Robert L. Moore and Jeannette S. Parry v. Painewebber, Inc.

189 F.3d 165, 1999 U.S. App. LEXIS 20180

• Court: Court of Appeals for the Second Circuit
• Decided: August 20, 1999
• Docket: 1998
• Status: Published

Opinions

CALABRESI, Circuit Judge:

The plaintiffs, Robert L. Moore and Jeannette S. Parry, claim that PaineWebber, Inc., the defendant, disguised a life insurance policy as an investment package similar to an Individual Retirement Account (“IRA”), thereby tricking them into buying life insurance with funds that they would otherwise have used for IRAs or similar investments. Moore and Parry brought suit under the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. § 1961 et seq., and for common-law fraud. The United States District Court for the Southern District of New York (Keenan, J.) dismissed the complaint pursuant to Fed.R.Civ.P. 12(b)(6). According to the district court, the plaintiffs had met two of the RICO statute’s requirements by alleging that Paine-Webber engaged in material misrepresentations and that those misrepresentations caused the plaintiffs to purchase the “investment package” at issue. To state a claim under RICO, however, a plaintiff must also allege that the defendant’s unlawful acts were in a legal sense the cause of the plaintiffs economic loss. See, e.g., First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763, 769 (2d Cir.1994). The district court held that Moore and Parry had failed to allege such “loss causation,” and it therefore dismissed the complaint. We conclude that, if proved, the claims in the plaintiffs’ complaint would show loss causation as required under RICO. We therefore vacate the judgment of the district court.

BACKGROUND

PaineWebber is a financial services company that offers a variety of investment and insurance opportunities to its clients. According to the complaint, changes in the federal tax code in the late 1980s prompted many investors to reduce the amount of money they put into IRAs, thus making the IRA business less lucrative for Paine-Webber. At the same time (the plaintiffs claim), PaineWebber was searching for new ways to persuade people to buy life insurance. In order to recapture its lost IRA investment stream and to boost life insurance sales, PaineWebber allegedly decided to market a universal life insurance policy — the “Provider” — as if it were an IRA or an IRA substitute.

The plaintiffs assert that PaineWebber used a variety of deceptive techniques in its attempt to present the Provider as a kind of IRA. For example, PaineWebber is said to have advertised the Provider as a retirement savings plan offering “cash accumulation,” competitive interest rates, and tax-advantaged status. The size of the investment that clients were told to make in their Provider accounts — $2000 each year — was allegedly chosen because $2000 is both the maximum and the typical amount that people contribute annually to IRAs. The complaint further charges that PaineWebber, in its marketing for the Provider, deliberately avoided insurance-associated terms like “premium” and instead used inappropriate words like “contribution” or “deposit.” Finally, according to the plaintiffs, PaineWebber’s internal training materials explicitly acknowledged that the targeted customer basé could be easily persuaded to invest large amounts of money in the Provider, so long as the customers did not think of the Provider as a life insurance policy.

PaineWebber did tell its clients that purchasers of the Provider would get life insurance coverage. The plaintiffs claim, however, that this insurance was presented as an added benefit rather than the investment itself. In reality, the Provider was a universal life insurance policy and nothing more. It was of course true that, given the nature of universal life insurance, purchasers who put in money could, in the long term, take out cash. But the plaintiffs state that they would not have bought into the Provider if they had realized that all they were buying was a universal life insurance policy.

Moore and Parry are both PaineWebber clients who were sold the Provider package in 1989.¹ They both allege that they were approached by PaineWebber and told that the Provider would be a good replacement for their existing IRAs. Moore contributed $2000 to the Provider in 1989 and each year thereafter through the filing of the complaint in 1997. Parry contributed $2000 in each of 1989,1990,1992, and 1993. Both retain their “investments.” Nevertheless, they assert that had they known what the Provider really was, they would have done other things with their money, such as put it in real IRAs.

After they had “invested” in the Provider, the plaintiffs received account statements in the mail, detailing the full range of the portfolios they held with Paine-Webber. In these statements, Paine-Webber listed the annual Provider “deposits” as part of the plaintiffs’ holdings, along with their stocks, bonds, and so forth, as if the Provider were a cash savings plan. But the moneys paid for the Provider were not held as deposits in an account. They were, instead, used to pay insurance premiums on a universal life insurance policy. As a result, at least for the first several years, the cash value of the Provider was substantially less than the actual dollar amount contributed.

