CHARLES R. RICHEY, UNITED STATES DISTRICT JUDGE
Pyramid Securities Limited ("Pyramid") has sued International Bank ("International") for compensatory and punitive damages. Pyramid charges International with violating and conspiring to violate the Racketeer Influenced and Corrupt Organizations ("RICO") statutes, 18 U.S.C. §§ 1962(c), (d) and also raises fraud, breach of contract, and other state law claims. International has filed a motion to dismiss, or in the alternative, for summary judgment. The Court will grant the defendant's motion for summary judgment because: (1) there is no genuine issue of material fact on the "pattern" element of Pyramid's RICO claim and (2) due to the lack of diversity between the parties, the Court does not have subject matter jurisdiction over Pyramid's remaining state law claims, which, in any event, would have to be dismissed as time-barred.
I. Factual Background
The connection between Pyramid and International in the context of this lawsuit, is not immediately apparent. Therefore, the Court will briefly explain the various links in this litigation chain, accepting as true for the purposes of deciding this motion, most of Pyramid's allegations. Pyramid is a British Virgin Islands corporation with its principal place of business in the Cayman Islands, British West Indies. At the outset, this dispute arose out of a business relationship between Pyramid and Washington International Bank and Trust Limited ("WIBT"), which is located in the Cayman Islands and organized and licensed under Cayman Islands law. Pyramid owned and traded stocks and other securities for its own account, and it paid WIBT commissions to administer Pyramid's accounts with various brokerage houses, serve as Pyramid's agent in investment and banking matters, and perform certain bookkeeping and accounting functions for Pyramid. WIBT was a subsidiary of the defendant International, an Arizona corporation with its principal place of business in the District of Columbia.
Nicholas J. Duggan, WIBT's President and Manager, personally oversaw WIBT's activities relating to Pyramid. In June of 1981, upon Duggan's recommendation, Pyramid entered into an agreement with Linda Pearson and E.F. Hutton & Co. ("Hutton"), making Pearson and Hutton securities brokers on Pyramid's behalf. Pearson and Hutton sold and purchased securities on Pyramid's behalf for over two months, but on or about August 31, 1981 Pyramid's President, Edward J. Attridge, told Duggan and WIBT, as well as Pearson and Hutton, that all trading on Pyramid's account should cease. In spite of this directive, Pearson "churned" Pyramid's account from the beginning of September 1981 (when Pearson apparently knew that Attridge was in Hawaii on his honeymoon) until about the end of November 1981 (when Attridge returned from his honeymoon and discovered the churning). Pearson's unauthorized trading of approximately $ 4.5 million worth of stock through Pyramid's account reduced the value of the account from about $ 890,000 to $ 40,000.
In November 1981, when Attridge first discovered Pearson's unauthorized trading, he made inquiries of WIBT, which usually received telexes from brokers, including Hutton, confirming transactions involving Pyramid's accounts. According to Pyramid, WIBT disclaimed any knowledge of Pearson's churning of Pyramid's accounts and stated that it had not received any trade confirmations from Hutton since August 31, 1981. In 1983 Pyramid brought suit against Pearson and Hutton, and in December 1985 Pyramid recovered $ 850,000 from Hutton pursuant to a settlement agreement.
At some point during the Hutton litigation, Pyramid learned that WIBT and its officers participated in the churning; that they knew of the unauthorized trades before they were completed; and that they had recorded these trades in a "secret" ledger. Armed with this newly discovered information and believing that the settlement with Hutton did not fully compensate it for its damages, Pyramid filed suit against, inter alia, WIBT and International in the Southern District of Florida. However, Judge Marcus dismissed the case because the Cayman Islands "citizenship" of both Pyramid and WIBT meant that there was not complete diversity between the parties.
At long last, we arrive at the final link in the chain: Pyramid's filing of this suit, in which International is the only named defendant. Pyramid's Complaint charges International with: (1) breach of contract, (2) breach of fiduciary duty, (3) negligence, (4) civil conspiracy, (5) fraud, and (6) violations of the RICO statutes. Relying exclusively on a "piercing the corporate veil" theory to hold International liable for WIBT's wrongful acts, Pyramid alleges that International "has continually exercised substantial control over the operations of WIB[T]" and that "such control and domination . . . has rendered WIB[T] a 'mere instrumentality' of International . . ., thereby rendering International . . . liable for the wrongful acts of its subsidiary WIB[T]." Complaint para. 38. International has now filed a renewed dispositive motion.
