Opinion
CIVIL ACTION NO: 01-3625
April 22, 2003
ORDER AND REASONS
Before the Court is the motion of defendant, James Smith, Jr., for summary judgment on plaintiff's RICO claims. Also before the Court is the motion of defendants, James Smith, Jr. and Smith Martin, P.L.C., for summary judgment. For the following reasons, the Court grants James Smith, Jr.'s motion as to plaintiff's RICO claims. The Court also grants Smith and Smith Martin's motion as to plaintiff's federal securities law claims. The Court dismisses plaintiff's remaining state law claims without prejudice.
I. BACKGROUND
A. Factual Background
This matter arises out of a family dispute between plaintiff Warren Reuther and his nephew, defendant James Smith, Jr. ("Smith"), over control of a number of closely-held corporations. Reuther and Smith's father, James Smith, Sr., created the "Corporations" to engage primarily in the tourist industry in the New Orleans area. Reuther and Smith Sr. each obtained a 50% stake in the Corporations. At no time was Reuther less than a 49% shareholder in any of the Corporations, and he is currently a 49% shareholder in each of the Corporations. He remains the Corporations' largest individual shareholder and, together with his wife's 1% share, retains voting control of 50%. Smith, along with his law firm, defendant Smith Martin, P.L.C., acted as counsel for the Corporations and also served as counsel to Reuther individually. Until 1995, Reuther served as President of the Corporations and was responsible for managing their day-to-day operations.
The Corporations, which are named as defendants in this lawsuit, are Airport Holdings, Inc., Airport Shuttle, Inc., Airport Shuttle Colorado, Inc., Chicory Building, Inc., Delta Transit, Inc., Destination Management, Inc., Hospitality Enterprises, Inc., Lodging, Inc., New Orleans International Cruise Ship Terminal, Inc., New Orleans Paddlewheels, Inc., New Orleans Tours, Inc., On the Town, Inc., RSC Management, Inc., and Visitor Marketing, Inc. (hereinafter collectively referred to as the "Corporations").
An independent, organizational assessment of the Corporations that was conducted in 1993 concluded that Reuther provided valuable insight and vision, but that employees were frustrated by his managerial style. In 1995, Reuther and Smith Sr. agreed to turn over the day-to-day management of the Corporations to others. Reuther stepped down as President, and the Corporations' Board of Directors elected him to the position of Chief Executive Officer ("CEO"). Joseph Frederick, a non-family member who was a former executive of Hilton Hotels, became President. In 1997, Smith's brother, Duane Smith, became President. Reuther remained CEO. During Duane Smith's tenure as President, he and Reuther coauthored a memorandum to the Corporations' managers indicating that, as CEO, Reuther's responsibilities included "the up-keep of all business relationships, new project development, city and state relationships, board relations, and sales and marketing for all companies." (Pl.'s Opp. to Smith's Mot. for Summ. J., Ex. 10, Memo of Nov. 10, 1997.) Reuther's role in the Corporations at this time is further illuminated in a letter that Duane Smith wrote to Reuther on the same day as the memorandum:
Technically speaking, each of the Corporations has its own Board of Directors. Because all of the Boards of Directors consist of the same individuals and meet simultaneously, the Court uses the singular term "Board of Directors" to collectively refer to all of the Boards.
We agreed that you would stay out of the day to day management of these companies. Your recent inquiries and meetings with the Purchasing Department suggests to me that you have no intentions of keeping your word. . . .
You must stay out of the day to day management of these companies and allow me to do my job. My sole intentions are to make all of us a profit, including yourself and our shareholders.
(Smith's Mot. for Summ. J., Ex. G, Duane Smith's Letter of Nov. 10, 1997.)
In October 1998, Smith proposed to the Board of Directors that he replace Duane Smith as President. A draft of Smith's plan indicated that Reuther would remain CEO. Reuther would provide "the vision of the corporation" and would "generally oversee Marketing activities in all companies . . . [and] oversee company development and new projects." (Pl.'s Opp. to Def. Smith's Mot. for Summ. J., Exs. 11, 12, and Ex. 2, Dep. of James E. Smith, Jr., at 67.) Smith and Reuther would "seek each other's approval" in carrying out their duties. ( Id., Ex. 13, Dep. of Claire Durio, at 87.) A revised version of the plan indicated that Reuther would be an "officer" and the "Chairman of the Board" of the Corporations. Reuther presided over a January 1999 meeting at which the Board elected Smith as President, and, according to the minutes of the Board meeting, elected Reuther as Chairman of the Board "to serve in said capacity at the pleasure of the Board of Directors." ( Id., Ex. 14.) The minutes of this January 1999 meeting do not mention Reuther's position as CEO, but minutes from other Board meetings held in 1999 and 2000 indicate that Reuther retained this title. ( Id., Ex. 5.) Some minutes, however, such as the minutes from a meeting in February 2000, identify Reuther only as Chairman of the Board. (Smith's Mot. for Summ. J., Ex. U.) The parties disagree as to whether the Board agreed, at the January 1999 meeting, to limit Smith's initial term as President to one year. Regardless, Smith was reelected President in February 2000. After he became President, Smith continued to practice law in connection with the Corporations. From January 1999 until June 2002, the Board of Directors of the Corporations consisted of Reuther, Reuther's wife, Smith, and Smith Sr.
After Smith became President, the Corporations continued to hold Reuther out to the public, and to investors, as their Chairman of the Board and CEO. First, Craig Smith, the Corporations' Secretary/Treasurer, filed corporate certificates for the Corporations with the Louisiana Secretary of State's Office that reflect Reuther's titles. Certificates of four of the Corporations, dated February 26, 1999, identify Reuther as both CEO and Chairman of the Board. A fifth certificate, also dated February 26, identifies Reuther only as Chairman of the Board. A sixth certificate, dated October 7, 1999, identifies Reuther as "Chief Executive Officer / Authorized Representative." (Pl.'s Opp. to Smith's Mot. for Summ. J., Ex. 15.) Second, in August 2000, Doug Bernard, a financial advisor, prepared investment offering packages for the Garden District Hotel and the Royal St. Charles Hotel that reflect Reuther's titles. These investment packages included Reuther's résumé, which Reuther submitted at Bernard's request, on which Reuther identified himself as the Corporations' CEO. The investment packages were distributed to prospective investors, but they were never placed in the mail. As late as October 16, 2001, Reuther noted in a letter to Smith and Smith Sr. that he was the Corporations' Chairman of the Board and Chief Executive Officer, and that he had certain "responsibilities." (Id., Ex. 25 at 3.)
