MLSMK Investment Company v. JP Morgan Chase & Co., No. 10-3040 (2d Cir. 2011)
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This case arose from the infamous Ponzi scheme perpetrated by Bernard Madoff. Between October and December 2008, Plaintiff MLSMK Investment Company invested $12.8 million with Madoff's investment company. Defendants JP Morgan Chase & Co. (JPMC) and JP Morgan Chase Bank (Chase) were trading partners in Madoff's legitimate market-making business and the bank with which Madoff maintained his accounts. MLSMK lost its money when Madoff was arrested and his assets seized. MLSMK subsequently filed suit, alleging that Defendants had conspired with Madoff to "fleece" his victims in violation of federal racketeering laws. Furthermore, MLSMK alleged that Defendants knew of Madoff's fraudulent scheme, and "eagerly" continued to receive the substantial fees derived from Madoff's market-making and banking activities. The district court dismissed MLSMK's petition in its entirety, concluding that the complaint did not adequately plead any of the claims purportedly contained therein. The Second Circuit previously upheld the district court's decision to dismiss MLSMK's petition on its state-law claims, but the federal racketeering issue was one of first impression for the Court. Upon review of the submitted briefs and the applicable legal authority, the Court concluded that the racketeering claim must also be dismissed because it was barred by a section of the Private Securities Litigation Reform Act (PSLRA). Accordingly, the court affirmed that portion of the district court's judgment pertaining to federal law.
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10-3040-cv MLSMK Investment Co. v. JP Morgan Chase & Co. 1 UNITED STATES COURT OF APPEALS 2 FOR THE SECOND CIRCUIT 3 August Term, 2010 4 5 (Argued: May 25, 2011 Final Submission: Decided: July 7, 2011) 6 Docket No. 10-3040-cv 7 June 10, 2011 ------------------------------------- 8 MLSMK INVESTMENT COMPANY, 9 Plaintiff-Appellant, 10 - v - 11 JP MORGAN CHASE & CO., JP MORGAN CHASE BANK, NA, 12 Defendants-Appellees. 13 ------------------------------------- 14 Before: McLAUGHLIN, POOLER, and SACK, Circuit Judges. 15 Appeal from a judgment of the United States District 16 Court for the Southern District of New York (Barbara S. Jones, 17 Judge) dismissing the plaintiff's complaint in its entirety 18 pursuant to Rule 12(b)(6) of the Federal Rules of Civil 19 Procedure. 20 dismissal of the plaintiff's New York state-law claims. 21 not, however, resolve the plaintiff's appeal from the dismissal 22 of its remaining, federal claim that the defendants had conspired 23 with Bernard L. Madoff in violation of the Racketeer Influenced 24 and Corrupt Organizations Act, 18 U.S.C. §§ 1962(d) and 1964(c), 25 thereby injuring the plaintiff. 26 heretofore unresolved claim is precluded by section 107 of the By summary order dated June 6, 2011, we affirmed the We did We now conclude that the 1 Private Securities Litigation Reform Act, 18 U.S.C. § 1964(c). 2 We therefore affirm the district court's dismissal of that claim. 3 AFFIRMED. 4 5 6 7 HOWARD KLEINHENDLER, Wachtel & Masyr, LLP (Julian D. Schreibman, Sara G. Spiegelman, of counsel), New York, NY, for Plaintiff-Appellant. 8 9 10 11 PATRICIA M. HYNES, Allen & Overy LLP (Andrew Rhys Davies, Laura R. Hall, of counsel), New York, NY, for DefendantsAppellees. 12 SACK, Circuit Judge: 13 This case arises out of the massive and now infamous 14 Ponzi scheme1 perpetrated by Bernard L. Madoff, which culminated 15 abruptly with his arrest in December 2008 but whose aftershocks 16 continue. 17 Between October and December 2008, the plaintiff, MLSMK 18 Investment Company ("MLSMK"), invested $12.8 million with 19 Madoff's investment company, Bernard L. Madoff Investment 20 Securities ("BMIS"). 21 ("JPMC") and JP Morgan Chase Bank, N.A. ("Chase Bank"), were, 22 respectively, a trading partner for Madoff's apparently 23 legitimate market-making business and the bank with which Madoff 24 maintained the account for BMIS. The defendants, JP Morgan Chase & Co. MLSMK lost its $12.8 million 1 A "Ponzi scheme" is one "in which earlier investors' returns are generated by the influx of fresh capital from unwitting newcomers rather than through legitimate investment activity." SEC v. Credit Bancorp, Ltd., 290 F.3d 80, 89 (2d Cir. 2002) (internal quotation marks omitted). For a description of the operations of the eponymous Charles Ponzi himself, see Cunningham v. Brown, 265 U.S. 1, 7-9 (1924). 2 1 investment when, on December 11, 2008, Madoff was arrested and 2 his assets seized. 3 MLSMK subsequently filed this lawsuit in the United 4 States District Court for the Southern District of New York 5 alleging several New York state-law claims against the 6 defendants. 7 defendants had conspired with Madoff to "fleece" his victims, in 8 violation of the Racketeer Influenced and Corrupt Organizations 9 Act ("RICO"), 18 U.S.C. §§ 1962(d) and 1964(c). It also asserted a federal claim contending that the In that 10 connection, MLSMK alleges that by late summer 2008, the 11 defendants became suspicious of Madoff's business activities and 12 therefore undertook a "due diligence" investigation into Madoff's 13 activities, and that the investigation revealed to the defendants 14 that Madoff's investment business was a thoroughly fraudulent 15 enterprise. 16 to continue receiving the substantial fees they derived from 17 Madoff's market-making and banking activity -- continued to trade 18 with and provide banking services to him. 19 failing to freeze Madoff's accounts, the defendants became liable 20 for conspiracy to violate RICO by aiding and abetting Madoff's 21 breach of fiduciary duty, commercial bad faith, and negligence. 