                                                                                                                           Opinions of the United
2004 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


3-11-2004

Lum v. Bank Amer
Precedential or Non-Precedential: Precedential

Docket No. 01-4348P




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PRECEDENTIAL                                        Argued on June 2, 2003
   UNITED STATES COURT OF
           APPEALS                          Before: SLOVITER, ALITO and ROTH,
    FOR THE THIRD CIRCUIT                              Circuit Judges
         ____________
                                                (Opinion filed: March 11, 2004)
              No: 01-4348


                                            Ira A. Schochet, Esquire
HING Q. LUM; DEBRA LUM, husband
                 and wife,                  G. Martin Meyers, Esquire (Argued)
individually and on behalf of all persons
                                            35 West Main Street, Suite 106
   similarly situated; GARY ORIANI
                                            Denville, New Jersey 07834
                      v.

 BANK OF AMERICA; CITIBANK,                       Counsel for Appellants
N.A.; CHASE MANHATTAN BANK;
MORGAN GUARANTY TRUST CO.;
 FIRST UNION NATIONAL BANK;
WELLS FARGO BANK, N.A.; FLEET
                                            William E. Deitrick, Esquire
      BANK; PNC BANK N.A.;
 THE BANK OF NEW YORK; KEY                  Mayer, Brown, Rowe & Maw
  BANK; BANK ONE ; U.S. BANK;
                                            190 South LaSalle Street
 JOHN DOES, ONE THROUGH 100
                                            Chicago, Illinois 60603
          Hing Q. Lum, Debra Lum, and
            Gary S. Oriani,
                                            Richard H. Klapper, Esquire
                              Appellants
                                            Sullivan & Cromwell
                                            125 Broad Street
                                            New York, New York 10004
 Appeal from the United States District
                 Court
    for the District of New Jersey
                                            Kenneth N. Laptook, Esquire
 (D.C. Civil Action No. 00-cv-00223)
  District Judge: Honorable Faith S.        Wolff & Samson, P.C.
              Hochberg
                                            5 Becker Farm Road
      ______________________                Roseland, New Jersey 07068
Peter E. Greene, Esquire (Argued)           Darryl J. May, Esquire
Skadden, Arps, Slate, Meagher & Flom,       Ballard, Spahr, Andrews & Ingersoll, LLP
LLP
                                            1735 Market Street, 51st Floor
Four Times Square
                                            Philadelphia, PA 19103
New York, New York 10036

                                            Frederick A. Nicoll, Esquire
Joseph L. Buckley, Esquire
                                            Dorsey & Whitney, LLP
Sills, Cummis, Radin, Tischman
                                            East 80, Route 4
Epstein & Gross
                                            Paramus, New Jersey 07652
One Riverfront Plaza
Newark, New Jersey 07102
                                            Brian J. McMahon, Esquire
                                            Gibbons, Del Deo, Dolan, Griffinger &
Gregory R. Haworth, Esquire                 Vecchione
Duane, Morris LLP                           One Riverfront Plaza
744 Broad Street, Suite 1200                Newark, New Jersey 07101
Newark, New Jersey 07102
                                            William T. Marshall, Esquire
Anthony J. Laura, Esquire                   Zeichner, Ellman & Krause
Reed Smith, LLP                             103 Eisenhower Parkway
One Riverfront Plaza                        Roseland, NJ 07068
Newark, New Jersey 07102
                                            Allen E. Molnar, Esquire
Anthony P. La Rocco, Esquire                Klett, Rooney, Lieber & Schorling
Kirkpatrick & Lockhart, LLP                 550 Broad Street, Suite 810
One Riverfront Plaza, 7 th Floor            Newark, NJ 07102
Newark, New Jersey 07102
                                            Mark S. Melodia, Esquire


                                        2
Reed Smith                                        which publish independent indices of the
                                                  prime rate. The banks allegedly violated
136 Main Street
                                                  RICO by making these misrepresentations
Princeton Forrestal Village, Suite 250            about “prime rate” through the mails and
                                                  over interstate wires. Plaintiffs claim that
Princeton, NJ 08540
                                                  the fraudulently inflated “prime rate” has
                                                  resulted in their being charged higher
                                                  interest than permitted by the terms of the
       Counsel for Appellees
                                                  “prime plus” loan agreements.
           ________________
                                                          The District Court dismissed
                  OPINION                         plaintiffs’ RICO claim because it lacked
                                                  the specificity in pleading fraud that is
                                                  required under Fed. R. Civ. P. 9(b). It
                                                  dismissed the antitrust claim for failure to
ROTH, Circuit Judge:                              meet the minimum standards for pleading
                                                  an antitrust conspiracy. Lum v. Bank of
         The meaning of the term “prime
                                                  America, No. 00-223, slip op. at 11-12,
rate” lies at the heart of this appeal.
                                                  (E.D. Pa. Nov. 29, 2001). 1
Plaintiffs, Hing Q. Lum, his wife Debra,
and Gary Oriani have borrowed money                       We agree that the RICO claim was
from defendant banks pursuant to lending          properly dismissed.       Because it is
agreements with “prime plus” interest             predicated on mail and wire fraud, Federal
rates. Plaintiffs claim in their Amended          Rule of Civil Procedure 9(b) requires that
Complaint that the defendant banks, in            the fraud be pled with specificity. It was
setting “prime plus” interest rates, have         not. Moreover, the antitrust claim is also
violated the Sherman Antitrust Act, 15            based on fraud – on misrepresentations in
U.S.C. § 1, and the Racketeer Influenced          the information given to consumers and on
and Corrupt Organizations Act (RICO), 18          misrepresentations in the information
U.S.C. § 1962(c), § 1962(d). The banks
allegedly violated the Sherman Act by
agreeing to misrepresent that “prime rate”
                                                    Plaintiffs also allege violations of the
is the lowest rate available to their most
                                                  New Jersey Consumer Fraud statute,
creditworthy borrowers, when in fact they
                                                  56:8-2 et seq., and the New Jersey
have offered some large borrowers
                                                  common law of contracts. Having
financing at interest rates below prime
                                                  dismissed all the federal claims, the
rate; they allegedly gave false information
                                                  District Court dismissed these claims for
about their “prime rate” both to consumers
                                                  lack of supplemental jurisdiction. See 28
who were seeking credit and to leading
                                                  U.S.C. §1367(c)(3); Borough of West
financial publications, such as the New
                                                  Mifflin v. Lancaster, 45 F.3d 780, 788
York Times and the Wall Street Journal,
                                                  (3d Cir. 1995).

