Lerner v. Colman

UNITED STATES DISTRICT COURT

DISTRICT OF MASSACHUSETTS

___________________________________

)

SANDRA COLMAN LERNER, )

)

Plaintiff, )

)

v. ) CIVIL ACTION

) NO. 19-11738-WGY

STEPHEN J. COLMAN, )

DANIEL J. FLYNN III, )

JAMES CANAVAN, LISA LABRIQUE, )

ELIZABETH COLMAN, KAREN REIDY, )

KIRSTEN HUNT, and WILLIAM )

CHRISTOPHER COLMAN, )

)

Defendants. )

___________________________________)

YOUNG, D.J. September 4, 2020

MEMORANDUM AND ORDER

I. INTRODUCTION

This estate dispute has morphed into a civil action under

the Racketeer Influenced and Corrupt Organizations Act (“RICO”),

18 U.S.C. § 1964. Susan Colman Lerner (“Lerner”) alleges that

her cousin Stephen Colman (“Colman”), while participating in a

criminal enterprise, used his position as personal

representative of their uncle’s estate to enrich his associates

and siblings at the expense of the estate. Lerner also brings

Massachusetts law claims for breach of fiduciary duty, fraud,

and, with respect to Colman’s siblings, money had and received.

Colman and the other defendants seek to dismiss her claims,

arguing that she fails properly to allege a RICO violation, that

her RICO claims are barred, and that her state law claims are

unavailing.

Lerner alleges Colman and his associates were involved in

five different schemes. Four of these schemes may not be used

to develop a RICO claim, in accordance with section 107 of the

Private Securities Litigation Reform Act, because they are

actionable as securities fraud. The last scheme, the Solar

Resources scheme from which Lerner alleges injury, is not alone

sufficient to sustain her RICO claims. The defendants’ motions

to dismiss must therefore be granted as to Lerner’s RICO claims.

Since the RICO claims are the sole federal questions involved

and there is no diversity jurisdiction, the Court declines to

exercise supplemental jurisdiction over the remaining claims and

therefore dismisses them for want of jurisdiction.

II. BACKGROUND

A. Factual Allegations

In October 2003, William Colman (“Bill Colman”) formed

Solar Resources, Inc. (“Solar Resources”), a Utah company, to

develop land there for salt extraction. Compl. ¶ 97, ECF No. 3.

At the time, he was Solar Resources’ sole owner and stockholder.

Id. Bill Colman’s nephew Stephen became treasurer and secretary

of Solar Resources in 2005. Id. ¶ 98.

On December 11, 2011, Bill Colman died intestate on

Martha’s Vineyard, leaving behind no children and no spouse.

Id. ¶ 13. His heirs-at-law were his twelve nieces and nephews.

Id. ¶¶ 14-18. Upon his uncle’s death, Colman volunteered to

serve as personal representative and took sole control of Bill

Colman’s estate. The estate included Solar Resources, as well

as Water Right 13-3457 in Utah (the “water right”), which Bill

Colman acquired in 1984 and held in his personal capacity. Id.

¶¶ 27-28, 96.

Two weeks before his death, Bill Colman’s personal water

right was transferred to Solar Resources. Id. ¶ 99. Stephen

Colman then filed an Assignment of Water Right with the Utah

Division of Water Rights on December 14, 2011, three days after

Bill Colman’s death, which was rejected. Id. ¶ 101. On January

4, 2012, Colman resubmitted the Assignment, which was then

approved, completing the transfer of the water right to Solar

Resources. Id. ¶¶ 100-103. The complaint alleges that Colman

forged Bill Colman’s signature to orchestrate this transfer

without his knowledge. Id. As a result, the water right was

not included in Bill Colman’s estate when Stephen meted out its

assets in probate. Id. ¶ 104.

Shortly after his uncle’s death, Colman became president of

Solar Resources, and transferred a total of 53.5 percent of the

company’s shares to himself and two of his associates -- Daniel

J. Flynn (“Flynn”) and James Canavan (“Canavan”) –- as well as

Bill Colman’s ex-wife Phyllis and Colman’s siblings (the

“Siblings”): Lisa LaBrique, Elizabeth Colman, Karen Reidy,

Kirsten Hunt, and William Christopher Colman. Id. ¶¶ 105-129.

Around the time of the transfers, Colman met with cousins Robert

Colman, Roberta Colman, and Thomas Collins (but not Lerner), and

informed them that he and his siblings had invested in Solar

Resources. Id. ¶¶ 123-125, 147. Lerner learned of the stock

transfers in 2018, when Collins told her about his meeting with

Colman. Id. ¶¶ 146-147.

In December 2012, Colman executed the stock sale of Solar

Resources to Great Salt Lake Minerals Corporation (“GSLMC”) for

$11,000,000. Id. ¶¶ 130, 132. Bill Colman’s estate received

roughly $5,115,000 for its 46.5-percent stake in Solar

Resources. Id. ¶ 133. Colman, his siblings, Phyllis Colman,

Flynn, and Canavan split the proceeds from the remaining 53.5

percent of stock, albeit in unequal portions. Id. ¶¶ 134-145.

B. RICO Allegations

Lerner claims the Solar Resource transfers were the work of

a criminal enterprise composed of Colman, Flynn, and Canavan.

Id. ¶¶ 35-50. In her complaint, Lerner notes the various ties

that bind the three men, who have known each other since high

school and did business in the same building in Quincy,

Massachusetts for several years. Id. ¶¶ 35, 38-41. From 1995

until 2014, Colman worked as general counsel for Flynn’s

company, Daniel J. Flynn & Co. (“DJFCO”). Id. ¶ 38. Lerner

claims the Solar Resources stock and water right transfers were

the latest in the group’s “series of fraudulent schemes to

divert monies and assets from third parties in order to enrich

themselves and others working with them.” Id. ¶ 42.

To establish the existence of a criminal enterprise under

RICO, Lerner alleges four predicate acts in addition to the

Solar Resources scheme, two of which relate to a fraud

conviction for which Flynn is currently serving a federal

sentence.

First, Lerner alleges that Colman joined Flynn in

soliciting investments in Flynn’s DJF Real Estate Opportunity

Fund (“DJF Fund”) in 2008, and subsequently drafted false

promissory notes to misrepresent the fund’s holdings in its

communications to other limited partners between 2010 and 2012.1

Id. ¶¶ 51-57. Second, Lerner claims Colman, Canavan, and Flynn

engaged in a Ponzi scheme involving a building on Greenleaf

Street in Quincy (the “Greenleaf Property”), which Flynn

purchased in 2005. Id. ¶¶ 58-69. She alleges Flynn obtained

loans and other investments ostensibly related to the purchase

and development of the Greenleaf Property, which were instead

1 Flynn and his general partner, Alex Petro, signed the

communications. Compl. ¶ 53. Petro died by suicide in December

2014. Id. ¶ 57.

“used . . . to repay earlier investors and fraud victims from

their other schemes.” Id. ¶ 67. Lerner claims Colman drafted

loan documents, promissory notes, and false purchase and sale

agreements for Flynn, while Canavan “conducted . . . residential

real estate work and closings.” Id. ¶ 58.

On February 1, 2017, Flynn pleaded guilty to nine counts of

federal mail and wire fraud arising from a series of schemes

that occurred between 2007 and 2015, including the DJF Fund and

Greenleaf Property schemes. Id. ¶ 44; see also Indictment ¶¶ 6-

13, 17-23, United States v. Flynn, Crim. A. No. 15-10283 (D.

Mass. 2017) (Zobel, J.), ECF No. 12 (“Flynn Indictment”);

Electronic Clerk’s Notes, id., ECF No. 39. As part of his

criminal sentence Flynn agreed to pay more than $20,000,000 in

restitution to seventy-three victims. Assented Motion Joint

Restitution Order, Flynn, Crim. A. No. 15-10283, ECF No. 58.

Third, Lerner claims Colman, Canavan, and Flynn

fraudulently took control of a property on East Howard Street in

Quincy (the “East Howard Street Property”). Compl. ¶¶ 70-86.

In 2002, Flynn, acting on behalf of DJFCO, entered into a

listing agreement with LINC Property I, LLC (“LINC”), a Delaware

company doing business in Massachusetts, to act as its agent in

selling the East Howard Street Property. Id. ¶ 70, 72. The

following year, LINC struck a purchase and sale agreement with

the Des Moines Street Realty Trust for $825,000. Id. ¶ 74.

Unbeknownst to LINC, Flynn had an interest in this trust, and

Canavan was a trustee. Id. ¶¶ 74-75. Around the same time,

Flynn negotiated the sale of the East Howard Street Property to

George Brewster (“Brewster”) for $1,325,000 and pocketed the

$500,000 windfall. Id. ¶¶ 77-78, 80-81.

