Michael Deguelle v. Kristen Camilli

In the
United States Court of Appeals
For the Seventh Circuit
No. 10-2172
M ICHAEL J. D EG UELLE,
Plaintiff-Appellant,
v.
K RISTEN J. C AMILLI, et al.,
Defendants-Appellees.
Appeal from the United States District Court
for the Eastern District of Wisconsin
No. 2:10-cv-00103— J. P. Stadtmueller, Judge.
A RGUED S EPTEMBER 27, 2011—D ECIDED D ECEMBER 15, 2011
Before F LAUM, K ANNE, and H AMILTON, Circuit Judges.
K ANNE, Circuit Judge. Michael J. DeGuelle, a tax em-
ployee of S.C. Johnson & Son, Inc., was terminated after
reporting an alleged tax fraud scheme to the company and
federal law enforcement agencies. Following his termina-
tion, DeGuelle filed suit asserting two civil claims under
the Racketeer Influenced and Corrupt Organizations
Act (“RICO”), 18 U.S.C. §§ 1962(c) and 1962(d). The district
2 No. 10-2172
court dismissed DeGuelle’s RICO claims with prejudice,
finding that the predicate acts alleged were either unre-
lated or did not proximately cause DeGuelle’s injuries.
DeGuelle believes the district court erred in finding
that the appellees’ retaliatory acts were unrelated to the
alleged tax fraud scheme. Because we find that the acts
are related under the Supreme Court’s “continuity plus
relationship” test, the judgment of the district court will
be reversed.
I. B ACKGROUND
We review de novo the district court’s finding that
DeGuelle failed to state a claim for relief under RICO.
Rennell v. Rowe, 635 F.3d 1008, 1010 (7th Cir. 2011). Con-
struing the complaint in a light most favorable to
DeGuelle, we accept all well-pleaded facts as true and
draw all possible inferences in DeGuelle’s favor. Golden
v. Helen Sigman & Assocs., Ltd., 611 F.3d 356, 360 (7th
Cir. 2010).
DeGuelle worked for S.C. Johnson & Son, Inc.
(“SCJ”), from approximately January 2, 1997, to April
10, 2009. SCJ employs approximately 12,000 people
and sells household consumer products in more than
110 countries. DeGuelle was employed in SCJ’s tax depart-
ment, first as an International Tax Compliance Manager
and later as a State Tax Manager.
In December of 2000, SCJ received Internal Revenue
Service (“IRS”) audit reports for fiscal year-ends (“FYE”)
No. 10-2172 3
1998, 1999, and 2000. Defendant-Appellee Daniel Wenzel,
Global Tax Counsel, delivered these reports to DeGuelle
for review. DeGuelle discovered that SCJ improperly
received $5,082,048 in foreign tax credits. In January of
2001, DeGuelle reported his findings to Wenzel and asked
how these errors should be remedied. Wenzel responded
that they should wait and “[t]his is why I go to church
on Sundays.” Wenzel reported DeGuelle’s findings to
Defendant-Appellee Robert Randleman, Vice President and
Corporate Tax Counsel, but not to the IRS. Instead,
Wenzel directed DeGuelle to alter or destroy records so
that the errors would not be detected. Subsequently,
altered reports were submitted to the IRS via United
States mail.
In 2002, Wenzel instructed DeGuelle and a fellow
employee to structure a transaction so that SCJ could claim
a tax deduction by exploiting tax accounting rules. Wenzel
told DeGuelle and his fellow employee to fabricate
a business purpose for the transaction and then destroy
associated business records in case “the IRS examines
this transaction in the future.” DeGuelle believes
SCJ received a benefit in excess of $2,000,0000 in the form
of reduced tax liability as a result of this structured trans-
action. Further, Wenzel received a significant discretionary
bonus for his role.
In February of 2005, Wenzel directed DeGuelle
to fraudulently alter an income statement, which
would result in approximately $3,700,000 in financial
benefits for SCJ. DeGuelle refused to alter the statement.
4 No. 10-2172
He discussed his concerns with Donald Pappenfuss,
a supervisor within the tax department, who instructed
DeGuelle to alter the form pursuant to Wenzel’s instruc-
tions. Wenzel approved the altered income statement and
submitted it to the IRS by mail.
In June of 2005, Pappenfuss submitted a fraudulently
amended tax return for FYE 1998 in order to take advan-
tage of the IRS’s previous auditing errors. Randleman
approved the return and sent it to the IRS via mail.
DeGuelle alleges that Randleman knew of the IRS’s errors
at the time he approved the amended 1998 tax return.
In July of 2007, DeGuelle and Pappenfuss discussed
the need to set aside a reserve to cover potential exposure
on an intercompany loan. Pappenfuss directed DeGuelle
to take his concerns to Wenzel, who refused to create
a reserve and downplayed the likelihood of such a reserve
being necessary.