                                              3
given to the independent financial                  therefore, affirm the judgment of the
publications. Although antitrust claims             District Court.
generally are not subject to the heightened
pleading requirement of Rule 9(b), fraud
must be pled with particularity in all                 I. Facts and Procedural History
claims based on fraud – “In all averments
of fraud or mistake, the circumstances
constituting fraud or mistake shall be                      On January 14, 2000, Hing and
stated with particularity.” Fed. R. Civ. P.         Debra Lum filed a complaint in the United
9(b) (emphasis added). Fraud is the basis           States District Court for the District of
for the antitrust violation alleged here. In        New Jersey on behalf of themselves and of
paragraph 18 of the Amended Complaint,              a purported class of similarly situated
plaintiffs aver that the banks “fraudulently        individuals who borrowed money from the
and artificially inflate[d] the ‘prime rate’        defendant banks from April 22, 1987, to
published in the outside indexes by falsely         the present. The purported class was not
reporting the Bank’s individual prime rates         certified prior to dismissal of the
to the various publications. . . . the ‘prime       complaint. The defendants in the suit are
rate’ published by the outside indexes              twelve of the country’s largest banks and
remained artificially high and the prime            one hundred unnamed individuals. On
plus interest rates on the consumer credit          April 6, 2000, the plaintiffs filed an
instruments were fraudulently inflated.”            Amended Complaint adding Gary Oriani
(emphasis added). Because, as in the                as a plaintiff. The Amended Complaint
RICO claim, plaintiffs’ allegations of              alleges that defendants violated RICO, the
fraud did not comply with Rule 9(b), the            Sherman Antitrust Act, and New Jersey
antitrust claim would properly have been            law by the manner in which they fixed the
dismissed on these grounds.2                        “prime plus” interest rate. Prime plus
                                                    interest rates are tied to the “prime rate” as
       Finally, we agree with the District
                                                    it is defined by the lender or by an outside
Court’s denial of leave to amend.
                                                    index reported in a major financial
Plaintiffs’ statements at oral argument and
                                                    publication. These publications in turn
their briefs both before the District Court
                                                    develop their indices from the prime rates
and before us make it clear that granting
                                                    reported by leading financial institutions,
leave to amend would be futile. We will,
                                                    including defendant banks. At the heart of
                                                    the Amended Complaint are the following
                                                    allegations:
  Although the allegations of conspiracy
in the Amended Complaint are somewhat
conclusory, we do not agree with the
                                                           17. At some point in
District Court’s position that they do not
                                                           time prior to the
meet the pleading requirements of Fed.
                                                           Class Period, the
R. Civ. P. 8(a).

                                                4
Bank Defendants                      scheme, conspiracy
f o r m u l a te d a n d             and course of
carried out a plan,                  conduct designed to
scheme             and               f r a u d ul e n t l y a n d
conspiracy to fix and                artificially inflate the
control the “prime                   “prime                rate”
rate” published by                   published in the
the outside indexes.                 outside indexes by
Because these prime                  falsely reporting the
rate indexes had been                Bank ’s individual
incorporated into                    prime rates to the
thousands of existing                various publications.
financial instruments                To effectuate this
as well as into new                  scheme, the Banks
financial instruments                reported as their
written by the Banks,                prime rates, rates far
control of the prime                 in excess of the rates
rate published in the                the Banks actually
outside indexes                      charged to their
would enable the                     largest and most
Banks to effectively                 creditworthy
raise interest rates                 customers.             As a
unilaterally on these                result of this plan,
credit instruments,                  scheme, conspiracy
and in so doing                      and course of
increase their income                conduct, the “prime
and profits by                       rate” published by
m il l i o n s , if not              the outside indexes
billions of dollars on               remained artificially
an annual basis.                     high and the prime
                                     plus interest rates on
                                     the consumer credit
18. During the Class                 instrume nts were
Period, while                        fraudulently inflated.
main taining an
                               (emphasis added).
appearance of
following a prime                      The Amended Complaint then
rate set by neutral            identifies three financial transactions
forces, the Banks              pursuant to which the named plaintiffs
entered into a plan,           obtained financing at a “prime plus”

                           5
interest rate. The plaintiffs did not attach       Debra Lum obtained a home equity loan
the agreements documenting these three             from Morris County Savings Bank, now
transactions, but the defendants provided          First Union National Bank, in April 1987.
copies of the agreements in support of             This loan required the plaintiffs to pay
their motion to dismiss.3 First, Hing and          interest at a rate of two percentage points
                                                   above the prime rate, as reported in The
                                                   New York Times. Second, plaintiff Debra
                                                   Lum received credit cards from defendant
  While plaintiffs did not attach this
                                                   Bank of America in 1990 and from Chase
credit agreement to the complaint, they
                                                   Manhattan Bank in 1991. These cards
do not dispute that the District Court
                                                   have interest rates tied to the prime rate
properly considered the agreement. In
                                                   reported in the Wall Street Journal. The
deciding motions to dismiss pursuant to
Rule 12(b)(6), courts generally consider
only the allegations in the complaint,
exhibits attached to the complaint,                agreements are integral to and relied
matters of public record, and documents            upon in the complaint.
that form the basis of a claim. See In re                  It should be noted that, under this
Burlington Coat Factory Sec. Litig., 114           standard, the District Court improperly
F.3d 1410, 1426 (3d Cir. 1997); Pension            took judicial notice of Hing Lum’s
Benefit Guar. Corp. v. White Consol.               deposition testimony in a prior
Indus., Inc., 998 F.2d 1192, 1196 (3d Cir.         proceeding that he understands that the
1993). A document forms the basis of a             term prime rate does not mean the lowest
claim if the document is "integral to or           rate available to a bank’s most
explicitly relied upon in the complaint."          creditworthy customers. While a prior
Burlington Coat Factory, 114 F.3d at               judicial opinion constitutes a public
1426 (emphasis omitted). The purpose               record of which a court may take judicial
of this rule is to avoid the situation where       notice, it may do so on a motion to
a plaintiff with a legally deficient claim         dismiss only to establish the existence of
that is based on a particular document             the opinion, not for the truth of the facts
can avoid dismissal of that claim by               asserted in the opinion. See Southern
failing to attach the relied upon                  Cross Overseas Agencies, Inc. v. Wah
document. See Pension Benefit Guar.                Kwong Shipping Group, Ltd., 181 F.3d
Corp., 998 F.2d at 1196. Further,                  410, 427 (3d Cir. 1999). Thus, “a court
considering such a document is not                 that examines a transcript of a prior
unfair to a plaintiff because, by relying          proceeding to find facts converts a
on the document, the plaintiff is on               motion to dismiss into a motion for
notice that the document will be                   summary judgment.” Id. at 427 n. 7.
considered. See Burlington Coat                    Nevertheless, since there are sufficient
Factory, 114 F.3d at 1426. In the present          other grounds to support dismissal here,
case, there is no dispute that the credit          this error is not a basis for reversal.