Fourth and finally, Lerner claims Flynn obtained from

Brewster financing for investment properties in Massachusetts

and Rhode Island through a nonexistent entity. Id. ¶¶ 87-94.

Brewster invested $1,600,000 in “Patriot Acquisition,” which

Lerner claims Flynn then shuffled to an entity named Patriot

Investments, LLC, without providing any benefit to Brewster.

Id. ¶¶ 91, 93-94.2 Colman himself was the listed manager of

Patriot Investments, LLC. Id. ¶¶ 93-94.

Lerner alleges three RICO violations (counts I-III). Id.

¶¶ 153-185. Under Massachusetts law, she alleges breach of

Colman’s fiduciary duty as personal representative of Bill

Colman’s estate (count IV), id. ¶¶ 186-189; fraud arising from

the Solar Resources stock transfers and sale (count V), id. ¶¶

190-198; and a claim for money had and received against the

Siblings (count VI). Id. ¶¶ 199-206. She seeks damages –-

including treble damages and reasonable attorney’s fees and

2 Brewster brought an action for fraud against DJFCO, Flynn,

Colman and Canavan, after Canavan admitted the fraud to him.

Compl. ¶¶ 71, 84.

costs as provided under section 1964(c) –- as well as injunctive

relief.

This Court has federal question jurisdiction over Lerner’s

claims because her cause of action arises under section 1964(c)

of the RICO statute. 28 U.S.C. § 1331.

C. Procedural History

Lerner filed suit in this Court on August 12, 2019. See

Compl. On September 13, 2019, Colman moved to dismiss Lerner’s

complaint for failure to state a claim. Def. Colman’s Mot.

Dismiss, ECF No. 25; Def. Colman’s Mem. Supp Mot. Dismiss

(“Colman Mem.”), ECF no. 26. The Siblings moved to dismiss

Lerner’s claims on September 23, 2019, and joined Colman’s

motion. Defs.’ Mot. Dismiss, ECF No. 29. Canavan likewise

moved to dismiss on October 7, 2019. Def. Canavan Mot. Dismiss,

ECF No. 40; Def. Canavan Mem. Supp. Mot. Dismiss (“Canavan

Mem.”), ECF No. 41.

Lerner filed her opposition to Colman and the Siblings’

motions on October 15, 2019, Pl.’s Opp’n Mot. Dismiss (“Pl.’s

Opp’n Colman”), ECF 43, followed by her opposition to Canavan’s

motion on October 21. Pl.’s Opp’n Canavan Mot. Dismiss (“Pl.’s

Opp’n Canavan”), ECF No. 44.

This Court held a hearing on the motions on December 10,

2019. Elec. Clerk’s Notes, ECF No. 45; Tr. Mot. Dismiss Hr’g

(“Hr’g Tr.”), ECF No. 47. At the hearing, Lerner agreed to

consider amending the complaint by re-pleading the RICO claims

in the alternative as securities fraud claims, id., but

ultimately decided that there was no basis for doing so. Letter

Michael Connolly, ECF No. 48.

II. ANALYSIS

A. Legal Standard and Preliminary Issues

1. Standard of Review

In order to survive a motion to dismiss, a complaint must

“state a claim upon which relief can be granted.” Fed. R. Civ.

P. 12(b)(6). A complaint must contain sufficient factual

allegations that, accepted as true, “state a claim to relief

that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550

U.S. 544, 570 (2007). This Court will “draw every reasonable

inference” in favor of the plaintiff, Berezin v. Regency Sav.

Bank, 234 F.3d 68, 70 (1st Cir. 2000), but it will disregard

statements that “merely offer legal conclusion[s] couched as . .

. fact[ ] or [t]hreadbare recitals of the elements of a cause of

action,” Ocasio-Hernandez v. Fortuno-Burset, 640 F.3d 1, 12 (1st

Cir. 2011) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)

(alterations and omission in original) (internal quotation marks

omitted)). “A ‘formulaic recitation of the elements of a cause

of action’ is not enough.” Whitman & Co., Inc. v. Longview

Partners (Guernsey) Ltd., 140 F. Supp. 3d 138, 140 (D. Mass.

2015) (quoting Twombly, 550 U.S. at 555).

2. Heightened Pleading Standard for Fraud

Federal Rule of Civil Procedure 9(b) creates a heightened

pleading standard for allegations of fraud, under which “a party

must state with particularity the circumstances constituting

fraud or mistake,” though the elements of “[m]alice, intent,

knowledge, and other conditions of a person’s mind may be

alleged generally.” Where, as here, “the predicate acts

supporting a RICO claim sound in fraud, the plaintiff must

assert all elements of his RICO claim according to the

heightened pleading requirements of Fed. R. Civ. P. 9(b).”

System Mgmt., Inc. v. Loiselle, 91 F. Supp. 2d 401, 408 (D.

Mass. 2000) (citing Feinstein v. Resolution Trust Corp., 942

F.2d 34, 42 (1st Cir. 1991)). Colman argues that Lerner has

failed to plead any of the predicate acts involving fraud with

the requisite specificity under Rule 9(b). Colman Mem. 12-14.

The goal of Rule 9(b) is “to give adequate notice of the

plaintiff’s claim of fraud.” McGinty v. Beranger Volkswagen,

Inc., 633 F.2d 226, 228-29 (1st Cir. 1980). This heightened

pleading standard for mail and wire fraud typically requires a

plaintiff to provide the “time, place and content” of the

allegedly fraudulent communications. Ahmed v. Rosenblatt, 118

F.3d 886, 889 (1st Cir. 1997) (dismissing RICO claim for failure

to plead with particularity). Where mail fraud is alleged as

the predicate act, plaintiffs must allege “(1) a scheme to

defraud based on false pretenses; (2) the defendant’s knowing

and willing participation in the scheme with the intent to

defraud; and (3) the use of interstate mail or wire

communications in furtherance of that scheme.” United States v.

Cheal, 389 F.3d 35, 41 (1st Cir. 2004). Notably, reliance is

not an element of federal wire fraud, nor of a RICO claim based

on wire fraud. Bridge v. Phoenix Bond & Indem. Co., 553 U.S.

639, 649 (2008).

This Court disagrees with Colman that the claims must be

dismissed under Rule 9(b) because Lerner’s complaint

sufficiently alleges the time, place, and content of each of the

alleged schemes to survive scrutiny under Rule 9(b). First,

Lerner sufficiently alleges the fraudulent conduct at issue in

the Solar Resources scheme: the allegedly fraudulent transfer of

the water right from Colman’s estate to Solar Resources; the

allegedly fraudulent transfer of stock from Solar Resources to

Colman, Flynn, Canavan, and Colman’s family; and the allegedly

fraudulent communication from Flynn to Colman inducing her

consent to the sale of Solar Resources. Compl. ¶ 160. Lerner

lists the date, parties, and content of each of these

communications or actions. Id. For example, with respect to

Colman’s communications with the Utah Division of Water Rights,

Lerner alleges that Colman sent messages on December 14, 2011

and January 4, 2012, and names the type of documents Colman

sent. Id. ¶¶ 160(g), 160(t). Lerner’s “conclusory” allegation

that these communications were fraudulent is sufficient, Colman

Mem. 13, as a party at the pleading stage need not provide

actual evidence of intent or knowledge. McGinty, 633 F.2d at

228. Lerner also sufficiently pleads the elements of wire and

mail fraud because she alleges material false pretenses,

Colman’s knowledge and intent, and the use of interstate

communications for the three interlocking, allegedly fraudulent

acts (the water rights transfer, the stock transfers, and the

inducement of her consent). Compl. ¶ 160; see Bonilla v. Volvo

Car Corp., 150 F.3d 62, 66-67 (1st Cir. 1998).

Lerner makes similarly detailed allegations for each of the

four alleged Flynn-led schemes. For example, for the DJF

Opportunity Fund Scheme, Lerner states that Colman drafted

fraudulent subscription agreements in January 2008 for twenty-

five individuals, and caused them to be sent by email or mail to

partners in Massachusetts, New York, California and elsewhere.

Compl. ¶¶ 51-52. With respect to intent she pleads that Colman

and/or Canavan forged signatures on promissory notes in support

of the fraudulent scheme. Id. ¶¶ 54-56. The allegations are

similarly detailed for the other three predicate schemes. Id.

¶¶ 58-94. In fact, Lerner is able to pinpoint the exact dates

that many of the allegedly fraudulent communications were sent

to investors. Id. ¶ 169.

In conclusion, Lerner’s pleadings are sufficiently detailed

to survive Colman’s Rule 9(b) challenge.

