Petition for Writ of Certiorari — Tiffany Industries, Inc. v. Grant

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84-1084

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FILED

JAN 2 1985

WLEXANDER L. STEVAS,

tne

IN THE

Supreme Court of the United States

OCTOBER TERM, 1984

TIFFANY INDUSTRIES, INC.,

Petitioner,

VS.

ALEXANDER GRANT & COMPANY,

Respondent.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

Jim J. SHOEMAKE

(Counsel of Record)

Davip W. HARLAN

F. VINCENT VATTEROTT

GUILFOIL, PETZALL & SHOEMAKE

100 N. Broadway, Suite 2000

St. Louis, Missouri 63102

(314) 241-6890

Attorneys for Petitoner

St. Louis Law Printing Co., Inc., 411 No. Tenth Street 63101

314-231-4477

QUESTIONS PRESENTED FOR REVIEW

1. Whether prudential standing requirements preclude

judicial enforcement of a treble damage claim brought under 18

U.S.C. § 1964(c) by a public accounting firm against its former

client for past due accounting fees, injury to business reputation

and legal costs resulting from the discovery and disciosure of a

scheme by the client to overstate its financial condition in order

to influence potential lenders.

2. Whether a complainant bringing an action under 18

U.S.C. § 1964(c) must allege a distinct racketeering injury as the

Second Circuit requires or an injury arising from its ownership,

patronage or competition with an infiltrated enterprise as the

Seventh Circuit requires in order to demonstrate his entitlement

to judicial enforcement of his claim, or whether such allegations

are unnecessary as the Eighth Circuit and one panel of the

Seventh Circuit hold.

PARTIES TO THE ACTION

Petitioner, defendant below, is Tiffany Industries, Inc., a

publicly-held company which manufactures office furniture and

exports grain-handling and storage equipment. Petitioner’s

subsidiaries and affiliates are listed in the Appendix (App.

A-46). Farrell Kahn and Gail Martin were also defendants

below.

Respondent, plaintiff below, is Alexander Grant & Company,

a partnership engaged nationally in public accounting.

;

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TABLE OF CONTENTS

Questions Presented For Review ....................

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The Decisions Of The Second, Seventh And

The Issue Involves The Requisite Public Im-

portance To The Courts And _ Litigants

Trrougnout The Nation ..................

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Appendix:

Opinion of Court of Appeals ..............

Cyeemson Of Epistrict Court .................

Complaint (without exhibits) ..............

Statutory Provisions Involved .............

Petitioner’s Subsidiaries and Affiliates ......

Page

TABLE OF AUTHORITIES

Cases: \

Alexander Grant & Company v. Tiffany Industries,

Inc., 742 F.2d 408 (8th Cir. 1984), petition for

rehearing denied, (October 31, 1984) ....... Jo Oem FO, 42

American National Bank & Trust Company of Chicago

v. Haroco, Inc., No. 83-2529 (7th Cir., Oct. 19,

1984) petition for cert. filed, 53 U.S.L.W. 3437

(U.S. Nov. 21, 1984) (No. 84-822)........... 1%; om ay 4a

Associated General Contractors of California v.

California State Council of Carpenters, U.S.

Pee, ea are a et 7

Association of Data Processing Service Organizations v.

Camp, 397 U.S. 150, 90 S.Ct. 827 (1970) .......... 7

Bankers Trust Co. v. Rhoades, 741 F.2d 511 (2d Cir.

1984) petition for cert. filed, 53 U.S.L.W. 3367

(U.S. Oct. 24, 1984) (No. 84-657) ............ 5, 7, 20, 01

Bennett v. Berg, 685 F.2d 1053 (8th Cir. 1982), aff'd in

part and rev’d in part, 710 F.2d 1361 (8th Cir.) (en

banc), cert. denied, RS: ee

SG ce Nb Ne uanis: coca inaitey wae Oak ak 10

Cenco, Inc. v. Seidman & Seidman, 686 F.2d 449 (7th

Cir.), cert. denied, 459 U.S. 880 (1982)....... 4,7,8,9, 12

Furman v. Cirrito, 741 F.2d 524 (2d Cir. 1984), perition

for cert. filed, sub nom. Joel v. Cirrito, 53

U.S.L.W. 3343 (U.S. Oct. 15, 1984) (No. 84-604) . 5

Joel v. Cirrito, petition for cert. filed, 53 U.S.L.W. 3343

(U.S. Oct. 15, 1984) (No. 84-604), aff’g Furman v.

Cirrito, -741 F 20 324 (2a Cir. 19646)... oo ee » ae Ee

Sedima, S.P.R.L. v. Imrex Co., 741 F.2d 482 (2d Cir.

1984) petition for cert. filed, 53 U.S.L.W. 3367

(U.S. Oct. 22, 1984) (No. 84-648) ........ 5. 7, 3.9; i, i

Sutliff, Inc. v. Donovan Companies, Inc., 727 F.2d 648

ee Mol cE in SAivatac wy Usiceip Nase eck wath hg acuta Vinee 9

Warth v. Seldin, 422 U.S. 490, 9 S.Ct. 2197 (1975) .... 7

Statutes:

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Miscellaneous:

Racketeering Litigation Reporter (Andrews) .......... 6

No.

\ IN THE

Supreme Court of the United States

OCTOBER TERM, 1984

TIFFANY INDUSTRIES, INC.,

Petitioner,

VS.

ALEXANDER GRANT & COMPANY,

Respondent.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

Petitioner, Tiffany Industries, Inc. respectfully requests that

a writ of certiorari issue to review the judgment of the United

States Court of Appeals for the Eighth Circuit entered August

22, 1984.

a te

OPINIONS BELOW

The Opinion of the United States Court of Appeals for the.

Eighth Circuit is reported at 742 F.2d 408 (8th Cir. 1984) and is

reprinted in the Appendix (App. A-1). The Memorandum and

Order of the United States District Court for the Eastern

District of Missouri, Eastern Division, is reported at 563

F.Supp. 35 (E.D.Mo. 1982), and is reprinted in the Appendix

(App. A-13).

JURISDICTION

The United States Court of Appeals for the Eighth Circuit

entered judgment on August 22, 1984. Petitions for Rehearing

and Suggestions for Rehearing En Banc were denied by the

Eighth Circuit on October 31, 1984. Jurisdiction of this Court

is invoked under 28 U.S.C. §1254(1).

lit i

STATUTES INVOLVED

The Racketeer Influenced and Corrupt Organizations Act

(RICO), 18 U.S.C. §$1961-68 is reprinted in the Appendix

(App. A-34).

Section 1964(c) of that act provides:

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 and the

cost of the suit, including a reasonable attorney’s fee.

18 U.S.C. § 1964(c).

a oe

STATEMENT OF THE CASE

Alexander Grant & Company (Grant) brought suit against

Tiffany Industries, Inc. (Tiffany), and two of its employees in

February, 1979, alleging a civil violation of the Racketeer In-

fluenced and Corrupt Organizations Act (RICO), 18 U.S.C. §

1964(c). The RICO claim was predicated on allegations of Tif-

fany’s use of the mail or the telephone to justify accounting en-

tries claimed to be fraudulent. 18 U.S.C. §§ 1341, 1343. The

communications, according to the complaint, were part of a

scheme to report favorable financial results to potential lenders.

A step towards the fulfillment of the scheme involved

misrepresentations as to its financial condition made by Tiffany

to Grant during Grant’s audit of Tiffany’s 1977 financial state-

ment. Grant discovered and, later, disclosed the scheme. Grant

sought treble damages for past due accounting fees, injury to

reputation and legal and other expenses incurred.

On Petitioner’s motion, the District Court dismissed the ac-

tion oi1 December 30, 1982 for failure to allege an injury of the

type redressable under RICO. The District Court followed the

reasoning of the Seventh Circuit in Cenco, Inc. v. Seidman &

Seidman, 686 F.2d 449 (7th Cir.) cert. denied, 459 U.S. 880

(1982), a case described by the District Court as ‘‘strikingly

similar to the facts in this matter’’, which held that the objec-

tives and purpose of RICO would not be served by permitting

the action. (App. A-14). On August 22, 1984, the District

Court’s decision was reversed by the Eighth Circuit Court of

Appeals which held that Grant had alleged an injury within the

meaning of 18 U.S.C. § 1964(c). On October 31, 1984, the

Eighth Circuit denied Tiffany’s Petition for Rehearing.

The Eighth Circuit’s analysis is directly contrary to and

specifically rejects the meaning of the Seventh Circuit in Cenco

that standing under § 1964(c) should be determined in the con-

text of the purposes and objectives of the statute. The Eighth

Circuit also rejected the standing requirement adopted by the

aie idk

Second Circuit in the Sedima trilogy which held that a com-

plaint must allege a distinct racketeering injury. Sedima,

S.P.R.L. v. Imrex Co., 741 F.2d 482 (2d Cir. 1984), petition for

cert. filed, 53 U.S.L.W. 3367 (U.S. Oct. 22, 1984) (No. 84-648);

Bankers Trust Co. v. Rhoades, 741 F.2d 511 (2d Cir. 1984),

petition for cert. filed, 53 U.S.L.W. 3367 (U.S. Oct. 24, 1984)

(No. 84-657); Furman v. Cirrito, 741 F.2d 524 (2d Cir. 1984)

petition for cert. filed sub. nom. Joel v. Cirritto, 53 U.S.L.W.

33431 (U.S. Oct. 15, 1984) (No. 84-604).

as eee

REASONS FOR GRANTING WRIT

The prospect of recovering treble damages, in addition to

costs and attorneys’ fees, under the civil remedy provision of

RICO, 18 U.S.C. § 1964(c) has inspired plaintiffs in steadily in-

creasing numbers to include RICO claims in garden variety

commercial litigation. Evidence of the growing recognition of

RICO as a supplement to or as a surrogate for more familiar

statutory or common law remedies is that it has spawned a

specialized bar and a specialized publication, the Racketeering

Litigation Reporter. The burgeoning use of RICO in this con-

text threatens to impose unduly expansive liability and the pro-

spect of duplicative damages on unsuccessful defendants. Plain-

tiffs, on the other hand, are likely to experience either windfall

damage awards or undeserved settlements cudgeled from defen-

dants with legitimate fears of being subjected to a treble damage

judgment or the implications of being labeled as racketeers.

Understandably, the rampant employment of this treble damage

provision has resulted in uncertainty and confusion among trial

courts and litigants as to the scope of the remedy. The Circuit

Courts of Appeal are in similar turmoil.

The Circuits have rendered inconsistent, sometimes confusing

opinions concerning the scope of the cause of action under §

1964(c). The Second, Seventh and Eighth Circuits conflict on

this question. At the heart of their conflict is whether concepts

of prudential standing should limit the types of claims which

may be brought under § 1964(c) or whether the statute should be

interpreted literally to allow any claim.

The issue of the scope of the remedy provided by § 1964(c) is

ripe for review. Civil RICO claims are being filed with increas-

ing frequency, and the prejudice to litigants from the lack of

uniformity in the statute’s application promises to continue. A

reconciliation among the Circuits is unlikely due to the fun-

damental differences in the approach each has taken to the

issue. The decision of the Eighth Circuit in this case in par-

ticularly appropriate for review inasmuch as it specifically

fish, Seon

declined to consider Congressional purpose in enacting §

1964(c) in order to determine whether any prudential standing

requirements limit the scope of the remedy.

Petitions for writs of certiorari to the Second and Seventh

Circuits which raise similar issues regarding standing under §

1964(c) are now pending before the Court. Joel v. Cirrito,

supra, 53 U.S.L.W. 3343 (U.S. Oct. 15, 1984) (No. 84-604);

Sedima, S.P.R.L. v. Imrex Company, supra, 53 U.S.L.W. 3367

(U.S. Oct. 22, 1984) (No. 84-648); Bankers Trust Co. v.

Rhoades, supra, 53 U.S.L.W. 3367 (U.S. Oct. 24, 1984) (No.

84-657); American National Bank and Trust Company of

Chicago v. Haroco, Inc., No. 83-2529 (7th Cir., Oct. 19, 1984);

petition for cert. filed, 53 U.S.L.W. 3437 (U.S. Nov. 21, 1984)

(No. 84-822). Petitioner is informed that a conference to con-

sider the question of granting or denying the requested writs is

scheduled for January 4, 1985.

