Hedayat Zolfaghari, Fakr Riahi-Amini, Parviz Azmoun, Pari Azmoun, Massoud Djahanbani, Kaveh Farboud, Parvaneh Farboud, Parviz Khabir, Manijeh Khabir, Issa Malek, Amir F. Momtaz, Mohammad R. Momtaz, Shaheen Masseri, as Trustee for Nazari and Shirin Atabaki, Faradj Panahy, as Trustee for His Daughter Yasmin Panahy, Lili C. Panahy, as Trustee for Nosrat Mahmoudi Chaicar, Nini Tavallali, as Trustee for Nosrat Mahmoudi Chaicar Nini Tavallai, Jalal C. Tavallali, and Batool Tajbaksh, Feresteh Razaghitajbaksh, Manoucher Tajbaksh v. Houshang I. Sheikholeslami, Moore, Libowitz & Thomas, a Partnership of Richard W. Moore, Michael S. Libowitz and Steven A. Thomas, Howard S. Margulies, Jenkins & Block, a Partnership of Robert Jenkins and Bruce Block, Mark Greenberg, Charlotte Clott, Alisa L. Clott, 943 F.2d 451, 4th Cir. (1991)
Hedayat Zolfaghari, Fakr Riahi-Amini, Parviz Azmoun, Pari Azmoun, Massoud Djahanbani, Kaveh Farboud, Parvaneh Farboud, Parviz Khabir, Manijeh Khabir, Issa Malek, Amir F. Momtaz, Mohammad R. Momtaz, Shaheen Masseri, as Trustee for Nazari and Shirin Atabaki, Faradj Panahy, as Trustee for His Daughter Yasmin Panahy, Lili C. Panahy, as Trustee for Nosrat Mahmoudi Chaicar, Nini Tavallali, as Trustee for Nosrat Mahmoudi Chaicar Nini Tavallai, Jalal C. Tavallali, and Batool Tajbaksh, Feresteh Razaghitajbaksh, Manoucher Tajbaksh v. Houshang I. Sheikholeslami, Moore, Libowitz & Thomas, a Partnership of Richard W. Moore, Michael S. Libowitz and Steven A. Thomas, Howard S. Margulies, Jenkins & Block, a Partnership of Robert Jenkins and Bruce Block, Mark Greenberg, Charlotte Clott, Alisa L. Clott, 943 F.2d 451, 4th Cir. (1991)
Hedayat Zolfaghari, Fakr Riahi-Amini, Parviz Azmoun, Pari Azmoun, Massoud Djahanbani, Kaveh Farboud, Parvaneh Farboud, Parviz Khabir, Manijeh Khabir, Issa Malek, Amir F. Momtaz, Mohammad R. Momtaz, Shaheen Masseri, as Trustee for Nazari and Shirin Atabaki, Faradj Panahy, as Trustee for His Daughter Yasmin Panahy, Lili C. Panahy, as Trustee for Nosrat Mahmoudi Chaicar, Nini Tavallali, as Trustee for Nosrat Mahmoudi Chaicar Nini Tavallai, Jalal C. Tavallali, and Batool Tajbaksh, Feresteh Razaghitajbaksh, Manoucher Tajbaksh v. Houshang I. Sheikholeslami, Moore, Libowitz & Thomas, a Partnership of Richard W. Moore, Michael S. Libowitz and Steven A. Thomas, Howard S. Margulies, Jenkins & Block, a Partnership of Robert Jenkins and Bruce Block, Mark Greenberg, Charlotte Clott, Alisa L. Clott, 943 F.2d 451, 4th Cir. (1991)
2d 451
Fed. Sec. L. Rep. P 96,192, RICO Bus.Disp.Guide 7817
Jan Schneider, Robert Alan Burka, Knopf & Burka, Washington, D.C.,
The plaintiffs in this action, who have advanced securities act and Racketeer
Influenced Corrupt Organization (RICO) act claims, are not among the class of
sophisticated institutional investors. They are a group of Iranian immigrants,
many of whom do not even speak English. Some of them may have been
dispossessed of their life savings by the FAMCO enterprise. As the district
court has recognized, common law fraud may well have existed. Yet, of course,
when assessing whether there has been a breach of the federal Racketeer
Influenced Corrupt Organizations Act, 18 U.S.C. 1961, et seq., that is not
enough. The defendants against whom RICO charges have been leveled are
natural persons who were associated with FAMCO in various capacities. At the
summary judgment stage, we take it that any of the defendants could have been
in a position to stop FAMCO in its tracks and that each of them was in a
position to blow the whistle. The defendants variously contend that they were
ignorant of FAMCO's wrongdoing, that they believed Michael Clott's
protestations of rectitude, that they thought discovered irregularities were
isolated, and, moreover, that they owed no duty to the plaintiffs and the public.
