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BERG v. FIRST AMERICAN BANKSHARES

October 19, 1984

Stephen Berg, et al., Plaintiffs
v.
First American Bankshares, Inc., et al., Defendants


Norma Holloway Johnson, District Judge.


The opinion of the court was delivered by: JOHNSON

Opinion of NORMA HOLLOWAY JOHNSON, District Judge.

This case and a related class claim ( Kas v. Financial General Bankshares, Inc., 617 F. Supp. 288) arise out of a private merger involving Financial General Bankshares, Inc. (Financial General), a Virginia corporation, pursuant to which all publicly held shares of stock in the corporation, including those of the plaintiffs in both suits, were cancelled and converted into a right to receive a specified amount of cash. As a result of this merger, the entire interest in Financial General was acquired by FGB Holding Corporation (FGB), another Virginia corporation. Since the merger, the new company has been known as First American Bankshares, Inc. Plaintiffs brought this action for money damages against the defendants alleging a violation of federal securities laws, common law fraud, and breach of fiduciary duties in connection with the merger which was approved on August 11, 1982, by over two-thirds of the relevant shareholders of Class A common stock held by plaintiffs.

 The basis of plaintiffs' claim, as set forth in the original complaint filed August 11, 1983, is, in essence, that plaintiffs were not paid enough for their Class A stock. Plaintiffs allege that the manner and method by which their shares were cancelled and converted violated federal securities laws, and also constituted a fraud upon plaintiffs in violation of the common law of Virginia and a breach of common law fiduciary duties. The gravamen of plaintiffs' complaint is that defendants issued a false and misleading proxy statement which contained material omissions and misstatements in violation of Sections 10(b), 14(a), and 13(e) of the Securities and Exchange Act, 15 U.S.C. 78(j), et seq. (1982).

 The complaint in this case was originally filed in the United States District Court for the Southern District of New York. 576 F. Supp. 1239. On December 28, 1983, plaintiffs filed an amended complaint which added a sixth cause of action against four of the named defendants. In the added count, plaintiffs assert that the acquiring group, the defendants Adham, al Fulaij, Darwaish, and Credit and Commerce American Investment, B.V., violated the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1961, et seq. (1982). In this regard, the complaint alleges that these defendants were an "enterprise" within the meaning of the RICO statute and participated in a pattern of racketeering activity involving fraud in connection with the sale or purchase of securities. Following the amendment of the complaint, the case was transferred to this court pursuant to 28 U.S.C. § 1404(a). The case is presently before this Court on a motion by defendant Kamal I. Adham to dismiss the sixth count of the complaint; i.e., the RICO count. For the reasons appearing hereafter, the motion to dismiss will be granted.

 Defendant Kamal I. Adham moves this Court, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, for entry of an order dismissing the sixth cause of action of the amended complaint alleging violation of the federal RICO statute. In a motion to dismiss pursuant to Rule 12(b)(6), the moving party bears a heavy burden of persuasion. Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957). It is well established that a complaint should not be dismissed "unless it appears beyond doubt that plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Id.

 In support of the motion to dismiss, defendant Adham contends that the amended complaint fails to allege predicate racketeering acts upon which a RICO claim can be based; that plaintiffs have not alleged an injury cognizable under RICO; that the complaint fails to allege the conduct of an enterprise's affairs through a pattern of racketeering activity; that the complaint fails to state securities law convictions or criminal offenses as the necessary predicate acts constituting a pattern of racketeering activity under RICO; and that the addition of Count VI in the amended complaint is no more than an attempt to derive windfall treble damages under the guise of RICO.

 Plaintiffs' amended complaint alleges violation of § 1962(c) of RICO. That provision provides as follows:

 
It shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity or collection of unlawful debt.

 18 U.S.C. § 1961 defines the conduct which falls within the scope of RICO. "Racketeering activity" includes the commission of an act (1) "chargeable" as one or more stated state law felonies, or (2) "indictable" under one or more stated provisions of federal law. 18 U.S.C. § 1961(1). Among the federal crimes which can serve as the so-called "predicate offenses" for purposes of RICO are those involving fraud in the sale of securities which are punishable under federal law. Id. at 1961(1)(D). Under § 1961(5), a

 
"pattern of racketeering activity" requires at least two acts of racketeering activity, one of which occurred after the effective date of this chapter and the last of which occurred within ten years (excluding any period of imprisonment) after the commission of a prior act of racketeering activity.

 18 U.S.C. § 1964(c) sets forth a private cause of action and provides for treble damages. That section provides:

 
Any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefor in any appropriate United States district court and shall recover threefold the damages he sustains and the cost of the suit, including reasonable attorney's fees.

 It appears, therefore, that under this statutory scheme, there are four express elements of a private RICO damage action to consider in deciding whether a RICO claim has been stated. Those elements are: (1) "fraud in the sale of securities", (2) a "pattern of racketeering activity", (3) an injury in "business or property by reason of a violation ...


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