united states district court eastern district ......case 2:10-cv-05783-ldw -akt document 26 filed...

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF NEW YORK ----------------------------------------------------------------------- x

THE CITY OF NEW YORK,

Plaintiff,

-against-

KING MOUNTAIN TOBACCO COMPANY, INC., and DELBERT WHEELER, Sr.,

Defendants.

Civil Action No. 10 cv 5783 (LDW)

----------------------------------------------------------------------- x

MEMORANDUM OF LAW OF PLAINTIFF THE CITY OF NEW YORK

IN OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS ____________________________________________________________

MICHAEL A. CARDOZO Corporation Counsel of the City of New York Attorney for Plaintiff the City of New York 100 Church Street, Room 20-99 New York, New York 10007 (212) 788-1324

Of Counsel: Eric Proshansky (EP 1777) Aaron Bloom (AB 1977) Assistant Corporation Counsel

Case 2:10-cv-05783-LDW -AKT Document 26 Filed 06/22/11 of 31

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TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES ......................................................................................................... iii

PRELIMINARY STATEMENT .....................................................................................................1

POINT I - THE AMENDED COMPLAINT STATES A CLAIM UNDER THE CCTA ............2

A. King Mountain’s Transport and Sale of Unstamped Cigarettes That Are Subject to Applicable Taxes Violates the CCTA..................................................................................3

1. There is an Applicable State Tax. ............................................................................4

2. There is an Applicable City Tax. .............................................................................9

B. King Mountain’s Purported Status as a Chapter 52 Manufacturer Does Not Immunize it From CCTA Liability in this Case CCTA.....................................................12

POINT II - THERE IS NO BASIS TO DISMISS THE PACT ACT CLAIM ............................16

A. The City Has Standing Under the PACT Act. ...................................................................16

B. The City Has Properly Alleged that the Watkins Sellers Are Not “Lawfully Operating” Within the Meaning of the PACT Act. ...........................................................17

POINT III - THE AMENDED COMPLAINT STATES A CLAIM FOR RICO CONSPIRACY AGAINST WHEELER ..................................................................19

A. Wheeler Is Not Immune from Liability for RICO Conspiracy..........................................19

B. The City Has Properly Alleged RICO Injury. ...................................................................21

C. The RICO Predicate Offenses (CCTA Violations) Directly Caused the City’s Injury. ................................................................................................................21

D. The City Has Sufficiently Alleged a RICO Conspiracy. ...................................................23

CONCLUSION..............................................................................................................................25


iii

TABLE OF AUTHORITIES

CASES Page Cayuga Indian Nation of New York v. Gould,

14 N.Y.3d 614 (2010) ................................................................................................. 3, 6, 7, 8, 9

City of New York v. Golden Feather Smoke Shop, Inc., 08-cv-3966, 2009 U.S. Dist. LEXIS 20953 (E.D.N.Y. Mar. 16, 2009)................................ 3, 20

City of New York v. Golden Feather Smoke Shop, Inc., 08-cv-3966, 2009 U.S. Dist. LEXIS 76306 (E.D.N.Y. Aug. 25, 2009) ........................... 3, 6, 18

City of New York v. Golden Feather Smoke Shop, Inc., 597 F.3d 115 (2d Cir. 2010).................................................................................................... 4, 6

City of New York v. Milhelm Attea & Bros., Inc., 550 F. Supp. 2d 332 (E.D.N.Y. 2008) ........................................................................ 3, 4, 10, 12

City of New York v. Milhelm Attea & Bros., Inc., 591 F. Supp. 2d 234 (E.D.N.Y. 2008) .................................................................................... 3, 8

Dep’t of Taxation & Fin. of N.Y. v. Milhelm Attea & Bros., Inc., 512 U.S. 61 (1994).................................................................................................................. 2, 4

Hecht v. Commerce Clearing House, Inc., 897 F.2d 21 (2d Cir. 1990)........................................................................................................ 24

Hemi Group, LLC v. City of New York, 130 S. Ct. 983 (2010).......................................................................................................... 21, 22

Muscogee (Creek) Nation v. Henry, Civ-10-019, 2010 U.S. Dist. LEXIS 26445 (E.D. Okla. Mar. 18, 2010).................................... 5

Oneida Nation of New York v. Cuomo, No. 10-4265, 2011 U.S. App. LEXIS 9497 (2d Cir. May 9, 2011).......................... 3, 4, 6, 9, 18

Pasquantino v. United States, 544 U.S. 349 (2005).................................................................................................................. 21

Salinas v. United States, 522 U.S. 52 (1997)........................................................................................................ 19, 20, 23

State Farm Mut. Auto. Ins. Co. v. CPT Med. Svces., 375 F. Supp. 2d 141 (E.D.N.Y. 2005) ................................................................................ 20, 23

United States v. Baker, 63 F.3d 1478 (9th Cir. 1995) .............................................................................................. 15, 25

United States v. Boggs, 775 F.2d 582 (4th Cir. 1985) .................................................................................................... 11

United States v. Conway, 323 Fed Appx. 517 (9th Cir. Apr. 16, 2009)............................................................................. 22


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United States v. Elshenawy, 801 F.2d 856 (6th Cir. 1986) .............................................................................................. 15, 24

United States v. Fiander, 547 F.3d 1036 (9th Cir. 2008) ................................................................................ 19, 20, 21, 25

United States v. Morrison, 685 F. Supp. 2d 339 (E.D.N.Y. 2010) ...................................................................................... 23

United States v. Rubin, 844 F.2d 979 (2d Cir. 1988)...................................................................................................... 24

United States v. Trapilo, 130 F.3d 547 (2d Cir. 1997)...................................................................................................... 20

United States v. Tusaneza, 116 Fed. Appx. 305 (2d Cir. 2004)........................................................................................... 25

United States v. Wardy, 777 F.2d 101 (2d Cir. 1985)...................................................................................................... 24

United States v. Wen Hui Huang, 2000 U.S. App. LEXIS 9973 (2d Cir. 2000) ............................................................................ 22

Washington v. Confederated Tribes of the Colville Indian Reservation, 447 U.S. 134 (1980).................................................................................................................... 5

FEDERAL STATUTES 15 U.S.C. § 375(4) .................................................................................................................... 1, 18

15 U.S.C. § 376............................................................................................................................. 25

15 U.S.C. § 376a ............................................................................................................................. 1

15 U.S.C. § 376a(a)(3).................................................................................................................. 17

15 U.S.C. § 376a(d) ...................................................................................................................... 18

15 U.S.C. § 378(c) .................................................................................................................. 16, 17

15 U.S.C. § 378(d) ........................................................................................................................ 17

18 U.S.C. § 1961(1) ........................................................................................................................ 2

18 U.S.C. § 1962(c) ........................................................................................................................ 2

18 U.S.C. § 1962(d) ............................................................................................................ 2, 19, 23

18 U.S.C. § 2341(2) ........................................................................................ 1, 3, 7, 13, 14, 16, 24

18 U.S.C. § 2342(a) ........................................................................................................ 1, 3, 14, 24

18 U.S.C. § 2346(b)(1) ........................................................................................................... 12, 19

18 U.S.C. § 3663A(a) ................................................................................................................... 22

26 U.S.C. § 5713(b) ...................................................................................................................... 14


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Fed. R. Civ. P. 12 (b) (6)........................................................................................................... 1, 25

STATE AND LOCAL STATUTES 19 R.C.N.Y. § 4-20(c).............................................................................................................. 10-11

20 N.Y.C.R.R. § 71.1.................................................................................................................... 18