This lawsuit largely concerns the legal meaning of Reuther s titles of CEO and Chairman of the Board. Even though Reuther held himself out to the public as CEO and Chairman of the Board, served as Chairman "at the pleasure of the Board," presided over Board meetings, and provided long-term vision for the Corporations, Smith testified that he was "certain" that he had the authority to terminate Reuther within "my first year" as President. ( Id., Ex. 2, at 122.) In February 2001, Smith Martin prepared a memorandum indicating that Reuther's powers as CEO and Chairman of the Board "can be subject to debate" because these positions are neither listed in the by-laws, nor defined in Board meeting minutes. (Pl.'s Supp. Memo. in Opp. to Smith's Mot. for Summ. J., Ex. A.) Later in 2001, Smith Martin further investigated the status of the Corporations' bylaws. In a Memorandum dated October 17, 2001, Smith Martin indicated to the Board of Directors that bylaws were never completed for one of the Corporations, Airport Holdings, Inc. Smith Martin further indicated that the bylaws for Delta Transit, Chicory Building and Visitor Marketing could not be located, and the law firm provided to the Board copies of Amended and Restated Bylaws. These bylaws did not provide for the role of CEO. (Pl.'s Opp. to Smith's Mot. for Summ. J., Ex. 8.)
On October 30, 2001, Smith wrote to Reuther that there was no CEO position in the companies, and that "Chairman of the Board" was an empty title:
Regarding your position as "Chief Executive Officer" this is not a position than has been established within the [Corporations]. There is no CEO. You have not been elected to this position by the directors of the companies and the position does not exist. The chief executive officer of the companies is the president. I am aware that you have sometimes utilized this title, and in the interest of keeping peace, I have not objected. . . .
Regarding your status as Chairman of the Board of Directors, the duties of this position are not defined in the Articles of Incorporation or Bylaws of any of the companies and therefore this position exists in name only. No corresponding duties have ever been prescribed by the directors.
( Id., Ex. 27.) Smith terminated Reuther on the following day, October 31, 1999. The thrust of Reuther's complaint is that Smith took advantage of his role as the Corporations' counsel to seize control of the Corporations unlawfully.
Reuther also alleges that once Smith became President, he unlawfully diverted corporate assess to himself in the form of executive compensation. Smith's compensation as President is based on the net pre-tax revenues of a number of corporations, including New Orleans Paddlewheels ("NOP"). NOP's revenues consisted in part of the revenues of its subsidiary, Shreveport Paddlewheels ("SP") In 2000, Paul Cordes, a tax attorney, recommended that the ownership of SP be vested directly in the individual shareholders of NOP, as opposed to being vested in NOP itself. This change would reduce the revenue of NOP, and, consequently, would reduce Smith's compensation. NOP's attorneys structured the proposal as a Board-authorized dividend payable to all shareholders of NOP consisting of 100% of the ownership interests in SP. A draft of the proposal circulated in July 2000. NOP's Board at that time consisted of Reuther, Reuther's wife, Smith and Smith, Sr. Reuther and his wife signed the proposed "Unanimous Written Consent of the Board of Directors of New Orleans Paddlewheels, Inc.," but Smith and Smith Sr. did not. None of the Board members signed the proposed Operating Agreement. Correspondence in late July 2000 indicates that Reuther and Smith disputed terms of the Operating Agreement. While the proposal was being considered, Smith Martin filed a petition with the Louisiana State Gaming Control Board on behalf of NOP for permission to change SP's ownership structure consistent with the proposal in the event that the proposal was adopted. The Gaming Control Board approved the change on October 17, 2000. NOP's Board, however, never adopted the proposal. A February 2001 status report indicates that the proposed change was cancelled. Smith attests that he informed Reuther at this time that the proposal was abandoned. Consistent with this representation, Reuther received his January and February 2001 monthly dividend checks representing SP revenues on checks written out of an NOP account. On March 6, 2001, Reuther faxed correspondence to Smith telling him to issue Reuther's future monthly dividend checks directly from an SP account. (Id., Ex. 21.) Beginning in March 2001, Reuther began to receive dividends directly from SP. On June 14, 2001, Smith Martin sent a letter to the Louisiana State Gaming Control Board indicating that the plan to alter SP's ownership structure had been abandoned. Reuther suspects that the plan was scrapped because of its impact on Smith's compensation. Smith attests that he did not vote for the proposal because the Corporations' C.P.A. believed that the plan would have negative tax consequences.
Reuther's final allegation pertains to his guaranty of a loan issued to the Corporations by Whitney National Bank. Reuther alleges that he executed a continuing guaranty in the amount of $2 million based on Smith's representations to Whitney (1) that Reuther would receive roughly $60,000 per month in dividend income from his ownership interest in SP, and (2) that Cordes' proposal had gone through. Reuther alleges that Smith made these representations in a loan application submitted to Whitney in June 2001. In September 2001, Reuther stopped receiving dividend checks from these entities. Smith asserts that a downturn in the New Orleans tourism industry caused by the terrorist attacks of September 11, 2001 brought about the cessation of dividends. On September 21, 2001, Smith indicated that the Corporations were losing as much as $80,000 per day. Reuther alleges that he would not have signed the guaranty had Smith disclosed to him that the revenues would stop flowing and that Cordes' proposal had been abandoned.
B. Procedural Background
Reuther's complaint, which is brought on his own behalf and derivatively on behalf of the shareholders of the Corporations, consists mostly of state law claims. Reuther asserts that defendants Smith and Smith Martin committed malpractice by failing to amend the by-laws to reflect the role of CEO, failing to advise Reuther that this was necessary, falsifying minutes of board meetings, and operating under an unwaivable conflict of interest. Reuther brings additional state law claims sounding in fraud, unfair trade practices, breach of fiduciary duties, and malfeasance.