22 Nevertheless, MLSMK asserts, the defendants -- eager MLSMK asserts that by The district court (Barbara S. Jones, Judge) dismissed 23 the plaintiff's complaint in its entirety, concluding that the 24 complaint did not adequately plead any of the claims purportedly 25 contained therein. We have affirmed that court's dismissal of 3 1 the plaintiff's state-law claims for aiding and abetting breach 2 of fiduciary duty, commercial bad faith, and negligence. 3 MLSMK Inv. Co. v. JP Morgan Chase & Co. ("MLSMK I"), No. 10-3040- 4 cv, 2011 WL 2176152, 2011 U.S. App. LEXIS 11425 (2d Cir. June 6, 5 2011) (summary order). 6 brought under RICO, addressing an issue of first impression in 7 this Court, we conclude that the claim also must be dismissed, 8 because it is barred by section 107 of the Private Securities 9 Litigation Reform Act (the "PSLRA"), 18 U.S.C. § 1964(c). See With regard to the remaining claim We 10 therefore affirm that portion of the district court's judgment 11 that remains on appeal. 12 13 BACKGROUND The following statement of facts is drawn from the 14 plaintiff's complaint. As is required on appeal from a 15 successful motion to dismiss in the district court, we accept as 16 true all well-pleaded factual allegations in the complaint and 17 draw all inferences in the plaintiff's favor. 18 Shore Servs., Ltd. v. Fed. Republic of Ger., 615 F.3d 97, 114 (2d 19 Cir. 2010), cert. denied, 131 S. Ct. 1502 (2011); see also Harris 20 v. Mills, 572 F.3d 66, 71 72 (2d Cir. 2009) (reciting the Supreme 21 Court's guidance in Bell Atl. Corp. v. Twombly, 550 U.S. 544 22 (2007), and Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009), that we 23 need not credit legal conclusions couched as factual statements 24 or "threadbare recitals of the elements of a cause of action, 4 See Mortimer Off 1 supported by mere conclusory statements" (alterations and 2 internal quotation marks omitted)). 3 This suit arises out of Bernard L. Madoff's infamous 4 and long-running Ponzi scheme. MLSMK Investment Company is a 5 Florida partnership, all of whose partners are citizens of that 6 state. 7 panoply of investment banking and financial services to 8 businesses and individuals; Chase Bank, a U.S.-based commercial 9 bank, is a wholly owned subsidiary of JPMC. JPMC is a global financial services firm providing a Both are Delaware 10 corporations with their principal places of business in New York 11 City.2 12 The general contours of Bernard L. Madoff's businesses 13 and transgressions are notorious. For about forty years 14 preceding his December 2008 arrest, he owned and operated BMIS, a 15 broker-dealer business based in Manhattan. 16 separate entities providing distinct services: investment- 17 advisory services, market-making services, and proprietary 18 trading. 19 JPMC was a trading partner, is generally thought (and is conceded 20 by MLSMK) to have been legitimate,3 but BMIS's investment- BMIS operated three BMIS's market-making business, of which the defendant 2 The subject matter jurisdiction of the district court was premised on "both federal question and diversity jurisdiction," pursuant to 28 U.S.C. §§ 1331 and 1332(a)(1). J.A. 7 (Compl. ¶ 9). 3 According to the complaint, Bear Stearns was among Madoff's chief market-making trading partners until JPMC purchased the investment house in March 2008. MLSMK asserts that JPMC thereafter kept in place Bear Stearns's system, which "automatically defaulted to BMIS as the market maker." J.A. 9 5 1 advisory business, according to MLSMK, was "entirely fictional" 2 and central to Madoff's criminal enterprise. 3 ¶ 20). 4 clients promising to invest them in the investment-advisory 5 entity through which the clients would earn returns of "up to 10- 6 12% a year." Id. at 11 (Compl. ¶ 22). 7 investments. Instead, he used later-invested money to pay 8 "returns" to other investors and to fund his lavish lifestyle: a 9 classic Ponzi scheme.4 10 J.A. 10 (Compl. Madoff accepted funds from individual and corporate Madoff never made those Having received monthly statements from BMIS for June 11 through September of 2008 indicating a 10 to 12 percent 12 annualized return on previously made investments, MLSMK "caused 13 $12.8 million to be transferred to BMIS by wiring the funds to 14 BMIS'[s] account at Chase Bank in New York" between October 6, 15 2008, and December 5, 2008. 16 Id. at 7 (Compl. ¶ 5). MLSMK alleges that all of the money Madoff received "in 17 the [fraudulent] investment advisory business [was] deposited 18 into accounts he held at [defendant] Chase Bank," id. at 11 19 (Compl. ¶ 24), and that, because the investor's account number 20 was required to be written on the face of the check, Chase Bank (Compl. ¶ 16). The plaintiff contends on information and belief that "[t]his was an unusual accommodation" for which Madoff paid Bear Stearns (and later JPMC) "substantial fees." Id. 4 On December 11, 2008, Madoff was arrested and charged with securities fraud. The SEC froze all of his and BMIS's assets. On March 12, 2009, Madoff pleaded guilty to an eleven-count criminal information and admitted that BMIS's investment-advisory business was a Ponzi scheme and that he had "never executed a single trade on behalf of any client" of that business. J.A. 18 (Compl. ¶¶ 45-46). 6 1 knew that the funds were "not Madoff's or BMIS'[s] but rather 2 belonged to the victim and were being received by BMIS as a 3 fiduciary," id. at 12 (Compl. ¶ 25). 4 many years prior to 2008, BMIS's Chase Bank account "had an 5 average balance of several billion dollars." 6 With the advent of the global financial crisis in September 2008, 7 however, the account balance "often dropped to near zero." 8 MLSMK asserts that, for Id. (Compl. ¶ 27). Id. MLSMK alleges that JPMC, in addition to operating as a 9 market-making trading partner for BMIS, developed a derivative 10 product "specifically for use with Madoff-related investments." 11 Id. at 14 (Compl. ¶ 33). 12 primarily to European investors, guaranteed a return of three 13 times the earnings of a fund offered by the Fairfield Greenwich 14 Group, one of Madoff's so-called "feeder fund[s]." 