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IN RE IKON OFFICE SOLUTIONS

March 1, 2000

IN RE IKON OFFICE SOLUTIONS, INC. SECURITIES LITIGATION. WHETMAN
V.
IKON.



The opinion of the court was delivered by: Katz, Senior District Judge.

MEMORANDUM & ORDER

This case was originally filed in the District of Utah as Whetman v. Ikon Office Solutions, Inc., et al., but was transferred to this court by order of the Judicial Panel on Multi-District Litigation. See JPMDL Order of December 2, 1999. Now before the court is the defendants' motion to dismiss the seventh and eighth causes of action in the Second Amended and Supplemental Complaint, which allege, respectively, violations of the Racketeer Influenced and Corrupt Organizations Act and breach of fiduciary duty under the Employee Retirement Income Security Act of 1984.*fn1

I. Background

Although the court will discuss the allegations in more detail as appropriate, the gist of plaintiff Julia Whetman's complaint is that her former employer, Ikon Office Solutions,*fn2 and some of its employees and officers systematically engaged in improper accounting, leasing, and billing procedures in order to inflate Ikon stock artificially and to permit certain individuals to receive large bonuses. Whetman claims that she became aware of these irregularities in the course of her employment with Ikon and was demoted and ultimately constructively terminated because of her efforts to bring these improprieties to the attention of Ikon's headquarters and other authorities.

As is most relevant to the present motion to dismiss, two of the complaint's eight counts allege violations of RICO and ERISA. The RICO count claims that eight named individuals and Ikon itself conspired to commit mail fraud, wire fraud, and the interstate transportation of money and property obtained through fraud or theft. Whetman alleges that she was demoted and fired to further this conspiracy. The eighth count alleges that Ikon itself and eight "individual fiduciaries" breached their fiduciary duties under ERISA in a variety of ways, including failing to inform participants of the company's troubled finances and permitting the investment of the employer's matching contribution to remain solely in Ikon securities.*fn3

II. Choice of Law

Because this matter will likely arise again in the course of this litigation, some comments on the applicable law are in order. This court will follow the holding of In re Korean Air Lines Disaster, 829 F.2d 1171 (D.C.Cir. 1987), and apply Third Circuit law as binding precedent, although it will give "close consideration" to the law of the Tenth Circuit, the transferor circuit, as appropriate. Id. at 1176. This court agrees that "[a]pplying divergent interpretations of the governing federal law to plaintiffs, depending solely upon where they initially filed suit, would surely reduce the efficiencies achievable through consolidated preparatory proceedings." Id. at 1175.*fn4

III. RICO*fn5

Defendants argue that the court must dismiss count seven, alleging RICO violations. First, defendants argue that the Private Securities Litigation Reform Act (PSLRA) bars Whetman's RICO claim because she alleges predicate acts that are actionable as securities fraud. Second, defendants argue that the RICO claims are not pleaded with the particularity required by Federal Rule of Civil Procedure 9(b). Finally, defendants argue that termination in retaliation for whistle-blowing cannot serve as a cognizable injury under RICO, although, acknowledging that the Supreme Court has granted certiorari on this issue, defendants suggest that the court defer ruling on this and related issues.

Following amendment by the PSLRA in 1995, the RICO statute reads as follows:

Any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefor in any appropriate United States district court and shall recover threefold the damages he sustains . . ., except that no person may rely upon any conduct that would have been actionable as fraud in the purchase or sale of securities to establish a violation of section 1962.

18 U.S.C. § 1964(c); see also Bald Eagle Area Sch. Dist. v. Keystone Fin., 189 F.3d 321, 327 (3d Cir. 1999) (describing circumstances of revision). To have standing to pursue a claim under section 1964(c), "a plaintiff must first demonstrate that the defendant committed a violation of one or more subsections of section 1962, and second, that the violation was a substantial cause of the injury to his business or property." Rehkop v. Berwick Healthcare Corp., 95 F.3d 285, 288 (3d Cir. 1996).

In this case, plaintiff alleges that she was injured by defendants' violation of 18 U.S.C. § 1962(d), which states, "It shall be unlawful for any person to conspire to violate any of the provisions of subsection (a), (b), or (c) of this section." Id. "To plead conspiracy adequately, a plaintiff must set forth allegations that address the period of the conspiracy, the object of the conspiracy, and the certain actions of the alleged conspirators taken to achieve that purpose. . . . Additional elements include agreement to commit predicate acts and knowledge that the acts were part of a pattern of racketeering activity." Shearin v. E.F. Hutton Group, Inc., 885 F.2d 1162, 1166-67 (3d Cir. 1989). The complaint, accordingly, includes allegations that the defendants conspired to violate or violated 18 U.S.C. § 1962(a), (b), and (c). See 2d Am. & Supp.Compl. ¶¶ 174-76. As to the section 1962(d) conspiracy, plaintiff claims that she was injured by being demoted and fired because of her efforts to halt the improprieties at Ikon, which, as described in more detail subsequently, are pled as predicate acts.

