352 Capital GP LLC v. Wear

Background

Plaintiffs 352 Capital GP LLC and Leucadia Asset Management, LLC sued Ryan Wear, Jordan Chirico, Tyler Sadek, Jeremy Briggs, REVL and REVL Securities, and numerous corporate entities. Plaintiffs alleged that defendants misappropriated proceeds from bonds issued by Water Station Management, a company that purported to own, operate, and manufacture self-service water-station machines.

The 352 Fund purchased $15 million of WSM’s Class B notes in April 2022. Plaintiffs alleged that defendants then submitted at least 25 fraudulent withdrawal certificates to obtain bond proceeds, represented that WSM owned thousands of water machines that it did not own, and diverted most of the withdrawn money for other purposes. Plaintiffs also alleged that Jordan Chirico, while serving as the fund’s portfolio manager, failed to disclose his financial ties to WSM and directed additional purchases of WSM bonds. By the end of 2023, the fund’s exposure to WSM exceeded $100 million, and WSM later defaulted on its bond payments.

The amended complaint asserted three claims under the federal Racketeer Influenced and Corrupt Organizations Act, commonly called RICO, and various state-law claims. Some defendants filed motions to dismiss. Other defendants had declared bankruptcy, entered an equity receivership, failed to respond and received default judgments, or were otherwise subject to earlier procedural orders.

RICO Claims

The court applied the rule governing motions to dismiss for failure to state a claim. Under that rule, a complaint must allege enough facts to make the claim plausible, while conclusory statements are insufficient.

The court held that the civil RICO claims were barred by the “RICO Amendment” in the Private Securities Litigation Reform Act. That provision bars a person from relying on conduct that would have been actionable as fraud in connection with the purchase or sale of securities to establish a civil RICO violation.

The court rejected Plaintiffs’ argument that the alleged wrongdoing involved only later misappropriation of bond proceeds rather than fraud connected to the bond purchases. The court found that the amended complaint alleged misrepresentations and undisclosed conflicts during the April 2022 bond offering and alleged that Chirico directed later bond purchases while knowing about the fraudulent scheme. Because the securities transactions and alleged breaches of fiduciary duty coincided, the court concluded that the alleged withdrawals sounded in securities fraud. The court also held that labeling some conduct as wire fraud or bank fraud did not avoid the RICO Amendment, and that one securities-fraud predicate act was enough to defeat the alleged single RICO scheme.

The first, second, and third causes of action were therefore dismissed for failure to state a claim.

State-Law Claims

After dismissing the only federal claims, the court considered whether to exercise supplemental jurisdiction, meaning authority to hear related state-law claims in the same case. The court declined to exercise that authority. It noted that discovery was not scheduled to end until the end of the year and that trial or summary judgment remained months away. The court concluded that the remaining claims should be left for resolution in state court.

The remaining causes of action were dismissed for lack of subject matter jurisdiction.

Default Judgments and Disposition

The court also vacated the default judgments previously entered against defendants who had not appeared. It reasoned that leaving those judgments in place while dismissing the same claims against the defendants who litigated would create an improper inconsistency.

The court directed the clerk to terminate all open motions, strike the earlier order for default judgment at Docket 201, and close the case.