I. The Second, Seventh, and Eighth Circuits Conflict

The basis of the conflict among the Circuits is their view of

the doctrine of prudential standing as applied to § 1964(c).

Associated General Contractors of California v. California

State Council of Carpenters, ___. U.S. ___, 103 S.Ct. 897

(1983); Warth v. Seldin, 422 U.S. 490, 500, 95 S.Ct. 2197, 2206

(1975); Association of Data Processing Service Organizations,

Inc. v. Camp, 397 U.S. 150, 90 S.Ct. 827 (1970). While the

Eighth Circuit and one panel of the Seventh Circuit hold that

they must give effect to the literal language of § 1964(c), the Se-

cond Circuit and another panel of the Seventh Circuit have

found the statute’s terms ambiguous, and they have examined

the legislative purposes of RICO in order to interpret it consis-

tent with Congressional intent. Compare Alexander Grant &

Co. v. Tiffany Industries, Inc., supra, 742 F.2d 408 (8th Cir.

1984) and American National Bank and Trust Company of

Chicago v. Haroco, Inc., supra, No. 83-2529 (7th Cir., Oct. 19,

1984), with Cenco, Inc. v. Seidman & Seidman, supra, 686 F.2d

a es

449 (7th Cir.) and Sedima, S.P.& 1. v. Imrex Co., supra, 741

F.2d 482 (2d Cir.).

In Alexander Grant & Company vy. Tiffany Industries, Inc.,

742 F.2d 408 (8th Cir. 1984), petition for rehearing en banc

denied, (Oct. 31, 1984), the Eighth Circuit held that Grant had

standing to sue Tiffany, its former client, and two of Tiffany’s

employees under § 1964(c). The Court held that Grant’s allega-

tions of past due accounting fees and other damages arising out

of a scheme to overstate Tiffany’s finanical position for poten-

tial lenders constituted an injury redressable under RICO.

In reaching this conclusion, the Eighth Circuit specifically re-

jected the reasoning of the Seventh Circuit in Cenco, Inc. v.

Seidman & Seidman, 686 F.2d 449 (7th Cir.), cert. denied, 459

U.S. 880 (1982). In Cerco, the Seventh Circuit affirmed the

dismissal of a RICO claim brought against Cenco by its former

auditors. On facts similar to those here, the Seventh Circuit

determined that the auditors had no standing to sue for

damages incurred as a consequence of being the witting or un-

witting tool of the criminal enterprise. The Court reasoned that

Congress enacted RICO to cope with the criminal infiltration of

legitimate businesses. It provided civil remedies under § 1964(c)

for injured owners, customers or competitors of a business con-

ducted in violation of the act rather than a remedy for the enter-

prise’s accountants. The Court found that enforcing the

auditor’s treble damage claim in the circumstances would not

serve the compensatory and deterrent objectives of the RICO

Act. Id. at 457.

The Eighth Circuit rejected the Seventh Circuit’s analysis of

RICO’s purposes and objectives and its resultant prudential

standing determination. With apparent disregard for the likely

impact of its approach, the Eighth Circuit held that standing

should not be determined based on an analysis of RICO’s pur-

poses and objectives. Instead, it adopted a literal reading of the

statute.

a Gans

The Eighth Circuit questioned the value of the Cenco prece-

dent citing Sutliff, Inc. v. Donovan Companies, Inc., 727 F.2d

648 (7th Cir. 1984), authored by Judge Posner, who also wrote

the Cenco opinion. Citing language from the Sut/iff opinion,

the Eighth Circuit suggested that Judge Posner had recon-

sidered his position on prudential standing taken in Cenco.

Alexander Grant & Co. v. Tiffany Industries, Inc., supra, 742

F.2d at 412, n.10. Nothing in Sut/iff supports that suggestion.

The Sutliff case, in which Judge Posner found it unnecessary to

cite or distinguish Cenco, involved a suit by the infiltrated enter-

prise against its former infiltrators. Such a suit of course falls

squarely within the standing requirements discussed in Cenco

and is therefore wholly consistent with it. Judge Posner’s

reference to the breadth of the remedy provided for by Congress

in § 1964(c) concerned the reoccurring question of the presence

or absence of evidence of plaintiffs’ ‘‘organized crime’’ connec-

tions, not the question of standing. Sutliff, Inc. v. Donovan

Companies, Inc., supra, 727 F.2d at 654. The Eighth Circuit

also attempted to distinguish Cenco on the basis that Grant’s in-

jury was ‘direct’? while Seidman & Seidman’s was ‘‘indirect,”’

but its attempt was unconvincing because the distinction is not

real, but only semantic.

The Eighth Circuit’s opinion also conflicts with the pruden-

tial standing requirements found by the Second Circuit to apply

to § 1964(c) in Sedima, S.P.R.L. v. Imrex Co., supra, 741 F.2d

482 (2d Cir. 1984), petition for cert. filed, 53 U.S.L.W. 3367

(U.S. Oct. 22, 1984) (No. 84-648).' In Sedima, after a thorough

analysis of RICO’s legislative history and the ‘‘by reason of”’

language of the statute, the Second Circuit concluded that Con-

gress did not intend the far-reaching and redundant remedy that

a literal reading of § 1964(c)’s language would create. Jd. at

' The Eighth Circuit declined to rule on the question of the prior

criminal conviction requirement adopted by the Second Circuit in

Sedima, supra, because it was not raised in the trial court. Alexander

Grant & Co. v. Tiffany Industries, Inc., supra, 742 F.2d at 413, n.11.

482. It therefore determined two prerequisites for standing to

sue under § 1964(c): 1) a prior criminal conviction of the defen-

dant for either a violation of the RICO statute or one of the

predicate acts listed in 18 U.S.C. § 1961(1); and, 2) an allega-

tion of a ‘‘racketeering enterprise injury’’ apart from the injury

from the underlying predicate acts.

The Eighth Circuit found the racketeering enterprise injury

requirement inappropriate because of its similarity to the com-

petitive or commercial injury requirement which it previously

rejected in Bennett v. Berg, 685 F.2d 1053 (8th Cir. 1982), aff’d

in part and rev'd in part, 710 F.2d 1361 (8th Cir. 1983) (en banc)

cert. denied, ___. U.S. ___, 104 S.Ct. 527 (1983) and because

it was a ‘“‘slippery concept whose definition has eluded even

those courts professing to recognize it’’ Alexander Grant & Co.

v. Tiffany Industries, Inc., supra, 742 F.2d at 413.

Despite its criticism of the Sedima analysis, the Eighth Circuit

employed equally ‘‘slippery’’ concepts in this case by requiring

‘‘something more’’ than mere injury from underlying predicate

acts. Jd. Despite its words, the Eighth Circuit’s decision is also

inconsistent with the Second Circuit’s holding in Bankers Trust

v. Rhoades, supra, 741 F.2d 511. The Second Circuit there

adopted a ‘‘distinct RICO injury”’ standing requirement virtual-

ly identical to the racketeering enterprise injury requirement

previously rejected by the Eighth Circuit. Although the Eighth

Circuit admitted that it applied the ‘‘something more’’ require-

ment in a far narrower fashion than did the Court in Bankers

Trust, the conflict between the rationale and results of these

decisions is too great to be explained as simply a matter of

degree.

Since the decision of the Eighth Circuit in Alexander Grant

on August 22, 1984, a panel of the Seventh Circuit has issued an

opinion on the scope of civil RICO. American National Bank

and Trust Company of Chicago v. Haroco, Inc., supra, No.

83-2529 (7th Cir. Oct. 19, 1984), petition for cert. filed, 53

i ne

U.S.L.W. 3437 (U.S. Nov. 21, 1984) (No. 84-822). This opi-

nion specifically rejects the prior criminal conviction and

racketeering enterprise injury requirements of Sedima, supra, as

well as the distinct RICO injury requirement of Bankers Trust.

Ignoring the language of § 1964(c) which limits suits under it to

“any person injured...by reason of a violation of section

1962’’, the Seventh Circuit held that a plaintiff could sue under

civil RICO by merely alleging injury from underlying predicate

acts. American National Bank and Trust Company of Chicago

v. Haroco, Inc., supra, slip op. at 28. Although the Seventh

Circuit expressed bewilderment about the Eighth Circuit’s posi-

tion in Grant regarding the scope of the remedy under § 1964(c),

the adoption of a literal reading of the statute and the rejection

of the ‘‘by reason of a violation of section 1962’’ standard

places the Haroco decision in conflict with the Eighth and Se-

cond Circuits. /d. at 9, n.6.

Fundamental conflicts exist between three of the Circuits con-

cerning prudential standing under § 1964(c). These conflicts

cannot be resolved on factual or procedural grounds. To end

the continuing uncertainty resulting from the lack of uniformity

among the Circuits in the application of the potent remedy pro-

visions of § 1964, the Court should grant review on the issue of

prudential standing to sue under 18 U.S.C. § 1964(c).

Il. The Issue Involves The Requisite Public Importance To

The Courts and Litigants.

Questions of prudential standing under a statute enacted by

Congress are uniquely appropriate for Supreme Court review.

Uniformity and consistency, always important attributes in the

development of the law, have greater significance where the

issue is whether the judiciary ought to enforce a claim or not.

Disunity on this threshold matter would result in intolerable

forum-shopping and a perception of injustice. Only a ruling

from this Court can provide the required uniformity.

—:

The civil remedy available to litigants under § 1964(c) pro-

mises to alter the future conduct of commercial litigation in

federal courts throughout the country. Indeed, many would

argue that it already has. Plaintiffs have already transmogrified

everyday disputes over past due accounting fees (Alexander

Grant), the proper .calculation of interest rates (Haroco),

overstated invoices for parts (Sedima), and the terms of sale of a

business (Cirrito) into treble damage actions which potentially

will punish the respective defendants in their pocketbooks and

in their reputations on a scale not heretofore allowed.’ Every

case which arguably involves misstatements, concealment or

other overreaching is a candidate for enhancement by the inclu-

sion of a RICO claim. While speculation about the future effect

of § 1964(c) on the caseload in federal courts is fruitless, one can

predict with safety that no counsel for the plaintiff in a commer-

cial dispute arguably within the terms of § 1964(c) could ignore

its provisions without running the risk of having his or her pro-

fessional competence questioned.

The harshness of the remedies provided for in § 1964(c) sug-

gest the public importance of the issue of standing to invoke the

remedy. Treble damage provisions are unusual in federal

statutes. In those exceptional statutes, such as the Clayton Act,

where such provisions are found, this Court, recognizing the

potential for abuse as well as the punitive nature of the provi-

sions has assiduously supervised their development and applica-

tion. The provisions of § 1964(c) require similar attention.

? Alexander Grant & Company v. Tiffany Industries, Inc., supra,

742 F.2d 408; American National Bank & Trust Company of Chicago

v. Haroco, Inc., supra, No. 83-2529 (7th Cir., Oct. 19, 1984); Sedima,

S.P.R.L. v. Imrex Co., supra, 741 F.2d 482; Joel v. Cirrito, sub nom.

Furman vy. Cirritto, supra, 741 F.2d 524.

CONCLUSION

For the foregoing reasons, the Court should grant this peti-

tion.

Respectfully submitted,

Jim J. Shoemake

David W. Harlan

F. Vincent Vatterott

GUILFOIL, PETZALL & SHOEMAKE

100 N. Broadway, Suite 2000

St. Louis, Missouri 63102

314-241-6890

Attorneys for Petitioner

Tiffany Industries, Inc.

APPENDIX

ag ee

APPENDIX A

UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

No. 83-1608

ALEXANDER GRANT AND COMPANY,

Appellant,

VS.

TIFFANY INDUSTRIES, INC., Farrell Kahn and Gail Martin,

Appellees.

Submitted Jan. 13, 1984.

Decided Aug. 22, 1984.

Before ROSS, JOHN R. GIBSON and BOWMAN, Circuit

Judges.

JOHN R. GIBSON, Circuit Judge.

