Martinek et al v. Diaz et al

Filing 73

MEMORANDUM Opinion and Order Signed by the Honorable Joan B. Gottschall on 7/18/2012: Mailed notice(lp, )

UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

DENNIS F. MARTINEK, ROBERT
HEBEL, JR., individually and derivatively
on behalf of POLITICO, LLC, and MAS
VERDE, INC.,

)
)
)
)
)
Plaintiffs,
)
)
v.
)
)
ROSENDO DIAZ, ROSENDO DIAZ d/b/a )
VINI’S PIZZA OF PALATINE, HV-A)
SLICE, INC., d/b/a VINI’S OF PALATINE, )
VINI’S PIZZA OF UPTOWN, LLC,
)
BRYAN MATSUI, EDDIE SANTIAGO, )
VINI’S PIZZA OF BARTLETT, LLC,
)
JOHN H. REDFIELD, ESQ., MARY JO
)
LAROCCO, and JOHN AND JANE DOES, )
)
Defendants.
)

Judge Joan B. Gottschall
Case No. 11 C 7190

MEMORANDUM OPINION & ORDER
The plaintiffs in this action have filed a sixty-eight-page complaint alleging some
nineteen different causes of action against various defendants,1 including inter alia fraud,
conversion, theft, embezzlement, breach of fiduciary duty, tortious interference, civil
conspiracy, malpractice, violations of the Illinois Securities Act, and violations of the
Racketeer Influenced and Corrupt Organizations Act (“RICO”). The court is now faced
with three motions to dismiss: one filed by Rosendo Diaz and Mary Jo Larocco; one filed
by Hv-A-Slce, Inc., Vini’s Pizza of Uptown, LLC, Vini’s Pizza of Bartlett, LLC, Eddie
Santiago, and Bryan Matsui; and one filed by John Redfield. Because the court concludes

1

The plaintiffs originally named First Data Corporation (“First Data”) as an additional defendant,
but voluntarily dismissed all claims against First Data with prejudice on December 2, 2011.

that the plaintiffs have failed to state a RICO claim, the court grants the motions and
dismisses the complaint without prejudice.
I. BACKGROUND
The plaintiffs claim that the conspiracy alleged in the complaint actually started
long before they got involved. According to the plaintiffs, in 2003, Defendant Rosendo
Diaz and Dion Romano were both 50% shareholders in D.R. Crew, Inc., which owned
and operated a pizza shop called Vini’s Pizza in Palatine. In August of 2003, Romano
agreed to transfer and sell his interest in that Vini’s Pizza to Diaz for $250,000. Diaz
continued to own and operate the Vini’s Pizza, but according to the plaintiffs, Diaz—
together with Eddie Santiago, Bryan Matsui, and Diaz’s attorney John Redfield—
“devised a plan and entered into a conspiracy” to hide Diaz’s interest in the business.
They did so by incorporating a new business, Hv-A-Slce, Inc. (“Hv-A-Slce”),2 that was
registered to do business as “Vini’s of Palatine.” Matsui was the president of Hv-A-Slce,
while Diaz was the owner. Under an October 2004 agreement, Diaz supposedly sold 200
shares in the new corporation to Santiago and Matsui for $100,000; he also purported to
give up his proprietary interest and managerial control, although Diaz retained the
exclusive right to obtain 800 shares at no cost at any time. No money transferred hands,
and eight months later Diaz filed for Chapter 13 bankruptcy. In the bankruptcy
proceedings, Diaz and Redfield intentionally failed to disclose Diaz’s purchase of the
business from Romano, the stock sale he purported to make to Matsui and Santiago, and
the $100,000 purchase price. Diaz also misrepresented his income and assets, his
employer’s name, and his real property holdings. The plaintiffs allege that Diaz, Matsui,

2

Sometimes the defendant’s name is spelled “Hv-A-Slice,” but the court will use the name given in
the caption of the complaint.

2

and Santiago embezzled money from Vini’s of Palatine; that Diaz only sporadically paid
Romano the money he owed and gave Romano false financial statements; that Diaz,
Matsui, Santiago, and Hv-A-Slce falsely reported income on tax returns; and that Hv-ASlce employed undocumented aliens. (See Compl. ¶¶ 12-20.)
But none of this has to do with the plaintiffs in this case. They did not get
involved with Diaz until 2008. In February or March of that year, Diaz proposed to
plaintiff Dennis Martinek that Diaz and Martinek should join together to start a Vini’s
Pizza in the Lincoln Park neighborhood of Chicago. Diaz told Martinek that Vini’s Pizza
in Palatine was netting over $1 million per year, and sent a summary and projections for
the Lincoln Park business to Martinek via mail. (See Compl. Ex. A.) The plaintiffs allege
that this information was known to be false, and was provided with the intent to induce
Martinek to invest with Diaz. In any event, Martinek and Diaz agreed that Martinek
would provide start-up capital of about $253,000; that Martinek and Diaz would each
receive 2000 common shares based on an initial capital contribution of $20,000 each; and
that instead of receiving a $6000 per month salary for managing the business, Diaz’s
salary would be used as a capital contribution. Diaz told Martinek that Redfield would
form a new company for them called Politico, LLC (“Politico”) for $1000—but in truth
Politico had already been formed prior to Martinek’s involvement, with Diaz as its
manager and sole officer. Martinek, without counsel to represent him, executed the
agreement forming the LLC (“the Politico LLC Agreement”). Under the Politico LLC
Agreement, Martinek was simply a passive investor.
Diaz found a location for the business in Lincoln Park, and entered into a fiveyear lease in May 2008. Martinek then made capital contributions and provided money

