Securities Fraud

RICO’s civil remedies provision, section 1964(c), states (emphasis added):

Any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefore in any appropriate United States district court and shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney’s fee, except that no person may rely upon any conduct that would have been actionable as fraud in the purchase or sale of securities to establish a violation of section 1962.  The exception contained in the preceding sentence does not apply to an action against any person that is criminally convicted in connection with the fraud . . . .

The emphasized language of section 1964(c) (above) was added by Congress in 1995 when it passed the Private Securities Litigation Reform Act (“PSLRA”) and made it far more difficult for a civil plaintiff to predicate a RICO claim on securities fraud.  Since 1995, a civil RICO claim cannot be predicated on securities fraud unless the defendant has already been criminal convicted of securities fraud.  Powers v. Wells Fargo Bank NA, 439 F.3d 1043, 1046 (9th Cir. 2006)(section “1964(c) by its terms only permits RICO claims against a defendant convicted in connection with the securities fraud. Section 1964(c) does not permit RICO claims against all defendants involved in a fraud merely because one or more of them is convicted”); see also Swartz v. KPMG LLP, 476 F.3d 756, 761 (9th Cir. 2007) (the plaintiff’s civil RICO claims were barred where the defendant had not be convicted of securities fraud and where the sale of stock was the lynchpin of defendants’ allegedly fraudulent scheme); Calderon Serra v. Banco Santander Puerto Rico, 747 F.3d 1, 7 (1st Cir. 2014) (the PSLRA barred the plaintiffs’s civil RICO claim where “the defendants fraudulently misrepresented or failed to disclose the Regulation U margin lending restrictions as part of a scheme to induce plaintiffs to purchase more securities than they otherwise would have, such fraud [was] … ‘in connection with’ the purchase or sale of securities within the meaning of Rule 10b–5”). Since 1995, civil RICO claims can rarely be predicated on securities fraud.

In an effort to avoid the bar of the PSLRA, civil plaintiffs have tried to plead civil RICO claims against aiders and abetters of securities fraud, because the securities laws do not provide a private cause of action based upon aiding and abetting securities fraud.  In MLSMK Inv. Co. v. JP Morgan Chase & Co., 651 F.3d 268 (2d Cir. 2011), the plaintiff sought to hold the defendant liable for aiding and abetting securities fraud.  Although aiding and abetting securities fraud may be prosecuted by the government, there is not a private right of action for aiding and abetting securities fraud. Thus, the Second Circuit considered whether the bar of the PSLRA “applie[d] to claims based on conduct that could be actionable under the securities laws even when the particular plaintiff . . . cannot bring a cause of action under the securities laws.”  Id. at 274.  The court held that the claim was barred:

Crucially, the plain language of the statute does not require that the same plaintiff who sues under RICO must be the one who can sue under securities laws; its wording … does not make such a connection. (Quotation marks omitted.)

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. . . [I]t is clear from the Senate Report that Congress was aware that the [PSLRA] would place some claims—such as those for aiding and abetting securities laws violations—outside the reach of private civil RICO suits. But the Senate appears to have been satisfied that the securities laws “generally provide adequate remedies for those injured by securities fraud.” . . .

        For the foregoing reasons, we conclude that the PSLRA’s RICO Amendment, 18 U.S.C. § 1964(c), bars a plaintiff from asserting a civil RICO claim premised upon predicate acts of securities fraud, including mail or wire fraud, even where the plaintiff could not bring a private securities law claim against the same defendant.

Id. at 278-280 (citing agreement with (among others) Bixler v. Foster, 596 F.3d 751, 759–60 (10th Cir.2010) and Howard v. Am. Online Inc., 208 F.3d 741, 749 (9th Cir.) cert. denied, 531 U.S. 828 (2000)).

If the purchase or sale of securities is only incidental to the fraud, then the PSLRA does not bar the civil RICO claim. See Menzies v. Seyfarth Shaw, LLP, 943 F.3d 328, 336 (7th Cir. 2019), cert. denied, 140 S. Ct. 2674 (2020) (holding that the PSLRA did not bar the plaintiff’s RICO claim where “every aspect of the stock sale was entirely lawful,” and the plaintiff “received every last dollar he expected from the sale”; the plaintiff was damaged when the proceeds of the sale did not receive the tax treatment that the defendants had represented); D’Addario v. D’Addario, 75 F.4th 86, 93 (2d Cir. 2023) (holding that “for a claim to be barred, the fraud must be ‘in the purchase or sale of securities,’ which means that the actual purchase or sale of securities was fraudulent; it is not enough for the securities to be an incidental feature of an overall scheme”).

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