Alexander Grant and Company, a public accounting firm,

appeals the dismissal of its complaint brought against its former

client, Tiffany Industries, and certain Tiffany officials and

employees under Title IX, the Racketeer Influenced and Cor-

rupt Organizations (RICO) provision of the Organized Crime

Control Act of 1970, Pub.L. 91-452, 84 Stat. 941, codified at 18

U.S.C. §§ 1961-1968 (1982). The district court, 563 F.Supp. 35

(E.D.Mo. 1982), relying on the Seventh Circuit’s decision in

Cenco, Inc. v. Seidman & Seidman, 686 F.2d 449 (7th Cir.),

cert. denied, 459 U.S. 880, 103 S.Ct. 177, 74 L.Ed.2d 145

(1982), dismissed the complaint under Fed.R.Civ.P. 12(6)(6) on

the ground that Grant lacked standing to sue under RICO’s civil

remedy provision. It also denied Grant’s motion to file an

amended complaint. Grant argues on appeal that the district

court erred in dismissing its RICO claim and that it abused its

discretion in denying Grant’s motion to file the amended com-

plaint. We reverse and remand for further proceedings.

aa. ae

Grant was retained by Tiffany from 1970 through May, 1978.

In 1979, Grant filed an action under RICO’s civil remedy provi-

sion, 18 U.S.C. § 1964(c), against Tiffany, its president, Farrell

Kahn, and Kahn’s secretary Gail Martin. Grant claimed that it

was the target of a pervasive scheme of mail and wire fraud

fiscal year 1977. Tiffany allegedly sought the favorable audit to

obtain credit on better terms and to mislead its stockholders and

the Securities & Exchange Commission into believing that the

company was financially healthy.

For purposes of reviewing the district court’s dismissal of

Grant’s complaint under Fed.R.Civ.P. 12(b)(6), we must accept

as true all of Grant’s material allegations and liberally construe

the complaint in its favor. Loge v. United States, 662 F.2d

1268, 1270 (8th Cir. 1981), cert. denied, 456 U.S. 944, 102 S.Ct.

2009, 72 L.Ed.2d 466 (1982). The first allegation is that Kahn,

in an effort to inflate the value of Tiffany inventory, falsely

represented to Grant that Steelabrade Corporation, a supplier

of products to Tiffany, held $500,000 worth of Tiffany inven-

tory as of March, 1978. Grant requested confirmation of this

claim from Steelabrade president James Murphy. Kahn and

Martin, knowing Murphy would not comply, instead requested

that he compile a schedule of all purchases of Steelabrade pro-

ducts by Tiffany during 1977. The two then attached a copy of

Grant’s confirmation request to the schedule and fraudulently

inserted language above Murphy’s signature stating that ‘‘[t]his

inventory was at Our premises at December 31, 1977, and March

1, 1978.’ These documents were then mailed to Grant.

Grant’s second claim of fraud concerns an alleged sale of

$3,500,000 worth of Tiffany products to the government of

Nigeria. Grant learned through the course of its audit that a

substantial portion of the products sold had not yet been pur-

chased by Tiffany. Grant questioned whether Tiffany could,

under these circumstances, record in its financial statements the

substantial earnings resulting from this sale. In response, Tif-

fany personnel stated that the sale should be certified because

a ao

they had issued purchase orders for the products as of June 30,

1977, and that the products were held by ten suppliers who were

simply awaiting further shipping instructions. Grant requested

confirmation of this claim from the ten suppliers. Kahn and

Martin backdated purchase orders and mailed to Grant forged

letters from the suppliers confirming the representations made

by Tiffany personnel. Grant, still apprehensive, sought ‘‘recon-

firmation’’ of the same information. Kahn and Martin then

pressured six suppliers to sign and mail reconfirmation letters

back to Grant.

Grant further asserts that Kahn and Martin typed two letters

at Tiffany’s St. Louis County offices allegedly from Nigerian

bank officials. The two letters, one a forgery and the other ‘‘on

information and belief’? a forgery, represented that the two

banks had extended $3,500,000 in loan commitments to the

Nigerian government to enable it to purchase the Tiffany pro-

ducts. Grant also claims that Tiffany used false information to

persuade four independent public accounting firms to certify

the Nigerian sale, thereby pressuring Grant to do the same.

These certifications were then mailed to Grant. By April, 1978,

Grant suspected that it was being defrauded and reported its

concerns to the Securities & Exchange Commission as required

by SEC regulations.

Grant concludes its complaint with the allegation that Tif-

fany’s actions constitute a substantive RICO violation under 18

U.S.C. § 1962(c).' It asserts that mail fraud, 18 U.S.C. § 1341,

and wire fraud, id. § 1343, are two of the acts included in the

Section 1962(c) provides that

{i]t 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, direct-

ly or indirectly, in the conduct of such enterprise’s affairs

through a pattern of racketeering activity or collection of

unlawful debt.

a |

definition of ‘racketeering activity,’’? that the defendants car-

ried out two or more such acts within a ten-year period, thus

establishing a ‘‘pattern of racketeering activity,’’> and that Tif-

fany is an interstate ‘‘enterprise’’* conducted by defendants

through a pattern of racketeering activity. Grant further asserts

that it is entitled to civil damages for this violation under 18

U.S.C. § 1964(c).°

The district court denied Grant’s motion to file an amended

complaint. The amended complaint names additional Tiffany

officials as defendants and recites the foregoing with far greater

specificity and clarity. It also incorporates additional claims of

fraud; the original complaint includes 26 acts of mail fraud and

4 acts of wire fraud while the amended complaint reveals 48 and

10 instances, respectively. Included in the amended complaint

are the following additional allegations: (1) Tiffany officials

were negotiating with seven insurance companies for $9,000,000

in loans when it discovered in June, 1977 that, if generally ac-

cepted accounting principles were used, it was operating at a

* “*Racketeering activity’’ is defined as, inter alia, ‘‘any act which is

indictable under any of the following provisions of title 18, United

States Code: * * * section 1341 (relating to mail fraud), section 1343

(relating to wire fraud) * * *.’’ 18 U.S.C. § 1961(1)(B).

* A “pattern of racketeering activity’’ is defined as ‘‘at least two

acts of racketeering activity * * the last of which occurred within ten

years * * after the commission of a prior act of racketeering activity.”’

18 U.S.C. § 1961(5).

* “Enterprise’’ includes ‘‘any individual, partnership, corporation,

association, or other legal entity, and any union or group of in-

dividuals associated in fact although not a legal entity.’’ 18 U.S.C. §

1961(4).

* 18 U.S.C. § 1964(c) provides a civil remedy to ‘‘{aJ]ny person in-

jured in his business or property by reason of a violation of section

i962 °*.”

— yaa

loss for the year; (2) Tiffany officials forged at least some of the

‘‘reconfirmation”’ letters from those suppliers who either refus-

ed or ignored Kahn’s request that they assure Grant that they

held Tiffany inventory bound for Nigeria; (3) Tiffany officials

forged a third letter and a telex from officers of Nigeria banks

that confirmed the $3,500,000 loan commitment to the Nigerian

government; and (4) Tiffany officials further defrauded Grant

by representing that Tiffany ‘‘farm stores’’ held inventory in ex-

cess of its actual value. The officials also pressured the

managers of these stores to send false certifications to Grant

and to make phony offers to purchase their inventories at in-

flated prices.

Grant asserts the it was damaged in three respects as a result

of Tiffany’s fraudulent representations. First, it claims that it

suffered ‘‘theft of services,’’ i.e., the fraud required it to spend

substantially more time on the Tiffany audit with a commen-

surate increase in fees, none of which have been paid. Second,

it contends that the SEC investigation caused it to spend large

amounts for attorneys’ fees, document requests, and other ex-

penses. Third, Grant argues that the fraud caused it to suffer

damages to its business reputation.

I. Standing

The district court did not hold, nor does Tiffany argue, that

Grant has failed to plead facts sufficiently alleging that Tiffany

committed a substantive violation of RICO under section

1962(c).° Rather, the district court relied on Cenco and its

® See supra note 1. We do observe that Grant’s original complaint

alleges that Tiffany is both a ‘‘person”’ and an “‘enterprise’’ within the

meaning of section 1962(c). It was precisely because of the possibility

of such an identity that we held that count II of the complaint in Ben-

nett v. Berg, 685 F.2d 1053, 1061-62 (8th Cir. 1982), aff’d in part and

rev'd in part, 710 F.2d 1361 (8th Cir. 1983) (en banc), cert. denied,

___ U.S. ___, 104 S.Ct. 527, 78 L.Ed.2d 710 (1983), failed to state a

claim. Tiffany does not raise this point on appeal. We note, however,

that Grant’s amended complaint alleges that, in addition to Tiffany,

two other distinct ‘‘enterprises’’ existed. The first consists of an

= ee

holding that the accounting firm in that case suffered only ‘‘in-

direct’’ injury insufficient to grant it standing under section

1964(c).’ Grant asserts that Cenco should not be adopted as the

law of this circuit because its restrictive interpretation has no

basis in the language or legislative history of RICO. It further

argues that, in any event, this case is distinguishable from Cenco

because Grant has been ‘‘directly’’ injured by Tiffany’s

fraudulent practices. Tiffany argues that Cenco was properly

decided and that Grant has suffered the same indirect injury

alleged by the accounting firm in that case.’

association in fact of the six named individuals alleged in the amended

complaint to have participated in the fraud. The second consists of all

Tiffany employees.

’ See supra, note 5. The term ‘‘indirect injury’’ discussed in Cenco

has also been used as a synonym for the ‘‘commercial’’ or ‘‘com-

petitive’ injury requirement. See, e.g., Schacht v. Brown, 711 F.2d

1343, 1356-58 (7th Cir.), cert. denied, ___ U.S. ___, 104 S.Ct. 509,

78 L.Ed.2d 698 (1983). It has been suggested that this requirement,

borrowed from antitrust law, is applicable to RICO because the

statute’s legislative history reveals that it was ‘‘intended in part to

combat the threat posed by racketcer influences in the free market

system.’’ Bennett, 685 F.2d at 1059. We explicitly rejected in Bennett

any ‘“‘commercial’’ or ‘‘competitive’’ injury restriction on standing

under RICO. Jd. See also Blakey, The RICO Civil Fraud Action in

Context: Reflections on Bennett v. Berg, 58 Notre Dame L.Rev. 237,

255 n. 52 (1982).

* Appellee Kahn argues separately that Grant’s injury is insufficient

because it was not a victim in the ‘‘target area’’ of the alleged RICO

violation. He asserts that this concept, derived from standing tests

developed under section 4 of the Clayton Act, 15 U.S.C. § 15 (1982),

is applicable to RICO plaintiffs. Recognizing that we declined in Ben-

nett an invitation to apply antitrust standing restrictions to RICO

piaintiffs, see supra note 7, Kahn does not argue that Grant satisfies

the target area test only if it suffers ‘‘commercial’’ or ‘‘competitive’’

injury. Rather, Kahn asserts that Grant must ‘‘loan Tiffany money,

buy its stock or otherwise extend economic benefits to [it] * * *’’ to

have standing. Appellee’s Brief at 20. We believe that this reasoning

is simply an alternative means of characterizing Grant’s injury as ‘‘in-

direct,’’ and therefore feel it merits no analysis independent of our

discussion of Cenco.

Say, gevee

We believe that Cenco is distinguishable from this case. In

Cenco, the accounting firm of Seidman & Seidman was a co-

defendant with Cenco, Inc., in a class action brought by persons

who had purchased Cenco stock at allegedly inflated prices due

to the company’s fraudulent representations. The co-

defendants cross-claimed against each other. Seidman argued

that it too had been defrauded by Cenco and sought as damages

under RICO indemnification for its liability to the shareholders.

In this case, Grant seeks not indemnification but damages for

the amount of its lost fees, the amount spent by reason of the

SEC investigation, and the amount representing its loss of

business reputation. We believe there are direct injuries,

distinguishable from a claim for indemnification. which, by its

very nature, is secondary and indirect.

Second, and more compellingly, we are unpersuaded by the

reasoning employed in Cenco. Judge Posner, writing for the

panel, reasoned that the case was one of first impression and

that the ‘‘language of section 1964(c) provides no answer * * *

and there is no useful legislative history relating to the provi-

sion.’’ Cenco, 686 F.2d at 457. The opinion thus focused on

whether recognizing a cause of action in favor of Seidman

would be consistent with the ‘‘compensatory and deterrent ob-

jectives of RICO”’ and would comport with its primary purpose

of ‘‘cop[ing] with the infiltration of legitimate businesses.’ ”’ Jd.