DeGuelle met with Defendant-Appellee Kristen Camilli,
Director of Human Resources, in October of 2007 to
discuss his allegations that Wenzel was creating a
hostile work environment. Camilli and DeGuelle had a
follow-up meeting on January 9, 2008, during which
Camilli informed DeGuelle that she investigated his
complaints and determined that Wenzel had not created
a hostile working environment. DeGuelle then in-
formed Camilli of the IRS audit errors and Wenzel’s
instructions to destroy or alter records. Camilli requested
documentation supporting DeGuelle’s allegations,
which DeGuelle provided to Camilli on January 14,
No. 10-2172 5
2008. DeGuelle also spoke with Defendant-Appellee
Gayle Kosterman, who informed him that an internal
committee had decided to hire an outside law firm
to investigate DeGuelle’s allegations of tax fraud. DeGuelle
discussed his concerns with two attorneys from the law
firm of Kirkland & Ellis LLP on January 17, 2008.
In March of 2008, Wenzel told DeGuelle to bring
any concerns about issues in the tax department to appro-
priate department personnel instead of taking such con-
cerns to accounting or human resources. Wenzel was
loud and physically aggressive toward DeGuelle during
this meeting. Wenzel also made disparaging comments
about DeGuelle in front of other SCJ employees. That
same month, DeGuelle received a negative six-month
performance review even though such mid-year reviews
were not routine, and despite the fact that DeGuelle
received an Officer’s Award in recognition of his superior
job performance in January of that year.
DeGuelle had several meetings with Camilli and
Kosterman following this negative review. First,
DeGuelle met with Camilli on March 12, 2008, to discuss
his performance review. He also met with Kosterman
on March 14, 2008, to discuss his concerns regarding
the tax credits and his personal issues with Wenzel.
In April of 2008, Camilli met with DeGuelle about a salary
adjustment. Camilli indicated she needed to talk about
DeGuelle’s salary increase with Wenzel first. (DeGuelle
also raised the salary issue with Wenzel, who acknowl-
edged a ten percent raise might be appropriate but “given
6 No. 10-2172
some of the problems we have had in the past few months,
I don’t think that will be happening this year.”)
Kosterman met with DeGuelle again in May of 2008.
She informed DeGuelle that no one at SCJ committed
any wrongdoing and he was paranoid for thinking he
would suffer reprisal from Wenzel. She recommended
DeGuelle meet with Wenzel and a human resources coach
to mend their relationship. It’s unclear whether such
coaching occurred, but the relationship between DeGuelle
and Wenzel did not improve.
In August of 2008, DeGuelle met with Camilli
and expressed his concerns about the reserve issue
he raised with Pappenfuss and Wenzel in July of 2007.
DeGuelle indicated that he would have to pursue
an internal audit if no reserve was set aside. Camilli
relayed DeGuelle’s statements to Wenzel. All three parties
met on August 28, 2008, to discuss the issue. Wenzel
was confrontational and aggressive toward DeGuelle
and accused DeGuelle of not bringing the issue to
his attention. DeGuelle and Camilli met once again
on September 10, 2008, to discuss DeGuelle’s concerns
for his safety in light of Wenzel’s behavior.
On September 23, 2008, Wenzel and DeGuelle had
another verbal altercation and DeGuelle received a nega-
tive “needs im provem ent” perform ance review
from Wenzel. DeGuelle contacted Camilli and alleged that
his review was retaliation for his whistleblowing activities.
Camilli informed DeGuelle on October 10, 2008, that
the negative review would be investigated. In November,
No. 10-2172 7
DeGuelle contacted Camilli in writing and informed her
he would contact state or federal agencies regarding
Wenzel’s retaliatory acts if SCJ refused to take action.
On December 18, 2008, DeGuelle met with Kosterman
and Camilli. They informed DeGuelle that the negative
review was retaliatory in nature and it would be revoked.
They also discussed a possible salary adjustment and
transfer to a different department at SCJ. Kosterman
directed DeGuelle to drop his complaints of tax fraud,
but DeGuelle stated he would file a whistleblower com-
plaint with the Department of Labor. Later that
day, Kosterman and Camilli contacted DeGuelle
by telephone and informed him that he would receive
a salary increase. They also offered to make a partial
payment of DeGuelle’s attorney’s fees if DeGuelle agreed
to sign a release of claims and confidentiality agreement.
DeGuelle believes this offer came from W. Lee McCollum,
Executive Vice President and Chief Financial Officer, and
Defendant-Appellee Mark Eckhardt, Vice President and
Chief Information Officer.
Instead of accepting the company’s offer, DeGuelle filed
a whistleblower complaint under the Sarbanes-Oxley
Act with the Department of Labor on December 18,
2008. He attached financial statements, tax documents,
and internal communications to his complaint.
DeGuelle met with Kosterman in January of 2009 to
retract his salary request because he feared it could
be viewed as an attempt to benefit from SCJ’s tax fraud
scheme. Kosterman stated that she had not interpreted
8 No. 10-2172
his request in this way and she restated her belief that
no illegal activity had occurred.
DeGuelle continued to contact federal agencies about
SCJ’s tax fraud. He also emailed Dr. H. Fisk Johnson, Chief
Executive Officer, requesting a meeting and again stating
his belief that the tax department was engaging in illegal
acts. This email was forwarded to Kosterman, who met
with DeGuelle on February 10, 2009, and informed him he
needed to “move beyond these issues.” Camilli notified
DeGuelle that she had looked into his concerns and
no illegal or fraudulent activity was discovered. She told
him “we need to move forward.” On February 17, 2009,
the Department of Labor determined that SCJ was not
a covered entity under the Sarbanes-Oxley Act.