20 N.Y.C.R.R. § 74.3.................................................................................................................... 15

N.Y. Tax L. § 471 ................................................................................................................... 4, 7, 9

N.Y. Tax L. § 471(1) ............................................................................................................ 4, 5, 12

N.Y. Tax L. § 471(2) ................................................................................................................ 4, 12

N.Y. Tax L. § 480 ......................................................................................................................... 18

N.Y. Tax L. § 480-a ...................................................................................................................... 18

N.Y.C. Ad. Code § 11-1301(4)..................................................................................................... 10

N.Y.C. Ad. Code § 11-1302 ................................................................................................... 11, 17

N.Y.C. Ad. Code § 11-1302(a)(2) ................................................................................................ 10

N.Y.C. Ad. Code § 11-1302(b)(4) .......................................................................................... 10, 11

N.Y.C. Ad. Code § 11-1304 ........................................................................................................... 4

N.Y.C. Ad. Code § 11-1306 ......................................................................................................... 11

N.Y.C. Ad. Code § 11-1311 ......................................................................................................... 10

OTHER AUTHORITIES “Feds raid Yakama tobacco company” Seattle Times, February 17, 2011, available at

http://seattletimes.nwsource.com/html/localnews/2014256577_ apwatobaccoraid.html (last visited May 31, 2011)................................................................... 19


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MEMORANDUM OF LAW OF PLAINTIFF THE CITY OF NEW YORK IN OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS

Plaintiff the City of New York (the “City”), respectfully submits this memorandum of

law in opposition to the motion of King Mountain Tobacco Company, Inc. and Delbert Wheeler,

Sr. (“Defendants”) to dismiss the Amended Complaint pursuant to Fed. R. Civ. P. 12 (b) (6). No

ground urged for dismissal has legal merit. The motion should be denied in its entirety.

PRELIMINARY STATEMENT

The City has sued King Mountain Tobacco Company, Inc. and its owner and president,

Delbert Wheeler, Sr., for violating the Contraband Cigarette Trafficking Act (the “CCTA”), the

Jenkins Act, as amended by the Prevent All Cigarette Trafficking Act of 2010 (the “PACT Act”),

and the Racketeer Influenced Corrupt Organizations Act (“RICO”). Defendants do so by dealing

in “unstamped” cigarettes, i.e., cigarettes that do not bear New York State or New York City tax

stamps, with individuals identified in the Amended Complaint as “the Watkins Sellers,” who are

located on the Poospatuck Indian Reservation in Mastic, New York.

The CCTA and PACT Act expressly empower local governments to proceed against

anyone who engages in transactions in unstamped cigarettes with unlicensed entities and thereby

evades State and local tobacco regulatory regimes. Specifically, the CCTA prohibits Defendants

from engaging in transactions with unstamped cigarettes in a locale where the cigarettes should

be stamped, 18 U.S.C. §§ 2341(2), 2342(a); the PACT Act prohibits Defendants from engaging

in non-face to face sales of unstamped cigarettes to “consumers,” defined as persons not licensed

to deal in tobacco products, 15 U.S.C. §§ 375(4); 376a. As detailed below, Defendants’ sale and

transport of unstamped cigarettes to the Watkins Sellers – who are not licensed to deal in

cigarettes in any respect – violate the plain language of both the CCTA and the PACT Act. The


2

CCTA violations in turn are predicate acts that, when committed by an enterprise, as a pattern,

violate the RICO statute. See 18 U.S.C. §§ 1961(1), 1962(c), (d).

Defendants’ central argument on this motion is that “[s]ince both the City and State had

no legal authority to impose the taxes the Defendants allegedly failed to pay, all of the City’s

claims fail as a matter of law.” Def. Mem. at 1 (emphasis in original). But this central premise

of Defendants’ motion is not even colorably correct. The cases cited below demonstrate that the

“authority” of the City and the State, as the case may be, to impose taxes on the cigarettes

Defendants delivered to the Watkins Sellers has been established so many times, and reiterated

so recently, that Defendants’ ignorance of the law is either astounding or feigned. Moreover,

Defendants’ contention that the sales of King Mountain cigarettes are within the exceedingly

narrow exception by which members of the same tribe may trade amongst themselves in tax-free

cigarettes for their own personal consumption, necessarily rests on the proof of extrinsic facts –

facts that may not even be addressed on a motion to dismiss and that, as established in prior

cases, in any event show that the Watkins Sellers engage nearly exclusively in sales of

unstamped cigarettes to the public. The Amended Complaint therefore properly states claims

under the CCTA, the PACT Act, and RICO and Defendants’ motion should be denied.

POINT I

THE AMENDED COMPLAINT STATES A CLAIM UNDER THE CCTA

Defendants argue for dismissal of the City’s CCTA claim because (a) neither New York

State nor New York City had authority to impose taxes on the cigarettes Defendants sold to the

Watkins Sellers; and (b) King Mountain’s status as an IRS Chapter 52 permittee bars CCTA

liability. Def. Mem. 15. Neither argument has merit. New York State’s and the City’s

“authority” to impose taxes on the cigarettes that Defendants sold to the Watkins Sellers has

been settled for decades, see, e.g., Dep’t of Taxation & Fin. of N.Y. v. Milhelm Attea & Bros.,


3

Inc., 512 U.S. 61, 64 (1994), and repeatedly and recently confirmed. See, e.g. Oneida Nation of

New York v. Cuomo, 2011 U.S. App. LEXIS 9497 at *9 (2d Cir. May 9, 2011); Cayuga Indian

Nation of New York v. Gould, 14 N.Y.3d 614, 623, 647-48, 653 (2010); City of New York v.

Golden Feather Smoke Shop, Inc., 08-cv-3966, 2009 U.S. Dist. LEXIS 20953, at *34 (E.D.N.Y.

Mar. 16, 2009) and 2009 U.S. Dist. LEXIS 76306, at *13-14 (E.D.N.Y. Aug. 25, 2009); City of

New York v. Milhelm Attea & Bros., Inc., 550 F. Supp. 2d 332, 337 (E.D.N.Y. 2008), reconsid.

den. 591 F. Supp. 2d 234 (E.D.N.Y. 2008). Second, King Mountain’s purported status as an IRS

Chapter 52 permitted tobacco manufacturer is not a license to deal in unstamped cigarettes with

anyone it pleases. The plain language of the CCTA addressed to Chapter 52 permittees allows

manufacturers to deal in unstamped cigarettes with other licensed entities, but imposes liability

when a manufacturer ships, sells, transports, or distributes those cigarettes to anyone other than a

common carrier or licensed state tax agent. See 18 U.S.C. §§ 2341(2); 2342(a).

A. Defendants’ Transport and Sale of Unstamped Cigarettes That Are Subject to Applicable Taxes Violates the CCTA.

The CCTA makes it “unlawful for any person knowingly to ship, transport, receive,

possess, sell, distribute or purchase contraband cigarettes.” 18 U.S.C. § 2342(a). Contraband

cigarettes are “a quantity in excess of 10,000 cigarettes [50 cartons], which bear no evidence of

the payment of applicable State or local cigarette taxes in the State or locality where such

cigarettes are found, if the State or local government requires a stamp, impression, or other

indication to be placed on packages or other containers of cigarettes to evidence payment of

cigarette taxes.” 18 U.S.C. § 2341(2) (emphasis added). As demonstrated below, King Mountain

violates the CCTA because the unstamped cigarettes Defendants sell and transport to the

Watkins Sellers are subject to applicable City and New York State taxes and are thus

“contraband” under the CCTA.