15 ¶¶ 34-35) (internal quotation marks omitted).5 16 Greenwich Group's fund, known as the "Sentry Fund," had assets 17 totaling $7.5 billion, 95 percent of which was invested with 18 BMIS.6 19 JPMC hedged against the risk assumed by its derivative product by 20 depositing three times the face amount of the notes -- up to $250 JPMC's product, a note it offered Id. at 14-15 (Compl. ¶ 35). Id. (Compl. The Fairfield According to the complaint, 5 MLSMK alleges that the Fairfield Greenwich Group "directed clients to Madoff's investment advisory business . . . and received hefty fees." J.A. 14 (Compl. ¶ 34). For example, "[i]n 2007, Fairfield reported $250 million in revenue, $160 million of which came from Madoff." Id. 6 The Sentry Fund was made up of three smaller funds: the Fairfield Sentry fund, the Greenwich Sentry fund, and the Greenwich Sentry Partners fund. The complaint refers to these funds collectively as the "Sentry Fund." 7 1 million by the summer of 2008 -- directly into the Madoff-linked 2 Sentry Fund. 3 was expected to do, based on Madoff's consistent 10 to 12 percent 4 (bogus) returns -- JPMC's returns "would offset its obligations 5 on the notes." 6 plaintiff, this Madoff-invested fund continued to report gains of 7 five percent "due to the returns Madoff was showing on the money 8 invested with BMIS," even as the financial markets were crumbling 9 in the summer and early fall of 2008. 10 Consequently, if the Sentry Fund did well -- as it Id. at 15 (Compl. ¶ 35). According to the Id. (Compl. ¶ 36). MLSMK alleges that the Sentry Fund's consistently 11 strong returns despite the market mayhem triggered JPMC's 12 suspicion about Madoff's results. 13 therefore "embarked on a due diligence investigation of Madoff's 14 operations."7 15 its investigation, in or about September 2008, [JPMC] quietly 16 liquidated" its investment in the Madoff-related fund, although Id. The investment company The complaint alleges that "[a]s a result of 7 The complaint offers the details of the investigation on information and belief and based upon the plaintiff's understanding of "standard industry practice." J.A. 15 (Compl. ¶ 37). The complaint alleges that JPMC representatives "met with Madoff to discuss his operations" and "had access to" the former Bear Stearns trading desk, and employees within the company who regularly traded with BMIS. Id. (Compl. ¶¶ 37-38). MLSMK asserts that the investigative "team also had access to" and, "[u]pon information and belief, . . . accessed and reviewed . . . Madoff's Chase [Bank] account records," which "showed consistent huge cash positions until the middle of 2008." Id. at 16 (Compl. ¶ 39). MLSMK has provided neither the date nor the time of the alleged meeting with Madoff. Indeed, MLSMK acknowledges that it has no actual knowledge of whether the meeting or diligence investigation did in fact take place, let alone where or when. MLSMK alleges only that it consulted with certain unnamed experts who advised that such investigations were standard practice. 8 1 it remained liable on its own derivative product. 2 (Compl. ¶ 40). 3 concluded that Madoff's reported returns were false and 4 illegitimate and that the only way to protect its own 5 capital . . . was to liquidate the entirety of its Madoff-related 6 investments." 7 [JPMC] knew that Madoff's business was a fraud."). 8 asserts that "in January 2009, [JPMC] publicly admitted that the 9 withdrawal of its investment was based on concerns and questions 10 Id. at 16 By that time, the defendants "had unequivocally Id.; see also id. ("In short, by September 2008, The plaintiff raised during the due diligence investigation of Madoff." 11 Id. Finally, the complaint alleges that, despite the 12 defendants' actual knowledge that Madoff's investments were a 13 sham, and that Madoff was diverting customer funds, JPMC 14 "continued to trade with Madoff's market making business," and 15 Chase Bank "continued to provide Madoff with banking services." 16 Id. at 16 17 (Compl. ¶ 41). 17 defendants continued these activities because Madoff's account 18 "was very lucrative, having provided Chase for years with 19 substantial earnings and fees from the large cash balances in the 20 account." 21 "[r]ather than protect other victims of Madoff's fraud as it had 22 already protected itself, Chase chose not only to protect Madoff, 23 but [also] to partner with him in the fleecing of his victims[] 24 by providing exactly the same range of services, for substantial 25 fees, after learning of his criminal enterprise, as it had before 26 its investigation." According to the plaintiff, the Id. at 17 (Compl. ¶ 41). Id. 9 The plaintiff asserts that 1 On April 23, 2009, MLSMK filed a complaint in the 2 United States District Court for the Southern District of New 3 York asserting five claims against JPMC and Chase Bank. 4 the five causes of action -- aiding and abetting breach of 5 fiduciary duty, commercial bad faith, and two counts of 6 negligence -- were pleaded under New York law. 7 denominated "Count One" in the complaint -- alleged that, from 8 about September 2008 to December 2008, the defendants conspired 9 to violate RICO, 18 U.S.C. §§ 1962(d) and 1964(c),8 by "knowingly Four of The fifth -- 10 and purposely conspir[ing]" with Madoff to further Madoff's 11 racketeering enterprise by "providing Madoff with banking 12 services that were integral to the functioning of the 8 18 U.S.C. § 1964(c) provides, in pertinent part, that "[a]ny person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefor in any appropriate United States district court and shall recover threefold the damages he sustains . . . ." In this case, the plaintiff asserts that the defendants violated section 1962(d), the criminal RICO statute. That section provides that "[i]t shall be unlawful for any person to conspire to violate any of the provisions of subsection (a), (b), or (c) of this section." Those subsections, in turn, outlaw (a) the use of income "derived . . . from a pattern of racketeering activity" to acquire an interest in, establish, or operate an enterprise engaged in or affecting interstate commerce; (b) the acquisition of any interest in or control of such an enterprise "through a pattern of racketeering activity"; [and] (c) the conduct or participation in the conduct of such an enterprise's affairs "through a pattern of racketeering activity." GICC Capital Corp. v. Tech. Fin. Grp., Inc., 67 F.3d 463, 465 (2d Cir. 1995) (quoting 18 U.S.C. § 1962(a)-(c)), cert. denied, 518 U.S. 1017 (1996). 