The tax department filed a fraudulent second amended
tax return for FYE 1998 on March 10, 2009. This tax return
was signed by Eckhardt and sent to the IRS by mail. Like
previous altered documents sent to the IRS, this return
sought to obtain a tax refund related to foreign tax credits.
On March 19, 2009, DeGuelle provided SCJ counsel with
a five-page memorandum detailing his concerns about tax
fraud within the company. Kosterman also reviewed this
memorandum. Kosterman met with DeGuelle and offered
him the opportunity to resign with one year of salary
and benefits if he signed a confidentiality agreement
and released all claims. Again, DeGuelle refused SCJ’s
offer.
Three weeks later, on April 9, 2009, SCJ began investigat-
ing DeGuelle for misconduct relating to his disclosure of
No. 10-2172 9
confidential business documents outside of the company.
DeGuelle met with Camilli and other investigators.
During that interview, DeGuelle denied disclosing confi-
dential business documents but admitted to attaching
documents to his Department of Labor complaint.
He asserted that Camilli was well aware of his disclosures.
Following the interview, DeGuelle was placed on adminis-
trative leave and sent home. The following day he
was terminated for taking confidential business docu-
ments, disclosing them outside the company, and being
untruthful during the investigation. Eckhardt and
Kosterman made the decision to terminate DeGuelle. The
company also demanded return of any SCJ property in
DeGuelle’s possession.
SCJ subsequently filed a lawsuit against DeGuelle in
Racine County Circuit Court seeking recovery of SCJ
property, documentation, and other confidential informa-
tion. SCJ also sued DeGuelle for breach of contract and
conversion.1 In the months following the institution of
SCJ’s lawsuit, SCJ allegedly made defamatory statements
against DeGuelle that were published in local media
outlets.
On February 5, 2010, DeGuelle filed the present lawsuit
in the Eastern District of Wisconsin, alleging violations of
1
On June 23, 2011, the circuit court ruled in favor of SCJ,
finding that DeGuelle is liable for $50,000 in damages and that
SCJ is entitled to the return of all SCJ documents in DeGuelle’s
possession. DeGuelle is appealing the court’s decision.
10 No. 10-2172
RICO, breach of contract, wrongful termination, and
defamation. Defendants-Appellees filed a motion to
dismiss on February 17, 2010. The district court granted
this motion on April 12, 2010, dismissing DeGuelle’s
RICO claims with prejudice and the remaining state
law claims without prejudice. DeGuelle filed his
timely notice of appeal on May 11, 2010.
II. A NALYSIS
Under RICO, “[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 . . . .” 18 U.S.C. § 1964(c). A cause of action
under § 1964(c) requires a plaintiff to plead “(1) an
injury in its business or property (2) by reason of (3)
the defendants’ violation of section 1962.” RWB Servs.,
LLC v. Hartford Computer Grp., Inc., 539 F.3d 681, 685
(7th Cir. 2008) (internal quotation marks and brackets
omitted). DeGuelle appeals the district court’s dismissal
of his §§ 1962(c) and 1962(d) RICO claims.
To survive a motion to dismiss, “a complaint must
provide a short and plain statement of the claim show-
ing that the pleader is entitled to relief, which is sufficient
to provide the defendant with fair notice of the
claim and its basis.” Maddox v. Love, 655 F.3d 709, 718
(7th Cir. 2011) (internal quotation marks omitted).
A plaintiff may not rely on mere labels, conclusions, or
a formulaic recitation of the elements of a cause of
action. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).
No. 10-2172 11
In addition, the complaint must state a “plausible” claim
for relief. Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009).
“A claim has facial plausibility when the plaintiff
pleads factual content that allows the court to draw the
reasonable inference that the defendant is liable for the
misconduct alleged.” Id.A. Section 1962(c)
DeGuelle’s first RICO claim alleges that the appellees
violated § 1962(c), which makes it unlawful for an em-
ployee of an enterprise engaged in interstate commerce
“to conduct or participate, directly or indirectly, in the
conduct of such enterprise’s affairs through a pattern
of racketeering activity . . . .” 18 U.S.C. § 1962(c). To state
a claim for relief under § 1962(c), DeGuelle must allege
“(1) conduct (2) of an enterprise (3) through a pattern of
racketeering activity.” United States v. Shamah, 624 F.3d
449, 454 (7th Cir. 2010), cert. denied, 131 S. Ct. 1529(2011). The parties dispute whether a “pattern of racketeer-
ing activity” was properly alleged in the complaint.
A pattern requires the commission of at least two predi-
cate acts of racketeering activity occurring within ten
years of each other. 18 U.S.C. § 1961(5). “Racketeering
activity” is limited to the specific acts statutorily enumer-
ated in 18 U.S.C. § 1961(1). DeGuelle’s complaint alleges
several acts of racketeering, including mail fraud
in violation of 18 U.S.C. § 1341; tampering with a witness
in violation of 18 U.S.C. § 1512(b)(3); altering, destroying,
mutilating, or concealing a document with the intent
12 No. 10-2172
to obstruct justice in violation of 18 U.S.C. § 1512(c)(1);
and retaliation against a witness or informant in violation
of 18 U.S.C. § 1513(e)-(f). The parties do not dispute that
these alleged predicate acts occurred within a ten-year
period.