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1. There is an Applicable State Tax.

New York State law plainly imposes a cigarette tax applicable to Defendants’ sales to the

Watkins Sellers:

There is hereby imposed and shall be paid a tax on all cigarettes possessed in the state by any person for sale, except that no tax shall be imposed on cigarettes sold under such circumstances that this state is without power to impose such tax . . . .

N.Y. Tax L. § 471(1).1 Stamps are required to evidence payment of the tax. N.Y. Tax L. §

471(2).

Defendants claim there is no “applicable tax” within the meaning of the CCTA because

“federal and state governments lack authority to tax cigarettes sold to members of Native

American tribes for their own consumption.” Def. Mem. at 6 (quoting City of New York v.

Milhelm Attea, 550 F. Supp. 2d at 337).2 That legal principle is undisputed, but equally

undisputed – and actually relevant to this case – is the principle that “New York may . . . tax

‘[o]n-reservation cigarette sales to persons other than reservation Indians.’” Oneida Nation,

2011 U.S. App. LEXIS 9497, at *7 (quoting Dep’t of Taxation & Fin. of N.Y. v. Milhelm Attea,

512 U.S. at 64); see also City of New York v. Golden Feather Smoke Shop, Inc., 597 F.3d 115,

122 (2d Cir. 2010).

However true Defendants’ cited principle may be, it is completely beside the point,

because no facts alleged in the Amended Complaint permit an inference that Defendants’

1 N.Y. Tax L. § 471 was amended June 21, 2010, effective September 1, 2010, but the language quoted here, and elsewhere in this brief, was not altered by the amendment. 2 Defendants phrase their argument in terms of “stamp status” (i.e. whether stamps are required) instead of whether there is an “applicable tax,” see Def. Mem. at 13-15, but because New York City and State require stamps to evidence the payment of applicable cigarette taxes, there is no significant distinction between the terms. See N.Y. Tax L. § 471(2) (requiring State tax stamps); N.Y.C. Ad. Code § 11-1304 (requiring City tax stamps).


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cigarettes were sold to “members of Native American tribes for their own consumption.” The

Amended Complaint instead alleges that Defendants sold cigarettes to the Watkins Sellers, who

are “New York residents who sell cigarettes through sole proprietorships . . . located on the

Poospatuck Indian Reservation in Mastic, New York.” Am. Compl. ¶ 14. There are no

allegations that the Watkins Sellers themselves are Indians, that they personally consumed the

cigarettes, that the Watkins Sellers sold the cigarettes to members of their own tribe for personal

consumption, or that Defendants are members of the Poospatuck Tribe, and yet it is only

intratribal, on-reservation sales for personal consumption that are tax exempt. Washington v.

Confederated Tribes of the Colville Indian Reservation, 447 U.S. 134, 160-61 (1980) (only on-

reservation sales by Indian retailers to Indians enrolled in the same tribe are tax exempt);

Muscogee (Creek) Nation v. Henry, Civ-10-019, 2010 U.S. Dist. LEXIS 26445, at *6-10 (E.D.

Okla. Mar. 18, 2010) (holding that cigarettes manufactured by an Indian-owned company are not

tax-exempt when shipped to Indian retailers located on a different tribe’s reservation, noting that

“the Supreme Court has repeatedly held that Native American immunities from state taxation

and regulation only extend to commerce within a particular tribe, not to commerce among

different tribes or their members”).

Defendants remain free to attempt the factual showing that the cigarettes sold to the

Watkins Sellers were tax exempt because they were sold to “members of Native American tribes

for their own consumption,” but not on this motion to dismiss, where extrinsic facts may not be

introduced. The burden of proving that any cigarettes are tax exempt is on the possessor. N.Y.

Tax L. § 471(1) (“It shall be presumed that all cigarettes within the state are subject to tax until

the contrary is established, and the burden of proof that any cigarettes are not taxable hereunder


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shall be upon the person in possession thereof.”). Defendants obviously cannot meet that burden

here:

Defendants cannot defeat CCTA liability for the possession of massive quantities of untaxed cigarettes intended for resale to non-Tribe members based upon the hypothetical possibility, unsupported in the record, that some portion of those cigarettes may be sold to Tribe members for their own consumption. Such cigarettes are contraband from the moment defendants purchase, receive, or possess them in quantities greater than 10,000 cigarettes, unless defendants carry their burden of proving that any such cigarettes are not taxable.

Golden Feather, 2009 U.S. Dist. LEXIS 76306, at *104.3

Defendants next argue that State tax stamps were not required because New York State

lacked a “mechanism to impose taxes on cigarettes destined for a qualified reservation,” citing

Cayuga Indian Nation of New York v. Gould, 14 N.Y.3d 614 (2010). Def. Mem. at 7. But

Cayuga did not hold that any mechanism was necessary for New York to impose a tax on

cigarettes sold on Indian reservations to non-Indian consumers or that no stamps were required

on such cigarettes. Rather, Cayuga held that New York cigarette tax laws did impose the tax, but

3 Defendants have no chance of ultimately meeting their burden of proving that the cigarettes sold to the Watkins Sellers were sold to “members of Native American tribes for their personal consumption.” See Oneida Nation, 2011 U.S. App. LEXIS 9497 at *9 (“[Poospatuck] retailers purchased approximately 5 million untaxed cigarette cartons from state-licensed stamping agents in 2009 and 3.5 million untaxed cartons from January through June 2010. If only [Poospatuck] members had consumed these cigarettes, every man, woman, and child would have smoked 364 packs per day in 2009.”). The overwhelming evidence, as found in cases to which the Amended Complaint refers, is that the Watkins Sellers engage almost exclusively in sales of unstamped cigarettes to the public. See Golden Feather, 597 F.3d at 119 (“essentially unchallenged” facts show “[the Watkins Sellers’ store] . . . along with [its] proprietors . . . to have participated in bulk sales of unstamped cigarettes . . . in blatant violation of the CCTA”); Golden Feather, 2009 U.S. Dist LEXIS 76306 at *20 (Poospatuck cigarette retailers “sell . . . reduced price cigarettes to bootleggers who transport the cigarettes off the reservation and into New York City where they resell them for a profit to other consumers who do not wish to pay the full price.”); id. at *26 (“[The Watkins Sellers’ store] sells cigarettes mostly to the general public, to customers coming from throughout the New York metro area.”) (quotation marks, brackets and record citation omitted).


7

that Indian retailers could not be subject to State criminal prosecutions for failing to comply with

those laws, absent a collection mechanism that distinguished tax exempt from non-exempt sales.

See 14 N.Y. 3d at 647 (“Indian retailers cannot be criminally prosecuted for non-compliance

with the laws governing sales taxes.”) (emphasis added); id. at 647-48 (“[S]ales taxes are due

when non-Indian consumers purchase cigarettes from Indian retailers.”); id. at 653 (“Tax Law §

471 certainly ‘imposes’ a cigarette sales tax,” but lack of collection scheme “precludes reliance

on Tax Law § 471 as the sole basis to sanction [Cayuga Indian] Nation retailers for alleged non-

compliance with the New York Tax Law”) (emphasis added).

Defendants argue based on Cayuga for an inference that stamps were not required

because Indian retailers could not be prosecuted for unstamped sales, but Cayuga supports no

such inference. Cayuga would not have referred to the Indian retailers’ conduct as “non-

compliant” with the law unless stamps were required for Indian sales to the public. Cayuga

expressly recognized the existence of a tax: “[T]he issue in this case is not whether sales taxes

are due when non-Indian consumers purchase cigarettes from Indian retailers -- they are.”

