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Case 0:11-cv-61688-JIC Document 80 Entered on FLSD Docket 05/08/12 10:43:38 Page 1 of 14 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF FLORIDA Case No. 11-61688-CIV-COHN/SNOW AMY ADAMS, et al., Plaintiffs, v. SCOTT W. ROTHSTEIN, TD BANK, N.A., and GIBRALTAR PRIVATE BANK AND TRUST COMPANY, Defendants. ___________________________/ ORDER OF DISMISSAL THIS CAUSE is before the Court upon Defendant TD Bank, N.A.’s (“TD Bank’s”) Motion to Dismiss [DE 34] and Defendant Gibraltar Private Bank and Trust Company’s (“Gibraltar’s”) Motion to Dismiss [DE 35]. The Court has considered the Banks’ Motions, Plaintiffs’ Consolidated Response [DE 52] (“Response”), TD Bank’s Reply [DE 58], Gibraltar’s Reply [DE 59], the related filings, the record in this case, and is otherwise fully advised in the premises. I. BACKGROUND On July 28, 2011, 62 Plaintiffs filed this action against Defendants Scott W. Rothstein, TD Bank, and Gibraltar. See Complaint [DE 1]. In the [Corrected] First Amended Complaint [DE 12], Plaintiffs recount that Defendant Rothstein is currently serving a 50-year sentence in federal prison after pleading guilty to five felony charges relating to one of the largest fraudulent schemes in history. Corr. First Am. Compl. ¶ 2. Plaintiffs allege that the Banks “played critical roles in selling and facilitating Rothstein’s Case 0:11-cv-61688-JIC Document 80 Entered on FLSD Docket 05/08/12 10:43:38 Page 2 of 14 structured settlement scheme to unwitting investors.” Id. Plaintiffs describe Mr. Rothstein’s Ponzi scheme as follows: The Rothstein fraud centered on the sale of so-called “confidential structured settlements.” In sum, Rothstein solicited investors to purchase interests in litigation settlements that were reached with putative defendants based upon claims of sexual harassment and/or whistle-blower actions. Each of the litigation settlements were purportedly to be paid over a period of time. Rothstein represented to his victims that because these “plaintiffs” were willing to accept a 20-40% discount in exchange for an immediate pay-out, the settlements could be purchased at a discounted value, resulting in a fixed and high yielding rate of return . The investor funded the up-front payment, and in return, was paid back with the pre-funded settlement over time (minus Rothstein’s fees and costs), generating a healthy “guaranteed” return. To induce the investment, investors or their representatives were given executed settlement agreements (with the parties’ names redacted), “lock letters” from TD Bank showing that the putative defendant had already funded the entire settlement amount, and audited financial statements of the investment vehicles. Corr. First Am. Compl. ¶¶ 77-79; Civil RICO Statement [DE 10] at 14 ¶(f)(2). Plaintiffs contend that they were induced to invest in the Ponzi scheme by an Offering Memorandum and unspecified related documents to purchase interests in two Delaware limited partnerships, Banyon Income Fund, LP and Banyon Income Fund II, LP (“the Banyon Funds”). Corr. First Am. Compl. ¶¶ 80-83; Civil RICO Statement at 14 ¶(f)(2). The Offering Memorandum explained to investors that the Banyon Funds into which each limited partner would invest would pool investors’ funds to buy, at a discount, unidentified “Purchased Settlements” from litigants whose full settlement amount had been deposited into an account at an unidentified bank. Corr. First Am. Compl. ¶ 83. The Banyon Funds would then be assigned a right to receive the full payments. Id. Investors were told that they could expect a 30% return on their 2 Case 0:11-cv-61688-JIC Document 80 Entered on FLSD Docket 05/08/12 10:43:38 Page 3 of 14 investments. Id. However, “Unbeknownst to Plaintiffs, the investment was nothing more than a Ponzi scheme. The so-called settlements were bogus, the funds were not ‘locked’ in trust accounts, and the so-called ‘guaranteed returns’ were illusory. Instead, investor funds were moved between the Defendant Banks in an effort to cover redemptions before the scheme collapsed.” Id. ¶ 85; Civil RICO Statement at 15 ¶ (f)(2). In this action, Plaintiffs assert the following seven counts against Defendants: violation of the Federal Racketeer Influenced and Corrupt Organization Act (“RICO”), 18 U.S.C. § 1961 et seq.