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Second Circuit Affirms RICO Dismissal

Cruz v. FX DirectDealer, LLC, 720 F.3d 115 (2d Cir. 2013)

Issue:  Is a corporate RICO defendant distinct from a RICO enterprise consisting of itself, its parent, and corporate officers who acted within their scope of employment, in perpetuating a fraud?

Answer: The Second Circuit reaffirms the principles of Riverwoods and Discon in finding that a corporate defendant is not distinct from an enterprise consisting of itself, its officers, or its parent. As a result, there was not a valid claim under RICO sections 1962(c) or (d), and the court affirmed the district court’s dismissal of the RICO complaint.


In Cruz v. FX DirectDealer, LLC, 720 F.3d 115 (2d Cir. 2013), the Second Circuit affirmed the dismissal of a RICO complaint finding that a corporate defendant was not sufficiently distinct from the proposed enterprise. In Cruz, the amended complaint alleged that the RICO defendant (FXDD) was a RICO “person” that conducted the deceptive practices of an association of individuals and entities dubbed the “FXDD Fraud Enterprise” consisting of FXDD itself; Tradition (FXDD’s parent company); FXDD’s chief operating officer; FXDD’s managing director and corporate counsel; and some unrelated software companies that developed and sold FXDD’s software. (The court found that these non-FXDD entities did not share a common purpose and were properly excluded from the RICO enterprise.Id., at 121.)

It is well established in all circuits that under § 1962(c) and (d), the alleged RICO ‘person’ and RICO ‘enterprise’ must be distinct.” See, e.g., DeFalco v. Bernas, 244 F.3d 286, 307 (2d Cir. 2001). There is rarely a “distinctness” issue when an individual is the RICO defendant and the enterprise is a corporate entity. Cedric Kushner Promotions, Ltd. v. King (Kushner), 533 U.S. 158, 161 (2001) made it clear “that the corporate owner/employee, a natural person, is distinct from the corporation itself, a legally different entity with different rights and responsibilities due to its different legal status.” And we can find nothing in the statute that requires more “separateness” than that.” Cf. McCullough v. Suter, 757 F.2d 142, 144 (7th Cir. 1985) finding either formal or practical separateness sufficient to be distinct under 1962c)).” Id. 163.

But, complex issues exist when a corporate entity is named as the RICO defendant. Kushner in its holding specifically distinguished earlier Second Circuit precedent where the RICO defendant is a corporation; the court stated, “[W]e do not here consider the merits of these cases, and note only their distinction from the instant case.” Id. 164.

One case Kushner distinguished was the seminal case of Riverwoods Chappaqua Corp v. Marine Midland Bank, 30 F.3d 339 (2d Cir. 1994). In Riverwoods, the Second Circuit affirmed the dismissal of a RICO action finding inadequate distinctness between the defendant (Marine Midland Bank) and the enterprise (the Restructuring Group), who were a group of individuals employed by the bank who undertook loan restructurings on behalf of the bank. The Riverwoods court explained that the distinctiveness requirement may not be circumvented “by alleging a RICO enterprise that consists merely of a corporate defendant associated with its own employees or agents carrying on the regular affairs of the defendant… .” Id. at 344 (emphasis added).

The court in Cruz addressed the distinctness principles with regard to members of the alleged enterprise—FXDD, Tradition, corporate counsel, and the chief operating officer. The court found that the corporate defendant (FDXX) was not distinct from the individual officers, stating — based on Riverwoods, supra — that it had long since rejected the idea that a RICO enterprise may consist “merely of a corporate defendant associated with its own employees or agents carrying on the regular affairs of the defendant.” Id. 121. The court added that the requirement of distinctness cannot be evaded by alleging that a corporation has violated the statute by conducting an enterprise that consists of itself plus all or some of its officers or employees.

Lastly, addressing Tradition (the parent company), and FXDD itself, the court in Cruz held that corporations that are legally separate but “operate within a unified corporate structure” and “guided by a single corporate consciousness” cannot be both the “enterprise” and the “person” under section 1962(c). Discon Inc. v. NYNEX Corp., 93 F.3d 1055, 1064 (2d Cir. 1996). FXDD and Tradition were alleged to operate as part of a single, unified corporate structure and, as such, were not sufficiently distinct to demonstrate the existence of a RICO enterprise.” Accordingly, the court concluded that the District Court did not err when it concluded that Cruz’s amended complaint failed to allege a RICO enterprise distinct from FXDD. Id. 121.