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PYRAMID SECS. LTD. v. INTERNATIONAL BANK

December 19, 1989

PYRAMID SECURITIES LIMITED, Plaintiff,
v.
INTERNATIONAL BANK, Defendant



The opinion of the court was delivered by: RICHEY

 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. *fn1" 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.

 II. Analysis

 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, *fn2" 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. *fn3" 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 ...


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