Antitrust Law Daily Wrap Up, RICO—2ndCir: Private Securities Litigation Reform Act Preempts RICO Claims Based on Aiding and Abetting Securities Fraud, (Jun 3, 2013)

By Tobias J. Gillett, J.D., LL.M.

Alleged aiding and abetting of securities fraud by individuals and entities involved in the sale of debentures could not support RICO claims asserted by investors who purchased the debentures, because the Private Securities Litigation Reform Act (PLSRA) preempted their claims, the U.S. Court of Appeals in New York has ruled (Sissel v. Klimley, June 3, 2013, per curiam).

On June 2, 2008, a class of investors filed suit against individuals and entities involved in the sale of debentures issued by VWE Group, Inc. The investors alleged that the defendants fraudulently sold the debentures in violation of the RICO Act, the Securities and Exchange Act of 1934, and state law. The district court granted the defendants’ motion to dismiss, and subsequently denied the investors’ motion for leave to amend for futility and delay.

On appeal, the Second Circuit upheld the district court’s disposition of the RICO claims. The investors had conceded that they could not seek recovery under the RICO Act for direct securities fraud, because the PSLRA would preempt that claim, but contended that they could still bring a RICO claim based on aiding and abetting securities fraud, since aiding and abetting securities fraud is not actionable under the federal securities laws. The district court held that the PSLRA “bar[red] all RICO claims based on any conduct that could be actionable under the securities laws, including conduct that constitutes aiding and abetting securities fraud.”

The court of appeals affirmed this decision, noting that in the time between the district court’s dismissal of the claims and the appeal the Second Circuit, in MLSMK Inv. Co. v. JP Morgan Chase & Co., 651 F.3d 268 (2011), had “squarely held that section 107 of the [PLSRA] bars civil RICO claims based upon alleged predicate acts of securities fraud, including aiding and abetting.”

The cases are Nos. 13-952-cv and 12-965-cv.

Attorneys: Richard B. Reiling for D. Kent Sissel. Edward Spiro (Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer, P.C.) and Jack Babchik (Babchik & Young LLP) for Laura Klimley.

Companies: VWE Group, Inc.

Cases: RICO ConnecticutNews NewYorkNews VermontNews