by Fed. R. Civ. P. 9(b). Second, respecting the RICO count, EMC and the Estate argue that Koulouris failed to allege: (1) that either EMC or Chalmers committed a predicate act under RICO; (2) that either EMC or Chalmers engaged in a "pattern of racketeering activity," as required by § 1962(a)-(c) and defined in § 1961(5); and (3) that either EMC or Chalmers conspired to violate any of the provisions of RICO, as required by § 1962(d). Third, EMC maintains that Koulouris' claim under § 1962(c) must be dismissed, as EMC cannot be liable as both a "person" and "enterprise" under that section. Fourth, the Estate asserts that Koulouris' § 1962(a) claim must be dismissed because Koulouris has failed to allege that Chalmers received or invested income from racketeering activity in an enterprise, as required under that section. Finally, defendants argue that Koulouris' common-law fraud claim should be dismissed for lack of supplemental jurisdiction. We address each argument in turn.

 A. Rule 9(b) Particularity

 Defendants argue that Koulouris' RICO and other fraud claims are not pled with the particularity required by the Federal Rules of Civil Procedure. Fed. R. Civ. P. 9(b) ("in all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity"). We disagree.

 Rule 9(b)'s requirements are certainly applicable to fraud claims in civil RICO complaints. See Haroco, Inc. v. American Nat'l Bank & Trust Co., 747 F.2d 384, 405 (7th Cir. 1984), aff'd, 473 U.S. 606, 105 S. Ct. 3291, 87 L. Ed. 2d 437 (1985); Uniroyal Goodrich Tire Co. v. Mutual Trading Corp., 749 F. Supp. 869, 872 (N.D. Ill. 1990). These requirements, however, are not absolute or unbounded; defendants need not be given a "pretrial memorandum containing all the evidentiary support for plaintiff's case." Uniroyal Goodrich, 749 F. Supp. at 872 (citing Pellman v. Cinerama, Inc., 503 F. Supp. 107, 111 (S.D.N.Y. 1980); Bruss Co. v. Allnet Communication Servs., Inc., 606 F. Supp. 401, 405 (N.D. Ill. 1985)).

 Koulouris' complaint need only set forth "a brief sketch of how the fraudulent scheme operated, when and where it occurred, and the participants." Tomera v. Galt, 511 F.2d 504, 509 (7th Cir. 1975); Uniroyal Goodrich, 749 F. Supp. at 872. Koulouris' amended complaint contains specific allegations concerning two sets of purported fraud. First, Koulouris maintains that the circumstances surrounding the February 1985, Regulation A offering are tantamount to fraud. In support of this allegation, Koulouris states that the offering was commenced in less than twelve months after the previous offering, and was priced in disregard to the market price for EMC stock -- clear violations of Regulation A. Amended Complaint PP11-12, at 3-4. Further, contrary to EMC's assertion, the facts underlying these violations support the inference that it was willful and fraudulent:

 

Defendant Chalmers personally selected the 18 recipients of the stock of EMC, offering them the opportunity to make substantial profits on their $ 1 per share investment. He did this so as to have a ready supply of stock in order to further his scheme to manipulate the market by fraudulently generating a demand for the stock.

 Id. P19, at 5-6. Second, Koulouris states that during the aggressive campaign to promote EMC stock in the Chicago metropolitan area, both Chalmers and Nanos made misrepresentations and omissions regarding the financial status of EMC. Specifically, Koulouris claims that Chalmers and Nanos, failed to disclose the fact that a Regulation A offering was in progress, whereby the EMC stock was being offered at $ 1 per share. Id. P26, at 7. According to Koulouris, neither Chalmers nor Nanos stated that "EMC had suffered severe financial difficulties subsequent to the publication of its last report on its SEC Form 10-K." Id. These allegations regarding each of the purported sets of fraudulent activity are sufficiently particular to meet the requirements of Rule 9(b); they "adequately detail[], in broad strokes, the nature and essential factual elements of the alleged fraud. . . ." The defendants are not left guessing as to the outlines to the fraud, its purposes, or the critical facts. . . ." Adair v. Hunt Int'l Resources Corp., 526 F. Supp. 736, 744 (N.D. Ill. 1981).

 B. Violation of Regulation A as a Predicate Act

 In order to state a claim under the RICO statute, Koulouris must allege "at least two acts of racketeering activity" transpiring within a ten-year time period. 18 U.S.C. § 1961(5) (1984). Section 1961(1), wherein "racketeering activity" is defined, includes as a predicate act "any offense involving . . . fraud in the sale of securities . . . punishable under any law of the United States." Id. § 1961(1)(D). Defendants' current contention is that non-compliance with Regulation A, 15 U.S.C. § 77c(b), does not fall within the ambit of § 1961(1)(D) or any other of the enumerated acts set forth in § 1961(1) and, as such, cannot provide the basis for a predicate act under RICO.

