D'Addario v. D'Addario

21-2105
D’Addario v. D’Addario
In the
United States Court of Appeals
FOR THE SECOND CIRCUIT
AUGUST TERM 2022
No. 21-2105
VIRGINIA A. D’ADDARIO, INDIVIDUALLY AND ON BEHALF OF THE
F. FRANCIS D’ADDARIO TESTAMENTARY TRUST AND THE VIRGINIA
D’ADDARIO TRUST; AND VIRGINIA A. D’ADDARIO, EXECUTRIX, AS
EXECUTRIX OF THE PROBATE ESTATE OF ANN T. D’ADDARIO,
DECEASED, AND ON BEHALF OF THE F. FRANCIS D’ADDARIO
TESTAMENTARY TRUST AND THE ANN T. D’ADDARIO MARITAL
TRUST,
Plaintiff-Appellant,
BRENT A. PLATT, TRUSTEE, AS TRUSTEE FOR THE VIRGINIA
D’ADDARIO SPRAY TRUST #1, THE VIRGINIA D’ADDARIO SPRAY
TRUST #2, AND THE VIRGINIA D’ADDARIO ACCUMULATION TRUST,
Plaintiff,
v.
DAVID D’ADDARIO, MARY LOU D’ADDARIO KENNEDY, GREGORY S.
GARVEY, RED KNOT ACQUISITIONS, LLC, SILVER KNOT, LLC, AND
NICHOLAS VITTI,
Defendants-Appellees. *
* The Clerk of Court is directed to amend the caption as set forth above.
On Appeal from the United States District Court
for the District of Connecticut
ARGUED: DECEMBER 8, 2022
DECIDED: JULY 24, 2023
Before: CARNEY, MENASHI, and ROBINSON, Circuit Judges.
Plaintiff-Appellant Virginia D’Addario appeals from the grant
of a judgment on the pleadings that barred her claims brought under
the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C.
§§ 1961 et seq. According to Virginia, Defendant-Appellant David
D’Addario, her brother and executor of their father’s probate estate,
looted the assets of the estate with the assistance of other defendants.
Virginia seeks damages for legal expenses that she incurred in seeking
to remove David as executor. The district court held that Virginia’s
claims are barred by the Private Securities Litigation Reform Act of
1995, also known as the “RICO Amendment,” which provides that
“no person may rely upon any conduct that would have been
actionable as fraud in the purchase or sale of securities to establish a
violation of [RICO].” 18 U.S.C. § 1964(c). We conclude that Virginia’s
claims are not barred by the RICO Amendment because the fraud she
alleges is not “in the purchase or sale of securities.” Accordingly, we
reverse the judgment of the district court and remand for further
proceedings consistent with this opinion.
Judge Carney concurs in part and dissents in part in a separate
opinion.
2
Edward C. Taiman, Jr., Sabia Taiman LLC, Hartford, CT,
F. Dean Armstrong, Armstrong Law Firm PC, Frankfort,
IL, for Plaintiff-Appellant.
BRIAN SPEARS, Spears Manning & Martini LLC,
Southport, CT, for Defendants-Appellees Gregory S. Garvey
and Red Knot Acquisitions, LLC.
Tony Miodonka, Benjamin M. Arrow, Finn Dixon &
Herling LLP, Stamford, CT, for Defendants-Appellees
David D’Addario, Mary Lou D’Addario Kennedy, Silver
Knot, LLC, and Nicholas Vitti.
MENASHI, Circuit Judge:
Plaintiff-Appellant Virginia D’Addario appeals from a
judgment of the United States District Court for the District of
Connecticut granting the defendants’ motion for judgment on the
pleadings. D’Addario v. D’Addario, No. 16-CV-0099, 2021 WL 3400633(D. Conn. Aug. 4, 2021).
Virginia brought claims, both individually and as the executrix
of her mother’s estate, under the Racketeer Influenced and Corrupt
Organizations Act (“RICO”), 18 U.S.C. §§ 1961 et seq., against her
brother, David D’Addario; her sister, Mary Lou D’Addario Kennedy;
Gregory Garvey; Nicholas Vitti; Red Knot Acquisitions, LLC; and
Silver Knot, LLC. She alleged that David orchestrated a long-running
scheme to “plunder, pillage and loot the over $162,000,000 in assets of
his deceased father’s probate estate.” App’x 40; Second Amended
Complaint (“SAC”) ¶ 1, D’Addario v. D’Addario, No. 16-CV-0099
3
(D. Conn. Oct. 15, 2019), ECF. No. 73. The district court concluded that
Virginia’s RICO claims were barred by the Private Securities
Litigation Reform Act of 1995—also known as the “RICO
Amendment”—which provides that “no person may rely upon any
conduct that would have been actionable as fraud in the purchase or
sale of securities to establish a violation of [RICO].” 18 U.S.C.
§ 1964(c).
We conclude that Virginia’s claims are not barred by the RICO
Amendment. Accordingly, we reverse the judgment of the district
court and remand for further proceedings.
BACKGROUND
In considering this appeal, we “accept all factual allegations in
the complaint as true and draw all reasonable inferences in favor” of
the plaintiff, Virginia. Bank of N.Y. v. First Millennium, Inc., 607 F.3d
905, 922 (2d Cir. 2010) (internal quotation marks omitted).
I
Virginia’s father, F. Francis D’Addario, controlled D’Addario
Industries, a business enterprise with ventures in “environmental
waste recycling and management, real estate, construction, building
materials, professional sports, communications, and fuel oil.” SAC
¶ 9. Francis died in an airplane crash in 1986 with a net worth of
approximately $111 million. He was survived by his wife, Ann, and
their five children, Virginia, Larry, Mary Lou, Lisa, and David.
Shortly after his death, Francis’s will was filed for probate in
the probate court of Trumbull, Connecticut. Francis had appointed his
two sons, David and Larry—along with three non-family members—
to be executors of his estate. His will provided that one half of his net
4
assets would go into a marital trust for the benefit of his wife and the
other half into five separate trusts for the benefit of his five children
in equal shares. The will and other estate-planning documents
provided that if any of the five children predeceased the others while
the estate remained open, the deceased child’s interests would return
to the estate for pro rata distribution to the remaining siblings.
Over three decades after Francis’s death, the estate remains
open in probate court, and assets have not been distributed to
beneficiaries. According to Virginia, the assets have not been
distributed because, since at least 1987, David has done “everything
within his power to transfer the significant assets of the Estate for his
personal financial benefit.” SAC ¶ 20. Although he “owed fiduciary
duties to [Virginia]” as an executor of the estate and as a trustee of
various testamentary trusts, he “engaged in a continuing course of
conduct” in breach of those duties in order to capture the assets of the
estate for himself. SAC ¶ 102. Apart from transferring assets away
from the estate, David has allegedly kept the estate open in order to
deprive Virginia of her interest in the estate. He allegedly told
Virginia, “I’m 15 years younger than you, I’ll outlive you, and I can
keep the Estate open until after you die.” SAC ¶ 16.
The defendants include David D’Addario; his sister, Mary Lou
D’Addario Kennedy; his business partner and alleged co-conspirator
Gregory S. Garvey; Red Knot Acquisitions, a Connecticut limited
liability company owned by Garvey but alleged to be the alter ego of
David; Silver Knot, a Delaware limited liability company formed by
David and Garvey to engage in a scheme described below; and
Nicholas Vitti, David’s personal financial advisor and confidant.
5
In effectuating his alleged long-term plan to transfer estate
assets for his personal benefit, David “designed and implemented a
number of schemes.” SAC ¶ 27. We describe each in turn.
A
First, we recount the “Red Knot Forbearance Agreement”
scheme. SAC at 17. In 1986, the estate owed approximately $25 million
to three banks—Connecticut National Bank, Connecticut Bank and
Trust Company, and People’s Bank (collectively, the “Bank
Group”)—on account of loans extended to F. Francis D’Addario. Four
years later, the Bank Group claimed that the estate was in default on
these loans and sought the sale of estate assets to satisfy the
obligations. The estate and the Bank Group entered into an agreement
pursuant to which additional funds were loaned to the estate and the
estate’s executors would sell assets to settle the loans.
In 1992, the Bank Group filed an application for removal of the
executors in the probate court due to the estate’s failure to dispose of
assets in a timely fashion. The Bank Group alleged that David and
Larry, as executors of the estate, had conflicts of interest that impeded
the settlement of the estate to the detriment of its creditors. With the
help of “skilled counsel,” however, David delayed a disposition by
the probate court for over five years. SAC ¶ 54.
By 1997, the amount owed to the Bank Group had grown to
over $48 million. Because of its own “inner turmoil” and “substantial
financial difficulties,” the Bank Group offered to extinguish the loan
obligations and liens in exchange for a one-time cash payment of $4.75
million. SAC ¶ 55. According to the complaint, David falsely claimed
that the estate could not produce the required funds. Instead, David
and Gregory Garvey created an entity called Red Knot Acquisitions,
6
which purchased the Bank Group’s secured loan position and entered
into a forbearance agreement with the estate.