(quoting United States v. Turkette, 452 U.S. 576, 591, 101

S.Ct. 2524, 2532, 69 L.Ed.2d 246 (1981)). The court concluded

that the objectives and purposes of RICO would not be served

by permitting such actions, and also expressed concern with the

volume of treble damage lawsuits an opposite decision might

spawn.”

* The particular language in Cenco is as follows:

It is presumably on behalf of the owners, perhaps also the

customers and competitors, of such businesses that the civil

damages remedy was created, and not on behalf of the people

—s ww

We cannot agree that Grant’s standing under section 1964(c)

is to be determined by means of an appeal to RICO’s purpose

and objectives. Section 1964(c) provides a civil remedy for

**fa]Jny person injured in his business or property by reason of a

violation of section 1962 * * *.’’ This language is unambiguous

and, ‘‘in the absence of a ‘clearly expressed legislative intent to

the contrary, that language must ordinarily be regarded as con-

clusive.’ ’’ Russello v. United States, SE

S.Ct. 296, 299, 78 L.Ed.2d 17 (1983) (quoting Turkette, 452

U.S. at 580, 101 S.Ct. at 2527). We find no legislative history

supporting the direct-indirect dichotomy; indeed, to the extent

that the concept of indirect injury is a surrogate for concerns of

federal-state relations and crowded court dockets, the legislative

history indicates that Congress recognized that these were

necessary costs in the fight against organized crime. See Blakey,

supra note 7, at 280. It is simply ‘‘beyond our authority to

restrict the reach of the statute’’ in this manner. Bennett v.

Berg, 685 F.2d 1053, 1064 (8th Cir. 1982), aff’d in part and

rev'd in part, 710 F.2d 1361 (8th Cir. 1983) (en banc), cert.

denied, ___ U.S. ___, 104 S.Ct. 527, 78 L.Ed.2d 710 (1983);

see generally Moss v. Morgan Stanley, Inc., 719 F.2d 5, 21 (2d

Cir. 1983), cert. denied, U.S. ___., 104 S.Ct. 1280, 79

L.Ed.2d 684 (1984); Schacht v. Brown, 711 F.2d 1343, 1361 (7th

Cir.), cert. denied, ____ U.S. ___, 104 S.Ct. 509, 78 L.Ed.2d

698 (1983).

We also observe that Judge Posner, in the post-Cenco deci-

sion of Sutliff, Inc. v. Donovan Cos., 727 F.2d 648 (7th Cir.

1984), determined the scope of RICO with considerably greater

who supply office equipment or financial or legal services to

criminal enterprises that may be violating RICO. It is unlikely

that Congress if it had adverted to the issue would have chosen

to create in the wake of every RICO violation waves of treble-

damage suits by all who may have suffered indirectly from the

violation, especially when many of these would inevitably be, as

here, the witting or unwitting tools of the violator.

686 F.2d at 457.

— > om

deference to its plain language than he did in Cenco.'° We

believe that Sutliff robbed Cenco of much of the precedential

value accorded it by the district court. Insofar as the ap-

proaches in the two cases differ, the task of reconciliation is left

to the Seventh Circuit.

We conclude that Grant has suffered injury within the mean-

ing of section 1964(c).

II. Racketeering Enterprise Injury

Section 1964(c) provides that a civil remedy is available to

persons suffering injury ‘‘by reason of a violation of section

1962 * * *.’’ Yet section 1962(c) does not prohibit ‘‘racketeering

activity;’’ rather, it makes it unlawful for a person to ‘‘conduct

or participate * * * in the conduct of [an] enterprise’s affairs

through a pattern of racketeering activity * * *.’’ Tiffany

reasons that the language of these two sections combines to limit

civil recovery to persons suffering a ‘‘racketeering enterprise in-

jury’’—the conduct of an enterprise through a pattern of

racketeering—and does not create a cause of action for those

suffering injury only from the underlying predicate acts. Tif-

'© In Sutliff, Judge Posner made the following observation in the

context of rejecting an organized crime connection for civil RICO

recovery:

Congress deliberately cast the net of liability wide, being more

concerned to avoid opening loopholes through which the mi-

nions of organized crime might crawl to freedom than to avoid

making garden-variety frauds actionable in federal treble-

damage proceedings—the price of eliminating all possible

loopholes. We must abide by Congress’s decision, made at a

time of less sensitivity than today to the workload pressures on

the federal courts and to the desirability of maintaining a

reasonable balance between state and federal courts, however

much we may regret not only the burdens that the decision has

cast on the federal courts but also the displacement of state tort

law into the federal courts that it has brought about.

727 F.2d at 654 (citations omitted). Sutliff does not refer to the Cenco

decision.

— A-10 —

fany asserts that Grant’s injuries have resulted solely from the

particular acts of mail and wire fraud outlined in the complaint.

We have characterized the attempt to limit the scope of RICO

by seizing on the ‘‘by reason of’’ ianguage contained in section

1964(c) as a ‘‘reiterat[ion] in new guise [of] the argument that no

[distinct] ‘enterprise’ is alleged * * *.’’ Bennett, 685 F.2d at

1059 n. 5. As advanced by Tiffany here, a racketeering enter-

prise injury also appears to bear some resemblance to the com-

mercial or competitive injury concept and to the requirement

that RICO is applicable to only those defendants associated

with organized crime. We rejected both of these restrictions in

Bennett. 685 F.2d at 1058-59, 1063-64. We recognize that a

racketeering enterprise injury is a slippery concept whose defini-

tion has eluded even those courts professing to recognize it. See

In Re Catanella and E.F. Hutton and Co. Sec. Litigaton, 583

F.Supp. 1388, 1434-37 (E.D.Pa.1984) (collecting cases).

“‘Underlying this [racketeering enterprise injury] requirement is

the familiar judicial discomfort with the potential breadth of

RICO’s civil component.’’ Jd. at 1434.

We need not further consider the nature of a racketeering

enterprise injury, however, for it is clear that Grant’s complaint

does not simply allege injury from the underlying predicate acts.

It contends that Tiffany was conducted through a pattern of

mail and wire fraud that enabled it to remain in business. As a

result of this extended life, Grant continued to provide its ac-

counting services to Tiffany for a time greater than it would

have had the fraud not occurred. This also increased the harm

resulting to Grant’s business reputation. We conclude that

these allegations sufficiently plead an injury ‘‘by reason of” a

RICO violation.

The Second Circuit recently held in Sedima, S.P.R.L. v. Im-

rex Co., 741 F.2d 482 (2d Cir. 1984), that the ‘‘by reason of”’

language in section 1964(c) requires that the injury result from

mobster activity or the efforts of organized crime. As indicated

previously, this requirement is contrary to our holding in Ben-

— A-ll —

nett.'' We do view our decision today as consistent with the Se-

cond Circuit’s decision in Bankers Trust Co. v. Rhoades, 741

F.2d 511 (2d Cir. 1984). Both require that civil RICO plaintiffs

allege something more than injury from the underlying

predicate acts. We recognize, however, that the Second Circuit

in Bankers Trust defines that ‘‘something more’’ in a far nar-

rower fashion. Jd. at 517. See also Furman v. Cirrito, 741 F.2d

§24 (2d Cir. 1984) (criticizing the requirement of a racketeering

enterprise injury imposed by Sedima and Bankers Trust).

Appellee Kahn asserts in the alternative that no ‘‘racketeering

enterprise injury’’ exists because Tiffany never secured the

favorable audit from Grant, and therefore its business opera-

tions were never enhanced, nor did it receive any financial ad-

vantage, from its racketeering activity. We are not persuaded

by this argument. As concluded above, Grant’s complaint suf-

ficiently alleges that its injury resulted from the operation of

Tiffany through a pattern of racketeering activity. Moreover,

Kahn’s argument would lead to the anomalous result that the

racketeering activity must be allowed to proceed to successful

completion before civil recovery is permitted. No interpretation

of the plain language of RICO’s civil provisions supports the

position that Grant must silently tolerate the significant costs

and risks associated with ongoing fraud before it seeks redress.

111. Amended Complaint

The district court did not articulate its reasons for refusing to

allow Grant to file the amended complaint. Two factors con-

vince us that the district court should on remand give serious

consideration to Grant’s motion. First, any additional allega-

tions contained in the amended complaint would in all

'' Sedima also holds that a prior criminal conviction is a prerequisite

to civil RICO recovery. This issue has not been raised in the district

court in this case.

— A-12 —

likelihood be permitted in evidence under the original com-

plaint. Second, the amended complaint relates Grant’s claim in

a far clearer and more specific manner.

In summary, we conclude that Grant has sufficiently pled that

it was ‘‘injured’’ by Tiffany’s fraudulent practices and that its

injury occurred by reason of”’ Tiffany’s alleged violation of sec-

tion 1962(c).

— A-13 —

APPENDIX B

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF MISSOURI

EASTERN DIVISION

No. 79-191 C (3)

ALEXANDER GRANT & COMPANY,

Plaintiff,

Vv.

TIFFANY INDUSTRIES, INC., et al.,

Defendants.

MEMORANDUM AND ORDER

(Filed Dec. 30, 1982)

This matter is before the Court on defendants’ renewed mo-

tions to dismiss. The Court in its order of July 20, 1982, set out

a pre-trial procedure which would be followed in this matter. In

this initial stage the Court will consider only the legal issue of

plaintiff’s standing under the civil liability provisions of the

Racketeer Influenced and Corrupt Organizations Act (RICO),

18 U.S.C. §1964. Both sides have briefed this issue extensively

for the Court.

Plaintiff is the former independent auditor of defendnat Tif-

fany Industries. In its complaint plaintiff alleges that defen-

dants committed various fraudulent acts in an attempt to

deceive plaintiff as to Tiffany’s true financial condition. Plain-

tiff claims that the resulting deception visited upon it resulted in

harm to its reputation and seeks treble damages under RICO.

Defendants contend that plaintiff has no standing under

RICO to bring this action and cite in support of their argument

the Seventh Circuit’s recent opinion in Cenco, Inc. v. Seidman

& Seidman, 686 F.2d 449 (7th Cir. 1982). Thus the Court’s rul-

ing on defendants’ motions turns upon Cenco’s meaning and

applicability to this action.

—

Cenco was an action involving facts very similar to those in

this action. Purchasers of Cenco stock brought a class action

against Cenco and its independent auditor Seidman & Seidman

alleging that fraudulent practices committed by various defen-

dants artificially inflated the value of Cenco’s stock. Seidman &

Seidman cross-claimed against Cenco under RICO. The court

phrased the issue as a question of ‘‘the standing of auditors

under the RICO statute...to sue [the audited company] for

damages....’’ 686 F.2d at 451. The court inquired ‘‘whether a

treble-damages action by auditors of criminal enterprises would

contribute to the compensatory and deterrent objectives of

RICO.’’ /d. at 457. Pursuant to this analysis, the court held

that auditors such as Seidman & Seidman have no standing

under RICO to sue the audited company. In so doing the court

stated:

[i]t is presumably on behalf of owners, perhaps also the

customers and competitors, of such businesses that the

civil damages remedy was created, and not on behalf of the

people who supply office equipment or financial or legal

services to criminal enterprises that may be violating

RICO.

Id.

In the matter sub judice plaintiff attempts to distinguish Cen-

co by arguing that the auditors there alleged only indirect injury

while plaintiff here is alleging a direct injury. Although the

matter seems to be largely a question of semantics, the holding

of the Seventh Circuit is clear—auditors of companies that have

been practicing fraudulent bookkeeping techniques do not have

standing under RICO to sue the audited companies. The court

ruled as a matter of law that auditors of fraud practicing firms

do not suffer the type of injury redressable under RICO.

Plaintiff also contends that Cenco is in conflict with a recent

Eighth Circuit decision, Bennett v. Berg, 685 F.2d 1053 (8th Cir.

1982), and that the Eighth Circuit’s opinion is controlling here.

It is true, of course, that if the Seventh and Eighth Circuits had

— A-15 —

issued conflicting rulings of law, this Court would be bound by

the Eighth Circuit’s edict. This, however, is not the situation

here. In Berg the Court addressed two arguments raised by ap-

pellees there. First, the couri resolved the issue of whether

plaintiffs in that action were required to plead breach of con-

tract to state a claim under RICO. Second, the court answered

appellees’ contention that plaintiffs had alleged no ‘‘injury to

property,’’ which appellees argued was a requirement of RICO.