10 1 racketeering enterprise" and by engaging in various RICO 2 "predicate acts," including "numerous interstate wire 3 communications," for which the defendants were "paid substantial 4 fees . . . derived entirely from Madoff's racketeering 5 enterprise." 6 an award of treble damages under RICO for this allegedly illegal 7 activity. 8 9 Id. at 23 (Compl. ¶ 67). MLSMK seeks, inter alia, On June 5, 2009, the defendants moved to dismiss the complaint in its entirety pursuant to Rule 12(b)(6) of the 10 Federal Rules of Civil Procedure, arguing that the plaintiff did 11 not adequately plead the required elements of its claims, and, as 12 to the RICO conspiracy cause of action, that the claim is barred 13 by section 107 of the PSLRA. 14 By order dated July 14, 2010, the district court 15 granted the defendants' motion and dismissed the complaint in its 16 entirety. 17 the court concluded, MLSMK failed adequately to plead the 18 defendants' requisite state of mind. 19 The district court dismissed the RICO claim because, MLSMK now appeals. In a summary order dated June 6, 20 2011, we affirmed the dismissal of MLSMK's four state-law claims 21 for substantially the reasons relied upon by the district court; 22 however, we retained jurisdiction over the RICO claim. 23 I, 2011 WL 2176152, at *2-*3, 2011 U.S. App. LEXIS 11425, at *3- 24 *6. 25 MLSMK's RICO conspiracy claim. 26 See MLSMK This opinion therefore addresses only the viability of DISCUSSION 11 1 "We review de novo the dismissal of a complaint under 2 Rule 12(b)(6), accepting all factual allegations as true and 3 drawing all reasonable inferences in favor of the plaintiff." 4 Litwin v. Blackstone Grp., L.P., 634 F.3d 706, 715 (2d Cir. 2011) 5 (internal quotation marks omitted). 6 Chase Bank and JPMC argued before the district court, 7 and continue to assert on appeal, that MLSMK's RICO conspiracy 8 claim is precluded by section 107 of the PSLRA, 18 U.S.C. 9 § 1964(c), presenting a question of first impression for this 10 Court. The district court judges in our Circuit that have 11 addressed it are divided. 12 avoided the issue altogether by dismissing MLSMK's RICO claim on 13 the ground that the plaintiff had not adequately pled scienter, 14 which is required when a plaintiff alleges a RICO claim based on 15 fraudulent predicate acts. 16 v. Satinwood, Inc., 385 F.3d 159, 178 (2d Cir. 2004) ("[A]ll 17 allegations of fraudulent predicate acts[] are subject to the 18 heightened pleading requirements of Federal Rule of Civil 19 Procedure 9(b)."); Baisch v. Gallina, 346 F.3d 366, 377 (2d Cir. 20 2003). 21 in the district court to amend the complaint based on recently 22 discovered evidence and then successfully replead scienter, we 23 affirm the dismissal, instead, on the grounds that, in any event, 24 section 107 of the PSLRA bars the plaintiff's RICO conspiracy 25 claim. 26 Litig., 488 F.3d 112, 134 (2d Cir. 2007) (stating that this Court The district court in the instant case See First Capital Asset Mgmt., Inc. In light of the possibility that the plaintiff might seek See In re Methyl Tertiary Butyl Ether Prods. Liab. 12 1 may "affirm a district court decision on any grounds for which 2 there is a record sufficient to permit conclusions of law, even 3 grounds not relied upon by the district court" (internal 4 quotation marks omitted)). 5 Section 107 of the PSLRA -- which was enacted as an 6 amendment to the RICO statute and accordingly is often referred 7 to as the "RICO Amendment" -- provides that "no person may rely 8 upon any conduct that would have been actionable as fraud in the 9 purchase or sale of securities to establish a violation of 10 section 1962." 11 States District Court for the Southern District of Texas, 12 "[b]efore the RICO Amendment, a plaintiff could allege a private 13 civil RICO claim for securities laws violations sounding in fraud 14 because 'fraud in the sale of securities' was listed as a 15 predicate offense." 16 Litig., 284 F. Supp. 2d 511, 618 (S.D. Tex. 2003) (citing Bald 17 Eagle Area Sch. Dist. v. Keystone Fin., Inc., 189 F.3d 321, 327 18 (3d Cir. 1999)). 19 was [, before the 1995 RICO Amendment,] a predicate offense in 20 both criminal and civil RICO actions, plaintiffs regularly 21 elevated fraud to RICO violations because RICO offered the 22 potential bonanza of recovering treble damages." 23 Sch. Dist., 189 F.3d at 327 (citation omitted). 24 18 U.S.C. § 1964(c). As explained by the United In re Enron Corp. Sec., Derivative & ERISA "Inasmuch as 'fraud in the sale of securities' Bald Eagle Area The RICO Amendment changed the use of that tactic by 25 barring civil RICO claims based on allegations of securities 26 fraud. See Thomas H. Lee Equity Fund V, L.P. v. Mayer Brown, 13 1 Rowe & Maw LLP, 612 F. Supp. 2d 267, 281 (S.D.N.Y. 2009) 2 ("Section 107 of the PSLRA . . . bars private causes of action 3 under RICO for predicate acts that describe conduct that would 4 otherwise be actionable as securities fraud."); see also Bald 5 Eagle Area Sch. Dist., 189 F.3d at 327 ("The PSLRA amended RICO 6 by narrowing the kind of conduct that could qualify as a 7 predicate act."). 8 bar "was to prevent litigants from using artful pleading to boot- 9 strap securities fraud cases into RICO cases, with their threat As the plaintiff concedes, the purpose of the 10 of treble damages." 11 Area Sch. Dist., 189 F.3d at 327-28 (quoting the legislative 12 history and explaining the purpose of the PSLRA). 