Wednesday, September 28, 2011

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.

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