Cayuga 14 N.Y.3d at 647-48 (emphasis added). The Court in Cayuga held that § 471 “certainly

‘imposes’ a cigarette sales tax” and that, regardless of whether collection regulations exist, there

remains “statutory liability for taxes as they relate to sales on Indian reservations to nonexempt

individuals.” 14 N.Y.3d at 648, 653. Cayuga is direct authority that the cigarettes Defendants

sold to the Watkins Sellers meet the CCTA’s definition of “contraband cigarettes”: fifty or more

cartons of cigarettes “which bear no evidence of the payment of applicable State or local

cigarette taxes.” 18 U.S.C. § 2341(2) (emphasis added). There was thus an applicable State tax

on the cigarettes Defendants sold to the Watkins Sellers and the cigarettes bore no evidence

(stamps) that the tax was paid. While Cayuga may have barred state law prosecutions of


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reservation cigarette sellers for on-reservation sales of unstamped cigarettes to non-Indian

consumers, Cayuga’s holding does not permit the inference urged by Defendants that the tax was

not “applicable” or that stamps are not required. See Milhelm Attea, 591 F. Supp. 2d at 237

(non-enforceability of collection scheme does not affect applicability of tax for purposes of

CCTA cause of action).

Defendants also neglect to point out that whatever Cayuga held, the case expressly

excepted from its holding the bulk sales at issue here. Cayuga emphasized that it addressed

“retail sales to consumers – not cigarette wholesaling activities.” 14 N.Y. 3d at 630. Cayuga

explained that “the complex calculation and collection issues raised when a state attempts to

collect sales taxes from Indian retailers . . . are not present when a wholesaler or distributer,

whether Indian or otherwise, makes a bulk sale of cigarettes to a party that intends to resell them

off the reservation.” Id. at 653. “No special calculation or collection mechanism . . . is

necessary” in such a situation, the Court explained, “because not a single pack of cigarettes

involved in such a transfer would be tax exempt.” Id. As alleged in the Amended Complaint,

Defendants were engaged in “cigarette wholesaling activities” and “bulk sale[s] of cigarettes”

with the Watkins Sellers and Cayuga itself states that its holding does not apply in that setting.

Id.; see Am. Compl. ¶¶ 21-24.

Cayuga fails to support Defendants’ position for yet another reason: the Amended

Complaint does not allege that the Watkins Sellers are Indians. All Defendants can point to is

the allegation that the Watkins Sellers’ businesses are located on the Poospatuck Reservation, see

Def. Mem. at 7, but Cayuga is not concerned with non-Indian retailers located on an Indian

reservation. Cayuga’s holding only applies to Indian retailers. See 14 N.Y. 3d at 647 (“Indian

retailers cannot be criminally prosecuted for non-compliance with the laws governing sales


9

taxes.”) (emphasis added); id. at 653 (lack of collection scheme “precludes reliance on Tax Law

§ 471 as the sole basis to sanction [Cayuga Indian] Nation retailers for alleged non-compliance

with the New York Tax Law”) (emphasis added); see also id. at 649-50 (noting legislative intent

to respect Indian sovereignty by collecting tax “‘at the distributor level,’ rather than pursuing

enforcement directly from Indian retailers”).

Finally, if it ever were, the challenge to the June 21, 2010 amendments to the State Tax

Law is now unequivocally not relevant to this case.4 See Def. Br. at 8. The challenge was

rejected by the Second Circuit, and the federal court stays on State enforcement of the amended

Tax Law have been vacated. See Oneida Nation, 2011 U.S. App. LEXIS 9497, at *4-5, 59.

2. There is an Applicable City Tax.

Defendants’ argument that the City, like the State, lacks authority to tax the cigarettes

Defendants sold and transported to the Watkins Sellers first relies on the purported absence of

State authority, Def. Mem. at 9, and thus fails for the above reasons. Defendants’ argument in

reliance on Cayuga, Def. Mem. at 12, likewise fails for the above reasons. Defendants’ other

arguments regarding the City tax are equally meritless, as shown below.

Defendants argue that the City lacks authority to tax cigarettes sold and transported to the

Watkins Sellers because the Watkins Sellers are located outside the City and “the City’s taxing

authority is limited to ‘its territorial limits.’” Def. Mem. at 10. Defendants thereby concede the

taxability of the cigarettes at issue here, because the City tax is not operating in an

“extraterritorial” fashion: Defendants transported the cigarettes through the City, subjecting

them to tax. Am. Compl. ¶¶ 22, 24 (“In shipping and distributing the cigarettes from White

Swan, Washington to Mastic, New York, the King Mountain Defendants transported the

unstamped cigarettes through New York City.”); id. ¶ 27 (City cigarette tax applies to transport 4 The challenge never was relevant as the City’s argument does not rely on the amended text.


10

in the City). City law imposes a tax on “[t]he use of all cigarettes in the city” and “use” includes

transport. See N.Y.C. Ad. Code. § 11-1302(a)(2) (imposing use tax); N.Y.C. Ad. Code § 11-

1301(4) (defining “use” as “[a]ny exercise of a right or power, actual or constructive, and shall

include, but is not limited to the receipt, storage, or any keeping or retention for any length of

time”). Thus, there is an applicable City tax on the cigarettes Defendants sold and transported

through the City to the Watkins Sellers.5

Citing a tax refund provision, Defendants argue that the City lacks authority to tax

cigarettes “sold and shipped to a dealer outside the city for sale there.” Def. Mem. at 10 (quoting

N.Y.C. Ad. Code § 11-1311). But the City’s cigarette tax law contains a specific exception

relating to such cigarettes and Defendants do not argue that they meet it, nor could they, based

on the allegations in the Amended Complaint. The City law provides that the cigarette tax does

not apply to “[c]igarettes possessed in the city by any agent or wholesale dealer for sale to a

dealer outside the city . . . provided such agent or wholesale dealer complies with the regulations

relating thereto.” N.Y.C. Ad. Code § 11-1302(b)(4) (emphasis added). The corresponding City

regulation states:

Where an agent or wholesale dealer sells cigarettes to a dealer for sale outside the City . . . he shall demand and receive from the purchaser, at the time of delivery of the cigarettes, or at the time of sale, a certificate in writing signed by the purchaser, which certificate shall be substantially in the following form: . . . “I hereby certify that the cigarettes purchased by me and described in the attached invoice will be resold outside the City of New York.”

5 Defendants cite Milhelm Attea, 550 F. Supp. 2d at 340-41, for the proposition that cigarettes sold to resellers located outside the City fall “outside the scope of the pre-collection scheme for City taxes.” Def. Mem. at 10. But the Milhelm Attea decision involved licensed stamping agents (which King Mountain is not) and did not address the relevant question here: whether the City’s cigarette use tax applies to cigarettes transported through the City. In any event, Milhelm Attea held that CCTA liability could attach despite the inapplicability of a City tax, because there was an applicable State tax, providing the City the basis for a CCTA claim. 550 F. Supp. 2d at 346.


11

19 R.C.N.Y. § 4-20(c). The regulation also requires the agent or wholesale dealer to retain a

copy of the invoice and certificate for inspection by the City’s finance department. Id. Further, a

City law titled “Possession and transportation of unstamped cigarettes” provides:

Every person who shall possess or transport upon the public highways, roads or streets of this city more than four hundred cigarettes in unstamped packages, shall be required to have in his or her actual possession invoices or delivery tickets for such cigarettes . . . . [which] show the true name and address of the consignor or seller, the true name of the consignee or purchaser and the quantity and brands of the cigarettes transported. The absence of such invoices or delivery tickets shall be prima facie evidence that such person is a dealer in cigarettes in the city and subject to the provisions of this chapter.