The forbearance agreement gave Red Knot a lien on virtually
all the estate’s assets. The agreement also provided that if David were
ever removed as an executor, Red Knot would have “the immediate
right to engage in collection efforts on the over $48,000,000 allegedly
owed to Red Knot.” SAC ¶ 60. The agreement contained a purchase
option under which the estate could purchase the loan position at a
variable price until January 7, 2003. In 2000, for example, the estate
could have exercised the purchase option for approximately $800,000
and extinguished the debt owed to Red Knot. David did not exercise
that option on behalf of the estate.
Allegedly, the true purpose of the forbearance agreement was
to make it practically impossible to remove David as an executor.
“Rather than operate as a mechanism for a legitimate secured creditor
(purportedly, Red Knot) and a debtor (the Estate) to extend and work
out a debtor’s defaulted loan obligations, here the Red Knot
Forbearance Agreement was used by David and Garvey as a
mechanism for David to stay in control of the Estate for as long as he
desired.” SAC ¶ 65.
B
Second, we recount the “Silver Knot/Wise Metals” scheme.
SAC at 28. In 1986, shortly before his death, F. Francis D’Addario had
been negotiating an investment in an aluminum can recycling
business known as New England Redemption. After Francis’s death,
David “usurped that business opportunity for his personal financial
benefit” rather than continue the negotiations on behalf of the estate.
SAC ¶ 80. David “offered free rent in the Estate’s Bridgeport Brass
7
Building [to New England Redemption] in exchange for a 25%
ownership interest in the venture” for himself. SAC ¶ 80. Upon the
sale of New England Redemption in 1994, David “converted the
profits ... for his personal financial benefit[] and refused to plow those
profits back into the Estate.” SAC ¶ 81.
In 1999, David used those proceeds—or possibly other estate
assets—to form Silver Knot, LLC, which acquired a controlling
interest in Wise Metals, a producer of aluminum cans. 1 In 2014,
Constellium N.V., a Dutch aluminum company, acquired Wise
Metals for $1.4 billion, including a cash payment to Silver Knot of $455
million. David again did not deliver the proceeds of that sale to the
estate. Instead, he “converted those sale proceeds for his personal
financial gain and for the benefit of his co-conspirator Defendants.”
SAC ¶ 84.
C
Third, we recount the schemes that allegedly involved the
wrongful disposition of the estate’s real property. In 1986, the estate
owned an undeveloped plot of land on “Honeyspot Road” in
Stratford, Connecticut. SAC ¶ 29. David failed to pay taxes on the
land—even though the estate had sufficient “liquid assets” to pay its
taxes—resulting in a delinquency and a foreclosure sale. SAC ¶ 33.
The property was sold to “close friends” of Mary Lou in 1996 and then
1 The district court said that David formed Silver Knot and acquired the
interest in Wise Metals “using the proceeds from the New England
Redemption sale.” D’Addario, 2021 WL 3400633, at *2. But the complaint
describes the source of the funds only as “assets, proceeds and business
opportunities of the Estate.” SAC ¶ 83.
8
sold back to an entity controlled by David in 1997 at below-market
prices. SAC ¶ 34.
The estate also owned several residential properties in New
York, California, Florida, and Vermont. For over a decade, David,
Mary Lou, and Larry had “free and unfettered use” of the properties
while the estate paid all the maintenance costs. SAC ¶ 76. In 1997, the
New York and Vermont condominiums were deeded to David and
the Vermont lot was deeded to Mary Lou without payment to the
estate. In 1999, the California property was sold to a third party and
David did not remit the proceeds from the sale to the estate.
Additionally, the estate owned a 50 percent interest in an
undeveloped plot of land on “Frenchtown Road” in Trumbull,
Connecticut. SAC ¶ 41. David knew that the town was interested in
purchasing the property to build a new school. “In breach of his
fiduciary duties, David did not take all reasonable steps necessary to
accord the Estate the opportunity to acquire the [other] 50% interest”
in the property. SAC ¶ 43. Instead, he purchased the remaining 50
percent interest through his own company for $450,000 and
proceeded to sell the entire lot to the town for $6,000,000. Through the
transaction, he earned $2.25 million in personal profit that should
have reverted to the estate had he not usurped the business
opportunity.
II
In January 2016, Virginia sued the defendants in the United
States District Court for the District of Connecticut. She asserted RICO
claims—under 18 U.S.C. §§ 1962(b), 1962(c), and 1962(d)—and
Connecticut state law claims related to David’s breach of his fiduciary
duties. Her RICO claims were predicated on acts of mail fraud, wire
9
fraud, money laundering, monetary transactions with unlawful
proceeds, interstate racketeering, and interstate transport of
misappropriated funds in connection with the fraudulent schemes
discussed above.
The district court granted the defendants’ motion to dismiss
under Federal Rule of Civil Procedure 12(b)(6), concluding that
Virginia “fail[ed] to adequately plead substantive RICO violations,
there is no diversity of parties, and the Court will not exercise
supplemental jurisdiction over the state law claims.” D’Addario v.
D’Addario, No. 16-CV-0099, 2017 WL 1086772, at *1 (D. Conn. Mar. 22,
2017), vacated and remanded, 901 F.3d 80 (2d Cir. 2018).
On appeal, we vacated the district court’s judgment and
remanded for further proceedings. We concluded that Virginia had
adequately pleaded a RICO claim under 18 U.S.C. § 1964(c) against
all the defendants and adequately pleaded a RICO claim under
18 U.S.C. § 1962(b) against David, Garvey, and Red Knot. D’Addario
v. D’Addario, 901 F.3d 80, 85-86 (2d Cir. 2018). While Virginia’s claims
based on her lost inheritance—and that of her mother’s estate—were
not ripe because the estate remained open and the amount of the lost
inheritance was too speculative, her claim under RICO for legal
expenses incurred in protecting her interest in the estate against
David and other defendants was ripe. Id. at 95-96. We directed the
district court to reconsider on remand whether to exercise
supplemental jurisdiction over her remaining state law claims. Id. at
104-05.
On remand, the district court granted in part Virginia’s motion
for leave to file a second amended complaint and elected to exercise
supplemental jurisdiction over her previously asserted state law
10
claims. Ruling on Plaintiff’s Motion for Leave to File Second
Amended Complaint at 13-14, D’Addario v. D’Addario, No. 16-CV-0099
(D. Conn. Sept. 23, 2019), ECF No. 69. However, Virginia
subsequently moved to stay consideration of all state law claims or
for the district court to decline to exercise supplemental jurisdiction
over those claims pending resolution of the state law claims in an
existing state court suit. The district court granted Virginia’s motion
and declined to exercise supplemental jurisdiction, dismissing those
counts related to Connecticut state law claims for breach of fiduciary
duties, aiding and abetting breach of fiduciary duties, conspiracy to
breach fiduciary duties, and unjust enrichment. Ruling on Plaintiff’s
Motion to Stay or Decline Supplemental Jurisdiction at 10, D’Addario
v. D’Addario, No. 16-CV-0099 (D. Conn. Apr. 3, 2020), ECF No. 88.
On September 4, 2020, the defendants filed a motion for
judgment on the pleadings arguing that Virginia’s RICO claims were
barred by the RICO Amendment, which provides that “no person
may rely upon conduct that would have been actionable as fraud in
the purchase or sale of securities to establish a violation of [RICO].”
18 U.S.C. § 1964(c); see Defendants’ Motion for Judgment on the
Pleadings, D’Addario v. D’Addario, No. 16-CV-0099 (D. Conn. Sept. 4,
2020), ECF No. 114. The district court granted the motion, concluding
that the alleged fraudulent conduct described in the Red Knot and
Silver Knot/Wise Metals schemes was actionable as securities fraud
and therefore barred by the RICO Amendment. D’Addario, 2021 WL
3400633, at *6.
The district court explained that when a “scheme to defraud
and the sale of securities coincide,” such conduct is actionable as
securities fraud and cannot form the basis of a RICO claim. Id. at *4(quoting SEC v. Zandford, 535 U.S. 813, 822 (2002)). The district court
11
concluded that this case involved such conduct. Virginia alleged that
David had granted a lien to Red Knot on the estate’s assets—
including securities—in exchange for a sham forbearance agreement
that had the practical effect of making it impossible to remove him as
executor. A pledge of securities is equivalent to a sale of securities for
purposes of the securities fraud statutes. See Rubin v. United States, 449
U.S. 424, 425 (1981) (“[A] pledge of stock to a bank as collateral for a
loan is an ‘offer or sale’ of a security.”). Because the granting of the
lien on estate securities coincided with the scheme to defraud, the
district court held that the RICO Amendment applied and barred
Virginia’s claims.
The district court also concluded that the Silver Knot/Wise
Metals scheme coincided with securities transactions because
Virginia alleged that David converted estate assets in breach of his
fiduciary duties through the purchase and sale of securities in New
England Redemption, Silver Knot, and Wise Metals. D’Addario, 2021
WL 3400633, at *5. Based on these two schemes, the district court
concluded that Virginia’s RICO claims were barred and granted
judgment on the pleadings in favor of the defendants. The district
court did not separately address the alleged wrongful dispositions of
real property. Virginia timely appealed.
DISCUSSION
We review a district court’s decision to grant a motion for
judgment on the pleadings de novo. Latner v. Mount Sinai Health Sys.,
Inc., 879 F.3d 52, 54 (2d Cir. 2018). We “accept all factual allegations
in the complaint as true and draw all reasonable inferences in favor”
of Virginia. Bank of N.Y., 607 F.3d at 922 (internal quotation marks
omitted).
