Civil RICO Claims Against Adoption Agency Reinstated on Appeal

This posting was written by Mark Engstrom, Editor of CCH RICO Business Disputes Guide.

A federal district court improperly dismissed RICO claims that seven couples brought against an adoption agency and its principals, the U.S. Court of Appeals in Cincinnati has ruled.

The defendants allegedly defrauded the couples while they were trying to adopt children from Guatemala. Although the lower court correctly held that the plaintiffs failed to properly allege extortion, it incorrectly held that four well-pled predicate acts of mail and wire fraud over a two-month period were insufficient to establish a pattern of racketeering.

Pattern of Racketeering

In order to establish a pattern of racketeering, plaintiffs had to show that the alleged racketeering acts were “related.” They also had to show that the acts amounted to, or posed a threat of, “continued criminal activity.” Together, these requirements constituted RICO’s “relationship plus continuity” test.

The relationship prong was met in this case, the court explained, because the predicate acts of mail and wire fraud were committed by the same parties (the principals), using similar methods (email correspondence, telephone conversations, and a website presence), in an attempt to ensnare similar victims (couples seeking to adopt Guatemalan children), for a similar purpose (to defraud the victims out of adoption-related fees).

Continuity

To establish continuity, plaintiffs had to show either a “close ended” pattern of racketeering (a series of related predicate acts extending over a substantial period of time) or an “open-ended” pattern (a set of predicate acts that posed a threat of continuing criminal conduct that extended beyond the period in which the predicate acts were performed).

The plaintiffs in this case could not establish a close-ended pattern because the predicate acts at issue were not spread across a “substantial” period of time, the court explained. Significantly, the Sixth Circuit had previously ruled that seventeen months of racketeering activity was insufficient to establish a close-ended pattern. In this case, the predicate acts of racketeering spanned less than two months.

Nevertheless, the plaintiffs’ established the existence of open-ended continuity, in the court’s view. At the time that the defendants had allegedly committed the predicate acts of mail and wire fraud, “there was no indication that their pattern of behavior would not continue indefinitely into the future.”

The defendants argued that a threat of continued criminal activity was absent because the adoption agency had been shut down as the result of a criminal prosecution. Subsequent events, however, were irrelevant to an analysis of open-ended continuity. According to the court, the threat of continuity must be viewed at the time the racketeering activity occurred. Moreover, the absence of a threat of continued criminal activity could not be asserted merely by showing that a “fortuitous interruption” of that activity had occurred.

Because the plaintiffs adequately alleged an open-ended pattern of racketeering activity, the dismissal of their RICO claims was reversed and the matter was remanded for further proceedings.

Intent

Rule 9(b) of the Federal Rules of Civil Procedure required RICO plaintiffs to plead facts that would establish a basis for inferring fraudulent intent, the court observed. Significantly, courts have “uniformly held” that a plaintiff’s general averment of a defendant's knowledge of a material falsity was inadequate to establish scienter “unless the complaint also sets forth specific facts that make it reasonable to believe that defendant knew that a statement was materially false or misleading.”

The plaintiffs in this case alleged, in a general and conclusory fashion, that the defendants knew they were making materially false statements regarding the availability of adoptive children. More specifically, the plaintiffs alleged that the defendants “frequently advertised children on their website who they knew, or should have known, were unavailable for adoption.”

The plaintiffs failed, however, to set forth specific facts that would support of a reasonable inference that: (1) the children were actually unavailable and (2) the defendants knew they were unavailable. These allegations, which were not part of the “four well-pled predicate acts of mail and wire fraud,” were insufficient to establish a basis for inferring intent, the court concluded.

The decision is Heinrich v. Waiting Angels Adoption Services, Inc., CCH RICO Business Disputes Guide ¶12,165.