3
Having earlier held that FAMCO investment instruments were not "securities,"
there being no further federal claims or diversity jurisdiction, the district court
dismissed the suit. The instant appeal was then filed.
I. RICO
6
The plaintiffs attacked on the basis of 18 U.S.C. 1962(c) which states that:
7 shall be unlawful for any person employed by or associated with any enterprise
It
engaged in, or the activities of which affect, interstate ... commerce, to conduct or
participate, directly or indirectly, in the conduct of such enterprise's affairs through a
pattern of racketeering activity....
8
There are two manners of doing so. The plaintiffs could have sought to prove
that FAMCO was an interstate enterprise infiltrated by one or more of the
defendants to conduct its affairs through a pattern of racketeering activity. Or
the plaintiffs could have endeavored to show the defendants had participated in
an ongoing criminal organization amounting to an enterprise of individuals and
entities associated in fact to engage in fraudulent acts. United States v. Griffin,
660 F.2d 996, 999 (4th Cir.), cert. denied, 454 U.S. 1156, 102 S.Ct. 1029, 71
L.Ed.2d 313 (1982).
9
Although the reach of RICO has been extended to include wholly illegal
organizations, United States v. Turkette, 452 U.S. 576, 101 S.Ct. 2524, 69
L.Ed.2d 246 (1981), the original core purpose of the Act was to prevent and
remedy the criminal misuse of legitimate businesses. See D. Smith & T. Reed,
Civil RICO, p 3.01 (1990). So legality or illegality of FAMCO, on which the
efforts of the plaintiffs were focused, under 1962(c), was not an essential
question requiring decision. Nevertheless, in pleading and pursuing their case,
the plaintiffs have sought to prove that there was in being a criminal
association-in-fact separate from FAMCO-as the "association in fact". United
States v. Griffin.1
10
The plaintiffs, in short, did not choose to pursue a supportable route to avoid
summary judgment against them, and we should not replead their case for
them.2 Rather, they have pled and structured their case as alleging that the
defendants' enterprise was an associated-in-fact illegal enterprise.
11
The district court granted summary judgment as to the claims for the
defendants because it believed that "the facts of record here 'taken as a whole
could not lead a rational trier of fact to find for the non-moving party.' "
(quoting Matsushita Electric Industrial Co. v. Zenith, 475 U.S. 574, 587, 106
S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986)). Although the district court accepted
that there was evidence that the defendants' acts may have constituted common
law fraud, it determined that there was not more than a "scintilla" of evidence
that the defendants acted with the specific intent to participate in the overall
RICO criminal enterprise.
In dismissing the plaintiffs' claims under federal securities laws, the district
court relied on cases holding that "FAMCO-originated mortgage loans are not
'securities' as defined by both federal and state law." E.g., First Financial
Federal Savings and Loan Ass'n v. E.F. Hutton Mortgage Corp., 652 F.Supp.
471 (W.D.Ark.1987), aff'd, 834 F.2d 685 (8th Cir.1987). It was understandable
that the district court did so. In their complaint, the plaintiffs referred to their
understanding that they were buying "notes secured by first mortgages."
However, on close perusal, it would not appear proper to dispose of the case on
the basis of that understanding alone, since other factual allegations clearly
before us on the defendants' motion for summary judgment point in another
direction. The evidence, though factually disputed, would support, if accepted
In United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 853, 95 S.Ct.
2051, 2061, 44 L.Ed.2d 621 (1974), the Supreme Court set out the "touchstone"
test for whether an investment constitutes a "security":an investment in a
common venture premised on a reasonable expectation of profits to be derived
from the entrepreneurial or managerial efforts of others. By profits [we mean to
include] participation in earnings resulting from the use of investors' funds....