In H.J. Inc. v. Northwestern Bell Telephone Co., the
Supreme Court held that to show a pattern of racketeering
activity, a plaintiff must demonstrate a relationship
between the predicate acts as well as a threat of continuing
activity. 492 U.S. 229, 239 (1989). A relationship is estab-
lished if the criminal acts “have the same or similar
purposes, results, participants, victims, or methods
of commission, or otherwise are interrelated by distin-
guishing characteristics and are not isolated events.” Id.
at 240 (quoting 18 U.S.C. § 3575(e)). Continuity can be
a closed- or open-ended concept. Id. at 241. Closed-ended
continuity refers to criminal behavior that has ended
but “the duration and repetition of the criminal activity
carries with it an implicit threat of continued criminal
activity in the future.” Jennings v. Auto Meter Prods.,
Inc., 495 F.3d 466, 473 (7th Cir. 2007). In contrast, open-
ended continuity requires a showing of past conduct
that “by its nature projects into the future with a threat
of repetition.” H.J., 492 U.S. at 241. The “continuity plus
relationship” test established in H.J. allows lower courts
to apply a flexible test in determining what constitutes
a pattern, while at the same time addressing Congress’s
concern that RICO target only long-term criminal conduct.
See id. at 239, 242.
No. 10-2172 13
Even if a plaintiff establishes a RICO violation through
a pattern of racketeering activity under § 1962(c), a
plaintiff may only recover for damages to one’s “business
or property” occurring as a result of that violation.
See Evans v. City of Chicago, 434 F.3d 916, 924-25 (7th
Cir. 2006); 18 U.S.C. § 1964(c). A RICO plaintiff’s
injuries must be “by reason of” a violation of § 1962.
18 U.S.C. § 1964(c). This requires a showing of “but
for” causation and proximate cause. Corley v. Rosewood
Care Ctr., Inc. of Peoria, 388 F.3d 990, 1005 (7th Cir. 2004).
Here, DeGuelle alleges that he suffered injuries to
his business or property in that he was terminated from
his employment, sued in Racine County Circuit Court,
and defamed in local media outlets. In light of
DeGuelle’s injuries, logically he can only claim he
was injured “by reason of” the appellees’ retaliatory
actions. But we agree with the district court that the
§ 1513(e) retaliatory acts on their own do not demonstrate
a pattern of racketeering activity. Those acts by themselves
do not satisfy the closed- or open-ended continuity require-
ment.2 Thus, in order for DeGuelle’s claims to have
2
The district court held that the retaliation scheme did not meet
the closed-ended continuity test because it occurred over a short
period of time, involved only a few predicate acts, and targeted
only one victim. DeGuelle v. Camilli, No. 10-CV-0103, 2010 WL
1484236, at *8 (E.D. Wis. Apr. 12, 2010). Further, the open-ended
continuity test was not satisfied because “there is nothing to
indicate that the defendants’ retaliatory actions against the
(continued...)
14 No. 10-2172
any merit, the retaliation predicate acts must be grouped
with other predicate acts of fraud to form a pattern of
racketeering activity. To do so, these predicate acts must
be related.
The district court determined that DeGuelle’s complaint
alleged two unrelated schemes: “tax fraud” and “retalia-
tion.” Because the district court considered the alleged
predicate acts as two separate schemes, the retaliatory
actions taken against DeGuelle (terminating DeGuelle,
filing a lawsuit, and making defamatory statements)
were considered unrelated to the predicate acts alleged
as part of the tax fraud scheme (mail fraud, destroying
records, and offering DeGuelle benefits in exchange for
his silence). The district court reasoned that the
two schemes were unrelated because they involved
different actors, motives, and victims. The tax fraud
scheme was undertaken by Wenzel, Pappenfuss,
and Randleman, while the retaliation scheme was carried
out by Camilli, Kosterman, and Eckhardt. The tax
fraud scheme aimed to defraud the IRS of tax revenue
while the retaliation scheme’s sole purpose was to retaliate
against DeGuelle for being a whistleblower. Since none
of the retaliatory acts occurred prior to DeGuelle’s whistle-
blowing, such acts could not support a theory that
the appellees were attempting to “cover up” their
2
(...continued)
plaintiff will repeat into the future, such as a specific threat of
repetition or the nature of the enterprise.” Id. at *9.
No. 10-2172 15
tax fraud. In other words, by the time DeGuelle suffered
retaliation, the government was already aware of
SCJ’s wrongdoing.
DeGuelle argues that the Sarbanes-Oxley Act’s addition
of § 1513(e) as a RICO predicate act allows his claim to
proceed. Congress enacted the Sarbanes-Oxley Act to
address growing concerns about the reliability and accu-
racy of disclosures made by publicly-traded corporations.
See Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204,
116 Stat. 745 (2002). In addition to protecting investors,
Title VIII of the Act provides protection for whistleblowers
and prohibits retaliation against employees who provide
evidence of fraud to a government agency. See 18
U.S.C. § 1514A. The Sarbanes-Oxley Act also
added subsection (e) to 18 U.S.C. § 1513. That section
provides:
Whoever knowingly, with the intent to retaliate, takes
any action harmful to any person, including interfer-
ence with the lawful employment or livelihood of any
person, for providing to a law enforcement officer any
truthful information relating to the commission or
possible commission of any Federal offense, shall be
fined under this title or imprisoned not more than 10
years, or both.
18 U.S.C. § 1513(e). Section 1513(f) subjects wrongdoers
to the same penalties for entering into a conspiracy
to commit such acts. Under RICO, violations of § 1513
are considered “racketeering activity.” 18 U.S.C.
§ 1961(1). Prior to enactment of the Sarbanes-Oxley Act,
16 No. 10-2172
retaliation against an employee in the form of interference
with his or her lawful employment was not considered
a racketeering act, see, e.g., Hamm v. Rhone-Poulenc
Rorer Pharm., Inc., 187 F.3d 941, 953 (8th Cir. 1999),
and courts denied RICO standing to employees terminated
for refusing to cooperate in an alleged racketeering
scheme, see Corporate Healthcare Fin., Inc. v. BCI
Holdings Co., 444 F. Supp. 2d 423, 432 (D. Md. 2006) (listing
cases).3
The addition of § 1513(e) as a predicate act raises issues
about the relationship between retaliatory actions and
the underlying wrongdoing. The language of § 1513(e)
and logic imply that retaliatory actions always occur
after a whistleblower reports others’ wrongdoing. Under
the district court’s reasoning, retaliation cannot be related
3
Many cases addressing RICO retaliation claims since the
enactment of the Sarbanes-Oxley Act have declined to recon-
sider these issues. See, e.g., Hoatson v. N.Y. Archdiocese, No. 05
Civ. 10467, 2007 WL 431098, at *6 (S.D.N.Y. Feb. 8, 2007)
(“Retaliatory firing is clearly not a listed predicate act or ‘racke-
teering activity.’ ”), aff’d, 280 F. App’x 88 (2d Cir. 2008);
Herrick v. South Bay Labor Council, No. C-04-02673, 2004 WL
2645980, at *3 (N.D. Cal. Nov. 19, 2004) (whistleblower termi-
nated in retaliation for reporting her concerns could not bring
RICO claim because her injuries stemmed from wrongful
discharge, not alleged racketeering activity); but cf. Vierria v.
Cal. Highway Patrol, 644 F. Supp. 2d 1219, 1236-37 (E.D. Cal.
2009) (termination of employee constituted racketeering activity
under section 1513(e)).
No. 10-2172 17
to the underlying wrongdoing for purposes of RICO
because the retaliatory acts will always occur after
the underlying wrongdoing has been disclosed. Thus,
there is no “cover up.” In addition, the motives and victims
will almost never be the same. We can conceive of very
few cases in which a single retaliatory act would
be considered “related” to other predicate acts under
this reasoning. This is troubling when one considers the
purposes of the Sarbanes-Oxley Act and its addition
of § 1513(e) to RICO’s statutory scheme.
When an employer retaliates against an employee, there
is always an underlying motivation. In this case, for
example, the motivation was to retaliate against DeGuelle
for disclosing the tax scheme. Retaliatory acts are inherently
connected to the underlying wrongdoing exposed by
the whistleblower. Although there may not be the
same victims or results, in most cases retaliatory acts
and the underlying scheme “are interrelated by distin-
guishing characteristics and are not isolated events.”
H.J., 492 U.S. at 240. Accordingly, we believe a relationship
can exist between § 1513(e) predicate acts and predicate
acts involving the underlying cause for such retaliation.
Such a finding is consistent with the Supreme Court’s
flexible standard and acknowledges the rationale behind
the Sarbanes-Oxley Act’s whistleblower provisions.4
4
We acknowledge that there is a danger, as expressed by many
courts prior to the enactment of the Sarbanes-Oxley Act, that
(continued...)
18 No. 10-2172
This is not to say that a predicate act of retaliation will
always be related to the underlying wrongdoing. Courts
must still examine the facts of each case in determining
whether the alleged predicate acts satisfy the “continuity
plus relationship” test in that they are “not isolated
events.” For instance, the district court’s finding of
two independent schemes in this case, if we were to
adopt this point of view, would indicate that the retaliatory
acts were isolated events separate and apart from the tax
fraud scheme. But the allegations contained within the
complaint suggest otherwise. We believe the district court
erred in finding that the retaliatory actions taken against
DeGuelle were unrelated to the ongoing tax fraud scheme.