12
I
RICO authorizes a cause of action against persons involved in
a pattern of racketeering activity. See 18 U.S.C. § 1961(1) (defining
“racketeering activity”). Section 1964(c) provides that “[a]ny 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.”
18 U.S.C. § 1964(c). Section 1962 makes it unlawful to “acquire or
maintain” an interest in or control of an enterprise through a pattern
of racketeering activity, id. § 1962(b), to conduct or participate in the
conduct of an enterprise through a pattern of racketeering activity, id.
§ 1962(c), and to conspire to do so, id. § 1962(d).
Congress amended the cause of action with the Private
Securities Litigation Reform Act, Pub. L. No. 104-67, § 107, 109 Stat.
737 (1995). Before the amendment, a plaintiff could allege a civil RICO
claim for securities fraud violations because “fraud in the sale of
securities” is a predicate act of racketeering activity. 18 U.S.C.
§ 1961(1)(D); see MLSMK Inv. Co. v. JP Morgan Chase & Co., 651 F.3d
268, 274 (2d Cir. 2011). The amendment eliminated securities fraud as
a basis for a civil RICO claim—at least in the absence of a criminal
conviction—by providing that “no person may rely upon any conduct
that would have been actionable as fraud in the purchase or sale of
securities to establish a violation of section 1962.” 18 U.S.C. § 1964(c). 2
The RICO Amendment aimed to avoid duplicative recoveries
for securities fraud violations. “Because the securities laws generally
2 See generally Eliza Clark Riffe, Note, Actionability and Ambiguity: RICO
After the Private Securities Litigation Reform Act, 2012 U. Chi. Legal F. 463,
469-70 (2012).
13
provide adequate remedies for those injured by securities fraud, it is
both [un]necessary and unfair to expose defendants in securities cases
to the threat of treble damages and other extraordinary remedies
provided by RICO.” 141 Cong. Rec. H13, 691-08, at H13, 704 (daily ed.
Nov. 28, 1995) (statement of SEC Chairman Arthur Levitt). The
amendment sought to “prevent litigants from using artful pleading to
boot-strap securities fraud cases into RICO cases, with their threat of
treble damages.” MLSMK, 651 F.3d at 274.
The question presented in this case is whether claims arising
from fraudulent conduct constituting a breach of fiduciary duties by
the executor of an estate are barred by the RICO Amendment because
the claims involve securities transactions. We conclude that for a
claim to be barred, the fraud must be “in the purchase or sale of
securities,” which means that the actual purchase or sale of securities
was fraudulent; it is not enough for securities to be an incidental
feature of an overall scheme. 18 U.S.C. § 1964(c) (emphasis added).
The Supreme Court has cautioned that securities fraud under section
10(b) of the Securities Exchange Act of 1934 “must not be construed
so broadly as to convert every common-law fraud that happens to
involve securities into a violation.” Zandford, 535 U.S. at 820. The
RICO Amendment also must not be construed so broadly as to bar
RICO claims based on common law frauds that happen to involve
securities.
Other circuits have reached the same conclusion. In Rezner v.
Bayerische Hypo-Und Vereinsbank AG, the Ninth Circuit held that a
pledge of securities—as part of a tax scheme to generate the
appearance of capital losses—was not fraud in the purchase or sale of
securities for purposes of the RICO Amendment. 630 F.3d 866, 872
(9th Cir. 2010). While the defendant argued that the pledge of
14
securities coincided with the fraud, the court concluded that the tax
“fraud bore an insufficient connection to the securities” and that
“securities were merely a happenstance cog in the scheme.” Id.In Ouwinga v. Benistar 419 Plan Servs., Inc., the Sixth Circuit
decided that claims arising from a tax fraud effectuated through the
purchase of life insurance policies were not barred by the RICO
Amendment because the securities transactions “were not integral to
... the fraudulent scheme as a whole.” 694 F.3d 783, 791 (6th Cir. 2012).
The Sixth Circuit favorably cited a district court decision from our
circuit with a similar holding. According to that decision, even when
an “alleged [tax] fraud could not have occurred without the sale of
securities at the inflated basis ... it is inaccurate to suggest that the
actual purchase and sale of securities were fraudulent.” Kottler v.
Deutsche Bank AG, 607 F. Supp. 2d 447, 458 n.9 (S.D.N.Y. 2009). Rather,
“the alleged fraud here involved a tax scheme, with the securities
transactions only incidental to any underlying fraud.” Id.Similarly, in Menzies v. Seyfarth Shaw LLP, the Seventh Circuit
held that the RICO Amendment does not bar claims arising from a tax
shelter fraud effectuated through a series of securities transactions.
943 F.3d 328, 333-36 (7th Cir. 2019). In that case, the “complaint
focused not on the ... stock sale, but instead on its tax consequences.”
Id. at 335. To show fraud in the purchase or sale of securities, the court
explained, the plaintiff must have “incurred his alleged losses as a
more direct consequence of misrepresentations that closely touched
the stock sale itself and not just its tax consequences.” Id.We join these courts in holding that the RICO Amendment bars
claims only when the alleged fraud is in the actual purchase or sale of
securities, not when securities are incidental to the fraud.
15
A
Virginia alleged that David breached his fiduciary duty to the
estate by arranging for his alter ego, Red Knot, to purchase the estate’s
debts in order to enhance his personal control over the estate. The
transaction made Red Knot a secured creditor of the estate, with a lien
on virtually all of the estate’s assets. Those assets happened to include
securities. Red Knot then entered into a forbearance agreement with
the estate. But according to the complaint, the agreement was a sham
because it provided that if David were ever removed as an executor,
Red Knot would have “the immediate right to engage in collection
efforts on the over $48,000,000 allegedly owed to Red Knot.” SAC
¶ 60. The agreement had the practical effect of making it impossible
to remove David as an executor of the estate. See SAC ¶¶ 59-65.
The alleged fraud was the use of an alter ego to purchase the
estate’s debts so that David could wield personal influence over the
estate and the creation of the sham forbearance agreement that made
David unremovable as an executor. That the estate owned securities
was an incidental fact. Because the securities were merely “incidental
to any underlying fraud,” Kottler, 607 F. Supp. 2d at 458 n.9, there was
no fraud “in the purchase or sale of securities,” 18 U.S.C. § 1964(c).
B
Virginia also alleged a scheme in which David converted estate
assets to his personal use. Since at least 1987, David has allegedly
acted to “plunder, pillage and loot” the estate, SAC ¶ 28, and has done
“everything within his power to transfer the significant assets of the
Estate for his personal financial benefit,” SAC ¶ 20. He did so by using
estate assets to acquire interests in two aluminum processing
16
companies, New England Redemption and Wise Metals, and then by
converting proceeds from the sale of those interests.
In particular, the complaint alleged that David
misappropriated a business opportunity that his father had been
negotiating. Rather than continue negotiations on behalf of the estate,
David “usurped that business opportunity for his personal financial
benefit.” SAC ¶ 80. This allegation does not describe fraud “in the
purchase or sale of securities.” 18 U.S.C. § 1964(c).
David proceeded to use an estate asset—rentable space in the
estate’s Bridgeport Brass Building—to acquire a 25 percent ownership
interest in the New England Redemption venture. Eight years later,
he “converted the profits from the sale of [the venture] for his
personal financial benefit, and refused to plow those profits back into
the Estate.” SAC ¶ 81.
David continued the conversion scheme through the formation
of Silver Knot and the purchase and sale of Wise Metals. Again, David
allegedly used “assets, proceeds and business opportunities” of the
estate to capitalize Silver Knot, which would acquire a controlling
interest in Wise Metals. SAC ¶ 83. After the sale of Wise Metals, David
again did not deliver the proceeds of that sale to the estate but
“converted those sale proceeds for his personal financial gain and for
the benefit of his co-conspirator Defendants.” SAC ¶ 84.
While securities transactions occurred with the purchase and
sale of interests in New England Redemption and Wise Metals,
securities were incidental to the multi-year conversion scheme.
Virginia does not allege that David made misrepresentations about
the value of securities or that he was not authorized to transact in
securities on behalf of the estate. The alleged fraud was the
17
misappropriation and conversion of estate assets in violation of
fiduciary duties to the estate. That is not fraud “in the purchase or sale
of securities.” 18 U.S.C. § 1964(c). 3
II
The district court concluded that Virginia’s RICO claims were
barred because the alleged misconduct described in the Red Knot and
Silver Knot/Wise Metals schemes was actionable as securities fraud
under SEC v. Zandford. In Zandford, the Supreme Court concluded that
3 The partial dissent argues that “[u]nlike the Red Knot forbearance
scheme, the securities transactions underlying the alleged Silver Knot/Wise
Metals scheme were fraudulent in and of themselves.” Post at 4. We
disagree. Of the Red Knot scheme, the partial dissent explains that
“although the scheme involved a pledge by the Estate of collateral that
included securities,” a securities transaction, “nothing about the Estate’s
pledge of securities was fraudulent”:
Virginia does not allege, for example, that David made any
misrepresentations about the value of the securities pledged
or that those securities could not lawfully be pledged as
collateral. What made the Red Knot scheme fraudulent was
instead that David was on both sides of the forbearance
agreement and that he allegedly did not make a good faith
effort to repay the Estate’s debt.
Id. at 3. A similar argument applies to the Silver Knot/Wise Metals scheme.