Before Parry bought the Provider, PaineWebber also sent her a chart showing the projected value of her universal life insurance policy.² This chart was labeled at the top, in capital letters, “CAPITAL GAINS (FLEXIBLE PREMIUM ADJUSTABLE BENEFIT LIFE INSURANCE POLICY).” The chart showed that the expected cash value of the insurance policy would be lower than Parry’s cumulative deposits for seven years. Significantly, the chart did not state that the life insurance policy whose value it depicted was coextensive with, as opposed to being a component of, the Provider.

On September 9, 1996, Moore filed suit against PaineWebber in the Southern District of New York (Keenan, J.) on both a RICO and a common-law fraud theory. Judge Keenan dismissed the complaint pursuant to Rule 12(b)(6), finding that Moore had no standing to bring suit under RICO because, inter alia, he had failed to allege “loss causation,” i.e., a sufficient causal relationship between PaineWebber’s deceit and any losses Moore sustained. Judge Keenan did, however, grant Moore leave to replead his complaint.

On October 15, 1997, Moore filed an amended complaint with Parry as co-plaintiff. They set forth the allegations described above. Liability was again premised on RICO and common-law fraud under New York law. The plaintiffs claimed to have suffered damages because they were charged insurance premiums and commissions and because they forewent the (greater) benefits that would have accrued to them had they put their money in IRAs and other retirement savings plans (as they allegedly would have done had they known that the Provider was nothing but life insurance).

PaineWebber moved to dismiss for lack of subject matter jurisdiction under Rule 12(b)(1), for failure to state a claim under Rule 12(b)(6), and for failure to plead fraud with particularity as required by Rule 9(b). On September 24, 1998, the district court granted the motion.³ It explained that, to avoid dismissal, a RICO claim that asserts fraud as the injury-producing predicate act must (a) allege a material misrepresentation, (b) allege that this misrepresentation was a but-for cause of the plaintiffs’ entering into the transactions at issue, (c) allege that the misrepresentation was the proximate cause of the losses the plaintiffs sustained, and (d) allege the fraud with the required particularity. The court found that the claimed attempt to conceal the fact that the Provider was merely universal life insurance was a material misrepresentation and that the plaintiffs had sufficiently asserted “transaction causation.” It held, however, that the plaintiffs had not adequately pled “loss causation.” Accordingly, Judge Keenan deemed it unnecessary to address whether the fraud had been pled with particularity. He declined to permit a further opportunity to amend, saying that the plaintiffs had had two chances and that the reasons they had been unable to plead loss causation were inherent in the facts of the case. Having dismissed the plaintiffs’ federal claims, the district court also dismissed their pendent state law claims.

The plaintiffs now appeal.

DISCUSSION

We review a dismissal granted under Rule 12(b)(6) de novo, with all inferences drawn in favor of the nonmoving party. See Jaghory v. New York State Dep't of Educ., 131 F.3d 326, 329 (2d Cir.1997).

The plaintiffs’ theory of RICO liability is based on predicate acts of mail fraud in violation of 18 U.S.C. § 1341 and wire fraud in violation of 18 U.S.C. § 1343. For RICO liability to exist as a result of a violation of these statutes, the defendant must have made misrepresentations that are material to the harm caused to the victim. See United States v. Frank, 156 F.3d 332, 336 (2d Cir.1998) (per curiam); United States v. Starr, 816 F.2d 94, 98 (2d Cir.1987). The causation requirement, which is jurisdictionally mandated, has two different components. There must be “transaction causation,” meaning that the misrepresentation must have led the plaintiffs to enter into the transactions at issue, and there must be “loss causation,” meaning that the misrepresentation must be both an actual and a proximate source of the loss that the plaintiffs suffered. See First Nationwide Bank, 27 F.3d at 769.

I. Misrepresentation

The central question in this case, therefore, is whether PaineWebber made misrepresentations that caused the plaintiffs to suffer economic loss. Judge Keenan characterized PaineWebber’s disclosures about the nature of the Provider (as described in the complaint) as being “neb ther full nor objective,” and he noted that PaineWebber had deliberately concealed the fact that the Provider was simply a universal life insurance policy. Based on that assessment, he concluded that the plaintiffs had successfully pled misrepresentations by PaineWebber.