Reuther and his wife control 50% of the shares of each Corporation. Various members of the Smith family control the remaining 50%.
Reuther filed a Second Amended and Supplemental Complaint on May 6, 2002. He filed a Third Amended and Supplemental Complaint on July 17, 2002. Reuther also filed a petition in state court, with similar allegations, seeking injunctive relief.
In addition to these state law claims, Reuther brings two federal claims. First, Reuther alleges that Smith violated the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C.A. §§ 1961- 1968 (West 2000 and Supp. 2002), by engaging in a pattern of racketeering activity involving predicate acts of mail fraud. Second, Reuther alleges that Smith and Smith Martin violated federal securities law by representing to investors, including Reuther, that Reuther was CEO despite knowledge that no such position existed. Smith moves the Court for summary judgment on Reuther's RICO claims. Smith and Smith Martin move for summary judgment on the securities claims.
Reuther takes the position that Smith did not join in Smith Martin's motion for summary judgment on the securities claims. (See Pl.'s Memo. in Opp. to Corporations' Mot. for Summ. J., at 5.) The Court disagrees. Smith Martin's motion clearly indicates that Smith joined in the motion in his capacity as a lawyer. (Smith Martin's Mot. for Summ. J., at 1.) Further, Smith clearly expressed his intent to join in Smith Martin's motion for summary judgment in a later, written submission to the Court. (Def.'s Joint Submission in Response to Minute Entry of Nov. 20, 2002, at 2.)
II. Legal Standard
Summary judgment is appropriate when there are no genuine issues as to any material facts, and the moving party is entitled to judgment as a matter of law. FED. R. Civ. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 2551 (1986). The court must be satisfied that no reasonable trier of fact could find for the nonmoving party or, in other words, "that the evidence favoring the nonmoving party is insufficient to enable a reasonable jury to return a verdict in her favor." Lavespere v. Niagara Mach. Tool Works, Inc., 910 F.2d 167, 178 (5th Cir. 1990); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 So. Ct. 2505, 2510 (1986). The moving party bears the burden of establishing that there are no genuine issues of material fact. Krim v. BancTexas Group, Inc., 989 F.2d 1435, 1445 (5th Cir. 1993). A factual dispute precludes a grant of summary judgment if the evidence would permit a reasonable jury to return a verdict for the nonmoving party. See Hunt v. Rapides Healthcare System, LLC, 2001 WL 1650961 (5th Cir. 2001) (citations omitted).
If the dispositive issue is one for which the nonmoving party will bear the burden of proof at trial, the moving party may satisfy its burden by merely pointing out that the evidence in the record contains insufficient proof concerning an essential element of the nonmoving party's claim. Celotex, 477 U.S. at 325, 106 So. Ct. at 2552; Lavespere, 910 F.2d at 178. The burden then shifts to the nonmoving party, who must, by submitting or referring to evidence, set out specific facts showing that a genuine issue exists. Celotex, 477 U.S. at 324, 106 S.Ct. at 2553.
III. Reuther's RICO Claims
Reuther alleges that Smith violated RICO and relies on asserted instances of mail fraud as predicate acts. In his RICO Case Statement, Reuther asserts that Smith violated two provisions of the RICO statute. (RICO Case Statement, December 26, 2001.) Reuther first cites 1 U.S.C. § 1962 (b), which provides:
Reuther has abandoned earlier attempts to establish that securities law violations also constitute predicate acts. See 18 U.S.C. § 1964 (c); Reuther, 2002 WL 1303119 at *4 n. 1.
It shall be unlawful for any person through a pattern of racketeering activity or through collection of an unlawful debt to acquire or maintain, directly or indirectly, any interest in or control of any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce.18 U.S.C. § 1962 (b). Reuther asserts that Smith — the RICO person — engaged in a pattern of racketeering activity in his efforts to acquire control over the Corporations — the RICO enterprise.
Reuther also alleges that Smith violated 18 U.S.C. § 1962 (c), which provides:
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. § 1962 (c). Reuther asserts that Smith — the RICO person — conducted the affairs of Smith Martin — the RICO enterprise — through a pattern of racketeering activity.
A civil remedy for RICO violations is provided in § 1964, which states that "[a]ny person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefor . . . and shall recover threefold the damages he sustains and the cost of the suit. . . ." 18 U.S.C. § 1964 (c) (emphasis added) The "by reason of" language "requires a causal connection between the predicate mail or wire fraud and a plaintiff's injury that includes `but for' and `proximate' causation." Summit Properties Inc. v. Hoechst Celanese Corp., 214 F.3d 556, 558 (5th Cir. 2000) (emphasis added); see Holmes v. Securities Investor Protection Corporation, 503 U.S. 258, 268, 112 S.Ct. 1311, 1317 (1992)
Violations of either § 1962(b) or § 1962(c) require that there be (1) a person who engages in (2) a pattern of racketeering activity that is (3) connected to the acquisition, establishment, conduct or control of an enterprise. In re Mastercard International Inc. Internet Gambling Litigation, 313 F.3d 257, 261 (5th Cir. 2002); St. Paul Mercury Insurance Co. v. Williamson, 224 F.3d 425, 439 (5th Cir. 2000). These three fundamental elements of a RICO claim must be addressed before the Court may move on to the substantive requirements of § 1962(b) and § 1962(c). St. Paul Mercury, 224 F.3d at 439. Smith does not dispute Reuther's characterization of Smith as the "person" identified as having engaged in the racketeering activity. Instead, Smith asserts that Reuther has failed to establish the existence of a pattern of racketeering activity. Smith asserts that Reuther is "hard-pressed to present evidence to persuade this Court he should be permitted to go forward on even one predicate act" of mail fraud, let alone the multiple acts of mail fraud necessary to establish a RICO violation. (Smith's Mot. for Summ. J., at 24.) The Court will therefore address the parties' dispute as to whether Smith engaged in "a pattern of racketeering activity."