The complaint does not allege that David misrepresented the value of the
securities or that the securities could not lawfully be purchased and sold.
Instead, the Silver Knot/Wise Metals scheme was fraudulent because David
did not act in good faith as executor but instead converted the estate’s assets
for his and the other defendants’ benefit. In describing the fraud this way,
we do not seek to describe the scheme at a “high level without referencing
securities.” Id. at 14. Rather, we recognize that an executor’s breach of
fiduciary duties to an estate is distinct from a fraudulent purchase or sale
of securities.
18
a stockbroker’s conduct—selling client securities held in a brokerage
account and converting the proceeds to his own personal use—
constituted fraud “in connection with” the purchase or sale of
securities under section 10(b) of the Securities Exchange Act. Even
though the stockbroker was authorized to engage in securities
transactions on behalf of the client, the sales were “properly viewed
as a course of business that operated as a fraud or deceit on [the]
stockbroker’s customer.” Zandford, 535 U.S. at 821 (internal quotation
marks omitted). In such circumstances, “[i]t is enough that the scheme
to defraud and the sale of securities coincide.” Id. at 822.
But the holding in Zandford “does not transform every breach
of fiduciary duty into a federal securities violation.” Id. at 825 n.4. The
Court cautioned that section 10(b) “must not be construed so broadly
as to convert every common-law fraud that happens to involve
securities into a violation.” Id. at 820. For example, a case in which “a
thief simply invested the proceeds of a routine conversion in the stock
market” would not involve securities fraud. Id. For the fraud to
“coincide” with a securities transaction, a claim must “necessarily
allege,” “necessarily involve,” or necessarily “rest on” the purchase
or sale of securities. Romano v. Kazocos, 609 F.3d 512, 522 (2d Cir. 2010)
(quoting Dabit v. Merrill Lynch, Fenner & Smith, Inc., 395 F.3d 25, 48, 50
(2d Cir. 2005)).
The Zandford Court emphasized the “threat to investor
confidence in the securities industry” that results from stockbrokers
misappropriating client assets from discretionary brokerage
accounts:
Not only does such a fraud prevent investors from
trusting that their brokers are executing transactions for
19
their benefit, but it undermines the value of a
discretionary account like that held by the [victims]. The
benefit of a discretionary account is that it enables
individuals, like the [victims], who lack the time,
capacity, or know-how to supervise investment
decisions, to delegate authority to a broker who will
make decisions in their best interests without prior
approval. If such individuals cannot rely on a broker to
exercise that discretion for their benefit, then the account
loses its added value.
Zandford, 535 U.S. at 822-23. The stockbroker’s fiduciary duty to his
client was to execute securities transactions in the client’s best interest.
For that reason, the securities transactions were a necessary feature of
the fraud.
By contrast, an executor of a decedent’s estate bears
responsibility for the estate’s administration. The executor is
generally responsible for gathering estate assets, paying expenses and
claims, filing tax returns, making distributions under the terms of the
decedent’s will, and maintaining records concerning management of
the estate. The executor owes a duty of loyalty to beneficiaries and
must avoid self-dealing. “No principle is more equitable or better
settled in the law than that a trustee shall make no personal profit
from the funds entrusted to his care beyond a reasonable
compensation for his services.” Candee v. Skinner, 40 Conn. 464, 468
(1873).
The Red Knot and Silver Knot/Wise Metals schemes involve
alleged fraudulent conduct in breach of an executor’s duty of loyalty
to an estate. David purportedly engaged in self-dealing by
purchasing the estate’s debt in order to enhance his personal control
over the estate. He made personal profits through the
20
misappropriation of estate assets. These fraudulent schemes only
incidentally involved securities, unlike a securities broker who sells
client securities in breach of his duty to execute securities transactions
in the best interests of the client. 4
CONCLUSION
For the reasons stated above, we conclude that the alleged
conduct was not fraud “in the purchase or sale of securities” and that
Virginia’s claims are not barred by the RICO Amendment. 18 U.S.C
§ 1964(c). We reverse the judgment of the district court and remand
for further proceedings.
4 Because we conclude that the RICO Amendment does not bar Virginia’s
claims even as to the Red Knot and Silver Knot/Wise Metals schemes, we
need not separately address the district court’s decision to issue a judgment
on the pleadings as to the real property schemes that did not involve
securities.
21
21-2105
D’Addario v. D’Addario
CARNEY, Circuit Judge, concurring in part and dissenting in part:
This Nutmegger family feud comes before this Court for the second time. 1
Virginia D’Addario (“Virginia”) alleges that her younger brother, David D’Addario
(“David”), has orchestrated a sprawling, decades-long scheme to “plunder, pillage and
loot” the estate of their late father, F. Francis “Hi Ho” D’Addario (“Francis”). Second
Amended Complaint (“SAC”) ¶ 1. Francis, a prominent and successful Connecticut
businessman, died in an airplane crash in March 1986; his estate (the “Estate”) remains
open in Connecticut’s probate court system to this day, close to forty years later.
Virginia alleges that David has chronically mismanaged the Estate and that he has
abused his role as an Executor of the Estate by fraudulently cementing himself in that
role, misappropriating the Estate’s assets and opportunities for his own gain, and
plotting to keep the Estate open until Virginia’s death (at which point her share will
devolve to the Estate and be divided equally among her surviving siblings). Virginia
alleges that all Defendants—David; Mary Lou D’Addario Kennedy (David and
Virginia’s sister); Gregory Garvey; Nicholas Vitti; Red Knot Acquisitions, LLC; and
Silver Knot, LLC—participated in at least some part of this scheme to defraud the
Estate. 2
1The “Nutmegger” nickname for Connecticut residents derives from the story that, in the
State’s early days, “traders from the north shore of the Sound were not above selling ostensible
nutmegs that, upon close examination, proved to have been carved out of wood.” José A.
Cabranes, Notes on the History of the Federal Court of Connecticut, 57 CONN. BAR J. 351, 352–53
(1983).
2As the Majority recognizes, we review the district court’s grant of judgment on the pleadings
de novo, accepting all of the SAC’s factual allegations as true and drawing all reasonable
inferences in Virginia’s favor. See Bank of N.Y. v. First Millennium, Inc., 607 F.3d 905, 922 (2d Cir.
2010).
In light of this Court’s decision in the first appeal and the proceedings on
remand, the only claim remaining in this lawsuit is Virginia’s claim under the Racketeer
Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. §§ 1961 et seq., for the
substantial legal expenses she incurred, before first filing this suit, in opposing David’s
alleged mismanagement of the Estate and in seeking to unseat him as an Executor. 3
The question presented in this appeal is whether Virginia’s claim for recovery of
those expenses is barred by section 107 of the Private Securities Litigation Reform Act of
1995, commonly referred to as the “RICO Amendment” because it amended the RICO
statute. Section 107 provides in relevant part: “[N]o person may rely upon any conduct
that would have been actionable as fraud in the purchase or sale of securities to
establish a violation of [RICO].” 18 U.S.C. § 1964(c). The district court (Arterton, J.)
concluded that Virginia’s RICO claim was barred by the RICO Amendment and
granted Defendants’ motion for judgment on the pleadings with respect to Virginia’s
3In the first appeal, this Court vacated the district court’s dismissal of Virginia’s complaint
under Fed. R. Civ. P. 12(b)(6). We concluded that:
(1) Virginia’s claim for distribution of her inheritance and that of her mother’s
estate [was] not ripe under RICO because the Estate [was] not closed and the
amount of the lost inheritance [was] too speculative; (2) her claim under RICO for
legal expenses incurred in pursuing her grievances against David and other
defendants [was] ripe; (3) she ha[d] plausibly alleged that her legal expense
injuries were proximately caused by Defendants’ RICO violations; (4) she ha[d]
adequately pleaded that David, Garvey, and Red Knot violated 18 U.S.C. § 1962(b);
and (5) she ha[d] adequately pleaded that all six defendants violated 18 U.S.C.
§ 1962(c).
D’Addario v. D’Addario, 901 F.3d 80, 85–86 (2d Cir. 2018). We also directed the district court to
reconsider its decision not to exercise supplemental jurisdiction over Virginia’s state law claims.
Id. at 105. On remand, having decided that she preferred to pursue her state law claims in state
court, Virginia moved the district court to decline supplemental jurisdiction over those claims.
The court granted that motion, leaving Virginia’s RICO claim for legal expenses as the only
surviving claim in this action. Dist. Ct. Dkt. 88. The record before us does not reflect the current
status of her state law claims.
2
claim for legal expenses. See D’Addario v. D’Addario, No. 16-cv-99, 2021 WL 3400633, at
*6 (D. Conn. Aug. 4, 2021). Virginia now appeals.
I fully agree with the Majority that the Red Knot forbearance scheme does not
allege conduct that would be actionable as securities fraud and thus does not trigger the
RICO Amendment. 4 Although the Red Knot scheme—as alleged—was certainly
fraudulent, and although the scheme involved a pledge by the Estate of collateral that
included securities, nothing about the Estate’s pledge of securities was fraudulent:
Virginia does not allege, for example, that David made any misrepresentations about
the value of the securities pledged or that those securities could not lawfully be pledged
as collateral. What made the Red Knot scheme fraudulent was instead that David was
on both sides of the forbearance agreement and that he allegedly did not make a good
faith effort to repay the Estate’s debt. Rather, he let the debt balloon and used the threat
of foreclosure to secure his role as Executor. Therefore, I concur with the Majority’s
ruling that the fraud alleged in the Red Knot forbearance scheme was not “in the
purchase or sale of securities,” 18 U.S.C. § 1964(c) (emphasis added); to use the term
adopted by the Supreme Court in S.E.C. v. Zandford and examined further below, the
fraud did not “coincide” with the purchase or sale of securities. 535 U.S. 813, 822 (2002).