Both parties having presented -- and the Court having considered -- matters outside the pleading, the Court will treat International's motion as one for summary judgment. See Fed.R.Civ.Proc. 12(b), 56.
Rule 56(c) of the Federal Rules of Civil Procedure requires that the Court grant a motion for summary judgment if the pleadings and supporting affidavits and other submissions "show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Moreover, it is well-established that the Court must believe the non-movant's evidence and must draw all justifiable inferences in its favor. Anderson v. Liberty Lobby, 477 U.S. 242, 255, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986). However, "the mere existence of a scintilla of evidence in support of the plaintiff's position will be insufficient; there must be evidence on which the jury could reasonably find for the plaintiff." Id. at 252.
A. The RICO Claims
Pyramid alleges that International (through the acts of its "dominated" subsidiary WIBT), Duggan, Pearson, and Hutton violated and conspired to violate the RICO laws, 18 U.S.C. §§ 1962(c), (d), and also that WIBT and Duggan conspired to conceal those violations from Pyramid. Both parties agree that a violation of § 1962(c) consists of "(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity." Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496, 87 L. Ed. 2d 346, 105 S. Ct. 3275 (1985) (footnote omitted). Pyramid alleges that WIBT, Duggan, Pearson, and Hutton conducted "racketeering activity," see § 1961(1), consisting of, inter alia : securities fraud, mail fraud, wire fraud, and conspiracy to violate RICO. Moreover, Duggan, WIBT, Pearson, and Hutton allegedly formed an enterprise (a so-called "association-in-fact") for the legitimate trading of securities long before Pearson's churning of Pyramid's account.
Assuming for the purposes of this discussion that Pyramid could withstand summary judgment on these other elements of RICO,
Pyramid has failed to raise a genuine issue of material fact regarding the "pattern" element. A pattern is an essential element of both the § 1962(c) claim and the § 1962(d) RICO conspiracy claim, which is predicated solely upon the alleged § 1962(c) violation.
Since Pyramid has failed to establish the pattern element, International is entitled to judgment as a matter of law on both RICO claims.
In H.J., Inc. v. Northwestern Bell Telephone Co., 492 U.S. 229, 106 L. Ed. 2d 195, 109 S. Ct. 2893 (1989), the Supreme Court recently attempted to clarify what a plaintiff must show to satisfy the "pattern" element of a RICO claim. The Court emphasized that:
the section of the statute headed "definitions," 18 U.S.C. § 1961, does not so much define a pattern of racketeering activity as state a minimum necessary condition for the existence of such a pattern. Unlike other provisions in § 1961 that tell us what various concepts used in [RICO] "mean," § 1961(5) says of the phrase "pattern of racketeering activity" only that it "requires at least two acts of racketeering activity . . . [occurring within a ten-year period]." It thus places an outer limit on the concept of a pattern of racketeering activity that is broad indeed.
Id. 109 S. Ct. at 2899 (emphasis added). The H.J. Court then went on to expand upon the idea, previously mentioned in Sedima, that "while two acts are necessary, they may not be sufficient." Id. (quoting Sedima, 479 U.S. at 496 n. 14).
If it was at all unclear before H.J., it is now established that merely proving two predicate acts without more is insufficient to satisfy the pattern element of a RICO claim. An analysis of RICO's legislative history led the H.J. Court to conclude that "continuity plus relationship" produce a "pattern." Id. 109 S. Ct. at 2900. Thus, in addition to satisfying the statutory prerequisite of showing at least two predicate acts, a plaintiff "must show that the racketeering predicates are related, and that they amount to or pose a threat of continued criminal activity." Id. (emphasis in original).
