PHILADELPHIA (CN) – Four current and former IBM vice presidents must answer civil claims accusing them of orchestrating a $12 million Ponzi scheme, a federal judge ruled.
Hardware company Devon IT says the executives violated anti-racketeering law when they induced its involvement in a development deal for a product the executives knew would never come to fruition.
The vice presidents continued soliciting the Philadelphia-based company for investments in the purported development of the energy-efficient Blade computer, even though they knew the Blade project had already been terminated and that lofty sales projections would never materialize, according to a federal complaint filed in June. The suit also names IBM as a defendant.
Devon claimed the executives concealed the cancellation of the project because they didn’t want to risk losing Devon’s $3 million investment for development of the iDataPlex computer rack, a project that, like Blade, was subsequently aborted.
The vice presidents knew Devon’s investments weren’t going to be used for either project, and that Devon’s money would be channeled elsewhere in an effort to inflate the performance of IBM’s hardware division, to fund other projects with other business partners or for other improper reasons, according to the complaint.
The defendants asserted that eight of the nine claims in the complaint were barred by releases signed by Devon.
But in a 32-page opinion filed Thursday, U.S. District Judge Joel Slomsky declined to enforce the releases, finding that Devon may have been fraudulently induced into signing them.
While Slomsky dismissed three of Devon’s counts on the basis of failure to state a claim, the judge found that “plaintiffs have sufficiently alleged predicate acts of wire fraud or ‘racketeering activity.'”
The defendants wanted the RICO claim tossed, arguing that Devon failed to sufficiently plead a “pattern” of racketeering.
But Slomsky said the complaint’s allegation of a five-year scheme to obtain investments through fraud satisfied the 3rd Circuit’s determination that predicate acts for a RICO violation must occur over at least a 12-month period.
Slomsky, however, did dismiss a claim against IBM for allegedly aiding and abetting the vice-presidents’ purported RICO violations.
“The Third Circuit has held that there is no private cause of action for aiding and abetting in violation of RICO,” he ruled.
The judge refused to dismiss the negligence claim against IBM, though.
“Here, plaintiffs allege in the complaint that the individual defendants were acting under direction of a senior vice president at IBM, who had been indicted and pled guilty to securities fraud in connection with his position at IBM … [and] that defendants have executed this investment scheme on other companies as well,” Slomsky wrote. “Given these facts and the extensive time period and the large amount of money involved, there is a factual basis to infer at this stage that defendant IBM, with the exercise of ordinary care, should have known of the alleged propensity for misconduct by individual defendants,” Slomsky found.
The defendants must file an answer to the complaint by April 21.