But PaineWebber’s deceit did not, in the district court’s view, mislead as to the actual economics of the package it was selling. On the contrary, Judge Keenan wrote, “PaineWebber fully and accurately disclosed the economic aspects of the Provider” to the plaintiffs, primarily in the chart that showed the projected value of the life insurance sold. If the economics of the Provider were disclosed to the plaintiffs, then PaineWebber did not misrepresent the value of the Provider. And if PaineWebber did not mislead as to the Provider’s value, then even if it misled in other ways about the Provider, Paine-Webber cannot be held legally responsible for any loss that Moore and Parry suffered.

The district court identified this conclusion as a finding on the issue of loss causation, but the foregoing analysis does not really involve causation at all. It is, instead, about whether the plaintiffs have sufficiently pled that PaineWebber’s misrepresentations concerned the economic value of the transaction. The contention that Moore and Parry state no claim because they had been told the value of the Provider when they bought it is, therefore, best considered under the rubric of whether or not PaineWebber engaged in a material misrepresentation, and not under that of loss causation.

A misrepresentation is material to a fraud claim only if it is the type of misrepresentation likely to be deemed significant to a reasonable person considering whether to enter into the transaction. See TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976). The falsehoods that Paine-Webber is said to have told about the Provider would not have been material, for RICO purposes, unless they conveyed misstatements of the Provider’s economic value. And, absent material misrepresentations, the complaint would have to be dismissed. If, therefore, we agreed that PaineWebber had not misled Moore and Parry with regard to the actual economics of the Provider, we would affirm the judgment below, albeit not for the doctrinal reason that the district court gave. Our decision would rest not on the plaintiffs’ inability to plead loss causation but rather on their failure to identify material misrepresentations.

As it happens, however, we believe that the alleged deceptions are such that the plaintiffs may be able to prove that Paine-Webber misdescribed the economic value of the bargain. The characterization of the Provider as a “savings” plan featuring “cash accumulation” implied that the money “deposited” would be a floor from which the value of a Provider fund would grow. This impression was reinforced by periodic statements mailed to the plaintiffs in which the plaintiffs’ aggregate annual “deposits” were allegedly shown as a portfolio holding analogous to stocks or cash accounts. But the money was not actually accumulating in the manner indicated. Some of it was lost as insurance premiums and hence was recoverable only if the plaintiffs died prematurely. As a result, for the first several years, the amount of money that the plaintiffs could have withdrawn had they failed to continue to “invest” in the plan and sought to remove their “deposits” — in other words, had they cashed out — was less than the total of their previous deposits. Assuming, as alleged, that the defendant attempted to disguise the Provider as a retirement savings plan like an IRA, the plaintiffs might, instead, have reasonably believed that the value of their accounts would — as in an IRA — always have been at least as great as the sum of their annual $2000 contributions.⁴ Accordingly, given that the value of the Provider was actually less than that amount for several years, there would seem to have been material misrepresentations as to the value of the transaction.

In support of its claim that it accurately communicated to the plaintiffs the economic parameters of the Provider, Paine-Webber points to the chart, furnished to Parry, that showed the projected year-by-year value of the Provider.⁵ The chart does show that, for several years, the cash value of the Provider was expected to be smaller than the amount contributed and that only later would it become substantially larger than that. PaineWebber argues, and the district court held, that Parry’s receipt of this chart bars her claim.

The record contains no indication that the chart was sent to Moore as well as to Parry. Therefore, even if the chart has the significance that PaineWebber contends, it would serve to block only Parry’s complaint and not Moore’s. But it is for a broader reason that we reject Paine-Webber’s argument on this point. The table in question is clearly labeled as a chart about life insurance. In capital letters at the top of the page, the document announces that the data it contains pertain to a “flexible premium adjustable benefit life insurance policy” offered by the First Capital Life Insurance Company. According to the amended complaint, the plaintiffs believed that they were investing in an IRA-like savings vehicle and getting some life insurance thrown in as a bonus. As a result, when Parry received a chart showing the value of her life insurance, she may have assumed that the document stated less than the entirety of her Provider account. She had, after all, allegedly been led to believe that the Provider was more than just a life insurance policy.