4As the reader may recall, in 1997, the Estate owed over $48 million to three banks (the “Bank
Group”). The Red Knot forbearance scheme alleges that Red Knot Acquisitions, LLC (“Red
Knot”)—a company that was created at David’s instance and functioned as his “alter-ego”—
purchased the Bank Group’s loan position for $4,875,000. SAC ¶¶ 59, 61. Red Knot then entered
into a forbearance agreement with the Estate that gave Red Knot a lien on “virtually all” of the
Estate’s assets and provided that, if David was ever removed as an Executor of the Estate, Red
Knot would have the “immediate right” to collect on the Estate’s debt and foreclose on its
assets. SAC ¶ 60. The SAC alleges that this forbearance agreement is a “sham” that has operated
to secure David’s role as Executor against all potential challenges, allowing him to mismanage
and pillage the Estate with impunity. SAC ¶ 62. See generally Maj. Op. at 6–7.
3
The alleged Red Knot scheme thus does not preclude Virginia from pursuing her claim
for legal expenses under RICO.
I also agree with the Majority that a civil RICO claim predicated on allegations of
fraud is not barred by the RICO Amendment simply because the alleged fraud
somehow involves securities; instead, as the text of the RICO Amendment makes clear,
the bar applies only when the fraud is “in the purchase or sale of securities,” 18 U.S.C.
§ 1964(c) (emphasis added), that is, when “the actual purchase or sale of securities [is]
fraudulent,” Maj. Op. at 14.
I respectfully disagree with the Majority, however, with regard to how this
requirement applies to the conduct alleged in the Silver Knot/Wise Metals scheme. In
my view, this alleged scheme turns on fraud in the purchase or sale of securities—and
thus triggers the RICO Amendment—because David committed the underlying fraud
when, using Estate assets, he purchased securities for personal gain and in breach of his
fiduciary duty. Unlike the Red Knot forbearance scheme, the securities transactions
underlying the alleged Silver Knot/Wise Metals scheme were fraudulent in and of
themselves. Accordingly, the fraud alleged in the Silver Knot/Wise Metals scheme
“coincided” with the purchase of securities. Zandford, 535 U.S. at 820.
The Majority conceives of the alleged Silver Knot/Wise Metals scheme as a
“multi-year conversion scheme” involving “the misappropriation and conversion of
[E]state assets in violation of fiduciary duties to the [E]state.” Maj. Op. at 18. But by
defining the Silver Knot/Wise Metals scheme at such a high level of generality, the
Majority overlooks the fact that, in this scheme, David allegedly misappropriated Estate
assets through the purchase of securities. As alleged, David committed fraud when he
purchased securities for his own gain using Estate assets. Because this alleged fraud
was “in the purchase or sale of securities,” 18 U.S.C. § 1964(c), the Silver Knot/Wise
Metals scheme triggers the RICO Amendment.
4
I therefore respectfully dissent from the Majority’s holding insofar as it concerns
the Silver Knot/Wise Metals scheme. I would hold that Virginia’s RICO claim, at least as
it relates to that scheme, is barred by the RICO Amendment. Accordingly, I would:
reverse the district court’s judgment with respect to the Red Knot forbearance scheme;
affirm with respect to the Silver Knot/Wise Metals scheme; and remand to allow the
district court to determine in the first instance whether Virginia can pursue her RICO
claim for legal expenses, exclusive of allegations concerning the Silver Knot/Wise
Metals scheme. 5
BACKGROUND
I. The RICO Amendment, Section 10(b), and Rule 10b-5
A civil RICO claim is barred by the RICO Amendment if the plaintiff alleges
“conduct that would have been actionable as fraud in the purchase or sale of securities.”
18 U.S.C. § 1964(c). To determine whether a plaintiff has alleged conduct that satisfies
this description, courts have looked to section 10(b) of the Securities Exchange Act of
5 Some courts have opined that, when a civil RICO claim is based on one overarching fraudulent
scheme, even one securities fraud allegation is sufficient to bar the entire claim. See, e.g., Gilmore
v. Gilmore, No. 09-cv-6230, 2011 WL 3874880, at *6 (S.D.N.Y. Sept. 1, 2011), reconsideration denied,
2011 WL 5517832 (S.D.N.Y. Nov. 10, 2011), aff’d, 503 F. App’x 97 (2d Cir. 2012) (summary order);
Great W. Ins. Co. v. Graham, No. 18-cv-6249, 2020 WL 3415026, at *37 (S.D.N.Y. June 22, 2020);
Zohar CDO 2003-1, Ltd. v. Patriarch Partners, LLC, 286 F. Supp. 3d 634, 650–51 (S.D.N.Y. 2017). In
this case, however, the Silver Knot/Wise Metals scheme was a discrete part of the sprawling and
multi-faceted fraudulent pattern of behavior alleged in the SAC. Indeed, to the extent that any
particular scheme alleged in the SAC can be said to underpin Virginia’s entire RICO claim, that
would be the Red Knot forbearance scheme, which is the vehicle through which David
maintained control over the Estate, enabling Defendants to carry out most (if not all) of the
other, subsidiary schemes alleged in the SAC. Our Panel is unanimous that the Red Knot
forbearance scheme does not rest on allegations of securities fraud. Accordingly, in my view, it
is unclear whether the Silver Knot/Wise Metals scheme can be disentangled from the
overarching scheme to defraud alleged in the SAC such that the remainder of Virginia’s claim
can survive the RICO Amendment bar. I would remand for the district court to make this
determination in the first instance, with the assistance of briefing from the parties.
5
1934 and Rule 10b-5, which the Securities and Exchange Commission (“SEC”)
promulgated pursuant to its authority under section 10(b). See Maj. Op. at 14–15, 20;
D’Addario, 2021 WL 3400633, at *4; see also, e.g., Menzies v. Seyfarth Shaw LLP, 943 F.3d
328, 334 (7th Cir. 2019); Rezner v. Bayerische Hypo-Und Vereinsbank AG, 630 F.3d 866, 871
(9th Cir. 2010); Bixler v. Foster, 596 F.3d 751, 759–60 (10th Cir. 2010). 6
Section 10(b) makes it unlawful for any person “[t]o use or employ, in connection
with the purchase or sale of any security . . .[,] any manipulative or deceptive device or
contrivance in contravention of such rules and regulations as the [SEC] may
prescribe . . . .” 15 U.S.C. § 78j(b). Rule 10b-5, in turn, makes it unlawful:
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a
material fact necessary in order to make the statements made, in the light
of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or
would operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.
17 C.F.R. § 240.10b-5; 7 see also S.E.C. v. Frohling, 851 F.3d 132, 136 (2d Cir. 2016) (“Section
10(b) of the Exchange Act and Rule 10b-5 . . . are violated if a person has (1) made a
6 As discussed further below, section 10(b) and Rule 10b-5 provide the natural starting point for
determining whether conduct would be actionable as securities fraud. See Zohar, 286 F. Supp. 3d
at 644 (“To best define what constitutes conduct actionable as fraud in the purchase or sale of
securities, courts have consulted an obvious source in Section 10(b) of the Securities Exchange
Act of 1934, which—while not identical to the language of the RICO Amendment—covers a
broad range of securities fraud.”). Tying the scope of the RICO Amendment to the scope of
section 10(b) and Rule 10b-5 is also consistent with the legislative purpose of the RICO
Amendment: “to prevent litigants from using artful pleading to boot-strap securities fraud cases
into RICO cases.” MLSMK Inv. Co. v. JP Morgan Chase & Co., 651 F.3d 268, 274 (2d Cir. 2011)
(internal quotation marks omitted).
7 “Rule 10b–5 is coextensive with the coverage of § 10(b) . . . .” Zandford, 535 U.S. at 816 n.1.
6
material misrepresentation or a material omission as to which he had a duty to speak,
or used a fraudulent device; (2) with scienter; (3) in connection with the purchase or sale
of securities.” (internal quotation marks omitted)).
II. The Silver Knot/Wise Metals Scheme
As the Majority’s description indicates, the “Silver Knot/Wise Metals scheme” is
something of a misnomer: although the parties refer to the “scheme” in the singular (a
practice I adopt in this dissent), the scheme in fact consists of two distinct sets of
fraudulent securities transactions.
As to the first, Virginia alleges that shortly before his death in 1986, Francis had
been negotiating to acquire a 50% ownership interest in an aluminum can recycling
business called New England Redemption. After Francis died, David did not advance
these negotiations on behalf of the Estate; rather, he “usurped that business opportunity
for his personal financial benefit” by personally acquiring shares representing a 25%
interest in New England Redemption. SAC ¶ 80. In exchange for the shares, David
provided the company “free rent” in the Bridgeport Brass Building, a property
belonging to the Estate. Id. After New England Redemption was sold for a “multi-
million[-]dollar profit” in 1994, David “converted” his share of those profits “for his
personal financial benefit, and refused to plow [them] back into the Estate.” SAC ¶ 81.
