Tuesday, July 26, 2011

No Exception to PSLRA Bar for Aiding and Abetting Claims in RICO Case

This posting was written by Mark Engstrom, Editor of CCH RICO Business Disputes Guide.

The Private Securities Litigation Reform Act (PSLRA) barred a RICO conspiracy claim against two financial services companies that allegedly aided and abetted a Ponzi scheme that was perpetrated by former hedge fund manager Bernie Madoff, the U.S. Court of Appeals in New York City ruled earlier this month. The ruling settled a conflict among district courts in the Second Circuit regarding the scope of the PSLRA’s bar on civil RICO claims.


The PSLRA prohibited private plaintiffs from pursuing RICO claims that were predicated on conduct that was actionable as fraud in the purchase or sale of securities. The issue in this case was whether an exception to the bar existed when an injured plaintiff lacked a cause of action sounding in securities fraud (in this case, because the plaintiff alleged only an aiding and abetting claim, which could not serve as the basis for a private right of action). When Congress stated that “no person” could bring a civil RICO action for conduct that would have been actionable as securities fraud, it did not mean “no person except one who has no other actionable securities fraud claim,” the court explained. Moreover, the legislative history of the PSLRA supported this reading.

Legislative History

The Conference Committee Report for the relevant PSLRA provision stated that Congress intended the provision to “eliminate securities fraud as a predicate offense in a civil RICO action,” and bar a plaintiff from “plead[ing] other specified offenses, such as mail or wire fraud, as predicate acts under civil RICO if such offenses are based on conduct that would have been actionable as securities fraud.” Congress was aware that the RICO amendment would place some claims—such as those for aiding and abetting securities laws violations—outside the reach of private civil RICO suits. It appeared, however, that the Senate was satisfied that the securities laws would “generally provide adequate remedies for those injured by securities fraud,” according to the court.

Finally, the Third, Fifth, Ninth, and Tenth Circuits each came to a similar conclusion, even though those courts were not presented with the same circumstances (aiding and abetting) that existed in this case.

The July 7, 2011, decision in MLSMK Invest. Co. v. JP Morgan Chase & Co. (2nd Cir.) will appear at CCH RICO Business Disputes Guide ¶12,069.

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