CSX Transportation Can Pursue RICO Claims Alleging Phony Asbestosis Suits

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

A provider of rail-based transportation services (CSX Transportation, Inc.) sufficiently alleged RICO violations by three lawyers and a doctor, all of whom allegedly orchestrated a scheme to inundate CSX with thousands of asbestos-related occupational illness claims throughout the state of West Virginia, the federal district court in Wheeling, West Virginia, has ruled.

The complaint asserted more than abuse of process or malicious prosecution because the pleadings described a complex scheme involving activities that went beyond the filing of eleven fraudulent claims.

Mail and Wire Fraud

The predicate acts alleged by CSX involved mail and wire fraud, including the filing and service of mass lawsuits and all of the actions taken by the lawyer defendants to generate medical evidence in support of their fraudulent asbestosis claims. The lawyer defendants’ characterization of these filings and mailings as “routine litigation activity” was contrary to CSX’s allegations.

CSX alleged that the three lawyers: (1) gained access to potential clients through unlawful means; (2) retained clients and procured medical diagnoses for them through intentionally unreliable mass screenings; (3) prosecuted clients’ claims using dishonest, fraudulent, and deceptive tactics; and (4) fabricated and prosecuted asbestosis claims with no basis in fact, and did so using mass lawsuits in overburdened courts in an effort to deprive CSX of access to meaningful discovery, which in turn concealed the fraudulent claims and leveraged higher settlements based on the threat of mass trials.

The court concluded that these allegations were sufficient to support the inference that each of the lawyer defendants knew that the mails were being used to further their scheme.

Heightened Pleading Standard for Fraud

The predicate acts of mail and wire fraud were alleged with sufficient particularity under Rule 9(b) of the Federal Rules of Civil Procedure, which required fraud plaintiffs to identify the time, place, and contents of false representations, as well as the identity of the persons who made the misrepresentations and what they obtained thereby.

According to the court, CSX adequately identified: (1) the date when each fraudulent claim was filed and the court in which it was filed; (2) the person who signed each complaint and caused it to be filed; (3) the circumstances surrounding the service of each complaint on CSX; and (4) the relevant portions of each complaint that was fraudulently filed.

Injury

CSX sufficiently pled an injury to its business or property by reason of the defendants’ alleged racketeering activities, the court determined. The company alleged that it was forced to expend substantial sums of money and resources in order to process, defend, and settle “deliberately fabricated claims” that never should have been filed. Its complaint described a direct relationship between the lawyer defendants’ fraudulent claims and CSX’s need to “expend resources” to respond to those claims.

Accordingly, CSX properly alleged an injury as the direct result of the defendants’ fraudulent claims.

Pattern of Racketeering: Relatedness

For predicate acts to be related, they must have the same or similar purposes, results, participants, victims, or methods of commission, or must otherwise be interrelated by distinguishing characteristics. In this case, the predicate acts of mail and wire fraud involved the same participants (the lawyer and doctor defendants); the same victim (CSX); the same alleged purpose (to defraud CSX through the manufacturing, filing, and prosecution of fraudulent asbestosis claims); and similar methods of commission (the addition of fraudulent claims to mass lawsuits that were filed in the same overburdened court system and filed motions to compel the mandatory mass mediation of those claims).

The relatedness analysis in this case depended on whether the predicate acts were defined as the eleven fraudulent asbestosis claims that the lawyer defendants filed, or whether the mass suits themselves were considered predicate acts. Eleven fraudulent claims was a small percentage of the total number of claims that composed the mass lawsuits alleged in CSX’s complaint. The lawyer defendants argued that this isolated conduct—a mere 0.2% of the asbestosis claims filed by their law firm against CSX—did not create a pattern of racketeering activity.

The predicate acts alleged in CSX’s complaint, however, arguably encompassed more than just the eleven fraudulent claims. CSX asserted that the lawyer defendants “deliberately filed … mass lawsuits in overburdened courts to deprive CSX[] of access to meaningful discovery, which in turn concealed fraudulent claims and leveraged higher settlements based on the threat of mass trials.” The fact that only some of the lawsuits filed against CSX were fraudulent did not negate the argument that the mass lawsuits were filed as part of a larger plan to conceal the fraudulent claims, the court explained.