DeGuelle alleges violations of four statutes which
are considered “racketeering activity.” First, DeGuelle
alleges several instances of mail fraud in violation of
18 U.S.C. § 1341. These acts occurred in December 2000,
February 2005, June 2005, and March 2009. DeGuelle
alleges that Wenzel, Randleman, Pappenfuss, and Eckhardt
participated in these fraudulent activities. Next,
DeGuelle alleges violations of 18 U.S.C. § 1512(c)(1), which
prohibits the destruction of records. DeGuelle alleges that
4
(...continued)
plaintiffs will bring claims which should be handled by state law
(i.e., wrongful termination) into federal court under the guise of
RICO. See Midwest Grinding Co. v. Spitz, 976 F.2d 1016, 1022
(7th Cir. 1992). But we are confident the continuity requirement
will often weed out those claims which do not truly demonstrate
a threat of continued wrongdoing.
No. 10-2172 19
Wenzel instructed him to destroy records in 2002 so
that they would not be discovered by the IRS. DeGuelle’s
third series of allegations focus on illegal tampering with
a witness in violation of 18 U.S.C. § 1512(b)(3).
DeGuelle alleges that in December of 2008, Camilli,
Kosterman, and Eckhardt offered to pay him a higher
salary and to pay his attorney’s fees if he agreed to sign
a confidentiality agreement and release all claims. This
offer came after DeGuelle informed Kosterman and
Camilli that he intended to file a whistleblower complaint
with the Department of Labor. In addition, in March of
2009, Kosterman offered DeGuelle the opportunity to
resign in exchange for one year of salary and benefits if he
agreed to sign a confidentiality agreement and release
all claims. Finally, DeGuelle alleges that Camilli,
Kosterman, and Eckhardt engaged in retaliatory acts
against him in violation of 18 U.S.C. § 1513(e)-(f) by
terminating his employment, filing a lawsuit against
him, and disseminating defamatory statements to the
press.
The district court found that the alleged acts of retalia-
tion (including his termination, the lawsuit, and defama-
tion) were unrelated to the alleged acts of fraud (including
mail fraud, destroying records, and corrupt persuasion
to get DeGuelle to sign a confidentiality agreement).
The district court noted the different victims, participants,
and motives. But the district court’s interpretation over-
looked key allegations linking the predicate acts. First,
the district court overlooked DeGuelle’s allegation
that Eckhardt participated in both the mail fraud and
20 No. 10-2172
retaliatory acts. The complaint alleges that Eckhardt signed
a fraudulent tax return before submitting it to the IRS in
March of 2009. The appellees argue that this allegation
lacks sufficient particularity to demonstrate that Eckhardt
played a role in the fraud scheme. But even if this is true,
the district court also did not recognize that Kosterman,
Camilli, and Eckhardt were responsible for the first act of
tampering in December of 2008. These three actors
offered DeGuelle an increase in salary and payment of
attorney’s fees if he agreed to sign a confidentiality agree-
ment and release all claims. This offer occurred after
DeGuelle informed human resources he planned to file
a whistleblower complaint. The district court clearly
identified this act as part of the fraud scheme, and rightly
so, as it was intended to prevent DeGuelle from disclosing
the company’s alleged wrongdoing. Yet the district court
did not recognize that these same three actors were also
responsible for DeGuelle’s termination, thus providing a
link between the fraud scheme and the retaliation scheme.
In addition, there is a temporal relationship between the
predicate acts in this case, such that under H.J., we can
conclude that these acts “otherwise are interrelated by
distinguishing characteristics and are not isolated events.”
492 U.S. at 240. The first act of tampering, which the parties
and the district court agree is related to the alleged acts
of mail fraud, occurred in December 2008. During the
same month, DeGuelle filed his Department of Labor
complaint. An additional act of mail fraud occurred
in March 2009. Shortly thereafter, a second act of tamper-
ing occurred in which Kosterman offered DeGuelle the
No. 10-2172 21
opportunity to resign with pay and benefits if he signed a
confidentiality agreement and release of claims. After
DeGuelle refused, he was terminated in early April 2009.
It is reasonable to infer from the alleged facts that
Kosterman, recognizing all attempts to silence DeGuelle
had failed, resorted to retaliatory termination as a result.
The lawsuit and defamatory statements followed shortly
thereafter. Thus, over a five-month period, the company
engaged in two acts of tampering, one act of mail fraud,
and three acts of retaliation. Moreover, the second act
of tampering preceded DeGuelle’s termination by a
very short period of time. It is safe to say these were not
isolated events.
Admittedly, some of the actions taken by Kosterman and
Camilli are inconsistent with any alleged involvement in
the tax fraud scheme. The human resources department
apparently took DeGuelle’s allegations seriously, prompt-
ing the hiring of an outside law firm to investigate tax
fraud within the company. In addition, both Kosterman
and Camilli investigated DeGuelle’s negative performance
review. After they determined the review was retaliatory
in nature, it was revoked. Despite these inconsistencies,
however, there are enough allegations within the com-
plaint to conclude, at this stage in the proceedings, that
Kosterman and Camilli were participants in the RICO
scheme. For instance, Kosterman and Camilli attempted
to silence DeGuelle by offering him incentives if he signed
a confidentiality agreement. They also participated
in DeGuelle’s termination, an alleged act of retaliation.
22 No. 10-2172
In light of the above discussion and the “relatively
broad” relationship standard, United States v. Maloney,
71 F.3d 645, 661 (7th Cir. 1995), we find that the predicate
acts alleged in the complaint are related. Additionally,
we find that the continuity requirement is satisfied.