Even if Pyramid's allegations and supporting documents are sufficient to show two or more related predicate acts, Pyramid has failed to raise a genuine issue of material fact on the continuity prong of the pattern element. H.J. established two methods for demonstrating continuity: "'Continuity' is both a closed- and open-ended concept, referring either to a closed period of repeated conduct, or to past conduct that by its nature projects into the future with a threat of repetition." Id. at 2902.
(1) Threat of Continued Criminal Activity
There is nothing on this record from which the Court can infer that the predicate acts alleged by Pyramid by their nature constitute a threat of continued racketeering activity. This conclusion is buttressed by a comparison between the instant case and the scenarios used by the H.J. Court as illustrative, albeit non-exhaustive, examples of racketeering acts threatening future criminal conduct. The churning of Pyramid's account is qualitatively different from the Supreme Court's scenarios, in which a hypothetical "hoodlum" extorts money from storekeepers, telling them that he will reappear once every month to collect his "premium," or "in which the predicate acts or offenses are part of an ongoing entity's regular way of doing business." Id.
Unlike the H.J. Court's examples, the scheme to churn Pyramid's account simply does not pose a threat of continued racketeering activity nor is there any indication on the record that churning is part of International's regular way of doing business. Compare United States v. Alexander, 888 F.2d 777, 778 (11th Cir. 1989) (H.J.'s threat of continued criminal activity requirement satisfied because school board official extorted, or conspired to extort, money each year from 1977 to 1984 and would have continued to do so); United States v. Kaplan, 886 F.2d 536, 542-43 (2d Cir. 1989) (applying H.J. to hold pattern element satisfied, even though predicate acts consisted of only two instances of bribing city officials; "external facts" of defendant's willingness to facilitate corruption generally within government agency and his pursuit of another bribery scheme at time when investigation halted further activities would permit finding that predicate acts entailed threat of continuing racketeering activity); Combs v. Bakker, 886 F.2d 673, 677-78 (4th Cir. 1989) (applying H.J. to hold that scheme, in which interstate wire and mail facilities were allegedly used to fraudulently sell partnerships in "PTL" enterprise to over 55,000 individual victims, amounted to threat of continued criminal activity and satisfied pattern element).
(2) Closed Period of Repeated Conduct
Pyramid fares no better in demonstrating continuity by attempting to show a "closed period of repeated conduct." The H.J. Court seemed to have exactly this type of case in mind when it stated:
[Continuity] is . . . centrally a temporal concept . . . . A party alleging a RICO violation may demonstrate continuity over a closed period by proving a series of related predicates extending over a substantial period of time. Predicate acts extending over a few weeks or months and threatening no future criminal conduct do not satisfy this requirement. Congress was concerned in RICO with long-term criminal conduct.
H.J., 109 S. Ct. at 2902 (emphasis added). The Court then went on to reverse the dismissal of a RICO claim, which alleged that many defendants (Northwestern Bell Telephone Company officers and employees, members of the Minnesota Public Utilities Commission (MPUC), and other unnamed individuals and corporations) had bribed five members of the MPUC over at least a six-year period, causing injury to many victims (a class consisting of customers of the telephone company). See id. at 2897, 2906. In light of H.J.'s language -- even resolving all justifiable inferences in Pyramid's favor -- the Court holds that the churning of Pyramid's account over a period of no more than three months, with the alleged active participation and assistance of WIBT and Duggan, does not amount to long-term criminal conduct within the reach of RICO.
In an apparent attempt to conform its Complaint to the recent changes in RICO jurisprudence wrought by H.J., Pyramid in its opposition to International's renewed motion for the first time argues a "concealment of racketeering" theory. Under this theory, the pattern of racketeering activity allegedly "consisted of a variety of predicate acts committed by WIBT and Duggan from September 1981 through at least 1985." Pyramid Renewed Opposition at 18. The Court disagrees with Pyramid's characterization of this three-month-long churning scheme as a pattern of racketeering activity lasting for over four years. The conspiracy -- and the racketeering activity for purposes of deciding whether the continuity prong of RICO's "pattern" element has been satisfied -- both terminated around the end of November 1981 when Pyramid first discovered the churning by Pearson and Hutton.