14
15
16
Purchaser understands that the mortgage loans have been purchased by Seller in
the secondary market and that Seller is selling the mortgage loans "as is" and is
making no representations and warranties with respect to the mortgage loans
but will assign to Purchaser those representations and warranties which it has
received from the Originator and all of its rights under the Servicing
Agreement.
17
652 F.Supp. at 473. In addition, First Financial retained "the right to review all
mortgage files and to make on site inspections of the properties securing any
mortgage loan and reject any mortgage loan that does not meet the terms and
conditions of this Agreement...." Id. at 473. What First Financial bought, and, in
point of fact, received, were specific, individual mortgages, evidenced by the
fact that purchasers were expected by the contract to assess the soundness of
the individual loans purchased. The circumstances of the instant case may be
substantially different.
18
The evidence permits a finding that the plaintiffs here did not purchase
individual loans, but rather, purchased participation interests in a mortgage
backed mutual fund pool run by FAMCO, and as such the plaintiffs were
relying upon FAMCO's "entrepreneurial and managerial efforts" for their profit.
It may be that no one, neither plaintiffs nor defendants, expected the individual
investors to manage the loan portfolios. Perhaps all thought the success of the
investments depended upon FAMCO's skill in managing mortgage based
investments.
19
20
Michael Clott's deposition was not before the district court. It, therefore, plays
no part in our decision here. Since we are remanding for further factual
development, quite possibly by trial, however, the introduction of the
deposition would not be barred.
21
Thus, viewed at the time the investments were sold, what was involved may
well have been a pooled loan portfolio, not individual mortgages. The facts are
there to support a finding that FAMCO was seeking money from individual
investors for the general use of FAMCO. To be sure, FAMCO's internal
Thus, from a point of view determined as of the time of sale, the investment
instruments in question here may, indeed, have been securities. Although, as a
part of the overall scheme, there did exist some mortgage backed notes that
were not securities, those notes do not appear to have been what the plaintiffs as
investors received. The part of the scheme that did utilize notes was the fraud,
not involving securities, on institutional investors like First Financial. The fraud
on the individual plaintiff investors, however, did not appear to have utilized
notes. Rather, what was sold to the plaintiffs may well have been a
participation interest in a mortgage backed mutual fund type pool investment.
At the least, a jury conclusion to that effect would be sustainable.
III. CONCLUSION
23
While we affirm the summary judgment for the defendants on the RICO claim,
we conclude that summary judgment for the defendants on the securities fraud
claim was not warranted.
24
25
26
27
not matter, but it must. Tafflin v. Levitt, 865 F.2d 595, 599 (4th Cir.1989) (the
character of an instrument is determined when it is issued). Though it seems
self-evident, the securities laws protect persons who intend to purchase
securities. If a seller promises to deliver a security to a buyer, but delivers a
widget, he has committed securities fraud. If, on the other hand, the seller
promises a widget but delivers a security, he has committed widget fraud. I just
cannot see how a person who has no intention of buying a security, and is not
promised a security, can be the victim of securities fraud.
28
I would hold the plaintiffs to the fatal admissions in their complaint. No less
than three times, in paragraphs 17, 27, and 28, the plaintiffs assert that they
thought they were buying mortgage notes. The majority holds that,
notwithstanding these assertions, evidence in the record shows that the
plaintiffs might be able to prove otherwise; consequently, there is a sufficient
issue of material fact to preclude summary judgment. This holding ignores
Barwick v. Celotex Corp., 736 F.2d 946 (4th Cir.1984), in which this court held
that a party cannot create a genuine issue of material fact by contradicting itself.
Moreover, the complaint's allegations are not inadvertent errors; FAMCO's
representation that investors were purchasing mortgage notes is the cornerstone
of the fraud.
29
For an error not raised at the time when the district judge finally rules, at trial
or on summary judgment, to be considered on appeal there must have been very
limited circumstances amounting to plain error and refusal to consider must
Reves points out that "a note is presumed to be a 'security.' " 110 S.Ct. at 952. It
also equates "investment" with "security." The role of the plaintiffs has
fundamentally been that of investors. That presumption can be rebutted in case
of a note secured by a mortgage on a home, as distinguished from a mortgage
pool, where, as here, no notes were issued to the plaintiffs