We must not, at this stage of the proceedings, speculate as to the likelihood that Parry will be able to demonstrate that she reasonably misunderstood the chart’s significance. On a motion to dismiss under 12(b)(6), the fact that she may be able to make the necessary showing about the chart is enough to require us treat the misrepresentation as material and, hence, to bar dismissal.

II. Causation

Having concluded that Moore and Parry did adequately plead a material misrepresentation, we turn to the issues of causation. As noted earlier, the plaintiffs must allege that PaineWebber’s misrepresentations both caused them to invest in the Provider (“transaction causation”) and caused them economic loss (“loss causation”). To show transaction causation, the plaintiffs must demonstrate that but for the defendant’s wrongful acts, the plaintiffs would not have entered into the transactions that resulted in their losses. See First Nationwide Bank, 27 F.3d at 769. To show loss causation, the plaintiffs must show that the defendants’ misstatements or omissions were “the reason the transaction[s] turned out to be ... losing one[s].” Id.

In the instant case, the plaintiffs’ complaint adequately pleads all the forms of loss causation, as required by the RICO statute.

Moore and Parry clearly allege that PaineWebber’s misrepresentations were made for the purpose of inducing them to buy the Provider and that they would not have invested any money in the Provider but for those representations. The requirement to show transaction causation is thus satisfied.

The plaintiffs have also pled loss causation. That losses were pleaded cannot be doubted.⁶ These include the funds that were deducted from the accounts as insurance premiums and also the foregone returns of the alternative IRA or other retirement savings plan in which, but for PaineWebber’s misrepresentations, the plaintiffs claim they would have placed the money that they put into the Provider. The cash value of such an IRA or other retirement savings plan would, at all relevant times, have been higher than the cash value of the Provider. Such losses are sufficient to confer RICO standing. See Terminate Control Corp. v. Horowitz, 28 F.3d 1335, 1343 (2d Cir.1994) (holding that the value of business opportunities lost due to RICO predicate acts is compensable under RICO); Standardbred Owners Ass’n v. Roosevelt Raceway Assocs., 985 F.2d 102, 104-05 (2d Cir.1993) (holding that expenses incurred in reliance on fraudulent representations confer RICO standing).

Moreover, on the pleadings, these losses were sufficiently linked and proximate to the misrepresentations to satisfy RICO’s requirement of loss causation. There is no indication, on the current state of the record, that—as a result of unlikely, extraneous, or intervening causes—the Provider performed more poorly than one would have thought when the plaintiffs purchased the Provider. Indeed, PaineWebber’s defense rests in part on the claim that the plaintiffs received what they knew, or should have known, they were buying. On the pleadings, the plaintiffs losses from investing in the Provider (rather than doing something else with the money) were manifestly foreseeable to the defendants at the time of the transaction. See Citibank, N.A. v. K-H Corp., 968 F.2d 1489, 1495 (2d Cir.1992) (stating, in the context of securities fraud, that the element of loss causation requires the plaintiff to prove “that the damage suffered was a foreseeable consequence of the misrepresentation.”).

All this fulfills Moore and Parry’s need to demonstrate RICO’s causation requirements. See Abrahams v. Young & Rubicam, Inc., 79 F.3d 234, 237-38 n. 3 (2d Cir.1996). We conclude that plaintiffs’ case arises out of a harm that is within the contemplation of the statute under which they have sued, and does so proximately.

Ill. Pleading fraud with particularity

Federal Rule of Civil Procedure 9(b) states that in averments of fraud, “the circumstances constituting fraud ... shall be stated with particularity.” This provision applies to RICO claims for which fraud is the predicate illegal act. See S.Q.K.F.C., Inc., v. Bell Atlantic Tricon Leasing Corp., 84 F.3d 629, 634 (2d Cir.1996). The district court did not reach the question of whether the plaintiffs conformed to this requirement.