Smith moves for summary judgment on three grounds: first, that Reuther's claim is time-barred; second, that Reuther does not satisfy the RICO standing requirements of injury and causation; and, third, that Reuther has not established the existence of a pattern of long-term criminal activity.
The term "racketeering activity" applies to certain state and federal crimes listed in § 1961(1). Among these are any act that is indictable under the federal mail fraud statute, 18 U.S.C. § 1341. A pattern of racketeering activity exists only when the RICO person has engaged in two or more predicate acts. In re Mastercard, 313 F.3d at 261; St. Paul Mercury, 224 F.3d at 441. But the law presents "a more stringent requirement than proof simply of two predicates. . . ." H.J. Inc. v. Northwestern Bell Telephone Company, 492 U.S. 229, 237, 109 S.Ct. 2893, 2899 (1989) Specifically, the two predicates must be "related" and they must "amount to or pose a threat of continued criminal activity." Id. at 239, 109 S.Ct. at 2900; St. Paul Mercury, 224 F.3d at 441.
Smith engaged in an indictable act of mail fraud if he devised or intended to devise a scheme to defraud and used the mail for the purpose of executing or attempting to execute the scheme. U.S. v. Caldwell, 302 F.3d 399, 409 (5th Cir. 2002); U.S. v. Shively, 927 F.2d 804, 814 (5th Cir. 1991). The elements of mail fraud as a predicate offense for civil RICO purposes are:
(1) A scheme or artifice to defraud or to obtain money or property by means of false or fraudulent pretenses, representations or promises.
(2) Interstate or intrastate use of the mails for the purpose of furthering or executing the scheme or artifice to defraud.
(3) The use of the mails by the defendant connected with the scheme artifice to defraud.
(4) Actual injury to the business or property of the plaintiff.Landry v. Air Line Pilots Assocation International AFL-CIO, 901 F.2d 404, 428 (5th Cir. 1990). In addition, when mail fraud is alleged to be a predicate act under the RICO statute, the plaintiff must have relied upon the fraudulent conduct. In re Mastercard, 313 F.3d at 263; Summit, 214 F.3d at 562. One exception to the reliance requirement is that a plaintiff company need not show reliance "`when a competitor lured the plaintiff's customers away by a fraud directed at the plaintiff's customers.'" Proctor Gamble Company v. Amway Corporation, 242 F.3d 539, 565 (5th Cir. 2001) (quoting Mid Atlantic Telecom, Inc. v. Long Distance Services, Inc., 18 F.3d 260, 263-64 (4th Cir. 1994)).
In the RICO Case Statement and in his opposition to Smith's motion for summary judgment, Reuther identifies four predicate acts of mail fraud: (1) mailing correspondence relating to Reuther's loan guaranty to Whitney National Bank; (2) mailing investment packages identifying Reuther as the Corporations' CEO to prospective investors; (3) mailing correspondence regarding Cordes' proposal to alter SP's ownership structure to the Louisiana Gaming Control Board; and (4) mailing corporate certificates identifying Reuther as CEO, Chairman, or both, to the Louisiana Secretary of State's Office. ( See RICO Case Statement at 16-18.) As to the first alleged predicate act, in opposition to Smith's motion for summary judgment Reuther neither asserts nor brings evidence indicating that anything was ever mailed to Whitney National Bank. (Def.'s Opp. to Smith's Mot. for Summ. J., at 12-13 and Ex. 26.) As to the second alleged predicate act, Reuther asserts in his brief that the investment packages were delivered to prospective investors through the mail, but he brings no evidence supporting this assertion. ( Id. at 8.) Doug Bernard, the financial advisor who prepared the investment packages, attests that the packages were never placed in the mail. (Smith's Mot. for Summ. J., Ex. X, Aff. of Doug Bernard, at 2.) Bernard's testimony therefore stands uncontroverted, meaning that Reuther has failed to create an issue of fact as to whether the investment packages constitute a predicate act of mail fraud. The only alleged predicate acts that remain are the letter to the Gaming Control Board, and the mailing of corporate certificates to the Louisiana Secretary of State.
1. The Letter to the Gaming Control Board
On June 14, 2001, Ira Rosenzweig, an attorney with Smith Martin, indicated to the Louisiana Gaming Control Board that NOP abandoned its plans to alter the ownership structure of SP. ( Id. at Ex. M, Rosenzweig Letter of June 14, 2001.) Reuther asserts that the letter represents an indictable act of mail fraud in that it furthered Smith's fraudulent scheme to divert corporate assets into his own compensation. The key facts are as follows.
SP is a subsidiary of NOP, whose Board during the relevant time period consisted of Reuther, Reuther's wife, Smith, and Smith Sr. Cordes, a tax attorney, advised Reuther that it would be advantageous to change SP's ownership structure. (Pl.'s Mot. in Opp. to Smith's Not. for Summ. J., Ex. 1, at 6.) This change would have had a negative impact on Smith's executive compensation. As structured, the proposal required NOP's Board to authorize a dividend consisting of 100% of the ownership interests in SP, payable to all shareholders of NOP. ( Id. at Ex. 17.) A proposed Operating Agreement and "Unanimous Written Consent of the Board of Directors of New Orleans Paddlewheels, Inc." circulated in July 2000. ( Id.) Reuther and his wife signed the "Unanimous Written Consent," but Smith and Smith Sr. did not. ( Id.) No Board member signed the Operating Agreement. In late July 2000, "open issues" regarding the Operating Agreement remained outstanding. (Smith's Mot. for Summ. J., Ex. L.) Smith attests that he did not agree to the proposal because the Corporations' C.P.A. indicated that the proposal would have negative tax consequences. ( Id. at Aff. of James Smith, Jr., at 2.) While the proposal was being considered, Rosenzweig sent a copy of the proposed changes to the Gaming Control Board in August 2000, requesting the Control Board's approval of the proposal should NOP adopt it. (Pl.'s Mot. in Opp. to Smith's Mot. for Summ. J., Ex. 18.) The Control Board approved the proposal on October 17, 2000. ( Id. at 19.) By February 2001, however, NOP had abandoned the proposal. (Pl.'s Supp. Memo. in Opp. to Smith's Mot. for Summ. J., Ex. B.) Smith attests that he notified Reuther in February 2001 that the proposal had been abandoned. (Aff. of James Smith, ¶ 8.) Consistent with Smith's representation, in January and February 2001 Reuther received monthly dividends representing SP revenues on checks written out of an NOP account. (Pl.'s Mot. in Opp. to Smith's Mot. for Summ. J., Ex. 20.) In March 2001, Reuther directed Smith to issue his future monthly dividend checks directly out of an SP account. ( Id. at Ex. 21.) From March 2001 through August 2001, Reuther's dividend checks were written out of an SP account. ( Id. at Ex. 22.) On June 14, 2001, Rosenzweig sent a second letter to the Control Board — the alleged predicate act of mail fraud — indicating that "the shareholders [of NOP] determined not to proceed with the transfer" and that "the transfer was never consummated, so [SP] remains a single member limited liability company wholly owned by New Orleans Paddlewheels, Inc." (Pl.'s Mot. in Opp. to Smith's Mot. for Summ. J., Ex. 23.) Also in June 2001, someone, presumably Smith, represented to Whitney National Bank that revenues from SP would not flow into NOP and would ultimately be paid out in the form of dividends to the principals, just as though Cordes' proposal had been adopted. ( Id. at Exs. 1 and 26.)
