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Robo RICO Suit Dismissed

A participant suit that had charged violations of both ERISA and RICO has been rejected – for the present, anyway.

The suit, filed last August in the U.S. District Court for the Northern District of Illinois, had charged Morningstar, Inc., Prudential Investment Management Services, LLC, and Prudential Retirement Insurance and Annuity Company with violations of both the Racketeer Influenced and Corrupt Organizations Act (RICO) and ERISA in the development and administration of the GoalMaker investment advice program.

Specifically, plaintiff Michael Green (one of the 10,000 participants in the $500 million Rollins, Inc. plan) alleged that the program influenced the plans’ retirement investors to invest in high-cost investments that paid “unwarranted” fees to Prudential and that, in turn, sent software development-related, consulting and other revenues to Morningstar. Green had sought to represent up to 5 million investors in “hundreds” of retirement plans that used the GoalMaker platform.

RICO Review

In considering the issues presented, Judge Virginia M. Kendall noted that to establish a violation of § 1962(c), a plaintiff must allege and prove: “(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity.”

She began her analysis by explaining that, under the RICO statute, an enterprise is defined as “any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity.” Moreover, to establish the existence of an “enterprise,” a plaintiff must allege facts to plausibly suggest “a group of persons associated together for a common purpose of engaging in a course of conduct” – and that, in turn requires “at least three structural features: a purpose, relationships among those associated with the enterprise, and longevity sufficient to permit these associates to pursue the enterprise's purpose.”

Pattern of Purpose

The court rejected the establishment of a purpose, but said that even if it were to assume one, an enterprise “is something more than a group of people who get together [and agree] to commit a ‘pattern of racketeering activity.’” Here she noted that the plaintiff had not alleged – or concluded – “that the Defendants were organized for any purpose other than procuring revenue-sharing payments.” And while the plaintiff alleged that a “mutually beneficial revenue sharing arrangement is a sufficient allegation of a common purpose,” Judge Kendall was unpersuaded.

Judge Kendall went on to note that the complaint “does not present a single factual claim asserting that each RICO Defendant had any interest in the outcome of the alleged scheme beyond their own individual interests.” She went on to explain that “…it is true that all of the Defendants are alleged to have received fees and/or payments,” but “the shared goal of financial profit, by each party conducting its own business, does not qualify as a ‘common purpose’ under RICO.”

Enterprise Evaluated

Writ large, she noted that the case here lacked “…allegations of concerted, structured, and purposeful conduct by the Defendants involved. Accordingly, the complaint fails to adequately allege the existence of an enterprise.”

As for the next element, Judge Kendall noted that the complaint fails to allege a pattern of racketeering activity – specifically that a “pattern” requires at least two acts of “racketeering activity” occurring within 10 years of each other. “More importantly,” she wrote, “the complaint does not plausibly allege that each Defendant committed the requisite two predicate acts, rendering the existence of a pattern of activity overly speculative.”

As a final point, Judge Kendall explained that the complaint, in large part, “treats all of the Defendants collectively as one and it frequently fails to differentiate between PRIAC and PIMS,” and that “such ‘lumping together’ of defendants is not sufficient to state a RICO claim under § 1962(c), particularly under this element which requires allegations sufficient to demonstrate that each RICO Defendant engaged in at least two predicate acts.”

While Judge Kendall dismissed the complaint, she did so without prejudice, and left the door open for the plaintiff to have “one more time to replead the cause of action in conformity with this opinion.”

The case is Green v. Morningstar, Inc., 2018 BL 90773, N.D. Ill., No. 1:17-cv-05652, order dismissing case 3/16/18.