Pattern of Racketeering: Continuity

CSX alleged that “the predicate acts were continuous in that they occurred on a regular basis.” It also alleged facts indicating that the lawyer defendants continued to prosecute their fraudulent claims even after CSX had filed its original amended complaint in this case. The calculated and deliberate strategy of the lawyer defendants to participate in and conduct the affairs of the lawyers’ firm through a pattern and practice of unlawful conduct, as described in the complaint, indicated that the filing of fraudulent lawsuits was a part of the firm’s regular business practice, according to the court. Taken together, these facts, if proven, established a threat of continuing racketeering activity, and therefore open-ended continuity.

The decision is CSX Transportation, Inc. v. Gilkison, CCH RICO Business Disputes Guide ¶12,207.

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Alleged Horse-Breeding Scheme May Have Violated Federal RICO Law

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

Investors could proceed with civil RICO claims against defendants that allegedly engaged in a fraudulent investment scheme that involved the leasing of thoroughbred mares for a single breeding season, the federal district court in Lexington, Kentucky, has ruled.

The defendants unsuccessfully argued that the plaintiffs were required to allege that each defendant had personally made misrepresentations or had used the mails or wires in order state a claim. They were unsuccessful, as well, in their argument that the plaintiffs did not allege a valid “investment” claim under RICO §1962(a).

Mail, Wire Fraud

Although the U.S. Court of Appeals for the Sixth Circuit required plaintiffs to identify with specificity the actions that each defendant had taken in furtherance of an alleged fraud, the mail and wire fraud statutes did not require a showing that each defendant had personally made a misrepresentation, the court explained.

To plead fraud with the particularity required by Rule 9(b) of the Federal Rules of Civil Procedure, a plaintiff had to allege only that each RICO defendant had participated in a scheme to defraud “knowing or having reason to anticipate [that] the use of the mail or wires would occur and that each such use would further the fraudulent scheme.”

Investment of Racketeering Income

The defendants unsuccessfully argued that the plaintiffs failed to plead a valid “investment” claim under RICO §1962(a).

According to the defendants, the plaintiffs failed to allege that specified defendants had used or invested income from a pattern of racketeering activity to acquire an interest in, or to operate an enterprise engaged in, interstate commerce.

The plaintiffs, however, “clearly alleged” that the specified defendants had invested income from their racketeering activity (the proceeds they received from the mare leases) into a business that was used to facilitate the cover up of the alleged fraud, according to the court.

The decision in ClassicStar Mare Lease Litigation will appear at CCH RICO Business Disputes Guide ¶12,106.

Further information regarding CCH RICO Business Disputes Guide is available here.

High Court Limits Scope of “Honest Services Fraud,” Restricting Reach of RICO

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

The recent Supreme Court decision in Skilling v. United States restricted the definition of “honest services fraud” to schemes involving bribery and kickbacks. In doing so, the decision restricted the reach of the federal Racketeer Influenced and Corrupt Organizations Act (through the mail and wire fraud statutes), as well.

Violations of the federal mail and wire fraud statutes, which make it a crime to use the interstate mails or wires to further a scheme or artifice to defraud, constitute predicate acts under RICO.

Although the Supreme Court held in McNally v. U.S. (483 U.S. 350; 1987) that the mail fraud statute protected property rights, not the “intangible rights to honest services,” Congress quickly nullified that decision by enacting the honest services fraud statute (18 U.S.C. §1346), which defined a “scheme or artifice to defraud” to include schemes and artifices that deprive others of their "intangible right of honest services."

Constitutionality

In Skilling, former Enron officer Jeffrey Skilling—who was convicted of conspiring to prop up Enron's stock price by overstating the company's financial health—challenged the constitutionality of the honest services fraud statute.

To satisfy due process, a penal statute must define a criminal offense: (1) with sufficient definiteness that ordinary people can understand what conduct is being prohibited and (2) in a manner that does not encourage arbitrary and discriminatory enforcement. According to Skilling, the honest services fraud statute did neither. First, the phrase “intangible right to honest services” failed to adequately define the behavior that it barred. Second, the statute’s “standardless sweep” allowed policemen, prosecutors, and juries to pursue personal predilections that facilitated opportunistic and arbitrary prosecutions.