The second set of transactions began in 1999, when, at David’s direction, David’s
attorney created Defendant Silver Knot, LLC for the purpose of acquiring a controlling
interest in Wise Metals, a company that produced aluminum can stock. The SAC alleges
that David controlled Silver Knot. In 2001, David used “assets, proceeds and business
opportunities of the Estate to acquire a controlling interest in Wise Metals through
Silver Knot, which interest equitably belonged to the Estate.” SAC ¶ 83. After Silver
Knot (and with it, Wise Metals) was acquired in 2014 for $1.4 billion, David again
7
“converted [the] sale proceeds for his personal financial gain” and refused to plow them
back into the Estate. SAC ¶ 84.
Thus, as described above, the Silver Knot/Wise Metals scheme (itself a relatively
small part of David’s decades-long looting of the Estate) consists of two alleged frauds.
In each, David used Estate assets to purchase securities in his own name or in the name
of a company he controlled. When those securities were sold, David pocketed the
proceeds. Accordingly, in the alleged Silver Knot/Wise Metals scheme, securities
transactions are the vehicle by which David defrauded the Estate.
DISCUSSION
The RICO Amendment has been construed to incorporate the definition of
securities fraud established by section 10(b) and Rule 10b-5. See, e.g., Menzies, 943 F.3d at
334; Rezner, 630 F.3d at 871. Whether the Silver Knot/Wise Metals scheme triggers the
RICO Amendment thus turns on whether that scheme includes allegations of fraud “in
connection with the purchase or sale of any security.” 15 U.S.C. § 78j(b). I believe that it
does. The scheme includes fraud because, by investing Estate assets for purely personal
gain, David breached his fiduciary duty to the Estate’s beneficiaries. David committed
this fraud “in connection with” the purchase or sale of securities because he carried it
out through the purchase of stock—first, in New England Redemption, and second, in
Wise Metals.
In concluding otherwise, I fear that the Majority has adopted an unduly cramped
construction of the RICO Amendment that is at odds with the Amendment’s language
and purpose. By focusing on an overly high-level description of the Silver Knot/Wise
Metals scheme, the Majority fails to recognize that this scheme was allegedly carried out
through stock purchases that were fraudulent in and of themselves. And by focusing on
the nature of David’s fiduciary duty instead of the nature of the alleged fraudulent
8
transactions, the Majority limits the reach of the RICO Amendment in a way that is
inconsistent with the Supreme Court’s historically broad construction of section 10(b)
and Rule 10b-5—a construction that should apply with equal force to the RICO
Amendment.
I. The Silver Knot/Wise Metals scheme alleges a fraudulent scheme, act, or
course of business.
The Majority appears to agree with me that, in carrying out the alleged Silver
Knot/Wise Metals scheme, David committed fraud. See Maj. Op. at 18, 21 (discussing
the “alleged fraud” and the “alleged fraudulent conduct” underlying the Silver
Knot/Wise Metals scheme).
Subsections (a) and (c) of Rule 10b-5 make it unlawful to “employ any device,
scheme, or artifice to defraud,” or to engage in any fraudulent “act, practice, or course
of business,” “in connection with the purchase or sale of any security.” 17 C.F.R.
§ 240.10b-5(a), (c). The Supreme Court has explained that section 10(b)—and thus Rule
10b-5—should be “construed not technically and restrictively, but flexibly to effectuate
its remedial purposes.” Zandford, 535 U.S. at 819 (internal quotation marks omitted). In
this spirit, courts and the SEC alike have interpreted subsections (a) and (c) of Rule 10b-
5 broadly to prohibit all sorts of fraudulent conduct—so long as the fraud is carried out
“in connection with” the purchase or sale of a security. See, e.g., Lorenzo v. S.E.C., 139 S.
Ct. 1094, 1101–02 (2019) (explaining that subsections (a) and (c) of Rule 10b-5 contain
“expansive” language that “capture[s] a wide range of conduct”); Superintendent of Ins.
of State of N.Y. v. Bankers Life & Cas. Co., 404 U.S. 6, 10 n.7 (1971) (“[Section] 10(b) and
Rule 10b-5 prohibit all fraudulent schemes in connection with the purchase or sale of
securities, whether the artifices employed involve a garden type variety of fraud, or
9
present a unique form of deception.” (quoting A.T. Brod & Co. v. Perlow, 375 F.2d 393,
397 (2d Cir. 1967))). 8
Here, it is undisputed that David, as an Executor of the Estate, owed a fiduciary
duty to the Estate’s beneficiaries, including Virginia. See Maj. Op. at 14, 21; see also Hall
v. Schoenwetter, 686 A.2d 980, 983 (Conn. 1996) (“[A]n executrix must remain loyal to the
estate that she is administering and must not act out of self-interest or for the interests
of parties other than the heirs, distributees, and creditors of the estate.”); Geremia v.
Geremia, 125 A.3d 549, 571 (Conn. App. Ct. 2015) (“The administrator or executor . . . has
a fiduciary duty to bargain for the rights of all decedent’s beneficiaries and to turn over
to them their appropriate share of any proceeds.” (internal quotation marks omitted)).
In the Silver Knot/Wise Metals scheme, as described above, David allegedly used
Estate assets to purchase stock for his own personal gain—first in New England
Redemption, and then in Wise Metals. In other words, David used property and money
that belonged to the Estate to make investments on his own behalf rather than on behalf
of the Estate. David thereby breached his fiduciary duty to the Estate’s beneficiaries. See
Maj. Op. at 21 (“No principle is more equitable or better settled in the law than that a
trustee shall make no personal profit from the funds entrusted to his care beyond a
reasonable compensation for his services.” (quoting Candee v. Skinner, 40 Conn. 464, 468
(1873))).
8See also Leonard B. Sand, et al., 4 Modern Federal Jury Instructions: Civil, Instruction 82–4 (2023)
(“A device, scheme, or artifice to defraud is merely a plan for the accomplishment of any
objective. Fraud is a general term that embraces all ingenious efforts and means that individuals
devise to take advantage of others.”); United States v. Treacy, No. S2 08-cr-366, 2008 WL 4934051,
at *4 (S.D.N.Y. Nov. 19, 2008) (same), reconsideration granted on other grounds, 2009 WL 47496(S.D.N.Y. Jan. 8, 2009); United States v. Bongiorno, No. 05-cr-390, 2006 WL 1140864, at *5 (S.D.N.Y.
May 1, 2006) (same).
10
This conduct satisfies the “fraud” component of section 10(b) and Rule 10b-5: in
carrying out the alleged Silver Knot/Wise Metals scheme, David abused his position as
Executor to take advantage of the Estate’s beneficiaries, who were entitled to trust that
any transactions involving Estate assets would be made for their benefit. In the
language of Rule 10b-5, David engaged in a fraudulent “scheme,” “act,” or “course of
business.” 17 C.F.R. § 240.10b-5(a), (c).
II. The fraud alleged in the Silver Knot/Wise Metals scheme was committed in
connection with the purchase of securities.
The critical question, then, is whether the fraud alleged in the Silver Knot/Wise
Metals scheme was committed “in connection with the purchase or sale of any security.”
15 U.S.C. § 78j(b) (emphasis added). In answering this question in the affirmative, I part
ways with the Majority.
In Zandford, the Supreme Court explained that section 10(b)’s “in connection
with” requirement is satisfied when “the scheme to defraud and the sale of securities
coincide.” 535 U.S. at 822. 9 In that case, the SEC alleged that a stockbroker sold his
customers’ securities without the customers’ knowledge or consent and
misappropriated the proceeds of those sales, taking them for his own benefit. See id. at
815, 825. The Court concluded that the broker’s alleged fraud was committed “in
connection with” the sale of securities because “each sale [of securities] was made to
further [the broker’s] fraudulent scheme; [and] each was deceptive because it was
9Although Zandford did not involve the RICO Amendment, courts applying the RICO
Amendment have looked to Zandford for guidance in determining whether the fraud at issue
was committed “in connection with” the purchase or sale of securities. See, e.g., Menzies, 943
F.3d at 334–35; Zohar, 286 F. Supp. 3d at 644; see also Maj. Op. at 14–15, 19–21. This approach
makes good sense because, as explained above, courts have understood the RICO Amendment
to incorporate the definition of securities fraud established by section 10(b) and Rule 10b-5,
including the “in connection with” requirement the Supreme Court construed in Zandford.
11
neither authorized by, nor disclosed to, the [customers]. . . . Indeed, each time [the
broker] exercised his power of disposition [of the stock] for his own benefit, that
conduct, without more, was a fraud.” Id. at 820–21 (internal quotation marks omitted).
In my view, the fraud alleged in the Silver Knot/Wise Metals scheme satisfies the
standard set out in Zandford. When David purchased stock in New England
Redemption on his own behalf in exchange for allowing the company to occupy space
in the Estate’s Bridgeport Brass Building, he breached his fiduciary duty to act in the
best interest of the Estate’s beneficiaries. David thereby committed fraud (again,
assuming the truth of the allegations). 10 Likewise, David’s purchase—through Silver
Knot—of Wise Metals stock was fraudulent because the purchase was made for David’s
personal financial benefit even though it was funded with Estate assets. 11 These
10The Majority concludes that David’s purchase of New England Redemption stock was not
fraudulent and that it does not trigger the RICO Amendment. Virginia makes no such argument
on appeal. Indeed, neither of Virginia’s appellate briefs even mentions New England
Redemption. This at least raises the possibility that, as Appellant, Virginia has waived any
argument that the purchase of New England Redemption stock does not trigger the RICO
Amendment. See LoSacco v. City of Middletown, 71 F.3d 88, 92 (2d Cir. 1995); Fed. R. App. P.