3

for start-up costs to Politico’s bank account, which by September of that year totaled
$329,000. Diaz never made any capital contributions to Politico, but withdrew over
$318,537 from Politico’s bank account. Diaz told Martinek that he was paying cash for
items to save money, and refused to provide detailed bills and receipts when pressed. The
amounts Diaz purported to pay for equipment and build-out were grossly inflated;
although Diaz and Matsui compiled figures showing the equipment costs were
$161,126.00 and that the improvements made to the store totaled $178,290.00, in fact
neither of these expenses should have exceeded $50,000. Diaz made these same
misrepresentations to the Internal Revenue Service.
Vini’s Pizza of Lincoln Park opened in late October 2008. In managing the
business, Diaz used a point-of-sale system called “Revention POS.” This system was not
a comprehensive accounting system, and allowed for entries to be manually entered,
removed, or canceled. A comparison between the Revention records and Politico’s bank
records show that a substantial amount of cash and check sales proceeds were never
deposited into Politico’s bank account. Diaz represented to Martinek that the Lincoln
Park pizza shop was not making enough money to meet its obligations, and requested
additional funds. Martinek asked Robert Hebel, Jr. for help. Hebel contributed $163,660
to the business in consideration for receiving shares in Politico as set forth in the Politico
LLC Agreement. Martinek and Hebel also made payments to various creditors of
Politico, including rent payments and late fees paid directly to restaurant’s landlord. In
the meantime, Diaz was issuing checks from the Politico account to himself and to Mary
Jo Larocco (the woman with whom Diaz lived at the time). In addition to simply not

4

depositing the proceeds of sales, Diaz or Santiago would at times instruct customers to
send payment directly to other, non-Vini’s of Lincoln Park addresses.
The only distribution Martinek ever received from the Vini’s Pizza business was
in February 2009. In order to hide Politico’s income from Martinek and Hebel, Diaz,
Matsui and Santiago diverted the proceeds to other bank accounts, including accounts for
Hv-A-Slce, Inc.; Diaz, Santiago, or Matsui’s personal accounts; and accounts for other
Vini’s Pizza locations. Diaz also secretly opened up additional Politico or personal bank
accounts into which he deposited some sales proceeds. Diaz used these accounts to pay
personal expenses, as well as to open and operate other Vini’s restaurants (including
Vini’s Pizza of Uptown, LLC and Vini’s Pizza of Bartlett, LLC, both of which purported
to be owned by Santiago or Santiago’s mother). Diaz, Matsui, and Santiago would
arrange for employees to take supplies belonging to Vini’s of Lincoln Park to other
Vini’s locations, without reimbursing the Lincoln Park location for costs. Diaz also wrote
checks to various Politico employees, but failed to withhold the amounts owed for federal
and state taxes, Social Security, Medicare, and unemployment, although those amounts
were deduced from employee paychecks. Diaz, Matsui and Santiago did not pay the full
amounts owed to the federal and state government, nor did they file appropriate W2
forms for their employees. Diaz also lied on Politico’s tax returns, stating that Politico
had not paid its officers any compensation, nor had it paid salaries or wages to
employees. Diaz told Hebel and Martinek that he maximized profits by hiring
undocumented aliens, particularly those from Mexico, and paid them in cash. When
Hebel and Martinek objected, Diaz ultimately told them he had stopped the practice as of
February 2009.

5

Vini’s Pizza of Lincoln Park incurred significant overdraft charges as a result of
Diaz’s practice of writing bad checks. In May 2009, Hebel insisted that Politico open a
new bank account, one which Hebel would be able to link to his private account so as to
avoid future overdraft fees. Diaz somehow managed to open yet another bank account
that was linked to the new Politico account, and continued to transfer money from the
Politico account to his personal account.
The plaintiffs claim that Diaz et al.’s diversions of funds continued until August
2010. On or about August 4, 2010, Diaz telephoned Martinek and told Martinek that he
was closing the business that day because it had never made any money. Based on the
assurances Martinek had heard from Diaz, Martinek was “shocked and surprised.” When
Martinek went to the Lincoln Park store, employees told him that they lacked the food
and supplies needed to make pizzas for customers, and that Diaz was at a new Vini’s
Pizza location located on Lawrence Avenue in Chicago’s Uptown neighborhood.
Martinek had no idea Diaz had opened a new store, and he later learned that Diaz had
taken equipment and supplies from the Lincoln Park location to the Uptown location.
At this point, Martinek decided to take action. On August 5, 2010, Martinek
arranged to reopen the Lincoln Park location: he changed the locks, contacted some
employees, bought food supplies, and opened for business. Martinek began to unravel the
outstanding liabilities and issues left in Diaz’s wake, and decided to form a new
corporation, Mas Verde, Inc. (“Mas Verde”), to operate Vini’s Pizza of Lincoln Park.
Mas Verde initially could not complete its registration with the State of Illinois due to
Politico’s unpaid taxes. The State demanded that Martinek pay the taxes, and Martinek
requested a hearing. As part of that proceeding, Martinek moved to subpoena Diaz’s bank

