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New York City’s novel pursuit of tax revenue lost to direct sales of cigarettes over the Internet was dismissed Thursday by Southern District Judge Deborah Batts. But Corporation Counsel Michael A. Cardozo and attorneys with the Law Department say they are confident that Batts’ decision allowing them to refile its complaint against 16 Internet cigarette dealers under the Racketeer Influenced and Corrupt Organizations Act will allow them to prevail eventually. City v. Cyco.net, 03 Civ 383, attempted to break new ground by claiming that the dealers’ failure to file so-called Jenkins Act reports with New York state on the volume of cigarette sales in New York constitute the predicate acts of mail and wire fraud needed to make a case, and win treble damages, under RICO. Batts ruled the city had failed to meet the standard for “distinctiveness” under RICO, in that it had not shown there was any difference between the employees of the Internet sales companies named in the suit and the companies themselves. “We are very happy with the decision,” said James L. Bikoff of Silverberg Goldman & Bikoff in Washington D.C., who represents the dealers. He said the judge made it clear that, under relevant case law, the city had not adequately pleaded distinctiveness because “you don’t have unrelated entities who are involved,” in the alleged racketeering enterprise. But Batts’ grant of leave to replead on this point gave the Law Department all the encouragement it needed to proceed with the case after it remedies what Cardozo called a “technical pleading imperfection.” The case was the first of five brought against some 55 dealers of cigarettes who have carved out a sizeable market share in a state that imposes more than $1.50 in tax on every pack of cigarettes sold. The direct sales over the Internet, the city claims, cost it and the state as much as $100 million a year. New York City has already won a default judgment against one foreign company, leaving the number of suits at four and both sides agree that yesterday’s decision set the parameters for the other remaining cases. Batts dealt a clear victory to the defendants on common law fraud claims and claims for deceptive acts and practices under �349 of New York’s General Business Law — claims based on the dealers’ advertising on their Web sites that their cigarettes are “tax free.” On those claims, the judge denied the city leave to replead. For the city, the language of Batts’s decision on the RICO claims gave lawyers at the Law Department reason to hope that their aggressive use of the RICO statute will pay off. Aside from the issue of distinctiveness, Batts found that the city had met the pleading standards under RICO in several other respects. “Plaintiff has shown, through its communications with the New York State tax authorities, that none of the defendants have ever filed Jenkins Act reports, which … may be construed as a misrepresentation resulting in fraud,” she said. “Therefore, reading the Complaint and the RICO Statement generously and drawing all inferences in favor of the pleader, as the court must do in deciding a Rule 9(b) motion … the Court finds that Plaintiff has successfully pleaded fraudulent intent and the content of the alleged omissions with sufficient particularity.” Bikoff pointed to several passages in the judge’s 91-page opinion in which he said she appeared skeptical of the city’s theory of recovery under RICO. ‘NOVEL THEORY’ In a footnote, Batts said the city’s “novel theory of causation here, based on the Jenkins Act — the Court is unaware of any other civil RICO actions based on the Jenkins Act — is questionable on several grounds.” “One question that arises is whether the Jenkins Act even applies in a civil case. The plain language of the Jenkins Act makes it clear that it is a criminal act, to be used by the federal government against tobacco companies to prevent state cigarette tax avoidance prospectively, through the use of injunctions, and retrospectively, through the use of criminal penalties.” The judge said it was “extremely unlikely” that any party other than the federal government may sue under the Jenkins Act. But, Batts added, “As Plaintiff here is not basing its complaint on actual violations of the Jenkins Act, but merely using the Defendants’ violation of the Act (which Defendants do not seem to deny) to bootstrap allegations of fraud, the Court need not reach the question of whether in a civil case a municipality may validly enforce a seemingly criminal statute that requires that reports be filed with state taxing authorities.” The city said the dealers’ “pattern of racketeering activity” involved “intentionally concealing from New York State tax authorities cigarette sales made to New York City residents, in violation of the Jenkins Act”; and of “assurances given to Internet cigarette purchasers that cigarettes sold to New York City residents are ‘tax free.’” And an integral part of that scheme, the city argues is the “evasion of taxes through cigarette smuggling across interstate boundaries” in violation of federal mail and wire fraud statutes. “While the Court finds these arguments survive, it notes that they are extremely attenuated,” Batts said. “A scheme to defraud under the mail or wire fraud statutes in the Second Circuit is described as ‘a plan to derive a person of something of value by trick, deceit, chicanery or overreaching.” She said, “The defendants here do not deny the fact that they do not file Jenkins Act reports. While the consumers here could not be deceived by these true statements, the Court recognizes that, however attenuated, the fact that the Defendants state that they do not file the reports may have encouraged some consumers into purchasing cigarettes safe in the knowledge that they would not get caught for not paying taxes. This could be considered part of an overall scheme to defraud the city of taxes owed.” CITY CRACKDOWN The decision came shortly after the city announced a crackdown on bulk purchasers of cigarettes in the five boroughs. The names of those purchasers, officials said, came from lists of Internet cigarette dealers who complied with filing requirements on sales in the state. In an effort to collect more than $1 million in lost tax revenue, the city last week sent letters warning about 3,700 buyers of their tax liability. Eric Proshansky, deputy chief of the Law Department’s Affirmative Division, who is leading the case against the dealers, said yesterday that he would soon file an amended complaint in the action.

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