The Court disagreed. Viewed in light of the “solid core” of pre-McNally case law, which "uniformly recognized bribery and kickback schemes as honest services fraud," and in light of federal statutes that prohibited and defined similar crimes, there was "no doubt" that Congress had intended the honest services fraud statute to include bribes and kickbacks. Therefore, a criminal defendant who has participated in a bribery or kickback scheme could not tenably assert that the phrase “intangible right to honest services” was unconstitutionally vague.

If Congress had intended the honest services fraud statute to reach further, however, it had to "speak more clearly." Construing the statute to proscribe a wider range of misconduct would raise due process concerns, according to the Supreme Court.

Flawed Conviction

Nevertheless, Skilling's conspiracy conviction was “flawed.” Because Skilling’s misrepresentation of Enron's financial health involved neither bribery nor kickbacks, his conviction could not rest on honest services fraud. Moreover, the government had based its conspiracy charge on securities fraud and money-or-property wire fraud in addition to honest services wire fraud.

The jury, however, had not identified the basis on which their conspiracy verdict rested. Accordingly, the Fifth Circuit's ruling was vacated and the case was remanded to determine whether Skilling's conviction could be upheld absent honest services wire fraud.

Concurrence

Justices Scalia and Thomas joined the majority in rejecting honest services fraud as a legitimate basis for Skilling's conviction, but they did so for a different reason. The justices thought that the statutory phrase "intangible right to honest services" was unconstitutionally vague.

The June 24 decision, Skilling v. United States, appears at CCH RICO Business Disputes Guide ¶11,875.

Further information regarding the CCH RICO Business Disputes Guide appears here on the CCH Online Store.

Reliance Not Required for RICO Claim Predicated on Mail Fraud . . .

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

A district court erred in holding that reliance was an element of a RICO claim predicated on mail fraud, the U.S. Court of Appeals in Richmond, Virginia, has ruled.

The lower court improperly limited the U.S. Supreme Court’s decision in Bridge v. Phoenix Bond & Indemnity Co. (CCH RICO Business Disputes Guide ¶11,500)—which states that reliance is not required in RICO mail fraud actions—to cases involving third-party reliance.

The Bridge Court held that a plaintiff asserting a RICO claim predicated on mail fraud “need not show, either as an element of its claim or as a prerequisite to establishing proximate causation, that it relied on the defendant's alleged misrepresentations.”

Although Bridge did, in fact, involve a plaintiff who had been harmed by a third party’s reliance on the defendant’s misrepresentations, the Court’s holding was not limited to circumstances involving third-party reliance.

“[U]sing the mail in furtherance of a scheme to defraud is a predicate act of racketeering under RICO, even if there is no reliance on the misrepresentation,” the appellate court explained.

Nevertheless, the district court’s grant of summary judgment was affirmed because the plaintiffs failed to demonstrate, or even allege, that they were misled about any fraudulent behavior.

The decision is Biggs v. Eaglewood Mortgage, LLC, CCH RICO Business Disputes Guide ¶11,775.

. . . But Failure to Plead Reliance Could Still Bar Claim

Health care and welfare funds that allegedly paid excessive prices for the prescription drug Lipitor lacked standing to pursue RICO claims against the drug’s manufacturer (Pfizer), the federal district court in New York City has ruled.

The plaintiffs (and other third-party payors) complained that Pfizer had allegedly made fraudulent misrepresentations to physicians and pharmacy benefit decision makers about Lipitor’s comparative efficacy and safety.

The plaintiffs did not, however, plead reliance on those misrepresentations, and thus failed to establish that their overpayments were proximately caused by Pfizer's misconduct.

In Bridge v. Phoenix Bond & Indemnity Co. (CCH RICO Business Disputes Guide ¶11,500), the U.S. Supreme Court noted that the complete absence of reliance could prevent a plaintiff from establishing proximate cause.

Although the plaintiffs pled reliance on Pfizer’s allegedly false claim that its marketing of Lipitor was lawful, that reliance was irrelevant, the appellate court explained, in light of the plaintiffs’ failure to allege that the physicians who prescribed the drug had relied on the drug maker’s misrepresentations.

The decision is Southern Illinois Laborers' and Employers' Health and Welfare Fund v. Pfizer Inc., SD N.Y., CCH RICO Business Disputes Guide ¶11,779.