In its examination of whether the June 14, 2001 letter constitutes an indictable act of mail fraud, the Court begins with the fundamental premise that mail fraud requires that there exist a scheme or artifice to defraud by means of use of false or fraudulent pretenses, representations or promises. Landry, 901 F.2d at 428. Reuther characterizes Smith's fraudulent scheme broadly as a scheme to divert corporate assets into his own executive compensation. Upon closer examination, Reuther's allegations of fraud prove elusive. The only alleged instance of a diversion of corporate assets is that pertaining to the abandonment of Cordes' proposal.
One way that Reuther frames Smith's allegedly fraudulent abandonment of the proposal is by asserting that there was an agreement to adopt the proposal, but that Smith somehow deceptively undermined the implementation of that agreement. The problem with this allegation is that the Board never adopted the proposal. The parties structured the transaction as an NOP Board-authorized dividend, consisting of 100% of the ownership interests in SB, payable to the shareholders of NOP. A proposed Operating Agreement and Unanimous Consent circulated in July 2000. No Board member signed the Operating Agreement, at least in part because of a dispute between Smith and Reuther over its terms. Reuther brings no evidence indicating that this dispute was ever resolved. Reuther and his wife signed a proposed Unanimous Consent in July 2000, but Smith and Smith Sr. did not. Reuther does not explain why the only version of the Unanimous Consent in the record is signed only by Reuther and his wife. Nor does Reuther otherwise bring documents evidencing Board or shareholder action approving the transaction. This means that Cordes' proposal was never anything more than a proposal. Because NOP never adopted Cordes' proposal, the Court rejects Reuther's allegation that Smith fraudulently abandoned or undermined a plan that NOP adopted.
The second way to read Reuther's allegations is that Smith fraudulently induced Reuther to believe that NOP adopted the proposal when, in fact, it had not. The obstacle here is reliance. Reuther is a sophisticated businessman. He created the Corporations. When NOP considered Cordes' proposal, Reuther controlled 50% of its voting stock and presided over its Board meetings as Chairman of the Board. Reuther knew that he himself had never signed the proposed Operating Agreement, and knew or should have known that only he and his wife signed the Unanimous Consent. Given Reuther's position, it strains credulity to believe that he could have possibly been deceived by Smith's fraudulent conduct into the mistaken belief that NOP adopted the proposal. The June 14, 2001 letter constitutes an indictable act of mail fraud only if Reuther relied on Smith's fraudulent conduct. In re Mastercard, 313 F.3d at 263; Summit, 214 F.3d at 562. To support his far-fetched allegation, Reuther does not assert that Smith's fraudulent conduct consisted of forging documents, or even that Smith told him that the deal went through. Rather, Reuther points to only two actions that can be construed as false or fraudulent pretenses, representations or promises. First, Reuther notes that beginning in March 2001, Smith issued his monthly dividend checks directly from an SB account. Reuther, however, directed Smith to issue his March 2001 dividend check directly out of an SB account. (Pl.'s Mot. in Opp. to Smith's Mot. for Summ. J., Ex. 21.) Second, Reuther points to Smith's alleged representation, not to him, but to Whitney National Bank, in June 2001 that SB's revenues would not flow into NOP's revenues and would ultimately be paid out as dividends to the principals. It would be a stretch to conclude that the change in the source of the checks that he requested (in March 2001) and a representation made to a third party (in June 2001) could have induced a person in Reuther's position to believe that NOP adopted Cordes' proposal. The Court finds that Reuther could not have possibly relied on the fraudulent conduct alleged, and that Reuther has therefore failed to create an issue of fact as to the reliance requirement.
The narrow exception to the reliance requirement set forth in Proctor Gamble does not apply. The Proctor Gamble court neld that a plaintiff company need not show reliance "`when a competitor lured the plaintiff's customers away by a fraud directed at the plaintiff's customers.'" Proctor Gamble, 242 F.3d at 565. Here, the plaintiff is not a company. Reuther does not allege that Smith lured Reuther's customers away through fraudulent conduct.
Two further points bear mention, both of which relate to the fact that Reuther's broad allegation that Smith diverted corporate assets boils down to whether Smith engaged in a fraudulent scheme to induce Reuther to believe that NOP adopted Cordes' proposal when it had not. First, given that the June 14, 2001 letter amounts to a clear public statement that the Board abandoned the proposal, it is difficult for the Court to see how the letter was mailed "in furtherance" of the scheme. If anything, the letter serves to expose the fraudulent scheme that Reuther alleges to have existed. Second, RICO requires Reuther to prove that but for Smith's fraudulent conduct, NOP would have adopted Cordes' proposal. Summit Properties, 214 F.3d at 558. Adoption of the proposal required the approval of either Smith or Smith's family, which controlled 50% of the voting stock and two of the four seats on NOP's Board. Reuther has made no "but for" showing that the Smiths would have otherwise gone through with the transaction. Reuther's problem is that he owned only half of the Corporations.