As noted by the district court, the predicate acts of
tax fraud satisfy the closed-ended continuity test because
these acts occurred over a period of five years and involved
several actors and methods of commission. Grouping
the § 1513(e) predicate acts with the alleged acts of
tax fraud does not undermine this closed-ended continuity
analysis. Instead, this grouping includes additional predi-
cate acts, victims, and injuries, further supporting a finding
of closed-ended continuity. See Morgan v. Bank
of Waukegan, 804 F.2d 970, 975 (7th Cir. 1986) (“Relevant
factors include the number and variety of predicate
acts and the length of time over which they were commit-
ted, the number of victims, the presence of separate
schemes and the occurrence of distinct injuries.”).
The appellees assert that the continuity requirement
has not been satisfied because the alleged wrongdoing
revolves around foreign tax credits for FYEs 1998,
1999, and 2000. The scheme, appellees argue, is based
on mistakes made by the IRS in audit reports and there
is no indication that such mistakes will occur in the
future. Thus, there is a built-in termination point and
the scheme cannot support an inference of a continuing
criminal threat. But the appellees overlook additional
allegations of tax fraud within the complaint which are
not limited to foreign tax credits, such as the structuring
No. 10-2172 23
of a transaction to exploit tax accounting rules, fabrication
of a business purpose for the transaction, and destruction
of documents after completion of the transaction. In
addition, the complaint alleges that Wenzel instructed
DeGuelle to fraudulently alter an income statement for FYE
2004. These allegations indicate that the alleged tax fraud
scheme extended beyond foreign tax credits and beyond
FYEs 1998, 1999, and 2000.
Because the “continuity plus relationship” test is satis-
fied, we conclude that DeGuelle has properly alleged a
pattern of racketeering activity under § 1962(c). The district
court’s decision with regard to § 1962(c) must be reversed.
B. Section 1962(d)
DeGuelle’s second RICO cause of action alleges a con-
spiracy under 18 U.S.C. § 1962(d). As with his
§ 1962(c) claim, DeGuelle must allege that he was
injured “by reason of” a violation of § 1962. See 18
U.S.C. § 1964(c). “[I]njury caused by an overt act that is
not an act of racketeering or otherwise wrongful
under RICO . . . is not sufficient to give rise to a cause
of action under § 1964(c) for a violation of § 1962(d).”
Beck v. Prupis, 529 U.S. 494, 505 (2000). A RICO conspiracy
plaintiff must “allege injury from an act
that is . . . independently wrongful under RICO.” Id. at
505-06. DeGuelle alleges that a wrongful predicate act,
retaliation under 18 U.S.C. § 1513(e), proximately caused
his injuries.
24 No. 10-2172
In order to state a claim for § 1962(d) conspiracy,
“a plaintiff must allege that (1) the defendant agreed
to maintain an interest in or control of an enterprise or
to participate in the affairs of an enterprise through
a pattern of racketeering activity, and (2) the defendant
further agreed that someone would commit at least
two predicate acts to accomplish those goals.” Slaney
v. Int’l Amateur Athletic Fed’n, 244 F.3d 580, 600 (7th
Cir. 2001). “[T]he touchstone of liability under § 1962(d)
is an agreement to participate in an endeavor which,
if completed, would constitute a violation of the substan-
tive statute.” Goren v. New Vision Int’l, Inc., 156 F.3d
721, 732 (7th Cir. 1998). The defendant need not
personally commit a predicate act; rather, a plaintiff must
allege that the defendant agreed that someone would
commit at least two predicate acts in furtherance of
the conspiracy. See Lachmund v. ADM Investor Servs.,
Inc., 191 F.3d 777, 784 (7th Cir. 1999).
“A conspiracy to violate RICO may be shown by proof
that the defendant, by his words or actions, objectively
manifested an agreement to participate, directly or indi-
rectly, in the affairs of an enterprise, through the commis-
sion of two or more predicate crimes.” Roger Whitmore’s
Auto. Servs., Inc. v. Lake Cnty., Ill., 424 F.3d 659, 674 (7th Cir.
2005) (internal quotation marks and brackets omitted).
A defendant’s physical presence during the commission
of a predicate act is not enough, id. at 675, and not
all substantive RICO violations constitute conspiracies,
see id.No. 10-2172 25
The district court did not determine whether the com-
plaint properly alleged an agreement to commit tax fraud,
finding instead that DeGuelle failed to prove causation.
In light of our analysis above, this finding is in er-
ror. DeGuelle has properly alleged that his termination was
proximately caused by a RICO predicate act of retaliation.
We are therefore left to determine whether DeGuelle’s
complaint properly alleges an agreement.
The complaint alleges that Wenzel, Randleman,
and Pappenfuss 5 engaged in tax fraud in order to
receive significantly higher discretionary bonuses.
DeGuelle first alleges that Wenzel informed Randleman
of the IRS’s errors in January of 2001. Afterwards,
Wenzel instructed DeGuelle to alter or destroy records.