685 F.2d at 1058. Thus, Berg is simply a different case than

Cenco, which indeed, is strikingly similar to the facts in this

matter.

Moreover, Berg is distinguishable from Cenco on one other

ground as well. In Berg plaintiffs were customers of defendants

and were alleging that the ‘‘life-care’’ they had contracted for at

the subject retirement village was endangered by defendants’

financial mismanagement. Contrast this with the situations in

Cenco and here in which piaintiffs are neither ‘‘owners...

customers {nor] competitors’’ of the alleged criminal enter-

prises. Cenco, 686 F.2d at 457. Accordingly, the Court does not

believe that Berg in any way alters the applicability or per-

suasiveness of Cenco, and thus, defendants’ motions to dismiss

plaintiff’s complaint will be granted.

Dismissal of plaintiff’s complaint does not, however, bring

this entire matter to a close. Several defendants in this action

have filed counterclaims against plaintiff, and the question re-

mains whether these are to be dismissed as weil. Inasmuch as

the counterclaims seem to raise primarily state law issues, the

Court is most concerned with whether it has subject matter

jurisdiction over the counterclaims. The Court, therefore, will

ask the parties to brief the issue of whether dismissa! of defen-

dants’ counterclaim is appropriate under the circumstances of

this action.

In accordance with the foregoing,

IT IS HEREBY ORDERED that defendants’ renewed mo-

tions to dismiss piaintiff’s complaint be and are GRANTED.

— A-16 —

IT IS FURTHER ORDERED that plaintiff’s complaint be

and is DISMISSED without prejudice.

IT IS FURTHER ORDERED that the parties shall within 15

days of the date of this order submit to the Court memoranda

on the issue of whether defendants’ counterclaim in this action

should be dismissed.

Dated this 30th day of December, 1982.

/s/ Edward L. Filippine

United States District Judge

inne wnt Matai,

ADEA i i ac i wae

— A-17 —

APPENDIX C

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF MISSOURI

EASTERN DIVISION

No. 79-0191-C(4)

ALEXANDER GRANT & COMPANY, a partnership,

Plaintiff,

VS.

. TIFFANY INDUSTRIES, INC., FARRELL KAHN

and GAIL MARTIN,

Defendants.

COMPLAINT

COUNT I

JURISDICTION AND VENUE

1. Jurisdiction of this Court is founded upon the provisions

of Chapter 96, U.S. Code, ‘‘Racketeer Influenced and Corrupt

Organizations’’, Title 18, U.S. Code, Sections 1961, 1962, 1963

and 1964. Defendants were associated with an enterprise [as

defined by 18 U.S.C. 1961 (4)], which enterprise was engaged in

interstate or foreign commerce (or affected interstate or foreign

commerce). Defendants did unlawfully, willfully, and know-

ingly conduct and participate, directly and indirectly, in the

conduct of such enterprise’s affairs through a pattern of

‘‘racketeering activity’? as defined in 18 U.S.C. 1961, to the

damage of plaintiffs as hereinafter alleged.

2. This civil action is brought under 18 U.S.C. 1964(c), which

provides that any person injured in his business or property by

reason of a violation of 18 U.S.C. 1962 may sue therefor in the

U.S. District Court for threefold damages.

3. Venue in this Court is founded upon 18 U.S.C. 1965(a), in

that defendants reside in the Eastern District of Missouri, or

— A-18 —

may be found in said District, or are transacting business in said

District.

4. Plaintiff Alexander Grant & Company (hereinafter

**Grant’’) is a partnership and brings this action in its common

name pursuant to Rule 17(b)(1), F.R.C.P. for the purpose of

enforcing a substantive right existing under the Constitution or

laws of the United States. Grant is a public accounting firm and

is engaged in the business of rendering audit and accounting ser-

vices throughout the United States. In the course of rendering

its services, Grant represents numerous publicly held companies

~ which are subject to regulation and supervision by the federal

Securities and Exchange Commission (‘‘SEC’’).

5. Defendant Tiffany Industries, Inc. (‘‘Tiffany’’) is a cor-

poration having its principal place of business in the Eastern

District of Missouri. Tiffany is a publicly held company. Until

approximately May 1, 1978, the stock of Tiffany was traded on

the American Stock Exchange.

6. Defendant Farrell Kahn (‘‘Kahn’’) is a resident of St.

Louis County, Missouri. At all relevant times herein alleged

and until approximately May 1, 1978, Kahn was President and

Chief Executive Officer (“‘CEO’’) of Tiffany. As CEO of Tif-

fany, Kahn directed and controlled the business of Tiffany and

its Operations.

7. Defendant Gail Martin (‘‘Martin’’) resides in the Eastern

District of Missouri. At all relevant times herein alleged, Martin

was employed by Tiffany as secretary to defendant Kahn.

8. At all relevant times, the activities of defendants Kahn and

Martin, and the activities of all other officers, agents and

employees of Tiffany, all as described herein, were performed

within their employment capacities with Tiffany and were car-

ried out in behalf of Tiffany.

9. Under the provisions of SEC regulations, public com-

panies, including Tiffany, are required to retain independent

— A-19 —

public accountants to audit their books and to certify to their

financial statements. SEC regulations further require filings by

Tiffany and other public companies of independently audited

financial statements, and the SEC and the investing public rely

upon the accuracy and reasonableness of said financial

Statements. For several years prior to 1978 and until approx-

imately May 22, 1978, Grant was retained by Tiffany to render

accounting and auditing services. Tiffany’s fiscal year ends on

December 31. Among the services rendered by Grant to Tiffany

was the conduct of annual audits of Tiffany’s books and

records. The results of audits conducted by Grant were incor-

porated by Tiffany into its annual reports to stockholders and

were also included in reports made by Tiffany to the SEC as re-

quired by federal securities laws.

10. Tiffany has, from time to time, borrowed substantial

sums from various lenders. Upon information, in July of 1977,

Tiffany sought and obtained additional loans upon representa-

tions by Tiffany to its lenders that Tiffany’s financial position

was sound and that Tiffany was enjoying positive earnings and

thus was a good credit risk to said lenders.

11. Defendant Tiffany is and was at all relevant times a ‘‘per-

son’’ as defined in 18 U.S.C. Sec. 1961(3). Tiffany sells its pro-

ducts in interstate and foreign commerce. Defendants Kahn

and Martin were at all relevant times ‘‘persons’’ employed by

Tiffany. Defendants were at all relevant times associated with

an ‘‘enterprise’’ as defined in 18 U.S.C. Sec. 1961(3) engaged in

or the activities of which affect interstate and foreign com-

merce, specifically, Tiffany and its business operations and af-

fairs.

12. Sometime prior to June 30, 1977, the exact time presently

unknown to plaintiffs, defendant Kahn and other officers and

employees of Tiffany devised a scheme or artiface to defraud

Grant and others. Defendant Kahn and other officers and

employees of Tiffany became aware that Tiffany’s actual finan-

cial position was unsound and that if ‘‘generaily accepted ac-

— A-20 —

counting principles’’ (““GAAP’’) were applied, Tiffany was in-

curring losses rather than earnings. Tiffany misrepresented its

true financial position to its lenders in order to obtain financing.

Grant was not retained by Tiffany to conduct ‘‘interim’’ audits

on Tiffany’s books and records during the year. Accordingly,

during the year Tiffany was able to record certain sales (as

hereinafter described) and to make other entries to its books

during the year without any check by independent auditors. Tif-

fany ‘‘closed’’ its 1977 books and sought to show earnings for

the fiscal year ending December 31, 1977. After adjustments

proposed by Tiffany, Defendant Kahn and other officers and

employees of Tiffany knew that if the actual financial facts (ap-

plying GAAP) concerning its 1977 performance were

discovered, Tiffany would have sustained a substantial loss for

the year instead of a profitable year as shown on Tiffany’s

books.

13. Defendants sought to induce Grant into assisting, aiding

and abetting Tiffany in making false, misleading and fraudulent

financial statements. Defendant Kahn and other officers and

employees of Tiffany gave Grant false, misleading and

fraudulent information, intending that Grant accept such false,

misleading and fraudulent information and permit Tiffany to

include such information in Tiffany’s financial statements.

Defendants further sought to induce Grant to restrict the scope

of its audit investigations by complaining that the scope was ex-

cessive and by withholding payment of amounts due and

theretofore promised to Grant for services performed by Grant

during the course of the audit. Defendants further sought to in-

duce Grant to ‘‘certify’’ its audit and financial statements to the

SEC and to stockholders, thus lending Grant’s reputation and

credibility as independent auditors to such false and fraudulent

financial statements.

14. Having devised the scheme to defraud as heretofore alleg-

ed, defendants conducted or participated, directly or indirectly,

in the conduct of Tiffany’s affairs through a pattern of

—__ ee

— A-21 —

racketeering activity as defined in 18 U.S.C. Sec. 1961(5) in the

following particulars:

(a) In late February or early March, 1978, defendant Kahn, in

furtherance of said scheme to defraud, called (on the telephone)

one Murphy, who is President of Steelabrade Corporation

(‘‘Steelabrade’’), a supplier of products to Tiffany. Kahn, with

full knowledge that as of December 31, 1977 and early March,

1978 Steelabrade held no Tiffany ‘‘inventory’’ in its possession,

nevertheless, fraudulently and willfully attempted to induce

Murphy to represent to Grant that Steelabrade did, in fact, have

in its possession as of December 31, 1977 and early March, 1978

certain inventory purportedly the property of Tiffany. Murphy

refused Kahn’s fraudulent request, whereupon Kahn directed

Murphy to prepare and deliver to Kahn a schedule of all pur-

chases during 1977 of Steelabrade products by Tiffany. Murphy

complied.

(b) Kahn falsely and fraudulently represented to Grant that

Steelabrade held in its possession (as of December 31, 1977 and

early March, 1978) approximately $500,000 in ‘‘inventory”’

(products sold by Steelabrade to Tiffany and other products, all

of which were held in Steelabrade’s possession). In reliance

upon said representations, Grant caused to be sent to

Steelabrade a ‘‘confirmation’’ request, that is, a written request

that Steelabrade confirm to Grant that Steelabrade did, in fact,

have in its possession said inventory. A copy of said confirma-

tion request is attached as Exhibit A and incorporated herein.

direction) prepared a schedule showing sales by Steelabrade to

Tiffany during 1977 and additional products. The total of said

sales and other property was valued at approximately $500,000.

To said schedule said defendants attached a confirmation re-

quest. Defendant Kahn, or defendant Martin, or some third

person (acting at the direction of Kahn or Martin) signed the

name ‘‘James V. Murphy’’ (President of Steelabrade) to said

document and dated the same. Said signature was made

— see

without the knowledge, consent or authorization of Murphy,

and is a forgery. Further, defendant Kahn, or defendant Martin

(at Kahn’s direction) inserted the following typed language in

the confirmation request:

**Attached please find a list of materials that was either

purchased from us going back to 1976 or was delivered to

our facility for processing during 1977. This inventory was

at our premises at December 31, 1977 and March 1, 1978.”’

The insertion of said language was done without the knowledge,

consent or authorization of Murphy, and is a false statement. A

copy of the fictitious and fraudulent confirmation, together

with the schedule, is attached as Exhibit B and is incorporated

herein.

(d) Defendants committed the acts herein alleged as part of a

scheme to defraud Grant, in that Defendants by means of false

representations and forgery, intended to induce Grant to believe

that Tiffany owned some $500,000 in inventory in the posses-

sion of Steelabrade. Defendants further attempted to induce

Grant to make a certified audit which would reflect ownership

by Tiffany of said inventory. Such certification would have

materially increased Tiffany’s earnings (or decreased its losses)

for 1977, and would have distorted Tiffany’s actual financial

condition as of December 31, 1977.

(e) On or about March 8, 1978, defendants, having devised

and intending to devise a scheme or artifice to defraud (as

heretofore alleged) by means of false or fraudulent representa-

tions, and for the purpose of executing such scheme or artifice

or attempting so to do, placed in a post office or authorized

depository for mail, to be sent or delivered by the U. S. Post Of-

fice Department, the fictitious, fraudulent and forged confirma-

tion (Exhibit B), addressed to Grant at its offices in Clayton,

Missouri. Such actions of defendants are in violation of Title

18, United States Code, Section 1341 (Mail Fraud). Further,

such actions constitute a part of a pattern of racketeering activi-

ty in violation of Title 18, United States Code, Section 1962.

