Two men share securities regulation news

Breaking news and expert analysis on legal and compliance issues

[Back To Home][Back To Archives]

From Securities Regulation Daily, April 13, 2017

Lack of ‘security’ dooms fraud claims based on contract misrepresentations

By Rodney F. Tonkovic, J.D.

In a non-binding disposition, a Third Circuit panel has affirmed the dismissal of a securities fraud and RICO action brought against a satellite imagery company. The panel concluded that the complaint failed to state a claim under the Exchange Act because the plaintiff did not purchase a "security." The complaint's RICO claims also failed because they were not pleaded with the required specificity (Northeast Revenue Services, LLC v. Maps Indeed, April 7, 2017, Chagares, M.).

According to the complaint, Maps Indeed, Inc. (Maps) held itself out as a technology company that used satellite imagery to access and share geospatial and property data. In reality, the complaint alleged, Maps was a phony corporate shell used by its parent company, Insequence, Inc., to collect money from unsuspecting investors.

Failure to perform. In 2012, Maps Indeed approached plaintiff Northeast Revenue Services (Northeast) to enter into an investment opportunity. Under the contract, Northeast was required to pay $150,000, market Maps's proprietary software to Pennsylvania counties and municipalities, and to assist with the setup and maintenance of a geospatial information system. In exchange, Maps would provide "products, services, and investment return." After Northeast completed its payments, Maps failed to perform at all and provided none of the agreed upon products, support, and/or services, the complaint alleges.

Northeast claimed that Maps fraudulently induced it to enter into the contract through a number of misrepresentations. Among other alleged falsehoods, Northeast said that it was told that the former governor of Pennsylvania was a director of Maps and that the company's core technology was originally developed for the Department of Defense. The district court concluded that Northeast had failed to adequately allege securities fraud, a RICO violation, and a RICO conspiracy.

No "security." The panel, agreeing with the district court, first found that Northeast failed to state a claim under the Exchange Act because it did not purchase a "security." There was no dispute that the first two elements of Howey were satisfied: the contract was an investment of money in a common enterprise. The issue, then, was whether Northeast's profits would come solely from the efforts of others.

The panel found that the contract was not one in which Northeast's duties were nominal or limited. Instead, the profits to be derived by Northeast were in part dependent on its networking, expertise, and marketing efforts. As the district court stated, Northeast was required to make significant efforts under the contract because the benefits promised were based directly on Northeast's performance of its duties. The panel accordingly concluded that the contract between Northeast and Maps was not an investment contract and that Northeast thus failed to state a claim for securities fraud.

RICO. The next two counts of the complaint alleged violation of RICO and conspiracy to violate RICO. Here, Northeast alleged predicate acts of "bank fraud, mail fraud, and wire fraud." The panel observed that when pleading these predicate acts, FRCP 9(b) requires that the circumstances be pleaded with particularity. Northeast's allegations, including that Maps used means of interstate commerce and engaged in a course of conduct that "necessarily consisted of instances of bank fraud, mail fraud, and wire fraud," lacked the specificity required to satisfy Rule 9(b) because they lacked precision and some measure of substantiation, the panel said.

The case is No. 15-3742.

Attorneys: John G. Dean (Elliott Greenleaf & Dean) for Northeast Revenue Services, LLC. Andrew J. Katsock, III (Law Offices of Andrew J. Katsock, III) for Maps Indeed, Inc. Kevin J. Mangan (Womble Carlyle Sandridge & Rice, LLP) for Insequence, Inc.

Companies: Maps Indeed, Inc.; Insequence, Inc.; Northeast Revenue Services, LLC

MainStory: TopStory FraudManipulation DelawareNews NewJerseyNews PennsylvaniaNews VirginIslandsNews

Back to Top

Securities Regulation Daily

Introducing Wolters Kluwer Securities Regulation Daily — a daily reporting service created by attorneys, for attorneys — providing same-day coverage of breaking news, court decisions, legislation, and regulatory activity.


A complete daily report of the news that affects your world

  • View full summaries of federal and state court decisions.
  • Access full text of legislative and regulatory developments.
  • Customize your daily email by topic and/or jurisdiction.
  • Search archives for stories of interest.

Not just news — the right news

  • Get expert analysis written by subject matter specialists—created by attorneys for attorneys.
  • Track law firms and organizations in the headlines with our new “Who’s in the News” feature.
  • Promote your firm with our new reprint policy.

24/7 access for a 24/7 world

  • Forward information with special copyright permissions, encouraging collaboration between counsel and colleagues.
  • Save time with mobile apps for your BlackBerry, iPhone, iPad, Android, or Kindle.
  • Access all links from any mobile device without being prompted for user name and password.