The court will look at defendant's argument pertaining to injury first, as it provides necessary context for the subsequent dispositive arguments. In its initial motion to dismiss, the defendants argued that an injury does not confer standing under 18 U.S.C. § 1962(d) unless it comes from the underlying substantive RICO violations. Because termination and demotion are not included as racketeering acts, most other circuits hold that such claims cannot serve as a cognizable injury under 18 U.S.C. § 1962(d). See Rehkop, 95 F.3d at 290 & n. 6 (acknowledging majority position). The Third Circuit is in the minority of circuits that have held to the contrary. See Shearin, 885 F.2d at 1162 (An "allegation that [plaintiff] was fired in furtherance of a conspiracy in violation of 18 U.S.C. § 1962(d) states a claim for relief under section 1964(c)"); see also Rehkop, 95 F.3d at 285 (reiterating this holding). Thus, under Third Circuit law, the fact that the only injuries alleged are demotion and firing would not require dismissal.*fn6

The more difficult question is whether plaintiff's RICO claims are barred by the PSLRA amendments previously described. The predicate acts alleged in the complaint are various acts of mail fraud, wire fraud, and interstate transportation of money or property obtained by theft or fraud. See 2d Am. & Supp.Compl. ¶¶ 167-71. The defendants argue that these acts are actionable as securities fraud, notwithstanding their designation here as other causes of action. They stress that the same allegations described as predicate acts in Whetman's complaint form the basis of the securities fraud complaint in Pennsylvania and that the parties have actually cross-referenced each others' allegations. See Pa.2d Am.Compl. ¶¶ 48-49 (referring to Whetman's allegations); Whetman 2d Am. & Supp.Compl. ¶¶ 189-90 (incorporating securities allegations in Pennsylvania case into her ERISA count). They also note that, at least in the ERISA count, Whetman acknowledges that the purported fraud inflated the price of the Ikon stock used as "currency" in acquiring other businesses. See 2d Am. & Supp. Compl. ¶ 190.

In response, plaintiff argues that even if one result of the accounting improprieties constituting the predicate acts was inflation of stock prices, her complaint alleges primarily that the alleged frauds were undertaken to permit certain individuals to receive large bonuses. See 2d Am. & Supp.Compl. ¶¶ 32-38. Plaintiff also points out that she was fired, allegedly in retaliation for her whistleblowing activities, long before the charge to earnings taken in August 1998 precipitated the securities fraud action.

The court finds that under the Third Circuit's decision in Bald Eagle, 189 F.3d at 321, the actions alleged in support of the RICO count are actionable as securities fraud and therefore cannot constitute proper predicate acts necessary to sustain a claim under 18 U.S.C. § 1962(d). See id. at 327 (noting that the PSLRA has eliminated conduct actionable as securities fraud "as a predicate act for a private cause of action under RICO"); Mathews v. Kidder, Peabody & Co., Inc., 161 F.3d 156, 157 (3d Cir. 1998) (stating that the PSLRA removes securities fraud as a predicate act). The plaintiffs in Bald Eagle alleged that they were directly harmed by an elaborate Ponzi scheme that had already been the subject of SEC action. The district court dismissed the complaint based on the PSLRA. On appeal, the plaintiffs claimed that various actions taken in the course of the securities fraud were not, themselves, actionable as securities fraud and thus could be pled as RICO predicate acts without running afoul of the PSLRA. See Bald Eagle, 189 F.3d at 329.*fn7 The Third Circuit rejected this argument:

The School Districts' position ignores two significant and intertwined facts. First, as noted earlier, the RICO Amendment removed securities fraud as a predicate offense in a civil RICO action. Section 10(b) of the Securities Exchange Act of 1934 . . . and SEC Rule 10b-5 . . . are directed at fraud "in connection with the purchase or sale" of securities. The School Districts' position ignores the reality that the same set of facts can support convictions for mail fraud, wire fraud, bank fraud and securities fraud without giving rise to any multiplicity problems. . . . Consequently, a plaintiff cannot avoid the RICO Amendments' bar by pleading mail fraud, wire fraud and bank fraud as predicate offenses in a civil RICO action if the conduct giving rise to those predicate offenses amounts to securities fraud.

Id. at 329-30.

Similarly, in the present case, the predicate acts alleged by plaintiff were undeniably undertaken in connection with the alleged securities fraud. The court cannot accept plaintiff's implicit contention that because the securities aspects of this case are pled in a separate ERISA count, the bases for which were discovered at a later time period than the bases for the RICO count, plaintiffs have avoided the bar of the RICO amendment. Particularly at the hearing on this matter, plaintiffs put much emphasis on the portion of Bald Eagle that stresses that district courts should not inquire as to whether the conduct alleged is "`intrinsically connected to, and dependent upon' conduct actionable as securities fraud." Id. at 330 (citing lower court opinion).*fn8 The court does not rule, however, that the underlying financial improprieties were "intrinsically connected to" the securities fraud: the underlying financial improprieties are actionable as securities fraud, as clearly demonstrated by the ERISA claim and the ...


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