N.Y.C. Ad. Code § 11-1306.

Defendants have not attempted to show, based on the allegations of the complaint, that

they meet the § 11-1302(b)(4) exception to the use tax described above – i.e. that they qualify as

“an agent or wholesale dealer” and that they complied with the relevant regulations by procuring

and maintaining the requisite invoices and certificates for their sales to the Watkins Sellers.

Thus, the City’s use tax applies to the cigarettes Defendants transported through the City, and

serves as an “applicable tax” triggering CCTA liability. See United States v. Boggs, 775 F.2d

582, 584-85 (4th Cir. 1985) (finding CCTA violation where defendants were transporting

cigarettes through West Virginia on their way to Michigan where the cigarettes would be sold,

but cigarettes did not bear West Virginia tax stamps and defendants did not comply with West

Virginia regulation requiring persons transporting unstamped cigarettes to have “invoices or

delivery tickets for such cigarettes”).

Again relying on the refund provision – irrelevant to the facts of this case, because the

cigarettes Defendants sold were unstamped – Defendants claim that the City is pursuing a “tax

now, seek refunds later” policy for sales to out-of-City Indian retailers, contrary to federal law


12

regarding taxation of Indians because it supposedly “requires prepayment of taxes to which the

City is not entitled.” Def. Mem. at 11. Even if sales to Indian retailers were involved here,

which is nowhere alleged in the Amended Complaint, the City has no such policy – Defendants

have invented it based on its misunderstanding of the City’s laws. As described above, City law

exempts from the tax cigarettes sold to out-of-City dealers by wholesale dealers and agents who

comply with the relevant regulations. Thus, agents and wholesale dealers who sell to out-of-City

dealers and comply with the regulations need not prepay any City taxes. But Defendants have

not made the factual showing to establish such compliance, nor can they on this motion.

The discussion above establishes that there was an applicable City tax, but, in any event,

the City’s CCTA claim does not rest on the City tax alone; even absent an applicable City tax,

the City’s CCTA claim could proceed based solely on the applicable State tax. See 18 U.S.C. §

2346(b)(1) (“[A] local government . . . may bring an action in the United States district courts to

prevent and restrain violations of this chapter by any person . . . .”). In Milhelm Attea, which

also involved deliveries to the Poospatuck reservation, the court held that “The City’s claim

under the CCTA may be maintained because N.Y. Tax Law § 471(1)-(2) constitutes an

‘applicable’ tax for the purposes of 18 U.S.C. § 2341.” 550 F. Supp. 2d at 346.

B. King Mountain’s Purported Status as a Chapter 52 Manufacturer Does Not Immunize it From CCTA Liability in this Case.

The CCTA contains a limited exception to the definition of “contraband cigarettes,”

permitting possession of unstamped cigarettes by licensed entities engaged in regulated

transactions in cigarettes: manufacturers, common carriers, and tax-stamping agents.

Defendants seek to turn this regulatory exception into a global immunity, allowing sales of

unstamped cigarettes to all comers.

As relevant here, “Contraband cigarettes” are defined as:


13

(2) . . . a quantity in excess of 10,000 cigarettes, which bear no evidence of the payment of applicable State or local cigarette taxes in the State or locality where such cigarettes are found, if the State or local government requires a stamp, impression, or other indication to be placed on packages or other containers of cigarettes to evidence payment of cigarette taxes, and which are in the possession of any person other than—

(A) a person holding a permit issued pursuant to chapter 52 of the Internal Revenue Code of 1954 [1986] as a manufacturer of tobacco products . . . ;

(B) a common or contract carrier transporting the cigarettes involved under a proper bill of lading . . . ; [and]

(C) a person – (i) who is licensed or otherwise authorized by the State where the cigarettes are found to account for and pay cigarette taxes imposed by such State; and (ii) who has complied with the accounting and payment requirements relating to such license or authorization with respect to the cigarettes involved . . . .

18 U.S.C. § 2341 (emphasis added).

The statute makes clear that while unstamped cigarettes are not contraband when a

tobacco manufacturer holding an IRS Chapter 52 permit or another entity in the regulatory chain

(a common carrier or State-licensed stamping agent) retains possession, the cigarettes become

contraband the moment they are transferred to any other person outside of the regulatory scheme.

Thus, when an entity defined under § 2341(2)(A) (a permitted manufacturer) deals in unstamped

cigarettes with a “§ 2341(2)(B) entity” (a common or contract carrier) or a “§ 2341(2)(C) entity”

(a person licensed to account for and pay cigarette taxes) the cigarettes do not become

contraband upon transfer because they remain “in the possession of” a common carrier or

stamping agent. But when a manufacturer sells, ships, transports, or distributes unstamped

cigarettes to anyone else, the cigarettes become contraband as soon as they are possessed by such

non-exempt person. Accordingly, the manufacturer has sold, shipped, transported, or distributed


14

contraband cigarettes, violating the CCTA. See 18 U.S.C. § 2342(a). Defendants’ sale,

shipment, transport and distribution of unstamped cigarettes to the Watkins Sellers is therefore

not within the CCTA exemption created by 18 U.S.C. § 2341(2)(A) because the Watkins Sellers

are not permitted manufacturers, common or contract carriers or licensed tax-stamping agents.

Although the cigarettes may not have been contraband as long as they remained in Defendants’

hands, they became contraband the moment they reached the Watkins Sellers, and Defendants

were the ones who sold and distributed those contraband cigarettes.6

The § 2341(2)(A)-(C) exception is broad enough to permit manufacturers to perform their

role of supplying cigarettes to those who are “licensed or otherwise authorized by the State . . .

to account for and pay cigarette taxes” (i.e. stamping agents), but not so broad as to exempt

manufacturers from liability for all transactions with unstamped cigarettes by permitting them to

deal with anyone they wish. Thus, a manufacturer who transfers unstamped cigarettes to an

unlicensed person has sold, shipped, transported, or distributed contraband cigarettes, because

the cigarettes become contraband upon leaving the manufacturer’s hands. Any other

interpretation would turn an exception clearly meant to accommodate the state stamping process

(in which manufacturers must be able to transport unstamped cigarettes to the State-licensed

stamping agents of nearly 50 different states) into a total immunity from the CCTA. The statute

is not applied in such a manner and both manufacturers and stamping agents are subject to

6Moreover, King Mountain’s purported status as a permitted manufacturer is not a fact which may be established on this motion. The permit is dated March 18, 2008 and may well have been suspended or revoked given the activities alleged in the recently filed complaint by the United States alleging that King Mountain executed a fraudulent scheme beginning in September 2008 involving the use of falsified invoices to avoid paying federal taxes and contributing to the tobacco Master Settlement Agreement (“MSA”) fund. See 26 U.S.C. § 5713(b) (conditions for suspension or revocation of IRS tobacco manufacturer permits); Complaint, United States v. $339,574.45 in U.S. Currency, 11-cv-00090-SA-JAD, PACER No. 1 (N.D. Miss. April 15, 2011)(attached as Exhibit 1 to the June 8, 2011 Declaration of Aaron M. Bloom (“Bloom Decl.”)).


15

liability for CCTA violations when they ship to unlicensed entities. See e.g. Complaint, United

States v. $339,574.45 in U.S. Currency, 11-cv-00090-SA-JAD, PACER No. 1 (N.D. Miss. April

15, 2011) (attached as Exhibit 1 to the Bloom Decl.) (seeking forfeiture of proceeds from King

Mountain’s CCTA violations); Indictment, United States v. Kaid, 99-cr-131, (W.D.N.Y. Sept.

