State Cigarette Tax Evasion RICO Lawsuit Gets Green Light From Manhattan US Judge
In its second amended complaint the city claims the North Carolina wholesale distributor was fully aware cigarettes he was shipping were headed to NYC, making a profit off dodging New York taxes.
May 31, 2019 at 04:02 PM
4 minute read
A Manhattan federal judge on Friday allowed civil racketeering and other charges brought by New York City against a group of transporters and distributors of cigarettes from North Carolina to New York.
The decision was a victory for attorneys from the New York City Law Department who gained success at the third time of asking for their second amended complaint, which accuses the cigarette distributors of evading taxes aimed at lowering tobacco consumption and mitigating the costs of disease caused by smoking.
Civil charges were brought under federal statutes including RICO—or Racketeering-Influenced and Corrupt Organizations.
In a statement provided to the New York Law Journal, New York City Law Department Deputy Chief Eric Proshansky, who leads the city's efforts in the suit, hailed the district court's decision.
“This important decision permits the City to seek damages from out of state cigarette suppliers who knowingly partner with New York-based cigarette bootleggers who evade taxes specifically enacted to curb the rate of smoking,” Proshanksy said.
On two other occasions since the suit was first brought in January 2018, U.S. District Judge Paul Engelmayer of the Southern District of New York found that the city's complaints against a North Carolina wholesale cigarette distributor, Amjed Hatu, failed to pass muster with the court.
In May 2018, Engelmayer directed the city to file an amended complaint or opposition order, after Hatu, his company and another defendant filed motions to dismiss the initial complaint. A few weeks later, the city complied, filing an amended complaint.
In June, Hatu filed another motion to dismiss, while the remaining non-movant defenders filed answers to the amended complaint. In September, Engelmayer dismissed the city's claims, finding the pleadings failed to sufficiently establish facts that the participants in the alleged scheme knew that what was being shipped from North Carolina was ending up in New York to be distributed illegally. Similarly, under the RICO claims, New York's long-arm statute was unsupported by the inferences drawn from the allegations.
All this changed Friday, when Engelmayer denied Hatu's motion to dismiss the city's second amended complaint, filed in January 2019.
The critical factor for the district court was the inclusion of affidavits of two other alleged co-conspirators, in which they describe numerous conversations with Hatu that provide the city with evidence to overcome Engelmayer's previous concerns.
These conversations, according to the affidavits, included discussions the parties had about the alleged scheme to transport cigarettes taxed in North Carolina at a fraction of the rate of New York's taxes, to specifically be sold for profit based on the margin of difference between the two states' tax rates. The affidavits also include claims that Hatu altered invoices to conceal the “suspiciously high volume of cigarettes he sold” to the middlemen, the district court said.
“The implication is clear, and the circumstantial inference is strong, that Hatu appreciated that the higher New York taxes would not be paid,” Engelmayer noted in his opinion. “These allegations alone provide a strong basis from which to infer that Hatu was aware of the scheme to sell under-taxed cigarettes in New York, and that he knowingly participated in that scheme anticipating financial gain from the sales there of under-taxed cigarettes.”
These findings supported the district court's conclusion that personal jurisdiction was appropriate in the case, and that the RICO claims, as well as federal claims against the defendants under the Contraband Cigarette Trafficking Act and Prevent All Cigarette Trafficking Act, as well as the state claims, to move forward.
Engelmayer set a June 11 deadline for the parties to submit case management proposals for discovery, which he hoped to see end by September.
Bleakley Platt & Schmidt partner William Murphy represents Hatu in the suit. He declined to comment on the district court's decision.
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