 Regulation A, promulgated by the SEC pursuant to § 3(b) of the Securities Exchange Act of 1933, provides issuers of certain securities an exemption from the general registration requirements of the federal securities laws. The exemption is contingent on a number of technical requirements, detailed at 17 C.F.R. §§ 230.236-230.263. Failure to comply with these requirements can only result in suspension of the registration exemption, see id. § 230.261, and not criminal sanction (i.e., not "punishment" as required by § 1961(1)(D)). It is axiomatic that, in order to constitute a predicate act, the conduct in question must be "an act in itself subject to criminal sanction." S. Rep. No. 617, 91st Cong., 1st Sess. 158 (1969) (emphasis supplied); see also Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 488, 105 S. Ct. 3275, 3280-81, 87 L. Ed. 2d 346 (1985) ("The predicate acts involve conduct that is 'chargeable' or 'indictable,' and 'offenses' that are 'punishable,' under various criminal statutes. § 1961(1). As defined in the statute, racketeering activity consists not of acts for which the defendant has been convicted, but of acts for which he could be.") (emphasis supplied). While the allegations surrounding the purported violation of Regulation A may be tantamount to fraud, the violation itself is not subject to criminal prosecution and, therefore, it does not fall within the statutory definition of "racketeering activity."

 This is not to say, however, that Koulouris has failed to allege two predicate acts. Indeed, any willful misrepresentation, or omission, of a material fact made in connection with the sale of the EMC stock certainly falls within the statutory definition of "racketeering activity." See Laird v. Integrated Resources, Inc., 897 F.2d 826, 838 (5th Cir. 1990) (misrepresentation and/or failure to disclose in violation of § 10(b) and Rule 10b-5 as a predicate act under RICO); Marshall & Ilsley Trust Co. v. Pate, 819 F.2d 806, 807-809 (7th Cir. 1987) (same); Norris v. Wirtz, 703 F. Supp. 1322, 1330 (N.D. Ill. 1989) (same). Koulouris' amended complaint explicitly sets forth two such acts, allegedly committed as part of Chalmers' aggressive sales campaign: (1) that Chalmers and Nanos failed to disclose that a Regulation A offering was in progress, whereby the EMC stock was being offered at $ 1 per share; and (2) that neither Chalmers nor Nanos stated that EMC had suffered severe financial difficulties subsequent to the publication of its last report on its SEC Form 10-K. Neither EMC nor Chalmers' Estate argues that these acts do not fall within the statutory definition of "fraud in the sale of securities." 18 U.S.C. § 1961(1)(D).

 C. The Pattern Requirement of Subsections 1962(a)-(c). *fn3"

 Assuming that the alleged § 10(b) violations are sufficient to constitute "racketeering activity," these predicate acts alone do not establish a "pattern of racketeering activity," as required by § 1962(a)-(c) and defined in § 1961(5). Rather, Koulouris must satisfactorily allege that the "racketeering predicates are related, and that they amount to or pose a threat of continued criminal activity." H.J., Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 239, 109 S. Ct. 2893, 2900, 106 L. Ed. 2d 195 (1989) (emphasis in original); see also Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496 n.14, 105 S. Ct. 3275, 3285 n.14, 87 L. Ed. 2d 346 (1985) ("It is this factor of continuity plus relationship which combines to produce a pattern."). Koulouris appears to satisfy the relationship element of the pattern requirement. As noted in Morgan v. Bank of Waukegan, 804 F.2d 970, 975 (7th Cir. 1986), "relationship implies that the predicate acts were committed somewhat closely in time to one another, involve the same victim, or involve the same type of misconduct." See also H.J., Inc., 492 U.S. at 240, 109 S. Ct. at 2901 (relationship element is satisfied where the predicate acts "are said to be related by a common purpose"). In the instant case, the purported omissions are most certainly related. These predicate acts involved the same type of misconduct, occurred simultaneously and were undertaken for a single goal (i.e., generating a demand for EMC stock).

 Koulouris, however, cannot establish that these predicate acts possess the continuity necessary to constitute a pattern of racketeering activity. "'Continuity' is both a closed- and open-ended concept, referring either to a closed period of repeated conduct, or to past conduct that by its nature projects into the future with a threat of repetition." H.J., Inc., 492 U.S. at 241, 109 S. Ct. at 2902. While the Supreme Court has not established a general test applicable in continuity determinations, the Seventh Circuit has set forth a number of relevant factors to guide the inquiry, including: "'the number and variety of predicate acts and the length of time over which they were committed, the number of victims, the presence of separate schemes and the occurrence of distinct injuries.'" J.D. Marshall Int'l, Inc. v. Redstart, Inc., 935 F.2d 815, 820 (7th Cir. 1991) (quoting Morgan, 804 F.2d at 975). Presently, Koulouris has alleged two predicate acts, *fn4" which for all practical purposes are identical in kind. These acts, together aimed at inducing Koulouris to buy EMC stock, took place over a period of approximately 21 months -- from January 14, 1984 (the beginning of the sales campaign) to October 1985 (the collapse of the stock). *fn5" Although Koulouris initially sought to bring this suit as a class action, and thus his amended complaint references "others similarly situated," Amended Complaint P23, at 6, Koulouris has not set forth any allegations indicating that Chalmers targeted any other victims. Indeed, the facts as alleged support nothing more than a single scheme inflicting one distinct injury on Koulouris, the deterioration in value of his EMC stock. The circumstances of this case evince the type of closed-ended scheme transpiring over a relatively short period of time that lacks sufficient continuity to comprise a pattern. See, e.g., U.S. Textiles, Inc. v. Anheuser-Busch Companies, 911 F.2d 1261, 1267-68 (7th Cir. 1990) (seventeen months); Triad Assoc., Inc. v. Chicago Housing Authority, 892 F.2d 583, 594-95 (7th Cir. 1989) (twenty-eight months), cert. denied, 111 S. Ct. 129, 112 L. Ed. 2d 97 (1990).

