Antitrust Law Daily Wrap Up, RICO—C.D. Cal.: Corporate looting, “pump-and-dump” scheme claims dismissed, (Jan 7, 2015)

By Greg Hammond, J.D.

An e-business company successfully evaded claims that it violated the Racketeer Influenced and Corrupt Organizations Act (RICO) by allegedly defrauding consumers with regard to direct stock offerings (pump-and-dump scheme) and engaging in various acts of corporate looting that devalued consumers’ stock positions (corporate looting scheme). In partially granting the company’s motion to dismiss, the federal district court in Los Angeles determined that the pump-and-dump scheme claim was barred by the Private Securities Litigation Reform Act (PSLRA), and the corporate looting scheme allegations could only be brought as derivative claims (Li v. EFT Holdings, Inc., January 6, 2015, Fischer, D.).

Consumers alleged that EFT Holdings, Inc., its CEO, Jack J. Qin, and other defendants operated an endless chain scheme. They claim that they were fraudulently induced to purchase substandard products and that they were separately defrauded through direct stock offerings in EFT and their stock positions were devalued by various acts of corporate looting by Qin and other defendants. The consumers brought RICO claims against EFT and Qin for the alleged: (1) endless chain scheme; (2) pump-and-dump scheme; and (3) corporate looting scheme. EFT moved to dismiss.

The court first determined that there was no question that the pump-and-dump scheme could form the basis of a securities fraud claim, and therefore could not form the basis of a RICO claim under the PSLRA. Second, the court found that the corporate looting scheme claims could only be brought as derivative claims, not as individual claims. However, the endless chain allegations were not dismissed, despite EFT’s argument that the allegations are also based in securities fraud. The court determined that, although the endless chain allegations could be the basis of a securities fraud claim, EFT’s limited showing did not convince the court. The corporate looting and pump-and-dump scheme claims were therefore dismissed, and the endless chain claim was allowed to continue.

The case number is CV 13-8832 DSF (CWx).

Attorneys: Erin Lee Jeanette Pfaff (Edwards Wildman Palmer LLP) for Shuxin Li. Marc S. Harris (Scheper Kim and Harris LLP) for Jack J. Qin. Ali R. Rabbani (Winston and Strawn LLP) for EFT Holdings Inc.

Companies: EFT Holdings Inc.

Cases: RICO CaliforniaNews