United States District Court, District of Columbia
September 25, 2000
W.L. MENG, ET AL., PLAINTIFFS,
BERNARD L. SCHWARTZ AND LORAL SPACE AND COMMUNICATIONS, LTD., ET AL., DEFENDANTS.
The opinion of the court was delivered by: Lamberth, District Judge.
Now before the Court are several motions to dismiss a
derivative suit filed on November 24, 1998 by W.L. Meng, S.S.
Jones, Jr., and Roy and Joan Gillison, all shareholders of Loral
Space and Communications, Ltd, ("Loral"). The plaintiffs named
over fifteen defendants, among them Loral, its CEO Bernard
Schwartz, President Clinton, Vice President Gore, and the
Democratic National Committee.*fn1
The plaintiffs allege that Schwartz bribed President Clinton
and other government officials with campaign contributions in an
effort to secure export licenses for Loral products. The
plaintiffs claim that this alleged conduct gives rise to five
causes of action: (1) breach of fiduciary duty, (2) negligence,
(3) unjust enrichment, (4) civil conspiracy, and (5) civil RICO.
The defendants all demur, and ask this Court to dismiss the
claims pursuant to Federal Rule of Civil Procedure 12(b)(6). For
the following reasons, the Court dismisses the RICO claim and
declines to exercise jurisdiction over the remaining claims.
The plaintiffs' allegations in this case chart a course of
drama and intrigue. One wonders what proof, if any, may lie
behind these charges. But this stage of the proceedings is not
designed for determining veracity; rather, it is designed to
determine whether the plaintiffs have stated an actionable
claim. To do this, the Court
must "take as true the material facts alleged in the
[plaintiffs'] amended complaint." Hospital Bldg. Co. v.
Trustees of Rex Hosp., 425 U.S. 738, 740, 96 S.Ct. 1848, 48
L.Ed.2d 338 (1976). Thus, in recounting as true many of the
plaintiffs' allegations, the Court does not suggest that the
allegations are indeed true.
Loral is one the world's top manufacturers of satellites. It
is currently in the midst of establishing a global cellular
telephone network, known as project "Globalstar." The project
requires the placement of 56 satellites in low earth orbit. To
this end, Bernard Schwartz, Loral's CEO, contracted with several
Chinese launch providers while on a trade mission sponsored by
the United States Department of Commerce in August 1994.
Before any launch could take place, Loral needed to obtain a
suspension of the Foreign Relations Authorization Act of 1990
and 1991, 22 U.S.C. § 2151 et seq. (1994). The Act, enacted in
the wake of Tiananmen square, prohibited the export of U.S.
satellites intended for launch in China. The Act provides that
the suspension may be lifted on a case by case basis if the
President determines that it is in the national interest to do
so. On February 6, 1996, President Clinton signed a waiver
permitting one of Loral's satellites to be exported. The
President did so a second time on February 18, 1998.
Between 1994, when the launch contracts were first signed, and
1998, when the last waiver was signed, Schwartz contributed over
$1.4 million of his personal funds to three organizations: the
Democratic National Committee, the Democratic Senatorial
Campaign Committee, and the Democratic Congressional Campaign
Committee. Schwartz was later reimbursed for these expenditures
by Loral. The plaintiffs allege that President Clinton and other
government officials explicitly agreed to trade export waivers
for campaign contributions.
In May 1998, three months after President Clinton signed the
second waiver, it was announced that Loral was being
investigated by the Department of Justice's Campaign Finance
Task Force. Thus began, relatively speaking, a minor political
scandal. The Washington Post and the New York Times each
covered the emerging story, while various politicians and
Schwartz himself made appearances on the Sunday morning talk
show circuit. The scandal gradually faded from the headlines
until June 1999, when the House Select Committee on U.S.
National Security and Military/Commercial Concerns with the
People's Republic of China issued the "Cox Report." The report
recounted many of Loral's dealings in the satellite industry and
made numerous suggestions of impropriety. In response, Loral
took out full page ads in several major newspapers denying any
Unpersuaded by Loral's denials, the plaintiffs brought suit.
In their derivative suit, the plaintiffs seek to have Loral
compensated for the harms visited on it by Schwartz, President
Clinton, the Democratic National Committee, and the other
The plaintiffs make one federal claim and four state law
claims. Section 1331 of title 28 grants this Court jurisdiction
over issues of federal law. See 28 U.S.C. § 1331 (1994).
Further, section 1367 permits this Court to exercise
supplemental jurisdiction over nonfederal claims that are "so
related" with the original jurisdiction claim as to be "part of
the same case or controversy." See 28 U.S.C. § 1367(a) (1994).
As the state law claims alleged in this case are closely
intertwined with the federal claim, all claims are properly
before the Court.