3. Time Bar

Colman argues that Lerner’s RICO claims are time barred

because the RICO statute of limitation is four years, the

alleged fraudulent concealment of his stock transfer occurred in

2012, and Lerner does not plead with sufficient particularity

that the existence of the fraud was concealed from her. Colman

Mem. 19 (citing Agency Holding Corp. v. Malley-Duff & Assocs.,

Inc., 483 U.S. 143 (1987)). Under the injury discovery accrual

rule, the clock begins to tick on a RICO claim when the

plaintiff knows or should know of her injury, or in other words,

when she receives “storm warnings” of potential fraud. Álvarez-

Maurás v. Banco Popular of P.R., 919 F.3d 617, 626 (1st Cir.

2019) (quoting Young v. Lepone, 305 F.3d 1, 8 (1st Cir. 2002)).

Once a reasonable person receives sufficient notice of potential

injury as to give rise to suspicion, the statute of limitation

will begin to run unless she diligently investigates, and she is

charged with knowledge of those facts that would have been

available after such investigation. McIntyre v. United States,

367 F.3d 38, 52 (1st Cir. 2004). The test of whether a

plaintiff “should have” suspected fraud is objective. Maggio v.

Gerard Freezer & Ice Co., 824 F.2d 123, 128 (1st Cir. 1987).

Lerner alleges in her complaint that she first learned of

the 2012 meeting between Colman and the other family members, at

which he told them the shares of Solar Resources were

investments rather than gifts, in 2018, which raised her

suspicion of fraud. Compl. ¶ 117. Arguably, Lerner could have

become suspicious when she learned that some members of the

family had received stock transfers as “gifts,” id., and indeed

it appears from her complaint that she did ask Colman for an

explanation before ultimately signing her consent to the

transfers. Id. ¶ 129; Colman Mem., Ex. 1, Consent to Petition

and Order, ECF No. 26-1. There is significantly less notice of

potential fraud here than was present in other cases where

courts have found such notice to exist, however. See, e.g.,

Painters & Allied Trades Dist. Council 82 Health Care Fund v.

Forest Pharms., Inc., 915 F.3d 1, 14-15 (1st Cir. 2019)

(existence of other lawsuits after unsealing of government

complaint against company triggered inquiry notice); Morales-

Melecio v. United States (HHS), 890 F.3d 361, 369 (1st Cir.

2018) (death certificate indicating septic shock triggered

inquiry notice of medical malpractice). The situation here

appears more like Stanley v. Schimdt, where another session of

this Court determined that neither the fact that a broker was

investing in overly risky securities, nor that he disclosed

conflicts of interest, triggered inquiry notice for potential

securities fraud. 369 F. Supp. 3d, 297, 309-310 (D. Mass. 2019)

(Gorton, J.). Still, “[t]his inquiry is highly fact- and case-

specific.” McIntyre, 367 F.3d at 52. Taking all inferences in

favor of the non-moving party, Lerner has pled sufficient facts

to allow the inference that she could not have reasonably

learned of Colman’s deceit until 2018, and therefore that her

claims are not time barred.

B. Counts I-III: Civil RICO

Lerner brings a private cause of action under RICO, 18

U.S.C. § 1964(c), and alleges violations of sections 1962(c)

(count I), 1962(a)-(b) (count II), and 1962(d) (count III).

Lerner’s first claim is for violation of section 1962(c).

Compl. ¶¶ 153-161. In order to state a section 1962(c) RICO

claim, a plaintiff must allege “(1) conduct (2) of an enterprise

(3) through a pattern (4) of racketeering activity.” Sedima,

S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 496 (1985) (footnote

omitted). A plaintiff may pursue a civil action under RICO only

if she “can demonstrate (1) a violation of section 1962, and (2)

harm ‘by reason of’ the violation. The harm alleged may be

either ‘direct’ or ‘indirect,’ so long as it ‘flows from’ the

predicate acts.” Willis v. Lipton, 947 F.2d 998, 1000 (1st Cir.

1991) (internal citations omitted). It is sufficient for

purposes of standing to show injury from only one of the

predicate acts. Pelletier v. Zweifel, 921 F.2d 1465, 1497 (11th

Cir. 1991).

Though Lerner explicitly lists only the activity related to

Solar Resources under this claim, Compl. ¶ 169, the claim

incorporates her allegations regarding the other Flynn-led

schemes, and she considers them all part of a single enterprise.

Id. ¶¶ 162, 165. Lerner alleges that between 2008 and 2011,

Colman caused transfers of Solar Resources stock to Flynn, the

Siblings, Phyllis Colman, and himself without Bill Colman’s

authorization, “knowing such stock was taken by fraud” in

violation of the National Stolen Property Act, 18 U.S.C. § 2314,

and 18 U.S.C. §§ 471-473. Compl. ¶¶ 159, 160a. Additionally,

Lerner claims Colman committed mail and wire fraud, 18 U.S.C. §§

1341, 1343, by procuring her consent to the sale of Solar

Resources in August 2012 through interstate wire without

disclosing (1) the transfer of the water right from Bill Colman

to Solar Resources and (2) the transfer of more than half of

Solar Resources’ stock to Colman, Flynn, the Siblings, and

Phyllis Colman. Compl. ¶ 160h. Lerner claims that Colman,

Canavan, and Flynn comprise an association-in-fact enterprise,

which was active from 1999 until Flynn’s indictment in 2015, and

that this enterprise committed a pattern of racketeering

activity consisting of the Solar Resources scheme and the four

Flynn-led investment schemes. Compl. ¶¶ 155-160. The viability

of this claim depends on the applicability of section 107 of the

Private Securities Litigation Reform Act, which will be

discussed infra.

Lerner’s second claim, for violation of sections 1962(a)

and (b), is easily disposed of due to inadequate pleading.

Section 1962(a) makes it unlawful for any person to use income

derived from a pattern of racketeering activity to acquire an

interest in a business or operation involved in interstate

commerce. 18 U.S.C. § 1962(a). An allegation that the

defendant harmed the plaintiff solely and directly through a

predicate act (as opposed to through the use of income derived

from the racketeering) does not meet the requirement of this

section. See, e.g., Abraham v. Singh, 480 F.3d 351, 356-57 (5th

Cir. 2007). Section 1962(b) makes it unlawful for a party to

acquire an interest in a business directly through racketeering

activity. 18 U.S.C. § 1962(b). As with section 1962(a), an

allegation that the defendant harmed the plaintiff directly

through the predicate act is insufficient; the injury must come

as a result of the defendant using racketeering activity to gain

an interest in a business. See Compagnie De Reassurance D’Ile

De Fr. v. New Eng. Reinsurance Corp., 57 F.3d 56, 92 (1st Cir.

1995); P.R. Med. Emergency Group, Inc. v. Iglesia Episcopal

Puertorriqueña, Inc., 118 F. Supp. 3d 447, 459 (D.P.R. 2015).

In making this claim, Lerner describes the four Flynn-led

schemes and the Solar Resources scheme, draws a connection

between them, and labels the entire course of conduct a “pattern

of racketeering activity.” Compl. ¶ 168-178. Lerner alleges

that she has been damaged by this scheme due to her status as a

beneficiary of William Colman. Id. ¶ 179. The problem is that

in count II Lerner has thoroughly alleged a RICO enterprise in

accordance with section 1962(c), but not 1962(a) or (b); she

does not allege that the defendants used the income or influence

derived from their racketeering enterprise to enable the Solar

Resources scheme, but instead that they directly gained control

of it through fraud. Id. ¶¶ 168, 179.3 Her allegation that

Flynn reinvested his ill-gotten gains back into his own real

estate holdings is insufficient because her injury was unrelated

to these investments. Id. ¶ 168; cf. Ouaknine v. MacFarlane,

897 F.2d 75, 83 (2d Cir. 1990).

The problem with Lerner’s pleading echoes the pleading

considered in Abraham v. Singh, where the Fifth Circuit upheld a

district court’s dismissal of charges under sections 1962(a) and

(b), but reversed for sections 1962(c) and 1962(d) (conspiracy

to commit a RICO violation). 480 F.3d at 356-57. That case

involved claims by a group of Indian citizens alleging human

3 For an example of a proper 1962(a) allegation, see System

Mgmt., 91 F. Supp. 2d at 415-17 (ruling plaintiff had made a

valid 1962(a) claim by alleging the defendants had used income

derived from unlawful underpayment of wages to subsidize lower

contract bids, and therefore injure them by underbidding for

contracts).

trafficking: they came to the United States after being promised

well-paying jobs and permanent residence, only to have their

passports confiscated and wages stolen. Id. at 353-54. The

Fifth Circuit explained that these charges did not match

subsections 1962(a) or (b) because there was no connection

between the workers’ injuries and the defendant acquiring an

interest in a company, but the scheme as a whole could certainly

qualify as a racket, allowing claims under subsections 1962(c)

and (d). Id. at 356-57. This pleading requirement reflects the

purpose of these sections. While the RICO laws on the whole may

be used to target a wide variety of rackets, Sedima, 473 U.S. at

497, subsections (a) and (b) have the narrower original purpose

of targeting organized crime that uses ill-gotten profits,

threats, coercion, or debt to gain control of legitimate

business. Lightning Lube, Inc. v. Witco Corp., 4 F.3d 1153,

1188, 1190 (3d Cir. 1993).