22, 2009) (attached as Exhibit 2 to the Bloom Decl.) (indicting, inter alia, A.D. Bedell Company,

Inc., a New York licensed stamping agent, for CCTA violations and RICO conspiracy predicated

on CCTA violations for sales to unlicensed entities); United States v. Kaid, 99-cr-131, PACER

No. 604 (W.D.N.Y. Oct. 29, 2003) (entry noting Bedell’s guilty plea).

Defendants’ contention that that the City interprets the CCTA as imposing liability based

on “projected or speculative future possession by a non-exempted person,” Def. Mem. 14, does

not fit with the facts of the regulated cigarette trade. Nor does such operation of the statute

“reach back in time and render non-contraband cigarettes possessed by an exempted person

‘contraband’ for purposes of the act.” Id. Defendants’ own language demonstrates the error of

their argument. Possession by “a non-exempted person” is never “projected” nor “speculative” –

manufacturers know to whom they ship cigarettes and are obligated to know whether those

persons are licensed stamping agents. See 20 N.Y.C.R.R. § 74.3 (licensed stamping agents are

the only point of entry for unstamped cigarettes into New York State); United States v.

Elshenawy, 801 F.2d 856, 859 (6th Cir. 1986) (those who deal in large quantities of cigarettes

presumed to be aware of relevant regulations); United States v. Baker, 63 F.3d 1478, 1492 (9th

Cir. 1995) (same). In this case, possession by “a non-exempted person” is definite and known,

caused intentionally and instantaneously by Defendants’ sale and transport to the Watkins

Sellers, who Defendants knew were not licensed stamping agents. Am. Compl. ¶ 20. No “reach

back in time” is necessary – when Defendants sell or transport cigarettes to the Watkins Sellers,


16

the cigarettes are contraband the moment they are sold to an unlicensed person, and Defendants

know the status of their buyers.

Defendants sold, shipped, transported, and distributed unstamped cigarettes to the

Watkins Sellers, who are not New York State licensed stamping agents or otherwise within the

exceptions of 18 U.S.C. § 2341(2). The cigarettes became contraband in the hands of the

Watkins Sellers; King Mountain therefore violated the CCTA, even assuming arguendo that it

has a valid Chapter 52 permit, because it engaged in prohibited transactions – sale, shipment,

transport, and distribution to the Watkins Sellers – involving those contraband cigarettes.

POINT II

THERE IS NO BASIS TO DISMISS THE PACT ACT CLAIM

A. The City Has Standing Under the PACT Act.

Defendants argue that the City lacks standing to sue under the PACT Act because the

City “lacks authority” to tax the cigarettes King Mountain sold and transported to the Watkins

Sellers. Def. Mem. at 16-17. The City’s “authority” to tax the cigarettes has been established

above; in any case, such authority is irrelevant to the City’s PACT Act standing.7

The PACT Act provides:

(c) State, local, and tribal enforcement. (1) In general.

(A) Standing. A State, through its attorney general, or a local government . . . that levies a tax subject to Section 2A(a)(3) [15 U.S.C. § 376a(a)(3)], through its chief law enforcement officer, may bring an action in a United States district court to prevent and restrain violations of this Act by any person or to obtain any other appropriate relief from any person for violations of this Act, including civil penalties, money damages, and injunctive or other equitable relief.

7 King Mountain argues that the PACT Act does not grant the City additional taxing authority. Def. Mem. at 15-16. The City did not claim that it does and hence need not address the argument.


17

15 U.S.C. § 378 (emphasis added). The sole requirement “to obtain . . . relief from any person

for violations of the [PACT] Act” is that the local government “lev[y] a tax subject to [15 U.S.C.

§ 376a(a)(3)].” That section, in turn, refers to “laws generally applicable to sales of cigarettes,”

including laws imposing taxes. 15 U.S.C. § 376a(a)(3). Section 11-1302 of the City’s

Administrative Code imposes a cigarette tax and plainly satisfies the statutory requirement. The

City accordingly has standing to sue Defendants under the PACT Act.

Defendants argue that the PACT Act “only requires compliance with the laws of the

delivery destination.” Def. Mem. at 16. Even assuming this is a correct interpretation of the Act,

it is irrelevant to the City’s standing to sue. The complaint alleges that Defendants do not

comply with the laws of the delivery destination – New York State – and the plain language of

the PACT Act does not limit a local government to actions that involve violations of its tax laws

alone or deliveries into its territory alone. The PACT Act authorizes local governments to bring

actions against “any person” over “violations of this Act.” 15 U.S.C. § 378(c)(1)(A) (emphasis

added). Any conceivable doubt on this point is dispelled by the PACT Act’s grant of standing to

tobacco manufacturers – who self-evidently lack their own tax laws or territory – to sue “any

person” (besides governments) “for violations of this Act.” 15 U.S.C. § 378(d). Tobacco

manufacturers are not limited to suits over violations in their “own” territory or for non-payment

of their “own” taxes, and neither is the City.

B. The City Has Properly Alleged that the Watkins Sellers Are Not “Lawfully Operating” Within the Meaning of the PACT Act.

Defendants ignore the Amended Complaint in asserting: “The City’s conclusory

allegation that the Watkins Sellers were not lawfully operating is insufficient.…” Def. Mem. at

17. Far from making a conclusory allegation, the Amended Complaint alleges:

[T]he Watkins Sellers have been “consumers” within the meaning of the PACT Act because they are persons who purchased


18

cigarettes and, because they are not licensed or registered in any manner by New York State to deal in tobacco products and have been found to have been selling cigarettes in violation of the CCTA, were not “lawfully-operating cigarette manufacturers, distributors, wholesalers or retailers.”

Am Compl. ¶ 35 (emphasis added) (citation omitted). The allegation plainly is not “conclusory”:

it uses the word “because,” followed by the statements of fact that the Watkins Sellers “were not

licensed or registered . . . by New York State” and “have been selling cigarettes in violation of

the CCTA.” These facts mean that the Watkins Sellers were not “lawfully operating.” See N.Y.

Tax L. §§ 480, 480-a (imposing licensing and registration requirements on wholesale and retail

cigarette dealers); 20 N.Y.C.R.R. § 71.1. (“[U]nless . . . licensed or specifically provided for, no

person may possess in this State more than 400 cigarettes in unstamped or unlawfully stamped

packages without establishing . . . that such cigarettes are not subject to tax.”); Oneida Nation,

2011 U.S. App. LEXIS 9497 at *6 (“New York … mandates that [state-licensed stamping

agents] be the only entry point for cigarettes into New York’s stream of commerce.”); Golden

Feather, 2009 U.S. Dist. LEXIS 76306 at 25-30 (describing Watkins Sellers’ CCTA violations).8

The allegations of specific facts showing that the Watkins Sellers were not “lawfully

operating” tobacco businesses renders the Watkins Sellers “consumers” within the meaning of

the PACT Act. 15 U.S.C. § 375(4). Defendants’ delivery sales to them constitute violations of

the Act. 15 U.S.C. § 376a(d).

8 Defendants offer no language from the PACT Act from which to infer that “lawfully operating” as used in § 375(4) means that the cigarette buyer only need be “lawfully operating” with respect to the particular cigarettes sued on. See Def. Mem. at 17 (“The City’s claim that the Watkins Sellers are not ‘lawfully operating’ rests on allegations unrelated to the facts in this lawsuit that have no relationship to the subject deliveries.”). In any case, the Watkins Sellers were not licensed or registered at all relevant times, including when Defendants delivered cigarettes to them. Am. Compl. ¶ 35.