II. Standard for Dismissal under Rule 12(b)(6)
Under Rule 12(b)(6) of the Federal Rules of Civil Procedure, a
defendant's motion for dismissal may be granted if the
plaintiffs claim fails "to state a claim upon which relief can
be granted." FedR.Civ.Pro. 12(b)(6).
In reviewing a claim, a court should presume the allegations to
be true and liberally construe them in favor of the plaintiff.
See Phillips v. Bureau of Prisons, 591 F.2d 966, 968 (D.C.Cir.
1979) (citing Miree v. DeKalb County, Ga., 433 U.S. 25, 27 n.
2, 97 S.Ct. 2490, 53 L.Ed.2d 557 (1977)). In addition, the
plaintiff must be given every favorable inference that may be
drawn from his allegations of fact. See Scheuer v. Rhodes,
416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974). "However,
legal conclusions, deductions or opinions couched as factual
allegations are not given a presumption of truthfulness."
Wiggins v. Hitchens, 853 F. Supp. 505, 508 n. 1 (D.C. 1994)
(citing 2A Moore's Federal Practice, S12.07, at 63 (2d ed. 1986)
(footnote omitted); Haynesworth v. Miller, 820 F.2d 1245, 1254
(D.C.Cir. 1987)). Finally, dismissal is only appropriate if it
appears beyond doubt that no set of facts proffered in support
of plaintiffs claim would entitle him to relief. See EEOC v.
St. Francis Xavier Parochial Sch., 117 F.3d 621, 624 (D.C.Cir.
1997) (citing Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct.
99, 2 L.Ed.2d 80 (1957)).
III. The Plaintiffs' RICO Claim
The plaintiffs allege that all of the named defendants engaged
in a scheme violative of the Racketeer Influenced and Corrupt
Organizations Act, 18 U.S.C. § 1962 (1994). The defendants argue
that, even if RICO violations were committed, the violations
were not the proximate cause of the plaintiffs' harm. The Court
agrees with the defendants and therefore dismisses the RICO
A. RICO and Proximate Cause
The RICO statute creates a private civil action for a person
"injured in his business or property by reason of a violation of
[18 U.S.C. § 1962]." 18 U.S.C. § 1964 (1994). To state a valid
RICO claim, a plaintiff must allege, inter alia, two or more
predicate acts that constitute a "pattern of racketeering
activity." 18 U.S.C. § 1961. On its face, the RICO statute does
not require proximate causation; that is, the statute does not
expressly require the "predicate acts" designated in section
1961 to proximately cause the "injury" designated in section
1962. The United States Supreme Court, however, read such a
clause into the statute in Holmes v. Securities Investor
Protection Corp., 503 U.S. 258, 112 S.Ct. 1311, 117 L.Ed.2d 532
Holmes involved a stock manipulation scheme used to inflate
the price of several stocks. When the scheme was exposed, the
stock prices plummeted, eventually requiring the Securities
Investor Protection Corporation ("SIPC") to advance $13 million
to several broker-dealers who owned large quantities of the
stock. The SIPC sued the scheme's perpetrators under RICO. The
Supreme Court rejected the suit, finding that there was no
"direct relation between the injury asserted and the injurious
conduct alleged." Holmes, 503 U.S. at 268, 112 S.Ct. 1311.
According to the Supreme Court, cause and effect in the RICO
context is not merely a metaphysical connection; rather it is a
connection informed by "social policy."*fn2 Id. In taking
account of social policy, the Court considered issues such as
duplicative recovery, fair apportionment of liability, adequate
deterrence. Id. at 269, 112 S.Ct. 1311.
Since Holmes, the Second Circuit has extensively explored
the concept of causation in the RICO context.*fn3 Its
reveals two principles relevant to the instant case. First,
proximate causation demands that the plaintiff be the "intended
target of the RICO violation." American Express,
39 F.3d 395, 400 (2d Cir. 1994). American Express involved the
repercussions of a scheme by American Express executives to
defame one of its competitors. The scheme backfired, and
eventually forced American Express to pay a $10 million
settlement. Faced with a shareholders' derivative claim under
RICO, the Second Circuit found causation lacking, explaining
the shareholders of American Express were certainly
not the intended targets of the RICO violations.
Quite the contrary, the RICO violations were intended
to benefit American Express by injuring one of its
Id. Since American Express, the "intended target" requirement
has been repeatedly endorsed.*fn4
See Abrahams v. Young &
Rubicam, Inc., 79 F.3d 234
, 239 (2d Cir. 1996), BCCI Holdings
(Luxembourg), Societe Anonyme v. Pharaon, 43 F. Supp.2d 359, 366
(S.D.N.Y. 1999); Medgar Evers Houses Tenants Association v.
Medgar Evers Houses Associates, 25 F. Supp.2d 116, 122 (S.D.N.Y.