Finally, Lerner brings her third claim under section

1962(d), which prohibits conspiracy to commit a RICO violation.

18 U.S.C. § 1962(d). To establish a conspiracy under section

1962(d), it is sufficient to prove that the defendant agreed

with one or more individuals to commit at least two predicate

offenses in violation of subsection 1962(a), (b) or (c). Aetna

Casualty Surety Co. v. P & B Autobody, 43 F.3d 1546, 1562 (1st

Cir. 1994) (citing United States v. Boylan, 898 F.2d 230, 252

(1st Cir. 1990)). This count is dependent on the existence of

another viable RICO claim. See Beck v. Prupis, 529 U.S. 494,

507 (2000)

1. The Private Securities Litigation Reform Act

Exception

The first step in analyzing liability under subsections

1962(c) and (d) is to determine which alleged predicate acts

support viable RICO causes of action. Colman argues that

Lerner’s RICO claims must be dismissed because “the predicate

acts alleged by her are grounded in securities fraud which is

exempt from liability under RICO.” Colman Mem. 15. This

argument refers to section 107 of the 1995 Private Securities

Litigation Reform Act (PSLRA), which modified section 1964(c) by

barring a private plaintiff from relying on “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).

Colman argues that the four schemes allegedly led by Flynn

cannot be used as predicate acts because they involve promissory

notes and securities fraud. Colman Mem. 15. At oral argument,

Colman clarified that this argument applied only to the four

Flynn-led transactions, under the theory that Colman’s alleged

actions with respect to Solar Resources did not involve the

“purchase and sale” of a security and therefore could not have

been part of the same RICO “scheme” as the Flynn-led

transactions. Hr’g Tr. 7-9. The Second Circuit has treated the

invocation of the PSLRA exception as an affirmative defense,4 so

the Court will limit its analysis of the PSLRA exemption to the

four Flynn-led schemes. See Gilmore v. Gilmore, 503 Fed. Appx.

97, 99 (2d Cir 2012).5

When it passed the Private Securities Litigation Reform Act

in 1995, “Congress meant not only to ‘eliminate securities fraud

as a predicate offense in a civil RICO action, but also to

prevent a plaintiff from pleading other specified offenses, such

as mail or wire fraud, as predicate acts under civil RICO if

such offenses are based on conduct that would have been

actionable as securities fraud.’” Calderon Serra v. Banco

Santander Puerto Rico, 747 F.3d 1, 4 (1st Cir. 2014) (quoting

Bald Eagle Area Sch. Dist. v. Keystone Fin., Inc., 189 F.3d 321,

327 (3d Cir. 1999)); see Mathews v. Kidder, Peabody & Co., Inc.,

161 F.3d 156, 170 (3d Cir. 1998) (detailing the PSLRA’s

legislative history). Consequently, this Court must make “a

4 As Colman has stated he is not waiving any affirmative

defenses, he would be able to argue at a future stage of these

proceedings that the PSLRA exception should apply to the alleged

actions in the Solar Resources scheme, should he determine such

an argument to have merit. See Colman Mem. 2 n.1. Furthermore,

the reasoning from Gilmore suggests that he could raise this

defense at a later stage of the proceedings even if he had not

explicitly reserved his rights. 503 Fed. Appx. at 97.

5 Canavan has joined all of Colman’s arguments on this point

without raising any new ones of his own. See Canavan Mem. 6.

sort of reverse Rule 12(b)(6) inquiry,” Calderon Serra, 747 F.3d

at 4, to determine whether the conduct Lerner alleges would be

“actionable as fraud in the purchase or sale of securities.” 18

U.S.C. § 1964(c); see Bald Eagle, 189 F.3d at 330 (“[T]he proper

focus of the analysis is on whether the conduct pled as

predicate offenses is ‘actionable’ as securities fraud . . .

.”).

Although section 1964(c) does not specify which statute

this Court should use as its benchmark for an actionable

securities fraud claim, the First Circuit has relied upon

section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.

§ 78j, and U.S. Securities and Exchange Commission Rule 10b–5,

17 C.F.R. § 240.10b–5. See Calderon Serra, 747 F.3d at 4

(noting that “actions for fraud in the purchase or sale of

securities often arise” under section 10(b) and Rule 10b-5).

These provisions target fraud “in connection with the purchase

or sale” of securities. Blue Chip Stamps v. Manor Drug Stores,

421 U.S. 723, 733 (1975). Therefore, this Court must determine

“whether the RICO counts in the plaintiff’s Complaint ‘rely upon

any conduct that would have been actionable as fraud in the

purchase or sale of securities’” under section 10(b) or Rule

10b-5. Chase v. Merson, 384 F. Supp. 3d 106, 111 (D. Me. 2019)

(footnote omitted) (quoting Bald Eagle, 189 F.3d at 327).

Actionable by whom? Neither this Court nor the First

Circuit has addressed whether the PSLRA exception applies where

the RICO plaintiff herself could not bring an action for

securities fraud. See Pl.’s Opp’n Colman 22-23. In other

words, does a civil RICO suit run afoul of the PSLRA only when

the securities fraud alleged is actionable by the RICO

plaintiff, or does the PSLRA bar kick in so long as the

securities fraud is actionable by anyone?

Before answering this question, the Court must first

determine if the four Flynn-led schemes would be actionable as

securities fraud by anyone. This Court is not concerned that

Lerner is engaging in “surgical” pleading –- after all, as

Lerner points out, the government chose to indict Flynn on wire

and mail fraud, not securities fraud, Pl.’s Opp’n Colman 21 -–

but the approach used in several circuits would bar Lerner from

relying upon these as predicate acts if anyone would have

standing to bring these securities fraud claims. See, e.g.,

MLSMK Inv. Co. v. JP Morgan Chase & Co., 651 F.3d 268, 278 (2d

Cir. 2011). Because of the concern over “surgical” pleading,

the PLSRA exception applies regardless of whether the complaint

contains the elements and technical requirements for pleading

securities fraud, so long as the elements are evident from the

pled facts. Bald Eagle, 189 F.3d at 330.

“A typical 10b–5 securities fraud claim requires proof of:

(1) a material misrepresentation or omission; (2) scienter, or a

wrongful state of mind; (3) a connection with the purchase or

sale of a security; (4) reliance; (5) economic loss; and (6)

loss causation.” Calderon Serra, 747 F.3d at 4 (internal

quotation marks omitted) (quoting Hill v. Gozani, 638 F.3d 40,

55 (1st Cir. 2011)). For all four of the alleged Flynn-led

schemes, Colman has pled facts indicating that some party could

bring a claim that satisfies all six elements of 10b-5

securities fraud, though the third factor -– the connection to

the purchase or sale of a security –- requires some unpacking.

See Compl. ¶¶ 54-57, 169a-e, 171a (alleging misrepresentation,

scienter, reliance, loss, and loss causation for the DJF Fund

scheme); id. ¶¶ 67-69, 169d, 171b (Greenleaf Property scheme);

id. ¶¶ 78-86 (East Howard Street Property scheme); id. ¶¶ 88-94

(Patriot Investments scheme).

The Securities Exchange Act of 1934 defines a security as

any note, bond, investment contract, and so forth that allows

for participation in a profit-sharing enterprise (excluding

instruments that mature in excess of nine months). 15 U.S.C. §

78c(a)(10). Congress defined securities in sufficiently broad

and general terms so as to include virtually any instrument that

may be sold as an investment. Reves v. Ernst & Young, 494 U.S.

56, 60-61 (1990) (citing United Housing Found., Inc. v. Forman,

421 U.S. 837, 847-49 (1975)). Determining whether an instrument

is a security is a question of economic reality rather than

form. Forman, 421 U.S. at 851-52. The federal securities laws

govern fraud that occurs face to face as well as fraud in an

organized market. Superintendent of Ins. v. Bankers Life &

Casualty Co., 404 U.S. 6, 12 (1971).