In addition to relying upon H.J. itself for guidance, this Court reached its conclusion after engaging in the kind of flexible, common-sense, fact-specific analysis contemplated by H.J., 109 S. Ct. at 2901-02. As discussed above, continuity is primarily a temporal concept, but other relevant factors include: (i) the number and variety of predicate acts; (ii) the number of victims; (iii) the number of perpetrators; (iv) the presence of separate schemes; and (v) the occurrence of distinct injuries. See Parcoil Corp. v. NOWSCO Well Serv., Ltd., 887 F.2d 502, 504 (4th Cir. 1989) (applying H.J.); Shearin v. E.F. Hutton Group, Inc., 885 F.2d 1162, 1166 (3d Cir. 1989) (same); Sutherland v. O'Malley, 882 F.2d 1196, 1204 (7th Cir. 1989) (same).
Not only was the churning in this case of limited duration, but on this record it was nothing more than one narrowly circumscribed scheme involving essentially similar predicate acts with one victim suffering one economic injury.
Moreover, a review of circuit court cases that have applied H.J.'s "closed period of repeated conduct" theory demonstrates that the churning of Pyramid's account did not amount to long-term criminal activity.
The instant case has many parallels with Parcoil Corp., 887 F.2d at 503, in which the racketeering activity consisted of a contractor instructing its subcontractor to use one composition of sand in "fracturing" the plaintiff's oil and gas wells but write another composition on the invoices. Consequently, the subcontractor sent the plaintiff seventeen falsified reports over a four-month period. Id. The Fourth Circuit stated that "it takes scant analysis to discern that this is not the type of continuity contemplated by H.J.," id. at 504, and affirmed the district court's grant of summary judgment.
In Sutherland v. O'Malley, 882 F.2d 1196 (7th Cir. 1989), the Seventh Circuit also applied H.J. to hold that the plaintiff failed to satisfy the continuity prong of RICO's pattern element. The plaintiff charged O'Malley, who had been the plaintiff's co-counsel in a personal injury action, with a RICO violation (predicated on extortion and multiple acts of mail fraud) after O'Malley allegedly diverted settlement checks away from the plaintiff and refused to pay the plaintiff her share of the contingency fee. The Seventh Circuit held that the predicate acts relied upon by the plaintiff neither amounted to, nor constituted a threat of, continuing racketeering activity. Id. at 1205. Several factors, all equally applicable to the instant case, contributed to this conclusion: there was "only one dishonest undertaking" accomplished "in a single five-month period" with "only one victim" who suffered "only one distinct economic injury." Sutherland, 882 F.2d at 1204-05.
Another case that is analogous to the case before the Court is Menasco, Inc. v. Wasserman, 886 F.2d 681 (4th Cir. 1989). Wasserman allegedly violated the RICO laws by pursuing a scheme to defraud two corporations of their investments in oil and gas properties. Id. at 682. The Fourth Circuit affirmed the district court's dismissal of the RICO claim for failure to allege a pattern of racketeering activity. Explaining its conclusion that the plaintiff's allegations did not satisfy the continuity prong, the appellate court emphasized that: (i) the defendant's actions "were narrowly directed towards a single fraudulent goal"; (ii) "they involved a limited purpose"; (iii) "they involved but one perpetrator"; (iv) "they involved but one set of victims"; and (v) "the transaction took place over approximately one year." Id. at 684.
Applying the same analysis to the record before this Court reveals that all of Wasserman's factors (except the number of perpetrators involved) favor the same finding of lack of continuity in this case, especially considering that the Wasserman scheme lasted four times longer than the churning of Pyramid's account for three months. Furthermore, the three cases discussed above, which held that continuity was not established, involved schemes lasting between four months and one year. By comparison, H.J. itself and those post-H.J. cases holding that the plaintiff's allegations satisfied the "closed period of repeated conduct" version of continuity all had something, as set forth in the margin, that the instant case does not: a scheme or schemes lasting two or more years (the one exception being a fourteen-month-long scheme) and, in most cases, also multiple victims or multiple schemes.
Consequently, the Court, mindful of its responsibility to read the RICO statute broadly, see H.J., 109 S. Ct. at 2905; Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 497, 87 L. Ed. 2d 346, 105 S. Ct. 3275 (1985), nevertheless must hold that on this record Pyramid has failed to raise a genuine issue of material fact as to whether the churning amounted to, or posed a threat of, continued criminal activity.