— A-23 —

(f) On or about March 8, 1978, defendants, having devised

and intending to devise a scheme or artifice to defraud (as

heretofore alleged) by means of false or fraudulent representa-

tions, and for the purpose of executing such scheme or artifice

or attempting so to do, placed in a post office or authorized

depository for mail, to be sent or delivered by the U. S. Post Of-

fice Department, a copy of the fictitious, fraudulent and forged

confirmation (Exhibit B-1 attached hereto and incorporated

herein), addressed to James V. Murphy at Steelabrade at its of-

fices in St. Louis County, Missouri. Such actions of defendants

as alleged herein are a separate and additional violation of Title

18, United States Code, Section 1341 (Mail Fraud). Further,

such actions constitute a part of a pattern of racketeering activi-

ty in violation of Title 18, United States Code, Section 1962.

15. In June, 1977, shortly prior to obtaining loans as describ-

ed in paragraph 10, Tiffany recorded on its books a purported

sale to the Government of Nigeria (hereinafter the ‘‘Nigerian

sale’’) in the approximate amount of $3,500,000. The effect of

Tiffany’s recordation of such purported sale was to increase

substantially Tiffany’s net income for 1977 (or to decrease

losses substantially). The recordation of such sale by Tiffany

was effected unilaterally, that is, without audit by Grant.

16. In late December, 1977 when Grant personnel commenc-

ed work on the audit of Tiffany’s books for 1977, the purported

Nigerian sale was brought to Grant’s attention. Grant

discovered that most of the products allegedly ‘‘sold’’ by Tif-

fany in 1977 to the Government of Nigeria had not, in fact,

been shipped by Tiffany to the Customer. Additionally,

Grant’s investigation revealed that a substantial portion of the

products allegedly ‘‘sold’’ by Tiffany in 1977 were products Tif-

fany was to purchese from suppliers, and most of said products

had not even been purchased by Tiffany for delivery to the

Government of Nigeria.

17. As the result of discoveries by Grant as alleged in

paragraph 16, serious and substantial questions arose as to

~h~

whether, in accord with GAAP, Tiffany had properly recorded

the Nigerian sale, and whether Tiffany had the right to reflect in

its financial statements the substantial earnings (or reduction in

losses) which would result from such a sale. Grant personnel

communicated to defendant Kahn and to other Tiffany person-

nel their serious doubts as to the validity of the purported

‘*sale’’. Tiffany personnel and representatives of Tiffany ag-

gressively sought to persuade Grant to ‘‘sign off’’ on said sale,

that is, to certify that said purported ‘‘sale’’ was indeed a sale in

accord with GAAP.

18. Between January and May, 1978, defendants conducted

or participated, directly or indirectly, in the conduct of

Tiffany’s affairs through a pattern of racketeering activities in

that they committed acts in violation of 18 U.S.C. 1341 (mail

fraud) and 18 U.S.C. 1343 (wire fraud) as part of a fraudulent

scheme or artifice to deceive Grant and to induce Grant to cer-

tify the purported Nigerian sale as a sale in accord with general-

ly accepted accounting principles. More specifically:

(a) In carly 1978, Tiffany personnel represented to Grant per-

sonnel that the Nigerian sale should be recognized as a sale for

various reasons, including Tiffany’s representation that while

the products ‘‘sold’’ had not yet been delivered, nevertheless

Tiffany had issued purchase orders in June 1977 (before the

Nigerian sale was recorded by Tiffany) to various suppliers, and

that the suppliers were ‘‘holding’’ the products as early as June,

1977, awaiting only shipment instructions from Tiffany. Tif-

fany personnel urged Grant personnel to consider such products

as ‘‘sold’’ since Tiffany was obligated to pay the suppliers for

such products (by virtue of the purchase orders), and the pro-

ducts were ready for shipment.

(b) In response to the representations by Tiffany as described

in subparagraph (a), Grant personnel requested of Tiffany con-

firmation from each supplier as to the following: (1) the is-

suance by Tiffany of purchase orders to the various suppliers

o dh

prior to June 30, 1977 (the date the Nigerian sale was recorded);

(2) the fact that the products so ordered were in fact being held

for Tiffany by the suppliers prior to June 30, 1977.

paragraph (a) were false and fraudulent and known to be so

when made. Tiffany had not, in fact, issued such purchase

orders prior to June 30, 1977 as represented, nor were said pro-

ducts being held (per any such purchase orders) by said suppliers

awaiting orders for shipment. |

(d) Having devised a scheme or artifice to defraud, as hereto-

fore alleged, Tiffany caused to be placed in a post office or

authorized depository for mail matter, to be delivered by the

U.S. Post Office Department, and thereafter received a letter

dated February 20, 1978 from Hunter Manufacturing, Inc. to

Tiffany (Exhibit C attached and incorporated herein). Tiffany

caused said letter to be mailed and received said letter for the

purpose of executing a scheme to defraud Grant and to induce

Grant to ‘‘sign off’’ on the Nigerian sale, that is, to certify the

sale as a sale and to aid Tiffany in issuing false and fraudulent

financial statements which would distort Tiffany’s actual earn-

ings or losses. The aforesaid acts by Tiffany are in violation of

18 U.S.C. 1341 (mail fraud) and are part of a pattern of

racketeering activity carried out by Tiffany in the conduct of its

affairs.

(e) Tiffany committed nine additional and separate violations

of 18 U.S.C. 1341 (mail fraud) by causing nine letters to be sent

by other suppliers to Tiffany. None of the suppliers, including

Hunter Manufacturing, Inc., were aware of Tiffany’s true pur-

pose and intent. As to each such letter, Grant restates the

allegations contained in subparagraph (d) hereof. Each such

violation constitutes part of a pattern of racketeering activity by

Tiffany in the conduct of its affairs. Said letters are marked Ex-

hibits D, E, F, G, H, I, J, K and L, and are further described as

follows:

— A-26 —

Exhibit D: Letter of Merritt Roaster Corp. dated 2/2/78

to Tiffany

Exhibit E: Letter to Hagan Manufacturing Company

dated 2/17/78 to Tiffany

Exhibit F: Letter of the Essmueller Company dated

2/21/78 to Tiffany

Exbibit G: Letter of Seedburo International Equipment

Co. dated 2/21/78 to Tiffany

Exhibit H: Letter of Ferrell-Ross dated 2/20/78 to Tif-

fany

Exhibit I: Letter of Gustafson, Incorporated dated

2/17/78

Exhibit J: Letter of Universal Industries dated 2/17/78

Exhibit K: Letter of Howe Richardson Scale Company

dated 2/20/78 to Tiffany

Exhibit L: Letter of Superior Equipment Manufacturing

Co. dated 2/21/78 to Tiffany

(f) Copies of the ten letters (Exhibits C through L) were

delivered by Tiffany employees to Grant personnel in early

1978. Grant personnel advised Tiffany that Grant wished to

‘treconfirm’’ the representations of the suppliers by having Tif-

fany address an additional letter to some of the suppliers. Grant

wished to ask a representative group of the suppliers whether

the purported Purchase Order to each supplier was, indeed,

received by the supplier prior to June 30, 1977, and whether the

material supposedly ordered by the Purchase Order had, in-

deed, been held for Tiffany’s account and continued to be so

held. A draft of such a confirmation letter was prepared. On or

about March 13, 1978, Defendant Kahn, knowing that the

representations in said letter (if signed and returned by the sup-

pliers) were false, and intending to defraud and mislead Grant,

caused six (6) letters (Exhibits M through R attached and incor-

porated herein) to suppliers to be typed on Tiffany letterhead.

Defendant Kahn and other Tiffany personnel acting on behalf

of Tiffany, having devised a scheme or artifice to defraud, caus-

ed to be placed in a post office or authorized depository for mail

matter, to be delivered by the U.S. Post Office Department,

said six letters (Exhibits M through R). Each such letter contain-

ed false and fraudulant statements, and said letters were placed

in the mail, addressed to the suppliers as addressees, with the in-

tent by Tiffany to induce each addressee to sign such letter and

return the same to Grant and thus to aid and assist Tiffany in

defrauding Grant. Tiffany caused said letters to be mailed for

the purpose of executing a scheme to defraud Grant and to in-

duce Grant to ‘‘sign off’’ on the Nigerian sale, that is, to certify

the sale as a sale and to aid Tiffany in issuing false, fraudulent

and misleading financial statements which would distort Tif-

fany’s actual earnings or losses.

(g) Each of the six mailings (Exhibits M through R) wherein

Tiffany caused a confirmation to be mailed, is a separate and

additional violation of 18 USC 1341 (mail fraud) and each such

violation is a part of a pattern of racketeering activity carried

out by Tiffany in the conduct of its affairs.

(h) Upon information and belief, Grant alleges that after the

six letters (Exhibits M through R) described in sub-paragraphs

(f) and (g) were received by the various suppliers, one or more of

said suppliers communicated to Tiffany a refusal or reluctance

to sign and return the confirmation letter, since at least portions

of the statements each supplier was asked to ‘‘confirm’’ was

false. At various times (the specific instances presently unknown

to Grant) officers and employees of Tiffany, having devised a

scheme or artifice to defraud Grant by means of false and

fraudulent representations (as heretofore described) and for the

purpose of executing such scheme or artifice, transmitted or

caused to be transmitted by means of wire (telephone) in in-

terstate commerce messages regarding said letters (Exhibits M

— A-28 —

through R) and fraudulent requests that one or more of said

suppliers sign and return said confirmations. Each such

telephone or other wire communication is a separate violation

of 18 USC 1343 (wire fraud).

(i) Having devised a scheme or artifice to defraud (as

heretofore described), and for the purpose of executing such

scheme or artifice, officers and agents of Tiffany induced the

suppliers identified in Exhibits M to R to sign said letters and

further caused said letters to be addressed to Grant and to be

placed in a post office or authorized depository or mail matter,

to be delivered by the U.S. Post Office Department. Each of

the six instances aforesaid, wherein Tiffany caused s-id letters

to be mailed to Grant, is a separate and additional violation of

18 U.S.C. 1341 (mail fraud) and each such violation is a part of

a pattern of racketeering activity carried out by Tiffany in the

conduct of its affairs. Tiffany caused said confirmations to be

mailed to Grant for the purpose of executing a scheme to

defraud Grant and to induce Grant to ‘“‘sign off’? on the

Nigerian sale, that is, to certify the sale as a sale and to aid Tif-

fany in issuing false and fraudulent financial statements which

would distort Tiffany’s actual earnings and losses.

(j) In early 1978, questions were raised by Grant as to whether

the Government of Nigeria (the alleged purchaser, sometimes

referred to as the ‘‘Bendel Food Production Board’’) had made

arrangements so as to provide Tiffany sufficient assurance that

amounts due Tiffany under the purported Nigerian sale would

be paid. Defendant Kahn and other Tiffany officers and

employees represented to Grant that ‘‘financing’’ had been ar-

ranged, and that a consortium of banks in Nigeria had made

commitments to loan the Purchaser sufficient funds to make

full payment to Tiffany for products sold under the Nigerian

sale. As purported proof of said financing commitments,

defendant Kahn, acting in behalf of defendant Tiffany,

delivered to Grant the following documents (marked as follows

and incorporated herein):

— A-29 —

Exhibit S: Letter dated 3/9/78 to Tiffany, from W. J.

Anukpe, Chairman/Managing Director, New

Nigeria Bank Ltd. (the ‘‘Anukpe letter’’).

Exhibit T: Letter dated 3/20/78 to Tiffany, from M. In-

sole, Principal Manager, Standard Bank

Nigeria Limited (the ‘‘Insole letter’’).

Defendant Kahn represented to Grant that Exhibits S and T had

been received by Tiffany from the Nigerian banks designated in

said exhibits, and further represented that by virtue of said let-

ters and other assurances given Kahn by the banks and by the

Purchaser, payment in full under the Nigerian sale was assured.

(k) The representations made by defendant Kahn and by

other Tiffany employees as described in subparagraph (j) were

false and fraudulent and known to be so when made:

(1) The Anukpe letter, Exh. S, is a forgery, the pur-

ported signature having been forged by defendant Kahn or

some other Tiffany officer or employee acting in Tiffany’s

behalf.