                                               6
Bank of America agreement defines this                    The District Court had jurisdiction
prime rate as “the base rate on corporate          over the federal RICO and antitrust claims
loans at large U.S. money center                   pursuant to 28 U.S.C. § 1331, and
commercial banks.” The Chase Manhattan             supplemental jurisdiction over the state
agreement states that:                             law claims pursuant to 28 U.S.C. § 1367.
                                                   We have jurisdiction over the District
       For purposes of this
                                                   Court’s final order pursuant to 28 U.S.C. §
       Agreement, the Prime Rate
                                                   1291.
       as published in “Money
       Rates” table of The Wall                            We exercise plenary review over a
       Street Journal or any other                 district court’s dismissal of a complaint
       newspaper of national                       under Rule 12(b)(6). Ditri v. Coldwell
       circulation selected by us is               Banker Residential Affiliates, Inc., 954
       merely a pricing index. It is               F.2d 869, 871 (3d Cir. 1992). We review
       not, and should not be                      a district court’s denial of leave to amend
       considered by you to                        for abuse of discretion. Heyl & Patterson
       represent, the lowest or the                Int’l, Inc. v. F.D. Rich Housing of the
       best interest rate available to             Virgin Islands, Inc., 663 F.2d 419, 425 (3d
       a borrower at any particular                Cir. 1981).
       bank at any given time.
                                                                III. Discussion
                                                           In considering a motion to dismiss,
       In connection with all three of these       a court must accept as true all of the
transactions, the defendant banks have sent        factual allegations in the complaint and
to plaintiffs, through the U.S. mail,              draw all reasonable inferences from those
monthly statements regarding the prime             facts in favor of the plaintiffs. Moore v.
rate.                                              Tartler, 986 F.2d 682, 685 (3d Cir. 1993).
                                                   A court may dismiss the complaint only if
        On May 5, 2000, defendants moved
                                                   it is clear that no relief could be granted
to dismiss the complaint.         In their
                                                   under any set of facts that could be proved
opposition to the motion, plaintiffs
                                                   consistent with the allegations. Hishon v.
submitted a detailed RICO Case Statement
                                                   King & Spalding, 467 U.S. 69, 73 (1984).
pursuant to the Local Rules of the District
                                                   In the present case, even accepting the
of New Jersey. On November 29, 2001,
                                                   allegations in the complaint as true and
following oral argument, the District Court
                                                   drawing every reasonable inference in
granted defendants’ motion to dismiss.
                                                   favor of the plaintiffs, they have failed to
Plaintiffs filed a timely appeal.
                                                   adequately plead either a RICO or an
                                                   antitrust cause of action.
  II. Jurisdiction and Standard of                 A. RICO:
Review

                                               7
          The plaintiffs have failed to                         676 (3d Cir. 1988), vacated on other
adequately plead a RICO cause of action                         grounds, 489 U.S. 1049 (1989).
predicated on mail and wire fraud because
                                                                        The federal mail and wire fraud
their general allegations of fraud do not
                                                                statutes prohibit the use of the mail or
comply with Rule 9(b) and their specific
                                                                interstate wires for purposes of carrying
a l l eg a t i o n s r e g a r d in g p a r t i c u l a r
                                                                out any scheme or artifice to defraud. See
transactions do not amount to fraud. The
                                                                18 U.S.C.      §§ 1341, 1343. "'A scheme
RICO statute provides that:
                                                                or artifice to defraud need not be
         It shall be unlawful for any                           fraudulent on its face, but must involve
         person employed by or                                  some sort of fraudulent misrepresentation
         as s o c i at e d w i t h a ny                         or omission reasonably calculated to
         enterprise engaged in, or the                          deceive persons of ordinary prudence and
         activities of which affect,                            comprehension.'" Brokerage Concepts,
         interstate or foreign                                  Inc. v. U.S. Healthcare, Inc., 140 F.3d 494,
         commerce, to conduct or                                528 (3d Cir. 1998) (quoting Kehr
         participate, directly or                               Packages, Inc. v. Fidelcor, Inc., 926 F.2d
         indirectly, in the conduct of                          1406, 1415 (3d Cir. 1991)).
         such enterprise’s affairs
                                                                       Where, as here, plaintiffs rely on
         through a pattern of
                                                                mail and wire fraud as a basis for a RICO
         racketeering activity or
                                                                violation, the allegations of fraud must
         collection of unlawful debt.
                                                                comply with Federal Rule of Civil
                                                                Procedure 9(b), which requires that
                                                                allegations of fraud be pled with
18 U.S.C. § 1962(c). It is also unlawful
                                                                specificity. See Saporito, 843 F.2d at 673.
for anyone to conspire to violate § 1962(c).
                                                                In order to satisfy Rule 9(b), plaintiffs
See 18 U.S.C. § 1962(d). In order to plead
                                                                must plead with particularity “the
a violation of RICO, plaintiffs must allege
                                                                ‘circumstances’ of the alleged fraud in
(1) conduct (2) of an enterprise (3) through
                                                                order to place the defendants on notice of
a pattern (4) of racketeering activity. See
                                                                the precise misconduct with which they are
Sedima, S.P.R.L. v. Imrex Co., Inc., 473
                                                                charged, and to safeguard defendants
U.S. 479, 496 (1985). A pattern of
                                                                against spurious charges of immoral and
racketeering activity requires at least two
                                                                fraudulent behavior.”       Seville Indus.
predicate acts of racketeering. See 18
                                                                Mach. Corp. v. Southmost Mach. Corp.,
U.S.C. § 1961(5). These predicate acts of
                                                                742 F.2d 786, 791 (3d Cir. 1984).
racketeering may include, inter alia,
                                                                Plaintiffs may satisfy this requirement by
federal mail fraud under 18 U.S.C. § 1341
                                                                pleading the “date, place or time” of the
or federal wire fraud under 18 U.S.C. §
                                                                fraud, or through “alternative means of
1343. See 18 U.S.C. § 1961(1); Saporito
                                                                injecting precision and some measure of
v. Combustion Eng’g, Inc., 843 F.2d 666,
                                                                substantiation into their allegations of