13 Appellant's Reply Br. 19; accord Bald Eagle But the scope of the RICO Amendment's bar is unsettled 14 in this Circuit. The parties dispute whether it applies to all 15 civil RICO claims predicated upon securities fraud, or if there 16 is an exception where, as here, the plaintiff cannot bring a 17 securities fraud claim against the defendant because the 18 plaintiff alleges only an aiding and abetting claim, which cannot 19 serve as a basis for a private right of action, see Cent. Bank of 20 Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 21 164, 177 (1994) (concluding that section 10(b) of the Securities 22 Exchange Act of 1934, 15 U.S.C. § 78j(b), does not "impos[e] 23 private civil liability on aiders and abettors" of securities 24 fraud). 25 Amendment bars all RICO claims "that would have been actionable 26 as fraud in the purchase or sale of securities," 18 U.S.C. § The determinative question, then, is whether the RICO 14 1 1964(c), or only RICO claims in cases where that plaintiff could 2 have asserted a fraud claim against the named defendant. 3 is, we must determine whether, as the defendants assert, the bar 4 applies to "claims based on conduct that could be actionable 5 under the securities laws even when the [particular] plaintiff . 6 . . cannot bring a cause of action under the securities laws," 7 Appellees' Br. 32 (quoting Thomas H. Lee, 612 F. Supp. 2d at 283) 8 (internal quotation marks omitted); see Appellees' Supp. Br. 3-4, 9 or whether, as MLSMK contends, the viability of a RICO claim That 10 turns on the "claims available against a particular defendant," 11 Appellant's Reply Br. 19; see Appellant's Supp. Br. 5 ("A court 12 must analyze whether the particular plaintiff has a cause of 13 action sounding in securities fraud against the named 14 defendant.").9 15 This Court has not weighed in on the question. 16 answers proffered by the district courts in this Circuit diverge, 17 but at least three district court judges in this Circuit have 18 accepted the argument made by the defendants here. 9 The In Fezzani v. The parties also appear to agree that the RICO Amendment applies to mail fraud and wire fraud, in addition to ordinary securities fraud, when such claims "are based on conduct that would have been actionable as securities fraud." OSRecovery, Inc. v. One Groupe Int'l, Inc., 354 F. Supp. 2d 357, 368 (S.D.N.Y. 2005) (internal quotation marks omitted); see Bald Eagle Area Sch. Dist., 189 F.3d at 327 (quoting H.R. Rep. No. 104-369, at 47 (1995) (Conf. Rep.), reprinted in 1995 U.S.C.C.A.N. 730, 746); Jordan (Berm.) Inv. Co. v. Hunter Green Invs. Ltd., 205 F. Supp. 2d 243, 248 (S.D.N.Y. 2002) ("In amending RICO, Congress was clear in stating that the PSLRA was meant to eliminate the possibility that litigants might frame their securities claims under a mail or wire fraud claim." (internal quotation marks omitted)). 15 1 Bear, Stearns & Co., No. 99 Civ. 0793, 2005 WL 500377, 2005 U.S. 2 Dist. LEXIS 3266 (S.D.N.Y. Mar. 2, 2005) (Richard C. Casey, 3 Judge), the plaintiffs, who had asserted section 10(b) claims and 4 RICO claims against several defendants, urged the court to 5 interpret the RICO Amendment to permit a civil RICO claim based 6 upon alleged predicate acts of aiding and abetting securities 7 fraud. 8 narrow interpretation of the RICO [A]mendment," which would 9 "permit RICO liability against any defendant not individually The district court rejected the plaintiff's "particularly 10 alleged to have committed securities fraud, despite [that 11 defendant's] extensive reliance on others' securities fraud." 12 Fezzani, 2005 WL 500377, at *4, 2005 U.S. Dist. LEXIS 3266, at 13 *14. 14 Congress's purpose" in enacting the law. 15 104-98, at 19 (1995), reprinted in 1995 U.S.C.C.A.N. 679, 698 16 (describing Congress's intent "to eliminate securities fraud as a 17 predicate act of racketeering in a civil RICO action"). 18 court specifically rejected the contention -- also pressed by 19 MLSMK here -- that because securities fraud laws do not create a 20 private cause of action for aiding and abetting securities, mail, 21 or wire fraud, a plaintiff should be able to pursue a RICO claim 22 against an alleged aider and abetter of securities fraud. 23 Fezzani, 2005 WL 500377, at *4, 2005 U.S. Dist. LEXIS 3266, at 24 *15. 25 plaintiffs' interpretation, a plaintiff could too easily 26 manipulate a complaint to skirt the RICO Amendment's limitations: The court viewed this approach as "inconsistent with Id.; see also S. Rep. The The court expressed concern that if it were to accept the 16 1 2 3 4 5 6 7 8 9 10 11 12 13 Armed with the knowledge that aiding and abetting a manipulative or deceptive practice is insufficient under Central Bank [of Denver, 511 U.S. at 191], for example, a plaintiff could deliberately plead facts that established no more than that a particular defendant aided and abetted another's securities fraud. Such incentive is particularly strong where, as here, a plaintiff might rely on the securities fraud of those with few assets to obtain treble damages against deeper pockets. Id. In Thomas H. Lee, then-district judge Gerard E. Lynch 14 15 reached the same conclusion. Thomas H. Lee, 612 F. Supp. 2d at 16 281-83. 17 that a defendant violated RICO by aiding and abetting another's 18 securities law violations. 19 reasoning of Fezzani, stating that the plaintiffs' proffered 20 interpretation of the PSLRA's RICO Amendment -- under which "so 21 long as [plaintiffs] are pursuing aiders and abettors[, ]they may 22 proceed under RICO" because their securities claims are not 23 actionable -- is "treacherous." 24 "[t]he language of the statute simply does not require that, for 25 a RICO claim to be barred, the plaintiff who sues under RICO must 26 be able to sue under securities laws, or that the conduct 27 'actionable as securities fraud' on which the plaintiff relies to 28 establish the RICO violation must be that of the defendant." 