As the Wasserman court insightfully observed:
This case presents a paradigm of one in which no pattern of racketeering activity is present. If the pattern requirement has any force whatsoever, it is to prevent this type of ordinary commercial fraud from being transformed into a federal RICO claim. If we were to recognize a RICO claim based on the narrow fraud alleged here, the pattern requirement would be rendered meaningless. We refuse, as did H.J., Inc., to read the statutory term as surplusage.
Wasserman, 886 F.2d at 685 (4th Cir. 1989) (citations omitted).
B. The Remaining State Law Claims
In addition to invoking this Court's jurisdiction by relying upon the federal question presented by its RICO claim, Pyramid also alleges that the Court's jurisdiction is based on diversity of citizenship pursuant to 28 U.S.C. § 1332. With the dismissal of the RICO claim, as discussed above, the federal question disappears, and diversity becomes the only possible basis for the Court to exercise jurisdiction over Pyramid's remaining state law claims.
At first glance, there seems to be complete diversity between Pyramid (an alien) and International (a citizen of Arizona and the District of Columbia). However, the issue is not that clear-cut because WIBT, International's subsidiary, is also an alien.
Although WIBT is not named as a defendant in this suit, Pyramid's claims against International are, in every respect, based exclusively upon WIBT's alleged misconduct. Pyramid repeatedly alleges and argues that International's complete control and domination of WIBT rendered WIBT a "mere instrumentality" of International and that therefore International should be liable for WIBT's wrongful acts.
Pyramid's theory of "piercing the corporate veil" and holding International vicariously liable for the misfeasance of its subsidiary implicates one of the more arcane areas of diversity jurisdiction law: whether the subsidiary's citizenship should be imputed to the parent corporation. It is true, as Pyramid contends, that "subsidiary and parent corporations are generally considered to be separate entities for diversity jurisdiction purposes." U.S.I. Properties Corp. v. M.D. Constr. Co., 860 F.2d 1, 7 (1st Cir. 1988), cert. denied, 490 U.S. 1065, 109 S. Ct. 2064, 104 L. Ed. 2d 629 (1989). But this by no means completes the analysis required to determine International's citizenship for the purposes of this Court's jurisdiction.
Although the proposition of law cited above is generally correct, several courts have recognized and applied an "alter ego" exception when the parent corporation is being sued solely for the acts of its completely controlled subsidiary. In Freeman v. Northwest Acceptance Corp., 754 F.2d 553 (5th Cir. 1985), for example, the court vacated and remanded due to its "serious doubts" about the district court's subject matter jurisdiction and held "that Northwest, as alter ego of First Commercial [Northwest's wholly-owned subsidiary], acquired the Colorado citizenship of First Commercial for purposes of subject matter jurisdiction of this action." Id. at 558; see Kuehne & Nagel (AG & Co.) v. Geosource, Inc., 874 F.2d 283, 291 (5th Cir. 1989) ("no diversity jurisdiction existed to entertain the action of the alien plaintiff . . . against Geosource, because Geosource is also an alien once it assumes the residence of [its alter ego subsidiary]"); Chesco Co. v. National Gypsum Co., 649 F. Supp. 65, 66-67 (E.D.N.Y. 1986) (even if court assumes that National Gypsum and its wholly-owned subsidiary are one corporate entity, court would dismiss for lack of complete diversity because both subsidiary and plaintiff are incorporated in New York).
Thus, for purposes of diversity jurisdiction, a corporation may have multiple citizenships: its place of incorporation, its principal place of business, and the place of incorporation of its alter ego subsidiary. Panalpina Welttransport GMBH v. Geosource, Inc., 764 F.2d 352, 354 (5th Cir. 1985). The Panalpina court's language is particularly appropriate in this case:
The alter ego doctrine may be used to add places of citizenship to the abrogation of diversity jurisdiction . . . . Consistent therewith, if a parent were sued as a result of activities of a subsidiary, the alter ego doctrine would attribute the subsidiary's place of incorporation to the parent even if such resulted in destroying complete diversity.