In summary, the Court does not find that Reuther has created an issue of fact as to whether the June 14 letter constitutes a predicate act of mail fraud. Reuther alleges that Smith mailed the letter in furtherance of a scheme to divert corporate assets into his own compensation by fraudulently abandoning Cordes' proposal, but Reuther could not have possibly relied on the alleged fraudulent conduct to believe that NOP adopted the proposal when it had not. Further, Reuther brings no evidence that "but for" the fraud the transaction would have gone through. The Court expresses no opinion as to whether, in abandoning Cordes' proposal, Smith breached fiduciary duties or otherwise violated state law.
2. Mailing Corporate Certificates to the Louisiana Secretary of State
The only predicate act that remains is the mailing of corporate certificates to the Louisiana Secretary of State's Office. Reuther brings no evidence as to when the certificates were placed in the mail, but five such certificates are dated February 26, 1999. Four of these certificates identify Reuther as both CEO and Chairman of the Board; one certificate identifies Reuther as only Chairman of the Board. A sixth certificate is dated October 7, 1999. This certificate identifies Reuther as "Chief Executive Officer / Authorized Representative." (Pl.'s Opp. to Smith's Mot. for Summ. J., Ex. 15.)
Reuther asserts that the certificates were mailed on February 26, 1999. (Pl.'s Opp. to Smith's Mot. for Summ. J., at 8.) The Court will assume, however, that the certificate dated October 7, 1999 was mailed in October 1999.
Even assuming that these certificates amount to indictable acts of mail fraud, they do not constitute "a pattern of racketeering activity" because they do not "amount to or pose a threat of continued criminal activity." H.J., 492 U.S. at 239, 109 S.Ct. at 2900; St. Paul Mercury, 224 F.3d at 441. In enacting RICO, "Congress was concerned with `long-term criminal conduct.'" Word of Faith World Outreach Center Church, Inc. v. Sawyer, 90 F.3d 118, 122 (5th Cir. 1996) (internal quotations omitted). Continued criminal activity may consist of "either a closed period of repeated conduct, or an open-ended period of conduct that by its nature projects into the future with a threat of repetition." Id. Reuther alleges the existence of both an open-ended and a closed period of continued criminal activity.
The Court rejects at the outset Reuther's assertion that Smith is engaged in an open-ended period of criminal activity. The Court has already determined that Reuther has not created an issue of fact as to the existence of any acts of mail fraud aside from the corporate certificates. Each of the corporate certificates at issue dates to 1999. Further, the certificates relate to an alleged scheme to wrest control of the Corporations from Reuther, which scheme, if any, culminated in October 2001 when Smith terminated Reuther. There is, then, no threat of future criminal activity. H.J., 492 U.S. at 242, 109 S.Ct. at 2902.
To establish a closed period of continued criminal activity, the Supreme Court requires that the predicates extend over more than "a few weeks or months." Id. Courts consistently require a length of time greater than six or seven months. United States v. Pelullo, 964 F.2d 193, 209 (3rd Cir. 1992) ("[W]e have never found [a closed period of continued criminal activity] to exist where the racketeering activity occurred over a period of one year or less."); American Eagle Credit Corp., v. Gaskins, 920 F.2d 352, 354 (6th Cir. 1990) (Six months is a "very short period of criminal activity which is insufficient to state a pattern under [RICO]."); Scottsdale Insurance Co. v. Dorman, 153 F. Supp.2d 852, 857 (E.D.La. 2001) (Eight months "is an insufficient period of time to satisfy the RICO statute's concern with long term criminal conduct.") Further, the continuity requirement is less likely to be met when the defendant is alleged to be involved in only one fraudulent scheme with a closed group of targeted victims. In Efron v. Embassy Suites (Puerto Rico), Inc., 223 F.3d 12 (1st Cir. 2000), for example, the plaintiff alleged that his partners intentionally caused an investment to experience financial difficulties in order to extract additional money from him and impair the value of his interest in the partnership. The Efron court decided that 17 instances of mail fraud during a 21-month period did not amount to a closed period of continued criminal activity, particularly given the narrow purpose of the alleged scheme and the scheme's focus on a singular victim. Efron, 223 F.3d at 18; see also Vicom, Inc. v. Harbridge Merchant Services, Inc., 20 F.3d 771, 779-82 (7th Cir. 1994) (Nine months does not amount to continued criminal activity under RICO when the defendant is alleged to be part of a single scheme that did not involve a variety of different types of predicate acts). Here, Smith's scheme has a narrow purpose — wresting control of the Corporations from Reuther. Smith's scheme targets a closed group of victims. And, if 17 instances of mail fraud extending over a 21-month period does not constitute a pattern of racketeering activity, then certainly evidence of only six corporate certificates mailed over a seven-month period does not. (Pl.'s Opp. to Def. Smith's Mot. for Summ. J., Ex. 15.) Mailing five corporate certificates at the end of February, and then one more at the beginning of October, does not amount to a closed period of continued criminal activity, particularly given the alleged scheme's singular purpose and closed group of victims. See Efron, 223 F.3d at 18. Smith is therefore entitled to summary judgment on Reuther's RICO claims. The Court need not address the dubious proposition that Smith's fraudulent scheme to wrest control of the Corporations from Reuther by giving Reuther meaningless corporate titles is the but-for and proximate cause of Reuther's injury.
Reuther, of course, is the primary target of the alleged scheme. Although Reuther brings no evidence that the scheme caused a decline in the value of shares in the Corporations, Reuther alleges that additional victims of the scheme include the shareholders of the Corporations. Together, Reuther and his wife own 50%.of the Corporations' stock; various members of the Smith family own the remaining 50%.