29 at 281-82; see also id. at 282 ("The [plaintiffs'] argument to 30 the contrary is problematic for precisely the reasons discussed 31 in Fezzani." (citing Fezzani, 2005 WL 500377, at *4, 2005 U.S. 32 Dist. LEXIS 3266, at *14-*15)). As in Fezzani, the plaintiffs in Thomas H. Lee alleged Id. at 281. Id. Judge Lynch adopted the The court explained that Id. Finally, the Thomas H. Lee court 17 1 noted that the plaintiffs' narrower interpretation of the RICO 2 Amendment would require the court to "overlook[] that the 3 amendment barring RICO claims was made in the same statute that 4 explicitly . . . authoriz[ed] only the SEC -- not private 5 parties -- to bring enforcement actions against aiders and 6 abettors." 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Id. The court concluded that [i]t would be strange indeed if Congress, in a statute that otherwise bars private causes of action under RICO for predicate acts that describe conduct actionable as securities fraud, nevertheless chose to allow enhanced RICO remedies -- treble damages and attorneys' fees -- against only the very parties that Congress simultaneously made immune from private suit under the securities laws. The better interpretation -- and the one supported by the plain meaning of § 107 [of the PSLRA] -- is that the RICO Amendment bars claims based on conduct that could be actionable under the securities laws even when the plaintiff, himself, cannot bring a cause of action under the securities laws. Id. at 282-83 (emphasis in original). At least one other district court has accepted the 25 interpretation adopted in Thomas H. Lee and Fezzani: Cohain v. 26 Klimley, Nos. 08 Civ. 5047, 09 Civ. 4527, 09 Civ. 10584, 2010 WL 27 3701362, at *8-*9, 2010 U.S. Dist. LEXIS 98870, at *27-*28 28 (S.D.N.Y. Sept. 20, 2010) (Paul G. Gardephe, Judge) (adopting the 29 Thomas H. Lee court's interpretation of section 107 of the PSLRA 30 and noting that "most courts to address the subject have held 31 that 'any conduct that would have been actionable as fraud in the 32 purchase or sale of securities' -- including aiding and abetting 33 securities fraud -- may not be relied upon to establish a RICO 18 1 violation"); see id. at *8, 2010 U.S. Dist. LEXIS 98870, at *27 2 (collecting cases). 3 As the Thomas H. Lee court noted, 612 F. Supp. 2d at 4 281 -- and as the plaintiff points out in its opening brief on 5 appeal and in its supplemental briefing10 -- at least two other 6 district courts in this Circuit have interpreted the RICO 7 Amendment bar more narrowly. 8 Brown & Wood, LLP, 399 F. Supp. 2d 283, 292 n.47 (S.D.N.Y. 2005) 9 (Shira A. Scheindlin, Judge) (noting the split among courts in See Seippel v. Sidley, Austin, 10 the Southern District of New York on the issue of the breadth of 11 the RICO Amendment's bar). 12 Int'l Inc., 354 F. Supp. 2d 357 (S.D.N.Y. 2005), the plaintiffs 13 asserted a RICO claim based on the defendant's alleged aiding and 14 abetting of another's securities law violations. 15 foreign bank moved to dismiss the RICO claim, arguing that it was 16 precluded by the RICO Amendment. 17 court (Lewis A. Kaplan, Judge) denied the defendant's motion, 18 interpreting the RICO Amendment to bar only RICO claims based on 19 predicate acts of securities fraud that the plaintiffs could have 20 pursued as securities claims against the named defendant. 21 id. at 369-70. 22 relevant question under the PSLRA to be whether "the [specific 10 In OSRecovery, Inc. v. One Groupe The defendant Id. at 364, 368. The district See That is, the court in OSRecovery thought the After oral argument, but before the publication of MLSMK I, we issued an order directing the parties to submit supplemental briefing limited to the issue of PSLRA preclusion of the plaintiff's RICO claim. See Order, MLSMK Inv. Co. v. JP Morgan Chase & Co., No. 10-3040-cv (2d Cir. May 31, 2011), ECF No. 63. 19 1 defendant's] alleged conduct is actionable under [the securities] 2 laws." 3 "there is no private right of action for aiding and abetting 4 under Section 10(b) of the [Securities] Exchange Act," id., and 5 the plaintiffs therefore could not have sought to vindicate their 6 rights by filing a securities claim, the RICO Amendment did not 7 bar the plaintiffs' RICO claim. 8 9 Id. at 369. The district court concluded that, because In Renner v. Chase Manhattan Bank, No. 98 Civ. 926, 1999 WL 47239, 1999 U.S. Dist. LEXIS 978 (S.D.N.Y. Feb. 3, 1999) 10 (Charles S. Haight, Jr., Judge), the district court determined 11 that the RICO Amendment did not preclude the plaintiff's RICO 12 claim. 13 Haight reasoned that, because the plaintiff's claim against Chase 14 Manhattan Bank (a predecessor to the defendants in the case now 15 before us) alleged only that the bank aided and abetted the fraud 16 of another, the allegations did not provide a "valid basis for a 17 securities fraud claim." 18 at *18. 19 have been 'actionable' against Chase under the securities law," 20 and accordingly was not prohibited by the PSLRA's RICO Amendment. 21 Id. at *7, 1999 U.S. Dist. LEXIS 978, at *20; see also id. at *6, 22 1999 U.S. Dist. LEXIS 978, at *17-*18 ("[T]he application of the 23 Reform Act turns upon whether Chase's alleged conduct is 24 'actionable' under the securities laws."). 25 26 Id. at *6 *7, 1999 U.S. Dist. LEXIS 978, at *20. Judge Id. at *6, 1999 U.S. Dist. LEXIS 978, The court continued that the claim therefore "would not MLSMK asserts that the district judges accepting the defense of RICO Amendment preclusion were "concerned 20 1 predominantly with the policy implications of a plaintiff 2 electing between causes of action to evade the restrictions of 3 the PSLRA," Appellant's Reply Br. 21,issues that the plaintiff 4 contends are not present here, see id. ("The court [in Fezzani] 5 specifically feared that a plaintiff who might legitimately have 6 a securities fraud claim against a defendant would nevertheless 7 instead plead only aiding and abetting conduct in order to bring 8 the case under RICO."). 