6

records, but Redfield moved to quash the subpoena after Diaz paid the outstanding state
taxes. Because Diaz’s payment mooted the issue in the eyes of the State, the motion to
quash was granted.
Martinek learned that Diaz had informed many of their larger customers that
Diaz’s new pizza shop, Vini’s Pizza of Uptown, would beat any price proposed by Vini’s
Pizza of Lincoln Park. Still, Mas Verde did fairly well its first week in business as Vini’s
of Lincoln Park, making over $7500 in sales. First Data was to process the credit card
sales, but First Data mistakenly processed certain sales via Politico’s merchant account
instead of Mas Verde’s account, which resulted in the proceeds being deposited into a
non-Politico bank account owned by Diaz. Martinek asked Diaz to return the funds, as
well as any other Politico property or funds Diaz still had in his possession. Diaz refused.
Martinek also requested that Redfield turn over any of Politico’s books or records, and
that Redfield cease acting as counsel for Politico or Vini’s Pizza of Lincoln Park due to
the conflict of interest that had arisen. Redfield refused.
Although Mas Verde was beginning to break even by about May 2011, an
unexpected increase in the property tax portion of Mas Verde’s lease payment forced
Mas Verde to have to close Vini’s Pizza of Lincoln Park. Martinek has been sued by the
landlord for about $100,000 in unpaid rent, including rent that should have been paid
while Diaz was managing the Lincoln Park store. The parties met after the dissolution of
the business to discuss settlement, but Diaz dropped out of the negotiations, which
prompted the plaintiffs to file the instant suit.

7

II. LEGAL STANDARD
Under Federal Rule of Civil Procedure 12(b)(6), the defendant may seek to
dismiss the case if the plaintiff “fail[s] to state a claim upon which relief can be granted.”
The court accepts as true all well-pleaded facts and draws all reasonable inferences in
favor of the plaintiff. Stayart v. Yahoo! Inc., 623 F.3d 436, 438 (7th Cir. 2010). But
although Federal Rule of Civil Procedure 8(a) requires only that the complaint contain “a
short and plain statement of the claim showing that the pleader is entitled to relief,”
nonetheless the complaint must include “more than labels and conclusions, and a
formulaic recitation of the elements of a cause of action will not do.” Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 555 (2007); see Ashcroft v. Iqbal, 566 U.S. 662 (2009) (noting
that while Rule 8 does not require detailed factual allegations, “it demands more than an
unadorned, the-defendant-unlawfully-harmed-me accusation”). The relevant question is
whether the complaint includes enough factual allegations to “raise a right to relief above
the speculative level.” Id. In other words, to survive a motion to dismiss post-Twombly,
“‘the plaintiff must give enough details about the subject-matter of the case to present a
story that holds together,’ and the question the court should ask is ‘could these things
have happened, not did they happen.’” Estate of Davis v. Wells Fargo Bank, 633 F.3d
529, 533 (7th Cir. 2011) (quoting Swanson v. Citibank, N.A., 614 F.3d 400, 404-05 (7th
Cir. 2010)).
In addition, any fraud-based allegations, such as allegations of fraud in a civil
RICO complaint, must satisfy the heightened pleading standard of Federal Rule of Civil
Procedure 9(b). See Slaney v. Int’l Amateur Athletic Fed’n, 244 F.3d 580, 597 (7th Cir.
2001); Goren v. New Vision Int’l, Inc., 156 F.3d 721, 726 (7th Cir. 1998) (“Rule 9(b) is

8

of course applicable to allegations of fraud in a civil RICO complaint.”). This means the
plaintiff must, at a minimum, provide the time, place, and content of the alleged false
representations, the method by which the representations were communicated, and the
identities of the parties to those representations. Slaney, 244 F.3d at 597.
III. ANALYSIS
In this case, federal jurisdiction is predicated on the viability of the plaintiffs’
RICO claims. The plaintiffs state that the defendants (except for Larocco) committed
mail fraud and wire fraud, unlawfully employed aliens, engaged in money laundering,
and transacted in property derived from illegal activity. Together, the plaintiffs allege
these acts violated 18 U.S.C. §§ 1962(a)-(d)—in other words, all four of the prohibited
activities set out in the RICO statute. 18 U.S.C. § 1962 reads, in relevant part, as follows:
(a) It shall be unlawful for any person who has received any income
derived, directly or indirectly, from a pattern of racketeering activity . . . to
use or invest, directly or indirectly, any part of such income, or the
proceeds of such income, in acquisition of any interest in, or the
establishment or operation of, any enterprise which is engaged in, or the
activities of which affect, interstate or foreign commerce. . . .
(b) It shall be unlawful for any person through a pattern of racketeering
activity . . . to acquire or maintain, directly or indirectly, any interest in or
control of any enterprise which is engaged in, or the activities of which
affect, interstate or foreign commerce.
(c) It shall be unlawful for any person employed by or associated with any
enterprise engaged in, or the activities of which affect, interstate or foreign
commerce, to conduct or participate, directly or indirectly, in the conduct
of such enterprise’s affairs through a pattern of racketeering activity . . . .
(d) It shall be unlawful for any person to conspire to violate any of the
provisions of subsection (a), (b), or (c) of this section.