Reuther alleges that this pattern of racketeering activity began in January 1999, when Smith took over as President of the Corporations. (Pl.'s Opp. to Def.'s Mot. for Summ. J., at 16.) Before the alleged scheme began, Reuther was the Corporations' CEO. Even though the position of CEO was neither included in the Corporations' bylaws nor fleshed out in Board meeting minutes, Reuther exercised the powers of his office by providing long-term vision for the Corporations. In 1999, after the alleged pattern of racketeering activity began, Reuther served as the Corporations' Chairman of the Board. Again, even though the position of Chairman of the Board was neither listed in the Corporations' bylaws nor fleshed out in Board meeting minutes, Reuther continued to provide long-term vision for the Corporations. Reuther's position in 1999 was, in a legal sense, the same as it was in 1998, before the alleged fraud began. Stated differently, Smith possessed the same authority, if any, to fire Reuther in 2001 that Duane Smith possessed when he was President in 1998. It is therefore difficult to see how an alleged scheme to strip power from Reuther that began in 1999 is both the but-for and proximate cause of Reuther's injury. ( See Smith's Mot. for Summ. J., at 4.)
It strikes the Court that Reuther is attempting to squeeze the square-peg of a dispute over a family business into the round hole of RICO. When it passed the RICO statute to combat long-term criminal activity, Congress did not have business disputes of this sort in mind. For this reason, the Fifth Circuit has held that the continuity requirement is not met when a party engages in an alleged fraud as part of a single, discrete and otherwise lawful commercial transaction. Word of Faith, 90 F.3d at 122 (citing In re Burzynski, 989 F.2d 733 (5th Cir. 1993)). This is because the fraud "has a built-in ending point, and the case does not present the necessary threat of long-term, continued criminal activity." GE Investment Private Placement Partners II v. Parker, 247 F.3d 543, 549 (4th Cir. 2001). The Court expresses no opinion as to whether Smith was entitled to terminate Reuther, or whether Smith or Smith Martin committed legal malpractice or otherwise violated state law in their dealings with the Corporations. It is clear, however, that Smith did not engage in indictable acts of mail fraud that amount to a pattern of racketeering activity.
IV. Reuther's Federal Securities Law Claims
Reuther alleges that defendant Smith and defendant Smith Martin violated federal securities law, 15 U.S.C. § 78j, 17 C.F.R. § 241.10b-5, in connection with his purchase, sometime after January 1999, of securities in the Garden District Hotel and the Royal St. Charles Hotel. (Second and Supplemental Amended Compl. ¶ 82.) Section 10(b) of the Securities Exchange Act of 1934 makes it unlawful for a person to:
use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities and Exchange] Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.15 U.S.C. § 78j (b). Rule 10b-5 makes it unlawful for any person, directly or indirectly, to:
make any untrue statement of material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading . . . in connection with the purchase or sale of any security.17 C.F.R. § 240.10b-5. Accordingly, in order to prevail on his federal securities law claims, Reucher must establish (1) a misstatement or an omission, (2) of material fact, (3) occurring in connection with the purchase or sale of securities, (4) that was made with scienter, (5) upon which he justifiably relied, (6) and that proximately caused his injury. Mercury Air Group, Inc. v. Mansour, 237 F.3d 542, 546 (5th Cir. 2001); Rubinstein v. Collins, 20 F.3d 160, 166 (5th Cir. 1994).
Here, the alleged misrepresentations are statements, included in investment packages pertaining to the Garden District Hotel and the Royal St. Charles Hotel, that identify Reuther as the CEO of the Corporations. These statements appear in Reuther's résumé, which was submitted by Reuther at Bernard's request and included in the investment packages. Reuther does not allege that the investment packages include any other misstatements. Nor does Reuther base his securities claims on any other alleged misrepresentation that either Smith or Smith Martin made over the years pertaining to Reuther's corporate titles. Rather, Reuther's securities claims rest in their entirety on the inclusion in his résumé of his title of CEO. (Pl.'s Opp. to Smith Martin's Mot. for Summ. J., at 4.) Smith and Smith Martin move for summary judgment on these claims on three grounds: first, that Smith Martin had no involvement in the preparation of the investment offerings in dispute; second, that the inclusion of the résumé does not violate federal securities law; and, third, that Reuther did not rely on the alleged misstatements in the investment packages when he purchased the securities. The Court begins its analysis with the issue of reliance.
A portion of the Garden District Hotel investment package that includes Reuther's résumé is attached to Smith's Motion for Summary Judgment on Reuther's RICO claims. (Smith's Mot. for Summ. J., Ex. W.) Neither party has provided the Court with a copy of the investment package prepared for the Royal St. Charles Hotel, but the parties do not dispute that this investment package also contained a copy of Reuther's résumé.
As to Reuther's investment in the Garden District Hotel, the record makes clear that Reuther did not rely on the alleged misstatement in the investment package. Reliance "requires that the plaintiff have known of the particular misrepresentation complained of, have believed it to be true and because of that knowledge and belief purchased or sold the security in question." Nathenson v. Zonagen, Inc., 267 F.3d 400, 413 (5th Cir. 2001). Reuther testified that he invested in the Garden District Hotel before the investment package in dispute had been prepared. (Smith Martin's Mot. for Summ. J., Ex. A, Dep. of Warren Reuther, at 64-67.) After the investment package was prepared, Reuther "didn't make any more investments in the [Garden District Hotel.]" ( Id. at 66-67.) Reuther could not have possibly relied on an alleged misrepresentation appearing in an investment package prepared after he made his investment. Nor does Reuther bring any evidence indicating that any other investor relied on the alleged misrepresentation. ( Id., Ex E, Dep. of Warren Reuther, at 208.)