The alleged fraud in the DJF Fund scheme is actionable (by

someone) as securities fraud because it involves the type of

security called an investment contract. See SEC v. W. J. Howey

Co., 328 U.S. 293, 298-99 (1946). Howey explains that “an

investment contract for purposes of the Securities Act means a

contract, transaction or scheme whereby a person invests his

money in a common enterprise and is led to expect profits solely

from the efforts of a promoter or a third party.” Id. In other

words, the investor is “attracted solely by the prospects of a

return on their investment.” Id. at 300. In contrast, a real

estate contract whose purpose is to allow an individual to buy

property for commercial or personal use is not a security.

Forman, 421 U.S. at 852-53. Lerner labels the organization an

“investment fund,” and her description of it in the complaint

indicates that participants pooled their assets expecting

collectively to receive a return through the growth of their

investments rather than because they were trying collectively to

run a business out of the chosen properties. See Compl. ¶ 51;

SEC v. SG Ltd., 265 F.3d 42, 50 (1st Cir. 2001) (noting that

Howey requires the existence of a common enterprise and holding

that “horizontal commonality” –- pooled assets of investors that

share in the profits and risk of an enterprise –- is the proper

test).

The other three schemes -- Greenleaf Property, East Howard

Street Property and Patriot Acquisition –- must be analyzed

under the standard from Reves that pertains to promissory notes,

since they do not involve solely the type of pooled investment

fraud alleged in the first scheme. 494 U.S. at 64-65. There is

a presumption that such notes are securities, but this

presumption can be rebutted by a showing that they were issued

for the purpose of enabling commerce, rather than investment.

Id. The test is whether such instruments bear a “family

resemblance” to non-securities, relying on four factors: whether

it was issued to generate investment profit rather than finance

commercial operations; whether the “plan of distribution”

indicates it is intended for speculation or investment; whether

a reasonable investor would consider it a security; and whether

another regulatory scheme significantly governs the transaction,

making application of the Securities Act unnecessary. Id. at

66-67.

The first Reves factor leans in favor of finding these

schemes to involve securities because there is no indication

that the selling and buying of these properties were for

commercial purposes, and there are many indicia throughout the

complaint that these transactions were done for the purpose of

investment. See, e.g., Compl. ¶¶ 58 (terming the victims of the

Greenleaf Property schemes “investors”), 67 (alleging Greenleaf

Property to be essentially a Ponzi scheme where money from

earlier investors was used to pay previous investors), 87

(referring to Patriot Acquisition as an “investment

opportunity”); see also Bald Eagle, 189 F.3d at 300 (“[C]onduct

undertaken to keep a securities fraud Ponzi scheme alive is

conduct undertaken in connection with the purchase and sale of

securities.”). The complaint is somewhat unclear as to whether

the East Howard Street Property transactions were for investment

or commercial use, but Lerner clarifies the issue by referring

to Brewster –- one of the buyers -- as an “investor” in her

Opposition. Pl.’s Opp’n Colman 5. Even if some of the

transactions were commercial or had commercial components, when

the scheme as a whole is intertwined with and supports

securities fraud then it is “in connection with the purchase or

sale of securities.” Bald Eagle, 189 F.3d at 330. The second

factor is not well-developed in the complaint, but the third

factor also points in favor of finding these transactions to be

securities: the Greenleaf Property and East Howard Street

Property schemes were done by and through DJFCO, Compl. ¶¶ 60,

70, and Flynn sold the Patriot Investments scheme as an

investment opportunity, id. ¶ 88. There is no countervailing

regulatory regime that counsels against finding these

transactions to be securities under the fourth factor. On

balance, all these alleged schemes are therefore actionable as

securities under the “reverse 12(b)6 inquiry.” Calderon Serra,

747 F.3d at 4.

As Lerner herself would not have standing to bring these

claims because those schemes did not injure her, the next

question is whether the PSLRA bars her reliance on these alleged

schemes as predicate acts. The Second Circuit conducted the

most in-depth treatment of this question when it endorsed an

actionable-by-anyone approach, ruling the PSLRA precluded the

plaintiffs from bringing a RICO claim for aiding and abetting

securities fraud, when they were statutorily barred from suing

directly. See MLSMK, 651 F.3d at 273-80 (ruling the section

1964(c) bar applies “even where a plaintiff cannot itself pursue

a securities fraud action against the defendant”). The Ninth

Circuit has also ruled that section 1964(c) bars any conduct

actionable as securities fraud, regardless of the RICO

plaintiff’s standing to bring such a claim. Howard v. Am.

Online Inc., 208 F.3d 741, 749 (9th Cir. 2000), cert. denied,

531 U.S. 828, 121 (2000) (holding securities claims that “could

be brought by a plaintiff with proper standing” were actionable

and therefore barred). The majority of district courts

considering the issue without clear guidance from their Circuits

have following MLSMK in ruling that the PSLRA applies if any

party would have standing to bring a claim. See, e.g., Capital

Inv. Funding, LLC v. Field, Civ. A. No. 6:13-2326, 2015 U.S.

Dist. LEXIS 8206 *11 (S.C. Jan. 20, 2015); Amos v. Franklin Fin.

Servs. Corp., Civ. No. 10-1285, 2011 U.S. Dist. LEXIS 134431 at

*15 (M.D. Penn. Noc. 22, 2011). In an unpublished opinion, the

Eleventh Circuit has summarized this trend (without itself

ruling on the standing issue): “courts have applied the RICO bar

in § 1964(c) broadly, regardless of whether the plaintiff

explicitly relied upon securities fraud as a predicate act or

even had standing to pursue a securities fraud claim.” Licht v.

Watson, 567 Fed. Appx. 689, 693 (11th Cir. 2014).

Lerner urges this Court instead to adopt a narrower

interpretation of section 1964(c). Pl.’s Opp’n Colman 23

(citing Menzies v. Seyfarth Shaw LLP, 197 F. Supp. 3d 1076 (N.D.

Ill. 2016), aff’d in part, 943 F.3d 328 (7th Cir. 2019)

(affirming the district court’s analysis of section 107 of the

PSLRA)). In Menzies, Judge Blakey looked closely at the

language of the PSLRA exception:

[A] plain reading of the phrase ‘any conduct that

would have been actionable’ means conduct that: (1)

injured a person’s business or property (and is thus

being relied upon by that person to establish a RICO

violation); and (2) would have been actionable as

fraud in the purchase or sale of securities. When

such injurious ‘conduct’ to the RICO ‘person’ could

also trigger an ‘action’ for remedies under the

securities laws, then it constitutes ‘actionable’

conduct under the exception. As such, the term

‘actionable’ conduct means injuries to the ‘person’

that he could use to seek a remedy via a private

securities fraud action, or the same injurious conduct

to such person that could otherwise be remedied via a

public action filed by the SEC.

Menzies, 197 F. Supp. 3d. at 1107. Securities fraud injuring

someone other than the RICO plaintiff is not “actionable” within

the meaning of the PSLRA exemption, Judge Blakey explained,

because “it does not relate to the ‘conduct’ being relied upon

by the ‘person’ bringing suit to address ‘his’ injury to

business or property.” Id.

Statutory interpretation begins with the language of the

statute. United States v. Ron Pair Enters., 489 U.S. 235, 241

(1989); Stornawaye Fin. Corp. v. Hill (In re Hill), 562 F.2d 29,

32 (1st Cir. 2009). Extrinsic material such as legislative

history may be consulted to the extent it sheds light on the

Legislature’s understanding of ambiguous terms. Exxon Mobil

Corp. v. Allapattah Servs., Inc., 545 U.S. 546, 568 (2005).

This Court finds the statutory analysis in Menzies to be

perfectly plausible but disagrees that the text is so clear as

to be unambiguous. Menzies places the weight of its analysis on

the grammatical connection of the word “actionable” to the

“person” who has been injured, but other courts have made an

equally plausible argument that “actionable” should be read on

its own. See, e.g., Howard, 208 F.3d at 749 (placing emphasis

on whether “any conduct” is actionable); Tittle v. Enron Corp.

(In re Enron Corp. Sec. Derivative & ERISA Litig.), 284 F. Supp.

2d 511, 620 (S.D. Tex. 2003) (noting the absence of explicit

language connecting “actionable” to the person injured).

The First Circuit has looked in the past to legislative

history to interpret another contested clause of the PSLRA, so

this Court does so now. See Greebel v. FTP Software, Inc., 194

F.3d 185, 195 (1st Cir. 1999). The legislative history is not

entirely clear, however. The Second Circuit pointed out that

the Conference Committee Report for section 107 of the PSLRA

explained that Congress “‘intend[ed]’ that the section would

‘eliminate securities fraud as a predicate offense in a civil

RICO action’” and further noted that Congress’s purpose was to

“remove [as a predicate act of racketeering] any conduct that

would have been actionable as fraud . . .’” MLSMK, 651 F.3d at

278-279 (quoting H.R. Rep. 104-369, at 47 (1995) (Conf. Rep.)

and citing S. Rep. 104-98, at 19) (brackets and emphasis

provided by Second Circuit). MLSMK also emphasized that

Congress was aware that the exception would remove some types of

claims (including aiding and abetting claims, at issue in that

case) from RICO liability, but that it concluded the securities

laws “generally provide adequate remedies for those injured by

securities fraud.” Id. (quoting S. Rep. 104-98, at 19).