(2) The Anukpe letter, Exh. S, although represented as

having been typed and prepared in Nigeria, was in fact

typed at Tiffany’s offices in St. Louis County, Missouri by

defendant Martin or some other Tiffany officer or

employee acting in Tiffany’s behalf.

(3) The Insole letter, Exh. T, although represented as

having been typed and prepared in Nigeria, was in fact

typed at Tiffany’s offices on the same Tiffany typewriter

used to type the forged Anukpe letter.

(4) Upon information and belief, Grant alleges that the

Insole letter is a forgery.

(1) Upon information and belief, Grant further alleges:

(1) At various times (the specific instances presently

unknown to Grant), officers and employees of Tiffany, or

— =

others acting in Tiffany’s behalf, having devised a scheme

or artifice to defraud Grant by means of false and

fraudulent representations (as heretofore described) and

for the purpose of executing such scheme or artifice, plac-

ed (or caused 10 be placed) in a post office or authorized

depository for mail matter, to be sent or delivered by the

U.S. Post Office Department, one or both of the fictitious,

spurious and fraudulent documents (Exhs. S and T); in

violation of 18 U.S.C. 1341 (mail fraud).

(2) At various times (the specific instances presently

unknown to Grant), officers and employees of Tiffany, or

others acting in Tiffany’s behalf, having devised a scheme

or artifice to defraud Grant by means of false and

fraudulent representations (as heretofore described) and

for the purpose of executing such scheme or artifice,

transmitted or caused to be transmitted by means of wire

(telephone) and by telex in interstate or foreign commerce

the contents or substance of the contents of Exhs. S and T,

in violation of 18 U.S.C. 1943 (wire fraud).

(m) In a false and fraudulent attempt to ‘‘pressure’’ Grant in-

to certifying the Nigerian sale as a sate, Tiffany engaged the ser-

vices of four independent public accounting firms and furnished

to said firms the fictitious, spurious and fraudulent documents

(Exhs. S and T) and other false, misleading and fraudulent

materials. Tiffany intended, by such fraudulent actions, to per-

suade said accounting firms to render opinions to the effect that

the Nigerian sale should be recognized, and thus to coerce Grant

to render such opinion. Based upon the false representations

made to said firms, they did indeed render such opinions. Upon

information and belic:, Grant further alleges:

(1) At various times (the specific instances presently

unknown to Grant), officers and employees of Tiffany, or

others acting in Tiffany’s behalf, having devised a scheme

or artifice to defraud Grant by means of false and

fraudulent representations (as heretofore alleged), and for

———

the purpose of executing such scheme or artifice, placed or

caused to be placed in a post office or authorized

depository for mail matter, to be sent or delivered by the

U.S. Post Office Department, and transmitted by wire or

telex in interstate or foreign commerce, false and

fraudulent communications to said accounting firms and

to others, in violation of 18 U.S.C. 1341 (mail fraud) and

18 U.S.C. 1943 (wire fraud).

19. Throughout the course of the audit by Grant of Tiffany’s

books and records for 1977, Tiffany officers, agents and

employees (or others acting in Tiffany’s behalf) impeded and

obstructed the ordinary course of the audit and engaged in a

conspiracy to conceal relevant facts from Grant and to defraud

and mislead Grant. As the result of such conspiratovial and

fraudulent conduct, the time required by Grant personnel to

conduct the audit was substantially enlarged over the time which

would have been required had Tiffany not engaged in such con-

duct. Tiffany was well aware that the charges by Grant to Tif-

fany for audit services would be based upon the time spent by

Grant personnel. In further perpetration of this fraudulent and

criminal conspiracy, Tiffany attempted to induce Grant to com-

plete its audit and certify Tiffany’s fraudulent transactions first

by withholding payment; then, when the fraudulent and

criminal conduct was disclosed, Tiffany sought to conceal said

conduct by promising to pay Grant in full.

20. Had Grant been aware of the activities of defendants as

above alleged, it would not have performed any accounting ser-

vices for Tiffany in connection with the 1977 audit. As a result

of the fraudulent conduct of defendants as described above,

none of which was known or disclosed to Grant, the personnel

of Grant continued to perform accounting services for defen-

dant, all to Grant’s injury to its business and property.

21. Through late April, 1978, defendants attempted to con-

ceal (and are continuing to conceal) their fraudulent and

unlawful acts. In late April, 1978 when Grant confirmed that

— A-32 —

defendants had used forged and fictitious documents in an at-

tempt to defraud Grant and in a further attempt to publish

misleading and fraudulent financial reports, Grant promptly

advised Tiffany and its counsel that Grant would report its fin-

dings to the SEC as required by SEC Regulations. Following

said report, the SEC commenced an intensive investigation of

Tiffany; said investigation is still pending. Following Grant’s

report to the SEC, Tiffany terminated Grant and refused to pay

Grant for its services.

22. As the result of the SEC investigation, which was

necessitated by and resulted directly from the unlawful and

fraudulent actions of defendants, Grant has incurred substan-

tial expense in responding to SEC subpoenas and requests for

documents, interviews, the giving of testimony, counsel fees

related to same, and other related expenses.

23. As a further result of the unlawful and fraudulent actions

of defendants and their continued effort to conceal such ac-

tions, Grant has been damaged in its reputation as a national in-

dependent public accounting firm. Defendant Tiffany has

issued misleading public statements to the effect that Tiffany’s

problems do not involve violations of law but instead are little

more than ‘‘disputes’’ with its former auditors (Grant).

24. In furtherance of its fraudulent and unlawful actions, Tif-

fany (beginning in early May, 1978) promised to pay Grant all

fees owed (totaling $258,000), whereas Tiffany intended not to

pay Grant at all, but to induce Grant to limit its responses to the

SEC and to lend its reputation to representations made to the

SEC by Defendants.

25. As the result of the foregoing, Grant has been damaged in

the sum of $1,500,000.

WHEREFORE, plaintiffs (Grant) prays judgment against

defendants under Count I in the sum of $1,500,000; further, in

accord with 18 U.S.C. 1964(c), that said award of damages be

APERTURE

— A-33 —

trebled, and that plaintiffs further recover the cosis of this ac-

tion and reasonable attorney’s fees.

Walter M. Clark

and

Thomas E. Wack

Attorneys for Plaintiff

611 Olive St., Suite 1950

St. Louis, Missouri 63101

314-621-5070

OF COUNSEL:

ARMSTRONG, TEASDALE,

KRAMER & VAUGHAN

on hel

APPENDIX D

RACKETEER INFLUENCED AND

CORRUPT ORGANIZATIONS ACT

18 U.S.C. §§1961-1968

§1961. Definitions

As used in this chapter—

(1) ‘racketeering activity’? means (A) any act or threat in-

volving murder, kidnapping, gambling, arson, robbery,

bribery, extortion, or dealing in narcotic or other dangerous

drugs, which is chargeable under State law and punishable by

imprisonment for more than one year, (B) any act which is in-

dictable under any of the following provisions of title 18, United

States Code: Section 201 (relating to bribery), section 224

(relating to sports bribery), sections 471, 472, and 473 (relating

to counterfeiting), section 659 (relating to theft from interstate

shipment) if the act indictable under section 659 is felonious,

section 664 (relating to embezzlement from pension and welfare

funds), sections 891-894 (relating to extortionate credit transac-

tions), section 1084 (relating to the transmission of gambling in-

formation), section 1341 (relating to mail fraud), section 1343:

(relating to wire fraud), section 1503 (relating to obstruction of

justice), section 1510 (relating to obstruction of criminal in-

vestigations), section 1511 (relating to the obstruction of State

or local law enforcement), section 1951 (relating to interference

with commerce, robbery, or extortion), section 1952 (relating to

racketeering), section 1953 (relating to interstate transportation

of wagering paraphernalia), section 1954 (relating to unlawful

welfare fund payments), section 1955 (relating to the prohibi-

tion of illegal gambling businesses), sections 2314 and 2315

(relating to interstate transportation of stolen property), sec-

tions 2421-24 (relating to white slave traffic), (C) any act which

is indictable under title 29, United States Code, section 186

(dealing with restrictions on payments and loans to labor

— A-35 —

organizations) or section 501(c) (relating to embezzlement from

union funds), or (D) any offense involving bankruptcy fraud,

fraud in the sale of securities, or the fellonious manufacture,

importation, receiving, concealment, buying, selling, or other-

wise dealing in narcotic or other dangerous drugs, punishable

under any law of the United States;

(2) ‘‘State’’ means any State of the United States, the District

of Columbia, the commonwealth of Puerto Rico, any territory

or possession of the United States, any political subdivision, or

any department, agency, or instrumentality thereof;

(3) ‘‘person’’ includes any individual or entity capable of

holding a legal or beneficial interest in property;

(4) ‘‘enterprise’’ includes any individual, partnership, cor-

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

group of individuals associated in fact although not a legal enti-

ty.

(5) ‘‘pattern of racketeering activity’’ requires at least two

acts of racketeering activity, one of which occurred after the ef-

fective date of this chapter and the last of which occurred within

ten years (excluding any period of imprisonment) after the com-

mission of a prior act of racketeering activity;

(6) ‘‘unlawful debt’’ means a debt (A) incurred or contracted

in gambling activity which was in violation of the law of the

United States, a State or policial subdivision thereof, or which is

unenforceable under State or Federal law in whole or in part as

to principal or interest because of the laws relating to usury, and

(B) which was incurred in connection with the business of

gambling in violation of the law of the United States, a State or

political subdivision thereof, or the business of lending money

or a thing of value at a rate usurious under State or Federal law,

where the usurious rate is at least twice the enforceable rate;

(7) ‘‘racketeering investigator’’ means any attorney or in-

vestigator so designated by the Attorney General and charged

with the duty of enforcing or carrying into effect this chapter;

—-

(8) ‘‘racketeering investigation’” means any inquiry con-

ducted by any racketeering investigator for the purpose of ascer-

taining whether any person has been involed in any violation of

this chapter or of any final order, judgment, or decree of any

court of the United States, duly entered in any case or pro-

ceeding arising under this chapter.

(9) ‘‘documentary material’’ includes any book, paper, docu-

ment, record, recording, or other material; and

(10) ‘‘Attorney General’’ includes the Attorney General of

the United States, the Deputy Attorney General of the United

States, any Assistant Attorney General of the United States, or

any employee of the Department of Justice or any employee of

any department or agency of the United States so designated by

the Attorney Gener! to carry out the powers conferred on the

Attorney General by this chapter. Any department or agency so

designated may use in investigations authorized by this chapter

either the investigative provisions of this chapter or the in-

vestigative power of such department or agency otherwise con-

ferred by law.

§ 1962. Prohibited activities

(a) It shall be unlawful for any person who has received any

income derived, directly or indirectly, from a pattern of

racketeering activity or through collection of an unlawful debt

in which such person has participated as a principal within the

meaning of section 2, title 18, United States Code, to use or in-

vest, directly or indirectly, any part of such income, or the pro-

ceeds of such income, in acquisition of any interest in, or the

establishment or operation of, any enterprise which is engaged

in, or the activities of which affect, interstate or foreign com-

merce. A purchase of securities on the open market for pur-

poses of investment, and without the intention of controlling or

participating in the control of the issuer, or of assisting another

to do so, shall not be uniawful under this subsection if the

securities of the issuer held by the purchaser, the members of his

— ee ee

— < )

immediate family, and his or their accomplices in any pattern or

racketeering activity or the collection of an unlawful debt after

such purchase do not amount in the aggregate to one percent of

the outstanding securities of any one class, and do not confer,

either in law or in fact, the power to elect one or more directors

of the issuer.

(b) It shall be unlawful for any person through a pattern of

racketeering activity or through collection of an unlawful debt

to acquire or maintain, directly or indirectly, any interest in or

control of any enterprise which is engaged in, or the activities of

which affect, interstate or foreign commerce.

associated with any enterprise engaged in, or the activities of

which affect, interstate or foreign commerce, to conduct or par-

ticipate, directly or indirectly, in the conduct of such

enterprise’s affairs through a pattern of racketeering activity or

collection of unlawful debt.

(d) It shall be unlawful for any person to conspire to violate

any of the provisions of subsections (a), (b), or (c) of this sec-

tion.