The Court now turns to the investment package prepared for the Royal St. Charles Hotel. Reuther testified that he could not remember whether he invested in the Royal St. Charles Hotel before the investment package was put together, but that he "positively" wanted to invest before outside investors were brought in. (Pl.'s Opp. to Smith Martin's Mot. for Summ. J., Ex. D, Dep. of Warren Reuther, at 72-73.) Reuther also testified, somewhat contradictorily, that he relied on the investment package when he made his investment. ( Id.) Reuther did not, however, attest that he relied on the particular statement in the package that identified him as CEO. At the time of his investment in 1999 (Second Amended and Supplemental Compl. ¶ 82), Reuther had already been holding himself out to the public as the Corporations' CEO for at least four years, ever since he stepped down as President of the Corporations and was elected Chief Executive Officer. (Smith Martin's Mot. for Summ. J., Ex. I, Minutes of Board of Directors Meeting, January 11, 1995.) Reuther himself submitted his résumé identifying himself as the Corporations' CEO. It is therefore preposterous to conclude that Reuther, in making his investment, relied on the statement in the investment package identifying him as CEO. Reuther's understanding of his role within the Corporations was drawn from years of interaction with Smith, Duane Smith, and the Corporations' Board of Directors. It did not come from a statement, appearing four years after he was elected CEO, that he himself included in an investment package prepared for outside investors. Reuther has therefore failed to create an issue of fact as to whether he relied on the alleged misstatement. The Court further notes that Reuther brings no evidence that any other investor relied on the alleged misrepresentation in the Royal St. Charles Hotel investment package. Smith and Smith Martin are therefore entitled to summary judgment on plaintiff's federal securities law claims.
In addition, the Court notes that the causation requirement in a Rule 10b-5 case is satisfied "only if the misrepresentation touches upon the reasons for the investment's decline in value." Nathenson, 267 F.3d at 413 n. 10 (quoting Huddleston v. Herman MacLean, 640 F.2d 534, 549 (5th Cir. 1981)). The misrepresentation must be a reasonably direct or proximate cause of the loss. Huddleston, 640 F.2d at 549. Reuther has made no showing that the value of his investments declined, and, if so, that the decline is related to the misrepresentation of his title. The thrust of Reuther's complaint is that he lost power and control over the Corporations; it is not that his loss of power caused the value of his investments in two hotels to decline. As to the latter, Reuther has not created a triable issue of fact.
V. Continuance to Permit Further Discovery
Reuther seeks a continuance of defendants' motions for summary judgment pursuant to Rule 56(f) on the grounds that he has not been afforded sufficient time to conduct discovery. FED. R. Civ. P. 56(f). Motions for a continuance pursuant to Rule S6(f) are "generally favored, and should be liberally granted." Stearns v. Airport Equipment Company, Inc. v. FMC Corporation, 170 F.3d 518, 534 (5th Cir. 1999). They are not, however, granted as a matter of course. To justify such a motion, Reuther must demonstrate (1) why additional discovery is needed and (2) how the additional discovery is likely to create an issue of material fact. Id. Reuther "`may not simply rely on vague assertions that additional discovery will produce needed, but unspecified facts.'" Krim v. BancTexas Group, Inc., 989 F.2d 1435, 1442 (5th Cir. 1993) (quoting SEC v. Spence Green Chemical Co., 612 F.2d 896, 901 (5th Cir. 1980)). A district court may grant summary judgment if it appears that further discovery will not produce evidence that creates a genuine issue of material fact. Id.
In his opposition to Smith's motion for summary judgment, Reuther does not support his assertion that further discovery is required with an explanation of how this additional discovery is likely to create an issue of fact. (Pl.'s Opp. to Smith's Mot. for Summ. J., at 25.) This Court will not grant a continuance based on Reuther's vague assertions that additional discovery will yield needed, but unspecified, facts. Krim, 989 F.2d at 1442. The Court further notes that Reuther was afforded ample time to conduct discovery — Reuther filed his opposition to Smith's motion for summary judgment on November 4, 2002, which is 11 months after he filed his original complaint. By Minute Entry entered on December 4, 2002, the Court ordered that discovery is closed.
Reuther's motion to review the Magistrate Judge's Minute Entry granting in part and denying part Reuther's motion to compel is currently pending before the Court. In this motion, Reuther seeks responses to certain deposition questions that were asked to Claire Durio, Shaun Rafferty and Staci Rosenberg. The unanswered questions directed to Claire Durio relate to whether board meeting minutes were falsified; to Rafferty, whether Reuther was CEO of the Corporations; and to Rosenberg, whether attorneys needed to check with Smith before giving information to Reuther. Reuther also seeks to compel production of unspecified documents in the possession of Shaun Rafferty. These inquiries have nothing to do with (1) whether Smith engaged in a fraudulent scheme to block Cordes' proposal to alter the ownership structure of SB; (2) whether the mailings of corporate certificates to the Louisiana Secretary of State amount to a pattern of racketeering activity; or (3) whether Reuther (or any other investor) relied on the alleged misstatement included in the two investment packages. At any rate, Rule 56(f) does not require the Court to surmise what facts these discovery requests might reveal. Rather, it is incumbent on the party seeking a continuance to explain how the additional discovery is likely to create an issue of material fact. FMC Corporation, 170 F.3d at 534. Reuther's failure to provide such an explanation prevents this Court from granting the relief sought.
VI. Supplemental Jurisdiction
Having granted defendants' motions for summary judgment on plaintiff's RICO and federal securities law claims, the Court notes that all of the claims that remain in this lawsuit are state law claims over which the Court does not have original jurisdiction. District courts may decline to exercise supplemental jurisdiction over a state law claim if the district court has dismissed all claims over which it has original jurisdiction. 28 U.S.C. § 1367 (c)(3). The general rule is that district courts should decline jurisdiction over state law claims when all federal claims are dismissed. Smith v. Amedisys Inc., 298 F.3d 434, 447 (5th Cir. 2002). The rule, however, "is neither mandatory nor absolute." Id. at 447.
The Court has yet to address the merits of Reuther's numerous state law claims. These claims lie at the heart of Reuther's complaint. Further, certain issues of state law, including breach of fiduciary duties and legal malpractice, may well be either novel or complex. To be sure, some factors support the exercise of supplemental jurisdiction: the lawsuit has been pending for over one year and the parties have already conducted extensive discovery. On balance, however, the Court finds that the rule counseling against the exercise of supplemental jurisdiction applies in this situation. The Court therefore dismisses plaintiff's state law claims without prejudice.
VII. Conclusion
For the foregoing reasons, the Court GRANTS defendant James Smith Jr.'s motion for summary judgment on plaintiff's RICO claims. The Court also GRANTS defendants Smith and Smith Martin's motion for summary judgment on plaintiff's federal securities law claims. The Court dismisses plaintiff's remaining state law claims without prejudice.