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While each subsection of the statute targets different behavior, they share at least two
things in common: the plaintiffs must establish both the existence of an “enterprise” and a
“pattern of racketeering activity.” The court turns to the “enterprise” requirement first.
A. Enterprise
“[A] RICO complaint must identify the enterprise,” Crichton v. Golden Rule Ins.
Co., 576 F.3d 392, 398 (7th Cir. 2009) (internal quotation marks and citation omitted),
and the enterprise can include “any individual, partnership, corporation, association, or
other legal entity, and any union or group of individuals associated in fact although not a
legal entity,” see 18 U.S.C. § 1961(4). Here, the plaintiffs have identified what they call
the “Diaz Enterprise,” which they allege consists primarily of Diaz, Matsui, and Santiago
and their pizza businesses (Hv-A-Slce, Vini’s Pizza of Palatine, Vini’s Pizza of Bartlett,
and Vini’s Pizza of Uptown). The plaintiffs further allege that the Diaz Enterprise is
“assisted by” Redfield, Santiago’s mother, and various John and Jane Does.
As the plaintiffs have not alleged that the Diaz Enterprise has status as a legal
entity, they must instead intend to proceed under the “association-in-fact” enterprise
theory. See Jennings v. Emry, 910 F.2d 1434, 1440 (7th Cir. 1990) (describing enterprises
as being of two types: “legal entities and extra-legal ‘associations in fact’”). Yet the
complaint as drafted provides none of the requisite facts to establish an association in
fact. In attempting to load the complaint with reference to as much documentary evidence
as possible, the plaintiffs have lost sight of the point of Rule 8—that the plaintiff provide
a “short and plain statement of the claim” that suffices to put the defendant on notice of
the claims against him. Intentionally or not, the complaint obfuscates the precise nature
of the RICO claims at issue. Despite being 68 pages long, the complaint simply provides

10

a blanket allegation that all of the defendants (save Larocco) participated in all of the
prohibited activities set out 18 U.S.C. §§ 1962(a)-(d) by committing various predicate
acts. Although each subsection of § 1962 requires different proof, the plaintiffs do not
attempt to establish specifically how each individual subsection was violated, nor do they
set out each defendant’s respective role in the alleged enterprise.
Under an association-in-fact theory, the “enterprise” and the person(s) sought to
be held liable must be sufficiently distinct. See Crichton, 576 F.3d at 398. Here, the
plaintiffs have not defined the enterprise sufficiently for this court to determine whether
this is so. In addition, the plaintiffs have not set out any type of organizational structure
or hierarchy. The enterprise must be defined “by what it is, not what it does.” Jennings,
910 F.2d at 1440; see Slaney, 244 F.3d at 600 n.11. Although the plaintiffs provide some
minimum detail with respect to Diaz, Matsui and Santiago’s positions within some of the
pizza businesses, the plaintiffs do not provide any structure for the enterprise itself. Thus,
the plaintiffs have failed to state a RICO claim. See Crichton, 576 F.3d at 400 (“[The
plaintiff] failed to adequately plead an association-in-fact enterprise because he has not
pleaded an organizational structure or hierarchy for the alleged association-in-fact
enterprise.”); Stachon v. United Consumers Club, Inc., 229 F.3d 673, 675-77 (7th Cir.
2000) (“A RICO enterprise must have an ongoing structure of persons associated through
time, joined in purpose, and organized in a manner amenable to hierarchial or consensual
decision making.”) (internal quotation marks and citation omitted).
B. Pattern of Racketeering Activity
A “pattern” of racketeering activity exists when at least two predicate acts of
racketeering, which are enumerated in 18 U.S.C. § 1961(1), occur within a ten-year

11

period. See 18 U.S.C. § 1961(5); DeGuelle v. Camilli, 664 F.3d 192, 199 (7th Cir. 2011).
Although the plaintiffs have stated that the defendants committed more than two of the
statutorily enumerated specific acts within a ten-year period, such allegations alone do
not suffice. See Haroco, Inc. v. Am. Nat’l Bank & Trust Co. of Chi., 747 F.2d 384,
387 (7th Cir. 1984) (“[T]o state a claim under RICO, a civil plaintiff must allege more
than the occurrence of two predicate acts of racketeering from the list in section 1961.”).
The RICO statute “was never intended to allow plaintiffs to turn garden-variety state law
fraud claims into federal RICO actions.” Jennings v. Auto Meter Prods., Inc. (“Auto
Meter”), 495 F.3d 466, 472-73 (7th Cir. 2007) (citing Midwest Grinding Co. v. Spitz, 976
F.2d 1016, 1022 (7th Cir. 1992)). Instead, RICO “is a unique cause of action that is
concerned with eradicating organized, long-term, habitual criminal activity.” Gamboa v.
Velez, 457 F.3d 703, 705 (7th Cir. 2006). But the siren call of the treble damages and
attorney’s fees often proves too tempting to withstand, and the courts continue to face
“widespread attempts to turn routine commercial disputes into civil RICO actions.” Auto
Meter, 495 F.3d at 472-73 (quoting Midwest Grinding Co., 976 F.2d at 1022).
To rebuff such attempts, “courts carefully scrutinize the pattern requirement to
forestall RICO’s use against isolated or sporadic criminal activity.” Id. To satisfy the
pattern requirement, a plaintiff must meet the “continuity plus relationship” test: “the
predicate acts must be related to one another (the relationship prong) and pose a threat of
continued criminal activity (the continuity prong).” Id.; see DeGuelle, 664 F.3d at 201 n.4
(“We acknowledge that there is a danger . . . that plaintiffs will bring claims which
should be handled by state law . . . into federal court under the guise of RICO. But we are