In 2005, DeGuelle approached Pappenfuss with his con-
cerns, but he was directed by Pappenfuss to do as
Wenzel directed. Later that same year, Pappenfuss pre-
pared a fraudulent tax return at the instruction of
Wenzel and Randleman. As alleged in the complaint,
these men stood to personally benefit from the filing
of amended tax returns based on the IRS’s errors. Further,
there are sufficient factual allegations indicating that these
men worked in tandem within the tax department and
made decisions together. One could infer that these three
agreed to participate in the affairs of an enterprise through
5
Although Donald Pappenfuss is listed as a defendant in the
complaint, DeGuelle did not appeal the district court’s judgment
as to Pappenfuss.
26 No. 10-2172
a pattern of racketeering activity, and further agreed to
commit at least two predicate acts of mail fraud.
In order to state a claim for relief, however, DeGuelle
must allege that this conspiracy proximately caused
his injuries. The complaint indicates that Wenzel,
Randleman, and Pappenfuss only engaged in acts of
mail fraud and did not participate in decisions to silence
or terminate DeGuelle. Thus, DeGuelle must allege that
an agreement existed between the three tax department
conspirators and Eckhardt, Kosterman, or Camilli.
DeGuelle alleges that all of the appellees in this case
had knowledge of illegal acts, discussed those acts, and
facilitated commission of those acts such that it may
be inferred that there was an agreement among all of
the appellees. DeGuelle notes that he informed Camilli
of Wenzel and Randleman’s actions in January of 2008,
and Wenzel was aware of this report by March 2008.
Thus, there must have been some communication between
Wenzel and Camilli. In addition, Camilli and Randleman
initially approved Wenzel’s negative performance review,
Kosterman and Camilli offered to pay DeGuelle’s attor-
ney’s fees to persuade him not to expose the tax
fraud scheme, and Eckhardt and Kosterman also attempted
to silence DeGuelle so that he could not disclose
further information to outside parties. Finally, DeGuelle
points out that Eckhardt signed and filed a fraudulent
tax return and was involved in the decision to terminate
DeGuelle (along with Camilli and Kosterman).
No. 10-2172 27
Eckhardt’s one alleged act of mail fraud occurred
in March of 2009, nearly four years after any prior alleged
act of fraud. This one isolated event is not enough to
infer that an agreement existed between Eckhardt and
the tax department conspirators to engage in tax
fraud. DeGuelle argues, however, that coupling Eckhardt’s
act of fraud with his acts of tampering and/or retaliation
establishes an agreement with the other conspirators
to commit tax fraud and conceal it. Although “efforts
to conceal a conspiracy are not automatically a part of
the conspiracy,” United States v. Masters, 924 F.2d 1362,
1368 (7th Cir. 1991), a conspiracy may still include an
agreement to conceal the defendants’ crime if such acts
of concealment are “done in furtherance of the
main criminal objectives of the conspiracy.” Grunewald
v. United States, 353 U.S. 391, 405 (1957).
We can easily infer that the tax department conspirators
intended to conceal their crimes: Wenzel and Randleman
did not disclose the foreign tax credit errors to the IRS
and DeGuelle was ordered on more than one occasion
to alter or destroy records to prevent detection. Even
though Eckhardt, Camilli, and Kosterman may not
have been involved in the formation of the conspiracy,
“parties may still be found guilty even though they join
or terminate their relationship with the core conspirators
at different times.” United States v. Noble, 754 F.2d
1324, 1329 (7th Cir. 1985). Eckhardt, Camilli, and
Kosterman engaged in acts aimed at preventing DeGuelle
from disclosing information outside the company. It
can be inferred from the facts of the complaint that these
28 No. 10-2172
actions against DeGuelle were part of the original conspira-
tors’ agreement to conceal their fraud.6
Although the complaint’s allegations as to the existence
of an agreement are sparse, at this stage in the proceedings,
there are enough allegations to infer that an agreement
existed. Undoubtedly these allegations will be explored in
greater detail throughout the discovery process. Accord-
ingly, DeGuelle’s § 1962(d) claim should survive.
6
As noted previously, some of Camilli and Kosterman’s actions
are inconsistent with a finding that all of the appellees were
participating in the same conspiracy. For instance, Camilli and
Kosterman initiated an investigation into DeGuelle’s allegations
of tax fraud. This investigation included disclosure of company
materials to third parties outside the company. This behavior is
inconsistent with an agreement among the appellees to conceal
acts of fraud. Further, although Camilli may have initially
approved Wenzel’s negative performance review, she later
investigated the retaliatory nature of the review and revoked it.
Again, this action refutes the notion that Camilli was working in
furtherance of a conspiracy with Wenzel. Finally, Wenzel
specifically told DeGuelle not to go to human resources with his
concerns. This indicates that he was not working in agreement
with Camilli and Kosterman. All of these acts, however, oc-
curred prior to the first act of tampering by Camilli, Kosterman,
and Eckhardt. We may infer from the complaint that these three
appellees did not agree to participate in the conspiracy prior to
their commission of this first predicate act. Accordingly, these
facts do not necessarily foreclose DeGuelle’s claim.
No. 10-2172 29
III. C ONCLUSION
For the foregoing reasons, we R EVERSE the district court’s
judgment and R EMAND for proceedings consistent with this
opinion.
12-15-11