28(a)(8)(A) (appellant’s brief must include contentions and reasons). The Majority nonetheless
reaches the merits of this issue and rules in Virginia’s favor. I therefore address the merits of
this issue as well.
11The SAC charges that David, acting through his controlled entity, Silver Knot, used Estate
assets to acquire a controlling interest in Wise Metals in 2001. The SAC also asserts, however,
that Silver Knot initially held this interest “in trust for the benefit of the Estate” and that
therefore the “original holding of the Estate’s interest in Wise Metals . . . was not per se
wrongful.” SAC ¶ 85. Virginia alleges that David’s possession (through Silver Knot) of the Wise
Metals stock did not become wrongful until October 2014, when Silver Knot was sold and
David refused to pay those sale proceeds into the Estate. SAC ¶¶ 82–83, 85. The SAC’s legal
conclusion regarding when David’s possession of the Wise Metals stock became wrongful is not
entitled to any weight. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Moreover, Virginia cannot
avoid the RICO Amendment bar by strategically choosing not to allege that David acted with
fraudulent intent when he first purchased the Wise Metals stock. See MLSMK, 651 F.3d at 274; cf.
Bald Eagle Area Sch. Dist. v. Keystone Fin., Inc., 189 F.3d 321, 330 (3d Cir. 1999) (“Allowing such
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securities transactions were part and parcel of David’s scheme to misappropriate Estate
assets for his own gain; the stock purchases and the alleged fraud “were not
independent events.” Id. at 820. Accordingly, David’s breach of his fiduciary duty—the
alleged fraud underlying the Silver Knot/Wise Metals scheme—“coincided” with the
purchase of securities. Id.
The Silver Knot/Wise Metals scheme resembles the alleged scheme that was
found to trigger the RICO Amendment in Zohar CDO 2003-1, Ltd. v. Patriarch Partners,
LLC, 286 F. Supp. 3d 634 (S.D.N.Y. 2017). In that case, several entities (collectively,
“Zohar”) alleged that the defendants “engaged in a wide-ranging conspiracy to enrich
themselves by pillaging Zohar’s funds and impairing its assets, ultimately rendering it
unable to repay investors.” Id. at 638. In particular, Zohar alleged that the defendants,
who created Zohar and managed its investments, used Zohar’s funds to acquire equity
on their own behalf rather than on behalf of Zohar and its noteholders. See id. at 648–49.
In a careful and detailed opinion, Judge Pauley concluded that this scheme presented “a
clear example in which a breach of fiduciary duty and a securities transaction coincide,”
and therefore that Zohar’s RICO claim was barred by the RICO Amendment. Id. at 649,
651.
The allegations here are comparable: David, as an Executor of the Estate, was
authorized to invest the Estate’s assets and had a duty to act in the interest of the
Estate’s beneficiaries. But David abused this position of trust by using Estate assets to
make investments for his own gain alone. Because securities transactions are the means
surgical presentation of the cause of action . . . would undermine the congressional intent
behind the RICO Amendment.”). In any event, the facts alleged by the SAC—especially when
viewed in the context of David’s alleged ongoing decades-long scheme to loot the Estate—do
not plausibly suggest that David secretly (and lawfully) held the Wise Metals shares in his
controlled entity’s name for the benefit of the Estate, only to change his mind and develop a
fraudulent intent after the sale was completed and the proceeds received.
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by which David breached his fiduciary duty, his fraudulent conduct coincided with the
purchase of securities. The RICO Amendment therefore applies.
III. David’s stock purchases cannot be separated from the alleged fraud
underlying the Silver Knot/Wise Metals scheme.
The Majority decides that the alleged fraud underlying the Silver Knot/Wise
Metals scheme did not occur “in,” or “in connection with,” the purchase or sale of
securities. To reach this conclusion, the Majority attempts to drive a wedge between the
alleged fraud and David’s purchases of stock in New England Redemption and Wise
Metals. The Majority endeavors to separate the alleged fraud from the stock purchases
by defining the fraud at the highest possible level of generality: the fraud, in the
Majority’s telling, was a “multi-year conversion scheme” involving “the
misappropriation and conversion of [E]state assets in violation of fiduciary duties to the
[E]state.” Maj. Op. at 18; see also id. at 18 n.3 (“[T]he Silver Knot/Wise Metals scheme
was fraudulent because David did not act in good faith as executor but instead
converted the [E]state’s assets for his and the other defendants’ benefit.”). Because the
Silver Knot/Wise Metals scheme can be described at this high level without referencing
securities, the Majority concludes that David’s stock purchases were only “incidental”
to the alleged fraud. Id. at 18.
But nowhere does the Majority explain why David’s alleged stock purchases
were not fraudulent in and of themselves. In my view, no such explanation exists: as
discussed above, David made these purchases for his own personal benefit using Estate
assets in breach of his fiduciary duty. The stock purchases were fraudulent standing
alone; they are the vehicle through which David executed the alleged fraud. To use the
Majority’s framing, the stock purchases are how David “misappropriat[ed] and
conver[ted] . . . [E]state assets in violation of fiduciary duties.” Id. Accordingly, the
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Majority errs in concluding that the stock purchases were merely incidental to the Silver
Knot/Wise Metals scheme. They were essential to it.
To be sure, the Majority is correct that the Silver Knot/Wise Metals scheme “does
not allege that David made misrepresentations about the value of securities or that he
was not authorized to transact in securities on behalf of the [E]state.” Id. But these are
not the only ways for a securities transaction to be fraudulent. Securities fraud need not
involve a misrepresentation about a security’s value. See 17 C.F.R. § 240.10b-5(a), (c);
Zandford, 535 U.S. at 820; Frohling, 851 F.3d at 136. And, as Zandford illustrates, a
fiduciary who is generally authorized to trade securities on another’s behalf can
nonetheless commit securities fraud by engaging in unauthorized securities
transactions for the fiduciary’s own benefit. See 535 U.S. at 820–21. That is exactly what
is alleged here. Although David was “authorized to transact in securities on behalf of
the [E]state,” Maj. Op. at 18, he was not authorized to use Estate assets to purchase
securities in his own name and for his own benefit. That is why the Silver Knot/Wise
Metals scheme alleges securities fraud.
IV. The tax fraud precedents on which the Majority relies are distinguishable.
In concluding that the Silver Knot/Wise Metals scheme does not trigger the RICO
Amendment, the Majority relies on precedents from our sister circuits (and from a
district court in this Circuit) that construed the RICO Amendment as not erecting a bar
to claims involving fraudulent tax shelters. In my view, these cases are distinguishable.
In each case, the plaintiffs alleged that the defendants sold them tax shelters that
turned out to be fraudulent. Although the tax frauds involved securities—the frauds
were committed using proceeds derived from securities transactions—the RICO
Amendment did not bar the plaintiffs’ RICO claims because nothing about the
underlying securities transactions was fraudulent. See Menzies, 943 F.3d at 335–36 (“The
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complaint all but says every aspect of the stock sale itself was entirely lawful. . . . The
fraud Menzies alleged is at least one step removed—focused not on the sale of the . . .
stock but on how and why he charted a particular course in his treatment of the sale for
federal tax purposes and the losses he sustained by doing so.”); Rezner, 630 F.3d at 872(“Rezner’s decision to use bonds had no effect on the fraudulent scheme, which instead
concerned the tax treatment of a loan.”); Ouwinga v. Benistar 419 Plan Servs., Inc., 694
F.3d 783, 791 (6th Cir. 2012) (“The Ouwingas . . . do not allege fraud relating to the
purchase of [securities] by the [fraudulent welfare benefit plan]. . . . [T]heir fraud claim
relates only to the tax consequences of the . . . [p]lan . . . .”); Kottler v. Deutsche Bank AG,
607 F. Supp. 2d 447, 457 n.9 (S.D.N.Y. 2009) (“[I]t is inaccurate to suggest that the actual
purchase and sale of securities were fraudulent. In actuality, the securities performed
exactly as planned and marketed; it was the overall [tax] scheme that allegedly
defrauded the Plaintiffs . . . .”).
The Silver Knot/Wise Metals scheme is unlike the frauds alleged in these cases. In
all of these cases, the plaintiffs alleged that the defendants sold fraudulent tax shelters
that were funded in part by proceeds derived from lawful securities transactions. In
none of these cases was it alleged—as it is here—that the underlying securities
transactions were fraudulent in and of themselves. 12
12As the Majority points out, the above-cited decisions emphasized that the underlying
securities transactions were only “incidental” to the alleged tax frauds. Ouwinga, 694 F.3d at
791; see also Rezner, 630 F.3d at 872 (“[T]he securities were merely a happenstance cog in the
scheme.”); Menzies, 943 F.3d at 335 (same). But the securities transactions in the foregoing cases
were “incidental” to the fraudulent schemes only insofar as the securities transactions were not
the specific aspects of the schemes that made the schemes fraudulent. In this case, by contrast,
David’s stock purchases are what made the Silver Knot/Wise Metals scheme fraudulent: the
stock purchases are the means by which David breached his fiduciary duty to the Estate’s
beneficiaries.
