Five years ago, Haynes and Boone partner David R. McAtee read some email evidence that convinced him his client could bring a rare civil RICO case, which can result in treble damages but is difficult to prove.
McAtee says, “No lawyer files a RICO case lightly. They have to make sure the evidence supports the elements of RICO to get the treble damages it offers.”
McAtee represents Transfirst Holdings Inc., a Dallas-based payment processing company. TransFirst executives thought the emails supported allegations that former business associates had breached noncompete agreements. Within days of reading those messages, McAtee concluded Transfirst should pursue causes of action under the Racketeer Influenced and Corrupt Organization (RICO) Act.
McAtee’s decision ultimately led to a $7.2 million final judgment in favor of his clients, issued Aug. 30 by U.S. District Judge Jorge A. Solis in the Northern District of Texas in Dallas. Although the judge found for McAtee’s clients on their RICO claim, they elected to recover on the basis of their fraud claim.
Before issuing the judgment for McAtee’s clients, Solis on March 8 issued an order in Transfirst Holdings Inc., et al v. Andrew M. Phillips, et al, finding that the three individual defendants engaged in mail and wire fraud “to defraud by diverting ‘funds and contracts from plaintiffs to companies created by or affiliated with Defendants . . .’ [and] defendants violated RICO.”
Transfirst Holdings and two of its subsidiaries filed their second amended complaint on July 5, 2007. The plaintiffs alleged that in 2004 Transfirst agreed to pay $34 million for the assets of Payment Resources International (PRI). The plaintiffs further alleged that three then-officers of PRI — defendants Andrew M. Phillips, Dominic J. Magliarditi and John S. Blaugrund — received funds and stock certificates, agreed to continue to serve as officers for PRI and agreed to enter noncompete agreements. The plaintiffs alleged the three men then used Byzantine corporate structures to divert funds from Transfirst and conceal their violations of the noncompete agreements.
In the second amended complaint, Transfirst and its subsidiaries also listed as defendants companies allegedly controlled by the three men: SSF Holdings, DII Investments, TP Investments, JSB Holdings, Serenity Ventures and Summer Ventures.
In the second amended complaint, the plaintiffs alleged a number of causes of action against the three individual defendants and the companies they allegedly controlled, including fraud and wire and mail fraud barred under RICO.
In individually filed answers, the defendants denied the plaintiffs’ allegations. And in a jointly filed Nov. 17, 2007, counterclaim and third-party complaint, the defendants alleged Transfirst and its subsidiaries wrongfully deprived them of bonuses and employment. They also brought various causes of action, which the plaintiffs denied.
In Solis’ Jan. 19, 2010, findings of fact and conclusions of law, he ruled in the plaintiffs’ favor on all their causes of action but did not allow them to recover damages for alleged lost value of the company’s sale price. He also ruled against the defendants on their counterclaims, except for their claim of breach of contract.
In his final judgment, Solis allocated responsibility for the money damages he awarded to the plaintiffs among all the defendants. He issued a take-nothing judgment on all the defendants’ counterclaims except breach of contract, for which he awarded them damages that partially offset the damages they owed.
Brian Hail, a partner in Dallas’ Gruber Hurst Johansen Hail Shank who represents Magliarditi, says he stopped the plaintiffs from getting an even higher judgment by persuading the judge, prior to entry of the final judgment, to reject $21 million in lost-value damages proposed by the plaintiffs.
Hail also notes the plaintiffs elected to have their recovery based on the fraud allegations. He thinks the RICO finding might have proven difficult to uphold on appeal, given previous rulings of the 5th U.S. Circuit Court of Appeals and the U.S. Supreme Court.
McAtee says his clients elected the fraud findings as the recovery basis because the damages could be calculated slightly higher that way.
Brian Clark, a director in Dallas’ Kane Russell Coleman & Logan who represents Phillips, and Bob Jenevein, a partner in Dallas’ Vincent Lopez Serafino Jenevein who represents Blaugrund, did not return one call each to their offices seeking comment. Hail, Clark and Jenevein also represent the defendant companies allegedly controlled by Phillips, Blaugrund, and Magliarditi.
McAtee worked on the case with Peter D. Marketos, a partner in Dallas’ Reese Gordon Marketos, who previously was a partner in Haynes and Boone.
From start to finish, Marketos says, the plaintiffs and their lawyers agreed that the RICO approach was the way to go, even though there are few civil RICO wins in federal court in any given year.
That rarity makes the final judgment issued in August all the sweeter. “By any measure this case is a significant win, because it’s a RICO win,” says McAtee.
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