9 accept the view adopted in the Fezzani line of cases, citing the 10 court's statement in Thomas H. Lee that the "minority" approach 11 endorsed in OSRecovery "is both unpersuasive and against the 12 great weight of precedent." Thomas H. Lee, 612 F. Supp. 2d at 13 281; see Cohain, 2010 WL 3701362, at *8, 2010 U.S. Dist. LEXIS 14 98870, at *27 ("OSRecovery has not been relied on for [the] 15 proposition [that the RICO Amendment 'does not bar RICO claims 16 premised on conduct that constitutes aiding and abetting 17 securities fraud'], however, and several courts have explicitly 18 rejected its reasoning."). 19 The defendants, by contrast, urge us to We agree with the defendants that the reasoning of the 20 district courts in Fezzani and Thomas H. Lee is persuasive. 21 conclude that section 107 of the PSLRA bars civil RICO claims 22 alleging predicate acts of securities fraud, even where a 23 plaintiff cannot itself pursue a securities fraud action against 24 the defendant.11 11 We MLSMK argues for the first time in its supplemental brief that the defendants' conduct is not "actionable securities fraud" because the "the predicate acts alleged in this case could 21 1 Crucially, the plain language of the statute "does not 2 require that the same plaintiff who sues under RICO must be the 3 one who can sue under securities laws; its wording . . . does not 4 make such a connection." 5 see 18 U.S.C. § 1964(c) ("[N]o person may rely upon any conduct 6 that would have been actionable as fraud in the purchase or sale In re Enron, 284 F. Supp. 2d at 620; not possibly have induced MLSMK to purchase or sell securities." It contends that the claim therefore does not satisfy the requirements of section 10(b) of the Securities Exchange Act. Compare Appellant's Supp. Br. 6, with Appellees' Supp. Br. 7-8. Even were we not to consider this argument waived because of the lateness of the hour in which it was asserted, we would nonetheless decline to address it because we conclude that the effect of the RICO Amendment does not turn on whether MLSMK would be able to state a valid claim against JPMC and Chase Bank under section 10(b). To the extent that MLSMK argues that the defendants' alleged conduct does not qualify as securities fraud because it was not "integrally related to the purchase and sale of securities," Appellant's Supp. Br. 6, we conclude that the contention is without merit. In Bald Eagle Area School District, the Third Circuit considered a plaintiff's allegation that a defendant bank had assisted in "a massive Ponzi scheme . . . perpetrated through the purchase and sale of [securities] in violation of securities laws including § 10(b) of the Securities Exchange Act of 1934," and determined that the alleged scheme was "at the heart of th[e plaintiff's] RICO action." Id., 189 F.3d at 328. The court concluded that "[a] Ponzi scheme . . . continues only so long as new investors can be lured into it so that the early investors can be paid a return on their 'investment.' Consequently, conduct undertaken to keep a securities fraud Ponzi scheme alive is conduct undertaken in connection with the purchase and sale of securities." Id. at 330; cf. Sell v. Zions First Nat'l Bank, No. CV-05-0684, 2006 WL 322469, at *10, 2006 U.S. Dist. LEXIS 6558, at *33-*34 (D. Ariz. Feb. 9, 2006) (stating that "the question is not whether a plaintiff can state a claim under a non-securities-related predicate act, but whether the allegations that form the basis of that predicate act occur 'in connection with' securities fraud," and concluding that, in a Ponzi scheme, a bank's "disbursement[s] of money from more recent investors to older investors" are actions "in connection with" securities fraud). 22 1 of securities to establish a violation of section 1962." 2 (emphases added)). As another district court has explained, 3 4 5 6 7 8 9 10 11 12 when Congress stated that "no person" could bring a civil RICO action alleging conduct that would have been actionable as securities fraud, it meant just that. It did not mean "no person except one who has no other actionable securities fraud claim." It did not specify that the conduct had to be actionable as securities fraud by a particular person to serve as a bar to a RICO claim by that same person. 13 Hemispherx Biopharma, Inc. v. Asensio, No. Civ. A. 98-5204, 1999 14 WL 144109, at *4, 1999 U.S. Dist. LEXIS 2849, at *13-*14 15 (E.D. Pa. Mar. 15, 1999), quoted in In re Enron Corp., 284 F. 16 Supp. 2d at 620. 17 broadly and does not indicate that Congress intended that it be 18 applied in the limited manner that MLSMK urges. 19 of Denver, 511 U.S. at 177 (quoting Blue Chip Stamps v. Manor 20 Drug Stores, 421 U.S. 723, 734 (1975) ("When Congress wished to 21 provide a remedy to those who neither purchase nor sell 22 securities, it had little trouble in doing so expressly.")). 23 We agree that the RICO Amendment is worded Cf. Cent. Bank This language seems to us to be unambiguous. But it is 24 worth noting in any event that our reading of it also is 25 supported by the PSLRA's legislative history. 26 Lowenstein Int'l Hum. Rights Project v. Dep't of Homeland Sec., 27 626 F.3d 678, 681 (2d Cir. 2010) ("Any potential ambiguity in the 28 statute's plain meaning is removed, moreover, by the history of 29 the statute's amendments."); id. ("Where we find ambiguity we may 30 delve into other sources, including the legislative history, to 23 Cf. Allard K. 1 discern Congress's meaning." (brackets and internal quotation 2 marks omitted)). 3 The Conference Committee Report for section 107 states 4 that Congress "intend[ed]" that the section would "eliminate 5 securities fraud as a predicate offense in a civil RICO action," 6 and would bar a plaintiff from "plead[ing] other specified 7 offenses, such as mail or wire fraud, as predicate acts under 8 civil RICO if such offenses are based on conduct that would have 9 been actionable as securities fraud." H.R. Rep. 104-369, at 47 10 (1995)(Conf. Rep.), reprinted in 1995 U.S.C.C.A.N. 730, 746. 