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The difference between the tax fraud cases and the Silver Knot/Wise Metals
scheme is also highlighted by focusing on when the alleged frauds were consummated.
In the tax fraud cases, the frauds were not consummated upon the occurrence of the
underlying securities transactions. 13 Rather, the frauds were consummated later, when
the plaintiffs deployed tax strategies that were found to be unlawful. See Menzies, 943
F.3d at 335–36; Rezner, 630 F.3d at 872; Kottler, 607 F. Supp. 2d at 457 n.9. In Zandford, by
contrast, the stockbroker committed fraud each time he made an unauthorized sale of
his clients’ securities for his own benefit. 535 U.S. at 820–21. Likewise, in Zohar, the
defendants committed fraud each time they used company funds to acquire equity for
themselves. See 286 F. Supp. 3d at 649.
So too here in the Silver Knot/Wise Metals scheme: immediately upon using
Estate assets to purchase stock in New England Redemption for his own gain, David
had committed fraud; the same is true with respect to the purchase of Wise Metals
stock. No further act was necessary to complete the fraud. 14 The fraud was therefore
13If a scheme becomes fraudulent upon the occurrence of a securities transaction, then the
securities transaction is what made the scheme fraudulent, and the “in connection with”
requirement is satisfied. Cf. Zandford, 535 U.S. at 825 (“[T]he fraud was not complete before the
sale of securities occurred.”). If, on the other hand, a fraud is consummated sometime before or
after a securities transaction and through some other means, then the “in connection with”
requirement is not satisfied, and the RICO Amendment does not apply. Cf. Chem. Bank v. Arthur
Andersen & Co., 726 F.2d 930, 943 (2d Cir. 1984) (Friendly, J.) (“[Section 10(b) and Rule 10b-5]
impose liability for a proscribed act in connection with the purchase or sale of a security; it is
not sufficient to allege that a defendant has committed a proscribed act in a transaction of which
the pledge of a security is a part.”).
14This is not to say that the alleged fraudulent scheme ended after David’s stock purchases. The
SAC alleges that, after David’s interests in New England Redemption and Wise Metals were
sold, David misappropriated the proceeds of those sales for his own benefit. SAC ¶¶ 81, 84. But
the SAC would allege securities fraud even if David had not misappropriated the sale proceeds.
See Zandford, 535 U.S. at 822 (“The fact that respondent misappropriated the proceeds of the
sales provides persuasive evidence that he had violated § 10(b) when he made the sales, but
misappropriation is not an essential element of the offense.”).
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“in,” and “in connection with,” the purchase of securities. 18 U.S.C. § 1964(c); 15 U.S.C.
§ 78j(b).
V. The “in connection with” inquiry focuses on how the alleged fraud was
carried out, not on the type of duty breached by the fraudster.
As discussed, the Majority concludes that the stock purchases underlying the
Silver Knot/Wise Metals scheme were merely “incidental” to the alleged fraud. Maj. Op.
at 18. The Majority contrasts this scheme with the fraud alleged in Zandford by focusing
on the nature of the stockbroker’s duty to his clients and by distinguishing that duty
from the one David owed to the Estate’s beneficiaries. See Maj. Op. at 20–21. In my
view, the Majority’s approach misapprehends the focus of the “in connection with”
inquiry in a way that unduly limits the reach of the RICO Amendment.
First, the Majority states that the nature of the broker-client relationship is what
made the securities transactions in Zandford a “necessary” rather than an “incidental”
feature of the fraud. Maj. Op. at 18, 21. I believe this interpretation of Zandford is
incorrect.
In that case, as described above, the stockbroker’s alleged fraud was “in
connection with” the sale of securities because each individual sale of securities was
unauthorized by the broker’s clients and was made for the broker’s own benefit. See 535
U.S. at 820–21. Nonetheless, in explaining why its holding would not “transform every
breach of fiduciary duty into a federal securities violation,” the Court provided
hypothetical situations demonstrating that the stockbroker could have defrauded his
clients without transacting in securities. The Court stated that such a fraud would not
have violated section 10(b): “If, for example, a broker embezzles cash from a client’s
account or takes advantage of the fiduciary relationship to induce his client into a
fraudulent real estate transaction, then the fraud would not include the requisite
connection to a purchase or sale of securities.” Id. at 825 n.4.
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These hypotheticals illustrate that, even though the broker’s relationship with his
clients inherently involved securities, not every fraud committed by the broker against
his clients would have been “in connection with” the purchase or sale of securities. In
other words, where the alleged fraud is a breach of fiduciary duty, the “in connection
with” inquiry focuses on the nature of the fraudulent transaction, not on the nature of
the duty breached by the fraudster. Thus, in this case, it is immaterial that David’s
fiduciary duty to the Estate’s beneficiaries did not necessarily involve trading in
securities. Virginia alleges that the Silver Knot/Wise Metals scheme was carried out
through fraudulent stock purchases. That is what counts in the RICO Amendment
inquiry.
Second, the Majority emphasizes that, because the fraud in Zandford constituted
the abuse of a stockbroker-client relationship, that fraud posed a “threat to investor
confidence in the securities industry.” Maj. Op. at 20 (quoting Zandford, 535 U.S. at 822).
This is, of course, a valid observation: the Silver Knot/Wise Metals scheme does not
appear to implicate investor confidence in the securities industry, and David’s fiduciary
duty, as discussed, arose not in the investment context but rather from his role as
Executor of his father’s Estate.
The application of section 10(b) and Rule 10b-5 is not limited, however, to frauds
that implicate the integrity of the securities markets. See Zandford, 535 U.S. at 821–22
(“Although we recognized [in Bankers Life] that the interest in ‘preserving the integrity
of the securities markets’ was one of the purposes animating the statute, we rejected the
notion that § 10(b) is limited to serving that objective alone.” (quoting 404 U.S. at 12)).
Thus, section 10(b) applies to face-to-face securities frauds as well as those committed
on a stock exchange, id.; and section 10(b) applies to transactions in stock issued by
small or closely held corporations just as it applies to transactions in stock issued by
large, publicly traded companies, see Overton v. Todman & Co., CPAs, P.C., 478 F.3d 479,
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488 (2d Cir. 2007); Sulkow v. Crosstown Apparel Inc., 807 F.2d 33, 37 (2d Cir. 1986). As the
Supreme Court has repeatedly instructed, section 10(b) is to be “construed ‘not
technically and restrictively, but flexibly to effectuate its remedial purposes.’” Affiliated
Ute Citizens of Utah v. United States, 406 U.S. 128, 151 (1972) (quoting S.E.C. v. Cap. Gains
Rsch. Bureau, Inc., 375 U.S. 180, 195 (1963)); see also Zandford, 535 U.S. at 821; Bankers Life,
404 U.S. at 12. This same principle should apply in determining what constitutes
actionable securities fraud for purposes of the RICO Amendment.
Accordingly, although David is not a stockbroker, the fact remains that he
exposed himself to charges of securities fraud when he used Estate assets to purchase
securities for his own gain. See Bankers Life, 404 U.S. at 12 (“Since there was a ‘sale’ of a
security and since fraud was used ‘in connection with’ it, there is redress under
[section] 10(b) . . . .”); id. at 10 n.7 (“Novel or atypical methods should not provide
immunity from the securities laws.” (quoting A.T. Brod & Co., 375 F.2d at 397)). The
Silver Knot/Wise Metals scheme therefore triggers the RICO Amendment.
One final point bears mentioning. Given the unique nature of the frauds alleged
by Virginia and their nexus to ongoing probate matters, we all might agree that—
notwithstanding the alleged securities law breach—the SEC is unlikely to bring an
enforcement action against David. But the RICO Amendment is worded broadly and
tells us that the bar applies whenever the alleged conduct “would have been
actionable” as securities fraud. 18 U.S.C. § 1964(c). Reading that language literally, and
expansively, is appropriate and consistent with the Amendment’s purpose: “to prevent
litigants from using artful pleading to boot-strap securities fraud cases into RICO cases,
with their threat of treble damages.” MLSMK Inv. Co. v. JP Morgan Chase & Co., 651 F.3d
268, 274 (2d Cir. 2011) (internal quotation marks omitted). Therefore, in applying the
RICO Amendment, courts should be concerned only with whether the SEC could bring
20
an enforcement action on the alleged facts; the decision whether to bring such an action
is committed to the agency.
CONCLUSION
The Silver Knot/Wise Metals scheme turns on allegations that David breached his
fiduciary duty to the Estate’s beneficiaries through the purchase of securities. I believe
that this conduct would have been actionable as securities fraud, and that therefore the
RICO Amendment applies—at least with respect to this scheme. Accordingly, I would:
reverse the district court’s judgment with respect to the Red Knot forbearance scheme;
affirm with respect to the Silver Knot/Wise Metals scheme; and remand for the district
court to determine in the first instance whether Virginia can pursue her RICO claim for
legal expenses without relying on allegations concerning the Silver Knot/Wise Metals
scheme. For the foregoing reasons, and with respect, I concur in part and dissent in
part.
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