                                                            8
fraud.”    Id. (holding that a plaintiff          conspiracy described in this
satisfied Rule 9(b) by pleading which             Complaint.          Each month
machines were the subject of alleged              during the Class Period,
fraudulent transactions and the nature and        Defendants mailed
subject of the alleged misrepresentations).       thousands of bank
Plaintiffs also must allege who made a            statements, advertisements
misrepresentation to whom and the general         for credit cards, contracts
content of the misrepresentation. See             and promotional materials
Saporito, 843 F.2d at 675; Rolo v. City           containing the fraudulent
Investing Co. Liquidating Trust, 155 F.3d         sta ted a nd a r tif ic ially
644, 658-59 (3d Cir. 1998); Klein v.              inflated interest rates to
General Nutrition Co., Inc., 186 F.3d 338,        Plaintiffs and the Class in
345 (3d Cir. 1999).                               f u r t h e ra n c e o f t h e i r
                                                  fraudulent scheme. Each
       In the present case, the RICO cause
                                                  such act constituted a
of action consists of the following
                                                  violation of 18 U.S.C. §
allegation of mail and wire fraud:
                                                  1341.
       44.        During the Class
       Period, within the meaning
       of 18 U.S.C. §1962(c), the                 (b)           During the Class
       Defendants conducted and                   Period Defendants
       participated, directly and                 transmitted or caused to be
       indirectly, in the conduct of              transmitted by means of
       the enterprises through the                wire communications in
       pattern of racketeering                    interstate or foreign
       activity:                                  commerce, writings, signs,
                                                  signals, pictures or sounds
                                                  for the purpose of executing
       (a)        During the Class                a scheme or artifice to
       Period, Defendants used the                defraud the plaintiffs, or for
       U.S. mails and/or interstate               obtaining money or property
       wire facilities in connection              of the Plaintiffs and the
       with accomplishing the                     Class by means of false or
       fraudulent scheme described                f r a u d u le n t p r e t e n se s ,
       in this Complaint. Each                    representations or promises
       such use of the U.S. mails or              as se t f orth in this
       interstate wire facilities was             Complaint in the allegations
       for the purpose of executing               set forth above. Examples
       and furthering the                         include interstate telephone
       f r a u d u lent sche m e o r              calls and/or facsim ile

                                              9
       transmissions by prospective                 District Court failed to address explicitly
       borrowers, seeking to                        the fact that the factual background section
       promote borro win g                          of the Amended Complaint and the RICO
       allegedly tied to the "prime                 Case Statement identify three specific
       rate," or to collect interest                allegedly fraudulent transactions – the
       charges and loan payments                    mortgage with First Union, and the credit
       allegedly due in connection                  card transactions with Bank of America
       with borrowing on the                        and Chase Manhattan, the dates of these
       f i n a n ci a l a n d c r e d it            transactions, and the names of the
       instruments tied to the                      d e f e n d a nts w h o m a d e a l le g e d
       "prime rate," as well as                     misrepresentations to particular plaintiffs.4
       interstate telephone or wire
       transmissions of the Bank's
       prime rate to the publishers
                                                      In their brief, plaintiffs claim that the
       of the outside indexes. Each
                                                    RICO Case Statement alleges that Oriani
       of these acts constitutes a
                                                    entered into an instant credit agreement
       violation of 18 U.S.C. §
                                                    with Bank of New York in March 1994.
       1343.
                                                    However, the RICO Case Statement only
The “fraudulent scheme described in the             alleges that Bank of New York
Complaint” refers to paragraphs 17 and 18           represented a certain interest rate tied to
of the Amended Complaint which we have              the prime rate on a particular date. It
set out above in Part I.                            does not allege that Oriani entered into a
                                                    credit agreement with Bank of New
        The District Court properly ruled
                                                    York, the date of the credit agreement, or
that these conclusory allegations do not
                                                    the terms of the agreement (in particular
satisfy Rule 9(b). They do not indicate the
                                                    what interest rate Oriani would pay).
date, time , or place of any
                                                    Plaintiffs did not submit the credit
misrepresentation; nor do they provide an
                                                    agreement that Oriani allegedly entered
alternative means of injecting precision
                                                    into with Bank of New York. Based on
and some measure of substantiation into
                                                    the representations of Oriani's counsel at
the fraud allegations because they do not
                                                    oral argument before the District Court,
identify particular fraudulent financial
                                                    Bank of New York conducted a search of
transactions. See Seville, 742 F.2d at 791.
                                                    its records but could not find a record of
Nor do these allegations indicate which
                                                    the agreement with Oriani. Nevertheless,
defendant(s) made misrepresentations to
                                                    Bank of New York submitted its standard
which plaintiff(s). See id.; Saporito, 843
                                                    Instant Credit Agreement from the period
F.2d at 675; Rolo, 155 F.3d at 658-59;
                                                    during which Oriani claimed he entered
Klein, 186 F.3d at 345.
                                                    into an agreement with Bank of New
       Plaintiffs contend, however, that the        York. This agreement merely defined
                                                    the term “prime rate” as the rate reported