 Notwithstanding the short duration of the scheme, Koulouris attempts to establish the threat of continued criminal activity by arguing that "the predicate acts are a regular way of conducting defendants' ongoing legitimate business." See H.J., Inc., 492 U.S. at 243, 109 S. Ct. at 2902. This contention, however, is completely unsupported by the allegations of Koulouris' amended complaint. That Chalmers or EMC, through the actions of Chalmers or any other officer, committed securities fraud as a regular way of conducting ongoing business requires more than allegations concerning the circumstances surrounding Koulouris' dealings with Chalmers. See Fleet Credit Corp. v. Sion, 893 F.2d 441, 447-48 (1st Cir. 1990); Johnston v. Wilbourn, 760 F. Supp. 578, 588 n.13 (S.D. Miss. 1991). Koulouris has not pointed to any other transaction in which defendants made a misrepresentation, or omission, of material fact in connection with the sale of securities. In short, Koulouris has not presented one shred of evidence that racketeering is defendants' regular way of conducting business.

 In the absence of racketeering activity amounting to, or posing a threat of, continued criminal activity, we dismiss Koulouris' claims against each defendant predicated on violations of § 1962(a)-(c). *fn6"

 D. Subsection 1962(d) Conspiracy

 Subsection 1962(d) of the RICO statute 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." 18 U.S.C. § 1962(d) (Supp. 1991). Defendants argue that Koulouris' conspiracy claim under § 1962(d) should be dismissed for failure to allege a colorable conspiracy. We agree.

 "A plaintiff alleging conspiracy must identify the nature of the conspiracy and the defendant's role in it with some particularity." Midwest Grinding Co. v. Spitz, 716 F. Supp. 1087, 1093 (N.D. Ill. 1989) (citing Frymire v. Peat, Marwick, Mitchell & Co., 657 F. Supp. 889, 896 (N.D. Ill. 1987)). Specifically, as conspiracy hinges on agreement, "the plaintiff must allege with some particularity facts sufficient to show an agreement between the parties to inflect the alleged wrong." Id. The only reference to a conspiracy in Koulouris' amended complaint is the conclusory statement that "the acts, misrepresentations and omission of Chalmers in conspiracy with co-conspirator Andrew Nanos to violate [subsections] (a), (b) and (c) of § 1962 of Title 18 U.S.C. constituted a violation of 18 U.S.C. § 1962(d)." Amended Complaint P43, at 13. Notwithstanding the fact that the conspiracy as alleged does not include defendant EMC, Koulouris has failed to allege any facts supporting an inference of agreement on the part of either defendant or Nanos. Nor does Koulouris set forth any facts indicating the nature of the purported conspiracy or each defendants' role in it. Accordingly, defendants' motions to dismiss Koulouris' § 1962(d) claim is granted.

 III. Conclusion

 While Koulouris has adequately asserted two instances of "racketeering activity," he has failed to satisfactorily allege that the racketeering predicates amount to, or pose a threat of, continued criminal activity. Accordingly, we dismiss Koulouris' claims against each defendant predicated on violations of § 1962(a)-(c). Further, in the absence of particular allegations of agreement, Koulouris' conspiracy claim under § 1962(d) must fall. Finally, Koulouris' common-law fraud claim is dismissed without prejudice for lack of supplemental jurisdiction. *fn7" It is so ordered.

 MARVIN E. ASPEN

 United States District Judge

 Dated March 25, 1992

 EDITOR'S NOTE: The following court-provided text does not appear at this cite in 790 F. Supp. 1372.

 JUDGMENT IN A CIVIL CASE

 IT IS ORDERED AND ADJUDGED that while Koulouris adequately asserted two instances of "racketeering activity," he has failed to satisfactorily allege that the racketeering predicates amount to, or pose a threat of, continued criminal activity. Accordingly, we dismiss Koulouris' claims against each defendant predicated on violations of § 1962(a)-(c). Further, in the absence of particular allegations of agreement, Koulouris' conspiracy claim under [1962(d) must fall. Finally, Koulouris' common-law fraud claim is dismissed without prejudice for lack of supplemental jurisdiction.


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