12

confident the continuity requirement will often weed out those claims which do not truly
demonstrate a threat of continued wrongdoing.”) (citation omitted).
“Satisfying the pattern requirements—that there be continuity and relationship
among the predicate acts—is not easy in practice.” J.D. Marshall Int’l., Inc. v. Redstart,
Inc., 935 F.2d 815, 820 (7th Cir. 1991). A relationship between the predicate acts exists
where the acts “‘have the same or similar purposes, results, participants, victims, or
methods of commission, or otherwise are interrelated by distinguishing characteristics
and are not isolated events.’” DeGuelle, 664 F.3d at 199 (quoting H.J. Inc. v. Nw. Bell
Tel. Co., 492 U.S. 229, 240 (1989)). As to the continuity prong, either “closed-ended” or
“open-ended” continuity will suffice. “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,” whereas “openended continuity requires a showing of past conduct that by its nature projects into the
future with a threat of repetition.” Id. (internal quotation marks and citation omitted).
Here, the plaintiffs allege that in February 2008, Diaz, Matsui and Santiago
devised a plan to defraud Martinek, Hebel, Politico, and Mas Verde, as well as the United
States, the State of Illinois and the City of Chicago. The plaintiffs identify three
categories of predicate acts3 which they believe establish a “pattern of racketeering
activity”: mail and wire fraud in violation of 18 U.S.C. §§ 1341 and 1343, unlawful
employment

of

aliens

in

violation

of

18

U.S.C.

§ 1324a,

and

money

laundering/transacting with illegal property in violation of 18 U.S.C. §§ 1956 and 1957.
To support their allegations of mail and wire fraud, the plaintiffs point to the defendants’

3

Although certain of the defendants complain that the plaintiffs only allege predicate acts of mail
and wire fraud, this is simply not true. (See Hv-A-Slce et al. Mem. in Supp. of Mot. to Dismiss at 6.)

13

representations as to (1) the cost of the equipment and renovations to the rental space, (2)
operating income and expenditures, (3) financial and accounting data, and (4) the amount
of withholdings and wages paid to employees, all of which were made to convince
Martinek and Hebel to invest money or to cover up the conspiracy. To support their
allegations relating to unauthorized employment of aliens, the plaintiffs claim that the
defendants (1) intentionally recruited and hired unauthorized aliens, (2) failed to record
or verify Social Security numbers for employees, and (3) issued checks to individuals not
recorded as employees, which made issuing W2’s for these people impossible, as part of
a conspiracy to defraud the United States and the State of Illinois and to hide or steal
income produced by Politico and the other Vini’s Pizzas.4 Finally, to support their
allegations of money laundering and transacting with illegal property, the plaintiffs allege
that the defendants deposited, withdrew, transferred or exchanged the proceeds of their
illegal activities from various financial institutions with the intent of carrying out
additional illegal activities, to conceal the nature, location, source, ownership or control
of the proceeds, and to avoid any reporting requirements.
1. Relationship
A “relationship” between predicate acts exists where the acts “have the same or
similar purposes, results, participants, victims, or methods of commission, or otherwise
are interrelated by distinguishing characteristics and are not isolated events.” H.J., Inc.,
492 U.S. at 240. The defendants argue that the plaintiffs failed to allege a relationship
between the various acts of mail and wire fraud, and also failed to allege any relationship
between the mail/wire fraud allegations and those relating to illegal aliens or money

4

As some of the other Vini’s Pizza restaurants are named as defendants and as participants in the
Diaz Enterprise, this allegation seems at odds with the rest of the complaint.

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laundering. (See Diaz & Larocco Mem. in Supp. of Mot. to Dismiss at 7.) The plaintiffs
muddy the waters by spending significant time detailing Diaz’s alleged scheme from
2003-2005 to defraud Romano (the original co-owner of the Vini’s Pizza of Palatine).
But despite dedicating ten pages of facts to this history, the plaintiffs have not described
any of the criminal acts that allegedly took place during this time as being “predicate
acts” for purposes of the RICO charges. (See Compl. ¶¶ 62-72.) They certainly could
have done so: “[A] plaintiff need not demonstrate injury to himself from each and every
predicate act making up the RICO claim.” Corley v. Rosewood Care Ctr., Inc. of Peoria,
388 F.3d 990, 1004 (7th Cir. 2004).
But even if they had alleged that these were predicate RICO acts, they have not
sufficiently pleaded a relationship between these earlier acts and the later acts involving
Martinek et al. In fact, the plaintiffs describe the scheme to defraud Romano as being
separate from the scheme(s) involving the plaintiffs. According to the plaintiffs, the
purpose of the Romano scheme was “to hide Diaz’s interest in, income from, and
involvement with [the Palatine business]” from the tax and bankruptcy authorities. (Id. ¶
13.) By contrast, the primary purpose of the scheme(s) involving the plaintiffs was to
defraud Martinek and Hebel. In addition, the schemes involve different victims, and the
way in which these schemes were accomplished is not so similar that the court can
conclude they are “not isolated events.” For instance, in attempting to hide Diaz’s
ownership in the Palatine business, Diaz, Matsui, and Santiago allegedly formed an
entirely new corporation and Diaz transferred his entire interest in the new business, HvA-Slce, to Matsui and Santiago. But there is no similar allegation in the scheme(s)
involving Martinek—there, Diaz and Martinek executed an agreement that jointly created