                                               10
Plaintiffs, citing Michaels Building Co. v.         date, time, or place of the alleged
Ameritrust Co., 848 F.2d 674 (6th Cir.              m i s r e p re s e n ta t i o n s , the fin ancia l
1988), and Haroco, Inc. v. American Nat'l           transactions in connection with which
Bank and Trust Co. of Chicago, 747 F.2d             these misrepresentations were made, or
384 (7th Cir. 1984), aff'd 473 U.S. 606             who made the misrepresentation to whom.
(1985), argue that these allegations are            See Seville, 742 F.2d at 791; Saporito, 843
sufficient to plead a RICO cause of action.         F.2d at 675; Rolo, 155 F.3d at 658-59;
In Michaels and Haroco, the Courts of               Klein, 186 F.3d at 345. Plaintiffs also
Appeals for the Sixth and Seventh                   allege that, on February 4, 2000, and
Circuits, respectively, held that complaints        March 29, 2000, Citibank and First Union
adequately pled RICO causes of action               represented to the "class" that the prime
predicated on mail and wire fraud when              rate was the rate charged to their most
they alleged that banks misrepresented in           creditworthy comm ercial customers.
particular loan agreements that the prime           However, plaintiffs do not allege that these
rate is the interest rate charged by the            representations were made to a named
banks to their most creditw orthy                   plaintiff, or that any particular individual
commercial borrowers, although in fact the          entered into a financial transaction with
banks charged lower rates to some                   this term. See Rolo, 155 F.3d at 659
commercial borrowers. See Michaels, 848             (holding that, until a class is certified, a
F.2d at 677; Haroco, 747 F.2d at 385.               RICO action is one between the named
                                                    plaintiffs and defendants, and the
       In the present case, however, the
                                                    adequacy of the pleading must be analyzed
Amended Complaint fails to allege fraud
                                                    with regard to the specificity of the fraud
in relation to the three identified
                                                    allegations relating to the named
transactions because, unlike Michaels or
                                                    plaintiffs).
Haroco, the plaintiffs do not, and cannot,
allege that any of the three purportedly                   In order to counter their failure to
fraudulent credit agreements define the             cite specific instances of active
term “prime rate” as the lowest interest            misrepresentation that the prime rate is the
rate available to a bank’s most                     lowest rate available to a bank’s most
creditworthy borrowers. See id.                     creditworthy borrowers, the plaintiffs
                                                    focus on omissions by defendants. They
       In addition, plaintiffs make general
                                                    argue that the term “prime rate” is so
claims that defendants misrepresented that
                                                    generally understood to mean the lowest
the prime rate is the lowest rate charged to
                                                    rate available to a bank’s most
their most creditworthy custom ers.
                                                    creditworthy borrowers that the failure to
However, these allegations do not satisfy
                                                    disclose that some borrowers obtain loans
Rule 9(b) because they do not indicate the
                                                    with interest rates below the prime rate
                                                    constitutes fraud.
                                                            We conclude to the contrary. Even
in the Wall Street Journal.

                                               11
drawing every reasonable inference in                rate because “a decision to charge certain
favor of plaintiffs, the meaning of the term         customers lower rates than others – a
“prime rate” is sufficiently indefinite that         common occurrence in the banking
it is reasonable for the parties to have             industry – merely reflects the bank’s
different understandings of its meaning.             greater confidence in the financial stability
For example, more than twenty years ago,             of those customers.”). It is therefore
a congressional committee, in a staff                unreasonable to infer that defendants’ use
report, described “prime rate” as a “murky,          of the equivocal term “prime rate” was
ill-defined term that rarely reflects the            reasonably calculated to deceive persons
lowest rates available to corporate                  of ordinary prudence and comprehension
customers.” See Staff of House Comm. on              into believing that no borrower obtained
Banking, Finance and Urban Affairs, 97th             an interest rate below the prime rate.
Cong., 1 st Sess., An Analysis of Prime              Plaintiffs’ claim boils down to a
Rate Lending Practices of the Ten Largest            disagreement about the meaning of the
United States Banks 3 (Comm. Print                   term “prime rate.” This disagreement does
1981). This lack of precision in the term            not rise to the level of fraud; at most, it
“prime rate” has also been recognized by             alleges a contract dispute. See Blount, 819
the courts. See, e.g., Blount Fin. Serv. Inc.        F.2d at 152-53.
v. Walter E. Heller and Co., 819 F.2d 151,
                                                             Moreover, the requirement of Rule
152-53 (6th Cir. 1987) (“The fact that the
                                                     12(b)(6) that we draw every reasonable
parties take different positions under the
                                                     inference in favor of plaintiffs does not
contract as to the appropriate prime rate, or
                                                     preclude us from reaching this result.
the fact that the defendant charged too
                                                     Plaintiffs do not ask us just to infer that the
high a ‘prime rate’ and thereby concealed
                                                     term “prime rate” means the lowest rate
or refused to disclose what the plaintiff
                                                     available to defendants’ most creditworthy
considers the true prime rate called for
                                                     borrowers. They ask us to conclude that
under the contract, does not give rise to a
                                                     this meaning is so universally accepted
valid claim for fraud.”); Wilcox v. First
                                                     that it is the only possible meaning and
Interstate Bank of Oregon, 815 F.2d 522,
                                                     that a reasonable person could not
527-28 (9th Cir. 1987) (opining that prime
                                                     understand the term to mean anything else.
rate indicates the average cost of a loan
                                                     In light of Wilcox and Blount, this is not a
because most loans are negotiated at
                                                     reasonable inference. See Blount, 819
interest rates above or below prime);
                                                     F.2d at 151; Wilcox, 815 F.2d at 528. We
Center Cadillac, Inc. v. Bank Leumi Trust
                                                     conclude that the term “prime rate,” in the
Co. of New York, 859 F. Supp. 97, 103
                                                     context in which it was used here, is
(S.D.N.Y. 1994), aff’d, 99 F.3d 401 (2d
                                                     imprecise.
Cir. 1995) (holding that a lender does not
commit the predicate act of mail fraud by                  Furthermore, even if we were to
omitting a definition of prime rate and              have held it to be fraudulent to use the
charging some borrowers below the prime              term “prime rate” without disclosing that

