The James Streibich Revocable Trust of 2002 v. Flagstad
1:20-cv-02242
N.D. Ill.Apr 20, 2021Background
- Brock Flagstad solicited a $2,000,000 investment from the James Streibich Revocable Trust to Folding Light, LLC, promising the funds would be used solely for trading and to secure a preferred interest for the Trust.
- Plaintiffs allege Flagstad diverted substantial Folding Light funds to himself and to multiple Flagstad-controlled LLCs (Oxford Marketing, Oxford Media, Oxford Tax Partners, Oxford FG, Oxford GP, Financial Freedom Advisors, Cloverpoint), including at least $849,000 in traced wire transfers and over $1.5 million in cash payments to Flagstad.
- The amended complaint adds allegations of >$5.29 million in American Express charges paid by the corporate defendants/related entities, and that Oxford Marketing and Oxford Tax obtained about $640,000 in PPP loans via inflated applications, which plaintiffs allege were used to enrich Flagstad.
- Plaintiffs sued under RICO (18 U.S.C. § 1962(c)–(d)) and multiple Illinois state-law claims; the district court previously dismissed the original complaint and plaintiffs filed an amended complaint before the present motion to dismiss.
- The court dismissed the amended complaint’s RICO and RICO-conspiracy claims with prejudice (RICO claims futile), dismissed the state-law claims without prejudice (declining to retain supplemental jurisdiction), and permitted plaintiffs to move to amend again narrowly to add Channel Clarity, LLC and a proposed CFAA claim against Flagstad.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Existence of an association-in-fact RICO enterprise | Alleged group of Flagstad and affiliated LLCs formed an enterprise to commit financial fraud to enrich Flagstad | The alleged associations are just a collection of entities under Flagstad’s control, not a distinct enterprise with a separate common purpose | Court: Plaintiffs failed to plead an enterprise distinct from the defendants or predicate acts; claim dismissed |
| Operation or management of the enterprise (Reves) | Corporate defendants participated in transfers, paid expenses, and implemented Flagstad’s directions | Only Flagstad is specifically alleged to have directed and operated activities; corporate defendants were passive/pass-throughs | Court: Plaintiffs did not plead facts showing corporate defendants operated or managed the enterprise; §1962(c) fails |
| Pattern of racketeering activity (continuity and Rule 9(b) predicate pleading) | Wire transfers, AMEX charges, PPP loan fraud, and other misconduct show an ongoing scheme and predicate acts | Predicate-act allegations are specific mainly to Flagstad; plaintiffs lump defendants together without particularized fraud allegations | Court: Plaintiffs adequately pleaded predicate acts against Flagstad but not against corporate defendants; failed to show relatedness/continuity as to an enterprise; pattern element fails |
| RICO conspiracy (§1962(d)) | Defendants agreed to participate in the enterprise and to commit predicate acts | No plausible allegation of a meeting of the minds or agreement among defendants beyond Flagstad’s unilateral conduct | Court: Conspiracy claim fails because plaintiffs did not plead an agreement to conduct enterprise affairs through a pattern of racketeering |
| Leave to amend and state-law claims | Plaintiffs seek another chance and limited discovery to fill gaps; asked to add Channel Clarity and a CFAA claim | Defendants opposed further RICO amendment; court must evaluate futility | Court: Further amendment to cure RICO deficiencies would be futile—RICO dismissed with prejudice; state claims dismissed without prejudice; plaintiffs may renew a narrow amendment to add Channel Clarity and a CFAA claim |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleading standard requires plausible factual allegations, not conclusions)
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) (complaint must allege facts raising claim above speculative level)
- Reves v. Ernst & Young, 507 U.S. 170 (1993) (RICO requires participation in operation or management of the enterprise)
- Boyle v. United States, 556 U.S. 938 (2009) (association-in-fact enterprise requirements: purpose, relationships, longevity)
- United Food & Commercial Workers Unions & Employers Midwest Health Benefits Fund v. Walgreen Co., 719 F.3d 849 (7th Cir. 2013) (enterprise must be meaningfully distinct from defendants)
- Goren v. New Vision Int’l, Inc., 156 F.3d 721 (7th Cir. 1998) (Rule 9(b) requires defendant-specific fraud pleading in RICO cases)
- Menzies v. Seyfarth Shaw LLP, 943 F.3d 328 (7th Cir. 2019) (pattern element requires continuity plus relationship; heightened pleading for fraud predicates)
- Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158 (2001) (distinction when a corporate employee is the person and corporation is enterprise)
- Hemi Group, LLC v. City of New York, N.Y., 559 U.S. 1 (2010) (RICO proximate-causation limits; direct causal connection required)
- United States v. Turkette, 452 U.S. 576 (1981) (enterprise requirement and separate purpose from predicate acts)