15

Politico, and Diaz maintained an ownership interest in the business (albeit without
making the requisite capital contributions). Diaz did not attempt to hide his involvement
with Politico or Vini’s Pizza of Lincoln Park. The court concludes that the plaintiffs have
not established a relationship between the acts alleged in 2003-2005 and the later acts
involving Vini’s Pizza of Lincoln Park.
The other issue is whether the acts actually alleged as predicate acts in the
complaint, i.e., those acts revolving around the Vini’s Pizza of Lincoln Park, share the
requisite relationship. The court is not clear on how many different schemes are at
issue—at times the plaintiffs seem to treat these acts as being part of a single, large
scheme to defraud Martinek and Hebel and to avoid detection, whereas at other times the
plaintiffs seem to treat as separate schemes the attempts to (1) defraud Martinek and
Hebel into making initial capital contributions, (2) to divert sales proceeds from Vini’s
Pizza of Lincoln Park’s catering contracts, (3) to generally hide Politico’s proceeds from
Martinek and Hebel, and (4) to commit tax fraud. Regardless, the court believes the mail
and wire fraud predicate acts are sufficiently related for RICO purposes.
First, the mail and wire fraud took place over a relatively short period of time,
from 2008 to 2011, and were perpetrated by a stable group of participants against the
same victims. While the purposes of each individual scheme might vary, overall the
plaintiffs have alleged that the acts were undertaken for the purpose of defrauding the
plaintiffs and avoiding detection by the relevant authorities. Although it is not a slam
dunk, the plaintiffs have alleged sufficient facts to satisfy the relationship element of the
pattern requirement at this stage in the proceedings, at least for the mail and tax fraud
allegations. See J.D. Marshall Int’l., 935 F.2d at 820 (“[The plaintiff’s] allegations of

16

mail and wire fraud by [defendants] all involve the same type of misconduct—defrauding
[the plaintiff] of its proceeds—all occur within a relatively short period of time—thirteen
months—and are all related by a common purpose—the desire to recoup what [the
plaintiff] purportedly owed.”); see also Fujisawa Pharm. Co., Ltd. v. Kapoor, 115 F.3d
1332, 1338 (7th Cir. 1997) (describing a pattern of racketeering activity consisting of
“innumerable mail and wire frauds successfully designed to lure [the plaintiff] into
investing more and more of its money in [a business], much of which went into [the
defendant’s] pocket”). And because the money laundering/transacting in illegal property
predicate acts are basically certain acts of mail or wire fraud restated in a different
fashion, these acts would also satisfy the “relationship” prong of the test.
This is not true, however, with respect to the unlawful employment of aliens. The
court has little useful information by which to proceed—for instance, the court has not
been provided with any indication that anyone other than Diaz was involved in the
decision to employ such persons, nor does the court have any idea how many such
persons were allegedly employed. (Although the plaintiffs state that 63 employees did not
have their Social Security numbers recorded, this does not necessarily mean that these
people were unlawfully employed aliens.) And if anything, the time frame over which the
aliens were employed indicates that this predicate act is not related to the other acts: Diaz
began paying employees by check and represented that he had stopped any such practice
by February 2009. (See Compl. ¶ 44.) Although the plaintiffs claim that the Diaz
Enterprise has continued to employ illegal aliens in the other Vini’s Pizza businesses, this
can have no bearing on a scheme to defraud Martinek and Hebel. Consequently, the court

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concludes that the unlawful employment of aliens does not share a relationship with the
other predicate acts alleged in the complaint.
2. Continuity
Some defendants argue that at best, the allegations relate to a “one-off event” that
fails to satisfy the “continuity” requirement. (See Hv-A-Slce et al. Mem. in Supp. of Mot.
to Dismiss at 4-5; Redfield Mem. in Supp. at 5.)5 The court agrees.
Although the relationship prong and the continuity prong are analytically distinct,
their proof often overlaps. See Corley, 388 F.3d at 1002. The continuity requirement can
be satisfied by showing “closed-ended continuity,” i.e., criminal behavior that has ended
but carries the implicit threat of continued activity in the future. To establish this type of
continuity, a plaintiff may prove “a series of related predicates extending over a
substantial period of time.” Roger Whitmore’s Auto. Servs., Inc. v. Lake Cnty., Ill., 424
F.3d 659, 672-73 (7th Cir. 2005). Alternatively, the continuity requirement can be
satisfied by showing “open-ended continuity,” i.e., past conduct that—although it lacks
the duration and repetition to establish continuity—by its very nature threatens repetition
in the future. Id. To evaluate whether the plaintiffs have satisfied the continuity
requirement, the court considers “(1) the number and variety of predicate acts and the
length of time over which they were committed, (2) the number of victims, (3) the
presence of separate schemes, and (4) the occurrence of distinct injuries.” Id. No single
factor is dispositive; instead, the court must look at the specific facts of the case “with the
goal of achieving a ‘natural and commonsense’ result, consistent with Congress’s
concern with long-term criminal conduct.” Id. at 673 (citations omitted).

5

Curiously, other defendants choose to forego this issue entirely. (See Diaz & Larocco Reply at 6.)