(Count I); conspiracy to violate the Federal RICO Act (Count II); fraud (by Plaintiff White Oak Global Advisors, LLC against Defendant TD Bank only) (Count III); aiding and abetting conversion (Count IV); aiding and abetting fraud (Count V); aiding and abetting breach of fiduciary duty (VI); and unjust enrichment (Count VII). In their Motions to Dismiss, the Banks seek dismissal of the entire [Corrected] First Amended Complaint. Plaintiffs oppose dismissal. II. LEGAL STANDARD Under Rule 12(b)(6), a motion to dismiss lies for “failure to state a claim upon which relief can be granted.” Fed. R. Civ. P. 12(b)(6). In order to state a claim, Federal Rule of Civil Procedure 8(a)(2) requires “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). “While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff’s obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief’ requires more than labels and conclusions, and a formulaic recitation of the elements of 3 Case 0:11-cv-61688-JIC Document 80 Entered on FLSD Docket 05/08/12 10:43:38 Page 4 of 14 a cause of action will not do.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 545 (2007) (citations omitted). “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 570). At this stage in the litigation, the Court must consider the factual allegations in the Complaint as true, and accept all reasonable inferences therefrom. Jackson v. Okaloosa Cnty., Fla., 21 F.3d 1531, 1534 (11th Cir. 1994). Nevertheless, the Court may grant a motion to dismiss when, “on the basis of a dispositive issue of law, no construction of the factual allegations will support the cause of action.” Marshall Cnty. Bd. of Educ. v. Marshall Cnty. Gas Dist., 992 F.2d 1171, 1174 (11th Cir. 1993). III. ANALYSIS The Banks seek dismissal on a number of grounds. First, both Banks argue that the Private Securities Litigation Reform Act (“PSLRA”), 18 U.S.C. § 1964, bars the RICO claims and that the Court should decline to exercise jurisdiction over the remaining state law claims. Second, the Banks contend that Plaintiffs have no derivative standing because (1) any litigation on behalf of Banyon Income Fund, LP must be stayed due to its involuntary bankruptcy, and (2) Plaintiffs fail to satisfy Rule 23.1. Third, Gibraltar argues that the Banyon Funds should be “realigned” as a Defendant instead of a Plaintiff. Fourth, Gibraltar contends that Plaintiffs do not have standing to assert their RICO claims. Finally, Gibraltar claims that Plaintiffs have failed to state a claim with respect to Counts I, II, and IV-VII, and TD Bank claims that Plaintiffs have failed to state a claim with respect to each count of the [Corrected] First Amended Complaint. 4 Case 0:11-cv-61688-JIC Document 80 Entered on FLSD Docket 05/08/12 10:43:38 Page 5 of 14 As discussed below, the Court agrees with the Banks that the PSLRA bars the RICO claims as a matter of law. Therefore, the Court will dismiss the RICO claims with prejudice. The Court will also decline to exercise jurisdiction over the state law claims and dismiss those claims without prejudice. As such, the Court does not reach the remaining arguments for dismissal. A. The PSLRA Bars Plaintiffs’ RICO Claims In Counts I and II, Plaintiffs allege violation of the RICO Act and conspiracy to violate the RICO Act. The RICO Act provides civil and criminal penalties for persons engaged in a “pattern of racketeering activity.” 18 U.S.C. § 1962. Specifically, the Act states, “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). “To establish a federal civil RICO violation under § 1962(c), the plaintiffs must satisfy four elements of proof: (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity.” Edwards v. Prime, Inc., 602 F.3d 1276, 1291-92 (11th Cir. 2010) (quotations and citations omitted). A “pattern of racketeering activity” “requires at least two acts of racketeering activity.” 18 U.S.C. § 1961(5); Edwards, 602 F.3d at 1292. “An act of racketeering is commonly referred to as a ‘predicate act.’” Edwards, 602 F.3d at 1292. The RICO Act includes a long list of criminal offenses that constitute “racketeering activity” or predicate acts. See 18 U.S.C. § 1961(1). In 1995, Congress amended the RICO Act by enacting the Private Securities 5 Case 0:11-cv-61688-JIC Document 80 Entered on FLSD Docket 05/08/12 10:43:38 Page 6 of 14 Litigation Reform Act (“PSLRA”), 18 U.S.C. § 1964. In doing so, Congress effectively “narrow[ed] the type of conduct that can qualify as a predicate act under RICO.” Eagletech Commc’ns Inc. v. Citigroup, Inc., No. 07-60668-CIV, 2008 WL 3166533, at *9 (S.D.