11 committee explained that the RICO Amendment's purpose was to 12 "remove [as a predicate act of racketeering] any conduct that 13 would have been actionable as fraud in the purchase or sale of 14 securities as racketeering activity under civil RICO." 15 (emphasis added); accord S. Rep. 104-98, at 19, 1995 U.S.C.C.A.N. 16 at 698 (repeating the same explanation for the amendment). 17 Congress did not say that it was removing "any claim that would 18 have been actionable." 19 satisfy RICO's predicate-act requirement. The Id. Its focus was on the behavior alleged to 20 Moreover, it is clear from the Senate Report that 21 Congress was aware that the RICO Amendment would place some 22 claims -- such as those for aiding and abetting securities laws 23 violations -- outside the reach of private civil RICO suits. 24 the Senate appears to have been satisfied that the securities 25 laws "generally provide adequate remedies for those injured by 26 securities fraud." But S. Rep. 104-98, at 19, 1995 U.S.C.C.A.N. at 24 1 698; see id. ("The Committee considered testimony endorsing the 2 result in Central Bank and testimony seeking to overturn th[at] 3 decision. 4 [Securities Exchange] Act to provide explicitly for private 5 aiding and abetting liability actions under Section 10(b) would 6 be contrary to [the RICO Amendment's] goal of reducing meritless 7 securities litigation. 8 SEC express authority to bring actions seeking injunctive relief 9 or money damages against persons who knowingly aid and abet The Committee believes that amending the 1934 The Committee does, however, grant the 10 primary violators of the securities laws." (emphasis added)). 11 We are not persuaded by the plaintiff's attempts to 12 distinguish the decisions in Thomas H. Lee and Fezzani. It is 13 true that, in those cases, the plaintiffs pled fraud and RICO 14 claims in the alternative, whereas in this case, the plaintiff 15 pleads only a civil RICO claim without asserting that the 16 defendants are liable for frauds or securities violations of 17 their own. 18 Lee and Fezzani were not limited to concerns about "gamesmanship" 19 in pleadings. 20 whether the complaints "relie[d] extensively on [allegations of] 21 fraud to establish . . . liability under RICO," and, where the 22 complaints did so rely, concluded that the RICO claims "fall[] 23 squarely within the scope of the PSLRA bar." 24 F. Supp. 2d at 281 (internal quotation marks omitted). 25 analyzed the meaning of the statutory language independently from 26 the specific facts of the cases before them. But the district courts' determinations in Thomas H. Appellant's Reply Br. 22. 25 Rather, they focused on Thomas H. Lee, 612 They See generally id. 1 at 281-83; Fezzani, 2005 WL 500377, at *4-*6, 2005 U.S. Dist. 2 LEXIS 3266, at *10-*18. 3 Nor do we think that the cases relied upon by the 4 plaintiff compel a different conclusion. 5 MLSMK places great weight, the district court appears to have 6 assumed that the dispositive issue was whether the relevant 7 defendant's conduct was "actionable under the securities laws." 8 Id., 354 F. Supp. 2d at 369. 9 interpretation of the statute pressed by the defendants here or 10 accepted by the courts in Fezzani and Thomas H. Lee -- that it 11 was Congress's intention that the applicability of the RICO 12 amendment to a plaintiff's civil RICO claim would not depend on 13 the plaintiff's ability to bring a private securities law action 14 against a particular defendant.12 15 In OSRecovery, on which It did not seem to consider the Finally, the interpretation we adopt today finds 16 support in the decisions of several of our sister circuits. 17 Affco Invs. 2001, L.L.C. v. Proskauer Rose, L.L.P., 625 F.3d 185, 18 189-91, 191 n.5 (5th Cir. 2010) (affirming the district court's 19 dismissal of a RICO claim as barred by the PSLRA in spite of the 20 fact that, by doing so, the plaintiff was left without an avenue 21 for relief because it could not assert a section 10(b) securities 22 claim against the relevant defendant); Bixler v. Foster, 596 F.3d 23 751, 759-60 (10th Cir. 2010) (applying the RICO Amendment to mail 24 and wire fraud, which "cannot support a civil RICO claim after 12 See The OSRecovery court did not, of course, have the benefit of the analysis in Fezzani, which was decided two months later. 26 1 enactment of the PSLRA" if the frauds are "undertaken in 2 connection with the purchase of a security" (internal quotation 3 marks omitted)); Howard v. Am. Online Inc., 208 F.3d 741, 749 4 (9th Cir.) (holding that the RICO Amendment bar applies even 5 where the plaintiff does not have standing to sue under 6 securities laws because the plaintiff did not buy or sell 7 securities), cert. denied, 531 U.S. 828 (2000); Bald Eagle Area 8 Sch. Dist., 189 F.3d at 330 (Third Circuit decision expressing 9 reasoning similar to that in Fezzani and Thomas H. Lee and 10 concluding that the PSLRA precludes a RICO claim based on a Ponzi 11 scheme that was accomplished by the purchase and sale of 12 securities). 13 question presented here, they do deal with other circumstances in 14 which -- for various reasons -- the plaintiff could not make out 15 a private securities claim against the defendant. 16 fact that this result left the plaintiffs in those cases, like 17 the plaintiff here, without recourse to a private cause of action 18 under the securities laws, our sister courts nonetheless 19 concluded that the plaintiffs' RICO claims were barred by the 20 RICO Amendment. 21 22 While none of these cases addresses the precise Despite the CONCLUSION For the foregoing reasons, we conclude that the PSLRA's 23 RICO Amendment, 18 U.S.C. § 1964(c), bars a plaintiff from 24 asserting a civil RICO claim premised upon predicate acts of 25 securities fraud, including mail or wire fraud, even where the 26 plaintiff could not bring a private securities law claim against 27 1 the same defendant. We therefore affirm the judgment of the 2 district court dismissing MLSMK's RICO claim (Count One) against 3 the defendants JPMC and Chase Bank on that ground. 28
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