                                                12
some borrowers obtain financing below                Street Journal) expressly stated in one of
the prime rate, the defendants in this case          the three allegedly fraudulent credit
clearly did disclose that some borrowers             agreements, relied upon by the plaintiffs,
obtained financing below the prime rate.             that the prime rate is not the lowest rate
The 1991 credit card agreement between               offered to the bank’s most creditworthy
defendant Chase Manhattan and plaintiff              customer, it would be difficult to conclude,
Debra Lum states:                                    as plaintiffs allege, that the defendants
                                                     conducted an enterprise through a pattern
       For purposes of this
                                                     of racketeering activity by making
       Agreement, the Prime Rate
                                                     misrepresentations or omissions that were
       as published in "Money
                                                     reasonably calculated to deceive persons
       Rates" table of The Wall
                                                     of ordinary prudence and comprehension.
       Street Journal or any other
       newspaper of national                                 Plaintiffs, however, point to a
       circulation selected by us is                 representation in another of the three
       merely a pricing index. It is                 agreements, the credit card agreement
       not, and should not be                        between Debra Lum and Bank of America,
       considered by you to                          in support of their fraud claim. They argue
       represent, the lowest or the                  that the representation in this agreement –
       best interest rate available to               that the prime rate is "the base rate on
       a borrower at any particular                  corporate loans at large U.S. money center
       bank at any given time.                       commercial banks" – is tantamount to
                                                     defining the prime rate as the lowest rate
                                                     available to a bank’s most creditworthy
(emphasis added). Plaintiffs argue that the          borrowers. However, as with the term
term “it” in the last sentence of the Chase          “prime rate,” a person of ordinary
Manhattan agreement refers to the term               prudence and comprehension would not
“index” in the preceding sentence, not the           conclude from this statement that no
term “prime rate.” This distinction is               commercial borrowers obtain an interest
meaningless, however, because, according             rate below the base rate because nothing in
to the terms of the contract, the prime rate         the term “base rate” excludes the
for purposes of the credit card agreement            possibility of discounts for some
is the prime rate reported in the Wall Street        custome rs.        Indeed, as plaintiffs
Journal. Thus, the caveat applies equally            acknowledge in their opening brief, citing
to both rates.                                       B LACK’S L AW D ICTIONARY 1191 (6 TH Ed.
                                                     1990), “base rate” is “effectively
        Given the fact that one member of
                                                     equivalent” to “prime rate.” See also Form
the RICO association-in-fact (alleged by
                                                     FR 2028a/s, Fed. Res. Board, Prime Rate
plaintiffs to be the defendant banks plus
                                                     Supp. to Survey of Terms of Business
the Reuters News Service, Dow Jones,
                                                     Lending. As with the term “prime rate,”
Inc., The New York Times, and the Wall

                                                13
because of the possibility of discounts, the          U.S. 464, 473 (1962); see also Hospital
term “base rate” may not mean the lowest              Bldg. Co. v. Trustees, 425 U.S. 738, 746
possible rate.                                        (1976) (“[I]n antitrust cases, . . . dismissal
                                                      prior to giving the plaintiff ample
        We conclude, therefore, that
                                                      opportunity for discovery should be
plaintiffs have failed to plead fraud with
                                                      granted very sparingly.”). Likewise, in
particularity in their RICO claim so that
                                                      Knuth v. Erie-Crawford Dairy Coop, this
the District Court properly dismissed it. 5
                                                      Court stated that "we should be extremely
B. Sherman Antitrust Act:                             liberal in construing antitrust complaints."
                                                      395 F.2d 420, 423 (3d Cir. 1968).
       Similarly, since the Amended
Complaint alleges that defendants carried                    We have, however, recognized that
out their antitrust conspiracy through                “‘while antitrust complaints are not subject
fraud, plaintiffs have failed to state a cause        to especially stringent pleadings, see
of action under Section 1 of the Sherman              Knuth, supra, neither are they exempt from
Antitrust Act because of the defects in the           the federal rules.’” Commonwealth of
fraud allegations discussed above.                    Pennsylvania v. Pepsico, Inc., 836 F.2d
Generally, the pleading standard for                  173, 179 (3d Cir. 1988) (quoting Sims v.
Section 1 claims is the short and concise             Mack Truck Corp., 488 F. Supp. 592, 608
statement standard of Rule 8(a). In Poller            (E.D. Pa. 1980)).
v. Columbia Broad. Sys., the Supreme
                                                      Because plaintiffs allege that the
Court cautioned that “summary procedures
                                                      defendants accomplished the goal of their
should be used sparingly in complex
                                                      conspiracy through fraud, the Amended
antitrust litigation where motive and intent
                                                      Complaint is subject to Rule 9(b). See
play leading roles, the proof is largely in
                                                      Fed. R. Civ. P. 9(b) (“In all averments of
the hands of the alleged conspirators, and
                                                      fraud or mistake, the circumstances
hostile witnesses thicken the plot.” 368
                                                      constituting fraud or mistake shall be
                                                      stated with particularity.” (emphasis
                                                      added)). Plaintiffs, nevertheless, pointing
  Having correctly found that plaintiffs
                                                      to paragraph 17 of the Amended
failed to adequately plead a substantive
                                                      Complaint, argue that their antitrust claim
RICO claim under 18 U.S.C. § 1962(c),
                                                      merely alleges that defendants conspired to
the District Court properly dismissed the
                                                      set an artificially high floor on interest
RICO conspiracy claim under 18 U.S.C.
                                                      rates by agreeing to raise the prime rate,
§ 1962(d). “Any claim under section
                                                      and that allegations of misrepresentations
1962(d) based on conspiracy to violate
                                                      regarding the prime rate only go to their
the other subsections of section 1962
                                                      RICO claim.        In paragraph 17, the
necessarily must fail if the substantive
                                                      A m ended Complaint alleges that
claims are themselves deficient.”
                                                      defendants “formulated and carried out a
Lightning Lube, Inc. v. WITCO Corp., 4
                                                      plan, scheme and conspiracy to fix and
F.3d 1153, 1192 (3d Cir. 1993).