The second lesson gleaned from the Second Circuit RICO cases
is a distinction between scheme and scandal. Again American
Express is instructive. Had the scheme by the American Express
executives remained a secret, the company would have undoubtedly
profited. Instead, the scheme was exposed and a scandal ensued,
costing the company millions. The Second Circuit declined to
find proximate causation, opining that "any losses to American
Express were caused . . . because the scheme itself was exposed
and thus failed." This logic has been affirmed several times.
See Abrahams, 79 F.3d at 239; In re Teledyne Defense
Contracting Derivative Litigation, 849 F. Supp. 1369, 1374
B. Proximate Causation in the Instant Case
Viewing the plaintiffs' claims against the above precedent,
the Court finds that the injuries alleged were not proximately
caused by the supposed RICO violations. The circumstances of the
case at hand are exceedingly similar to those in American
Express and its progeny. The alleged bribery by Schwartz was
undertaken to benefit Loral by harming its competitors. Nowhere
in the plaintiffs' pleading is there a claim that Schwartz
sought to harm Loral through his actions. Thus, Loral and its
shareholders were not the intended targets of Schwartz' actions.
Also, the shareholder injury in this case arose as a result of
the scandal, not the scheme itself. Indeed, had the scandal
never occurred, none of the harm alleged by the plaintiffs would
have occurred. The plaintiffs argue that the scandal/scheme
distinction is inappropriate because "it obviously is a
reasonable, foreseeable, and natural consequence of engaging in
any unlawful conduct that the unlawful conduct will be
discovered and investigated." Plaintiffs' brief at 10. The Court
As public figures, spin doctors, and the press are all aware,
scandals often unfold in kaleidoscopic fashion. They are not
creatures of order, but of entropy. All sorts of indiscretions
lurk in eaves of this nation's capital, yet only a few, through
mere circumstance, fall upon the fertile ground of scandal. A
briefcase left in a cab; a roommate who works for the wrong
agency; a dress that never went to the cleaners. All of these
are the sources of scandal and none of them are part of a
predictable chain of events. In sum, the origin and development
of scandals are inherently unpredictable. Thus, this Court
agrees with the Second Circuit that, in RICO cases such as this
one, a scandal severs the chain of legal causation.
In keeping with the directives of Holmes, this Court's
decision is also well-grounded in social policy. Denying a RICO
claim in this case would not shield the alleged wrongdoers from
liability, nor would it prevent the shareholders from seeking
other remedies. In both instances, a properly plead derivative
action would provide both a penalty for the malfeasant and a
remedy for the shareholders. See Holmes, 503 U.S. at 269, 112
S.Ct. 1311; American Express, 39 F.3d at 401. Further,
"granting standing to attenuated and indirect parties" gives
rise to the risk of "duplicative recoveries" and "superfluous
deterrence." American Express, 39 F.3d at 401; see also
Holmes, 503 U.S. at 269-70, 112 S.Ct. 1311. These factors
together persuade the Court that the RICO claim must be
In sum, the Court grants the defendants' motion to dismiss the
RICO claim because the plaintiffs' injuries, if any, were not
proximately caused by the alleged RICO violations.
IV. The Plaintiffs' Claim for Breach of Fiduciary Duty,
Negligence, Unjust Enrichment, and Civil Conspiracy
The plaintiffs alleged five counts in their pleading: four
state law claims and one federal claim. Being without diversity
of citizenship, the plaintiffs' presence in federal court rests
on supplemental jurisdiction, which permits a federal court to
extend its jurisdiction to claims properly appended to a claim
falling within its original jurisdiction. See
28 U.S.C. § 1367(a) (1994). In the case at hand, the claim falling within
this Court's original jurisdiction was the plaintiffs' RICO
claim; this claim has now been dismissed. Thus, with the
explicit permission of Congress, this Court declines to hear the
remaining state law claims. See 28 U.S.C. § 1367(c).
By statute, this Court "may decline to exercise supplemental
jurisdiction over a claim . . . if (3) the district court has
dismissed all claims over which it has original jurisdiction."
28 U.S.C. § 1367(c) (1994). Accordingly, as the plaintiffs RICO
claim has been dismissed, the Court declines jurisdiction over
the remaining claims.
Although the Court is not obliged to explain its reasoning in
declining jurisdiction, it is worth noting that the remaining
claims would require the court to go beyond its usual role in
interpreting state law. Loral is incorporated in Bermuda, the
law of which is derived chiefly from England. Thus, the issues
of demand and corporate duty, which have been briefed by some
parties, would require the court to delve into areas
substantially beyond its experience or expertise.
For the forgoing reasons, the Court dismisses the plaintiffs'
RICO claim pursuant to Federal Rule of Civil Procedure 12(b)(6)
and declines to exercise jurisdiction over the remaining claims
pursuant to 28 U.S.C. § 1367(c). An order consistent with this
holding accompanies this opinion.