Menzies expands this legislative history by looking to its

“entirety.” 197 F. Supp. 3d at 1114. What that analysis shows

is that the final language of the PSLRA bill was the result of a

series of compromises between members of Congress, some of whom

favored a more expansive standard that would bar any predicate

act that “involved” securities fraud, and others who saw such

language as stripping injured investors of a remedy. Id. at

1112-14. The final compromise bill included both the current

“any conduct that would be actionable” language and the

“conviction exception” that allows for securities fraud to be

used as a predicate act for parties who have been convicted.

Id. at 1113. Judge Blakey characterizes this final bill as

“narrower” in terms of the type of conduct covered than the

initially proposed “involves” standard, which is clearly

correct, but the legislative history he cites indicates that the

battle lines were drawn over the span of fraud exempted by the

bill, not over the “actionable-by-whom” standard at issue in

this case. Id. at 1112-13. Overall, the courts have been able

to cite general propositions in the congressional record that

support their interpretation, but not a precise citation to the

congressional record specifically addressing this exact issue.

Compare id. at 1114 (quoting Securities Litigation Reform

Proposals S. 240, S. 667, and H.R. 1058: Hearings Before the

Subcomm. on Securities of the S. Comm. on Banking, Housing, and

Urban Affairs, 104th Cong. 251 (1995) (statement of Arthur

Levitt, Chairman of the SEC) (emphasizing the need to provide

adequate remedies), with MLSMK, 651 F.3d at 278-79 (quoting H.R.

Rep. 104-369, at 47) (noting congressional intent to eliminate

securities fraud as a predicate offense in a civil RICO action).

All in all, the congressional record itself appears to be

ambiguous. Perhaps this ambiguity was the result of Congress

not considering this precise pattern of facts, or perhaps it was

intentional. If the latter, “at best there appears to have been

an agreement to disagree . . . and perhaps, as is common, to

leave such matters for courts to resolve.” Greebel, 194 F.3d at

195. On the current question, the majority of courts have

resolved the issue by ruling the PSLRA to be broadly preclusive

under the “actionable-by-anyone” standard, and this Court deems

their analysis persuasive. See MLSMK, 651 F.3d 268. The

countervailing position espoused by the district court in

Menzies is extremely thorough and thoughtful but ultimately does

not persuade this Court that the PSLRA bar is so limited.

Moreover, the Court observes that joining the majority position

has the benefit of increasing predictability and preventing

forum-shopping. The Court rules that the PSLRA bars reliance on

the four Flynn-led schemes as predicate acts for Lerner’s RICO

claims since those schemes are actionable as securities claims.

One other matter requires attention in this context. The

PLSRA “conviction exception” allows suits against persons like

Flynn who have been convicted for fraud. See 18 U.S.C. §

1964(c); In re Enron Corp., 284 F. Supp. 2d at 623 (collecting

cases). Courts have consistently held, however, that this

exception is available only to the victims of the indicted

conduct. See Kaplan v. S.A.C. Capital Advisors, L.P., 104 F.

Supp. 3d 384, 389 (S.D.N.Y. 2015); Krear v. Malek, 961 F. Supp.

1065, 1076-78 (E.D. Mich. 1997). Lerner was not one of the

victims in Flynn’s schemes. See Flynn Indictment ¶¶ 6-14, 17-

23. Thus, all of the alleged predicate acts related to the

Solar Resources claim survive because Colman has not argued that

those are actionable as securities fraud, but Lerner cannot use

the four Flynn-led schemes as predicate acts.

2. Count I: Violation of 18 U.S.C. section 1962(c)

What remains after applying the PSLRA exception are the

claims related to the Solar Resources scheme. See Compl. ¶¶

153-161. For purposes of analyzing the four elements of

1962(c), this Court will look only to the Solar Resources scheme

for the “conduct” and “racketeering” elements, but will consider

the facts alleged with respect to the Flynn-led scheme in

determining if an “enterprise” exists. This is because the

PSLRA exception refers to any “conduct” actionable as fraud, a

term of art in the RICO landscape referring to one of the four

elements of a claim. 18 U.S.C. § 1964(c); Sedima, 473 U.S. at

496. The “racketeering” element derives from the “conduct”

element. See id. at 495 (explaining that “‘racketeering

activity’ consists of no more and no less than commission of a

predicate act”); id. at 496 (holding that “the compensable

injury necessarily is the harm caused by predicate acts

sufficiently related to constitute a pattern”); see also MLSMK,

651 F.3d at 278-79 (“Congress ‘intend[ed]’ that the section

‘would eliminate securities fraud as a predicate offense in a

civil RICO action . . . .’” (quoting H.R. Rep. 104-369, at 47)

(alteration in original but emphasis added)). The existence of

an “enterprise,” however, is a separate inquiry not based on any

particular “conduct.” See United States v. Turkette, 452 U.S.

576, 580 (1981) (“The ‘enterprise’ is not the ‘pattern of

racketeering activity’; it is an entity separate and apart from

the pattern of activity in which it engages.”). The pattern

element will be discussed below as the question of how it

interacts with the PSLRA is complex and warrants separate

treatment.

a. The Enterprise

Colman argues that Lerner has failed adequately to plead

the existence of an association-in-fact enterprise because she

has failed to allege a connection between the Solar Resources

scheme and the Flynn-led schemes. Colman Mem. 8-9. Since he

did not manage DJFCO or any other entity Lerner accuses of

wrongdoing, Colman reasons that this Court cannot consider him

part of the alleged enterprise. Id. at 9 (citing Brennan v.

Ferriera, 251 F. Supp. 3d 338, 342 (D. Mass. 2017)). Canavan

similarly argues that the facts alleged in the complaint do not

adequately allege criminal conduct, let alone conduct as part of

an enterprise. Canavan Mem. 3-5. Lerner argues that these

defendants, two attorneys, need not hold a formal managerial

position in the enterprise to be considered participants if they

are involved in its operation. Pl.’s Opp’n Colman 10 (citing

Reves, 507 U.S. at 179). Here, a liberal reading of Colman’s

complaint indicates that she has sufficiently pled the

association-in-fact elements of a RICO enterprise.

An “enterprise” includes “any individual, partnership,

corporation, association, or other legal entity, and any union

or group of individuals associated in fact although not a legal

entity.” 18 U.S.C. § 1961(4); Turkette, 452 U.S. at 583. An

association-in-fact enterprise requires three features: “a

purpose, relationships among those associated with the

enterprise, and longevity sufficient to permit these associates

to pursue the enterprise’s purpose.” Boyle v. United States,

556 U.S. 938, 946 (2009). In order “‘to conduct or participate,

directly or indirectly, in the conduct of such enterprise’s

affairs’ one must participate in the operation or management of

the enterprise itself.” Reves, 507 U.S. at 185 (quoting 18

U.S.C. § 1962(c)); cf. United States v. Marino, 277 F.3d 11, 34

(1st Cir. 2002) (“The RICO net is woven tightly to trap even the

smallest fish, those peripherally involved with the enterprise.”

(quoting United States v. Elliott, 571 F.2d 880, 903 (5th Cir.

1978))). The plaintiff must provide “evidence of an ongoing

organization, formal or informal, and . . . evidence that the

various associates function as a continuing unit.” Turkette,

452 U.S. at 583.

Lerner alleges that Colman, Canavan, and Flynn formed the

association-in-fact enterprise around 1999 for the purpose of

“inducing investors to loan money to the enterprise under false

pretenses and knowing the investors would not receive a return

on their investments in order to obtain money not rightfully

belonging to the enterprise.” Compl. ¶¶ 155-157. She also

claims that the enterprise existed “to illegally take control

over Solar Resources, illegally increase the value of Solar

Resources, and then sell it at a profit.” Id. She claims that

the three men have known each other since high school, id. ¶ 35,

and that for a period of at least six years, both Canavan and

DJFCO, which employed Colman as general counsel, did business at

1495 Hancock Street in Quincy. Id. ¶¶ 38-41. While it is not

plausible that the three men came together in 1999 to effect the

latter half of this twofold common purpose -- the Solar

Resources scheme -– Lerner sufficiently alleges they had a

common purpose to defraud investors in other schemes, and that

their enterprise was involved in Solar Resources.