                                                 14
control the ‘prime rate’ published by the                   consumer credit instruments
outside indexes.”                                           were fraudulently inflated.
        This paragraph of the Amended
Complaint cannot, however, be read in
                                                     (emphasis added). In short, the fact that
isolation. See Chabal v. Reagan, 822 F.2d
                                                     the fraud is not identified in paragraph 17
349, 357 (3d Cir. 1987). The very next
                                                     of the Amended Complaint does not rule
paragraph of the Amended Complaint
                                                     out that fraud is part of the antitrust
makes clear that plaintiffs are alleging that
                                                     allegation because paragraph 17 merely
the defendants carried out this plan,
                                                     identifies the existence of a conspiracy to
scheme, and conspiracy through fraud:
                                                     fix the prime rate, while paragraph 18
       18.       During the Class                    identifies how the rate fixing was
       Period, while maintaining                     accomplished – through fraud.
       an appearance of following
                                                             Because plaintiffs have alleged
       a prime rate set by neutral
                                                     fraud as a basis for their antitrust cause of
       forces, the Banks entered
                                                     action, this claim is subject to the
       into a pla n, s ch e m e,
                                                     heightened pleading requirement of Rule
       conspiracy, and course of
                                                     9(b). As discussed above, plaintiffs have
       c o n d u c t d e s i g n e d to
                                                     failed to satisfy the requirements of Rule
       fraudulently and artificially
                                                     9(b) with regard to their theory that
       inflate the “prime rate”
                                                     defendants misrepresented that the prime
       published in the outside
                                                     rate would be the lowest rate available to
       indexes by falsely reporting
                                                     their most creditworthy customers. They
       the Bank’s individual prime
                                                     have also failed to particularize how false
       r a t e s t o t h e va r i o us
                                                     information on their “prime rate” was sent
       publications. To effectuate
                                                     to the financial publications for inclusion
       this scheme, the Banks
                                                     in the independent indices. They have not
       reported as their prime rates,
                                                     set out who sent what information to
       rates far in excess of the
                                                     whom or when it was sent. Nor have they
       rates the Banks actually
                                                     particularized by how many points the
       charged to their largest and
                                                     prime rate was falsely reported or whether
       most         creditworthy
                                                     there was any consistency among the
       customers. As a result of
                                                     defendant banks in the amount by which
       this plan , sc h em e,
                                                     the prime rate was falsely reported. We
       conspiracy and course of
                                                     conclude, therefore, that plaintiffs have not
       conduct, the “prime rate”
                                                     adequately pled an antitrust claim
       published by the outside
                                                     predicated on fraud.
       indexes remained artificially
       high and the prime plus                       C. Leave To Amend:
       interest rates on th e

                                                15
        Can plaintiffs cure the deficiencies                  what we believe at this time
in the Amended Complaint by further                           is the basis of the claim, that
amendment, either by providing particulars                    we can assert in good faith
of the fraudulent conduct or by dropping                      is based on conscious
the allegations of fraud? The Federal                         parallelism, and it might
Rules of Civil Procedure provide that                         very well be that during
leave to amend “shall be freely given when                    discovery, we will be able to
justice so requires.” Fed. R. Civ. P. 15(a).                  establish that there were
The District Court denied the request to                      actual meetings and direct
amend on the basis that amendment would                       discussions.
be futile.
       We agree that it is clear from the
                                                               This statement, viewed in light of
statements in plaintiffs’ briefs and at oral
                                                       the record before the court, is not
argument both before the District Court
                                                       sufficient to establish cons cio us
and before us that leave to amend would
                                                       parallelism. “The law is settled that proof
be futile.      Plaintiffs cannot allege
                                                       of consciously parallel business behavior
sufficient facts to support fraud in either
                                                       is circumstantial evidence from which an
the RICO or the antitrust claims. At oral
                                                       agreement, tacit or express, can be inferred
argument, plaintiffs did not identify any
                                                       but that such evidence, without more, is
additional allegations of fraud related to
                                                       insufficient unless the circumstances under
other financial transactions, or of other
                                                       which it occurred make the inference of
misrepresentations made in connection
                                                       rational independent choice less attractive
with the three identified transactions, that
                                                       than that of concerted action.” Bogosian,
they would include in a Second Amended
                                                       561 F.2d at 446. We have identified two
Complaint.        Having examined the
                                                       such circumstances, known as “plus
contracts from the three purportedly
                                                       factors”: 1) where defendants acted in
fraudulent transactions, it is clear that there
                                                       contradiction of their own economic
are no further particulars of fraud in these
                                                       interests, and 2) where there is satisfactory
transactions to set out and that granting
                                                       demonstration of a motive to enter into an
leave to amend would be futile.
                                                       agreement. See id.; Venzie Corp. v.
        Similarly, permitting plaintiffs to            United States Mineral Prod., 521 F.2d
amend their antitrust claim to remove the              1309, 1316 (3d Cir. 1975).              Since
fraud allegation would be futile. They will            conscious parallelism is an evidentiary rule
have no additional information to provide              that relates to how a plaintiff may prove
here either. The only alternative basis for            the existence of an agreement, a plaintiff
the antitrust claim that plaintiffs propose is         need not allege the existence of these plus
a claim of conscious parallelism. As                   factors in order to plead an antitrust cause
plaintiffs’ attorney stated at oral argument:          of action. See Bogosian, 561 F.2d at 446
                                                       (holding that plaintiffs adequately pled an

                                                  16
antitrust cause of action where they alleged               Citi Platinum Select 1.65
a combination and that the defendants
                                                           Citi Advantage Card 9.9
entered into parallel contracts with tying
agreements).                                        First Union
        In the present case, however,                      Visa Classic 7.9
granting plaintiffs leave to plead conscious
                                                           Visa Gold 6.4
parallelism would be futile because
plaintiffs do not allege, or seek to amend                 Visa Platinum 4.9
their complaint to allege, that defendants
                                                    US Bank
engaged in consciously parallel pricing as
to the final interest rate that defendants                 WorldPerks Visa Card 9.75
charged consumers. Indeed, the Amended
                                                    Wells Fargo
Complaint alleges that the Chase
Manhattan Advantage Credit agreement                      Proven Credit Standard/Platinum
offered an interest rate of 6 percentage            MasterCard 9.4
points above the prime rate (or 5
                                                          Preferred     Proven      C r e d it
percentage points above the prime rate if
                                                    Standard/Platinum MasterCard 7.4
the customer had a Chase Manhattan
banking relationship), but Citibank offered               Premium Credit Standard/Platinum
an interest rate of 1.65 percentage points          MasterCard 4.0
above the prime rate. In addition, in their
                                                           Standard Mastercard 7.4
RICO Case Statement, plaintiffs allege
that the following banks offered the                        Further, according to the RICO
following interest rates on the following           Case Statement, some defendants offered
credit cards through March 29, 2000:                prime plus interest rates where the
                                                    percentage points above the prime rate
                                                    varied. The following banks offered the
       Percentage Points Above Prime
                                                    following interest rates on the following
Bank of America:                                    credit cards through March 29, 2000:
       Visa Classic 2.9                                    Percentage Points Above Prime
       Visa Gold 2.9                                Bank of America
       Standard Mastercard2.9                              Visa Classic 2.9 to 12.9
Bank One                                                   Standard Mastercard 2.9 to 12.9
      Visa OneCard         Platinum     (for               Visa Gold 2.9 to 12.9
purchase)6.9
                                                           Visa Platinum 7.9 to 12.9
CitiBank
                                                    Key Bank