19

POINT III

THE AMENDED COMPLAINT STATES A CLAIM FOR RICO CONSPIRACY AGAINST WHEELER

A. Wheeler Is Not Immune from Liability for RICO Conspiracy.9

Defendants argue that Wheeler’s immunity from civil liability under the CCTA also

immunizes him from a RICO conspiracy claim. Def. Mem. at 20.10 The very same argument was

rejected by the Ninth Circuit in United States v. Fiander, 547 F.3d 1036 (9th Cir. 2008),

applying black letter law of conspiracy and of RICO conspiracy in particular. In Fiander,

defendant Roger Fiander, like Wheeler a member of the Yakama tribe, was arrested for

transporting unstamped cigarettes into Washington State and indicted for a RICO conspiracy to

violate the CCTA. Fiander also argued that his immunity from criminal prosecution under the

CCTA (an immunity Fiander possessed by reason of a Yakama treaty) foreclosed prosecution for

RICO conspiracy under 18 U.S.C. § 1962(d). The Ninth Circuit recognized that Fiander could

not be prosecuted under the CCTA, but, relying on Salinas v. United States, 522 U.S. 52 (1997),

flatly rejected Fiander’s argument that any such immunity could foreclose a RICO conspiracy

prosecution: “[A]lthough Fiander may not be prosecuted for a substantive violation of the CCTA

because of his status as a member of the Yakama Nation, he may be prosecuted for a RICO

9 Defendants can hardly blame the City for the “stigma” of a RICO claim (Def. Mem. at 18), in light of the federal search warrant executed at King Mountain’s offices months ago as a prelude to a complaint alleging, inter alia, King Mountain’s participation “in schemes to avoid MSA payments and to avoid the payment of the Federal Tobacco Excise Tax (FET).” United States v. 339,574.45 in U.S. Currency, 11-cv-00090-SA (N.D. Miss April 15, 2011) PACER No. 1, ¶¶ 10-14 (Bloom Decl. Ex. 1); see “Feds raid Yakama tobacco company” Seattle Times, February 17, 2011, available at http://seattletimes.nwsource.com/html/localnews/2014256577_ apwatobaccoraid.html (last visited May 31, 2011).

10 For purposes of this motion only, the City does not dispute Wheeler’s status as an “Indian in Indian Country,” and his consequent immunity from civil CCTA actions by a local government pursuant to 18 U.S.C. § 2346 (b)(1).


20

conspiracy in which the racketeering activity is contraband cigarette trafficking.” Fiander, 547

F.3d at 1042; see id. at 1043 (“[T]he government can prosecute Fiander for RICO conspiracy

even though it cannot prosecute him for the substantive RICO offense of violating the

CCTA . . . .”).

Fiander is no different than this case; Salinas, which compelled the result in Fiander,

controls here as well. In Salinas, the Supreme Court held that liability for RICO conspiracy

attaches to a conspirator who did not commit or agree to commit the substantive offense that is

the object of the conspiracy, so long as the conspirator “knew about and agreed to facilitate the

scheme.” 522 U.S. at 63-66. The Amended Complaint plainly alleges that Wheeler knew about

and agreed to facilitate a scheme to sell unstamped cigarettes in violation of the CCTA. Am.

Compl. ¶¶ 47-60. Just as immunity from criminal prosecution under the CCTA was of no

consequence to a criminal RICO charge in Fiander, 547 F.3d at 1041, so too is Wheeler’s

alleged immunity from a civil CCTA claim irrelevant to his liability for civil RICO conspiracy

here. See Salinas, 522 U.S. at 64 (“A person . . . may be liable for conspiracy even though he

was incapable of committing the substantive offense.”). “[L]egal impossibility affords a

conspirator no defense.” United States v. Trapilo, 130 F.3d 547, 552 n.9 (2d Cir. 1997). “As the

Supreme Court made clear in Salinas, a defendant may properly be found guilty of RICO

conspiracy, but not guilty of committing a substantive RICO violation.” State Farm Mut. Auto.

Ins. Co. v. CPT Med. Svces., 375 F. Supp. 2d 141, 151 (E.D.N.Y. 2005).

Notably, the Watkins Sellers – Wheeler’s co-conspirators – are not immune from CCTA

liability. See City of New York v. Golden Feather, 2009 U.S. Dist. LEXIS 20953, at *38

(E.D.N.Y. Mar. 16, 2009) (Poospatuck Reservation retailers are not “Indians in Indian country”


21

and may be liable under CCTA); Fiander, 547 F.3d at 1041 (noting that Fiander conspired with

non-Yakama individuals who could be prosecuted under CCTA).

As was true in Fiander, “[u]nder Salinas, [Wheeler] did not need to commit the

substantive offense of contraband cigarette trafficking in order to be guilty of the RICO

conspiracy. Instead, it is sufficient that he “knew about and agreed to facilitate the scheme.” 547

F.3d at 1041. The complaint clearly alleges that Wheeler did. The City’s claim is proper.11

B. The City Has Properly Alleged RICO Injury.

Defendants again argue that the City’s supposed lack of “authority” to tax the cigarettes

Defendants sold and transported through the City to the Watkins Sellers forecloses an injury to

City property “by reason” of the RICO conspiracy. Def. Mem. at 20-21. But, as established

above, the City had authority to, and did, tax those cigarettes transported through the City.

Supra, pp. 9-12. The evasion of those taxes constitutes injury to the City’s property, sufficient to

state a RICO claim. See Pasquantino v. United States, 544 U.S. 349, 355-56 (2005) (evasion of

taxes constitutes injury to government’s property).

C. The RICO Predicate Offenses (CCTA Violations) Directly Caused the City’s Injury.

Defendants’ causation argument – that the City’s injury could not be caused by the

conspiracy because the City had no authority to tax the cigarettes Defendants sold and

transported to the Watkins Sellers (Def. Mem. at 21-23) – is no different from the argument on

injury and was rebutted above. Supra, pp. 9-12. Defendants’ assertion that injury to the City

would require transport of the cigarettes back to the City, and their sale there, (Def. Mem. at 22)

simply ignores the Amended Complaint, which alleges that the cigarettes became subject to an 11 Defendants randomly pluck phrases from Hemi Group, LLC v. City of New York, 130 S. Ct. 983, 994 (2010). Def. Mem. at 19. Hemi Group addressed neither RICO conspiracy nor the CCTA and is wholly irrelevant to Defendants’ assertion that Wheeler’s CCTA immunity also serves as immunity for RICO conspiracy.


22

applicable City tax when transported through the City. Am. Compl. ¶¶ 22, 24, 27. As shown

above, supra, pp. 9-12, a sale in the City is unnecessary for there to be an “applicable tax”;

transport suffices.

Defendants’ reference to Hemi Group, LLC v. City of New York, 130 S. Ct. 983 (2010)

(Def. Mem. at 22) is misplaced. In that case, the Court plurality found the City’s injury from the

predicate acts (mail or wire fraud) to be too indirect for RICO’s “direct relationship

requirement,” because the conduct of additional, non-defendant actors was necessary to complete

the City’s injury, requiring the Court to “move well beyond the first step.” See 130 S. Ct. at 989

(failure of the online cigarette seller to file a report with the State prevented the State from

passing the information on to the City, which in turn prevented the City from identifying City

purchasers and attempting to collect tax from them). In this case, by contrast, the City’s RICO

injury is from a CCTA violation that requires only one “step” – City tax liability attached (and

was not paid) when Defendants transported unstamped cigarettes through the City. Am. Compl. ¶

84. No other actors or steps were required to cause the tax loss from the RICO predicate offense

– trafficking in unstamped cigarettes in the City – which was therefore the “but for” and

“proximate” cause of the City’s injury. Hemi Group, 130 S. Ct. at 989.