Regarding the continuity and distinctness requirements,

Boyle held that an enterprise requires “a purpose, relationships

among those associated with the enterprise, and longevity

sufficient to permit these associates to pursue the enterprise's

purpose.” 556 U.S. at 946; see also United States v. Rodríguez-

Torres, 939 F.3d 16, 24 (1st Cir. 2019) (“[T]here must also be

evidence of ‘interpersonal relationships’ calculated to effect

that purpose, i.e., evidence that the group members came

together to advance ‘a certain object’ or ‘engag[e] in a course

of conduct.’”) (alteration in original) (quoting Boyle, 556 U.S.

at 946). Here, Lerner alleges that all three men participated

in the Greenleaf Property, East Howard Street Property, and DJF

Fund schemes, Compl. ¶¶ 58-86, and alleges Flynn and Colman’s

involvement in the Patriot Investments scheme. Id. ¶¶ 87-94.

With respect to the Solar Resources scheme, Flynn and Canavan

are named as recipients of the allegedly fraudulent stock

transfers. Id. ¶¶ 95-104, 107, 109-110.6 The use of DJFCO as

6 Regarding each member’s respective role in the alleged

enterprise, Lerner alleges:

the hub for these schemes imposes an ascertainable structure on

the actions of the three men, as it represents an enterprise

distinct from the racketeering activity. See Handeen v.

Lemaire, 112 F.3d 1339, 1352 (8th Cir. 1997).7 In light of

Flynn’s indictment coupled with the allegations that Flynn,

Canavan, and Colman worked in concert in the past, and the fact

that Flynn and Canavan are beneficiaries of the stock transfer,

it is plausible that the three men formed a continuing unit.

The inquiry into whether Colman, Canavan, and Flynn played

a part in the operation or management of the enterprise is

narrower. Section 1962(c) imposes liability only upon

individuals who conduct or participate in the enterprise’s

affairs “through” a pattern of racketeering activity. 18 U.S.C.

§ 1962(c). Thus, the operation and management test from Reves,

507 U.S. at 185, is limited to an analysis of those actions that

“[E]ach of the defendants participated in the conduct

of the criminal Enterprise: Colman drafted fraudulent

legal documents and caused them to be sent by email

and mail to investors, Flynn induced investors to loan

the enterprise money through fraud, misrepresentation,

and deceit as to how the funds would be used and the

strength of the investments, and Canavan contributed

legal real estate work and purchased property that was

central to the schemes to defraud.”

Compl. ¶ 172.

7 Of course the Solar Resources scheme has no direct

connection to DJFCO, but the overlap in personnel involved in

the schemes allows the plausible inference that the continuing

enterprise from the Flynn-led schemes existed there, as well.

can be considered part of the pattern of racketeering activity.

In this case that category encompasses only the Solar Resources

scheme. As alleged in Lerner’s complaint, Colman was the

ringleader of this portion of the scheme. See Compl. ¶ 160.

The role of Colman and Flynn, as alleged, appears to be the

entirely passive reception of fraudulently acquired stock and

promissory notes. See id. ¶¶ 109-110, 120-122, 136-137, 144-

145, 160a-b (mentioning Flynn’s and Canavan’s alleged

involvement without making any accusation that they took an

active role), id. ¶¶ 124-127, 130, 160 (accusing Colman alone of

causing the allegedly fraudulent transfers). Without some

allegation that the two men aided Colman in executing the

scheme, this connection does not impose RICO liability. Flynn

and Canavan had significantly less involvement than the outside

accounting firm in Brennan, which this Court did not consider

subject to enterprise liability, despite handling a RICO

enterprise’s books and making false entries, since the firm did

not make decisions. 251 F. Supp. 3d at 342.

Therefore, while Lerner has properly alleged the existence

of an enterprise, the narrowing of available predicate acts

under the PSLRA means that she can bring RICO claims only

against Colman.

b. Pattern of Criminal Activity

Lerner alleges that Colman’s various actions in advancing

the Solar Resources scheme constituted multiple discrete

predicate acts, and can themselves form a pattern of

racketeering activity. Compl. ¶¶ 159-160.8

To show that Colman engaged in a pattern of racketeering

activity, Lerner must allege the commission of two or more

predicate acts. 18 U.S.C. § 1961(5); H.J. Inc. 492 U.S. at 238;

United States v. Cianci, 378 F.3d 71, 88 (1st Cir. 2004).

“[W]hile two predicate acts are necessary to form a RICO

‘pattern,’ they may not be sufficient unless they are both

‘related’ and ‘amount to or pose a threat of continued criminal

activity.’” Schultz v. Rhode Island Hosp. Tr. Nat’l Bank, N.A.,

94 F.3d 721, 731 (1st Cir. 1996) (quoting H.J. Inc., 492 U.S. at

239); see also Apparel Art Int’l, Inc. v. Jacobson, 967 F.2d

720, 723 (1st Cir. 1992) (discussing the elusiveness of a

working definition of a RICO “pattern”). To satisfy the

relatedness requirement, the plaintiff must show that the

predicate acts “have the same or similar purposes, results,

participants, victims, or methods of commission, or otherwise

8 In her Opposition Lerner refers to the Solar Resources

scheme as a single predicate act, along with each of the four

Flynn-led schemes. Colman Opp’n 13 (“[T]he Complaint alleges

five separate predicate acts . . .”). This Court considers the

use of the term “predicate act” in her Opposition merely to

reflect the different focus of her argument, rather than an

attempt to back-track on the complaint’s allegation that the

scheme itself was made of multiple predicate acts.

are interrelated by distinguishing characteristics and are not

isolated events.” H.J. Inc., 492 U.S. at 240 (quoting 18 U.S.C.

§ 3575(e)). To show a threat of continuing criminal activity,

the plaintiff need not cite separate criminal “schemes” but must

show that either the predicate acts together formed a continuous

racket (“closed” continuity) or that they threaten future

criminal acts (“open-ended” continuity). Id. at 240-41.

Lerner alleges four viable types of predicate acts within

the Solar Resources scheme.9 Separate from the primary scheme,

she alleges that on January 7, 2008 Colman transferred 2,500

shares of stock to Flynn without authorization in violation of

18 U.S.C. § 2314 (the National Stolen Property Act) and 18

U.S.C. §§ 471-473 (counterfeiting securities). Compl. ¶ 160a.10

The second set of predicate acts is Colman’s transfer of shares

to himself, Flynn, Canavan, and the Colman family members in

violation of the same provisions. Id. ¶¶ 107, 160c-d. The

9 Lerner does not explicitly number these actions, but

whether this Court counts up each instance of separate mailings

or views them collectively does not change the analysis. See

Menzies, 197 F. Supp. 3d at 1100 (“[T]he sheer number of mail or

wire fraud acts alone does not, by itself, establish the

requisite threat of continued criminal activity.”).

10 Her second allegation, that Colman issued promissory

notes to Canavan without Bill Colman’s authorization, does not

qualify as a RICO predicate act because as pled it constitutes

only a potential violation of fiduciary duty, which is not

actionable under RICO. See Compl. ¶ 160b; La Vay Corp. v.

Dominion Fed. Sav. & Loan Ass’n, 830 F.2d 522, 529 (4th Cir.

1987).

third act is the mailing of the falsified water right assignment

to the Utah Division of Water Rights in violation of the mail

and wire fraud acts, and the fourth is the procurement of

Lerner’s consent to the sale of Solar Resources through

fraudulent interstate communication. Id. ¶¶ 160e-h. These

predicate acts have the same victim -- Bill Colman or his estate

–- the same purpose of extracting value from Solar Resources,

and the same method of utilizing fraudulent or forged documents,

id. ¶¶ 126-127, 160, and therefore easily pass the relatedness

test. H.J. Inc., 492 U.S. at 240.

i. Closed Continuity

Colman argues that all of his alleged actions surrounding

the Solar Resources scheme are “related to a unitary goal” and

therefore cannot form a RICO pattern. Colman Mem. 10. Colman

is correct for the purpose of examining closed continuity.

The Supreme Court has “described continuity as ‘both a

closed- and open-ended concept, referring either to a closed

period of repeated conduct, or to past conduct that by its

nature projects into the future with a threat of repetition.’”

Efron v. Embassy Suites (P.R.), Inc., 223 F.3d 12, 16 (1st Cir.

2000) (quoting H.J. Inc., 492 U.S. at 241). A small number of

predicate acts committed over a “few weeks or months” do not

establish closed continuity, id. (quoting H.J. Inc., 492 U.S. at

242), but where the acts are so far-reaching and extend over

such a long time period that “common sense compels a conclusion

of continuity,” then closed continuity exists, Giuliano v.