                                               17
        Variable Rate Gold Visa1.99 to               the following interest rates on lines of
13.99                                                credit:`
                                                             Percentage Points Above Prime
       Variable Rate Gold MasterCard
1.99 to 13.99                                        Chase Manhattan Advantage Credit 6
        Variable Rate Classic Visa 1.99 to           First Union Cash Reserve Credit (New
13.99                                                York) 9.5
       Variable Rate Classic MasterCard              Key Bank Preferred Line of Credit (New
1.99 to 13.99                                        York)5.49
US Bank                                              PNC Unsecured         Line    of   Credit   A
                                                     competitive rate
        Visa Classic 2.9 to 8.9
                                                     Bank of New York EquityLink Line of
        Visa Platinum 1.9 to 8.9
                                                     Credit0 6
       Still other defendants offered
                                                             The only reasonable conclusion that
incentives.    For example, Bank One
                                                     can be drawn from these figures is that
offered a credit card with an introductory
                                                     there was price competition as to the final
rate of 2.9% for the first six months,
                                                     interest rate on credit cards and lines of
followed by a rate of 6.9 percentage points
                                                     credit. See Hishon, 467 U.S. at 73.
above the prime rate (for purchases).
Chase Manhattan offered a credit card                        Plaintiffs argue that they do not
with a fixed rate of 3.99% for the first nine        have to allege conscious price parallelism
months, followed by a rate of 8.49                   as to the actual interest rate charged to
percentage points above the prime rate               customers because their allegations of
(9.49 percentage points for non-preferred            conscious price parallelism as to the prime
customers). Bank of New York offered a               rates is sufficient to state an antitrust cause
credit card with an introductory rate of             of action. In support of this argument,
5.99% for nine months, followed by a                 plaintiffs cite several cases that recognize
fixed rate of 13.49% for balances greater            that an agreement to artificially inflate the
than or equal to $2,500, or 15.49% for               base rate from which negotiations begin
balances less than $2,500 – or a customer            can violate the antitrust laws by causing
could elect a variable rate after the first          consumers to pay more than they would
month of 5.49 percentage points above the            absent an agreement to inflate the base
prime rate for balances greater than or              rate. See In re NADSAQ Market-Makers
equal to $2,500, or 7.49 percentage points           Antitrust Litig., 169 F.R.D. 493, 517-18
above the prime rate for balances less than
$2,500.
                                                       The Bank of New York EquityLink
       Similarly, the RICO Case Statement
                                                     Line of Credit had an introductory fixed
alleges that the following banks offered
                                                     rate of 5.9% for the first six months.

                                                18
(S.D.N.Y. 1996); In re Indus. Diamond                      In an industry with hundreds
Litig., 167 F.R.D. 374, 383 (S.D.N.Y.                      of products and a pervasive
1996); Fisher Brothers, 102 F.R.D. 570,                    policy of allowing discounts
578 (E.D. Pa 1984); In re Glassine and                     and promotional allowances
Greaseproof Paper Antitrust Litig., 88                     to purchasers, . . . charts and
F.R.D. 302, 306 (E.D. Pa. 1980). We need                   reports focusing on list
not decide whether an actual agreement to                  prices rather than
artificially raise a base price violates                   transactional prices have
antitrust laws because that issue is not                   little value. “Especially in
before us. Rather, the issue before us is                  an oligopoly setting, in
whether we reasonably can infer from                       which price competition is
plaintiffs’ factual allegations of parallel                most likely to take place
base pricing that defendants agreed to                     through less observable and
inflate the interest rates charged to                      less regular means than list
consumers and small businesses.                            p r i c e s , i t w o u l d be
                                                           unre ason able to dra w
        The Supreme Court and this Court
                                                           conclusions about the
already have decided this issue in the
                                                           existence of tacit
negative. See Brooke Group LTD v.
                                                           coordination                 or
Brown & Williamson Tobacco Corp., 509
                                                           supracompetitive pricing
U.S. 209, 227, 235-36 (1993); In re Baby
                                                           from data that reflect only
Food Antitrust Litig., 166 F.3d 112, 128
                                                           list prices.” Brooke Group,
(3d Cir. 1999). In Brooke Group and In re
                                                           509 U.S. at 236.
Baby Food Antitrust Litigation, the
plaintiffs argued that an inference of an           166 F.3d at 128 (emphasis in original).
agreement to artificially inflate prices
                                                            While Brooke Group involved
could be drawn from evidence of
                                                    judgment as a matter of law and In re Baby
consciously parallel list prices. See id.
                                                    Food Antitrust Litigation involved
Both the Supreme Court and this Court
                                                    summary judgment, assuming the factual
rejected this argument, holding that the
                                                    allegations are true in the present case and
relevant inquiry for purposes of
                                                    drawing every reasonable inference in
determining if an agreement to inflate
                                                    favor of plaintiffs, the plaintiffs contend
prices can be inferred from consciously
                                                    that they can allege that there is price
parallel pricing is whether there is
                                                    parallelism in setting the prime rate. We
consciously parallel pricing in the final
                                                    can see, however, from the information
price consumers pay, not whether there is
                                                    provided to the District Court by the
conscious parallelism in the list price from
                                                    plaintiffs that, due to discounts and
which negotiations for the final price
                                                    com petition regarding how many
begins. See id. As we stated in In re Baby
                                                    percentage points above the prime rate that
Food Litigation:
                                                    banks may charge, there is not price

                                               19
parallelism in the final interest rate
charged to consumers.         Under these
circumstances, in light of Brooke Group
and In re Baby Food Antitrust Litigation,
it is clear that no relief could be granted
under any set of facts that could be proved
consistent with the allegations. Therefore,
granting leave to amend would be futile.


IV. Conclusion
       For the reasons stated above, we
will affirm the judgment of the District
Court.




                                              20