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There are a few guiding principles that are particularly applicable to this case.
First, “even a period of several years may not qualify as substantial enough to satisfy the
continuity requirement.” Id. Here, the predicate acts could not have spanned more than a
few years, and the vast majority fell within the relatively short time frame from February
2008 to August 2010, when Diaz informed Martinek that he was closing the business.
This weighs against a finding that the plaintiffs satisfied the continuity requirement.
Second, “[a] fairly small number of predicate acts cuts against showing
continuity, particularly when a large proportion of the acts involved wire or mail fraud,
neither of which are favored means of establishing a RICO pattern in this circuit.” Id. at
673; see Auto Meter, 495 F.3d at 475. Here, the court has no idea how many individual
incidents of mail or wire fraud are alleged, because the plaintiffs have lumped many of
these allegations together into broad groups. But there can be no question that the vast
majority of predicate acts alleged in this case involve wire or mail fraud. And as the
defendants have pointed out, the plaintiffs’ allegations of money laundering or
transacting with illegal property pursuant to 18 U.S.C. §§ 1956 and 1957 are basically
just restatements of certain of the mail and wire fraud charges. See Auto Meter, 495 F.3d
at 475 (discussing a plaintiff’s failed attempt to demonstrate a wide variety of predicate
acts by alleging that individual acts violated multiple statutes, e.g., treating the act of
mailing false information to constitute tampering with evidence). So even if these
predicate acts together comprise a large number of criminal violations, “just because the
complexity of the transaction creates the potential for a greater number of possible
fraudulent acts does not mean that there is the requisite threat of continued criminal

19

activity.” See Uniroyal Goodrich Tire Co. v. Mut. Trading Corp., 63 F.3d 516, 523 (7th
Cir. 1995).
Third, the number of victims is relatively small. While “the existence of a single
victim does not preclude the existence of a pattern of racketeering activity,” id. at 523,
the small number of victims remains relevant. On the other hand, the court is not
equipped to determine whether the plaintiffs are alleging separate schemes, and the court
will presume that the plaintiffs suffered a number of distinct injuries. But at the end of the
day, the court’s job is to achieve “a ‘natural and commonsense’ result, consistent with
Congress’s concern with long-term criminal conduct.” Roger Whitmore’s Auto. Servs.,
Inc., 424 F.3d at 673. After analyzing the factors, and after stepping back to look at the
facts of the case as a whole, the court concludes that the plaintiffs have not established
the requisite continuity to state a RICO claim. The allegations in the complaint describe a
“routine commercial dispute,” Auto Meter, 495 F.3d at 472-73, not the “organized, longterm, habitual criminal activity” that is the hallmark of RICO. See Gamboa, 457 F.3d at
705.
C. Rule 9(b)
Even if the court was to conclude that the plaintiffs properly pleaded both the
existence of an “enterprise” and a “pattern of racketeering activity,” the court would
nonetheless dismiss the complaint. As noted above, Rule 9(b)’s particularized pleading
requirements apply to allegations of fraud in a civil RICO complaint. See Goren, 156
F.3d at 726. Thus, for each fraudulent act, a RICO plaintiff “must, at a minimum,
describe the predicate acts [of fraud] with some specificity and state the time, place, and
content of the alleged communications perpetrating the fraud.” Midwest Grinding, 976

20

F.2d at 1020; see Wigod v. Wells Fargo Bank, N.A., 673 F.3d 547, 569 (7th Cir. 2012)
(noting that the particularity requirement requires “the who, what, when, where, and
how”). Moreover, when a plaintiff is alleging that multiple defendants took part in the
fraud, “Rule 9(b) requires a RICO plaintiff to plead sufficient facts to notify each
defendant of his alleged participation in the scheme.” See Goren, 156 F.3d at 726 (citing
Vicom, Inc. v. Harbridge Merch. Servs., Inc., 20 F.3d 771, 778 (7th Cir. 1994)).
The plaintiffs have not satisfied the Rule 9(b) standard on either front. First,
although some of the allegedly fraudulent acts may have been described with the
requisite particularity in the background factual section, the plaintiffs never make it clear
precisely which acts they rely upon as being predicate acts. In other words, instead of
pointing to a specific act of mail fraud as a predicate act, they simply group the mail and
wire fraud together into broad categories such as “provid[ing] false operating income and
expenditure information.” (See Compl. ¶ 64.) The court cannot glean how many (or
which) such instances are at issue, which means the court cannot discern which of the
defendants was involved in each communication, whether each communication is alleged
to have violated the wire fraud statute or the mail fraud statutes (or both), the date on
which each communication took place, or how each communication was transmitted.
Second, the plaintiffs have stated only that the “Diaz Enterprise” committed all of
the prohibited activities set out in the RICO statute. The defendants are not provided with
information regarding each defendant’s individual participation in the scheme(s). In fact,
given the way the complaint is pleaded, the defendants cannot even tell whether they are
alleged to have violated each of §§ 1962(a)-(d). And since § 1962(d) deals with those
who conspire to violate the provisions of § 1962(a)-(c), the plaintiffs could be asserting

21

not only violations of subsection (a), (b), and (c) against each defendant, but also that
each defendant conspired to violate each subsection. The court, and each defendant, has
no way of telling. The complaint does not meet the particularized pleading standard set
out in Rule 9(b).6
D. Private Securities Litigation Reform Act
Were the problems with the plaintiffs’ complaint limited to what the court has
already discussed, the court would dismiss the RICO claims without prejudice and permit
the plaintiffs leave to amend their complaint. However, the last issue that the court must
consider renders any amendment to the RICO claims futile.
Under the Private Securities Litigation Reform Act of 1995 (“PSLRA”), Pub. L.
No. 104-67, 109 Stat. 737, a person attempting to establish liability under the RICO
statute cannot “rely upon any conduct that would have been actionable as fraud in the
purchase or sale of securities to establish a violation of section 1962.” 18 U.S.C.
§ 1964(c); see Moorehead v. Deutsche Bank AG, No. 11 C 0106, 2011 WL 4496221, at
*11 (N.D. Ill. Sept. 26, 2011). Defendants Diaz and Larocco argue that the plaintiffs are
attempting to do just that, as evidenced by the fact the plaintiffs allege securities fraud
under 815 Ill. Comp. Stat. 5/12.7 Thus, the defendants argue that the RICO claims must
be dismissed based on this so-called “RICO bar.” The plaintiffs respond that the RICO
bar only applies where the fraudulent representations relate to the value of the securities
being purchased, and that here “the fraud was not representations concerning the value of
6