Fulton, 399 F.3d 381, 387 (1st Cir. 2005) (quoting Efron, 223

F.3d at 17). When the time period lies somewhere in the middle

a court should look to other indicia, including whether the acts

amount to a single scheme, whether the scheme had multiple

victims, and whether it had the potential to last indefinitely

or was essentially finite. Home Orthopedics Corp. v. Rodríguez,

781 F.3d 521, 529 (1st Cir. 2015). The First Circuit has

explained that “RICO is not aimed at a single narrow criminal

episode, even if that single episode involves behavior that

amounts to several crimes.” Systems Mgmt., Inc. v. Loiselle,

303 F.3d 100, 105 (1st Cir. 2002) (internal citations omitted).

Here, all of the alleged acts occurred over a period of

four and one-half years (January 2008 to August 2012). Compl. ¶

160. This is not so long a period of time so as to

automatically qualify as “continuous.” Cf. Fleet Credit Corp.

v. Sion, 893 F.2d 441, 447 (1st Cir. 1990) (holding that 95

fraudulent mailings over a four and one-half year period

constituted closed continuity, but that if the number of

predicate acts had been “few” there would be no continuity).

Except for one disconnected act in 2008, all of the conduct was

committed over a short period of time, making the 2008

transaction a “sporadic” offshoot that does not weigh heavily in

the temporal analysis. Id. (quoting H.J. Inc., 492 U.S. at

239).

The other indicia show that the Solar Resources scheme did

not exhibit closed continuity. The ur-example of a single

scheme that would qualify comes from H.J. Inc., where the

Supreme Court ruled that Northwestern Bell’s alleged six-year

campaign of bribery targeted at five Minnesota government

officials, designed to secure favorable rates, exhibited closed

continuity despite being a single “scheme.” 492 U.S. at 250.

The First Circuit has been reluctant to find closed continuity

in single schemes of a more limited nature, however. In Efron,

the court ruled that a scheme consisting of numerous alleged

instances of wire and mail fraud, all designed to drive up costs

in the construction of a hotel in order to extract value, did

not exhibit closed continuity because the scheme was limited to

a single business venture. 223 F.3d at 19. Similarly, in

Giuliano the court ruled that a series of fraudulent mailings

designed to gain control of a racetrack business venture were

insufficient to establish closed continuity, as the fraud was

limited to a single business with only one victim. 399 F.3d at

390 (“Our case law suggests that the commission of 16 predicate

acts over a six-month period is inadequate to establish a

closed-ended pattern of racketeering activity.”). Accord Home

Orthopedics, 781 F.3d at 530; Systems Mgmt., 303 F.3d at 105-06.

The Solar Resources scheme -- viewed on its own -- targeted

only a single business, had a very limited set of victims (Bill

Colman and his estate), and had a finite end date. It therefore

does not exhibit the kind of closed continuity indicating a RICO

pattern.

b. Open-ended Continuity

Lerner argues that the Solar Resources forms a pattern with

the Flynn-led schemes because, in all of them, the enterprise

members diverted funds and assets in order to enrich themselves

through the use of fraudulent or forged promissory notes and

investment documents. Pl.’s Opp’n Colman 14. Though she argues

that the five schemes together exhibit closed continuity, her

allegations also suggest open-ended continuity by illustrating

the enterprise’s regular way of doing business. H.J. Inc., 492

U.S. at 242. This is true only when taking into account the

four Flynn-led schemes, however, and the PSLRA exception bars

this Court from considering them for the open-ended continuity

analysis.

A plaintiff may demonstrate a “pattern” by showing a

“threat” of future criminal activity, defined as “a realistic

prospect of continuity over an open-ended period yet to come.”

Home Orthopedics 781 F.3d at 531 (quoting Feinstein v.

Resolution Tr. Corp., 942 F.2d 34, 45 (1st Cir. 1991)). “This

approach necessitates a showing that the racketeering acts

themselves include a specific threat of repetition extending

indefinitely into the future [or] . . . are part of an ongoing

entity’s regular way of doing business.” Feinstein, 942 F.2d at

45 (alteration and omission in original) (citation and internal

quotation marks omitted). “The ‘open-ended’ approach . . .

allows a plaintiff to state a claim without waiting for a long-

term pattern to develop ‘so long as the alleged racketeering

acts themselves include a specific threat of repetition

extending indefinitely into the future or are part of an ongoing

entity’s regular way of doing business.’” Rojas-Buscaglia v.

Taburno-Vasarely, 39 F. Supp. 3d 208, 214 (D.P.R. 2014) (quoting

Giuliano, 399 F.3d at 387).

Here, Lerner has alleged that Colman conducted the Solar

Resources scheme through the use of fraudulent documents and

forgeries, just as the enterprise allegedly conducted itself

through the regular provision of falsified promissory notes and

documents. See Compl. ¶¶ 160, 169, 171; Bolivar v. Fit Int'l

Group Corp., No. 12cv781 (PGG) (DF), 2017 U.S. Dist. LEXIS

39887, at *56 (S.D.N.Y. Mar. 16, 2017). Flynn’s subsequent

arrest and conviction do not interrupt the open-ended continuity

analysis, as this analysis examines events as they existed at

the time of the predicate acts. Heinrich v. Waiting Angels

Adoption Servs., Inc., 668 F.3d 393, 410 (6th Cir. 2012).

The PSLRA, however, presents a roadblock to establishing

open-ended continuity. The text of section 1964(c) states that

a plaintiff may not rely on “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).

Allowing Lerner to cite Colman’s alleged involvement in the

Flynn-led schemes to establish open-ended continuity would allow

her to use “conduct” barred by the PSLRA to “establish a

violation of section 1962.” As a general rule, a court may look

beyond predicate acts to the totality of the circumstances in

establishing open-ended continuity, see Heinrich, 668 F.3d at

410; United States v. Kaplan, 886 F.2d 536, 542 (2d Cir. 1989),

but the plain language of the PSLRA creates an exception to the

rule. This interpretation comports with the case law. For

example, the Second Circuit in MLSMK stated that the PSLRA

exception was designed “to prevent litigants from using artful

pleading to boot-strap securities fraud cases into RICO cases,

with their threat of treble damages.” 651 F.3d at 274 (citation

omitted). Similarly, the district court in Krear, interpreting

the PSLRA’s “conviction exception,” narrowed its application

only to the victims of indicted conduct in part because allowing

parties other than the victims to sue “would necessarily cause

the ‘conviction exception’ to swallow the rule which prohibits

civil RICO claims for securities fraud.” 961 F. Supp. at 1076.

Here, allowing Lerner to cite the conduct from the Flynn-led

schemes would let her “boot-strap” a limited and discrete case

of fraud into a RICO claim, using securities fraud as the strap.

This conflicts with the accepted broad interpretation of the

PSLRA.

Without the Flynn-led schemes, the Solar Resources scheme

does not exhibit open-ended continuity. Accordingly, this Court

must dismiss count I against Colman.

3. Count III: Violation of 18 U.S.C. section 1962(d)

Lerner argues that, even if counts I and II are not viable,

she still has a valid claim for RICO conspiracy under section

1962(d) because the existence of a conspiracy can be inferred by

the conduct of the enterprise. Pl.’s Opp’n Colman 17-18.

Colman argues the opposite, that Lerner’s failure to plead a

viable cause of action renders her conspiracy claim null.

Colman Mem. 12.

Colman is correct. A plaintiff can bring a section 1964(d)

conspiracy claim only if she has been injured by racketeering

activity, so proof of conspiracy naturally requires the

existence of a viable racketeering injury. Beck, 529 U.S. at

507. Section 1964(d) is not redundant due to other RICO

provisions because “the conspiracy provision allows persons who

are responsible for an injury, but did not actually participate

in the injury-causing activity, to be held liable.” Beck v.

Prupis, 162 F.3d 1090, 1099 (11th Cir. 1998). Here, as Lerner

does not have a viable racketeering claim, she also cannot bring

a conspiracy claim.

4. State Law Claims

The remaining state law claims do not give rise to federal

question jurisdiction. 28 U.S.C. § 1331. The Court declines to

exercise supplemental jurisdiction over these claims. See 28

U.S.C. § 1367(c); Carlsbad Tech., Inc. v. HIF Bio, Inc., 556

U.S. 635, 639-40 (2009); Lambert v. Fiorentini, 949 F.3d 22, 29

(1st Cir. 2020). Accordingly, these claims are dismissed without

prejudice to their refiling in the appropriate state court.

III. CONCLUSION

The Defendants’ motions to dismiss as to counts I-III is

GRANTED, and Lerner’s RICO claims are dismissed with prejudice.

The Defendants’ motion to dismiss counts IV-VI is also GRANTED,

and these claims are dismissed without prejudice.

SO ORDERED.

/s/ William G. Young

WILLIAM G. YOUNG

DISTRICT JUDGE