In the RICO context, Rule 9(b) calls for the complaint to “specify the statements it claims were false or misleading, give particulars as to the respect in which plaintiffs contend the statements were fraudulent, state when and where the statements were made, and identify those responsible for the statements.” McLaughlin v. Anderson, 962 F.2d 187, 191 (2d Cir.1992) (quoting Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir.1989)). The plaintiffs must also “identify the purpose of the mailing within the defendant’s fraudulent scheme.” McLaughlin, 962 F,2d at 191. In addition, the plaintiffs must “allege facts that give rise to a strong inference of fraudulent intent.” San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 812 (2d Cir.1996).

We believe that Moore and Parry have met these requirements. Their complaint states that the Provider was sold as a “savings plan” and that PaineWebber, through the use of deceptive account statements, further induced the plaintiffs to believe that their “deposits” were accumulating in the manner of an IRA. They specifically allege that PaineWebber said it was selling an investment that “included” life insurance rather than one that was life insurance and no more. The complaint also contains a chart listing twelve different mailings said to contain fraudulent representations, along with the dates of these mailings and cross-references to the paragraphs of the complaint in which the mailings are further discussed. The persons responsible for the allegedly fraudulent statements are identified, and the chart lists dates and specific documents. Moreover, the plaintiffs’ detailed claim that PaineWebber had a general plan to trick IRA customers into buying life insurance satisfies their obligations to allege facts that suggest fraudulent intent by the defendant and to explain the role of the identified statements within the alleged fraudulent scheme. We hold, therefore, that Moore and Parry’s complaint sets forth its claim of fraud with sufficient particularity to meet the requirements of Rule 9(b).

CONCLUSION

The judgment of the district court is vacated, and the case is remanded to that court for further proceedings consistent with this opinion.

1 . They propose to sue PaineWebber on behalf of themselves and all persons similarly situated, but no class has to date been certified.

2 . The record does not indicate whether such a chart was also sent to Moore.

3 . Because loss causation is an element of standing to sue under the RICO statute, the appropriate ground of dismissal for failure to plead loss causation would seem to be the lack of subject matter jurisdiction rather than the plaintiffs' failure to state a claim. Cf. Steel Co. v. Citizens for a Better Environment, 523 U.S. 83, 88-89, 118 S.Ct. 1003, 140 L.Ed.2d 210 (1998) (contrasting standing, which implicates a federal court’s subject-matter jurisdiction, with failure to state a cognizable claim, which is almost never jurisdictional). Dismissal would then be pursuant to Rule 12(b)(1) rather than 12(b)(6). The district court, however, dismissed the complaint under 12(b)(6). In some similar cases, this court has treated dismissals for failure to allege RICO standing as if they were pursuant to 12(b)(6) when the district court below so classified them. See, e.g., Burdick v. American Express Co., 865 F.2d 527, 528 (2d Cir.1989) (per curiam). The distinction makes no difference in the present case, because the standards for reviewing dismissals granted under 12(b)(1) and 12(b)(6) are identical. See Jaghory v. New York State Dep’t of Educ., 131 F.3d 326, 329 (2d Cir.1997) (setting forth both standards of review). Accordingly, in keeping with the usage of the district court, we will speak of the dismissal as one under 12(b)(6).

4 . Early withdrawals from IRAs may involve penalty payments, meaning that an investor, who cashes out an IRA in the first several years after investing, would be likely to recover less than 100% of the funds that, on paper, were in the account. Nevertheless, the failure to recover 100% of deposits plus accumulated interest, as this hypothetical IRA investor would, is different from failure to recover even the base amount deposited. And for the first seven years of its existence, the projected cash value of the Provider was actually less than the absolute dollar value deposited.

5 . The chart in question was not included in the complaint, and the plaintiffs claim that it was therefore not properly before the district court at the time of the motion to dismiss. The chart was, however, referenced by name and excerpted in the complaint, and the defendant attached the entire document to its memorandum in support of dismissal. The district court concluded that the plaintiffs' reference to the chart made the whole document fair game. We hold that the chart does not justify dismissing the plaintiffs' complaint, and we accordingly need not decide whether it was properly before the district court on the motion to dismiss.

6 . This does not mean that issues as to the extent or even existence of damages may not arise as the litigation proceeds. Thus, if one of the plaintiffs were to die before the present suit concludes, the consequent payment under the Provider might preclude any claim that the plaintiff’s economic position was worse for having bought the life insurance at issue.