The complaint may not even satisfy Rule 8. For instance, to establish a violation of § 1962(c) for
each defendant, the plaintiffs must show that that defendant “participate[d] in the operation or management
of the enterprise itself.” Crichton, 576 F.3d at 399 (citations omitted). By failing to describe each
defendant’s involvement, the plaintiffs have not even alleged a plausible violation of § 1962(c).
7

The complaint appears to contain a typographical error, as it alleges a violation of 515 Ill. Comp.
Stat. 5/12, which does not exist. Chapter 515 of the Illinois Compiled Statutes addresses issues relating to
fish.

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the securities that would be issued, but rather the conduct of the business, the theft,
looting, embezzlements, and other wrongful activities in the way the Diaz Enterprise
Defendants operated their businesses to rob the corporation of its income and kill the
business.” (Combined Resp. at 17.)
The plaintiffs’ position ignores the specifics of their complaint. In Count XII, the
plaintiffs allege that the shares in Politico that were purchased by Martinek and Hebel
were securities, and that Diaz engaged in “fraud in the sale of securities” by
F. [Engaging in a] transaction, practice or course of business in connection
with the sale or purchase of securities which works or tends to work a
fraud or deceit upon the purchaser or seller thereof.
G. [Obtaining] money or property through the sale of securities by means
of any untrue statement of a material fact or any omission to state a
material fact necessary in order to make the statements made, in the light
of the circumstances under which they were made, not misleading[, and]
****
I. [Employing] any device, scheme or artifice to defraud in connection
with the sale or purchase of any security, directly or indirectly.
See 815 Ill. Comp. Stat. 5/12. In other words, the plaintiffs’ allegations specifically relate
at least in part to misrepresentations Diaz made in selling securities to Martinek and
Hebel. The plaintiffs’ attempt to avoid the RICO bar simply by not stating a claim for
federal securities fraud is unavailing. See Moorehead, 2011 WL 4496221, at *12 (“A
number of courts have found the PSLRA to bar RICO claims regarding similar or
identical tax-reducing investment strategies even without the specific allegations
regarding securities.”); Gatz v. Ponsoldt, 297 F. Supp. 2d 719, 731 (D. Del. 2003) (“A
plaintiff cannot circumvent the PSLRA’s exclusion of securities fraud as a RICO
predicate act through artful pleading.”).

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The plaintiffs’ view that the misrepresentations at issue must concern the value of
the securities is too narrow. Although the Seventh Circuit does not appear to have had
occasion to speak on scope of the RICO bar, the Ninth Circuit’s approach is informative:
it interprets the requirement that the fraud be committed “in connection with” a securities
transaction to mean that “a certain relationship [must] be established between the fraud
and the transaction that resulted in the injury complained of.” Rezner v. Bayerische HypoUnd Vereinsbank AG, 630 F.3d 866, 871-72 (9th Cir. 2010) (citations omitted). The court
therefore must “carefully examine the predicate acts in relation to the overall fraudulent
conduct to determine if they are part of a scheme that operated as a fraud on sellers or
purchasers of securities.” See Hollinger Int’l, Inc. v. Hollinger Inc., No. 04 C 0698, 2004
WL 2278545, at *6 (N.D. Ill. Oct. 8, 2004). This ensures that the alleged fraud is of the
type the securities laws were intended to remedy. Rezner, 630 F.3d at 871-72.
Here, the plaintiffs have alleged that the Diaz Enterprise intended to deceive and
defraud the plaintiffs from the very beginning, before Martinek even signed off on the
Politico LLC Agreement. As a result of fraudulent misrepresentations, both Martinek and
Hebel agreed to purchase securities in Politico. The court must conclude that a number of
the wire and mail fraud acts alleged were part of a scheme that operated as a fraud on
Martinek and Hebel, who by their own admission were purchasers of securities. As a
result, the PSLRA bars the plaintiffs’ RICO claims. The court will not permit
amendment, as any amendment to the complaint would be futile. See Bixler v.
Foster, 596 F.3d 751, 760 (10th Cir. 2010) (“Plaintiffs also attempt to avoid the PSLRA
bar by arguing that most of their alleged predicate acts do not describe securities
fraud . . . . Allowing plaintiffs to engage in ‘surgical presentation of the cause of action’

24

would undermine the purpose of the RICO amendment.”); Swartz v. KPMG LLP, 476
F.3d 756, 761 (9th Cir. 2007) (“Because the PSLRA bar would apply under any
internally consistent set of facts, it would be futile to amend the RICO claim.”).
IV. CONCLUSION
For the reasons set out above, the court grants the defendants’ motions to dismiss.
The RICO claims are dismissed with prejudice. In their response, the plaintiffs requested
leave to replead, noting that they might amend their complaint to allege a federal
securities fraud claim. Because the court is aware of the possibility that the plaintiffs
might present an alternative basis for federal jurisdiction, the court merely dismisses the
remainder of the complaint without prejudice. The plaintiffs shall file an amended
complaint by 8/17/2012, or the case will be dismissed.

ENTER:

/s/
JOAN B. GOTTSCHALL
United States District Judge
DATED: July 18, 2012

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