§1963. Criminal penalties

(a) Whoever violates any provision of section 1962 of this

chapter shall be fined not more than $25,000 or imprisoned not

more than twenty years, or both, and shall forfeit to the United

States (1) any interest he has acquired or maintained in violation

of section 1962, and (2) any interest in, security of, claim

against, or property or contractual right of any kind affording a

source of influence over, any enterprise which he has establish-

ed, operated, controlled, conducted, or participated in the con-

duct of, in violation of section 1962.

(b) In any action brought by the United States under this sec-

tion, the district courts of the United States shall have jurisdic-

— A-38 —

tion to enter such restraining orders or prohibitions, or to take

such other actions, including, but not limited to, the acceptance

of satisfactory performance bonds, in connection with any pro-

perty or other interest subject to forfeiture under this section, as

it shall deem proper.

shall authorize the Attorney General to seize all property or

other interest declared forfeited under this section upon such

terms and conditions as the court shall deem proper. If a pro-

perty right or other interest is not exercisable or transferable for

value by the United States, it shall expire, and shall not revert to

the convicted person. All provisions of law relating to the

disposition of property, or the proceeds from the sale thereof,

or the remission or mitigation of forfeitures for violation of the

customs laws, and the compromise of claims and the award of

compensation to informers in respect of such forfeitures shall

apply to forfeitures incurred, or alleged to have been incurred,

under the provisions of this section, insofar as applicable and

not inconsistent with the provisions hereof. Such duties as are

imposed upon the collector of customs or any other person with

respect to the disposition of property under the customs laws

shall be performed under this chapter by the Attorney General.

The United States shall dispose of all such property as soon as

commercially feasible, making due provision for the rights of

innocent persons.

§1964. Civil remedies

(a) The district courts of the United States shall have jurisdic-

tion to prevent and restrain violations of section 1962 of this

chapter by issuing appropriate orders, including, but not limited

to: ordering any person to divest himself of any interest, direct

or indirect, in any enterprise; imposing reasonable restrictions

on the future activities or investments of any person, including,

but not limited to, prohibiting any person from engaging in the

same type of endeavor as the enterprise engaged in, the activities

— A-39 —

of which affect interstate or foreign commerce; or ordering

dissolution or reorganization of any enterprise, making due pro-

vision for the rights of innocent persons.

(b) The Attorney General may institute proceedings under

this section. In any action brought by the United States under

this section, the court shall proceed as soon as practicable to the

hearing and determination thereof. Pending final determina-

tion thereof, the court may at any time enter such restraining

orders or prohibitions, or take such other actions, including the

acceptance of satisfactory performance bonds, as it shall deem

proper.

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 and the cost of the suit, in-

cluding a reasonable attorney’s fee.

(d) A final judgment or decree rendered in favor of the

United States in any criminal proceeding brought by the United

States under this chapter shall estop the defendant from denying

the essential allegations of the criminal offense in any subse-

quent civil proceedings brought by the United States.

§1965. Venue and process

(a) Any civil action or proceeding under this chapter against

any person may be instituted in the district court of the United

States for any district in which such person resides, is found, has

an agent, or transacts his affairs.

(b) In any action under section 1964 of this chapter in any

district court of the United States in which it has shown that the

ends of justice require that other parties residing in any other

district be brought before the court, the court may cause such

parties to be summoned, and process for that purpose may be

served in any judicial district of the United States by the marshal

thereof.

— A-40 —

the United States under this chapter in the district court of the

United States for any judicial district, subpoenas issued by such

court to compel the attendance of witnesses may be served in

any other judicial district, except that in any civil action or pro-

ceeding no such subpoena shall be issued for service upon any

individual who resides in another district at a place more than

one hundred miles from the place at which such court is held

without approval given by a judge of such court upon a showing

of good cause.

(d) All other process in any action or proceeding under this

chapter may be served on any person in any judicial district in

which such person resides, is found, has an agent, or transacts

his affairs.

§1966. Expedition of actions

In any civil action instituted under this chapter by the United

States in any district court of the United States, the Attorney

General may file with the clerk of such court a certificate stating

that in his opinion the case is of general public importance. A

copy of that certificate shall be furnished immediately by such

clerk to the chief judge or in his absence to the presiding district

judge of the district in which such action is pending. Upon

receipt of such copy, such judge shall designate immediately a

judge of that district to hear and determine action. The judge

so designated shall assign such action for hearing as soon as

practicable, participate in the hearings and determination

thereof, and cause action to be expedited in every way.

§1967. Evidence

In any proceeding ancillary to or in any civil action instituted

by the United States under this chapter the proceedings may be

open or closed to the public at the discretion of the court after

consideration of the rights of affected persons.

ao eon

$1968. Civil investigative demand

(a) Whenever the Attorney General has reason to believe that

any person or enterprise may be in possession, custody, or con-

trol of any documentary materials relevant to a racketeering in-

vestigation, he may, prior to the institution of a civil or criminal

proceeding thereon, issue in writing, and cause to be served

upon such person, a civil investigation demand requiring such

person to produce such material for examination.

(b) Each such demand shall —

(1) state the nature of the conduct constituting the alleg-

ed racketeering violation which is under investigation and

the provision of law applicable thereto;

(2) describe the class or classes of documentary material

produced thereunder with such definiteness and certainty

as to permit such material to be fairly identified;

(3) state that the demand is returnable forthwith or

prescribe a return date which will provide a reasonable

period of time within which the material so demanded may

be assembled and made available for inspection and copy-

ing or reproducing; and

(4) identify the custodian to whom such material shall

be made available.

(1) contain any requirement which would be held to be

unreasonable if contained in a subpena duces tecum issued

by a court of the United States in aid of a grand jury in-

vestigation of such alleged racketeering violation; or

(2) require the production of any documentary evidence

which would be privileged from disclosure if demanded by

a subpoena duces tecum issued by a court of the United

States in aid of a grand jury investigation of such alleged

racketeering violations.

— A-42 —

(d) Service of any such demand or any petition filed under

this section may be made upon a person by —

(1) delivering a duly executed copy thereof to any part-

ner, executive officer, managing agent, or general agent

thereof, or to any agent thereof authorized by appoint-

ment or by law to receive service of process on behalf of

such persons, or upon any individual person;

(2) delivering a duly executed copy thereof io the prin-

cipal office or place of business of the person to be served;

(3) depositing such copy in the United States mail, by

registered or certified mail duly addressed to such person

at its principal office or place of business.

(e) A verified return by the individual serving any such de-

mand or petition setting forth the manner of such service shall

be prima facie proof of such service. In the case of service by

registered or certified mail, such return shali be accompanied by

the return post office receipt of delivery of such demand.

(f)(1) The Attorney General shall designate a racketeering in-

vestigator to serve as a racketeer document custodian, and such

additional racketeering investigators as he shall determine from

time to time to be necessary to serve as deputies to such officer.

(2) Any person upon whom any demand issued under this

section has been duly served shall make such material available

for inspection and copying or reproduction to the custodian

designated therein at the principal place of business of such per-

son, or at such other place as such custodian and such person

thereafter may agree and prescribe in writing or as the court

may direct, pursuant to this section on the return date specified

in such demand, or on such later date as such custodian may

prescribe in writing. Such person may upon written agreement

between such person and the custodian substitute for copies of

all or any part of such material originals thereof.

— = pe

(3) The custodian to whom any documentary material is so

delivered shall take physical possession thereof, and shall be

responsible for the use made thereof and for the return thereof

pursuant to this chapter. The custodian may cause the prepara-

tion of such copies of such documentary material as may be re-

quired for officiaui use under regulations which shall be pro-

mulgated by the Attorney General. While in the possession of

the custodian, no material so produced shall be available for ex-

amination, without the consent of the person who produced

such material, by any individual other than the Attorney

General. Under such reasonable terms and conditions as the

Attorney General shall prescribe, documentary material while in

the possession of the custodian shall be available for examina-

tion by the person who produced such material or any duly

authorized representatives of such person.

(4) Whenever any aitorney has been designated to appear on

behalf of the United States before any court or grand jury in

any case or proceeding involving any alleged violation of this

chapter, the custodian may deliver to such attorne such

documentary material in the possession of the custodian as such

attorney determines to be required for use in the presentation of

such case or proceeding on behalf of the United States. Upon

the conclusion of any such case or proceeding, such attorney

shall return to the custodian any documentary material so

withdrawn which has not passed into the control of such court

or grand jury through the introduction thereof into the record

of such case or proceeding.

(5) Upon the completion of —

(i) the racketeering investigation for which any

documentary material was produced under this chapter,

and

(ii) any case or proceeding arising from such investiga-

tion, the custodian shall return to the person who produc-

ed such material all such material other than copies thereof

aa ee

made by the Attorney General pursuant to this subsection

which has not passed into the control of any court or grand

jury through the introduction thereof into the record of

such case or proceeding.

(6) When any documentary material has been produced by

any person under this section for use in any racketeering in-

vestigation, and no such case or proceeding arising therefrom

has been instituted within a reasonable time after completion of

the examination and analysis of all evidence assembled in the

course of such investigation, such person shall be entitled, upon

written demand made upon the Attorney General, to the return

of all documentary material other than copies thereof made pur-

suant to this subsection so produced by such person.

(7) In the event of the death, disability, or separation from

service of the custodian of any documentary material produced

under any demand issued under this section or the official relief

of such custodian from responsibility for the custody and con-

trol of such material, the Attorney General shall promptly—

(i) designate another racketeering investigator to serve

as custodian thereof, and

(ii) transmit notice in writing to the person who produc-

ed such material as to the identity and address of the suc-

cessor so designated.

Any successor so designated shall have with regard to such

materials all duties and responsibilities imposed by this section

upon his predecessor in office with regard thereto, except that

he shal! not be held responsible for any default or dereliction

which occurred before his designation as custodian.

(g) Whenever any person fails to comply with any civil in-

vestigative demand duly served upon him under this section or

whenever satisfactory copying or reproduction of any such

material cannot be done and such person refuses to surrender

such material, the Attorney General may file, in the district

court of the United States for any judicial district in which such

person resides, is found, or transacts business, and serve upon

such person a petition for an order of such court for the en-

forcement of this section, except that if such person transacts

business in more than one such district such petition shall be fil-

ed in the district in which such person maintains his principal

place of business, or in such other district in which such person

transacts business as may be agreed upon by the parties to such

petition.

(b) Within twenty days after the service of any such demand

upon any person, or at any time before the return date specified

in the demand, whichever period is shorter, such person may

file, in the district court of the United States for the judicial

district within which such person resides, is found, or transacts

business, and serve upon such custodian a petition for an order

of such court modifying or setting aside such demand. The time

allowed for compliance with the demand in whole or in part as

deemed proper and ordered by the court shall not run during the

pendency of such petition in the court. Such petition shall

specify each ground upon which the petitioner relies in seeking

such relief, and may be based upon any failure of such demand

to comply with the provisions of this section or upon any con-

stitutional or other legal right or privilege of such person.

(i) At any time during which any custodian is in custody or

control of any documentary materia! delivered by any person in

compliance with any such demand, such person may file, in the

district court of the United States for the judicial district within

which the office of such custodian is situated, and serve upon

such custodian a petition for an order of such court requiring

the performance by such custodian of any duty imposed upon

him by this section.

(j) Whenever any petition is filed in any district court of the

United States under this section, such court shall have jurisdic-

tion to hear and determine the matter so presented, and to enter

each order or orders as may be required to carry into effect the

provisions of this section.

—s oe

APPENDIX E

Petitioner’s Subsidiary and Affiliated Companies

Tiffany Industries, Inc. is the parent company of the follow-

ing wholly-owned subsidiary corporations:

Centralia Container Corp., d/b/a *‘Concen Corp.’’

Modulo 3 Inc.

Tiffany Industries Americus Corp.

Tiffany Industries Americas, S.A., Inc.

(a wholly-owned subsidiary of Tiffany Americus

Corp.)

Tiffany Industries Americas, C.A., Inc.

(a wholly-owned subsidiary of Tiffany Americus

Corp.) .

Tiffany Industries Americus, Ltd.

(a wholly-owned subsidiary of Tiffany In-

dustries Americas, C.A., Inc.)

TRULOCK Machinery Fair, Inc.

TRULOCK Southern, Inc.

Vuetech Corp.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.