In MLSMK Investment Co. v. JP Morgan Chase & Co., No. 10-3040-cv, 2011 WL 2640579 (2d Cir. July 7, 2011), the United States Court of Appeals for the Second Circuit affirmed the dismissal of claims brought under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1962 and 1964, seeking to hold defendants liable for allegedly conspiring with Bernard L. Madoff ("Madoff") to perpetrate his now-infamous Ponzi scheme. The Court held that plaintiff's RICO claims were precluded by Section 107 of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), codified at 18 U.S.C. § 1964(c), which bars civil RICO claims based upon predicate acts of securities fraud. In so holding, the Court resolved in the affirmative the unsettled question whether the Reform Act bars civil RICO claims predicated on acts of securities fraud, even where a plaintiff cannot otherwise pursue a securities fraud action against the defendant.
Plaintiff MLSMK Investment Company ("MLSMK"), a
trading partner for Madoff's market-making business, lost its
$12.8 million investment when Madoff was arrested and his assets
seized on December 11, 2008. Thereafter, MLSMK brought suit in the
United
States District Court for the Southern District of New York
asserting several state law claims against defendants JP Morgan
Chase & Co. and JP Morgan Chase Bank, N.A. MLSMK also brought a
federal RICO claim alleging that the defendants had conspired with
Madoff to defraud his victims. MLSMK contended that, prior to
Madoff's arrest, defendants had undertaken a due diligence
investigation into Madoff's business activities and learned
that his investment business was a fraud, but nonetheless continued
to trade with and provide business services to him. MLSMK thus
asserted that the defendants were liable for conspiracy to violate
RICO by aiding and abetting Madoff's fraudulent
enterprise.
The district court dismissed MLSMK's complaint in its entirety.
On appeal, the Second Circuit affirmed by summary order the
district court's dismissal of MLSMK's state law claims.
See MLSMK Investment Co. v. JP Morgan Chase
& Co., No. 10-3040-cv, 2011 WL 2176152 (2d Cir.
June 6, 2011). The Second Circuit also affirmed the district
court's dismissal of MLSMK's RICO claim, concluding that
the claim was barred by Section 107 of the Reform Act.
Section 107 of the Reform Act, often referred to as the "RICO
Amendment," provides 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 [18 U.S.C. §]
1962." Prior to its enactment, "fraud in the sale of
securities" was a predicate offense for purposes of both
criminal and civil RICO actions. As a consequence, plaintiffs
frequently asserted RICO claims in tandem with securities fraud
claims, enticed by RICO's promise of treble damages plus
attorneys' fees in the event of a successful suit.
Since the RICO Amendment's enactment in 1995, district courts
in the Second Circuit have split on the issue of its scope, with
some courts holding that the RICO Amendment bars all RICO
claims "that would have been actionable as fraud in the
purchase of securities," while others concluding that the RICO
Amendment bars RICO claims only in cases where the plaintiff could
have otherwise brought a securities fraud claim against the
defendant. Here, the Second Circuit adopted the former position,
reasoning that the statute's plain meaning and legislative
history compelled this result. As a result, the Second Circuit
affirmed the district court's dismissal of MLSMK's RICO
claims, which were predicated on alleged acts of securities fraud,
notwithstanding that MLSMK could not assert a private aiding and
abetting securities fraud claim against the defendants.
This decision of first impression in the Second Circuit clarifies
the scope of the RICO Amendment's bar and establishes that
plaintiffs unable to bring a private securities fraud action
against a defendant cannot turn to RICO to assert claims premised
upon predicate acts of securities fraud.
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