Last week it was widely reported that a RICO class action was filed against Elon Musk (Johnson et al., v. Elon Musk Space Exploration Technologies Corp. and Tesla Inc., case 22-5037 (S.D.N.Y.)). But further details about the case, and the huge problems with its RICO allegations were not reported. Let me tell you what you did not read in the reporting about the case.
This case is probably dead on arrival. It’s essentially a securities fraud class action by a disgruntled investor in Dogecoin, a crypto currency firm. Plaintiff alleges that Musk manipulated the price of Dogecoin through Twitter as defacto C.E.O. of the company. Musk’s tweets caused the price of Dogecoin to fluctuate wildly in both directions. Plaintiff allegedly bought the interest in Dogecoin as a result of one of Musk’s tweets about the expected rise in asset value to come. And then, owing to a different tweet, he lost 70% of his investment.
Unfortunately for Plaintiff, who makes RICO allegations of wire fraud and “gambling” predicate acts, the Private Securities Law Reform Act (PSLRA) of 1995 bars any RICO claim which could be brought as securities fraud. This case is rather obviously a securities fraud case. So no RICO claim can be brought to redress this injury caused as it was by conduct which could be the subject of a securities fraud action either by either Plaintiff or the S.E.C. We can expect Musk’s lawyers will raise this in a motion to dismiss the RICO claim. And this is a problem which cannot be fixed by repleading the complaint to try and circumvent the bar to a RICO claim. It dooms the RICO claims.
There is another fatal flaw with Plaintiff’s RICO claims. No enterprise is pleaded. All civil RICO claims require that the racketeering activity be conducted in relation to an enterprise. The enterprise can be a formal legal entity such as a corporation or partnership or an informal group of persons (called an “association in fact”). The Complaint does not allege either type, and for that reason it should be dismissed. It is unclear whether a court would allow the plaintiff’s lawyer to try an amend the Complaint to add a workable enterprise. Some judges would believe this is too big a deficiency to fix by amendment. But when the securities issue is added, it is likely the case will be dismissed with prejudice.
There are lesser additional problems, such as the Complaint does not allege that interstate wires were used, or that that they were the “proximate case” of Johnson’s injury as opposed to other factors which could have caused the price of the company to fall. This pertains to the pleading of the wire fraud predicate acts. But the larger problems make this insignificant.
So expect to see another news story when this case against Elon Musk is dismissed, which is the proper result. RICO is a powerful statute but is overused by lawyers who do not know it leading to pervasive judicial skepticism about RICO. It’s important for RICO plaintiffs to use RICO counsel. If you are thinking about a civil RICO claim think about Foster PC. Call us at 312-726-1600. If you have a good case, the rewards can be great.