The “directness” of injury in this case is supported by analogy to restitution awards under

the Mandatory Victims Restitution Act (“MVRA”). Restitution is required when a person is

“directly and proximately harmed” by an eligible offense. 18 U.S.C. § 3663A(a)(1),(2). Courts

have required cigarette traffickers to make restitution to governments for the tax lost from CCTA

violations. See United States v. Wen Hui Huang, 2000 U.S. App. LEXIS 9973 (2d Cir. 2000)

(defendant convicted of conspiracy to sell contraband cigarettes was properly ordered to pay

restitution for the tax loss associated with the sales); United States v. Conway, 323 Fed Appx.


23

517 (9th Cir. Apr. 16, 2009) (upholding district court’s award of restitution under the MVRA for

Washington State’s tax losses resulting from defendants’ contraband cigarette sales); United

States v. Morrison, 685 F. Supp. 2d 339, 350 (E.D.N.Y. 2010) (State of New York may recover

for its tax loss attributable to CCTA violations).

D. The City Has Sufficiently Alleged a RICO Conspiracy.

Without even specifying the required elements of a RICO conspiracy claim or addressing

the facts set forth in the Amended Complaint, Defendants assert that the City has not pleaded

sufficient facts. Def. Mem. at 23. The RICO conspiracy statute states no more than: “It shall be

unlawful for any person to conspire to violate any of the provisions of subsection (a), (b), or (c)

of [18 U.S.C. § 1962].” 18 U.S.C. § 1962(d). A defendant violates § 1962(d) by agreeing with

another to facilitate a scheme to commit RICO predicate acts, (i.e., to violate the substantive

RICO provisions), followed by injury to the plaintiff caused by the commission of at least one

such act by one of the conspirators. See Salinas, 522 U.S. at 66; Terminate Control Corp. v.

Horowitz, 28 F.3d 1335, 1346 n.4. (2d Cir. 1994). To recover for a RICO conspiracy, a plaintiff

must plead and prove (i) a knowing agreement to commit or to facilitate a scheme to commit

predicate acts, and (ii) an overt, predicate act by a conspirator in furtherance of the conspiracy,

(iii) causing (iv) injury to the plaintiff’s business or property. See State Farm, 375 F. Supp. 2d at

150; Salinas, 522 U.S. at 63-66. “Therefore, if ‘conspirators have a plan which calls for some

conspirators to perpetrate the crime and others to provide support, the supporters are as guilty as

the perpetrators.’” State Farm, 375 F. Supp. 2d at 151 (quoting Salinas, 522 U.S. at 63).

The facts alleged in the Amended Complaint satisfy these elements. The predicate acts

alleged are CCTA violations: the purchase, sale and transport of contraband cigarettes.

Wheeler’s agreement knowingly to commit or to facilitate a scheme to commit such acts is

supported by allegations that (i) Wheeler controlled King Mountain, Am. Compl. ¶ 51; (ii)


24

Defendants repeatedly sold and transported thousands of cartons of unstamped cigarettes to the

Watkins Sellers, taking them through the City; Am. Compl. ¶¶ 21-24; and (iii) Defendants knew

that the Watkins Sellers were not stamping agents licensed by New York State or City. Am.

Compl. ¶ 20. The sales transactions themselves, detailed in the Amended Complaint by date,

order amount and method of payment, constitute the required agreement – agreements to sell,

purchase, transport, and receive unstamped cigarettes. The cigarettes were intentionally without

the stamps required by City and State law; hence, the sales transactions were agreements to

commit and facilitate CCTA violations, i.e. predicate acts. 18 U.S.C. §§ 2341, 2342; see supra,

pp. 3-15; see also Hecht v. Commerce Clearing House, Inc., 897 F.2d 21, 25 (2d Cir. 1990)

(RICO conspiracy complaint must allege facts “implying [an] agreement” to commit predicate

acts); United States v. Rubin, 844 F.2d 979, 984 (2d Cir. 1988) (“[P]roof of an agreement ‘does

not require evidence of a formal or express agreement; it is enough that the parties have a tacit

understanding to carry out the prohibited conduct.’”) (quoting United States v. Wardy, 777 F.2d

101, 107 (2d Cir. 1985) (jury can infer an agreement from circumstantial evidence)). The

express sales agreements alleged here thus go beyond the pleading requirements.

Defendants’ conclusory assertion that the agreements were “simply legal sales from a

permitted tobacco products manufacturer to reservation retailers” (Def. Mem. at 23) has already

been thoroughly rebutted. See supra, pp. 3-15. Moreover, because King Mountain and Wheeler

deal regularly in large quantities of cigarettes in New York State and City (Am. Compl. ¶¶ 21-

24), Wheeler cannot claim that his “knowing” actions are not alleged. Wheeler is presumed to

be aware of the pertinent cigarette regulations. See Elshenawy, 801 F.2d at 859 (“In regard to

very large quantities of cigarettes, ‘the probability of regulation is so great that anyone who is

aware that he is in possession of them or dealing with them must be presumed to be aware of the


25

regulation.’”) (citation omitted); Baker, 63 F.3d at 1492 (“[K]nowledge of cigarette taxing

requirements can be presumed among those who deal in cigarettes in quantities exceeding 60,000

[300 cartons].”). Wheeler thus knowingly agreed to a scheme to commit CCTA violations.

Wheeler’s knowledge of illegality is bolstered by factual allegations that the conspirators

concealed their transactions. Under the Jenkins Act, even prior to amendment by the PACT Act,

Defendants were required by law to report their sales to the Watkins Sellers to the State of New

York. 15 U.S.C. § 376. Instead, Defendants concealed the sales. Am. Compl. ¶ 38. See

Fiander, 547 F.3d at 1041-1042 (allegation that Fiander concealed the cigarettes); United States

v. Tusaneza, 116 Fed. Appx. 305, 306 (2d Cir. 2004) (defendant’s knowledge that a transaction

was illegal inferred from her role in facilitating the concealing aspects of the transaction).

The sufficiency of the Amended Complaint’s allegations is confirmed by comparison

with the allegations in Fiander, which sustained a RICO conspiracy conviction: “Fiander

collected payment from tribal retailers in Washington, took the payment to Mahoney in Idaho,

received the cigarettes, concealed them in his vehicle for delivery to Washington, and collected

delivery fees.” 547 F.3d at 1041-42.12 The Amended Complaint alleges as much.

CONCLUSION

For all of the reasons set forth above, the Defendants’ motion to dismiss the Amended

Complaint pursuant to Fed. R. Civ. P. 12 (b) (6) should be denied in its entirety.

12 Fiander admitted that he had raised his normal delivery fees to compensate for the risk of seizure of his vehicle. Fiander, 547 F.3d at 1042. This apparently provides the basis for the otherwise cryptic observation by Defendants that the Amended Complaint does not allege that King Mountain received “any premium payment as a result of these transactions.” Def. Mem. at 23. Nothing in Fiander or any other RICO conspiracy case imposes such a requirement. Whether a participant in a conspiracy receives a “premium payment” might be relevant to knowledge of illegality, an element adequately established by the Amended Complaint. See supra at 24-25.


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