Participation Units into account. Id. P 100. Perlman alleges that the defendants knew that their representations were false and misleading, and intended them to induce these third parties to allow the various sale and refinancing transactions to proceed. Id. PP 100-01. Perlman alleges that the defendants falsely represented to third parties that the sales to the REITs were properly authorized by the respective partnerships, when in fact the partnership agreements prohibited such transactions. Id. PP 103-05.
Perlman next alleges that the defendants transmitted fraudulent amendments to various partnership agreements improperly authorizing the transfer of properties to the REITs, via the mails and wire systems. Id. PP 116-18. The actual proceeds of the sales and refinancings were then transmitted to certain defendants, who received them in trust and embezzled them. Id. Last, Perlman alleges that certain other mailings allowed the defendants to conceal the sales and refinancing transactions, and also their receipt and conversion of distributions that should have been paid to Perlman. Id.
The defendants first argue that Perlman cannot state a claim for mail or wire fraud because the alleged misrepresentations were made to third parties, not Perlman. The defendants also argue that these misrepresentations did not themselves deprive Perlman of property. They claim that the alleged misrepresentations were made in furtherance of refinancing and sales transactions, not in furtherance of a scheme to convert Perlman's distributions.
In SJ Advanced Tech. & Mfg. Corp. v. Junkunc, 627 F. Supp. 572, 576 (N.D. Ill. 1986), the court held that misrepresentations to third parties may violate the mail fraud statute. The court implicitly recognized that there must be some type of nexus between the fraudulent misrepresentations to third parties and the actual plaintiff. The court held that such a nexus existed there, where the goal of the defendant's misrepresentations to third parties was to advantage itself competitively in a manner that injured the plaintiff. Id. The statements to third parties were thus a cause of the plaintiff's injuries.
In the present case, the misrepresentations to the various third parties--financial institutions, buyers, and others whose involvement was necessary to the transactions--are similarly related to the plaintiff's injury. The misrepresentations were made to induce sales and refinancing transactions which on their face were not aimed at injuring Perlman. Perlman has alleged, however, that the misrepresentations were the first step in the defendants' scheme to defraud him, and that the ultimate purpose of the manner in which the transactions were conducted was to put money in the defendants' pockets at the expense of Perlman and other investors. Seen in this light, the sales and refinancing transactions were a necessary part of the scheme to convert the Class II sale and refinancing proceeds, and the misstatements to the third parties enabled those transactions to be consummated. This is a sufficient causal link under SJ Advanced.
Apart from the misrepresentations made to third parties, the other acts of embezzlement and conversion that Perlman alleges as part of this scheme are also prohibited by the mail and wire fraud statutes. See Carpenter v. United States, 484 U.S. 19, 27, 98 L. Ed. 2d 275, 108 S. Ct. 316 (1987) (for mail fraud purposes, "fraud" "includes . . . embezzlement, which is the 'fraudulent appropriation to one's own use of the money or goods intrusted to one's care by another'") (quoting Grin v. Shine, 187 U.S. 181, 189, 47 L. Ed. 130, 23 S. Ct. 98 (1902)); Appley v. West, 832 F.2d 1021, 1027-28 (7th Cir. 1987) (mailings in furtherance of conversion of funds constitute mail fraud); Heritage Ins. Co. v. First Nat'l Bank, 629 F. Supp. 1412, 1416 (N.D. Ill. 1986) (allegations of false statements coupled with diversion of funds state a claim of mail fraud). In the present case, Perlman alleges that the defendants used the mails and wire systems to misappropriate his shares of the partnership distributions and proceeds, and to convert and embezzle those funds. Taken in the overall context of the complaint, these allegations are sufficient to make out a claim for mail fraud.
Finally, Perlman alleges that the defendants owed him a fiduciary obligation. If so, the nondisclosure and acts of concealment that he has alleged also may constitute mail and wire fraud. See United States v. Dial, 757 F.2d 163, 168 (7th Cir.) (the deliberate concealment of material information in a setting of fiduciary obligation can violate the mail and wire fraud statutes), cert. denied, 474 U.S. 838, 88 L. Ed. 2d 95, 106 S. Ct. 116 (1985); United States v. Dick, 744 F.2d 546, 550 (7th Cir. 1984) ("This court has recognized that breach of a fiduciary duty to disclose information . . . can support a mail fraud conviction.") (citing United States v. Feldman, 711 F.2d 758 (7th Cir.), cert. denied, 464 U.S. 939, 78 L. Ed. 2d 317, 104 S. Ct. 352 (1983)). Even where there is no fiduciary duty, "a misleading omission is actionable as part of a scheme to defraud 'if it is intended to induce a false belief and resulting action to the advantage of the misleader and the disadvantage of the misled.'" United States v. Morris, 80 F.3d 1151, 1161 (7th Cir. 1996) (quoting Emery v. American Gen. Fin., Inc., 71 F.3d 1343, 1348 (7th Cir. 1995)). Perlman has alleged that the defendants made misleading omissions with the intention of ultimately benefitting themselves at the expense of Perlman and other investors. Accordingly, under all of these cases, he has adequately alleged mail fraud in connection with this scheme.
3. Scheme to Convert Class I Partnership Distributions
Perlman alleges that since he left Equity in June 1990, various defendants have engaged in an ongoing scheme to fraudulently convert more than $ 1 million in distributions that should have been paid to Perlman from the Class I partnerships. This conversion has been allegedly perpetrated through various false representations and pretenses, including the pretense that Perlman is indebted to B/S Investments for a loan in the amount of $ 300,000. Perlman alleges that the defendants used this pretense of a $ 300,000 loan to cause Equity and the Class I partnerships to withhold all distributions that should have been paid to him. The complaint also alleges that the mails were utilized in carrying out this scheme: Perlman was sent invoices falsely characterizing the $ 300,000 payment as an outstanding loan, and received letters stating that his distributions were being withheld on account of this false "debt." Perlman also alleges that the defendants mailed a verified pleading in the state court action which falsely stated that the $ 300,000 was a loan which Perlman was obligated to repay.
The defendants claim that the mail fraud claims are deficient because there was no scheme to defraud--Perlman has not alleged any actual deception here. The defendants rely on McDonald v. Schencker, 18 F.3d 491, 495 (7th Cir. 1994), in which the court held that the alleged conversion of funds and subsequent mailings surrounding that event did not constitute mail fraud because there were no acts of deceit or chicanery on the part of the defendant. There, the defendant (an attorney) simply told the plaintiff (a former client) that he was going to apply the plaintiff's escrow funds to an unpaid legal bill. There were no allegations that the defendant intended to defraud the plaintiff. The court held that this openly stated plan, standing alone, was not a "scheme to defraud" within the meaning of the mail fraud statute. Id.
"Scheme to defraud," as that term is used in the mail and wire fraud statutes, "describes a broad range of conduct, some [types] which involve false statements or misrepresentations of fact, and others which do not." United States v. Doherty, 969 F.2d 425, 429 (7th Cir.), cert. denied, 506 U.S. 1002, 121 L. Ed. 2d 542, 113 S. Ct. 607 (1992) (citations omitted).
The plain meaning of "scheme" is a "design or plan formed to accomplish some purpose," Black's Law Dictionary 1344 (6th ed. 1990), or "a plan, design, or program of action to be followed." The Random House College Dictionary 1177 (rev. ed. 1980). To "defraud" means "to practice fraud," "to cheat or trick," Black's, supra, at 483, or "to deprive of a right or property by fraud," Random House, supra, at 349; "fraud" means "deceit, trickery, or breach of confidence, used to gain some unfair or dishonest advantage." Id. at 526.