Thursday, June 14, 2007

Legal Advisors Did Not Form a RICO Enterprise to Defraud Middle Eastern Prince

This posting was written by Sonali Oberg, editor of CCH RICO Business Disputes Guide.

The legal advisors of a Middle Eastern prince could not have constituted an “enterprise” for purposes of a federal RICO claim, absent a showing that they—and other specified entities—functioned as a unit in committing predicate acts of racketeering, according to the federal district court in New York City.

Prince Jefri, the youngest brother of the ruling Sultan of Brunei, contracted to pay two English barristers £1 million per year each to serve as his “principal legal advisors, strategists, and confidantes.” He also appointed them as directors of several of his corporate entities.

The prince later claimed that the advisors associated to defraud him by (1) selling several properties he owned to an entity they owned or controlled, (2) falsifying employment documents to overstate compensation due to one of them, (3) executing below-market leases of properties that belonged to the prince, (4) failing to return confidential documents relating to the prince’s companies following their termination, and (5) threatening to disclose privileged information if the prince did not drop his lawsuit.

Notably, the prince asserted that the advisors—with other individuals and entities—comprised a RICO enterprise that committed predicate acts of mail fraud, wire fraud, and bank fraud.


A RICO enterprise is “a group of persons associated together for a common purpose of engaging in a course of conduct,” the existence of which is proved “by evidence of an ongoing organization, formal or informal, and by evidence that the various associates function as a continuing unit.”

When a complaint alleges an “association-in-fact” enterprise, courts in the Second Circuit look to the hierarchy, organization, and activities of the association to determine whether its members functioned as a unit, Judge Lewis A. Kaplan observed.

In this case, the complaint failed to allege a RICO enterprise, since it simply grouped together all of the individuals and entities involved in the racketeering acts and called them an “enterprise.” It did not allege that the individuals and entities operated according to any structure or hierarchy.

Besides the two barristers (who were husband and wife), the participants were not alleged to have acted for the benefit of any other participant, the court found. “They appear to have no relationship to one another, and their actions and involvement in [the barristers’] schemes appear to have been isolated and independent,” the court stated.

Ongoing Organization?

There was no indication that the alleged association was an “ongoing organization” as opposed to an ad hoc collection of entities and individuals who each happened to have been involved in a scheme against the prince.

An alleged “hub-and-spoke” structure—in which the barristers were the “hub” and the other entities of the enterprise were the “spokes”—was insufficient to satisfy the enterprise element of a RICO claim.

The court was not persuaded that the group of entities was “anything other than a laundry list of the individuals and entities” connected to the barristers and “somehow involved in one of their alleged schemes.”

Thus, the complaint alleged little more than “garden variety fraud and breach of duty claims” and the prince failed to state a RICO claims, court concluded.

The case is Cedar Swamp Holdings, Inc. v. Zaman U.S. District Court for the Southern District of New York, 06 Civ. 13626 (LAK), May 17, 2007. It will appear in in CCH RICO Business Disputes Guide.

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